Credito Valtellinese Società Cooperativa Registered Offices in Piazza Quadrivio 8 — Sondrio, Italy Tax code and Sondrio Company Register No. 00043260140 — Register of Banks No. 489 Parent Company of the Credito Valtellinese Banking Group — Register of Banking Groups No. 5216.7 Internet: http://www.creval.it E-mail: [email protected] Data as at 30/09/09: Share Capital EUR 728,667,845.50 fully paid-in – Reserves EUR 1,234,707,461 Member of the Interbank Guarantee Fund
Interim Report on Operations Q1 2010
1 2 Company Officers of Credito Valtellinese
Board of Directors Chairman • Giovanni De Censi Substitute Vice Chairman Angelo Maria Palma Vice Chairman • Giuliano Zuccoli Managing Director • Miro Fiordi Directors Fabio Bresesti • Gabriele Cogliati Michele Colombo • Paolo De Santis Aldo Fumagalli Romario Paolo Stefano Giudici Gian Maria Gros Pietro • Franco Moro Valter Pasqua • Alberto Ribolla Paolo Scarallo • Members of the Executive Committee
Board of Statutory Auditors Chairman Angelo Garavaglia Permanent Auditors Marco Barassi Alfonso Rapella Substitute Auditors Aldo Cottica Edoardo Della Cagnoletta
Panel of Arbitrators Permanent Arbitrators Emilio Berbenni Francesco Bertini Emilio Rigamonti
Substitute Arbitrators Adriano Bassi Silvano Valenti
General Management General Manager Miro Fiordi Substitute Vice General Manager Giovanni Paolo Monti Vice General Manager Franco Sala Vice General Manager and Executive in charge of drawing up the corporate accounting documents Enzo Rocca
Independent auditing firm Reconta Ernst & Young S.p.A.
3 4 Contents
Company Officers of Credito Valtellinese ...... 3 CONSOLIDATED FINANCIAL AND ECONOMIC HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AS AT 31 MARCH 2010...... 7 ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO VALTELLINESE BANKING GROUP ...... 9 RECLASSIFIED CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 MARCH 2010...... 13 COMMENTS ON THE FINANCIAL STATEMENTS ...... 15 MANAGEMENT PERFORMANCE DURING THE QUARTER...... 17 ECONOMY AND FINANCIAL MARKET TRENDS ...... 17 SIGNIFICANT EVENTS DURING THE QUARTER...... 20 BUSINESS OUTLOOK ...... 27 SIGNIFICANT EVENTS OCCURRING AFTER THE CLOSE OF THE FIRST QUARTER OF 2010 ...... 28 NOTES TO THE FINANCIAL STATEMENTS ...... 29
5 6 CONSOLIDATED FINANCIAL AND ECONOMIC HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AS AT 31 MARCH 2010
STATEMENT OF FINANCIAL POSITION 31/03/2010 31/12/2009 % change 31/03/2009 % change DATA
(in thousands of EUR) Loans to customers 20,617,990 20,373,644 1.20 18,821,945 9.54 Financial assets and liabilities 616,941 680,513 -9.34 771,967 -20.08 Investments in associates and 246,507 242,859 1.50 233,980 5.35 companies subject to joint control Total assets 25,260,424 24,895,771 1.46 23,530,327 7.35 Direct deposits from customers 20,647,631 20,216,534 2.13 19,526,396 5.74 Indirect deposits from customers 12,909,931 12,636,048 2.17 11,854,164 8.91 of which: - Managed savings 6,206,214 5,874,767 5.64 5,310,987 16.86 Total deposits 33,557,562 32,852,582 2.15 31,380,560 6.94 Shareholders’ equity 1,929,758 1,927,051 0.14 1,668,820 15.64
FINANCIAL STATEMENT RATIOS 31/03/2010 31/12/2009 Indirect deposits from customers / Total deposits 38.5% 38.5% Managed savings / Indirect deposits from customers 48.1% 46.5% Direct deposits from customers / Total liabilities 81.7% 81.2% Customer loans / Direct deposits from customers 99.9% 100.8% Customer loans / Total assets 81.6% 81.8%
