Annual Financial Report 2019
1 Contents
Introduction 4 Composition of the Corporate Bodies 5
Report on Operations 2019 in brief Economic data and performance indicators 8 Equity data and performance indicators 9 The macroeconomic scenario and the lending system 10 Results for the year 11 Economic results 11 Financial aggregates 16 The business 24 Operating structure 30 Corporate Governance 32 Non-financial disclosure 43 Other information 58 Significant subsequent events 58 Business outlook 59 Proposed allocation of net income for the period 60
Accounting statements Balance Sheet 62 Income Statement 63 Statement of comprehensive income 64 Statement of changes in shareholders' equity 65 Statement of Cash Flows 67
Notes to the Financial Statements Part A – Accounting policies 70 Part B – Information on the balance sheet 114 Part C – Information on the income statement 154
2 Part D – Comprehensive Income 175 Part E – Information on risks and relative hedging policies 178 Part F – Information on capital 231 Part H – Transactions with related parties 236 Part L – Segment reporting 243 Part M – Leasing information 245
Country-by-country reporting (Art. 89 Directive 2013/36/EU) 247
Attestation of the separate financial statements under the terms of Article 81-ter of CONSOB Regulation 11971 of 14 May 1999, as amended 249
3 Introduction
The Financial Statements of Mediocredito Centrale, in application of Italian Legislative Decree 38 of 28 February 2005 and of Italian Legislative Decree 136 of 18 August 2015, have been drawn up according to the IAS/IFRS accounting standards issued by the International Accounting Standards Board (IASB) and the related interpretation documents of the International Financial Reporting Interpretations Committee (IFRIC), endorsed by the European Commission, as established by Community Regulation no. 1606 of 19 July 2002. The financial statements at 31 December 2019 have been prepared on the basis of the “Instructions for Drafting the Financial Statements of Banks” issued by the Bank of Italy with its provision of 22 December 2005, with which Circular no. 262/05 was issued, and subsequent updates. These instructions establish the format of the Financial Statements and the related preparation methods, as well as the content of the Notes to the Financial Statements. The Separate Financial Statements are made up of the Balance Sheet, the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Shareholders’ Equity, the Statement of Cash Flows and the Notes to the Financial Statements, and they are also accompanied by a Report on Operations outlining, on the economic results achieved and on the Bank’s equity and financial situation. In support of the comments on the results for the period, the Report on Operations presents and illustrates the reclassified income statement and balance sheet. On the Bank’s website (at: www.mcc.it) the financial reports and the press releases published in the period are available, together with other financial documentation.
4 Composition of the Corporate Bodies
Board of Directors
Chairperson Massimiliano Cesare Chief Executive Officer Bernardo Mattarella Director Pasquale Ambrogio Director Leonarda Sansone Director Gabriella Forte
Board of Statutory Auditors Chairperson Paolo Palombelli Regular Auditor Carlo Ferocino Regular Auditor Marcella Galvani Alternate Auditor Roberto Micolitti Alternate Auditor Sofia Paternostro
* * *
Auditing Firm PricewaterhouseCoopers S.p.A.
Financial Reporting Manager Elena De Gennaro
5
Report on Operations
6
2019 in brief
7
Economic data and performance indicators
Changes Reclassified income statement (millions of euro) Amount %
25.0 Net interest income -6.9 -21 31.1
of which: interest income 36.4 44.1 -7.7 -18
of which: interest expense 11.3 12.2 0.9 -7
54.7 Net fees and commissions -1.4 -3 56.1
Titolo asse 88.5 Net banking and insurance income 88.3 0.2 0
47.4 Operating profit/(loss) 48.8 -1.4 -3
31.2 Net operating profit/(loss) 22.0 9.2 41
29.1 Gross profit from continuing operations 24.1 5.0 21 22.5 Net income for the period 2.3 -11 20.2
Profitability indicators (%)
46.4 Cost/Income (net of expense recoveries) 44.7
8.4 Net gains(losses)/Average shareholders' equity (ROE) 8.3
Net interest income/Net banking and insurance income 28.3 36.1 61.8 Net fees and commissions/Net banking and insurance income 63.5 0.9 Net income/Total assets 1.0
31.12.2019 31.12.2018
8 Equity data and performance indicators
Changes Balance sheet (millions of euro) Amount %
1,559.9 Due from customers 129 9 1,430.9
1,506.1 of which: performing 138.4 10 1,367.7
84.7 Due from banks 22.4 36 62.3
2,113.0 Total deposits 1,985.6 127.4 6 272.0 Shareholders’ equity (excluding profit for the period) 245,2 26.8 11
Capital ratios (%)
Tier 1 capital ratio/risk weighted assets (Tier 1 capital ratio) 20-36 19.62
Risk indicators (%)
0.5 Non-performing loans/Loans to customers 0.7
3.5 Classified loans/Loans to customers 4.4
31.12.2019 31.12.2018
Ratings
The Bank’s ratings are the following:
Moody’s S&P Global Ratings
Long-term deposit Baa3 Long-term Issuer Rating BBB-
Short-term deposit P-3 Short-term Issuer Rating A-3
Outlook Under Review Outlook Negative
Issuer Rating Ba1
9
The macroeconomic scenario and the lending system
Uncertainties continue in Italy also due to the slowing seen both in Europe and generally. Signals coming from indicators are contradictory.
In fact, on one hand the conditions on the financial and lending markets have improved and investor confidence has improved, as can be seen by the significant purchases of public securities by non-residents and the considerable drop in the relative returns and interest differentials with regards to the Bund.
Nonetheless, preliminary ISTAT estimates indicate a 0.3% decrease in GDP with respect to the 4th quarter of 2018, also due to unfavourable changes in the most erratic components of final demand, held up by a positive change in household spending and in inventories, mitigating the foreign component which saw a decisive drop.
Bank of Italy projections published in January’s economic bulletin suggest limited growth after the lack of change seen in 2019, but much higher in the coming two years.
Much will depend on international trade disputes, geopolitical tensions, future economic relationships between the European Union and the United Kingdom as well as possible impacts on the Chinese economy deriving from the spread of the coronavirus, given its status as one of the main motors driving global growth.
In terms of financial markets, the return differential between Italian 10-year government securities and the corresponding German bonds is still nearly two times that seen in Spain and Portugal, at 140 basis points.
The reduction in the rate applied to bank deposits in the Eurosystem was transferred to short-term market returns and a recovery of net purchases of financial assets put downward pressure on long-term returns.
In the banking sector, credit quality continues to improve while the inflow of new impaired loans remains constant.
Profitability has increased with respect to the same period the previous year, and as noted in a recent interview with the Governor of the Bank of Italy, net of extraordinary components, ROE rose on average from 5.8% to 6.6% during the first nine months of 2019.
10 In a situation of modest revenue growth, with net interest income continuing to make a small contribution, with fee components contributing more, in order to maintain expected profitability, which Prometeia estimates suggest will not be likely to exceed 5% in 2022, reductions in operating expenses and in the cost of risk will be the determining factors in maintaining expected profitability, thanks to controlling credit quality and a lower need for extraordinary writedowns on impaired items.
Results for the year
Economic results
Net profit in 2019, totalling 22.5 million, +11% with respect to 2018 and well in line with the budget approved by the Board of Directors on 14 February 2019, outlines the Bank’s trends through:
a) net banking and insurance income substantially in line with the previous year, totalling 88.5 million (88.3 million at 31.12.2018), showing a decrease in net interest income despite development of lending, given the continuing spread levels applied to customers with ever lower margins for segments with greater creditworthiness, a decrease in commissions generated by the Guarantee Fund due to operational slowdowns after the Reform took effect on 15 March, mitigated by the greater contribution made by profits deriving from management of the securities portfolio (8.8 at 31.12.2019 compared to 0.3 at 31.12.2018), thanks to the temporary reduction in the third quarter of 2019 of the differential between Italian and German ten-year securities;
b) the normalisation of credit risk adjustments, mainly attributable to the impaired portfolio, compared to the “extraordinary” figure recorded in 2018. On a net basis, the impact of the impaired portfolio fell again from 4.7% to 3.7%, while the coverage rate rose to 60%, compared to 53.3% at the end of 2018. These adjustments include the valuation done relative to the € 12 million subscription on 20.12.2019 of a subordinate bond loan (Banca Carige 2019-2029, fixed rate Tier II, with a total nominal value of 200 million), issued as part of a complex transaction to strengthen the capital for the Ligurian bank, which saw the departure of the government appointed commissioner on 31 January 2020;
11 c) tax benefits, in terms of a lower tax load (3.2 million vs. 3.9 at 31.12.2018) due to the so-called Patent Box, following the Revenue Agency's acceptance of the request for subsidised income taxation for 2015-2019.
Below is the reclassified income statement.
Changes RECLASSIFIED INCOME STATEMENT 31.12.2019 31.12.2018 Amount % figures in €/millions Net interest income 25.0 31.9 -6.9 -21% of which: Interest income 36.4 44.1 -7.7 -18% of which: Interest expense (11.3) (12.2) 0.9 -7%
Net fees and commissions 54.7 56.1 -1.4 -3% Net result of financial transactions and other income 8.8 0.3 8.5 n.s. NET BANKING AND INSURANCE INCOME 88.5 88.3 0.2 0% Personnel expenses (25.3) (24.0) -1.3 5% Other administrative expenses (14.0) (15.6) 1.6 -10% Expense recoveries 2.7 2.1 0.6 31% Net value adjustments of PPE, intangible assets and third-party assets (4.5) (2.0) -2.5 129% OPERATING EXPENSES (41.1) (39.5) -1.6 4% OPERATING PROFIT/(LOSS) 47.4 48.8 -1.4 -3% Net adjustments for credit risk on financial assets and contractual changes (16.2) (26.8) 10.6 -39% NET OPERATING PROFIT/(LOSS) 31.2 22.0 9.2 41% Provisions for risks and charges, charges for transactions (2.1) 2.1 -4.2 -199% GROSS PROFIT ON CONTINUING OPERATIONS 29.1 24.1 5.0 21%
Income taxes for the period (6.6) (3.9) -2.7 67%
NET INCOME FOR THE PERIOD 22.5 20.2 2.3 11%
12
Net banking and insurance income
Changes NET BANKING AND INSURANCE INCOME 31/12/2019 31/12/2018 Amount % figures in €/millions Net interest income 25.0 31.9 -6.9 -21% of which: Interest income 36.4 44.1 -7.7 -18% of which: Interest expense (11.3) (12.2) 0.9 -7%
Net fees and commissions 54.7 56.1 -1.4 -3% Net result of financial transactions and other income 8.8 0.3 8.5 n.s.
Total 88.5 88.3 0.2 0%
Net banking and insurance income shows:
• a lower contribution from net interest income (-21%), due to the continuation of the smaller spread applied to customers, not yet compensated for by new disbursements;
• a decrease in net fees and commissions (-2.6% with respect to 2018) due to the slowdown in operations by the National Guarantee Fund in the months immediately before the reform decree took effect on 15 March 2019, which among other things introduced a business creditworthiness evaluation model, with the possibility of defining probability of default for the final beneficiary, restructuring guarantee measures inversely to borrower riskiness, and the introduction of specific rules for transactions against investments. During 2019, the National Guarantee Fund saw a slight decrease of -3.4% in terms of requests granted, guaranteeing a volume of loans totalling 19.4 billion (+0.9% over 2018), of which 5,346.9 million to companies in southern Italy (- 1.4% with respect to 2018);
• profits from disposal of financial assets totalling 9 million (0.3 million at 31.12.2018) due to the release and subsequent reinvestment of the bank’s portfolio of securities, benefiting from the decrease in the spread between the BTP and Bund seen in the third quarter of the year.
13 Changes OPERATING EXPENSES 31/12/2019 31/12/2018 Amount % figures in €/millions Personnel expenses (25.3) (24.0) -1.3 5% Other administrative expenses (14.0) (15.6) 1.6 -10% Expense recoveries 2.7 2.1 0.6 31% Net value adjustments of PPE, intangible assets and third-party assets (4.5) (2.0) -2.5 129%
Total (41.1) (39.5) -1.6 4% Personnel expenses amounted to 25.3 million (+5% over 2018), relative to a workforce of 295 employees (283 at 31.12.2018), broken down as follows: • 10 executives; • 171 middle managers; • 112 in other professional areas; • 2 seconded by the parent company Invitalia S.p.A.. Relative to other administrative expenses, the process to improve efficiency continued, thanks to targeted renegotiation of contracts with the main suppliers and a review of processes with the aim of reducing waste and inefficiencies. The cost income ratio was 46.4% (44.7% at 31 December 2018).
Changes NET GAINS/(LOSSES) 31/12/2019 31/12/2018 Amount % figures in €/millions OPERATING PROFIT/(LOSS) 47.4 48.8 -1.4 -3%
Net adjustments for credit risk on financial assets and contractual changes (16.2) (26.8) 10.6 -39%
NET OPERATING PROFIT/(LOSS) 31.2 22.0 9.2 41%
Provisions for risks and charges, charges for transactions (2.1) 2.1 -4.2 -199%
GROSS PROFIT ON CONTINUING OPERATIONS 29.1 24.1 5.0 21%
Income taxes for the period (6.6) (3.9) -2.7 67%
NET INCOME FOR THE PERIOD 22.5 20.2 2.3 11%
Net value adjustments for credit risk, totalling 15.9 million (against 26.8 in 2018) include net adjustments on amounts due from customers for 13.1 million and on amounts due from banks for 2.8 million, relative to the 12 million subscription of the subordinate bond loan issued by Banca Carige, referenced above. Additionally, net losses from contractual changes were seen in the amount of 0.3 million. During the year, writedowns on receivables were recognised in the amount of 20.1 million, almost entirely relative to impaired positions, classified as probable default, while writebacks of 4.2 million were recognised for financial receivables (of which 2.6 million relative to performing receivables - with regards to repaid positions/transfers between
14 stages, and 1.6 million of writebacks relative to impaired receivables - of which 0.3 due to amounts collected).
Net provisions for risks and charges of 2.1 million include: a) net writedowns of 1.1 million relative to valuation of commitments to disburse loans; b) provisioning of around 1 million relative to the provision for redundancies, following the resolution made by the Board of Directors on 20 February 2020.
15 Financial aggregates
ASSETS
Changes BALANCE SHEET - ASSETS 31.12.2019 31.12.2018 Amount % figures in €/millions Cash and cash equivalents 1.1 25.0 -23.9 -96% Financial assets measured at fair value through other comprehensive income 748.0 715.8 32.2 5% Financial assets measured at amortised cost 1,644.6 1,493.2 151.4 10% Due from banks 84.7 62.3 22.4 36% Due from customers 1,559.9 1,430.9 129.0 9% Hedging derivatives 88.0 82.6 5.4 7% Equity investments 0.6 0.6 0.0 0% Property, plant and equipment and intangible assets 20.1 2.6 17.5 668% Tax assets 12.4 20.3 -7.9 -39% Other assets 9.5 10.4 -0.9 -8%
TOTAL ASSETS 2,524.3 2,350.5 173.8 7%
Financial assets at fair value through other comprehensive income
Financial assets measured at fair value through other comprehensive income, equal to 748 million (715.8 million at 31 December 2018), consist entirely of investments in Italian government bonds, in line with the Policies adopted by the Bank relative to the use of liquid treasury assets.
Financial assets measured at amortised cost
Gross value Total value adjustments Net Value Stage one Stage two Stage three Stage one Stage two Stage three figures in €/millions Due from banks 74,996 (62) 74,934
Other due from banks 537 0 537
Due from banks: Securities 12,030 (2,777) 9,253
Due from customers: Securities 27,562 (55) 27,507
Due from customers 1,290,355 114,054 134,840 (6,494) (5,657) (81,023) 1,446,075
Due from PA customers 65,665 (1,127) 64,538
Other due from customers 481 (230) 250
Postal current accounts 4,582 (4) 4,578
Due from RMBS 16,843 0 16,843
Security deposits 77 0 77 Total item A40 1,493,128 114,054 134,840 (10,749) (5,657) (81,023) 1,644,593
16 Due from banks
Amounts due from banks amounted to 84.7 million, compared to 62.3 million at 31 December 2018. The item consists of liquidity held in bank current accounts totalling 65.3 million (56.3 million at 31 December 2018), obligatory reserves of 9.6 million (5.5 million at 31 December 2018) and other receivables totalling 0.5 million (0.7 million at 31 December 2018). This sub-item also includes the Tier II subordinate bond loan issued by Banca Carige S.p.A. and subscribed for 9.3 million by the Bank (net of credit risk adjustments).
Due from customers
This item, of 1,559.9 million (1,430.9 million at 31 December 2018) is made up of: • loans to customers in the amount of 1,473.6 million (1,336.2 million at 31.12.2018), consisting of gross loans for 1,566.8 million, of which performing, stage 1 and 2 equal to 1,432 million (1,421.8 million at 31.12.2018) and adjustment provisions of 93.3 million, of which 81 million relative to impaired loans and 12.3 for performing loans (85.6 million at 31.12.2018). Loans to customers include bonds subscribed during the year, mainly through the basket bond mechanism, based on the issue of an ABS guaranteed by a pool of minibonds, for € 27.5 million (gross value 27.6 million and adjustment provisions for 0.1 million). Non Performing Loans (with a gross value of 134.8 million and adjustment provisions of 81.0 million) of 53.8 million (against 63.2 million in 2018), accounting for 3.7% of total financial receivables (against 4.7% in 2018). In particular, loans classified as Bad loans totalled 7.6 million (0.5% of loans to customers), with a coverage rate of 73.3%. Loans classified as Unlikely to pay totalled 46.2 million (3.1% of loans to customers), with a coverage rate of 56.6%. There were no impaired past-due exposures. The impact of the item "due from customers" relative to the total on a net basis is 3.4% (from 4.4% at 31 December 2018). • trade receivables due from public administrations for management of subsidised funds of 64.5 million (against 66.6 million at 31 December 2018); • current accounts open with Poste Italiane of 4.6 million (5.6 million at 31 December 2018); • receivables claimed from the special purpose vehicle company MCC RMBS srl of 16.8 million (22.4 million at 31 December 2018), for collections recorded by the same during
17 the 4th quarter of 2019 as part of the securitisation transaction involving the Bank’s mortgage loan portfolio, completed pursuant to Italian Law 130/99 during 2016.
• Security deposits and other net receivables total € 0.4 million.
Other asset items
The item “hedging derivatives” at 31 December 2019 was equal to 88.0 million, and showed the fair value of derivatives established to hedge against interest rate risk relative to Bank bond issues.
Equity investments total 0.6 million and derive from the 2017 subscription of 558,140 shares of the Istituto della Enciclopedia Italiana fondata da Giovanni Treccani, equal to 0.89% of the Institute's share capital.
Property, plant and equipment and intangible assets amount to € 20.2 million (2.6 million at 31 December 2018) and include 1.9 million for investments in software, 0.4 million for PPE relative to furniture, fixtures and hardware functional to the Bank’s operations and 17.9 million for rights of use relative to leases of properties (17.8 million) and long-term rentals of vehicles (0.1 million), recognised in accordance with the new accounting standard IFRS 16.
Tax assets came to 12.4 million (20.3 million at 31 December 2018), consisting entirely of deferred tax assets (of which 8.2 million for adjustments on loans, 2.8 million for allocations to provisions for risks and charges, 1.3 million for negative fair value changes recognised in the securities valuation reserves and 0.1 million for other items).
Other assets total 9.5 million, substantially in line with respect to 31 December 2018 (10.3 million). The main figures included in the item at 31 December 2019 are costs incurred on third-party assets (2.7 million), tax receivables (4.2 million), prepaid expenses (0.7 million), receivables due from the parent company (0.4 million) and other receivables to be invoiced and other items (1.5 million).
18
LIABILITIES
Changes BALANCE SHEET - LIABILITIES 31.12.2019 31.12.2018 Amount % figures in €/millions Financial liabilities measured at amortised cost 2,113.0 1,985.6 127.4 6% Due to banks 494.4 892.8 -398.4 -45% Due to customers 1,161.4 796.1 365.3 46% Securities issued 457.2 296.7 160.5 54%
Value adjustments of financial liabilities with macro-hedging 78.2 73.8 4.4 6% Tax liabilities 1.0 0.1 0.9 795% Other liabilities 24.0 15.8 8.2 51% Employee severance benefits 3.1 3.2 -0.1 -1% Provisions for risks and charges 8.3 6.6 1.7 26% Reserves 67.5 40.7 26.8 66% Share capital 204.5 204.5 0.0 0% Net income for the period 22.5 20.2 2.3 11%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,524.3 2,350.5 173.8 7%
Financial liabilities measured at amortised cost came to € 2,113.0 million (1,985.6 million at 31 December 2018).
Amounts due to banks at 494.4 million, compared to 892.8 million at 31 December 2018, can be broken down as follows:
Changes DUE TO BANKS 31.12.2019 31.12.2018 Amount % figures in €/millions Open market transactions with ECB 320.5 396.8 (76.3) -19% Time deposits guaranteeing hedging derivatives 86.5 87.3 (0.8) -1% Time deposits and interbank loans from Italian banks 0.0 180.0 (180.0) -100% Repurchase agreements 42.0 199.0 (157.0) -79% EIB Funds 41.5 25.0 16.5 66% Other items (amounts to be returned for pool operations) 3.8 4.6 (0.8) -18%
Total 494.4 892.8 (398.4) -45%
Amounts due to customers at 1,161.4 million, compared to 796.1 million at 31 December 2018 can be broken down as follows:
19 Changes DUE TO CUSTOMERS 31.12.2019 31.12.2018 Amount % figures in €/millions CDP funding 53.7 59.6 (5.9) -10% PA current accounts 194.6 115.5 79.1 68% Customer current accounts 387.2 275.4 111.8 41% Invitalia current accounts 0.9 0.4 0.5 116% Time deposits from corporate customers 344.1 184.3 159.8 87% Invitalia time deposits 152.2 150.0 2.2 1% Financial payables for rights of use 18.3 0.0 18.3 n.s. Other items (including amounts to be returned) 10.4 10.9 (0.5) -4%
Total 1,161.4 796.1 365.3 46% The item due to customers shows an increase of around 365 million mainly due to increases in current accounts and time deposits from corporate customers, against a corresponding reduction in amounts due to banks.
Securities issued, equal to 457.2 million (against 296.7 million at 31 December 2018) consist of a pre-existing bond loan listed on the MOT and revenue from the inaugural “Social” bond issue (unsecured senior preferred) completed last October in the amount of 300 million, with an annual 1.5% fixed rate, maturing on 24 October 2024. Proceeds from the issue, listed on the Luxembourg Stock Market, and intended for institutional investors under the one billion Euro Medium Term Notes (EMTN) program, will be used to finance and/or refinance loans granted to businesses which contribute to the economic development of depressed areas, in particular in southern Italy, in full compliance with the Bank's mission.
Value adjustments of financial liabilities with macro-hedging
The value adjustment of financial liabilities subject to macro hedging was a positive 78.2 million, compared to 73.8 million at 31 December 2018.
Tax liabilities
Tax liabilities, equal to 1 million (0.1 million at 31 December 2018), refer for 0.9 million to payables for current taxes and for 0.1 million to deferred taxes recognised as contra- entries in shareholders’ equity, as they relate to taxes on valuation reserves, as well as actuarial gains on employees’ severance indemnities.
20 Other liabilities Other liabilities of 24 million (15.8 million at 31 December 2018) consisted of 7.6 million in operating payables due to suppliers, 7.9 million of payables due to public administrations, 2.6 million of payables to employees and social security institutions, 2.4 million in tax payables, 1.8 million of payables due to the parent company Invitalia and 1.6 million in other items. The increase is mainly due to greater concentration of amounts due to suppliers near the end of the financial year.
Equity
Shareholders’ equity at 31 December 2019 was made up of the share capital - represented by 40,901,738 ordinary shares with a face value of € 5 each, for a total amount of 204.5 million, the legal reserve and other reserves for a total amount of 71.4 million, negative valuation reserves for 3.9 million and the profit for the period amounting to 22.5 million.
Shareholders’ equity at 31 December 2019 including profit for the period amounts to 294.5 million (See the Notes - Part B - Section 12).
The Bank holds no shares of its own either directly or through trust companies or intermediaries.
At 31 December 2019 own funds, determined on the basis of the current rules issued by the Bank of Italy, were 279.7 million (242.9 million at 31 December 2018) capable of guaranteeing a level of capitalisation for the Bank more than sufficient with respect to expected risks and the target level of capitalisation, outlined in the Risk Appetite Framework (RAF) (see the Notes, Part E).
The capital absorptions and thus the capital requirements are determined on the basis of the following approaches: • Credit Risk: Standardised Approach; • Counterparty Risk: Standardised Approach applied to exposures calculated with the Current Value Method; • Operational Risk: Basic Approach; • Credit Valuation Adjustment Risk: Standardised Approach.
In the absence of a trading book, no absorption is calculated for market risk.
21 The overall total of risk-weighted assets (credit, counterparty, market and operational risks) amounted to 1,374 million compared to 1,238 million at 31 December 2018.
The CET1, Tier1 and Total Capital Ratios are 20.36%.
Total prudential requirements, calculated with the Basel III approaches, amount to 109.9 million.
CET1, Tier1 and Total Capital ratios are all in line with both the Bank of Italy indications relative to SREP and the RAF established by the Board of Directors (15.5%).
Binding Capital Total requirement Capital ratio requirement Guidance1 (OCR) (TSCR) (P2G) CET1 Ratio 5.54% 8.04% 8.54% T1 Ratio 7.39% 9.89% 10.39% TCR 9.86% 12.36% 12.86%
1 In order to ensure that binding measures are respected even in the case of a deterioration in the economic and financial situation, in consideration of exposure to risks under stress conditions, in the same provision the Regulatory Authority identified the guiding capital levels (capital guidance), which constitute the Regulatory Authority's expectations relative to additional capital resources which the Bank must hold.
22 With reference to the RAF (Risk Appetite Framework) the risk targets identified by the Bank are presented below: Objective Metric Threshold
Total Capital Ratio (TCR) ≥ 15.5% Capital adequacy Leverage Ratio (LR) ≥ 6%
Loan portfolio quality Net NPL Ratio (NPL) ≤ 6%
Profitability ROE ≥ 6%
Operating efficiency Cost/Income ≤ 55%
∆ Economic value/Own funds ≤/ 10% Banking Book interest rate ∆ Net interest income ≤ 5.5€/mln
Liquidity Coverage Ratio ≥ 140% Liquidity Stable funding/Illiquid assets ≥ 100%
Asset encumbrance Tied assets/Total Assets ≤ 55%
23 The business During 2019, in full compliance with that established in the Business Plan, the Bank’s commercial activities were mainly focussed on small and medium enterprises in southern Italy, through a well-developed array of products, with lending also carried out in synergy with other local players. Activities to support the commercial development of SME was carried out both by Level II bank activities, making use of local partnerships with banks, financial companies and loan consortia, with previously signed agreements, and in B2C mode through the use of the web portal. To support the Level II Bank role: • new memorandums of understanding were signed with loan consortia, associations and professional organisations; • the Basket Bond and Tranched Cover mechanisms were used to satisfy medium/long-term funding requirements for businesses, maintaining good asset quality.
The portfolio of offerings was enhanced, which includes:
Credit products managed through the Portal • Chirofast (Fast Unsecured): simple, fast and effective variable rate loan with a Fund guarantee and a term: o from 18 to 60 months for inventories and other financial needs; o from 18 to 84 months for investments in property, plant and equipment and in intangible assets; • Chiro PMI (Unsecured SME): variable rate loan supported by a Fund guarantee, with a term: o from 18 to 60 months for inventories and other financial needs; o from 18 to 84 months for investments in property, plant and equipment and in intangible assets; • Chiro Nuove Imprese (New Business Unsecured): loan supported by a Fund guarantee, for small and medium enterprises with a maximum of two financial statements filed and/or for innovative start-ups, to support the start of business and initial growth stages, with a term:
24 o from 18 to 60 months for inventories and other financial needs (in the case of innovative start-ups or when supported by loan consortia guarantees); o from 18 to 84 months for investments in property, plant and equipment and in intangible assets;
Credit products for large companies • Medium/long-term loans: unsecured or secured loans with excellent flexibility to satisfy even highly structured requirements: o from 18 to 60 months for inventories and other financial needs; o from 18 to 84 months for investments in property, plant and equipment and in intangible assets; • Factoring: financing for trade receivables in several technical forms: o With recourse; o Without recourse; o Reverse; • Subsidy advance: Unsecured loan for businesses benefiting from subsidy measures. Allows a company to more efficiently make use of sums needed for investment, without waiting for the subsidies to be disbursed • Unsecured loans: loans dedicated to SMEs, large companies and midcaps, available: o on demand: up to 18 months for commercial commitments; o with set maturity: short or medium/long-term; The maturity can be undetermined if the guaranteed counterparty is a public entity; • Advances on invoices: loan which provides an advance on trade payables, prior to their effective availability and maturity, which the company has due from debtors.
Essentially, viewed structurally, the Bank's operations, downstream from implementations completed and in progress, involve:
25
Relative to its position as a service Bank, in 2019 the SME Guarantee Fund (hereafter, the “Fund”) showed a slowing trend due to the Reform Decree taking effect as of 15 March 2019. Requests received totalled 125,918 (-3.9% with respect to 2018), against a slight decrease in transactions granted guarantees, totalling 124,954 (-3.4% with respect to 2018) and the amount guaranteed, € 13.3 billion (-2.3% with respect to 2018), while there was an increase in the volume of loans of around € 19.4 billion (+0.9% with respect to 2018).
In 2019, resources totalling € 1.7 billion were deposited relative to the Fund, of which:
• 300.0 million relative to resources of the Development and Cohesion Fund based on the CIPE Resolution 94 of 2017, pursuant to Article 1, paragraph 53, second sentence in Italian Law 147 of 27 December 2013; • 2.8 million relative to resources in the National Operational Program “Companies and Competitiveness” FESR 2014-2020, pursuant to the Italian Ministry of Economic Development Decree, in concert with the Italian Ministry of Economy and Finance of 13 March 2017, published in Official Journal 92 of 20 April 2017; • 2.6 million for resources for the 2014-2020 Emilia-Romagna FESR Regional Operating Programme, following the establishment of the relative Special Section, pursuant to the agreement signed between the Italian Ministry of Economic
26 Development, the Italian Ministry of the Economy and Finance and the Region on 11 February 2019; • 3.2 million relative to resources of the Fund Reserve to support micro-enterprises; • 30.0 million relative to resources of the Development and Cohesion Fund based on the CIPE Resolution 49 of 2018, pursuant to Article 1, paragraph 53, second sentence in Italian Law 147 of 27 December 2013; • 435.0 million pursuant to article 22 of Italian Decree Law 119 of 23/10/2018; • 3.0 million relative to resources of the Fund Reserve for sequestered and confiscated businesses; • 25.7 million for resources for the 2014-2020 Sicily FESR Regional Operating Programme, following the establishment of the relative Special Section, pursuant to the agreement signed between the Italian Ministry of Economic Development, the Italian Ministry of the Economy and Finance and the Region on 20 July 2018; • 34.0 million for resources for the special section Remain in the South; • 150.0 million to establish the section to support mid-cap companies; • 6.0 million for resources for the 2014-2020 Piedmont FESR Regional Operating Programme, following the establishment of the relative Special Section, pursuant to the agreement signed between the Italian Ministry of Economic Development, the Italian Ministry of the Economy and Finance and the Region on 1 July 2019; • 1.3 million for resources for the 2014-2020 Veneto FESR Regional Operating Programme, following the establishment of the relative Special Section, pursuant to the agreement signed between the Italian Ministry of Economic Development, the Italian Ministry of the Economy and Finance and the Region on 05 October 2018; • 670.0 million pursuant to article 41 of Italian Decree Law 124 of 26 October 2019;
The main significant events involving the instrument during the year were:
• publication of the operating provisions, which took effect as of 15 March 2019, pursuant to the Italian Ministry of Economic Development Decree, after hearing from the Italian Ministry of Economy and Finance of 12 February 2019, regarding approval of the conditions for admission and general provisions relation to the "New methods of evaluating businesses for access to the SME Guarantee Fund and establishment of guarantee measures" and the Ministry of Economic Development Decree of 12 February 2019, after hearing from the Ministry of Economy and
27 Finance, regarding approval of admissions conditions and general provisions for financial transactions with tripartite risk. • the start of operations for the "Special Section, Calabria Region", following the deposit of € 1.3 million relative to resources for the FESR Regional Operating Programme 2014-2020 for Calabria; • the start of operations for the "Special Section, Emilia-Romagna Region", following the deposit of € 1.3 million relative to resources for the FESR Regional Operating Programme 2014-2020 for Emilia-Romagna; • the update of methods used for the Special Section, Sicily Region, increasing ordinary coverage measures up to 80% with direct guarantees and up to 90% with reinsurance and counter-guarantees, as well as extending it to transactions with tripartite risk and to regional loan portfolios; • the update of methods used for the Special Section, Friuli Venezia Giulia Region, increasing ordinary coverage measures up to 80% with direct guarantees, reinsurance and counter guarantees; • the update of methods used for the Special Section, Veneto Region, increasing ordinary coverage measures up to 70% with direct guarantees, and up to 90% with reinsurance and counter guarantees; • the signing of a guarantee contract with Cassa Depositi e Prestiti under the terms of the Thematic Investment Platform to Support Italian SMEs - EFSI, Juncker Plan. The contract involves a counter-guarantee by CDP equal to 80% of a portfolio of new guarantees granted by the Fund up to a maximum of € 3.8 billion in loans, with a 6.06% cap; • the update of methods used for the Special Section, Campania Region; • publication of general provisions for the granting of Fund guarantees on loan portfolios, to implement the provisions contained in the Ministry of Economic Development decree, in concert with the Ministry of Economy and Finance of 21 June 2019, published in the Official Journal no. 217 of 16 September 2019.
In 2019, pursuant to article 1 of Law 147 of 27 December 2013, published in Official Journal 302 of 27 December 2013, aimed at supporting growth and strengthening the capital solidity of loan consortia, resources totalling € 50.0 million were deposited relative to the Fund, in favour of 58 loan consortia.
Additionally, management of various incentives and subsidised financial instruments
28 continued on the account of the government and certain Regions. Of these, the main instrument managed is the Sustainable Growth Fund (FCS) managed by MCC on the account of the Italian Ministry for Economic Development, as the head bank of a temporary consortium consisting of 8 banks and the National Research Council. The Fund supports investments in R&D and provides cofinancing with PON I&C 2014/2020 resources.
On 22 January 2019 the first come first served tender was launched for the presentation of research and innovation projects in the Agrifood and Intelligent Factory sectors. Projects are currently being evaluated and some decrees have already been issued. In 2019 concession decrees were issued for 50 projects, for investments totalling € 110 million and subsidies granted of € 70 million. During 2019 assessment and decrees by the Ministry of Economic Development regarding projects presented for various tenders previously issued by the Administration starting in 2014 continued: Digital Agenda and Sustainable Industry (FRI), Horizon 2020 PON, Innovation Agreements and Framework Agreements, Large Projects PON. In 2019 award decrees were issued for 60 projects, for investments totalling over € 626 million and subsidies granted of € 325 million. The Ministry of Economic Development issued a decree on 2/8/2019 which refinances subsidy projects throughout Italy to support companies investing in large research and development projects in the areas of “Digital Agenda” and “Sustainable Industry”. Additionally, subsidies for projects to reconvert production processes relative to the circular economy were also established. This measure is financed with the resources of the rotating fund for support of companies and the Fund for Sustainable Growth. The allocation totalled € 329 million. Preliminary assessment of project proposals continued in 2019, relative to tenders for Innovation Agreements for research and development projects (Ministerial Decree 24/5/2017 and Ministerial Decree 5/3/2018); specifically, for the Agrifood, Intelligent Factory and Life Science tender, the initial financial resources were increased to over € 535 million, in order to ensure the widest coverage of proposals presented.
On 15/10/2019 a Ministry of Economic Development decree was published which governs the methods and terms for presentation of requests for subsidies to support experimental industrial research and development projects. These are projects that fall under the scope of the National Strategic Plan and the innovation agreements for the Space Economy. The
29 decree identifies the methods used to implement the subsidy project already defined by Ministerial Decree 2/3/2018, through which financial resources of € 100 million were allocated. Disbursement activities were fully operational for the following tenders, issued by the administration: Horizon 2020, Digital Agenda and Sustainable Industry, Horizon 2020 PON, Large Projects PON, Framework Agreements, Digital Agenda and Sustainable Industry (FRI) and Euro Trans Bio Tenders. Disbursements carried out during 2019 involved 574 projects for a total of over € 216 million. Additionally, through a temporary consortia with FISG S.r.l., the Bank was the successful tenderer for the arranger service in favour of Campania Development, as part of structuring a Minibond issue by SMEs operating in Campania, supported by public guarantees in the form of cash collateral, as a basket bond, subscribed by a special purpose vehicle in turn financed through the issuing of ABS notes subscribed by institutional investors.
Operating structure Human Resources As of 31 December 2019, Bank staff included 295 employees (including 6 seconded to Invitalia by MCC and 2 seconded to MCC by Invitalia), of which 11 executives2, 172 middle managers3 and 112 non-managerial personnel. Additionally, as of 31 December 2019, the Bank had 9 interns, 11 temporary workers and a long-term freelance worker.
During 2019, 40 new employees were hired, of which 1 executive (initially seconded through 31 December 2018), 10 middle managers (including 1 seconded by the shareholder) and 29 non-managerial employees; 28 employees left the company (5 executives - including 2 seconded executives, 4 middle managers and 19 non-managerial personnel).
Organisational solutions and operating projects implemented
During 2019 activities to implement the Business Plan continued. With reference to credit offerings these included:
2 Of which an executive seconded by the parent company 3 Of which a middle manager seconded by the parent company
30 • extension of the “Credit Portal” platform to support both channels for the origination and assessment of loans for small and medium enterprises (SME). At present, the Credit Portal makes it possible for the bank to offer digital lending both directly and through partners (lending consortia, local banks, trade associations and other brokers) and allows for real time verification of transaction feasibility on the basis of information provided through public databases. During the year, phases involving the investigation of loans were also automated, making use of information coming from external providers (e.g. Credit Bureaus, Central Credit Register, specialised providers) with analysis algorithms that generate “alerts” and “insights” to support creditworthiness analysis by the investigator; • adaptation of credit granting processes, to consolidate credit offerings developed by transactions: o Tranched Cover, carried out synergistically with Banca Monte dei Paschi di Siena, reserved for companies operating in integrated logistics with operating headquarters in southern Italy; o supported by the "InnoVFin SME Guarantee” provided by the European Investment Fund; o presented by companies with legality ratings; • the revision of the operating model to develop factoring; • implementation of a compliant conservation system for digital documents relative to accounting and contractual documents.
In the Subsidised area, the main actions involved: • adjustment of the digital platforms supporting the Guarantee Fund, made necessary by the reform of the tool as of 15 March 2019, which required the implementation of: - online rating calculation for beneficiary companies, on the basis of data collected, making use of information from external databases, credit bureaus and central credit registers; - functions dedicated to beneficiary companies to allow them to directly take part in document control stages, to provide evidence and observe their ceiling; • activation of mass demand acquisition functions for the Fund, through a dedicated FEA protocol (Advanced Electronic Flow);
31 • extension of the functions of the “FCS” application platform (Sustainable Growth Fund) to manage new agreements and tenders on the account of the Ministry for Economic Development.
Corporate Governance
This paragraph also serves as the Report on Corporate Governance and Ownership Structures which describes the main features of the risk management and internal audit system linked to the financial reporting process (Art. 123-bis, paragraph 2, letter b) of the Consolidated Law on Finance).
The governance model adopted by the Bank is the “traditional” one, featuring the classic two-part system of the Board of Directors and the Board of Statutory Auditors; independent auditing of the accounts is entrusted to an external auditing firm.
The Shareholders’ Meeting is held periodically to decide on the matters reserved for the same by law and by the supervisory regulations.
More specifically, the Ordinary Shareholders’ Meeting approves the Financial Statements and the allocation of the profits, appoints the Directors and the Statutory Auditors and can also revoke the same; on proposal of the Board of Statutory Auditors, it confers and revokes the mandate of the auditing firm; it approves the remuneration policies and decides on the responsibilities of the Directors and of the Auditors, and it resolves on all other matters attributed to its competence by law or by the Articles of Association. The Extraordinary Shareholders’ Meeting passes resolutions on amendments to the Articles of Association (except those necessary for adapting the same to provisions of law, and those concerning mergers in the cases contemplated by Arts 2505 and 2505-bis of the Italian Civil Code and the reduction of share capital in the event of withdrawal for the shareholder), on the appointment and replacement of liquidators and the powers vested on the same and on every other matter attributed to its competence by law. Given the administration and control system adopted by the Bank, the Board of Directors has responsibility for strategic supervision.
