PILLAR 3
Disclosure by institutions pursuant to Regulation (EU) No 575/2013
Figures as at 31/12/2020
INTRODUCTION ...... 3 1. RISK MANAGEMENT OBJECTIVES AND POLICIES ...... 6 2. SCOPE OF APPLICATION ...... 60 3. OWN FUNDS ...... 62 4. CAPITAL REQUIREMENTS ...... 74 5. CREDIT RISK ...... 76
5.1 LOAN LOSS PROVISIONS ...... 77 5.2 ENCUMBERED AND UNENCUMBERED ASSETS ...... 107 5.3 USE OF ECAIS ...... 114 5.4 USE OF CREDIT RISK MITIGATION TECHNIQUES ...... 119
6. EXPOSURE TO COUNTERPARTY RISK ...... 124 7. OPERATIONAL RISK ...... 136 8. EXPOSURES TO SECURITISATION POSITIONS ...... 137 9. EXPOSURE IN EQUITIES NOT INCLUDED IN THE TRADING BOOK ...... 149 10. EXPOSURE TO INTEREST RATE RISK ON POSITIONS NOT INCLUDED IN THE TRADING BOOK ...... 159 11. REMUNERATION POLICIES ...... 162 12. FINANCIAL LEVERAGE ...... 163 DECLARATION OF THE MANAGER CHARGED WITH PREPARING THE COMPANY’S FINANCIAL REPORTS PURSUANT TO ART. 154-BIS, PARAGRAPH 2 OF LEGISLATIVE DECREE NO. 58/1998 (THE CONSOLIDATED LAW ON FINANCE)...... 172
INTRODUCTION
The Pillar III regulatory requirements provide for an obligation of disclosure concerning capital adequacy, risk exposure and the general features of the systems used to identify, measure and manage such risks.
The harmonised requirements for credit institutions and investment firms set out in Regulation (EU) No. 575/2013 of 26 June 2013 ("CRR") and Directive (EU) 2013/36 of 26 June 2013 ("CRD IV"), transposing the reforms of the Basel Committee accords ("Basel 3") into European law, entered into force on 1 January 2014. The EU directive is complemented by the provisions set out by the Bank of Italy with circular No. 285 of 17 December 2013 and subsequent updates, which collects the prudential supervisory provisions applicable to Italian banks and banking groups – as revised and updated to adapt internal legislation to the innovations in the international regulatory framework, with particular regard to the new regulatory and institutional structure of EU banking supervision, and to take account of the needs that have emerged in the exercise of supervision of banks and intermediaries – and lists the provisions for the purpose of the CRR. The prudential regulatory framework is structured around three Pillars: - the First pillar sets out the regulatory capital required to address the typical risks of the banking core business, and introduces alternative methodologies for calculating capital requirements; - the Second pillar requires banks to adopt a strategy and process to control their current and forward-looking capital adequacy. - the Third pillar defines a set of disclosure requirements, which allow market participants to more accurately gauge the capital adequacy and risk exposure of banks. Third pillar disclosure is directly regulated by: • the CRR, Part Eight “Disclosure by Institutions” (art. 431 – 455) and Part Ten, Title I, Chapter 3 “Transitional provisions for disclosure of own funds” (art. 492); • Regulations of the European Commission laying down the regulatory or implementing technical standards required to obtain harmonised models for the disclosure of different types of information. • Guidelines published by the European Banking Authority (EBA) to harmonise the templates for disclosure of different types of information. The regulations require banks to provide specific information to the public - in order to strengthen market discipline - on, inter alia, capital adequacy, risk exposure, the general features of risk management and control systems, corporate governance structures and remuneration policies. Banca Carige (hereinafter the “Parent Company”, “Banca Carige”, “Carige” or the “Bank”) fulfils the obligation of disclosure to the public for the Banca Carige Group (hereinafter referred to as the “Carige Group” or the “Group”) and draws up this document on the basis of the
aforementioned regulatory provisions, on a consolidated basis, with reference to a “prudential” scope of consolidation which essentially coincides with the supervisory definition of banking group. The document is therefore organised in accordance with the CRR to provide qualitative and quantitative information, where it is considered applicable to the Group, and, in compliance with Art. 433, para. 2, it is published in conjunction with the financial statements.
It should be noted that in light of the COVID-19 pandemic and in response to the negative consequences of the ongoing economic crisis, the disclosure requirements needed to be updated in order to allow for adequate reporting to the public. For these reasons, in June 2020 the EBA published the “Guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID‐19 crisis” (EBA/GL/2020/07), covering the disclosure requirements for the exposures subject to measures adopted to mitigate the effects of the COVID‐19 crisis. Still within the framework of the pandemic scenario described above, Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 was published as a CRR quick fix. By amending Regulations (EU) 575/2013 and (EU) 2019/876, the quick fix introduces temporary measures, intended to provide capital and liquidity support to companies and households.
On 31 January 2020, the Parent Company's Temporary Administration procedure, initiated by the ECB on 2 January 2019, came to a close and new governing and control bodies were appointed by the Shareholders’ Meeting, resulting in a situation of ordinary, stable governance being restored. Therefore, the Consolidated Financial Statements at 31 December 2020 of the Banca Carige Group relate to financial reporting for the period 1 February - 31 December 2020 (eleven months).
Article 433, paragraph 2 of the CRR requires that the Pillar III annual disclosure should be published on the same date as the date on which institutions publish their financial statements, thus establishing a connection between these reports. It is noted that, in light of this connection and in the absence of financial reporting obligations for the financial year 2019, the Group, having heard the opinion of the competent supervisory bodies, decided to fulfil the obligations set out in Part 8 of the CRR as at 31 January 2020, in line with the reporting period of the Consolidated Financial Statements for the financial year under Temporary Administration, i.e. 01.01.2019 - 31.01.2020, prepared in accordance with art. 75, para. 2 of the Italian Consolidated Law on Banking and approved by the ECB. Finally, it should be noted that, albeit determined in compliance with the applicable prudential regulatory framework, certain quantitative information contained in this document was not submitted to the Supervisory Authorities, as it referred to 31 January 2020, a date which is not relevant under the regulations in force for certain data reporting flows.
For completeness, it is specified that:
• Further information on the risks to which the Group is exposed is published in Part E of the Explanatory Notes to the Consolidated Financial Statements as at 31 December 2020 for the Banca Carige Group. • all information on the governance is shown in the “Corporate Governance and Ownership Structure Report for 2020”, available in the “Company Documents” section of the “Governance” section of the Group website www.gruppocarige.it (hereinafter the “website”); • all information required by art. 450 of the CRR on remuneration policies and practices, relating to the categories of staff whose professional activities have a significant impact on the Bank’s risk profile are set out in the “Remuneration Report”, which can be found in the “Shareholders’ Meetings” section of the “Governance” menu of the website.
The document is available on the Group website www.gruppocarige.it, in the section “Basel Report – Pillar 3” of the “Investor Relations” menu.
Unless otherwise indicated, figures are expressed in thousands of EUR.
1. RISK MANAGEMENT OBJECTIVES AND POLICIES
QUALITATIVE INFORMATION – art. 435 CRR
1.1 Introduction
Risk management is structured in four specific phases: (a) definition of risk management strategies, with particular reference to the organisation's risk tolerance and risk appetite, as set out by the Administrative Bodies of the Parent Company; (b) standard procedures for the identification, measurement and control of the various risks which the Group’s activities are exposed to; (c) management of the identified risks; (d) verification of the adequacy of the systems for measuring and managing these risks. The following paragraphs provide details about the Group’s activities aimed at achieving the described objectives.
A. Definition of risk management strategies
In accordance with the Supervisory Rules, the Board of Directors of the Parent Company, by approval on 17/06/2014 of the Risk Appetite Framework and its subsequent updates, identified the target risk-return profile that the Banking Group intends to achieve, in coherence with the defined strategic policy, the chosen business model and the Group’s competencies. The types of risk to be monitored under the RAF, as well as the relevant indicators, mainly relate to six risk profiles: solvency, profitability, credit risk, market risk, interest rate risk and liquidity risk. In accordance with the Supervisory instructions, a system of quantitative thresholds including risk appetite, risk tolerance, risk capacity and risk profile has been defined for all selected indicators. In relation to the major risk profiles included in the RAF, the Board of Directors defined both risk appetite thresholds consistent with the strategy outlined in the Business Plan and tolerance limits to ensure compliance with capacity even under stress conditions. In conjunction with the definition of indicators, the Board of Directors also approved the mechanisms regulating the governance of the RAF process in terms of the process of updating and revising, monitoring and escalation. As regards the information provided to the Board of Directors, the Risk Management department is expected to arrange for periodic monitoring of the RAF indicators to verify the evolution of the different risk profiles over time and measure their consistency with the defined risk/return targets. The Board of Directors is also involved in the escalation mechanisms when there is a breach of the risk tolerance levels set for the different indicators, by approving the implementation of the action plans prepared by the assigned functions.
B. How to identify, measure and control the various risks
As part of the activities for the ICAAP report, the Board of Directors of the Parent Company approves the risk map to which the Group is exposed, with regard to the types of its operations and reference markets. In the Risk Appetite Framework, the Carige Group identified the types of risk to be monitored and extrapolated from the risk map those with more strategic value. For each one of the main risk profiles, the RAF sets out risk targets based on different indicators that are then reflected in the more general preservation of a solvency ratio consistent with the Group's business model and with the strategies pursued as defined in the Strategic Plan. The Group's risk map includes the following types of risk: • credit and counterparty risk; • market risk; • operational risk; • concentration risk; • interest rate risk (relating to the banking book); • real-estate risk; • liquidity risk; • residual risk; • risk arising from securitisation transactions; • strategic risk; • reputational risk; • country risk; • transfer risk; • basis risk; • sovereign risk; • risk from defined benefit pension schemes; • risk of excessive financial leverage; • equity investment risk; • money laundering and terrorist financing.
The risk measurement methodologies were brought to the attention of the Board of Directors who verified their adequacy in order to measure the risks which the Group is exposed to as part of the activities for the latest ICAAP report.1
1During the Temporary Administration procedure, the ICAAP and ILAAP processes were suspended and the preparatory measures for their reactivation and relative reporting are currently underway.
C. Management of identified risks
As part of the process of monitoring the risks taken and that may be taken by the Group, information and organisational management systems were set up to produce updated reporting serving the various roles involved in risk management and control activities, facilitating the timely identification of anomalies and the management of events, consistently with the risk/return targets defined by the top management.
The information on second level control activities carried out by the Risk Management department is provided to the Board of Directors through an exhaustive set of reports relating to the evolution of the risk profiles defined by Regulation (EU) No 575/2013 and Bank of Italy Circular no 285/2013, with a further focus on the evolution of the RAF indicators over time, the characteristics of the Group’s loan book and the performance of the internal rating system.
Below is a list of the main information flows addressed to the Board of Directors:
• quarterly monitoring of Risk Appetite Framework indicators;
• annual report on the characteristics of non-performing loans and the risk profiles of the performing loan book;
• annual analysis of the rating provided by ECAIs on corporate customers;
• annual report including results from validation activities conducted on all the components of the rating system;
• annual report on the Internal Capital Adequacy Assessment Process (ICAAP);
• annual report on the Internal Liquidity Adequacy Assessment Process (ILAAP);
• annual report on the activities carried out by the risk control function.
Moreover, the Board of Directors is periodically informed about the activities of the Risk Control Committee that supports the corporate bodies and/or advisory committees in integrated risk management.
Please refer to section 1.3 of this chapter for a detailed analysis of the measurement, management and control systems adopted by the Group in relation to the different types of assumed and/or assumable risk.
D. Verification of the adequacy of the systems for measuring and managing these risks
In order to guarantee sound and prudent management, which reconciles the pursuit of profitability with consistent risk-taking and a conduct of business driven by the criteria of transparency and fairness, the Parent Banca Carige, in compliance with the law and regulations and the provisions of the Corporate Governance Code for listed companies, has adopted an Internal Control System (ICS) designed to detect, measure and continually verify the risks typical of the Bank's activities.
The prerequisite for an efficient internal control system is the proper subdivision of the Corporate Organisational System.
The Corporate Organisational System comprises 5 systems:
the organisational and corporate governance system the operational management system the risk measurement and assessment system the capital adequacy self-assessment system the internal control system
It is designed and continually monitored to ensure coherence at all times with the supervisory organisational model, i.e. the set of provisions of law and regulations that together govern the processes, procedures and organisational structure.
The active involvement of the Bank's governing bodies in adapting the corporate organisational system to the supervisory regulations is vitally important. The regulations set out precisely the duties and responsibilities of the governing bodies in defining the banks' internal control systems.
The strategic supervision unit is in charge of defining the business model, strategic guidelines, acceptable levels of risk and approval of the most important company processes (e.g., risk management, assessment of company activities and approval of new products and services).
The individual processes making up the corporate organisational system are described in specific regulations, which constitute the first level regulatory sources, and are given further detail in the second level internal regulatory sources.
The main purpose of the regulations governing the processes of the corporate organisational system is to regulate the risks to which the Group is exposed, especially the risk of regulatory non- compliance, i.e. the risk that the processes do not comply with the legislation and supervisory regulations (external rules).
The regulatory framework is therefore designed to:
constantly define the Bank’s rules (internal rules) on corporate processes as a whole, including corporate governance and control, in compliance with the external regulatory framework; periodically assess: a. the organisational risk of non-compliance of the internal process-governing rules with the corresponding external rules (regulatory compliance), indicating the extent of any deviation from the external rules; b. the organisational risk of non-compliance of the activities performed in the processes with the relative external rules (operational compliance), indicating the extent of any deviation from the external rules; ensure the accuracy of risk assessment by the ongoing verification of compliance of the procedures used to carry out the assessment; periodically inform the governing bodies of the results of the inspections performed regarding the organisational risk of regulatory and operational non-compliance of the processes; take steps necessary to eliminate any shortcomings identified by the inspections, particularly the most relevant ones, i.e. those which might impact the management of risk and the pursuit of the Bank's targets.
The Banca Carige Internal Control System, periodically reviewed and adjusted to reflect changes in the Bank's operations and the business environment, is based on a set of rules, procedures and organisational structures designed to ensure conformity with company strategies and balanced operational management.
Partly in the light of the observations made at Group level by the ECB within the Supervisory Review and Evaluation Process and further to subsequent inspections, the Parent Bank's Internal Auditing, Risk Management and Compliance functions are subject to close monitoring by both the functions and the Bank's competent operating units to ensure they are adequate in terms of qualitative and quantitative sizing, as a pre-requisite to obtain the adequacy of the Group wide risk monitoring and control system.
The adequacy and effectiveness of the ICS as a whole are assessed by internal audits.
Within the Internal Control System, (2nd level) Risk Management controls are designed to verify the regulatory and operational compliance of business processes with the law and regulations, define risk measurement methods, verify compliance with the limits assigned to the various
operating units and monitor the achievement of their risk-performance targets. These controls are performed by departments other than operating units. More specifically,the risk control function lies with the Chief Risk Officer’s Area which, in accordance with supervisory instructions, has complete independence of judgement and action, is part of the Chief Executive Officer's staff and can report directly, via its Manager who holds the position of Chief Risk Officer – CRO, to the governing and control bodies of the Parent Company and the Group banks/companies, which outsource this function to the Parent Company. The Risk Control Function verifies the: correct recognition and measurement of all risks facing the Group; capital adequacy (also known as total capital) in relation to the summation of risks (overall internal capital); operational compliance of the process followed by the organisational units responsible for loan classification, expected loss determination and debt collection; compliance with the RAF limits laid down by the Board of Directors; operational compliance of the ICAAP and ILAAP process.
The CRO Department performs its functions for the Parent Company and the Group companies, which outsource this function to the Parent, working in conjunction with various corporate structures and with the support of special representatives in each of the companies concerned.
In order to both ensure segregation of risk modelling from risk control functions and adaptation of the structure to the ever-growing need for developing an integrated vision of bank-wide risks, partly via the identification of middle management roles, the Chief Risk Officer’s area is made up of:
Chief Risk Officer division, reporting directly to the CEO and made up of the following structures and units: o Internal Validation Unit, reporting to the CRO o Risk Data and Tools Management Unit, reporting to the CRO o Risk Strategy and Capital Management Unit, reporting to the CRO o Credit Risk Management structure, comprising the: . Credit Risk Control Unit . Risk Modelling Unit o Financial and Operational Risk Management structure, comprising the: . Financial and Wealth Risk Management Office . Operational Risk Management Unit
1.2 Risk governance: the Board of Directors – composition and roles
A. Board of Directors: composition
On several occasions, this document has highlighted the functions of the Board of Directors and the fundamental role it plays in risk governance, the definition and evaluation of the Group’s risk appetite and the determination of the adequacy of the risk measurement and management systems. A description of the distinctive features of the Board of Directors is given below.
The Board of Directors of Banca CARIGE may be composed of a minimum of seven to a maximum of fifteen members, as determined by the Shareholders’ Meeting, which is also exclusively responsible for appointing the Chairman and Deputy Chairman of the Board.
The Directors shall remain in office for three financial years and their term of office shall expire on the date of the Shareholders’ Meeting called for approving the financial statements related to the last financial year of their term in office. Directors may be re-elected. The members of the Board of Directors are elected on the basis of lists submitted by the shareholders in accordance with the provisions of the Articles of Association.
The Directors perform their duties diligently, bearing in mind their position and the number of positions held in other banking, financial, insurance companies, either listed or of significant size.
The Supervisory Regulations on Corporate Governance also require that:
- members of the corporate bodies should devote time and resources appropriate to the complexity of their appointment;
- members of the corporate bodies should guarantee adequate time for their assignment, taking into account: (i) the nature and quality of the commitment required and the functions carried out in the bank, including in relation to the characteristics of the assignment; (ii) other positions in companies or entities, assignments or work activities performed, without prejudice to the limits to the cumulation of positions set by the CRD IV or by legal or statutory provisions.
Please note that by its resolution of 2 January 2019, the European Central Bank placed Banca Carige under Temporary Administration and notified the Bank of its decision to dissolve the administrative and control bodies and to replace them with three Temporary Administrators and a Surveillance Committee pursuant to Articles 69 octiesdecies, 70 and 98 of Legislative Decree No. 385 of 1 September 1993 (Consolidated Law on Banking).
At the end of the Temporary Administration period, the Ordinary Shareholders’ Meeting of 31/01/2020 restored the bank's governing bodies by appointing the Board of Directors and Board of Statutory Auditors for the 2020-2021-2022 financial years, with term of office until the date of the Shareholders’ Meeting called to approve the financial statements as at 31/12/2022. On 26/06/2020 the Deputy Chair of the Board of Directors, Angelo Barbarulo, tendered his resignation with immediate effect. On 14/10/2020, the Board of Directors co-opted Paolo Ravà
to serve as a Member of the Board of Directors, with term of office until the date of the next Shareholders' Meeting. The Chairman of the Bank, Prof. Vincenzo Calandra Buonaura, passed away on 28/12/2020. On 22/2/2021, the ordinary Shareholders' Meeting of Banca Carige resolved to appoint Giuseppe Boccuzzi and Paolo Ravà, as members of the Board of Directors, to serve for the remaining term of the Board of Directors currently in office, i.e. until the date of the Shareholders’ Meeting called to approve the financial statements for the year ending 31 December 2022; The Shareholders' Meeting also resolved to appoint Giuseppe Boccuzzi and Paolo Ravà respectively as Chair and Deputy Chair of the Board of Directors.
The Board of Directors is currently made up of:
Position Name and Surname Date and place of birth Chair Giuseppe Boccuzzi (1) Bollate (Milan) - 7 December 1954 Deputy Chair Paolo Ravà (5) Genoa, 24 January 1965 Chief Executive Officer Francesco Guido Lecce – 7 January 1958 Director Sabrina Bruno (1) and (2) Cosenza – 30 January 1965 Director Lucia Calvosa (3) and (4) Rome – 26 June 1961 Director Paola Demartini (5) Genoa - 31 May 1962 Director Miro Fiordi (2) and (8) Sondrio – 20 November 1956 Director Gaudiana Giusti (6) Livorno – 14 July 1962 Director Francesco Micheli (4) and (7) Rome – 3 January 1946 Director Leopoldo Scarpa (5) Venice – 16 June 1951
(1) Member of the Nomination, Governance and Sustainability Committee (2) Member of the Remuneration Committee (3) Chair of the Nomination, Governance and Sustainability Committee (4) Member of the Related-Parties Committee (5) Member of the Risk Committee (6) Chair of the Related-Parties Committee. (7) Chair of the Remuneration Committee (8) Chair of the Risk Committee
B. Board of Directors: role
Pursuant to art. 20 of the Articles of Association, the Board of Directors is vested with all the powers of ordinary and extraordinary administration. For the purposes of risk governance, in particular, the following matters are reserved for the Board of Directors:
- definition of the nature and level of risks compatible with the Bank’s strategic objectives;
- assessment of the adequacy of the organisational, administrative and accounting structure of Carige and its strategically relevant subsidiaries, with particular reference to the internal control and risk management system;
- assessment of the company's business performance, in particular by taking account of any information received from the delegated bodies and regularly tracking results against planning;
- assessment, at least once a year, of the functioning of the Board and its Committees, as well as their size and composition, also taking into account elements such as the professional characteristics, managerial and other experience and gender of its members, as well as their seniority in office;
- definition of a procedure for the internal management and external communication of all corporate information, with particular reference to privileged information, ensuring the correct management of such information.
In addition, with reference to the Bank of Italy’s rules on prudential supervision:
- the Board of Directors of Banca Carige has long approved the “ICAAP process governance model”, the map of the risks to which the Banca Carige Group is exposed and the “Operating Manual of the capital adequacy assessment process”, as well as the “Pillar 3 Disclosure Process Governing Model” and the “Pillar 3 Information Gathering and Publication Process”. It has also approved the constitution of the ICAAP Committee charged with assisting and supporting the definition and maintenance of the process currently being updated;
- for the purposes of the supervisory provisions on the internal control system, the Board of Directors approved the Risk Appetite Framework (RAF) of the Banca Carige group setting out the target risk-performance profile which the Banking Group intends to achieve (risk appetite statement), the types of risk to be monitored and the relevant indicators, the quantitative thresholds for all selected indicators as well as the processes and governance of the RAF.
Since the “Temporary Administration” measure notified by the ECB on 2/1/2019, the functions of the Board of Directors have jointly been performed by the Temporary Administrators until 31/01/2020.
Please refer to the Corporate Governance and Ownership Structure Report made available by the Issuer at any given reporting period for a more exhaustive listing and description of the activities carried out by the Board of Directors.
C. Board of Directors: engagement policies
The members of the Board of Directors are elected on the basis of lists submitted by shareholders as follows: shareholders who, individually or jointly with other shareholders, prove that they are the holders of at least 1% of the ordinary share capital (or a lower threshold of ownership as indicated - under the prevailing legislation - in the call notice of the Meeting convened to decide upon the appointment of the directors), may submit or send in a list of candidates which may include as many names as the maximum number of directors provided for in the Articles of Association, sequentially numbered and deposited at the head office of the Company, under penalty of cancellation, within the deadline laid down by the prevailing law and regulations, (currently, by the twenty-fifth day prior to the date of the Shareholders’ Meeting), as specified in the convening notice.
The lists are made available to the public at the Company's head office, on the Bank's website and in other ways prescribed by prevailing law and regulations, within the legally required deadline (currently, by the twenty-first day prior to the date of the Shareholders' Meeting). Ownership of the minimum shareholding required to present a list shall be attested via the procedures and terms prescribed by prevailing law and regulations, in accordance with the instructions given in the convening notice. Each shareholder may only submit and vote for one list of candidates and each candidate shall only appear in one list, under penalty of ineligibility.
By the set deadline, each list must be deposited at the registered office along with the curriculum of each candidate and the statements with which the individual candidates accept their candidacy and certify, under their own responsibility, that there are no causes of ineligibility or incompatibility and that they meet the statutory and regulatory requirements for holding the office of Director, the list of governing and control appointments they hold in other companies, as well as any mention of eligibility to qualify as an independent director pursuant to art. 18, paragraph 4, of the Articles of Association.
Lists of at least three candidates must ensure compliance of candidates identification with the gender proportionality principle provided for in the current legislation and by the Articles of Association, and contain a number of specifically indicated candidates meeting the independence requirements –laid down in the Articles of Association– of at least one quarter of the candidates presented in the list (rounded down to the nearest whole number if the first decimal is equal to or less than 5). The qualification of a candidate belonging to the least represented gender and the qualification as independent can be combined in the same person.
Any list submitted in non-observance of the prescriptions referred to above shall be rejected.
Further information on the appointment policies is contained in the chapter “Board of Directors” of the Corporate Governance and Ownership Structure Report published by the Issuer in any given reporting period.
D. Board of Directors: diversity policies
Pursuant to the Articles of Association, the composition of the Board of Directors must ensure a balance of gender, at least to the minimum extent required by statutory and regulatory provisions in force.
In this regard, it should be noted that the regulatory framework has recently been amended with two subsequent measures (conversion law No. 157/2019 of Italian Law Decree No. 124/2019 in force since 25 December 2019 and Italian Budget Law No. 160/2019 in force since 1 January 2020) according to which the gender balance legislation has been extended from three to six consecutive terms of office requiring that the least represented gender should obtain at least two fifths of the elected members, instead of one third as previously required.
With its Communication No. 1 of 30 January 2020, Consob clarified that, as part of its supervisory activity on the matter at issue, it will consider the principle of rounding up to the nearest upper number (set forth in para.3 of Art. 144-undecies.1 of the Issuers’ Regulations) as inapplicable, the reason being that it is arithmetically impossible to be applied to corporate bodies made up of three members. Therefore, with reference to these corporate bodies, Consob will consider rounding down to the lower unit to be in line with the new rules.
Subsequently, by resolution of 13 May 2020, Consob approved the amendments to the Issuers' Regulations, confirming the approach given in the aforementioned Communication of 30 January 2020. It was therefore reiterated that the criterion for calculating the number of seats on corporate bodies to be reserved for the least represented gender is that of rounding up. The criterion of rounding down is foreseen, instead, only in the case of corporate bodies of three members, due to the arithmetic impossibility of guaranteeing the gender balance based on the rounding up criterion.
The Articles of Association mechanisms for the election of Directors and Auditors by list voting ensure compliance with this provision. More specifically:
- the lists of Directors presenting at least three candidates must, in the identification of the candidates, comply with the principle of gender balance described above;
- if, after voting, a sufficient number of Directors belonging to the least represented gender are not appointed and therefore the gender balance requirement is not met, the candidate with the lowest ratio, whose election would result in failure to meet the gender balance requirement, shall be excluded. The excluded candidates will be replaced by the next candidates in the ranking, whose election would meet the gender balance requirement;
- in the election of the Board of Statutory Auditors, the lists presenting at least three candidates must ensure the representation of both genders in the identification of the first two candidates to the position of Statutory Auditor.
In accordance with supervisory and statutory rules, for the purposes of appointing or co-opting Directors, the Board of Directors shall identify in advance its most optimal composition in terms of both quality and quantity, identifying and motivating the appropriate theoretical profile of the candidates (including characteristics of professionalism and independence, if applicable), including, inter alia, the presence within the Board of appropriately differentiated profiles, with particular reference to gender.
E. Risk Committee: composition
A Risk Committee has been established within the Board of Directors of Carige with advising and proposing roles, in particular to support the Board in assessing the adequacy of the internal control and risk management system.
The Committee is composed of non-executive directors and a majority of independent directors, whose number (from a minimum of three to a maximum of five) is determined by the Board of Directors upon appointment in a manner that is consistent with the complexity of the mandate assigned to it by the Board. The members of the Committee must have the professional skills required to perform their role and, in particular, knowledge of risk governance and management in order to examine and monitor the guidelines and strategies defined by the competent bodies.
The Committee appoints a Chair to coordinate the proceedings from among its independent members.
At least one member of the Board of Statutory Auditors and one member of the Corporate and Group Affairs department shall take part in the work of the Committee, with the task of taking minutes. The Chair may invite other officers and department managers as well as external advisors to the meetings.
At the end of Temporary Administration (31/1/2020), the newly-established Board of Directors appointed by the Shareholders’ Meeting constituted the Risk Committee consisting of four members and proceeded to their appointment with term of office lasting until approval of the Financial Statements for the year ending 31/12/2022.
F. Risk Committee: role
The Risk Committee supports the Board of Directors on matters concerning risks, the internal control system and business organisation, paying particular attention to all the functional activities required to allow the Board of Directors to correctly and effectively determine the RAF (“Risk Appetite Framework”) and risk governance policies.
In practice, the Committee reports to the Board, at least on a six-month basis, during the approval of the annual and half-year financial report, on the activity carried out and on the adequacy of the internal control and risk management system. However, the Committee may report to the Board of Directors and to the Board of Statutory Auditors, through the Chair, also verbally, where necessary and whenever deemed useful.
In the past, the Risk Committee was also assigned the responsibilities envisaged for independent directors under the CONSOB Related Parties Regulation, the Bank of Italy Regulations on Connected Parties and the supervisory rules on “Shareholdings that may be held by banks and banking groups” .
However, at the end of Temporary Administration, the new Board of Directors identified the opportunity to establish a specific Related-Parties Committee, which has been vested with the functions required, as specified above, for transactions with related parties and connected persons under the current regulatory framework.
Please refer to the chapters of the Corporate Governance and Ownership Structure Report published in any given reporting period by the Issuer for further information on the composition, operation and functions assigned to the Risk Committee and the Related-Parties Committee.
G. Coordination between parties involved in the internal control and risk management system
In accordance with the provisions of Principle 7.P.3 of the Corporate Governance Code and in compliance with the current supervisory regulations, given that the circulation of information among and within corporate bodies is a pre-requisite for achieving operational efficiency and effectiveness of controls, Carige takes special care in organising both the disclosure and exchange of complete, timely and accurate information among the bodies holding functions of strategic supervision, management and control, in relation to the responsibilities of each one, as well as within each body.
