IMPORTANT NOTICE
You must read the following before continuing. The following disclaimer applies to the redacted offering memorandum attached to this notice (the “Document”). The Document is a redacted and abridged version of an offering memorandum that was prepared exclusively for transactions in the United States of America with institutional investors. Information related to any offering or potential offering of securities has been redacted from the Document in order to comply with rules and regulations relating to the offering of securities in the United States of America. The Document is not intended for release, publication or distribution, directly or indirectly to persons in the United States of America, Canada, Australia, Japan or any other jurisdiction where the distribution of such information is restricted by law. The Document is for information purposes only and does not constitute an offer to subscribe, or solicitation of an offer to subscribe, for securities in the United States of America, Canada, Australia, Japan or in any other jurisdiction in which it is unlawful to make such an offer or solicitation. Any securities referred to in the Document have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any state of the United States of America or other jurisdictions. Securities may not be offered or subscribed in the United States of America or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act), absent registration or an exemption from registration under the Securities Act, or in any other jurisdiction other than in compliance with the laws of that jurisdiction. There is no intention to register any securities described in the Document in the United States of America or to conduct a public offering of securities in the United States of America. No money, securities or other consideration is being solicited, and, if sent in response to the information contained in the Document, will not be accepted. THE ATTACHED OFFERING MEMORANDUM MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER AND, IN PARTICULAR, MAY NOT BE FORWARDED TO ANY U.S. PERSON OR U.S. ADDRESS. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORIZED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORIZED AND WILL NOT BE ABLE TO PURCHASE ANY OF THE SECURITIES DISCUSSED IN THE ATTACHED OFFERING MEMORANDUM. [Redacted Text]
OFFERING MEMORANDUM STRICTLY CONFIDENTIAL
INTESA SANPAOLO S.p.A. (incorporated as a società per azioni in the Republic of Italy) and INTESA SANPAOLO S.p.A., NEW YORK BRANCH (as Guarantor for Section 3(a)(2) Notes (as defined herein) only) US$50,000,000,000 Medium Term Note Program
For the issue of notes due nine months or more from their date of issue
[Redacted Text]
Investing in the Notes involves certain risks, see “Risk factors” beginning on page 11 of this Offering Memorandum.
[Redacted Text]
Arrangers [Redacted Text] Dealers [Redacted Text]
The date of this Offering Memorandum is May 21, 2021.
GENERAL DESCRIPTION OF THE PROGRAM [Redacted Text]
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE PROGRAM ...... 2 NOTICE TO PURCHASERS ...... II RESTRICTIONS ON MARKETING AND SALES TO RETAIL INVESTORS ...... III ITALIAN “WHITE LIST STATES” ...... IV IMPORTANT ITALIAN SUBSTITUTE TAX REQUIREMENTS AND INFORMATION IN RESPECT OF THE TAX CERTIFICATION PROCEDURES ...... V SERVICE OF PROCESS AND ENFORCEABILITY OF JUDGMENTS ...... VI DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS ...... VII PRESENTATION OF FINANCIAL INFORMATION...... VIII INCORPORATION BY REFERENCE...... XI INDUSTRY AND MARKET DATA ...... XII AVAILABLE INFORMATION ...... XIII SUMMARY ...... 1 RISK FACTORS...... 2 USE OF PROCEEDS...... 24 UBI BANCA ACQUISITION ...... 25 EXCHANGE RATE ...... 29 RATINGS ...... 30 CAPITALIZATION AND REGULATORY CAPITAL...... 31 SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER INFORMATION ...... 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 45 RISK MANAGEMENT ...... 89 SELECTED STATISTICAL INFORMATION ...... 121 BUSINESS...... 143 THE NEW YORK BRANCH...... 180 SUPERVISION AND REGULATION ...... 182 MANAGEMENT ...... 209 RELATED-PARTY TRANSACTIONS ...... 226 PRINCIPAL SHAREHOLDERS ...... 232 TERMS AND CONDITIONS ...... 233 SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY NOTES ...... 234 BOOK-ENTRY, DELIVERY AND FORM...... 235 DESCRIPTION OF BOOK-ENTRY INTERESTS AND THE DEPOSIT AGREEMENT ...... 236 TRANSFER RESTRICTIONS ...... 237 TAXATION ...... 238 ERISA CONSIDERATIONS ...... 239 PLAN OF DISTRIBUTION...... 240 LEGAL MATTERS...... 241 INDEPENDENT AUDITORS ...... 242 GENERAL INFORMATION ...... 243 APPENDIX A...... A-1 FORM OF FINAL TERMS...... A-1 APPENDIX B...... B-1 INDEX TO FINANCIAL STATEMENTS ...... F-1
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ANNEX A...... ANNEX A-1 ANNEX B...... ANNEX B-1
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NOTICE TO PURCHASERS [Redacted Text]
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RESTRICTIONS ON MARKETING AND SALES TO RETAIL INVESTORS [Redacted Text]
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ITALIAN “WHITE LIST STATES” [Redacted Text]
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IMPORTANT ITALIAN SUBSTITUTE TAX REQUIREMENTS AND INFORMATION IN RESPECT OF THE TAX CERTIFICATION PROCEDURES [Redacted Text]
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SERVICE OF PROCESS AND ENFORCEABILITY OF JUDGMENTS [Redacted Text]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS All statements other than statements of historical facts contained in this Offering Memorandum including statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward looking statements. In addition, forward looking statements generally can be identified by the use of forward looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward looking statements are reasonable, we do not provide any assurance with respect to such statements. Our ability to achieve our projected results is dependent on many factors which are outside management’s control. Actual results may differ materially from and be more negative than those projected or implied in the forward looking statements. Such forward looking information involves risks and uncertainties that could significantly affect expected results and is based on certain key assumptions. Factors that could cause actual results to differ materially and adversely include, but are not limited to:
volatility in the global financial markets and adverse global macroeconomic conditions in Italy, the Eurozone or globally;
our ability to implement our Business Plan;
sovereign debt risk in the Eurozone;
Italy’s debt position, which could adversely affect the terms on which financing is available to us and result in losses to the Italian-related debt that we own;
changes in interest rates and exchange rates, which can be caused by many factors outside of our control;
our ability to successfully identify and manage risk, including credit, counterparty and market risk and other operational risks, including fraud, misconduct by clients or employees, security breaches, technical and information technology errors or failures and other adverse events;
the reliability of our assumptions, judgments and estimates used to value our assets;
risks associated with our international presence, including the difficult economic and/or political conditions in North Africa and in Central and Eastern European countries in which we operate;
our ability to successfully integrate UBI Banca in our business;
legal, regulatory and governmental developments, particularly those relating to the financial services industry;
investigations or proceedings brought by authorities in the U.S.;
unfavorable developments in our credit rating, increases in our funding costs and the availability of our sources of liquidity, including the access to capital markets;
the consequences of Brexit and its impact on our business and cost of funding; the exposure to write-downs and other risks beyond our control due to our investments in the Atlante Fund which engages in recapitalizations of Italian banks; and
our obligations under European and Italian regulations to make contribution in support of the banking system for amounts which can be significant and/or unpredictable. You should not place undue reliance on forward looking statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward looking statements that we may issue in the future. We do not undertake any obligation to publicly release any revisions to such forward looking statements after the date hereof to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
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PRESENTATION OF FINANCIAL INFORMATION The financial information set forth in this Offering Memorandum is derived from two sets of annual consolidated financial statements, each of which include comparative information of the prior year, prepared in accordance with IFRS as adopted by the European Union and in accordance with the instructions of the Bank of Italy set forth in Circular No. 262 of December 22, 2005, as amended (“Circular No. 262”) (the “Consolidated Financial Statements”). These sets of Consolidated Financial Statements are taken from (i) our annual report as of and for the year ended December 31, 2020 (the “2020 Annual Report”) and (ii) our annual report as of and for the year ended December 31, 2019 (the “2019 Annual Report”). Furthermore, certain information which covers the most recent three months financial period and the respective prior comparative period, provided for information purposes only, was derived from our press release published on May 5, 2021 (the “Q1 Press Release Financials”). The 2020 Annual Report includes: (i) the audited consolidated financial statements as of and for the year ended December 31, 2020 (the “2020 Audited Consolidated Financial Statements”), (ii) the audited comparative consolidated financial statements as of and for the year ended December 31, 2019, each of which is included in the F-Pages hereto and (iii) the report on operations for the year ended December 31, 2020 (any reference in the F-pages to the report on operations should be to the report on operations included in the Annual Report, which is published on our website (https://group.intesasanpaolo.com/en/investor-relations/financial-reports). The 2019 Annual Report includes: (i) the audited consolidated financial statements as of and for the year ended December 31, 2019 (the “2019 Audited Consolidated Financial Statements”), (ii) the audited comparative consolidated financial statements as of and for the year ended December 31, 2018, each of which is included in the F-Pages hereto and (iii) the report on operations for the year ended December 31, 2019 (any reference in the F-pages to the report on operations should be to the report on operations included in the Annual Report, which is published on our website (https://group.intesasanpaolo.com/en/investor-relations/financial-reports/2019). Except where otherwise indicated, the financial information contained in this Offering Memorandum and used as the basis for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein is unaudited and different from the Consolidated Financial Statements in as much as: (i) in certain cases, as specified below, it has been subject to reclassification by aggregating and/or changing certain line items from the Consolidated Financial Statements and, in some instances, by creating new line items or moving amounts to different line items as set forth in Annex A and Annex B hereto and (ii) in certain cases, as specified below, has been subject to adjustments to account for changes in accounting principles and/or changes in the scope of consolidation. This financial information is used by our management to analyze our business performance and our financial results in our year-end. To prepare the 2020 Non-GAAP financial information included in the Offering Memorandum (i) we (a) reclassified our 2020 Audited Consolidated Financial Statements and we (b) restated the consolidated income statement of our 2020 Audited Consolidated Financial Statements to reflect the economic results of the first four months of 2020 of the company RBM Assicurazione Salute S.p.A. (the “2020 Unaudited Restated and Reclassified Financial Information”) and (ii) we (a) reclassified our 2019 Audited Consolidated Financial Statements and we (b) restated the consolidated income statement of our 2019 Audited Consolidated Financial Statements to reflect (x) economic results of 2019 of the company RBM Assicurazione Salute S.p.A. and (y) the fees due to Prelios following the UTP loans servicing agreement, effective from the end of 2019 and (c) we restated the consolidated balance sheet of our 2019 Audited Consolidated Financial Statements to reflect the inclusion in the Group of the company RBM Assicurazione Salute S.p.A. (the “2019 Unaudited Restated and Reclassified Financial Information Presented in 2020”). Such presentation is in line with the segment reporting information that we present in accordance with IFRS 8. To prepare the 2019 Non-GAAP financial information included in the Offering Memorandum (i) we reclassified our 2019 Audited Consolidated Financial Statements (the “2019 Unaudited Reclassified Financial Information”) and (ii) we (a) reclassified our 2018 Audited Consolidated Financial Statements, we (b) restated the consolidated income statement of our 2018 Audited Consolidated Financial Statements to reflect (x) the economic results of the business line to be contributed to Nexi, pursuant to the agreement signed in December 2019, (y) the transition to IFRS 16 (z) the first three months of 2018 of the companies of the Morval Vonwiiller Holding SA. Group, the 12 months of 2018 of Autostrade Lombarde and the outsourcing of the servicing of bad loans to a special purpose vehicle named Tersia within the framework of the strategic
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partnership with Intrum and (j) the reclassification of the cost for Deposit Protection Funds of the international subsidiary banks previously recorded under operating expenses, and we (b) restated our consolidated balance sheet of our 2018 Audited Consolidated Financial Statements to reflect (x) the final purchase price allocation of Autostrade Lombarde and (y) the transition to IFRS 16 (the “2018 Unaudited Restated and Reclassified Financial Information Presented in 2019”). Such presentation is in line with the segment reporting information that we present in accordance with IFRS 8. As a result of these restatements and reclassifications, we have presented certain financial information (i) for 2020 once, in the form of the 2020 Unaudited Restated and Reclassified Financial Information (ii) for 2019 twice, once in the form of the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020 and once in the form of the 2019 Unaudited Reclassified Financial Information, and (iii) for 2018 once, in the form of the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. While the restatements and reclassifications made to our financial information which is presented herein have been made to assist prospective investors in comparing our results across periods, prospective investors may find it difficult to make comparisons between the financial information included herein and the financial information reported in a financial statement and/or to make comparisons between the Banking Group Financial Information and the Group Financial Information. Prospective investors are therefore cautioned against placing undue reliance on such comparisons. See “Risk factors—Risks related to the presentation of financial information—Much of the financial information used as the basis for discussion and analysis in this Offering Memorandum is unaudited and has been reclassified and/or restated, and because our financial information is presented in different ways, prospective investors may find it difficult to make comparisons”. Additionally, the December 31, 2020 figures presented include the effects deriving from the UBI Banca Acquisition, subject to consolidation from the date of the UBI Banca Acquisition (August 3, 2020). No adjustments have been made to the historic reclassified income statement and balance sheet data in order to retroactively reflect the effects of the UBI Banca Acquisition. In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we presented certain Non GAAP un-audited figures net of the UBI Banca’s results, in order to ensure a like-for-like comparison. For an illustration of the December 31, 2020 data aggregated without UBI Banca, please refer to our reclassified financial information set out in our 2020 Annual Report in section “Income statement and balance sheet aggregates”. For more information about the UBI Banca Acquisition, see “UBI Banca Acquisition”. Further note that the accounting standards adopted in preparation of the 2020 Audited Consolidated Financial Statements and the 2019 Audited Consolidated Financial Statements, with regard to the accounting of “Leases”, have changed compared to those adopted for the consolidated financial statements as at December 31, 2018. These amendments derive essentially from the mandatory application, from January 1, 2019, of the following international financial reporting standards:
IFRS 16 “Leases”, issued by in January 2016 and endorsed by the European Commission through Regulation no. 1986/2017, which replaced IAS 17 “Leases”, IFRIC 4 “Determining whether an arrangement contains a lease”, SIC 15 “Operating leases – Incentives” and SIC 27 “Evaluating the substance of transactions involving the legal form of a lease”, with effect from January 1, 2019. Prospective investors should note, in addition, that data from the Consolidated Financial Statements, as opposed to the Unaudited Restated and Reclassified Financial Information, is used in the section “Selected Statistical Information” and certain other sections noted herein. Therefore, prospective investors may, in some circumstances, find that financial information is different in the management’s discussion and analysis of the income statement and our financial condition and in “Selected Statistical Information” or in other sections based on the Consolidated Financial Statements. Further, the Bank of Italy requires us to present in the Consolidated Financial Statements certain financial information solely with respect to our banking activities, referred to as the “Banking Group”, rather than the consolidated Group as a whole (the “Group Financial Information”). Certain tables in the section “Selected Statistical Information” are based on the “Banking Group Financial Information” (as defined in “Selected Statistical Information”) rather than the Group Financial Information. Prospective investors may find it difficult to make comparisons between the financial information included herein and the financial information reported in a financial statement and/or to make comparisons between the Banking Group Financial Information and the Group Financial Information. Prospective investors are therefore cautioned against placing undue reliance on such comparisons.
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Except where indicated, references to IFRS in this Offering Memorandum are solely to IFRS as currently adopted by the European Union for use in the European Union. Merely for convenience, this Offering Memorandum contains translations of certain Euro amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the Euro amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. See “Exchange rate” for more information. Capitalized terms used in the following discussion are defined in the “Summary” section below. In making an investment decision, prospective investors must rely upon their own examination of the consolidation financial statements and financial information included elsewhere in this Offering Memorandum and should consult their professional advisors for an understanding of: (i) the differences between IFRS and other systems of generally accepted accounting principles and how those differences might affect the financial information included in this Offering Memorandum; and (ii) the impact that future additions to, or amendments of, IFRS principles may have on the Group’s results of operations and/or financial condition, as well as on the comparability of prior periods. New York Branch Financial Statements. The New York Branch does not have any operations independent from the Issuer and, therefore, does not separately produce financial statements. The Consolidated Financial Statements include the results of the consolidated Group as a whole, including the New York Branch.
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INCORPORATION BY REFERENCE The information contained in this Offering Memorandum should be read in conjunction with the 2020 Audited Consolidated Financial Statements and the 2019 Audited Consolidated Financial Statements (prepared in accordance with IFRS and the instructions issued Bank of Italy set forth in Circular No. 262 of December 22, 2005, as amended), together with the audit report and report on operations, for each period, each of which can be examined on our website (https://group.intesasanpaolo.com/en/investor-relations/financial-reports) as well as on the website of Borsa Italiana. For the convenience of the reader, our Group’s financial information has been presented in this Offering Memorandum in a format consistent with the discussions of financial information set out herein. Except where otherwise indicated, the financial information contained in this Offering Memorandum is unaudited and different from the Consolidated Financial Statements. For consistency of presentation the reader should therefore refer to the discussions of our financial information contained in this Offering Memorandum in, inter alia, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Management” and “Related-Party Transactions”. See “Risk Factors—Much of the financial information used as the basis for discussion and analysis in this Offering Memorandum is unaudited and has been reclassified and/or restated, and because our financial information is presented in different ways, prospective investors may find it difficult to make comparisons.”
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INDUSTRY AND MARKET DATA Certain industry and market data included in this Offering Memorandum were obtained from publicly available sources. Neither we nor the Dealers have independently verified this industry and market data, nor can we or the Dealers assure you of the accuracy and completeness of, or take any responsibility for, such data. Further, we do not assume any obligation to update this industry and market data. In addition, behavior, preferences and trends indicated by this industry or market data may not be reliable future indicators.
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AVAILABLE INFORMATION The Issuer shall, during any period in which it is not subject to and in compliance with the reporting requirements of Section 13 or 15(d) of the United States Securities Exchange Act of 1934 (the “Exchange Act”) nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, duly provide to any holder of a Rule 144A Note or to any prospective purchaser of such securities designated by such holder, upon the written request of such holder or (as the case may be) prospective holder addressed to the Issuers and delivered to the Issuers or to the specified office of the Note Registrar, the information specified in Rule 144A(d)(4) under the Securities Act.
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SUMMARY [Redacted Text]
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RISK FACTORS [Redacted Text] Although the risks and uncertainties described below are those that our Group considers material, they are not the only risks our Group faces. Additional risks and uncertainties that are not presently known to our Group or that our Group currently deems immaterial may also materially and adversely affect our Group’s business, financial condition or results of operations. Capitalized terms not defined in this section are defined elsewhere herein. Risks related to our business Volatility in the global financial markets and adverse global macroeconomic conditions in Italy, the Eurozone or globally could have a material adverse effect on our business, results of operations and financial condition In recent years, the global financial markets have experienced significant disruptions and volatility as a result of, among other things, concerns regarding the overall stability of the Eurozone, fears related to a slowdown of the Chinese economy, uncertainty relating to the timing of monetary policy changes in the United States, and trade disputes between China and the United States. In Europe, the continued modest GDP growth and low inflation have raised concerns, as evidenced by the quantitative easing program introduced by the ECB in January 2015 which was extended to the end of 2018, and subsequently resumed in September 2019 and expanded in 2020, and the uncertainty over the continued weak economic development of certain countries in the Eurozone. The market conditions have also been, and are likely to continue to be, affected by the slower economic growth and increased debt levels in China, the timing of monetary policy changes in the United States and the volatile global oil prices. Geopolitical events, such as continued tensions in the Middle East and the Korean Peninsula, the United Kingdom’s withdrawal from the EU, changes in certain policy goals of the U.S. government and in trade policies globally, including the introduction of related protectionist initiatives such as new or higher tariffs, pandemics and widespread public health crises have also caused, and are likely to continue to cause, uncertainty in the markets and concern about the development of the global economy. For example, the Covid-19 Pandemic, which has spread globally in 2020, has disrupted various markets and resulted in uncertainty about the development of the economies affected by the outbreak. Italy and the other European nations in which we operate have experienced particularly bad outbreaks of Covid-19, which has led to significant disruptions to business operations. The recession connected to the COVID-19 Pandemic may have a persistent negative impact on employment and profitability of businesses, which would generally expose us to credit losses as those entities and persons to whom we have lent money will be less likely to pay their obligations on time or at all. However, the exact ramifications of the Covid-19 outbreak are highly uncertain and, despite the release of the various vaccines, it is difficult to predict the spread or duration of the pandemic. See “—We are subject to risks related to the spread of contagious diseases”. There can also be no assurances that a potential tightening of liquidity conditions in the future as a result of, for example, further deterioration of public finances of some European countries will not lead to new funding uncertainty, resulting in increased volatility and widening credit spreads. Should there be any further turbulence in European or other markets, this could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us. Further, any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations. Although the COVID-19 Pandemic did not lead to the suspension of the Group’s activities or the disappearance of the reference markets in which it operates, it nevertheless contributed to creating a climate of extreme uncertainty. In particular, the COVID-19 Pandemic caused a significant threat to the resilience of the companies in the Group’s loan portfolio. On the other hand, a series of unprecedented government measures were implemented to support the economy, which must be considered in assessing risk. With regard to business areas, the Banca dei Territori Division, which accounts for half of the fee and commission income of the business units, recorded a decrease (-6.4%, or €269 million) in fee and commission income, affected by the abrupt slowdown in the first six months of 2020 associated with containment of the COVID-19 Pandemic, to be attributed to both the management, dealing and financial consultancy and commercial banking segments. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— Factors affecting our business— The aftermath of the COVID-19 Pandemic.”
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We are exposed to sovereign debt risk in the Eurozone, including Italy
Market volatility has negatively affected the debt of certain sovereign states in Europe, a significant portion of which debt is owned by financial institutions, including us. Such concerns began in 2008 and spread across European economies, extending to larger countries such as Italy, our primary market, where we generated 79.9% of our operating income, 85.0% of our loans to customers and 86.3% of our direct deposits from banking business as of and for the year ended December 31, 2020 and have lingered over the past decade. The Italian financial system has been negatively affected by concerns regarding Italy’s sovereign debt position since 2011. The sovereign debt-to-GDP ratio has increased significantly, reaching 155.8% in 2020 from 126.5% in 2012 (source: Eurostat). Italy’s interest expenditure as a percentage of GDP decreased to 3.4% in 2019; in 2020, despite the major increase in the debt ratio and the fall in nominal GDP, it only marginally increased to 3.5% of GDP (source: Eurostat). Similarly, the ratings of the Republic of Italy have declined since 2011. Any future downgrade of the Republic of Italy’s long-term credit rating may in turn affect our credit rating, which could have a material adverse effect on our business, results of operations and financial condition. See “—Unfavorable developments in our credit rating would increase our funding costs and affect our ability to access capital markets”. In recent years, Italian debt has experienced significant financial tensions, particularly in the two-month period between May and June 2018, during the negotiations to form a new government following the political elections held in March 2018. Since the elections, the BTP/Bund spread for the ten-year BTP has been volatile, increasing from 141 bps as of February 28, 2018 to 258 bps as of February 28, 2019. The BTP-Bund spread then returned to lower levels. The COVID-19 Pandemic led to renewed tensions in March and April 2020, but since then the launch by the ECB of the Pandemic Emergency Purchase Programme has led to a marked improvement in risk perception. On January 26, 2021, Prime Minister Giuseppe Conte resigned, leaving Italy in an uncertain political situation with Covid-19 infections still very high. However, one week later, Mario Draghi, the former head of the European Central Bank, accepted the mandate from President Sergio Mattarella to form a new unity government that would guide the country out of the pandemic and through economic recovery and, on February 13, 2021, he became Prime Minister. The new Italian government received resounding votes of confidence in both the Chamber of Deputies and the Senate on February 17 and February 18, 2021. As a result, the BTP/bund spread for the ten-year BTP declined to 105 bps However, new political elections will be held before mid 2023, which will lead to a change in the governing coalition and, possibly, to government policies. In the meantime, there is no certainty that the government will retain the level of parliamentary support required to implement its agenda. As an Italian bank, we are materially affected by our investments in Italian sovereign debt. As of December 31, 2020, the book value of our exposure with respect to sovereign Italian risk (which includes debt securities from central and local governments) was €90,170 million (of which €54,963 million related to debt securities held by our insurance business) compared with €85,826 million (of which €51,708 million related to debt securities held by our insurance business) as of December 31, 2019. In addition, our exposure on loans to Italian sovereigns as of December 31, 2020 was equal to €10,237 million, compared to €10,818 million as of December 31, 2019. If conditions in the Eurozone, instead of improving as it is currently expected, worsen so markedly as to threaten a new sovereign debt crisis, and if European policy makers are then unable to avert such crisis, we could see reduced growth of our ordinary business, an increase in our cost of credit, declines in our asset values, accelerated loan impairment losses and decreased profitability, in addition to being required to take further write downs on our sovereign exposures or other assets. Also, if Italy’s debt sustainability deteriorates, specific measures might be implemented that would affect the entire Italian banking system, including the Group. This could result in the rating agencies further lowering the rating of the Group’s debt and might restrict our access to funding on acceptable terms. If we are unable to access financing through the capital markets on acceptable terms or if we are otherwise negatively affected by a deterioration in the sustainability of Italy’s debt position, this could have a material adverse effect on our business, financial condition and results of operations. For additional details regarding macroeconomic conditions in Italy, and the Group’s funding activities, see “Rating” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic overview—Liquidity and Capital Resources”.
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We are subject to risks related to the spread of contagious diseases
Our operations may be negatively affected by an outbreak of any contagious disease with human-to-human airborne or contact propagation effects, such as Covid-19, that escalates into a regional epidemic or global pandemic. The occurrence of an epidemic or pandemic is beyond our control and we can provide no assurance on the future spread of Covid-19 or other contagious diseases in areas in which we operate or what the impact on our business and operations will be, due to, among other things, quarantines or other restrictive measures. Moreover, to the extent an epidemic or pandemic does affect our business, we are and will be unable to accurately predict the impact of such epidemic or pandemic on our business and operations as, by nature, the spread and subsequent containment of such epidemic or pandemic is unpredictable and beyond our control. We depend on access to the capital markets to maintain certain levels of liquidity and to obtain long-term financing
Liquidity and funding enables us to meet payment obligations in cash and on delivery, whether scheduled or unscheduled, so as not to adversely affect our current activities or financial situation. Our procurement of liquidity and long-term financing has been and could in the future be adversely impacted by a number of factors, many of which are beyond our control, such as a general weakening of capital markets, or loss of confidence in the capital markets, including uncertainties and speculation regarding the financial health of market participants. Ongoing concerns relating to the global and European capital markets have negatively affected the terms of available financing such as financing available to Italian financial institutions, including us. There can be no assurances that such concerns will not persist or intensify in the future and continue to negatively impact the terms of available financing. If we are unable to procure liquidity or access financing through the capital markets on acceptable terms, or at all, we may experience difficulties in operating our business, which could have a material adverse effect on our business, financial condition and results of operations. For additional details regarding recent macroeconomic conditions, including in Italy, and our funding activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic overview—Liquidity and Capital Resources”. Our business is focused primarily in Italy and our financial condition and results of operations would be particularly affected by a worsening of the current volatility in the Italian financial market and political landscape or of the macroeconomic conditions in Italy
Although our Group operates in many countries, Italy is our primary market. Our business is therefore particularly sensitive to adverse macroeconomic and political conditions in Italy. As of and for the year ended December 31, 2020, 79.9% of our operating income, 85.0% of our loans to customers and 86.3% of our direct deposits from banking business were generated in Italy. In recent years, Italy’s recovery has lagged behind the rest of the Eurozone. Italy’s gross domestic product (GDP) decreased by 8.9% in 2020, compared to an increase of 0.3% in 2019 and 0.9% in 2018. The Eurozone’s gross domestic product decreased by 6.6% in 2020, compared to an increase of 1.3% in 2019 and 1.9% in 2018 (source: Eurostat). As for 2021, GDP estimates foresee a rebound of 4.2% for Italy and 4.3% for the Eurozone (source: European Commission). If, following unexpected or materially adverse developments, GDP stagnates or declines, this would result in higher rates of loan impairment and/or NPLs and default and insolvency, and cause an overall reduction in demand for our services. A continuation or worsening of the current volatility in the Italian financial market can affect us significantly, not only from the liquidity perspective. The Italian stock exchange has historically been subject to volatile movements in prices, which can effect certain of our income streams. In particular, unfavorable developments in financial markets affect, inter alia: (i) the placement of products relating to assets under management and assets under administration, with resulting adverse effects on the amounts of placement commissions received; (ii) management commissions due to the reduced value of assets (direct effect) and the redemptions resulting from unsatisfactory performance (indirect effect); (iii) the operations of our Corporate and Investment Banking business segment, particularly with respect to the placement of financial products and customer dealing with adverse effects on the amount of commissions received; and (iv) the results of the banking and trading portfolios. We develop and apply specific risk management policies to identify, monitor and manage these types of risks. However, there can be no assurance that our business, financial condition and results of operations may not be materially adversely affected by unfavorable developments in the financial markets.
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For additional details regarding recent Italian macro-economic conditions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic overview—Italian economy”. We are exposed to risks related to the large concentration of NPLs in the European and Italian market
The European banking market continues to experience challenges surrounding asset quality, capital adequacy and profitability. The total volume of non-performing loans (“NPLs”) in the Eurozone reached a peak of €1.2 trillion in 2016, more than double the levels in 2009. In 2020, Greece reported NPL ratios of more than 30%, Cyprus reported NPL ratios of almost 20%, and Croatia and Italy reported NPL ratios above 5%. In Italy, the banking sector is feeling the strain of NPLs, which increased by approximately 160% between 2009 and 2016. As of December 31, 2020, the total volume of NPLs in Italy amounted to €119 billion (source: European Parliament). Approximately half of total gross NPL stock is represented by loans collateralized by real estate and almost 80% of the loans are towards small and medium enterprises (“SMEs”). We have been in a position to gradually reduce our NPL volume (net of loan loss provision) from €34.0 billion in 2014 to €4.3 billion as of the year ended December 31, 2020 (source: Bank of Italy). There has been significant government and regulatory support for, and commitment to, the sale and resolution of NPL credits compared to previous market cycles to accelerate bank sector rehabilitation and improvement to the real economy. In 2019 and 2020, the Italian government continued to assist in the improvement of Italian banks’ positions and in particular the liquidity of the NPL market. In addition, Italian authorities introduced new measures aimed at improving the efficiency and speed of judicial and extrajudicial insolvency procedures in order to further reduce the input of NPLs on bank balance sheets. Despite these measures, the Italian banking sector continues to face significant challenges related to NPLs. If Italian banks fail to address NPLs, they could affect the banking sector and industry, which could have a material adverse effect on our business, financial condition and results of operations. See “—Volatility in the global financial markets and adverse global macroeconomic conditions in Italy, the Eurozone and globally could have a material adverse effect on our business, results of operations and financial condition”. The reduced support in liquidity provided by Governmental and Central Bank may result in increased difficulty in procuring liquidity on the market
In recent years authorities have intervened with respect to the level of capitalization of banking institutions in various ways. In many countries, this was achieved through measures of support to the financial system and the direct intervention by governments in the share capital of the banks in different forms. In order to permit such government support, financial institutions were required to pledge securities deemed appropriate by central financial institutions as collateral. In the last ten years, we made recourse to the ECB’s short-term main refinancing operations (“MROs”) program and the ECB’s targeted long-term refinancing operation program (“TLTRO I”). A second series of TLTROs was announced in 2016 (“TLTRO II”), to which we also made recourse. In March 2020, new long term refinancing operations (“LTRO”) were announced to ensure liquidity and regular money market conditions. In December 2020, ECB announced a new series of quarterly targeted longer-term refinancing operations (“TLTRO III”). As of December 31, 2020, in the context of financial liabilities, which include interest on funding transactions with negative rates, the Group’s interest income was recognized on other TLTROs in the total amount of €544 million in 2020 and €243 million in 2019. The amount recognized in 2020 includes €484 million of interest accrued on TLTRO III operations, in addition to the UBI Banca’s contribution. For additional information on our Group’s operational risk and its management of such risk see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources— ECB funding”. The unavailability of liquidity through such measures, or the decrease or discontinuation of such measures by governments and central authorities, or our inability to participate in such measures, including due to a lack of “eligible” assets, could result in increased difficulties in procuring liquidity on the market and/or result in higher costs for the procurement of such liquidity necessary to conduct or expand our business, which could have a material adverse effect on our business, financial condition and results of operations. Also, these measures may have the effect of dampening economic growth over the short, medium and longer terms. The consequent declining or stagnant economic growth (or a fall into recession) in the Eurozone could exacerbate the difficulty of Eurozone sovereigns and non-sovereigns in refinancing their debt as it comes due, further increasing pressure
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on the macroeconomic environment in the Eurozone and the global economy, which could have a material adverse effect on our business, results of operations and financial condition. For additional details regarding our funding from the ECB, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. The consequences of Brexit are still uncertain and may negatively impact our business and cost of funding
On June 23, 2016, the United Kingdom (“UK”) voted in a referendum to leave the European Union (“EU”) (“Brexit”). Under Article 50 of the 2009 Lisbon Treaty (“Article 50”), the UK will cease to be a member state when a withdrawal agreement is entered into or, failing that, two years following the notification of an intention to leave under Article 50, unless the European Council (together with the UK) unanimously decides to extend this period. On March 29, 2017, the UK formally notified the European Council of its intention to leave the EU. Despite several rounds of rejected proposed drafts of an agreement to withdraw from the EU, following the victory of Boris Johnson’s Conservative Party in December’s general election, the European Union (Withdrawal) Act 2018 (“EUWA”) was eventually passed by the British Parliament. After months of negotiations, a preliminary implementation period came to an end: the UK and the EU eventually entered into the EU-UK Trade and Cooperation Agreement, which came into effect on January 1, 2021 (the “Trade Agreement”). The European Commission proposed to apply the Trade Agreement on a provisional basis for a limited time until February 28, 2021, by which time the Trade Agreement should have been approved by the European Parliament. The Trade Agreement has been finally approved by the European Parliament on April 27, 2021. Given the recent entry into force of the Trade Agreement, as of the date of this Offering Memorandum, the exact effects of the Trade Agreement, its practical application and the overall relationship of the UK and the EU are not fully clear. Since during the preliminary implementation period EU law continued to apply, financial institutions have been able to continue to rely on the system of mutual recognition of authorizations and of supervisory systems for financial markets and intermediaries (the single passport). However, following the Trade Agreement coming into force, UK financial institutions no longer have automatic access to EU markets and EU financial institutions continue to have access to the UK market only for a further transitional period under the terms of the UK’s temporary permissions regime. On March 26, 2021 both the EU and the UK announced the conclusion of a technical discussion on a memorandum of understanding in order to lay down a framework for regulatory cooperation on financial services by the end of March 2021 (the “Memorandum”). Additional steps are required on both the EU and UK side in order to sign the Memorandum. The failure to sign the Memorandum as well as the potential problematic provisions or the potential uncertain interpretation of the Trade Agreement could adversely and significantly affect European or worldwide economic or market conditions and may contribute to instability in global financial and foreign exchange markets. In addition, it would likely lead to legal uncertainty and divergent national laws and regulations. Any of these effects of Brexit, and others which cannot be anticipated, could have a material adverse effect on our business, results of operations and financial condition. Our Group is subject to significant credit, counterparty, country and market risk and such risks are exacerbated by periods of financial crisis and recession
Our Group is exposed to the credit risk of third parties, primarily with regard to the traditional lending and deposit taking business, but also, to a lesser extent, to non-traditional businesses such as derivative transactions, securities, futures and commodities trading, owning securities of third parties, and other credit arrangements. This exposes our Group to the risk of counterparty defaults, which have historically been aggravated during periods of economic downturn like that experienced since 2020 due to the COVID-19 Pandemic. While our Group’s clients would be responsible for losses our Group incurs in taking positions for their accounts, our Group may be exposed to additional credit risk as a result of their need to cover any such losses. Our Group’s business may also suffer if our Group’s clients lose money and our Group loses the confidence of clients in our products and services. We are also exposed to country risk, which is the risk that events within a country, such as currency crises, regulatory changes and other political and economic events, will adversely affect the ability of the sovereign government and/or obligors within the country to honor their obligations to the Group. The Group has cross-border exposure to many countries, including certain European countries that experienced
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varying degrees of credit deterioration due to weaknesses in their economic and fiscal situations, including Italy, Spain, Ireland and Greece. The Group uses a system of operating limits to further monitor cross-border exposures towards countries, outside the Eurozone, considered at risk according to the internal sovereign rating model. Our banking businesses make provisions for loan losses, which correspond to the provision for impairment losses in our income statement, in order to maintain appropriate allowances for loan losses based upon an assessment of prior loan loss experience, the volume and type of lending being conducted by each bank, industry standards, past due loans, economic conditions and other factors related to the collectability of each entity’s loan portfolio. This determination is based primarily on our historical experience and judgment, and our banking businesses may have to increase or decrease their provisions for loan losses in the future as a result of increases or decreases in non-performing assets or for other reasons. For example, for the year ended December 31, 2020, total impaired losses on loans, net of adjustments to guarantees and commitments, amounted to €4,214 million (including the €54 million contribution of UBI Banca), an increase of 101.7% from the €2,089 million for the year ended December 31, 2019, which had previously recorded a decrease of 38.5% from the €3,394 million for the year ended December 31, 2018. In April 2019, the ECB and the European Commission introduced measures to ensure more timely coverage practices for non-performing exposures (“NPE”). They introduced a minimum level of provisions for newly originated loans starting from April 26, 2019 (when turning into non-performing) through amendments to the Capital Requirements Regulation (“CRR”). The backstop envisaged a 100% coverage of non-performing loans after 3, 7 or 9 years of NPE classification. The ECB also introduced guidelines setting supervisory expectations on minimum level of provisioning in line with the Pillar 1 treatment, with a scope of application including the NPEs arising from loans which originated before April 26, 2019, and adopted a minimum loss coverage ratio for new loans becoming NPEs and originated after April 26, 2019. On August 22, 2019, the ECB decided to revise its supervisory expectations for prudential provisioning of new NPEs. As a result, the guidelines can be divided into three categories based on the date of the exposure’s origination and the date of a NPE’s classification: (i) NPEs classified before April 1, 2018 (Pillar II – Stock): 2/7 years tenor buckets for unsecured/secured NPEs, subject to supervisory coverage recommendations and phase-in paths as communicated in SREP letters; (ii) NPEs originated before April 26, 2019 (Pillar II – ECB Flows): 3/7/9 years tenor buckets for unsecured/secured other than by immovable property/secured by immovable property, progressive path to 100%; and (iii) NPEs originated on or after April 26, 2019 (Pillar I – CRR Flows): 3/7/9 years tenor buckets for unsecured/secured other than by immovable property/secured by immovable property, progressive path to 100%. Any increase in the provision for loan losses, any loan losses in excess of the previously determined provisions with respect thereto or changes in the estimate of the risk of loss inherent in the portfolio of non-impaired loans could have a material adverse effect on our business, results of operations and financial condition. Furthermore, for the year ended December 31, 2020, we recorded a NPL volume (net of loan loss provision) equal to €10.8 billion. See “—We are exposed to risks related to the large concentration of NPLs in the European and Italian market”. We are also exposed to market risk as a consequence of our open positions in the foreign exchange, interest rate and capital markets. The risk is linked to variations in financial results due to fluctuations in market prices or exchange rates. Market risk in the trading portfolio arises through trading activities in the interest rate, foreign exchange and equity markets and market risk in the banking portfolio arises from differences in fixed-rate periods. In periods of volatility, significant profits on trading can be followed by periods of losses on trading. Our Group may suffer material losses if we cannot close out deteriorating positions in a timely manner, in particular with respect to illiquid assets such as assets not traded on stock exchanges or other public trading markets such as derivatives contracts between banks.