32 The Board of Directors, made up of 5 members (of which at least one fourth4 holding the requisites of independence required by the laws in force), is vested with all powers for the ordinary and extraordinary administration to achieve the company purpose, except for matters which the law and/or supervisory provisions reserve for the Shareholders’ Meeting. Additionally, it is the body granted priority for ensuring that Shareholders' Meeting resolutions are promptly and accurately carried out. During the period, the Board of Directors met 18 times. The Board of Directors elects a Chairperson from among its members, unless already appointed by the Shareholders’ Meeting, and it may appoint a Deputy Chairperson solely to act in lieu of the Chairperson in the case of his or her temporary absence or impediment. Should the Deputy Chairperson also be absent or unable to fulfil his or her duties, he or she shall be replaced by the most senior member of the Board of Directors or, in the event of equal length of service, by the eldest member. At present, no Deputy Chairperson has been appointed. The Chairperson legally represents the Bank and takes the chair at the Shareholders’ Meeting, and convokes and chairs Board of Directors’ meetings, during which they guide, coordinate and moderate discussions. The Board of Directors appoints a Chief Executive Officer and may appoint a General Manager, both of which must possess the requirements established under the current regulations. The Board of Directors may delegate powers to the Chief Executive Officer and, based on a proposal by them, to the General Manager (if appointed), determining the limits of the delegation, the powers and rights that it deems opportune, within the limits imposed by law and the Articles of Association. In any case, the Chief Executive Officer has the power to submit loan proposals which must be decided by a Board of Directors’ resolution. The Board of Directors may confer special delegated powers, on the granting of loans and on current management to Management Committees, executives, officials and other employees, determining the limitations, terms and conditions. The decisions taken by the recipients of delegated powers must be brought to the attention of the Board according to the methods and with the frequency, at least quarterly, determined by the latter.
4 Circular 285/2013 specifies that when this ratio is not a whole number, it is rounded up when the first decimal is equal to or less than 5. Otherwise, it is rounded up.
33 The Chief Executive Officer is the person responsible for managing the Bank and ensures that the same is performed in accordance with the legislation, the Articles of Association and the guidelines approved by the Board of Directors. Observing the organisational framework approved by the Board of Directors, the Chief Executive Officer sets up the Bank’s Organisational Structure defining the tasks and responsibilities of the single Organisational Units and the related interconnections. The Chief Executive Officer is also vested with the legal representation of the Company. The Board of Statutory Auditors, appointed by the Shareholders’ Meeting, is composed of 3 regular auditors, from whom the Shareholders’ Meeting elects the Chairperson, and 2 alternate auditors. Given the administration and control system adopted, the Board of Statutory Auditors serves as the Bank's audit body. The Board of Statutory Auditors, in particular, presides over compliance with the law, regulations and provisions of the Articles of Association and the adequacy of the Bank’s management and accounting procedures, the risk management and control system and the functionality of the system of internal controls as a whole, promoting actions to correct the shortcomings and irregularities found. In order to properly fulfil its duties, the Board of Statutory Auditors is granted the widest powers allowed under the regulatory provisions and regulations in effect and makes use of the internal audit structures and departments, from which it receives appropriate periodic reports, to carry out and guide its audits and required investigations. In addition, the Board of Statutory Auditors performs its activity coordinating its work with the Auditing Firm appointed for independent auditing of the accounts. In this regard, the Board of Statutory Auditors, after informing the Board of Directors, proposes to the Shareholders’ Meeting to confer the independent auditing appointment, assessing the independence of the Firm proposed and supervising over time the activities performed by the latter. Despite the attribution of the appointment to an auditing firm, the Board of Statutory Auditors conserves the tasks connected with assessing the adequacy and functioning of the accounting system. During the financial year, the Board of Statutory Auditors met 16 times. Under the terms of the Articles of Association, the independent auditing of the Bank’s accounts must be carried out by an Auditing Firm listed on the specific register, appointed by the Shareholders’ Meeting.
34 On 26 April 2012, on a grounded proposal of the Board of Auditors, the Shareholders' Meeting resolved to confer the mandate for independent auditing of the accounts for the financial years 2012-2020 on the auditing firm PricewaterhouseCoopers S.p.A. In order to favour and improve the functioning of the organisational processes aimed at delegation, coordination of departments, integration and shared decision-making, the following Management Committees operate within the Bank. The main responsibilities of each of these are listed below: • Credit Committee: this supervises the loan granting and management process. It exercises the delegated powers conferred by the Board of Directors in relation to granting credit, non-performing loans, probable defaults and past due/over-the-limit exposures within the limits established by the Board of Directors. It examines the results of loan analysis and monitoring prepared and presented to the Committee by the Bank’s competent units, for subsequent presentation by the Chief Executive Officer to the Board of Directors; • Commercial Committee: exercises the delegated powers granted by the Board of Directors with regards to the granting of credit, relative to the business segments and limits established by the Board of Directors; supervises the credit granting process in compliance with the criteria defined by the relevant internal departments, in order to achieve volume, profit and risk containment objectives; • Pricing Committee: exercises the delegated powers granted to it by the Board of Directors in regards to definition of prices (spread and conditions) applied to lending products; • Business Monitoring Committee: has the objective of systematically monitoring business development progress, in terms of production volumes and margins for initiatives; it also approves initiatives used to implement the Business Plan on the basis of the limited business plans proposed by the commercial departments; it assesses partnership/convention proposals proposed by commercial structures; • Internal Controls and Risks Committee: this has an advisory and propositional role. It assists the Chief Executive Officer and the other corporate bodies in the integrated management of the overall risks to which the Bank is exposed, and of the overall internal control system.
There are also Subsidy Committees for managing public actions and funds, in order to ensure segregation between management of public initiatives and funds and other banking
35 activities, also on the basis of what is defined in the agreements signed by the Bank. The members of these Committees—who cannot be Bank employees—are chosen on the basis of the specifications contained in the single agreements and, unless otherwise contemplated by law or by the relevant agreements, are appointed by the Chief Executive Officer based on proposals made by the structures responsible for managing Public Funds (and where applicable, designated by client administrations). The Subsidy Committees - whose functions are established by the relative regulations and Agreements - resolve on proposals to admit/reject individual transactions, on revocations, renunciations, transactions and anything else necessary for the implementation or termination of a subsidy agreement, as well as on the filing of lawsuits; following the relative schedule, they approve reports and accounts relative to available funds, commitments, insolvencies and disputes, demonstrational prospectuses and the relative report on the amount of commissions and reimbursements due to the Manager; they define guidelines and operating methods with respect to subsidies, also with regards to the relations between the Bank as manager, the intermediaries and beneficiary businesses.
Internal control system “Internal Control System” means the set of rules, functions, structures, resources, processes and procedures that aim to ensure, observing healthy and prudent management, that the following objectives are achieved: 1. checking implementation of corporate strategies and policies; 2. containing risk within the limits indicated in the reference framework for determining the Bank's risk propensity; 3. safeguarding the value of assets and protecting against losses; 4. effectiveness and efficiency of corporate processes; 5. reliability and security of corporate information and IT procedures; 6. preventing the risk that the company will be involved, even involuntarily, in illegal activities; 7. compliance of operations with the provisions of laws and regulations, including supervisory rules, and with internal policies, regulations and procedures. The Internal Control System plays a central role in the corporate organisation and is strategically significant because:
36 • it represents a fundamental element of knowledge for the corporate bodies, so as to ensure full awareness of the situation and effective monitoring of company risks and their interactions; • it orients the changes of the strategic approaches and corporate policies and makes it possible to adapt the organisational context in a coherent manner; • it oversees the functions of the management systems and observance of the prudential supervisory requirements; • it favours the diffusion of a correct culture in terms of risks, legality and corporate values.
The Internal Control System must: • ensure the completeness, adequacy, functioning (in terms of efficiency and effectiveness) and reliability of the risk-management process, and its consistency with the Risk Appetite Framework (RAF); • provide for control activities spread over every operating segment and hierarchical level; • guarantee that the anomalies encountered are promptly brought to the attention of the Bank’s appropriate organisational levels (to the Corporate Bodies, if significant) capable of quickly activating the opportune corrective actions.
The Board of Directors, in exercising its duty of strategic supervision, defines the architecture of the Internal Control System in terms, for example, of principles and guidelines, organisational oversight, tasks and responsibilities, resources and powers, information flows and integration of risk management and conflict of interest processes, in observance of the laws and supervisory regulations, and the Articles of Association. Annually the Board of Directors, also taking into account the results of the activity of the Board of Statutory Auditors and supported by the internal audit unit, assesses the completeness, adequacy, functioning and reliability of the Internal Control System. The control activities in the Bank are carried out at all hierarchical levels and in all departments of the organisational structure. All company structures are engaged, each for their specific level of responsibility and assigned duties, in controlling the processes and operating activities they are responsible for. The results of the controls then flow into an articulated system of reporting and information flows, the final destination being the Supervisory Authority and the governance, management and control bodies, on the basis
37 of the frequency and the contents established by external and internal regulations and according to the responsibilities of each body. In application of the principle of proportionality, the Bank has structured its Internal Control System based on its size and the complexity of its operations, the nature of its activities and the associated risks to which the Bank is exposed. The Bank's Internal Control System includes the following levels: • First level: these include all control activities which the individual business/operating units carry out on their own processes in order to identify, assess, manage and monitor their associated risks, in relation to which they identify and implement specific actions aimed at ensuring the processes are properly completed. They are carried out by the same business/operating functions (e.g. hierarchical, systematic and sample controls), or to the extent possible, are incorporated in IT procedures and are considered an integral part of every company process. • Second level: these are performed by the risk control function (which includes both the risk control and validation departments) and by the compliance and anti-money laundering function, with the aim of monitoring company risks to ensure the prudential conduction of business, reliability of information and compliance with eh law and internal procedures; • Third level: assigned to the internal audit department, which ensures constant, independent and objective assessment of the functioning of the overall Internal Control System.
The Compliance and Anti-Money Laundering Area includes the compliance department and the anti-money laundering department. Their responsibilities are based on specific provisions contained in laws and supervisory regulations and are implemented through internal regulation documents, approved by the Board of Directors. The Manager of the Area is appointed manager of the compliance department as well as the company's anti-money laundering manager and reports to the Chief Executive Officer. In any case, he or she has direct access to the Board of Directors and to the Board of Statutory Auditors and communicates with them without restrictions or intermediation. The Compliance model adopted by the Bank assigns the Compliance department the task of directly monitoring non-compliance risk with reference to the relevant regulations governing bank and brokering activities, management of conflicts of interest, transparency with customers and, more generally, consumer protection regulations. It is also
38 responsible for identifying specialised safeguards within the Bank in order to manage non- compliance risk for the regulatory areas which apply (e.g. workplace safety, taxes). In any case, the Compliance department continues to be responsible, for these areas as well, for at least the definition of methods used to assess non-compliance risks, to identify the relative procedures and to verify the adequacy of these procedures in preventing non- compliance risks, as well as assessing the adequacy of these safeguards in managing the overall non-compliance risks.
The Risk Management Department plays the role of risk control unit - as defined by the current regulatory rules - and performs the tasks assigned to this unit in the guidance documents, and in the policies and guidelines approved by the Board of Directors, in particular with reference to the Risk Control Department Regulations. The manager of the department is also the Risk Control Department Manager and reports to the Chief Executive Officer. In any case, they have direct access to the Board of Directors and the Board of Statutory Auditors and can communicate with them without restrictions or intermediaries.
The Internal Audit Department plays the role of internal audit unit, as defined by the current regulatory rules and performs the tasks assigned to this unit in the guidance documents, in the policies and guidelines and approved by the Board of Directors, in particular with reference to the Internal Audit Process Regulations. The Manager of the Department is appointed Manager of the internal audit unit. The manager of the internal audit unit reports to the Board of Directors; he or she has direct access to the Board of Statutory Auditors and communicates with them without restrictions or intermediation. The link between the manager of the internal audit unit and the Chief Executive Officer is in any case ensured through adequate information flows and participation, as a member, in any management committees in the field of internal controls and risks.
The managers of the control units hold suitable requisites of professionalism, are appointed and revoked by the Board of Directors, after consulting the Board of Statutory Auditors, and do not have direct responsibility for operating areas subject to audit.
39 The Bank’s System of Controls also includes the Board of Auditors, the Oversight Committee pursuant to Italian Legislative Decree 231/2001(henceforth also the “231 OC”) and the independent auditing firm.
The main objective of the 231 OC is to prevent the crimes contemplated by Legislative Decree 231/2001 by verifying the adequacy and effectiveness of the Organisational and Management Model adopted by the Bank pursuant to the Decree. The Committee operates according to regulations approved by the Board of Directors and has a budget for expenses and wide powers of control and inspection at all levels.
The 231 OC, a specifically established collegial body, currently consists of the Chairperson, an independent external professional, and two other members, specifically the managers of the Bank's Internal Audit and Risk Management departments (which, in the context of the company, have no operational tasks, ensuring full independence). Alternatively, as established in current norms, the Bank's 231 OC functions may be performed by the Board of Statutory Auditors.
The Auditing Firm, for the duties assigned to the same by law, liaises - for the purpose of exchanging information and/or data - with the Board of Directors, the Board of Auditors, the Internal Audit Department and the other corporate control bodies and/or units.
Lastly, as regards coordination and operational management of the internal control model required by Law 262/05 on Investor Protection (Art. 154-bis of the Consolidated Law on Finance), the Manager of the Administration, Control and Finance Department, in his/her capacity as Financial Reporting Manager, must prepare—and effectively put into practice—adequate administrative and accounting procedures for preparing the Company’s financial statements as well as every other communication of a financial nature made available to the market.
The Bank’s Financial Reporting Manager—jointly with the Chief Executive Officer—must also, in a specific report on the Company’s annual and six-monthly financial statements, certify: • adequacy and effective application of the administrative and accounting procedures; • compliance with the applicable international accounting standards recognised in the European Community pursuant to Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 2002;
40 • correspondence with the entries in the accounting ledgers and documents; • the true and correct representation of the shareholder’s equity, and economic and financial situation of the bank; • the inclusion in the report on operations of a reliable analysis of performance and of the operating result, together with a description of the main risks and uncertainties to which the Bank is exposed.
In order to comply with the provisions of law, the Bank has adopted an Internal Control System which involves the application of a common methodological framework based on: • use of a uniform model based on internationally-recognised methodological standards (CoSO and Cobit); • constant updating of the Model, with attribution of specific responsibilities to the subjects involved; • generalised communication of the model through training programmes.
Specifically for the model adopted: • documentation must be validated and the execution of the controls on the part of the respective competent managers must be confirmed; • every administrative/accounting procedure and every control must be documented, assessed, tested and validated and a single manager appointed as responsible for executing the activities contemplated therein; • an internal confirmation flow (to the Bank’s Financial Reporting Manager) has been defined as well as an external confirmation flow (to the Parent Company’s Financial Reporting Manager and to the market) in relation to the Internal Control System for financial disclosure.
The Bank adopts a Regulation for the Financial Reporting Manager in which - in line with the provisions of Art. 154-bis of the Consolidated Law on Finance and in accordance with Art. 24 of the Articles of Association - the following are defined:
• appointment procedures, requisites, duties, powers and resources of the Financial Reporting Manager; • relations with the Bank’s governing bodies and control bodies;
41 • the information flows from and to the other control structures and the Financial Reporting Manager of the parent company, within the sphere of the information required for preparing the consolidated financial statements.
Additionally, the Guidelines - Financial Information Internal Control System (hereinafter “FIICS”) have been approved which govern—in compliance with the provisions of art. 154- bis of the CLF—the criteria and methods, and identify the roles and responsibilities: • for establishing and maintaining over time the Bank’s Financial Information Internal Control System; • for assessing its adequacy and effective operation.
The provisions of the FIICS are part of the Bank’s overall internal control system and are in keeping with the current legislative prescriptions. Additionally, provision 1079 “Procedure for compliance 262/05” governs operating activities and methodological tools use to institute and maintain over the time the Bank’s Financial Information Internal Control System (FIICS), as well as for assessing its adequacy and operational effectiveness, in respect of the roles and responsibilities defined in the FIICS.
On the basis of the internal regulations, during the year the planned updating of the administrative procedures was carried out, to comply with Italian Law 262/05. The roles involved, the activities and responsibilities relating to the steps of the macro processes were also identified.
During 2019, the Financial Reporting Manager issued the attestations and declarations required, maintaining, in the context of her activity, all the contacts and relations with the other external and internal control bodies, namely the Board of Statutory Auditors, the Auditing Firm, the Oversight Committee, the Internal Controls and Risks Committee, the internal audit, compliance and money-laundering units, and with the Parent Company’s Reporting Manager.
On the occasion of the presentation of the Company’s annual separate financial statements and the six-monthly financial report, the Financial Reporting Manager submits to the Board of Directors a report on the Financial Information Internal Control System, as well as the text of the certification to the Market, to be signed jointly with the Managing Director to guarantee compliance with the requirements imposed by law.
42 Non-financial disclosure
Legislative changes and Sustainability
On 25 January 2016, Legislative Decree 254/2016 (O.J. 10.1.2017) came into force. This implements the European Directive on information of a non-financial nature that certain businesses are required to publish. The Bank5, to which the law does not apply obligatorily owing to its size, has decided in any case to supplement the information of a non-financial nature in the Report on Operations, taking the opportunity to present to the market and to the main stakeholders the total value generated by the business, also through the relative social and environmental impacts, as useful elements for strengthening its business and better overseeing its risks and impacts. The Report provides a brief description which illustrates the interconnection between corporate objectives, activities and results achieved with respect to certain specific areas that the Bank is managing as priorities: the actions and activities carried out for achieving these objectives are therefore illustrated, assessing the results obtained also with reference to the improvement actions carried out and identified as necessary for the near future.
The Report takes as a reference a number of indicators typical of sustainability reporting, taken from the GRI (Global Reporting Initiative) Guidelines, and provides significant qualitative and quantitative elements in relation to the goals and policies defined and their impact on the Bank’s main stakeholders: employees; businesses and private customers, the Public Administration, relations with which are managed by the Bank in a manner and according to processes governed by specific agreements, treated separately from the banking activities, with a separate decision-making, organisational, administrative and accounting framework.
Mission and corporate model, values and principles, compliance and control processes
Mediocredito Centrale S.p.A. is a bank which operates mainly in lending and in managing public subsidies and services in line with its statutory mission.
5 Therefore, the Bank did not assign any compliance audit either to the independent auditing firm nor to any other authorise subject.
43 The Bank is 100% controlled by Invitalia S.p.A. , which in turn is fully held by the Ministry of Economy and Finance. A series of principles and values guide the actions of subjects who operate within the Bank, at every level, formalised in the Code of Ethics and in the Suppliers’ and Partners’ Code of Conduct, and available to all employees on the corporate Intranet. The Code of Ethics - an integral part of the Organisation, Management and Control Model adopted by the Bank pursuant to Legislative Decree 231/2001 - is the result of shared work by the Bank’s departments and specifies activities, rights and duties in relation to the various stakeholders, as well as the principles of conduct that guide the behaviour of employees in daily activities. The Bank has continued to implement its Organisation Management and Control Model, which is supported by a system based on specific operating protocols and on a formalised system of controls, under the responsibility of operational management, the results of which are periodically reported to the Oversight Committee. In this framework, the Bank’s internal control system can functionally provide for constant and effective monitoring which can detect, govern and control the risks linked to the activities carried out and the effective application of the principles outlined in the Code of Ethics adopted. During 2019, the Operating Protocols were updated, in order to implement the organisational changes which had occurred, as well as to insert the more recent changes made to national regulations. The Bank supports continuous improvement of its organisational and process safeguards, contributing to the spread of a culture of control at all levels of the organisation and directing improvement initiatives to the areas of attention which come to light thanks to the monitoring activity. The guiding principles of the Bank’s activity consequently include special attention to compliance and to control of the risks linked to the specific business, the responsibility for which is given not only to the company departments appointed for the purpose at governance level, but also to each employee. This aspect is an integral part of the corporate culture, to make its people increasingly participants in and responsible with reference to the corporate project: and this must entail constant attention to conformity and control of risks, observance of the internal and external regulations, but also continuous monitoring of reputational areas which are extremely significant, in relation to the Bank’s core business.
44 Given the Bank’s special nature, also within the sphere of the internal controls, special importance is attributed to safeguarding correct relations with its reference market, especially the Public Administrations, to preventing fraud risks, and to protecting customer data. Specific oversight has also been defined for managing reputational risk associated in particular with the lending process.
Governing Body
The composition of the Board of Directors provides for a balance between genders (a minimum of one third are women); the average age is 53.2.
People
Care and development for people is at the centre of MCC’s growth strategies, with management aimed at the personal and professional development of all employees. Through this view, management decisions and initiatives are implemented using methodologies and criteria which focus on equity and paying attention to the characteristics and well-being of every individual, while also taking advantage of diversity.
Total employees, broken down by contract and gender
31.12.2019 31.12.2018
TYPE OF CONTRACT F M TOTAL F M TOTAL
Temporary contract - 2 2 - 1 1 Permanent 139 154 293 135 147 282 Total 139 156 295 135 148 283 Full-time 113 155 268 108 147 255 Part-time 26 1 27 27 1 28 Total 139 155 295 135 148 283
The corporate population is balanced in terms of gender, with 53% men and 47% women. In terms of diversity and inclusion, MCC works to implement management policies and develop its people with a focus on equity. Taking advantage of diversity is the foundation of organisational management and development, with ad hoc initiatives to develop those with merit and make it easier to find work/life balance, in order to create a more favourable working environment.
45 Meetings with Unions with regards to various company projects continued in a constant manner, with the aim of shared solutions that respect the different needs of the parties. Five agreements were signed during the year, within which ample space was dedicated to welfare solutions, including innovative initiatives to improve work/life balance, paying attention to people. In particular: 1. Working hours and behavioural norms: with an eye to creating work/life balance, MCC restructured weekly working hours, increasing flex hours. The agreement allows for workers to begin work earlier (at 8:00 instead of 8:30), extended flexibility by 30 minutes, as well as allowing for early departure at 4:30 pm from Monday through Thursday and at 1:30 pm on Friday. Additionally, it is possible to take lunch breaks at the company offices, spaces which have been specifically furnished for this purpose. 2. New measures to promote work/life balance for employees: the agreement establishes that recipients of the company bonus may choose between three different bonus possibilities: • Only the welfare component; • Monetary + welfare component; • Only monetary component. Additionally, to further improve work/life balance, the monetary portion of the company bonus can be used to increase free time -- workers can fully or partially make use of the monetary component to obtain time off work (known as “welfare hours”).
3. Smart working: rules were established and experiments with new methods of working involving only a certain number of organisational units began. The new methods offer the possibility for workers to provide their services in locations other than company offices. The goal of the project is to improve the quality of life for employees while increasing motivation. 4. Smart working agile agreement addendum: the scope of experimentation for the new working methods was subsequently extended. 5. “Solidarity” smart working: the possibility of smart working was reserved for certain workers for whom daily commuting was extremely difficult or who had specific personal requirements. Experiments will begin in 2020, limited to a small number of workers, and will last for 6 months.
46 35% of employees are members of the union.
With reference to corporate welfare, given the enthusiasm seen in previous years, in 2019 the Bank again took part in the national initiative “Bimbi in ufficio con mamma e papà”, [Bring your children to work], to allow employees’ children from 3 to 12 years of age to get to know the place where their parents work. During the day, children were involved in games, experiments and interactive laboratories dealing with the issues of sustainable development, renewable energy and waste recycling.
In 2019, MCC further strengthened its training, in part thanks to the use of incentives made available by funds (FBA and Fondir) to finance company/individual training plans. The annual training plan was the result of careful analysis of training requirements. As established in the Code of Ethics, all employees undertake to develop their own skills, and to accept responsibility for their own growth projects in order to contribute to the improved performance of the organisation. A bottom-up recognition method was introduced in 2019, through the use of focus groups consisting of a representative sample of workers. Training projects, provided in various ways (remote, classroom, etc.), focussed on developing technical/specialist, managerial and behavioural skills. With an eye to supporting excellence, the Bank also promoted the initiative “knowing to excel”, reimbursing workers who participated in training courses such as a master, university course or specialisation.
Annual training hours per employee, by category and gender Gender 31.12.2019 31.12.2018 M 3,934 4,204 F 4,565 2,984 Professional categories Executives 177 515 Middle managers 4,958 4,592 Non-managerial personnel 3,363 2,081 Total 8,498 7,188 Annual training hours by type
Training type 31.12.2019 31.12.2018
Classroom training 5,442 6,498
Remote learning 3,056 690
Total 8,498 7,188
47
The assessment system adopted by MCC involves comparison of the contribution provided by every worker in the context of their role with the Bank's expectations, including assessment of their skills and actions within the company. The assessment forms contain qualitative and quantitative performance indicators, representing work performance. The process ends with assessment by the manager and a meeting with the worker, with the aim of sharing the assessment as well as professional development objectives. The meeting represents an additional opportunity for interaction between manager and employee. In order to maximise the effectiveness of evaluation systems, also with an eye to managerial self-development, an upward feedback mechanism was introduced, which brings the bank’s appraisal systems closer to the ideal of comprehensive feedback.
The selection procedure begins with a careful search for any internal candidates, to make the most of interested and motivated employees and create opportunities and room for growth. Through job postings employees can apply for positions open both within MCC and the Invitalia Group, concretely supporting the professional development goals of all while strengthening infra-group mobility. In its research, MCC makes use of the main online recruitment channels, as well as a dedicated section of the company's institutional website “work with us”, which publishes open positions and can collect spontaneous job applications. Additionally, MCC works with the most important Italian universities, participating in career days, in order to select young talent and offer the opportunity for training to interns, introducing them to the world of work.
In its internal communication the Bank is careful to develop a shared culture based on corporate values and to support a sense of belonging for its employees. Corporate tools such as the Intranet and the social network Yammer were strengthened/activated, which makes it possible to openly communicate and interact, to share and collect ideas, facilitating the circulation of information at all levels of the organisation. Team building activities were introduced to maximise contacts between co-workers who are not organisationally contiguous.
48 Structured listening accompanies these tools, which supports management and company departments with regards to any issue or specific requirement. In this light, related initiatives were increased during the year (feedback, focus groups).
Additionally, MCC participated in “Dynamo Team Challenge 2019”, a fund raising initiative for Dynamo Camp Onlus, the first recreational therapy camp in Italy, which hosts children and teenagers affected by serious pathologies with the aim of offering them treatment and therapy, also supporting a fundraising event organised by Invitalia with the “Ultrabroad Band” concert. Additionally a work to school project “AllenaMenti” was begun which included 16 students from the Vivona high school in Rome and 20 co-workers in a 40 hour training course, allowing students to learn about the world of work, presenting the corporate model, business and professional positions of Mediocredito Centrale.
Health and Safety
In 2019, MCC carried out a Correlated Work Stress assessment, with the assistance of external consultants. This assessment, used to analyse the well-being of workers, was in- depth and included two stages with the involvement of not only the relevant company employees but also a sample of workers, divided into homogeneous groups.
Social responsibility and core business
In implementation of that established in article 3 of the Bylaws, in the context of its business the Bank acts with the prevalent purpose of supporting the Southern economy, as established in article 2, paragraph 162 of Italian Law 191 of 23 December 2009.
In order to measure and monitor its ability to achieve its mission, the Bank has identified a panel of indicators, both qualitative and quantitative.
These indicators are divided into two categories:
• The Lending Business indicators make it possible to measure the Bank’s support for the economy of the South through its lending business;
49 • The Actions for Development indicators make it possible to measure the Bank’s ability to support the economy of the South, which may also include financial resources that are not its own or study, promotion and social support activities.
Lending Business indicators are subject to quarterly monitoring and the results are presented to the Chief Executive Officer and all of the relevant operating departments, which identify possible corrective actions for commercial development.
All indicators are subject to half-yearly monitoring and the results are presented to the Board of Directors and the Board of Statutory Auditors, which assess the Bank’s effective degree of orientation in achieving its statutory mission over the medium term.
Lending Business indicators
AC.1 - Loans to the South out of total Loans (amount)
This is the percentage ratio between existing loans classified by the Bank as in “loans to the South” relative to total existing loans to customers (businesses, households, Public Administrations).
At 31 December 2019, the percentage of loans to the South with respect to total loans to customers was 51.3% (a total of 800.3 million), of which 38.3% relative to subjects residing in or with their head offices in the South (equal to 597.5 million).
AC.2 - Businesses based in the South out of total businesses (number)
This is the percentage ratio between the number of business customers based in the South and the total number of business customers and makes it possible to monitor the prevalence of business customers with registered offices in the South.
At 31 December 2019, the percentage of the Bank’s business customers with registered offices in the South was 58.2%.
50 AC.3 - Offices in the South
This is the percentage ratio between the offices in the South and total offices and makes it possible to monitor the compliance of the Bank’s commercial policy with the statutory mission.
At 31 December 2019, the Bank had offices in Naples, Bari, Pescara, Catania and Milan, which contribute to supporting the Bank’s presence in these areas, in line with its statutory mission. The ratio between offices open in the South and total existing offices is 80.0%.
AC.4 - Business loan files for the South
This is the percentage ratio between loan applications classifiable as “loans to the South” received during the year of reference from businesses and total applications received from businesses during the same period.
At 31 December 2019, 59.77% of loan applications received are classifiable as “loans to the South”, regardless of the end result.
Development Action indicators
IS.1 - Loans and grants to the South connected with the activity of Manager on behalf of the Public Administrations
This measures the loans and grants destined for businesses in the South connected with the Bank’s activity as Manager on behalf of the Public Administrations responsible for the related subsidies. While always acting in accordance with public law and with the instructions of the responsible Bodies, the Bank makes a substantial contribution to the development of the South through the management of public subsidies.
At 31 December 2019, loans and grants to the South connected with the activity of Manager on behalf of the Public Administrations amounted to:
• 14.7 billion of existing bank loans activated thanks to the guarantees given in relation to the Guarantee Fund for SMEs (equal to 13.4 billion at 31 December 2018, +9.7%);
51 • 1.45 billion of subsidised loans and grants through management of the Sustainable Growth Fund, destined for investments in the South (for 1.33 billion, +9% compared to 2018);
• 1.55 billion of subsidised loans and contributions managed in relation to other National and Regional Funds (e.g. FAR and PON of the Ministry of Education, Universities and Research, FIT of the Ministry of Economic Development).
IS.2 - Initiatives for mobilising and disbursing new resources to the South
This measures (i) the resources assigned to Southern companies by third parties (e.g. the Regions, basket bonds, EIF, CDP, other banks, etc.) co-financed with the Bank, (ii) initiatives to channel and disburse new resources to companies and public administrations in the South.
At 31 December 2019, resources assigned to companies in the South through third parties in co-lending agreements with the Bank (e.g. Regions, basket bonds, EIF, IEB, Ministry of Education, CDP, other banks, etc.) amounted to around 175 million.
Initiatives are also under way to channel and disburse other resources to companies and the public administration of southern Italy in addition to the € 1.10 billion and € 0.37 billion under management for the, respectively, 2007-2013 and 2014-2020 programs (national and regional structured funds for the Guarantee Fund, agreements with other intermediaries etc.), as well as the € 1.45 billion for research and development under the referenced 2014-2020 program.
In particular, note the initiative promoted by the Campania Region, “Campania Bond Guarantee”, relative to which the Bank, through a temporary consortium with FISG, was awarded the tender issued by Sviluppo Campania to identify the arranger of the operation. The contract was signed with Sviluppo Campania on 1 August 2019. For the Basket Bond, the guarantee resources allocated by the Region totalled € 37 million.
IS.3 - Study, promotion and social support initiatives
This measures the resources directed by the Bank to support (i) new young and women’s business initiatives, increases in size and internationalisation, research and innovation and cultural and economic progress, (ii) social initiatives in the South, (iii) the performance of studies aimed at supporting economic, social and employment growth in the South and 52 their diffusion to businesses and Public Administrations and (iv) study activities and implementation of subsidy actions in favour of the South in support of Public Administrations.
During the year various initiatives were carried out for the purposes of research, promotion and social support. In particular:
• participation in meetings to promote subsidy projects in favour of companies in southern Italy, to described the operations of the SME Guarantee Fund and provide information about the reform for the Fund, also taking advantage of events organised by the Ministry of Economic Development relative to initiatives known as “Italy that works - Reform and tools to support businesses”, “Wikibusiness - at the heart of development” and “Synergy for development - projects to support businesses in Sicily”;
• participation in a series of meetings to launch a new subsidy tool “Campania Bond Guarantee”;
• participation in a cycle of informational days known as “Remain in the South Days”, organised by Invitalia, to prevent Bank loans associated with the Remain in the South subsidy;
• participation in many other public appointments relative to the Guarantee Fund (general operation, reform or specific aspects such as mini bonds and innovative businesses), the Sustainable Growth Fund and Bank loans to southern Italian businesses and the SME Portal.
• In particular, the Chief Executive Officer spoke at various meetings on the issue of southern Italy and economic and social growth. Below we note the main meetings held this year:
▪ Rome - presentation of the OECD report: Impactful finance - one route to sustainable development (16 May 2019);
▪ Genoa - ASVIS event: Regions, cities and territories for sustainable development (3 June 2019).
53 ▪ 4 July 2019, Confindustria Benevento: Guarantee Fund, instruments for SME in southern Italy;
▪ 22 July 2019 Confindustria Bari: “Let’s give credit to Italy” convention;
▪ 10 September 2019 Campania Development; Innovative finance for growth;
▪ 2 November 2019 Mamma Seeds: Sustainable agriculture models (Sicily)
▪ 29 November 2019: Confindustria Napoli: “Let’s give credit to Italy” convention;
▪ 6 December 2019: “Social Impact Investments International Conference” (social bond).
• As part of social support activities, of note is the sponsorship of the Christmas Charity Gala organised by the Uniti del Cuore 2019 committee, to promote the activities of associations operating in the Scampia neighbourhood of Naples, as well as development projects to help local children;
• Cooperative agreements with universities and training entities in the area also continued this year, with the aim of offering alternating work/study opportunities and to help guide professional decisions, by offering direct knowledge of the working world through internship opportunities at its offices;
▪ Participation at Career Day, on 4 May 2019, at Università Luiss Guido Carli Rome;
▪ Renewal of cooperative agreements to promote internships with the following universities: La Sapienza, Tor Vergata, Luiss Guido Carli and RomaTre;
▪ Renewal of participation in the Lazio Region's "Garanzia Giovani” program, intended to identify internships for new graduates and the unemployed;
54 ▪ Renewal of cooperation with the Centro per l’Impiego “Porta Futuro” in Rome to favour work supply/demand balancing;
▪ During the first half of 2019 the “Alternating School/Work” project was carried out, hosting 16 students from the Classical High School F. Vivona in Rome;
▪ Renewal of cooperative agreements with the IPE specialisation schools and with STOA’ (both in Naples) to identify promising new graduates;
▪ Strengthening the cooperation with Ateneo Universitario “Tor Vergata” in Rome through the execution of initiatives aimed at inserting the most worthy new graduates in the working world.
Environmental impact
In 2019, the internal communication campaign dedicated to environmental issues, energy savings and sustainable mobility continued through specific projects, with the conviction that environmental sustainability is not just a value to be defended but an action to be spread. In this context, we note: - the promotion of usage of public transport through an increase in the contribution from the Bank for the purchase of public transport passes; - the careful management of the company fleet using selection criteria and usage standards which respect the environment; - the agreement with ECooltra (electric scooter sharing); - the Bank’s continuous commitment to digitalise documents, with consequent use of alternative conservation
The “Beyond” project began, through which the Bank intends to implement initiatives primarily aimed at 3 areas: paperless, plastic free and water saving. To that end, we note: - the initiative #refillati through which the Bank introduced usage of reusable water bottles; - establishing default front/back printing on all multi-function printers; - the introduction of green stationery;
55 - the adoption of a “sustainability” communication campaign (e.g. best practices).
Analysis of the economic and financial situation represented as added value With regard to the Bank's 2019 results, the added value is shown in the following Statement for Determination and Distribution of Added Value, a tool useful for giving an overall view of the financial and non-financial performance of the organisation. In 2019, "total economic value generated" saw a 16.8% increase with respect to 2018, mainly due to profits from disposal and lower writedowns on loans. "Economic value distributed" increased with respect to the previous year (11.9%), substantially due to the increase in income taxes for the year.
56 Statement for determination and distribution of added value (values in thousands of €) 2019 2018 10. Interest and similar income 40,847 50,764 20. Interest and similar expense (-) (15,799) (18,859) 40. Fee and commission income 55,020 56,541 50. Fee and commission expense (net of expenses for external networks - e.g. agents, (365) (431) financial advisors) (-) 80. Net gains/(losses) on trading activities 0 90. Net gains/(losses) on hedging activities (105) 9 100. Gains/(losses) on disposal or repurchase of: 9,038 867 a) financial assets measured at amortised cost 867 b) financial assets measured at fair value through other comprehensive income 9,038 0 c) financial liabilities 0 110. Net gains/(losses) of other financial assets and liabilities measured at fair value (0.526) (0) through profit and loss a) financial assets and liabilities measured at fair value b) other financial assets obligatorily measured at fair value (0.526) (0) 130. Net value adjustments for credit risk: (15,927) (26,774) a) financial assets measured at amortised cost (15,905) (26,786) b) financial assets measured at fair value through other comprehensive income (22) 13 140. Gains/losses from contractual changes without derecognition (288) 200. Other operating expense/income (net of expenses for external networks - e.g. agents, 713 462 financial advisors) 250. Gains/(losses) on disposal of investments 12 A. TOTAL ECONOMIC VALUE GENERATED 73,132 62,591 160.b Other administrative expenses (after indirect taxes and donations/gifts) (‐) (13,782) (15,361) ECONOMIC VALUE DISTRIBUTED TO SUPPLIERS (13,782) (15,361) 160.a Personnel expenses (including expenses for external networks – e.g. agents, (25,271) (24,043) financial advisers) (‐) ECONOMIC VALUE DISTRIBUTED TO EMPLOYEES AND COLLABORATORS (25,271) (24,043) 160.b Other administrative expenses: indirect taxes (‐) (251) (216) 270. Income taxes for the period (portion relative to current taxes, changes in current taxes from previous financial years and the reduction in current taxes for the year) (7,490) (2,203)
ECONOMIC VALUE DISTR. CENTRAL AND PERIPHERAL ADMINISTRATION (7,741) (2,419) 160.b Other administrative expenses: donations and gifts (-) (4) ECONOMIC VALUE DISTRIBUTED TO COMMUNITY AND ENVIRONMENT 0 (4) B. TOTAL ECONOMIC VALUE DISTRIBUTED (46,794) (41,827) 170. Net provisions for risks and charges (2,053) 2,067 a) commitments and guarantees given (1,131.09) 726.03 b) net other provisions (922) 1,341 180. Net value adjustments on property, plant and equipment * (1,719.43) (285.14) 190. Net value adjustments on intangible assets (923) (598) 270. Income taxes for the period (for the portion relative to the change in deferred tax 877 (1,746) assets and the change in deferred tax receivables) 300. Profit destined to be carried forward ** (22,519) (20,201) C. TOTAL ECONOMIC VALUE RETAINED (26,338) (20,764)
(*) Includes right of use (RoU) on properties and vehicles (**) See proposed allocation of profit for the period
57 Other information
Other information This Report on the Financial Statements mainly develops aspects regarding the performance of the Bank’s business, the performance indicators and the disclosure required on Corporate Governance, also as regards financial information (pursuant to Art. 123-bis, Section two, letter b, of the Consolidated Law on Finance) and the system of internal controls, including the requirements of Law 262/05 on investor protection, on the basis of the provisions of Art 154-bis of the Consolidated Law on Finance.
All the other information required can be found in the Notes to the Financial Statements.
In particular, the information on risks and uncertainties is given in the Notes to the Financial Statements, specifically in part A where the going concern information is provided; risks and uncertainties linked to the use of estimates are considered in part B (Section 10.6 Provisions for Risks and Charges); and part E illustrates in detail the information on financial and operational risks.
The Notes to the Financial Statements also give information on relations with the Parent Company and the Group companies, in part H, Transactions with related parties.
Significant subsequent events On 14 February 2020, Law 5 of 7 February 2020 was published in the Official Journal no. 37, converting into law, with amendments, Decree Law 142 of 16 December 2019, containing urgent measures to support the credit system in southern Italy and to create an investment bank, assigning to the Agenzia Nazionale per l’attrazione investimenti e lo sviluppo d’impresa S.p.A. – Invitalia, capital grants, up to a total maximum of € 900 million for 2020, entirely intended to strengthen equity through capital grants in favour of Banca del Mezzogiorno – Mediocredito Centrale S.p.A. so that it can promote, using market logic, criteria and conditions, the development of financial and investment activities, including to support businesses and employment in southern Italy, to be accomplished through financial transactions, including the acquisition of equity investments in banking and financial companies. As of the date the financial statements were approved, COVID-19 (also known as Coronavirus), which originated in China, was spreading throughout Italy.
58 Given the exceptional situation seeing rapid developments, and considering the two activity lines around which MCC's business operates, it is foreseeable that companies and especially SME, the Bank’s target customers, will be affected by the possible long-term duration of the epidemic. In this sense, it will be fundamental to consider possible extraordinary support projects, both national and EU-wide, political, economic and financial. These are currently being discussed, as well as the implementation of adequate and targeted actions to, if necessary, support and calm the markets while assisting enterprises lacking liquidity (especially SME). Also in terms of the possible worsening of the creditworthiness of borrower companies or companies who will be borrowing, as well as the system to which the Bank belongs, only in the coming weeks will it be possible to assess possible impacts, also in the light of regulatory and legislative actions which may be issued. Therefore, at present the impacts on Bank business associated with the disease cannot yet be foreseen. The Bank guarantees compliance with the provisions issued by the relevant authorities, prioritising the requirements to protect its staff and institutional needs for continuation provision of services.