CREDIT RISK 31/03/2010 31/12/2009 % change Net doubtful loans (in thousands of EUR) 362,405 343,581 5.48 Other net doubtful loans (in thousands of EUR) 866,030 740,729 16.92 Net doubtful loans / Loans to customers 1.8% 1.7% Other net doubtful loans / Loans to customers 4.2% 3.6% Hedging of doubtful loans 61.6% 62.6% Hedging of other doubtful loans 5.1% 5.2%
7 ORGANISATIONAL DATA 31/03/2010 31/12/2009 % change Number of employees 4,412 4,415 -0.07 Number of branches 518 515 0.58 Banc@perta line users 144,954 137,942 5.08
Normalised Q1 % ITEMS (amounts in thousands of EUR) Q1 2010 Q1 2009 2009 (*) change
Interest margin 118,632 132,384 -10.39 132,384 Operating income 197,938 193,164 2.47 197,077 Operating expenses (132,986) (128,175) 3.75 (128,175) Net income from banking activities 64,952 64,989 -0.06 68,902 Income (loss) before tax from continuing operations 42,287 45,157 -6.36 49,070 Income after tax from continuing operations 24,159 27,600 -12.47 31,270 Net income (loss) 20,425 23,415 -12.77 27,085
(*) Non-recurring income for the transfer of non strategic shares, classified among Financial assets held for trading, for a total value of EUR 3.7 million net of the related tax effect, are excluded from the results.
8 ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO VALTELLINESE BANKING GROUP
The Credito Valtellinese Group adopts a banking operations model that seeks to enhance its relations with customers and with the territory, by creating a network formed by a series of local banks, specialised and complementary companies, enhanced by consolidated partnerships with highly qualified banking and financial organisations. Creval’s DNA is based on the archetypal matrix of the cooperative bank, therefore the philosophy underlying corporate activities is centred on territorial origins, seeking to become a clear and constant reference point for the local community and to act in close synergy with its economic and social fabric. In order to soundly implement this corporate mission, the Group’s organisational and corporate structure incorporates companies focused on the banking business, on the provision of specialist financial services and on support activities, with the aim of pursuing scale and specialist economies and the highest levels of service.
BAI
Banca Credito Credito Credito Credito Credito Credito Siciliano Carifano MARKET Cattolica Artigiano Valtellinese Piemontese
Bancaperta Aperta SGR Aperta Fiduciaria
Lussemburgo Finanziaria San Mediocreval Gestioni SA Giacomo
Creset Servizi Global Assicurazioni FINANCE SPECIALISED Territoriali [*]
Deltas Bankadati Stelline
PRODUCTION
[*] not included in the banking group as it is an insurance company
The Group operates in 518 branches in the reference territory, through retail banks as follows (“Market Sector”):
- Credito Valtellinese S.c., parent company, cooperative bank listed on the Electronic Stock Market (MTA), organised and managed by Borsa Italiana S.p.A. (MTA), whose business is centred on principles of solidarity and whose primary objective is to guarantee the improvement of economic, cultural and social well-being in the reference territory. Credito Valtellinese is characterised by its constant focus on the territory and on small-scale businesses. It operates in the provinces of Sondrio, Lecco, Como, Varese, Bergamo and Trento through a network of 125 branches.
- Credito Artigiano S.p.A., established in 1946 in Milan. In 1995 it joined the Credito Valtellinese Group and in July 1999 was listed on the Stock Market. The Bank currently has 142 branches in Milan, Monza e Brianza, Lodi, Pavia, Cremona, Rome, Florence, Prato, Pisa, Lucca, Pistoia and Piacenza.