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If any of our instruments and strategies for hedging or otherwise managing our exposure to credit, counterparty, country or market risk are not effective, we may not be able to effectively mitigate our risk exposures, which could have a material adverse effect on our business, financial condition and results of operations. Our Group’s financial results are also dependent upon how effectively our Group determines and assesses the cost of credit and manages its credit risk, counterparty risk and market risk concentrations. To the extent our Group’s assessments of migrations in credit quality and of risk concentrations, or our Group’s assumptions or estimates used in establishing its valuation models for the fair value of our Group’s assets and liabilities or in determining the appropriate level of its loan loss allowances and other risk allowances prove inaccurate or not predictive of actual results, our Group could suffer higher than expected credit, trading or investment losses. This in turn could have a material adverse effect on our business, results of operations and financial condition. For a discussion of our Group’s credit and market risks and its management of such risks, see “Risk Management”. We are exposed to counterparty credit risk in derivative transactions
We execute a wide range of derivatives transactions, including interest rate, exchange rate, share/index prices, commodity and credit derivatives with counterparties in the financial services sector, commercial banks, investment banks, funds and institutional clients, as well as with other non-institutional clients of the Group. The value of derivative contracts (having a positive fair value) entered into with retail clients, non-financial companies and public entities (excluding banks, financial and insurance companies) amounted to €8,700 million as of December 31, 2020, compared to €7,694 million as of December 31, 2019. At the same time, the notional value of derivative contracts having the same characteristics (except for having a negative fair value) amounted to €75,296 million as December 31, 2020 compared to €62,528 million as of December 31, 2019. The Group also executes derivatives transactions with counterparties that do not operate in the financial services sector, retail customers and public entities. Operating in derivative financial instruments exposes us to market risk and operational risk, as well as the risk that the counterparty defaults on its obligations or becomes insolvent prior to maturity when we have an outstanding claim against that counterparty. This risk has increased due to the recent volatility in the financial markets and may be further exacerbated when the collateral held by us cannot be realized or is liquidated at a value that is insufficient to cover the full amount of the counterparty exposure. There can be no assurance that a default by a counterparty with respect to its obligations under an agreement entered into with us or a company of the Group and/or the insufficient value of the collateral, where available, will not occur, any of which could have a material adverse effect on our business, financial condition and results of operations. Changes in interest rates are caused by many factors beyond our control and such changes have had and may continue to have significant adverse effects on our financial results, including our net interest income, which represents the majority of our operating income Our Group derives the majority of its operating income from net interest income. As a result, our operations are affected by fluctuations of interest rates in Europe and in other markets in which we operate. In particular, our banking and financing operations depend on the management of our exposure to interest rates, and the change of the relationship between the changes in interest rates in our markets and the interest margin. A mismatch of interest earning assets and interest bearing liabilities in any given period could, in the event of changes in interest rates, reduce our interest margin and adversely affect our Group’s net interest income, which could in turn have a material adverse effect on our business, results of operations and financial condition. For example, the decrease of interest rates and spreads to historically low levels in recent years adversely affected our net interest income. However, for the year ended December 31, 2020, net interest income increased by 0.9% to €7,070 million from €7,005 million for the year ended December 31, 2019. For additional details regarding the effect interest rates have had on our net interest income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors affecting our business— Net interest income”. Our Group is subject to foreign exchange risk
Our consolidated financial statements are prepared in Euro, although we conduct business in currencies other than the Euro, most importantly in Central and Eastern European currencies, as well as U.S. dollars. Foreign
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exchange effects can significantly affect our income. This exposes our Group to foreign currency translation risks and foreign currency transaction risks. As of December 31, 2020, the assets and liabilities (including derivatives) in currencies other than the Euro of the Group amounted to €5,329 million compared to €6,003 million as of December 31, 2019 (prudential consolidation). Negative changes in foreign exchange rates in particular with respect to the exchange rate between the Euro and the currencies in Central and Eastern Europe and the U.S. Dollar could have a material adverse effect on our business, results of operations and financial condition. Our Group’s risk management policies, procedures and methods may leave our Group exposed to unidentified or unanticipated risks, which could lead to material losses
Our Group devotes significant resources to developing risk management policies, procedures and assessment methods for its banking and other businesses in line with best market practices in the industry. Such techniques and strategies include historical analysis of the market and statistical models to identify, monitor, control and manage risk. Nonetheless, the risk management techniques and strategies applied by our Group may not be fully effective in mitigating risk exposure in all economic market environments or against all types of risk, particularly in respect of assets that are not publicly traded, such as derivative contracts. Monitoring the value of assets like these can be difficult and may lead to losses that our Group has not anticipated. In addition, the markets in which we operate are characterized by high levels of uncertainty and volatility and may subject us to unanticipated events. Unanticipated quantified risk exposures could result in material losses, which could have a material adverse effect on our business, results of operations and financial condition. See “Risk Management—Credit risk”. The assumptions, judgments and estimates used to assess the fair value of our assets may prove unreliable
Under IFRS, our Group recognizes at fair value: (i) financial assets classified as “held for trading” (€53,165 million as of December 31, 2020 and €45,152 million as of December 31, 2019), “financial assets designated at fair value” (€3 million as of December 31, 2020 and €195 million as of December 31, 2019) or “other financial assets mandatorily measure at fair value” (€5,078 million as of December 31, 2020 and €4,067 million as of December 31, 2019), (ii) financial assets “measured at fair value through other comprehensive income” (€57,858 million as of December 31, 2020 and €72,410 million as of December 31, 2019), (iii) financial assets “pertaining to insurance companies, measured at fair value pursuant to IAS 39” (€177,170 million as of December 31, 2020 and €168,202 million as of December 31, 2019), and (iv) hedging derivatives (€1,134 million as of December 31, 2020 and €3,029 million as of December 31, 2019). In order to establish the fair value of these financial assets our Group relies on quoted market prices (level 1 of the fair value hierarchy or “Level 1”) or, where the market for a financial instrument is not sufficiently active, internal valuation models that utilize observable market data (level 2 of the fair value hierarchy or “Level 2”). In certain circumstances, the market data for individual financial instruments or classes of financial instruments utilized by such valuation models may not be available or may become unavailable due to adverse market conditions, as has been the case over the past several years. In such circumstances, our Group’s internal valuation models require us to make assumptions, judgments and estimates in order to establish the fair value of such instruments (level 3 of the fair value hierarchy or “Level 3”). As of December 31, 2020, including insurance companies, the fair value of Level 1 assets amounted to €241,748 million, the fair value of Level 2 assets amounted to €46,237 million and the fair value of Level 3 assets amounted to €13,683 million. These internal valuation models are complex, and the assumptions, judgments and estimates we are required to make often relate to matters that are inherently uncertain, such as expected cash flows, the ability of borrowers to service debt, property appreciation and depreciation, and relative levels of defaults and deficiencies. Such assumptions, judgments and estimates may prove unreliable and may need to be updated to reflect changing trends and market conditions. The resulting change in the fair values of our financial assets could have a material adverse effect on our business, results of operations and financial condition. For a discussion of certain of our critical accounting policies, including the effects of amendments to IAS 39 and IFRS 7 that permitted us to reclassify certain financial assets from “financial assets held for trading” to “loans” or “financial assets available for sale” and the effects of the introduction of IFRS 9, see “Management’s
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Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies” and our Financial Statements. We have a significant amount of goodwill on our balance sheet, which could be subject to impairment if there are further adverse changes in the business climate in which we operate
We test goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate, indicate that these assets may be impaired. The parameters and information used to determine the recoverability of goodwill, including interest rates directly affecting the profitability of the entities subject to the impairment, are significantly influenced by the general market and the macroeconomic environment, each of which may continue to be subject to rapid and unpredictable events and changes. We did not record any goodwill impairments for the years ended December 31, 2019 or 2018. In the year ended December 31, 2020, we recorded a goodwill impairment for the Banca dei Territori cash generating unit of €981 million, gross of related tax. We had €3,154 million of goodwill included in our balance sheet as of each of December 31, 2020, compared with €4,055 million and €4,227 million as of December 31, 2019 and 2018, respectively. The goodwill primarily relates to businesses we acquired in connection with the Banca Intesa acquisition of Sanpaolo IMI in 2007, as well as certain other businesses we subsequently acquired. Any future unfavorable changes in circumstances could require additional impairments to our goodwill that would result in a reduction of our income and shareholders’ equity, which could have a material adverse effect on our business, results of operations and financial condition. For additional details regarding how we record goodwill, including testing for impairments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies—Impairment of financial assets and intangible assets”. Factors outside our control may affect the implementation of our Business Plan
On February 6, 2018, we announced the approval of our new business plan (the “Business Plan”), following the successful completion of the business plan for the 2014-2017 period. Our Business Plan contains the objectives of the Group until the end of 2021 and includes well-defined managerial steps. Details of our Business Plan are set forth hereunder under “Business—Overall Group strategy and Business Plan”. The Business Plan is based on projections and estimates relating to the occurrence of future events and regarding the effect of initiatives and steps taken by our Group. The main assumptions relate to the macroeconomic situation which is beyond the control of the management, and to assumptions relating to specific actions and future events with respect to which the management has only limited control, which may not occur or which may evolve differently than assumed in our Business Plan. Given the subjective nature of the underlying assumptions of our Business Plan, in the event that one or more of our Business Plan’s underlying assumptions prove incorrect or events evolve differently than assumed in our Business Plan, including because of events affecting the Group’s operations or the external circumstances that may not be foreseeable or quantifiable as of the date hereof, we may not be able to achieve the objectives set forth in our Business Plan and our results may differ, including significantly, from the Business Plan, which could have a material adverse effect on our business, results of operation or financial condition. [Redacted Text] Our Group is subject to operational risks, including fraud, misconduct by clients or employees, security breaches, technical and information technology errors or failures and other adverse events, many of which are wholly or partially beyond our control
Our Group, like all financial institutions, is exposed to many types of operational risk, including the risk of fraud or other misconduct by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record keeping errors or errors resulting from faulty computer or telecommunications systems. We are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous diverse markets in many currencies and some of these transactions have become increasingly complex. Given our Group’s high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, our Group’s dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee
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tampering or manipulation of those systems will result in losses that are difficult to detect. If any of these systems fail to operate properly, or are disabled, it could have a material adverse effect on our business, results of operations and financial condition. In addition, our Group’s ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. According to our Business Plan, we are assigning these investments adequate priority; still, if the design of our controls and procedures prove inadequate, or are circumvented, delays in detection or errors in information may result. Consequently, we could suffer reputational and/or financial harm, which could have a material adverse effect on our business, results of operations and financial condition. Our Group may also be subject to disruptions or breaches of its operating systems, or of the infrastructure that supports it, arising from events that are wholly or partially beyond our control. This includes, but is not limited to, disruptions or breaches caused by terrorist activities, computer viruses, electrical or telecommunication outages, transportation or other services used by us or third parties with whom we conduct business. For instance, there is a continuous threat from cyber-attacks to the security of our Group’s information and customer data. Risks related to technology and cyber-security change rapidly and require continued innovation and investment. Given the rapidly increasing sophistication and scope of potential cyber-attack, it is possible that future attacks may lead to breaches in our security. Any of these disruptions, the inability to adequately manage cyber-security risk, or the interception of confidential or proprietary information could give rise to losses in service to our customers and to loss or liability to our Group. This in turn could have a material adverse effect on our business, results of operations and financial condition. Our critical business processes rely on large volumes of financial data from a number of different systems and sources. If data governance (including data retention and deletion, data quality and data architecture policies and procedures) is not sufficiently robust, manual intervention, adjustments and reconciliations may be required to reduce the risk of error in the our external reports or in reporting to senior management or regulators. We must also comply with requirements under law or regulation which require classification of customers, counterparties, financial transactions or instruments. Financial institutions that fail to comply with in-country (local) and global regulatory and compliance requirements may face supervisory measures, which could in turn have a material adverse effect on our operations, financial condition and prospects. Our Group is further exposed to the risk that external vendors may be unable to fulfill their contractual obligations to our Group (or that external vendors will be subject to the risk of fraud or operational errors by their respective employees), and to the risk that our (or our vendors’) business continuity and data security systems could prove ineffective. Any problems caused by these third parties or affiliates, including as a result of them not providing us their services for any reason, or performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise conduct its business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third party vendors or affiliates could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that it restructures such arrangements. Although our Group maintains a system of controls designed to keep operational risk at appropriate levels, our Group has suffered losses from operational risk and there can be no assurance that we will not suffer losses from operational risk in the future, any of which could have a material adverse effect on our business, results of operations and financial condition. For additional information on our Group’s operational risk and its management of such risk see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources— ECB funding”. Our anti-money laundering and anti-terrorism policies may be circumvented or not be sufficient
We are also subject to the risk of money laundering and financing of terrorism. Although we believe that our policies and procedures comply with applicable rules and regulations, we cannot guarantee that our anti-money laundering and anti-terrorism financing policies and procedures will not be circumvented or effectively be able to prevent all money laundering or terrorism financing activities. Any of such events may have severe consequences, including sanctions, fines and, notably, reputational consequences, which could have a material adverse effect on our financial condition and results of operations. We are exposed to risks arising from climate change either directly through its own operations or indirectly through its financing and investment activities
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According to the Financial Stability Board’s report, ‘The Implications of Climate Change for Financial Stability”, released on November 2020, two main types of risks can be identified: transition risks and physical risks. On the one hand, transition risks would result from an adjustment towards a low-carbon economy and would cause changes in the behavior of economic and financial actors. On the other hand, physical risks would result from the current or expected economic effects of a continuation in climate change and, therefore, would correspond to extreme weather events, rising water levels, increasing temperatures and other events which affect people and property directly. Furthermore, liability risks may derive from both categories of risk. However, even though we yearly identify the potential impact and the mitigation action to be taken to address both transition and physical risks, climate change could nonetheless could have a material adverse effect on our business, results of operations and financial condition. We are exposed to risks relating to the real estate market
We are exposed to the real estate segment as lender to companies that we classify as entities whose cash flows are mainly backed by the proceeds deriving from the lease or sale of real estate (commercial real estate). During the last four years, within the real estate market, prices and the number of completed transactions have declined, transaction volumes have decreased, commitments due to financial obligations have increased and refinancing has been obtained with greater difficulty. Increases in unemployment rates in Italy and in the other countries in which we operate, the imposition or increase of property taxes, declines in corporate profitability and the increase in insolvencies with respect to lease payments could increase the inability of borrowers to repay loans and reduce the market value of loan collateral, any of which could have a material adverse effect on our business, results of operations and financial condition. While our Group assesses counterparties mainly on the strength of their underlying businesses and ability to generate cash flows rather than the value of their real estate and other collateral, declines in the value of real estate and other collateral (or a deterioration of any other metric used to assess the performance of a loan) could have a negative impact on the ability of such counterparties to meet their obligations. The difficulties experienced by counterparties operating in a deteriorated market, a decline in real estate values and in the value of collateral have had and could continue to have an adverse effect on the repayment of loans granted by us. Any of the foregoing risks could have a material adverse effect on our business, results of operations and financial condition. We are exposed to risks relating to our insurance operations, including risks deriving from the ability to accurately price our insurance products, risks deriving from insurance claims and risks relating to our loss reserve calculations for our life insurance policies
Our business, results of operations and financial condition depend on our ability to select and underwrite risks, and in particular the ability to accurately price our different insurance products, to establish appropriate loss reserves to cover the underwritten risks and the performance of our obligations, and, with respect to our life operations and pension products, to perform correct statistical and actuarial projections regarding life expectancies and factors related to pension claims. Our ability to set adequate premium rates can be adversely affected by several factors, including the lack of sufficient reliable data, the incomplete or incorrect analysis of available data, the uncertainties inherent in estimates and assumptions (particularly with respect to the number and amount of claims to be covered by premiums), the application of inappropriate or inadequate formulae or methodologies, unanticipated changes in the regulatory and judicial framework as well as changes in claims settlement practices. We use our experience in this sector and information available to us in the market to develop estimates of revenues from future insurance policies. However, future claims may significantly exceed the estimates used to price our products, both in terms of volume and amount, which could have a material adverse effect on our business, results of operations and financial condition. Every insurance company in the Group establishes reserves covered by selected assets, depending on the category of insurance and the type of risk insured. In particular, with respect to loss reserves in our non-life operations, the amount of such reserves is adjusted at the end of every financial year and reflects the results of operations of such period, and if such reserves prove insufficient with respect to actual claims, of future periods. To the extent our loss reserves prove to be
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insufficient in the future (also in light of judicial and regulatory developments), it could have a material adverse effect on our business, results of operations and financial condition. With respect to our loss reserves for our life operations, and in particular insurance policies which provide for minimum guaranteed returns (in accordance with applicable law and regulations), we are subject to a financial risk related to the performance of the assets underlying such policies. If such assets fail to perform at a level required to fund the guaranteed return, our profitability could be adversely affected, which could have a material adverse effect on our business, results of operations and financial condition. Premiums payable in connection with life insurance policies are calculated based on statistical and actuarial estimates with respect to life expectancies. If such statistical data is unreliable, our loss reserves with respect to life insurance and pension products may be insufficient, which could have a material adverse effect on our business, results of operations and financial condition. In addition, with respect to our pension products, we determine technical reserves based on forecasts of: (i) mortality rates; (ii) job turnover rates within the workforce; (iii) invalidity rates; (iv) early retirement rates; (v) discount rates; (vi) long-term interest on investments; and (vii) rates regarding salary raises, future pension claim increases and increases of long-term health care costs. These parameters may differ from actual data as a result of, among other things, changes in economic conditions related to increased or decreased life expectancies of the insured clients. Any difference may affect the amount of pensions or pension related costs in future years, and could result in our technical reserves becoming insufficient, which could have a material adverse effect on our business, results of operations and financial condition. Our international presence exposes us to certain risks; in particular, the difficult economic conditions in Central and Eastern European (“CEE”) countries and in the Middle East and North Africa have had and may continue to have a material adverse effect on our business, results of operations and financial condition
We operate in several Central and Eastern European countries as well as in Egypt through our International Subsidiary Banks business segment. As of December 31, 2020, our International Subsidiary Banks business segment accounted for 11.0% of our operating income, 9.0% of our loans to customers and 10.1% of our direct deposits from banking business. Our Group also operates in the Russian Federation with 28 branches located in that country as of December 31, 2020. In February and March 2014, hostilities broke out between Russia and Ukraine, resulting in alleged Russian military forces entering Ukrainian territory. The fall of oil prices, as well as continued or new tensions between Russia and other countries, the imposition of further economic or other sanctions in response to such tensions, and the alleged intervention of Russia in the U.S. presidential election of 2016, which led to the imposition of additional sanctions and is subject to continuing investigations, could have a material adverse effect on the operations of our Russian branches and on our business, results of operations and financial condition. Similarly, our Group also has significant operations in Egypt, a country that has been in a political crisis since January 2011. In particular, currency export restrictions have been in place since 2012 on the repatriation of funds denominated in Egyptian pounds; specifically, the dividend denominated in Egyptian pounds is paid to Intesa Sanpaolo in U.S. Dollars in staggered transactions that are authorized by the Egyptian Central Bank on a daily basis. In 2016, Egypt switched to a free floating exchange rate system and the value of the Egyptian pound against the dollar more than halved, rising above 18 EGP:1 USD, which had a negative effect on our net interest income. Certain countries in Eastern Europe are characterized by high levels of volatility of capital markets and exchange rates, as well as a certain degree of political, economic and financial instability, exacerbated by the economic crisis, as a result of which several countries were forced to adopt extraordinary measures with respect to loans as well as financial and management policies. Furthermore, our Group may be subject to unilateral policies by regulatory and governmental authorities of such countries, and may need to transfer an increased amount of funds in order to the meet liquidity or regulatory capital requirements of our subsidiaries at a time when access to liquidity is or may be difficult in the international markets. The increase in credit risk may also trigger additional write-downs and write offs, which could further unfavorable developments affecting our international operations and could have a material adverse effect on our business, results of operations and financial condition.
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We are legally obligated to make both ordinary and extraordinary contributions to the Deposit Guarantee Scheme and Single Resolution Fund, the amounts of which can be significant and/or unpredictable
Following the crisis that affected many financial institutions in 2008, various risk-reducing measures were introduced, both at the European and individual Member State level. Their implementation requires significant payments by individual financial institutions in support of the banking system. See “Supervision and Regulation—Recovery and Resolution under the BRRD and SRM Regulation—Resolution Funds” and “Supervision and Regulation—Recovery and Resolution under the BRRD and SRM Regulation—DGSD and deposit insurance”. As a result of the Deposit Guarantee Schemes Directive (the “DGSD”) of April 16, 2014, the BRRD and the SRM Regulation establishing the predecessor of the current Single Resolution Fund (the “SRF”, which until 2015 was called the “National Resolution Fund”), we are obligated to provide financial resources to fund the Deposit Guarantee Scheme (“DGS”) and the SRF. These contribution obligations could have a significant impact on our financial and capital position. These amounts are in addition to the capital commitments paid to the Atlante Funds. For the year ended December 31, 2020, we contributed €710 million to DGS schemes and to the SRF, as compared to €526 million for the year ended December 31, 2019. We cannot currently predict the payments which may be necessary for future banking crises, but if significant, they could have a material adverse effect on our business, results of operation and financial position. In addition, the Bank of Italy could ask us to make further contributions in the future for an amount that cannot currently be quantified, as occurred on December 28, 2016, when the Bank of Italy requested an extraordinary contribution to the Group equal to €316 million, which could be significant and have a material adverse effect on our business, results of operation and financial condition. Regulatory changes or enforcement initiatives could adversely affect our business
We are subject to regulation applicable to listed companies and to extensive banking and financial services laws and government regulation in each of the jurisdictions in which we conduct business, including the ECB, the Bank of Italy, CONSOB and the Istituto per la Vigilanza sulle Assicurazioni (“IVASS”) (formerly known as the Istituto per la Vigilanza sulle Assicurazioni Private e di Interesse Collettivo or ISVAP) with respect to our bancassurance operations – see “Supervision and Regulation”. Regulatory agencies have broad administrative power over many aspects of the financial services business, which may include liquidity, capital adequacy and permitted investments, ethical issues, money laundering, privacy, transparency, record keeping, and marketing and selling practices. Banking and financial services laws, regulations and policies currently governing us and our subsidiaries may change at any time in ways which materially affect the way in which we conduct business, the products or services we may offer, and the value of our assets. In addition, regulatory agencies have the power to bring administrative or judicial proceedings against us, which could result, among other things, in suspension or revocation of our licenses, cease and desist orders, fines, civil penalties, criminal penalties, or other disciplinary action. Any such changes or procedures against us could negatively affect the services we offer or provide and have a material adverse effect on our business, results of operations and financial condition. We are also required to comply with banking regulations and to maintain adequate capital resources in order to operate our business. In the past decade, many governments and international organizations have proposed and, in certain cases, adopted significant changes to bank regulations relating to adequate capital reserves. During 2010 and 2011, the Basel Committee of Banking Supervision issued the “Basel III rules”, which provide new regulatory standards on bank capital adequacy and liquidity. The rules aim to set out higher and better quality capital, better risk coverage, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards. The Basel III rules provide for two ratios, the Liquidity Coverage Ratio (the “LCR”) and the Net Stable Funding Ratio (the “NSFR”), which should, respectively, promote the short-term resilience of the liquidity risk profile of banks, by ensuring that they possess sufficient liquidity to survive a significant stress test scenario lasting 30 (thirty) calendar days, and provide a sustainable maturity structure of assets and liabilities of banks. The committee has put in place processes to ensure the implementation of the Basel III rules by January 2019. As of December 31, 2020, our LCR and NSFR were already well above the Basel III target requirements, with a ratio in both cases above 100%.
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On June 26, 2013, the European Parliament and the Council of the European Union adopted the “CRD IV Package” (as defined below) implementing Basel III rules. Implementation of Basel III rules began on January 1, 2014, with certain parts of the CRD IV Package being phased in over a period of five years (the requirements are fully effective and some transitional provisions provide for their phase-in up to 2024). On October 15, 2013, the Council of the European Union also adopted Regulation No. 1024/2013 (the “SSM Regulation”) for Eurozone banks and other credit institutions, which gave the ECB, together with the national regulatory authorities of the Eurozone states, direct supervisory responsibility over “significant banks” in the Eurozone. Pursuant to the SSM Regulation, in connection with its new supervisory tasks, the ECB carried out a comprehensive assessment, including a balance-sheet assessment, of, inter alia, certain significant credit institutions in the Eurozone, including the Group. The comprehensive assessment started in November 2013 and the results were published on October 26, 2014. The comprehensive assessment consisted of an asset quality review and a stress test (performed with the European Banking Authority (the “EBA”)) to examine the resilience of banks’ balance sheets to stress scenarios. The ECB assumed its direct supervision tasks on November 4, 2014 upon the official start of the Single Supervisory Mechanism. The results of the comprehensive assessment did not identify any capital shortfall for us, thus the ECB did not request any special capital measure from us. In 2018, we took part in the 2018 EU-Wide Stress Test, the exercise conducted by the EBA, in collaboration with the Bank of Italy, the ECB and the European Committee for Systemic Risk (“ESRB”), with respect to the financial statements of European banks as at December 31, 2017. The exercise consisted in estimating the impact on the Group’s financial position and results arising from the application of two scenarios – baseline and adverse – and covered a period of three years (2018-2020). The EU-Wide Stress Test has been an important source of information for the purposes of the SREP as the results are useful to the competent authorities in assessing our ability to comply with the related prudential requirements in stress scenarios. With specific regard to the regulatory multi-risk exercises, on March 19, 2020 the EBA officially communicated the postponement of EU Wide Stress Test from 2020 to 2021. Up to that time, we had sent the advance data collection (March 9, 2020), i.e. the advance data represented since the end of 2019. For 2021, the Group is taking part in the 2021 EU-Wide Stress Test, the exercise conducted by the EBA, in collaboration with the Bank of Italy, the ECB and the ESRB on the financial statements of European banks as at December 31, 2020. The Group distinguishes between the following types of stress tests:
multi-risk exercise, based on scenario analysis, which enables the forward-looking assessment of the simultaneous impact on the Group of multiple risk factors, also taking into account the interrelationships between them and, where applicable, the top management’s reaction capacity. This type of exercise, which requires the full revaluation of the impacts, is also used in the Risk Appetite Framework (RAF), Internal Capital Adequacy Assessment Process (ICAAP) / Internal Liquidity Adequacy Assessment Process (ILAAP) and Recovery Plan processes;
regulatory multi-risk exercise, ordered and coordinated by the supervisor/regulator which defines its general assumptions and scenarios, and requires the full revaluation of the impacts;
situational exercise, ordered by the top management or by the supervisor/regulator in order to assess the impact of particular events (relating to the geopolitical, financial, economic, competitive environment, etc.) from a forward-looking perspective. Its scope may vary from case to case;
a single or specific risk exercise to assess the impact of scenarios (or single or more specific risk factors) on specific risk areas. For additional information regarding stress tests, asset quality reviews and other analyses relating to the adequacy of capital of European financial institutions, see “Management’s Discussion and analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Supervision and Regulation”. As the EBA is continuing to develop a single supervisory handbook of harmonized prudential rules (including, without limitation, regulatory technical standards) for credit institutions within the EU financial sector and applicable in EU Member States (the “EBA Rulebook”), we are unable to predict the manner in which the ECB shall exercise its direct supervisory authority and discretion over our business although some guidance is provided by recent documentation (including, without limitation, the guide to banking supervision published by
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the ECB on November 4, 2014), and therefore, there can be no assurance that our business, results of operations and financial condition and/or the [Redacted Text] will not be materially adversely affected by the SSM Regulation and inherent legal provisions within the framework of the “Banking Union”. For additional information regarding the SSM Regulation, see “Supervision and Regulation—Single Supervisory Mechanism”. Furthermore, other regulatory initiatives at different stages of finalization may represent additional regulatory pressure and negatively impact our business. The main new regulatory features which are in the process of being defined, the implementation of which could result in significant adjustment costs for the Issuer and/or the Group, and/or impacts on its operations, include the process of revising the calculation methods for capital held by banks for prudential purposes by regulators, both at a global and European level. For additional information see “Supervision and Regulation—Other regulatory developments”. In addition to the abovementioned regulatory initiatives, on November 23, 2016 the European Commission presented a package of reforms aimed at strengthening the resilience of EU banks (the “EU Banking Reform Package”) by amending certain provisions of the CRD IV and CRR as well as of the BRRD and SRM Regulation. The proposal contained a series of amendments to certain provisions of the CRD IV (the “CRD V”) and CRR (the “CRR II”) as well as of the BRRD (the “BRRD II”) and SRM (the “SRM II”) Regulation. After a legislative procedure of more than two years, the EU Banking Reform Package has been adopted by the European Parliament and the Council of the EU in the second quarter of 2019 and the final text was published in the Official Journal of the EU on June 7, 2019, entering into force on June 27, 2019. Most of the provisions of the CRR II will apply as of June 28, 2021, with some exceptions listed in article 3 of the new Regulation, while the SRM II, the CRD V and the BRRD II entered into force on December 28, 2020. With respect to capital adequacy and prudential requirements, the EU Banking Reform Package provides for: (i) the application of more risk-sensitive capital requirements, in particular in the area of market risk, counterparty credit risk, and for exposure to central counterparties; (ii) the implementation of methodologies that are able to reflect more accurately the actual risks to which banks are exposed; (iii) the imposition of a binding leverage ratio to prevent institutions from excessive leverage; and (iv) a binding NSFR to address the excessive reliance on short-term wholesale funding and reduce long-term funding risk. Additional measures are connected to the requirements to hold a minimum amount of loss-absorbing instruments and liabilities in accordance with the BRRD and SRM Regulation, as better detailed below. For additional information, see “Supervision and Regulation—EU Banking Reform Package”. As a part of the EU Banking Reform Package, the minimum requirement for own funds and eligible liabilities (“MREL”), which was introduced through Directive 2014/59/EU (the “BRRD”) in order to ensure sufficient loss absorption, as well as recapitalizing capacity for the bank following resolution, has been updated. The EU Banking Reform Package has implemented, within the European framework, the principles developed by the Financial Stability Board on the minimum amount of liabilities and own funds which are eligible for bail-in in the case of the withdrawal of systemically important banks (“TLAC”). The TLAC aims at ensuring that each systemically important bank is able to absorb the losses following withdrawal and preserve, or reconstruct, the capital necessary to carry out its main functions. For additional information, see “Supervision and Regulation— MREL Requirements and TLAC implementation”. The adoption of the EU Banking Reform Package, as well as the secondary legislation adopted in connection therewith, may result in, inter alia, our capital structure being affected. Therefore, regulatory changes could have a material adverse effect on our business, results of operations and financial condition. If we were to fail to maintain minimum capital adequacy requirements or comply with other regulatory requirements, we would face adverse consequences, including potential measures by the ECB
As anticipated in “Risk factors—Regulatory changes or enforcement initiatives could adversely affect our business”, the rules on capital adequacy define the prudential minimum capital requirements, the quality of capital resources and the risk mitigation instruments. In addition to the more risk-sensitive capital requirements introduced by the EU Banking Reform Package, we also have to satisfy the leverage ratio requirement. As a consequence, if we are unable, for instance, to pay interest provided for by our outstanding instruments, this could cause difficulty for us in accessing the capital
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markets, resulting in an increase in the cost of funding, and possibly having negative effects on our business, results of operations and financial condition. Furthermore, the SREP is carried out at least annually by the ECB, in addition to any other inspections it carries out in the ordinary course, and, therefore, there is a risk that, following future SREPs or other inspections, the ECB may order us to maintain higher capital adequacy standards than those currently applicable. In these circumstances, we could find it necessary to take additional measures to strengthen our capital in order to meet new standards and/or undergo potentially invasive intervention by the ECB, such as the imposition of restrictions or limitations on assets and/or the disposal of assets that present excessive risks to our stability. In exercising their supervisory powers, the ECB, the Bank of Italy, CONSOB and other supervisory authorities could request us to adopt organizational measures or take any other action to remedy any problem identified during their inspections, resulting in possible adverse effects on our business, results of operations and financial condition. Regulations in the United States and regulatory proposals in the European Union regarding the prohibition of proprietary trading or its separation from the deposit-taking business may materially affect our business model
Final rules issued by the U.S. financial regulators to implement the “Volcker Rule”, a regulatory provision required by the Dodd-Frank Act prohibit U.S. insured depository institutions, bank holding companies, foreign banks with U.S. banking offices or subsidiaries (such as us) and companies affiliated with such institutions from engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments, for their own account. The final rules also impose limits on sponsorship of and investments in, and other relationships with, hedge funds or private equity funds. See “Supervision and Regulation—Supervision and Regulation of the Issuer’s New York Branch in the United States—Recent Financial Regulatory Reform”. Moreover, in January 2014, the European Commission published a draft Regulation on Structural Measures Improving the Resilience of EU Banks and Transparency of the Financial Sector, referred to as the “Proposed Regulation”, which, if enacted as proposed, would prohibit certain large banks from engaging in proprietary trading in financial instruments and commodities and investing in hedge funds or other entities that engage in proprietary trading, for the sole purpose of making a profit for its own account. The Proposed Regulation would also grant supervisors broad powers to require these banks to separate certain activities deemed to be high risk from other businesses, such as deposit-taking and lending. The impact of the Volcker Rule is complex in that the Issuer’s global trading and fund activities must be conducted in compliance with the Volcker Rule and its implementing regulations, including through reliance on exemptions that permit the Issuer to conduct trading and fund activities solely outside the United States. The inability to limit trading and fund activities to those permitted by the Volcker Rule could adversely affect our business, financial condition and results of operations. We are subject to legal risk, including the risk of class action lawsuits, which could have a material adverse effect on our business, results of operations or financial condition
We are subject to litigation in the ordinary course of our business, including civil and administrative legal proceedings, as well as criminal, arbitration and tax proceedings. We have included provisions for litigation risks in our consolidated financial statements to cover such possible liabilities, based on advice of internal and external counsel, previous experience in similar cases or proceedings or other pending litigation. As of December 31, 2020, our “net provisions and net impairment losses on other assets” in our consolidated income statement amounted to €338 million, compared to €254 million in 2019. Given the complexity of the relevant circumstances and corporate transactions underlying these proceedings, together with the issues relating to the interpretation of applicable law, it is inherently difficult to estimate the potential liability related to such liability risks, to evaluate the outcome of such litigation or the time when such liability may materialize. Management makes estimates regarding the outcome of legal, regulatory and arbitration matters and creates provisions when losses with respect to such matters are deemed probable and can be reasonably estimated. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including but not limited to the type and nature of the litigation, claim or
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proceeding, the progress of the matter, the advice of legal counsel and other advisers, possible defenses and previous experience in similar cases or proceedings. Legal proceedings with remote or non-quantifiable outcomes are not included in “other allowances for risks and charges” and we may be required to cover litigation losses that are not covered by such allowances, including for example series of similar proceedings. In particular, we are subject to civil investigations brought by authorities in the U.S. and certain tax proceedings. As a result, there can be no assurance that such provisions will be sufficient to fully cover the possible losses arising from litigation or administrative proceedings. A negative outcome in one or more of such proceedings, even in light of our provisions, could have a material adverse effect on our business, results of operations or financial condition. For information about our pending material legal proceedings, see “Business—Litigation and other proceedings”. We may be subject, from time to time, to investigations or proceedings brought by authorities in the U.S.
As we have operations in the United States, including our New York Branch, we are subject to various regulations, including relevant New York State law and regulations implemented by the Superintendent of Financial Services of the State of New York (the “Superintendent”) under the New York Banking Law. In addition to being subject to New York laws and regulations, the New York Branch is also subject to federal regulation, including under the International Banking Act of 1978, as amended, as well as laws prohibiting money laundering and terrorist financing and any sanctions regimes enforced by the U.S, such as OFAC. For example, U.S. banking supervisory authorities in the past initiated a public supervisory action, following which we entered into an agreement with the supervisory authorities pursuant to which we agreed to strengthen our anti money-laundering procedures. In addition, the U.S. Securities and Exchange Commission (the “SEC”) launched an investigation on the activities of certain brokers, including our subsidiary Intesa Sanpaolo IMI Securities Corp. (“IMI Securities”), regarding particular financial instruments known as “ADRs” (deposit receipts for shares issued by non-U.S. companies). At the end of the first half of 2017, a settlement agreement was reached between IMI Securities (then named Banca IMI Securities Corp.) and the SEC staff involving the payment of the total sum of $35 million. On August 18, 2017 the SEC accepted the settlement and we have agreed to a cease-and-desist order consistent with the settlement. In October 2016, the Antitrust Division of the Department of Justice (the “DOJ”) of New York launched an investigation into trading in ADRs. Specifically, the DOJ is investigating whether a cartel was formed among market participants, including IMI Securities. IMI Securities pleaded guilty, admitting that, between March 2012 and August 2014, it engaged in the conspiracy to submit rigged bids to borrow pre-release ADRs with other institutions and individuals. On May 10, 2019, it was sentenced to pay a fine in excess of U.S. $2 million. Despite the cooperation provided by IMI Securities in the context of the overall proceedings, we cannot exclude that other risks in connection with these proceedings may arise in the future. To the extent a new investigation or proceeding is commenced against us, such an investigation or proceeding could result in us being required to pay fines and/or being the subject of criminal or civil penalties (which today are not quantifiable). Such an adverse outcome could adversely affect our reputation and have a material adverse effect on our business, results of operations and financial condition. See “Supervision and Regulation— Supervision and Regulation of the Issuer’s New York Branch in the United States—United States Anti-Money Laundering Regulation” and “Litigation and Other Proceedings—Civil Proceedings—Judicial and administrative proceedings involving Banca IMI Securities Corp. of New York”. Unfavorable developments in our credit rating would increase our funding costs and affect our ability to access the capital markets
As of the date of this Offering Memorandum, the rating assigned to our Group by Fitch Ratings Ltd. (“Fitch”) is “F3” on our short-term debt and “BBB-” on our medium and long-term debt, with a stable outlook. The rating assigned by Moody’s Investors Service Limited (“Moody’s”) is “P-2” on our short-term debt and “Baa1” on our medium to long-term debt, with a stable outlook. S&P Global Ratings LLC (“Standard & Poor’s”) has rated our short-term debt “A-2” and our long-term debt “BBB”, with a stable outlook. DBRS Ratings Limited (“DBRS”) has rated our short-term debt “R-1 (low)” and our long-term debt “BBB (high)”, with a negative outlook for both short-term and long-term debt. The “outlook” reflects a rating agency’s short-term expectation with respect to the rating assigned to our Group. In determining the rating assigned to us, the agencies examine
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several performance indicators of our Group, including business franchise, profitability, liquidity, capitalization and risk profiles. In the event that we do not achieve or maintain certain performance measures, or maintain our capital ratios above certain levels, one or more of our ratings may be lowered. Any downgrading of the ratings assigned to us or to any companies of our Group could potentially increase our funding costs, limit our funding resources, negatively impact our access to liquidity, and therefore have a material adverse effect on our business, results of operations and financial condition. For more information on our recent ratings downgrade, see “Ratings”. Increases in taxes and other assessments may adversely affect our business
The Italian government regularly enacts legislation affecting the tax and other assessment regimes to which we and our customers are subject. Such legislation may include increases in tax rates or other assessments and the enactment of new and/or temporary taxes. The effects of these possible increases, and any other changes resulting from enactment of additional tax legislation, have not been, and cannot be, quantified. Furthermore, we cannot predict which taxes will be imposed in the future. Therefore, there can be no assurance that these laws may not, once enacted, have a material adverse effect on our business, results of operations and financial condition. In Italy, Article 3 of Decree No. 66/2014 increased up to 26.0% the rate of taxation for both capital income (interest, dividends, and yields on mutual funds) and capital gains and losses from investments in stocks, bonds and other products. The risk associated with this measure is that it could discourage the inflow of foreign capital in Italy as well as affect the placement of bank bonds. In addition, Article 11 provides that the Italian Inland Revenue Agency reduces the conditions and compensations for payments made through bank channels presenting the “F24 Form”, a form prepared by the Italian Revenue Agency for the payment of taxes (“F24”). Under this scheme, the costs incurred by the banks for F24’s payments and services are not covered by the compensation received. The same Article 11 provides that in the case of payments made by the customer on-line with F24 on behalf of third parties, a bank must retain the authorization of the third party. The duty of retaining the authorization may increase operational costs. Therefore, increases in taxes and other tax assessments could have a material adverse effect on our business, results of operations and financial condition. Our leveraged finance business, private equity and hedge fund investments have been and may continue to be adversely affected by unfavorable economic conditions Leveraged finance has been particularly affected by the deterioration of economic environment beginning in 2008. Since 2008, the business volumes of this segment have declined rapidly due to the worsening of companies’ market values and the stricter terms and conditions for loans applied by financial institutions. As of December 31, 2020, our leveraged transactions according to ECB “Guidance on Leveraged Transactions” amounted to €33 billion. In the event of a deterioration of the current macroeconomic situation and market conditions, the capacity of borrowers to repay large amounts of debt used to finance acquisitions may decrease, which could have a material adverse effect on the value of such investments and expose us to the risk of further write-downs or sales of assets below their book value. In addition, we have been and may continue to be involved in debt restructurings for our borrowers, some of which may result in our Group accepting to amend the credit positions of its clients or, as a last resort, to convert in full or in part, the outstanding loans into equity capital of such borrower. The foregoing could have a material adverse effect on our business, results of operations and financial condition. Risks related to the acquisition of UBI Banca and related transactions On February 17, 2020, we announced our intention to launch a public exchange offer with respect to all ordinary shares of UBI Banca with the aim of delisting UBI Banca’s ordinary shares from the MTA and merging UBI Banca with and into our business (the “UBI Banca Acquisition”). The exchange offer, including the squeeze- out conducted pursuant to Italian law, was successfully completed on September 20, 2020, the delisting of UBI shares was completed on October 5, 2020. Lastly, on January 29, 2021, the plan for the merger by incorporation of UBI Banca into us was filed with the Torino Company Register. The merger was then approved by our Board of Directors on March 2, 2021.
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In order to secure regulatory approval for the UBI Banca Acquisition, we entered into agreements to divest certain assets to BPER Banca S.p.A. and UnipolSai Assicurazioni S.p.A.. For additional details, please see “Business— Factors affecting our business — Integration of UBI Banca”. Like any merger, the integration of UBI Banca into our business could present challenges. We may not be able to integrate the business of UBI Banca into our Group smoothly or successfully and the process may take longer than expected. The integration of certain operations will require the dedication of significant management resources that may distract management’s attention from day-to-day business operations. If we are unable to successfully integrate the operations of the business of UBI Banca, we may be unable to realize benefits we expect to achieve as a result of the UBI Banca Acquisition. The success with which we are able to integrate the business of UBI Banca will depend on our ability to manage a variety of issues, including the following:
integrating the information technology system, the operating system, the control and risk management system, the financial, information and accounting system or any other systems of UBI Banca into those of the Group;
integrating the business cultures, procedures and policies of UBI Banca into those of the Group;
consolidating administrative structures and eliminating possible duplications;
managing and coordinating the assets, relationship and liabilities acquired in the UBI Banca Acquisition, including legal claims, claims for breach of contract, local authority proceedings, employment related claims, anti-corruption and sanctions law violations or tax liabilities;
retaining key members of management;
absorbing the increase in our cost of operations with existing personnel/certain personnel retained from UBI Banca;
changing patterns of consumer behavior which may require us to redirect our marketing expenditures;
market consolidation and competitive dynamics; and
managing tax costs or inefficiencies. We also face certain risks related to the divestiture of certain assets to BPER Banca S.p.A. and UnipolSai Assicurazioni S.p.A. Specifically, we are subject to the risk that we will divest assets, including real property and contractual rights, that, if maintained, could have increased our revenues, profits, and growth trends above what they otherwise would have been. In addition, we are subject to the risk that we will miss opportunities due to the personnel and client relationships we will lose through the divestitures. Many of the above-listed difficulties and complexities are outside of our control, and the process of operational integration may entail an increase in costs and/or a reduction in revenues, which could have a material adverse effect on our business, financial condition and results of operations. Risks related to the presentation of financial information This Offering Memorandum (including the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) is not updated to include our financial information for the three months and nine months of each year and certain investors could consider such financial information to be relevant to an investment [Redacted Text]
This Offering Memorandum (including the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) includes year-end financial information and the consolidated financial statements and related information as of and for the year ended December 31, 2020 and December 31, 2019. This Offering Memorandum (including the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) is not updated to include the financial information for the three months and nine months of each year because consolidated financial information is not prepared for these periods on a substantially consistent basis with our year-end and semi-annual financial information. In addition, such
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financial information is unaudited and has been prepared by management. Our results for the first three months and nine months of each year are generally published in May and November, respectively, of each year and will be available on our website (www.group.intesasanpaolo.com) following publication. However, such information is not, and will not be, incorporated by reference in this Offering Memorandum. Investors are therefore cautioned that they may wish to review such information prior to making an investment decision [Redacted Text]. It is possible that certain financial results as of and for the three-month period ending March 31 and the nine-month period ending September 30 may differ significantly from those set forth in this Offering Memorandum as of and for the year ending December 31. Investors could consider such financial information to be relevant to an investment decision [Redacted Text]. Much of the financial information used as the basis for discussion and analysis in this Offering Memorandum is unaudited and has been reclassified and/or restated, and because our financial information is presented in different ways, prospective investors may find it difficult to make comparisons The financial information set forth in this Offering Memorandum is derived from the Annual Consolidated Financial Statements. These sets of Financial Statements are taken from (i) our 2020 Annual Report and (ii) our 2019 Annual Report. Except where otherwise indicated, the financial information contained in this Offering Memorandum and used as the basis for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein is unaudited and different from the Financial Statements in as much as: (i) in certain cases, as specified below, it has been subject to reclassification by aggregating and/or changing certain line items from the Financial Statements and, in some instances, by creating new line items or moving amounts to different line items as set forth in Annex A and Annex B hereto and (ii) in certain cases, as specified below, has been subject to adjustments to account for changes in accounting principles and/or changes in the scope of consolidation. This financial information is used by our management to analyze our business performance and our financial results in our year end. To prepare the 2020 Non-GAAP financial information included in the Offering Memorandum (i) we (a) reclassified our 2020 Audited Consolidated Financial Statements and we (b) restated the consolidated income statement of our 2020 Audited Consolidated Financial Statements to reflect the economic results of the first four months of 2020 of the company RBM Assicurazione Salute S.p.A. (the “2020 Unaudited Restated and Reclassified Financial Information”) and (ii) we (a) reclassified our 2019 Audited Consolidated Financial Statements and we (b) restated the consolidated income statement of our 2019 Audited Consolidated Financial Statements to reflect (x) economic results of 2019 of the company RBM Assicurazione Salute S.p.A. and (y) the fees due to Prelios following the UTP loans servicing agreement, effective from the end of 2019 and (c) we restated the consolidated balance sheet of our 2019 Audited Consolidated Financial Statements to reflect the inclusion in the Group of the company RBM Assicurazione Salute S.p.A. (the “2019 Unaudited Restated and Reclassified Financial Information Presented in 2020”). Such presentation is in line with the segment reporting information that we present in accordance with IFRS 8. To prepare the 2019 Non-GAAP financial information included in the Offering Memorandum (i) we reclassified our 2019 Audited Consolidated Financial Statements (the “2019 Unaudited Reclassified Financial Information”) and (ii) we (a) reclassified our 2018 Audited Consolidated Financial Statements, we (b) restated the consolidated income statement of our 2018 Audited Consolidated Financial Statements to reflect (x) the economic results of the business line to be contributed to Nexi, pursuant to the agreement signed in December 2019, (y) the transition to IFRS 16 (z) the first three months of 2018 of the companies of the Morval Vonwiiller Holding SA. Group, the 12 months of 2018 of Autostrade Lombarde and the outsourcing of the servicing of bad loans to a special purpose vehicle named Tersia within the framework of the strategic partnership with Intrum and (j) the reclassification of the cost for Deposit Protection Funds of the international subsidiary banks previously recorded under operating expenses, and we (b) restated our consolidated balance sheet of our 2018 Audited Consolidated Financial Statements to reflect (x) the final purchase price allocation of Autostrade Lombarde and (y) the transition to IFRS 16 (the “2018 Unaudited Restated and Reclassified Financial Information Presented in 2019”). Such presentation is in line with the segment reporting information that we present in accordance with IFRS 8.
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Because of the restatements and reclassifications made to our financial information, prospective investors may find it difficult to make comparisons between our different sets of financial information. In addition, prospective investors should note that the Financial Statements, as opposed to the Unaudited Restated and Reclassified Financial Information, are used in the section “Selected Statistical Information” and certain other sections noted herein. Therefore, prospective investors may find, in some circumstances, that financial information presented in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is different than the “Selected Statistical Information” or in other sections based on the Financial Statements. Further, the Bank of Italy requires us to present certain financial information solely with respect to our banking activities, referred to as the “Banking Group”, rather than the consolidated Group as a whole. Certain tables in the section “Selected Statistical Information” are based on the “Banking Group Financial Information” (as defined in “Selected Statistical Information”) rather than the Group Financial Information. Prospective investors may find it difficult to make comparisons between the Financial Statements and the Unaudited Restated and Reclassified Financial Information and/or to make comparisons between the Banking Group Financial Information and the Financial Statements. Prospective investors are therefore cautioned against placing undue reliance on such comparisons. For further details on our reclassifications and restatements, see “Presentation of Financial Information”, “Selected Statistical Information” and Annex A and Annex B hereto. Our audited financial information included in this Offering Memorandum was prepared and presented in accordance with IFRS, which differs in certain significant ways from U.S. GAAP
The Financial Statements included in this Offering Memorandum are prepared and presented in accordance with IFRS. Certain significant differences exist between IFRS and U.S. GAAP, which may be material to the financial information herein. We have made no attempt to quantify the impact of those differences. In making an investment decision, prospective investors must rely upon their own examination of our Group, the terms of the offering and the financial information. Prospective investors should consult their own professional advisors for an understanding of the differences between IFRS and U.S. GAAP. Our consolidated balance sheet includes assets held by certain special purpose entities (“SPEs”) that issue or guarantee covered bonds and other securities which are secured by such SPEs’ assets; investors [Redacted Text] should therefore be aware that assets of such SPEs are available only for holders of covered bonds and securities issued or guaranteed by such SPEs. Furthermore, other parties have preferred claims on our assets
We operate in structured credit products, acting as originator, sponsor, investor or lender, and we set up SPEs in connection with, inter alia, covered bond transactions and other securitizations. The holders of securities issued or guaranteed by such SPEs have a priority claim over the assets held by such SPEs. For accounting purposes, we consolidate such SPEs’ assets into our Group’s financial statements and therefore the value of such SPEs’ assets is part of our total assets. See “Risk Management—Securitization SPEs.” We value our structured credit securities portfolios by monitoring their fair value and their economic value. The valuation models used are inherently complex, and the assumptions, estimates and valuations on which they are based often take into consideration uncertain and unpredictable data. Any write-down to be taken when required by IFRS could have a material adverse effect on our capital and financial condition, the extent of which will vary in proportion to the difference between the book value and fair value. Our SPEs include vehicles established in connection with three covered bond programs: (i) the €20 billion covered bond program, guaranteed by ISP CB Pubblico S.r.l., for the purpose of issuing bonds backed by certain eligible indebtedness extended to, or guaranteed by, certain public state or local authorities defined by law, (ii) the €20 billion covered bond program, guaranteed by ISP CB Ipotecario S.r.l., for the purpose of issuing certain bonds backed by eligible mortgage loans and (iii) the multi-originator €30 billion covered bond program, guaranteed by ISP OBG S.r.l., for the purpose of issuing certain bonds backed by eligible mortgage loans. As of December 31, 2020, the outstanding securities issued under these programs were equal to €23.8 billion. Our Group could issue up to an aggregate of €95 billion in covered bonds under these programs.