In this respect, specific company regulations govern the identification of the parties required to regularly send information to the corporate bodies, in particular ensuring that those responsible for the control functions within the organisational structure of the Bank report directly to the Board of Directors, the Risk Committee and the Board of Auditors.
Furthermore, the “Group Regulations for the Coordination of Control Bodies and Functions” defines specific coordination activities between the bodies and functions of the Parent Company, as well as between the bodies and functions of the various Group companies, at each stage of the control process.
The flows activated between the control bodies and functions are summarised in detail in the Corporate Governance and Ownership Structure Report made available for any given reporting period by the Issuer, more specifically in the paragraph concerning coordination between the parties involved in the internal control and risk management system and in the paragraph concerning the role of the Board of Directors, which are referred to for additional information.
1.3 Risk governance: definition, strategy and risk monitoring of the Group
The preceding paragraphs presented an analysis of the activities carried out by the Group to manage risks and a description of the parties involved in these activities. The following paragraphs, on the other hand, offer a review of the various risks taken and/or that may be taken by the Group, with the aim of highlighting their main characteristics, aversion strategies, as well as the measurement and monitoring methodologies for each one.
A. Credit risk
Generally, credit risk is the possibility that a debtor of the Bank does not fully comply with the contractual obligations or does not meet the agreed deadlines.
In broader terms, credit risk also refers to the change in value of a credit asset linked to the change in the creditworthiness of a counterparty, when the change in risk is not counterbalanced by adjustments to the economic conditions granted to the customer.
Strategy
The Group’s credit supply mainly targets households, small businesses, small and medium-sized companies and the public administration, without however neglecting the corporate segment.
The Parent Company pursues the policy of consolidating its current market position through actions to increase the level of penetration on current customers, mainly via cross-selling, in any event without neglecting new business initiatives. Growth-boosting activities target the consumer and small business segments, as well as local corporate businesses.
The main objective outside the Liguria region is the assessment of the network potential to increase the customer base, with particular reference to the Consumer and Small Business segment and SMEs.
The main guidelines for the Group's credit policies focus on the:
- mitigation of credit risk to be pursued through a selective expansion of loans, guided by the borrowers' rating class and business sectors, together with a renewed emphasis on collateral;
- restructuring of the credit portfolio in accordance with the prospects for growth in the markets of operation;
- mitigation of concentration risk for loans to single-name customers or customer groups;
- simplification of the range of credit products offered.
Organisational aspects
The lending process provides for decision-making decentralisation within the scope of the decision-making powers defined by the Parent Company’s Board of Directors. Credit facility proposals are normally prepared by bank branches and advisory teams, then submitted to the authorised decision-making bodies -both at branch network and head office level- for approval, on the basis of the qualitative and quantitative aspects of the credit facilities and expected loss assigned to the borrower for rated segments. Subsidiary banks act within the limits of their powers
and restrictions as established by the Parent Company, through specific directives issued in accordance with Group Regulations under the existing statutory framework.
Monitoring and measurement methodologies
In relation to decision-making decentralisation, central organisational units have been assigned the task of verifying that assumed risk levels comply with the strategic policies formulated by the Administrative Bodies, with regard to counter-party credit ratings and in terms of formal compliance with internal and external codes of conduct.
The Carige Group credit risk measurement, management and monitoring process involves:
Credit Risk Management activities, aimed at the strategic governance of the Group’s lending activities, through portfolio quality monitoring based on the performance analysis of risk indicators from rating sources (PD and LGD) and other aspects of interest, with accurate monitoring of compliance against internal and statutory limits for risk concentration and capital adequacy with respect to credit risk taken; specific loan book monitoring processes have also been introduced, in line with the provisions of the supervisory rules on second-level controls performed by the Credit Risk Management functions;
Activities of an operational nature, to monitor the quality of loans disbursed. Specifically, a tool for the operational monitoring of credit is in place (“Monitora”, established in the Credit Division) and allows for the various areas of control activities to be combined with risk indicators developed according to the IRB approach, with a view to improving monitoring efficiency and managing credit with an approach ever more consistent with customer risk profiles. Within this framework, the monitoring process was strengthened by defining final deadlines for addressing credit positions showing major performance irregularities, after which, failing normalisation, they are classified as non-performing.
These activities feed into a reporting system used by the various company units responsible for monitoring Group credit risk.
Internal rating models were developed by the Parent Company based on historical data for the Retail segment (Consumers, Small market players and Small Businesses) and Corporate segment (SMEs and Large corporate). Banca Carige also implemented models for the consolidated determination of Probability of Default (PD), Loss Given Default (LGD), Exposure At Default (EAD).
The information sources used to estimate the probability of default (PD) pertain to three main areas of analysis that are used in varying degrees for the assessment of the segment by bank branches: financial information (financial statement data), performance-related information (in- house data and Central Credit Register data) and customer records. With regard to the SME and
Large Corporate segments, the statistical rating override procedure makes it possible to take account of significant data for the purpose of correct customer classification.
Expected Loss (the product of PD, LGD and EAD) was the parameter used to determine the decision-making route for loan applications in relation to counterparties from the retail segment (Consumers, Small market players and Small Businesses) and the Corporate segment (SMEs and Large Corporate).
Risk parameters (PD and LGD) are recalibrated in order to reflect the most recent risk developments in the Group's loan book.
Classification of non-performing assets is based on an ongoing process, which involves monitoring activities that are focused on the prompt identification of any irregularities in relationship management, changes in rating scores over time and any emerging events pointing to a potential impairment of the account.
Moreover, on behalf of all subsidiary banks, the Parent Company has introduced operating procedures for the automated flagging of positions with irregular loan repayment and IT monitoring tools to make credit management consistent with the risk profiles identified.
Measures triggered by the aforementioned monitoring activities are differentiated according to the degree of anomaly identified and comply with regulations approved by the Boards of Directors of all Carige Group banks.
Receivables that were classified -not automatically- as non-performing are reclassified to performing status subject to a positive assessment of the financial capacity of customers who, having overcome the difficulties that led to non-performing classification, are considered to be fully capable to fulfil their commitments with the Bank.
Credit risk mitigation techniques
The Group’s credit policy focuses with utmost care on the selection of credit, financed initiatives and borrowers and on the monitoring of customer relationship performance. Creditworthiness assessment is based on statistical indicators and qualitative information used to assess the borrower’s capacity to generate financial resources in line with debt repayment.
Medium/long-term loans are mainly backed by mortgages and, if a more significant risk profile is identified, the credit facilities are backed by personal guarantees (specific or general) and guarantees by loan-guarantee consortia.
In this context, personal guarantees and collaterals are obtained as deemed appropriate for credit risk mitigation. In light of the mortgage loans' share of the aggregate portfolio and in compliance with regulatory provisions, a value monitoring process for the assets pledged as collateral has thus been put in place.
More specifically, for a proper assessment of the extent of loan coverage for capital requirements calculation, the value of mortgaged property is subject to periodic revaluation based on statistical data obtained from a leading institute in real economy research.
Moreover, the process envisages that a new appraisal should be carried out if there is a significant impairment in the market value of the asset, with the aim of implementing the most suitable credit protection measures. A similar process is in place for leased real estate properties and securities pledged as collateral for loans to customers.
For properties pledged against exposures of significant amounts, a periodic check of the value of the collateral is conducted with the support of an estimation report of the value of the fixed asset by a network of independent experts.
B. Residual risk
Residual risk means “the risk that the credit risk mitigation techniques used by the bank are less effective than expected”.
Residual risk can therefore be reflected in the Credit Risk Mitigation (CRM) techniques used by the Group in the credit management process and in determining the relevant capital requirement for the purposes of the supervisory reports.
Strategy
Credit Risk Mitigation (CRM) techniques consist in ancillary contracts to the credit facilities or other instruments and techniques leading to a reduction in the risk of losses, which the legislation therefore recognises as a benefit in terms of capital absorption. As there are different eligibility requirements for the different CRM techniques, the Group has carried out a series of investigations over time to verify the consistency and completeness of contracts and internal regulations in relation to the regulatory requirements, defining a series of interventions aimed at ensuring compliance with the specific requirements regarding the different types of guarantees. These include for example a rationalised and computerised management of appraisal experts, by entrusting the Crif S.p.A. managed network of experts with the appraisals of loan-backing properties, whereas concerning the periodic revaluation process of real estate guarantees, a centralised revaluation process of all mortgages linked to mortgage loans has been active for some time, based on statistical indexes acquired from an institute specialising in studies on the real economy (Nomisma). With specific reference to second-level monitoring of property appraisals, which is important to determine the compliance of collateral with eligibility criteria, reported below are the main areas of focus:
monitoring focuses on the entire portfolio and is aimed at making sure that the appraisal value is correct; monitoring occurs by differentiated clusters of properties and is based on specific Key Risk Indicators (KRI) and related thresholds for each cluster; In 2020, cooperation with an external provider was initiated to assess the adequacy of the appraisals and to carry out the planned checks on the quality of service offered by the providers used by the Bank. The activity started with a pilot phase aimed at defining the processes and tools required to enable effective controls.
Monitoring and measurement methodologies
As part of the ICAAP process, the economic impacts will be quantified as a result of the findings of Level 2 controls and, in particular, based on the share of positions identified as irregular with respect to the portion of the portfolio sampled during the process.
C. Market risk
Market risk is related to changes in the value of a financial instrument or portfolio of financial instruments linked to unexpected changes in market variables (interest rates, securities prices, exchange rates, etc.).
EU Regulation 575/2013 (“CRR”) deals with market risk in Part Three, Title IV, dividing it into the following risk categories:
Position risk Expresses the risk arising from fluctuations in the price of financial instruments for factors relating to the general market performance (“generic” position risk) and the particular situation of the issuing company (“specific” position risk) Exchange risk Expresses the risk of suffering losses due to adverse changes in foreign exchange rates Position risk on commodities Risk arising from fluctuations in commodity prices
In the context of market risk, basis risk represents the risk of losses caused by mismatches in offsetting positions of opposite signs, which are similar but not identical. For more details on basis risk, please refer to the sections in this Chapter dealing specifically with this issue.
Finally, Part Three, Title V of the CRR deals with Settlement Risk, which is the risk originating from transactions in financial instruments which remain unsettled by the counterparty after their contractual due dates.
Strategy
The Board of Directors of the Parent Company defines the strategic policies and guidelines related to the assumption of market risk and identifies the levels of Risk Appetite and Risk Tolerance within the scope of the Risk Appetite Framework.
The Risk Control Committee monitors the dynamics of market risk and compliance with the limits, whereas the Finance and ALM Committee monitors the market risk management actions, operationally implemented by the Finance department.
The Risk Control Function guarantees the ongoing measurement and control of Group exposure to market risk by monitoring the Value at Risk (VaR) on a daily basis, also under stress scenarios.
The main sources of interest rate risk are activities carried out on bond-related financial assets and interest rate derivatives, both regulated and OTC.
The main sources of price risk are activities carried out on equity-related financial assets, equity funds and equity derivatives.
The Group’s investment portfolio management activities are carried out with a substantially conservative risk profile, with a view to maintaining a balanced risk/return ratio and paying particular attention to the Group’s liquidity profiles and, therefore, to the dynamics of the liquidity reserves (counterbalancing capacity).
Monitoring and measurement methodologies
For operational management purposes, the Parent Company Risk Management Function ensures daily monitoring of interest rate risk and price risk in the regulatory trading portfolio, at the same time checking compliance with the established operational limits.
Interest rate risk and price risk are measured by calculating the Value at Risk (VaR) and its breakdown into Interest Rate and Stock Risk factors. Risk Management uses VaR for operational management purposes, with the objective of measuring both the risks associated with financial instruments held in HFT portfolios (Other Business Model - OBMFT) and the risks associated with financial instruments allocated to banking book portfolios (HTC&S and HTC), by monitoring their dynamics over time and constantly verifying compliance with the operational limits defined in the Risk Appetite Framework.
VaR is calculated using a methodology based on a 1-year historical approach, with a 99% confidence interval and a 10-day holding period. Stress test analyses are also carried out, that highlight the impact in terms of both VaR and present value resulting from pre-set shocks that refer to specific past events. Stress scenarios are defined by Risk Management on the basis of particularly severe market conditions, taking into account the actual portfolio composition.
D. Operational risk
Operational risk is the possibility of suffering losses arising from internal or external fraud, inadequacy or incorrect functioning of company procedures, errors or shortcomings of human resources and internal systems, interruptions or malfunctions of services or systems (including computer systems), errors or omissions in the provision of services offered, or from external events; it also includes legal risk (for example, customer complaints and risks related to the distribution of products in disregard of the provisions governing the performance of banking, investment and insurance services, and to penalties arising from regulatory breaches or failure to comply with the procedures for the identification, monitoring and management of risks).
Strategy
The strategy for the mitigation of the operational risks which the Group’s activity is exposed to is reflected in the development of measurement methodologies and monitoring processes aimed at the activation of the most suitable technical-organisational solutions to reduce exposure to these risks and at the forward-looking fine-tuning of capital allocation strategies.
Monitoring and measurement methodologies
The Operational Risk Management (ORM) framework adopted by the Banca Carige Group foresees a process of identifying operational risks, aimed at measuring and collecting operational risk information through the coherent and coordinated processing of all relevant sources in order to build a complete database that is consistent with the Group’s activity.
In line with the principle of safeguarding the clarity and logical coherence of the framework adopted, this information is collected on the basis of some reference models aimed at ensuring a uniform classification of data. These models lie at the basis of the two processes used for the identification of operational risks:
collection of operational losses (LDC – Loss Data Collection), in order to build a dataset of operational risk events; self-assessment activity on operational risks, aimed at a forward-looking assessment of exposure to operational risks.
The Loss Data Collection process consists in the structured collection of information about operational (and reputational) events occurring within the Group’s operations. The Group has implemented a methodology to ensure the availability of uniform, complete and reliable data, a prerequisite for the use of operational risk measurement and management tools. The method of collection is defined continuously to intercept malicious events in the shortest time possible. Specifically, the operating event collection system involves the Bank’s departments in identifying
and reporting operational events. The objective of the process of gathering information about operational and reputational events is that of building a solid and structured system with all the historical loss data required, ensuring timely reporting and management of events and completeness and coherence of the information collected, including with a view to appropriately identifying any mitigation actions to be taken and therefore preventing operational and reputational risk events from reoccurring.
The process of Risk Self-Assessment is built with a forward-looking approach, identifying and evaluating the potential occurrence of operational events. The methodology implemented by the Banca Carige Group aims, through the collection of subjective ex-ante estimates, provided by expert professionals within the Group, to obtain a set of information useful for identifying and evaluating the potential degree of exposure to operational risks. Subjective estimates collected during the risk self-assessment process help to identify the Group’s vulnerable areas and consequently define mitigation actions. The methodology implemented by the Banca Carige Group requires the risk self-assessment to be carried out at company level by the Operational Risk Management office on an annual basis. The aggregated result of the assessments provided by the risk owners and any mitigation actions to be implemented are presented to the Board of Directors.
The Operational Risk Management Framework additionally includes a measurement, management and reporting phase.
As concerns measurement, for the purpose of quantifying its Pillar 1 capital, the Group has been using a “standardised” approach, which involves measuring the capital requirement separately for each individual regulatory business line on the basis of a relevant indicator and specific, predetermined risk ratios. The Business lines and their ratios are defined by the Supervisory Authority (Title III of EU Regulation 575/2013). For the purposes of measuring Pillar 2 capital (ICAAP), an operational risk VaR model was developed, duly calibrated and benchmarked against strategic guidelines, using the Group’s time series of operating losses.
With a view to gradual improvement, the management process involves the definition of operational risk assumption, reduction and transfer policies to be implemented in relation to the Group’s exposure to operational risk. This process is carried out on the basis of a conscious, targeted and objective cost/benefit analysis carried out by organisational bodies with the support of the CRO area. In general, the management tools available are: 1) risk reduction, i.e. reducing risk exposure through the implementation of risk mitigation and prevention actions. Generally this choice is connected with events with a high frequency of occurrence and a low economic impact; (2) the transfer of risk which provides for the use of traditional insurance–based risk mitigation or other techniques based on financial schemes (a.k.a. Alternative Risk Transfer) which, while leaving the risk factors unchanged, allow for transfer of the relevant financial impact. This choice is generally linked to events with a low frequency of occurrence and higher impact; 3) the assumption of risk (passive management) foresees the acceptance by the Group of a certain level against which capital should be set aside. This choice is generally linked to events with a low frequency of occurrence and lower impact.
The Banca Carige Group has also implemented a monitoring and reporting process for operational risks, deriving from the results obtained from the processes of identification, measurement and management of operational risks, in order to analyse and monitor the evolution of exposure over time and guarantee that adequate information is provided to the Top Management in a strategic operating perspective.
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In order to improve the Group's operational risk management system and, consequently, reduce the economic impact of potential operating losses, the Banca Carige Group continued to develop the instruments and processes described above, in accordance with the regulatory provisions of the “Standardised” Approach (Title III of EU Regulation 575/2013), adopted by the Group for estimating Pillar 1 capital requirements. Moreover, appropriate synergies were sought with IT risk management and monitoring; in this regard, since 2019, a new specific framework for IT risk measurement, monitoring and management has been applied, taking due account of recent regulatory updates and the new layout of the Group after the IT systems were fully outsourced.
The activities for preparing and populating the Italian Operating Loss Database (Database Italiano Perdite Operative - DIPO) established in 2003 by the Italian Banking Association (ABI), and which the Carige Group has supported since its establishment, have been incorporated in the ORM processes.
In particular, the IT system of all Group companies is centralised in the Parent Company which, in relation to the risks associated with business disruption, defines and maintains a Business Continuity and Disaster Recovery Plan aimed at identifying the interventions necessary to restore the Group's normal operations in crisis situations. The Plan was duly updated after the outsourcing.
E. Rate risk
The interest rate risk of the banking book is the risk that a variation in market interest rates may have a negative effect on the value of equity (a risk associated with equity) and on Net Interest Income (a risk associated with earnings) in relation to assets and liabilities in the Financial Statements that are not allocated to the trading book for supervisory purposes.
The exposure to such type of risk, with reference to transactions with a floating interest rate, is a direct consequence of balance sheet structures that are mismatched in terms of both maturity dates (maturity gap) and interest refixing (refixing gap). Exposure for transactions with a fixed interest rate depends on the maturity gap.
Rate risk can be broken down in more detail as follows:
Repricing risk Risk linked to a mismatch in maturities (fixed rate), in the methods and timing of refixing (variable rate) the assets and liabilities, which exposes the Bank to parallel shifts and other variations (shocks) of the interest rate curve Yield curve risk Risk of unexpected changes in the slope or shape of the interest rate curve (non-parallel shocks) Basis risk Risk that interest rates against which variable interest rate transactions are indexed may react differently in time and intensity to varying market conditions, inducing an imperfect correlation between the indexing parameters of lending and funding Optionality risk Risk linked to “explicit” or “implicit” options in the Banks’ assets or liabilities. Certain contractual forms include optional components which impose an analytical assessment for the purpose of measuring exposure to interest rate risk. Particular reference is made to the options for an early repayment of loans (prepayment) or bonds (callable and puttable) and to the withdrawal/payment of money from commercial lending and funding products with maturity “at sight”
Strategy
The Board of Directors of the Parent Company defines the strategic policies and guidelines related to the assumption of interest rate risk in the banking book and identifies the levels of Risk Appetite and Risk Tolerance within the scope of the Risk Appetite Framework.
The Risk Control Committee monitors the dynamics of interest rate risk in the banking book and compliance with the limits, whereas the Finance and ALM Committee monitors the actions for managing interest rate risk in the banking book, which are operationally implemented by the Finance department.
Monitoring and measurement methodologies
The Risk Management department guarantees the ongoing measurement and control of Group exposure to interest rate risk in the banking book, from both an equity and revenue perspective.
Monitoring the interest rate risk of the banking book consists in measuring the impact of changes in interest rates on both the equity fair value and the interest income expected over a predefined time period (gapping period).
For further details on the methodologies to measure rate risk exposure, please refer to Chapter 10 “Exposure to interest rate risk on positions not included in the trading book”.
Hedging
Interest risk hedging is mainly used for funding and lending components with medium/long-term initial duration. Fair value hedging is intended to immunise changes in the fair value of deposits and loans caused by changes in the financial market, while cash flow hedges are intended to hedge the variation of cash flows associated with floating-rate exposures. The Risk Management Department monitors hedge effectiveness for hedge accounting purposes in compliance with international accounting standards, with particular reference to the identification and documentation of the hedging relationship through the production of hedging cards. Hedge effectiveness is tested through both prospective and retrospective testing on a quarterly basis. The aims and strategies underlying these hedging transactions are to reduce interest rate risk by entering into unquoted OTC derivative contracts.
F. Real-estate risk
The Carige Group's real-estate risk consists in potential losses due to the negative fluctuation of the Group companies' real-estate portfolio value; customer-owned mortgaged properties are excluded.
Calculation of the risk associated with the real estate portfolio distinguishes the ‘for own use’ component (branches and agencies) from the ‘not for own use’ component of banking and financial activities.
Strategy
The risk is measured as part of the ICAAP process in the time horizon under consideration, in line with the contents of the Strategic Plan: the scope of reference is therefore represented by the properties owned by the Banks of the Group.
Monitoring and measurement methodologies
The assessment of real-estate risk and the consequent absorption of internal capital are based on the methodology used for the ECB’s Comprehensive Assessment and are diversified depending on whether the property is or is not ’for own use’.
G. Liquidity risk
Liquidity risk, in its main meaning as funding liquidity risk, is the risk of the Group not being able to meet its cash outflow obligations (both expected and unexpected) and its need for collateral at an economical price, without jeopardising the core business or financial situation of the Group. Liquidity risk can be generated by events that are closely connected with the Group and its core business (idiosyncratic) and/or with external events (systemic). The two types of risk factors are not alternative to each other, and may occur jointly. The risk of liquidity is generally divided into:
Funding liquidity risk Inability to obtain adequate funding
Market liquidity risk Existence of limits to the disposal of assets
Liquidity risk also includes the risk of having to discharge payment obligations at non-market costs, i.e. by incurring a high cost of funding.
Strategy
The purpose of liquidity risk governance, management and monitoring is to promote the balancing of incoming and outgoing cash flows in the short term and, at the same time, minimise structural imbalances in the medium/long-term liquidity profile, to ensure a high degree of solvency and optimise the cost of funding.
From the point of view of the organisational model, the separation between liquidity risk management and liquidity risk monitoring processes constitutes the founding principle of the Group’s liquidity risk management model, and this is achieved by assigning specific roles and responsibilities to the various corporate bodies and functions involved.
In particular, the Board of Directors of the Parent Company defines the strategic policies and guidelines related to the assumption of liquidity risk in terms of Risk Appetite and Risk Tolerance.
The Risk Control Committee monitors the dynamics of liquidity risk and compliance with the limits, whereas the Finance and ALM Committee monitors the actions for managing liquidity risk, which are operationally implemented by the Finance department.
The Liquidity Policy of the Banca Carige Group involves the centralisation of the liquidity risk management and monitoring process at the Parent Company, Banca Carige. In particular, the Parent Company is responsible for the development and updating of the liquidity policy and manages funding and the liquidity risk at Group level.
The Liquidity Policy also has a separate system of limits for short term (less than 1 year) and medium/long term (with maturity over 1 year) liquidity positions.
The objective of controlling short-term liquidity (operational liquidity) is to guarantee that the Group is in a position to face its expected and unexpected payment obligations over a reference period of 12 months, without jeopardising day-to-day operations. Short-term liquidity management therefore aims to continuously rebalance incoming and outgoing cash flows.
The objective of medium/long-term liquidity management (structural liquidity) is to ensure that an appropriate ratio of assets and liabilities is maintained, limiting pressures on short-term funding. Structural liquidity is therefore managed with a view to both redistributing the maturities of funding, in order to reduce the less stable funding sources, and financing Group growth with strategic funding activities in terms of maturities.
Monitoring and measurement methodologies
The Risk Management department regularly ensures the measurement and control of the Group’s exposure to operational (short-term) and structural (medium-long term) liquidity risk. Operational liquidity is measured and monitored on a daily basis with the operational maturity ladder. The operational maturity ladder enables an analysis of the distribution of positive and negative cash flows over time, any gaps, as well as the reserves (counterbalancing capacity) that are available to deal with such gaps. The Risk Management department constantly monitors compliance of the operating limits that apply to the balances of cash flows only, as well as to the total balances of cash flows and reserves. The Group also performs a stress test against the maturity ladder in use, with a view to analysing the effect of crisis scenarios on the liquidity position and assessing the adequacy of liquidity reserves in place, which are in turn subject to a “stressed” valuation. In addition to liquidity ratios, the Liquidity Coverage Ratio (LCR) is monitored, comparing the value of highly liquid assets with the value of net cash outflows in a 30-day stress scenario.
31/12/2019 31/01/2020 31/03/2020 30/06/2020 30/09/2020 31/12/2020
Liquidity buffer 3,484,019 3,602,646 3,919,760 4,271,689 4,488,573 4,414,101
Net liquidity outflow 1,360,036 1,344,254 1,360,441 1,470,064 1,573,443 1,624,554
Liquidity coverage ratio (%) 260% 272% 294% 303% 297% 285%
Values calculated as the unweighted average of end-of-month observations in the previous twelve months
Structural liquidity is measured and monitored with the structural maturity ladder. The structural maturity ladder is based on the maturity mismatch model and includes demand items covering a period of up to 20 years and beyond and includes certain or modelled capital flows generated by
all the balance sheet items. In this regard the Risk Management department has defined the indicators in terms of a gap ratio on maturity dates over one year and the relative monitoring limits. In addition to monitoring operating indicators, the Net Stable Funding Ratio (NSFR) is monitored, which compares the amount of funding available with compulsory funding, according to the types of liquidity and the residual useful life of the various assets held. Medium/long-term liquidity management policies, at Group level, take these limits into account when planning strategies and budget. Lastly, the Group has adopted a Contingency Funding Plan (CFP), to protect the Group and its individual companies from stress conditions or from any other type of crisis, guaranteeing business continuity when faced with a sudden reduction of available liquidity. For this reason, Early Warning Indicators (EWI) that can forecast the emergence of stress conditions or a liquidity crisis are monitored.
H. Risk arising from securitisation transactions
Risk arising from securitisation is the risk that the economic substance of the securitisation transaction is not fully reflected in the risk assessment and management decisions.
The quantitative assessment of risk arising from securitisation transactions carried out by the Carige Group is performed in accordance with the provisions of the applicable legislation.
Monitoring and measurement methodologies
As regards the measurement of risks related to the various transactions performed by the Group over time, a qualitative assessment methodology has been established with the introduction of a scorecard, which is filled out by the various owners involved in the process and includes the assessments related to three specific areas of investigation, namely:
• expected cash flows;
• legal aspects;
• entities involved.
Each of the investigated areas is assigned a score, then weighted and normalised on a scale, according to a logic of increasing risk levels.
For further details on the current transactions, their economic/financial profiles, monitoring methods and related organisational controls, as well as their reporting methods, see Chapter 8 “Exposures to securitisation positions” below.
I. Strategic Risk
Strategic risk is the current or future risk of declining profits or capital resulting from changes in the operating environment or incorrect business decisions, inadequate implementation of decisions, poor responsiveness to changes in the competitive environment.
Monitoring and measurement methodologies
Given its nature, strategic risk is not easy to measure, but it may be subject to a qualitative assessment to determine areas for potential improvement in the processes of making and monitoring strategic decisions, while steering any corrective action that may become necessary.
The strategic risk assessment methodology adopted by the Carige Group involves the use of scorecards (drawn up by the internal functions of Organisation, Risk Management and Commercial), which permit a quantitative analysis of:
I. the level of consistency of the actions taken by the Bank with the main objectives of the Strategic Plan in force;
II. the strategic planning process and the main elements which may affect performance, with a particular twofold focus on: the Bank's ability to prevent the adoption of incorrect business decisions or the inadequate implementation of decisions and the Bank's responsiveness to changes in the competitive environment in which the Group operates.
Qualitative assessments were run in parallel with the quantification of business risk, which is intended as the risk of adverse or unexpected changes in fee and commission income compared to forecasts, in relation to volatility in volumes due to competitive pressure or market circumstances.
J. Reputational Risk
Reputational risk is the current or future risk of declining profits or capital resulting from a negative perception of the image of the bank by the stakeholders (customers, suppliers, employees, shareholders, investors, supervisory authorities, etc.).
Monitoring and measurement methodologies
Given its overarching and pervasive nature, reputational risk is not easy to measure. At the same time, it is possible to define management policies and assessment analyses of areas at greater risk in order to disseminate a culture of risk prevention and identify actions for correction and mitigation.
In this context, the Carige Group's reputational risk is managed by having appropriate organisational mechanisms in place to monitor and mitigate risk. These mechanisms involve a number of functions and bodies, each with distinct areas of competence and responsibility for monitoring and managing specific areas of risk, which include, but are not limited to, Compliance, the Risk Control Committee, the Supervisory Body pursuant to Legislative Decree 231/2001, the Manager pursuant to Legislative Decree 231/2001, the Manager pursuant to Legislative Decree 81/08. Moreover, the Group adopts a Code of Ethics describing the values on which its identity is based and the principles of conduct that lie at the heart of the activities it performs. Compliance with the Code of Ethics is required of any person who directly or indirectly maintains relations with the Group (suppliers, business partners, contractors, etc.).
A qualitative assessment aimed at steering management actions for corrective and/or mitigation purposes takes into account any events which are potentially capable of generating reputational risks as well as stakeholders relevant for preserving the Group’s image and reputation. The areas under observation include: the management of complaints; customer retention ability, with an assessment of customer acquisition rates; the level of customer satisfaction through customer satisfaction surveys; media exposure through periodic media monitoring; and, finally, the evaluation of the Company’s relationship with its staff through an assessment of the quality of its training, performance achieved, ability to retain qualified resources.
