ANNUAL REPORT 2009 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Annual Report for financial Year 2009 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12
Banco Popolare Società Cooperativa
Registered office and Headquarters: Piazza Nogara, 2 - 37121 Verona Share Capital as at 31st December 2009: euro 2,305,735,923.60 fully paid Tax code, VAT no. and Registration no. in the Verona Enterprise Registry: 03700430238 Member of the Interbank Fund for Deposit Protection and of the National Guarantee Fund Parent company of Gruppo Bancario Banco Popolare Registered in the Banking Groups Registry
2 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 CORPORATE BOARDS, MANAGEMENT AND AUDITING COMPANY AS AT 31 DECEMBER 2009
Supervisory Board
Chairman Carlo Fratta Pasini Deputy Vice Chairman Dino Piero Giarda Vice Chairman Maurizio Comoli (*) Directors Marco Boroli (*) Giuliano Buffelli (*) Guido Duccio Castellotti Costantino Coccoli (*) Gabriele Camillo Erba (*) Gianni Filippa (*) Andrea Guidi (*) Pietro Manzonetto (*) Maurizio Marino (*) Mario Minoja (*) Gian Luca Rana (*) Claudio Rangoni Machiavelli (*) Fabio Ravanelli (*) Alfonso Sonato (*) Angelo Squintani (*) Sandro Veronesi (*) Tommaso Zanini (*)
(*) Independent directors under art. 6 of the Corporate Governance Code adopted by Banco Popolare
Management Board
Chairman Vittorio Coda Chief Executive Officer and Vice Chairman Pier Francesco Saviotti Directors Franco Baronio Alfredo Cariello Aldo Civaschi (**) Luigi Corsi (**) Domenico De Angelis Maurizio Di Maio Maurizio Faroni Giorgio Papa Roberto Romanin Jacur (**) Andrea Sironi (**)
(**)Independent directors under art. 6 of the Corporate Governance Code adopted by Banco Popolare
Board of Advisors
Standing Marco Cicogna Luciano Codini Giuseppe Bussi
Alternate Aldo Bulgarelli Attilio Garbelli
Manager in charge of preparing corporate financial reports Gianpietro Val
Auditing firm Reconta Ernst & Young S.p.A.
3 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 4 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 TABLE OF CONTENTS
Notice to convene ...... 7
EXECUTIVE REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
Group Structure ...... 12 Group Geographical Network ...... 14 Group financial highlights and ratios ...... 16
Report on Group operations ...... 19 Economic backdrop ...... 21 Noteworthy events for the year ...... 23 Banking activities ...... 34 Banche del Territorio - Retail Banks ...... 34 Investment & Private Banking, Asset Management ...... 56 Leasing and Factoring ...... 66 Corporate Center and Other ...... 67 Results ...... 73 Credit intermediation ...... 78 Financial assets ...... 83 Investments in associates and companies subject to join control ...... 84 Shareholders’ equity and solvency ratios ...... 85 Consolidated income statement ...... 86 Rating and stock performance ...... 90 Risk management ...... 92 Planning, auditing and service activities ...... 103 Human resources ...... 103 Internal audit ...... 108 Compliance ...... 109 Technological and administrative services ...... 109 Technological investments and projects ...... 114 Communications ...... 122 Performance of the main Companies of the Group ...... 125 Mutuality and shareholders initiatives ...... 152 Operational outlook ...... 166
Declaration of the Chief Executive Officer and of the Manager responsible for preparing corporate financial reports .... 169
Independent Auditors’ Report on the consolidated financial statements ...... 173
Consolidated financial statements ...... 177 Consolidated Balance sheet ...... 178 Consolidated Income statement ...... 179 Statement of Consolidated Comprehensive Income ...... 180 Statement of Changes in consolidated Shareholders’ Equity...... 181 Consolidated statement of cash flows ...... 183
Notes to the consolidated financial statements ...... 185 Section A – Accounting policies ...... 186 Section B – Information on the consolidated Balance sheet ...... 224 Section C – Information on the consolidated Income statement ...... 272 Section D – Consolidated comprehensive income ...... 288 Section E – Information on risks and relative hedging policies ...... 289 Section F – Information on consolidated capital ...... 357 Section G – Business combinations ...... 364 Section H – Information on transactions with related parties ...... 370 Section I – Share-based payments ...... 374 Section L – Segment reporting ...... 381
Attachments ...... 387
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Soc. Coop. - Sede sociale in Verona, Piazza Nogara, 2 - Capitale sociale Euro 2.305.735.923,60 i.v. Codice fiscale, Partiva I.V.A. e numero di iscrizione al Registro Imprese di Verona 03700430238 Iscritto all'Albo delle Banche al n. 5668 - Aderente al Fondo Interbancario di Tutela dei Depositi e al Fondo Nazionale di Garanzia Capogruppo del Gruppo Bancario Banco Popolare - Iscritto all’Albo dei Gruppi Bancari
GENERAL SHAREHOLDERS’ MEETING
NOTICE TO CONVENE
Pursuant to art. 22 of the Articles of Association, the General Shareholders’ meeting shall be convened on first call on Friday, 23rd April 2010, at 9 o’clock, at the Novara's headquarters (Via Negroni, 12) to discuss the following
AGENDA
1) Report of the Management Board, the Supervisory Board and the Auditing firm on financial year 2009; approval of the annual report as at 31st December 2009, under articles 20, paragraph 3, item 3, and 41.3 letter a) of the Articles of Association; presentation of the Consolidated Financial Statements and the Social Report 2) Resolution on profit allocation and distribution 3) Calculation of the total amount to be allocated to charity, social solidarity and public interest initiatives, in compliance with art. 4 bis of the Articles of Association 4) Authorization to purchase treasury shares to support the stock liquidity 5) Approval of a stock option plan devoted to employees of the companies of Gruppo Banco Popolare as part of the corporate bonus envisaged by the national collective agreement and authorization to purchase treasury shares to provide for the plan 6) Compensation of Supervisory board members, including Directors filling special offices, under art. 39.12 of the Articles of Association 7) Election of ten members of the Supervisory Board for financial years 2010-2011-2012, including the Chairman and Vice Chairmen 8) Appointment of the Board of Arbitrators for financial years 2010-2011-2012
Should the meeting fail to reach the legal number, in compliance with art. 22 of the Articles of Association, it shall be held on second call on Saturday 24th April 2010 at 9 o’clock in Novara, at the Sporting Village, Piazzale dello Sport Olimpico, 2, to resolve on the above agenda in compliance with articles 24 and 25 of the Articles of Association. ------Meeting attendance (art. 23 of the Articles of Association) Shareholders who were entered in the Shareholders’ record at least 90 (ninety) days before and who, at least 2 (two) working days before the meeting’s first call, namely by 21st April 2010, have given “notice” to Banco Popolare through their authorized intermediaries as provided for by art. 85, paragraph 4, Legislative Decree n. 58 of 24/2/98 (T.U.F.) and art. 23 of the joint Order by the Bank of Italy and Consob of 22/2/08, have the right to participate in the Shareholders’ meeting.
Shareholders - whose shares are already deposited in a custody and administration account with the Banks of the Group, and precisely - Banca Popolare di Verona – S.Geminiano e S.Prospero - Banca Popolare di Lodi - Banca Popolare di Novara - Banca Popolare di Crema - Credito Bergamasco - Banca Popolare di Cremona - Banca Aletti & C. - Banca Caripe - Cassa di Risparmio di Lucca Pisa Livorno and as such have already been dematerialized - must in any case give specific instructions that the “notice” be executed, and obtain an immediate copy thereof, to be used as admission ticket to the Shareholder’s meeting.
Shareholders whose shares are deposited with other authorized intermediaries, must instruct the latter to execute the above “notice” under the mentioned Consob Resolution, and obtain the relevant copy thereof. Shareholders in possession of shares that have not been dematerialized yet, must turn them in to Banco Popolare, to the above banks of the Group or to other authorized intermediary for their dematerialization, and give instructions for the execution of the necessary “notice” to participate in the Shareholders’ meeting.
Whereas the share capital totals Euro 2,305,735,923.60, subdivided into 640,482,201 shares, we specify that, under the bylaws, each Shareholder is entitled to one single vote, irrespective of the number of shares in his/her possession.
Shareholders are entitled to be represented by another Shareholder at the meeting, provided the latter is not a member of the Supervisory or Management boards, or employee of Banco Popolare or member of the managing or auditing boards or employee of the companies directly or indirectly controlled by Banco Popolare, or does not fall under one of the incompatibility cases envisaged by law, and who is in possession of a written proxy valid under the law, duly filled out and
7 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 whose signature has been authenticated by a public officer or by an employee of Banco Popolare or of one of the above mentioned banks of the Group. The form at the foot of the “notice” issued to the Shareholder by one of the Group banks or by another authorized intermediary can be used for this purpose. Each Shareholder may represent only one other Shareholder by proxy, with the exception of trustees.
Pursuant to art. 26 of the Articles of Association, the Chairman of the Supervisory Board, in his capacity as Chairman of the Shareholders’ Meeting, has full powers to verify the validity of the proxies, and in general the shareholders’ actual right to attend the Shareholders’ Meeting, so as to verify whether the meeting has been duly formed, and if the legal number necessary to pass resolutions has been reached. To this purpose, all Shareholders concerned may submit their proxies at Banco Popolare’s Head offices, also by way of the Group’s bank branches, by 19th April 2010. Proxies submitted after the above deadline or at the Shareholders’ meeting must in any case be filled out and authenticated along the same modalities described above.
Appointment of five members of the Supervisory Board: presentation of candidate slates (art. 39 of the Articles of Association) With regard to the expiration of the term of the Supervisory Board members appointed by way of the merger deed, the next Shareholders’ Meeting shall have to elect 10 (ten) members of the Supervisory Board, including the Chairman and Vice Chairmen. Pursuant to our bylaw provisions: – 4 (four) candidates must be chosen from among shareholders residing in the provinces of BPI’s Original Franchise, i.e. in the provinces of Lombardy (other than Brescia, Bergamo and Mantua), Tuscany, Liguria and Lazio, Abruzzo, Sicily and Bologna (Imola area); – 6 (six) candidates must be chosen from among shareholders residing in the provinces of BPVN’s Original Franchise – outside of BPI’s Original Franchise, and in particular in the provinces of Veneto, Emilia Romagna (other than Bologna, Imola area), Piedmont and Valle d’Aosta.
In any case, out of the twenty members of the Board, eight must be residing in the provinces of BPI’s Original franchise – and among them at least five must be resident or domiciled in the province of Lodi – twelve must be residing in the provinces of BPVN’s Original Franchise – and among them at least five must be resident or domiciled in the province of Verona and at least three must be resident or domiciled in the province of Novara. They shall remain in office for three financial year and their term shall expire on the date of the following General Shareholders’ Meeting provided for in paragraph two or art. 2364 bis of the civil code. They can be re-elected. The Members of the Supervisory Board are elected based on slates in compliance with our Articles of Association and pursuant to existing regulatory and legal requirements. Now, therefore, pursuant to art. 39.1 of the Articles of Association, each list must be submitted directly, or jointly with the Supervisory Board, by at least 500 Shareholders with voting rights, irrespective of the total shareholding percentage they hold, or by shareholders who, individually or jointly, hold an interest representing at least 0.50% of the share capital of Banco Popolare. Under penalty of inadmissibility: a) candidate lists must be arranged in numerical sequence and, on penalty of nullity, must be filed with the registered office of Banco Popolare at least fifteen days before the date of the general meeting’s first call, i.e., by 8th April 2010. In order to give evidence of owning the number of shares required to present the lists, shareholders must sign the list and present a copy of the certificates issued in compliance with existing laws and regulations. The signature of each presenting shareholder must be certified under the law or the shareholder must sign before a duly authorized employee of the Company or of the Group banks; b) in compliance with article 38.1.1, in the event that 10 (ten) Members of the Supervisory Board are to be elected, the first candidate of the list shall be designated among shareholders residing in BPVN’s Original Franchise (resident or domiciled in the province of Verona), the second in BPI’s Original Franchise (resident or domiciled in the province of Lodi), the third in BPVN’s Original Franchise (resident or domiciled in the province of Novara), the fourth in BPI’s Original Franchise, the fifth and sixth in BPVN’s Original Franchise, the seventh in BPI’s Original Franchise, the eighth in BPVN’s Original Franchise, the ninth in BPI’s Original Franchise, the tenth in BPVN’s Original Franchise; c) each shareholder may only present and vote one list of candidates, and each candidate may only run in one list, under penalty of ineligibility; d) lists must indicate at list two candidates, and in any case a number of candidates not exceeding the number of Board members to be elected; e) each list must be supplemented by the relevant documents, to be filed within the list presentation deadline (8th April 2010) at the registered offices of Banco Popolare, providing complete information on the candidates’ personal and professional characteristics, together with the statements with which the single candidates accept their candidacy, and state on their own responsibility that no ineligibility and incompatibility causes exist, that they meet the requirements prescribed for the office of Member of the Supervisory Board by the applicable law, regulations and corporate governance provisions and specify the administration and control offices filled in other Companies.
Any list of candidates failing to fully comply with the above procedures shall be deemed not presented. Pursuant to art. 39.5 of the Articles of Association, the offices of Chairman, Deputy Vice Chairman and Vice Chairman shall go to the first 3 (three) candidates indicated in the list who obtain the highest number of votes.
8 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 In the event that upon expiration of the term specified in the above item a) only one list of candidates is presented, or only lists submitted by shareholders who under the applicable laws are deemed connected, Banco Popolare shall immediately inform the market that additional lists can be presented up to the 5th day after said date, with the consequent lowering of the thresholds provided for under art. 144 sexies, paragraph five of the Issuers Regulation. In compliance with applicable regulations, regularly presented lists shall be made available to the public - without delay, and in any case at least ten days before the General Shareholders’ Meeting - at the registered offices of Banco Popolare and of Borsa Italiana S.p.A., and shall also be published on the Company website (www.bancopopolare.it). Pursuant to art. 39.7 of the Articles of Association, should no list be presented within the specified term, the General Meeting shall decide by relative majority of the attending Shareholders. Without prejudice to bylaw regulations, for the purpose of harmonizing the activities necessary to prepare and present the lists of candidates for the appointment of Supervisory Board members, Banco Popolare approved specific operational procedures. Moreover, to streamline the procedure to present lists of candidates, Heads of Branches, Business Area Managers and specific Executives of Banco Popolare, of the retail banks Banche del Territorio and of Banca Aletti have been authorized to authenticate the signature of the Shareholder presenting the list. The relating documentation is filed with the registered offices of Banco Popolare in Verona, Piazza Nogara, 2 (Ufficio Soci e Azioni - Shareholding office – tel. 045/8675226), at the disposal of Shareholders; it has also been made available on the Company website (www.bancopopolare.it).
*****
In compliance with the existing laws, the executive reports and the required documentation covering the proposals on the agenda shall be filed with Borsa Italiana fifteen days before the General Meeting and published on the Company’s website (www.bancopopolare.it); moreover, the report on Banco Popolare’s acceptance of the Code of Conduct for Listed Companies shall be made available in compliance with the existing regulations and laws. Shareholders are entitled to receive a copy of the documents after their filing.
This notice to convene is published in compliance with legal requirements and is made available on Banco Popolare’s website.
Verona, 16th March 2010 On behalf of the MANAGEMENT BOARD The Chairman (prof. Vittorio Coda)
Published on the Official Gazette of the Italian Republic - Section II n. 34 of 20th March 2010, in compliance with the corporate Articles of Association
9 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Executive report and consolidated financial statements for the year WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Group Structure
Aletti & C. Banca di Banca Popolare di Verona - Investimento Mobiliare S.Geminiano e S.Prospero Aletti Gestielle SGR Banca Popolare di Lodi Aletti Gestielle Alternative SGR Banca Popolare di Novara Banca Aletti & C. (Suisse) Credito Bergamasco E banca Cassa di Risparmio di Lucca Pisa Livorno E gestioni SGR Banca Popolare di Crema Italfortune International Advisors Banca Popolare di Cremona B.P.I. International (UK) Banca Caripe Valori Finanziaria Aletti Fiduciaria Nazionale Fiduciaria
Banca Italease Mercantile Leasing Società Gestione Crediti BP Italease Network Società Gestione Servizi BP Factorit Holding di Partecipazioni Italease Finance Finanziarie Banco Popolare Release Bipielle Real Estate Immobiliare BP Tecmarket Servizi Bipielle International Holding AT Leasing Romania Banco Popolare eská Republika Banco Popolare Croatia Banco Popolare Hungary Banco Popolare Luxembourg
12 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Banche del Territorio (Local retail banks)
Investment & Private Banking, Asset Management
Leasing and Factoring
Others
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Branches of Gruppo Banco Popolare in Italy
Trentino Alto Adige: 24 Lombardia: 585
Valle d’Aosta: 6 Friuli-Venezia Giulia: 16
Piemonte: 239 Veneto: 329
Emilia-Romagna: 255
Liguria: 136 Marche: 9 Toscana: 240 Umbria: 13
Abruzzo: 50
Lazio: 70 Molise: 8
Puglia: 6
Campania: 62
Basilicata: 3
Calabria: 3
Sicilia: 143
Sardegna: 1
The subsidiaries of Gruppo Italease are not included.
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Branches of Gruppo Banco Popolare (*) N
Banca Popolare di Verona – S.Geminiano e S.Prospero 547 Credito Bergamasco 251 Banca Popolare di Novara 428 Banca Caripe 51 Banca Popolare di Lodi 497 Cassa di Risparmio di Lucca Pisa Livorno 237 Banca Popolare di Crema 44 Banca Popolare di Cremona 70 Banca Aletti 36 Efibanca 5 Total 2,166
(*) Excluding treasury branches and Gruppo Italease branches
Foreign operations
Foreign operations comprise the subsidiaries BP Luxembourg, BP Croatia, BP eská Republica, BP Hungary, AT Leasing Romania, a London branch and Banca Aletti Suisse.
In Asia, the Group is present with Representative Offices in India (Mumbai), China (Beijing, Shanghai and Hong Kong) and Russia (Moscow).
15 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 GROUP FINANCIAL HIGHLIGHTS AND RATIOS
Financial highlights
Shown below are the Group’s main financial highlights and ratios, calculated based on reclassified financial statements.
31/12/2009 (in millions of Euros) 31/12/2009 31/12/2008 (*) Changes without Italease
Income statement Net interest, dividend and similar income 2,095.0 2,056.4 2,226.6 -7.6% Net fee and commission income 1,228.1 1,215.0 1,261.5 -3.7% Net interest and other banking income 3,690.7 3,525.3 3,740.5 -5.8% Operating expenses 2,458.4 2,391.7 2,328.7 2.7% Profit from operations 1,232.3 1,133.6 1,411.8 -19.7% Income (loss) before tax from continuing operations 502.0 482.6 (531.3) Net income (loss) for the year 267.0 202.4 (333.4) (*) Adjusted to comply with IFRS 5 and with the changes introduced by the update of the circular letter n.262/2005 (Banks’ Financial Statements).
31/12/2009 (in millions of Euros) 31/12/2009 31/12/2008 (*) Changes without Italease
Balance sheet Total assets 135,709.1 125,490.5 121,327.2 3.4% Loans to customers (gross) 99,485.7 88,871.9 83,768.0 6.1% Financial assets and hedging derivatives 14,607.6 14,797.5 12,593.1 17.5% Shareholders’ equity 11,532.8 11,460.2 9,784.0 17.1%
Customer financial assets Direct customer funds 105,183.1 97,880.1 93,131.0 5.1% Indirect customer funds 77,212.6 75.090.7 2.8% - Assets under management 30,974.7 31,301.2 -1.0% - Mutual funds and Sicav 9,996.0 11,867.2 -15.8% - Managed accounts invested in securities and funds 9,908.7 10,959.6 -9.6% - Insurance policies 11,070.0 8,474.5 30.6% - Assets under custody 46,237.9 43,789.5 5.6%
Operational structure Average number of employees (**) 20,375 20,003 20,410 Bank branches 2,292 2,253 2,265 (*)Adjusted to comply with changes introduced by the update of circular letter n.262/2005 (Banks’ Financial Statements). (**) Monthly arithmetic mean .
16 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Group financial ratios and other data
31/12/2009 31/12/2009 31/12/2008 without Italease
Profitability ratios (%) ROE 2.4% 1.8% -3.3% Net interest, dividend and similar income / Net interest and other 56.8% 58.3% 59.5% banking income Net commission income / Net interest and other banking income 33.3% 34.5% 33.7% Operating expenses / Net interest and other banking income 66.6% 67.8% 62.3%
Operational productivity (€/1000) Customer loans (gross) per employee 4,882.7 4,442.9 4,104.2 Net interest and other banking income per employee 181.1 176.2 183.3 Operating expenses per employee 120.7 119.6 114.1
Credit quality ratios (%) Net NPLs/ Customer loans (net) 2.79% 1.73% 1.22% Net substandard loans / Customer loans (net) 5.70% 3.77% 2.50% Net NPLs / Shareholders’ equity 23.05% 12.95% 10.09%
17 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Verona, Ponte Pietra WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Report on Group operations
Head of ce of Banca Popolare di Verona, Verona WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 20 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Report on Group operations
ECONOMIC BACKDROP
World scenario
In the first part of 2009 the world bore the brunt of the financial crisis that had broken out in 2007 and has been deepening in second half 2008. According to available estimates, for the first time in its history the world GDP reported a negative growth rate, brushing an annual 0.6% drop. In 2009, the world trade fell by 12.5% year on year, as compared with a 2.5% growth in 2008.
The economic crisis has been stanched through massive monetary and fiscal policy measures, and yet, although the general climate showed some signs of improvement in the second quarter, there has been no clear indication that a widespread economic growth recovery was actually taking place until the end of summer. The turning point came in the third quarter, when GDP returned to positive growth both in the US and in Europe, which technically marked the end of the recessive phase. The climate of confidence across the major industrialized areas remained positive up to year end, bolstering the favorable sentiment that had already emerged, although the appearance of conflicting signals prevented a recovery from taking root, especially in most highly industrialized countries.
Recession produced important effects that are still weighing against the frail economic recovery underway, thus dampening its import. The labor market in all major industrialized countries grew weaker during the year, slumping back to structurally high unemployment rates (10% in USA, 9.8% in EMU).
Based on recent data, the US reported an annual 2.5% drop in GDP growth rate, driven down by consumer spending, which fell by 0.6% annually, non residential private investments, down by 17.6%, and inventory, which dropped by 0.9%. A weaker dollar favored the recovery of foreign trade: net exports, with a 1.1% contribution, had a positive impact on GDP, also thanks to the 15% fall in imports.
Among the other advanced economies, Japan was hard hit by recession, despite the unexpected growth recovery in the second quarter of 2009 spurred by hefty public investments, and at year end it reported an annual GDP contraction of 5.5%, with consumer prices still on a deflationary trend dropping by 0.9% year on year.
The recessive phase proved so deep that it affected also emerging countries, which still reported a positive growth rate, yet clearly much lower than the previous year. Based on available data, China and India reported an annual GDP growth rate of respectively 8.7%, driven by the strong acceleration posted in the second quarter bolstered by the significant economic stimulus measures adopted at the beginning of the period, and 6.7%. Russia was affected by falling oil prices, which drove GDP down by 7.9% annually.
In the Euro Area, after a decline in the first part of the year, GDP started growing again in the third quarter, and the improving trend continued through December. As a result, GDP decreased by 4.1% annually in 2009 in the Euro Area (- 4.2% in the EU27 area), driven down by a negative contribution of consumptions, which fell by about 1.1%, and of investments, which decreased by about 10.1%. Finally the contraction of international trade affected exports, which fell by about 14.7% over the previous year. In some EU Countries, among which Germany and France, GDP was back to positive already in the second quarter of the year. Despite the weak economic cycle, the area posted a positive inflation rate (+0.3% year on year at the end of 2009) also owing to an upswing towards year-end.
Italy
Similarly to the other main Euro Area economies, the official data for the last two quarters of the year confirmed that also the Italian economy is showing signs of recovery. After a significant fall in the first half of the year and following five running quarters of contraction, GDP in Italy started to grow quarter to quarter between July and September (+0.6% QoQ and -4.6% YoY). Globally however, in 2009 GDP fell by 5.0% annually, as a result of the negative contribution made by household spending, which fell by 1.8%, and gross fixed investments, down by -12.1%. On the contrary, with an increase of 1.1%, public spending made a positive contribution – owing to a budget policy supportive of the weak economic cycle. As a whole, in 2009 domestic demand, net of inventory, decreased by 3.5%. The crisis of international trade caused an annual decrease of 19.1% in Italian exports, whose negative contribution to GDP came close to 1.2%.
The effects of the crisis affected the labor market throughout the period, with a greater impact towards the end of the year, when the jobless rate exceeded 8%. The weak economic cycle favored a sideways movement of the inflation rate, which however towards the end of the period became much livelier and at year-end published a growth rate of 1.0% with regard to the consumer price index referring to the entire domestic community (so called NIC), and of 1.1% year on year with respect to the harmonized consumer price index (HCPI).
Public accounts were affected by the expansionary fiscal policies that were adopted to support domestic demand and stave off the effects of the recession: in 2009 government spending (85.9 billion euro) increased by 31.6 billion euro over 2008 (54.3 billion euro), reaching 5.6% of nominal GDP.
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Monetary and financial markets
In first half 2009, the Governments and Central Banks of the major countries sustained demand and employment with highly expansionary fiscal and monetary policies. In keeping with the intention declared by the G20 to deeply reform the current financial system, G8 leaders agreed on the need to develop a set of principles and common rules on propriety, integrity and transparency in international economic and financial activities. In the second half of the year, having given the interest rate lever full play, the monetary authorities of the major industrialized countries resorted to quantitative easing measures to keep on supporting the banking industry, while starting to think about the most appropriate “exit strategy” actions, to back away from the emergency phase that had led to the adoption of extraordinary monetary measures.
No doubt, the timely and massive intervention of fiscal and monetary authorities at the end of 2008 prevented the crisis from spreading in 2009. Yet it also gave rise to two highly negative effects: on the one side the creation of a large monetary base by Central Banks represented a cause of potential price acceleration; on the other side, widespread public interventions to sustain real economy produced a rapid and marked deterioration of public finance.
With regard to monetary policy, the Federal Reserve first drove FED Fund rates to 0.25% and the discount rate to 0.50% (December 2008), then kept them unchanged until the end of the year. The European Central bank on 13th May 2009 cut the main refi rate by other 25 bps to a new record low of 1%, and it narrowed the standing facilities corridor available to eligible counterparties on their own initiative from 200 to 150 bps. Credit support by Central Banks was crucial, and as mentioned it caused a hefty increase in base money: in the Euro Area, in October M1 had grown by 11.8% annually.
Short term rates in major industrialized countries moved in tune with highly expansionary monetary policies. In the US, the interbank rate fell in line with the official rate (0.25%). In the Euro Area, from July the 3-month Euribor dropped below the base rate, and at the end of 2009 closed at about 0.70%. Towards the end of the period Eonia went so far as to hit a record low of 0.32%. As to lending terms, surveys carried out by Central Banks suggested that in the third quarter lending criteria to households and businesses in the United States and in the Euro Area became less strict. The return to a less negative economic climate triggered an adjustment phase also on the government securities market: during the year in the Euro area yield spreads over ten-year German Bunds, while still high, yet dropped significantly with respect to the peaks reached at the beginning of 2009.
Italian banking industry
The deep crisis did not miss the domestic banking industry, although its impact was slightly less dramatic than in the other primary European countries. While in 2009 within the Euro area the recession phase was characterized by a significant general slowdown of total loans to business companies, the contraction was definitely less marked within the Italian banking sector, which also retained a positive dynamic of loans to the private sector in general, despite the appreciable deceleration of their growth rate, also owing to a declining demand for loans for productive investments by enterprises. Moreover, market conditions and the difficulties caused by the crisis obliged the banking industry to adopt more stringent lending criteria.
In greater detail, according to preliminary data, in December total loans to Italian residents belonging to the private sector published a trend growth rate of 1.7%; household and non-financial business loans grew by 0.5% annually. With respect to maturities, short term loans (one year or below) in December decreased by 7.5% over the previous year, while medium/long term loans (above one year) grew by 4.0% annually. At the end of 2009, loans to households to purchase homes posted a recovery, with a trend growth rate in December of 6.1%. The aggregate’s breakdown into households and businesses shows that the dynamic of loans to non-financial businesses in December reported a 2.4% decline as compared to the end of 2008. Loans to consumer households instead grew by 6.9%.
A persisting risk aversion, supported by the sideways drift of the monetary market yield curve, favored bank deposits over other market instruments, especially with regard to its more liquid component. At year-end, bank total customer funds, represented by resident customer deposits and bonds, grew by 9.3% year on year. As to the single constituents, resident customer deposits rose by 8.0%, while bank bonds grew by 11.2%. Checking accounts went up by 11.7% over the end of 2008. On the contrary, retail repos diminished in value: in December they posted a drop a tad below 24%. According to the most recent available data, in November foreign deposits were trending down (-12.8%).
The weighted average interest rate for total loans to households and non-financial businesses went further down: in December 2009 it was standing at 3.76% (its record low), 233 bps below the December 2008 level. The interest rate on euro-denominated deposits of households and non-financial businesses in December was 0.68%, as compared with 1.99% one year before. For euro-denominated checking accounts, the interest rate was 0.31% as compared with 1.53% a year before. The average interest rate on customer funds (households and non-financial businesses) at the end of 2009 was standing at 1.59% against 3.00% in December 2008.
In December 2009, the spread between the average household and non-financial business lending and deposit rates stood at 217 bps, shedding about 92 bps with respect to December 2008. In December, the mark-up (the spread between the average interest rate on household and non-financial business loans and the average BOT yield) went down to 310 bps from 396 bps in December 2008, while the mark-down (spread between the average Euro-denominated interest rate on
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deposits of households and non-financial business and the average BOT yield) stood at -93 bps against -87 bps in December 2008.
Finally, according to preliminary data, in December, owing to the deteriorated economic cycle, gross non-performing loans across the Italian banking sector totaled 59.0 billion euro, i.e., 17.7 billion more than in December 2008, reporting a 42.8% annual change. The NPL to loan ratio was 3.3%, up from 2.4% in December 2008. In December 2009, NPLs net of write- downs came in at 35.9 billion euro, up by 14.3 billion from the end of the previous year.
NOTEWORTHY EVENTS FOR THE YEAR
Illustrated below are the most noteworthy events in financial year 2009.
Agreement on Gruppo Banca Italease
On 15th March 2009 the Board of Directors of Banco Popolare, Banca Popolare dell’Emilia Romagna (BPER), Banca Popolare di Sondrio (BPS) and Banca Popolare di Milano (BPM) approved a combined operation to reorganize and restructure the business activities of the Group led by Banca Italease, to be implemented through: the launch by Banco Popolare of a voluntary tender offer (VTO or Offer) on all outstanding common shares of Banca Italease, not directly or indirectly held by Banco Popolare, performed pursuant to and to the effect of articles 102 and 106, paragraph four of Legislative Decree n. 58 of 24th February 1998. The aim of the VTO was to take control of Banca Italease; the concentration, after completion of the VTO, of part of the assets and liabilities of Gruppo Banca Italease in two newly formed financial companies - “Newco One” and “Newco Two” - that are to receive respectively part of the non-performing and performing assets of Gruppo Italease outstanding on 31st March 2009. Shareholders of the two Newcos shall be Banco Popolare and/or Banca Italease itself, as well as BPER, BPS and BPM, and the companies shall receive adequate assets, operational structures, personnel and means to perform their business, with the aim of creating the best possible conditions to favor an efficient management of the transferred business units, so as to maximize their value.
On 14th May, after Consob approved the Prospectus, the Offer was launched and it was competed on 1st July. 90,479,182 shares of common stock of Banca Italease (corresponding to 77.55% of shares under the Offer) were tendered into the Offer, totaling euro 135,718,773. As a result, by adding the Banca Italease shares tendered into the Offer to those already held by the Group, on 1st July Banco Popolare held 142,212,139 shares of Banca Italease, accounting for 84.447% of the subscribed and paid-in capital. Based on the above results, the Offer’s condition precedent regarding the Minimum Percentage of Acceptance was not fulfilled (90% of Banca Italease’s share capital). In compliance with the Prospectus, Banco Popolare decided to waive the above Condition Precedent for the Offer and to voluntarily extend the Tender Period from 9th July 2009 to 15th July 2009, at the same price of euro 1.50 per share (namely, at the same price offered for shares tendered into the offer from 14th May 2009 to 1st July 2009) along the procedures specified in the Prospectus.
On 8th July 2009, upon transferring the full ownership of the shares onto Banco Popolare, shareholders were paid in cash the price offered for each Banca Italease share tendered into the Offer from 14th May 2009 to 1st July 2009 - fixed at Euro 1.50 per share and representing an aggregate amount of Euro 135,718,773. In compliance with the Framework Agreement, and after Banca Italease shares held by BPER, BPS, BPM and Società Reale Mutua di Assicurazioni were transferred to Banco Popolare, the Shareholders’ Agreement on Banca Italease shares, that had been originally signed by the above counterparties on 28th February 2008, was terminated effective as of 8th July 2009.
Again on 8th July, upon proposal of an institutional counterparty, Banco Popolare acquired the latter’s bonds issued by Banca Italease corresponding to a total nominal amount of about 270 million. The purchased securities, expiring 2012 and 2017, are listed on the Luxembourg Exchange.
On 15th July the voluntary extension of the Tender Period ended. At the end of the period, 6,196,773 more Banca Italease shares (corresponding to 5.311% of shares under the Offer) were tendered into the Offer, representing an aggregate amount of 9,295,159.5 euro, which was paid on 22nd July. By adding the Banca Italease shares tendered into the Offer during the Voluntary Extension to the 90,479,182 shares tendered during the Tender Period (totaling 96,675,955 , corresponding to 82,862% of shares under the Offer), and to those already directly or indirectly held by the Offeror (51,732,957 shares), Banco Popolare currently owns 148,408,912 Banca Italease shares, corresponding to 88.127% of the company’s subscribed and paid-in capital.
During the Offer Period and the Voluntary Extension Period, Banco Popolare, did not, either directly or indirectly, purchase any Banca Italease share outside the Offer.
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Since the shares tendered into the Offer did not make it possible to exceed the thresholds of 90% or 95% of the share capital, the conditions for the buy-out obligation pursuant to articles 108 paragraph 2, 108 paragraph 1 and 111 of TUF were not fulfilled, which would have triggered the stock delisting from the Milan stock market.
Business restructuring and reorganization plan for Gruppo Banca Italease
Banca Italease capital actions – covering losses and new share issue
With regard to the capital structure of Gruppo Italease, on 8th September 2009 the Board of Directors of Banca Italease convened to analyze the initiatives to be implemented to cover the losses that had been recognized on 31st December 2008, greater than one third of the share capital, and on 30th June 2009, which as a whole drove the shareholders’ capital down to 207 million. The Board of Directors decided to convene the Special Shareholders’ Meeting to examine and approve the company’s financial situation as at 30th June 2009, pursuant to art. 2446 Civ. Code, and to pass the consequent resolutions to cover the losses also through a reduction of the share capital. The Shareholders’ Meeting – which was held on 12th October 2009 - having eliminated the indication of the par value expressed by shares, resolved to entirely cover past losses by drawing from non-restricted reserves and by reducing the share capital, and it approved the proposal to vest the Board of Directors, pursuant to art. 2443 of the civil code, with the power to approve a capital increase against payment of Banca Italease through a right issue to be offered to shareholders, for a maximum total amount (inclusive of share premium) of 1.2 billion, to be executed within 12 months, upon receipt of the required authorizations. The above capitalization actions were made necessary to restore Banca Italease’s share capital, as well as to bring capital ratios back in line with supervisory regulations and to ensure appropriate management conditions for Banca Italease and its subsidiaries in the future. To this end, Banco Popolare undertook to subscribe also for the shares unsubscribed by the other shareholders. Then, on 28th October, in fulfillment of the powers granted by the Special Shareholders’ Meeting, the Board of Directors of Banca Italease determined that the 1.2 billion share capital increase would be carried out through a rights issue, by offering in option common shares with regular dividend rights to company shareholders against payment and with a possible share premium, upon inception of the subscription period, proportionately to the number of shares held. On 23rd November 2009, the Board of Directors of Banca Italease defined the final terms and conditions for the rights issue. The capital increase was carried out by issuing max. 1,683,989,730 shares, to be offered in option to Banca Italease shareholders at a price of 0.712 euro for each new share (of which 0.612 euro as a share premium), based on a share ratio of 10 new common shares for each share held on inception of the subscription period, for a maximum total amount of euro 1,199,000,687.76. The implied accounting parity of each newly issued share was fixed to 0.10 euro. After Consob issued its authorization to publish the prospectus, the rights were tradable on the Italian Stock Exchange from 7th December to 16th December 2009 and could be exercised between 7th December 2009 and 23rd December 2009. On 23rd December 2009 the offer of preemptive rights on the common shares underlying the Capital Increase was closed: Banco Popolare, either directly or through its subsidiaries Credito Bergamasco and Holding di Partecipazioni BP, subscribed for its attributable stake, corresponding to 1,621,129,970 newly issued shares totaling 1,154.2 million, which brought its interest up to 91.225%. Banco Popolare fully exercised its option rights proportionately to its direct and indirect shareholding in Banca Italease. As a result, it subscribed for its attributable share of capital increase corresponding to 1,484,089,120 newly issued shares, totaling 1,056,7 million. At the end of the offer period, 6,285,976 option rights remained unexercised, which entitled to the subscription of 62,859,760 newly issued shares of Banca Italease, totaling 44.8 million. Unexercised option rights have been offered on the Italian Stock Exchange by Banca Italease pursuant to art. 2441, paragraph three of the Civil Code, and were sold out in their first trading session. Having exercised 6,053,376 unexercised option rights, Banco Popolare subscribed additional 60,533,760 Banca Italease newly issued shares, totaling 43.1 million. Upon completion of the capital increase, Gruppo Banco Popolare holds a total of 1,693,031,792 shares, corresponding to 91.397% of Banca Italease’s share capital. Since the free float was not restored, Banco Popolare must fulfill the obligation to purchase the remaining Banca Italease shares pursuant to art. 108, paragraph 2, of TUF, as more exhaustively described in the Explanatory Note’s section devoted to noteworthy events after the balance sheet date.
Banca Italease capital actions - Public exchange offer on bonds issued by Banca Italease
In 2009, in order to optimize the Group’s capital structure following the takeover of Banca Italease, the Management Board of Banco Popolare approved a public offer for the entire amount of two “Lower Tier II” subordinated floating rate notes, listed on the Luxembourg Exchange, issued by Banca Italease on 15th October 2004 and 28th June 2006 (with an aggregate nominal value of 275 million Euro, net of held securities) in exchange for new notes having the same subordination level, to be issued by Banco Popolare under its EMTN Program, approved on 28th July 2009. The offer ran from 29th October to 4th November, and upon its completion, notes corresponding to a nominal value of 116.2 million had been tendered into the offer, accounting for 42.27% of the nominal value of the notes under the offer, fulfilling the minimum quantity condition to which the offer was subject.
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In particular, 77.5 million (51.67%) were tendered for the Lower Tier II callable step-up notes due 2014, which originally amounted to nominal 150 million, and 38.8 million (31.02%) were tendered for the Lower Tier II floating rate notes due 2016, which originally amounted to 125 million. The transaction was settled on 12th November 2009, and the amount paid in cash for odd lots and interest accrued on notes totaled 12.6 million. In compliance with the Offer Document approved by Consob, the final repurchase prices and exchange ratios correspond to 95% for the “Tier II Subordinated Callable Step-Up Notes due 2014” and 82% for the “Lower Tier II Subordinated Callable Floating Rate Notes due 2016”. Based on the information on notes tendered in exchange and as established in the Offer Document, as of 12th November 2009 Banco Popolare issued a new Lower Tier II subordinated note due 12th November 2016 and with a fixed rate annual 5.473% coupon, corresponding to a total nominal value of 300 million, of which 93 million to cover the Offer and 207 million sold to qualified investors and destined to further strengthen our capital structure and to the current operating business.
Transfers to NewCo One and NewCo Two
In keeping with the Framework Agreement signed on 15th March last by Banco Popolare, Banca Popolare dell’Emilia Romagna, Banca Popolare di Milano and Banca Popolare di Sondrio, two new companies were formed: the first is to manage impaired loans - non-performing or substandard – of Banca Italease and its subsidiaries (NewCo One, afterwards called “Release”) and the second is to manage and develop leasing activities, to support the economies of the market areas of the shareholding banks, in particular with reference to Small- and Medium-sized Enterprises (NewCo Two, afterwards called “Alba Leasing”). Subject to the required authorizations of the Supervisory Authorities, the two new companies came into operation as of 31st December 2009, concurrently with the effectiveness of the transfer deeds provided for under the reorganization plan. To this regard, on 23rd December 2009 deeds were signed to transfer the business units comprising Banca Italease’s non- performing loans to Release; on the same date, a deed was signed for the partial spin-off of the non-performing business units of Italease Network and Mercantile Leasing to Release. On 24th December 2009 a deed was signed to transfer the business units made up of the performing loans of Banca Italease and Mercantile Leasing to Alba Leasing.
The transferred or spun-off business units involved a set of assets, liabilities, and legal relations including personnel. With regard to assets transferred/spun-off to Release, the main balance sheet item is the amount of transferred receivables totaling about 4.9 billion gross; as to assets transferred to Alba Leasing, the main balance sheet item is the amount of transferred non-securitized receivables amounting to about 2.5 billion gross, while the risks and benefits associated with securitized loans originated by the banking channel of about 2.4 billion are attributable to Alba Leasing.
As to Release’s share capital, after the transfer and the related share capital increase and premium to 400 million, and following the share transfer in January 2010, 80% of it is held by Banca Italease 10.84% by Banca Popolare dell’Emilia Romagna, 6.24% by Banca Popolare di Sondrio and 2.92% by Banca Popolare di Milano. The company shall receive the operational structures, the personnel (40 employees) and the means to carry out its business activity, with the purpose of creating the best possible conditions for an efficient management of the transferred business unit, so as to maximize its value. In terms of funding commitments, the new company shall be proportionally financed by its shareholders. After the described transactions, Alba Leasing’s shareholding structure comprises Banca Italease with 32.79%, Banca Popolare dell’Emilia Romagna with 36.43%, Banca Popolare di Sondrio with 20.95% and Banca Popolare di Milano with 9.83%. The new company, which has been capitalized by the shareholders with 360 million, so as to ensure a Total Capital Ratio of 7%, shall receive the operational structures, the personnel (350 employees) and the means to carry out its business activity, with the purpose of focusing the newco’s activities on specific business segments, that are deemed strategic and worth developing based on the contribution made by each shareholder: the aim is to support the economies – in particular Small and Medium sized Enterprises – in the market areas of the shareholding and associate banks. In terms of funding, the new company shall be financed by shareholders other than Banca Italease and/or Banco Popolare.
Finally, it is worth highlighting that Banco Popolare can guarantee to Banca Italease the necessary capital resources to ensure the compliance with minimum capital requirements under applicable laws and regulations. Banco Popolare shall see to the financial support of Banca Italease also with regard to the outstanding bond and securitization maturities. Upon completion of the described Reorganization actions, Banca Italease shall continue to run its business, directly or indirectly, by managing the outstanding contract and loan portfolio in close coordination with the other Group structures.
Reorganization actions
On 22nd December 2009, as part of the plan to rationalize the organizational structure of the factoring business, and with the aim of making Factorit independent from an operational and organizational point of view, Banca Italease and Itaca Service S.p.A. signed the transfer deeds assigning their business units to Factorit, effective as of 31st December 2009. Moreover, with regard to the transfer of securitized loans originated by the banking channel to Alba Leasing, on 24th December 2009 Alba Leasing and Banca Italease signed an agreement, based on which, in keeping with what had been preliminarily defined in the Framework Agreement of March 2009, the risks associated with a possible default of loans included in the securitizations originated by the banking channel are borne by Alba Leasing and consequently Alba Leasing
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shall reap the corresponding benefits, as if it were the exclusive owner of the portfolio outstanding on 31st December 2009 as of 31st March 2009. To this regard, Alba Leasing undertook to pay back to Banca Italease: (i) the junior notes relating to the securitized loans originated by the banking channel, net of individual write-downs, in compliance with the rules and priorities of each securitization and (ii) the remuneration share of the above junior notes relating to loans originated by the banking channel accrued by Banca Italease up to 31st March 2009. Since owing to the complexity of the Agreement on securitized loans it has been impossible to complete its execution, to date Banca Italease could not precisely define each single aspect characterizing the profitability and financial profiles. To represent anyway the P&L impacts of the Agreement in the annual report as at 31st December 2009, an external expert was hired to assess said effects. The Board of Directors of Banca Italease decided to follow the estimate rationale and the conclusions of the appraisal, based on which a provision of 100 million was set aside, pursuant to IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, which was deemed representative of the estimate of the net P&L impacts generated by the performance of the Agreement. For more details, please refer to the more exhaustive explanation provided in the explanatory notes.
Next steps
Having successfully completed the first part of the Italease project, aiming - as described above - at setting up the two Newcos, a reorganization plan was launched, to fully integrate Italease within Gruppo Banco Popolare so as to maximize cost synergies, also through an appropriate organizational and company rationalization of the former Italease Group, and the requalification of the existing human resource asset. Actions to recover bad loans and to dispose of the most significant real estate and securities assets were carried on, so as to reduce the portfolio concentration risk in compliance with regulations and with the Bank of Italy’s guidelines, in particular with regard to Release S.p.A. The plan covering the so called “phase two” has been subdivided into the following actions: delisting of Banca Italease; company rationalization: the goal is to examine and implement appropriate rationalization actions for Banca Italease subsidiaries; Credit process: harmonization of Italease’s rules, processes and procedures with those implemented in Gruppo Banco Popolare; Operations: the goal is to rationalize and optimize administrative and IT costs, also by centralizing activities at the Parent company’s; Human Resources: outplacement and re-training of redundant personnel as a result of the reorganization activities; valorization of Release’s real estate assets.
Application to issue the financial instruments provided for by LD 185/08
On 10th March 2009, in relation to the publication of the Ministerial Decree of 25th February 2009, enacting Law Decree n. 185/08, in the Official Gazette of the Italian Republic of 7th March 2009, Banco Popolare submitted a formal application to the Italian Ministry of Economy and Finance and to the Bank of Italy to issue the financial instruments under art. 12 of the above mentioned Law Decree, for an amount of 1.45 billion. On 26th March, the Ministry of Economy and Finance, after acknowledging the opinion issued by the Bank of Italy and after consulting with the Global Advisory and Guarantee Committee (pursuant to the Prime Minister’s directive of 15th October 1993), authorized Banco Popolare’s application. On 19th June, the Minister for Economy and Finance approved the subscription of the instruments issued by Banco Popolare for the requested amount of 1.45 billion by the Ministry. In the meantime, the Chief Executive Officer of Banco Popolare and the Director General of the Treasury signed a memorandum of understanding – pursuant to article 2, paragraph 2, of the ministerial decree of 25th February 2009 – containing provisions for the subscription of the financial instruments convertible into shares of common stock of Banco Popolare, and which provides for: the adoption by the Group of a Code of Ethics containing, among other things, provisions regulating top management remuneration policies; the Group’s commitment to: o make more loans available to Small- and Medium-sized Enterprises over the next three years, i.e., on average 6% more per year than the average loans granted in 2007 and 2008, provided that the credit quality is adequate, in conformity with the principle of sound and prudent bank management; o apply more favorable conditions to the beneficiaries of loans backed by the Central Guarantee Fund for small and medium-sized enterprises, and make a 21.75 million contribution to the Fund itself; o suspend payments of home mortgage loans – if requested by the individuals indicated in the Agreement and if the subjective and objective conditions provided therein are fulfilled – free of charge for the borrower for 12 months; o assure adequate liquidity levels for creditors of public administrations.
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The Memorandum is effective until the issued financial instruments are outstanding or until Banco exercises the option to redeem all the instruments subscribed by the Ministry.
On 31st July 2009, the issue of the financial instruments by Banco Popolare in favor of the Italian Ministry of Economy and Finance was finalized, for an amount of 1.45 billion. The issuance and subscription of the above instruments shall ensure an adequate capitalization for the Group, also with an eye to the future, and allow to strongly raise lending levels to businesses and households.
Partial sale of the equity interest in Istituto Centrale Banche Popolari Italiane (ICBPI) and subsequent capital increase by the associate
On 9th January 2009, Banco Popolare finalized the transfer of a 841,965 share stake, accounting for 7.62% of ICBPI’s share capital, to Veneto Banca Holding S.p.A. The sale was made at a unit price of euro 43.35 per share, for a total amount of 36.5 million, and generated a capital gain of about 3.7 million, gross of tax effect, which was recognized in the P&L of first quarter 2009. Pursuant to the agreement, 50% of the attributable share of dividends accrued in financial year 2008 were collected by the transferring companies. For Gruppo Banco Popolare this amount represents a supplement to the selling price.
On 31st January 2009, Gruppo Banco Popolare carried out ICBPI’s capital increase approved by the Company’s General Meeting on 19th November 2008. The increase was performed by issuing 1,578,487 rights offered in option to shareholders at a par value of 3 euro and a share premium of 40.90 euro. Gruppo Banco Popolare accepted the offer through its Parent company and the subsidiaries Banca Popolare di Crema and Holding di Partecipazioni Finanziarie BP, already shareholders of the associate, and subscribed for a total of 399,101 shares for a total amount of 17.5 million. The subscribed shares’ dividend rights are effective as of 1st January 2009. Subsequent to the sale and capital increase, Gruppo Banco Popolare holds a 3,173,747 share stake in ICBPI, accounting for 25.133% of the share capital, plus the interest held by Gruppo Banca Italease, corresponding to 0.016% of the share capital.
Voluntary Tender offer of Banco Popolare Croatia
On 9th January 2009, the Management Board of Banco Popolare approved the launch of a Voluntary Tender Offer (VTO) on Banco Popolare Croatia’s preferred shares, at a unit value of HKR 1.700, for a max. theoretical cost of 18.9 million HKR in case of full acceptance. The VTO ended on 9th March 2009: the accepting shareholders tendered 10,052 shares into the offer, for a total amount of HKR 17.1 million, corresponding to 2.3 million euro. As a result of the above transaction, Banco Popolare’s stake in the Croatian bank went from 91.442% to 97.984%.
Sale of Delta S.p.A.
On 22nd January 2009, Banco Popolare signed an agreement with Onda and Sviluppo Investimenti Estero (representing respectively the Management Board of Gruppo Delta and of Cassa di Risparmio della Repubblica di San Marino) aiming at enabling Banco Popolare to exit from Delta’s shareholding structure, owing to changes in the Group’s strategies and in the reference market. The sale by Banco Popolare of a 13.293% interest in Delta, corresponding to 14,140,026 shares, was carried out at a price of 3.1 euro per share for a total amount of 43.8 million, generating a capital gain of 3.5 million, gross of tax effect.
Acceptance of BPER’s VTO for Meliorbanca
On 6th February 2009, Banco Popolare accepted the Voluntary Tender Offer launched by Banca Popolare dell’Emilia Romagna (BPER) for Meliorbanca. As a result, Gruppo Banco Popolare tendered its entire stake, corresponding to 19,513,327 shares, equal to 15.455% of Meliorbanca’s share capital, at a price of 3.20 euro per share, totaling 62.4 millions. The acceptance of the VTO had no P&L impacts in 2009, as the equity investment had already been realigned to the value of the VTO.
Merger by acquisition of Bipielle Finanziaria and Bipitalia Alternative in Holding di Partecipazioni Finanziarie Banco Popolare
The merger by acquisition of Bipitalia Alternative into Bipielle Finanziaria along a fast-track procedure under art. 2505 c.c. was finalized on 27th March 2009, while the merger by acquisition of Bipielle Finanziaria into Holding di Partecipazioni Finanziarie Banco Popolare along a simplified procedure under art. 2505 c.c. was finalized on 31st March 2009. Accounting and fiscal effects shall run retroactively from 1st January 2009.
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Liquidation of Bipielle Bank (Suisse)
The Shareholders’ meeting of the subsidiary Bipielle Bank (Suisse), fully owned by the Parent company, on 6th May 2009 decided to place the company in liquidation, legally effective as of 13th May 2009; as a result, the Board of Directors was dissolved and liquidators were appointed.
Sale of the equity investment in Aletti Private Equity
On 17th April 2009, an agreement was signed to sell the Group’s equity interest in Aletti Private Equity to Assietta S.p.A.. The sale was finalized on 26th October, after receiving the required authorization, at a price of 1,4 million, practically in line with the company’s asset value. For financial year 2009 the contribution of the subsidiary, which was fully consolidated, to the consolidated financial statements was recognized under item 310 of the P&L (Profit/loss after tax from non-current assets held for sale and discontinued operations), in compliance with the accounting standard IFRS 5.
Change of legal form of the Subsidiary Società Gestione Crediti BP to a consortium joint-stock company
On 1st October, the change of legal form to a consortium joint-stock company of Società Gestione Crediti BP S.p.A., that had been approved by the Management Board on 16th June 2009, was finalized. As a result the company changed its name into Società Gestione Crediti BP Soc. Consortile per Azioni.
Sale of Banco Popolare eská Republica
On 1st December 2009, the Management Board approved the sale of the entire 100% equity interest held by the parent company in Banco Popolare eská Republica to Società PA Holdings Limited belonging to the UK private equity fund AnaCap; the sale agreement was signed on 9th December 2009. The price, referring to 31st December 2008, was fixed to about 1,210 million crowns, corresponding to about 47 million euro, to be adjusted based on the shareholders’ equity on the date of finalization, which in 2010 is contingent upon the obtainment of the necessary authorizations from competent authorities and the satisfactory completion of a due diligence. As a result of the above transaction, Gruppo Banco Popolare should generate an estimated capital gain of about 7 million. The contribution made to the consolidated financial statements by the subsidiary, which was fully consolidated, was recognized under items 150 of Assets (Non-current assets held for sale and discontinued operations), 90 of Liabilities (Liabilities associated with non-current assets held for sale and discontinued operations) and 310 of the P&L (Profit/loss after tax from non-current assets held for sale and discontinued operations), in compliance with the accounting standard IFRS 5,.
Reorganization of the Group’s insurance brokerage business line
On 29th May 2009, an agreement was signed to sell the Bipitalia Broker business unit to Arena Broker. The transaction, that had been approved by the Management Board of Banco Popolare on 7th April 2009, involved the entire business unit comprising the assets, liabilities and legal relations, including the employees, of Bipitalia Broker. The net book value of the assets and liabilities being sold totaled 0.3 million euro. The sale, aiming at achieving an efficiency gain in the insurance brokerage business by concentrating the structures belonging to the former BPVN and BPI groups in a single entity, was finalized on 1st June 2009. With the sale of the business unit, Bipitalia Broker ceased its operations. On 30th September 2009, the merger by acquisition of Bipitalia Broker into Holding di Partecipazioni Finanziarie Banco Popolare was finalized through a fast-track procedure under art. 2505 c.c.. On the same occasion, also the merger by acquisition of Efimmobiliare into Holding di Partecipazioni Finanziarie Banco Popolare was finalized through a fast-track procedure under art. 2505 c.c.. The legal and accounting effects of both mergers run retroactively from 1st January 2009.
Reorganization of the real estate business line
On 12th October, the Shareholders’ Meeting of Bipielle Real Estate approved the merger by incorporation trough a fast-track procedure under art. 2505 c.c., of Andromeda Immobiliare, Antares Immobiliare, Antilia Immobiliare, Azimuth Immobiliare, Pegaso Immobiliare and Perseo Immobiliare. On the same date, a similar resolution was passed by the Shareholders’ Meetings of the acquirees. The merger deeds were finazied on 18th December 2009, with retroactive accounting effectiveness from 1st January 2009.
Agreement between Parmalat and Gruppo Banco Popolare
On 18th February 2009, Parmalat S.p.A., the Commissioner for the extraordinary administration of the Companies of Gruppo Parmalat, and Banco Popolare reached a final out-of-court settlement upon their respective relations and the claims to the Banks belonging to the former Gruppo Banco Popolare di Verona e Novara referring to the period before the Parmalat Group filed for bankruptcy (December 2003).
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Under the above agreement, the cost for the Banks of the Group (Banca Popolare di Verona SGSP and Credito Bergamasco) totaled 24.2 million, with no negative impact on the P&L, as all the necessary provisions had already been set aside in due time. Parmalat and the Commissioner of the Companies of Gruppo Parmalat under extraordinary administration that did not take part in the composition, shall waive any existing or future claw-back action and/or compensation claim or any other action against Gruppo Banco Popolare, while the above Banks shall waive their rights to loans that have already been included among liabilities under the bankruptcy procedure and to the inclusion of the sums being paid under this agreement.
Agreement with Pandette Finanziaria S.r.l.
On 23rd February 2009, Banco Popolare and Pandette Finanziaria signed an agreement on the put and call option contracts on shares of common stock of RCS MediaGroup S.p.A. that had been entered on 29th November 2006 and 19th April 2007, respectively. Under the agreement, the option contract relating to 18,300,000 shares of common stock of RCS was regularly executed upon the original expiration date, namely, 3rd March 2009. The option contract relating to 25,300,000 shares of common stock of RCS was instead postponed by 5 years, whereas the voting right associated with said shares shall continue to be exercised by Pandette.
Actions in favor of Group customers who subscribed index-linked policies backed by securities issued by defaulting financial organizations
In order to increase customer loyalty, the Group decided to launch important initiatives with a view to supporting customers who subscribed to policies distributed by the Group Banks and are currently uncertain as to whether they will recover their invested capital due to the default of the financial organizations (Lehman Brothers and Icelandic banks) which had issued the securities backing the subscribed policies. The proposed actions are intended to give customers the certainty of recovering their entire invested capital. In some cases the actions were carried out in joint agreement with the insurance counterparties, as was the case with the index-linked policies issued by the associate Popolare Vita, whose underlying securities had been issued by the Lehman Brothers Group. On 22nd January 2009, 56.2 million were deposited in Popolare Vita’s future capital increase account, to provide the company with the necessary financial resources to support the planned action. To this regard, note that the charge related to the above action and attributable to Gruppo Banco Popolare had already been expensed to income in financial year 2008.
Significant actions were planned during the year, in favor of customers who subscribed policies backed by securities issued by defaulting Icelandic banks. In particular, on 1st December 2009 Banco Popolare decided to launch a voluntary public exchange offer, proposing holders of index-linked policies “Bipielle Aphrodite II Serie Index I/2005”, “Bipielle Magnolia Index II/2005”, “Bipielle Azalea Index III/2005” issued by UGF Assicurazioni (former Aurora Assicurazioni), “Bipielle Aphrodite Serie II”, “Bipielle Magnolia”, “Bipielle Azalea” issued by Eurovita Assicurazioni, backed by securities issued by the Icelandic banks Landsbanki Islands, Glitnir Banki and Kaupthing Bunadarbanki, to exchange each policy with zero- coupon senior bonds issued by Banco Popolare, plus a possible balance payment in cash. The offer is promoted in Banco’s own name and on behalf of the Group Banks(Banca Popolare di Lodi, Banca Caripe, Banca Popolare di Crema, Banca Popolare di Cremona, Cassa di Risparmio di Lucca Pisa Livorno) which sold the policies to their customers, and to which the policies tendered into the Offer shall be transferred. The Offer is addressed exclusively to eligible policy-holders or beneficiaries of the capital rights or of other rights attached to the policies resident or domiciled in Italy, and it covers max. 8,535 policies corresponding to total nominal premiums paid of 138.7 million, referring to policies that have not been liquidated yet. Participants in the Offer have been assigned five-year unstructured zero-coupon senior bonds to be issued by Banco Popolare at the exchange date, fixed on 12th April 2010, for a total maximum amount of 150 million. The issue price of the bonds offered in exchange has been fixed to 807.5 euro, i.e., 80.75% of the unit nominal value of 1,000 euro. As consideration, each participant shall receive a total nominal value upon expiration of the replacement securities corresponding to the single premium paid for each policy, net of issuance expenses and inclusive of a balance payment in cash in case the paid premium is not a multiple of the minimum bond denomination of 1,000 euro. The Offer is irrevocable and is not conditional to reaching a minimum level of participation or to any other condition precedent. To guarantee the success of the Offer, in the event that not all the policies under the Offer are tendered, the distributing Banks undertook to subscribe the residual amount of replacement securities, proportionally to the value of the policies they have distributed, as well as an additional amount of securities up to a total nominal value of 150 million.
As described in the section devoted to noteworthy events after the balance sheet date, the Tender Period, which started on 8th February, ended on 12th March 2010, with a participation rate of 98,11%.
Accordingly, costs of about 16 million have been charged to income for the year, to top up the provisions already earmarked when preparing the 2008 annual report.
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Banco Popolare convertible bond issuance
In the meeting held on 23rd November 2009, the Management Board and Supervisory Board of Banco Popolare approved the proposal, to be submitted to the Shareholders’ Meeting of Banco Popolare on 30th January 2010, to give the Management Board, under art. 2420-ter of the civil code, the power to issue bonds convertible into shares of the Company’s common stock within maximum two years of the resolution date up to a maximum amount of 1 billion. Based on the proposal, the convertible bonds are to be offered in option to shareholders and holders of convertible bonds under the 2000/2010 4.75% Subordinated Convertible Bond (“TDF” )– ISIN IT 0001444360 program, issued by Banco Popolare. The main features of the convertible bonds are: - repayment unsubordinated to other company debts (senior ranking); - 4 year maturity; - fixed rate annual yield (4.75%); - bond-holders can convert the bonds into shares of the company’s common stock at any time starting from the eighteenth month after the issue date and until maturity; - as of the eighteenth month after the issue date and until maturity, the company can early redeem the bonds thorough a partial or full payment in shares; - cash repayment upon maturity of convertible bonds whose conversion option was not exercised; repayment can also take place by converting the bonds into company shares; - listing of the convertible bonds on the Electronic Market (Mercato Telematico Azionario) of Borsa Italiana S.p.A., also subsequent to their issue.
Bonds can also be redeemed early through a partial or full payment in cash. As more exhaustively described in the section devoted to noteworthy events after the balance sheet date, the Special Shareholders’ Meeting almost unanimously approved the above described convertible bond issue, whose offer on the market ended in the month of March 2010. Owing to the instrument’s nature and peculiarities (so called soft mandatory loan), this deal represents a highly flexible financing facility, as it can be used right away to finance business activities, and, to the discretion of the company, it can be permanently converted into share capital. In particular, this initiative allows the company to shore up its share capital while at one time expanding the range of instruments to support the needs of households and businesses in the Group’s market territories.
EIB – Banco Popolare Agreement for Small and Medium-sized Enterprises and Local Authorities
Banco Popolare and the European Investment Bank signed an agreement on 12th June 2009 to provide aggregate financing of 300 million euro subdivided into two facilities: 200 million euro shall be allocated for SMEs loans to develop investment projects and initiatives in the manufacturing, service and tourism industries; 100 million euro shall be earmarked for Public Entities and Utilities.
Under the partnership, the funds made available by EIB for SMEs shall be passed on through the retail branches of Gruppo Banco Popolare to enterprises with less than 250 employees, via medium term loans with a maturity of up to 12 years, a fixed or floating rate, up to a maximum amount of 12.5 million euro per project.
This operation will open up new resources to support businesses, which shall gain access to low-cost funds to start business growth and development plans. Thanks to this initiative, Banco Popolare shall count on supplementary resources, with a simple, swift and flexible access, to offer a concrete support to enterprises against the current crisis.
Loans financed under the 100 million facility allocated for Public entities and Utilities must support projects for the creation of small and mid-sized infrastructures in the energy, environment, education and healthcare sectors. To qualify for financing, eligible projects must not exceed a total investment cost of 25 million euro, and each single loan cannot exceed 50% of the project total cost, up to 12.5 million Euro. The maximum maturity for the loans will be 20 years.
Banco Popolare joined the agreement on the debt moratorium for SMEs
On 1st September 2009, Banco Popolare formally joined the “Small Business Act” signed by the Italian Banking Association (Abi), the Italian Government and Business associations to suspend the payment of debts for Small and Medium-sized Enterprises (SMEs). The agreement, which aims at supporting SMEs in distress, was signed by all the Group Banks and confirms our commitment to back this customer class, which represents the backbone of our domestic economy. The agreement is addressed to companies with less than 250 employees and annual sales below 50 million euro, which, albeit under temporary distress, have an adequate outlook for business growth and continuity. The actions envisage a 12 month suspension of mortgage and lease principal payments, postponing the maturities of short- term trade receivables by up to 270 days and, for businesses implementing capital strengthening actions, the possibility of accessing a specific loan facility. Banco’s commitment in favor of SMEs is witnessed also by the agreements signed with various trade associations and institutions. To mention the most recent ones, in addition to the above described agreement entered with E, Banco signed a memorandum of understanding promoted by the Ministry for Tourism, which has approved a 200 million facility in favor of
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tourism enterprises. Moreover, Banco Popolare contributed 21.75 million to the capital strengthening of the Guarantee Fund for SMEs.
Reorganization of the Direct Banking business
In May, Banco Popolare started reorganizing the Group’s “Banca Diretta” business, specializing in online and electronic services. More specifically, an ad hoc function in charge of launching and developing electronic products has been added to the other functions dealing with the other major classes of products/services; the sales network of the Group’s commercial banks is responsible for commercial operations, while SGS, the Group’s service company, provides specialist customer services.
Reorganization of Retail Services
Unlike the current structure, which is organized in segments and products (households, investment and protection, small businesses), the reorganization of the Retail Service in based on a concept where structures are specialized by product/service areas, hinging on the provision of a dedicated and all-round service by type of product, regardless of the segment they are geared to, so as to promote the development of centers of excellence that can guarantee high-quality service levels to the retail banks (Banche del Territorio). The plan envisages also the creation of discrete segment desks disjoint from the structures dedicated to product development, to guarantee a functional correspondence with their peer structures in the Banche del Territorio. Moreover, the so called Reti Esterne Specializzate (RES – External Specialized Networks) – in charge of approving loans and in particular mortgages – are going to be closed down as ”stand-alone entities", and repositioned partly in the loan and lending policies service with regard to loan approval and risk governance issues, and partly in the retail service for all aspects regarding sales, marketing and product definition issues. Again, the goal is to ensure the best possible management of both aspects (risk and sales issues), by bringing it back under the bank’s consistent and collective control with all the other typical activities/products. The new organization chart comprises four departments directly reporting to the retail service: retail performance planning and analysis, product marketing and communication, res mortgages, market research and development.
The reorganization was defined in agreement with Trade Unions and it involves 61 employees, of which 42 shall be placed in the branch network and 19 in SGS.
Activities connected with the reorganization of the consumer credit business
In July, following the finalization by Crèdit Agricole and Banco Popolare on 22nd December 2008 of the consumer credit joint-venture combining their consumer credit companies Agos and Ducato, the migration of Ducato’s IT procedures onto Agos’s target information system was completed. The outcome was a single IT platform for consumer credit, which was a pre-requisite to obtain the potential cost synergies from this operation. On 19th October 2009, the Shareholders’ Meetings of Agos and Ducato approved the simplified merger by acquisition under art. 2505 c.c. of Ducato into Agos. The merger was carried out with no capital increase on the part of the acquirer, and was finalized in December: in the meanwhile, the acquirer changed its company name in Agos - Ducato S.p.A. Finally, a specific operational agreement is being negotiated to optimize and rationalize the distribution operational processes and the support activities provided to the joint-venture.
Completion of activities connected with the sale of Banca Popolare di Mantova
Following the sale to Banca Popolare di Milano on 22nd December of the shareholding held by Banca Popolare di Lodi in Banca Popolare di Mantova, in performance of the agreement signed by the parties on 23rd July 2008, the IT migration of Popolare di Mantova onto the target information system of Banca Popolare di Milano was successfully completed, this being the last steppingstone allowing Popolare di Mantova to gain its full autonomy in its new Banking Group of belonging.
Audit by the Bank of Italy
In 2009, the Bank of Italy carried out a sector audit across the Group to assess the adequacy of the credit risk management and control processes, in the light of the integration process after the recent merger that led to the formation of the BP Group, as well as of the considerable complexity that of late has been characterizing credit and financial market scenarios. The heads of the Parent company’s operational and control structures were interviewed, and the governance systems and instruments have been thoroughly analyzed, together with the related processes. Based on the outcome of the above audit, the Group has already implemented or is implementing the required adequacy or improvement interventions. It should be noted that the Group is constantly engaging in activities to develop and enhance our risk governance systems, not only to comply with prudential supervisory regulations, but also in keeping with market best practices.
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Implementation of Organizational Changes
In the meeting held on 27th January 2009, after prior opinion of the Supervisory Board, the Management Board started to implement the framework resolution of 14th November 2008, by: appointing Mr. Massimo Alfonso Minolfi as “single” General Manager, who then, as specified later on, tendered his resignations; delegating the groundwork activities for the Group’s organizational and business innovation and development and the management of business partnerships to Mr. Franco Baronio.
In the meeting held on 10th February 2009, the Management Board proceeded with the implementation of the above mentioned resolution of 14th November 2008, by: appointing Mr. Maurizio Faroni as Banco’s CFO, who shall be in charge of Group finance, equity investments, business planning and control, investor relations, special projects, M&A, as well as of the strategic reporting by Banca Aletti and the finance product companies, and shall report directly to the CEO. Mr. Faroni shall resign from his office as Managing Director of Banca Aletti at the approval of the 2008 annual report; consolidating ALM, banking book, repo desk and proprietary portfolio management activities at the Parent company’s; consolidating Banca Aletti’s monitoring and control activities under the management of Banco’s CEO.
In the meeting held on 15th September 2009, the Supervisory Board authorized the guidelines of the review of the Top management structure of Banco Popolare as resolved by the Management Board. The new structure shall have a summit represented by the Chief Executive Officer, and seven departments: Corporate, Retail, Lending, Finance, Legal Affairs and Compliance, Operations, Human Resources. The review of the Top management structure stems from the opportunity to put in place an organizational layout that is consistent with the business plan and with the goal territorial proximity, and blends with the corporate governance plan, whereby the decision-making and management processes are organized along criteria of utmost efficiency: constant risk control, rapidity, minimum information flow dispersion, clear identification of responsibility centers for the various operational areas, rationalization of direct reporting. In keeping with our bylaws, the review does not foresee the presence of a general manager. This was made possible by the fact that the structure shall require that: the most important functions be concentrated in the Head offices; direct reporting to the CEO be downsized; specific Committees be set up, to ensure that all managers have a comprehensive view, accountability and crosscut knowledge of risks. This new organizational arrangement lays a strong emphasis on Committees (Steering Committee, Risk Committee, Finance and ALM Committee), which are expected to meet on a high frequency basis and to record the minutes so as to keep track of decision-making processes; greatest attention be paid to risk monitoring and control functions; the Group’s corporate structure, where the retail banks (Banche del Territorio) are incorporated as joint stock companies and their top management sits in the Parent company’s Management Board and in a specific Group Committee chaired by the Chief Executive Officer.
The nimbleness of the structure, the transparency and accountability of decision-making processes reflect on the most appropriate operational modalities of the business plans.
Changes in executive positions
On 29th January 2009, Mr. Enrico Maria Fagioli Marzocchi resigned from his office as member of the Management Board of Banco Popolare and Managing Director of Efibanca. On 8th April 2009, the employment contract between Massimo Minolfi and Banco Popolare was consensually terminated, and concurrently Mr. Minolfi quit all his positions at the Group.
The Parent company Shareholders’ Meeting held on 25th April elected five additional members of the Supervisory Board of Banco Popolare, who shall serve a three-year term from 2009 to 2011, thus bringing the total number of Members to 20, as provided for by the merger agreement between BPVN and BPI. The new directors, elected based on the number of votes received, belonging to the two filed slates of candidates and chosen according to bylaw criteria, are Sandro Veronesi, Gabriele Camillo Erba, Gianni Filippa, Andrea Guidi and Tommaso Zanini, the latter representing minority shareholders.
The Supervisory Board of Banco Popolare on 28th July 2009 unanimously appointed Giorgio Papa as member of the Management Board, in the position of executive director, thus partially restoring the composition of the Management Board.
In the meeting held on 15th September 2009, the Supervisory Board unanimously appointed Aldo Civaschi as member of the Management Board, thus fully reconstituting the Management Board.
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Appointment of new managers in charge of corporate financial reporting in the Group
In compliance with art. 154bis of TUF (Consolidated Finance Act) implementing the changes introduced with Legislative Decree 195 of 6.11.2007 (Transparency- Implementation of 2004/109/EC directive on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market), the subsidiaries Banca Aletti S.p.A and Efibanca S.p.A appointed their own Managers responsible for corporate financial reporting. Their appointment was required as both Efibanca and Banca Aletti are “listed issuers having Italy as home member state”.
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BANKING ACTIVITIES
Banche del Territorio – Retail banks
The key element underlying the country-wide development of Gruppo Banco Popolare’s banking activities and customer relations are our “Banche del Territorio”, the retail banks, which are the foundation of the Group’s organizational structure: Banca Popolare di Verona – SGSP; Banca Popolare di Lodi, Credito Bergamasco, Banca Popolare di Novara, Cassa di Risparmio di Lucca Pisa Livorno, Banca Caripe, Banca Popolare di Cremona and Banca Popolare di Crema.
Banco Popolare has direct operations in 20 regions with 2,237 distribution structures, that break down as follows:72% in Northern Italy, 15% in the Center of Italy, 13% in Southern Italy and in the Islands. The Group’s historical stronghold regions are of course characterized by a deeper entrenchment: Veneto, Lombardy, Piedmont, Tuscany, Emilia Romagna, Liguria, Abruzzo and a noteworthy presence in Sicily.
Shown below is the percentage distribution by region of the Group’s retail bank branches as at 31/12/2009:
Lombardy 26% Veneto 15% Emilia Romagna 12% Piedmont 11% Tuscany 11% Sicily 7% Liguria 6% Lazio 3% Campania 3% Abruzzo 2% Trentino Alto Adige 1% Friuli Venezia Giulia 1% Umbria 1% Marche, Molise, Puglia, Valle d’Aosta, Basilicata, Calabria and Sardinia 1% Total 100%
At Group level the banking business is supervised by the Retail and Corporate Departments, which are both in charge of defining and coordinating market development strategies within their area of competence, with a special focus on supporting our retail banks (Banche del Territorio) and on an ongoing product innovation activity, to meet the needs of existing and prospective customers.
Since 2008, the customer deposit business is coordinated at Group level, with the introduction of the Single Issuer, i.e., the Parent Company, which acts also as counterparty for the single Banche del Territorio, thus smoothing out any operating mismatch that might be generated.
Interest income generated by customer funds at the end of December decreased to 1,970.4 million. At the end of the prior year it amounted to 2,593.0 million. The pro-forma income statement, which factors in the impact of the midyear discontinuation of maximum overdraft commissions, shows a interest income generated by deposits and loans of 1,959.0 million, down by 14.7% with respect to the prior year. This was mainly the result of the plunge of the mark-down on deposits, -117 bps, which was only partly offset by an improved mark-up on loans, +41 bps.
Total loans to customers as at 31.12.2009 came in at 75,844.5 million, up by 3.1% as compared to the actual year-end figure of the prior year, i.e. 73,568.4 million. Gross average loans to customers of the Banche del Territorio at year end totaled 75,032.5 million, up by 1.3% with respect to the prior year’s average of 74,097.6 million, and they generated an interest income of 1,888.2 million. Short term loans totaled 31,128.2 million, while medium/long term loans amounted to 43,904.4 million. Gross average retail loans totaled 32,144.0 million, up by 3.9% from 30,943.7 the year before, while corporate loans came in at 38,590.5 million, up by 0.7% from 38,305.1 in the prior year.
Total customer funds for the Banche del Territorio as at 31.12.2009 stood at 77,541.9, down by 1.1% as compared to the actual data as at 31.12.2008, totaling 78,387.1 million. In 2009, “overall” average direct funds (inclusive of the Parent company’s bonds distributed by the Banche del Territorio) totaled 64,847.7 million, up by 5.3% from 61,571.4 million the prior year, and an interest income of 116.7 million as compared to 831.1 million in 2008. The drastic contraction of interest on deposits was the result of the market rate trends throughout the year, as already explained above.
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Overall average direct retail deposits and funds totaled 48,402.5 million, up by 7.7% from 44,960.7 million in 2008, while in the corporate segment they came in at 11,250.5 million, down by 2.5% from 11,540.6 million in 2008.
The spread between loans and overall direct deposits generated by the Banche del Territorio in 2009 was 2.64%, in the pro- forma income statement prepared to factor in the effects of the regulatory change regarding maximum overdraft commissions. The prior year the spread had been 3.33%. In a year marked by interest rates at their historical low , this dynamic has been experienced by the entire banking industry.
Net commissions generated by the Banche del Territorio in 2009 totaled 1,393.7 million, up by 16.4% from 1,196.9 million in 2008.
Average indirect customer funds totaled 54,263.7 million in 2009, down by 17.6% as compared to the previous year’s average assets amounting to 65,837.4 million.
Retail
As a whole, our Retail business counts 2.3 million accountholding customers (individuals and companies). Shown below is the breakdown of our Retail customers by Group retail bank:
% Nr. accountholding Banca del Territorio – Retail Bank customers Banca Popolare di Verona – SGSP 26% Banca Popolare di Lodi 22% Banca Popolare di Novara 22% Credito Bergamasco 12% Cassa di Risparmio di Lucca Pisa Livorno 11% Banca Popolare di Cremona 3% Cassa di Risparmio di Pescara 2% Banca Popolare di Crema 2% Total Retail Accountholding Customers 2.3 million
The Group’s Retail customers are subdivided into two macro-segments – Private Individuals and Small Businesses – that in turn are broken down into sub-segments with specific needs and characteristics, upon which the Retail Department specifically focuses when developing marketing actions and product innovation. The sub-segments are: shareholders, households, students, the young, foreigners and senior customers (as part of the Private Individuals segment); firms, shopkeepers, artisans, professionals, women businesses (as part of the Small Businesses segment).
Household products and services
When developing products and services devoted to households, we focused in particular on: covering mass market segments having a high growth and development potential, for example: the Youth, Immigrants, and the low-cost acquisition channel by definition: the web, by innovating products, services and processes on checking accounts, savings deposits and online services; “Smart” mortgages, ” proposed to reward the loyalty and to support the financial needs of households, together with a full range of consumer credit products to support the financing needs of each family member across the different stages of life; New payment card solutions, to foster the knowledge and interest of households towards secure, customizable and readily accessible products.
In the meanwhile, the product offer was rationalized and simplified by reducing the complexity of the portfolio, so as to facilitate the selling process and standardize the offer structure across the entire Gruppo Banco Popolare.
Special attention has been devoted to strengthening customer retention and customer satisfaction levers, by organizing among other things loyalty programs, contests, extra-banking services, etc.
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Checking accounts
The number of commercial checking accounts opened with the Banche del Territorio by Retail customers at the end of December was 1.87 million, of which about 1.5 million referring to household customers (Universals + Affluents). Shown below is the breakdown of outstanding checking accounts at the end of 2009:
% Nr. Commercial Banca del Territorio checking account Banca Popolare di Verona – SGSP 25% Banca Popolare di Lodi 22% Banca Popolare di Novara 22% Credito Bergamasco 12% Cassa di Risparmio di Lucca Pisa Livorno 12% Banca Popolare di Cremona 3% Cassa di Risparmio di Pescara 2% Banca Popolare di Crema 2% Total n. commercial checking accounts 1,87 million
In 2009 the above volume growth was driven by the opening of about 262 thousand new checking accounts, of which about 190 thousand by Universals and Affluents.
Within the Checking Account offer, in 2009 the Group Banks were busy marketing the new offer, “Let’s Bank”, dedicated to youth between the ages from 12 to 30 yrs. This challenging and innovative project was launched at the end of 2008 and gave origin to three different types of accounts: Discover (Scoprire) 12-17 yrs is a deposit account dedicated to minors at their first banking experience; Study (Studiare) 18-29 yrs dedicated to University or master students; Work (Lavorare) 18-29 yrs is the checking account for young workers.
In particular, Discover 12-17 yrs received a prestigious award from the specialized newspaper Milano Finanza: the jury of MF Innovazione Award 2009 awarded the first prize for the category Young 0-18 years to Banco’s deposit account. The success of the Let’s Bank product range has been testified also by customers, who went well beyond our estimated targets: about 25,000 youth during the year set up new accounts, which combine regular checking account services with a wide range of extra-banking services.
With regard to products for junior customers, at the end of 2009 Brucoconto, the passbook dedicated to customers from 0 to 11 years of age, that was offered in 2008 by all the Banks of the Group in its new nominal version, reached the threshold of 40,000 accounts.
Banco has always entertained a special and privileged relation with its Registered shareholders, which reflects also in the development of dedicated products, as Insieme Soci and Insieme Soci Giovani. Insieme Soci is a well consolidated relationship program that has been extended across all the banks of the Group, designed to make the Shareholder feel he is part of an exclusive club. The package includes the common banking services, combined with extra-banking services like discounts and allowances, and with the loyalty-building program “Valore Insieme Soci” with its traditional prize catalogue that was renewed until March 2010. A “light” version was introduced in 2009, to give the opportunity to make a gradual entry into the Insieme Soci world, featuring more contained costs and services. The favor granted to this offer reserved to Banco Registered shareholders at the end of 2009 produced about 83 thousand dedicated checking accounts, of which 63 thousand “Insieme Soci” accounts.
The Group has always been particularly attentive to the needs of foreign citizens who live and work in Italy and has developed an entire dedicated range of products and services called “Formula Friend Service”. Formula Friend Account is a fixed-fee checking account that includes various free-of-charge services and a special insurance coverage specifically designed to meet the needs of people who live far away from their home country. Formula Friend Transfer is a highly inexpensive money transfer service. Romanian and Moroccan customers can also benefit from Formula Friend TwinAccount: this is a unique service in Italy, whereby thanks to the agreement signed with Groupe Société Générale, they can open a checking account in their home country at no charge (with BRD Groupe Société Générale and SoGen Maroc) just with a simple phone call. 2009 has been a very important year for the immigrants project. In January the Ethnic Team was officially set up, made up of Ecuadorian, Romanian and Moroccan developers. Société Générale works with Banco as partner of excellence for this initiative on the Italian market, sharing costs as well as the direct experience it has already accrued in similar projects. The goals of the Ethnic Team are: develop and promote the product offer of Banco and Société Générale (Twin Account); report possible agreements with embassies, consulates and other institutional organizations; identify intermediaries and opinion leaders at local level (e.g. cultural mediators); promote marketing and communication initiatives geared to the Community.
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We started the analysis to identify or set up new specialized distribution structures tactically located in the local banks’ market territories.
For retail customers looking for liquidity remuneration instruments, a new range of deposit accounts was launched in June 2009 called RendiConto, characterized by almost zero costs and very favorable interest rates. Almost 6,000 RendiConto accounts were opened in only six months, which testifies the interest generated by an offer that was distributed only through the Branch network and by word of mouth, as we decided not to invest in a dedicated communication action and not to benefit from the support of any kind of advertising campaign.
With regard to the “flagship” of the Checking Account offer, 2009 marked the consolidation and harmonization of the “Specchio” range across all the Group Banks. This range had been launched in 2007 to meet the different needs of our customers and is based on four main product solutions: • Tuttofare: aimed at customers who regularly use their checking account for normal transactions, that are included in the monthly fee, without limits and additional charges; • Tuttotasso: geared to customers who keep significant amounts deposited on their accounts, thanks to a competitive rate of return; • Tuttoperuno: geared to customers who rarely use their checking account for their transactions; in this case the account has no monthly fee, and charges depend exclusively on its actual use; • Tuttonline: aimed at customers who prefer a “self-service” use of their checking account; this solution has no monthly fee or additional commissions if transactions are executed on-line.
The above described “Specchio” range has been further complemented with product solutions dedicated to specific commercial initiatives designed to increase the loyalty of existing customers and acquiring new ones. By the end of the year, the contribution of all the initiatives implemented in 2009 produced a total of almost 200,000 outstanding Specchio accounts.
Retail mortgages
In spite of the marked slowdown experienced by the market with respect to prior years (in Q3, mortgages granted in 2009 at national industry level shrank by about 15% as compared with the same period last year), Gruppo Banco Popolare reported an overall new business growth of about 40% compared to 2008.
Outstanding retail mortgages in Banco Popolare at the end of 2009 totaled about 16 billion euro (residual debt), and their breakdown by retail bank is as follows:
Banca del Territorio Breakdown of residual debt
Banca Popolare di Verona - SGSP 28% Banca Popolare di Novara 22% Banca Popolare di Lodi 20% Credito Bergamasco 14% Cassa di Risparmio di Lucca Pisa Livorno 10% Banca Popolare di Cremona 2% Cassa di Risparmio di Pescara 2% Banca Popolare di Crema 2%
In 2009 the Group Marketing structures focused on two main areas: support households against the current economic crisis; meet customer housing needs by proposing innovative products.
Actions to support households
Against a market backdrop characterized by deep changes in terms of real economy, capital markets and regulatory framework, the Italian government and the Country’s primary economic players took action to deal with the present situation. Banco Popolare was very proactive with respect to these initiatives: it joined agreements proposed by the Government, as well as by Agencies, Trade Associations and Institutional entities, and also launched its own initiatives on the territory. All these actions aim at supporting the social and economic fabric during a highly complex economic cycle, and they can be grouped in three macro areas of intervention, reflecting three different goals: softer terms to favor access to loans (mortgages, loans, credit lines); actions to guarantee payment deferrals; actions to support liquidity and investments.
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The table below gives a brief description of Banco Popolare’s main initiatives, specifying the target beneficiary groups.
Subscription/ Participating Initiative Description Proposers Target customers Launch Banks
Reduction of interest rates of floating rate mortgages for main home (public Ex. D.L.185/08 “Law Decree 4%” allowance that turns into a tax credit (Tremonti Bis) 1 January 2009 Gruppo BP Retail for Banks with the Inland Revenue Service) Suspension of home mortgage payments (main home purchase) for Tremonti Bond – 12 months at no additional charge 1 July 2009 Gruppo BP Retail payment suspension (for individuals specified in ABI-MEF protocol) Inclusion in catalog of wages Retail under C.I.G.S Advance guarantee fund advance product 1 April 2009 Gruppo BP Wages Guarantee (Cassa Integrazione Guadagni) Fund (CIG) Setting up soft loans to rebuild residential buildings damaged by the 1 June 2009 Banca Caripe Retail (Abruzzo) Initiatives for earthquake (ABI-CDP agreement) Abruzzo Agreement with ABI to suspend mortgage payments until 31/12/2009 1 June 2009 Banca Caripe Retail (Abruzzo) for people hit by the earthquake
Product innovations
Also in 2009 we continued to propose new products characterized by a highly innovative content. Following the government actions aiming at meeting family housing needs (Home Plan - Piano Casa), in addition to our mortgage product range all the Group’s retail banks, Banche del Territorio, started to distribute “Mutuo 3”: a loan specifically designed to take advantage of the opportunities offered by the Government’s Home Plan. This product offers special terms and innovative ways of financing home extensions of up to 20% of the original volume, demolitions and remodeling (with extension) of residential buildings or purchase of houses belonging to new urban settlements built under the joint action of Government, Regions and local authorities.
Faced with a market characterized by interest rates at their historical low and by customers favoring floating rates (similarly to what had already happened between 2003 and 2006, which then caused many customers to be in financial hardship due to increasing interest rates and bloating mortgage payments), Banco Popolare supplemented its rich mortgage catalog with “Mutuo Partenza Facile”: a mortgage/real estate mortgage loan with maturities from 10 to 30 years, which gives customers the opportunity to benefit from the current low interest rates while protecting themselves with a fixed rate. Mutuo PartenzaFacile has: a fixed entry rate for the first 12 months, tied to the ECB rate (as a result, the fixed entry rate stands at the same levels of floating rate mortgages, and the customer can benefit from the current level of market interest rates); a subsequent standing fixed rate that is “pegged” at the time of signing the loan contract (as a result, the standing fixed rate is determined already when setting up the loan, i.e. when interest rates are low).
Consumer Credit
As to commercial results, in spite of the marked slowdown experienced by the market with respect to prior years (in Q3, at national industry level new business in 2009 shrank by about 12% as compared with the same period last year), Gruppo Banco Popolare reported an overall growth of about 2% with respect to new business in 2008.
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In particular, shown below is the breakdown of Agos-Ducato personal loans (accounting for about 92% of Banco Popolare’s total business) by retail bank (Banche del Territorio):
Banca del Territorio % Agos-Ducato Granted Loans
Banca Popolare di Verona – SGSP 29% Banca Popolare di Novara 22% Banca Popolare di Lodi 21% Credito Bergamasco 12% Cassa di Risparmio di Lucca Pisa Livorno 13% Banca Popolare di Cremona 1% Cassa di Risparmio di Pescara 1% Banca Popolare di Crema 1%
This is the outcome of a “successful” model based: on a specialized product company (Agos-Ducato), leading to an optimization of the product range and a much quicker response time to customers in terms of loan approval time (while carrying out a constant and careful credit review and monitoring of the loan quality); and on the pervasiveness and the service focus characterizing the distribution network of our Group.
In 2009 again our strong focus on keeping the product range evolution consistent with customer needs substantiated into a number of initiatives to broaden and diversify our offer. In particular, a new dynamic product, called “Versatilo” Loan, was created, that supplements the Agos-Ducato personal loan range and is designed to satisfy all our customers’ needs, especially for sophisticated customers who require tailored products. This product is a classical personal loan with a pre- defined rate, which however features the following distinguishing characteristics, which make it very flexible: a) possibility to change the payment amount during the repayment plan; b) possibility to skip a payment in case of distress, deferring it until the end of the amortization plan. The new product was expressly set up to provide customers with a solution, as they are guaranteed the possibility to face up to future needs (which obviously cannot be foreseen at the time of the loan issue), allowing them to reduce the payment amount or defer it in time.
In order to provide a material support to those households which have been most harshly hit by the current economic situation, Banco Popolare joined the initiative promoted by the Italian Banking Association (ABI) and the Italian Episcopal Conference (CEI) to set up a microcredit program for families in need due to the economic crisis. The program is addressed to families with at least 3 school-children, or where one of its members is disabled or critically ill, which have lost all their employment or self-employment income as a result of the economic crisis. A key pre-requisite to access the program is a project for reinstatement to work or for setting up a business activity. Eligible applicants shall be given the chance to receive a loan, called “Prestito della Speranza” (loan of hope), of maximum 6,000 euro at a favorable interest rate and backed by a guarantee issued by a Fund set up with CEI.
Again in 2009, the distribution process of the pension/payroll-secured loan, Cessione del Quinto dello Stipendio/Pensione, set up with the cooperation of Soluzio Quinto Finanziaria (a Company of Gruppo Agos-Ducato), became fully operational. This product is a secured personal loan, with a fixed rate and an up to 120 month maturity, where payments are directly deducted from the payroll (or pension) by the employer (or by the Welfare agency), so that even customers who in the past had problems with banks are given the opportunity to obtain a loan.
Online channels (“By” Services)
“By Services” represent the multi-channel offer designed for retail customers and include all the different interaction modes a customer can use in addition to branch services. The available channels (Internet, call center, voice response, ATM, sms messaging and e-mail) are characterized by an ongoing evolution in terms of learning curve quality and quantity of operational options, and therefore call for a permanent project-development activity. Among the various projects launched in 2009, worth mentioning is the renewed management of security codes to access By Services: in addition to the established solution based on the installation of a digital certificate on the customer’s PC, as of February 2010 a time-synchronized OTP Card shall be introduced. Our Bank shall be the first in Italy to adopt this innovative instrument, that has the form and practicality of a credit card. When the customer presses a specific key, a code will be displayed on the screen for thirty seconds, that will allow him to use multi-channel services anywhere and in total security.
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In 2009, the rationalization of the By Services started in 2008 with by Web continued. The by Call service set up a single toll-free number for all Group customers, and harmonized logics and commissions across all our retail banks (Banche del Territorio), to simplify customer communications and the understanding of the services.
ATM
A renewed attention was devoted to the ATM channel: harmonization, development and innovation are the guidelines that in 2009 directed activities in this field and that will keep the Group busy also in the coming period. During the year, numerous implementations were extended to the Group’s almost 2,500 ATM. In particular: a pilot project was launched for the acceptance of the European EAPS circuit (Euro Alliance of Payment Schemes). This new scheme, born of the agreement reached by the main national circuits (for example our Bancomat), represents the European-wide harmonized solution to bring SEPA (Single Euro Payments Area) into being. Through the harmonization of the different circuits, the project aims at increasing the development of the payments systems; a more modern and personalized interface was created for our Group, based on a 3D logic, with moving slides to capture the user’s attention; the approach used to represent the different services by the single bank was improved, within the framework of a single and synergic structure; a series of standardized advertising images and videos were introduced regarding the various Banche del Territorio that run when terminals are in stand-by mode; the offer of the main services has been harmonized.
Payment instruments
Debit cards
In keeping with the strategies decided the prior year, in 2009 the various ongoing activities have been further consolidated through a constant growth of the product’s penetration rate among our customers.
Changes in n. of debit cards (in thousand and %)
FY 2006 - 17 (-1.7%) FY 2007 - 13 (-1.3%) FY 2008 +77 (+8.0%) FY 2009 + 87 (+8%) Of which first half + 49 Of which second half + 38
YoY debit card volume changes
84,0 80,4 MoM debit card changes in 2009 75,8 68,9 62,6 56,8 84 48,7 40,2 31,5 24,9 77 15,9 7,8
gen feb mar apr mag giu lug ago set ott nov dic
-17- -13
2006 2007 2008 2009
Data in thousands of euros
In spite of economic difficulties, the increase in cards issued, together with the various initiatives that had been launched in 2008, favored the growth in absolute terms of card transactions. To simplify our customer relations and improve their transparency, all operating activities linked to this product have been further enhanced, in particular by: introducing the automated renewal of expiring cards with delivery to the cardholder’s home; using a new card without changing the Pin code;
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simplifying and standardizing the names used in the various communications sent to the customer (e.g., information sheets, account statements, etc).
To relaunch and promote two of our historical brands, Cassa di Risparmio di Imola and Banco di Chiavari, ATM cards have been created with their logos on the front and back of the product. Finally, in 2009 we laid the foundations to face the challenges associated with the adoption of PSD, scheduled for the first months of 2010, and to fully implement SEPA instructions.
Credit cards
In line with the strenuous effort made by the banking industry to reduce inefficiencies associated with cash management, that has been so well described for some time now by the expression “War on Cash”, in 2009 the Group Banks have focused on increasing the dissemination of cards among their customers, launching an important campaign that was internally referred to as “More Cards” (“Più Carte”). Supported by “Master in Card”, a training and motivational event attended by the bank tellers of all the Banks, the campaign featured the “turnkey” delivery of classic and gold credit cards, with exemption from paying the card fee for one year. Numerous account-holders were given the chance to freely familiarize with the most comprehensive electronic money instrument, experimenting its efficacy and convenience. In 2010 the Group Banks will then fully benefit from the use of the new cards, also from a profit standpoint, by those customers who shall appreciate the product and decide to keep it in their wallet. In addition to the strong focus devoted to training and marketing, a major effort was made also to update the product range, with the introduction of the Black card and the launch of the distribution of the first credit card supported by a contactless interface on the MasterCard PayPass circuit. The Black card was designed for a more selected niche of sophisticated and demanding customers in terms of offered services and disposable income, while the contactless technology represents a great opportunity, with a potential for boosting the electronic payments sector. Finally, thanks to a new framework agreement, American Express products are available on the shelves of all the Group’s bank branches, i.e., credit cards that can supplement banking products and that can be used as customer care-oriented commercial tools for customer retention.
Bancassurance - Protection
In 2009, the work carried out by Avipop Assicurazioni, the joint-venture between Gruppo Banco Popolare and Gruppo Aviva, in constant coordination with Banco Popolare’s Retail Department produced an expansion of the product range, which was supplemented with new insurance solutions in line with the Group’s goal of developing insurance products dedicated to individual, home, family and business protection. Among credit protection insurance products (CPI), made available to customers and linked to credit facilities, worth mentioning are: “CPI NON Finanziata” designed to protect holders of newly extended mortgages, featuring the option of paying upfront a single premium without including it in the loan itself. This solution is particularly suited for mortgage subrogation from other banks. As with all protection products, also in this case a special rate was dedicated to all Banco Registered Shareholders; CPI policy to protect loans to SMEs, in particular in addition to the traditional CPI products associated with business unsecured or mortgage loans, we introduced also CPI products to protect lines of credit or short term credit facilities such as Idea Credito and Idea Bullet, which represent an absolute novelty in the Italian CPI insurance world.
In addition to credit protection insurance products, two new insurance policies for individual, home and family protection, supplementing the existing range, were distributed across the Group network in 2009: Healthcare policy "Diaria da ricovero" (Hospitalization Allowance) which guarantees the payment of a daily amount in case of hospitalization; "Tre-30" accident insurance, a novelty in the Group’s protection product range, as it gives all customers with children the opportunity to protect them from severe accident risks, ensuring them not only to simply continue with their school education, but also a guaranteed annual income for a set period of 10 or 20 years.
Both products, as with all the Avipop range, have special versions devoted to Registered Shareholders and to Group employees. Thanks to the product range evolution mentioned above, in 2009 the Group retail bank networks reported total premiums written of about 210 million euro.
Savings/Investment products and services
This range includes products and services meeting the savings/investment needs of Group customers, such as: Direct funding instruments: for example bonds and repurchase agreements; Asset management products: mutual funds and managed accounts; Investment instruments: for example certificates, administered accounts; Life insurance policies.
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In the year under examination, customers favored conservative investment choices, reducing asset management products in their investment portfolios (in favor, for example, of Government bonds and Gruppo Banco Popolare bonds). A heavy selling activity of Group bonds represented one of the main features of the commercial activities performed in 2009 in the investment product and service area, together with a renewed interest for traditional insurance policies.
Group bonds
In 2009, Group bonds were issued to satisfy diversified customer requirements, totaling about 12,000 million, of which about 5,500 million were structured products and more than 1,200 million were bonds issued by third parties. Sales showed that customers favored more simple form of investments, for example “Plain Vanilla” medium term fixed rate or zero coupon bonds. Similarly, customers preferred diversified issues of structured bonds, with notes featuring stepping up coupons and early redemption (Step Up Callable). In the last quarter, we also proposed floating rate bonds, but with a prefixed coupon (floor and cap). As to the secondary market of Group bonds, in compliance with ABI’s guidelines for the transposition of Consob’s third level MiFID regulation (so called Illiquid financial instruments), the time between the offering and the trading of securities has been drastically reduced: as of November all issues have been listed after 90 days of the closing of the offer. In keeping with the development targets of Banco Popolare’s funding activity, ordinary Group bonds have been complemented in 2009 by specific bond issues at particularly competitive terms in order to acquire new customers and raise new funds; in 2009 these issues reached a sales volume of about 3,200 million. The growth of new customer and funding volumes was supported by the offer of specific short-term funding products (for ex. 12-month repos). This activity towards the end of the year was incremented and shall continue also next year to increase the Group’s customer base and market share. Moreover, our Registered Shareholders could benefit from liquidity investment transactions with repos at highly competitive rates. As to bonds issued by third parties, in the first part of the year we distributed some issues from primary Italian banks with a highly reliable rating, aiming at offering the best capital invested protection to investors.
Other investment instruments and initiatives to support customers
The strong volatility of financial markets offered some interesting opportunities, that were seized by part of our customers, whose risk profile shows a greater penchant for equity investments. For these investors, the Group offered Aletti Certificates, that is, medium term investment certificates linked to financial markets with protection forms that at times are conditional. To protect customers affected by the financial distress situations and bankruptcy of some issuers, the Group during the year offered its support and legal aid in case of affidavits of debt to customers holders of bonds issued by Lehman Brothers, Icelandic banks and General Motors.
With regard to the Lehman Brothers default, in January 2009 Gruppo Banco Popolare completed its action aiming at protecting the subscribers of Index-linked policies backed by securities issued by the defaulting US bank. Practically, by replacing the policy, customer can receive/recover the nominal value of the paid-in capital at a deferred maturity with respect to the original.
As a result of the financial and credit crisis that among others hit Iceland, Gruppo Banco Popolare decided to take action also in favor of those customers who had subscribed index-linked policies backed by Icelandic bank instruments. Overall, there were 6 policies issued by UGF Assicurazioni (former Aurora Assicurazioni) and Eurovita Assicurazioni, distributed by the branches of former Gruppo BPI. Four policies expired in March and May 2009, while the last 2 index- linked policies shall come due in June 2010 next. Owing to the financial crisis of the Icelandic banks, Insurance Companies could not pay benefits to the policy-holders, whose capital invested in the policies has been totally impaired. Even the subsequent international moratorium for debtors most likely will not make it easy to rapidly and fully recover the original premium paid.
The action planned by Gruppo BP is part of an effort to build loyalty and restore a climate of trust between customers and Banks, with the aim in the future to guarantee and favor the continuation and development of business relations, and of course to avoid negative impacts that could tarnish our reputation. In December, after the Parent company’s Management Board approved the action, the necessary documentation was filed with Consob to launch a voluntary public exchange offer (PEO) of the index-linked policies with 5-year zero coupon bonds issued by Banco Popolare, plus, in case, a cash balance for residual amounts. As a result, upon expiration of the bond offered in exchange for the index-linked policy, the customer will recover the original invested capital, net of taxation on accrued interest.
As of September, the Group, assisted by the specialized support offered by Banca Aletti, helped customers who wished to repatriate their assets held abroad, taking advantage of the possibility to repatriate capitals under the “Scudo Fiscale ter” (Tax Shield) safe-conduct.
Asset Management
Market conditions caused the asset management sector to report a performance characterized by redemption flows that in 2009 produced a net outflow from Retail customers mutual funds and managed assets of about 2.5 billion.
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In 2009, the managed accounts product range was rationalized, with an effort to keep customers’ changing investment and saving needs always in focus. In particular, in step with market trends, the Group’s mutual fund range in 2009 underwent a rationalization and simplification process, leading to a consolidation process and to a marked reduction of Aletti Gestielle SGR Funds (currently 22). The pension funds managed by the SGR have been combined into similar compartments, so that the compartments coming with the Banks before the merger of the new Banking Group have been merged together. Also with regard to Arca SGR, the CinqueStelle fund range has been rationalized, and two bond funds were launched, with a prefixed maturity, called Arca Cedola Governativo Euro Bond I and II and Arca Cedola Corporate Bond I and II. Finally, in 2009 for the Discretionary Asset Management arm three new compartments of Aletti Gestioni “Multilinea” were launched, in addition to the existing 8 compartments. As of the second half of 2009, the Banks proposed again the balanced line “Protezione Più 0-50” to their customers, i.e., an Asset Management product backed by guarantee, with invested capital guarantee upon expiration of the product’s 5-year maturity period.
Life Bancassurance
In this area, upon termination of the prior exclusivity agreements with other business partners, in 2009 the entire Gruppo Banco Popolare operated through the company “Popolare Vita”, a joint-venture with the insurance partner Fondiaria Sai, and with the Irish subsidiary “The Lawrence Life Assurance”. In 2009, Popolare Vita’s offer was constantly complemented with the distribution of new products that provide a “complete” solution to the insurance investment needs of our Group customers. Also in this sector the market performance affected the development of sales activities, generating in 2009 a new business of about 3,500 million, of which about 2,320 million on Index Linked policies, about 1,150 million on Life insurance policies (Ramo I) and the remaining on investment-linked insurance policies (Ramo V) and Unit-Linked policies. The Group’s product range underwent the following actions: Distribution of a Life policy (Ramo I) with very low entry loads, and penalties in case of early exit, called “Beldomani Futuro Garantito Flex”. It adds up to the previous version of the traditional policy with a minimum return guaranteed; launch of a new favorable rate for the traditional policy, reserved to Shareholding customers and Group employees; restyling of the investment-linked policy (Ramo V) to manage business liquidity.
The sale of Index Linked products resumed in May with the distribution of 4 index-linked policies issued by the Irish company; they feature: bonds issued by Banco Popolare as underlying asset as capital guarantee upon maturity, a fixed coupon structure and index linking to world equity market. The distributed tranches, called “Popolare Life Cedola Plus” (May 2009), “Popolare Life Multicedola” (June 2009), “Popolare Life Top Index 1 and 2” (September and October 2009) enjoyed a great success, due to the fact that the investment combines fixed coupon flows with the typical advantages of insurance products.
Finally, Popolare Vita’s pension offer saw the restyling of the Supplementary Pension Scheme “Popolare Vita Previdenza”, a product that in the last months of the year raised much interest among investors.
Mifid
Throughout 2009 we worked to improve the operational processes, the IT procedures and the organizational model that the Group has been using since the introduction of MiFID. In particular, in compliance with current regulatory requirements: disclosure to customers on transparency and incentives received by Banks in return of distribution services has been gradually automated; all those financial instruments on the secondary market (issued before November 2007, when the directive came into effect) have been reclassified, that were not in line with the profile of the new products issued in compliance with the criteria defined by the Group; Branch networks have been prompted to update investment service contracts for customers that had not been reached yet or had not availed themselves of the Banks’ services.
With regard to the adoption of level 3 measures regarding the so called “illiquid financial products”, a dedicated project was launched to implement the regulation that requires of Intermediaries to behave with fairness and transparency when they offer illiquid products. By the end of December, more than 860,000 retail customers holders of financial instruments have been contacted by the bank branches and “profiled” based on the MiFID profiling questionnaire.
Advisory Platform for Private Managers (Affluents and Universals)
In 2009, the new Advisory platform has been released on all the Group branches, to support Private Managers when providing advisory services on their customers’ savings/investment product portfolio.
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In their periodic meetings with customers, Managers can use this tool to obtain: information for portfolio analysis and a summary report on the customer’s position with respect to the portfolio assigned to the customer’s profile. The tool also makes it possible to identify proposals to “rebalance” the portfolio, putting forward recommendations after checking the adequacy of the suggested transactions. For the purpose of ease-of-use, a dedicated on-line training course has been made available to the networks, in addition to a set of extensive user guides on how to use the platform, and training meetings were organized with the retail banks, Banche del Territorio.
Products and services for SMEs
In 2009, Gruppo Banco Popolare devoted a great attention to the SME segment, with the expansion of the dedicated checking accounts, loans and credit facilities product ranges. Owing to the economic crisis, we also took a number of actions to facilitate access to loans and sustain the liquidity of companies at a time of a rough business cycle.
Checking accounts
In spite of the crisis, in 2009 Gruppo Banco Popolare strongly expanded its customer base. Commercial checking accounts and deposit accounts reported a positive delta of about 19,000 accounts (difference between opened and closed accounts), up by 7% over the prior year. The best performance was published by Banca Popolare di Lodi and Cassa di Risparmio di Lucca Pisa Livorno, with a growth rate of 10% and 11% over 2008, respectively. In 2009 another goal was to consolidate the good results obtained with the launch of the new “Idea” checking accounts, a highly innovative range, developed along a sub-segmentation logic. In 2008 we launched Idea Professionisti (professionals), Idea Artigiani (artisans), Idea Commercianti (shopkeepers), Idea Farmacie (pharmacies), Idea Aziende (firms), Idea Turismo (tourism) and Idea On Line. Since inception, about 62,000 customers chose Idea products, accounting for more than 20% of the total number of checking accounts. this number is bound to grow even further in 2010, considering that the range is going to be complemented with new lines dedicated to other sub-segments (e.g., farmers).
In 2009, we launched Idea Risparmio, the first deposit account in the Idea range, designed to satisfy the investment and liquidity management needs of Small business. It comprises two specific lines: Idea Risparmio “Libero” and Idea Risparmio “3 mesi”. In December 2009, a new version of the Idea Commercianti account was launched, called Idea Commercianti Sviluppo: an instrument with favorable terms on expiration that was made available to Branches and Retail business developers to acquire new SME customers.
Loans and Credit facilities
Also in 2009, in spite of the difficult economic cycle, Gruppo Banco Popolare continued to take heed of the loan needs expressed by SME customers, and as a result it increased the loan offer and it joined anti-crisis industry-wide initiatives, such as the moratorium on SME debts.
More than 3.5 billion euro in MLT loans were granted, representing a growth rate of 10% with respect to the volumes extended in 2008 and of 25% in terms of number of loans, with particularly satisfying results for unsecured loans (which grew by about 30%). The granting of mortgage, real estate and construction loans to SMEs was in line with loans issued in 2008, which is justified by the fact that the demand for this type of investment by our customers declined.
The main new loans launched in 2009 to support SMEs were:
Idea Bullet Unsecured loan with a distinctive characteristic: capital is fully repaid on loan maturity, and throughout the amortization period the customer makes quarterly interest-only payments;
Idea Credito su misura Unsecured loan with a maturity between 6 and 48 months, geared to support the investment and financial needs of SMEs;
Idea Anticipo Pos It is an uncommitted credit facility, with which the customer, a shopkeeper user of a POS terminal, can receive a line of credit to be repaid with POS takings;
Smobilizzo crediti verso lo Stato – tax credit financing It is a credit facility through which the Banche del Territorio favor access to loans by SMEs, by creating new liquidity flows for Customer businesses that claim a sure, liquid and refundable tax credit with the Public Administration.
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Actions to support companies as a result of the crisis
Owing to the economic crisis that characterized 2009, Gruppo Banco Popolare on 31st August 2009 joined the Small Business Act (signed at the presence of the Minister of Economy and Finance by ABI and the trade associations of the Osservatorio banche-imprese) aiming at supporting the revitalization of SMEs after a period marked by economic difficulties. To favor the revitalization of companies that are facing a liquidity crisis, a series of actions were planned in favor of SMEs: 12-month suspension of principal payments on mortgages and leases, extension up to 270 days of short term commercial loan maturities. Eligible companies are firms with less than 250 employees and annual sales of less than 50 million euro (or with balance sheet assets not exceeding 43 million euro), which, albeit under temporary distress, have an adequate outlook for business growth and continuity. Under the agreement, the participating Banks also undertook to favor the financial strengthening of small and mid-sized enterprises by setting up a specific credit facility, corresponding to a multiple of the capital increase actually paid in by shareholders. So, Idea Capitale was launched, an unsecured mortgage loan aiming at supporting companies that carry out capital strengthening actions with new share issues against payment. The Bank grants a medium term loan to the company presenting a corporate capitalization plan, whose amount is a multiple of (at least twice) the capital increase amount approved and paid in by the shareholders, up to a maximum of 200,000 euro. The only constraint is that the share capital increase must be deposited with our Banca del Territorio.
Among the initiatives developed by the Government to sustain liquidity and access to loans by enterprises that Banco joined in we can mention: The 21.75 million euro contribution to the Guarantee Fund (to build up a loan volume of about 400 million) managed by Medio Credito Centrale and aiming at facilitating the access to loans by SMEs by issuing specific guarantees to banks; implementation of the M.D. establishing the criteria and modalities regulating the issue of demand guarantees and counter-guarantees eligible for SGFA (Soc. Gest. Fondi Agroalimentari) on behalf of ISMEA (Ist. Serv. per il Mercato Agricolo Alimentare). The guarantees must back MLT loans to support farming activities (research, technological innovation, purchase of equipment,…); after the subscription of the Tremonti Bond, commitment to grant more loans to SMEs over the next three years, at an annual average rate of 6% over the 39.8 billion euro of the 2007-2008 period (average of actual year-end data); subscription of two new lending agreements between BP and EIB (European Investment Bank) to issue MLT credit facilities to support investment projects and industrial initiatives proposed by SMEs, Public Entities and Public Utilities up to an aggregate financing of 300 million euro.
Again to support the enterprises, Banco entered a series of agreements with the Regions of Veneto, Emilia Romagna, Lombardy, Liguria, Tuscany.
At the end of 2009, after a flood struck the provinces of Lucca, Pisa and Perugia, our Banking Group set up an extraordinary action plan to support our business customers whose offices were located in the flooded areas. The plan envisages two loans, an unsecured loan and a bullet loan up to maximum 75,000 euro, to support the expenses necessary to reconstruct the damaged structures, or to indemnify the partial and/or total production loss. As part of the government project “Italia & Turismo” (aiming at supporting new investments by enterprises and at favoring the revitalization of a strategic industry for the Country’s economic development) Banco Popolare joined the agreement signed by the Minister of Tourism and the National Trade Associations (Assoturismo, Confturismo, Federturismo). This was the origin of “Plafond Turismo”: an initiative envisaging the earmarking of a 200 million euro credit line ceiling “Rilancio Attività Turistiche”. The offer is geared to tourism operators and features to loan products (Idea Credito and Idea Bullet issued against a Confidi guarantee) and the checking account package Idea Turismo, that includes services designed for this type of customers.
Insurance coverage
The interest of Small Business customers for non-life insurance products was confirmed also by new business volumes in 2009, that enjoyed a growth rate of 200% over the prior year for CPI premiums (Creditor Protection Insurance) for newly issued and outstanding loans. To broaden the product range of Banco Popolare and to satisfy the growing protection needs expressed by our Small- Business customers, two additional products were released within the non-life insurance line: the policies Multirischi Commercio and Multirischi Impresa. Customer can choose their guarantees from among Fire, Theft, Civil Liability, Electronics, Legal Protection and Consultation, they can define the insurance maximums and can thus build their own personalized coverage, tailored to their specific needs. In a few months we distributed about 3,000 policies, a rather satisfying number if we consider the complexity of the product structure, and that it is bound to progressively grow in 2010 in the light of our customers’ needs.
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Actions and commercial initiatives for SMEs
The SME segment is one of the key elements of the Group’s business growth; hence, in 2009 just as in 2008, a special attention was paid to commercial initiatives, in particular: Against the current scenario of economic uncertainty, Banco developed Check-up “Stato di salute”: it is an initiative aiming at setting up instruments to monitor the operating and financial evolution of our SME customers; to better understand how they are tackling the crisis and what are their needs; to sharpen our perception of the risk level inherent in our loan book. To this end, a specific action was launched, based on a proactive schedule of contacts and visits to our SME customers, with the goal of gauging their health status. Customers were approached and submitted a questionnaire made up of 4 sections to collect more detailed information on their business performance, their business strategy, their financial needs and their recourse to borrowings. In 2009 we also launched many commercial initiatives on the market:
Prendi Quota Action to increase assets originated by short term commercial loans (invoice advances and trade receivable financing). Chirografari in scadenza (Due unsecured loans) Based on our CRM application, on a monthly basis we contact our SME customers who have an unsecured loan falling due and propose an early replacement of the outstanding loan with a new one. 13ª/14ª F24 Imposte e Tasse (thirteenth and fourteenth extra month’s pay, tax return and taxes) Periodic campaign to help SMEs pay their taxes through the F24 tax return. The sales network has been provided with a financing product to support the liquidity needs of their customers, who can thus have access to the necessary funds to pay their taxes. Fido Potenziale Campaign which allows to identify SME customers that at the time of the survey meet specific creditworthiness requirements. A proposal is submitted to the identified customers, through a simplified inquiry procedure, to raise a new credit line or increase the existing facilities according to prefixed amounts or limits; Liste Prospect (Lists of Prospects) Action aiming at acquiring prospective customers to increase the net checking account balance, thus guaranteeing the growth of the Bank’s customer base. To this end, about 200,000 prospective SME names have been made available to the sales network, and the Branches used the lists to approach them and carry out business development actions; Retention Fine-tuning of the system to identify and report names that show the typical behavior of customers who have abandoned the Bank in recent months. The reports highlight irregular banking activity or very limited banking activity. The Branches and the Managers can use some commercial levers to restore trust and customer relations.
Direct Banking product and services
The Direct Banking offer – “Banca Diretta” - includes all the “electronic multi-channel” products and services offered to the Group’s various customer segments: Retail, SME, Corporate, Large Corporate. The importance of this business area is well evidenced by the dimensional indicators illustrated below:
Products/Services End 2009
Phone Banking customers – by Call 233,363 Home Banking customers – by Web 314,453 Web Online Trading customers 39,322 Mobile customers – by Alert 145,611 Remote Banking customers 200,552 POS terminals 59,806 ATM terminals 2,497
Thanks to the quality of our services, the efficacy of our actions and to our innovation, the customers using direct channels have been constantly increasing. For our customers the direct channels are becoming more and more instruments of daily relationship with our bank. This prodded us to carry out a double effort: offer functional, stable, user-friendly solutions to our customers, while setting up for our sales network all the information supports they need to acquire a good knowledge and sell our wide range of products. Traditionally, the best results come from leveraging the potentials offered by information technology, in a complicated marriage of multi-channels, business and interoperability, where the final goal is to improve the loyalty of our customer base. This was precisely the focus of the various initiatives launched by our Group also in 2009, where a special attention was devoted to the needs expressed by the market, while supporting our retail banks with the “Multicanale” offer, also through “Electronic Specialists” to assist them.
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Home Banking – by Web
Also in 2009, the number of customers subscribing to the Home Banking - by Web service increased (+25%), hand in hand with a corresponding growth in use, both for inquiries and for transactions. The quality of our services and the unrelenting focus on the evolution of content, graphics and functionalities contributed to these results.
Mobile - by Alert
Customers confirmed their favor for alerting services through the “mobile” channel. By now these services can be considered “consolidated” in terms of contents and generally accepted/required by the market, thanks also to their ease-of- use, rapidity and full availability on various devices, via the SMS standard. The alerting service linked to channel security (web/cards) and payment instructions was particularly appreciated. We think that further significant developments will go through the mobile channels, in step with the expectations of a part of the market that turns to the banking world.
Remote Banking
The Remote Banking service reported a + 7% growth rate in the number of users, that were well in excess of 200,000. During the year we organized ad hoc focus groups with our Banche del Territorio to better identify the areas of development and enhancement of sales processes and business logics. Customers met with great favor the service offered through the “Vantaggio” technological platform, which this year began to be turned into a Portal for Enterprises “Vantaggio - tutto in un clic” – all in one click. Also in this case, an unrelenting attention was devoted to the evolution of functions made available to customers, to enable them to make the best use of what has become an electronic branch on the customer’s desk, available 24h/24h. In 2009, we worked in particular to provide our customers with all the best tools to increase their IT security. All Remote Banking channels are constantly up-to-date with the CBI Service standards (Corporate Banking Interbancario), of which our Group is an active member.
POS
Two important initiatives were carried out in the POS area: A renewed focus on e-commerce. During the year, we set up the by Pos service, the new virtual Pos solution of Banco Popolare, to manage takings via web with credit cards. Launch on the market of the new contactless POS terminals, i.e., state-of-the-art terminals that enable contactless payment transactions. This new collection mode was adopted because of the benefits shopkeepers can enjoy from it: simplicity, speed, convenience and innovation. All the Banks of our Banking Group can propose these innovative terminals to their customers. Also MasterCard is involved in this initiative with its PayPass brand.
Among the activities carried out during the year with regard to the POS service offer, worth mentioning are: The new agreement with American Express to manage acquiring transactions; Dematerialization of account statements; Thanks to our partnership with KCCS (Key Client Cards & Solutions), launch of the new service portal for accredited shopkeepers to access accounting data and information, also by way of a detailed research engine; Launch on the market of the new “SSL” terminals, for shopkeepers with web connection, leading to the optimization of performance and costs.
In the POS arena, the technological evolution of the numerous and different solutions offered on the market continues to be highly dynamic also in our Group. Our terminal fleet continues to grow (+9%), at a rate greater than the prior year, a comforting evidence that we made the right choices.
Contact Center
The Contact Center delivers inbound and outbound information services to Group customers. The structure seeks information or carries out transactions in response to customer requests by phone, e-mail, by web, from our public and private websites, and by IVR (Interactive Voice Response). The “traditional” Phone-Banking activities (by Cal service, up by 14%) go along with help desk services for home-banking customers, support to the sales network for Popolare Vita services and MIFID regulations, fraud detection activities (checking suspicious transactions performed abroad to identify possible debit card clonation events), and general customer information services (toll-free numbers). The Contact Center is a daily operational reference for our customers and for the Group network. Among the most important activities involving this area, worth mentioning are: Adoption of a new call center technological platform, that makes it possible to offer a better service to our customers, while guaranteeing a high performance level and the interaction with the internet channel; Customer service within the extended Consumer Credit joint-venture originating from the combination of Agos and Ducato;
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Consolidation in a single toll-free number (800.024.024) of services that previously were offered through different phone numbers by the various Banche del Territorio: now with this single number it is possible to access by Call Phone Banking Services and the by Service Customer Service.
In addition to these inbound activities, we have numerous proactive Telemarketing, Customer Care and Customer Service activities, also by resorting to outsourcers. Our “Welcome Call” has consolidated, and is by now a traditional activity whereby new customers are contacted to develop a more solid Bank/customer relation and to assess the level of satisfaction with respect to the products and services offered by the Group.
Corporate
The Group corporate network is dedicated to the Corporate segment, cuts across the various retail banks, our Banche del Territorio, can count on 76 Corporate Centers (Centri Imprese) with 370 Corporate managers, plus the branches of Credito Bergamasco, which serves corporate customers through these sophisticated structures on its market territory. Clients belonging to the Corporate segment to date remain at the same levels as in 2008 (about 60,000) with slight percentage differences as compared to the prior year in the breakdown by Bank (fig. 1-2).
2009
BPL Aggr.; 24.4% CRLUPILI; 11.0%
BPV - SGSP; 26.7% CREBERG; 19.6%
BPN; 18.3%
2008
BPL Aggr.; 24.2% CRLUPILI; 10.6%
BPV - SGSP; 27.3% CREBERG; 20.2%
BPN; 17.7%
Fig. 1-2. Breakdown of Corporate customers by Bank (Counterparties in Corporate portfolios to date. BPL Aggregate includes BPL SpA, BP Crema, BP Cremona, Caripe).
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The breakdown of customers by sales classes reveals a significant concentration on lower classes (up to 50 million euro), up 0.2% with respect to 2008 (fig. 3-4).
2009
3.7% 1.4% 6.1% 0 - 25 MLN 3.0% 25 - 50 MLN 50 - 100 MLN 100 - 150 MLN oltre 150 MLN
85.8%
2008
4.0% 1.4% 6.6% 0 - 25 MLN 2.9% 25 - 50 MLN 50 - 100 MLN 100 - 150 MLN oltre 150 MLN
85.1%
Fig. 3-4. Breakdown of Corporate customers by sales classes (million/euro).
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The customer breakdown by business sector shows that the Service sector, even though it slipped slightly, still has the lion’s share, (fig. 6-7).
2009
3.9% 3.3% Other services 3.1% Services to trade 4.3% 2.9% Building and construction 2.7% 5.2% 2.0% Metal products 1.9% Other manufacturing equipment 5.4% 1.8% Machines and mechanical equ. 1.5% Textile and clothing 6.5% Transportation and communications Other 9.4% Food P.A., Healthcare and extra-terr. sv. 24.8% Electric materials and supply Non-ore mineral processing Rubber and plastics 21.3% Paper and publishing Agriculture
2008
4.0% 3.2% Other services 2.9% Services to trade 4.4% 2.6% Building and construction 2.1% 5.3% 2.0% Metal products 1.8% Other manufacturing equipment 5.7% 1.5% Machines and mechanical equ. 2.4% Textile and clothing 6.4% Transportation and communications Other 9.3% Food P.A., Healthcare and extra-terr. sv. 25.2% Electric materials and supply Non-ore mineral processing Rubber and plastics 21.2% Paper and publishing Agriculture
Fig. 5-6. Breakdown of Corporate customers by Business sector.
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As to intermediated assets, the average loan balance increased to about 39 billion euro as at 31st December 2009 (fig. 7-8).
Total loans 2009/2008
39.1
38.0
2008 2009
Total loans
BPL Aggr.; 22.7% CRLUPILI; 11.0%
CREBERG; 16.5%
BPV - SGSP; 32.3%
BPN; 17.5%
Fig. 7-8. Comparison of the Monthly Average Balance of Total Loans in 2009 and 2008 on a like-to-like basis based on the 2009 customer segmentation. Breakdown of total Corporate loans by Banca del Territorio (Monthly average balances measured on 31-12-2009).
In detail, Mid Corporate loans (sales between 2.5 million euro to 250 million euro) on 31st December 2009 soared to about 28 billion euro, 73% of total corporate loans (fig. 9-10).
Total MID Corporate loans 2009/2008
28.4
27.4
2008 2009
Total MID Corporate loans
BPL Aggr.; 22.6% CRLUPILI; 12.3%
CREBERG; 17.8%
BPV - SGSP; 29.4%
BPN; 17.9%
Fig. 9-10. Comparison of the Monthly Average Balance of Total Mid Corporate Loans in 2009 and 2008 on a like-to-like basis based on the 2009 customer segmentation. Breakdown of total Mid Corporate loans by Banca del Territorio (Monthly average balances measured on 31-12-2009).
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The breakdown by loan maturity shows that the Medium/Long Term made a greater contribution to volume growth during the year. The reason lies in the peculiar economic situation, which on the one hand caused companies to cut back on investments and focus more on short term planning, while on the other it drove the demand for committed MLT loans up.
S/T loans came in at about 21 billion euro (fig.11-12).
Short term loans 2009/2008
20.9
20.6
2008 2009
Short term loans
BPL Aggr.; 21.2% CRLUPILI; 8.8%
CREBERG; 20.7% BPV - SGSP; 29.1%
BPN; 20.2%
Fig. 11-12. Comparison of the Monthly Average Balance of Short Term Loans in 2009 and 2008 on a like-to-like basis based on the 2009 customer segmentation. Breakdown of total S/T loans by Banca del Territorio (Monthly average balances measured on 31-12-2009).
ML/T loans stood at 18.3 billion euro, corresponding to about 48% of total corporate loans (fig.13-14).
ML/T loans 2009/2008
18.3
17.3
2008 2009
ML/T loans
BPL Aggr.; 24.3% CRLUPILI; 13.4%
CREBERG; 11.7%
BPV - SGSP; 36.2%
BPN; 14.4%
Figure 13-14. Comparison of the Monthly Average Balance of Medium/Long Term Loans in 2009 and 2008 on a like-to-like basis based on the 2009 customer segmentation. Breakdown of ML/T loans by Banca del Territorio (Monthly average balances measured on 31-12-2009).
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Extended direct Corporate customer funds (i.e., Raccolta diretta allargata, RDA: direct customer funds + bonds issued and distributed by the banks) at the end of 2009 went up to 11.6 billion euro (fig.15-16).
Extended direct customer funds (RDA) 2009/2008 comparison
11.6
10.5
2008 2009
Extended direct customer funds (RDA)
BPL Aggr.; 24.3% CRLUPILI; 7.8%
BPV - SGSP; 29.4% CREBERG; 23.0%
BPN; 15.5%
Fig. 15-16. Comparison of the Monthly Average Balance of Extended Direct Customer Funds in 2009 and 2008 on a like-to-like basis based on the 2009 customer segmentation. Breakdown of Expanded Direct Customer Funds by Banca del Territorio (Monthly Average balances measured on 31-12-2009).
Last year was characterized by a particularly difficult economic situation for the Italian and world economy, which deeply affected the relations between the banking industry and the corporate world. In the light also of these events, a number of important strategic choices were made to pursue our primary objectives, while improving/increasing the efficiency and efficacy of the retail bank’s commercial activities, standing even closer to companies in these hard-pressed times.
Listed below are the priorities identified and pursued in 2009, which were developed keeping in mind the afore mentioned systemic crisis and in compliance with Group strategic guidelines: targeted growth of corporate loans, with a special focus on our “core” sector (mid-sized companies), setting up actions to support the economic recovery and limiting the exposure to “pure” loans; favor medium/long term finalized loans, keeping total exposure under control to comply with funding needs and requirements, both in terms of volumes and costs; targeted pricing adjustment in view of changing market conditions and creditworthiness, by gradually introducing “risk-adjusted pricing” models and instruments to guarantee the correct corporate loan remuneration as a function of the capital-at-risk; strong increase in corporate Direct funds, also to sustain the necessary self-financing for loan growth; support the commission component of Net interest and other banking income, by developing so called value added products and services (e.g., Foreign operations, Risk Hedging and Corporate Finance).
In keeping with its mission and with the identified priorities, the Corporate Department carried out a series of actions and launched important activities directed at a greater efficiency and effectiveness of the commercial action, as well as at increasing the quality of the support provided to our Banche del Territorio. Among the main activities, worth mentioning are: the creation of a service model centralized in the Parent company for Large Corporate and Institutional customers, and a specific model for Local Large Corporate segments (covered by the Banche del Territorio) and Mid-sized enterprises with large lines of credit (so called MID PLUS), where specific commercial and lending coordination mechanisms have been put in place across the Group Banks; actions aiming at improving and innovating the product catalog, to give companies, whether customers or not, the necessary support, considering among other things last year’s hard-pressed economic backdrop; the dissemination of commercial behaviors, instruments, pricing indications and products aiming at optimizing profitability as a function of risk, bringing about a way of working across the sales network that is consistent with
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the need for an efficient allocation of Banco’s capital; the strong commitment of resources to make a tangible contribution to the sales training program for the Corporate salespeople of the Group Banks; joining ABI’s “Small Business Act” for the debt moratorium for SMEs.
Large Corporate, Institutions and Public Entities
The Large Corporate, Institutions and Public Entities Service is in charge of dealing with large manufacturing and business companies, i.e., Large Corporate, with Italian and foreign financial institutions , Institutional customers, Local Authorities, as well as their associates, and Public Entities. The Service’s three activities share a common characteristic, namely they manage the commercial and lending needs of the customer segment they are responsible for with the support of a team of managers and analysts that are dedicated exclusively to the management of the assigned customer relations. In particular, Domestic Large Corporate was set up as a result of a resolution passed by the Management Board on 7th April 2009, which establishes that the commercial management and the decisions as to the lending ceiling of the 103 Groups of large customers be centralized at the Parent Company’s, Banco Popolare. For this purpose, 6 teams were created, each with a Manager (called Global Relationship Manager, GRM) and an Analyst/Assistant, located in Lodi, Bergamo, Verona, Modena, Lucca and Rome, in charge of supervising the commercial relation with the assigned customers, ensuring that the latter are applied the same economic terms across the entire Banking Group and enjoy a coherent commercial offer, while the operational management of the relationship still lies in the Banche del Territorio. GRM are also in charge of setting the global lending ceiling and of allocating the loans to the retail banks on behalf of the Lending Department, which then sees that this information is reported to the competent Corporate Boards. The Institutions and Public Entities Function was set up as a result of a resolution passed by the Management Board on 16th June 2009, which establishes that a new coordination model be set up at Group level for risk management and control for Institutional Counterparties, i.e., Banks and Banking Groups, Insurance Companies and Insurance Groups, financial companies, mainly associates of Banks and Insurance companies. To this end, the Institutional Counterparty Manager was put in place. The above Function is also in charge of coordinating the activities of all the Group Banks with respect to the Public Entities Segment (mainly Local Entities, Public Utilities, Healthcare Organizations and Institutions, Social Security Agencies, Welfare Agencies, Schools), assisted by a dedicated team of specialists.
Mid Corporate
The Mid Corporate Service was set up to help the sales network pursue the loan and deposit growth targets within this segment, together with the related margins, in keeping with the group strategy of focusing on Small and Medium-sized Enterprises. In 2009, the economic crisis was particularly harsh on SMEs, as they not only had to face a reduction in sales and orders and worsening payment terms, but had to come to grips also with the systemic weakness of their financial and capital structure. Hence, the service focused on providing the sales network with the tools and information that could favor the support and access to loans by enterprises, while keeping a close watch on risk and optimizing capital absorption. The segment’s main activity was to promote sales, based on the following initiatives: introduction of the management model for mid corporate customers with large credit lines (so called MID PLUS) across the Banche del Territorio to improve risk control and profitability, also thanks to dedicated product and services; analysis of the needs of mid-sized enterprises, together with opportunities, guarantee and soft financing instruments to favor access to loans by SMEs (training meetings on financial instruments and soft financing opportunities for enterprises have been promoted across the network with local Confidi trade association representatives and regional authorities); development of an integrated offer for the Corporate segment in coordination with Banca Aletti. During the year a fruitful collaboration was started between Mid Corporate and Banca Aletti’s Capital Market Service to optimize the synergies between our offer and the capital market as additional growth opportunity for companies; support to sales initiatives by innovating products and launching marketing campaigns; monitoring of the health status of our companies (a questionnaire was sent to 2,200 companies belonging to this segment), of the adopted strategies to tackle the crisis, their financial requirements, to better define the room for improvement of our commercial proposition; preparation of sector and geographical market analysis to support the sales/advisory activities of corporate managers.
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Strategic Planning
In addition to planning, monitoring and developing sales activities, in 2009 the Corporate Strategic Planning Service launched the project “Gestione Valore Cliente” (Customer Value Management), in close cooperation with the Group Corporate Center (Business Planning and Control) and Risk Management. Following the introduction of Basel 2 and the consequent complying changes introduced by the Bank, it was necessary to bring activities and sales resources in line with the new operational modality introduced by the regulation. The goal of the Gestione Valore Cliente project was to develop a “risk-based” business model to optimize RWA (Risk Weighted Assets) with respect to generated returns, acting on customer portfolios, products and on the sales strategy. In brief, the model implementation involved: the definition of performance indicators at managerial and operational level, that take the cost of risk according to the Basel 2 FIRB approach into due account; identification of a set of operating levers to guide the commercial action on the customer portfolio, and in general steering a gradual change in working modalities through a detailed program on customers with a high risk/return ratio; creating the necessary empowering factors to support the dissemination of the model across the Network: a training Roll Out program for the Corporate Manager Network and the CREBERG Branch Managers (as a whole more than 670 resources), the development of instruments to support the adoption of the “risk-based” model (including pricing) to be made available to the Sales Network.
Towards the end of the year, a unit was set up, reporting to the Strategic Planning Service, called “Gestione Valore Cliente”, in charge of coordinating the activities of the Banche del Territorio, and ensuring the effective and efficient implementation of the defined models across the sales network. The Sales Planning and Reporting Function, which reports to Strategic Planning, is in charge of developing dedicated sales guidelines for this segment in line with Group objectives, and of defining sales initiatives to support the retail banks, based on the analysis of the customer base and on performance monitoring to identify sales opportunities. Finally, towards the end of the year the Strategic Planning Service set up a dedicated structure to control pricing at Group level, with actions to define guidelines, to rationalize and harmonize pricelists (which goes also in favor of transparency), and to monitor the applied terms through the development of ad hoc reports and instruments.
Corporate products and services
In 2009 “Programma Banco Imprese” was released, a product offer supplementing the traditional one, aiming at sustaining strategic corporate investment plans devoted to research and development, technological, product and process innovation, as well as at supporting corporate growth and competitiveness. Banco Imprese features 4 lines of intervention, each responding to specific corporate needs with a diversified product offer: Circolante (working capital): the goal is to help companies manage the slowdown of their working capital turnover as a result of longer payment collection times in a more efficient way, providing them with a sort of financial buffer helping them to face the pressure generated by the economic crisis; Sviluppo (development): the goal is to sustain companies with productive investments, including most innovative ones with respect to energy saving; Capitale (capital): the goal is to help companies improve their capital structure with ad hoc financial actions; Estero (foreign operations): the goal is to guide Italian SMEs along the internationalization process, through a structured offer of banking and non-banking instruments, from loans to insurance of the foreign sales operations, to regular advisory and customer services throughout the entire process.
Foreign Operations
The Foreign Operations Function in 2009 strove to further increase its contribution to Corporate Net interest and other banking income, by developing and proposing high value added products - i.e., featuring a corresponding higher commission stream, as well as by giving Companies financial support, by systematically making our customers aware of the wide range of short term and ML/T financial products that they could use, also from a “risk-based” perspective. As a result, the contribution to the Corporate Net interest and other banking income by Foreign Operations grew significantly, confirming our group’s ability to work side by side with customers operating on foreign markets, with appropriate services, products and loans, even in particularly critical circumstances for the world economy. Important centralization processes were launched and implemented, to bring accounts with foreign Banks onto Banco Popolare, and once fully operational, with Documentary Loans and guarantees in the name of Banco Popolare, this will allow us to gain a greater visibility and greater commercial power on international markets. To contain risks taken with foreign banking counterparties, in the interest of our exporting customers, an important agreement was signed in the name of Banco Popolare with IFC-World Bank, based on which all our Banche del Territorio to transfer all of part of its foreign banking risks, guaranteed by Basel 2 compliant commitments.
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Risk Hedging
The Risk Hedging Function is in charge of supervising corporate hedging derivative products, and it manages and updates the product catalog, keeping the commercial processes and methodologies abreast with market changes and with regulatory or legal developments. In 2009, the product catalog was further simplified, by eliminating strategies belonging to the Conditional Hedge and Active Management product families. More than 95% of new deals closed with customers in 2009 belong to the Effective Hedge products, and are mainly split between Fixed Rate (Irs) and Maximum Rate (Cap). As to the management of the existing product portfolio, Gruppo Banco Popolare continued to cancel transactions belonging to the Active Management family, so that by now they make up a marginal component of the total portfolio. On 31st December, 95% of the customer derivatives portfolio was made up of effective hedge transactions, corresponding to a notional commercial value of about 92% of the total value. As to processes, the Risk Hedging Function further developed the applications used to provide advisory services on OTC derivatives, to make them compliant with the requirements raised by the levels III and IV of MiFid regulation, as well as to favor and promote the sales action of the banking network.
Corporate Finance
In 2009, the Corporate Finance Function engaged in both a specific technical segment-oriented activity as well as a planning activity. An effort was made to harmonize the processes of the retail banks and to coordinate them and help them structure financial interventions, as well as to define technical instruments available to segment specialists, to support parent company structures on specific projects, to manage some activities directly (typical of an Agency) when the group played a pivotal role vis-à-vis the banking industry in connection with programs linked to corporate restructuring processes, and to collaborate with the Group Training School on specialized training programs for corporate managers.
With regard to segment results, the Corporate Finance activities carried out by the Commercial Banks reported a positive growth and increased its contribution to the Group’s total non-interest income.
Out of total segment revenues – in excess of 31 million worth of commissions – structured corporate lending accounted for about 32%, real estate deals for 28%, actions associated with acquisitions for 10%, and the remaining 30% referred to the outstanding portfolio.
An increase in the number and quality of structured deals with Large Corporate customers was reported with respect to the prior year, as a result of centralizing in the Parent company the segment’s customer relations management, with a general and positive growth in activities that generated a commission income that was not linked to new financing and a general improvement of returns from single actions. In key with the market trend, real estate or M&A financing abated and focused on selected initiatives.
Corporate Lab
The Corporate Lab, whose mission is to favor the growth or repositioning of companies within the new competitive scenario by analyzing the productive capacity of our traditional market territories, and by fostering a direct dialogue with primary local entrepreneurs, this year also engaged in the in-house training of employees who are in close contact with enterprises. Research focused on the new production pipelines. The research studies of the 15 sectors that had been analyzed in the past have been revised in the light of the current crisis.
Investment & Private Banking, Asset Management
The private and finance activities are carried out in the subsidiaries Banca Aletti with regard to private and investment banking, Efibanca for merchant banking, Aletti Gestielle for fund management, Aletti Gestielle Alternative for funds of hedge fund management and Aletti Fiduciaria for fiduciary mandates.
Illustrated below are the main activities performed by the Investment & Private Banking and Asset Management structures.
Capital Market
Banca Aletti’s Capital Market structure, subdivided into Equity Capital Market and Debt Capital Market, is in charge of coordinating origination, arranging and syndication activities on primary market transaction on behalf of the Banks and Companies of the Group.
Equity Capital Market
Owing to the protraction of the crisis, also in 2009 the Italian primary equity market was largely characterized by capital increases and tender offers, totaling 30 deals with respect to only 6 IPOs, of which 5 on AIM Italy (Alternative Investment Market), the exchange regulated market recently launched by Borsa Italiana, where the subsidiary Banca Aletti was
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authorized to operate as a Nomad (the Nominated Advisor who is responsible before Borsa Italiana for ensuring that the prospective issuers are suitable for admission on AIM Italia) and with 4 key executives.
In January, Eurofly SpA concluded its capital increase totaling about 33 million euro, with the subsidiary Banca Aletti acting as Financial Advisor. During the year, the subsidiary Banca Aletti also acted as Financial Advisor and Intermediary in charge of coordinating the collection of tenders into the offer for shares of FMR-Art’è, Management & Capitali and Mirato, and as Intermediary in charge of coordinating the collection of tenders into the offer for shares of IPI.
In June, the subsidiary Banca Aletti joined the underwriting syndicate for ENEL’s capital increase, with an underwriting of about 27.5 million euro. The subsidiary Banca Aletti also took a sub-underwriting for a maximum amount of 60 million euro in the rights issue launched in December 2009 for the 4.25% 2009-2013 Convertible Bond of Credito Valtellinese, which should be closed in January 2010.
In 2009, it acquired a mandate as specialist for Marcolin shares, while the mandates referring to the following units and shares expired: Fondo BNL Portfolio Immobiliare Crescita as a result of the liquidation of the fund, Mirato due to delisting, and Bastogi and Retelit. As at 31st December 2009, 13 specialist mandates are effective.
Debt Capital Market
In the first half of 2009, the subsidiary Banca Aletti, in its capacity as Sole Arranger, concluded the structuring of the securitization of residential mortgages originated by the Specialized External Networks (Reti Esterne Specializzate), for about 1,1 billion euro. On the contrary, the securitization of commercial loans of Ducato S.p.A. totaling about 500 million euro, where the subsidiary Banca Aletti acted as Sole Arranger, was not carried through as Agos S.p.A. (company into which Ducato merged) decided to buy back the entire loan pool from the SPV. In June, the subsidiary Banca Aletti participated in the Public Offering of ENI 2009-2015 fixed and floating rate bonds, and collected tenders for more than 147 million euro.
In second half, the subsidiary Banca Aletti took part in the underwriting and placement of the first two bond issues of Banco Popolare destined to institutional investors after the outbreak of the financial crisis. In the first deal, launched in July, with a three year maturity and a 1 billion euro issue, then increased in September by additional 350 million euro, the subsidiary Banca Aletti acted as Joint-Lead Manager, raising almost 500 million euro worth of subscriptions. In the second deal, launched in October, with a 5 year maturity and a 1 billion euro issue, the subsidiary Banca Aletti, for the first time acting also as a Book runner, raised about 600 million euro worth of subscriptions. In November, the subsidiary Banca Aletti took part in the Public Offering of Mediobanca 5-year, fixed and floating rate bonds, raising subscriptions for about 45 million euro.
Equity Research
Banca Aletti’s Equity Research Structure engages in research studies on stocks listed or on their way to being listed on the Italian market and develops financial economic models. Against a marked economic deterioration and a growing illiquidity of certain asset classes, in 2009 the Equity Research office focused on preserving its analysis scope and on stabilizing the number of counterparties. Considering the Group’s franchise, the research coverage still hinges on Italian Small/Mid Cap and is spreading over to mid caps, due to the persistent illiquidity of the reference niche. This was made possible by the fact that some securities with limited free float and capitalization stopped being covered by our research, and our team was joined by new professionals, who included new securities and sectors marked by a wider capitalization in the research scope. Marketing activities with main counterparties and with the management (road show) of some listed companies continued to be implemented.
Commercial services
The Sales structure of Banca Aletti, divided into “Private Banking Commercial” services and “Corporate and Institutional Sales Commercial” services, offers integrated investment services to Private, Corporate and Institutional customers, in cooperation with the Group Sales Service.
Private banking commercial services
At the end of 2009, the subsidiary Banca Aletti published total assets under management (managed and administered assets) of euro 14.5 billion, of which 0.3 billion from institutional customers. 2009 was characterized by a decline in Net interest and other banking income with respect to the previous year, albeit with the monthly trend constantly and gradually rising. The persistence of these rough market conditions induced many customers to take defensive stances and interest income was squeezed by interest rate dynamics.
With regard to asset management, actions were taken to strongly revitalize this business area, by focusing on medium term investment portfolios. During the year, we constantly and firmly pursued the goals of increasing assets and broadening our customer base.
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In the second half of the year, the repatriation of financial assets as a result of the Italian tax amnesty (so called “scudo fiscal ter”) kept us particularly busy. Net inflows (euro 1,582 million in the private segment alone) were particularly significant and well above the commercial targets for the period (121% of the budget). Also customer acquisition proved significant, with 1,330 new customers coming in, confirming Aletti’s brand perceived quality on the market and the extensive sales actions implemented by the Private Banking Network.