9 - Credito Siciliano S.p.A., established in 2002 from the merger by incorporation of Banca Popolare Santa Venera S.p.A. and Leasingroup Sicilia S.p.A. into Banca Regionale Sant’Angelo S.p.A. On 1 July 2002, Credito Siciliano also acquired the network of Cassa San Giacomo branches to become one of the largest banks in Sicily. Credito Siciliano’s mission is to actively contribute to the island’s economy and community through its own commercial network that covers the whole of Sicily with a total of 136 branches.
- Banca dell’Artigianato e dell’Industria S.p.A., established in Brescia in 1997 at the initiative of a committee of promoters comprising local tradesmen, business men and freelance professionals, with the aim of contributing to economic development in the Brescia area. In 2000, it became a member of the Credito Valtellinese Group. Without neglecting reinforcement of its traditional reference territory, the bank is also expanding into the Veneto region, implementing a project that envisages extension of the Credito Valtellinese Group influence to this region. The Bank currently operates in the provinces of Brescia, Vicenza, Verona and Padua with 33 branches.
- Credito Piemontese S.p.A., operative since 25 February 2008 following the acquisition of 23 branches – including 10 in Turin, 9 in the province of Turin and 4 in the Alessandria area – from the Intesa Sanpaolo Group. The Bank later acquired the Verbania and Novara branches from Credito Valtellinese and Credito Artigiano, and opened the Borgomanero and Arona branches (both in Novara province) and Asti, to increase its total network to 28 branches.
- Cassa di Risparmio di Fano S.p.A., founded in 1843, joined the Credito Valtellinese banking group as of 3 December 2008 following the Parent Company’s acquisition of a controlling interest in the bank’s share capital. Carifano operates 45 branches in the provinces of Pesaro, Ancona, Forlì-Cesena, Perugia and Rimini.
- Banca Cattolica S.p.A., established in 1928 and based in Montefiascone (VT), joined the Group in 2009 following the Parent Company’s acquisition of the 80% controlling interest in the bank’s share capital. Banca Cattolica is present in the provinces of Viterbo and Terni with 9 branches.
The Group also encompasses a number of other companies providing specialised financial services (“Specialised Finance Sector”): - Bancaperta S.p.A. is the bank specialised in financial asset management services, private banking and real estate financial services; it also acts as the financial centre, coordinating the activities of its subsidiaries and associated companies: Aperta SGR, Global Assicurazioni, Aperta Fiduciaria and Aperta Gestioni; - Aperta SGR S.p.A., an asset management company, wholly controlled by Bancaperta and enrolled on the specific register held by the Bank of Italy. In October 2005, the asset management business previously handled directly by Bancaperta was transferred to Aperta SGR; - Lussemburgo Gestioni SA, Luxembourg-based management company, specialising in the management and administration of UCIs, established with the purpose of widening the range of financial products offered to the customers and of contributing to the development of new business areas, by enhancing the experience gained by the Group in the asset management sector; - Global Assicurazioni S.p.A. is a multifirm insurance agency acting as partner of excellence in the bancassurance sector and, more in general, in the sales network distribution of standard insurance policies.
10 - Aperta Fiduciaria S.r.l, a company authorised by the Italian Ministry for Production Activities to perform what is known as “static” fiduciary services, including the administration of third party assets, the fiduciary registration of the same, mediation in the exercise of related rights, and the representation of shareholders and bondholders; - Mediocreval S.p.A., a bank specialised in the provision and management of medium to long-term financing. The concentrated supervision of the business finance sector is centred on Mediocreval; - Finanziaria San Giacomo S.p.A. is a company included on the Special Register of Intermediaries operating in the financial sector pursuant to Article 107 of the TUB (Consolidated Banking Law). The company purpose is to provide financial activities consisting in the acquisition, management and disposal of problem loans for financial intermediary activities of the Credito Valtellinese Group and its associated companies. - Creset Servizi Territoriali S.p.A., established in 2006 in line with the strategic plan to strengthen the Credito Valtellinese Group in the payment systems and public authority services sectors. The company was formed following the tax collection reform (Article 3, Italian Legislative Decree no. 203 of 30 September 2005) from a business branch split from Rileno S.p.A., former concessionary for the provinces of Como and Lecco. The scope of the Group also includes a number of entities that provide services complementary to the banking business, with a view to achieving synergies and economies of scale (“Production sector”). With the objective of guaranteeing a greater management economic efficiency of the Group and stronger compliance between the modus operandi and the company organisation, in the first half of 2010 the transformation of Bankadati and Deltas in “limited consortium companies” was resolved.