Aiming to strengthen the management of this risk, a framework for the continuous measurement, management and monitoring of reputational risks was defined, which involves the structuring of processes, methodologies and tools aligned to the industry’s best practices, guidance provided by the legal framework of reference (e.g. Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) - European Banking Authority), and consistent with the characteristics and specificities of the Group. Within this framework, appropriate synergies were put in place, with activities designed to further develop the operational risk management framework; in particular, the specific aspects required for an assessment of reputational factors were integrated in the operational losses collection process (Historical Data Collection, HDC).
The reputational risk measurement and management process being developed pursues the following main objectives:
prevention,with a view to minimising the occurrence of reputational risk events based on the analysis of what has already occurred (retrospective analysis) and developing a forward-looking evaluation of what might happen (forward-looking analysis). Continuous monitoring of risk exposure provides information to support the definition of actions aimed at reducing/mitigating the possibility that an event with negative effects on the company’s reputation may occur; optimisation of organisational and monitoring mechanisms dealing with reputational risk; containment and recovery, with a view to adequately and promptly responding to any damage to the Group’s reputation that may be caused by particular situations of reputational crisis (ex-post management), including through appropriate escalation mechanisms.
More specifically, the process for the periodic collection of KRIs (Key risk Indicators) was consolidated with the support of the Company’s units owning the risk. KRIs are useful for assessing the performance of the main metrics, which might be influenced by the Bank’s reputation.
In addition, a process was set up to gather information from the media that may have an impact on the Group's image.
K. Concentration risk
Concentration risk is the risk arising from exposure to individual customers or groups of connected customers (single name concentration) or to counterparties belonging to the same sector (geo- sectoral concentration), therefore with multiple correlated trends as they are exposed to shared risk factors.
Quantification of an additional capital requirement for this risk helps to confirm the assumption of the loan book infinite granularity underlying the standardised and IRB credit risk models.
Strategy
The Carige Group pursues a growth strategy that, in the medium term, ensures adequate profiles for diversifying the loan book, both at “single name” level and as regards exposure to certain production sectors or geographic areas, consistently with the specificities of the local areas served by the Group. This approach is reflected in priority being preferably given to the growth of the Retail segment, accompanied, however, by wide support for the Corporate segment, within the framework of a selective growth policy. With reference to the risk of single name concentration, specific limits have been defined in the assumption of risk from groups of connected customers in order to ensure an adequate level of loan book fragmentation.
Monitoring and measurement methodologies
As mentioned in the paragraph on credit risk measurement techniques, the methodology for estimating the Pillar 2 requirement is such as to duly consider any concentrations found in the banking book of the Banca Carige Group.
The risk of single-name concentration, concerning exposures rated as performing, is quantified by using techniques that simulate losses associated with large exposures.
The risk of geo-sectoral concentration in relation to performing exposures is represented by the Marginal Contribution to VaR of the individual geo-sectoral clusters, identified according to a principle of correlation between the time series of the annual variations of decay rates.
L. Country Risk
Risk of losses caused by political or other events occurring in a country other than Italy. The concept of country risk is broader than that of sovereign risk as it is related to all exposures, irrespective of the nature of the counterparties, be they natural persons, businesses, banks or public administrations.
Strategy
In view of the nature of the operations of the Carige Group, mostly oriented to the domestic market, exposures potentially subject to this type of risk are marginal.
Having said this, the evaluation of the risk profiles linked to the occurrence of events in the country of origin that may compromise the solvency of borrowers falls, from a managerial point of view, within the broader and more articulated assessment of the counterparty’s credit rating, particularly when the risk is assumed, in the form of either investment in debt securities or the granting of loans.
The Group’s credit policy guidelines take account of this specific type of risk.
Monitoring and measurement methodologies
Country risk is measured by tracking exposures in securities and receivables of the Carige Group Banks to parties (sovereign governments, financial institutions, businesses, natural persons, etc.) residing in foreign countries potentially subject to political or other events, the occurrence of which may result in partial or total default of the borrower.
Each recorded exposure is associated with a country rating formulated by a third party (the Italian export credit agency, SACE) according to that risk; the exposure is then weighted according to the risk judgment expressed in the country rating and the total amount of the weighted exposures constitutes the measure of exposure to this specific risk.
M. Transfer Risk
Risk that a bank, exposed to a counterparty, which is financed in a currency other than that in which it receives its main sources of income, may incur losses due to the debtor’s difficulties in converting its currency into the currency in which the exposure is denominated.
Transfer risk is normally considered as a component of Country risk, specifically related to events in the field of currency convertibility, restrictions to capital movements, strong devaluations and similar events, which any party whose main sources of income are denominated in a risk currency is exposed to.
Strategy
In view of the nature of the operations of the Carige Group, mostly oriented to the domestic market, exposures potentially subject to this type of risk are marginal.
Similarly to Country risk, the assessment of any risk profiles linked to possible restrictions in currency conversion and/or circulation in certain countries, such that may compromise the solvency of borrowers, is, from a risk management point of view, part of the broader and more articulated assessment of the counterparty’s credit rating, particularly when risk is assumed.
The Group’s credit policy guidelines take account of this specific type of risk.
Monitoring and measurement methodologies
Given that, in principle, at individual counterparty level, exposure to transfer risk depends on the amount of cash flows denominated in a risk currency in relation to the overall company size (turnover, capital invested, the presence of alternative flows, etc.), as an approximation it was decided that the perimeter of potential transfer risk exposure should coincide with the portfolio of customers/issuers residing in one of the countries considered to be at risk in terms of currency convertibility.
Transfer risk is measured by tracking exposures in securities and receivables of the Carige Group Banks to parties (sovereign governments, financial institutions, businesses, natural persons, etc.) residing in foreign countries potentially subject to restrictions in the conversion or circulation of national currency.
Each recorded exposure is associated with a rating formulated by a third party (the Italian export credit agency, SACE) according to that specific risk (thus different from the broader and more generic country risk); the exposure is then weighted according to the risk judgment reflected in the rating related to currency conversion risk and the total amount of the weighted exposures constitutes the measure of exposure to this specific risk.
N. Basis Risk
In the context of market risk, basis risk represents the risk of losses caused by mismatches in offsetting positions of opposite signs, which are similar but not identical. The Supervisory Authority requires that, in consideration of this particular risk, special attention should be paid by banks which, calculating their capital requirement for position risk in accordance with the standardised approach, compensate positions in one or more equity instruments included in a stock index with one or more positions in futures or other derivatives related to that index or compensate for opposite positions in futures on equity indexes, which are not identical in terms of maturity and/or composition.
Strategy
Exposure to basis risk is included in the market risk assessment, which is carried out daily by the Risk Management department using VaR analyses; moreover, market risk is not significant as a whole, given the size of the trading book, of which basis risk constitutes a residual portion.
Monitoring and measurement methodologies
Basis risk is measured by using the internal VaR model, applied to more precisely measure the market risk of the trading book, which also includes the risk of mismatched movements in opposite-sign exposures held in the portfolio.
O. Sovereign risk
Risk concerning the capacity, or the will, of sovereign debtors to honour their payment commitments. It refers not only to the actual availability of resources, but also to reputation and the existence of previous restructuring of government debt.
Strategy
The evaluation of the risk profiles linked to the occurrence of events in the country of origin that may compromise the solvency of borrowers falls, from a risk management point of view, within the broader and more articulated assessment of the counterparty’s credit rating, particularly when the risk is assumed, in the form of either investment in debt securities or the granting of loans.
Monitoring and measurement methodologies
Exposure to sovereign risk for the positions included in the HTC&S portfolio is measured using the analyses required under the market risk framework (VaR and Present Value sensitivity) and assessing the impacts of specific scenarios (i.e. methodology applied under the 2018 EBA stress testing process). The choice of the scope of analysis is reflective of the accounting criteria (positions at fair value through OCI). Stress factors and the severity of the stress applied are consistent with those defined for the ICAAP stress scenario.
P. Risk from defined benefit pension schemes
Risk that the contributions paid/set aside for defined-benefit pension plans are not sufficient to cover the guaranteed benefits in relation to unforeseen demographic dynamics (a.k.a. actuarial risk) and/or that an insufficient return on assets in which such contributions have been invested may occur (a.k.a. financial risk), with consequent additional charges for the bank.
Strategy
Three complementary pension funds are managed by the Carige Group:
Pension Fund of Banca Carige S.p.A. (hereinafter FIP Carige); Pension Fund of Cassa di Risparmio di Savona S.p.A. (hereinafter FIP Carisa); Pension Fund of Cassa di Risparmio di Carrara S.p.A. (hereinafter FIP Carrara).
Following the merger of Cassa di Risparmio di Savona S.p.A. and Cassa di Risparmio di Carrara S.p.A., the pension funds established within the above-indicated companies have remained separate also for accounting purposes within the merging company Banca Carige S.p.A.
The Funds are not, however, structured in individual accounts and are closed to new participants; in particular, only retired employees are registered with FIP Carrara, as the defined contribution section which the employees participated in, was closed in February 2015, in compliance with the resolution taken by the Board of Directors of Cassa di Risparmio di Carrara on 10/11/2014.
Moreover, the three funds do not have autonomous legal personality, and:
the Carige and Carisa funds, are constituted as accounting entries within the total assets of Banca Carige S.p.A.; therefore, they have no plan assets; the Carrara fund is established as a segregated and autonomous fund pursuant to art. 2117 of the Italian Civil Code, as part of the overall assets of Banca Carige S.p.A.
IAS19 distinguishes “post-employment benefits”, i.e. post-employment benefits due after termination of the employment relationship, such as the funds in question, into defined contribution plans and defined benefit plans. Defined benefit plans are characterised by the fact that actuarial and investment risks are not transferred to an outside party or to the employee, but fall on the Entity.
For IAS purposes, the aforesaid Funds are post-employment defined benefit plans.
The Entity’s obligation consists in the payment of:
direct pensions to retired employees; indirect pensions to survivors of employees who died while they were employed; dependants’ pensions, to the survivors of former employees who died after retirement.
Monitoring and measurement methodologies
For the purpose of drawing up the technical budget of a defined benefit pension fund in accordance with IAS 19, the actuarial values to be determined are:
the Defined Benefit Obligation (DBO), which represents the average present value of pension benefits at the date of assessment; the Current Service Cost (CSC), which represents the average present value of the benefits accrued by the workers in service during the financial year. In the case of FIP Carrara, as all of its members are retirees, the CSC is zero; the Interest Cost (IC), which represents the interest on the net liability (difference between DBO and plan assets at fair value) at the beginning of the year; the plan assets at fair value, which represents the present value of the fund assets. For the Funds in question, which do not have independent legal personality, there are no plan assets.
Ultimately, the risks associated with the defined benefit funds relate to both the sums that are recognised in profit or loss (Interest Cost and Current Service Cost), and sums charged to the Balance Sheet - Valuation Reserve (Other Comprehensive Income “OCI”) in connection with actuarial losses (variation of the Defined Benefit Obligation). The latter evaluative component represented by actuarial gains/losses constitutes the main risk driver.
Q. Risk of Excessive Financial Leverage
The Supervisory Authority defines the risk of excessive financial leverage as “the risk that a particularly high level of indebtedness with respect to the own funds available makes the bank vulnerable, requiring the adoption of corrective measures to the business plan, including the sale of assets with the recognition of losses which could result in value adjustments also on the remaining assets”2.
Monitoring and measurement methodologies
Financial leverage is measured by the leverage ratio, which correlates the company’s assets (Tier 1) with total assets, including off-balance sheet assets, the exposure to which is quantified using appropriate conversion factors. The leverage ratio is one of the RAF indicators, in which Risk Appetite and Risk Tolerance values have been defined, and are specifically monitored.
2 See ‘New provisions for the prudential supervision of banks’ (Bank of Italy Circular No. 285/2013, Title III - Chapter 1, Annex A - risks to be assessed in the ICAAP).
R. Money laundering and terrorist financing risk
A risk that identifies the criminal acts involving money laundering, namely the conversion and transfer of property from a criminal activity or its purchase, detention and use, as well as the concealment or disguise of the true nature of the illicit origin of the property, in addition to other aspects related to terrorist financing.
Strategy
In strict adherence to the FATF model, the methodology contained in the standards for an adequate organisational structure issued by the Bank of Italy provides for the process to be divided into the following macro activities:
identification of inherent risk: the recipients identify current and potential risks to which they are or may be exposed, including in consideration of elements provided by external information sources; vulnerability assessment: the recipients analyse the adequacy of the organisational structure, and prevention and control safeguards with respect to risks previously identified, in order to detect any vulnerabilities; residual risk assessment: the recipients analyse the level of risk which they are exposed to in relation to the level of inherent risk and the soundness of mitigation safeguards in place; remedial actions: the recipients take appropriate remedial actions in view of any existing shortcoming and adopt appropriate measures to prevent and mitigate AML risk.
The self-assessment framework consists in an RBA (Risk Based Approach) model composed of:
a logical framework for the collection of quantitative information; a logical framework for the collection of qualitative information; criteria for the formation and organisation of the data set (risk factors); algorithms for qualitative and quantitative information processing and risk profile estimation; IT infrastructure for the production of evidence (e.g. excel spreadsheets or other software tools).
The methodological framework consists of four logical sections, structured into dedicated environments for the collection, classification and processing of the information that make up the data set:
inherent risk assessment form; vulnerability assessment form; residual risk assessment form; output report generation form.
Monitoring and measurement methodologies
Self-assessment involves the following logical and formal steps:
calculation of "inherent risk" for each line of business identified, using specific indicators designed to measure the intermediary's operations with reference to the "Key Risk Indicators" identified; Inherent risk analysis is methodically conducted through the development of KRIs or risk indicators, i.e. qualitative and quantitative facts that can be considered as evidence of exposure to risk or of the potential occurrence of adverse events; in other words, the data set is constructed by processing the information and data collected for the development of the KRIs, specifically conceived of and adjusted for each business line by taking different risk factors into account; according to the traditional Risk Management approach, the following must be taken into consideration for an estimation of risk exposure: . likelihood of the occurrence of an adverse event; . severity of the impacts of the occurrence of an adverse event on the Bank, independent of the economic measures in place. The model developed assigns a frequency measure to the adverse event underlying each KRI, i.e. for each relevant element identified in the risk factors and within the business line.
Inherent risk by business line is calculated as the average potential risk scoring assigned to the kth KRI, weighted by level of severity (assigned weight).
푛 ∑푘=1(푠푐표푟푒푘∗푠푒푣푒푟푖푡푦푘) 퐼푁퐻퐸푅퐸푁푇 푅퐼푆퐾 휇 = 푛 ∀ 퐵푢푠푖푛푒푠푠 퐿푖푛푒 ∑푘=1 푠푒푣푒푟푖푡푦푘
determination of "vulnerability" for each business line / risk area (in terms of adequacy of the organisational structure and safeguards in place). Once the intensity of inherent risk is determined for each of the intermediary's business lines, the level of vulnerability of the relevant system of controls and safeguards must be assessed for each business line. The system of controls and safeguards is designed under the methodological framework as a set of deterrent measures adopted by the Bank to mitigate potential risk. Following the approach presented in the Bank of Italy's note, the system of controls and safeguards is assessed by taking into account the following clusters of control:
organisational framework; internal control system; inherent risk awareness.
The conduct of the assessment aims to specifically ascertain the existence and effectiveness of the aforesaid clusters of control, breaking down the system of controls and safeguards into its most basic components, i.e. into granular deterrence measures.
S. Equity investment risk
Risk of potential impairment losses arising from non-speculative financial investments in companies outside the scope of consolidation.
Strategy
In April 2015, the Bank adopted the ‘Group Regulations governing the process of equity investments’ and a policy containing strategies and policies on equity investments in non-financial companies. The Parent Company performs management and coordination activities over its subsidiaries and promotes the efficiency, enhancement and entrepreneurial interest of the individual companies, without prejudice to their due autonomy, and of the Group as a whole, in compliance with the principles of correct corporate management, safeguarding their stability and profitability.
The management of equity investments in non-financial companies, with specific regard to the acquisition and disposal of equity interests, mainly takes into account the development and growth opportunities for the Group's core business resulting from the investment, both from the standpoint of the business initiatives implemented by the subsidiary and from a promotional point of view. Investments in non-financial companies follow a logic of differentiated allocation of Group resources with the aim of achieving direct and indirect economic returns in the medium/long term in terms of dividend distribution and commissions received as a "reference" banking intermediary for the subsidiary company.
The management of equity investments of this type may also be oriented towards establishing or maintaining and developing significant relationships with companies or entities reflecting the Bank footprint areas, or having systemic importance as they are functional to the Group's activities, or promoted by trade associations or other entities or groups with economic or social importance. This is aimed at promoting the Group's image and brand, both among institutional stakeholders and depositors/investors.
Equity investments acquired as a result of the conversion of receivables from companies in temporary financial difficulty or as a way to recover receivables from a subsidiary company or from a shareholder in a subsidiary company, do not fall within the scope of the investment objectives described above. In both cases, the cost-effectiveness of the transaction compared to other forms of credit protection must be carefully assessed.
In case of acquisition of equity investments in companies in temporary financial difficulty, a recovery plan with a maximum duration of five years, shared by a number of banks representing a high share of the overall exposure to the system, shall be submitted for approval to the management body of the Group Bank involved and, if different, of the Parent Company, for its required favourable opinion, and the lead bank in charge of verifying the correct execution of the plan and the substantial achievement of the objectives pursued shall be identified.
The acquisition of direct equity investments in the debtor company in order to recover the receivable shall, on the other hand, be aimed exclusively at accelerating the procedures for asset liquidation through one or more transactions to be submitted to the prior approval of the management Body of the Group Bank involved and, if different, of the Parent Company for its required favourable opinion.
In any case, investment decisions and the management of the portfolio of equity investments in non-financial undertakings shall be guided by a risk/return tradeoff.
As required by Supervisory regulations, equity investments may not be acquired in excess of the available margin for investment in shareholdings and real estate. Moreover, this is without prejudice to the overall limit and the limit on the concentration of qualified investments in non- financial companies, which shall respectively be contained within 60% and 15% of eligible capital at a consolidated level, as required by regulations in force.
Monitoring and measurement methodologies
Item “equity investments” includes investments in subsidiaries not held for sale, recognised in the financial statements according to the equity method. Initial recognition is at the settlement date. Classified under this category are subsidiaries excluded from full consolidation and associates excluded from application of the equity method when they are not considered significant. These companies are recognised at cost. At the end of each reporting period, impairment testing is performed when there are signs that an equity investment may need to be written down. These signs are normally identified in an investment’s internal and external factors, i.e.:
the equity investment’s value has declined during the period; changes have taken place in the environment in which the investee operates; market interest rates have increased during the period; the economic performance of the investment is, or will be, worse than expected. If any of these conditions is met, the recoverable value of the investment is calculated, i.e. the higher between the fair value less costs to sell and its value in use. If the recoverable value proves less than the accounting value, the equity investment is written down. The value in use is calculated as the present value of future cash flows generated by the investment, applying a market rate on these flows that reflects the cost of capital and risks specific to the investment. When calculating the value in use it is also necessary to discount the final value of the presumed disposal of the investment on the basis of a hypothetical price that is agreed in an arm’s length transaction between independent, knowledgeable, willing parties.
If an impairment loss recognised in prior periods no longer exists or has decreased, a reversal is recognised in profit or loss. In this case, the resulting value of the equity investment cannot exceed the cost prior to write-down.
Equity investments are derecognised when the assets in question are sold, substantially transferring all related risks and rewards, or when the contractual rights to cash flows have expired; the value
reported under “Equity investments” corresponds to the amount indicated in item 100 of the Assets of the Consolidated Balance Sheet. It is noted that the equity investments set out in item 100 are all unlisted and measured using the equity method or at cost if they have no significant impact on the accounts.
With regard to equity investments as a whole, according to the regulatory definition, compliance with the following regulatory limits is periodically monitored:
capital available, defined as the difference between Eligible Capital and assets invested in real estate and equity investments; total holdings in non-financial undertakings not exceeding 60% of the institution’s eligible capital; every holding in non-financial undertakings not exceeding 15% of the institution’s eligible capital. Limits for non-financial undertakings are also checked under stress conditions, with the calculation thus including the total amount of investments in companies in temporary financial difficulty or for debt collection.
2. SCOPE OF APPLICATION
QUALITATIVE INFORMATION – art. 436 CRR
The scope of application of this document is the scope of the Banca Carige Banking Group. The Banking Group is made of the subsidiaries that carry out banking, financial and real estate activities. The concept of control applied is that outlined in IFRS 10 - Consolidated financial statements. At the reporting date, no jointly controlled companies were identified, to which IFRS 11 - Joint Arrangements applies. Subsidiaries exercising dissimilar activities are included in the consolidation area of the statutory financial statements, drawn up in accordance with the IAS/IFRSs, but are excluded from the scope of this disclosure. As at 31/12/2020, the two areas of consolidation do not coincide, as control of the company St. Anna Golf S.r.l. was acquired. Since the activity was not considered as part of the core business, it was decided that it should not be included in the Banking Group. During the reporting period, control was also acquired of the company St. Anna Gestione Golf Società Dilettantistica a r.l. which, given its non-significant size (carrying amount of EUR 0.1 mln, total assets of EUR 0.5 mln, shareholders' equity of EUR 0.1 mln, loss of EUR 0.3 mln as at 31/12/2020) and the activity carried out, it was decided that it should be excluded from the scope of consolidation for prudential and accounting purposes.
As regards the scope of business, subsidiaries can be divided into banking institutions (Banca Carige S.p.A, Banca del Monte di Lucca S.p.A, Banca Cesare Ponti S.p.A.), trust companies (Centro Fiduciario C.F. S.p.A. in liquidation), securitisation vehicles (Argo Mortgage 2 S.r.l., Lanterna Finance S.r.l., Lanterna Consumer S.r.l. and Lanterna Lease S.r.l.), vehicles for the issuance of covered bonds (Carige Covered Bond S.r.l. and Carige Covered Bond 2 S.r.l.) and real estate companies (Carige Reoco S.p.A.). It is noted that the special-purpose vehicles Argo Mortgage 2 Srl, Lanterna Finance Srl, Lanterna Lease S.r.l., Lanterna Mortgage S.r.l., Carige Covered Bond Srl and Carige Covered Bond 2 Srl were all consolidated line by line. The assets were not derecognised from the financial statements of the respective transferors under either the securitisations or disposals for the issuance of covered bonds, as all connected risks and rewards were substantially retained by the Group.
It is noted that no material or legal restrictions or constraints exist that may hinder the prompt transfer of capital resources within the Group. The only existing constraints are the ones that can be traced to (i) regulatory provisions, which may require the preservation of a minimum amount of own funds or a Liquidity Coverage Ratio (LCR) or a ban on dividend pay-out, and (ii) the Italian Civil Code provisions on reserves and profit distribution, or (iii) regulatory requirements including the prohibition, under art. 2358 of the Italian Civil Code, for any stock company to provide financial support to its shareholders or any third party to facilitate the purchase or the subscription of its own shares, the prohibition for subsidiaries to subscribe for shares of the parent under art. 2359-quinquies of the Civil Code and the prohibition of the reciprocal subscription of shares under art. 2360 of the Civil Code.
QUANTITATIVE INFORMATION – art. 436 CRR
2.1 Consolidation area as at 31 December 2020 Operating Registered Shareholding relationship Treatment Company name held by for accounting for prudential office office % held purposes purposes A. Companies A.1 Fully consolidated Banking Group 1. Banca CARIGE SpA Genoa Genoa 2. Banca del Monte Lucca SpA Lucca Lucca A1.1 69.97 fully consolidated fully consolidated 3. Banca Cesare Ponti SpA Milan Milan A1.1 100.00 fully consolidated fully consolidated 4. Centro Fiduciario C.F. SpA in liquidation Genoa Genoa A1.1 96.95 fully consolidated fully consolidated 5. Argo Mortgage 2 Srl Genoa Genoa A1.1 60.00 fully consolidated fully consolidated 6. Carige Covered Bond Srl Genoa Genoa A1.1 60.00 fully consolidated fully consolidated 7. Carige Covered Bond 2 Srl Genoa Genoa A1.1 60.00 fully consolidated fully consolidated 8. Lanterna Finance Srl (1) Genoa Genoa A1.1 5.00 fully consolidated fully consolidated 9. Lanterna Mortgage Srl (1) (2) Genoa Genoa A1.1 5.00 fully consolidated fully consolidated 10. Lanterna Lease Srl (1) Genoa Genoa A1.1 5.00 fully consolidated fully consolidated 11. Carige Reoco SpA Genoa Genoa A1.1 100.00 fully consolidated fully consolidated
Other companies 12. St. Anna Golf Srl Genoa Genoa A1.11 100.00 fully consolidated at equity
(1) Securitisation SPV, controlled under the requirements of IFRS 10 (2) Former Lanterna Consumer Srl. The company changed its name on 28/5/2020
The prudential scope of consolidation has remained unchanged with respect to that used for preparation of the Financial Statements for the period ended 31 January 2020. The company, Abitare R.E. S.r.l. no longer exists, as it was merged by absorption in Carige Reoco S.p.A..
3. OWN FUNDS
QUALITATIVE INFORMATION – art. 437 CRR
The Company's own funds were determined on the basis of the harmonised legislation for banks and investment entities included in EU Regulation No. 575/2013 (CRR), updated by EU Regulation No. 876/2019 (CRR2) and subsequently amended by EU Regulation No. 873/2020, and EU Directive 36/2013 (CRDIV) which transpose the standards defined by the Basel Committee on Banking Supervision in the European Union. The provisions issued by the Bank of Italy with circulars No. 285/2013 and No. 286/2013 and their relative updates were also taken into account with specific reference to the right to exercise national discretion.
On 12 December 2017, the European Parliament and the Council issued Regulation (EU) No. 2395/2017 "Transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds", which updates Regulation No. 575/2013 CRR, adding the new article 473 bis "Introduction of IFRS 9", which gives banks the possibility of mitigating the impact on their own funds resulting from the introduction of IFRS 9 over a transitional period of 5 years (from March 2018 to December 2022) by neutralising the impact on CET1 through the application of scaling factors over time. On 31 January 2018, Banca Carige communicated to the ECB its intention to adopt for all the Banks of the Group the “phase in” regime introduced by Regulation (EU) No. 2017/2395, which dilutes the IFRS 9 transition impact on own funds over 5 years, by including in CET1 a portion -decreasing over time down to zero- of the difference between the new credit loss provisions calculated in accordance with IFRS9, and the credit loss provisions calculated by applying IAS39. Banca Carige has also opted for a dynamic approach to the transitional adjustments.
On 24 June 2020, the European Parliament and the Council issued Regulation (EU) 873/2020 introducing certain amendments to both the CRR and Regulation (EU) 876/2019 in response to the Covid-19 pandemic. Among other measures, an amendment to the transitional arrangements was adopted in response to the introduction of IFRS 9 under art. 473 bis of the CRR. In particular, with reference to the dynamic approach to the transitional adjustments, the possibility was introduced to sterilise the increase in ECL provisions for non-credit-impaired assets occurring in the period 2020-2021 with the application of decreasing percentages over time (100% for 2020 and 2021, 75% for 2022, 50% for 2023, 25% for 2024 and 0% from 2025). Banca Carige also opted to make use of the new criterion introduced by paragraph 7 bis of Article 473 bis, thus increasing its weighted assets by an amount equal to the benefit obtained in the calculation of its own funds from the application of both the static and dynamic prudential filter. Having opted for the temporary treatment, Banca Carige is required to provide market disclosure on its available capital, RWAs, capital ratio and leverage ratio with and without the application of the transitional provisions under IFRS 9.
Conversely, Banca Carige opted not to apply the filter introduced by the new article 468 “Temporary treatment of unrealised gains and losses measured at fair value through other comprehensive in view of the COVID-19 pandemic”.
Furthermore, a new more favourable regime was introduced by Commission Delegated Regulation (EU) 2020/2176 as regards the deduction of software assets from Common Equity Tier 1 items.
Capital instruments’ main features template
The following templates are structured on the basis of the templates contained in Implementing Regulation (EU) No. 1423 of 20 December 2013 laying down implementing technical standards with regard to disclosure of Own Funds requirements for institutions under Regulation No. 575/2013 of the European Parliament and of the Council.
In particular, Annex II to the aforementioned Regulation provides a specific template for the disclosure of the main characteristics of capital instruments.
1. Common Equity Tier 1– CET 1
Common Equity Tier 1, prior to the application of prudential filters, consists of the following positive or negative elements: share capital share premium reserves treasury shares in the securities portfolio loss for the period accumulated other comprehensive income non-controlling interests
The prudential filters of CET 1 consist of the following elements: cash flow hedges all fair value gains and losses arising from the institution’s own credit risk related to derivative liabilities regulatory value adjustments
Deductions from CET 1 consist of: intangible assets deferred tax assets that rely on future profitability and that do not arise from temporary differences net of related tax liabilities deferred tax assets that are based on future income and derive from temporary differences
The impacts on CET 1 resulting from the transitional arrangements must be added to the elements listed above to mitigate the impact arising from the introduction of IFRS 9.