The “private-corporate cross-selling” program – called “Pri-Corp” - has been rolling for three years now. It is implemented by the Private Banking network of the subsidiary Banca Aletti in synch and cooperation with the Group branch networks. Results are steadily and constantly growing: since the launch of the project (2006), 2,043 million euro were raised, of which 834 million euro in 2009. In order to multiply development opportunities, as in prior years, strategies were set up to create contact opportunities with prospective customers, for example by organizing a series of events on the territory (about 80 in 2009).
At the end of 2009, Banca Aletti’s network comprised 9 Areas, 36 Units and 178 Private Bankers.
Corporate and Institutional Sales Commercial services
The “Corporate and Institutional Sales Commercial” structure is made up of “Group Networks Distribution”, “Institutional Sales” and “Large Corporate Sales”.
Group Networks Distribution
In 2009 the activities of the Group Networks Distribution structure were strongly influenced by market dynamics, by the high volatility of stock markets and credit spreads, by the widespread uncertainty and by the low risk propensity of investors. Distribution strategies and product structuring and selling activities were focused on simple and transparent products, with capital guaranteed and short-term maturities. Interest rate indexing prevailed, to the detriment of equity markets, and the favored issuer was Banco Popolare as compared to third-party issuers. More than 60% of the investment structured products sold by the retail banks during the year (about 9.6 billion euro) was represented by bonds issued by the Group.
In spite of the customers’ high risk aversion and the falling volumes with respect to 2008, the subsidiary Banca Aletti still maintained a leading position on the Italian certificates market, participating in the sector’s main events and organizing product road-shows, and it received much credit from investors.
A project was put in place to improve branch post-sale information on structured products, by developing dynamic product sheets available on the Internet, so as to increase our customer-relation advisory content with the subscribers of our products. The offer of Euribor Cap CWs to floating-rate mortgage holders resumed momentum. Hedged assets in 2009 totaled about 760 million euro, more than double with respect to the prior year.
As to asset management sales, we focused on improving sales-supporting instruments, by defining periodic bulletins and ad hoc reports that allow our networks to give advice to customers in at particularly difficult time for the asset management industry.
In June, in cooperation with the Parent company’s Retail Department, a joint action was planned to revitalize this business segment, by identifying a new graphic layout for the asset management families making up the product range, by launching new investment solutions to complement the current catalog and by planning a number of road-shows with the retail banks (Banche del Territorio).
Institutional Sales
With regard to business development with non-captive customers, the banks privileged direct funding with plain vanilla bonds, therefore the derivative hedging of bond issues decreased. A penchant for simpler structures and a disposition oriented towards Italian issuers, favored the Bank’s activity as arranger for Banco Popolare issues. There were interesting developments on the primary market: the subsidiary Banca Aletti was joint-lead manager for Banco Popolare’s first issuances of the year , and for the first time book runner in the last issuance of the year. Private placements in excess of 320 million euro were placed with institutional investors.
On the secondary market we benefitted from the repositioning of many institutional investors on less risky investments, such as bonds, with an intermediated volume of 1,300 million euro and the acquisition of 15 new customers. As to the distribution of Banca Aletti products, in 2009 we reported a three-fold increase in certificates with respect to 2008, with 21 issuances for banking networks and 14 issuances for financial advisor networks.
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Also for interest rate risk hedging products, Cap Warrant volumes reported a four-fold increase over 2008 driven by the expectation of rising interest rates.
The sale of asset management products to non-captive networks on the contrary reported a net outflow, due to the harsh time the entire asset management industry is experiencing, which induced investors to prefer direct funding products and products with an insurance content, such as investment-linked policies.
Equity Brokerage was ailing also in 2009, due to the troublesome market conditions that caused institutional investors interested in the equity market to privilege large caps. Nevertheless, during the year new accounts were opened with UBS and Henderson, and an extensive commercial action was carried out, by organizing various meetings with our Italian and foreign customers, with investors and with company management in Italy and in Switzerland.
In 2009, a strong impulse was given to the cooperation project between the Institutional Sales Function and Aletti’s Private Banking network, with a special focus on asset management sales.
In second half 2009, in cooperation with the Investment Management Sales Office, a project was set up to develop our relations with the Pension Funds. Various activities were carried out, among which the participation in 5 calls for bids for the selection of fund managers, 10 commercial visits and various meetings with advisors, as well as participation in events and trade seminars.
Large Corporate Sales
In 2009 the “Large Corporate Sales” structure continued to manage financial risk for customers accredited by the Group Banks with the subsidiary Banca Aletti and, in cooperation with the Parent company’s Corporate Department and with the retail banks, it engaged in business development to attract prospective accreditable customers.
During the year, a total of 40 customers were called upon to present our range of services and to consolidate acquired relations. At times, joint meetings were held with the Macroeconomic Strategy and Analysis Office to give accredited customers the necessary advice. During the period, interest rate and exchange rate risk hedging transactions were closed with 22 counterparties of primary standing, corresponding to a total notional amount of about euro 1,13 billion.
Effective hedge products were mainly used to manage the interest rate risk; in particular, to take advantage of the exceptionally low levels of the Euro curve, large corporations privileged interest rate swaps or the purchase of interest rate caps, in line with their specific medium/long term debt profile.
Exchange rate hedges regarded mainly the US dollar and were mostly carried out through simple futures transactions or plain vanilla option structures. In the second half of the year, in cooperation with the Capital Markets Function and with the Parent company’s Corporate Service, the Large Corporate Sales Function launched a marketing project involving the group networks and prospective customers, aiming at identifying target companies that may require assistance in case of corporate actions on the capital markets.
Investment Banking
The Investment Banking structure, comprised of Structured Products, Brokerage, Trading and Treasury, is in charge of coordinating and guaranteeing the development of the primary and secondary market business in the equity, bond and securitization areas for the Banks and the Companies of the Group.
Structured Products
The Structured Products structure comprises “Fixed Income Structured Products”, “Equity Structured Products” and “Financial Engineering”.
Fixed Income Structured Products
In 2009 the corporate hedging segment was characterized by a decreasing business volume with Group customers; closed transactions reached a nominal amount of 7.4 billion euro from 10,3 billion euro in 2008, which however included about 2 billion worth of cancellations of outstanding transactions, and reported an increase of transactions closed with Large Corporate customers (1.1 billion euro from 150 million euro).
As to retail structures sold by the Group networks, the tendency in favor of simplified structures continued, as well as the reallocation towards simpler structures linked to interest rates. About 7 billion worth of interest rate linked issues were structured and sold, as compared with 3.8 billion euro in 2008. Cap warrants structured by Aletti more than doubled in volume, buoyed by monetary rates at their all-time low and by the expectation of future hikes in interest rates.
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After a severe crisis in the first half of the year, in second half credit spreads narrowed sharply, to the advantage of the value on the secondary market of many securities that in the past had been sold by the Group networks.
From a strategic and organizational standpoint, in 2009 the management of the secondary market for the entire Structured Products Service was centralized in the Fixed Income Structured Products Function, so as to achieve a better credit risk management within the Service and improve relations with Issuers.
Equity Structured Products
The severe uncertainty that has been surrounding financial markets in last year’s fourth quarter is still persisting in the first quarter of this year. Concerns that the measures undertaken by the governments and central banks of the main industrialized countries could be ineffective and unable to tackle the world financial crisis, and thus lead to possible recessive economic consequences, drove stock and commodity prices down to new lows (with the only exception of copper) and credit spreads up to new highs.
In the second quarter, the situation improved noticeably, after the main governments reached practical agreements on actions to be undertaken to protect the financial industry and guarantee the bloodstream to the entire economic system. Stock and commodity prices rebound almost to where they used to be at year-start, and also credit spreads narrowed considerably. This trend further consolidated throughout the second half of the year, and stock and commodity prices hit their highs at year closing. In this scenario, volatility and (implied and realized) correlation levels remained sensibly high, albeit lower than the year before.
Against this backdrop, equity trading was characterized by the search for spot hedging positions, to reduce as much as possible risk positions held in the books, without having to give up positions on the volatility and correlation market, albeit limited to more liquid underlying assets. The structuring of Equity-linked products strongly shrank owing to the lower volumes associated with these products distributed by the group networks. Only Index-linked policies and similar products were an exception – few numerically but making up a considerable amount – although it should be noted that the equity component making up these products is very limited. On the contrary, structuring and pricing for institutional customers not belonging to the group sharply increased.
Market making on the regulated markets IDEM and SEDEX was in line with the previous year. The exchange rate market was no exception with respect to the general climate of uncertainty shrouding the entire financial industry. As a result, the demand for short term hedge instruments by corporate customers was weak.
The high levels of implied and realized volatility that have been characterizing this half-year gave in any case rise to ample opportunities on this markets, on which we concentrated our proprietary trading activities.
Financial Engineering
In 2009 the existing pricing and hedging tools continued to be upgraded and extended. The development covered both functional aspects (automation of some hedging procedures and of the control of maturity schedules), as well as purely methodological aspects (upgrade of pricers for equity options, inflation derivatives, short/long term interest rate spread options).
In particular, new pricing and calibration models (SABR) were developed for CMS rate options, as well as stochastic volatility models for equity derivatives (Heston). Both activities are part of the regular benchmarking process against market best practice that the Function is constantly keeping up.
In the first half of the year, the entire exotic equity derivatives book was migrated from models having a native Montecarlo engine in our position keeping system, to entirely proprietary models. This important achievement guarantees a greater autonomy compared to the position keeping system, and it already significantly expanded the desk’s business opportunities (hybrid ir/eq., inflation/eq, fx/eq derivatives).
In second half, we started developing a new “general-purpose” Montecarlo pricing framework for interest rate derivatives. This tool will feature a high flexibility and with just a small additional implementation effort, it shall enable us to rapidly and easily assess the pricing of many types of interest rate derivatives traded on the market, whose risk we might have to manage in the future.
The Function during the year regularly calculated the future potential exposure indicator for derivatives included in the corporate catalog, and it estimated the potential return of all financial products the Group offers to its customers.
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Brokerage
The Brokerage structure comprises “Equity Brokerage”, “Retail Banking” and the “Repo Desk”.
After a negative start at the beginning of the year, as of the second quarter equity indices began to show more solid recoveries, picking up a bullish trend that at the end of 2009 resulted in two-digit increases. Rising stock prices apparently rekindled the predisposition towards equity investments, this time however marked by caution and restrained optimism. Despite the recovery, the turnover of equity trades on Borsa Italiana’s stock market dropped by about 35% over the previous year; this was partly due to the unwinding of portfolios by Asset Managers owing to incoming redemption requests, as well as to the loss of value of shares, which express much lower values although their free-float remains unchanged. Against this backdrop, also the subsidiary Banca Aletti reported declining intermediated volumes on domestic markets, primarily associated with institutional counterparty trades, only partly mitigated by the resumption of Private and Retail trades.
Trading and Treasury
The Trading and Treasury structure comprises “Fixed Income” and “Equity Proprietary Trading and G.S.F.”.
Fixed Income
In 2009, the government bond market had a diverging performance depending on the yield curve time frame taken into consideration.
While the short-term yield curve continued to benefit from the interest rate cuts and from the liquidity injections by Central banks, on the longer term the yield curve underperformed as a result of the large amount of government securities offered on the primary market to finance bloating state deficits. These two events put together caused the curve to get steeper and steeper until it hit all time levels.
In all this, also the marked narrowing of spreads in countries belonging to the Euro area played an important role, in particular between the notes of euro-regional peripheral nations and German bonds.
If the forced sales in 2008 caused yield spreads among euro-area notes to hit their all time highs since the creation of the single currency, the return to an abundant liquidity triggered the reverse process, causing spreads to backtrack almost completely, with the exception of a few countries, like Greece and Ireland.
After a generalized credit spread widening in 2008 and in the first months of 2009, corporate bonds staged one of the biggest rallies in the history of credit, as a result of the economic policy measures implemented by Governments and Central Banks.
A very important factor that contributed to buoy up the market was the liveliness of new corporate issues, which allowed a wide number of issuers to raise capital on the financial markets to refinance and extend their debt profile.
Retail customer transactions on the Hi-Mtf and Group Securities Market platforms came in big volumes.
These combined factors, together with the strategies we adopted, allowed us to obtain much greater profit than we expected from managing our bond portfolios.
Equity Proprietary Trading & G.S.F.
During the year the bank continued to engage in market making on Italian single-stock futures on 46 underlying stocks. The increase in intermediated volumes over 2008 allowed us to hold a significant market share of 10.78%.
With regard to our trend trading portfolio, owing to the high volatility characterizing the first half of the year, we privileged a merger arbitrage strategy involving low-risk takeovers. In the second part of the year, the progressive raising of the ban on short selling allowed us to start implementing market neutral arbitrage strategies again, involving companies belonging to the same sector, without being exposed to market trends.
During the year, the basket trading strategy on the Spanish index Ibex35 was progressively consolidated, and Delta 1 trading on foreign stocks listed on Liffe was increased with good results.
The liquidity crisis that had been characterizing this industry in 2008 had had a positive impact on bond lending volumes as well as on the related trading spreads. The gradual ebbing of this phenomenon brought total volumes back to pre-crisis levels and partly restarted the equity segment, confirming that the subsidiary Banca Aletti is among the leading players in the Italian market within this area.
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Investment Management
Banca Aletti’s “Investment Management” structure is in charge of adding value to the Group’s Asset Management Customer relations (Retail, Private and Institutional) by optimizing all portfolio analysis, management and assessment activities relating to the single management mandates.
In 2009 equity markets reported a very positive performance, with practically uninterrupted advances since the month of March. MSCI WORLD indexes in local currency on industrialized and emerging equity markets published a rise of 23% and 61%, respectively. This performance was sustained by a subsiding risk aversion, by the progressive improvement of the macroeconomic scenario with the overcoming of recession in all areas, and by the constant improvement of corporate earnings.
Among most industrialized countries, US equity indexes performed relatively better than the European and the Japanese. The Nasdaq and S&P 500 indexes increased by 44% and 23.5%, respectively, as compared with 28.5% and 19% for the Eurostoxx 600 and Nikkei indexes.
In 2009 the overall performance of the government bond market was marginally positive (+0.75%), marked by a marked volatility, especially in the second part of the year, on the wake of the recovery perspectives of the macroeconomic scenario and of the estimated interest rate trend. At area level, the negative performance of the US dollar denominated government debt (-3.7%) was counterpoised by the positive performance of the euro denominated debt (+4.4%) and of the emerging countries (+29.7%). The high standing corporate bond segment during the year posted a clearly positive performance.
The forex market was mainly characterized by the inherent weakness of the US dollar, especially after the first quarter, and by the appreciation of the currencies of emerging countries most highly exposed to commodity prices. At the end of the year, the US dollar reported a greater than 2% depreciation against the euro, while among emerging country currencies, the Brazilian Real appreciated by about 30% against the US dollar.
Returns on managed products were highly positive, both in absolute terms and with respect to benchmark indexes, by taking advantage of the favorable market performance of the different asset classes.
At 31st December 2009, assets under management added up to about 11,920 million euro, up by 6.1% during the year, in stark contrast with the 26% reduction reported during 2008: after hitting a low in March, inflows reported a constant uprise. The year 2009 marks a break in the managed assets outflow trend that has been characterizing the entire Italian sector both in 2007 and 2008.
As to the managed asset makeup, just as in 2008 inflows for investment lines for private, VIP and institutional customers performed well, while Retail products, quantitative products and capital guaranteed products suffered an outflow.
During the year we continued to enrich our commercial catalog, that had been introduced in the first months of 2008; worth mentioning is the Multilinea product, specifically geared to retail customers, and replacing Sistema Mosaico: the goal is to match as efficiently as possible the different investor profiles with products featuring different management styles.
As to structures reporting to the Investment Management Function, after the business consolidation phase characterizing 2008, in 2009 the Advisory Desk, which is in charge of the direct Private customers of the subsidiary Banca Aletti, which had in turn been accredited by the Group Banks, intensified its effort to seek and develop new business in close cooperation with the commercial network. As at 31st December 2009, the structure counted 83 active contracts, corresponding to about 185 million euro, well above the results reported in 2008 (40 active contracts for about 105 million euro).
Merchant Banking
During the year, in the Merchant Banking sector Efibanca conformed to the general guidance of Gruppo Banco Popolare pointing at rightsizing the overall portfolio of private equity and merchant banking investments.
On 31st December 2009, total investments in securities and shares and in units of closed-end mutual funds, or equivalent Italian or foreign instruments owned by the bank (balance sheet items 40, 100 and 140, according to IAS) came in at 276.7 million euro, down by 11.2% from 311.6 million euro on 31st December 2008.
Total securities and equity investments carried out during the year added up to a cost of 23 million euro, as compared with 59.1 million euro in 2008, that breaks down as follows: 14.8 million euro for incremental purchases of shareholding units in funds already held in portfolio (for 2.6 million euro) and payment of closed-end private equity funds and/or similar instruments (for 12.2 million euro), for cash calls against subscription commitments for a total original amount of 243.9 million euro (attributable to Efibanca) and reduced at the end of 2009 to 83.5 million euro; 7.9 million euro being the carrying amount of new equity investments or equity financial instruments expressed by corporate borrowers after finalized financial restructuring actions with their groups; The residual difference is a follow-on, i.e., equity actions involving companies already included in our equity portfolio.
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During the year, 19.7 million euro worth of disposals were carried out, as compared with 82.2 million euro the prior year. In particular, they break down as follows: total disposal of industrial and financial equity investments of 17.6 million euro; repayments the Bank received from closed-end funds and similar entities as a result of divestitures carried out by the funds for 2.1 million euro.
During the year, the business generated about 5.1 million revenues (capital gains and dividends) and write-downs of 18.8 million euro.
Asset Management
Aletti Fiduciaria
In financial year 2009, Aletti Fiduciaria confirmed its growth trend, especially in the last quarter, when it obtained numerous fiduciary mandates as a result of the repatriation of foreign assets. In particular, the portfolio increased by 60%, from 502 mandates on 31st December 2008 to 803, and also its fiduciary assets enjoyed a marked expansion. The trust portfolio underwent the expected contraction from 23 to 11 trusts. This reduction is simply one of the effects of the plan to rationalize the Group fiduciary business, that among other things envisaged the creation of a trust company where all trust relations, trustee business and trust advisory services are to be combined. Financial year ended on 31st December 2009 was characterized also by a significant support to Banca Aletti’s private network and to the networks of the retail banks, thanks to which Aletti Fiduciaria could continue to develop and/or consolidate its role as qualified partner for fiduciary services.
Aletti Gestielle SGR
(in millions of Euros) 31/12/2009 31/12/2008 Changes
Business volumes Net asset value of managed funds 7,340.6 8,163.5 -10.1% Subscriptions 2,266.6 6,105.2 -62.9% Redemptions 3,700.2 13,548.9 -72.7%
In 2009, the product range was rationalized through a merger by acquisition effective as of 30/5/2009. As a result, funds decreased from 50 in 2008 to 31.
In 2009, the Company reported a 10% drop in assets under management from 8,163 million at the end of 2008 to 7,341 million on 30/12/2009. In terms of net asset flows for the year, a total outflow was reported from Aletti Gestielle’s 31 mutual funds of 1,433.6 million.
With regard to the performance of managed funds, during the year Gruppo Banco Popolare slipped to number fourteen from number ten in the asset management groups ranking, with a market share of 1.96% and total assets under management of 8,435 million, of which 7,341 million managed by the company.
The table below shows a NAV comparison between the various fund classes under management (the changes in each fund class are affected by the merger that took place during the year):
(in millions of Euros) 30/12/2009 30/12/2008 Changes
Equity funds 1,621 1,264 28.2% Fixed income funds 4,872 6,350 -23.3% Balanced funds 395 164 140.8% Flexible funds 215 122 76.2% Non-harmonized funds 238 264 -9.9% Net assets under management 7,341 8,164 -10.1%
Evidencing the unrelenting effort devoted to asset management, also in 2009 the company won the credit of the asset management industry and was awarded the Premio Alto Rendimento organized by Gruppo Il Sole 24-Ore and CSF Rating as: First Best Italian Mutual Fund Manager – BIG Class; Best America Fixed Income Fund with the Gestielle Bond Dollars Fund.
Also this year the commitment to ethical finance was worth of notice: with the creation of the Gestielle Etico per AIL fund, the planned annual donation was channeled towards a single beneficiary which implements country-wide extensive and
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continuous projects. Thanks to the assets accrued in this fund, AIL (Italian Association against Leukemia-lymphomas and myeloma) received a contribution of 164 thousand euro. The donation made in 2009 will help realize a project of paramount importance: the creation of a single “AIL Home Care” model across Italy, geared on the needs of hematological patients, that will then lead to the quality certification of AIL’s home care on the domestic territory. The project shall start in Rome and will then be extended to services in other towns.
As to the development of the so called non-captive market (i.e., sales activities through banks and networks not belonging to Gruppo Banco Popolare), 2009 posted a positive inflow and a solid growth of AuM. Non-captive networks ended 2009 with a net balance between subscriptions and redemptions of +16.7 million euro, while assets generated by “extra-group” networks increased by 5.6% over the previous year, and at year-end totaled 1,378.2 million euro, accounting for 18.7% of the SGR’s total assets under management. Although uncertainty still prevailed, which in 2009 caused this industry to report a year-end total net outflow of -2,957 million, of which -12,668 million from Italian funds, the Company obtained positive results on the non-captive market thanks to the unfailing and incremented support lent to the distribution networks.
As to the Open-end Pension Fund Gestielle Pensione e Previdenza, Net Assets for the Distribution of Benefits at the end of the prior year (combining the two pension funds managed by the Company together) totaled 65.2 million (15.0 million for Gestielle Pensione e Previdenza and 50.2 million for Bipitalia Multiprev), while at the end of 2009 they reached 80.6 million (after the merger by acquisition of the Bipitalia Multiprev Fund in the pension fund Gestielle Pensione e Previdenza effective as of 31/10/2009), up by 23.62%. The total number of members decreased by 261 units from 4,697 to 4,436.
Illustrated below are intercompany relations with Banco and with the other Group subsidiaries: Banca Popolare di Verona - SGSP SpA, Credito Bergamasco S.p.A., Banca Aletti & C S.p.A., Banca Popolare di Novara S.p.A., Banca Popolare di Lodi S.p.A. Cassa di Risparmio di Lucca Pisa e Livorno S.p.A., Banca Popolare di Crema, Banca Popolare di Cremona, Banca Popolare di Mantova, Banca Caripe engaged in the sale and distribution of managed funds; Banco Popolare e del Credito Bergamasco S.p.A (the latter until 31/05/2009) acted as Custodian Banks for the managed funds.
Aletti Gestielle Alternative SGR
(in millions of Euros) 30/12/2009 30/12/2008 Changes
Business volumes Net asset value of managed funds 826.46 2,098.66 -1,272.20 Subscriptions 24.29 146.97 -122.68 Redemptions in 2009 including Side Pocket 577.84 1,161.41 -583.57
In 2009, the Company’s Board repeatedly intervened in the management and on the structure of managed UCITS to protect investors’ interests. The effects of the financial crisis which broke out in 2008 induced the Company to review its investment process, so as to adjust it to the new market context, especially with regard to hedge funds, that underwent a sudden change as a result of the crisis and of associated events. As part of this new investment process, the Company elected to do without the services of its Advisors, Union Bancaire Privée and FIM Advisers LLP, and terminated the related service agreements. Moreover, the high number of redemptions on managed funds especially in the second half of 2008, combined with the financial crisis, which persisted until the month of March 2009, have been thoroughly discussed in the Board meetings of Aletti Gestielle Alternative of 15 January, 22 January and 23 April 2009. In order to guarantee a more regular and orderly management of this period and to ensure the best possible investment protection to our investors, the Board made a number of important decisions, as summarized below:
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1) In the light of the issue of L.D.185 of 28 November 2008 and the following issue of the enacting Bank of Italy Order of 16/12/2008, which abolished the maximum ceiling of 200 members for each speculative fund, the Board of Directors on 15 January 2009 decided to rationalize the product range and to merge the following low and medium volatility funds:
Acquired Funds Acquiring Fund
Gestielle Hedge Arbitrage Gestielle Hedge Defensive Gestielle Hedge Protection Gestielle Hedge Conservative Gestielle Hedge Low-Volatility Gestielle Hedge Composite Gestielle Hedge Market Neutral Gestielle Hedge Alpha Fund Gestielle Hedge Alternative Gestielle Hedge Dynamic Gestielle Hedge Multi-Strategy Gestielle Hedge Concentrated Low 2 Gestielle Hedge Concentrated Low 3 Gestielle Hedge Concentrated Low 1 Gestielle Hedge Concentrated Low 4 Gestielle Hedge Concentrated Low 5
The merger came into effect on 30/01/2009 and was carried out at the NAV per share of 31/12/2008. 2) The Board of Directors also decided to adopt the redemption gate at the NAV per share of 31/12/2008 on the following quarterly low volatility funds, fixed at 20% of the fund total assets (max cap permitted by the management policies, art.7.5 paragraph 8): GH Low Volatility GH Arbitrage GH Defensive GH Alpha Fund GH Alternative Fund GH Composite GH Conservative GH Market Neutral GH Protection.
3) The Board of Directors on 23 April 2009 decided to repeat the adoption of the redemption gate at the NAV per share of 31/03/2009 for the Gestielle Hedge Low Volatility Fund (acquirer fund of the low volatility quarterly range), again fixed at 20% of the fund total assets.
The possibility of using redemption gates was provided also in L.D.185 of 28 November 2008 and in the enacting Bank of Italy Order of 16/12/2008 as a means to contend with the deepening financial crisis that caused an increase in the illiquidity of invested target hedge funds. The gate makes it possible to modulate redemption requests to protect the interest and guarantee an equal treatment of participants. The liquidity level of the Gestielle Hedge Low Volatility Fund, together with the normalization of customer redemption flows and a generalized improvement of the liquidity of underlying hedge funds, in particular those that had imposed a suspension or delay of redemptions, induced the Board of Directors not to repeat the adoption of the redemption gate starting from redemptions at the NAV per share of 30/06/2009.
4) As to the monthly range, the marked reduction in the portfolio liquidity, combined with the numerous redemption applications submitted by participants, induced the Board of Directors of Aletti Gestielle SGR on 22 January 2009 to set up side-pockets, in compliance with L.D. 185/2008 (“Decree”) and the Bank of Italy Order of 16/12/2008, for the products belonging to the Concentrated range. In order not to impair the interests of participants, art. 14, paragraph 6, letter b) of the Decree allows asset management companies to transfer the illiquid assets of the speculative fund in an ad hoc closed-end mutual fund (so called side-pocket) until 31 December 2009. The transaction was carried out by partially demerging the speculative fund, whereby liquid assets were kept in the speculative fund, while illiquid assets were transferred in the new entity. The participants in the speculative fund received an equal number of shares in the closed-end fund to their share in the speculative fund. Based on the side-pocket mechanism, the participants in the speculative funds – whose redemption applications were not liquidated or settled before the setting up of the new vehicle – have been repaid partly in cash and partly with shares in the new fund, proportionately to the assets transferred in the side-pocket. Shown below are the liquid asset and side-pocket percentages as at 31/12/2008:
Fund % Side Pocket % Liquid
Gestielle Hedge Concentrated Low 1 54% 46% Gestielle Hedge Concentrated Medium 1 33.5% 66.5%
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The downsized but liquid speculative fund continued to operate in compliance with the investment policy provided in the management policy, while the strategy followed for the closed-end fund, which cannot issue new shares, was to unwind illiquid assets, and redeem shares every time assets were liquidated. In 2009 the Company carried out three distributions of available liquidity to customers of the two closed-end funds Gestielle Hedge Concentrated Low – Side Pocket (“S1”) and Gestielle Hedge Concentrated Medium – Side Pocket (“S2”). The three distributions together added up to about 51.9 million euro for S1 and 5.3 million euro for S2, which, with respect to the assets transferred in the side-pocket funds when demerged from their parent funds, account for 46.47% for S1 and 47.24% for S2. These figures are in line with the plan to unwind the illiquid assets transferred in the side-pocket funds, which had estimated to redistribute 45% of the assets during 2009, for both S1 and S2.
As a result, the product range managed by the Company to date comprises 8 speculative funds, and two closed-end side- pocket funds, as illustrated below:
Fund Type
Gestielle Hedge Low Volatility Low volatility speculative fund with quarterly liquidity Gestielle Hedge Multi-Strategy Medium volatility speculative fund with quarterly liquidity Gestielle Hedge High Volatility High volatility speculative fund with quarterly liquidity Gestielle Hedge Opportunity High volatility speculative fund with six-month liquidity Gestielle Hedge Long/Short World Speculative fund specialized in equity strategies with monthly liquidity Gestielle Hedge Credit Fund Speculative fund specialized in credit strategies with quarterly liquidity Gestielle Hedge Concentrated Low 1 Low volatility speculative fund with monthly liquidity Gestielle Hedge Concentrated Medium 1 Medium volatility speculative fund with monthly liquidity Gestielle Hedge Concentrated Low – Side Pocket Closed-end side-pocket fund Gestielle Hedge Concentrated Medium – Side Pocket Closed-end side-pocket fund
In 2009 the Company did not set up new funds. Note however, that in July 2009 the Company applied with the Supervisory Authorities to extend its business to include non-speculative open-end funds to launch a new non-EU compliant open end fund (fund of funds) called “AGA Absolute Return”. Although it belongs to the “alternative” strategies universe, the fund is going to invest in EU-compliant UCITS III vehicles, featuring a greater liquidity compared to traditional hedge funds.
During the year, the Company reported a decrease in assets under management, net of investments in in-house funds, from 1,662.02 million euro on 31/12/2008 to 820.29 million euro on 31/12/2009. As noted above, this contraction followed a strong flow of redemptions reported in the second half of 2008, which continued also in first quarter 2009. Redemption flows started to subside in the second quarter 2009, also thanks to the good performance reported by all the managed funds during the year, from +3.22% of Gestielle Hedge Concentrated Medium 1 to +11.32% of Gestielle Hedge Credit Fund, while the new product scheduled to be rolled out in the new year is going to contribute to the resumption of inflows. Against a still rough backdrop for the hedge industry, in 2009 the Company continued to support the sales networks, assisting private salespeople, and staged monthly conference calls with updates on market analysis, performance of managed funds and ongoing initiatives, as a supplement to monthly reports. The inflow crunch hit the entire hedge fund industry worldwide. At domestic level, total assets managed by speculative Sgr went from 20,795.2 million euro on 31/12/2008 to 13,008.7 million euro on 31/12/2009. In relative terms, as compared to the competition and considering the ranking prepared by Mondohedge listing Italian assets net of foreign management mandates, the Company’s market share went from 7.20% on 31/12/2008 to 6.43% on 31/12/2009.
Leasing and Factoring
Gruppo Banco Popolare engages in leasing and factoring through its subsidiary Banca Italease and the latter’s subsidiary companies, which joined our consolidation scope in July 2009 after the voluntary Tender Offer launched by Banco Popolare. The ability of the former Gruppo Banca Italease to develop its core business and generate profit was strongly affected since 2008 by the deteriorating macroeconomic backdrop, the paucity and expensiveness of available financial resources and by a marked increase in loan impairments due to the concentration of its loan portfolio and to its exposure to the real estate sector. This factors, together with the intervening capital shortage, continued to strongly affect results also in 2009, and Banca Italease had to resort to a big capital increase.
Leasing
Based on Assilea (Italian leasing association) data, in 2009 the negative trend reported by the Italian leasing market in 2008 deepened further, in key with the general trend of the domestic economy and in particular of investments. On 31 December 2009, the annual decline hit 33% and the market volume of executed lease contracts went from about 39 billion to about euro 26 billion. The segment which suffered the strongest contraction was aircraft, watercraft and railway equipment leases, which shrank by 57%. The other sectors saw their volumes scaled down by about one third with respect to executed leases in 2008: car leases dropped by 33%, equipment leases – negatively affected by the industry’s decrease in production and in incoming orders – fell by 31%; real estate leases – influenced by the negative performance of its reference market – declined by 30%.
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With respect to December 2008, out of total executed lease contracts, the share of equipment leases (at 32.7%) and real estate leases (at 40.6%) increased, to the detriment of aircraft, watercraft and railway equipment leases (at 4.9%). The contribution of the automotive segment remained basically unchanged (at 21.8%).
Against this market scenario, the marked capital shortfall caused by the large losses suffered in financial years 2008 and 2009 deprived Banca Italease and its subsidiaries of the possibility to increment loans. For this reason, if in the prior year, in consideration of the financial constraints experiences by Banca Italease, new business volumes were very carefully governed, in 2009 it was necessary to restrain the start of new contracts, and process the outstanding lease business. For these reasons, on 31 December 2009 Banca Italease reported a scant volume of executed lease contracts at consolidated level (totaling euro 110 million, down by 94% over the end of 2008), and new income-producing lease business came in at euro 466 million, down by 79% over 2008.
Factoring
Provisional market surveys produced by the trade association Assifact, based on the preliminary indications of its members, report a slight decrease over 2008 in the total volume of factored receivables, as a result of declining company sales and the of the slowdown of the Italian real economy. In spite of the GDP drop, factoring continues to represent an anti-cyclical tool that companies can use to supplement their working capital and to manage and protect themselves from the risk of default of debtors. As a result, the trend that was reported throughout 2009 was confirmed, pointing at an expansion of both the outstanding receivables volume, as well as of the share financed by factors. However, the increase in outstanding receivables and advances against a fall in turnover volumes reported by the industry confirm that the average receivables collection period is growing longer and that the economic cycle is critical. The sector is characterized by a high volume concentration, influenced by factors belonging to primary banking groups, and in this context Factorit ranks a solid fourth and remains a point of reference for the market with its 10% market share. In 2009 Factorit generated a turnover volume of euro 11,491 million, down by 15.9% over 2008. The troublesome economic backdrop and the events associated with the reorganization of the parent company Banca Italease deeply affected the performance of the company in terms of volumes. Running against the stream of market dynamics, Factorit’s commercial policy pointed at controlling risks – i.e., avoid raising the concentration levels and limit big-ticket deals and actions on receivables with a slower turnover – and at increasing the loyalty of the most appealing customers, who feature a good risk/return ratio and are more interested in receiving highly tailored factoring products. We modulated our engagement in sectors that are still under the impact of the past months’ strong criticalities (Tourism and Organized Retailers), as well as in the intermediation of receivables that companies claim against the Public Administration. As to the mix of offered products, the lion’s share goes as usual to solutions featuring an interaction between receivables servicing and financing (maturity and without recourse factoring). This distinctive feature, together with the pursuit of an appreciated level of excellence in an ever competitive market, helped us defend our volumes and our customer portfolio, while the volumes generated in the Foreign business compartment confirmed their negative performance, especially in the import sector. At the end of 2009, volume contraction was followed by a progressive, sensible and guided reduction in average loans. Under such complex circumstances, the distinctive and positive feature of Factorit’s business activity is its ability to hold its primacy in intermediated receivables turnover efficiency, thus optimizing capital employment. In 2009, the average collection turnover did not exceed 100 days. In keeping with Banca Italease’s decision to assess possible opportunities to maximize Factorit’s valuation also by way of corporate actions, negotiations with some counterparties were started in the second half of 2009, leading to an agreement signed in February 2010 with Banca Popolare di Sondrio and Banca Popolare di Milano, based on which Banca Popolare di Sondrio is to acquire the control over Factorit with a 60.5% share, while Banca Popolare di Milano is to take a 30% share. The remaining 9.5% share will remain with Gruppo Banco Popolare. The deal is described in greater detail in section A of the consolidated Explanatory Notes – sub-section 4 Noteworthy events after the balance sheet date.
Corporate Center and Other
Foreign banks
Italian companies wishing to operate in foreign markets on the long term, alongside the traditional export and import of goods and services, can rely on Banco to receive information and tailored assistance, allowing them to assess possible solutions to do business abroad, to take advantage of the evolutions of new markets and facilitate their access. A network of dedicated specialists is active on the territory, supported by central structures that focus in particular on high potential markets for Italian companies, such as China, India, Russia and other East European Countries (specific Desks have been created for these countries). Gruppo Banco Popolare has own operating Banks also in Croatia, Hungary and the Czech Republic, with a Leasing company in Romania, and Representative offices in China (Hong Kong, Shanghai, Beijing), India (Mumbai) and Russia (Moscow), where customers can count on a bespoke service. As to the subsidiary Banco Popolare eská Republica, on 9 December 2009 an agreement was signed to sell 100% of the share capital, to be finalized in first half 2010.
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Our international network can count also on the Luxembourg and Swiss Banks and on the London Branch, which are more focused on financial services, but provide also commercial services.
Banco Popolare Croatia d.d.
After three years with a positive bottom line (about 1 million euro cumulative in spite of significant investments), 2009 for the first time ended with a negative result, with a loss of about 7.7 million euro, caused by a number of combined, mostly one-time factors, such as the impairment of some loan positions, a one-off loss caused by the order issued by the Croatian National bank to modify the pricing policy on the kuna/euro exchange rate (which practically reduced the spread on the official exchange rate applied to these transactions, impacting the P&L as a result of the impairment of euro-linked loans), and the change of the information system. The current financial year shall be characterized by a sweeping strategic revision to achieve efficiency gains and return profitable.
Banco Popolare Hungary Kft
2009 ended with a deficit of about 3.9 million euro, strongly affected by the troublesome economic context ailing the country, which caused lending activities to be reined back, although the loan portfolio reported a slight growth. The loss is greater than the prior year in spite of an operating result basically in line with 2008. However, unlike the previous year during which marked loan write-backs were reported, in 2009 net loan impairments came in at 0.9 million euro. In 2010 the target is to work to approach breakeven, which however shall be reached only in 2011 through a gradual and prudent implementation of intermediated assets.
Banco Popolare eská Republica a.s. (under disposal)
Banco Popolare eská Republica at the end of 2009 posted a loss of 2.7 million euro. During the year, the bank focused on growing direct customer funds, which reached 82 million euro, almost double the previous year figure. Gross loans to customers totaled about 114 million euro, up by 35% with respect to 2008. The uncertainty surrounding the hinted disposal and the business slowdown, in particular loans, in the second half of the year had a negative impact on the operating result. Actual Operating expenses were in line with the budget, as were net loan impairments, which in 2009 were below 0.2 million euro. During the year, thanks to business development actions, the number of customers and of accounts constantly increased, reaching about 3,200 customers and 5,700 accounts, more than double with respect to 2008. For 2010, the budget estimated a pro-rated loss for the Group (until disposal).
AT Leasing Romania
The Company’s P&L data reflect the dire situation of the Romanian economy (GDP fell by 7.5% and the local currency strongly depreciated), especially for the leasing industry, which saw its new business plummet by 70%. Despite the generation of an operating income, provisions in 2009 had a drag-down effect causing a net loss of 1.3 million euro. For 2010, given the likely persistency of the crisis in the region, a limited loss has been estimated, with a profit comeback in 2011, mainly as a result of cost cutting actions and a stringent control on credit risks.
Banco Popolare London Branch
The Branch’s 2009 financial statements evidence that although it did not generate new loans, the branch managed the assets inherited with the contributions of the two previous branches BPL and BPV-SGSP, and was able to generate an excellent treasury additional income. In spite of this, the year ended with a big loss of 88 million euro, as a result of the negative impact of some big, non-recurring doubtful loans. The net impact generated by provisions charged to income was quite harsh: 104 million, of which 82 million referring to Glass Italy and Stichting Glass (from former BPL London), in addition to positions originated by the Branch (Icelandic banks 3.5 million), or by the Head Office (Compass 9.9 million), and other ex- BPL loans. Next year we expect the branch to be back to profit.
Banco Popolare Luxembourg S.A.
The year closed with a net income of 3.2 million euro, net of provisions of 1.2 million. The main objective in such troublesome circumstances was to strengthen the traditional customer service, to consolidate results and acquired volumes, with a special focus on risk management, especially credit risk, which often goes hand in hand with the deterioration of the economic and financial context. Considering these combined factors and the foreign asset repatriation under the Italian “scudo fiscale” measure, the 2010 plan estimates a slight contraction of earnings.
Group Services: Group Finance
The Parent company coordinates and controls the management policies of its structural asset and liability items, as well as those of the other Group companies, to optimize available capital, identify adequate funding strategies and transactions for
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the Group, through actions on domestic and international markets, and to control liquidity requirements and dynamics. To this end, the Parent company launched a series of initiatives in 2009, aiming at streamlining the Group organization, by concentrating a number of financial activities, that were previously managed by the subsidiary Banca Aletti, in the Group Finance Service.
Illustrated below are the main changes introduced in the Finance, Corporate Center and Equity Investment Department: Setting up and assigning the role of CFO of Banco Popolare to Mr. Maurizio Faroni, in charge of Group Finance activities and having Banca Aletti and the other operating companies of the Finance Area strategically reporting to him; Treasury and foreign exchange, and Proprietary portfolio management for all accounting classes centralized at the Parent company’s,
With a description of the activities carried out by the Group Finance structures.
Group Finance activities are performed by the following organizational structures: ALM & Asset Backed Funding, Capital Management & Wholesale Funding, Group Treasury and Proprietary Portfolio Management.
ALM & Asset Backed Funding
Interest rate risk
Structural interest rate risk management and containment policies confirmed the same strategies pursued in the past. In particular, domestic and international bond issues characterized by structural pay-offs and fixed rate bond issues have been fully hedged along the fair value option methodology. Since July 2008, under the “Banco Popolare single issuer” project, also the interest rate risk originated by the Holding company and connected with bonds distributed by the commercial network was effectively hedged. In the second half of 2009, the Bank adopted the hedge accounting method only for the new EMTN bond issues sold to institutional investors. Owing to the bullish view on interest rates and the positive results reported also in the first quarter 2009, in the second quarter the fixed-rate position set up on Banco Popolare to partly offset the bullish position of the retail banks was closed. More precisely, 19 securities of the Loans & Receivables (“L&R”) portfolio of Banco Popolare were hedged, corresponding to a total nominal value of about 4.5 billion euro. Since the remaining 3 securities, corresponding to a total nominal value of about 1.3 billion euro, were shortly due and the impact of a possible interest rate increase would have been most presumably, it was decided not to intervene.
Liquidity position
The liquidity risk is generated by the time mismatch between expected inbound and outbound cash flows on a very short time horizon. In addition to the difficulty or impossibility of hedging against said mismatches, the liquidity risk may also entail an interest rate risk caused by the need to raise/use funds at unknown rates, that as a result could be potentially unfavorable. In the second quarter of 2009, the operating management of treasuries of all the Group banks was transferred over from the subsidiary Banca Aletti to Banco Popolare. Among other things, the Group liquidity policy and the liquidity contingency plan were approved; new estimate models were implemented for behavioral and/or optional parameters (on demand items; prepayment on expiring transactions; derivative margining with credit support annex; risk of credit line available margin calls; etc.) and operating limits have been revised and updated. The first-line defense against liquidity risk is the daily monitoring and control of the cumulative operating liquidity mismatch, generated by transactions with interbank and institutional counterparties, over the following timeframes: overnight, 14 days, 1 month, 3 months and 6 months. The ALM and Asset Backed Funding Function of the Group Finance Service is in charge of the operating liquidity risk monitoring, i.e., the first line defense; the Transformation and Operational Risk Function of the Risk and Capital Service is in charge of the second-line defense. The second-line defense against the liquidity risk is the monitoring of possible structural liquidity mismatches, generated by transactions of the entire banking portfolio, over the following timeframes: 14 days, 1 month, 3 months and 6 months. The Transformation and Operational Risk Function of the Risk and Capital Service is in charge of monitoring the structural liquidity risk limits. The third-line defense against the liquidity risk is the measurement and management of the structural liquidity risk by the ALM & Asset Backed Funding Function of the Group Finance Service. The measurement of the structural liquidity risk, namely the availability of the necessary cash funds to cover financial outlays, is based on the spreadsheets generated by the Operating Asset & Liability Management (ALMO) procedure, in particular, the simulation module that is used also to measure the interest rate risk. The structural liquidity risk is measured both statically, by examining liquidity requirements based on the single time frames of the liquidity gap (difference between due loans and deposits), and dynamically, by identifying liquidity requirements under different settings, where the financial factors that may affect the time profile of liquidity are varied. In 2009 the Group continued to pursue the goal of incrementing the eligible securities portfolio, and carried out three
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securitizations (BPV Mortgages, BPL Mortgages series 3 and BPL Mortgages series 4) of loans originated by the Banche del Territorio for a total nominal value of about 8 billion euro.
Capital Management & Wholesale Funding
Capital optimization
To increase the Group’s capitalization, on 31.07.2009 Banco Popolare issued 1.45 billion euro worth of financial instruments pursuant to art.12 of Law Decree n. 185/08 in favor of the Ministry of Economy and Finance (so called Tremonti Bond).
After acquiring the control over Banca Italease, Banco restructured the subordinated components of the subsidiary’s regulatory capital, by launching a PEO on the entire outstanding subordinated debt, amounting to 275 million euro, Euros, in exchange for new debt securities having the same subordination level. As a result, 300 million euro worth of new Lower Tier II bonds were issued, of which 116 to be used for the above mentioned public exchange offer.
Additional 103 million subordinated Lower Tier II bonds were issued and sold to institutional customers.
In 2009, the credit risk transfer activities implemented in 2007 and 2008 by setting up a single-name CDS portfolio were followed by a marked decrease in hedged positions. Hedges for a nominal amount of 478 million euro were cancelled as they were considered to be inefficient with respect to the optimization of capital absorption. On 31 December 2009, outstanding hedges totaled 270 million euro.
Proprietary Portfolio Management
Directional proprietary portfolio
With respect to asset management, the following positions in HFT, HTM, AFS securities and Mutual Funds are outstanding: HFT positions – At year-end, the bond exposure totaled about 510 million euro, and was mainly made up of fixed-rate securities of financial issuers, which gave rise to a significant and positive P&L impact in terms of income stream; with respect to directional position, note that in 2009 the position in RCS Mediagroup securities was reduced (classified as HFT); HTM positions – At the end of 2009, the Held to Maturity portfolio, which had been set up in 2004 to obtain a stable capital remuneration, comprised 300 million worth of fixed-rate securities at market value with maturities ranging between one and three years, of government issuers, and to a lesser extent of financial corporate issuers of high credit standing. The securities in this portfolio are highly liquid, since they are almost exclusively eligible for refinancing with the ECB, and therefore readily convertible into cash to face possible liquidity crisis without having to dispose of the portfolio on the market; AFS positions – During the year the bond portfolios classified as AFS were sensibly increased. They include 250 million euro worth of inflation-linked BTP due in 2019, which were swapped and report a significant return in excess of the 3-month Euribor, while about 400 million euro are represented by other Italian and Spanish government securities; Positions in Mutual Funds – The final stage of the centralization of UCITS investments with the Parent company’s was carried out; they contributed to the particularly brilliant performance of the entire portfolio.
Investment portfolios
As of 1 April 2009, the management of the HFT portfolio, that had been previously delegated to the subsidiary Banca Aletti, was centralized at the Parent company’s in the Group Finance Service. Against a backdrop of deep economic crisis and high uncertainty of financial markets, the management policy of the proprietary HFT portfolio of Banco Popolare maintained a conservative strategic approach, seeking, whenever possible, to stabilize returns, seek the right balance between interest income and capital gains and ensure a high portfolio funding.
The average duration of assets made up of fixed rate government securities was maintained at conservative levels, i.e., by closing risks almost completely towards the end of the year. In 2009, existing investments, almost exclusively Italian government issues, were held in portfolio, and they reported higher yields than the German bonds, while investments were diversified by adding government securities of other European countries, like Spain and Belgium, and by shifting our focus on supranational bonds and bonds issued by government agencies enjoying a top-tier credit standing. In order to curb performance volatility, exposure to short-term - max. 5 years - securities has been retained. Part of the duration risk has been mitigated with derivative hedges using bond futures and swaps, while for the cost of funding, hedging techniques were based swaps (Overnight Index Swap). The mark to market valuation of this position produced a positive result, mainly stemming from the narrowing of the yield spread between German bunds and the government securities of other European countries. An additional positive contribution to the year-end result was made by the movement of the short-term end of the yield curve, as a result of the interest rate cuts introduced by the main Central banks, and by the positive steepness (yield spread between a 10-year and a 2-year government security) reported by the yield curves of the main world economies.
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The floating-rate government securities compartment had significant initial positions, that were substantially reduced in 2009, as a result of the natural maturity of securities, as well as for precise portfolio management choices. On 31 December 2009, the investment in CCT amounted to a total nominal value of about euro 850 million. During the year, purely trading oriented arbitrage transactions on government interest rate curves were carried out. In particular, owing to the widening yield spreads, Italian government bonds transactions against the German and US yield curve were executed. As to the non-governmental portfolio component (bonds issued mainly by banks and financial institutions), during the year the strategy was based on a prudent approach, dictated by the strong uncertainty. Corporate investments have been held stably at about 30% of the total portfolio, seeking to improve the distribution of investments among companies belonging to different economic sectors, while slightly extending the average investment maturity. This investment remained prevailingly focused on the financial sector, with securities with short/medium term maturities and a current average Standard and Poor’s single A rating. Out of the total exposure of the non-governmental bond portfolio, about one third belongs to the “loans & receivables” accounting class. In September 2008, Banco Popolare had decided to make use of the option to change the accounting class of some issues from “held for trading” to “loans & receivables”, corresponding to a nominal amount of about 550 millions. At year-end, as a result of ABS amortization and redemptions, the nominal amount decreased to about euro 470 million. Securities from securitizations, and thus belonging to the ABS asset class (primarily RMBS), that have been in the portfolio for more than two years, are concentrated on AAA issues, they are not subject to US or European subprime mortgages (so called toxic securities), and correspond to a total amount of about euro 100 million. Equity investments have been managed along a tactic and diversified approach, with a contained exposure in the first months of the year, that was then gradually increased during the year up to important levels to take advantage of the positive macroeconomic news, as well as of the reduction in risk premiums on risk-bearing investments. Equity trades were carried out by using derivative instruments that made it possible to optimize the portfolio’s risk profile management at a time of high uncertainty. As with the other asset classes held in the portfolio, risks were reduced towards the end of the year. In 2009, the alternative investment portfolio, after ailing from a negative performance throughout 2008, posted positive returns, in line with the main world markets. Already active investment positions in Aletti Gestielle Alternative funds of funds were held, that were based on low and medium volatility strategies.
Group Treasury
As of 1 April 2009, treasury and foreign exchange activities, that were previously carried out in Banca Aletti, were centralized with the Parent company’s in the Group Finance Service.
Money Market
The expansionary policies introduced in September 2008 by the main Governments and Central Banks were instrumental in restraining the collapse of economic indicators in 2009 and stave off the demise of the financial system. Although we are far from experiencing a regaining of trust among market players, that was badly shaken by the Lehman case, still in 2009 we saw a gradual resumption of deals on capital markets.
Although in an uncoordinated way, Central Banks acted to expand the opportunities offered by their monetary policies, introducing Quantitative Easing elements to keep the cost of money close to zero and guarantee an unlimited access to liquidity.
New operating models were imposed on monetary markets: looking for counterparties with an adequate capitalization (required also by regulators and governments), cash exchange through collateralized instruments and additional guarantees to cover against financial and credit risks.
As to market rates in the Euro area, the abundant liquidity injected in the system through monetary policy actions drove short term rates well below the ECB base rate, which remained pinned at 1% since May. After the peaks in 2008, also Euribor rates (-2.24% on the three-month maturity) and the Euribor-Eonia spread (-0.93%) - which measures the credit risk perception on the very short term - were caught in a down-draft.
The ample liquidity in the system and the consequent carry trade opportunities translated into a significant and generalized interest rate reduction, and into a substantial resizing of both corporate and government credit spreads, including those of emerging countries. The curve slope remained positive as a result of a market that is discounting a possible exit from economic stimulus measures by Central Banks.
Against this backdrop, Banco Popolare’s money market deals focused on optimizing collateral management to support the Group’s liquidity requirements.
In step with structural initiatives, we sought a progressive extension of maturities by diversifying the funding channels which privileged opportunity logics in favor of the overall funding cost by resorting to collateralized instruments. The recourse to the monetary policy actions of the European Central Bank, often updated, was instead occasional and
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mainly aimed at diversifying the funding channels. Extensive volumes were exchanged on the collateralized interbank market (Mic), which allowed us to optimize the use of eligible collateral with positive impacts on the cost of funding.
Forex
Forex deals were characterized by a progressive depreciation of the dollar against the euro, especially in the second half of 2009, which between the lows of March (1.2460) and the highs of the beginning of December (1.5130) reported a percentage variation of about 21%. Only in the last days of December a quick retracement repositioned the exchange rate in the 1.44 area by year end.
Taking advantage of the market volatility, we focused mainly on short term, and significantly increased intra-day trading, which reported a marked rise in terms of volumes and number of trades, with good returns. Also in the second part of the year, the structure supported all the ancillary activities deriving from the transfer of the Office at the Parent company’s (market disclosure, contracts, operating instruments, credit facilities). In October, the “Single Exchange Rate Risk Position” project was completed, whereby all Exchange risk positions of the retail banks (Banche dei Territori) were concentrated in Banco Popolare’s single position, thus simplifying the risk structure and the flow management.
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RESULTS
Consolidated Balance sheet
Reclassified assets 31/12/2009 31/12/2009 31/12/2008 (*) Changes (in thousands of euro) without Italease
Cash and cash equivalents 580,798 580,788 710,004 -129,216 -18.2% Financial assets and hedging derivatives 14,607,639 14,797,455 12,593,074 2,204,381 17.5% Due from banks 9,566,348 10,105,649 12,482,048 -2,376,399 -19.0% Customer loans 95,350,225 85,951,262 81,096,693 4,854,569 6.0% Investments in associates and companies subject to joint control 1,637,221 2,796,815 1,457,405 1,339,410 91.9% Property and equipment 1,442,462 1,259,539 1,329,149 -69,610 -5.2% Intangible assets 5,294,942 5,288,116 5,333,248 -45,132 -0.8% Non-current assets held for sale and discontinued operations 1,915,762 281,573 186,691 94,882 50.8% Other assets 5,313,694 4,429,285 6,138,918 -1,709,633 -27.8% Total 135,709,091 125,490,482 121,327,230 4,163,252 3.4%
(*) Adjusted in compliance with IFRS 5 and pursuant to the changes introduced by the update of circular n.262/2005 (Bank Financial Statements).
Reclassified liabilities 31/12/2009 31/12/2009 31/12/2008 (*) Changes (in thousands of euro) without Italease
Due to banks 8,420,417 7,454,602 8,357,652 -903,050 -10.8% Due to customers, securities issued and financial liabilities measured at fair value 105,183,120 97,880,079 93,130,974 4,749,105 5.1% Financial liabilities and hedging derivatives 4,047,105 3,863,018 3,424,803 438,215 12.8% Provisions 1,474,904 1,280,884 1,403,816 -122,932 -8.8% Liabilities associated with non-current assets held for sale and 960,065 117,159 22,561 94,598 419.3% discontinued operations Other liabilities 3,511,268 3,059,779 4,799,765 -1,739,986 -36.3% Minority interests 579,373 374,760 403,644 -28,884 -7.2% Shareholders’ equity 11,532,839 11,460,201 9,784,015 1,676,186 17.1% - Share capital and reserves 11,265,801 11,257,828 10,117,387 1,140,441 11.3% - Net income (loss) for the period 267,038 202,373 -333,372 535,745 n.s Total 135,709,091 125,490,482 121,327,230 4,163,252 3.4%
(*)Adjusted in compliance with IFRS 5 and pursuant to the changes introduced by the update of circular n.262/2005 (Bank Financial Statements).
The reclassified balance sheet simply aggregates the items required in the balance sheet presentation under the Bank of Italy’s circular letter N. 262 dated 22nd December 2005.
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Consolidated income statement
Reclassified income statement 2009 2009 2008 (*) Changes (in thousands of euro) without Italease
Interest margin 1,991,236 1,952,692 2,240,242 -12.8% Profit (loss) on investments in associates and companies subject to 103,779 103,741 -13,618 joint control carried at equity Net interest, dividend and similar income 2,095,015 2,056,433 2,226,624 -7.6% Net fee and commission income 1,228,113 1,215,016 1,261,531 -3.7% Other revenues 181,669 -14,429 55,516 n.s Net financial income 185,856 268,251 196,792 36.3% Other operating income 1,595,638 1,468,838 1,513,839 -3.0% Net interest and other banking income 3,690,653 3,525,271 3,740,463 -5.8% Personnel expenses -1,522,758 -1,488,698 -1,485,363 0.2% Other administrative expenses -773,865 -746,680 -672,949 11.0% Net impairment of property and equipment and intangible assets -161,744 -156,293 -170,358 -8.3% Operating expenses -2,458,367 -2,391,671 -2,328,670 2.7% Profit from operations 1,232,286 1,133,600 1,411,793 -19.7% Net impairment of loans, guarantees and commitments -749,022 -673,993 -1,170,053 -42.4% Net impairment of other financial activities -31,680 -31,680 -199,457 -84.1% Net provisions for risks and charges -56,569 -50,730 -200,922 -74.8% Goodwill and equity investment impairments -9,132 -9,131 -873,796 -99.0% Profit (Loss) on disposal of equity and other investments 116,141 114,532 501,175 -77.1% Income (loss) before tax from continuing operations 502,024 482,598 -531,260 n.s Tax on income from continuing operations -240,275 -262,154 140,258 n.s Income (loss) after tax from continuing operations 261,749 220,444 -391,002 n.s Income (Loss) after tax of merchant banking investments and non-current assets held for sale (*) -3,810 -11,710 125,093 n.s After tax integration charges - -36,249 n.s Net income (loss) 257,939 208,734 -302,158 n.s Minority interests 9,099 -6,361 -31,214 -79.6% Parent company’s net income (loss) 267,038 202,373 -333,372 n.s (*) Inclusive of results of subsidiaries acquired through merchant banking investments.
Shown below are the reclassifications with respect to the balances illustrated in the official income statement: the figurative cost to fund the financial assets purchased to produce structured financial products for trading was reclassified from interest expense (item 20) to net financial income; dividends from shares classified among assets available for sale and assets held for trading (item 70) have been reclassified under net financial income; profit or loss on disposal of loans (item 100) have been consolidated with net write-downs/write-backs on impairment of loans, guarantees and commitments and credit derivatives; profit or loss on disposal or repurchase of financial assets available for sale and financial liabilities (to be found under item 100) have been reclassified under net financial income; tax and other expense recoveries (under item 230) have been directly deducted from G&A expenses instead of being itemized under other operating income; the depreciation of expense for improvements to third party assets (accounted for under item 230) was recognized in combination with impairment of property and equipment and intangible assets, instead of being itemized under other operating income and expense; the share of profit of associates carried at equity (item 240) was recognized under a specific item, that in combination with the interest margin makes up the aggregate called net interest, dividend and similar income; integration charges were shown in a specific item called “After-tax integration charges” instead of the relevant items making up the aggregate of Operating expenses and the associated tax; in the reclassified income statement, charges and expenses of associates referring to the merchant banking activities carried out by the Group, which do not fall within the application scope of IFRS 5 but practically represent discontinued operations, are recognized under the item Profit/(Loss) after tax on non-current assets held for sale and discontinued operations.
Attached to this annual report is a chart comparing the income statement items prescribed by the Bank of Italy’s Circular n. 262, of 22nd December 2005 with the reclassified income statement.
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Since 8 June 2009, after the closing of the Tender Offer period launched on all outstanding shares of common stock of Banca Italease, Banco Popolare acquired the majority of shares outstanding and as a result the control over the company. As of the second half, Banca Italease and its subsidiaries joined the consolidation scope of Banco Popolare. In compliance with IFRS 3, the consolidated financial statements of Gruppo Banco Popolare include the financial assets and liabilities pertaining to Gruppo Banca Italease as at 31 December 2009, while the 2009 income statement includes the income contribution of the companies belonging to Gruppo Italease only as at the second half.
The 2009 annual report was prepared by recognizing the effects of the acquisition of Gruppo Italease in compliance with the applicable international accounting standards, in particular IFRS 3, as the purchase price allocation process has been completed, and was determined to amount to 225.1 million with respect to the effective date of the acquisition (8 July 2009). Against this cost, the share of acquired shareholders’ equity (based on its book value) of the companies of Gruppo Italease totaled 226 million. The difference between the purchase price and the book value of assets and liabilities acquired through this transaction was allocated to the balance sheet assets and liabilities acquired through the business combination and, net of the minority interests, it came in at 190.6 million (difference between the fair value and the book value of the above balance sheet items). The residual difference, amounting to 191.5 million, was recognized through profit and loss as other operating income.
The main differences between the fair value and the book value of purchased assets and liabilities involved: property and equipment: difference between the fair value estimated on 1 July 2009 and the book value of some buildings; non-current assets held for sale: difference between the fair value estimated on 1 July 2009 and the book value of the assets and liabilities of Factorit S.p.A.; securities in issue: difference between the fair value estimated on 1 July 2009 and the book value of securities issued by Banca Italease. The marked difference is explained by the material change in creditworthiness attributed to Banca Italease on 1 July 2009 as compared with the issue date of the single debt securities; provisions for risks and charges: estimate of a contingent liability not recognized in Banca Italease’s balance sheet on 1 July 2009, as associated with the framework agreement signed by Banco Popolare and the other banks that at present make up the shareholding structure of Alba Leasing S.p.A. (Banca Popolare dell’Emilia Romagna, Banca Popolare di Sondrio and Banca Popolare di Milano). The agreement sets forth the modalities to transfer the risks and benefits deriving from securitized performing loans originated by the banking channel from Banca Italease and its subsidiaries to Alba leasing; tax liabilities: tax effect calculated on the above described differences between the fair values and the book values.
The 2009 result was therefore impacted by the residual acquisition difference and by the recognition through profit and loss of the differences - with respect to the acquisition date - between the value at which the assets and liabilities acquired with the business combination have been recognized in the financial statements of the related companies of Gruppo Italease and their fair value as measured upon allocating the purchase price. Illustrated below are the resulting P&L impacts: Interest income: the P&L impact was – 60.7 million on 31 December 2009 (-32 million in third quarter and 28.7 million in fourth quarter), and was generated by the lower value recognized during PPA to securities issued by Banca Italease as part of the business combination. The negative impact was due to the consequent addition of interest expense recognized by Banca Italease against said debt securities for the portion that was not repurchased after 1 July 2009; Other revenues: the impact was + 191.5 million on 31 December 2009. It’s the badwill resulting from the PPA referring to 1 July 2009 that was recognized through profit and loss in the fourth quarter; Net financial income: the impact was – 69.6 million on 31 December 2009 (-57 million in third quarter and -12.6 million in fourth quarter), again due to the lower value recognized during PPA to securities issued by Banca Italease as part of the business combination. The negative impact was due to the repurchase of said debt securities after 1 July 2009; Depreciation of property and equipment: the impact was + 7 million on 31 December 2009 as a result of the realignment of the value of some buildings to their fair value as measured by Banca Italease in fourth quarter 2009. The lower fair value had already been accounted for when measuring badwill; Provisions for risks and charges: the impact was + 100 million on 31 December 2009 as a result of the recognition by Banca Italease in fourth quarter of a provision for the contingent liability associated with the agreements signed with Alba Leasing S.p.A. and regarding the sale of the securitized loans originated by the banking channel. Also this provision had already been accounted for when measuring badwill; Profit on disposal of investments: the impact was – 7.2 million on 31 December 2009 and was due to the sale by Banca Italease in fourth quarter of buildings which had been recognized at a greater than their book value upon allocating the purchase price.
Net of +191.5 million referring to the badwill recognized in the third quarter, listed below are the P&L impacts in the third and fourth quarter 2009: net interest and other banking income: - 89 million in third quarter and – 41.3 million in fourth quarter; profit from operations: - 89 million in third quarter and – 34.3 million in fourth quarter;
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income/loss before tax : - 89 million in third quarter and + 58.5 million in fourth quarter; income tax:+ 28.8 million in third quarter and – 14.2 million in fourth quarter; minority interests: + 7.3 million in third quarter and – 5.8 million in fourth quarter.
The overall impact on the consolidated net income came in at -14.8 million on 31 December 2009 (-52.9 million in third quarter and + 38.1 million in fourth quarter). Including badwill, the total impact on the consolidated net income was +176.7 million on 31 December 2009 (+138.6 million in third quarter and + 38.1 million in fourth quarter).
As required by the adopted accounting standards, once the PPA was completed, the third quarter 2009 income statement, that had already been published, was restated to recognize the above described impacts with the correct timing.
The income statement of Gruppo Banco Popolare – both in 2009 and in the prior-year comparison - includes also P&L impacts deriving from the allocation of the merger difference referring to the business combination of Gruppo Banca Popolare Italiana on 1 July 2007. For a full and transparent disclosure, illustrated below are the impacts generated from the recognition of profit adjustments reported by the income-generating units acquired by Gruppo Italease and Gruppo Banca Popolare Italiana due to the higher values recognized in the consolidated financial statements on the date of effectiveness of the business combinations as a result of applying the accounting standard IFRS 3: Interest margin: the P&L impact was – 153.9 million on 31st December 2009 (-34.5 million in Q4) and -199.1 million on 31st December 2008, and is mainly attributable to the greater value recognized during PPA to loans acquired under the business combination; Other operating income: the impact was – 44.0 million on 31st December 2009 (-11 million in Q4 2009), primarily represented by the amortization of intangible assets having a defined useful life recognized upon the PPA. The impact on the income statement as at 31st December 2008 was – 83.0 million, of which 36.2 million relating to the greater value recognized during PPA to a minority stake sold as part of our merchant banking business, and 50.2 million to the amortization of the above mentioned intangible ass.
The following P&L impacts in the financial years under comparison were reported: net interest and other banking income: - 198 million in 2009 and – 282.2 million in 2008; profit from operations: - 202.1 million in 2009 and – 289.1 million in 2008; income/loss before tax : - 207.4 million in 2009 and – 780.1 million in 2008; income tax:+ 68 million in 2009 and +95.6 million in 2008; net loss on discontinued operations: -13 million in 2008; minority interests: +10 million in 2009 and +12.4 million in 2008.
The overall effect on the consolidated net income came in at -129.4 million on 31st December 2009 and -685 million on 31st December 2008.
Summarized below are the effects generated by material non-recurring events or transactions on the consolidated operating result of the periods under comparison. The following criteria are followed to identify non-recurring items: profit on the disposal of all fixed assets is considered non-recurring (Investments in associates and companies subject to joint control, tangible assets, financial assets available for sale, investments held to maturity and NPL portfolios); profit and loss on non-current assets held for sale are considered non-recurring; income components associated to combination or restructuring transactions (for ex. redundancy fund charges) are considered non-recurring; material income components that are not destined to repeat frequently (for ex. sanctions, impairment of fixed assets, effects caused by changes in regulations, exceptional results, etc.) are considered non-recurring; conversely, results generated by the Group’s merchant banking business and the material operating impacts caused by valuation aspects and/or by changes in parameters used in generally applied valuation methods are considered recurring.
Listed below are the income items classifiable as non-recurring, that have generated a total negative impact of 23.8 million on the operating result generated in 2009: - positive 22.1 million impact on profit (loss) on investments in associates and companies subject to joint control carried at equity as a result of the dividend paid by Agos S.p.A upon distributing the 2008 earnings, that were generated before the acquisition of the equity investment by Banco Popolare; - other revenues include 191.5 million revenues linked to the badwill from the combination of Gruppo Banca Italease; - negative 350.5 million impact on net financial income as a result of the increase in the book value of debt securities in issue measured at fair value owing to the improved creditworthiness of Banco Popolare in 2009; - profit on the disposal of stakes classified as available for sale, among which Delta S.p.A. and SIA-SSB S.p.A., had an overall impact on net financial income of 8.9 million; - costs incurred for early retirement schemes, totaling 13.2 million, posted in personnel expenses;
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- charges associated with the planned closedown of some branches, totaling 7.2 million, recognized in impairment of tangible and intangible assets and provisions for risks and charges; - an overall 9.1 million impact on impairment of goodwill and investments in associates and companies subject to joint control, as result of the write-down of the consolidated carrying value of some Investments in associates and companies subject to joint control held by the Group, and carried at equity; - 105 million profit made by the subsidiary Immobiliare BP, recognized in profit/loss on disposal of equity and other investments, as a result of the transfer of heritage buildings of high artistic value to the closed-end real estate fund “Eracle”, owing to the expiration of the preemption right held by the Italian Monuments and Fine Arts Service (Sovrintendenza alle Belle Arti), as part of the plan launched the prior year to valorize and rationalize the Group’s real estate assets; - profit on the partial sale of the equity investment held by the Group in Istituto Centrale Banche Popolari Italiane (3.7 million) and on the sale of other investments for 7.4 million, again recognized in profit/loss on disposal of equity and other investments; - 52.1 million charges, classified as income tax for the period on continuing operations, generated by the decision to settle almost all tax litigations regarding the pre-merger conduct of some companies belonging to the former Gruppo Banca Popolare Italiana, by resorting to a fast-track composition with immediate tax audit and remedy. This item was also positively impacted by the 31.8 million benefit from IRAP reimbursements and other contingent assets; - 3.8 million loss after-tax on discontinued operations almost entirely attributable to the disposal of merchant banking investments currently under finalization.
Note, that in the fourth quarter the charge debited in the second quarter and referring to the 21.7 million contribution to the Guarantee Fund for small- and medium-sized enterprises as a result of the issue of the “Tremonti bonds” was derecognized from the P&L and was directly deducted from equity reserves, as this accounting procedure is consistent with the nature of this charge, namely ancillary costs for the issued “Tremonti bonds”, that are classified as equity instruments.
Reclassified consolidated income statement – Quarterly evolution
For a full and transparent disclosure in compliance with Consob Regulation n. 11971 of 14 May 1999 and following amendments, regarding the preparation of quarterly reports, shown below is the quarterly evolution of operating results.
Reclassified income statement FY 2009 (*) (in thousands of euro) IV Q III Q (***) II Q I Q (**)
Interest margin 480,725 487,646 502,446 520,419 Profit (Loss) on investments in associates and companies subject to joint control 46,393 20,093 23,742 13,551 carried at equity Net interest, dividend and similar income 527,118 507,739 526,188 533,970 Net fee and commission income 341,422 296,334 325,184 265,173 Other revenues 14,118 171,832 -5,001 720 Net financial income -14,500 -66,880 -13,930 281,166 Other operating income 341,040 401,286 306,253 547,059 Net interest and other banking income 868,158 909,025 832,441 1,081,029 Personnel expenses -409,053 -382,024 -362,414 -369,267 Other administrative expenses -182,229 -200,926 -194,615 -196,095 Net impairment of property, equipment and intangible assets -44,917 -40,895 -38,331 -37,601 Operating expenses -636,199 -623,845 -595,360 -602,963 Profit from operations 231,959 285,180 237,081 478,066 Net impairment of loans, guarantees and commitments -256,167 -222,531 -137,493 -132,831 Net impairment of other financial transactions -15,015 -4,662 -8,817 -3,186 Net provisions for risks and charges -20,271 12,178 -32,577 -15,899 Impairment of goodwill and investments in associates and companies subject to -5,983 - -3,149 - joint control Profit (Loss) ) on disposal of equity and other investments 1,107 13,436 820 100,778 Income (loss) before tax from continuing operations -64,370 83,601 55,865 426,928 Tax on income from continuing operations -9,591 15,382 -36,669 -209,397 Income (loss) after tax from continuing operations -73,961 98,983 19,196 217,531 Profit (Loss) after tax from discontinued operations (****) 19,626 4,973 -28,006 -403 Net income (loss) for the period -54,335 103,956 -8,810 217,128 Minority interests 4,942 8,296 -5,590 1,451 Parent company’s net income (loss) -49,393 112,252 -14,400 218,579 (*) Adjusted for comparison to account for changes in consolidation scope and in discontinued operations under IFRS 5. (**) -11 million reclassified from "Net financial income” to “Interest margin” for comparability. (***) 21.2 million reclassified from "Net financial income" to “Interest margin". (****) Inclusive of the results of the subsidiaries acquired through our merchant banking business.
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Credit intermediation
To analyze the performance of the main balance sheet and P&L items for financial year 2009 on a like-to-like basis with the prior year, data as at 31 December 2009 were presented also without the contribution of the companies belonging to Gruppo Banca Italease, after the date of acquisition. Restated data are shown in column A of the tables below. For the sake of completeness, similar detailed tables are presented referring to the performance reported in the period by Gruppo Banca Italease, compared with the prior year’s data adjusted for comparison to account for discontinued operations under IFRS 5.
Direct funding
Direct Funding
120,000
100,000 ) 97,880.1 80,000 93,131.0
60,000 in millions of euro ( 40,000
20,000 31/12/2008 31/12/2009 without Italease
On 31 December 2009, direct funding reached 105,183.1 million; net of the contribution of the Group led by Banca Italease it totaled 97,880.1 million, as compared with 93,131 million on 31 December 2008, up by 5.1%. As to the various deal types, repurchase agreements reported a sharp reduction from 13,319.4 million to 8,547.4 million (-35.8%) as did certificates of deposits and other securities, down by 1,277.8 million (-36.9%). However this dynamic was offset by the growth in traditional direct customer funds (checking accounts and deposits), which went from 37,152 million at the end of 2008 to 43,622 million on 31 December 2009 (+ 17.4%). Also bonds enjoyed a marked year on year increase of 10.6%. The quarter on quarter increase was 4.5%. Household and small businesses funds increased by 9% year on year.
31/12/2009 31/12/2008 Abs.change % Change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Customer funds strictly speaking 47,107,600 46,942,372 41,494,197 5,448,175 13.1% - checking accounts and demand deposits 43,622,032 43,622,032 37,151,989 6,470,043 17.4% - time deposits 1,153,305 1,136,970 880,988 255,982 29.1% - certificates of deposit and other securities 2,332,263 2,183,370 3,461,220 -1,277,850 -36.9% Repurchase agreements 8,416,526 8,547,399 13,319,440 -4,772,041 -35.8% Bonds 49,658,994 42,390,308 38,317,337 4,072,971 10.6% Total direct funding 105,183,120 97,880,079 93,130,974 4,749,105 5.1%
In the period under examination the Group led by Banca Italease showed the following dynamics:
31/12/2009 30/06/2009 31/12/2008 Abs. change % Change (in thousands of euro) (A) adjusted Adjusted (B) (A-B) (A/B)
Customer funds strictly speaking 165,228 154,042 149,167 16,061 10.8% - time deposits 16,335 5,193 - 16,335 - certificates of deposit and other securities 148,893 148,849 149,167 -274 -0.2% Repurchase agreements 270,821 194,467 254,561 16,260 6.4% Bonds 8,100,059 11,496,145 13,392,775 -5,292,716 -39.5% Total direct funding 8,536,108 11,844,654 13,796,503 -5,260,395 -38.1%
Direct funding attributable to Gruppo Italease mainly comprised 1,115.2 million liabilities associated with outstanding securitizations and other 6,984.9 million worth of bonds issued. In the second half, Gruppo Italease did not carry out new securitizations or bond issues, while it early redeemed a 5 million euro bond on 27 October 2009, featuring a step-up structure and an original maturity on 27 October 2017. Under the Securitized loan agreement, liabilities associated with securitizations decreased by 1.5 billion for securitization securities sold on the market.
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The aggregate includes 148.9 million worth of Preferred Securities (nominal value of 150 million), classified in other securities.
Indirect customer funds
Measured at market values, at the end of December indirect customer funds totaled 77,212.6 million, up by 2.8% from 75,090.7 at the end of the prior year. As of the second quarter, also indirect customer funds started to report a trend reversal: after an uninterrupted volume decrease until 31st March 2009, the aggregate posted a growth rate of 3.9% in Q2, of 2.7% in Q3 and of 0.6% in Q4. Within the asset management aggregate, the marked drop in mutual funds and SICAV (-15.8%) and managed assets (-9.6%) was partly offset by the increase in insurance policies (+30.6%), mainly associated to the issue and sale of policies through Lawrence Life, under the bancassurance agreements signed with Gruppo Fondiaria-SAI. These new sales are partly backed by bonds issued by the Parent company (1,587.6 million included in the direct funding aggregate). Also assets under administration reported a positive dynamic, from 43,789.5 million on 31st December 2008 to 46,237.9 million on 31st December 2009, up by 5.6%.
Indirect customer funds
100,000
80,000 ) 75,090.7 77,212.6 60,000
40,000 in millions of euro ( 20,000
0 31/12/2008 31/12/2009 without Italease
(in thousands of euro) 31/12/2009 31/12/2008 Abs. change % change
Assets under management 30,974,667 31,301,160 -326,493 -1.0% - mutual funds and SICAV 9,995,987 11,867,152 -1,871,165 -15.8% - managed accounts invested in securities and in funds 9,908,714 10,959,558 -1,050,844 -9.6% - insurance policies 11,069,966 8,474,450 2,595,516 30.6% of which: Lawrence Life policies 1,587,622 - 1,587,622 Assets under administration 46,237,939 43,789,533 2,448,406 5.6% Total indirect customer funds 77,212,606 75,090,693 2,121,913 2.8%
Excluding administered and managed funds of institutional customers (mutual funds, banking foundations, merchant banks, leasing and factoring companies, investment companies, SICAV, fund managers, insurance companies, pension and other superannuation funds, central supervisory authorities and banking trade associations), managed and administered funds totaled 58,254.1 million, down 0.9% from 58,783.2 million on 31 December 2008. Total funding (direct funding + indirect customer funds), net of direct funds underlying insurance policies, added up to 180,808.1 million, up by 7.5% as compared with 31 December 2008.
On 31 December 2009, Gruppo Italease had no outstanding indirect funding transactions.
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Loans to customers
On 31 December 2009, gross loans reached 99,485.7 million, 88,871.9 without the contribution of Gruppo Italease, up by 6.1% from 83,768 million on 31 December 2008 (+1.8% in Q4). Also in the fourth quarter growth centered in households and small businesses, which loans increasing by 3.8% (+8.7% year on year) and 3% (+5.1% year on year), bearing witness of the unfailing support the Group is lending to the economies of its market territories. Loans below 250 thousand euro account for 93% of total loans, evidencing their high degree of granularity.
Gross customer loans
100,000
80,000 88,871.9 83,768.0 )
60,000
40,000 in millions of euro ( 20,000
0 31/12/2008 31/12/2009 without Italease
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Mortgages 42,943,825 41,801,744 39,817,532 1,984,212 5.0% Checking accounts 17,024,840 17,116,382 17,032,460 83,922 0.5% Finance leases 9,313,281 35,598 88,567 -52,969 -59.8% Repurchase agreements 2,016,603 2,016,603 1,250,578 766,025 61.3% Credit lines and other loans 24,051,676 24,980,935 22,907,556 2,073,379 9.1% Total net loans to customers 95,350,225 85,951,262 81,096,693 4,854,569 6.0%
Net of total write-downs and of the contribution of the group led by Banca Italease, loans came in at 85,951.3 million, up by 6% from 81,096.7 million on 31 December 2008.
Worth highlighting are mortgages, that increased from 39,817.5 million to 41,801.7 million (+5%) and repurchase agreements, which on 31 December 2009 totaled 2,016.6 million from 1,250.6 at year-end 2008. Also other loans reported a significant increase to 24,980.9 million (+ 2,073.4 million).
The portfolio of the group led by Banca Italease in the period under examination had the following makeup:
31/12/2009 30/06/2009 31/12/2008 Abs. change % change (in thousands of euro) (A) adjusted Adjusted (B) (A-B) (A/B)
Mortgages 1,666,135 2,077,727 2,157,288 -491,153 -22.8% Finance lease 8,815,588 14,275,063 15,408,928 -6,593,340 -42.8% Credit lines and other loans 2,159,237 1,120,077 1,404,781 754,456 53.7% Total net loans to customers 12,640,960 17,472,867 18,970,997 -6,330,037 -33.4%
On 31 December 2009 loans to customers stood at 12,641 million, confirming the downtrend that has been characterizing the whole prior year and 2009, with a 27.7% decrease over the end of June 2009 (-33.4% from year-start). The marked capital shortfall suffered by Banca Italease owing to the reported losses obliged the bank not to promote the production of new contracts and to manage the lease business already outstanding with customers, while in fact the portfolio continued to undergo its natural amortization. At the end of 2009, about 4.8 billion net customer loans were transferred to the company Alba Leasing, i.e., on 31 December 2009 they were no more part of the Group consolidated assets; 2.4 billion of the above loans are net non- securitized loans, while 2.4 billion are net securitized loans, whereby under the mentioned Securitized loan agreement all risks and benefits are transferred to Alba Leasing. This same agreement provides that, from within Banca Italease’s customer loans at the end of 2009, 1.3 billion emerge referring to junior notes and senior securities that were not sold on the market, and corresponding to the portfolio transferred to Alba Leasing.
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The tables below show cash loans to customers on 31 December 2009 compared with 31 December 2008.
Abs. change(A- (in thousands of euro) 31/12/2009 31/12/2009 (A) 31/12/2008 (B) % change(A/B) B) Gross impaired loans 13,306,786 8,455,387 5,492,216 2,963,171 54.0% Doubtful loans 4,856,731 3,056,138 2,105,564 950,574 45.1% Substandard loans 6,651,290 3,968,416 2,758,548 1,209,868 43.9% Restructured loans 860,323 674,685 150,520 524,165 348.2% Past dues 938,442 756,148 477,584 278,564 58.3% Gross performing loans 86,178,879 80,416,505 78,275,820 2,140,685 2.7% Total gross loans 99,485,665 88,871,892 83,768,036 5,103,856 6.1% Write-downs of impaired loans -3,562,346 -2,423,408 -1,937,401 486,007 25.1% Doubtful loans -2,198,437 -1,572,359 -1,118,529 453,830 40.6% Substandard loans -1,212,062 -730,194 -729,678 516 0.1% Restructured loans -106,155 -82,943 -32,058 50,885 158.7% Past dues -45,692 -37,912 -57,136 -19,224 -33.6% Write-downs of performing loans -573,094 -497,222 -733,942 -236,720 -32.3% Total write-downs -4,135,440 -2,920,630 -2,671,343 249,287 9.3% Net impaired loans 9,744,440 6,031,979 3,554,815 2,477,164 69.7% Doubtful loans 2,658,294 1,483,779 987,035 496,744 50.3% Substandard loans 5,439,228 3,238,222 2,028,870 1,209,352 59.6% Restructured loans 754,168 591,742 118,462 473,280 399.5% Past dues 892,750 718,236 420,448 297,788 70.8% Net performing loans 85,605,785 79,919,283 77,541,878 2,377,405 3.1% Total net loans 95,350,225 85,951,262 81,096,693 4,854,569 6.0%
The effects of the economic crisis clearly unfolded in the dynamic of credit quality. On 31 December 2009, total impaired loans (doubtful loans, substandard loans, restructured loans and past dues/overdrafts), gross of write-downs and net of Gruppo Italease, totaled 8,455.4 million, up by 54% from 5,492.2 million of 31 December 2008. Among impaired loans, gross doubtful loans (3,056.1 million) increased by 45.1% with respect to 31 December 2008. Substandard loans were the most hardly affected, with an increase of 1,209.9 million, from 2,758.5 million on 31 December 2008 to 3,968.4 million on 31 December 2009. However, upon preparing the 2008 annual report, it had already been highlighted that performing loans included positions for 502.7 million that in the first months of 2009 had already been reclassified as substandard loans. Gross past dues increased by 58.3%, from 477.6 million on 31 December 2008 to 756.1 million at the end of 2009, net of Gruppo Italease. The growth in past dues reported in the fourth quarter (+34%) is attributable to the first time adoption of the new classification criteria introduced by the Supervisory Authority during the year, which among other things lowered the time threshold for some loan classes to be classified as past due to 90 days.
Gross impaired loans
10,000
8,000 8,455.4 )
6,000
5,492.2 4,000 in millions of euro ( 2,000
0 31/12/2008 31/12/2009 without Italease
On 31 December 2009, the impaired to total customer loan ratio – gross of write-downs – stood at 9.51%, up by 2.96% with respect to 31 December 2008 (6.56%). Net of write-downs, it went from 4.38% on 31 December 2008 to 7.02% at year-end 2009.
The NPL to loan ratio – gross of write-downs – came in at 3.44%, as compared with 2.51% on December 2008. Net of write-downs, it stood at 1.73% from 1.22% on 31 December 2008.
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Gross NPL/Gross loans
3.44%
2.51%
31/12/2008 31/12/2009 senza Italease
On 31 December 2009 write-downs of impaired loans accounted for 28.7% of their total gross amount, with respect to 35.3% on 31 December 2008. More precisely, at the end of the year write-downs of doubtful loans accounted for 51.4% of their total gross amount (53.1% on 31 December 2008). Note, however, that as a whole 92% of doubtful loans have been written-down, written-off or collateralized.
The cash loan situation of the group led by Banca Italease shows the following dynamic:
31/12/2009 30/06/2009 31/12/2008 Abs. change % change (in thousands of euro) (A) adjusted Adjusted (B) (A-B) (A/B) Gross impaired loans 4,851,253 4,870,028 4,462,164 389,089 8.7% Doubtful loans 1,800,497 1,514,728 631,587 1,168,910 185.1% Substandard loans 2,682,824 3,235,310 3,651,466 -968,642) -26.5% Restructured loans 185,638 9,295 7,802 177,836 2279.4% Past dues 182,294 110,695 171,309 10,985 6.4% Gross performing loans 9,005,651 13,826,821 15,559,637 -6,553,986 -42.1% Total gross loans 13,856,904 18,696,849 20,021,801 -6,164,897 -30.8% Write-downs of impaired loans -1,138,938 -1,118,846 -952,596 186,342 19.6% Doubtful loans -626,078 -548,346 -287,784 338,294 117.6% Substandard loans -481,868 -559,324 -650,718 -168,850 -25.9% Restructured loans -23,212 -793 -773 22,439 2902.8% Past dues -7,780 -10,383 -13,321 -5,541 -41.6% Write-downs of performing loans -77,006 -105,136 -98,208 -21,202 -21.6% Total write-downs -1,215,944 -1,223,982 -1,050,804 165,140 15.7% Net impaired loans 3,712,315 3,751,182 3,509,568 202,747 5.8% Doubtful loans 1,174,419 966,382 343,803 830,616 241.6% Substandard loans 2,200,956 2,675,986 3,000,748 -799,792 -26.7% Restructured loans 162,426 8,502 7,029 155,397 2210.8% Past dues 174,514 100,312 157,988 16,526 10.5% Net performing loans 8,928,645 13,721,685 15,461,429 -6,532,784 -42.3% Total net loans 12,640,960 17,472,867 18,970,997 -6,330,037 -33.4%
With regard to Gruppo Italease, gross consolidated impaired loans reported a strong acceleration from the end of 2008. In spite of the fact that on 31 December 2009 about 240 million gross impaired loans (of which: non-performing about 90 million, substandard about 100 million, restructured about 6 million and past due about 44 million) were transferred to Alba Leasing (a company which is not part of the full consolidation scope), total impaired loans (non-performing, substandard, restructured, past-due/overdraft), gross of write-downs on 31 December 2009, totaled 4,851.3 million, up by 8.7% from 4,462.2 million on 31 December 2008. Gross non-performing loans (1,800.5 million) increased by 185.1% with respect to 31 December 2008. Substandard loans instead decreased by 968.6 million, from 3,651.5 million on 31 December 2008 to 2,682.8 million on 31 December 2009.
This evolution is a direct consequence of the impact of the macroeconomic events that took place between 2008 and the beginning of 2009 on the loan portfolio, characterized by large exposures on the real estate sector originated at the time when Gruppo Italease was having a strong commercial growth, pursued until the first months of 2007. The high concentration level of these impaired positions is confirmed by the fact that at the end of December 2009 about 72% of gross non-performing loans tied in with 30 business groups with contracts mainly referring to the real estate sector, and about 80% of gross substandard loans tied in with 30 business groups with contracts mainly referring to the real estate sector.
On 31 December 2009, the NPL to total gross customer loan ratio was 12.99%, up from 8.10% (adjusted) on 30 June 2009 (3.15% on 31 December 2008). This evolution was mainly due to entry of a restricted number of customers with big-ticket finance lease contracts on real estate assets. On the other hand, since these positions are effectively backed by guarantees represented by real estate, their entry caused the coverage ratio to decrease from 36.2% at the end of June 2009 to 34.8% in December 2009 (45.6% at the end of 2008). Net of write-downs of 626.1 million, on 31 December 2009 net doubtful loans stood at 1,174.4 million, accounting for 9.3% of total net customer loans (5.5% at the end of June 2009 and 1.8% on 31 December 2008).
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The gross substandard loan to total gross customer loan ratio was 19.4% on 31 December 2009, up from 17.3% on 30 June 2009. Write-downs of substandard loans came in at 481.9 million, generating a coverage ratio of 18%. Net of write-downs, net substandard loans stood at 2,201 million, accounting for 17.4% of total net customer loans (15.3% at the end of June 2009).
As a whole, write-downs of impaired loans on 31 December 2009 accounted for 23.5% of their total gross amount, up from 23% on 30 June 2009 (21.4% on 31 December 2008).
Financial assets
On 31 December 2009, Group financial assets totaled 14,607.7 million; net of the contribution of Gruppo Italease, which was affected also by the intercompany subscriptions of securities issued by Banca Italease, they added up to 14,797.5 million, up by 17.5% from 12,593.1 million on 31 December 2008, mainly as a result of the trading book. The aggregate breaks down as follows:
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Financial assets held for trading 11,930,649 12,196,848 10,033,368 2,163,480 21.6% Financial assets measured at fair value 183,526 183,526 311,375 -127,849 -41.1% Financial assets available for sale 2,056,466 2,049,115 1,625,154 423,961 26.1% Investments held to maturity 306,240 306,240 530,296 -224,056 -42.3% Hedging derivatives 130,758 61,726 92,881 -31,155 -33.5% Total 14,607,639 14,797,455 12,593,074 2,204,381 17.5%
Illustrated below is the breakdown by asset class:
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Debt securities 8,888,939 9,320,125 7,543,346 1,776,779 23.6% Equity securities 1,039,745 1,038,868 1,009,561 29,307 2.9% UCITS units 1,201,184 1,201,184 875,433 325,751 37.2% Trading and hedging derivatives 3,477,771 3,237,278 3,164,734 72,544 2.3% Total 14,607,639 14,797,455 12,593,074 2,204,381 17.5%
The tables below illustrate the breakdown by balance sheet item and by asset class of financial assets of the group led by Banca Italease in the period under considerations:
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 30/06/2009 (A) (B) (A-B) (A/B)
Financial assets held for trading 181,143 161,395 139,218 41,925 30.1% Financial assets available for sale 7,351 58,391 58,643 -51,292 -87.5% Investments held to maturity - - 124 -124 Hedging derivatives 151,333 150,109 123,006 28,327 23.0% Total 339,827 369,895 320,991 18,836 5.9%
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 30/06/2009 (A) Adjusted (B) (A-B) (A/B)
Debt securities 6,474 57,514 57,890 -51,416 -88.8% Equity securities 877 877 877 - 0.0% Trading and hedging derivatives 332,476 311,504 262,224 70,252 26.8% Total 339,827 369,895 320,991 18,836 5.9%
For Gruppo Banca Italease financial assets held for trading are represented by derivatives, mainly with corporate customers for OTC trading derivatives, where an out-of-court settlement is being reached on some contracts. Financial assets available for sale on 31 December 2009 were mainly represented by debt securities; no financial assets measured at fair value and Investments held to maturity were reported.
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On 31 December 2009, financial assets held for trading, net of Gruppo Italease, accounted for 82.4% of the Group financial assets, up by 21.6%. Shown below is the breakdown by type of financial instruments of financial assets held for trading.
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Debt securities 7,350,093 7,787,753 6,201,595 1,586,158 25.6% Equity securities 395,937 395,937 299,916 96,021 32.0% UCITS units 837,606 837,606 460,004 377,602 82.1% Financial and credit derivatives 3,347,013 3,175,552 3,071,853 103,699 3.4% Total 11,930,649 12,196,848 10,033,368 2,163,480 21.6%
Financial assets measured at fair value are mainly represented by investments in Undertakings for Collective Investments in Transferable Securities.
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Debt securities 9,814 9,814 50,202 -40,388 -80.5% Equity securities 3,118 3,118 6,075 -2,957 -48.7% UCITS units 170,594 170,594 255,098 -84,504 -33.1% Total 183,526 183,526 311,375 -127,849 -41.1%
Shown below is the breakdown of financial assets available for sale.
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Debt securities 1,222,792 1,216,318 761,253 455,065 59.8% Equity securities 640,690 639,813 703,570 -63,757 -9.1% UCITS units 192,984 192,984 160,331 32,653 20.4% Total 2,056,466 2,049,115 1,625,154 423,961 26.1%
Investments held to maturity are exclusively represented by debt securities, of which part is used for repos.
31/12/2009 31/12/2008 Abs. change % change (in thousands of euro) 31/12/2009 (A) (B) (A-B) (A/B)
Debt securities 306,240 306,240 530,296 -224,056 -42.3% Total 306,240 306,240 530,296 -224,056 -42.3%
Investments in associates and companies subject to joint control
Investments in associates and companies subject to joint control on 31 December 2009 totaled 1,637.2 million, from 1,457.4 million on 31 December 2008. The detailed analysis of companies under a significant influence (associates) is illustrated in the Explanatory Notes, Section B, Sub-section 10; described below are the year’s main transactions involving investments in associates and companies subject to joint control carried at equity.
As illustrated in the section devoted to noteworthy events for the year, on 26 January 2009 the Group subscribed the new share issue of the associate Popolare Vita for a total amount of 56.2 million. The deposit was tied in with the restructuring of the index-linked policies issued by Novara Vita (merged into in Popolare Vita), to protect the assets of Gruppo Banco Popolare customers.
In January we finalized the partial sale of the stake held in Istituto Centrale delle Banche Popolari Italiane corresponding to 36.9 million.
Again in January 2009, the Group subscribed the new share issue of the associate Istituto Centrale Banche Popolari Italiane (ICBPI) for a total amount of 17.5 million, thus raising the Group’s stake to 25.133%, plus the 0.016% interest held by Gruppo Banca Italease.
On 20 April 2009, the Group made a 6 million deposit in the future capital increase account of the associate Avipop Assicurazioni, in keeping with the decision met by the Special Shareholders’ Meeting of the associate to carry out a 22.5 million capital increase.
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In May 2009, after part of the credit facilities granted by Efibanca to Pantex International S.p.A. as part of its merchant banking activities were converted into risk capital, the Group increased its shareholding to 49.847%. As a result, Pantex International, which was previously recognized in financial assets available for sale, in this consolidated annual report is carried at equity at a consolidated carrying amount of 4.3 million.
On 7 May 2009, the liquidation of the associate Evoluzione 94 was completed, owing to which in October the Group recognized total net proceeds of 1.6 million. In this consolidated annual report, the shareholding is recognized at its realizable value, considering the past effects of the equity-method measurement.
In July, we subscribed Agos’s new share issue, as was approved by the company’s Special Shareholders’ Meeting of 8 July 2009, for a total amount of 22.1 million. In October, upon then finalization of the stock option plan, a further 8.4 million capital increase was carried out; the share subscribed by the Group amounts to 3.3 million.
Owing to the takeover of Gruppo Banca Italease, also the companies Alba Leasing S.p.A. (118 million), Renting Italease S.r.l. (2.1 million) and Aosta Factor S.p.A. (1.9 million) are carried at equity, while unlike 31 December 2008, Banca Italease and its subsidiaries are no longer carried at equity (77.6 million), but are consolidated on a line-by-line basis.
Finally, the carrying amount of equity investments held for sale is posted in item 150 “Non-current assets held for sale and discontinued operations”. On 31 December 2009, this item included also the consolidated carrying amount of the equity investments in Finoa (60 million) and Efibanca Palladio Finanziaria (0.4 million).
Shareholders’ equity and solvency ratios
On 31 December 2009, the consolidated shareholders’ equity, inclusive of valuation reserves and of Net income (loss) for the year, totaled 11,532.8 million. Net of the negative impact generated by the consolidation of Gruppo Italease (totaling 72.6 million, of which 64.6 million resulting in less net income), the shareholders’ equity came in at 11,460.2 million. Of the increase reported over the period, 1,450 million originated from the issue on 31 July 2009 of the hybrid financial instruments under art. 12 of LD 185/08.
Consolidated shareholders’ equity
12,000
11,460.2 10,000 ) 9,784.0 8,000
6,000 in millions of euro ( 4,000
2,000 31/12/2008 31/12/2009 without Italease
On 31 December 2009, the consolidated regulatory capital totaled 9,958 million, while Tier 1 amounted to 7,124.8 million. On 31 December 2009, the Group’s TIER 1 capital ratio (Tier 1 capital over RWA) came in at 7.69%, while the total capital ratio (regulatory capital plus third level subordinated securities issued to cover market risks over risk weighted assets) was 10.75%.
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Reconciliation between the Parent company’s and the consolidated shareholders’ equity and net income
Shareholders’ Net income (loss) (in thousands of euro) equity for the year
Balance as at 31/12/2009 as in Parent company’s accounts 10,355,274 240,047 Write-off of dividends collected in the period from fully consolidated companies and companies -540,038 carried at equity Derecognition of intercompany capital gains from discontinuing and contributing operations -193,570 -386 Difference between the shareholders’ equity of consolidated associates and their carrying 1,201,052 amount, net of minority interests Net income (loss) for the period of consolidated associates, net of minority interests 505,948 Difference between the pro-rata value of the shareholders’ equity and the carrying amount of 170,083 Investments in associates and companies subject to joint control carried at equity Group’s share of profit for the period of associates carried at equity 61,467 Balance as at 31/12/2009 as in consolidated accounts 11,532,839 267,038
Consolidated income statement
Illustrated below, are the dynamics of the key profitability highlights for financial year 2009, reported also without the contribution of the group led by Banca Italease for the second half, compared with the previous year. As already explained, restated data are shown in column A of the tables below.
In a scenario characterized by rapidly plummeting interest rates, interest margin stood at 1,991.2 million. Net of the contribution of Gruppo Italease, it totaled 1,952.7, down by 12.8% from 2,240.2 million in 2008. On a more comparable basis, if we strip out the contribution of the 33 branches sold on 1 September 2008 to Credito Emiliano from the 2008 interest income, it declined by 12% from 31 December 2008. This drop is mainly attributable to the marked fall of market rates in the last twelve months, with the one-month Euribor diving from 4.04% at the end of 2008 to 0.45% at the end of 2009. As of the third quarter, interest income was also negatively affected by the elimination of the maximum overdraft commission. Interest margin in Q4 came in at 480.7 million, as compared with 487.6 million in third quarter. Also Gruppo Italease reported a sizable drop-off of its interest margin, which went from 219.4 million in 2008 to 164.6 million at the end of 2009, mainly driven by a decrease in loans, which in turn was caused by the need to manage new business, within the restraints posed by financial funding and by the intervening capital shortfall, as well as by the increase in the average cost of funding. Gruppo Italease’s contribution in the second half of the year was 38.5 million.
Net interest income
2,800
2,450 )
2,100 2,240.2
1,952.7 1,750 in millions of euro ( 1,400
1,050 31/12/2008 31/12/2009 without Italease
Profit/loss on investments in associates and companies subject to joint control carried at equity totaled 103.8 million, and includes the share of profit/loss of the main associates, among which Agos-Ducato for 64.8 million, Istituto Centrale delle Banche Popolari Italiane for 13.1 million, Arca SGR for 2.8 million, Popolare Vita for 12.7 million, Avipop Assicurazioni for -8.7 million, Energreen for -1.8 million and Centrosim for -1 million. It also includes the dividend paid by Agos-Ducato upon the profit distribution carried out before Banco Popolare acquired the equity investment, totaling 22.1 million and considered a non-recurring item. In 2008, companies carried at equity made a negative contribution of -13.6 million, owing to 47.9 million non-recurring items from the associate Popolare Vita.
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Net interest, dividend and similar income added up to 2,095 million, 2,056.4 million net of the contribution of the group led by Banca Italease, down by 7.6% from 2,226.6 million in 2008.
Net fee and commission income stood at 1,228.1 million, 1,215 million net of the Italease Group, down by 3.7% from 1,261.5 million in 2008. In the fourth quarter, net fee and commission income was 341.4 million, as compared with 296.3 million in the third quarter. The year on year reduction of commission income is mainly due to the contraction of management, brokerage and advisory services (-78.2 million, -12%) and more precisely to the flows generated by asset management (-87.3 million, -38%). However, this negative performance was partly offset by the growth of other commissions (+31.7 million, +5.2%).
Net commission income
1,500
1,200 1,261.5 ) 1,215.0
900
600 in millions of euro ( 300
0 31/12/2008 31/12/2009 without Italease
2009 2008 Abs. change % change (in thousands of euro) 2009 (A) (B) (A-B) (A/B)
Management, brokerage and advisory services 573,035 573,687 651,897 -78,210 -12.0% Administration and management of checking accounts and other loans to retail customers and overdraft facility fee (so called CDC) 388,028 388,041 364,423 23,618 6.5% Payment and collection services 112,294 112,726 120,843 -8,117 -6.7% Guarantees given 54,084 54,458 53,169 1,289 2.4% Other services 100,134 86,104 71,199 14,905 20.9% Total net fees and commissions 1,227,575 1,215,016 1,261,531 -46,515 -3.7%
The table below shows a breakdown of net commissions on management, brokerage and advisory services.
2009 2008 Abs. change % change (in thousands of euro) 2009 (A) (B) (A-B) (A/B)
Asset management 142,561 142,561 229,877 -87,316 -38.0% Distribution of third party services 296,940 297,592 274,793 22,799 8.3% Securities sale and distribution 47,061 47,061 67,200 -20,139 -30.0% Custodian bank 15,043 15,043 22,745 -7,702 -33.9% Order collection 52,937 52,937 37,744 15,193 40.3% Trading of financial instruments 12,130 12,130 15,931 -3,801 -23.9% Currency trading 4,311 4,311 5,208 -897 -17.2% Securities custody and administration 4,962 4,962 3,446 1,516 44.0% Advisory services 2,119 2,119 5,552 -3,433 -61.8% Off-branch sale of securities, products and services -5,029 -5,029 -10,599 5,570 -52.6% Total 573,035 573,687 651,897 -78,210 -12.0%
Also Gruppo Italease experienced a drop in Net fee and commission income (-19.4% over 2008), as a result of the sizable contraction of new lease business and of medium/long term loans.
Other revenues stood at 181.7 million; net of the contribution of Gruppo Italease, amounting to 196.1 million, of which 191.5 million generated by the recognition of the badwill upon allocating the purchase price, net revenues came in at 14.4 million. In the prior year, net revenues totaled 55.5 million, which included net positive non-recurring items for 94.1 million related to the sale of a business line comprising 33 branches.
Net financial income added up to 185.9 million, 268.3 million excluding the effect of the consolidation of Gruppo Italease of -82.4 million, mainly as a result of the recognition of the reversal effects of PPA, as compared with 196.8 million in the
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prior year. Net financial income includes also the effect of the book value increase of debt securities in issue, measured at fair value, owing to the upgrading of the creditworthiness of Banco Popolare with respect to end 2008. The negative P&L impact for the year was 350.5 million (-17.2 million in Q4), as compared with a positive impact of 215.7 million in 2008. Net of this impact and of other minor non-recurring items, net financial income on 31 December 2009 added up to 609.8 million, as compared with the loss of 47.8 million posted in 2008, against a backdrop dominated by the market crisis. This result was also positively affected by the effect of interest rate derivatives entered in 2008 to offset the negative effects on interest income as a result of the expected decrease in interest rates. The actual decline of interest rates led to the recognition of proceeds generated by the collection of spreads and the fair value change of derivatives as compared to year- start of about 120 million.
Illustrated below is the breakdown of the main constituents of net financial income:
2009 2008 Abs. change % change (in thousands of euro) 2009 (A) (B) (A-B) (A/B) Net trading income and income from 495,387 500,282 -191,847 692,129 proprietary portfolio Fair value changes in hedge relationships -8,264 -303 -3,620 -3,317 -91.6% Profit/loss from purchase / sale: 30,373 99,914 48,049 51,865 107.9% - financial assets available for sale (AFS) 8,589 8,949 49,531 -40,582 -81.9% - Investments held to maturity (HTM) 6 6 5 1 20.0% - financial liabilities 21,778 90,959 -1,487 92,446 Profit/loss on financial assets and liabilities -342,225 -342,225 309,695 -651,920 measured at fair value of which: creditworthiness -350,513 -350,513 215,740 -566,253 Dividends from investments in associates and 10,585 10,583 34,515 -23,932 -69.3% companies subject to joint control Total 185,856 268,251 196,792 71,459 36.3%
The consolidation of Gruppo Italease generated a negative impact on net financial income of 82.4 million; in addition to the mentioned PPA reversal effect, it was also impacted by the charges associated with OTC trading derivatives as a result of settlements and contract terminations with customer and banking counterparties, and of fair value changes on outstanding hedging transactions.
Other operating income (operating income other than interest, dividend and similar income) totaled 1,595.6 million, 1,468.8 million net of Gruppo Italease, as compared with 1,513.8 million in 2008.
Net interest and other banking income (net interest, dividend and similar income + other operating income) added up to 3,690.7 million, 3,525.3 net of Gruppo Italease, down by 5.8% from 3,740.5 million on 31 December 2008. Net of non- recurring items, it came in at 3,844.8 million with respect to 3,455.3 million in 2008 (+ 11.3%).
Total income
5,000
4,000 ) 3,740.5 3,000 3,525.3
2,000 in millions of euro ( 1,000
0 31/12/2008 31/12/2009 without Italease
Personnel expenses stood at 1,522.8 million, 1,488.7 net of Gruppo Italease, reporting a slight increase from 1,485.4 million on 31 December 2008 (+0.2%). Net of non-recurring costs for early retirement schemes for redundant personnel after the reorganizations (13.2 million), personnel expenses decrease by 0.7% over the prior year.
Other administrative expenses totaled 773.9 million, 746.7 million without Gruppo Italease, up by 11% from 672.9 million in 2008. This increase was generated by the fact that since the beginning of the year VAT started to be applied to intercompany service provisions (58 million), as well as by the recognition of higher rents (48 million) as a result of the finalization of the contribution of a significant number of operating real estate units owned by the Group to the real estate
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fund Eracle at the end of last year. The real estate contribution was immediately followed by the sale of all fund units to institutional investors and to draw up the rental contracts for the above real estate units.
Net impairment of property, equipment and intangible assets totaled 161.7 million, 156.3 net of Gruppo Italease, as compared with 170.4 million the year before. The decrease is due to the fact that as of 2009 the depreciation referring to the real estate units transferred to the Eracle fund is missing. The reported D&A takes already into account the charge generated by the reduction in useful life of the assets of branches that are planned to be closed as part of the general branch reorganization plan (5.1 million). Net of these discontinuity elements, represented by the change in fiscal regulations and the effect of transferring the real estate units to the Eracle Fund, expenses decreased by 32 million (-4.6%) with respect to the previous year, reflecting our constant effort to contain costs.
As a result, operating expenses came in at 2,458.4 million, 2,391.7 million net of Gruppo Italease, up by 2.7% from 2008. Net of non-recurring items, the above described increase in revenues drove our cost income ratio down to 61.7% from 67.4% at year-end 2008.
Profit from operations amounted to 1,232.3 million, 1,133.6 million net of Gruppo Italease, as compared with 1,411.8 million on 31 December 2008. Net of non-recurring items, it came in at 1,471.4 million, up by 30.6% from 1,126.6 million the prior year.
Net impairment of loans, guarantees and commitments totaled 749 million, of which 75 million attributable to Gruppo Italease. The extraordinary events occurred in 2008 had a significant impact on that year’s write-downs, which ran up to 1,170.1 million and included the impact of the major defaults at international and domestic level. The cost of credit, represented by net loan write-downs to net loan ratio, was 76 b.p. year on year.
Net impairments of other financial activities amounted to 31.7 million (199.5 million on 31 December 2008) and were almost entirely represented by the impairment of securities classified as financial assets available for sale to realign their value to the fair value expressed by market quotes at the end of the year. The 2008 quarterly figures were affected by non- recurring items represented by the impairment of securities held in portfolio, among which Lehman Brothers, Hopa and Banca Network Investimenti.
Net provisions for risks and charges added up to 56.6 million, 50.7 net of Gruppo Italease, from 200.9 million in 2008. They include the additional charge deriving from the commitments undertaken by the Group to protect customers holding index-linked policies backed by securities issued by Icelandic financial institutions.
Impairments of goodwill and investments in associates and companies subject to joint control totaled 9.1 million, and refer to the impairment of the carrying amount of some investments in associates and companies subject to joint control held by the Group, consolidated along the equity method (among which Gruppo Comital for 3.1 million, Efibanca Palladio Finanziaria for 3.2 million, Centrosim for 1.4 and Ch&f Bertolini for 1.1 million). No goodwill impairment was recognized. The previous year, against an unprecedented backdrop, impairments of goodwill and investments in associates and companies subject to joint control totaled 873.8 million.
Profit/loss from sale of equity and other investments totaled 116.1 million, 114.5 million net of Gruppo Italease, and includes the capital gain of 105 million, gross of tax effect, generated by the transfer to the Eracle fund of the heritage buildings with high artistic value as part of the plan launched the prior year to valorize and rationalize the Group’s real estate assets. This item also includes the profit on the partial sale of the stake held by the Group in Istituto Centrale Banche Popolari Italiane (ICBPI), of 3.7 million, plus additional net profit on the disposal of minor equity and other investments of 7.4 million. In 2008, it came in at 501.2 million and it included the capital gain on the transfer of unencumbered property to the Eracle Fund.
Income/Loss before tax from continuing operations posted a positive balance of 502 million, 482.6 million net of the contribution of the group led by Banca Italease, as compared with a loss of 531.3 million the year before. Net of non- recurring items, it came in at 717.8 million.
Profit/loss after tax on discontinued operations posted a negative balance of 3.8 million (11.7 million net of Gruppo Italease), mostly as a result of the sales under finalization of merchant banking investments. In 2008 it showed a profit of 125.1 million and it included the contribution, inclusive of the capital gain on disposal, of Ducato and Banca Popolare di Mantova, that were sold at the end of the year.
Tax on income from continuing operations added up to 240.3 million (262.2 million net of the consolidation effects of Gruppo Italease) and include additional charges of 52.1 million (on top of what already set aside for this purpose in the financial statements of 31 December 2008) as a result of the decision to settle outstanding tax litigations regarding the conduct of some companies belonging to the former Gruppo Banca Popolare Italiana, by resorting to a fast-track composition with immediate tax audit and remedy. It also includes 31.8 million net non-recurring revenues generated among others by the recognition of IRAP tax credits referring to previous years and for which a reimbursement application was filed.
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Net of a minority interests of 9.1 million, net income (loss) for the year came in at 267 million, as compared with the 333.4 million loss posted in FY 2008. Italease made a positive contribution of 64.6 million, resulting from the sum of the loss reported by Italease after the takeover by Banco Popolare (-112.1 million) and the gain from the recognition of the “badwill” net of PPA’s reversal effects (+176.7 million). Net of Italease’s contribution and the impact of the above described non-recurring items, Gruppo Banco Popolare would have generated a net income (loss) for the year of 376.8 million.
Rating and stock performance
Group Rating
In 2009 the Group entertained a constant dialogue with all three rating agencies. 8 meetings and 1 conference call were organized, to analyze the financial profile, the risk profile and the strategy of Gruppo Banco Popolare. In March 2009, following the announcement of the Tender Offer on Banca Italease, the rating firms Fitch and S&P downgraded both the short and long term ratings of Banco Popolare by one notch, on 19/03/2009 and 26/03/2009, respectively. Still on 19/03/2009, Fitch put the long term rating on watch for a possible downgrading, while Standard & Poor’s put the long term rating on watch for a possible downgrading on 19/12/2009. In addition to hinting at a desirable capital strengthening in an operational context that was perceived as being riskier, these actions reflect the expectation of a negative impact from the consolidation of Banca Italease on the Group’s financial profile. As to Moody’s Investors Service, on 17 March 2009 it had put Banco Popolare’s ratings on watch for a possible downgrading, then confirmed the ratings on 1 July 2009.
The table below compares the Group ratings on 31/12/2009 with those on 31/12/2008.
Ratings on 31/12/2009 Ratings on 31/12/2008 Rating firm Rating (‘Outlook’ or ‘Watch’ in brackets) (‘Outlook’ in brackets) A- A Long term (IDR) (negative ‘Watch’) (*) (negative ‘Outlook’) Fitch Short term (IDR) F2 F1 A2 A2 Long term (stable ‘Outlook’) (stable ‘Outlook’) Moody’s Short term P-1 P-1 A- A Long term S&P (negative ‘Watch’) (**) (negative ‘Outlook’) Short term A-2 A-1 Long term ratings refer to senior debt. (*) put on watch on 19th March 2009 (‘Rating Watch Negative’). (**) put on watch on 17th December 2009 (‘CreditWatch Negative’).
The table below summarizes the ratings of Gruppo Banco Popolare and those of its main subsidiaries, including ratings other than those referring to short and long term debt (data updated on 15 March 2010).
Banco Banca Banca Rating Credito Bergamasco Popolare Aletti Italease Long term (IDR) A- (*) BBB+ (**) Short term (IDR) F2 F2 (**) Fitch Individual C E Support 2 2 Long term A2 Baa3 Moody’s Short term P-1 P-3 Financial Strength C- E+ Long term A- A- A- S&P Short term A-2 A-2 A-2 Long term ratings refer to senior debt. (*) put on watch on 19 March 2009 (‘Rating Watch Negative’). (**) put on watch on 7 July 2009 (‘CreditWatch Negative’).
The ratings of Credito Bergamasco and Banca Aletti tracked the ratings of Banco Popolare. Instead, all the main ratings of Banca Italease were upgraded at the end of the Tender Offer launched by Banco Popolare.
Banco Popolare stock
The Banco Popolare stock is listed on Borsa Italiana; trading started on July 2nd, 2007, following the merger between Gruppo BPVN and Gruppo BPI. On January 2010, 640,482,201 shares of common stock of Banco Popolare were outstanding, with a par value of euro 3.60 each, corresponding to euro 2,305,735,924.00.
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The table below summarizes the weight of Banco Popolare in some of the main Italian and European indexes where the stock was represented in January 2010.
Index % Weight
FTSE Italia All-Share 1,038 FTSE Italia All-Share Banks 3,437 DJ Euro Stoxx 0,135 DJ Euro Stoxx Banks 0,783
NB: weighted values were updated on 25 January 2010 (source: Bloomberg).
The chart below shows the performance of the shares of Banco and of Credito Bergamasco, also listed on Borsa, as of 01/02/2009, compared to the performance of the FTSE MIB index (which represents 40 primary Italian securities). In 2009, the Italian stock market had an overall positive performance, stock prices hit their lowest low in March, when the economic and financial crisis was at its worst, then gradually recovered in the following months and closed the year at +21% (including distributed dividends) compared with year end 2008. The Banco Popolare stock in 2009 had a more volatile performance, mainly owing to the vicissitudes associated with Banca Italease, on which Banco on 15/03/2009 announced the launch of a tender offer. Its price was at its lowest in March at 1.88 euro, in synch with equity markets, then suddenly picked up in the two following months, reaching its highest high for the year at 7.24 euro, then consolidated at around 5 euro in June and July. The stock went back to 7 euro in the third quarter, along the track of the equity market rallies, driven by the growing expectations of an economic recovery from 2010, and finally ended the year at 5.27 euro, at the same level of the end of 2008.
Banco Popolare and Credito Bergamasco stock performance as compared with FTSE MIB (02/01/2009 – 30/12/2009)
60%
40%
20%
0%
-20%
-40%
-60%
-80% 02/01/09 16/01/09 30/01/09 13/02/09 27/02/09 12/03/09 27/03/09 10/04/09 24/04/09 08/05/09 22/05/09 05/06/09 19/06/09 03/07/09 17/07/09 31/07/09 14/08/09 28/08/09 11/09/09 25/09/09 09/10/09 23/10/09 06/11/09 20/11/09 04/12/09 18/12/09
Banco Popolare Credito Bergamasco FTSE MIB
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RISK MANAGEMENT
Generic Risks
Main risks and uncertainties facing the Group
Illustrated below are the main risk classes to which the Group is exposed as a result of its business activities.
Credit risk: is the risk that a Group borrower (which includes also counterparties in financial transactions with OTC derivatives – in this case it is more precise to speak of counterparty risk) may fail to perform on an obligation, or that his or her credit standing deteriorates. Closely connected with credit risk, if not an actual constituent, is the concentration risk, emerging from exposures to a group of counterparties that are connected to one another or belong to the same economic sector, or perform the same business, or belong to the same geographical area. The assessment of possible losses that could be incurred with regard to a single credit exposure or to the total loan portfolio is an inherently uncertain activity and depends upon many factors, among which, the general economic performance, or the economic performance of single manufacturing sectors, the change in the rating of single counterparties, structural and technological changes within borrowing companies, a deterioration of the competitive position of counterparties, the possible mismanagement of companies or of the borrowing counterparties, the growing indebtedness of households and other exogenous factors, such as legal and regulatory requirements. The lending policy adopted by the banking Group devotes a strong attention to containing risk through a stringent credit analysis at the time of granting the loan, geographical and sector diversification of loans, acquisition of guarantees, whenever necessary, securing the granted loan, and an accurate monitoring of the evolution of the lending relation. In general, the Group’s lending activity is mainly performed in areas characterized by a diversified business and entrepreneurial structure. As a result, the loan book risk is spread across various business sectors. The banking Group keeps its loan book under constant monitoring, analyzing the evolution of its risk-profile, of lines of credit, and line utilization by economic sector, region, customer segment and type of loan. A special focus is devoted to having internal rules and regulations clearly define corporate functions/units in charge of managing risk determinants and the procedures to be adopted to monitor and contain risk within preset levels in compliance with assigned targets. As to guarantees, the residual risk is managed, associated with the possibility that generally accepted techniques to mitigate credit risk used by banks may turn out to be less effective than expected. An internal policy has been implemented throughout the entire Group to deal with this risk, governing the acquisition, finalization and management of guarantees. A special focus was devoted by Gruppo Banco Popolare to the assessment of creditworthiness of banks and institutional counterparties (investment banks and financial companies), in particular with regard to financial transactions (trading of derivatives and money market instruments, lending, investments in bonds). The key principles underlying the management of risk originated by these counterparties are: centralization of the lending process at the parent company; internal system for rating assignment and periodic revision (supplementing the rating assigned by international rating firms); daily measurement and control systems monitoring credit exposure and the compliance with ceilings; minimization of the risk generated by OTC derivative trading by making a wide use of mechanisms documenting collateral arrangements (Credit Support Annex agreements with all the main counterparties).
Market risk: is represented by the possibility that the Group may generate less revenues than expected, or suffer from depreciation of balance sheet items or capital losses from financial open positions, due to sharp and adverse movements in market rates or prices, in particular interest rates, stock prices, exchange rates, and the associated volatilities (generic risk), or due to events that may impair the issuer’s redemption capability (specific risk). Market risks can materialize both with regard to the trading book, which includes trading and treasury financial instruments and the associated derivative instruments, and with regard to the banking book, which includes all other financial assets and liabilities. In this case, it can also be called banking book Interest Rate Risk, referring to the possibility of loss caused by potential changes in interest rates, and banking book Equity Risk, referring to the possibility of a decrease in fair value of equity securities in the banking book in relation to the market volatility or to the situation of single issuers. With regard to trading books, the market risks stemming from the commercial activities performed by the Group banks are systematically transferred over to the subsidiary Banca Aletti. The risk exposures falling on the Parent company are associated with the investment portfolios, whose sub-advisory is delegated to Banca Aletti (residual exposures falling on the commercial banks are marginal). The main risk factor is the interest rate associated with bond portfolios, most of which have a floating rate or are hedged by asset swap structures, with a very contained total duration. Also the risk associated with single equity or bond issuers is managed very conservatively. The main market risks taken on by Banca Aletti are associated with interest rate and equity risk exposures as part of the trades carried out on cash and derivative markets. The exposure to the exchange rate risk is marginal. Market risk is measured by way of specific estimate and control models with specific risk limits, assigned to the function in charge of managing this risk, and adequate monitoring and check procedures. In key with the market’s financial innovation, in particular in the area of derivatives, the Group pursues a constant evolution of financial instrument valuation and risk assessment methodologies and systems, especially with more complex instruments and their related market parameters.
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As to the interest rate risk associated with banking books, the Group adopted a system of prudential limits, targeted for the single companies and approved by the competent corporate Boards, aiming at pegging the possible impact from sudden hikes or drops of market interest rates on interest income and on capital value.
Liquidity risk: is represented by a possible instability caused by a negative mismatch between incoming and outgoing cash flows, which can occur in particular on the short term, if not adequately covered by liquidity reserves represented by available for sale securities and eligible for refinancing with the European Central Bank. A special attention is paid to this risk, which may possibly materialize mostly in the presence of exceptional events, such as market liquidity crunches, and may result in the banks being unable to fulfill payment obligations. This risk is managed and minimized by changing the funding source mix, and by increasing the reserves of securities eligible for refinancing to counter unexpected cash outflows. Right from its incorporation, the Group adopted a set of limits, both for the so called operating or treasury liquidity, and for the structural liquidity generated in the banking book, which is constantly monitored and fine-tuned. Moreover, upon approval of the Corporate Boards, a Liquidity Policy was implemented, supplemented with a specific Liquidity Contingency Plan, to guarantee a timely and efficient management in case of liquidity crisis or stress. The Plan fixes specific early warning indicators that can forewarn of liquidity stress conditions associated with market crises or Group-specific crises; these indicators are monitored and controlled on a daily basis.
Operational Risk: is the risk of incurring losses as a result of the inappropriateness or the malfunctioning of procedures, of mistakes or shortcomings of human resources and internal systems, or external events. The legal risk is included, while the strategic and reputational risks are not. Among the main sources of operational risk there are: the instability of operational processes, insecure information systems, a growing use of automation, the outsourcing of corporate functions, the use of a small number of suppliers, strategy changes, frauds, mistakes, personnel recruitment, training and retention, and finally social and environmental impacts. It is not possible to identify a prevailing source of operational risk constantly present within the Group, since said risk is inherent in all corporate processes and activities. This leads to the implementation of widespread risk mitigation and management actions, in particular by transferring the risk over by way of insurance instruments and/or outsourcing, by constantly improving process efficiency (control enhancement and re-engineering) and by checking that the latter are compliant with existing regulations.
Business risk: is the risk of incurring losses, in terms of a decrease in expected net interest and other banking income (net of the credit and market risks), due to changes in the macro- or micro-economic environments, leading to a volume reduction and/or income squeeze, that may weigh down on the bank’s ability to make profits. To this regard, the Group is exposed to the risk of fluctuations of commission income from investment services. This risk is managed and minimized through commercial policies and actions aimed at building customer loyalty, so as to favor a stable service provision activity with a constant income flow, and at maintaining a high value added and innovative business offer, in line with our customers’ present and future needs.
Strategic risk: is the risk of suffering from a decrease in income or capital as a result of changes in the competitive scenario or of wrong strategic business decisions, of an inappropriate implementation of strategic decisions, of a poor or missing reaction to changes in the competitive scenario. For example, the risk may come from an unexpected evolution of key indices used as a key reference for the strategic plan (for example projected levels of GDP or inflation, household savings, expected corporate investments in different economic sectors or geographical areas, etc.), diverging from market expectations, leading to a positive effect on the Group’s expected results, which then upon consolidation may not be fully realized. The constant monitoring of operating performance, of the company’s key financials and of all the other important variables, be they internal or external to the Group, allows corporate boards in charge of making strategic decisions to minimize this risk, making it possible to take timely corrective and/or adjustment actions should competitive or market circumstances change.
Reputational risk: is the risk of suffering from a decrease in income or capital as a result of a negative perception of the bank’s image in the eyes of customers, counterparties, bank shareholders, investors or supervisory authorities, as a result of specific critical events hitting for example given operational, product or process areas. Gruppo Banco Popolare keeps a watchful eye on the constant improvement of its image and on the consolidation of its reputation, and it implements a preventive policy on various fronts, in particular: customer protection, by guaranteeing an adequate information flow that puts them in a position to make knowledgeable financial decisions; careful and deep verification, not only formal, of the consistency between operational procedures and company behaviors and external and internal regulations and policies.
The strategic risk and the reputational risk are characterized by the fact that they are risk classes that are mainly monitored by group structures. For these two risk classes however, activities are underway to experiment and develop also quantitative assessment methodologies.
Real estate risk: is the risk of suffering from a decrease in the market value of proprietary real estate assets, as a result of price changes on the Italian real estate market. This risk is monitored by specific technical structures set up within the Group.
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Securitization risk: is the risk that the economic substance of a securitization is not fully reflected in risk assessment and management decisions. To deal with this risk, Banco set up a specialized structure in charge of defining securitizations of own assets. Among other things, this structure is in charge of selecting the portfolio under disposal, of defining the structure to be adopted and of revising the documents prepared by the hired lawyer.
Compliance risk: is the risk of incurring administrative and legal penalties as a result of nonconformance between external regulations and internal regulations (and corporate procedures), between corporate governance codes and internal codes of conduct. Compliance risk also arises in situations of nonconformance that may cause material financial losses and reputational damages. For further information on the management and control of the compliance risk, please refer to the specific paragraph in this report.
Risk-taking, management and hedging objectives and policies
Gruppo Banco Popolare and the companies of belonging conform their activities to the criteria of prudence and low risk exposure, with regard to: the need for stability with respect to its banking activities; its investors’ profile; its cooperative origin and the values of cooperative lending (credito popolare).
Gruppo Banco Popolare exercises its risk propensity by identifying a restricted portion of its capital, unavailable to risk- taking, destined to medium-long term going concern purposes, to a gradual capital strengthening, to ensuring business flexibility conditions and the capital coverage of impacts caused by the occurrence of stressful events.
In keeping with its risk propensity, the Group and its subsidiaries pursue the following goals: stable growth, that is, characterized by a limited variability of results and of corporate value; shareholders value creation as compared to financial investments having a comparable risk-return profile; creation of value added for shareholders as compared to financial investments having a comparable risk-return profile; strong credit risk distribution, in line with the objective of financing prevailingly small and medium enterprises and households; exposure to the structural interest rate risk roughly in line with the industry best practice, to be pursued also through a progressive hedging of risks associated with items repayable on demand; market risk-taking closely related to commercial needs; exclusion of risks that are unrelated to core activities and accurate assessment of initiatives that introduce new types of risks; development of more and more accurate and comprehensive risk monitoring methodologies, also in view of the validation of internal models for supervisory purposes; active management of corporate risks, based on state of the art techniques; disclosure of decision-making and negotiation processes, also based on a clear assignment of competences and responsibilities; utmost risk exposure transparency to the market.
The Group can count on an organizational structure, corporate processes, human resources and skills that are well suited to guarantee the identification, monitoring, control and management of the sundry risks characterizing its business activity, in order to protect the Group’s financial solidity and reputation against undesired events.
The entire risk management and control process is coordinated by Banco Popolare, in its twin capacity as Parent company and entity in which all the Group’s joint and mutual interest functions are combined.
The risk management, control and hedging process runs at different levels of the organizational structure.
The key player in managing and controlling risks is the Supervisory Board, which decides the strategic approach, approves risk management policies and assesses the efficiency and adequacy of internal controls, in particular with regard to risk control.
The Audit Committee, comprised of members of the Supervisory Board, is responsible for overseeing the functionality of the global internal audit system, reviews the entire process and verifies its formal and substantial adequacy.
The Parent company’s Management Board and the Board of Directors of the subsidiaries define the risk-taking operational and business approaches and guidelines rand approve their Regulation on risk limits, establishing guidelines, risk limits and control procedures in conformity with those set by the Supervisory Board.
The Risk Management policy is developed by the Group Risk Committee and the Finance Committee, which are both organizational units of the Parent company. An important role is played by the Risk Management Service and by the Group Audit Function, that are part of the Parent company’s Governance structure.
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The Group Risk Committee, which is made up of the Chief Executive Officer and the representatives of the Parent company’s main functions, assists the Parent company’s Management Board and the single Boards of Directors in the formulation of risk policies and takes action to correct situations that do not comply with said policies.
The Finance Committee meets periodically and oversees market and liquidity risk management actions, defining the Group’s funding policies.
For further information on the risk management and control system, please see Section E of the Explanatory Notes.
Other risk factors
Illustrated below are the risk factors and/or criticalities, both generic and specific, to which Banco Popolare and the Group it heads may be exposed to.
Risks associated with shareholding caps and with the exercise of voting rights
Art. 30 of the Single Banking Act states that in a cooperative bank (banca popolare) no shareholder may possess an interest exceeding 0.50% of the share capital, except for UCITS, that are subject to the limits set by their own specific regulations. Should Banco Popolare determine that said limit has been exceeded, and in any case in compliance with existing regulations, it shall give immediate notice of the breaching to the shareholder and the intermediary. Excess shares must be alienated within one year of the objection, after which the relevant capital rights accrued until their alienation are acquired by Banco Popolare.
Art. 30 of the Single Banking Act states that the registered shareholders of cooperative banks are entitled to only one vote, under the “one member – one vote” rule, irrespective of the number of shares they hold. Art. 23 of the Articles of Association states that each registered shareholder may represent only one other registered shareholder under a written proxy, provided he/she is not a member of the supervisory or management boards, or a Company employee, or a member of the administrative and auditing boards or employee of the companies directly or indirectly controlled by Banco Popolare.
Risks associated with pending legal proceedings
Banco Popolare and the Group Companies are involved in a number of court proceedings, that are part of the normal business activity of a company. Although it is impossible to foresee the outcome with absolute certainty, we deem that an unfavourable result of said proceedings would not, be it singularly or globally, entail material negative repercussions on the financial and operating situation of Gruppo Banco Popolare. Below is a detailed description of the main risk positions.
Clawback action instructed by Italgest bankruptcy trustees against former Banca Popolare di Novara S.c. a r.l. In November 2004, the Naples Court pronounced its decision in first instance on the clawback action under examination. In first instance the court condemned Banco Popolare di Verona e Novara to pay €129.2 million plus any interest and legal expenses. Banco Popolare filed an appeal (still pending) against this decision. To be noted, that the actual contingent liability shall not in any case exceed the net bankruptcy liability balance, that has already been expensed. At present, bankruptcy assets are still being measured. Total loans included in bankruptcy liabilities, net of Banco Popolare’s credit (amounting to about 4.5 millions) total 59.5 million. Note that various court denials of insolvency are pending against the Municipalities, regarding the preemptive rights of the admitted credits. Banco also instructed an equal number of clawback actions under art. 102 of the bankruptcy act (now art. 98) against the Municipalities to which the Treasuries belonged (representing credits accounting for about 72% of the admitted bankruptcy liabilities), since criminal procedures ascertained the non liability of former BPVN’s officers on the one side, and on the other the criminal liability of most Municipal officers. During said clawback proceedings, upon instruction of the Court, the Official Receiver ordered the trustees to take part in the proceedings, to require the revocation of credits. All revocation requests filed up to now refer to credits included in the bankruptcy liabilities for a total amount of about 44.7 million. Italgest Bankruptcy trustees also instructed a legal proceeding against former Banco Popolare di Verona e Novara (now Banco Popolare) invoking the latter’s responsibility, also under art. 2049 c.c., on the assumption that ex BPVN and its officers contributed to causing the insolvency by keeping up the lines of credit with Italgest. The required claims are equal to the entire bankruptcy liabilities outstanding at the time of application (lire 107 billion, equivalent to Euro 55,260,888.21). We deem this legal action (the proceeding is still in first instance) to be groundless, supported also by the criminal court decisions acquitting BPVN’s employees and condemning Municipal employees, as well as by the dismissal of the counterparty’s requests for inquiry to demonstrate the extent of the alleged suffered damages. Banco Popolare decided not to set aside any provision against the requested claims, in keeping with the counsel expressed by defendant’s lawyers. On 22.5.2007 a third party filed a bankruptcy agreement proposal for the Italgest S.p.A. Bankruptcy. Against the order issued by the Naples Appeal Court on 24.4.2009, filed on 19.5.2009 - which, rectifying the order of the Naples Court, accepted the bankruptcy agreement - the trustee, the Ministry of Economy and Finance and Banca della Campania S.p.A., proposed to appeal to Cassation Court. The proposer of the bankruptcy agreement opposed the three appeals, asking the adversary appeal to be declared inadmissible or be rejected, and to confirm the order of the Appeal Court, after having consolidated the appeals. In the proceeding instructed by appeal of the trustees, he also proposed an incidental appeal, objecting to the lack of legitimacy of the trustees. Banco Popolare and the Municipality Calvizzano opposed the appeals with an equal number of counter-appeals. The Municipality of Boscoreale proposed a late joint incidental appeal, asking the
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appeals of the plaintiff to be accepted. The proposer of the bankruptcy agreement opposed also this late appeal. With respect to all the proceedings, the appointment of the Rapporteur and the hearing dates are pending.
Litigation against Giovanni Cerea On 23rd January 2001, Mr. Giovanni Cerea filed a civil action with the Civil Court of Milan demanding to condemn BPI to pay a 38.5 million euro claim for an alleged mandate the plaintiff would have received from BPI in relation to the acquisition of the controlling stake of Banca Popolare di Crema. On 2nd January 2002, Mr. Ernesto Preatoni and the company Parin S.r.l. appeared before the court and filed claims both against the plaintiff and the defendant. With decision n. 7332/04, the first instance Court accepted the defensive argument of BPI, rejected all the claims by the plaintiff and successive third parties, and condemned the latter to refund the trial expenses to BPI. This decision was appealed against by all losing parties, who in July 2004 served BPI with two summons to appear in appeal court for a full reversal of judgment n. 7332/04, based on the same reasons put forward as ground for the claims at first instance. The actions, which were instituted separately, were joined in the II Section of the Appeal Court of Milan. On 8th June 2005, BPI signed an out-of-court agreement with Parin S.r.l. and Mr. Preatoni, based on which Parin S.r.l. and Mr. Preatoni waived the legal action and the associated claims (compensation and annulment of takeover) and in turn BPI waived its claim for compensation against Parin S.r.l. and Mr. Preatoni. Under the above agreement, Parin and Preatoni waived their requests also against Mr. Cerea, who in turn accepted to waive his action against them; as a result the Appeal court, with judgment 2392/05, declared the action and legal proceedings between Preatoni, Parin and BPI (on the one side) and between Preatoni, Parin and Cerea (on the other side) to be extinguished. The only action still outstanding is the suit between BPI and Mr. Cerea. In September 2009, the parties reached an out-of-court agreement, with consequent commitment to extinguish the appeal decision, which is being formalized.
Litigation against Area S.p.A. In July and September 2009, Banco Popolare and Banca Popolare di Lodi S.p.A., together with others, were summoned before the Court of Milan, with separate actions by two separate groups of former minority shareholders of Area S.p.A. In the first proceeding, the 42 plaintiffs asked to condemn the defendants to refund alleged damages, quantified in 13.15 million euro. The alleged liability would stem from a supposed agreement between Banca Popolare di Lodi S.c. a r.l. and Banca Intesa S.p.A., which among other things would have caused the ousting of the minority shareholders of Area S.p.A., depriving them of their share and without recognizing any right, in particular the due consideration had they be allowed to exercise their right of withdrawal as a result of the merger of Area S.p.A. into Bipielle Investimenti S.p.A. The first hearing was fixed on 18th May 2010. In the second proceeding, the 76 plaintiffs asked to condemn Banco Popolare, Banca Popolare di Lodi S.p.A. and Mr. Fiorani – after ascertaining his supposed personal criminal liability and the liability under art. 5 Lgs. D. n. 231/2001 of the two banks – to refund alleged damages, quantified in 25.2 million, after deducting the same profiles put forward in the previous proceeding. The first hearing took place on 23rd February 2010. Banco Popolare and Banca Popolare di Lodi consider the plaintiffs’ claims totally groundless and therefore did not set aside any provision.
Litigation against the Trust for the safeguard of former Banca Popolare di Crema Shareholders With deed filed on 27th October 2008, the “Trust for the safeguard of former Shareholders of Banca Popolare di Crema” subpoenaed Mr. Gianpiero Fiorani, Banco Popolare Soc. coop. and Banca Popolare di Lodi S.p.A. before the Court of Tempio Pausania, This trust (under English law) acquired the ownership of the capital, claim and credit rights (current and future) and the relative powers of 424 former shareholders of Banca Popolare di Crema associated with the alleged damage suffered as a result of the sale of a total number of 450,249 ordinary shares, corresponding to euro 58,255,838.00. The plaintiff trust claims that Banca Popolare di Lodi S.c. a r.l., under the management of Mr. Gianpiero Fiorani, from 1995 to 2000 took control of Banca Popolare di Crema’s capital in a covert manner and breaching regulations governing the acquisition of a significant or controlling stake in companies listed on regulated markets, at a distorted average price, completely different from the official price that was artificially offered by Banca Popolare di Lodi S.c. a r.l. in the following take-over bid in 2000. With decision dated 25 February 2010, the Court rejected all the claims raised by the Trust against Banco Popolare and Banca Popolare di Lodi, condemning the plaintiff to refund all legal expenses. Banco and Banca Popolare di Lodi S.p.A. had not set aside any related provision for risks and charges.
Litigation against Antonio Aiello and CGI – Compagnia di Gestione e Iniziative S.r.l. On 31st October 2008, Banca Popolare di Lodi S.p.A. was summoned before the Court of Rome by Mr. Antonio Aiello and CGI – Compagnia di Gestione e Iniziative S.r.l. The counterparty’s claim asked the Court to ascertain alleged grave liabilities plus repayment of damages caused to the plaintiffs between 2005 and 2007 by the behavior of Banca Popolare di Lodi S.p.A., with regard to groundless charges, widely covered also by the press, against Mr. Aiello. The claims for damage, both monetary and non, amount to 10 million. With regard to this litigation, Banca Popolare di Lodi S.p.A. deemed it unnecessary for the time being to set aside any provisions for risks and charges.
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Parmalat and Cirio positions With regard to the criminal proceeding underway at the Court of Parma, dealing with the financial crack of Gruppo Parmalat, on 17th December 2008 Banco Popolare and Banca Popolare di Lodi S.p.A. were summoned as they were considered liable under civil law. Likewise, with regard to the criminal proceeding underway at the Court of Rome as a result of the financial crack of Gruppo Cirio, authorization was given to the summons of Banco Popolare Soc. coop. and Banca Popolare di Lodi S.p.A. – considered liable under civil law. To date, it is impossible to exactly assess possible risk profiles, in terms of liabilities to be borne by Banco and Banca Popolare di Lodi. In case the former executives of BPI were to be charged guilty, BPI, Banco and Banca Popolare di Lodi may suffer capital damages as they are liable under civil law. However, it should be underlined that the Civil court of Rome in February 2008 had completely rejected the claims for damage against Banco and BPI in the Cirio trial, while it charged some other defendant. After this first-instance opinion, on 16th December 2008 Banco Popolare was summoned in Appeal. With regard to these positions, Banco and Banca Popolare di Lodi deemed it unnecessary for the time being to set aside any provisions for risks and charges.
Litigation against Gian Paolo Zini With summons dated 21st July 2004, Parmalat Finanziaria S.p.A. ("Parmalat Finanziaria") and Parmalat S.p.A. ("Parmalat") summoned Lawyer Gian Paolo Zini and Messrs. Calisto Tanzi, Stefano Tanzi, Luciano Del Soldato, Giovanni Tanzi, Giovanni Bonici, Gianfranco Bocchi, Claudio Pessina, Franco Gorreri and Fausto Tonna. Parmalat Finanziaria and Parmalat instituted an action for compensation (under articles 2392, 2393, 2394, 2447, 2448, 2449 of the civil code, as well as for contract and out-of-contract liability under article art. 2043 of the civil code) against the defendants, stating that in their various capacities they were responsible for the default of the two companies of the Group owned by Mr. Calisto Tanzi. Hence, a claim for damages of 2.63 billion in favor of Parmalat and 9.273 billion in favor of Parmalat Finanziaria. In the course of the trial, the newco Parmalat S.p.A., being the “assumptor” of the judicial compositions, joined the claims and submitted the same requests. With summons on third party complaint, Lawyer Zini summoned a number of entities to appear in court, among which also BPI, asking for the alleged joint liability of the defendants to the alleged plaintiffs to be ascertained. With deed dated 4th January 2005, BPI appeared before the court asking that the third party summons issued by Lawyer Zini against BPI be verified and declared inadmissible, as they fail to meet legal requirements and/or for lack of passive legitimacy. To this regard, BPI also requested that all the adversary claims be rejected, since they are totally groundless in fact and by right. In the joint hearing held on 26th May 2006, some of the parties summoned by Parmalat and Parmalat Finanziaria raised the objection to extinguish the judgment under art. 8 of Law D. 5/2003 as the plaintiffs had not duly and/or regularly sent them the notification of the date of the hearing. A new hearing was therefore fixed on 20th September 2006 for the oral discussion of said objections. In this hearing, the Court decided to suspend the judgment. In particular, since the Court attested that Parmalat S.p.A. under extraordinary administration acted as a plaintiff for damages in a criminal proceeding for the same events, which were objected in the case under examination (thus unequivocally transferring the civil action in a criminal case), it declared: 1. the extinguishment of the civil action promoted by Parmalat S.p.A. under extraordinary administration; 2. the suspension of the civil case under examination, determining that it may resume between the assumptor (newco Parmalat S.p.A. which as we said stepped in the civil action but did not formally institute a civil action in a criminal case), the defendants and third parties (among which BPI), only upon resolution of the criminal case. The reason is that, in consideration of the preliminary nature of one case over the other, the judgment resolving the criminal proceeding may be material and opposable in the civil action.
To date, the civil action is suspended until the resolution of the criminal proceeding. Without prejudice to what illustrated above with regard to BPI’s defense and the entity of the claims put forward by Lawyer Zini, it is impossible to predict the possible outcome of the court decision. BPI’s Board of Directors deemed it unnecessary to set aside any provisions for risks and charges.
Litigation against Immobiliare Valadier On 29th July 2008, the subsidiary Banca Popolare di Lodi S.p.A. was notified that its 76.6 million euro senior loan had not been admitted as a proof of debt in the bankruptcy procedure against Immobiliare Valadier S.r.l. of Roma, that was declared bankrupt by the Court of Rome in January 2008, against a mortgage loan granted in 2006. Obviously, the decision was challenged, considering the regular finalization of the mortgage and the regular acquisition of the consolidated and enforceable lien on guaranteeable assets, where the mortgage was also backed by the transfer of lease payments as guarantee. On 14th October 2009, the Rome Court passed its motivated order, with which it accepted the reasons of Banca Popolare di Lodi S.p.A, and regularly included the Bank’s loan into the bankruptcy procedure, condemning the bankruptcy commissioner to refund legal expenses. Then, on 12th November 2009, the Bankruptcy commissioner of Immobiliare Valadier appealed with the Cassation court against the above order, hence Banca Popolare di Lodi through its lawyers immediately prepared and filed its counter- appeal. To date, the subsidiary Banca Popolare di Lodi decided not to carry out specific write-downs related to the court proceeding pending with the Supreme Court, with the exception of those relating to the realizable timeframe, also considering the positive outcome of the appeal.
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Another litigation is pending: Valadier’s Bankruptcy commissioner on 24th November 2008 summoned the subsidiary Banca Popolare di Lodi to ascertain and declare the simulation of the mortgage contract and the consequent charge to pay back the total amount of 9.7 million received by the Bank as a repayment of mortgage payments or pre-amortization payments, in addition to interest and revaluations. The court proceeding was postponed to the hearing on 2nd February 2010 and to date, although the Bank certain of its reasons that are also supported by circumstantial external opinions, yet it deemed it appropriate to set aside a conservative provision to cover the legal action costs.