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Investors in the Notes (and beneficial interests therein) should be aware that holders of securities issued or guaranteed by our covered bond or other securitization SPEs have a priority claim over the assets held by such SPEs. Furthermore, investors in the Notes (and beneficial interests therein) should be aware that the ECB has a priority claim over the assets deemed “eligible” under ECB rules and regulations which we have pledged as security in order to participate in the TLTROs and the MROs. See “Risks related to our business—Governmental and Central Bank actions intended to support liquidity may be insufficient or discontinued”. The introduction of new accounting principles and changes to applicable accounting principles may have an adverse impact on our financial statements
We are exposed, like other parties operating in the banking sector, to the development and application of new accounting principles or standards and regulations and/or changes to them (including those resulting from International Accounting Standards as endorsed and adopted into EU law). Specifically, in the future we may need to revise the accounting and regulatory treatment of some existing assets, liabilities and transactions (and related income and expense), with possible negative effects, including significant ones, on the estimates in financial plans for future years, which could require us to restate previously published financial data. With regard to the new measurement metrics for the exposures, the impact of the first-time adoption of the standard, depending on the composition of the loan and bond portfolios at the date of transition and the macroeconomic forecasts for the future years, will not be critical for the Group’s levels of balance-sheet equity and regulatory capital. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies”. An important change is the entry into force of IFRS 9 “Financial Instruments”. On July 24, 2014, the International Accounting Standard Board (IASB) issued the final version of the new IFRS 9, which replaced the previous versions published in 2009 and 2010. IFRS 9 has been effective since January 1, 2018. The introduction of the new IFRS 9 completes the reform of IAS 39. IFRS 9 impacts the methods of classification and measurement of financial instruments and the calculation logics and methods of value adjustments. With respect to impairment, a new model based on the concept of “expected loss” instead of the current “incurred loss”, directed at recognizing losses timely, has been introduced. IFRS 9 requires that entities recognize expected losses in the 12 months (stage 1) following initial recognition of the financial instrument. The time horizon for calculating expected losses is the entire residual life of the asset being measured if credit risk has increased “significantly” since initial recognition (stage 2) or if it is impaired (stage 3). Under IFRS 9, lifetime credit losses are generally expected to be recognized before the financial instrument becomes past due or the occurrence of other borrower-specific default events, which will likely create pressure on banks to correct the book values of their loans, and which could have a material adverse effect on our business, results of operations and financial condition. The new impairment rules introduce a significant change compared to the approaches in IAS 39. The application of IFRS 9 and the new impairment accounting model based on an expected losses approach could have the consequence of causing an increase in the write-downs made to unimpaired assets and specifically to receivables from customers. Greater volatility may be reflected in the financial results across different accounting periods, due to the change between the different stages of financial assets recorded in the financial statements. Another important change stems from the application of IFRS 16, which took effect on January 2019. Through Regulation (EU) No. 1986/2017, IFRS 16 replaced IAS 17 “Leases”, IFRIC 4 “Determining whether an arrangement contains a lease”, SIC 15 “Operating leases – Incentives” and SIC 27 “Evaluating the substance of transactions involving the legal form of a lease”. The entering into force of IFRS 16 triggered an increase in RWAs, which resulted in an impact on our CET1 Ratio of 1.25%. [Redacted Text]
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USE OF PROCEEDS [Redacted Text]
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UBI BANCA ACQUISITION Overview On February 17, 2020, we announced our intention to launch a voluntary public purchase and exchange offer with respect to a maximum of 1,144,285,146 ordinary shares of Unione di Banche Italiane S.p.A. (“UBI Banca” and, collectively, the “Exchange Offer”), representing all the subscribed and paid-in share capital of an Italian bank headquartered in Bergamo, Italy, and listed for trading on the Mercato Telematico Azionario (the “MTA”) organized and managed by Borsa Italiana S.p.A. (“Borsa Italiana”). On the same date, we also launched a private placement in the United States regarding the UBI Banca shares reserved for “qualified institutional buyers”. The aim was the delisting UBI Banca’s ordinary shares from the MTA and the merger of UBI Banca with and into our business (the “UBI Banca Acquisition”). The total consideration paid by us in connection with the UBI Banca Acquisition represented 0.5% of our total assets as of December 31, 2019. UBI Banca’s pre-tax operating income represented 6.5% of our pre-tax operating income for the year ended December 31, 2019 and UBI Banca’s total assets represented 15.5% of our total assets as of December 31, 2019. Prior to the launch of the exchange offer, UBI was the fourth largest banking group in Italy by number of branches and had a market share of 6.7% in Italy (2019). UBI Banca has experienced particular success recently, as evidenced by a variety of important financial and operational measures. According to UBI Banca’s 2019 Annual Report, UBI Banca increased its net operating income by 18.5% in 2019, in part, by growing its operating income (+2.9%) while simultaneously reducing its operating expenses (-1.9%). UBI Banca also improved its balance sheet in 2019, increasing CET1 FL (+95 bps) and reducing gross NPLs (-29.6%). To prevent any possible antitrust concerns that might be raised by the UBI Banca Acquisition, on February 17, 2020, we entered into a binding agreement with BPER Banca S.p.A., subsequently amended and supplemented in order to take appropriate account of the economic situation generated by the outbreak of the COVID-19 pandemic and conditional upon the success of the Exchange Offer, in respect of the disposal of 532 branches (of which 501 were from legacy UBI Banca and 31 were Intesa Sanpaolo branches) and related staff and customer relationships, for a cash consideration equal to 38.0% of the fully loaded Common Equity Tier 1 resulting from the balance sheet of UBI Banca as of June 30, 2020. The sale to BPER Banca S.p.A. of the former UBI Banca branches – including a going concern owned by UBISS (a consortium company controlled by UBI Banca) – took effect on February 22, 2021, while the sale of the branches owned by us will take effect from June 21, 2021. On July 16, 2020, we received a notification by the Italian Antitrust Authority approving the UBI Banca Acquisition transaction, subject to the fulfilment of certain legal and economic commitments. On January 15, 2021, we entered into an agreement with “Banca Popolare di Puglia e Basilicata S.C.p.A.” for the sale of a going concern consisting of 17 branches with accounting autonomy and 9 operational outlets of UBI Banca in Abruzzo, Molise, Basilicata and Calabria. The transaction is subject to legal authorisations, with completion expected by the end of the first half of 2021. We also received authorizations from Italian competent authorities for the indirect acquisition of (i) controlling interests in UBI Banca group companies Pramerica SGR S.p.A. (as well as a qualified interest in Polis Fondi SGR S.p.A.), UBI Leasing S.p.A., UBI Factor S.p.A. and Prestitalia S.p.A.; and (ii) a controlling interest in BancAssurance Popolari S.p.A. and qualified interests in Aviva Vita S.p.A. and Lombarda Vita S.p.A. The Terms of the UBI Banca Acquisition The terms of the Exchange Offer were the following: for every ten UBI Banca shares tendered to us, we offered 17 of our shares. At then-current market prices, the exchange ratio of 1.7x represented a significant premium to UBI Banca shareholders. The shares offered in the exchange were issued by virtue of a capital increase and offered exclusively to those tendering their UBI Banca shares to us (i.e., our shareholders had no preemptive rights with respect to the offering, pursuant to Article 2441, paragraph 4, of the Italian Civil Code). In this regard, on April 27, 2020, our Shareholders’ Meeting resolved, inter alia, to grant our Board of Directors full powers to approve a share capital increase by December 31, 2020, up to a maximum total amount of €1,011,548,072.60, plus any share premium, through the issuance of a maximum number of 1,945,284,755 ordinary shares. The capital increase was de facto approved by our Board of Directors on June 16, 2020.
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On July 17, 2020, with a view toward overcoming UBI Banca shareholder divisions and on the basis of updated valuations, we revised the terms of the offer by adding cash consideration equal to €0.57 per share to the initial offer terms. At the same time, the offer period was extended ex officio by Consob from the initial deadline of July 28, 2020 to July 30, 2020. We announced to the market on August 3, 2020 that approximately 90.2% of the UBI Banca shares subject to the offer were tendered and we came to hold 91.0% of UBI Banca’s share capital. The successful completion of the Exchange Offer was conditioned on our acquiring of the “percentage threshold condition” (i.e. the condition that we came to hold an overall interest at least equal to 66.67% of the UBI Banca share capital). As we fulfilled this condition, along with the others required, the Exchange Offer was effective and was able to be completed. On August 5, 2020, in exchange for the transfer of the ownership of the UBI Banca shares, we issued and assigned in favor of the acceptors of the Exchange Offer a total of 1,754,328,645 new Intesa Sanpaolo shares, representing approximately 9.1% of our share capital, based on the ratio of 1.7000 Intesa Sanpaolo shares to 1 UBI Banca share. To this end, on August 19, 2020, we paid a cash consideration of €0.57 for each UBI Banca share tendered in acceptance, which totally amounted to €588,216,075.39. At the end of the acceptance period, we held (considering both direct and indirect holdings) a controlling interest higher than 90% of the UBI Banca share capital, but less than 95%. Therefore, we met the conditions for the compulsory squeeze-out pursuant to Article 108, paragraph 2, of the Consolidated Financial Act, in accordance to which we were required to purchase the remaining outstanding ordinary shares (representing 9.8% of the share capital) from the shareholders of UBI Banca who requested it (the “Compulsory Squeeze-Out”). The consideration for these shares was determined as follows: (i) a consideration equal to 1,7000 newly issued ordinary shares of Intesa Sanpaolo and €0.57 for each UBI Banca share tendered in acceptance; or (ii) only upon request, a cash consideration in full based on the sum of (x) the weighted average of our share price recorded on the Italian Stock Exchange during the five trading days prior to the payment date multiplied by an exchange ratio equal to €2.969 and (y) €0.57, for a total of €3.539 per each share. The Compulsory Squeeze-Out procedure, carried out between August 24 and September 11, 2020, resulted in sale requests for 90,691,202 shares, representing 7.9% of the share capital of UBI Banca. With reference to the 90,691,202 remaining shares: (x) for 87,853,597 remaining shares, the owners have requested to receive the same consideration established in the context of the Exchange Offer; and (y) for 2,837,605 remaining shares, the owners have requested to receive the cash consideration in full, i.e. €3.539 per each remaining share. On September 17, 2020, we paid the consideration for the Compulsory Squeeze-Out through the issuance of 149,351,114 new ordinary shares of Intesa Sanpaolo, representing 0.8% of our share capital, and the payment of a total consideration of (x) €50,076,550.29 in favor of shareholders who chose the consideration established for the Exchange Offer and (y) €10,042,284.10 in favor of the shareholders who requested the cash consideration in full. At the end of the Compulsory Squeeze-Out procedure, we came to hold more than 95% of the share capital of UBI Banca. Therefore, we exercised our right of squeeze-out pursuant to Article 111 of the Consolidated Finance Act and, at the same time, carried out the compulsory squeeze-out pursuant to Article 108, paragraph 1 of the Consolidated Finance Act for the shareholders of UBI Banca that requested it, through a specific joint procedure agreed with CONSOB and Borsa Italiana (the “Joint Procedure”) and carried out between September 18 and 29, 2020. The Joint Procedure targeted a maximum of 21,635,917 UBI Banca residual shares. During the Joint Procedure, sale requests were submitted for a total of 3,013,070 remaining shares, i.e. 13.9% of the shares subject to the procedure. Those residual shares also included 8,877,911 treasury shares held by UBI Banca and 120,985 UBI Banca ordinary shares held on our account by us before February 17, 2020. We did not transfer the UBI Banca treasury shares and the UBI Banca ordinary shares held on our own account under the Joint Procedure. On October 5, 2020, we made the payment of the consideration for the Joint Procedure through (i) the issuance of 17,055,121 new Intesa Sanpaolo shares, representing 0.09% of our share capital and the payment of a consideration of €5,718,482.25 to (x) the accepting shareholders who chose the option to receive consideration as established for the offer and (y) to the shareholders that did not submit any
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sale requests and therefore were deemed to have elected this option and (ii) the payment of €9,217,655.24 for the accepting shareholders that requested the cash consideration in full. Following the conclusion of the Joint Procedure, we came to hold 100.0% of the share capital of UBI Banca. After the completion of the steps described above, Borsa Italiana ordered the delisting of UBI Banca shares from trading on the MTA as of October 5, 2020, subject to suspension of the share during the sessions of October 1-2, 2020. Lastly, on January 29, 2021, the plan for the merger by incorporation of UBI Banca into us was filed with the Torino Company Register. The merger was then approved by our Board of Directors on March 2, 2021. UBI Banca Acquisition Rationale We launched the Exchange Offer in order to further consolidate, through the contribution of UBI Banca’s customers and network, our leadership in the Italian banking sector, in which we operate successfully in all market segments. The outlook for the financial and banking sector in the coming years is characterized by consolidation in which the main operators will be successful both in Europe and outside Europe. It is in our interest to reach a scale that will allow us to compete independently and play a proactive role in the European banking community. The offer had, inter alia, three main objectives: (i) the creation of value through a rapid and successful business integration, able to achieve significant synergies; (ii) the combination of talents of the two groups (people, skills, distinctive assets); and (iii) the launch of a European-scale champion aimed at playing a leading role in the evolution of the post-COVID-19 banking sector. UBI Banca’s business model, its market positioning and territorial coverage, the set of values shared by the management, the strong orientation to the support of Italian economy and sustainable and inclusive growth and the significant presence of Italian stakeholders make UBI Banca a company that largely reflects a profile similar to ours and, therefore, we believe it is a company whose integration could take place smoothly and in a way that enhances UBI Banca’s resources. Although UBI Banca is a significant player in the sector (the fourth largest operator in Italy in terms of volumes handled), we believe that it does not have the scale necessary to successfully operate in the banking sector which is undergoing profound change and evolution. We believe the banking sector going forward will be characterized by low interest rates (and margins) and the need to bear the cost of significant technological investments. Where the size and ability to operate and compete not only at a national, but also at an international level, are essential prerequisites for the development of the business and the value of the company in order to obtain an adequate return on capital, we believe that UBI Banca will perform more successfully as part of our group than independently. We believe the UBI Banca Acquisition will provide, among others, the following benefits:
a consolidation of the Group’s position in Italy by strengthening its active role in supporting the Italian economy;
an increase in critical mass in and simultaneous achievement of greater coverage of geographical markets previously less served, in order to achieve significant cost synergies deriving from economies of scale, among other factors. These benefits derive from economies of scale and the Group’s experience and ability to operate efficiently on the market with an agile operating structure, which will also enable the freeing up of significant financial resources, including for technological investments (i.e. artificial intelligence, machine learning and advanced analytics). These investments are necessary to operate with ever greater effectiveness and efficiency in a competitive context which is witnessing a growing role played by new types of competitors and which, being of a considerable size, require an adequate response in terms of an elevated scale and a broad customer base;
revenue synergies which are expected to be achieved in full from 2023 deriving from the increase in productivity per customer and branch at the Group level, as well as an increase in profitability. Thanks to the efficiency gains resulting from the integration of the respective product factories of the Group and UBI Banca in the high value-added business segments (such as wealth management, life and non- life “bancassurance”, where the Group is seeking to become the market leader on the non-motor retail market, leasing and factoring), by leveraging an internalized distribution and offer model.
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complementarity in certain business sectors (consumer credit and direct banking), with the possibility of higher sales of products and/or complementary products from the catalogue;
a strengthening of the leadership in corporate social responsibility, with the aim of being a benchmark for individuals and companies in Italy;
an improved ability to attract new talent with a strong commitment to supporting the growth of the core business through new recruitment, thus promoting generational turnover within the Group without human impact;
alignment to the best risk management and credit policies of the Group;
maintenance of a sound capital base even at the completion of the transaction; and
an acceleration of the de-risking of UBI Banca’s assets, without any charges for the shareholders.
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EXCHANGE RATE The following table sets out, for the periods indicated, the high, low, average and period end noon buying rates in New York City for cable transfers between the Euro and U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York expressed as U.S. dollars per €1.00. These rates may differ from actual rates used in the preparation of the Consolidated Financial Statements and other financial information appearing in this Offering Memorandum. We make no representation that the Euro or U.S. dollar amounts referred to in this Offering Memorandum have been, could have been or could, in the future, be converted into U.S. dollars or Euro, as the case may be, at any particular rate, or at all. The average rate for a year means the average of the noon buying rates of the last business day of each month (or portion thereof) during the relevant period. The average rate for a month means the average on each business day of the month (or portion thereof). The Federal Reserve Bank of New York certified on May 14, 2021 that as of May 17, 2021, €1.00 represented US$1.2141.
U.S. dollars per €1.00 Period High Low average (1)(2) Period end Year 2014 ...... 1.3932 1.2098 1.3285 1.2098 2015 ...... 1.2103 1.0497 1.1102 1.0856 2016 ...... 1.1532 1.0389 1.1069 1.0520 2017 ...... 1.2041 1.0416 1.1287 1.1839 2018 ...... 1.2488 1.1281 1.1817 1.1456 2019 ...... 1.1524 1.0905 1.1194 1.1227 2020 ...... 1.2280 1.0682 1.1410 1.2280 Month January 2021...... 1.2295 1.2099 1.2178 1.2135 February 2021...... 1.2229 1.1974 1.2094 1.2093 March 2021 ...... 1.2091 1.1717 1.1900 1.1730 April 2021 ...... 1.2126 1.1759 1.1971 1.2020 May 2021 (through May 19, 2021) ...... 1.2222 1.2005 1.2104 1.2175 ______(1) The average rate for the year means the average Federal Reserve Bank of New York rate on the last business day of each month during a year. (2) The average rate for each month presented is based on the average Federal Reserve Bank of New York rate for each business day of such month.
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RATINGS The following are the ratings issued on Intesa Sanpaolo’s short-term and medium and long-term debt by the principal international credit rating agencies as of the date of this Offering Memorandum. The “outlook” reflects the rating agency’s long term expectation with respect to the rating assigned to our Group. Our credit ratings were downgraded in 2017 and 2018 by Fitch, Moody’s, Standard & Poor’s and/or DBRS, following the credit rating downgrades for the Republic of Italy. The agencies stated that the downgrades of our debt were based on, among other things, our exposure to Italian sovereign debt and the focus of our business on the Italian domestic market. On January 20, 2017, DBRS downgraded our long-term rating from A (low) to BBB (high) and changed our outlook to stable. On April 28, 2017, Fitch downgraded our long-term rating from BBB+ to BBB and revised our outlook to stable from negative. On October 31, 2017, S&P upgraded our long- term rating from BBB- to BBB and our short-term rating from A-3 to A-2 with a stable outlook. On September 5, 2018 and October 30, 2018 Fitch and S&P, respectively, revised our outlook from stable to negative, following their revisions of the outlook of the Republic of Italy. On May 12, 2020, Fitch downgraded our long-term rating from ‘BBB’ to ‘BBB-’ with a stable outlook, and our short-term rating from ‘F2’ to ‘F3’. On March 11, 2021, S&P upgraded our outlook from negative to stable. In 2021, Moody’s upgraded our outlook from negative to stable.
Short-Term Rating Agency: Debt Long-Term Debt O utlook Fitch(1) ...... F3 BBB- Stable Moody’s ...... P-2 Baa1 Stable S&P...... A-2 BBB Stable DBRS ...... R-1 (low) BBB (high) Negative ______(1) Fitch has also assigned Intesa Sanpaolo a “bbb-” viability rating.
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CAPITALIZATION AND REGULATORY CAPITAL The following table summarizes the consolidated capitalization of our Group as of December 31, 2020 and December 31, 2019. Prospective investors should read this table in conjunction with the sections herein entitled “Risk factors”, “Use of Proceeds”, “Selected Consolidated Historical Financial and Other Information” and “Presentation of Financial Information”.
As of As of December 31, December 31, 2020(*) 2019 Equity (in € million) Share capital ...... 10,084 9,086 Share premium reserve ...... 27,444 25,075 Retained earnings...... 16,469 12,500 Other reserves ...... 992 779 Valuation reserves...... (515) (157) Valuation reserves attributable to insurance companies...... 809 504 Equity instruments ...... 7,441 4,103 Treasury shares ...... (130) (104) Net income for the period ...... 3,277 4,182 Shareholders’ equity of the Group...... 65,871 55,968 Minority interests ...... 450 247 Total shareholders’ equity ...... 66.321 56,215 ______(*) The December 31, 2020 figures presented include the effects deriving from the UBI Banca Acquisition. Under CRR and Circular No. 285 governing the implementation of Basel III, Italian banking groups are required to maintain a ratio of Own Funds to the total risk exposure amount (the “Total Capital Ratio”) of at least 8% on a consolidated basis, excluding the capital conservation buffer and other buffers contained in Directive 2013/36/EU (CRD IV). For information regarding the calculation of our regulatory capital ratios and related additional information, see “Risk Management—Basel III rules and capital adequacy—Capital adequacy”. Own Funds, risk-weighted assets and regulatory capital ratios as of December 31, 2020 and December 31, 2019 were calculated according to the harmonized rules and regulations for banks and investment companies contained in Directive 2013/36/EU (CRD IV) and in (EU) Regulation No. 575/2013 (CRR) of June 26, 2013, which transpose the banking supervision standards defined by the Basel III framework to European Union laws, and on the basis of Bank of Italy Circulars No. 285. Except for Article 473, paragraph 4(e) of the CRR, relating to the amendments to be applied to IAS 19 at the end of 2018, the transition phase for the introduction of the “Basel 3” regulatory framework was completed as at December 31, 2017. It provided for the partial inclusion within or deduction from the Own Funds of certain items in accordance with the provisions of the CRD IV and the CRR. Specific transitional provisions have also been established for subordinated instruments that do not meet the requirements envisaged in the new regulatory provisions, aimed at the gradual exclusion of instruments no longer regarded as eligible from Own Funds (over a period of eight years). See “Supervision and Regulation—Overview of regulations applicable to banks”. Since January 1, 2018, the new financial reporting standard IFRS 9 has applied to the Group. For the transitional period (2018-2022) the Group has exercised the option provided in Regulation (EU) 2017/2395 adopting the “static” approach, which allows the neutralization of a progressively decreasing amount of the impact of IFRS 9 in CET1 solely in relation to the FTA component of the impairment. In particular, the comparison between the IAS 39 adjustments as of December 31, 2017 and the IFRS 9 adjustments as of January 1, 2018 in relation to performing loans and securities (stage 1 and 2) and adjustments to NPLs (stage 3), net of tax and having eliminated any shortfall reserve, is reincluded in the capital according to phase-in percentages of 95% in 2018, 85% in 2019, 70% in 2020, 50% in 2021, and 25% in 2022. During the transitional period, the Group may elect to change its approach only once, subject to the authorization from the Supervisory Authority, transition from the “static” approach to the “dynamic” approach or suspending the application of the transitional treatment in favor of the fully loaded regime. On June 24, 2020 the European Union Council adopted the Regulation (EU) 2020/873 (the “CRR Quick Fix”), which amended Regulation (EU) No 575/2013 and Regulation (EU) 2019/876. In particular, the CRR Quick Fix extended certain IFRS 9 transitional arrangements until 2024 in order to mitigate the significant increase in expected credit loss provisions deriving from the application of the IFRS 9 during the economic downturn caused by the Covid-19 Pandemic. For more information about the CRR
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Quick Fix, see “Supervision and Regulation—Overview of the EU legal framework—Changes in European Laws and Regulations in Response to Covid-19 Pandemic”. See also “Transition to IFRS 9”, included in the F- Pages hereto. The table below sets forth our regulatory capital ratios as of December 31, 2020 and December 31, 2019.
As of As of December 31, December 31, 2020(1) 2019(2) IFRS 9 IFRS 9 IFRS 9 “Fully loaded” “Transitional” “Transitional” Group Regulatory Capital Ratios Common Equity Tier 1 / Risk-weighted assets (CET1 Capital Ratio) .... 14.0% 14.7% 13.9% Tier 1 Capital/ Risk-weighted assets (Tier 1 Capital Ratio) ...... 16.2% 16.9% 15.3% Total Own Funds(2)/ Risk-weighted assets (Total Capital Ratio)...... 19.2% 19.6% 17.7% Risk-weighted assets (in € millions)...... 348,519 347,072 298,524 ______(1) Figures from the 2020 Annual Report. For further details, see “Risk Management─Basel III rules and capital adequacy”. (2) The Group has decided not to adopt the temporary treatment for the calculation of Own Funds provided for in order to mitigate the possible negative effects of the COVID-19 Pandemic as at December 31, 2020. For further information about Own Funds, please see “Risk Management—Basel III rules and capital adequacy— Basel III.”
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER INFORMATION The financial information in the tables below is our Unaudited Restated and Reclassified Financial Information which is derived from and should be read together with our Consolidated Financial Statements. The restatements and reclassifications are detailed in Annex A and Annex B. For a summary of such restatements and reclassifications see “Presentation of Financial Information”. As a result of these restatements, we presented certain financial information (i) for 2020 once, in the form of 2020 Unaudited Restated and Reclassified Financial Information, (ii) for 2019 twice, once in the form of the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020 and once in the form of the 2019 Unaudited Reclassified Financial Information, and (iii) for 2018 once, in the form of the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. The restatements and reclassifications made to our financial information may make it difficult for prospective investors to make comparisons between different sets of our financial information. Prospective investors are therefore cautioned against placing undue reliance on such comparisons. See “Risk factors—Risks related to the presentation of financial information—Much of the financial information used as the basis for discussion and analysis in this Offering Memorandum is unaudited and has been reclassified and/or restated, and because our financial information is presented in different ways, prospective investors may find it difficult to make comparisons”. Additionally, the December 31, 2020 figures presented include the effects deriving from the UBI Banca Acquisition. For an illustration of the December 31, 2020 data aggregated without UBI Banca, please refer to our reclassified financial information set out in our 2020 Annual Report in section “Income statement and balance sheet aggregates”. For more information about the UBI Banca Acquisition, see “UBI Banca Acquisition”. The following tables set forth certain key financial information and ratios for the periods indicated.
For the years ended December 31, 2020(1) 2019(2) (in € millions) Net interest income ...... 7,783 7,005 Net fee and commission income ...... 8,303 7,962 Income from insurance business ...... 1,353 1,268 Profits (losses) on financial assets and liabilities designated at fair value...... 1,572 1,928 Other operating income (expenses) ...... 12 4 O perating income...... 19,023 18,167 Personnel expenses ...... (6,139) (5,748) Other administrative expenses ...... (2,679) (2,601) Adjustments to property, equipment and intangible assets (1,153) (1,058) O perating costs...... (9,971) (9,407) O perating margin...... 9,052 8,760 Net adjustments to loans...... (4,214) (2,089) Other net provisions and net impairment losses on other assets ...... (346) (254) Other income (expenses) ...... 64 55 Income (loss) from discontinued operations ...... 1,163 88 Gross income (loss)...... 5,719 6,560 Taxes on income ...... (1,360) (1,825) Charges (net of tax) for integration and exit incentives ...... (1,561) (106) Effect of purchase price allocation (net of tax) ...... 1,960 (117) Levies and other charges concerning the banking industry (net of tax)(3) ...... (512) (360) Impairment (net of tax) of goodwill and other intangible assets...... (912) - Minority interests ...... (57) 30 Net income (loss) ...... 3,277 4,182 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. See also “Annex A”. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. See also “Annex A”. (3) Figures including the expenses imposed by way of legislative decree to support the stability of the banking system, and that are, by their nature, necessarily outside the control of our management.
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For the years ended December 31, 2019(1) 2018(2) (in € millions) Net interest income ...... 7,005 7,271 Net fee and commission income ...... 7,962 7,952 Income from insurance business ...... 1,184 1,084 Profits (losses) on financial assets and liabilities designated at fair value...... 1,928 1,472 Other operating income (expenses) ...... 4 34 O perating income...... 18,083 17,813 Personnel expenses ...... (5,744) (5,812) Other administrative expenses ...... (2,488) (2,618) Adjustments to property, equipment and intangible assets...... (1,058) (1,057) O perating costs...... (9,290) (9,487) O perating margin...... 8,793 8,326 Net adjustments to loans...... (2,089) (2,394) Other net provisions and net impairment losses on other assets ...... (254) (187) Other income (expenses) ...... 55 506 Income (loss) from discontinued operations ...... 88 71 Gross income (loss)...... 6,593 6,322 Taxes on income ...... (1,838) (1,650) Charges (net of tax) for integration and exit incentives ...... (106) (120) Effect of purchase price allocation (net of tax) ...... (117) (156) Levies and other charges concerning the banking industry (net of tax) (5) ...... (360) (378) Impairment (net of tax) of goodwill and other intangible assets...... - - Minority interests ...... 10 32 Net income (loss) ...... 4,182 4,050 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. See also “Annex B”. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. See also “Annex B”. (3) Figures including the expenses imposed by way of legislative decree to support the stability of the banking system, and that are, by their nature, necessarily outside the control of our management.
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As of December December 31, 2020(1) 31, 2019(2) (in € millions) Assets...... Due from banks...... 108,040 47,170 Loans to customers...... 461,572 395,229 Financial assets measured at amortized cost which do not constitute loans ...... 47,102 25,888 Financial assets at fair value through profit or loss ...... 57,065 48,636 Financial assets at fair value through other comprehensive income ...... 57,585 72,046 Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39 ..... 177,170 168,233 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 1,211 649 Investments in associates and companies subject to joint control...... 1,996 1,240 Property, equipment and intangible assets ...... 19,044 17,157 Tax assets ...... 19,503 15,476 Non-current assets held for sale and discontinued operations ...... 28,702 494 Other assets ...... 23,624 24,352 Total Assets ...... 1,002,614 816,570 Liabilities and Shareholders’ Equity ...... Due to banks at amortized cost ...... 115,943 103,316 Due to customers at amortized cost and securities issued ...... 512,463 414,578 Financial liabilities held for trading...... 59,033 45,226 Financial liabilities designated at fair value ...... 3,032 4 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 1,928 818 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39 77,207 75,935 Tax liabilities ...... 3,029 2,322 Liabilities associated with non-current assets held for sale and discontinued operations 35,676 41 Other liabilities ...... 24,007 23,433 Technical reserves...... 96,811 89,243 Allowances for risks and charges ...... 7,164 5,132 Share capital ...... 10,084 9,086 Reserves ...... 44,775 38,250 Valuation reserves...... (515) (157) Valuation reserves pertaining to insurance companies ...... 809 504 Equity instruments ...... 7,441 4,103 Minority interests ...... 450 554 Net income (loss) ...... 3,277 4,182 Total Liabilities and Shareholders’ Equity ...... 1,002,614 816,570 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. See also “Annex A”. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. See also “Annex A”.
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As of December January 1, 31, 2019(1) 2019(2) (in € millions) Assets...... Due from banks...... 47,170 68,723 Loans to customers...... 395,229 393,550 Financial assets measured at amortized cost which do not constitute loans ...... 25,888 14,183 Financial assets at fair value through profit or loss ...... 48,636 41,536 Financial assets at fair value through other comprehensive income ...... 72,046 60,441
Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39 ..... 168,202 149,546 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 612 952 Investments in associates and companies subject to joint control...... 1,240 943 Property, equipment and intangible assets ...... 17,153 17,145 Tax assets ...... 15,467 17,258 Non-current assets held for sale and discontinued operations ...... 494 1,297 Other assets ...... 23,965 23,811 Total Assets ...... 816,102 789,385 Liabilities and Shareholders’ Equity ...... Due to banks at amortized cost ...... 103,316 107,982 Due to customers at amortized cost and securities issued ...... 414,578 405,960 Financial liabilities held for trading...... 45,226 41,895 Financial liabilities designated at fair value ...... 4 4 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 818 810
Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39 75,935 67,800 Tax liabilities ...... 2,321 2,391 Liabilities associated with non-current assets held for sale and discontinued operations ...... 41 258 Other liabilities ...... 23,381 20,884 Technical reserves...... 89,136 80,797 Allowances for risks and charges ...... 5,131 6,254 Share capital ...... 9,086 9,085 Reserves ...... 38,250 37,690 Valuation reserves...... (157) (913) Valuation reserves pertaining to insurance companies ...... 504 9 Equity instruments ...... 4,103 4,103 Minority interests ...... 247 326 Net income (loss) ...... 4,182 4,050 Total Liabilities and Shareholders’ Equity ...... 816,102 789,385 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. See also “Annex B”. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. See also “Annex B”. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. IFRS Financial Statements Data The financial information presented in the tables below is taken from our Consolidated Financial Statements prepared in accordance with IFRS which are included in this Offering Memorandum in the F-Pages hereto. See also “Presentation of Financial Information”. The Consolidated Financial Statements, including the financial information presented in the tables below, serve as the source from which our Unaudited Restated and Reclassified Financial Information is derived. Except where otherwise indicated, the financial information contained in this Offering Memorandum and used as the basis for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein is taken from the Non-GAAP Unaudited Restated and Reclassified Financial Information and different from the Consolidated Financial Statements and tables set forth immediately below in as much as: (i) in certain cases, as specified below, it has been subject to reclassification by aggregating and/or changing certain line items from the Consolidated Financial Statements and, in some instances, by creating new line items or moving amounts to different line items as set forth in Annex A and Annex B hereto and (ii) in certain cases, as specified below, has been subject to adjustments to account for changes in accounting principles and/or changes
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in the scope of consolidation. This financial information is used by our management to analyze our business performance and our financial results in our year end.
As of As of December 31, December 31, 2020 2019 (in € millions) Assets...... Cash and cash equivalents ...... 9,814 9,745 Financial assets measured at fair value through profit or loss ...... 58,246 49,414 a) financial assets held for trading...... 53,165 45,152 b) financial assets designated at fair value ...... 3 195 c) other financial assets mandatorily measured at fair value...... 5,078 4,067 Financial assets measured at fair value through other comprehensive income ...... 57,858 72,410 Financial assets pertaining to insurance companies, measured at fair value pursuant to IAS 39 ...... 177,170 168,202 Financial assets measured at amortized cost ...... 615,260 467,815 a) due from banks ...... 110,095 49,027 b) loans to customers ...... 505,165 418,788 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 1,211 612 Hedgin g derivatives ...... 1,134 3,029 Fair value change of financial assets in hedged portfolios (+/-) ...... 2,400 1,569 Investments in associates and companies subject to joint control...... 1,996 1,240 Technical insurance reserves reassured with third parties...... 93 28 Property and equipment...... 10,850 8,878 Intangible assets...... 8,194 9,211 of which: - goodwill ...... 3,154 4,055 Tax assets ...... 19,503 15,467 a) current...... 2,326 1,716 b) deferred ...... 17,177 13,751 Non-current assets held for sale and discontinued operations ...... 28,702 494 Other assets ...... 10,183 7,988 Total assets ...... 1,002,614 816,102
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As of As of December 31, December 31, 2019 2018 (in € millions) Assets...... Cash and cash equivalents ...... 9,745 10,350 Financial assets measured at fair value through profit or loss ...... 49,414 42,115 a) financial assets held for trading...... 45,152 38,806 b) financial assets designated at fair value ...... 195 208 c) other financial assets mandatorily measured at fair value...... 4,067 3,101 Financial assets measured at fair value through other comprehensive income ...... 72,410 60,469 Financial assets pertaining to insurance companies, measured at fair value pursuant to IAS 39 ...... 168,202 149,546 Financial assets measured at amortized cost ...... 467,815 476,503 a) due from banks ...... 49,027 69,307 b) loans to customers ...... 418,788 407,196 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 612 952 Hedgin g derivatives ...... 3,029 2,993 Fair value change of financial assets in hedged portfolios (+/-) ...... 1,569 124 Investments in associates and companies subject to joint control...... 1,240 943 Technical insurance reserves reassured with third parties...... 28 20 Property and equipment...... 8,878 7,372 Intangible assets...... 9,211 9,141 of which: - goodwill ...... 4,055 4,227 Tax assets ...... 15,467 17,258 a) current...... 1,716 3,320 b) deferred ...... 13,751 13,938 Non-current assets held for sale and discontinued operations ...... 494 1,297 Other assets ...... 7,988 8,707 Total assets ...... 816,102 789,790
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As of As of December 31, December 31, 2020 2019 (in € millions) Liabilities and Shareholders’ Equity ...... Financial liabilities measured at amortized cost ...... 630,146 519,382 a) due to banks...... 115,947 103,324 b) due to customers ...... 422,365 331,181 c) securities issued ...... 91,834 84,877 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 1,935 826 Financial liabilities held for trading...... 59,033 45,226 Financial liabilities designated at fair value ...... 3,032 4 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39...... 77,207 75,935 Hedgin g derivatives ...... 7,088 9,288 Fair value change of financial liabilities in hedged portfolios (+/-) ...... 733 527 Tax liabilities 3,029 2,321 a) current...... 284 455 b) deferred ...... 2,745 1,866 Liabilities associated with non-current assets held for sale and discontinued operations ...... 35,676 41 Other liabilities ...... 14,439 12,070 Employee termination indemnities...... 1,200 1,134 Allowances for risks and charges ...... 5,964 3,997 a) commitments and guarantees given...... 626 482 b) post-employment benefits ...... 324 232 c) other allowances for risks and charges ...... 5,014 3,283 Technical reserves...... 96,811 89,136 Valuation reserves...... (515) (157) Valuation reserves pertaining to insurance companies ...... 809 504 Redeemable shares...... - - Equity instruments ...... 7,441 4,103 Reserves ...... 17,461 13,279 Share premium reserve ...... 27,444 25,075 Share capital ...... 10,084 9,086 Treasury shares (-) ...... (130) (104) Minority interests (+/-) ...... 450 247 Net income (loss) (+/-) ...... 3,277 4,182 Total liabilities and shareholders’ equity ...... 1,002,614 816,102
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As of As of December 31, December 31, 2019 2018 (in € millions) Liabilities and Shareholders’ Equity ...... Financial liabilities measured at amortized cost ...... 519,382 513,942 a) due to banks...... 103,324 107,982 b) due to customers ...... 331,181 323,900 c) securities issued ...... 84,877 82,060 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 826 810 Financial liabilities held for trading...... 45,226 41,895 Financial liabilities designated at fair value ...... 4 4 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39 ...... 75,935 67,800 Hedgin g derivatives ...... 9,288 7,221 Fair value change of financial liabilities in hedged portfolios (+/-) ...... 527 398 Tax liabilities ...... 2,321 2,391 a) current...... 455 163 b) deferred ...... 1,866 2,228 Liabilities associated with non-current assets held for sale and discontinued operations ...... 41 258 Other liabilities ...... 12,070 11,670 Employee termination indemnities...... 1,134 1,190 Allowances for risks and charges ...... 3,997 5,064 a) commitments and guarantees given...... 482 510 b) post-employment benefits ...... 232 261 c) other allowances for risks and charges ...... 3,283 4,293 Technical reserves...... 89,136 80,797 Valuation reserves...... (157) (913) Valuation reserves pertaining to insurance companies ...... 504 9 Redeemable shares...... - - Equity instruments ...... 4,103 4,103 Reserves ...... 13,279 13,006 Share premium reserve ...... 25,075 24,768 Share capital ...... 9,086 9,085 Treasury shares (-) ...... (104) (84) Minority interests (+/-) ...... 247 326 Net income (loss) (+/-) ...... 4,182 4,050 Total liabilities and shareholders’ equity ...... 816,102 787,790
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For the year For the year ended ended December 31, December 31, 2020 2019 (in € millions) Interest and similar income...... 10,183 10,193 of which: interest income calculated using the effective interest rate method ...... 10,277 10,565 Interest and similar expense...... (2,451) (3,269) Interest margin...... 7,732 6,924 Fee and commission income ...... 10,312 9,658 Fee and commission expense...... (2,334) (2,159) Net fee and commission income ...... 7,978 7,499 Dividend and similar income ...... 86 117 Profits (Losses) on trading...... 628 506 Fair value adjustments in hedge accounting...... 71 (61) Profits (Losses) on disposal or repurchase of:...... 633 1,385 a) financial assets measured at amortized cost ...... (193) 97 b) financial assets measured at fair value through other comprehensive income...... 870 1,218 c) financial liabilities ...... (44) 70 Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss ...... (9) 123 a) financial assets and liabilities designated at fair value ...... 57 (103) b) other financial assets mandatorily measured at fair value ...... (66) 226 Profits (Losses) on financial assets and liabilities pertaining to insurance companies pursuant to IAS 39 ...... 3,463 3,991 Net interest and other banking income ...... 20,582 20,484 Net losses/recoveries for credit risks associated with: ...... (4,364) (2,201) a) financial assets measured at amortized cost ...... (4,356) (2,175) b) financial assets measured at fair value through other comprehensive income...... (8) (26) Net losses/recoveries pertaining to insurance companies pursuant to IAS39 ...... (81) (9) Profits (Losses) on changes in contracts without derecognition ...... (29) (6) Net income from banking activities...... 16,108 18,268 Net insurance premiums ...... 10,842 10,147 Other net insurance income (expense)...... (12,802) (12,673) Net income from banking and insurance activities ...... 14,148 15,742 Administrative expenses:...... (12,160) (9,692) a) personnel expenses...... (7,562) (5,825) b) other administrative expenses...... (4,598) (3,867) Net provisions for risks and charges...... (793) (73) a) commitments and guarantees given...... 4 23 b) other net provisions...... (797) (96) Net adjustments to / recoveries on property and equipment...... (578) (523) Net adjustments to / recoveries on intangible assets ...... (818) (692) Other operating expenses (income) ...... 3,347 774 O perating expenses ...... (11,002) (10,206) Profits (Losses) on investments in associates and companies subject to joint control...... (16) 53 Valuation differences on property, equipment and intangible assets measured at fair value ..... (42) (13) Goodwill impairment ...... (981) - Profits (Losses) on disposal of investments ...... 101 96 Income (Loss) before tax from continuing operations ...... 2,208 5,672 Taxes on income from continuing operations ...... (59) (1,564) Income (Loss) after tax from continuing operations...... 2,149 4,108 Income (Loss) after tax from discontinued operations...... 1,136 64 Net income (loss) ...... 3,285 4,172 Minority interests ...... (8) 10 Parent Company’s net income (loss) ...... 3,277 4,182 Basic EPS – Euro ...... 0.18 0.24 Diluted EPS – Euro ...... 0.18 0.24
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For the year For the year ended ended December 31, December 31, 2019 2018 (in € millions) Interest and similar income...... 10,193 10,486 of which: interest income calculated using the effective interest rate method ...... 10,565 10,814 Interest and similar expense...... (3,269) (3,144) Interest margin...... 6,924 7,342 Fee and commission income ...... 9,658 9,548 Fee and commission expense...... (2,159) (2,023) Net fee and commission income ...... 7,499 7,525 Dividend and similar income ...... 117 94 Profits (Losses) on trading...... 506 445 Fair value adjustments in hedge accounting...... (61) (111) Profits (Losses) on disposal or repurchase of:...... 1,385 549 a) financial assets measured at amortized cost ...... 97 (19) b) financial assets measured at fair value through other comprehensive income...... 1,218 508 c) financial liabilities ...... 70 60 Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss ...... 123 298 a) financial assets and liabilities designated at fair value ...... (103) 28 b) other financial assets mandatorily measured at fair value ...... 226 270 Profits (Losses) on financial assets and liabilities pertaining to insurance companies pursuant to IAS 39 ...... 3,991 3,240 Net interest and other banking income ...... 20,484 19,382 Net losses/recoveries for credit risks associated with: ...... (2,201) (2,509) a) financial assets measured at amortized cost ...... (2,175) (2,507) b) financial assets measured at fair value through other comprehensive income...... (26) (2) Net losses/recoveries pertaining to insurance companies pursuant to IAS39 ...... (9) (26) Profits (Losses) on changes in contracts without derecognition ...... (6) (11) Net income from banking activities...... 18,268 16,836 Net insurance premiums ...... 10,147 8,180 Other net insurance income (expense)...... (12,673) (9,968) Net income from banking and insurance activities ...... 15,742 15,048 Administrative expenses:...... (9,692) (10,000) a) personnel expenses...... (5,825) (5,931) b) other administrative expenses...... (3,867) (4,069) Net provisions for risks and charges...... (73) (35) a) commitments and guarantees given...... 23 88 b) other net provisions...... (96) (123) Net adjustments to / recoveries on property and equipment...... (523) (383) Net adjustments to / recoveries on intangible assets ...... (692) (596) Other operating expenses (income) ...... 774 733 O perating expenses ...... (10,206) (10,281) Profits (Losses) on investments in associates and companies subject to joint control...... 53 177 Valuation differences on property, equipment and intangible assets measured at fair value ...... (13) (9) Goodwill impairment ...... - - Profits (Losses) on disposal of investments ...... 96 452 Income (Loss) before tax from continuing operations ...... 5,672 5,387 Taxes on income from continuing operations ...... (1,564) (1,363) Income (Loss) after tax from continuing operations...... 4,108 4,024 Income (Loss) after tax from discontinued operations...... 64 48 Net income (loss) ...... 4,172 4,072 Minority interests ...... 10 (22) Parent Company’s net income (loss) ...... 4,182 4,050 Basic EPS – Euro ...... 0.24 0.24 Diluted EPS – Euro ...... 0.24 0.24
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Ratios
For the years ended December 31, As of January 1, 2020(1) 2019(2) 2019(3) 2019(4) Profitability Ratios ...... Cost / Income ratio(5) ...... 52.2% 51.8% 51.4% 53.3% Net income / Shareholders’ equity (ROE)(6) ...... 5.9% 8.8% 8.8% 8.8% ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. See also “Annex A” (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. See also “Annex A” (3) Figures from the 2019 Unaudited Reclassified Financial Information. See also “Annex B” (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. See also “Annex B”. (5) Cost to income ratio is defined as the ratio between operating cost and operating income. (6) Ratio of net income to shareholders’ equity at the end of the period. Shareholders’ equity does not take into account AT1 capital instruments or the income for the period.
As of December 31, As of January 1, 2020(1) 2019(2) 2019(3) 2019(4) Risk Ratios ...... Net bad loans / Loans to customers ...... 0.9% 1.7% 1.7% 1.8% Cumulated adjustments on doubtful loans / Gross doubtful loans to customers ...... 48.6% 54.6% 54.6% 54.5% ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. See also “Annex A” (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. See also “Annex A”. (3) Figures from the 2019 Unaudited Reclassified Financial Information. See also “Annex B”. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 Comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. See also “Annex B”. The table below sets forth the Own Funds attributable to the Issuer on a standalone basis as of December 31, 2020 under the Basel III framework.
As of December 31, 2020 IFRS 9 transitional(1) Issuer Regulatory Capital Ratios ...... Common Equity Tier 1 / Risk-weighted assets (CET1 Capital Ratio) ...... 13.3% Tier 1 Capital/ Risk-weighted assets (Tier 1 Capital Ratio) ...... 15.4% Total Own Funds(2)/ Risk-weighted assets (Total Capital Ratio)...... 17.7% Risk-weighted assets (in € billions)...... 334,337 ______(1) Figures from the 2020 Annual Report. (2) The Group has decided not to adopt the temporary treatment for the calculation of Own Funds provided for in order to mitigate the possible negative effects of the COVID-19 Pandemic as at December 31, 2020. For further information about Own Funds, please see “Risk Management—Basel III rules and capital adequacy— Basel III.” The table below sets forth the regulatory capital ratios of the Group as of December 31, 2020 and as of December 31, 2019. See also “—Capitalization and Regulatory Capital” above.