2. Additional Tier 1 capital (AT1)
Additional Tier 1 capital consists of: paid up capital (savings shares) non-controlling interests
3. Tier 2 capital (T2)
Tier 2 capital consists of the following positive or negative elements: own T2 instruments deductible items due to indirect holdings of T2 instruments minority interests
The instruments qualifying for inclusion in T2 capital are represented by the following types of subordinated debt:
1) Tier II subordinated bonds issued by the Bank, with the following characteristics: - nominal value of EUR 320,000,000, issued on 30 November 2018, outstanding as at 31 December 2020 for an amount of EUR 6,800,000, divided into bonds with a unit par value of EUR 100,000, qualifying for inclusion in T2 capital for an amount of EUR 6,800,000; it should be noted that the quota indirectly held by the subsidiaries, Banca Ponti and Banca del Monte di Lucca, through the Voluntary Scheme of the Interbank Deposit Protection Fund (FITD) is deducted; - rate: 8.25% p.a. payable on a quarterly basis; - maturity: 30 November 2028, with early repayment option from the fifth year after the date of issuance, subject to prior authorisation by the relevant Supervisory Authority; - subordination clause: the bonds are in any case subordinated and, in the event of voluntary liquidation or compulsory administrative liquidation or resolution of the Issuer, they shall be repaid only after all other creditors not equally subordinated to the Issuer have been satisfied and, that is, after all subordinated and unsubordinated creditors of the Issuer, have been satisfied, except for those with a degree of subordination equal to or greater than that of the bonds; - characteristics for inclusion in CET1: no Capital Increase was carried out by 30 June 2019, which resulted in the Bank's failure to comply with the applicable minimum capital requirements (defined as the Pillar 1 and Pillar 2 requirements, thus excluding the capital conservation buffer and Pillar 2 guidance), at an individual and/or consolidated level. For this reason the bond holder -at the request of the Bank and/or the competent Supervisory Authorities- used the bonds at the end of 2019 to strengthen the Bank's Common Equity Tier 1 ratio (CET1) by a nominal amount of EUR 313,200,000. The residual amount of EUR 6,800,000 may be used on a case by case basis to the extent that is strictly necessary to ensure compliance with the foregoing minimum requirements.
2) Tier II subordinated bonds issued by the Bank, with the following characteristics: - nominal value of EUR 200,000,000 issued on 20 December 2019, fully outstanding as at 31 December 2020, divided into bonds with a unit par value of EUR 100,000, qualifying for inclusion in T2 capital for an amount of EUR 200,000,000; - rate: 8.25% p.a. payable on a quarterly basis until the “Reset Date” (first 5 years); from the “Reset Date” until maturity or early repayment, the “Reset Rate”: Reset Rate= Market Rate + Margin; where “Market rate” is the 5-year swap rate, “Margin” is the difference between the Initial Interest Rate and the 5-year swap rate as at the Date of Issuance. - maturity: 20 December 2029, with early repayment option from the fifth year after the date of issuance, subject to prior authorisation by the relevant Supervisory Authority; - subordination clause: the bonds are in any case subordinated and, in the event of liquidation or insolvency proceedings of the Issuer, they shall be repaid i) only after all preferential and ordinary creditors of the Issuer have been satisfied, ii) pari passu with all other holders of financial instruments of the Issuer with the same degree of subordination
and with the creditors of the Issuer with the same degree of subordination; iii) in any case with priority over the holders of financial instruments or negotiating positions characterised by a greater degree of subordination than Bonds).
The main features of the Tier 2 instrument included are shown below.
Capital instruments' main features template (1) 1 Issuer Banca Carige S.p.A. 2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) IT0005353526 3 Governing law(s) of the instrument Italian Regulatory treatment 4 Transitional CRR rules Additional Tier 2 capital 5 Post-transitional CRR rules Additional Tier 2 capital 6 Eligible at solo/(sub-)consolidated/solo & (sub-)consolidated level Additional Tier 2 capital at solo and consolidated level Instrument type (types to be specified by each jurisdiction) Bonds - Art. 62,63 and 77 of EU Regulation no. 575/2013 8 Amount recognised in regulatory capital (currency in million, as of most recent EUR 6.8 mln reporting date) 9 Nominal amount of instrument EUR 320,000,000 initial 6,800,000 outstanding at the reporting date 9a Issue price 100 9b Redemption price 100 10 Accounting classification Liabilities - Amortised cost 11 Original date of issuance 30/11/2018 12 Perpetual or dated Dated 13 Original maturity date 30/11/2028 14 Issuer call subject to prior supervisory approval Yes 15 Optional call date, contingent call dates and redemption amount 30/11/2023 16 Quarterly on 31/3, 30/6, 30/9 and 31/12 of each year as of Subsequent call dates, if applicable 31/03/2019 Coupons/dividends Yes 17 Fixed or floating dividend/coupon Fixed 18 Coupon rate and any related index 8.25% 19 Existence of a dividend stopper No 20a Fully discretionary, partially discretionary or mandatory (in terms of timing) Fully discretionary 20b Fully discretionary, partially discretionary or mandatory (in terms of amount) Fully discretionary 21 Existence of step up or other incentive to redeem No 22 Non-cumulative or cumulative Non-cumulative 23 Convertible or non-convertible Non-convertible 24 If convertible, conversion trigger(s) N/A 25 If convertible, fully or partially N/A 26 If convertible, conversion rate N/A 27 If convertible, mandatory or optional conversion N/A 28 If convertible, specify instrument type convertible into N/A 29 If convertible, specify issuer of instrument it converts into N/A 30 Write-down features N/A 31 If write-down, write down trigger(s) N/A 32 If write-down, full or partial N/A 33 If write-down, permanent or temporary N/A 34 If temporary write-down, description of write-up mechanism N/A 35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Tier II 36 Non-compliant transitioned features No 37 If yes, specify non-compliant features (1) "N/A” if the information is not applicable
Capital instruments' main features template (1) 1 Issuer Banca Carige S.p.A. 2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) IT0005389934 3 Governing law(s) of the instrument Italian Regulatory treatment 4 Transitional CRR rules Additional Tier 2 capital 5 Post-transitional CRR rules 6 Eligible at solo/(sub-)consolidated/solo & (sub-)consolidated level Instrument type (types to be specified by each jurisdiction) Bonds - Art. 62,63 and 71 of EU Regulation no. 575/2013 8 Amount recognised in regulatory capital (currency in million, as of most recent 200 reporting date) 9 Nominal amount of instrument EUR 200,000,000 9a Issue price 100 9b Redemption price 100 10 Accounting classification Liabilities - Amortised cost 11 Original date of issuance 20/12/2019 12 Perpetual or dated Dated 13 Original maturity date 20/12/2029 14 Issuer call subject to prior supervisory approval Yes 15 Optional call date, contingent call dates and redemption amount 20/12/2025 16 Quarterly on 20/3, 20/6, 20/9 and 20/12 of each year as of Subsequent call dates, if applicable 20/03/2020 Coupons/dividends Yes 17 Fixed or floating dividend/coupon Fixed 18 Coupon rate and any related index 8.25% 19 Existence of a dividend stopper No 20a Fully discretionary, partially discretionary or mandatory (in terms of timing) Fully discretionary 20b Fully discretionary, partially discretionary or mandatory (in terms of amount) Fully discretionary 21 Existence of step up or other incentive to redeem No 22 Non-cumulative or cumulative Non-cumulative 23 Convertible or non-convertible Non-convertible 24 If convertible, conversion trigger(s) N/A 25 If convertible, fully or partially N/A 26 If convertible, conversion rate N/A 27 If convertible, mandatory or optional conversion N/A 28 If convertible, specify instrument type convertible into N/A 29 If convertible, specify issuer of instrument it converts into N/A 30 Write-down features N/A 31 If write-down, write down trigger(s) N/A 32 If write-down, full or partial N/A 33 If write-down, permanent or temporary N/A 34 If temporary write-down, description of write-up mechanism N/A 35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Tier II 36 Non-compliant transitioned features No 37 If yes, specify non-compliant features (1) "N/A” if the information is not applicable
QUANTITATIVE INFORMATION – art. 437/445/492 CRR
3.1 Own funds as at 31 December 2020
Total Total 31/12/2020 31/01/2020
A. Common Equity Tier 1 (CET1) prior to the application of prudential filters 1,355,334 1,599,774 o.w. CE T1 instruments subject to transitional provisions - - B. CET1 prudential filters (+/-) 61,353 72,371 C. CET1 gross of deductions and effects of transitional provisions (A+/-B) 1,416,687 1,672,145 D. Deductions from CET1 (483,047) (620,790) E. Transitional provisions – Effect on CET1 (+/-), including minority interests subject to transitional provisions 278,879 245,144 F. Total Common Equity Tier 1 (CET1) (C-D+/-E) 1,212,519 1,296,499 G. Additional Tier 1 Capital (AT1) gross of deductions and effects of transitional provis ions 1,285 175 o.w. AT1 instruments subject to transitional provisions - - H. Deductions from AT1 - - I. Transitional provisions – Effect on AT1 (+/-), including instruments issued by - - subsidiaries and qualifying as AT1 due to transitional provisions L . Total Additional Tier 1 Capital (AT1) (G-H+/-I) 1,285 175
M. Tier 2 Capital (T2) gross of deductions and effects of transitional provisions 208,515 206,795 o.w. T2 instruments subject to transitional provisions - - N. Deductions from T2 - - O. Transitional provisions – Effect on T2 (+/-), including instruments issued by - - subsidiaries and qualifying as T2 due to transitional provisions P . Totale Tier 2Capital (T2) (M-N+/-O) 208,515 206,795 Q. Total own funds (F+L+P) 1,422,319 1,503,469
Reported below is the Template on the comparison of institutions’ own funds and capital and leverage ratios with and without the application of transitional arrangements for IFRS 9 as provided for in the EBA’s Guidelines published on this subject on 16/01/2018 and amended on 11/8/2020 to ensure compliance with the CRR "quick fix" in response to the Covid-19 pandemic.
3.2 Quantitative template 31/12/2020 31/01/2020 31/12/2018 Available capital (amounts) 1 Common E quity Tier 1 capital (CE T1) 1,212,519 1,296,499 1,572,743 2 Common E quity Tier 1 capital (CE T1) as if IFRS 9 or analogous E CLs 933,640 1,051,355 1,240,047 transitional arrangements had not been applied 2a Common E quity Tier 1 capital (CE T1) as if the temporary treatment under art. n.a. 468 of the CRR for unrealised gains and losses measured at fair value through other comprehensive income had not been applied 3 Tier 1 capital 1,213,804 1,296,674 1,575,170 4 Tier 1 capital as if IFRS 9 or analogous E CLs transitional arrangements had not 934,925 1,051,530 1,242,474 been applied 4a Tier 1 capital as if the temporary treatment under art. 468 of the CRR for n.a. unrealised gains and losses measured at fair value through other comprehensive income had not been applied 5 Total capital 1,422,319 1,503,469 1,896,943 6 Total capital as if IFRS 9 or analogous E CLs transitional arrangements had not 1,143,440 1,258,325 1,564,247 been applied 6a Total capital as if the temporary treatment under art. 468 of the CRR for n.a. unrealised gains and losses measured at fair value through other comprehensive income had not been applied Risk-weighted assets (amounts) 7 Total risk-weighted assets 9,441,032 10,781,824 14,727,271 8 Total risk-weighted assets as if IFRS 9 or analogous E CLs transitional 9,162,153 10,408,564 14,125,730 arrangements had not been applied Capital ratios 9 Common E quity Tier 1 capital (as a percentage of risk exposure amount) 12.8% 12.0% 10.7% 10 Common E quity Tier 1 capital (as a percentage of risk exposure amount) as if 10.2% 10.1% 8.8% IFRS 9 or analogous E CLs transitional arrangements had not been applied
10a Common E quity Tier 1 capital (as a percentage of risk exposure amount) as if n.a. the temporary treatment under art. 468 of the CRR for unrealised gains and losses measured at fair value through other comprehensive income had not been applied 11 Tier 1 capital (as a percentage of risk exposure amount) 12.9% 12.0% 10.7% 12 Tier 1 capital (as a percentage of risk exposure amount) as if IFRS 9 or 10.2% 10.1% 8.8% analogous E CLs transitional arrangements had not been applied 12a Tier 1 capital (as a percentage of risk exposure amount) as if the temporary n.a. treatment under art. 468 of the CRR for unrealised gains and losses measured at fair value through other comprehensive income had not been applied
13 Total capital (as a percentage of risk exposure amount) 15.1% 13.9% 12.9% 14 Total capital (as a percentage of risk exposure amount) as if IFRS 9 or analogous 12.5% 12.1% 11.1% E CLs transitional arrangements had not been applied 14a Total capital (as a percentage of risk exposure amount) as if the temporary n.a. treatment under art. 468 of the CRR for unrealised gains and losses measured at fair value through other comprehensive income had not been applied
Leverage ratio 15 Leverage ratio total exposure measure 23,052,757 22,777,752 22,657,486 16 Leverage ratio 5.3% 5.7% 7.0% 17 Leverage ratio as if IFRS 9 or analogous E CLs transitional arrangements had not 4.1% 4.6% 5.5% been applied 17a Leverage ratio as if the temporary treatment under art. 468 of the CRR for n.a. unrealised gains and losses measured at fair value through other comprehensive income had not been applied
3.3 Reconciliation between balance sheet items used to calculate own funds and regulatory own funds
Assets 31/12/2020 Im pact on Im pact on Im pact on Im pact on
CET1 AT1 T2 Ow n Funds 10. CAS H AND CAS H E QUIVALE NTS 267,695 20. FINANCIAL AS S E TS AT FAIR VALUE 168,601 (22) - (4) (26) THR OUGH P R OFIT OR LOS S
20. c) OTHE R FINANCIAL AS S E TS MANDATOR ILY 166,873 (22) - (4) (26) AT FAIR VALUE
100. INTANGIBLE AS S E TS 85,594 (33,925) - - (33,925) of which: - goodwill 110. TAX AS S E TS 1,413,628 (449,122) - - (449,122) 110. a) CUR R E NT 586,154 - - - - 110. b) DEFERRED 827,474 (449,122) - - (449,122) TOTAL ASSETS 22,030,236 (483,069) - (4) (483,073)
Total liabilities and shareholders' equity 31/12/2020 Im pact on Im pact on Im pact on Im pact on CET1 AT1 T2 Ow n Funds 10. FINANCIAL LIABILITIE S MEAS UR E D AT 19,771,001 - - 206,800 206,800 AMOR TIS E D COS T 10. a) DUE TO BANKS 3,843,524 10. b) DUE TO CUS TOMER S 12,819,390 10. c) S E CUR ITIE S IS S UE D 3,108,087 - - 206,800 206,800 120. VALUATION RESERVES (79,996) (15,607) - - (15,607) 150. R E S E R VE S (844,873) (599,729) - - (599,729) 160. S HAR E P R E MIUM R E S E R VE 623,922 623,922 - - 623,922 170. CAP ITAL 1,915,164 1,915,164 - - 1,915,164 180. TREASURY SHARES (-) (15,536) (15,536) - - (15,536) 190. NON-CONTR OLLING INTE R E S TS (+/-) 12,867 8,317 1,285 1,719 11,321 200. NE T P R OFIT (LOS S ) FOR THE YE AR (+/-) (251,641) (217,906) - - (217,906) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY22,030,236 1,698,625 1,285 208,519 1,908,429
Other accounting elements for reconciliation with Own Funds Impact on Impact on Impact on Impact on CE T 1 AT 1 T2 Own Funds Changes in own credit s tanding (2) - - (2) R egulatory value adjus tments (3,035) - - (3,035) Total other accounting elements for reconciliation with Own Funds (3,037) - - (3,037) TOTAL OWN FUNDS 1,212,519 1,285 208,515 1,422,319
3.4 Transitional own funds disclosure template
(C) AMOUNT S SUBJECT TO PRE- R E GUL AT ION (E U) (B) R E GUL AT ION No. 575/2013 (E U) No. 575/2013 T R E AT ME NT OR Common Equity T ier 1 (CET 1) capital: instruments and reserves (A) AMOUNTS AT DISCLOSUR E DATE AR T ICL E PRESCRIBED R E FE R E NCE R E S IDUAL AMOUNT OF R E GUL AT ION (E U) No. 575/2013
1 Capital instruments and the related share premium accounts 2,539,08526 (1), 27, 28, 29, E BA list 26 (3)
o.w.: instrument type 1 2,539,085 E BA list 26 (3)
26 (1) and transitional 2 R etained earnings (1,031,492) arrangements, art. 473 245,403 bis
Accumulated other comprehensive income (and other reserves, to include 3 106,624 26 (1) unrealised gains and losses under the applicable accounting standards)
5 Minority interests (amount allowed in consolidated CE T 1) 8,317 84, 479, 480
6 Common Equity T ier 1 capital before regulatory adjustments 1,622,534 245,403
Common Equity Tier 1 (CET1) capital: regulatory adjustments
7 Additional value adjustments (negative amount) (3,035) 34, 105
8 Intangible assets (net of related tax liability) (negative amount) (33,925) 36 (1) (b), 37, 472 (4)
Deferred tax assets that rely on future profitability excluding those arising from 10 temporary differences (net of related tax liability, where the conditions in Art. (425,344) 36 (1) (c), 38, 472 (5) - 38(3) are met) (negative amount)
11 Fair value reserves related to gains or losses on cash flow hedges) 64,390 33 (a)
Gains or losses on liabilities valued at fair value resulting from changes in own 14 (2) 33 (b) credit standing
Direct or indirect holdings by the Institution of own CET 1 Instruments (negative 16 (15,558) 36 (1) (f), 42, 472 (8) amount)
Deferred tax assets arising from temporary differences (amount above 10% 36 (1) (c), 38, 48 (1) 21 threshold, net of related tax liability where the conditions in Article 38 (3) are (23,779) - (a), 470, 472 (5) met) (negative amount)
25a Losses for the current financial year (negative amount) (251,641) 36 (1) (a), 472 (3) 33,476
28 Total regulatory adjustments to Common Equity Tier 1 (CET1) (688,894) 33,476
29 Common Equity Tier 1 (CET1) capital 933,640 278,879
Additional Tier 1 (AT1) capital: instruments
Qualifying T ier 1 capital included in consolidated AT 1 capital (including minority 34 1,285 85, 86, 480 - interests not included in row 5) issued by subsidiaries and held by third parties
36 Additional Tier 1 (AT1) capital before regulatory adjustments 1,285 -
Additional Tier 1 (AT1) capital: regulatory adjustments
44 Additional Tier 1 capital 1,285 -
45 Tier 1 capital (T1= CE T1 + AT1) 934,925 278,879
Tier 2 (T2) capital: instruments
46 Capital instruments and the related share premium accounts 206,800 62, 63 Qualifying own funds instruments included in consolidated T 2 capital (including 48 minority interests and AT 1 instruments not included in rows 5 or 34) issued by 1,719 87, 88, 480 - subsidiaries and held by third parties
51 Tier 2 (T2) capital, before regulatory adjustments 208,519 -
Tier 2 (T2) capital: regulatory adjustments
Direct or indirect holdings by the Institution of own T 2 instruments and 63 (b) (i), 66 (a), 67, 52 (4) subordinated loans (negative amount) 477 (2)
57 Total regulatory adjustments to Tier 2 (T2) capital (4) -
58 Tier 2 (T2) capital 208,515 -
59 Total capital (TC= T1+T2) 1,143,440 278,879
R isk-weighted assets in respect of amounts subject to pre-CR R treatment and 59a transitional arrangements, subject to phase-out as prescribed in R egulation (EU) 278,879 No. 575/2013 (i.e. CR R residual amounts)
of which: value adjustments not permitted under the transitional arrangements 278,879 473 bis for mitigating the impact of the introduction of IFR S 9
60 Total risk-weighted assets 9,441,032
Capital ratios and buffers
61 Common Equity T ier 1 (as a percentage of risk exposure amount) 12.8% 92 (2) (a), 465
62 T ier 1 (as a percentage of risk exposure amount) 12.9% 92 (2) (b), 465
63 T otal capital (as a percentage of risk exposure amount) 15.1% 92 (2) (c)
Institution specific buffer requirement (CET 1 requirement in accordance with art. 92 (1) (a) plus capital conservation and countercyclical buffer requirements, plus 64 8.5% CR D 128, 129, 130 systemic risk buffer, plus the systemically important institution buffer (G-S II or O- S II buffer), expressed as a percentage of risk exposure amount)
65 o.w.: capital conservation buffer requirement 2.5%
Common Equity T ier 1 available to meet buffers (as a percentage of risk 68 2.8% CR D 128 exposure amount)
Capital ratios and buffers
36 (1) (h), 45, 46, 472 Direct or indirect holdings of the capital of financial sector entities where the (10) 56 (c ), 59, 60, 72 institution does not have a significant investment in those entities (amount below 24,792 475 (4), 66 (c ), 69, 70, 10% threshold and net of eligible short positions) 477 (4)
Deferred tax assets arising from temporary differences (amount below 10% 36 (1) (c ), 38, 48, 470, 75 threshold, net of related tax liability, where the conditions in art. 38 (3) are met) 119,521 472 (5) (negative amount)
Applicable caps on the inclusion of provisions in Tier 2
Capital instruments subject to phase-out arrangements (only applicable between 1 January 2013 and 1 January 2022)
82 Current cap on AT 1 instruments subject to phase out arrangements 32,000 484 (4), 486 (3) & (5)
84 Current cap on T 2 instruments subject to phase out arrangements 93,866 484 (5), 486 (4) & (5)
4. CAPITAL REQUIREMENTS
QUALITATIVE INFORMATION – art. 438 CRR
One of the main strategic objectives of the Group is to strengthen its capital position and mitigate risk profiles by identifying a gradual return to profit under capital balance conditions, with capitalisation objectives consistent with Banca Carige’s consolidated prudential requirements notified by the European Central Bank (ECB). In its SREP Decision of 8 June 2020, the ECB notified the Bank of a reduction in the Pillar 2 additional own funds requirement from 3.25% to 2.75% and requested the Banca Carige Group to meet its Overall Capital Requirement (OCR) as follows: Common Equity Tier 1 Ratio (CET1 Ratio) of 8.55% on a consolidated basis (which includes a minimum requirement of 4.5%, an additional own funds requirement of 2.75% to be held in the form of 56.25% of CET1 capital, as a minimum, and a combined buffer requirement of 2.5%). Tier 1 Ratio (T1 Ratio) of 10.56% on a consolidated basis (which includes a minimum requirement of 6%, an additional own funds requirement of 2.75% to be held in the form of 75% of Tier 1 capital, as a minimum, and a combined buffer requirement of 2.5%). Total Capital Ratio (TC Ratio) of 13.25% on a consolidated basis (composed of a minimum coefficient of 8%, an additional own funds requirement of 2.75% and a combined buffer requirement of 2.5%); The ECB also required the Bank to maintain, on a consolidated basis, a minimum Total SREP Capital Requirement (TSCR) of 10.75%; Via the SREP Decision in June 2020, the Bank was also recommended to comply with a Capital Guidance of 1.55% on all capital levels.
QUANTITATIVE INFORMATION – art. 438/445 CRR
4.1 CAPITAL REQUIREMENTS AND REGULATORY CAPITAL RATIOS
Capital ratios as at 31/12/2020 exceed the levels required by the ECB in its SREP Decision of 8 June 2020, including as a result of regulatory updates on the prudential amortisation of intangible assets, government-backed loans granted as a consequence of the pandemic and the progress made in the derisking transactions in 2020. With regard to the Pillar 2 capital guidelines, all the Group’s levels of capital are in line with the ECB's recommendation set out in the 2020 SREP letter.
CAPITAL REQUIREMENTS BY RISK TYPE CAPITAL ADEQUACY
UNWEIGHTED WEIGHTED TYPE OF RISK REQUIREMENT AMOUNTS AMOUNTS REGULATORY CAPITAL REQUIREMENTS 22,914,596 8,716,376 697,310
1. Credit and counter-party risk Central governments and Central Banks 9,608,332 493,145 39,452 Institutions 812,646 286,110 22,889 Regional governments and local authorities 583,430 116,686 9,335 Multilateral development banks - - - International organisations - - - Public sector entities 208,739 206,495 16,520 Corporates 2,400,161 2,051,927 164,154 Retail exposures 2,532,668 1,687,989 135,039 Exposures secured by mortgages on immovable 3,970,913 1,421,424 property 113,714 Exposures in default 269,344 296,249 23,700 High-risk exposures 294,717 442,075 35,366 Short-term exposures/businesses - - - Exposures in the form of units or shares in CIUs - - -
Equity instruments 365,567 365,567 29,245 Other 1,825,954 1,283,582 102,687 Items representing securitisation positions 42,126 65,128 5,210 64 2. CVA risk (standardised approach)
3. Market risks (standardised approach) 134 general risk - debt securities 134 general risk - equity securities specific risk - debt securities specific risk - equity securities specific risk - securitisations position risk on units in UCITS general risk on gamma and vega factors foreign exchange risk 4. Operational risk (standardised approach) 57,774
5. Other prudential requirements - 6. Total prudential requirements 755,283
CAPITAL RATIOS Risk-weighted assets 9,441,032 Common Equity Tier 1/Risk-weighted assets (Common Equity Tier 1 capital ratio) 12.8% Tier 1 capital/Risk-Weighted Assets (Tier 1 capital ratio) 12.9% Own Funds /Risk-Weighted Assets (Total capital ratio) 15.1%
5. CREDIT RISK
5.1 LOAN LOSS PROVISIONS
QUALITATIVE INFORMATION – art. 442 CRR
Assets consist in financial assets to customers and banks, with fixed or otherwise determinable payments, not quoted on an active market. They are recognised on the date when the contract is signed, which normally coincides with the date of disbursement to the borrower.
Should creditworthiness deteriorate to such an extent that would make it unlikely for the customer to duly honour his contractual commitments, the asset is classified as a non-performing exposure when the vulnerabilities that have emerged from performance monitoring are confirmed.
NPEs are divided into the following categories:
Bad loans: exposures to customers who are insolvent or in a state similar to insolvency.
Unlikely-to-pay exposures: credit exposures other than bad loans for which the bank deems it unlikely that, without recourse to actions such as the enforcement of collateral, the debtor will fully meet his credit obligations.
Past due exposures: exposures, other than those classified as bad loans or unlikely to pay loans, which, at the reporting date, have been overdue and/or in excess of limits for more than 90 days and exceed a pre-set materiality threshold.
Exposures that are overdue and/or in excess of limits can, alternatively, be calculated based on the individual borrower or - for exposures to retail customers only - based on the individual transaction.
The Group opted for recognising Past Due exposures by individual borrowers: therefore, customers whose loans have been overdue and/or in excess of limits for more than 90 days are classified as past due, if the overdue and/or limit-exceeding amount or their daily recorded average in the last quarter is equal to or higher than 5% of the overall exposure to the debtor, net of possible compensations with margins available on other credit lines to the same customer. On 28 September 2016, the EBA published the "Guidelines on the application of the definition of default" (EBA/GL/2017/07), which, together with Commission Delegated Regulation (EU) 2018/171 on the materiality threshold for past due credit exposures (RTS (EU) 2018/171), constitute the regulatory package known as the "New Definition of Default". The new regulation, which entered into force on 1 January 2021, introduces some regulatory innovations, including: a new objective materiality threshold for assessing the relevance of the customer's credit obligation past due, consisting of an absolute component (EUR 100 for Retail customers; EUR 500 for non-Retail customers) and a relative component (1% of the total amount of all on-balance sheet exposures to that obligor of the bank);
a mandatory period of at least 90 consecutive days of regularity and absence of default events for the customer's return to "non-defaulted status” (so-called “Probation Period”); the presence of certain objective and / or subjective conditions for default contagion between joint credit obligations and related customer groups; a new objective criterion for the classification of exposures as Unlikely to Pay under the forbearance measures, where these involve a “distressed restructuring” (i.e. when the customer’s diminished financial obligation exceeds the 1% threshold in the ratio between the Net Present Value (NPV) of the loan before the application of the forbearance measure and the NPV of the loan after the changes in its terms and conditions). To implement the above regulatory updates, the Banca Carige Group has undertaken special planning that led to adjustments in its internal procedures and IT systems. In the context of NPLs, bad loans and unlikely-to-pay exposures are assessed analytically if their amount is significant, and collectively if it is not significant, while past due exposures are always evaluated collectively, irrespective of the loan amount. More specifically, the analytical evaluations are made on the basis of the expected cash flows, at the estimated realisation value of the collateral supporting the loan3 and the costs that could be incurred for any forced collection. These items are discounted at the interest rate in force when the exposures are classified as NPLs, if the time limits for the collection of such cash flows exceed 12 months. In order to comply with the prudential rules of Basel 3, positions for a non-significant amount are written down on the basis of the risk indicators estimated with the internal models developed and used for all Banks in the Carige Group. Similarly, the portfolio not classified in the foregoing NPL categories (a.k.a. the performing loan portfolio) for which no objective indication of long-term impairment has emerged, is collectively written down using properly recalibrated internal models.
Management strategies and policies
The strategies adopted by the Carige Group for managing non-performing exposures were specifically defined in compliance with the current regulatory framework and the expectations of the competent supervisory authorities with the clear objective of significantly reducing the overall non-performing loan portfolio to a level that is consistent with that observed in comparable European financial institutions.
The 2019-2023 Strategic Plan, whose latest update - despite a context of utmost uncertainty regarding the repercussions that the Covid-19 pandemic will have in the medium-long term- was approved by the Board of Directors of Banca Carige on 23 February 2021, structurally reduces the Group's risk profile. In particular, continuing to pursue the overall derisking effort already initiated at the end of 2019, the Group completed the sale of a significant portfolio of non-performing exposures during the second half of 2020. As at 31 December 2020, for a residual portion of the held-for-sale loan book amounting to EUR 171 mln in GBV consisting in non-performing leases, the conditions for derecognition were not yet in place. The closing of the disposal of the residual portion held for sale remains planned by 2021. During the month of December, Banca Carige completed further loan disposal transactions. For more information on
3 Given the continuing crisis in the real estate sector, the Carige Group applies appropriate prudential supervisory haircuts, differentiated by type of asset and realisation procedure, when assessing the recoverable sums resulting from the enforcement of mortgage guarantees.
the transactions carried out and / or in progress, please refer to the contents of the paragraphs of Section 5 - “Other aspects” of the Notes to the Consolidated Financial Report as at 31 December 2020.