Fingruppo Holding On 21st August 2008, the Court of Brescia rejected Fingruppo Holding’s filing for bankruptcy owing to the finalization on August 20th of a restructuring agreement on Fingruppo’s debt under and in compliance with art. 182 bis of the bankruptcy law. No challenges were raised in the hearing held on 24th September 2008, therefore the authorization of the restructuring agreement was finalized. Gruppo Banco Popolare shows an exposure of 158 million euros to Fingruppo Holding through its subsidiary Banca Popolare di Lodi S.p.A., which was recognized under watchlist loans. Banca Popolare di Lodi entered the workout agreement, which provides that any loan outstanding between the parties to the agreement and Fingruppo shall not bear interest as of 1st July 2008. As to the principal, under the agreement, Banca Popolare di Lodi’s loan is to be repaid first of all through the proceeds generated by the market sale of Hopa shares and Banca Popolare di Lodi 2002-2012 bonds held by Fingruppo and deposited as collateral in favor of Banca Popolare di Lodi. 10.3 million related to the sale of Hopa shares and 25.4 million related to the sale of Banca Popolare di Lodi shares were deposited with Banca Popolare di Lodi with value date 30th December 2008 and 10th June 2009, respectively. On 26th February 2009, as first down-payment and loan repayment, 23 million were credited to Banca Popolare di Lodi, Considering also the coupons collected by Banca Popolare di Lodi, after the approval of the restructuring agreement, with regard to the above mentioned bonds, the Gruppo Banco Popolare’s residual credit went down to 98 million. After joining the agreement, the Group companies submitted their Fingruppo and Hopa loans to a new measurement to reassess their value. The finalization of the restructuring agreement represented one of the main pre-conditions to the performance of the letter of intent signed on 23rd July 2008 between Mittel S.p.A. and Equinox Two S.c.p.a., one the one side, and Banco Popolare Soc. Coop. and Banca Monte dei Paschi di Siena S.p.A., on the other. This agreement provides the creation of a new company, where Mittel and Equinox shall jointly hold 66.6%, while Banco Popolare and Banca Monte dei Paschi di Siena shall hold an equal share of the remaining 33.3%. The acquisition of the interest in the newco, Tethys S.p.A., entailed a 5 million investment for Banco Popolare. Tethys acquired all the Investments in associates and companies subject to joint control held by Fingruppo and the Hopa shares purchased by the above mentioned banks. In 5 years time Tethys is entitled to acquire the additional Hopa shares held by Banco Popolare and MPS at a price of euro 0.10 per share (call option). Banco Popolare’s stake in Hopa is represented by n. 101,019,756 shares (corresponding to 7.3% of its share capital) belonging to the AfS portfolio (assets available for sale). The agreement provides that the business partners of Mittel and Equinox are in charge of managing and valorizing the acquired Investments in associates and companies subject to joint control, and they are entitled in 5 years time to acquire the share in Tethys held by Banco Popolare and MPS for 10 million euro. Following the signing of the above agreement, Banco Popolare reassessed the value of the above shares, in line with the call option exercise price that would be recognized to Tethys. The described agreement, together with the supplementary agreements signed in August 2009, provide the granting by Banco Popolare and Banca Monte Paschi di Siena of some guarantees to Tethys against possible contingent assets and liabilities that were not reported in Hopa’s balance sheet on which the above agreements were based.
Penalty procedure for breach of anti-money laundering regulations. In October 2008, the Verona Tax Police (Guardia di Finanza) notified two reports to Banco Popolare, which is bound jointly and severally, disclosing irregularities regarding the compulsory reporting of suspicious transactions, attributed to two employees who had been successive Branch Mangers in Sommacampagna (VR) between 2003 and 2007, that might give rise to a substantial administrative fine. An expert Professional was hired to assist Banco Popolare in the proceedings, and a conservative provision of 4,926,290.93, corresponding to 50% of the maximum total fine has been set aside.
Raffaele Viscardi S.r.l. The litigation, reflecting a claim of about 46 million, hinges on the conduct of the Salerno branch of Banca Popolare di Novara with regard to transactions executed by the bank as part of credit lines granted to the plaintiff company. In particular, the plaintiff maintains it was induced to subscribe for Banco bonds to back extended loans, and therefore the bank would have abused its dominant position, thus breaching contract rules, as well as CONSOB regulations. Moreover, the plaintiffs claim a damage for being reported to the Credit Bureau, which caused a false representation of the company’s true conditions. The action is in the fact-finding phase. With regard to this litigation, for the time being it was deemed unnecessary to set aside a provision for risks and charges.
Described below are the main risk positions regarding Gruppo Italease.
Investigations and lawsuits With regard to the lawsuit against some members of the former managing board of Banca Italease, including Mr. Faenza and some mediators, the Bank brought a civil action in the proceedings to obtain full compensation for damages, both compensatory and general, suffered as a result of the defendants’ criminal conduct, of which they were charged in the order of indictment.
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The Bank also asked and obtained the precautionary seizure of personal property and real estate registered in the name of most of the defendants and parties with civil liabilities, who were summoned as jointly and severally liable. The precautionary measure was confirmed by the special Court (“Tribunale del riesame”) to which some defendants and their lawyers had appealed to have their case re-examined. Banca Italease believes it can legitimately claim the personal property and real estate currently under precautionary seizure to be repaid of the material damages suffered as a result of the detrimental actions carried out against the company. In the hearing of 24 March 2009, the Judge of the Preliminary Hearing upheld two of the four plea bargaining requests and sentenced the two defendants to a 1 year and 6 months term in prison (the sentence was suspended). As to the other two defendants, which applied for a fast-track trial, the Judge upheld the request and sentenced them to a 2 year and 8 month term in prison, and to pay a provisional fine of respectively euro 15.4 million and euro 7.1 million to compensate Banca Italease for damages. The Bank’s lawyers asked for the precautionary seizure of the defendants’ assets to be converted into a distraint under art. 686 of the Code of Civil Procedure. Proceedings against the other defendants who did not apply for alternative trials or whose plea bargaining requests have been dismissed shall continue,
As part of the various criminal proceedings currently pending before the Italian Public Prosecutor’s Office at the Milan Court, in which Banca Italease is for one reason or another involved, on 17 November 2009 the Bank was notified the notice of closure of preliminary investigation on alleged crimes for obstructing Supervisory Authorities, rigging the market and perpetrating an accounting fraud charged against the former Chief executive Officer, Mr. Faenza, and the former General Manager. In this proceeding, pursuant to Lgs.D. 231/2001. Banca Italease was summoned as a result of the corporate crimes with which the former CEO and the former General Manger have been charged with. The proceeding is in its investigation phase and therefore no question was posed yet to the Bank.
Since dailies published news of protests that would have been registered with the Milan Public Prosecutor’s Office by some minority shareholders of Banca Italease, asking the Court to verify the correctness of Banca Italease’s financial statements as at 31st December 2007 and 31st December 2008, it should be noted that neither Banca Italease, nor – to our understanding – any of its board members received any notification by the Milan Public Prosecutor’s Office with regard to the aforementioned petitions, and what is in the knowledge of the Bank is only what was published on newspapers.
Administrative proceedings Consob – Banca Italease With an appearance and defense brief filed on 29th January 2009, Consob joined the proceeding instituted to challenge the sanctioning measures pursuant to Consob’s Resolution n. 16651/08, regarding alleged procedural shortcomings and other breaches of regulations governing investment service operations. The first hearing on the challenge to the Resolution was held on 4th March 2009 at the Milan Court. In addition to the challenge proposed by Banca Italease, an independent challenge was filed also by some former corporate executives, while others joined the Bank’s challenge . The Court combined the appeals and on request of the parties adjourned the debate on 7th October 2009, granting joint deadlines to file the defense briefs on 30 June 2009 and 20 September 2009. The joint hearing was held on 25th November 2009. With order filed on 17th February 2010, the Appeal Court of Milan dismissed the objection raised by Banca Italease and by the former executives, and after acknowledging the death of Mr. Lucio Rondelli, reduced the total amount to be paid by Banca Italease by the amount of the latter’s fine, owing to his death. The Bank and its lawyers are considering the opportunity of appealing to the Cassation Court against said decision.
On 29th January 2009 Consob filed an appearance and defense brief in the proceeding instituted to challenge the sanctioning measures pursuant to Consob’s Resolution n. 16650/08, regarding the alleged delayed disclosure to the public of information on derivatives trading activities and on events occurred in first half 2007. The first hearing on the challenge to the Resolution was held on 4th March 2009 at the Milan Court. This proceeding, other than the previous one, was not combined to it. The Court adjourned the hearing to the 7th October 2009, setting the deadlines for Banca Italease to file its defense brief on 30 June 2009 and 20 September 2009. The joint hearing was held on 25th November 2009. With order filed on 11 February 2010, the Milan Appeal Court dismissed the challenge made by Banca Italease.
Challenge to Banca Italease’s Annual Report as at 31st December 2006 As to the sentence regarding the challenge to the 2006 Annual Report, on 14th January 2009, Consob notified the request to set a hearing restricted to the following breaches: “incorrect assessment and recognition of OTC structured derivatives subscribed with customers” and “failure to disclose the types of OTC derivatives and the inherent risks in the financial statements”. On 30th April 2009, the Milan Court passed its first instance decision regarding the challenge to the 2006 annual report made by Consob. The sentence upholds the reasons for challenging the annual report referring to the measurement and recognition of OTC derivatives, and therefore repeals the resolution approving the annual report as at 31st December 2006, and on the same grounds declares the nonconformity of the consolidated financial statements as at 31st December 2006. On 27 August 2009, the Board of Directors of Banca Italease, also based on the favorable opinion of its legal advisors, resolved to appeal against the first instance decision passed by the Milan Court. The Milan Appeal Court set the first discussion hearing on 13th April 2010. The Court decision, to date, is void of any executive efficacy and is susceptible of revision in the following court instances, and in any case does not affect the representation of the financial and operating situation made in the annual report or in recently approved financial reports.
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Egerton Capital Limited In March 2008, Banca Italease was summoned to the Milan Court by Egerton Capital Limited (on its own behalf and on behalf of the funds Egerton Capital European Fund plc, Egerton Capital Partners L.P., Egerton Investement Partners L.P., the Egerton European equity Fund Ltd, The Egerton European Dollar Fund Ltd., CF Egerton Sterling Investment Fund). The objection regarded the investment of the aforementioned funds in Banca Italease shares between 25 January 2007 and 10 May 2007. In this time period the above mentioned funds purchase a total of n. 2,697,346 shares, for euro 136,322,797.34. Owing to the stock plunge, the same funds between 4 June and 2 July 2007 sold the entire stake for euro 55,141,748.15. Egerton brought the civil action to obtain compensation of 105 million euro, of which 81,181,049.19 euro for the ensuing damage (trading loss) and 23,856,489.50 euro for missed profit (the amount was calculated by the plaintiff and should correspond to the assumed annual return the company would have received if it had invested in other securities). Banca Italease objected to the counterparty’s deductions, arguing that the fund had no active legitimacy to bring the action, that the alleged damage the plaintiff maintains it has suffered is inexistent, as is the breach of art. 114 TUF by Banca Italease, that there is no etiological connection between the latter’s behavior and the damage suffered by the plaintiff, and asking for the corporate trial procedure to be replaced by an ordinary trial. Having dispelled the reservations raised in the hearing before the Milan Court on 26 November 2009 – the objections put forward by the Bank were partly upheld, with regard to the proof of the procedural legitimacy of the plaintiff Egerton Capital Limited (in its capacity as General Partner of Egerton Capital Limited Partnership) to act on behalf of the funds indicated as plaintiffs (with the exception of CF Egerton Sterling Investment Fund), and the plaintiff was given 60 days time to summon the person in charge of representing the funds before the court. In the hearing held on 25 March 2010, after the debate the court reserved judgment on the request for a technical advice by a court-appointed expert made by the lawyers of Banca Italease.
Kevios With notice sent on 18th December 2009, Kevios S.p.A. summoned Banca Italease before the Milan Court to obtain satisfaction of a claim for damages of about 65 million, based on the following alleged existence of multiple offences: abuse of economic dependence, abuse of right and breach of contract, in thesi, ascribed to the Banca. The first hearing was fixed on 22 May 2010. Banca Italease shall fully challenge the claims made by the plaintiff, as they are deemed to be groundless and require no provisioning.
Exposure to Gruppo Zunino
In July the Public Prosecutor’s Office of Milan filed a bankruptcy petition against the Group led by Luigi Zunino, operating on the real estate market with Risanamento. The group was hit by the industry crisis and by a huge indebtedness, and submitted to the court a debt restructuring agreement under art. 182 bis of the Bankruptcy Law, supported also by primary lending institutions, to which the Zunino group has a large exposure, and which undertook to finance the continuation of the ongoing real estate operations. The Milan Bankruptcy Court, which was asked by the Public Prosecutor’s Office to assess a possible bankruptcy declaration, dismissed this request with order filed on 10 November 2009, and accepted the debt restructuring agreements entered by Gruppo Risanamento with various banks, among which Gruppo Banco Popolare. On 31st December 2009, the Group had an exposure of about 294 million, classified as substandard loans, referring to mortgages and loans granted by Banca Popolare di Lodi, plus the exposure attributable to Gruppo Italease totaling 223 million, which were also recognized under substandard loans. The exposures were adequately provided for and their book value was impaired in the financial statements of the previous financial years and in 2009. As described in the section devoted to noteworthy events after the balance sheet date, on 1st March 2010 a Framework Agreement was signed by Risanamento and Bipielle Real Estate, which on 31st December 2009 had an exposure of about 100 million for down payments and deposits referring to the Milano Santa Giulia project. Under this agreement, Risanamento shall sell the stakes in the companies Sviluppo Comparto 6 S.r.l. (100%), Sviluppo Comparto 8 S.r.l. (100%) and Mariner S.r.l. (50%), to Bipielle Real Estate, in addition to the proceeds generated by selling some property. As to the exposure of Gruppo Italease, which was fully allocated to the subsidiary Release, on 29 January 2010 three lease contract were consensually terminated, having a gross total value of about 116 million, and Release was given back the underlying buildings, while another real estate contract of about 81 million was transferred by Risanamento to one of the SPV acquired by Bipielle Real Estate under the aforementioned framework agreement. As a result, the residual exposure of Gruppo Italease comprises now a gross credit of 26 million with Risanamento and non-performing loans referring to two buildings directly owned by Luigi Zunino for a total gross amount of about 19 million.
Exposure to Gruppo Delta
In May 2009, Delta S.p.A., the Holding company of Gruppo Delta, engaging in consumer credit, and Sedici Banca S.p.A. (banking institution belonging to Gruppo Delta) were put by the Bank of Italy under temporary management owing to the serious management irregularities that had come to light. The two banks were then admitted to extraordinary administration; the Bank of Italy appointed 3 commissioners, Prof Bruno Inzitari, Dott. Enzo Ortolan and Dott. Antonio Taverna. Cassa di Risparmio di San Marino (CRSM), Delta’s parent company, appointed its own advisors: Professors Lusignani and Lamandini e KPMG.
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The plan prepared by CRSM’s advisors provided for the sale of Sedici Banca and of part of the assets of the Group (sales network, insurance company, etc.) to Intesa SanPaolo (ISP). The assets of the operating companies (Carifin, Plusvalore and Detto Factor) would be used to pay the debts with creditors, mostly represented by banks. After due diligence, ISP expressed its unwillingness to finalize the purchase, which caused the restructuring agreement prepared by CRSM’s advisors to fail. Owing to the failure to close an agreement, the Commissioners presented a new plan to the banks. The plan, which applies art. 182 bis of the Italian Bankruptcy Law, was submitted to the Bank of Italy on 23rd March 2010. Based on the assumptions made by the Commissioners, about 65% of the nominal value of the loans of the operating companies should be collected, the exception being transactions operated with earmarked assets, that should be 100% repaid .
On 12th February 2010 the banks of Gruppo Banco Popolare grant Gruppo Delta credit facilities for 230.7 million and utilization 206.4 million. Main utilizations regarded: a transaction with earmarked assets of 100 million a credit line in favor of the parent company Delta per 40 million.
Assuming that a workout agreement can be reached with CRSM to safeguard the 40 million credit line to Delta, the estimated loss for Banco Popolare is fully covered by the loss provisions that had already been charged to income totaling 25 million. The position is classified under loans under restructuring. The Bank of Italy expects 100% of the banks to join the Restructuring Agreement and required an answer by 31 March 2010.
Risks associated with tax audit notices issued by the Inland Revenue Service
With regard to the significant fiscal litigations generated by a series of transactions finalized among various companies belonging to Gruppo Banca Popolare Italiana in financial years from 2001 to 2005, Banco Popolare’s Management Board – in the special meeting held on 8th May 2009 – assessed the risks and charges that would ensue from both assuming an out- of-court settlement, and proceeding with legal actions. Considering that a considerable room for uncertainty hovers over the final outcome of each action, and that this uncertainty is particularly high when dealing with tax issues; considering that court proceedings are set to drag for many years, the Management Board – supported by the affirmative opinion of authoritative advisors – deemed it against the interest of Gruppo Banco Popolare to instruct such a material tax proceeding in court, and thus retain a significant potential risk onto the Group for a long period of time. Hence, the Management Board decided to go for an out-of-court settlement of the above disputes. Upon preparing the 2009 Q1 report, the total charge to be incurred to settle the dispute had been estimated to be about 170 million, therefore the provisions that had already been set aside were further supplemented and 57.5 million were charged to income for the first quarter. The charge, which includes what claimed by the Tax Authorities in terms of more taxes, penalties and interest, in addition to the considerations to be paid to external consultants who were hired to manage the dispute, has been fully recognized in the income statement under the item “tax”. Following the approval of the Q1 report, the out-of-court settlement of the above pending actions was finalized with no additional charges to the Group’s income statement. As a result of the out-of-court settlement and with no negative consequences for the Group as to other minor disputes, contingent liabilities associated with notified tax audits, which on 31st December 2008 totaled 578 million, were brought down to about 66 million.
As to the tax situation of the main companies of the Group, please refer to part B – section 14 of the consolidated explanatory notes.
Future evolution of Group risks/objectives
The Group selects, takes on, controls and mitigates risks originating in its banking and financial business, to pursue stable and sustainable growth objectives, in keeping with the general guidelines approved by the Supervisory Board on proposal of the Management Board and regulated by the “Group Regulation or risk limits”. Said guidelines in particular point at: spreading out credit risk in keeping with the objective of financing mainly households and SMEs, taking on market risks when closely related to business needs, closely monitoring liquidity to make sure that expected and unexpected financial needs can be rapidly satisfied, and excluding risks that are unrelated to our core business. The implementation of the above described guidelines is an assurance for the Group that it is best prepared to tackle possible adverse and even unforeseeable evolutions of the economic and financial scenario.
For the time being, the great uncertainty around the depth and evolution of the Italian and world economic recovery does not harbinger a possible and longed-for ebbing of corporate risks, especially credit risks. A worsening of the economic backdrop, rather unlikely according to major analysts, or, in alternative, a persisting stagnation may cause a deterioration of corporate creditworthiness also at industry-wide level, with possible negative repercussions on the financial statements of the banking industry. The credit policy objectives pursued by the Group aim among other things at diversifying its loan portfolio, limiting the
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concentration of exposures, and at supporting the development of businesses in its market territory, taking advantage of its close relationship with customers: these objectives aim at minimizing the risks associated with a possible adverse business cycle. Moreover, as part of the impact assessment programs defined by the supervisory authorities, the Group was keen on performing stress testing exercises applied to credit risk, as a tool to check the resilience over time to a possible strong deterioration of the economic scenario.
As to liquidity risk, on the one side, the Group continued to enhance the existing controlling tools and adopted assessment models to simulate the effects extreme scenarios may have on liquidity; on the other side, it implemented a risk management approach favoring a constant improvement of the liquidity profile, in terms of balanced financial maturities, increased liquidity reserves and implementation of new instruments (for ex., covered bonds and soft mandatory bonds), which will allow us to withstand with a sudden and significant liquidity crunch at system level. To this regard, how and when the prudential regulation revision proposed by the Basel Committee is adopted will be a key issue for the financial industry, because in the next two years this may spawn an excessive issuance of medium/long term bank debt instruments by the domestic and international banking industry, with potential impacts on the liquidity position of single banks, as well as on the profitability of the entire banking industry.
With regard to the interest rate risk, in case of possible interest rate increases induced by restrictive measures adopted by the supervisory authorities, the Group is well positioned in terms of the positive impact this dynamic would have on interest income. On the other hand, in addition to the positive impact on income, the described scenario could also cause interest rates to be volatile, with consequent risks (i.e., potential decrease in market value) both for the regulatory trading portfolio and for the banking book. The constant management and control of these risks, also through caps, ensure the balance sheet sustainability of the assumed scenario.
As to the integration processes of former Gruppo Banca Italease, we are determined to reduce the risk of the defaulted loan book, with a special focus on large exposures.
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PLANNING, AUDITING AND SERVICE ACTIVITIES
Human resources
Personnel makeup
Shown below is Gruppo Banco Popolare’s personnel breakdown by category and gender as at 31st December 2009:
Men Women Categories Total Full time Part time Total Full time Part time Total
Executives 306 - 306 22 - 22 328 Management 5,840 10 5,850 1,743 153 1,896 7,746 Employees 5,815 86 5,901 4,457 1,464 5,921 11,822 Other staff 90 5 95 9 3 12 107 Foreign companies 165 - 165 406 1 407 572 Total 12,216 101 12,317 6,637 1,621 8,258 20,575 of which Apprentices 198 - 198 231 - 231 429 Training employment contracts or entrance 89 - 89 78 - 78 167 contracts Permanent employment contracts 11,899 101 12,000 6,285 1,621 7,906 19,906 Temporary employment contracts 30 - 30 43 - 43 73
The above headcount include also the personnel of the former Gruppo Banca Italease, which on 31 December 2009 had 435 employees, excluding the 350 resources destined to the newly formed company called “Alba” (which is not part of Banco’s consolidated scope) and the 145 resources of the Company Factorit, recognized in compliance with IFRS 5 (company under disposal).
Hiring policies
In 2009, Banco Popolare’s employment policy was primarily focused on preserving the jobs of the Group employees – including temps – by slowing down employee turnover and promoting early retirement schemes to stimulate a generational churn, in line with the 2007-2010 business plan. A growing attention was dedicated to the possibility of organic growth through career pathways and the enhancement of tools to assess the performance and the potentials of employees. The hiring of employees under temporary contracts made the generational change even smoother, allowing us to further the development of the new resources and offer them professional opportunities. We still turned to the labor market, albeit less than in the past, to look for specialized profiles that were not present in the Group, in particular in the field of regulatory and risk control and Retail Business Development. In any case we continued to hire young newly graduates, especially in the local branch networks, by activating more flexible employment contracts, and in some cases, for special needs, we resorted to staff supply contracts.
The new Recruitment and Selection process for first-time hires is now fully operational throughout the Group, based also on the centralized Selection Assessment, which is the first steppingstone along the professional career in Banco Popolare, to assess and guide the future development of each single resource. To preserve and strengthen our ties with our market territory, we continued to carry out attitudinal tests and candidate selections directly in the single provinces. The School Project was extended to the entire national territory: 6 Banche del Territorio joined the project and involved 37 schools, where we met more than 1,500 students.
Professional mobility management
In 2009, actions to achieve efficiency gains and the standardization of internal organizational models and work processes across the Group moved ahead; in particular, the Parent company structures were deeply revised to improve the control and coordination of activities and processes. The revision of the Holding company’s organizational model gave rise to the need to strengthen the Parent company’s structures, both qualitatively and quantitatively: this prompted us to resort to professional mobility, so as to favor also the career growth of our resources by building up their experience both at the Head Office and at the Retail Banks. To this end, the various Human Resource Management functions worked in team to satisfy the different needs, streamlining intercompany mobility and developing professional opportunities both at the Parent Company and in the Retail Banks.
In the second half of the year, actions were taken to terminate the numerous personnel secondments across the Group Companies, by stabilizing the working relationship in the Company where the employees are working.
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This led to more than 360 transfers, and the process will continue also in the first half of 2010 so as to stabilize structures and professional positions over a longer timeframe.
Practical training and Internships
Agreements entered with Universities and Local Institutions reinforced the Group ties with local agencies and with the academic world. Internships (which in 2009 were more than 20) proved to be a useful tool for young newly graduates and graduating students, who had the opportunity to make a training and orientation experience in the various companies of the Group.
The well established cooperation between Banco Popolare and the most prestigious Italian educational centers promoted a fruitful exchange of knowledge both for our Institute and for the teachers who led the trainees along their training courses, and who had for the most part an economic or legal education background.
Human Resource Development
The most noteworthy activities in 2009 were: the “Branch Manager development project”; growth and development activities for our Talents, that is, 100 high-potential resources identified in 2008; launch of the “Value project” devoted to resources who ranked between the 101 and 200 position in the Talent scouting list; course dedicated to the Heads of Headquarter Functions and Office; Executives development seminar; Development project for all Human Resource Managers.
The main goal of the development project for Branch Managers, that in 2009 is in its second year, is to build a consistent work model and style throughout the Group. A special focus is dedicated to the need to create a strong integration between this position and the market territory, to support and assist businesses and households.
In 2009 also the Talent project was in its second year. The selected employees follow a three-year development path, that is designed to provide them with the necessary skills to cover key positions within the Group, provided the identified potentials make themselves manifest in practice. The focus of development is on three core highly-strategic areas: integration and communication, global view of macro economic and social scenarios, strategic leadership.
Human Resource Managers have been involved in a development path aiming at bringing different cultures together and at mainstreaming the role’s typical skills and competences, to create a harmonized and established “community”.
The project devoted to Heads of Headquarter Functions and Offices moved ahead. Its goal is to develop harmonized behaviors and an effective role interpretation to improve internal processes and provide a value added service to external customers.
In the second half of 2009, managerial development meetings were held for Executives in charge of Group structures. In particular, they focused on improving the key competence of “Communication”.
Training
In 2009 we scaled up our training activity to enhance the professional skills of all human resources within the Group.
The development of new work models and processes and the analysis of different business contexts brought to light the need to “plan” people’s growth by carrying out actions that are functional to the filled position. To this end, we decided to develop differentiated training paths geared to the specific professional roles, aiming at providing the necessary tools to acquire the skills and competences required by the position in a standardized and uniform way across all the Group Banks.
To guarantee a high standard of the training offering, in 2009 we decided to measure the validity of training actions, by setting up various review processes: training requirements, by introducing a specific identification tool, for Network and Headquarter position, and developing technical assessments for branch managers; training satisfaction surveys, by enhancing the existing questionnaires; learning curve, by introducing entry and exit tests; training efficacy, by creating a review process, with the active participation of the supervisors of the course attendees.
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In 2009, a total of 862,675 training hours were delivered, equivalent to 115,023 man/days, up by 4.89% with respect to the prior year’s volumes. The table below provides a summary of the training activities in 2009:
Develop- Skill Mandatory Project-based Training on Total training Category Attendees Role Courses ment Enhancement training training demand hours
Executives 277 300 174 - 2,725 4,670 212 8,081 Managers 7,151 73,936 59,855 29,521 129,396 70,802 23,420 386,930 Employees 10,081 3,270 114,420 21,488 195,783 47,588 23,982 406,531 Other 582 - 13,097 180 45,284 2,168 404 61,133 Total 18,091 77,506 187,546 51,189 373,188 125,228 48,018 862,675
Assessment
The Assessment Center, which became fully operational in 2009 after its launch in the summer of the prior year, is in charge of assessing managerial skills, that is, competences that are generally defined as “crosscutting” or even “transferable” because they can be enhanced and maximized within the organization, irrespective of the technical and professional content required by the different organizational work settings. In 2009, its activities took different courses and spanned the Banche del Territorio and the Group companies.
Remuneration policies and incentive schemes
Group remuneration policies ensure an equal and consistent treatment throughout all the companies belonging to the Group. Without neglecting the specificities of the single companies and the needs to contain personnel costs, these policies pursue a series of common objectives, such as the acknowledgement of merit, the stability of employment relations, attracting talents, directing behaviors toward corporate priorities, internal and external equity.
2009 was characterized by a growing attention to remuneration policies – caused by the economic crisis – both by news media and by national and international Supervisory Authorities. In June, in compliance with transparent disclosure requirements, our Group prepared a remuneration policy report. Later on, the G-20 Financial Stability Board first, then the Bank of Italy, published documents setting out guidelines and operating instructions for compensation policies and incentive schemes. As a result, our remuneration policy report was updated on 16 march 2010 in line with these documents, whereby some aspects of our internal regulations on incentive schemes were revised, in particular with regard to top managers. A new policy was implemented, requiring top managers to achieve results over a three-year time span, and eliminating incentives exceeding fixed compensation. In any case, an in-depth evaluation of the pay-mix was carried out for all professional classes.
In order to implement the above compensation policies along objective criteria, our periodic evaluation of managerial positions was carried out, to compare the organizational roles within the various business sectors across our Group. Thus we will be able to apply consistent and harmonized criteria, in particular with regard to the variable wage component of managerial positions of equal value. These analyses are also used to update compensation comparisons with the same positions in peer external companies.
As a corollary to the revision of remuneration policies, we carried out a self-assessment of compensation methodologies and practices, as required by the Bank of Italy, covering a variety of aspects, among which: the remuneration policy structure; the pay-mix structure for top managers, heads of audit and control functions, traders and branch network supervisors; the criteria to define bonuses in incentive schemes; risk control by setting up a series of mechanisms to guide given behaviors and assess the congruity between the paid bonuses and the attained results; how long results must be assessed before granting bonuses; payment modalities. The self-assessment outcome was submitted to the Bank of Italy: the Group shall keep abreast of the latest regulatory developments in this delicate field and over time shall introduce the adequate updates.
The special events described above were add-ons to the already ongoing and thorough analysis of compensation practices in the Group companies, through which we can carry out a comparison among companies, pursue integration within the Group, verify that the adopted policies are correct and define new policies. A study is well underway to gain access to more sophisticated analysis tools.
The consistency of compensation policies was further refined also by redefining the incentive scheme regulations of the Group companies operating on the financial market, or based abroad.
In 2009, the value attached to the quality of the work carried out by our resources was once again endorsed. Incentive schemes promoted the achievement of customer satisfaction objectives (as assessed ad hoc by a specialized company), the compliance with MIFID directives, and the quality of extended loans. All these qualitative elements had a direct effect on the accrual of premiums within the incentive schemes of all the Banche del Territorio.
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The quantitative elements reported in the consolidated financial statements, in particular with regard to variable wage payments, are: 2009 Personnel costs = 1,489 million euro; cost of the company bonus provided for by the contract and paid in 2009 based on 2008 results = 83 million (5.6% Personnel cost in 2009); cost of incentives paid in 2009 based on 2008 results = 34 million (2.3% Personnel cost in 2009).
Health and safety
For the Group, employee health and safety are of paramount importance, and to this end it adopted a prevention-oriented strategy based on the analysis and assessment of risks at work so as to identify the most suited actions to eliminate or reduce hazards and their potential consequences.
The Prevention and Protection Service put in place emergency plans for all Group sites, depending on the specific risks of the working environment and based on the potential and foreseeable emergency conditions linked to the activities performed, such as fire, natural disasters (earthquakes, floods), robbery and sickness; to this regard, in 2009 emergency evacuation drills were held in premises that are deemed at greater risk among Group offices.
The banking industry reports contained risk indexes compared to other industrial sectors, as shown by the surveys conducted by the Italian Statistics Institute. The most frequent accident takes place off time and off work.
As to Gruppo Banco Popolare, in 2009 we had 289 accidents (of which 103 on-work and 186 off-time and off-work), leading to 7,608 days of absence, as shown in the table below. As explained in note 1 and note 2, data reflect different corporate scopes between 2008 and 2009 (note 1 and note 2).
Accidents FY 2009 (*) FY 2008 (**) in-work accidents 103 65 off-work accidents 186 203 in-work days of absence 2,797 1,350 off-work days of absence 4,811 4,862 Total 289 accidents 268 accidents 7,608 days of absence 6,212 days of absence (*) 2009 data include all Group companies except Aletti Fiduciaria, Aletti Trust and Aletti Gestielle. (**)2008 data include only the Group Banks and SGS BP.
Based on the identification of the surveyed occupational risks, a single healthcare plan for all the Group Banks/Companies was prepared, that defines the application guidelines, the operational procedures and the contents of the Healthcare Surveillance under L.D. 81/08.
Also in 2009, the healthcare protocol adopted by the Group Banks/Companies covered employee categories mainly exposed to the risk deriving from the use of video-terminals, and to a lesser extent those exposed to the risks of noise, manual load handling and nightshifts.
Risk of exposure to external violence at work - the duty to “assess all risks” stems from art.21 of law n. 39 of 1st March 2002, that transposes the duties deriving from Italy being a member country of the European Union through the “2001 EC Law”. The lawmaker is even more circumstantial and with L.D. 81/08 defines also the formal terms regarding how this assessment must be conducted and clarifies that all risks must be assessed, even those that, though not directly related to the employer’s purview, may still potentially exist in the working sites and may damage the employees, among which the risk of “external violence - robbery”. The assessment of this type of risk calls for a different approach than the traditional one used in the working environment. In case of “external violence”, risk factors are on the one side connected with the employer’s organizational processes and choice, on the other they are caused essentially by criminal behaviors by external individuals that can be foreseen only in terms of probability of occurrence.
The preventive measures enacted by the Group Banks/Companies to reduce risks can be broken down into two categories, depending on whether they are intended to: reduce the probability of occurrence, in this case they will be active/passive defense measures, identified with the help of the “support tool for the assessment of robbery risk”, developed by ABI’s technical group; mitigate the damage, with specific actions regarding safety procedures, information and training of employees and with support services for employees who fell victims of criminal events.
By developing training initiatives and safety information especially directed to newly hired employees, atypical employees, employees in charge of emergencies, employees exposed to specific risks and to the robbery risk, and by stimulating the active participation of all personnel in identifying dangers and managing preventive measures, a culture of prevention is taking root in our structures.
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In 2009, 4,159 training days to 3,913 employees at Group level were delivered, as shown in the table below.
Total Trained Total training Course Training days Employees hours
M. D. 388/2003 (First aid) 675 8,100 1,080 M. D. 388/2003 art.3. c.5 – First aid 876 3,504 467 Robbery emergency procedures 1,460 11,680 1,557 Lgs. D. 81/08 (Newly hired) 173 2,076 277 Lgs. D. 81/08 and M.D. 10.03.98 (Medium Risk) 729 5,832 778 Total 3,913 31,192 4,159
Gruppo Banco Popolare industrial relations
Relations with Trade Unions
In 2009 consultations with Trade Unions aimed at seeking an accord and at striking a balance among the harmonization of employment regulations, operating cost control, protection of youth employment by stabilizing contracts, the promotion of work and social cohesion. The revision of corporate premiums – while in any case safeguarding the purchasing power of wages – allowed us to direct the freed up economic resources to the stabilization of positive employment relations with temps, more than 900 resources under an apprenticeship contract, entrance contract or temporary contract. The agreements reached in the field of employment give evidence of the special attention social partners devoted to new generations, to grant them the right conditions for a progressive consolidation, and allow the Group not to disperse the key qualitative asset inherent in new professional positions. It was also possible to increase minimum company contributions to supplementary pension schemes and better guarantee the future of our youths, who are less favored by the public pension system. Consistent and uniform pay-grade systems were agreed at Group level, with regard to the target organizational model of the sales network: as a result, career paths and personnel development are better defined and certain, and human resource management is more efficient. Again, consultations with trade unions led to the development of specific training actions in favor of employees, in particular for professional outplacement and reinstatement and workplace safety, subsidized by the Bilateral training funds and the Solidarity fund. No significant worker demonstrations were staged at Group level; only two days of strike were called in one Company. The integration with former Gruppo Banca Italease relied on this spirit of social dialogue and solidarity and of joint protection of the enterprise and of jobs to define, in accord with trade unions, how to manage the impacts on employees and favor their reinstatement in new companies.
Supplementary pension schemes
In 2009 also for this delicate sector we started a process to harmonize the administrative structures across the group and to set up a single integrated software system, while respecting autonomies. In 2010, a web platform shall be available to active and retired employees, allowing them to interact with their welfare schemes. The Group Welfare Function, in cooperation with a primary advisory company, Prometeia, is working on a new investment compartment structure, to provide members with useful tools, options and information to manage their welfare positions in a flexible and informed way, adjusting them to their own personal and family choices and characteristics (Life cycle).
Social affairs
In 2009, the activity called “Progetto Persona” was developed further: it is an initiative in favor of employees, aiming at promoting health and wellbeing and at providing human resource managers with the necessary tools to better and more effectively manage situations of malaise on the workplace. The Project was set up in cooperation with the Multifunctional Center Don Calabria, and follows this schedule: 1. Consolidation Phase 2008/2009 with consolidation in Verona and rollout in Lodi and Modena; 2. Expansion Phase 2009/2010 with consolidation in Verona, Lodi, Modena and rollout in the market territories of Banca Popolare di Novara and Credito Bergamasco.
Individual outreach services
This Service provides support to overcome specific situations of individual malaise. It provides support to individuals and to HR managers in the following ambits: support to employees who suffer from situations of distress or difficulties with negative repercussions on their working life; advice and support to employees to analyze issues that impact upon the organizational wellbeing (disability, addictions, depression, etc.); advice to disabled employees to find the best match between their abilities and their job;
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advice to improve the working mainstreaming of people with disability/difficulties/distress; activation of social services on the territory; mediation between employee and company in case of incident.
The Service is managed by two professional experts from Centro Polifunzionale Don Calabria. Interested employees and HR managers may refer to them for advice and support, on a voluntary basis and respecting the individual’s privacy.
Labor disputes and disciplinary measures
In 2009 the total number of labor disputes at Group level remained basically unchanged compared to the previous year, confirming once again that our dispute trend is below the industry average; the number of new lawsuits equals that of settled ones. Litigations were managed uniformly and consistently throughout all the Group Companies, in compliance with criteria that whenever possible favored a settlement of lawsuits out of court.
Internal audit
In 2009, the Parent company’s Group Audit activities were in line with the objectives addressing the constant assessment of the adequacy of the internal auditing system not only in the Parent company, but also in the entire Group. Audits were conducted to verify that regulatory, operational and business requirements were met, and that they were then transposed in information, assessments and recommendations regarding the correctness of the business activity and the effectiveness of the auditing system, while pointing out possible improvement areas.
The Parent company’s Group Auditing Service is in charge of conducting institutional, coordination and service audits. In particular, on site and remote activities were performed regarding the Parent company’s central and peripheral structures, with a special focus on particularly critical processes, the Parent company’s Group structures in Italy and abroad, as well as the central and peripheral structures of the banks and companies covered by a specific outsourcing agreement, in virtue of which a global or partial auditing service is delivered. The individual auditing functions of the subsidiary companies and banks, when existing, are in charge of the remaining activities that have not been outsourced, still in coordination with the Parent company’s Auditing Service. More specifically, outsourced activities mainly covered audits on central structures, and also specialized areas such as ICT auditing, the specialized operational support to the Surveillance Bodies set up in the single group companies under Law D. 231/01, as well as the remote monitoring of the banks’ branch networks in terms of credit, accounting-operational, anti- money laundering and financial risks. During the year, the function prevailingly carried out audits on credit (loan granting and monitoring, management of substandard loans), on term management and on the provision of investment services.
During the year, the Group Audit service carried out all the internal audit activities indicated by prudential Supervisory regulations. In particular, specific audits were conducted regarding first pillar risks (credit, operational and market risks), and transparency of disclosure (III pillar), revision of the internal credit rating system, revision of operational risk management and of ICAAP (Internal Capital Adequacy Assessment Process).
As required by supervisory regulations, we verified the modalities through which the conformity of compensation practices to the regulatory framework is guaranteed. The main goal was to verify organizational compliance of compensation and incentive systems with Bank of Italy regulations, and the outcome evidenced that our organizational setup guarantees the compliance with relevant regulations. The outcome was reported to the competent boards and functions.
Audits on the sales networks of the single banks did not identify any special criticality and confirmed the compliance of operations, in line with prior years.
In order to implement/rationalize the information system dedicated to remote audits, a new application was deployed in the Parent company to identify the most critical areas at Group level and set in motion appropriate targeted actions to remove the identified issues. Thanks to this system, it is possible to identify which branches and business areas of the sales networks of the Italian banks show the most significant criticalities, and instruct also the local auditing functions as to where it would be advisable to carry out a closer monitoring.
The service also constantly supported the other business functions by helping them verify regulations to be issued. A significant support was provided to the Supervisory Board, the Control Committee, the Management Board and the Chief Executive Officer, as well as to the Boards of Statutory Auditors and the Auditing Firms of the Group companies, by suggesting possible improvements to risk management policies, measurement tools and procedures.
In addition to the specific activities assigned to the Service, in 2010 we will continue to keep operations up to date with operational and legislative changes and evolutions, and to implement and develop tools and methodologies, proceeding with the planned steps of the project to coordinate audit activities from a methodological standpoint, aiming at integrating and systematizing activities that are being monitored and analyzed in view of the global assessment of the Internal Audit System (SCI – Sistema Controlli Interni). This project was launched by the Service at the end of 2008 and moved ahead in
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2009 in cooperation with the competent Group and company functions. The aim in 2010 is to map risks and activated controls, assess the adequacy and functionality of the existing system components and define a specific management information system.
Compliance
Gruppo Banco Popolare attaches a specific importance to the control of non-compliance risks, based on the tenet that the observance of rules and business integrity are key to the banking business, which by its own nature is founded on trust.
The first control against compliance risk is the identification of the compliance manager among one of the Group top managers and the creation of the Compliance Service. In 2009, the number of employees of the Compliance Service was increased, and the new organizational model of the Legal and Compliance Department, to which the Compliance Service reports, was approved. The new organizational model provided for the creation of a function reporting directly to the Compliance manager, in charge of pre-verifying the compliance of matters to be approved by the Management Board, and to develop the organization of the Compliance Service, which gradually must extend its supervision to include different business process and activities, also by way of ex-post controls especially (but not only) in the field of investment services. As part of this reorganization, Finance Complaints were handed over to the Parent company’s Quality Service, while the overall supervision and the obligations with respect to the periodic reporting to Corporate Boards are still under the competence of the Compliance Service. Complaints on banking services must be managed by the auditing structures of the Banche del Territorio.
The activities carried out during the year focused on those that are considered the most meaningful areas in terms of non- compliance risk, in particular: - Intermediation activities – Provision of investment services – Distribution of insurance products - Transparency towards the customer – Credit intermediation - Insider List and prevention of market abuses - Management of conflicts of interest - Usury prevention - Countering anti-money laundering and terrorism - Consistency of the rewarding system - Protection of personal data
Among the various activities carried out by the Compliance Service, the following activities were particularly significant with respect to the above issues: participation in the “III Level Mifid Project”, (so called “Illiquid Products Project”), aiming at defining and implementing procedures to transpose Consob’s guidelines on the duties for a correct and transparent distribution of financial illiquid products; participation in the “Conflict of interest Project”, including controls on how intercompany resolutions are met; participation in the “Anti-usury Project”, focusing on the transposition of the new regulations issued by the Bank of Italy; participation in the “Transparency Project”, aiming at transposing the new regulations issued by the Bank of Italy, with in-depth analysis of the decision-making processes regarding changes in interest rates; response to reports of the Audit structures evidencing non-compliance risks, within the scope of its competence; training to the Group operational structures on specific issues (e.g., preventing market abuses, managing conflicts of interest) participation in the definition of the Incentive system and the assessment system for the branch network, in compliance with the principles of equity defined by the Supervisory Authorities; validation (within its area of competence) of incentive campaigns for employees. The Compliance Manager worked directly with the Human Resource Department and with the top management for the definition of top management compensation processes and criteria, in constant communication with the Supervisory Authorities; certification of the rulebook describing the tasks of the Manager Responsible of preparing corporate financial reports pursuant to law 262/05.
In compliance with the Supervisory Instructions issued by the Bank of Italy on 10 July 2007 regarding the Compliance Function, in 2009 the mapping of the main non-compliance risks to which the Group and its constituents are exposed was completed, as part of the “extended Basel 2 Project” launched by the Compliance Service. This activity, which will help the Group acquire a global view on this issue, further confirmed and renewed our commitment towards regulatory/procedural update programs, to improve the adoption of the various laws and regulations protecting and controlling our business activities.
Technological and administrative services
The Group’s technological and administrative services have been centralized in Società Gestione Servizi BP S.p.A. (hereinafter SGS), which is the “operational engine” of the Group. Once the integration was completed, activities were directed towards the consolidation of IT systems and applications and
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work processes, focusing on optimizing technical and human resources to guarantee the best service support to the business activities of the Group banks at the lowest possible cost. Innovative projects were implemented involving the technological infrastructure and IT procedures, in particular for the Credit and Finance area, which resulted in a greater user-friendliness of applications and the availability of more sophisticated risk monitoring and control tools. Also work processes, procedures to produce accounting data and management control procedures were enhanced, to accelerate the production of data and thus also the decision-making process underlying the planning of strategic and business actions. In 2009, the spotlight was on system projects aiming at making procedures compliant or at installing new applications to manage services and provide reports in compliance with new national, European and International interbank regulations. Administrative services constantly guaranteed a valid support both to the business activities of the retail bank branches, and to the launch of innovative projects. The Group Safety and Security service constantly monitored physical and IT intrusion risks, so as to activate the most appropriate prevention systems; it developed the Business Continuity plan and conducted controls to test its validity.
Technological services
In 2009, actions were largely directed towards the optimization of the technological infrastructure and the achievement of efficiency gains to guarantee the best service to Corporate Clients, while identifying possible processing power recovery opportunities in view of our strong focus on cost containment. The specific initiatives carried out in the different sectors are summarized below.
Development of applications for the investment area
Custodian Bank
The centralization at the parent company of the Custodian Bank activities for mutual funds that were previously performed by Banca Popolare di Verona SGSP, Banca Popolare di Lodi, Banca Popolare di Novara and Credito Bergamasco was completed. The necessary Custodian Bank-related information system implementations were put in place, to improve the monitoring and control processes and to comply with the instructions issued by the Bank of Italy.
Funds and Sicav
A specific project was launched to reduce operational risks and manual activities for the Back Office, with the release of new functionalities for the underwriting procedure, the management of multi-currency accounts, intercompany transferability, feeds to the capital gain procedure for the accounting treatment of capital losses associated with foreign UCITS (Undertakings for Collective Investments in Transferable Securities).
Evolution of front office/position keeping systems
In 2009, activities in this area developed along two complementary and distinctive lines. On the one hand, the supporting tools for Banca Aletti’s Business were strengthened, by consolidating the architecture and expanding the functionalities of the Risque position keeping application. On the other hand, the application architecture used in the Group Finance activities of Banco Popolare was revised, and it was decided to implement a more sophisticated position keeping system in line with market standards (Kondor+ to replace Merlino). Therefore, with respect to Banca Aletti’s Front Office, the main goals of the Risque position keeping system enhancements were: optimizing operational processes; risk monitoring (especially the operational risk); consolidating the system’s application architecture to guarantee a more adequate performance and reliability. The activities instrumental to the installation of the new application release (live since October 2009) were essential to achieve: the release of new business supportive functionalities (in particular, analysis based on more effective interest rate risk indicators); the consolidation of the system’s technological architecture (in particular, revision of the database and of the internal communication infrastructure); the activation of more performing data processing processes, which for example reduced the time necessary to process month-end accounting data.
Other operations were implemented on the Risque application to help the activities of the middle and back office structures, among which: the production of reports and the development of control functionalities for traders, for the Middle Office and for the Head Office; the reconciliation with back office systems; the automation of processes to acquire deals carried out on the market; the compliance with interbank regulations (PSD, Supervisory Reporting).
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Development of applications for payment collections and electronic money
ATM
The 2009 marketing plan actions were implemented to achieve the functional alignment and an improved communication by redesigning ATM screens (microcircuit). Displays were totally revised, and new graphics have been introduced, more modern and more in key with the Group brand. The Group’s ATMs now include the EAPS circuit (Euro Alliance of Payment Schemes), within SEPA, which of course also the Bancomat Consortium has joined. As a result, more than 200 million cards distributed in Italy, Germany, United Kingdom, the Netherlands, Spain and Portugal will be able to carry out transactions in the other member countries (2 million POS and 190,000 ATMs) as if they were operating on their own national circuit.
Electronic Payments/POS
To support the development of internet payments, a new solution called “By Pos” was activated to manage web-based collections with credit cards. With this new product, every virtual retailer can accept credit card payments. The new product can be used by retailers with a website having a “virtual shop-window”, as well as by other retail businesses such as hotels, travel agencies, tour operators, movie theaters, which do not have an actual virtual shop but accept credit card payments based on the same modalities of mail orders. Other operations were made on the POS retailer master data application and on the card distribution application to allow our Group to take part in the “PayPass” initiative on the Milan marketplace. With this innovative system, it is no longer necessary to conduct a standard chip and Pin transaction, but simply hold the card to the “Contactless” reader to pay.
Local Treasuries
As part of the business development of Local agency treasuries, operations were made at the University of Verona and at the Azienda Consortile Acquedottistica di Pescara. In the latter case, the company supported Cassa di Risparmio di Pescara by activating the micro-payment system, which allows about 500,000 inhabitants of 64 municipalities of the provinces of Pescara and Chieti to pay their water bills at any of the branches of the above mentioned Bank.
Car Registration Service (Documentate Auto)
Our Group was among the first to join the “UNRAE Registration Process”, with the creation of a technological platform connecting Car manufacturers, Car dealers, Banks and the Motor-vehicle Licensing Agency on a web portal. With a few exceptions, the declaration of conformity, without which no vehicle can be sold and that is used as guarantee for car financing, has now been dematerialized at national level. Thanks to dematerialization, more than 2 million paper- based certificates, that were sent to the Banks when cars were delivered to the Car dealers, have been eliminated, and most of them are now processed electronically by our Group network through our web portal PDA (Portale Documentate Auto) that can be accessed by all our branches. Mazda and the Volkswagen Group are among our major car manufacturing customers.
Microcircuit updates
In 2009 we completed the migration of the machines of the former Gruppo BPI, and about 340 ATMs were replaced with the microcircuit version, so that now 85% of our ATM fleet is up to date with the new technology. The progressive changeover of the ATM fleet combined with a more effective maintenance produced also a service level improvement, with a service availability rate of 98%.
Development of applications for internet banking and telecommunications
“By web” Service
Services provided to Retail customers via the Internet have been further improved, the website graphics have been revised and new functionalities introduced, and now the “By” Service offer is uniform across all the Banks of the Group. For example, the depth of the inquiry on checking account movements was expanded from 90 days to one year, new research keys were added, including text, and it is now possible to view booked matches. Customers who joined this service and gave an email address or a mobile phone number can now take advantage of the Personal Mail (dematerialization in PDF format of main banking communications) on accounts with single account-holder. This operation allows the customers to view immediately their mail and obtain guaranteed electronic storage for 10 years. Since June, when the new deposit product called “RendiConto” was released, it is possible to inquire movements by web and to instruct for bank transfers to checking accounts that were pre-authorized at the branch.
“By alert” Service
A number of operations were made on the infrastructure to monitor and improve the customer information system mainly with respect to security, by making it more robust so as to support larger transaction numbers, and by managing sending
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priorities, so that SMS classified as important are sent to the customer first (for example, an anti-fraud SMS as compared with an account information), and to have a view on the status of sent SMS. More than 18 million SMS were managed on the platform in 2009.
Vant@ggio: Remote Banking service for Corporate clients
In 2009 we followed two main guidelines: guarantee a greater security level to counteract the increasing fraud attempts, and release the services planned by the CBI Consortium. With respect to security, in addition to activating a messaging system to customers every time they make bank transfers from Italy to a Foreign country, since October OTP tokens (One Time Password) were distributed by a Tecmarket Servizi company in all branches to counteract Remote Banking frauds. These are devices to be used by customers, that automatically generate dynamic security codes to be keyed in when accessing and authorizing payments. SGS acted on the user master data system and developed a new procedure to manage the devices and to monitor stocks at the branches. In compliance with regulations on digital signatures for transaction flows sent via CBI, in their capacity as passive bank, branches were released a procedure to send the received instructions without having to send specific authorizations by traditional channels (fax). Then again for the CBI service, the dematerialization of account statements has been activated for a good number of pilot customers of the “Vant@ggio” service. Customers will thus receive their banking documentation in PDF format: checking account statements, securities, mortgages, portfolio, accounts receivable advances.
Projects for improvements and efficiency gains
Single Treasury in Foreign currencies and centralization of settlements on Banco Popolare – Estero Pr.E.M.I.A
The Single Treasury in Foreign currencies was activated at the Parent company, and foreign currency settlements with Foreign correspondent banks were centralized. The first Bank of the Group to benefit of this new function was Banca Popolare di Novara as of 14 September. The new operational model envisages: the centralization at Banco Popolare of foreign currency and euro denominated accounts with Foreign correspondent banks, and closing of those currently open at the retail banks (Banche del Territorio); the routing of Swift messages referring to foreign currency transactions within the Group onto Banco Popolare, as it now occurs for Euro transactions; the centralization at Banco Popolare of currency and repo bookings; the management of exchange rate and interest rate risks on Banco Popolare’s single position.
The project was completed with the release of this function to Banca Popolare di Verona-SGSP, Credito Bergamasco and then all the Banks in October 2009.
Cash management centralized at the Parent company
The goal of this project was to set up a single “Central Cash Treasury” to be managed at the Parent company from an accounting point of view, allowing Banco to act as a single entity with the Bank of Italy when carrying out deposit and withdrawal transactions with the Central Bank. Managing transactions became much easier, because the spate of transactions between single banks was fully automated through a procedure that guarantees entries to single Banks and branches involved in the transfers. The in-house benefits were: the current level of service to branches was retained, and for them the changeover to the single central cash treasury was “transparent”; the operational accounting management of the Central Cash Treasury was simplified (28 “accounting rooms” across the territory as compared to 100 in the past) and the number of transactions was reduced, leading to a consequent reduction in personnel; the overall cash freezing was reduced, by taking advantage of synergies generated by the centralization; the operational processes of external companies in charge of accounting audits or transportation were streamlined, leading also to an operational risk reduction.
The Production Department actively supported the regular operations and the annual tests for Business Continuity, departmental environments, the Host central system, the AS400 environment and the network infrastructure.
Centralized administrative services
In 2009 the Administrative services provided by SGS BP to the entire Gruppo Banco Popolare focused in particular on the centralization of Middle Office and Back Office activities within the Company itself, and on the development of Information Systems to support and automatically manage transactions and services. These actions generated sizable cost synergies and paved the way to the Group Banks to offer high quality and distinctive products and services. The most important activities in which the Administrative Service Department was involved were: the creation of the Single Treasury and the centralization of settlements at Banco Popolare; the creation of the Group Central Cash Treasury;
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the launch of SEPA Direct Debit operations; the reorganization of operational processes and operational risk control for OTC derivatives; launch of daily margining for “Credit Support Annex” contracts; launch of the Single Securities Custodian with centralization of all assets in Banca Aletti and Banco Popolare; centralization of the Fund Custodian Bank at Banco Popolare; the reorganization of operational processes for the sale of UCITS products; administrative management of asset repatriation and/or regularization transactions called “scudo-ter”; the drawing up and release of the new Group policy for proprietary securities pricing and for bond issues of Gruppo Banco Popolare; the speeding up of month-end accounting closings.
Group Safety and Security
In 2009 we focused on the consolidation of all the areas making up the Group Safety and Security Department, along the same centralization logic pursued the year before, which led to the reorganization of the Department’s entire organizational structure.
IT Security
With respect to IT Security, we constantly upgraded and enhanced data integrity tools, and monitored external threats on a daily basis to keep our anti-intrusion systems constantly up to date. A special focus was devoted to the deployment of defensive and preventive actions to minimize fraud risks in the Group, aiming at guaranteeing a greater effectiveness and timeliness in adopting countermeasures, and at generating synergies with other corporate functions. In particular, on-line payment systems (home banking) and payments with electronic cards issued by the Group are constantly monitored, in case of clones the cards are immediately replaced, new authorization logics were developed, together with new intrusion prevention, fraud detection and malware tools.
Physical Safety
As part of the changes to the organizational structure introduced in 2009, specific local desks were set up in charge of physical safety and health on the workplace, which report directly to the new Security and Safety Function. These desks work jointly with the central Security and Safety offices and guarantee a greater efficacy and a more harmonized action. Among ongoing projects, worth mentioning are the enhancement of the branch remote control systems, transferred on a data transmission network instead of dedicated channels, which improved the cost/benefit ratio, and the IT integration of flows originated by department stores as part of the procedure to manage the transportation of valuables to the branches. From an infrastructural standpoint, we improved crime prevention and deterrence by using new control systems integrated with physical safety, by partitioning cash, integrating alarm systems and developing CCTV solutions. As a result, less “successful” robberies and thefts were reported at Group level in 2009. In addition to internal actions, we continued to collaborate with law enforcement agencies (Police departments, Police prefects, Carabinieri provincial stations and Tax Police - Guardia di Finanza), to favor the fight against robberies and thefts in bank branches.
Health and Safety
In addition to actions carried out to comply with national regulations, the management of temporary and mobile worksites for the renovation of Group structures and buildings was centralized at the Technical Service of BP Property Management, where all the responsible are, especially with respect to the “project manager”. The Prevention and Protection Service set up emergency plans for all Group premises, geared to the specific risks of the working environment and based on the potential and foreseeable emergency conditions linked to the activities performed, such as fire, natural disasters (earthquakes, floods), robbery and sickness; to this regard, in 2009 emergency evacuation drills were held in premises that are deemed at greater risk among Group Offices.
Business Continuity
The goal of the Group Business Continuity Plan prepared by the Business Continuity Function and approved by the Parent company’s Management Board is to manage critical situations caused by sector-wide accidents or catastrophes impairing the integrity of key structures. Other critical situations that do not entail material destruction are taken into consideration, as for example the non-availability of personnel as a result of epidemics. In 2009 new tests were carried out, which gave a positive outcome, and involved Organizational Units of Banco Popolare, Banca Aletti and SGS in various simulation sessions, where selected offices would become unavailable and would be restored in other towns in keeping with operational manuals. In particular, we simulated with success a scenario of sudden unavailability of the Group Treasury, based in Bergamo, and the stepping in of units based in Lodi, which carried out correctly all the planned tasks. In September 2009, we successfully conducted the annual information system disaster recovery test, with the activation of the backup site in Milan, and bringing in operation 10 Group branches, at least one for each Banca del Territorio.
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As suggested by the Supervisory Authority, we constantly maintained the plan, by taking corrective, enhancing or upgrading actions, within the size, functional and technical scopes.
Technological investments and projects
Rationalization of the geographical network and network organization model
In 2009 we revised the Network organization model of Credito Bergamasco to harmonize it with Group models and professional roles, and introducing also in this Bank a greater specialization by customer segments and the two Group branch organizational models (Specialized branches and Small branches).
To make our presence on the territory more efficient, new local retail branches were opened for the Banche del Territorio while overlapping branches on the same marketplace were consolidated (CR Lucca Pisa Livorno, Creberg, BPV-SGSP).
For the same reason, during the year a number of rationalization actions were taken, as summarized below: branch operational configuration (standalone – light); reference branches for foreign operations; branch transfers in new premises; Business Area remodeling (BPN: consolidation of the Business Areas of Alessandria – Asti; BPL: rationalization of Business Areas in Liguria; Banca Caripe: consolidation of two existing Business Areas); organization of Corporate Centers in the single Business Areas; elimination of Head Offices in Liguria and Sicily (BPL).
A Business Area specialist was introduced at Group level to support Branches with subsidized loans to retail customers, which is considered a rather delicate matter at a time of troubled markets and of constant regulatory updates.
Transformation of service companies into consortia
During the year we completed the project aiming at transforming the service companies from for-profit joint-stock companies to non-profit consortia. This transformation regarded Società Gestione Servizi BP, BP Property Management and Società Gestione Crediti BP, and it highlighted the value of the synergies they created as cost centers. In order to implement this organizational solution, the consortia’s shareholding structures had to be extended to include the Group client companies. The share of each company is determined based on the level of utilization of consortium services.
Italease
Banco Popolare carried out a complex project to restructure Gruppo Banca Italease, in keeping with the guidelines set out in the agreement signed by the shareholding banks in March 2009. On 31.12.2009 two new companies became fully operational: Release, engaging and specializing in credit recovery - an associate of Banca Italease – which received by Banca Italease and its subsidiary nonperforming, substandard or impaired loans, and Alba Leasing – an associate of Banco Popolare – which received the performing loans of Banca Italease and its subsidiaries and engages in the development and distribution of lease financing through the networks of its shareholding banks. In 2009, Banco Popolare took numerous actions on Banca Italease’s capital and capital structure: in June/July the Tender Offer on all its common shares, in October/November the Public Exchange Offer on Italease subordinated bonds in exchange for Banco Popolare fixed rate securities, in December 2009/January 2010 the capital increase to reach a 91.397% interest. Numerous actions were carried out to rationalize and improve the efficiency of the entire organizational structure of Banca Italease and its subsidiaries, taking advantage of the many opportunities in terms of synergies and centralization with the operational structures of the Parent company, Banco Popolare, and the Group service companies, SGC, SGS, BP Property. In Q3, all the activities necessary to achieve a full integration of the organizational structures, and of processes and systems to identify, measure, manage, mitigate, control and report risks were launched and are still underway, in order to ensure their consistency with risk control strategies, policies and regulations developed by the Parent company Banco Popolare. We also started to carry out preliminary estimates of the exposure of the new group to the main corporate risks, based on widely accepted risk measurement methods and systems, supplemented by qualitative and quantitative assessments, and in case of lack of internal data, we resorted to regulatory requirements. Based on preliminary results, with respect to the second half of 2009 there were no negative elements, from a management standpoint, impacting the capital adequacy of the new Group.
Migration of BP Croatia
The migration of Banco Popolare Croatia is part of a master project for the migration of the Group foreign banks onto the Group information system.
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Two banks at present are operating on this system: BP eská Republica (migrated in March 2008) BP Croatia (migrated in June 2009).
The decision to create a target platform for our Foreign banks was constrained by some strategic choices, for example the difficulty of managing and controlling multiple systems and suppliers, the high license cost and the lack of synergies when evolving each single system. The benefits we reaped from this choice were many: the greater robustness of the system, scalability, lower management costs, the Parent company can control the systems and check current operations. The migration project of Banco Popolare Croatia was carried out in about 12 months, most of which were devoted to the gap analysis between the old and the new system and to make the new IT platform compliant with the Country’s regulatory and procedural constraints. A big training effort was made to teach how to use the new system, with training delivered to almost all the 270 employees of the Bank with a series of internships organized also in Italy. The migration as usual was preceded by a general test (warm-up 23-24 May), and was then carried out in the week-end of 13-14 June. On Monday, 15 June the Bank was operating regularly using the new system. With its 35 branches, the Bank represents the largest foreign bank of the Group, and to date it operates efficiently; the trend of executed transactions is constantly rising, evidencing the excellent learning curve of the system and the solidity of the training activities delivered to users.
Manager responsible for the preparation of corporate financial reports (L.262/2005)
Considering the increasing number of Managers Responsible within the Group, and to improve the management of the “Control Model for the preparation of corporate financial reports”, a new “Group Rulebook for the Manager Responsible” was developed. In addition to harmonizing the adoption of procedures across all the Group companies that make a significant contribution to the preparation of the Consolidated Financial Statements, the rulebook also gives a more exhaustive description of other key aspects, such as the interrelation between the Parent company’s Manger Responsible and the Managers Responsible of subsidiaries and other Group companies, operational flows between Corporate Boards/Structures and the Mangers Responsible of the Parent company and of the single subsidiaries, the activities and development of the methodological component, control over IT processes that affect financial disclosure.
Administrative liability of Companies
Banco Popolare’s organizational and management model pursuant to Lgs. D. 231/01 requires the Company to periodically revise the mapping of corporate processes and activities that may give rise to the risk of committing one of those crimes expressly mentioned in the aforesaid legislative decree. To this end, the Group Organization Service activated a project to map the “231 risk” areas, covering 203 Organizational units, more than 70 key officers and 13 top managers between 7 April and 4 November 2009. The outcome of this mapping were summarized in a report, which in practice shows that the “control systems” set up to mitigate potential “231 risks”, and the actions to improve or consolidate the effectiveness of this control system proved adequate.
Anti-money laundering
Numerous initiatives were takes as part of the anti-money laundering project, leading to the creation of a Group Anti-Money Laundering Manager, i.e., the Head of the Research and Investigation Function of Banco Popolare’s Legal Service. Each single Bank and Company of the Group in the meanwhile appointed an anti-money laundering responsible/desk in charge of transposing the instructions given by the Group Manager into the local structures. Again to harmonize information and operational procedures, all reporting power delegations issued by the Group Banks to report suspicious transactions and violations under art. 49 of Lgs.D. 231/07 have been centralized at the Research and Investigation Function, and an IT procedure was released to manage suspicious transaction reports.
Mifid/Consob Compliance
In order to adopt the regulatory guidelines set out in Consob’s Communication 9019104 of 2 March 2009 "The duty of intermediaries to act correctly and transparently in the distribution of illiquid financial products”, the Group activated a specific project coordinated by the Parent company Governance structures, to establish ad hoc procedures to manage the regulatory measures for transparency and correctness. The main novelties were: shorter lag between the time of distribution of the financial instrument and the time when it can actually be traded on the Group Securities Market (Mercato Titoli Gruppo) for Bonds issued by the Group and Bonds issued by third parties and distributed exclusively by the Group Banks. As of 1 November 2009, this must occur within 90 calendar days of the settlement date of the transaction executed on the primary market; introduction of specific policies to identify illiquid financial products and referring to pricing issues;
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ex-ante transparency with disclosure of OTC derivative prices; identification and activation of the monitoring process for the correlation of OTC derivative transactions executed by customers for interest risk hedging. To comply with the above requirements, a number of technological actions had to be taken, among which: we developed a procedure for OTC derivative transactions, to identify the correlation between the debit position of the customer and the associated hedging transaction (for interest rate hedging products); we completed the necessary application adjustments for a correct management of outstanding relations with qualified counterparties; we made Post Trade Transparency processes and procedures compliant with new Consob instructions; we completed the steps to automate Aletti’s advisory model; we fine-tuned the process to manage retail customer relations; we introduced a new procedure to manage conflicts and to keep the related record, automatically integrated with sector procedures for distribution and trading; we released the MIFID-compliant insurance questionnaire for advisory services when distributing index-linked, unit-linked and capital guaranteed policies; we completed activities to include in all transaction forms (with graphics more in tune with the advisory service) all the regulatory disclosure requirements to be provided to the customer at the time of proposal and upon confirming the order execution.
Transparency
Following the coming into effect of the new Supervisory Instructions issued by the Bank of Italy for the transparency of banking and financial services and transactions and a correct relation between intermediaries and investors, published on 29 July 2009, an ad hoc working group was set up, in charge of analyzing the impacts the new regulation will have on the organizational structure and on the operations of Gruppo Banco Popolare. The working group acted promptly to adopt the new instructions aiming at safeguarding Customers, while improving the quality of customer relationships. The goals of the working group were: adjustment of customer management and customer communications with respect to the changes in “linked interest rates” and the implementation and automation of the process to enter the justified reason for customer communications as a result of changes required by the Bank Head Offices; management of customer communications in case of “expiring” terms and conditions; management of changes regarding individual customer accounts (unilateral when on the bank’s initiative and bilateral when agreed with customer) and automatic production of contract forms.
Once the activities were completed in the month of October 2009, we started planning new implementations to be carried out in 2010, following the issue by the Bank of Italy of a new version of the Regulation on transparency of banking transactions.
Usury
The new regulation issued by the Bank of Italy in August 2009 called for the revision of the existing anti-usury IT tools. Considering that usury is a criminal offense, the activity required the collaboration and the support of other Group structures, such as Legal Advisory office, Compliance, Group Organization, Retail and Corporate Departments. At the end of 2009 we identified the necessary contingency solutions to guarantee correct operations as of 1 January 2010. In any case the project will continue also in the first months of 2010 to complete the procedural actions and change internal policy rules.
Fondo Unico Giustizia (FUG)
L.D.143 of 16 September 2008 prescribed the duty for Banks to set up a fund (so called FUG) where all the money coming from seizures and forfeitures must be channeled. Under the regulation, a monthly report must be sent to Equitalia Giustizia SpA; for this reason SGS developed a tool for the automated and integrated management of a master database containing records and reports.
Sepa and Payment Services Directive
The first step of the SEPA project called “Credit Transfer” had been completed at the beginning of 2008, and in keeping with the National Migration Plan of the SePa Project, in November 2009 we started to manage the new payment collection tool Sepa Direct Debit (SDD) to run side by side with the already operational Sepa Credit Transfer (SCT). It is a new European service of pre-authorized debiting directly agreed by creditor and debtor and comparable to the Italian RID. Thanks to this scheme, debiting procedures will be swifter and more secure, and the debtor’s bank will have no need to carry out additional checks. SGS started to make the necessary adjustments to the Portfolio Procedure – Receivables Collection to manage this new type of transaction within the deadline fixed by the directive, and on 2 November last we released the new functionalities to all the Banks of the Group to manage the “debit” side of the transaction (checking
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account debiting). The “credit” side (payment collection instructions by customers) will be released as soon as the Payment Services Directive shall be transposed into domestic law (February 2010). Thanks to these developments, the Group can already support the migration from domestic instruments to the new pan- European instruments. In 2009 we also launched a Project for the analysis and implementation of necessary adjustments to comply with the Payment Services Directive 64/2007 EC (PSD) which has been transposed in January 2010; the PSD is the key juridical foundation through which existing regulatory differences among EC member countries can be overcome. It defines new transparency, efficiency and security rules, and it strengthens the protection and rights of customers. The new regulation cuts across various areas of the bank-customer relation, among which, for example, execution time and value date, mandatory use of the IBAN code, disclosure to customers, full revision of contracts for payment and collections services. At the end of December 2009, even though PSD had not been transposed yet into domestic law, SGS implemented a project to identify which areas are affected and define and develop all the technological and process implementations necessary to comply with the directive. About 66 products currently distributed by the Group Banks had to be modified, 70 operational processes revised and about 50 IT operations were carried out. Customer contract forms had to be made compliant and existing contracts with some suppliers had to be verified (external services). To guarantee compliance by 1 November 2009 it was necessary to commit Group internal resources from the impacted areas (SGS, Organization, Legal Affairs, Sales, etc.), corresponding to about 2,900 man days, plus those of suppliers. To date the project can be considered over, although a grace period until May 2010 has already been scheduled for the Collection procedure and for payments made by Public Administration. The directive came into force on 1 March 2010.
Streamlining the Lending processes
Loan granting process
To support the sales network and improve the information set used when granting loans, the decision-making system for Retail customers was revised, based on Basel 2 calculation logics using the PD parameter (Probability of Default) also for loans to retail customers of all the Banche del Territorio. SGS delivered the going live of the application tool for the calculation of decision powers and the automatic renewal of uncommitted credit facilities, including the activation of the decision-making engine Sco.Pri., all fully integrated with the decision-making strategies defined by the Group Lending Policies. The new decision-making system for the Small Business segment was released by making the necessary application changes, and the new Decision-making system was released across the entire sales network at the end of November 2009. Actions were made to facilitate the control of larger customer Groups, which will improve counterparty assessment, and important administrative activities to support the lending process (guarantee management) started to be centralized at the Parent company. At the same time, we continued to work on IT integration to extend the “New ELISE Mortgage and Loan Procedure” for Retail non-subsidized loans to all the Group Banks. Side by side with the launch of the new platform, we also launched the new loan processing procedure at the “Subsidized Loan” structure (“Crediti Speciali”), based on which minutes are sent to the branches within the second working day of the receipt of the complete documentation at the competent offices. The target was attained and consistently maintained as of June 2009, also thanks to the development of the “Automatic Minutes- maker” and to micro-organizational actions made within the structure.
In 2009, the entire Lending sector was busy complying with the numerous measures designed by the Government and the Italian Banking Association (ABI) to support Households and Small Businesses, owing to the harsh economic cycle that has been characterizing the entire year. To mention the main ones, there were the “Tremonti” measures, the initiatives in favor of families and enterprises hard hit by the earthquake in Abruzzo, and the “Debt Moratorium for SMEs” based on the guidelines of ABI, Government and Trade Associations (Small Business Act) to suspend debt payments by SMEs, and of course all the necessary IT implementations were developed, and we are now extending them to other segments (Household Plan).
Monitoring Process
Actions were made to improve loan monitoring, strengthening the sales network structures and revising procedures so as to enable a more effective and timely systematic monitoring of corporate customers by upgrading and enhancing the instruments supporting the customer loan monitoring process. We focused on the one side on optimizing the Performance Management process (G.AN.C. Procedure), by reducing our risk-taking level through the early detection of a restricted number of impaired loans to be closely monitored; on the other side, we focused on the opportunity to use the low risk loan portfolio profitably, to promote sales initiatives. The tool is being used by all the Banche del Territorio and periodic notification letters have been prepared, that are automatically sent to users (CPC, Renewals and Average Approval Time, etc.). The project is now dealing with the development of management reports for the Group Performance Department.
Process to manage doubtful loans
In 2009 a new process was released to manage payment defaults by retail customers, triggering the intervention of external entities, such as contact centers and doorstep loan collection firms.
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To further improve the process, the Banche del Territorio handed over the management of substandard and restructured loans for single names or Groups exceeding the one million euro unit amount to Società Gestione Credito (SGC) of Gruppo Banco Popolare, specializing in doubtful loans.
Actions in case of defaulted financial instruments
As part of the services offered to our customers, the bank took a number of actions in favor of customers holding bonds issued by some companies which defaulted in 2008- 2009. For all customers involved in the default of the Lehman Brothers Group, the Icelandic banks and General Motors we took over directly the management of the obligations associated with said positions for the affidavits of debt in compliance with the procedures defined from time to time by competent Authorities, and in any case we paid for legal charges and provided these services free of charge. The group is closely monitoring the situation, so as to keep our customers informed as to how things are progressing. To retain and improve customer relations, at the beginning of 2010 the Group launched an initiative to protect investments in index-linked policies backed by securities of Icelandic banks. To this end, it voluntarily offered to exchange the above policies with bonds issued by Banco, plus a possible cash balance settlement. By participating in the PEO, customers can recover the capital originally invested in the policies upon expiration of the bonds received in exchange.
Pattichiari
With the purpose of lending momentum to the strategy of increasing the competitiveness on the retail market, on 31 December 2008 Banco Popolare as a Group joined the New PattiChiari Consortium (Nuovo Consorzio PattiChiari), which came into operation on 1 January 2009, this being the pre-requisite for the effectiveness of the sector action plan, based on a continuous relation to improve business relations between banks and customers. In keeping with the above goals, the Consortium introduced important changes to its governance and to rules to participate in its initiatives, requiring new undertakings from banks, that will translate into practical benefits for customer relationships. In particular, the most important undertakings implemented up to now are: Automatic RID transferability (RID – B2C pre-authorized direct debiting); Automatic transferability of mortgage data and payments; Automatic Ri.Ba. transferability Ri.Ba. - B2B pre-authorized direct debiting); Protection against unlawful use of cards.
By 31/12/2010 the following undertakings must be implemented: Automatic bank transfer transferability; Automatic credit card account statement transferability; Automatic transferability of securities accounts.
UNI EN ISO 9001:2008 certification – project development and provision of treasury and cash management services to public agencies
A Quality Management System implies the existence of a certified operational model to manage and monitor the activities of an organization that wishes to guarantee customer satisfaction. After extending it to all the Group Banks, Banco Popolare obtained the certification of compliance with the new 2008 version of the UNI EN ISO 9001 standard: our quality certification for the design and provision of services to public agencies is still at top levels. This certification will enable the Banks of the Group to consolidate and foster their “community bank” vocation, and to strengthen the ties that have been established over time with local governments, guaranteeing high service standards that meet the stringent quality requirements of the ISO standards.
Bancassurance
In 2009, the partnership agreements between Banco Popolare and Gruppo Fondiaria SAI (investment-linked, savings and retirement scheme life policies) and Gruppo AVIVA (non-life and protection insurance products) were developed further. Since April 2009, the Banche del Territorio started to distribute Lawrence Life Policies, an Irish company of Gruppo Fondiaria-SAI; as a result, Popolare Vita’s product offering was expanded. Since July 2009 the new Insurance Company Avipop Vita is operational, and will work with Avipop Assicurazioni to design and offer protection products. With Gruppo Aviva we are also revising the product sales processes and procedures for the Group branches. In the unrelenting pursuit of customer service improvement, in May 2009 back office activities associated with bancassurance products were transferred over to SGS BP to achieve a greater operational efficiency. This led to the deployment of implementations to bring the post-sale management of policies on a single application. Groundwork activities have been carried out to distribute new life and non-life policies. With respect to non-life products, actions were taken to manage the distribution of the new products “Multirischi Impresa”
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and “Multirischi Commercio”, and a project was launched to implement a new web-based distribution procedure developed by the Insurance Company. With respect to life products: the Fondiweb application for the distribution of Life Products was released also to the banks of former Gruppo BPI; all the groundwork has been carried out to distribute the new Irish policies issued by Lawrence Life; the new products Popolare Vita Beldomani Futuro Garantito 2009 Soci e Dipendenti were implemented.
Enterprise architecture
In 2009 we designed a new strategy for the business process mapping and description system. Considering the increasingly stringent requirements in the field of compliance, we decided to point the system’s focus towards this ambit, and we designed and implemented a progressive integration among risk and control processes and systems. The Internal Auditing and Risk Management sub-systems were involved in the implementation. At first, the new strategy was aimed at supporting the Internal Control Development project, to obtain as quickly as possible a general mapping of the main Basel II risks within the different business processes (ICAAP standard). In the meantime it was decided to include the Internal Regulation of the various Group Companies in the mapping, and to analytically identify the associated process for each Regulation- based activity, together with the related risks and controls, if in place. The purpose was to obtain a gradual descriptive harmonization of the different Regulations, and extend it to the link between activities and the different business processes.
Strengthening of Parent company Governance
In 2009, the role of the Parent company was progressively strengthened, in particular with respect to risk monitoring and control activities. In April treasury and forex activities, as well as the management of Banco Popolare’s proprietary portfolio (which were previously carried out by Banca Aletti for the Group Banks) were centralized at the Parent company. In June, a new differentiated sales management model for “large corporate” customers was activated at Group level, whereby the sales management and the creditworthiness assessment of corporate customers of national import and complex financial requirements were to be centralized at the Parent company, with the appointment of dedicated specialists (Global Relationship Managers – GRM). In July Custodian Bank activities were centralized at Banco Popolare. In September the following actions were taken: activation at Group level of a new model to coordinate risk control and customer relations with institutional counterparties, i.e., domestic Banks and Banking groups, foreign Banks and Banking groups, non-banking Institutional Counterparties (Insurance companies, Insurance groups and Financial companies mainly associates of Banks and Insurance companies). Here as well, the relationship management and the assessment of the creditworthiness were centralized at the Parent company, and activities are to be coordinated by dedicated specialists (Institutional Counterparty Managers); activation at Group level of a new model to manage “nostro” and “vostro” accounts with foreign correspondent banks, centralized at the Parent company; centralization at the Parent company of some activities generally performed by the Loan Secretary offices of the retail banks (update, management and monitoring of Credit Bureau reports; preparation, execution and filing of documents referring to guarantees, collaterals and atypical guarantees); centralization at SGC BP SpA of the management of substandard and restructured loans with a unit amount above one million euro, to be added to the already ongoing management of non-performing loans.
Again in September 2009, the top management structure of Banco Popolare was revised to include the Chief Executive Officer and seven Departments: Corporate Retail Lending Finance, Corporate Center and Investments in associates and companies subject to joint control Legal Affairs and Compliance Operations Human Resources.
This action was in key with the corporate governance plan, whereby the decision-making and management processes are organized along criteria of utmost efficiency: constant risk control, minimum information flow dispersion, clear identification of head departments for the various operational areas, rationalization of direct reporting. Also the Parent company Committees were likewise revised to ensure clarity of vision, responsibility, crosscut knowledge of risks, traceability of decision-making processes. After the revision of the top management structure of Banco Popolare, and in step with the progressive strengthening of the controlling role of the Parent company, towards the end of the year the organizational models of the Corporate, Retail, Lending, Legal Affairs and Compliance Departments and of the Equity Investment service were equally revised. In December 2009 it was decided to have the Planning and Management Control structures of the retail banks functionally report to the peer structure at the Parent company.
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Basel 2
In 2009, as part of the “Extended” Basel 2 program, Banco Popolare moved ahead with the necessary activities to obtain the authorization from the Supervisory Authority to use internal rating systems to calculate minimum capital requirements. Described below is the work-in-progress of this and other projects as at 31 December 2009.
Credit Risk
In 2009, Gruppo Banco Popolare moved ahead with pre-validation activities with the Supervisory Authority to obtain the authorization to use internal rating systems (Internal Rating Based – IRB) to calculate capital requirements.
Credit risk models Pre-validation activities called for: the recalibration of “Probability of default” (PD) internal models for “Corporate” customers across the entire Gruppo Banco Popolare; the development and deployment of the PD model to adopt the advanced internal rating system (AIRB) for “Retail” customers; the reassessment of the “Loss Given Default” (LGD) model.
The Group intends to continue adopting risk analysis and measurement methods: the first step for the extension of the LDG parameter LGD (Loss Given Default) has already been reached in loan granting processes, and the parameter is used for the automatic renewal of credit facilities (December 2009). Decision-making engines for Retail customers and Small Businesses have been released to the various Banks, with strategies adequately integrated to take into account the unit Expected loss (EL), calculated by multiplying PD, Probability of Default times LGD, Loss given default.
The project is now focusing on extending the management utilization scope of LGD and developing a new engine to calculate effective LGD.
Liquidity Risk
Gruppo Banco Popolare completed the project for the fine-tuning of its management and control system for the liquidity risk, through the following steps: approval of the Group Liquidity Policy and of the Liquidity Contingency Plan to guarantee a timely and efficient management in case of liquidity stress or crisis; fine-tuning of quantitative methodologies to estimate cash flows associated with balance sheet items with an indefinite or recurring maturity, and related revision of existing risk limits; fine-tuning of the stress test methodologies; consolidation of a methodology to quantify economic capital absorption for liquidity risk (Basel II Second pillar).
Market Risks
During 2009 the Group continued to fine-tune the methodology to measure market risk, both from a technological and methodological standpoint. In the latter case, the methodology was made more suitable for the factoring in of market volatility risks in its risk measures. Back-testing procedures were developed, allowing us to verify ex-post the correctness and robustness of the model against risks that have actually occurred. In 2009 we also added detailed limits for each risk factor to the measurement and daily reporting of risks based on the VaR methodology, to allow a better control and a more careful management of the different market risk factors. Internal regulations on risk limits have been revised so as to harmonize measures across all the banks of Gruppo Banco Popolare. In 2010 we will develop risk analyses to verify the economic impact in case of extreme movements of market risk factors.
Project to certify the internal market risks model
The project to certify the internal model to calculate regulatory capital requirements to replace the standard methodology was launched in 2008 and in 2009 it went through a series of important evolutions from a functional, technological, scope and process standpoint. At functional level we developed the back-testing system to monitor the predictive quality of the risk management system with respect to actual portfolio profits and losses. Trade-off analyses are underway to assess whether to use the internal model, because the changes made to supervisory regulations by the Basel Committee (July 2009) tend to significantly reduce the benefits of using the internal model instead of the standard model currently in use.
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Operational Risks
Gruppo Banco Popolare implemented a model to calculate capital requirements based on the standardized approach rules prescribed by the new Supervisory Directives, and is moving ahead with the development and fine-tuning of a model to calculate capital absorption based on VaR logics for management and regulatory purposes, also in view of the plan to adopt the advanced methods to quantify capital requirements in the medium term. We implemented all the necessary infrastructures to manage operational risk, and in particular we: defined the new Group risk policy; integrated and implemented risk identification and assessment processes, as well as the new integrated model to measure capital requirements; defined new risk exposure reporting and assessment models; implemented self-assessment workshops on the risk management system.
The internal operational risk policy was approved by the Group corporate bodies in February 2008, followed by the adoption of the organizational model. Methodological analyses have been carried out to develop models and tools to measure capital requirements based on more advanced methods (so called Advanced Measurement Approach – A.M.A.). The scope of the internal model covers the companies of the Group that adopt the standardized approach also on an individual basis. In order to provide the competent structures with an effective tool to monitor operational risk, we developed a remote monitoring system to check the performance of the so called Centri di Responsabilità (CdR – Responsibility Centers) based on an application whose parameters can be fully specified by the user. The new application is managed by the Centralized Controls Function, and allows the periodic and/or on demand detection of potentially irregular phenomena due to failure to perform line controls or to non-compliant behaviors that could give rise to operational losses or risks. 160 types of events are monitored thanks to this procedure. Based on the parameters specified by the user, the procedure checks for anomalies and reports them to the Responsibility Centers to take the necessary actions; with this procedure it is possible to backtrack also single basic events that caused the anomaly. The procedure is fed by the sub-systems Administration, Finance and Loans, and was released in February 2009 to all the Group Banks.
Capital adequacy assessment
As part of the activities to adopt the new supervisory regulations (so called “Basel 2”), we moved ahead with the adoption of the so called “Second Pillar”, which requires a discrete process to measure the capital’s adequacy to face all material risks, that now include a wider class of risks than in the First Pillar. The process is called Internal Capital Adequacy Assessment Process or ICAAP. Based on this process, in April 2009 the Management and Supervisory Boards of the Parent company approved the second “ICAAP Report” to be submitted to the Bank of Italy (the first report had been sent at the end of October 2008), thus bringing the annual ICAAP assessment and reporting procedure to full operation. The process requires first of all the measurement of quantifiable risks based on management metrics to be defined autonomously, also based on the materiality of risks to be assessed; the Group uses as much as possible internal statistical/quantitative methodologies (VaR or Value at Risk), based on market practice. The ICAAP report showed a satisfactory level of capital adequacy for the Group, both with respect to 31 December 2008 (so called “current assessment”) and to 31 December 2009 (so called “prospective” assessment), to adequately face the set of identified risks. ICAAP calls also for a qualitative analysis of organizational checkpoints, to assess for each risk the competent organizational structures, the supporting IT systems, internal policies, controls, reports etc. that have been put in place to control and mitigate these risks. The analysis depicted a positive picture of the existing organizational checkpoints for risk mitigation and control. In addition to risk control, the Group pays special attention also to its capitalization level, to make sure it can maintain and strengthen its support to the households and SMEs of its market territory, also in case of economic crisis. The issue of 1.45 billion worth of financial instruments under L.D. 185/08 (so called “Tremonti Bonds”), and the issue of convertible bonds up to a maximum amount of 1 billion (“soft mandatory”) were based on the above rationale.
Risk limit system
To regulate corporate risk-taking, in 2009 the Group adopted a consistent and comprehensive risk limit system, where the risk limits represent the maximum level of risk to be taken, consistently with available capital and with the Group risk propensity (indicative to this regard is the allocation of a capital reserve not destined to cover current risks but set aside for capital strengthening purposes and to cover possible severe stresses). The responsibility to comply with each limit is assigned to specific corporate functions/bodies, which can determine risk dynamics by using managerial levers. As to liquidity risk, caps are set to ensure the sustainability of the financial flows generated by the expiration of outstanding intermediation transactions.
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Market disclosure
In April 2009 a specific public disclosure document, under Basel 2 Pillar Three, was published on the website of the Parent company, giving qualitative and quantitative information on the Group’s capital adequacy, on its risk exposure and on the general characteristics of the systems put in place to identify, measure, manage and control risks.
Technologies to monitor the Group interest rate/liquidity risk
To improve the application supports used by the Finance and Risk Management structures, a new procedure (Eagle) was implemented to monitor the performance of corporate liquidity based on aggregate and detailed views. The new application supports both Treasury requirements, by providing a valid tool to liquidity risk hedging strategies, as well as control functions (ALM and Risk Management), through specific reports developed to control the Group’s inventory and availability of eligible assets (Counterbalancing Capacity) and the related operational limits. In 2009 we completed the acquisition of revision flows from procedures and we released the complete set of counterbalancing capacity reports.
“Controls on CSA Contracts” Project
The negotiation of Credit Support Annex contracts (CSA) allowed us to effectively monitor OTC contracts with market counterparties, improving the efficacy of counterparty risk controls, as debt positions are covered with the periodic exchange of guarantees. Considering the increase in the number of counterparties involved and even more important the need to carry out daily controls, we decided to go for a double approach. First of all we joined the interbank circuits (triResolve by Trioptima) which provide their members with standardized systems to control outstanding positions. These tools (control reports, master data and single transaction assessment details, threshold and limit controls, etc.) are used by SGS’s Back Office for its daily controls, at present it is operational on a limited set of counterparties, and the goal is to complete the coverage within the first months of 2010. We then developed a new application (called “MATCH/CSA”) to guarantee also the control on outstanding positions with counterparties that are not members of the above interbank circuits, so as to ensure a comprehensive governance of control operations performed by SGS’s Back Office, through functionalities to automatically verify the alignment with counterparties positions.
Early Warning
In order to improve the control over transactions outstanding with banking borrowing counterparties, in October we completed the application development of the monitoring system for different types of credit facilities, such as OTC, deposits, bonds in portfolio, securities lending. The system must provide a daily monitoring of material positions (to date, about 1,000 banks with 35 billion euro worth of credit facilities), by spotting possible symptoms of relationship deterioration from among market, performance and financial signals. The project is strongly oriented towards an effective process management and is based on threshold logics with a traffic light format, mainly linked to: market price of risk (CDS); rating; comparison with country rating; comparison with sector averages; financial statements. Among the various functions we developed, worth mentioning is “watch list”, a sort of final summary of the different signals, highlighting counterparties on the basis of criticalities.
Communications
Based on the defined communication guidelines, in 2009 Gruppo Banco Popolare developed its communication initiatives primarily to consolidate its brand, reinforce the Banks’ ties with their historical franchises and share with its stakeholders, from shareholders to employees, its values and strategies, by clearly and fully expressing our “popolare” Group vocation and nature in all our communication initiatives.
Communications and External Relations
Press relations in 2009 were intense, and reported an increase in initiatives with respect to the previous year. 212 press releases were issued, from price sensitive, to commercial, corporate and institutional communiqués, and reports illustrating the charity and social initiatives of the companies of the Group. More than 20 press conferences were held, covering the numerous activities performed by the Group banks and highlighting initiatives closely tied to our territory. Banco’s coverage on local TV and radio stations was widely used to disseminate market and product information. We also increased our collaborations with numerous newspaper columns dealing with economy, finance and credit topics of interest for the general public. With regard to institutional communications, we focused on strengthening and spreading the Group brand name, values and image through targeted national advertising campaigns and a greater focus on local actions on the market territories, by running the 2008 positioning campaign themes on the press and the Internet. The Banco Popolare brand was strengthened further by the various local initiatives taken by the Banks in their franchises, thus reinforcing the association between the Gruppo Banco Popolare brand and the local brands of retail banks. A number of nation-wide cultural, musical and sports initiatives organized and sponsored by the Group in 2009 further
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contributed to spreading Banco Popolare’s brand. Worth mentioning are: the consolidation of the magazine “Rivista del Banco Popolare”, a six-monthly publication in its second year, featuring authoritative articles, spanning topics of general interest, from economy to culture, to innovation, and targeting a wide national public including the Group’s main stakeholders; the success of the sponsored exhibition “Corot e l’arte moderna. Souvenirs et impressions” at Palazzo della Gran Guardia in Verona, a national event stemming from the agreement between the Verona Museums and the Louvre in Paris; the support to the thirtieth edition of the Meeting for friendship amongst peoples, tagged “Knowledge is always a happening”, held in Rimini at the end of August. As to sports, our agreement with the soccer team Juventus F.C. is still ongoing. In the eighth edition of ABI’s event “Invito a Palazzo”, Banco Popolare for the first time participated in the extraordinary opening of heritage buildings having historical, artistic and architectural value with eleven corporate premises, tallying almost six-thousand visitors: Palazzo Altieri in Rome, Palazzo Scarpa in Verona, Palazzo Tacoli and Palazzo Carandini in Modena, Palazzo “Ex Albergo pei Poveri” in Bergamo, Palazzo Fossa in Reggio Emilia, Palazzo Ferrari Schizzi in Cremona, the Historical Head office and the Corporate Center of Banca Popolare di Lodi in Lodi, Palazzo Pantaleoni in Imola and Palazzo Spinola Gambaro in Genoa were opened to the public. Banca Aletti, in collaboration with the local Banche dei territori, organized meetings on foreign assets repatriation (Scudo Fiscale) in the various towns. In our historical franchises, also in 2009 the Group Banks kept on consolidating their traditional ties with their communities, by supporting and organizing various initiatives. Among musical show initializes, there was the seventh edition of “Estate in Concerto”, a series of summertime pop music events organized by Banca Popolare di Verona – S.Geminiano e S.Prospero in well established towns in Veneto, Emilia Romagna, Trentino and Friuli Venezia Giulia. In the franchise of Banco S.Geminiano e S.Prospero, worth mentioning are also the concerts of the Corale Rossini in Modena and of the Virtuosi Italiani in Reggio Emilia. Worth mentioning are the sponsorships of the music event “Estate Teatrale Veronese” and of the Teatro Filarmonico on the part of Banca Popolare di Verona, and the uninterrupted support in Lodi to the Bipielle Art Center, permanent seat in the corporate premises of an exhibition area open to the public. To this regard, the exhibition devoted to Fabrizio De Andrè in the tenth anniversary of his death was highly appreciated: “Sguardi randagi” retraces the artistic life of the Genoese singer- songwriter through the pictures of the photographer and friend of a lifetime, Guido Harari. Significant was also Banca Popolare di Lodi’s contribution in Pavia, at Castello Visconteo, for the exhibition “Da Velazquez a Murillo”, spanning one hundred years of Spanish paintings with the collections kept at the Hermitage in Saint Petersburg. Cassa di Risparmio di Lucca Pisa e Livorno also in 2009 sponsored the initiative “Banca delle Piazze”, which strengthens its ties with the towns of its franchise, which is also the objective of the support given to “Giugno pisano” and the sponsorship of the first edition of Lucca Maraton. As to sports events, Banca Popolare di Verona confirmed its commitment as main sponsor of AC Chievo Verona, as did Banca Popolare di Lodi with Amatori Hockey (A1 league) and Banca Popolare di Cremona as second sponsor of Triboldi Basket (A2 league). Other examples of support to the territory and its institutions is the long standing relationship of Banca Popolare di Verona with Ente Veronafiere, for well-established and successful shows such as “Vinitaly”, “Fiera Cavalli”, as well as with the Industrial Association of Verona. Certainly we cannot forget the initiatives undertaken by Banca Popolare di Novara and Credito Bergamasco to promote and support areas of excellence on their territories. For example, in the sports arena, Credito Bergamasco sponsored Atalanta Bergamasca Calcio for the 2009/2010 championship and Volley Bergamo Foppapedretti, national and international “excellence” in women’s volleyball (with the 2008-2009 edition, the Bergamo team reached the sixth “Champions League”). Banca Popolare di Novara supported Novara Calcio and Asystel Volley. In the cultural and artistic ambit, in addition to the traditional conferences on topical issues, Credito Bergamasco also organized and hosted in its historical corporate premises the exhibition dedicated to Gianfranco Bonetti, a primary Bergamo painter, who died too soon in July 2007, and the show “Longaretti. La metafisica delle cose”, first anthological exhibition of oil paintings on canvas and board of the renowned local author, which was highly appreciated by the public with more than 10,200 visitors. Not to mention Banca Popolare di Novara’s interventions in support of the areas of Verbano, Cusio and Ossola, the promotion of the unique and valuable collection of more than fifty Sicilian corals of the XVII-XVIII century from Trapani and Western Sicily kept in Palazzo Bellini, and again the support lent by Banca Popolare di Novara with Banco Popolare to the Genoa Aquarium. With regard to internal communications, in 2009 the graphics of the internet portals of the Companies of the Group have been revised and the content distribution improved to reinforce their role as timely source of information for Group employees. BANCO&NOI, the corporate bimonthly magazine for Group employees, had a circulation of more than 30 thousand copies per issue and represented an effective showcase for initiatives that saw the active participation of retail banks in their franchises, by widely informing its readers. A variety of events were also planned and organized for the Group employees, with the primary goal of fostering the quality of decision-making processes through the exchange of knowledge and experiences.
Investor relations
Illustrated below are the activities carried out by Investor Relations in 2009, together with an overview on registered and ordinary shareholders, while ratings and stock performance are dealt with in specific sections. For further details, an Investor Relations section is present on the corporate website (www.bancopopolare.it).
Investor Relations Activities
In 2009, Banco Popolare managed 75 events, generally with the participation of the Group’s top management, and reached more than 270 between investors and financial analysts, as illustrated in the table below.
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N° events % N° participants %
Presentations of Banco Popolare (webcast conference calls) 5 6.7% 5 (*) 1.8% Trade conferences 11 14.7% 139 (**) 51.1% Roadshows (equity) in other European countries 6 8.0% 26 9.6% Other meetings (one to one and group of investors) 28 37.3% 62 22.8% Phone and video conferences 16 21.3% 31 11.4% Meetings with rating firms 9 12.0% 9 3.3% Total events/participants 75 100% 272 100% (*)Participants in presentations and rating meetings organized by Banco Popolare are counted as only one. (**)Excluding investors who attended ‘floor presentations’ in trade conferences.
During the year, Banco Popolare organized four webcast conference calls to update the market on the Group’s financial performance and strategy, and a phone conference with webcast to explain Banca Italease’s restructuring plan to the market. Significant was our participation in 11 trade conferences, organized primarily in London by primary equity research and intermediation firms or promoted by Borsa Italiana, which allowed us to reach about 51% of our stakeholders, as well as in one on one meetings and group meetings. During the year, the Investor Relations Function promoted 6 equity roadshows – all staged in European countries except Italy and the United Kingdom – covering about 10% of investors and analysts. Finally, investors and analysts had the opportunity to communicate with the management of Banco Popolare by way of about 40 other contacts (other direct meetings, conference calls and videoconferences). Banco Popolare’s stock is actively covered by about 25 equity research firms, and the Investor Relations Function entertains a constant open dialogue with their “sell-side” analysts.
Shareholders
Banco Popolare’s share capital is subdivided between retail investors, marked by a very strong fragmentation reflecting the Group’s retail nature, and institutional investors in Italy and abroad. According to Consob, in January 2010, one institutional investor held a greater than 2% interest in Banco Popolare, as shown in Table 2.
Key shareholders of Banco Popolare (Source: Consob; snapshot as at 22/01/2010)
Shareholders % of share capital
Blackrock Investment Management (UK) Limited 3.543%
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PERFORMANCE OF THE MAIN COMPANIES OF THE GROUP
For a more in-depth analysis, below is a brief overview of the performance of the main companies of the Group.
Banco Popolare Soc. Coop. Banco’s role within the Group
Banco Popolare Società Cooperativa is the Parent company of the Banking Group Banco Popolare. The structure adopted by the Group sees the presence of a Holding Bank, Banco Popolare, which is a listed Cooperative company acting as Parent company, and is vested with management and control functions over the subsidiary Retail Banks (Banche del Territorio), the Specialized Banks, the Operating Companies, and the Service Companies. The Parent company Banco Popolare has a specific organizational structure that allows a uniform and coordinated management of service, support, management and control functions, centralized and segregated by business functions. The Holding company hosts functions that allow the definition of development strategic guidelines, organizational structure, business, administration and accounting planning, risk, credit and personnel management policies, audits and all the other functions that put the Parent company in a position to perform its role, as institutionally defined also by the applicable regulations.
Results
31-12-2009 31-12-2008 Changes (A) (B)
Income statement (millions of euro) Net interest, dividend and similar income 593.5 210.3 - Net fee and commission income 15.0 9.7 54.6% Net interest and other banking income 770.5 306.4 - Operating costs - 271.1 - 271.1 - Profit from operation 499.4 35.3 - Income (loss) before tax from continuing operations 296.2 - 975.5 - Income (loss) after tax from continuing operations 240.0 - 493.9 - Net income (loss) 240.0 - 493.9 -
Balance sheet (millions of euro) Total assets 71,317.5 54,640.4 30.5% Direct customer funds 39,212.2 24,106.5 62.7% Customer loans (gross) 14,550.7 4,426.5 (**) - Financial assets and hedging derivatives 9,596.6 8,231.3 16.6% Shareholders’ equity 10,355.3 8,681.3 19.3%
Structure and operating productivity Average number of employees (*) 1,388 1,480 -6.2% Bank branches 2 2 - (*) Monthly weighted average. (**) Restated in compliance with update of Circular 262/05 of the Bank of Italy.
With regard to the update of 18 November 2009 of the Bank of Italy’s Circular n. 262/2005 on financial statements and compilation rules, the comparative 2008 data have been adjusted to guarantee a like-to-like comparison with the new regulations adopted in the current year. The adjustments had impacts on both the official and reclassified financial statements and on the summary tables.
Credit intermediation
Customer funds
On 31 December 2009, direct customer funds, including debt securities in issue, stood at 39,212.2 million from 24,106.5 million the prior year. The 62.7% increase (+15.1 billion) is mainly attributable to the sale of bonds classified as “Financial liabilities measured at fair value” to retail customers of the retail banks. Financial liabilities measured at fair value comprise bonds issued by Banco Popolare that have been fair value hedged with derivatives. By exercising the fair value option instead of Hedge accounting to measure financial liabilities we can eliminate misalignments caused by the different accounting recognition criteria between derivatives and bonds, which would otherwise be measured at amortized cost.
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Customer loans
Customer loans are mainly represented by bonds issued by SPEs in securitizations performed by Group banks and companies, and by loans granted by the London branch included in “Other loans”.
Financial assets and hedging derivatives
Banco Popolare’s financial assets and hedging derivatives amounted to 9,596.6 million, up 16.6% with respect to the prior year.
Investments in associates and companies subject to joint control
On 31 December 2009, equity investments in companies under significant influence and joint controlled companies stood at 12,151.6 million from 11,249.8 million the year before.
The table below shows equity investment changes during the year.
Investments in associates and companies Decrements Direct subject to joint control - item 100 Book value Book value Increments of which shareholding Balance sheet assets 31 12 2008 31 12 2009 Decrements impairment % (in thousands of euro) losses Aletti & C. Banca di Investimento Immobiliare 133,908 - - - 133,908 60.47% S.p.a. Aletti Gestielle SGR SpA 11,860 - - - 11,860 21.63% Auto Trading SA 5,698 - (1,538) (1,538) 4,160 99.97% Banca Popolare di Lodi Capital Company LLC 1,012 - - - 1,012 100.00% Banca Popolare di Lodi Capital Company LLC II 980 - - - 980 100.00% Banca Popolare di Lodi Capital Company LLC III 26,593 - (226) (226) 26,367 100.00% Banca Popolare di Lodi SpA 2,051,109 - - - 2,051,109 100.00% Banca Popolare di Novara SpA 813,467 - - - 813,467 100.00% Banca Popolare di Verona - SGSP SpA 2,266,695 - - - 2,266,695 100.00% Valori Finanziaria SpA 49,297 198 - - 49,495 99.79% Banco Popolare Croatia dd 36,577 2,319 - - 38,896 97.98% Banco Popolare Luxembourg S.A. 32,559 - - - 32,559 99.97% Bipielle Bank Suisse SA in liquidation 21,564 29,080 (1,458) (1,458) 49,186 100.00% Bipielle International (UK) Ltd - 1,460 - - 1,460 82.00% Bipielle International Holding SA 10,027 - - - 10,027 100.00% Bipielle Real Estate SpA 387,760 - - - 387,760 100.00% Società Gestione Crediti BP Società Consortile 99,290 - (83,404) - 15,886 16.00% per azioni Bipitalia Alternative Spa 988 - (988) - - 0.00% Bipitalia Broker ex Ducato Insurance 1,525 - (1,525) - - 0.00% Bipielle Fianaziaria Spa 266,812 - (266,812) - - 0.00% BP Property Management Soc. consortile a r.l. 36,983 9,736 (33,382) - 13,336 27.31% Carfid 48 - (48) - - 0.00% Cassa di Risparmio di Lucca Pisa Livorno SpA 1,549,710 - - - 1,549,710 78.92% Compagnia finanziaria Ligure Piemontese - 12,146 - - - 12,146 100.00% COFILP SpA (in liquidation) Credito Bergamasco SpA 1,004,177 18,841 - - 1,023,018 88.99% Efibanca SpA 541,931 - (151,353) (151,353) 390,578 93.69% Holding di Partecipazioni Finanziarie Banco 188,304 433,337 - - 621,641 100.00% Popolare SpA Banco Popolare Hungary Zrt. 35,200 82 - - 35,282 100.00% Immobiliare BP Srl 325,387 - - - 325,387 100.00% Italfortune International Advisors SA 735 - - - 735 100.00% Partecipazioni Italiane 13,607 - - - 13,607 7.31% Royle West Ltd in Voluntary Liquidation 0 - - - 0 99.00% Seefinanz S.A. (in liquidation) 11,062 - - - 11,062 100.00% Società di Gestione Servizi - BP Soc. consortile 77,824 1,157 (57,847) - 21,134 20.50% p.Az. Tecmarket Servizi SpA 1,425 2,576 (1,407) - 2,593 87.13% Tiepolo Finance Srl 10 - - - 10 60.00% BP Covered Bond srl - 6 - - 6 60.00% Banco Popolare Ceskà Republika a.s. 37,500 - (37,500) - - 100.00% Popolare Vita SpA 77,910 29,655 - - 107,565 25.61%
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Investments in associates and companies Decrements Direct subject to joint control - item 100 Book value Book value Increments of which shareholding Balance sheet assets 31 12 2008 31 12 2009 Decrements impairment % (in thousands of euro) losses Agos-Ducato SpA 1,000,000 26,651 - - 1,026,651 39.00% Arca SGR 14,209 - - - 14,209 10.28% Banca per il Leasing - Italease SpA 33,191 993,391 - - 1,026,583 70.55% Centrosim SpA 1,975 - (1,075) (1,075) 900 7.50% Evoluzione 94 in liquidation 1,484 347 (1,831) - - 0.00% Finanziaria ICCRI - Bruxelles Lambert 1,259 - (12) (12) 1,247 50.00% Istituto Centrale delle Banche Popolari Italiane 65,908 28,385 (36,924) - 57,369 15.31% SpA Società Coop. Banche Popolari "L. Luzzatti" 123 18 - - 141 26.69% S.c.r.l. Aosta Factor - 1,855 - - 1,855 13.79% BPI Residential - 0 - - 0 4.00% Total 11,249,827 1,579,093 (677,328) (155,662) 12,151,592
During the year, Banco Popolare launched a Tender Offer on all the outstanding common shares of Banca Italease S.p.A., to acquire its control. At the deal closing, Banco Popolare had raised its interest from 13.14% to 70.549%, corresponding to a total amount of 147.6 million. After the takeover, Banco Popolare subscribed its share of capital increase, aiming at covering the losses reported by the neo-subsidiary, against payment of 845.9 million. Finally, at the end of the capital increase subscription period, Banco Popolare purchased unexercised option rights on the market, corresponding ditto a total amount of 43.1 million. These options were then exercised in January 2010, bringing its total stake to 73.817%.
Still in 2009 a project was carried out to convert some service subsidiaries from for-profit joint stock companies to consortia. This conversion called for the reallocation of the equity investments in Società di Gestione Servizi BP, BP Property Management, and Società Gestione Crediti BP within the Group, depending on the level of utilization of consorted services. At the end of the reorganization, Banco Popolare’s interest in Società di Gestione Servizi BP Società consortile per azioni had been reduced to 20.5%, in BP Property Management Soc. consortile a responsabilità limitata to 27.308% and in Società Gestione Crediti BP Soc. consortile per azioni to 16%. The 14.8 million net loss generated by the reallocation of equity investments in consortia has been deducted from net equity in compliance with the relevant regulations.
As to the reorganization of the other controlling equity investments, the main deals were the acquisition by Holding di Partecipazioni Finanziarie Banco Popolare of Bipielle Finanziaria and Bipitalia Broker for a total amount of 268.3 million, which in addition to the capital increase of 165 million carried out during the year, produced an increase in the carrying amount of the equity investment of 4,333 million. During the year, Banco Popolare subscribed also the capital increase of Bipielle Bank Suisse in liquidation for a total amount of 29.1 million and purchased 784,961 shares of the subsidiary Credito Bergamasco from retail customers for a total amount of 18.84 million, raising its interest in the company to 88.99%.
The main equity investments increments regarded the subscription of the capital increase of Agos - Ducato S.p.A for 22.1 million and the deposit in Popolare Vita S.p.A.’s future capital increase account of 28.8 million provide the company with the necessary financial resources to purchase from Group customers its index-linked policies whose underlying securities had been issued by the Lehman Brothers Group.
The main equity investments decrements for the year refer to: the sale of part of the stake held in Istituto Centrale Banche Popolari to Veneto Banca Holding leading to a capital gain of 16.5 million. During the year a capital increase launched by the same institute was subscribed for 11.9 million; the reclassification in discontinued operations of the equity investment held in Banca Popolare Ceska Republica for 375 million; the impairment losses reported during the year, of which 151.4 million refer to the equity investment held in Efibanca S.p.A..
Income statement
Interest margin in 2009 came in at 59.2 million. The growth over the prior year’s figure (a loss of 317.6 million) is mainly attributable to the positive effect of interest rate hedges of bonds at amortized cost, issued by the retail banks, to counterbalance the negative effects on interest income generated by the interest rate fall. Interest margin also benefitted from the centralization in Banco Popolare of forex and money market operations that were previously managed by the subsidiary Banca Aletti S.p.A..
Dividend income came in at 534.3 million of which 509.9 million paid by fully consolidated companies as a result of profits generated in 2008.
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Net interest, dividend and similar income as a result added up to 593.5 million.
Net fee and commission income totaled 15 million, up by 55.4% over the previous year.
Other revenues amounted to 196,1 million. In particular, service fees, net of recoveries, charged to Group companies in 2009 totaled 203.5 million.
The net financial result posted a loss of 34.1 million.
The net fair value changes in hedge relationships totaled 1.6 million.
Profit on disposal of financial assets available for sale totaled 7.2 million and were mainly represented by the sale of the equity investment in Delta S.p.A., for 3.5 million, of the interest held in Centrale dei Bilanci for 1.5 million, and by the sale of the equity stake held in S.I.A. - SSB S.p.A. for 1.4 million.
Net loss on financial assets and liabilities designated at fair value through profit and loss added up to 195.6 million. In detail, the loss on financial liabilities measures at fair value (the algebraic calculation of fair value changes in bonds and associated hedging derivatives) came in at 228.8 million. The worsening with respect to the previous year is mainly attributable to two factors. First of all the change in the criterion used to measure debt securities issued and sold to retail or similar customers. The second cause of the loss on financial assets and liabilities measured at fair value was the measurement of debt securities sold to institutional customers. The method used to measure the fair value of these liabilities has remained unchanged and therefore it factors in also changes caused by the fluctuation of the issuer’s creditworthiness. The upgrading of Banco Popolare’s creditworthiness last year caused the impairment of the debt securities and the consequent charge to income. Net profit on financial assets measured at fair value totaled 33.2 million, of which 25 million were generated by capital gains on debt securities (of which 21.8 million attributable to the revaluation of bonds of the subsidiary Creberg), and 12 million by the capital gains on UCITS units, of which 11.5 million attributable to Hedge Funds managed by the subsidiary Aletti Alternative SGR. The 3.8 million capital losses are entirely attributable to UCITS units. The net financial result includes also dividends from financial assets held in portfolio totaling 5.4 million.
On 31 December 2009, personnel expenses stood at 158.8 million, while other administrative expenses added up to 111 million, and depreciation and amortization amounted to 1.3 million. Operating costs totaled 271.1 million, basically unchanged with respect to the previous year.
Net impairments of loans, guarantees and commitments totaled 29.3 million, and are mainly represented by impairments recognized on syndicated loans granted to the Icelandic banking industry of 3.7 million, impaired loans of the London branch of 16.9 million (of which 7.7 million non-performing loans, 6.6 million substandard loans and 2.6 million restructured loans). The loan to Equilon S.p.A. was further impaired for 9.9 million. The loan portion whose repayment is subordinated to the collection of a consumer credit portfolio (25 million) by now has been fully impaired. Collective impairments totaled 0.3 million, while write-backs and profit on loan sales consist of 0.7 million worth of write-backs on bank country risk, 0.8 million collective impairments and 0.08 million losses on sale of securities classified in the loan portfolio.
Net impairments of other financial activities totaled 13.3 million, and are mainly represented by impairments recognized on equity investments below 20% and debt securities shown under financial assets available for sale. The main losses charged to income for the year refer to the equity investments held in Banca Network S.p.A. of 6.7 million, in Archimede 1 S.p.A. of 1.3 million and in Blue Square Fund of 2.2 million.
Net impairment of equity investments and goodwill totaled 155.7 million, and consists of equity investment write-downs charged to income as a result of impairment losses. The main impairments involved the equity investments in: Efibanca S.p.A. for 151.4 million, Auto Trading SA for 1.5 million, Bipielle Bank Suisse SA in liquidation for 1.5 million and Centro SIM S.p.A. for 1.1 million. Profit on sale of equity and other investments totaled 16.9 million, and were mainly represented by the sale of the equity investment held in Istituto Centrale Banche Popolari for 16.5 million.
Tax on income for the period totaled 56.1 million. It includes 51.8 million representing the charge incurred to settle out of court a number of tax litigations inherited ager the merger with Banca Popolare Italiana. The item includes also 7.1 million charges deriving from the impairment of a part of deferred tax assets that is unlikely to be recovered, and 4.4 million revenues from recognizing the credit resulting from the Irap refund application referring to prior years.
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Banca Popolare di Verona - S.Geminiano e S.Prospero
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest, dividend and similar income 463.0 725.5 -36.2% Net fee and commission income 367.3 334.3 9.9% Net interest and other banking income 824.6 1,242.1 -33.6% Operating expenses -559.9 - 580.1 -3.5% Profit from operations 264.6 662.0 -60.0% Income (loss) before tax from continuing operations 63.1 419.7 -85.0% Income (loss) after tax from continuing operations 16.3 267.4 -93.9% Net income (loss) for the year 16.3 267.4 -93.9% Balance sheet Total assets 32,304.8 31,397.9 2.9% Loans to customers (gross) 25,603.4 23,781.9 7.7% Financial assets and hedging derivatives 419.9 427.4 -1.8% Shareholders’ equity 2,364.8 2,581.2 -8.4% Customer financial assets Direct customer funds 26,978.1 26,541.4 1.6% Indirect customer funds 20,513.5 18,550.4 10.6% - Assets under management 7,674.0 7,990.4 -4.0% - Mutual funds and Sicav 3,021.7 3,447.2 -12.3% - Managed accounts invested in securities and in mutual funds 1,724.0 1,949.3 -11.6% - Insurance policies 2,928.3 2,593.9 12.9% - Assets under custody 12,839.5 10,560.0 21.6% Other data Average number of employees (*) 4,169 4,265 Bank branches 547 547
(*) Monthly arithmetic mean.
Credit intermediation
Direct customer funds
On 31 December 2009 “extended” direct funds, inclusive of sold Parent company bonds, reached 31,381.1 million euro, from 27,984.4 million on 31 December 2008, posting an increase in absolute terms of 3,396.7 million euro (+ 12.14%). The increase reported for extended funds is confirmed also when considering only direct customer funds. Significant was the growth reported by checking accounts and deposits, running at 1,847.3 million (+19.3%), a springboard for the growth of loans to customers, in spite of the decrease in repos. The volume of repurchase agreements outstanding on 31 December 2008 was the result of a very competitive selling policy from a return standpoint, which had been launched in the last quarter of 2008, and when it expired it was not renewed in the current year. Securities issued and financial liabilities reported a sizable drop due to the fact that in the current year bonds for about 726 million euro expired, while other bonds for about 520 million euro were early redeemed, as too expensive. These issues were not replaced, because already since September 2008 the Bank sells to its customers securities issued by the Parent company and its own funding requirements are met by intercompany interbank financing. In 2009 the above sales reported a substantial increase in volume (2,960 million growth in absolute terms).
Indirect customer funds
Marked to market indirect customer funds totaled 20,513.5 million euro, up by 10.58% as compared with 18,550.3 million euro last year. Also restricted indirect funds under custody (i.e., mutual funds, banking foundations, merchant banks, leasing and factoring companies, SIM, SICAV, fund managers, insurance companies, pension funds and other superannuation funds, central supervisory authorities and banking associations) decreased by about 680.4 million euro in absolute terms (-7.46%), because the Bank privileged the sale of the Parent company’s debt securities, which somehow partially eroded the stock of other securities held by customers. Hence, driven only by the growth in sold Parent company bonds, total indirect funds grew in absolute terms by 1,963.1 million euro (+10.58%), but net of this component, restricted indirect customer funds decreased by 996.8 million euro (- 5.83%). Total customer funds, (direct + indirect) on 31 December 2009 came in at 47,491.6 million euro, up by more than 956.7 million euro compared with 31 December 2008 (+ 2.06%). The volume-related decrease in restricted indirect customer funds, amounting to 1,757.7 million euro, was only partly offset by the price-related increase in value, totaling 760.8 million euro.
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Loans to customers
In keeping with the previous year, in 2009 we consolidated the policy which on the one side focused lending activities on the typical business sectors of a retail bank, in particular small and medium enterprises and retail customers, and on the other side reduced the exposure to the Large Corporate sector. As a result, at year end loans, gross of write-downs, reached 25,603.3 million euro, up by 7.40% from 23,840.1 million euro on 31 December 2008. The actual figure on 31 December 2009 includes also 406 million euro worth of loans to Banca Italease until 30 December and that at the balance sheet date had been transferred to Release S.p.A., which is not a bank and therefore the related loans have been included in customer loans. Gross of write-downs, loans increased by 1,763.2 million euro in absolute terms (1,357.2 without Release S.p.A.), but about 845.4 million euro were absorbed by the hefty increase in impaired loans. Growth in performing loans was driven both by corporate loans (about 734 million euro), and by retail loans (about 685 million euro).
(in thousands of euro) 31/12/2009 31/12/2008 Changes
Impaired assets 2,417,431 1,429,664 987,767 69.1% Doubtful loans 935,516 686,182 249,334 36.3% Substandard loans 946,749 497,783 448,966 90.2% Restructured loans 284,061 101,090 182,971 181.0% Past dues 251,105 144,609 106,496 73.6% Performing loans 23,185,915 22,410,480 775,435 3.5% Total gross loans 25,603,346 23,840,144 1,763,202 7.4% Individual adjustments -618,317 -475,593 -142,724 30.0% Collective adjustments -107,497 -190,450 82,953 -43.6% Total net loans 24,877,532 23,174,101 1,703,431 7.4%
Total impaired loans to customers reported a significant increase in 2009, along the prior year’s uninterrupted trend. Gross of write-downs and including impaired securitized loans (totaling 103 million euro), they came in at 2,417.4 million euro from 1,429.7 million euro on 31 December 2008 (+ 69.09%).
The increase of this aggregate was caused by the growth of all classes of impaired loans. In particular, doubtful loans went from 686.2 million euro to 935.5 million euro, posting a net increase of more than 249 million euro (+36.34%), as a result of new classifications of about 529 million euro, of which about 470 million from substandard loans at the end of last year, net of loan collections of 86.4 million euro and write-offs of about 192.4 million euro. The NPL coverage ratio was 45.35%, down from 47.48% last year, however this decrease is linked to significant accelerated write-offs carried out last year. Should we include said losses, the coverage ratio would rise to 54.28% compared to 53.75% last year.
Particularly significant was the rise reported by substandard loans, from 497.8 million euro last year to 946.7 million on 31 December 2009, posting an increase of 449 million euro in absolute terms (90.19%). During the year, new substandard classifications totaled more than 1.3 billion euro (of which 403.7 million directly reclassified from past dues), while about 470 million euro worth of loans were reclassified from substandard to non-performing and more than 305 million euro from substandard to performing loans. As with non-performing loans, the coverage ratio went from 19.11% last year down to 15.99% the current year, however the decline is due to the fact that some sizable loans with significant write-downs outstanding on 31 December 2008 were reclassified as non-performing in 2009, pushing down the coverage level. We should also consider that the figure as at 31 December 2009 include 4 loans under restructuring for a total exposure of 110.8 million euro and write-downs of 26.7 million euro. Net of these positions, the average coverage ratio of substandard loans would come in at 12.43%.
In 2009, a sizable number of new restructured loans were recognized for about 203.9 million euro, for which about 17 million euro write-downs were posted. One single large position, amounting to 23 million euro, was reclassified as performing. The average coverage ratio for this class of loans was 11.21%, down by more than seven percentage points compared to last year. This decrease is due to the fact that some of the new sizable restructured position did not give way to write-downs because the restructuring process did not require sacrifices from a profitability standpoint and the workout plans are being complied with. Net of the above hefty positions, the average coverage ratio for cash exposures came in at about 18%, in line with last year.
With respect to past dues, it should be noted that the comparison between the two years is not on a like-to-like basis, as this year has been impacted by the new regulations issued by the Bank of Italy as of June 2009, prescribing that loans to real estate companies and mortgages due for over 90 days must be classified as past dues. The impact of this new regulation is quantifiable in about 120-130 million euro. With respect to write-downs, the coverage ratio went down to 4.33% al 31 December 2009 in compliance with a policy issued by the Parent company, which at the end of the financial year asked all the retail banks belonging to Gruppo Banco Popolare to bring the past due impairment criteria in line with the specified percentage rate, based on the recent history of the banks in terms of recoverability analysis of past dues. Moreover, last year the past due coverage ratio (25.2%) exceeded that of substandard and restructured loans (18.98%) as
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past dues included individual adjustments of some sizable corporate loans that in the first months of 2009 have been reclassified as substandard loans. Net of these exposures and write-downs, the average coverage ratio of past dues on 31 December 2008 went down to 9.73%.
At the end of 2009 the impaired to total customer loan ratio, gross of write-downs, amounted to 9.46% as compared with 6.01% in the same period last year. As a result of the above described dynamics, write-downs of impaired loans at the end of the year accounted for 25.58% of their total gross amount, with respect to 33.29% on 31 December 2008. The rising trend of gross impaired loans is confirmed also by the same ratio net of write-downs, which soared from 4.13% on 31 December 2008 to 7.24% at year-end. This trend is linked to the progressive deterioration of the economic environment in 2009, during which the distress signals from the manufacturing industry that had started to emerge in Q4 2008 grew even worse.
Write-downs of performing loans totaled 0.46% of gross loans on 31 December 2009 from 0.85% on 31 December 2008, and include only collective write-downs. Note that last year individual adjustments had been carried out on performing loans that had shown signs of deterioration or of requiring a workout plan in the first two months of 2009 and before the approval on 4 March 2009 of the draft annual report as at 31 December 2008, such as to call for individual adjustments. These loans, corresponding to an exposure of about 200 million euro, were then classified as impaired loans in the first months of this year. Should we consider only collective write-downs, the coverage ratio of performing loans on 31 December 2008 went down to 0.47% , in line with last year’s coverage ratio, that had suffered from a worsening of the parameters referring to “probability of default” (PD) and “Loss Given Default” (LGD), as a result of the shift forward of one year of the five-year historic series taken as a reference to calculate them.
Operating performance
2009 data are not comparable with the previous year as the corporate scope differs between the two years, as a result of the corporate actions carried out in the second half of 2009.
Net interest, dividend and similar income totaled 462.9 million euro, as a result of an interest income of 1,027.3 million euro and an interest expense of 564.3 million euro. The main constituent of interest income is net customer interest, totaling 319.9 million euro, resulting from a loan interest income of 878.5 million euro and interest expense from checking accounts and savings deposits of 188.3 million euro and on securities and certificates of deposit in issue of 370.4 million euro.
Additional interest income came from financial assets held in portfolio for 19.8 million euro and from other assets for 0.6 million euro, as well as a interest margin towards banking counterparties of 89.6 million euro. The decrease in net interest, dividend and similar income reported in 2009 is attributable to the unfavorable movements of interest rates, which have been diving suddenly and constantly throughout 2009. In particular, it was customer funds that made a lower contribution to interest margin, as the combined effect of lower average volumes with respect to 2008, and foremost the narrowing spreads caused a decrease in the overall contribution of this income source of about 170 million euro. This contraction was partly offset by the customer loan repricing policy, so that, with average volumes of granted loans remaining basically unchanged in 2008 and 2009, yet we obtained a higher P&L contribution of more than 90 million euro. After considering the remaining constituents, the result is the above interest, dividend and similar income contraction. More than 70% of the above drop is attributable to the BPV network, and breaking it down into the various segments, it was largely caused by the Retail segment, followed by Private and Others, partly offset by the growth reported only by the Corporate segment. Net fee and commission income came in at 367.3 million euro (334.3 million euro in 2008), as a result of a commission income of 392.2 million euro and a commission expense of 24.9 million euro. Commissions from management, brokerage and advisory services account for 65.15% of total net commissions (61.6% in 2008). Commissions from “other services” refer to ATM and credit card services for 13.2 million euro (14.6 million in 2008) and to securitization servicing for 1.9 million euro (2.5 million in 2008). Among management, brokerage and advisory services, securities sales is the constituent that made the greater P&L contribution in 2009. In particular, in addition to the commissions paid by the Parent company for the sale of its bonds, this sub-item includes commissions received from “other companies” of Gruppo Banco Popolare for funds sold to customers of about 23.3 million euro (41.5 million in 2008) and securities of about 15.9 million (22.5 million in 2008). Also commissions from distribution of third party services made a significant contribution, made up of 42 million euro (50.8 million in 2008) referring to insurance products (of which 24.1 for Lawrence Life Index-linked policies), Ducato consumer lending products (21.2 million), credit cards (14.2 million) and 2.8 million from other products. This item includes also the sale of asset management products that generated net commissions of 6.6 million, as compared with 12.8 last year.
Net financial income totaled 45.5 million euro (11.8 million in 2008) This aggregate is the result of a net trading loss of 5.9 million euro, that include charges paid on customer transactions regarding some leveraged derivative positions and provisions on other positions at risk for a total amount of 1.6 million euro (21.9 million in 2008).
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We also reported a currency trading loss of about 3.5 million euro, offset by profits and capital gains generated by the trading portfolio of 0.9 million and by derivatives trading of about 4 million euro. The net result also includes the 5.8 million negative effects of credit default swaps that were executed to hedge against the credit risk of customer loans and reduce regulatory capital absorption (the contribution of these derivatives in 2008 had been in excess of +5.9 million).
Net financial income also incorporates the net loss on debt securities measured at fair value and the associated derivatives of 38.9 million euro (+23.4 million euro on 31 December 2008), of which 40.5 million referring to the recognition through profit or loss of capital gains accrued until 31 December 2008 on bonds issued as a result of loan market variations due to the change in their recognition criterion, as more exhaustively described in the section dealing with noteworthy events for the year. On 31 December 2008 this component had posted a positive P&L contribution of 27.4 million euro.
Total personnel expenses came in at 284.5 million euro (299.4 million in 2008), net of recoveries associated with personnel seconded in other Group companies. This aggregate includes non-recurring costs produced by the ongoing integration process, amounting to 2.1 million euro (5.7 million in 2008, of which 2.6 due to early retirement schemes).
Other administrative expenses totaled 259.3 million euro (268.4 million in 2008), of which 86.6 million euro referring to direct costs (104.5 million in 2008), the remaining part being charges due to Group companies. In particular, costs payable to the Parent company refer to charges for functions provided centrally.
Depreciation and amortization totaled 16.1 million euro (12.4 million in 2008): 5.7 million euro refer to own property and equipment (5 million in 2008), 7.6 million euro (7.5 million in 2008) to leasehold improvements mainly for the renovation of rented buildings occupied by our branches, and 2.7 million euro to leasehold improvement adjustments, not fully depreciated on 31 December 2009, referring to branches to be closed or transferred according to the plan approved on 15 December 2009.
Net loan impairments totaled 195.3 million (228.8 million in 2008) and include a profit on non-recourse sales of impaired loans of 1.5 million euro (1.2 million in 2008). Net of these sales, net write-downs would rise to 196.8 million euro (230 million in 2008). Net loan impairments have inevitably been largely affected by the deterioration of real economy, as well as by write-downs related with substantial provisions at the Bank and totaling about 42.5 million euro, which are an anomaly with respect to the pursued credit policy. Net of these positions, total write-downs would have amounted to 152.9 million euro. This year’s figure includes also about 17 million worth of supplementary write-downs required by the Bank of Italy as a result of the Group audit.
Net income (loss) for the year in 2009 amounted to 16.3 million euro (267.4 million in 2008), after an income tax of 46.8 million (152.3 million in 2008).
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Banca Popolare di Lodi
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest, dividend and similar income 417.36 506.19 -17.5% Net fee and commission income 264.91 196.94 34.5% Net interest and other banking income 661.49 698.23 5.3% Operating expenses -481.08 -507.33 -5.2% Profit from operations 180.41 190.90 -5.5% Income (loss) before tax from continuing operations 64.87 -55.93 n.s. Income (loss) after tax from continuing operations 30.82 -55.31 n.s. Net income (loss) for the year 30.82 -55.31 n.s. Balance sheet Total assets 19,114.2 19,334.1 -1.1% Gross Loans to customers (*) 14,060.7 14,339.7 -1.9% Financial assets and hedging derivatives 300.7 429.1 -29.9% Shareholders’ equity 1,432.3 1,402.4 2.1% Customer financial assets Direct customer funds (**) 14,294.6 14,778.5 -3.3% Indirect customer funds 14,868.7 13,564.0 9.6% - Assets under management 3,511.9 3,131.9 12.1% - Mutual funds and Sicav 1,398.8 1,544.0 -9.4% - Managed accounts invested in securities and in mutual funds 515.1 482.9 6.7% - Insurance policies 1,598.0 1,105.0 44.6% - Assets under custody (***) 11,356.8 10,430.2 8.9% Other data Average number of employees (****) 3,405 3,425 Bank branches 505 518 (*) inclusive of loans to Ducato S.p.A. for 0.1billion (1.8 billion in 2008) (**) inclusive Holding company bonds for 17.3 billion (15.9 billion in 2008) (***) inclusive of Holding company bonds for 2.9 billion (1.1 billion in 2008) (****) Monthly arithmetic mean
Credit intermediation
Total assets under administration (direct and indirect customer funds) totaled 29,163 million, up by 2.9% from 28,342 million on 31 December 2008. Retail customer funds stood at 14,294.6 million euro (-483.9 million, -3.3 % over 31.12.2008); the decline was mainly attributable to the decrease of issues following the centralization of the role of single issuer at the parent company Banco Popolare, in spite of the marked increase in checking accounts and deposits. Should we include also Holding company’s bonds, this item would add up to 17.3 billion (15.9 billion in 2008), corresponding to a growth rate of 8.8% On 31 December 2009, retail assets under management (Mutual funds, Managed accounts, Sicav and insurance products) stood at 3,512 million euro, on the upside with respect to the end of the previous year (+380 million, +12.1%) Gross customer loans totaled 14,060 million euro, down by 279 million (-1.9%) from 31.12.2008. Loss provisions (including NPV discounting effects) added up to 650.4 million (+25 million, -4.0% over 31.12.2008), therefore net customer loans came in at 13,410 million euro, down by 304 million (-2.2%) over 31.12.2008. Performing loans amounted to 12,548 million euro gross and 12,437 million net of collective write-downs (the aggregates reported a -2.6% and -2.7% increase over 31.12.2008); impaired loans, made up of non-performing loans, substandard loans, restructured loans or under restructuring and past dues, added up to 1,512.3 million gross (+4.3% over 31.12.2008) and 972.8 million net of write-downs (+4.0% over 31.12.2008).
(in thousands of euro) 31/12/2009 31/12/2008 Changes
Impaired loans 1,512,287 1,450,432 61,855 4.3% - Non-performing loans 486,398 407,677 78,721 19.3% - Substandard loans 900,415 949,267 -48,852 -5.1% - Restructured loans 31,919 5,845 26,074 446.1% - Past dues 93,555 87,643 5,912 6.7% Other performing loans 12,548,446 12,889,259 -340,813 -2.6% Total gross loans 14,060,733 14,339,691 -278,958 -1.9% Individual write-downs -539,449 -514,595 24,854 -4.8% Collective write-downs -111,002 -110,993 9 0.0% Total net loans 13,410,282 13,714,103 -303,821 -2.2%
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Operating performance
On 31 December 2009, net interest, dividend and similar income stood at 417.4 million. Interest income totaled 680.9 million and are mainly referred to interest accrued on customer loans (including securitized loans) of about 586 million and loans to other banks of 51.2 million. Interest expense added up to 283.2 million and mainly refer to interest accrued on due to customers of 93.4 million, on debt securities of 159.6 million and on due to other banks of 30.2 million. Dividend income from Investments in associates and companies subject to joint control totaled 19.7 million.
Net fee and commission income came in at 264.9 million; commission income amounted to 281.7 million, while commission expense stood at 16.8 million. The most significant component of commission income was commissions from management, brokerage and advisory services, amounting to 155.1 million.
Other revenues/charges totaled -1.7 million, net of recoveries of indirect taxes and sundry expenses (totaling 24.6 million, of which 28.2 million were tax recoveries, 0.7 million recoveries from real estate expenses and rents, 1.2 million recoveries from Group companies for services provided by Bpl and 4 million recoveries of other expenses) and of reclassified D&A as a result of leasehold improvement of 7.9 million that incremented net write-downs of tangible and intangible assets. The aggregate shows a negative sign owing to revenues from periodic charges debited on checking accounts that were reclassified from Other revenues/charges to Net fee and commission income.
Net financial income/loss incorporates net trading income and income from assets and liabilities measured at fair value, as well as the profit/loss on disposal of other financial assets or on repurchase of financial liabilities. On 31 December it added up to -19.1 million, as it includes -23.7 million euro associated with the change in creditworthiness.
Operating expenses amounted to 481 million euro and break down into personnel expenses of 228.6 million, other administrative expenses of 237.9 million and depreciation and amortization of 14.5 million.
Net write-downs on impairment of loans, guarantees and commitments totaled 97.3 million, resulting from: write-downs and provisions of 182.1 million, with the following breakdown: write-downs of 56.2 million on substandard loans, 82.3 million on non-performing loans, 5.4 on restructured loans, 4.8 on past dues, 12.9 million for loan losses and 20.5 million for the increase in collective impairment of performing loans; write-backs of 85.4 million (of which 36.5 million on substandard loans and 34.3 on non-performing loans, 3.5 on past dues, 8.2 on restructured loans and 2.9 million from decrease in collective impairment); profit on disposal of non-performing loans of 0.4 million; write-downs of guarantees backing substandard loans of 1 million and write-downs of guarantees backing non- performing loans of 0.03 million euro.
Net impairment of other financial assets available for sale came in at 11.7 million euro, and refer to write-downs on subordinated securities from the securitizations Tiepolo Finance II (11.3 million) and Tiepolo Finance I (0.4 million).
Provisions for risks and charges totaled 6.3 million and incorporate provisions net of write-backs of 7.7 million for legal disputes and 1.2 million for write-backs of other assets.
As a result, an Income (loss) before tax from continuing operations of 64.9 million was posted.
Income tax totaled 34.1 million euro and include current taxes of 26.8 million of which 9.4 IRES and 17 IRAP, changes in deferred tax assets of 7.9 million, changes in deferred tax liabilities of 6.6 million and a release of tax provisions of 7.3 million.
Net of income tax, Net income (loss) for the year as at 31 December 2009 totaled 30.8 million.
Other noteworthy events in the year
Summarized below are the main noteworthy events impacting BPL in 2009: by-law changes to make the Articles of Association compliant with Statutory Directives on corporate governance and harmonize all the by-laws of the Group retail banks (Banche del Territorio); approval by the Board of Directors of Banca Popolare di Lodi of the Corporate Governance Plan, the Institutional counterparty Plan, the Large and Mid Corporate plans, the Group Lending Policies, which set out the lending guidelines and general principles for Gruppo Banco Popolare and regulates the Lending Role of the subsidiary Banks and Companies, and of the Operational rules of the Board of Directors and on information flows in compliance with the Bank of Italy directives; approval by the Board of Directors of BPL of a plan to centralize the relationship management of foreign (commercial and financial) Clearing Counterparties, with respect to flows of foreign currency payments and collections for the single Banks of the Group and for the accounting centralization of cash management at the Parent company; compliance with Lgs.D. 231/07 to adopt the regulatory novelties and strengthen the processes and controls in the field of anti-money laundering and terrorism financing, with the additional purpose of preventing a direct involvement of the Group companies in similar crimes;
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launch of a project to identify specific initiatives to optimize our Branch Network, aiming at increasing the Group’s commercial and profitability performance; approval of the new version of the Risk Assessment Document pursuant to Lgs.D. 81/2008 on healthcare protection and security on the workplace; adoption of the Group Regulation on the Manager responsible for the preparation of financial reports (L. 262/2005).
Banca Popolare di Novara
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest, dividend and similar income 430.8 508.1 -15.2% Net fee and commission income 322.5 274.7 17.4% Net interest and other banking income 706.7 805.1 -12.2% Operating expenses -435.2 -431.6 0.8% Profit from operations 271.5 373.5 -27.3% Income (loss) before tax from continuing operations 142.2 231.1 -38.5% Income (loss) after tax from continuing operations 83.1 142.8 -41.8% Net income (loss) for the year 83.1 142.8 -41.8% Balance sheet Total assets 16,402 18,944 -13.4% Loans to customers (gross) 13,915 13,158 5.8% Financial assets and hedging derivatives 803 751 6.9% Shareholders’ equity 1,066 979 8.9% Customer financial assets Direct customer funds 13,436 16,508 -18.6% Indirect customer funds 19,136 20,167 -5.1% - Assets under management 6,221 6,399 -2.8% - Mutual funds and Sicav 1,089 1,479 -26.4% - Managed assets invested in securities and in mutual funds 1,203 1,480 -18.7% - Insurance policies (Index) 3,929 3,440 14.2% - Assets under custody 12,915 13,768 -6.2% - Holding company bonds 4,053 1,602 153.0% Assets under custody 32,572 36,675 -11.2% Other data Average number of employees (*) 3,229 3,259 Bank branches 428 426
(*) Monthly arithmetic mean.
Credit intermediation
Direct customer funds
On 31 December 2009, direct customer funds totaled 13,436 million euro, down by 3,072 million (-18.6%) over 31.12.2008. The aggregate includes the Balance sheet items n. 20 (due to customers), n. 30 (debt securities in issue) and n. 50 (financial liabilities measured at fair value) and it incorporates Liabilities from assets sold and not derecognized offset through loans from securitizations. The decrease spanned all the constituents, and in absolute terms it was particularly significant for repos and other payables (-1,507 million), and percentagewise (except for time deposits that are almost down to zero) for securities issued (-69,2%); conversely, checking accounts and deposits basically held (-121 million, -1.5%).
This nosedive was the consequence also of specific factors: on the one side, the outflow of sizable volumes (incidentally, transferred to the Parent company) due to the centralization of Custodian Bank activities at the Holding company (which caused decreases especially in repo funds); on the other side, the Group liquidity management policy set out in 2008, based on which the role of “Single Issuer” for the Group’s entire bond funding has been centralized at the Holding company, while the retail banks (including of course BPN) are in charge of selling the bonds to their Retail customers. In 2009 the direct issue of bonds by BPN was marginal, and its issued bond portfolio shrank significantly as a result of expirations or early redemptions.
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Indirect customer funds
On 31 December 2009, total assets under management (Mutual Funds, Managed assets, Sicav and insurance products) – including Banca Aletti managed accounts invested in securities and in mutual funds sold by BPN – totaled 6,221 million euro, down 178 million (-2.8%) year on year. This dynamic is ascribable to Mutual funds and Sicav, which in twelve months fell by -390 million, and to the performance of Managed Assets, down by -277 million. Conversely, the insurance policy portfolio reported a considerable increase (+489 million).
On the same date, customer assets under custody stood at 12,915 million, down by 853 million year on year (-6.2%); this dynamic is basically attributable to the outflow of considerable volumes, transferred to the Parent company as a result of the already mentioned centralization of Custodian Bank activities. Note, that as part of the decision to centralize the role of single issuer for all the Group’s direct bond funding at the Parent company, as of March 2008 we started selling Bonds issued by the Holding company, and at the end of 2009 the sold bond portfolio totaled 4,053 million; said bonds are now incorporated in total Assets under custody.
Total assets under administration (direct + indirect customer funds) amounted to 32,572 million, down by 11.2% from 36,675 million on 31 December 2008.
Loans to customers
Gross retail customer loans added up to 13,915 million euro, up by 757 million (+5.8%) over 31.12.2008. The aggregate includes assets sold and not derecognized relating to securitized loans (that must be still recognized since they do not meet the requirements to be actually derecognized). Write-downs (inclusive of NPV discounting) totaled 383 million (+77 million, +25.1% over 31.12.2008); as a result, net loans added up to 13,532 million euro, up by 681 million (+5.3%) over 31.12.2008.
Performing loans stood at 12.416 million euro gross and 12,332 million net of write-downs (the aggregates increased by 69 million, +0.6%, and 80 million, +0.7% respectively over 31.12.2008). Impaired loans, consisting of non-performing loans, substandard loans, restructured loans or under restructuring and past dues, added up to 1,499 million gross (+688 million, +84.9% YoY) and 1,200 million net of write-downs (+ 601 million, +100.3% over 31.12.2008).
Gross of write-downs, the performing loan to customer loan ratio was 89.23% (93.84% at year-end 2008); the impaired loan to customer loan ratio was 10.77% (6.16% on 31 December 2008). The net performing loan to customer loan ratio was 91.13% (95.34% on 31.12.2008); as a result, the net impaired loan to customer loan ratio was 8.87% (4.66% at year- end 2008). The above dynamics were correlated to the well known effects of the economic and financial crisis.
(in thousands of euro) 31/12/2009 31/12/2008 Changes
Impaired loans 1,498,777 810,755 688,022 84.9% - nonperforming 491,329 305,407 185,922 60.9% - substandard 704,061 350,768 353,293 100.7% - restructured 131,971 38,798 93,173 240.1% - past due 171,416 115,782 55,634 48.1% Performing loans 12,416,184 12,346,820 69,364 0.6% Total gross loans 13,914,961 13,157,575 757,386 5.8% Individual write-downs 299,117 204,221 94,896 46.5% Collective write-downs 83,988 101,968 -17,980 -17.6% Total net loans 13,531,856 12,851,386 680,470 5.3%
Operating performance
Net interest, dividend and similar income totaled 430.8 million euro (-77.3 million, -15.2% YoY), resulting from an interest income of 670.0 million euro and interest expense of 239.2 million euro.
The main constituent of interest margin is net customer interest, totaling 328.2 million euro, deriving from interest income on loans of 555.5 million euro and interest expense on checking accounts, savings deposits and bonds of 227.3 million euro. Interest income on financial assets held in portfolio totaled 18.5 million euro. The interbank spread generated an income of 45.4 million. All the above constituent suffered a contraction YoY, which percentagewise was particularly marked for interbank interest income.
Spreads on derivatives linked to financial liabilities measured at fair value (which up until 2008 were incorporated in net spreads on hedging transactions) generated an income of 25.4 million, while in 2008 they had posted a loss of similar amount (-26.4 million).
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Net spreads on hedging transactions, which in 2008 posted a loss of -12.8 million, in 2009 showed a total positive balance of 13.3 million, basically as a result of the favorable trend of market rates associated with financial derivatives used to hedge demand items on the liabilities-side of the balance sheet (checking account and deposits) totaling 24.2 million euro (as compared with the -17.2 million loss in 2008). This evolution more than offset the negative performance of spreads on hedges of other items (AFS securities, mortgages, cash flow hedges), which posted a loss of -10.9 million (as compared to +4.4 million in 2008).
Commission income came in at 338.4 million (up by 44.3 million YoY) and are mainly represented by revenues from management, brokerage and advisory services (195.7 million euro), accounting for about 58% of total commissions. This item was impacted by a reclassification – in keeping with the instructions set out in the update of circular 262 issued by the Bank of Italy – requiring revenues from periodic charges debited on customer checking accounts (40.3 million euro, incidentally well below the 51.7 million reported at the end of 2008) to be reclassified from Other revenues/charges to Net fee and commission income. Commission expense totaled 15.9 million (-3.5 million with respect to 31.12.2008): accounting for 39% of total commission expense, management and brokerage service charges (6.2 million) are the main constituent, mostly represented by payments to other Companies of the Group in exchange for outsourced activities. As a result, Net fee and commission income added up to 322.5 million (274.7 million on 31 December 2008).
On 31 December 2009, we posted a net financial loss of -44,0 million, down by 71.3 million from the prior year. This evolution is mainly attributable to the loss on assets and liabilities measured at fair value (-43.3 million, with respect to +22.6 million on 31 December 2009); in particular this constituent includes the charge generated by the recognition through profit or loss, in this case a loss, of all the capital gains associated with credit spread changes reported in previous years (-49.0 million), as a result of the methodology changes effective as at 31 March 2009 to measure creditworthiness changes. On 31 December 2008, based on the method used at that time, we had posted a profit of 27.2 million. This P&L component is considered a non-recurring item: in recurring terms we would have posted a net financial income of 5.0 million (-4.6 million on 31 December 2008).
Other revenues/charges came in at -2.6 million; on 31 December 2008 they amounted to -4.9 million. This result was caused by the already mentioned considerable reallocation of revenues from periodic charges debited on customer checking accounts to be reclassified from Other revenues/charges to Net fee and commission income.