Business outlook On 31 December the MCC Board of Directors resolved to sign a framework agreement with Banca Popolare di Bari (BPB) and the Interbank Deposit Protection Fund (FITD) which identifies the essential steps through which Banca Popolare di Bari can be restructured and recapitalised in the coming months, with total funds involved not to exceed € 1.4 billion. The project involving Banca Popolare di Bari, as outlined in the framework agreement, is subordinate to the fulfilment of a series of conditions. These include, beyond the necessary authorisations from the relevant supervisory authorities, the adoption of the relative implementation decrees to ensure adequate capital for MCC, as well as a lack of any indications received from the European Commission contrary to the transaction, in terms of the rules for government aid. With the goal of favouring the successful completion of the operation, MCC will determine the amount of its contribution as a function of the expected remuneration of invested capital, in line with normal investment conditions and anchored to market parameters and logic, with the preparation of a business plan by BPB and in-depth assessment to be
59 carried out in coming months, also with reference to the results coming from past management. MCC’s actions will be consistent with the methods and aims indicated in Law 5 of 7 February 2020, converted to law, with amendments, from Decree Law 142 of 16 December 2019, containing “urgent measures to support the credit system in southern Italy and to create an investment bank”, thanks to which MCC will be strengthened to allow it to promote, through market logic, criteria and conditions, the development of financial and investment business, also to support companies in southern Italy, in part to be carried out through acquisition of equity investments in banks.
Proposed allocation of net income for the period We present to the Shareholder the following proposal for allocation of net income for the period, amounting to € 22,518,990.13:
- € 1,125,949.51 to the legal reserve;
- € 21,393,040.62 to the extraordinary reserve.
60
Accounting statements
61 BALANCE SHEET
Assets 31.12.2019 31.12.2018 10. Cash and cash equivalents 1,054,675 25,018,540 20. Financial assets measured at fair value through profit and loss 444 969 a) financial assets held for trading; b) financial liabilities measured at fair value; c) other financial assets obligatorily measured at fair value 444 969 30. Financial assets measured at fair value through other comprehensive income 747,965,802 715,751,445 40. Financial assets measured at amortised cost 1,644,593,190 1,493,237,182 a) due from banks 84,723,444 62,357,866 b) due from customers 1,559,869,746 1,430,879,316 50. Hedging derivatives 88,038,993 82,649,638 70. Equity investments 600,000 600,000 80. Property, plant and equipment 18,254,483 625,565 90. Intangible assets 1,912,874 1,997,729 100. Tax assets 12,380,645 20,277,305 a) current 5,424,640 b) deferred 12,380,645 14,852,665 120. Other assets 9,505,836 10,292,557 Total assets 2,524,306,942 2,350,450,930
Liabilities and shareholders' equity 31.12.2019 31.12.2018 10. Financial liabilities measured at amortised cost 2,113,000,883 1,985,601,291 a) due to banks 494,388,404 892,752,597 b) due to customers 1,161,367,455 796,149,883 c) securities issued 457,245,024 296,698,811 40. Hedging derivatives 2,248,325 50. Value adjustments of financial liabilities with macro-hedging (+/-) 78,181,530 73,788,761 60. Tax liabilities 965,328 107,822 a) current 882,552 b) deferred 82,776 107,822 80. Other liabilities 23,956,674 15,851,849 90. Employee severance benefits 3,120,779 3,162,656 100. Provisions for risks and charges: 8,290,622 6,556,576 a) commitments and guarantees given 1,712,457 581,369 b) pensions and similar obligations 3,322,927 3,287,261 c) other provisions for risks and charges 3,255,238 2,687,946 110. Valuation reserves (3,875,227) (10,517,063) 140. Reserves 71,390,348 51,189,025 160. Share capital 204,508,690 204,508,690 180. Profit (Loss) for the year (+/-) 22,518,990 20,201,323 Total liabilities and shareholders’ equity 2,524,306,942 2,350,450,930
62 INCOME STATEMENT
Item 31.12.2019 31.12.2018 10. Interest and similar income 40,846,875 50,763,914 of which interest income calculated using the effective interest method 20. Interest and similar expenses (15,798,963) (18,859,233) 30. Net interest income 25,047,912 31,904,681 40. Fee and commission income 55,019,586 56,540,913 50. Fee and commission expense (364,830) (432,266) 60. Net fees and commissions 54,654,756 56,108,647 80. Net gains/(losses) on trading activities 90. Net gains/(losses) on hedging activities (104,910) 8,626 100. Gains/(losses) on disposal or repurchase of: 9,038,390 867,427 a) financial assets measured at amortised cost 867,427 b) financial assets measured at fair value through other comprehensive income 9,038,390 c) financial liabilities Net gains/(losses) of other financial assets and liabilities measured at fair value through profit 110. (526) (214) and loss a) financial assets and liabilities measured at fair value b) other financial assets obligatorily measured at fair value (526) (214) 120. Net banking and insurance income 88,635,622 88,889,167 130. Net value adjustments for credit risk: (15,927,139) (26,773,908) a) financial assets measured at amortised cost (15,905,251) (26,786,433) b) financial assets measured at fair value through other comprehensive income (21,888) 12,525 140. Gains/losses from contractual changes without derecognition (288,398) 150. Net gains/(losses) on financial operations 72,420,085 62,115,259 160. Administrative expenses: (39,305,160) (39,622,747) a) personnel expenses (25,271,491) (24,041,270) b) other administrative expenses (14,033,669) (15,581,477) 170. Net provisions for risks and charges (2,053,352) 2,066,544 a) commitments and guarantees given (1,131,087) 726,030 b) net other provisions (922,265) 1,340,514 180. Net value adjustments on property, plant and equipment (1,719,432) (285,142) 190. Net value adjustments on intangible assets (923,298) (597,711) 200. Other operating income/expenses 712,710 462,186 210. Operating expenses (43,288,532) (37,976,870) 250. Gains/(losses) on disposal of investments 12,000 260. Profit (Loss) from continuing operations before tax 29,131,553 24,150,389 270. Income taxes for the period on continuing operations (6,612,563) (3,949,066) 280. Profit (Loss) from continuing operations after tax 22,518,990 20,201,323 300. Profit (Loss) for the year 22,518,990 20,201,323
63 STATEMENT OF COMPREHENSIVE INCOME
Item 31.12.2019 31.12.2018 10. 10. Profit (Loss) for the year 22,518,990 20,201,323 Other income components after tax without reversal to income statement: 20. Equity securities at fair value through other comprehensive income Financial liabilities designated at fair value through profit and loss (changes in own credit 30. standing) 40. Hedging of equity securities at fair value through other comprehensive income 50. Property, plant and equipment 60. Intangible assets 70. Defined-benefit plans (270,990) 90,992 80. Non-current assets and disposal groups held for sale 90. Portion of reserves from valuation of equity investments carried at equity Other income components after tax with reversal to income statement: 100. Hedging of foreign investments 110. Exchange differences 120. Cash flow hedges 130. Hedging instruments (non-designated elements) Financial assets (other than equity securities) measured at fair value through other 140. 6,912,826 (5,384,025) comprehensive income 150. Non-current assets and disposal groups held for sale 160. Portion of reserves from valuation of equity investments carried at equity 170. Total other income components after tax 6,641,836 (5,293,033) 180. Comprehensive income (Item 10 +170) 29,160,826 14,908,290
64 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - YEAR 2019
Allocation of previous Shareholders’ Changes during the period
year’s results equity at
ry
- -
equity equity equity equity equity equity
Stock
Issue of
-
Changes
Purchase
’ ’ ’ ’ ’ ’
-
-
-
lders
shares
options
balance
tion of dividends
Reserves
ceat 01.01.2019
31.12.2019
allocations
newshares
Extraordinary
transactions transactions
year year to31.12.2019
of of treasuryshares
Changesin opening transactions
Dividendsand other
Changesin reserves
in equity in instruments
Balanceat 31.12.2018 Balan
Shareholders Shareho Shareholders Shareholders Shareholders Shareholders
transactions
transactions Derivativestreasu on
Comprehensiveincome
transactions distribu
Share capital 204,508,690 204,508,690 204,508,690 a) ordinary shares 204,508,690 204,508,690 204,508,690 b) other shares Share premium reserve Reserves 51,189,025 51,189,025 20,201,323 71,390,348 a) of profits 51,189,025 51,189,025 20,201,323 71,390,348 b) other Valuation reserves (10,517,063) (10,517,063) 6,641,836 (3,875,227) Equity instruments Own shares Profit (Loss) for the year 20,201,323 20,201,323 (20,201,323) 22,518,990 22,518,990 Shareholders’ equity 265,381,975 265,381,975 29,160,826 294,542,801
65 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - YEAR 2018
Allocation of previous Shareholders’ Changes during the period
year’s results equity at
- -
equity equity equity equity equity equity
Stock
Issue of
-
Changes
Purchase
’ ’ ’ ’ ’ ’
-
-
- rs
ers
shares
options
balance
Reserves
31.12.2018
allocations
newshares
Extraordinary
transactions transactions
videndsand other
of of treasuryshares
Changesin opening transactions
Di
Changesin reserves
in equity in instruments
Balanceat 31.12.2017 Balanceat 01.01.2018
Shareholders Sharehold Shareholders Shareholde Shareholders Shareholders
transactions
transactions Derivativestreasury on
Comprehensiveincome
transactions
period period ended 31.12.2018 distribution of dividends
Share capital 204,508,690 204,508,690 204,508,690 a) ordinary shares 204,508,690 204,508,690 204,508,690 b) other shares Share premium reserve Reserves 36,330,245 (5,494,449) 30,835,796 20,353,228 51,189,024 a) of profits 36,330,245 (5,494,449) 30,835,796 20,353,228 51,189,024 b) other Valuation reserves (5,611,236) 387,206 (5,224,030) (5,293,033) (10,517,063) Equity instruments Own shares Profit (Loss) for the year 20,353,228 20,353,228 (20,353,228) 20,201,323 20,201,323 Shareholders’ equity 255,580,927 (5,107,243) 250,473,684 14,908,290 265,381,974
66
STATEMENT OF CASH FLOWS Indirect method
Amount 31.12.2019 31.12.2018 A. A. OPERATING ACTIVITIES 1. Operations 52,618,149 49,859,731 - profit (loss) for the period (+/-) 22,518,990 20,201,323 - capital gains/losses on financial assets held for trading and on other assets/liabilities measured
at fair value through profit and loss (+/-) 525 214 - capital gains/(losses) on hedging activities (-/+) 104,910 (8,626) - net value adjustments for credit risk (+/-) 15,927,139 26,773,908 - net value adjustments of PPE and intangible assets (+/-) 2,642,730 882,853 - net provisions for risks and charges and other costs/revenues (+/-) 2,126,079 (1,983,129) - taxes, duties and tax credits not paid (+/-) 6,612,563 3,749,066 - net value adjustments on discontinued operations net of tax effect (+/-) - other adjustments (+/-) 2,685,213 244,122 2. Cash generated/used by financial assets (195,405,138) 240,187,708 - financial assets held for trading - financial assets designated at fair value - other assets obligatorily measured at fair value (969) - financial assets measured at fair value through other comprehensive income (21,907,803) 16,316,971 - financial assets measured at amortised cost (168,500,752) 191,689,385 - other assets (4,996,583) 32,182,321 3. Cash generated/used by financial liabilities 119,727,288 (264,117,078) - financial liabilities measured at amortised cost 128,074,995 (92,317,100) - financial liabilities held for trading - financial liabilities designated at fair value - other liabilities (8,347,707) (171,799,978) Net cash generated/used by operating activities (23,059,701) 25,930,361 B. INVESTING ACTIVITIES 1. Cash generated by 12,000 - sales of equity investments - dividends from equity investments - sales of property, plant and equipment 12,000 - sales of intangible assets - sales of business units 2. Cash used by (904,164) (996,413) - acquisitions of equity investments - purchases of property, plant and equipment (49,551) (32,147) - purchases of intangible assets (854,613) (964,266) - acquisitions of business units Net cash generated/used by investment activities (904,164) (984,413) C. FUNDING ACTIVITIES - issue/purchase of treasury shares - issue/purchase of equity instruments - distribution of dividends and other purposes Net cash generated/used by funding activities NET CASH GENERATED/USED IN THE FINANCIAL YEAR (23,963,865) 24,945,948
KEY: (+) generated (-) used
67
RECONCILIATION
Amount Accounting item 31.12.2019 31.12.2018 Cash and cash equivalents at start of period 25,018,540 72,592 Total net cash generated/used in the period (23,963,865) 24,945,948 Cash and cash equivalents: effect of currency fluctuation Cash and cash equivalents at end of period 1,054,675 25,018,540
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Notes to the Financial Statements
69
Part A – Accounting policies
70
A1. General information
Section 1 - Declaration of compliance with International Financial Reporting Standards The Financial Statements at 31 December 2019, independently audited by the company PricewaterhouseCoopers S.p.A. have been drawn up according to the IAS/IFRS accounting standards issued by the International Accounting Standards Board (IASB) and the related interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and endorsed by the European Commission, as provided for in European Union Regulation no. 1606 of 19 July 2002 up to the date of approval of the Draft Financial Statements by the Board of Directors. The Financial Statements at 31 December 2019 have been prepared on the basis of the instructions for preparing Financial Statements issued by the Bank of Italy, exercising the powers established by art. 9 of Legislative Decree 38/2005 and article 43 of Legislative Decree 136/2015, with the Provision of 22 December 2005, with which Circular no. 262/05 was issued, as well as the subsequent amendments, the most recent on 30 November 2018. These instructions establish the format of the Financial Statements and the related preparation methods, as well as the content of the Notes to the Financial Statements. In support of the comments on the results of the period, the Report on Operations presents and illustrates the reclassified Income Statement and Balance Sheet.
Section 2 - Basis of preparation The present Financial Statements are made up of the Balance Sheet, the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Shareholders’ Equity, the Statement of Cash Flows (prepared applying the “indirect method”) and the Notes to the Financial Statements, and they are accompanied by a Report on Operations, on the economic results achieved and on the Bank’s financial situation. No exceptions were made to application of the IAS/IFRS accounting standards. The figures in the Financial Statements correspond to the company’s accounting entries which, in turn reflect the business events that occurred during the period. The Financial Statements have been prepared to present a true and fair view of the Bank’s financial situation, results of operations in the period and cash flows. The 71
Financial Statements have been prepared with a going concern assumption because there is a reasonable expectation that the company will continue with its operating activity in the foreseeable future (IAS 1 para. 23), in observance of the accruals concept (IAS 1 para. 25 and 26) and of consistent presentation and classification of the accounting items (IAS 1 para. 27). Assets and liabilities, and revenues and costs have not been offset unless offsetting is required or permitted by a standard or an interpretation (IAS 1, para. 32). These criteria did not change from the previous year. The Financial Statements have been prepared using the euro as accounting currency, while the amounts in the Notes to the Financial Statements are expressed in thousands of euro and those in the Report on Operations in millions of euro.
Section 3 - Subsequent events Subsequent to the Financial Statements reporting date no events occurred that would lead to adjustments in the Bank’s economic results, equity and financial situation, in accordance with IAS 10, paragraph 10. With particular reference to the spread of COVID-19, initially in China, and subsequently in other countries, including Italy, this event does not involve adjustments to balance sheet figures, pursuant to IAS 10, paragraph 21, given that the existence of an international emergency was declared by the World Health Organisation only as of the end of January 2020.
Section 4 - Other aspects
Going concern information While preparing the financial statements, directors must assess the entity’s ability to continue to operate as a going concern. The Financial Statements must be drawn up on a going concern basis, unless management intends to liquidate or wind up the company or has no other realistic alternatives. If management, when making its assessments, is aware of significant uncertainties in relation to events or conditions that could lead to serious doubts on the company’s ability to continue as a going concern, these uncertainties must be disclosed. If the Financial Statements are not drawn up assuming that the business is a going concern, this fact must be indicated, together with the criteria on the basis of which the statements have been drawn up and the reason for which the company is no longer considered a going concern. 72
Considering the risks and uncertainties linked to the present macro economic context and on the basis of the best information available when these financial statements were being prepared (see the Report on Operations - “Significant subsequent events” and “Business outlook”), it is reasonable to expect the Bank to continue to exist and to operate in the foreseeable future; furthermore its capital and financial structure and business performance do not demonstrate any symptoms which could determine significant uncertainties on the specific point and, consequently, the financial statements have been drawn up considering the company as a going concern.
Risks and uncertainties linked to the use of estimates Preparation of the Financial Statements also requires use of estimates and assumptions which may have influence the values recognised in the Balance Sheet and Income Statement, as well as information relative to contingent assets and liabilities. Estimates and the relative hypotheses are based on the use of available management data and subject assessments based on historic experience. By their nature, the estimates and assumptions used may change from year to year and, therefore, it is possible that in subsequent years the actual values shown in the Financial Statements may differ, even significantly, as a result of a change in the subjective evaluations used. The main cases which involve the most use of subjective valuations by company management are: - quantification of losses due to reduction in the value of loans, securities, equity investments and, in general, other financial assets; - quantification of provisions for risks and charges (determined on the estimate of the outgoings necessary to fulfil the obligations for which it is considered probable that resources will have to be used); - quantification of employees’ severance indemnity provisions, of the company pension fund and of the other employee benefits (determined on the estimate of the present value of the obligations referred to the probable outgoings which are discounted considering financial aspects—interest rates—estimated trend of remuneration, turnover rates and demographic data); - deferred tax assets (the recognition of items related to deferred tax assets is based on the assessment that in coming years the Bank will produce taxable 73
income of amounts such as to have the reasonable certainty that the future taxes to be paid on the said income will enable full absorption of the deferred tax assets); - use of assessment models to determinate the fair value related to financial instruments not quoted on active markets. It follows, therefore, that risk assessment is mainly linked both to the evolution of the national and international socio-economic context (including effects linked to COVID- 19), and to the performance of the financial markets, which can have consequences on the trend in bank rates, price fluctuations, actuarial bases and, more in general, counterparties’ creditworthiness.
New accounting standards and interpretations and those coming into force shortly
Accounting standards and interpretations applied since 1 January 2019 As required under IAS 8 - Accounting policies, changes in accounting estimates and errors - we list here new international accounting standards or amendments to already applicable accounting standards for which application became obligatory as of 1 January 2019: • IFRS 16 – Leasing, adopted with Regulation EU 1986/2017. The standard intends to improve accounting recognition of leasing contracts. IFRS 16 (Leases) replaces the accounting standard IAS 17, as well as IFRIC Interpretations 4 (Determining whether an Arrangement contains a Lease), SIC 15 (Operating Leases – Incentives) and SIC 27 (Evaluating the Substance of Transactions Involving the Legal Form of a Lease). The standard provides a new definition of a lease and introduces a criteria based on control (right of use) over an asset to distinguish leasing contracts from service contracts, identifying the following as discriminating factors: identification of the asset, the right to replacement of the same, the right to substantially obtain all economic benefits deriving from use of the asset and the right to direct the use of the asset underlying the contract. The objective is to guarantee greater consistency between financial statements due to different accounting measures used between operating and financial leasing. The standard establishes a single model for recognising and measuring leasing contracts for the lessee, which involves the recognition of the asset involved in the lease (even
74
if operating) in the assets, with a contraentry as a financial payable, also offering the possibility of not recognising as leases contracts relative to low-value assets and leases with contractual durations of 12 months or less. The new standard does not involve significant changes for lessors. • Amendments to IFRS 9 - Financial instruments - Prepayment features with negative compensation, adopted with Regulation EU 498/2018. The amendments made are aimed at clarifying classification of certain financial assets which can be redeemed in advance when IFRS 9 applies. • Interpretation IFRIC 23 - Uncertainty about treatments relative to income taxes, adopted with Regulation EU 1595/2018, the objective is to specify how to reflect uncertainties when recognising income taxes. • Annual Improvements to IFRSs 2015 - 2017 Cycle adopted with Regulation EU 412/2019; the amendments involve: - Amendments to IFRS 3 - Business combinations: clarifies that when a party to a joint control agreement acquires control over a jointly controlled asset, the transaction is a business combination carried out in multiple stages. - Amendments to IFRS 11 - Joint arrangements: clarifies that a party investing in a jointly controlled asset without having joint control, in the case in which they acquire joint control they must redetermine the fair value of the previously held interest. - Amendments to IAS 12 - Income taxes: establishes that an entity must recognise the tax effects of dividends, as defined under IFRS 9, for the purposes of income taxes at the time the liability to be paid relative to the dividend is recognised. - Amendments to IAS 23 - Borrowing costs: establishes that, to the degree that an entity generically acquires debt and uses financing to obtain an asset that justifies capitalisation, the entity must determine the amount of capitalised borrowing costs, applying a capitalisation rate to the costs sustained for the asset. This capitalisation rate must correspond with the weighted average of borrowing costs applicable to all of the entity’s loans in existence during the year. However, the entity must exclude from the calculation borrowing costs applicable to the loans specifically obtained to acquire an asset which justifies capitalisation until substantially all transactions necessary to prepare the asset for the planned usage or sale have been completed. 75
• Amendments to IAS 28 – Investments in associates and joint ventures - Long- term Interests in Associates and Joint Ventures, adopted with Regulation EU 237/2019. These amendments clarify that an entity which does not apply the equity method to financial instruments relative to associated companies or joint ventures must apply IFRS 9 to long-term interests, without taking account of any value adjustments made to the same. • Amendments to IAS 19 – Employee benefits - Plan Amendment, Curtailment or Settlement: adopted with Regulation EU 402/2019. The objective of the amendments is to clarify that after amendment, curtailment or settlement of a defined benefit plan, the entity must apply hypotheses updated through redetermination of the net liability (asset) for defined benefits for the remainder of the reference period.
Accounting standards and interpretations coming into force shortly As of the date these financial statements were approved, the following standards/interpretations had been issued by the IASB and approved by the European Union, for adoption as of 1 January 2020: • Amendments to the Conceptual Framework; • Amendments to IAS 1 and IAS 8: Definition of Material. • Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Benchmark Reform
The following standards/interpretations are still awaiting approval by the European Union: • Amendments to IFRS 3 Business combination; • IFRS 17 – Insurance contracts.
The consequences that these standards, amendments and interpretations coming into force shortly may have on the financial disclosure are being examined and assessed.
The transition to international accounting standard IFRS 16
Regulatory provisions
76
The new accounting standard IFRS 16, issued by the IASB in January 2016 and approved by the European Commission through Regulation 1986/2017, as of 1 January 2019, replaced IAS 17 Leasing, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases - Incentives and SIC 27 Evaluating the Substance of Transactions in the Legal Form of a Lease, and governs requirements for recognising leasing contracts. The new standard requires determination of whether a contract is or contains a lease, based on the concept of control over the use of an identified asset for a given period of time. It follows that rental, leasing or free rent contracts also fall within the scope of the new rules. In light of the above, significant changes were introduced in terms of recognising leasing transactions in the financial statements of the lessee/user, involving the introduction of a single accounting model, based on the right of use. More specifically, the main change consists in overcoming the distinction between operating and financial leases according to IAS 17: all leasing contracts must be recognised in the same manner, as an asset and as a liability. The accounting model involves recognition of the right of use relative to the leased asset in the Balance Sheet Assets, while the payables due for the leasing yet to be paid are recognised in the Liabilities. The method of recognising components in the income statement has also changed. While under IAS 17 leasing fees were recognised under Administrative Expenses, under IAS 16, charges relative to amortisation/depreciation of the right of use and interest expense on the payable are recognised under the relevant items. On the other hand, outside of greater disclosure requirements, there are no substantial changes with regards to leasing accounting for the lessor, as the distinction between operating and financial leases continues. As of 1 January 2019, the effects on the financial statement with regards to the application of IFRS 16 for the lessee - assuming profitability and final cash flows are the same - involve an increase in the assets recorded in the financial statements (leased assets) an increase in the liabilities (payable with regards to the leased asset), a decrease in administrative expenses (leasing fees) and a simultaneous increase in financial expense (payment of the recognised payable) and amortisation/depreciation (relative to rights of use). With reference to the income statement, considering the entire duration of the contracts the economic impact does
77
not change over the total horizon of the lease, whether applying the previous IAS 17 or the new IFRS 16, but the division occurs differently over the time period. During 2018, together with the Group to which it belongs, the Bank began a specific project to implement IFRS 16 - Leasing in order to investigate and determine the associated qualitative and quantitative impacts. In terms of procedure, the IT outsourcer provided a specific application module to determine values under IFRS 16.
Scope of contracts - lessee The Standard applies to all types of contracts which contain a lease, that is contracts which give the lessee the right to control usage of an identified asset for a given period of time (period of use) in exchange for a fee. The logic of the Standard is that "control" over an asset requires the asset be identified, for example if explicitly specified within the contract, or implicitly specified at the moment it becomes available for use by the customer. An asset is not specified if the supplier has the substantial right to replace it or if the supplier is essentially able to substitute the asset with an alternative asset throughout the period of use and receives economic benefits from making use of this right. Once it has been established that an identified asset underlies the contract, it must be determined whether the entity has the right to control it, as it simultaneously has both the right to obtain substantially all economic benefits deriving from use of the asset and the right to decide on the use of the identified asset. For the Bank, analysis of the contracts falling under the scope of the standard involved those in the following categories: (i) real estate, (ii) vehicles. Real estate leasing contracts represented the most significant area of impact in that these contracts represent 99.7% of the value of rights of use. In general, real estate leasing contracts have terms exceeding 12 months and generally include renewal and termination options which can be exercised by either the lessor or lessee based on the rules of the law or specific contractual provisions. Generally, these contracts do not include a purchase option at the end of the lease or significant restoration costs for the Bank. Contracts regarding other types of leasing involve vehicles. These are long-term leasing contracts for the company fleet, made available to certain employees. They
78
have a multi-year term, without renewal options. These contracts generally do not include an option to purchase the asset.
The Bank's choices The Bank decided to carry out First-Time Adoption (FTA) of IFRS 16 using the modified retrospective approach, which offers the option, to recognise the cumulative effects of applying the Standard as of the date of FTA and not to restate comparative amounts in the financial statements where IFRS 16 is applied for the first time. Therefore, amounts from accounting schedules relative to financial year 2019 are not comparable with reference to the amounts for rights of use and corresponding leasing payables. At first-time application, the Bank adopted some of the practical expedients provided under the standard in paragraph C10 and subsequent. More specifically, contracts with remaining terms of 12 months or less were excluded ("short-term contracts"). Also, when applied in its entirety, the Bank has decided not to apply the new standard to contracts with a total term of 12 months or less or to low value contracts, that is contracts where the value of the underlying asset, when new, is € 5,000 or less.
Contractual term The term of a lease is determined by the non-annullable period during which the Bank has the right to use the underlying asset, also considering: (i) periods covered by options to extend the lease, if the lessee is reasonably certain to exercise the option; and (ii) periods covered by options to terminate the lease, if the lessee is reasonably certain it will not exercise this option.
Discount rate With regards to the discount rate, on the basis of IFRS 16 requirements, the Bank uses the marginal loan rate, that is the rate that would be applied to disburse a loan with a similar duration and guarantees.
The effects of first-time application (FTA) of IFRS 16 The adjustment of the opening financial statements following application of IFRS 16 using a modified retrospective approach led to an increase in assets, following the recognition of new rights of use totalling € 12,024 thousand, and an increase in 79
financial liabilities (payable due to the lessor) of the same amount. Therefore, first- time application of the standard did not give rise to impacts on shareholders' equity since, given the choice to adopt the modified approach (option B), asset and liability values coincide at first time application. IFRS 16 provides a practical expedient for first time application which allows the Bank to not redetermine the scope of application, but instead apply the standard solely to leasing contracts identified on the basis of the requirements of IAS 17 and IFRS 4 (paragraph C3a of IFRS 16). More specifically, at FTA, the Bank used the practical expedient in paragraph C3 referenced above. For all operating leases classified as such under IAS 17, it recognised liabilities determined as future discounted fees as well as rights of use in the same amount (known as modified B). Below are the individual financial statement items affected by the change to the opening balances.
Assets 31.12.2018 Impact of IFRS 16 01.01.2019 80. Property, plant and equipment 625,565 12,023,911 12,649,476 Total assets 2,350,450,930 12,023,911 2,362,474,841
Liabilities and shareholders' equity 31.12.2018 Impact of IFRS 16 01.01.2019 10. Financial liabilities measured at amortised cost 1,985,601,291 12,023,911 1,997,625,202 Total liabilities and shareholders’ equity 2,350,450,930 12,023,911 2,362,474,841
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A.2 FINANCIAL STATEMENT ITEMS
1. Financial assets measured at fair value through profit and loss (FVTPL)
Classification criteria This category includes financial assets other than those classified among financial assets measured at fair value through other comprehensive income and among financial assets measured at amortised cost. In particular, the item includes: - financial assets held for trading; - financial assets which must be measured at fair value, represented by financial assets which do not meet the requirements for measurement at amortised cost or fair value through other comprehensive income. These are financial assets for which the contractual terms do not involve solely payments of principal and interest (meaning the SPPI test is not passed), or which are not held within the scope of a business model whose objective is to hold an asset in order to collect contractual cash flows (Hold to Collect business model) or whose objective is achieved both through the collection of contractual cash flows and through the sale of financial assets (Hold to Collect and Sell business model); - financial assets designated at fair value, that is financial assets measured in this way at the time of initial recognition and when the requirements are met. An entity may irrevocably designated a financial asset as measured at fair value through profit and loss at the time of initial recognition if, and only if, by doing so a measurement inconsistency is eliminated or significantly reduced (fair value option). Reclassifications to other categories of financial assets is not permitted unless the entity changes its business model to manage financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified to one of the other two categories included under IFRS 9 (financial assets measured at amortised cost and financial assets measured at fair value through other comprehensive income). The transfer value is represented by the fair value at the time of reclassification and the effects of the reclassification operate prospectively starting from the date of reclassification. In this case, the effective interest rate for the reclassified financial asset is determined on the basis of its fair value on the reclassification date and this date is also considered to be the initial recognition date 81
for allocation within the various credit stages (stage assignment) for impairment purposes.
Recognition criteria Financial assets are initially recognised at the settlement date for debt and equity securities, on the disbursement date for loans and the subscription date for derivative contracts. Financial assets are initially recognised at their fair value without considering transaction costs or income directly attributable to the instruments.
Measurement criteria After initial recognition, financial assets measured at fair value through profit and loss are measured at fair value. The effects of applying this measurement criteria are recognised in the Income Statement. Market listings are used to determine the fair value of financial instruments listed on an active market. In the absence of an active market, commonly used estimate methods and models are adopted, which take all risk factors associated with the instruments into account and are based on data which can be obtained on the market, including: prices for listed instruments with similar characteristics, calculations of discounted cash flows, models to determine options prices, values taken from recent comparable transactions, etc. For equity securities and derivatives relative to equity securities, not listed on an active market, the cost criteria is used as an estimate of fair value only to a residual extent and limited to a few circumstances, specifically in the case that all the previously referenced measurement methods cannot be applied, or in the presence of a wide range of possible fair value measurements, in which cost represents the least significant estimate.
Cancellation criteria Financial assets measured at fair value through profit and loss are cancelled from the financial statements when the right to receive cash flows expires or in the case of disposal, only if the disposal involved substantial transfer of all risks and benefits associated with the assets in question. On the other hand, if a significant portion of the risks and benefits relative to the financial assets transferred remain, they continue
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to be recognised in the Financial Statements, even if legal ownership of the same has effectively been transferred. In the case it is not possible to ascertain substantial transfer of risks and benefits, the financial assets are eliminated from the Financial Statements if no type of control over the same has been retained. Otherwise, even partial retention of control means that the asset must continue to be recognised in the Financial Statements in an amount equal to the residual involvement, measured by the exposure to changes in value to the asset transferred and changes in the cash flows of the same.
2. Financial assets measured at fair value through other comprehensive income (FVOCI)
Classification criteria This item includes financial assets which meet both of the following conditions: - financial assets are held based on a business model whose objective is achieved both through the collection of contractually established cash flows and through sale (Hold to Collect and Sell business model), and - the contractual terms of the financial asset establish, at certain dates, cash flows solely representing payment of principal and interest on the amount of capital to be repaid (SPPI test passed). In addition, this item includes equity instruments, not held for trading purposes, for which at the time of initial recognition the option to designate them at fair value through other comprehensive income was exercised. Reclassifications to other categories of financial assets is not permitted unless the entity changes its business model to manage financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified to one of the other two categories included under IFRS 9 (financial assets measured at amortised cost or financial assets measured at fair value through profit and loss). The transfer value is represented by the fair value at the time of reclassification and the effects of the reclassification operate prospectively starting from the date of reclassification. In the case of reclassification from the category in question to that of amortised cost, the cumulative profit (loss) recognised in the valuation reserve is used to adjust the fair value of the financial asset at the date of reclassification. On the other hand, in the case of reclassification to the category of fair value through profit and loss, the 83
cumulative profit (loss) previously recognised in the valuation reserve is reclassified from shareholders’ equity to profit (loss) for the year.
Recognition criteria Financial assets are initially recognised at the settlement date for debt and equity securities and on the disbursement date for loans. They are initially recognised at their fair value inclusive of transaction costs or income directly attributable to the instruments.
Measurement criteria After initial recognition, assets measured at fair value through other comprehensive income are measured at fair value, with recognition in the Income Statement of impacts deriving from application of the amortised cost and the effects of impairment, while other profits or losses deriving from a change in fair value are recognised in a specific shareholders’ equity reserve, without passing through the income statement, until the financial asset is eliminated. At the time of disposal, whether total or partial, the cumulative profit or loss in the valuation reserve is entirely or partially posted to the Income Statement. When the decision is made to classify equity instruments in this category, they are measured at fair value and the amounts recognised in a contraentry to shareholders’ equity (Statement of comprehensive income) do not need to subsequently be transferred to the income statement, even in the case of disposal. The only component relative to the equity securities in question subject to recognition in the income statement is any associated dividends. Financial assets measured at fair value through other comprehensive income are subject to verification of a significant increase in credit risk (impairment) as established under IFRS 9, with consequent recognition of a value adjustment in the income statement to cover expected losses. More specifically, for instruments classified in stage 1 (that is financial assets at the time of origination, when not impaired, and instruments which have not seen a significant increase in credit risk with respect to initial recognition) expected losses after one year are recognised on the initial recognition date and at each subsequent reporting date. On the other hand, for instruments classified in stage 2 (performing assets, but with a significant increase
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in credit risk with respect to initial recognition) and in stage 3 (impaired exposures) expected loss is recognised for the entire residual life of the financial instrument.
Cancellation criteria Financial assets measured at fair value through other comprehensive income are cancelled from the financial statements when the right to receive cash flows expires or in the case of disposal, only if the disposal involved substantial transfer of all risks and benefits associated with the assets in question. On the other hand, if a significant portion of the risks and benefits relative to the financial assets transferred remain, they continue to be recognised in the Financial Statements, even if legal ownership of the same has effectively been transferred. In the case it is not possible to ascertain substantial transfer of risks and benefits, the financial assets are eliminated from the Financial Statements if no type of control over the same has been retained. Otherwise, even partial retention of control means that the asset must continue to be recognised in the Financial Statements in an amount equal to the residual involvement, measured by the exposure to changes in value to the asset transferred and changes in the cash flows of the same.
3. Financial assets measured at amortised cost
Classification criteria This category includes financial assets (in particular loans and debt securities) which meet both of the following conditions: - financial assets are held based on a business model whose objective is achieved through the collection of contractually established cash flows (Hold to Collect business model), and - the contractual terms of the financial asset establish, at certain dates, cash flows solely representing payment of principal and interest on the amount of capital to be repaid (SPPI test passed). More specifically, this item includes: - loans to banks in various technical forms which meet the requirements indicated in the previous paragraph; - loans to customers in various technical forms which meet the requirements indicated in the previous paragraph; 85
- debt securities which meet the requirements indicated in the previous paragraph. This category also includes operating receivables associated with the provision of financial activities and services (for example, to manage public subsidy funds or for servicing activities). Reclassifications to other categories of financial assets is not permitted unless the entity changes its business model to manage financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified to one of the other two categories included under IFRS 9 (financial assets measured at fair value through other comprehensive income or financial assets measured at fair value through profit and loss). The transfer value is represented by the fair value at the time of reclassification and the effects of the reclassification operate prospectively starting from the date of reclassification. Profits or losses resulting from the difference between the amortised cost of the financial asset and the relative fair value are recognised in the income statement in the case of reclassification between the financial asset measured at fair value through profit and loss and shareholders' equity, in the specific valuation reserve, in the case of reclassification between financial assets at fair value through other comprehensive income.
Recognition criteria Financial assets are initially recognised at the settlement date for debt securities and on the date of disbursement in the case of loans. They are initially recognised at their fair value inclusive of transaction costs or income directly attributable to the instruments. In particular, with regard to loans, the disbursement date normally coincides with the date the contract was signed. If they do not coincide, a commitment to grant the funds is recognised on the date when the contract is signed; the commitment then ends when the instrument is disbursed. The loan/receivable is posted at its fair value, equal to the amount disbursed, or the subscription price, including costs/income directly attributable to the individual loan and which can be defined from the beginning of the transaction, even if settled subsequently. Costs which, even if they have the aforementioned characteristics, are subject to reimbursement by the debtor counterparty or can be classified as normal internal administrative costs are excluded.
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Measurement criteria Subsequent to initial recognition, the financial assets in question are measured at amortised cost with the effective interest-rate method. In these terms, the asset is recognised in the financial statements for an amount equal to the initial recognition value minus repayments of principal, plus or minus cumulative amortisation and adjusted for any provision to cover losses. The effective interest rate is the rate equal to the present value of the future cash flows of the asset, in terms of both principal and interest, of the amount disbursed inclusive of the costs/income attributable to said financial asset. This method of recognition, using a financial logic, makes it possible to distribute the economic effect of costs/income directly attributable to a financial asset throughout its expected residual life. The amortised cost method is not used for assets - measured at historic cost - which have a short enough duration to make the effects of apply discounting negligible, nor for those without a defined maturity date and for those payable on demand. Calculation of expected loss values from impairment is closely connected to the classification of the instruments in question in one of three stages established under IFRS 9. Specifically, stage 1 includes performing assets for which no significant increase in credit risk has been seen, stage 2 includes financial assets which are performing but have seen a significant increase in credit risk and stage 3 includes impaired financial assets (past due, unlikely to pay and non-performing). Value adjustment are then recognised in the income statement: - at initial recognition, in an amount equal to the expected loss after 12 months; - when the asset is measured subsequently, when the credit risk has not significantly increased with respect to initial recognition, in relation to changes in the amount of value adjustments for expected losses after 12 months (stage 1); - when the asset is measured subsequently, when the credit risk has significantly increased with respect to initial recognition (transfer to stage 2), in relation to the recognition of value adjustments for expected losses relative to the entire residual life contractually established for the asset; - when the asset is measured subsequently, when—after a significant increase in credit risk has been seen with respect to initial recognition—the significance of the increase no longer exists, in relation to the adjustment of cumulative value adjustments in order to take into account the passage from lifetime expected losses to losses over twelve months (return to stage 1). 87
When the financial assets in question are performing, the are subject to measurement, aimed at determining value adjustments to be recognised in the Financial Statements, at the level of the individual loan, as a function of the risk represented by probability of default (PD), loss given default (LGD) and exposure at default (EAD), with the aim of taking into account the provisions of accounting standard IFRS 9. If, in addition to a significant increase in credit risk, objective evidence of a loss of value is also determined (transfer to stage 3), then the amount of the loss is measured as the difference between the book value of the asset - classified as impaired, in the same way as all other relationships held with the same counterparty - and the current value of estimated future cash flows, discounted at the original effective interest rate. The amount of the loss, to be recognised in the Income Statement, is determined on the basis of an analytical measurement process or determined for homogeneous categories and, therefore, analytically attributed to each position and takes into account, as detailed in the section on "Impairment of financial assets", forward looking information and possible alternative collection scenarios. The scope of impaired assets includes financial instruments classified as non- performing, probable default or past-due/over-the-limit for more than 90 days, based on Bank of Italy rules, in line with IAS/IFRS and European regulations. Expected cash flows take into account expected collection times and the presumable value in use of any collateral. When the reasons for the impairment no longer exist following an event occur subsequent to the recognition of the reduction in value, writebacks are carried out, recognised in the Income Statement. Writebacks cannot exceed the amortised cost which the financial instrument would have had in the absence of previous adjustments. Writebacks connected with the passing of time are posted as net interest income. In some cases, during the life of the financial assets in question and, in particular, those of loans, the original contractual conditions are subject to later modification by the parties to the contract. When, during the course of the life of an instrument, the contractual clauses are subject to change, it must be verified whether the original asset must continue to be recognised in the Financial Statements or whether,
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instead, the original instrument should be derecognised and a new financial instrument recognised in its place. In general, changes to a financial asset lead to its derecognition and the recognition of a new asset, when the changes are substantial. Assessment of whether a change is substantial must include consideration of both qualitative and quantitative elements.
Cancellation criteria Financial assets are cancelled from the financial statements when the right to receive cash flows expires or in the case of disposal, only if the disposal involved substantial transfer of all risks and benefits associated with the assets in question. On the other hand, if a significant portion of the risks and benefits relative to the financial assets transferred remain, they continue to be recognised in the Financial Statements, even if legal ownership of the same has effectively been transferred. In the case it is not possible to ascertain substantial transfer of risks and benefits, the financial assets are eliminated from the Financial Statements if no type of control over the same has been retained. Otherwise, even partial retention of control means that the asset must continue to be recognised in the Financial Statements in an amount equal to the residual involvement, measured by the exposure to changes in value to the asset transferred and changes in the cash flows of the same.
4. Hedging The Bank makes use of the possibility, established when IFRS 9 was introduced, to continue to fully apply the provisions of the previous accounting standard IAS 39 with regards to hedge accounting, for all types of hedges (in the carved out version approved by the European Commission).