As of December 31, 2020(1) As of IFRS 9 IFRS 9 December 31, “Fully loaded” “Transitional” 2019(1) (2) Group Regulatory Capital Ratios ...... Common Equity Tier 1 / Risk-weighted assets (CET1 Capital Ratio) . 14.0% 14.7% 13.9% Tier 1 Capital/ Risk-weighted assets (Tier 1 Capital Ratio) ...... 16.2% 16.9% 15.3% Total Own Funds(3)/ Risk-weighted assets (Total Capital Ratio)...... 19.2% 19.6% 17.7% Risk-weighted assets (in € millions)...... 348,519 347,072 298,524 ______(1) Figures from the 2020 Annual Report. For further details, see “Risk Management─Basel III rules and capital adequacy”. (2) Figures from the 2019 Annual Report.
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(3) The Group has decided not to adopt the temporary treatment for the calculat ion of Own Funds provided for in order to mitigate the possible negative effects of the COVID-19 Pandemic as at December 31, 2020. For further information about Own Funds, please see “Risk Management—Basel III rules and capital adequacy— Basel III.” The table below sets forth the Leverage Ratio of the Group as of December 31, 2020 and December 31, 2019.
As of As of December 31, December 31, 2020 2019 Leverage Ratio ...... 7.2% 6.7% The CET1 ratios of the Issuer and the Group will depend on their respective levels of net income, their ability to limit their total risk exposure, and other factors, including those described under “Risk factors” in this Offering Memorandum. [Redacted Text]
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We encourage you to read the following discussion together with the section entitled “Selected Consolidated Historical Financial and Other Information” as well as with our Consolidated Financial Statements and the related notes thereto. The discussion below analyzes our Group’s historical results of operations and financial condition. We describe certain factors that have affected, and may continue to affect, our business, results of operations and financial condition. The impact of these and other potential factors may vary significantly in the future. The speed and unpredictability of unfolding events in the context of the global financial crisis and recessionary economic environment make past performance a less reliable predictor of future performance than would be the case under normal conditions. In addition, the following discussion includes forward looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those expressed or implied by the forward looking statements. For a discussion of some of those risks and uncertainties please refer to the sections entitled “Disclosure Regarding Forward Looking Statements” and “Risk Factors”. The financial information used in the discussion below is based on our 2020 Unaudited Restated and Reclassified Financial Information, our 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020, our 2019 Unaudited Reclassified Financial Information and our 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019, which is derived from our Consolidated Financial Statements and should be read together with our Consolidated Financial Statements. The restatements have been made to account for changes in accounting principles and/or changes in the scope of consolidation, while the reclassifications have been made to aggregate and/or change certain line items from the Consolidated Financial Statements and, in some instances, by creating new line items or moving amounts to different line items, each as set forth in Annex A and Annex B. For a summary of such restatements and reclassifications see “Presentation of Financial Information”. As a result of these restatements and reclassifications, we have presented certain financial information (i) for 2020 once, in the form of the 2020 Unaudited Restated and Reclassified Financial Information, (ii) for 2019 twice, once in the form of the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020 and once in the form of the 2019 Unaudited Reclassified Financial Information, and (iii) for 2018 once, in the form of the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. Unaudited Restated and Reclassified Financial Information used in the discussion below is derived from our segment reporting information that we present in Part L – Segment Reporting of our 2020 Audited Consolidated Financial Statements and 2019 Audited Consolidated Financial Statements, each of which is included in the F Pages hereto, which is prepared in accordance with IFRS 8, Operating Segments. The attribution of economic and balance sheet results to the various sectors is based on the accounting principles used in the preparation and presentation of the 2020 Audited Consolidated Financial Statements and 2019 Audited Consolidated Financial Statements. Use of the same accounting standards allowed segment information and Audited Consolidated Financial Statements to be effectively reconciled. The restatements and reclassifications made to our financial information may make it difficult for prospective investors to make comparisons between our different sets of financial information. Prospective investors are therefore cautioned against placing undue reliance on such comparisons. See “Risk Factors—Risks related to the presentation of financial information—Much of the financial information used as the basis for discussion and analysis in this Offering Memorandum has been reclassified and/or restated, and because our financial information is presented in different ways, prospective investors may find it difficult to make comparisons”. Additionally, the December 31, 2020 figures presented include the effects deriving from the UBI Banca Acquisition, subject to consolidation from the date of the UBI Banca Acquisition (August 3, 2020). No adjustments have been made to the historic reclassified income statement and balance sheet data in order to retroactively reflect the effects of the UBI Banca Acquisition. In this section we presented certain Non-GAAP unaudited figures net of the UBI Banca’s results, in order to ensure a like-for-like comparison. For an illustration of the December 31, 2020 data aggregated without UBI Banca, please refer to our reclassified financial information set out in our 2020 Annual Report in section “Income statement and balance sheet aggregates”. For more information about the UBI Banca Acquisition, see “UBI Banca Acquisition”.
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Macroeconomic overview Global economy and the European market
The global economy, the condition of financial markets and macroeconomic developments in our primary markets significantly influenced our performance over the financial periods ended December 31, 2020, December 31, 2019 and December 31, 2018. Background 2019 was a relatively volatile year for the financial markets, which were affected by the trade w ar between the United States and China, which led to a significant increase in tariffs and a sharp drop in trade between the two countries before easing at the end of the year. The repercussions affected the rest of Asia and Europe. Global manufacturing continued to slow down until the autumn quarter, when it started to show signs of stabilizing. The U.S. economy began on a downward path. Unemployment fell to below 4%, but signs of wage pressure were still limited. Inflation returned below 2%. The Federal Reserve responded to the risks of slowdown with three cuts in official rates, for a total of 75 basis points. The slowdown in the emerging countries, including India and China, continued, and Latin America felt the effects of the downturn in Mexico, Argentina and Venezuela. In the countries of Central-Eastern Europe, where our subsidiaries are based, despite having slowed down, growth was still strong in Hungary, whereas Slovakia and Slovenia experienced a significant downturn. The countries of South-Eastern Europe also slowed down, although Romania was able to maintain a better pace. Growth also slowed down in Russia, but maintained a good pace in Ukraine and Moldova. Egypt continued to stand out as a dynamic economy. Growth slowed down in the Eurozone, due to the decline in manufacturing, particularly in Germany. Fiscal policy was eased off slightly, while consumption was boosted by rising household income. The unemployment rate fell to 7.4%. Inflation fell below 1%, a long way from the European Central Bank’s target, bouncing back only at the end of the year. The Italian economy remained in a phase of substantial stagnation, with GDP growth estimated at just above zero. Industrial production decreased. However, the construction and, in particular, the services sectors posted stronger performance. The unemployment rate fell to 9.9% and inflation was 0.5% in December. The public finances performed better than expected: the deficit amounted to 1.6% of GDP in 2019, but the debt-to-GDP ratio increased further to 134.6%. The European Central Bank responded to the economic slowdown with a series of measures, including a new cycle of Targeted Long-Term Refinancing Operations (“TLTRO III”), a reduction in the deposit rate to -0.50%, and a resumption of net purchases of securities. As short-term rates fell further, medium and long-term rates declined. Government bond yields also fell. The spread of 10-year BTP on German securities remained very high until mid-August, almost always above 200 bps. After the change in parties with a political majority in Italy, the spread fell rapidly to 131 bps in September, settling to between 150 and 173 bps in the final months of 2019. On the currency markets, the euro lost ground against the dollar, although it only moved within a relatively narrow range and has showed signs of recovery since October. Against this background, bank interest rates reached new lows. The year 2019 started with upwards adjustments to interest rates on new loans, although these were small and not seen across the board. From the summer, this phase gave way to renewed declines. In terms of annual average, the interest rate on outstanding loans fell slightly. The cost of the stock of customer deposits was lower than in 2018, due to the shifting of the aggregate towards less costly forms of funding, current account interest rates remaining at close to zero, and the decrease in bond interest rates. The spread between lending and funding rates in terms of annual average was unchanged on 2018. In the credit market, the strong growth in loans to households continued, driven by mortgages and consumer credit. In contrast, loans to business fell again, against a background of continued sluggish demand and high liquidity. Banks have continued to make progress in reducing their risk assets, thanks to lower inflows of non- performing exposures, recovery activities, and securitizations. The stock of bad loans also fell. Customer deposits recovered more strongly than expected, driven by the performance of deposits, particularly for demand deposits. This was accompanied by a rapid improvement in bonds, where the decline in stock halted and issues resumed on wholesale markets. With regard to assets under management, net inflows to mutual funds and portfolio management schemes continued to be weak. In particular, the first half of the year was characterized by negative net inflows attributable to the overhang from the disappointing performance in 2018, followed by improvement in the second half. Nevertheless, assets under management grew robustly thanks to the very strong
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performance of the equity markets and the decline in the sovereign spread. Against this backdrop, collected premiums for life insurance were substantially resilient thanks to growth in traditional policies. In 2020, an infectious disease related to the virus “SARS-CoV-2” and which is commonly associated to a severe acute respiratory syndrome spread globally and resulted in a deep global recession (the “COVID-19 Pandemic”). In January and February the effects were concentrated in China and impacted the rest of the world mainly through trade. However, between February and March, the epidemic spread to Europe and the United States and the contagion then went on to affect the emerging countries. All the countries affected by the virus had to adopt containment measures based on social distancing, the closure of many businesses, and restrictions on travel and tourism; the advanced countries whose health systems were least equipped to deal with the emergency were forced to impose longer suspensions of production activities. Even where less restrictive measures have been adopted, economic activity has been well below the norm, resulting in an almost total standstill for air transport, tourism and social consumption. The restrictions were gradually eased from the end of April to the beginning of June, but with limitations that continued to affect travel between countries and social gatherings, and were imposed again during the fall, although more selectively. The COVID-19 Pandemic and the subsequent policy measures have had a significant impact on the bank credit market. Unlike other crises, there has not been a supply shock, thanks to the ECB’s measures to support liquidity and longer-term funding, as well as initiatives by supervisory and regulatory authorities to enable banks to support credit and deal with the risks associated with the crisis. Credit supply conditions were still favorable overall, despite increased prudence on the part of banks in view of the foreseeable deterioration in credit quality, partly mitigated by the support policies put in place. For customer deposits the effects of the COVID-19 Pandemic strengthened the trends underway prior to the onset of the crisis. In particular, current accounts, which had already been very lively for over seven years, gained even more momentum, growing by more than 10% year-on-year from September and reaching a high of +14.2% in December. The robust increase in deposits was driven by the climate of uncertainty, which resulted in a strong preference for liquidity, lower consumption levels and higher propensity to save. In addition, there was strong growth in deposits from non-financial companies, fueled in part by the increase in government guaranteed loans. The strong performance of the on- demand component led to a significant increase in overall deposits and customer funding, despite the sharp decline in the bond component from March onwards. In the credit market, the demand shock has had contrasting effects, negative for loans to households, which have slowed down significantly, and positive for loans to businesses, whose trend has reversed, climbing back up again from March and reaching a growth rate of 8.3% at end-2020. Furthermore, average rates on new loans to businesses fell slightly in 2020. For assets under administration, the decline in debt securities held in custody by banks on behalf of households continued in 2020. The persistence of the trend reflected the ongoing fall in bank bonds held by retail customers. The asset management business showed good resilience. For mutual funds, significant outflows in the first quarter, linked to the collapse of the stock market indices due to the COVID-19 Pandemic, were followed by robust inflows in the subsequent quarters, leading to positive net inflows for the whole year. Life insurance, on the other hand, saw a fall in new business compared to 2019, which was particularly sharp for traditional policies and much smaller for unit-linked policies. Interest rates Interest rates were significantly affected by the financial crisis, with central banks, including the ECB and the U.S. Federal Reserve continuing to reduce official interest rates. These policy actions, combined with the abundant liquidity, contributed to significant declines in Euribor market rates. In 2017, the 1-month Euribor market rate has hovered just above negative 0.4%; in 2018, the 1-month Euribor rate has hovered just below negative 0.4%; in 2019, the 1-month Euribor rate ranged between negative 0.3% and 0.4%. The 1-month USD Libor rose consistently with the gradual tightening of policy rates by the U.S. Federal Reserve in 2017 and then, in 2018, the 1-month USD Libor ranged between 1.5% and 2.5%. In 2019, the U.S. Federal Reserve proceeded to loosen policy rates, such that the 1-month USD Libor fell below 2% by the end of the year. In 2020, the 1- month USD Libor fell below 1% by the end of the year, whereas the 1-month Euribor market rate fell to negative 0.5%. The expansionary monetary policy and innovative measures adopted by the ECB, such as the Targeted Longer Term Refinancing Operations (“TLTROs”), which provide financing for banking institutions at low interest rates and long maturities to stimulate lending, have driven a recovery in loans to the private sector in recent years. Growth in loans to households has been particularly robust, until the onset of the COVID-19 Pandemic,
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as very low interest rates have fostered a solid increase in house purchase financing and consumer credit. However, loans to non-financial corporations remained subdued in 2019, in part as a result of deleveraging and diversification towards market financing. The number of bankruptcies continued to decline in 2019 and so did the Default Rate of bank loans, thanks to the consolidation of the economic recovery and the healthier financial condition of Italian firms. As a result, NPL ratios and provisions declined in the period ending December 31, 2019. Sale and securitizations and internal workout of NPLs were decisive in reducing the stock of impaired loans in bank balance-sheets. De-risking in the banking sector continued in 2020, despite the COVID-19 Pandemic. In 2020, the number of bankruptcies in Italy decreased by about one third compared to 2019. According to the Bank of Italy, the lower number of bankruptcies depended on two factors: first the moratorium (moratoria) on bankruptcies and the general slowdown of operations in the courts as a consequence of the measures to contain the COVID-19 Pandemic. Second, certain firms that were already distressed before the COVID-19 Pandemic, and that presumably would have been bankrupt in 2020, may have survived only because of the economic support measures. Based on estimates of the elasticity of bankruptcies to the business cycle, and assuming that the 2020 “missed” bankruptcies will re-emerge in early 2021, the number of bankruptcies could increase by about 6,500 cases (nearly 60% of those recorded in 2019) by 2022. In 2020, despite the COVID-19 Pandemic, banks again recorded a significant reduction of total NPL stock. Furthermore, the continued uncertainty surrounding Brexit during 2018 and 2019 caused volatility in the global capital markets up and until the formal departure of the United Kingdom from the EU (“Brexit”), which occurred on January 31, 2020 and the Trade and Cooperation Agreement entered into by the EU and the UK on December 24, 2020. This volatility has mainly affected the foreign exchange market, where it resulted in a decrease in the value of sterling against the US dollar and other foreign currencies, including the Euro, in the first half of 2019, followed by an equal rise in value in the second half of the year. An environment of accommodative monetary policy and subdued inflation expectations have resulted in low global bond yields across the credit spectrum. Macroeconomic overview The MENA area (Middle East and North Africa) as a whole experienced a decline in growth during 2020, where GDP fell by 3.4%, as compared to an increase of 0.8% in 2019 and 1.2% in 2018 (source: IMF), due to the negative economic impact of the outbreak of the Covid-19 Pandemic, though being mitigated by accommodating monetary and fiscal policies. Within the MENA area, GDP growth over performed in Egypt where, despite the COVID-19 Pandemic, it increased by 3.6% in 2020, after recording a buoyant 5.6% in 2019. Central and South-Eastern Europe (“CESEE”) was also hit by the economic effects of the Covid-19 Pandemic, even if to a lesser extent than the Euro Area. In the countries in which our Subsidiaries operate GDP fell (on a PPP-weighted average) by 4.8% during 2020, compared to a GDP increase of 3.5% in 2019. In the Commonwealth of Independent States (“CIS”) countries, in Russia the economic activity fell by 3.1% in 2020, compared to a growth rate of 1.3% in 2019 and 2.3% in 2018. In 2020, the Eurozone suffered a major decline in economic activity because of the COVID-19 Pandemic. The impact of the COVID-19 Pandemic on GDP in the first half of the year was unprecedented: a fall of -3.8% quarter on quarter (“QoQ”) in the first quarter was followed by a double-digit decline in the second quarter (- 11.6%). GDP rebounded in the third quarter by 12.5%, but declined again in the fourth (-0.7%). The decline in services, retail trade and, to a lesser extent, in manufacturing construction, led to a 6.6% drop in GDP in 2020, compared to the 2019 level. The unemployment rate was 8.2% December 2020, 0.8 percentage points higher than in the same month of 2019. Inflation dropped to 0.3%. The international trend in stock markets was very positive in 2019 and stock markets in the Eurozone and Asia continued to grow over the year. However, 2020 did not follow such trend in the Eurozone, due to the Covid- 19 Pandemic. In 2020, the S&P 500 increased by 16.3% while the Nasdaq largely outperformed, with a rise of 43.6%. In China, the SSE A-Share benchmark index increased by 13.9% and the Japanese Nikkei 225 index increased by 16.0%. During the same period, the Euro Stoxx index closed the year down by 1.6%, the CAC 40 recorded a negative trend (-7.1%) at the end of the period, the Dax 30 had a positive performance (3.6%), while the IBEX 35 underperformed, ending the year at -15.5%. Outside the Eurozone, the Swiss market index SMI closed the period broadly unchanged (+0.8%), while the United Kingdom’s FTSE 100 index closed the year down 14.3%.
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In countries where our subsidiaries are located, the Russian ruble and Ukrainian hryvnia were particularly weak (both lost more than 15% of their value against the U.S. dollar). The currencies of the CEE and SEE countries remained quite stable against the Euro, except in Hungary, where the exchange rate also lost more than 15% of its value against the Euro. After the end of the second quarter, Croatia entered the ERM II (Exchange Rate Mechanism) on July 10, 2020 with a central exchange rate of 7.5345 kuna within a range of +/-15%. In the MENA area, the Egyptian pound appreciated slightly against the U.S. dollar. Medium and long-term interest rates remained overall at very low levels. Italian economy
Although our Group operates in many countries, Italy is our primary market. As of and for the period ended December 31, 2020, 79.9% of our operating income, 85.0% of our loans to customers and 86.3% of our direct customer deposits were generated in Italy compared to, respectively, 79.1%, 81.2% and 83.5% as of and for the year ended December 31, 2019. Accordingly, our business is particularly sensitive to adverse macroeconomic conditions in Italy. Before the COVID-19 Pandemic, the Italian economy was gradually recovering from the economic crises of 2008-09 and 2011-12 (see “—Global economy and European sovereign debt crisis”). Italy’s GDP growth grew by 0.2% in 2019, but the COVID-19 Pandemic caused a major decline in economic activity in 2020. The fall in GDP in the first quarter was larger than in the whole of the euro area (-5.6% QoQ), due to the longer duration of the lockdown. In the second quarter, GDP fell by a further 12.9% QoQ. The lifting of restriction led to a 15.8% rebound in the third quarter, but a new wave of contagion reduced GDP in the fourth quarter by -1.8% QoQ. As a result, in 2020 the average annual rate of change of GDP was -8.9%. Additional measures taken by the ECB aimed at improving financing conditions and access to credit, plus the tax incentives provided by the Italian government and rising business confidence, resulted in an increase in investment spending. The fiscal stance, too, turned more growth-friendly in 2016-2020. The current account in the balance of payments has been positive since 2013, while the net investment position, after reaching almost 25% of GDP in early 2014, has steadily decreased to negative 9.0% of GDP as of December 31, 2020, compared to negative 2.9% in 2018 (source: Eurostat). Despite the substantial GDP drop, unemployment rates in Italy continued their gradual decline, falling from 12.0% in the fourth quarter of 2015 to 9.8% in 2020 (source: Eurostat). Nevertheless, the unemployment rate in Italy continues to be higher than the average European level (source: Eurostat) and the impact of the Covid- 19 Pandemic on employment has been significant. The Italian government issued several legislative support measures in order to cushion the impact of the crisis, which had a significant impact on public sector balances. In 2020 the net borrowing of the government sector was equal to 9.5% of GDP and the government debt ratio ended the year at 155.8% of GDP. The government debt ratio may increase further in 2021 as the government takes additional steps to offset the economic consequences of the Covid-19 Pandemic. Against this backdrop, Italy has experienced significant political uncertainty in recent years. Italy held general elections in March 4, 2018, which led to a radical change of government. That government could not be sustained, and, following the resignation of the Prime Minister Giuseppe Conte, it collapsed on August 21, 2019. The renewed period of crisis and uncertainty was furtherly exacerbated by the need to operate a difficult budget cutting before the end of the year, and to prevent a scheduled increase in VAT rates. On August 29, 2019, the Democratic Party (PD) and the 5-Star Movement struck a deal and Giuseppe Conte was assigned the mandate to form a new government by President Sergio Mattarella. The government obtained the approval of the Italian Parliament on September 10, 2019. On December 27, 2019, the Italian Parliament eventually approved the 2020 budget law preventing the abovementioned VAT increase. In March 2020, due to the Covid-19 Pandemic in Italy, the Italian Government progressively locked down the entire country and closed its factories and all non-essential production. At the same time, it approved a package of spending amounting to €25 billion to support businesses and households. Thereafter, the Italian government continued to explore and implement measures to support the economy. Eventually, on January 26, 2021, Prime Minister Giuseppe Conte resigned, leaving Italy in an uncertain political situation with Covid-19 infections still very high. However, one week later, Mario Draghi, the former head of the European Central Bank, accepted the mandate from President Sergio Mattarella to form a new unity government that would guide the country out of the pandemic and through economic recovery and, on February 13, 2021, he became Prime Minister. The new Italian government received resounding votes of confidence in
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both the Chamber of Deputies and the Senate on February 17 and February 18, 2021. At this time, it is not possible to quantify the long-term economic impact of the Covid-19 Pandemic and of political developments on the Italian economy. The vaccination campaign may speed up the recovery, while the Next Generation EU program is expected to boost government spending on fixed capital in the next years. General elections will be held in 2023 at the latest, which may potentially lead to new changes in government policies. See “Risk Factors—Our business is focused primarily in Italy and our financial condition and results of operations would be particularly affected by a continuation or worsening of the current volatility in the Italian financial market and political landscape or the current adverse macroeconomic conditions in Italy” and “Risk Factors—The consequences of Brexit are still uncertain and may negatively impact our business, and cost of funding”. In 2020, Italian banks consolidated a great deal of progress made in previous years in reducing asset risk. The credit quality indices confirmed the improvements, due to the lower inflows of non-performing exposures, the more effective recovery activities and sales and securitization transactions. The stock of net bad loans as a percentage of total loans decreased to 1.2%, down 3.7 percentage points compared to the highs of 2015-16. In the third quarter of 2020, the default rate in terms of annualized quarterly flow of non-performing loans (“NPLs”) in relation to total performing loans fell to new all-time lows, at 0.9% for the entire economy but then rebounding to 1.1% in the fourth quarter. This trend continues to reflect the government measures to support access to credit (moratoria and guarantees on new loans), as well as the use of the flexibility allowed in the loan classification rules, in accordance with the guidance from the supervisory authorities. In recent years there has been significant government and regulatory support for, and commitment to, the sale and resolution of NPLs compared to prior market cycles to accelerate bank sector rehabilitation and improvement of the real economy. During 2016, the Italian government implemented a number of measures to improve the current status of the Italian banks and in particular the liquidity of the NPL market. These measures include, among others, the implementation of state backed guarantees on senior tranches of securitized NPLs (“GACs”) and amendments on bankruptcy and foreclosure proceedings aimed at accelerating recovery of NPLs. Recent data shows positive results in the de-risking of bank balance sheets. In 2019 and 2020, the significant decline of NPLs is mainly due to the strong reduction in NPL inflows, internal workout activities, several operations of sale and securitizations, while other NPL transactions are in the pipeline. As a result, gross NPL ratio of Italian Significant Institutions went down to 4.1% at end-2020, according to the EBA definition, from 6.7% twelve months before. However, in 2020 Italian banks increased the loan loss provisions for performing loans to bring forward likely future losses. Overall, the pandemic led to a reduction in profitability in 2020. The ROE of Italian banks, net of extraordinary components, fell from 5.0% in 2019 to 1.9%, largely due to the rise in loan loss provisions, coupled with the decline in total revenues. The credit rating of Italy remained stable in 2020. In the past few years, the sovereign rating has been supported by a growing and diversified economy, important structural reforms and the government’s support of the Italian banking system to reduce the high level of NPLs. However, the very large government debt burden weighs negatively on such ratings, and prompted Fitch Ratings’ to change its outlook from “stable” to “negative” in 2018. If concerns regarding Italy’s debt position further worsen, due to the government’s ongoing efforts to offset the economic effects of the Covid-19 Pandemic or any other reason, it could affect our ability to access funds through the capital markets or otherwise on acceptable financial terms. For more information regarding this risk, see “Risk Factors—Recent concerns regarding Italy’s debt position could adversely affect the terms on which financing is available to us and result in losses relating to the Italian related debt that we own”. Italy’s public debt has increased steadily since 2007, reaching 134.4% of GDP in 2018, 134.6% in 2019 and 155.8% in 2020 (source: Eurostat) and investor concerns about Italy and the broader Eurozone crisis have increased since 2017, occasionally bringing up Italy’s borrowing costs on sovereign government debt. However, the interest rates on Italy’s sovereign bonds have been falling in recent years: with the median gross yield on Italy’s 10-year sovereign bonds being 2.77% as of December 31, 2018, 1.86% as of December 31, 2019 and 0.75% as of December 31, 2020. Italy’s interest expenditure as a percentage of GDP decreased to 3.4% in 2019; in 2020, despite the major increase in the debt ratio and the fall in nominal GDP, it only edged up marginally to 3.5% of GDP (source: Eurostat). In addition, as of December 31, 2020, the book value of our sovereign risk (excluding loans) with respect to Italy, which includes debt securities from sovereigns (central and local governments) was €90,170 million (of which €54,963 million related to debt securities held by our insurance business), as compared to €85,826 million (of which €51,708 million related to debt securities held by our insurance business) as of December 31, 2019, and €75,913 million (of which €45,723 million related to debt securities held by our insurance business) as of
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December 31, 2018. For additional details regarding macroeconomic conditions in Italy, see “Risk Factors— Risks related to our business—A continuation or worsening of the current volatility in the global financial markets, current adverse global macroeconomic conditions, or the sovereign debt crisis in Europe could have a material adverse effect on our business, financial condition and results of operations”. In 2020, the Italian stock market performed negatively, but with a recovery from the lows of mid-March. The FTSE MIB closed the year down 5.4%, in line with the performance of the FTSE Italia All Share (-5.6%). Mid cap stocks overperformed: the FTSE Italia STAR index ended the period up 14.1%. The financial crisis in Italy has affected the functioning of the Italian financial system and financial entities operating in Italy, including the Group, in a number of ways, including:
decreased market value of Italian government bonds;
limited liquidity in the Italian banking system;
decreased capacity to provide credit to customers;
increased NPLs; and the incorporation of Atlante, a private fund created specifically to aid Italian banks in financial difficulties. See “Business—Recent Developments—Participation in the Atlante Fund”. Factors affecting our business Integration of UBI Banca
On February 17, 2020, we announced our intention to launch a voluntary public exchange offer (the “Exchange Offer”) with respect to all ordinary shares of Unione di Banche Italiane S.p.A. (“UBI Banca”), an Italian bank headquartered in Bergamo, Italy, and listed for trading on the Mercato Telematico Azionario (the “MTA”) organized and managed by Borsa Italiana S.p.A. (“Borsa Italiana”), with the aim of delisting UBI Banca’s ordinary shares from the MTA and merging UBI Banca with and into our business (the “UBI Banca Acquisition”). The total consideration paid by us in connection with the UBI Banca Acquisition represented 0.5% of our total assets as of December 31, 2019. UBI Banca’s pre-tax operating income represented 6.5% of our pre-tax operating income for the year ended December 31, 2019 and UBI Banca’s total assets represented 15.5% of our total assets as of December 31, 2019. We launched the Exchange Offer for maximum of 1,144,285,146 ordinary shares of UBI Banca representing all subscribed and paid-in share capital, except the ordinary shares owned by us as of February 17, 2020, on June 25, 2020. For every ten UBI Banca shares tendered to us, we offered 17 of our shares. At then-current market prices, the exchange ratio of 1.7x represented a significant premium to UBI Banca shareholders. The shares offered in the exchange were issued by virtue of a capital increase and offered exclusively to those tendering their UBI Banca shares to us (i.e., our shareholders had no preemptive rights with respect to the offering). The capital increase was approved by our Board of Directors on June 16, 2020, and our extraordinary shareholders’ meeting held on April 27, 2020. On July 17, 2020, with a view toward overcoming UBI Banca shareholder divisions and on the basis of updated valuations, we revised the terms of the offer by adding cash consideration equal to €0.57 per share to the initial offer terms. At the same time, the offer period was extended by Consob from the initial deadline of July 28, 2020 to July 30, 2020. We announced to the market on August 3, 2020 that approximately 90.2% of the shares subject to the offer were tendered and we came to hold 91.0% of UBI Banca’s share capital. As through the Exchange Offer we received higher than 90% but lower than 95% of UBI Banca’s share capital, pursuant to Italian law, we met the conditions to launch the procedure for a compulsory squeeze-out, pursuant to which we were required to purchase the remaining ordinary shares from the shareholders of UBI Banca who requested it. The compulsory squeeze-out procedure resulted in sale requests for a total of 90,691,202 shares, representing 7.9256% of the share capital of UBI Banca. As a result of the compulsory squeeze-out, since we owned more than 95% of UBI Banca’s share capital, we reserved the right granted under Italian law to exercise the squeeze-out shareholders of UBI Banca that request
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it through a specific joint procedure that was agreed with CONSOB and Borsa Italiana (the “Joint Procedure”), targeting all of the remaining outstanding UBI Banca ordinary shares. On October 5, 2020, we made the payment of the consideration for the Joint Procedure through (i) the issuance of 17,055,121 new Intesa Sanpaolo shares, representing 0.09% of our share capital and the payment of a consideration of €5,718,482.25 to the accepting shareholders who chose the consideration established for the offer and to the shareholders that did not submit any sale requests and (ii) the payment of €9,217,655.24 for the accepting shareholders that requested the cash consideration in full. Following the conclusion of the Joint Procedure, we came to hold 100% of the share capital of UBI Banca. After the completion of the steps described above, Borsa Italiana ordered the delisting of UBI Banca shares from trading on the MTA as of October 5, 2020 subject to suspension of the share during the sessions of October 1-2, 2020. Lastly, on January 29, 2021, the plan for the merger by incorporation of UBI Banca into us was filed with the Torino Company Register. The merger was then approved by our Board of Directors on March 2, 2021. For more information about the anticipated benefits of the UBI Banca Acquisition, see “UBI Banca Acquisition”. The aftermath of the COVID-19 Pandemic
The COVID-19 Pandemic has massively disrupted the global economy. The containment measures adopted triggered a recession of unprecedented severity and speed in the first half of 2020, followed by a major rebound and another slowdown in the fourth quarter. Although the COVID-19 Pandemic did not lead to the suspension of the Group’s activities or the disappearance of the reference markets in which it operates, it nevertheless contributed to creating a climate of extreme uncertainty. In particular, the COVID-19 Pandemic caused a significant threat to the resilience of the companies in the Group’s loan portfolio. On the other hand, a series of unprecedented government measures were implemented to support the economy, which must be considered in assessing risk. With regard to business areas, the Banca dei Territori Division, which accounts for half of the fee and commission income of the business units, recorded a decrease (-6.4%, or €269 million) in fee and commission income, affected by the abrupt slowdown in the first six months of 2020 associated with containment of the COVID-19 Pandemic, to be attributed to both the management, dealing and financial consultancy and commercial banking segments. The COVID-19 Pandemic also affected the Group’s results for the year ended December 31, 2020. With regard to the most significant impacts of the COVID-19 Pandemic on the operating income of the Group, the increases in intermediated volumes related to the legislative and non-legislative measures implemented to combat crisis situations connected with the COVID-19 Pandemic – together with the contribution from the TLTROs with the ECB, which amounted to €82.9 billion as at December 31, 2020 (of which €12 billion related to UBI Banca) – had a positive impact on net interest income, amounting to €7,783 million (of which €713 million related to UBI Banca) over the twelve months, an increase of 11.1% on the figure of €7,005 million for 2019. Moreover, net fee and commission income increased to €8,303 million in 2020 (of which €721 million related to UBI Banca), compared to €7,962 million in 2019 (+4.3%, amounting to €341 million). Net fee and commission income for 2020, excluding the contribution of €721 million attributable to UBI Banca, came to €7,582 million, down by 4.8% compared to 2019 on a like-for-like basis. Despite the recovery in the third and fourth quarters, the result was severely influenced by the performance in the first half of the year, marked by the lockdown and by the financial market collapse at the height of the COVID-19 pandemic. However, the gradual easing of restrictions from May, enabled a considerable recovery in net fee and commission income in the following months, with a rise in the last quarter equal to 14.6% on the previous three months of 2020 and more than 22% on the second quarter (+€272 million and +€389 million respectively), returning to levels close to those earned in the same period of 2019 (-€33 million, or -1.5%). However, the most significant effect related to the considerable increase in the cost of risk, which rose to 104 basis points in December 2020 from 53 basis points at the end of 2019, due to the adoption within the projection models of the ECB – Bank of Italy scenarios and the managerial overlays, which led to an increase in ECL and macro-scenario add-ons, despite default rates still remaining low. The cost of risk rose to 104 basis points (of which 54 basis points related to the COVID-19 Pandemic). In general, in terms of impacts on the Group’s risks, it should be noted that, in view of the tension seen in the early months of the year some indicators
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already reflected the negative effects of the COVID-19 Pandemic, whereas for others, such as certain metrics related to credit risk, for now the negative impacts have not yet fully manifested themselves also thanks to the effects of the extraordinary measures adopted. Net interest income
Net interest income (representing 40.9% and 38.6% of operating income for the year ended December 31, 2020 and 2019, respectively) increased by 11.1% to €7,783 million (including the €713 million contribution of UBI Banca) from €7,005 million for the years ended December 31, 2020 and 2019. Net interest income (representing 38.6% and 40.7% of operating income for the year ended December 31, 2019 and 2018, respectively) decreased by 3.7% to €7,005 million from €7,271 million for the years ended December 31, 2019 and 2018. Interest rates have significantly affected our net interest income during 2020, 2019 and 2018. Our average spread between our lending and funding rate narrowed slightly and amounted to 1.33% as of the year ended December 31, 2020. See “Selected Statistical Information—Interest rate data—Changes in interest income and expenses—Volume and rate analysis”. In 2019, net interest income decreased by 3.7%, compared to the figure for 2018, primarily due to lower interest on non-performing assets, as well as the lower average volumes of loans and the smaller contribution from hedging of core deposits. In 2020, net interest income increased by 0.9% (net of UBI Banca), compared to the figure for 2019, primarily due to the higher contribution from customer dealing and, within other net interest income, the higher contribution from the TLTRO programs. These changes partially offset lower contributions from financial assets and liabilities, accounts with banks and non-performing assets, with the latter due to the progressive reduction in NPLs, also as a result of the derisking activities. For additional details regarding our net interest income, see “—Results of operations—Results of operations for the year ended December 31, 2020 and December 31, 2019—Net interest income” and “—Results of operations—Results of operations for the years ended December 31, 2019 and December 31, 2018—Net interest income”. Net fee and commission income
Net fee and commission income (equal to 43.6% of our operating income for the year ended December 31, 2020) increased by 4.3% to €8,303 million (including the €721 million contribution of UBI Banca) from €7,962 million between the years ended December 31, 2020 and December 31, 2019. Considering our results net of UBI Banca, in 2020, net fee and commission income decreased by 4.8% compared to the figure for 2019. The result was severally influenced by the performance in the first half of the year, marked by the lockdown and by the financial market collapse at the height of the COVID-19 Pandemic. These phenomena were reflected in a decline in fee and commission income both on commercial banking business with decreases across all components, and on management, dealing and financial consultancy business in particular, there was a decrease in the contribution relating to individual and collective portfolio management schemes and securities dealing and placement. Finally, other fee and commission income also declined due to the decrease in revenues on factoring transactions and other transactions. Net fee and commission income (equal to 43.8% of our operating income for the year ended December 31, 2019) increased by 0.1% to €7,962 million from €7,952 million between the years ended December 31, 2019 and December 31, 2018. In 2019, net fee and commission income, increased by 0.1% compared to the figure for 2018. This is primarily the result of a moderate decline in revenues from commercial banking (-1.9%) and other fee and commission income (-2.2%), entirely offset by growth in the management, dealing and financial consultancy segment (+1.5%). For additional details regarding our net fee and commission income, see “—Results of operations—Results of operations for the year ended December 31, 2020 and December 31, 2019—Net fee and commission income” and “—Results of operations—Results of operations for the years ended December 31, 2019 and December 31, 2018—Net fee and commission income”.
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Profits (losses) on financial assets and liabilities designated at fair value
Profits (losses) on financial assets and liabilities designated at fair value and profits on trading, the line item most sensitive to market volatility, recorded significant increases between 2018 and 2019. Profits (losses) on financial assets and liabilities designated at fair value (representing 10.6% and 8.3% of our operating income in the year ended December 31, 2019 and December 31, 2018) increased by 31.0% to €1,928 million for the year ended December 31, 2019 from €1,472 million for the year ended December 31, 2018. Profits (losses) on financial assets and liabilities designated at fair value (representing 8.3% and 10.6% of our operating income in the year ended December 31, 2020 and December 31, 2019) decreased by 18.5% to €1,572 million (including the €131 million contribution of UBI Banca) for the year ended December 31, 2020 from €1,928 million for the year ended December 31, 2019. In 2019, profits (losses) on financial assets and liabilities designated at fair value increased by 31.0% to €1,928 million, compared to €1,472 million for the year ended December 31, 2018. The result was influenced by the fair value measurement, in the first quarter, of the interest held in NTV - Nuovo Trasporto Viaggiatori (€264 million) in relation to its subsequent sale. It is also influenced by the positive effect of the sale of debt securities, including securities measured at amortized cost as a consequence of the trends in the correlations for credit and interest rate risk in the second quarter that occurred prior to the EU elections, which offset the capital losses recognized, in the same aggregate, in respect of certificates issued by Banca IMI, as a result of the measurement of the DVA valuation component recognized in the period. In 2020, profits (losses) on financial assets and liabilities designated at fair value, which includes profit (losses) on trading and the fair value adjustments in hedge accounting decreased by 18.5% to €1,572 million (including the €131 million contribution of UBI Banca), compared to €1,928 million for the year ended December 31, 2019. The decline is equal to 25% approximately (net of €131 million relating to UBI Banca) was due to lower contribution from transactions in instruments designated at fair value through other comprehensive income and financial liabilities as a result of lower capital gains released which fully offset the increase in profits (losses) on financial assets and liabilities designated at fair value. For additional details regarding our profits (losses) on trading, see “—Results of operations—Results of operations for the year ended December 31, 2020 and December 31, 2019—Profits (losses) on trading” and “— Results of operations—Results of operations for the years ended December 31, 2019 and December 31, 2018— Profits (losses) on trading”. Net adjustments to loans
Net adjustments to loans increased by 101.7% to €4,214 million (including the €54 million contribution of UBI Banca) from €2,089 million between the years ended December 31, 2020 and 2019. Net adjustments to loans increased by 99.1% to €4,160 million (net of the €54 million contribution of UBI Banca) from €2,089 million between the years ended December 31, 2020 and 2019, compared to a decrease of 12.7% to €2,089 million from €2,394 million between the year ended December 31, 2019 and 2018. Net adjustments to loans remain a significant factor affecting our results of operations as a result of the financial, banking and NPL crisis affecting our loan portfolio and the economies of Italy and the other main countries in which we operate. The decrease in the adjustments to loans in 2018 and in 2019 was due to lower adjustments for stage 3 loans and for bad loans in particular, whose decrease was partly offset by higher adjustments on unlikely-to-pay loans and the “one-off” effect of the early adoption by the Group, from November 2019, of the new definition of default. This performance was also influenced by the recoveries on performing loans, which benefited from a better risk profile, also due to portfolio recomposition effects and the updating of customer ratings. Net adjustments to loans, net of UBI Banca, almost doubled in 2020 for 2019. The increase was due to the greater provisions required by the revision of the scenario following the COVID-19 Pandemic, in application of the customary methods we adopted, while taking into account the prospective scenario outlined by the ECB and the Bank of Italy, with the recognition of adjustments of €2,164 million, of which €986 million to performing loans and €1,178 million of non-performing loans. In December 2020, continuing the process of deleveraging NPLs that has marked the last few years, we launched additional initiatives for the purpose of disposing of the
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NPLs acquired, whose closing is expected during 2021. This process entails the reclassification of the NPLs purchased or originated credit impaired loans under discontinued operations pursuant to IFRS 5. For additional details regarding our net adjustment to loans, see “—Results of operations—Results of operations for the year ended December 31, 2020 and December 31, 2019—Net adjustment to loans” and “—Results of operations—Results of operations for the years ended December 31, 2019 and December 31, 2018—Net adjustment to loans”. Goodwill
We test goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate, indicate that these assets may be impaired. For additional details regarding how we record goodwill, including testing for impairments, see “—Critical accounting policies—Impairment of financial assets and intangible assets”, “—Results of operations—Results of operations for the year ended December 31, 2020 and December 31, 2019, Impairment (net of tax) of goodwill and other intangible assets” and “—Results of operations—Results of operations for the years ended December 31, 2019 and December 31, 2018—Impairment (net of tax) of goodwill and other intangible assets”. Levies and other charges concerning the banking industry (net of tax)
For the year ended December 31, 2020, our line item levies and other charges concerning the bank industry (net of tax) totaled €512 million, net of taxes. Net of €47 million attributable to UBI Banca, these costs increased to €465 million from €360 million on the previous year due to the increase in deposit guarantee fund charges and, to a lesser extent, resolution fund charges. The charges recognized during the reporting period may be broken down into €233 million attributable to resolution funds, €171 million to deposit guarantee funds, €42 million to charges recognized by international subsidiary banks and €19 million to Atlante Fund. For additional details on our investment in the Atlante Fund, see “Risk Factors—Risks related to our business—We have a significant investment in the Atlante Funds, which recapitalized BPVi and Veneto Banca, which expose us to risk write- downs and other risks relating to actions beyond our control”.
Segment reporting Business segments The tables below set forth the breakdown of our operating income, net income, loans to customers and direct deposits from banking business by business segment for the periods indicated:
Direct deposits from banking Operating Income Net Income Loans to customers business For the year ended For the year ended December 31, December 31, As of December 31, As of December 31, 2020(1) 2019(2) % Change 2020(1) 2019(2) % Change 2020(1) 2019(2) % Change 2020(1) 2019(2) % Change (€ millions, except percentages) Business Segment: Banca dei Territori...... 8,083 8,392 (3.7) (677) 1,000 (167.7) 207,533 194,358 6.8 229,677 199,256 15.3 IMI Corporate and Investment Banking... 4,325 4,105 5.4 1,875 1,830 2.5 135,004 131,884 2.4 88,183 86,850 1.5 International Subsidiary Banks...... 1,908 1,998 (4.5) 473 723 (34.6) 36,079 34,038 6.0 46,308 43,420 6.7 Private Banking ...... 1,944 1,971 (1.4) 873 918 (4.9) 9,853 9,329 5.6 41,145 39,537 4.1 Asset Management...... 867 840 3.2 519 518 0.2 452 435 3.9 14 10 40.0 Insurance...... 1,257 1,216 3.4 686 661 3.8 ------Corporate Center ...... (975) (355) n.s. (1,578) (1,468) 7.5 12,903 25,185 (48.8) 51,642 56,439 (8.5) Total ...... 17,409 18,167 (4.2) 2,171 4,182 (48.1) 401,824 395,229 1.7 456,969 425,512 7.4 UBI Banca...... 1,614 0 n.s. 1,106 0 n.s. 59,748 0 n.s. 68,030 0 n.s. Total ...... 19,023 18,167 4.7 3,277 4,182 (21.6) 461,572 395,229 16.8 524,999 425,512 23.4
Direct deposits from banking Operating Income Net Income Loans to customers business As of As of As of As of For the year ended For the year ended December January December January December 31, December 31, 31, 1, 31, 1, (3) (4) (3) (4) (3) (4) (3) (4) 2019 2018 % Change 2019 2018 % Change 2019 2019 % Change 2019 2019 % Change (€ millions, except percentages) Business Segment: Banca dei Territori...... 8,473 8,825 (4.0) 1,551 1,256 23.5 186,354 196,093 (5.0) 199,256 190,960 4.3 Corporate and Investment Banking ...... 4,162 3,915 6.3 1,932 1,902 1.6 131,543 124,232 5.9 96,550 102,449 (5.8) International Subsidiary Banks...... 1,998 1,988 0.5 723 676 7.0 34,038 31,538 7.9 43,420 39,384 10.2 Private Banking ...... 1,971 1,874 5.2 919 848 8.4 9,329 9,530 (2.1) 38,737 32,103 20.7 Asset Management...... 840 716 17.3 518 454 14.1 435 228 90.8 10 6 66.7 Insurance...... 1,132 1,106 2.4 661 648 2.0 0 0 0 0 0 0 Corporate Center ...... (493) (611) (19.3) (2,122) (1,734) 22.4 33,530 31,929 5.0 47,539 50,180 (5.3) 18,083 17,813 1.5 4,182 4,050 3.3 395,229 393,550 0.4 425,512 415,082 2.5 Total ...... ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first- time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard.