Other operating income (operating income other than net interest, dividend and similar income) amounted to 275.9 million, -7.1% with respect to one year before. In recurring terms, it totaled 324.9 million (267.7 in 2008).
As a result of the above performance, net interest and other banking income came in at 706.7 million euro (-98.4 million, - 12.2% compared to 31 December 2008). The corresponding recurring aggregate was 755.7 million (775.8 million in 2008, -2.6%).
Operating expenses totaled 435.2 million euro, posting a YoY increase (+3.6 million, +0.8%) and break down in personnel expenses of 231.0 million (+0.2 million, +0.1%), other administrative expenses of 196.5 million (+1.3 million, +0.7%) and net impairment of tangible and intangible assets of 7.7 million (+2.1 million, +37.8%). Net of non-recurring items (2.3 million for Personnel expenses, as in 2008, and 0.6 million for higher D&A associated with residual charges for leasehold improvements in branches that are going to be closed, recognized in impairment of tangible and intangible assets), Operating expenses stood at 432.3 million (429.3 million in 2008).
Profit from operations was 271.5 million euro, down by 102.0 million compared to one year before (-27.3%). The corresponding recurring profit totaled 323.4 million (-23.1 million, -6.7% YoY).
Net write-downs on impairment of loans and guarantees and commitments totaled -128.9 million, resulting from write- downs and provisions of 194.7 million, write-backs of 65.6 million and a net balance of profit/loss on loan sale resulting in a profit of 0.2 million (in the reclassified P&L this profit is stated under net loan impairments). On 31 December 2008 it came in at 114.1 million, resulting from the algebraic sum of write-downs and provisions of 135.2 million, write-backs of 27.0 million and a net loss on loan sale of 5.9 million. Net of non-recurring items (i.e., the above profit on loan sale), net impairments rise to 129.1 million (108.2 million in 2008).
Net write-downs for impairment of other assets totaled 2,000 euro and refer to the impairment of the SACE S.p.A. stock (non-recurring item); on 31 December 2008 the same write-downs (again non-recurring) totaled 16.7 million and referred almost exclusively to the impairment of the Lehman Brothers securities, while about 41,000 euro were linked to the SACE stock.
Net provisions to risks and charges totaled 0.4 million, as compared with 11.5 million in 2008. Here again we have a non- recurring item (-0.2 million) resulting from the estimate of charges associated with already approved branch closings.
Income (loss) before taxes of continuing operations came in at 142.2 million euro (231.1 million one year before).
After accounting for income taxes of 59.0 million, net income on 31 December 2009 totaled 83.1 million, down by -41.8% compared to twelve months before (142.8 million).
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Non-recurring items included in gross income as at 31 December 2009 add up to a loss of about 51.9 million, while in 2008 they produced a profit of 3.7 million. Also income tax included non-recurring items bearing a positive sign (+2.7 million in 2009 and +3.3 million in 2008). Considering only recurring items, the 2009 Income (loss) before tax was 194.1 million, down by 33.2 million (-14.6%) as compared with 31.12.2008 (227.3 million).
As to net income (83.1 million, with respect to 142.8 million in 2008), the non-recurring portion was -32.7 million (against 4.5 million in 2008) and the recurring one 115.8 million (138.3 million in 2008).
Noteworthy events in the year
BPN’s operating report describes numerous events, mostly developed under the management and control of the Parent company, that are considered noteworthy from a corporate standpoint, and in view of the present or future effects they are going to have on the bank’s business from an operational, commercial, administrative/regulatory viewpoint. Summarized below are the most noteworthy events: launch of a project to identify specific initiatives to optimize our Branch network, with the aim of improving the Group’s commercial and operating performance; as a result, it was decided to turn some Branches in Light Branches and other ones in Detached Branches, and to close some branches (as already mentioned when talking about the evolution of the income statement); closing of the Office in charge of Custodian Bank and Delegated Activities, as a result of the mentioned centralization of these activities at the Holding company; capital increase of the company Centro Interportuale Merci di Novara CIM S.p.A., one of the primary logistics hubs in Northern Italy; approval of Policies and Projects (BPN Lending Enacting Rules, which forms an integral part of the Group Lending Policy, Corporate Governance Project, Institutional Counterparties Project, Large Corporate and Mid Corporate Plus Projects) of consequence for the growth of the Group, and within its scope, for the Bank itself.
Credito Bergamasco
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest, dividend and similar income 343.7 384.6 -10.6% Net fee and commission income 182.8 166.0 10.2% Net interest and other 500.3 580.2 -13.8% banking income Operating expenses 267.1 261.3 2.3% Profit from operations 233.2 319.0 -26.9% Income (loss) before tax from continuing operations 130.2 195.1 -33.3% Net income (loss) for the year 85.2 119.6 -28.7% Balance sheet Total assets 14,534.7 14,041.6 3.5% Loans to customers (gross) 11,885.1 11,226.7 5.9% Financial assets and hedging derivatives 241.6 243.4 -0.8% Shareholders’ equity 1,323.0 1,306.5 1.3% Customer funds Total funding 21,579.7 20,628.4 4.6% of which: - Direct customer funds 11,328.3 11,600.4 -2.3% - Indirect customer funds 10,251.3 9,028.0 13.6% of which: - Assets under management 3,032.9 2,805.6 8.1% - Mutual funds and SICAV 844.4 888.7 -5.0% - Managed accounts invested in securities and in mutual funds 801.4 847.1 -5.4% - Insurance policies 1,387.1 1,069.8 29.7% - Assets under custody 7,218.4 6,222.4 16.0% Other data Average number of employees (*) 1,979 (#) 1,969 0.5% Bank branches 251 250 0.4% (*) Monthly arithmetic mean.
Credit intermediation
The close ties forged with the served territory and its households and businesses enabled the bank to keep its satisfactory characteristic operating levels safe, despite the adverse business cycle. On 31.12.2009 Credito Bergamasco reported direct customer funds amounting to 11,328.3 million, compared with 11,600.4 million one year before (-2.3%); note, that in 2009 the bank redeemed a bond with a nominal value of 400 million
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subscribed in 2007 by Banco Popolare following the issuance by the Parent company, in its own name and on behalf of Credito Bergamasco, of an equivalent amount of two-year Medium Term Notes. Among the various types of funding sources, significant was the increase posted by due to customers (mainly represented by checking accounts and deposits or time accounts) which increased YoY by 21.9% reaching 8,767.6 million. At operating level, the so called “extended direct funds”, i.e., direct customer funds plus bonds issued by Banco Popolare and sold by the Creberg branches to their customers (amounting to 1,781.9 million on 31.12.2009 and 761.5 million on 31.12.2008), added up to 13,110.2 million, with an annual growth rate of 6.1%. Indirect customer funds – including the above mentioned bonds issued by the Parent company and net of a “Large Corporate” custody account that has already been dealt with in previous reports and that on 31.12.2009 totaled 1,022 million – stood at 9,229.4 million, up by 14% from 8,096.1 million on 31.12.2008. Among the constituents of indirect customer funds, assets under management came in at 3,032.9 million, reporting an increase of 8.1% from 2,805.6 million at the end of 2008. In particular, Banca Aletti’s managed accounts distributed by the branch network of Credito Bergamasco amounted to 801.4 million, reporting a 5.4% drop from 847.1 million at the end of 2008, while mutual funds came in at 844.4 million (-5% YoY). Total insurance policies reached 1,387.1 million, thus hitting a 29.7% increase from 1,069.8 million at year-end 2008. Indirect customer funds under custody totaled 6,196.5 million, up by 17.1% from 5,290.4 million on 31.12.2008. Including also the “large corporate” custody account mentioned above, indirect customer funds reached 10,251.3 million, up by 13.6% from 9,028 million at year-end 2008. Net customer loans stood at 21,579.7 million, up by 4.6% from 20,628.4 million on 31.12.2008. On 31 December 2009, gross loans reached 11,885.1 million, as compared with 11,226.7 million at the end of 2008 (+5.9%). Net customer loans stood at 11,648.3 million, up by 5.7% from 11,017.5 million on 31.12.2008. This evolution, which is totally in key with the objectives pursued by the commercial policy developed for 2009 – is the outcome of highly differentiated changes across different customer segments, with a progressive exposure reduction to “large corporate” customers not belonging to our franchise (-18.5% the annual average operating balance) and the growth in loans to households and SMEs, the backbone of our local economy. The balance sheet breakdown by loan product shows that total retail and corporate mortgages reached 5,395.3 million, up by 9.7% with respect to the adjusted figure at the end of 2008.
The table below analyzes cash customer loans by loan grade on 31 December 2009 as compared with 31 December 2008.
(in thousands of euro) 31/12/2009 31/12/2008 Changes
Gross impaired loans 837,223 544,797 292,426 53.7% Non-performing loans 280,538 193,804 86,734 44.8% Substandard loans 396,474 317,562 78,912 24.8% Restructured loans 55,758 3,342 52,416 -% Past dues 104,453 30,089 74,364 -% Gross performing loans 11,047,908 10,681,876 366,032 3.4% Total gross loans 11,885,131 11,226,673 658,458 5.9% Write-downs of impaired loans -175,111 -152,100 -23,011 15.1% Write-downs of performing loans -61,763 -57,039 -4,724 8.3% Total net loans 11,648,257 11,017,534 630,723 5.7%
In spite of the relentless and effective credit risk control exercised by the bank’s competent functions, still the difficulties experienced by our domestic and local economy affected the dynamic of impaired loans. The impaired to total customer loans ratio, gross of write-downs on 31 December 2009 stood at 7.04% from 4.85% at the end of 2008. Net of write-downs, the ratio on a like-to-like basis came in at 5.68% against 3.56% at the end of 2008.
Taking non-performing loans alone, the NPL to customer loans ratio on 31.12.2009 – gross of write-downs – was 2.36% from 1.73% on 31.12.2008. Net of write-downs, it came in at 1.34% against 0.86% on 31.12.2008. Write-downs on impaired loans on 31 December 2009 accounted for 20.92% of their gross total amount, as compared with 27.92% on 31 December 2008. In particular, write-downs on non-performing loans on 31.12.2009 accounted for 44.27% of their gross total amount, compared with 50.90% on 31.12.2008. Write-downs of performing loans on 31.12.2009 accounted for 0.56% of their total amount as compared with 0.53% at the end of 2008.
Operating performance
Interest margin totaled 316.4 million, down by 15.4% from 373.8 million on 31.12.2008. Profit from Investments in associates and companies subject to joint control carried at equity, including a negative impact of 1.4 million generated by the change introduced by the associate Efibanca in the method to measure the fair value of financial liabilities issued by Efibanca itself, and Creberg’s share of loss of 3.3 million from the associate Banca Italease, amounted to 27.3 million, as compared with 10.7 million one year before, inclusive of Creberg’s non-recurring 12.1 million share of loss from Efibanca.
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Net interest, dividend and similar income added up to 343.7 million, down by 10.6% from 384.6 million one year before (348.4 million being the recurring net interest, dividend and similar income, -12.2% YoY). Other operating income was 156.6 million, compared to 195.7 million the year before (-20%). On a recurring basis, other operating income reached 191.7 million, reporting an annual growth rate of 17.4%. This aggregate incorporates net service commissions of 182.8 million, up by 10.2% from 166 million adjusted for comparison the year before. Other revenues stood at 2.6 million, from 3.7 million the year before. Net financial income/loss – which was impacted by a non-recurring negative amount of 35.1 million, as compared to non- recurring positive items of 32.3 million on 31 December 2008 – posted a loss of 28.8 million, as compared to the 26 million income on 31.12.2008. The 2008 P&L included a positive impact of 25.6 million generated by the impairment of financial liabilities issued by the bank and measured at fair value and 6.7 million worth of profit on disposal of assets available for sale. On 31.12.2009 – besides reporting an 0.1 million worth of profit on disposal of assets available for sale and an 0.3 million charge from the measurement of financial liabilities issued by the bank and sold to institutional customers (incidentally this type of liability has a marginal weight on the bank’s financial statements) – the financial statements were affected by a negative P&L impact of 34.9 million as a result of the change in the methodology used to measure the fair value of bonds issued by the bank and sold to retail customers or “similar”. Net of non-recurring components, net financial income came in at 6.3 million, as compared with the 6.3 million loss one year before. Net interest and other banking income reached 500.3 million, as compared to 580.2 million one year before. Net of non- recurring items, net interest and other banking income stood at 540.1 million, as compared with the 560 million adjusted for comparison the year before (-3.6%). On 31.12.2009, net of recoveries, personnel expenses reached 154.1 million, posting a slight increase (+1.2%) from 152.2 million one year before; net of non-recurring items (totaling 0.9 million in 2009, and referring to the solidarity fund provision and to the early retirement scheme as compared to 3.8 million in 2008), personnel expenses stood at 153.2 million, posting an annual growth rate of 3.2%. Net of recoveries, other administrative expenses stood at 106.9 million, up by 3.9% YoY, mainly as a result of the new intercompany VAT regulation; depreciation and amortization of tangible and intangible assets came in at 6.2 million, as compared with 6.1 million one year before. As a result, on 31.12.2009, total Operating expenses added up to 267.1 million, up by 2.3% from 261.3 million on 31.12.2008 (+3.8% being the annual increase on a recurring basis). The cost/income ratio was 53.4%, as compared with 45% at the end of 2008; on a recurring basis, the ratio came in at 49.3% from 45.8% on 31.12.2008. Profit from operations totaled 233.2 million, from 319 million one year before; on a recurring basis, it stood at 273.8 million, down by 9.8% from 303.5 million on 31.12.2008. The desire to keep the risks inherent in the loans granted by the bank under constant control, in the face of the business cycle trend, caused net write-downs on loan impairment to be increased, so that on 31.12.2009 they reached 98.9 million, against 73.1 million the year before; net write-downs on impairment of other assets amounted to 0.2 million, while net provisions for risks and charges totaled 1.4 million, from 5.3 million on 31.12.2008. Net impairment of goodwill and Investments in associates and companies subject to joint control came in at 4.3 million (of which 3 million worth Crebergis share in the goodwill impairment carried out by the associate Efibanca and 1.3 million from the impairment of Investments in associates and companies subject to joint control held by Efibanca and Banca Aletti), as compared to 46.3 million one year before (of which 30.5 million referring to the impairment of the equity investment in Banca Italease and 15.8 million to the goodwill impairment of some associates that impacted the measurement of Investments in associates and companies subject to joint control carried at equity); profit on disposal of equity and other investments totaled 1.7 million, from 0.8 million on 31.12.2008. Income (loss) before tax from continuing operations came in at 130.2 million, against 195.1 million one year before; net of non-recurring items, Income (loss) before tax stood at 173.5 million, down by 22.6% from 224.2 million on 31.12.2008. Tax on income came in at 45 million and net income added up to 85.2 million, as compared with 119.6 million on 31.12.2008; on a recurring basis, net income was 114.9 million, down by 22.5% from 148.1 million one year before. On 31 December 2009 regulatory capital ratios were notable: the Tier 1 Capital ratio – measured in compliance with the update of the Bank of Italy Circular n. 262, issued on 18.11.2009 – stood at 15.89%, while the Total Capital ratio reached 15.95%.
Noteworthy events in the year
The operating report of Credito Bergamasco describes numerous events, mostly developed under the management and control of the Parent company, that are considered noteworthy from a corporate standpoint, and in view of the present or future effects they are going to have on the bank’s business from an operational, commercial, administrative/regulatory viewpoint. Summarized below are the most noteworthy events: revision of the distribution system, leading to the adoption of a model specialized by customer segment to guarantee the best and most efficient operational conditions to the entire sales network. In particular, as regards the Business Areas – which provide branches with the appropriate support for the commercial management of customers – the new model requires the creation of an SME Business Manager, a Retail Business Manager and a Mid Corporate Business Manager to organize and coordinate the activities of the branch network, and to launch marketing campaigns for their respective customer segments;
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creation of Loan Committees for the Business Areas to improve even more the efficacy of our presence on the market territory at a time of adverse economic cycle; acquisition of a shareholding in Welfare Italia Servizi S.r.l., a company founded in February 2009 by Consorzio Nazionale CGM – with which the bank entertains longstanding relations – aiming at promoting the wellbeing of the community by planning and creating quality services at accessible prices, managed by a pervasive domestic network of nonprofit cooperative companies. The services offered by Welfare Italia Servizi hinge in particular on the “proximity healthcare” sector (dentistry practices, specialized outpatient’s clinics, light rehab centers), and the aim is to expand onto “social housing” and “family services”. This investment entails a big social value for the bank’s market territories, with positive returns in terms of institutional and business relations.
Cassa di Risparmio di Lucca Pisa Livorno
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest, dividend and similar income 227.2 314.6 -27.8% Net fee and commission income 141.8 116.8 21.4% Net interest and other banking income 349.8 454.6 -23.1% Operating expenses -228.8 -227.7 0.5% Profit from operations 121.0 227.0 -46.7% Income (loss) before tax from continuing operations 50.4 178.4 -71.7% Income (loss) after tax from continuing operations 25.2 114.0 -77.9% Net income (loss) for the year 25.2 114.0 -77.9% Balance sheet Total assets 10,981.4 11,396.8 -3.6% Loans to customers (gross) 8,206.4 8,527.3 -3.8% Financial assets and hedging derivatives 192.9 155.2 24.3% Shareholders’ equity 1,242.7 1,254.4 -0.9% Customer financial assets Direct customer funds 7,737.8 8,636.8 -10.4% Indirect customer funds 6,101.5 4,716.2 29.4% - Assets under management 1,987.2 1,952.1 1.8% - Mutual funds and Sicav 800.8 1,020.7 -21.5% - Managed accounts invested in securities and in mutual funds 416.8 436.9 -4.6% - Insurance policies 769.6 494.5 55.6% - Assets under custody including institutional 4,114.3 2,764.1 48.8% Other data Average number of employees (*) 1,679 1,680 -0.1% Bank branches 237 236 0.4%
(*) Monthly arithmetic mean
Credit intermediation
Direct customer funds
On 31 December 2009 direct customer funds totaled 7,737.8 million euro (-899.0 million, -10.4% with respect to 31.12.2008); the aggregate includes the Balance sheet items n.20 (due to customers), n. 30 (securities issued) and n. 50 (financial liabilities measured at fair value, i.e., bonds under the fair value option). Customer funds include “Liabilities from assets sold and not derecognized” as an offset to outstanding securitized loans.
The decrease is mainly attributable to the decline in “Debt securities in issue” (-72.9%) and “Liabilities measured at fair value” (-12.1%), whereas customer funds reported an increase in checking accounts and deposits of 15.1%.
Indirect customer funds
On 31 December assets under management (Funds, Managed accounts, Sicav and Insurance Products) amounted to 1,987.2 million euro, reporting a modest increase with respect to the end of the previous year (+ 35.2 million, +1.8%). This dynamic is attributable on the one side to the decrease reported by Mutual funds, down by 220.0 million (-21.5%), on the other side to the increase in Insurance Policies, up by 275.2 million (+55.7%). On the same date, customer assets under custody stood at 4,039.1 million, up by 1,366.5 million from December 2008 (+51.1%). Bank and Institutional assets under custody came in at 75.2 million euro, down by 16.3 million with respect to 31.12.2008 (-17.8%).
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Total administered funds (direct + indirect funds) amounted to 13,839.3 million, reporting a moderate growth with respect to the end of 2008 (486.4 million +3.6%).
Customer loans
On 31 December 2009 gross loans to retail customers stood at 8,206.4 million euro, down by 320.9 million (-3.8%) as compared with 31.12.2008. The aggregate incorporates net assets sold and not derecognized of 1,021.4 million (436.1 million on 31.12.2008), representing securitized loans that must be still recognized since they do not meet the requirements to be actually derecognized.
Performing loans added up to 7,457.8 million euro, gross of collective write-downs, and to 7,415.2 million net of write- downs (the two aggregates decreased by -7.3% and -7.4% respectively over 31.12.2008); impaired loans, consisting of non- performing loans, substandard loans, restructured loans or under restructuring and past dues, totaled 748.6 million gross (+55.4% over 31.12.2008) and 561.3 million net of write-downs (+73.5% over 31.12.2008).
The net performing loan to total customer loan ratio was 93.0%, the weight of net impaired loans was 7.0%. At the end of 2009, the impaired loan to total customer loan ratio gross of write-downs was running at 9.1% from 5.6% on 31 December 2008.
Loan loss provisions (inclusive of NPV discounting effects) added up to 229.9 million (+32.6 million, +16.5% over 31.12.2008), hence net customer loans amounted to 7,976.5 million euro, down by 353.5 million (- 4.2%) with respect to 31.12.2008.
(in thousands of euro) 31/12/2009 31/12/2008 Changes
Impaired loans 748,576 481,789 266,787 55.4% - nonperforming 275,219 199,232 75,987 38.1% - substandard 396,223 224,203 172,020 76.7% - restructured 8,989 2,907 6,082 209.2% - past due 68,145 55,447 12,698 22.9% Performing loans 7,457,839 8,045,500 -587,661 -7.3% Performing loans 7,457,839 8,045,500 -587,661 -7.3% Total gross loans 8,206,415 8,527,289 -320,874 -3.8% Individual write-downs -187,233 -158,176 -29,057 18.4% Collective write-downs -42,646 -39,075 -3,571 9.1% Total net loans 7,976,536 8,330,038 -353,502 -4.2%
Operating performance
The volume dynamic reported in 2009 combined with interest rates at historical lows on financial markets caused interest margin, and as a consequence net interest, dividend and similar income to post a balance of 227.2 million euro, down by 27.8% as compared to year-end 2008. Interest income decreased by 35.2% over December 2008 and stood at 421.0 million euro, while interest expense, as a result of the re-composition of the funding mix, amounted to 193.8 million euro, down by 42.2% as compared to the end of 2008. Commission income came in at 148.0 million, on the rise with respect to the previous year (+20.8%), and is mainly represented by commissions on sale and distribution of third party services and order collection (81.4 million), accounting for about 55.0% of total commissions, then 24.8% is commissions on checking account management and administration, 8.0% commissions on payments and collections, and the remaining part is essentially made up of commissions received for other services and guarantees given, accounting for 12.2%. Commission expense added up to 6.2 million, up with respect to the previous year (+10.1%), and breaks down as follows: 54.6% payment and collection commissions, 17.2% management and brokerage commissions, and the remaining part is essentially made up of other services and guarantees given (28.2%). Net fee and commission income as a result added up to 141.8 million, down by 25.0 million (+21.4%) over 2008.
Other revenues/charges reported a negative balance of 1.4 million euro, posting a 1.0 million decrease (+266.8%) with respect to 31.12.2008. This reversal was mainly due to the decrease of other revenues, which in the prior year had benefited from non-recurring net postings of about 0.6 million. The reclassified P&L, which is what is being analyzed here, shows this aggregate net of indirect tax recoveries and sundry expenses (of which 15.0 million referring to recoveries of indirect taxes and 3.4 million to recoveries of other expenses), that were restated as a deduction to “Other administrative expenses”, and net of depreciation on leasehold improvements (1.8 million), restated in “net impairment of tangible and intangible assets”. In particular, the result was affected by “Profit/loss on financial assets and liabilities measured at fair value”, due to the fact that when measuring securities sold to retail customers – including Banking foundations – creditworthiness is no longer factored in, generating a P&L charge of 23.8 million (in 2008 it reported a revenue of 16.4 million). Moreover, the prior year benefited from an additional positive effect of 3.0 million generated by currency futures included in “Net trading
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income/loss”. As to the changes in “Financial assets available for sale” (AFS), in 2008 they had benefited from the sale of the equity investment in Centrale dei Bilanci for about 2.6 million.
Other operating income (operating income other than interest, dividend and similar income) added up to 122.7 million, down by 17.3 million with respect to 2008. As a result, net interest and other banking income stood at 349.8 million euro (-104.8 million, -23.1% over 31 December 2008).
Operating expenses totaled 228.8 million euro, down by 1.2 million with respect to the previous year. They break down as follows: personnel expenses of 118.5 million (+1.4 million), other administrative expense of 106.4 million, basically unchanged, and net impairment of tangible and intangible assets of 3.9 million (+0.3 million).
Profit from operations came in at 121.0 million, down by 106.0 million with respect to 31 December 2008.
Total write-downs on impairment of loans and guarantees and commitments amounted to 65.6 million, up by 25.1 million over 2008 (+62.1%)
Net impairment of other financial transactions amounted to 1.0 million euro. They refer to “Financial assets available for sale”, and regard write-downs of debt securities generated by the Tiepolo Finance s.r.l. securitization. Net provisions for risks and charges came in at 2.2 million. Income (loss) before tax from continuing operations, net of the above write-downs, amounted to 50.4 million euro, down by 128.0 million over 31 December 2008 (-71.8%). Tax income came in at 25.2 million euro, and incorporate current taxes of 26.5 million, of which 16,1 million for IRES, 10.0 million for IRAP, 0.4 million for substitute tax. Net of income tax, net income as at 31 December 2009 added up to 25.2 million.
Noteworthy events in the year
Integration plan
Although at the end of 2008 the integration plan had been formally completed, in 2009 a number of actions were taken to adjust the structure to the intervening regulatory changes and to do some fine-tuning. Worth mentioning, among the various actions taken, are the centralization of activities at the Parent company, in keeping with the business plan that aimed at achieving greater synergies and at setting up a model where retail banks focus on commercial customer services and management, while all those common services and activities that are shared by all the Group companies are to be centralized respectively in the Parent company, and in the service and product companies.
Changes to the Articles of Association The shareholders’ meeting held on 30 June 2009 approved the changes to the Articles of Association of Cassa di Risparmio di Lucca Pisa Livorno S.p.A. to conform them to the new “Supervisory Directives on Bank Corporate Governance and Organization”, issued by the Bank of Italy, and on the same occasion it seized the opportunity to harmonize Cassa’s Bylaws to the Articles of Association of the Parent company and of the other retail banks.
Banca Aletti & C.
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest and other banking income 337.6 301.6 11.9% Operating expenses -104.9 -115.6 -9.4% Profit from operations 232.7 185.8 25.2% Net income (loss) for the year 162.6 91.4 77.8% Balance sheet Total assets 10,691.9 25,394.6 -57.9% Shareholders’ equity 596.3 432.1 38.0% Indirect customer funds 15,306.9 14,053.5 8.9% Other data Average number of employees (*) 467 492 -5.1% Bank branches 36 39 -7.7% (*) Monthly arithmetic mean.
Banca Aletti is organized along three departments that work in close synergy with the Group’s sales networks: Private Banking; Investment Management; Investment Banking.
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Private Banking
Financial year 2009 was characterized by a decrease in net interest and other banking income with respect to the prior year, although the monthly trend showed a constant and gradual recovery. The persisting market turbulences kept many customers on defensive positions and the interest rate dynamics compressed interest margin. As to asset management, a strong revitalization action has been put in place to restore medium term portfolios. In Private Banking, on 31 December 2009, Banca Aletti reported total assets under management (under administration and management) of 25.156 billion, of which euro 14.530 billion from private customers and the remaining euro 10.626 billion from institutional customers. Last year has been characterized by a constant focus on increasing assets and expanding our customer base, with significant results in terms of net inflows and of new customers, supported also by the repatriation of assets held abroad under the tax amnesty law “Scudo Fiscale Ter” of 837 million euro under the physical repatriation procedure and 781 million euro under the declaration procedure.
Investment Management
In 2009, stock markets posted a very positive performance, with basically uninterrupted rises since the month of March: local currency MSCI WORLD indexes on industrialized and emerging stock markets rose by about 23% and 61%, respectively. The overall performance of the government bond market was only marginally positive (+0.75%), marked by a high volatility, especially in the second part of the year, on the wake of the macroeconomic recovery perspectives and interest rate projections. At 31 December 2009, assets under management totaled about 11,920 million euro, up by 6.1%, in stark contrast with the 26% drop reported in 2008: after bottoming out in March, AuM started to report a constant increase. 2009 represents a year of discontinuity of the outflow trend that has been characterizing the entire Italian asset management industry in 2007 and 2008.
Investment Banking
Derivative and Structured Products - Financial Engineering
2009 has been a very harsh year on all financial markets. The credit crunch after the Lehman crack has been the talk of the day throughout the first half of the year, which has been characterized by a strong volatility and illiquidity on all major markets. The main topic was fly to quality; all market players liquidated their risky positions and invested in Treasuries, and as a result the five-year swap spread skyrocketed to almost 100bps at the beginning of 2009. Central banks reacted by rapidly decreasing interest rates and injecting a lot of liquidity not only on overnight but also on longer maturities. In the Euro area, ECB’s Term Refinancing Operation carried out in June 2009 was key (12 month liquidity at a 1% rate for 440 bn euro). In the second half of the year, liquidity caused all main financial assets to rally, and many indicators (for example the credit spreads of many corporate securities) bounced back to pre-Lehman default levels. Against this context, equity trading was characterized by the search for spot hedging positions, to reduce as much as possible the risk positions on risk books, without having to give up on taking positions on the volatility and correlation market, albeit limited to more liquid underlying assets. As to interest rate derivatives, 2009 was characterized by a decrease in corporate hedging transactions with Group customers, while with respect to retail structures distributed by the Group network, the trend continued towards a simplification of structures and the reallocation towards simpler interest-linked structures.
Stock markets
After a negative start, as of the second quarter stock indexes began to score more convincing upturns, picking up a bullish trend that at the end of 2009 resulted in two digit percentage increases. During the year Banca Aletti continued to engage in market making on Italian single-stock futures on 46 underlying stocks. The increase in intermediated volumes with respect to 2008 allowed us to hold a significant market share of 10.78%. With respect to our trend trading portfolio, in view of the high volatility that characterized the first six months of the year, we privileged a merger arbitrage strategy involving low-risk takeovers. In the second part of the year, with the progressive reopening of short selling, we started implementing market neutral arbitrage strategies again, involving companies belonging to the same sector without exposure to market trends. During the year, we progressively consolidated our basket trading strategy on the Spanish index Ibex35 and we scaled up Delta 1 trading of foreign stocks listed on the Liffe with good results.
Bond markets
In 2009, the government bond market had a diverging performance depending on the yield curve segment taken into consideration. While the short-term yield curve continued to benefit from the interest rate cuts and from the liquidity injections by Central banks, on the longer term the yield curve underperformed as a result of the spate of government securities offered on the primary market to finance bloating state deficits. These two events put together caused the curve to get steeper and steeper until it hit all time levels. In all this, also the marked narrowing of spreads in countries belonging to the Euro area played an important role, in particular between the notes of euro-regional peripheral nations and German bonds. If the forced sales in 2008 caused yield spreads among euro-area notes to hit their all time highs since the creation of
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the single currency, the return to an abundant liquidity triggered the reverse process, causing spreads to backtrack almost completely, with the exception of a few countries, like Greece and Ireland. After a generalized credit spread widening in 2008 and in the first months of 2009, corporate bonds staged one of the biggest rallies in the history of credit, as a result of the economic policy measures implemented by Governments and Central Banks. A very important factor that contributed to buoy up the market was the liveliness of new corporate issues, which allowed a wide number of issuers to raise capital on the financial markets to refinance and extend their debt profile. Retail customer transactions on the Hi-Mtf and Group Securities Market platforms came in big volumes. These combined factors, together with the strategies we adopted, allowed us to obtain much greater profit than we expected from managing our bond portfolios.
Securities Lending
The liquidity crisis that had been characterizing this industry in 2008 had had a positive impact on bond lending volumes as well as on the related trading spreads. The gradual ebbing of this phenomenon brought total volumes back to pre-crisis levels and partly restarted the equity segment, confirming Aletti among the leading players in the Italian market within this area.
Capital Market
Debt Capital Market In 2009, Banca Aletti completed the structuring of the securitization of residential mortgages originated by the Specialized External Networks (Reti Esterne Specializzate) of about 1.1 billion euro. In June, Banca Aletti took part in the Public Offering of ENI 2009-2015 fixed and floating rate bonds, raising orders in excess of 147 million euro. In the second half, Banca Aletti participated in the underwriting and placement of the first two bond issues of Banco Popolare limited to institutional investors after the outbreak of the financial crisis. In November Banca Aletti also participated in the Public Offering of Mediobanca five-year fixed and floating rate bonds, raising orders for about 45 million euro.
Equity Capital Market Owing to the protraction of the crisis, also in 2009 the Italian primary equity market was largely characterized by capital increases and tender offers, totaling 30 deals with respect to only 6 IPOs, of which 5 on AIM Italy (Alternative Investment Market), the exchange regulated market recently launched by Borsa Italiana, where Banca Aletti was authorized to operate as a Nomad and with 4 key executives.
Equity Research Against a marked economic deterioration and a growing illiquidity of certain asset classes, in 2009 the Equity Research office focused on preserving its analysis scope and on stabilizing the number of counterparties. Considering the Group’s franchise, the research coverage still hinges on Italian Small/Mid Cap and is spreading over to mid caps, due to the persistent illiquidity of the reference niche. This was made possible by the fact that some securities with limited free float and capitalization stopped being covered by our research, and our team was joined by new professionals, who included new securities and sectors marked by a wider capitalization in the research scope. Marketing activities with main counterparties and with the management (road show) of some listed companies continued to be implemented.
Forex and Money Market The reorganization process that as of 1 April 2009 brought all money market activities back at the Parent company kept the structure busy for the entire first part of the year dealing with the transfer of operations (market disclosure, contracts, operating instruments, credit facilities). Hence, money market operations were limited to trading and were focused on funding optimization by effectively managing collaterals. In order to take advantage all funding opportunities, we kept a close watch on the numerous extraordinary initiatives taken by regulators to stabilize the market and make it thicker. As to the forex market, on the wake of the last months of 2008 also the first six months of this year were characterized by a scarce liquidity, favoring volatile and erratic movements. After an initial appreciation of the dollar against the euro, the exchange rate rapidly settled on the 1.35 – 1.40 range and has been since drifting sideways. We focused mainly on short term trades, to the detriment of intra-day, which led to a contraction of the number of transactions and traded volumes, with good returns. In the first part of the year, the structure supported all the ancillary activities deriving from the transfer as of 1 April 2009, of the Office at the Parent company’s (market disclosure, contracts, operating instruments, credit facilities).
Corporate & Institutional Sales In 2009 the activities of this Function were strongly influenced by market dynamics, by the high volatility of stock markets and credit spreads, by the widespread uncertainty and by the low risk propensity of investors. Distribution strategies and product structuring and selling activities were focused on simple and transparent products, with capital guaranteed and short-term maturities. Interest rate indexing prevailed, to the detriment of equity markets, and the favored issuer was Banco Popolare as compared to third-party issuers.
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In spite of the customers’ high risk aversion and the falling volumes with respect to 2008, Banca Aletti still maintained a leading position on the Italian certificates market, participating in the sector’s main events and organizing product road- shows, and it received much credit from investors. With regard to business development with non-captive customers, the banks privileged direct funding with plain vanilla bonds, therefore the derivative hedging of bond issues decreased. A penchant for simpler structures and a disposition oriented towards Italian issuers, favored the activity as arranger for Banco Popolare issues. There were interesting developments on the primary market: Banca Aletti was joint-lead manager for Banco Popolare’s first issuances of the year , and for the first time book runner in the last issuance of the year. Private placements in excess of 320 million euro were placed with institutional investors.
Operating performance
Banca Aletti closed financial year 2009 posting a 77.76% increase in net income, from 91,449 thousand euro on 31 December 2008 to 162,558 thousand euro on 31 December 2009. However, non-recurring items went from 124,803 thousand euro on 31 December 2008 to 165,284 thousand euro on 31 December 2009, up by 32.44 % tantamount to 40.48 million euro. If we analyze recurring net income, total recurring income increased by 11.90%, reaching 337,534 thousand euro (301,628 thousand euro on 31 December 2008). Recurring interest margin came in at 53,073 thousand euro on 31 December 2009, on the downturn with respect to 2008 (103,207 thousand euro) mainly as a result of the impact of the transfer of liquidity, interest rate and exchange rate risk management activities from Banca Aletti to Banco Popolare. Other recurring Operating Income increased overall by 43.36% driven by the considerable increase in financial income, which rose from 113,531 thousand euro on 31 December 2008 to 218,114 thousand euro on 31 December 2009, whole Net fee and commission income dropped by 19.9 %, from 80,009 thousand euro on 31 December 2008 to 64,070 on 31 December 2009 and other revenues fell from 4,881 thousand euro on 31 December 2008 to 2.277 thousand euro on 31 December 2009, corresponding to -53.4%. Recurring Operating expenses decreased by 8.52% from 114,711 thousand euro on 31 December 2008 to 104,942 thousand euro on 31 December 2009, due to the transfer of activities from Banca Aletti to Banco Popolare, and to the achievement of economies of scale after the BPI-BPVN integration.
Efibanca
31/12/2009 31/12/2008 % Changes
Income statement Net interest, dividend and similar income 45.6 74.8 -39.0% Net fee and commission income 5.0 11.1 -55.0% Net interest and other banking income 34.2 147.7 -76.8% Net write-downs on impairment of loans and Investments in associates and -122.3 -355.6 -65.6% companies subject to joint control Profit/Loss from financial operations -88.1 -208.0 -57.6% Operating expenses -32.9 -41.0 -19.8% Goodwill impairment -70.0 -230.0 -69.6% Income (Loss) before tax from continuing operations -191.0 -479.0 -60.1% Net income (Loss) for the year -139.9 -353.4 -60.4% Balance sheet Customer loans 2,973.9 3,539.8 -16.0% Financial assets and Investments in associates and companies subject to joint 276.7 303.1 -8.7% control Intangible assets 0.0 70.0 -100.0% Debt securities in issue and financial liabilities measured at fair value 1,417.3 2,686.1 -47.2% Shareholders’ equity 419.2 576.9 -27.3% Other data Net non-interest income / Net interest and other banking income 147.8% 58.2% Cost / Income ratio 96.2% 27.8% ROE -25.0% -38.0%
Financial year 2009 ended with a net loss of 139.9 million, and was affected by the persisting financial crisis, which fully unfolded at the end of 2008 and caused the deterioration of the performance of many economic sectors. Against this backdrop, also in 2009 some corporate clients started to show a progressive deterioration of their financial and operating situation, and the close monitoring carried out by Efibanca in cooperation with the Parent company’s Loan Service highlighted the impaired loan positions, in some cases shared with other Banks of the Group, which in some cases we tried to solve through workout agreements; nevertheless, 103.4 million loan write-downs were recognized. With respect to our equity investment portfolio, the assessment of both actual and when available perspective P&L and
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financial data of the held Investments in associates and companies subject to joint control and funds led to the recognition of write-downs of 18.8 million. As a result total impairments affecting the bottom line came in at 122.3 million. During the year other factors affected the year-end result, in particular: the contraction of the average loan volume (-494.1 million) which was not offset by an equal decrease in funding (-226.2 million), mainly as a result of the increase in non-performing loans which negatively impacted interest margin; the limited volume of new loans (315 million against 966 million in 2008) which for various reasons has characterized the year and affected commission income; the downsizing of the merchant banking and private equity businesses did not produce noteworthy revenues; the impact generated by the Parent company instructions not to factor Banco’s creditworthiness in as of 31.03.09 when calculating the fair value of bonds issued, generating a non-recurring negative effect of 31.9 million; the goodwill impairment loss that produced a non-recurring negative effect of 70 million.
As to key P&L highlights: interest margin decreased by 35% from 65.1 to 42.6 million, driven by a 67% drop in average loan volumes with respect to 2008 (from 966 to 315 million) and by the increase in non-performing loans; net commissions decreased by 55% (from 11.1 to 5.0 million), as they are strictly related to decreasing loan volumes; dividends and similar income declined by 69% (from 9.8 to 3.0 million); profit on disposal of financial assets available for sale and Investments in associates and companies subject to joint control dropped by 96% (from 49.5 to 2.1 million); profit/loss on financial assets and liabilities measured at fair value reported a loss of 19.5 million, as compared with the 14.7 million profit the prior year, due to the above mentioned change to the fair value calculation procedure (-31.9 million); as a result, net interest and other banking income fell by 77% (from 147.7 to 34.2 million); net impairments of loans and Investments in associates and companies subject to joint control totaled 122.3 million, and although they have decreased (-66%) when compared to 355.6 million in 2008, yet they still evidence the ongoing risk profile deterioration, that has emerged outright towards the end of the prior year; Operating expenses declined by 20% (from 41.0 to 32.9 million), mainly as a result of personnel expense reductions. the item Goodwill impairment reflects the goodwill impairment loss.
Key balance sheet items evidence that: customer loans reported a 16% fall (from 3,540 to 2,974 million). the merchant banking portfolio decreased by 10% (from 311.6 to 276.7 million) because of both disposals and write-downs; goodwill was fully impaired; tax assets increased by 35% (from 129.5 to 174.3 million): the change refers to the recognition of tax credits on excess loan write-downs and goodwill impairment; assets under administration fell by 12% (from 3,686.7 to 3,259.1 million) due to shrinking loans and of the equity investment portfolio; shareholders’ equity decreased by 27% (from 576.9 to 419.2 million) owing to net income and to the decrease (-17.9 million) in reserves for securities available for sale; capital ratios rose driven by a change in the calculation method and exceeded the regulatory threshold: both the Tier1 and the Total capital ratio stood at 15.04% with respect to a Tier1 and a Total capital ratio of 10.93% reported in 2008.
Financial year 2009 was characterized by important initiatives and projects involving the organizational, regulatory and technological ambits of the bank. In October we approved the bank reorganization plan aiming at gaining a greater efficiency and productivity, together with a better control on credit risk and a more stringent monitoring, as well as the full integration and harmonization with the procedures of Gruppo Banco Popolare, including actions for IT compliance with Group standards. Summarized below are the plan key elements: reorganization of the Commercial Structure, with the decommissioning of local branches and the creation of the CRM (“Client Relationship Manager”), in charge of active monitoring activities and of trade promotion in cooperation with peer structures at the Parent company; personnel rationalization, with headcount to be reduced to about 130 employees by the beginning of the second quarter of 2010, also through the complete implementation of the functional centralization actions at the Parent company leading to a decrease in fixed operational costs.
During the year various regulatory and procedural update projects were launched in cooperation with the Group, among which the implementation of the 231/2001 form, the compliance with the anti-money laundering directive and the creation of the Procedure to manage subsidies under L. 488.
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Aletti Gestielle SGR
(in millions of euro) 31/12/2009 31/12/2008 % Changes
Income statement Net interest and other banking income 21.77 38.60 -43.6% Profit from operations 0.04 -19.82 100.2% Net income/loss for the year -0.73 -19.10 96.2% Balance sheet Total assets 103.54 114.80 -9.8% Shareholders’ equity 70.61 71.30 -1.0% Business volumes Net asset value of managed funds 7,340.6 8,163.5 -10.1% Subscriptions 2,266.6 6,105.2 -62.9% Redemptions 3,700.2 13,548.9 -72.7% Other data Average number of employees (*) 95 105
(*) Monthly arithmetic mean
In 2009 the range of managed funds was rationalized through a merger by acquisition effective as of 30/5/2009. The number of funds went from 50 the prior year to 31.
In 2009, the Company reported a 10% drop in assets under management from 8,163 million at the end of 2008 to 7,341 million on 30/12/2009. With respect to net asset flow for the year, the 31 Aletti Gestielle funds reported an outflow of (1,433.6) million.
As to the performance of the managed funds, during the year Gruppo Banco Popolare slipped from number tenth to number fourteenth in the asset management groups ranking, with a market share of 1.96% and total assets under management of 8,435 million, of which 7,341 million managed by the company.
The table below compares the net asset values of the different classes of managed funds (the changes in each fund class were affected by the changes caused by the merger that took place during the year):
(in millions of euro) 30/12/2009 30/12/2008 Changes
Equity funds 1,621 1,264 28.2% Fixed income funds 4,872 6,350 -23.3% Balanced funds 395 164 141.7% Flexible funds 215 122 76.5% Non-harmonized funds 238 264 -9.9% Net assets under management 7,341 8,163 -10.1%
Evidencing the unrelenting effort devoted to asset management, also in 2009 the company won the credit of the asset management industry and was awarded the Premio Alto Rendimento organized by Gruppo Il Sole 24-Ore CSF Rating as: First Best Italian Mutual Fund Manger – BIG class; Best America Fixed Income Fund with Gestielle Bond Dollars.
Also this year the commitment to ethical finance was worth of notice: with the creation of the Gestielle Etico per AIL fund, the planned annual donation was channeled towards a single beneficiary which implements country-wide extensive and continuous projects. Thanks to the assets accrued in this fund, AIL (Italian Association against Leukemia-lymphomas and myeloma) received a contribution of 164 thousand euro. The donation made in 2009 will help realize a project of paramount importance: the creation of a single “AIL Home Care” model across Italy, geared on the needs of hematological patients, that will then lead to the quality certification of AIL’s home care on the domestic territory. The project shall start in Rome and will then be extended to services in other towns.
As to the development of the so called non-captive market (i.e., sales activities through banks and networks not belonging to Gruppo Banco Popolare), 2009 posted positive net inflows and a solid growth of AuM. Non-captive networks ended 2009 with a net balance between subscriptions and redemptions of +16.7 million euro, while assets generated by “extra-group” networks increased by 5.6% over the previous year, and at year-end totaled 1,378.2 million euro, accounting for 18.7% of the SGR’s total assets under management. Although uncertainty still prevailed, which in 2009 caused this industry to report a year-end total net outflow of -2,957 million, of which -12,668 million from Italian funds, the Company obtained positive results on the non-captive market thanks to the unfailing and incremented support lent to the distribution networks.
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As to the Open-end Pension Fund Gestielle Pensione e Previdenza, Net Assets for the Distribution of Benefits at the end of the prior year (combining the two pension funds managed by the Company together) totaled 65.2 million (15.0 million for Gestielle Pensione e Previdenza and 50.2 million for Bipitalia Multiprev), while at the end of 2009 they reached 80.6 million (after the merger by acquisition of the Bipitalia Multiprev Fund in the pension fund Gestielle Pensione e Previdenza effective as of 31/10/2009), up by 23.62%. The total number of members decreased by 261 units from 4,697 to 4,436.
Illustrated below are intercompany relations with Banco and with the other Group subsidiaries: Banca Popolare di Verona - SGSP SpA, Credito Bergamasco S.p.A., Banca Aletti & C S.p.A., Banca Popolare di Novara S.p.A., Banca Popolare di Lodi S.p.A. Cassa di Risparmio di Lucca Pisa e Livorno S.p.A., Banca Popolare di Crema, Banca Popolare di Cremona, Banca Popolare di Mantova, Banca Caripe engaged in the sale and distribution of managed funds; Banco Popolare e del Credito Bergamasco S.p.A (the latter until 31/05/2009) acted as Custodian Banks for the managed funds).
Banca Italease and its subsidiaries
31/12/2008 (in millions of euro) 31/12/2009 Changes Pro forma
Income statement - consolidated (*) Net interest, dividend and similar income 164.6 219.4 -24.9% Net fee and commission income 28.6 35.5 -19.4% Net interest and other banking income 199.9 271.6 -26.4% Operating expenses -132.2 -185.4 -28.7% Profit from operations 67.7 86.2 -21.4% Income (loss) before tax from continuing operations -303.7 -999.9 -69.6% Income (loss) after tax from continuing operations -297.9 -1,137.1 -73.8% Net income/loss for the year -276.2 -1,093.7 -74.7% Balance sheet - consolidated (*) Total assets 17,056.2 22,664.1 -24.7% Loans to customers (gross) 13,856.9 20,021.8 -30.8% Financial assets and hedging derivatives 340.8 321.8 5.9% Shareholders’ equity 1,293.8 415.7 211.2% Other data - consolidated Average number of employees (**) 830 979 - Number Branches and other Offices 23 42 - (*): Data at 31 December 2008 are adjusted for comparison to include the updates of 18 November 2009 of circular n. 262 and the classification criteria of the accounting items of the Parent company Banco Popolare and are pro-forma to account for the transfer of Factorit in discontinued operations under IFRS 5 (**) Monthly arithmetic mean.
Consolidated income statement
Net customer loans at the end of December 2009 totaled euro 12,641.0 million. At the end of 2009, about euro 4.8 billion worth of net customer loans were transferred to the company Alba Leasing, therefore on 31 December 2009 they were no more part of Banca Italease consolidated assets: about euro 2.4 billion are net non-securitized loans, while euro 2.4 billion are net securitized loans, under an agreement signed on 24 December 2009 by Banca Italease and Alba Leasing (the ”Agreement on securitized loans”), based on which all risks and benefits are transferred to Alba Leasing. Under the same Agreement, Banca Italease’s customer loans at the end of 2009 must incorporate euro 1.3 billion worth of junior notes and senior securities not sold on the market corresponding to the portfolio transferred to Alba Leasing through the Securitized loan agreement, and said securities shall be owned by the Bank. Net of these components, the decline in customer loans confirms the downward trend that had been characterizing the prior year. The sizable capital shortfall experience by Banca Italease as a result of the losses reported in 2008 and 2009, and the confirmed scarcity and expensiveness of financial resources, obliged the Bank to restrain the start of new contracts and limit itself to processing the outstanding lease business, while the portfolio continued to go through its natural impairment process. In detail, on 31 December 2009: (i) euro 8,815.6 million refer to net lease-related loans; (ii) euro 1,666.1 million refer to mortgages and (iii) euro 868.0 million to other net loans, including among other things assets under construction and those pending to go under finance lease (totaling 462.1 million).
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(in thousands of euro) 31/12/2009 31/12/2008 Changes
Gross impaired loans 5,023,252 4,548,999 474,253 10.4% - nonperforming 1,847,272 671,521 1,175,751 175.1% - substandard 2,771,802 3,690,199 -918,397 -24.9% - restructured 185,638 7,802 177,836 2279.4% - past due 218,540 179,477 39,063 21.8% Gross performing loans 10,373,287 17,120,939 -6,747,652 -39.4% Other gross assets 10,373,287 17,120,939 -6,747,652 -39.4% Total gross loans - consolidated 15,396,539 21,669,938 -6,273,399 -28.9% Individual write-downs -1,192,597 -997,340 -195,257 19.6% Collective write-downs -89,236 -108,595 19,359 -17.8% Total net loans - consolidated 14,114,706 20,564,003 -6,449,297 -31.4%
Credit quality data include both in 2008 and 2009 loans to Factorit customers.
The events that in 2008 had already caused a marked deterioration of the loan portfolio of Banca Italease and its subsidiaries continued to affect also 2009, generating an additional increase of impaired loans, in particular non-performing loans. Note, that although about euro 240 million worth of gross impaired loans (of which: non-performing of about euro 90 million, substandard of about euro 100 million, restructured of about euro 6 million and past due of about euro 44 million) have been transferred to Alba Leasing (a company that does not fall within the consolidation scope) effective as at 31 December 2009, gross consolidated impaired loans rose to euro 5.0 billion on 31 December 2009. Evidence of the high concentration level of the impaired loan portfolio, at the end of December 2009 : (i) about 72% of gross non-performing loans was represented by 30 industrial groups, (ii) about 80% of gross substandard loans is represented by 30 industrial groups, (iii) about 99% of gross restructured loans is represented by 2 industrial groups and (iv) about 74% of gross past dues is represented by 30 industrial groups. On 31 December 2009, the gross NPL to customer loan ratio was 12.0%, well above 3.1% reported on 31 December 2008. The gross substandard loan to customer loan ratio was 18.1% on 31 December 2009, basically unchanged with respect to 17.0% on 31 December 2008. Finally, restructured loans and past dues accounted for 1.2% and 1.4% of gross customer loans (0.04% and 0.8% at the end of 2008). The NPL coverage ratio went from 47.6% at the end of 2008 to 35.9% on December 2009, due to the inflow of a big amount of loans validly backed by guarantees represented by real estate. Also the substandard loan coverage ratio, coming in at 17.9% and therefore almost in line with prior year’s 18.0%, factors in the weight of the real estate product in the aggregate. The coverage ratio of restructured loans rose from 9.9% to 12.5%, while for past dues it went from 7.9% to 4.4%. Net of provisions, non-performing loans stood at euro 1,183.4 million, substandard loans at euro 2,275.9 million, restructured loans at euro 162.4 million and past dues at euro 208.9 million.
On 31 December 2009 tax assets amounted to euro 174.9 million, and they included deferred tax assets of euro 100.1 million. We reported euro 107.3 million worth of deferred tax assets net of deferred liabilities (inclusive of deferred tax assets net of deferred liabilities of Factorit or euro 11.2 million, classified on 31 December 2009 in non-current assets held for sale and discontinued operations). This is the same amount that was reported in the consolidated half-year report, because some of the assumptions on which the standalone recoverability estimates were based faded, and when Banca Italease asked the Parent company for a guidance on the possibility of recovery as part of tax consolidation, Banco Popolare answered that for the time being it had not made any decision as to the possibility of proposing to Banca Italease and or one of its subsidiaries to join the Group taxation option, and it specified that if and when this decision were to be made, in any case the share of deferred tax assets to be recognized to Banca Italease and its subsidiaries following a recovery based on the taxable income of the other companies of Gruppo Banco Popolare is to be mutually agreed by the parties. We should also consider that the multiannual plan of Gruppo Banco Popolare incorporating the business activities of Banca Italease and its associates (“leasing business”) will be presumably developed and submitted to the approval of the competent bodies during the year. In view of the sizable amount of potential deferred tax assets of Banca Italease, a complete assessment of their recovery probability, even under the perspective of Gruppo Banco Popolare, shall be possible only based on a multiannual plan that takes into consideration also the future contribution of the leasing business. This being said, Banco Popolare informed Banca Italease that, based on preliminary analyses, Banco Popolare shall make sure that that Banca Italease and its subsidiaries may at least recover the amount of deferred tax assets (net of deferred liabilities) posted in the consolidated half-year report as at 30 June 2009, amounting to euro 107.3 million. Not recognized net potential tax assets total euro 395.5 million.
On 31 December 2009, due to banks stood at euro 5,709.0 million, down by 18.7% from the prior year. Note, that for euro 2.4 billion this decline in due to banks was caused by the transfer of said liabilities to the company Alba Leasing. Securities issued decreased by 39.1%, reaching euro 8,249.0 million, as in 2009 Banca Italease did not carry out any new public securitizations and made no new bond issuances. Liabilities associated with outstanding securitizations at the end of December 2009 totaled euro 1,115.2 million, while bonds amounted to euro 6,984.9 million. A Preferred Securities deal of euro 148.9 million (par value of euro 150 million) is underway. As a result of the Agreement on securitized loans, securitization-related liabilities decreased by euro 1.5 billion referring to the consolidation of part of the securitized securities sold on the market.
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The increase in provisions for risks and charges with respect to the prior year was mainly driven by the other provisions, which include euro 106.5 million set aside in 2009 to provide for the estimated one-off and non-recurring effects of the execution of an agreement to transfer securitized loans to Alba Leasing, and partly for the guarantee given to Alba Leasing on the ownership, the origin and the status of the transferred loans. At the end of 2009 the provision for litigation risks stood at euro 33.2 million.
On 31 December 2009, the consolidated shareholders’ equity stood at euro 1,293.8 million, up by 211.2% from euro 415.7 million on 31 December 2008. The difference was mainly caused by the end of the offering period for the Capital increase, through which we raised euro 1,153 million. Thanks to the completion of the first phase (offering period) of the Capital Increase and to the deconsolidation of risk weighted assets as a result of the finalization of the Reorganization Operations, the consolidated capital ratios of Banca Italease improved significantly, to go well above the prudential regulatory thresholds fixed by bank regulators. The consolidated pro-forma Core Tier 1 Ratio on 31 December 2009 was about 9%, the Tier 1 Ratio was about 10% and the Total Capital Ratio was about 11% .
Consolidated income statement
With respect to 31 December 2008 interest margin plummeted from euro 219.4 million to euro 164.6 million. This evolution was mainly driven by a: (i) decrease in loans, caused by the need to restrain new business, due to the constraints dictated by funding and the intervening capital shortfall, (ii) growth in the average cost of funding and (iii) volume of cost – bearing funding greater than interest-bearing loans, due to the progressive deterioration of the portfolio’s quality. Also the decline in Net fee and commission income (-19.4% against 2008), which came in at euro 28.6 million at the end of 2009, was due to the marked contraction of new lease business and medium/long term loans. Net interest and other banking income, which at the end of December 2008 stood at euro 271.6 million, on 31 December 2009 amounted to euro 199,9 million. Cost containment actions are reporting positive results. Other administrative expenses decreased by 7.3% with respect to 31 December 2008, reaching euro 50.7 million and personnel expenses dropped by 27.3% compared to the previous year, running at euro 65.4 million thanks to the personnel cuts carried out under the master turnover management project. The consolidated average headcount (including non-employees) went from 979 units in 2008 to 830 in 2009. Net impairment of tangible and intangible assets, which on 31 December 2008 included euro 31.5 million that were mainly linked to write-downs of real estate assets held for investment by the subsidiary Italease Gestione Beni, at the end of December 2009 reached euro 16.1 million, including a 1 million write-down associated with a single building held for investment by Banca Italease and euro 6 million worth of write-downs on 4 buildings held for investment by the subsidiary Italease Gestione Beni for legal or technical-urban planning problems.
Net loan impairments at the end of December 2009 broke down as follows: net individual loan write-downs of 235.6 million, of which about euro 163.0 million write-backs for discounting interest accrued during the year and recognized in income. The most important reason underlying the above write-down trend (excluding write-backs) is the increase in total impaired loans reported in 2009; net performing loan write-downs of euro 19.3 million, up from euro 7.0 million in 2008 despite the reduction of the loan portfolio they refer to because of the progressive adjustments to PD parameters (Probability of Default) on customer loan portfolios in response to the general loan quality deterioration, only partly offset by improving PD parameters on the bank loan portfolio.
Net write-downs include also write-downs for guarantees given of euro 2.6 million, related to the increase in counterparty risk of some loans transferred to Alba Leasing, that under the agreement are to return in Banca Italease’s assets in 2010.
Net provisions for risks and charges, which at the end of December 2008 (euro 9.3 million) were largely linked to legal litigation provisions, on 31 December 2009 broke down as follows: euro 14.7 million for provisions set aside during the year for legal litigations and bankruptcy procedures; euro 106.5 million for provisions set aside to account for the estimated one-off and non-recurring effects of the execution of an agreement to transfer securitized loans to Alba Leasing (the ”Agreement on securitized loans” more exhaustively described later on), and partly for the guarantee given to Alba Leasing on the ownership, the origin and the status of the transferred loans; euro 1.7 million for other risks.
On 31 December 2009, profit on disposal of equity and other investments, totaling euro 9 million incorporated among others: (i) a euro 8 million capital gain from the sale of operating real estate in Turin, Corso Ferrucci 100/A, and Milan, Via Tortona 7, and (ii) a euro 0.4 million capital gain from the sale of three buildings held for investment by Italease Gestioni Beni. Profit after tax on discontinued operations on 31 December 2009 (euro 18.9 million) represents the entire net income of the subsidiary Factorit, down by 42.3% over the prior year. As a result of the above described factors, on 31 December 2009 we posted a net loss of euro 276.2 million.
Relations with subsidiaries and associates
Please, refer to the Explanatory Notes, Section H, for a more detailed illustration of transactions with related parties.
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MUTUALITY AND SHAREHOLDERS INITIATIVES
Criteria followed in managing social actions to fulfill our mutuality purpose
This paragraph was prepared in compliance with article 2545 of the Civil Code, according to which directors of cooperatives, also when not prevailingly mutual, must “explicitly indicate the criteria followed in managing social actions to fulfill their mutuality purpose" in the report on operations.
Banco Popolare adopted the dual corporate governance system (art. 2409-octies and following articles of the civil code). It is organized along a listed Parent Holding company (Banco Popolare), with management and coordination functions – pursuant to art. 61, paragraph four, Lgs. D. n. 385, 1 September 1993 – towards the companies that fall within the corporate consolidation scope, i.e., the retail banks (Banche del Territorio), the specialized Banks and the Operating companies (product factories). The mutuality purpose is therefore primarily fulfilled through the Parent company’s directions to its Retail Banks and its main subsidiaries, while respecting specific company peculiarities and prerogatives.
Article 4 of the Articles of Association provides a first important guidance on the company object and its mutuality nature, by specifying its business activity scope ("the objects of the Company are to collect and maintain saving funds and issue loans and credit, in its various forms …"), identifying the entities to which banking services are offered ("… both its registered shareholders and non-shareholders") and performing banking activities in keeping with "the principles underlying Cooperative Credit". Moreover, in keeping with its cooperative credit origin (art. 4 bis), the Company gives special regard to the market territory of its subsidiaries, through the pervasive proximity of its distribution network to Small and Medium-sized Enterprises, cooperative companies and households. Finally, in keeping with its institutional mission, Banco extends favorable conditions, also through its subsidiaries, to its customer-shareholders for the use of specific services.
Accordingly, Banco Popolare interprets mutuality both in its strict definition - the relationship between shareholders who contribute capital to the bank and receive services as customers - and in a more general sense as the interaction between the bank and its social and economic setting, based on the spirit of localism at the service of civil society. From a corporate point of view, on 31 December 2009, Gruppo Banco Popolare had 209.595 registered Shareholders, of which about 80% holders of a commercial checking account, mostly resident in the five historical franchises of its Banks: Veneto, Lombardy, Piedmont, Emilia Romagna and Tuscany. Moreover, on that same date registered shareholders with shares deposited with the banks of the Group were more than 186,000. This once again confirms the importance of the joint Shareholder-customer identity that has always been a distinctive feature of cooperative “popolari” banks, whose foundations lie on reciprocal trust and loyalty. In 2009, the Banco Popolare Shareholders’ Office received and handled 35,892 new applications for admission as registered shareholders, quite a big number demonstrating the lively interest to join the shareholding structure. Applications are always approved in compliance with bylaw provisions and with applicable laws regulating shareholding thresholds (at present, 0.5%). To this regard, 12 shareholders who exceeded this threshold will have to sell the overhang shareholding under the law.
The General Shareholders’ Meetings of Banco Popolare represent the key event of direct participation for the registered Shareholder to the Bank’s corporate life, as demonstrated also by the fact that the annual report is submitted to the approval of the Shareholders’ meeting. The thorough monitoring over the observance of legal and statutory regulations governing the status of Registered shareholder and corporate life represents an indispensable corollary. Accordingly, Banco Popolare is committed to favoring the highest shareholders attendance to the important engagement with the General Annual Meeting, to promote the principle of shareholding democracy and to encourage the direct participation of shareholders in the passing of resolutions. From an organizational viewpoint, this is achieved by predisposing a large and adequate venue to host a large number of participants, and from an organizational viewpoint, by putting shareholders in a position to exercise their corporate rights in the best way possible.
This year the General Meeting of Banco Popolare’s shareholders took place on 25 April 2009, with a total attendance of 5,418 Shareholders for the special session and 9.548 for the regular session, in line with a tradition of wide participation that has been characterizing for decades the corporate life of the Group Banks. The Shareholders’ meeting approved the second annual report of Banco Popolare and, through the mechanism of voting lists, it appointed five members of the Supervisory Board, which brings to twenty the number of members of this Board in charge of strategic planning and control as provided by the Articles of Association and by applicable regulations.
On 30 January 2010, the Special Shareholders’ Meeting of Banco Popolare was convened, with an attendance of 3,603 Shareholders. The two items on the agenda were approved almost unanimously: the issuance of a convertible “soft mandatory” bond and some amendments to by-law articles. As a result, the Shareholders’ Meeting gave the Management Board the power to issue convertible bonds redeemable in shares, subject to the prior favorable opinion of the Supervisory Board, up to a maximum amount of 1 billion, to be offered in option to shareholders and to convertible bond holders.
The next Annual Shareholders’ Meeting of Banco Popolare shall be convened on 23 April 2010 on first call (if required, on 24 April on second call), and will be asked to approve the 2009 statutory financial statements and to elect through the
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voting list mechanism 10 Supervisory Board members, whose term is expiring, including the Chairman and Vice-chairmen, who had been appointed at the time of the merger between BPVN and BPI; they can be re-elected and the term of the office is three years.
Through its Banche del Territorio, Banco Popolare offers to its Shareholders an exclusive complete and manifold package of products and services that interpret and strengthen the tie between them and the Bank. a The main program is dedicated to Registered shareholders and it is called “Insieme Soci”. It features a fixed fee checking account with a wide range of banking, insurance and non-banking services, including an unlimited number of transactions, two debit cards and up to two credit cards, also Gold, at no charge, no account and securities administration expenses, and it gives free of charge access to all on-line services of the Bank. Moreover, the holders of this package are entitled to take part in the point collection program, called "Valore Insieme Soci", that rewards the ownership and use of some products and banking services, and features a loyalty bonus rewarding shareholding seniority, and gives the possibility of offering the accumulated point to some social associations: Fondazione Zanotto, Unicef or Fondazione Exodus.
At the end of 2009 about 83 thousand Shareholders had subscribed our dedicated offers, of which about 63 thousand chose the “Insieme Soci” program.
“Insieme Soci Giovani” was geared to Shareholders below 36 years of age, and has the same characteristics of Insieme Soci at an even lower cost. The “Insieme Soci” range was then extended to sole proprietorships with an offer called “Insieme Soci Impresa”.
A number of novelties were introduced in 2009: the new “Insieme Soci Passbook” was distributed, linked necessarily to the Insieme Soci account and designed to give more value to the liquidity of account holders who prefer more traditional savings products. Specific solutions have been designed in the personal and family protection area, featuring a lower premium for Shareholders. As to loan offers dedicated to Shareholders, they are offered particularly advantageous terms on mortgages and personal loans. Each Shareholder is also exempted from custody rights on Banco Popolare shares deposited with the Banks of the Group.
The second main class of initiatives through which Banco pursues its mutuality purpose is its support to the civil and social fabric of its traditional franchises. In turn, they can be broken down into two main areas: banking activities and charity.
With regard to banking activities, Banco Popolare serves its customers through a very close-knit network of branches, concentrated in its franchises, with a strong and pervasive coverage of the territory. This allows the bank to offer credit services not only to large metropolitan areas, but also to smaller municipalities, guaranteeing the same qualitative standards and range of solutions, which is a feature that definitely allows the Group to be the bank of choice for many local communities. The strong ties with its historical market territories allow the bank to focus its attention on the entities that characterize the social and economic system of its franchises: households and small and medium companies, that make up the vast majority of the Group’s customer base.
Against this backdrop, and again in line with the overriding principle of mutuality, this is the rationale underlying the actions made both in terms of support to economic development, and in terms of charity, referring to Shareholding customers and initiatives in support of the civil and social fabric of the Group’s historic market territory.
The Group’s national outreach did not undermine its localism, as our banking activities are keyed to relationship banking and this allowed us to retain a strong focus on local community issues and safeguard our deeply rooted ties with our market territory.
Social solidarity, charitable and public interest activities are yet another institutional goal of Banco Popolare and a qualified way to pursue its mutuality purposes. To this regard, the articles of association (art. 4 bis) state that “the banks whose share capital is directly and fully owned by Banco Popolare can destine to charitable, social solidarity and public interest activities the net income share provided by their articles of association, up to a maximum amount to be decided every year by the Shareholders’ Meeting of Banco Popolare”. This amount is distributed among the market territories of the retail banks based on a precise proportion set out by the above mentioned bylaw provision. Moreover, the Supervisory Board issues directives and guidelines regarding the expenditure and social responsibility policies of the Group.
Group charitable activities are performed either directly by the Banche di Territorio or through the Foundations they have set up, and that are guaranteed a primary support by the articles of association. Although each Foundation has its own distinctive traits, they all share a common denominator: pursue charitable aims in favor of local communities. Specific areas for action are schooling and education, social solidarity initiatives, safeguarding architectural and artistic heritage, as well as promoting culture, publishing and sports. A brief review of the main charitable activities performed in the past year is illustrated in the following paragraph.
Finally, every year the Group prepares its Social report, which gives a detailed description of initiatives in favor of stakeholders, among which a great attention is devoted to charitable initiatives, and illustrates the many aspects of corporate relations that contribute to the fulfillment of the mutuality purpose.
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Charitable, social solidarity and public interest initiatives
Despite the unprecedented and unusually severe economic cycle, Banco Popolare did not deviate from the founding tenets of cooperative credit and from its mutuality purposes, over and above its primary role in serving the economy. Therefore, in spite of the spare means available, Banco Popolare made a major effort, especially through its Retail banks, to take heed of emerging needs and daily requests and to give concrete answers, which bears witness to our undertaking to strengthen the fruitful ties with our communities, a commitment that was nurtured day in, day out, as it is the expression of the Group’s deeply rooted position within the community, and of its role as the partner of choice to turn to for help and support. Well aware of the role we are called to play to meet the needs of civil society, the Management Board, after favorable opinion of the Supervisory Board, submitted a number of proposals to the approval of the Shareholders’ Meeting aiming at safeguarding the observance of the mutuality purposes provided by a specific bylaw provision. On 25 April 2009, the Special Shareholders’ meeting approved the amendment to article 4 bis, second paragraph of the Articles of Association, to be immediately effective, then the GAM approved the distribution of Euro 10 million in FY 2009 for donations to charity, social solidarity and cultural initiatives by the banks fully owned by Banco. In compliance with the third paragraph of the aforesaid article, and in keeping with the guidelines of the Charity Committee, also in 2009 Banco took advantage of its vested prerogative as provided by the Articles of Association, and in order to favor an equitable and fair distribution of funds across the Group, it issued guidelines and indications with respect to the destination of available resources. To this end, and without prejudice to the distribution criteria set out by the Articles of Association, everybody endorsed the possibility for Banca Popolare di Lodi to draw from Banca Popolare di Novara’s and Banca Popolare di Verona–SGSP’s profit allocation share, as determined upon approving the 2008 annual report, to pursue its charity purposes; as a result of commitments made in the past, Banca Popolare di Verona–SGSP was also required to pay Euro 416,000.00 to Fondazione di Culto San Geminiano San Prospero drawn from its disposable funds deriving from the bank’s profit allocation share. Even after the above allocations, Popolare di Novara and Popolare di Verona were still left with adequate means to go ahead with their supportive and furthering actions in favor of the civil and social fabric of their market territories. Considering the unprecedented times we are experiencing, as part of its guidance, Banco expressed the need to make smaller donations to ensure the continuity of Banco’s presence across its wide operational reach. It also underscored the importance of privileging most hard hit economic contexts, social initiatives and voluntary services, provided that the most worthy initiatives must have the priority and be covered completely. Nevertheless, the significant overall reduction in available resources to be devoted to charity was hard felt, especially whenever we had to blend the need to keep faith with the solidarity values that are the foundation of a cooperative bank having close ties with its territory, with the need to satisfy the growing number of issues and the wide variety of social needs that began to emerge with the critical deterioration of the economic, social and environmental setting. Gruppo Banco Popolare addressed this highly complex situation with a purposeful and genuine approach, that was expressed through the important actions made in the various areas by the Group companies, as described below, bearing witness to the deep consideration our Group has always given to the growing needs of the local communities of our market territories.
Banca Popolare di Lodi and Fondazione Banca Popolare di Lodi
In 2009, Banca Popolare di Lodi, through its Charity Committee and the Committees of the Genoa, Romagna and Catania Areas, made important donations to support voluntary services and initiatives of local associations in the field of education, recreation, schooling, religion, health-care and social outreach, scientific research. Summarized below are the main ones.
Education and culture Economic support was lent to: - the Municipalities of Somaglia (LO) and Melegnano (MI) to stage historical reenactments of important events that had taken place in the territory; - to the Rome section of AVIS to organize the conference “Blood donation –citizens’ protection and prevention”; - to the Association Roberto Malusardi – Amici del cuore Onlus in Lodi, for a concert to raise funds for scholarships to further education in the field of cardiology; - to the Emergency Ward of the Codogno Hospital (LO), to organize a conference for physicians, nurses and paramedics on “The hot topics of emergency-urgency”; - to the Health-care Organization of the Province of Lodi for the initiative “Continuous training, primary ultrasound and telemedicine” aiming at favoring a health-care sustainable development of rural communities in Madagascar; - to the Association Il Porto dei Piccoli Onlus in Genova to “train entertaining and educational hospital operators”.
Contributions were made to the Università Cattolica del Sacro Cuore in Milano for scholarships for young students in need of financial assistance and to the Fondazione San Bassiano di Lodi Vecchio (LO) to award “merit grants” to mid- and high- school students.
Recreational events Donations to support numerous initiatives were granted, in particular: - to roll out the first edition of the “European Special Bocce Olympic Games” (an Italian version of bowling) held in Lodi, with more than 250 disabled athletes coming from various European countries; - to the Municipality of Imola for the show “Imola in musica 2009”;
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- to the Associazione Emilia Romagna Festival di Imola to organize “Itinerari musicali 2009”; - for the concert season of the Società Filarmonica di Sestri Levante (GE) and the Giovine Orchestra Genovese; - to the Associazione Culturale di Noto (SR) “Corteo Barocco” for the show “Infiorata di Noto”; - to the Municipality of Cogorno (GE) for the exhibition “I Borghi dei Fieschi” and “I concerti dei Fieschi”.
Additional donations were made to various Sports associations to support their activities.
Health-care and social outreach We contributed to the purchase of a multidisciplinary ultrasonograph for the ill elderly residents of Fondazione “Ing. P. Zoncada” Onlus di Borghetto Lodigiano (LO) and to the purchase of a vehicle for the transportation of patients of Fondazione Castellini di Melegnano (MI).
Financial support was offered to Fondazione Serena di Milano to implement the equipment and expand the structure of the “Centro Clinico Nemo” (NEuroMuscular Omnicentre) and to Interplast Italy – Volunteering in Reconstructive Plastic Surgery, Lodi section.
Generous donations were made to the Italian Red Cross Catania Committee to purchase telephone and IT equipment, and to the Lodi Committee – female section, to the Opera Diocesana Madonna del Bambino Villaggio del Ragazzo di San Salvatore di Cogorno (GE), to the multiple sclerosis association “Lega Italiana Sclerosi Multipla ONLUS” in Milano, to support activities in favor of needy and ill people. We also collaborated with the Curia Arcivescovile di Chiavari (GE) and with Virtus Entella di Chiavari (GE) to carry out two solidarity projects in favor of the homeless and of deprived people.
Religious initiatives Resources were destined to Parishes and Parish Youth clubs to support small renovation works, among which the most significant contribution went to the Parish of Briga Marina (ME) to restore the canonicals destroyed by the flood last October.
Scientific research A donation was made to FON.CA.NE.SA. Onlus in Catania, a foundation for the study and treatment of blood neoplastic diseases.
At the suggestion of the Charity Committee, part of the funds were used in the Areas and Branches located in the historical marketplaces of Banca (Lodi, Pavia, Gallarate, Parma and Piacenza) for small-sized actions to be chosen autonomously in favor of Associations and Agencies for sports events and events linked to local traditions.
By taking part in the fund raising for the people hit by the earthquake in Abruzzi, promoted by Banca Caripe and other Abruzzi Casse in cooperation with the Abruzzi newspaper “Il Centro”, Banca Popolare di Lodi achieved an important goal: the raised amount was destined to the “Progetto mensa di Celestino” aiming at building a structure to host the church, a soup kitchen and shelters for the poor.
Banca Popolare di Lodi and Fondazione Banca Popolare di Lodi
Fondazione Banca Popolare di Lodi pursued its purposes to promote and further the wellbeing of the Lodi area and used its funds to support numerous initiatives marked by a high social utility in favor of its community. In 2009, through its Charity Committee and its Board of Directors, the foundation undertook itself to support various sectors, in particular the social sector which has become a priority with the worsening of the economic crisis. Note, that in 2009 the Foundation made some amendments to its Articles of Association, that were approved by the Board of Directors of Banca Popolare di Lodi, among which the possibility of allocating part of its contributions directly. This option, in addition to FOA (funding opportunity announcements), allowed the Foundation to be more effective in urgent cases, where an actual call for bid procedure would have required too much time.
With the first funding opportunity program announcement “Bando per settori di intervento”, that was publicized in the Lodi territory by local newspapers, the Foundation received 180 proposals for a total amount of about 24 million. In the first screening carried out to identify priority interventions, that is, those that could promote innovation and development initiatives for the territory, at first the Foundation selected 72 projects, and a few months after other 42 projects were added in by way of direct actions, with a fair distribution across the territory.
Religious initiatives Contributions were made for the renovation, restoration, preservation and remodeling of the historical and architectural heritage of religious buildings such as churches and related buildings, like museums, libraries, parish youth clubs. For example in Lodi we contributed to the renovation of the Church of the San Fereolo Parish and the youth club of the Parish of Santa Maria Assunta. Liberal contributions were assigned to the Parish of Santo Stefano Lodigiano to renovate the church damaged by the earthquake in 2008 and to the Parish of Castiglione d'Adda to build a multifunctional sporting center.
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Schooling and education 14 initiatives were financed, aiming at promoting education at every school grade and level, also by creating or updating IT labs, with a special focus on disabilities and learning impairments. Resources were destined to initiatives to foster a renewed environmental awareness, the promotion of local culture and the integration and mainstreaming of different cultures living in the Lodi territory.
Recreational events 32 interventions were supported, aiming at favoring social, cultural and non-professional sports cohesion.
Health-care and social outreach Consideration has been given to social projects and interventions aiming at promoting and developing the dignity of human beings and at providing financial support to families in need as a result of the economic crisis (a few thousand families in the Lodi area). The Foundation made a contribution to the Solidarity Fund for Families created by the Diocese of Lodi and another to the Provincial Anti-crisis Solidarity Fund jointly set up by trade unions and the Consortium of Municipalities for Social Services, the Province and the Municipality of Lodi, and the network of municipalities of the Lodi area, to support the families of workers who lost or are losing their jobs. Additional donations were assigned to centers sheltering people in need; in particular: - to Associazione “Il Cammino” to build mini-apartments for adults who recovered from drug and alcohol addiction at Senna Lodigiana; - to Cooperativa Amicizia at Codogno and Fondazione Danelli in Lodi for centers for the disabled, in particular autistic children and adults; - to the social cooperative “Marcellino” at Borghetto Lodigiano for a center that shelters children referred by the Juvenile Court, who suffered from violence and abuse; - to the nursing home of Sant’Angelo Lodigiano and of Codogno; - to the rehab Community for the recovery of drug-addicts managed by the Fondazione Don Leandro Rossi through the Cooperativa Amicizia.
A similar initiative with related purposes regarded also the Lodi Consortium for social services, made up of almost all the municipalities of the Lodi area, to set up a team to follow minors who have committed crimes, for their rehabilitation and mainstreaming in society. Additional contributions were assigned to oncologic and pediatric projects and initiatives. Worth mentioning are for example the donations to A.L.A.O. to purchase a van in Lodi for patients living in the Lodi area who must undergo treatments outside the territory, and to “Il Samaritano” to set up a working group of volunteers in Codogno to manage hospices for terminal patients.
Other grants were given to A.B.I.O to purchase an ultrasonograph for the pediatric ward of the Lodi hospital, and to the Associazione “Amici di Serena” to train and recruit people to assist pediatric patients during transfers from the emergency ward to the pediatric ward.
Scientific research Two projects submitted by the Polo Universitario and by the Parco Tecnologico Padano passed our scrutiny: the first deals with the opening of a research and continuous training center for laparoscopic surgery to train surgeons in the innovative techniques of mini-invasive and robotic surgery; the second, which benefited from funds received at the time of the incorporation of Banco Popolare, concerns the applied research for the development of advanced analytical genomic and chemistry technologies to guarantee food safety, promote agricultural and zootechnical produces and protect typical products.
As to direct interventions carried out by the Foundation, the following liberal contributions were assigned: - to the “Prozoo” project developed by the Parco Tecnologico Padano and the Istituto Sperimentale Italiano “Lazzaro Spallanzani”.; - to the Provincial Anti-crisis Solidarity Fund, that needed additional financial help to secure that all the persons entitled could be subsidized; - to Associazione Progetto Insieme to build three two-room flats in Caviaga di Cavenago to be assigned on an annual turnover basis to people in special need; - to Istituto delle Suore Missionarie del Sacro Cuore di Gesù in Sant'Angelo Lodigiano to create a multifunctional center to offer educational services and assistance to children between 3 and 6; - to Tiro a Segno Nazionale in Lodi to renovate the structure hosting it: it is a shooting range where the Police carries out its firearms practice.
The Foundation also purchased part of the personal archive of the renowned Lodi poet Ada Negri, who lived between the end of 1800 and the first half of 1900. The massive documentation (manuscripts, letters, autographed typescripts and a small photographic archive) supplements what had already been given to the Lodi Association “Poesia, la vita” by the grandson prof. Gianguido Scalfi. The initiative will open the way to more in-depth philological studies on the renowned Italian poet, who in 1940 was admitted among Italy’s Academics.
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At the end of the archiving process, on 30 December 2009, the Department of Heritage Libraries of the Lombardy Region (Soprintendenza ai Beni Librari della Regione Lombardia) issued a Decree declaring the archives of cultural interest pursuant to Lgs. D. 42/04.
Cassa di Risparmio di Lucca Pisa Livorno S.p.A.
In 2009, Cassa di Risparmio di Lucca Pisa Livorno revitalized its support to actions in favor of the protection of artistic and architectural heritage and to social solidarity initiatives, cultural events and research activities.
Artistic and architectural heritage protection An additional concrete support was lent to: - the restoration of the Church of San Pietro in Vinculis in Pisa completed in March 2009: the intervention was started in 2002 and called for the entire architectural renovation of the monumental complex better known as S. Pierino. Over the years, also thanks to the Bank’s help, it was possible to consolidated the entire structure, set up new functional systems, in particular restore the façade to its original state, re-insert the floor tiles and integrating the missing parts, and renovating the frescos mostly located in the crypt; - the renovation of the rooms of the Parish Youth Club of Madonnina di Lucca through the Association for the “Cappella di S.Cecilia”; - the renovation and furnishing of the Museo Diocesano di Arte Sacra through the Diocese of Livorno.
Social solidarity Contributions were assigned to the deprived.
Of great importance were the initiatives in favor of Caritas Diocesana of Pisa to support families in need due to the current economic crisis and in favor of the Croce Verde of Viareggio to purchase a new ambulance, because the old one was seriously damaged by the railroad disaster on 29 June last.
Donations were also made to the families who were hit by the same disaster. On that occasion, Cassa gave its financial and organizational help to set up a concert in the town of Viareggio, and the entire proceeds were donated to the victims of the railroad disaster.
Liberal contributions were made in favor of various associations with ongoing projects in Third World countries, for example the Tuareg Association and the Kalama Association. A financial support was given to the families and businesses located in the flooded areas of the river Serchio which overflowed on Christmas night. For the Christmas holidays, contributions were made to various Dioceses located in the market territory of Cassa to support their projects.
Education and Research Resources were destined to the Faculty of Economics of the University of Pisa, to grant scholarships to the most worthy young students who attended Masters in finance.
By way of the Associazione Confartigianato, organizer of the contest “Artigianato e Scuola”, involving all the schools of the province of Lucca, prizes were awarded to single students, specific classes or schools.
Resources were committed to a project on bio-ethics developed by the Diocese of Terni-Narni-Amelia.
Cultural events A concrete support was lent to the numerous initiatives organized by Associations, both as musical events and conferences: suffice it to mention the contribution made to the Teatro del Giglio for their 2009 artistic season and the donation to the Associazione Musicale Lucchese to organize their 2009 concert season.
Contributions were granted to the Associazione Scoprendo l’Italia to organize the conference “Convegno su Caravaggio” at Orbetello and the exhibition “Chagall ed il Mediterraneo” in Pisa.
Credito Bergamasco and Fondazione Credito Bergamasco
Since its foundation, Credito Bergamasco has always been very sensitive to the social issues emerging in its market territory, so much so that it introduced a constraint in its articles of association in favor of charity, social assistance or liberal contributions, which at present is set at 6% of net income for the year. As always, also in 2009 a great attention and commitment were devoted to charitable activities, which were directed towards solidarity actions, support to initiatives and projects developed by local social organizations in the social, care, cultural, religious and sports ambits, as well as scientific and medical research. All the initiatives, some of which span multiple years, have been either carried out directly by Credito Bergamasco or through its Foundation, which among other things is in charge of organizing charitable events. Summarized below are the most noteworthy examples.
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Social outreach Donations were made to the following initiatives: - Association “NEPIOS Onlus” in Bergamo, a nonprofit charity association which operates on the Bergamo territory in favor of children and families, in close cooperation with the town’s local authorities and agencies, supported also by the liberality of local businesses and institutions. The Association has launched two pilot projects in Bergamo and three international projects: the former two deal with a research on the early diagnosis of neuropsychomotory and cognitive development disorders in selected “high-risk” children, and with the secondary prevention of psychic malaise in children and adolescents living in disrupted social and family conditions, in cooperation with the Centro Famiglia di Longuelo (Bg); the international projects regard the construction of the village “Silvia e Michele Citaristi” at Azimganj in India, the support to the activities of St. Mary’s Lacor Hospital at Gulu in Uganda, and the start of a dress-making business in Ecuador employing “deprived” female workers; - Fondazione della Comunità Bresciana in Brescia to carry out social cooperation and social care/solidarity projects. 23 projects were financed, submitted by nonprofit associations or agencies located in the municipalities of the Brescia area served by 47 branches of the bank; - Associazione Cure Palliative Onlus to fund G&A expenses, and the construction of the 12 rooms of the Bergamo Hospice (Borgo Palazzo district) where terminal patients can be hosted, treated and cared for; - “Consorzio Solco” – an agency comprising about 60 social cooperatives operating in the Bergamo province – whose goal is to help the weak and deprived population groups (elderly, youth in difficulty, immigrants, disabled); - Associazione Animazione Educazione Prevenzione e Reinserimento (AEPER) in Bergamo, a social solidarity cooperative whose volunteering focuses on proximity to psychiatric patients and outcasts.
Smaller contributions were made to Fondazione Casa Serena Onlus at Leffe, for the project “Quartiere bene comune” launched by the Social Cooperative In Cammino in San Pellegrino Terme, for third world missions where Bergamo missionaries are present to Associazione Pro Jesu “Canta La Pace”, for the creation a new infirmary in the center of the Comunità Don Lorenzo Milani in Sorisole, for the creation of a Day center for Alzheimer patients to the Cooperativa Sociale Servire, and finally for the creation of innovative social and healthcare services to Welfareitalia – Gruppo Cooperativo Cgm in Brescia.
Arts and Culture Liberal contributions were granted to: - the Association “Bergamoscienza” in Bergamo, of which the Bank is a member, to organize the Science Festival from 3 to 18 October 2009, which offered 124 events free of charge (conferences, round tables, etc.) with highly authoritative participants and speakers; - Pro Universitate Bergomensi to support and further the University of Bergamo by organizing extra-curricular activities, research labs, seminars and conferences, special projects aiming at promoting the servicing role the University plays for its local community; - Università degli Studi di Bergamo to enrich university libraries, in particular for the Department of Juridical Science; - Centro Studi Valle Imagna, a cultural association operating in the Imagna Valley, to revive and promote the social history of the communities populating those mountain areas; - Istituto di Istruzione Superiore Paolina Secco Suardo in Bergamo to build a climbing wall in the new gymnasium.
Health-care and medical-scientific research Generous donations were made to: - Associazione Paolo Belli - Lotta Alla Leucemia in Bergamo, to support the creation of the “Nuova casa del Sole”, a project to build a center to host patients treated at the Hematology Department of the Ospedali Riuniti in Bergamo, and their relatives; - Istituto Ricerche Farmacologiche Mario Negri in Bergamo to support medical- scientific research; - Fondazione Humanitas in Milano to assure a psychological support to hospital volunteers working in the field of oncology care; - Associazione Italiana Parkinsoniani in Milano to support physiotherapy activities; - Lega Italiana per la Lotta contro i Tumori in Bergamo to support the research and prevention of cancer and to assure care and support to the more deprived social groups.
Architectural heritage protection and promotion Either directly or through its Foundation, Credito Bergamasco has always devoted a special attention to the promotion of culture and art in the town of Bergamo, and as a confirmation thereof it financed numerous interventions, among which the most noteworthy are: - Parish of S. Sisto In Colognola for the conservative restoration of four important paintings; - Parish of S. Bartolomeo Apostolo in Colere to purchase the painting of the painter Allegretti, depicting “Il Battesimo di Gesù” – the baptism of Jesus; - Parish of S. Martino Vescovo in Alzano Lombardo to restore the premises of the Alzano Museum; - Church of S. Andrea Apostolo di Mornico al Serio to restore and consolidate the decorations of the Church devoted to St. Andrew; - Fondazione Adriano Bernareggi in Bergamo to restore the wooden statues belonging to the Diocesan network of Archeological museums;
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- Church of S. Martino Vescovo di Sarnico to support the restoration of its stuccos and frescos; - Parish of S. Maria Assunta in Romano di Lombardia to support the prestigious Museo di Arte e Cultura Sacra; - Patronato San Vincenzo in Bergamo to restore and revive a building to be used to host a cultural and spiritual center.
Other minor contributions were granted to the Clarisse Monastery in Bergamo, the Parish S. Giuseppe Artigiano Fiorine in Clusone, to the Association Amici della Biblioteca in Bergamo, and to the Civic Library Angelo Mai in Bergamo to restore the portrait of Antonio Tiraboschi, to the Parish S. Giovanni Battista di Bagnatica (to restore the organ), the Parish Natività S. Agata di Martinengo (to restore the wooden choir), to the Parish SS. Martino Carlo Borromeo e Natività della B.V. di Adrara S. Martino (to restore a painting of the XVIII century, Madonna con Bambino e S. Carlo), and to the Parish S. Maria Assunta di Verteva (to restore frescos).
Sports and leisure time Numerous sports and leisure time initiatives were financed, among which those organized by the Parish of S. Pio X Celadina in Bergamo for a parish soccer field; by Club Alpino Italiano in Bergamo to organize the historical contest “Trofeo Parravicini” of ski touring, and for the refurbishment of the refuge Benigni in the Municipality of Ornica. A financial support was lent to numerous non-professional sports societies for activities characterized by a high community proximity, a wide participation and a practical social role for children and the young.
Fairs and music shows Liberal contributions were granted to associations and organizations, in particular: to Promoberg (Promozioni Bergamo - Ente Manifestazioni Fieristiche) for fair exhibitions promoting the produce and business activities of the province of Bergamo; to the International Center for Competitiveness Studies in The Aviation Industry (“ICCSAI”) to promote and set up a Research Center on air transportation, in cooperation with other Bergamo authoritative organizations and businesses, and involving researchers and experts from other universities and research centers; to the Association Anymore to organize the 21st edition of the “Festival Danza Estate 2009” with the patronage of the Ministry for Cultural Heritage and Resources, the Lombardy Region and the local Bergamo agencies and the collaboration of the newspaper Eco di Bergamo, at the former Church of S. Agostino (Piazzale della Fara) in Bergamo Alta,; to the Foundation Centesimus Annus in Rome for spiritual and cultural initiatives.
As to Fondazione Credito Bergamasco, for years it has been pursuing the promotion of art, culture and medical-scientific research, and illustrated below are examples of the numerous interventions, some particularly significant, carried out in these ambits: artistic, publishing, cultural, and last but not least health-care, scientific research and protection of architectural heritage.
Publishing Generous donations were made to publish the following volumes, some entirely financed by the Foundation: - “La Basilica di S. Martino e le sue Sagrestie in Alzano Lombardo” edited by Riccardo Panigada and published by Moma Editrice. This work is the natural corollary to the numerous restorations of masterpieces by Fantoni and other art works kept in the Museum of Sacred Art S. Martino in Alzano, financed by the bank in recent years; - The new edition of Leopardi’s “Canti” (Florence 2006) by Prof. Franco Gavazzeni, that had been long out of print. The reprint, sponsored by the Accademia della Crusca in Firenze, on which Franco Gavazzeni had been working in recent years with his students, has been complemented with the commented edition of “Poesie disperse”, and with the commented edition of the “Canti”, thus turning it into a must for the scholars and readers of the Recanati poet.
Among other publishing initiatives, worth mentioning are the publications promoted by the “Accademia Guardia di Finanza” in Bergamo, the support to the Association Giovanni Testori Onlus to publish the volume “Roberto Longhi Bibliografia” (great Italian art critic), the work promoted by the Parish SS. Redentore in Seriate (Bg) for the bibliography of “Mons. Carozzi”, archpriest of Seriate between 1919 and 1970, the volume prepared by the Associazione ex alunni dell’Oratorio dell’Immacolata di Bergamo on San Leonardo da Noblac. A financial support was lent also to the preparation of the “Saggi in onore di Trancredi Bianchi”, for the volume “Bergamo Urbs Picta”.
Music and artistic events The Foundation organized a number of events, for example: - the concert held at Teatro Creberg in Bergamo of the renowned jazz pianist Stefano Bollani, as part of the seventh edition of the event “Dai credito alla solidarietà”, whose costs have been entirely financed by the Foundation, while the proceeds have been donated to the “Associazione Paolo Belli/Lotta alla Leucemia Onlus”; - the exhibition hosted in the Bank’s headquarter dedicated to the Bergamo painter Gianfranco Bonetti, who died prematurely in 2007, and the support to the side-initiatives organized at the Liceo Artistico Statale di Bergamo in memory of the Bergamo teacher and painter; - the VII edition of the event “Invito a Palazzo”, whereby the head office of Credito Bergamasco was opened to the public for the event “Longaretti. La metafisica delle cose”, exhibiting numerous magnificent works of the celebrated Maestro, and the public was given the opportunity to visit the frescos and bas-reliefs decorating the Bank’s premises.
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Renewing the collaboration between Fondazione Credito Bergamasco and Fondazione/Museo Bernareggi, in 2009 cultural events were programmed such as: at the former Parish Youth club of San Lupo in Bergamo, the solo exhibit of the Greek artist Jannis Kounellis, a historical representative of contemporary Arte Povera (Italian minimal art), and the video- installation “Ascesi e Caduti” by Ferdinando Ferrario at the annual event of Macabre Dances and the exhibition of “Gianriccardo Piccoli “Stanze per Villa Panza” at Villa Panza (Varese). Liberal contributions were granted to protect the frescos of the Accademia Carrara (Bg), to support some events at the “Fiera Nuova” of Bergamo to promote art, culture and shows publicizing the Bergamo territory, to the cultural Project “Ultima cena di Leonardo”, and to support the “Stagione di Prosa e di Operetta” and the “Stagione Lirica e di Balletto” of Teatro Donizetti di Bergamo.
Worth mentioning is also the initiative promoted by the Foundation, that was welcomed with great success by the community, to distribute complimentary copies of the newspaper “L’Eco di Bergamo” for three months to patients of the Ospedali Riuniti di Bergamo, as well as the contribution, in addition to the bank’s donation, for the Diocese of Brescia to organize the visit of Pope Benedict XVI in Brescia.
Health-care and medical-scientific research Also in 2009 we continued to support: - the Fondazione San Martino, as part of an agreement between Fondazione S. Martino and Ospedali Riuniti di Bergamo, aiming at supporting the activities of the “Research center for liver diseases – CeLiveR”; - the development of research on prevention, diagnosis and medical-surgical treatment of “heart failure” at the Cardiovascular Department of Ospedali Riuniti di Bergamo; - the Surgery Department II° Breast Diseases and Anatomo-Pathology Unit of Ospedali Riuniti di Bergamo, by supplying them with diagnostic kits and disposables to complete the donation made by the Foundation of a medical equipment “GeneSearch”, that based on bio-molecular techniques can rapidly and reliably detect to what degree the cancer has spread to the breast.
Preservation and promotion of architectural heritage Either directly or through its Foundation, Credito Bergamasco has always devoted a special attention to the promotion of culture and art in the town of Bergamo, in particular to Accademia Carrara, either by giving precious works of art under gratuitous bailment, or by shouldering the burden of important exhibitions, and especially by financing the restructuring of the facilities that shall host the Gallery of Modern and Contemporary Art (Galleria d’Arte Moderna e Contemporanea). Driven by its keen interest for the promotion and dissemination of art among the public, in 2008 the bank promoted the creation of an Underground Hall in the yard opposite the Accademia Carrara in Bergamo, and saw to its executive design. However, since the possibility of building an Underground Hall must be considered unfeasible owing to insurmountable difficulties, recently Fondazione Credito Bergamasco informed the Municipality of its availability to examine an alternative project, to provide the town with an exhibition hall to support Accademia Carrara – to replace the planned Underground Hall – to be built in the area between the former Convento delle Dimesse e delle Servite and the Suardi Park in Bergamo, provided that said availability is subject to a number of sine qua non conditions, as the Municipality in due time must: • approve the urban plan (P.G.T.) and transpose the remarks raised by the “Ateneo di Scienze Lettere ed Arti di Bergamo” and by other private citizens; • purchase the area; • approve the new framework program and the agreement to supplement or replace the former one.
The Foundation in 2009 also paid the last tranche of a multiannual commitment for the restoration of the “Duomo di Bergamo”.
Fondazione Banca Popolare di Novara per il territorio
Founded in 2002 after the merger between Banca Popolare di Novara Scarl and Banca Popolare di Verona - Banco San Gemignano e San Prospero Scarl, Fondazione Banca Popolare di Novara per il territorio, in keeping with the tenets set out in its articles of association, promotes and finances ideas and projects in the areas of education, schooling, socialization, social and healthcare assistance, religion and scientific research, evaluating also their correct integration within the social fabric of its market territory.
The Foundation, which operates mainly in the Bank’s Original Franchise, finances two main types of interventions: micro- charity, devoted to small associations, and liberal donations to large projects to favor initiatives with a strong impact on the territory. Both ambits are characterized by social actions aiming at furthering the social and economic conditions of civil society.
All the actions approved by the Foundation have an impact on various aspects of the territory and are the result also of suggestions made by members of the Charity Committee, so as to make choices resting on a prudent distribution of the available financial resources.
This year the Board of Directors of the Foundation, in the light of the social emergencies caused by the delicate economic situation, decided it was important to privilege social support and solidarity, in particular in the labor world.
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Against this bleak economic cycle and in keeping with the principle of social solidarity that must be safeguarded across its community, the Foundation focused on people who lost their jobs. At Christmas, in addition to the traditional donations to social organizations, the Foundation decided to destine part of its resources to the “Fondo Emergenza Lavoro”, an initiative that was jointly developed by the Fondazione della Comunità del Novarese Onlus with the contribution of the Novara Diocese. The Foundation also turned its attention to the neighboring territory of Vercelli and participated in the project “Fondo di Garanzia a sostegno prestito d’onore ai lavoratori”, to try and alleviate situations of serious deprivation.
As usual, funds were used to finance numerous initiatives.
Health-care and medical-scientific research Funds were used to purchase equipment to be donated to the Local Healthcare Organization of Vercelli (equipment and furniture for the Emergency ward), to the Università del Piemonte Orientale “A. Avogadro” - Facoltà di Medicina e Chirurgia di Novara (portable echocardiograph). Financial support was given to the Università degli Studi del Piemonte Orientale “A. Avogadro” - Facoltà di Medicina e Chirurgia di Novara, for a specialized clinic devoted to the treatment of skin cancer, to the Association Idea Insieme Onlus in Novara, to set up a Master in Palliative Care in cooperation with the Faculty of Oncology of the Università del Piemonte Orientale “A. Avogadro” di Novara, to the Ambulatorio di Pronta Accoglienza Centro Città di Novara, for health care volunteering activities to help people in need, to the Fondazione Malattie Renali del Bambino Onlus based in the Ospedale Gaslini di Genova, for a research project on pediatric nephrology, and to the Research Center on Neuromuscular Diseases CMN in Milano, for its research activities.
Social outreach The Foundation’s constant solicitude for the outcast did not recede, and we continued to support numerous charity organizations such as Caritas Diocesana in Novara, in Verbania and Vercelli, the Nursing Home “Borsetti Sella Facenda - Opera Pia Guelpa” at Mosso Santa Maria (BI) (renovation of the Center for the Elderly), the Parish Santuario Sacro Cuore di Gesù in Novara (the soup kitchen), and Comunità di Sant’Egidio Piemonte Onlus in Novara. Other funds were used to support the Associazione Novarese Volontari per Anziani in Novara (to purchase food for the town’s elderly in need), the Associazione Nazionale Mutilati Invalidi Civili - Sezione Provinciale di Novara (to purchase a vehicle for the disabled) and many others.
Schooling and education Generous contributions were made to theater events, in particular for Fondazione Teatro Regionale Alessandrino indi Alessandria and Fondazione Teatro Coccia in Novara. As to the schooling area, worth mentioning are the donations to Università del Piemonte Orientale “A. Avogadro” - Facoltà di Economia di Novara, to support the 7th edition of the Master in Economy and Financial Intermediation Management and the 1st edition of the Master in Management to Promote and Publicize Healthy and Agro-food Products, and to Università degli Studi di Scienze Gastronomiche Pollenzo - Bra (CN), for research activities.
Music shows and events In keeping with a well established tradition, worth mentioning is the support lent to the Municipality of Stresa for the “Notte Jazz, New Orleans sbarca a Stresa” as part of the Jazz Festival of Ascona, the contribution to the Municipality of Orta San Giulio (NO) for the 2009 Horticulture program, the generous donation to the Municipality of Novara to organize important artistic and music events in addition to the traditional Estate Novarese, events that had positive repercussions not only on the town’s life, but also on its tourist appeal.
Protection and promotion of architectural heritage Massive funds have been committed to finance also in part the restoration and renovation of the architectural heritage. Worth mentioning are the restoration of the Insigne Basilica di San Gaudenzio in Novara, the Cappelle del Crocifisso e dell’Angelo Custode, the Cappella “Il primo sogno di San Giuseppe”, located in the ancient complex of Nazareth, in the Riserva Naturale Speciale del Sacro Monte di Varallo (VC), the Cappella di Sant’Antonio Abate in the Parish Church of San Gaudenzio di Baceno (VB), the Northern façade of the Church in the Parish S. Ambrogio di Savona and of the Via Crucis at the Parish Maria Vergine Assunta in Armeno (NO). Contributions were given also to the Municipality of Livorno Ferraris (VC), to preserve the Council Hall of Palazzo Ferraris, to the Municipality of Mollia (VC), to restore the XVIII century Casa Belli featuring the typical architectural style of the Valsesia area. The Foundation renewed its support to the activities of Ente Giardini Villa Taranto Cap. Neil McEacharn of Verbania Pallanza, whose botanic assets are renowned all over the world and every year attract more than 150,000 visitors.
Fondazione di Culto Banco S.Geminiano e S.Prospero
Thanks to the allocation of euro 416,000 made by Banca Popolare di Verona – SGSP, also in 2009 Fondazione di Culto Banco S.Geminiano e S.Prospero could pursue its peculiar purposes, supporting initiatives in favor of local parishes and religious activities of the Dioceses located in the Emilia territory. In particular, the above funds were granted to: - the Archdiocese of Modena-Nonantola, to build the parish complex Gesù Redentore di Modena, to restore the presbytery of Montecuccolo (Pavullo), and to restructure the Parish S.Anna ai Torrazzi in Modena;
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Also in 2009 resources were devoted to training and pastoral initiatives; - the Diocese of Reggio Emilia-Guastalla to restore the Episcopal Seminary in Marola and to restore the parish complex of Villalunga (Casalgrande); - the Diocese of Carpi to restructure buildings to be used for educational activities in favor of the youth (A.C.E.G.).
Fondazione Giorgio Zanotto
While keeping faith with our commitment to honor and recall the memory of Professor Giorgio Zanotto, the precious and longstanding collaboration between Banca Popolare di Verona and the Foundation grew deeper and the numerous cultural, social and scientific initiatives it engendered revived the spirit, the thought and the work of the unforgettable Chairman of the Bank. The Foundation’s main areas of intervention were:
Education and University activities - The project promoted by the Accademia di Belle Arti GB Cignaroli and implemented by the company Edulife to enhance training tools and methodologies for a constantly evolving learning; - The Francesco Geminiani Award, sponsored with the Bank, to give high quality instruments as a free loan to talented young musicians of any nationality. The winners took part as soloists in some concerts of the Orchestra “I virtuosi Italiani”. - A scholarship granted to a researcher of the I Clinical Department of General Surgery of Ospedale Civile di Verona to go and study at the Cancer Center of the Yale University. Worth mentioning in the research ambit is the contribution to finance the organization of the 2009/2010 Master in Business Intelligence and Knowledge Management.
Publishing The Foundation promoted the publication by Marsilio of the volume on the activities of Giorgio Zanotto banchiere written by the journalist and writer Giancarlo Galli. Under the agreement with the Verona University, Faculty of Jurisprudence, the Foundation supported the Research Center VeronaInnova, to research, collect documentation and evaluate proposals on public administration using innovative electronic means. A similar support was lent also to the publication of the periodical Magazine of Jurisprudence, to the publication of the handbook La stanza creativa – forme e colori delle emozioni, written by Piera Legnagli, adopted in rehab therapies for the disabled and to subscriptions to the bimonthly magazine “La Società”, dealing with culture and research on the Church’s social doctrine.
Cultural initiatives The Foundation supported conferencing activities by organizing the conference “Oltre il conflitto di civiltà: il dialogo tra le culture – la sfida dell’integrazione”, in collaboration with the Center for European Culture Sant’Adalberto, and in memory of the tenth anniversary of the death of Giorgio Zanotto, the conference “Oltre l’ideologia della crisi: lo sviluppo, l’etica e il mercato” in collaboration with Banca Popolare di Verona. Again in collaboration with the Center for European Culture Sant’Adalberto, we organized the conference “Il seme di Nasirijah. Dal dolore alla speranza” held in December. Among cultural events, the Foundation paid a special attention to the exhibition “Alcide De Gasperi – Un Europeo venuto dal futuro”, to recall the role and commitment of the Italian statesman.
Social initiatives and solidarity Important contributions were granted to the 2009 edition of “Sensazionale”, organized by the Association Più di Uno in favor of the intellectually disabled of all ages and their families, to activities to promote social responsibility among the young organized by Unione Sportiva Atlas and for the 2009 activity program of the Music Association “Arti Mestieri Musica”.
A generous donation was granted to the Parish of S. Andrea a Romagnano (VR) to restore three art works kept in the Church. Particularly significant were the Foundation’s interventions: - to build the Istituto di Certificazione Etica nello Sport, to promote the quality and the management of ethics in Sports: - in favor of the Fondo Nominativo Aldo Tavella, which in 2009 – also through the Painting school - organized courses, guided tours to exhibitions, and organized figurative and paining arts awards for emerging artists; - in favor of the BURUNDI Project – Università degli Studi Verona, to build a Didactic Center in Ngozi, equipped with electronic systems to use for teleconferences, tele-education and telemedicine.
Banca Popolare di Verona - S.Geminiano S.Prospero S.p.A.
The Bank’s deep ties with its market territory, of which the Bank is a living and profound expression, are manifested in the various actions made to safeguard our deep relations with our civil community.
In addition to the commitment made in the past to devote part of the earnings to Fondazione di Culto Banco S.Geminiano e S.Prospero in Modena and to the constant collaboration with Fondazione Zanotto, as mentioned above, also in 2009, in
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keeping with its cooperative nature, Banca Popolare di Verona - S.Geminiano S.Prospero S.p.A. took special heed of the needs of its market territory, which stretches out to include Veneto, Emilia Romagna, Friuli Venezia-Giulia, and Trentino Alto Adige, and supported numerous initiatives in the field of care, charity and public interest, as summarized below.
University and professional education and Schooling As usual, a concrete support was given to the academic world by granting 25 scholarships for specific projects identified by the Verona Hospital Organization, and by supporting the research activities of the Università degli Studi di Verona with four Ph.D. scholarships. A generous donation was given to the Jurisprudence Faculty to purchase ancient law texts for the library, and we should not forget the completion of the restoration (started in 2007) and extension of the “ex–Zitelle” building, and the inauguration of the Faculty’s Auditorium.
Our close relation with Professional Organizations did not fail, and we supported the Itinera Project promoted by the Comitato Provinciale per l’Orientamento Scolastico e Professionale in Verona (COSP) to allow students attending the last year of high-school to get acquainted with the labor world.
A special attention was devoted to the Order of Medical Surgeons and Dentists of Reggio Emilia which received a contribution to reprint their Professional Register.
The Bank continued with its unfailing support to schools. Among the numerous donations, worth mentioning are the renovation of the integrated nursery school managed by the Parish of S. Pio X in Verona, the extension and bringing into compliance of the nursery school “Nido dei Sogni” at Caselle di Sommacampagna, the installation of a fire escape and an elevator at the kindergarten “Nori Princivalle” in Verona, and the bringing into compliance of systems and replacement of ceilings at the Kindergarten Don Riccardo Adani at Mirandola (Mo).
A concrete aid was given to Istituto Don Nicola Mazza in Verona to build two new classrooms of the Liceo Scientifico, to Istituto Salesiano S.Zeno to set up a multimedia classroom and to the Scuola alle Stimate to create an IT lab, as wellas to the Association Alma Graduate School in Bologna to organize the XXI edition of the Profingest Master.
A significant support was lent to E.D.S.E.G. Città dei Ragazzi in Modena to create the new Youth Center.
Restoration and Promotion of Artistic and Architectural Heritage As in the past, donations were given to restructure monumental architectural complexes and artifacts of great artistic value to be protected against the deterioration of time. Worth mentioning are first of all the significant preservative interventions started in 2004 on the Basilica di Santa Anastasia: in 2009, once the transept was fixed, the presbytery started to be restored, to be followed by the Giusti Chapel and the Rosario Chapel. Works should be completed by the end of 2010 and by then the entire monumental complex of the Basilica, a landmark for the in citizens and the history of Verona, will be admired in all its revived splendor.
As to the Basilica di San Zeno, the restoration of the apse was completed: after replacing the windowpanes, the preservative intervention addressed the walls of the apse and the presbytery; great relevance was given after two years of restoration to the famous Pala by Mantegna reinstated on the high altar during the celebration of the Patron of Verona, San Zeno, on 21 May. With the bank’s support, soon the restoration of the façade with its valuable Rose window will begin.
Worth mentioning are the contributions given for the restructuring, completed in 2009, of the eastern wing of the monastery complex of S.S. Vito Modesto e Crescenzia at Badia Calavena and for the restoration and bracing of the Church of San Gallo Abate di Pesina at Caprino Veronese.
We took heed of the appeal made by the Verona community to support the urgent bracing of the vault and of the roof of Pieve di Santi Apostoli in Verona, damaged by exceptional weather events and by prolonged water infiltrations.
Numerous parishes in 2009 received donations to restore their Churches or precious works of art; other funds were assigned to the extraordinary maintenance of restructuring of Centers for youth cohesion.
In Mantua we funded the overhaul of the lighting system of the Rotonda di San Lorenzo, while in Montorso Vicentino we donated a contribution to restore the façade of the Church of San Biagio.
Donations were made to complete the restructuring and bringing into compliance of the systems of the Social Tourist Center Dolomiti Pio X in Borca di Cadore, and for the artistic restoration and static buttressing, started in 2005, of the Cathedral of Reggio Emilia.
Social and Health-care assistance The Bank has always been close to associations acting in the volunteering of health-care services, among which the local organizations of AVIS, Croce Verde, Croce Rossa, FIDAS and many others. Among the most significant donations worth mentioning are those to the Association P.A. Volontari S.O.S. in Valeggio sul Mincio and to the Comitato pro Ambulanza Croce Verde in Grezzana, in both cases to purchase an ambulance, to
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Fondazione per l’Incremento dei Trapianti d’Organo e di Tessuti in Padua to organize training courses for medical and paramedical personnel, and to the Association Rosa Gallo in Verona to create a National Center for Desmoid Tumors.
Noteworthy also the contribution to the Bussolengo Hospital to equip the Pediatric and Neonatal Pathology Department with two devices to be used for the respiratory impairment of preterm infants and to assess the respiratory function in infants, as well as the support lent to the Hospital “Villa Santa Giuliana” for the project “Mens sana in corpore sano” to assist psychiatric patients.
A significant financial support was given to FEVOSS in Verona – a well known and appreciated association working in favor of suffering people – to roll out a wandering project “La carovana della solidarietà”, aiming at raising the consciousness of the citizens of the province of Verona.
Worth mentioning also the contribution made also this year to the Istituto Oncologico Veneto in Padua to complete the research project stated in 2007 “Innovative treatment strategies in tumors associated with the “von Hippel Lindau disease”.
Social initiatives Significant donations were made to help people in need and difficulty, in particular: - to the project “Novastrada” organized by the local section of Padua, Vicenza and Verona of the National Association Guida Legislazioni Andicappati Trasporti; - to Associazione Trentina Nuovi Orizzonti Onlus in Villalagarina to help and carry out preventive actions for people in difficulty; - to Società Mutua per l’Autogestione in Verona; - to Ceis – Centro di Solidarietà di Modena .
In the Emilia area numerous interventions were carried out in the name of Banco S.Geminiano e S.Prospero; worth mentioning is the significant support to the project “Scopri il respiro di Modena e Reggio Emilia” promoted by the Associazione Italiana per la Ricerca Medica Epidemiologica e Farmaeconomica, to give the citizens of Modena and Reggio Emilia the opportunity to have expert lung specialists test free of charge their respiratory function; the research outcome hae been publicly presented in Verona and will soon be in Reggio Emilia.
Cultural initiatives, music events and shows A special attention was devoted to cultural events promoted by various organizations, among which the renewed collaboration with the Literary Society in Verona, to organize the International Festival “Verona Poesia 2009” and with the Accademia di Agricoltura Scienze e Lettere in Verona to support their 2009 cultural program, as well as the support to the Fondazione Culturale Antonio Salieri for the 2008/2009 theater season performed at the Teatro Salieri in Legnago.
Noteworthy also the support lent also in 2009 to the Associazione Giochi Antichi di Verona for various activities, in particular to organize the international event “Tocatì”.
The Bank made also a significant contribution to art events, for example: - to Fondazione Arena di Verona to organize the 2009/2010 artistic season of the Teatro Filarmonico; - to the Municipality of Verona for the event “Estate Teatrale Veronese 2009”; - to the Municipality of Modena for the 18th edition of “Serate Estensi 2009”.
Moreover, we renewed our contributions to Fondazione Teatro Comunale in Modena and to Emilia Romagna Teatro Fondazione for the 2008/2009 artistic season, as well as to Fondazione Atlantide di Verona for the 2009/2010 artistic season.
The Bank remains close to local culture also by supporting other theater events, concerts and conferences.
As to initiatives promoted by Agencies, local bodies and organizations, we renewed our collaboration with Fondazione Studium Generale Marcianum in Venezia, an authoritative institution aiming at transmitting and processing knowledge, a meeting and sharing point of different cultures.
Worth mentioning is the contribution given to the Municipality of Sant’Ambrogio di Valpolicella to create a “Centro Servizi del Marmo”, with the restructuring of Villa Bassani – Brenzoni, where the new school of marble will be hosted.
A significant donation was made to the Municipality of Ferrara di Monte Baldo to renovate the building called “Ex Convento”, to be used as a town cultural center.
Noteworthy were also the contributions to support the expenses to place the monument “Filo spinato” created by the Maestro Giuseppe Castagna dedicated to the Italian victims of deportations in the Second World War, and the contribution to the Associazione Nazionale ex Deportati Politici nei Campi Nazisti of Verona, to place a memorial stone in the Sanctuary of the Madonna of Lourdes (ex Forte S. Leonardo) in memory of all the people who were imprisoned and died there during the last world war in the name of liberty, justice and peace.
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The Bank also contributed to the expenses to make a marble and bronze sculpture to honor the Arma dei Carabinieri; the statue was placed on the lakeshore of Peschiera.
In the Modena area, we renewed our commitment in favor of Fondazione Casa Natale Enzo Ferrari di Modena to set up an Exhibition Gallery and a museum in memory of the unforgettable car manufacturer from Modena; donations were also made to the Archdiocese of Modena and Nonantola, of the Municipality and Province of Reggio Emilia to set up Guarantee funds to help people in temporary financial difficulties.
Fondazione Ermanno Gorrieri in Modena received a contribution to support the historical-biographical and scientific research study on the works and teaching of Ermanno Gorrieri, a protagonist of the Italian catholic movement of the last century.
Conferences and symposia Either directly or by hosting events in its premises, the Bank gave a concrete support to Azione Cattolica Italiana of Rome to organize two conferences for the trainers and operators of Azione Cattolica and to the Camera Internazionale Triveneta di Verona which in cooperation with the town’s Bar organized the legal conference “Il regolamento Roma II”. In 2009 we lent our support also to Fondazione Marco Biagi in Modena to support conferences and seminars.
Religious institutions. We took heed also of numerous charitable and training initiatives having an evangelizing aim in Italy and abroad.
Worth mentioning are also our interventions in favor of: - Facoltà Teologica del Triveneto in Padua for educational and training activities; - Istituto Teologico S. Antonio Dottore dei Frati Minori Conventuali in Padua to update the book assets of the Library “S. Antonio Dottore”; - Conferenza Episcopale Italiana in Roma for religious and cultural activities promoted in the Italian Dioceses; - Diocese of Verona to publish the new four-monthly magazine “Ars et Ratio” aiming at disseminating the knowledge of the artistic heritage of the Diocese.
At Christmas, we renewed our support to the Municipality of Verona for the event “Natale vero” to the benefit of the people in developing countries.
Moreover the Bank solicitously adhered to the invitation made by the Committee “Progetto Verona per l’Abruzzo”, contributing with a concrete donation to the reconstruction of the areas hit by the earthquake in Abruzzi.
Worth mentioning is the contribution granted to the Association Amici del Basket in Verona to build a basketball playground in Jericho to help young Palestinians, and to Associazione Bertoni in Verona to send a food container to the people of Georgia.
In addition to actions on our home territory, other interventions regarded missions in Africa, Asia and South America by supporting congregations, parishes, religious institutes and associations. Worth mentioning is the renewed contribution to the Association Amici di Quixadà Onlus to open a Faculty of Medicine at the Catholic University of “Rainha do Sertao” in the Diocese of Quixadà in the Northeast of Brazil, to make the structure compliant with the educational needs of the hospital “Maternidade Jesus Maria Josè” where the Oncology and Respiratory Cardiology clinics are still under construction.
Sports In this field the Bank made numerous interventions in favor of various sporting groups, with a special focus on youth: for example, the support to BluVolley Verona for their “Volley School” project, involving 40 primary and secondary schools of the province of Verona and to C.U.S. Centro Universitario Sportivo in Verona to disseminate the social and educational values of rugby among youngsters.
A special attention was devoted to Associations working with disabled athletes: in particular in favor of Divi Sport in Altavilla Vicentina for the “Festa dello Sport”, of EOS – Michele Dusi Onlus in Verona for initiatives in favor of the disabled who engage in sailing, and of Associazione Pier Giorgio Frassati in Verona to help young disabled who play mini-basket on a wheelchair.
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OPERATIONAL OUTLOOK
As projected, in the last part of 2009 the world economy strengthened, albeit at different pitches depending on the country or the area. In major advanced economies the domestic product crept up slowly, while in emerging economies the acceleration was more prominent. In general, recovery continued to benefit from accommodating economic and monetary policies, with positive impacts also on the climate of confidence of businesses and households, and on financial markets, that were back to normal. In view of the performance of the last months of 2009, 2010 projections have been revised upwards: according to the OECD, advanced economies should gradually increase their domestic product by about 2%, with a more favorable trend in USA, less so in the Euro area. Yet, many uncertainties still linger as to the robustness of the recovery: first of all, the temporary nature of many public stimulus measures that have been implemented to date, the likewise temporary nature of inventory increases, and finally the possible slowdown effects generated on consumer demand by a labor market with rising unemployment rates. In the Euro area, the improving climate of confidence has not translated yet in a similarly strong increase in production output and consumption, as demonstrated for example by the weak performance of the German economy in the last months. In Italy production output progressed at a very modest pace, mainly driven by exports; domestic demand remains lukewarm and the country’s economic growth for 2010 is estimated to linger in the 0.6% and 0.8% range, and reach about 1% in 2011. The credit market in our Country is still under the influence of the long production activity slowdown, which translated into a stagnation of loan demand, especially by companies which saw their financial requirements dwindle. The most recent economic cycle surveys on credit point at a break in the downturn of demand by business companies and a somehow less restrictive offer by banks, in particular with respect to the terms and conditions made to large corporations. As to household loans, lending policies are still marked by caution, especially in home mortgages, in view of the income perspectives and the creditworthiness of consumers. As to customer deposits and funds, the latest data show a partial, albeit modest, growth recovery of the aggregates, driven in particular by the acceleration of resident deposits, that offset the contraction of repos. As to wholesale markets, with liquidity coming back to normal conditions, access is becoming less and less difficult.
With respect to the Group’s outlook, in the coming months we shall move ahead with the numerous activities we have put in place to come to grips with an extremely complex scenario, so as to efficiently compete on the market and continue to provide our household and business customers with all the support that a large cooperative banking group can offer, with responsibility and efficacy.
Banca Italease’s integration is rolling out in compliance with the planned schedule and procedures. After the conclusion of the compulsory buy-out of the residual shares of Banca Italease pursuant to art. 108, paragraph 2, of Lgs.D. n. 58, of 24 February 1998, at the date of payment of the consideration (31 March 2010) Banco Popolare shall hold a 98.853% stake in Banca Italease, therefore, having exceeded the 95% threshold, it shall exercise its right to purchase the residual Banca Italease shares still outstanding pursuant to art. 111 TUF, and shall comply with the obligation to purchase under art. 108, paragraph 1, TUF. As to the business reorganization plan – where the capital increase has played a key role as it brought the company’s perspective financial position on safe ground – actions are successfully centered on reducing the risk profile and on disposing of non-core assets, such as the equity investment in Factorit, described in another section of this Report. Once the transfers to the Newcos are over, Banca Italease’s loan book shall feature a high fragmentation and sector diversification, and the plan is to progressively scale it down in the coming financial years. Also Release, the company in charge of managing the non-performing loan portfolio, is stabilizing, both from a financial and risk standpoint. In this case the loan book is much more concentrated on few large positions in the real estate sector (backed by valuable real estate assets), but numerous selling agreements have already been formalized, which will lead to a strong reduction in the above exposures.
In the current year we will continue to evaluate other initiatives for a progressive capital strengthening of the Group: after the issuance last July of 1.45 billion worth of financial instruments subscribed by the Ministry for Economy and Finance, we had another debt issuance of about 1 billion (“Banco Popolare 2010/2014 convertible bond redeemable in shares”), and the announced disposals of Banco Popolare eská Republica and Factorit. The guidelines that in the coming months shall underlie the Group’s strategies for traditional credit intermediation – where we operate through banks that are in most cases the territory’s banks of choice – point at further strengthening and lending continuity to our ability to entertain relations with the social and business entities we serve, well aware of the fact that customer satisfaction is a key to success. With respect to our internal organization, in April 2010 a project was launched to optimize the sales network. Neighboring branches of some Group banks shall be involved in the transfer of activities. The aim is to eliminate geographical overlaps that developed also as a result of the combination processes, in order to promote the opening of new branches on market places that are important for the strengthening of our distribution network. This action will involve 33 branches of Banca Popolare di Lodi, 5 branches of Cassa di Risparmio di Lucca Pisa e Livorno, 12 branches of Banca Popolare di Novara and 34 branches of Banca Popolare di Verona – SGSP, which shall be closed and their relations transferred to other nearby branches.
166 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Report on Group operations
The main objectives of the retail customer strategy are first the acquisition of new customers, by promoting offering policies focused on “savings and protection” products, as well as by promoting the sale of more traditional banking products. Loans to small and medium-sized enterprises, which are our traditional catching areas, shall be the priority, keeping a close watch over pricing. For corporate loans, we shall continue to stabilize the Large Corporate portfolio (the strategic management of these loans has been centralized at the Parent company to ensure harmonization and a better risk control), with a greater weighting to smaller corporations and a progressive increase of commercial loans. As to funding policies, based on the data reported in the last months, the retail segment has been making a positive contribution, especially with demand deposits. This strategy is bound to stay even if the improvement of financial markets and the positive performance of Banco’s credit spreads have recently opened up the doors of the institutional funding market again: as of last August, Banco performed 5 new issues, totaling 3.9 billion, of which 2.9 billion under EMTN programs and 1 billion (with one program out of a total of 5) of Bank Covered Bonds. All issues have enjoyed a wide participation by the market, especially asset managers and insurance companies, which allowed us to extend the maturities of liabilities and to further strengthen the Group’s liquidity profile, that has been constantly improving over time, at economic conditions in line with the planned profit targets. Among other things, this is allowing us to guide the retail banks’ distribution networks towards intermediating financial assets with a higher value added and profitability, that can also meet the growing request for welfare and insurance contents by customers and make a stable contribution to the growth of non-interest income. Governing the efficiency and cost profiles of the Group will be key, against a macroeconomic scenario that is still calling for caution with respect to revenue growth estimates. Personnel expenses shall remain under control, also thanks to a partial replacement of the natural turnover with redundancies from the branch closedown plan. We will continue to keep a close watch on assets risk profiles, as the Group always did, which is what allowed us to close financial year 2009 with a cost of credit in line with expectations. 2010 shall still be affected by the long wake of this cyclical slowdown, so that we do not anticipate noticeable reductions on the short term. A positive contribution to the Group’s profitability will continue to come from the progressive efficiency gains and profitability improvements attained by Banca Popolare di Lodi. After a number of years of losses, it reported an actual turnaround, and is back to profit, thanks to the brilliant commercial dynamics in its core-business sectors, to a gradual alignment with the productivity and risk benchmarks of the other retail banks and to its revitalized ability to appeal to new customers.
Noteworthy events after the balance sheet date
In keeping with the special regulations issued by the Bank of Italy, noteworthy events after the balance sheet date are illustrated in the Explanatory Notes, Section A, Sub-section 3.
Verona, 30 March 2010
The Management Board
167 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Bergamo, piazza Vecchia WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Declaration of the Chief Executive Officer and of the Manager responsible for preparing corporate financial reports
Head of ce of Credito Bergamasco, Bergamo WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12
170 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12
Certification of the consolidated financial statements pursuant to art. 81-ter of Consob Regulation n. 11971 of 14 May 1999 and following amendments and additions
1. We, the undersigned, Pierfrancesco Saviotti, as Chief Executive Officer of Banco Popolare Soc. Coop., and Gianpietro Val, as Manager responsible of preparing the corporate financial reports of Banco Popolare Soc. Coop., in keeping also with art. 154-bis, paragraphs 3 and 4, of Legislative decree n. 58 of 24 February 1998, herewith certify that the administrative and accounting procedures followed to prepare the 2009 consolidated financial statements:
were adequate with regard to the company features, and
were effectively applied.
2. The assessment of the adequacy and of the effective application of the administrative and accounting procedures for the preparation of the financial statements as at 31 December 2009 took place against a backdrop characterized by the finalization of the business combination of Gruppo Banca Italease and the consequent launch of an extensive reorganization of the acquired companies. The valuation was based on an internal model defined by Banco Popolare Soc. Coop., in conformity with the model issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Report”), representing the generally accepted standard worldwide for internal auditing systems.
3. We also certify that:
3.1 the consolidated financial statements:
a) were prepared in compliance with the applicable international accounting standards adopted by the European Union pursuant to the EC Regulation n. 1606/2002 of the European Parliament and Council of 19 July 2002;
b) are congruous with accounting books and book-keeping entries;
c) are fit to provide a truthful and correct representation of the financial and operating situation of the Issuer and of the companies falling within the consolidation scope.
3.2 The report on operations includes a reliable analysis of the operating performance and results, as well as of the situation of the Issuer and of the companies falling within the consolidation scope, together with the description of the major risks and uncertainties they are exposed to.
Verona, 30 March 2010
Pierfrancesco Saviotti Gianpietro Val Chief Executive Officer Manager responsible of preparing corporate financial reports
Signed on the original Signed on the original
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Head of ce of Banca Popolare di Novara, Novara WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Lodi, piazza Duomo WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Consolidated financial statements
Head of ce of Banca Popolare di Lodi, Lodi WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Consolidated financial statements
CONSOLIDATED BALANCE SHEET
Assets 31/12/2009 31/12/2008 (*) (thousands of euro)
10 Cash and cash equivalents 580,798 710,004 20 Financial assets held for trading 11,930,649 10,033,368 30 Financial assets designated at fair value through profit and loss 183,526 311,375 40 Financial assets available for sale 2,056,466 1,625,154 50 Investments held to maturity 306,240 530,296 60 Due from banks 9,566,348 12,482,048 70 Loans to customers 95,350,225 81,096,693 80 Hedging derivatives 130,758 92,881 90 Fair value change of financial assets in hedged portfolios 7,267 9,142 100 Investments in associates and companies subject to joint control 1,637,221 1,457,405 120 Property and equipment 1,442,462 1,329,149 130 Intangible assets 5,294,942 5,333,248 of which: goodwill 4,474,030 4,469,851 140 Tax assets 2,358,414 2,214,391 a) current 249,737 365,466 b) deferred 2,108,677 1,848,925 150 Non-current assets held for sale and discontinued operations 1,915,762 186,691 160 Other assets 2,948,013 3,915,385 Total 135,709,091 121,327,230
Liabilities and shareholders’ equity 31/12/2009 31/12/2008 (*) (thousands of euro)
10 Due to banks 8,420,417 8,357,652 20 Due to customers 53,191,863 51,352,417 30 Securities issued 25,227,520 24,252,656 40 Financial liabilities held for trading 3,878,649 3,374,818 50 Financial liabilities designated at fair value through profit and loss 26,763,737 17,525,901 60 Hedging derivatives 168,456 49,985 70 Fair value change of financial liabilities in hedged portfolios 41,518 70,555 80 Tax liabilities 731,499 1,217,207 a) current 41,353 571,692 b) deferred 690,146 645,515 90 Liabilities associated with non-current assets held for sale and discontinued operations 960,065 22,561 100 Other liabilities 2,738,251 3,512,003 110 Employee termination benefits 415,688 417,746 120 Provisions for risks and charges 1,059,216 986,070 a) post-employment and similar obligations 244,280 192,278 b) other provisions 814,936 793,792 140 Valuation reserves 35,720 -8,825 160 Equity instruments 1,452,534 2,534 170 Reserves 2,622,787 2,968,874 180 Share premium reserve 4,880,038 4,880,035 190 Share capital 2,305,736 2,305,735 200 Treasury shares ( - ) -31,014 -30,966 210 Minority interests 579,373 403,644 220 Net income (loss) 267,038 -333,372 Total 135,709,091 121,327,230 (*) Adjusted to comply with changes introduced by the update of circular n.262/2005 (Bank financial statements). Herewith attached is a table reconciling the balance sheet published in the 2008 annual report and the one restated in this table.
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CONSOLIDATED INCOME STATEMENT
Income statement 2009 2008 (*) (thousands of euro)
10 Interest and similar income 4,098,864 6,195,258 20 Interest and similar expense -2,130,069 -3,940,376 30 Interest margin 1,968,795 2,254,882 40 Fee and commission income 1,361,451 1,410,963 50 Fee and commission expense -133,876 -149,919 60 Net fee and commission income 1,227,575 1,261,044 70 Dividend and similar income 560,693 447,999 80 Profits (losses) on trading -69,398 -522,804 90 Fair value adjustments in hedge accounting -8,264 -3,620 100 Profits (Losses) on disposal or repurchase of: 31,799 32,567 a) loans 1,426 -15,482 b) financial assets available for sale 8,589 49,531 c) investments held to maturity 6 5 d) financial liabilities 21,778 -1,487 110 Profit (loss) on financial assets and liabilities designated at fair value -308,301 199,117 120 Net interest and other banking income 3,402,899 3,669,185 130 Net losses / recoveries on impairment of: -872,144 -1,353,754 a) loans -823,050 -1,140,237 b) financial assets available for sale -29,251 -176,492 c) investments held to maturity - -23,575 d) other financial activities -19,843 -13,450 140 Net income from banking activities 2,530,755 2,315,431 170 Net income from banking and insurance activities 2,530,755 2,315,431 180 Administrative expenses: -2,604,945 -2,701,592 a) personnel expenses -1,624,672 -1,622,443 b) other administrative expenses -980,273 -1,079,149 190 Net provisions for risks and charges 33,730 -204,422 200 Net adjustments to / recoveries on property and equipment -109,978 -126,005 210 Net adjustments to / recoveries on intangible assets -109,556 -136,735 220 Other operating expenses (income) 564,154 655,922 230 Operating expenses -2,226,595 -2,512,832 240 Profit (Losses) on investments in associates and companies subject to joint control 76,236 -271,410 260 Goodwill impairment - -485,776 270 Profits (Losses) on disposal of investments 112,487 397,368 280 Income (loss) before tax from continuing operations 492,883 -557,219 290 Tax on income from continuing operations -229,099 139,631 300 Income (loss) after tax from continuing operations 263,784 -417,588 310 Income (Loss) after tax from discontinued operations -5,845 115,430 320 Net income (loss) 257,939 -302,158 330 Minority interests 9,099 -31,214 340 Parent company’s net income (loss) 267,038 -333,372 (*) Adjusted to comply with IFRS 5 and with the changes introduced by the update of circular n.262/2005 (Bank financial statements). Herewith attached is a table reconciling the income statement published in the 2008 annual report and the one restated in this table.
179 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Consolidated financial statements
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(thousands of euro) 31/12/2009 31/12/2008
10. Net income (loss) 257,939 -302,158 Other comprehensive income (net of tax) 20. Financial assets available for sale 59,066 -141,306 30. Property and equipment 1,036 - 50. Hedges of foreign investments -50 - 60. Cash flow hedges 2,789 -3,916 100. Share of valuation reserve connected with investments carried at equity -14,519 - 110. Total other comprehensive income (net of tax) 48,322 -145,222 120. Comprehensive income (Items 10+110) 306,261 -447,380 130. Consolidated comprehensive income attributable to minority interests -7,862 30,098 140. Consolidated comprehensive income attributable to the Parent company 314,123 -477,478
180 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
Allocation of net income Changes over the year from previous year Operations on shareholders’ equity Group Minority Opening Changes in Opening 31 December 2009 shareholders’ shareholders’ balance as at opening balance on Changes Comprehensive (thousands of euro) equity on equity on 1/01/2009 balance 1/01/2009 Dividends in income for the Reserves and other reserves year 31/12/2009 31/12/2009 Stock Stock shares shares equity shares options options
allocations treasury treasury dividends dividends Changes in in Changes Purchase of of Purchase instruments instruments Issue of new of Issue Extraordinary Extraordinary Derivatives on
Share capital: 2,305,735 - 2,305,735 - 1 - - 2,305,736 143,176
a) ordinary shares 2,305,735 - 2,305,735 - 1 - - 2,305,736 143,047
b) other shares ------129
Share premium reserve 4,880,035 - 4,880,035 - 3 - - 4,880,038 39,685
Reserves: 2,968,874 2,540 2,971,414 -333,372 -15,255 - - - - - 2,622,787 403,782
a) retained earnings 2,626,144 - 2,626,144 -333,372 -29,278 - - - - - 2,263,494 195,415
b) other 342,730 2,540 345,270 14,023 - - - 359,293 208,367
Valuation reserves -8,825 -2,540 -11,365 - 47,085 35,720 2,029
Equity instruments 2,534 - 2,534 1,450,000 1,452,534 -
Treasury shares -30,966 - -30,966 -48 - - -31,014 -200
Net income (loss) for the year -333,372 - -333,372 333,372 - 267,038 267,038 -9,099
Group shareholders’ equity 9,784,015 - 9,784,015 - - -15,303 4 - - 1,450,000 - - 314,123 11,532,839
Minority interests 403,644 - 403,644 - 183,591 - - -7,862 579,373
Consolidated financial statements statements financial Consolidated 1 1
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Consolidated financial statements statements financial Consolidated 18 18
Allocation of net income from Changes over the year previous year Operations on shareholders’ equity Group Minority 31 December 2008 Opening balance as Comprehensi shareholders’ shareholders’ (thousands of euro) at 1/01/2008 Dividends and Changes in Purchase of Changes in Derivatives equity on equity on Issue of new Extraordinar Stock ve income for Reserves other reserves treasury equity on treasury 31/12/2008 31/12/2008 shares y dividends options the year allocations shares instruments shares
Share capital: 2,305,733 - 2 - - 2,305,735 146,350
a) ordinary shares 2,305,733 - 2 - - 2,305,735 146,139
b) other shares ------211
Share premium reserve 4,880,023 - 12 - - 4,880,035 41,475
Reserves: 2,752,729 595,883 -13,537 - -1,127 -365,074 - - 2,968,874 184,036
a) retained earnings 2,417,293 595,883 -20,831 - -1,127 -365,074 2,626,144 177,443
b) other 335,436 7,294 - - - 342,730 6,593
Valuation reserves 141,953 -6,672 -144,106 -8,825 791
Equity instruments 2,534 - 2,534 -
Treasury shares -28,163 - -2,803 -30,966 -222
Net income (loss) for the year 617,223 -595,883 -21,340 -333,372 -333,372 31,214
Group shareholders’ equity 10,672,032 - -21,340 -20,209 14 -3,930 -365,074 - - - -477,478 9,784,015
Minority interests 402,756 -27,851 -1,359 - - 30,098 403,644
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
Direct method (thousands of euro)
A. Operating activities 31/12/2009 31/12/2008
1. Cash flow from operations 1,332,528 2,279,885 - interest income received (+) 4,098,864 6,199,444 - interest expense paid (-) -2,130,069 -3,941,067 - dividend and similar income (+) 560,693 447,999 - net commissions (+/-) 1,227,575 1,061,009 - personnel expenses (-) -1,588,416 -1,571,986 - other costs (-) -1,061,119 -725,422 - other revenues (+) 459,944 553,760 - taxes (-) -229,099 139,867 - costs/revenues associated with discontinued operations, net of tax effect (+/-) -5,845 116,281 2. Cash flow from / used in financial assets -15,498,320 5,111,408 - financial assets held for trading -1,025,908 1,102 - financial assets designated at fair value through profit and loss -770,511 739,550 - financial assets available for sale -460,563 11,011 - loans to customers -15,079,174 2,442,128 - due from banks: repayable on demand -92,239 518,268 - due from banks: other loans 3,010,531 1,132,798 - other assets -1,080,456 266,551 3. Cash flow from / used in financial liabilities 12,639,610 -6,422,699 - due to banks: repayable on demand 557,846 -1,517,535 - due to banks: other payables -495,081 -3,244,772 - due to customers 1,839,446 224,916 - debt securities issued 974,864 -5,899,191 - financial liabilities held for trading 503,831 250,197 - financial liabilities designated at fair value through profit and loss 9,237,836 5,574,819 - other liabilities 20,868 -1,811,133 Net cash flow from / used in operating activities -1,526,182 968,594
B. Investing activities
1. Cash flow from: 292,790 940,180 - sales of investments in associates and companies subject to joint control 39,063 13,909 - sales/reimbursements of investments held to maturity 225,233 277,013 - sales of property and equipment 28,295 645,541 - sales of intangible assets 199 3,717 2. Cash flow used in: -377,600 -1,336,154 - purchases of investments in associates and companies subject to joint control -233,762 -1,044,593 - purchases of investments held to maturity -685 -100,394 - purchases of property and equipment -78,286 -130,872 - purchases of intangible assets -64,867 -60,295 Net cash flow from / used in investing activities -84,810 -395,974
C. Financing activities
- issues/ purchases of treasury shares 31,786 -168,231 - issues / purchases of equity instruments 1,450,000 -365,074 - dividend distribution and other - -21,340 Net cash flow from / used in financing activities 1,481,786 -554,645 Net increase/decrease in cash and cash equivalents -129,206 17,975
Reconciliation 31/12/2009 31/12/2008
- Cash and cash equivalents at beginning of period 710,004 692,029 - Net increase/decrease in cash and cash equivalents -129,206 17,975 Cash and cash equivalents at end of period 580,798 710,004
183 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Lucca, piazza An teatro WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Head of ce of Cassa di Risparmio di Lucca Pisa Livorno, Lucca WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
SECTION A – ACCOUNTING POLICIES
A.1 – IN GENERAL
Introductory note
Since 1 July 2009, at the end of the Tender Offer period launched on all the outstanding ordinary shares of Banca Italease, Banco Popolare acquired the majority of outstanding shares and therefore the control over the company. Since the beginning of the second half, Banca Italease and its subsidiaries have joined the full consolidation scope of Banco Popolare. Therefore, the consolidated financial statements of Gruppo Banco Popolare as at 31 December 2009 include Gruppo Banca Italease’s balance sheet assets and liabilities at that date. The consolidated income statement of Gruppo Banco Popolare on 31 December 2009 incorporates the contribution of Gruppo Banca Italease limited to the income generated after 1 July 2009. As a result of the above business combination, the consolidated balance sheet and income statement of Gruppo Banco Popolare on 31 December 2009 are not readily comparable with the same statements as at 31 December 2008. However, to guarantee an adequate disclosure on the operating performance of the Group, the report on operations shows the specific balance sheet and income statement of Gruppo Banco Popolare without the contribution of Gruppo Italease, for a like-to-like comparison with the same statements of the year before.
Sub-section 1 - Statement of conformity with International Accounting Standards
This consolidated annual report, in compliance with Legislative Decree n. 38 of 28 February 2005, was prepared in compliance with IAS/IFRS standards issued by the International Accounting Standard Board (IASB) and the related interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) and adopted by the European Commission, as defined in the EC Regulation n. 1606 of 19 July 2002.
The following documents have been used to interpret and apply the international accounting standards, although they have not been specifically adopted by the European Commission: Framework for the preparation and presentation of Financial Statements (“Framework”); Implementation Guidance, Basis for Conclusions, together with other documents prepared by IASB or IFRIC as a supplement to issued accounting standards.
The accounting standards applied to prepare these financial statements are those in effect on 31 December 2009 (including the SIC and IFRIC interpretation documents).
For an overview of the standards transposed in 2009 and those transposed in prior years, whose adoption is expected on financial year 2009 (or future years), see the following “Sub-section 5 – Other aspects”, that illustrates also the main impacts on the Group.
Sub-section 2 – General accounting principles
The consolidated financial statements comprise 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 explanatory notes, and is supplemented with the Executive Report on operations and on the general performance of the companies falling within the consolidation scope.
The financial statements and the contents of the explanatory notes have been prepared in keeping with the directives released by the Bank of Italy in Circular n. 262 of 22 December 2005 “Bank financial statements: layouts and compilation”, and following update of 18 November 2009. As to the latter update, the following “Sub-section 5 – Other aspects” illustrates the main novelties that have been introduced and the associated financial statement reclassifications and changes in the tables of the explanatory notes in FY 2008 with respect to those published last year, to guarantee a like-to-like comparison with data on 31 December 2009.
This annual report adopted the Euro as functional currency.
The amounts shown in the financial statements and the data illustrated in the explanatory notes are expressed in thousands of Euro, unless specified otherwise.
The consolidated financial statements were drawn up so as to provide a clear, fair and correct representation of the assets and liabilities, profit and loss and financial performance generated during the year by Banco Popolare and by its subsidiaries. The financial statements used to prepare the consolidated annual report are those prepared by the subsidiaries as at 31 December 2009, adjusted, if necessary, to comply with IAS/IFRS.
186 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Should the information required by the international accounting standards and by the above mentioned Circular not suffice to provide a truthful and correct representation, the notes to the accounts provide relevant supplementary information. If, in exceptional cases, the adoption of a provision under the international accounting standards is incompatible with a truthful and correct representation of the assets and liabilities, profit and loss and financial performance, said provision shall not be applied. The notes shall give an explanation for this possible deviation and shall illustrate the impact on the representation of assets and liabilities, profit and loss and financial performance.
The financial statements were drawn up in compliance with the following general principles: Going concern: financial statements are drawn up on the assumption that the Group shall continue as a going concern; Accrual basis of accounting: financial statements are prepared using the accrual basis of accounting, except for cash flow information; Consistency of presentation: the presentation and classification of items in the financial statements are retained from one financial year to the next, unless a standard or an interpretation require a presentation change, or a different presentation or classification proves to be more appropriate than what required by IAS 8. In this case, the notes to the financial statements shall contain due disclosure of the changes introduced as compared with the previous year. Materiality and aggregation: the balance sheet and income statement faces are made up of items (marked by Arabic numerals), by sub-items (marked by letters), and by further details (“of which” in items and sub-items). Items, sub-items and the related details make up the financial accounts. The presentation complies with the guidelines released by the Bank of Italy in Circular n. 262 of 22 December 2005. Additional items can be added to these charts if their content cannot be associated with any of the items already shown in the faces and only if they represent material amounts. Sub-items can be grouped together when one of the following conditions occur: a) the sub-item amount is immaterial; b) the aggregation favors a clear financial statement presentation; in this case, the notes to the accounts shall give a disaggregated description of the sub-items that have been consolidated. The balance sheet and income statement do not include accounts that show no amounts for the current balance sheet year, nor for the previous year. Substance over form: transactions and other events are recognized and shown in compliance with their substance and financial reality and not only based on their legal form; Offsetting: assets and liabilities, income and expense shall not be offset unless permitted or required by an international accounting standard or its interpretation, or by the prescriptions contained in the above mentioned Circular released by the Bank of Italy; Comparative information: each item of the balance sheet and income statement is matched with a comparative item referring to the previous year. The previous year’s data can be adjusted, if necessary, to guarantee the comparability with current year data. This is clearly the case with this consolidated annual report, as comparative information must be adjusted based on the new provisions set out in the 1st update of Circular n. 262. In case of non-comparability, adjustments or failure to do so, said events shall be duly disclosed and commented in the notes to the accounts.