Classification criteria - type of hedge Risk hedging transactions are carried out to deal with risks connected to changes in market value or in future cash flows relating to a certain element or groups of elements which could have potential effects on the income statement. The type of hedging used by the Bank is fair value hedging, with the aim of hedging exposure against changes in fair value (attributable to the various kinds of risks) of assets and liabilities posted on the balance sheet, or portions of the same, groups of 89
assets/liabilities, irrevocable commitments and portfolios of financial assets and liabilities, as allowed by IAS 39 endorsed by the European Commission.
Recognition criteria Hedging derivatives, like all derivatives, are initially recognised and subsequently carried at fair value.
Measurement criteria In the case of fair value hedging, the change in the fair value of the item hedged is offset with the change in the fair value of the hedging instrument. This offsetting is recognised by booking the changes in value to the income statement of both the item hedged (as regards the changes produced by the underlying risk factor), and the hedging instrument. Any difference, representing the partial ineffectiveness of the hedge, consequently constitutes its net economic effect. The derivative instrument is designated as a hedging instrument if there is official documentation regarding the relationship between the instrument hedged and the hedging instrument, and if it is effective from the start of the hedging and throughout the life of the hedge. Hedging effectiveness depends on the degree to which the changes in fair value of the instrument hedged are offset by those of the hedging instrument. Consequently, the effectiveness is measured by comparing these changes, taking into account the Bank’s intended goal at the time the hedge was put in place. A hedge is effective when the changes in the fair value of the hedging instrument almost completely neutralise, within the limits established by the 80–125% range, the changes in the hedged instrument, resulting from the risk element being hedged (Dollar offset method). Effectiveness is assessed at every annual or interim reporting date. If it is found that the hedging is not effective, as of that moment the hedging transaction is no longer entered in the accounts as such and the derivative contract is reclassified under instruments held for trading, and the financial instrument hedged is subsequently measured according to its accounting classification. Under IAS 39, fair value hedging can cover not only a single financial asset or liability but also a monetary amount resulting from a number of financial assets and liabilities (or parts of the same), so that a series of derivative contracts can be used to reduce the changes in the fair value of the hedged instruments consequent to changes in market
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interest rates (macro hedging). Net amounts resulting from asset or liability imbalances cannot be covered by macro hedging. As in the case of fair value micro hedging, macro hedging is considered highly effective if, both at the start and during its life, the changes in the fair value of the monetary amount hedged are offset by changes in the fair value of the hedging derivatives and if the effective results fall within a range specified by IAS 39. In accordance with the instructions issued by the Bank of Italy for preparation of banks’ financial statements, value adjustments on macro hedged financial assets/liabilities are posted under item 60 of the Assets and item 50 of the Liabilities, with a contra item under item 90 of the Income Statement.
5. Equity investments
Classification, recognition and measurement criteria This item includes equity investments in controlled companies (over which direct or indirect control is exercised); in joint ventures (for which a joint control agreement exists) and in associated companies (over which significant influence is exercised, but not classifiable as one of the two previous categories). Equity investments are recognised at the purchase or subscription cost. If there is evidence that the value of an equity investment may have decreased, the recoverable value of the investment is then estimated, taking into account the current value of future cash flows which may be generated by the investment, including the final disposal value of the investment. The original value is restored in subsequent years if the reason for the value adjustments made no longer exists. Economic results relative to measurement and gains/losses on disposal are recognised in a specific item in the income statement. Dividends are recognised in the financial year in which they are resolved.
Cancellation criteria Equity investments are derecognised when they are disposed of, when all associated risks and benefits are substantially transferred or when the contractual rights of the financial flows that derive from them expire.
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6. Property, plant and equipment
Classification criteria Property, plant and equipment includes plant, office machinery, furniture, computers, printers, fittings and equipment of any type. These are instrumental assets with several years of useful life used to carry out the company’s business. In application of the new accounting standard IFRS 16, “property, plant and equipment” also includes rights of use acquired through leases and relative to the use of property, plant and equipment for lessees.
Recognition criteria Property, plant and equipment items are initially recognised at cost, inclusive of any directly attributable transaction costs. The cost is increased by any expenses incurred subsequently to improve these assets, replace a part or perform non-routine maintenance activities resulting in an increase in their future economic benefits. Routine maintenance expenses are recognised directly in the income statement. Based on IFRS 16, leases are recognised on the basis of a right of use model based on which, at the start date, the lessee has a financial obligation to make the payments due to the lessor to compensate for the right to use the underlying asset for the duration of the lease. When the asset is made available to the lessee for use (start date), the lessee recognises both the liability and the asset, consisting of the right of use.
Measurement criteria Property, plant and equipment items are carried at cost, minus any depreciation or impairment. Property, plant and equipment depreciate, on the basis of the estimated expected useful life, as follows: Fittings and equipment 15% Furniture 12% Office machines 20% Depreciation is calculated at the reporting date and recognised in the income statement. In the case of impairment, assets are written down and the amount of the impairment is recognised in the income statement.
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With reference to assets consisting of the right of use, recognised on the basis of IFRS 16, these are measured by using the cost model based on IAS 16 Property, plant and equipment. In this case, the assets are subsequently depreciated throughout the duration of the leasing contract and subject to an impairment test if indications of impairment arise.
Cancellation criteria The carrying amount of an item of property, plant and equipment must be derecognised in case of disposal, or when no future economic benefit is expected from its use. Gains and losses arising from the difference between the price collected from the sale of an asset and the carrying amount of such an asset are recognised in a specific item of the income statement.
7. Intangible assets
Classification criteria Intangible assets, essentially represented by software, are recognised only if it probable that the future economic benefits attributed to the assets will arise and if the cost of the assets can be reliably determined. There are no intangible assets generated internally.
Recognition criteria At initial recognition, intangible assets are recognised at cost, adjusted for any accessory charges.
Measurement criteria After initial recognition, intangible assets with a finite useful life are posted at cost net of total amortisation and any impairment. The amortisation charge on intangible assets with a finite useful life (normally three years) is posted on the income statement at the reporting date and tests are performed for any impairment to be recognised in the income statement. The Bank has no intangible assets with an indefinite lifetime.
Cancellation criteria 93
Intangible assets are derecognised at the moment of their disposal or when no future economic benefits are expected.
8. Other Assets Other assets essentially include items awaiting processing and items not classifiable under other items in the balance sheet, among which we note receivables associated with supplies of non-financial goods and services, and tax items different from those recognised under the specific item.
9. Current and deferred taxes Income taxes are accounted for as cost on an accrual basis, in conformity to the methods for recognising the costs and revenues which have generated them. Therefore, they represent the balance of current and deferred taxes relating to the income of the period. Deferred taxes are calculated by applying the balance sheet liability method, bearing in mind the fiscal effect connected with temporary differences between the carrying value of assets and liabilities and their fiscal value, which lead to taxable or deductible amounts in future periods. For such purposes, taxable temporary differences are those which in future periods will determine taxable amounts and deductible temporary differences those which in future periods will determine deductible amounts. Deferred taxes are calculated by applying tax rates established under current laws to temporary taxable difference for which there is an effective probability that taxes will be paid and to temporary deductible differences for which there is reasonable certainty of future taxable amounts at the time the relative tax deductibility will arise (probability test). Prepaid and deferred taxes relative to the same tax and maturing during the same period are offset. When deferred tax assets and liabilities refer to components that impacted the income statement, the contra entry is represented by income taxes. In cases in which prepaid and deferred taxes refer to transactions which directly affected shareholders’ equity without impacting the income statement (such as adjustments from first time application of IAS/IFRS, measurements of financial instruments recognised at fair value through other comprehensive income or contracts deriving from cash flow hedges), these are recognised as a contra entry to
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shareholders’ equity, relative to specific reserves when appropriate (e.g. valuation reserves). In December 2017, the Bank complied with the parent company’s request to exercise the option to adhere to national tax consolidation for the 2018-2020 period (introduced by Legislative Decree 344 of 12 December 2003). The exercising of this option, which is neutral for the Bank with respect to its prior status, allows the following for Group’s tax burden: • immediate total or partial use of tax losses during the period for companies participating in consolidation, decreasing the taxable income of other consolidated companies; • the introduction of an IRES credit and debit compensation mechanism among the companies participating in tax consolidation; • excluding taxation of dividends distributed between the companies participating in the tax consolidation within the same financial year.
10. Provisions for risks and charges
Provisions for retirement and similar benefits Retirement funds are established in implementation of company agreements and can be classified as defined benefit plans. The liability for these plans and the relative social security cost for current provisions of labour are determined on the basis of actuarial hypotheses which involve projections of future payments on the basis of analysis of historic statistics and the demographic curve, and financial discounting of said flows on the basis of a market interest rate. Actuarial gains and losses (variations in the current value of the obligation deriving from changes to actuarial hypotheses and adjustments based on past experience) are recognised in the statement of comprehensive income.
Provisions for risks and charges against commitments and guarantees issued The sub-item of provisions for risks and charges in question includes provisions for credit risk recognised against commitments to disburse funds and to guarantees given which fall within the scope of application of the impairment rules pursuant to IFRS 9. As a basic principle, for these cases the same methods of allocation are used with reference to the three credit risk stages and to calculation of expected 95
losses, indicated with reference to financial assets measured at amortised cost or at fair value through other comprehensive income.
Other provisions Other provisions for risks and charges include allocations for legal obligations or associated with employment relations, or to disputes, including tax disputes, originating from a past event for which the disbursement of financial resources is likely in order to fulfil the said obligation, as long as the relevant amount can be reliably estimated. Consequently, a provision is only recognised if and only if: - there is an obligation in course (legal or implicit) as the result of a past event; - it is probably that in order to fulfil the obligation it will be necessary to make use of resources aimed at producing economic benefits; and - a reliable estimate can be made of the amount deriving from fulfilment of the obligation. The amount recognised for the provision represents the best estimate of the sum required to comply with the obligation existing at the reporting date and reflects risks and uncertainties which inevitably are associated with multiple events and circumstances. When the time factor is significant, provisions are discounted using current market rates. The provision and increases due to the time factor are recognised in the Income Statement. The provision is reversed when it becomes improbable that resources aimed at producing economic benefits will be used to fulfil the obligation or when the obligation is eliminated.
11. Financial liabilities measured at amortised cost
Classification criteria Amounts due to banks, amounts due to customers and securities issued represent the various forms of inter-bank funding and funding from customers, as well as repurchase agreements with repurchase obligation on maturity and funding via bonds and other funding instruments issued, net of any redeemed amounts. These also include payables recognised by the company in its role as the lessee relative to leasing contracts. 96
Recognition criteria Such financial liabilities are first recognised on the date on which the related contract is signed, which normally coincides with the moment of the receipt of the sums collected or the issue of the debt securities. Initial recognition takes place at the fair value of the liabilities, usually equal to the amount collected or to the issue price, increased by any additional costs/income directly attributable to the individual deposit or issue transactions. Internal administrative costs are excluded.
Measurement criteria After initial recognition, these financial assets are measured at the amortised cost, using the effective interest rate method. However, short term liabilities, for which the time factor is negligible, are an exception. They are entered at the amount collected. Leasing payables are revalued when there is a lease modification (e.g. a change to the scope of the contract), if this is not recognised/considered as a separate contract.
Cancellation criteria Financial liabilities are derecognised when they have matured or been discharged. Derecognition also takes place when previously issued debt securities are repurchased. The difference between the carrying amount of a liability and the amount paid for purchase is booked to the Income Statement.
12. Financial liabilities held for trading
Recognition criteria The financial instruments in question are recognised on the subscription date or issue date at a value equal to the fair value of the instrument, without considering any transaction costs or income directly attributable to the instruments themselves.
Measurement criteria All liabilities held for trading are measured at fair value with recognition of the result of said measurement in the Income Statement. 97
Cancellation criteria Financial liabilities held for trading are derecognised from the Financial Statements when the contractual rights over relative cash flows expire or when the financial liability is transferred, including the substantial transfer of all risks and benefits deriving from ownership of the same.
13. Financial liabilities designated at fair value
Classification criteria This item includes financial liabilities measured at fair value with a contra entry in the income statement, on the basis of the option granted to companies (fair value option) under IFRS 9 and in compliance with the cases established under the reference regulations.
Recognition criteria Recognition of these liabilities is done on the issue date in a degree equal to their fair value, including the value of any embedded derivative and net of placement fees paid.
Measurement criteria These liabilities are measured at fair value and the result is recognised in accordance with the following rules established under IFRS 9: - changes in fair value attributable to changes in own credit standing must be recognised in the statement of comprehensive income (shareholders’ equity) and are not subject to reversal to the income statement even when the liability matures; - the remaining fair value changes must be recognised in the Income Statement.
Cancellation criteria Financial liabilities measured at fair value are derecognised from the Financial Statements when the contractual rights over relative cash flows expire or when the financial liability is transferred, including the substantial transfer of all risks and benefits deriving from ownership of the same.
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15. Other information
Revenue recognition Revenues can be recognised: - at a specific time, when the entity fulfils obligations by transferring the asset or service promised to the customer, or - over time, as the entity gradually fulfils obligations by transferring the asset or service promised to the customer. An asset is transferred when, or over the course of the period during which, the customer acquires control over it. In particular: - interest is recognised pro rata temporis according to the contractual interest rate or to the effective interest rate in case of application of the amortised cost; - fees for revenues from services, including commissions for the management of public subsidies, are stated, on the basis of the existence of contractual agreements, in the period in which the services were provided; - fees considered in the amortised cost for the purpose of determining the effective interest rate are included in interest; - revenues or costs deriving from the sale of financial instruments, resulting from the difference between the amount paid or collected on the transaction and the fair value of the instrument, are posted on the income statement when the transaction is recognised.
Recognition of costs Costs are recognised on the income statement whenever there is a decrease in future economic benefits entailing a decline in assets or an increase in liabilities. Financial expenses are interest and other expenses incurred in connection with amounts borrowed and are recognised as a cost in the year in which they are incurred.
Expenditure on third-party assets Costs incurred on third parties’ assets (tangible and intangible) are capitalised in consideration of the fact that, for the term during which the Bank uses the same, it has control of the assets and can obtain future economic benefits. The said costs,
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classified as other assets, as provided for in the Bank of Italy instructions, are amortised according to the contractual terms.
Offsetting financial assets and liabilities On the basis of the indications of IAS 32 asset and liability items are offset in the accounts if the following requisites are fulfilled: - possession of the contractual right exercisable for offsetting the amounts recognised in receivables and payables; - the intention to settle the items net, or to realise the asset and at the same time extinguish the liabilities. In accordance with the provisions of IFRS 7, more detailed information is provided in the tables of the Notes to the Financial Statements included in Part B - Other information. In particular, the carrying amounts affected by the standard before and after the effects of the offset and the measurement of the associated real guarantees are recognised.
Classification criteria for financial assets Classification of financial assets into the three categories established under the standard depend on two classification criteria, or drivers: the business model under which the financial instruments are managed and the contractual characteristics of the cash flows deriving from financial assets (SPPI test). Financial assets are classified based on the combination obtained from these two drivers, in accordance with that indicated below: - Financial assets measured at amortised cost: assets which pass the SPPI test and fall under the Hold to collect (HTC) business model; - Financial assets measured at fair value through other comprehensive income (FVOCI): assets which pass the SPPI test and fall under the Hold to collect and sell (HTCS) business model; - Financial assets measured at fair value through profit and loss (FVTPL): this is a residual category, which includes financial instruments which cannot be classified within the previous categories on the basis of the results of the business model test or due to failure of the SPPI test.
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SPPI test For a financial asset to be classified at amortised cost or FVOCI, in addition to business model analysis, it is necessary that the contractual terms of the asset establish cash flows on certain dates which consist solely of payments of principal and interest (SPPI). This analysis must be done, in particular, on loans and debt securities. The SPPI test must be performed on each individual financial instrument, at the time it is recognised in the Financial Statements. After initial recognition, and as long as it is recognised in the Financial Statements, the asset is not subjected to new assessments in terms of the SPPI test. When a financial instrument is derecognised and when a new financial asset is recognised, it is necessary to carry out the SPPI test on the new asset. For the purposes of applying the SPPI test, IFRS 9 provides the following definitions: - Principal: the fair value of the financial asset at the time of initial recognition. This value may change during the life of the financial instrument, for example as an effect of payments of principal; - Interest: the payment for the time value of money and the credit risk associated with the capital, existing at a particular moment in time. It may also include remuneration for other base risks and costs associated with lending activity and a profit margin. When assessing whether cash flows from a financial asset can be defined as SPPI, IFRS 9 refers to the general concept of a basic lending arrangement which is independent of the legal form of the business. When the contractual clauses introduce exposure to risks or volatility of cash flows not in line with the definition of a basic lending arrangement, the contractual cash flows do not meet the definition of SPPI. Application of the classification driver based on contractual cash flows will occasionally require a subjective decision and, therefore, the definition of internal policies for application. In the case of a modified time value of money, or when the interest rate is periodically redetermined on the basis of the average of given short or medium/long-term rates, the company must assess, using both quantitative and qualitative elements, whether the contractual cash flows still meet the definition of SPPI (benchmark cash flows test). When the test indicates that the (non-discounted) contractual cash flows are significantly different with respect to the cash flows deriving from a benchmark 101
instrument (also non-discounted), or without the time value element modified, contractual cash flows cannot be said to meet the definition of SPPI. As established under IFRS 9, a given characteristic of contractual cash flows does not influence classification of a financial asset if it can only have a minimal effect on the contractual cash flows of the financial asset (in each financial year and cumulatively). Similarly, if a characteristic of the cash flows is not realistic, (not genuine), or influences the contractual cash flows of the instrument only when an event occurs which is extremely rare, very unusual or very improbable, it does not influence classification of the financial asset.
Business model With regards to the business model, IFRS 9 identifies three cases regarding the methods used to manage cash flows and sales of financial assets: - Hold to Collect (HTC): this is a business model in which the objective is achieved by receiving contractual cash flows from financial assets included in their relative portfolios. The insertion of a portfolio of financial assets in this business model does not necessary mean it is impossible to sell these instruments, even if it is necessary to consider the frequency, value and schedule of sales in previous years, the reasons for the sales and expectations regarding future sales; - Hold to Collect and Sell (HTCS): this is a mixed business model, in which the objective is achieved by receiving contractual cash flows from the financial assets in the portfolio and also through sales activities, which are an integral part of the strategy. Both activities (collection of cash flows and sales) are indispensable for achieving the objective of the business model. Therefore, sales are more frequent and significant with respect to an HTC business model and are an integral part of the strategies pursued; - Other/Trading: this is a residual category which includes both financial assets held for trading purposes and financial assets managed using a business model which is different to the previous categories (Hold to Collect and Hold to Collect and Sell). In general, this classification is applied to a portfolio of financial asset for which management and performance are measured on a fair value basis. The business model reflects the methods with which the financial assets are managed to generate cash flows to benefit the entity and is defined by top management with appropriate involvement of business structures. It should be 102
determined considering the method used to manage the financial assets and, as consequence, the degree to which cash flows in the portfolio derive from the receipt of contractual cash flows, from sales or financial assets or from both activities.
Method of determining amortised cost Amortised cost is one of the possible measurements of a financial asset or liability. This assessment is done for financial assets measured at amortised cost (item 40, assets), for those measured at fair value through other comprehensive income (item 30, assets) prior to fair value adjustment, and for financial liabilities measured at amortised cost (item 10, liabilities). Amortised cost must be calculated using the effective interest rate method, a method that involves distributing interest received or paid, and transaction costs and revenues, along the duration of the financial instrument. The amortised cost makes it possible to allocate all the costs and revenues generated by a financial instrument along the entire expected life of the said instrument. The costs and revenues to be allocated along the expected life of the said financial instrument include the transaction costs (revenues) which are the marginal costs (revenues) directly attributable to the issue/acquisition of a financial instrument. Marginal means the costs (revenues) that would not have been produced if the entity had not acquired or issued the financial instrument. With particular reference to receivables, the commissions payable to the distribution channels and fees payable for participation in pooled loans are considered costs attributable to the financial instrument; while the revenues considered in calculating the amortised cost are up-front commissions, and those for participation in pooling operations. For securities issued and other funding transactions the placing commissions are considered in calculating the amortised cost, as well as legal expenses necessary for preparing placement. The effective interest rate is the rate that reduces to zero the present value, at the time of the measurement, of the total cash flow (the future payments or collections envisaged along the expected life of the financial instrument) of the financial instrument. The calculation of the effective interest rate must include all the economic components paid or received which are an integral part of the same, the transaction costs, and all the other premiums or discounts. Determination of the amortised cost is different according to whether the financial instruments considered are at fixed rate or variable rate and—in this latter case—according to whether the variability of the rate is known in advance (fixed rate for time bands) or otherwise. For
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financial instruments at fixed rate or at fixed rate for time bands (with the rate that varies after a certain period in fixed mode), the future cash flows must be quantified on the basis of the known interest rate (single or variable) during the life of the instrument. For instruments at variable rate, the variability of which is not known in advance (for example because it is linked to an index), the cash flows must be determined on the basis of the last known rate, and at each rate revision date the new effective rate of return is recalculated. Measurement at amortised cost does not apply for assets/liabilities whose short duration leads the economic effect of the discounting to be considered negligible, nor for receivables with no definite maturity or on demand.
Method of determining impairment Pursuant to IFRS 9, at every reporting date financial assets not measured at fair value through profit and loss are subject to assessment, in order to determine whether there is evidence which suggests that the recognition value of the assets in question is not entirely recoverable. Similar analysis is also done for commitments to disburse funds and for guarantees given which fall within the scope subject to impairment under IFRS 9. If this evidence exists (i.e. “evidence of impairment”), the financial assets in question—together with all other remaining assets pertaining to the same counterparty—are considered impaired and placed in stage 3. Against these exposures, represented by financial assets classified in the categories of non- performing, probable default and past-due over 90 days, pursuant to the provisions of Bank of Italy Circular 262/2005, value adjustments must be recognised in an amount equal to expected losses over a time horizon equal to their entire residual life. For financial assets for which no evidence of impairment is found (non-impaired financial assets), it is instead necessary to determine whether there are indicators that the credit risk of an individual operation has significantly increased with respect to initial recognition. From a staging and measurement point of view, the consequences of this verification are the following: - when these indicators exist, the financial asset is placed in stage 2. In this case, in line with the dictates of international accounting standards and even in the absence of a manifest loss of value, the measurement involves recognition of value adjustments equal to expected lifetime losses. These adjustments are subject to review at each subsequent reporting date, in order to periodically verify 104
their congruence with respect to constantly updated loss estimates and to take into account—if the indications of significantly increased credit risk no longer exist—the change in the time horizon for calculating expected losses; - when these indicators do not exist, the financial asset is placed in stage 1. In this case, in line with international accounting standards and even in the absence of a manifest loss of value, the measurement involves recognition of expected losses over the next twelve months for the specific financial instrument. These adjustments are subject to review at each subsequent reporting date, both in order to periodically verify their congruence with respect to constantly updated loss estimates and to take into account—if indications of significantly increased credit risk present themselves—the change in the time horizon for calculating expected losses. Taking into account the fact that at each reporting date the Bank must recognise in the Income Statement the amount of the change in expected lifetime losses as an impairment gain or loss, the model adopted by the Bank to calculate value adjustments on financial assets at the individual transaction level is the following:
where:
• = value adjustment calculated at the reporting date; • N = residual life of the relationship (contractual maturity minus reporting date);
• = value of EAD in the immediate future ;
• = marginal probability of default in ;
• = value of LGD in the immediate future ; • = discounting rate equal to IRR. With reference to financial assets classified in stage 1, the formula outlined above is calculated only to 1 year (n equal to or less than 12 months), while for financial assets classified in stage 2, instants ti indicated in the formula are consistent with the frequency of cash flows established in the case of multi-period EAD or annually, in the case of an amortisation plan with a single payment at maturity (bullet).
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The degree of specificity used to determine impairment is individual relationships for the loan portfolio, while for the securities portfolio, reference should be made to individual tranches remaining. In the cases that multiple tranches6 of the same security are purchased at different times, it is possible that different initial acquisition conditions are seen (different ratings at issue or different issuer ratings) and therefore it is expedient to consider each tranche acquired as an individual financial instrument, even if they are from the same security. This leads to the need to assess impairment of credit standing at the level of each individual tranche acquired, and the possibility of classifying different tranches from the same security in different stages.
Probability of default (PD) While awaiting consolidation of a portfolio able to provide robust evidence of internal risk, the Bank estimates PD at one year for its exposures with the help of an external ratings model. In particular, PDs are estimated for each ratings class on the basis of a recalibration process which uses the PDs for the model and a multiplier, provided by the external provider, in order to determine Bank level PDs from system level PDs. Input data are subject to quality control and when appropriate are normalised to guarantee monotonicity of PDs with respect to ratings. Positions without ratings are placed in ratings classes with an average PD, unless analysis and monitoring indicates a risk profile that is significantly higher than the average. To guarantee proper application of the accounting standard, PDs are subject to the following processing, broken down into the following steps: 1) PIT adjustment Prudentially and considering the volatility of default rates observed on the loan portfolio, when appropriate 1Y PD from the model are recalibrated using a Bayesian approach on the basis of an average decay rate observed on the portfolio (Central Tendency – CT). This parameter is updated periodically, on the basis of risk trends observed internally, in order to estimate PDs which represent the riskiness of the portfolio as accurately as possible; 2) Forward-looking correction
6 In this document, the term “tranche” means a lot of a given ISIN acquired at a specific moment in time.
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The PD curves obtained in this way are subject to forward-looking correction, generally for the first 3 years, on the basis of multipliers estimated using satellite models. 3) Calculation of multiperiod cumulative PDs Multiperiod PDs are derived from1Y PD using a Markovian approach, using the transition matrices provided by the same provider. For the Private segment and in particular for residential mortgages, the multiperiod PDs are derived using a negative exponential distribution (described below), as this is deemed most appropriate for estimating the PD curve for this product/segment, with respect to the Markovian approach:
In particular, the first three years of the yield curve are obtained using parameter λ derived from PD PIT, while for subsequent years, an λ derived from PD TTC is used. 4) Determination of conditional marginal PDs Starting from the yield curve of cumulative PDs, the yield curve for marginal and conditional PDs is determined.
Loss Given Default (LGD) Considering the lack of availability of internal loss rates after default, assignment of loss given default (LGD) to individual positions is done by making use of regulatory values or those derived from benchmarks, considered flat for the entire duration of the loan and suitably updated, evaluating the appropriateness of using prudential margins. In relation to the type of collateral associated with a loan product, the loans portfolio has been broken down into the following segments: 1) Unsecured / Other loans; 2) Loan with guarantee from the Central SME Guarantee Fund (FdG); 3) Non-residential mortgage; 4) Residential mortgage; 5) Salary-backed loan (CQS); 6) Factoring.
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Exposure at Default (EAD) For on balance positions, the Bank uses cash flows resulting from the effective amortisation plans for loans as exposure at default. In particular, for the first year7 (positions in stage 1 and stage 2), the respective carrying amount of the exposure is used, while for subsequent years (stage 2), the residual debt for the capital component of the exposure is considered, as in the IAS plan. For off-balance sheet positions, exposure at default is determined in compliance with Regulation 575/2013, under article 111, Part Three, chapter 2, section 1.
Separate accounting Management of Public Funds and provision of services related to them is governed by contracts signed with the Public Administrations. Management of the related resources is recorded in separate accounts, reported annually to the Public Administrations.
A.3 DISCLOSURE ON TRANSFERS BETWEEN FINANCIAL ASSET PORTFOLIOS The Bank has not carried out any reclassifications between portfolios measured at fair value and those measured at amortised cost.
A.4 DISCLOSURE ON FAIR VALUE Qualitative information Fair value represents the price at which an asset can be exchanged, or a liability extinguished, between aware and willing parties, in an orderly transaction in a free market context. Substantially fair value is a criterion that presupposes that the entity is carrying on its business normally with no intention to liquidate its assets or to carry out transactions at unfavourable conditions. For financial instruments the fair value is determined according to a hierarchy of criteria in relation to the type and quality of the information used. More specifically three different input levels are identified according to whether the prices for the measurements:
7 For stage 1 positions with residual life of less than one year, expected loss at one year is rendered proportional to the number of months to maturity.
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- are represented by prices for identical assets and liabilities on active markets to which the entity has access; - or are observable directly or indirectly; - or, lastly, not observable.
A.4.1 Fair value levels 2 and 3: measurement techniques and inputs used Fair value of derivative instruments The determination of the fair value of derivatives is based on level 2 input, since they are instruments not quoted on active markets; in particular, the determination of the fair value is based on the spot interest rates curve and on the forward values and the volatility of the monetary market rates. Derivatives in the portfolio, all used for hedging purposes, have the following properties: IRS (receive fixed rate, pay Euribor 6 months) for hedging liabilities. These positions are measured on the basis of the income method; this involves the application of the discounted cash-flow method, which contemplates: - an estimate of the uncertain future interest flows, indexed to the 6-month Euribor parameter, determining the forward values of the parameter implicit in the specific curve of the spot rates at the date of reference; - the discounting of certain future interest flows and future interest flows estimated as indicated above, in order to take into account the time value of money. In terms of assessing counterpart risk, the derivative contracts in question are backed by CSA (Credit Support Annex), with collateral consisting of cash and daily margining: counterparty risk on these positions is considered negligible and therefore no CVA/DVA (Credit Value Adjustment / Debt Value Adjustment) is applied;
Following this approach, the market factors which affect determination of the fair value of derivatives are attributable to risk-free interest rates, EUR IRS interest rates, to the forward values of the 6-month EurLibor. Input data for measurement models: The curve of the discount factors used in determining the fair value is taken from a zero coupon rates curve using as a convention the ACT/365 day count and the compound capitalisation system. In turn, the zero-coupon rate curve is obtained through bootstrap and linear interpolation of the EUR OIS rate curve identified on the market (source: Reuters), as the derivatives are cash collateral, with daily margining 109
and remuneration at the EONIA rate. The forward values of the 6-month EurLibor parameter are calculated on the basis of a zero-coupon rates curve obtained by bootstrap and linear interpolation starting from Futures and Forward Rate Agreement contracts (for securities maturing within 12 months) and from the EUR IRS rates (for subsequent maturities).
A.4.3 Fair value hierarchy With regard to the breakdown of portfolios according to fair value hierarchies, there are three separate levels: - the fair value of the financial instrument is level 1 in the case of instruments listed on active markets which allow reliable use of market prices for their measurement; - the fair value of the financial instrument is level 2 in the case of instruments not listed on active markets, whose fair value can, in any case, be determined by means of valuation models based on market prices; - the fair value of the financial instrument is level 3 in the case of instruments not listed on active markets whose fair value cannot be determined by means of valuation models based on market prices.
To be precise, at present the Bank has the following financial instruments carried at fair value: - financial assets measured at fair value through other comprehensive income represented by Italian government securities listed on a regulated market, which are level 1 since the fair value posted on the financial statements is acquired from active market prices and is available on a price list under a regulatory authority; these prices represent actual market transactions which take place regularly in normal trading; - hedging derivatives, which are level 2 since, although there is no official listing on an active market, active markets exist for the parts of which they are composed and, therefore, the fair value is determined on the basis of the pertinent market prices of their components. Therefore any transfers between the various fair value levels occur in practice only when the markets of reference of which the quotations are adopted in determining the related fair value are closed, or if the quotations give prices for the financial 110
instruments to be measured, which are no longer deemed significant due to the absence of trading or scarce market liquidity. In such cases, full information is given on the date of the event and the related reasons, describing the measurement models adopted (mark to model) in line with the generally accepted methods.
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Quantitative information A.4.5 Fair value hierarchy A.4.5.1 Assets and liabilities carried at fair value on a recurrent basis: breakdown by fair value level The following table shows the breakdown of the financial portfolios on the basis of the aforementioned fair value levels.
Total 31.12.2019 Total 31.12.2018
Assets/financial liabilities carried at fair L1 L2 L3 L1 L2 L3 value Financial assets measured at fair value 1. 1 through profit and loss a) financial assets held for trading b) financial liabilities designated at fair value c) other financial assets obligatorily 0 1 measured at fair value Financial assets measured at fair value 2. 747,966 715,751 through other comprehensive income 3. Hedging derivatives 88,039 82,650 4. Property, plant and equipment 5. Intangible assets Total 747,966 88,039 715,751 82,650 1 1. Financial liabilities held for trading 2. Financial liabilities designated at fair value 3. Hedging derivatives 2,248 Total 2,248
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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A.4.5.4 Assets/liabilities not measured at fair value or measured at fair value on a non- recurring basis: breakdown by fair value level
31.12.2019 31.12.2018
Assets/liabilities not carried at fair value or carried CA L1 L2 L3 CA L1 L2 L3 at fair value on a non-recurrent basis 1. Financial assets measured at amortised cost 1,644,593 1,788,007 1,493,390 1,629,590 2. Property, plant and equipment held for investment Non-current assets and disposal groups held for 3. sale Total 1,644,593 1,788,007 1,493,390 1,629,590 1. Financial liabilities measured at amortised cost 2,113,001 528,363 1,653,067 1,985,601 347,871 1,682,026 2. Liabilities associated with assets held for sale Total 2,113,001 528,363 1,653,067 1,985,601 347,871 1,682,026
Key: CA = Carrying Amount L1 = Level 1 L2 = Level 2 L3 = Level 3
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Part B – Information on the balance sheet
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Assets
Section 1 - Cash and cash equivalents - Item 10
1.1 Cash and cash equivalents: breakdown
Total 31.12.2019 Total 31.12.2018 a) Cash on hand 1 2 b) Demand deposits with Central Banks 1,054 25,017 Total 1,055 25,019
The decrease with respect to the previous year derives from the non-recurring nature of the balance at 31.12.2018, the date on which 25 million used on 2.1.2019 for settlement of ECB auctions was accredited.
Section 2 - Financial assets measured at fair value through profit and loss - Item 20
2.5 Other financial assets obligatorily measured at fair value: breakdown by type
Total 31.12.2019 Total 31.12.2018
Item/Amount L1 L2 L3 L1 L2 L3 1. Debt securities 1.1 Structured securities 1.2 Other debt securities 2. Equity securities 1 Units in collective investment 3. undertakings 4. Loans 4.1 Repurchase agreements 4.2 Other Total 1
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
The item includes the portion due to the Bank of securities subscribed through the FITD Voluntary Scheme following the interventions carried out by the same. These securities are measured at the fair value identified by KPMG Advisory SpA, which was appointed by the Voluntary Scheme.
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2.6 Other financial assets obligatorily measured at fair value: breakdown by debtor/issuer
Item/Amount Total 31.12.2019 Total 31.12.2018 1. Equity securities 1 of which: banks of which: other financial companies 1 of which: non-financial companies 2. Debt securities a) Central Banks b) Public administrations c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies 3. Units in collective investment undertakings 4. Loans a) Central Banks b) Public administrations c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies f) Households Total 1
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Section 3 - Financial assets measured at fair value through other comprehensive income - Item 30
3.1 - Financial assets measured at fair value through other comprehensive income: breakdown
Total 31.12.2019 Total 31.12.2018
Item/Amount L1 L2 L3 L1 L2 L3 1. Debt securities 747,966 715,751 1.1 Structured securities 1.2 Other debt securities 747,966 715,751 2. Equity securities 3. Loans Total 747,966 715,751
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
The portfolio consists solely of Italian government securities (BTP) with a residual life of 2.8 years. The item includes the cumulative fair value change at 31 December 2019, negative for 4.5 million, reduced to 3 million net of the tax effect, mainly determined by the trend in the sovereign spread.
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3.2 Financial assets measured at fair value through other comprehensive income: breakdown by debtor/issuer
Item/Amount Total 31.12.2019 Total 31.12.2018 1. Debt securities 747,966 715,751 a) Central Banks b) Public administrations 747,966 715,751 c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies 2. Equity securities a) Banks b) Other issuers: - other financial companies of which: insurance companies - non-financial companies - other 3. Loans a) Central Banks b) Public administrations c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies f) Households Total 747,966 715,751
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3.3 Financial assets measured at fair value through other comprehensive income: gross value and total value adjustments
Gross value Total value adjustments
of which: Total instruments Stage one Stage two Stage three Stage one Stage two Stage three partial with low write-offs* credit risk Debt securities 748,554 748,554 (588) Loans Total 31.12.2019 748,554 748,554 (588) Total 31.12.2018 716,317 716,317 (566) of which: acquired or originated impaired financial assets
* Values to be shown for informational purposes
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Section 4 - Financial assets measured at amortised cost - Item 40
4.1 Financial assets measured at amortised cost: breakdown of amounts due from banks
Total 31.12.2019 Total 31.12.2018
------
L1 L2 L3 L1 L2 L3
unt
------
Type of transaction/Amount
gethree
impaired impaired
ir Value ir
Sta Stagethree
or originated or originated or
FairValue FairValue FairValue FairValue FairValue Fa
Carryingamount Carryingamount Carryingamo Carryingamount Carryingamount Carryingamount
Stage one and twoStageone and twoStageone and
ofacquired which: ofacquired which:
A. Due from Central Banks 1. Time deposits 2. Mandatory reserve 3. Repurchase agreements 4. Other B. Due from banks 84,724 88,367 62,358 62,358 1. Loans 75,471 75,471 62,358 62,358 1.1 Current accounts and demand deposits 65,267 56,278 1.2. Time deposits 9,667 5,511 1.3. Other loans and advances: 537 569 - Reverse repurchase agreements - Financing for leasing - Other 537 569 2. Debt securities 9,253 12,896 2.1 Structured securities 2.2 Other debt securities 9,253 12,896 Total 84,724 88,367 62,358 62,358
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
The sub-item Debt securities includes the Tier II subordinated bond loan 2019 - 2029 issued by Banca Carige, subscribed by MCC for a nominal value of € 12 million.
For better comparison, certain trade receivables totalling € 152,000 were reclassified in sub-item "other receivables and other entries" from other assets at 31 December 2018, where they had been recognised among due from banks in the annual financial statements at 31 December 2018.
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4.2 Financial assets measured at amortised cost: breakdown of amounts due from customers
Total 31.12.2019 Total 31.12.2018
------
2
L1 L L3 L1 L2 L3
------e e
Type of transaction/Amount
impaired impaired
Stagethree Stagethree
or originated or originated or
FairValue FairValue FairValu FairValue FairValue FairValue
Carryingamount Carryingamount Carryingamount Carryingamount Carryingamount Carryingamount
Stage one and twoStageone and twoStageone and
ofacquired which: ofacquired which:
1. Loans 1,478,545 53,817 1,670,566 1,367,681 63,198 1,567,080 1.1. Current accounts 4,578 5,559 1.2. Reverse repurchase agreements 1.3. Mortgage loans 1,252,008 53,817 1,221,798 63,198 1.4. Credit cards, personal loans and salary-backed 3,503 2,666 loans 1.5. Financing for leasing 1.6. Factoring 59,873 141 1.7. Other loans 158,583 137,517 2 Debt securities 27,507 29,074 2.1. Structured securities 2.2. Other debt securities 27,507 29,074 Total 1,506,052 53,817 1,699,640 1,367,681 63,198 1,567,080
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
For the breakdown and change in the item with respect to 2018, please see the Report on Operations - Financial aggregates. In particular, the item "Other loans" indicated above, equal to 158,583 thousand, includes: • Subsidies granted of 76,830 thousand; • Receivables from the vehicle company of 16,843 thousand; • Receivables from Public Administrations, for fees earned and to be collected for services rendered in managing public subsidies of 64,538 thousand; • Receivables for advances on invoices of 10,000; • Other receivables of 362,000.
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4.3 Financial assets measured at amortised cost: breakdown of amounts due from customers by debtor/issuer
Total 31.12.2019 Total 31.12.2018
of which: of which: acquired or acquired or Stage one Stage one Type of transaction/Amount Stage three originated Stage three originated and two and two impaired impaired assets assets 1. Debt securities 27,507 a) Public administrations b) Other financial companies 26,529 of which: insurance companies c) Non-financial companies 978 2. Loans to: 1,478,545 53,817 1,367,681 63,198 a) Public administrations 64,555 66,562 b) Other financial companies 68,895 54,004 of which: insurance companies c) Non-financial companies 986,751 48,979 853,715 58,665 d) Households 358,344 4,838 393,400 4,533 Total 1,506,052 53,817 1,367,681 63,198
The item Debt securities - Other financial companies includes ABS securities issued by securitisation vehicles, as part of basket bond transactions.
4.4 Financial assets measured at amortised cost: gross value and total value adjustments
Gross value Total value adjustments
of which: instruments Stage Stage Total partial Stage one Stage two Stage one Stage two with low three three write-offs* credit risk Debt securities 39,592 (2,832) Loans 1,453,536 114,054 134,840 (7,917) (5,657) (81,023) Total 31.12.2019 1,493,128 114,054 134,840 (10,749) (5,657) (81,023) Total 31.12.2018 1,291,784 154,661 135,311 (8,269) (7,984) (72,113)
(*) Values to be shown for informational purposes
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Section 5 - Hedging derivatives - Item 50
5.1 - Hedging derivatives: breakdown according to type of hedge and level
FV 31.12.2019 FV 31.12.2018
NV NV L1 L2 L3 L1 L2 L3 31.12.2019 31.12.2018 A. Financial derivatives 88,039 151,421 82,650 288,583 1) Fair value 88,039 151,421 82,650 288,583 2) Cash flows 3) Foreign investments B. Credit derivatives 1) Fair value 2) Cash flows Total 88,039 151,421 82,650 288,583
Key: NV=notional value L1 = Level 1 L2 = Level 2 L3 = Level 3
Hedging derivatives are all related to funding obtained with bond issues.