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Geographic segments
We have organized our operations in three geographic segments: Italy, Europe and the Rest of the World. Our business is conducted principally in Italy, which, compared to the Rest of the World, accounted for 79.9% of our operating income, 85.0% of our loans to customers and 86.3% of our direct customer deposits as of and for the year ended December 31, 2020 (including UBI Banca). For the year ended December 31, 2020, operating income increased by 4.7% as compared to December 31, 2019. The increase recorded in Italy and in Europe was by 5.2% and 4.1%, respectively, while the Rest of the World decreased by 2.4%. Compared to December 31, 2019, loans to customers experienced an increase in Italy of 21.4%, with a decrease in Europe and in the Rest of the World of 1.3% and 12.3%, respectively. For the year ended December 31, 2020, direct deposits from banking business increased by 23.4% as compared to December 31, 2019. The increase recorded in Italy was by 28.8%, while Europe and the Rest of the World decreased by 1.3% and 11.0%, respectively. The tables below sets forth the breakdown of our operating income, net income, loans to customers and direct deposits from banking business by geographic area for the periods indicated:
Operating Income Loans to customers Direct deposits from banking business For the year ended As of As of As of As of December 31, December December December December 2020(1) 2019(2) % Change 31, 2020(1) 31, 2019(2) % Change 31, 2020(1) 31, 2019(2) % Change (€ millions, except for percentages) Geographic Area(5): Italy ...... 15,193 14,438 5.2 392,185 322,977 21.4 453,127 351,849 28.8 Europe...... 3,072 2,952 4.1 53,987 54,694 (1.3) 64,215 65,056 (1.3) Rest of the World ...... 758 777 (2.4) 15,400 17,558 (12.3) 7,657 8,607 (11.0) Total ...... 19,023 18,167 4.7 461,572 395,229 16.8 524,999 425,512 23.4
Operating Income Loans to customers Direct deposits from banking business For the year ended As of As of As of As of December 31, December January 1, December January 1, 2019(3) 2018(4) % Change 31, 2019(3) 2019 (4) % Change 31, 2019(3) 2019 (4) % Change (€ millions, except for percentages) Geographic Area(5): Italy ...... 14,354 14,160 1.4 322,977 327,336 (1.3) 351,849 350,585 0.4 Europe...... 2,952 2,950 0.1 54,694 51,214 6.8 65,056 55,681 16.8 Rest of the World ...... 777 703 10.5 17,558 15,000 17.1 8,607 8,816 (2.4) Total ...... 18,083 17,813 1.5 395,229 393,550 0.4 425,512 415,082 2.5 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first-time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. (5) Geographic area determined on the basis of the place of incorporation of the relevant Group entities. Critical accounting policies Preparation of our Consolidated Financial Statements requires the use of estimates and assumptions that may have a significant effect on the amounts reported in our Consolidated Financial Statements. Estimates are based on available information and subjective evaluations (often founded on past experience), which are used to formulate assumptions to be used in measuring our business performance and results of operations. The estimates and assumptions used may vary from year to year and may involve matters that are inherently uncertain and susceptible to change. Therefore, amounts currently reported in our Consolidated Financial Statements may significantly differ in future financial years as a result of changes in conditions or underlying circumstances and/or changes in our subjective estimates. With respect to accounting principles, Regulation No. 1254/2012 (effective from 2014) introduced various changes in the area of consolidation through the endorsement of certain accounting standards (IFRS 10, IFRS 11 and IFRS 12) and the ensuing introduction of amendments to existing standards (IAS 27 and IAS 28). The objective of IFRS 10 is to provide a single consolidation model that identifies control or “de facto control” as the basis for consolidation for all types of entities. The standard provides a precise definition of the case in which an investor controls a company. In fact, according to IFRS 10, control exists if and only if the investor:
has the power to direct the investee’s activities;
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is exposed to the variability of the returns of the investee in which it has invested; and
has the ability to influence the investee’s future returns, by using the power at its disposal. IFRS 10 establishes that in order to have control of a company, an investor must have the ability, deriving from a legal right or even from a mere de facto situation, to affect the type of management strategies to be assumed with regard to the subsidiary’s relevant activities and to be exposed to the variability of returns. IFRS 11 instead defines the principles of financial reporting by entities that are parties to arrangements that establish “joint control”, which may take the form of a joint venture (an entity in which the parties have rights to their share of net assets) or a joint operation (an operation whereby the parties that have joint control have rights to the assets and obligations for the liabilities). IFRS 12 combines, strengthens and supersedes disclosure obligations for subsidiaries, joint arrangements and associates and unconsolidated structured entities. This standard was developed with the aim of consolidating and improving, including by introducing certain changes in terms of required disclosures, the disclosure requirements envisaged by the previous IAS 27, 28 and 31. We have identified the following matters that involve significant and subjective accounting estimates that affect our Consolidated Financial Statements:
measurement of impairment losses on loans, investments and other financial assets;
use of measurement models for determining the fair value of financial instruments not listed on active markets;
evaluation of the appropriateness of amounts stated for goodwill and other intangible assets;
quantification of the fair value of property and valuable art assets;
measurement of personnel funds and provisions for risks and charges;
estimates and assumptions on the collectability of deferred tax assets; and
demographic (i.e. life expectancy) and financial (i.e. trends in financial markets) estimates used to structure insurance products and to calculate integrative reserves. In Regulation 634/2014 (effective from 2015), the commission endorsed IFRIC 21 – Levies, which provides guidance on when to recognize a liability for a levy imposed by public entities and accounted for in accordance with IAS 37. With the introduction of Regulation 1361/2014 (effective from 2015), the commission endorsed the amendments to IFRS 3 and 13 and IAS 40. However, those amendments are not particularly significant for the Group. IASB also issued an amendment to IFRS 4 in the fourth quarter of 2016, endorsed in 2017. This amendment allows insurance companies to minimize differences in accounting results due to the application of IFRS 9 affecting the valuation of assets, which is due to become effective before the new accounting standard on insurance companies is adopted (IFRS 17, which instead focus on valuation of liabilities). In June 2020 the IASB amended IFRS 4 Insurance Contracts, the Amendments extend the expiry date of the temporary exemption from applying IFRS 9 from 1 January 2021 to 1 January 2023 to align the effective dates of IFRS 9 Financial Instruments with IFRS 17 Insurance Contracts. IASB issued IFRS 16 in the first quarter of 2016 (effective from January 2019 and endorsed by the European Commission with Regulation 1986/2017) and IFRS 17 in the first half of 2017 (effective from January 2021 and not yet endorsed by the European Commission). In June 2020 the IASB amended IFRS 4 on Insurance Contracts. The amendments extended the expiry date of the temporary exemption from applying IFRS 9 from January 1, 2021 to January 1, 2023 to align the effective dates of IFRS 9 on financial instruments with IFRS 17 on insurance contracts. IASB issued IFRS 16, implemented in 2019, in the first quarter of 2016 (effective from January 2019 and endorsed by the European Commission with Regulation 1986/2017) and IFRS 17 in the first half of 2017 (effective from January 2021 and not yet endorsed by the European Commission).
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In this context, IFRS 16, implemented in 2019, introduces significant changes to the accounting for lease transactions in the Consolidated Financial Statements of the lessee/user, with the introduction of a single accounting model for lease contracts for the lessee, based on the right of use model. Specifically, the main change consists of the elimination of the distinction between operating and finance leases, established by IAS 17: all lease contracts must therefore be accounted for in the same way with the recognition of an asset and a liability. In terms of disclosure, the minimum information required from the lessees includes:
the sub-division of the leased assets among different “classes”;
an analysis by due date of the liabilities related to the leases; and
the information that is potentially helpful for a better understanding of the entity’s activities with regard to lease contracts (for example, prepayment or extension options). In addition, there are no substantial changes, other than some additional disclosure requirements, for the accounting for leases by the lessors, where the current distinction is maintained between operating leases and finance leases. With reference to IFRS 16, please refer to the chapter “Transition to IFRS 16” included in the annual report as of 31 December 2019. The new accounting standard related to insurance contracts, IFRS 17 (the new standard shall be applied for annual reporting periods on or after January 1, 2023, subject to European Endorsement), requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts. This requirement will provide transparent reporting about a company’s financial position and risk. IFRS 17 requires a company to recognize profits as it delivers insurance services (rather than when it receives premiums) and to provide information about insurance contract profits the company expects to recognize in the future. This information will provide metrics that can be used to evaluate the performance of insurers and how that performance changes over time. The amendments of IFRS 4 also extended the scope of IFRS 4 to the “insurance sector of a financial conglomerate” and not just to “entities that predominantly undertake insurance activities”, in order to avoid creating a situation of competitive disadvantage. The main amendments to IFRS 4 consist of the introduction of two new options: the so called “deferral approach”, which allows the full exemption from IFRS 9, in force since January 1, 2023, and maintaining IAS 39 until the Consolidated Financial Statements for the year ended December 31, 2022, provided that (i) no financial instruments have been transferred between the insurance sector and the other sectors of the financial conglomerate other than financial instruments designated at fair value through profit or loss (FVTPL) by both the sectors (insurance and non-insurance) following November 29, 2017, (ii) the financial conglomerate indicates the insurance entities of the group that apply IAS 39 in its Consolidated Financial Statements, and (iii) the disclosures required by IFRS 7 are provided separately for the insurance sector (which applies IAS 39) and for the rest of the group (which applies IFRS 9); and the so-called “overlay approach”, which allows entities that issue insurance contracts to remove part of the accounting asymmetries from profit or loss for the period, continuing to apply IAS 39 to financial assets measured at FVTPL according to IFRS 9, but which would have been measured at fair value through other comprehensive income in accordance with IAS 39, thereby having an impact on other comprehensive income rather than profit or loss. In view of the potential impact in terms of increased volatility for the insurance businesses, we decided to adopt the deferral approach. The deferral of the adoption of IFRS 9 by the companies of the Insurance Division of our Group means that, starting from January 1, 2018, different financial reporting standards needed to be applied for the financial assets and liabilities within the Group’s Consolidated Financial Statements. In the absence of specific instructions from the Bank of Italy on how to adopt this approach, we used specific captions in the official Consolidated Financial Statements layouts provided by the fifth update to Circular No. 262 and to provide the related disclosure in the notes to the Consolidated Financial Statements, in accordance with the requirements of IFRS 7 and IFRS 4.
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See “Part A—Accounting Policies” of the Notes to our Consolidated Financial Statements for a discussion of our critical accounting policies and estimates, the most significant of which are summarized below. Impairment of financial assets and intangible assets
Impairment of financial assets Pursuant to IFRS 9, for each reporting date the financial assets other than those measured at fair value through profit or loss are subject to an assessment, aimed at discovering any evidence that the carrying value of the assets may not be recoverable in full. A similar analysis is also performed for loan commitments and for guarantees issued that are subject to impairment under IFRS 9. In the event that any evidence of an impairment is found, these financial assets are considered impaired and are included in the stage 3 (or NPL). For such exposures, consisting of financial assets classified as “bad loans”, “unlikely-to-pay” (or UTP) and “past due exposures” by more than ninety days, as provided by Circular No. 262, the value adjustments must be recognized as being equal to the respective lifetime expected credit losses. For financial assets for which there is no evidence of impairment (so called “performing financial instruments”) it is necessary to check whether there are indicators that the credit risk of the individual transaction has increased significantly since initial recognition. Where such indicators are present, the relevant financial asset will be included in the stage 2. In this case, the measurement consists of the recognition of value adjustments equal to the lifetime expected credit losses of the financial instrument. Where such indicators are not present, the relevant financial asset will be included in stage 1. In this case, the measurement consists of the recognition of the 12- month expected credit losses for the specific financial instrument. In both cases, the adjustments are subject to revision at each subsequent reporting date. Finally, NPLs classified as “bad loans” and UTP are subject to analytical-statistical measurement (in case the exposure is lower than €2 million) or to analytical-specific assessment (in case the exposure is greater than €2 million). Past due exposures are always subject to analytical-statistical measurement. The assessment also includes an add-on taking into account forward looking-information, with the possibility of the inclusion of sales scenarios for disposable positions, regardless of the division of the exposure, in case the business plan envisages sales of them and those sales have not yet been carried out. Impairment of intangible assets Intangible assets with indefinite useful life, including goodwill (the positive difference between the purchase price and the fair value of an acquired business), are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate, indicate that these assets may be impaired. Intangible assets other than goodwill, with a definite useful life, are amortized over their respective useful life. If the useful life is indefinite, no amortization is carried out but the adequacy of the book value is regularly verified. On the cut-off date of every annual or interim financial statement, upon evidence of impairment indicators, the recoverable value of the asset is estimated. The amount of the impairment, recorded in the income statement, is the difference between the book value of the asset and the recoverable value. The determination of the recoverable value in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring that management make subjective judgments and assumptions. These judgments and assumptions could result in significant differences to the amounts reported if underlying circumstances were to change. With respect to goodwill, the impairment test aims at confronting the recognition value of the cash generating unit (“CGU”), to which the goodwill was allocated, and the recoverable amount, which is equal to the higher of the value in use and the possible sale price on the market (fair value less costs of sale) of the CGU. The parameters and information used to determine the recoverability of goodwill, including interest rates directly affecting the profitability of the entities subject to the impairment, are significantly influenced by general market and macroeconomic environment, which may continue to be subject to rapid and unpredictable events and changes. This also requires management to make subjective judgments and assumptions, and these judgments and assumptions could result in significant differences to the amounts reported if the underlying circumstances were to change.
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Fair value measurement
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). We carry certain financial instruments (including securities, derivatives, structured credit products and loans) at fair value. For instruments quoted on active markets, fair value is determined with reference to quoted market prices (this is referred to as the level 1 “Market Quote“ approach). For instruments not quoted on active markets, we determine fair value using internal valuation techniques. Such techniques include: (i) the so-called level 2 “comparable” approach in which reference is made to market values indirectly connected to the relevant instrument and to other instruments with a similar risk profile; and (ii) the level 3 “Mark-to-Model” approach in which valuations are performed using models in which some or all of the parameter inputs are not observable in the market and are based on assumptions made by our management. Fair value must first be determined with the most reliable means available and, therefore, we are required to use the level 1 Market Quote approach when possible. We only use the level 2 Comparable approach if level 1 is unavailable and we only use the level 3 Mark-to-Model approach if levels 1 and 2 are unavailable. In reaching estimates of fair value, management judgment needs to be exercised. The level of management judgment required in establishing fair value with the level 1 Market Quote approach is minimal. Similarly, with respect to the level 2 Comparable approach, there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. However, the level of subjectivity and degree of management judgment required is more significant for those instruments valued using the level 3 Mark-to-Model approach where some or all of the parameter inputs are not observable. Management judgment is required in the selection and application of appropriate parameters, assumptions and modeling techniques. In particular, where data are obtained from infrequent market transactions, extrapolation and interpolation techniques must be applied. In addition, where no market data are available, parameter inputs are determined by assessing other relevant sources of information such as historical data, fundamental analysis of the economics of the transaction and information from similar transactions with appropriate adjustments to reflect the terms of the actual instrument being valued and current market conditions. Where different valuation techniques indicate a range of possible fair values for an instrument, management has to establish what point within the range of estimates best represents fair value. Further, some valuation adjustments may require the exercise of management judgment to achieve fair value. In addition, Intesa Sanpaolo evaluates at fair value real estate and valuable art assets. In detail, as illustrated in “Part A—Accounting Policies” of the Notes to our Consolidated Financial Statements, we have adopted the revaluation model as the basis of measurement for the owner-occupied properties and valuable art assets accounted for according to IAS 16 and fair value for the investment properties accounted for according to IAS 40. The table below summarizes the fair value by level of our assets and liabilities carried at fair value as of December 31, 2020, December 31, 2019 and December 31, 2018.
As of(1)(2) December 31, 2020 December 31, 2019 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in € millions) Financial assets designated at fair value 22,890 31,994 3,362 17,934 28,658 2,822 through profit or loss ...... Financial assets designated at fair value 49,681 7,747 430 63,815 8,173 422 through other comprehensive income...... Hedgin g derivatives ...... 1 1,118 15 8 3,008 13 Property and equipment...... - - 7,252 - - 5,748 Intangible assets...... ------Total ...... 72,572 40,859 11,059 81,757 39,839 9,005 Financial liabilities held for trading...... 15,742 43,168 123 18,422 26,704 100 Financial liabilities designated at fair value ... - 3,032 - - 4 - Hedgin g derivatives ...... 1 7,084 3 - 9,284 4 Total ...... 15,743 53,284 126 18,422 35,992 104 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. (2) Insurance products are not included.
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As of(1) (2) December 31, 2019 December 31, 2018 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in € millions) Financial assets designated at fair value 17,934 28,658 2,822 11,037 28,462 2,616 through profit or loss ...... Financial assets designated at fair value 63,815 8,173 422 53,527 6,399 543 through other comprehensive income...... Hedgin g derivatives ...... 8 3,008 13 - 2,983 10 Property and equipment...... - - 5,748 - - 5,720 Intangible assets...... ------Total ...... 81,757 39,839 9,005 64,564 37,844 8,889 Financial liabilities held for trading...... 18,422 26,704 100 14,928 26,824 143 Financial liabilities designated at fair value .... - 4 - - 4 - Hedgin g derivatives ...... - 9,284 4 - 7,216 5 Total ...... 18,422 35,992 104 14,928 34,044 148 ______(1) Figures from the 2019 Audited Consolidated Financial Statements. (2) Insurance products are not included. The table below summarizes the fair value by level of our financial assets and liabilities carried at fair value related to insurance companies, as of December 31, 2020, December 31, 2019 and December 31, 2018.
As of(1) Assets / liabilities at fair value December 31, 2020 December 31, 2019 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in € millions) Financial assets held for trading 321 33 47 284 22 46 Financial assets designated at fair value 86,779 51 377 83,816 141 308 through profit or loss ...... Financial assets available for sale ...... 82,076 4,845 2,192 79,315 2,162 1,902 Hedgin g derivatives ...... - 449 - - 206 - Property and equipment...... - - 8 - - - Intangible assets...... ------Total ...... 169,176 5,378 2,624 163,415 2,531 2,256 Financial liabilities held for trading...... 4 54 - - 45 - Financial liabilities designated at fair value - 77,149 - - 75,886 - through profit or loss ...... Hedgin g derivatives ...... - - - - 4 - Total ...... 4 77,203 - - 75,935 - ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
As of(1) Assets / liabilities at fair value December 31, 2019 December 31, 2018 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 (in € millions) Financial assets held for trading ...... 284 22 46 231 11 47 Financial assets designated at fair value through profit or loss...... 83,816 141 308 73,920 121 273 Financial assets available for sale ...... 79,315 2,162 1,902 71,254 2,286 1,382 Hedging derivatives...... - 206 - - 21 - Property and equipment...... ------Intangible assets...... ------Total ...... 163,415 2,531 2,256 145,405 2,439 1,702 Financial liabilities held for trading ...... - 45 - 3 41 - Financial liabilities designated at fair value through profit or loss...... - 75,886 - - 67,755 - Hedging derivatives...... - 4 - - 1 - Total ...... - 75,935 - 3 67,797 - ______(1) Figures from the 2019 Audited Consolidated Annual Financial Statements. See “Part A—Accounting Policies” of the Notes to our Consolidated Financial Statements as of December 31, 2020 for information on fair value.
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Valuations of employees’ post-employment benefit funds and provisions for risks and charges
Our liabilities related to employees’ post-employment benefits and the relative cost of current service are determined on the basis of actuarial assumptions based on the “Projected Unit Credit Method”. This method forecasts future obligations using demographic (i.e. life expectancy) and financial (i.e. trends in financial markets) estimates and determines the current obligations by finding the net present value of future cash flows (using market interest rates to discount the cash flows). The present value of our obligations is also adjusted by the fair value of any plan assets. It may be necessary in the future to modify any of these elements (including our demographic or financial assumptions and the fair value of plan assets), which could materially change our future estimates of our obligations related to employees’ post-employment benefits. We make other allowances for risks and charges in connection with legal obligations (including labor, tax, civil and administrative obligations or litigation proceedings) that may require a future settlement payment, provided that the amount of such payment can be reasonably estimated. As with our estimates of employees’ post-employment benefits, our estimates of future payments arising from our various legal obligations could change as circumstances develop (particularly in the case of litigation). Allowances for risks and charges for commitments and guarantees given
Allowances for risks and charges contains the allowances for credit risk recognized for loan commitments and guarantees given that come under the scope of the IFRS 9 impairment rules. In these cases, the methods described for financial assets measured at amortized cost or at fair value through other comprehensive income are adopted for the assignment to the three credit risk stages and the calculation of the expected credit loss. This aggregate also includes allowances for risks and charges made to cover other types of commitments and guarantees given that, due to their specific characteristics, do not fall under the scope of impairment pursuant to IFRS 9. Valuation of deferred tax assets
Deferred tax assets are recognized to the extent that it is probable that sufficient taxable profit will be available against which the unused tax losses, unused tax credits or deductible temporary differences can be utilized. This assessment requires significant management judgments and assumptions related to, for example, future tax laws and projected future operating income. Estimates of deferred tax assets could therefore change from period to period if circumstances underlying our assumptions change. Valuations of insurance products As with our liabilities related to employees’ post-employment benefits, the assumptions we use to structure insurance products and to calculate expected returns on such products take into account demographic (i.e. life expectancy) and financial (i.e. trends in financial markets) estimates. It may be necessary in the future to modify any of these elements, which could materially change our future estimates of our obligations and our returns related to such products. Results of operations Results of Operations for the year ended December 31, 2020 and December 31, 2019
The following table sets forth our summary financial information for each of the periods indicated.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Net interest income ...... 7,783 7,005 778 11.1 Net fee and commission income ...... 8,303 7,962 341 4.3 Income from insurance business ...... 1,353 1,268 85 6.7 Profits (losses) on financial assets and liabilities designated at fair value...... 1,572 1,928 (356) (18.5) Other operating income (expenses) ...... 12 4 8 n.s. O perating income...... 19,023 18,167 856 4.7 Personnel expenses ...... (6,139) (5,748) (391) 6.8 Other administrative expenses ...... (2,679) (2,601) (78) 3.0 Adjustments to property, equipment and intangible assets...... (1,153) (1,058) (95) 9.0
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For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) O perating costs...... (9,971) (9,407) (564) 6.0 O perating margin...... 9,052 8,760 292 3.3 Net adjustments to loans...... (4,214) (2,089) (2,125) n.s. Other net provisions and net impairment losses on other assets ...... (346) (254) (92) 36.2 Other income (expenses) ...... 64 55 9 16.4 Income (Loss) from discontinued operations ...... 1,163 88 1,075 n.s. Gross income (loss)...... 5,719 6,560 (841) (12.8) Taxes on income ...... (1,360) (1,825) 465 (25.5) Charges (net of tax) for integration and exit incentives ...... (1,561) (106) (1,455) n.s. Effect of purchase price allocation (net of tax) ...... 1,960 (117) 2,077 n.s. Levies and other charges concerning the banking industry (net of tax)(3) ...... (512) (360) (152) 42.2 Impairment (net of tax) of goodwill and other intangible assets...... (912) - - n.s. Minority interests...... (57) 30 (87) n.s. Net income (loss) ...... 3,277 4,182 (905) (21.6) ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures including the expenses imposed by way of legislative decree to support the stability of the banking system, and that are, by their nature, necessarily outside the control of the Group’s management.
Net interest income The table below sets forth our net interest income for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Relations with customers...... 7,686 7,392 294 4.0 Securities issued...... (1,698) (2,073) 375 (18.1) Customer dealing ...... 5,988 5,319 669 12.6 Instruments measured at amortized cost which do not constitute loans ....s 468 345 123 35.7 Other financial assets and liabilities designated at fair value through profit or loss...... 57 125 (68) (54.4) Other financial assets designated at fair value through other comprehensive income ...... 768 868 (100) (11.5) Financial assets...... 1,293 1,338 (45) (3.4) Relations with banks ...... 17 79 (62) (78.5) Differentials on hedging derivatives...... (712) (724) 12 (1.7) Non-performing assets ...... 833 905 (72) (8.0) Other net interest income...... 364 88 276 313.6 Net interest income...... 7,783 7,005 778 11.1 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. For the year ended December 31, 2020, our net interest income (which represented 40.9% of our operating income) increased by 11.1% to €7,783 million (of which €713 million related to UBI Banca) from €7,005 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our net interest income increased by €65 million from €7,005 million for the year ended December 31, 2019 to €7,070 million for the year ended December 31, 2020. The item increased due to the higher contribution from customer dealing and, within other net interest income, the higher contribution from the TLTRO programs. These changes were partially offset by lower contributions from financial assets and liabilities, accounts with banks and non- performing assets, with the latter due to the progressive reduction in NPLs, also as a result of the derisking activities. Net interest from customer dealing for the year ended December 31, 2020 amounted to €5,988 million (of which €524 million related to UBI Banca), an increase of 12.6% compared to 2019, which mainly resulted from the decrease in the cost of funding in the form of securities issued and by higher loan volumes. Considering our results net of UBI Banca, our net interest income from customer dealing increased by €145 million from €5,319 million for the year ended December 31, 2019 to €5,464 million for the year ended December 31, 2020. Interest
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on financial assets amounted to €1,293 million (of which €63 million related to UBI Banca) in the year ended December 31, 2020, a decrease of 3.4% compared to 2019. Considering our results net of UBI Banca, our interest on financial assets decreased by €108 million from €1,338 million for the year ended December 31, 2019 to €1,230 million for the year ended December 31, 2020. Among the other components, there were significant declines in interest on non-performing assets, due to the decrease in new NPL flows, and net interest income on relations with banks and, to a lesser degree, the contribution of hedging of core deposits, including differentials on hedging derivatives. Our average spread (determined on the basis of the arithmetic mean of the balance at the end of the quarterly periods) between lending and funding rates was 1.33% for the year ended December 31, 2020 (a decrease of 0.09% compared to the average of 1.42% for the year ended December 31, 2019). See “Selected Statistical Information— Interest rate data— Average balances and interest rates— Average yield/rate”. The table below sets forth our net interest income by business segment for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Banca dei Territori...... 4,090 4,134 (44) (1.1) IMI Corporate and Investment Banking ...... 2,131 1,872 259 13.8 International Subsidiary Banks ...... 1,310 1,370 (60) (4.4) Private Banking ...... 196 177 19 10.7 Asset Management...... - 1 (1) Insurance ...... - - - - Total net interest income for the business segments ...... 7,727 7,554 173 2.3 Corporate Center...... (657) (549) 108 19.7 Intesa Sanpaolo Group (net of UBI Banca)...... 7,070 7,005 65 0.9 UBI Banca ...... 713 - - - Total net interest income for the Group...... 7,783 7,005 778 11.1 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. Net interest income from the International Subsidiary Banks business segment, which mainly engages in retail banking, including traditional lending, deposit taking and associated financial services, (which accounts for 16.8% of the total net interest income for the business segments) decreased by 4.4% to €1,310 million from €1,370 million for the year ended December 31, 2019. Net interest income attributable to the Private Banking business segment (which generated 2.5% of the total net interest income for the business segments for the year ended December 31, 2020) increased by 10.7% to €196 million compared to €177 million for the year months ended December 31, 2019. The net interest income of the IMI Corporate and Investment Banking (which generated 27.4% of the total net interest income for the business segments for the year ended December 31, 2020) increased by 13.8% to €2,131 million from €1,872 million for the year ended December 31, 2019, due to the greater contribution from loans to customers, driven by structured finance operations. Even though it still accounts for 52.6% of the total net interest income results for the business segments, the Banca dei Territori business segment recorded a decrease of net interest income by 1.1% to €4,090 million from €4,134 million for the year ended December 31, 2019. The UBI Banca contribution to our net interest income for the year ended December 31, 2020 was €713 million.
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Net fee and commission income The table below sets forth our net fee and commission income for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Guarantees given/received...... 202 229 (27) (11.8) Collection and payment services...... 486 507 (21) (4.1) Bank accounts...... 1,371 1,222 149 12.2 Credit and debit cards...... 323 325 (2) (0.6) Commercial banking activities...... 2,382 2,283 99 4.3 Dealing and placement of securities ...... 844 764 80 10.5 Currency dealing...... 15 10 5 50.0 Portfolio management ...... 2,536 2,371 165 7.0 Distribution of insurance products ...... 1,519 1,441 78 5.4 Other ...... 238 264 (26) (9.8) Management, dealing and consultancy activities ...... 5,152 4,850 302 6.2 Other net fee and commission income...... 769 829 (60) (7.2) Net fee and commission income ...... 8,303 7,962 341 4.3 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. For the year ended December 31, 2020, our net fee and commission income (which represented 43.6% of our operating income for the year ended December 31, 2020) increased by 4.3% to €8,303 million from €7,962 million for the year ended December 31, 2019 as a result of the UBI Banca Acquisition. The overall increase resulted primarily from the performance of bank accounts (increasing by 12.2% to €1,371 million from €1,222 million for the year ended December 31, 2019), dealing and placement securities (increasing by 10.5% to €844 million from €764 million for the year ended December 31, 2019) and portfolio management (increasing by 7.0% to €2,536 million from €2,371 million for the year ended December 31, 2019). The overall increase was tempered by a slight decrease with respect to guarantees given/received (down 11.8% to €202 million from €229 million for the year ended December 31, 2019). Net fee and commission income for 2020, excluding the contribution of €721 million attributable to UBI Banca, came to €7,582 million, down by 4.8% compared to 2019 on a like-for-like basis. Despite the recovery in the third and fourth quarters, the result was severely influenced by the performance in the first half of the year, marked by the lockdown and by the financial market collapse at the height of the COVID-19 Pandemic. These phenomena were reflected in a decline in fee and commission income both on commercial banking business (- 6.3%, or -€144 million), with decreases across all components, and on management, dealing and financial consultancy business (-2.4%, or -€118 million); in particular, there was a decrease in the contribution relating to individual and collective portfolio management schemes (-2.7%, or -€64 million) and securities dealing and placement (-3.3%, or -€25 million). Finally, other fee and commission income also declined (-14.2%, or -€118 million) due to the decrease in revenues on factoring transactions and other transactions. The table below sets forth our net fee and commission income by business segment for the year ended December 31, 2020 and December 31, 2019.
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For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Banca dei Territori...... 3,910 4,179 (269) (6.4) IMI Corporate and Investment Banking ...... 979 999 (20) (2.0) International Subsidiary Banks ...... 505 537 (32) (6.0) Private Banking ...... 1,714 1,747 (33) (1.9) Asset Management...... 835 799 36 4.5 Insurance ...... 2 - 2 - Total net fee and commission income for the business segments ...... 7,945 8,261 (316) (3.8) Corporate Center...... (363) (299) 64 21.4 Intesa Sanpaolo Group (net of UBI Banca)...... 7,582 7,962 (380) (4.8) UBI Banca ...... 721 - - - Total net fee and commission income for the Group ...... 8,303 7,962 341 4.3 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. For the year ended December 31, 2020, net fee and commission income across our business segments increased by 4.3% to €8,303 million from €7,962 million for the year ended December 31, 2019. Banca dei Territori, which accounts for more than 47.0% of the net fee and commission income of the business segments and whose territory of business operation is primarily Italy, recorded a 6.4% decrease in net fee and commissions as compared to the year ended December 31, 2019. Net fee and commission income for International Subsidiary Banks decreased by 6.0% as compared to the year ended December 31, 2019. Net fee and commission income for IMI Corporate and Investment Banking, which also covers jurisdictions other than Italy, decreased by 2.0% as compared to the year ended December 31, 2019, mainly due to the negative performance of the commercial banking segment. Additionally, net fee and commission income for Private Banking decreased by 1.9% as compared to the year ended December 31, 2019 and Asset Management increased by 4.5% as compared to the year ended December 31, 2019. The UBI Banca contribution to our net fee and commission income for the year ended December 31, 2020 was €721 million.
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Income from insurance business The table below sets forth our income from our insurance business for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change Non-life Non-life Captions(3) Life (casualty) Total Life (casualty) Total amount % (in € millions, except for percentages) Technical margin ...... 196 351 547 185 243 428 119 27.8 Net Insurance premiums(4)...... 10,056 951 11,007 9,623 965 10,588 419 4.0 Net charges for insurance claims (8,979) (403) (9,382) (6,544) (514) (7,058) (2,324) 32.9 and surrenders(5)...... Net charges for changes in technical (2,038) (4) (2,042) (4,497) (2) (4,499) 2,457 (54.6) reserves(6) ...... Gains (losses) on investments pertaining to insured parties on 1,277 - 1,277 1,751 - 1,751 (474) (27.1) insurance products(7)...... Net fees on investment contracts(8)... 329 - 329 322 1 323 6 1.9 Commission expenses on insurance (460) (159) (619) (476) (163) (639) 20 (3.1) contracts(9)...... Other technical income expense(10)... 11 (34) (23) 6 (44) (38) 15 (39.5) Net investment result ...... 723 10 733 791 12 803 (70) (8.7) Operating income from investments 4,557 10 4,567 10,084 12 10,096 (5,529) (54.8) Net interest income ...... 1,620 3 1,623 1,741 3 1,744 (121) (6.9) Dividends...... 256 6 262 254 2 256 6 2.3 Gains/losses on disposal...... 69 2 71 1,815 7 1,822 (1,751) (96.1) Valuation gains/losses...... 2,698 - 2,698 6,352 - 6,352 (3,654) (57.5) Portfolio management fees paid (11)... (86) (1) (87) (78) - (78) (9) 11.5 Gains (losses) on investments (3,834) - (3,834) (9,293) - (9,293) 5,459 (58.7) pertaining to insured parties...... Insurance products(12)...... (1,354) - (1,354) (1,768) - (1,768) 414 (23.4) Investment’s unrealized capital gains/losses pertaining to insured 57 - 57 (19) - (19) 76 n.s. parties on insurance products(13).. Investment products(14) ...... (2,537) - (2,537) (7,506) - (7,506) 4,969 (66.2) Income from insurance business 919 361 1,280 976 255 1,231 49 4.0 gross of consolidation effects ..... Consolidation effects...... 73 - 73 37 - 37 36 97.3 Income from insurance business ... 992 361 1,353 1,013 255 1,268 85 6.7 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) The table illustrates the economic components of the insurance business broken down into those regarding: (a) products considered to be insurance products according to IAS/IFRS, which include contracts where the risk insured is considered significant or in which the decision of the return on the contracts is not market-based but depends on the insurance company’s choices, and (b) investment products, which include financial products without a significant insurance risk. The latter are accounted for in the Consolidated Financial Statements as financial movements. (4) Includes premiums issued only for products considered to be insurance products according to IAS/IFRS, net of the portions ced ed to reinsurers. For the Non-life insurance business, the change in the premiums reserve is also included. (5) Includes the amounts paid (claims, surrenders and maturities) and the change in claims reserves and reserves for amounts to be paid, net of portions ceded to reinsurers. (6) Includes the change in technical reserves, net of the portions ceded to reinsurers. (7) Includes the portion of the profit/loss from investments (for insurance products) pertaining to insured parties, including the impact of shadow accounting. (8) Includes net fees on investment products; specifically, charges paid by customers, management fees received by the financial units and fee expenses reversed by the insurance companies to the sales network and management companies. (9) Includes commission expenses on insurance products (including unit and index-linked insurance products and pension funds) paid to the sales network. (10) Includes fee income on insurance product management fee income (unit and index-linked insurance products and pension funds), rebates, net interest income on current accounts of the insurance company and on subordinated loans and other income and technical charges. (11) Includes fees paid to management companies for the management of traditional insurance products (separate management) portfolios and pension funds. This also includes fees from consolidated funds underlying insurance units. (12) Includes the portion of the profit/loss from investments (for insurance products) pertaining to insured parties, without the impact of shadow accounting. (13) Includes the portion of unrealized capital gains/losses pertaining to insured parties on insurance products (shadow accountin g). (14) Refers to the valuation of financial liabilities designated at fair value which represent the amount payable to insured parties for investment products. For the year ended December 31, 2020, income from our insurance business, which includes the cost and revenue captions of the insurance business of the Group’s life and non-life companies (also includes the results of RBM Assicurazione Salute, following the finalization of the acquisition of the majority shareholding of the company in May 2020) increased by 6.7% to €1,353 million (of which €10 million related to UBI Banca) from €1,268 million as for the year ended December 31, 2019. Considering our results net of UBI Banca, our income from our insurance business increased by €75 million from €1,268 million for the year ended December 31, 2019 to €1,343 million for the year ended December 31, 2020, due to the increase in the technical margin (30.6% or €131 million), due to the strong performance of the non-life business, which benefited from the excellent result of the non-motor component, owing to the significant decrease in claims associated with the lockdown, while premium performance remained constant. The net investment result decreased by 8.7% to €733 million (of which €22 million related to UBI Banca) from €803 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our net investment result decreased by €92 million from €803 million for the year ended December 31, 2019 to €711 million for the year ended December 31, 2020 due to the lower profitability generated by the investments in the life portfolio.
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Profits (losses) on financial assets and liabilities designated at fair value The table below sets forth our profits on financial assets and liabilities designated at fair value for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Interest rates ...... 260 170 90 52.9 Equity instruments ...... 182 357 (175) (49.0) Currencies ...... 156 123 33 26.8 Structured credit products...... (7) 25 (32) n.s. Credit derivatives ...... 140 (40) 180 n.s. Commodity derivatives ...... 18 18 0 0.0 Income from operations on assets designated at fair value through profit or loss ...... 749 653 96 14.7 Profits (Losses) on disposal or repurchase of assets designated at fair value through other comprehensive income and financial liabilities ..... 823 1,275 (452) (35.5) Profits (losses) on financial assets and liabilities designated at fair value ...... 1,572 1,928 (356) (18.5) ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. For the year ended December 31, 2020, our profits on financial assets and liabilities designated at fair value, the line item most sensitive to market volatility, decreased to €1,572 million (of which €131 million related to UBI Banca) from €1,928 million for the year ended December 31, 2019, representing a 18.5% decrease, with a sharp decrease in profits (losses) on disposal or repurchase of assets designated at fair value through other comprehensive income and financial liabilities, which decreased to by 35.5% to €823 million (of which €56 million related to UBI Banca) million from €1,275 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our profits on financial assets and liabilities designated at fair value, decreased by €487 million from €1,928 million for the year ended December 31, 2019 to €1,441 million for the year ended December 31, 2020, due to the lower contribution from transactions in instruments designated at fair value through other comprehensive income and financial liabilities as a result of lower capital gains realized, which fully offset the increase in profits (losses) on financial assets and liabilities designated at fair value through profit or loss. Our profits (losses) on disposal or repurchase of assets designated at fair value through other comprehensive income and financial liabilities decreased by €508 million from €1,275 million for the year ended December 31, 2019 to €767 million for the year ended December 31, 2020, due to lower capital gains on securities. Other operating income (expenses) Considering our results including the contribution of UBI Banca (positive for €39 million), other operating income (a residual line item that includes various types of income and expenses that cannot be recognized in other operating income line items) increased to €12 million for the year ended December 31, 2020 from €4 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our other operating income (expenses) decreased by €31 million from €4 million operating income for the year ended December 31, 2019 to €27 million operating expenses for the year ended December 31, 2020, due to the lower contribution from the investments carried at equity. Operating income For the year ended December 31, 2020, our operating income amounting to €19,023 million (of which €1,614 million related to UBI Banca) increased by €856 million or 4.7% compared to the year ended December 31, 2019. Considering our results net of UBI Banca, our operating income decreased by €758 million from €18,167 million for the year ended December 31, 2019 to €17,409 million operating income for the year ended December 31, 2020 due to the downtrend in profits (losses) on financial assets and liabilities designated at fair value and net fee and commission income, only partially offset by the moderately positive performances of income from insurance business and net interest income. Overall, the resilience of revenues largely offset the adverse impacts of the persistent COVID-19 Pandemic on the income statement.
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The table below sets forth our operating income by business segment for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Banca dei Territori...... 8,083 8,392 (309) (3.7) IMI Corporate and Investment Banking ...... 4,325 4,105 220 5.4 International Subsidiary Banks ...... 1,908 1,998 (90) (4.5) Private Banking ...... 1,944 1,971 (27) (1.4) Asset Management...... 867 840 27 3.2 Insurance ...... 1,257 1,216 41 3.4 Total operating income for the business segments ...... 18,384 18,522 (138) (0.7) Corporate Center...... (975) (355) 620 n.s. Total Intesa Sanpaolo Group (net of UBI Banca) ...... 17,409 18,167 (758) (4.2) UBI Banca ...... 1,614 - - - Total operating income for the Group ...... 19,023 18,167 856 4.7 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. Operating costs The table below sets forth our operating costs for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Wages and salaries ...... 4,245 3,964 281 7.1 Social security charges ...... 1,095 1,012 83 8.2 Other ...... 799 772 27 3.5 Personnel expenses ...... 6,139 5,748 391 6.8 Information technology expenses...... 748 678 70 10.3 Management of real estate assets expenses ...... 340 323 17 5.3 General structure costs ...... 373 367 6 1.6 Professional and legal expenses ...... 320 316 4 1.3 Advertising and promotional expenses ...... 132 128 4 3.1 Indirect personnel costs ...... 45 82 (37) (45.1) Other costs...... 597 598 (1) (0.2) Indirect taxes and duties ...... 1,017 895 122 13.6 Recovery of expenses and charges ...... (893) (786) (107) 13.6 Administrative expenses...... 2,679 2,601 78 3.0 Property and equipment...... 543 498 45 9.0 Intangible assets...... 610 560 50 8.9 Adjustments ...... 1,153 1,058 95 9.0 O perating costs...... 9,971 9,407 564 6.0 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. For the year ended December 31, 2020, our operating costs increased by 6.0% to €9,971 million (of which €885 million related to UBI Banca) from €9,407 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our operating costs decreased by €321 million from €9,407 million for the year ended December 31, 2019 to €9,086 million operating expenses for the year ended December 31, 2020, due to the fall in both personnel expenses (-3.8%), as a result of the downsizing of the workforce and the reduction in the variable component – which more than offset the effect of the salary increases linked to the renewal of the National Collective Bargaining Agreement – and for administrative expenses (-5.4%). Personnel expenses increased by 6.8% to €6,139 million (of which €608 million related to UBI Banca) from €5,748 million, together with administrative expenses, which increased by 3.0% from €2,601 million to €2,679 million (of which €219 million related to UBI Banca) for the year ended December 31, 2019. Considering our results net of UBI Banca, our personnel expenses and administrative decreased by €217 million and €141 million, respectively, from €5,748 million and €2,601 million for the year ended December 31, 2019 to €5,531 million and €2,460 million for the year ended December 31, 2020.
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The cost/income ratio for the period amounted to 52.4%, compared to the 51.8% recorded for the year ended December 31, 2019. The table below sets forth our operating costs by business segment for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Banca dei Territori...... (5,065) (5,291) (226) (4.3) IMI Corporate and Investment Banking ...... (1,098) (1,148) (50) (4.4) International Subsidiary Banks ...... (981) (991) (10) (1.0) Private Banking ...... (604) (614) (10) (1.6) Asset Management...... (156) (157) (1) (0.6) Insurance ...... (241) (224) 17 7.6 Total operating costs for the business segments...... (8,145) (8,425) (280) (3.3) Corporate Center...... (941) (982) (41) (4.2) Intesa Sanpaolo Group (net of UBI Banca)...... (9,086) (9,407) (321) (3.4) UBI Banca ...... (885) Total operating costs for the Group ...... (9,971) (9,407) 564 6.0 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. The performance of the Group’s operating costs was the result of a differentiated dynamic among the business divisions. Operating costs of Banca dei Territori, which accounts for over 50.8% of total costs for the business segments, decreased by 4.3%, from €5,291 million in the year ended December 31, 2019 to €5,065 million in the year ended December 31, 2020 as a result of lower personnel expenses, attributable to a reduction in the average workforce, and to administrative expenses, in spite of the greater expenses associated with the health emergency. The decrease of 4.4% in operating costs for the IMI Corporate and Investment Banking, from €1,148 million in the year ended December 31, 2019 to €1,098 million in the year ended December 31, 2020, also contributed to the overall decrease in the Group’s operating costs, together with the decrease by 0.6%, from €157 million, for the year ended December 31, 2019, to €156 million, for the year ended December 31, 2020, of the operating costs of the Asset Management business segment. The operating costs of the International Subsidiary Banks business segment decreased by 1.0%, from €991 million in the year ended December 31, 2019, to €981 million in the year ended December 31, 2020 offset by the increase by 7.6% from €224 million in the year ended December 31, 2019 to €241 million in the year ended December 31, 2020 of operating costs for Insurance. Operating costs of Private Banking decreased by 1.6% from €614 million in the year ended December 31, 2019, to €604 million in the year ended December 31, 2020. The UBI Banca contribution to our operating costs for the year ended December 31, 2020 was €885 million. Personnel expenses. For the year ended December 31, 2020, personnel expenses increased by 6.8% to €6,139 million (of which €608 million related to UBI Banca) from €5,748 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our personnel expenses decreased by €217 million from €5,748 million for the year ended December 31, 2019 to €5,531 million personnel expenses for the year ended December 31, 2020. Other administrative expenses. For the year ended December 31, 2020, administrative expenses increased by 3.0% to €2,679 million (of which €219 million related to UBI Banca) from €2,601 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our administrative expenses decreased by €141 million from €2,601 million for the year ended December 31, 2019 to €2,460 million personnel expenses for the year ended December 31, 2020. Adjustments to property, equipment and intangible assets. For the year ended December 31, 2020, adjustments to property, equipment and intangible assets increased by 9.0% to €1,153 million (of which €58 million related to UBI Banca) from €1,058 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our adjustments to property, equipment and intangible assets increased by €37 million from €1,058 million for the year ended December 31, 2019 to €1,095 million for the year ended December 31, 2020.
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Operating margin For the year ended December 31, 2020, operating margin increased by 3.3% to €9,052 million (of which €729 million related to UBI Banca) from €8,760 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our operating margin decreased by €437 million from €8,760 million for the year ended December 31, 2019 to €8,323 million for the year ended December 31, 2020 due to the results of the abovementioned revenue and costs trends. Net adjustments to loans The table below sets forth our net adjustments to loans for the year ended December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020(1) 2019(2) Change % (in € millions, except for percentages) Bad loans (sofferenze) ...... (1,832) (905) (927) n.s. Unlikely to pay (inadempienze probabili) ...... (1,383) (1,314) (69) 5.3 Past due loans (crediti scaduti/sconfinanti)...... (197) (356) 159 (44.7) Stage 3 loans...... (3,412) (2,575) (837) 32.5 Stage 2 loans...... (762) 104 (866) n.s. Stage 1 loans...... (16) 365 (381) n.s. Net losses/recoveries on impairment loans (4,190) (2,106) (2,084) 99.0 Profits/losses from contractual changes without derecognition ...... (29) (6) (23) n.s. Net adjustments to guarantees and commitments ...... 5 23 (18) (78.3) Net adjustments to loans ...... (4,214) (2,089) (2,125) n.s. ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. For the year ended December 31, 2020, net adjustments to loans increased to €4,214 million (of which €54 million related to UBI Banca) from €2,089 million for the year ended December, 2019. Considering our results net of UBI Banca, our net adjustments to loans increased by €2,071 million from €2,089 million for the year ended December 31, 2019 to €4,160 million for the year ended December 31, 2020, due to the greater provisions required by the revision of the scenario following the Covid-19 Pandemic, in application of the conservative methods we adopted, while taking account of the prospective vision outlined by the ECB and the Bank of Italy, with the recognition of greater adjustments of €2,164 million, of which €986 million to performing loans (Stage 1 and Stage 2) and the remainder to Stage 3 non-performing loans. The “bad loans” and “unlikely to pay” categories increased to €1,832 million from €905 million, by 5.3% to €1,383 million from €1,314 million in the year ended December 31, 2019, respectively. NPLs continued to decline as a percentage of total loans in 2020 due to lower NPL flows; the cost of credit, expressed as the ratio of net adjustments to net loans, amounted to 104 basis points (91 basis points including UBI Banca and the effects associated with the purchase price allocation), which is 51 basis points higher than in the previous period. For the year ended December 31, 2020, the average coverage of bad loans was 58.8%, while the average coverage of loans in the “unlikely to pay” category was 42.6% and 18.2% for past-due loans. The coverage ratio for forborne positions within the NPL category was 40.9% at the end of December 2020. See “Selected Statistical Information—Risk Elements in the Loan Portfolio: Loan Classification—Quality of Loan Portfolio”.