The explanatory notes are subdivided into sections: Accounting policies, Notes to the consolidated Balance sheet, Notes to the consolidated Income statement, Consolidated statement of comprehensive income, Risks and associated hedging policies, Consolidated shareholders’ equity, Business combinations, Transactions with related parties, Share-based payments, Segment reporting. Each section is organized in sub-sections, and each sub-section describes a single business element.
Uncertainty associated with the use of estimates to prepare the annual report
The application of certain accounting standards necessarily requires the use of estimates and assumptions that affect the values of assets and liabilities recognized in the balance sheet and the reporting of potential assets and liabilities. The assumptions underlying estimates take into account all information available at the balance sheet date, as well as assumptions deemed to be reasonable, in the light of historical data and of this unique time financial markets are going through. To this end, it is important to keep in mind that the situation caused by the current economic and financial crisis has called for forward-looking assumptions marked by significant uncertainty. In view of this situation of pervasive uncertainty, it cannot be ruled out that the assumptions we relied on, as reasonable as they could be, may well find no confirmation in the future scenarios against which the Group shall operate. Therefore, future reported results may differ from the estimates developed to prepare this annual report, and as a result, possible adjustments to the book value of recognized assets and liabilities might prove necessary, that cannot be foreseen or estimated today. The balance sheet items that are most exposed to uncertainty situations are loans, financial assets, Investments in associates and companies subject to joint control, intangible assets, deferred tax assets, Financial liabilities designated at fair value through profit and loss, provisions for risks and charges and tax provisions. Illustrated below are the measurement processes that call for a greater use of estimates and assumptions to calculate the values to be recognized in the balance sheet:
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Calculation of estimated incurred impairments of loans and other financial assets recognized under balance sheet assets Loan write-downs are estimated based on evidence put together through a careful and constant monitoring of how outstanding relations with borrowers evolve, together with their operating and financial position. The calculation of cumulative portfolio write-downs is based on historical data, reported in terms of impaired loan decay rates and recovery rates with respect to loan classes that show homogeneous characteristics as compared with those under measurement at the balance sheet date. Write-downs of financial assets that are not measured at fair value are estimated based on evidence coming from the careful and constant monitoring of issuers’ operating and financial positions. To this regard, note that the protraction or worsening of the current economic and financial crisis could cause a further deterioration of the financial position of borrowers and issuers, which may generate losses on granted loans or purchased financial assets greater than what can be currently projected and thus considered upon preparing the balance sheet.
Estimated losses on intangible assets and Investments in associates and companies subject to joint control On a yearly basis, upon preparing the financial statements, intangible assets and Investments in associates and companies subject to joint control recognized on balance sheet assets are tested for impairment. The impairment test is generally conducted by determining the value in use and the fair value of assets and verifying that the value at which the intangible asset or the equity investment has been recognized in the balance sheet is lower than its value in use or fair value, net of selling costs, whichever is greater. The financial and economic crisis that fully unfolded in 2008 has deeply changed the backdrop scenarios that had been taken into consideration when preparing the business plans approved by the Group at the end of March 2008, so much so that the full accomplishment of the projected income targets cannot be expected anymore. Owing to the uncertainty of future backdrop scenarios, the Group to date does not have an updated business plan that can be used as a significant base to project the value in use of Investments in associates and companies subject to joint control and of cash flow generating units to which intangible assets with indefinite useful lives are assigned. Hence, the impairment test was based exclusively on the calculation of fair value as compared with the carrying value of balance sheet assets under measurement. The fair value of Investments in associates and companies subject to joint control and of cash flow generating units to which intangible assets with indefinite useful lives were allocated has been calculated by referring both to the adoption of market parameters to income and balance sheet values of the Investments in associates and companies subject to joint control / generating units being tested, as well as the consideration actually applied to recently performed comparable transactions. With regard to income items to which market parameters were applied, note that they were derived from the adjustment of corporate expected economic performance data for financial year 2010 that should conservatively take into account the changes intervened in the relevant financial and economic backdrop. Clearly, considering this unique situation of market turbulence, we cannot rule out that the assumptions we made, as reasonable and prudential as they might be, could be invalidated by the future scenarios against which the Group will operate. Moreover, the current resilient market volatility does not allow us to exclude, that measurements based on market parameters and on the values of recently performed transactions may in the long term fail to fully reflect the fair value of assets under impairment test.
Business combination The recognition of business combinations requires that the acquired assets and liabilities be assigned the difference between their purchase price and their net book value. For most assets and liabilities this is done by recognizing assets and liabilities at their fair value. The residual cost of acquisition if positive is recognized as goodwill; if negative it is charged to income as a revenue. When allocating the purchase price, Gruppo Banco Popolare takes into account all the available information; however, by definition, this process requires the use of very complex and subjective estimates.
Calculation of the fair value of financial assets and liabilities When the fair value is not directly observable on active markets, more highly subjective elements lie in the choice of measurement models, as well as of input parameters, since also the latter may not be observable on the market. In case of illiquid markets, it is necessary to use more complex measurement processes, characterized by a greater subjectivity.
Estimate of the recoverability of deferred tax assets The Group presents significant deferred tax assets among its balance sheet assets, mainly due to temporary differences between the income statement recognition date of given business costs and the date when said costs can be deducted. Said deferred tax assets recognized in the balance sheet refer to temporary differences, and to a lesser extent to losses recoverable over a very long period of time. Deferred tax assets are impaired to the extent they are deemed to be non- recoverable with respect to income prospects and the associated expected taxable income. The measurement procedure is based on the same income prospects taken into consideration for the impairment test of Investments in associates and companies subject to joint control and intangible assets.
Estimate of provisions for risks and charges, post-employment benefit provisions and tax provisions The companies belonging to the Group are defendants in a wide range of lawsuits and fiscal proceedings. The complexity of the situations and corporate deals that underlie outstanding legal actions, together with the interpretational issues as to the applicable law, make it difficult to estimate the liabilities that may result when pending lawsuits are settled. The difficulties lie in assessing if and what is due, as well as how much time will elapse before liabilities materialize. For the 2009 annual report, an additional source of uncertainty represented by provisions for risks and charges was caused by the securitized loans agreement signed by Banca Italease and Alba Leasing on 24 December 2009. The complexity of the
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agreement, both from an interpretational and execution standpoint, prevented the parties to come to a final quantification of impacts in time to prepare this annual report. Although the measurement of the effects described in Section B – Sub-section 12 of the explanatory notes represents the best estimate based on available information, we cannot rule out that the assumptions based on which the agreement might be executed can differ from the ones used to calculate the estimates for this annual report.
We provide the above list of measurement procedures simply to allow our readers to gain a better understanding of the main areas of uncertainty, and in no way it should be construed as implying that to date alternative assumptions could prove more appropriate. Moreover, balance sheet measurements are based on the going concern principle, as no risks have been identified that could impair our normal course of operation. The report on risks, in particular the liquidity risk, is illustrated in Section E – Risks and associated hedging policies.
Sub-section 3 - Consolidation scope and methods
The consolidated annual report illustrates the financial and operating situation of the Parent company and its direct and indirect subsidiaries. The consolidation scope is defined in compliance with the provisions set forth in IAS 27. Also all associates are included in compliance with IAS 28 and 31. The concept of control goes beyond the percentage interest in the share capital of an investee, and is rather defined as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Investments in associates and companies subject to joint control held for sale are accounted for in compliance with IFRS 5, which prescribes the accounting of non-current assets held for sale. The consolidated annual report date coincides with the Parent company’s individual balance sheet date. Companies whose financial year ends on a date other than that of the Parent company prepare an ad hoc balance sheet and income statement as at the reference date.
Full consolidation is the line-by-line combination of assets, liabilities, profit and loss of subsidiaries. Upon the identification and recognition of minority interests in net assets and net income under a specific item, the carrying amount of the investment is eliminated as an offset to the residual portion of the subsidiary’s equity. Any difference resulting from the above operation, if positive – after being accounted for under the subsidiary’s assets or liabilities – shall be initially recognized as goodwill under the item “Intangible assets” upon the first consolidation, and then under “Other reserves”. Negative differences are charged to income. The purchase price allocation of business combinations is measured provisionally, as permitted by international accounting standards. Paragraph 62 of IFRS 3 prescribes that the initial accounting of business combination must be completed within twelve months of the date of acquisition.
Assets, liabilities, revenues and expenses among consolidated companies are eliminated in full.
The operating performance of a subsidiary acquired during the period is included into the consolidated financial statements as from the date of acquisition. The operating performance of a subsidiary which has been disposed of is included in the consolidated financial statements until the date of disposal. The difference between the proceeds from the disposal and its carrying amount as of the date of disposal, including any exchange rate difference recognized period by period in equity upon consolidation, is recognized in income. If necessary, the financial statements of consolidated companies, when prepared in compliance with different accounting standards, shall be uniformed to the Group’s accounting procedures.
Investees on which the Group exercises a significant influence (so called “associates”), that is, enterprises in which the Group has the power to participate in the financial and operating policy decisions, but is not in control over those policies, and which are neither a subsidiary nor a joint venture, are carried at equity. If an associate applies other accounting standards than those used by the Group, adjustments are made to the associate’s financial statements used by the Group to apply the equity accounting method.
Under the equity method, the investment is initially recognized at cost and the carrying amount is then adjusted based on the proportionate interest in the investee. The difference between the carrying amount of the investment and the investee’s equity is treated similarly to the line-by-line consolidation differences described above. In measuring the pro-rata share of net assets, potential voting rights are not considered. The pro-rata share of net income from the associate is recognized under a specific item of the consolidated income statement.
Investments in jointly controlled companies are recognized using the equity method. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when a unanimous consensus by all venturers (i.e., the parties to a joint venture, having joint control over it) is required to make strategic financial and operational decisions.
Shares received as pledge have not been considered for the purpose of consolidation, as they are not aimed at exercising control or influence on the business policies of an enterprise so as to obtain benefits from its activities.
The balance sheet and P&L statements of the consolidated companies whose functional currency is not the Euro, are translated based on the following rules:
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balance sheet assets and liabilities are translated at the exchange rate in effect at year-end; P&L revenues and costs are translated at the year’s average exchange rate; all exchange rate differences originated by the conversion are recognized in a specific and separate reserve under shareholder’s equity. Said reserve is eliminated through profit or loss when the equity interest is disposed of.
Shown below are Investments in associates and companies subject to joint control in subsidiaries, associates and joint ventures (full or proportionate consolidation method)
Shareholding Type of Voting right Head Office relation (a) % (b) Company % Share
A. Companies A.1 Line by line consolidation Parent Banco Popolare soc. coop. Verona company Acque Minerali Riunite S.p.A. (*) Rome (1) Efibanca 100.000% Aletti & C. Banca di Investimento Mobiliare Milan (1) Banco Popolare 60.472% S.p.A. Credito Bergamasco 20.864% Holding di Partecipazioni 16.560% Valori Finanziaria 2.104% Aletti Fiduciaria S.p.A. Milan (1) Banca Aletti & C. 100.000% Aletti Gestielle SGR S.p.A. Milan (1) Banco Popolare 21.630% Credito Bergamasco 12.994% Holding di Partecipazioni 65.376% Aletti Gestielle Alternative SGR S.p.A. Milan (1) Holding di Partecipazioni 78.796% Credito Bergamasco 21.204% Aletti Trust S.p.A. Milan (1) Banca Aletti & C. 100.000% Arena Broker S.r.l. Verona (1) Holding di Partecipazioni 57.300% Auto Trading Leasing IFN s.a. RO - Bucharest (1) Banco Popolare 99.967% Holding di Partecipazioni 0.033% B.P.I. International (UK) Ltd. UK - London (1) Banco Popolare 82.000% Banca Aletti & C. (Suisse) S.A. CH - Lugano (1) BP Luxembourg 100.000% Banca Caripe S.p.A. Pescara (1) Banca Popolare di Lodi 95.000% Banca Italease S.p.A. Milan (1) Banco Popolare 73.027% Holding di Partecipazioni 15.173% Credito Bergamasco 3.025% Banca Italease Funding LLC Delaware (1) Banca Italease 100.000% Banca Popolare di Crema S.p.A. Crema (1) Banca Popolare di Lodi 94.468% Banca Popolare di Cremona S.p.A. Cremona (1) Banca Popolare di Lodi 99.590% Banca Popolare di Lodi S.p.A. Lodi (1) Banco Popolare 100.000% Banca Popolare di Lodi Capital Company LLC USA - Delaware (1) Banco Popolare 100.000% Banca Popolare di Lodi Capital Company LLC II USA - Delaware (1) Banco Popolare 100.000% Banca Popolare di Lodi Capital Company LLC III USA - Delaware (1) Banco Popolare 100.000% Banca Popolare di Novara S.p.A. Novara (1) Banco Popolare 100.000% Banca Popolare di Verona - S. Geminiano e S. Prospero S.p.A. Verona (1) Banco Popolare 100.000% Banco Popolare Ceská Republika, a.s. (*) CZ - Prague (1) Banco Popolare 100.000% Banco Popolare Croatia d.d. HR - Zagreb (1) Banco Popolare 97.984% 98.713% Banco Popolare Hungary Zrt. H - Budapest (1) Banco Popolare 100.000% Banco Popolare Luxembourg S.A. L - Luxembourg (1) Banco Popolare 99.969% Holding di Partecipazioni 0.031% Banco Popolare Service Kft. H - Budapest (1) BP Hungary 100.000% Bio Energy International S.A. L - Luxembourg (1) Efibanca 99.998% Bipielle Bank (Suisse) S.A. in liquidation CH - Lugano (1) Banco Popolare 100.000% Bipielle International Holding S.A. CH - Lugano (1) Banco Popolare 100.000% Bipielle Real Estate S.p.A. Lodi (1) Banco Popolare 100.000%
BRF Property S.p.A. Parma (1) Partecipazioni Italiane 51.114% BP Covered Bond S.r.l. Milan (1) Banco Popolare 60.000% Bormioli Rocco & Figlio S.p.A. Fidenza (1) Partecipazioni Italiane 81.114% Efibanca 14.314% Bormioli Rocco S.A.S. F - S. Sulpice (1) Bormioli Rocco France 100.000%
190 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Shareholding Type of Voting right Head Office relation (a) % (b) Company % Share
Bormioli Rocco (Spain) S.A. E - Guadalajara (1) Bormioli Rocco Intern. 74.070% Bormioli Rocco & Figlio 25.930% Bormioli Rocco Glass Co. Inc. S.C. USA - New York (1) Bormioli Rocco Intern. 100.000% Bormioli Rocco International S.A. L - Luxembourg (1) Bormioli Rocco & Figlio 100.000% Bormioli Rocco France S.A. F - S. Sulpice (1) Bormioli Rocco Intern. 56.640% Bormioli Rocco & Figlio 43.360% Bormioli Rocco Valorisation S.A.S. F - Masnieères (1) Verreries de Masnières 100.000% BP Property Management Soc. Consortile a r.l. Verona (1) Banco Popolare 27.309% Banca Popolare Lodi 10.000% Banca Popolare Novara 20.000% BPV-SGSP 20.000% Credito Bergamasco 10.000% Immobiliare BP 4.615% Banca Aletti & C. 1.000% C.R. Lucca Pisa Livorno 1.000% Banca Popolare Crema 1.000% Banca Popolare Cremona 1.000% Banca Caripe 1.000% Società Gestione Crediti BP 1.000% S.G.S. BP 1.000% Aletti Gestielle SGR 0.538% Holding di Partecipazioni 0.538% Braidense Seconda S.r.l. Milan (1) Efibanca 100.000% Cassa di Risparmio di Lucca Pisa Livorno S.p.A. Lucca (1) Banco Popolare 78.923% Castimm S.r.l. Livorno (1) C.R. Lucca Pisa Livorno 100.000% Compagnia Finanziaria Ligure Piemontese S.p.A. Milan (1) Banco Popolare 100.000% (in liq.) Credito Bergamasco S.p.A. Bergamo (1) Banco Popolare 88.990% Decoro Fidenza S.r.l. Fidenza (1) Bormioli Rocco & Figlio 100.000% Efibanca S.p.A. (***) Lodi (1) Banco Popolare 93.695% 90.600% Credito Bergamasco 6.305% 6.097% Efigestioni SGR S.p.A. Milan (1) Efibanca 90.154% Essegibi Promozioni Immobiliari S.p.A. Milan (1) Italease Gestione Beni 100.000% Factorit S.p.A. Milan (1) Banca Italease 100.000% Itaca Service n.s. FIN.E.R.T. S.p.A (in liquidation) Marano (NA) (1) SE.RI. 100.000% HCS S.r.l. Milan (1) Italease Gestione Beni 100.000% Holding di Partecipazioni Finanziarie Banco Verona (1) Banco Popolare 100.000% Popolare S.p.A. Immobiliare BP S.r.l. Verona (1) Banco Popolare 100.000% Istituto Pisano Leasing S.p.A. (in liquid.) Pisa (1) C.R. Lucca Pisa Livorno 100.000% Itaca Service S.p.A. Milan (1) Banca Italease 100.000% Italfortune International Advisors S.A. L - Luxembourg (1) Banco Popolare 100.000% Italease Finance S.p.A. Milan (1) Banca Italease 70.000% Italease Gestione Beni S.p.A. Milan (1) Banca Italease 100.000% Italease Network S.p.A. Milan (1) Banca Italease 100.000% Lido dei Coralli S.r.l. S.T. di Gallura (SS) (1) Bipielle Real Estate 100.000% Mercantile Leasing S.p.A. Florence (1) Banca Italease 100.000% Milano Leasing S.p.A. (in liquidation) Milan (1) Efibanca 99.999% Monticchio Gaudianello S.p.A. (*) Melfi (1) Acque Minerali Riunite 100.000% Nadir Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Nazionale Fiduciaria S.p.A. Brescia (1) Banca Aletti & C. 100.000% Novara Invest SIM S.p.A. (in liquidation) Milan (1) Banco Popolare 99.000% Aletti Gestielle SGR 1.000% Parchi del Garda S.p.A. Milan (1) Efibanca 73.636% Partecipazioni Italiane S.p.A. Milan (1) Glass Italy 92.653% 92.679% (1) Banco Popolare 7.312% 7.321% Release S.p.A. Milan (1) Banca Italease 80.392% Royle West Ltd. (in voluntary liquidation) IRL - Dublin (1) Banco Popolare 99.000% Seefinanz S.A. (in liquidation) CH - Lugano (1) Banco Popolare 100.000%
191 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Shareholding Type of Voting right Head Office relation (a) % (b) Company % Share
Servizi Riscossione Imposte SE.R.I. S.p.A. (in liq.) Naples (1) Banco Popolare 80.000% Sirio Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Società Gestione Crediti BP Soc. Cons. p.az. Lodi (1) Banco Popolare 16.000% Banca Popolare Lodi 20.000% Banca Popolare Novara 20.000% BPV-SGSP 20.000% Credito Bergamasco 10.000% C.R. Lucca Pisa Livorno 10.000% Banca Popolare Crema 1.000% Banca Popolare Cremona 1.000% Banca Caripe 1.000% Efibanca 1.000% Società Gestione Servizi BP Soc. Consortile p. az. Verona (1) Banco Popolare 20.500% Banca Popolare Lodi 15.000% Banca Popolare Novara 15.000% BPV-SGSP 15.000% Banca Aletti & C. 10.000% Credito Bergamasco 10.000% C.R. Lucca Pisa Livorno 10.000% Banca Popolare Crema 0.750% Banca Popolare Cremona 0.750% Banca Caripe 0.750% Società Gestione Crediti BP 0.750% Aletti Gestielle SGR 0.500% Immobiliare BP 0.500% Holding di Partecipazioni 0.500% Tecmarket Servizi S.p.A. Verona (1) Banco Popolare 87.132% Credito Bergamasco 12.868% Tiepolo Finance S.r.l. Lodi (1) Banco Popolare 60.000% Tiepolo Finance II S.r.l. Lodi (1) BP S.G.C. 60.000% Tirrena Professional Factor S.p.A. (in liquidation) Pisa (1) C.R. Lucca Pisa Livorno 69.498% Valori Finanziaria S.p.A. Verona (1) Banco Popolare 99.786% Verona e Novara (France) S.A. (in liquidation) F - Paris (1) BP Luxembourg 99.686% Verreries de Masnières S.A. F - Masnieères (1) Bormioli Rocco France 100.000%
Banca Italease Capital Trust Delaware (4) Banca Italease Funding LLC 100.000% Banca Popolare di Lodi Banca Popolare di Lodi Investor Trust I USA - Delaware (4) 100.000% Capital Company LLC Banca Popolare di Lodi Banca Popolare di Lodi Investor Trust II USA - Delaware (4) 100.000% Capital Company LLC II Banca Popolare di Lodi Banca Popolare di Lodi Investor Trust III USA - Delaware (4) 100.000% Capital Company LLC III Bipitalia Residential S.r.l. (**) Milan (4) Banco Popolare 4.000% BP Mortgages S.r.l. (**) Brescia (4) - 0.000% BPL Mortgages S.r.l. (**) Conegliano V. (TV) (4) - 0.000% BPV Mortgages S.r.l. (**) Verona (4) - 0.000% Erice Finance S.r.l. Conegliano V. (TV) (4) - 0.000% Gestielle Harmonia Dinamico Milan (4) Banco Popolare 54.482% Gestielle Harmonia Vivace Milan (4) Banco Popolare 71.736% Gestielle Hedge Long Short World Milan (4) Banco Popolare 85.721% Banca Aletti & C. 9.121% Gestielle Hedge Multi Strategy Milan (4) Banco Popolare 47.443% Banca Aletti & C. 3.957% Glass Italy B.V. NDL - Amsterdam (4) Stichting Glass Italy 94.999% Efibanca 5.001% Italfinance RMBS S.r.l. Trento (4) - 0.000% Italfinance Securitisation VH 1 S.r.l. Conegliano V. (TV) (4) Banca Italease 9.900% Italfinance Securitisation VH 2 S.r.l. Conegliano V. (TV) (4) - 0.000% Leasimpresa Finance S.r.l. Conegliano V. (TV) (4) - 0.000% Mercantile Finance S.r.l. Florence (4) Mercantile Leasing 10.000%
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Shareholding Type of Voting right Head Office relation (a) % (b) Company % Share
Pami Finance S.r.l. Milan (4) - 0.000% Stichting Glass NDL - Amsterdam (4) - 0.000% A.2 Proportionate consolidation N/A (a) Types of relation: (1) Control under art. 2359 of the civil code, paragraph 1, n. 1, (majority of voting rights in general shareholders’ meetings) (4) Other forms of control (b) The actual voting right percentage in the General Annual Meeting is indicated only if it differs from the shareholding percentage. (*) Discontinued operation under IFRS 5. (**) Majority of benefits and risks (SIC-12 Consolidation – Special Purpose Company). (***) When calculating the shareholding, treasury shares held by Efibanca were not accounted for, because capital rights are attributed to the other shareholders (proportionately to the shareholding)). The calculation of the voting right percentage is inclusive of treasury shares, because these shares are accounted for in the share capital to determine the Shareholders’ meeting constitutive and deliberative quorum, although the voting right is suspended (art. 2357 ter c.c.).
Changes in consolidation scope
The main changes in consolidation scope compared to the situation on 31 December 2008 are attributable to the takeover of the Group led by Banca Italease, upon completion of the Tender Offer in July 2009.
In particular, as of 8 July 2009, the full consolidation scope incorporates the following companies: - Banca Italease S.p.A. (previously carried at equity) - Factorit S.p.A. - Mercantile Leasing S.p.A. - Italease Network S.p.A. - Italease Gestione Beni S.p.A. - Itaca Service S.p.A. - HCS S.p.A. - Essegibi Promozioni Immobiliari S.p.A. - Banca Italease Funding LLC - Banca Italease Capital Trust - Erice Finance S.r.l. - Italfinance RMBS S.r.l. - Italfinance Securitisation VH1 S.r.l. - Italfinance Securitisation VH2 S.r.l. - Leasimpresa Finance S.r.l. - Mercantile Finance S.r.l. - Pami Finance S.r.l.
On 5 August 2009, as part of the reorganization of the Group led by Banca Italease, Banca Italease incorporated the company Tramonto S.p.A. Later on, the company, which is to receive part of the non-performing assets of Gruppo Italease, changed its company name into Release S.p.A. and, as of the closing of the current quarter, is consolidated on a line by line basis.
After the acquisition on 22 September 2009 of 50% of the share capital of BP Covered Bond S.r.l., a company engaging in the purchase of loans as part of covered bond issues pursuant to art. 7-bis of Law n. 130 of 30 April 1999, Gruppo Banco Popolare reached a total interest of 60% and therefore acquired the control of the company, with is consolidated on a line by line basis.
As of financial year 2009, the subsidiaries Banco Popolate eská Republica and Factorit make a compound contribution to the financial statements in items 150 of assets (Non-current assets held for sale and discontinued operations), 90 of liabilities (Liabilities associated to discontinued operations) and 310 of the income statement (Income/loss after tax on discontinued operations) as they are going to be sold, in compliance with IFRS 5. The sale was finalized in October. A similar classification was adopted also for Aletti Private Equity: as a result of the sale to third parties finalized in the fourth quarter of the year, the P&L of the associate up to the time of the sale is incorporated in income/loss after tax on discontinued operations.
The merger by acquisition of the subsidiary Bipitalia Alternative in Bipielle Finanziaria was finalized on 27 March, conducive to the following merger on 31 March of Bipielle Finanziaria into Holding di Partecipazioni Finanziarie Banco Popolare. At the end of September we formalized the mergers of Bipitalia Broker and of Efimmobiliare in Holding di Partecipazioni Finanziarie Banco Popolare, while in December the real estate companies Andromeda, Antares, Antilia, Azimuth, Pegaso and Perseo were merged into Bipielle Real Estate and Crifefi Sim into Banca Aletti. The above deals did not produce changes in the consolidation scope as the companies involved were owned 100%.
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With respect to companies carried at equity, as explained above the equity investment in Banca Italease S.p.A. is no more part of this category, as it is consolidated on a line to line basis together with its subsidiaries. The acquisition of Gruppo Italease caused the company Aosta Factor S.p.A. to be carried at equity, while before it was recognized in financial assets available for sale, as the total interest held by Gruppo Banco Popolare totals 20.69%. Similarly, as of the current consolidated quarterly report, the Investments in associates and companies subject to joint control held by Banca Italease in the associates Alba Leasing S.p.A. and Renting Italease S.r.l. are carried at equity. An addition to this category was the equity investment in Pantex International S.p.A., held by Efibanca as part of its merchant banking activity, accounting for 50% of its share capital.
On 9 January, the partial sale of stakes held by the Parent company and some of its subsidiaries in Istituto Centrale Banche Popolari Italiane (ICBPI) to Veneto Banca Holding was formalized; as a result, the associate continues to be carried at equity, as the interest held by the Group went from 32.731% to 25.133%, after the associate’s capital increase, plus the 0.016% stake held by Gruppo Banca Italease.
In the first half of the year the associate Evoluzione 94 was fully liquidated, after the approval by the shareholders’ meeting on 7 May 2009 of the final liquidation report. The final liquidation distribution, amounting to 1.6 million, was collected by the Group on 12 October 2009, in keeping with the term prescribed by art. 2493 of the Civil Code (90 days from filing the liquidation report). As a result, with respect to the preparation of this consolidated annual report, the equity investment was deconsolidate. Similarly, due to Efibanca’s failure to subscribe the capital increase of the associate Comital, after its capital had been slashed down by the incurred losses, the Group’s interest in Comital was reduced to zero and was therefore deconsolidated.
In December, Banca Italease purchased 33.333% of the real estate company Centro Milano S.p.A. from third parties, and the company is now carried at equity.
Finally, during the period, some associates changed their company names: Holding di Partecipazioni Finanziarie Popolare Verona e Novara S.p.A. in January changed its name into Holding di Partecipazioni Finanziarie Banco Popolare S.p.A.; Banca Valori S.p.A. on 26 January 2009 changed its name in Valori Finanziaria S.p.A., and moved its registered office from Brescia to Verona; Società Gestione Servizi BP S.p.A., after turning into a consortium company as approved by the Special Shareholders’ Meeting on 26 February 2009, changed its name into Società Gestione Servizi BP Soc. Consortile per Azioni; BPVN Immobiliare S.r.l. changed its name into BP Property Management S.r.l. and after turning into a consortium company as approved by the Special Shareholders’ Meeting on 6 March 2009, changed its name into BP Property Management Società Consortile a responsabilità limitata; Carfid S.r.l.’s Special Shareholders’ Meeting held on 12 May 2009 approved the transformation of the company into a joint-stock company (S.p.A.), the change of the company name into Aletti Trust S.p.A. and the change of the company object: in addition to the fiduciary activity, it can act also as trustee, guardian, enforcer or protector of trusts under the Hague convention of 01/07/1985; Società Gestione Crediti BP S.p.A., after turning into a consortium company on 1 October 2009, changed its company name into Società Gestione Crediti BP Soc. Consortile per Azioni.
Sub-section 4 – Subsequent events after the balance-sheet date
Illustrated below are the most significant events occurred between the balance sheet date and the approval of the draft annual report by the Management Board.
Compulsory buyout of Banca Italease common shares pursuant to art. 108, paragraph 2, of Lgs. D. 58/1998: price fixing and authorization by Consob to publish the Prospectus.
At the closing of the capital increase in the first days of January 2010, Banco Popolare held 91.397% of Banca Italease’s share capital: Banco declared it did not intend reconstituting the free float, while it intended performing the obligation to purchase the remaining Banca Italease shares. On 4 March 2010, pursuant to art. 108 of TUF, Consob set the consideration related to the performance of the compulsory buyback of Banca Italease common shares to 0.797 euro, for a total maximum amount of Euro 127,011,686.16 for the 159,362,216 residual shares, and authorized the publishing of the prospectus for the Mandatory Offer procedure. The Procedure started on 8 March 2010 and ended on 26 March 2010, and raised 138,124,468 residual shares. By adding these shares to those already directly and indirectly held by Banco Popolare, at the payment date of the consideration, set on the 31 March 2010, the Group shall hold a 98.853% stake in Banca Italease. Having exceeded the 95% threshold of Banca Italease’s share capital, the prerequisites are met for Banco Popolare to execute the Joint Procedure: therefore, as declared in the Prospectus, Banco Popolare shall exercise its right to purchase, at the same price of 0.797 euro per share, the remaining outstanding shares pursuant to art. 111 TUF, and at the same time it shall fulfill the buyout obligation under art. 108, paragraph 1, of TUF. As of 8 April 2010, Banca Italease shares shall be delisted.
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Agreement for the sale of Factorit S.p.A.
The Corporate boards of Banca Popolare di Sondrio, Banca Popolare di Milano, Banco Popolare and Banca Italease on 25 February 2010 approved the sale of 90.5% of the share capital of Factorit S.p.A. The company, which is currently 100% owned by Gruppo Banco Popolare through Banca Italease, was founded in 1978 by a group of cooperative banks (banche popolari); it engages in factoring and related services and ranks fourth among the largest factoring companies in Italy by turnover. Under the agreement, Banca Popolare di Sondrio will acquire a 60.5% controlling stake in the company, while Banca Popolare di Milano will take 30%. The remaining 9.5% will remain with Gruppo Banco Popolare. The agreement was finalized on 22 March 2010. The price was agreed by the parties based on a company value of 170 million, in line with the company’s consolidated carrying value. Therefore, Popolare Sondrio and Popolare Milano shall expend about 103 million and 51 million, respectively. Immediately after the contract is signed, whose execution is subject to prior authorization by competent Authorities, and before the shares are transferred, the buyers will carry out a confirmatory due diligence on Factorit.
Exercise of put option issued in favor of Fondazione Cassa di Risparmio di Lucca
On 6 May 2005, Banca Popolare Italiana had entered an option contract with Fondazione Cassa di Risparmio di Lucca, based on which the Foundation can exercise a put option on 143,997,909 common shares of Cassa di Risparmio di Lucca Pisa e Livorno (corresponding to 20.39% of the share capital) and Banco Popolare, which after the merger took on all the commitments of former BPI, must purchase these shares at a price equal to the net equity of Cassa di Risparmio di Lucca Pisa e Livorno, as published in the last financial statements approved before executing the option, multiplied by the multiplier agreed upon in the contract and equal to 1.3054. On 11 February 2010, the Foundation fully exercised the put option. For this financial year, the consideration due by Banco Popolare and estimated based on the book value of shareholders’ equity posted in the annual report as at 31st December 2009, totals 312.9 million. Under the agreement, the option must be settled by 5 July 2010. Under the contract, Banco Popolare must pay the price by transferring, under the law, equity financial instruments issued by companies belonging to Gruppo Banco Popolare and regularly quoted and traded on an Italian regulated market to the Foundation. In this case, the option exercise by the Foundation would have no significant impact on the regulatory capital and on the consolidated capital ratios of Banco Popolare, as the repurchase of the minority share in Cassa di Risparmio di Lucca Pisa e Livorno would be offset by the concomitant sale of a minority stake in a listed company belonging to Gruppo Banco Popolare (Credito Bergamasco). Whereas the contract performance provides exclusively for the delivery of Group listed securities, Banco will assess with Fondazione Cassa di Risparmio di Lucca possible alternative settlement modalities. Therefore, should the settlement modality agreed upon by the parties differ from the one envisaged by the contract, the effect of the contract performance on the regulatory capital and therefore on the consolidated capital ratios of Banco Popolare could also change. For accounting aspects please refer to the following “Section 5 – Other aspects”.
Liquidation of Royle West
On 11 January 2010 the Irish company Royle West Limited, 99% owned by Banco Popolare, went into voluntary liquidation, therefore the company name was changed into Royle West Limited (In Voluntary Liquidation).
Covered bank bond program
As part of a multiannual Program for the issue of a total of 5 billion worth of Covered Bank Bonds, in January 2010 a Covered Bank Bond issuance (Obbligazioni Bancarie Garantite “OBG” or “Covered Bond”), geared to institutional investors, was rolled out at Group level. Banco Popolare acts as issuer of the Covered Bonds, while the retail banks (Banche del Territorio) belonging to the Group act as transferors of the assets under art. 7-bis of law n. 130 of 30 April 1999 (“Law 130”). The issuance of Covered Bonds is part of the Group’s strategic plan, to diversify funding sources, reduce the relative cost, extend liability maturities: in particular, the issuance of Covered Bonds is of particular interest at a time when institutional investors are barely active on the securitization market, with very penalizing spreads. According to the Program, the Banche del Territorio involved will unwind the self-securitization transactions they have originated, by repurchasing the loans that had been previously sold and then selling them back to the Program’s SPV. In particular, it is worth highlighting that investors shall also benefit from an irrevocable and unconditioned demand guarantee, granted by BP Covered Bond S.r.l., the program’s SPV, covering a pool entirely made up of high-quality residential mortgages, originated by the retail banks of Gruppo Banco Popolare. In January we already unwound the BPL Mortgages 1 and BPL Mortgages 2 deals and sold a first pool to back the bonds to the SPV BP Covered Bond, for a total amount of about 1.4 billion euro; in February the opening issue was completed of fixed rate Covered Bonds for about 1 billion euro, 7 year maturity, devoted to institutional investors.
Banco Popolare 2010/2014 4.75% convertible bonds redeemable in shares
The Special Shareholders’ Meeting of Banco Popolare held on 30 January 2010 approved the issuance of a convertible bond for a total maximum amount of 1 billion: specifically, the Shareholders gave the Management Board the power to issue
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bonds convertible into shares of the Company’s common stock, subject to the favorable opinion of the Supervisory Board, up to an amount of 1 billion euro, to be offered in option to shareholders and holders of “Banco Popolare 4.75% 2000/2010 Subordinated Convertible Bonds, resulting in a splittable share capital increase to service the conversion for a maximum total amount of Euro 1 billion, including the share premium, through the issue of Banco Popolare common shares. The resolution passed by the Shareholders give the Management Board of the Bank, subject to the favorable opinion of the Supervisory Board, the power to decide on: the denomination of the bond; the nominal value; the subscription price and the option ratio of the convertible bonds; the coupon amount; the conversion ratio and its adjustment modalities; the settlement of the convertible bonds, and the making of all the necessary changes that may be required by the Supervisory Authorities and by the stock exchange; the redemption procedure and the maturity; the maximum number of newly issued shares to service the conversion; the maximum nominal amount of the capital increase that can be split to service the conversion and that in any case may not exceed the maximum amount of Euro 1 billion; any other term and condition regulating the issue and offer of the convertible bonds and the subsequent underlying capital increase.
The Shareholders’ Meeting consequently has approved the amendment of article 6 of the Articles of Association, “Share Capital”, by introducing a new paragraph specifying the amount, procedure and deadlines of the share capital changes as a result of the issue of the Convertible Bond and the exercise of the associated option rights. Finally, as regards the second item on the agenda, the Shareholders’ meeting has approved the additional amendments to the Articles of Association proposed by the Supervisory Board. The changes involved articles: 6, Share capital; 33.2, Exclusive competences (Management Board); 39.1 Lists of candidates (to elect the Supervisory Board); 41.2 Strategic supervisory and directional functions (of the Supervisory Board); 46, Management Team; 52, Distribution of earnings.
In keeping with the resolution passed by the Special Shareholders’ meeting held on 30 January 2010 and with the favorable opinion of the Supervisory Board, on 25 February 2010, the Management Board approved the terms of the “Banco Popolare 2010-2014 4.75% convertible bond redeemable in shares” to be offered in option to Company shareholders and/or holders of convertible bonds under the “Banco Popolare 4.75% 2000/2010 Subordinated Convertible Bond (“TDF”)– ISIN IT 0001444360. On 1 March 2010 Consob authorized the publication of the prospectus regarding the offer in option and the admission to listing on the MTA electronic market of the convertible bonds.
The issue of the convertible bonds totals 996,386,475.15 euro, with the issue of 162,014,061 convertible bonds having a nominal value of euro 6.15 each, to be offered to shareholders and/or holders of the afore mentioned convertible bonds based on a conversion ratio of n. 1 convertible bond every n. 4 shares and 43 convertible bonds every 400 convertible bonds. The issue price for each convertible bond has been fixed at par at 6.15 euro. The convertible bonds shall be listed on the MTA Electronic Market managed by Borsa Italiana, they shall pay a fixed coupon to bond holders, corresponding to 4.75% gross annual of the nominal value of the convertible bonds, and will have a term running from 24 March 2010 to 24 March 2014. They have a senior ranking, whereby theif redemption shall not be subordinated to any other Company debt. The convertible bonds shall: - give bond holders the possibility to convert bonds into shares of Banco Popolare common stock – with a price equal to 6.15 euro - at any time, starting from the eighteenth month after the issue date and until maturity; - give Banco Popolare the possibility, as of the eighteenth month after the issue date and until maturity, to early redeem the bonds by paying them fully or partly with shares, recognizing a premium on the bond nominal value of 10%; - give the Company the possibility upon maturity to redeem the convertible bonds whose conversion option has not been exercised by paying them in cash and/or shares, based on the most recent market price of the Banco Popolare stock and corresponding to an amount not below the bond nominal value.
The Subscription Period shall run from 1 March 2010 to 24 March 2010.
The Management Board also approved a splittable share capital increase to cover the conversion for a total maximum amount of 996,386,475.15 euro, including the share premium, through the issue of n. 162,014,061 shares of the Company’s common stock having a par value of Euro 3.60 each, with regular rights, and featuring the same characteristics as those outstanding on the issue date, to be used exclusively for the conversion.
During the offer period, a total of 160,128,993 bonds were subscribed, accounting for 98.84% of the total, corresponding to a total value of 984.8 million. On indication of Borsa Italiana, starting on 31 March 2010 the bonds shall be traded on the MTA Electronic Equity Market.
PEO on Index-linked policies issued by UGF Assicurazioni and Eurovita Assicurazioni
As more thoroughly explained in the operating report section devoted to noteworthy events for the year, the voluntary Public Exchange Offer (PEO) launched by Banco Popolare closed on 12 March, with 98.11% of policies tendered into the offer. The offer was devoted to holders of the following policies: “Bipielle Aphrodite II Serie Index I/2005” "Bipielle Magnolia Index II/2005” "Bipielle Azalea Index III/2005”, issued by UGF Assicurazioni S.p.A., former Aurora Assicurazioni S.p.A., and “Bipielle Aphrodite Serie II”, “Bipielle Magnolia”, “Bipielle Azalea”, issued by Eurovita Assicurazioni S.p.A. During the tender period, running from 8th February 2010 to 12 March 2010, a total o f 8,374 policies were tendered into
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the offer for a nominal value of premiums paid of 136.7 million, corresponding to a total value of 136.3 million in terms of unstructured senior Zero Coupon bonds offered in replacement. Banco Popolare shall issue additional senior bonds for 13.7 million to comply with the supervisory regulatory requirements regulating bank issuances exceeding 150 million. The banks which had distributed the policies to be replaced (Banca Caripe, Banca Popolare di Crema, Banca Popolare di Cremona, Cassa di Risparmio di Lucca Pisa Livorno and Banca Popolare di Lodi) undertook to subscribe the additional bonds, proportionately to the value of the policies they had distributed.
Optimization of the Group network
Banco Popolare launched the process to optimize the group network, aiming at improving its competitive position on the territory, by eliminating existing overlaps and improving the branch performance. In April, 86 branches are going to be closed, and 6 shall be turned into detached branches. This operation involves 199 employees, who shall be all outplaced with no redundancies. This reorganization also aims at identifying investment opportunities to strengthen our presence on specific historic and high worth territories. Precisely, the operation covers 42 branches of Banca Popolare di Verona, 33 of Popolare di Lodi, 12 of Popolare di Novara and 5 of Cassa di Risparmio di Lucca Pisa e Livorno.
Debt restructuring for the Statuto group
On 2 February 2010, the corporate boards of Banco Popolare, in its capacity as Parent company of Banca Italease and Release (a subsidiary of Banca Italease), within their respective competence, approved an agreement with the group led by the entrepreneur Giuseppe Statuto, outlining the key terms of a global debt restructuring for the Statuto real estate group. The deal, whose performance is subordinated to the negotiation and finalization of the specific contract instruments, involves a total gross risk of about 1.027 billion as at 31 December 2009 (of which about 880 million with respect to Release and about 147 million with respect to Banca Italease). This exposure is represented by 21 lease contracts, 20 of which are real estate leases. Among other things, the agreement provides: the reduction of the total exposure from 1.027 billion to about 700 million by way of: (i) the agreed termination of lease contracts on 3 buildings and (ii) the early repayment of 2 lease contracts; a series of initiatives aiming at bringing the remaining positions back to regular terms, for example: (i) payment of part of the accrued outstanding debt of about 26 million, (ii) contract renegotiation, (iii) allocation of rents from buildings still under lease, (iv) capital injections by the entrepreneur on some of the companies concerned, totaling 35 million (of which 10 million cash and 25 million distributed over three years) and (v) granting of cash facilities of about 40 million backed by VAT credits and securities.
The described deal is consistent with the strategy to reduce and regularize large exposures classified as impaired loans of Banca Italease and its subsidiaries, which is the ultimate objective of the reorganization of the former Gruppo Banca Italease and, in particular, the creation of the company Release. In the event that the final contracts negotiations are successfully closed and the suspending conditions under the agreement are fulfilled, the restructuring is scheduled to be completed by the month of April 2010.
Sub-section 5 – Other aspects
Annual report approval and publication term
Art. 154-ter of Lgs.D. 59/98 (T.U.F.), as amended by Lgs.D. 195 of 6 November 2007 – transposing the EC Directive 2004/109/EC (so called Transparency Directive) – prescribes that the annual financial statements and the annual report consisting of the individual and the consolidated financial statements, the report on operations and the responsibility statement pursuant to article 154-bis, paragraph 5, must be approved and published within one hundred and twenty days of the end of the financial year.
The draft annual report was approved by the Management Board on 30 March 2010 and shall be submitted to the approval of the Shareholders’ Meeting on 24 April.
Audit
The individual and consolidated financial statements have been audited by the auditing firm Reconta Ernst & Young S.p.A. pursuant to Lgs. D. 58/98, in execution of the 2007/2015 engagement assigned to this company with the shareholders’ resolution of 1 April 2007. The integral auditors’ report is published with the annual report, pursuant to art. 154-ter of Lgs. D. 58/98.
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Changes to accounting standards adopted by the European Commission
Described below are the main changes to accounting standards, approved by IASB and adopted by the European Commission, that are relevant to the Group and were therefore complied with when preparing the 2009 consolidated financial statements.
Revised IAS 1 “Presentation of financial statements” – adopted with EC Reg. n. 1274 of 17 December 2008 The standard, applicable as from 1 January 2009, requires that the “Statement of Changes in shareholders’ equity” must show only transactions among shareholders. For this reason, a new statement was introduced, called “Statement of Comprehensive Income”, that shows the costs and revenues directly recognized in equity; in other terms, these are changes in equity that are not attributable to transactions with shareholders (“non-owner changes in equity”). For example, this statement may include: - changes in valuation reserves for property plant and equipment and intangible assets (IAS 16 and IAS 38); - foreign exchange gains and losses from foreign operations (IAS 21); - reserve changes as a result of fair value measurement of financial assets available for sale (IAS 39); - the effective share of profit or loss on qualified derivatives in a cash flow hedge relationship (IAS 39).
In particular, IAS 1 prescribes that all costs and revenues, included those directly recognized in equity, can be presented in a single statement or in two separate statements. The Bank of Italy, as specified in the update of the aforementioned Circular n. 262, elected to present two separate statements, which the Group complied with. The statement of comprehensive income shows the net income (loss) for the year as reported in the income statement and the “Other comprehensive income”, i.e., the value changes in assets recognized during the year through the valuation reserves (after tax). It was also necessary to change the “Statement of changes in shareholders’ equity” to specify the share of change in equity that is not attributable to transactions with shareholders (the latter being for example a capital increase, dividend distribution, …), but stem from the “Statement of comprehensive income”. This is a disclosure standard, and has no impact on the measurement of balance sheet assets and liabilities.
IFRS 8 “Operating segments” – adopted with EC Reg. n. 1358 of 21 November 2007 As from 1 January 2009, financial statements shall have to apply the new accounting standard IFRS 8 “Operating segments”, replacing IAS 14 “Segment reporting”. In keeping with IAS 14, IFRS 8 specifies that if the financial statements set includes both the consolidated and the individual financial statements, segment reporting is required only in the consolidated report. The new standard does not impact on the measurement of balance sheet assets and liabilities and therefore on the calculation of the year’s net income, as it is a pure disclosure standard. In summary, IFRS 8 requires that segment reporting be based on information prepared for internal management decisions (so called management-approach) and replaces the need to identify the Group’s primary reporting segment (business segment) and the secondary reporting segment (geographical segment). Therefore the defining of operating segments must be based on the internal reports that are regularly reviewed by the management to allocate resources to the various segments and on performance analyses. Note, that the Group deemed the operating segments definition and measurement criteria under IFRS 8 to be substantially in line with the prior procedure under IAS 14; it was necessary to introduce the new operating segment “Leasing and Factoring” exclusively owing to the finalization of the takeover of Banca Italease. For the annual report , IFRS 8 requires to disclose information about revenues and assets in foreign Countries, irrespective of whether this information is used for internal reporting.
Amendment IFRS 1 “First time adoption of International Financial Reporting Standard” and IAS 27 “Consolidated and separate financial statements” – adopted with EC Reg. n. 69 of 23 January 2009 The new version of IFRS 1 allows companies that for the first time adopt IAS/IFRS (“First Time Adopters”), and that elected to recognize Investments in associates and companies subject to joint control on a cost basis in separate financial statements, to determine said cost using the deemed cost method. This cost may be represented, alternatively, by the fair value at the date of transition under IAS 39 or by the carrying amount of the equity investment under the previous accounting standards. Moreover, prior to the mentioned amendment, IAS 27 required the parent company, which measured Investments in associates and companies subject to joint control at cost, to recognize the dividend income as an income generated before the acquisition and to be deducted from the investment cost. This provision would have been a potential problem for First-Time Adopters, because if the parent company had acquired an equity investment before the date of transition to IFRS, it would have been necessary to calculate the income generated before the acquisition in compliance with IAS/IFRS. For this reason IASB decided to eliminate from IAS 27 the different accounting treatment of dividends in profit or loss before or post acquisition, as a guideline to assess whether the dividend is a recovery on the investment made or not. The new version of IAS 27 requires that all dividends be recognized in profit or loss when the right to receive the dividend is established. To avoid that new dividend recognition rules might cause an overvaluation of the equity investment, two new specific impairment indicators were introduced in IAS 36, as might result from dividend distribution.
Amendment IFRS 7 “Financial instruments: disclosures” – adopted with EC Reg. n. 1165 of 27 November 2009 The amendment to IFRS 7 represents IASB’s response to improve the transparency of disclosures in the aftermath of the
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financial market crisis, by requiring more disclosure on fair value measurement and on liquidity risk. In particular, for financial instruments measured at fair value it is now necessary to give evidence of how the fair value is measured based on a 3-level hierarchy (level 1, 2, 3) depending on the extent to which market inputs are observable, as described in sub-section “A.2 – Section on main balance sheet aggregates”, to which you may refer for additional details. In particular, the additional information required by the new IFRS 7 can be summarized as follows: - specify the fair value hierarchy level under which the fair value measurement can be classified; - reasons for movements from level 1 to level 2, if significant; - reconciliation between the opening balance and the year-end balance for financial instruments classified under level 3; - for level 3 instruments, i.e., instruments whose fair value is significantly measured based on unobservable inputs, and therefore marked by a certain subjectivity, it is necessary to give evidence of the impacts, if material, deriving from a change in the assumptions underlying the fair value measurement.
As to the liquidity risk, the amendments to IFRS 7 introduced a new definition of risk regarding the difficulties in paying financial liabilities settled by cash or other financial assets. Moreover, additional disclosures are required for derivatives and other financial liabilities. The need to provide disclosure on financial assets held to manage the liquidity risk is confirmed, if material with respect to the assessment of the nature and measurement of risk; this necessarily applies to a financial institution where the management of maturities of financial liabilities is closely integrated with that of financial assets (Asset & Liability Management). The above changes, which are pure disclosure changes, are to be adopted on financial statements of financial year starting on 1 January 2009; for the first year of adoption there is the possibility of being exempted from giving comparative information. The Group elected to follow the three-level fair value hierarchy also with respect to 2008 comparative data, so as to guarantee the utmost transparency and comparability with the current year. For more information on the fair value hierarchy, see Sub-section “A.3 - Fair value disclosure”. The liquidity risk disclosure, prepared based on the directives set out in Circular n. 262, is reported in Section E – Risks and associated hedging policies, Sub-section 1.3 – Liquidity risk.
The following is a comprehensive list of standards endorsed in 2009 or in prior years, whose adoption has become mandatory as from financial year 2009. Except for the above changes, the other standards did not give rise to any material impact related to the preparation of this annual report.
Accounting standards and Adopting EC Effective for annual Remarks interpretations Regulation periods beginning on:
New standards EC Reg. n. 1358 of 21 Replaces IAS 14 and requires a disclosure consistent November 2007 and n. IFRS 8 – Operating Segments with internal operating reports reviewed by the chief 1 January 2009 1126 of 3 November operating decision maker 2008 Changes to existing standards IFRS 1 – First time adoption of Upon FTA it allows to take the carrying amount of International Financial Reporting Investments in associates and companies subject to Standard joint control as a substitute for cost. In separate EC Reg. n. 69 of 23 IAS 27 – Consolidated and separate financial statements, dividends from subsidiaries, 1 January 2009 financial statements associates and joint ventures are always recognized January 2009 as revenues in profit or loss
IFRS 2 – Vesting conditions and It clarifies that vesting conditions are service and cancellations performance conditions only and gives indications EC Reg. n. 1261 of 16 as to the accounting treatment of cancellations 1 January 2009 December 2008
IFRS 7 – Enhancing disclosures It introduces a three-level fair value hierarchy for about fair value and liquidity risk the purposes of disclosure EC Reg. n. 1165 of 27 It modifies the analysis of liquidity, in particular for 1 January 2009 derivative instruments November 2009
IAS 1 – Presentation of financial It introduces the need to include the statement of statements comprehensive income In case of restatement of balances due to the EC Reg. n. 1274 of 17 1 January 2009 adoption of new accounting standards, three December 2008 complete statements of financial position must be presented IAS 23 – Borrowing costs The capitalization of borrowing costs directly EC Reg. n. 1260 of 10 attributable to the construction of qualifying assets 1 January 2009 December 2008 becomes mandatory
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Accounting standards and Adopting EC Effective for annual Remarks interpretations Regulation periods beginning on: IAS 32 and IAS 1 – Puttable If contract provisions state that the repayment be instruments and obligations arising linked to the issuer’s operating results, the on liquidation instruments repayable at any time or upon EC Reg. n. 53 of 21 1 January 2009 liquidation are classified as equity instruments January 2009
IAS 39 e IFRIC 9 – Clarification It clarifies the accounting treatment of derivatives regarding assessment of embedded embedded in financial assets that are to be EC Reg. n. 1171 of 30 1 January 2009 derivatives reclassified to reflect the IAS 39 amendment of November 2009 October 2008
Improvements to IFRSs (approved Minor changes 1 January 2009 EC Reg. n. 70 of 23 by IASB in May 2008) (30 June 2009 for IFRS January 2009 5 amendments) New interpretations IFRIC 13 – Customer Loyalty It identifies the accounting treatment of loyalty Programs award credits granted by the company to customers EC Reg. n. 1262 of 16 1 January 2009 to acquire goods and services when buying December 2008 products/services (e.g., points)
For the sake of completeness, listed below are the standards that were endorsed by the European Commission in financial year 2009, but were not adopted in the financial statements as at 31 December 2009, and for which the Group did not opt for the early adoption, when permitted:
Accounting standards and Adopting EC Effective for annual Remarks interpretations Regulation periods beginning on:
Changes to existing standards It allows the recognition of minority goodwill (full goodwill). The acquisition or loss of control entail the IFRS 3 – Business combinations recognition of revenues and charges in profit or loss; EC Reg. n. 494 and 495 IAS 27 – Consolidated and 1 July 2009 upward or downward changes in interest without the of 3 June 2009 separate financial statements loss of control are considered transactions among owners and are recognized in equity It clarifies how to recognize certain rights when issued IAS 32 – Classification of rights EC Reg. n. 1293 of 23 instruments are denominated in a currency other than 1 February 2010 issues December 2009 the issuer’s functional currency It establishes the conditions necessary to allow the hedging of the inflation risk of a hedged item and it EC Reg. n. 839 of 15 IAS 39 – Eligible hedged items 1 July 2009 specifies that the hedged risk does not include the time September 2009 value of a purchased option New interpretations It defines how to recognize the rights and obligations IFRIC 12 – Service concession EC Reg. n. 254 of 25 under a concession based on the type of service 1 January 2010 arrangements March 2009 concession arrangement It provides guidance as to when revenue from the IFRIC 15 – Agreements for the construction of real estate should be considered as a EC Reg. n. 636 of 22 1 January 2010 Construction of Real Estate sale of goods (IAS 18) or as construction services (IAS July 2009 11) IFRIC 16 – Hedges of a net It clarifies how to adopt IAS 21 and IAS 39 in the event EC Reg. n. 460 of 4 investment in a Foreign that an entity hedges the foreign currency risk arising 1 July 2009 June 2009 operation from its net investments in foreign operations IFRIC 17 – Distributions of non- It establishes that non-cash assets distributed to owners EC Reg. n. 1142 del 26 1 November 2009 cash assets to owners must be measured at fair value November 2009 It establishes the accounting treatment of items of IFRIC 18 – Transfers of assets Property and equipment received from customers to EC Reg. n. 1164 of 27 1 November 2009 from customers provide the customers with ongoing supply of goods or November 2009 services
Finally, the adoption of the new standard IFRS 9, that had been initially scheduled by the end of 2009, was postponed. The new standard is part of the more general revision of IAS 39, based on a three-phase project: - Classification and measurement; - Impairment methodology; - Hedge accounting.
With respect to the first phase, in November 2009 IASB approved the new standard IFRS 9, dealing with the classification and measurement of financial assets. Basically, the new standard divides financial assets into three categories (“Financial assets designated at fair value through profit and loss through profit or loss”, “Financial assets measured at amortized cost”,
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“Instruments measured at fair value recognized in equity”) depending on the business model and on the characteristics of the instrument (“Basic loan future”). The new standard must be adopted in 2013. As mentioned above, the adoption process was suspended when on 12 November 2009 IFRAG, i.e., the committee that helps the European Commission with the technical evaluation of standards, stated that it needed more time to fully assess all the effects of the new standard, in particular with regard to the evaluation of the number of assets to be measured at fair value. As to the second phase of the revision project, in November 2009 IASB issued an Exposure Draft (ED), providing for the recognition of expected losses on financial assets (expected loss approach). This model differs from the current one, in which losses on financial assets are recognized only when the impairment event takes place (incurred loss approach). An ED for the third phase, Hedge Accounting, is scheduled for the first quarter of 2010.
Change in the method to measure the fair value of financial liabilities issued under fair value option
In first quarter 2009, more precisely as from the end of February, Banco Popolare’s credit spreads as reflected by the quotations of Credit Default Swap (CDS) suddenly soared, driven by extraordinary factors, associated among others with the events involving the subsidiary Banca Italease and its restructuring assumptions. This led to an increasing illiquidity on the CDS market with respect to Banco Popolare, which was particularly evident at the end of March. At this point it was questionable whether prices determined on the basis of a measurement technique which considers only CDS quotations as inputs reflecting creditworthiness could effectively be representative of a fair value. In view of the unique illiquidity on the CDS market and of a confirmed pricing policy for the repurchase of financial liabilities on the secondary market of retail customers aiming at adopting credit spreads in line with those outstanding at the time of issue, starting from the first quarter operating report as at 31 March 2009 some changes were introduced to the method used to measure the fair value of financial liabilities issued by the Group and designated at fair value, in particular the method to calculate changes in Banco Popolare’s creditworthiness. With regard to financial liabilities sold to retail customers, the change entailed the use of prices actually quoted on the secondary market of securities issued, setting aside the use of valuation methods and maximizing the use of actual prices directly observable on the market considered to be active. In other words, when preparing this annual report, the fair value measurement did not consider the changes in creditworthiness which occurred since the issue date if, based on the observed market practice, transaction prices did not undergo any specific adjustment to price in the creditworthiness; these are issues destined to retail customers from a substantial viewpoint. As a result of this change, 211 million were charged to income for the period, corresponding to the profit recognized in financial years 2008 and 2007 on the fair value measurement of the financial liabilities under examination. As reported in the annual report as at 31 December 2008, the above losses would have been in any case recognized in the P&L of future financial years if the liabilities had not been repurchased at a price in line with their book values. As to financial liabilities sold to institutional customers, whose fair value measurement includes among its significant factors the change in Banco Popolare’s creditworthiness, the same measurement method in use on 31 December 2008 was confirmed. For these issues, the charge debited to income in 2009 as a result of the upgrading of Banco Popolare’s creditworthiness totaled 139.5 million. The net loss recognized in 2009 in “110. Profit or loss on financial assets and liabilities measured at fair value” associated with the effects of Banco Popolare’s creditworthiness, as specified above, came in at 350.5 million.
Exercise of the put option issued in favor of Fondazione Cassa di Risparmio di Lucca
As described in the above Sub-section 4 – Noteworthy events after the balance sheet date, on 31 December 2009 Banco Popolare had an option contract outstanding with Fondazione Cassa di Risparmio di Lucca based on which the Foundation can exercise a put option on 143,997,909 common shares of Cassa di Risparmio di Lucca Pisa e Livorno (corresponding to 20.39% of the share capital) in exchange for equity instruments issued by companies belonging to Gruppo Banco Popolare, in this case shares of Credito Bergamasco. On 11February 2010, the Foundation fully exercised the put option put, and the settlement is due by 5 July 2010. From an accounting viewpoint, the deal did not give rise to any recognition in the consolidated financial statements as at 31 December 2009 (except for the commitment made upon purchasing the shares), as it was considered as a derivative underlying the exchange two equity instruments, both considered representative of a residual interest in the Group’s net assets. At the date of execution of the contract, the impact on the consolidated financial statements shall depend upon the carrying value of the Investments in associates and companies subject to joint control. Under the contract, changes in the interest held in Cassa di Risparmio di Lucca Pisa e Livorno and in Credito Bergamasco must be recognized as if it were equity transactions among owners, as the Group will retain control over both companies. In this case, the book values of the shareholders’ equity of the Group and of third parties must be adjusted to reflect the changes in the percentage interest and the difference between the acquired and the sold third party equity shall be directly recognized as a change in equity. Based on the carrying amounts posted in the consolidated financial statements as at 31 December 2009 and on the estimated change in equity interest, the exchange should cause a decrease in the Group’s equity of about 100 million, owing to the higher carrying amount given to the shares of Credito Bergamasco to be assigned to third parties as compared to the decrease in third party equity associated with the sale of Cassa di Risparmio di Lucca Pisa e Livorno to the Group.
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Description of main changes introduced by the 1st update of 18 November 2009 of Circular n. 262 – change in classification criteria
On 18 November 2009 the Bank of Italy published the 1st update of Circular n. 262/2005 on financial statements and compilation rules.
The update reflects the new standards and changes to existing standards, described in the previous paragraph “Changes to accounting standards adopted by the European Commission”. In particular: - the revision of IAS 1 called for the introduction of a new statement called “Consolidated statement of comprehensive income” and of a new section of the consolidated explanatory notes - Section D – to provide detailed information (amounts before and after tax, fair value changes, recognition through profit or loss); - changes to IFRS 7 regarding the fair value hierarchy required the creation of a specific sub-section “A.3 – Fair value disclosure”, in Section A – Accounting policies, and to add the itemization of the level breakdown in the tables illustrating the composition of financial assets and liabilities portfolios measured at fair value. The Bank of Italy requires the same level of detail also with respect to “Investments held to maturity” on the assets side, and to “Securities issued” on the liabilities side; - the disclosure on reclassified securities out of portfolios of “financial assets held for trading” and “financial assets available for sale”, as provided by the amendment of IAS 39 in October 2008, was incorporated in sub-section “A.3 – Fair value disclosure”, in Section A – Accounting policies.
In addition, the changes introduced by the update are a follow-up to the requests raised by the Italian Banking Association (ABI) aiming at rationalizing and simplifying financial disclosure and at providing clarification to specific interpretational issues. Described below are the main changes that were introduced, and that, with respect to the Group, had an impact on the financial statements or on the explanatory notes, requiring a reclassification of the prior year’s data to make a like-to-like comparison with the current year possible. For this reason, the balance sheet balances or the details shown in the explanatory note tables may differ from those published in the 2008 annual report as approved by the Shareholders’ Meeting.
Description of the main changes having an impact on balance sheet items To comply with the compilation rules for bank financial statements, the following reclassifications were made for the 2008 annual report: - some tax items, that were previously tied in with “Tax assets / Tax liabilities”, were posted in “Other assets / Other liabilities”, as it was specified that the first aggregate must include only assets/liabilities recognized under IAS 12, i.e., income tax-related items; - some payables and receivables linked to the provision of financial services (for ex. distribution of financial products) that could be recognized in the residual items “Other assets / Other liabilities” have been restated in the items “Due from customers/banks”, “Due to customers/banks”, depending on the counterparty; - proceeds from periodic or variable expenses charged to customer checking accounts, that were previously posted in “Other revenues” if referring to payable checking accounts, were recognized in “Commission income”, unless they represented a refund of incurred expenses; - in “Administrative expenses” some charges were more specifically tied in to the sub-item “b) other administrative expenses”, instead of sub-item “a) personnel expenses”.
In addition, the Circular specified that performance bonuses for the year but to be paid in the following year must be recognized in “personnel expenses” through the balance sheet item “other liabilities”. In view of the rationale underlying this requirement, in the 2009 annual report liabilities associated with employee provisions were tied in to “other liabilities” or to “provisions for risks and charges – other”, depending on the time the payment is due, which in turn depends on whether the obligation is certain or not. In particular, “other liabilities” incorporate obligations that are certain, and whose payment is generally due the following year, while the item “provisions for risks and charges – other” includes obligations whose amount or contingency date are considered uncertain at the date of preparation of this report, in line with IAS 37. In both cases, the P&L offset account is “personnel expenses”, giving a greater weighting to their substantial nature. Based on these criteria, for comparability reasons the data of the prior year have been restated accordingly, mostly in “other liabilities". In order to give an idea of the quantitative impacts of the above reclassifications, the attachments include a reconciliation between the prior year’s restated balance sheet and income items and the original data published in the 2008 annual report. Moreover the income statement was changed to retrospectively reflect the P&L effects linked to the equity investment in Banco Popolare eská Republica, which on 31 December 2009 was classified as “discontinued operation”, in compliance with IFRS 5.
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Description of the main changes having an impact on details to be provided in the explanatory notes In general, in the explanatory notes the disaggregation of consolidated data in operational groups (banking group, insurance companies, other companies) was eliminated and replaced by the obligation to provide this detail.
In addition, described below are the main changes introduced by the Circular that had an impact on the disclosure details required to be shown in the tables of the Explanatory Notes, considering that: - assets sold and not derecognized and the associated liabilities, and impaired assets that in the 2008 annual report had to be shown separately in the table itemizing the balance sheet and income statement data, must now be posted based on their original deal type. Disclosure on credit quality and on selling transactions is included in Section E of the Explanatory Notes. Accordingly, we redefined the tables with the breakdown by type of instrument, the annual changes and the breakdown by debtor/issuer, if required, for the following sections of the balance sheet assets: Section 2 – Financial assets held for trading – item 20; Section 3 – Financial assets designated at fair value through profit and loss – item 30; Section 4 – Financial assets available for sale – item 40; Section 5 – Investments held to maturity - item 50; Section 6 – Due from banks – item 60; Section 7 – Due from customers – item 70 For the tables of section 7 we also specified performing assets and impaired assets for each deal type. In addition, payables associated with the disposal of financial assets, that do not meet the IAS 39 requirements due to their full derecognition, have been tied in to “other payables”, with the exception of repurchase agreements executed with treasury shares that are posted in their specific item “Repurchase agreements”, together with similar transactions executed with securities from reverse repurchase agreements. In compliance with the above instructions, we restated the prior year data referring to “Sub-section 1 – Due to banks – item 10” and “Sub- section 2- Due to customers”. - for the tables of “Sub-section 1 – Interest income/expense - items 10 and 20”, 2008 data have been stated to take into consideration the elimination of the details required for assets sold and not derecognized and associated liabilities, and impaired assets. In addition, spreads on derivatives operationally linked to trading assets and liabilities or derivatives linked with the fair value option according to accounting requirements must be posted, depending on their algebraic sign, as interest income or interest expense in “financial assets held for trading – other transactions” and “financial liabilities held for trading – other transactions”. As a result, it was necessary to restate the 2008 spreads accordingly, as previously they were generally posted in “hedging derivatives” ; - derivatives disclosure has been rationalized and combined prevailingly in Section E; Section B of the explanatory notes continues to include information on the grand totals. In the tables in Section E, Sub-section 2 – Market risks, 2.4 Derivative instruments, comparative information on notional and fair values shown in the 2008 annual report was restated, when required, to take into account the new breakdown of “underlying assets / types of derivatives”. - the disclosure required in Section E, Sub-section 1 – Credit risk, “A. Credit quality” and “Distribution and concentration of credit exposures”, now covers only credit exposures. As a result, equity securities and UCITS units exposures included in items 20, 30, 40 of the balance sheet assets are no longer shown here. Based on these specifications, we restated the prior year’s comparative data. For the sake of completeness, note that as a footnote to balance sheet tables it is now necessary to detail the equity securities issued by entities classified as being impaired or substandard by the bank, specifying accrued write-downs and write-downs carried out during the year.
Update of Circular n. 272 “Supervisory Reports” of 10 December 2009 – change in the definition of “Objective substandard loans” and “Past dues and/or overdrafts” –
With respect to credit quality, the Bank of Italy has recently changed the definition of impaired loans to be used for statistical supervisory reports for banks on an individual and on a consolidated basis. The new definitions are bound to be consistently applied also to classify balance sheet loans. The introduced changes refer in particular to the classification criteria of “past dues and/or overdrafts” and of “objective substandard loans”, that were duly adopted as from the annual report of 31 December 2009.
The most significant impacts on the 2009 annual report come from the new wording of the criteria to identify “past dues and/or overdrafts” (so called past dues).
According to the previous regulations, for most of the prudential portfolios past dues and/or overdrafts were determined along the “single borrower” approach, which in summary required: - the presence of an overdraft for more than 180 uninterrupted days; - the possibility to net outstanding past dues and overdrafts on some lines of credit with available margins on other lines of credit granted to the same borrower; - the presence of relevant thresholds: the total exposure towards a borrower had to be classified as past due and/or overdraft if at the supervisory report date, the greater of the two following values was equal or higher than the 5% threshold:
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average of the past due and/or overdrawn portion out of the entire exposure measured on a daily basis in the previous quarter; past due and/or overdraft portion out of the entire exposure as at the date of the supervisory report).
This recent regulation, applicable to banks that calculate the capital requirement for credit and counterparty risk along the standardized method (Basel II), as it is the case in Gruppo Banco Popolare, requires that real estate-backed loans be considered as “past dues and/or overdrafts” based on a “single transaction” approach. Single loans that have been past due and/or overdrawn uninterruptedly for more than 90 days (instead of 180 days) must be considered past dues; no netting is permitted with available margins on other lines of credit granted to the same borrower or relevant thresholds, as with the “single borrower” approach.
The introduction of more stringent criteria drove loans classified as “past dues and/or overdrafts” on 31 December 2009 up; this must be taken into due consideration when assessing the evolution of credit quality as compared with the situation on 31 December 2008, which was based on the previous criteria.
A.2 – MAIN ACCOUNT ITEMS
The annual report as at 31 December 2009 was prepared by adopting the same accounting standards used to prepare the consolidated financial statements of the year before, except for changes illustrated in sub-section 5 – Other aspects, A.1 In General.
Below are the applied accounting standards, illustrated by account item.
1- Financial assets held for trading
This category includes only debt and equity securities, UCITS units, the positive value of derivatives that are held for trading, as well as derivatives related to assets/liabilities measured at fair value. Derivative contracts include those embedded in structured financial instruments that have been recognized separately from their host contract because: their economic characteristics and risks are not closely related to those of the host contract; a separate instrument with the same terms as the embedded derivative would meet the definition of derivative; the hybrid instruments to which they belong are not measured at fair value with changes in fair value through profit or loss.
Financial assets are initially recognized on the settlement date in case of debt and equity securities, and on the subscription date for derivative contracts. Upon their initial recognition, financial assets held for trading are measured at fair value, which generally corresponds to the consideration paid, excluding transaction costs or proceeds that are directly associated to the financial instruments, that are recognized through profit or loss. Any embedded derivative in complex contracts, which is not closely related to its host contract and qualifies as derivative, is separated from its host contract and measured at fair value, while the host contract is accounted for along its relevant accounting standard.
Subsequent to initial recognition, financial assets held for trading are measured at fair value, with recognition of changes through profit or loss.
To determine the fair value of financial assets quoted on an active market, quoted market prices are used. In the absence of an active market, estimate methods and valuation models are used, that take into account all the risk factors associated with the instruments and that are based on market inputs, such as: methods based on the fair value of other quoted instruments that are substantially the same, discounted cash flow analysis, option pricing models, recent arm’s length market transactions. For further details, please see paragraph “18- Other information, Fair value measurement of financial instruments”.
In case no reliable estimate of the fair value is possible in keeping with the above guidelines, equity instruments and related derivatives are measured at cost and are written down in case of impairment losses. Said impairment losses cannot be reversed.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred. Trading profits or losses and gains or losses as a result of the trading portfolio measurement are recognized in income in the item “80. Profit (losses) on trading”, except for income or loss on derivatives connected with the fair value option that are classified in item “110. Profit or loss on financial assets and liabilities measured at fair value”.
Reclassifications to other classes of financial assets (Loans, Financial assets available for sale, Investments held to maturity) are possible only in rare circumstances or if certain conditions are met as explained in the following paragraph “18- Other information, Reclassifications among financial assets portfolios (IAS 39 amendment)”.
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2- Financial assets available for sale
This category includes non-derivative financial assets not designated as Loans, Held-for-trading assets, Held-to-maturity assets or Assets measured at fair value. In particular, this category includes also shareholdings that are not held for trading and do not qualify as interests in subsidiaries, associates and joint ventures, including private Investments in associates and companies subject to joint control, as well as the portion of subscribed syndicated loans that had been designated at origin as available for sale. Financial assets are initially recognized on the settlement date in case of debt and equity securities, and on the origination date in case of other financial assets not classified as loans. Upon their initial recognition, assets are measured at cost, meaning their fair value, including transaction costs or proceeds directly associated with the instrument itself. If recognition follows a reclassification of Investments held to maturity or of Financial assets held for trading, assets will be recognized at their fair value at the time of reclassification, which shall represent the new amortized cost for debt securities. Recognition following a reclassification of “Financial assets held for trading” can take place only in rare circumstances and in any case only if the asset is no longer held for trading in the short term as described in the following paragraph “18- Other information, Reclassifications among financial assets portfolios (IAS 39 amendment)”.
Subsequent to initial recognition, available-for-sale assets continue to be measured at fair value with recognition of the corresponding amortized cost value through profit or loss, while profits or losses generated by changes in fair value are recognized in a specific Equity reserve until the financial asset is derecognized or an impairment loss is recognized, and the entire difference between the carrying value and the sale price or fair value is recognized through profit or loss. The fair value is measured using the same criteria illustrated for financial assets held for trading. In case no reliable estimate of the fair value is possible in keeping with the above guidelines, equity securities and related derivatives are measured at cost and written down in case of impairment. Impairment tests to assess if there is an objective evidence of impairment are conducted at each balance sheet or interim reporting date. For further details on events reflecting an impairment loss, please see the following paragraph “18- Other information, Financial assets impairment test”.
For equity securities, a possible sign of impairment is represented by a significant or prolonged reduction in fair value below the original book value. In particular, the Group considered a fair value reduction to be significant when in excess of 30% and prolonged when it progressed without interruptions for 24 months. Barring exceptional circumstances, the violation of one of the two thresholds requires the security to be impaired, causing a P&L impact. In the absence of a violation of the above automatic thresholds, qualitative analyses are carried out to check for impairments in case of : debt securities that show a fair value decrease greater than 20% of the original book value, discounted of amortized cost; equity securities that show a fair value decrease greater than 20% of the original book value or by a fair value loss protracting for more than 12 months.
In the latter cases, a difference between the fair value and the carrying amount is not by itself sufficient to conclude that an impairment loss has occurred. This evidence must be supplemented by a qualitative analysis, to identify possible negative effects, that may lead to believe that the assets’ carrying value is not recoverable in its entirety.
In case of objective evidence, the impairment loss is charged to income as a cost. If the reasons for an impairment loss are no more valid due to an event occurring after the impairment was originally recognized, write-backs are recognized through profit and loss if referring to debt securities or loans, or else to a specific equity reserve in case of equity securities. For debt securities and loans, the write-back in any case cannot exceed the instrument’s amortized cost in the absence of previous adjustments. Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred. Financial assets available for sale can be reclassified as “Investments held to maturity” if: - a change occurs in the intent or ability to hold the asset to maturity; - no reliable fair value measurement is available (a rare circumstance); - the tainting rule period has expired and the portfolio of Investments held to maturity can be reinstated.
It is also possible to carry out a reclassification in the “Loans” portfolio, when conditions are met as described in the following paragraph “18- Other information, Reclassifications among financial assets portfolios (IAS 39 amendment)”.
3- Investments held to maturity
This category includes debt securities with fixed or determinable payments and fixed maturity date, that the Group has the positive intention and ability to hold to maturity. If a held-to-maturity investment must be sold as a consequence of a reconsideration or of an event beyond the entity’s control, the asset is reclassified as available for sale.
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Financial assets are initially recognized on the settlement date. Upon initial recognition, financial assets designated as held to maturity are measured at cost, i.e., the fair value of the exchanged amount, including any directly associated costs or revenues. If the recognition in this category follows a reclassification from Assets available for sale or Financial assets held for trading, the fair value of the asset at the time of reclassification is recognized at the asset’s new amortized cost. For reclassifications of Financial assets held for trading, which occurs only in rare circumstances, please refer to the following paragraph “18- Other information, Reclassifications among financial assets portfolios (IAS 39 amendment)”.
Subsequent to initial recognition, Investments held to maturity are measured at amortized cost, using the effective interest method. Gains or losses from fair value changes in assets held to maturity are recognized through profit and loss at the time of derecognition. The assessment of objective evidence of impairment losses is carried out at each balance sheet or interim reporting date. In case of objective evidence, the impairment is computed as the difference between the asset’s carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The impairment loss is recognized through profit and loss. If the reasons for an impairment loss are no more valid due to an event occurring after the impairment was originally recognized, write-backs are recognized through profit and loss.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred. The only possible reclassification out of this portfolio is to the portfolio of “Financial assets available for sale”. If a significant amount of held-to-maturity investments are sold or transferred before their maturity, the entire portfolio must be reclassified as available for sale and it is then prohibited to classify any assets as held-to-maturity for the current and next two full annual financial periods (so called tainting rule), unless the sales and the reclassifications: - are so close to maturity or to the option date of the financial asset that the fluctuations of the interest rate on the market would have no material effect on the fair value of the financial asset; - occur after having received practically all the original capital of the financial asset; - are attributable to an isolated event, out of the company’s control, non recurring and that could not reasonably be foreseen, for example a material downgrading of the creditworthiness of the entity who issued the financial asset.
4– Loans
Loans include loans to customers and to banks, either originated or acquired, with fixed or determinable payments, that are not quoted in an active market and that were not designated from inception as financial assets Available for sale. Loans include receivables, loans originating from financial leases and securities acquired as a result of a private placement or subscription, with fixed or determinable payments, not quoted on an active market. As to loans acquired without recourse, they are classified as loans, provided there are no contract provisions significantly changing the risk exposure of the assignee company. This category also includes “repurchase agreements” requiring the security to be sold at a stated time and “securities lending” transactions backed by the deposit of a collateral in cash. Said transactions are recognized as loans and do not give rise to any change in the proprietary portfolio.
Loans are initially recognized on the origination date or, in case of debt security, on the settlement date, based on the fair value of the financial instrument, the recognition being equal to the extended amount, or subscription price, including costs/revenues directly associated to the individual loan and that can be determined from the start of the transaction, although settled later on. Costs are excluded, that, although carrying the above characteristics, are refunded by the borrowing counterparty or fall under normal internal administrative costs. If the recognition into this category is due to a reclassification from Financial assets available for sale or held for trading, the recognition value shall correspond to the fair value at the date at which the reclassification was approved, and this shall be considered the asset’s new amortized cost. For further details, please see the following paragraph “18- Other information, Reclassifications among financial assets portfolios (IAS 39 amendment)”.
For loans that are not negotiated at arm’s length market conditions, the fair value is computed using specific valuation techniques; the difference with the extended amount or the subscription price is recognized directly in income.
After initial recognition, loans are valued at amortized cost, equal to the initial recognition value decreased/increased by capital repayments, write-down/write-backs and the amortization – computed along the effective interest rate method – of the difference between the extended amount and the amount repayable at maturity, typically comparable to the costs/revenues directly associated to the individual loan. The effective interest rate is determined by computing the rate that equals the loan’s present value of future principal and interest cash flows, to the extended amount including costs/rewards associated with the loan. This accounting method, based on a financial logic, spreads the economic effect of costs/revenues throughout the loan’s expected residual life. The amortized cost method is not used for short-term loans, whose limited life span makes the discounting effect immaterial. Said loans are measured at historical cost and their costs/revenues are recognized in profit and loss linearly throughout the loan contract life. The same measurement criterion is used for demand loans.
At each balance sheet or interim report date, loans are reviewed to identify loans that due to events occurred after their initial recognition, show objective evidence of an impairment loss, as explained in the following paragraph “18- Other
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information, Financial assets impairment test”. These are loans classified as non-performing, substandard or restructured under the current rules of the Bank of Italy, in line with IAS requirements.
Said impaired loans undergo an analytical, or individual valuation, whereby the write-down of each loan is equal to the difference between the loan’s book value at the time of measurement (amortized cost) and the present value of expected future cash flows, using the original effective interest rate. Expected cash flows factor in the expected recovery time, the estimated realizable value of collaterals, and possible costs incurred to recover the credit exposure. The cash flows of loans that are expected to be recovered within a short period of time are not discounted. The original effective interest rate of each loan remains unchanged over time, unless a loan restructuring or workout agreement has been negotiated that changes the contractual interest rate, or unless in practice the transaction bears no contractual interest.
The write-down is charged to income. The original loan value is reinstated in following financial years whenever the reasons for their original write-down no longer apply, provided said evaluation is objectively correlated to an event occurred after the write-down. Write-backs are recognized through profit or loss and in any case cannot exceed the loan’s amortized cost had no write-downs been carried out in the past.
Impaired loans include also past dues, that is, loans reporting uninterrupted overdrafts or payment delays, automatically identified by the Group’s IT procedures, based on the current rules established by the Bank of Italy. The impairment of this type of loans, albeit measured along a forfeit/statistical calculation, is reported as “Specific write-downs”, in compliance with the instructions set out in the Bank of Italy Circular n. 262.
Individual loans that give no objective evidence of impairment, that is generally speaking performing loans, including loans to counterparties residing in countries at risk, undergo a collective valuation. This valuation is carried out by loan classes carrying similar credit risk characteristics and their percentage loss is estimated by taking into account their historical loss experience, adjusted on the basis of current observable data, so as to estimate the loss latent in every loan group. Collectively determined write-downs are charged to income. At each balance sheet and interim report date, any additional write-down or write-back is recalculated differentially making reference to the entire performing loan book on the same date.
Sold loans are derecognized only if the sale entails the substantial transfer of all risks and rewards associated to the loans. On the contrary, should the risks and rewards associated with the sold loans be retained, the loans will continue to be recognized, although from a legal point of view the loan ownership has been actually transferred. In case the substantial transfer of risks and rewards cannot be verified, loans are derecognized if control of the loans has been relinquished. Otherwise, if be it even a partial control has been retained, the loans will continue to be recognized to the extent of the Group’s residual involvement, based on the exposure to the changes in value of the sold loans and to their changes in cash flows. Finally, sold loans are derecognized in case the contractual rights to receive the relevant cash flows are retained, with the concurrent obligation to pay said flows, and nothing more, to third parties.
5- Financial assets designated at fair value through profit and loss
A financial asset is measured at fair value through profit or loss upon initial recognition only when: 1. it is a hybrid contract containing one or more embedded derivatives, and the embedded derivative significantly changes the financial flows that would otherwise be expected from the contract; 2. the measurement at fair value through profit or loss makes it possible to provide a more reliable information as: i. it eliminates or considerably reduces the inconsistent treatment, that would otherwise be caused by measuring assets or liabilities or recognizing the associated profit and loss on a different basis; ii. a group of financial assets, or financial liabilities, or both is managed and its performance measured at fair value based on a documented risk management or investment strategy, and group reporting is provided internally to managers in charge of strategic functions based on this approach.
These financial assets are designated to be measured at fair value on initial recognition, i.e., on the settlement date. Initial revenues and costs are directly recognized through profit or loss. The fair value is measured based on the criteria illustrated for Financial Assets held for trading.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
6- Hedges
Assets and liabilities include hedging financial derivatives, which at the balance sheet date reported a positive and negative fair value, respectively.
A hedge aims at neutralizing potential losses associated with a given financial instrument or a group of financial instruments, attributable to a specific risk, by offsetting them with the profit associated with a different financial instrument or group of financial instruments in case that given risk should actually materialize.
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IAS 39 provides for the following categories of hedges: a fair value hedge, that is, a hedge of the exposure to changes in fair value of a recognized asset or liability attributable to a particular risk; a cash flow hedge, that is, a hedge of the exposure to variability in cash flows attributable to a particular risk associated with a recognized asset or liability; a hedge of foreign currency transactions or operations; fair value macro-hedging, to reduce fair value fluctuations, attributable to the interest rate risk, of a monetary amount deriving from a financial asset and liability portfolio (including “core deposits”). Net amounts deriving from the mismatch of assets and liabilities cannot be macro-hedged.
With regard to the consolidated financial statements, only instruments involving an external counterparty to the Group may be designated as hedging instruments. Any result associated with intercompany internal transactions is eliminated.
The derivative instrument can be designated as a hedge provided that the hedging relationship between the hedged and the hedging instruments is formally documented, and it is effective at the time of origination and prospectively throughout its entire life. The hedge effectiveness depends on the extent to which the changes in the fair value or in the expected cash flows of the hedged item are actually offset by those of the hedging instrument. As a result, effectiveness is measured by comparing said changes, while considering the aim pursued by the company when the hedge was established. A hedge is effective (within a range of 80 to125%) when changes in the fair value (or in the cash flows) of the hedging instrument neutralize almost completely the changes in the hedged item attributable to the hedged risk. Hedge effectiveness is assessed at each reporting date, using: prospective tests, that justify the application of hedging accounting in that they demonstrate its expected effectiveness; retrospective tests, demonstrating the hedge’s actual effectiveness achieved over the period being examined. In other words, they measure to what extent actual results diverge from a perfect hedge.
Should the above tests give evidence of a hedge ineffectiveness, both retrospectively and prospectively, hedge accounting, as described above, is discontinued. The hedged instrument is recognized in its class of belonging at a value equal to its fair value at the time ineffectiveness triggered in, and goes back being measured based on the criteria in use in its original class of belonging.
Hedges are measured at fair value; in particular: in case of a fair value hedge, the change in fair value of the hedged item is offset against the change in fair value of the hedging instrument. Said offset is recognized by recognizing in profit or loss the value changes referring both to the hedged item (referring to the changes generated by the underlying risk factor), as well as to the hedging instrument. Any resulting difference, which reflects the partial hedge ineffectiveness, represents a net income effect. The recognition of fair value changes through profit or loss referring to the hedged item, attributable to the risk being hedge, is applied even when the hedged element is a financial asset available for sale; in the absence of a hedge, the change would be recognized through equity; in case of cash flow hedge, the portion of changes in the fair value of the derivative that are determined to be an effective hedge is recognized directly through equity, while it is recognized through profit and loss only when the hedged cash transaction affects profit or loss gives rise to changes in the cash flows to be offset. The portion of the profit or loss of the hedge that is considered ineffective is recognized through profit or loss. Said portion is equal to the difference between the cumulated fair value of the hedge and the cumulated fair value of the hedged instrument; in any case, the variations in fair value between the hedged item and the hedge must lie within the 80%-125% range; hedges of foreign currency transactions are accounted for similarly to cash flow hedges.
Hedging assets and liabilities are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset or liability is disposed of, and all risks and rewards of ownership of the asset have been substantially transferred.
7- Investments in associates and companies subject to joint control
This item includes interest held in associates or jointly controlled companies, which are carried at equity. Associate companies are enterprises on which the Group has a significant influence and are not subsidiaries. By significant influence we assume all cases in which the Group holds 20% or more of voting the power of the investee, and, irrespective of the shareholding percentage, whenever it can partake in business and financial decisions of the investees. Jointly controlled companies are enterprises where the joint control is based on a contract or other agreement whereby it is necessary to obtain the unanimous consensus of all the parties sharing the control to make strategic financial and operating decisions.
Financial assets are initially recognized on the settlement date. Upon initial recognition, financial assets classified under this category are recognized at cost. The book value is subsequently increased or decreased to reflect the share of profit or loss of the investees attributable to the Group generated after the acquisition date, through the consolidated income statement item “240. Profit (Loss) on Investments in associates and companies subject to joint control”. Dividends received from an
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investee are deducted from the book value of the equity investment. Should it be necessary to carry out write-downs caused by changes in shareholders’ equity of the investee that have not been recognized in income by the latter (for ex. as a result of the fair value measurement of financial assets available for sale, revaluation of Property and equipment), the share of the above changes attributable to the Group is recognized directly in the equity item “140. Valuation reserves”.
If there is any indication that an investment in an associate may be impaired, the recoverable value of the associate is estimated, i.e., the higher of the fair value, net of selling costs, and its value in use. The value in use is calculated by discounting to present value the future cash flows that the equity investment could generate, including the final disposal value of the investment. Should the resulting recoverable amount be lower than the carrying amount, the difference is recognized in profit and loss. Whenever the reasons of the impairment loss are no longer valid due to an event occurring after the recognition of said impairment, write-backs are recognized through profit and loss. Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
8- Property and equipment
Tangible assets (PPE) include land, operating property, real estate investments, technical plants, furniture, fittings and equipment of any type. Said tangible assets are held to be used for the production or provision of goods and services, to be rented to third parties, or for administrative use, and they are expected to be used for more than one period. This item includes also assets used under finance lease contracts, provided that the legal ownership of the assets rests within the leasing company. Said item also includes improvements and incremental expenses incurred on third party assets, whenever they are represented by identifiable and distinguishable tangible assets.
Tangible assets are initially recognized at cost, which includes the purchase price and all expenditures directly attributable to the acquisition of the item and to bring the asset to working conditions. Non-recurring maintenance costs entailing probable future economic benefits are included in the asset’s carrying amount, while other repairs and maintenance are charged to income. Leasehold improvements for rented buildings are capitalized under the rationale that throughout the lease contract life the lessee retains the control over the assets and may obtain future economic benefits from it. Leasehold improvements of rented buildings are depreciated over a period not exceeding the lease contract life.
Tangible assets, including “non-operating” property, are measured at cost, less any depreciation and impairment. Tangible assets are systematically depreciated throughout their useful life, along the straight-line method, with the exception of: land, whether purchased separately or as part of the buildings standing on it, in that land has an unlimited life. In case its value is embedded in the value of the buildings built on it, in virtue of the application of the approach by components, land is considered a separate asset from the building; the separation between the land and the building values is based on the survey of independent experts; works of art, because the useful life of a masterpiece cannot be estimated and its value normally is destined to increase with time.
At each balance sheet date, if there is an indication that an asset may be impaired, the asset’s carrying amount is compared with its recoverable amount, that is equal to the higher of the asset’s fair value, net of sale costs, and its value in use, meaning the present value of future cash flows originated by the asset. Any write-downs are charged to income. Whenever the reasons of the impairment loss are no longer valid, write-backs are recognized, that must not exceed the asset’s value had no impairment taken place in the past, net of accrued depreciation.
A tangible asset is derecognized from the balance sheet at the time of disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
9- Intangible assets
Intangible assets are non-monetary, identifiable and non-physical assets, owed to be used for several years. Intangible assets are carried at cost, adjusted to account for accessory charges, only if it is likely that the future economic benefits attributable to the asset will be realized, and if the cost of the asset can be measured reliably. Otherwise, the cost of the intangible asset is recognized through profit or loss in the year in which it was incurred.
Goodwill is the positive difference between the cost of acquisition (including accessory charges) and the fair value of the acquired assets and liabilities. It can be recognized as intangible asset if said difference is representative of future economic benefits to be generated by the subsidiary (goodwill). Should this difference be negative (badwill or negative goodwill) or in the assumption that goodwill is not justified by the anticipated future economic benefits generated by the subsidiary, the difference is directly recognized through profit or loss. Goodwill is not amortized, and it must be regularly tested for impairment to verify the adequacy of its book value. Goodwill must be tested any time there is evidence of impairment, and in any case at least once a year. To this end, the cash-generating unit to which the goodwill is allocated is identified. The impairment amount is calculated based on the
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difference between the goodwill’s carrying amount and its recoverable amount, if lower. Said recoverable amount is equal to the higher of the fair value of the cash-generating unit, net of selling costs, and its value in use. The value in use is the current value of future financial flows expected from cash-generating units to which goodwill was allocated. Any resulting write-down is charged to income. Subsequent write-backs cannot be recognized.
Other intangible assets are recognized as such if they are identifiable and stem from legal or contract rights. The cost of intangible assets is amortized on a straight-line basis over their useful life. If their useful life is not definable, amortization will not be applied, and periodically the assets will be tested for impairment. At each balance sheet date, if there is evidence of impairment losses, the asset’s recoverable amount is estimated. The loss, which is charged to income, is equal to the difference between the asset’s carrying amount and its recoverable amount.
An intangible asset is derecognized from the balance sheet at the time of disposal and whenever no more future economic benefits are expected.
10- Non-current assets held for sale and discontinued operations and liabilities associated with non-current assets held for sale and discontinued operations.
This item includes non-current assets/liabilities that are available for immediate sale and their sale is highly probable, and discontinued operations that either have been disposed of or are held for sale. In particular, these assets/liabilities are measured at the lower of fair value less costs to sell and their carrying amount. Any gains or charges are recognized in profit or loss in a separate item net of tax effect. In case the disposal groups are depreciable, starting from the year they have been classified as non-current assets held for sale, the depreciation process is discontinued. The associated revenues and charges are recognized in profit or loss in a separate item net of tax effect when they refer to discontinued operations; in this case the same P&L information is disclosed in a separate item also for the comparative periods shown in the report.
11- Tax assets and liabilities
These items include current and deferred tax assets, and current and deferred tax liabilities.
Income tax, calculated in compliance with current tax regulations, is recognized through profit and loss based on the accrual principle, in line with the method used to recognize the costs and revenues that generated it. Taxes on items credited or debited directly to equity represent an exception, as they as well are consistently recognized directly through equity.
Deferred tax assets and liabilities are based on temporary differences arising between the tax base of assets and liabilities and their carrying amounts, without any time limits. Deferred tax assets are recognized in the annual or half-year report when it is probable that they can be recovered, measured based on the ability of the company concerned and of the Group, as a result of the so called “tax consolidation” option, to continue to generate positive taxable income in future financial years. Deferred tax liabilities are recognized in the annual or half-year report, with the exception of assets recognized at an amount higher than the value recognized fiscally and of reserves under tax suspension, where it is reasonable to believe that no operations will be performed deliberately that would trigger taxation. Recognized deferred tax assets and liabilities are systematically measured to account for any regulatory or tax rate changes, as well as for any changes in the position of the single Group companies. Current tax assets and liabilities are shown as a net balance in the balance sheet, in case the settlement is executed based on the net balance, owing to the existence of a legal right to netting. Deferred tax assets and liabilities are shown as open balances, without any kind of netting. Tax liabilities include earmarked funds, in compliance with IAS 37, set aside to provide for charges that may be generated by already notified tax audits or in any case outstanding disputes with legal authorities.
12- Provisions for risks and charges
Provisions for risks and charges include liabilities whose amount or maturity are uncertain and are recognized only if: - there is a present obligation (legal or constructive) as a result of past events; - it is likely that an outflow of resources will be required to produce economic benefits to settle the obligation; - the obligation amount can be reliably estimated.
The item “Provisions for risks and charges” includes provisions for long-term benefits and post-employment benefits covered by IAS 19 as well as provisions for risks and charges covered by IAS 37. Provisions for risks and charges do not include write-downs caused by an impairment of guarantees given, and equated credit derivatives under IAS 39, recognized under item “Other liabilities”.
The sub-item “other provisions for risks and charges” includes provisions for possible losses on lawsuits, including clawback actions, estimated outlays for customer complaints regarding securities brokerage, as well as a reliable estimate of other outlay due to any other legal or implicit obligation outstanding at the balance sheet or interim report date.
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Whenever the time factor is significant, provisions are discounted using current market rates. The effect of discounting to net present value is recognized in profit and loss, as is the provision increase as a result of the passing of time. Provisions are re-examined at each balance-sheet date and adjusted to reflect the best current estimate. If it is unlikely that resources shall have to be used to fulfill the obligation, the liability is derecognized. Each provision must be used to pay for outlays for which the provision itself had been originally set aside. As explained in the following paragraph “18- Other information, Employee termination benefits”, the sub-item “post- employment provisions and similar obligations" shows defined-benefit plans, namely pension funds backed by a capital repayment and/or return guarantee in favor of beneficiaries. Benefits to be paid in the future are measured by an external actuarial, using the “projected unit credit method”, as required by IAS 19.
13- Due to banks and customers and securities issued
The items “Due to banks”, “Due to customers” and “Securities issued” include various forms of interbank and customer loans and funding through certificates of deposit and bonds outstanding, net of any repurchased amount. Also loans registered by lessees as part of financial leases are included, as well as repurchase agreements and lent securities against a cash collateral.
These financial liabilities are first recognized when the raised amounts are received or the securities issued. The initial recognition is based on the fair value of liabilities, generally the consideration received or the issue price, plus any additional costs/revenues directly attributable to the single funding or issue operation and not refunded by the lending counterparty. Internal administrative costs are excluded. Repurchase agreements with obligation to repurchase are recognized as funding transactions for the amount paid spot.
After initial recognition, financial liabilities are measured at amortized cost along the effective interest rate method. Short- term liabilities are an exception, if the time factor is immaterial: they are stated at their received value and any incurred costs are charged to income on a straight-line basis over the liability contract life. Note, that Funding instruments under an effective hedge are measured along the standards prescribed for hedges.
For structured instruments, provided that the requirements under IAS 39 are satisfied, the embedded derivative is separated from the host contract and measured at fair value as a trading liability. In this case the host contract is recognized at the amortized cost.
Financial liabilities are derecognized from the annual or half-year report when expired or cancelled. Derecognition takes place also in case of repurchases of securities issued. The difference between the carrying amount of liabilities and the consideration paid is registered in the income statement. The subsequent sale of own debt instruments following their repurchase is considered as a new issue, recognized at the new selling price, with no P&L effect.
14- Financial liabilities held for trading
This item includes the negative amount of trading derivative contracts measured at fair value and cash financial liabilities held for trading. It also includes the negative value of derivatives associated with the assets and liabilities measured at fair value, embedded derivatives, which were separated from their host financial instruments under IAS 39, as well as liabilities originating from technical overdrafts generated by securities trades.
Initial recognition is based on the fair value of liabilities, that generally corresponds to the collected amount, excluding transaction costs or proceeds directly associated with the instruments, that are directly recognized through profit or loss.
Gains and losses from changes in the fair value and/or from the sale of trading instruments are recognized through profit or loss.
Financial liabilities are derecognized from the annual or half-year report when expired or cancelled. Trading profits or losses and gains or losses on valuation of the trading portfolio are recognized through profit or loss in the item “80. Profit (losses) on trading”, except for those related to derivatives associated with the fair value option that are classified in item “110. Profit (loss) on financial assets and liabilities measured at fair value”.
15- Financial liabilities designated at fair value through profit and loss
A financial liability is designated at fair value through profit or loss upon initial recognition only when: 1. it is a hybrid contract containing one or more embedded derivatives, and the embedded derivative significantly changes the financial flows that would otherwise be expected from the contract; 2. or when the designation at fair value through profit or loss makes it possible to provide more reliable information as: i. it eliminates or considerably reduces the inconsistent treatment, that would otherwise be caused by measuring assets or liabilities or recognizing the associated profit and loss on a different basis; ii. a group of financial assets, or financial liabilities, or both is managed and its performance measured at fair
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value based on a documented risk management or investment strategy, and group reporting is provided internally to managers in charge of strategic functions based on this approach.
The financial liabilities under examination are measured at fair value right from the initial recognition. Initial revenues and charges are immediately recognized through profit or loss. Financial liabilities are derecognized from the annual or half-year report when expired or cancelled. In case of financial liabilities represented by securities issued, derecognition is carried out also in case or repurchase: the difference between the book value of the liability and the amount paid to purchase it is recognized through profit or loss. The sale of own securities on the market after their repurchase is considered a new issue, with recognition at the new selling price, with no P&L effect. For a more in-depth analysis on the scope of liabilities under fair value option, on the method used to measure the fair value and the quantification of the creditworthiness, please refer to the following paragraph “18- Other information, Fair value measurement of financial instruments”.
16- Foreign currency transactions
Upon initial recognition, foreign currency transactions are recognized in the functional currency, and the exchange rate applied to the amount expressed in foreign currency is the one in effect at the date of the transaction.
At each balance sheet date, items expressed in foreign currencies are measured as follows: cash items are translated at the exchange rate in effect at the closing date; non-cash items measured at their historical cost are translated at the exchange rate in effect at the date of transaction; non-cash items measured at fair value are translated based on the exchange rates in effect at the closing date.
Exchange rate differences originated by the settlement of cash items, or by the translation of cash items at rates other than the initial ones, or by the conversion of the previous financial statements, are recognized in profit and loss at the time of their accrual.
When a gain or loss from a non-cash item is carried at equity, the relevant exchange rate difference is also carried at equity. Conversely, when a gain or loss is recognized through profit or loss, also the associated exchange rate difference is recognized through profit or loss.
17- Insurance assets and liabilities
No insurance companies fall under the consolidation scope.
18- Other information a) other balance sheet items
Cash and cash equivalents
This item includes legal tender, including foreign paper notes and coins and demand deposits with the Central Bank of the Country or Countries where the Group is active with companies or branches. The item is recognized at its face value. For foreign currencies, the face value is translated into Euro at the closing exchange rate in effect at year-end.
Fair value change of financial liabilities in hedged portfolios
These items indicate the positive or negative balance of fair value changes of assets or liabilities in portfolios hedged against interest rate risk (macro-hedging).
Other assets
This item includes assets that do not belong to the other balance sheet assets items. This item for example may include: a) gold, silver and precious metals; b) accrued income other than those that are to be capitalized onto the associated financial assets; c) any inventories under IAS 2; d) improvements and incremental expenses incurred on third party assets other than those associated with the item “Property and equipment”. In particular, assets that are form an integral part with the goods they belong to and cannot be used separately are classified under this item. Said costs are recognized under other assets, because, owing to the lease contract, the tenant company has control over the goods and can obtain a future economic benefit from their use; e) receivables associated with providing non-financial goods or services.
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Also balances (“debit balance”) of temporary or suspense items that have not been allocated to the relevant accounts can be presented under this item, but only if the amount is immaterial.
Other liabilities
This item includes liabilities that cannot be associated with other balance sheet liability items. For example, this item may include: a) payment agreements that under IFRS 2 must be classified as debts; b) the initial recognition of guarantees issued and the equated credit derivatives under IAS 39, as well as the following impairment write-downs; c) payables associated with the payment of non-financial goods or services received; d) accrued liabilities others than those to be capitalized onto the relevant financial liabilities.
Employee termination benefits
Following the supplementary pension reform, under Legal Decree n. 252 of 5 December 2005, new regulations were introduced for employee termination benefits beginning from 1 January 2007. From an accounting perspective, beginning 1 January 2007 termination benefits are considered a “defined contribution plan” based on IAS 19; the charge to be incurred by companies is limited to the benefits defined under the Civil Code, without applying any actuarial methodology. The termination benefit provision accrued up to 31 December, 2006 continues to be accounted for as a defined benefit plan under the classification indicated by IAS 19. The liability associated with the accrued termination benefits however must be measured at actuarial value without applying the pro-rata of the rendered service since the benefit to be measured may be considered fully accrued. Pension plans and liabilities associated with the so called “personnel seniority bonuses” are distinguished between defined benefits and defined contributions. In defined contribution plans the cost is represented by contributions accrued during the year, since the company must only pay the contributions defined by contract to an external fund, and has therefore no legal or implicit obligation to pay other amounts in addition to said contributions in case the fund does not have sufficient assets to pay all the benefits to employees. In defined benefit plans, liabilities are measured based on the actuarial methodology prescribed by IAS 19, as the actuarial and investment risk, namely the risk that contributions are insufficient or that the assets in which contributions are invested do not generate a sufficient return, is borne by the company. The measurement of the actuarial values under the above standard is carried out by an external independent actuarial. In particular, commitments associated with plans, where the company has guaranteed capital repayment and/or return in favor of beneficiaries, are recognized in “Post-employment funds and similar obligations”, while seniority bonuses are recognized in “Provisions for risks and charges – other”. For all defined benefit plans, actuarial profits and losses are recognized immediately through profit or loss. Actuarial profits or losses are caused by changes in the actuarial assumptions, owing to what is actually being experienced or as a result of changes to the assumptions themselves.
Valuation reserves
This item includes valuation reserves for financial assets available for sale, net investment hedging, cash flow hedging, and for foreign currency translation adjustments, as well as for “individual assets” under disposal and discontinued operations. It also includes the revaluation reserves recognized in compliance with special revaluation regulations, also if tax exempt.
Share capital and treasury shares
Share capital includes common and preferred stock issued by the bank net of any capital already subscribed but not yet paid in at the balance sheet date or at the date of the interim report. This item includes any treasury stock held by the bank. The latter are shown with a minus sign in the item bearing their name under balance sheet liabilities. The original cost of repurchased treasury shares and the gain or loss originated by their subsequent sale are recognized as changes to shareholders’ equity.
Minority interests
This item shows the portion of consolidated shareholders’ equity attributable to shares owned by minority shareholders based on “equity ratios”. The amount is net of any treasury shares repurchased by consolidated companies. b) other significant accounting treatments
Dividends and revenue recognition
Revenues are recognized when received or in any case when it is likely that future benefits will be received and that said benefits can be reliably measured. In particular:
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default interests, if provided for by the contract, are recognized in profit and loss only when actually collected; dividends are recognized in profit and loss when the legal right to collect them ensues, hence when their distribution is ratified; revenues from the brokerage of trading financial instruments are recognized in profit and loss when the transaction is recognized, based on the difference between the transaction price and the instrument fair value, using measurement techniques that are based on the most favorable input parameters that are observable on the market. The resulting fair value is then adjusted for the recoverability risk of any positive margin, depending on the specific counterparty with which the financial instrument has been negotiated (credit risk adjustment); proceeds from financial instruments whose fair value cannot be measured based on observable market parameters are distributed over time taking into account the instrument’s nature and life (for ex. capital guaranteed or capital protected products); revenues on bond issues generated by the difference between the transaction cost and the instrument’s fair value are recognized through profit and loss at the issue date if the fair value can be measured based on observable parameters or on recent transactions observable on the same market where the instrument is traded. In the event that said parameters cannot be directly observed on the market, as with all other retail market issues, the measurement technique used to measure the fair value takes the commercial spread as adjusting factor to discount cash flows to net present value. The resulting fair value corresponds to the collected consideration: hence, no profit is accounted for on the issue date. In order to guarantee a substantial representation of the cost of the funding transaction based on the correlation between costs and revenues, in case of fees and commissions paid to companies that do not belong to the Group, and that are charged to income at the issue date, on the same date a revenue is recognized, represented by the commercial spread, until the cost of the distribution fees and commissions is topped out.
Share-based payments
Share based payment are payments made to employees, as a consideration for the work done, based on capital shares, that may be represented for example by the assignment of: stock options; stock grants.
Considering how difficult it is to directly estimate the fair value of received working services in exchange for the assignment of shares, it is possible to measure the value of received services indirectly, by referring to the fair value of the equity instruments at their assignment date. The fair value of payments settled through the issue of shares is recognized as “Personnel expenses”, offset by a corresponding increase in “Reserves”, based upon the accrual principle. In particular, when assigned shares are not immediately “usable” by the employee, but they will be when the employee has completed a given service term, the enterprise shall recognize the cost as a consideration for the provided service throughout their vesting period.
Securitizations
When first adopting international accounting standards, the Group made use of the option not to recognize assets underlying securitizations performed before 1 January 2004, that had been derecognized from the balance sheet based on the previous accounting standards. As a result, only the subscribed securities are shown in the balance sheet assets of the originating bank. For deals finalized after the above mentioned date, the sold loans are not derecognized from the balance sheet if a substantial amount of risks and benefits is still retained, although formally they have been sold without recourse to a special purpose entity. This may occur for example, when the bank subscribes tranches of Junior notes or similar exposures, as in this case it shall bear the risk of the initial losses, and likewise it shall benefit from the return on the deal. As a result, loans are shown in the balance sheet as “Assets sold and not derecognized” against the loan received by the special purpose entity, net of the securities issued by the latter and subscribed by the originating bank. Similar representation criteria, based on substance over form, are applied to measure accruals.
Reclassifications among financial assets portfolios (IAS 39 amendment)
On 13 October 2008, IASB approved an amendment to IAS 39 and IFRS 7, adopted along a fast-track procedure by the European Commission on 15 October 2008 with Regulation n. 1004/2008. Based on said amendment, under given circumstances it is now possible to reclassify financial instruments, that when purchased had been recognized as “Financial assets held for trading” or “Financial assets available for sale”, into another category. Prior to said amendment, the general rule prohibited reclassifications to other categories, with the exception of reclassifications between “Financial assets available for sale” and “Investments held to maturity”. Based on what prescribed in paragraphs 50D and 50E of the new version of IAS 39, the following financial instruments can be reclassified: financial instruments, other than derivatives, previously classified as financial assets held for trading. It is not possible to reclassify financial instruments belonging to the category of “Financial assets designated at fair value through profit and loss” as a result of the so called “fair value option”. The new accounting category of destination is “Loans”. To qualify for reclassification, the financial instrument at the date of the reclassification must meet the
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prescribed requirements to be classified in the “Loans” portfolio, and the company’s intent must be to stop trading the financial instruments being reclassified and hold them for the foreseeable future or to maturity; non-derivative financial instruments classified as “Financial assets available for sale” can be reclassified as “Loans” if at the reclassification date the financial instrument met the “Loan” definition and the company now wants to and can hold it for the foreseeable future or to maturity.
Any other non-derivative debt or equity instrument can be reclassified from the category “Financial assets held for trading” to the category “Financial assets available for sale” or from the category “Financial assets held for trading” to “Investments held to maturity” (debt instruments only), whenever said instruments are no more held for trading in the short term; this however is admitted only in rare circumstances, as illustrated in paragraph 50 B.
The reclassified financial asset is recorded in the new category (“Loans”, “Investments held to maturity”, “Financial assets available for sale”) at its fair value on the reclassification date, representing the new cost or amortized cost. Once reclassified, financial instruments shall comply with the recognition and measurement rules of the category of destination, except for what specified below; therefore, the effective rate of return must be calculated to be used as of the reclassification date for assets measured at the amortized cost. For reclassified assets, any future positive change in estimated cash flows contributes to the calculation of the effective interest rate when the projection is reviewed, and shall be accounted for throughout the instrument’s residual life instead of changing the asset’s book value with offset accounting through profit or loss, as prescribed for non-reclassified assets. Vice versa, any future reduction in estimated cash flows as of the reclassification date shall comply with prior regulations, therefore they shall be immediately charged to income in case it represents an impairment loss. Gains and losses that were previously suspended in equity reserves for Financial assets available for sale, if referring to an instrument with a fixed maturity shall be amortized along the entire investment term along the amortized cost principle; vice versa, if the instrument has no fixed maturity (for ex. perpetual instruments), it shall remain suspended in the equity reserve until sold or cancelled. In case the financial asset is reclassified and up until its expiration, it is necessary to report the consequent effects and those that would have arisen in the absence of the reclassification, as explained in the following sub-section “A.3 – Fair value disclosure”.
Business combinations and Goodwill
A business combination is the merger of separate enterprises or businesses into a single reporting entity. A combination can give rise to an equity interest connection between the acquiring Parent company and the acquired subsidiary. In this case, the acquirer shall adopt IFRS 3 in the consolidated financial statements, while in the separate financial statements it shall report the acquired interest as an equity investment in a subsidiary, adopting IAS 27 “Consolidated and separate financial statements”. A combination can entail also the purchase of the net assets of another entity, excluding goodwill, or the purchase of the equity of another entity (mergers, transfers, acquisitions of business lines). This combination does not translate into an equity interest connection similar to that arising between a parent company and a subsidiary so in this case IFRS 3 is applied also in the acquirer’s separate financial statements. Business combinations are accounted for using the purchase method, according to which the price of the business combination is determined and then allocated, at the acquisition date, to the acquired assets, liabilities and contingent liabilities. In particular, the cost of a business combination is the result of the sum of: - the fair value, at the exchange date, of assets sold, liabilities incurred or taken over and equity instruments issued by the acquirer in exchange for the control over the acquiree; - accessory costs directly attributable to the business combination.
In case of a step acquisition, the combination cost is the overall cost of the single transactions, the exchange date is the date of each exchange transaction, while the acquisition date is when control is obtained over the acquiree. The business combination cost is then allocated by recognizing assets, liabilities and contingent liabilities of the acquiree at their fair value at the acquisition date. The positive difference between the business combination price and the Group’s interest in the fair value of acquired assets, liabilities and contingent liabilities represents goodwill, which is initially recognized at cost. After initial recognition, goodwill is recognized at cost less any accrued impairment losses. In order to assess it for impairment, at acquisition date goodwill arising on a business combination is allocated to the Group’s single cash- generating units, or to a group of cash-generating units that should benefit from the combination synergies, irrespective of whether other acquiree’s assets or liabilities are assigned to said units or group of units. When goodwill is part of a cash-generating unit (or group of cash-generating units), and part of the internal assets belonging to said unit are sold, goodwill associated with the sold assets is included in the accounting value of the assets to measure the profit or loss on the sale. Goodwill sold under said circumstances is measured by reference to the relative values of the sold assets and to the portion of unit still outstanding. Any negative difference between the business combination price and the Group’s interest in the fair value acquired assets, liabilities and contingent liabilities is immediately recognized through profit or loss as a revenue in item “Other revenues”, after a re-measurement has been performed to verify that the purchase price allocation has been correctly executed. The measurement of the fair value of the acquiree’s assets, liabilities and contingent liabilities can be carried out
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provisionally at the end of the financial year in which the business combination has been carried out and must be finalized within twelve months of the acquisition date. Reorganizations involving two or more companies or business activities belonging to Gruppo Banco Popolare are not considered business combinations. International accounting standards do not apply to transactions between entities under common control, that are accounted for using the predecessors value method, where financial statements are a continuation of amounts that had been reported previously, in compliance with IAS 8 par.10, stating that in the absence of an IFRS that specifically applies to a transaction, event or condition, management uses its judgment in selecting and applying an accounting policy that results in relevant, reliable and prudent financial information, reflecting the transaction’s economic content.
Bank capitalization instruments under D. L. 185/ 2008 (so called “Tremonti Bond”)
The representation of the financial instruments provided by D.L. 185/2008 issued by Banco Popolare in favor of the Ministry of Economy and Finance complies with the instructions set out in the joint Bank of Italy/Consob/Isvap document n. 3 of 21 July 2009, based on which the economic content of these instruments – as resulting from the overall consideration of all the contract provisions (no redemption, remuneration based on the issuer’s performance, loss absorption on a going concern basis pari passu with the other shareholders, convertibility, in favor of the company, of a fixed number of issuer’s shares) – is consistent with their classification under the balance sheet item equity instruments (consolidated item “160. Equity instruments”). A similar representation criterion is applied to recognize financial considerations (interest expense and accessory charges). The liability associated with the remuneration due to the instruments under examination is recognized by debiting equity reserves at the date the liability is considered to be certain and collectible, as if it were a dividend distribution. Similarly, liabilities for accessory charges represented by the contribution to the guarantee fund for loans to small and medium enterprises, under article 11 of L.D. 185/2008, is recognized by directly deducting them from the consolidated equity item “170. Reserves”.
Fair value measurement of financial instruments
The fair value represents the consideration at which an asset could be traded or a liability cancelled, in a free transaction performed at arm’s length between independent and knowledgeable parties, at a given measurement date. The fair value is the price that would be paid in an ordinary transaction, that is, a transaction involving market participants who wish to negotiate, thus excluding any kind of forced transaction. The fair value measurement of financial instruments is based on the assumption that the company is a going concern, namely it is assumed that the company shall continue to be fully operational and will not liquidate or significantly reduce its operations, nor will it carry out transactions at unfavorable terms.
Financial assets and liabilities held for trading, Financial assets designated at fair value through profit and loss, Financial assets available for sale, Hedging derivatives
A “fair value policy” is in effect for the above financial instruments that are measured at fair value, that attaches the top priority to official prices available on active markets (mark to market) and a lower priority to the use of non-observable inputs, as they are more discretional (mark to model).
Mark to Market To measure the fair value, the Bank uses information based on market data, any time it is available, obtained from independent sources, in that it is considered to be the best evidence of fair value. In this case, the fair value is the market price of the financial instrument under valuation – that is, without changes or recomposition of the instrument - derived from the quotes expressed by an active market. A market is considered to be active when price quotations reflect normal market transactions, are regularly and promptly available through the Stock exchanges, quote services, brokers, and when said prices represent actual and regular market transactions. Generally, the following are considered active markets: regulated securities and derivative markets, with the exception of the “Luxembourg” marketplace; organized trading systems; some OTC electronic trading circuits (for ex. Bloomberg), under given circumstances based on the presence of a certain number of contributors with executable offers, characterized by bid-ask spreads – i.e., the difference between the price a seller is offering for a security (ask price) and the price a buyer is willing to pay (bid price) – lying within a given tolerance threshold; the secondary market for UCITS units, expressing the official NAV (Net Asset Value), based on which the issuing asset management company must settle units. The NAV can be adequately adjusted to account for the fund’s diminished liquidity, i.e., the time span between the redemption application date and that of the actual redemption, as well as for possible exit commissions.
Mark to Model When the Mark to Market policy is not applicable, because there are no market prices directly observable on active markets, it is necessary to turn to measurement techniques that maximize the use of information available on the market, based on the following measurement approaches:
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1. Comparable approach: in this case the instrument’s fair value is derived from the prices observed in recent transactions of similar instruments in active markets, adequately adjusted to account for differences in the instruments and in the market conditions; 2. Valuation Model: in the absence of observable transaction prices for the instrument under measurement or similar instruments, it is necessary to apply a valuation model; the model must provide proven reliability for the estimate of hypothetical “operational” prices and therefore must be generally accepted by market participants.
In particular: debt securities are measured based on the expected cash flow discounting method, adequately adjusted to account for the issuer risk; derivative contracts are measured based on a multiplicity of models, depending on the input factors (interest rate risk, volatility, exchange rate risk, price risk, etc.) which affect their measurement; unquoted equity securities are measured based on direct transactions of the same security or similar securities observed over an adequate time frame as compared to the measurement date, on the peer company market multiples method, and subordinately on financial, P&L and balance sheet valuation methods.
As a result of the above described “fair value policy”, fair value goes through a three-tiered hierarchy, based on the availability of market parameters: 1. Price quotations derived from active markets (Level 1): The measurement is based on the market price of the instrument itself, derived from the price quotations expressed by an active market. 2. Measurement methods based on observable market parameters (Level 2) The measurement of the financial instrument is not based on the market price of the financial instrument under measurement, but on prices that can be derived from market prices of similar assets or through measurement techniques whereby all significant factors – including credit and liquidity spreads – are derived from observable market data. This level entails a limited level of discretion, because all parameters are derived from the market (for the same security or similar securities) and the calculation methods make it possible to replicate price quotations expressed on active markets. 3. Measurement methods based on non-observable market parameters (Level 3) Fair value measurements rely on measurement techniques, that are extensively based on significant inputs that cannot be derived from the market, and therefore they call for estimates and assumptions made by the management.
The above hierarchy is in line with the amendments to IFRS 7 “Financial instruments: disclosures”, adopted with EC Regulation n. 1165 of 27 November 2009, which require to provide a disclosure on levels fair value three, as described in the following sub-section “A.3 – Fair value disclosure”.
Financial liabilities designated at fair value through profit and loss and assessment of own creditworthiness
“Financial liabilities designated at fair value through profit and loss” include securities issued by the bank, that are already under the “Fair Value Option”. In particular, the Fair Value Option scope covers le following issues: plain vanilla fixed rate bond programs; structured bonds whose pay-off is linked to equity components (securities or indices) or to exchange rate components; structured bonds whose pay-off is linked to interest rate or inflation rate structures or similar indices.
In these cases, the adoption of the Fair Value Option makes it possible to avoid the otherwise ensuing accounting mismatch, by measuring the bond at its amortized cost and the related derivative at fair value. In addition to simplifying the administrative and accounting management of hedges, the reason why the Group opted to make use of the Fair Value Option, instead of Hedge Accounting, is closely linked to the actual modalities through which the Group carries out its hedging policies, by managing its market exposure globally and not through a discrete relation with the issued bond. Unlike Hedge Accounting, whose accounting rules require that only fair value changes attributable to the hedged risk be measured on hedged instruments, the Fair Value Option requires the recognition of all fair value changes, irrespective of the risk factor that generated them, including the issuer’s credit risk. As of the second half of 2009, in order to reduce the P&L volatility caused by the fluctuations of own creditworthiness, the Group decided to apply Hedge accounting rules for some new issues of significant amount, hedged with derivative instruments. In particular, we are referring to some issues which are considered as institutional issues under and by effect of what explained below. To evidence the actual transfer of the hedged risk outside the Group and pass the effectiveness test at consolidated level, traceable hedging transactions have been executed for each single bond issue, as required in the above paragraph “6- Hedges”. In addition, hedge relationships for the bond issues of the subsidiary Banca Italease, which joined the Group’s consolidation scope in second half 2009 after the Tender Offer, are managed in Hedge Accounting at Group level.
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For own bond issues, the Group’s fair value policy as adopted starting from the quarterly report of 31 March 2009 prescribes a distinction depending on the factors that are considered significant by market participants to fix the exchange price of a hypothetical transaction on the secondary market. When measuring fair value, creditworthiness changes occurred after the issue date are not taken into consideration if this reflects the practice observed on the reference market. This happens, for example, for retail issues, dedicated to Group customers, that are quoted on an organized trading system based on a pricing policy that tends to confirm credit spreads outstanding at the issue date. In this case, the fair value shall be equated with the price of Group securities observed on the organized trading system, as it is considered an active market. For bond issues whose subsequent transactions are impacted by changes in own credit spread, the same methodology used in the 2008 annual report is confirmed, based on cash flow discounting, where the curve used for discounting is equal to the risk-free interest rate, plus the creditworthiness curve. This policy applies for example to issues dedicated to institutional customers, where the price observed on the market or applicable in a hypothetical transaction considers creditworthiness changes occurred after the issue date as a significant input. As illustrated above, for some significant bond issues in second half 2009 belonging to the latter type, the Group adopted the Hedge Accounting rules instead of the Fair Value Option, to sterilize the economic impact associated with changes in own creditworthiness; for prior issues, the Fair Value Option rules are confirmed, since designation is irrevocable. Note, that the issuance of this type of bonds, that are hedged against the interest rate risk, is generally reserved to the Parent company – Banco Popolare.
The creditworthiness curve is plotted by maximizing the use of observable and significant market parameters, as a function of the relative liquidity. Starting from financial year 2008, the market reference that could best express our creditworthiness was considered to be the Credit Default Swap (CDS) curve – senior or subordinated – as a function of the issue’s subordination grade and the maturity date. Note, that for all the Companies of the Group, the reference CDS curve is the Parent company’s – Banco Popolare – the latter being the guarantor of last resort, with no additional adjustment. Once the appropriate market parameters that can best reflect one’s creditworthiness have been identified, the fair value change attributable to the factor under examination, between the issue date and the measurement date, is obtained by calculating the difference between the pricing received - all risk factors being considered to which the bond is exposed, including credit risk - and the fair value resulting when considering the same factors, except the credit risk change arising in the period.
When discounting cash flows, the measurement technique takes into consideration a spread adjustment, so as to sterilize right from the issue date any profit deriving from the difference between the fair value and the consideration collected by the customer, net of transaction costs. As shown in the item “Dividend income and revenue recognition”, this spread adjustment is equal to the commercial spread implied in the issue, net of distribution commission expense paid to third party companies, that is fully charged to income at the issue date. As a result, at the issue date a profit is recognized amounting to the distribution commission expense, and both are posted in the P&L item “110 Profit (Loss) on financial assets and liabilities measured at fair value”.
Due to and from banks and customers, Securities issued, Investments held to maturity
For the other financial instruments recognized at their amortized cost and basically classified as due to and from banks or customers, debt securities in issue or Investments held to maturity, a fair value was measured for reporting purposes in the Explanatory notes. In particular: for medium/long term impaired loans (non-performing and substandard), the fair value is measured by discounting contract flows at a risk-free market rate, net of expected losses. For medium/long term performing loans, the fair value measurement is based on a risk-aversion approach: the discounting of expected cash flows, adequately adjusted to account for expected losses, is based on a risk-free market rate, incremented by an amount considered to reflect risk aversion, so as to take into account additional factors other than the expected loss; for assets and liabilities on demand or with a short-term or indefinite maturity, the book value at which they have been recognized is considered a good approximation of fair value; for bond programs measured at the amortized cost, basically floating rate bonds, fair value is measured by discounting the note’s cash flows based on the risk-free interest rate curve, adequately adjusted to account for changes in creditworthiness, whenever this is considered a material factor by market participants, based on the methodology described for “Financial liabilities designated at fair value through profit and loss”; for debt securities classified as “Investments held to maturity” or as “Loans to banks or customers”, even following a portfolio reclassification, the fair value is measured by using prices obtained on active markets or measurement models, as described above for financial assets and liabilities designated at fair value.
Financial assets impairment test
At each balance sheet date, all financial assets, except those measured at fair value through profit or loss, undergo an impairment test to verify whether there is an objective evidence of impairment losses that may impair the recoverability of the investment. In particular, the objective evidence of an impairment loss affecting an asset or a group of financial assets can be associated with the following negative events:
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significant financial difficulties experienced by the issuer or the borrower; breach of contract, for example a default or failure to make any interest or principal payment when due; giving the beneficiary an allowance, that the bank took in consideration primarily for economic or legal reasons linked to the beneficiary’s financial difficulties, and which otherwise would not have been granted; probability that the borrower may file for bankruptcy or other financial restructuring procedures; disappearance of an active market related to the financial asset under examination due to the issuer’s financial difficulties. However, the disappearance of an active market caused by the fact that the company’s instruments are not publicly traded any more is no evidence of a fair value reduction; events that point at a significant decrease in the issuer’s future cash flows (which include the general local or domestic economic conditions against which the issuer operates).
Furthermore, an objective evidence of impairment loss for an investment in an equity instrument may materialize in the presence of the following additional negative events: significant changes negatively affecting the technological, economic or regulatory environment in which the issuer operates, indicating that the investment cannot be recovered anymore; a prolonged or significant fair value reduction below the purchase price.
In case an objective value reduction occurs as a result of one or more events that occurred after the initial recognition of the asset, it is necessary to calculate the impairment loss, along different rules depending on whether we are dealing with financial instruments measured at the amortized cost or assets measured at fair value with changes carried at equity. With regard to the measurement of impairment losses, please refer to what described for “Investments held to maturity”, “Loans to banks and customers” for assets measured at amortized cost, and “Financial assets available for sale” for assets measured at fair value through a specific equity reserve.
A.3 – FAIR VALUE DISCLOSURE
A.3.1 Transfers between portfolios
A.3.1.1 Reclassified financial assets: carrying amount, fair value and impact on comprehensive income
On 15 October 2008 the European Commission approved Regulation n. 1004 transposing the amendments to IAS 39 regarding the reclassification of financial instruments and to IFRS 7 regarding disclosure requirements. Based on these amendments, it is now possible, under certain circumstances, to reclassify financial instruments, that at the time of purchase had been recognized as financial assets held for trading or financial assets available for sale, to another accounting category, as described in greater detail in the above “Section A.2”.
Based on the above regulatory changes, in the meeting of 28 October 2008, the Management Board of Banco Popolare decided to reclassify the unquoted financial assets held for trading, with a nominal value of 594.1 million, corresponding to a carrying amount of 565.2 million, as loans, as the crisis that was raking the world financial markets was preventing the bank from reasonably pursuing the intents that had justified the recognition of these financial instruments in the category of financial assets held for trading, and in fact was forcing it to hold them for the foreseeable future or to maturity. As provided by the amendment to IAS 39, owing to this exceptional circumstance, the transfer was performed based on the prices of 1 July 2008, as the reclassification had been resolved before 1 November 2008.
In 2009, the Board of Directors of Efibanca decided to reclassify UCITS units, amounting to 8.6 million, held in closed-end private equity funds from the “Financial assets held for trading” portfolio to the “Financial assets available for sale” portfolio. This reclassification replicated that of other similar investments, that Efibanca had already classified in item 40 – Financial assets held for sale, in view of the expected stability for this form of investment, and considering also that the financial market crisis would have prevented trading in the short term. As the reclassification was resolved after 1 November 2008, the recognition value in the new category is represented by the fair value as at 30 June 2009, i.e., at the date of the reclassification resolution, as provided by the relevant accounting standards.
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On 31 December 2009 the book value of the reclassified UCITS units totaled 7.2 million, taking into account the additional cash calls of 0.4 million after the transfer.
Income components in Income components Type of Book value Fair value at the absence of transfer reported for the year financial Old portfolio New portfolio at 31.12.2009 (before tax) (before tax) instrument 31.12.2009 Valuation Other Valuation Other
Debt Financial assets held for Loans to banks 155,103 148,364 22,172 3,320 - 4,795 securities trading (item 20) (item 60) Debt Financial assets held for Customer loans 342,804 336,305 34,151 9,954 - 12,646 securities trading (item 20) (item 70) Financial assets Financial assets held for UCITS units available for sale 7,165 7,165 -1,835 - -1,835 - trading (item 20) (item 40) Total 505,072 491,834 54,488 13,274 -1,835 17,441
Debt securities
On 31 December 2009, the reclassified portfolio represented by “Debt securities” comprised 18 corporate securities – primarily banks and financial institutions and 16 Asset Backed Securities (ABS), plus UCITS units reclassified by Efibanca. Since reclassification - 30 September 2008 – to date no trading-related changes occurred in reclassified securities, in keeping with our intents; the only change referred to the early redemption of some ABS (of which 2 full redemptions), with a nominal value of 53.9 million euro. On 31 December 2009, the residual nominal value of reclassified securities totaled 540.2 million, corresponding to a carrying amount of 505.1 million (gross of end-of-period accruals).
In particular, with respect to ABS, reclassified positions corresponded to a carrying amount on 31 December 2009 of 112 million (NV 114.7 million), and represented almost all the Group’s structured credit products. All ABS belong to the senior class, which takes priority over other unsecured or junior debt when making principal and interest payments. The underlying assets are generally represented by residential mortgages from Italy and other European countries, and Italian government securities; ratings generally range between double A and triple A. With respect to corporate securities, having a nominal value of 425.5 million, corresponding to a carrying amount of 385.9 million, they are mainly represented by issues of primary banks and financial institutions from USA (42%), Europe (38%), and Italy (17%); there are no structured credit securities. In detail, 68% of securities are plain vanilla issues (non-structured issues exposed only to the interest rate and counterparty risk), and the remaining 32% are subordinated issue, mostly from European and Italian banks. The cumulative reclassification effect on 31 December 2009 was a gain of 13.2 million (as resulting from the difference between the column “Book value at 31.12.2009” and “Fair value at 31.12.2009”), as detailed below: failure to recognize net losses as a result of the 6.8 million fair value change (compared with 64.2 million net capital gains on 31 December 2008). The resulting positive P&L impact would be 57.4 million; recognition of income components represented by an additional interest income of 6.4 million as a result of the adoption of the amortized cost for reclassified assets (compared with 1.3 million on 31 December 2008). The amortized cost for the year, recognized in the 2009 P&L, was 5.2 million.
In the absence of the reclassification, the 2009 P&L result would have been 52.2 million higher than the posted bottom line (corresponding to the difference between column “Income components in the absence of transfer” and column “Income components reported for the year”).
UCITS units
For these securities, income components of -1.8 million reported for the year were the result of the combined effect of the recognition of impairment losses of 2 million charged to income and the positive fair value change of 0.2 million recognized through a specific equity reserve. This impact would have taken place also in the absence of the transfer, the only difference being that in the latter case the positive fair value change would have been recognized through profit or loss instead of equity.
A.3.1.2 Reclassified financial assets: impact on comprehensive income before reclassification
Under IFRS 7, in the year of the reclassification it is required to disclose the effects on comprehensive income before reclassification. In particular, for UCITS units reclassified in 2009, losses through profit and loss before the reclassification date totaled 1.7 million, as shown in the following table:
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Gains/losses through Gains/losses through Type of profit and loss shareholders’ equity financial Old portfolio New portfolio (before tax) (before tax) instrument 31/12/2009 31/12/2008 31/12/2009 31/12/2008
Financial assets held for trading Financial assets available for UCITS units (2) (1,745) - - (item 20) sale (item 40) Total (2) (1,745) - -
A.3.1.3 Reclassification of financial assets held for trading
For the reasons underlying the reclassification, please read the previous paragraph A.3.1.1. Finally, note that at the time when Banco Popolare had carried out the reclassification, IABS had expressly considered the deterioration of the world’s financial markets that had occurred during the third quarter as a possible example of rare circumstances, as stated in their news release of 13 October 2008.
A.3.1.4 Effective interest rate and cash flows expected from reclassified activities
Debt securities
On 31 December 2009, the effective interest rate of reclassified debt securities, weighted according to the debt securities outstanding, amounted to 2.46%. The estimated value of foreseeable principal-related cash flows totaled 515.7 million; the difference with respect to the book value net of accruals, amounting to 19.5, shall be recognized in interest margin, as a result of the amortized cost, in addition to the interest-related cash flows under the contracts. In particular, for the two Lehman Brothers securities, with a reported nominal value of 35 million, the estimated recovery is 30% of the total exposure, while for the other securities we expect to recover the entire nominal value. Interest margin recognized in financial year 2009 totaled 17.4 million euro, of which 5.2 million of additional interest income deriving from the adoption of the amortized cost.
A.3.2 Fair value hierarchy
A.3.2.1 Accounting portfolios: breakdown by fair value levels
The growing complexity of financial instruments and the recent financial market turbulences called for the need to provide a complete and transparent disclosure on how fair value is measured, both qualitatively and quantitatively. This need underlies the amendments to IFRS 7 “Improving Disclosure about Financial Instrument”, approved by IASB on 5 March 2009 and adopted with EC Reg. n. 1165 of 27 November 2009. Shown below is the disclosure required by IFRS 7 for portfolios of financial assets and liabilities measured at fair value based on the three-level hierarchy illustrated in paragraph “Fair value measurement of financial instruments” in Section “A.2 – Main account items”. To provide this disclosure we complied with the guidelines set out in the “Regulation on criteria and market parameters to account for financial instruments”, approved by the Group in 2009, to define the methodological approach and the operational model used to valuate financial instruments measured at fair value.
(thousands of euro) 31/12/2009 31/12/2008 (*) Financial assets/liabilities measured at fair value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
1. Financial assets held for trading 7,410,298 4,429,888 90,463 5,411,911 4,573,178 48,279 Financial assets designated at fair value 2. 166,791 3,001 13,734 245,356 10,885 55,134 through profit and loss 3. Financial assets available for sale 1,029,118 509,874 517,474 645,006 375,835 604,313 4. Hedging derivatives - 130,758 - - 92,881 - Total 8,606,207 5,073,521 621,671 6,302,273 5,052,779 707,726 1. Financial liabilities held for trading 245,146 3,629,306 4,197 496,675 2,869,003 9,140 Financial liabilities designated at fair value 2. 13,728,051 13,035,686 - 86,244 17,439,657 - through profit and loss 3. Hedging derivatives - 168,456 - - 49,985 - Total 13,973,197 16,833,448 4,197 582,919 20,358,645 9,140 (*) for comparative data as at 31 December 2008, level 1 corresponds for almost all financial instruments to what indicated as “quoted” in the tables showing the breakdown of financial assets and liabilities published in the prior year’s consolidated financial statements; similarly, the sum of securities in level 2 and level 3 generally correspond to what indicated as “unquoted”. The differences are due to some instruments listed on markets that are generally considered active, where however there was the need to measure their fair value again as the prices expressed by said markets were not representative. As to Financial assets designated at fair value through profit and loss, hedge funds classified as “unquoted” in the financial statements have been classified in level 1 with respect to the fair value hierarchy due to their periodic measurement of the fund NAV and their characteristic liquidability.
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Financial assets
Financial instruments measured based on prices derived from active markets (Level 1) or on parameters observable on the market (Level 2) account for 95.7% of total Financial assets designated at fair value through profit and loss. Instruments significantly measured based on non observable parameters (Level 3) are but a minor portion (4.3%) and are represented by 83.2% by financial assets available for sale, mostly all minority Investments in associates and companies subject to joint control measured on the basis of internal models (income, equity or mixed models) and private equity funds. The remaining positions regard a limited number of illiquid securities or securities with complex structures, mainly issued by Italian banks, where fair value was mainly derived from information provided by external contributors, based on non- publicly available sources; the latter fair values have been prudentially classified in level 3.
Financial assets consist of 3,476 million worth of derivative instruments held for trading and hedging; they are mostly Over the Counter contracts (OTC) measured with models that make a significant use of parameters observable on the market or drawn from independent sources (Level 2). On 31 December 2009 the breakdown of the financial assets portfolio based on the three-level fair value hierarchy is basically in line with the prior year.
Financial liabilities
Financial liabilities held for trading are mainly represented by derivative instruments, whose fair value was measured making a significant use of observable market parameters (Level 2). Positions included in level 3 refer to a limited number of contracts relating to options sold in connection to capital guaranteed managed assets. Financial liabilities designated at fair value through profit and loss are represented by bonds issued hedged with derivatives, for which the fair value option was exercised. On 31 December 2008, for most bonds the fair value was measured using observable market parameters (Level 2), including one’s own creditworthiness, as illustrated in the above “Section A.2 – Main account items”. On 31 December 2009 bonds were basically equally distributed between level 1 and level 2; the change with respect to the prior year is due to the fact that as from 31 March 2009 the pricing method to price issues sold to retail customers was changed, using quotations derived from the organized trading system relating to Group securities, considered to be an active market. For further details on changes to the method used to measure financial liabilities under the fair value option, please see sub-section 5 – Other aspects of Section “A.1 – In General”.
Except for what illustrated for bonds under the fair value option, in 2009 no additional material transfers were carried out between Level 1 and Level 2.
A.3.2.2 Annual changes in Financial assets designated at fair value through profit and loss (level 3)
FINANCIAL ASSETS (thousands of euro) designated at fair held for trading Available for sale hedging value
1. Opening balance 48,279 55,134 604,313 - 2. Increases 62,915 7,182 77,512 - 2.1 Purchases 44,438 1,501 34,839 - of which: business combinations - - 92 - 2.2 Profits recognized through: 1,121 5,367 8,374 - 2.2.1 Profit and loss 1,121 5,367 3,029 - of which: gains 1,102 4,333 - - 2.2.2 Equity 5,345 - 2.3 Reclassifications from other levels 15,416 314 175 - 2.4 Other incremental changes 1,940 - 34,124 - 3. Decreases (20,731) (48,582) (164,351) - 3.1 Sales (17,202) (42,089) (88,408) - of which: business combinations - - - - 3.2 Redemptions (990) - (3,264) - 3.3 Losses recognized through: (1,017) (6,075) (70,290) - 3.3.1 Profit and loss (1,017) (6,075) (25,886) - of which: losses (815) (3,288) (13,779) - 3.3.2 Equity (44,404) - 3.4 Reclassifications from other levels - - - - 3.5 Other decremental changes (1,522) (418) (2,389) - 4. Closing balance 90,463 13,734 517,474 -
“Other incremental changes” of financial assets available for sale mainly refer to UCITS units that have been reclassified in 2009 from the held-for-trading asset portfolio, and equity instruments received as a result of loan restructuring agreements.
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A.3.2.3 Annual changes in Financial liabilities designated at fair value through profit and loss (level 3)
FINANCIAL LIABILITIES (thousands of euro) designated at fair held for trading hedging value 1. Opening balance 9,140 - - 2. Increases 804 - - 2.1 Issues 804 - - of which: business combinations - - - 2.2 Losses recognized through: - - - 2.2.1 Profit and loss - - - of which: losses - - - 2.2.2 Equity - 2.3 Reclassifications from other levels - - - 2.4 Other incremental changes - - - 3. Decreases (5,747) - - 3.1 Redemptions - - - of which: business combinations - - - 3.2 Repurchases - - - 3.3 Profits recognized through: (5,747) - - 3.3.1 Profit and loss (5,747) - - of which: gains - - - 3.3.2 Equity - 3.4 Reclassifications from other levels - - - 3.5 Other decremental changes - - - 4. Closing balance 4,197 - -
A.3.3 Disclosure on so called “day one profit/loss”
Pursuant to IFRS 7 paragraph 28, the Group financial instruments included options sold in connection with capital guaranteed managed assets, whose fair value measured upon initial recognition (transaction price) and the amount calculated at that same date using the so called “Day 1 Profit” measurement method differ. In view of the type of products, the fact that input parameters are not observable and no reference prices exist for similar products on an active market, the difference was distributed pro-rata temporis, as described in “Section A – Accounting policies” in the paragraph “Dividends and revenue recognition”. The amount recognized through profit or loss in “Net trading income or loss” on 31 December 2009 was a profit of 5.7 million; the residual difference still to be recognized totals 4.2 million.
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SECTION B – INFORMATION ON THE CONSOLIDATED BALANCE SHEET
Similarly to the financial statements, the following tables of the Explanatory notes show the data for the period under examination and the corresponding comparative data restated in compliance with the changes provided by the update of Circular n. 262/2005 (Bank Financial Statements). The Attachments include a reconciliation table between the financial statements published in the 2008 annual report and the one restated in this annual report.
ASSETS
Sub-section 1 – Cash and cash equivalents – Item 10
1.1 Cash and cash equivalents: breakdown
(thousands of euro) 31/12/2009 31/12/2008 a) Cash 565,170 680,710 b) Demand deposits with Central Banks 15,628 29,294 Total 580,798 710,004
Sub-section 2 - Financial assets held for trading
2.1 Financial assets held for trading: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) L1 L2 L3 L1 L2 L3 A Cash assets 1. Debt securities 6,103,948 1,157,745 88,400 4,445,137 1,711,571 44,887 1.1. Structured securities 16 1 - 17 4 3 1.2. Other debt securities 6,103,932 1,157,744 88,400 4,445,120 1,711,567 44,884 2. Equity securities 395,897 - 40 299,660 - 256 3. UCITS units 827,742 7,841 2,023 456,868 - 3,136 4. Loans ------4.1. Repurchase agreements ------4.2. Other ------Total A 7,327,587 1,165,586 90,463 5,201,665 1,711,571 48,279 B Derivatives 1. Financial derivatives 82,711 3,262,794 - 210,246 2,827,619 - 1.1 Trading 82,686 3,107,563 - 210,246 2,672,401 - 1.2 Under fair value option - 67,856 - - 145,913 - 1.3 Other 25 87,375 - - 9,305 - 2. Credit derivatives - 1,508 - - 33,988 - 2.1 Trading - 716 - - 33,988 - 2.2 Under fair value option ------2.3 Other - 792 - - - - Total B 82,711 3,264,302 - 210,246 2,861,607 - Total (A+B) 7,410,298 4,429,888 90,463 5,411,911 4,573,178 48,279
On 31 December 2009, financial assets held for trading amounted to 11,930.6 million, up by 18.9% from 10,033.4 million on 31 December 2008. On 31 December 2009, cash assets added up to a 8,583.6 million (+ 23.3% compared to 31 December 2008), of which 71.9% were represented by debt securities, mostly issued by governments (with Italian treasuries having the lion’s share) and financial and banking issuers. The equity component is marginal, in line with the portfolio’s overall low risk profile. The portfolio does not include investments with a high financial complexity, in line with the portfolio profile that privileges highly liquid securities and eligible for refinancing with the ECB.
Derivatives under fair value option are represented by derivatives that are operationally linked to issues of bonds where the Group made use of the fair value option, in compliance with IAS 39, paragraph 9. For “level 3” financial assets, please refer to Section A.3 of Section A – Accounting policies of these Explanatory Notes.
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The table below shows the breakdown of UCITS units.