- Deltas Soc. Cons. p .A., consortium company that plays a role of coordination and monitoring to ensure that the various business areas follow the guidelines established by Credito Valtellinese as being in the interests of stability and growth. This role, given the title of “Corporate Centre”, involves the provision of support for administration, planning, human resource management, marketing, auditing, legal affairs, compliance and risk management; - Bankadati Servizi Informatici Soc. Cons. p A. is the Group’s centre for ICT management and development, organisation, back office and support processes. - Stelline Servizi Immobiliari S.p.A. manages the property and artistic assets of all companies in the Group. The company also provides other services such as the preparation of real estate valuations to support the disbursement of credit by the territorial banks and develops initiatives in favour of the local communities. The Credito Valtellinese network is completed by several associates and companies subject to joint control, specifically: - Banca di Cividale S.p.A., a retail bank that operates in Friuli Venezia Giulia and in the Veneto provinces of Belluno, Treviso and Venice through a network of 62 branches. The Parent company holds 25 % of its share capital; - Istituto Centrale delle Banche Popolari Italiane S.p.A., of which Credito Valtellinese is one of the majority shareholders (20.6%), provides support in the development of customer financial institutions; this is achieved by promoting initiatives and providing services that aim to increase the efficiency and competitiveness of payment systems and in areas related to the administration of securities and finance;
11 - Banca della Ciociaria S.p.A. operates in the provinces of Frosinone, Latina and Rome through a network of 15 branches. Credito Valtellinese holds 37.96 % of its share capital; - Aperta Gestioni Patrimoniali SA, based in Lugano (Switzerland), operating in the asset management sector; - Global Assistance S.p.A., an insurance company specialised in the non-life sector, in which the Parent company has a 40% investment; - Istifid S.p.A., financial company and auditing firm, 28.66% owned by Credito Valtellinese.
The following subsidiary or associated companies are also included in the Group scope of consolidation: - Omega S.r.l., an associated company of Stelline Servizi Immobiliari S.p.A. (100.00%); - Sondrio Città Centro S.r.l., an associated company of Stelline Servizi Immobiliari S.p.A. (30.00%); - Progetti Industriali Valtellina S.r.l., an associated company of Stelline Servizi Immobiliari S.p.A. (49.00%); - Sondrio Città Futura S.r.l., an associated company of Stelline Servizi Immobiliari S.p.A. (49.00%).
Lastly, the map of consolidation is completed with Quadrivio Finance S.r.l., a special purpose company associated with the securitisation implemented in the first half of 2009.
12 RECLASSIFIED CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 MARCH 2010
RECLASSIFIED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in thousands of EUR)
ASSETS 31/03/2010 31/12/2009 % change Cash and cash equivalents 155,883 186,153 -16.26 Financial assets held for trading 293,737 316,857 -7.30 Financial assets available for sale 297,462 402,290 -26.06 Financial assets held to maturity 60,054 1 n/a Due from banks 1,662,419 1,437,907 15.61 Loans to customers 20,617,990 20,373,644 1.20 Hedging derivatives 654 749 -12.68 Investments in associates and companies subject to joint control 246,507 242,859 1.50 Property, plant and equipment and intangible assets (1) 1,204,820 1,207,774 -0.24 Other assets (2) 720,898 727,537 -0.91 Total assets 25,260,424 24,895,771 1.46
(1) Includes statement of financial position items "120. Property, plant and equipment" and "130. Intangible assets". (2) Includes items "140. Tax assets" and "160. Other assets".