At the moment, having achieved the Strategic Plan objective of reducing the non-performing share of the total loan portfolio and pending the aforementioned completion of the sale of the residual portion of the portfolio held for sale, no further NPL disposal transactions are envisaged.
Write-offs
Included in the write-off policies adopted by the Bank were (i) unilateral initiatives not linked to an explicit waiver of the Bank's claims against the customers and (ii) initiatives resulting from specific agreements between the Bank and its customers/borrowers which instead did result in the full or partial waiver of the Bank’s claims against the customers.
With specific reference to the latter, under its ordinary course of business, the NPE Unit's task is to negotiate restructuring agreements with customers -including when transactions are syndicated with other banking institutions- using the legal instruments made available by the Bankruptcy Law (e.g. Recovery Plans pursuant to Art. 67 of the Bankruptcy Law, Restructuring Agreements pursuant to Art. 162 of the Bankruptcy Law), which sometimes require the Bank to partially (or fully) waive its credit claims in terms of principal and/or interest (on regular or late repayment). These agreements are entered into by the Bank, often leveraging the specialist support of specialised financial and industrial advisors, in order to guarantee the requalification of the customer's financial profile, the broadest protection of the Bank's interest, and the mitigation of any “reputational” risks to which the Bank would be exposed and which are often linked to "social" and "geographic" factors.
From an operational perspective, the process for derecognising an exposure from the accounts is a joint effort involving the operating units in charge of negotiating the restructuring agreements described above (i.e. the NPE Unit) and the organisational units in charge of the Bank's accounting and financial statements, in accordance with the accounting standards adopted by the Bank and current regulations in force.
QUANTITATIVE INFORMATION – art. 442 CRR
5.1.1 Breakdown of financial assets by portfolios and credit quality (gross and net values)
Non-performing Performing
Portfolio/quality
offs*
-
write
adjustments adjustments
Net exposure Net exposure Net
Overall value value Overall value Overall
Overall partial partial Overall
Total (net exposure) (net Total
Grossexposure Grossexposure
1. Financial assets at 645,041 (335,827) 309,214 12,412 16,139,744 (125,305) 16,014,439 16,323,653 amortised cost 2. Financial assets at fair value through other - - - - 2,340,912 (230) 2,340,682 2,340,682 comprehensive income
3. Financial assets at fair - - - - X X - - value through profit or loss4. Other financial assets 57,623 (15,886) 41,737 - X X 113,855 155,592 mandatorily at fair value 5. Financial assets held for sale and discontinued ------operations
Total 31/12/2020 702,664 (351,713) 350,951 12,412 18,480,656 (125,535) 18,468,976 18,819,927 Total 31/01/2020 1,249,896 (571,732) 678,164 21,299 18,498,092 (89,222) 18,511,988 19,190,152
Markedly poor credit quality assets Other assets Portfolio/quality Accumulated capital losses Net exposure Net exposure
1. Financial assets held for trading 2 8 1,722
2. Hedging derivatives - - 9,355 Total 31/12/2020 2 8 11,077 Total 31/01/2020 1 7 10,795
The values shown correspond to those indicated in Part E Section 1 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table A.1.2 for the same item.
5.1.2 Breakdown of financial assets by past-due buckets (book values)
Stage 1 Stage 2 Stage 3
Portfolio/Risk stage
> > 90 days > 90 days > 90 days
1 1 to 30 days 1 to 30 days 1 to 30 days
> > 30 to 90 days > 30 to 90 days > 30 to 90 days 1. Financial assets at amortised cost 17,922 16,762 7,078 6,198 45,763 76,171 671 5,708 255,733
2. Financial assets at fair value through ------other comprehensive income
3. Financial assets held for sale and ------discontinued operations
Total 31/12/2020 17,922 16,762 7,078 6,198 45,763 76,171 671 5,708 255,733 Total 31/01/2020 23,590 6,761 939 12,889 196,611 39,707 782 85,553 350,598
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Statements as at 31.12.2020 in table A.1.1 for the same item.
5.1.3 On- and off-balance sheet credit exposures to banks: gross and net values
Overall value Overall Type of exposure/Amount Gross exposure Net exposure adjustments and partial write- provisions offs* 0 Non- Performing 0 0 0 performing 0 0 0 0 0 0
A. On balance-sheet exposures a) Bad loans - X - - - - of which: forborne - X - - - b) Unlikely-to-pay exposures 13,036 X 5,000 8,036 - - of which: forborne 13,036 X 5,000 8,036 - c) Non-performing past due exposures - X - - - - of which: forborne - X - - - d) Performing past due exposures X - - - - - of which: forborne X - - - - e) Other performing exposures X 3,983,972 193 3,983,779 - - of which: forborne X - - - - Total (A) 13,036 3,983,972 5,193 3,991,815 - B. Off-balance-sheet credit exposures a) Non-performing - X - - - b) Performing X 11,505 - 11,505 - Total (B) - 11,505 - 11,505 - Total (A+B) 13,036 3,995,477 5,193 4,003,320 -
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Statements as at 31.12.2020 in table A.1.4 for the same item.
5.1.4 On- and off-balance sheet credit exposures to customers: gross and net values
Overall value Overall Type of exposure/Amount Gross exposure Net exposure adjustments and partial write- provisions offs* 0 Non- Performing 0 0 0 performing Type of exposure/Amount 0 0 0 0 0
A. On balance-sheet exposures a) Bad loans 277,849 X 194,490 83,359 12,163 - of which: forborne 42,291 X 29,208 13,083 416 b) Unlikely-to-pay exposures 387,519 X 147,854 239,665 244 - of which: forborne 193,602 X 68,269 125,333 86 c) Non-performing past due exposures 24,260 X 4,369 19,891 3 - of which: forborne 1,882 X 198 1,684 - d) Performing past due exposures X 177,126 7,232 169,894 2 - of which: forborne X 14,598 1,293 13,305 - e) Other performing exposures X 14,442,490 118,110 14,324,380 - - of which: forborne X 170,761 12,234 158,527 - Total (A) 689,628 14,619,616 472,055 14,837,189 12,412 B. Off-balance-sheet exposures a) Non-performing 184,072 X 15,990 168,082 - b) Performing X 4,027,489 2,842 4,024,647 - Total (B) 184,072 4,027,489 18,832 4,192,729 - Total (A+B) 873,700 18,647,105 490,887 19,029,918 12,412
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Statements as at 31.12.2020 in table A.1.5 for the same item.
5.1.5 Breakdown by geographic area of on- and off-balance sheet credit exposures to customers
p.1
Italy Other European countries America
Exposures/Geography
adjustments adjustments
Net exposure Net exposure Net exposure
Overall value Overall value A. On-balance-sheet exposures A.1 Bad loans 77,854 182,002 4,528 10,230 927 A.2 Unlikely-To-Pay exposures 239,243 147,751 422 103 - A.3 Non-performing past due exposures 19,791 4,346 89 19 3 A.4 Performing exposures 14,091,899 124,978 399,094 343 1,688 Total (A) 14,428,787 459,077 404,133 10,695 2,618 B. Off-balance-sheet exposures B.1 Non-performing exposures 168,082 15,988 - 2 - B.2 Performing exposures 4,021,345 2,834 3,224 10 32 Total (B) 4,189,427 18,822 3,224 12 32 Total (A+B) 31/12/2020 18,618,214 477,899 407,357 10,707 2,650 Total (A+B) 31/01/2020 18,541,992 668,173 79,119 11,391 2,760
p.2
America Asia Rest of the world
Exposures/Geography
adjustments adjustments adjustments
Net exposure Net exposure
Overall value Overall value Overall value A. On-balance-sheet exposures A.1 Bad loans 2,137 - - 50 121 A.2 Unlikely-To-Pay exposures - - - - - A.3 Non-performing past due exposures 1 5 2 3 1 A.4 Performing exposures 6 1,330 15 263 1 Total (A) 2,144 1,335 17 316 123 B. Off-balance-sheet exposures B.1 Non-performing exposures - - - - - B.2 Performing exposures - 37 - 9 - Total (B) - 37 - 9 - Total (A+B) 31/12/2020 2,144 1,372 17 325 123 Total (A+B) 31/01/2020 2,139 1,586 35 626 122
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Statements as at 31.12.2020 in table B.2 for the same item.
The geographic breakdown of on- and off-Balance Sheet credit exposures to customers in Italy is given below.
5.1.6 Prudential consolidation - Breakdown by geographic area of on- and off-balance sheet credit exposures to customers
North West Italy North East Italy Central Italy South and islands
Exposures/Geography
Net Net Net Net
value value value value
Overall Overall Overall Overall
exposure exposure exposure exposure
adjustments adjustments adjustments adjustments A. On-balance-sheet exposures A.1 Bad loans 50,402 106,978 9,237 28,062 12,122 32,413 6,093 14,549 A.2 Unlikely-To-Pay 178,334 108,496 14,984 14,615 38,658 19,846 7,267 4,794 exposuresA.3 Non-performing past 11,583 2,428 1,056 258 4,201 963 2,951 697 A.4due Performingexposures exposures 6,370,670 79,517 1,832,436 10,742 5,190,958 25,083 697,835 9,636 Total A 6,610,989 297,419 1,857,713 53,677 5,245,939 78,305 714,146 29,676 B. Off-balance-sheet exposures B.1 Non-performing 118,183 10,772 36,693 2,600 12,130 2,374 1,076 242 B.2exposures Performing exposures 2,523,155 1,964 519,185 125 767,351 690 211,654 55 Total B 2,641,338 12,736 555,878 2,725 779,481 3,064 212,730 297 Total (A+B) 31/12/2020 9,252,327 310,155 2,413,591 56,402 6,025,420 81,369 926,876 29,973 Total (A+B) 31/01/2020 9,132,897 534,713 2,313,907 50,074 6,220,762 61,800 874,426 21,586
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table B.2.1 for the same item.
5.1.7 Prudential consolidation - Breakdown by geographic area of on- and off-balance sheet credit exposures to banks
off-balance sheet credit exposures to banks
Italy Other European countries America
Exposures/Geography
value
adjustments adjustments
Net exposure Net exposure Net exposure
Overall Overall value A. On-balance-sheet exposures A.1 Bad loans - - - - - A.2 Unlikely–to-pay exposures - - - - 8,036 A.3 Non-performing past due - - - - - A.4exposures Performing exposures 3,629,858 15 317,494 151 35,764 Total (A) 3,629,858 15 317,494 151 43,800 B. Off-balance-sheet exposures B.1 Non-performing exposures - - - - - B.2 Performing exposures 5,307 - 4,589 - 19 Total (B) 5,307 - 4,589 - 19 Total (A+B) 31/12/2020 3,635,165 15 322,083 151 43,819 Total (A+B) 31/01/2020 4,072,612 36 464,285 327 34,255
America Asia Rest of the world
Exposures/Geography
adjustments adjustments adjustments
Net exposure Net exposure
Overall value Overall value Overall value A. On-balance-sheet exposures A.1 Bad loans - - - - - A.2 Unlikely–to-pay exposures 5,000 - - - - A.3 Non-performing past due - - - - - A.4exposures Performing exposures 23 351 - 312 4 Total (A) 5,023 351 - 312 4 B. Off-balance-sheet exposures B.1 Non-performing exposures - - - - - B.2 Performing exposures - - - 1,590 - Total (B) - - - 1,590 - Total (A+B) 31/12/2020 5,023 351 - 1,902 4 Total (A+B) 31/01/2020 3,369 357 - 2,034 5
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table B.3 for the same item.
The geographic breakdown of on- and off-Balance Sheet credit exposures to banks in Italy is given below.
5.1.8 Prudential consolidation - Breakdown by geographic area of on- and off-balance sheet credit exposures to banks
North West Italy North East Italy Central Italy South and islands
Exposures/Geography
adjustments adjustments adjustments adjustments
Net exposure Net exposure Net exposure Net exposure
Overall value Overall value Overall value Overall value A. On-balance-sheet exposures A.1 Bad loans ------A.2 Unlikely–to-pay exposures ------A.3 Non-performing past due exposures ------A.4 Performing exposures 325,901 15 - - 3,303,957 - - - Total (A) 325,901 15 - - 3,303,957 - - - B. Off-balance-sheet credit exposures B.1 Non-performing exposures ------B.2 Performing exposures 5,157 - - - 150 - - - Total (B) 5,157 - - - 150 - - - Total (A+B) 31/12/2020 331,058 15 - - 3,304,107 - - - Total (A+B) 31/01/2020 321,293 32 88 - 3,751,231 4 - -
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table B.3.1 for the same item.
5.1.9 Prudential consolidation - Breakdown by segment of on- and off-balance sheet credit exposures to customers
p.1
Public administrations Financial institutions Financial companies (of which: insurance companies) Exposures/Counterparties Overall value Overall value Overall value Net exposure Net exposure Net exposure adjustments adjustments adjustments
A. On-balance-sheet exposures
A.1 Bad loans - - 179 701 - -
- of which: forborne - - - 137 - -
A.2 Unlikely–to-pay exposures 119 212 86,926 39,225 - -
- of which: forborne - 1 44,539 22,645 - -
A.3 Non-performing past due exposures 752 173 6 1 - -
- of which: forborne ------
A.4 Performing exposures 2,738,189 480 1,459,786 1,321 14 -
- of which: forborne 2,814 1 2,733 113 - -
Total (A) 2,739,060 865 1,546,897 41,248 14 -
B. Off-balance-sheet credit exposures
B.1 Non-performing exposures - - 4,142 134 - - B.2 Performing exposures 901,324 261 71,858 60 10,056 2 Total (B) 901,324 261 76,000 194 10,056 2 Total (A+B) 31/12/2020 3,640,384 1,126 1,622,897 41,442 10,070 2 Total (A+B) 31/01/2020 2,707,118 1,203 2,684,701 95,879 25,047 3
p.2
Non-financial companies Households Exposures/Counterparties Net exposure Overall value adjustments Net exposure Overall value adjustments
A. On-balance-sheet exposures
A.1 Bad loans 49,801 147,443 33,379 46,346
- of which: forborne 8,662 25,248 4,422 3,823
A.2 Unlikely-To-Pay exposures 109,284 84,786 43,336 23,631
- of which: forborne 62,938 38,998 17,855 6,625
A.3 Non-performing past due exposures 5,469 841 13,664 3,354
- of which: forborne 1,681 196 3 1
A.4 Performing exposures 4,861,899 81,708 5,434,400 41,833
- of which: forborne 108,439 9,606 57,847 3,807
Total (A) 5,026,453 314,778 5,524,779 115,164 B. Off-balance-sheet credit exposures B.1 Non-performing exposures 160,445 15,251 3,495 605 B.2 Performing exposures 2,763,143 2,330 288,322 191 Total (B) 2,923,588 17,581 291,817 796
Total (A+B) 31/12/2020 7,950,041 332,359 5,816,596 115,960
Total (A+B) 31/01/2020 7,437,812 496,057 5,796,452 88,719
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table B.1 for the same item.
5.1.10 Time breakdown of financial assets and liabilities by contractual term to maturity
>15 >6 >1 to >7 to >1 to 3 >3 to 6 >1 to 5 Items/time bands On demand days to 1 months >5 years 7 days 15 days months months years month to 1 year
Indefinitelife
On balance sheet assets 1,736,140 2,779 7,675 402,334 939,304 1,258,250 975,111 5,233,252 5,195,911 3,345,594
A.1 Government securities 16 - - - 330,484 787,613 364,650 842,559 25,089 -
A.2 Other debt securities 13,390 ------93 270,028 41,736
A.3 Units in CIUs 10,683 ------
A.4 Loans 1,712,051 2,779 7,675 402,334 608,820 470,637 610,461 4,390,600 4,900,794 3,303,858
- Banks 318,723 - - 328,988 - - 261 2,090 37,995 3,303,858
- Customers 1,393,328 2,779 7,675 73,346 608,820 470,637 610,200 4,388,510 4,862,799 -
On balance sheet liabilities 11,469,867 16,504 14,355 536,986 688,062 292,003 859,934 5,121,647 788,520 -
B.1 Deposits and current accounts 11,343,329 13,593 13,354 28,263 181,999 270,151 202,762 571,910 - -
- Banks 9,745 ------
- Customers 11,333,584 13,593 13,354 28,263 181,999 270,151 202,762 571,910 - -
B.2 Debt securities 2,593 - - 506,643 504,476 6,428 636,226 735,967 732,987 -
B.3 Other liabilities 123,945 2,911 1,001 2,080 1,587 15,424 20,946 3,813,770 55,533 -
Off-balance sheet transactions
C.1 Financial derivatives with exchange of principal
- Long positions - 4,033 1,933 2,340 24,578 43,773 145 - - -
- Short positions - 5,961 1,930 2,339 24,475 41,625 144 - - -
C.2 Financial derivatives without exchange of principal
- Long positions 1,481 - - 4,570 333 897 1,735 - - -
- Short positions 43,769 - - - 98 76 54 - - -
C.3 Deposits and borrowings to be received
- Long positions ------
- Short positions ------
C.4 Irrevocable commitments to disburse funds
- Long positions 761,531 225 - 33 4,219 50,205 45,604 75,082 28,195 -
- Short positions 965,093 ------
C.5 Financial guarantees given 9,094 - - - - 9 166 2,195 32 -
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 ------
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in the 2 tables with separate currencies of denomination in section 1.4 “Liquidity risk”.
The Risk Management Function constantly monitors the observance of the operating limits that apply to the balances of cash flows only, as well as to the total balances of the cash flows and reserves. The Group also performs a stress test against the maturity ladder in use with a view to analysing the effect of exceptional albeit realistic crisis scenarios on the liquidity position and assessing the adequacy of liquidity reserves in place.
5.1.11 - On-balance-sheet Non-performing exposures to banks: changes in overall write-downs
Non-performing past due Bad loans Unlikely-to-pay exposures exposures
Description/category of which: of which: of which: Total forborne Total forborne Total forborne exposures exposures exposures
A. Opening balance: total write-downs - - 3,348 3,348 - -
- of which: sold but not derecognised ------
B. Increases - - 1,652 1,652 - - B.1 write-downs of purchased or - X - X - X originated impaired financial assets B.2 other write-downs - - 1,652 1,652 - - B.3 losses on disposal ------B.4 inflows from other categories of non------performing exposures
B.5 contractual modifications not ------resulting in derecognition
B.6 other increases ------B.4 other increases ------C.1 write-backs from valuation ------C.2 write-backs from collection ------C.3 gains on disposal ------C.4 write-offs ------C.5 outflows to other non-performing ------exposures C.6 contractual modifications not ------resulting in derecognition
C.7 other decreases ------D. Closing balance: total write-downs - - 5,000 5,000 - -
- of which: sold but not derecognised ------
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table A.1.8 for the same item.
5.1.12 - On-balance-sheet credit exposures to customers: changes in overall write-downs
Bad loans Unlikely-to-pay exposures Non-performing past due exposures Description/category of which: of which: of which: Total forborne Total forborne Total forborne exposures exposures exposures
A. Opening balance: total write-downs 209,100 24,788 354,838 60,949 4,446 1 - of which: sold but not derecognised 6,381 183 5,552 1,126 87 -
B. Increases 50,692 5,223 65,966 25,967 3,433 205 B.1 write-downs of purchased or - X - X - X originated impaired financial assets B.2 other write-downs 30,398 3,476 58,283 23,433 3,082 74 B.3 losses on disposal - - 3,233 - - - B.4 inflows from other categories of non- 18,409 1,704 891 372 12 7 performing exposures
B.5 contractual modifications not - - 100 82 2 1 resulting in derecognition
B.6 other increases 1,885 43 3,459 2,080 337 123 C. Decreases 65,302 803 272,950 18,647 3,510 8 C.1 write-backs from valuation 2,122 221 11,866 58 29 - C.2 write-backs from collection 2,777 87 14,646 637 343 - C.3 gains on disposal 550 - 3,717 - - - C.4 write-offs 2,971 103 128,737 - 2 - C.5 outflows to other non-performing 235 201 18,053 1,418 1,024 6 exposures C.6 contractual modifications not - - 22 21 - - resulting in derecognition
C.7 other decreases 56,647 191 95,909 16,513 2,112 2 D. Closing balance: total write-downs 194,490 29,208 147,854 68,269 4,369 198
- of which: sold but not derecognised 8,503 256 2,104 1,295 134 -
The values shown correspond to those indicated in Part E Section 2 of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table A.1.9 for the same item.
5.1.13 - Net losses/recoveries on impairment of financial assets at amortised cost: breakdown
Losses (1) Recoveries (2) Total Transactions/P&L items Stage 1 Stage 3 Stage 1 Stage 3 and 2 Write-offs Other and 2 31/12/2020
A. Loans to banks - - (1,653) 197 - (1,456) - Loans - - (1,653) 197 - (1,456) - Debt securities ------o.w.: purchased or originated ------credit-impaired B. Loans to customers (36,866) (2,716) (81,971) 442 30,726 (90,385) - Loans (36,649) (2,716) (81,971) 334 30,726 (90,276) - Debt securities (217) - - 108 - (109) o.w.: purchased or originated ------credit-impaired Total (36,866) (2,716) (83,624) 639 30,726 (91,841)
Key
A = From interest
B = Other reversals
The values shown correspond to those indicated in Part C of the Explanatory Notes to the Consolidated Financial Report as at 31.12.2020 in table 8.1 for the same item.
Reported below is the information that credit institutions are required to disclose according to the “Guidelines on disclosure of non-performing and forborne exposures” (EBA/GL/2018/10). Proportionality is embedded in the EBA guidelines based on the significance of the credit institution and their level of NPEs. There is a set of templates applicable to all credit institutions and some additional templates applicable only to significant credit institutions with a gross NPL ratio of 5% or above. Given that the Banca Carige Group is not a significant credit institution, disclosure is limited to the four tables below.
5.1.14 Credit quality of forborne exposures
Accumulated impairment, Collateral received and Gross carrying amount/nominal amount of exposures with accumulated negative changes financial guarantees received forbearance measures in fair value due to credit risk on forborne exposures and provisions
Of which collateral and financial guarantees Non-performing forborne On On non- received on Performing performing performing non- forborne forborne forborne performing exposures exposures exposures with forbearance of which of which measures
defaulted impaired
Loans and 1 advances 185,359 250,810 250,810 250,810 13,527 102,675 248,228 117,279
2 Central Banks ------
General 3 governments 2,815 - - - 1 - - -
Credit 4 institutions - 13,036 13,036 13,036 - 5,000 - -
Other financial 5 corporations 2,846 67,321 67,321 67,321 113 22,782 45,265 44,535
Non-financial 6 corporations 118,044 137,723 137,723 137,723 9,606 64,443 135,468 54,686
7 Households 61,654 32,730 32,730 32,730 3,807 10,450 67,495 18,058
8 Debt securities ------
Loan
9 commitments 63 12 1,400 359 359 359 186 368 given
10 Total 186,759 251,169 251,169 251,169 13,590 102,861 248,596 117,291
5.1.15 Credit quality of performing and non-performing exposures by past due days
Gross carrying amount/nominal amount
Performing exposures Non-performing exposures
Unlikely to pay Not past due Past due > 30 that are not Past due > 90 Past due > Past due > 2 Past due > 5 Past due > 1 Past due > 7 Of which or past due ≤ days ≤ 90 past due or are days ≤ 180 180 days ≤ 1 years ≤ 5 years ≤ 7 year ≤ 2 years years defaulted 30 days days past due ≤ 90 days year years years days
Loans and 1 12,609,350 12,456,763 152,587 645,042 79,118 11,913 51,130 200,035 198,377 27,169 77,300 645,042 advances
2 Central Banks ------
General 3 governments 351,599 340,865 10,734 1,257 - - 1,257 - - - - 1,257
4 Credit institutions 659,694 659,694 - 13,036 - - - 13,036 - - - 13,036
Other financial 5 corporations 1,178,217 1,177,750 467 69,415 3 4 67 68,309 778 141 113 69,415
Non-financial 6 corporations 4,943,607 4,903,171 40,436 397,622 55,916 4,365 23,338 88,101 156,975 23,037 45,890 397,622
7 Of which SMEs 3,857,271 3,827,310 29,961 223,871 50,016 3,973 17,523 64,847 66,817 8,341 12,354 223,872
8 Households 5,476,233 5,375,283 100,950 163,712 23,199 7,544 26,468 30,589 40,624 3,991 31,297 163,712
9 Debt securities 2,669,892 2,669,892 - 57,623 57,623 ------57,623
10 Central Banks ------
General 11 governments 2,387,006 2,387,006 ------
12 Credit institutions - - - 57,623 57,623 ------57,623
Other financial 13 corporations 282,886 282,886 ------
Non-financial 14 corporations ------
Off-balance-sheet 15 4,028,069 184,072 184,072 exposures
16 Central Banks - - -
General 17 governments 901,585 - -
18 Credit institutions 2,139 - -
Other financial 19 corporations 71,642 4,276 4,276
Non-financial 20 corporations 2,764,203 175,697 175,697
21 Households 288,500 4,099 4,099
22 Total 19,307,311 15,126,655 152,587 886,737 136,741 11,913 51,130 200,035 198,377 27,169 77,300 886,737
5.1.16 Performing and non-performing exposures and related provisions
Accumulated impairment, accumulated negative changes in Collateral and financial Gross carrying amount/nominal amount fair value due to credit risk and provisions guarantees received
Accumulated Non-performing exposures – partial write- Performing exposures – accumulated impairment, off Performing exposures Non-performing exposures accumulated impairment accumulated negative and provisions changes in fair value due to On On non- credit risk and provisions performing performing exposures exposures Of Of Of Of Of Of Of which Of which which which which which which which stage 1 stage 2 stage 2 stage 3 stage 1 stage 2 stage 2 stage 3
Loans and 1 advances 12,609,350 10,825,412 1,670,471 645,042 - 645,042 125,029 33,972 91,057 335,828 - 335,828 12,411 6,952,006 223,496
Central 2 Banks ------
General 3 governments 351,599 344,419 7,180 1,257 - 1,257 249 199 50 386 - 386 - 29,592 -
Credit 4 institutions 659,694 627,107 - 13,036 - 13,036 173 173 - 5,000 - 5,000 - - -
Other
5 financial 1,178,217 1,097,141 5,266 69,415 - 69,415 1,066 724 342 24,041 - 24,041 25 439,283 45,216 businesses
Non-
6 financial 4,943,607 3,942,391 996,146 397,622 - 397,622 81,708 24,445 57,263 233,069 - 233,069 3,929 1,808,061 113,380 corporations
Of which 7 SMEs 3,857,271 2,993,869 863,402 223,872 - 223,872 66,653 15,395 51,258 112,111 - 112,111 725 1,401,296 78,939
8 Households 5,476,233 4,814,354 661,879 163,712 - 163,712 41,833 8,431 33,402 73,332 - 73,332 8,457 4,675,070 64,900
Debt 9 - securities 2,669,892 2,669,503 - 57,623 - - 488 488 - 15,886 - - - -
Central 10 Banks ------
General 11 governments 2,387,006 2,387,006 - - - - 234 234 ------
Credit 12 institutions ------
Other
13 financial 282,886 282,497 - 57,623 - - 254 254 - 15,886 - - - - - corporations
Non-
14 financial ------corporations
Off-balance-
15 sheet 4,028,069 3,879,716 148,353 184,072 - 184,072 2,842 1,747 1,095 15,990 - 15,990 73,525 7,278 exposures
Central 16 Banks ------
General 17 governments 901,585 900,978 607 - - - 261 261 - - - - 446 -
Credit 18 institutions 2,139 2,139 ------
Other
19 financial 71,642 71,413 229 4,276 - 4,276 61 61 - 134 - 134 3,728 3,958 corporations
Non-
20 financial 2,764,203 2,630,352 133,851 175,697 - 175,697 2,328 1,301 1,027 15,251 - 15,251 56,594 3,305 corporations
21 Households 288,500 274,834 13,666 4,099 - 4,099 192 124 68 605 - 605 12,757 15
22 Total 19,307,311 17,374,631 1,818,824 886,737 - 829,114 128,359 36,207 92,152 367,704 - 351,818 12,411 7,025,531 230,774
5.1.17 Collateral obtained by taking possession and execution processes
Collateral obtained by taking possession
Value at initial recognition Accumulated negative changes
1 Property, Plant and Equipment (PP&E) - -
2 Other than PP&E 137,884 5,650
3 Residential immovable property 136,029 5,649
4 Commercial immovable property 1,855 1
5 Movable property (auto, shipping, etc.) - -
6 Equity and debt instruments - -
7 Other - -
8 Total 137,884 5,650
The template provides an overview of the collateral obtained by taking possession and recognised in the balance sheet as at the date of reporting.
The EBA “Guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID‐19 crisis” (EBA/GL/2020/07 published in June 2020) raises the institutions’ awareness about the need for public disclosure regarding the application of legislative and non‐ legislative payment moratoria and public guarantees in response to the COVID‐ 19 crisis.
Reported below is the information that credit institutions are required to disclose according to Annex 3 of EBA/GL/2020/07.