Total Total (thousands of euro) 31/12/2009 31/12/2008
a) Equity Funds 30,951 28,402 b) Balanced Funds 5,657 3,012 c) Fixed Income Funds 97,253 74,131 d) Liquidity Funds 419,611 144,599 e) Flexible Funds 171,875 182,678 f) Hedge Funds 112,225 27,155 g) Real Estate Funds 34 27 Total 837,606 460,004
2.2 Financial assets held for trading: breakdown by debtor/issuer
(thousands of euro) 31/12/2009 31/12/2008
A CASH ASSETS 1. Debt securities 7,350,093 6,201,595 a) Governments and Central banks 4,699,427 4,158,509 b) Other public entities 34,912 34,485 c) Banks 1,968,515 1,537,086 d) Other issuers 647,239 471,515 2. Equity securities 395,937 299,916 a) Banks 41,386 45,649 b) Other issuers: 354,551 254,267 - insurance companies 36,420 33,495 - financial companies 47,380 50,428 - non-financial companies 270,750 170,343 - other 1 1 3. UCITS units 837,606 460,004 4. Loans - - a) Governments and Central banks - - b) Other public entities - - c) Banks - - d) Other counterparties - - Total A 8,583,636 6,961,515 B DERIVATIVES a) Banks - fair value 2,578,639 1,950,599 b) Customers - fair value 768,374 1,121,254 Total B 3,347,013 3,071,853 Total (A+B) 11,930,649 10,033,368
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2.3 – Cash financial assets held for trading: annual changes
Equity (thousands of euro) Debt securities UCITS units Loans Total securities
A. Opening balance 6,201,595 299,916 460,004 - 6,961,515 B. Increases 60,346,350 27,354,062 779,821 - 88,480,233 1. Purchases 60,035,393 26,730,788 569,954 - 87,336,135 of which: for business combinations - - - - - 2. Positive fair value changes 103,622 23,848 23,436 - 150,906 3. Other changes 207,335 599,426 186,431 - 993,192 C. Decreases (59,197,852) (27,258,041) (402,219) - (86,858,112) 1. Sales (57,150,065) (26,572,591) (392,142) - (84,114,798) of which: business combinations - - - - - 2. Redemptions (1,922,039) (72) (990) - (1,923,101) 3. Negative fair value changes (16,038) (20,376) (210) - (36,624) 4. Transfers to other portfolios - - (8,630) - (8,630) 5. Other changes (109,710) (665,002) (247) - (774,959) D. Closing balance 7,350,093 395,937 837,606 - 8,583,636
Sub-section 3 - Financial assets designated at fair value through profit and loss – Item 30
3.1 Financial assets designated at fair value through profit and loss: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) L1 L2 L3 L1 L2 L3
1 Debt securities - 4 9,810 - 7,369 42,833 1.1 Structured securities ------1.2 Other debt securities - 4 9,810 - 7,369 42,833 2 Equity securities 121 2,997 - 3 3,202 2,870 3 UCITS units 166,670 - 3,924 245,353 314 9,431 4 Loans ------4.1 Structured ------4.2 Other ------Total 166,791 3,001 13,734 245,356 10,885 55,134 Cost 243,640 3,342 12,696 349,212 27,264 71,831
Financial assets designated at fair value through profit and loss are mainly represented by investments in Hedge Funds: the designation at fair value lies on the need to manage and represent a portfolio of financial instruments in consistency with a given investment strategy and based upon a performance target. Insurance contracts recognized under “equity securities”, as they are correlated to the performance of equity securities, are designed to build up the provision required to pay out supplementary pension benefits to some managers upon their retirement. The fair value designation of this investments is linked to the cost of employee benefits, that is recognized under retirement provisions in compliance with IAS 19. The table below shows the breakdown of UCITS units.
(thousands of euro) 31/12/2009 31/12/2008
a) Equity Funds - - b) Balanced Funds - - c) Fixed Income Funds - - d) Liquidity Funds - - e) Flexible Funds - - f) Hedge Funds 170,113 254,596 g) Real Estate Funds 481 502 Total 170,594 255,098
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3.2 Financial assets designated at fair value through profit and loss: breakdown by debtor/issuer
(thousands of euro) 31/12/2009 31/12/2008
1 Debt securities 9,814 50,202 a) Governments and Central Banks - - b) Other public entities - - c) Banks 4 32,051 d) Other issuers 9,810 18,151 2 Equity securities 3,118 6,075 a) Banks 29 39 b) Other issuers: 3,089 6,036 - insurance companies 2,986 904 - financial companies - - - non-financial companies - - - other 103 5,132 3 UCITS units 170,594 255,098 4 Loans - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other counterparties - - Total 183,526 311,375
3.3 Financial assets designated at fair value through profit and loss: annual changes
Debt Equity UCITS (thousands of euro) Loans Total securities securities units
A Opening balance 50,202 6,075 255,098 - 311,375 B Increases 5,971 576 91,564 - 98,111 1. Purchases - 353 78,286 - 78,639 (of which for business combinations) - - - - 0 2. Positive fair value changes 3,492 219 13,251 - 16,962 3. Other changes 2,479 4 27 - 2,510 C Decreases -46,359 -3,533 -176,068 - -225,960 1. Sales -7,537 -185 -97,044 - -104,766 (of which for business combinations) - - - - 0 2. Redemptions -32,917 - - - -32,917 3. Negative fair value changes - - -3,684 - -3,684 4. Other changes -5,905 -3,348 -75,340 - -84,593 D Closing balance 9,814 3,118 170,594 - 183,526
Sub-section 4 - Financial assets available for sale – Item 40
4.1 Financial assets available for sale: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) L1 L2 L3 L1 L2 L3 1 Debt securities 815,635 399,727 7,430 447,911 274,123 39,219 1.1 Structured securities ------1.2 Other debt securities 815,635 399,727 7,430 447,911 274,123 39,219 2 Equity securities 133,303 110,147 397,240 140,739 101,712 461,119 2.1 Measured at fair value 133,262 107,045 349,763 140,737 98,684 414,707 2.2 Measured at cost 41 3,102 47,477 2 3,028 46,412 3 UCITS units 80,180 - 112,804 56,356 - 103,975 4 Loans ------Total 1,029,118 509,874 517,474 645,006 375,835 604,313
Financial assets available for sale on 31 December 2009 amounted to 2,056.5 million, up by 26.5% from 1,625.2 million the previous year.
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About 31% of portfolios available for sale are made up of shareholdings that do not qualify as controlling interest, jointly controlled or associate interest, and of bonds of high creditworthy issuers, with complex pay-offs and medium to long term maturities. Most bonds have been hedged with derivatives, as shown in the following table “4.3 Financial assets available for sale under specific hedging”, to obtain absolute returns on short term interest rates.
The table below shows the breakdown of UCITS units.
(thousands of euro) 31/12/2009 31/12/2008
a) Equity Funds 135,549 104,595 b) Balanced Funds - - c) Fixed Income Funds 5,824 20,876 d) Liquidity Funds - - e) Flexible Funds - - f) Hedge Funds 23,020 26,061 g) Real Estate Funds 28,591 8,799 Total 192,984 160,331
4.2 Financial assets available for sale: breakdown by debtor/issuer
(thousands of euro) 31/12/2009 31/12/2008
1 Debt securities 1,222,792 761,253 a) Governments and Central Banks 793,780 344,336 b) Other public entities 6,167 - c) Banks 208,476 189,558 d) Other issuers 214,369 227,359 2 Equity securities 640,690 703,570 a) Banks 159,221 243,233 b) Other issuers: 481,469 460,337 - insurance companies 18,727 21,261 - financial companies 115,169 186,390 - non-financial companies 336,247 240,669 - other 11,326 12,017 3 UCITS units 192,984 160,331 4 Loans - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other counterparties - - Total 2,056,466 1,625,154
4.3 Financial assets available for sale under specific hedging
(thousands of euro) 31/12/2009 31/12/2008
1 Financial assets under specific fair value hedging 889,234 447,077 a) interest rate risk 843,469 402,247 b) price risk - - c) exchange rate risk 45,765 44,830 d) credit risk - - e) multiple risks - - 2 Financial assets under specific cash flow hedging - 98 a) interest rate risk - - b) exchange rate risk - - c) other - 98 Total 889,234 447,175
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4.4 Financial assets available for sale: annual changes
Debt Equity UCITS (thousands of euro) Loans Total securities securities units
A Opening balance 761,253 703,570 160,331 - 1,625,154 B Increases 609,986 129,908 67,286 - 807,180 1. Purchases 487,317 46,094 46,858 - 580,269 (of which for business combinations) 57,514 877 - - 58,391 2. Positive fair value changes 67,547 62,449 9,460 - 139,456 3. Write-backs - - 1,764 - 1,764 - through profit and loss ------carried at equity - - 1,764 - 1,764 4. Transfers from other portfolios - - 8,630 - 8,630 - Financial assets held for trading - - 8,630 - 8,630 - Investments held to maturity - - - - - 5. Other changes 55,122 21,365 574 - 77,061 C Decreases (148,447) (192,788) (34,633) - (375,868) 1. Sales (57,633) (132,885) (24,056) - (214,574) (of which for business combinations) - - - - - 2. Redemptions (33,806) - - - (33,806) 3. Negative fair value changes (4,856) (45,394) (3,049) - (53,299) 4. Impairments (12,902) (12,085) (4,264) - (29,251) - through profit and loss (12,902) (12,085) (4,264) - (29,251) - carried at equity - - - - - 5. Transfers to other portfolios - (1,857) - - (1,857) 6. Other changes (39,250) (567) (3,264) - (43,081) D Closing balance 1,222,792 640,690 192,984 - 2,056,466
Outcome of the impairment tests on financial assets available for sale
On 31 December 2009, an impairment test was carried out to verify the objective existence of impairment losses and the consequent recognition of write-downs to be charged to income. As described in “Section A – accounting policies”, the impairment test is triggered by a negative fair value change greater than 20% of the historic cost, and for equity securities alone with a negative change in fair value lasting more than twelve months. The qualifying securities underwent a qualitative analysis based on income projections and the development outlook of the issuing company, considering all the information available on the market.
Sub-section 5 - Investments held to maturity – Item 50
5.1 Investments held to maturity: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) Fair value Fair value Book value Book value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1 Debt securities 306,240 301,582 - 10,500 530,296 514,991 - 10,500 1.1 Structured - 14,639 ------1.2 Other 306,240 286,943 - 10,500 530,296 514,991 - 10,500 2 Loans ------Total 306,240 301,582 - 10,500 530,296 514,991 - 10,500
On 31 December 2009, Investments held to maturity amounted to 306.2 million, down by 42.3% from 530.3 million at the end of 2008.
At the end of 2009, this portfolio, that had been set up to obtain a stable capital remuneration, was largely made up of fixed income securities, with maturities ranging from one to three years, issued by governments and to a smaller extent by financial institutions with a high credit standing. Securities held in the portfolio have a high liquidability, as they are almost exclusively represented by securities eligible for refinancing with the European Central Bank and therefore are readily available to address possible liquidity crises without having to sell securities held in portfolio.
Impaired assets, totaling 10.5 million, are senior notes issued by Lehman Brothers Holding, with a fixed 4% rate expiring in 2011, with a nominal value of 35 million.
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The criteria followed to measure the fair value are illustrated in Section A of these Explanatory Notes.
5.2 Investments held to maturity: breakdown by debtor/issuer
(thousands of euro) 31/12/2009 31/12/2008
1 Debt securities 306,240 530,296 a) Governments and Central Banks 255,129 425,877 b) Other public entities - - c) Banks 36,323 40,611 d) Other issuers 14,788 63,808 2 Loans - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other counterparties - - Total 306,240 530,296 Total Fair Value 312,082 525,491
5.3 Investments held to maturity under specific hedging
(thousands of euro) 31/12/2009 31/12/2008
1 Financial assets under specific fair value hedging - - a) interest rate risk - - b) price risk - - c) exchange rate risk - - d) credit risk - - e) multiple risks - - 2 Financial assets under specific cash flow hedging 4,287 - a) interest rate risk - - b) exchange rate risk - - c) other 4,287 - Total 4,287 -
5.4 Investments held to maturity: annual changes
Debt (thousands of euro) Loans Total securities
A Opening balance 530,296 - 530,296 B Increases 14,981 - 14,981 1. Purchases 685 - 685 (of which for business combinations) - - - 2. Write-backs - - - 3. Transfers from other portfolios - - - 4. Other changes 14,296 - 14,296 C Decreases -239,037 - -239,037 1. Sales -22,705 - -22,705 (of which for business combinations) - - - 2. Redemptions -202,528 - -202,528 3. Write-downs - - - 4. Transfers to other portfolios - - - 5. Other changes -13,804 - -13,804 D Closing balance 306,240 - 306,240
Sales refer to Bipielle Bank (Suisse) S.A. in liquidation.
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Sub-section 6 – Due from banks – Item 60
6.1 Due from banks: breakdown by instrument
(thousands of euro) 31/12/2009 31/12/2008
A Due from Central Banks 1,454,941 1,471,488 1. Time deposits 80,085 16,150 2. Compulsory reserve 1,359,679 1,427,955 3. Reverse repurchase agreements - - 4. Other 15,177 27,383 B Due from banks 8,111,407 11,010,560 1. Checking accounts and demand deposits 1,967,770 1,875,531 2. Time deposits 4,112,244 2,208,511 3. Other loans: 1,856,236 6,625,183 3.1 Reverse repurchase agreements 1,003,596 4,205,522 3.2 Finance lease 17,136 - 3.3 Other 835,504 2,419,661 4. Debt securities 175,157 301,335 4.1 Structured securities - - 4.2 Other debt securities 175,157 301,335 Total (book value) 9,566,348 12,482,048 Total (fair value) 9,566,348 12,482,048
On 31 December 2009, due from banks totaled 9,566.3 million, down by 23.4% from 12,482 million the prior year.
“Due from Central banks” include 1,282.8 million referring to the compulsory reserve that the Parent company lends out to the Bank of Italy on behalf of the Group banks to guarantee its exposure to other Lending institutions and time deposits associated with trades on the Securitized Interbank Market (MIC – mercato interbancario collateralizzato).
6.2 Due from banks under specific hedging
No loans to banks are under specific hedging.
6.3 Finance lease
31/12/2009 Minimum Payments Gross investment
Impaired of which residual of which residual exposures Principal Interest non-guaranteed guaranteed value value - On demand - 255 - 20 275 - - Up to 3 months - 546 - 55 601 1 - Between 3 months - 2,339 - 200 2,539 1 and 1year - Between 1 and 5 - 11,831 - 625 12,456 3,310 years - Over 5 years - 1,307 - 195 1,502 166 - Undefined term - 858 - - 861 - Net total - 17,136 - 1,095 18,234 3,478
The finance leases shown in the table above refer to Banca Italease and its subsidiaries, which joined Gruppo Banco Popolare as from the second half of the year.
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Sub-section 7 - Loans to customers – Item 70
7.1 Loans to customers: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) Performing Impaired Performing Impaired
1 Checking accounts 15,455,583 1,569,257 15,871,875 1,160,585 2 Reverse repurchase agreements 2,016,603 - 1,250,578 - 3 Mortgages 39,165,647 3,778,178 38,074,902 1,742,630 4 Credit cards, personal loans and payroll secured loans 374,033 21,068 492,232 20,127 5 Finance lease 5,476,141 3,347,823 41,899 - 6 Factoring 27,104 90 46,392 276 7 Other transactions 21,356,382 1,024,441 21,329,521 620,519 8 Debt securities 1,727,352 10,523 434,480 10,677 8.1 Structured securities - - - - 8.2 Other debt securities 1,727,352 10,523 434,480 10,677 Total (book value) 85,598,845 9,751,380 77,541,879 3,554,814 Total (fair value) 87,906,467 9,821,771 80,568,968 3,519,976
On 31 December 2009 gross loans totaled 99,485.7 million. Net of total write-downs of 4,135.5 million, net loans came in at 95,350.3 million. On 31 December 2008, “impaired assets” and “assets sold and not derecognized” totaled 3,483.9 million and 5,759.2 million, respectively. Both categories have been reclassified to their original deal type of belonging. Worth mentioning in this aggregate is the increase in mortgages, that went from 39,817.5 million to 42,943.8 million, and of repurchase agreements which on 31 December 2009 amounted to 2,016.6 million against 1,250.6 at the end of 2008. The increase in finance leases is almost totally attributable to Banca Italease and its subsidiaries.
7.2 Loans to customers: breakdown by debtor/issuer
31/12/2009 31/12/2008 (thousands of euro) Performing Impaired Performing Impaired 1 Debt securities 1,727,352 10,523 434,480 10,677 a) Governments - - - - b) Other public entities - - - - c) Other issuers 1,727,352 10,523 434,480 10,677 - non-financial companies 27,514 - 34,732 - - financial companies 1,624,959 10,523 375,990 10,677 - insurance companies 74,879 - 23,758 - - other - - - - 2 Loans to: 83,871,492 9,740,858 77,107,399 3,544,137 a) Governments 68,269 2 77,340 - b) Other public entities 515,254 4,209 445,236 8,758 c) Other counterparties 83,287,969 9,736,647 76,584,823 3,535,379 - non-financial companies 59,348,575 8,137,973 52,248,235 2,656,495 - financial companies 6,390,635 273,704 8,307,666 159,621 - insurance companies 599,071 11,243 103,396 43 - other 16,949,688 1,313,727 15,925,526 719,220 Total 85,598,844 9,751,381 77,541,879 3,554,814
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7.3 Loans to customers under specific hedging
(thousands of euro) 31/12/2009 31/12/2008
1 Loans under specific fair value hedging: 8,429,682 202,150 a) interest rate risk 8,429,682 202,150 b) exchange rate risk - - c) credit risk - - d) multiple risks - - 2 Loans under specific cash flow hedging: 1,976,889 127,805 a) interest rate risk - 80,285 b) exchange rate risk - 45,866 c) other 1,976,889 1,654 Total (book value) 10,406,571 329,955
7.4 Finance lease
31/12/2009 Minimum payments Gross investment
Impaired of which residual of which residual exposures Principal Interest non-guaranteed guaranteed value value - On demand - 45,641 - 8,281 53,920 759 - Up to 3 months - 200,997 - 42,838 243,835 4,940 - Between 3 months and - 681,797 - 167,366 849,164 30,762 1year - Between 1 and 5 years - 2,139,316 - 520,023 2,652,208 170,100 - Over 5 years - 2,229,451 - 412,421 2,661,956 897,863 - Undefined term 3,347,823 179,234 - - 179,234 - Net total 3,347,823 5,476,436 - 1,150,929 6,640,317 1,104,424
The above finance lease refer to Banca Italease and its subsidiaries, which joined Gruppo Banco Popolare as from the second half of the year. On 31 December 2008 the Group had customer finance lease receivables totaling 42 million, almost exclusively referring to the Romanian subsidiary Auto Trading Leasing IFN S.A.
Sub-section 8 - Hedging derivatives – Item 80
8.1 Hedging derivatives: breakdown by type of hedging and level
31/12/2009 31/12/2008 (thousands of euro) Fair value Fair value NV NV L1 L2 L3 L1 L2 L3 A) Financial derivatives - 130,758 - 1,074,451 - 92,881 - 22,524 1. Fair value - 130,623 - 1,049,898 - 92,881 - 22,524 2. Cash flows ------3. Foreign investments - 135 - 24,553 - - - - B) Credit derivatives ------1. Fair value ------2. Cash flows ------Total - 130,758 - 1,074,451 - 92,881 - 22,524
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8.2 Hedging derivatives: breakdown by hedged portfolio and by type of hedge (book value)
Fair Value Cash flows
Specific Foreign (thousands of euro) invest. Interest Exchange Credit Multiple Macro Specific Macro Price risk rate risk rate risk risk risks
1 Financial assets available for sale - - - - - X - X X 2 Loans and receivables - - - X - X - X X 3 Financial assets held to maturity X - - X - X - X X 4 Portfolio ------X 5 Other transactions X X X X X X X X 135 Total assets ------135 1 Financial liabilities 69,032 - - X - X - X X 2 Portfolio - - - - - 61,591 - - X Total liabilities 69,032 - - - - 61,591 - - 1 Expected transactions X X X X X X - X X 2 Financial assets and liabilities portfolio X X X X X - X - -
Specific hedges under hedging test are attributable to Banca Italease and refer entirely to the fair value hedging of structured and non-structured bond issues. Macro-hedging refers to the positive changes in interest rate derivatives entered to hedge the fair value of a portfolio made up of customer checking accounts (core deposits). The change in fair value of hedged liabilities is recognized in the balance sheet liabilities item “70 Fair value change of financial liabilities in hedged portfolios”.
Sub-section 9 – Fair value change of financial assets in hedged portfolios – Item 90
9.1 Fair value change of financial assets in hedged portfolios: breakdown by hedged portfolios
(thousands of euro) 31/12/2009 31/12/2008
1 Positive fair value changes 7,267 9,142 1.1 in specific portfolios: 7,267 9,142 a) loans and receivables 7,267 9,142 b) financial assets available for sale - - 1.2 Aggregate - - 2 Negative fair value change - - 2.1 in specific portfolios: - - a) loans and receivables - - b) financial assets available for sale - - 2.2 Aggregate - - Total 7,267 9,142
The change in fair value of macro-hedged financial assets refers to a portfolio of mortgages included in item “Customer loans”. The total amount of loans under macro-hedging is shown in the following table 9.2. The associated hedging derivatives, which on 31 December 2009 posted a negative fair value change, are shown in the balance sheet liabilities item “60 Hedging derivatives”. Profit or loss on fair value changes associated with hedging derivatives and the hedged portfolio are recognized in item 90 “Net fair value changes in hedge relationships”.
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9.2 Interest rate risk macro-hedging
(thousands of euro) 31/12/2009 31/12/2008
1 Loans and receivables 142,026 158,920 2 Financial assets available for sale - - 3 Portfolio - - Total 142,026 158,920
Sub-section 10 – Investments in associates and companies subject to joint control – Item 100
10.1 Investments in companies subject to joint control (carried at equity) and in companies subject to a significant influence: information on equity stakes
Type of Shareholding Voting right Name Head office relation % (b) (a) Company % share
A. Companies carried at equity A.1 Companies under joint control Polo Finanziario S.p.A. Verona (7) BPV-SGSP 33.333% A.2 Companies under significant influence (associates) AF Mezzanine SGR S.p.A. Milan (8) Efibanca 50.000% Agos-Ducato S.p.A. Milan (8) Banco Popolare 39.000% Alba Leasing S.p.A. Milan (8) Banca Italease 32.790% Mercantile Leasing n.s. Alfa Iota 2002 S.r.l. Milan (8) Efibanca 35.000% Aosta Factor S.p.A. Aosta (8) Banco Popolare 13.793% Banca Italease 6.897% Arca SGR S.p.A. Milan (8) Banco Popolare 10.280% Holding di Partecipazioni 7.568% Banca Pop. di Cremona 5.310% Banca Pop. di Crema 5.118% Assipromos S.r.l. (in liquidation) Livorno (8) C.R. Lucca Pisa Livorno 34.000% AviPop Assicurazioni S.p.A. Milan (8) Holding di Partecipazioni 49.999% Bertani Holding S.p.A. Verona (8) Efibanca 22.330% Bussentina S.c.a.r.l. Rome (8) Bipielle Real Estate 20.000% Centrosim S.p.A. Milan (8) C.R. Lucca Pisa Livorno 10.000% Banco Popolare 7.500% Banca Pop. di Crema 4.852% Banca Pop. di Cremona 2.500% Banca Italease 0.300% Co.Ge.Vi. S.A. E - Guadalajara (8) Bormioli Rocco(Spagna)S.A. 37.300% Co.Im.A. S.r.l. Acireale (CT) (8) Banca Popolare di Lodi 33.330% Energreen S.A. L - Luxembourg (8) Efibanca 45.000% Estates Capital Venture S.A. L - Luxembourg (8) Efibanca 43.368% Eurocasse SIM S.p.A. (in liquidation) Milan (8) Banco Popolare 20.795% (8) C.R. Lucca Pisa Livorno 0.186% Finanziaria ICCRI BBL S.p.A. (in liquidation) Milan (8) Banco Popolare 50.000% G.I. Holding S.p.A. Milan (8) Efibanca 29.346% 30.412% GEMA Magazzini Generali BPV-BSGSP S.p.A. Castelnovo Sotto (RE) (8) BPV-SGSP 33.333% Gruppo Operaz. Underwriting Banche Popolari Milan (8) Banca Aletti 20.000% S.r.l. HI-MTF S.p.A. Milan (8) Banca Aletti 20.000% Immobiliare Centro Milano S.p.A. Milan (8) Banca Italease 33.333% Istituto Centrale delle Banche Popolari Italiane Milan (8) Banco Popolare 15.313% S.p.A. Holding di Partecipazioni 6.386% Banca Pop. di Crema 0.921% Banca Italease 0.014% Novara Promuove S.r.l. Novara (8) Banca Popolare di Novara 49.000% Pantex Sud S.r.l. Pescara (8) Efibanca 50.000% Phoenix S.p.A. Verona (8) Efibanca 40.000% Popolare Vita S.p.A. Verona (8) Holding di Partecipazioni 24.388%
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Type of Shareholding Voting right Name Head office relation % (b) (a) Company % share
Portone S.c.a.r.l. (in liquidation) Ravenna (8) Bipielle Real Estate 30.000% Renting Italease S.r.l. Rome (8) Italease Gestione Beni 50.000% Soc. Coop. fra le Banche Pop. "L.Luzzatti" S.c.r.l. Rome (8) Banco Popolare 26.693% Tre Pi S.p.A. (agreement with creditors) Rome (8) Efibanca 20.000% Triera Power S.p.A. Rovigo (8) Bio Energy 30.000% B. Companies under proportionate consolidation N/A (a) Type of relation: (7) Joint control (8) Associate (b) Effective voting right percentage in General Annual Meeting is indicated only if different from shareholding percentage.
10.2 Investments and companies subject to joint controland companies subject to significant influence: financial highlights
Total Total Income Sharehold- (in thousands of euro) Book value Fair value assets revenues (Loss) ers’ equity
A. Companies carried at equity A.1 Companies under joint control 14,887 Polo Finanziario S.p.A. (1) 63,056 202 -407 59,663 14,887 X A.2 Companies under significant influence (associates) 1,622,334 AF Mezzanine SGR S.p.A. 2,177 2,277 410 1,832 831 * Agos S.p.A. 20,063,261 1,635,872 197,726 1,673,514 1,079,539 * Alba Leasing S.p.A. 360,000 - - 360,000 118,044 * Alfa Lota 2002 S.r.l. 205 2 -12 120 42 * Aosta Factor S.p.A. 110,813 6,445 701 27,532 5,696 * Arca SGR S.p.A. 163,136 173,591 10,686 113,125 39,705 * Assipromos S.r.l. (in liquidation) 131 4 -9 -29 - * AviPop Assicurazioni S.p.A. 126,654 44,217 407 45,638 9,274 * Bertani Holding S.p.A. 23,877 11,054 405 11,444 5,211 * Bussentina S.c.a.r.l. 445 5 - -278 - * Centrosim S.p.A. 143,055 37,959 -4,622 12,964 3,264 * Co.Ge.Vi. SA 4,609 11,978 - 713 266 * Co.Im.A. S.r.l. 79 5 -1 15 6 * Energreen S.A. 558,359 44,423 -4,045 80,156 41,838 * Estates Capital Venture S.A. 5,315 5 -244 2,248 975 * Eurocasse SIM S.p.A. (in liquidation) 9,269 52 -745 -16,650 - * Finanziaria ICCRI BBL S.p.A. (in liquidation) 2,880 118 -105 2,494 1,247 * G.I. Holding S.p.A. (2) 26,680 37,600 -252 1,653 773 * GEMA Magazzini Generali BPV - BSGSP S.p.A. 5,942 1,652 -459 4,394 1,306 * Gruppo Operaz.Underwriting Banche Popolari S.r.l. 104 34 7 97 20 * HI-MTF S.p.A. 4 2,126 121 3,967 794 * Immobiliare Centro Milano S.p.A. 120 - - 120 40 * Istituto Centrale delle Banche Popolari Italiane (2) 7,019,372 913,023 58,147 544,186 137,652 * Novara Promuove S.r.l. 160 151 13 131 64 * Pantex Sud S.r.l. 11,011 21,966 -670 2,925 4,323 * Phoenix S.p.A. 178 1 -47 80 128 * Popolare Vita S.p.A. 7,725,102 2,265,917 37,865 324,835 166,849 * Portone S.c.a.r.l. (in liquidation) 42 19 - 26 8 * Renting Italease S.r.l. 49,070 21,851 -593 4,180 2,090 * Società Coop. fra le Banche Pop. "L. Luzzatti" S.c.r.l. 5,621 0 5,084 -29 1,449 * Tre Pi S.p.A. (arrangement with creditors) 4,630 129 -196 -20,705 - * Triera Power S.r.l. 489 6 2 34 900 * B. Companies under proportionate consolidation Notes * Unquoted company (1) Shareholders’ equity is net of capital subscribed and not yet paid in (2) Data refer to the consolidated financial statements
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10.3 Investments in associates and companies subject to joint control: annual changes
(in thousands of euro) 2009 2008
A. Opening balance 1,457,405 870,477 B. Increases 341,867 1,099,676 B.1 Purchases 233,762 1,044,593 B.2 Write-backs - - B.3 Revaluations - - B.4 Other changes 108,105 55,083 C. Decreases -162,051 -512,748 C.1 Sales -39,063 -13,909 C.2 Write-backs -9,132 -345,799 C.3 Other changes -113,856 -153,040 D. Closing balance 1,637,221 1,457,405 E. Total revaluations F. Total impairments -525,340 -516,208
Purchases made as part of capital strengthening actions refer to the deposit of 56.2 million as capital contribution to the subsidiary Popolare Vita in January. The deposit was carried out as a result of the restructuring of the index-linked policies issued by Novara Vita (merged into Popolare Vita) to protect the assets of the customers of Gruppo Banco Popolare. In January the Group also subscribed the capital increase of the associate Istituto Centrale Banche Popolari Italiane (ICBPI) for 17.5 million. In April the Group made a 6 million deposit in the future capital increase account of the associate Avipop Assicurazioni, following the resolution met by the Special Shareholders’ Meeting of the associate to carry out a capital increase of 22.5 million. In July, the capital increase of Agos was subscribed for 22.1 million, resolved by the Special Shareholders’ Meeting of the company on 8 July 2009. In October, having finalized the stock option plan, an additional capital increase of 8.4 million was performed; the attributable share subscribed by the Group totaled 3.3 million. Purchases to acquire control over Gruppo Banca Italease include the companies Renting Italaese (2.1 million), Aosta Factor S.p.A. (1.9 million) and Alba Leasing S.p.A. (118.0 million). As part of our merchant banking business, purchases include the acquisition of 50% of Pantex Sud S.r.l. for 4.3 million.
Other increases include 93.9 million profit from the valuation under the equity method, and the 3.7 million profit on disposal of Investments in associates and companies subject to joint control (see sub-section 16 of the Income statement for further details).
Sales represent the value of disposals executed during the year and refer to part of the share in Istituto Centrale Banche Popolari Italiane for 36.9 million and the total amount (2.1 million) collected at the end of the liquidation procedure of the associate Evoluzione 94.
Impairments totaled 9.1 million (see sub-section 16 of the Income statement for further details).
Other decreases include a 12.0 million loss from the valuation under the equity method (see sub-section 16 of the Income statement for further details). Finally they include the 77.6 million decrease as a result of the takeover of Banca Italease and its subsidiaries, as a result of which Banca Italease, as compared with 31 December 2008, is no longer carried at equity.
Criterion used to determine the recoverable amount of Investments in associates and companies subject to joint control for the preparation of the annual report as at 31 December 2009
In order to quantify impairment losses, the carrying amount and the recoverable amount of Investments in associates and companies subject to joint control were compared. Based on IAS 36 the recoverable amount is the higher of fair value net of selling costs and value in use.
Illustrated below are the valuations of the main Investments in associates and companies subject to joint control: In the light of the existing stock option plan, to value the equity investment held in Agos Ducato we decided to use the Dividend Discount Model (“DDM”), based on which the value of a company is a function of its predicted dividend stream. More precisely, we used the Excess Capital version of the DDM method, which expresses economic value as the sum of the current value of future cash flows generated in a given projection horizon, that could be paid out to shareholders while retaining an adequate capitalization level to guarantee the future expected growth, and the Terminal Value corresponding to the perpetual capitalization of the discounted dividend in the last year of the Plan, based on a pay-out ratio as a function of a stable profitability. In particular, the Plan was adjusted assuming a return of the cost of risk, i.e., total allowances to Loan loss provision, on values consistent with the average in recent years and with Agos’s projections.
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to value our equity investment in Istituto Centrale delle Banche Popolari Italiane we referred to the capital increase subscribed by Iccrea in October 2009. to value our equity investment in Arca Sgr we used the same methods applied to measure the fair value of the Sgr (asset management companies) of Gruppo Banco Popolare described in the sub-section Intangible Assets.
For the valuation of the Investments in associates and companies subject to joint control held in Popolare Vita and in Avipop Assicurazioni, please refer to the following sub-section 13.
With regard to our equity investment in Alba Leasing, please refer to the description of the restructuring of the former Gruppo Banca Italease, carried out in the second half of the year under examination, in SECTION G of these explanatory notes.
10.4 Commitments relating to investments in jointly controlled companies
No commitments relating to investments in jointly controlled companies were reported.
10.5 Commitments relating to investments in associates
The Special Shareholders’ Meeting of Avipop Assicurazioni on 24 April 2009 approved a capital increase of 22.5 million. It also decided that the above capital increase be immediately subscribed but paid in only in the amount of 12 million. As a result, Gruppo Banco Popolare, though its subsidiary Holding di Partecipazioni Finanziarie BP, on the same date paid 6 million, and has a commitment outstanding with the company of 5.25 million.
Commitments under the consumer credit agreements with Credit Agricole
Banco Popolare signed a shareholders’ agreement with Sofinco (Gruppo Credit Agricole), which became binding on 22 December 2008. Among other things, the agreement provides that in the event that Banco should own another company engaging in consumer credit, as part of a business combination plan with other Institutes which own a consumer credit company or in case it acquires a new entity which has a controlling interest in a consumer credit company, it must offer the new indirectly acquired consumer credit entity at a market price to Agos. Assuming that Banco does not sell the new entity to third parties in the mean time and does not renew the commercial agreements signed with Agos on their second expiration date, Sofinco will be entitled to purchase from Banco, that in turn will be committed to sell, 5% of the share capital of Agos S.p.A. at its nominal value.
Commitments under bancassurance agreements
Commitments towards Fondiaria SAI
Provisions under the shareholders’ agreements give FonSAI the control over Popolare Vita and the granting of reciprocal put&call options in case of partnership dissolution. In particular, under the shareholders’ agreement, Fondiaria-Sai can resell 50% plus one share of Popolare Vita’s share capital to Banco Popolare, should the following conditions occur: change of control of Banco Popolare; breach of the exclusive granted by Banco Popolare under the distribution agreement and/or serious breach of the latter; failure to renew the distribution agreement by Banco Popolare; failure to renew the distribution agreement by Popolare Vita as a result of a decision made with the favorable vote of Fondiaria-SAI; Banco Popolare, also through its subsidiary Holding di Partecipazioni Finanziarie BP, is no longer holding an interest below 50% less one share of the share capital of Popolare Vita.
In case the option is exercised, the value of the transaction would be determined based on current market methods by an independent expert hired by the parties. The distribution agreement between Popolare Vita and the distribution networks of Banco Popolare has a ten year term, renewable for additional 5 year periods.
Commitments towards Aviva Italia Holding
Banco Popolare and Aviva Italia Holding signed a shareholders’ agreement to regulate the business aspects of their partnership and the corporate governance rules of Avipop Assicurazioni. Among other things, the agreement provides for put&call options in case of partnership dissolution. In particular, under the shareholders’ agreement, Aviva Italia Holding can resell its 50% interest (plus one share) Avipop Assicurazioni’s share capital to Banco Popolare, should the following conditions occur: change of control of Banco Popolare; breach of the exclusive granted by Banco Popolare under the distribution agreement and/or serious breach of the latter;
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failure to renew the distribution agreement by Banco Popolare; failure to renew the distribution agreement by Avipop Assicurazioni as a result of a decision made with the favorable vote of Aviva Italia Holding; the coming into effect of a law and/or issuance of an order abolishing the exclusive bond provided by the distribution agreement, within the first expiration date of the agreement; the issuance of an order obliging Banco Popolare to distribute protection insurance products with entities other than Avipop Assicurazioni within the first expiration date of the agreement; the occurrence of an underperformance event (i.e., in any three-year period as from 1 January 2009, a total product sales volume – gross of redemptions - 20% below the one set for the same period by the business plan, in terms of premiums written).
In case the option is exercised, the value of the transaction would be determined based on current market methods by an independent expert hired by the parties. The distribution agreement between Avipop Assicurazioni and the distribution networks of Banco Popolare has a ten year term, renewable for additional 5 year periods
Sub-section 11 - Technical insurance reserves reassured with third parties – Item 110
The Group has no shareholding in insurance companies.
Sub-section 12 - Property and equipment – Item 120
On 31 December 2009, property and equipment amounted to 1,442.4 million, up by 8.5% from 1,329.1 million the year before.
12.1 Property and equipment: breakdown of assets measured at cost
(thousands of euro) 31/12/2009 31/12/2008
A) Operating property 1. Owned 1,215,725 1,248,584 a) land 327,572 331,246 b) buildings 615,139 628,312 c) furniture 53,433 52,208 d) electronic systems 49,260 52,517 e) other 170,321 184,301 2. Under financial lease 43,295 43,884 a) land 19,314 10,450 b) buildings 23,867 33,408 c) furniture - - d) electronic systems - - e) other 114 26 Total A 1,259,020 1,292,468 B) Investment property 1. Owned 123,427 36,681 a) land 49,959 10,204 b) buildings 73,468 26,477 2. Under financial lease 60,015 - a) land 33,203 - b) buildings 26,812 - Total B 183,442 36,681 Total (A+B) 1,442,462 1,329,149
Set out below is the estimated useful life of depreciated property and equipment, by class of asset: - land indefinite - buildings 33 years - investment property 33 years - furniture 7-9 years - equipment 3-7 years
12.2 Property and equipment: breakdown of assets measured at fair value or revalued
The Group has no tangible assets measured at fair value or revalued.
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12.3 Operating property and equipment: annual changes
Electronic (thousands of euro) Land Buildings Furniture Other Total systems
A) Gross opening balance 344,753 942,668 227,783 414,542 787,980 2,717,726 A.1 Net impairments -3,057 -280,948 -175,575 -362,025 -603,653 -1,425,258 A.2 Net opening balance 341,696 661,720 52,208 52,517 184,327 1,292,468 B) Increases: 26,188 33,894 13,567 24,494 42,234 140,377 B.1 Purchases 2,098 16,298 13,289 19,047 41,464 92,196 (of which for business combinations) 2,087 8,396 1,612 1,599 1,009 14,703 B.2 Capitalized expenditure on improvements - 7 - - - 7 B.3 Write-backs ------B.4 Positive fair value changes carried at: a) equity ------b) income ------B.3 Write-backs ------B.5 Positive exchange differences - - 2 32 - 34 B.6 Transfer from investment property ------B.7 Other changes 24,090 17,589 276 5,415 770 48,140 C) Decreases -20,998 -56,608 -12,342 -27,751 -56,126 -173,825 C.1 Sales -8,443 -13,238 -268 -5,238 -1,070 -28,257 (of which for business combinations) - - -97 - - -97 C.2 Depreciation - -29,949 -11,944 -22,305 -40,888 -105,086 C.3 Impairment losses charged to: a) equity -859 -1,793 - - -322 -2,974 b) income 0 0 - - 0 0 C.4 Negative fair value changes charged to: -859 -1,793 - - -322 -2,974 a) equity b) income ------C.2 Depreciation ------C.3 Impairment losses charged to: ------C.5 Negative exchange differences - - -2 -26 0 -28 C.6 Transfer to: -9,371 -7,182 -104 -84 -354 -17,095 a) investment property, plant and equipment - -3,675 - - - -3,675 b) discontinued operations -9,371 -3,507 -104 -84 -354 -13,420 C.7 Other changes -2,325 -4,446 -24 -98 -13,492 -20,385 D) Net closing balance 346,886 639,006 53,433 49,260 170,435 1,259,020 D.1 Net impairments 6,075 311,528 191,460 385,705 645,595 1,540,363 D.2 Gross closing balance 352,961 950,534 244,893 434,965 816,030 2,799,383 E) Measured at cost ------
Impairment losses charged to income and totaling 2.9 million include mainly write-downs carried out by the subsidiary Bipielle Real Estate to bring the carrying amounts of owned property (land and buildings) in line with the lower values shown in surveys carried out by independent companies at the balance sheet date.
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12.4 Investment property and equipment: annual changes
(thousands of euro) Land Buildings Total
A) Opening balance 10,204 26,477 36,681 B) Increases 76,443 83,898 160,341 B.1 Purchases 52,826 71,842 124,668 (of which for business combinations) 52,420 71,455 123,875 B.2 Capitalized expenditure on improvements - - - B.3 Positive fair value changes - - - B.4 Write-backs - - - B.5 Positive exchange differences - - - B.6 Transfer from operating property 7,680 3,675 11,355 B.7 Other changes 15,937 8,381 24,318 C) Decreases -3,485 -10,095 -13,580 C.1 Sales - -135 -135 (of which for business combinations) - - - C.2 Depreciation - -1,804 -1,804 C.3 Negative fair value changes - - - C.4 Impairment losses -112 - -112 C.5 Negative exchange differences 0 - - C.6 Transfers to other asset portfolios -152 -159 -311 a) operating properties - - - b) non-current assets held for sale -152 -159 -311 C.7 Other changes -3,221 -7,997 -11,218 D) Closing balance 83,162 100,280 183,442 E) Measurement at fair value 105,266 145,729 250,995
12.5 Commitments to purchase property and equipment
No commitments to purchase property and equipment were reported.
Sub-section 13 – Intangible assets – Item 130
13.1 Intangible assets: breakdown by type of asset
31/12/2009 31/12/2008 (thousands of euro) Definite useful Indefinite useful Definite useful Indefinite useful life life life life
A.1 Goodwill X 4,474,030 X 4,469,851 A.1.1 attributable to the Group X 4,474,030 X 4,469,851 A.1.2 attributable to third parties X X A.2 Other intangible assets 584,512 236,400 626,997 236,400 A.2.1 Assets measured at cost: 584,512 236,400 626,997 236,400 a) Internally generated intangible assets - - - - b) Other assets 584,512 236,400 626,997 236,400 A.2.2 Assets measured at fair value: - - - - a) Internally generated intangible assets - - - - b) Other assets - - - - Total 584,512 4,710,430 626,997 4,706,251
13.1.1 Intangible assets: impairment test
Allocation of goodwill and of other intangible assets with an indefinite useful life to their cash-generating units
In keeping with paragraph 66 of IAS 36, if there is any indication that an asset may be impaired, the recoverable amount should be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an enterprise should determine the recoverable amount of the cash-generating unit to which the asset belongs.
With regard to goodwill, paragraph 80 states that in testing for impairment, goodwill arising on acquisition on the acquisition date must be allocated to each of the acquirer’s cash generating unit, or group of cash-generating units, that may benefit from synergies generated by the combination, irrespective of the fact that other assets or liabilities of the acquired company are allocated to the same unit or group of units. Each unit or group of units to which goodwill is allocated must:
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(a) represent the minimum level within the enterprise whose goodwill is being monitored for internal auditing; (b) not be greater than a segment based on the enterprise’s primary or secondary segment format determined in compliance with IFRS 8 Segment reporting.
In order to identify the cash-generating units to which assets to be submitted to the impairment test are to be allocated, it is necessary that the potentially identified units generate cash inflows that are largely independent of those from other potentially identified units.
Consistently with the annual report as at 31 December 2008, the cash-generating units to which goodwill and other intangible assets with an indefinite useful life (trademarks) must be allocated do not coincide with the single legal entities making up the economic sectors representing the primary format of segment reporting. The single retail banks (Banche del Territorio) can no longer be considered cash-generating units largely independent of one another for the following reasons: concentration at the Parent company of the treasury management and of the issue of bonds destined to both institutional and retail customers; Banche del Territorio turned into providers of standardized products created in the product factories, including the joint-ventures in which the Parent company has a shareholding interest; strategies as to the kind of products to be distributed by the Banche del Territorio decided at Parent company level; standardization of compensation and incentive policies for the branch network personnel; reorganization of the branch network by swapping bank branches between different retail banks to maximize their global profitability and efficiency through a stronger territorial penetration guaranteed by the presence of a single brand in the Group’s market territories; optimization of the branch network based on a plan approved by the Management Board of the Parent company in December 2009 and coordinated by the Retail structure; strengthening of the Parent company structures to bring about a greater coordination across lending and loan monitoring policies; completion of the Large Corporate project, with the transfer at the Parent company of all the customer relations belonging to this segment, in addition to centralizing at Banco Popolare the commercial management of customers having a national scope and no specific local market, and characterized by complex financial requirements; layout of the reporting and internal audit system to guarantee a direct monitoring of the performance of the Banche del Territorio CGU and thus allow the Parent company a more efficient exercise of its strategic planning and direction functions.
With regard to the Private & Investment Banking CGU, the latter includes Banca Aletti and the fully owned fiduciary companies (Aletti Fiduciaria, Nazionale Fiduciaria and Aletti Trust) as their business is ancillary to that of the parent company.
As a result, the impairment test to prepare the annual report as at 31 December 2008 was conducted by comparing the carrying amount of the single CGU in the consolidated financial statements with the higher of the of the value in use and the fair value of the same entities.
The impairment test conducted to prepare the annual report as at 31 December 2008 had evidenced a total impairment of 486 million, which break down as follows:
C.G.U. Impairment Goodwill Trademarks Total (millions of euro) (FY 2008)
Banche del Territorio 3,338 236 3,574 - Banco Popolare eska 8 - 8 8 Banco Popolare Croatia 30 - 30 30 Banco Popolare Hungary 22 - 22 22 AT Leasing 4 - 4 4 Bipielle Suisse 4 - 4 4 Private and Investment Banking 896 - 896 - Aletti Gestielle 53 - 53 41 Aletti Gestielle Alternative 11 - 11 9 Efibanca 246 - 246 246 Bormioli 155 - 155 122 BRF Property 9 - 9 - Avipop Assicurazioni 77 - 77 - Popolare Vita 102 - 102 - Other minor 1 - 1 - Total 4,956 236 5,192 486
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In consistency with the method used in the prior year, when preparing the annual report as at 31 December 2009, the impairment test on intangible assets with an indefinite useful life was conducted based on: a CGU incorporating all retail banks (Banche del Territorio): Banca Popolare di Verona-S.Geminiano e S.Prospero, Banca Popolare di Novara, Banca Popolare di Lodi, Cassa di Risparmio di Lucca Pisa Livorno, Credito Bergamasco, Banca Popolare di Crema, Banca Popolare di Cremona and Banca Caripe a CGU corresponding to the companies engaging in Private & Investment Banking several CGUs corresponding to the single Asset Management Companies - Sgr (Aletti Gestielle, Aletti Gestielle Alternative) several CGUs corresponding to the single companies engaging in Bancassurance (Popolare Vita, Avipop Assicurazioni) other CGUs corresponding to the single companies where intangible assets with an indefinite useful life have been allocated
Criterion used to measure the recoverable amount of cash-generating units for the preparation of the annual report as at 31 December 2009
Generally, impairment tests represent one of the most complex and critical aspects of business management. The current environment made things even more complex. In particular, when conducting tests of this kind, the high volatility of financial markets and the strong uncertainty pervading economic and financial development scenarios significantly increase the risk of making errors in estimating values. In the light of the uncertainty shrouding future scenarios, to date Gruppo Banco Popolare does not have an updated business plan that can be used as a significant base to estimate the value in use of Investments in associates and companies subject to joint control and of cash-generating units to which intangible assets with indefinite useful life have been allocated. Gruppo Banco Popolare therefore decided to use Market Multiples (Stock Multiples and Comparable Transaction multiples) in general to measure the Fair Value of the Group CGUs (expressing 4,516 million worth of assets with an indefinite life) for the Impairment Test, with the exception of the recoverable value of bancassurance cash-generating units and of the investment in Gruppo Bormioli (expressing 212 million worth of goodwill), which instead is based on their values in use.
When conducting the impairment test, we took into due consideration the recommendations contained in the joint letter issued by the Bank of Italy, Consob and Isvap on 3 March 2010, in particular the existence of an impairment indicator for Banco Popolare, represented by a market capitalization significantly below its consolidated shareholders’ equity.
These methodologies and implementation procedures have been chosen in order to manage the risks of over/underestimating the identified value and the risks associated with the current economic and financial environment. By using Stock multiples, in view of the volatility of financial markets and the conservative prices expressed by the markets themselves, we may run the risk of identifying conservative values, especially if they were to be applied to income and financial key figures of the entities under valuation over a purely short term timeframe, strongly influenced by contingent factors. However, should we rely only on Comparable Transaction multiples, and put Stock Multiples aside, we might miss important changes in the economic and financial scenario against which the entities under valuation actually operate. Therefore, in order to limit the above risks, we decided to use the Stock price average calculated over a 6 month horizon to stabilize quotations, and to apply an adjusted income, namely stripped of non-recurring items and/or contingent on the current environment. Whenever possible, in addition to Stock Multiples, we also took into consideration Comparable Transaction Multiples. In particular, with regard to the Retail Banks CGU, the Goodwill/AuM multiple was adjusted with the multiplier obtained from peer company transactions. This decision was supported by the availability of a considerable sample of recent transactions regarding commercial banks, and by the historic analysis conducted on Stock multiples that evidenced that the current level of this multiple shows a definite misalignment with respect to the past on a long time horizon.
Procedure to measure the fair value of cash-generating units: basic information
With respect to the CGUs under valuation, the analyses was based on 2009 preliminary data, on the 2010 budget and on the 2010 adjusted budget. The 2010 adjusted budget takes the 2010 budget as a starting point, and then prudentially assumes constant assets, stripping out non-recurring or contingent positive and negative components, also in view of the unprecedented economic backdrop; these adjustment are justified and sustained by specific projections made by the Group or evidence made available by External Sources (e.g. Prometeia).
For the Retail Banks CGU, the 2010 adjusted budget was calculated taking the 2010 budget as a starting point, and adjusting it to take the following factors into consideration: interest margin has been “adjusted” based on the reference macro-economic scenario, which over the 2010-2012 timeframe projects a 180 bps increase in market rates (1 month Euribor: 93 bps in 2010, 273 bps in 2012); the 2010 budget was “adjusted” by applying an average cost of credit of 45 bps, more consistent with a context of macroeconomic stability, as expected in the reference scenario; the 2010 budget of the Banche del Territorio was “adjusted” by derecognizing additional charges generated by the levy of VAT on intercompany services, as this tax regime is considered transitory;
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the 2010 budget of the Banche del Territorio was “adjusted” to take into account the drying up of the income stream as a result of customers being transferred to the Parent company under the “National Large Corporate” plan, whereby Large Corporate customers having a national scope will be passed over to the Parent Company; the 2010 budget of the Banche del Territorio was “adjusted” to factor in the progressive reduction in the commission stream due to the change in retrocessions paid by Aletti Gestielle Sgr and correspondingly Aletti Gestielle Sgr’s budget was “adjusted” by an equal amount; the adjustments did not assume increments of the other income components with respect to the 2010 estimate.
The adjusted 2010 budget of the Private & Investment Banking CGU was calculated based on the 2010 budget, adjusted to take into account the following factors: transfer of business activities carried out by the Money Market and Forex offices; changes introduced by Isvap to index-linked policies; transfer of the management of Banco Popolare’s proprietary portfolio; reduction in the estimate of performance fees accrued in 2009, as deemed not entirely duplicable in financial year 2010; the 2009 net income also benefitted from the narrowing of credit spreads as a result of the stabilization of financial markets after Lehman’s default in September 2008;
The adjusted 2010 budget of the Asset Management CGU was calculated based on the 2010 budget, adjusted to take into account the following factors:
Aletti Gestielle SGR decline of rebate rates to captive networks, stripping Client Relationship amortization (intangible asset with a definite life) away from costs, reduction of costs associated with non-recurring UCITS merger, accounting for commission benefits linked to the launch of new products
Aletti Gestielle Alternative SGR stripping Client Relationship amortization (intangible asset with a definite life) away from costs
Procedure to measure the fair value of cash-generating units: adopted valuation methods
With respect to the CGUs of Banche del Territorio, of Private & Investment Banking and of asset management companies, the valuation was conducted with the Market Multiple method, based on the analysis of peer listed companies or comparable transactions and by applying the obtained parameters to the values of the enterprise/CGU under valuation. Multiples represent the ratio between the peer company valuation, expressed by stock prices, or prices paid in M&A transactions, and the related income and financial key figures. The Market Multiple method was implemented as follows: identification of peer listed companies and of Comparable Transactions (when applied), taking into consideration various factors such as the industry and country of belonging, the company risk and size, profitability and capitalization, and for listed companies the share turnover; definition of the time horizon for the analysis, based on its goals; in order to make information implied in stock prices available and to limit/reduce the high volatility effect that is currently affecting stock markets, the time horizon taken into consideration was 6 months; identification of most significant multiples, based on the characteristics of the industry to which the company under valuation belongs. Generally, both income and capital multiples are used, if they can provide a link between P&L/balance sheet data and the enterprise value.
Peer listed companies were chosen from among the most similar to the CGU under valuation in terms of core business. To calculate the multiples of the comparables, companies with an annual volume turnover ratio below 10% (over Share Capital) were excluded, as they were considered illiquid. The financial data of comparables were derived from the latest available official documents, while profitability data, in consistency with the data used for the entities under valuation, were calculated on Adjusted Earnings (Source Bloomberg) according to analyst consensus. Consistently with the impairment test conducted for the 2008 annual report, the identified multiples were: i) Adjusted Price/Earnings, calculated as the ratio between the average 6-month market capitalization and the adjusted income ratio, taken as the average analyst consensus (source Bloomberg); ii) Goodwill/AuM, calculated as the ratio between the difference between the average 6-month market capitalization and the Tangible Net Equity and total assets. The latter parameter, drawn from official reports (financial statements of peer companies), is equal to the sum of direct and indirect customer funds in case of the Retail Banks CGU, or assets under management for the Private & Investment Banking CGU and the Asset Management Companies. Negative multiples have been excluded from the samples as considered non significant, while Adjusted Price/Earnings above 20x were prudentially excluded as considered too optimistic. With regard to the Retail Banks CGU, also following the historic analysis of Stock Multiples, it was decided to take also Comparable Transactions into consideration for the capital multiple alone. For the Private & Investment CGU and in particular with regard to Banca Aletti, the value was measured by splitting the Bank’s business into Investment Banking and Asset Management; the assumed breakdown was based on historic data, and allocated 80% of activities to Investment
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Banking and the remaining 20% to Asset Management. With regard to the latter component and to Asset management companies, the equity multiple was not obtained by averaging out comparables, but rather through the regression of Goodwill/AuM on their Net income/AuM. The use of the average multiple would have given rise to much higher results.
When applying the Adjusted P/E (hereinafter, also Adj P/E), valuations were conducted by considering the capitalization level of the CGU, so as to adequately reflect any over/under-capitalization of the entity with respect to regulations or with respect to peer entities (also called “adjustment for Excess/Deficit Capital”). When applying the Adjusted P/E Multiple, the consideration of the Excess/Deficit Capital implies a correction of the adjusted 2010 budget used in the valuation so as to reflect the impact of the different assumed capital profile on income. The Fair Value deriving from the income multiple is therefore equal to the sum of the Excess/Deficit Capital and the Adj P/E multiple applied to the current adjusted income as a result of the Excess/Deficit Capital. For prudential reasons, the difference between the adjusted 2010 budget and the 2010 budged was deducted from the outcome of the income multiple.
Shown below are the multiples used:
P/E Adjusted GW/AuM Total
Banche del Territorio 15,11X 5.22% Asset Management (1) 14,39X 1.36% Investment Banking 15,26X n.d. (1) for Asset Management the multiple used refers to GW/AuM. The multiples of peer companies (whose average is mentioned above) have been scaled down depending on their profitability; therefore the multiple applied ends up being different for the various entities under valuation.
With regard to Bancassurance companies, the calculation of the Recoverable amount was based on the Appraisal Value method (generally used to value Insurance Companies, and in particular for those engaging in Bancassurance), based on the same valuation elements used when selling the above mentioned stakes. Base on this method, the value of a company is defined as the sum of i) Adjusted Net Equity (ANE), calculated on the basis of the book value of the shareholders’ equity at the reference date of the valuation, adjusted to discount balance sheet assets and liabilities to current market values and/or estimates; ii) In Force Value (VIF, generally estimated only for Life insurance companies), calculated on the basis of actuarial methodologies as the actual value of net income to be generated by the existing portfolio at the reference date of the valuation, net of reinsurance, tax, associated operating costs and figurative charges deriving from keeping the capitalization levels necessary to meet existing supervisory requirements; iii) value referring to future new business (Goodwill), corresponding to the actual value of net income to be generated by the new subscribed business, calculated on the basis of actuarial methodologies similar to those used to calculate VIF. These analysis showed that even when using highly conservative and prudential assumptions, the carrying amounts are well below recoverable amounts.
As to the Investments in associates and companies subject to joint control in Bormioli Rocco e Figlio, since a business plan is available and considering that it is a manufacturing company, we decided to use the Discounted Cash Flow (“DCF”) method. Based on this method, the economic value of a company corresponds to the sum of the following components: i) net operating cash flows that the company can generate within a specific planning period, discounted by a discount rate corresponding to the Weighted Average Cost of Capital, or WACC; ii) the Terminal Value, expressing the enterprise value after the given period, calculated as a perpetual income from a cash flow sustainable over the long term; iii) the company’s net financial position expressed at market values.
The valuation of BRF Property was made by adjusting the statutory Shareholders’ equity posted in the company’s financial statements as at 31 December 2009 based on the valuation at market values of its main real estate assets.
The table below summarizes the results of the impairment test:
C.G.U. Impairment Goodwill Trademarks Total (millions of euro) (FY 2009)
Banche del Territorio 3,342 236 3,578 - Private and Investment Banking 896 - 896 - Aletti Gestielle 12 - 12 - Aletti Gestielle Alternative 2 - 2 - Avipop Assicurazioni 77 - 77 - Popolare Vita 102 - 102 - Bormioli 33 - 33 - BRF Property 9 - 9 - Other minor 1 - 1 - Total 4,474 236 4,710 -
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As a result of the Impairment Tests conducted in compliance with IAS 36, the carrying amounts of all Group business activities held, in particular with reference to core and strategic businesses, such as the Banche del Territorio.
In keeping with paragraph 134 of IAS 36, with regard to CGUs that did not report any Impairment losses, shown below are the multiples that (holding all else constant and according to the adopted methodologies) give a Fair Value equal to the carrying amount: Adj P/E for retail banks (Banche del Territorio): 12.79X if the multiple is applied as a standalone; 6.77X if the multiple is applied in combination with the GW/AuM multiple; GW/Total AuM for Banche del Territorio: 2.35% if the multiple is applied as a standalone; 1.25% if the multiple is applied in combination with the Adj P/E multiple; Adj P/E Private & Investment Banking (for the investment banking arm): 12.78X
This analysis further confirmed the significance of the process and the inputs used to measure the recoverable value of intangible assets with an indefinite life, as the impairment test of most intangible assets with an indefinite life shown in the financial statements of Gruppo Banco Popolare (4,474 million out of 4,737 worth of total intangible assets) would have been passed also by applying much lower multiples than the ones used for the valuation.
Sensitivity analysis
In view of the current volatility of financial markets, it is difficult to identify stock multiples, without running the risk of over/underestimating the entities under analysis. In order to overcome this difficulty, in addition to using six-month price averages, historic multiples (stock multiples of Italian commercial banks from 2000 to 2008) were analyzed for the most significant cases (Banche del Territorio). These analysis evidenced that the Goodwill/Total AuM multiple currently observable on the market is highly penalized, so much so as to induce us to consider also Comparable Transactions for this multiple. Considering the present economic and financial scenario, it is also difficult to identify viable Comparable Transactions. Appropriate sensitivity analysis were therefore conducted, changing the observation time horizon or the benchmark sample. All the above sensitivities confirmed values greater than the carrying amount.
In particular, we: modified the reference time horizon, using the average market capitalization of peer companies at 3 instead of 6 months; worsened the assumptions underlying the adjustment of 2010 budgets, assuming a deteriorating adjusted income; in particular, the 2010 adjusted budget was reduced by 20% for the Retail Banks CGU and by 10% for the remaining CGUs; changed the comparables sample used for the Retail Banks CGU, both for listed companies (taking a sample made up of Italian and European banks) and for Comparable Transactions (using only the three worst transactions and those executed between 2008 and 2009, during the financial crisis); changed the capitalization levels when calculating the Excess/Deficit Capital for the Private & Investment Banking CGU; changed the contribution margin to the operating result between Investment Banking and asset management for the Private & Investment Banking CGU; set the entire Terminal Value to zero for the Bancassurance CGU and, with reference to Popolare Vita, we also carried out an additional stress test simulating the cancellation of all the pension product business.
Exogenous impairment signs
It should be noted, that there is a misalignment between the quotations of Gruppo Banco Popolare expressed by financial markets and its book values. However, the current quotations appear to be characterized by conservative values and by a high volatility. In particular, the quotations of primary Italian banks are traded at a discount over the book value of their shareholders’ equity; also the market capitalization to net equity ratio is below the last ten year average. This misalignment is essentially a consequence of the recent global financial crisis that was particularly harsh on the banking industry; we should also recall that before the crisis the valuations expressed by financial markets, unlike today, were well above net equity and more in line with the historical average. Market values stem from the valuations of the financial community, and by their own nature they rely on short term objectives and estimates, and therefore do not fully reflect the medium to long term growth potentials of a company. Instead, valuations expressed by executives are not characterized by the volatility inherent in stock prices, as they represent an exercise aiming at extrapolating the economic value of an enterprise based on a normal income generation capability, which by the way is not even fully acknowledged by financial markets. This valuation covers a longer timeframe than the one taken into consideration by the financial community and, although it does take the current financial and economic context into due account, however it is not directly correlated. The analyses we conducted, in particular the calculation of implied multiples and the sensitivity analysis, confirmed the validity of the goodwill values that had been recognized in the financial statements for all the Group CGUs, therefore there was no need to impair intangible assets with an indefinite life.
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As a further guarantee thereof, an independent expert (KPMG Advisory S.p.A.) issued a fairness opinion on the appropriateness and correctness of the parameters, valuation methods and sensitivity analysis used in the estimate procedure.
13.2 Intangible assets: annual changes
Other intangible assets Internally (thousands of euro) Goodwill Other Total generated DEF INDEF DEF INDEF A. Opening balance 4,955,627 - - 1,190,827 236,400 6,382,854 A.1 Net impairments (485,776) - - (563,830) - (1,049,606) A.2 Net opening balance 4,469,851 - - 626,997 236,400 5,333,248 B. Increases: 4,179 - - 67,378 - 71,557 B.1 Purchases 4,087 - - 67,296 - 71,383 (of which for business combinations) - - - 6,516 - 6,516 B.2 Increase in internal intangible assets X - - - - - B.3 Write-backs X - - - - - B.4) Positive fair value changes carried at ------equity X ------income X - - - - - B.5) Positive exchange differences - - - 82 - 82 B.6) Other changes 92 - - - - 92 C. Decreases - - - (109,863) - (109,863) C.1 Sales - - - (199) - (199) (of which for business combinations) ------C.2 Impairment losses - - - (109,470) - (109,470) - Amortization X - - (109,151) - (109,151) - Impairment charged to - - - (319) - (319) + equity X - - - - - + P&L - - - (319) - (319) C.3 Negative fair value changes charged to ------equity X ------P&L X - - - - - C.4 Transfers to non-current assets held for sale - - - (60) - (60) C.5 Negative exchange differences - - - (86) - (86) C.6 Other changes - - - (48) - (48) D. Net closing balance 4,474,030 - - 584,512 236,400 5,294,942 D.1 Net impairments (485,776) - - (675,679) - (1,161,455) E. Gross closing balance 4,959,806 - - 1,260,191 236,400 6,456,397 F. Measured at cost ------
The other intangible assets with a definite useful life include 498.1 million worth of intangibles recognized upon Purchase Price Allocation (P.P.A.) regarding the valuation of Client Relationships.
13.3 Other information
On 31 December 2009, no commitments referring to intangible assets were reported.
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Sub-section 14 - Tax assets and liabilities – Item 140 of assets and Item 80 of liabilities
14.1 Deferred tax assets: breakdown
(thousands of euro) IRES IRAP Other 31/12/2009 31/12/2008
A) Through Profit and Loss Goodwill impairment deductible in coming financial years 699,610 119,267 818,877 751,520 Loan impairment deductible in coming financial years 793,541 - - 793,541 496,798 Provisions and impairments deductible in coming financial years 157,235 762 - 157,997 193,980 Fair value measurement of financial assets and liabilities deductible in coming financial years 51,425 7 - 51,432 39,813 Deferred taxes on intercompany capital gains eliminated upon consolidation 25,476 - - 25,476 25,499 Personnel costs and termination benefit provisions deductible in coming financial years 47,225 - - 47,225 47,565 Impairment of Investments in associates and companies
subject to joint control deductible in coming financial years 5,488 - - 5,488 5,488 Losses from prior financial years 10,627 10,627 20,426 Depreciation of non-operating property deductible in coming financial years 1,014 - 1,014 807 Other 129,527 17,911 1,794 149,232 178,256 Total A 1,921,168 137,947 1,794 2,060,909 1,760,152 B) Through Net Equity Fair value measurement of financial assets available for sale 13,994 3,517 - 17,511 36,664 Other 26,430 3,712 115 30,257 52,109 Total B 40,424 7,229 115 47,768 88,773 Total (A+B) 1,961,592 145,176 1,909 2,108,677 1,848,925
14.2 Deferred tax liabilities: breakdown
(thousands of euro) IRES IRAP Other 31/12/2009 31/12/2008
A) Through Profit and Loss Fair value measurement of financial instruments taxable in coming financial years 4,714 6 - 4,720 21,557 Goodwill impairments deducted but not yet charged to income 45,419 4,815 - 50,234 11,971 Other impairments deducted but not yet charged to income 28,226 1,971 - 30,197 16,766 Deferred taxes on retained earnings of companies carried at equity 4,791 8,257 70 13,118 20,781 Capital gains taxable in coming financial years 24,199 311 - 24,510 31,088 Impairments taxable in coming financial years referring to business combinations (PPA) 381,859 65,592 447,451 315,672 Other 42,543 61,061 4,899 108,503 220,167 Total A 531,751 142,013 4,969 678,733 638,002 B) Through Net Equity Fair value measurement of financial assets available for sale 3,295 3,162 - 6,457 6,025 Other 3,690 255 1,011 4,956 1,488 Total B 6,985 3,417 1,011 11,413 7,513 Total (A+B) 538,736 145,430 5,980 690,146 645,515
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14.3 Changes in deferred tax assets (through profit and loss)
(thousands of euro) 2009 2008
1. Opening balance 1,760,152 919,124 2. Increases 533,547 1,198,651 2.1 Deferred tax assets recognized during the year 413,607 1,153,483 a) referring to prior years 76,897 24,988 b) due to changes in accounting standards - - c) write-backs - - d) other 336,710 1,128,495 2.2 New taxes or tax rate increases 1 19,997 2.3 Other increases 119,939 25,171 (of which for business combinations) 107,730 1,550 3. Decreases (232,790) (357,623) 3.1 Deferred tax assets derecognized during the year (231,193) (293,805) a) transfers (197,598) (293,630) b) impairment of non-recoverable items (22,538) (175) c) changes in accounting standards - - d) other (11,057) - 3.2 Tax rate reductions - (2,187) 3.3 Other decreases (1,597) (61,631) (of which for business combinations) - (40,826) 4. Closing balance 2,060,909 1,760,152
In the absence of a plan, the valuation of the probability to recover deferred tax assets for the companies currently falling under the tax consolidation agreement of Banco Popolare for financial year 2009 was conducted on the basis of the only available information, i.e., the estimate of taxable income derived from the 2010 budget and from the “adjusted” budget, that is, the document approved by the Management Board summarizing the management forecast of the potential expected recurring income.
In particular, with regard to IRES deferred tax assets referring to past tax losses and IRAP deferred tax assets pertaining to the Parent company, the estimated taxable base was calculated by considering only the expected profitability of the Parent company. As to the other IRES deferred tax assets referring to deductible temporary differences pertaining to the companies falling under the current scope of the “tax consolidation” agreement, we took into consideration the sum of the expected taxable income of the companies concerned.
The test on IRAP deferred tax assets pertaining to the Parent company showed that temporary differences deductible in financial year 2010 will only be partly covered by the estimated IRAP taxable income based on the 2010 budget. The deferred tax assets referring to the share of deductible temporary difference that most likely will not be recoverable were impaired. The impairment amounted to 7.2 million.
Also the test on IRES deferred tax assets pertaining to the Parent company and generated by past tax losses, whose recovery period under the law shall expire in 2011, led us to consider the related recognized deferred tax assets as non unlikely to be recovered. As a result, also these assets have been impaired by 11.2 million. For the other Group companies, the recoverability test led to an additional total impairment of 4.1 million.
As a result of the tests conducted on the basis of the estimated results projected in the 2010 budget and in the “adjusted” budget, considering also foreseeable tax planning opportunities, we believe that the remaining deferred tax assets recognized in the financial statements are likely to be recovered.
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14.4 Changes in deferred tax liabilities (through profit and loss)
(thousands of euro) 2009 2008
1. Opening balance 638,002 702,833 2. Increases 195,461 202,697 2.1 Deferred tax assets recognized during the year: 82,434 131,326 a) referring to prior years 248 27,689 b) due to changes in accounting standards - - c) other 82,186 103,637 2.2 New taxes or tax rate increases - 6,456 2.3 Other increases 113,027 64,915 (of which for business combinations) 105,596 3,774 3. Decreases (154,730) (267,528) 3.1 Deferred tax assets derecognized during the year: (147,801) (210,410) a) transfers (131,487) (182,344) b) changes in accounting standards - - c) other (16,314) (28,066) 3.2 Tax rate reductions - (456) 3.3 Other decreases (6,929) (56,662) (of which for business combinations) - (15,001) 4. Closing Balance 678,733 638,002
Net IRES deferred tax assets not recognized in the financial statements added up to Euro 395.5 million and are entirely referred to Banca Italease: 101.0 million derive from tax losses that can be carried forward and the remaining part from deductible temporary differences, mostly referring to loss impairments exceeding the maximum direct deductibility threshold under tax regulations. These assets have not been recognized in the consolidated financial statements because a full and exhaustive evaluation of their recoverability can be carried out only after defining the scope of Banco Popolare’s new tax consolidation agreement and after approving the Group multiannual plan. Banco Popolare shall take all the necessary actions, in accordance with applicable tax regulations, to recover also deferred tax assets that at present have not been recognized.
14.5 Changes in deferred tax assets (through equity)
(thousands of euro) 2009 2008
1. Opening balance 88,773 142,321 2. Increases 7,462 30,402 2.1 Deferred tax assets recognized during the year 6,621 15,537 a) referring to prior years - - b) due to changes in accounting standards - - c) other 6,621 15,537 2.2 New taxes or tax rate increases - 1 2.3 Other increases 841 14,864 (of which for business combinations) - - 3. Decreases (48,467) (83,950) 3.1 Deferred tax assets derecognized during the year (48,391) (75,951) a) transfers (48,390) (75,951) b) impairment of non-recoverable items - - c) changes in accounting standards - - d) other (1) - 3.2 Tax rate reductions (1) - 3.3 Other decreases (75) (7,999) (of which for business combinations) - (7,892) 4. Closing balance 47,768 88,773
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14.6 Changes in deferred tax liabilities (though equity)
(thousands of euro) 2009 2008
1. Opening balance 7,513 50,488 2. Increases 6,040 2,557 2.1 Deferred tax assets recognized during the year: 2,764 2,511 a) referring to prior years - - b) due to changes in accounting standards - - c) other 2,764 2,511 2.2 New taxes or tax rate increases - - 2.3 Other increases 3,276 46 (of which for business combinations) - - 3. Decreases (2,140) (42,338) 3.1 Deferred tax assets derecognized during the year: (1,869) (32,251) a) transfers (780) (30,813) b) changes in accounting standards - - c) other (1,089) (1,438) 3.2 Tax rate reductions - (177) 3.3 Other decreases (271) (13,104) (of which for business combinations) - (11,423) 4. Closing balance 11,413 7,513
14.7 Other information
Fiscal position of the Group
Fiscal position of former Banco Popolare di Verona e Novara s.c.ar.l. At the balance sheet date, only fiscal years 2005, 2006 and 2007 are still open from the point of view of direct taxes and VAT. In 2007 a 3.73 million tax levy had been notified, for IRAP settlement, fines and default interest for FY 2003. The fiscal claim refers to the IRAP rate applicable to the net value of production in the Veneto region, corresponding to the premium rate of 5.25% instead of the ordinary rate of 4.25%. A petition against said assessment and tax levy was filed with the Provincial Tax Commission, which accepted the petition and cancelled the assessment and tax levy. In 2008 the Inland Revenue appealed to the Regional Tax Commission, which in 2009 partially upheld the objection and fixed the applicable rate at 4.75%. An appeal against this decision is being filed with the Cassation Court. In 2008 another tax levy was notified for 4.8 million referring to fiscal year 2004, for the same reasons. In particular, it referred to the IRAP tax rate applicable to the value of production in the Veneto Region (applied tax rate of 5.25% instead of 4.25%) and in the Tuscany Region (tax rate of 4.40% instead of 4.25%) , plus fines and default interest. A petition was filed with the Provincial Tax Commission, which in 2008 upheld the petition and cancelled the assessment and the tax levy. In 2009 the Inland Revenue appealed to the Regional Tax Commission. In 2009 another tax levy was notified for 6.5 million euro for fiscal year 2005, referring to the IRAP tax rate applicable to the value of production in the Veneto Region (applied tax rate of 5.25% instead of 4.25%), plus fines and default interest. A petition against said assessment and tax levy was filed with the Provincial Tax Commission. Potential liabilities deriving from the above litigations have been classified as possible.
Fiscal position of former Banca Popolare Italiana soc. coop and its subsidiaries On 31 December 2008 a number of tax assessments and notification reports were pending against Banca Popolare Italiana and some of its subsidiaries (for additional information on litigations please see the detailed description in the 2008 Annual Report), so to deflate the litigation front it was deemed appropriate to file tax settlement proposals. The Inland Revenue Agency declared its willingness to accept an out-of-court settlement, and therefore in a special meeting held on 8 May last the Management Board of Banco Popolare thoroughly examined the risks and charges associated with two available options, i.e., out-of-court settlement or going to court. Considering that the final outcome of any controversy always allows for some uncertainty and that, in the light of the latest decisions passed by the Cassation Court, in these cases the uncertainty is rather high because in-court litigations are bound to last for many years, both because of the length of every lawsuit (about eight years) and for the multiannual span of some objections, the Board, supported by the opinion of authoritative advisors, deemed it was not to Banco Popolare’s interest to bring a huge tax litigation to court while exposing the Group to a significant potential risk for many years. For this reason, the Board decided to settle the above litigations out of court.
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The total cost for finalizing the settlement was about 168 million, of which 57.5 million were charged to income in financial year 2009.
Illustrated below is the fiscal situation after the above mentioned out-of-court settlement.
Fiscal position of former Banca Popolare Italiana soc. coop. Fiscal years 2005, 2006 and 2007 are still open for the purpose of direct taxes and VAT. A ruling is pending before the Milan Regional Tax Commission regarding the higher value assigned by Lodi’s Inland Revenue Office to a business line, that in 2004 had been transferred from Banca Eurosistemi S.p.A. (then combined into Banca Popolare Italiana Soc. Coop.) and Banca Popolare di Lodi Soc. Coop. The additional stamp duty objected in the rectification notice totaled 7 million. The first instance court rejected the appeal filed by the company. The liability has been classified as probable.
The rulings are pending before the Cassation court regarding the rectification and settlement notices with which in 2005 the Milan Inland Revenue office reclassified a number of real estate transfers as business line transfers. The reclassified transfers had taken place in 2002 among Cassa di Risparmio di Lucca S.p.A., Cassa di Risparmio di Livorno S.p.A., Cassa di Risparmio di Pisa S.p.A. (now combined into Cassa di Risparmio di Lucca Pisa e Livorno S.p.A.), Banca Bipielle Centrosud S.p.A., Banca Eurosistemi S.p.A., Bipielle Investimenti S.p.A., ICCRI Banca S.p.A. (now combined into Banco Popolare Soc. Coop.) as transferors and Bipielle Immobili S.p.A. (now Bipielle Real Estate S.p.A.) as transferee. In the first two court instances the company saw its petition rejected. The potential liability classified as probable adds up to 2.6 million, plus legal fees (co-obligee Bipielle Real Estate S.p.A.).
The ruling is pending before the Regional Tax Commission regarding the notice to pay taxes and fines notified to the former Banca Popolare Italiana (as acquirer of Reti Bancarie Holding, former Banco di Chiavari e della Riviera Ligure), with a tax claim totaling 13.6 million for the reclassification of the transfer deed among companies regarding a business line. The Milan Provincial Tax Commission accepted the petition in full. The Inland Revenue Agency filed an appeal. The potential liability as a result was classified as possible.
Fiscal position of Banca Popolare di Crema Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. In January 2010 the Cremona Tax police completed the tax assessment covering direct tax and VAT obligations of Banca Popolare di Crema in fiscal year 2008. To reduce the outstanding litigation, the tax claim of 0.3 million euro has been settled pursuant to art. 5-bis of Lgs.D. n. 218/97 by filing a remedial action to the notification report.
Fiscal position of Banca Popolare di Cremona Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. The disputes against the IRPEG and ILOR assessment notices for fiscal years 1978, 1979, 1980 and 1982 and the disputes regarding withholding agent returns for fiscal years 1982 and 1983 are still pending before the Central Tax Commission. Tax liabilities total about 1 million euro. The outcome of the litigation is favorable in both first and second instance.
Fiscal position of Banca Caripe Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT.
Fiscal position of Cassa di Risparmio di Lucca Pisa e Livorno Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. The term is pending to appeal before the Regional Tax Commission against the decision of the Pisa Provincial Tax Commission which rejected the petition against the notice to settle the main stamp duty on the reclassification as business line transfer of the securities sale carried out in 2002 between Cassa di Risparmio di Pisa s.p.a. (now Cassa di Risparmio di Lucca Pisa e Livorno s.p.a.) and Banca Popolare Italiana soc. coop.. The tax levy of 14.5 million euro was paid, regarding the assessment carried out by the Pisa Local Inland Revenue Office, pending the appeal decision. The amount paid was recognized as a tax credit because the potential liability is still considered possible and not probable.
Fiscal position of Bipielle Real Estate Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. The ruling is pending before the Cassation court referring to the notice to pay the taxes and fines regarding the reclassification as business line transfers of a number of real estate transfers notified to Cassa di Risparmio di Lucca Pisa e Livorno S.p.A.. The outcome of the litigation was negative both in first and second instance. The tax levy of 16.4 million euro (inclusive of fines in excess of 5 million) was paid regarding the assessment carried out by the Pisa Local Inland Revenue Office, pending the appeal decision. With respect to the fines, a petition was filed to request their refund, and an equal amount was recognized as tax credit.
The ruling is pending before the Milan Regional Tax Commission referring to a settlement notice for taxes and fines regarding a business line transfer to Reti Bancarie Holding (former Banco di Chiavari e della Riviera Ligure) leading to a total tax claim of 13.6 million euro. The Milan Provincial Tax Commission upheld the petition in full.
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Fiscal position of Bipitalia Gestioni SGR Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. The assessments and tax levies of 1.6 million (notified in 2007) and of 21.9 million euro (notified in 2008) were cancelled by the Finance Administration.
Fiscal position of Banca Valori Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. A ruling is pending before the Regional Tax Commission regarding a tax levy of 0.4 million euro notified after an automatic assessment of the 2005 Consolidated tax return filed for fiscal year 2004. The Provincial Tax Commission rejected the petition, therefore the tax levy was paid, pending the appeal decision.
Fiscal position of Efibanca Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. No litigations are outstanding.
Fiscal position of Banca Popolare di Novara Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. On 21 October 2009 Banca Popolare di Novara S.p.A. was notified the tax assessment issued by the Inland Revenue Agency – Central Assessment Department upon completion of a tax audit covering fiscal year 2004. The audit focused on a securities lending transaction. Through the above tax notification report, the Agency objects to the bank that it abused the provisions under art. 109, paragraph 8, of TUIR, by executing the transaction to generate an extra return with no other reason other than to obtain a tax benefit. The tax claim raised by the Financial Administration totals 3.6 million euro for IRAP plus the associated fines and default interest, and 26 million euro for Ires, plus the associated fines and default interest. A petition was filed against the above objections with the tax court. The potential liability is considered possible.
Fiscal position of Credito Bergamasco Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. In 2007 the Inland Revenue Agency notified a tax levy of € 0.2 million, inclusive of fees and default interest. The tax claim refers to the IRAP rate applicable in 2003 to the net value of production in the Veneto Region, which should have been 5.25% instead of the ordinary tax rate of 4.25%. The Provincial Tax Commission upheld the petition against this tax levy. The Inland Revenue Agency appealed to the Regional Tax Commission, which rejected the claim. At present, the term to appeal to the Cassation court is pending. For the same reason, in 2008 a petition was filed with the Provincial Tax Commission against a tax levy of euro 0.3 million notified by the Inland Revenue Agency for fiscal year 2004. The Commission upheld the petition, and the term to appeal is pending. Again for the same reason, in 2009 a tax levy of euro 0.2 million was notified for fiscal year 2005. The petition filed against said claim is pending before the plus the associated fines and interest Provincial Tax Commission.
Fiscal position of Banca Italease Fiscal years 2005, 2006, 2007 and 2008 are still open for the purpose of direct taxes and VAT. The appeal filed with the Cassation court by the Inland Revenue Agency is pending, referring to Euro 32.4 million over- assessed IRPEG – plus the same amount due for administrative fines – for fiscal years 1995, 1996 and 1997. In second instance the claims of the Financial Administration had been fully rejected. With respect to the litigation over the Euro 4.4 million over-assessed IRPEG - plus the same amount due for administrative fines – for fiscal years 1998, The Regional Tax Commission partly upheld the appeal filed by the Inland Revenue Agency. An appeal against this decision was filed with the Cassation court by both parties. In 2008 we paid the euro 1.3 million tax levy issued as a result of the court decision in second instance. In 2008, following tax audits at the counterparties’, two tax assessments were notified referring to fiscal years 2003 and 2004, with which the Financial Administration objects the wrong application of VAT on two leasing transactions. In particular, the objection regards the non-taxability of lease payments referring to a contract for a real estate asset, following the receipt of the related letter of understanding. On 8 February 2010 the Milan Provincial Tax Commission issued its decision, and upheld the petition filed by the company for fiscal year 2003, while it rejected the petition for fiscal year 2004. Based on the analysis we carried out, there are solid reasons to appeal against the decision with which the petition is rejected, as it goes against the guidance expressed by the Supreme Court with respect to the legal qualification of leasing. The tax over-assessment is euro 0.2 million plus euro 0.3 million for fines and default interest.
In 2009 a tax assessment for fiscal year 2004 was notified, transposing in full the objections raised as a result of the tax audit conducted in November 2007 – July 2008, referring to the application of a cut VAT rate and it reflects similar objections raised to all nautical leasing companies. The VAT over-assessment was 0.2 million euro, plus 0.3 million euro for default interest and fines.
In the same year, a tax levy of 34.1 million euro was notified, owing to the failure by the Inland Revenue to recognize the tax payments made for fiscal year 2005. The Milan Provincial Tax Commission upheld our petition against this tax levy. Again in 2009, to settlement notifications for mortgage and cadastral duties for fiscal year 2006 were notified. The settled
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taxes amounted to euro 3.2 million. The petitions filed with the Provincial Tax Commission are pending. The potential liabilities were classified as possible.
On 18 December 2009, the Milan Inland Revenue Office notified a notification report to Banca Italease as a result of the audit on big-ticket real estate leases, carried out between 2005 and 2007, including also a minor objection referring to personal property leases. The objections refer to both VAT and direct taxes, and they add up to Euro 340.4 million as a result of undeductible VAT and higher direct taxes, in addition to fines and default interest that can be quantified only when the tax assessment is issued.
Fiscal position of Leasimpresa (company acquired by Banca Italease) The appeal filed with the Cassation court is pending, against the decision of the Regional Tax Commission that cancelled the VAT fines amounting to Euro 0.3 million referring to fiscal year 2003. Other litigations are outstanding for minor amounts. The potential liability is classified as possible.
Fiscal position of Factorit In 2008 and 2009 two tax assessments were notified regarding the 2003 and 2004 VAT. The VAT over-assessment totaled Euro 1.7 million, plus Euro 2.3 million of fines and default interest for 2003 and Euro 2.3 million plus Euro 3.1 million of default interest and fines for 2004. The petitions against the above assessments are pending before the Provincial Tax Commission. With respect to the 2003 tax assessment, a tax levy was notified totaling Euro 1.0 million, following the entry in the tax roll of 50% of the assessed taxes. The suspension of the tax levy was accepted. On 26 February 2010, the decision of the Milan Provincial Tax Commission was issued, which upheld the petition filed by the company.
With respect to the 2004 tax assessment, a tax levy was notified totaling Euro 1.3 million, following the entry in the tax roll of 50% of the assessed taxes. The potential liabilities are classified as possible.
On 18 June 2009, the Tax Police started a general VAT audit in Factorit for fiscal years from 2005 until the access date for VAT purposes, and for years 2006 and 2009 for income tax purposes. The audit was completed on 13 October 2009. A notification report was issued, whereby the objections raised mainly lie on the assumption that the purpose of the notified transactions was not a credit facility but rather a loan management activity. The VAT over-assessment totals 40.5 million euro for years from 2005 to 2009 in addition to fines and default interest that can be quantified only when the tax assessment is issued.
Fiscal position of Mercantile Leasing In 2008, a tax assessment was notified referring to 2003 VAT as a result of the tax audit on some nautical leases. The VAT over-assessment totaled Euro 1.4 million, plus Euro 1.9 million of default interest and fines. The Florence Provincial Tax Commission only partly upheld the petition, therefore an appeal will be filed against the first instance decision.
In 2009, two tax assessments were notified referring to IRES, IRAP and VAT for fiscal years 2004 and 2005 as a result of the audits on some real estate and nautical leases. The tax over-assessment totaled 138 million euro, plus a default interest of 15 million euro and fines of 309 million euro. The petitions filed before the tax court against the above tax assessments are pending. The potential liability has been classified as possible.
Fiscal position of Italease Gestione Beni With respect to the Inland Revenue audit started in May 2009, on 18 December 2009 the Milan Inland Revenue Office completed its audit on fiscal year 2006 and notified the related notification report regarding direct taxes and to a lesser extent VAT objections, claiming that costs, entertainment expenses and loan losses are not tax-deductible. The claims add up to about Euro 1.6 million euro in terms of direct tax over-assessment, in addition to fines and default interest that can be quantified only when the tax assessment is issued.
Fiscal position of the other companies of the Group With regard to the other companies belonging to the Group, small tax controversies are outstanding for immaterial amounts.
In summary, the requests notified by the State Finance Administration with the tax assessments illustrated above total about 679 million (additional assessed taxes and associated fines). The companies of the Group were also notified notification reports whereby the Financial Administration is making requests totaling 761 million euro. In the majority of cases we deem that there are valid and well grounded reasons to object to the requests raised by the Finance Administration, as maintained also by well founded external opinions. Potential liabilities classified as probable in relation to the tax assessments received to date total about 24 million and are fully covered by provisions earmarked as tax liabilities. The remaining 655 million were classified as possible but not probable liabilities, in the light of the reference accounting standard.
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National Tax Consolidation Regime
The Group opted for the national tax consolidation regime under articles from 117 to 129 of DPR n. 917 of 22nd December 1986.
This option, covering fiscal period from 2007 to 2009, refers to all the Group companies that meet the requirements set forth by the above regulation, namely: 1. Aletti Fiduciaria S.p.A.; 2. Aletti Gestielle SGR S.p.A.; 3. Aletti Gestielle Alternative SGR S.p.A.; 4. Banca Aletti & C. S.p.A.; 5. Banca Caripe S.p.A.; 6. Banca Popolare di Crema S.p.A.; 7. Banca Popolare di Cremona S.p.A.; 8. Banca Popolare di Lodi S.p.A.; 9. Banca Popolare di Novara S.p.A.; 10. Banca Popolare di Verona - SGSP S.p.A.; 11. Bipielle Real Estate S.p.A.; 12. BP Property Management S.r.l.; 13. Cassa di Risparmio di Lucca Pisa Livorno; 14. Credito Bergamasco S.p.A.; 15. Efibanca S.p.A.; 16. Holding di Partecipazioni Finanziarie; 17. Immobiliare BP S.r.l.; 18. Lido dei Coralli S.r.l.; 19. Nadir Immobiliare S.r.l.; 20. Nazionale Fiduciaria S.p.A.; 21. Parchi del Garda S.p.A.; 22. Sirio Immobiliare S.r.l.; 23. Società Gestione Crediti BP S.p.A.; 24. Società Gestione Servizi BP S.p.A.; 25. Tecmarket Servizi S.p.A.. 26. Valori Finanziaria S.p.A.
In 2009, the interest in Aletti Private Equity SGR S.p.A. was disposed of, therefore the company is no longer partaking in the tax consolidation agreement.
During the year, Bipielle Finanziaria S.p.A. (which in turn had acquired its subsidiary Bipitalia Alternative SGR S.p.A.) and Bipitalia Broker S.p.A. were merged into the company Holding di Partecipazione Finanziaria.
Critefi Sim S.p.A. was merged into Banca Aletti & C. S.p.A..
As a result, consolidated companies add up to twenty-six, as compared to thirty-one the year before, plus the holding company Banco Popolare Società Cooperativa.
The advantages of exercising the national consolidation option in 2009 are mainly linked: to the fact that taxes are levied on one single taxable income, resulting from the summation of the taxable income of the above companies that exercised the option; to the possibility of offsetting the undeductible portion of interest expense against the possible Gross Operating Income availability (G.O.I.), pertaining to other Companies of the Group, under art. 96 paragraph 4) T.U.I.R. G.O.I. is the core business gross operating income calculated as the difference between the value of production and the cost of production under letters A) and B) of art. 2425 of the Civil Code, excluding depreciation and amortization and finance lease payments for capital goods; to the full deductibility of interest expense of banks and other financial entities – accrued against entities participating in the tax consolidation – up to the total amount of interest expense accrued by the participating entities in favor of entities not included in the tax consolidation.
With the adoption by Banco Popolare soc. coop. of Group taxation and the fiscal consolidation of the above mentioned subsidiaries, its administrative responsibilities and duties have increased, as illustrated below: exclusive responsibility for the fulfillment of duties associated with the calculation of the group’s total consolidated income; joint responsibility for any increased tax, fines and interest on the total taxable income of each consolidated company; joint responsibility with all the relevant companies for the failure to pay what due based on the consolidated income tax return.
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To this end, and in compliance with the regulatory changes introduced by the 2008 Budget law, Banco prepared the “consolidation agreements” governing Banco’s relations with the above mentioned subsidiaries that joined the consolidated taxation treatment. The agreements were approved by the individual Boards of Directors.
In no case did we opt for the fiscal transparency regime under articles 115 and following of DPR 917-1986.
Sub-section 15 - Non-current assets held for sale and discontinued operations, and associated liabilities – Item 150 of assets and Item 90 of liabilities
15.1 Non-current assets held for sale and discontinued operations: breakdown by type of asset
(thousands of euro) 31/12/2009 31/12/2008
A. Single assets A.1 Financial assets - - A.2 Investments in associates and companies subject to joint control 60,370 60,000 A.3 Property and equipment 42,864 60,842 A.4 Intangible assets 54,621 - A.5 Other non-current assets 2,420 2,420 Total A 160,275 123,262 B. Discontinued operations (disposal groups) B.1 Financial assets held for trading - - B.2 Financial assets designated at fair value through profit and loss - - B.3 Financial assets available for sale - - B.4 Investments held to maturity - - B.5 Due from banks 75,467 441 B.6 Loans to customers 1,579,657 - B.7 Investments in associates and companies subject to joint control - - B.8 Property and equipment 26,565 28,671 B.9 Intangible assets 27,117 16,705 B.10 Other assets 46,681 17,612 Total B 1,755,487 63,429 C. Liabilities associated with single assets available for sale C.1 Payables 36,317 - C.2 Securities - - C.3 Other liabilities - - Total C 36,317 - D. Liabilities associated with discontinued operations D.1 Due to banks 696,433 4,833 D.2 Due to customers 117,416 - D.3 Debt securities in issue - - D.4 Trading liabilities - - D.5 Financial liabilities measured at fair value - - D.6 Provisions 32,081 4,299 D.7 Other liabilities 77,818 13,429 Total D 923,748 22,561
15.2 Other information
No other material information is reported.
15.3 Information on Investments in associates and companies subject to joint control in companies under significant influence not carried at equity
There are no associate companies under significant influence not carried at equity.
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Sub-section 16 - Other assets – Item 160
16.1 Other assets: breakdown
(thousands of euro) 31/12/2009 31/12/2008
Receivables from Inland Revenue (not classifiable in tax assets) 878,777 473,517 Receivables for sale of goods and provision of services 116,395 132,835 Commission receivables 13,977 30,637 Other receivables 88,986 150,501 Checks and other valuables 114,646 164,569 Items still under processing 313,090 499,187 Temporary items among branches 222,228 311,719 Illiquid items for portfolio transactions 5,388 70,914 Securities and coupons to be settled 147,830 612,623 Other transactions to be settled 166,731 140,352 Improvements and similar expenses on third party assets 66,907 81,237 Sundry accrued income and deferred charges 37,302 28,807 Other entries 775,756 1,218,487 Total 2,948,013 3,915,385
This item incorporates tax credits such as VAT, IRPEG/ILOR tax, withholding tax and other tax credits that are not recognized in item 140 “Tax assets” owing to the new bank financial statements compilation rules set out in the first update issued on 18 November 2009 of the Bank of Italy circular 262/05. “Items still under processing” include account debit entries for utility bills received by external companies that have not come due yet and are pending to be debited on our customers’ checking accounts”. “Improvements and similar expenses on third party assets” include expenses incurred for assets that do not fall under the item “Property and equipment”, whose depreciation is recognized in the P&L item 220 “Other operating income and expense”. “Other entries” include 148.7 million worth of assets referring to the Pension Fund, 142.1 million inventories under IAS 2 entirely attributable to Bormioli, and 484.9 million worth of other assets, such as for example 100.2 million worth of down payments and advances paid by Basileus S.p.A and Bipielle Immobili Strumentali S.p.A in 2005, transferred to Bipielle Real Estate in 2006, following the preliminary agreement signed to purchase residential property and offices in the real estate complex called “Milano Santa Giulia”.
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LIABILITIES
Sub-section 1 - Due to banks – Item 10
1.1 Due to banks: breakdown by instrument
(thousands of euro) 31/12/2009 31/12/2008
1. Due to central banks 2,617,438 - 2. Due to banks 5,802,979 8,357,652 2.1 Checking accounts and demand deposits 1,294,493 736,648 2.2 Time deposits 2,392,665 2,961,425 2.3 Loans 2,079,591 4,590,848 2.3.1 repurchase agreements 1,209,251 3,645,785 2.3.2 other 870,340 945,063 2.4 Commitments to repurchase own equity instruments - - 2.5 Other payables 36,230 68,731 Total 8,420,417 8,357,652 Fair Value 8,420,417 8,357,652
On 31 December 2008, due to banks totaled 8,420.4 million, up by 0.8% from 8,357.6 million the year before.
For due to banks the fair value measurement is almost identical to their book value as they are mostly short term loans.
“Due to central banks” refer to the Parent Company Banco Popolare and it incorporates time deposits linked to trades on the MIC (Mercato Interbancario Collateralizzato) and those backed by ECB rated loans of the Banche del Territorio to guarantee the granting of credit facilities at ECB rates.
1.2 Breakdown of item 10 “Due to banks”: subordinated loans
At the balance sheet date, similarly to the end of the previous year, no material subordinated loans payable to banks were reported.
1.3 Breakdown of item 10 “Due to banks”: structured debts
At the balance sheet date, similarly to the end of the previous year, no structured debts payable to banks were reported.
1.4 Due to banks under specific hedging
(thousands of euro) 31/12/2009 31/12/2008
1. Payables under specific fair value hedging 69,062 - a) interest rate risk 69,062 - b) exchange rate risk - - c) multiple risks - - 2. Payables under specific cash flow hedging 189,556 190,710 a) interest rate risk 189,556 190,595 b) exchange rate risk - - c) other - 115 Total 258,618 190,710
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1.5 Finance lease payables
31/12/2009 (thousands of euro) Minimum payments Gross investment Principal Interest Finance lease payables Up to 3 months 876 281 1,120 Between 3 months and 1 year 2,976 803 3,335 Between 1 and 5 years 15,660 3,246 17,331 Above 5 years 16,948 771 17,719 Indefinite term - - - Total 36,460 5,101 39,505
The finance leases shown in the above table basically refer to Banca Italease and its subsidiaries, which joined Gruppo Banco Popolare in the second half of the year.
On 31 December 2008, due to banks for finance leases, as shown in table 1.1 “Due to banks: breakdown by instrument”, were mainly represented by payables referring to some real estate lease contracts entered by Group companies (Credito Bergamasco and Banco Popolare) and Banca Italease totaling 16.3 million.
Sub-section 2 - Due to customers – Item 20
2.1 Due to customers: breakdown by instrument
(thousands of euro) 31/12/2009 31/12/2008
1. Checking accounts and demand deposits 43,622,032 37,151,989 2. Time deposits 1,153,305 880,988 3. Loans 7,662,160 11,407,877 3.1 repurchase agreements 7,108,959 8,372,500 3.2 other 553,201 3,035,377 4. Commitments to repurchase own equity instruments - - 5. Other payables 754,366 1,911,563 Total 53,191,863 51,352,417 Fair Value 53,186,152 51,347,039
On 31 December 2009, due to customers stood at 53,191.9 million euro, down by 3.6% from 51,352.4 million euro reported the year before. On 31 December 2008, 2,893.4 million euro worth of “liabilities associated with assets sold and not derecognized” had been posted. In compliance with the new layout required for financial statements this year, these liabilities have been reclassified in their original deal type of belonging.
2.2 Breakdown of item 20 “Due to customers”: subordinated loans
At the balance sheet date, no material subordinated loans payable to customers were reported.
2.3 Breakdown of item 20 “Due to customers”: structured debts
At the balance sheet date, as in the previous year, no structured debts payable to customers were reported.
2.4 Due to customers under specific hedging
At the balance sheet date, no material payables to customers under specific hedging were reported.
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2.5 Finance lease payables
31/12/2009 (thousands of euro) Minimum payments Gross investment Principal Interest Finance lease payables Up to 3 months 510 237 747 Between 3 months and 1 year 1,555 686 2,241 Between 1 and 5 years 8,970 2,984 11,954 Above 5 years 17,848 1,032 18,880 Indefinite term - - - Total 28,883 4,939 33,822
The finance leases shown in the table refer to Banca Italease and its subsidiaries, which joined Gruppo Banco Popolare as from the second half of the year.
Sub-section 3 - Securities issued – Item 30
3.1 Securities issued: breakdown by instrument
Total Total 31/12/2009 31/12/2008 (thousands of euro) Fair value Fair value Book value Book value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. Securities 1. Bonds: 21,164,702 3,341,480 17,894,141 - 19,023,939 3,161,264 15,570,958 - 1.1 structured 1,515,583 - 1,519,639 - 15,559 - 15,392 - 1.2 other 19,649,119 3,341,480 16,374,502 - 19,008,380 3,161,264 15,555,566 - 2. Other securities: 4,062,818 - 3,941,029 - 5,228,717 - 5,228,690 - 2.1 structured ------2.2 other 4,062,818 - 3,941,029 - 5,228,717 - 5,228,690 - Total 25,227,520 3,341,480 21,835,170 - 24,252,656 3,161,264 20,799,648 -
On 31 December 2009, securities issued totaled 25,227.5 million, up by 4.0% from 24,252.7 million the prior year. The fair value, that was measured along the criteria described in “Section A – accounting policies” stood at 25,176.7 million.
3.2 Breakdown of item 30 “Securities issued”: subordinated securities
At the balance sheet date, subordinated debt securities issued totaled 4,497.4 million (4,714.4 million at the end of 2008) of which 751.8 million are represented by perpetual instruments (preferred shares). During the year, the Parent company issued 2 subordinated securities totaling 352 million and redeemed 4 EMTN bonds having a book value of 769.5 million.
The characteristics of subordinated loans calculated for regulatory purposes are illustrated in Section F, “Consolidated Shareholders’ Equity”.
3.3 Securities issued: securities under specific hedging
(thousands of euro) 31/12/2009 31/12/2008
1. Payables under specific fair value hedging: 5,869,153 - a) interest rate risk 5,869,153 - b) exchange rate risk - - c) multiple risks - - 2. Payables under specific cash flow hedging: 422,078 71,766 a) interest rate risk 422,078 71,766 b) exchange rate risk - - c) other - - Total 6,291,231 71,766
Cash flow hedges refer to floating rate bonds issued to fund fixed rate loans.
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Sub-section 4 - Financial liabilities held for trading – Item 40
4.1 Financial liabilities held for trading: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) FV FV NV FV* NV FV* L1 L2 L3 L1 L2 L3 A. Cash liabilities 1. Due to banks 142 146 - - 146 58 983 - - 983 2. Due to customers 34,013 34,386 - - 34,386 75,596 71,188 - - 71,188 3. Debt securities ------3.1 Bonds ------3.1.1 Structured - - - - X - - - - X 3.1.2 Other bonds - - - - X - - - - X 3.2 Other securities ------3.2.1 Structured - - - - X - - - - X 3.2.2 Others - - - - X - - - - X Total A 34,155 34,532 - - 34,532 75,654 72,171 - - 72,171 B. Derivatives 1. Financial derivatives 874,234 2,960,911 4,197 424,504 2,868,363 9,140 1.1 Trading X 874,102 2,851,308 4,197 X X 424,433 2,837,270 9,140 X 1.2 Associated with fair value option X - 2,428 - X X - 31,093 - X 1.3 Other X 132 107,175 - X X 71 - - X 2. Credit derivatives - 4,775 - - 640 - 2.1 Trading X - 4,671 - X X - 640 - X 2.2 Associated with fair value option X - - - X X - - - X 2.3 Other X - 104 - X X - - - X Total B X 874,234 2,965,686 4,197 X X 424,504 2,869,003 9,140 X Total (A+B) X 908,766 2,965,686 4,197 X X 496,675 2,869,003 9,140 X FV = Fair value FV* = Fair value calculated excluding value changes caused by a change in the issuer’s credit standing with respect to the issue date NV = Nominal value L1 = Level 1 L2 = Level 2 L3 = Level 3
Item “Cash liabilities – Due to customers” includes exclusively technical overdrafts on quoted equity securities, issued by other companies, of the subsidiary Aletti & C. Banca di Investimento Mobiliare S.p.A.
4.2 Breakdown of item 40 “Financial liabilities held for trading”: subordinated liabilities
At the balance sheet date, similarly to the end of the previous year, no subordinated financial liabilities were reported.
4.3 Breakdown of item 40 “Financial liabilities held for trading”: structured debts
At the balance sheet date, similarly to the end of the previous year, no structured debts were reported among trading liabilities.
4.4 Cash trading financial liabilities (excluding “technical overdrafts”): annual changes
No cash trading financial liabilities are reported, as due to banks are entirely represented by technical overdrafts and there were no changes during the year.
261 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 26 26 Sub-section 5 - Financial liabilities designated at fair value through profit and loss – Item 50
5.1 Financial liabilities designated at fair value through profit and loss: breakdown by instrument
31/12/2009 31/12/2008 (thousands of euro) FV FV NV FV* NV FV* L1 L2 L3 L1 L2 L3 1. Due to banks ------1.1 Structured - - - - X - - - - X 1.2 Other - - - - X - - - - X 2. Due to customers ------2.1 Structured - - - - X - - - - X 2.2 Other - - - - X - - - - X 3. Debt securities 6,901,635 13,728,051 13,035,686 - 26,787,421 18,009,265 86,244 17,439,657 - 17,900,098 3.1 Structured 845,653 414,578 2,272,982 - X 3,681,041 - 3,451,797 - X 3.2 Other 6,055,982 13,313,473 10,762,704 - X 14,328,224 86,244 13,987,860 - X Total 6,901,635 13,728,051 13,035,686 - 26,787,421 18,009,265 86,244 17.439,657 - 17,900,098 FV = Fair value FV* = Fair value calculated excluding value changes caused by a change in the issuer’s credit standing with respect to the issue date NV = Nominal value L1 = Level 1 L2 = Level 2 L3 = Level 3
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Financial liabilities designated at fair value refer to own bond issues, namely fixed rate plain vanilla securities, or indexed to equity components, exchange rates, inflation rates or to interest rate structures and hedged with derivatives. In this case, the use of the Fair Value Option satisfies the need to eliminate or significantly reduce an accounting inconsistent treatment, in alternative to Hedge Accounting methodologies. Otherwise, derivatives would be still measured at fair value, while bonds would be measured at amortized cost. For the scope of securities under fair value option and the method used to measure fair value, please refer to “Section A – Accounting policies”.
For value changes due to the changes in creditworthiness, please refer to the next table 5.3.
5.2 Breakdown of item 50 “Financial liabilities designated at fair value through profit and loss”: subordinated liabilities
On 31 December 2009, financial liabilities designated at fair value represented by subordinated liabilities totaled 749.3 million, from 661.4 million the year before.
The characteristics of subordinated bonds measurable for regulatory purposes are described in Section F, “Consolidated shareholders’ equity”.
5.3 Financial liabilities designated at fair value through profit and loss: annual changes
Due to Due to Debt securities (thousands of euro) Total banks customers issued
A. Opening balance - - 17,525,901 17,525,901 B. Increases: - - 15,726,516 15,726,516 B.1 Issues - - 14,314,961 14,314,961 B.2 Sales - - 25 25 B.3 Positive fair value changes - - 537,698 537,698 B.4 Other changes - - 873,832 873,832 C. Decreases - - (6,488,680) (6,488,680) C.1 Purchases - - (2,882,963) (2,882,963) C.2 Redemptions - - (2,830,349) (2,830,349) C.3 Negative fair value changes - - (38,628) (38,628) C.4 Other changes - - (736,740) (736,740) D. Closing balance - - 26,763,737 26,763,737
Items B.3 and C.3 include, respectively, the positive and negative fair value annual changes that were recorded under Item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement. The same item includes the fair value changes of derivatives under the fair value option, whose positive and negative valuations at the balance sheet date are shown in tables 2.1 of sub-section 2 of the balance sheet assets and 4.1 of sub-section 4 of balance sheet liabilities in Section B – Notes to the consolidated balance sheet of these explanatory notes.
Item B.4 “Increases: other changes” includes accrued interest as at 31 December 2009, recognized under item 20 “interest expense on financial liabilities measured at fair value” of the income statement, as well as losses on the disposal or extinguishment of said financial liabilities, recorded under item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement.
Item C.4 “Decreases: other changes” includes deducted accrued interest as at 31 December 2009, recognized under item 20 “interest expense on financial liabilities measured at fair value” of the income statement, as well as profits on the disposal or extinguishment of said financial liabilities, recorded under item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement.
Fair Value Option – Credit spread change
As described in Section A of the Explanatory Notes, in the section devoted to changes in the application of accounting standards, the Group opted for the possibility of measuring hedged debt securities in issue at fair value in order to reduce inconsistent accounting treatments in alternative to the hedge accounting method.
In 2009 the Gruppo changed the procedure used to measure the fair value of financial liabilities, specifically how changes in creditworthiness of Banco Popolare are measure, as described in Section A, sub-section 5 – Other aspects of these explanatory notes. In particular, for issues classified as “institutional or similar”, creditworthiness was measured on the basis of the senior or subordinated Credit Default Swap – CDS curve, depending on the payment priority of the loans. For the remaining issues, we used prices observable on the secondary market of Group securities, or prices resulting from a measurement technique that does not include changes in creditworthiness among its significant factors, as in market practice.
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For bonds outstanding on 31 December 2009 the creditworthiness change as compared to their issuance date generated a lower liability fair value of 23.7 million (obtained from the difference between the FV column and the FV* column of FY 2009 in the above table 5.1). Accordingly, on 31 December 2008 the change in credit risk had caused the recognition of a lower liability of 374.2 million. This change is attributable for 211 million to the different method used to determine the credit spread, as described above, and to the improved creditworthiness as compared to the issuance date for most loans, totaling 139.5 million. The operating effect in FY 2009 was negative and totaled 350.5 million, as shown in the income statement table “7.1 Fair value change in financial assets and liabilities designated at fair value: breakdown”. Note that net accrued capital gains recognized on 31 December 2009 as a result of changes in own creditworthiness, which translated into a reduction in the book value of won liabilities, amounted to 23.7 million and are bound to create a negative impact on future years’ income statements, proportional to the mismatch between the liabilities repurchase price and their book value.
For the sake of completeness, note that, based on the current supervisory regulations, net accrued capital gains attributable to the deterioration of one’s own creditworthiness do not contribute to the measurement of the regulatory capital owing to the adoption of prudential filters.
Sub-section 6 - Hedging derivatives – Item 60
6.1 Hedging derivatives: breakdown by type of contracts and underlying assets
31/12/2009 31/12/2008 (thousands of euro) L1 L2 L3 NV L1 L2 L3 NV A) Financial derivatives - 168,456 - 3,576,611 - 49,985 - 206,495 1. Fair value - 131,994 - 3,177,027 - 30,265 - 110,978 2. Cash flows - 36,258 - 370,000 - 19,720 - 95,517 3. Foreign investments - 204 - 29,584 - - - - B) Credit derivatives ------1. Fair value ------2. Cash flows ------Total - 168,456 - 3,576,611 - 49,985 - 206,495 Legend NV = nominal value L1 = Level 1 L2 = Level 2 L3 = Level 3
6.2 Hedging derivatives: breakdown by hedged portfolios and by type of hedge
Fair value Cash flows Specific Foreign (thousands of euro) investments Interest Exchange Credit Multiple Generic Specific Generic Price risk rate risk rate risk risk risks 1. Financial assets available for sale 36,851 1,089 - - - X - X X 2. Loans 14,919 - - X - X - X X 3. Investments held X to maturity X - - X - X - X X 4. Portfolio ------8,613 X 5. Other X X X X X X X X 204 Total Assets 51,770 1,089 - - - - - 8,613 204 1. Financial liabilities 79,135 - - X - X 27,645 X X 2. Portfolio ------X Total Liabilities 79,135 - - - - - 27,645 - 1. Expected transactions X X X X X X - X X 2. Portfolio of financial assets and liabilities X X X X X - X - -
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Sub-section 7 Fair value change of financial liabilities in hedged portfolios – Item 70
7.1 Fair value change of financial liabilities in hedged portfolios
(thousands of euro) 31/12/2009 31/12/2008
1. Positive fair value change of financial liabilities 41,518 70,555 2. Negative fair value change of financial liabilities - - Total 41,518 70,555
This item refers to the fair value change recorded on the funding of payable checking accounts under item due to customers, that were put under a fair value derivative macro-hedging. Profit or loss on value adjustments referring to hedging derivatives and to the hedged portfolio are recognized under item 90 “Fair value change of financial assets in hedged portfolios”.
7.2 Financial liabilities hedgedd by macrohedging of interest rate risk: breakdown
(thousands of euro) 31/12/2009 31/12/2008 1. Due to customers 1,002,944 1,973,063 2. Securities issued - - 3. Subordinated liabilities - - 4. Financial liabilities - - 5. Portfolio - - 6. Due to banks - - Total 1,002,944 1,973,063
Sub-section 8 - Tax liabilities – Item 80
This Section was illustrated in Sub-section 14 of the balance sheet assets in Section B – Notes to the consolidated balance sheet of these explanatory notes.
Sub-section 9 - Liabilities associated with non-current assets held for sale and discontinued operations – Item 90
This Section was illustrated in Sub-section 15 of the balance sheet assets in Section B – Notes to the consolidated balance sheet of these explanatory notes.
Sub-section 10 - Other liabilities – Item 100
10.1 Other liabilities: breakdown
(thousands of euro) 31/12/2009 31/12/2008
Due to Inland revenue for sums to be paid on behalf of third parties 150,090 170,164 Due to Personnel 136,804 171,113 Due to Welfare Agencies 25,502 22,205 Due to Suppliers 376,091 414,822 Payable for sundry items related to the Inland Revenue Service 44,292 39,244 Items in transit between branches not yet allocated to destination accounts 55,477 335,888 Amounts available to be paid to third parties 111,316 192,629 Bank transfers to be cleared 395,816 476,091 Items associated with securities transactions 24,892 140,872 Other items under processing 218,301 320,276 Adjustments for illiquid portfolio entries 423,045 330,876 Accrued costs and deferred revenues not assignable to a specific item 56,366 22,072 Other entries 720,259 875,751 Total 2,738,251 3,512,003
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Sub-section 11 - Employee termination benefits – Item 110
11.1 Employee termination benefits
(thousands of euro) 2009 2008
A. Opening balance 417,746 436,982 B. Increases 43,218 87,127 B.1 Provisions for the year 21,550 31,914 B.2 Other increases 21,668 55,213 C. Decreases (45,276) (106,363) C.1 Termination benefits paid (25,487) (61,585) C.2 Other decreases (19,789) (44,778) D. Closing balance 415,688 417,746
Sub-section 12 - Provisions for risks and charges – Item 120
12.1 Provisions for risks and charges: breakdown
(thousands of euro) 31/12/2009 31/12/2008 1. Post-employment benefits 244,280 192,278 2. Other provisions for risks and charges 814,936 793,792 2.1 legal controversies 304,246 304,892 2.2 personnel charges 189,025 151,007 2.3 other 321,665 337,893 Total 1,059,216 986,070
Provisions for risks and charges on 31 December 2009 totaled 1,059.2 million.
Item “post-employment benefits” includes two types of funds. The first is defined benefit funds totaling 114.4 million, which the Group has set up to guarantee benefits in favor of retired employees. The second is defined contribution funds amounting to 129.9 million, fed through an annual payment of a contribution borne by the main companies.
Other provisions for risks and charges include item 2.1 “legal controversies”, which mainly refers to provisions set aside for claw-back actions and other pending legal proceedings. For the description of the most significant Group Claw-back actions and pending Legal proceedings, please refer to sub-section “Risks associated with pending legal proceedings” in the Report on Operations. Item 2.3 “other” include the Group’s charity provisions, foreseeable liabilities from received customer complaints, provisions for possible claims against derivative positions and the fund for the liability associated with the supplementary pension scheme SI.PRE (Sistema Integrativo Previdenziale). The item 2.3 “others” incorporates Group charity provisions of 15.133 million, provisions for possible claims on financial instruments, including derivative positions, and tax litigations, totaling 26.706 million, and other foreseeable liabilities totaling 263.882 million. Worth mentioning to this respect are the provisions to back commitments taken by Banco towards third parties and group companies, of which 43 million allocated to actions in favor of the retail bank customers for the repayment of index-linked policies backed by securities issued by Icelandic banks. The item also includes 106.5 million provisions linked to Banca Italease and its subsidiaries. More specifically, there is a 100 million provision set aside by Banca Italease for charges generated by the execution of the securitized loans agreement signed with Alba Leasing. As described in the Report on Operations in the section devoted to noteworthy events for the year, in particular the integration of Gruppo Italease, on 24 December 2009 Alba Leasing and Banca Italease signed an agreement for the transfer to Alba Leasing of securitized loans originated by the banking channel (totaling about 2.4 billion on 31 December 2009). The securitized loan agreement, in keeping with the preliminary arrangements set out in the Framework Agreement, was designed in such a way as to turn over to Alba Leasing the operating and financial effects that would have been generated had the securitized loan portfolio originated by the banking channel outstanding on 31 December 2009 had been transferred to Alba Leasing as from 31 March 2009. Hence, the risks associated with any default payment for the securitized loans originated by the banking channel have been taken over by Alba Leasing, therefore Alba Leasing shall receive the cash flows pertaining to the securitized junior notes and the additional rights to receive sums after the full settlement of junior notes. Alba Leasing agreed to pay to Banca Italease the principal and interest amounts due with respect to partial payments of loans originated by the banking channel, defaulted after 31 December 2009, plus, when applicable, any charge, cost and/or amount provided by the financial documentation of each securitization in case of default by borrowers for loans originated by the banking channel. Banca Italease agreed to transfer these amounts to the SPVs. Banca Italease made the same commitment towards Alba Leasing with respect to the loans of the non-banking sub-portfolio. In keeping with what described above, Alba Leasing agreed to repay the principal amount of junior notes belonging to the
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securitized loans originated by the banking channel to Banca Italease, net of individual write-downs, in compliance with the rules and priorities of each securitization. The other payments, to be made by the SPVs to Banca Italease – again with respect to loans originated by the banking channel – shall pertain to Alba Leasing as regards the junior notes and all the other subordinated amounts along the payment stream. The only exception are payments to be made by SPVs to remunerate the junior notes referring to the securitized loan originated by the banking channel up until 31 March 2009. The agreement was so complex that it was impossible to fully execute it and quantify the actual P&L and balance sheet impacts that will ensue from it, therefore as at 31 December 2009 said impacts could only be estimated. Considering that they are just estimates, no adjustment has been made to the P&L and balance sheet bottom lines of Banca Italease’s financial statements to reflect the impacts of the above agreement, for example the impairments of loans and proceeds from junior notes as at 31 March 2009 and the recoveries as a result of the provisions for securitized loans originated by the banking channel from 31 March to 31 December 2009. In any case Banca Italease, together with an external expert, estimated the ensuing impacts, which, based on the available information at the balance sheet date, turned out to be a loss of about 100 million for Banca Italease. This liability was recognized in the balance sheet item “Provisions for risks and charges”. Note that the consolidated P&L item “net provisions for risks and charges” does not include any allowance, as the liability had already been foreseen upon allocating the purchase price of the business combination (PPA). In fact, upon consolidating Banca Italease on 31 December 2009, this liability was extinguished and the cost shown by Banca Italease was cancelled. For further details on the allocation procedure, please see Section G – Business combinations in these explanatory notes.
12.2 Provisions for risks and charges: annual changes
Post-employment Other (thousands of euro) Total benefits provisions
A. Opening balance 192,278 793,792 986,070 B. Increases 64,194 426,108 490,302 B.1 Provisions for the year 3,303 295,892 299,195 B.2 Time-value changes 3,918 10,075 13,993 B.3 Discount-rate related changes 1,297 2,170 3,467 B.4 Other changes 55,676 117,971 173,647 C. Decreases (12,192) (404,964) (417,156) C.1 Utilization during the year (9,305) (248,740) (258,045) C.2 Discount-rate related changes - (3,875) (3,875) C.3 Other changes (2,887) (152,349) (155,236) D. Closing balance 244,280 814,936 1,059,216
Item B.4 “Other changes” under increases includes the amount contributed by the former Gruppo Italease of 86.5 million.
Item C.1 “Utilization during the year” includes mainly personnel benefits, provisions used for claw-back actions to cover loan losses recognized in income after closing the settlements with bankruptcy receivers and components associated with other legal controversies. Item C.3 “Other changes” under decreases includes the reallocation of surplus provisions, of which 90.5 million are attributable to BPL Real Estate for its exposure to Gruppo Risanamento in the Santa Giulia project, because the risk of a loan loss is considered remote.
12.3 Defined benefit pension plans
1- Description of pension plans
With regard to the defined benefit supplementary pension plans, the measurement of present values as required by IAS 19 “Employee benefits” is carried out by an independent Actuary. The definition of economic estimated assumptions led to the adoption of a discount rate of 4.4% (on 31 December 2008 it was 4.75%) and of 3.8% for the plans of the former Gruppo Banca Italease, and an inflation rate of 2%. The method and the demographic economic and financial technical basis adopted differ from fund to fund. The technical-financial system adopted for the actuarial measurement is full capitalization.
The Group’s defined benefit plans split into internal and external plans. Internal pension plans include Fondo Ex Banca Popolare Italiana, Fondo Cassa di Risparmio di Livorno, Fondo Cassa di Risparmio di Pisa, Fondo Ex Banco di Chiavari, Fondi ex BIG (Banca Industriale Gallaratese), Fondo esattorie Lucca e Cremona, Fondo ex personale di Bipielle Adriatico, Fondo Banca Popolare di Cremona, fondo del Gruppo Banca Italease. External pension plans are the plan for employees of Credito Bergamasco and plans where the Parent company guarantees defined benefits to a group of retired employees on 31st December 2009, passed over by former BPVN S.c.a.r.l..
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2. Fund changes during the year
Pension Internal External plan for Pension Pension Pension pension pension employees plan for plan for plan for plan for plan for of Creberg employees employees employees 31/12/2009 employees employees and other of of of Gruppo of Banco of Banco minor CrLuPiLi Cremona Italease Popolare Popolare schemes
A. Opening balances 33,663 11,348 14,240 22,540 148 - 81,939 B. Increases 3,221 1,000 1,542 2,316 11 32,808 40,898 B.1 Pension costs associated with working 59 - 8 6 - 1,050 1,123 services B.2 Time-value changes 1,513 558 675 1,004 7 320 4,077 B.3 Other actuarial losses 375 - 350 557 - 306 1,588 B.4 Discount-rate related changes 1,268 335 - 749 4 - 2,356 B.5 Other increases 6 107 509 - - 31,132 31,754 C. Decreases (3,083) (1,136) (71) (2,439) (32) (1,698) (8,459) C.1 Utilization during the year (3,083) (1,037) (65) (2,439) (17) (961) (7,602) C.2 Discount-rate related changes ------C.3 Other actuarial profit - (99) - - (15) - (114) C.4 Other decreases - - (6) - - (737) (743) D. Closing balance 33,801 11,212 15,711 22,417 127 31,110 114,378
Sub-section 13 - Insurance reserves – Item 130
The Group has no shareholdings in insurance companies falling within the consolidation scope.
Sub-section 14 - Redeemable shares – Item 150
14.1 Redeemable shares: breakdown
At the balance sheet date, as well as on 31st December 2008, the Group held no redeemable shares.
Sub-section 15 - Group Shareholders’ equity - Items 140, 160, 170, 180, 190, 200 and 220
15.1 Group Shareholders’ equity: breakdown
On 31 December 2009 the Group’s shareholders’ equity consisted of 640,482,201 ordinary shares with a par value of 3.6 euro each (640,482,047 ordinary shares at the end of 2008). On 31 December 2009, 332,450 treasury shares were held in portfolio (332,450 treasury shares at the end of 2008).
268 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
15.2 Share capital – Parent company shares: annual changes
Ordinary Other
A. Shares outstanding at year start 640,482,047 - - fully paid-in 640,482,047 - - not fully paid-in - - A.1 Treasury shares ( - ) -332,450 - A.2 Shares outstanding: opening balance 640,149,597 - B. Increases 154 - B.1 New issues 154 - - against payment: 154 - - business combinations - - converted bonds - - exercised warrants 154 - - other - - scrip issue: - - to employees - - to directors - - other - B.2 Sale of treasury shares - B.3 Other changes - C. Decreases - C.1 Cancellation - C.2 Purchase of treasury shares - C.3 Business transfers - - C.4 Other changes - - D. Shares outstanding: closing balance 640,149,751 - D.1 Treasury shares (+) 332,450 - D.2 Shares outstanding at year-end 640,482,201 - - fully paid-in 640,482,201 - - not fully paid-in - -
15.3 Share capital: other information
All ordinary shares outstanding on 31 december 2009 are authorized and fully paid in. The par value per share is 3.6 euro; shares are bound by no constraints or privilege of any kind and each share has the same rights in terms of dividend payment and capital redemption. At the balance sheet date, only Banco Popolare held treasury shares.
15.4 Retained earnings: other information
(thousands of euro) 31/12/2009 31/12/2008
a) Legal reserve 487,510 487,510 b) Statutory reserves 486,013 738,497 c) Other retained earnings 1,289,971 1,400,137 Total 2,263,494 2,626,144
15.5 Other information
During the year, Banco Popolare issued the capitalization instruments under art. 12 of L. D.185/08, aka “Tremonti bonds” in favor of the Ministry of Economy and Finance (MEF), for a total amount of 1,450 million.
Item 160 Equity instruments includes also 2.5 million worth of convertibility option incorporated in the subordinated convertible bond.
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Sub-section 16 - Minority interests – Item 210
16.1 Equity instruments: breakdown and annual changes
No financial instruments have been issued by not fully owned Group companies.
Other information
1. Guarantees given and commitments
(thousands of euro) 31/12/2009 31/12/2008
1) Financial guarantees given 1,737,954 3,818,871 a) Banks 353,659 628,043 b) Customers 1,384,295 3,190,828 2) Commercial guarantees given 6,226,281 7,180,449 a) Banks 303,124 562,639 b) Customers 5,923,157 6,617,810 3) Irrevocable commitments to grant credit facilities 4,424,539 4,653,383 a) Banks 372,430 533,993 i) certainty of utilization 222,165 330,436 ii) uncertainty of utilization 150,265 203,557 b) Customers 4,052,109 4,119,390 i) certainty of utilization 316,329 186,277 ii) uncertainty of utilization 3,735,780 3,933,113 4) Commitments underlying credit derivatives: protective puts - 32,335 5) Assets pledged to secure third party obligations 45,534 - 6) Other commitments 1,190,886 1,515,621 Total 13,625,194 17,200,659
2. Assets pledged as collateral for own liabilities and commitments
(thousands of euro) 31/12/2009 31/12/2008
1. Financial assets held for trading 1,757,282 2,262,408 2. Financial assets designated at fair value - 9,524 3. Financial assets available for sale 453,474 354,053 4. Investments held to maturity 162,224 319,410 5. Due from banks 4,905,691 8,448,256 6. Loans to customers 2,023,275 1,235,551 7. Property and equipment - - Total 9,301,946 12,629,202
3. Information on operating leases
As at 31 December 2009, there were no operating lease assets and liabilities.
4. Breakdown of investments associated with unit-linked and index linked policies
On 31 December 2009, the Group held no investments associated with unit and index linked policies.
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5. Asset management and brokerage on behalf of third parties
(thousands of euro) Amounts
1. Trading of financial instruments on behalf of third parties 7,641,663 a) Purchase 3,751,634 1. settled 3,516,446 2. unsettled 235,188 b) Sale 3,890,029 1. settled 3,757,152 2. unsettled 132,877 2. Managed accounts 11,851,783 a) individual 11,850,886 b) collective 897 3. Securities custody and administration 274,538,493 a) non-proprietary securities on deposit: as custodian bank (excluding managed accounts) 1. securities issued by companies falling within the consolidation scope 16,848,486 2. other securities 3,000 b) other non-proprietary securities on deposit (excluding managed accounts): other 16,845,486 1. securities issued by companies falling within the consolidation scope 126,831,329 2. other securities 12,277,773 c) non-proprietary securities deposited with others 114,553,556 d) proprietary securities deposited with others 125,553,805 Securities custody and administration 5,304,873 4. Other transactions 2,231,545
Item “Managed accounts” reflects the total amount, marked to market, of assets managed on behalf of third parties excluding the liquidity component. Securities shown under the item “Securities custody and administration” are recognized based on their nominal value. Securities belonging to Managed accounts under item 2 are excluded.
271 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
SECTION C – INFORMATION ON THE CONSOLIDATED INCOME STATEMENT
In addition to data for the period, the following tables in the Explanatory notes and the Income statement show also the corresponding comparable data adjusted in compliance with IFRS 5 and with the changes introduced by the update of Circular n. 262/2005 (Bank Financial Statements). Attached herewith is a reconciliation table between the income statement published in the 2008 annual report and the one restated in this annual report.
Sub-section 1 - Interest income and expense – Items 10 and 20
1.1 Interest and similar income: breakdown
Debt (thousands of euro) Loans Other 31/12/2009 31/12/2008 securities
1. Financial assets held for trading 91,028 - 385,502 476,530 279,085 2. Financial assets designated at fair value 3,968 - - 3,968 7,920 3. Financial assets available for sale 50,673 - - 50,673 43,383 4. Investments held to maturity 13,711 - - 13,711 21,774 5. Due from banks 1,843 169,522 441 171,806 717,357 6. Loans to customers 17,792 3,283,947 307 3,302,046 5,109,967 7. Hedging derivatives X X 71,897 71,897 - 8. Other assets X X 8,233 8,233 15,772 Total 179,015 3,453,469 466,380 4,098,864 6,195,258
1.2 Interest and similar income: differentials on hedging transactions
(thousands of euro) 2009 2008
A. Positive differentials on hedging transactions 196,228 495,595 B. Negative differentials on hedging transactions -124,331 -561,182 C. Balance (A-B) 71,897 -65,587
1.3 Interest and similar income: other information
1.3.1 Interest income on financial assets denominated in foreign currency
(thousands of euro) 2009 2008
Interest income on foreign currency assets 73,538 159,059
1.3.2 Interest income on finance lease receivables
(thousands of euro) 2009 2008
Interest income on finance lease receivables 153,143 2,049
272 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
1.4 Interest and similar expense: breakdown
Other (thousands of euro) Payables Securities 2009 2008 liabilities
1. Due to central banks 59 X - 59 - 2. Due to banks 156,138 X 1,432 157,570 367,771 3. Due to customers 434,806 X 13,973 448,779 1,518,958 4. Securities issued X 693,322 - 693,322 1,295,378 5. Financial liabilities held for trading 474 - 4,406 4,880 144,912 6. Financial liabilities designated at fair value - 807,762 - 807,762 546,753 7. Other liabilities and provisions X X 17,697 17,697 1,017 8. Hedging derivatives X X - - 65,587 Total 591,477 1,501,084 37,508 2,130,069 3,940,376
Interest reported in sub-item “Hedging derivatives” represents the balance of all spreads accrued on macro-hedges against the interest rate risk on customer checking accounts and deposits.
1.5 Interest and similar expense: differentials on hedging transactions
See table 1.2 as the differential balance in 2009 is positive, while it was negative in 2008.
1.6 Interest and similar expense: other information
1.6.1 Interest expense on liabilities denominated in foreign currency
(thousands of euro) 2009 2008
Interest expense on foreign currency liabilities 42,250 129,044
1.6.2 Interest expense on finance lease payables
(thousands of euro) 2009 2008
Interest expense on finance lease payables 394 897
273 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 2 – Fees and commissions – Items 40 and 50
2.1 Fee and commission income: breakdown
(thousands of euro) 2009 2008
a) guarantees given 56,751 55,221 b) credit derivatives 152 529 c) management, brokerage and advisory services: 619,466 725,760 1. trading of financial instruments 28,706 48,211 2. currency trading 4,311 5,231 3. managed accounts 142,561 229,877 3.1 individual 54,595 74,243 3.2 collective 87,966 155,634 4. securities administration and custody 12,466 13,843 5. custodian bank 15,043 22,745 6. underwriting of securities 64,383 87,764 7. order collection and transmission 52,937 37,744 8. advisory services 2,119 5,552 8.1 for investment 2,119 5,552 8.2 for the financial structure - - 9. distribution of third-party services 296,940 274,793 9.1 managed accounts 416 892 9.1.1 individual - 467 9.1.2 collective 416 425 9.2 insurance products 177,537 154,120 9.3 other products 118,987 119,781 d) payment and collection services 152,271 157,373 e) securitization servicing 2,842 2,357 f) factoring services 51 30 g) tax collection services - - h) management of multilateral trading facilities - - i) management and administration of checking accounts 279,827 286,078 j) other services 250,091 183,615 Total 1,361,451 1,410,963
2.2 Fee and commission expense: breakdown
(thousands of euro) 2009 2008
a) guarantees given 2,667 2,052 b) credit derivatives - - c) management, brokerage and advisory services: 46,431 73,863 1. trading of financial instruments 16,576 32,280 2. currency trading - 23 3. managed portfolios - - 3.1 proprietary portfolio - - 3.2 non-proprietary portfolio - - 4. securities administration and custody 7,504 10,397 5. underwriting of securities 17,322 20,564 6. off-branch distribution of financial instruments, products and services 5,029 10,599 d) payment and collection services 39,973 36,530 e) other services 44,805 37,474 Total 133,876 149,919
274 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 3 - Dividend and similar income – Item 70
3.1 Dividend and similar income: breakdown
2009 2008 (thousands of euro) Profit from UCITS Profit from UCITS Dividends Dividends units units
A. Financial assets held for trading 527,962 1,276 419,373 380 B. Financial assets available for sale 8,680 695 22,489 4,712 C. Financial assets designated at fair value - 15 1,030 15 D. Equity investments 22,065 X - X Total 558,707 1,986 442,892 5,107
Dividends from equity investments, namely investments in associates and companies subject to joint control (22.1 million), refer to dividends distributed by the company Agos in 2009 on earnings generated before the date of acquisition by the Group. To verify whether this accounting treatment produced an overvaluation of the equity investment, an impairment test under IAS 36 was conducted, which produced a recoverable amount as at 31 December 2009 greater than the carrying amount.
Sub-section 4 - Profits/losses on trading – Item 80
4.1 Profits/losses on trading: breakdown
Net profit or Capital gains Trading profit Capital losses Trading loss (thousands of euro) loss ( A ) ( B ) ( C ) ( D ) (A+B)-(C+D)
1. Financial assets held for trading 163,119 699,052 (38,432) (546,989) 276,750 1.1 Debt securities 122,980 149,582 (18,802) (15,830) 237,930 1.2 Equity securities 23,091 537,621 (19,342) (531,057) 10,313 1.3 UCITS units 17,048 11,111 (288) (62) 27,809 1.4 Loans - - - - - 1.5 Other - 738 - (40) 698 2. Financial liabilities held for trading 828 2,951 (1,046) (23,540) (20,807) 2.1 Debt securities - - - - - 2.2 Deposits and payables 828 2,951 (1,046) (23,540) (20,807) 2.3 Other - - - - - 3. Other financial assets and liabilities: X X X X (39,193) exchange differences 4. Derivatives 2,749,831 5,890,053 (2,002,927) (6,948,365) (286,148) 4.1 Financial derivatives: 2,749,831 5,876,263 (1,965,980) (6,938,363) (252,989) - on debt securities and interest rates 1,677,621 5,262,329 (1,302,852) (5,815,584) (178,486) - on equity securities and equity indices 1,062,025 613,934 (653,511) (1,120,633) (98,185) - on currencies and gold X X X X 25,260 - other 10,185 - (9,617) (2,146) (1,578) 4.2 Credit derivatives - 13,790 (36,947) (10,002) (33,159) Total 2,913,778 6,592,056 (2,042,405) (7,518,894) (69,398)
275 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 5 - Fair value adjustments in hedge accounting – Item 90
5.1 Fair value adjustments in hedge accounting
(thousands of euro) 2009 2008
A. Income on: A.1 Fair value hedging derivatives 32,165 147,089 A.2 Hedged financial assets (fair value) 26,243 44,832 A.3 Hedged financial liabilities (fair value) 33,772 - A.4 Cash flow hedging derivatives - - A.5 Foreign currency assets and liabilities - - Total hedging income (A) 92,180 191,921 B. Expense on: B.1 Fair value hedging derivatives (75,528) (46,926) B.2 Hedged financial assets (fair value) (1,949) (19,845) B.3 Hedged financial liabilities (fair value) (22,967) (114,218) B.4 Cash flow hedging derivatives - - B.5 Foreign currency assets and liabilities - (14,552) Total hedging expense (B) (100,444) (195,541) C. Net profit/loss on hedging transactions (A-B) (8,264) (3,620)
Sub-section 6 - Profits (Losses) on disposal/repurchase – Item 100
6.1 Profits (losses) on disposal/repurchase
2009 2008 (thousands of euro) Profit Loss Net result Profit Loss Net result
Financial assets 1. Due from banks ------2. Customer loans 6,502 (5,076) 1,426 13,201 (28,683) (15,482) 3. Financial assets available for sale 10,179 (1,590) 8,589 58,053 (8,522) 49,531 3.1 Debt securities 143 (1,178) (1,035) 165 (7,672) (7,507) 3.2 Equity securities 8,770 (388) 8,382 57,825 (850) 56,975 3.3 UCITS units 1,266 (24) 1,242 63 - 63 3.4 Loans ------4. Investments held to maturity 6 - 6 5 - 5 Total Assets 16,687 (6,666) 10,021 71,259 (37,205) 34,054 Financial liabilities 1. Due to banks ------2. Due to customers ------3. Securities issued 29,632 (7,854) 21,778 513 (2,000) (1,487) Total Liabilities 29,632 (7,854) 21,778 513 (2,000) (1,487)
276 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 7 - Profit/Loss on financial assets and liabilities designated at fair value – Item 110
7.1 Fair value change in financial assets and liabilities designated at fair value: breakdown
Profit on Loss on Net profit or Capital gains Capital losses (thousands of euro) disposal disposal loss ( A ) ( C ) ( B ) ( D ) (A+B)-(C+D)
1. Financial assets 34,905 2,153 (3,684) (2,087) 31,287 1.1 Debt securities 25,282 2,126 - - 27,408 1.2 Equity securities 253 - - (391) (138) 1.3 UCITS units 9,370 27 (3,684) (1,696) 4,017 1.4 Loans - - - - - 2. Financial liabilities 25,918 6,927 (561,260) (95,869) (624,284) 2.1 Securities issued 25,918 6,927 (561,260) (95,869) (624,284) 2.2 Due to banks - - - - - 2.3 Due to customers - - - - - 3. Foreign currency financial assets and liabilities: exchange differences X X X X (956) 4. Financial and credit derivatives 206,515 750,219 (653,136) (17,946) 285,652 Total 267,338 759,299 (1,218,080) (115,902) (308,301)
This item includes the net result of bonds under the fair value option and of their hedging derivatives. We exercised the fair value option to reduce the inconsistent accounting treatment that would otherwise occur by measuring financial liabilities issued at amortized cost and the associated hedging derivatives at fair value. Note that, in compliance with the relevant accounting standard, when measuring the fair value we also factored in the effect of Banco Popolare’s creditworthiness change occurred after the issue date. For financial year 2009, the effect charged to income totaled 350.5 million, of which 211 million as a result of the different procedure used to measure the fair value of some types of issues defined as “retail or similar”, as described in Section A of these Explanatory notes. For the remaining issues, the change in creditworthiness with respect to the issue date or, for issues carried out in prior years, with respect to 31 December 2008, caused the recognition of a loss of 139.5 million, almost entirely attributable to Banco Popolare issues. This is due to the general improvement of own creditworthiness , which for issues carried out in prior years caused a climb- down of the capital gains that had been recognized in the past. For further details, please see Sub-section 5 of balance sheet liabilities of these explanatory notes, covering “Financial liabilities designated at fair value through profit and loss”.
Sub-section 8 - Net losses / recoveries on impairment – Item 130
8.1 Net impairment losses on loans: breakdown
Impairment losses Recoveries (thousands of euro) Individual Individual Collective 2009 2008 Collective Write-offs Other A B A B A. Due from banks - (4,418) (726) - 117 - 7,619 2,592 (57,867) - Loans - (4,418) (726) - 117 - 7,619 2,592 (57,867) - Debt securities ------Due from B. (97,930) (1,046,280) (209,106) 170,109 309,565 - 48,000 (825,642) (1,082,370) customers - Loans (97,930) (1,046,236) (209,106) 170,109 306,493 - 48,000 (828,670) (1,082,370) - Debt securities - (44) - - 3,072 - - 3,028 - C. Total (97,930) (1,050,698) (209,832) 170,109 309,682 - 55,619 (823,050) (1,140,237) A = Interest-related B = Other recoveries
277 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
8.2 Net impairment losseson financial assets available for sale: breakdown
Individual impairment losses Individual recoveries (thousands of euro) 2009 2008 Write-offs Other A B A. Debt securities - (12,902) - - (12,902) (15,500) B. Equity securities (2) (12,083) X X (12,085) (151,719) C. UCITS units - (4,264) X - (4,264) (9,273) D. Loans to banks ------E. Loans to customers ------F. Total (2) (29,249) - - (29,251) (176,492) A = Interest-related B = Other recoveries
8.3 Net impairment losses on investments held to maturity: breakdown
impairment losses Recoveries Total Total (thousands of euro) Individual Individual Collective Collective 2009 2008 Write-offs Other A B A B A. Debt securities ------(23,575) B. Loans to banks ------C. Loans to customers ------D. Total ------(23,575) A = Interest-related B = Other recoveries
8.4 Net impairment losses onother financial activities: breakdown
impairment losses Recoveries Total Total (thousands of euro) Individual Individual Collective Collective 2009 2008 Write-offs Other A B A B A. Guarantees given - (23,085) (22) - 4,769 - 946 (17,392) (14,061) B. Credit derivatives ------Commitments to grant C. - - (27) - - - 5 (22) 7 loans D. Other transactions - (2,452) - - 23 - - (2,429) 604 E. Total - (25,537) (49) - 4,792 - 951 (19,843) (13,450) A = Interest-related B = Other recoveries
Sub-section 9 - Net premiums – Item 150
Not material for the Group.
Sub-section 10 - Other insurance revenues and charges – Item 160
Not material for the Group.
278 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 11 - Administrative expenses – Item 180
11.1 Personnel expenses: breakdown
(thousands of euro) 2009 2008
1) Employees on payroll 1,579,052 1,576,998 a) wages and salaries 1,052,512 1,070,348 b) social security charges 306,330 302,949 c) termination benefits 67,348 39,882 d) pension expenses 792 1,188 e) provisions for employee termination benefits 21,550 31,914 f) provisions for post-employment benefits and similar: 15,353 13,725 - defined contributions 8,675 9,412 - defined benefits 6,678 4,313 g) payments to external supplementary pension funds: 19,774 33,630 - defined contributions 17,158 31,573 - defined benefits 2,616 2,057 h) costs associated with share-based payments 1,145 12 i) other employee benefits 94,248 83,350 2) Other staff 21,055 22,232 3) Directors and statutory auditors 22,080 20,375 4) Retired personnel 4,954 6,246 5) Expense recovery for detached personnel (5,016) (6,394) 6) Expense recovery for detachment of third party personnel 2,547 2,986 Total 1,624,672 1,622,443
11.2 Average number of employees by category
2009 2008
Employees on payroll 20,063 19,930 a) senior managers 339 348 b) total managers 7,564 7,297 of which: 3rd and 4th level 3,570 3,408 c) remaining staff on payroll 12,160 12,285 Other staff 312 480 Average number of employees 20,375 20,410
The prior year’s data have been adjusted as we used the weighted average instead of the simple one. In case of part-time employees 70 per cent is generally accepted. The average is calculated by taking the weighted average of employees, where the weight is represented by the number of months worked in a year.
11.3 Post-employment defined benefit plans: total costs
(thousands of euro) 2009 2008
Pension cost related to current employment services 83 278 Time-value related financial charges 3,937 3,276 Actuarial gains and losses 2,643 795 Profit and loss on curtailments or settlements 15 (36) Total 6,678 4,313
11.4 Other employee benefits
The item referring to other employee benefits is shown in the previous table 11.1, item “i) other employee benefits”, totaling 94.248 million, whereas in 2008 it came in at 83.350 million.
279 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
11.5 Other administrative expenses: breakdown
(thousands of euro) 2009 2008
a) property expenses: 216,839 244,699 - rental and maintenance 161,734 126,146 - cleaning of premises 16,733 15,322 - energy, water and heating 38,372 103,231 b) direct and indirect taxes 151,511 157,563 c) postage, telephone, print-outs and other office expenses 73,447 88,293 d) maintenance and rents for furniture, plant and equipment 58,077 55,609 e) Fees to external professionals and advisors 128,636 92,202 f) information and survey expenses 15,233 39,029 g) security and armored truck guards 16,918 17,573 h) third party services 153,570 116,804 i) advertising, entertainment and gifts 30,940 41,106 l) insurance premiums 17,580 18,396 m) transportation, rentals and other travel expenses 35,696 45,820 n) other sundry costs and expenses 81,826 162,055 Total 980,273 1,079,149
Sub-section 12 - Net provisions for risks and charges – Item 190
12.1 Net provisions for risks and charges: breakdown
Reallocated (thousands of euro) Provisions 31/12/2009 31/12/2008 surpluses
Net provisions for risks and charges: (98,100) 131,830 33,730 (204,422) a) litigations (56,304) 124,004 67,700 (92,769) b) personnel costs (303) - (303) (2,607) c) other (41,493) 7,826 (33,667) (109,046) Total (98,100) 131,830 33,730 (204,422)
With respect to the P&L impact of changes in Provisions for Risks and Charges, see the comment to table 12.2 “Provisions for risks and charges: annual changes” of Sub-section 12 “Provisions for risks and charges” of liabilities of Section B of the Consolidated Explanatory Notes.