5.2 Hedging derivatives: breakdown according to portfolios hedged and type of hedge
Fair value - specific Fair value Cash flows
indexes
Transaction/type of hedge ciesand
gold
other
Micro
Macro Macro
Foreign
ren
loansand
receivables
Investments
commodities
interestrates
cur
equitysecurities
and share debtsecurities and
Financial assets measured at fair value through other 1. comprehensive income 2. Financial assets measured at amortised cost 3. Portfolio 4. Other transactions Total assets 1. Financial liabilities 2. Portfolio 88,039 Total liabilities 88,039 1. Expected transactions 2. Portfolio of financial assets and liabilities
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Section 7 - Equity investments - Item 70
7.1 Equity investments: information on equity investment relationships
Name Registered office Operating office Stake held % Available votes A. Fully held companies 0 0 B. Jointly controlled companies 0 0 C. Companies subject to significant influence 0 0 Istituto della Enciclopedia Italiana fondata da Giovanni Rome, Piazza Rome, Piazza 0.890 Treccani S.p.A. dell'Enciclopedia 4 dell'Enciclopedia 4
7.4 Insignificant equity investments: accounting information
after after
ome
Name nts
tax
tax(2)
aftertax
of equity
continuing
the year (1) theyear
Total assets
investments
Otherinc
Total liabilities
Total revenues
Profitfor (Loss) Comprehensive
operations after operationsafter
Carryingamount
Profit from (Loss) Profit from (Loss) compone
income(3)=(1)+(2) ceasedoperations
A. Fully held companies B. Jointly controlled companies C. Companies subject to significant influence Istituto della Enciclopedia Italiana fondata da Giovanni 600 149,660 82,391 53,390 (1,663) 282 282 Treccani S.p.A.
The figures shown in the table refer to the most recently approved financial statements (31.12.2018): on the basis of the information available, there is no evidence of impairment.
7.5 Equity investments: annual change
Total 31.12.2019 Total 31.12.2018 A. Opening balance 600 600 B. Increases B.1 Purchases B.2 Write-backs B.3 Revaluations B.4 Other changes C. Decreases C1. Sales C.2 Value adjustments C.3 Impairment C.4 Other changes D. Closing balance 600 600 E. Total revaluations F. Total adjustments
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Section 8 - Property, plant and equipment - Item 80
8.1 Property, plant and equipment for business use: breakdown of assets carried at cost
Asset/Amount Total 31.12.2019 Total 31.12.2018 1. Owned assets 400 626 a) land b) buildings c) furniture and fixtures 190 292 d) electronic equipment 181 245 e) other 29 89 2. Rights of use acquired with leasing 17,854 a) land b) buildings 17,677 c) furniture and fixtures d) electronic equipment e) other 177 Total 18,254 626
The item is made up of the furniture, fixtures and equipment needed for the Bank’s operations. Rights of use, recognised on the basis of the new accounting standard IFRS 16, mainly refer to real estate leasing contracts, including that for the Bank's registered offices, and to leasing contracts for company vehicles provided to employees for free use.
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8.6 Property, plant and equipment for business use: annual changes
Electronic Land Buildings Furniture Other Total equipment A. Gross opening balance 1,628 795 538 2,961 A.1 Total net write-downs 1,336 550 450 2,336 A.2 Net opening balance 292 245 88 625 B. Increases: 4 40 6 50 B.1 Purchases 4 40 6 50 B.2 Capitalised improvement costs B.3 Write-backs B.4 Positive fair value changes a) equity b) income statement B.5 Exchange gains B.6 Transfers from property held for investment B.7 Other changes C. Decreases: 106 104 65 275 C1. Sales C.2 Amortisation 106 104 65 275 C.3 Value adjustments on a) equity b) income statement C.4 Negative fair value changes a) equity b) income statement C.5 Exchange losses C.6 Transfers to: a) property, plant and equipment held for investment b) non-current assets and disposal groups held for sale C.7 Other changes D. Net closing balance 190 181 29 400 D.1 Total net write-downs 1,442 653 515 2,610 D.2 Gross closing balance 1,632 834 544 3,010 E. Measured at cost
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8.6-Bis Rights of use acquired with leasing: annual changes
Electronic Land Buildings Furniture Other Total equipment A. Gross opening balance A.1 Total net write-downs A.2 Net opening balance B. Increases: 29,862 233 30,095 B.1 Purchases 17,875 195 18,070 B.2 Capitalised improvement costs B.3 Write-backs 11,987 38 12,025 B.4 Positive fair value changes booked to a) equity b) income statement B.5 Exchange gains B.6 Transfers from property held for investment B.7 Other changes C. Decreases: 12,185 56 12,241 C1. Sales C.2 Amortisation 1,389 55 1,444 C.3 Value adjustments due to impairment recognised in a) equity b) income statement C.4 Negative fair value changes booked to a) equity b) income statement C.5 Exchange losses C.6 Transfers to: a) property, plant and equipment held for investment b) non-current assets and disposal groups held for sale C.7 Other changes 10,796 1 10,797 D. Net closing balance 17,677 177 17,854 D.1 Total net write-downs 858 55 913 D.2 Gross closing balance 18,535 232 18,767 E. Measured at cost
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Section 9 - Intangible assets - Item 90
9.1 Intangible assets: breakdown by type
Total 31.12.2019 Total 31.12.2018
Asset/Amount Finite life Indefinite life Finite life Indefinite life A.1 Goodwill A.2 Other intangible assets 1,913 1,998 A.2.1 Assets carried at cost: 1,913 1,998 a) Intangible assets generated internally b) Other assets 1,913 1,998 A.2.2 Assets carried at fair value: a) Intangible assets generated internally b) Other assets Total 1,913 1,998
The item comprises exclusively software. To develop and manage its software, the Bank uses an IT consortium, which means it has a limited need to invest in the same.
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9.2 Intangible assets: annual changes
Other intangible assets: Other intangible assets: generated internally other
Goodwill FIN INDEF FIN INDEF Total A. Opening balance 5,271 5,271 A.1 Total net write-downs 3,273 3,273 A.2 Net opening balance 1,998 1,998 B. Increases 855 855 B.1 Purchases 855 855 B.2 Increases in internal intangible assets B.3 Write-backs B.4 Positive fair value changes: - in equity - in income statement B.5 Exchange gains B.6 Other changes C. Decreases 940 940 C1. Sales C.2 Value adjustments 923 923 - Amortisation 923 923 - Impairment: + equity + income statement C.3 Negative fair value changes: - in equity - in income statement C.3 Transfer to non-current assets held for sale C.5 Exchange losses C.6 Other changes 17 17 D. Net closing balance 1,913 1,913 D.1 Total net value adjustments 1,967 1,967 E. Gross closing balance 3,880 3,880 F. Measured at cost
Key: FIN = finite life INDEF = indefinite life
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Section 10 – Tax assets and liabilities – Asset Item 100 and Liability Item 60
10.1 Deferred tax assets: breakdown
Amount
Asset/Amount 31.12.2019 31.12.2018 1. Deferred tax assets Write-downs of loans 8,179 7,736 Other financial instruments 1,314 4,753 Property, plant and equipment and intangible assets 17 17 Provisions for risks and charges 2,783 2,273 Other assets/liabilities 87 74 Total 12,381 14,853
Deferred tax assets totalled 12,381 thousand, a contraentry of 10,328 thousand was recognised in the income statement and a contraentry of 2,053 thousand in equity.
10.2 Deferred tax liabilities: breakdown
Amount
Asset/Amount 31.12.2019 31.12.2018 1. Deferred tax liabilities Other financial instruments 23 14 Other assets/liabilities 60 94 Total 83 108
Deferred tax liabilities are all recognised as a contra entry in equity.
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10.3 Changes in deferred tax assets (recognised in the income statement)
Total 31.12.2019 Total 31.12.2018 1. Opening balance 9,443 8,983 2. Increases 1,916 3,045 2.1 Deferred tax assets recognised during the year 1,916 3,045 a) relating to previous years 11 b) due to change in accounting policies 2,206 c) write-backs d) other 1,916 828 2.2 New taxes or increases in tax rates 2.3 Other increases 3. Decreases 1,031 2,585 3.1 Deferred tax assets derecognised in the year 1,031 2,585 a) reversals 1,030 2,585 b) write-downs for supervening non-recoverability c) change in accounting policies d) other 1 3.2 Reductions in tax rates 3.3 Other decreases: a) transformation into tax credits pursuant to Italian Law 214/2011 b) other 4. Closing balance 10,328 9,443
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10.3-bis Changes in prepaid taxes pursuant to Italian Law 214/2011
Total 31.12.2019 Total 31.12.2018
1. Opening balance 5,436 5,436 2. Increases 3. Decreases 3.1 Reversals 3.2 Transformation into tax credits a) deriving from losses for the year b) deriving from tax losses 3.3 Other decreases 4. Closing balance 5,436 5,436
Deductibility of impairment and losses on loans
The regime pursuant to Law 83 of 27 June 2015, converted with Law 132 of 6 August 2015, introduced changes in relation to the deductibility of impairment and losses on loans of financial and credit institutions. In particular, in financial year 2016 impairment and losses on loans to customers recognised in the financial statements and losses incurred following sales for a consideration are fully deductible, for IRES and IRAP purposes, in the year in which they are recognised, while impairment not deducted at 31 December 2015 can be deducted by 31.12.2025 based on specific annual rates. As a consequence, deferred tax assets pursuant to the table above will no longer increase as a result of the full deductibility of write-downs on loans. The current amount will be progressively recovered in tax returns through to financial year 2025. Italian Law 216/2016 ensured the compatibility of DTAs (Deferred Tax Assets) with the European rules on State aid. In particular the possibility of converting qualified DTAs (related to: write-downs of loans, goodwill and other intangible assets) into tax credits was introduced for banks but only exercising an option that provides for payment of an annual fee. The Bank made use of the option, and therefore continues to not deduct DTAs from calculation of Own Funds. The deduction of the 2019 portion was deferred by the 2020 Budget Law (no. 160 of 27/12/2019) with the following methods: - At constant rates for the tax period in effect at 31/12/2022 and the three subsequent ones with regards to the 12% portion established under Decree Law 83/2015; - For the tax period in effect at 31/12/2028 relative to the 10% portion established under Law 145/2018 (FTA IFRS9). 132
10.5 Changes in deferred tax assets (with contra entry in shareholders’ equity)
Total 31.12.2019 Total 31.12.2018
1. Opening balance 5,410 3,009 2. Increases 90 2,492 2.1 Deferred tax assets recognised during the year 90 2,492 a) relating to previous years b) due to change in accounting policies c) other 90 2,492 2.2 New taxes or increases in tax rates 2.3 Other increases 3. Decreases 3,446 91 3.1 Deferred tax assets derecognised in the year 3,446 91 a) reversals 3,439 91 b) write-downs for supervening non-recoverability c) due to change in accounting policies d) other 7 3.2 Reductions in tax rates 3.3 Other decreases 4. Closing balance 2,054 5,410
10.6 Changes in deferred tax liabilities (recognised in shareholders’ equity)
Total 31.12.2019 Total 31.12.2018
1. Opening balance 108 125 2. Increases 9 2.1 Deferred tax liabilities recognised in the year 9 a) relating to previous years b) due to change in accounting policies c) other 9 2.2 New taxes or increases in tax rates 2.3 Other increases 3. Decreases 34 17 3.1 Deferred tax liabilities derecognised during the year 34 17 a) reversals 34 17 b) due to change in accounting policies c) other 3.2 Reductions in tax rates 3.3 Other decreases 4. Closing balance 83 108
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Section 12 - Other assets - Item 120
12.1 Other assets: breakdown
Amount
Asset/Amount 31.12.2019 31.12.2018 1. Expenses for costs incurred on third-party assets 2,713 4,057 2. Loans and receivables to be invoiced 549 296 4. Other receivables and other entries 863 619 5. Tax receivables 4,210 3,803 6. Receivables due from the parent company 438 355 8. Prepaid expenses 732 1,163 Total 9,506 10,293
For better comparison, certain trade receivables totalling € 152,000 were reclassified in sub-item "other receivables and other entries" from other assets at 31 December 2018, where they had been recognised among due from banks in the annual financial statements at 31 December 2018.
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Liabilities
Section 1 - Financial liabilities measured at amortised cost - Item 10
1.1 Financial liabilities measured at amortised cost: breakdown of amounts due to banks
Total 31.12.2019 Total 31.12.2018
Carrying Fair Value - Fair Value - Fair Value - Carrying Fair Value - Fair Value - Fair Value - Type of transaction/Amount amount L1 L2 L3 amount L1 L2 L3 1. Due to central banks 320,504 396,822 2. Due to banks 173,884 495,931 2.1 Current accounts and demand deposits 0 0 2.2 Time deposits 2.3 Loans and advances 83,573 404,013 2.3.1 Repurchase agreements 42,044 199,002 2.3.2 Other 41,529 205,011 2.4 Payables for commitments to repurchase own equity instruments 2.5 Payables for leasing 2.6 Other payables 90,311 91,918 Total 494,388 489,064 892,753 888,194
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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1.2 Financial liabilities measured at amortised cost: breakdown of amounts due to customers
Total 31.12.2019 Total 31.12.2018
Carrying Fair Value - Fair Value - Fair Value - Carrying Fair Value - Fair Value - Fair Value - Type of transaction/Amount amount L1 L2 L3 amount L1 L2 L3 1. Current accounts and demand deposits 582,219 391,214 2. Time deposits 496,281 334,315 3. Loans 53,692 59,641 3.1 Repurchase agreements 3.2 Other 53,692 59,641 Payables due to commitments to repurchase own 4. equity instruments 5. Payables for leasing 18,323 6. Other payables 10,853 10,980 Total 1,161,368 1,164,003 796,150 793,832
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
This item, which rose by 365 million with respect to 31 December 2018, reflects the consolidation of actions undertaken by the Bank on the funding market, intended to diversify its funding sources, also through offers aimed at corporate counterparties. Also note the increase in funding from public administrations, in part thanks to the opening of current accounts for liquidity coming from subsidy measures managed by the parent company Invitalia S.p.A. Leasing payables, which represent the current value of future rents to be paid, are recognised for the first time in application of the new accounting standard IFRS 16.
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1.3 Financial liabilities measured at amortised cost: breakdown of securities issued
Total 31.12.2019 Total 31.12.2018
Carrying Fair Value - Fair Value - Fair Value - Carrying Fair Value - Fair Value - Fair Value - Type of transaction/Amount amount L1 L2 L3 amount L1 L2 L3 A. Securities 1. bonds 457,245 528,363 296,699 347,871 1.1 structured 1.2 other 457,245 528,363 296,699 347,871 2. other securities 2.1 structured 2.2 other Total 457,245 528,363 296,699 347,871
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
Securities issued consist of:
- € 158.5 million relative to a residual bond loan listed on the MOT, issued on 9 February 1998 and maturing on 10 February 2028; - € 298.7 million relative to a “social” bond loan (unsecured senior preferred), listed on the Luxembourg Stock Exchange, for a total amount of € 300 million (excluding transaction costs), with an annual fixed rate of 1.5%, issued on 24 October 2019 and maturing on 24 October 2024.
1.6 Payables for leasing
Below is the analysis of leasing payables, broken down by expiration dates (IFRS 16, paragraph 58):
From over 3 From over 6 From over 1 From over 5 Up to 3 More than months to 6 months to 1 year to 5 years to 10 Total months (*) 10 years months year years years
Payables for leasing 342 180 377 3,915 6,768 6,741 18,323 (*) Includes accrued expenses of € 178,000.
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Section 4 - Hedging derivatives - Item 40
4.1 Hedging derivatives: breakdown by type of hedge and hierarchical level
NV NV Fair value 31.12.2019 Fair value 31.12.2018 31.12.2019 31.12.2018
L1 L2 L3 L1 L2 L3
A. Financial derivatives 300,000 2,248 1) Fair value 300,000 2,248 2) Cash flows 3) Foreign investments B. Credit derivatives 1) Fair value 2) Cash flows Total 300,000 2,248
Key: NV: notional value L1 = Level 1 L2 = Level 2 L3 = Level 3
4.2 Hedging derivatives: breakdown according to portfolios hedged and type of hedge
Fair value - specific Fair value Cash flows
Transaction/type of hedge ign
gold
other
Micro
Macro Macro
Fore
loansand
receivables
investments
commodities
interestrates
currenciesand
equitysecurities
andindexes share debtsecurities and
Financial assets measured at fair value through other 1. comprehensive income 2. Financial assets measured at amortised cost 3. Portfolio 4. Other transactions Total assets 1. Financial liabilities 2. Portfolio 2,248 Total liabilities 2,248 1. Expected transactions 2. Portfolio of financial assets and liabilities
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Section 5 - Value adjustments of financial liabilities with macro hedging - item 50
5.1 Value adjustments of hedged financial liabilities: breakdown by portfolios hedged
Value adjustment of hedged liabilities/Amount Total 31.12.2019 Total 31.12.2018 1. Positive adjustment of financial liabilities 80,341 73,789 2. Negative adjustment of financial liabilities (2,160) Total 78,181 73,789
This item reflects the changes in discount rates with respect to the previous year, in addition to changes in the underlying financial liabilities.
Section 6 - Tax liabilities - Item 60
See section 10 of the assets.
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Section 8 - Other Liabilities - Item 80
8.1 Other liabilities: breakdown
Amount
Asset/Amount 31.12.2019 31.12.2018 1. Due to the parent company 635 586 2. Due to the parent company for tax consolidation 1,134 3. Social security charges 935 893 4. Trade payables 1,364 1,360 5. Payables for invoices to be received 6,279 3,855 6. Payables to personnel 1,692 1,492 7. Security deposits 30 8. Payables to public administrations 7,924 5,164 7. Sundry payables 1,482 315 9. Tax payables for indirect taxes 2,377 2,096 10. Accrued expense and deferred income 105 91 Total 23,957 15,852
The increase is mainly due to greater concentration of orders to suppliers near the end of the financial year. Additionally, in application of the tax consolidation agreement with the parent company, IRES payables are classified in this item.
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Section 9 - Employee severance benefits - Item 90
9.1 Employee severance indemnity: annual changes
Total 31.12.2019 Total 31.12.2018 A. Opening balance 3,163 3,260 B. Increases 150 96 B.1 Provisions in the year 27 33 B.2 Other changes 123 63 C. Decreases 192 193 C.1 Payments made 192 193 C.2 Other changes D. Closing balance 3,121 3,163 Total 3,121 3,163
9.2 Other Information
The Bank’s provisions for employee severance benefits from 1 January 2007 are no longer increased by the annual amount set aside for the participants, because on the basis of the employees’ choice the same are put into a special Treasury fund set up by the INPS or into a complementary pension fund. As the indemnity represents a post-employment benefit, it is recognised on the basis of its actuarial value taking into account the appraisal carried out by an independent expert. The costs of the period are posted under personnel costs and actuarial gains and losses are posted as a contra item in equity. At 31 December 2019 the cumulative actuarial gains recognised in equity amounted to 308,000, while the related deferred taxation recognised as a reduction amounted to 85,000. During the period, actuarial gains decreased by 123,000. Specifically, the negative fair value changes refer for 7,000 to changes associated with collective measurements (new entries, resignations, etc.), compensated for by a change in the opposite direction of 130,000 relative to financial and demographic assumptions.
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Section 10 - Provisions for risks and charges - Item 100
10.1 Provisions for risks and charges: breakdown
Item/Amount Total 31.12.2019 Total 31.12.2018 1. Provisions for credit risks relative to financial commitments and guarantees issued 1,712 581 2. Provisions for other commitments and guarantees given 3. Company pension funds 3,323 3,287 4. Other provisions for risks and charges 3,256 2,688 4.1 legal and tax disputes 234 234 4.2 personnel expenses 2,734 2,030 4.3 other 288 424 Total 8,291 6,556
10.2 Provisions for risks and charges: annual changes
Provisions for Other provisions other Pension funds for risks and Total commitments and charges guarantees given A. Opening balance 3,287 2,688 5,975 B. Increases 308 2,328 2,636 B.1 Provisions in the year 37 2,328 2,365 B.2 Changes due to passage of time B.3 Changes due to changes in discount rate B.4 Other changes 271 271 C. Decreases 272 1,760 2,032 C.1 Use during the year 272 1,568 1,840 C.2 Changes due to changes in discount rate C.3 Other changes 192 192 D. Closing balance 3,323 3,256 6,579
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10.3 Provisions for credit risks relative to financial commitments and guarantees issued
Provisions for credit risks relative to financial commitments and guarantees issued
Stage one Stage two Stage three Total
1. Commitments to disburse funds 973 380 300 1,653 2. Financial guarantees given 60 60 Total 973 440 300 1,713
The table shows adjustment provisions associated with irrevocable commitments, broken down by stage, relative to loans stipulated and unsecured loans granted.
10.5 Defined-benefit company pension funds
Illustration of the features of the funds and of the related risks
The company’s pension fund posted on the Financial Statements since 1982 regards the management of the remaining balance of the complementary pension fund, related to a minority of retired employees who at the time voted against liquidation. At 31 December, participants in this fund included only 8 pensioners and no active employees.
10.6 Provisions for risks and charges - other provisions
Legal disputes
Specific allocations have been made for a labour lawsuit and three disputes with customers. There are also other disputes with customers and another tax dispute (further information is given below) for which no allocations have been made since at present the cost is unknown and the cases are expected to be won by the Bank. We can also note that several other tax disputes and disputes with customers, as the result of agreements with contractual counterparties in the context of extraordinary operations (business unit spin-offs or sales, termination of a series of legal agreements) agreed between 1 July 2008 and 1 September 2010 with companies of the UniCredit Group, are substantially the responsibility of these latter, although the Bank may still be involved in the proceedings. Lastly, in relation to subsidies managed by the Bank on the account of public administrations, there are several disputes with no relative provisions, in that any adverse judgements would be payable by the public administrations and therefore sustained through the available balances managed. 143
Notification of IRES assessment for financial year 2008
In December 2011, on conclusion of a general inspection by the Revenues Agency regarding the year 2008, the Bank was served a Report of Findings which challenged the deductibility of the costs incurred in 2008—for a total of € 19.6 million—for transactions concluded for current and potential disputes with the Parmalat Group. In relation to this dispute, following observations sent by the Bank on 29 February 2012, no notification of assessment has been received from the Revenues Agency. The said Report of Findings also assessed the Bank as having a taxable income of € 16.2 million, pursuant to art. 37 bis of Italian Presidential Decree 600/73, resulting from a reorganisation operation of the credit recovery sector, gained from the sale on the part of the Bank and other companies of the UniCredit Group of non- performing positions in the factoring and loans segment to a subsidiary of the then parent company UniCredit S.p.A. Following the Report of Findings in 2012 the Lazio Regional Head Office of the Revenues Agency charged the Bank and UniCredit S.p.A., pursuant to art. 37 bis, for deducting losses resulting from the sale of the non performing positions. An appeal lodged against this charge by UniCredit SpA and the Bank was accepted by the Rome Provincial Tax Commission on 2 October 2014. In May 2015, the Revenues Agency lodged an appeal. The hearing for discussion was held on 10 May 2016 with judgement filed on 13 June with a positive result as in the first instance. On 13 January 2017, the Revenues Agency lodged an appeal with the Court of Cassation. UniCredit, as the consolidating entity, presented a request for facilitated settlement pursuant to article 6 of Decree Law 119 of 23 October 2018, relative to the judgement originally made by the bank jointly with MCC, as well as a request to suspend the judgement until 31 December 2020, formulated pursuant to paragraph 10 of the aforementioned article 6. In this regard, as for the previous year, the Bank decided not to set aside any provisions for risks and charges, as these are expenses, obligations and responsibilities referable to the Corporate Business Unit, already demerged to UCCB SpA (now UniCredit SpA) on 01 September 2010 and, therefore, of exclusive pertinence to the former parent company UniCredit S.p.A.
144
Personnel expenses
The provision includes direct and indirect charges relative to production bonuses/incentives which on the basis of subsequent resolutions or trade union agreements will have to be paid to personnel, as well as the allocation for restructuring charges, equal to 1.3 million, initially approved by the Board of Directors in 2017 and most recently in February 2020, following regulatory changes relative to the pension situation aimed at guaranteeing the redefinition of the organisational structure.
Other
The item includes Provisions for liabilities attributable essentially to operational risks deriving from the management of public subsidies (238,000), to the estimated value of liabilities related to irrevocable commitments—assumed between 2007 and 2008—following changes in market conditions, in terms of cost of funding (49,000).
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Section 12 - Capital - Items 110, 130, 140, 150, 160, 170 and 180
12.1 “Share capital” and “Treasury shares”: breakdown
Paid-up share capital € 204,508,690 represented by 40,901,738 ordinary shares with a value of € 5 each.
12.2 Share capital - Number of shares: annual changes
Items/Types Ordinary Other A. Shares outstanding at start of period 40,901,738 - fully paid up 40,901,738 - not fully paid up A.1 Own shares (-) A.2 Shares outstanding: opening balance B. Increases B.1 New issues - against payment: - business combinations - bond conversion - exercise of warrants - other - free of charge: - to employees - to directors - other B.2 Sale of own shares B.3 Other changes C. Decreases C.1 Cancellation C.2 Purchase of own shares C.3 Disposal of companies C.4 Other changes D. Shares outstanding: closing balance 40,901,738 D.1 Own shares (+) D.2 Shares at end of the year 40,901,738 - fully paid up 40,901,738 - not fully paid up
12.3 Share capital: other information
Share capital is subscribed by the sole shareholder Invitalia S.p.A. for an amount of € 204,508,690 made up of 40,901,738 shares of € 5 each.
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12.4 Profit reserves: other information
Amount
Item/Amount 31.12.2019 31.12.2018 1. Legal reserve 25,461 24,451 2. Extraordinary reserve 66,881 47,689 3. UniCredit Infrastrutture merger surplus reserve 826 826 4. Negative reserve for sales to companies in the UniCredit group (16,355) (16,355) 5. Positive reserve for sales to companies in the UniCredit group 72 72 6. FTA IFRS 9 reserve (5,494) (5,494) Total 71,390 51,189
1. The legal reserve, made up of net income, can be used to cover losses. 2. The extraordinary reserve, composed of profit reserves, can be used to cover losses, for capital increases and for shareholder distributions. 3. The reserve from the merger of UniCredit Infrastrutture can be used to cover losses, for capital increases and for shareholder distributions. The reserve is made up of paid-up share capital of € 695,000 and, for the remainder, the income reserves of the company taken over in 2008. 4. The negative reserve includes capital losses incurred in 2008 subsequent to the sale of the non-performing positions to the company Aspra Finance, within the sphere of the overall restructuring of the non-performing loan department of the UniCredit Group. 5. The positive reserve derives from the sale, in 2010, of the Information Technology branch to the company UGIS belonging to the UniCredit Group. 6. The FTA IFRS 9 was established following initial application of the new international accounting standard relative to recognition of financial assets.
12.6 Other information
Amount
Item/Amount 31.12.2019 1. Actuarial gains on Employees’ Severance Indemnity Provision 224 2. Actuarial losses on Company pension funds (1,485) 3. Negative reserve for financial assets measured at fair value through other comprehensive income (2,614) Total (3,875)
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Other information
1. Financial commitments and guarantees given not designated at fair value
Nominal value of financial commitments and guarantees given
Stage one Stage two Stage three Total 31.12.2019 Total 31.12.2018 1. Commitments to disburse funds 123,239 20,477 1,743 145,459 99,298 a) Central Banks b) Public administrations 200 c) Banks d) Other financial companies 4,117 4,117 e) Non-financial companies 118,926 20,477 1,743 141,146 99,048 f) Households 196 196 50 2. Financial guarantees given 5,000 5,000 3,688 a) Central Banks b) Public administrations c) Banks d) Other financial companies e) Non-financial companies 5,000 5,000 3,688 f) Households
Irrevocable commitments to disburse funds to customers consist of loans contracted for disbursement of 145,459 thousand. Guarantees given to customers in the amount of 5,000 thousand refer to commercial unsecured loans.
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2. Other commitments and guarantees given
Nominal value
Total 31.12.2019 Total 31.12.2018 1. Other guarantees given 9 3 of which: impaired a) Central Banks b) Public administrations c) Banks 9 3 d) Other financial companies e) Non-financial companies f) Households 2. Other commitments of which: impaired a) Central Banks b) Public administrations c) Banks d) Other financial companies e) Non-financial companies f) Households
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3. Assets lodged as guarantee for own liabilities and commitments
Amount Amount Portfolios 31.12.2019 31.12.2018
1. Financial assets measured at fair value through profit and loss 2. Financial assets measured at fair value through other comprehensive income 101,098 436,532 3. Financial assets measured at amortised cost 599,631 454,971 4. Property, plant and equipment of which: inventory
Specifically, the item includes:
− Financial assets measured at fair value through other comprehensive income:
✓ 42,123 thousand relative to repurchase agreements (recognised under item P10, see Section 1.-1.1 of the Liabilities); ✓ 54,297 thousand relative to Eurosystem financing transactions with the ECB (recognised under item P10, see Section 1.-1.1 of the Liabilities); ✓ 2,507 thousand relative to guarantees given to public administrations for activities carried out on their account to disburse subsidies to companies; ✓ 2,171 thousand relative to commitments associated with the internal social security fund (recognised under item P100, see Section 10.-10.1, point 3);
− Financial assets measured at amortised cost:
✓ 359,348 thousand relative to lending contracts transferred as a guarantee to the ECB, in the context of Eurosystem refinancing transactions; ✓ 142,411 thousand in favour of the ECB relative to the nominal value of an ABS security, subscribed following the securitisation of a portfolio of residential mortgages in 2016, valued by the ECB at 129,998 thousand; ✓ 58,935 thousand relative to loan transactions given to guarantee CDP funding; ✓ 38,860 thousand relative to loan transactions given to guarantee BEI funding; ✓ 77,000 relative to time deposits associated with Bank operations.
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4. Management and intermediation services for customer accounts
Type of services Amount 1. Execution of orders on behalf of customers a) purchases 1. settled 2. not settled b) sales 1. settled 2. not settled 2. Individual portfolio management a) individual b) collective 3. Securities custody and administration 862,330 a) third-party securities deposited: connected with the role of depositary bank (excluding portfolio management) 1. securities issued by the bank which prepares the Financial Statements 2. other securities b) third-party securities deposited (excluding portfolio management): other 1. securities issued by the bank which prepares the Financial Statements 2. other securities c) third-party securities deposited with third parties d) securities owned by bank deposited with third parties 862,330 4. Other transactions 6,550,241
With reference to point 4. Other transactions from the table above, below are the balances at 31 December 2019 for the main funds managed by MCC using separate accounting on the basis of specific agreements with the national government and the regions:
Other transactions Amount
Guarantee fund Law 23/12/1996 662 c/o Mediocredito Centrale 6,377,667
of which deposited with the Treasury of the State 6,365,578
Sustainable Growth Fund Decree Law 22/06/12 83, article 23, paragraph 2 95,519
Fund Law 23/12/00 art. 106 c/o Mediocredito Centrale 32,499
of which deposited with the Treasury of the State 32,252
Fund Law 23/12/1997 454 c/o Mediocredito Centrale 1,453
Fund of funds for national research and innovation operating program 2014-2020 558
Management of Single Fund Marche Region portion 8,509
Management of Single Fund Liguria Region portion 8,757
Law 488 RTI (MCC/BDS/IRFIS) MAP (now Ministry of Education) 7,428
Other provisions 17,851
Total 6,550,241 151
5. Financial assets offset in the financial statements or subject to offsetting framework agreements or similar agreements.
Related amounts not subject to netting in the financial statements
Amount of Net amount financial of financial Gross Cash liabilities assets Financial Net amount amount of deposits Net amount Technical type offset in recognised instruments 31.12.2019 financial received as 31.12.2018 financial in financial (d) (f=c-d-e) assets (a) collateral (e) statements statements (b) (c=a-b) 1. Derivatives 85,791 85,791 85,791 390 2. Repurchase agreements 3. Securities lending 4. Other Total 31.12.2019 85,791 85,791 85,791 Total 31.12.2018 82,650 82,650 82,260 390
The amounts in the table refer to hedging derivative contracts taken out with a bank counterparty for which a credit support annex (CSA) was drawn up. The contract contemplates making a deposit, in this case exclusively in cash, to guarantee the loan resulting from the fair value of the derivatives, the value of which is adjusted according to changes in the fair value of the said contracts. The contract stipulated according to the ISDA standard allows, in the case of default by either party, offsetting of the positions in derivatives and the use of the deposit constituted as guarantee.
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6. Financial assets offset in the financial statements or subject to offsetting framework agreements or similar agreements.
Related amounts not subject to netting in the financial statements
Amount of Net amount financial of financial Gross Cash liabilities assets Financial Net amount amount of deposits Net amount Technical type offset in recognised instruments 31.12.2019 financial given as 31.12.2018 financial in financial (d) (f=c-d-e) liabilities (a) collateral (e) statements statements (b) (c=a-b)
1. Derivatives 2. Repurchase agreements 42,044 42,044 42,044 3. Securities lending 4. Other Total 31.12.2019 42,044 42,044 42,044 Total 31.12.2018 204,144 204,144 204,089 55
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Part C – Information on the income statement
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Section 1 - Interest - Items 10 and 20
1.1 Interest and similar income: breakdown
Other Total Total Items/Technical types Debt securities Loans transactions 31.12.2019 31.12.2018 Financial assets measured at fair value 1. through profit and loss: 1.1 Financial assets held for trading 1.2 Financial assets designated at fair value 1.3 Other financial assets obligatorily 0 measured at fair value Financial assets measured at fair value 2. 802 802 843 through other comprehensive income Financial assets measured at amortised 3. 350 28,474 28,824 34,089 cost: 3.1 Due from banks 30 5 5 3 3.2 Due from customers 320 28,469 28,819 34,086 4. Hedging derivatives 8,589 8,589 13,276 5. Other assets 39 39 43 6. Financial liabilities 2,592 2,513 Total 1,152 28,474 8,628 40,846 50,764 of which: interest income on impaired 1,641 1,641 financial assets
This item, mainly consisting of interest on the customer loan portfolio, showed a decrease with respect to the previous year, despite loan stock increasing to 1,560 million at 31 December 2019 (from 1,431 million at 31 December 2018), as an effect of pricing renegotiations on already existing transactions with customers and the continual erosion of spreads on new disbursements.
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1.3 Interest and similar expenses: breakdown
Other Total Total Items/Technical types Payables Securities transactions 31.12.2019 31.12.2018 Financial liabilities measured at amortised 1. (5,052) (10,350) (15,402) (18,632) cost 1.1 Due to central banks 1.2 Due to banks (806) (806) (3,208) 1.3 Due to customers (4,246) (4,246) (2,118) 1.4 Securities issued (10,350) (10,350) (13,306) 2. Financial liabilities held for trading 3. Financial liabilities designated at fair value 4. Other liabilities and provisions 5. Hedging derivatives 6. Financial assets (398) (227) Total (5,052) (10,350) (15,800) (18,859) of which: interest payable on leasing (601) (601) payables
1.4 Interest expense and similar income: other information
1.4.2 Interest expense on financial leasing transactions Interest expense relative to leasing payables totals € 601,000, of which 600,000 relative to real estate leases and 1,000 relative to vehicle leases.
1.5 Spreads relating to hedging transactions
Item/Amount Total 31.12.2019 Total 31.12.2018 A. Positive spreads relating to hedging transactions 8,589 13,276 B. Negative spreads relating to hedging transactions C. Balance (A-B) 8,589 13,276
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Section 2 - Fees and commissions - Items 40 and 50
2.1 Fee and commission income: breakdown
Type of service/Amount Total 31.12.2019 Total 31.12.2018 a) guarantees given 23 22 b) credit derivatives c) management, broking and consultancy services: 1. financial instrument trading 2. foreign currency trading 3. individual portfolio management 4. custody and administration of securities 5. depositary bank 6. securities placement 7. receiving and transmitting orders 8. advisory services 8.1 on investments 8.2 on financial structure 9. distribution of third-party services 9.1. portfolio management 9.1.1. individual 9.1.2. collective 9.2 insurance products 9.3 other products d) collection and payment services 201 222 e) servicing activities for securitisations 48 59 f) services for factoring transactions 100 5 g) tax collection services h) management of multilateral trading facilities i) holding and managing current accounts j) other services 54,648 56,233 Total 55,020 56,541
The item “other services” includes commissions for the management of public subsidy funds, of which the SME Guarantee Fund the largest, equal to € 51.4 million (53 million at 31.12.2018).
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2.3 Fee and commission expense: breakdown
Service/Amount Total 31.12.2019 Total 31.12.2018 a) guarantees received (200) (284) b) credit derivatives c) management and broking services: 1. financial instrument trading 2. foreign currency trading 3. portfolio management: 3.1 own 3.2 third-party portfolio 4. custody and administration of securities 5. financial instrument placement 6. off-premises offer of financial instruments, products and services d) collection and payment services (136) (136) e) other services (29) (12) Total (365) (432)
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Section 5 - Net gains/(losses) on hedging activities - Item 90
5.1 Net gains/(losses) on hedging activities: breakdown
Income component/Amount Total 31.12.2019 Total 31.12.2018 A. Income related to: A.1 Fair value hedges 7,032 A.2 Hedged financial assets (fair value) A.3 Hedged financial liabilities (fair value) 2,636 7,204 A.4 Cash flow hedges A.5 Assets and liabilities in foreign currencies Total hedging income (A) 9,668 7,204 B. Expenses related to: B.1 Fair value hedges (2,744) (7,196) B.2 Hedged financial assets (fair value) B.3 Hedged financial liabilities (fair value) (7,029) B.4 Cash flow hedges B.5 Assets and liabilities in foreign currencies Total expense on hedging activities (B) (9,773) (7,196) C. Net gains/(losses) on hedging activities (A - B) (105) 8
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Section 6 - Gains/(losses) on disposal or repurchase - Item 100
Section 6.1 Gains (Losses) on disposal/repurchase: breakdown
Total 31.12.2019 Total 31.12.2018
Net Net Items/Income components Gains Losses Gains Losses gains/(losses) gains/(losses) A. Financial assets 1. Financial assets measured at amortised 867 867 cost: 1.1 Due from banks 1.2 Due from customers 867 867 2. Financial assets measured at fair value 23,879 (14,840) 9,039 through other comprehensive income 2.1 Debt securities 23,879 (14,840) 9,039 2.2 Loans and advances Total assets (A) 23,879 (14,840) 9,039 867 867 Financial liabilities measured at B. amortised cost 1. Due to banks 2. Due to customers 3. Securities issued Total liabilities (B)
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Section 7 - Net gains/(losses) of other financial assets and liabilities measured at fair value through profit and loss - Item 110
7.2 Net value change in other financial assets and liabilities measured at fair value through profit and loss: breakdown of other financial assets obligatorily measured at fair value
Net Disposal gains Capital losses Disposal losses Transactions/Income components Capital gains (A) gains/(losses) (B) (C) (D) [(A+B)-(C+D)] 1. Financial assets (1) (1) 1.1 Debt securities (1) (1) 1.2 Equity securities 1.3 Units in collective investment undertakings 1.4 Loans and advances Financial assets in other currencies: 2. exchange differences Total (1) (1)
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Section 8 – Net value adjustments for credit risk – item 130
8.1 Net value adjustments for credit risk relative to financial assets measured at amortised cost: breakdown
Writedowns (1) Writebacks (2)
Stage one Stage three - Stage three - Stage one Total Total Transactions/Income components Stage three and two write-off Other and two 31.12.2019 31.12.2018 A. Due from banks (2,790) 3 (2,787) 47 - loans (13) 3 (10) 47 - debt securities (2,777) (2,777) Of which: acquired or originated impaired loans B. Due from customers: (1,513) (83) (15,700) 2,571 1,606 (13,118) (26,833) - loans (1,458) (83) (15,700) 2,571 1,606 (13,063) (26,833) - debt securities (55) (55) Of which: acquired or originated impaired loans C. Total (4,304) (83) (15,700) 2,574 1,606 (15,906) (26,786)
Net value adjustments for credit risk, totalling 15.9 million (against 26.8 in 2018) include net adjustments on amounts due from customers for 13.1 million and adjustments on amounts due from banks for 2.8 million, relative to the 12 million subscription of the larger equity strengthening fixed rate Tier II 2019-2029 subordinate bond loan issued by the Ligurian bank Banca Carige. During the year, writedowns were recognised for 20.1 million, almost entirely relative to impaired positions, while writebacks on loans totalling 4.2 million were recognised (of which 2.6 million on performing receivables and 1.6 million in writebacks on impaired receivables, of which 0.3 due to amounts collected).
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8.2 Net value adjustments for credit risk relative to financial assets measured at fair value through other comprehensive income: breakdown
Writedowns (1) Writebacks (2)
Stage one Stage three - Stage three - Stage one Total Total Transactions/Income components Stage three and two write-off Other and two 31.12.2019 31.12.2018 A. Debt securities (586) 564 (22) 13 B. Loans - to customers - to banks of which: acquired or originated impaired financial assets Total (586) 564 (22) 13
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Section 9 - Gains/losses from contractual changes without derecognition - Item 140 9.1 Gains (losses) from contractual changes: breakdown
Losses from contractual changes without derecognition totalled € 293,000, while profits totalled € 5,000.