LIABILITIES AND SHAREHOLDERS’ EQUITY 31/03/2010 31/12/2009 % change Due to banks 1,306,692 1,470,661 -11.15 Direct customer deposits (1) 20,647,631 20,216,534 2.13 Financial liabilities held for trading 34,966 39,384 -11.22 Other liabilities 792,336 700,949 13.04 Provisions for specific purpose (2) 258,079 243,739 5.88 Minority interests 290,962 297,453 -2.18 Shareholders’ equity (3) 1,929,758 1,927,051 0.14 Total liabilities and shareholders’ equity 25,260,424 24,895,771 1.46
(1) Includes items "20. Due to customers" and "30. Securities issued". (2) Includes items "80. Tax liabilities", "110. Employee termination indemnities" and "120. Provisions for risks and charges". (3) Includes items "140. Valuation reserves", "160. Equity instruments", "170. Reserves", "180. Share premium reserve", "190. Capital", "200. Treasury shares” and "220. Profit (loss) for the period".
13 RECLASSIFIED CONSOLIDATED INCOME STATEMENT
(in thousands of EUR)
ITEMS Q1 2010 Q1 2009 % change
Interest margin 118,632 132,384 -10.39
Net fee and commission income 66,744 50,077 33.28
Dividends and similar income 45 - -
Income from investments in associates and companies subject to joint control carried 2,804 4,122 -31.97 at equity (1)
Profit (loss) on trading, hedging activities and disposals/repurchases 5,149 6,378 -19.27
Other operating expenses/income (4) 4,564 4,116 10.88
Operating income 197,938 197,077 0.44
Personnel expenses (81,872) (77,283) 5.94
Other administrative expenses (2) (41,564) (42,002) -1.04
Net adjustments to/recoveries on property, plant and equipment and intangible assets (9,550) (8,890) 7.42 (3)
Operating costs (132,986) (128,175) 3.75
Net operating margin 64,952 68,902 -5.73
Net losses/recoveries on impairment of loans and other financial assets (22,160) (20,111) 10.19
Net provisions for risks and charges (506) 266 n.s.
Profit (losses) on disposal of investments in associates and companies subject to 1 13 n.s. joint control
Income (loss) before tax from continuing operations 42,287 49,070 -13.82
Taxes on income from continuing operations (18,128) (17,800) 1.84
Income after tax from continuing operations 24,159 31,270 -22.74
Minority interests (3,734) (4,185) -10.78
Profit for the period 20,425 27,085 -24.59
(1) Income from investments in associates and companies subject to joint control carried at equity include the profit (loss) on investments carried at equity included in item 240 "Profits (losses) on investments in associates and companies subject to joint control". The residual amount of that item is included in profits (loss) from disposal of investments in associates and companies subject to joint control, together with item 270 "Profits (losses) on disposal of investments"; (2) Other administrative expenses include taxes and other recoveries recognised to item "220 Other operating expenses/income" (EUR 11,863 thousand for the first quarter of 2010, and EUR 11,900 thousand for the first quarter of 2009); (3) Net adjustments to/recoveries on property, plant and equipment and intangible assets include items 200 "Net adjustments to/recoveries on property, plant and equipment", 210 "Net adjustments to/recoveries on intangible assets" and the accumulated depreciation of costs incurred for leasehold improvements, under item 220 "Other operating expenses/income" (EUR 1,547 thousand for the first quarter of 2010, and EUR 1,648 thousand for the first quarter of 2009); (4) Other expenses and income correspond to item 220 "Other operating expenses/income" net of the above reclassifications.