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Other net provisions and net impairment losses on other assets For the year ended December 31, 2020, other net provisions increased by 52.8% to €191 million (of which €3 million related to UBI Banca) from €125 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our other net provisions increased by €63 million from €125 million for the year ended December 31, 2019 to €188 million for the year ended December 31, 2020. Net impairment losses on instruments measured at amortized cost and on instruments designated at fair value through other comprehensive income were negative €1 million (of which negative €4 million related to UBI Banca) for the year ended December 31, 2020 from negative €67 million for the year ended December 31, 2019. Considering our results net of UBI Banca, Net impairment losses (gains) on instruments measured at amortized cost and on instruments designated at fair value through other comprehensive income increased by €70 million from negative €67 million for the year ended December 31, 2019 to positive €3 million for the year ended December 31, 2020. Net impairment losses on other assets increased to €136 million for the year ended December 31, 2020, from €59 million for the year ended December 31, 2019. For the year ended December 31, 2020, net losses pertaining to insurance companies pursuant to IAS 39 were €18 million (of which €1 million related to UBI Banca) from €3 million for the year ended December, 2019. Considering our results net of UBI Banca, our net losses pertaining to insurance companies pursuant to IAS 39 increased by €14 million from €3 million for the year ended December 31, 2019 to €17 million for the year ended December 31, 2020. Overall, other net provisions and net impairment losses on other assets increased for the year ended December 31, 2020 to €346 million (of which €8 million related to UBI Banca) from €254 million for 2019. Considering our results net of UBI Banca, our other net provisions and net impairment losses on other assets increased by €84 million from €254 million for the year ended December 31, 2019 to €338 million for the year ended December 31, 2020. Such increase was mainly due to higher net provisions for legal disputes and tax disputes and adjustments to other assets. Other income (expenses) For the year ended December 31, 2020, other income not directly related to our ordinary business, increased to €64 million compared to €55 million recorded for the year ended December 31, 2019. Income (loss) from discontinued operations For the year ended December 31, 2020, income or loss from discontinued operations increased to €1,163 million (relating to the income components attributable to the business line consisting of the acquiring activities transferred to Nexi) compared to €88 million recorded for the year ended December 31, 2019. Gross income (loss) For the year ended December 31, 2020, income before tax from continuing operations decreased by 12.8% to €5,719 million (of which €667 million related to UBI Banca) compared to €6,560 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our gross income decreased by €1,508 million from €6,560 million for the year ended December 31, 2019 to €5,052 million for the year ended December 31, 2020. Taxes on income For the year ended December 31, 2020, taxes on income decreased by 25.5% to €1,360 million (of which €170 million related to UBI Banca) from €1,825 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our tax on income decreased by €635 million from €1,825 million for the year ended December 31, 2019 to €1,190 million for the year ended December 31, 2020. Charges (net of tax) for integration and exit incentives For the year ended December 31, 2020, charges (net of tax) for integration and exit incentives amounted to €1,561 million (of which €1,387 million related to UBI Banca), a sharp increase as compared to €106 million for the year ended December 31, 2019 due to expenses relating to the integration of UBI Banca into the Group relating for the most part to the agreement reached with the trade unions for the voluntary exits, and for the remainder to IT and advisory expenses connected with the integration process. Considering our results net of
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UBI Banca, our charges (net of tax) for integration and exit incentives increased by €68 million from €106 million for the year ended December 31, 2019 to €174 million for the year ended December 31, 2020. Effect of purchase price allocation (net of tax) For the year ended December 31, 2020, the effect of purchase price allocation (net of tax) increased by €2,077 million to positive €1,960 million (of which €2,062 million related to UBI Banca) from negative €117 million for the year ended December 31, 2019. Considering our results net of UBI Banca, the effect of purchase price allocation (net of tax) decreased by €15 million from negative €117 million for the year ended December 31, 2019 to negative €102 million for the year ended December 31, 2020. For a like-for-like comparison, the positive effect (€2,062 million) relating to the recognition of the negative goodwill relating to the UBI Banca Acquisition must be excluded from the figure reported for 2020. Net of this extraordinary caption, in 2020 these costs amounted to negative €102 million, compared to negative €117 million recorded in 2019. Levies and other charges concerning the banking industry (net of tax) For the year ended December 31, 2020, levies and other charges concerning the bank industry (net of tax) increased by 42.2% to €512 million (of which €47 million related to UBI Banca), net of taxes, from €360 million in the year ended December 31, 2019. The charges recognized during the year ended December 31, 2020 may be broken down as follows: €233 million attributable to resolution funds, €171 million to deposit guarantee funds, €42 million to charges recognized by international subsidiary banks and €19 million to the Atlante Fund. Considering our results net of UBI Banca, our levies and other charges concerning the banking industry (net of tax) increased by €105 million from €360 million for the year ended December 31, 2019 to €465 million for the year ended December 31, 2020, due to the increase in deposit guarantee fund charges and, to a lesser extent, resolution fund charges. Impairment (net of tax) of goodwill and other intangible assets Impairment (net of tax) of goodwill and other intangible assets was equal to €912 million for the year ended December 31, 2020. No impairment (net of tax) of goodwill and other intangible assets was recognized in the year ended December 31, 2019. Net income (loss) For the year ended December 31, 2020, net income decreased by 21.6% to €3,277 million (of which €1,106 million related to UBI Banca) from €4,182 million for the year ended December 31, 2019. Considering our results net of UBI Banca, our net income decreased by €2,011 million from €4,182 million for the year ended December 31, 2019 to €2,171 million for the year ended December 31, 2020. Net of the UBI Banca contribution, the effect of the purchase price allocation, as well as the write-off of the goodwill of the Banca dei Territori Division, net income was €3,083 million, compared with a like-for-like figure of €4,182 million in 2019. Results of Operations for the years ended December 31, 2019 and December 31, 2018
The following table sets forth our summary financial information for each of the periods indicated.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Net interest income ...... 7,005 7,271 (266) (3.7) Net fee and commission income ...... 7,962 7,952 10 0.1 Income from insurance business ...... 1,184 1,084 100 9.2 Profits (losses) on financial assets and liabilities designated at fair value 1,928 1,472 456 31.0 Other operating income (expenses) ...... 4 34 (30) (88.2) O perating income...... 18,083 17,813 270 1.5 Personnel expenses ...... (5,744) (5,812) (68) (1.2) Other administrative expenses ...... (2,488) (2,618) (130) (5.0) Adjustments to property, equipment and intangible assets...... (1,058) (1,057) 1 0.1 O perating costs...... (9,290) (9,487) (197) (2.1) O perating margin...... 8,793 8,326 467 5.6 Net adjustments to loans...... (2,089) (2,394) (305) (12.7) Other net provisions and net impairment losses on other assets ...... (254) (187) 67 35.8 Other income (expenses) ...... 55 506 (451) (89.1) Income (Loss) from discontinued operations ...... 88 71 17 23.9
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Gross income (loss)...... 6,593 6,322 271 4.3 Taxes on income ...... (1,838) (1,650) 188 11.4 Charges (net of tax) for integration and exit incentives ...... (106) (120) (14) (11.7) Effect of purchase price allocation (net of tax) ...... (117) (156) (39) (25.0) Levies and other charges concerning the banking industry (net of tax) (3) (360) (378) (18) (4.8) Impairment (net of tax) of goodwill and other intangible assets...... - - - - Minority interests ...... 10 32 (22) (68.8) Net income (loss) ...... 4,182 4,050 132 3.3 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. (3) Figures including the expenses imposed by way of legislative decree to support the stability of the banking system, and that are, by their nature, necessarily outside the control of the Group’s management. Net interest income The table below sets forth our net interest income for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Relations with customers...... 7,392 7,622 (230) (3.0) Securities issued...... (2,073) (2,406) (333) (13.8) Customer dealing ...... 5,319 5,216 103 2.0 Instruments measured at amortized cost which do not constitute loans ..... 345 268 77 28.7 Other financial assets and liabilities designated at fair value through profit or loss...... 125 90 35 38.9 Other financial assets designated at fair value through other comprehensive income ...... 868 755 113 15.0 Financial assets...... 1,338 1,113 225 20.2 Relations with banks ...... 79 70 9 12.9 Differentials on hedging derivatives...... (724) (339) 385 Non-performing assets ...... 905 1,156 (251) (21.7) Other net interest income...... 88 55 33 60.0 Net interest income...... 7,005 7,271 (266) (3.7) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. For the year ended December 31, 2019, our net interest income (which represented 38.7% of our operating income) decreased by 3.7% to €7,005 million from €7,271 million for the year ended December 31, 2018. The overall change was affected by the asset size effect attributable to lower average loans, lower interest on non- performing assets due to the reduction of NPLs and the more limited contribution of hedging of core deposits. Net interest from customer dealing for the year ended December 31, 2019 amounted to €5,319 million, an increase of 2% compared to the same period in 2018, which mainly resulted from driven by the decrease in the cost of funding in the form of securities issued and by higher interest on financial assets. Interest on financial assets amounted to €1,338 million in the year ended December 31, 2019, an increase of 20.2% compared to the same period in 2018. However, these positive effects were offset by the negative impact of the differentials on hedging derivatives. Our average spread (determined on the basis of the arithmetic mean of the balance at the end of the quarterly periods) between lending and funding rates was 1.42% for the year ended December 31, 2019, compared to an average spread for the year ended December 31, 2018 that was equal to 1.48%. See “Selected Statistical Information— Interest rate data— Average balances and interest rates— Average yield/rate”.
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The table below sets forth our net interest income by business segment for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Banca dei Territori...... 4,187 4,437 (250) (5.6) Corporate and Investment Banking ...... 1,899 1,773 126 7.1 International Subsidiary Banks ...... 1,370 1,322 48 3.6 Private Banking ...... 177 155 22 14.2 Asset Management...... 1 - 1 - Insurance ...... - - - - Total net interest income for the business segments ...... 7,634 7,687 (53) (0.7) Corporate Center...... (629) (416) 213 51.2 Total net interest income for the Group...... 7,005 7,271 (266) (3.7) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. The International Subsidiary Banks business segment, which mainly engages in retail banking, including traditional lending, deposit taking and associated financial services, contributed to net interest income for the year ended December 31, 2019, compared to the year ended December 31, 2018. In particular, net interest income from the International Subsidiary Banks (which accounts for 17.9% of the total net interest income for the business segments) increased by 3.6% to €1,370 million from €1,322 million for the year ended December 31, 2018. Interest income attributable to the Private Banking business segment (which generated 2.3% of the total net interest income for the business segments for the year ended December 31, 2019) increased by 14.2% to €177 million compared to €155 million for the year ended December 31, 2018. The net interest income of the Corporate and Investment Banking (which generated 24.9% of the total net interest income for the business segments for the year ended December 31, 2019) increased by 7.1% to €1,899 million from €1,773 million for the year ended December 31, 2018, due to the Global Markets segment, which driven by the positive performance of the securities portfolio. Even though it still accounts for 54.8% of the total net interest income results for the business segments, the Banca dei Territori business segment recorded a decrease of net interest income by 5.6% to €4,187 million from €4,437 million for the year ended December 31, 2018, due to the lesser contribution from loan volumes, particularly in the short term, and the more limited contribution of the hedging of core deposits. Net fee and commission income The table below sets forth our net fee and commission income for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Guarantees given/received...... 229 271 (42) (15.5) Collection and payment services...... 468 444 24 5.4 Bank accounts...... 1,222 1,260 (38) (3.0) Credit and debit cards...... 325 312 13 4.2 Commercial banking activities...... 2,244 2,287 (43) (1.9) Dealing and placement of securities ...... 764 746 18 2.4 Currency dealing...... 49 50 (1) (2.0) Portfolio management ...... 2,371 2,304 67 2.9 Distribution of insurance products ...... 1,441 1,462 (21) (1.4) Other ...... 264 255 9 3.5 Management, dealing and consultancy activities ...... 4,889 4,817 72 1.5 Other net fee and commission income...... 829 848 (19) (2.2) Net fee and commission income ...... 7,962 7,952 10 0.1 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. For the year ended December 31, 2019, our net fee and commission income (which represented 44% of our operating income for the year ended December 31, 2019) increased by 0.1% to €7,962 million from €7,952 million for the year ended December 31, 2018.
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The overall increase resulted primarily from the performance of collection and payment services (increasing by 5.4% to €468 million from €444 million for the year ended December 31, 2018), credit and debit cards (increasing by 4.2% to €325 million from €312 million for the year ended December 31, 2018) and portfolio management (increasing by 2.9% to €2,371 million from €2,304 million for the year ended December 31, 2018). The overall increase was moderated by a decrease with respect to commissions on traditional commercial banking activities (down 1.9% to €2,244 million from €2,287 million for the year ended December 31, 2018). The table below sets forth our net fee and commission income by business segment for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Banca dei Territori...... 4,212 4,314 (102) (2.4) Corporate and Investment Banking ...... 1,029 1,077 (48) (4.5) International Subsidiary Banks ...... 537 524 13 2.5 Private Banking ...... 1,746 1,696 50 2.9 Asset Management...... 799 701 98 14.0 Insurance ...... - - - - Total net fee and commission income for the business segments ...... 8,323 8,312 11 0.1 Corporate Center...... (361) (360) 1 0.3 Total net fee and commission income for the Group ...... 7,962 7,952 10 0.1 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. For the year ended December 31, 2019, net fee and commission income across our business segments increased by 0.1% to €8,323 million from €8,312 million for the year ended December 31, 2018. Banca dei Territori, which accounts for more than 50.6% of the net fee and commission income of the business segments and whose territory of business operation is primarily Italy, recorded a 2.4% decrease in net fee and commissions as compared to the year ended December 31, 2018. Net fee and commission income for International Subsidiary Banks increased by 2.5% as compared to the year ended December 31, 2018. Net fee and commission income for Corporate and Investment Banking, which also covers jurisdictions other than Italy, decreased by 4.5% as compared to the year ended December 31, 2018, mainly due to the negative performance of the commercial banking segment. Additionally, net fee and commission income for Private Banking and Asset Management increased by, respectively, 2.9% and 14% as compared to the year ended December 31, 2018.
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Income from insurance business The table below sets forth our income from our insurance business for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change Non-life Non-life Captions(3) Life (casualty) Total Life (casualty) Total amount % (in € millions, except for percentages) Technical margin ...... 185 159 344 134 129 263 81 30.8 Net Insurance premiums(4)...... 9,623 524 10,147 7,779 401 8,180 1,967 24.0 Net charges for insurance claims and surrenders(5) ...... (6,544) (175) (6,719) (8,612) (103) (8,715) (1,996) (22.9) Net charges for changes in technical reserves(6) ...... (4,497) (2) (4,499) 81 (2) 79 (4,578) Gains (losses) on investments pertaining to insured parties on insurance products(7)...... 1,751 - 1,751 1,072 - 1,072 679 63.3 Net fees on investment contracts(8)..... 322 1 323 329 - 329 (6) (1.8) Commission expenses on insurance contracts(9)...... (476) (144) (620) (495) (120) (615) 5 0.8 Other technical income expense(10)..... 6 (45) (39) (20) (47) (67) (28) (41.8) Net investment result ...... 791 12 803 842 14 856 (53) (6.2) Operating income from investments .. 10,084 12 10,096 (1,962) 14 (1,948) 12,044 Net interest income ...... 1,741 3 1,744 1,803 3 1,806 (62) (3.4) Dividends...... 254 2 256 239 3 242 14 5.8 Gains/losses on disposal...... 1,815 7 1,822 451 8 459 1,363 Valuation gains/losses...... 6,352 - 6,352 (4,381) - (4,381) 10,733
Portfolio management fees paid (11)..... (78) - (78) (74) - (74) 4 5.4 Gains (losses) on investments pertaining to insured parties...... (9,293) - (9,293) 2,804 - 2,804 (12,097) Insurance products(12)...... (1,768) (1,768) (1,017) - (1,017) 751 73.8 Investment’s unrealized capital gains/losses pertaining to insured parties on insurance products(13).... (19) - (19) (39) - (39) (20) (51.3) Investment products(14) ...... 7,506 - 7,506 3,860 - 3,860 (11,366) Income from insurance business gross of consolidation effects ...... 976 171 1,147 976 143 1,119 28 2.5 Consolidation effects...... 37 - 37 (35) - (35) 72 Income from insurance business ..... 1,013 171 1,184 941 143 1,084 100 9.2 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. (3) The table illustrates the economic components of the insurance business broken down into those regarding: (a) products considered to be insurance products according to IAS/IFRS, which include contracts where the risk insured is considered significant or in which the decision of the return on the contracts is not market-based but depends on the insurance company’s choices, and (b) investment products, which include financial products without a significant insurance risk. The latter are accounted for in the consolidated financial statements as financial movements. (4) Includes premiums issued only for products considered to be insurance products according to IAS/IFRS, net of the portions ceded to reinsurers. For the non-life insurance business, the change in the premiums reserve is also included. (5) Includes the amounts paid (claims, surrenders and maturities) and the change in claims reserves and reserves for amounts to be paid, net of portions ceded to reinsurers. (6) Includes the change in technical reserves, net of the portions ceded to reinsurers. (7) Includes the portion of the profit/loss from investments (for insurance products) pertaining to insured parties, including the impact of shadow accounting. (8) Includes net fees on investment products; specifically, charges paid by customers, management fees received by the financial units and fee expenses reversed by the insurance companies to the sales network and management companies. (9) Includes commission expenses on insurance products (including unit and index-linked insurance products and pension funds) paid to the sales network. (10) Includes fee income on insurance product management fee income (unit and index-linked insurance products and pension funds), rebates, net interest income on current accounts of the insurance company and on subordinated loans and other income and technical charges. (11) Includes fees paid to management companies for the management of traditional insurance products (separate management) portfol ios and pension funds. This also includes fees from consolidated funds underlying insurance units. (12) Includes the portion of the profit/loss from investments (for insurance products) pertaining to insured parties, without the impact of shadow accounting. (13) Includes the portion of unrealized capital gains/losses pertaining to insured parties on insurance products (shadow accounting). (14) Refers to the valuation of financial liabilities designated at fair value which represent the amount payable to insured parti es for investment products. For the year ended December 31, 2019, income from our insurance business, which includes the cost and revenue captions of the insurance business of the Group’s life and non-life companies increased by 9.2% to €1,184 million from €1,084 million as for the year ended December 31, 2018. The net investment result decreased by 6.2% to €803 million from €856 million for the year ended December 31, 2018. The overall performance was mainly due to the stability of the non-life business, which offset the decrease of the net investment result. Profits (losses) on financial assets and liabilities designated at fair value The table below sets forth our profits on financial assets and liabilities designated at fair value for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages)
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Interest rates ...... 170 378 (208) (55.0) Equity instruments ...... 357 422 (65) (15.4) Currencies ...... 123 47 76 Structured credit products...... 25 10 15 Credit derivatives ...... (40) 35 (75) Commodity derivatives ...... 18 18 0 Income from operations on assets designated at fair value through profit or loss ...... 653 910 (257) (28.2) Profits (Losses) on disposal or repurchase of assets designated at fair value through other comprehensive income and financial liabilities .... 1,275 562 713 Profits (losses) on financial assets and liabilities designated at fair value ...... 1,928 1,472 456 31.0 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. For the year ended December 31, 2019, our profits on financial assets and liabilities designated at fair value, the line item most sensitive to market volatility, increased to €1,928 million from €1,472 million for the year ended December 31, 2018, representing a 31.0% increase, with a sharp increase in profits (losses) on disposal or repurchase of assets designated at fair value through other comprehensive income and financial liabilities, which increased to €1,275 million from €562 million for the year ended December 31, 2018. Other operating income (expenses) Other operating income (a residual line item that includes various types of income and expenses that cannot be recognized in other operating income line items) decreased to €4 million from €34 million for the year ended December 31, 2018. Operating income For the year ended December 31, 2019, our operating income increased by 1.5% to €18,083 million from €17,813 million for the year ended December 31, 2018. The result was primarily due to the decrease in net interest income, as well as, to a lesser extent, other net operating income, whereas profits (losses) on financial assets and liabilities designated at fair value increased. The table below sets forth our operating income by business segment for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Banca dei Territori...... 8,473 8,825 (352) (4.0) Corporate and Investment Banking ...... 4,162 3,915 247 6.3 International Subsidiary Banks ...... 1,998 1,988 10 0.5 Private Banking ...... 1,971 1,874 97 5.2 Asset Management...... 840 716 124 17.3 Insurance ...... 1,132 1,106 26 2.4 Total operating income for the business segments ...... 18,576 18,424 152 0.8 Corporate Center...... (493) (611) (118) 19.3 Total operating income for the Group ...... 18,083 17,813 270 1.5 ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019.
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Operating costs The table below sets forth our operating costs for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Wages and salaries ...... 3,961 4,056 (95) (2.3) Social security charges ...... 1,012 1,029 (17) (1.7) Other ...... 771 727 44 6.1 Personnel expenses ...... 5,744 5,812 (68) (1.2) Information technology expenses...... 678 674 4 0.6 Management of real estate assets expenses ...... 323 368 (45) (12.2) General structure costs ...... 367 389 (22) (5.7) Professional and legal expenses ...... 313 387 (74) (19.1) Advertising and promotional expenses ...... 124 136 (12) (8.8) Indirect personnel costs ...... 81 84 (3) (3.6) Other costs...... 493 462 31 6.7 Indirect taxes and duties ...... 895 925 (30) (3.2) Recovery of expenses and charges ...... (786) (807) (21) (2.6) Administrative expenses...... 2,488 2,618 (130) (5.0) Property and equipment...... 498 531 (33) (6.2) Intangible assets...... 560 526 34 6.5 Adjustments ...... 1,058 1,057 1 0.1 O perating costs...... 9,290 9,487 (197) (2.1) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. For the year ended December 31, 2019, our operating costs decreased by 2.1% to €9,290 million from €9,487 million for the year ended December 31, 2018. Personnel expenses decreased by 1.2% to €5,744 million to €5,812 million, together with administrative expenses, which decreased by 5.0% from €2,618 million to €2,488 million for the year ended December 31, 2018. The cost/income ratio for the period amounted to 51.4%, compared to the 53.3% recorded for the year ended December 31, 2018. The table below sets forth our operating costs by business segment for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Banca dei Territori...... 5,034 5,311 (277) (5.2) Corporate and Investment Banking ...... 1,088 1,085 3 0.3 International Subsidiary Banks ...... 991 975 16 1.6 Private Banking ...... 613 593 20 3.4 Asset Management...... 157 150 7 4.7 Insurance ...... 204 187 17 9.1 Total operating costs for the business segments...... 8,087 8,301 (214) (2.6) Corporate Center...... 1,203 1,186 17 1.4 Total operating costs for the Group ...... 9,290 9,487 (197) (2.1) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. The performance of the Group’s operating costs was the result of a differentiated dynamic among the business divisions. Operating costs of Banca dei Territori, which accounts for over 60% of total costs for the business segments, decreased by 5.2%, from €5,311 million in the year ended December 31, 2018 to €5,034 million in the year ended December 31, 2019 as a result of lower administrative expenses, mainly due to lower service costs, and personnel expenses, due to the reduction in the average workforce. The operating costs for the Corporate and Investment Banking were in line with those of the prior year, increasing just 0.3% from €1,085 million in the year ended December 31, 2018 to €1,088 million in the year ended December 31, 2019. All other business segments weighed against the positive impact of the operating
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cost reductions of Banca dei Territori. The operating costs of the Asset Management business increased by 4.7%, from €150 million, for the year ended December 31, 2018, to €157 million, for the year ended December 31, 2019. The operating costs of the International Subsidiary Banks business segment increased by 1.6%, from €975 million in the year ended December 31, 2018, to €991 million in the year ended December 31, 2019. Operating costs of Insurance for the period increased by 9.1%, from €187 million in the year ended December 31, 2018 to €204 million in the year ended December 31, 2019, as well as operating costs of Private Banking, which increased by 3.4% from €593 million in the year ended December 31, 2018, to €613 million in the year ended December 31, 2019. Personnel expenses. For the year ended December 31, 2019, personnel expenses decreased by 1.2% to €5,744 million from €5,812 million for the year ended December 31, 2018. Other administrative expenses. For the year ended December 31, 2019, administrative expenses decreased by 5.0% to €2,488 million from €2,618 million for the year ended December 31, 2018. Adjustments to property, equipment and intangible assets. For the year ended December 31, 2019, adjustments to property, equipment and intangible assets increased by 0.1% to €1,058 million from €1,057 million for the year ended December 31, 2018. Operating margin For the year ended December 31, 2019, operating margin increased by 5.6% to €8,793 million from €8,326 million for the year ended December 31, 2018. Net adjustments to loans The table below sets forth our net adjustments to loans for the year ended December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019(1) 2018(2) Change % (in € millions, except for percentages) Bad loans (sofferenze) ...... (905) (1,167) (262) (22.5) Unlikely to pay (inadempienze probabili) ...... (1,314) (1,174) 140 11.9 Past due loans (crediti scaduti/sconfinanti)...... (356) (374) (18) (4.8) Stage 3 loans...... (2,575) (2,715) (140) (5.2) Stage 2 loans...... 104 (12) 116 (8.6) Stage 1 loans...... 365 256 109 42.6 Net losses/recoveries on impairment loans...... (2,106) (2,471) (365) (14.8) Profits/losses from contractual changes without derecognition ...... (6) (11) (5) (45.5) Net adjustments to guarantees and commitments ...... 23 88 (65) (73.9) Net adjustments to loans ...... (2,089) (2,394) (305) (12.7) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. For the year ended December 31, 2019, net adjustments to loans decreased by 12.7% to €2,089 million from €2,394 million for the year ended December 31, 2018 due to due to lower adjustments to Stage 3 NPLs and greater recoveries on loans in Stage 1 loans and Stage 2 loans. The “bad loans” and “past due loans” categories decreased by 22.5% from €1,167 million to €905 million, by 4.8% to €356 million from €374 million in the year ended December 31, 2018, respectively. NPLs continued to decline as a percentage of total loans in 2019 due to lower NPL flows; the cost of credit, expressed as the ratio of net adjustments to net loans, amounted to 53 basis points, which is 8 basis points lower than in the previous year. For the year ended December 31, 2019, the average coverage of bad loans was 65.3%, while the average coverage of loans in the “unlikely to pay” category was 38.7% and 16% for past-due loans. The coverage ratio for forborne positions within the NPL category was 54.6% at the end of December 2019. See “Selected Statistical Information—Risk Elements in the Loan Portfolio: Loan Classification—Quality of Loan Portfolio”. Other net provisions and net impairment losses on other assets For the year ended December 31, 2019, other net provisions decreased by 5.3% to €125 million from €132 million for the year ended December 31, 2018. Net impairment losses on instruments designated at fair value
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through other comprehensive income were €67 million from €5 million for the year ended December 31, 2018. Net impairment losses on other assets increased by 7.3% to €59 million for the year ended December 31, 2019, from €55 million for the year ended December 31, 2018. For the year ended December 31, 2019, net losses pertaining to insurance companies pursuant to IAS 39 were €3 million from €5 million for the year ended December 31, 2018. Overall, other net provisions and net impairment losses on other assets increased by 35.8% for the year ended December 31, 2019 to €254 million from €187 million for the same period in 2018. Such increase must be considered in conjunction with greater net provisions for risks and charges and, to a lesser extent, net adjustments to securities designated at fair value. Other income (expenses) For the year ended December 31, 2019, other income not directly related to our ordinary business, decreased to €55 million compared to €506 million recorded for the year ended December 31, 2018. Income (loss) from discontinued operations For the year ended December 31, 2019, income or loss from discontinued operations increased to €88 million compared to €71 million recorded for the year ended December 31, 2018. Gross income (loss) For the year ended December 31, 2019, income before tax from continuing operations increased by 4.3% to €6,593 million compared to the year ended December 31, 2018. Taxes on income For the year ended December 31, 2019, taxes on income increased by 11.4% to €1,838 million from €1,650 million for the year ended December 31, 2018. Charges (net of tax) for integration and exit incentives For the year ended December 31, 2019, charges (net of tax) for integration and exit incentives amounted to €106 million, an 11.7% decrease as compared to €120 million for year ended December 31, 2018. Effect of purchase price allocation (net of tax) For the year ended December 31, 2019, the effect of purchase price allocation (net of tax) decreased by 25.0% to €117 million from €156 million for the year ended December 31, 2018. Levies and other charges concerning the banking industry (net of tax) For year ended December 31, 2019, levies and other charges concerning the bank industry (net of tax) decreased 4.8% to €360 million, net of taxes, from €378 million in the year ended December 31, 2018. Impairment (net of tax) of goodwill and other intangible assets No impairment (net of tax) of goodwill and other intangible assets or loss after tax from discontinued operations assets was recognized in either the year ended December 31, 2019 or the year ended December 31, 2018.
Net income (loss) For the year ended December 31, 2019, net income increased 3.3% to €4,182 million from €4,050 million for the year ended December 31, 2018. Liquidity and Capital Resources We obtain the funds needed to finance our activities mainly through bank accounts and deposits, the issuance of bonds and the use of the interbank (money) market. In addition, during 2012 we obtained funds from the ECB, including through its Long term Refinancing Operations (“LTROs”), which we refinanced under the TLTRO II program in 2016. For additional details regarding our participation in the ECB’s LTRO and our rights offering, see “—ECB funding” and “—The capital increase” and “Risk Factors—We depend on access to the capital markets to maintain certain levels of liquidity and to obtain long-term financing”.
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The table below shows the financial resources used by our Group, excluding equity, as of December 31, 2020 and December 31, 2019.
As of December 31, 2020(1) As of December 31, 2019(2) Change Amount % Amount % Amount % (in € millions, except for percentages) Current accounts and deposits...... 407,832 50.0 316,810 45.6 91,022 28.7 Repurchase agreements and securities lending ...... 944 0,1 4,505 0.6 (3,561) (79.0) Bonds ...... 70,060 8.6 65,485 9.4 4,575 7.0 Certificates of deposit...... 3,976 0.5 4,574 0.7 (598) (13.1) Subordinated liabilities...... 11,786 1.4 9,308 1.3 2,478 26.6 Other deposits ...... 30,401 3.7 24,830 3.6 5,571 22.4 —of which designated at fair value(4)...... 12,536 1.5 10,934 1.6 1,602 14.7 Direct deposits from banking business ...... 524,999 64.3 425,512 61.2 99,487 23.4 Deposits from insurance companies(6) ...... 175,279 21.5 165,945 23.9 9,334 5.6 —of which Financial liabilities of the insurance business designated at fair value(5) ...... 77,149 9.5 75,886 10.9 1,263 1.7 Direct customer deposits(7) ...... 700,278 85.8 591,457 85.1 108,821 18.4 Due to banks ...... 115,947 14.2 103,324 14.9 12,623 12.2 Total Funding...... 816,225 100.0 694,781 100.0 121,444 17.5 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures included in the balance sheet under financial liabilities designated at fair value through profit and loss. (4) Figures included in the balance sheet under financial liabilities held for trading. (5) Figures included in the balance sheet under financial liabilities designated at fair value through profit and loss. (6) Figures included in the balance sheet under due to customers and securities issued. (7) Figures do not include technical reserves relating to the insurance business, which represent the amounts owed to customers subscribing to traditional policies or policies with significant insurance risk. Direct deposits from banking business increased by 23.4% to €524,999 million as of December 31, 2020 from €425,512 million as of December 31, 2019. Current accounts and deposits increased by 28.7% to €407,832 million from €316,810 million as of December 31, 2019. This result was mainly due to the growth of current accounts and deposits (+€91.0 billion). Bonds increased by 7.0% to €70,060 million from €65,485 million as of December 31, 2019. Repurchase agreements and securities lending decreased by 79.0% to €944 million from €4,505 million in the year ended December 31, 2019. Certificates of deposit in the year ended December 31, 2020 recorded a 13.1% decrease to €3,976 million from €4,574 million for the year ended December 31, 2019. Subordinated liabilities in the year ended December 31, 2020 recorded a 26.6% increase to €11,786 million from €9,308 million for the year ended December 31, 2019. Other deposits increased by 22.4% to €30,401 million from €24,830 million for the year ended December 31, 2019. Considering our results net of the UBI Banca contribution of €68 billion, our direct deposits from banking business amounted to €457 billion as of December 31, 2020 up by 7.4% on the beginning of the year. The positive performance was essentially due to the growth of current accounts and deposits (+€45.2 billion), which represent a considerable reserve for funding the asset management industry. This component offset the downtrend in bonds (-€13.2 billion), repurchase agreements and securities lending (-€3.6 billion), largely attributable to institutional counterparties. Other funding also increased (+€3.4 billion), inclusive of certificates and commercial papers. As of December 31, 2020, the Group’s share of deposits and bonds on the domestic Italian market (according to the ECB’s harmonized definition) and including UBI Banca equaled 23.6%, up if compared to 18.3% as of December 31, 2019. Funding from banks in the category “due to banks”, increased by 12.2% to €115,947 million as of December 31, 2020, from €103,324 million as of December 31, 2019. For additional information regarding our sources of funding, see “Selected Statistical Information—Deposits” and “Risk management—Liquidity risk”.
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ECB funding
Access to ECB funds requires pledging as security an equivalent amount of certain assets that are deemed “eligible” under ECB rules and regulations. The ECB has two categories of eligible assets: “marketable” and “non-marketable”. Eligible marketable assets consist of the following: ECB debt certificates, central government and central bank debt instruments, local and regional government debt instruments, supranational debt instruments, covered bank bonds, credit institution debt instruments, debt instruments issued by corporate and other issuers, and asset-backed securities. Eligible non-marketable assets consist of credit claims for the public sector, non-financial corporations, and international and supranational institutions, as well as retail mortgage-backed debt instruments. As of December 31, 2018, with regard to the TLTRO II program, the Group’s participation amounted to €61 billion. The 2018 improvement in the trend of loans to businesses was influenced by compliance with the benchmark on TLTRO II, which provided a boost at the beginning of the year and, in the opposite direction, by the cleaning of balance sheets by banks. Eventually, the reimbursement of TLTRO in 2021 may partially influence funding needs through bonds and time deposits. As of December 31, 2019 and as of December 31, 2020, the Group was not a participant in the TLTRO II program. The TLTRO III seek to preserve favorable bank lending conditions and support the accommodative monetary policy stance. Some of the parameters established by the ECB on June 6, 2019 were subsequently revised to make improvements, most recently on December 10, 2020, in light of the economic impact of the continuation of the COVID-19 Pandemic. The amount of funding that each bank can obtain depends on the amount of loans granted to non-financial companies and households at particular reporting dates (eligible loans). The operations have been conducted on a quarterly basis, from September 2019, and each operation has a duration of three years. The interest rate for each operation is set at a level equal to the average interest rate on the Eurosystem’s main refinancing operations (main refinancing operations, or “MROs”), currently 0%, except for the special interest rate period from June 24, 2020 to June 23, 2022, when a rate of 50 basis points lower will apply. Banks granting net eligible loans above a benchmark net lending can receive an interest rate reduction. Specifically, the favorable rate applied will be equal to the average rate on deposits with the central bank (Deposit Facility), currently -0.5%, for the entire duration of the respective operation, except for the special interest rate period. The continued inflow to current accounts and the substantial contribution from the TLTRO III operations, both in terms of negative rates and large volumes, will reduce the cost of funding. Minor haircuts may be seen on current account rates, but without falling into negative territory. As a result, interest rates on loans will still be very low, despite the foreseeable deterioration in credit risk. As of December 31, 2020, in the context of financial liabilities, which include interest on funding transactions with negative rates, the Group’s interest income was recognized on other TLTROs in the total amount of €544 million in 2020 and €243 million in 2019. The amount recognized in 2020 includes €484 million of interest accrued on TLTRO III operations, in addition to UBI Banca’s contribution. Additionally, interbank activity presented a positive contribution due to the recognition of the positive interest accrued on the TLTRO III funds obtained in the June 2020 auction. Additionally, amounts due to central banks as of December 31, 2020 include loans received from the ECB as part of the TLTRO program, for a total of €70 billion, fully attributable to the “TLTRO III” tranche. Moreover, the book value of amounts due to central banks of €86,235 million as of December 31, 2020 includes the balance of TLTRO refinancing operations for a total of €82,854 million, including UBI Banca, fully attributable to the TLTRO III. In addition to TLTROs, the Eurosystem’s regular open market operations consist also of one-week liquidity-providing operations in Euro (the MROs, which serve to steer short-term interest rates, to manage the liquidity situation, and to signal the monetary policy stance in the Eurozone). Bond issuances
We conduct funding both in the domestic Italian capital market and the international capital markets. The international bond markets also represent an important part of our overall funding. We currently maintain two medium term note programs and three covered bond programs: (i) a €70 billion Euro Medium Term Note Program, (ii) the Program, a US$50 billion Global Medium Term Note Program, described by this Offering
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Memorandum (the “Global Medium Term Note Program”), (iii) a €20 billion Covered Bond (Obbligazioni Bancarie Garantite or OBG) Program secured by public sector assets and transferred to the Guarantor ISP CB Pubblico S.r.l., (iv) a €25 billion Covered Bond (OBG) Program secured by mortgage assets originated by Intesa Sanpaolo and transferred to the guarantor ISP CB Ipotecario S.r.l., and (v) a €50 billion Covered Bond (OBG) Program secured by mortgage assets originated by the Group and transferred to the guarantor ISP OBG S.r.l.. We periodically issue debt under these programs. In the year ended December 31, 2018, we issued €2.2 billion of notes under our Euro Medium Term Note Program and US$2.5 billion fixed-rate notes under this Global Medium Term Note Program. During the same period, we also issued €5.6 billion in covered bonds (Obligazioni Bancarie Garantite) as part of our Covered Bond (OBG) Programs. In the year ended December 31, 2019, we issued €2.3 billion of notes under our Euro Medium Term Note Program and we issued $2 billion of notes under this Global Medium Term Note Program. During the same period, we also issued €1.5 billion in covered bonds (Obbligazioni Bancarie Garantite) as part of our €20 billion Covered Bond (OBG) Program. In the year ended December 31, 2020, we issued €1.3 billion of notes under our Euro Medium Term Note Program and we did not issue any notes under this Global Medium Term Note Program. During the same period, we also issued €750 million in covered bonds (Obbligazioni Bancarie Garantite) as part of our €20 billion Covered Bond (OBG) Program. In the year ended December 31, 2020, we issued (i) a senior preferred fixed-rate security for GBP350 million (corresponding to €413 million), aimed at the UK and European market; (ii) a senior preferred fixed-rate security for €1.25 billion, aimed at European institutional investors; (iii) a hybrid perpetual fixed-rate AT1 instrument for €1.5 billion, aimed at European institutional investors, in two tranches; and (iv) a hybrid perpetual fixed- rate AT1 instrument for €1.5 billion, aimed at European institutional investors, in two tranches. Furthermore, in January 2020, UBI Banca (now incorporated into the Group) issued a hybrid perpetual fixed-rate AT1 instrument for €400 million, targeted to European institutional investors. Capital adequacy, stress tests and ongoing ECB comprehensive assessment
Basel II is an international capital adequacy framework whose fundamental objective is to further strengthen the soundness and stability of the international banking system, while seeking to ensure that capital adequacy regulations are not a significant source of competitive inequality among international banks. Under Bank of Italy guidelines governing the implementation of Basel II (effective January 1, 2007) banks’ capital was divided into core capital (or former “Tier 1 Capital”) and supplementary capital (or former “Tier 2 Capital”), adjusted by “prudential filters” (i.e. adjustments made to balance sheet capital items to exclude certain items of income) and net of certain deductions. On December 2010, the Basel Committee of Banking Supervision issued the so called Basel III rules, which provide the new regulatory standards on bank capital adequacy and liquidity. The rules aim at setting out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards. The Committee has put in place processes to ensure the rigorous and consistent global implementation of the Basel III rules by January 2019. The standards will be phased in gradually so that the banking sector can move to the higher capital and liquidity standards while supporting lending to the economy. See “Supervision and Regulation—Capital adequacy requirements”. On June 26, 2013 the European Parliament and the Council of the European Union adopted the so called “CRD IV Package” implementing Basel III rules. The CRD IV Packages comprises (i) Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms and (ii) Directive No. 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms. See “Supervision and Regulation—Capital adequacy requirements”. On October 15, 2013, the Council of the European Union also adopted Regulation No. 1024/2013 (the “SSM Regulation”), that conferred on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and became effective on November 3, 2013 (as subsequently supplemented by Regulation (EU) No. 468/2014 of the ECB of April 16, 2014 establishing the framework for co-operation within the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated
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authorities). Pursuant to the SSM Regulation in view of the assumption of its tasks, the ECB must carry out a comprehensive assessment, including a balance-sheet assessment, of, inter alia, the significant credit institutions of the EU Member States whose currency is the Euro (as well as of the EU Member States whose currency is not the Euro which have established a close cooperation in accordance with the SSM Regulation). As per the ECB’s note of October 23, 2013 on the comprehensive assessment, we have been identified as one of the entities which are subject to the comprehensive assessment. On October 26, 2014, the ECB announced the results of the comprehensive assessment, in which we met the required thresholds. It consisted of two main pillars: (i) an asset quality review (“AQR”) to enhance the transparency of bank exposures by reviewing the quality of banks’ assets, including the adequacy of asset and collateral valuation and related provisions and (ii) a stress test (that is being performed with the EBA) to examine the resilience of banks’ balance sheet to stress scenarios. Furthermore, depending upon the availability of data, a supervisory risk assessment could support the comprehensive assessment through a control/consistency check of the two main pillars in the form of a quantitative and qualitative review of key risks (including liquidity, leverage and funding). The assessment was based on a capital benchmark of 8.0% CET1 (such ratio being calculated to risk-weighted assets of the relevant entity) for the baseline scenario, whereas for the adverse scenario a benchmark of 5.5% CET1 applied. In particular, as regards the AQR, it comprises two phases: (i) portfolio selection (Phase 1) and (ii) on-site inspection (Phase 2 to be conducted in accordance with the methodology provided in the relevant manual published by the ECB on March 11, 2014). As to the stress test, on April 29, 2014 the EBA released a note on the methodology to be used for such test. For information regarding the regulations adopted by the Council of the European Union, see “Supervision and Regulation—Overview of regulations applicable to banks” and “Risk factors—Regulatory changes or enforcement initiatives could adversely affect our business”. For a description of our capital adequacy requirements, our liquidity risk management and our regulatory capital for the years ended December 31, 2020, 2019 and 2018, see “Supervision and Regulation—Capital adequacy requirements” and “Risk Management—Basel III rules and capital adequacy—Capital adequacy”. Derivatives
We enter into derivatives contracts in the course of our business, partly to manage various risks associated with our operations, such as credit risk, counterparty risk and foreign exchange risk. For a description of our risk management policies and a summary of our derivatives positions as of the year ended December 31, 2020, see “Risk Management—Credit risk—Derivatives”. Structured credit products
For a description of our structured credit products portfolio, see “Risk Management—Credit risk—Structured credit products”. Off-balance sheet arrangements We enter into off-balance sheet arrangements with unconsolidated entities in the ordinary course of our business, primarily to facilitate client transactions. These arrangements include the provision of guarantees on behalf of customers, retained interest in assets that have been transferred to an unconsolidated entity and obligations arising out of variable interests in an unconsolidated entity. The discussion in this section is based on Part B of the Notes to the 2020 Audited Consolidated Financial Statements (see “—Presentation of Financial Information”). Guarantees and commitments
Typically, when we or a company in our Group issues guarantees on behalf of its customers, we obtain collateral, have a right of recourse to the customer, or both. The primary types of guarantees that companies in our Group provide are commercial and financial guarantees given to other banks and financial institutions on behalf of customers to secure loans, overdraft and other types of facilities. In addition, we have certain other commitments, including irrevocable commitments to lend funds (our lending commitments to our customers and bank borrowers), underlying commitments on credit derivatives (“protection sales” which are our
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commitments to pay counterparties in the event of a reference asset default in connection with a credit derivative), assets pledged as collateral of third party commitments and other commitments. The following table provides an analysis of our guarantees and commitments as of December 31, 2020, 2019, and 2018, other than those designated at fair value. The amounts disclosed represent the maximum (undiscounted) potential amount of future payments we could be required to make under the relevant type of guarantee, lending arrangement or credit derivative before any recovery through recourse or collateralization provisions. In addition, assets pledged as collateral of third party commitments represents the value of assets pledged primarily for certain transactions with third parties. Finally, the value of our other commitments relates primarily to the value of securities we may be obligated to purchase in connection with put options we have sold.