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Section 10 - Administrative expenses - Item 160
10.1 Personnel expenses: breakdown
Type of expense/Amount Total 31.12.2019 Total 31.12.2018 1) Employees (24,671) (23,139) a) wages and salaries (17,310) (16,421) b) social security contributions (4,636) (4,386) c) severance benefits (969) (920) d) pensions e) allocation to employee severance benefit provision (36) (48) f) provisions for pension fund and similar obligations: (37) (36) - defined contribution - defined benefit (37) (36) g) payments to external pension funds: (375) (356) - defined contribution (375) (356) - defined benefit h) costs deriving from payment agreements based on own equity instruments i) other employee benefits (1,308) (972) 2) Other personnel in service (163) 3) Directors and statutory auditors (323) (330) 4) Retired personnel 5) Recovery of expenses for employees seconded to other companies 428 348 6) Refunds of expenses for third-party employees seconded to the company (542) (920) Total (25,271) (24,041)
The increase in the item derives from the increase in Bank employees, mainly in the network, in the sales department and in the guarantee instrument department.
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10.2 Average number of employees by category
Item/Amount Total 31.12.2019 Total 31.12.2018 Employees: 290 284 a) executives 12 10 b) middle managers 161 160 c) other employees 117 114 Other personnel 12 11
The figures shown in the table were prepared using the average FTE criteria
10.3 Defined benefit company pension funds: costs and revenues During 2019, the fund managed by the Bank paid out 272,000 in complementary pensions, in line with 2018. On the basis of the actuarial appraisal, in line with the accounting policies already presented, additional provisions of 37,000 became necessary (36,000 in 2018), while actuarial losses, of 271,000 (gains of 165,000 in 2018), are posted as a contraentry under Shareholders’ Equity.
10.4 Other employee benefits
31.12.2019 31.12.2018
a) injury policies (178) (197) b) health policies (311) (309) c) early retirement incentives d) meal vouchers (260) (261) e) other benefits (559) (205) TOTAL (1,308) (972)
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10.5 Other administrative expenses: breakdown
Type of expense/Amount 31.12.2019 31.12.2018 1. Indirect taxes and duties (251) (216) 2. Sundry costs and expenses (13,782) (15,365) a) advertising, marketing and communication expenses (90) (27) - entertainment expenses (6) (12) - advertising expenses (56) (3) - sponsorship expenses (28) (12) b) expenses related to credit risk (1,011) (884) - legal expenses for recovery of receivables (105) (77) - commercial information, inspections and other expenses (906) (807) c) indirect labour costs (357) (344) - travel and motor vehicle rental costs (346) (331) - other personnel expenses (11) (13) d) Information and communication technology expenses (4,151) (4,823) - telephone and data transmission expenses (167) (225) - ICT service (3,984) (4,567) - maintenance and repair of ICT equipment (1) (1) e) consulting and professional services (4,107) (3,176) - Technical and specialist advisory services (35) (48) - other professional services (1,547) (1,520) - legal and notarial expenses (2,524) (1,608) f) expenses related to properties (1,105) (3,042) - security (226) (265) - cleaning services (198) (218) - Maintenance of furniture and fixtures, plant and equipment (4) (4) - Maintenance of premises (178) (187) - rental expenses for rented premises (332) (2,221) - utilities (169) (149) g) other overheads (2,962) (3,069) - insurance (184) (201) - postal expenses (106) (107) - printing and stationery (27) (42) - duties, subscriptions and contributions to trade associations and guarantee funds (188) (251) - contribution to the Resolution Fund (1,476) (1,390) - administrative and logistical services (340) (402) - charity (4) - other (641) (672) Total (14,034) (15,581) The decrease in rents payable, of 1.9 million, derives from adoption of the new accounting standard IFRS 16 relative to leases. Charges relative to real estate leases, previously recognised among other administrative expenses, are now broken down as follows:
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- € 600,000 as interest expense
- € 1,389 thousand as depreciation of rights of use. Below is remuneration (net of VAT) for the activities performed by the auditing firm. During the year, companies associated with the auditing firm did not carry out any consulting work.
Item/Amount Total 31.12.2019 Total 31.12.2018
Fees to the auditing firm PricewaterhouseCoopers S.p.A.: - auditing activities provided for in art. 155 paragraph 1 letter a) of the CLF (33) (32) - limited auditing of the interim Financial Statements (34) (30) - auditing of the annual Financial Statements (80) (79) Total auditing services (147) (141) - other services associated with auditing (60) (47) Total other services (60) (47) Total (207) (188)
Services correlated with the 2019 audit refer to the issuing of comfort letters as part of the social bond issue.
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Section 11 - Net provisions for risks and charges - Item 170
11.1 Net provisions for credit risks relative to commitments to disburse funds and financial guarantees given: breakdown
Amount
Item/Amount 31.12.2019 31.12.2018 a) Provisions for credit risks relative to financial commitments and guarantees issued 1,177 95 Total a 1,177 95 b) Excess for credit risk relative to commitments to disburse (46) (821) Total b (46) (821) Total (a+b) 1,131 726
11.3 Net other provisions for risks and charges: breakdown
Amounts
Item/Amount 31.12.2019 31.12.2018 - Other provisions 999 63 Total a 999 63 Excess provisions in previous years: - for legal disputes (429) - for other provisions (77) (974) Total b (77) (1,403) Total a+b 922 (1,341)
The change in the item is mainly due to the trend seen in the provision for restructuring expenses, which during 2019 saw additional allocations of € 950,000, following the Board of Directors resolution of 20 February 2020.
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Section 12 - Net value adjustments on property, plant and equipment - Item 180
12.1 Net value adjustments on property, plant and equipment: breakdown
Impairment Net adjustments Asset/Income component Amortisation (a) Write-backs (c) losses (b) (a+b-c) A. Property, plant and equipment 1. For business use (1,719) (1,719) - owned (275) (275) - rights of use acquired with leasing (1,444) (1,444) 2. Held for investment purposes - owned - rights of use acquired with leasing 3. Inventories Total (1,719) (1,719)
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Section 13 - Net value adjustments of intangible assets - Item 190
13.1 Net value adjustments of intangible assets: breakdown
Impairment Net adjustments Asset/Income component Amortisation (a) Write-backs (c) losses (b) (a+b-c) A. Intangible assets A.1 Owned (923) (923) - Generated within the company - Other (923) (923) A.2 Rights of use acquired with leasing Total (923) (923)
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Section 14 – Other operating income and expenses- Item 200
14.1 Other operating expenses: breakdown
Amounts
Item/Amount 31.12.2019 31.12.2018 1. Amortisation/depreciation of third-party assets (1,833) (1,071) 2. Transactions and negotiations (300) (40) 3. Securitisation expenses (210) (166) 4. Other sundry expense (47) (465) Total (2,389) (1,743)
14.2 Other operating income: breakdown
Amounts
Item/Amount 31.12.2019 31.12.2018 1. Customer recoveries 276 245 2. Recoveries from management with public administrations 2,453 1,842 3. Other income 373 118 Total 3,102 2,205
Section 18 - Gains/(Losses) on disposal of investments - Item 250 18.1 Gains/(losses) on disposal of investments: breakdown
Income component/Amount Total 31.12.2019 Total 31.12.2018 A. Property - Gains on disposal - Losses on disposal B. Other assets 12 - Gains on disposal 12 - Losses on disposal Net gains/(losses) 12
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Section 19 - Income taxes for the period on continuing operations - Item 270
19.1 Income taxes for the period on continuing operations: breakdown
Income component/Amount Total 31.12.2019 Total 31.12.2018
1. Current taxes (-) (7,449) (2,114)
2. Changes in current taxes for previous years (+/-) (41) (89)
3. Reduction of current taxes for the year (+) 3.bis Reduction of current taxes of the year for tax credits pursuant to Italian Law 214/2011 (+)
4. Changes in deferred tax assets (+/-) 877 (1,746)
5. Changes in deferred tax liabilities (+/-)
6. Taxes pertaining to the year (-) (-1+/-2+3+3bis+/-4+/-5) (6,613) (3,949)
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19.2 Reconciliation of theoretical tax liability and actual tax liability recognised
TAXATION TAX RATE TAXATION TAX RATE TAXES - IRES 2019 2019 2018 2018
Profit on continuing operations before tax 29,132 27.5 24,150 27.5
Income taxes at nominal rate (8,011) (6,641)
Tax increases:
Costs not deductible for taxation - permanent differences (257) 0.88 (167) 0.69
Other changes (tax rate variations etc.)
Decreases in taxes:
Non-taxable revenues - permanent differences 92 (0.31) 50 (0.21)
Non-taxable revenues - permanent differences relative to ACE 516 (1.78) 516 (2.14)
Non-taxable revenues - permanent differences relative to Patent Box 2,661 (9.13) 3,240 (13.42)
Other changes (71) 0.24 (21) 0.09
IRES INCOME TAX (5,067) 17.40 (3,023) 12.51
TAXATION TAX RATE TAXATION TAX RATE TAXES - IRAP 2019 2019 2018 2018
Profit on continuing operations before tax 29,132 5.57 24,150 5.57
Income taxes at nominal rate (1,623) (1,345)
Tax increases:
Non-deductible personnel costs (67) 0.23 (47) 0.19
Net provisions for risks and charges and impairment of receivables (61) 0.21 61 (0.25) ) Non-taxable revenues - permanent differences relative to Patent Box 539 (1.85) 656 (2.72)
Other changes (333) 1.14 (251) 1.04
IRAP INCOME TAX (1,546) 5.30 (926) 3.83
The taxes determined at 31 December 2019 presented a tax rate of 22.7%, up compared to the 16.34% recorded in 2018. The increase, despite the lack of change in the nominal rate during the two years, is substantially due to lower benefits achieved through the “Patent Box”, recognised for 2015-2019, with regards to subsidised taxation for income deriving from the use of copyright, pursuant to Decree Law 3 of 24 January 2015, converted through Law 33 of 24 March 2015, which fell to 3,184 thousand from 3,896 thousand in 2018.
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Part D – Comprehensive Income
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PART D – Comprehensive Income
COMPREHENSIVE INCOME
Detailed statement of comprehensive income
Item Total 31.12.2019 Total 31.12.2018 10. Profit (Loss) for the year 22,519 20,201 Other income components without reversal to income statement 20. Equity securities at fair value through other comprehensive income: a) changes in fair value b) transfers to other equity components Financial liabilities designated at fair value through profit and loss (changes in own credit 30. standing): a) changes in fair value b) transfers to other equity components 40. Hedging of equity securities at fair value through other comprehensive income: a) changes in fair value (instrument hedged) b) changes in fair value (hedging instrument) 50. Property, plant and equipment 60. Intangible assets 70. Defined-benefit plans (395) 138 80. Non-current assets and disposal groups held for sale 90. Portion of reserves from valuation of equity investments carried at equity 100. Income taxes relative to other income components without reversal to income statement 124 (47) Other income components with reversal to income statement 110. Hedging of foreign investments: a) changes in fair value b) reversal to income statement c) other changes 120. Exchange differences: a) changes in value b) reversal to income statement c) other changes 130. Cash flow hedges: a) changes in fair value b) reversal to income statement c) other changes of which: net result of positions 140. Hedging: (non-designated elements) a) changes in value b) reversal to income statement c) other changes Financial assets (other than equity securities) measured at fair value through other 150. 10,329 (8,044) comprehensive income: a) changes in fair value 19,345 (8,031)
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b) reversal to income statement (9,016) (13) - adjustments for credit risk 22 (12) - gains/losses on disposal (9,038) (1) c) other changes 160. Non-current assets and disposal groups held for sale: a) changes in fair value b) reversal to income statement c) other changes 170. Portion of reserves from valuation of equity investments carried at equity: a) changes in fair value b) reversal to income statement - write-downs for impairment - gains/losses on disposal c) other changes 180. Income taxes relative to other income components with reversal to income statement (3,416) 2,660 190. Total other income components 6,642 (5,293) 200. Comprehensive income (Item 10 +190) 29,161 14,908
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Part E – Information on risks and relative hedging policies
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Introduction In the overall Internal Control and Risks System, definition of the Risk Appetite Framework (RAF) is assigned to the Board of Directors. The RAF is subject to revision at least once a year and identifies the Bank’s risk objectives, which are implemented and monitored through the operational limits system and control indicators. Below are the risk/return objectives defined for financial year 2019: Objective Metric Threshold
Total Capital Ratio (TCR) ≥ 15.5% Capital adequacy Leverage Ratio (LR) ≥ 6%
Loan portfolio quality Net NPL Ratio (NPL) ≤ 6%
Profitability ROE ≤ 55%
Operating efficiency Cost/Income ≥ 6%
∆ Economic value/Own funds ≤ 10% Banking Book interest rate ∆ Net interest income ≤ 5.5€/mln
Liquidity Coverage Ratio ≥ 140% Liquidity Stable funding/Illiquid assets ≥ 100%
Asset encumbrance Tied assets/Total Assets ≤ 55%
This risk objective system is subject to periodic review based on the results of the Supervisory Review and Evaluation Process (SREP) and the Bank’s update risk appetite framework, always in line with the strategic objectives established in the Business Plan, the Bank’s business model and the methodologies used in the internal capital adequacy assessment process (ICAAP). Constant monitoring of the risk/return profile, using the methods, methodologies and processes defined and updated promptly in the company regulations, is supervised by organisational structures inspired by the criteria of separation and autonomy. The departments are structured as follows:
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• first level controls, provided by the same operating structures that assume the risks; • second level controls, carried out by the Risk Management Department and the Compliance and Anti-Money Laundering Department; • third level audits and controls, performed by the Internal Audit Department; • overall coordination and supervision, assigned to the Internal Controls and Risks Committee. Through specific regulations, the Board of Directors governs the requirements and methods used by the Risk Management Department to ensure its responsibilities are effectively carried out, outlined in detail in the Disclosure to the Public document (see herein). The Bank’s remuneration and incentive policy system is annually approved by the Shareholders’ Meeting in accordance with the international and national regulations. The information regarding capital adequacy, risk exposure, the general features of the systems used to identify, measure and manage these risks, and the information on remuneration policies, are made public in a dedicated document (Disclosure to the Public – Pillar III, which also contains the Bank's Remuneration Policy) on the Bank’s website: www.mcc.it, within the terms laid down for publication of the Financial Statements, in line with the Prudential Supervisory Rules (See Bank of Italy Circular 285/2013, Part One, Title III, Chapter 2, “Disclosure to the Public State by State”). The Bank pays special attention to sharing a risk culture and works so that this concept permeates all processes, both through periodic updates of documents prepared for reporting, self-assessment and planning purposes (Tableau de bord, ICAAP/ ILAAP, Risk Appetite Framework), and through initiatives dedicated to further researching specific issues. Additionally, the Bank guarantees that the risk culture is diffused throughout the organisation through training courses provided to its employees, with the aim of ensuring proper application of assessment models and risk safeguards. The approach of the Risk Management Department is constantly focussed on integrated risk management, considering both the macroeconomic situation and the Bank's business profile.
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SECTION 1 - CREDIT RISK Qualitative information 1. General aspects This risk is that of incurring losses due to the borrower’s inability to fulfil the obligations assumed towards the Bank. The notion of credit risk is very extensive and may also include: • counterparty risk, i.e. the risk that the counterparty to a transaction in certain financial instruments will default, before settling the transaction; • concentration risk, i.e. the possibility of the credit risk arising with significant impact because of exposure to counterparties, groups of connected counterparties and counterparties of the same economic sector which practise the same business, or which belong to the same geographical area. • spread risk, i.e. the possibility that the risk premium, or spread, requested by capital markets increases, while credit standing remains unchanged. For example, this increase may be due to a liquidity crisis on the markets or an increase in investor risk aversion8. The management provides guidance for the Bank’s credit development activities and risk strategies, periodically subject to the approval of the Board of Directors at the annual budget meeting and on the occasion of the examination of the risk policies and of the connected system of limits. Through this latter the Bank identifies the main determinants of the risk subject to monitoring; the Bank articulates this instrument in keeping with the effective evolution of operations and subjects it to regular revision, as laid down in the Regulation on the Risk Management process. At 31 December 2019, the empirical results of operations show the main loan exposures regarding primarily: • bank risk, with reference to: o demand and time deposits; o loans related to transactions in derivatives which generate counterparty risk. For these cases the Bank is compliant with the EMIR Regulation; • customer risk, which can be broken down into:
8 With reference to the Bank's securities portfolio, consisting exclusively of government securities from EMU countries, this risk became significant following the application of Accounting Standard IFRS 9, as of 1 January 2018, which determined the end of the regime which sterilised unrealised losses relative to these assets.
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o businesses: with reference to loans to customers, joint stock companies, limited companies and single member firms, and to other public and private entities, in compliance with the principle of prevalence; the Bank continues to be committed to supporting the development of businesses, also in synergy with the area of incentives managed by the Invitalia Group, the reference shareholder; o households, through its most prevalent form, residential mortgages: to that end, the Bank has stopped operations relative to this segment9, in line with the strategic guidelines that indicate focussing business on companies; • other risks: this category mainly includes risk relative to the Italian government, represented by positions in Government Securities and the risk related to the Central Administrations, in the form of fees received for performing the subsidy activity. Additionally, the Bank fully holds the tranches underlying the securitisation of residential mortgages carried out in 2016 (see SECTION 4 - LIQUIDITY RISK risk), through the special purpose vehicle (SPV) MCC- RMBS srl); on the basis of this structure, the operation does not give rise to securitisation risk and does not change the risk profile of the portfolio. For all other details, please see Section 4 – Liquidity risk. At 31 December there were no securitisation transactions originated with the goal of transferring credit risk. Nonetheless, during 2019 the Bank began two tranched cover transactions with the portfolio guaranteed by the Central Guarantee Fund to cover the initial losses10, with the aim of providing business loans. At 31 December 2019, these transactions did not indicate risk deriving from securitisations as these are simple standard transactions, in which the risk taken on and the mitigation guarantee are clear. These transactions fall under the operating methods identified by the Bank for achieving its mission to provide support for the economy. Therefore, it is expected that these instruments will be used more frequently in the near future.
9 Therefore, the portfolio of private mortgages is substantially in run-off status. 10 One transaction serves as a direct guarantee and the other as a counterguarantee through the participation of a loan consortia.
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Credit risk management policies 2.1 Organisational aspects As regards risk management, the Bank’s organisational system provides for clear separation between business departments which offer and propose new loans, and departments which assess the risk profile of such loans. Operational monitoring of credit relationships with customers is carried out by operational departments, according to a specific company regulation: they establish effective and immediate interaction with the borrowing customers, right from the appearance of the first signs of difficulty, such as late execution of repayments or requests for contractual waivers. In particular, over the last few years the Bank has strengthened its credit monitoring and management platform through the use of specific IT tools that support its operations, and through the adoption of related models to intercept/identify customers at risk of potential impairment, in order to guarantee timely monitoring of positions on the basis of personalised alert thresholds and to ensure second and third level controls. In the event a borrower’s risk profile deteriorates, the Credit Department becomes responsible for managing the account. In particular the Credit Monitoring Area monitors performing portfolios, proposing a change in classification, as a function of the powers assigned to it by the Board of Directors. Subsequently, responsibility for managing classified positions and further changes in classification are assigned to the Anomalous Credit Management Area.
2.2 Management, measurement and control systems Credit risk control and measurement activities are the responsibility of the Risk Management Department, both at the individual and the portfolio level; the Department has the task of monitoring: • in relation to single exposures, correct execution of the performance monitoring in terms of consistency of the classifications, congruity of provisions and correctness of the recovery process; • with reference to the portfolio, the trend of overall exposure to this risk, in keeping with the targets defined in the RAF. This activity comes within the scope of the Internal Control System as a second-level audit. 183
From a regulatory point of view, credit risk is estimated on the basis of the standard methods contemplated by the prudential supervisory instructions applicable to both how the exposures are managed and any guarantees backing the positions. At management level, according to what is laid down in the Lending Policies and in line with the definition of the operating limits, scoring systems are used to assess the customer risk, these are used in support of the inquiry phase for the prior definition of the levels of anomaly considered sustainable. Score methodologies are also used • to periodically establish acceptance/refusal thresholds, which are integrated as part of the wider investigation process managed by specifically dedicated resources; • to estimate expected returns from each loan, taking into account the risk component and the costs of all components in the production process. With regard to counterparty risk, within the sphere of the standardised methods, definition of credit equivalents is estimated by the current value method, recommended by the Prudential Supervisory regulations. In addition, with reference to derivatives, an additional capital requirement is calculated against the risk of unexpected losses generated by oscillations of the fair value deriving from changes in the creditworthiness of counterparties (Credit Value Adjustment - CVA). The Bank has issued specific guidelines aimed at limiting counterparty risk exposure by requiring collateral for derivative instruments. A Credit Support Annex (CSA) is required, usually with collateral in cash or in EMU government bonds and daily marginalisation. Additionally, the same guidelines, with reference to exposures through repurchase agreements, establish the stipulation of General Master Repurchase Agreements (GMRA) with at least weekly marginalisation, as a mitigation technique. With reference to concentration risk, besides verifying systematic observance of the rules on “large exposures” (see Part II, Chapter 10 of Bank of Italy Circular 285/2013 and Arts 387 ff. of Regulation (EU) 575/2013) and on “risk activities with associated subjects” (see Title V of Circular 263 of 2006), the Bank monitors the concentration level of exposures in respect of the component: • single borrower (or “single name”): through the method known as Granularity Adjustment (GA) envisaged by the prudential supervisory regulations (see Bank of Italy Circ. 285, Part One, TITLE III - Chapter 1 - Annex B); 184
• geo-sectoral: through methods based on practices prevalently adopted by the banking system and approved by the Supervisory Body. With regards to Credit Policies, in line with the rules for Large Exposures, internal exposure limits allowed based on counterparty rating have been established.
2.3 Expected loss measurement methods Following the introduction of accounting standard IFRS 9, management of credit risk is closely correlated to the recognition and measurement of expected losses. Based on the account standard, assets and loans falling within a well-defined area11 are divided into three stages. This classification is based on transfer criteria associated with the credit quality of the element in question, which impact the methods used to recognise value adjustments, differentiated by the time horizon of reference and the recognition of interest income. Therefore, the Bank has implemented instruments which, in line with the dictates of the standard, allow it to automatically measure significant increases in credit risk. These instruments are differentiated with respect to the reference portfolio. With regards to the securities portfolio, the Bank uses the following measurement methods: • for securities with an investment grade rating at the reporting date, a low-credit risk exemption is applied (LCRE)12; • for securities which have a speculative rating at the reporting date, the trend of the counterparty's credit rating between the acquisition/subscription date and the reporting date is considered, measured by the change in the ratings class. Significant impairment which leads to classification in stage 2 is identified by downgrading of at least 2 notches on the ratings scale. On the other hand, if
11 The scope of accounting standard IFRS 9 is as follows: 1. financial assets classified in the Hold to Collect portfolio, measured at amortised cost; 2. financial assets classified in the Hold to Collect and Sell portfolio, measured at fair value through other comprehensive income; 3. loan commitments (not if at Fair Value through Profit and Loss); 4. guarantees (not if at Fair Value through Profit and Loss; 5. trade receivables. 12 In application of the Low Credit Risk Exemption (LCRE), these can be assigned to stage 1 as of the reporting date, without the need to verify any significant decreases in credit standing, on the basis of the following requirements established in the Standard as representing low credit risk: 1. the financial instrument has a low risk of default; 2. the debtor has a strong capacity to satisfy its obligations over the short term; 3. any unfavourable changes in economic conditions over the medium/long term will not necessarily reduce the debtor's ability to fulfil its obligations.
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an objective loss occurs (credit event), the exposure is classified in stage 3. In the lack of significant impairment of the position, classification in stage 1 is envisaged, as in the Standard. For the loan portfolio, these instruments use: • information deriving from scoring models, comparing the measurements obtained at the origination date with periodic updates to the same; • information about payment trends (30 days past-due exceeded); • presence of forbearance measures relative to performing positions; • information coming from internal early warning systems (customers on the watchlist). The information used by the Bank to recognise expected losses for loans classified in stage 1 or stage 2 can be presented as follows: • customer probability of default (PD), obtained from an external rating model; this information is subject to adjustments dictated by the accounting standard, specifically: o a point in time (PIT) adjustment which, prudentially and considering volatility of default rates observed in the loan portfolio, consists of recalibration using a Bayesian approach on the basis of the average decay rate observed on the own portfolio; o a forward looking correction over the first three years of the curve, to include macroeconomic market forecasts; o a Through the Cycle13 calibration, using PDs and transition matrices determined as the average of observed values over the last 8 years. • loss given default (LGD), obtained by making use of regulatory values or those derived from market benchmark values, considering the statistical number of positions in the portfolio and the limited depth of historical series to measure internal recovery rates. These values are updated appropriately, when necessary using margins of prudence and segmenting on the basis of the type of guarantees associated with the loans; • exposure at default (EAD), differentiated between on and off balance sheet exposures; • residual life of the relationship;
13 Through a hybrid Markovian approach.
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• discounting rate, equal to the internal return rate of the position.
2.4 Credit risk mitigation techniques An essential component for proper monitoring of credit risk is adequate management of credit risk mitigation techniques and tools, both during the acquisition stage and during subsequent monitoring of the value and efficacy of the guarantees. The Bank has therefore adopted an internal procedure supported, when appropriate, by suitable IT tools for monitoring the guarantees acquired. The legal validity of the guarantees received is checked on acquisition by the operational departments, which are responsible, before disbursement, for checking their certainty and effectiveness; the guarantees acquired are normally valid for the entire duration of the loans and advances granted. The purpose of the collateral or personal guarantees is to back the loan and not to replace the borrower’s capacity to honour their obligations (creditworthiness). Creditworthiness is assessed by the departments responsible for credit inquiries14 mainly on the basis of the examination of the sources from which the repayment will be made (customer - transaction) and only secondarily the guarantees, considering both the present and future situation of the borrowing company and of any group it belongs to. The use of credit risk mitigation systems to calculate capital absorptions, according to the standard approach, is governed by internal guidelines and by a specific operating procedure; this governs the method of assessing and monitoring their eligibility as tools for mitigating credit risk and the related capital absorption. In the Disclosure to the Public a specific section dedicated to risk mitigation techniques is provided for, with qualitative and quantitative information. This document is made available on the Bank’s website in compliance with the provisions of the Prudential Supervisory regulations (see Part One, Title III - Chapter 2 and Part Two, Chapter 13 of Circular 285/2013). The internal guidelines have the following objectives: • to foster correct management of the loan and of the connected guarantees;
14 The departments are identified on the basis of the type of counterpart, loan and channel of origin. As cited in paragraph “General aspects”, the Bank’s strengthened commitment to supporting the development of southern Italy is also implemented through fully taking advantage of subsidies. For some segments the process designed for this purpose uses digital tools for customer contact and collection of information needed for credit inquiries and automated pre-screening models.
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• to maximise the risk mitigation effect afforded by the protective instruments; • to optimise the capital requirements according to the Basel recommendations (Credit Risk Mitigation); • to define the general rules for the eligibility, valuation, monitoring and management of the collateral and of the personal guarantees. The main types of guarantees suitable and used by the Bank for Credit Risk Mitigation are: • Real guarantees – Mortgages on residential or non-residential properties and, marginally, a real financial guarantee in the form of cash collateral; • Personal sureties – Central Guarantee Fund (backed by the State guarantee). When the regulatory requisites are met, mortgages contribute to cutting down the capital requirement as a result of their more favourable weighting, equal to 35% for residential properties and 50% for non-residential properties, under opportune LTV (Loan to Value) constraints. The Central Guarantee Fund benefits from zero weighting as a result of the counter- guarantee of the Italian State. The Bank also introduced a pledge on a current account held with the institution as a new form of guarantee. Finally, we note the presence of: • cash collateral, used to cover a position in derivatives with a leading Italian banking counterparty. From the contractual viewpoint, this guarantee is governed by an ISDA standard CSA; • cash collateral, used to cover repurchase agreements stipulated with leading international banking counterparts. From the contractual viewpoint, this guarantee is governed by a General Master Repurchase Agreement (GMRA).
3. Impaired credit exposures Starting on 1 January 2018, the criteria and logic used to determine performing loans are in line with the instructions contained in International Accounting Standard IFRS 9 - Financial instruments, which introduced a more long-term model for recognising expected losses, in order to improve disclosures about financial instruments due to issues which arose during the financial crisis. This model means moving from the
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incurred loss concept used under the previous standard (IAS 39) to an expected loss estimate methodology. Among the main changes introduced by the new accounting standard, worthy of note is the allocation of credit exposures into 3 stages, distinct risk segments, each of which corresponds to different logics used to estimate allocations for credit losses. In particular: • stage 1 includes performing positions which at the reporting date have not seen any significant deterioration with respect to the origination or acquisition date; • stage 2 includes performing positions for which the credit quality as of the reporting date has worsened significantly with respect to the origination or acquisition date; • stage 3 contains impaired financial assets with clear evidence of losses as of the reporting date. With reference to performing positions, those in stages 1 and 2, estimation of potential credit losses must be performed: • for stage 1, over a one-year time horizon, determining the corresponding expected 1-year credit loss; • for stage 2, over the lifetime of the asset, determining all possible losses that could be suffered through the expected life of the financial asset, weighted according to the relative probability of default. In compliance with this approach, performing loans and securities are measured using the Expected Loss criteria (expected credit loss - ECL) using the best available estimates of probability of default (PD) and loss given default (LGD). To that end, while awaiting consolidation of the elements for more solid estimation of customer riskiness (PD) and the maturation of an adequate loss given default series (LGD) for its own portfolio, the Bank makes use of reference benchmarks or regulatory values, accompanied by appropriate estimate and calibration logics structured around a general criterion of prudence, to estimate the risk parameters that best represent the riskiness of its own portfolio. Values connected with calculation of expected losses are subject to updating and progressive refinement, with the dual objective of: • better representing the risk profile of a credit portfolio which is substantially undergoing development and continuous change;
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• adopting a general criteria of prudential measurement, while awaiting consolidation of the historic series of internal risk data. More details on the determination of provisions made relative to performing loans are provided in paragraph 2.3 Expected loss measurement methods. Regulation EU 630/2019 took effect on 26 April 2019, requiring banks to record provisioning carried out relative to non-performing exposures, relative to disbursements which occurred after 26 April 2019, based on calendar provisioning, taking into account the ageing of the exposure and the type, establishing for a schedule that differentiates based on whether the transaction is secured or unsecured. In particular, for unsecured non-performing exposures, a three year calendar is used, while for guaranteed exposures a longer calendar is used, nine years for exposures with real estate guarantees and seven years for other types of guarantees. Calendar provisioning introduces a binding Pillar I requirement for all banks. The Bank will make use of application solutions, in order to ensure compliance with the new regulatory provisions on loan provisioning. Preliminary assessment had already begun by an external supplier at the end of the year in question.
3.1 Management strategies and policies Activities to monitor the trend of single cases and connected valuation are carried out by the Anomalous Credit Management Area, on the basis of criteria subject to systematic monitoring. In line with legislative developments, the Risk Management Department carries out checks on the correct execution of performance monitoring, with particular reference to impaired loans. In consideration of the characteristics of its own portfolio, the external situation and its own management capacities, the Bank has selected the internal management approach for impaired loans. To that end, it periodically prepares and updates the operating management plan for impaired loans for the short term (roughly a year) and medium/long-term (three years), sending it to the regulatory authorities for informational purposes. Objectives are established with reference to levels of Non – Performing Loans (NPL), before and after value adjustments, in absolute vales and as a percentage of total credit 190
exposures relative to customers, providing details of incoming and outgoing flows from the non-performing administrative categories and of the methods used to decrease the stock of impaired loans.
The NPL management strategy is integrated with the RAF, the ICAAP budget processes and the Bank's remuneration and incentive policies. The Bank's Board of Directors, based on a proposal from the Chief Executive Officer: • annually defines and updates the NPL operating management plan; • assesses and monitors, at least quarterly, progress made with respect to the objectives set in the plan; • updates the Credit Regulations which establish criteria for classification, measurement and management of NPLs; • identifies the units responsible for classifying, measuring and managing NPLs and defines their management objectives; • verifies that the selected organisational structure is adequate to limiting the margin of management discretion for individuals involved in the process of classifying, measuring and managing NPLs, in the case of conflicts of interest; • approves the objective systems used to select counterparties in the case of outsourcing and monitors the results; • ensures adequate internal controls over the NPL management processes. In general, in relation to the methods of classifying impaired receivables, in addition to the criteria defined by the Supervisory Authority (for non-performing loans, probable defaults, past-due and/or over-the-limit impaired exposures), it verifies events which affect loan customers, such as: • significant difficulties of the borrower; • serious breaches of contract; • high probability of bankruptcy; • granting of concessions which would not otherwise be granted, in view of the borrower’s financial difficulties. The classes that make up the “non-performing portfolio” are the following: • Impaired Past-due and/or Over-the-limit exposures, • Unlikely to pay, • Bad loans.
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The accounting status represents the customer’s overall position, as it is presented in the financial statements, and reported in the Bank of Italy’s Accounts Matrix. It refers the customer as a whole; it therefore does not refer to the single credit lines granted or the single existing exposures. It follows that, in the case of customers that have several loan products, the reclassification assessment is done considering total debt exposure, with consequent verification and application of the uniform classification for all the credit lines used, paying particular attention to analysing all the positions of the subject in the databases. In the context of each class forborne exposures are highlighted. These exposures are classified, as the case may be, as Bad Loans, Unlikely to pay or Impaired Past- due and/or Over-the-limit exposures and they do not form a separate category of impaired assets. The concept of forbearance refers to single loan contracts; only lending relationships held with customers that have been granted concessions must therefore be reclassified as forborne. The minimum provisioning percentages for losses are outlined below: 1) Bad loans: write-downs are differentiated on the basis of the portfolio they belong to. • Exposures to Private Customers: analytic, with a minimum of 35%; • Unsecured exposures to businesses: analytic, with the following minimums: o 60% in cases of going concerns; o 90% in cases of non-going concerns; o through to the successful enforcement and liquidation of guarantees; 20% minimum without time limits for positions guaranteed by the Central Guarantee Fund, SACE, IEB, ISMEA, EIF at 80%, with an increase in the coverage percentage if these guarantees are issued to a lesser degree and in any case up to the maximum of the non-guaranteed percentage, with the exception of adjustments associated with any problems which may arise in the case of enforcement. • Mortgage exposures to Businesses: analytic, with the following minimums: o 40% in cases of going concerns; o 50% in cases of non-going concerns. 192
2) Unlikely to pay: write-downs are differentiated on the basis of the portfolio they belong to: • Exposures with private customers: analytic, with the following minimums: o 15% if past-due / over-the-limit from 0 to 2 years; o 20% if past-due / over-the-limit for more than 2 years; • Unsecured exposures with businesses: analytic, with the following minimums: o 20% if past-due / over-the-limit from 0 to 2 years; o 40% if past-due / over-the-limit for more than 2 years; o 20% minimum without time limits for positions guaranteed by the Central Guarantee Fund, SACE, IEB, ISMEA, EIF at 80%, with an increase in the coverage percentage if these guarantees are issued to a lesser degree and in any case up to the maximum of the non- guaranteed percentage. • Mortgage exposures with businesses: analytic, with the following minimums: o 15% if past-due / over-the-limit from 0 to 2 years; o 30% if past-due / over-the-limit for more than 2 years. 3) Past due/over-the-limit: write-downs are differentiated on the basis of the portfolio they belong to: • Exposures to private customers: minimum: o 10% if past-due/over-the-limit • Unsecured exposures to businesses: minimum: o 10% if past-due / over-the-limit for up to 180 days; o 20% if past-due / over-the-limit for more than 180 days; • Mortgage exposures to businesses: minimum: o 10% if past-due / over-the-limit for up to 180 days; o 15% if past-due / over-the-limit for more than 180 days. The Bank has also established criteria for making exceptions to the above write- down percentages for: • Impaired exposures subject to repayment plans: loss provision percentages assessed case by case, to take into account the diversity of
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risk of impaired exposures that have a past due amount being regularised by the debtor; • Exposures classified as probable defaults that do not have unpaid instalments: loss provision percentages assessed case by case, to take into account the diversity of risk of exposures classified as Probable Defaults which, although they show anomalies such as to require the classification, are being regularly repaid; • Exposures classified as probable defaults subject to debt restructuring plans pursuant to art. 67. III c., letter D (certified recovery plan) or pursuant to art. 182 bis (restructuring agreement) of the Italian Bankruptcy Law: loss provision percentages assessed case by case, in keeping with the official documents of the debt restructuring agreements; • Exposures to subjects in an arrangement procedure other than bankruptcy: loss provision percentages assessed case by case, in keeping with the official documents of the arrangement procedures. These criteria for determining the write-downs and the related provisions are subject to benchmarking and continually reviewed and updated in order to always guarantee an adequate representation of the Bank's risk profiles. Interest on arrears is included in the item Interest income of the Income Statement only if effectively collected, since the part not collected is entirely written down.
3.2 Write-offs Write-offs of uncollectable accounting items and consequent recognition of losses may occur in the following cases: 1. uncollectability of the receivable, based on certain and precise elements, understood as: • debtor cannot be contacted or is destitute; • no amounts collected from enforcement of real estate and movable goods; • negative foreclosures; • bankruptcy procedures concluded without full compensation for the Bank, if there are no other guarantees which can be usefully enforced;
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• for loans of limited amount, when it can be demonstrated that legal and administrative costs to begin or continue legal action to recover the credit exceed probable amounts recovered; • statute of limitations reached; • in any case for unsuccessful use the legal actions available to the creditor, the significance of which must be directly proportional to the amount of the credit. 2. renunciation of the loan, based on: • unilateral withdrawal of the loan; • residual amount against settlement agreements; 3. credit disposals. In relation to various cases in which write-offs are possible, it is necessary, also for tax reasons, to keep all documents able to demonstrate the validity of the decision made, by way of example documents indicating the activities carried out and the date on which collection attempts ended, even if unsuccessful. The amount to be written off is based on the gross accounting balance at the customer level and must be fully written down. Additionally, under certain circumstances it is necessary to recognise partial impairment of gross loans in order to adjust them to the Bank's effective collection rights. These circumstances may arise, for example, in the case of provisions not committed, in the context of bankruptcy proceedings, on the basis of which a lower receivable is recognised than that in the books. In these cases, it is necessary to recognise impairment based on a resolution by the decision making body, identified on the basis of the current delegations of powers (indicating the loan allowed as the "amount offered"). Note that portions of loans subject to write-off must already be entirely provisioned and that approved partial write-offs are included when calculating total losses in the case of settlements following the write-off.
Transactions written off during 2019 totalled 33 positions, for a total amount of around € 4,550 thousand. These were positions classified as non-performing, fully written down during the course of the year or in previous years, for which the continuation of credit collection activities was deemed to be useless and uneconomical, as well as non-performing positions for which a settlement and write- 195
off agreement was signed with the debtor. Among the positions subject to cancellation, we note the without recourse disposal of a transaction classified as non- performing, which during the year generated a writeback of around € 47,000. During the same period, no transactions were cancelled with enforcement procedures still under way.
3.3 Acquired or originated impaired financial assets As part of the operation relative to the restructuring agreement pursuant to article 182-bis L.S. with regards to the debt of the Trevi Finanziaria Industriale Group, to which the Bank adhered in August 2019, the Bank granted new temporary financing to the group’s two operating companies, Soilmec and Trevi Spa, for a total of € 2.4 million, of which € 779,000 disbursed at 31 December 2019, maturing in 2023 with partial coverage by the SACE surety guarantee at 15.5%. The two positions were classified as unlikely to pay with provisioning equal to 20% of the disbursed amount, net of the portion guaranteed by SACE.
4. Financial assets subject to commercial renegotiation and forborne exposures On the basis of that established in the EBA Implementing Technical Standard (ITS), forbearance measures are defined as a "measure of tolerance" granted to a debtor by a bank, when the former finds itself, or is about to find itself, in difficulty to fulfil their financial commitments15. An exposure which has been granted a measure of tolerance by the bank must be classified among impaired forborne exposures or among other forborne exposures, regardless of whether the measure creates a loss for the bank. One of the following measures of tolerance is considered forbearance: • a change in the contractual terms and conditions which the debtor would not be able to comply with, entirely or partially, in consideration of the financial difficulties they find themselves in, aimed at making the debt more sustainable for the debtor and which would not be granted if the debtor was not having financial difficulties;
15 European Banking Authority, EBA FINAL draft Implementing Technical Standards on Supervisory reporting on forbearance and non-performing exposures under article 99(4) of Regulation (EU) No 575/2013,
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• a total or partial refinancing of a problematic loan, which would not be granted if the debtor was not having financial difficulties. The following are considered evidence of forbearance measures: • a change to contractual terms favourable to the debtor (forbearance in absolute terms); • a change in the contractual terms which involves applying more favourable terms and conditions with respect to those which the bank applies to customers with the debtor's same risk profile (forbearance in relative terms); • the exercising of contractual clauses the application of which is left to the debtor's discretion in the case the bank i. approves the exercising of said clauses; ii. becomes aware the debtor is having financial difficulties. Agreements reached between a debtor and a pool of creditor banks based on which existing credit lines are temporarily frozen while awaiting formal restructuring are not classified as forborne. In any case, these agreements do not interrupt the count of past-due days recognised for the purposes of classifying exposures as “past-due and/or over the limit”. In the case of restructuring transactions carried out by a pool of banks, those which do not adhere to the restructuring agreement must determine whether the conditions are met to classify their exposure among either non-performing or unlikely to pay. Exposures relative to debtors who have proposed a composition with creditors, in the “blank” form, are classified among forborne impaired, when the composition agreement is transformed into a Debt Restructuring Agreement pursuant to Article 182-bis of the Italian Bankruptcy Law. Also in the case that the composition agreement with business continuity is approved the exposure is recognised among forborne impaired exposures, with the exception of the above case of disposal of the operating company or disposal to one or more companies (even if newly established) not part of the debtor's economic group. In this case, the exposure is reclassified among performing assets. If the forbearance measure regards exposures with entities classified as “performing” or as performing past due and/or over the limit exposures, the requirement of debtor financial/economic difficulties is presumed to be met if the forbearance measure involves a pool of intermediaries. The existence of financial difficulty for the debtor is presumed to exist when: 197
• in the three months prior to the granting of the forbearance measure a past- due exceeding 30 days was recognised; • new financing is provided by the Bank in the presence of other existing exposures past due by at least 30 days; • the Bank has approved the use of contractual clauses which can be exercised at the debtor's discretion, for positions past due by at least 30 days or which would have been past due by at least 30 days if these clauses had not been exercised. Additionally, the following cases must be considered as forbearance measures and the relative exposures must be classified as “impaired forborne exposures”, as debtor financial difficulties are presumed to already have been ascertained: a) exposures for which the forbearance measure occurred after classification in a non-performing category, or if this classification would have occurred if not for the forbearance measure; b) the exposure has been written off, even partially; c) the Bank approved the exercising of contractual clauses which can be used at the discretion of the debtor for entities classified as non-performing, or which would have been classified as such if these clauses had not been exercised; d) after the granting of a new loan by the Bank, the debtor entirely or partially regularised other existing loans with the Bank classified as non-performing, or which would have been classified in this category if the payments had not been made.