14
COMMENTS ON THE FINANCIAL STATEMENTS
Statement of financial position aggregates
Figures as at 31 March 2010 confirm a positive development in statement of financial position aggregates, thanks to the development of the branch network and the strengthening of the market position, the constant attention in support of real economy of the operating areas, with a further increase of loans to SMEs and to households and new initiatives in favour of companies, within a strict credit risk framework. Direct deposits amounted to EUR 20,648 million, recording an increase of 2.1% compared to December 2009 and 5.7% for the same period last year. Indirect deposits totalled EUR 12,910 million, marking an increase of 2.2% compared to EUR 12,636 in December last year and 8.9% year-on-year. The increase in managed savings was more marked reaching EUR 6,206 million, up 5.6% compared to EUR 5,875 million at the end of 2009 and approximately 17% compared to the first quarter of 2009. Total deposits, equal to EUR 33.558 million, recorded a 2.2% growth compared to EUR 32,853 million at the end of 2009 and 6.9% year-on-year. At the end of March 2010, loans to customers amounted to EUR 20,618 million, up 1.2% compared to the end of 2009 and 9.6% compared to the same period last year. Within a strict credit risk framework, impaired loans, net of value adjustments, totalled EUR 1,228 million, up 13.3% compared to EUR 1,084 million at the end of December 2009. Doubtful loans, net of value adjustments, amounted to EUR 362 million compared to EUR 344 million in December 2009, with a 1.76% impact on the loans portfolio compared to 1.69% at the end of 2009 and of which 62% was hedged. Other net doubtful loans stood at EUR 866 million, compared to EUR 741 million as at the end of December 2009, representing 4.20% of loans portfolio, against the 3.64% in the previous year. Said indicators showed a limited credit risk profile, despite the increase in impaired loans consistent with the trend of the economic cycle
Economic trend of operations
Economic results are influenced by the prolonged drop in market interest rates and by the negative effects of the economic scenario on the cost of credit, in line with the business model focused exclusively on lending activities.
To enable a better comprehension of trends indicated below, the first quarter of 2009 included non-recurring income for the transfer of non strategic shares, classified among Financial assets held for trading, for a total value of EUR 3.7 million net of the related tax effect.
The interest margin reached EUR 118.6 million compared to EUR 132.4 million of the first quarter of 2009 decreasing by 10.4% as a consequence of the marked decrease in market interest rates, effects that were only partly offset by the increase in trading volumes. Net fee and commission income totalled EUR 66.7 million, up 33.3% year-on-year. Income from investments in associates and companies subject to joint control carried at equity totalled EUR 2.8 million. Positive the profit (loss) on trading activities and transfer of AFS totalling EUR 5.1 million, whist the other
15 operating income totalled EUR 4.6 million. Operating income reached EUR 198 million, recording a 0.4% increase compared to the first quarter of 2009 (+2.5% net of non-recurring income components). Operating costs amounted to EUR 133 million, an increase of 3.8% year on year. In detail, the cost components increased by 5.9% in terms of personnel costs, which amounted to EUR 81.9 million compared to EUR 77.3 million - due to the expansion of the workforce (ca. +100) related to the development of the commercial network - whereas other administrative expenses passed from EUR 42 million to EUR 41.6 million, decreasing by 1%. Net adjustments to/recoveries on property, plant and equipment and intangible assets reached EUR 9.6 million, up 7.4%. Net operating margin was EUR 65 million, decreasing by 5.7% compared to the same period last year but essentially in line net of non-recurring income components. Losses/recoveries on impairment of loans amounted to EUR 22 million increasing by 10.2% compared to EUR 20 million of the first quarter of 2009. The “cost of credit”, expressed as a percentage of total loans to customers, reached approximately 43 basis points. Income before tax from continuing operations therefore amounted to EUR 42.3 million decreasing by 13.8% compared to the first quarter of 2009 (-6.4% net of non-recurring income components). Income tax for the year, estimated at EUR 18.1 million and minority interests amounting to EUR 3.7 million fix the net profit for the period to EUR 20.4 million, down 24.6% compared to the result of the first quarter of 2009 and decreasing by 12.8% net of non-recurring income components.