As of December 31, 2020(1) 2019(2) 2018(3) (in € millions) Commitment to supply funds ...... 239,315 193,247 192,796 a) Central Banks ...... 1,762 1,573 1,865 b) Public Administration ...... 10,507 7,840 9,269 c) Banks ...... 30,395 30,901 32,998 d) Other financial companies ...... 25,373 17,329 12,594 e) Non-financial companies ...... 155,913 124,835 125,475 f) Families ...... 15,365 10,769 10,595 Commercial guarantees given ...... 44,679 38,693 38,760 a) Central Banks ...... 120 1 - b) Public Administration ...... 480 532 565 c) Banks ...... 2,936 3,291 3,511 d) Other financial companies ...... 1,572 1,185 1,134 e) Non-financial companies ...... 38,777 33,223 33,032 f) Families ...... 764 461 518 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. (2) Figures from the 2019 Audited Consolidated Financial Statements. (3) Figures from the 2018 Audited Consolidated Financial Statements. For additional information regarding our use of SPEs, including in connection with certain securitization activities (a small portion of which is off-balance sheet), and exposures to monoline insurers, see “Risk Management—Credit risk—Special purpose entities” and “Risk Management—Credit risk—Monoline insurers”. Business Plan On February 9, 2018 we approved the Business Plan. For further information regarding our Business Plan, see “Business—Overall Group strategy and 2018-2021 Business Plan”. Prospective 2021 Outlook
Heading into 2021, we expected our net income to grow as compared with 2020. We expected an increase in revenues, effective cost management and decrease of the cost of risk to be key enablers of the expected performance of our net income. Our dividend policy under the Business Plan included a commitment to distribute cash dividends equal to 70% of our net income for 2021. We anticipate the successful completion of the UBI Banca Acquisition will further diversify and strengthen our business beginning in 2020. However, the Covid-19 Pandemic has been and continues to be a material disruption to our business and the economies in which we operate. At this time, it is uncertain when the pandemic will cease to affect our business and the economies in which we operate. Accordingly, we are no longer in a position to forecast with any confidence how our business will perform in 2021. In light of the foregoing, our Board of Directors, at its meeting on March 31, 2020, decided to suspend the proposal regarding the cash distribution to shareholders of €3.4 billion, equal to €19.2 cents per share, on the agenda of the Ordinary Shareholders’ Meeting then scheduled for April 27, 2020, and passed a resolution to propose the allocation to reserves of net income for the financial year 2019
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at the upcoming Ordinary Shareholders’ Meeting. The actions of the Board of Directors was in compliance with the recommendation of the European Central Bank dated March 27, 2020 on dividend policy in light of the Covid-19 Pandemic. The allocation was approved by the shareholders as proposed on April 27, 2020. On April 28, 2021, the shareholders approved a partial distribution of the share premium reserve of €0.0083 for each of the 19,430,463,305 ordinary shares constituting the share capital for a total amount of €161,272,845.43. For further information regarding our Business Plan and our 2021 outlook, see “Business—Overall Group strategy and Business Plan” and also “—2021 Outlook”. The prospective financial information presented in the above paragraph is not intended to be a comprehensive statement of Intesa Sanpaolo’s financial or operational results for the year that will end on December 31, 2021. Such information has been prepared by management. The prospective financial information was not prepared with a view towards compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or GAAP. The independent statutory auditors of Intesa Sanpaolo have not audited, reviewed, compiled or performed any procedures with respect to the above prospective financial information for the purpose of its inclusion herein, and accordingly, the independent statutory auditors of Intesa Sanpaolo do not express an opinion or provide any form of assurance with respect thereto for the purpose of this Offering Memorandum. Furthermore, the prospective financial information does not take into account any circumstances or events occurring after the date it was prepared. The prospective financial information is based on a number of assumptions that are subject to inherent uncertainties and subject to change. Accordingly, Intesa Sanpaolo’s actual results for the year that will end on December 31, 2021 may vary from the prospective financial information contained above, and such variations could be material. As such, you should not place undue reliance on the inclusion of prospective financial information in this Offering Memorandum and such inclusion should not be regarded as an indication that such prospective financial information will be an accurate prediction of future events. See “Forward-Looking Statements” and “Risk Factors” for a more complete discussion of certain of the factors that could affect Intesa Sanpaolo’s future performance and results of operations. Financial results for the three months ended March 31, 2021
We announced our results for the first three months of 2021 with a press release published on May 5, 2021 (the “Q1 Release”). The Q1 Release is available on our website (www.group.intesasanpaolo.com). Below is a summary of certain matters covered by the Q1 Release. Our net interest income decreased by 4.3% to €1,948 million for the first three months of 2021 from €2,036 million for the same period in 2020. Our net fee and commission income increased by 8.9% to €2,301 million for the first three months of 2021, compared with €2,112 million for the same period in 2020, due primarily to an increase of 12.6% in commissions on management, dealing and consultancy activities. Commissions on commercial banking activities decreased by 0.5%. This is primarily the result of an increase of 49.7% in dealing and placement of securities, 4.6% in the distribution of insurance products and 10.5% in the portfolio management. Profits on financial assets and liabilities at fair value amounted to €791 million, compared with €188 million in the fourth quarter of 2020. Contributions from customers decreased from €92 million to €81 million, those from capital markets recorded a positive result of €318 million compared to a negative result of €90 million, those from trading and treasury increased from €170 million to €387 million and those from structured credit products decreased from €16 million to €5 million. Profits on financial assets and liabilities at fair value of €791 million for the first quarter of 2021 compare with profits of €1,044 million in the first quarter of 2020 when contributions from customers amounted to €153 million, those from capital markets to €478 million, those from trading and treasury to €451 million and those from structured credit products were negative €38 million. Our income from insurance business increased by 0.3% to €373 million for the first three months of 2021, compared to €372 million for the same period of 2020. Our operating income amounted to €5,461 million, up 8.9% compared with €5,013 million in the fourth quarter of 2020 and down 2.0% from €5,570 million in the first quarter of 2020.
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Our operating costs decreased by 2.6% to €2,542 million for the first three months of 2021, compared to €2,610 million for the first three months of 2020, as a result of a decrease by 1.2% in personnel expenses and 6.1% in administrative expenses. Adjustments decreased by 2.6% compared to the three months ended March 31, 2020. Our operating margin decreased by 1.4% to €2,919 million for the first three months of 2021 compared to €2,960 million for the first three months of 2020, with our cost/income ratio at 46.5% compared to 46.9% in the first three months of 2020. Net adjustments to loans decreased by 25.3% to €402 million from €538 million in the first three months of 2020. Net provisions and net impairment losses on other assets decreased to €133 million in the first three months of 2021, compared to €428 million in the same period in 2020. Consolidated net income increased by 31.7% to €1,516 million in the first three months of 2021 from €1,151 million in the same period in 2020. Capital ratios as of March 31, 2021, calculated by applying the transitional arrangements for 2021 and net of the dividends accrued for the first quarter, equaled 14.9% for the common equity ratio (compared to 14.7% at December 31, 2020), 16.8% for the Tier 1 ratio (compared to 16.9% at December 31, 2020) and 19.5% for the total capital ratio (compared to 19.6% at December 31, 2020). These capital ratios include net income for the first quarter after the deduction of accrued dividends.
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RISK MANAGEMENT Our Group is subject to risks that are an inherent part of our business activity. These risks include, inter alia, credit and counterparty risk, market risk (trading book), financial risk, strategic risk and operational risk, as well as business risk and risks specific to our insurance business. Our profitability depends, in part, on our ability to identify, measure and continuously monitor these risks. In order to achieve this, our Group’s internal control system has been built around a set of policies, rules, procedures and organizational structures designed to ensure: (i) the effectiveness and efficiency of our Group’s processes; (ii) the safeguarding of asset value and protection from losses; (iii) the reliability and security of accounting and IT procedures and management of information; (iv) the compliance of our Group’s transactions with applicable laws and supervisory regulations as well as our Group’s own policies, procedures and regulations; (v) the prevention of the risk that our Group may be involved, although unintentionally, in illegal activities (with specific regard to those relating to money-laundering, usury and financing of terrorism); (vi) the verification of the implementation of our strategies and policies; and (vii) the containment of risk within the limits indicated in the reference framework for determining our risk appetite (Risk Appetite Framework – RAF). The internal control system features an infrastructure that is designed to provide organized and systematic access to the guidelines, procedures, organizational structures and risks and controls within the business. This infrastructure incorporates our Group’s policies within the regulatory framework, including the instructions of the relevant supervisory authorities and provisions of law, including the principles established by Legislative Decree No. 231 of June 8, 2001 (“Decree 231”) and Law No. 262 of December 28, 2005, as amended. For further information regarding our Group’s risk management policies, see parts E and F of the “Notes to the Consolidated Financial Statements” included herein. General overview Our Board of Directors, with the support of the Risks Committee, defines the policies relating to general risk management and the acceptable levels of risk in our Group’s daily operations, sets targets regarding risk management and monitors major risk factors. Our Management Control Committee monitors the adequacy, efficiency and functionality of the risk management process. Our Surveillance Body, separate from the Management Control Committee, performs the duties and tasks of a surveillance body pursuant to Decree 231 on the administrative responsibility of companies, such as overseeing the effective and proper functioning and update of our organizational, management and control model adopted pursuant to Decree 231. In addition, our Chief Risk Officer sets risk management policies in accordance with our strategies and objectives. Our Chief Risk Officer is a member of our Steering Committee and our Group Control Coordination, Operational and Reputational Risk Committee, each of which, together with the other managerial committees and departments described below, were established to manage our Group’s risks.
The Steering Committee, chaired by the Managing Director and CEO, is a Group decision-making, reporting and consultative body in charge of, among other things, assisting the Managing Director and CEO in the performance of his duties and helping ensure the coordination and integrated risk management and the safeguarding of corporate value at the Group level, including the internal control system, in implementation of the strategic guidelines and management policies established by the Board of Directors.
The Group Financial Risk Committee, chaired by the Chief Risk Officer and the Chief Financial Officer, is a technical body with decision-making, reporting and consultative powers that focuses on both the banking business (proprietary financial risks for banking and trading books and Active Value Management) and life and non-life insurance business (exposure of results to the trends of market variables). The functions of the Group Financial Risk Committee are conducted by two sub-committees: o the Risk Analysis and Assessment sub-committee, chaired by the Chief Risk Officer, responsible for evaluating, inter alia, in advance of approval by the Board of Directors, the guidelines on undertaking and measuring financial risks and the liquidity risk of the Group and proposals for operational limits, financial operations referring to the interest rate risk of the banking took, the trading book and valuation risk, defining, within the scope of the powers received, the distribution thereof amongst the Group’s major units; and o the Management Guidelines and Operating Choices sub-committee, chaired by the Chief Financial Officer, provides operational guidelines in implementation of the strategic guidelines and risk management policies laid down by the Board of Directors, in respect of management
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of the banking book, liquidity, interest rate and exchange risk and periodically analyses the Group’s overall financial risk profile and its exposure to liquidity and interest rate risks, verifying any overruns of the limits as well as taking measures deemed appropriate to mitigate them.
The Credit Risk and Pillar 2 Internal Models Committee is a technical body with decision-making, reporting and advisory powers. In particular, with regard to the internal risk measurement systems, the Committee acts as the responsible Management Committee for the internal models for the (i) measurement and management of credit risk and (ii) Pillar 2 risks, other than those for the measurement and quantification of financial risks in the banking book, which fall under the scope of our Group Financial Risk Committee; however, their scope does include the models used for stress testing and forward-looking income statement valuations.
The Group Control Coordination, Operational and Reputational Risk Committee is divided into sub- committees: o the Integrated Internal Control System sub-committee, with reporting and advisory powers whose objective is to reinforce coordination and the interdepartmental cooperation mechanisms within the Group internal control system, thus promoting integration of the risk management process; and o the Operation and Reputational Risk sub-committees has decision-making, reporting and advisory powers, and supervises the implementation of operational and reputational risk management guidelines and policies in accordance with indications formulated by the Board of Directors; periodically reviews the overall operational risk profile, authorizing any corrective measures; coordinates and monitors the effectiveness of the main mitigation activities; and approves, in accordance with direction from the Board of Directors, operational risk transfer strategies. The sub-committee meetings are attended by, among others, the heads of corporate control functions, as well as the manager responsible for preparing the Issuer’s financial reports as a permanent member.
The Group Credit Committee is a body with decision-making and advisory powers that has the task of ensuring the coordinated management of issues relating to credit risk. Among the other duies, the Group Credit Committee makes decisions with respect to the granting, renewal and confirmation of loans within the scope of the powers assigned to it.
The Hold to Collect and Sell (HTCS) Sign-off Committee is responsible for proposing the assumption of market risk on request by our business structures and by those of our subsidiaries on the HTCS shares required for Originate to Share transactions.
The Chief Risk Officer Governance Area, which reports directly to the Managing Director and CEO, is responsible for governing the macro process of definition, approval, control and implementation of the Group’s Risk Appetite Framework with the support of the other corporate functions involved, as well as assisting the corporate bodies in setting the Group’s risk management guidelines and policies. Additionally, it manages the Group’s overall risk profile, including the profile linked to the model risk, by establishing methods and monitoring exposure to the various types of risk and reporting the situation periodically to the corporate bodies. It also carries out the level II controls of credit and risks other than credit risk and validates internal risk measurement systems. The area is divided into the following departments: Credit Risk Management Department, Financial and Market Risks Department, Enterprise Risk Management Department, Internal Validation and Controls Department, Foreign Banks Risk Governance and Coordination of Risk Management Initiatives. This area is also responsible for operational implementation of the strategic and management guidelines along the Issuer’s entire decision-making chain, down to its individual operational units.
The Chief Compliance Officer Governance Area, which reports directly to the Managing Director and CEO, is responsible for monitoring the Group’s regulatory compliance risk, including conduct risk. Within the Risk Appetite Framework, the Chief Compliance Officer Governance Area (i) proposes the statements and limits set for compliance risk; and (ii) collaborates with the Chief Risk Officer
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Governance Area in the monitoring and control of operational risks for compliance purposes, in the proposal of operational loss limits and, if these limits are exceeded, in the identification/analysis of events attributable to non-compliance with regulations and in the identification of appropriate corrective measures. The Chief Compliance Officer Governance Area is divided into the following organisational units: - BdT and Private Regulatory Compliance Head Office Department; - Corporate & Investment Banking Head Office Department; - Compliance Governance and Control Head Office Departments; - Anti Financial Crime Head Office Department, which is tasked, inter alia, with the duties and responsibilities of the anti-money laundering function; and - Digital & Data Transformation Compliance.
The Anti-Money Laundering Function, which reports directly to the Chief Compliance Officer, is responsible for monitoring compliance risk related to money laundering, combatting the financing of terrorism and embargo management.
The Internal Auditing Department, which reports to the Board of Directors and is functionally linked to the Management Control Committee, is responsible for ensuring the ongoing and independent surveillance of the regular progress of our Group’s operations and processes for the purpose of identifying and preventing any anomalous or risky behavior or situations, assessing the functioning of the overall internal control system and its adequacy to ensure the effectiveness and efficiency of company processes, safeguarding asset value and loss protection, monitoring the reliability and completeness of accounting and management information, and regulating the compliance of transactions with the policies set out by our Group’s administrative bodies and internal and external regulations. It is also responsible for supervising the internal control systems of the Group’s subsidiaries and ensuring that senior management and the relevant internal bodies and external regulators are promptly and systematically informed on the status of our control systems and on the outcome of our control activities. The Issuer performs a guidance and coordination role with respect to the Group companies, aimed at ensuring effective and efficient risk management at the Group level, setting the guidelines and methodological rules for risk management, and pursuing, in particular, integrated information at the Group level to the Corporate Bodies of the Issuer, with regard to the completeness, adequacy, functioning and reliability of internal control system. There are two different types of corporate control models within the Group: (i) the centralized management model, which centralizes activities at the Issuer level; and (ii) the decentralized management model, which coordinates locally established corporate control functions, that conduct their activities under the direction of the same corporate control functions of the Issuer to which they report. Irrespective of the control model adopted within their company, the corporate bodies of the Group companies are made aware of the choices made by the Issuer and are responsible for the implementation, within their respective organizations, of the control strategies and policies being pursued and promoting their integration within the Group controls.
With regard to the UBI Banca group, a decentralized management model has been applied, given the presence of local functions with standing and resources able to guarantee the sound and prudent management of the subsidiary’s risk. In particular, the corporate control functions of the Issuer and the subsidiary are expediting their sharing of approaches and tools to complete the integration of those frameworks, in order to benefit from possible synergies.
Basel III rules and capital adequacy Basel III With effect from January 1, 2014, the reforms of the accord by the Basel Committee (“Basel III”) were implemented in the EU. The aim of Basel III was to improve the banking sector’s ability to absorb shocks arising
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from financial and economic stress, whatever the source, improve risk management and governance, and strengthen banks’ transparency and disclosure. In doing so, the Basel Committee maintained the approach based on three pillars, which was the basis of the previous capital accord, known as “Basel II”, supplementing and strengthening Basel III by increasing the quantity and quality of intermediaries’ capital, as well as introducing counter-cyclical capital buffers, provisions on liquidity risk management and containment of leverage. The EU implemented “Basel III” through two legislative acts: EU Regulation 575/2013 of June 26, 2013 (CRR), which governs the prudential supervision requirements of Pillar 1 and public disclosure requirements (Pillar 3); and
Directive 2013/36/EU of June 26, 2013 (CRD IV), which concerns, among other things, access to the activity of credit institutions, freedom of establishment, freedom to provide services, supervisory review process and additional equity reserves. EU legislation is complemented by the provisions issued by the Bank of Italy, including in particular Circular No. 285, which contains the prudential supervision regulations applicable to banks and Italian banking groups, which was reviewed and updated to adapt such internal regulations for the new international regulatory framework, with special reference to the new regulatory and institutional structure of banking supervision of the European Union and taking into account the results from the supervision of banks and other intermediaries. In order to comply with the new rules under Basel III, the Group has launched project initiatives, expanding the objectives of the Basel II project in order to improve the measurement systems and related risk management systems. In December 2018, the Basel Committee published an update of the framework of Pillar 3 disclosure requirements, finalizing the Basel III post-crisis regulatory reforms which include new and revised requirements: (i) for credit risk (including provisions for prudential treatment of assets), operational risk, the leverage ratio and credit valuation adjustment; (ii) that would benchmark a bank’s risk-weighted assets (“RWAs”) as calculated by its internal models with RWA calculated according to the standardized approaches; and (iii) that provide an overview of risk management, key prudential metrics and RWA. Pillar 3, which concerns public disclosure on capital adequacy, risk exposure and the general features of the risk identification, measurement and management systems, was amended to introduce greater transparency requirements, more information on the composition of regulatory capital and the methods used by the banks to calculate capital ratios. In this regard, on December 14, 2016, the EBA published the first version of the “Guidelines on disclosure requirements under Part Eight of Regulation (EU) No. 575/2013” (EBA/GL/2016/11), subsequently updated on August 4, 2017. These guidelines aim to increase and improve the consistency and comparability of the information to be provided for Pillar 3, requiring, starting from December 31, 2017, the publication of new tables in the Pillar 3 disclosure, for G-SIBs and O-SIIs banks, specifying their frequency of publication, with detailed information on credit and counterparty risk, including risk mitigation techniques and credit quality, as well as market risk. Our Group publishes the Pillar 3 disclosure and subsequent updates on our website at the address: group.intesasanpaolo.com. The disclosure requirements for asset encumbrance, capital distribution constraints and the prudential treatment of problem assets have been implemented in 2020. The implementation deadline for the other disclosure requirements related to Basel III is January 1, 2022. In the aftermath of the COVID-19 Pandemic, in order to mitigate the possible negative effects of the current crisis and ensure disclosure regarding the areas affected by the containment measures adopted for that purpose, thereby promoting sufficient and suitable understanding of the risk profile of supervised institutions, on June 2, 2020, the EBA published the final version of the document “Guidelines to address gaps in reporting data and public information in the context of COVID-19” (EBA/GL/2020/07), which contains the guidelines for reporting and disclosure of exposures subject to the measures applied in response to the COVID-19 Pandemic, whose first-time application, for disclosure purposes, started on June 30, 2020 and therefore such disclosure has been added to our public disclosure in the “Credit risk: credit quality” section. Within the scope of the emergency scenario outlined above, Regulation (EU) 2020/873 of June 24, 2020, amending Regulations (EU) 575/2013 and Regulation (EU) 2019/876 containing temporary support provisions in terms of capital and liquidity, was published with an accelerated approval procedure (the “quick fix”). The
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Regulation (EU) 2020/873 of June 24, 2020 establishes that institutions that decide to apply the new transitional IFRS 9 rules relating to adjustments to loans after December 31, 2019, and/or the temporary treatment of unrealized gains and losses measured at fair value through other comprehensive income (FVOCI) in view of the COVID-19 Pandemic (the prudential filter for exposures to central governments classified as FVOCI) in addition to disclosing the information required in part eight of the CRR, are required to disclose the amounts of Own Funds, Common Equity Tier 1 capital and Tier 1 capital, the total capital ratio, the Common Equity Tier 1 capital ratio, the Tier 1 capital ratio, and the leverage ratio they would have in case they were not to apply that treatment. The Group has decided not to adopt the above-mentioned temporary treatment for the calculation of Own Funds as of December 31, 2020. Lastly, on December 23, 2020, Commission Delegated Regulation (EU) 2020/2176 entered into force, amending the Commission Delegated Regulation (EU) 241/2014 on the deduction of software assets from the Common Equity Tier 1 items. Such regulation, which is intended, inter alia, to support the transition to a more digitalized banking sector, introduces the criterion of prudential amortisation applicable to all software assets over a three- year period, regardless of their estimated useful lives for accounting purposes. The Group has applied the provisions of the above-mentioned regulation for the calculation of the capital ratios as at December 31, 2020. Capital adequacy The regulatory framework requires that Own Funds (or regulatory capital) are made up of the following tiers of capital:
Tier 1 capital, which is composed of: o Common Equity Tier 1 (CET1) capital; o Additional Tier 1 (AT1) capital; and
Tier 2 (T2) capital. Tier 1’s predominant element is Common Equity, mainly composed of equity instruments (e.g., ordinary shares net of treasury shares), share premium reserves, profit reserves, undistributed income for the period, valuation reserves, eligible minority interests, plus deducted elements. At present, with reference to the Intesa Sanpaolo Group, no equity instrument other than ordinary shares is eligible for inclusion in Common Equity. In general, the AT1 category includes equity instruments other than ordinary shares, meeting the regulatory requirements for inclusion in that level of Own Funds (e.g., savings shares). Tier 2 capital is mainly composed of eligible subordinated liabilities and any excess of credit risk adjustments over and above expected losses (the excess reserve) for positions weighted according to IRB approaches. Moreover, the new regulatory framework is being introduced gradually over a transitional period which is currently ongoing, during which several elements that, when the framework is in full effect, will be eligible for full inclusion in (or deduction from) Common Equity and will only have a partial percent effect on CET1 capital. Generally, the residual percentage, after the applicable portion, is included in/deducted from AT1 or T2, or is considered among risk-weighted assets. Except for Article 473, paragraph 4(e) of the CRR, relating to the amendments to be applied to IAS 19 at the end of 2018, the transition phase for the introduction of the “Basel 3” regulatory framework was completed as at December 31, 2017. It provided for the partial inclusion within or deduction from the Own Funds of certain items in accordance with the provisions of the CRD IV and the CRR. In addition, as at December 31, 2020, the Group no longer held any subordinated instruments subject to specific transitional rules (i.e. grandfathering, which would have ended in 2021) aimed at the gradual exclusion from Own Funds of instruments that do not meet the requirements of the new rules. In addition, to calculate risk-weighted assets, banks must weigh their assets and off-balance sheet exposures in relation to the nature of their debtors, country risk and the guarantees and collateral received. The various categories of assets are assigned different risk weightings depending on the nature of the counterparty and risk parameters (which may be based on internal models), subject to Bank of Italy (since 2014 ECB JST) validation.
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Italian banking groups are also required to maintain a ratio of Own Funds to total risk exposure amount (total capital ratio) of at least 8.0% fully loaded (on top of which 2.5% must be related to the capital conservation buffer) on a consolidated basis. Banks must comply with capital requirements for market risks on their whole trading book calculated separately for the various types of risk (e.g., position risk on debt securities and equities, settlement risk, and concentration risk). Moreover, with regard to their financial statements, banks must calculate foreign exchange risk and position risk on their commodities. The Issuer applies internal models to calculate general position risk (price fluctuation risk) and specific risk (issuer risk) for debt securities and for equities. Intesa Sanpaolo’s internal model also includes the calculation of the specific risk for certain types of credit derivatives in the trading book. Beginning in 2009, the scope of validated risks was extended to dividend derivatives, while the standard methods continue to be used for other risks. Internal model for counterparty risk has been validated from Bank of Italy starting from March 2014. In general terms, the group level capital requirement is calculated as the sum of the individual requirements of the single companies that make up the banking group, net of exposures arising from intragroup relations included in the calculation of credit, counterparty and settlement risk. In addition to the total capital ratio referred to above, other more rigorous ratios are also used to assess capital adequacy: the CET1 ratio, which is the ratio between CET1 capital and total risk exposure amount and the Tier 1 Capital ratio, which is the ratio between Tier 1 Capital and total risk exposure amount. Own Funds, risk-weighted assets and regulatory capital ratios as of December 31, 2020, December 31, 2019 and December 31, 2018 were calculated according to the harmonized rules and regulations for banks and investment companies contained in Directive 2013/36/EU (CRD IV) and in EU Regulation 575/2013 (CRR) of June 26, 2013, as amended, which transpose the banking supervision standards defined by the Basel III framework to European Union laws, and on the basis of Bank of Italy Circulars No. 285. Regulatory provisions governing Own Funds envisage the gradual introduction of the new regulatory framework, through a transitional period, during which several elements that will be eligible for full inclusion in or deduction from Common Equity when the framework is fully effective, will only have a partial percentage effect on CET1. Generally, the residual percentage, after the applicable portion, is included in/deducted from Additional Tier 1 capital (AT1) or Tier 2 capital (T2), or is considered among risk-weighted assets. Specific transitional provisions have also been established for subordinated instruments that do not meet the requirements envisaged in the new regulatory provisions, aimed at the gradual exclusion of instruments no longer regarded as eligible as Own Funds (over a period of eight years). Accordingly, certain historical prudential ratios take into account adjustments envisaged by the transitional provisions for 2019 and 2020. In addition to the above-mentioned regulatory initiatives, on November 23, 2016 the European Commission presented a package of reforms aimed at strengthening the resilience of EU banks (the “EU Banking Reform Package”) by amending certain provisions of the CRD IV and CRR as well as of the BRRD and SRM Regulation. With respect to capital adequacy and prudential requirements, the EU Banking Reform Package provides for: (i) the application of more risk-sensitive capital requirements, in particular in the area of market risk, counterparty credit risk, and for exposure to central counterparties; (ii) the implementation of methodologies that are able to reflect more accurately the actual risks to which banks are exposed; (iii) the imposition of a binding leverage ratio to prevent institutions from excessive leverage; and (iv) a binding NSFR to address the excessive reliance on short-term wholesale funding and reduce long-term funding risk. Additional measures are connected to the requirements to hold a minimum amount of loss-absorbing instruments and liabilities in accordance with the BRRD and SRM Regulation, as better detailed below. The text of certain Risk Reduction Measures (RRM) in the EU Banking Reform Package have been published in the Official Journal of the EU and entered into force on June 27, 2019. The package includes: Capital Requirements Regulation II or CRR II (Regulation (EU) 2019/876 of the European Parliament and of the Council of May 20, 2019 amending Regulation (EU) No 575/2013 with respect to the leverage ratio, the net stable funding ratio, requirements for Own Funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012). Specifically, the CRR II in Article 494(b) “Grandfathering of own funds instruments and eligible liabilities instruments”, introduced a new transitional regime, applicable until June 28, 2025, which allows own funds instruments
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– issued before June 27, 2019, which do not meet certain specific conditions – to qualify as AT1 and T2 instruments. For the Group, these transitional rules only applied to one T2 instrument, for a nominal amount of €1,250 million, issued in July 2010, which matured in July 2020;
Capital Requirements Directive or CRD V (Directive (EU) 2019/878 of the European Parliament and of the Council of May 20, 2019 amending Directive 2013/36/EU with respect to exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures);
Bank Recovery and Resolution Directive II or BRRD II (Directive (EU) 2019/879 of the European Parliament and of the Council of May 20, 2019 amending Directive 2014/59/EU with respect to the loss- absorbing and recapitalization capacity of credit institutions and investment firms and Directive 98/26/EC); and
Single Resolution Mechanism Regulation II or SRMR II (Regulation (EU) 2019/877 of the European Parliament and of the Council of May 20, 2019 amending Regulation (EU) No 806/2014 with respect to the loss-absorbing and recapitalization capacity of credit institutions and investment firms). For additional information, see “Supervision and Regulation—EU Banking Reform Package”. The table below sets forth the Own Funds attributable to our Group and minority interest shareholders as of December 31, 2020 and December 31, 2019 under Basel III framework.
As of As of December 31, December 31,
2020(1) 2019(2) (in € millions, except for percentages) Common Equity Tier 1 (CET1) before the application of prudential filters ...... 57,717 48,520 of which CET1 instruments subject to transitional adjustments ...... - - CET1 prudential filters ...... 706 641 CET1 before items to be deducted and effects of transitional period ...... 58,423 49,161 Items to be deducted from CET1...... (9,482) (10,209) Transitional period - Impact on CET1 ...... 2,129 2,590 Total Common Equity Tier 1 (CET1) ...... 51,070 41,542 Additional Tier 1 (AT1) before items to be deducted and effects of transitional period...... 7,486 4,096 of which AT1 instruments subject to transitional adjustments ...... - - Items to be deducted from AT1...... - - Transitional period - Impact on AT1, including instruments issued by subsidiaries and included in AT subject to transitional adjustments ...... - - Total Additional Tier 1 (AT1) ...... 7,486 4,096 Tier 2 ( T2) before items to be deducted and effects of transitional period ...... 9,632 7,244 of which T2 instruments subject to transitional adjustments ...... - - Item to be deducted from T2 ...... (255) (187) Transitional period – Impact on T2 (+/-)...... - - Total Tier 2 (T2) ...... 9,377 7,057 Total Own Funds ...... 67,933 52,695 Risk weighted assets...... 347,072 298,524 Ratios: Common Equity Tier 1 /Risk-weighted assets (CET1 capital ratio) ...... 14.7% 13.9% Tier 1 Capital / Risk-weighted assets (Tier 1 capital ratio) ...... 16.9% 15.3% Total Own Funds / Risk-weighted assets (Total capital ratio) ...... 19.6% 17.7% ______(1) Figures from the Basel Pillar 3 as of December 31, 2020. (2) Figures from the Basel Pillar 3 as of December 31, 2019.
The Group has decided not to adopt the temporary treatment for the calculation of Own Funds provided for in order to mitigate the possible negative effects of the COVID-19 Pandemic as at December 31, 2020. For further information about own funds, please see “Risk Management—Basel III rules and capital adequacy— Basel III.”
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The table below sets forth the Own Funds attributable to our Group and minority interest shareholders as of December 31, 2020 with regard to the impacts of IFRS 9 on a transactional and a fully loaded basis.
(1) As of December 31, 2020 IFRS 9 IFRS 9 transitional fully loaded (in € millions, except for percentages) Total Common Equity Tier 1 (CET1) ...... 51,070 48,941 Total Additional Tier 1 (AT1)...... 7,486 7,486 Total Tier 2 (T2) ...... 9,377 10,346 Total Own Funds ...... 67,933 66,773 Risk weighted assets...... 347,072 348,519 Ratios: Common Equity Tier 1 /Risk-weighted assets (CET1 capital ratio) ...... 14.7% 14.0% Tier 1 Capital / Risk-weighted assets (Tier 1 capital ratio) ...... 16.9% 16.2% Total Own Funds / Risk-weighted assets (Total capital ratio) ...... 19.6% 19.2% ______(1) Figures from the 2020 Unaudited Annual Financial Information.
The CET1 capital included the net income for the year ended December 31, 2020, since the conditions for its inclusion were met in accordance with Article 26(2) of the CRR. Net income for the years ended December 31, 2019 and December 31, 2020 was included in CET1 capital (only as the relative pro-rata dividend for the period), because we elected to apply the provision of Article 26 of the CRR and include the net income for the period only in case it exceeds the total amount of the planned dividend distribution for the year (equal to €0 for 2019 and €694 million for 2020, according to ECB Recommendation on dividend distributions during the COVID-19 Pandemic). Based on the foregoing, for the year ended December 31, 2020, our Total capital ratio was 19.2% on a fully loaded basis and 19.6% on a transitional basis (compared to 17.7% as of December 31, 2019), while our Tier 1 ratio was 16.2% on a fully loaded basis and 16.9% on a transitional basis (15.3% as of December 31, 2019). The ratio of our CET1 capital to risk-weighted assets (the Common Equity ratio) was 14.0% on a fully loaded basis and 14.7% on a transitional basis (13.9% as of December 31, 2019).
Supervisory Review and Evaluation Process In 2018, the ECB conducted a prudential Supervisory Review and Evaluation Process (“SREP”) on a number of Italian and European banks, including the Issuer. On November 25, 2020, the Issuer received the ECB’s final decision concerning the capital requirement that the Group has to meet, as of January 1, 2021. The overall capital requirement the Group has to meet in terms of Common Equity Tier 1 ratio is 8.59% for 2021 on a fully loaded basis. This is the result of: (i) an SREP requirement in terms of Total Capital ratio of 9.5%, comprising a minimum Pillar 1 capital requirement of 8%, and an additional Pillar 2 capital requirement of 1.5%, of which 4.5% and 0.84%, respectively, in the Common Equity Tier 1 ratio and 6% and 1.13%, respectively, in the Tier 1 ratio; (ii) the additional Capital Conservation Buffer requirement of 2.5% on a fully-loaded basis already from 2019 and the additional O-SII Buffer (Other Systemically Important Institutions Buffer) of 0.75% on a fully-loaded basis in 2021.
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Considering the additional requirement consisting of the Institution-Specific Countercyclical Capital Buffer, the Common Equity Tier 1 ratio to be met is 8.63% on a fully loaded basis.
The table below contains our CET1 capital ratio on a consolidated basis as of December 31, 2020 and December 31, 2019 compared to the regulatory requirements.
Minimum SREP requirement (as As of December As of December of December 31, 31, 2020 31, 2019 2020)
Common Equity Tier 1 /Risk-weighted assets (CET1 capital ratio) . 16.9% 15.3% 8.63%
Credit risk Credit risk is the risk of losses due to the failure on the part of our Group’s counterparties to meet their payment obligations to our Group. Credit risk refers to all claims against customers, arising mainly from loans, but also liabilities in the form of other extended credit, guarantees, interest bearing securities, approved and undrawn credit, as well as counterparty risk arising through derivatives and foreign exchange contracts. Credit risk also consists of concentration risk, country risk and residual risks, both from securitizations and uncertainty regarding credit recovery rates. Credit risk is the chief risk category for our Group. The Group’s strategies, powers and rules for the granting and managing of loans are aimed at:
achieving sustainable growth of lending operations consistent with our risk appetite and value creation; diversifying the portfolio, limiting the concentration of exposures on single counterparties/groups, single economic sectors or geographical areas;
efficiently selecting economic groups and individual borrowers through a thorough analysis of their creditworthiness aimed at limiting the risk of insolvency;
privileging lending business aimed at supporting the real economy and production system; and
monitoring relationships, through the use of both IT procedures and systematic surveillance of positions, with the aim of detecting any symptoms of imbalance and promoting corrective measures geared towards preventing possible deterioration of the relationship in a timely manner. Monitoring of the quality of the loan portfolio is also pursued through specific operating checks at all phases of loan management. Counterparty risk is a particular kind of credit risk associated with over-the-counter (“OTC”) derivative contracts that refers to the possibility that a counterparty may default before the contract matures. This risk, which is often referred to as replacement risk, is realized when the market value of a position has become positive and thus, should the counterparty default, the solvent party would be forced to replace the position on the market, thereby suffering a loss. Counterparty risk also applies to securities financing transactions (repurchase agreements, securities lending, etc.). Organization structure Within the Group, a fundamental role in managing and controlling credit risk is played by the corporate bodies, which, to the extent of their respective competences, ensure adequate coverage of credit risk by setting strategic guidelines and risk management policies, verifying that they remain constantly efficient and effective and assigning tasks and responsibilities to the company functions and units involved in the processes. The coverage and governance of credit ensured by the corporate bodies is reflected in the current organizational structure, which identifies areas of central responsibility attributable as described below.
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The Chief Lending Officer Governance Area (i) assesses the creditworthiness of the credit proposals received and approves or issues a compliance opinion, where applicable; (ii) supervises the proactive management of credit and the management and the monitoring of non-performing loans; (iii) manages the corporate crises of its customers, through business and financial restructuring instruments; (iv) analyzes the loan portfolio and the evolution of the cost of credit within the Group; (v) sets the rules for credit granting and for non-performing loans; (vi) assigns ratings to positions requiring specialist valuations and assesses proposals for improvement overrides made by the competent structures; (vii) defines the operational processes for credit; (viii) manages the non-core assets in line with the Group’s objectives, with a view to progressive reduction and disposal, including in collaboration with the other functions involved; and (ix) monitors Intrum Italy, and ensures the coordination of the Intesa Sanpaolo RE.O.CO. and Intesa Sanpaolo Provis. The Chief Risk Officer is responsible for adapting the Risk Appetite Framework for the management of credit risk, in accordance with the Issuer’s strategies and objectives, as well as for measuring and controlling the Group’s risk exposure. The Chief Risk Officer also establishes the metrics for the measurement of credit risk – both with regard to the collective measurement of performing loans and the measurement of non-performing loans on a statistical basis -, provides risk-adjusted pricing models and guidance on expected loss, economic capital (ECAP) and RWAs, monitors the capital absorption relating to credit risk, supporting the Chief Financial Officer Governance Area in the active management of capital and makes proposals for the allocation of credit granting and management powers. The Chief Risk Officer sees to the validation of internal risk measurement systems, governs the model risk and performs level 2 controls for credit risk. With regard to the credit management policies, the Chief Financial Officer Governance Area (i) assists the Group’s corporate bodies in defining, in accordance with the Group’s corporate strategies and objectives, guidelines and policies on administration, planning and management control, studies and research, active management of the loan portfolio, relations with investors and rating agencies, and social and environmental responsibility; (ii) oversees Credit Portfolio Management at the Group level, supporting the divisions in the active management of credit risk, with the aim of improving the risk-return profile of the loan portfolio in order to create value for shareholders, through targeted credit strategies and participation in market operations on performing and non-performing loan portfolios; and (iii) oversees the coordination of the “Group NPL Plan Control Room”, a managerial body with consulting, monitoring and guidance functions, established to ensure that the strategic targets of the Group’s NPL Plan, approved annually by the Issuer’s Board of Directors, are achieved in compliance with the performance goals, solidity of the capital ratios and creation of value for the Group. The Chief IT, Digital and Innovation Officer establishes the model for and oversees the Group’s Data Governance and Data Quality system, is responsible for the dissemination and implementation of the system, and coordinates the activities of the relevant parties involved. The Internal Auditing Head Office Department performs internal audits aimed at identifying breaches of the procedures and regulations and periodically assessing the completeness, adequacy, functioning (in terms of efficiency and effectiveness) and reliability of the internal control system and the ICT system (ICT audit), at preset intervals according to the nature and extent of the risks. Management, measurement and control systems Intesa Sanpaolo has developed a set of instruments that ensures analytical control over the quality of the loans to customers and financial institutions, and loans subject to country risk. Risk measurement uses rating models that are differentiated according to the borrower’s segment (Corporate, SME Retail, Retail, Sovereigns, Italian public sector entities, and Banks). These models make it possible to summarize the credit quality of the counterparty in a measurement, the rating, which reflects the probability of default over a period of one year, adjusted on the basis of the average level of the economic cycle. These ratings are then made comparable with those awarded by rating agencies, by means of a consistent scale of reference. In 2010, the Group began using the IRB model for the Corporate segment. Now the Group uses a number of rating models, including those differentiated according to the market (domestic or international) and size of the company as well as more specific models used for specialized lending, real estate initiatives, project finance transactions and leverage buy out/acquisition and asset finance transactions. Ratings are generally assigned on a decentralized basis by a relationship manager, who is the main figure in the process of assigning a rating to a
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counterparty. Any improvement on the calculated rating (so-called “override proposal”) is validated by a Specialist Rating Sub-Department allocated within the Credit Coordination Head Office Department. The Specialist Rating Sub-Department is responsible for the task of assigning what are known as “centralized ratings” provided for in the rating assignment processes according to the corporate method and of intervening in the calculation of ratings with specialist models. In 2010, the Group began using the IRB model for the Retail Mortgage segment (residential mortgages for private individuals). For other products aimed at individuals (Other Retail segment), the Group has used a managerial model until 2018. In 2018, the Group received authorization by the relevant regulatory authorities to use the IRB model for the entire Retail segment (Mortgages and Other Retail). The new model, made up of mortgages segment (model change) and other retail segment (first adoption), adopts for the mortgages a counterparty approach in place of the previous product approach, uses a massive approach on the total portfolio, and distinguishes clients in new clients, clients with a credit line, clients without a credit line. The Group’s rating model for Sovereigns assigns creditworthiness ratings to over 260 countries. The model’s structure includes a quantitative component for assessing country risk (which takes into account the structural rating assigned to a country by leading international rating agencies, implicit risk in market quotations of sovereign credit default swaps and bonds, and a macroeconomic model for more than 130 countries) and a qualitative component (which includes a qualitative opinion taking into consideration elements drawn from the broader scope of publicly available information concerning the political and economic structures of individual countries). Two models are available for Banks: banks in mature economies and banks in emerging countries. Countries are assigned a rating, which is the synthesis of different components, such as systemic risk, specific country risk (for Banks most closely correlated with country risk), and a model (the “relationship manager’s judgement”) that allows the rating to be modified in presence of certain conditions. In the Public Sector Entities segment, the reference models have been differentiated in relation to the type of counterparty. Default models have been developed for municipalities and provinces and shadow rating models for regions. An approach to extend the rating of the regulatory Entity (e.g., Region) has been adopted for local healthcare authorities, with possible changes dependent on the valuation of financial statement. The SME Retail rating models apply to the entirety of the small business retail sector, identified on the basis of two criteria defined at the regulatory level (exposure of the banking group under €1 million) and at the group level (with individual or economic group revenue of under €2.5 million). The counterparties are divided into “micro business” and “core business”, based on objective criteria. The definition of default (impairment) includes past due, unlikely to pay and bad loans, net of technical defaults. Both models encompass a quantitative model and a qualitative model. The difference of the model for micro business is based on the following variables: “existing customer/new customer” (according to the presence of the internal performance indicator on counterparty risk) and legal form (firm or partnership/joint-stock company). The information used to assess creditworthiness varies depending on the type of customer. A combination of the different basic calculation models provides the quantitative score. These basic models consider personal details, financial statement data for joint-stock companies, tax return for sole proprietorships and partnerships, risks to the Group and to the credit system and, finally, data on the financial assets of the customer and the joint and related parties, which allow significant refinement in the treatment of new customers and borrowers. The qualitative model is based on a qualitative questionnaire. The weights of questions and answers have been statistically estimated. It differs in terms of number of questions and weight between the micro and core rating model, in order to more accurately capture the segments’ specificities. Furthermore, a specific set of questions has been drawn up for new customers and newly-formed counterparties, aiming to enhance the specific soft information known by the managers and their contribution, in terms of experience, to the assessment for this type of counterparty. A statistically estimated matrix combines and integrates the quantitative rating and the qualitative score. Rating models have been adopted for the counterparties of the International Subsidiary Banks, partly derived from the Issuer and adapted to the local environment and partly developed by the Subsidiaries concerned. We have also developed “loss given default” models (“LGD” models), which are based on the concept of “Economic LGD”, to calculate the present value of the cash flows obtained in the various phases of the recovery
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process net of any administrative costs directly attributable to the exposure as well as the indirect management costs incurred by the Group. This approach involves:
estimate of a Doubtful LGD Model: starting from the LGD observed on the portfolio, namely “Workout LGD”, determined on the basis of the recoveries and costs, a regression econometric model of the LGD is estimated on variables considered to be significant for the determination of the loss associated to the default event; application of a correction factor, known as the “Danger Rate”: the Danger Rate is a multiplying correction factor, used to recalibrate Doubtful LGD with the information available on the other default events, in order to calculate an LGD representative of all the possible default events and their evolution; and
application of an additional correction factor, known as the “Final Settlement Component”: this component is used as an add-on to the estimate recalibrated for the Danger Rate in order to consider the loss rates associated with positions not evolved to the Doubtful Loan status (unlikely-to-pay or past-due positions). LGD is determined according to differentiated models, characterized by operating segment (Corporate, SME Retail, Retail, Factoring, Leasing, and Public Entities). For banks, the LGD calculation model partly diverges from the models developed for other segments, as the estimation model used is based on the market price of debt instruments observed 30 days following the official date of default and relating to a sample of defaulted banks from all over the world, which is provided by an external provider. The levels of autonomy assigned to the decision-making bodies are determined in terms of credit approval limits of the Bank/Banking Group with respect to the counterparty/economic group. The rating attributed together with any credit-risk mitigating factor, affects the determination of the credit limits for all credit approval bodies. The Issuer, as the parent company, has set out codes of conduct in relation to credit risk acceptance in order to prevent excessive concentrations, limit potential losses and maximize credit quality. Through specific control, guidance and coordination activities, the internal validation and controls head office department, within the Chief Risk Officer Governance Area, oversees the credit granting and management processes for the performing loans portfolio at the Group level and through controls on individual positions assesses that loans are properly classified. It also assesses the compliance of the internal risk measurement and management systems over time in determining the capital requirements for regulatory provisions, company needs and changes in the relative market. As far as regulatory capital for counterparty risk is concerned, Intesa Sanpaolo and Mediocredito Italiano are authorized to use an internal model to estimate the exposure at default both for derivative instruments and for securities financing transactions. An advanced methodology is also in place for managerial purposes, including the definition and measurement of credit lines for substitution risk. Counterparty risk is measured in terms of potential future exposure by the Risk Management Department and is monitored both in terms of individual and aggregate exposures by the credit department. In order to manage risk effectively, the risk measurement system is integrated into decision-making processes and the management of company operations. The Bank of Italy has authorized the use of the internal model for counterparty risk for regulatory purposes by the Issuer, banks belonging to the Banche dei Territori division (later incorporated in the Issuer) and Mediocredito Italiano for OTC derivatives. The same model has been authorized for securities financing transactions. Moreover, a stress program has been implemented in order to monitor the impact of extreme market movements on the counterparty risk measures. Back testing analysis is in place in order to assess the model reliability. Specifically, the following measures were defined and implemented:
Current Exposure: represents the amount presently owed to the bank taking into account enforceable netting and collateral agreements; Potential Future Exposure (“PFE”): is a prudential measure used for credit monitoring purposes. It evaluates the evolution of the credit exposure over time (i.e. positive mark-to-market) with a 95%
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confidence level. PFE is calculated for each counterparty on a day-to-day basis by a risk management calculation engine, and then sent to a credit monitoring engine;
Expected Positive Exposure (“EPE”): is a regulatory measure. It evaluates the weighted average for the expected time of the credit exposure, where the weightings are the portions that each time step represents of the entire time period; and
Credit Value Adjustment (“CVA”) Capital Charge: is calculated as the sum between the CVA Value at Risk (“VaR”), calculated on the movements in credit spreads of counterparties registered in the last year, and that calculated on the movements during a stress period that has currently been identified as the 2011-2012 period. Techniques for the mitigation of credit risk Our Group’s mitigation techniques are adopted in order to reduce losses following defaults. They include guarantees and certain types of contracts that result in a reduction in credit risk. Mitigating techniques are evaluated by a procedure that assigns a loss given default to each individual exposure, assuming the highest values in the case of ordinary non-guaranteed financing and decreasing in accordance with the strength given to any mitigating techniques present. The loss given default values are subsequently aggregated at the customer level in order to provide a summary evaluation of the strength of the mitigating factors on the overall credit relation. Our Group employs counterparty risk mitigation techniques for regulatory purposes. To mitigate the counterparty risk associated with OTC (i.e. unregulated) derivatives and SFTs (securities financing transactions, i.e. securities lending and repurchase agreements), our Group uses bilateral netting agreements that allow for credit and debt positions to be netted against one another if a counterparty defaults. This is achieved by entering into ISDA (International Swaps and Derivatives Association) agreements, which also reduce the absorption of regulatory capital in accordance with supervisory provisions. Our Group also enters into collateral agreements, typically calling for daily margins, to cover transactions in OTC derivatives and SFTs (respectively the Credit Support Annex and Global Market Repurchase Agreement or Global Market Security Lending Agreement). Credit quality Credit quality is monitored by managing the specific risk of each counterparty, as well as the overall risk of the loans portfolio. Such activities are performed using measurement methods and performance controls that permit the construction of a synthetic risk trend indicator on a monthly basis. This indicator interacts with our Group’s processes and procedures for loan management (periodic reviews, loan applications and non-performing loans) and for credit risk control and provides timely assessments when any anomalies arise or persist. Those positions to which the synthetic risk trend index assigns a persistent high-risk rating are intercepted (manually or automatically) and subjected to a non-performing loan review, which results in those positions that show an anomalous trend being automatically or manually qualified as non-performing assets and included in an operational category based on their risk profile. They are classified in certain categories (applying regulations issued by the Bank of Italy, consistent with Basel III regulations and IAS/IFRS, as supplemented by our Group provisions) as described further in “Selected Statistical Information—Risk elements in the loan portfolio: Loan classification—Loan Classification”. With regards to the positions of non-performing loans, excluding doubtful loans, the monitoring is carried out by internal organizational structures identified on the basis of pre-determined relevance thresholds of increasing significance, directly at the operating points that handle such accounts, or within peripheral organizational units that perform specialist activities within the Head Office Departments, which are responsible for the overall management and coordination of these matters. Loans in these categories are subject to impairment testing (individual measurement process or for homogenous categories, according to their amount or risk profile) and the incurred losses on such loans appear on our income statement in the form of an adjustment which, for a given loan, is equal to the difference between the carrying value of such loan at the time of measurement (amortized cost) and the present value of expected future cash flows, discounted using the original effective interest rate. These adjustments are then recorded in the income statement of our Financial Statements under “net losses/recoveries on impairment”. On the reclassified income
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statement of our Unaudited Restated and Reclassified Financial Information, these adjustments appear as “net adjustments to loans” (apart from the time value component of the adjustments, which is recorded as part of “net interest income” in our Unaudited Restated and Reclassified Financial Information). The Group has in place an organizational model for the management of doubtful loans which assigns the responsibility to the Loan Recovery Head Office Department of Intesa Sanpaolo Group Services of coordinating all loan recovery activities and direct management (for Intesa Sanpaolo and all banks within the Banca dei Territori business segment) of the portfolio already managed and of all new customers classified as doubtful, except the unsecured ones showing exposures below €100,000. In particular, this model calls for:
direct management by three external servicers (for Intesa Sanpaolo and almost all banks within the Banca dei Territori business segment) – under a specific mandate and with pre-defined limits – of customers classified as doubtful showing an unsecured exposure below the aforementioned threshold amount (the activity of said servicers is coordinated and monitored by the Loan Recovery Head Office Department); for unsecured doubtful positions of limited amounts and routine factoring without recourse to third-party companies on a monthly basis when they are classified as doubtful, with some specific exceptions; and
the interruption of the attribution of new doubtful loans to Italfondiario. The Loan Recovery Department draws on its own specialist units throughout the country to manage recovery activity for loans entrusted directly to it. As part of these activities, in order to identify the optimal strategies to be implemented for each position, judicial and non-judicial solutions are examined in terms of costs and benefits, also considering the financial impact of estimated recovery times. The Internal Validation and Controls Head Office Department of the Chief Risk Officer Governance Area carries out second level controls on single positions, to verify the proper classification and provisioning. Controls were also carried out on doubtful loans with provisioning calculated using LGD grids, in accordance with the internal validation framework for backtesting of accounting LGD applied to doubtful positions (LGD defaulted assets). For further information on loan classification policies and procedures of our Group, see “Selected Statistical Information—Loan loss experience—Credit quality”. Derivatives In determining the fair value of our derivatives portfolio, we consider not only market factors and the nature of the contract (e.g., maturity, type of contract, etc.), but also the credit quality of the counterparty and future exposures under the contract. The fair value of derivative financial instruments entered into with customers was determined considering, as for all other OTC derivatives, the creditworthiness of the single counterparty (“Bilateral Credit Value Adjustment”). The impact of the Bilateral Credit Value Adjustment is recorded in the income statement under “profits (losses) on trading”. For contracts outstanding as of December 31, 2020, this led to a negative effect in the income statement of €50 million. Considering relations with customers only, as of December 31, 2020, our Group recorded a positive fair value, gross of netting arrangements, of €8,934 million which, net of the contribution of the UBI Banca group for €234 million, was equal to €8,700 million (compared to €7,694 million as of December 31, 2019) in relation to derivatives trading with retail customers, non-financial companies and public entities (therefore excluding banks, financial and insurance companies). The notional value of these derivatives totalled €75,296 million which, net of the contribution of the UBI Banca group for €6,783 million, was equal to €68,513 million (compared to €62,528 million as of December 31, 2019). In particular, the notional value of plain vanilla contracts was equal to €69,636 million, which, net of the contribution of the UBI Banca group for €6,783 million, amounted to €62,853 million (compared to €58,403 million as of December 31, 2019), while the notional value of structured contracts was equal to €5,660 million (compared to €4,125 million as of December 31, 2019). As a measure of our exposure to our principal counterparties, we determined that, of these contracts, the positive fair value of all contracts in force with the
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10 customers with the highest exposures was €5,802 million as of December 31, 2020 compared to €5,269 million as of December 31, 2019), of which €543 million (compared to €476 million as of December 31, 2019) refer to structured contracts. Conversely, the negative fair value of all contracts in force with the same type of counterparties was €1,460 million as of December 31, 2020 (compared to €1,410 million as of December 31, 2019), which, net of the contribution of the UBI Banca group for €2 million, amounted to €1,458 million (compared to €1,410 million as of December 31, 2019). The notional value of these derivatives was equal to €19,222 million w hich, net of the contribution of the UBI Banca group for €712 million, amounted to €18,510 million (compared to €20,334 million as of December 31, 2019). In particular, the notional value of plain vanilla contracts was equal to €23,649 million (compared to €17,392 million as of December 31, 2019), while the notional value of structured contracts was equal to €1,413 million (compare to €2,942 million as of December 31, 2019) The following table provides an overview of the notional values of our Group’s derivatives (excluding credit derivatives) for the years ended December 31, 2020 and 2019, broken down by product type and underlying asset, purpose (trading or hedging) and whether such derivatives were traded OTC or on an exchange (through central counterparties).