5.1.18 Information on loans and advances subject to legislative and non-legislative moratoria
Gross Gross carrying amount Accumulated impairment, accumulated negative changes in fair value due to credit risk carrying amount
Performing Non-performing Performing Non-performing
Of which: Of which: Instruments Instruments with Of which: Of which: with Of Inflows to significant Unlikely to Of which: Of which: Unlikely to Of which: significant which: non- increase in pay that exposures exposures pay that are exposures increase in exposure performing credit risk are not with with not past due with credit risk s with exposures since initial past due or forbearance forbearance or are past forbearanc since initial forbeara recognition are past measures measures due ≤ 90 e measures recognition nce but not due ≤ 90 days but not credit- measures credit- days impaired impaired (Stage 2) (Stage 2)
Loans and advances 1,764,36 1,752,38 1 62,390 632,311 11,982 5,301 10,797 46,634 42,901 6,986 39,807 3,733 1,229 3,265 - subject to moratorium 5 3
2 of which: Households 567,424 563,651 10,770 169,014 3,773 2,039 3,686 10,644 9,576 777 8,711 1,068 492 1,045 -
of which: Collateralised by 3 465,758 463,000 7,871 128,065 2,758 1,623 2,719 8,384 7,591 549 6,945 793 433 784 - residential immovable property
of which: Non-financial 1,141,44 1,133,23 4 51,609 461,546 8,209 3,262 7,110 35,716 33,052 6,209 30,906 2,665 737 2,220 - corporations 1 2
of which: Small and 1,027,37 1,019,79 5 Medium-sized 46,448 424,979 7,577 2,964 6,497 33,083 30,619 5,402 28,840 2,464 694 2,023 - 4 7 Enterprises
of which: Collateralised by 6 727,063 725,702 35,741 321,551 1,360 765 1,360 25,478 25,095 4,140 23,795 383 155 383 - commercial immovable property
5.1.19 Breakdown of loans and advances subject to legislative and non-legislative moratoria by residual maturity of moratoria
Gross carrying amount
Residual maturity of moratoria
Number of obligors Of which: Of which:
legislative moratoria expired > 3 months > 6 months > 9 months <= 3 months > 1 year <= 6 months <= 9 months <= 12 months
Loans and advances for which moratorium 1 13,360 1,998,068 was offered
Loans and advances subject to moratorium 2 12,289 1,764,365 1,581,650 368,745 1,243,188 69,495 36,183 41,081 5,674 (granted)
3 of which: Households 567,424 498,643 226,423 216,804 57,982 23,012 41,025 2,179
of which: Collateralised by residential 4 465,758 403,811 214,114 133,651 54,035 21,718 40,118 2,121 immovable property
5 of which: Non-financial corporations 1,141,441 1,061,658 140,982 980,836 6,396 13,171 56 -
of which: Small and Medium-sized 6 1,027,374 989,211 133,396 876,706 6,396 10,821 56 - Enterprises
of which: Collateralised by commercial 7 727,063 690,669 85,026 631,116 - 10,920 - - immovable property
5.1.20 Information on newly originated loans and advances provided under newly applicable public guarantee schemes introduced in response to the COVID-19 crisis
Maximum amount of the guarantee Gross carrying Gross carrying amount that can be amount considered
Inflows to Public guarantees of which: forborne non-performing received exposures
Newly originated loans and advances subject to public guarantee 1 - schemes 1,532,670 1,433 1,231,656
- 2 of which: Households 221,044 - -
- 3 of which: Collateralised by residential immovable property - - -
- 4 of which: Non-financial corporations 1,298,068 1,408 1,023,158
- 5 of which: Small and Medium-sized Enterprises 1,149,866 - -
- 6 of which: Collateralised by commercial immovable property 1,146 - -
5.2 ENCUMBERED AND UNENCUMBERED ASSETS
QUALITATIVE INFORMATION – art. 443 CRR
Disclosure of the Group's encumbered and unencumbered assets was prepared on the basis of the guidelines and templates issued by the EBA on 27 June 2014, in line with the provisions contained in Part Eight, Title II of Regulation (EU) No. 575/2013 (CRR), as later supplemented by Commission Delegated Regulation (EU) 2017/2295 of 4 September 2017. An asset should be treated as encumbered if it has been pledged or if it subject to any form of arrangement to secure, collateralise or credit enhance an on-balance-sheet or off-balance-sheet transaction from which the asset cannot be freely withdrawn, unless with prior approval of the creditor. Unencumbered assets, instead, are those that do not meet the definition above. Below is a list of the main types of the Group’s encumbered assets: assets recognised in the balance sheet that are pledged as collateral in Covered Bond issuance programmes pursuant to Law 130 of 1999 and Supervisory regulations (Bank of Italy, 17 May 2007 as later amended). As at the reporting date, the Group has three Covered Bond Programmes outstanding (OBG1-OBG2 ed OBG3). Collateral resulting in encumbered assets includes balance amounts of current accounts opened with the Bank Account, residential and commercial mortgage loans under the OBG1 and OBG2 programmes, and eligible government bonds. In some cases (OBG1), the government bonds were partly purchased ("eligible investment") by the vehicle using cash available and partly received as contributions of assets by Banca Carige. Assets that are segregated and included in the cover pool underlying retained bonds count as encumbered if the Issuer uses the securities as a guarantee for loans received or as collateral backing a transaction in general. As at t 31 December 2020, covered bonds placed with third party investors accounted for approximately 61.49% of wholesale funding; on-balance-sheet assets sold to SPVs as part of securitisation transactions carried out pursuant to Law 130 of 1999 and having residential mortgage loans, mortgage and signature loans to small and medium-sized enterprises and leasing contracts as their underlying. Assets underlying retained securitisations should not be considered as encumbered unless the securities in question are pledged as a guarantee for loans received or otherwise used as collateral to provide some form of protection for a transaction. As at the end of 2020, ABS securities held by third-party investors accounted for 7.55% of wholesale funding; tradable assets (securities) and loans and receivables recognised in the financial statements, which are pledged as collateral for refinancing operations with the European Central Bank. The portion of collateral exceeding the minimum value set by the Central Bank must be allocated proportionally to the different assets placed as collateral; government bonds and loans and receivables recognised in the financial statements which are pledged as collateral for EIB funding; securities recognised in the financial statements, used as underlying assets in Securities Repurchase Transactions;
cash and government bond deposits encumbered as collateral for clearing and settlement mechanisms or in the form of independent amount and fair value of OTC derivatives. This includes matching front swap and back to back swap transactions entered into with market counterparties in order to manage the interest rate risk between assets and liabilities in the Special Purpose Vehicle of the covered bond programme (OBG1) and obtain an upgrade in the rating assigned by the Rating Agencies. In connection with swap contracts, Banca Carige is required to set up a term deposit consisting of the independent amount in Euro and changes in market value (MTM). As at the reporting date of 31 December 2020, the balance of the term deposit collateral was of approximately EUR 68.8 mln. Government bonds pledged as collateral for banker's drafts; cash deposits and government bonds placed as collateral with clearing systems as a condition for access to service or commercial corporations for the provision of services (e.g. clearing and settlement services, electronic money payment services, gold lending).
The foregoing transactions are functional for the implementation of the Group's funding strategy (which includes, inter alia, refinancing operations promoted by the Eurosystem, issuance of ABS securities, issuance of Covered Bonds), for the management of the liquidity position, structural liquidity, supervisory requirements, interest rate risk and to support commercial activity. More specifically, the guarantees (owned assets and collateral received from third parties) pledged as collateral for the Eurosystem's refinancing operations amount to approximately EUR 4.3 bn, while total own assets encumbered for the issuance of covered bonds amount to approximately EUR 3.6 bn.
The current liquidity management model provides for the centralisation of treasury activities with the Parent Company. Therefore, the Parent Company has the task of defining and securing funding inter alia by using the Subsidiaries’ on-balance sheet assets. Subsidiaries participate in secured funding transactions carried out by the Parent Company as originator, in the role of third- party pledgor or through intragroup repurchase agreements (securities). The share of encumbered assets is periodically measured and shared with the Management Bodies. Moreover, the Group constantly monitors the unencumbered assets available that are eligible to be pledged, in the short term, as collateral for secured funding transactions with the European Central Bank or market counterparties.
QUANTITATIVE INFORMATION – art. 443 CRR
Specifically, there is a substantial overlap between the accounting perimeter used in table "2 - Assets pledged as collateral for own liabilities and commitments" in the Notes to the Financial Statements and the perimeter used to prepare the “Asset Encumbrance” tables. The two tables differ in the way values are presented: end-of-period values in the former case; median values of the prior 4 quarters for the Asset Encumbrance tables. The figures reported in the tables below are expressed as a median of the four quarters of 2020.
Template A-assets highlights data on the Group's encumbered assets (cash, loans/receivables and securities) pledged as collateral for the foregoing transactions (2020 median values).
Template A-assets highlights data on the Group's encumbered assets (cash, loans/receivables and securities) pledged as collateral for the foregoing transactions (2020 median values).
Carrying amount of encumbered assets Fair value of encumbered assets Carrying amount of unencumbered assets Fair value of unencumbered assets
of which notionally of which notionally of which notionally of which notionally eligible Extremely eligible Extremely eligible Extremely eligible Extremely High Quality High Quality Liquid High Quality Liquid High Quality Liquid Liquid Assets Assets (EHQLA) and Assets (EHQLA) and Assets (EHQLA) and (EHQLA) and High High Quality Liquid High Quality Liquid High Quality Liquid Quality Liquid Assets (HQLA) Assets (HQLA) Assets (HQLA) Assets (HQLA)
010 030 040 050 060 080 090 100 010 Assets 8,491,741 1,801,620 13,564,824 3,940,042 Equity 030 - - 295,920 - instruments Debt 040 2,101,532 1,801,620 2,029,772 1,799,439 211,240 169,131 269,586 222,698 securities o.w.: 50 covered ------bonds o.w.: 60 asset-backed 299,912 - 276,488 - 41,953 - 42,065 - securities o.w.: 70 issued by 1,801,620 1,801,620 1,799,439 1,799,439 169,131 169,131 222,698 222,698 Governments o.w.: issued by 80 299,912 - 276,488 - 42,047 - 42,047 - financial corporations o.w.: issued by non- 90 - - - - 1 - 1 - financial corporations Other 120 6,420,192 - 13,012,451 3,725,277 assets EUR/000
In total, encumbered assets (in terms of median values) account for approximately 38.50% of Group's assets, slightly up from 38.08% in 2019. The assets pledged as collateral are as follows: - loans and cash pledged as collateral account for approximately 76% of the Group’s encumbered assets. Loans are mainly pledged as collateral for the following transactions: o issuance of covered bonds on the market; o issuance of senior tranches of ABSs; o issuance of retained covered bonds included in the Bank of Italy's cover pool; o issuance of ABS senior tranches held and pledged with the Bank of Italy’spool; o loans included in the Bank of Italy’s cover pool (ABACO); o loans from the European Investment Bank (EIB) and Cassa Depositi e Prestiti (CDP); o cash deposits encumbered as collateral for clearing and settlement arrangements or as independent amount and fair value of OTC derivatives. - encumbered securities account for about 24% of the Group’s assets. Own securities are mainly pledged in the collateral pool with the ECB for funding from the European Investment Bank (EIB) or Cassa Depositi e Prestiti (CDP), to secure OTC derivative transactions and Securities Repurchase Transactions.
Template B-Collateral received Collateral received by the Group (see Template B-Collateral Received) primarily consists of securities issued by Eurozone governments which were received for repurchase agreements or securities lending transactions. Collateral re-use approximately amounts to EUR 436.7 mln.
Fair value of collateral received or own Fair value of encumbered collateral debt securities issued available for received or own debt securities issued encumbrance
of which notionally of which notionally eligible Extremely eligible Extremely High Quality High Quality Liquid Liquid Assets Assets (EHQLA) and (EHQLA) and High High Quality Liquid Quality Liquid Assets (HQLA) Assets (HQLA)
010 030 040 060
130 Collateral received by the credit institution 436,747 436,747 39,635 39,520
140 Loans on demand - - - -
150 Equity instruments - - - -
160 Debt securities 436,747 436,747 39,635 39,520
170 o.w.: covered bonds - - - -
180 o.w.: asset-backed securities - - 185 -
190 o.w.: issued by Governments 436,747 436,747 39,520 39,520
200 o.w.: issued by financial corporations - - 207 -
210 o.w.: issued by non-financial corporations - - - -
220 Loans other than on demand - - - -
230 Other collateral received - - - -
Own debt securities issued other than own 240 - - 49,084 - covered bonds or ABSs
Own covered bonds and asset-backed 241 616,086 - securities issued and not yet pledged
TOTAL ASSETS, COLLATERAL RECEIVED 250 8,928,488 2,225,462 AND OWN DEBT SECURITIES ISSUED
EUR/000
Template C-Encumbered assets/collateral received and associated liabilities
Assets, collateral received and own Matching liabilities debt securities issued
or securities lent other than encumbered covered bonds and ABSs
010 030
010 Carrying amount of associated financial liabilities 6,661,921 9,012,127
(EUR/000)
The table provides information on the liabilities associated with encumbered assets and collateral received.
In general, secured financing transactions involve pledging or transferring collateral for a higher value than the value of deposits, with a resulting ratio of approximately 135.28% between "Assets (encumbered assets/collateral received or own debt securities issued, other than Covered Bonds and ABS securities)" and associated "Liabilities (matching financial liabilities, contingent liabilities or securities lent)". In the case of financing with the Central Bank, the Eurosystem applies a haircut to the assets used to secure transactions according to various parameters, including the type of asset, credit scoring, duration and type of rate. Cover pool assets of Covered Bonds are weighted to take account, inter alia, of any write- down/revaluation of mortgaged real estate assets, the borrowers’ creditworthiness, risk of set-off, commingling and negative carry. Furthermore, rating agencies require a certain level of over- collateralisation to be maintained in support of rating levels assigned. For securitisation transactions, specific credit enhancement mechanisms have been defined in connection with tranching and the creation and maintenance of cash reserves. For further details, please refer to the sections on securitisation and covered bond transactions in the Explanatory Notes.
Under the heading “Other unencumbered assets” (see Template A-assets), amounting to approximately EUR 13 bn, the assets which cannot be immediately encumbered (related to deferred tax assets, Property & Equipment and intangible assets, assets for derivative contracts) amount to approximately EUR 2 bn, equal to approximately 17.07% of the "Group’s total other unencumbered assets";
The Banca Carige Group operates mainly in euro.
5.3 USE OF ECAIs
QUALITATIVE INFORMATION – art. 444 CRR
The prudential supervisory provisions foresee two approaches for calculating the capital requirements for credit risk: the Standardised (STD) approach and the Internal Ratings Based (IRB) approach. Currently, the Carige Group determines the requirement according to the Standardised Approach, which, in brief, weighs credit exposures based on their inclusion in one of the regulatory portfolios, defined in relation to the characteristics of the borrower or transaction entered into with the customer, which the Basel Committee recognises as having uniform risk profiles. The Standardised approach also uses different risk-weightings based on the external rating of specialised agencies (External Credit Assessment Institutions, ECAIs), specifically approved by the Supervisory Authority.
The Group decided to adopt the solicited ratings by Moody’s Investors Service and Cerved Group for the following portfolios: Exposures to central governments or central banks; Exposures to international organisations; Exposures to multilateral development banks; Exposures to corporates and other parties; Exposures in the form of units or shares in collective investment undertakings (‧CIUs‧) Exposures to securitisations. The Carige Group uses the same approach of assigning risk weights to credit assessment classes as specified in the regulatory framework of reference (EU Regulation 575/2013 – CRR).
QUANTITATIVE INFORMATION – art. 444 CRR
Provided below are credit risk-weighted exposures under the standardised approach, the exposure values and the exposure values after credit risk mitigation associated with each credit assessment class for each regulatory portfolio, as well as the exposure values not considered in determining risk-weighted assets, inasmuch as they are directly deducted from Own Funds.
5.3.1 Standardised approach – on- and off-balance sheet risk-weighted assets
With regard to exposures to central governments and central banks, it should be noted that credit quality step 3 includes investments in Italian government bonds, to which supervisory rules assign a 0% risk weight irrespective of the weight associated with the rating of the Issuing Country.
The amount of exposures deducted from Regulatory Capital refers, on the other hand, to deferred tax assets.
STANDARDISED APPROACH – ON- AND OFF-BALANCE SHEET RISK-WEIGHTED ASSETS
E xposures covered by E xposures deducted from P ORTFOLIOS EAD collateral personal guarantees credit derivatives Regulatory Capital
Central governments or Central Banks 9,608,332 449,123 credit quality step 1 330,234 credit quality step 2 59,350 credit quality step 3 2,799,981 credit quality step 4 161,677 credit quality step 5 13,585 credit quality step 6 5,302 unrated 6,238,203
Institutions 812,646 613,399 550,323 - credit quality step 1 370,402 credit quality step 2 186,144 credit quality step 3 130,803 credit quality step 4 301 credit quality step 5 825 credit quality step 6 - unrated 124,171
Regional governments or local authorities 583,430 - credit quality step 1 - credit quality step 2 335 credit quality step 3 2,007 credit quality step 4 277 credit quality step 5 1,565 credit quality step 6 - unrated 579,246
Multilateral development banks - - credit quality step 1 - credit quality step 2 - credit quality step 3 - credit quality step 4 - credit quality step 5 - credit quality step 6 - unrated -
Public sector entities 208,739 5 1,239 - credit quality step 1 - credit quality step 2 - credit quality step 3 205,602 credit quality step 4 - credit quality step 5 - credit quality step 6 - unrated 3,136
Corporates 2,400,161 13,456 621,160 - credit quality step 1 729 credit quality step 2 431,785 credit quality step 3 354,335 credit quality step 4 490,241 credit quality step 5 134,411 credit quality step 6 32,530 unrated 956,130
Exposures covered by Exposures deducted from P ORTFOLIOS EAD Regulatory Capital collateral personal guarantees credit derivatives
Retail exposures 2,532,668 26,929 1,149,534 credit quality step 1 6 credit quality step 2 1,864 credit quality step 3 11,155 credit quality step 4 21,189 credit quality step 5 3,261 credit quality step 6 967 unrated 2,494,227
Exposures secured by mortgages on immovable property 3,970,913 credit quality step 1 - credit quality step 2 - credit quality step 3 64,784 credit quality step 4 107,238 credit quality step 5 21,193 credit quality step 6 7,676 unrated 3,770,022
Exposures in default 269,344 2,239 12,265 credit quality step 1 - credit quality step 2 - credit quality step 3 347 credit quality step 4 - credit quality step 5 - credit quality step 6 - unrated 268,997
Exposures associated with particularly high risk 294,717 26,115 credit quality step 1 - credit quality step 2 - credit quality step 3 6,137 credit quality step 4 51,091 credit quality step 5 18,312 credit quality step 6 10,041 unrated 209,136
Other items 1,825,954 credit quality step 1 10 credit quality step 2 1,137 credit quality step 3 231,133 credit quality step 4 4,704 credit quality step 5 140 credit quality step 6 980,485 unrated 608,345
Exposures covered by Exposures deducted from P ORTFOLIOS EAD collateral personal guarantees credit derivatives Regulatory Capital
Exposures in the form of units or shares in CIUs - - credit quality step 1 - credit quality step 2 - credit quality step 3 - credit quality step 4 - credit quality step 5 - credit quality step 6 - unrated -
Items representing securitisation positions 42,126 - credit quality step 1 - credit quality step 2 - credit quality step 3 - credit quality step 4 - credit quality step 5 - credit quality step 6 - unrated 42,126
Equity exposures 365,567 - credit quality step 1 1,642 credit quality step 2 41,180 credit quality step 3 - credit quality step 4 675 credit quality step 5 - credit quality step 6 - unrated 322,069
Short-term exposures/businesses - - credit quality step 1 - credit quality step 2 - credit quality step 3 - credit quality step 4 - credit quality step 5 - credit quality step 6 - unrated -
TOTAL 22,914,596 656,028 2,360,636 - 449,123 EUR/000
5.4 USE OF CREDIT RISK MITIGATION TECHNIQUES
QUALITATIVE INFORMATION – art. 453 CRR
On- and off-balance-sheet netting processes and policies The Carige Group adopts risk reduction policies through the stipulation of “Netting Agreements” and “Collateral Agreements” for derivatives, repo positions and securities lending positions. In the case of OTC derivatives, they consist in netting agreements with a Central Counterparty (ISDA/FIA CDEA) and bilateral netting agreements (Credit Support Annex - CSA). The agreements for repo transactions that comply with international TBMA/ISDA standards consist in Global Master Repurchase Agreements (GMRA) and all of the entitlements to financial collateral related thereto. The agreements for securities lending transactions consist in Global Master Securities Lending Agreements (GMSLAs). The Group periodically analyses all types of master netting agreements, or similar arrangements, which might be eligible for accounting offsetting (netting). Netting agreements on OTC derivatives subject to margin trading at a Central Counterparty (ISDA/FIA CDEA) meet the criteria for accounting offsetting. For other types, the Carige Group does not offset credit risk exposures with on- and off-balance sheet positions of opposite sign. The analysis performed, in fact, revealed that: - bilateral master netting agreements (CSA-ISDA, GMRA, GMSLA), entered into by Group Banks do not meet the accounting offsetting criteria under the joint provisions of paragraphs AG38A and AG38B of IAS 32; - repo transactions on securities with the Cassa di Compensazione e Garanzia (clearing house) do not meet the criteria for accounting offsetting as they are in fact regulated by a collateral agreement; - transactions in quoted derivatives, being immaterial for the Carige Group, were excluded from the scope of the analysis.
As at 31 December 2020, the Carige Group had 42 collateral agreements (CSA, Credit Support Annex) -of which 12 enforced- in place with institutional counterparties within the perimeter of OTC derivative contracts (about 145 margin trading agreements).
Policies and processes for collateral valuation and management
Collateral management
The disbursement of loans secured by collateral is subject to specific control measures, differentiated by type of guarantee pledged, which are applied during the phase of disbursement and monitoring. Two main types of collateral, subject to different regulations, can be identified by volumes of loans granted and number of customers, namely Mortgages and Pledges (Cash and Securities). In terms of compliance with key organisational requirements for risk mitigation, the following have been assured: the presence of an information system to support the guarantee life cycle phases (acquisition, evaluation, management, enforcement); the preparation of policies for the management of collateral (principles, practices, processes), available to the users; the presence of regulated, documented procedures for the management of collateral (principles, practices, processes), available to the users; In order to limit the risks related to the cessation or depletion of the value of tcollateral (a.k.a. Residual Risk), the Group may also require additional ancillary guarantees, such as, for example, the subscription of insurance policies. In cases where the value of the asset pledged as collateral is subject to market or foreign exchange risks, the Group makes recourse to valuation differences (haircuts), expressed as a percentage of the value of the guarantee pledged according to the volatility of the value of securities pledged. The monitoring phase requires the adjustment of the guarantees with a market value lower than the value approved, net of the haircut.
Description of the main types of collateral taken by the Group
According to the principles and rules defined by the legislation, a process of collateral value monitoring is in place, in which the monitoring of the value of mortgaged properties over time is of particular importance. In particular, the control mechanisms are ensured by the adoption of specific rules to identify what is known as a “significant reduction” in the value of collateral, on the basis of which specific activities are defined and assigned to the bank branches. More specifically, when a “significant reduction” in the value of a property pledged as collateral to guarantee a position is reported, the branch in charge requests a new appraisal of the asset by a trusted expert, in order to update the carrying amount of the collateral, and implement consistent measures, if the depletion in the value of the collateral is confirmed.
Moreover, again in compliance with the reference legislation, for positions characterised by mortgage guarantees linked to loans for an amount exceeding EUR 3 mln or 5% of Own Funds, the properties pledged as collateral are periodically appraised (every three years). In addition to the monitoring activity, a centralised statistical revaluation of all buildings mortgaged or financed under leasing operations is performed annually: the revaluation is done using statistical indexes acquired by a leading Institute specialising in studies on the real economy (Nomisma) and is used to determine the market value of the property by discounting the value of the guarantee. As concerns financial collaterals, since prudential supervisory legislation provides for them to be adjusted to “fair value” at least on a half-yearly basis, the revaluation is carried out monthly for the purpose of calculating risk-weighted assets. In compliance with the ECB’s "Guidelines to Banks on Non-Performing Loans", the valuation of real estate collateral of a non-performing loan of over EUR 300,000 is subject to an individual appraisal when the loan is classified as non-performing (unless an estimate was made over the previous twelve months) and is later periodically updated at a frequency not exceeding 12 months. As illustrated in Chapter 1 on Residual Risk, it is noted that the Carige Group is continuing the programme of actions aimed at strengthening the collateral management processes, to ensure full compliance with the eligibility requirements including credit risk mitigation techniques for the quantification of capital requirements, while at the same time fine-tuning procedural and operational aspects.
Main types of guarantor and credit derivative counterparty and their creditworthiness
Under risk mitigation techniques, the CRR defines eligible guarantors, differentiating between the Standardised approach and IRB methods; in the Standardised approach, eligible guarantors include Governments, Banks, Insurance undertakings and local authorities. To determine the capital requirements, according to these rules, the Carige Group uses only guarantees provided by these types of counterparties. Having said this, the most common types of personal guarantees are those issued by natural persons to other natural persons or to their businesses (specific guarantees and general guarantee agreements); personal guarantees issued by legal persons in the form of comfort letters are less frequent. In order to contain the economic repercussions caused by the Covid-19 emergency, the Italian government launched a series of legislative measures during the course of 2020, which, in the credit sector, were mainly reflected in moratoria and state-guaranteed lending. The Banca Carige Group immediately took action to support its customers financially by granting moratoria and loans backed by the Central Guarantee Fund for SMEs. As a result of these initiatives, which concerned a significant portion of the loan portfolio, the share of guarantees has significantly increased, which has had the effect of mitigating credit risk and improving capital requirements. Table 5.4.1 below reports the personal guarantees issued by Supervised Intermediaries, including credit guarantee consortia (‘Confidi’) under art. 1074.
Information about market or credit risk concentrations within the credit mitigation taken
As mentioned above, the greatest concentration is found on the type of guarantee, rather than on the individual guarantor: in fact, the higher incidence is due to mortgage guarantees which, however, taking account of the high number of specific transactions and the significant granularity of this portfolio, are not considered to expose the Group’s Banks to particular concentration risks, even though the current crisis of the real estate market may at this stage adversely affect the return on any potential disposal transactions.
The treatment for prudential purposes of banks and public sector entities without a specific counterparty rating depends on the creditworthiness of the Italian State, whose rating (Baa3) applies a 100% risk weight to all Italian supervised intermediaries and public sector entities. All credit guarantee consortia (‘Confidi’) pursuant to article 107 had to apply for registration with the new register of major credit guarantee consortia (‘Confidi’) (article 106 of the consolidated law on banking). However, not all of them obtained authorisation; for some the application is still pending and for others it was denied.
QUANTITATIVE INFORMATION – art. 453 CRR
5.4.1 Aggregate amount of guaranteed exposures – standardised approach
Personal Financial Type of exposure Other guarantees guarantees and collateral credit derivatives
Central governments or Central Banks - - -
Supervised Intermediaries - 613,399 550,323 Local authorities - - -
Not-for-profit and public-sector entities - 5 1,239 Multilateral development banks - - -
International organisations - - -
Corporates - 13,456 621,160
Retail exposures - 26,929 1,149,534 Short-term exposures to businesses - - -
Collective investment undertakings (CIUs) - - -
Secured by mortgages on immovable property - - -
Exposures in the form of covered bonds - - -
Past due exposures - 2,239 12,265
Exposures associated with particularly high risk - - 26,115 Other - -
Items representing securitisation positions - 282,497 Total 656,028 - 2,643,133 Figures in EUR/000
6. EXPOSURE TO COUNTERPARTY RISK
QUALITATIVE INFORMATION – art. 439 CRR
The Group pays attention to monitoring counterparty risk, understood as the risk that the counterparty of a transaction involving certain financial instruments – such as OTC derivatives, long settlement transactions, SFT transactions (Securities financing transactions, i.e. (funding or lending) repurchase transactions on securities or commodities, securities or commodities lending or borrowing transactions and margin lending transactions) – defaults before the transaction is settled. The Group bases its own method of measuring and monitoring the exposure to counterparty risk on the notional value of the transactions in question. From the operational point of view, the activity can be divided into two segments according to both the characteristics of the counterparty (institutional and retail/corporate customers), and the operational and monitoring methods adopted by the Group. In brief, the process of defining, measuring and monitoring counterparty risk involves: Lending – regarding the core business of the Finance department with financial institutions, the loan applications are managed internally by the Finance department, while for ordinary customer operations (corporate segment) the loan files are managed directly by the branch in charge. In both cases, the defined limits are reviewed periodically (at least once a year).
Monitoring – counterparty limits associated with loans are entered in the position management and monitoring systems of either institutional counterparties or retail/corporate customers. On a daily basis, the Finance department verifies the use of credit lines and their compliance with the limits, and initiates the appropriate procedures if the defined limits are breached. Any breaches by retail/corporate customers are reported to the branch in charge for the actions required. Counterparty risk is measured in terms of expected potential market values5 and probability of default. As far as derivatives are concerned, the calculation is based on the potential exposure at different time points up to 20 years. The scope covers all counterparties that do not have any collateral agreements (ISDA/CSA) in place.
To mitigate counter-party risk associated with OTC derivative positions, the Carige Group has entered into 42 CSA (Credit Support Annex) contracts. These bilateral contracts define the terms and rules for the mutual exchange of a collateral, i.e. a guarantee deposit, between counterparties
5 Fair value estimated in future time buckets.
that have a derivative contract in place. The technical operation of such agreements can be summarised as follows. At each established evaluation date, the net balance of the market value is determined for all transactions in OTC derivatives between the two parties. The party with the negative balance will have to transfer to the other party (as collateral on an account held by the counterparty) an amount equal to the aforementioned balance by way of margin or collateral. A minimum threshold can be set, below which the margin and/or a minimum transfer amount is not transferred (minimum transfer amount). Otherwise, it is also possible to define a fixed initial deposit to be paid by one or both parties as a further guarantee (independent amount). The calculation is made at each new evaluation date. If necessary, the margin is adjusted by integrating the deposit or having the difference returned. The deposit may consist of cash or securities and is remunerated in the agreed manner (usually at the Eonia rate for cash, return of coupons for securities). The risk deriving from the execution of repo transactions and securities lending is respectively mitigated through GMRA contracts (Global Master Repurchase Agreements) and GMSLA (Global Master Securities Lending Agreement), stipulated with the intent of ensuring a system of mutual financial guarantees. Forward exchange contracts (time “buckets” and forex swaps) with market counterparties may fall under CSA contracts and therefore be subject to margin trading, as for OTC derivatives. For regulatory purposes, counterparty risk is measured using the “market value” method, which quantifies the exposure by applying a surcharge (which depends on the type of instrument) to the fair value of the derivative contract.