16
MANAGEMENT PERFORMANCE DURING THE QUARTER
ECONOMY AND FINANCIAL MARKET TRENDS1
The recovery in the world economy continued at the end of 2009 and during the first months of the current year, even if at an uneven rate among countries and areas of the world. In the fourth quarter, GDP accelerated in the United States, in Japan and in the major developing countries; a slight recovery continued in the Eurozone. In all the main advanced economies, the activity continues to be sustained by monetary and tax relaxation policies; in some cases, a temporary support to productivity came from restocking; consumption is held back by the high level of unemployment, investments by uncertainty and by the wide margins of idle capacity. In the main emerging economies, growth continued to be supported by a strong trend in domestic demand.
According to the valuations of private analysts, in 2010 the growth in GDP should rank around 3% in the United States, 2% in Japan and 1% in the Eurozone; it should reach 10% in China, 8% in India and 5½% in Brazil. The forecasts published in January by the IMF, being revised, are not very different. International trade - which decreased by more than 12% in 2009 - is expected to increase by nearly 6%.
In the Eurozone, the trend in domestic demand is still weak. In recent months, industrial productivity and business confidence improved, especially in Germany, mostly reflecting the recovery of orders from abroad; retail sales continued to drop and consumer confidence seems to worsen.
Monetary policies were still widely expansive. Inflation in the main advanced economies was moderate. The Eurosystem continued the gradual removal of unconventional transactions that, thanks to the improvement of the conditions in financial markets, were not required as in the past; it continued to support the liquidity of the banking system and economic recovery.
Tension on Government bond markets were circumscribed - also thanks to the abundant liquidity available on the markets, share prices started to increase moderately; risk premiums of company bonds and of total debt of Developing countries remained steady or slightly decreased. Worries on the sustainability of the Greek national debt were transmitted to a limited extent to the securities market of the main European Countries.
The high volatility, from the end of last year, of credit risk premiums on Government bonds showed the concern with which investors considered public finance, strongly worsened in all the advanced Countries following the crisis. Whereas in 2010, the approach of tax policies should remain expansive in most of the countries, deficit reduction plans were announced for the following years. The credibility of these plans is essential for avoiding sharp rises in returns and guarantees the sustainability of public finance.
In Italy, economic recovery is still weak - Italian GDP slightly decreased in the fourth quarter of 2009. In connection with a slump in consumption and a further decrease in investments(especially in the building industry), exports did not confirm the slight recovery of the third quarter. In the second half of the year as a whole, the economic activity reported a modest expansion compared to the previous six months.
1 Bank of Italy Economic Bulletin no. 60 – April 2010 17 More recent figures on industrial productivity and the results of economic surveys indicate a more lively development of the activity during the first months of 2010. In particular, the judgements of businesses on the trends for orders and on production expectations improved. It seems that the de-stocking phase has finally come to an end. Signs of improvement in expectations also emerged in the building industry.
However, the consumer confidence worsened, reflecting increased worries regarding the economic situation and employment prospects. The fall in the number of employees, that already last year was expressed in a sensible decline in disposable income, continued in the first months of 2010. The propensity of businesses to invest is affected by the reduced profits and by the low use of production capacity. Businesses continued to report the ongoing credit squeeze, even if the tightening of lending criteria by the banks stopped. The factors at the base of the weak trend in domestic demand could weigh on the intensity and on the recovery time.