Sub-section 13 – Net adjustments to/recoveries on property and equipment – Item 200
13.1 Net adjustments to / recoveries on property and equipment: breakdown
Impairment Depreciation Recoveries Net result (thousands of euro) losses (a) (c) (a+b-c) (b)
A. Property and equipment A.1 Owned: (105,059) (3,087) - (108,146) - operating (103,492) (2,974) - (106,466) - investment (1,567) (113) - (1,680) A.2 Under finance lease: (1,832) - - (1,832) - operating (1,595) - - (1,595) - investment (237) - - (237) Total (106,891) (3,087) - (109,978)
280 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 14 – Net adjustments to/recoveries on intangible assets – Item 210
14.1 Net adjustments to/recoveries on intangible assets: breakdown
Impairment Amortization Recoveries Net result (thousands of euro) losses (a) (c) (a+b-c) (b)
A. Intangible assets A.1 Owned: (109,237) (319) - (109,556) - generated in-house - - - - - other (109,237) (319) - (109,556) A.2 Under finance lease - - - - Total (109,237) (319) - (109,556)
Sub-section 15 - Other operating expenses (income) – Item 220
15.1 Other operating expenses: breakdown
(thousands of euro) 2009 2008
a) charges on fixed assets under finance lease 76 - b) depreciation of expenses for leasehold improvements 25,980 19,735 c) other 158,259 247,294 Total 184,315 267,029
The item “other” mainly refers to expenses for the industrial activity carried out by the subsidiary Bormioli Rocco & Figlio S.p.A..
15.2 Other operating income: breakdown
(thousands of euro) 2009 2008
a) tax recoveries 136,326 135,335 b) expense recoveries 33,285 34,738 c) proceeds from securitizations 1,179 - d) rent income from property 12,949 11,897 e) other 191,486 f) tax recoveries 373,244 740,981 Total 748,469 922,951
“Other” operating income mainly comprise: - expense recoveries relating to indirect taxes (136.3 million) and legal expenses (29.7); - income from the acquisition of Banca Italease (191.5 million); - industrial income attributable to the subsidiary Bormioli Rocco & Figlio S.p.A..
281 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 16 - Profits (losses) on investments in associates and companies subject to joint control – Item 240
16.1 Profits (losses) on investments in associates and companies subject to joint control: breakdown
(thousands of euro) 2009 2008
1) Companies under joint control A. Income - - 1. Revaluations - - 2. Profits on disposal - - 3. Write-backs - - 4. Other positive changes - - B. Expenses -135 -17 1. Write-downs -135 -17 2. Impairment losses - 3. Losses upon disposal - 4. Other negative changes - Net result -135 -17 2) Companies under significant influence (associates) A. Income 97,523 142,100 1. Revaluations 93,865 35,603 2. Profits on disposal 3,658 104,688 3. Write-backs - - 4. Other positive changes - 1,809 B. Expenses -21,152 -413,493 1. Write-downs -12,016 -47,770 2. Impairment losses -9,132 -365,723 3. Losses upon disposal -4 - 4. Other negative changes - - Net result 76,371 -271,393 Total 76,236 -271,410
Revaluations and Write-downs include profit and loss, respectively amounting to 93.9 million (of which 64.8 million for Agos, 13.1 million for I.C.B.P.I., 2.8 million for Arca, 12.7 million for Popolare Vita) and 12.0 million (of which 8.7 million for Avipop Assicurazioni, 1.8 million for Energreen, 1.0 million for Centrosim), deriving from the measurement under the equity method of investments in companies under joint control and significant influence.
Profits upon disposal include gains recognized as a result of disposals of equity investments held I.C.B.P.I.. The loss upon disposal regards the completion of the liquidation procedure of the associate Evoluzione 94.
Impairment losses refer to the equity investments in Comital (3.1 million), Centrosim (1.4 million), Efibanca Palladio Finanziaria (3.2 million) and Ch&f Bertolini (1.1 million), with the last two being classified in item 150 Non-current assets held for sale and discontinued operations.
Sub-section 17 - Fair value changes of tangible and intangible assets – Item 250
17.1 Fair value changes (or revaluation changes) of tangible and intangible assets: breakdown
The Group has no tangible or intangible assets measured at fair value or revalued.
Sub-section 18 - Goodwill impairment – Item 260
18.1 Goodwill impairment: breakdown
No goodwill impairments were carried out.
282 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Sub-section 19 - Profits (losses) on disposal of investments – Item 270
19.1 Profits (lossws) on disposal of investments: breakdown
(thousands of euro) 2009 2008
A. Real Estate assets 112,374 397,270 - Profits on disposal 112,516 397,270 - Losses on disposal (142) - B. Other assets 113 98 - Profits on disposal 5,948 415 - Losses on disposal (5,835) (317) Net result 112,487 397,368
Profits on disposal includes the capital gain generated by the subsidiary Immobiliare BP as a result of the transfer of heritage buildings of high artistic value to the closed-end real estate fund “Eracle”, owing to the expiration of the preemption right held by the Italian Monuments and Fine Arts Service (Sovrintendenza alle Belle Arti), as part of the plan launched the prior year to valorize and rationalize the Group’s real estate assets; in financial year 2008 the capital gain totaled 358 million.
Sub-section 20 - Tax on income from continuing operations – Item 290
20.1 Tax on income from continuing operations: breakdown
(thousands of euro) 2009 2008
1. Current tax ( - ) (455,311) (757,526) 2. Changes in current tax in prior years (+/-) (21,622) (16,686) 3. Reduction in current tax for the year (+) 52 8,220 4. Changes in deferred tax assets (+/-) 182,415 840,818 5. Changes in deferred tax liabilities (+/-) 65,367 64,805 6. Income tax for the year (-1 +/- 2 + 3 +/- 4 +/- 5) (229,099) 139,631
The item does not include taxes referring to the companies Factorit S.p.A. and Banco Popolare Ceská Republika, a.s. which are shown in the specific table 21.2 “Breakdown of income tax referring to groups of assets/liabilities under disposal”.
283 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
20.2 Reconciliation between theoretical and effective tax charges recognized in the financial statements
IRES 2009
CONSOLIDATED GROSS INCOME 492,883 Negative operating components that have not been recognized permanently (+) 542,815 undeductible interest expense 115,324 capital loss on disposal/valuation of equity investments before consolidation entries 195,411 undeductible taxes other than income tax 4,639 other (undeductible losses, phone costs, representation expenses, vehicle costs, non-relevant costs, 224,359 undeductible contingent liabilities, etc.) effects from consolidation entries - effects from IFRS 3 (PPA) adjustments 3,081 Positive operating components that have not been recognized permanently (-) -652,178 immaterial portion of capital gain on disposal/valuation of equity investments before consolidation entries -25,060 immaterial portion of dividends recognized before consolidation entries -537,171 other (tax-free contingent assets, capital gains from transfer of property to real estate fund, etc.) -68,177 effects from consolidation entries -21,689 effects from IFRS 3 (PPA) adjustments -82 Permanent increases not linked to gross income elements (+) 395 other 395 Permanent decreases not linked to gross income elements (-) -98,033 income paid to directors - liberal donations through specific provision set up upon earning allocation -14,317 recovery of intercompany interest expense deductibility for tax consolidation -40,267 Other (mainly: deduction of negative income components charged directly to equity) -43,449 IRES TAXABLE BASE THROUGH P&L 285,882 Nominal tax rate IRES 27.50% Effective IRES 78,617 IRES tax rate 15.95%
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IRAP 2009
CONSOLIDATED GROSS INCOME 492,883 Negative operating components that have not been recognized permanently (+) 2,427,365 undeductible interest expense 145,232 undeductible portion of depreciation of operating assets 3,590 other undeductible administrative expenses 142,384 personnel expenses net of allowed deductions (wedge reduction, disabled, etc.) 1,026,076 loan impairments net of write-backs and net provisions for risks and charges 855,993 other operating charges (item 190 I.S. banks) 52,329 losses on equity investments (item 210 I.S. banks) before consolidation entries 163,736 immaterial losses on sale of investments (item 240 I.S. banks 1 other “ordinary” effects 32,425 effects from consolidation entries - effects from IFRS 3 (PPA) adjustments 5,600 Positive operating components that have not been recognized permanently (-) -1,047,733 profit on equity investments (item 210 I.S. banks) -2,295 immaterial portion of dividends (50%) recognized before consolidation entries -548,251 other operating income (item 190 I.S. banks)) -146,833 immaterial profit on disposal of investments (item 240 I.S. banks) -53 other (mainly: net recoveries from provisions for risks and charges) -152,558 effects from consolidation entries -97,744 effects from IFRS 3 (PPA) adjustments -100,000 Permanent increases not linked to gross income elements (+) 191,153 other (including not reportable losses for the year) 191,153 Permanent decreases not linked to gross income elements (-) -8,464 other -8,464 IRAP TAXABLE BASE THROUGH P&L 2,055,203 IRAP Weighted average nominal tax rate 4.73% Effective IRAP 97,188 IRAP tax rate 19.72%
NOT ACCRUED IRES AND IRAP AND OTHER TAXES 2009
Total impact 53,294 Ires - Current tax, deferred tax assets and liabilities from previous years -453 Irap - Current tax, deferred tax assets and liabilities from previous years 3,689 Effect from IRES refund application for partial deductibility of IRAP -11,324 Net effect of detaxation of misalignments ex art. 1, co. 48, L. 244/2007 and ex art. 15 L. D. 185/2008 - Substitute tax under art. 1, paragraphs 137 and following, Law n. 296 of 24.12.2006 8,432 PPA effects (mainly: reversal deferred tax on goodwill) -2,171 Other (mainly: taxes after litigation) 55,122 Not accrued IRES and IRAP tax rate and other taxes 10.81%
TOTAL TAX ON GROSS INCOME 2009
Total IRES + IRAP + Other taxes 229,099 TOTAL TAX RATE 46.48%
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Sub-section 21 - Income (Loss) after tax from discontinued operations – Item 310
21.1 Income (Loss) after tax from discontinued operations: breakdown
(thousands of euro) 2009 2008
1. Income 91,270 328,930 2. Expense (91,521) (409,564) 3. Valuation difference of discontinued operations and associated liabilities - - 4. Profit (Loss) on sale (1,136) 193,853 5. Tax (4,458) 2,211 Profit (Loss) (5,845) 115,430
The item includes the P&L contribution for the year (sub-item income and expense) and the capital loss recognized as a result of the sale of the subsidiary Aletti Private Equity (sub-item profit/loss on sale). It also includes the consolidated P&L contribution of some other subsidiaries under disposal.
21.2 Breakdown of income tax on groups of assets/liabilities under disposal
(thousands of euro) 2009 2008
1. Current tax ( - ) (8,578) (34,736) 2. Changes in deferred tax assets ( +/- ) 4,120 40,778 3. Changes in deferred tax liabilities ( -/+ ) - (3,831) 4. Tax on income for the year (-1 +/- 2 +/- 3) (4,458) 2,211
Pursuant to IFRS 5, the item includes the taxes referring to the companies Factorit S.p.A. and Banco Popolare Ceská Republika, a.s. that were under disposal at the balance sheet date.
Sub-section 22 - Minority interests – Item 330
22.1 Breakdown of item 330 “minority interest”
(in thousands of euro) 2009 2008
Credito Bergamasco 6,900 15,470 Cassa di Risparmio Lucca Pisa Livorno -3,334 13,861 Banca Aletti 3,812 2,201 Efibanca -547 -1,135 Banca Popolare di Crema -454 -49 Banca Caripe -320 -31 Arena Broker 200 42 Aletti Gestielle SGR -10 169 Aletti Gestielle Alternative SGR 6 17 Gruppo Bormioli 160 436 Glass Italy -2 -5 Partecipazioni Italiane 0 -1 Banca Italease -9,823 Release -3,797 Italease Network -1,631 Mercantile Leasing -1,212 Factorit 696 Italease Gestione Beni 161 Itaca Service 48 Essegibi Promozioni Immobiliari 1 HCS -4 Banca Italease Funding LLC 81 Merfinance/Veicoli 17 Other -47 239 Total -9,099 31,214
Item Other includes immaterial minority interest.
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Sub-section 23 - Other information
No additional material information is available other than what illustrated in the previous sections.
Sub-section 24 - Earnings per share
31 December 2009 31 December 2008 Weighted Weighted Share of profit EPS Share of profit EPS average of average of (euro) (euro) (euro) (euro) ordinary shares ordinary shares
EPS Basic 215,374,800 640,482,143 0.336 -333,371,891 640,481,532 -0.521 EPS Diluted 223,300,948 699,545,121 0.319 -335,086,934 699,980,349 -0.479
24.1 Average number of diluted ordinary shares
Basic EPS, which was calculated by dividing the net income attributable to ordinary shareholders by the average ordinary shares outstanding, takes into account the share of profit to be distributed to the Supervisory Board and to the non-executive members of the Management Board, allocations to charity, solidarity and social actions, as well as the share of profit to be set aside for the remuneration of the capitalization financial instruments under art. 12 of LD 185/08, issued on 31 July 2009, totaling 1.45 billion, as elements decrementing the numerator.
The dilutive effect on the number of common shares outstanding is due to the implied conversion option of the subordinated bond program expiring on June 2010 for 7,906,627 shares, to the issue of warrants assigned to the subscribers of the capital increase carried out by former Banca Popolare Italiana in 2006 for 49,458,060 shares, to the issue of shares as a result of the options exercised under the stock option plan for 1,458,750 shares, and for the issue of shares as a result of the possible conversion of capitalization financial instruments under art. 12 of LD 185/08, issued on 31 July 2009.
24.2 Other information
No additional material information is available other than what illustrated in the previous sections.
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SECTION D – CONSOLIDATED COMPREHENSIVE INCOME
Detailed statement of consolidated comprehensive income
(in thousands of euro) Gross Amount Income Tax Net Amount
10 Net income (loss) X X 257.939 Other comprehensive income 20 Financial assets available for sale: 75,810 -16,744 59,066 a) fair value changes 83,164 -16,578 66,586 b) reversal to income statement - impairment losses 1,880 -600 1,280 - gains/losses on disposals -6,218 484 -5,734 c) other changes -3,016 -50 -3,066 30 Property and equipment 1,036 - 1,036 40 Intangible assets - - - 50 Hedges of foreign investments: -50 - -50 a) fair value changes -50 - -50 b) reversal to income statement - - - c) other changes - - - 60 Cash flow hedges: 1,715 1,074 2,789 a) fair value changes 1,715 1,074 2,789 b) reversal to income statement - - - c) other changes - - - 70 Foreign exchange differences: - - - a) fair value changes - - - b) reversal to income statement - - - c) other changes - - - 80 Non-current assets held for sale: - - - a) fair value changes - - - b) reversal to income statement - - - c) other changes - - - 90 Actuarial gains (losses) on defined benefit plans - - - 100 Share of valuation reserve connected with investments carried at equity: -14,519 - -14,519 a) fair value changes -13,632 - -13,632 b) reversal to income statement - impairment losses - - - - gains/losses on disposal - - - c) other changes -887 - -887 110 Total other comprehensive income 63,992 -15,670 48,322 120 Total comprehensive income (Item 10+110) 306,261 130 Consolidated comprehensive income attributable to minority interests -7,862 140 Consolidated comprehensive income attributable to the Parent company 314,123
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SECTION E – INFORMATION ON RISKS AND RELATIVE HEDGING POLICIES
Sub-section 1 refers exclusively to the Banking Group, unless otherwise expressly indicated. The tables show data gross of intercompany relations (with other companies falling under the consolidation scope).
Sub-section 1 – Risks for the Banking Group
1.1 CREDIT RISK
QUALITATIVE INFORMATION
1. In general
Gruppo Banco Popolare pursues lending policy objectives aiming at: supporting the growth of the business activities operating in its market territories, with a strong customer relationship focus on small and medium sized companies , as well as on households; diversifying its portfolio, limiting loan concentration on single counterparties/groups, on single industries or geographical areas; adopting a homogeneous and univocal credit management model, based on internal IT and regulatory rules, methodologies, processes and procedures that have been harmonized and standardized across all Banche del Territorio.
The loan book monitoring is carried out by the Parent company’s Loan Department and is focused on the performance analysis of the risk profile of the various economic sectors, geographical areas, customer segments and types of granted loans, as well as on other analysis views, allowing the definition of possible corrective actions at central level. Reports are produced monthly to be submitted to the Management Board, and quarterly to be submitted to the Board of Directors of the Banche del Territorio.
2. Credit risk management policies
2.1 Organizational aspects
As credit intermediation is a core activity of the Group, it is exposed to the risk that granted loans are not paid back by borrowers when due, either partially or in full. This risk is sensitive to the domestic and international economic performance, to the structural and technological changes in the borrowing companies, to changes in competitive position of the counterparties, to structural macroeconomic factors, and other external factors such as regulatory and legal requirements. The Group organizational model with respect to its lending activity complies with the following principles: the Parent company guarantees a consistent management, planning, coordination and control of the credit process and of the associated credit risks for all the Group banks and the operating companies, by defining policies, procedures and processes, assessment criteria, adequate organizational, operational, IT and training tools and making sure that they are adopted by the companies of the Group; the Group banks and operating companies autonomously assess and approve the loans they grant directly, and retain the ownership of the relationships and of the associated profit and risk components; the banks and operating companies cooperate with the Parent company to prepare lending regulations, procedures and instruments, by contributing their know-how and expertise deriving from their direct relationships with customers and their lending activities on the territory.
With the aim of optimizing credit quality and minimizing the global credit risk cost for both the Group and the single companies, under the Group organizational model the Parent company’s Loan Department is in charge of developing lending activities and loan policy guidelines for the banks and companies of the Group. To fully implement the Group lending model, the subsidiary banks and companies actively: adopt the criteria, instruments and procedures to analyze creditworthiness and the method to assess loans in keeping with the instructions issued by the Parent company; ensure the constant compliance with the overall and individual ceilings fixed for “large risks”, both at single unit and at Group level; define the structure of the decision-making bodies and of internal power delegation mechanisms in compliance with the Parent company instructions; ensure the monitoring of borrowers and customers in general, by performing the first level controls in keeping with the Parent company instructions.
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With respect to the procedures to assess creditworthiness, and the approval and management of positions, each lending company adopts its own structure of decision-making bodies and defines the delegated powers to authorize loans, in keeping with the guidelines issued by the Parent company. The autonomy levels of Decision-making Bodies are defined in terms of credit line towards the risk group. The rating, up to predefined amounts, shall define who is authorized to approve the loan. Guidelines have been set at Group level, defining how to behave with respect to credit risk-taking, to avoid excessive concentrations, limit potential losses and guarantee credit quality. In particular, in the loan approval phase, the Parent company exercises its role of management, direction and support for the Group by defining: lending rules, regulating credit risk-taking modalities with respect to customers; the lending ceiling, that is, the global limit for loans that Group companies can grant to larger risk groups; the prior approval on the total amount of loans that can be granted to a single customer or a group of customers borrowing from Gruppo Banco Popolare.
2.2 Management, measurement and control systems
Gruppo Banco Popolare makes use of an elaborate set of instruments to monitor the loan book quality, including internal ratings. Their calculation is based on models that are differentiated and estimated specifically for each customer segment (large corporate, mid corporate, small business, retail and banks). Rating plays a key role in loan granting, monitoring and management. Given the occurrence of specific cases, the Rating Desk must examine the positions and decide whether to change the rating (so called “override”). The rating plays a role in deciding which are the competent bodies to approve loans, as well as on the mechanism for the automatic renewal of uncommitted credit facilities, and it contributes to guide the decisions of loan managers when classifying positions based on their performance. It also contributes to the outcome of creditworthiness assessment systems for retail customers and small-sized businesses, to support the lending decisions of the competent bodies. In 2009 the performance monitoring and management process underwent a deep revision. New risk monitoring processes were introduced and existing ones were updated based on the principle that loan positions are managed by the Managers who entertain a relation with the borrowed customer, and who must take all the necessary actions to assure a constant and correct monitoring and detection of events so as to identify those that might impair loans. Specifically, a new early-warning system was implemented and made available to relation managers, so that they can immediately take action and solve the detected anomalies. The process used to manage the performance of positions that give evidence of overt signs of deterioration to avoid defaulting was enhanced. With respect to retail customers, a new management process was adopted, supported by a new IT procedure, which sets out precise actions along well defined timings to bring the position back to performing and to recover the defaulted amount. As to Gruppo Banco Popolare’s internal lending limits, in addition to the compliance with risk concentration limits defined by supervisory regulations, whenever a preset loan threshold is exceeded in case of major customers, the Group Loan Department must resolve maximum ceilings or the Parent company’s competent boards must express their opinion thereon. The Parent company also decides the country classification and the Group-wise maximum exposure level for each country. In 2009 the “Loss Given Default” model (LGD) was re-estimated and actions were taken to use it within the lending processes to achieve a more comprehensive creditworthiness assessment. Management reports use loss given default (LGD) and exposure at default (EAD), both derived by internally developed models. The portfolio risk monitoring is based on a default model, that is applied on a monthly basis to the loan exposure of the commercial banks of Gruppo Banco Popolare, with regard to performing loans, cash loans and guarantees and commitments, and on resident and non-resident retail customers. This model allows to estimate operating capital absorption, taking into account the portfolio concentration and the assumption of a joint default of counterparties, in a predefined context of significant macroeconomic variables. The rate of confidence used is 99.96% and the time frame is one year. The operating capital absorbed by counterparties is determined along a “MonteCarlo” approach, that simulates a sufficiently high number of scenarios to provide a good empirical approximation of the theoretical distribution of loan book losses. In 2009, to extend the calculation of the Economic Capital to all counterparties, retail and not, of the commercial banks, the portfolio model was updated so that it is now possible to reconcile risk measurements with regulatory data. In 2009, we launched a project to develop a system to analyze, define, implement and monitor the Group’s lending policy strategies. The guidelines for the development and reorganization f the loan book aim at optimizing its risk-return ratio, in consistency with the target risk profile defined by the company boards, the available capital and the planned financial and profitability growth targets.
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2.3 Credit risk mitigation techniques
The Group has always kept a watchful eye on the acquisition of loan collaterals and securities, i.e. the use of tools and techniques that mitigate credit risk. When deemed necessary, the typical bank guarantees are required, namely collaterals based on property or financial instruments, as well as personal securities. In general, the decision to require a collateral is based on the customer’s creditworthiness and on the characteristics of the transaction. Following this analysis, it may be deemed appropriate to require additional guarantees to mitigate credit risk, considering the estimated recoverable value offered by the collateral. The system for the recording of collateral property, which also allows to periodically revaluate the property has been consolidated. The value of the financial collaterals is constantly and automatically monitored, so as to compare the present value of the collateral to the initial one, and to allow the manager to act on time in case the collateral suffers from a significant impairment loss. With regard to derivative transactions with market counterparties, we favor entities with which we have entered into agreements requiring the posting of collateral, especially ISDA - Credit Support Annex, so as to obtain a significant credit risk reduction.
2.4 Impaired financial assets
The Group avails itself of special organizational units in charge of the management of impaired loans, which apply predefined management and recovery methodologies, that differ based on the type of loan by amount and risk profile. Loan classifications follow fixed precautionary criteria, based on objective risk parameters. In general, impaired loans cover loans that give rise to a severely abnormal evolution of the business relations between the customer and the Group banks, serious irregularities evidenced in the reports sent to the Centrale Rischi, (i.e. the Credit Bureau managed by the Bank of Italy that gathers information on the solvency of banking customers), a worrisome situation of financial accounts, the onset of negative events that may decrease the value of the accessory securities or that in any case may impair loans. Write-downs are measured on an individual basis for each single position, they are based on precautionary criteria based on the actual recovery likelihood, also in association with the existence of collateral securities, and they are regularly verified. In particular, non-performing loans and substandard loans that exceed given predefined utilization ceilings are managed by a specific dedicated company, owned 100% by the Group, that acts as a servicer of non performing loans, specializing in business processes focusing on loan characteristics, to improve loan recovery capabilities and optimize the ratio between costs and collection percentages. As a result, the activity is oriented towards the economic result, privileging whenever possible out-of-court settlements and focusing on the timeless and speed of the recovery action. This company makes use of peripheral structures, specific IT and performance control tools that systematically produce reports.
Disclosure on structured credit products and on exposures towards Special Purpose Entities
The financial market crisis magnified the need for the market to have access to information on the type and breadth of risks taken on by financial intermediaries by trading structured credit products directly or through special purpose entities, such as collateralized debt obligations (CDO), residential mortgage-backed securities (RMBS), Commercial Mortgage Backed Securities (CMBS), other special purpose entities (SPE) and leveraged finance. Base on the recommendations issued in 2008 by the Financial Stability Forum and by the Bank of Italy, illustrated below is the disclosure on risks taken on by Banco Popolare with respect to structured credit products, which the market perceives as being high-risk, depending on the role played by the Group (investor of products issued by external third party issuers or originator).
Structured products issued by third parties and held by the Group
On 31 December 2009, the main positions in structured credit products issued by third parties (meaning by entities that do not belong to the Group) are represented by ABS and CDOs, as a result of activities carried out in past years; after the financial market crisis, the Group stopped trading these instruments.
The total exposure to these products, in terms of book value, is 112.3 million, accounting for a limited portion (1%) of the overall debt securities portfolio. All securities held belong to the senior class, having a top priority when principal and interest payments are made. The underlying assets generally are Italian and other European countries residential mortgages, as well as Italian government securities; ratings range between double and triple A.
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In particular, ABS have been reclassified on 30 September 2008 from “Financial assets held for trading” to “Customer loans”, as the foreseeable market conditions, particularly penalizing for this kind of investment, would prevent their active management, as described in greater detail in “Section A – Accounting policies – A.3 Fair value disclosure”. On 31 December 2009, ABS held in portfolio amounted to 114.7 million in terms of nominal value, corresponding to a book value of 112 million (the related fair value is 108.3 million ). In 2009 about one third of the securities outstanding at the beginning of the period has been redeemed; no impairment sign was identified.
For CDOs, classified in “Financial assets available for sale”, the exposure on 31 December 2009 in terms of book value was 0.3 million euro, owing to the impairment losses reported mostly in prior years.
For further details on exposures, see the following table “C.1.3 Exposures deriving from main “third party” securitizations broken down by securitized asset and type of exposure”.
Exposures to Special Purpose Entities (SPE)
The only exposures to Special Purpose Entities (SPE) – ad hoc vehicles set up to achieve a specific purpose – are connected with the securitization of Group company loans. Group loans are sold to an SPE, formed pursuant to law n. 130 of 30 April 1999, which issues public or private securities to finance the purchase. The obligations taken on by the SPE towards the subscribers of the securities are satisfied exclusively by using the cash flows generated by the sold loans. For more information on the purpose, structures and characteristics of the securitizations originated by the Group, see Sub- section “C. Securitizations and sales” of this sub-section 1 – Credit risk, and for originated securitizations, the following sub- section 3 – Liquidity risk.
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A. Credit Quality
A.1 Performing and non-performing credit exposure: amonts, adjustments, changes, economic and geographical breakdown
A.1.1 Breakdown of financial assets by portfolio and credit quality (book values)
Banking Group Other companies Non (thousands of euro) Substandard Restructured Past due Other Total Doubtful loans permorming Other loans loans loans assets loans 1. Financial assets held for trading 3,044 18,254 334 1,872 10,673,530 - 72 10,697,106 2. Financial assets available for sale - - - - 1,222,792 - - 1,222,792 3. Investments held to maturity 10,500 - - - 295,740 - - 306,240 4. Due from banks 6,249 17,426 - - 8,528,290 - 1,014,383 9,566,348 5. Customer loans 2,658,198 5,439,178 754,168 892,750 85,605,571 146 214 95,350,225 6. Financial assets designated at fair value - - - - 9,814 - - 9,814 7. Non-current assets held for sale 9,006 74,918 - 34,416 1,536,655 - 129 1,655,124 8. Hedging derivatives - - - - 130,758 - - 130,758 31/12/2009 2,686,997 5,549,776 754,502 929,038 108,003,150 146 1,014,798 118,938,407 31/12/2008 1,001,404 2,057,173 118,462 420,870 99,824,704 - 334,789 103,757,402
Data pertaining to the Banking Group is net of intercompany relations, including those entertained with the other companies falling under the consolidation scope. Notes to the consolidated financial statements statements financial consolidated to the Notes 29 29
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 29 29 A.1.2 Breakdown of financial assets by portfolio and credit quality (gross and net values)
Non performing assets Performing (thousands of euro) Individual Collective Total Gross exposure Net exposure Gross exposure Net exposure adjustments adjustments A. Banking Group 1. Financial assets held for trading 187,022 -163,489 23,533 X X 10,673,501 10,697,034 2. Financial assets available for sale - - - 1,222,792 - 1,222,792 1,222,792 3. Investments held to maturity 27,209 -16,709 10,500 295,740 - 295,740 306,240 4. Due from banks 77,929 -54,254 23,675 8,530,588 -2,298 8,528,290 8,551,965 5. Customer loans 13,306,640 -3,562,346 9,744,294 86,178,665 -573,094 85,605,571 95,349,865 6. Financial assets designated at fair value - - - X X 9,814 9,814 7. Non-current assets held for sale 171,999 -53,659 118,340 1,548,885 -12,230 1,536,655 1,654,995 8. Hedging derivatives - - - X X 130,758 130,758 Total A 13,770,799 -3,850,457 9,920,342 97,776,670 -587,622 108,003,121 117,923,463 B. Other companies falling under the consolidation scope 1. Financial assets held for trading - - - X X 72 72 2. Financial assets available for sale ------3. Investments held to maturity ------4. Due from banks - - - 1,014,383 - 1,014,383 1,014,383 5. Customer loans 146 - 146 214 - 214 360 6. Financial assets designated at fair value - - - X X - - 7. Non-current assets held for sale - - - 129 - 129 129 8. Hedging derivatives - - - X X - - Total B 146 0 146 1,014,726 0 1,014,798 1,014,944 31/12/2009 13,770,945 -3,850,457 9,920,488 98,791,396 -587,622 109,017,919 118,938,407 31/12/2008 5,621,025 -2,006,649 3,597,909 92,011,284 -735,457 99,449,387 103,047,296
Data pertaining to the Banking Group is net of intercompany relations, including those entertained with the other companies falling under the consolidation scope.
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
A.1.3 Banking group – Cash and off-balance sheet exposure to banks: gross and net values
Individual Collective (thousands of euro) Gross exposure Net exposure adjustments adjustments
A. Cash exposure a) Doubtful loans 23,274 (17,025) X 6,249 b) Substandard loans 54,655 (37,229) X 17,426 c) Restructured loans - - X - d) Past due loans - - X - e) Other assets 10,819,244 X (2,298) 10,816,946 Total A 10,897,173 (54,254) (2,298) 10,840,621 B. Off-balance sheet exposure a) Non performing loans - - X - b) Other 2,193,583 X (90) 2,193,493 Total B 2,193,583 - (90) 2,193,493 Total A + B 13,090,756 (54,254) (2,388) 13,034,114
A.1.4 Banking group – Cash exposure to banks: changes in gross non-performing exposures
Substandard Restructured Past due (thousands of euro) Doubtful loans loans loans loans
A. Gross opening balance 12,256 77,420 - - - of which: loans sold and not derecognized - - - - B. Increases 11,018 1,102 - - B.1 Transfers from performing loans - 221 - - B.2 Transfers from other non-performing loans 10,220 - - - B.3 Other increases 798 881 - - C. Decreases - (23,867) - - C.1 Transfers to performing loans - - - - C.2 Write-offs - - - - C.3 Collections - - - - C.4 Gains on disposal - - - - C.5 Transfers to other non-performing loans - (10,220) - - C.6 Other decreases - (13,647) - - D. Gross closing balance 23,274 54,655 - - - of which: loans sold and not derecognized - - - -
A.1.5 Banking group – Cash exposure to banks: changes in total adjustments
Substandard Restructured Past due (thousands of euro) Doubtful loans loans loans loans
A. Gross opening balance 8,656 51,431 - - - of which: loans sold and not derecognized - - - - B. Increases 8,369 3,699 - - B.1 write-downs 254 3,699 - - B.2 transfers from other non-performing loans 7,665 - - - B.3 other increases 450 - - - C. Decreases - (17,901) - - C.1 write-backs from valuation - - - - C.2 write-backs from collection - - - - C.3 write-offs - - - - C.4 transfer to other non-performing loans - (7,665) - - C.5 other decreases - (10,236) - - D. Gross closing balance 17,025 37,229 - - - of which: loans sold and not derecognized - - - -
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A.1.6 Banking group – Cash and off-balance sheet exposures to customers: gross and net values
Portfolio / Quality Individual Collective Gross exposure Net exposure (thousands of euro) adjustments adjustments
A. Cash exposure a) Doubtful loans 4,931,537 (2,253,833) X 2,677,704 b) Substandard loans 6,994,447 (1,307,897) X 5,686,550 c) Restructured loans 860,323 (106,155) X 754,168 d) Past dues 974,688 (47,522) X 927,166 e) Other assets 103,316,430 X (585,324) 102,731,106 Total A 117,077,425 (3,715,407) (585,324) 112,776,694 B. Off-balance sheet exposure a) Non performing 399,830 (210,864) - 188,966 b) Other 12,177,009 X (101,398) 12,075,611 Total B 12,576,839 (210,864) (101,398) 12,264,577 Total A + B 129,654,264 (3,926,271) (686,722) 125,041,271
A.1.7 Banking group – Cash exposures to customers: changes in gross non-performing exposures
Substandard Restructured Past due (thousands of euro) Doubtful loans loans loans loans
A. Gross opening balance 2,140,533 2,758,548 150,520 477,584 - of which: loans sold and not derecognized 8,341 74,729 - 2,528 B. Increases 3,720,723 7,437,607 1,057,581 1,325,959 B.1 Transfers from performing loans 904,303 3,507,218 655,851 957,511 B.2 Transfers from other non-performing loans 1,166,118 290,461 253,954 158,287 B.3 Other increases 1,650,302 3,639,928 147,776 210,161 C. Decreases (929,719) (3,201,708) (347,778) (828,855) C.1 Transfers to performing loans (1,512) (659,586) (59,976) (338,732) C.2 Write-offs (535,586) (38,261) - (950) C.3 Collections (237,672) (671,140) (249,888) (111,785) C.4 Gains on disposal (7,797) - - - C.5 Transfers to other non-performing loans (805) (1,523,828) (25,938) (318,249) C.6 Other decreases (146,347) (308,893) (11,976) (59,139) D. Gross closing balance 4,931,537 6,994,447 860,323 974,688 - of which: loans sold and not derecognized 139,616 406,344 - 203,000
A.1.8 Banking group – Cash exposures to customers: changes in total adjustments
Substandard Restructured Past due (thousands of euro) Doubtful loans loans loans loans
A. Gross opening balance 1,142,889 729,678 32,058 57,136 - of which: loans sold and not derecognized 2,244 12,273 - 167 B. Increases 1,899,876 1,301,314 121,807 122,269 B.1 Impairment losses 703,883 470,732 57,634 38,455 B.2 transfers from other non-performing loans 467,345 22,250 50,652 12,730 B.3 other increases 728,648 808,332 13,521 71,084 C. Decreases (788,932) (723,095) (47,710) (131,883) C.1 write-backs from valuation (135,064) (164,612) (15,315) (25,478) C.2 write-backs from collection (64,550) (20,595) (10,629) (762) C.3 write-offs (535,586) (38,261) - (950) C.4 transfer to other non-performing loans (357) (456,159) (3,607) (92,855) C.5 other decreases (53,375) (43,468) (18,159) (11,838) D. Gross closing balance 2,253,833 1,307,897 106,155 47,522 - of which: loans sold and not derecognized 80,985 43,365 - 8,488
296 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 A.2 Classification of exposures based on internal and external ratings
A.2.1 Banking group - Breakdown of cash and off-balance sheet exposures by external rating classes
Exposures AAA/AA- A+/A- BBB+/BBB- BB+/BB- B+/B- Below B- Unrated Total
A. Cash exposures 4,198,411 15,003,533 6,203,280 3,962,947 1,093,440 37,128 59,845,025 90,343,763 B.1 Financial derivatives 476,649 634,670 63,091 122,079 7,532 3 338,077 1,642,102 B.2 Credit derivatives ------1,509 1,509 C. Guarantees given 1,509,498 2,813,349 646,802 217,011 114,941 862 2,536,862 7,839,326 D. Commitments 137,434 627,350 339,431 205,719 53,907 - 2,362,545 3,726,387 Total 6,321,991 19,078,903 7,252,604 4,507,757 1,269,820 37,994 65,084,018 103,553,086
The distribution of cash and off-balance sheet loans by external rating classes does not include the higher value assigned to the loans of some banks belonging to the former BPI Group during the purchase price allocation (PPA) between the BPVN and BPI Groups, totaling 245.2 million.
A.2.2 Banking group - Breakdown of cash and “off-balance sheet” exposures by internal rating classes
Banks AAA AA A BBB BB B CCC Unrated Total Exposures A. Cash exposures - 766,246 3,848,104 982,339 88,340 13,970 3,146 2,540,941 8,243,087 B.1 Financial derivatives - 312,482 534,034 124,268 3,141 65 - 65,672 1,039,662 B.2 Credit derivatives ------C. Guarantees given - 3,933 289,163 171,470 43,704 7,917 449 79,154 595,791 D. Commitments - 793 22,290 125,167 12,976 - - 40,188 201,414 Total - 1,083,454 4,693,591 1,403,244 148,162 21,953 3,595 2,725,955 10,079,954
Notes to the consolidated financial statements statements financial consolidated to the Notes 29 29
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 29 29
Large Corporate 1 2 3 4 5 6 7 8 9 Unrated Total Exposures
A. Cash exposures 3,172 261,694 1,568,809 2,291,659 2,283,159 1,415,106 503,813 89,609 42,722 2,969,180 11,428,923 B.1 Financial derivatives 1,118 9,585 23,969 26,422 10,446 22,107 19 50,991 144,656 B.2 Credit derivatives - C. Guarantees given 35,378 64,597 1,364,939 571,061 557,721 333,686 135,924 37,741 24,057 257,007 3,382,112 D. Commitments 1,115 3,425 273,765 302,956 17,949 167,253 4,384 11 48,541 819,399 Total 38,550 328,524 2,946,757 3,160,454 3,170,258 1,777,187 829,097 131,753 66,790 3,325,719 15,775,090
Mid Corporate 1 2 3 4 5 6 7 8 9 Unrated Total Exposures
A. Cash exposures 1,189,093 3,544,216 5,124,942 4,443,792 4,116,057 3,938,696 2,880,703 1,620,841 749,906 637,946 28,246,192 B.1 Financial derivatives 10,507 22,033 37,653 43,086 32,131 27,617 29,968 13,964 6,634 88,731 312,325 B.2 Credit derivatives - C. Guarantees given 471,054 508,680 418,077 346,698 251,491 195,597 172,964 30,151 10,922 23,120 2,428,754 D. Commitments 83,800 171,080 212,507 210,812 120,448 104,743 34,055 25,423 11,812 175,239 1,149,920 Total 1,754,455 4,246,009 5,793,181 5,044,388 4,520,127 4,266,654 3,117,690 1,690,379 779,273 925,036 32,137,191
Small Business 1 2 3 4 5 6 7 8 9 Unrated Total Exposures
A. Cash exposures 204,958 780,872 1,699,314 2,780,615 2,778,425 2,230,606 1,544,805 748,015 547,091 300,427 13,615,129 B.1 Financial derivatives 712 2,313 4,722 9,009 13,812 24,505 4,125 2,661 1,069 178 63,106 B.2 Credit derivatives - C. Guarantees given 38,670 92,820 118,124 109,574 73,017 50,040 34,853 12,816 11,574 18,111 559,598 D. Commitments 26,349 103,297 123,588 93,985 72,785 47,488 29,335 13,292 4,271 57,394 571,786 Total 270,689 979,302 1,945,748 2,993,184 2,938,039 2,352,639 1,613,119 776,785 564,004 376,109 14,809,619
Tables in A.2.2 represent the breakdown by rating class of performing loans referring to companies that have migrated onto the Target system on 31 December 2009. 93% of the corporate portfolio has been rated.
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 A.3 Breakdown of secured exposures by type of security
A.3.1 Banking group - Secured cash exposure to banks
Collateral guarantees (1) Personal guarantees (2)
Credit derivatives Guarantees and commitments Net Total (1)+(2) (thousands of euro) exposure Other Govern- Other Govern- Other 31/12/2009 Property Securities Other public Other public collaterals CLN ments and Banks counter- ments and Banks counter- entities entities central banks parties central banks parties
1. Secured cash exposures: 1,675,579 - 1,559,476 229 ------21 121,553 1,681,279 1.1. fully secured 1,067,554 - 947,885 224 ------21 121,553 1,069,683 - of which non-performing loans ------1.2. partly secured 608,025 - 611,591 5 ------611,596 - of which non-performing loans ------2. Off balance sheet secured exposures: 890,614 - 20,895 892,140 ------2,860 - 915,895 2.1. fully secured 23,755 - 20,895 ------2,860 - 23,755 - of which non-performing loans ------2.2. partly secured 866,859 - - 892,140 ------892,140 - of which non-performing loans ------Total 2,566,193 - 1,580,371 892,369 ------2,881 121,553 2,597,174
Notes to the consolidated financial statements statements financial consolidated to the Notes 29 29
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 30 30 A.3.2 Banking group - Secured cash exposure to customers
Collateral guarantees (1) Personal guarantees (2)
Credit derivatives Guarantees and commitments Net Total (1)+(2) (thousands of euro) Govern- exposure Other Other Govern- Other 31/12/2009 Property Securities ments and Other public Other public collaterals CLN Banks counter- ments and Banks counter- central entities entities parties central banks parties banks 1. Secured cash exposures: 58,672,658 39,896,124 2,042,314 805,302 - - - 16,500 96,310 1,573 73,687 502,550 12,856,123 56,290,483 1.1. fully secured 53,925,791 39,292,373 1,758,213 538,528 - - - 16,500 14,643 1,573 62,852 441,241 11,694,920 53,820,843 - of which non-performing loans 6,013,170 5,102,873 17,573 32,597 - - - - - 218 21 216,479 853,796 6,223,557 1.2. partly secured 4,746,867 603,751 284,101 266,774 - - - - 81,667 - 10,835 61,309 1,161,203 2,469,640 - of which non-performing loans 970,754 236,085 38,757 61,092 ------30 18,888 242,436 597,288 2. Off balance sheet secured exposures: 3,079,193 1,257,243 117,979 219,577 ------1,120 48,234 1,184,754 2,828,907 2.1. fully secured 2,600,784 1,199,879 93,935 148,378 ------366 34,764 1,086,874 2,564,196 - of which non-performing loans 46,917 10,723 6,225 6,047 ------26,040 49,035 2.2. partly secured 478,409 57,364 24,044 71,199 ------754 13,470 97,880 264,711 - of which non-performing loans 8,731 58 107 384 ------3,686 4,235 Total 61,751,851 41,153,367 2,160,293 1,024,879 - - - 16,500 96,310 1,573 74,807 550,784 14,040,877 59,119,390
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 B. Loan distribution and concentration
B.1 Banking group - Breakdown by sector of cash and “off-balance sheet” exposures to customers (book values)
Governments and Central banks Other public entities Financial companies Insurance companies Non-financial companies Other counterparties
(thousands of euro) Individual Collective Individual Collective Individual Collective Individual Collective Individual Collective Individual Collective adjustments adjustments adjustments adjustments adjustments adjustments adjustments adjustments adjustments adjustments adjustments adjustments Net exposure Net exposure Net exposure Net exposure Net exposure Net exposure
A. Cash exposures A.1 Doubtful loans 1 35,734 X 1,238 1,476 X 46,411 175,340 X 48 20 X 2,283,260 1,655,968 X 346,746 385,295 X A.2 Substandard loans - 187 X 1,908 534 X 403,605 205,459 X 2 - X 4,561,547 1,019,063 X 719,488 82,654 X A.3 Restructured loans - - X - - X 16,715 17,223 X - - X 737,184 88,930 X 269 2 X A.4 Past dues 17 - X 4,740 140 X 2,420 73 X - - X 677,150 35,071 X 242,839 12,238 X A.5 Other loans 5,832,491 X 957 565,630 X 4,461 17,552,606 X 40,960 149,902 X 2 61,049,860 X 460,868 17,580,617 X 78,076 Total 5,832,509 35,921 957 573,516 2,150 4,461 18,021,757 398,095 40,960 149,952 20 2 69,309,001 2,799,032 460,868 18,889,959 480,189 78,076 Off-balance-sheet B. exposures B.1 Doubtful loans ------1,085 - - - - - 22,445 65,274 - 45 43 - B.2 Substandard loans ------122 3 - 20 - - 94,003 75,958 - 11,968 10,804 - B.3 Other non performing ------1,093 - - - - - 57,357 58,782 - 828 - - loans B.4 Other loans 229,946 X - 77,868 X - 435,074 X - 14,478 X - 7,208,530 X 93,130 4,109,715 X 8,268 Total 229,946 - - 77,868 - - 437,374 3 - 14,498 - - 7,382,335 200,014 93,130 4,122,556 10,847 8,268 31/12/2009 6,062,455 35,921 957 651,384 2,150 4,461 18,459,131 398,098 40,960 164,450 20 2 76,691,336 2,999,046 553,998 23,012,515 491,036 86,344 31/12/2008 5,351,044 34,481 128 562,532 1,539 3,562 15,636,372 286,429 123,196 223,588 24 127 67,568,861 1,277,805 637,310 23,261,280 370,726 62,341
Notes to the consolidated financial statements statements financial consolidated to the Notes
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 30 30 B.2 Banking group - Geographical breakdown of cash and “off-balance sheet” exposures to customers (book values)
ITALY OTHER EUROPEAN COUNTRIES AMERICA ASIA REST OF THE WORLD (thousands of euro) Total write- Total write- Total write- Total write- Total write- Net exposure Net exposure Net exposure Net exposure Net exposure downs downs downs downs downs
A. Cash exposures A.1 Doubtful loans 2,617,053 2,018,893 36,069 206,751 23,603 21,643 351 127 628 6,419 A.2 Substandard loans 5,223,292 1,105,588 456,100 184,122 263 17,018 2,855 319 4,040 850 A.3 Restructured loans 725,312 91,900 27,195 14,244 1,661 11 - - - - A.4 Past dues 917,983 41,702 7,887 5,800 40 1 1,255 19 1 - A.5 Other loans 98,095,070 558,239 3,803,575 16,489 756,564 1,628 54,074 8,874 21,823 94 Total 107,578,710 3,816,322 4,330,826 427,406 782,131 40,301 58,535 9,339 26,492 7,363 B. Off-balance-sheet exposures B.1 Doubtful loans 22,493 66,816 ------B.2 Substandard loans 101,816 84,490 2,204 383 6 1 2,057 373 105 18 B.3 Other non performing loans 60,282 58,783 - - - - 3 - - - B.4 Other loans 11,425,650 101,398 524,740 - 66,804 - 4,990 - 53,427 - Total 11,610,241 311,487 526,944 383 66,810 1 7,050 373 53,532 18 31/12/2009 119,188,951 4,127,809 4,857,770 427,789 848,941 40,302 65,585 9,712 80,024 7,381 31/12/2008 100,518,573 2,419,098 5,522,695 220,844 885,922 51,684 79,781 7,018 93,258 23,570
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 B.3 Banking group - Geographical breakdown of cash and “off-balance sheet” exposures to banks (book values)
ITALY OTHER EUROPEAN COUNTRIES AMERICA ASIA REST OF THE WORLD (thousands of euro) Total write- Total write- Total write- Total write- Total write- Net exposure Net exposure Net exposure Net exposure Net exposure downs downs downs downs downs
A. Cash exposures A.1 Doubtful loans - - 6,249 17,025 ------A.2 Substandard loans - - 17,426 37,229 ------A.3 Restructured loans ------A.4 Past dues ------A.5 Other loans 5,530,184 1,145 4,706,809 1,120 179,884 - 74,701 24 325,368 9 Total 5,530,184 1,145 4,730,484 55,374 179,884 - 74,701 24 325,368 9 B. Off-balance-sheet exposures B.1 Doubtful loans ------B.2 Substandard loans ------B.3 Other non performing loans ------B.4 Other loans 473,736 - 1,356,068 40 109,327 10 218,783 14 35,579 26 Total 473,736 - 1,356,068 40 109,327 10 218,783 14 35,579 26 31/12/2009 6,003,920 1,145 6,086,552 55,414 289,211 10 293,484 38 360,947 35 31/12/2008 11,298,003 990 4,478,980 61,696 226,511 4 435,366 64 362,748 19
B.4 Large risks
One major risk position is reported, totaling 1,001,915 thousand euro.
Notes to the consolidated financial statements statements financial consolidated to the Notes
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
C. Securitizations and sales
C.1 Securitizations
QUALITATIVE INFORMATION
In recent years securitizations have been used as a strategic funding channel as part of the global action plan aiming at satisfying the Group’s financial requirements. Finding medium term funding sources at competitive costs and for significant amounts and freeing up capital that can be used for new loans represent the main objectives of the Group’s current deals on the securitization market. To this end, the Group set up a dedicated structure located in the Parent company’s Finance Department, that can autonomously structure its asset securitizations. The collateralized pools of the performed transactions are constantly monitored by way of monthly and quarterly reports detailing the performance of principal and interest collections and the loan status. Deals entered after 1 January 2004 under IAS/IFRS are not considered a sale without recourse, as the Group retains the risks and benefits of the transaction and as such do not qualify for derecognition pursuant to IAS 39. At Group level, the retention of most risks and benefits, under SIC 12, calls for the SPEs to be fully consolidated despite the absence of a shareholding in the SPE’s share capital. As a result of the consolidation, assets sold and not derecognized are offset by the securities issued by the SPE to finance the deal and sold to third parties, net of tranches subscribed by the Banks of the Group. Securitizations that have been “fully derecognized” refer to securitizations that had been finalized prior to 2004, and for which we opted for the possibility under IFRS1 not to recognize the assets based on international accounting standards. As a result, the financial statements show the subscribed securities and any guarantees and commitments, adequately measured to reflect the P&L performance of the underlying securitization as at 31 December 2009. Securitizations characterized by the full subscription by the Group of the debt securities issued by the SPE are called “originated securitizations” and their exclusive purpose is funding. Banco Popolare and Banca Italease step in by subscribing senior and mezzanine funds that will be used to draw liquidity from the market through ECB refinancing transactions or repurchase agreements with market counterparties. These deals are illustrated in Section E – Sub-section 1 - Banking group risks – 1.3 Liquidity risk. On 24 December 2009, Alba Leasing and Banca Italease signed an agreement (“Securitized loans agreement”) to transfer to Alba Leasing about Euro 2.4 billion worth of securitized loans as at 31 December 2009 originated by the banking channel. The securitized loan agreement, in keeping with the preliminary arrangements set out in the Framework Agreement, was designed in such a way as to turn over to Alba Leasing the operating and financial effects that would have been generated had the securitized loan portfolio originated by the banking channel outstanding on 31 December 2009 had been transferred to Alba Leasing as from 31 March 2009 (see the Report on Operations and the Explanatory Notes Section A Accounting Policies – Other Information); as a result, some securitizations generated by Gruppo Banca Italease have been shown in the following table as “partly derecognized” due to the fact that the risks and benefits of part of the securitized loans have been transferred to Alba Leasing.
304 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
As at 31 December 2009, 22 securitizations were outstanding through 14 companies, as illustrated below:
Securities issue SPEs Originator Deal Type of securitization date
On-balance sheet securitizations Gruppo Banco Popolare Performing residential 1. BP Mortgages S.r.l. Banca Popolare di Novara, Credito Bergamasco June 2007 BP Mortgages 2 mortgages Performing residential 2. BP Mortgages S.r.l. Banca Popolare di Verona – SGSP March 2007 BP Mortgages 1 mortgages Banca Popolare di Crema, Banca Popolare di Performing residential 3. Bipitalia Residential S.r.l. June 2004 Residential Lodi, Cassa di Risparmio Lucca Pisa Livorno mortgages Gruppo Italease Italfinance Securitization 4. Banca Italease March 2006 ITA JUNIOR Performing leases Vehicle S.r.l Partly derecognized securitizations Gruppo Italease Italfinance Securitization 5. Banca Italease, Mercantile Leasing March 2007 ITA 9 Performing leases Vehicle 2 S.r.l 6. Leasimpresa Finance S.r.l Banca Italease October 2006 Leasimpresa 2 Performing leases Italfinance Securitization December 7. Banca Italease, Mercantile Leasing ITA 8 Performing leases Vehicle S.r.l 2005 December 8. Erice Finance S.r.l Banca Italease ITA BEI Performing leases 2005 9. Italease Finance S.p.A Banca Italease March 2005 ITA 7 Performing leases 10. Italease Finance S.p.A Banca Italease June 2004 ITA 6 Performing leases
Securities issue SPEs Originator Deal Type of securitization date
Fully derecognized securitizations Gruppo Banco Popolare Performing residential December 11. Sintonia Finance S.r.l. Banca Popolare di Cremona, Centrobanca Sintonia and commercial 2002 mortgages Non-performing 12. Tiepolo Finance II S.r.l. SGC BP April 2003 Tiepolo 2 mortgage and ordinary loans Non-performing Banca Popolare di Lodi, Cassa di Risparmio 13. Tiepolo Finance S.r.l. June 2001 Tiepolo mortgage and ordinary Lucca Pisa Livorno loans
305 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Securities issue Type of SPEs Originator Deal date securitization
Originated securitizations Gruppo Banco Popolare Banca Popolare di Verona - SGSP, Banca Performing Popolare di Novara, Credito Bergamasco, Banca residential and 14. BPL Mortgages S.r.l. Popolare di Lodi, Cassa di Risparmio di Lucca July 2009 BPL Mortgages 4 commercial Pisa Livorno, Banca Popolare di Cremona, mortgages Banca Popolare di Crema Banca Popolare di Verona - SGSP, Banca Performing 15. BPV Mortgages S.r.l. Popolare di Novara, Credito Bergamasco, Banca June 2009 BPV Mortgages residential Popolare di Lodi mortgages Banca Popolare di Verona - SGSP, Banca Performing Popolare di Novara, Credito Bergamasco, Banca 16. BPL Mortgages S.r.l. March 2009 BPL Mortgages 3 residential Popolare di Lodi, Cassa di Risparmio di Lucca mortgages Pisa Livorno, Banca Caripe Performing Banca Popolare di Verona - SGSP, Banca December 17. BPL Mortgages S.r.l. BPL Mortgages 2 residential Popolare di Novara, Credito Bergamasco 2008 mortgages Banca Popolare di Crema, Banca Popolare di Performing December 18. BPL Mortgages S.r.l. Cremona, Banca Popolare di Lodi, Cassa di BPL Mortgages 1 residential 2007 Risparmio Lucca Pisa Livorno mortgages Gruppo Italease November Residential 19. Italfinance RMBS S.r.l Banca Italease Italfinance RMBS 1 2008 mortgages Partly derecognized originated securitizations Gruppo Italease Italfinance Securitization Banca Italease, Italease Network, Mercantile 20. January 2009 ITA 11 Performing leases Vehicle 2 S.r.l Leasing 21. Pami Finance S.r.l Banca Italease, Mercantile Leasing October 2008 Quicksilver Performing leases Italfinance Securitization Banca Italease, Italease Network, Mercantile 22. May 2008 ITA 10 Performing leases Vehicle 2 S.r.l Leasing
Not derecognized securitizations
BP Mortgages 2 (June 2007)
On 22 June 2007, Credito Bergamasco “(Creberg”) and Banca Popolare di Novara (“BPN”), acting as Originators, entered an agreement with the SPE BP Mortgage S.r.l. to sell en bloc and without recourse a pool of home and residential mortgage loans backed by a voluntary mortgage on the property, classified as performing pursuant to the Bank of Italy’s regulations. The pools under securitization had a total value of 1,609.8 million euro; to raise the necessary funds to purchase the loans, on 29 June 2007 the SPE issued four classes of notes that were sold to institutional investors and listed on the “Ireland Stock Exchange” and two junior notes fully subscribed by the Originators.
Loan evolution by originator
Value on % Portfolio Value % Portfolio Value on % Portfolio at Bank 31/12/2009 on 31/12/2009 on 31/12/2008 on 31/12/2008 22/06/07 the selling date
Banca Popolare Novara 582,187 52.12% 656,741 51.26% 862,811 53.60% Credito Bergamasco 495,873 44.39% 579,676 45.24% 747,008 46.40% Banca Popolare Lodi 38,957 3.49% 44,892 3.50% - Total 1,117,017 100.00% 1,281,309 100.00% 1,609,819 100.00%
After the branch reallocation on 1 December 2008 between Banca Popolare di Lodi and Banca Popolare di Novara, Banca Popolare di Lodi joined the deal.
306 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Issue characteristics
Value on Rating Class Type Issue value Interest rate Maturity 31/12/09 Moody’s/S&P/Fitch
A1 Senior 147,300 - 3 month Euribor + 0.07% January 2018 Aaa/AAA/AAA A2 Senior 1,382,000 1,036,221 3 month Euribor + 0.13% July 2044 Aaa/AAA/AAA B Mezzanine 28,200 28,200 3 month Euribor + 0.25% July 2044 Aa3/AA/AA+ C Mezzanine 36,200 36,200 3 month Euribor + 0.66% July 2044 Baa1/BBB/BBB 3 month Euribor + 2% plus M1 Junior July 2044 Unrated 8,639 8,639 any Additional return (*) 3 month Euribor + 2% plus M2 Junior July 2044 Unrated 7,479 7,479 any Additional Return (*) Total 1,609,818 1,116,739
(*)Variable additional return depending on the actual operating results generated by the SPE on the securitized pool.
On 6 March 2009, based on the loan pool performance, the rating firm Fitch downgraded the rating assigned to Class C securities from BBB+ to BBB.
Accessory financial transactions
To immunize the interest rate risk to which the SPE is exposed owing to the mismatch between the securitized mortgage rates and the yield of the issued bonds, the Banking Originators entered an Interest Rate Swap agreement with the SPE, with Banca Aletti as intermediary, which in turn performed the transaction with the SPE having another market counterparty as intermediary.
BP Mortgages 1 (March 2007)
In data 16 March 2007 Banca Popolare di Verona, acting as Banking Originator, entered an agreement with the SPE BP Mortgage S.r.l. to sell en bloc and without recourse a pool of home and residential mortgage loans, classified as performing pursuant to the Bank of Italy’s regulations. The sold pool totaled 1,476.6 million; to raise the necessary funds to purchase the loans, on 11 April 2007 BP Mortgages S.r.l. issued four classes of notes that were sold to institutional investors and listed on the Luxembourg Stock Exchange and a class of junior notes fully subscribed by the Originator.
Loan evolution by originator
Value on % Portfolio Value % Portfolio Value on % Portfolio at Bank 31/12/2009 on 31/12/2009 on 31/12/2008 on 31/12/2008 16/03/07 the selling date
Banca Popolare Verona 794,854 89.08% 963,427 89.53% 1,476,589 100.00% Banca Popolare Lodi 97,420 10.92% 112,701 10.47% - - Total 892,274 100.00% 1,076,128 100.00% 1,476,589 100.00%
After the branch reallocation on 1 December 2008 between Banca Popolare di Lodi and Banca Popolare di Novara, Banca Popolare di Lodi joined the deal.
Issue characteristics
Value on Rating Class Type Issue value Interest rate Maturity 31/12/09 Moody’s/S&P/Fitch
A1 Senior 202,700 - 3 month Euribor + 0.06% January 2017 Aaa/AAA/AAA A2 Senior 1,172,650 830,598 3 month Euribor + 0.13% April 2043 Aaa/AAA/AAA B Mezzanine 25,300 25,300 3 month Euribor + 0.19% April 2043 Aa3/AA/AA+ C Mezzanine 32,600 32,600 3 month Euribor + 0.48% April 2043 Baa2/BBB/BBB+ 3 month Euribor + 2.5% plus M Junior 14,500 April 2043 Unrated 14,500 any Additional return (*) Total 1,446,196 902,998
(*) Variable additional return depending on the actual operating results generated by the SPE on the securitized pool.
307 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Accessory financial transactions
To immunize the interest rate risk to which the SPE is exposed owing to the mismatch between the securitized mortgage rates and the yield of the issued bonds, the Banking Originators entered an Interest Rate Swap agreement with the SPE, with Banca Aletti as intermediary, which in turn performed the transaction with the SPE having another market counterparty as intermediary.
Bipitalia Residential
In first half 2004, some banks belonging to the former BPI Group finalized the securitization, by selling residential mortgage loans classified as performing loans, for a nominal value of about 1 billion, to the SPE Bipitalia Residential which financed the purchase by issuing bonds. The transaction was finalized in 2 steps: the first on 17 May 2004 by signing the sale without recourse of a pool of money loans under the form of home mortgages. Then on 30 June 2004 the bonds were issued to finance the loan purchase. Under the deal, Banca Popolare di Lodi acts also as Servicer of the portfolio and as Administrative Servicer, with the other group banks stepping in as Sub Servicers and Società di Gestione Crediti BP as Special Servicer for delinquent loans.
Loan evolution by originator
Residual debt % Portfolio Residual debt % Portfolio Residual debt % Portfolio Bank 31/12/09 31/12/09 31/12/08 31/12/08 17/05/04 17/05/04
Banca Popolare Lodi 191,358 55.60% 235,123 54.28% 576,176 57.47% CR Lucca Pisa Livorno 130,532 37.92% 168,258 38.85% 375,327 37.44% Banca Popolare Crema 12,601 3.66% 17,727 4.09% 50,986 5.09% Banca Popolare Novara 7,536 2.19% 9,205 2.13% - - Banca Popolare Verona 2,170 0.63% 2,832 0.65% - - Total 344,197 100.00% 434,145 100.00% 1,002,490 100.00% The residual debt on 31 December 2009 includes the nominal value of performing mortgages, substandard and doubtful loans, it does not include accruals at the reference date.
Issue characteristics
Value on Rating Class Type Issue value Interest rate Maturity 31/12/09 Fitch / Moody’s
A1 Senior 230,000 - 3 month Euribor + 0.10% December 2040 AAA/Aaa A2 Senior 733,000 310,167 3 month Euribor + 0.175% December 2040 AAA/Aaa B Mezzanine 16,000 16,000 3 month Euribor + 0.30% December 2040 AA/Aa2 C Mezzanine 19,000 19,000 3 month Euribor + 0.80% December 2040 BBB/Baa1
D Junior 2,0 % plus Additional return (*) December 2040 Unrated 4,500 4,500 Total 1,002,500 349,667
(*)Variable additional return depending on the actual operating results generated by the SPE on the securitized pool
Senior and mezzanine notes are sold on the market to institutional investors and listed on the Luxembourg Stock Exchange. Junior notes have been subscribed by the Selling Banks on a pro-rata basis with respect to the sold loans.
Accessory financial transactions
Under the deal, Banca Popolare di Lodi granted a limited recourse subordinated loan of 12 million euro as a liquidity reserve. Upon issuing the notes, the SPE signed a Swap agreement with a third party, to hedge against the risk of mismatch between the rates of the securitized mortgages and the yield of the issued bonds.
Gruppo Italease securitizations: non derecognized (ITA JUNIOR) and partly derecognized (ITA 6, ITA 7, ITA 8, ITA BEI, ITA 9, Leasimpresa 2)
For securitizations originated by the companies of Gruppo Italease, in particular Banca Italease, Italease Network and Mercantile Leasing, securitized assets refer to the entire pool of loans sold deriving from performing leases entered by the companies with their customers, and they represent a segregated asset to be used exclusively for the holders of securities issued under these deals and of the other lenders participating in the single transactions. The companies act as Servicers within each transaction, so that since they are in charge of collecting and recovering loans, they retain the entire customer relationship management. On a monthly and quarterly basis the companies monitor the performance of the underlying assets, i.e., the loans associated with leases, to verify that collections and recoveries of past due loans are efficiently managed. The operating results of the (on and off-balance sheet) positions associated with the securitizations represent the borrowing
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costs incurred to cover the operating costs of the related issuer, the fees to service providers, the rights of holders of securities subscribed by third party investors. The rating of the loans underlying the single transactions was assigned by primary rating firms, such as Standards and Poor’s, Moody’s and Fitch.
2009 performance
On 13 February 2009, Moody’s downgraded the ratings of the Notes of the “ITA 8” securitization, carried out by the SPE Italfinance Securitisation Vehicle S.r.l; in particular, Series 2005-1-A was downgraded from Aaa to Aa1, Series 2005-1-B from A2 to A3, Series 2005-1-C from Baa3 to Ba3 and Series 2005-1-D from Ba1 to B3. Moody’s decided to carry out the downgrade because the loan pool underlying the single securitization Notes was underperforming with respect to the Rating Agency’s projections when the deal was first rated. In concomitance with the Payment Date on 16 March 2009, the “ITA 5” securitization, carried out by the SPE Italease Finance S.p.A. in December 2003 with loans associated with performing leases originated by Banca Italease and Italease Network (upon issuance, Focus Leasing.it S.p.A.), was fully repaid, since the conditions to exercise the “clean-up call” under art. 18 of the Sales Contract were satisfied. On 26 March 2009, Standard & Poor's downgraded the long and short term ratings for Gruppo Banco Popolare from "A/A- 1" to "A-/A-2" with negative outlook. As a result of this downgrade, Banca Popolare di Verona, which acts as Account Bank for the “Leasimpresa 2” securitization, no longer meets the criteria to be an Eligible Institution. Therefore, under the contract, the accounts opened with Banca Popolare di Verona by the SPE shall be closed and the deposited amounts shall be transferred to new accounts in the name of the SPE with BNP Paribas Securities Services, which was already a counterparty in the transaction (Paying Agent and Principal Payment Account Bank). On 18 September 2009 Moody's put the securities of the securitizations “ITA 7”, “ITA 8” and “ITA 9” under "Review for downgrade", owing to the quality impairment of the loan pool and the consequent deteriorating performance of the securitizations. For the same reason, on 29 September 2009, Standard & Poor’s put the ratings of the securities of the “ITA 8”securitization under “Negative Credit Watch”. On 23 October 2009, the clean-up call of the “ITA Junior” deal was exercised; the cash flow settlement and the full repayment of the transaction, in compliance with the contract, were carried out in concomitance with the Payment Date on 21 January 2010. On 19 November 2009, Standard&Poor’s downgraded the ratings of the Notes of the “ ITA 8” securitization. Specifically, Series 2005-1-B went from A to A-, Series 2005-1-C from BBB to BB- and Series 2005-1-D from BB to B-. Standard&Poor’s decided to carry out the downgrade because the loan pool underlying the single securitization Notes was underperforming with respect to the Rating Agency’s projections when the deal was first rated. On 21 December 2009, Fitch downgraded the ratings of the Notes of the “ ITA 9” securitization. Specifically, Series 2007-1- A went from AAA to AA, Series 2007-1-B from A to BBB, Series 2007-1-C from BBB to B and Series 2007-1-D from BBB- to CCC. Fitch decided to carry out the downgrade because the loan pool underlying the single securitization Notes was underperforming with respect to the Rating Agency’s projections when the deal was first rated.
Trigger events
During the life of securitizations, so called “trigger events” can take place, which, under the transaction’s documentation, give rise to changes, also structural, to the transaction. Illustrated below is an overview of the most significant trigger events.
Events linked to the failure to fulfill certain contract obligations
Events linked to the failure to fulfill certain contract obligations have been provided for. They differ from transaction to transaction, but the main events can be summarized as follows: - payment default by the Issuer: the Issuer defaults on interest and principal payment on outstanding Notes for five or more working days; - failure to fulfill other Obligations by the Issuer: failure to fulfill or noncompliance by the Issuer of commitments and obligations under the Sales Agreement or the other Transaction Documents; - breach of Declarations and Guarantees by the Issuer: any declaration and guarantee given by the Issuer in the Transaction Documents turns out to be incorrect or misleading; - Issuer insolvency; - Issuer liquidation; - Illicitness; - unlawful: if the performance or fulfillment of obligations taken on by the Issuer with respect to the notes or any other transaction document is or becomes unlawful.
Under the above circumstances, the immediate consequence is that the payment priority is changed. Interest and principal payment of mezzanine1 notes (if they have been issued) can take place only after senior notes have been fully repaid. Interest and principal payment of junior notes continues to be subordinated to the other classes of notes.
1 In an issue consisting of multiple tranches of securities, notes are subdivided into Senior, Mezzanine and Junior. Senior notes have priority with respect to interest and principal over other classes of debt, therefore they have a lower return. Mezzanine notes are subordinated to Senior notes but above Junior Notes, which are the most risky.
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Moreover, should some of the above events occur, the Representative of the note-holders can, either on his own initiative or under a resolution of the Special meeting of note-holders, require the early termination of the revolving2 phase (although still ongoing in the single securitization transaction) and, with the approval of the special note-holders’ meeting, he may also sell all or part of the loans on behalf of the issuer.
Pro Rata Amortization Condition
Also the Pro Rata Amortization Conditions (events linked to the violation of given thresholds with respect to indicators calculated by correlating the values of securities and their underlying loans), if provided for by the single securitization deals, can modify the payment priority of the securities.
Causes for loan purchase suspension and Acceleration Events
In deals in which the revolving phase is not over yet, loan purchase suspension causes are provided for, that in practice cause the early triggering of the amortization phase. In deals in which the amortization phase has started, it is instead possible to foresee Acceleration Events that can change the securities repayment priority.
Events linked to performance indicators
Finally, there are events linked to performance indicators (Delinquency Ratio and Default Ratio ), which represent the indicators’ threshold levels. These events and the related consequences can be summarized as follows: - Overcollateralization Trigger Ratio, when exceeded, a liquidity provision has to be set aside corresponding to a defined percentage of the initial Senior Notes amount; - Cash Trapping Trigger: when exceeded, funds are blocked within the structure; - Mezzanine Trigger Ratio: when exceeded, Mezzanine coupons cannot be paid until Senior Series have been fully paid off; - Cumulative Default Trigger Ratio: when exceeded, funds must be blocked within the structure; - Series Trigger Ratio: when exceeded, the coupons of securities with a lower seniority cannot be paid until higher seniority classes have been fully paid off.
The table below lists on the vertical axis the triggering performance indicators by deal, and on the horizontal axis the related above described trigger events.
ITALFINANC ITA 6 ITA 7 ITA 8 ITA 9 ITA JUNIOR Leasimpresa 2 ITA 10 QUICKSILVER ITA 11 E RMBS 1
Overcollater Net Net N/A N/A Performance N/A N/A N/A N/A N/A alization Cumulative Cumulative linked to Trigger Ratio Default Ratio Default Ratio ITA 5 - ITA 6 - ITA 7 Cash N/A N/A Net Net Performance Net Net N/A N/A Net Trapping Cumulative Cumulative linked to ITA Cumulative Cumulative Cumulative Trigger Default Ratio Default Ratio 5 Default Ratio Default Ratio Default Ratio Mezzanine Net N/A N/A N/A Performance N/A N/A N/A N/A N/A Trigger Ratio Cumulative linked to Default Ratio ITA 6 Cumulative Net N/A N/A N/A Performance N/A Net N/A N/A Net Default Cumulative linked to Cumulative Cumulative Trigger Ratio Default Ratio ITA 6 Default Ratio Default Ratio
Series Trigger N/A Gross Net Net Performance N/A N/A N/A N/A N/A Ratio Cumulative Cumulative Cumulative linked to Default Ratio Default Ratio Default Ratio ITA 7
Downgrading of Banca Italease’s rating
The downgrading of Banca Italease’s rating below given thresholds is a trigger event that can lead also to structural consequences for each securitization deal. Although they differ from deal to deal, the main aspects to be taken into consideration in case of downgrading of Banca Italease are the following: - end of the revolving phase (if still ongoing); - revocation of the Servicer and replacement by the Back-Up Servicer; - direct payment by users on the collection accounts of the related sellers/issuers and related notification to debtors.
The analysis of the impacts deriving from a downgrading of Banca Italease’s rating below investment grade on securitization deals outstanding on 31 December 2009, please refer to the “Report and Financial Statements” as at 31 December 2009 of
2 Period in which loans falling due are replaced by others through subsequent sales.
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Banca Italease. A further downgrading of Banca Italease’s rating would not entail any other consequences to the deals other than the ones described in the above mentioned “Report and Financial Statements”.
Fully derecognized securitizations
Described below are the main securitization deals that have been fully derecognized.
Tiepolo Finance II
On 30 December 2002, the company SGC BP S.p.A carried out a securitization of a pool of non-performing mortgage and ordinary loans, that had been previously purchased from some banks of the Group, by selling the loans to an SPE Tiepolo Finance II S.r.l. The SPE financed the purchase of the loans by issuing on 30 April 2003 bonds subdivided into four classes. Società di Gestione Crediti BP S.C.p.A acted as Servicer.
Loan evolutions per year
Year Mortgage residual value
Sale value 486,029 31/12/2003 427,630 31/12/2004 369,457 31/12/2005 168,516 31/12/2006 125,746 31/12/2007 94,276 31/12/2008 73,197 31/12/2009 57,557
The SPE issued Class A and B senior notes that have been already fully redeemed, Class C mezzanine notes amounting to 151 million and Class D junior notes amounting to 150.03 million. Junior notes had been subscribed by the banks that had originally owned the loans under securitization; in 2007 they have been sold to third parties. Class C (mezzanine) notes have been fully subscribed by Banca Popolare di Lodi S.p.A (they are unrated and have an annual return rate of 7%). On 31 December 2009 Class C notes were recognized in “Assets available for sale” showing an amount of 5.3 million, after write-downs totaling 145.7 million, or which 11.3 million in 2009.
Tiepolo Finance
In the second half of 2000, Banca Popolare di Lodi and Cassa di Risparmio di Lucca Pisa Livorno carried out a securitization of non-performing mortgage and ordinary loans, totaling 153 million, by selling them to the SPE Tiepolo Finance S.r.l which financed the purchase of the loans by issuing on 29 June 2001 bonds subdivided into three classes: senior notes (class A fully redeemed), mezzanine notes (class B, fully redeemed) and junior notes (class C), amounting to 50.5 million, of which 37 million subscribed by Cassa di Risparmio di Lucca Pisa e Livorno and 13.5 million by Banca Popolare di Lodi. On 31 December 2009, the value of Class C Notes was equal to zero, as in prior years the note had been fully impaired (in addition to the coupons and end-of-period accruals). On 31 December 2009, residual loans totaled 16.3 million. Banca Popolare di Lodi acted both as Servicer, managing the recovery and collection of loans, and as Cash Manager, hiring Società di Gestione Crediti BP S.C.p.A as Sub-Servicer for defaulted loans.
QUANTITATIVE INFORMATION
C.1.1 Banking group - Exposures resulting from securitizations classified by underlying asset quality
CASH EXPOSURE Underlying asset quality / Exposure Senior Mezzanine Junior (thousands of euro) Gross exposure Net Exposure Gross exposure Net Exposure Gross exposure Net Exposure
A. Proprietary underlying assets 969,310 969,310 277,670 131,532 434,013 522,047 a) non performing loans 168,875 22,737 50,500 b) other 969,310 969,310 108,795 108,795 383,513 522,047 B. Third party underlying assets 104,076 104,070 172 4 - - a) non performing loans b) other 104,076 104,070 172 4
Guarantees given and credit lines are omitted as not present.
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C.1.2 Banking group - Exposures resulting from main “proprietary” securitizations broken down by type of securitized asset and by type of exposure
CASH EXPOSURE
Type of securitized assets / Exposure Senior Mezzanine Junior (thousands of euro) Write- Write- Write- Book value downs/ Book value downs/ Book value downs/ Write-backs Write-backs Write-backs
A. Fully derecognized 941,601 - 79,479 (11,766) 299,577 61,602 A.1 Tiepolo 1 - doubtful loans 17,423 (452) A.2 Tiepolo 2 - doubtful loans 5,314 (11,314) A.3 Sintonia Finance - residential mortgages 2,700 - 2,474 (51) A.4 Sintonia Finance - residential mortgages 1,295 - 1,187 (24) A.5 ITA 6 - performing lease loans 6,666 1,389 A.6 ITA 7 - performing lease loans 467 97 A.7 ITA 8 - performing lease loans 3,542 738 A.8 ITA 9Bei - performing lease loans 36,491 52,747 2,446 510 A.9 Leasimpresa2 - performing lease loans 11,962 2,493 A.10 ITA10 Junior - performing lease loans A.11 ITA 9 - performing lease loans 6,032 1,257 A.12 ITA 10 - performing lease loans 320,654 67,793 14,130 A.13 Quick Silver - performing lease loans 253,898 105,820 22,056 A.14 ITA 11 - performing lease loans 330,558 91,188 19,007 B. Partly derecognized C. Not derecognized 27,709 - 52,053 - 222,470 - C.1 Residential 2004 - residential mortgages 12,000 - 11,745 - C.2 BP Mortgages March 2007 - mortgage loans 52,225 C.3 BP Mortgages June 2007 - mortgage loans 67,968 C.4 ITA 6 - performing lease loans 3,201 C.5 ITA 7 - performing lease loans 4,532 C.6 ITA 8 - performing lease loans 13,205 C.7 ITA 9Bei - performing lease loans 27,709 40,053 26,561 C.8 Leasimpresa2 - performing lease loans 22,420 C.9 ITA10 Junior - performing lease loans 7,265 C.10 ITA 9 - performing lease loans 13,348
Guarantees given and credit lines are omitted as not present.
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C.1.3 Banking group - Exposures resulting from main “third-party” securitizations broken down by type of securitized assets and by type of exposure
Type of underlying assets / Exposures Senior Mezzanine Junior ISIN Code Write-downs/ Write-downs/ Write-downs/ Book value Book value Book value (thousands of euro) write-backs write-backs write-backs
ES0312298005 AYT CED EUR TV 12 19,595 - - - - - Other ES0312885017 BANCAJA 6 A2 EUR /36 9,491 - - - - - Mortgages ES0314019003 BANKINTER/36 3A CL A 7,776 - - - - - Mortgages XS0276516829 BELUGA A1 TV 96 EUR 19,900 - - - - - Mortgages XS0208439694 CAMBER A3 04-53 TV - - 172 (168) - - Other ES0371622004 CEDULAS TDA EUR TV16 11,548 - - - - - Other XS0131470196 DELPHINUS EUR TV 66 2,385 - - - - - Mortgages IT0003675763 F-E GREEN TV 04-18 3,158 - - - - - Leases XS0206715137 G SQUARE FIN04-50 TV 153 (6) - - - - Other ES0345782009 HIPOCAT 6A 03/34 TV 1,449 - - - - - Other IT0003623532 INTESA LEAS 04-15 TV 439 - - - - - Leases IT0003428619 INTESABCI 03-23 A2 3,582 - - - - - Mortgages XS0192771516 SAECURE EUR TV 36 3,163 - - - - - Other IT0003731426 SCIC TV 04-23 7,992 - - - - - Loans IT0003386270 SIENA M.TV 2002-3 A2 5,015 - - - - - Mortgages ES0338450002 TDA IBERCAJA 35 TV 6,453 - - - - - Mortgages IT0003473748 VELAH HOME TV 03-27 1,977 - - - - - Mortgages 104,076 (6) 172 (168) - -
Guarantees given and credit lines are omitted as not present.
C.1.4 Banking group - Exposure resulting from securitizations broken down by pool of financial assets and by type
Exposure / pool Held for Designated at Available Held to Loans 31/12/2009 31/12/2008 (thousands of euro) trading fair value for sale maturity
1. Cash exposures 3,661 - 5,465 - 1,415,605 1,424,731 204,512 - Senior - xxx 147 xxx 1,045,524 1,045,671 146,589 - Mezzanine - xxx 5,318 xxx 74,165 79,483 47,571 - Junior 3,661 xxx - xxx 295,916 299,577 10,352 2. Off-balance sheet ------23,200 - Senior ------Mezzanine ------23,200 - Junior ------
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C.1.5 Banking group - Total amount of securitized assets underlying junior notes or other forms of credit support
Assets / Amounts Traditional Synthetic (thousands of euro) securitizations securitizations
A. Proprietary underlying assets: 2,803,683 - A.1 Fully derecognized 344,959 X 1. Doubtful loans 16,773 X 2. Substandard loans 2,290 X 3. Restructured loans - X 4. Past dues - X 5. Other assets 325,896 X A.2 Partly derecognized - X 1. Doubtful loans - X 2. Substandard loans - X 3. Restructured loans - X 4. Past dues - X 5. Other assets - X A.3 Not derecognized 2,458,724 - 1. Doubtful loans 16,347 - 2. Substandard loans 73,211 - 3, Restructured loans - - 4. Past dues 18,354 - 5. Other assets 2,350,812 - B. Third party underlying assets: - - 1. Doubtful loans - - 2. Substandard loans - - 3. Restructured loans - - 4. Past dues - - 5. Other assets - -
C.1.6 Banking group - Stakes in special purpose entities
Name Registered office Shareholding %
Tiepolo Finance S.r.l. Lodi 60.00 Tiepolo Finance II S.r.l. (*) Lodi 60.00 Sintonia Finance S.r.l. (**) Milan 5.00 Bipitalia Residential S.r.l. Lodi 4.00 Italease Finance S.p.A. (***) Milan 70.00 Italfinance Securitisation VH 1 S.r.l. (***) Conegliano 9.90 Mercantile Finance S.r.l. (****) Florence 10.00 (*) interest held by way of the subsidiary Società Gestione Crediti BP S.p.A. (**) interest held by way of the subsidiary Banca Popolare di Cremona S.p.A. (***) interest held by way of the subsidiary Banca Italease S.p.A. (****) interest held by way of the subsidiary Mercantile Leasing S.p.A.
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Securitized assets Percentage of redeemed notes (end-of-period) Loan collections in the year (end-of-period) Senior Mezzanine Junior SPE Non performing Non performing Non Non Non Performing Performing Performing Performing Performing loans loans performing performing performing assets assets assets assets assets assets Tiepolo Finance 15,433 4,969 100.00% 100.00% Tiepolo II 55,111 17,295 100.00% Residential 13,992 328,375 1,775 87,264 67.79% BP Mortgages (March 07) 38,525 846,777 2,720 184,434 39.61% BP Mortgages (June 07) 51,765 1,055,147 2,281 170,979 32.24% Sintonia Finance 3,630 29,981 64 11,459 84.29% 25.77% ITA 5 - Performing lease loans 539 11,558 100.00% 100.00% ITA 6 - Performing lease loans 12,314 164,238 5,751 140,852 79.00% 57.00% ITA 7 - Performing lease loans 17,902 239,620 15,069 122,668 72.00% 40.00% ITA 8 - Performing lease loans 29,639 320,575 66,957 188,104 71.00% 40.00% ITA 9BEI - Performing lease loans 47,341 372,622 30,073 136,319 ITA 9 - Performing lease loans 55,610 920,591 35,873 415,733 39.00% ITAJUNIOR - Performing lease loans 22,559 20,108 77.00% Leasimpresa 2 - Performing lease loans 28,199 477,475 3,206 313,475 53.00%
Notes to the consolidated financial statements statements financial consolidated to the Notes 31 31
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C.1.8 Banking group - Special purposes entities owned by the Banking Group
Name Registered office
Tiepolo Finance S.r.l. Lodi – Via Polenghi Lombardo n. 13 Tiepolo Finance II S.r.l. Lodi – Via Polenghi Lombardo n. 13 Italease Finance S.p.A. Milano – Via Sile n. 18
Shown below is a summary by SPE and by single securitization of the main transactions described in the explanatory notes (and in the attachments) of the financial statements of the acquiring companies and the issuing companies of the notes under Law 130/99.
Attachment to table C.1.8
Summary table of securitized assets and issued notes (by single SPE owned by the Banking Group)
Tiepolo Finance S.r.l.
(thousands of euro) 31/12/2009 31/12/2008
A. Securitized assets 16,323 20,341 1) Loans 16,323 20,341 - doubtful loans 16,323 20,341 - other loans - - 2) Securities - - 3) Other assets - - B. Use of available funds from loan management 2,987 30,443 1) Available funds on banking account 2,824 6,908 2) Other loans - 3) Repurchase agreements 23,200 4) Other assets 163 335 C. Issued notes 50,500 60,500 1) “Class A” notes - 2) “Class B” notes - 10,000 3) “Class C” notes 50,500 50,500 D. Loans received - 23,200 1) Securities lending 10,000 2) Subordinated loan 13,200 E. Other liabilities 34,276 29,883 1) Accrued expenses 821 2,136 2) Other liabilities 33,455 27,747 F. Interest expense on issued notes 1,546 3,715 G. Fees and commissions borne by the transaction 410 470 1) Servicing fees 256 307 2) Other services 154 163 H. Other charges 3,689 2,932 1) Other interest expense 1,654 1,692 2) Other charges 2,035 1,240 3) Fixed assets write-downs - I. Interest generated by securitized assets - L. Other revenues 2,980 5,714 1) Interest income 374 1,826 2) Other revenues 2,606 3,888
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Tiepolo Finance II S.r.l.
(thousands of euro) 31/12/2009 31/12/2008
A. Securitized assets 57,557 73,197 1) Loans 57,557 73,197 - non-performing 57,557 73,197 - other loans - - 2) Securities - - 3) Other assets - B. Use of available funds from loan management 4,577 5,330 1) Available funds on banking account 4,553 5,306 2) Other loans - - 3) Repurchase agreements - - 4) Other assets 24 24 C. Issued notes 301,030 301,030 1) “Class A” notes - - 2) “Class B” notes - - 3) “Class C” notes 151,000 151,000 4) “Class D” notes 150,030 150,030 D. Loans received - - 1) Securities lending - - 2) Subordinated loan - - E. Other liabilities 74,668 75,350 1) Accrued expenses 2,224 2,300 2) Other liabilities 72,444 73,050 F. Interest expense on issued notes 13,759 14,559 G. Fees and commissions borne by the transaction 959 1,395 1) Servicing fees 838 905 2) Other services 121 490 H. Other charges 10,259 13,396 1) Other interest expense - - 2) Other charges 10,259 13,396 3) Fixed assets write-downs - - I. Interest generated by securitized assets - - L. Other revenues 9,266 13,518 1) Interest income 168 1,034 2) Other revenues 9,098 12,484
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Italease finance S.p.A ITA 6
(thousands of euro) 31/12/2009 31/12/2008
A. Securitized assets 209,087 402,686 1) Loans 203,520 397,156 2) Securities 3) Other assets 5,567 5,530 B. Use of available funds from loan management 27,908 32,803 1) Available funds on banking account 2) Other loans 3) Repurchase agreements 4) Other assets (time deposits) 27,908 32,803 C. Issued notes 209,988 342,373 1) Senior notes – rating AAA/Aaa 176,496 293,607 2) Mezzanine notes – rating A/A2 23,019 38,293 3) Junior notes - unrated 10,473 10,473 D. Loans received 1) Securities lending 2) Subordinated loan E. Other liabilities 27,006 93,117 1) Accrued expenses 27,006 93,117 2) Other liabilities F. Interest expense on issued notes 11,064 36,577 G. Fees and commissions borne by the transaction 107 133 1) Servicing fees 70 96 2) Other services 37 37 H. Other charges 3,917 7,408 1) Other interest expense 2) Other charges 2,939 3,301 3) Fixed assets write-downs 978 4,107 I. Interest generated by securitized assets 14,849 42,865 L. Other revenues 239 1,253 1) Interest income 236 1,253 2) Other revenues 3
ITA 6
Issued securities senior mezzanine junior amount 422,650 53,200 10,473 Rating AAA/Aaa A/A2 unrated maturity 14 October 2017 14 October 2017 14 October 2017 interest rate 3 month Euribor offer 3 month Euribor offer (1) spread 16 bps 50 bps early redemption option (quarterly) As of the date on which the portfolio residual capital is <= to 10% of the initial portfolio amount 422,650 Rating AAA/Aaa maturity 14 October 2017 interest rate 3-month Euribor offer spread 20 bps early redemption option (quarterly) As of the date on which the portfolio residual capital is <= to 10% of the initial portfolio (1) Junior notes payments shall correspond to residual sums, if any, at each interest payment date, after all the claims of the other deal participants have been satisfied. The introduced contract changes break down the remuneration into three components: deferred price, interest on deferred price consideration and excess spread.
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Italease finance S.p.A ITA 7
(thousands of euro) 31/12/2009 31/12/2008
A. Securitized assets 307,973 535,836 1) Loans 307,824 534,168 2) Securities 3) Other assets (accrued income) 149 1,668 B. Use of available funds from loan management 4,092 6,243 1) Available funds on banking account 2) Other loans 3) Repurchase agreements 4) Other assets (time deposits) 4,092 6,243 C. Issued notes 248,965 372,265 1) Senior notes – rating AAA/Aaa 209,868 307,340 2) Mezzanine notes – rating AA/Aa3-A/A3 38,272 64,100 3) Junior notes - unrated 825 825 D. Loans received 1) Securities lending 2) Subordinated loan E. Other liabilities 63,100 169,814 1) Accrued expenses 63,100 169,814 2) Other liabilities F. Interest expense on issued notes 16,246 50,389 G. Fees and commissions borne by the transaction 121 257 1) Servicing fees 66 203 2) Other services 55 54 H. Other charges 3,306 6,781 1) Other interest expense 2) Other charges 2,998 4,196 3) Fixed assets write-downs 308 2,585 I. Interest generated by securitized assets 19,432 55,658 L. Other revenues 240 1,770 1) Interest income 240 1,585 2) Other revenues 185
ITA 7
Issued securities senior mezzanine junior amount 298,600 45,400 825 rating AAA/Aaa AA/Aa3 unrated maturity 14 September 2020 14 September 2020 14 September 2020 interest rate 3-month Euribor offer 3-month Euribor offer (1) spread 6 bps 20 bps early redemption option (quarterly) As of the date on which the portfolio residual capital is <= to 10% of the initial portfolio amount 447,900 18,700 rating AAA/Aaa A/A3 maturity 14 September 2020 14 September 2020 interest rate 3-month Euribor offer 3-month Euribor offer spread 10 bps 30 bps early redemption option (quarterly) As of the date on which the portfolio residual capital is <= to 10% of the initial portfolio (1) Junior notes payments shall correspond to residual sums, if any, at each interest payment date, after all the claims of the other deal participants have been satisfied. The introduced contract changes break down the remuneration into three components: deferred price, interest on deferred price consideration and excess spread.
319 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 3 3 C.2 Sale transactions
C.2.1 Banking group - Financial assets sold and not derecognized
Financial assets held Financial assets designated Financial assets Investments held to Due from banks Customer loans Total Total (thousands of euro) for trading at fair value available for sale maturity 31/12/2009 31/12/2008 A B C A B C A B C A B C A B C A B C
A. Cash assets 1. Debt securities 1,628,936 - - - - - 426,323 - - 162,224 ------2,217,483 3,893,499 2. Equity securities 45,390 ------X X X X X X X X X 45,390 930 3. UCITS ------X X X X X X X X X - - 4. Loans ------348,528 - - 13,337,682 - - 13,686,210 4,158,003 B. Derivatives - - - X X X X X X X X X X X X X X X - - 31/12/2009 1,674,326 - - - - - 426,323 - - 162,224 - - 348,528 - - 13,337,682 - - 15,949,083 of which non ------70,914 - - 70,914 performing loans 31/12/2008 2,092,104 - - 9,524 - - 280,612 - - 318,891 - - 199,936 - - 5,151,365 - - 8,052,432 of which non ------70,914 - - 70,914 performing loans A=financial assets sold and fully recognized (book value) B=financial assets sold and partially recognized (book value) C= financial assets sold and partially recognized (full value)
C.2.2 Banking group - Financial liabilities associated with financial assets sold and not derecognized
Financial assets Financial assets held Financial assets Investments held to (thousands of euro) designated at Due from banks Customer loans Total for trading available for sale maturity fair value
A. Due to customers 627,751 - 129,114 56,573 1,314,165 8,806,675 10,934,278 a) relating to fully recognized assets 627,751 - 129,114 56,573 1,314,165 8,806,675 10,934,278 b) relating to partially recognized assets ------B. Due to banks 1,934,390 - 325,870 142,784 3,289,651 - 5,692,695 a) relating to fully recognized assets 1,934,390 - 325,870 142,784 3,289,651 - 5,692,695 b) relating to partially recognized assets ------C. Debt securities in issue - - - - - 1,115,165 1,115,165 a) relating to fully recognized assets - - - - - 1,115,165 1,115,165 b) relating to partially recognized assets ------31/12/2009 2,562,141 - 454,984 199,357 4,603,816 9,921,840 17,742,138 31/12/2008 304,357 - - - 1,317,931 5,391,453 7,013,741
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
C.3 Banking group - Covered bonds
As illustrated in the Explanatory note section devoted to noteworthy events after the balance sheet date, in January 2010 the Group launched the issue of Bank Covered Bonds (“BCB” or “Covered Bonds”) destined to institutional investors, under a multi-annual 5 billion issuance program, where Banco Popolare acts as Issuer of the Covered Bonds, while the retail banks belonging to the Group are the sellers of the assets pursuant to art. 7-bis of law n. 130 of 30 April 1999 (the “Law 130”). The issue of Covered Bonds is one of the means envisaged by the Group’s strategic plan to diversify funding sources, reduce the related cost and to extend the maturities of its liabilities; in particular Covered Bond issues become particularly interesting at a time when institutional investors are lukewarm on the securitization market, and spreads are highly penalizing. Under the Program, the participating Banche del Territorio shall unwind the securitizations they had originated, by repurchasing the loans they had sold and selling them to the Program’s SPE. Investors shall also benefit from an irrevocable and unconditional demand guarantee, issued by BP Covered Bond S.r.l., the program’s SPE, covering the whole portfolio consisting of high-quality residential mortgages originated by the Banche del Territorio of Gruppo Banco Popolare. The deals of BPL Mortgages 1 and BPL Mortgages 2 were unwound in January, and a first backing portfolio totaling about 1.4 billion euro was sold to the SPE BP Covered Bond; in February, the opening issue of about 1 billion euro worth of fixed rate, 7-year BCB was made, destined to institutional investors.
D. Banking group - Credit risk assessment models
To assess the credit and the portfolio risks, the Risk Management Service avails itself of an econometric model fed by an extensive set of data and risk variables.
By resorting to Credit-VaR metrics, the model defines the probability of default distribution in the loan portfolio for performing loans, cash loans and guarantees and commitments to resident retail and financial customers. The distribution is used to measure the maximum potential loss is measured along an annual timeframe and with a specific level of confidence.
In particular, to calculate the distribution the model’s processing engine uses a “MonteCarlo” simulation approach, which simulates a sufficiently high number of scenarios to produce a good empirical approximation of the theoretical distribution of loan book losses.
The calculation of the maximum potential loss, that can be broken down in the classical Expected Loss and Unexpected Loss (Economic Capital), is affected by the concentration risk (generated by large exposures to single counterparties – name concentration – or types of peer counterparties in terms of geographical areas and/or industries, whose creditworthiness depends on one or more systematic factors – industry concentration –) and by the systematic risk (generated by the impact of unexpected changes in macroeconomic factors on the probability of default of the single counterparties).
In addition to the loan portfolio concentration level, the impact of the above components on credit risk depends also on the structure of the correlation matrix of the probabilities of default, which is estimated by using a quantitative stress testing model (developed and updated in-house), that can link the decay rates of peer counterparties in terms of industry and geographical areas to a set of “first level” (international and national) and “second level” (regional) economic and financial factors.
Finally, the portfolio model is periodically stress tested to verify how sensitive the credit risk of the Group portfolio is to moderate and extreme changes (albeit plausible) of one (so called sensitivity analysis) or more (so called scenario analysis) economic and financial factors.
1.2 BANKING GROUP - MARKET RISKS
1.2.1 Interest rate risk and price risk - regulatory trading book
QUALITATIVE INFORMATION
A. Overview
The organizational model adopted by Gruppo Banco Popolare for the trading portfolios exposed to the interest rate risk and the price risk hinges on the centralization: • of Treasury positions in the Group Finance Department, in charge of coordinating the management of short term liquidity and interest rate risk and exchange risk positions within the Group, and of managing the Proprietary portfolio to optimize its overall risk/return profile, by diversifying risks across different asset classes of financial instruments; • in the subsidiary Banca Aletti of the risk positions and the operating flows associated with securities, currency, OTC derivative trading and other financial assets. of the risk positions and of the operating flows relating to the trading of securities, currencies, OTC derivatives and other financial assets. In addition to this, there are the main interest rate risk exposures from the trading portfolio of Banca Aletti relating to trades both on money markets, and the associated listed or plain vanilla derivatives covered by the Fixed Income, Equity Proprietary Trading and GSF
321 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Functions, as well as on the markets of derivatives and OTC structured products and of listed derivatives, covered by the Structured Products Service.
This model does not include the subsidiary Efibanca and the companies of the former Gruppo Banca Italease, as no material positions are reported which may affect market risks. The Banche del Territorio still hold positions, which are extremely residual as compared to the above portfolios, that were not centralized in the Parent company, because they are held for specific needs and objectives of the individual Banks, or are directly linked to the commercial activity. Said portfolios are monitored by Banca Aletti, if deriving from trades with the commercial networks, and are represented by securities tranches that are not negotiable or not immediately marketable on the market. Additional positions are assigned to the Finance Department of the Parent company, relating to treasury bonds deposited as security, residual positions deriving from trading activities that cannot be immediately transferred to Banca Aletti because they do not meet the minimum amount requirements required by market settlement systems; finally, there are additional positions that from an operating point of view are considered an investment-trading, but from an accounting viewpoint are classified in the banking book.
Group Finance Portfolio.
Following the Group restructuring, as of 01.04.2009 the Treasury and proprietary portfolio Management Functions of Banco Popolare have been centralized in the Group Finance Department, in addition to the positions already held and connected with interest rate risks. In detail: • the “investment portfolio” of Banco Popolare represents the major source of interest rate risk associated with the Parent company’s trading portfolio; it is mainly comprised of bonds, characterized by a limited exposure to the interest rate risk, ensured also by careful hedges with listed derivatives or over the counter plain vanillas. At the end of 2009, the bond portfolio of Banco Popolare had a nominal value in excess of 5 billion Euro, made up by 53% of Government securities and the remaining part of Financial securities, mostly above the single A rating. Part of the portfolio consists of asset swap structures hedged against interest rate risk through derivatives (mainly plain vanilla I.R.S.); also instruments listed as futures have been used for interest rate risk hedging. The total interest rate risk sensitivity (delta) at year-end, net of long and short exposures on the different currencies and yield curve nodes, is about -22 million Euro, assuming a parallel 100 basis point yield curve movement, and considering correlate the associated interest rate derivatives used in the investment strategy (interest rate swap and futures) and the asset swap portfolio. • The Treasury portfolio of Banco Popolare reports an exposure of -12 million Euro, concentrated on the short term nodes of the Euro curve. These exposures include 830 million euro worth of positions in short term government bonds with an average duration of 6 months, that are largely financed through repurchase agreements.
As to the price risk component, the equity portfolio includes equity securities and UCITS units, and has also maintained a low risk profile, as it is invested in bond and money market funds for about 400 million Euro. The remaining part of about 45 million 45 Ml Euro was allocated on single sectors based on a thorough diversification approach.
Trading portfolio of Banca Aletti, held as part of its investment banking activities
In its capacity as Group investment bank, the subsidiary Banca Aletti holds a trading portfolio whose main exposures to the interest rate risk are linked to trades on the money market, with the associated listed or plain vanilla derivatives covered by the Fixed Income Function, as well as on the markets of derivatives and OTC structured product and listed derivatives, covered by the Structured Products Service. In particular: • the investment bond portfolios and the associated listed derivatives, held by the Fixed Income Function, are characterized by a prudent interest rate risk management; in particular, with regard to year-end positions, the portfolio had a nominal value of about 1 billion Euro, mainly allocated in government bonds (78%) and the remaining part in corporate bonds (22%). The generated total exposure to the interest rate risk is about 1.5 million Euro, assuming a parallel change in the interest rate curve of 100 basis points. This portfolio also includes positions deriving from trades on the Mercato Titoli di Gruppo, namely the Group’s organized trading facility for the management of the secondary markets of non structured securities issued by the Group, amounting to about 96 million Euro, as well as positions in securities from securitizations of the Banks of the Group, amounting to little more than 12 million Euro. Upon consolidation the latter positions are deducted from liabilities recognized against loans sold and not derecognized; • trades in structured instruments and listed and unlisted derivatives, including trades on the secondary market of structured products issued or sold by the banks of the Group, represent a second type of trading. By unwinding complex trades based on the underlying it is possible to achieve a centralized management of the interest rate, exchange rate and price risks within the specific Offices of the Bank’s Structured Products Service, which use sophisticated position keeping systems. In particular, the total interest rate sensitivity (delta) at year-end, net of long and short positions on the various currencies and nodes of the interest curves amounted to about 33 million Euro, assuming a parallel change in the interest rate curve of 100 basis points. This exposure also depends on the Structured bond portfolio, of more than 500 million 500 Ml Euro, including those deriving from trades on the Mercato Titoli di Gruppo of 270 million Euro.
322 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
The main exposures to the equity risk are related to trades on cash markets and associated listed or plain vanilla derivatives, covered by the Equity Proprietary Trading Function, as well as on the derivatives and OTC structured products market and the listed derivatives market covered by the Equity Structured Products Function. In particular: • equity portfolios with their listed derivatives, held for trading by the Equity Proprietary Trading Function, in its capacity as market maker on single Stock Futures and as Specialist, are characterized by limited overnight net daily exposures. As to proprietary trading, worth mentioning with regard to basket trading is trading on the Spanish stock Ibex 35. The portfolio consists of sales of index futures against cash positions on single names; • the Equity Structured Products Function is in charge of trades in structured instruments and listed and unlisted derivatives. As already mentioned, by unwinding complex trades based on the underlying it is possible to achieve a centralized management of the interest rate, exchange rate and price risks within the specific Offices of the Function, which use a sophisticated position keeping system specialized in interest rate, exchange rate and price risks. The system is integrated with pricing models and risk measurement (Greeks) developed in-house and validated by a specific Model Validation Group coordinated by the Parent company’s Risk Management Function, under the supervision of academic experts. At year-end, the total price risk exposure of the derivative portfolio of the Structured Products Function is equivalent to a short position of about 2.5 million Euro, net of hedges with derivatives and cash financial assets.
Banca Aletti’s risk positions are monitored on a daily basis to verify their compliance with the operating thresholds set by the Board of Directors on the entire portfolio and on the single underlying assets.
Additional residual portfolios of Banco Popolare or of the Group single retail banks (Banche di Territorio), monitored and managed by Banca Aletti or by the Parent company’s Finance Department
Please refer to the summarized account given in the consolidated report on operations.
The Internal Regulation on Risk Positions fixes the operational limits in terms of stock, interest rate risk sensitivity, asset allocation with respect to the type of issuer and related creditworthiness, as well as concentration on single names and rating class of belonging. These ceilings, which are approved by the Management and Supervisory Boards, are monitored by the Market Risk Function on a daily basis. Daily and period reports provide an account of this activity and of the held exposures. For additional information, please refer to the specific paragraph below dealing with risk management and measurement processes.
B. Interest rate risk and price risk management process and assessment methods
The function in charge of controlling the financial risk management for all the Banks of the Group, except Efibanca and Banca Italease, with the aim of identifying the type of risks, define the methods to assess risks, control limits at strategic level and verify the consistency between trade limits and the risk/return targets assigned, is the Market Risk Function. In particular, for the identification, measurement, management and operating control of the risk positions of the Banks of the Group, the Parent company’s Finance Department and Banca Aletti make use of a sophisticated position keeping and risk control system that provide a constant control over exposure levels and over the compliance with the operating limits defined by the Parent company’s Management and Supervisory Boards and by the Boards of Directors of the Group banks. Risk control for trading activities in listed and unlisted derivatives and in structured products is based on a specific application specializing in interest/exchange rate derivatives and equity instruments. In case of very complex and innovative structures, these models are complemented by pricing and sensitivity measurement models developed in house, that were validated by a Validation Group coordinated by the Parent company’s Market Risk Function. This position keeping system, automatically fed by market platforms and by the sales networks in case of trades in cash and in listed derivatives, is constantly aligned with accounting procedures and guarantees the constant measurement and control of position indicators, sensitivity and operational results. It is also closely integrated with the Value at Risk control systems, developed by the Market Risk Function. Financial risks are monitored on a daily basis by using deterministic indicators (risk exposure, duration, sensitivity) as well as probabilistic indicators (VaR). In particular, these indicators are considered the most appropriate instruments to ensure an effective and precise measurement and control of market risks generated by exposures to complex derivatives, also from a regulatory standpoint. Value at Risk (VaR), which indicates the maximum potential loss associated with market movements in unexceptional conditions, represents a synthetic risk measurement. The method used to calculate the VaR belongs to the historical simulation VaR models. The values are calculated with a confidence level of 99% and a time horizon of one day. The observation period is 250 days. As of the second half of 2009, a decay factor of 0.98 was introduced to give a different weighting to historical measurements; more recent measurements are thus considered more significant, and market volatility increases or declines can be identified more rapidly. The current model fully covers generic position and exchange risks, while the specific risk is calculated only for equity securities (at present we are experimenting the adoption of the VaR model to estimate the specific position risk for bonds). The risk factors taken into consideration are the interest rate risk, the equity risk and the exchange rate risk.
323 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
VaR reports are prepared, through which monitoring is ensured at Group level, at single bank level, by organizational unit, and by single trading portfolio. Said reports are sent to the Bank Head Office, the Finance Department and to Internal Audit. In 2009 we activated an automatic system to clean up daily management P&L and to carry out a comparison with historical simulation VaR measurement, so as to conduct back-test analyses and verify the correctness of the model with respect to risks that have actually materialized. As to scenario analyses (“stress testing”), simulations were defined and implemented by applying predefined shocks to the major risk factors, to assess the current and prospective level of capital adequacy, as required by Basel II second pillar regulations. The evolution of stress testing processes is underway, according to a logic based on the revaluation of portfolio positions after joint risk factor shocks. The VaR method described above is used to measure operational risks. During the year a project was launched to apply for the certification of the internal market risk model so that it can be used also to calculate capital requirements.
QUANTITATIVE INFORMATION
Regulatory trading portfolio: internal models and other sensitivity analysis methods
Shown below are the VaR(*) for 2009 referring to the regulatory trading book of Gruppo Banco Popolare. The data do not include the portfolios of Efibanca and former Gruppo Italease.
Daily VaR and VaR by risk factor GRUPPO BANCO POPOLARE: regulatory trading portfolio
var var_int var_azio var_fx 16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
02-01 13-01 22-01 02-02 11-02 20-02 03-03 12-03 23-03 01-04 13-04 22-04 04-05 13-05 22-05 02-06 11-06 22-06 01-07 10-07 21-07 30-07 10-08 19-08 28-08 08-09 17-09 28-09 07-10 16-10 27-10 05-11 16-11 25-11 04-12 15-12 24-12
* The VaR takes into consideration the correlations between risk factors as of the month of April, and as of the same date the VaR for single risk factors is available. As of the second half of 2009 a methodological upgrade was introduced, with the adoption of a time decay factor (lambda) to factor in the greater risk inherent in period of greater turbulence on financial markets.
324 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Regulatory trading portfolio 31-Dec 2009 (in millions of euro) 2008 2009 31-dic AVERAGE MAX MIN
Interest rate risk 5.457 2.838 2.838 4.752 7.521 2.603 Exchange rate risk 1.958 0.328 0.328 0.625 1.023 0.259 Equity risk 9.134 0.981 0.981 3.430 6.393 0.981 Uncorrelated total 16.549 4.147 4.147 Diversification effect -3.639 -2.218 -2.218 Combined risk 12.910 1.929 1.929 6.640 13.995 1.929
During the year, a gradual decrease in total VaR was reported, as a result of the reduction of interest rate risk positions in Banco Popolare’s Proprietary Portfolio and of equity risk in Banca Aletti. At the same time, the decreasing volatility on financial markets had a positive impact on the historical series used to calculate risk. The end-of-period VaR stood close to its period low.
Shown below is the back testing referring to the VaR methodology, referring to the Trading Portfolio of Gruppo Banco Popolare in 2009.
Back Testing of Gruppo Banco Popolare - FY 2009
15,000,000
10,000,000
5,000,000
0
-5,000,000
-10,000,000
-15,000,000
-20,000,000 02/01 09/01 16/01 23/01 30/01 06/02 13/02 20/02 27/02 06/03 13/03 20/03 27/03 03/04 10/04 17/04 24/04 01/05 08/05 15/05 22/05 29/05 05/06 12/06 19/06 26/06 03/07 10/07 17/07 24/07 31/07 07/08 14/08 21/08 28/08 04/09 11/09 18/09 25/09 02/10 09/10 16/10 23/10 30/10 06/11 13/11 20/11 27/11 04/12 11/12 18/12 25/12
HVaR P&L
1.2.2 Interest rate risk – Banking book
QUALITATIVE INFORMATION
A. General issues, management procedures and interest rate risk and price risk assessment methods
The interest rate risk borne by Gruppo Banco Popolare in correlation with its banking book is mainly associated with the core activity performed by the bank acting as an intermediary in the process of transformation of maturities. In particular, the issue of fixed rate bonds, the granting of fixed rate commercial loans and mortgages and funding from demand checking accounts represent a fair value interest rate risk; floating rate financial assets and liabilities represent a cash flow interest rate risk. The Parent company’s Operational and Transformation Risks function is in charge of monitoring and controlling the interest rate risk inherent in the banking book, and it performs this function also on behalf of the subsidiary banks. This activity is performed on a monthly basis to verify that the limits in interest income or equity changes are complied with, with intra- month updates in case of material transactions or significant events. The structure in charge of measuring and managing the interest rate risk is the Parent company’s ALM & Asset Backed Funding Function, which carries out this task also on behalf of the subsidiary banks, and pursues the maximization of the economic return from the bank’s commercial activity in compliance with the set interest rate risk exposure limits. The interest rate risk is measured by way of spreadsheets prepared based on the Operating Asset & Liability Management (ALMO) procedure, in particular the simulation module by aggregating positions analyzes the mismatches between deposits and loans. In 2009 we completed the project to obtain a more frequent risk measurement, allowing us to achieve a more updated and close monitoring of the evolution of mismatches. To date, ten-day measurements are focused on the definition of the liquidity profile and on the measurement of the associated risk, and we plan to extend the measurement frequency also to the interest rate risk.
325 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Also in 2009 the Group reported a net “asset-sensitive” structural mismatch, with an exposure to the interest rate risk within fixed limits, despite the significant interest rate contraction.
In the first part of 2010, according to plans the implementation of the automatic feeds from the IT procedures of the former Gruppo Banca Italease to the Group’s consolidated systems should be completed. By then it will be possible to bring also the interest rate risk profile of the new subsidiaries in the monitoring scope.
Alternative assets (funds of hedge funds), that are held for the strategic purpose of making the overall portfolio market neutral, are exposed to the price risk. For a more in-depth analysis please refer to the report on operations. We also have a portfolio consisting of minority shareholdings, classified as financial assets available for sale.
B. Fair value hedging
The management policy adopted by Gruppo Banco Popolare, aiming at stabilizing net interest income, implied the specific hedging of bond issues, both fixed rate and structured.
In particular, the interest rate risk was transferred to the market by our Group Investment Bank - Banca Aletti – through specific hedges set up with OTC contracts (mainly IRS, interest rate options). As to the accounting treatment of this hedging relation, in addition to the fair value option already in use, the Group introduced the accounting rule of micro fair value hedge adopted for new bond issues sold to institutional investors; both procedures aim at ensuring a consistent accounting treatment with hedging derivatives, that are necessarily measured at fair value. For further details, please see “Section A – Accounting policies” and the comment to table “50. Financial liabilities measured at fair value” -“Section B – Notes to the Consolidated Balance sheet” of these explanatory notes.
With regard to demand deposits, for a better and more sophisticated measurement of interest rate risk exposure, new models were implemented as part of the above mentioned project to estimate the behavioral parameters of these items. The stabilization effect for these items is ensured by the use of fair value macro-hedges with plain vanilla swaps on part of the demand deposits. In 2009 no partial renewals of expiring hedges were carried out.
The price risk of the alternative assets portfolio is monitored on a daily basis and is not hedged.
C. Cash flow hedging
In order to stabilize the cost of its floating rate deposits and reduce assets mismatches, Gruppo Banco Popolare resorted to swap hedges called macro cash flow hedges. Outstanding hedges are fully covered in terms of amount by the notional amounts of floating rate notes.
D. Hedging of foreign investment
For a detailed analysis, please refer to the Exchange rate risk section.
326 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
QUANTITATIVE INFORMATION
1. Banking book: breakdown by residual maturity (by repricing date) of financial assets and liabilities
Currency of denomination: Between 3 Between 6 Between 5 Up to 3 Between 1 Over 10 Undefined Euro On demand and 6 months and and 10 months and 5 years years term (thousands of euro) months 1 year years
1. Cash assets 57,652,210 14,412,341 1,369,317 1,869,431 6,133,648 2,908,593 13,019,161 1,842,823 1.1 Debt securities 198 3,307,786 43,297 198,448 923,622 720,034 8,380,887 82 - with early redemption option - - - - 20,226 185,735 7,250,181 - - other 198 3,307,786 43,297 198,448 903,396 534,299 1,130,706 82 1.2 Loans to banks 2,025,240 3,150,737 124,292 202,493 1,786,556 7,113 484 4,634 1.3 Loans to customers 55,626,772 7,953,818 1,201,728 1,468,490 3,423,470 2,181,446 4,637,790 1,838,107 - c/a 16,911,118 92,803 644 5,234 9,551 6,192 - 1 - other loans 38,715,654 7,861,015 1,201,084 1,463,256 3,413,919 2,175,254 4,637,790 1,838,106 - with early repayment option 24,337,243 1,750,016 522,008 411,429 1,487,028 1,257,259 3,633,142 229,267 - other 14,378,411 6,110,999 679,076 1,051,827 1,926,891 917,995 1,004,648 1,608,839 2. Cash liabilities 51,533,868 30,208,930 10,804,038 5,262,453 13,996,620 3,746,328 1,563,328 1,194,509 2.1 Due to customers 44,611,915 6,878,380 1,016,477 292,285 497,607 172,666 584,147 168,460 - c/a 40,801,202 658,031 38,279 55,541 - - - - - other payables 3,810,713 6,220,349 978,198 236,744 497,607 172,666 584,147 168,460 - with early repayment option - - - - 407 - - - - other 3,810,713 6,220,349 978,198 236,744 497,200 172,666 584,147 168,460 2.2 Due to banks 3,202,487 5,513,193 238,489 453,504 85,090 8,978 37 7 - c/a 1,154,116 29,333 ------other payables 2,048,371 5,483,860 238,489 453,504 85,090 8,978 37 7 2.3 Debt securities 78,522 16,567,241 9,470,257 4,503,962 13,313,901 3,355,886 513 964,570 - with early redemption option 9,597 4,727,191 2,539,512 21,031 50,739 693,095 - 964,570 - other 68,925 11,840,050 6,930,745 4,482,931 13,263,162 2,662,791 513 - 2.4 Other liabilities 3,640,944 1,250,116 78,815 12,702 100,022 208,798 978,631 61,472 - with early repayment option 117,549 5,816 467 - 172 3,250 25,806 - - other 3,523,395 1,244,300 78,348 12,702 99,850 205,548 952,825 61,472 3. Financial derivatives - 8,699,562 1,551,724 1,669,129 13,972,569 3,951,279 7,827,589 - 3.1 With underlying security ------Options ------+ long positions ------+ short positions ------Other derivatives ------+ long positions ------+ short positions ------Without underlying 3.2 - 8,699,562 1,551,724 1,669,129 13,972,569 3,951,279 7,827,589 - security - Options - 406,050 2,818 600,324 472,040 295,126 60,000 - + long positions - 218,088 1,409 300,162 223,520 145,000 30,000 - + short positions - 187,962 1,409 300,162 248,520 150,126 30,000 - - Other derivatives - 8,293,512 1,548,906 1,068,805 13,500,529 3,656,153 7,767,589 - + long positions - 3,413,372 1,269,944 929,202 11,536,632 761,637 - - + short positions - 4,880,140 278,962 139,603 1,963,897 2,894,516 7,767,589 - 57,652,210 14,412,341 1,369,317 1,869,431 6,133,648 2,908,593 13,019,161 1,842,823
327 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Currency of denomination: Between 3 Between 6 Between 5 Up to 3 Between 1 Over 10 Undefined currencies other than Euro On demand and 6 months and and 10 months and 5 years years term (thousands of euro) months 1 year years
1. Cash assets 672,902 823,987 139,611 121,283 248,116 138,696 32,350 10,555 1.1 Debt securities 6,474 546 - 2,264 - 22,004 - - - with early redemption option ------other 6,474 546 - 2,264 - 22,004 - - 1.2 Loans to banks 156,222 285,877 14,126 71,979 38,982 840 - - 1.3 Loans to customers 510,206 537,564 125,485 47,040 209,134 115,852 32,350 10,555 - c/a 65,412 54,406 14,334 7,375 3,256 10 - - - other loans 444,794 483,158 111,151 39,665 205,878 115,842 32,350 10,555 - with early repayment option 240 1,000 19 ------other 444,554 482,158 111,132 39,665 205,878 115,842 32,350 10,555 2. Cash liabilities 1,027,692 779,987 164,536 20,824 8,783 14,864 1,268 1,377 2.1 Due to customers 918,636 217,468 63,281 7,892 2,989 118 708 - - c/a 793,537 46,765 58,323 2,491 - - - - - other payables 125,099 170,703 4,958 5,401 2,989 118 708 - - with early repayment option ------other 125,099 170,703 4,958 5,401 2,989 118 708 - 2.2 Due to banks 109,047 336,885 22,232 2,198 5,794 14,746 560 - - c/a 11,008 9,717 ------other payables 98,039 327,168 22,232 2,198 5,794 14,746 560 - 2.3 Debt securities 7 225,634 79,023 10,734 - - - - - with early redemption option - - - 6,898 - - - - - other 7 225,634 79,023 3,836 - - - - 2.4 Other liabilities 2 ------1,377 - with early repayment option ------other 2 ------1,377 3. Financial derivatives - 7,035 ------3.1 With underlying security ------Options ------+ long positions ------+ short positions ------Other derivatives ------+ long positions ------+ short positions ------Without underlying 3.2 - 7,035 ------security - Options ------+ long positions ------+ short positions ------Other derivatives - 7,035 ------+ long positions - 6,305 ------+ short positions - 730 ------
328 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Banking book: internal models and other sensitivity analysis methods
The Group makes use of a Strategic Asset & Liability Management procedure (ALMS) to measure on a monthly basis the impact (“sensitivity”) from changes in the interest rate structure on the expected net interest, dividend and similar income and on the economic value of capital related to the banking and trading books. As already explained, in the banking book the ALM model takes into account also deposits opened to finance the trading book and measures the relative sensitivity; for a correct matching and a consequent correct measurement of sensitivity, it is therefore necessary to extend the analysis to include the correlated trading book. With regard to the expected net interest, dividend and similar income, the ALM system estimates its changes on a one year horizon in the assumption of deterministic shocks of the interest rate curves (bps increases/decreases applied to all the interest rate curves as if it were a sudden, single and parallel change), and shocks to adjust to the forward rates implied in money market rates, and again shocks from projections that reflect alternative scenarios. Estimates are based on the assumption that the capital structure remains unchanged in terms of aggregate assets and liabilities, as well as in terms of financial characteristics (rates, spreads, duration). With regard to the economic value of capital, the same assumptions on the interest rate curve changes are applied, measuring the change in present value of all transactions and comparing it with the economic value of capital. A third probability indicator was introduced in the capital adequacy assessment process (ICAAP), which measures the value at risk based on the VaR methodology on a time horizon of 12 months and a confidence ratio of 99.96%. Shown below are the main sensitivity data referring to 2009 compared with 2008, with regard to the banking and trading books.
FY 2009 FY 2008 Risk ratios (%) 31 December Average Max Min 31 December Average
Per shifts + 100 bp Net interest, dividend and similar income at risk/ 5.2 5.4 9.5 2.0 1.4 4.3 Net interest, dividend and similar income Economic value at risk / Capital Economic value -1.5 -0.7 0.3 -2.1 -2.9 0.8 Per shifts - 100 bp Net interest, dividend and similar income at risk/ -13.2 -9.9 -3.6 -17.2 -2.7 -4.7 Net interest, dividend and similar income Economic value at risk / Capital Economic value 2.0 1.0 2.5 -0.1 3.5 -0.2
Price risk monitoring and control activities for the funds of hedge funds banking portfolio are based on an internal VaR model. The risk is estimated by tying each fund to a combination of risk factors representing the management strategies (as well as a factor that can represent the relative specific risk component). The price risk of the equity securities classified as assets available for sale for the time being is not subject to specific monitoring.
Shown below are VaR data for 2008, referring to the banking book of Gruppo Banco Popolare, restricted to positions related to transactions classified as AFS, CFV, L&R and HTM.
NO Trading Portfolio 31-Dec 2009 (in millions of euro) 2008 2009 31-dic AVERAGE MAX MIN
Interest rate risk 1.332 0.135 0.135 0.292 0.653 0.060 Exchange rate risk 0.240 0.083 0.083 0.083 0.117 0.010 Equity risk 3.534 2.042 2.042 2.320 3.903 1.497 Uncorrelated total 5.106 2.261 2.261 Diversification effect -2.526 -0.275 -0.275 Combined risk 2.580 1.986 1.986 2.398 3.683 1.636
329 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Daily VaR and VaR by risk factor GRUPPO BANCO POPOLARE: banking portfolio
var var_int var_azio var_fx
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
02/01 13/01 22/01 02/02 11/02 20/02 03/03 12/03 23/03 01/04 13/04 22/04 04/05 13/05 22/05 02/06 11/06 22/06 01/07 10/07 21/07 30/07 10/08 19/08 28/08 08/09 17/09 28/09 07/10 16/10 27/10 05/11 16/11 25/11 04/12 15/12 24/12
The VaR takes into consideration the correlations between risk factors as of the month of April, and as of the same date the VaR for single risk factors is available. As of the second half of 2009 a methodological upgrade was introduced, with the adoption of a time decay factor (lambda) to factor in the greater risk inherent in period of greater turbulence on financial markets.
During the year, a gradual decrease in total VaR was reported, as a result of the decreasing volatility on financial markets. As of the second half of the year, a change was reported as a result of the introduction of the Lambda time decay factor.
1.2.3 Exchange rate risk
QUALITATIVE INFORMATION
A. General issues, management procedures and exchange rate risk assessment methods
Exchange rate risk management is centralized at the Treasury for Group Finance operations and at the Equity Structured Products Function for Banca Aletti. Exposures are extremely narrow for Banco Popolare’s Treasury, while with respect to Banca Aletti’s forex derivative trading, positions on the major currencies brush 10 million Euro. For a more detailed description of the methods used to measure and control the exchange rate risk generated by the trading portfolio, see section “Interest rate risk and price risk – Regulatory trading portfolio”. As with the other risks, the adopted methodologies are not used to calculate capital requirements.
B. Exchange rate risk hedging
Exchange rate risk positions are monitored on a daily basis and are hedged so as to meet the Risk limits provided for each function.
With respect to Exchange rate risk, hedges equivalent to the book value (net equity) of the Hungarian subsidiary, and to 65% of the book value of the Czech subsidiary (the hedging is deliberately partial because the currency is more stable) have been set up.
330 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
QUANTITATIVE INFORMATION
1. Breakdown by currency of assets and liabilities and of derivatives
Currencies (thousands of euro) Koruna Czech Other US Dollars GB Pounds Swiss Francs Forint Hungary Republic currencies
A. Financial assets 1,285,423 461,121 331,612 73,322 148,052 361,678 A.1 Debt securities 50,832 2,124 1,433 10,353 - 1,590 A.2 Equity securities 55,794 48,834 12,528 126 - 29,944 A.3 Loans to banks 189,977 82,181 154,305 21,564 35,869 161,010 A.4 Loans to customers 988,820 327,982 163,346 41,279 112,183 169,134 A.5 Other financial assets - - - - - 0 B. Other assets 35,200 7,334 6,896 2,425 5 15,338 C. Financial liabilities 1,283,020 371,866 231,163 230,632 57,567 314,155 C.1 Due to banks 462,908 62,316 138,683 185,175 7,214 45,900 C.2 Due to customers 664,632 294,219 24,852 45,457 158 120,254 C.3 Debt securities 154,962 51 67,359 - 50,195 147,999 C.4 Other financial liabilities 518 15,280 269 - - 2 D. Other liabilities 473 15,273 269 - - 2 E. Financial derivatives 2,749,281 257,362 477,364 35,050 60,742 757,114 - Options 539,770 6,588 33,325 49 - 100,700 + long positions 259,954 4,632 21,143 25 - 37,455 + short positions 279,816 1,956 12,182 24 - 63,245 - Other 2,209,511 250,774 444,039 35,001 60,742 656,414 + long positions 977,273 56,269 116,590 36 14,581 342,533 + short positions 1,232,238 194,505 327,449 34,965 46,161 313,881 Total assets 2,557,850 529,356 476,241 75,808 162,638 757,004 Total liabilities 2,795,547 583,600 571,063 265,621 103,728 691,283 Mismatch (assets - liabilities) -237,697 -54,244 -94,822 -189,813 58,910 65,721
2. Internal models and other sensitivity analysis methods
The exchange rate risks generated by the trading portfolio and the banking book are monitored through an internal VaR model extensively described in section “Interest rate risk and price risk – Regulatory trading portfolio”, where the values assumed by this indicator are shown, and in the section “Interest rate risk and price risk – Banking portfolio.
1.2.4 Derivative instruments
QUALITATIVE INFORMATION
Given the trades in derivatives, Gruppo Banco Popolare introduced specific and robust validation and control processes of the Pricing Model and the related Market Parameters.
Validation and control process of Market Parameters
Gruppo Banco Popolare adopted a Fair Value Policy defining the accounting rules to be used to value market parameters. To comply with this Policy, a rigorous process was put in place, to count, validate and control the market parameters used to measure the market value and to estimate the risk inherent in derivative positions. This process is carried out by the Parent company’s Risk Management Service. In particular, this process regulates: the constant update of the Parameter Manual, containing the main parameters used and their most significant features, and the definition of the source; the constant update of parameter control methodologies; the daily validation and control of the listed/quoted parameters, automatically fed by external info-providers; la daily validation and control of illiquid parameters, from a financial and management accounting viewpoint.
In order to support control activities, the Group introduced a state of the art application (fed by the front office system and, for benchmarking purposes, by alternative and highly specialized info-providers) under development, to monitor over time the performance of the parameters, featuring the statistical analysis of variations and operating warnings.
331 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Validation process of Pricing Models of OTC derivative products
Gruppo Banco Popolare deals with OTC derivative instruments, and in order to measure them, it uses quantitative pricing models already available in the Front Office application, or, for particular structures, models developed by Banca Aletti’s financial engineering. In order to ensure a precise and rigorous control over the adoption of new pricing models – be they market or in-house developed models - a validation process is in place, with the following features: activation of the Model validation group, made up of the heads of the various corporate functions and coordinated by the Parent company’s Risk Management Service; model validation based on rigorous consistency and robustness tests, conducted with the support of academic experts; official validation of new models by a Financial Product Innovation Committee, with the collaboration of key corporate managers.
Note, that based on the current policy pursued by the Group, innovative financial instruments can be entered only after a thorough analysis of the reliability and accuracy of their pricing models.
A limited number of OTC derivatives are left out (less than 0,0815% in terms of number of contracts), associated with matched trading, where the related fair values are hardly reproducible by in-house developed theoretical models, because of their high complexity. However, being matched trading, Gruppo Banco Popolare is not exposed to market risks in connection with these products. In order to correctly quantify the counterparty risk and give a correct accounting measurement, for these contracts the valuation is based upon information obtained from external contributors, through non-public sources. In any case, the weight of these instruments is bound to dwindle down over time, as the current policy followed by the Group requires that financial instruments with innovative characteristics can be entered only after a careful analysis of the reliability and accuracy of the related pricing models.
QUANTITATIVE INFORMATION
The table below illustrates the fair value of derivative positions of Banca Aletti (excluding forex futures transactions), with the corresponding pricing model in use. In its capacity as investment bank of Gruppo Banco Popolare, Banca Aletti manages the market risk associated with derivative trading.
Fair value of derivative positions (Fair Value in thousands of euro):
Positive Negative Aggregate Lots Fair Value Fair Value Fair Value
Total 185,634 -1,018,139 4,058,355 -5,076,495 of which: Listed/Quoted Derivatives 172,368 -128,850 79,989 -208,839 of which: OTC derivatives measured with proprietary models of the Front 12,163 -752,136 3,548,534 -4,300,670 Office system of which: OTC derivatives measured with internal models developed by 1,086 -93,115 375,452 -468,567 Banca Aletti’s finance engineering of which: OTC derivatives measured by external contributors 17 -44,039 54,380 -98,418
332 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
A. FINANCIAL DERIVATIVES
A.1 Regulatory trading portfolio: end-of-period and average notional amounts
Total Total Underlying assets / Types 31/12/2009 31/12/2008 (thousands of euro) Central Central Over the counter Over the counter Counterparties Counterparties 1. Debt securities and interest rates 156,151,826 10,119,008 118,461,553 4,561,845 a) Options 40,221,306 33,206 32,054,163 - b) Swaps 115,930,520 - 86,407,390 - c) Forward - - - - d) Futures - 10,085,802 - 4,561,845 e) Other - - - - 2. Equity securities and equity indexes 19,965,766 3,280,901 18,829,610 4,640,913 a) Options 19,965,766 2,999,425 18,330,537 4,224,644 b) Swaps - - - - c) Forward - - - 6,030 d) Futures - 281,476 - 410,239 e) Other - - 499,073 - 3. Foreign currencies and gold 3,071,591 - 8,452,898 - a) Options 907,905 - 981,984 - b) Swaps 19,600 - 39,200 - c) Forward 2,144,086 - 6,176,115 - d) Futures - - - - e) Other - - 1,255,599 - 4. Commodities - - - - 5. Other underlying assets - - - - Total 179,189,183 13,399,909 145,744,061 9,202,758 Average amounts 231,550,601 9,450,545 195,638,821 6,852,299
A.2 Banking book: end-of-period and average notional amounts
A.2.1 Hedging derivatives
31/12/2009 31/12/2008 Underlying assets / Types Central Central (thousands of euro) Over the counter Over the counter counterparties counterparties 1. Debt securities and interest rates 4,717,862 - 2,188,845 - a) Options 539,884 - 196,958 - b) Swaps 4,177,978 - 1,991,887 - c) Forward - - - - d) Futures - - - - e) Other - - - - 2. Equity securities and equity indexes - - - - a) Options - - - - b) Swaps - - - - c) Forward - - - - d) Futures - - - - e) Other - - - - 3. Foreign currencies and gold 96,249 - 29,865 - a) Options - - - - b) Swaps - - - - c) Forward 96,249 - 29,865 - d) Futures - - - - e) Other - - - - 4. Commodities - - - - 5. Other underlying assets - - - - Total 4,814,111 - 2,218,710 - Average amounts 4,382,327 - 2,277,272 -
333 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
A.2.2 Other derivatives
31/12/2009 31/12/2008 Underlying assets / Types Central Central (thousands of euro) Over the counter Over the counter counterparties counterparties 1. Debt securities and interest rates 14,413,132 - 3,437,674 - a) Options 811,937 - 121,083 - b) Swaps 13,601,195 - 3,316,591 - c) Forward - - - - d) Futures - - - - e) Other - - - - 2. Equity securities and equity indexes 3,947,258 - 3,406,144 - a) Options 3,947,258 - 3,406,144 - b) Swaps - - - - c) Forward - - - - d) Futures - - - - e) Other - - - - 3. Foreign currencies and gold 537,395 - 68,334 - a) Options 454,586 - 19,754 - b) Swaps 82,809 - 45,000 - c) Forward - - 3,580 - d) Futures - - - - e) Other - - - - 4. Commodities - - - - 5. Other underlying assets 1,021,412 - - - Total 19,919,197 - 6,912,152 - Average amounts 18,392,434 - 7,749,654 -
A.3 Financial derivatives: gross positive fair value – breakdown by products
Positive Fair value Portfolios / Type of derivatives 31/12/2009 31/12/2008 (thousands of euro) Central Central Over the counter Over the counter counterparties counterparties A. Regulatory trading portfolio: 3,136,718 84,191 2,760,723 208,166 a) Options 875,783 84,191 775,257 208,166 b) Interest rate swap 2,228,690 - 1,701,800 - c) Cross currency swap 3,077 - 1,470 - d) Equity swap - - - - e) Forward 28,981 - 281,189 - f) Futures 187 - 886 - g) Other - - 121 - B. Banking book – hedging derivatives 130,758 - - - a) Options 23,042 - - - b) Interest rate swap 107,581 - - - c) Cross currency swap - - - - d) Equity swap - - - - e) Forward 135 - - - f) Futures - - - - g) Other - - - - C. Banking book – other derivatives 137,446 - 97,633 - a) Options 46,069 - 3,778 - b) Interest rate swap 79,326 - 37,454 - c) Cross currency swap 12,051 - 56,401 - d) Equity swap - - - - e) Forward - - - - f) Futures - - - - g) Other - - - - Total 3,404,922 84,191 2,858,356 208,166
334 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
A.4 Financial derivatives: gross negative fair value – breakdown by products
Negative Fair value Portfolios / Types of derivatives 31/12/2009 31/12/2008 (thousands of euro) Central Central Over the counter Over the counter counterparties counterparties A. Regulatory trading portfolio: 2,739,722 986,227 2,341,178 1,023,152 a) Options 844,952 986,227 726,541 1,023,152 b) Interest rate swap 1,867,039 - 1,414,589 - c) Cross currency swap 159 - 1,461 - d) Equity swap - - - - e) Forward 27,385 - 192,967 - f) Futures 187 - 887 - g) Other - - 4,733 - B. Banking book – hedging derivatives 163,230 - 14,369 - a) Options 7,916 - - - b) Interest rate swap 154,021 - 14,273 - c) Cross currency swap - - - - d) Equity swap - - - - e) Forward 1,293 - 96 - f) Futures - - - - g) Other - - - - C. Banking book – other derivatives 97,049 - 20,709 7 a) Options 48,076 - 9,877 - b) Interest rate swap 48,973 - 10,832 7 c) Cross currency swap - - - - d) Equity swap - - - - e) Forward - - - - f) Futures - - - - g) Other - - - - Total 3,000,001 986,227 2,376,256 1,023,159
A.5 OTC financial derivatives: regulatory trading book – notional amounts, gross positive and negative fair value by counterparty – contracts not falling under netting arrangements
Contracts not falling under netting Governments Non- Other Other public Financial Insurance arrangements and Central Banks financial counter- entities companies companies (thousands of euro) Banks companies parties
1) Debt securities and interest rates - notional amount - 10,225 15,682,015 4,413,078 4,046,659 17,626,149 2,706,711 - positive fair value - 388 90,608 44,422 - 388,755 2,283 - negative fair value - 31 132,448 14,353 516,070 12,330 30,075 - future exposure - 64 42,456 29,752 39,164 79,413 24,284 Equity securities and equity 2) indexes - notional amount - - 97,557 560,262 7,766,924 57 1,160,195 - positive fair value - - 6,478 84,721 - 212 9,802 - negative fair value - - 3,463 16,265 119,803 - 12,322 - future exposure - - 10,455 10,248 650,932 5 89,075 3) Foreign currencies and gold - notional amount 64,781 - 416,607 304,054 - 1,098,400 125,722 - positive fair value 5,216 - 10,826 4,269 - 24,953 742 - negative fair value - - 7,756 2,395 - 20,041 7,061 - future exposure 648 - 4,707 2,911 - 11,910 1,295 4) Other values - notional amount ------positive fair value ------negative fair value ------future exposure ------
335 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
A.6 OTC financial derivatives: regulatory trading book – notional amounts, gross positive and negative fair value by counterparty – contracts falling under netting arrangements
Contracts falling under netting Governments Non- Other Other public Financial Insurance arrangements and Central Banks financial counter- entities companies companies (thousands of euro) Banks companies parties
1) Debt securities and interest rates - notional amount - - 94,583,353 17,083,638 - - - - positive fair value - - 1,816,710 177,094 - - - - negative fair value - - 1,162,422 253,514 - - - Equity securities and equity 2) indexes - notional amount - - 9,668,968 711,803 - - - - positive fair value - - 442,739 11,520 - - - - negative fair value - - 361,443 45,324 - - - 3) Foreign currencies and gold - notional amount - - 1,012,687 49,342 - - - - positive fair value - - 14,896 59 - - - - negative fair value - - 22,294 377 - - - 4) Other values - notional amount ------positive fair value - - - 26 - - - - negative fair value - - - 25 - - -
A.7 OTC financial derivatives: banking book – notional amounts, gross positive and negative fair value by counterparty – contracts not falling under netting arrangements
Contracts not falling under netting Governments Non- Other Other public Financial Insurance arrangements and Central Banks financial counter- entities companies companies (thousands of euro) Banks companies parties
1) Debt securities and interest rates - notional amount - - 9,463,280 127,720 - - 271,811 - positive fair value - - 114,129 1,013 - - - - negative fair value - - 58,418 5,421 - - - - future exposure - - 99,878 525 - - 955 Equity securities and equity 2) indexes - notional amount - - 1,696,368 48,720 - - 2,177,338 - positive fair value - - 32,407 421 - - - - negative fair value - - 33,535 454 - - - - future exposure - - 124,271 2,880 - - 164,873 3) Foreign currencies and gold - notional amount - - 593,391 - - - 2,444 - positive fair value - - 9,287 - - - - - negative fair value - - 4,277 - - - - - future exposure - - 37,510 - - - - 4) Other values - notional amount - - 1,006,296 15,116 - - - - positive fair value - - 8,645 161 - - - - negative fair value - - 8,645 161 - - - - future exposure - - 78,478 1,006 - - -
336 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
A.8 OTC financial derivatives: banking book – notional amounts, gross positive and negative fair value by counterparty – contracts falling under netting arrangements
Contract falling under netting Governments Non- Other Other public Financial Insurance arrangements and Central Banks financial counter- entities companies companies (thousands of euro) Banks companies parties
1) Debt securities and interest rates - notional amount - - 8,512,683 755,500 - - - - positive fair value - - 95,392 754 - - - - negative fair value - - 106,601 40,470 - - 108 Equity securities and equity 2) indexes - notional amount - - 24,832 - - - - - positive fair value ------negative fair value - - 2,189 - - - - 3) Foreign currencies and gold - notional amount - - 37,809 - - - - - positive fair value - - 5,883 - - - - - negative fair value ------4) Other values - notional amount ------(1) - positive fair value ------111 - negative fair value ------
A.9 Residual maturity of OTC financial derivatives: notional amounts
Underlying assets / Residual maturity Between 1 and Up to 1 year Over 5 years Total (thousands of euro) 5 years
A. Regulatory trading portfolio 35,583,307 104,241,274 39,364,602 179,189,183 A.1 Financial derivatives on debt securities and interest rates 29,279,885 90,867,580 36,004,361 156,151,826 A.2 Financial derivatives on equity securities and equity indexes 3,367,092 13,277,633 3,321,041 19,965,766 A.3 Financial derivatives on exchange rates and gold 2,936,330 96,061 39,200 3,071,591 A.4 Financial derivatives on other valuables - - - - B. Banking book 2,410,254 11,608,230 10,714,824 24,733,308 B.1 Financial derivatives on debt securities and interest rates 1,722,737 6,704,008 10,704,249 19,130,994 B.2 Financial derivatives on equity securities and equity indexes 401,446 3,540,812 5,000 3,947,258 B.3 Financial derivatives on exchange rates and gold 174,653 453,416 5,575 633,644 B.4 Financial derivatives on other valuables 111,418 909,994 - 1,021,412 31/12/2009 37,993,561 115,849,504 50,079,426 203,922,491 31/12/2008 33,690,010 84,445,416 30,756,589 148,892,015
A.10 OTC financial derivatives: counterparty risk / financial risk – Internal models
Gruppo Banco Popolare does not use EPE internal models validated by supervisory authorities to calculate the capital requirement for the counterparty risk. Recently, for management and capital adequacy assessment purposes (ICAAP), it developed and is now testing a model to estimate the risk related to over the counter (OTC) derivative trading. This model makes use of internal market risk estimate methods to determine the potential short term evolution of the fair value of positions, and it incorporates the benefits of market correlations and the impacts of guarantee agreements. Internal PD and LGD estimates and the IRB-related weighting formulas for credit risks are then applied to the resulting future exposures.
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B. CREDIT DERIVATIVES
B.1 Credit derivatives: end-of-period and average notional amounts
Regulatory trading portfolios Banking book Types of transactions (thousands of euro) Multiple Multiple One counterparty counterparties One counterparty counterparties (basket) (basket) 1. Protective calls a) Credit default products 143,589 - 269,533 - b) Credit spread products - - - - c) Total rate of return swaps - - - - d) Other - - - - Total 31/12/2009 143,589 - 269,533 - Average amounts 80,295 - 331,871 - Total 31/12/2008 73,335 - 823,485 - 2. Protective puts a) Credit default products - - - - b) Credit spread products - - - - c) Total Rate of return swaps - - - - d) Other - - - - Total 31/12/2009 - - - - Average amounts - - - - Total 31/12/2008 32,335 - - -
B.2 OTC credit derivatives: gross positive fair value – breakdown by products
Portfolios / Types of derivatives Positive fair value (thousands of euro) 31/12/2009 31/12/2008 A. Regulatory trading portfolio - 107 a) Credit default products - 107 b) Credit spread products - - c) Total rate of return swaps - - d) Other - - B. Banking book 1,508 24,205 a) Credit default products 1,508 24,205 b) Credit spread products - - c) Total rate of return swaps - - d) Other - - Total 1,508 24,312
B.3 OTC credit derivatives: gross negative fair value – breakdown by products
Portfolios / Types of derivatives Negative fair value (thousands of euro) 31/12/2009 31/12/2008 A. Regulatory trading portfolio 4,057 126 a) Credit default products 4,057 126 b) Credit spread products - - c) Total rate of return swaps - - d) Other - - B. Banking book 718 514 a) Credit default products 718 514 b) Credit spread products - - c) Total rate of return swaps - - d) Other - - Total 4,775 640
338 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
B.4 OTC credit derivatives: gross (positive and negative) fair value by counterparty – contracts not falling under netting arrangements
Contracts not falling under netting Governments Non- Other Other public Financial Insurance arrangements and Central Banks financial counter- entities companies companies (thousands of euro) Banks companies parties
Regulatory trading 1) Protective call - notional value ------positive fair value ------negative fair value ------future exposure ------2) Protective put - notional value ------positive fair value ------negative fair value ------future exposure ------Banking book 1) Protective call - notional value - - 35,500 184,033 - - - - positive fair value - - - 1,508 - - - - negative fair value - - 116 107 - - - 2) Protective put - notional value ------positive fair value ------negative fair value ------
B.5 OTC credit derivatives: gross (positive and negative) fair value by counterparty – contracts falling under netting arrangements
Contracts falling under netting Governments Non- Other Other public Financial Insurance arrangements and Central Banks financial counter- entities companies companies (thousands of euro) Banks companies parties
Regulatory trading 1) Protective call - notional value - - 138,589 5,000 - - - - positive fair value ------negative fair value - - 3,957 100 - - - 2) Protective put - notional value ------positive fair value ------negative fair value ------Banking book 1) Protective call - notional value - - 50,000 - - - - - positive fair value ------negative fair value - - 495 - - - - 2) Protective put - notional value ------positive fair value ------negative fair value ------
339 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
B.6 Residual maturity of credit derivatives: notional amounts
Underlying assets / Residual maturity Between 1 and Up to 1 year Over 5 years Total (thousands of euro) 5 years
A. Regulatory trading portfolio - 143,589 - 143,589 A.1 Credit derivatives with " qualified reference obligation " - - - - A.2 Credit derivatives with " unqualified reference obligation " - 143,589 - 143,589 B. Banking book 67,000 202,533 - 269,533 B.1 Credit derivatives with " qualified reference obligation " 67,000 108,424 - 175,424 B.4 Credit derivatives with " unqualified reference obligation " - 94,109 - 94,109 31/12/2009 67,000 346,122 - 413,122 31/12/2008 368,632 668,813 47,692 1,085,137
B.7 Credit derivatives: counterparty risk / financial risk – Internal models
The internal model used to estimate the counterparty risk of derivative instruments for management purposes is not applied to credit derivatives.