QUANTITATIVE INFORMATION – art. 439 CRR
6.1 Trading financial derivatives: end-of-period notional amounts
Total 31/12/2020 Total 31/01/2020 Over the counter Over the counter Without central Without central Underlying counterparties counterparties assets/Type Organise Organise Central Central of With Without d With Without d counterparti counterparti derivatives netting netting markets netting netting markets es es agreemen agreemen agreemen agreemen ts ts ts ts
1. Debt securities - 94,016 96,217 - - 84,876 87,661 - anda) interestOptions - 19,049 19,160 - - 23,408 23,468 - rates b)Swaps - 74,967 77,057 - - 61,468 64,193 - c)Forward ------s d)Futures ------e) Other ------2. Equity instruments ------anda) stockOptions ------indices b) Swaps ------c)Forwards ------d) Futures ------e) Other ------3. Foreign - - 5,339 - - - 3,001 - exchangea)Options ------rates and b) Swaps ------gold c) Forward - - 5,339 - - - 3,001 - s d)Futures ------e) Other ------4. ------5.Commoditi Other ------es Total - 94,016 101,556 - - 84,876 90,662 -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.1 “Trading financial derivatives”, table A.1 for the same item.
6.2 Trading financial derivatives: positive and negative gross fair value - breakdown by product
Total 31/12/2020 Total 31/01/2020
Over the counter Over the counter Type of derivatives Without central counterparties Organised Without central counterparties Organised Central markets Central markets couterp counterpartie arties With netting Without netting s With netting Without netting agreements agreements agreement agreements 1. Positive Fair
Value a) Options - 11 - - - 22 - - b) Interest rate - - 1,470 - - - 1,556 - swaps c) Cross ------currency swaps d) Equity ------swaps e) Forwards - - 89 - - - 22 - f) Futures ------g) Other ------
Total 11 1,559 22 1,578 2. Negative Fair
Value a) Options - - 8 - - - 20 - b) Interest rate - 980 - - - 1,140 - - swaps c) Cross ------currency swaps d) Equity ------swaps e) Forwards - - 68 - - - 4 - f) Futures ------g) Other ------
Total - - 980 76 - 1,140 24 -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.1 “Trading financial derivatives”, table A.2 for the same item.
6.3 OTC trading financial derivatives: notional amounts, positive and negative gross fair value by counterparty
Underlying assets
Banks
Central
corporations
Other entities
counterparties
Other financial Contracts not subject to netting agreements 1) Debt securities and interest rates - notional value X 827 21,792 73,598 - positive fair value X - 277 1,193 - negative fair value X - - 8 2) Equity instruments and stock indices - notional value X - - - - positive fair value X - - - - negative fair value X - - - 3) Foreign exchange and gold - notional value X 2,418 - 2,921 - positive fair value X - - 89 - negative fair value X 67 - 1 4) Commodities - notional value X - - - - positive fair value X - - - - negative fair value X - - - 5) Other - notional value X - - - - positive fair value X - - - - negative fair value X - - - Contracts subject to netting agreement 1) Debt securities and interest rates - notional value - 94,016 - - - positive fair value - 11 - - - negative fair value - 980 - - 2) Equity instruments and stock indices - notional value - - - - - positive fair value - - - - - negative fair value - - - - 3) Foreign exchange and gold - notional value - - - - - positive fair value - - - - - negative fair value - - - - 4) Commodities - notional value - - - - - positive fair value - - - - - negative fair value - - - - 5) Other - notional value - - - - - positive fair value - - - - - negative fair value - - - -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.1 “Trading financial derivatives”, table A.3 for the same item.
6.4 Term to maturity of OTC financial derivatives: notional amounts
Underlying assets/Term to maturity Up to 1 year > 1 to 5 years Over 5 years Total
A.1 Financial derivatives on debt 70,784 97,248 22,201 190,233 A.2 Financialsecurities derivatives and interest on equities rates - - - - and stock indices A.3 Financial derivatives on foreign 5,339 - - 5,339 exchange and gold A.4 Financial derivatives on - - - - commodities A.5 Other financial derivatives - - - - Total 31/12/2020 76,123 97,248 22,201 195,572 Total 31/01/2020 84,995 68,397 22,147 175,539
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.1 “Trading financial derivatives”, table A.4 for the same item.
No trading credit derivatives were in place as at 31 December 2020.
6.5 Hedging derivatives: end-of-period notional amounts
Total 31/12/2020 Total 31/01/2020 Over the counter Over the counter Underlying Without central Without central Organise assets/Type of Central counterparties Organised Central counterparties Without Without d derivatives counterp With netting markets counter With netting netting netting markets arties agreements parties agreement agreements agreements 1. Debt securities and - 2,155,626 - - - 1,615,499 - - interesta) Options rates ------b) Swaps - 2,155,626 - - - 1,615,499 - - c) Forwards ------d) Futures ------e) Other ------2. Equity instruments and ------stocka) Optionsindices ------b) Swaps ------c) Forwards ------d) Futures ------e) Other ------3. Foreign - - 65,441 - - - 482,420 - exchangea) Options and ------gold b) Swaps ------c) Forwards - - 65,441 - - - 482,420 - d) Futures ------e) Other ------4. Commodities ------5. Other ------Total - 2,155,626 65,441 - - 1,615,499 482,420 -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.2 “Hedging policies” in table A.1 for the same item.
6.6 Hedging financial derivatives: positive and negative gross fair value - breakdown by product
Positive and negative fair value Changes in value used to calculate hedge effectiveness Total 31/12/2020 Total 31/01/2020
Over the counter Over the counter Type of derivatives Without central counterparties Without central counterparties Organised Organised Total Total Central markets Central markets Without 31/12/2020 31/01/2020 counterparties With netting counterparties With netting Without netting netting agreements agreement agreements agreement
Positive Fair Valuea) Options ------b) Interest - 8,823 - - - 8,913 - - c)rate Cross swaps ------d)currency Equity ------swaps e)swaps Forwards - - 532 - - - 174 - f) Futures ------g) Other ------Total - 8,823 532 - - 8,913 174 - Negative Fair Valuea) Options ------b) Interest - 247,044 - - - 262,297 - - c)rate Cross swaps ------d)currency Equity ------swaps e)swaps Forwards - - 35 - - - 3,998 - f) Futures ------g) Other ------Total - 247,044 35 - - 262,297 3,998 -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.2 “Hedging policies” in table A.2 for the same item.
6.7 OTC hedging financial derivatives: notional amounts, positive and negative gross fair value by counterparty
Underlying assets
Banks
Central
companies
Other entities
counterparties
Other financial
Contracts not subject to netting agreements 1) Debt securities and interest rates - notional value X - - - - positive fair value X - - - - negative fair value X - - - 2) Equity instruments and stock indices - notional value X - - - - positive fair value X - - - - negative fair value X - - - 3) Foreign exchange and gold - notional value X 65,441 - - - positive fair value X 532 - - - negative fair value X 35 - - 4) Commodities - notional value X - - - - positive fair value X - - - - negative fair value X - - - 5) Other - notional value X - - - - positive fair value X - - - - negative fair value X - - - Contracts subject to netting agreements 1) Debt securities and interest rates - notional value - 2,155,626 - - - positive fair value - 8,823 - - - negative fair value - 247,044 - - 2) Equity instruments and stock indices - notional value - - - - - positive fair value - - - - - negative fair value - - - - 3) Foreign exchange and gold - notional value - - - - - positive fair value - - - - - negative fair value - - - - 4) Commodities - notional value - - - - - positive fair value - - - - - negative fair value - - - -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.2 “Hedging policies” in table A.3 for the same item.
6.8 Term to maturity of OTC hedging financial derivatives: notional amounts
Underlying assets/Term to maturity Up to 1 year > 1 to 5 years Over 5 years Total
A.1 Financial derivatives on debt 503,930 1,616,696 35,000 2,155,626 A.2 Financialsecurities derivatives and interest on equity rates - - - - instrumentsA.3 Financial and derivatives stock indices on 65,441 - - 65,441 A.4exchange Financial rates derivatives and gold on - - - - A.5 Other financialcommodities derivatives - - - - Total 31/12/2020 569,371 1,616,696 35,000 2,221,067 Total 31/01/2020 983,793 620,626 493,500 2,097,919
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.2 “Hedging policies” in table A.4 for the same item.
No credit derivative contracts were in place as at 31 December 2020.
6.9 OTC financial and credit derivatives: net fair value by counterparty
Banks
Central
companies
Other entities
counterparties
Other financial A. Financial derivatives 1) Debt securities and interest rates - notional value - - - - - positive net fair value - - - - - negative net fair value - - - - 2) Equity instruments and stock indices - notional value - - - - - positive net fair value - - - - - negative net fair value - - - - 3) Foreign exchange and gold - notional value - - - - - positive net fair value - - - - - negative net fair value - - - - 4) Commodities - notional value - - - - - positive net fair value - - - - - negative net fair value - - - - 5) Other - notional value - - - - - positive net fair value - - - - - negative net fair value - - - - B. Credit derivatives 1) Credit enhancement purchases - notional value - - - - - positive net fair value - - - - - negative net fair value - - - - 2) Credit enhancement sales - notional value - - - - - positive net fair value - - - - - negative net fair value - - - -
The values shown correspond to those indicated in Part E of the Explanatory Notes to the Consolidated Financial Report as at 31 December 2020, section 1.3.3 “Other information on derivatives” in table A.1 for the same item.
6.10 Counterparty Risk
COUNTERPARTY RISK - COLLATERAL HELD EAD VALUE
STANDARDISED APPROACH 613,399
- derivative contracts and long settlement transactions 10
- Securities Financing Transactions (SFTs) 613,389
COUNTERPARTY RISK EAD VALUE
STANDARDISED APPROACH 679,558
- derivative contracts and long settlement transactions 13,525
- Securities Financing Transactions (SFTs) 666,033
Figures in EUR/000 The capital requirement for counterparty risk is EUR 2,657/000 (RWAs EUR 33,210/000)
As can be seen in the table, exposure to counterparty risk as at 31 December 2020 was EUR 679.6 mln.
7. OPERATIONAL RISK
QUALITATIVE INFORMATION – art. 446 CRR
The Banca Carige Group adopts the “standardised approach” to calculate the capital requirement for operational risk6, applying the coefficients provided for by the7 reference regulation to the relevant indicator8 broken down by business line.
According to the afore-described calculation method, the capital requirement as at 31 December 2020 was EUR 57.77 mln (EUR 64.39 mln as at 31 December 20199).
*****
The percentage of operating losses at Carige Group level for the period 31/01/2020 - 31/12/2020 by type of event is reported below:
Gross losses: breakdown by Event Type
Execution, delivery and process management 29.41%
Business disruption and systems failures 14.91%
Damages to physical assets 3.55%
Customers, products and business practice 26.01%
Employment practices and workplace safety 5.29%
External fraud 8.74%
Internal fraud 12.10%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%
During the reporting period, the main sources of operational risk, in terms of amount, were related to situations classified under event type “Process management and execution” (29.41%) and “Customers, Products and Operating Practices” (26.01%), followed by the categories “Business disruption and systems failures” (14.91%) and “Internal Fraud”(12.10%).
6 Regulation EU 575/13, art 317 7 Regulation EU 575/13, art 316 8 Regulation EU 575/13, art 317 9The CRR requires that the capital requirements for operational risk be quantified once a year as at the reporting date of the full-year financial report.
8. EXPOSURES TO SECURITISATION POSITIONS
QUALITATIVE INFORMATION – art. 449 CRR
Traditional securitisations
The Carige Group has seven securitisations in place: 1) a securitisation of performing loans, which was carried out by the Parent Company through the SPV Argo Mortgage 2 S.r.l. in the first half of 2004, 2) a securitisation of performing loans carried out by the Parent Company and Banca del Monte di Lucca through the special purpose vehicle Lanterna Finance S.r.l. in 2020, 3) a securitisation of performing loans carried out by the Parent Company and Banca del Monte di Lucca through the special purpose vehicle Lanterna Finance S.r.l. in 2015, 4) a securitisation of performing leases carried out through the special purpose vehicle Lanterna Lease S.r.l. in 2019, 5) a securitisation of non-performing loans carried out by the Parent Company through the special purpose vehicle Pillarstone Italy SPV s.r.l., to facilitate the restructuring of loans granted to a customer, 6) a securitisation of bad loans carried out in 2017 by the three banks of the Group via the Brisca Securitisation s.r.l. vehicle, and 7) a securitisation on bad loans carried out through the Riviera N.p.l. S.r.l. vehicle in 2018.
In addition to these securitisations, medium- to long-term funding was raised via three Covered Bond issuances, which are further described in section E.4.
In 2020, the company also carried out a retained securitisation transaction with underlying performing loans, the information of which is contained in the section of the Explanatory Notes relating to Liquidity risk.
For the purpose of promoting a shared co-ordination and monitoring of securitisation and covered bond transactions originated by the Group, a unit was set up as part of the Finance division, which makes sure that these transactions and related activities are constantly monitored with an across- the-board approach by multiple functions and units of the company. Specifically, the assessment and control of risks deriving from the above-described securitisations are performed on the Carige Group’s Credit Risk Management (CRM) system, which monitors transactions in performing loans; the performance of individual transactions is constantly assessed by the General Management: specific reports are expected to be submitted to the Board of Directors on a half-yearly basis. As the first four securitisations do not fully meet the conditions for all risks and rewards to be transferred to third parties, they were retained in the transferors' balance sheets. The securitisation transactions are further explained below.
a) Securitisation of performing loans carried out through the SPV Argo Mortgage 2 S.r.l. in 2004.
The transaction involved the transfer without recourse to the special purpose vehicle Argo Mortgage 2 S.r.l. (in which Banca Carige currently has a 60% direct holding) of 13,272 mortgage loans for a total value of EUR 864.5 mln as at 30 June 2004, at a price of EUR 925.6 mln (of which EUR 61.1 mln as deferred price calculated by means of a profit extraction mechanism which specifically took account of the excess spread, net of transaction costs as at each payment date, the level of risk of the loans transferred and early repayment options). To finance these transactions, Argo Mortgage 2 S.r.l. issued EUR 864.4 mln worth of securities, of which EUR 808.3 mln class A, EUR 26.8 mln class B, EUR 29.4 mln class C, all listed on the Luxembourg stock exchange, and was granted a subordinated loan by Banca Carige for an amount of EUR 22.8 mln which was fully repaid in 2009. As at 31 December 2020, securities issued were rated as follows: SECURITIES CODE FITCH MOODY’S Class B IT0003694137 BBB+ Aa3 Class C IT0003694145 BBB+ Aa3
As at 31 December 2020, class A notes were fully repaid and mezzanine class B notes were repaid for an amount of EUR 19.4 mln as against an initial amount issued of EUR 26.8 mln. The deferred credit to be paid to Carige as at 31 December 2020 amounted to EUR 39.9 mln.
b) Securitisation of performing loans carried out through the vehicle Lanterna Finance S.r.l. in 2020.
The transaction, which was completed in June 2020, involved the transfer without recourse of 6,849 mortgage loans by the Parent Company and Banca del Monte di Lucca to the vehicle Lanterna Finance S.r.l. (in which Banca Carige currently has a 5% holding) for a total price of EUR 362.4 mln, o.w.EUR 337.9 mln by Carige and EUR 24.5 mln by Banca del Monte di Lucca. On 29 June 2020, the vehicle Lanterna Finance S.r.l. issued EUR 205 mln worth of A1 senior notes, EUR 20 mln worth of A2 senior notes, and one line of junior notes for an amount of EUR 137.5 mln. These securities were initially subscribed for by the Transferring Banks. In December 2020, the A1 senior notes were sold to third parties, thus the transaction became a traditional securitisation. As a guarantee for the senior bondholders, a EUR 4.1 mln cash reserve was set up. The securities issued were rated by DBRS and S&P Global. The participants in the transaction were the following: Originators/transferors: Banca Carige S.p.a. and Banca del Monte di Lucca S.p.A. Corporate Servicers and: Master Sericers: Banca Carige S.p.A. Additional servicer: Banca del Monte di Lucca
Account Bank and Paying Agent: Bank of New York Mellon, Milan Branch Calculation Agent: Bank of New York Mellon, London Branch Back up Servicer and Bondholder Representative: Zenith Service S.p.A. Arranger: Banca IMI S.p.A.
As at 31 December 2020, the senior notes were rated as follows: SECURITIES CODE S&P Global DBRS Class A1 IT0005415218 AA- A (high) Class A2 IT0005415226 A BBB (high)
As at 31 December 2020, class A1 notes were repaid for an amount of EUR 55.6 mln against an initial amount issued of EUR 205 mln.
c) Securitisation of performing loans carried out through the vehicle Lanterna Finance S.r.l. in 2015.
The transaction, which was completed in October 2015, involved the transfer without recourse of 8,599 mortgage and land loans by the Banks of the Carige Group to the vehicle Lanterna Finance S.r.l. (in which Banca Carige currently has a 5% holding) for a total price of EUR 716.9 mln (o.w. EUR 57.7 mln for the loans transferred by Banca del Monte di Lucca). During 2018, the transaction was updated by cancellation of the securities yet to be redeemed (EUR 5.3 mln in senior notes and EUR 331.8 mln in junior notes) and issuance of new securities for the same total amount (EUR 200 mln in senior notes and 137.1 mln in junior notes). The senior tranche was transferred to an institutional investor in December 2018, while the Junior tranche was underwritten by the two transferring banks. As a guarantee for the senior bondholders, a EUR 9.5 mln cash reserve was set up.
The securities issued are rated as follows: SECURITIES CODE DBRS MOODY’S Class A IT0005154064 AAA Aa3 Class B IT0005154072 N/A N/A
As at 31 December 2020, EUR 28.4 mln worth of Class A securities were to be repaid.
d) Securitisation of performing leases carried out through the special purpose vehicle Lanterna Lease S.r.l. in 2019
The transaction was carried out in the first half of 2019 and involved the transfer of receivables deriving from lease contracts to the special purpose vehicle Lanterna Lease S.r.l. The portfolio, consisting of 1,186 contracts, was sold at a total price of EUR 231,343,559. The bond issuance (ABS) of Lanterna Lease S.r.l. has the following characteristics: Class Amounts EUR Rating Legal Maturity Spread on 3- Features mln month Euribor A 113.7 Unrated 30-Jan-51 Bps 165 Floor 0% Z 120.8 unrated 30-Jan-51 N/A N/A
The senior tranche was underwritten by an institutional investor. As at 31 December 2020, senior securities were repaid for an amount of EUR 62.9 mln against an issuance of EUR 113.7 mln.
e) Securitisation of non-performing loans through the vehicle Pillarstone Italy SPV S.r.l.
The securitisation was carried out in 2016 in order to favour the workout of Banca Carige’s non- performing loans to the Premuda Group. Pursuant to Italian law 130/99, the SPV, Pillarstone Italy S.P.V. S.r.l. (not belonging to the Carige Group) was transferred three ship mortgage loans denominated in US dollars to Four Handy Limited for an aggregate amount of EUR 63.2 mln and revolving loan facilities to Premuda SAH for an amount of EUR 25.3 mln.
The transaction is a multioriginator securitisation, the securitised portfolio being made up of loans that were transferred to Pillarstone Italy SPV by several banks.
In exchange for the foregoing transfer, Banca Carige was paid the cash equivalent of 5% of the gross amount of the collateralised loans (EUR 2.7 mln) plus USD 56.2 mln in class B USD- denominated Senior notes and EUR 24.5 mln and USD 5 mln in class C Junior notes in exchange for the difference.
The workout transaction was backed by new liquidity provided to the SPV by an investor. The funds were raised by underwriting class A Super Senior securities with repayment priority over the other two types of notes.
Pillarstone Italy S.p.A. was engaged as the servicer in the transaction.
In March 2017, a credit facility amounting to EUR 1.15 mln was transferred to the SPV.
Following the considerable losses of Premuda S.p.A., based on the contractual agreements of the transaction, interventions were carried out in 2017 on the securitisation transaction, which profoundly modified the amount of the Bank's exposures thereto, either by restructuring significant
amounts of exposure through “swaps to equity” and “write offs” or by rescheduling the shipping loans repayment plans.
Therefore, pursuant to paragraph 21 of IAS 39, in 2017 the Bank derecognised the transferred loans in full and recognised the securitisation notes at their fair value in the IAS category Assets Available for Sale.
As at 31 December 2020, EUR 41.7 mln worth of class B securitisation notes were recognised in the Assets section of the financial statements under Financial Assets mandatorily measured at fair value, whereas the junior notes were fully written-down.
f) Securitisation of bad loans carried out by the three banks of the group through the special purpose vehicle Brisca Securitisation S.r.l. in 2017.
Banca Carige S.p.A., Banca del Monte di Lucca S.p.A. and Banca Cesare Ponti S.p.A. completed, with date of effect 16 June 2017, a non-recourse sale of bad loans to the SPV Brisca Securitisation s.r.l., for a total gross value of EUR 961.1 mln.
The consideration for the transfer of loans amounted to a total of EUR 309.7 mln, of which EUR 281.4 mln for loans transferred by Banca Carige, EUR 27.4 mln for loans transferred by Banca del Monte di Lucca S.p.A. and EUR 0.9 mln for loans transferred by Banca Cesare Ponti S.p.A.
A series of positions have been excluded from the portfolio in order to comply with the retention obligation provided for by the relevant legislation and these loans consist solely of Banca Carige S.p.A. loans.
On 5 July 2017, the following notes were issued, which were subscribed for by the three transferring banks:
Securities Carige B.M.L B.C.P Total nominal amount (EUR/000) Senior 242,952 23,632 816 267,400 Mezzanine 27,705 2,695 100 30,500 Junior 10,657 1,043 100 11,800 Total 281,314 27,370 1,016 309,700
At the same time, the three banks applied for government guarantee on the Senior tranche (a.k.a. GACS)
In August 2017, the Mezzanine and Junior notes of the three Banks of the Group were fully transferred to third parties.
Given that substantially all the risks and rewards of ownership of the financial assets were transferred (IAS 39 paragraph 20 a), as were the relevant rights to receive cash flows (IAS 39
para. 18 a), the transferred loans were derecognised from the Consolidated and Separate Financial Statements and the GACS-backed Senior notes were recognised as “Assets measured at amortised cost”.
As at 31 December 2020, the securitised Senior notes were recognised as financial assets measured at amortised cost for a total of EUR 151.7 mln (of which EUR 138.8 mln by Carige, EUR 13.4 mln by Banca del Monte di Lucca and EUR 0.5 mln by Banca Ponti).
The securities issued as at 31 December 2020 are rated as follows: SECURITIES CODE MOODY’S DBRS Class A IT0005274599 A3 BBB (high) Class B IT0005274607 B3 B (low) Class J IT0005274615 - -
g) Securitisation of bad loans carried out by Banca Carige and Banca del Monte di Lucca through the special purpose vehicle Riviera N.P.L. S.r.l. in 2018.
In order to reduce their non-performing loan exposure, Banca Carige S.p.A. and Banca del Monte di Lucca S.p.A. completed, with date of effect 4 December 2018, a non-recourse sale of bad loans to the SPV Riviera N.p.l. S.r.l., for a total gross value of EUR 859.8 mln.
The consideration of the transfer of loans amounted to a total of EUR 215 mln, of which EUR 207.6 mln for loans transferred by Banca Carige and EUR 7.4 mln for loans transferred by Banca del Monte di Lucca S.p.A.
Banca Carige granted a subordinated loan of EUR 7 mln to the vehicle in support of liquidity for the transaction.
On 17 December 2018, the following notes were issued, which were subscribed for by the two transferring banks:
Securities Carige B.M.L Total nominal Moody's Yield amount Ratings/Scope (EUR/000)
Senior 168,990 6,010 175,000 Baa3/BBB- Euribor 6M+0,65%
Mezzanine 28,970 1,030 30,000 Ca/B+ Euribor 6M+7%
Junior 9,657 343 10,000 unrated Euribor 6M+10%
Total 207,617 7,383 215,000
At the same time, the three banks applied for government guarantee on the Senior tranche (a.k.a. GACS)
On 17 December 2018, the Group sold 95% of the junior and mezzanine notes of the two Banks of the Group to a select institutional investor.
Given that substantially all the risks and rewards of ownership of the financial assets were transferred (IAS 39 paragraph 20 a), as were the relevant rights to receive cash flows (IAS 39 para. 18 a), the transferred loans were derecognised from the Consolidated and Separate Financial Statements, Senior notes were classified as "financial assets measured at amortised cost" and the shares of mezzanine and junior securities still held (5%) were reclassified among "assets mandatorily at fair value".
As at 31 December 2020, the securitised Senior notes were recognised as financial assets measured at amortised cost for a total of EUR 130.6 mln (of which EUR 126.1 mln for Carige and EUR 4.5 mln for Banca del Monte di Lucca) and the mezzanine and junior notes were recognised as financial assets mandatorily at fair value for a total of EUR 0.4 mln.
As at 31 January 2020, the securities issued were rated as follows:
Securities Moody's Ratings/Scope Senior Ba1/BB+ Mezzanine Ca/CCC Junior unrated
Synthetic securitisations
The Liguria Region (Regione Liguria) entrusted FI.L.S.E. S.p.A. with the role of managing a fund to facilitate access to credit for Ligurian SMEs through portfolios of loans made available with a 'Tranched Cover' structure by multiple Banks operating in Liguria. The foregoing loan portfolios are subdivided into two different tranches: a Junior Tranche, exposed to first loss risk, and a lower- risk Senior Tranche.
The guarantee consists in a tranched-cover mechanism whereby the risk of losses on loans within the portfolio upper limit will be broken down into the following tranches:
a) a junior tranche, accounting for 6.75% of the portfolio upper limit to cover any first losses occurring with respect to the overall upper limit amount, b) a senior tranche, accounting for the remaining 93.25% risk of the bank; it incurs losses if the junior tranche has been exhausted, i.e. whenever total losses exceed 6.75% of loans granted. Losses on loans granted as part of the “FI.L.S.E. Liguria 2015 Tranched Cover” loan pools, are sequentially assigned to tranches a) and b). Therefore, should losses exceed 6.75% of the asset pool drawn amount, the senior tranche becomes due, with risk being borne entirely by the bank.
Synthetically securitised loans were not derecognised. As at 31 December 2020, said loans amounted to gross EUR 1,415 thousand (of which EUR 82 thousand in NPLs); loan loss provisions amounted to EUR 52 thousand (of which EUR 47 thousand in NPLs). Deposits pledged as collateral in the name of FILSE S.p.A. are accounted for in Liabilities Item 10 - “Financial liabilities measured at amortised cost” (EUR 1,565 thousand as at 31 December 2020).
Approaches to calculating risk weighted exposure amounts that the institution follows for its securitisation activities.
Regulation (EU) 575/2013, updated by EU Regulation 2017/2401, lays down the rules for the prudential treatment of securitisation positions, both for those originated by the banks, and for the securities issued by other banks purchased and held in the portfolio. As regards transactions carried out directly, their prudential treatment depends on the verification of the requirement of significant transfer of risk: if this is the case, the assets transferred do not fall within the reporting scope and therefore do not generate any RWAs. Otherwise, the legislation requires that the underlying receivables be included in the bank’s weighted assets as if these loans had never been securitised. These conditions are met for the Brisca and Riviera securitisations.
As at 31 December 2020, other securitisations were in place, as reported below: Lanterna Finance: senior securities placed with investors; junior securities underwritten by Carige; Lanterna Lease: senior securities placed with investors; junior securities underwritten by Banca Carige; Pillarstone; Argo Mortgage 2; Lanterna Finance 3: senior securities placed with investors; junior securities underwritten by Banca Carige; Lanterna Mortgage (retained securitisation).
QUANTITATIVE INFORMATION – art. 449 CRR
8.1 EXPOSURE TO SECURITISATION POSITIONS FOR EACH CAPITAL REQUIREMENTS APPROACH USED
On-balance-sheet assets Off-balance sheet assets RWAs
Third-party Third-party Own securitisations Own securitisations CALCULATION securitisations securitisations APPROACH Type Type Type Type
Traditional Synthetic Traditional Synthetic Traditional Synthetic Traditional Synthetic
SEC-IRBA ------
SEC-SA ------390 2,523
SEC-ERBA ------
INT.ASS.APPROACH ------
OTHER ------41,737 62,605
Total 42,127 ------65,128
Figures in EUR/000
8.2 Exposures arising from major own securitisation transactions broken down by type of securitised asset and exposure
On-balance-sheet exposures Financial guarantees given Lines of credit Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior
backs backs backs
backs backs backs backs backs backs
- - -
------
Type of securitised
)/write )/write )/write )/write )/write )/write
) /write ) /write ) /write
------
- - -
asset/Exposure
(+) (+) (+) (+) (+) (+) (+) (+) (+)
Book valueBook valueBook valueBook
Net exposureNet exposureNet exposureNet exposureNet exposureNet exposureNet
adjustments (
Value Value adjustments ( Value Value adjustments ( Value adjustments ( Value adjustments ( Value adjustments (
Value Value adjustments ( Value adjustments ( Value adjustments (
A. Totally derecognised 287,769 (211) 42,126 1,809 ------A.1 Pillarstone Italy s.p.v. s.r.l.
- non-performing loans - - 41,737 1,938 ------A.2 Brisca Securitisation S.p.v.. s.r.l
- non-performing loans 151,685 ------A.3 Riviera Npl S.p.v. s.r.l.
- non-performing loans 136,084 (211) 389 (129) ------
B. Partially derecognised ------
C. Not derecognised - - 3,783 - 618,099 ------C.1 Argo Mortgage 2 s.r.l.
- performing loans - - 3,783 - 34,552 ------C.2 Lanterna Finance s.r.l. (1st transaction carried out in 2015)
Performing mortgage loan agreements - - 193,270 ------C.3 Lanterna Finance s.r.l. (3rd transaction carried out in 2020)
Performing mortgage loan agreements - - 156,997 ------C.4 Lanterna Lease s.r.l.