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Quantitative information A. Credit quality
A.1 Impaired and non-impaired loan exposures: amounts, value adjustments, trend and economic distribution A.1.1 Distribution of loan exposures by portfolio and credit quality (carrying amount)
Non-impaired Other non- Non- Probable Past-due Portfolio/quality past-due impaired Total performing defaults exposures exposures exposures Financial assets measured at amortised 1. 7,620 46,197 28,000 1,562,777 1,644,594 cost Financial assets measured at fair value 2. 747,966 747,966 through other comprehensive income 3. Financial assets designated at fair value Other financial assets obligatorily measured 4. at fair value 5. Financial assets held for sale Total 31.12.2019 7,620 46,197 28,000 2,310,743 2,392,560 Total 31.12.2018 9,937 52,999 262 22,722 2,123,221 2,209,141
A.1.2 Distribution of financial assets by portfolio and credit quality (gross and net amounts)
Impaired Non-impaired Total
Total Gross Total value Net partial Gross Total value Net (net Portfolio/quality exposure adjustments exposure write-offs exposure adjustments exposure exposure) (*) 1. Financial assets measured at amortised cost 134,840 81,023 53,817 1,607,182 16,405 1,590,777 1,644,594 Financial assets measured at fair value through 2. 748,554 588 747,966 747,966 other comprehensive income 3. Financial assets designated at fair value Other financial assets obligatorily measured at 4. fair value 5. Financial assets held for sale Total 31.12.2019 134,840 81,023 53,817 2,355,736 16,993 2,338,743 2,392,560 Total 31.12.2018 135,311 72,113 63,198 2,162,762 16,819 2,145,943 2,209,141
Gross exposure towards non-impaired customers includes receivables accrued for services rendered due from Public Administrations for € 66,665 thousand, against portfolio value adjustments of € 1,127 thousand.
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A.1.2 bis Distribution of financial assets by portfolio and credit quality (gross and net amounts)
Assets of evident low credit quality Other assets
Cumulative Portfolio/quality Net exposure Net exposure capital losses 1. Financial assets held for trading 2. Hedging derivatives 88,039 Total 31.12.2019 88,039 Total 31.12.2018 82,650
The item Hedging derivatives refers to derivatives for managing interest rate risk on bond issues. These derivatives are entered into with leading banking counterparties; in line with the corporate policy, the contracts provide for payment of deposits to guarantee the fair value of the contract and the counterparty risk is negligible.
A.1.3 Distribution of financial assets by past-due range (carrying amount)
Stage one Stage two Stage three
90 90
o
Portfolios/risk stages
days days days
30 days 30
days t days to 90 days to 90 days
Over 90 days 90 Over days 90 Over days 90 Over
From over 30 30 over From 30 over From 30 over From
Up to 30 days to Up 30 days to Up 30 From 1 day to to 1 day From
Financial assets measured at amortised 1. 22,758 322 602 3,158 1,159 24 280 40,880 cost Financial assets measured at fair value 2. through other comprehensive income 3. Financial assets held for sale
TOTAL 31.12.2019 22,758 322 602 3,158 1,159 24 280 40,880
TOTAL 31.12.2018 11,167 1,819 3,635 3,027 3,174 128 840 52,211
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A.1.4 Financial assets, commitments to disburse funds and financial guarantees given: trend of total value adjustments and total provisions
Total value adjustments Total provisions for Of which: commitments to Total value adjustments Assets Total value adjustments Total value adjustments Assets acquired or disburse funds and Total in stage 1 Assets in stage 2 in stage 3 originated financial guarantees impaired given financial
assets
Causes/risk stages
which: which:
other other other
f
income income income
lue through through lue of which: of which: of which: o of which: of which:
collective collective collective
individual individual individual
Stagetwo
Stageone
impairment impairment impairment impairment impairment impairment
Stagethree
a
measured at measured at measured at
v valuethrough valuethrough
amortisedcost amortisedcost amortisedcost
comprehensive comprehensive comprehensive
Financialassets Financialassets measuredfair at Financialassets Financialassets measuredfair at Financialassets Financialassets measuredfair at
Opening balance 8,270 566 8,835 7,984 7,984 72,113 72,113 443 100 39 89,515 Increases of acquired or originated financial assets Cancellations other than write-offs (439) (320) (758) (2,365) (2,365) (2,762) (2,762) (134) (33) (6,052) Net value adjustments for credit 2,918 341 3,260 37 37 13,168 13,168 664 373 261 17,763 risk (+/-) Contractual amendments without cancellations Changes in estimate methods Write-offs (1,884) (1,884) (1,884) Other changes 388 388 388 Closing balance 10,749 588 11,336 5,657 5,657 81,023 81,023 973 439 300 99,729 Recoveries from collection for financial assets subject to write- offs Write-offs recognised directly in (83) (83) (83) the income statement
A.1.5 Financial assets, commitments to disburse funds and financial guarantees given: transfer between various credit risk stages (gross and nominal values)
LV/NV Transfers between LV/NV Transfers between LV/NV Transfers between stage 1 and stage 2 stage 2 and stage 3 stage 1 and stage 3
From stage 1 From stage 2 From stage 2 From stage 3 From stage 1 From stage 3 Portfolios/risk stages to stage 2 to stage 1 to stage 3 to stage 2 to stage 3 to stage 1 Financial assets measured at amortised 1. 55,857 68,284 5,672 2,013 8,706 343 cost Financial assets measured at fair value 2. through other comprehensive income 3. Financial assets held for sale Commitments to disburse funds and 4. 21,302 8,501 financial guarantees given TOTAL 31.12.2019 77,159 76,785 5,672 2,013 8,706 343 TOTAL 31.12.2018 102,638 60,512 26,184 7,426 847
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A.1.6 On-balance sheet and off-balance sheet loan exposures to banks: gross and net amounts
Gross exposure
Total value Total partial Type of exposure/Amounts Impaired Non-impaired adjustments and Net exposure write-offs* total provisions ON-BALANCE SHEET LOAN A. EXPOSURES a) Bad loans - of which: forborne exposures b) Unlikely to pay - of which: forborne exposures c) Impaired past-due exposures - of which: forborne exposures d) Non-impaired past-due exposures 0 - of which: forborne exposures e) Other non-impaired exposures 87,563 2,839 84,724 - of which: forborne exposures TOTAL A 87,563 2,839 84,724 OFF-BALANCE SHEET LOAN B. EXPOSURES a) Impaired b) Non-impaired 85,800 85,800 TOTAL B 85,800 85,800 TOTAL A+B 173,363 2,839 170,524 * Values to be shown for informational purposes
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A.1.7 On-balance sheet and off-balance sheet loan exposures to customers: gross and net amounts
Gross exposure
Total value Total partial Type of exposure/Amounts Impaired Non-impaired adjustments and Net exposure write-offs* total provisions ON-BALANCE SHEET LOAN A. EXPOSURES a) Bad loans 28,515 20,894 7,621 - of which: forborne exposures 2,804 1,293 1,511 b) Unlikely to pay 106,325 60,129 46,196 - of which: forborne exposures 73,923 46,697 27,226 c) Impaired past-due exposures - of which: forborne exposures d) Non-impaired past-due exposures 28,997 997 28,000 - of which: forborne exposures 437 21 416 e) Other non-impaired exposures 2,239,176 13,157 2,226,019 - of which: forborne exposures 6,726 374 6,352 TOTAL A 134,840 2,268,173 95,177 2,307,836 OFF-BALANCE SHEET LOAN B. EXPOSURES a) Impaired 1,743 300 1,443 b) Non-impaired 148,717 1,413 147,304 TOTAL B 1,743 148,717 1,713 148,747 TOTAL A+B 136,583 2,416,890 96,890 2,456,583 * Values to be shown for informational purposes
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A.1.9 On-balance sheet exposures to customers: trend in gross impaired exposures
Past-due Reasons/Categories Bad loans Unlikely to pay exposures A. Gross opening exposure 23,604 111,396 311 - of which: exposures disposed of but not derecognised B. Increases 14,725 17,637 3 B.1 transfers from performing exposures 514 15,186 B.2 inflows from acquired or originated impaired financial assets B.3 transfers from other categories of impaired exposures 13,667 262 B.4 contractual amendments without cancellations 1 B.5 other increases 544 2,188 3 C. Decreases 9,814 22,708 314 C.1 outflows to performing exposures 2,531 43 C.2 write-offs 1,884 C.3 collections 1,644 5,922 6 C.4 proceeds from disposals 3,510 C.5 losses on disposals C.6 transfers to other categories of impaired exposures 13,667 262 C.7 contractual amendments without cancellations 184 C.8 other decreases 2,776 404 3 D. Gross closing exposure 28,515 106,325 0 - of which: exposures disposed of but not derecognised
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A.1.9-bis On balance sheet credit exposures to customers: trend in gross forborne exposures broken down by credit quality
Forborne Other forborne Reasons/Quality exposures: exposures impaired A. Gross opening exposure 76,053 13,784 - of which: exposures disposed of but not derecognised B. Increases 6,973 3,071 B.1 inflows from non-forborne performing exposures 1,413 716 B.2 inflows from forborne performing exposures 254 B.3 transfers from impaired forborne exposures 2,176 B.4 inflows from impaired non-forborne exposures 4,729 B.5 other increases 577 179 C. Decreases 6,300 9,692 C.1 outflows to performing non-forborne exposures 1,324 C.2 outflows to forborne performing exposures 2,176 C.3 outflows to impaired forborne exposures 254 C.4 write-offs 86 C.5 Collections 3,657 7,928 C.6 proceeds from disposals C.7 losses on disposals C.8 other decreases 381 186 D. Gross closing exposure 76,726 7,163 - of which: exposures disposed of but not derecognised
205
A.1.11 On-balance sheet impaired loan exposures to customers: trend in total value adjustments
Bad loans Unlikely to pay Past-due exposures
- of which: - of which: - of which: Reasons/Categories Total forborne Total forborne Total forborne exposures exposures exposures A. Total opening write-downs 13,667 1,043 58,397 39,677 49 5 - of which: exposures disposed of but not derecognised B. B. Increases 12,430 370 15,670 9,262 B.1 writedowns for acquired or originated impaired financial assets B.2 other write-downs 967 38 15,626 8,484 B.3 losses on disposals B.4 transfers from other categories of 11,075 325 44 5 impaired exposures B.5 contractual amendments without cancellations B.6 other increases 388 7 773 C. Decreases 5,202 119 13,939 2,242 49 5 C.1. write-backs following valuation 349 30 2,776 1,916 0 C2. write-backs following collection 207 3 88 1 5 C.3 gains on disposal C.4 write-offs 1,884 86 C.5 transfers to other categories of 11,075 325 44 5 impaired exposures C.6 contractual amendments without cancellations C.7 other decreases 2,762 D. Total closing write-downs 20,895 1,294 60,128 46,697 - of which: exposures disposed of but not derecognised
206
A.2 Classification of financial assets, commitments to disburse funds and financial guarantees given on the basis of external and internal ratings A.2.1 Distribution of financial assets, commitments to disburse funds and financial guarantees given: by external rating classes (gross values)
External rating class
Lower than Exposures AAA/AA- A+/A- BBB+/BBB- BB+/BB- B+/B- Unrated Total B- A. Financial assets measured at amortised 46 53,137 51,905 6,511 6,613 1,623,809 1,742,021 cost - Stage one 46 53,137 31,690 5,011 1,403,243 1,493,127 - Stage two 20,215 1,500 92,339 114,054 - Stage three 6,613 128,227 134,840 B. Financial assets measured at fair value 748,554 748,554 through other comprehensive income - Stage one 748,554 748,554 - Stage two - Stage three Total (A + B + C) 46 801,691 51,905 6,511 6,613 1,623,809 2,490,575 D. Commitments to disburse funds and 37 150,422 150,459 financial guarantees given - Stage one 123,239 123,239 - Stage two 37 25,440 25,477 - Stage three 1,743 1,743 Total D 37 150,422 150,459 Total (A + B + C + D) 46 801,691 51,942 6,511 6,613 1,774,231 2,641,034
The table shows exposures divided into on- and off-balance sheet positions of counterparties with external agency ratings. The breakdown shows the rating classes of Standard & Poor’s, which also relate to ratings assigned by other agencies (Moody’s and Fitch). Of total exposures, around 32.82% have external ratings.
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A.3 Distribution of secured credit exposures by type of guarantee A.3.1 Secured on-balance sheet and off-balance sheet loan exposures to banks
Personal Personal guarantees (2)- guarantees Personal guarantees (2) - Collateral (1) Credit derivatives- Other (1)+(2) (2)- Credit Unsecured loans derivatives
derivatives
-
teral
rties
CLN
Total
sexposure
Banks Banks
Public
Central
Property
Securities
Mortgages
companies companies
Properties
Netexposure leasingloans
counterpa
Othersubjects Othersubjects
Other financial Other financial
Othercolla
administrations Gros
Secured on-balance sheet loan 1. exposures: 1.1 fully secured - of which impaired 1.2 partially guaranteed - of which impaired Secured off-balance sheet loan 2. 85,791 85,791 85,791 exposures: 2.1 fully secured 85,791 85,791 85,791 - of which impaired 2.2 partially guaranteed - of which impaired
A.3.2 Secured on-balance sheet and off-balance sheet loan exposures to customers
Personal Personal guarantees (2)- guarantees Personal guarantees (2) - Collateral (1) Credit derivatives- Other (1)+(2) (2)- Credit Unsecured loans derivatives
derivatives
-
ages
CLN
Total
Banks Banks
Public
Central
Property
Securities
Mortg
companies companies
Properties
Netexposure leasingloans
counterparties
Othersubjects Othersubjects
Other financial Other financial
Othercollateral
administrations Grossexposure
Secured on-balance sheet loan 1. 1,120,236 1,079,099 690,283 89,781 62,320 1,000 50,596 115,966 1,009,946 exposures: 1.1 fully secured 1,007,254 968,178 684,488 82,403 44,731 40,976 110,739 963,337 - of which impaired 62,936 30,992 20,119 3,729 1,950 3,707 1,486 30,991 1.2 partially guaranteed 112,982 110,921 5,795 7,378 17,589 1,000 9,620 5,227 46,609 - of which impaired 1,456 488 48 428 476 Secured off-balance sheet loan 2. 80,526 79,682 9,658 695 1,970 22,967 35,290 exposures: 2.1 fully secured 30,821 30,276 9,658 695 1,970 17,953 30,276 - of which impaired 2.2 partially guaranteed 49,705 49,406 0 5,014 5,014 - of which impaired
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B. Distribution and concentration of loan exposures B.1 On-balance sheet and off-balance sheet exposures to customers by sector
Financial companies Non-financial Public administrations Financial companies (of which: insurance Households companies
companies)
alue alue
Exposure/Counterparty
justments
Total v Total value Total value Total value Total value
adjustments adjustments adjustments ad adjustments
Netexposure Netexposure Netexposure Netexposure Netexposure
A. On-balance sheet loan exposures A.1 Non-performing 5,615 17,830 2,005 3,065 - of which: forborne exposures 1,427 1,175 84 118 A.2 Probable defaults 43,364 58,366 2,833 1,763 - of which: forborne exposures 26,647 46,310 579 387 A.3 Impaired past-due exposures - of which: forborne exposures A.4 Non-impaired exposures 812,521 1,448 95,425 997 987,729 10,217 358,344 1,492 - of which: forborne exposures 3,781 221 2,987 174 Total (A) 812,521 1,448 95,425 997 1,036,708 86,413 363,182 6,320 B. Off-balance sheet loan exposures B.1 Impaired exposures 1,443 300 B.2 Non-impaired exposures 4,065 52 143,044 1,359 195 1 Total (B) 4,065 52 144,487 1,659 195 1 Total (A+B) 31.12.2019 812,521 1,448 99,490 1,049 1,181,195 88,072 363,377 6,321 Total (A+B) 31.12.2018 782,511 3,346 54,004 678 1,014,540 80,249 397,983 5,384
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B.2 On-balance sheet and off-balance sheet exposures to customers by region Operations with Italy
ITALY – SOUTH AND NORTH WEST ITALY NORTH EAST ITALY CENTRAL ITALY ISLANDS
Net Total value Net Total value Net Total value Net Total value Exposure/Geographical area exposure adjustments exposure adjustments exposure adjustments exposure adjustments A. On-balance sheet loan exposures A.1 Bad loans 642 994 198 2,003 11,483 4,975 8,219 A.2 Unlikely to pay 2,208 1,086 26,939 33,628 7,894 18,875 9,156 6,539 A.3 Impaired past-due exposures A.4 Non-impaired exposures 238,215 3,100 266,703 1,739 1,196,849 3,634 552,126 5,681 Total (A) 241,065 5,180 293,642 35,565 1,206,746 33,992 566,257 20,439 B. Off-balance sheet loan exposures B.1 Impaired exposures 1,443 300 B.2 Non-impaired exposures 32,800 427 14,758 265 31,326 397 68,420 323 Total (B) 32,800 427 16,201 565 31,326 397 68,420 323 Total (A+B) 31.12.2019 273,865 5,607 309,843 36,130 1,238,072 34,389 634,677 20,762 Total (A+B) 31.12.2018 204,924 5,502 230,325 27,019 1,185,853 34,722 627,636 22,216
The above geographical distribution is based on the criteria of the concentration models (borrowers’ province of residence) and, therefore, does not give a picture of the prevalence of the Bank’s operations. Furthermore, of exposures classified as Central Italy, an amount of € 748 million regards Italian government bonds, classified as financial assets measured at fair value through other comprehensive income, and an amount of € 64.5 million represents receivables due from Public Administrations for commissions earned on services rendered.
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Operations outside of Italy
OTHER EUROPEAN ITALY AMERICAS ASIA REST OF WORLD
COUNTRIES
ents
Exposure/Geographical area
tal value tal
To Total value Total value Total value Total value
adjustments adjustments adjustments adjustments adjustm
Netexposure Netexposure Netexposure Netexposure Netexposure
A. On-balance sheet loan exposures A.1 Bad loans 7,620 20,894 A.2 Unlikely to pay 46,197 60,129 A.3 Impaired past-due exposures A.4 Non-impaired exposures 2,253,893 14,154 126 0 Total (A) 2,307,710 95,177 126 B. Off-balance sheet loan exposures B.1 Impaired exposures 1,443 300 B.2 Non-impaired exposures 147,304 1,413 Total (B) 148,747 1,713 Total (A+B) 31.12.2019 2,456,457 96,890 126 Total (A+B) 31.12.2018 2,248,738 89,461 131 168 1
211
B.3 On-balance sheet and off-balance sheet loan exposures to banks by geographical area Operations with Italy
ITALY – SOUTH AND NORTH WEST ITALY NORTH EAST ITALY CENTRAL ITALY ISLANDS
Net Total value Net Total value Net Total value Net Total value Exposure/Geographical area exposure adjustments exposure adjustments exposure adjustments exposure adjustments A. On-balance sheet exposures A.1 Bad loans A.2 Unlikely to pay A.3 Impaired past-due exposures A.4 Non-impaired exposures 83,894 2,839 300 1 36 0 Total (A) 83,894 2,839 300 1 36 B. Off-balance sheet exposures B.1 Impaired exposures B.2 Non-impaired exposures 9 Total (B) 9 Total (A+B) 31.12.2019 83,894 2,839 300 1 45 Total (A+B) 31.12.2018 17,115 14 440 2 44,491 34 3
Operations outside of Italy
OTHER EUROPEAN ITALY AMERICAS ASIA REST OF WORLD
COUNTRIES
Exposure/Geographical area ments
xposure
otal otal value
T Total value Total value Total value Total value
adjustments adjustments adjust adjustments adjustments
Netexposure Netexposure Netexposure Netexposure Nete
A. On-balance sheet exposures A.1 Bad loans A.2 Unlikely to pay A.3 Impaired past-due exposures A.4 Non-impaired exposures 84,230 2,839 494 Total (A) 84,230 2,839 494 B. Off-balance sheet exposures B.1 Impaired exposures B.2 Non-impaired exposures 9 Total (B) 9 Total (A+B) 31.12.2019 84,239 2,839 494 Total (A+B) 31.12.2018
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B.4 Large Exposures For application of prudential supervisory regulations regarding large exposures (see Part II, Chapter 10 of Bank of Italy Circular 285/2013 and articles 387 and subsequent of Regulation (EU) 575/2013), at 31 December 2019 there were 3 exposures of this kind (more than 10% of the own funds) for a nominal amount of € 1,050,745 thousand, corresponding to a weighted amount of € 88,623 thousand.
C. Securitisation transactions C.2 Exposures from main “third party” securitisation transactions, broken down by type of securitised asset and type of exposure
On-balance sheet Guarantees given Credit lines
exposures
backs backs backs backs
- - - -
Type of underlying asset/exposures
ns/write
downs/write downs/write downs/write dow
- - - -
Carryingamount Carryingamount
Write Write Write Write
Minibond - EBB Export (code 67849) 20,042 16
Minibond - CheeseTake S.r.l. - Series 2018-2) (code 57139) 489 11
Minibond - EBB Export (Series 2) (code 53951) 5,998 5
E. Disposal transactions
Financial assets disposed of but not fully derecognised Qualitative information The financial assets indicated below refer to repurchase agreements recognised among amounts due to banks and carried out to obtain short-term funding, offering securities as collateral.
213
Quantitative information E.1 Financial assets disposed of and fully recognised and associated financial liabilities: carrying amount
Financial assets disposed of and fully recognised Associated financial liabilities
of which: of which: subject to subject to of which: of which: sales sales Carrying subject to of which Carrying subject to contracts contracts amount securitisation impaired amount securitisation with with transactions transactions repurchase repurchase agreements agreements A. Financial assets held for trading 1. Debt securities 2. Equity securities 3. Loans 4. Derivatives Other financial assets obligatorily measured B. at fair value 1. Debt securities 2. Equity securities 3. Loans Financial assets designated at fair value 1. Debt securities 2. Loans Financial assets measured at fair value D. 42,123 42,123 (42,044) (42,044) through other comprehensive income 1. Debt securities 42,123 42,123 (42,044) (42,044) 2. Equity securities 3. Loans E. Financial assets measured at amortised cost 1. Debt securities 2. Loans Total 31.12.2019 42,123 42,123 (42,044) (42,044) Total 31.12.2018 204,200 204,200 (199,002) (199,002)
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SECTION 2 – MARKET RISKS 2.1 - Interest-rate and price risk – regulatory trading book At 31 December 2019, there were no positions attributable to the regulatory trading book; therefore, the entire financial structure is composed of the “banking book”.
2.2 - Interest rate and price risk - Banking book Qualitative information A. Interest-rate risk and price risk: general aspects, management processes and measurement methods Interest-rate risk can be defined as the risk that changes in market interest rates have unfavourable effects on assets and liabilities held for purposes other than trading, with an impact, therefore, on profitability and/or on the Bank’s economic value. Exposure to this risk mainly derives from the degree of maturity transformation carried out by the Bank, that is collection of funds with short-term repricing schedules and use of assets with longer-term revision of the rate; for this reason, quantification is based on analysing the mismatch between repricing dates for asset and liability items. The definition and optimisation of the Bank’s financial structure is ensured by the Administration, Control and Finance Department in accordance with the indications laid down by the company bodies in specific Guidelines and in line with the risk targets set by the corporate bodies (“Risk Appetite Framework”). Interest rate risk appetite is expressed both in terms of expected impact on net interest income (short-term view), and its impact on economic value on the bank book (medium/long-term view). Financial management is monitored both preventively - in order to identify the optimal financial structure in relation to changes in market conditions - and after the fact, to ensure observance of risk objectives and the approved system of limits. The second-level control activities are the responsibility of organisational structures separate and independent from the operating units. As of 31 December 2019 the most significant elements that characterise exposure to interest rate risk are: • medium/long-term loans relative to core lending business, consisting mainly of variable rate loans indexed to the Euribor (84%), fixed rate loans (12%) and, to a residual extent, mixed-rate loans (4%); • factoring transactions; • investments in multi-year treasury bonds, with an average duration of 2.5 as of the reporting date;
215
• debenture bonds with fixed rate and zero coupon, with maturities distributed according to the time development shown in table B1 below; • ECB funding (“TLTRO II”); • variable rate deposit liabilities indexed to the Euribor with Cassa Depositi e Prestiti; • variable rate deposit liabilities indexed to the Euribor with the European Investment Bank (EIB); • short and medium-term deposit liabilities indexed to the Euribor with business customers; • short and medium-term deposit liabilities indexed to the Euribor with Invitalia Group companies; • repurchase agreements with banking counterparties; • on demand deposits from business customers, deriving from on demand current accounts and time deposits; • demand deposits from Invitalia Group companies; • demand deposits generated by technical current accounts related to management of public subsidies. Additionally, the following positions are part of the overall ALM structure: • hedging derivatives for bond funding; • deposits (assets or liabilities), indexed to EONIA, received or made as collateral for the positive or negative market value of hedging derivative contracts and for repurchase agreements (cash collateral). The positions deriving from the securitisation of residential mortgage loans carried out in 2016 have no effect on the overall ALM structure and, therefore, generate no interest rate risk, as the securities issued by the vehicle company were entirely subscribed by the Bank itself. The Bank adopts robust methodologies for measuring risk, able to include all relevant elements (risk exposure drivers and risk factors) in the light of its business model. In terms of the risk factor profile, both parallel and non-parallel changes in interest rate curves are considered, in both a deterministic (e.g. parallel shock on the interest rate curve equal to an increase of 200 basis points) and probabilistic view (shock to the interest rate curve corresponding to the 99th percentile of historical distribution). In order to ensure exposure to interest rate risk by the banking book is always in line with the Bank’s risk appetite - as defined in the Risk Appetite Framework - the operating and risk control departments independently carry out monthly monitoring and, relative to certain types of transactions (e.g. changes in the portfolio of securities owned), preventive impact analysis. 216
The risk control department also carries out stress test analyse to estimate potential adverse consequences deriving from extreme but plausible market scenarios. Stress scenarios are identified on the basis of the situation of financial markets and forecasts made by external sources, taking into account the vulnerabilities associated with the Bank's business model. Relative to price risk, the Bank has only negligible exposure, in that it holds only a non- significant number of shares.
217
Quantitative information 1. Banking book: distribution by residual maturity (repricing date) of financial assets and liabilities Currency of denomination - euro
From over From over From over From over On Up to 3 3 months More than Undefined Type/Residual maturity 6 months 1 year to 5 5 years to demand months to 6 10 years duration to 1 year years 10 years months 1. On-balance sheet assets 106,452 1,007,578 318,837 46,303 829,067 27,602 56,721 1.1 Debt securities 20,112 6,557 757,777 279 - with early redemption option 70 70 9,811 279 - other 20,042 6,487 747,966 1.2 Loans to banks 65,303 9,667 501 1.3 Loans to customers 41,149 997,911 298,224 39,746 71,289 27,323 56,721 - current accounts 4,578 - other loans 36,571 997,911 298,224 39,746 71,289 27,323 56,721 - with early redemption option 22,347 944,949 222,152 39,746 70,453 27,230 51,661 - other 14,224 52,962 76,072 836 93 5,060 2. On-balance sheet liabilities 683,705 254,181 348,970 271,219 382,875 165,312 6,741 2.1 Due to customers 593,394 170,608 151,814 147,870 84,173 6,768 6,741 - current accounts 582,219 170,587 97,944 147,493 80,258 - other payables 11,175 21 53,870 377 3,915 6,768 6,741 - with early redemption option - other 11,175 21 53,870 377 3,915 6,768 6,741 2.2 Due to banks 90,311 83,573 197,156 123,349 - current accounts 0 - other payables 90,311 83,573 197,156 123,349 2.3 Debt securities 298,702 158,544 - with early redemption option - other 298,702 158,544 2.4 Other liabilities - with early redemption option - other 3. Financial derivatives 3.1 With underlying security - Options + long positions + short positions - Other derivatives + long positions + short positions 3.2 Without underlying security (71,139) (380,282) 300,000 151,421 - Options + long positions + short positions - Other derivatives (71,139) (380,282) 300,000 151,421
218
+ long positions 300,000 151,421 + short positions 71,139 380,282 4. Other off balance sheet transactions + long positions 80,437 31,260 33,763 + short positions 145,460
219
2.3 – Exchange rate risk Qualitative information A. Exchange-rate risk: general aspects, management procedures and measurement methods During financial year 2019 the Bank did not carry out transactions involving gold, nor did it carry out foreign exchange transactions. At the end of the year, therefore, no transactions were recognised in currencies other than the Euro which could generate exchange risk.
SECTION 3 - DERIVATIVES AND HEDGING POLICIES 3.1 - Derivatives for trading purposes The bank does not carry out transactions involving derivatives for trading purposes.
A. Financial derivatives
3.2 – Recognised hedges Qualitative information A. Fair value hedging activities In order to immunise the Bank’s economic value against the impact of changes in interest rates on bond funding at zero coupon rates, each bond issue has been hedged by means of an Interest Rate Swap derivative contract stipulated with a primary market counterparty. Therefore, these positions can be classified as fair value hedges.
B. Cash flow hedges There are no cash flow hedges.
C. Hedging of foreign investments There are no hedges for foreign investments.
D. Hedging instruments Each hedging instrument includes a receivable portion that precisely replicates the interest accruing on bond issues and a payable portion indexed to the Euribor parameter plus a spread, so as to perfectly compensate for variations in cash flows from the hedged element due to variations in the rates.
E. Elements hedged
220
Given that the aim of the hedging transaction is to immunise the economic value of the banking book from interest rate risk, the element hedges is not precisely the bond, but a portion of it, represented by the component affected by the change in interest rates.
Verification of hedge effectiveness is done using the "hypothetical derivative" method, represented by the derivative contract that would be stipulated in the (theoretical) absence of counterpart risk. It consists in verifying that the change in the value of the hedged element (hypothetical derivative), based on a conventional interest rate shock, is equal to the change in the value of the hedging instrument (effective derivative). Any difference (ineffectiveness) must be attributed entirely to the differenced between the fair market spread (hypothetical derivative) and that effectively negotiated with the counterparty (effective derivative).
221
Quantitative information A. Financial hedging derivatives A.1 Financial hedging derivatives: notional values at end of period
Total 31.12.2019 Total 31.12.2018
Over the Over the Over the Over the counter - counter - counter - counter - Over the Without Without Over the Without Without counter - central central Organised counter - central central Organised Type of derivative Central counterparties counterparties markets Central counterparties counterparties markets counterparties - With - Without counterparties - With - Without offsetting offsetting offsetting offsetting agreements agreements agreements agreements Debt securities and interest 1. 451,421 288,583 rates a) Options b) Swaps 451,421 288,583 c) Forwards d) Futures e) Other Equity securities and share 2. indexes a) Options b) Swaps c) Forwards d) Futures e) Other 3. Currencies and gold a) Options b) Swaps c) Forwards d) Futures e) Other 4. Commodities 5. Other Total 451,421 288,583
222
A.2 Financial hedging derivatives: positive and negative fair value – breakdown by product
Change in value used Positive and negative fair value - Total Positive and negative fair value - Total to identify hedging 31.12.2019 31.12.2018
ineffectiveness (*)
------
- - - -
ies ies rties
Type of derivative
ut offsettingut
Central Central
hout central
agreements agreements agreements agreements
er the er counter
counterparties counterpa
With offsetting With offsetting
ver the ver counter
Without central Wit Without central Without central
counterpart counterparties counterparties counterparties
Total 31.12.2019 Total 31.12.2018
Without offsettingWithout Witho
O the Over counter the Over counter the Over counter the Over counter Ov
Organisedmarkets Organisedmarkets
1. Positive fair value 88,039 82,650 a) Options b) Interest rate swaps 88,039 82,650 c) Cross currency swaps d) Equity swaps e) Forwards f) Futures g) Other Total 88,039 82,650 Negative fair value (2,248) a) Options b) Interest rate swaps (2,248) c) Cross currency swaps d) Equity swaps e) Forwards f) Futures g) Other Total (2,248)
(*) The macro-hedging rules adopted by the Bank follow the dictates of IAS 39. Therefore, the column "Change in value used to identify hedging ineffectiveness" is not completed.
223
A.3 OTC financial hedging derivatives: notional values, positive and negative fair value by counterparty
Central Other financial Underlying assets Banks Other subjects counterparties companies Contracts not included in offsetting agreements 1) Debt securities and interest rates - notional value - positive fair value - negative fair value 2) Equity securities and share indexes - notional value - positive fair value - negative fair value 3) Currencies 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 Contracts included in offsetting agreements 1) Debt securities and interest rates - notional value 451,421 - positive fair value 88,039 - negative fair value 2,248 2) Equity securities and share indexes - notional value - positive fair value - negative fair value 3) Currencies and gold - notional value - positive fair value - negative fair value 4) Commodities - notional value - positive fair value - negative fair value 5) Other - notional value 224
- positive fair value - negative fair value
A.4 Residual life of OTC financial hedging derivatives: notional values
Over 1 year and Underlying/Residual life Up to 1 year More than 5 years Total up to 5 years Financial derivatives on debt securities and interest A.1 300,000 151,421 451,421 rates Financial derivatives on equity securities and stock A.2 indices A.3 Financial derivatives on foreign currencies and gold A.4 Financial derivatives on commodities A.5 Other financial derivatives Total 31.12.2019 300,000 151,421 451,421 Total 31.12.2018 145,702 142,881 288,583
225
3.3 – Other information on derivatives for trading and hedging A. Financial and credit derivatives A.1 OTC financial and credit derivatives: net fair values by counterparty
Central Other financial Banks Other subjects counterparties companies A. Financial derivatives 1) Debt securities and interest rates - notional value 451,421 - positive fair value 88,039 - negative fair value 2,248 2) Equity securities and share indexes - notional value - positive fair value - negative fair value 3) Currencies 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 B. B. Credit derivatives 1) Purchase and protection - notional value - positive fair value - negative fair value 2) Sale and protection - notional value - positive fair value - negative fair value
226
SECTION 4 - LIQUIDITY RISK Qualitative information A. Liquidity risk: general aspects, management processes and measurement methods Liquidity risk, in general terms, means the risk of the Bank being unable to finance new loans and/or to promptly comply with its own payment commitments. The liquidity risk governance and management system is intended to avoid the development of certain conditions which could give rise to this state of breach. Exposure to liquidity risk depends initially on the specific business model (second level bank focussed on business loans), which involves a low amount of retail deposits, at low cost and stable over the medium/long term, which requires higher usage of transformation of maturities and secured forms of funding in order to limit the cost of funding. Additionally, management decisions with regards to instruments used to mitigate the risk are also important. These include the qualitative/quantitative structure of liquidity reserves, the portion of tied assets, and level of diversification for funding. In relation to these aspects and risk factors which could impact expected cash flows, as part of the International Liquidity Adequacy Assessment Process (ILAAP), the following types of liquidity risk to which the Bank is exposed were identified: a. contingency liquidity risk, with low significance; b. mismatch liquidity risk, i.e. refinancing at unfavourable conditions, with high significance; c. market liquidity risk, i.e. risk of forced sale of securities or loans receivable at a price lower than fair value, with low significance; d. funding liquidity risk, i.e. risks associated with the structure of funding and concentration of counterparties/technical forms/maturities having negative effects of market propensity relative to the Bank's unsecured debt, with high significance; e. asset encumbrance risk, i.e. risk associated with tied assets for guaranteed funding operations having negative effects of market propensity relative to the Bank's unsecured debt, with high significance. In the face of these risks, the liquidity monitoring system is structured as follows. • with regards to funding liquidity risk, contingency liquidity risk and market liquidity risk, exposure to the risk is monitored jointly with the maturity ladder model, placing expected cash flows and the counterbalancing capacity on a monthly calender and calculating the cumulative balance for each maturity period. Scenario analysis involves the introduction of stress hypotheses relative to non-renewal of short-term funding and
227
haircuts on liquidity reserves. Risk exposure is expressed in terms of days of survival and, more specifically, using the Liquidity Coverage Ratio; • exposure to funding liquidity risk is also measured in terms of deposit concentration by technical form, counterparty and renewal date; • exposure to mismatch liquidity risk is expressed as the percentage of illiquid assets financed by stable deposits and, in particular, using the Net Stable Funding Ratio; • for asset encumbrance risk, exposure to risk is expressed as the ratio between tied assets and total assets; • in terms of risk factors (monitoring of unfavourable events which could impact expected cash flows), a system of early warning indicators is in effect, with the aim of identifying events able to create liquidity stress or crises in advance. The overall liquidity risk monitoring system involves daily checks carried out by: • the Administration, Control and Finance Department - Treasury Area, for first level controls assigned to the operating department that assumes the risk; • by the Risk Management Department, for second level controls by a structure that is separate and independent from the first. In relation to the monitoring illustrated above, risk objectives, operating limits and attention thresholds are defined which, in line with prudential regulations, represent the reference measures for the implementation of the Risk Appetite Framework, Contingency Funding Plan and Recovery Plan. In particular, in terms of escalation processes and options available in crisis situations, specific rules are established in terms of expected cash flows over the short term (3 months) and very short term (7 days), as well as with respect to the ratio between liquid reserves and net outflows expected under stress conditions (Liquidity Coverage Ratio). These indicators are also subject to prospective analysis when planning funding (funding plan), in order to verify before the fact whether balance is maintained in line with the risk appetite identified by the Board of Directors (Risk Appetite Framework). The tables below show distribution according to term and currency of the assets and liabilities at 31 December 2019.
228
Quantitative information 1. Distribution by maturity according to residual contractual term of financial assets and liabilities
Currency of denomination: Euro
o o
Items/Time frames
7days
3months
months
ths to 1to year ths
to5 years
todays15
to1 month
Ondemand
to months6to
From over From 3 over From 6
mon
From over From 1 year
From over From 7 days
Moreyears than 5
From over 15 daysover From 15
From over From 1 t day
From over From 1 month Undefinedduration A. On-balance sheet assets 76,997 10,901 4,079 69,233 82,595 183,737 157,924 1,296,123 494,880 9,674 A.1 Government securities 1,220 6,765 3,393 11,378 679,860 A.2 Other debt securities 248 304 642 571 38,286 A.3 Units in collective investment undertakings A.4 Loans 76,997 10,901 2,859 69,233 75,582 180,040 145,904 615,692 456,594 9,674 - banks 65,358 501 9,674 - customers 11,639 10,901 2,859 69,233 75,582 179,539 145,904 615,692 456,594 B. On-balance sheet liabilities 683,739 42,043 1 100,555 72,877 311,583 293,654 441,536 167,609 B.1 Deposits and current accounts 582,219 100,551 70,316 98,401 148,613 80,000 - banks 0 - customers 582,219 100,551 70,316 98,401 148,613 80,000 B.2 Debt securities 4,500 300,000 151,421 B.3 Other liabilities 101,520 42,043 1 4 2,561 213,182 140,541 61,536 16,188 C. Off-balance sheet transactions (95,491) 1,786 2,685 64 26,887 64,070 C.1 Financial derivatives with exchange of principal - long positions - short positions C.2 Financial derivatives without exchange of principal - long positions - short positions C.3 Deposits and loans to be received - long positions - short positions C.4 Irrevocable commitments to disburse funds (95,491) 1,786 2,685 64 26,887 64,070 - long positions 49,969 1,786 2,685 64 26,887 64,070 - short positions 145,460 C.5 Financial guarantees given C.6 Financial guarantees received C.7 Financial derivatives with exchange of principal - long positions - short positions C.8 Financial derivatives without exchange of principal - long positions - short positions
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SECTION 5 - OPERATIONAL RISKS Qualitative information A. General aspects, management processes and measurement methods Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Such losses include, among others, those resulting from fraud, human error, the interruption of operations, system non-availability, contractual default, natural disasters. Operational risk also includes legal risk, while strategic risk and reputational risk are not included. In consideration of the Bank's operations, exposure to operational risks is mainly associated with business lending activities, particularly with reference to SMEs, and to operations relative to the management of subsidised funds. In terms of monitoring the main operational risk phenomena/events, the Bank makes use of the Risk Self Assessment process, carried out with the contribution of all Bank structures, coordinated by the Risk Management department. This provides a prospective assessment of the main types of operational risks on the basis of estimates and judgements made by the risk owner operating departments. In the organisational structure adopted by the Bank, the unit responsible for controlling and gauging operational risks is the Risk Management department, which makes use of the collaboration of all the structures concerned, in order to identify the main initiatives of operational risk mitigation and to monitor their effective implementation.