C. FINANCIAL AND CREDIT DERIVATIVES
C.1 OTC financial and credit derivatives: net fair values and future exposure by counterparty
Governments Non- Other Other public Financial Insurance (thousands of euro) and Central Banks financial counter- entities companies companies Banks companies parties
Financial derivatives – bilateral 1) agreements - positive fair value - - 163,949 731 - - - - negative fair value - - 87,592 41,526 - - - - future exposure - - 20,532 1,100 - - - - net counterparty risk - - 7,523 - - - - Credit derivatives – bilateral 2) agreements - positive fair value ------negative fair value - - 614 - - - - - future exposure - - 42 - - - - - net counterparty risk ------3) "Cross product" agreements - positive fair value ------negative fair value ------future exposure ------net counterparty risk ------
1.3 BANKING GROUP – LIQUIDITY RISK
QUALITATIVE INFORMATION
A. General issues, liquidity risk management procedures and assessment methods
Liquidity risk comes from the time mismatch between expected cash in- and out-flows in a very short time horizon. In addition to the difficulty/impossibility of hedging such mismatches, the liquidity risk can also entail an interest rate risk caused by the need to raise/lend funds at unknown rates that could be potentially unfavorable. In 2009 the organizational model of Gruppo Banco Popolare was revised, and the operational management of the treasury of the banks of the entire Group was handed over to the Parent company’s Group Finance Service, Forex and Money market Function. During the year the liquidity policy was extended to include methodological actions (items on demand; prepayment on expiring transactions; margins for derivatives with credit support annex; risk of receiving a margin call an credit lines; etc.), more frequent measurements and stress scenarios; as a result, operating limits could be shifted onto more stringent levels and further improvement objectives could be identified and attained during the year.
340 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
The first line defense against the liquidity risk is the new daily monitoring and control of the cumulated mismatch of operating liquidity, generated by transactions with interbank and institutional counterparties, in the following time frames: overnight, 14 days, 1 month and 3 months and 6 months. The ALM and Asset Backed Funding f the Group Finance Service is in charge of monitoring operating liquidity risk limits as a first line control; the Transformation and Operational Risk Function of the Risk Management Service is in charge of the second line control. The second line defense against the liquidity risk is the monitoring of any structural liquidity mismatch, generated by transactions of the entire banking book, in the following time frames: overnight, 14 days, 1 month, 3 months and 6 months. The Transformation and Operational Risk Function of the Risk Management Service is in charge of monitoring structural liquidity risk limits. The third line defense against the liquidity risk is the measurement and management of the structural liquidity risk by the ALM & Asset Backed Funding Function of the Group Finance Service. The measurement of the structural liquidity risk, that is the availability of the necessary monetary resources to cover financial outflows, is carried out by using the spreadsheets supplied by the Operational Asset & Liability Management (ALMO) procedure, in particular the simulation module, used also to measure the interest rate risk. The measurement of the structural liquidity risk is carried out from a static view, by measuring the liquidity requirement based on the liquidity gap in the single time frames (difference between due loans and deposits) as well as from a dynamic view, by determining the liquidity requirement in different scenarios, characterized by the variation of some key financial elements that can affect the liquidity time profile. The daily, precise and constant measurement of the counterbalancing capacity plays an important role in assessing the Group’s liquidity risk. The counterbalancing capacity is a reserve of rapidly available liquidity, corresponding to the securities eligible for refinancing with the European Central Bank, after the required haircuts have been applied. The Group’s definition of its counterbalancing capacity is restrictive, as it includes only positions on single securities exceeding 5 million euro. In 2009 the Group continued to take actions to reduce maturity mismatches. In particular, the increase in sales of Banco Popolare bonds through the commercial network and the institutional issues under the EMTN program further reduced the short term exposure and extended the average maturity of liabilities. In 2009, significant securitization deals were carried out, which definitely favored the increase in liquidity reserves represented by securities eligible for refinancing at the ECB; the average amount of counterbalancing capacity hovered around 8.5 billion, with a highest high at 14.4 billion and a lowest low at 2.9 billion. Based on preliminary 2010 analyses, it has been further consolidating on an average amount of 12 billion, a high of 12.8 billion and a low of 11.5 billion. Also thanks to the adoption of these measures, the Group’s liquidity profile never broke below the set limits, guaranteeing a stable situation. In 2009 senior bonds were issued under the EMTN program for a total nominal amount of 6.5 billion, of which 0.4 billion worth of subordinated bonds. Two mortgage securitizations were carried out, for a total nominal amount of 6.992 billion, that shall increment the Group’s portfolio of available securities eligible for refinancing. By the first quarter of 2010 the “multi-originator” Covered Bond Program, set up under the Italian law (law 80 of 14 May 2005, Mef Decree 14 December 2006 and Supervisory Instructions issued by the Bank of Italy) is scheduled to be completed, with the opening issue of about 1 billion euro. Banco Popolare will thus have access to medium/long term funding, also by transforming ABS issued in originated securitization, at competitive conditions, while diversifying its funding forms. In the first part of 2010 the implementation of automatic feeding systems from the IT procedures of the former Gruppo Banca Italease to the Group consolidated systems should be concluded, and as a result also the liquidity profile of the new subsidiaries will be included in the monitoring scope.
341 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 34 34 QUANTITATIVE INFORMATION
1. Time distribution of financial assets and liabilities by residual contract maturity.
between 15 between 6 Currency of denomination: Euro between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year
Cash assets 33,335,037 957,978 1,515,534 2,231,086 4,918,221 4,768,487 7,342,996 31,692,921 34,236,382 672,554 A.1 Government bonds 16,110 - 76,889 229 486,243 655,967 510,523 3,046,443 709,550 145 A.2 Other debt securities 11,929 5,010 378,077 13,086 125,817 1,035,409 1,077,597 2,591,657 9,667,464 - A.3 UCITS units 886,231 ------470 A.4 Loans: 32,420,767 952,968 1,060,568 2,217,771 4,306,161 3,077,111 5,754,876 26,054,821 23,859,368 671,939 - Banks 1,017,665 608,079 437,251 483,845 1,775,356 319,667 541,305 2,386,055 114,324 5,105 - Customers 31,403,102 344,889 623,317 1,733,926 2,530,805 2,757,444 5,213,571 23,668,766 23,745,044 666,834 Cash liabilities 46,117,875 2,982,582 1,810,026 3,096,150 8,847,404 3,662,088 6,097,471 33,045,952 10,935,945 873,259 B.1 Deposits 44,885,307 1,382,631 771,059 1,284,118 1,642,733 234,682 290,528 695,122 1,688,544 168,475 - Banks 2,285,229 997,939 694,018 843,640 1,422,186 136,570 129,341 79,377 103,201 11 - Customers 42,600,078 384,692 77,041 440,478 220,547 98,112 161,187 615,745 1,585,343 168,464 B.2 Debt securities 101,294 232,249 331,073 620,921 4,109,051 2,069,751 4,530,666 29,427,601 6,105,404 654,058 B.3 Other liabilities 1,131,274 1,367,702 707,894 1,191,111 3,095,620 1,357,655 1,276,277 2,923,229 3,141,997 50,726 "Off-balance sheet" transactions 11,810,001 1,149,345 104,419 836,301 1,482,128 1,030,235 920,394 2,455,474 1,088,138 362,725 C.1 Financial derivatives with exchange of capital 3,558 946,017 87,523 660,584 1,129,080 561,823 226,336 1,032,320 92,635 22,387 - Long positions 416 659,875 48,636 355,418 716,035 371,376 94,675 503,973 44,601 11,457 - Short positions 3,142 286,142 38,887 305,166 413,045 190,447 131,661 528,347 48,034 10,930 Financial derivatives without exchange of C.2 6,242,084 4,465 4,762 45,580 56,061 175,090 237,028 - - - capital - Long positions 2,874,957 2,986 3,105 39,780 30,240 103,358 82,630 - - - - Short positions 3,367,127 1,479 1,657 5,800 25,821 71,732 154,398 - - - C.3 Deposits and loans to be settled - - - - - 58,880 - - - - - Long positions - - - - - 29,440 - - - - - Short positions - - - - - 29,440 - - - - C.4 Irrevocable commitments 4,032,475 198,863 12,134 130,131 296,697 232,974 413,361 1,390,591 985,860 313,602 - Long positions 446,349 198,863 12,134 130,131 291,395 212,101 407,108 1,208,629 847,698 255,356 - Short positions 3,586,126 - - - 5,302 20,873 6,253 181,962 138,162 58,246 C.5 Financial guarantees given 1,531,884 - - 6 290 1,468 43,669 32,563 9,643 26,736
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12
between 15 between 6 Currency of denomination: US dollar between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year Cash assets 202,044 36,975 37,713 101,874 166,024 97,849 38,961 269,546 197,588 - A.1 Government bonds ------20,011 6,514 - A.2 Other debt securities - - - 133 42 152 4,068 5,030 29,789 - A.3 UCITS units 7,445 ------A.4 Loans: 194,599 36,975 37,713 101,741 165,982 97,697 34,893 244,505 161,285 - - Banks 37,829 23,690 760 311 9,952 10,938 4,056 28,972 186 - - Customers 156,770 13,285 36,953 101,430 156,030 86,759 30,837 215,533 161,099 - Cash liabilities 596,417 106,292 20,681 108,773 129,051 87,822 11,639 773 1,326 - B.1 Deposits 543,145 105,497 20,303 102,764 114,756 30,899 4,634 773 768 - - Banks 3,355 103,042 17,354 73,339 93,386 22,213 695 - - - - Customers 539,790 2,455 2,949 29,425 21,370 8,686 3,939 773 768 - B.2 Debt securities 117 347 - 5,270 12,726 56,923 7,005 - - - B.3 Other liabilities 53,155 448 378 739 1,569 - - - 558 - "Off-balance sheet" transactions 320,970 661,767 92,646 450,589 450,040 578,790 563,752 129,513 50,618 20,678 C.1 Financial derivatives with exchange of capital 1,229 581,848 92,638 450,513 444,012 578,319 562,720 122,085 5,991 978 - Long positions 1,101 112,075 43,361 106,552 239,107 288,732 292,812 70,362 274 4 - Short positions 128 469,773 49,277 343,961 204,905 289,587 269,908 51,723 5,717 974 Financial derivatives without exchange of C.2 39,408 - 8 3 232 25 628 - - - capital - Long positions 15,051 - - 2 - - 612 - - - - Short positions 24,357 - 8 1 232 25 16 - - - C.3 Deposits and loans to be settled - 69,416 ------Long positions - 34,708 ------Short positions - 34,708 ------C.4 Irrevocable commitments 86,316 10,503 - 73 5,796 446 404 7,428 44,627 18,674 - Long positions 19,963 10,026 - 73 3,287 223 202 6,239 28,474 9,337 - Short positions 66,353 477 - - 2,509 223 202 1,189 16,153 9,337 Notes to the consolidated financial statements statements financial consolidated to the Notes C.5 Financial guarantees given 194,017 ------1,026
34 34
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 34 34
between 15 between 6 Currency of denomination: GB pound between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year Cash assets 34,157 71,154 557 12,535 4,407 471 17,946 81,642 76,061 - A.1 Government bonds ------A.2 Other debt securities - - - 29 - - 2,204 - - - A.3 UCITS units ------A.4 Loans: 34,157 71,154 557 12,506 4,407 471 15,742 81,642 76,061 - - Banks 5,651 70,938 1 - - - 2,703 - - - - Customers 28,506 216 556 12,506 4,407 471 13,039 81,642 76,061 - Cash liabilities 57,617 102,823 23,571 12,666 191 544 346 - - - B.1 Deposits 57,589 102,823 23,571 12,666 191 493 346 - - - - Banks 359 40 22,520 1 ------Customers 57,230 102,783 1,051 12,665 191 493 346 - - - B.2 Debt securities - - - - - 51 - - - - B.3 Other liabilities 28 ------"Off-balance sheet" transactions 66,654 128,805 2,786 7,746 122,588 11,794 18,194 39,827 446 434 C.1 Financial derivatives with exchange of capital - 115,309 2,786 7,746 122,412 11,794 14,454 2,617 280 - - Long positions - 2,582 1,148 6,102 36,068 4,875 9,044 1,352 259 - - Short positions - 112,727 1,638 1,644 86,344 6,919 5,410 1,265 21 - Financial derivatives without exchange of C.2 12,698 ------capital - Long positions 5,362 ------Short positions 7,336 ------C.3 Deposits and loans to be settled ------Long positions ------Short positions ------C.4 Irrevocable commitments 51,650 13,496 - - 176 - 3,740 37,210 166 434 - Long positions - 13,496 - - 176 - 3,740 34,424 166 217 - Short positions 51,650 ------2,786 - 217 C.5 Financial guarantees given 2,306 ------
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between 15 between 6 Currency of denomination: Swiss franc between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year Cash assets 44,280 3,247 6,170 30,784 33,002 7,215 40,455 20,541 19,281 - A.1 Government bonds ------28 - - - A.2 Other debt securities ------16,719 - - - A.3 UCITS units ------A.4 Loans: 44,280 3,247 6,170 30,784 33,002 7,215 23,708 20,541 19,281 - - Banks 23,069 2,436 1,029 23,459 110 74 13,614 6,830 19 - - Customers 21,211 811 5,141 7,325 32,892 7,141 10,094 13,711 19,262 - Cash liabilities 25,137 36,883 166 10,778 128 3,588 156 22 - - B.1 Deposits 25,118 17,339 166 3 126 227 156 22 - - - Banks 3,098 17,324 - - - - - 1 - - - Customers 22,020 15 166 3 126 227 156 21 - - B.2 Debt securities 19 19,544 - 10,775 - 3,361 - - - - B.3 Other liabilities - - - - 2 - - - - - "Off-balance sheet" transactions 17,213 286,208 148 135 56,354 35,694 24,966 16,462 - - C.1 Financial derivatives with exchange of capital - 264,426 148 135 56,354 35,694 24,966 15,786 - - - Long positions - 6,727 148 - 12,528 8,173 17,094 10,547 - - - Short positions - 257,699 - 135 43,826 27,521 7,872 5,239 - - Financial derivatives without exchange of C.2 13,981 ------capital - Long positions 7,758 ------Short positions 6,223 ------C.3 Deposits and loans to be settled - 20,220 ------Long positions - 10,110 ------Short positions - 10,110 ------C.4 Irrevocable commitments 3,115 1,562 - - - - - 676 - - - Long positions 607 1,562 - - - - - 339 - - - Short positions 2,508 ------337 - - Notes to the consolidated financial statements statements financial consolidated to the Notes C.5 Financial guarantees given 117 ------
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between 15 between 6 Currency of denomination: Hungary Forint between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year Cash assets 11,000 15,173 10,786 2,036 3,249 3,178 8,456 14,163 5,084 - A.1 Government bonds ------1,073 - - A.2 Other debt securities - - 9,228 ------A.3 UCITS units ------A.4 Loans: 11,000 15,173 1,558 2,036 3,249 3,178 8,456 13,090 5,084 - - Banks 6,372 15,173 ------Customers 4,628 - 1,558 2,036 3,249 3,178 8,456 13,090 5,084 - Cash liabilities 18,837 5,725 7,690 5,698 5,209 643 789 2,167 - - B.1 Deposits 18,837 5,725 7,690 5,698 5,209 643 789 2,167 - - - Banks ------2,167 - - - Customers 18,837 5,725 7,690 5,698 5,209 643 789 - - - B.2 Debt securities ------B.3 Other liabilities ------"Off-balance sheet" transactions - 185 - - 3,316 31,185 317 1 - - C.1 Financial derivatives with exchange of capital - 184 - - 3,316 31,185 317 1 - - - Long positions - 35 - - - - - 1 - - - Short positions - 149 - - 3,316 31,185 317 - - - Financial derivatives without exchange of C.2 ------capital - Long positions ------Short positions ------C.3 Deposits and loans to be settled ------Long positions ------Short positions ------C.4 Irrevocable commitments - 1 ------Long positions - 1 ------Short positions ------C.5 Financial guarantees given ------
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between 15 between 6 Currency of denomination: Czech Krone between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year
Cash assets 2,727 19,106 269 21,681 16,848 12,885 12,446 12,446 43,085 9,198 A.1 Government bonds ------A.2 Other debt securities ------A.3 UCITS units ------A.4 Loans: 2,727 19,106 269 21,681 16,848 12,885 12,446 12,446 43,085 9,198 - Banks 2,102 18,486 269 14,573 - 439 - - - - - Customers 625 620 - 7,108 16,848 12,446 12,446 12,446 43,085 9,198 Cash liabilities 23,422 4,677 6,715 6,453 19,019 62,917 9,151 3,719 - - B.1 Deposits 23,422 4,677 6,715 6,453 19,019 11,750 9,151 3,719 - - - Banks 1 - 2,592 ------Customers 23,421 4,677 4,123 6,453 19,019 11,750 9,151 3,719 - - B.2 Debt securities - - - - - 51,167 - - - - B.3 Other liabilities ------"Off-balance sheet" transactions 17,304 1,737 - 5,516 5,288 24,553 17,376 - - - C.1 Financial derivatives with exchange of capital - 1,737 - 5,516 5,288 24,553 17,376 - - - - Long positions - - - 1,889 2,644 - 8,310 - - - - Short positions - 1,737 - 3,627 2,644 24,553 9,066 - - - Financial derivatives without exchange of C.2 ------capital - Long positions ------Short positions ------C.3 Deposits and loans to be settled ------Long positions ------Short positions ------C.4 Irrevocable commitments ------Long positions ------
- Short positions ------statements financial consolidated to the Notes C.5 Financial guarantees given 17,304 ------
34 34
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between 15 between 6 Currency of denomination: other currencies between 1 and between 7 and between 1 and between 3 and between 1 and Indefinite on demand days and 1 months and 1 over 5 years (thousands of euro) 7 days 15 days 3 months 6 months 5 years maturity month year Cash assets 62,572 100,901 12,208 10,343 31,582 21,139 22,407 41,698 13,341 - A.1 Government bonds - - - 546 - - - - 126 - A.2 Other debt securities - - - - 10 713 - - - - A.3 UCITS units ------A.4 Loans: 62,572 100,901 12,208 9,797 31,572 20,426 22,407 41,698 13,215 - - Banks 31,255 95,468 2,784 2,940 3,606 2,416 4,357 2,933 636 - - Customers 31,317 5,433 9,424 6,857 27,966 18,010 18,050 38,765 12,579 - Cash liabilities 76,985 6,599 17,128 24,453 117,958 40,002 12,076 6,400 2,456 - B.1 Deposits 76,882 1,345 4,302 7,955 26,777 21,406 8,288 6,400 2,422 - - Banks 10,357 254 448 1,497 10,632 14,747 - - - - - Customers 66,525 1,091 3,854 6,458 16,145 6,659 8,288 6,400 2,422 - B.2 Debt securities 11 5,254 12,826 16,498 91,181 18,596 3,730 - - - B.3 Other liabilities 92 - - - - - 58 - 34 - "Off-balance sheet" transactions 6,684 123,601 22,751 251,032 313,902 99,379 74,913 32,208 534 849 C.1 Financial derivatives with exchange of capital 1,666 119,997 22,751 251,032 312,403 98,307 74,913 32,189 534 - - Long positions 1,666 13,508 15,147 217,786 202,443 51,155 45,082 18,782 192 - - Short positions - 106,489 7,604 33,246 109,960 47,152 29,831 13,407 342 - Financial derivatives without exchange of C.2 ------capital - Long positions - Short positions C.3 Deposits and loans to be settled - - - - 1,392 ------Long positions - - - - 696 ------Short positions - - - - 696 - - - - - C.4 Irrevocable commitments 5,018 3,604 - - 18 1,072 - 1 - - - Long positions 1,933 3,604 - - 9 536 - 1 - - - Short positions 3,085 - - - 9 536 - - - - C.5 Financial guarantees given - - - - 89 - - 18 - 849
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
As described in Section E – Sub-section 1 – Banking Group Risks – 1.1 Credit Risk - C. Securitizations and asset sales, as a result of “self-securitizations” originated by Group Banks or Companies, Banco Popolare and Banca Italease subscribed securities eligible for refinancing with the ECB or for repurchase agreements with market counterparties. Described below are the originated self securitizations outstanding on 31 December 2009.
Originated self securitizations
BPL Mortgages 4 (July 2009)
This securitization was originated by the following banks of the Group (“Banking Originators”): Banca Popolare di Verona SGSP S.p.A.(“BPV”), Banca Popolare di Novara S.p.A.(“BPN”), Banca Popolare di Lodi S.p.A. (“BPL”), Credito Bergamasco S.p.A.(“Creberg”), Cassa di Risparmio di Lucca, Pisa e Livorno S.p.A. (“CR Lucca”), Banca Popolare di Cremona S.p.A (“Cremona”) and Banca Popolare di Crema S.p.A.(“Crema”). The deal was finalized in two stages: on 16 June 2009 the Banking Originators sold a pool of performing residential and commercial mortgages and loans backed by voluntary mortgages on residential and commercial property for a total nominal amount of 3,990.4 million to the SPE BPL Mortgages S.r.l. (a special purpose entity set up pursuant to art 3 of Law n. 130 of 30 April 1999); on 30 July 2009 two classes of securities were issued (Class A Senior Notes and Class B Junior Notes). The Banking Originators acted as Servicers and managed the loan collection.
Loan breakdown by Originator
Residual debt % Portfolio Residual debt % Portfolio Banca al 31/12/2009 (1) al 31/12/2009 al 13/06/2009 al 13/06/2009
Banca Popolare Verona 1,210,553 32.98% 1,318,820 33.05% Banca Popolare Novara 635,222 17.31% 677,499 16.98% Banca Popolare Lodi 614,930 16.75% 668,100 16.74% Credito Bergamasco 602,071 16.40% 656,061 16.44% Cassa di Risparmio Lucca Pisa Livorno 325,742 8.88% 356,859 8.94% Banca Popolare di Cremona 160,612 4.38% 180,250 4.52% Banca Popolare di Crema 121,184 3.30% 132,885 3.33% Total 3,670,314 100.00% 3,990,474 100.00% (1) The residual debt as at 31 December 2009 includes the nominal value of performing, substandard and non-performing mortgages, while it does not include accruals at the reference date. The total loan selling price was 3,990.5 million; the sale was carried out based on the residual debt at the selling date, therefore no profit or loss on disposal was reported.
Issue characteristics
On 30 July 2009 two classes of ABS were issued: senior notes listed on the Irish Stock Exchange and entirely subscribed by Banco Popolare, and unrated junior notes, subscribed on a pro-rata basis by the Banking Originators. The securities had the following features: - Class A securities (senior notes): bonds with yield linked to the 6-month Euribor plus 80 basis points spread per annum, issued at par for a nominal amount of 3,411.8 million (rating AAA Standard & Poor’s, six-month coupon, due May 2055); - Class B securities (junior notes): bonds with yield equal to Additional Return, issued at par for a nominal amount of 578.6 million (unrated, due May 2055), subscribed on a pro-rated basis by the selling banks, specifically:
Bank Amount
Banca Popolare di Verona 191,230 Banca Popolare di Novara 98,238 Banca Popolare di Lodi 96,875 Credito Bergamasco 95,130 Cassa di Risparmio Lucca, Pisa Livorno 51,746 Banca Popolare di Cremona 26,137 Banca Popolare di Crema 19,268 Total 578,624
Accessory financial transactions
Upon issuing the securities, the SPE entered an “Interest Rate Swap” agreement with Banco Popolare, with a third party acting as intermediary, to hedge against the risk of mismatch between the interest rates of the securitized bonds and the yield of the issued bonds. Banco Popolare also subscribed with each Banking Originator an identical “Interest Rate Swap” and a “Total Return Swap” (to transfer the credit risk of the sold portfolio referring to the senior notes subscribed by the Parent company).
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To hedge against the risk of illiquidity periods, the SPE set aside a Cash Reserve, which on 31 December 2009 amounted to 47.4 million; at each Interest Payment Date, the Cash Reserve shall be fed until the target amount of 119.7 million is reached. Banco Popolare, the Banking Originators, Banca Popolare di Lodi and the SPE signed a First and Second Demand Guarantee agreement with which Banco Popolare guarantees the duties deriving from the role of Servicer covered by the Banking Originators and the role of Interim Account Bank assigned to Banca Popolare di Lodi, in addition to obligations originating from mortgages belonging to the “Mutuo Alberto” program subscribed by mortgagors; the maximum secured amounts are: - 47.5 million Banca Popolare di Verona SGSP S.p.A. – 17.9 million Banca Popolare di Novara S.p.A. – 107.6 million Banca Popolare di Lodi S.p.A – 11.6 million Cassa di Risparmio Lucca, Pisa, Livorno S.p.A.- 6.2 million Banca Popolare di Cremona – 4.3 million Banca Popolare di Crema. The residual debt distribution by geographical areas, with respect to residential mortgages is: North-West 47%, Center 30%,North-East 17%, South and Islands 6%; the residual debt distribution by geographical areas, with respect to commercial mortgages is: North–West 47%, Center 30%, North–East 18%, South and Islands 5%. The distribution by economic sectors refers mainly to “Non financial companies” (43%) and consumer households (37%).
BPV Mortgages (June 2009)
Since the end of 2007, some Banks of Gruppo Banco Popolare (“Banking Originators”), specifically Banca Popolare di Novara S.p.A.(“BPN”), Banca Popolare di Verona SGSP S.p.A. (“BPV”), Banca Popolare di Lodi S.p.A.(“BPL”) and Credito Bergamasco S.p.A.(“Creberg”) sold some pools of performing residential mortgages to BPV Mortgages S.r.l., (special purpose entity set up pursuant to Law n. 130 of 30 April 1999) as part of a warehousing securitization. The deal was structured into two phases: a warehousing phase which started in December 2007, during which the SPE privately financed the pool of mortgages that were from time to time purchased by issuing an unrated note subscribed by Banco Popolare, completed on 29 May 2009. The second take-out phase was completed on 16 June 2009, and the unrated securities were assigned a public “AAA” rating. Upon finalizing the take-out phase, the portfolios sold by each single bank during the warehousing phase totaled 1,044.9 million; the sale was carried out at book value, therefore no profit or loss on disposal was reported. The Banking Originators acted as Servicers and managed the loan collection.
Loan breakdown by Originator
Residual debt % Portfolio Residual debt % Portfolio Bank 31/12/2009 31/12/2009 16/06/2009 16/06/2009
Banca Popolare Novara 532,994 54.53% 566,754 54.24% Banca Popolare Verona 264,276 26.98% 284,203 27.20% Banca Popolare Lodi 114,447 11.69% 121,632 11.64% Credito Bergamasco 67,584 6.90% 72,302 6.92% Total 979,301 100.00% 1,044,891 100.00%
The residual debt as at 31 December 2009 includes the nominal value of performing, substandard and non-performing mortgages, while it does not include accruals at the reference date.
Issue characteristics
On 16 June 2009, two classes of ABS were issued: senior notes listed on the Irish Stock Exchange and entirely subscribed by Banco Popolare, and unrated junior notes, subscribed on a pro-rata basis by the Banking Originators. The securities had the following features: - Class A securities (senior notes): bonds with yield linked to the 6-month Euribor plus 60 basis points spread per annum, issued at par for a nominal amount of 1,027.9 million (rating AAA Standard & Poor’s, six-month coupon, due December 2052); - Class B securities (junior notes): bonds with yield equal to Additional Return, issued at par for a nominal amount of 128.4 million (unrated, due December 2052), subscribed on a pro-rated basis by the selling banks, specifically:
Bank Amount
Banca Popolare Novara 69,672 Banca Popolare Verona 34,937 Banca Popolare Lodi 14,952 Credito Bergamasco 8,888 Total 128,449
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Accessory financial transactions
Upon issuing the securities, the SPE entered an “Interest Rate Swap” agreement with Banco Popolare, with a third party acting as intermediary, to hedge against the risk of mismatch between the interest rates of the securitized bonds and the yield of the issued bonds. Banco Popolare also subscribed with each Banking Originator an identical “Interest Rate Swap” and a “Total Return Swap” (to transfer the credit risk of the sold portfolio referring to the senior notes subscribed by the Parent company). To hedge against the risk of possible illiquidity periods, the SPE shall set aside a Cash Reserve; on 31 December 2009 the cash reserve amounted to 27.9 million. Banco Popolare, the Banking Originators, Banca Popolare di Lodi and the SPE signed a First and Second Demand Guarantee Agreement with which Banco Popolare guarantees the duties deriving from the role of Servicer and Interim Account Bank covered by the Banking Originators; the maximum secured amounts are: - 9.2 million Banca Popolare di Novara S.p.A. – 4.5 million Banca Popolare di Verona SGSP S.p.A. - 2 million Banca Popolare di Lodi S.p.A.. The residual debt distribution by geographical area is: North-West 30%, Center 36%,North–East 12%, South and Islands 22%; all mortgages were granted to consumer households.
BPL Mortgages 3 (March 2009)
This securitization was originated by the following Group banks (“Banking Originators”): Banca Popolare di Lodi S.p.A. (“BPL”), Banca Popolare di Verona SGSP S.p.A. (“BPV”), Banca Popolare di Novara S.p.A. (“BPN”), Cassa di Risparmio di Lucca, Pisa e Livorno S.p.A. (“CR Lucca”), Credito Bergamasco S.p.A. (“Creberg”) and Banca Caripe S.p.A. (“Caripe”). The deal was finalized in two stages: - on 9 February 2009 the Banking Originators sold a pool of residential home and mortgage loans for a total nominal amount of 3,002 million to the SPE BPL Mortgages – on 16 March 2009 two classes of bonds were issued (Senior Class A notes, Junior Class B notes). The Banking Originators acted as Servicers and managed the loan collection.
Loan breakdown by Originator
Residual debt % Portfolio Residual debt % Portfolio Bank 31/12/2009 31/12/2009 06/02/2009 06/02/2009
Banca Popolare Lodi 730,713 27.78% 830,922 27.69% Banca Popolare Verona 715,703 27.22% 818,415 27.26% Banca Popolare Novara 413,507 15.72% 473,815 15.78% Cassa di Risparmio Lucca Pisa Livorno 337,341 12.82% 387,611 12.91% Credito Bergamasco 306,221 11.64% 347,650 11.58% Caripe 126,884 4.82% 143,386 4.78% Total 2,630,369 100.00% 3,001,799 100.00% The residual debt as at 31 December 2009 includes the nominal value of performing, substandard and non-performing mortgages, while it does not include accruals at the reference date.
The total loan selling price was 3,001.8 million; the sale was carried out based on the residual debt at the selling date, no profit or loss on disposal was therefore reported.
Issue characteristics
On 16 March 2009, two classes of ABS were issued: senior notes listed on the Irish Stock Exchange and entirely subscribed by Banco Popolare, and unrated junior notes, subscribed on a pro-rata basis by the Banking Originators. The securities had the following features: - Class A securities (senior notes): bonds with yield linked to the 6-month Euribor plus 80 basis points spread per annum, issued at par for a nominal amount of 2,799.1 million (rating AAA Standard & Poor’s, six-month coupon, due October 2054); - Class B securities (junior notes): bonds with yield equal to Additional Return, issued at par for a nominal amount of 202.6 million (unrated, due October 2054), subscribed on a pro-rated basis by the selling banks, specifically:
Bank Amount
Banca Popolare di Lodi 56,095 Banca Popolare di Verona 55,250 Banca Popolare di Novara 31,987 Cassa di Risparmio Lucca, Pisa Livorno 26,168 Credito Bergamasco 23,469 Banca Caripe 9,680 Total 202,649
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Accessory financial transactions
Upon issuing the securities, the SPE entered an “Interest Rate Swap” agreement with Banco Popolare to hedge against the risk of mismatch between the interest rates of the securitized bonds and the yield of the issued bonds. Banco Popolare also subscribed with each Banking Originator an identical “Interest Rate Swap” and a “Total Return Swap” (to transfer the credit risk of the sold portfolio referring to the senior notes subscribed by the Parent company). To hedge against the risk of possible illiquidity periods, the SPE set aside a Cash Reserve, which on 31 December 2009 amounted to 21.7 million; at each Interest Payment Date, the Cash Reserve shall be fed until the target amount of 60 million is reached. Banco Popolare, the Banking Originators, Banca Popolare di Lodi and the SPE signed a First and Second Demand Guarantee Agreement with which Banco Popolare guarantees the duties deriving from the role of Servicers covered by the Banking Originators and of Interim Account Bank assigned to Banca Popolare di Lodi, in addition to obligations originating from mortgages belonging to the “Mutuo Alberto” program subscribed by mortgagors ; the maximum secured amounts are: - 60.8 million Banca Popolare di Lodi S.p.A – 31.9 million Banca Popolare di Verona SGSP S.p.A. – 12.9 million Banca Popolare di Novara S.p.A. – 7.4 million Cassa di Risparmio Lucca, Pisa, Livorno S.p.A. – 2.9 million Banca Caripe S.p.A. The residual debt distribution by geographical area is: North-West 39%, Center 39%,North–East 14%, South and Islands 8%; all mortgages were granted to consumer households.
BPL Mortgages 2 (December 2008)
On 18 January 2010, the Banking Originators repurchased the loans sold under the above securitization; the repurchase was a pre-requisite for the subsequent sale of the portfolio to BP Covered Bond S.r.l so that in Q1 2010 the Parent company can issue Covered Bonds. We expect the BPL Mortgages 2008 securitization to be closed in October 2010 with the repayment of senior notes.
In 2008 some Group Banks (“Banking Originators”) finalized a securitization of performing residential home and mortgage loans by selling a pool of loans on 21 November 2008 to the SPE BPL Mortgages S.r.l. for a total amount of 1,052 million. The SPE financed the purchase of the loan pool by issuing two classes of bonds on 18 December 2008. The Banking Originators acted as Servicers and managed the loan collection.
Loan breakdown by Originator
Residual debt % Portfolio Residual debt % Portfolio Residual debt % Portfolio Bank 31/12/2009 31/12/2009 31/12/2008 31/12/2008 15/11/2008 15/11/2008
Banca Popolare di Novara 385,629 42.13% 433,508 41.70% 438,024 41.64% Banca Popolare di Verona 342,140 37.38% 392,791 37.79% 397,433 37.78% Credito Bergamasco 187,447 20.48% 213,102 20.50% 216,543 20.58% Banca Popolare di Lodi 68 0.01% 72 0.01% - - Total 915,284 100.00% 1,039,473 100.00% 1,052,001 100.00% The residual debt as at 31 December 2009 includes the nominal value of performing, substandard and non-performing mortgages, while it does not include accruals at the reference date
Issue characteristics
- Class A securities (senior notes): bonds with yield linked to the 6-month Euribor plus 80 basis points spread per annum, issued at par for a nominal amount of 973.1 million (rating AAA Standard & Poor’s, six-month coupon, due October 2054), listed on the Irish Stock Exchange and fully subscribed by Banco Popolare; - Class B securities (junior notes): bonds with yield equal to Additional Return, issued at par for a nominal amount of 78.9 million (unrated, due October 2054), subscribed on a pro-rated basis by the selling banks.
Accessory financial transactions
Upon issuing the securities, the SPE entered an “Interest Rate Swap” agreement with Banco Popolare to hedge against the risk of mismatch between the interest rates of the securitized bonds and the yield of the issued bonds. Banco Popolare also subscribed with each Banking Originator an identical “Interest Rate Swap” and a “Total Return Swap” (to transfer the credit risk of the sold portfolio referring to the senior notes subscribed by the Parent company). To hedge against the risk of possible illiquidity periods, the SPE set aside a Cash Reserve, which on 31 December 2009 amounted to 10.8 million; at each Interest Payment Date, the Cash Reserve shall be fed until the target amount of 21.0 million is reached. Banco Popolare entered a First Demand Guarantee agreement with which it guarantees the SPE for duties deriving from the roles of Servicer and Interim Account Bank carried out by the Banking Originators and by Banca Popolare di Lodi.
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BPL Mortgages 1 (December 2007)
On 18 January 2010, the Banking Originators repurchased the loans sold under the above securitization; the repurchase was a pre-requisite for the subsequent sale of the portfolio to BP Covered Bond S.r.l so that in Q1 2010 the Parent company can issue Covered Bonds. The securities linked to the BPL Mortgages 2007 securitization were repaid in January 2010.
On 21 April 2007 some Banks of the former Gruppo Banca Popolare Italiana finalized a securitization by selling residential home loans to the SPE BPL Mortgages S.r.l. for a total amount of about 1 billion euro. The deal was finalized in two stages: on 21 April 2007 the sale without recourse of a pool of loans was finalized, then on 17 December 2007 bonds were issued to finance the purchase of the loans. The Banking Originators acted as Servicers and managed the loan collection.
Loan evolution by originator
Residual debt % Portfolio Residual debt % Portfolio Residual debt % Portfolio Bank 31/12/2009 31/12/2009 31/12/2008 31/12/2008 21/04/2007 21/04/2007
Banca Popolare di Lodi 284,977 44.08% 336,386 44.31% 499,187 50.15% CR Lucca Pisa Livorno 229,496 35.50% 268,742 35.40% 345,613 34.72% Banca Popolare di Cremona 51,508 7.97% 62,924 8.29% 91,011 9.14% Banca Popolare di Crema 42,763 6.62% 47,913 6.30% 59,668 5.99% Banca Popolare di Verona 19,612 3.03% 22,593 2.98% - - Banca Popolare di Novara 18,079 2.80% 20,667 2.72% - - Total 646,435 100.00% 759,225 100.00% 995,479 100.00% The residual debt as at 31 December 2009 includes the nominal value of performing, substandard and non-performing mortgages, while it does not include accruals at the reference date.
Issue characteristics
Securities are subdivided into 4 different classes, with the following characteristics:
Nominal value at Rating Classes Type Value 31/12/09 Interest rate Maturity issue Moody’s/S&P/Fitch
A Senior 935,750 589,185 3-month Euribor + 0.45% December 2045 Aaa/AAA/AAA B Mezzanine 14,900 14,900 3-month Euribor + 1.70% December 2045 Aa2/AA/AA C Mezzanine 24,900 24,900 3-month Euribor + 3% December 2045 A3/BBB/BBB 3-month Euribor + 4% plus any D Junior 19,929 19,929 December 2045 Unrated Additional Return (*) Total 995,479 648,914
(*) Variable additional return depending on the actual operating results generated by the SPE on the securitized portfolio.
Class A B and C notes (senior and mezzanine), listed on the Irish Stock Exchange, have been fully subscribed by Banco Popolare. Class D notes have been subscribed on a pro-rata basis by the selling banks.
Accessory financial transactions
Upon issuing the notes, the SPE entered an “Interest Rate Swap” with a third counterparty, to hedge against the risk of mismatching between the interest rates of the securitized loans and the yield of the issued bonds; the third counterparty entered an Interest Rate Swap with Banca Popolare di Lodi with Banca Aletti acting as intermediary. To hedge against the risk of possible illiquidity periods, the SPE set aside a Cash Reserve, which on 31 December 2009 amounted to 21.4 million; at each Interest Payment Date, the Cash Reserve shall be fed until the target amount of 24.4 million is reached. Banco Popolare entered a First Demand Guarantee agreement with which it guarantees the SPE for duties deriving from the roles of Servicer and Interim Account Bank carried out by the Banking Originators and by Banca Popolare di Lodi.
Securitizations originated by Gruppo Italease: not derecognized (Italfinance RMBS) and partly derecognized ( ITA 10, ITA 11, Quicksilver)
The companies of Gruppo Italease, Banca Italease, Italease Network and Mercantile Leasing have a number of securitizations outstanding, in which upon issuance Banca Italease subscribed the notes issued by the SPE. They refer to self- securitizations carried out through the following special purpose entities: - Italfinance Securitisation Vehicle 2 S.r.l. (assignee/issuer) for the deals called “ITA 10” and “ITA 11”: - Pami Finance S.r.l. for the deal called “Quidksilver”; - Italfinance RMBS S.r.l. for the deal called “Italfinance RMBS 1”.
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The securitized assets refer to loans deriving from performing leases, extended by the companies to their customers, except for the deal “Italfinance RMBS 1” that uses loans from residential mortgages.
2009 performance
After the warehousing phases, which started in July 2008, on 21 January 2009 the take-out of “ITA 11” was launched, and the SPE Italfinance Securitisation Vehicle 2 S.r.l. (i) redeemed the Initial Securities related to the warehousing phase, (ii) issued Senior notes for a nominal amount of Euro 1,031.6 million that were assigned a “AAA” rating by S&P, and (iii) issued Junior notes (unrated) for a nominal amount of Euro 343.9 million. The Senior notes were fully subscribed by Banca Italease, while the Junior notes were subscribed by Banca Italease, Italease Network and Mercantile Leasing. The deal does not envisage the possibility of revolving loan sales. On 18 September 2009 Moody's put the securitized loans of ITA 10 under "Review for downgrade", owing to the deterioration of the loan pool quality, and the associated worsening of the deal’s performance.
Trigger events
In addition to what described in Section E – Sub-section 1 – Banking Group Risks – 1.1 Credit risk - C. Securitizations and asset sales, the performance indicator for each deal is: - Cash Trapping Trigger (Net cumulative Default Ratio applicable to ITA 10 and ITA11); - Cumulative Default Trigger Ratio (Net cumulative Default Ratio applicable ITA 10 and ITA11).
1.4 BANKING GROUP – OPERATIONAL RISKS
QUALITATIVE INFORMATION
A. General issues, management procedures and operational risk assessment methods
Type of risk
Operational risk is the risk of suffering losses caused by inadequacy or failure attributable to procedures, human resources and internal systems, or caused by external events. The strategic and reputational risks do not belong to this type of risk, while the legal risk is, considered as the risk of infringing laws and other compulsory regulations, of failing to comply with contract and extra-contract liabilities, as well as other litigations that may arise with counterparties in the course of business activities.
Risk sources
The main sources of operational risk are: the low reliability of operational processes – in terms of effectiveness /efficiency - internal and external frauds, operational mistakes, the qualitative level of physical and logical security, inadequate IT structure compared to the size of operations, the growing recourse to automation, the outsourcing of corporate functions, a limited number of suppliers, changes in strategies, incorrect personnel management and training policies and finally social and environmental impacts.
Risk management model and organizational structure
Gruppo Banco Popolare adopted a risk management model that illustrates the management modalities and the people involved in risk identification, measurement, monitoring mitigation and reporting. The contents of the model have been included in a Group Regulation, approved by the Corporate Boards in 2008. In order to set up adequate risk management policies, and in compliance with the relevant regulations, specific functions were identified in charge of governing, managing and controlling the operational risk model. For the operational risk identification and measurement phases, Gruppo Banco Popolare defined an internal methodology based on a quantitative and qualitative analysis along a VaR logic. The quantitative assessment is based first of all on internal loss data, registered and filed in a dedicated software application, in compliance with rules codified in specific regulations, that prescribe processes linked to the operational procedure followed for the accounting recording of the losses under examination: to this end, a system was developed that makes it possible to automate the loss collection process and to take account of commercial refunds and operational losses for the commercial networks. The loss collection process also includes a verification and certification system for the operational risk database, that ensures the completeness, quality and correctness of the single loss identifications. Secondly, also external loss data available to the Group are used for the quantitative assessment, in particular the inbound flows of the DIPO consortium, set up by the major Italian Banking Groups within ABI, which the Group joined since its formation. The qualitative risk assessment is carried out to complement the available quantitative data, in particular in case no historical loss data exist that may indicate the risk level associated with specific events (primarily related to low frequency and high impact events) or when the corporate business is being reorganized and revised in such a way as to change its risk exposure, and in general a prospective outlook is assigned to the global assessments. Risk Assessment data is collected periodically through a structured process involving the heads of the various organizational structures.
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Gruppo Banco Popolare implemented a capital requirement calculation model compliant with the standardized approach prescribed by the new Supervisory Regulations. The internal VaR calculation model for the operational risk, developed in 2008, was further enhanced in 2009 in terms of functional methodological analysis, fine-tuning and gauging. The model’s Group results are used at management level. Gruppo Banco Popolare implemented a reporting model, featuring: a) a directional information system with analysis and assessments of all the main issues concerning operational risk (in particular material losses – and the associated recoveries, the overall assessment of the risk profile, capital absorption and the implemented and/or planned risk management policies); b) an operational reporting system, that is, a tool for the operating structure that take part in loss collection processes, for an adequate risk management in the various areas.
Thanks to the operational risk actions planned and implemented by the Group, the standardized method was adopted in concomitance with the Supervisory instructions of 30 June 2008, along the combined method, which is adopted only by Group companies that combined together do not exceed the size thresholds provided by the Supervisory regulations (the companies of the former Gruppo Italease which on 31/12/2009 joined the consolidation scope of Gruppo Banco Popolare adopt this method). In order to implement the standardized model, the Group organizational model provides for specific Parent company structures to be in charge of the centralized risk management. Said structures act directly on behalf of the subsidiaries, and in case of companies adopting the standardized method they shall resort to decentralized functions in charge of local risk management.
Pending legal actions
The description of the primary pending legal actions and the possible associated losses are illustrated in “Section B – Liabilities – Sub-section 12 Provisions for risks and charges”.
QUANTITATIVE INFORMATION
With regard to sources of operational risk, an analysis was conducted covering pure operational risk events, with gross losses through profit or loss greater or equal to 5,000 euro and occurred on or after 1/1/2009, collected in the Group Loss collection archive. Loss data have been broken down by type of event, with views on impact and frequency, in line with the event classification scheme prescribed by the New Supervisory Regulations.
Breakdown of gross loss
Operating discontinuation Process Execution, Delivery and information system failure 1% and Management 9%
Customers, Business Internal fraud 4% practices and products 1%
Employment relation and workplace safety 8% External fraud 77%
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Frequency
Operating discontinuation Process Execution, Delivery and information system failure 1% and Management 12% Customers, Business Internal fraud 1% practices and products 1%
Employment relation and workplace safety 2%
External fraud 83%
The pie charts show that the main impacts and frequencies are associated with external frauds, primarily robbery. Among the other categories, worth reporting are the single events having a medium-high impact referring to specific workplace litigations and internal frauds.
Sub-section 2 - Insurance company risks
The Group has a 50% stake in the insurance companies AviPop Assicurazioni and Popolare Vita, given the bancassurance agreements signed during the year with Gruppo Aviva and Gruppo Fondiaria SAI. Said shareholdings fall within the consolidations scope of companies carried at equity and are shown in the consolidated assets under Investments in associates and companies subject to joint control. Banco Popolare has the joint control with Gruppo Aviva also of the insurance companies Eurovita and Aviva Previdenza, by way of the holding company Finoa, owned 50% and classified under discontinued operations.
With regard to this type of risks, the weight of the above companies on total consolidated assets is of little significance.
Sub-section 3 - Other company risks
No significant additional risks are reported for the remaining companies falling within the consolidation scope that are neither pat of the banking group, nor insurance companies. In particular, with regard to the Group’s real estate companies, most investments are related to Group operating property that were recognized in the balance sheet at values that do not exceed those reported by specific surveys conducted at the end of 2009 on the overall real estate assets.
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SECTION F – INFORMATION ON CONSOLIDATED CAPITAL
Sub-section 1 – Consolidated shareholders’ equity
A. Qualitative information
The corporate shareholders’ equity is made up of the sum of the balances of the following balance sheet liabilities: • Capital net of repurchased treasury shares • Share premium reserve • Reserves • Valuation reserves • Equity instruments, including financial instruments under art. 12 of L.D. n. 185/2008 (aka “Tremonti Bond”) • Net income for the period.
The description of the modality followed by the Group to pursue its capital management objectives is provided in the following sub-section 2.3.
B. Quantitative information
On 31 December 2009, the Group’s shareholders equity totaled 11,532.8 million, reporting a net increase of 1,748.8 million compared with the Group shareholders’ equity on 31 December 2008 amounting to 9,784 million. The increase is mainly attributable to the issue on 31 July 2009 of the financial instruments under art. 12 of L.D. n. 185/2008 for a total amount of 1,450 million and to the recognition of a total income for the year of 314.1 million (of which 267 million worth of net income for the year).
Sub-section 2 - Banking regulatory capital and solvency ratios
2.1 Regulatory scope of application
The consolidated regulatory capital and ratios are calculated in compliance with the instructions issued by the Bank of Italy with Circular n. 263 of 27 December 2006 (“New prudential regulatory instructions for banks”) and with Circular n. 155 of 18 December 1991 (“Instructions for preparing reports on regulatory capital and prudential ratios”), and following amendments.
As required by the regulation (Circular n. 155), since the consolidation scope considered for financial reporting purposes is wider than the one considered for the consolidated regulatory capital, only data referring to banking, financial and operating companies belonging to the Banking Group were taken into account to calculate the consolidated regulatory capital.
2.2 Banking regulatory capital
A. Qualitative information
In keeping with Circular n. 263, the regulatory capital is the sum of the Tier 1 capital – included in the calculation with no limits – and the Tier 2 capital, included within the maximum core capital limit. Investments in associates and companies subject to joint control, innovative equity instruments, hybrid capitalization instruments and subordinated assets, held in other banking and financial companies not belonging to the Group, are deducted. Also equity investments in insurance companies and subordinated liabilities issued by the same companies are deducted, if calculated by the issuer for regulatory capital purposes. As an exception to general provisions (50% deducted from Tier 1 capital and 50% from Tier 2 capital), until 31 December 2012 the above elements issued by insurance companies, purchased by the banks before 20 July 2006, are deducted from the total amount of Tier 1 capital and of Tier 2 capital.
Specific prudential filters are applied to both Tier 1 and Tier 2 capital, to safeguard the quality of the regulatory capital and to reduce its potential volatility as a result of the adoption of the new international accounting standards IFRS/IAS.
Each Tier 1 and Tier 2 capital element includes both the share belonging to the Banking Group and the minority interest.
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Tier 1 capital
On 31 December 2009, the Tier 1 capital was primarily made up of share capital, share premiums, equity reserves calculated in keeping with Circular n. 155, net of intangible assets, recognized under item 120 of the balance sheet assets, as well as treasury shares. The Tier 1 capital, in “other positive filters”, incorporates the financial instruments under art. 12 of L.D. n. 185/2008 (aka “Tremonti Bond”). The core capital also includes among its positive elements the allowed portion of 6 equity instruments of the “preference shares” type. An early redemption option is present in all 6 equity instruments, after 10 years of the issuance, subject to the prior authorization of the Bank of Italy.
Tier 2 capital
The Tier 2 capital mainly comprises valuation reserves and subordinated liabilities issued (the allowed portion under the above mentioned regulation), as well as the “preference shares” that cannot be included in Tier 1.
Tier 3 capital
On 31 December 2009 no Tier 3 elements were reported.
For all the above mentioned loans, subordination requires that, in the event of liquidation or receivership, the holders of these securities be repaid only after all other creditors with higher claim have been repaid.
Repayments upon maturity of “hybrid instruments” and early repayment for all subordinated liabilities are subject to the prior authorization of the Bank of Italy.
The main contract characteristics of the above mentioned instruments are described in the following tables.
358 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Illustrated below is a detailed listing of equity instruments included in the Tier 1 capital calculation:
Contribution Issued amount to regulatory ISIN Issuer Type Issue date Maturity Currency Interest rate Redemption modality Coupon (in mln €) capital (in mln €)
21-June-07 21-June- euro 6.756% fixed yearly until June 2017 then 3m 300.00 300.00 After prior approval of the Bank of Italy, bullet Yearly XS0304963373 Banco Popolare Soc.Coop. pref. shs. 2100 Euribor + 188 bp repayment upon maturity or early redemption option after 10 years from issuance. 21-June-07 21-June- euro 6.156% fixed yearly until June 2017 then 3m 350.00 350.00 After prior approval of the Bank of Italy, bullet Yearly XS0304963290 Banco Popolare Soc.Coop. pref. shs 2100 Euribor + 228 bp repayment upon maturity or early redemption option after 10 years from issuance. 6-Mar-00 6-Mar-2049 euro Floating 3m Euribor + 325 bp until March 2010 25.00 22.83 After prior approval of the Bank of Italy, bullet Quarterly XS0108916718 Banco Popolare Soc.Coop. pref. shs then 3m Euribor + 487 bp repayment upon maturity or early redemption option after 10 years from issuance. 29-Dec-00 29-Dec- euro Floating 3m Euribor + 300 bp until December 75.00 75.00 After prior approval of the Bank of Italy, bullet Quarterly XS0122427940 Banco Popolare Soc.Coop. pref. shs 2049 2010 then 3m Euribor + 450 bp repayment upon maturity or early redemption option after 10 years from issuance. 30-June-05 30-June- euro 6.742% fixed yearly until June 2015 then 3m 500.00 498.30 After prior approval of the Bank of Italy, bullet Yearly XS0223454512 Banco Popolare Soc.Coop. pref. shs 2049 Euribor + 525 bp repayment upon maturity or early redemption option after 10 years from issuance. After prior approval of the Bank of Italy, bullet 06-June- Floating 3m Euribor + 130 bp until June 2016 XS0255673070 Banca Italease Spa pref. shs 06-June-06 euro 150.00 145.00 repayment upon maturity or early redemption Quarterly 2049 then 3m Euribor + 230 bp option after 10 years from issuance.
Notes to the consolidated financial statements statements financial consolidated to the Notes 35 35
WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements statements financial consolidated to the Notes 36 36 Illustrated below is a detailed listing of subordinated liabilities included in the Tier 2 capital calculation:
Contribution to Issued amount regulatory ISIN Issuer Type Issue date Maturity Currency Interest rate Redemption modality Coupon (in mln €) capital (in mln €)
Bullet repayment upon maturity if not Yearly converted. Early redemption option from IT0001444360 Banco Popolare Soc.Coop. Sub 20-Mar-00 1-June-10 euro 4.75% fixed on a yearly basis 299.95 59.99 15/6/2005, conditional upon share price and after prior approval of the Bank of Italy 15-June-06 15-June-16 euro 3-month Euribor + 40 bp until June 2011 500.00 495.80 Early redemption option from 15/6/2011 Quarterly XS0256368050 Banco Popolare Soc.Coop. Sub then 3-month Euribor + 100 bp after prior approval of the Bank of Italy 22-Nov-06 22-Nov-16 euro 3-month Euribor + 45 bp until November 250.00 250.00 Early redemption option from 22/11/2011 Quarterly XS0276033510 Banco Popolare Soc.Coop. Sub 2011 then 3-month Euribor + 105 bp after prior approval of the Bank of Italy Early redemption option from XS0284945135 Banco Popolare Soc.Coop. Sub 8-Feb-07 8-Feb-17 euro 3-month Euribor + 35 bp until February 550.00 504.45 8/2/2012 after prior approval of the Bank Quarterly 2012 then 3-month Euribor + 95 bp of Italy XS0215451559 Banco Popolare Soc.Coop. Hybrid 23-Mar-05 23-Mar-15 euro 4.625% fixed on a yearly basis 300.00 298.95 Bullet repayment upon maturity Yearly 3-month Euribor + 25 bp until March Early redemption option from 31/3/2013 Quarterly IT0004328230 Banco Popolare Soc.Coop. Sub 31-Mar-08 31-Mar-18 euro 2013 then 3-month Euribor + 85 bp 500.00 450.98 after prior approval of the Bank of Italy XS0451531346 Banco Popolare Soc.Coop. Sub 9-Sept-09 9-Sept-16 euro 5.7% fixed on a yearly basis 50.00 50.00 Bullet repayment upon maturity Yearly XS0456106912 Banco Popolare Soc.Coop. Sub 7-Oct-09 7-Oct-14 euro 4.5% fixed on a yearly basis 50.00 50.00 Bullet repayment upon maturity Yearly XS0464464964 Banco Popolare Soc.Coop. Sub 12-Nov-09 12-Nov-16 euro 5.473% fixed on a yearly basis 300,00 294.71 Bullet repayment upon maturity Yearly 7-May-07 7-May-12 euro Refi rate 6-month Euribor +37 bp cap 40.00 24.00 Four -year straight-line redemption plan six-month IT0004230378 CR Lucca Pisa Livorno Sub 5.25% floor 2,75% IT0001433322 Banca Popolare di Lodi Hybrid 24-Feb-00 30-June-10 euro 6-month Euribor + 250 bp 219.50 215.35 Bullet repayment upon maturity six-month IT0003053318 Banca Popolare di Lodi Hybrid 15-Dec-00 15-Dec-10 euro 6.75% fixed on a yearly basis 100.00 95.88 Bullet repayment upon maturity Quarterly IT0003053326 Banca Popolare di Lodi Hybrid 15-Dec-00 15-Dec-10 euro 3-month Euribor + 100 bp 50.00 45.79 Bullet repayment upon maturity Quarterly IT0003209969 Banca Popolare di Lodi (ex Reti Bancarie) Hybrid 14-Dec-01 14-Dec-11 euro 5.75% fixed on a yearly basis 50.00 45.37 Bullet repayment upon maturity six-month IT0003210017 Banca Popolare di Lodi (ex Reti Bancarie) Hybrid 14-Dec-01 14-Dec-11 euro 3-month Euribor + 100 bp 75.00 67.71 Bullet repayment upon maturity Quarterly IT0003411821 Banca Popolare di Lodi Hybrid 27-Dec-02 27-Dec-12 euro 5.3% fixed on a yearly basis 100.00 92.87 Bullet repayment upon maturity six-month IT0003411847 Banca Popolare di Lodi Hybrid 27-Dec-02 27-Dec-12 euro 6-month Euribor + 75 bp 182.42 145.46 Bullet repayment upon maturity six-month 29-Apr-05 29-Apr-15 euro 3-month Euribor + 60 bp until April 173.74 157.42 Early redemption option from 29/4/2010 Quarterly IT0003846604 Banca Popolare di Lodi Sub 2010 then 3-month Euribor + 120 bp after prior approval of the Bank of Italy 3-month Euribor + 50 bp until October Early redemption option from 15/10/2009 XS0203156798 Banca Italease Sub 15-Oct-04 15-Oct-14 euro 150.00 62.27 Quarterly 2009 then 3-month Euribor + 110 bp after prior approval of the Bank of Italy 3-month Euribor + 55 bp until June 2011 Early redemption option from 28/06/2011 XS0259400918 Banca Italease Sub 28-June-06 28-June-16 euro 125.00 81.94 Quarterly then 3-month Euribor + 115 bp after prior approval of the Bank of Italy
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B. Quantitative information
B.1 Consolidated shareholders’ equity: breakdown by type of company
Netting and Banking Insurance Other (thousands of euro) adjustments on 31/12/2009 group companies companies consolidation
1. Share capital 2,443,987 - 4,925 - 2,448,912 2. Equity instruments 1,452,534 - - - 1,452,534 3. Share premium reserve 4,917,692 - 2,031 - 4,919,723 4. Reserves 3,138,553 - -103,815 -8,169 3,026,569 5. (Treasury shares) -31,214 - 0 - -31,214 6. Valuation reserves 38,153 - -404 - 37,749 Financial assets available for sale 50,375 - 0 - 50,375 Property and equipment - - 1,414 - 1,414 Intangible assets - - 0 - - Hedging of foreign investments -50 - 0 - -50 Cash flow hedging 2,572 - -1,818 - 754 Foreign exchange differences - - - - - Non-current assets held for sale - - - - - Actuarial gains (losses) on defined benefit - - - - - pension plans Share of valuation reserves connected with -17,058 - - - -17,058 investments carried at equity Special revaluation laws 2,314 - - - 2,314 7. Group’s net income (loss) for the year 253,589 - -5,344 9,694 257,939 and minority interests Shareholders’ equity 12,213,294 - -102,607 1,525 12,112,212
B.2 Valuation reserves of financial assets available for sale: breakdown
Netting and Banking group Insurance companies Other companies adjustments on 31-Dec-2009 (thousands of euro) consolidation Positive Negative Positive Negative Positive Negative Positive Negative Positive Negative reserve reserve reserve reserve reserve reserve reserve reserve reserve reserve
1. Debt securities 17,248 -38,872 ------17,248 -38,872 2. Equity securities 116,012 -38,606 ------116,012 -38,606 3. UCITS units 2,610 -8,017 ------2,610 -8,017 4. Loans ------Total 135,870 -85,495 ------135,870 -85,495 Total t-1 86,932 -95,623
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B.3 Valuation reserves of financial assets available for sale: annual changes
Debt Equity UCITS (thousands of euro) Loans securities securities units
1. Opening balance -61,877 62,074 -8,888 - 2. Positive changes 57,757 65,310 12,454 - 2.1 Fair value increases 56,520 61,657 6,552 - 2.2 Reversal through profit and loss of negative reserves: 170 331 1,325 - - impairment 0 88 1,192 - - disposal 170 243 133 - 2.3 Other changes 1,067 3,322 4,577 - (of which business combinations) 1,067 - - - 3. Negative changes -17,504 -49,978 -8,973 - 3.1 Fair value decreases -7,674 -43,680 -6,789 - 3.2 Impairments - - - - 3.3 Reversal through P&L of positive reserves: disposal -381 -5,314 -585 - 3.4 Other changes -9,449 -984 -1,599 - (of which business combinations) -686 - - - 4. Closing balance -21,624 77,406 -5,407 -
2.3 Capital adequacy
A. Qualitative information
Under the prudential regulation better known as “Basel 2”, the total capital requirement is the sum of the capital requirements required as a result of the credit, counterparty, market and operational risks. These requirements in turn are the result of the sum of the individual requirements of the companies belonging to the Supervisory Group, stripped of the intercompany relations on credit and counterparty risks.
For credit and counterparty risks and market risks we adopted the “standard approaches”. With regard to operational risk, the Group adopted the “combined approach”, as most Group companies used the “standard approach”, but some minor Companies used the “Base approach”.
Gruppo Banco Popolare’s capital management policies aim on the one side at guaranteeing that the capital base be consistent with the total risk measure, with regulatory constraints, with the target rating and with corporate development plans, on the other side at optimizing the capital makeup, namely the set of elements making up regulatory capital, by selecting a mix of suited financial instruments to minimize the cost of capital.
B. Quantitative information
The first update to Circular 262 (“Bank financial statements: layout and compilation rules”), issued on November 2009, established that in case of standardized method the “unweighted amounts” must correspond to the value of the exposure including prudential filters, risk mitigation techniques and credit conversion factors (E* in supervisory reports times the credit conversion factors in case of guarantees and commitments). The capital adequacy tables have been made compliant with the new regulations, including amounts referring to 31/12/2008.
The new definition does not change in practice the current results and the results published in the past.
The Group complies with the minimum capital requirement of 8 % of risk-weighted assets.
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Total Regulatory capital 31/12/2009 31/12/2008
A. Tier 1 prior to the adoption of prudential filters 6,555,670 5,808,496 B. Tier 1 prudential filters: B.1 Positive IAS/IFRS prudential filters (+) 1,450,000 - B.2 Negative IAS/IFRS prudential filters (-) 257,585 505,068 C. Tier 1 gross of deductions (A + B) 7,748,085 5,303,428 D. Deductions from core capital 623,300 581,242 E. Total core capital (TIER 1) (C – D) 7,124,785 4,722,186 F. Tier 2 prior to the adoption of prudential filters 3,563,584 3,515,705 G. Tier 2 prudential filters: G.1 Positive IAS/IFRS prudential filters (+) - - G.2 Negative IAS/IFRS prudential filters (-) 47,113 24,025 H. Tier 2 gross of deductions (F + G) 3,516,471 3,491,680 I. Deductions from supplementary capital 623,300 581,242 L. Total supplementary capital (TIER 2) (H – I) 2,893,171 2,910,438 M. Deductions from total Tier 1 and Tier 2 60,000 60,000 N. Regulatory capital (E + L – M) 9,957,956 7,572,624 O. Tier 3 - 242,878 P. Regulatory capital including TIER 3 (N+O) 9,957,956 7,815,502
Weighted amounts / Unweighted amounts CATEGORIES/AMOUNTS requirements 31/12/2009 31/12/2008 31/12/2009 31/12/2008
A. RISK ASSETS A.1 Credit and counterparty risks 1. Standard approach 197,392,624 143,924,621 93,674,444 63,176,813 2. Internal Rating Based approach 2.1 Base - - - - 2.2 Advanced - - - - 3. Securitizations 11,159,502 3,287,232 4,921,159 2,954,169 B. Capital adequacy requirements B.1 Credit and counterparty risks 6,548,573 5,163,387 B.2 Market risks 1. Standard approach 352,219 340,166 2. In-house models - - 3. Concentration risk - - B.3 Operational risks 1. Base approach 38,935 - 2. Standard approach 470,134 409,041 3. Advanced approach - - B.4 Other prudential requirements - - B.5 Other calculation elements - - B.6 Total prudential requirements 7,409,861 5,912,594 C. Risk assets and solvency ratios C.1 Risk weighted assets 92,623,263 73,907,425 C.2 Tier 1/ Risk weighted assets (Tier1 capital ratio) 7.69% 6.39% Regulatory capital (including Tier 3)/ Risk weighted assets (Total C.3 10.75% 10.57% capital ratio)
The unweighted exposure to securitizations is the sum of the nominal amounts of all junior, mezzanine and senior notes held in the portfolios of the Group companies. The shown amount includes the senior tranches purchased by the Parent company in self-securitizations. The increase over the prior year is attributable for about 6 billion to originated securitizations finalized during the year, and for 2 billion to the acquisition of Banca Italease.
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SECTION G -BUSINESS COMBINATIONS
Sub-section 1 – Business combinations performed during the year
1.1 Business combinations
Banca Italease
The acquisition of the Group led by Banca Italease was finalized in July, and on 31 December 2009 Gruppo Banco Popolare held a 91.23% interest. The stake held before the acquisition was 30.72%. As described in the section devoted to noteworthy events for the period and in the report on operations, the 60.51% shareholding increase is the result of a plan to reorganize and restructure the business activities of Banca Italease, that was implemented along the following stages: - launch of a voluntary tender offer on all Banca Italease shares, approved on 15 March 2009, and completed in July, leading to a 57.41% interest increase after a subsequent extension of the offer; - subscription of the capital increase, totaling 1.2 billion, to reconstitute the share capital after the incurred losses and restore regulatory capital ratios. Including the exercise of unexercised rights, the shareholding in Banca Italease’s capital in December increased by an additional 3.1%.
The table below provides some details regarding the combination. Note that the shown interest refers to the stake acquired upon completion of the Tender Offer; the same is for the transaction cost:
Group net Group net Date of the Transaction Total acquired Total Group loss for loss for (million euro) transaction cost stake (%) revenues the year the period (1) (2) (3) (4) (5) (6)
Banca per il Leasing - Italease S.p.A. 08/07/2009 147.5 57.408% 187.7 -276.2 -276.2 (1) Date on which control was acquired (2) Cost including already accounted for accessory charges (3) Percentage interest acquired with voting right in GAM (4) Net interest and other banking income in FY 2009 (5) Loss reported by Gruppo Italease in FY 2009 (6) Loss reported by Gruppo Italease as of the acquisition date
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Shown below are the book and accounting values of the acquired assets and liabilities:
(million euro) Book value Fair value
Assets Financial assets held for trading 161.4 161.4 Financial assets available for sale 59.4 59.4 Due from banks 1,179.5 1,179.5 Loans to customers 18,840.4 18,840.4 Hedging derivatives 150.1 150.1 Investments in associates and in companies subject to joint control 2.0 2.0 Property and equipment 138.2 166.5 Intangible assets 7.6 6.5 Tax assets 149.6 149.6 Non-current assets held for sale and discontinued operations 133.7 (*) 154.3 Other assets 568.1 568.1 Total assets 21,390.0 21,437.8 Liabilities Due to banks 8,669.2 8,669.2 Due to customers 222.4 222.4 Securities issued 11,646.5 11,286.3 Financial liabilities held for trading 144.4 144.4 Hedging derivatives 122.1 122.1 Liabilities associated with non-current assets held for sale and discontinued operations 75.6 75.6 Other liabilities 165.1 165.1 Employee termination benefits 9.3 9.3 Provisions for risks and charges 86.5 186.5 Tax liabilities (on differences between fair and book values) 98.3 Total liabilities 21,141.1 20,979.2 Minority interests 0.2 19.3 Gruppo Banca Italease’s shareholders’ equity at the date of acquisition 248.7 439.3 (*) This amount represents the sum of the book value of 133.7 million recognized for real estate assets that Banca Italease had classified as available for sale on 30 June 2009, and the potential gain on disposal of the Factorit stake, totaling 20.6 million, corresponding to the difference between the estimated net realizable value and the carrying amount. To this regard, for the purpose of the PPA, Gruppo Banco Popolare considered Factorit as a discontinued operation as a result of a restructuring plan aiming at disposing non-core assets. Since it turns out to be impossible to post the above gain in the specific assets and liabilities items that incorporated Factoring in Banca Italease’s financial situation on 30 June 2009, as a result of its line-by-line consolidation, it was decided to recognize it conventionally in the item “Non-current assets held for sale and discontinued operations”.
After the business combination, a plan was developed to restructure and reorganize the business activities of Gruppo Banca Italease, as described in the report on operations in “Noteworthy events for the year”.
Relevant accounting standard – IFRS 3 (2004 version)
Upon finalizing the Tender Offer, on 8 July 2009 Banco Popolare acquired control over Banca Italease and all its subsidiaries. The transfer of control indicates a business combination, falling under IFRS3 for the purpose of accounting treatment. As explained in Section A Accounting policies, the Group did not elect to early adopt the new version of IFRS 3, transposed with EC Reg. n. 495 of 3 June 2009, and mandatorily effective as of financial years starting 1 July 2009 (i.e., FY 2010 for Gruppo Banco Popolare). Therefore the IFRS 3 version adopted for the recognition of the combination of Banca Italease was the one transposed with EC Reg. n. 2236/2004. Under IFRS 3, the purchase price allocation must be definitively quantified by 1 July 2010, i.e., within maximum twelve months of the acquisition date. To this regard, note that at the balance sheet date the purchase price allocation can be considered definitive. Since after the acquisition in the third quarter report as at 30 September 2009 we opted to allocate the purchase price temporarily in a specific equity item called “Temporary acquisition difference”, it was then necessary to restate the balance sheet and P&L situation referring to that date to retroactively reflect the effects produced by the recognition of the business combination in compliance with the relevant accounting standard.
Step acquisition
As already explained, the acquisition of Banca Italease was made in steps (so called step acquisition), considering that on 31 December 2008 the Group held a minority interest of 30.72%, accounted for using the equity method under IAS 28. Only upon completion of the Tender Offer on 8 July 2009, the equity interest rose to 84.45%, thus leading to the acquisition of control. Under IFRS 3, if control is achieved through more than one exchange transaction, it is necessary to calculate the
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goodwill/badwill for each exchange transaction, based on the cost of the single transaction and on the share of acquired net assets based on their fair values at the exchange date. At the time of the business combination, meaning the date of acquisition of control, the share of assets and liabilities acquired before the acquisition of control must be reassessed based on the fair value of the net assets at the acquisition date, recognizing the associated revaluations/write-downs through equity. For the acquisition of Banca Italease, the measurement of the cost of the business combination and its allocation to net assets based on the fair value of each exchange transaction is null, because in the 2008 financial statements the equity interest held in Banca Italease had been impaired to bring the carrying value in line with the estimated realizable value, that was matched to the value of the Tender Offer, which turned out to be lower than the fair value measured under IFRS 3. This would entail a lower impairment of the carrying value of the equity investment recognized in the past. Similarly, note that the main fair value change against the book values is attributable to bonds issued by Banca Italease, mostly sold after the acquisition of the first equity interest. For this reason, we believe that conceptually there is no fair value change to be carried at equity associated with the liabilities acquired before the acquisition date. In the light of the above considerations, the business combination was recognized as if the entire equity interest (84.45%) had been acquired upon finalizing the Tender Offer (8 July 2009). For the sake of simplicity, the acquisition date was made to coincide with the starting date of the second half of the year (1 July 2009), so that we could refer to the accounting data reported in the half-year report as at 30 June 2009 already prepared by Banca Italease.
Recognition of purchases after the acquisition date
After 8 July 2008, Banco Popolare further increased its equity interest in Banca Italease by acquiring a 3.68% stake on 22 July 2009 at the end of the tender offer extension period. An additional 3.1% interest was acquired on 31 December 2009, after the capital increase approved by Banca Italease, owing to the failure by some minority shareholders to subscribe the capital increase. The 2004 version of IFRS 3 does not specifically prescribe how to account for subsequent purchases after the acquisition date. Note, that all purchases carried out in 2009 have been considered as a single business combination finalized on the conventional date of 1 July 2009, based on the book value of the shareholders’ equity of Banca Italease on 30 June 2009, as already explained before, since all purchases carried out in 2009 were instrumental to the achievement of a joint plan to reorganize and restructure the business activities of the bank and were all carried out in a time period close to the acquisition date, which, by the way, justifies the correspondence of all the values under examination.
Measurement and allocation of the business combination cost
IFRS 3 prescribes that at the acquisition date the cost of the combination must be identified and then allocated to the acquiree’s assets, liabilities and contingent liabilities identifiable at the acquisition date and measured at fair value. The cost incurred to acquire Banca Italease came in at 225.1 million, by summing 77.6 million representing the carrying amount of shares held on 31 December 2008 to the 145 million consideration paid to purchase additional shares during the Tender Offer and to the accessory acquisition charges of 2.5 million. Against this cost, the book value of the shareholders’ equity of the companies belonging to the acquired Gruppo Italease amounted to 226 million.
The recognition of the transaction provides for the cost of the business combination as measured above to be allocated on the basis of a precise sequence: 1. to the single assets and liabilities of the companies of Gruppo Italease, if the book values of these assets and liabilities as shown in the financial statements as at 30 June 2009 differ from their fair value. As the recognition of these assets and liabilities at fair value produces a mismatch between the book value and the fiscal value of the assets and liabilities, pursuant to IAS 12, a deferred tax asset or liability must be recognized corresponding to said differences; 2. for any contingent liability that had not been recognized in the financial statements of the companies of Gruppo Italease as at 30 June 2009; 3. to any specific intangible assets with a definite or indefinite life net of the related tax effect; 4. the residual to goodwill gross of tax effect. This stage of the allocation process is based on a preliminary carving out of assets and liabilities likely to show significant differences between their fair values and their book values. To carve them out, we considered all the available information provided by the Group, and as an important, albeit not exclusive, reference point we took the differentials between the book and fair values highlighted in the consolidated half-year report of Banca Italease as at 30 June 2009. Additional useful data was acquired by analyzing the documents and the evaluations carried out during the reorganization process involving Banca Italease, during which important transactions were finalized (business lines transfers to newly formed companies - Release and Alba Leasing – held by third party shareholders with respect to Banco Popolare), or are being finalized (sale of Factorit, company real estate, etc.).
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The assets and liabilities recognized in the financial statements of Banca Italease as at 30 June 2009 that presented a difference between their book and fair value are mainly associated with: property; some assets, whose sale started to be negotiated in second half, basically connected to the interest held in Factorit; securities issued; liabilities associated with securitization agreements.
The fair value of property was calculated based on appraisals or on the realizable value in case of sale. The difference between the fair value and the book value shall be recognized through the consolidated income statement as a result of the depreciation, sale, or, for property with a lower value, after the recognition of the impairment by Banca Italease. For the subsidiary Factorit the fair value was calculated based on ongoing negotiations with market counterparties; the difference shall be recognized at the time of the sale finalization. For securities issued, represented by liabilities issued in the name of the issuer Banca Italease, the fair value was calculated, in the presence of significant repurchases, based on the repurchase prices or, in the absence of transactions, by considering observable market parameters referring to the entity or to peer entities with similar characteristics. The lower fair value as compared to the carrying value is mainly due to the deterioration of the creditworthiness after the issue date. When quantifying this impact, we considered that its market parameters on 1 July 2009 were clearly distressed, due to the difficult situation Banca Italease was experiencing and the uncertainty regarding its reorganization. After its combination into Gruppo Banco Popolare, we took Banco Popolare’s credit spreads at the acquisition date as a reference, also considering that the latter have been negatively impacted by the vicissitudes with Banca Italease. The lower value assigned to these liabilities in the consolidated financial statements will lead to the recognition of higher interest expense as a result of the application of the amortized cost method. Moreover, to allocate the purchase price we also had to consider the commitment made by Banco Popolare towards Banca Popolare dell’Emilia Romagna, Banca Popolare di Sondrio, Banca Popolare di Milano under the framework agreement signed on 15 March 2009, that translated into the securitized loans agreement signed by Banca Italease and Alba Leasing on 24 December 2009. This commitment was valued 100 million, against which a specific provision for risks and charges was set aside. This provision was derecognized on 31 December 2009, after the consolidation of Banca Italease which recognized this same provision in its accounts. For a more detailed description of the commitment and its representation in the consolidated financial statements, see Section B – Sub-section 12 of these explanatory notes. Finally, no intangible assets were identified (such as client relationship, brand name), that could give rise to future economic benefits and whose fair value can be reliably measured.
The negative goodwill arising from the PPA of Banca Italease
As a result of the above described purchase price allocation (PPA) process, an excess value was identified between the acquisition cost and the share in the fair value of identifiable assets, liabilities and contingent liabilities, net of tax effect (negative goodwill or badwill). This situation, justified by the fact that Banca Italease is a distressed company, is caused essentially by two factors: - the lower fair value of the bonds issued by Banca Italease as compared to their book value; - the absence of goodwill or other intangible assets associated with the company’s operating and financial imbalance, which is the reason underlying the acquisition.
The negative goodwill that emerged from the described PPA process totaled 191.5 million and was immediately recognized through profit and loss in “other operating income”. The table with the breakdown of other operating income in Section C of these explanatory notes shows this revenue separately in the sub-item “Income from the acquisition of Banca Italease”.
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The table below summarizes the purchase price allocation of Banca Italease.
Summary of the purchase price allocation process (PPA) 01-July-09 (million euro)
Cost incurred to purchase the share 222.6 Accessory purchase charges 2.5 Cost of combination (A) 225.1 Acquired share of consolidated book value (B) 226.0 Differences between the book value and the fair value of assets and liabilities Property and equipment 28.3 Intangible assets - 1.1 Non-current assets held for sale and discontinued operations 20.6 Securities issued 360.2 Provisions for risks and charges - 100.0 Tax liabilities (on differences between fair and book values) - 98.3 Minority interests - 19.1 Acquired share of differences between the book and fair values of assets and liabilities (C) 190.6 Difference between the acquisition cost and the share of shareholders’ equity measured at fair value (badwill) recognized in 191.5 Other Operating Income (B) + (C) - (A)
The following table shows the accounting effect of recognition through profit and loss in the second half of 2009 of the mismatches between the book values recognized in the separate financial statements of Banca Italease’s subsidiaries and the values recognized in the consolidated financial statements after the business combination:
Reclassified income statement
(million euro)
Interest margin (60.7) Net interest, dividend and similar income (60.7) Net financial income (69.6) Other operating income (69.6) Net interest and other banking income (130.3) Net impairment of tangible and intangible assets 7.0 Operating expenses 7.0 Profit on operations (123.3) Provisions for risks and charges 100.0 Profits (losses) on equity and other investments (7.2) Income (loss) before tax from continuing operations (30.5) Tax on income from continuing operations 14.6 Income (loss) after tax from continuing operations (15.9) Income (loss) after tax from discontinued operations (0.4) Net income for the period (16.3) Minority interests 1.5 Parent company’s net income (loss) (14.8)
Other business combinations
As illustrated in Section A of these Explanatory notes, Sub-section 3 – Consolidation scope and method, during the year a number of mergers were formalized under the Group’s reorganization plan. In particular, on 27 March the merger by acquisition of the subsidiary Bipitalia Alternative into Bipielle Finanziaria was finalized; the deal was instrumental to the following merger on 31 March of Bipielle Finanziaria into Holding di Partecipazioni Finanziarie Banco Popolare. At the end of September we formalized the mergers of Bipitalia Broker and Efimmobiliare into Holding di Partecipazioni Finanziarie Banco Popolare, while in December the real estate companies Andromeda, Antares, Antilia, Azimuth, Pegaso and Perseo were merged into Bipielle Real Estate and Crifefi Sim into Banca Aletti. These transactions were accounted for based on the predecessor values method, since they were combinations among companies under joint control (owned 100%), as described in the accounting policies in Section A of these Explanatory notes. As a result, any reference to business combinations in the tables of Section B and Section C of these Explanatory notes refers to Banca Italease.
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Sub-section 2 – Business combinations after the balance sheet date
2.1 Business combinations
No business combinations were conducted after the balance sheet date.
Sub-section 3 – Retrospective restatements
Upon completing the purchase price allocation (PPA) of the business combination of the Group led by Banca Italease, we reassessed the effects of the above allocation with reference to data as at 30 September 2009. The impact of the restatement as at 30 September 2009 are illustrated in the consolidated Report on Operations, in the section devoted to the operating performance.
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SECTION H – INFORMATION ON TRANSACTIONS WITH RELATED PARTIES
1. Information on compensation of Directors and Top managers with strategic responsabilities
The table below illustrates the compensation paid to top managers with key responsibilities, namely managers who, directly or indirectly, have the power and the responsibility to plan, manage and control the business activities of the Group companies (directors, statutory auditors, general managers and other managers meeting the above characteristics). In total, 450 people fall under this category.
(thousands of euro)
Total annual gross compensation 2009 40,317 Share of profit FY 2009 (if any) - Short term benefits (e.g., car, lodging, accident insurance, health insurance) 1,542 Post-employment benefits (e.g., pension fund, supplementary pension scheme) 426 Long-term benefits (if any) - Employee termination benefits (e.g., termination benefits, other benefits) 3,555 Share-based payments (e.g., stock options/stock grants assigned during the year, share-based bonuses) -
2. Information on transactions with related parties
Banco Popolare adopted the “Enacting rules referring to the notion of related parties under IAS 24” – approved by the Management and Supervisory Boards – and effective for Banco and for all the companies of the Group. The above “Enacting rules” prescribe that Gruppo Banco Popolare shall adopt the definition of “related party” as provided by IAS 24 and set out the following operational criteria to identify related parties: a) Companies under significant influence and joint control: enterprises in which directly or indirectly the reporting enterprise owns at least a 20% interest in the voting power exercisable in the GAM, or 10% if shares are listed on regulated markets and any other company or entity eligible as related party under IAS 24; b) Key managers with strategic responsibilities: in addition to the members of the Management and Supervisory Boards of the Parent company and the members of the Boards of Directors and Boards of Statutory Auditors of the companies of the Group, this category includes also the General Manager/s, the heads of Parent company Departments (at present, Corporate – Retail – Lending – Finance Corporate Center and Equity Investments – Legal Affairs and Compliance – Operations – Human Resources) and Top managers under the Articles of Association (for ex., the manager responsible of preparing the corporate financial reports, the Head of the Internal Audit Function, the Compliance Manager); any other officers at the head of structures as might be identified by the Management Board / Board of Directors; c) Close relatives: unless otherwise stated in writing by the manager, under his own responsibility and with an analytical explanation of the reasons why they are not influential: the spouse, the domestic partner (including cohabitants not indicated in the family certificate), children of the individual, the spouse or the domestic partner, dependants of the individual, the spouse or domestic partner. Related party is any other person that may be expected to influence, or be influenced by the individual in dealings with Banco or with the other Group companies; d) Shareholding relations or strategic roles connected with top managers and their close family members: entities in which top managers and their close relatives hold a controlling interest under art. 2359, paragraph 1, civil code, or at least 20% of the voting powers exercisable in the GAM, or 10% if the company is listed on regulated markets, or if they fill the office of Chairman of the Supervisory Board, Chairman of the Management Board, Chairman of the Board of Directors, Chief executive officer or executive officer with delegated powers are considered related parties. e) Pension funds for the employees of Banco Popolare: i.e., the Pension funds for the Group staff and for any other related entity; f) Owners of a significant interest: Mutual funds or other authorized individuals, who are shareholders and own a stake of over 2% in the share capital of Banco Popolare. Also individuals who do not belong to the Group and hold a stake of over 2% in the other companies of the Group are considered related parties. The Board of Directors of the company may increase or decrease said percentage, explaining the reasons for doing so with respect to the significance of the shareholding; g) Individuals who are in a position to appoint members of the Supervisory Board or of the Board of Directors: individuals, who under the articles of association or shareholding agreements, can appoint one or more directors of other companies.
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Financial and commercial relations between subsidiaries and companies under a significant influence and jointly controlled companies.
Financial and commercial relations with related parties fall under the normal course of business and are carried out at arm’s length.
The table below shows the P&L and financial relations outstanding on 31 December 2009 with companies under a significant influence and jointly controlled companies, as well as with key managers (including governance boards) and other related parties.
Entities Managers exercising a Other % of Joint with key (thousands of euro) significant Associates related TOTAL consolidat- venture responsib- influence parties ed income ilities (1)
Financial assets held for trading - 6,046 - 999 28,733 35,778 0.30% Financial assets designated at fair value ------0.00% Financial assets available for sale - 499 - - 111,118 111,617 5.43% Investments held to maturity ------0.00% Due from banks - 885,617 - - - 885,617 9.26% Loans to customers - 1,228,328 - 450,267 687,506 2,366,101 2.48% Hedging derivatives ------0.00% Other assets - 28,315 - 240 890 29,445 0.20% Due to banks - 61,245 - - 3,100 64,345 0.76% Due to customers - 276,162 10,215 119,925 260,601 666,903 1.25% Securities issued - - - 488 209,297 209,785 0.83% Financial liabilities held for trading - 624,189 - 26 14,135 638,350 16.46% Financial liabilities designated at fair value - 195,167 - 232 18,639 214,038 0.80% Hedging derivatives ------0.00% Other liabilities - 9,869 - 1,967 1,589 13,425 0.23% Guarantees given and commitments - 2,176 - 131,734 81,114 215,024 1.58%
(1) Shareholding funds or other authorized entities holding a greater than 2% interest
Entities Managers exercising a Other % of Joint with key (thousands of euro) significant Associates related TOTAL consolidat- venture responsib- influence parties ed income ilities (1)
Interest margin - 34,457 - 3,963 -20,777 17,643 0.90% Net fees and commissions - 270,660 - 1 - 270,661 22.05% Dividend and similar income - 22,065 - - - 22,065 3.94% Administrative expenses - -8,609 - -240 -9,037 -17,886 0.69% Other costs / revenues - 14,704 - - -4,691 10,013 -1.13% (1) Shareholding funds or other authorized entities holding a greater than 2% interest
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Other transactions with related parties
The table below shows other relations - provision of goods and services and real estate transactions – conducted with related parties shown in the above table under “managers with key responsibilities” and “other related parties”.
Purchase and sale of Leases Leases (thousands of euro) goods and (receivable) (payable) services a) Directors - - - b) Managers with key responsibilities 9 17 7 c) Close relatives of individuals under letters a) and b) - - - d) Subsidiary, associated company, or under significant influence of individuals under letters a) - b) 8,980 1,097 487
Economic relations with Top Managers, Traders, Directors and Statutory Auditors
In compliance with art. 12 bis of Banco Popolare’s Ethical Code, illustrated below are the compensations paid to Top Managers, Traders, and members of the Managing and Governance Boards of Banco Popolare.
Compensation of members of the Supervisory Board and the Management Board of Banco Popolare
For a detailed illustration of compensations paid to the members of the management and supervisory boards of Banco Popolare, please refer to the section H of the notes to the statutory financial statements.
Compensation of Top Managers of Banco Popolare
For detailed information on the compensation of the top managers who are executive members of the Management Board (Mr. Franco Baronio, Mr. Alfredo Cariello, Mr. Domenico De Angelis, Mr. Maurizio Di Maio, Mr. Maurizio Faroni, Mr. Enrico Maria Fagioli Marzocchi (until 29/01/2009), Mr. Massimo Minolfi (until 6/04/2009), Mr. Giorgio Papa (since 28/07/2009)) and of the key managers of Banco Popolare, namely the Heads of the 7 Head Departments Corporate – Retail – Lending – Finance, Corporate Center and Equity investments – Legal affairs and Compliance – Operations – Human Resources) and the heads of the Group Audit, Risk Management and Administration and Financial reporting Services, please see section H of the Parent company's explanatory notes.
Banco Popolare’s Top Managers other than those mentioned above, are in charge of the Services reporting directly to the CEO: Corporate Secretary Office, Communications and External Relations, Quality (until 16/09/2009) and Assistant to the CEO (until 18/12/2009). The compensation of the above top managers are illustrated in the table below:
(thousands of euro)
Total gross compensation FY 2009 820 Total gross compensation retained for offices filled in the interest of the Group - Short-term benefits - car 53 - lodging 71 - accident insurance 1 - health insurance 4 Post-employment benefits - pension fund 10 - supplementary pension scheme - Termination benefits - termination benefits 54 Share-based payments - stock grants assigned during the year -
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Compensation of Top Managers of the main companies of Gruppo Banco Popolare
The table below shows the compensation paid to Top Managers1, other than those identified in the previous paragraphs, of the main companies of Gruppo Banco Popolare2. In total, 51 people fall under this category. The amounts shown include all the activities carried out by the above managers in the Group.
(thousands of euro)
Total gross compensation FY 2009 11,513 Total gross compensation retained for offices filled in the interest of the Group 279 Short-term benefits - car 529 - lodging 299 - accident insurance 15 - health insurance 88 Post-employment benefits - pension fund 241 - supplementary pension scheme - Termination benefits - termination benefits 613 Share-based payments - stock grants assigned during the year -
Compensation to Traders of Gruppo Banco Popolare
The tables below show the compensation of Traders of Gruppo Banco Popolare; it does not include the compensation of officers who also fill the office of “Top Mangers” in Gruppo Banco Popolare main companies, as already included in the previous table. Under art. 12 of the Ethical Code, the “Traders” category includes employees who received an all-inclusive annual compensation equal or above 200,000, totaling 9 people.
(thousands of euro)
Total gross compensation 2,504 Total gross compensation retained for offices filled in the interest of the Group - Short-term benefits - car 59 - lodging 21 - accident insurance 3 - health insurance 18 Post-employment benefits - pension fund 42 - supplementary pension scheme - Termination benefits - termination benefits 98 Share-based payments - stock grants assigned during the year -
1 Top Managers are the Managing Directors, the General Managers, the Co-General Managers and Vice General Managers of the companies of the Group and the managers reporting directly to the CEO of the Parent company. 2 Aletti & C. Banca d'Investimento Mobiliare SpA, Aletti Fiduciaria SpA, Aletti Gestielle Alternative SGR SpA, Aletti Gestielle SGR SpA, ATL Auto Trading Leasing IFN S.A., Banca Aletti & C. (Suisse) SA, Banca Caripe SpA, Banca Italease SpA, Banca Popolare di Crema SpA, Banca Popolare di Cremona SpA, Banca Popolare di Lodi SpA, Banca Popolare di Novara SpA, Banca Popolare di Verona S.Geminiano e S.Prospero SpA, Banco Popolare Ceska Republika A.s., Banco Popolare Croatia d.d., Banco Popolare Hungary Zrt, Banco Popolare Luxembourg S.A., Bipielle Real Estate SpA, BP Property Management Soc.Cons. a r.l., Cassa di Risparmio di Lucca Pisa Livorno SpA, Credito Bergamasco SpA, Efibanca SpA, Factorit SpA, Holding di Partecipazioni Finanziarie BP SpA, Mercantile Leasing SpA, Nazionale Fiduciaria SpA, Release SpA, Società Gestione Crediti BP Soc.Cons.p.A., Società Gestione Servizi BP Soc.Cons.p.A..
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SECTION I –SHARE-BASED PAYMENTS
1. Description of share-based payment agreements
Stock option plan
QUALITATIVE INFORMATION
The Board of Directors of former Banca Popolare di Verona – Banco S.Geminiano e S.Prospero on 23 October 2001 had approved the main guidelines of a Stock Option Plan for the managers of the Bank and of the Group, giving the Board of Directors, under art. 2443 of the civil code, the faculty to carry out a dedicated share capital increase to the exclusive service of the approved Plan. Said decisions were then approved by the Special Meetings for the merger of Banca Popolare di Verona – Banco S.Geminiano e S.Prospero and Banca Popolare di Novara held on 9 March 2002, leading to the formation of Banco Popolare di Verona e Novara. The same Shareholders had then granted the Board of Directors of Banco Popolare di Verona e Novara the faculty to carry out a capital increase exclusively to service the plan for a maximum nominal amount of 26,431,362 euro through the issue of max 7,342,045 common shares. In compliance with the above mentioned mandates, on 2 July 2002 the Regulations of the stock option plan of Banco Popolare di Verona e Novara were approved. The plan aimed at fostering a teamwork approach across its management, with a strong focus on the Group’s strategic objectives, as well as at increasing the Group’s ability to retain its most valuable human resources and to cater for the best talents present on the market. The plan provides for the grant of registered, personal and non transferable rights to subscribe newly issued Banco common shares to those managers who, according to the Board of Directors’ undisputable opinion, may have a relevant impact upon the success and the results achieved by Banco and by the Group at large. The plan envisages three yearly grant cycles. Granted options can be exercised later after three years from the grant and within the following three years thereon, provided that on the exercise date there is still an outstanding employment relationship with any one company of the Group. The option exercise price shall not be lower than the greater between the share normal and nominal values. The normal value is the mean of the prices registered by the Milan Stock Exchange in the time window between the option grant date and the same date of the solar month before the grant. On the same date, the validity was confirmed – and hence the suspension clause discontinued – of the effects of a total of 2,668,000 options already granted on 26 January 2002 to managers of Gruppo Banca Popolare di Verona - Banco S.Geminiano e S.Prospero, based upon the resolutions passed by its Board of Directors. As a result, said options shall still bear their effects on Banco Popolare di Verona e Novara upon a one to one exchange ratio between shares of Banca Popolare di Verona - Banco S.Geminiano e S.Prospero and those of Banco Popolare di Verona e Novara. The exercise price of said options is that fixed at the time of their original grant, equal to €11.248 per share. On the same date, the completion of the first grant cycle was approved, with the grant of further 1,122,000 options, with an exercise price of €13.4 per share. The second grant was carried out in financial year 2003, with the grant of 1,241,000 new options at the average exercise price of 10.55 euro, while 823,500 options were cancelled because the managers to whom they had been granted have left the company. In financial year 2004, 2,572,000 additional new shares have been granted at the exercise price of 13.73 euro, while again as a result of the resignation of granted managers, 21,000 were cancelled. In May 2005, a total of 1,020,500 options were exercised; during the year, 70,000 options were cancelled and no new grants were carried out. During 2006 the vesting period for the second tranche of the plan ended and as a result between 1 and 30 June 2006 (calendar month following the month in which the General Meeting was held) beneficiaries could exercise the above options and the residual options from the first tranche that had not been exercised yet. On said occasion, a total of 2,392,500 options were exercised, against which on 3 July 2006, 2,392,500 new shares were issued. In 2006, n. 28,000 options were cancelled and no new grants were carried out. Finally, in first half 2007 the vesting period for the third tranche of the plan ended and as a result the beneficiaries exercised said options, together with the residual options from the first and second tranche that had not yet been exercised. On said occasion, a total of 1,086,250 options were exercised, against which on 19 June 2007, 1,086,250 new shares were issued. In 2007, no options were cancelled and no new grants were carried out. Upon approving the Merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana, leading to the formation of Banco Popolare Società Cooperativa, the shareholders of BPVN and BPI, on 10 March 2007, gave mandate to the Management Board to carry out a capital increase for the newly formed Banco Popolare to service the stock option plan for a max. number of shares corresponding to the number of assigned options that on that date had not been exercised yet. In financial year 2008 (June 2008, calendar month following the month of the General Annual Meeting), no stock option holder exercised his/her options, therefore it was not necessary to carry out a capital increase. In particular, n. 55,000 options belonging to the 1st tranche were extinguished as they were not exercise in compliance with the Regulation by 30 June 2008. In May 2009 (i.e., the time of the year corresponding to the calendar month following the month of the General Annual meeting) no stock option holder exercised his/her options, therefore it was not necessary to carry out a capital increase. As a result, in 2009 n. 647,500 belonging to the 1st and 2nd tranche were extinguished, as they were not exercise in compliance with the Regulation by 31 May 2009.
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QUANTITATIVE INFORMATION
1. Annual changes
31 December 2009 31 December 2008 number of average number of average average prices average prices options maturity options maturity
A. Opening balance 2,106,250 12.988 5 months 2,161,250 12.944 6 months B. Increases - - - - B.1 new issues - - - - B.2 other changes - - - - C. Decreases 647,500 11.198 55,000 11.248 C.1 cancelled - - - - C.2 exercised - - - - C.3 expired 647,500 11.198 55,000 11.248 C.4 other changes - - - - D. Closing balance 1,458,750 13.781 5 months 2,106,250 12.988 5 months E. Options exercisable at the end of the 1,458,750 13.781 5 months 2,106,250 12.988 5 months year
2. Other information
The stock option plan described above is part of share-based payment transactions. The associated cost has already been fully charged to income in the previous years.
31 December 2009 31 December 2008
Number of Average Number of Average Market price Market price shares exercise price shares exercise price
(1) Options outstanding at start of period (**) 2,106,250 12.988 4.985 2,161,250 12.944 15.069 (2) New options assigned in the period ------(3) Options exercisable in the period ------(4) Options expired in the period (***) 647,500 11.198 5.923 (*) 55,000 11.248 11.202 (5) Options cancelled in the period ------(6) Options outstanding at end of period 1,458,750 13.781 5.273 2,106,250 12.988 4.985 of which: exercisable (****) 1,458,750 13.781 5.273 (**) 2,106,250 12.988 4.985 The market price is the average of the different dates, weighed for the amount of shares for (2), (3), (4) and (5), spot for (1) and (6). In case of assignment of free shares, options shall have an exercise price equal to zero. (*) 1st tranche options expired in June 2008 (**) of which: 647,500 exercisable in 2009 and 1,458,750 exercisable in 2009 and 2010 (***) 1st and 2nd tranche options expired in May 2009 (****) options exercisable in 2010
Options assigned as at 31/12/2009 of which exercisable (vested Exercise prices Residual contract life (euro denominated) between 1 and Average residual below 1 year above 3 years Total Total 3 years contract life
Below or equal to 10 ------Above 10 and below or equal to 12 ------Above 12 and below or equal to 15 (*)1,458,750 - - 1,458,750 1,458,750 (**) Above 15 ------Total 1,458,750 - - 1,458,750 1,458,750 - (*) 3rd tranche options assigned in 2004 (**) options exercisable in 2010
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Banca Italease stock option plans
Banca Italease has two stock option plans in place, in favor of employees, managers, executives and collaborators of Banca Italease and its subsidiaries.
2005 - 2010 Stock option plan
The Special shareholders’ meeting held on 11 April 2005 gave the Board of Directors, pursuant to article 2443 of the civil code, the power to carry out a capital increase against payment, excluding stock options and within five years of the shareholders’ meeting resolution, for a maximum nominal amount of Euro 11,756,105 by issuing max. n. 2,278,315 ordinary shares to be used for a stock option plan. On 6 May 2005, the Board of Directors of Banca Italease approved the regulations of the aforementioned plan, whose main conditions are illustrated below.
Beneficiaries The plan is directed to executives, employees, managers and collaborators as identified from time to time by the Board of Directors. The exercise of the options is conditional to the existence of an employment relationship or of a coordinated and continuous collaboration and/or a credit intermediation or financial agency relation, and for Executives, being an incumbent member of the Board of Directors of Banca Italease or a subsidiary at the time of the actual exercise of the options.
Reasons for adopting the plan The plan is designed to develop a culture that is strongly oriented towards value creation, that is, achieving growth results sustainable over time. The incentive plan therefore aims at: a) favor a “team building” approach among the beneficiaries, focusing the attention on the strategic objectives of Banca Italease and its subsidiaries, while closely correlating the total economic return extractable by top managers with the shareholders’ value, hence with the share appreciation on the market; b) increase the retention capacity, and restraining the propensity to consider offers from external companies by valuable managers; c) improve Banca Italease’s and its Subsidiaries’ competitiveness on the labor market, making them more appealing to the best talents on the market. The plan term shall depend on the achievement of the management incentive and loyalty-building objectives. The number of options granted to each beneficiary shall depend on the effective ability of the single individuals to actually contribute to the evolution and outlook of the Company, based on their experience and skills and on their function.
Exercise price of the options The exercise price of the options for all beneficiaries corresponds to the share nominal value, i.e., the market price of each share - pursuant to art. 9, paragraph four, of DPR n. 917 of 22 December 1986, and following amendments, and in keeping with the clarifications published by the financial administration in circular n. 98 of 17 May 2000 – corresponding to the arithmetic mean of prices quoted by the Milan Stock Exchange from the Option grant date to the same date of the previous calendar month. Should the granting take place before the admission to trading of the shares on the MTA organized and managed by Borsa Italiana, the share nominal value shall be calculated based on the provision of letter b) paragraph four of article 9 of DPR n. 917 of 22 December 1986, and its interpretation by the financial administration (among others, Res. N. 29/E of 20 March 2001), according to which the nominal value of unlisted shares is calculated based on the effective value of the company’s shareholders’ equity and not based on its book value.
Characteristics of the financial instruments The plan is designed to grant options that give the right to subscribe the shares issued at the time of the associated capital increase, based on a one share/one exercised option ratio. The plan term is from 11 April 2005 to 10 April 2010. The exercise of the options is conditional to the existence of an employment relationship or of a coordinated and continuous collaboration and/or a credit intermediation or financial agency relation, and for Executives, being an incumbent member of the Board of Directors of Banca Italease or a subsidiary at the time of the actual exercise of the options. In case of termination of the employment relation for voluntary resignation or dismissal for any reason, or in case of Executives, for revocation, the beneficiary – unless otherwise decided by the Board of Directors of Banca Italease – shall lose all relevant rights, and all the granted options that have not been exercised yet are considered immediately cancelled, and give no entitlement to claims or compensations of any kind in favor of the beneficiary. Under the plan, options are granted nominally and cannot be transferred by any right by inter vivos deed. The shares acquired upon exercising the options are disposable and are free of any restriction.
Granted stock options Between 2005 and 2006 the then Board of Directors, after prior favorable opinion of the Nomination and Remuneration Committee, granted the n. 2,278,315 options to n. 19 beneficiaries (managers of the Bank and its subsidiaries). In 2007, owing to the termination of their employment relation, n. 5 beneficiaries lost any right to exercise the options they had been granted, totaling n. 1,159,065 options. As a result, the options were available to the Board of Directors for future grants. On 8 November 2007, the new Board of Directors, after prior favorable opinion of the Nomination and Remuneration
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Committee, decided to grant part of the annulled options, corresponding to n. 1,090,000 options, to n. 8 new beneficiaries, specifically: n. 530,000 options to the Managing Director Massimo Mazzega and the remaining n. 560,000 options to n. 7 managers of the Bank and its Subsidiaries. Owing to the termination of the employment relation in 2008 of some managers of Banca Italease and its subsidiaries, n. 398,500 options were annulled, of which, n. 114,375 options were fully cancelled as at the date of resignation the first option tranche was already exercisable. As a result, the remaining n. 284,125 options were available to the Board of Directors of Banca Italease for future grants. When added to the previous n. 69.065 options already available to the Board, they made a total number of annulled options available for regranting of n. 353,190. Between 1 June 2008 and 31 July 2008, the first option tranche granted on 6 May 2005 became exercisable, and between 1 January 2009 and 28 February 2009 the first option tranche granted on 21 December 2005 became exercisable. During these two periods, no options were exercised by the beneficiaries. Between 1 May 2009 and 30 June 2009, the first option tranche granted on 6 May 2005 would have been exercisable again (for options not exercised between 1 June 2008 – 31 July 2008) and the same is for the first option tranche granted on 12 April 2006. However, since the Voluntary Tender Offer on Banca Italease shares was taking place, in compliance with article 8.5 of the stock option plan regulation approved on 6 May 2005 the exercise of options was suspended during that period. On 12 November 2009, the Board of Directors approved the final cancellation of the n. 353,190 options still available to the Board, since the conditions for future grants did not exist.
Events after 31 December 2009 As of 1 January 2010, the options granted to individuals whose employment relationship with Banca Italease and/or its subsidiaries has been terminated, or who, as a result of the reorganization of the former Gruppo Banca Italease have become employees of the newly formed Alba Leasing S.p.A. have been cancelled.
2007 - 2013 stock option plan
On 9 November 2006, the Special shareholder’s meeting approved a second stock option plan, and gave the Board of Directors under article 2443 of the civil code the power to make a capital increase against payment, excluding stock options and within five years of the shareholder’s resolution, for a maximum nominal amount of Euro 2,580,000 by issuing max. n. 500,000 ordinary shares to be used for the above mentioned plan. The key features of the plan are summarized below.
Beneficiaries The plan is directed to executives, employees, managers and collaborators as identified from time to time by the Board of Directors. The exercise of the options is conditional to the existence of an employment relationship or of a coordinated and continuous collaboration and/or a credit intermediation or financial agency relation, and for Executives, being an incumbent member of the Board of Directors of Banca Italease or a subsidiary at the time of the actual exercise of the options.
Reasons for adopting the plan The plan is designed to develop a culture that is strongly oriented towards value creation, that is, achieving growth results sustainable over time. The incentive plan therefore aims at: a) favor a “team building” approach among the beneficiaries, focusing the attention on the strategic objectives of Banca Italease and its subsidiaries, while closely correlating the total economic return extractable by top managers with the shareholders’ value, hence with the share appreciation on the market; b) increase the retention capacity(treatment of key resources), and restraining the propensity to leave Banca Italease or its Subsidiaries by valuable managers; c) improve Banca Italease’s and its Subsidiaries’ competitiveness on the labor market, making them more appealing to the best talents on the market. The plan term shall depend on the achievement of the management incentive and loyalty-building objectives.
Exercise price of the options The exercise price of the options for all beneficiaries corresponds to the share nominal value, i.e., the market price of each share corresponding to the arithmetic mean of prices quoted by the Milan Stock Exchange from the Option grant date to the same date of the previous calendar month.
Characteristics of the financial instruments The plan is designed to grant options that give the right to subscribe the shares issued at the time of the associated capital increase, based on a one share/one exercised option ratio. The plan term varies for each tranche and depends on the specific grant date for each tranche. In particular, the maximum theoretical term for each tranche is: - for the first tranche: 30 June 2012, - for the second and last tranche: 30 June 2013. In case of termination of the employment relation for voluntary resignation or dismissal for any reason, or in case of Executives, for revocation, the beneficiary – unless otherwise decided by the Board of Directors of Banca Italease – shall lose all relevant rights, and all the granted options that have not been exercised yet are considered immediately cancelled, and give no entitlement to claims or compensations of any kind in favor of the beneficiary.
377 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Under the plan, options are granted nominally and cannot be transferred by any right by inter vivos deed. The shares acquired upon exercising the options are disposable and are free of any restriction.
Granted stock options Under the plan regulation, there are two option grant periods: within 30 June 2007 for the first tranche and within 30 June 2009 for the second tranche. Moreover, under the plan the Board of Directors was given the power to decide the overall number of options to be granted, to identify the beneficiaries and define the exercise price, by 30 June 2007 for the exercisable options as part of the first tranche (thirty-sixth month as from the grant date and following two years) and by 30 June 2009 for the exercisable options as part of the second tranche (twenty-fourth month as from the grant date and following two years). On 8 November 2007 the new Board of Directors, after prior favorable opinion of the Nomination and Remuneration Committee, decided to grant all the n. 500,000 options to n. 8 beneficiaries (the same beneficiaries of the option regranting in the first stock option plan carried out on the same date), since the Board of Directors had not granted options under the first tranche. Options were distributed as follows: n. 220,000 options to the Managing Director Massimo Mazzega and the remaining n. 280,000 options to n. 7 managers of the Bank and its subsidiaries. The granted options became exercisable as from 8 November 2009 up until 8 November 2011.
Events after 31 December 2009 Also for the second stock option plan, as of 1 January 2010, the options granted to individuals whose employment relationship with Banca Italease and/or its subsidiaries has been terminated, or who, as a result of the reorganization of the former Gruppo Banca Italease have become employees of the newly formed Alba Leasing S.p.A. have been cancelled.
31 December 2009 31 December 2008 number of average number of average average prices average prices options maturity options maturity
A. Opening balance 2,310,750 12.42 15 months 2,709,250 12.22 23 months B. Increases B.1 new issues B.2 other changes C. Decreases 398,500 11.05 12 months C.1 cancelled 114,375 9.30 13 months C.2 exercised C.3 expired C.4 other changes 284,125 11.76 11 months D. Closing balance 2,310,750 12.42 3 months 2,310,750 12.42 15 months E. Options exercisable at the end of the 500,000 11.78 year
Stock grant plan
QUALITATIVE INFORMATION
Upon finalizing the merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana by incorporation of Banco Popolare Società cooperativa, and as an integral part of the merger itself, Banco Popolare, pursuant to articles 2357 and 2357-ter of the Civil Code, was authorized to purchase max. 660,000 common shares, in compliance with the threshold fixed by art. 2357, paragraph 1, of the Civil Code, corresponding to about 0.10% of Banco’s initial share capital, and the incumbent legal representative were each given a several mandate to proceed with the purchase under the law. The authorization to purchase own shares shall last for eighteen months starting from 1 July 2007, the effectiveness date of the merger. Treasury shares can then be used for a Stock Grant Plan for executives, managers and employees of Banco Popolare and its subsidiaries, under art. 2359 of the Civil Code.
Under the Stock Grant Plan, shares of Banco Popolare outstanding common stock shall be granted at no charge to those Beneficiaries, who, in the Management Board’s irrevocable opinion, are deemed to be in a position to play an important role in the success and results of Banco and/or the Group.
The Stock Grant Plan is governed by a specific Regulation setting down the operational criteria, approved by the Shareholders’ meetings of Banco Popolare di Verona e Novara and Banca Popolare Italiana on 10 March 2007.
The reasons and criteria based on which Banco decided to set up a correlation between the assignment of stock grants and other fixed compensation components aim at building up loyalty, as mentioned above, and also at giving the beneficiaries a global benefit in line with the market practices of Banco’s business sector.
378 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
The purposes pursued by this long-term incentive scheme may be summarized as follows: favor a “team building” approach among the management team, focusing the attention on Group strategic objectives, while closely correlating the total economic return extractable by top managers with the shareholders’ value, hence with the share appreciation on the market; increase our retention capacity, and restraining the propensity to leave the Group by valuable managers; improve the Group’s competitiveness on the labor market, making it more appealing to the best talents on the market.
The Plan term, hence the period by which the Management Board must identify the Beneficiaries and approve the grants, was fixed in 5 years from Banco’s incorporation, with the possibility for Banco’s Shareholders’ meeting to authorize additional term extensions. The plan term is suited to achieve the Plan objectives. In compliance with the relevant authorization conferred by the above mentioned Shareholders’ Meetings to the Management Board pursuant to articles 2357 and 2357-ter of the Civil Code – on 29 August 2008, after receiving prior favorable opinion of the Nomination and Remuneration Committee, the Management Board set up a Stock grant plan for executives, managers and employees of Banco Popolare and its subsidiaries, and it: authorized the purchase of all the 660,000 shares of Banco Popolare’s common stock (purchases were carried out on 19 November, at an average price of 8.43 euro); granted a total of 327,550 shares to 73 identified beneficiaries in December 2008.
The number of shares granted to the single beneficiaries was determined based on several assessments: actual ability and key-role of the individual beneficiary in terms of actual contribution to the achievement of results, and to the growth and future outlook of Banco and the Group companies; experience, competence and potentials; strategic importance of his/her function within the company; age and seniority, as the Plan aims at employee retention; and, in some cases, they were based on commitments made with the employees concerned upon hiring them.
In 2009 no additional stock grants were assigned.
QUANTITATIVE INFORMATION
1. Annual changes
31 December 2009 31 December 2008 Number of Average Average Number of Average Average shares prices maturity shares prices maturity
A. Opening balance 327,550 (*) 6.208 Dec. 2013 - - - B. Increases - - - 327,550 (*) 6.208 Dec. 2013 B.1 new issues - - - 327,550 6.208 Dec. 2013 B.2 other changes ------C. Decreases ------C.1 cancelled ------C.2 exercised ------C.3 expired ------C.4 other changes ------D. Closing balance 327,550 6.208 Dec. 2013 327,550 6.208 Dec. 2013 E. options exercisable at year end 327,550 6.208 Dec. 2013 327,550 6.208 Dec. 2013 (*) The value was calculated based on the arithmetic mean of prices quoted in the last month, where last month is the period going from the day the securities were granted to the employee to the same day of the previous month.
The total cost of share-based payments is reported for both financial years in Section C, Sub-section 11.1 “Personnel expenses” of these Explanatory notes, of which 0.3 million derive from securitizations recognized as share-based payments.
379 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Supplementary Pension Scheme (S.I.PRE.) 2005-2007
In 2005 the Board of Directors of former Banco Popolare di Verona e Novara had approved the adoption of a Supplementary Pension Scheme (S.I.Pre.), aiming at building up loyalty. Under the plan, the company makes payments into a collective insurance policy, made out to Banco Popolare, opened with an insurance company, which invests the assets exclusively in BP shares. The Managers who, in addition to joining the Plan, shall remain with the Group until retirement will therefore enjoy a supplementary pension, whose amount shall depend upon the growth in value of Banco Popolare shares over time. Those Mangers who are already benefiting from the Stock Option plan and have also been identified as beneficiaries of the Sipre scheme, in order to join the latter, have “locked up” the fact that they shall go on working with the Group with a number of Banco shares in their possession, corresponding to 80% of the net profit generated by exercising their stock options. This lock-up shall last for 5 years, scaling down by 1/5 every year, starting from the first year when the stock option tranche is exercisable, therefore the last lock-up shall expire in 2012. In the event that they should resign or be dismissed, thus terminating their employment on a non-consensual basis, in addition to being disqualified from Sipre, managers shall also have to give Banco back at no charge the shares in their possession that are still bound by the above mentioned lock-up. This system is linked to the share value appreciation over the Managers’ entire career, and has been introduced in Italy for the first time. The plan was closed in 2007.
380 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
SECTION L – SEGMENT REPORTING
Disclosure on operating segments was prepared in compliance with IFRS 8, which became effective as from financial year 2009, and requires the operating segments to be identified on the basis of the systems used by Top Management to make operating decisions. Therefore, the identification of the operating segments and the disclosure presented in this paragraph are based on the internal reporting used by the Top Management in order to allocate resources to the different segments and assess their performance.
Criteria followed to identify and aggregate operating segments
The adoption of IFRS 8 requirements caused no substantial change to the reportable segments. The segmentation used in internal reporting, based on the types of products and services sold and on the Group organizational structure, reflects the identification based on IAS 14. The introduction of the new segment called “Leasing and Factoring” was caused exclusively by the organizational changes introduced at Group level as of the second half of 2009 with the acquisition of Banca Italease.
The identified segments are: Banche del territorio (local retail banks); Investment and Private Banking, Asset Management; Leasing and factoring; Corporate Center and Other.
The business segments were identified by classifying the various Group Companies based on the prevailing business activity performed by each of them. The results of each segment result from the aggregation of the statutory financial statements of the legal entities assigned to that specific segment, adjusted to account for consolidation entries that have a significant effect on the result of the single segment. Netting among different segments is reported by the segment “Corporate Center and Other” and intercompany balances are not shown separately, in compliance with the operating reporting system used by the Group.
Illustrated below is a summary of the makeup of the various segments, while for a more detailed information on the business activities they engage in and the offered products and services, please refer to the Report on operations - “Banking activities”.
The “Banche del Territorio” segment represents the cornerstone of the development of the Group’s banking activity on the national territory and is the backbone of the entire organizational structure. This organizational model, centered on the Banche del Territorio, which ensure a balanced coverage at national level, is instrumental to the development of a product and service offer in step with the assorted customer needs characterizing the different market territories of the banks. This segment incorporates the following banks: Banca Popolare di Verona - S. Geminiano e S. Prospero S.p.A. Banca Popolare di Lodi S.p.A. Banca Popolare di Novara S.p.A. Credito Bergamasco S.p.A. Cassa di Risparmio di Lucca Pisa Livorno S.p.A. Banca Popolare di Crema S.p.A. Banca Popolare di Cremona S.p.A. Banca Caripe S.p.A.
The business activity linked to this segment is represented by the traditional credit intermediation on the national territory and the offering of related financial services to retail customers (consumers and small businesses) and corporate customers. With respect to retail customers, Group activities focus on developing an offer in the following areas: Household products and services: in particular checking accounts, consumer credit, mortgages, payment instruments (credit and debit cards) protection products and on-line services; Investment/Savings products and services: for example the offer of bonds issued by the Parent company, Managed Accounts, Life Insurance, other investment/advisory instruments; Products and services for Small Businesses: in particular checking accounts, loan products, insurance products and payment instruments; “Direct Banking” products and services: home banking, Remote Banking, POS, “remote” services.
For our corporate customers in Italy and abroad, the primary objective pursued by the Group is a constant innovation/maintenance of the product and service portfolio and a constant regulatory compliance, both in the traditional commercial banking area, and in the area of value added products and services, like those relating to commercial trades with foreign countries or derivative products to hedge against corporate risks.
381 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
The “Investment and Private Banking, Asset Management” segment incorporates the companies engaging in investment banking, merchant banking and asset management. The main subsidiaries included in this segment are: Aletti & C. Banca di Investimento Mobiliare S.p.A. Efibanca S.p.A. Aletti Gestielle SGR S.p.A. Aletti Gestielle Alternative SGR S.p.A. Aletti Fiduciaria S.p.A.
The “Leasing e Factoring” segment is made up of Banca Italease and its subsidiaries. As described in the report on operations, this segment was involved in a reorganization and restructuring plan the last December. The policy pursued in 2009 with respect to this segment was directed towards a careful management of the lease turnover, based on the management of business associated with leases executed in the past, without promoting the signing of new leases.
The segment called “Corporate Center and Other” includes the Parent company Banco Popolare, which carries out a management and support function, ALM activities, the management of the corporate proprietary portfolio and of the investment portfolio, the centralized management of treasury and forex, bond issues, Capital Management and Wholesale Funding for the entire Group. It also includes the service companies and the real estate companies, as well as foreign banks (Banco Popolare Repubblica Ceská Republika, Banco Popolare Croatia, Banco Popolare Hungary, Banco Popolare di Verona e Novara (Luxembourg) S.A.). Finally, this residual segment also incorporates all the consolidation entries that could not be specifically allocated to the above mentioned business segments.
Note that for the purpose of reconciling segment results with consolidated results: - The segment reporting measurement criteria shown in this section are consistent with those used in internal reporting, as required by the relevant accounting standards, and are also consistent with the accounting standards used to prepare the financial statements, as they are considered the most appropriate to provide a truthful and correct representation of the operating and financial situation of the Group. The only exception is the effect attributable to the change in creditworthiness of bonds issued measured at fair value, as this was not considered a factor that should be allocated to the “Banche del Territorio” segment, therefore the management did not take it into consideration when assessing the performance of each segment. On 31 December 2009 this impact was producing a total loss of 350.5 million and was fully allocated to the “Corporate Center and other” segment; - The effect of the purchase price allocation of business combinations referring to the acquisition of the former Gruppo Banca Popolare Italiana and of Banca Italease are shown separately in a specific column called “PPA – Purchase Price Allocation”.
Based on the above described identification and aggregation criteria, shown below is the 2009 operating segment reporting, compared with the previous year. The aggregates shown under the “Total” column correspond to the items posted in the Group’s reclassified financial statements.
For a like-to-like comparison, note that 2008 data has been restated based on the same criteria used on 31 December 2009. In particular: the foreign banks aggregate, that pursuant to IAS 14 had been allocated to the banche del territorio segment, was transposed in the residual segment in line with the “management approach”; consolidation entries have been allocated to the various segments based on the same logics used for 2009 reporting; the effect of the change in creditworthiness on the valuation of financial liabilities issued measured at fair value, which on 31 December 2008 produced a gain of 215.7 million, was allocated to the “Corporate Center and Other” segment.
382 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Segment reporting – P&L data
Invest. Bank, Corporate 31 December 2009 Banche del Leasing and Priv. Bank., Center and P.P.A.(*) Total (thousands of euro) Territorio Factoring Asset Man. Other
Interest margin 1,970,421 94,284 98,302 42,901 (214,672) 1,991,236 Dividends and profit/loss on investments carried at (3,203) (535) - 107,517 - 103,779 equity Net interest, dividend and similar income 1,967,218 93,749 98,302 150,418 (214,672) 2,095,015 Net fees and commissions 1,393,656 107,035 12,964 (285,542) - 1,228,113 Other revenues/charges (3,713) (3,980) 10,244 31,073 148,045 181,669 Net financial income 20,620 248,871 (6,867) (7,127) (69,641) 185,856 Other operating income/expense 1,410,563 351,926 16,341 (261,596) 78,404 1,595,638 Net interest and other banking income 3,377,781 445,675 114,643 (111,178) (136,268) 3,690,653 Personnel expenses (1,089,839) (92,480) (33,727) (306,712) - (1,522,758) Other administrative expenses (975,651) (83,951) (30,910) 316,647 - (773,865) Net adjustments/recoveries on tangible and intangible (51,152) (2,429) (12,451) (98,555) 2,843 (161,744) assets Operating expenses (2,116,642) (178,860) (77,088) (88,620) 2,843 (2,458,367) Profit/loss from operations 1,261,139 266,815 37,555 (199,798) (133,425) 1,232,286 Net losses on impairment of loans, guarantees and (635,610) (100,901) (75,046) 62,535 - (749,022) commitments Net losses on impairment of other financial activities (15,790) (2,066) - (13,824) - (31,680) Provisions for risks and charges (15,853) (6,274) (105,839) (28,603) 100,000 (56,569) Net impairment of goodwill and equity investments (6,151) (98,607) (42,581) 140,879 (2,672) (9,132) Profit (loss) on equity and other investments 2,070 377 8,851 114,661 (9,818) 116,141 Income (loss) before tax from continuing operations 589,805 59,344 (177,060) 75,850 (45,915) 502,024 Tax on income from continuing operations (275,976) (26,908) 5,301 (25,316) 82,624 (240,275) Income (loss) after tax from continuing operations 313,829 32,436 (171,759) 50,534 36,709 261,749 Profit (loss) after tax from merchant banking - (322) 7,619 (10,740) (367) (3,810) investments and discontinued operations Integration charges net of tax - Minority interests (2,015) (3,224) 15,053 (715) - 9,099 Income/loss of segments gross of P.P.A. effect 311,814 28,890 (149,087) 39,079 Effect of P.P.A. on segments (111,608) (23,036) 175,762 (4,776) 36,342 Net income 200,206 5,854 26,675 34,303 267,038
(*) P.P.A. (Purchase Price Allocation): cost of business combination generated by the mergers with Gruppo BPI and Gruppo Italease.
383 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Invest. Bank, Corporate 31 December 2008 adjusted (**) Banche del Leasing and Priv. Bank., Center and P.P.A.(*) Total (thousands of euro) Territorio Factoring Asset Man. other
Interest margin 2,593,016 144,311 - (297,969) (199,116) 2,240,242 Dividends and profit/loss on investments carried at 15,284 3,055 - (31,957) - (13,618) equity Net interest, dividend and similar income 2,608,300 147,366 - (329,926) (199,116) 2,226,624 Net fees and commissions 1,196,894 147,925 - (83,288) - 1,261,531 Other revenues/charges 110,365 583 - (8,587) (46,845) 55,516 Net financial income (37,477) 165,698 - 104,771 (36,200) 196,792 Other operating income/expense 1,269,782 314,206 - 12,896 (83,045) 1,513,839 Net interest and other banking income 3,878,082 461,572 - (317,030) (282,161) 3,740,463 Personnel expenses (1,108,582) (107,288) - (269,493) - (1,485,363) Other administrative expenses (998,558) (92,212) - 417,821 - (672,949) Net adjustments/recoveries on tangible and intangible (45,295) (2,491) - (115,655) (6,917) (170,358) assets Operating expenses (2,152,435) (201,991) - 32,673 (6,917) (2,328,670) Profit/loss from operations 1,725,647 259,581 - (284,357) (289,078) 1,411,793 Net losses on impairment of loans, guarantees and (734,201) (333,242) - (102,610) - (1,170,053) commitments Net losses on impairment of other financial activities (37,791) (64,149) - (96,630) (887) (199,457) Provisions for risks and charges (58,575) (7,705) - (134,642) - (200,922) Net impairment of goodwill and equity investments (31,487) (736,807) - 21,563 (127,065) (873,796) Profit (loss) on equity and other investments 21,343 2,502 - 495,703 (18,373) 501,175 Income (loss) before tax from continuing operations 884,936 (879,820) - (100,973) (435,403) (531,260) Tax on income from continuing operations (359,180) 87,808 - 316,029 95,601 140,258 Income (loss) after tax from continuing operations 525,756 (792,012) - 215,056 (339,802) (391,002) Profit (loss) after tax from merchant banking - 1,966 - 126,361 (3,234) 125,093 investments and discontinued operations Integration charges net of tax - - - (36,249) - (36,249) Minority interests (29,038) (1,156) - (1,020) - (31,214) Income/loss of segments gross of P.P.A. effect 496,718 (791,202) - 304,148 Effect of P.P.A. on segments (152,234) (180,980) - (9,822) (343,036) Net income 344,484 (972,182) - 294,326 (333,372) (*) P.P.A. (Purchase Price Allocation): cost of business combination generated by the mergers with Gruppo BPI and Gruppo Italease. (**) Adjusted in compliance with IFRS 5 and with the changes introduced by the circular update.
Segment reporting – income statement
Invest. Bank, Corporate 31 December 2009 Banche del Leasing and Priv. Bank., Center and P.P.A.(*) Total (thousands of euro) Territorio Factoring Asset Man. Other
Customer loans 75,844,525 4,131,892 12,640,929 2,487,631 245,248 95,350,225 Total assets 97,613,974 27,732,301 17,012,287 -6,360,391 -289,080 135,709,091
(*) P.P.A. (Purchase Price Allocation): cost of business combination generated by the mergers with Gruppo BPI and Gruppo Italease.
Invest. Bank, Corporate 31 December 2008 Banche del Leasing and Priv. Bank., Center and P.P.A.(*) Total (thousands of euro) Territorio Factoring Asset Man. Other
Customer loans 73,568,430 5,576,632 - 1,553,720 397,911 81,096,693 Total assets 99,571,898 34,884,637 - -12,931,422 -197,883 121,327,230
(*) P.P.A. (Purchase Price Allocation): cost of business combination generated by the mergers with Gruppo BPI and Gruppo Italease.
Invest. Bank, Corporate 31 December 2009 Banche del Leasing and Priv. Bank., Center and P.P.A.(*) Total (thousands of euro) Territorio Factoring Asset Man. Other
Due to customers, securities issued and financial 77,541,859 15,063,782 8,542,079 4,265,966 -230,566 105,183,120 liabilities measured at fair value Total liabilities 97,613,974 27,732,301 17,012,287 -6,360,391 -289,080 135,709,091
(*) P.P.A. (Purchase Price Allocation): cost of business combination generated by the mergers with Gruppo BPI and Gruppo Italease.
384 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Notes to the consolidated financial statements
Invest. Bank, Corporate 31 December 2008 Banche del Leasing and Priv. Bank., Center and P.P.A.(*) Total (thousands of euro) Territorio Factoring Asset Man. Other
Due to customers, securities issued and financial 78,387,128 12,441,639 - 2,303,777 -1,570 93,130,974 liabilities measured at fair value Total liabilities 99,571,898 34,884,637 - -12,931,422 -197,883 121,327,230 (*) P.P.A. (Purchase Price Allocation): cost of business combination generated by the mergers with Gruppo BPI and Gruppo Italease.
Invest. Bank, 31 December 2009 Banche del Consumer Leasing and Priv. Bank., Other Total (thousands of euro) Territorio Credit Factoring Asset Man.
Jointly controlled companies - - - 14,890 - 14,890 Associates - 91,224 1,079,539 325,697 125,871 1,622,331
Invest. Bank, 31 December 2008 Banche del Consumer Leasing and Priv. Bank., Other Total (thousands of euro) Territorio Credit Factoring Asset Man.
Jointly controlled companies - - - 15,025 - 15,025 Associates - 107,258 1,000,000 335,122 - 1,422,380
Note that most of assets and net interest and other banking income are generated in Italy, bearing witness of the strong franchise on the national territory, which is considered the Group’s primary market territory. Shown below is the breakdown of net interest and other banking income and of assets by geographical area.
31/12/2009 Foreign Italy Other Total (thousands of euro) operations
Net interest and other banking income 3,635,205 58,699 -3,251 3,690,653
31/12/2008 adjusted Foreign Italy Other Total (thousands of euro) operations
Net interest and other banking income 3,669,332 65,738 5,393 3,740,463
31/12/2009 Foreign Italy Other Total (thousands of euro) operations
Total assets 135,096,262 9,375,927 -8,763,098 135,709,091
31/12/2008 Foreign Italy Other Total (thousands of euro) operations
Total assets 117,651,527 6,956,530 -3,280,827 121,327,230
385 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Milano, Galleria Vittorio Emanuele WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Attachments
Head of ce of Banca Aletti, Milano WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Attachments
Statement of significant shareholdings under art. 126 of Consob’s Regulation n. 11971 of May 14th, 1999 (*)
(Shareholdings above 10% of capital represented by shares with voting rights in unlisted companies, held directly or indirectly by any right)
Percentage Type of Investee company Investing company Direct Indirect ownership Abitando S.p.A. 11.50% Efibanca Ownership Applicomp (India) Ltd 43.20% Partecipazioni Italiane Ownership Archimede 1 S.p.A. 15.00% Banco Popolare Ownership Argo Real Estate SGR S.p.A. 19.00% Banco Popolare Ownership Banca Network Investimenti S.p.A. 19.92% Banco Popolare Ownership Banca della Nuova Terra S.p.A. 15.00% Banco Popolare Ownership Biasi S.p.A. 10.60% Efibanca Ownership Black & Blue GMBH (under bankruptcy) 24.82% Efibanca Ownership De Fonseca S.p.A. 15.00% Efibanca Ownership Earchimede S.p.A. 11.92% Banco Popolare Ownership Euros Consulting S.p.A. in liquidation 6.60% Banco Popolare Ownership " 2.07% Holding di Partecipazioni Ownership " 0.74% Credito Bergamasco Ownership " 0.58% Banca Popolare di Crema Ownership " 1.54% Banca Popolare di Cremona Ownership Fira Servizi S.r.l. 15.00% Banca Caripe Ownership Flashmallit S.p.A. (under bankruptcy) 15.60% Efibanca Ownership Gruppo Stabila S.p.A. 12.13% Efibanca Ownership H.D.C. S.p.A. (under bankruptcy) 15.14% Efibanca Ownership Cassa di Risparmio di Lucca Pisa LU.CEN.SE. S.p.A. 12.50% Ownership Livorno Nolitel Italia S.r.l. (in liquidation) 100.00% Partecipazioni Italiane Ownership Nuova Foar S.r.l. (under bankruptcy) 29.97% COFILP Ownership Ponte S.p.A. 10.80% Efibanca Ownership Cassa di Risparmio di Lucca Pisa Porto Industriale di Livorno S.p.A. 12.15% Ownership Livorno SAGA - Società Abruzzese Gestione Aeroporto S.p.A. 10.73% Banca Caripe Ownership Tecnosistemi S.p.A. (in extraordinary administration) 14.50% Efibanca Ownership Tethys S.p.A. 16.67% Banco Popolare Ownership Unione Fiduciaria S.p.A. 4.00% Banco Popolare Ownership 11.00% Banca Popolare di Crema Ownership 0.40% Banca Italease Ownership United Business Holding S.p.A. 17.15% Banco Popolare Ownership
Adria Docks S.r.l. 26.47% Banca Popolare di Verona Pledge Ai Mori S.n.c. 100.00% Banca Popolare di Verona Pledge Albergo Basilea S.r.l. 100.00% Banca Popolare di Verona Pledge Aurelia 80 S.p.A. 50.00% Banca Popolare di Verona Pledge Berinal SA 100.00% Banca Popolare di Lodi Pledge Bertani Holding S.p.A. 27.42% Banca Popolare di Verona Pledge Carlo Raimondi fu Rodolfo S.p.A. 13.05% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa Cartiera Fenili S.r.l. 16.00% Pledge Livorno Castel-Service S.r.l. 100.00% Banca Popolare di Verona Pledge Consultinvest Costruzioni S.r.l. 13.59% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa Deca S.r.l. 60.00% Pledge Livorno Demiced S.r.l. 90.00% Banca Popolare di Verona Pledge EMC2 S.r.l. 99.00% Banca Popolare di Lodi Pledge Eulip S.p.A. 40.00% Banca Popolare di Lodi Pledge Cassa di Risparmio di Lucca Pisa Farmigea S.p.A. 100.00% Pledge Livorno F.F.M. S.r.l. 40.00% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa FMH S.p.A. 25.00% Pledge Livorno
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Percentage Type of Investee company Investing company Direct Indirect ownership Cassa di Risparmio di Lucca Pisa Fosber S.p.A. 30.00% Pledge Livorno G.A.G. Servizi Sanitari S.r.l. 100.00% Banca Popolare di Verona Pledge GF Uno Real Estate S.r.l. 100.00% Banca Popolare di Cremona Pledge Green Coast S.r.l. 100.00% Banca Popolare di Verona Pledge Gruppo Stabila S.p.A. 11.66% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa Harbour S.r.l. 66.60% Pledge Livorno Hidrodesign S.r.l. 15.00% Banca Popolare di Verona Pledge Hiper S.p.A. 100.00% Banca Popolare di Lodi Pledge Hotel Montecarlo S.r.l. 100.00% Banca Popolare di Verona Pledge Il Castello di Bevilacqua S.r.l. 100.00% Banca Popolare di Verona Pledge Immobiliare Brega S.r.l. 100.00% Banca Popolare di Verona Pledge Immobiliare Futura S.r.l. 51.00% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa Intergomma S.p.A. 50.01% Pledge Livorno Cassa di Risparmio di Lucca Pisa I.T.N. S.p.A. 80.00% Pledge Livorno Cassa di Risparmio di Lucca Pisa Latin Spark Italia S.r.l. 51.00% Pledge Livorno MAE S.p.A. 75.00% Banca Popolare di Novara Pledge Ma-Fra S.r.l. 100.00% Banca Popolare di Verona Pledge Misterday S.r.l. 80.00% Banca Popolare di Verona Pledge New Dieresin S.r.l. 100.00% Banca Popolare di Verona Pledge O.M.P. S.r.l. 100.00% Banca Popolare di Verona Pledge Plastic Company S.p.A. 22.22% Banca Popolare di Verona Pledge Pneus 2000 S.p.A. 20.00% Banca Popolare di Lodi Pledge S.I.C. S.r.l. 100.00% Banca Popolare di Verona Pledge Sirius S.r.l. 100.00% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa Starmond Holding S.r.l. 90.00% Pledge Livorno Stella Bianca S.p.A. 52.50% Banca Popolare di Lodi Pledge Cassa di Risparmio di Lucca Pisa Valdera Acque S.p.A. 23.04% Pledge Livorno Cassa di Risparmio di Lucca Pisa Telma S.r.l. 52.00% Pledge Livorno Tenuta delle Ripalte - Vallorita S.p.A. 25.75% Banca Popolare di Verona Pledge Cassa di Risparmio di Lucca Pisa TS EDE S.r.l. 100.00% Pledge Livorno TTL S.r.l. 100.00% Efibanca Pledge Villa Quaranta Park S.p.A. 100.00% Banca Popolare di Verona Pledge Villa Sarda S.r.l. 100.00% Banca Popolare di Lodi Pledge Wemar 2002 S.r.l. 100.00% Banca Popolare di Verona Pledge Zaga S.r.l. 100.00% Banca Popolare di Verona Pledge
(*)The list does not include companies falling within the consolidation scope.
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Reconciliation between income statement items and the reclassified income statement
Reclassified income statement Recl. Investim. Reclassified 2009 Reclassifications (thousands of euro) Merchant B. statement
10 Interest and similar income 4,098,864 (79) 16,747 4,115,532 20 Interest and similar expense (2,130,069) 8,591 (2,818) (2,124,296) Profit/loss on investment in associates and jointly controlled 240 103,779 103,779 companies Net interest, dividend and similar income 1,968,795 8,512 117,708 2,095,015 40 Fee and commission income 1,361,451 - 1,361,451 50 Fee and commission expense (133,876) 538 (133,338) 220 Other operating income/expense 564,154 (192,885) (189,600) 181,669 Net financial income: 20 Interest and similar expense 2,818 2,818 70 Dividend and similar income 560,693 - (22,065) 538,628 80 Profits (losses) on trading (69,398) - (69,398) 90 Fair value adjustments in hedge accounting (8,264) - (8,264) 100 Profits (losses) on disposal or repurchase 31,799 - (1,426) 30,373 110 Profit (loss) on financial assets and liabilities designated at FV (308,301) - (308,301) Other operating income/expense 1,998,258 (192,347) (210,273) 1,595,638 Net interest and other banking income 3,967,053 (183,835) (92,565) 3,690,653 180 Personnel expenses (1,624,672) 128,959 (27,045) (1,522,758) 180 Other administrative expenses (980,273) 2,400 204,008 (773,865) 200 Net adjustments/recoveries on property and equipment (109,978) 36,965 (73,013) 210 Net adjustments/recoveries on intangible assets (109,556) 836 19,989 (88,731) Operating expenses (2,824,479) 169,160 196,952 (2,458,367) Profit on operations 1,142,574 (14,675) 104,387 1,232,286 100 Profit (loss) on disposal or repurchase 1,426 1,426 130 Net losses/recoveries on impairment (872,144) 16 90,000 (782,128) 190 Net provisions for risks and charges 33,730 (299) (90,000) (56,569) Profit (losses) on investments in associates and companies 240 76,236 - (72,582) 3,654 subject to join control 260 Goodwill impairment - - (9,132) (9,132) 270 Profits (losses) on disposal of investments 112,487 - 112,487 Income before tax from continuing operations 492,883 (14,958) 24,099 502,024 290 Tax on income from continuing operations (229,099) 12,923 (24,099) (240,275) Income after tax from continuing operations 263,784 (2,035) - 261,749 310 Profit (loss) after tax from merchant banking investments and discontinued operations (5,845) 2,035 (3,810) Integration charges net of tax - - Net income (loss) 257,939 - - 257,939 330 Minority interests 9,099 - - 9,099 Parent company’s net income (loss) 267,038 - - 267,038
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Reconciliation between the 2008 balance sheet and income statement and the reclassified statements adjusted for comparison
Balance sheet
Assets Reclassifications Reclassif. 31/12/2008 31/12/2008 (thousands of euro) Circ. 262/2005 IFRS 5 restated
10 Cash and cash equivalents 710,004 - - 710,004 20 Financial assets held for trading 10,033,368 - - 10,033,368 30 Financial assets designated at fair value thr. P&L 311,375 - - 311,375 40 Financial assets available for sale 1,625,154 - - 1,625,154 50 Investments held to maturity 530,296 - - 530,296 60 Due from banks 12,480,432 1,616 - 12,482,048 1,616 (a) 70 Loans to customers 81,026,194 70,499 - 81,096,693 70,499 (a) 80 Hedging derivatives 92,881 - - 92,881 90 Fair value change of financial assets - - In hedged portfolios 9,142 - - 9,142 Investments in associates and companies subject to join 100 1,457,405 - - 1,457,405 control 110 Technical insurance reserves reassured with third parties - - - - 120 Property and equipment 1,329,149 - - 1,329,149 130 Intangible assets 5,333,248 - - 5,333,248 140 Tax assets 2,681,931 (467,540) - 2,214,391 (467,540) (b) Non-current assets held for sale and discontinued 150 186,691 - - 186,691 operations 160 Other assets 3,568,189 347,196 - 3,915,385 (1,616) (a) (70,499) (a) 467,540 (b) - (48,229) (b) - Total 121,375,459 (48,229) - 121,327,230 (a) reclassification of operating payables and receivables (b) reclassification of tax assets and liabilities
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Liabilities and shareholders’ equity Reclassifications Reclassifications 31/12/2008 31/12/2008 (thousands of euro) Circ. 262/2005 IFRS 5 restated
10 Due to banks 8,345,499 12,153 - 8,357,652 12,153 (a) 20 Due to customers 51,351,055 1,362 - 51,352,417 1,362 (a) 30 Securities issued 24,252,656 - - 24,252,656 40 Financial liabilities held for trading 3,374,818 - - 3,374,818 Financial liabilities designated at fair value throught 50 17,525,901 - - 17,525,901 profit and loss 60 Hedging derivatives 49,985 - - 49,985 70 Fair value change of financial liabilities - - In hedged portfolios 70,555 - - 70,555 80 Tax liabilities 1,306,794 (89,587) - 1,217,207 (41,358) (b) (48,229) (b) Liabilities associated with non-current assets held for 90 22,561 - - 22,561 sale and discontinued operations 100 Other liabilities 3,619,925 (107,922) - 3,512,003 (12,153) (a) (1,362) (a) 41,358 (b) (135,765) (c) 110 Employee termination benefits 417,746 - - 417,746 120 Provisions for risks and charges 850,305 135,765 - 986,070 135,765 (c) 140 Valuation reserves (8,825) - - (8,825) 160 Equity instruments 2,534 - - 2,534 170 Reserves 2,968,874 - - 2,968,874 180 Share premium reserve 4,880,035 - - 4,880,035 190 Share capital 2,305,735 - - 2,305,735 200 Treasury shares ( - ) (30,966) - - (30,966) 210 Minority interests 403,644 - - 403,644 220 Net income / loss (333,372) - - (333,372) Total 121,375,459 (48,229) - 121,327,230 (a) reclassification of operating payables and receivables (b) reclassification of tax assets and liabilities (c) reclassification of some liabilities connected with personnel provisions
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Income Statement
Income statement Reclassifications Reclassifications 31/12/2008 2008 (thousands of euro) Circ. 262/2005 IFRS 5 restated
10 Interest and similar income 6,199,444 - (4,186) 6,195,258 20 Interest and similar expense (3,941,067) - 691 (3,940,376) 30 Interest margin 2,258,377 - (3,495) 2,254,882 40 Fee and commission income 1,211,036 200,199 (d) (272) 1,410,963 50 Fee and commission expense (150,027) - 108 (149,919) 60 Net fee and commission income 1,061,009 200,199 (164) 1,261,044 70 Dividend and similar income 447,999 - - 447,999 80 Profits (losses) on trading (522,804) - - (522,804) 90 Fair value adjustments in hedge accounting (3,620) - - (3,620) 100 Profits (Losses) on disposal or repurchase of: 32,567 - - 32,567 a) loans (15,482) - - (15,482) b) financial assets available for sale 49,531 - - 49,531 c) investments held to maturity 5 - - 5 d) financial liabilities (1,487) - - (1,487) 110 Profit (loss) on financial assets and liabilities designated at fair value 199,117 - - 199,117 120 Net interest and other banking income 3,472,645 200,199 (3,659) 3,669,185 130 Net losses / recoveries on impairment of: (1,354,096) - 342 (1,353,754) a) loans (1,140,579) - 342 (1,140,237) b) financial assets available for sale (176,492) - - (176,492) c) investments held to maturity (23,575) - - (23,575) d) other financial activities (13,450) - - (13,450) 140 Net income from banking activities 2,118,549 200,199 (3,317) 2,315,431 170 Net income from banking and insurance activities 2,118,549 200,199 (3,317) 2,315,431 180 Administrative expenses: (2,705,918) - 4,326 (2,701,592) a) personnel expenses (1,629,784) 5,502 (e) 1,839 (1,622,443) b) other administrative expenses (1,076,134) (5,502) (e) 2,487 (1,079,149) 190 Net provisions for risks and charges (204,422) - - (204,422) Net adjustments to / recoveries on property and 200 (126,086) - 81 (126,005) equipment 210 Net adjustments to / recoveries on intangible assets (136,896) - 161 (136,735) 220 Other operating expenses (income) 856,285 (200,199) (d) (164) 655,922 230 Operating expenses (2,317,037) (200,199) 4,404 (2,512,832) Profit (losses) on investments in associates and 240 (271,410) - - (271,410) companies subject to joint control 260 Goodwill impairment (485,776) - - (485,776) 270 Profits (Losses) on disposal of investments 397,368 - - 397,368 280 Income (loss) before tax from continuing operations (558,306) - 1,087 (557,219) 290 Tax on income from continuing operations 139,867 - (236) 139,631 300 Income (loss) after tax from continuing operations (418,439) - 851 (417,588) 310 Income (Loss) after tax from discontinued operations 116,281 - (851) 115,430 320 Net income (loss) (302,158) - - (302,158) 330 Minority interests (31,214) - - (31,214) 340 Parent company’s net income (loss) (333,372) - - (333,372) (d) reclassification of expenses debited on customer checking accounts (e) reclassification of some personnel expenses
393 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 WorldReginfo - 43142dc3-f943-4537-a6a6-426f6fea5e12 Address
BANCO POPOLARE SOC. COOP.
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