Performing lease agreements - - 233,280 ------
8.3 Securitisation vehicles
Name of securitisation/ Registered office Consolidation ASSETS LIABILITIES Name of securitisation vehicle Loans and receivables Debt securities Other Senior Mezzanine Junior
Argo Mortgage 2 s.r.l. (1) Genoa YES 49,950 - 27,206 98 36,782 40,276
Lanterna Finance s.r.l. transaction carried out in 2020 (2) Genoa YES 249,301 - 66,134 170,737 - 144,698
Lanterna Finance s.r.l. Transaction carried out in 2015 (2) Genoa YES 210,700 - 13,132 29,019 - 194,813
Lanterna Lease s.r.l.(2) Genoa YES 273,112 9,188 156,216 126,084
Pillarstone Italy S.p.v. S.p.a. Milan NO 131,375 88,606 33,684 187,948 - 1,651
Brisca Securitisation s.r.l. Conegliano (TV) NO 126,105 12,520 149,938 30,505 - 41,818
Riviera Npl. s.r.l. (2) Conegliano (TV) NO 144,268 15,104 142,562 30,843 - 14,033
1) Banca Carige holds 60% of the investment in the vehicle 2) Banca Carige holds 5% of the investment in the vehicle
9. EXPOSURE IN EQUITIES NOT INCLUDED IN THE TRADING BOOK
QUALITATIVE INFORMATION – art. 447 CRR
Exposures in equities not included in the trading book can be divided into two macro-groups:
Investments in undertakings subject to significant influence, held for strategic, institutional or other purposes functional for the operations of the Bank and the development of its sales and distribution activities. There are currently no jointly controlled companies.
Controlling interests in entities not included in the Banking Group
Exposures in the form of units or shares in CIUs, included in the securities portfolio and held for financial investment purposes and classified as assets mandatorily measured at fair value through profit or loss (sub-item 20 c) of the balance sheet assets. The FVOCI portfolio (item 30 of Balance Sheet assets) also includes non-controlling investments over which no significant influence is exercised and which are held for institutional purposes (shareholdings in companies, entities and institutions linked to the regions of footprint) and for purposes which are necessary for the Bank’s operating and commercial activities.
ACCOUNTING TREATMENT Equity instruments included in the non-trading portfolio are posted under Assets in the Balance Sheet to: item 20 "Financial assets at fair value through profit or loss - sub-item 20 c) "Other financial assets mandatorily measured at fair value"; item 30 "Financial assets at fair value through other comprehensive income" or item 100 "Equity investments". Controlling interests in entities not included in the Banking Group, if considered significant, were consolidated line by line for accounting purposes. They were, instead, consolidated at equity for prudential purposes. The following is an excerpt from Part A “Accounting policies” of the Explanatory Notes to the Consolidated Financial Statements with reference to the accounting treatment of these items.
FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS
Classification criteria Financial assets at fair value through profit or loss include: a) financial assets held for trading; b) financial assets designated at fair value (fair value option); c) financial assets mandatorily at fair value. (omitted) Financial assets mandatorily at fair value are those assets -other than derivative contracts- represented by debt instruments whose contractual terms do not give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding10 and [represented by] assets other than those held for trading, with a different business model ('other business model')11. (omitted) Reclassifications are allowed only for debt instruments and not for derivative contracts12 and equity instruments, and must be done prospectively from the reclassification date, without restating any previously recognised profit and loss items.
Recognition criteria Financial assets measured at fair value through profit or loss are initially recognised at fair value, usually for an amount equal to the consideration given, less transaction costs or proceeds that are directly attributable to the financial asset, which are recognised directly in profit or loss. Loans are initially recognised when, and only when, the bank becomes a party to the contract of the financial asset and thus acquires the unconditional right to receive payment of the amounts due under the contract. Securities are recognised at settlement date; any changes in fair value occurring between the trade date and settlement date are recognised in profit or loss. Derivative contracts are recognised at the date when they are entered into.
Measurement criteria After initial recognition, financial assets measured at fair value through profit or loss are measured at fair value, with changes in fair value recognised in profit or loss. The criteria adopted for measuring the fair value of financial instruments are reported in Section A.4, “Information on Fair Value” of the Explanatory Notes. Transactions in derivatives settled through central clearing platforms, are subject to netting of
10 Financial instruments that do fail the “Solely Payment of Principal and Interest test (SPPI test)”. 11 “Other business models” are neither: held to collect - contractual flows (HTC)”, nor “held both to collect contractual cash flows and to sell financial assets (HTC&S) 12 Trading derivatives may only be subsequently designated as effective hedges.
positive and negative values under IAS 32, applying the conventional criteria described in Circular 262/2005, when both of the following requirements are met: a) an entity has a legally enforceable right to set off the recognised amounts; and b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Derecognition criteria Financial assets measured at fair value through profit or loss are derecognised when they are sold, substantially transferring all related risks and rewards, or when the contractual rights to cash flows expire.
Criteria for the recognition of income Interest income on loans and debt securities, as well as spreads and margins on derivatives operationally linked to financial assets and/or liabilities measured at fair value (subject to the fair value option) or classified as held for trading with settlement of spreads or margins expected to take place on different maturities (”multiflow“ contracts) are recognised on an accrual basis under the sub-items of interest income. Dividends are recognised on an accrual basis with reference to the date of the resolution adopted for the payout by the Shareholders’ Meeting and are posted to the item “Dividends and similar income”. Gains and losses from trading and capital gains and losses arising from fair value measurement are recognised through profit or loss in the period in which they arise and are posted to the item “Net profit (loss) from trading”.
FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
Classification criteria Debt instruments are classified as financial assets measured at fair value through other comprehensive income (equity) if both of the following conditions are met: • the financial asset is part of a “Held to collect and sell - HTC&S” business model, whose objective is achieved by both collecting contractual cash flows and selling financial assets, and • the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding13. Investments in equity instruments not held for trading that would otherwise have been measured at fair value through profit or loss are classified in this item, if an entity makes an irrevocable election at initial recognition to present in other comprehensive income any subsequent changes in the fair value of the investment ("Fair Value OCI option" or FVTOCI). In this item, the Bank only classifies securities, availing itself, in particular, of the “FVTOCI option” for investments not qualifying as interests in subsidiaries, associates and joint ventures.
The criteria adopted for reclassification of financial assets are reported in Section 1 "Financial assets measured at fair value through profit or loss”.
Recognition criteria Loans are initially recognised when, and only when, the bank becomes a party to the contract of the financial asset and thus acquires the unconditional right to receive payment of the amounts due under the contract. Securities are recognised at settlement date; any changes in fair value occurring between the trade date and settlement date are posted to an OCI reserve. Financial assets measured at fair value through other comprehensive income are initially recognised at fair value, usually for an amount equal to the consideration given, plus transaction costs or proceeds that are directly attributable to the financial asset14.
Transaction costs and proceeds directly attributable to the initial recognition are incremental costs directly attributable to the acquisition, issue or disposal of the financial assets which can be immediately determined as at that date; transaction costs do not include costs which, although having the same characteristics, may be subject to repayment by the counterparty or included under internal routine administrative costs.
Derecognition criteria
13Financial instruments that pass the “Solely payment of principal and interest test (SPPI test)”. 14 Except for trade receivables that do not contain a significant financing component and that must be initially recognised at their transaction price, in accordance with IFRS 15.
Financial assets measured at fair value through other comprehensive income are derecognised when they are sold, substantially transferring all related risks and rewards, or when the contractual rights to their cash flows expire, or when an entity expects that all or a portion of the exposures will not be recovered. The gross carrying amount of a financial asset shall be reduced if an entity has no reasonable expectations of fully or partly recovering such financial asset. The write-off may occur before the legal actions for asset recovery have been concluded and it does not necessarily imply the waiver of the legal right of recovery for the bank. The write-off constitutes an event of derecognition of a financial asset or a portion thereof. As regards a write-off of a portion of a financial asset, it may take place only if carried out after the identification of specific cash flows (or a portion thereof) that the entity has no reasonable prospects of recovering. The write-off policies adopted by the Bank are described in Section E of the Explanatory Notes concerning “Credit risk”.
Revenue recognition and measurement criteria Financial assets measured at fair value through other comprehensive income are subsequently measured at fair value, with changes in fair value presented in a valuation reserve. The criteria adopted for measuring the fair value of financial instruments are reported in Section A.4, “Information on Fair Value” of the Explanatory Notes. For debt instruments only, expected losses on receivables are also recognised in the income statement as an offsetting entry to the valuation reserve, with no reduction in the value of the asset, which is presented at its total fair value. Paragraph “3 - Financial assets measured at amortised cost” describes the criteria for the recognition of expected losses on loans. The write-off amount corresponds to: • the reversal of overall loan loss provisions, with offsetting entry to the gross carrying amount of financial assets, and • for the part exceeding the overall loan loss provisions amount, the impairment of the financial asset directly recognised in profit or loss. Possible recoveries subsequent to write-off are recognised in profit or loss under reversals, while the accounting of reversals on revalued assets previously de-recognised is not allowed. Interest income on debt securities is recognised on an accrual basis using the effective interest method as “Interest and similar income”; this item also includes the interest accrued in relation to the time value of money, determined when impaired financial assets are measured on the basis of their original effective interest rate. Arrears interest on credit-impaired financial assets is recognised in profit or loss only when collected. Dividends are recognised on an accrual basis with reference to the date of the resolution adopted for payout by the Shareholders’ Meeting and are posted to the item “Dividends and similar income”. Gains and losses from disposal of debt instruments measured at fair value through other comprehensive income are recognised in profit or loss in the period in which they arise and are
posted to the item “Profits (losses) on disposal or repurchase of financial assets at fair value through other comprehensive income”, which includes what is known as the recycle of the equity reserve to profit or loss. Profits (losses) on disposal of debt instruments at fair value through other comprehensive income, including what is known as the recycle of the equity reserve, are recognised as a retained earnings reserve.
EQUITY INVESTMENTS
Classification criteria This category includes investments in subsidiaries and in companies subject to significant influence. It is presumed that an entity is subject to significant influence, if 20 per cent or more of its voting power is held by an investor. The existence of significant influence by an entity is usually evidenced by its participation in the financial and operating policy decisions of the company, through shareholders agreements aimed at ensuring representation on the governing bodies and safeguarding a comprehensive management steering approach, but without giving rise to the control of the investee. Similarly classified under this item are any investments in subsidiaries, which are excluded from line-by-line consolidation. “Non-controlling interests” are classified under “Financial assets measured at fair value through other comprehensive income”15.
Criteria for classification and measurement Investments are initially recognised on the settlement date. Investments in subsidiaries excluded from the scope of line-by-line consolidation and in entities subject to significant influence exempt from application of the equity method for being considered non-significant are recognised at cost. The equity method is applied to investments in companies subject to significant influence. The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the change in the investor’s share of net assets of the investee. The share of changes in net assets arising from profit or loss of the investee is recognised in profit or loss as “Profits (losses) on investments in associates and joint ventures”; the share of changes in net assets arising in the financial position of the investee without passing through profit or loss are instead posted directly to the item “Reserves”. The difference between the cost of the investment and the share of net assets acquired is treated using a similar approach to line-by-line consolidation, except that if there is a positive residual difference (goodwill), it is not separately recognised among intangible assets (and therefore tested for impairment separately), but continues to be posted to Equity Investments.
At the end of each annual or interim reporting period, a review is performed to determine whether there is any indication that an equity investment may be impaired. These signs are normally identified in an investment’s internal and external factors, i.e.: the equity investment’s value has declined during the period; changes have taken place in the environment in which the investee operates;
15 Except for equity instruments relating to the Voluntary Scheme of the Interbank Deposit Protection Fund (FITD), which are classified as "Financial assets measured at fair value through profit or loss”.
market interest rates have increased during the period; the economic performance of the investment is, or will be, worse than expected. If any one of these conditions is met, the recoverable value of the investment is calculated, i.e. the higher between the fair value less costs to sell and the value in use. If the carrying amount exceeds the recoverable value of the investment, an impairment loss is recognised for the investment. The value in use is calculated as the present value of future cash flows generated by the investment, applying a market rate on these flows which is reflective of the cost of equity and risks specific to the investment. When calculating the value in use it is also necessary to discount the final value of the presumed disposal of the investment on the basis of a hypothetical price that is agreed in an arm’s length transaction between independent, knowledgeable, willing parties. If an impairment loss recognised in prior periods no longer exist or has decreased, the carrying amount is increased to the cost value prior to impairment.
Derecognition criteria Equity investments are derecognised when the financial assets are sold, substantially transferring all related risks and rewards, or when the contractual rights to the cash flows expire.
Criteria for the recognition of income Losses and reversals on impairment of investments and profit or loss on disposal of investments are recognised in “Profits (losses) on equity investments” for the period in which they arise. The value of the equity investments is reduced by the dividend periodically received by the Bank which is recognised in “Dividend and similar income”, at the time when the right to payment arises.
QUANTITATIVE INFORMATION – art. 447 CRR
Private equity investments in the accounts as at 31/12/2020 refer entirely to the Atlante Fund and amount to EUR 3.8 mln. These investments were allocated to the FVTPL section of the accounts, as they are mandatorily measured at fair value.
9.1 Banking book: on-balance sheet exposure in equities and CIUs Banking Item/Amount group Total L1 L2 L3 1. E quity investments - item 100 - - 94,121 94,121 1.1 Valued at cost or at equity - - 94,121 94,121 2. Financial assets mandatorily at fair value - item 20 c) - - 11,281 11,281 1 E quity instruments - - 598 598 1 Units or shares in CIUs - - 10,683 10,683 3. Financial assets at fair value through other 1,699 - 266,177 267,876 comprehensive income - item 30 1 E quity instruments 1,699 - 266,177 267,876 Total 1,699 - 371,579 373,278
The value reported with reference to the item "Equity investments" corresponds to the amount indicated in item 70 of the Assets in the Consolidated Balance Sheet, with reference to the Banking Group only; data relating to financial assets mandatorily measured at fair value are extracted from table 2.5 "Other financial assets mandatorily measured at fair value: breakdown" and data relating to financial assets measured at fair value through other comprehensive income are extracted from table 3.1 "Financial assets measured at fair value through other comprehensive income: breakdown" of Part B of the Consolidated Notes to the Financial Statements.
It is noted that the equity investments set out in item 70 are all unlisted and measured using the equity method or at cost if they have no significant impact on the accounts. Debt securities and units in CIUs are measured at fair value. The FVOCI equity instruments categorised within Level 3 of the fair value hierarchy also include the equity investment held in the Bank of Italy for an amount of EUR 244,050 thousand. Level 3 CIUs also include the investment in the Atlante Fund for an amount of EUR 3.8 mln. Equity securities mandatorily measured at fair value as level 3 include the investment in the FITD Voluntary Scheme for an amount of EUR 0.3 mln.
During the period, EUR 5 thousand worth of gains and EUR 31 thousand worth of losses on the sale of equity securities and units of CIUs classified as financial assets mandatorily measured at fair value were recognised in profit or loss, as shown in table 7.2 "Net changes in other financial assets/liabilities measured at fair value through profit or loss: breakdown of other financial assets mandatorily at fair value" in Part C of the Notes to the financial statements. With reference to equity securities classified in the OCI portfolio, it should be noted that only dividends have an impact on the income statement. At the end of the period, there were positive
valuation reserves of 3,987 thousand euros and negative valuation reserves of 865 thousand euros. In the calculation of Own Funds, the algebraic sum of these reserves had an impact on Common Equity Tier 1 capital.
10. EXPOSURE TO INTEREST RATE RISK ON POSITIONS NOT INCLUDED IN THE TRADING BOOK
QUALITATIVE INFORMATION – art. 448 CRR
Monitoring and measurement methodologies
The interest rate risk of the banking book is the risk that a variation in market interest rates may have a negative effect on the value of equity (a risk associated with equity) and on Net Interest Income (a risk associated with earnings) in relation to assets and liabilities in the Financial Statements that are not allocated to the regulatory trading book. The exposure to such type of risk, with reference to transactions with a floating interest rate, is a direct consequence of balance sheet structures that are mismatched in terms of both maturity dates (maturity gap) and interest refixing (refixing gap). Exposure for transactions with a fixed interest rate depends on the maturity gap.
The Board of Directors of the Parent Company defines the strategic policies and guidelines related to the assumption of interest rate risk in the banking book and identifies the levels of Risk Appetite and Risk Tolerance within the scope of the Risk Appetite Framework. The Risk Control Committee monitors the dynamics of interest rate risk in the banking book and compliance with the limits, whereas the Finance and ALM Committee monitors the actions for managing interest rate risk in the banking book, which are operationally implemented by the Finance department. The Risk Management department guarantees the ongoing measurement and control of Group exposure to interest rate risk in the banking book, from both an equity and revenue perspective.
From an equity point of view, the objective of monitoring the interest rate risk in the banking book consists in measuring the impact of variations in interest rates on the fair value of equity in order to maintain its stability. The variability in the economic value of equity followed by a market interest rate shock is measured according to two distinct approaches: i) Duration analysis: the variation in the economic value of equity is approximated by applying the duration to aggregates of transactions classified in a time bucket of reference, according to the date of maturity or repricing. As at 31 December 2020, this indicator was lower than the 20% of the Own Funds requirement. ii) Sensitivity analysis: the variation in the economic value of equity is measured, for each individual transaction, as the fair value difference before and after the indicated shock. As at 31 December 2020, the indicator was lower than the 20% of own funds requirement but higher than the 15% of Tier 1 capital set as warning threshold. With respect to this signal, appropriate analyses were carried out to identify a set of hedging instruments designed to reduce overall exposure.
From an income point of view, the objective of monitoring the interest rate risk in the banking book consists in measuring the impact of variations in interest rates on the interest income expected over a predefined time period (gapping period). The variability in the interest income following a market interest rate shock is measured via a gap analysis approach, according to which this variability depends on both the reinvestment (refinancing) at new market conditions -not known ex ante- of the capital cash flows maturing during the period of reference, and on the variation of interest cash flows (for floating interest rate transactions).
QUANTITATIVE INFORMATION – art. 448 CRR
The Balance Sheet impact is analysed hereunder, in terms of interest income, net interest and other banking income, profit and shareholders’ equity in parallel shifts of the curve (+100 bps up, and -100 bps down). The table reflects the overall impact and breakdown of the banking book (figures in EUR/mln):
+100 bp -100 bp Net Interest Income 24.67 -0.11 24.65 -0.11 - Banking book
Net interest and other banking 24.81 -0.08 income 24.65 -0.11 - Banking book
16.61 -0.05 Profit 1 16.50 -0.07 - Banking book
6.01 -10.65 Shareholders' equity 5.90 -10.67 - Banking book
1 Amounts estimated assuming a 33.07% tax rate.
11. REMUNERATION POLICIES
QUALITATIVE INFORMATION – art. 450 CRR
The remuneration and incentive policies are a vital tool of long- and medium-term strategy for the Group. For qualitative information about remuneration policies, please refer to the “Report on remuneration policy and compensation paid”, section 1 and 2, Part 1, as approved by the Shareholders’ Meeting and published at: https://www.gruppocarige.it/grpwps/portal/it/gruppo- carige/governance/documenti-societari
The Banca Carige Group’s remuneration policy incorporates all information required by art. 450 of the CRR, paying constant attention to the Italian and European legislation, including in light of the new documents published by the Supervisory Authorities.
QUANTITATIVE INFORMATION – art. 450 CRR
For quantitative information about remuneration policies, please refer to the “Report on remuneration policy and compensation paid”, section 1 and 2, Part 2, as approved by the Shareholders’ Meeting and published at: https://www.gruppocarige.it/grpwps/portal/it/gruppo- carige/governance/documenti-societari
The Banca Carige Group’s remuneration policy incorporates all information required by art. 450 of the CRR, paying constant attention to the Italian and European legislation, including in light of the new documents published by the Supervisory Authorities. However, due to the period of Temporary Administration which started on 2 January 2019 and lasted until 31/01/2020, with regard to quantitative information, accounting consistency is not possible with the Parent Company Banca Carige's Financial Statements which refer to the period of Ordinary Administration 1/2/2020 - 31/12/2020. The information on Remuneration relates to operational management data for the period 01/01/2020 - 31/12/2020, as the Remuneration Policies for the year 2020 were approved by the Shareholders' Meeting on 29/05/2020 and refer to the whole of 2020. In any case, it should be noted that the remuneration of personnel falling within the category of Directors refers to the period 1/2/2020 - 31/12/2020, given the appointment of the new Governance as of 31/1/2020, while that of the remaining Identified Staff (which includes executives with strategic responsibility) refers to operational data for 2020 in its entirety.
12. FINANCIAL LEVERAGE
QUALITATIVE INFORMATION – art. 451 CRR
The Basel III prudential framework has introduced a requirement for calculating, reporting and disclosing a minimum Leverage Ratio, to act as a supplementary measure to the risk-based capital requirements.
The financial leverage ratio is intended to:
restrict the build-up of leverage in the banking sector; reinforce the risk-based requirements with a simple, non-risk based “backstop” measure.
This ratio is calculated according to the rules set out in the "Commission Delegated Regulation (EU) 2015/62 of 10 October 2014 amending Regulation (EU) No. 575/2013 of the European Parliament and of the Council with regard to the leverage ratio".
The foregoing regulation amends Article 429 of the CRR, incorporating the requirements of the Basel Committee, which issued the "Basel III leverage ratio framework and disclosure requirement" in January 2014.
At its meeting of 15 April 2019, the European Parliament approved the 3% minimum requirement for the Leverage ratio under Pillar 1.
Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 ("CRR2"), amending Regulation (EU) 575/2013, applies two years after the date of its publication in the Official Journal of the European Union (June 2021).
This information is also provided in accordance with the "Commission Implementing Regulation (EU) 2016/200 of 15 February 2016 laying down implementing technical standards with regard to disclosure of the leverage ratio for institutions according to Regulation (EU) No. 575/2013 of the European Parliament and of the Council".
Measurement techniques Article 429 of the CRR defines the financial leverage ratio as an institution's capital measure divided by that institution's total exposure measure, with this ratio expressed as a percentage:
Tier 1 capital; and the total exposure, calculated as the sum of the exposure values of all assets and off- balance sheet items not deducted from Tier 1 capital.
In the period subject to transitional arrangements, the Financial Leverage ratio is calculated and reported using both of the following elements as a measure of capital: the “transitional” Tier 1 capital, which is the sum of an institution’s common equity Tier 1 capital (CET1) and additional Tier 1 capital (AT1); the “fully loaded” Tier 1 capital, i.e. excluding the derogations laid down in the transitional arrangements.
Total exposure includes (cited articles are drawn from the CRR):
Derivatives - measured in accordance with the Current Exposure Method referred to in article 274 or, alternatively, with the Original Exposure Method referred to in article 295. Written credit derivatives are measured at the gross notional amount in addition to the fair value, but with the possibility of deducting the loss of income recognised in fair value from the notional amount. In compliance with strict criteria, it is also possible to offset the notional amounts of eligible credit derivatives (protection bought) against protection sold; Security Financing Transactions – the exposure of which is measured by two components, i.e. counter-party risk, equal to the exposure net of collateral (and without considering the volatility effect), and the carrying amount of the transaction; Off-balance-sheet Exposures - measured, as provided for by art. 111, at their face value, but gross of value adjustments on specific receivables and subject to the application of the credit conversion factors provided for by the standard methodology for calculating RWAs. Other Assets – valued, according to the provisions of art. 111, at the remaining carrying amount after the application of value adjustments on specific receivables, additional value adjustments and other reductions in own funds relating to the asset item.
The amounts shown refer to the leverage ratio according to the transitional arrangements for the determination of Tier 1 capital.
QUANTITATIVE INFORMATION – art. 451 CRR
Table LRSum: Summary reconciliation of accounting assets and Leverage ratio exposures
Date of reference 31/12/2020 Name of the Bank/Banking Group Banca Carige Group Level of application consolidated Table LRSum - Summary reconciliation of accounting assets and leverage ratio exposures Applicable amounts 1 Total assets as per published financial statements 22,030,236 Adjustment for entities which are consolidated for accounting purposes but are outside 2 the scope of regulatory consolidation 1,022,521 (Adjustment for fiduciary assets recognised on the balance sheet pursuant to the applicable accounting framework but excluded from the leverage ratio exposure 3 measure in accordance with Article 429 (13) of Regulation (EU) No. 575/2013, the "CRR") 4 Adjustments for derivative financial instruments 5 Adjustments for securities financing transactions (SFTs)
6 Adjustment for off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
EU-6a (Adjustment for intragroup exposures excluded from the leverage ratio exposure measure in accordance with Article 429 (7) of Regulation (EU) No. 575/2013, the "CRR")
UE-6B (Adjustment for exposures excluded from the leverage ratio exposure measure in accordance with Article 429 (14) of Regulation (EU) No 575/2013, the "CRR") 7 Other adjustments 8 Total leverage ratio exposure 23,052,757
Table LRCom: Leverage ratio common disclosure
Date of reference 31/12/2020 Table LRCom - Leverage ratio common disclosure
Leverage ratio exposure (CRR) On-balance sheet items (excluding derivatives and SFTs) 1 On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral) 21,422,824 2 (Asset amounts deducted in determining Tier 1 capital) Total on-balance sheet exposure (excluding derivatives, SFTs and fiduciary assets) (sum of 3 lines 1 and 2) 21,422,824 Derivative exposures Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation 5,104 4 margin) Add-on amounts for potential future exposure (PFE) associated with all derivatives transactions 5 (mark-to-market method) 7,088 EU-5a Exposure determined under the Original Exposure Method Gross-up for derivatives collateral provided where deducted from the balance sheet assets 6 pursuant to the applicable accounting framework 7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) 8 (Exempted CCP leg of client-cleared trade exposures) 9 Adjusted effective notional amount of written credit derivatives
10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) 11 Total derivative exposures (sum of lines 4 to 10) 12,192 Securities financing transaction exposures Gross SFT assets (with no recognition of netting), after adjusting for sales accounting 12 transactions 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) 14 Counterparty credit risk exposure for SFT assets 386,548 Derogation for SFTs: Counterparty credit risk exposure in accordance with Article 429b (4) and EU-14a 222 of Regulation (EU) No. 575/2013 53,301 15 Agent transaction exposures EU-15a (Exempted CCP leg of client-cleared trade exposures) 16 Total securities financing transaction exposures (sum of lines 12 to 15a) 439,849 Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amount 1,177,892 18 (Adjustments for conversion to credit equivalent amounts) 19 Other off-balance sheet exposures (sum of lines 17 to 18) 1,177,892 (Exposures exempted in accordance with Article 429 (7) and (14) of Regulation (EU) No. 575/2013 (on- and off-balance sheet)) (Intragroup exposures (solo basis) exempted in accordance with Article 429 (7) of Regulation EU-19a (EU) No. 575/2013 (on- and off-balance sheet)) (Intragroup exposures (solo basis) exempted in accordance with Article 429 (14) of Regulation EU-19b (EU) No. 575/2013 (on- and off-balance sheet) Capital and total exposures 20 Tier 1 capital 1,213,804 21 Total leverage ratio exposures (sum of lines 3, 11, 16, 19, EU-19a and EU-19b) 23,052,757 Leverage ratio 22 Leverage ratio 5.3% Choice on transitional arrangements and amount of derecognised fiduciary items
EU-23 Choice on transitional arrangements for the definition of the capital measure "transitional" Amount of derecognised fiduciary items in accordance with Article 429(11) of Regulation (EU) EU-24 No. 575/2013
Table LRSpl: Split-up of exposures
Reporting date 31/12/2020 Table LR Spl - Split-up of on balance sheet exposures (excluding derivatives, SFTs and exempted exposures)
Leverage ratio exposure (CRR) Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted EU-1 exposures), of which: 21,422,824 EU-2 - Trading book exposures 0 EU-3 - Banking book exposures, of which: 21,422,824 EU-4 - Covered Bonds 0 EU-5 - Exposures treated as sovereigns 6,690,652
EU-6 - Exposures to regional governments, MDB, international organisations and PSE not treated as sovereigns 320,708 EU-7 - Institutions 1,284,013 EU-8 - secured by mortgages of immovable properties 3,966,951 EU-9 - Retail exposures 3,582,285 EU-10 - Corporate 2,769,384 EU-11 - Exposures in default 249,500 - Other exposures (e.g. equity, securitisations, and other non-credit obligation EU-12 assets) 2,559,330
Table LRQua: disclosure on qualitative elements
Table LRQua: free format text boxes for disclosure on qualitative items
As part of the RAF, risk tolerance - set at 3.65%- was Description of the processes used to determined in relation to the regulatory minimum level plus 1 manage the risk of excessive leverage a buffer. The risk appetite, now at 6.04%, is instead set in relation to the Business Plan target.
Description of the factors that had an The main factors which had an impact were the derisking impact on the leverage Ratio during the 2 transactions and certain regulatory changes (prudential period to which the disclosed leverage treatment of intangible assets) Ratio refers
DECLARATION OF THE MANAGER CHARGED WITH PREPARING THE COMPANY’S FINANCIAL REPORTS PURSUANT TO ART. 154-BIS, PARAGRAPH 2 OF LEGISLATIVE DECREE NO. 58/1998 (THE CONSOLIDATED LAW ON FINANCE)
I the undersigned Mauro Mangani, in my capacity as the Manager charged with preparing Banca CARIGE S.p.A.'s financial reports,
declare
that the accounting information contained in the document “Pillar 3 - Disclosure by institutions according to Regulation (EU) No. 575/2013 – Figures as at 31/12/2020” corresponds to the document results , books and accounting records.
Genoa, 10 March 2021
Manager charged with preparing
the company's financial reports
Mauro Mangani
[signed on the original]