Quantitative information In 2019 the Bank continued to acquire information on operational losses and to monitor the events in progress, reporting quarterly to the Internal Controls and Risks Committee and to the Company Boards on the capital requirement to cover operational risk. The amount of provisions for operational risk at 31 December 2019 was around € 0.3 million, down with respect to the previous year by around 0.2 million. At 31 December 2019, the capital requirement for operational risks, calculated with the basic approach contemplated by the Supervisory Instructions, amounted to € 13.3 million.
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Part F – Information on capital
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Section 1 – Capital
A. Qualitative information
The company’s Capital, broken down in detail in the following sections, is composed of share capital, profit reserves, the valuation reserve related to the HTCS securities portfolio and the defined-benefit plans. It is subjected to constant monitoring carried out jointly by the Administration, Control and Finance and Risk Management Departments, in order to check current and future adequacy, linked to capital needs, connected with business development and in keeping with the risk appetite as defined by the Board of Directors. Internal capital management procedures also take into account the mandatory minimum capital requirements set by the Supervisory Regulations (Basel III), which set two fundamental objectives:
• to strengthen banks’ ability to absorb the shocks deriving from financial and economic stress; • to increase transparency and disclosure to the public in relation to the risks that banks assume.
To achieve the first objective, measures have been provided for that increase the quantity and quality of the intermediaries capital endowment, through the application of additional reserves compared with the minimum requirements (capital conservation reserves and countercyclical supervisory instruments), rules on the management of liquidity risk and financial leverage (further requirements needed to face short term liquidity risk, to maintain the long-term structural balance and to contain financial leverage). Additionally, implementing the EBA guidelines on the SREP, the Supervisory Authority periodically reviews the capital requirements of individual banks in relation to their overall riskiness and the results of the prudential control process. In particular, in relation to the three capital ratios provided for in the legislation (CET1, Tier1 and TCR), as part of the SREP the Bank of Italy defines, for each Bank subject to its direct supervision, the individual level of the following requirements:
• Total SREP capital ratio (TSCR) or binding requirement; • Overall Capital Requirements (OCR) or total requirement; • Pillar 2 guidance (P2G) or target requirement (where provided for).
Quantitative information 232
B.1 The Bank’s capital: breakdown
Amount Amount Item/Amount 31.12.2019 31.12.2018 1. Share capital 204,509 204,509 2. Share premium reserve 3. Reserves 71,390 51,189 - of profits 71,390 51,189 a) legal 25,461 24,451 b) statutory c) own shares d) other 45,929 26,738 - other 3.5 Advances on dividends (-) 4. Equity instruments 5. (Own shares) 6. Valuation reserves (3,876) (10,517) - Equity securities at fair value through other comprehensive income Hedging of equity securities at fair value through other comprehensive income - Financial assets (other than equity securities) measured at fair value through other (2,614) (9,526) comprehensive income - Property, plant and equipment - Intangible assets - Hedging of foreign investments - Cash flow hedges - Hedging instruments (non-designated elements) - Exchange differences - Non-current assets and disposal groups held for sale - Financial liabilities designated at fair value through profit and loss (changes in own credit standing) - Actuarial gains (losses) on defined-benefit pension plans (1,262) (991) - Portion of valuation reserves related to investees carried at equity - Special revaluation laws 7. Profit (loss) for the year 22,519 20,201 Total 294,542 265,382
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B.2 Valuation reserves for financial assets measured at fair value through other comprehensive income: breakdown
Total 31.12.2019 Total 31.12.2018
Asset/Amount Positive reserve Negative reserve Positive reserve Negative reserve 1. Debt securities 46 (2,660) 29 (9,555) 2. Equity securities 3. Loans Total 46 (2,660) 29 (9,555)
B.3 Valuation reserves for financial assets measured at fair value through other comprehensive income: annual change
Debt securities Equity securities Loans 1. Opening balance (9,526) 2. Positive changes 15,755 2.1 Fair value increases 15,741 2.2 Net value adjustments for credit risk 14 2.3 Reversal to income statement of negative reserves from realisation 2.4 Transfers to other equity components (equity securities) 2.5 Other changes 3. Negative changes 8,842 3.1 Fair value decreases 2,793 3.2 Writebacks for credit risk 3.3 Reversal to income statement of positive reserves: for disposal 6,050 3.4 Transfers to other equity components (equity securities) 3.5 Other changes 4. Closing balance (2,614)
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B.4 Valuation reserves relating to defined benefit plans: annual changes
Amounts
Employees’ severance Internal pension Asset/Amount Total indemnity fund provision 1. Opening balance 313 (1,304) (991) 2. Positive changes 2.1 Fair value increases 2.2 Other changes 3. Negative changes 3.1 Fair value decreases 90 181 271 3.2 Other changes 4. Closing balance 223 (1,485) (1,262)
SECTION 2 – OWN FUNDS AND REGULATORY BANKING RATIOS
Please see the disclosure on own funds and capital adequacy found in the Disclosure to the Public ("Third Pillar"), which can be found on the Bank's website (www.mcc.it).
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Part H – Transactions with related parties
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In relation to the provisions of IAS 24 the perimeter of related parties was identified as including the following categories: - the parent company, at 100%: Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa S.p.A. (Invitalia S.p.A.); - companies belonging to the Invitalia Group; - companies which, directly or indirectly, hold stakes in the parent company such as to exercise a considerable influence over the same; - subjects who hold administrative, management and control positions - including the Directors and Statutory Auditors of the Bank or its parent company (key management personnel); - companies controlled directly and/or indirectly, also jointly, by key management personnel; - companies subject to considerable influence on the part of key management personnel, i.e. companies in which key management personnel directly or indirectly hold a significant portion of the voting rights; - the close family members of key management personnel and the entities which they control, individually or jointly, or over which they exercise a considerable influence, or which hold, directly or indirectly, a significant portion of the voting rights; - Pension Funds for Bank employees.
Although the Bank applies the exemption contemplated by paragraph 25 of IAS 24 for public entities, for the sake of standardisation in respect of the criteria adopted by the Parent Company in the preparation of the consolidated financial statements full information is given in the Bank’s separate financial statements on transactions with the Ministry of Economic Development and the Ministry of the Economy and Finance and companies controlled by said Ministries.
Information is given below concerning fees paid to key management personnel and transactions with various types of related parties.
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1. Disclosure on the fees of key management personnel
The following table provides the amount of benefits provided to key management personnel including VAT and accessory charges, when applicable.
Post- Short-term Other long-term Severance employment benefits benefits benefits benefits Fees to directors 247 Fees to Statutory Auditors 76 Fees to the Bank's key management personnel 3,536 19 335
2. Information on transactions with related parties
In 2019, there were no transactions with related parties, nor with entities other than related parties, or atypical or unusual transactions.
The atypical or unusual transactions carried out with related parties all fall within the sphere of the Bank’s ordinary operations and are normally carried out under market conditions and, in any case, at the same conditions as applied to independent third parties.
Without prejudice to compliance with art. 2391 of the Italian Civil Code, on the interests of directors, the Bank was subject to the provisions of art. 136 of the Consolidated Banking Act regarding the obligations of bank representatives, pursuant to which the latter cannot assume obligations of any kind or conduct buying and selling transactions, directly or indirectly with the Bank that they direct, manage or control, unless approved by a Board of Directors’ resolution passed unanimously, with the exclusion of the vote of the representative involved and with the favourable vote of all members of the company’s Board of Auditors.
The table below shows the assets, liabilities, economic data and guarantees in effect at 31 December 2019 according to type of related party.
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Assets Liabilities Income Statement Commitments
Other Commitments Due from Other Due to Other Interest Interest Personnel administrative to disburse Customers assets customers liabilities income expense expenses expenses funds
Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo 438 85,767 1,769 534 194 66 d’impresa S.p.A. (Invitalia S.p.A.) Infratel Italia S.p.A. 69,070 215 12,000 Key Executives-Directors- 1,489 22 Statutory Auditors
Commitmen Assets Liabilities Income Statement ts Interes Commitmen Due from Other Due to Other Fee and Interest Fee and t Administrati ts to Customer asset customer liabilitie commissio expens commissio incom ve expenses disburse s s s s n income e n expense e funds Cassa Depositi e 60,807 534 Prestiti S.p.A. Enel S.p.A. 100,037 30 Fincantieri Cantieri Navali 1,184 93 10,000 Italiani S.p.A. Leonardo 37 S.p.A. Gruppo Poste 4,626 200,178 3,107 95 13 1,536 Italiane S.p.A. Rai Way 235 1 S.p.A. RAM Logistica Infrastruttur 7 20 e e Trasporti S.p.A.
Relative to the Ministry of Economy and Finance, note receivables of 47,000 relative to expenses advanced by the Bank relative to its public subsidy management activity.
With regards to the Ministry of Economic Development, the bank holds receivables for 61,901 thousand relative to invoices issued or to be issued, relative to commissions accrued relative to management of subsidised funds.
During 2019, the Bank received guarantees from SACE S.p.A. totalling € 7,724 thousand and subscribed a two basket bonds with a nominal value of € 26 million, with a SACE guarantee. 239
Amounts due from customers include without recourse factoring operations for € 8,481 thousand and 17,000 of interest income, relative to which the transferred debtors have connections to our associated parties.
With regard to the complementary pension fund for Bank employees, contributions paid to the Previgen pension fund totalled € 1,114 thousand.
Disclosure on the activity of management and coordination of companies
The Bank is subject to the management and coordination of the parent company Invitalia S.p.A. The essential information about the parent company, provided in the following summary schedule as required by article 2497 bis of the Civil Code, was taken from the relative annual financial statements, most recently approved at 31 December 2018. For full and complete understanding of Invitalia S.p.A.'s equity and financial situation at 31 December 2018, as well as the results achieved by the company in the financial year ending on said date, please read the financial statements which, accompanied by the independent auditor’s report, are available in the form and using the methods envisaged under the law.
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AGENZIA NAZIONALE PER L'ATTRAZIONE DEGLI INVESTIMENTI E LO SVILUPPO D'IMPRESA S.p.A.
summary schedule of the essential information from the most recently approved financial statements, pursuant to article 2497-bis, Civil Code
€ thousands BALANCE SHEET 31.12.2018
ASSETS Cash and cash equivalents 14 Financial assets measured at fair value through profit and loss 121,753 Financial assets measured at amortised cost 1,075,619 Equity investments 325,123 Property, plant and equipment and intangible assets 55,881 Tax assets 12,336 Non-current assets and disposal groups held for sale 113,964 Other assets 37,523 TOTAL ASSETS 1,742,213
LIABILITIES AND SHAREHOLDERS’ EQUITY Financial liabilities measured at amortised cost 547,232 Tax liabilities 1,520 Other liabilities 380,733 Employee severance benefits 6,785 Provisions for risks and charges 13,351 Share capital 836,384 Reserves (51,916) Valuation reserves (9,878) Profit (Loss) for the year 18,003 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,742,213
COMMITMENTS 1,120,474
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INCOME STATEMENT 31.12.2018 ITEM Net interest income (2,309) Net fees and commissions 121,924 Dividends and similar income - Net gains/(losses) on trading activities (506) Net gains/(losses) on disposal or repurchase (16) Net gains/(losses) of other financial assets and liabilities measured at fair 399 value through profit and loss Net value adjustments for credit risk (467) Administrative expenses (123,410) Net provisions for risks and charges (6,434) Net value adjustments on property, plant and equipment (1,686) Net value adjustments on intangible assets (2,869) Other operating income/expense 24,576 Gains(losses) from equity investments 29,603 Income taxes for the period on continuing operations (1,993) Profit (Loss) from discontinued operations after tax (18,811) Profit (loss) for the period 18,003
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Part L – Segment reporting
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The segment reporting for the Bank is based on the elements that the management uses to adopt its operating decisions (so-called management approach) and is therefore in keeping with the disclosure requirements provided for in IFRS 8. In the context of the activities related to achieving the targets set forth in the Business Plan, the Bank’s organisational model is divided into two business segments: development bank and service bank.
Attribution of the economic and financial results to the two business segments is based on the accounting standards used for preparing and presenting the annual financial statements.
For each segment subject to disclosure the result achieved is presented in terms of gross profit from continuing operations.
Below are the main figures from the income statement and the equity aggregates, which summarise the contributions from the two segments.
ECONOMIC RESULTS 31/12/2019 31/12/2018
Management of Management of Lending Total Lending Total (figures in thousands of euro) Subsidised Funds Subsidised Funds
NET BANKING AND INSURANCE INCOME 34,886 53,569 88,454 32,816 55,520 88,336
OPERATING PROFIT/(LOSS) 19,336 28,064 47,400 18,382 30,464 48,846 Net value adjustments on receivables and on provisions for guarantees (16,836) and commitments 621 (16,216) (27,518) 744 (26,774) NET OPERATING PROFIT/(LOSS) 2,500 28,685 31,185 (9,136) 31,208 22,072
GROSS PROFIT ON CONTINUING OPERATIONS 737 28,394 29,132 (8,173) 32,323 24,151
Income taxes (6,613) (3,949)
NET INCOME FOR THE PERIOD 22,519 20,202
OTHER INFORMATION 31/12/2019 31/12/2018
Management of Management of Lending Total Lending Total (figures in thousands of euro) Subsidised Funds Subsidised Funds
Loan brokerage:
loans and advances to customers and banks 2,692 6,982 1,644,593 0 0 0
Management of Public Funds:
funds of third parties under management, recognised under separate accounting (*) 5,521,652 5,593,051 of which: Guarantee Fund Italian Law 662/96 5,319,080 5,310,083
______(*) See Part B of the Notes to the Financial Statements -“Management and intermediation services for third parties”
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Part M – Leasing information
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Section 1 – Lessee
Qualitative information The Bank has stipulated real estate leasing contracts in the role of lessee relative to: - the property in Rome, Viale America 351, which holds the Bank’s registered offices; - the properties which hold its representation offices in Milan, Pescara, Naples, Bari and Catania. Additionally, there are 16 long-term rental contracts for company cars, with durations of 2 or 3 years. Leasing contracts with durations of less than 12 months or of modest value are recognised without the recognition of a right of use, instead allocating the costs relative to the rent under administrative expenses, using the economic accrual principle.
Quantitative information For information about rights of use acquired through leasing, please see Part B - Section 8 - Property, plant and equipment - Item 80 of these Notes. For information about leasing payables, please see that found in Part B - Section 1 - Financial liabilities measured at amortised cost - Item 10 of these Notes. For information about interest expense on leasing payables and other charges associated with the rights of use acquired through leases, please see Part C - Section 1 - Interest - Item 20 and Section 12 - Net value adjustments on property, plant and equipment - Item 180 of these Notes.
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Country-by-country reporting (Art. 89 Directive 2013/36/EU)
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Country-by-country reporting (Art. 89 Directive 2013/36/EU)
Mediocredito Centrale carries on its business exclusively in Italy.
The Bank operates two lines of activity: development bank and service bank.
At 31 December 2019 we can note the following information:
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Certification of the Annual Financial Statements pursuant to article 81-ter of CONSOB Regulation 11971 of 14 May 1999, as amended
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Attestation of the separate financial statements pursuant to article 81 – ter of CONSOB Regulation 11971 of 14 May 1999 as amended
1. The undersigned, Bernardo Mattarella, in his capacity as Chief Executive Officer of Mediocredito Centrale S.p.A., and Elena De Gennaro, in her capacity as Financial Reporting Manager of Mediocredito Centrale S.p.A., attest, taking into account also the provisions of article 154-bis, paragraphs 3 and 4, of Italian Legislative Decree no. 58 of 24 February 1998:
• the adequacy in relation to the characteristics of the business, and • the effective application
of the administrative and accounting procedures for preparing the separate financial statements during 2019.
2. Verification of the adequacy and effective application of the administrative and accounting procedures for preparing the financial statements at 31 December 2019 was carried out on the basis of methods defined by Mediocredito Centrale S.p.A. in keeping with the COSO and, for the IT component, COBIT models, which constitute the framework of reference for the internal reference system generally accepted at the international level16.
In consideration of the gradual implementation of processes and, taking into account the evolution of the relevant legislation on the banking sector and the industrial strategies, the design and effective operation of the Bank’s administrative and accounting procedures remain the subject of further evolution and monitoring.
3. The undersigned attest, in addition, that
3.1 the separate financial statements:
a) have been drawn up in accordance with the applicable international accounting standards recognised in the European Community pursuant to Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 2002;
b) correspond with the entries in the accounting ledgers and documents;
c) are capable of providing a true and correct representation of the issuer’s equity, economic and financial situation.
3.2 the report on operations includes a reliable analysis of performance and of the operating result, and of the issuer’s situation, together with a description of the main risks and uncertainties to which it is exposed.
Rome, 24 February 2020
The Chief Executive Officer The Financial Reporting Manager
Bernardo Mattarella Elena De Gennaro
16 The COSO Framework was prepared by the Committee of Sponsoring Organizations of the Treadway Commission, an American organisation which has the objective of improving the quality of financial disclosure, by defining ethical standards and an effective system of corporate governance and organisation. The COBIT Framework - Control Objectives for IT and related technology is a set of rules prepared by the IT Governance Institute, an American organisation which has the objective of defining and improving corporate standards in the IT sector.
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Report of the Board of Statutory Auditors to the Shareholders' Meeting
To the Sole Shareholder INVITALIA S.p.A.
Relative to that specifically assigned to us, fulfilling our duties, pursuant to Articles 2403 and 2429 of the Italian Civil Code and to Article 153 of Italian Legislative Decree 58/1998, we submit our report on the activities performed during financial year 2019. The Board of Statutory Auditors has viewed the financial statements at 31.12.2019 prepared by the Directors and sent to us by them together with the Report on Operations. In compliance with that prescribed under the regulations in effect, we submit this document to your attention. The current members of the Board of Statutory Auditors were appointed by the Shareholders' Meeting held on 19 April 2018.
Report of the Board of Statutory Auditors pursuant to Article 2429 of the Italian Civil Code
During financial year 2019, the Board of Statutory Auditors fulfilled its institutional responsibilities in compliance with the Civil Code, with Legislative Decree 385/1993 (Consolidated Law on Banking) and Legislative Decree 58/1998 (Consolidated Law on Finance), the By-laws and provisions issued by the supervisory and control authorities, also taking into account the behavioural standards recommended by the National Council of Chartered Accountants and Accounting Experts. In particular, on the basis of the activities carried out during the financial year ending on 31 December 2019, we can note the following. The activities of the company bodies were performed in compliance with the provisions of the law and of the By-laws which govern their functioning. Participation of members of the Board of Statutory Auditors in Shareholders' Meetings and Board of Directors meetings can be seen in the respective minutes. In 2019, the Board of Directors met 18 times and the Board of Statutory Auditors met 16 times. As regards compliance with the regulatory provisions that govern banking activity, the Board of Statutory Auditors has no findings to note.
Observations on compliance with standards of proper administration The Chairman and the Chief Executive Officer, as well as the managers of the audit departments and the Financial Reporting Manager, each of which for their assigned responsibilities, periodically
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reported to the Board of Statutory Auditors on general management trends, foreseeable developments and transactions of significance carried out by the Bank, whether due to size or characteristics, as well as on the safeguards implemented to guarantee compliance with the law, regulations and internal policies and on the results of the activities performed. On the basis of the information gathered in carrying out its responsibilities, the Board of Statutory Auditors can reasonably report that the activities carried out by the Directors complied with "principles of proper administration". In particular, during the financial year in question the Directors did not carry out imprudent or reckless transactions, such as to compromise equity integrity, nor transactions in contrast to the company purpose, nor atypical and/or unusual transactions, either with third parties or with related parties, such as to significantly impact the Bank's equity and financial situation. The Board of Statutory Auditors also monitored compliance with the norms established in Regulations EU 575/2013 and 241/2014, as well as with article 56 of Legislative Decree 385/1993, both with regards to the maintenance of prescribed thresholds and in accordance with the guidance received as a result of the Supervisory Review and Evaluation Process (SREP) and with the risk appetite established in the Risk Appetite Framework (RAF). The Board of Statutory Auditors assessed and monitored the adequacy of the risk management and control system, verifying the effective monitoring by the assigned department of the Bank's risk profile, and compliance with capacity, tolerance and appetite thresholds. Relative to capital requirements, at 31.12.2019 CET1, Tier 1 and the total capital ratio (TCR) were equal to 20.36%, showing further improvement over the figures the previous year and well over the target threshold of 15.5% set for TCR and the RAF approved by the Board of Directors. The Board also continued to implement the NPL Reduction Plan and further increased the coverage level for significant exposures. The impact of the impaired portfolio relative to the value of the due from customers item fell from 4.7% to 3.7% and the coverage rate rose to 60%, from 53.3% at the end of 2018. Relative to the implementation of the 2018-2020 business plan and, in particular, the development guidelines identified, note that during 2019 the Bank, as requested by the Bank of Italy, carried out an assessment of the actual efficacy of solutions adopted. Consequently it further modified the governance and organisational structure of the commercial sector, eliminating the General Commercial Department established in 2018 and redistributing the functions. In 2019 the Bank’s commercial activities were mainly focussed on small and medium enterprises in southern Italy, carried out through a wide array of products, with loans also made in synergy with other local players.
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Activities to support the commercial development of SME was carried out both by Level II bank activities, making use of local partnerships, both in B2C mode and through the use and development of the web portal. To that end, as noted in the Directors’ Report under “Significant subsequent events” and as reported in the auditors’ report, it is necessary to state that “as of the date these financial statements were approved, the disease COVID-19 ( coronavirus), which originated in China, was spreading throughout Italy. Given the exceptional situation seeing rapid developments, and considering the two activity lines around which MCC's business operates, it is foreseeable that companies and especially SME, the Bank’s target customers, will be affected by the possible long-term duration of the epidemic. In this sense, it will be fundamental to consider possible extraordinary support projects, both national and EU-wide, political, economic and financial. These are currently being discussed, as well as the implementation of adequate and targeted actions to, if necessary, support and calm the markets while assisting businesses lacking liquidity (especially SME). Also in terms of the possible worsening of the creditworthiness of borrower companies or companies who will be borrowing, as well as the system to which the Bank belongs, only in the coming weeks will it be possible to assess possible impacts, also in the light of regulatory and legislative actions which may be issued. Therefore, at present the impacts on Bank business associated with the disease cannot yet be foreseen. The Bank guarantees compliance with the provisions issued by the relevant authorities, prioritising the requirements to protect its staff and institutional needs for continuation provision of services.”
Information on intragroup and related-party transactions and on conflicts of interest Information about transactions with related parties was provided in the Notes to the Financial Statements in compliance with the regulations in effect. The Board of Statutory Auditors also monitored the overall suitability of the relevant internal procedures in terms of risk management and conflicts of interest with related parties. Following up on that indicated in the report the previous year, note that the Bank, with resolutions made by the Board of Directors on 19 December 2019, after receiving a favourable opinion from the Board of Statutory Auditors, updated its Policy for managing related party transactions, based on that established in Bank of Italy Circular no. 263, Title V, Chap. 5, Section VI, paragraph 1 and its Policy on conflicts of interest. With reference to Decree Law 201/2011, converted with amendments by Law 214/2011, which introduced a prohibition on holders of roles on bank management and control bodies from taking on or exercising similar roles with competitor businesses (interlocking), the Board of Statutory Auditors
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notes that no corporate representative of the Bank had issues of incompatibility in relation to said regulations, on the basis of the annual check performed regarding positions held. The Board of Statutory Auditors also notes that the Bank carried out its annual verification ascertaining the independence requirements held by the Chairperson of the Board of Directors.
Exchange of information with the Oversight Committee pursuant to Legislative Decree 231/2001 After the expiration of the term of the previous Board of Statutory Auditors, the Board of Directors, with a resolution made on 19 April 2018, assigned the Oversight Committee function pursuant to Legislative Decree 231/2001 to an ad hoc organisation, rather than to the Board of Statutory Auditors as had been done previously and established as a general norm by the Bank of Italy. During 2019 the Board of Statutory Auditors met with the Oversight Committee which did not report any significant irregularities or problems, as is confirmed in the Committee's half yearly reports, as well as the reports issued by Internal Audit on its audits, also pursuant to Legislative Decree 231/2001.
Observations on out-sourced activities Pursuant to Bank of Italy Circular 285, the Board of Statutory Auditors monitored externalised departments, the IT system and the company as a going concern. On this point, we note that the examination of organisational/procedural safeguards and the result of the tests carried out relative to Business Continuity procedures and Disaster Recovery systems with the outsourcers Poste Italiane and Cedacri by the Internal Audit department ended with good results for both processes. The 2019 Annual Report on controls for important outsourced operating functions is not yet available, which contains the assessments of the adequacy of the organisational and control safeguards implemented. It must be presented to the Regulatory Authority by 30 April 2020.
Observations on the adequacy of the organisation structure The Board of Statutory Auditors acquired knowledge and monitored, to the extent of its responsibilities, the adequacy and functioning of the Bank's organisational structure, also by collecting information from the managers of the Bank's various internal departments and, to that end, has no observations.
Observations on the adequacy of the administrative accounting structure The Board of Statutory Auditors also acquired knowledge and monitored, relative to its responsibilities, the adequacy and functioning of the administrative/accounting system, as well as the reliability of the same in representing management events, through constant information received
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from the managers of the Bank's various internal departments and representatives of the Independent Auditing Firm, as well as by examining company documents and the Financial Reporting Manager's Report. On this point, we emphasise that assessment of the adequacy and effective application of administrative/accounting procedures is carried out through self-assessment by the Process Owners, which is then independently monitored by the Internal Audit department. The Board of Statutory Auditors did not identify any anomalies or problems in this area, but nonetheless notes that in the above cited report it is specified that, “in consideration of the gradual implementation of the processes and, taking into account the continual evolution of the relevant legislation on the banking sector and the industrial strategies, the design and effective operation of the Bank’s administrative and accounting procedures remain the subject of further evolution and monitoring.” The same note is found in the auditors’ report in paragraph 3.7, under “Other issues with the internal control system”.
Observations on the adequacy of the internal control system In line with the provisions of Bank of Italy Circular 285/2015, the Board of Statutory Auditors monitored the functioning of the overall system of internal controls, also through periodic meetings held with the managers of the Compliance, Anti-Money Laundering, Risk Control and Internal Audit departments, as well as with the Financial Reporting Manager, with which constant exchange of information was maintained regarding the results of checks carried out, and can reasonably confirm that the cited system appears adequate in terms of completeness, adequacy, functionality and reliability. On 17.04.2019, the Board of Statutory Auditors also expressed its opinion on the capital adequacy assessment process and liquidity governance and management system, formalised in the ICAAP/ILAAP Report at 31.12.2018. The Board of Statutory Auditors also monitored prompt and proper application of regulatory updates, periodically communicating with the manager of the Compliance department.
Observations on compliance with anti-money laundering regulations The Board of Statutory Auditors monitored compliance with regulations on money laundering, in particular the prompt adjustment to the Bank of Italy Provisions of 26 March 2019, containing “Provisions on organisation, procedures and internal controls aimed at preventing the use of intermediaries for money laundering and financing of terrorism” and those of 30 July 2019 “Provisions on know your customer and financing of terrorism” issued by the Bank of Italy after Legislative Decree 90/2017 took effect, implementing Directive EU 2015/849. Therefore, for application as of 1 January
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2020, the new version of the “Anti-money laundering and anti-terrorism procedure (regulatory and operating aspects)” was prepared.
Observations on remuneration policies With assistance from the Internal Audit department, the Board of Statutory Auditors also verified, with reference to the members of the Board of Directors and for employees, whether the remuneration policies adopted by the Bank were in line with the policies approved by the company bodies and the regulatory provisions.
Transition to international accounting standard IFRS 9 and IFRS 16 During 2019, the Board of Statutory Auditors also obtained information about the adoption of accounting standard IFRS 9 from the relative company departments and, in particular from the auditing firm. As of 1 January 2018, this standard replaced the IAS 39 impairment model based on sustained loss, with a measurement model using expected credit losses. Analysis of the 2019 financial statements done by PricewaterhouseCoopers SpA confirmed that the Bank has a procedural approach in line with the accounting standard and the best practices adopted by “less significant” banks, also taking into account the special characteristics of the Bank itself and the principle of proportionality. In 2019, international accounting standard IFRS16 – Leasing was applied for the first time, which for the lessee requires that leased assets, even those involving operating leases, be recognised under the assets with a financial liability as a balancing entry. Methods for first time application are described in paragraph 3.1 of the auditing firm’s report on the 2019 financial statements.
Observations on the Reports from the Auditing Firm and its independence Legislative Decree 135/2016 establishes that European Regulation 537/2014 applies in its entirety to entities of public interest. Pursuant to paragraph 2, letter a of article 6 of cited European Regulation 537/2014 and that required under paragraph 17 of Auditing Standard (ISA Italy) 260, the Board of Statutory Auditors received the annual confirmation of independence from the Independent Auditing Firm, which specifies that in the period between 01 January 2019 and the present date the firm complied with the ethical principles pursuant to articles 9 and 9-bis of Legislative Decree 39/2010 and that no situations arose that would compromise the firm's independence pursuant to Articles 10 and 17 of the same Legislative Decree 39/2010 and to Articles 4 and 5 of European Regulation 537/2014. During 2019, as a service correlated with the audit, the auditing firm PricewaterhouseCoopers SpA was appointed to issue comfort letters as part of the Euro Medium Term Note (EMTN) program for the Company, for a fee of € 60,000.
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To the extent of its responsibilities, the Board of Statutory Auditors confirms that it is not aware of any problems with regards to the independence of the Auditing Firm, nor, as of the present date, of any additional tasks assigned to it other than that granted by the Shareholders' Meeting. The Board of Statutory Auditors has received the Independent Auditing Firm's Report, pursuant to Article 11 of European Regulation 537/2014. The report specifies that, during the course of the normal auditing of the financial statements, no problems were identified in the internal control system with regards to the financial reporting process which, based on the professional judgement of the auditing firm, would have been sufficiently important to bring to the attention of the Board of Statutory Auditors in its role as the Internal Control and Audit Committee. The same report also confirms that, again during the normal course of auditing the annual Financial Statements, the use of the assumption of the Bank as a going concern is appropriate and that no cases of fraud or suspected fraud were identified, nor were any non-compliances relative to laws, regulations or statutory provisions. Additionally, on 9 March 2020, the Board of Statutory Auditors received the report from the auditing firm, pursuant to article 14 of Legislative Decree 39 of 27 January 2010 and Article 10 of Regulation EU 537/2014, which specifies that the financial statements at 31 December 2019 provide a true and accurate representation of the equity and financial situation of Banca del Mezzogiorno – Mediocredito Centrale SpA, and of the economic results and cash flows for the year ending on said date, in compliance with the International Financial Reporting Standards adopted by the European Union, as well as the provisions issued implementing Article 9 of Legislative Decree 38/2005 and article 43 of Legislative Decree 136/2015. Additionally, the same report confirms that the Report an Operations and other specific information contained in the report on corporate governance and the stockholding structure are in line with the annual financial statements and prepared in compliance with the law.
Other information As of the date of this report, no complaints or reports have been received relative to Article 2408 of the Civil Code. During the year the Bank received 12 complaints, all of which relative to lending activities, while none were received relative to management of public subsidies. The average response time was 19 days (24 in 2018) and 6 complaints were accepted as they were deemed to be grounded. Also note that with respect to complaints processed from 2015-2019, three judgements were issued against the Bank, of which two still in course and one settled. Additionally, six mediation procedures were begun relative to which the Bank has filed its briefs, stating the appropriateness of its actions and indicating the reasons it did not wish to adhere to the mediation request. Additionally, 6 complaints were
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presented to the Banking and Financial Ombudsman (ABF), of which 3 were deemed grounded and 1 rejected. Of the others, for one the issue of dispute ceased to exist and for the remaining case the ABF’s decision has not yet been issued. During 2019, the Board of Statutory Auditors issued the opinions as required under current law. The Board of Statutory Auditors monitored compliance with the principle of support to the economy of the South prevailing, as envisaged in the By-laws and Articles of Association. Ample information on this subject is provided in the Report on Operations, to which the reader is referred. During the year, the Board of Statutory Auditors performed the activities required under Article 19 of Legislative Decree 39/2010, as updated by Legislative Decree 135/2016 implementing Directive EU 56/2014, through meetings with the Independent Auditing Firm, examination of the audit plan and auditing approach used for each area of the financial statements, and of the relative risks associated with the various audit activities. No issues emerged during these meetings worthy of note in this Report. *** The Board of Statutory Auditors has examined the financial statements at 31 December 2019, approved by the Board of Directors at its meeting on 24 February 2020, and then made available. To that end, note that the sole shareholder Invitalia SpA, with a notification sent on 5 March 2020, expressly renounced the legal terms for the filing of the auditing firm’s report and that of the Board of Statutory Auditors, given that between the date on which the draft financial statements were approved and that of the first call of the Shareholders' Meeting for approval of the financial statements at 31 December 2019 the minimum period required under article 2429 of the Civil Code and under article 154 ter of Legislative Decree 58/98 will not pass. As the Board of Statutory Auditors is not responsible for statutory auditing of the financial statements, in fulfilling its duties it monitored, to the extent of its responsibilities, compliance by the Directors with the norms of the Civil Code and the provisions issued by the Supervisory Authorities relative to the preparation of financial statements. As regards this, we can certify that: • the Board of Statutory Auditors verified the consistency of the financial statements relative to the events and information it is aware of following the execution of its duties, and has not particular observations on the matter. Conclusions
On the basis of all that specified in this Report, taking into account the content of the reports issued by the Independent Auditing Firm PricewaterhouseCoopers SpA pursuant to Articles 10 and 11 of European Regulation 537/2014 and acknowledging the certifications jointly issued by the Chief
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Executive Officer and the Financial Reporting Manager, the Board of Statutory Auditors agrees, to the extent of its responsibilities, with the proposal made by the Directors relative to approval of the financial statements at 31 December 2019 and to destination of the profits for the year, of € 22,518,990. Rome, 9 March 2020
The Chairman Regular Auditor Regular Auditor (Paolo Palombelli) (Carlo Ferocino) (Marcella Galvani)
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Independent auditor’s report in accordance with article 14 of Legislative Decree No. 39 of 27 January 2010 and article 10 of Regulation (EU) No. 537/2014
Mediocredito Centrale SpA
Financial Statements as of 31 December 2019
Independent auditor’s report in accordance with article 14 of Legislative Decree No. 39 of 27 January 2010 and article 10 of Regulation (EU) No. 537/2014
To the Sole Shareholder of Mediocredito Centrale SpA
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of Mediocredito Centrale SpA (the “Company” or the “Bank”), which comprise the balance sheet as of 31 December 2019, the income statement, statement of comprehensive income, statement of changes in shareholders’ equity, statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the financial statements give a true and fair view of the financial position of the Company as of 31 December 2019, and of the result of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union, as well as with the regulations issued to implement article 9 of Legislative Decree No. 38/05 and article 43 of Legislative Decree No. 136/15.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISA Italia). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of this report. We are independent of the Company pursuant to the regulations and standards on ethics and independence applicable to audits of financial statements under Italian law. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key Audit Matters Auditing procedures performed in response to key audit matters
Evaluation of loans and advances to customers for loans measured at amortised cost In performing our audit we took into consideration the internal control relevant to Notes to the financial statements the preparation of the financial statements in order to define appropriate audit procedures Part A - Accounting policies - A.2 – Financial in the circumstances. Specifically, in order to statements items - 3. Financial assets address this key audit matter, we obtained an measured at amortised cost understanding and assessed the design of the key controls within the monitoring, Part B - Information on the balance sheet – classification and assessment of loans and the Section 4 – Financial assets measured at testing of the operating efficacy of such amortised cost – Item 40 controls.
Part C - Information on the income statement Special attention was paid, also with the – Section 8 – Net value adjustments for credit support of our PwC network experts, to risk – Item 130 understanding and testing the appropriateness of the policies, procedures and models used to Part E – Information on risks and relative measure the SICR and for the Staging, to hedging policies - 3. Impaired credit measure the ECL on both a collective and exposures analytical basis, as well as to the methods to determine and estimate the main parameters Loans and advances to customers, used in the context of the defined models. classified within item "Financial assets measured at amortised cost”, as of 31 In particular, regarding loans classified as non- December 2019 amounted to Euro 1,559 impaired (Stage 1 and Stage 2), in addition to million, equal to about 62 per cent of total verifying the correct application of the assets. The net adjustments for the measurement criterion established, specific impairment of loans resulting from the tests were performed in relation to the income statement as of 31 December 2019 determination and application of the main amounted to Euro 15.9 million. estimate parameters within the models used, The adjustments to loans and advances to together with the completeness and accuracy of customers represent the best estimate the data bases utilised to calculate the ECL. expressed by the management of Moreover, we selected a sample of loans and Mediocredito Centrale SpA, in order to verified their reasonable classification among reflect expected losses on the loan portfolio non-impaired loans based on available as at the reporting date according to the information about the debtor’s status and applicable accounting standards. These other useful items of evidence, including adjustments are calculated on an analytical external information. basis as concerns the non-performing loans that are considered significant individually In respect of impaired loans (Stage 3), specific
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(Stage 3) and on a collective basis as regards analyses were conducted about the all the other loans grouped in uniform reasonableness of the assumptions behind the categories (Stage 1 and 2). presumption to recover them.
As part of our audit work, we paid special In particular, in order to assess the attention to the evaluation of these loans reasonableness of the directors’ conclusions taking account of the significance of their book over the evaluation of loans, considering their value. classification in the financial statements according to the categories under the From another perspective, the evaluation applicable financial reporting and regulatory processes and methods are inevitably marked framework, we selected a sample of impaired by a high degree of professional judgement loans that were analytically assessed and and require complex estimations of a number verified the reasonability of the assumptions of variables. The use of significant developed on the identification and assumptions especially deserves attention in quantification of the expected future cash relation to the review of the Significant flows from the credit recovery activity, on the Increase in Credit Risk (SICR) and of the evaluation of the guarantees backing these Staging, as well as in respect of the exposures and the estimated recovery times. determination of the assumptions and input data behind the Espected Credit Loss models Finally, we examined the completeness and and, as regards loans assessed on an analytical adequacy of the financial statement basis (Stage 3), for the determination of the disclosures. expected future cash flows, related recovery times, together with the realizable values of any guarantees.
Responsibilities of the Directors and the Board of Statutory Auditors for the Financial Statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, as well as with the regulations issued to implement article 9 of Legislative Decree No. 38/05 and article 43 of Legislative Decree 136/2015 and, in the terms prescribed by law, for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
The directors are responsible for assessing the Company’s ability to continue as a going concern and, in preparing the financial statements, for the appropriate application of the going concern basis of accounting, and for disclosing matters related to going concern. In preparing the financial statements, the directors use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The board of statutory auditors is responsible for overseeing, in the terms prescribed by law, the Company’s financial reporting process
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Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (ISA Italia) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of our audit conducted in accordance with International Standards on Auditing (ISA Italia), we exercised our professional judgement and maintained professional scepticism throughout the audit. Furthermore:
• We identified and assessed the risks of material misstatement of the financial statements, whether due to fraud or error; we designed and performed audit procedures responsive to those risks; we obtained audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; • We obtained an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control; • We evaluated the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors; • We concluded on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern; • We evaluated the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicated with those charged with governance, identified at an appropriate level as required by ISA Italia, regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identified during our audit.
We also provided those charged with governance with a statement that we complied with the regulations and standards on ethics and independence applicable under Italian law and communicated
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with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determined those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We described these matters in our auditor’s report.
Additional Disclosures required by Article 10 of Regulation (EU) No. 537/2014
On 26 April 2012, during the annual general meeting, the shareholders of MedioCredito Centrale SpA appointed us to perform the statutory audit of the Company’s financial statements for the years ending 31 December 2012 to 31 December 2020.
We declare that we did not provide any prohibited non-audit services referred to in article 5, paragraph 1, of Regulation (EU) No.537/2014 and that we remained independent of the Company in conducting the statutory audit.
We confirm that the opinion on the financial statements expressed in this report is consistent with the additional report to the board of statutory auditors, in its capacity as audit committee, prepared pursuant to article 11 of the aforementioned Regulation.
Report on Compliance with other Laws and Regulations
Opinion in accordance with Article 14, paragraph 2, letter e), of Legislative Decree No. 39/10 and Article 123-bis, paragraph 4, of Legislative Decree No. 58/1998
The directors of Mediocredito Centrale SpA are responsible for preparing a report on operations and a report on the corporate governance and ownership structure of Mediocredito Centrale SpA as of 31 December 2019, including their consistency with the relevant financial statements and their compliance with the law.
We have performed the procedures required under auditing standard (SA Italia) No. 720B in order to express an opinion on the consistency of the report on operations and of the specific information included in the report on corporate governance and ownership structure referred to in article 123-bis, paragraph 4, of Legislative Decree No. 58/1998, with the financial statements of Mediocredito Centrale SpA as of 31 December 2019 and on their compliance with the law, as well as to issue a statement on material misstatements, if any.
In our opinion, the report on operations and the specific information included in the report on corporate governance and ownership structure mentioned above are consistent with the financial
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statements of Mediocredito Centrale SpA as of 31 December 2019 and are prepared in compliance with the law.
With reference to the statement referred to in article 14, paragraph 2, letter e), of Legislative Decree No. 39/2010, issued on the basis of our knowledge and understanding of the Company and its environment obtained in the course of the audit, we have nothing to report.
Rome, 9 March 2020
PricewaterhouseCoopers SpA
Signed by
Fabrizio De Dominicis (Partner)
This report has been translated into English from the Italian original solely for the convenience of international readers. We have not examined the translation of the financial statements referred to in this report.
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