In connection with the persistent weakness of domestic demand, the dynamic trend of exports was not enough in itself for returning growth to its high values. During the acute stage of the crisis (from the second quarter of 2008 to the second quarter of 2009) the volume of our foreign sales declined by a quarter, as in Germany, more than France. In the second half of 2009, in connection with a 9.3% growth in world trade, domestic recovery was only 2.6%, compared to 10% of German exports and 5.4% of French exports. In January this year, the volume of Italian exports showed a more marked recovery. Figures in value form a framework that is very similar to the one inferred from figures in quantity. The delay with which our foreign sales followed the trend of world demand is due to the same factors that penalised them previously: a deterioration in price competitiveness higher that the one observed in France and Germany; a segment specialisation still imbalanced to the traditional manufacturing sector; a limited presence in more dynamic emerging markets, such as the Asian markets.
Inflation became stable - Consumer price inflation has been gradually accelerating in recent months, stabilising at around 1.5%, a level near to that of the basic component, since the statistical effect on growth rates was over after twelve months from the strong decline in prices of energy reported in the second half of 2008. Inflation prospects for 2010 are set to the same level.
The Italian banking system. In February, bank lending in the non-financial private sector was standing at the level of twelve months earlier. It slightly decreased compared to three months earlier, reflecting the ongoing lending decline in non-financial companies (-3.9%), compared to a moderate growth of loans to household (4.4%). The decline in loans to businesses remains as a whole consistent with the extended decline of their borrowing requirement, related to recession. The tightening of lending criteria, accentuated in the previous quarters, would have stopped in the fourth quarter of 2009, according to the Italian Banks participating in the Bank Lending Survey in the Eurozone. For what concerns businesses, the monthly survey of ISAE and the quarterly survey carried out together with the Bank of Italy and Il Sole 24 Ore reported, in March, the ongoing credit squeeze, even if less acute compared to the peak of the crisis.
The quality level of loans remains historically low. After a strong deterioration of the previous quarters, it continues to suffer from the difficult economic situation. In the fourth quarter of 2009, the ratio in the flow of new adjusted doubtful loans and total loans, net of seasonal factors, was 1.8%. Though sagging compared to 2.2% of the third quarter, the ratio is approximately twice the average level of 2008 and 2007; moreover, the recent decrease could be temporary. Based on preliminary figures of the first two months of 2010, the total exposure for debtors recorded as doubtful for the first time slightly increased compared to the same period in 2009. There were some signs of improvement for businesses in the manufacturing sector whereas there was a further deterioration for businesses in other sectors and households. Information regarding other types of impaired loans (substandard, restructured, expired or overdue exposures) show that the deterioration in credit quality to businesses could continue also in the
18 following months; in December, their impact on total loans increased, compared to one year ago, from 4.7 to 7.7%.
The expansion rate year-on-year of total deposits in Italian banks was moderate in February. Changes in bond issues were low (2%). Resident deposits increased by 7.8%. Current accounts continued to grow at a high rate, especially household current accounts (13.1%), encouraged by a shift to more liquid forms within a context of low rates.
Banking profitability continued to decrease in 2009. Profits fell on average by about one third; the ROE decreased by about two percentage points, to nearly 4%. The decline in the interest margin, due to the reduction in traded volumes and in rates, was 8%; the drop was offset by the growth in revenues deriving from trading activities. Overall, net interest and other banking income remained stable. As a result of cost containment (-6%), income from banking activities increased by 8%. The deterioration in profitability was determined by the increase in provisions and net adjustments; those on loans, due to the significant deterioration of credit quality, increased by two thirds and absorbed about 60% of the income from banking activities (40% in 2008). According to the expectations of financial analysts, the recovery of the banking profitability should be gradual: results in line with 2008 would be achieved again in 2011.
Financial markets. Share prices remained nearly unchanged from the beginning of the year. The general Borsa Italiana index dropped significantly at the beginning of the first quarter of 2010, to coincide with the sharpening of the worries on the conditions of the public accounts of Greece and other countries of the area. Quotations increased later on. At the end of March, the index was mainly unchanged compared to the beginning of the year (-0.4%), similarly to what is observed for the index of the main listed companies of the Eurozone. The current and prospective profitability of the listed companies has not significantly changed.
19 SIGNIFICANT EVENTS DURING THE QUARTER