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Financial trading derivatives: period-end notional amounts
(millions of euro) Underlying asset/Type of December 31, 2020 December 31, 2019 derivatives Over the counter Organized Over the counter Organized markets markets Central without central Central without central counterparties Counterparties counterparties Counterpartie s With netting Without With netting Without netting agreements netting agreements agreements agreements
1. Debt securities and interest rate 1,850,843 277,526 75,307 162,222 1,638,170 171,607 56,717 211,811 a) Options - 81,269 7,722 54,385 - 83,974 7,429 63,006 b) Swaps 1,850,843 196,257 64,170 - 1,638,170 87,633 47,391 - c) Forwards - - 2,484 - - - 1,897 - d) Futures - - 931 107,837 - - - 148,805 e) Other ------
2. Equities and stock indices - 6,828 31,621 1,897 - 9,152 16,504 23,392 a) Options - 6,515 31,608 401 - 9,152 16,491 21,046 b) Swaps - 313 13 - - - 13 - c) Forwards - - - 7 - - - - d) Futures - - - 1,489 - - - 2,346 e) Other ------3. Foreign exchange rates and gold - 158,342 20,387 375 - 189,826 19,479 339 a) Options - 17,135 1,232 117 - 26,439 888 80 b) Swaps - 52,006 5,701 16 - 55,590 6,355 - c) Forwards - 88,952 12,860 - - 107,501 11,815 8 d) Futures - - - 242 - - - 250 e) Other - 249 594 - - 296 421 1
4. Commodities - 2,993 740 1,685 - 7,342 912 1,637
5. Other ------
Total 1,850,843 445,689 128,055 166,179 1,638,170 377,927 93,612 237,179
Financial hedging derivatives: period-end notional amounts
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(millions of euro) Underlying asset/Type of derivative 31.12.2020 31.12.2019 Over the counter Organize Over the counter Organized d markets markets Central Without central Central Counterparties Without central Counterpartie counterparties counterparties s With Without With Without netting netting netting netting agreements agreements agreements agreements 1. Debt securities and interest rates 225,066 25,626 5,617 - 21,477 184,377 6,235 - a) Options - 2,229 - - - 2,689 - - b) Swaps 225,066 22,827 4,173 - 21,477 181,668 4,645 - c) Forwards - 550 1,444 - - - 1,590 - d) Futures ------e) Others - 20 - - - 20 - - 2. Equities and stock indices ------a) Options ------b) Swaps ------c) Forwards ------d) Futures ------e) Other ------3. Foreign exchange rates and gold - 7,425 31 59 - 6,682 36 136 a) Options ------b) Swaps - 7,425 31 59 - 6,682 36 136 c) Forwards ------d) Futures ------e) Other ------4. Commodities ------5. Other ------TOTAL 225,066 33,051 5,648 59 21,477 191,059 6,271 136 The average notional amount in the year of the financial hedging derivatives was equal to €184,802 million. The following table provides an overview of the positive and negative fair values of our Group’s derivatives (excluding credit derivatives) for the years ended December 31, 2020 and 2019, broken down by product type and underlying asset, purpose (trading or hedging) and whether such derivatives were traded OTC or on an exchange.
Financial trading derivatives: gross positive and negative fair value – breakdown by product
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(millions of euro) Type of derivative 31.12.2020 31.12.2019 Over the counter Organized Over the counter Organized Central Without central markets Central Without central markets Counterparties counterparties Counterparties counterparties With Without With netting Without netting netting agreements netting agreements agreements agreements
1. Positive fair value a) Options - 2,426 774 45 - 2,466 95 581 b) Interest rate swaps 51,707 14,225 7,368 - 36,322 12,697 6,724 - c) Cross currency swaps - 1,254 353 - - 1,379 262 - d) Equity swaps - 3 6 - - - 4 - e) Forwards - 1,282 153 - - 917 82 - f) Futures ------g) Other - 173 60 1 - 257 68 1
Total 51,707 19,363 8,714 46 36,322 17,716 7,235 582 2. Negative fair value a) Options - 2,393 6,404 18 - 2,499 4,772 1,155 b) Interest rate swaps 52,369 19,447 1,124 - 41,748 12,633 789 - c) Cross currency swaps - 1,542 778 - - 1,421 840 - d) Equity swaps - 1 - - - - 1 - e) Forwards - 1,120 260 - - 847 93 - f) Futures ------g) Other - 173 62 1 - 262 70 -
Total 52,369 24,676 8,628 19 41,748 17,662 6,565 1,155
Financial hedging derivatives: gross positive and negative fair value – breakdown by product
(millions of euro) Type of derivative Positive and negative fair value Change in value used to calculate hedge effectiveness
Total 31.12.20120 Total 31.12.2019 Over the counter Over the counter
Total Total Without central Without central counterparties counterparties 31.12.2020 31.12.2019 With Without With Without netting netting netting netting agreements agreements agreements agreements
Central Counterparties Organizedmarkets Central Counterparties Organizedmarkets Positive fair value a) Options - 10 - - - 19 - - -155 -183 b) Interest rate swap 3,082 834 1 - 392 2,583 11 - 2,682 2,127 c) Cross currency swap - 287 - - - 385 - - 103 116 d) Equity swap ------e) Forwards - - 1 - - - 28 - - - f) Futures ------g) Other - 1 - - - 1 - - - -
Total 3,082 1,132 2 - 392 2,988 39 - 2,630 2,060 Negative fair value a) Options - 3 - - - 4 - - 3 1 b) Interest rate swap 9,455 2,626 161 - 907 8,039 141 - 8,871 6,242 c) Cross currency swap - 407 5 - - 397 1 - 204 356 d) Equity swap ------e) Forwards - - 12 ------f) Futures ------g) Other - - - 2 - - - 3 - -
Total 9,455 3,036 178 2 907 8,440 142 3 9,078 6,599
The following table provides an overview of the notional values of our Group’s credit derivatives for the year ended December 31, 2020 (with comparative totals as of December 31, 2019), broken down by product type, purpose (trading or hedging) and whether such derivatives were entered into with a single counterparty or with multiple counterparties.
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Regulatory trading book (1) Banking book—hedging(1) Multiple Multiple Single counterparties Single counterparties counterparty (basket) counterparty (basket) (in € millions) Protection purchases(2) Credit default products...... - - Credit spread products ...... 7,072 58,781 - - Total rate of return swap ...... - - - - Others ...... - - - - Total as of December 31, 2020 ...... - - - - Total as of December 31, 2019 ...... 7,072 58,781 - - Protection sales(3) 9,019 50,385 - - Credit default products...... - - Credit spread products ...... 7,253 51,887 - - Total rate of return swap ...... - - - - Others ...... - - - - Total as of December 31, 2020 ...... - - - - Total as of December 31, 2019 ...... 7,253 51,887 - - ______(1) Figures from the 2020 Audited Financial Statements. (2) Protection purchases are the commitments of our counterparties to pay our Group in the event of a reference asset default in connection with a credit derivative. (3) Protection sales are our commitments to pay counterparties in the event of a reference asset default in connection with a cre dit derivative. As at 31 December 2020, none of the contracts shown in the table above have been included within the structured credit products. The following table provides an overview of the positive and negative fair values of our Group’s credit derivatives for the years ended December 31, 2020 and 2019 broken down by product type. The credit derivatives below were part of our regulatory trading book. During the periods presented, we did not record any credit derivatives in our Group’s banking book for hedging purposes.
Positive fair value Negative fair value As of December 31, Regulatory trading book 2020(1) 2019(2) 2020(1) 2019(2) (in € millions) Credit default products ...... 1,616 1,770 1,759 1,942 Credit spread products ...... - - - - Total rate of return swap ...... - - - - Total ...... 1,616 1,770 1,759 1,942 ______(1) Figures from the 2020 Audited Financial Statements. (2) Figures from the 2019 Audited Financial Statements presented in 2020.
As at 31 December 2020, none of the contracts shown in the table above have been included within the structured credit products. Structured credit products We hold a portfolio of structured finance products, including various types of mortgage-backed securities. As of December 31, 2020, the risk exposure to structured credit products amounted to €2,729 million, compared to €3,794 million as of December 31, 2019, with respect to funded and unfunded ABSs/CDOs. The decrease in funded and unfunded ABS/CDO exposure (from €3,019 million as of December 31, 2019, to €1,972 million as of December 31, 2020) classified in the trading portfolio is mainly due to the lower level of investments compared to the disposals mainly made by IMI Corporate & Investment Banking Division in the financial assets held for trading portfolio and, to a lesser extent, in the assets measured at fair value through other comprehensive income portfolio, in addition to the investments made by the Issuer primarily in the financial assets held for trading portfolio.
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As of December 31, 2020 and December 31, 2019, with regard to the “Monoline risk” and “Non-monoline packages”, there were no positions because they have been disposed of in 2017, generating a contribution of €7 million as of December 31, 2017. Special purpose entities Special purpose entities (“SPEs”) are set up for specific financing purposes and generally do not enter into operating activity or have any employees. We use SPEs for various purposes, including for structured finance transactions such as project finance, asset backed purchases, leverage and acquisition finance and credit derivatives, as well as securitization.
Structured finance SPEs These SPEs carry out investment and funding transactions structured to achieve better risk/return results than those generated by standard transactions, through special structures aimed at optimizing accounting, tax and/or regulatory aspects of the transaction. We organize structured finance SPEs in the following categories: (i) Project Financing SPEs, which are financing instruments for capital intensive projects, which are based on the economic or financial validity of the industrial or infrastructural project, and are independent from the standing/creditworthiness of the sponsors who developed the “entrepreneurial” idea, (ii) Asset Backed SPEs, which are transactions aimed at acquisition/construction/management of physical assets by SPEs financed by one or more entities, and (iii) Leveraged & Acquisition Finance SPEs, which are mainly positions in support of leveraged buy-out projects. Securitization SPEs These are funding SPEs that enable an entity to raise funds through a securitization. In a typical asset securitization transaction, we sell financial assets to an SPE, which funds its purchase of those assets by issuing asset backed securities to investors. We also engage in “self-securitization” transactions, in which we purchase the asset backed securities issued by the SPE.
The tables below show our exposure to securitizations in the Banking group, broken down by quality of the underlying asset and by whether the exposure is on- or off-balance sheet, as of December 31, 2020.
On-balance sheet exposures(1) Senior exposure Mezzanine exposure Junior exposure Book Adjust./ Book Adjust./ Book Adjust./ value recoveries value recoveries value recoveries (in € millions) A. Fully derecognized for prudential and financial statement purposes(2) ...... 3,469 -12 238 - 188 -127 B. Partly derecognized for prudential and financial statement purposes ...... ------C. Not derecognized for prudential and financial statement purposes(3) ...... 21,187 -53 223 -11 367 -6 Total ...... 24,656 -65 461 -11 555 -133 ______(1) Figures from the 2020 Audited Financial Statements.
Country Risk Country risk for non-sovereign entities is an additional component of an individual borrower’s insolvency risk and takes the form of transfer risk. This component is linked to losses potentially resulting from international lending operations caused by events in a country that are partly or entirely within the control of the government concerned, but not that of the individual residents of the country in question, and is measured through an internal model for transfer risk which also considers the sovereign state’s creditworthiness. Country risk for sovereign entities is not an additional component and is linked to the loss due in the event that the government cannot service its own debt because it does not have the required amount of funds or is unwilling to service its debts and is measured through an internal model for sovereign risk. The country risk component is assessed in the context of the granting of credit to non-resident entities in order to arrive at a preliminary evaluation of the absorption of country risk limits set on an ex-ante basis. Such limits,
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expressed in terms of economic capital, identify the maximum acceptable risk for the Group, defined on an annual basis as the result of an exercise aimed at optimizing the risk implicit in the Group’s cross-border lending operations. Economic capital absorption of country risk is also periodically measured and monitored on a quarterly basis. Risk Exposure by country—Generally The following table shows the Group’s risk exposure to sovereign countries as of December 31, 2020.
As of December 31, 2020 DEBT SECURITIES LOANS Insurance Banking Business Business Total Financial assets measured at Financial fair value Financial assets with impact assets at fair measured at on value amortized comprehensi through cost ve income profit or loss (in € millions) EU Countries ...... 28,506 30,557 3,034 60,526 122,623 12,099 Austria ...... - 41 -76 2 -33 - Belgium ...... 793 531 -23 4 1,305 - Bulgaria ...... - - 10 64 74 - Croatia ...... 11 1,205 171 164 1,551 1,227 Cyprus ...... ------Czech Republic ...... ------Denmark ...... ------Estonia...... ------Finland ...... - 13 2 3 18 - France...... 2,564 3,555 388 2,081 8,588 4 Germany ...... 515 1,053 1,551 298 3,417 - Greece ...... - 12 47 - 59 - Hungary ...... 23 829 11 37 900 249 Ireland ...... 145 516 -3 57 715 - Italy...... 20,210 13,206 1,791 54,963 90,170 10,237 Latvia ...... - - - - - 32 Lithuania ...... 6 - - - 6 - Luxembourg ...... - - 3 - 3 - Malta ...... ------Netherlands...... 52 323 77 77 529 - Poland ...... 50 61 - 18 129 - Portugal ...... 84 356 -22 39 457 - Romania...... 66 314 17 288 685 6 Slovakia ...... - 672 - - 672 86 Slovenia ...... 1 186 2 - 189 196 Spain ...... 3,986 7,657 -936 2,431 13,138 62 Sweden ...... - 27 24 - 51 -
Non-EU Countries ...... Albania ...... 267 270 1 - 538 1 Egypt...... - 1,723 2 63 1,788 240 Japan ...... - 2,020 410 - 2,430 - Russia...... - 94 - - 94 - Serbia ...... 2 718 8 - 728 93 United Kingdom ...... - - - 101 101 - U.S...... 1,258 3,566 613 72 5,509 - ______
(1) Figures derived from the 2020 Unaudited Restated and Reclassified Financial Statements.
As of December 31, 2020, the exposure to Italian government securities amounted to €90.2 billion (compared to €86 billion as of December 31, 2019, which did not include UBI Banca), in addition to €10.2 billion represented by loans (compared to €11 billion as of December 31, 2019). Market risk Market risk arises as a consequence of our Group’s trading and its open positions in the foreign exchange, interest rate and capital markets and arises from the fluctuation in the value of listed financial instruments whose
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value is linked to market variables. Market risk in the banking portfolio arises from differences in fixed-rate periods. Market risks of trading book activities The market risks of our Group’s trading book are the risks resulting from positions in financial instruments held with trading intent or in order to hedge other elements of the trading book. Accordingly, these risks are associated with positions generated by transactions involving fixed-rate securities and stocks, exchange rates, derivatives and money market instruments. The quantification of trading risks, carried out by the Market Risk Department, is based on daily analysis of the vulnerability of the trading portfolio of Intesa Sanpaolo (including the IMI C&IB Division), which represents the main portion of our Group’s market risks, to adverse market movements with respect to the following risk factors:
interest rates; equities and market indices; investment funds; foreign exchange rates; implied volatilities; spreads in credit default swaps (CDSs); spreads in issued bonds; correlation instruments; dividend derivatives; asset backed securities (ABSs); and commodities. The analysis of market risk profiles relative to the trading book uses various quantitative indicators, with VaR being the most important. Since VaR is a synthetic indicator that does not fully identify all types of potential loss, risk management has been enriched with other measures, in particular, simulation measures for the quantification of risks from illiquid parameters (dividends, correlation, ABS). VaR estimates are calculated daily, based on simulations of weighted historical data, a 99% confidence level and 1-day holding period. The paragraphs below provide the estimates and evolution of operating VaR, defined as the sum of VaR and of the simulation on illiquid parameters. In line with what has been approved by the Board of Directors, with regard to the VaR limits for legal entities, the managerial VaR of the Trading component includes the HTCS portfolio of the IMI C&IB Division. With particular regard to the legal entity UBI Banca, following its consolidation within the Group, tactical solutions have been implemented with regard to the managerial market risk measures in order to report those risks in Intesa Sanpaolo’s portfolio. Specifically, the trading book is reported within the IMI C&IB Division, while the HTCS portfolio has been divided between the Group Treasury and Finance Department (liquidity portfolio) and the IMI C&IB Division (investment portfolio). During the fourth quarter of 2020, the managerial market risks generated by the Group decreased compared to the average values of the third quarter of 2020. These decreased from €277.6 million (third quarter average) to €200.2 million. The trend in that indicator was determined mainly by the IMI C&IB Division, which recorded a decrease in total VaR from €271.6 million to €201.0 million. That effect is mainly attributable to the rolling scenario effects, given the decreased volatility of the market as well as the reduction of HTCS securities of the IMI C&IB Division. The sole Trading Book component recorded a total reduction in risk from €73.3 million to €59.0 million. It is noted that the contribution as at December 31, 2020 of the trading book of the legal entity UBI Banca, merged into the IMI C&IB Division, came to €0.795 million. For the year ended on December 31, 2020, the Group’s average managerial VaR was equal to €254.8 million, up compared to €151.5 million in 2019. The performance of this indicator – mainly determined by the IMI
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C&IB Division – derives from an increase in the risk measures, mainly due to the volatility in the markets as a result of the COVID-19 pandemic.
The following table summarizes daily managerial VaR for trading book activities for the years ended December 31, 2020 and 2019, respectively.
(1) For the year ended December 31, (2) (3) 2020 2019 Average Minimum Maximum Last Day Average Minimum Maximum (in € millions) Group Treasury and Finance Department ...... 16.5 2.3 42.6 2.7 15.4 10.7 19.0 IMI C&IB Division ...... 239.9 85.0 356.3 133.2 136.0 84.1 192.3 of which IMI C&IB Division Trading Book ...... 46.6 20.7 72.1 36.4 29.5 23.1 38.4 Total ...... 254.8 96.1 395.9 137.6 151.5 95.1 208.8 of which GroupTrading Book(4)..... 65.3 31.4 98.6 41.6 45.0 35.0 57.1
(1) Each line in the table sets out past estimates of daily VaR calculated on the historical time-series of the year 2020 respectively of the Group Treasury and Finance Department, the IMI C&IB Division and the Intesa Sanpaolo Group (including other subsidiaries); minimum and maximum values for the overall perimeter are estimated using aggregate historical time-series and therefore do not correspond to the sum of the individual values in the column. (2) Figures from the 2020 Audited Financial Statements. (3) Figures from the 2019 Audited Financial Statements. (4) The Group Trading Book figure includes the managerial VaR of the Group Treasury and Finance Department, the IMI C&IB Division (Trading Book perimeter) and the other subsidiaries
For the Group, up to June 2020 the trend in VaR in 2020 was mainly caused by the volatility on the financial markets due to the health emergency generated by the COVID-19 pandemic (the main effects were recorded on government securities in the HTCS portfolio of the IMI C&IB Division). Instead, since the third quarter, the measures have decreased due to the following: - the merger by incorporation of Banca IMI into the Issuer, which resulted in diversification (in July) of the Group managerial VaR (including the HTCS book); - “rolling scenario” effect and reduction of the HTCS portfolio of the IMI C&IB Division in the following months. With reference to the rolling scenario effects, given the lower volatility of the markets, the most volatile scenarios were no longer part of the managerial VaR distributions. Market risks of banking book activities Market risk originated by the banking book arises primarily at the Issuer and in the main subsidiaries that carry out retail and corporate banking. The banking book also includes exposure to market risks deriving from the equity investments in listed companies not fully consolidated, which are mostly held by the Issuer. Interest rate risk and price risk management processes and measurement methods Interest rate risk is managed by setting limits and defining an early warning level for the exposure, approved within the Risk Appetite Framework (RAF). In particular, the early warning level allows to monitor the exposure to the risk of bends in the curve. In addition, the Group has adopted a specific internal policy document regarding interest rate risk (the IRRBB Guidelines), subject to the Board of Directors’ approval, governing, inter alia, the Group’s entire interest rate risk management framework. Our Group uses the following metrics to measure the interest rate risk generated by the banking book:
with regard to economic value: o fair value shift sensitivity (∆EVE); o fair value basis risk (BR);
o value at risk (VaR).
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with regard to net interest income: o net interest income sensitivity (∆NII); o net interest income basis risk. The shift sensitivity of the economic value (or fair value shift sensitivity) measures the change in the economic value of the banking book and is calculated at individual cash flow level for each financial instrument, based on (i) different instantaneous rate shocks and (ii) historical stress simulations aimed at identifying the worst and best cases. It reflects the changes in the present value of the cash flows of the positions already in the balance sheet for the entire remaining duration until maturity (run-off balance sheet). The cash flows used to determine the present value are developed at the contractual rate, FTP (internal fund transfer price) or risk-free rate (Euribor/Libor) and discounted, according to risk-free discount curves. When calculating the present value of loans, the expected loss component represents the amount of cash flow that the bank does not expect to recover on a given exposure and that thus reduces the value of the loan. The present value of the loan adjusted for the credit risk is calculated according to the “cash flow adjustment” method. Such calculation involves the algebraic sum of the equivalent in euro of the shift sensitivities of the positions in the various currencies by applying a parallel shock of +100 bps to the interest rate curves in the various currencies. The sensitivity of the relevant currencies is then corrected, according to a “currency aggregation” management technique, in order to take into account the imperfect correlation between the rates of the main currency (euro). The fair value basis risk (BR) is a risk measure designed to capture the effects on the floating-rate banking book caused by the imperfect correlation of changes in market indices. The calculation method is based on applying shocks - diversified by the reference curve of the main risk factors. The specific shock level is calculated as a change in the base of each reference rate, compared to a designated pivot rate in the same currency. Value at Risk (VaR) is calculated as the maximum loss that could be recorded with a 99% confidence level and over a ten days holding period. VaR is estimated using a method based on the historical simulation of the risk factors, represented by the risk-free market interest rate curves, in which the bank’s exposure is revalued (full evaluation) in the light of the curves observed over the last 250 days prior to the evaluation date. The sensitivity of net interest income quantifies the impact on interest income of shock to the interest rate curve. For managerial monitoring of the limits, the sensitivity of net income is measured over a 12- month’s period, excluding potential effects due to new transactions and future changes in the mix of assets and liabilities, by applying parallel, instantaneous interest rate shocks. This method implicitly assumes that the principal amounts of transactions are reinvested or refinanced through transactions with the same financial characteristics as those that have reached maturity or have been repriced (constant balance sheet assumption), within 12 months from the date of the analysis (date of the end-of-month situation). For the year ended December 31, 2020, the interest rate risk generated by our Group’s banking book, measured in terms of VaR, averaged €626 million, as compared to €227 million eas of December 2019. Price risk generated by minority stakes in listed companies, mostly held in the HTCS category and measured in terms of VaR, recorded an average level of €255 million, as compared to €43 million as of December 31, 2019. For the year ended December 31, 2020, the foreign exchange risk expressed by equity investments in foreign currency generated by our Group’s banking book, measured in terms of VaR, averaged €73 million, as compared to €35 million as of December 31, 2019. Sensitivity of the net interest income, assuming a +50, -50 basis and +100 point change in interest rates, amounted to €1,312 million, negative €1,011 million and €2,581 million, respectively, as of December 31, 2020. The last of these figures was up on €1,837 million recorded as of December 31, 2019. Fair value and cash flow hedging The Financial and Market Risks Head Office Department of the Issuer is in charge of measuring the effectiveness of interest rate risk hedges for the purpose of hedge accounting, in compliance with international accounting standards. Hedging of interest rate risk is aimed: (i) at protecting the banking book from variations in the fair value of loans and deposits due to movements in the interest rate curve; or (ii) at reducing the volatility of future cash flows related to a particular asset/liability. The main types of derivative contracts used are interest rate swaps, overnight index swaps, cross currency swaps, forward sales of debt securities and options on interest rates stipulated by Intesa Sanpaolo with third parties or with other Group companies. The latter, in turn, replicate
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the transactions on the market so that the hedging deals meet the criteria to qualify as IAS-compliant for consolidated financial statements. Hedging activities performed by our Group are recorded using various hedge accounting methods, including the fair value hedge of assets and liabilities specifically identified (micro hedging), mainly with respect to bonds issued or acquired by the Group and loans to customers. In addition, in order to preserve the economic value of a portion of the HTCS portfolio, by protecting the price of the securities against adverse market movements, the Group negotiates forward sales of the debt securities held in portfolio on a fair value hedging basis. Moreover, macro hedging is carried out on the stable portion of on-demand deposits and in order to cover the risk of fair value changes intrinsic in the installments under accrual generated by floating rate transactions. The Group is exposed to this risk in the period from the date on which the rate is set and the date of payment of the relevant interest. Another hedging method used is the cash flow hedge which has the purpose of stabilizing interest flow both on variable rate funding to the extent that the latter finances fixed-rate investments and on variable rate investments to cover fixed-rate funding (macro cash flow hedge). In other cases, cash flow hedges are applied to specific assets or liabilities (micro cash flow hedge). Foreign exchange risk Foreign exchange risk is defined as the possibility that foreign exchange rate fluctuations produce significant changes, either positive or negative, in our Group’s balance sheet totals. The key sources of exchange rate risk come from foreign currency loans and deposits held by corporate and retail customers; purchases of securities, equity investments and other financial instruments in foreign currencies; conversion into domestic currency of assets, liabilities and income of branches and subsidiaries outside Italy; and trading of foreign currencies and banknotes; collection and/or payment of interest, commissions, dividends and administrative costs in foreign currencies. Our Group’s foreign exchange risk deriving from operating positions involving foreign currencies in the banking book is systematically transferred from the business units to our Treasury Department in order to eliminate it. Our Group’s entities carry out similar risk containment measures for their own banking books. Our Group mitigates its foreign exchange risk by raising funds in the same currency as the assets it holds. Liquidity risk Liquidity risk is defined as the risk that our Group may not be able to meet its payment obligations due to the inability to procure funds on the market (funding liquidity risk) or liquidate its assets (market liquidity risk). Specific rules, metrics, processes, limits, roles and responsibilities are defined in the Group Liquidity Ris k Management Guidelines in order to ensure a prudent control of liquidity risk and guarantee an adequate, balanced level of liquidity for the whole Group. These Group Liquidity Risk Management Guidelines, annually updated, incorporate the latest international regulatory requirements and developments in order to reflect Basel III Liquidity requirements and EU Regulations (e.g., Regulation (EU) No. 575/2013 and Directive 2013/36/EU, European Commission Delegated Regulation 2015/61 and the Implementing Regulation (EU) 2016/322, Regulation (EU) 2019/876, each as amended and supplemented). From an organizational standpoint, a detailed description of the tasks assigned to the Board of Directors is prepared and reports are presented to senior management concerning certain important formalities such as the approval of measurement methods, the definition of the main assumptions underlying stress scenarios and the composition of early warning indicators used to activate emergency plans. The departments of the Issuer that are in charge of ensuring the correct application of the Group Liquidity Risk Management Guidelines are, in particular, the Group Treasury and Finance Head Office Department, responsible for liquidity management, and the Financial and Market Risks Head Office Department, directly responsible for measuring liquidity risk on a consolidated basis. With regard to liquidity risk measurement metrics and mitigation tools, in addition to defining the methodological system for measuring short-term and structural liquidity indicators, the Group also formalizes the maximum tolerance threshold (risk appetite) for liquidity risk, the criteria for defining liquidity reserves and the rules and parameters for conducting stress tests. The short-term liquidity indicators are aimed at ensuring an adequate, balanced level of cash inflows and outflows, in order to weather periods of tension on the various funding markets, including by establishing adequate liquidity reserves in the form of assets eligible for refinancing with central banks or liquid securities
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on private markets within a time period of 12 months. The structural liquidity indicators incorporate the set of measures and limits designed to control and manage the risks deriving from the mismatch of medium to long term maturities of the assets and liabilities giving rise to excessive imbalances to be financed in the short term, which is essential for the strategic planning of liquidity management. The Group Liquidity Risk Management guidelines also call for the periodic estimation of liquidity risk position in acute combined stress scenarios (both stress specific and market-related ones) and the introduction of a target threshold aimed at establishing an overall level of reserves suitable to meet greater cash outflows to restore the Group to balanced conditions. Further, the Group Liquidity Risk Management Guidelines provide management methods to be used in a liquidity crisis scenario, defined as a situation wherein our Group has difficulty or is unable to meet its cash obligations falling due, without implementing procedures and/or employing instruments that, due to their intensity or manner of use, do not qualify as ordinary administration. The Group has a contingency liquidity plan in place, which has the objective of safeguarding our Group’s asset value and enabling the continuity of operations under conditions of a liquidity constriction, or even in the absence of liquidity in the market. The plan ensures the identification of the early warning signals and their ongoing monitoring, the definition of procedures to be implemented in situations of liquidity stress, the immediate lines of action, and the intervention measures for the resolution of emergencies. In 2020, the Group’s liquidity position, supported by suitable high-quality liquid assets (HQLA) and the significant contribution from retail stable funding, remained within the risk limits set out in the current Group Liquidity Risk Management Guidelines and regulatory requirements. In particular, both the LCR and the NSFR requirements were met. Model risk Model risk is defined as the risk or potential loss an entity may incur in, arising from the improper use of the results of the internal models or from errors in the development and/or implementation of the internal models. In 2019 and 2020, the Internal Validation and Controls Head Office Department further developed the framework for the identification, assessment and mitigation of this risk. In particular, in order to set a specific economic capital buffer (under baseline conditions), included in the 2018-2021 ICAAP Report, the assessment was updated for the “inherent” model risk (expressed synthetically through a score) of several Pillar 1 and Pillar 2 methodologies that contribute to calculation of the Economic Capital and provide the Enterprise Risk Management Head Office Department with the parameters for the quantification of such economic capital buffer for the model risk. Operational risk Operational risk is the risk of incurring loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal and compliance risk, conduct risk, IT and cyber risk, physical security risk, business continuity risk, financial crime and financial reporting risk, third-party and model risk. Strategic risk and reputational risk are not included. The monitoring of the Group’s Operational Risk Management involves bodies, committees and structures that interact with different responsibilities and roles in order to create an effective operational risk management system that is closely integrated into the decision-making processes and the management of company operations. Control of the Group’s operational risk is attributed to the Board of Directors, which identifies risk management policies, and to the Management Control Committee, which is in charge of approval and verification of such policy, as well as of the guarantee of the functionality, efficiency and effectiveness of the risk management and control system. Moreover, the tasks of the Intesa Sanpaolo Group Control Coordination, Operational and Reputational Risk Committee include periodically reviewing the overall operational risk profile, authorizing any corrective measures, coordinating and monitoring the effectiveness of the main mitigation activities and approving operational risk transfer strategies.
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The operational risk governance model has been developed in view of:
optimising and enhancing organisational safeguards, interrelations and information flows between the existing organisational units and integrations of the operational risk management approach with other company models developed for specific risks (business continuity, IT security, etc.); and
fostering the transparency and the spread of models, methods and criteria of analysis, assessment and measurement used to facilitate the process of cultural spread and comprehension of the logic underlying the choices made. The Group has a centralized function within the Enterprise Risk Management Department for the management of our Group’s operational risk. This function is responsible for the definition, implementation, and monitoring of the methodological and organizational framework, as well as for the measurement of our risk profile, the effectiveness of mitigation and reporting to management. Each organizational unit must identify, assess, manage and mitigate risks and specific officers and departments have been identified within each organizational unit to be responsible for Operational Risk Management (structured collection of information relative to operational events, detection of critical issues and related mitigation actions, scenario analyses and evaluation of the business environment and internal control factors). Our Group’s operational risk management process is divided into the following phases:
identification phase, which includes the collection and classification of qualitative and quantitative information that makes it possible to identify and describe the Group’s potential areas of operational risk;
measurement and assessment phase, which includes the process of qualitative and quantitative determination of the Group’s exposure to operational risks;
monitoring phase, which includes the analysis and monitoring of the development of the exposure to operational risks, on the basis of the results of the identification, assessment and measurement processes and on the observation of indicators that represent a valid proxy of the exposure to operational risks (e.g., limits, early warnings and indicators established within the RAF);
mitigation phase, which includes activities designed to contain the exposure to operating risks, defined on the basis of the results of the identification, measurement and assessment and monitoring phases; and
communication phase, which includes the preparation of appropriate information flows associated with operational risk management, designed to provide useful disclosures. Capital-at-risk is, therefore, identified as the minimum amount at Group level required to bear the maximum potential loss (worst case). Capital-at-risk is estimated using a Loss Distribution Approach model (actuarial statistical model to calculate the value-at-risk of operational losses), applied to quantitative data and results of the scenario analysis, assuming a one-year estimation period with a level of confidence of 99.90%. The methodology also applies a corrective factor, which derives from the qualitative analyses of the risk level of the business environment (Business Environment Evaluation), to take into account the effectiveness of internal controls in the various organizational units. With regards to operational risk, the Group uses the Advanced Measurement Approaches (AMA - internal model), used partially along with the standardized (TSA) and basic approaches (BIA) to determine the associated capital requirement for regulatory purposes. The AMA approach was adopted by Intesa Sanpaolo S.p.A. and by the main companies in the Corporate and Investment Banking, Private Banking and Asset Management Divisions and by VUB Banka and PBZ Banka. Following the acquisition of the UBI Banca group, the former UBI Banca group companies now also participate in the formulation of our capital requirements. In particular, the former UBI Banca group was authorized to use its AMA model (with effect from the June 2012 regulatory calculation) for the following companies: UBI Banca, UBI Sistemi e Servizi and IW Bank Private Investments.
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In order to support the operational risk management process on a continuous basis, a structured training program was implemented for employees actively involved in this process. In addition, the Group employed a traditional operational risk transfer policy (to protect against offences such as employee disloyalty, theft and damage, cash and valuables in transit losses, computer fraud, forgery, cyber- crimes, earthquake and fire, and third-party liability), which contributes to mitigate our exposure to operational risk. In order to allow optimum use of the available operational risk transfer tools and to take advantage of the capital benefits, pursuant to applicable regulations, the Group maintains an insurance coverage policy named Operational Risk Insurance Program, which offers additional coverage to traditional policies, significantly increasing the limit of liability, transferring the risk of significant operational losses to the insurance market. The internal model’s insurance mitigation component has been approved by the Bank of Italy in June 2013. As of December 31, 2020, the capital absorption was equal to €2,205 million, up as compared to €1,697 million as of December 31, 2019, mainly due to the integration of the UBI Banca Group’s operational risk requirements. Legal risks Legal risks are analyzed by us and by Group companies. Provisions are made for the allowance of risks and charges for those legal obligations where the disbursements of funds to satisfy obligations is probable and such disbursement can be reasonably estimated. See “Risk Factors—We are subject to legal risk, including the risk of class action lawsuits, which could have a material adverse effect on our business, results of operations or financial condition” and “Business—Litigation and Other Proceedings”. Risks specific to our insurance business Life insurance business The typical risks of life insurance portfolios (managed by Intesa Sanpaolo Vita, Intesa Sanpaolo Life, Fideuram Vita and BancAssurance Popolari) can be divided into three main categories: premium risks, actuarial and demographic risks and reserve risk. Premium risks are managed initially during definition of the technical features and product pricing, and over the life of the instrument by means of periodic checks on sustainability and profitability (both at product level and at portfolio level, including liabilities). During the definition of a product, profit testing is used, aimed at measuring profitability and identifying any weaknesses beforehand, by means of specific sensitivity analyses. Actuarial and demographic risks arise when an unfavorable trend is recorded in the actual loss ratio compared with the trend estimated when the rate was calculated, and these risks are reflected in the level of “reserves”. This loss ratio refers not only to actuarial loss, but also financial loss (guaranteed interest rate risk). We manage these risks by performing systematic statistical analysis of the evolution of liabilities in its own contract portfolio divided by risk type and through simulations of expected profitability of the assets hedging technical reserves. We manage reserve risk through the calculation of mathematical reserves, with a series of checks as well as overall verifications performed by comparing results with the estimates produced on a monthly basis. Our Group places an emphasis on using the correct assumption for contracts by checking the relative portfolio against the movements during the period and the consistency of the amounts settled compared with the reserves movements. The mathematical reserves are calculated in respect of the portfolio on a contract-by-contract basis taking all future commitments into account. Non-life insurance business The typical risks of the non-life insurance portfolio (managed through Intesa Sanpaolo Assicura, Intesa Sanpaolo RBM Salute and Intesa Sanpaolo Vita) are essentially premium and reserve risk. Attempts are made to limit premium risks initially while the product’s technical features and pricing are established and then over the life of the instrument by means of periodic checks on the sustainability and profitability (both at product level and at portfolio level, including all liabilities). Reserve risk is managed through the exact calculation of technical reserves. In particular, technical reserves may be divided into a premium reserve, a claims reserve, a reserve for profit sharing and reversals, other technical reserves and a reserve for equalization.
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With regard to risk assumption, policies are checked when acquired through an automatic system aimed at detecting the underwriting parameters associated with the applicable tariff. The check is thus not only formal, but also substantive, and in particular allows the identification of exposures in terms of capital and limits of liability, in order to verify that the portfolio matches the technical and tariff scheme agreed upon with the sales network. Subsequently, statistical checks are carried out to verify potentially anomalous situations (such as concentration by area or by type of risk) and to keep accumulation at the level of individual persons under control (particularly with respect to policies providing coverage for accidents and medical care). This analysis also provides our Group’s reinsurance department with information on the portfolio characteristics for the preparation of the annual reinsurance plan. Asset liability management and financial risks In line with the growing focus in the insurance sector on the issues of value, risk and capital in recent years, a series of initiatives have been launched to strengthen risk governance and manage and control risk-based capital. With regard to both investment portfolios for the coverage of obligations with the insured and free capital, an internal regulation was adopted in order to define the investment policy. The aim of the investment policy is the control and monitoring of market and credit risks. The policy defines the goals and operating limits to distinguish the investments in terms of eligible assets and asset allocation, breakdown by rating classes and credit risk, concentration risk by issuer and sector, and market risks (in turn measured in terms of sensitivity to variations in risk factors and VaR). Investment decisions, portfolio growth and compliance with operating limits are reviewed on a monthly basis by specific investment committees. In order to better measure and manage actuarial and financial risks, a simulation tool is used to measure the intrinsic value, fair value of the liabilities and economic capital. The simulation tool is based on a dynamic Asset Liability Management (“ALM”) model that forecasts stochastically generated economic scenarios, simulating the evolution of the value of assets and liabilities based on the technical features of the products, trends in significant financial variables and a management rule which guides investments and disinvestments. This model measures the capital required to cover actuarial and financial risk factors. It models risks deriving from the dynamics of an extreme altering of policies, from sharp changes in mortality and longevity, and from pressure on costs. The model takes into consideration stress scenarios over year-long time spans on interest rates, on credit spread and on stock market trends. By means of the ALM model it is possible to compute the sensitivity of liabilities with respect to movements of market risk factors in order to efficiently manage the financial assets covering technical provisions. Investment portfolios The investments of the insurance subsidiaries of our Group are aimed at covering free capital and obligations with customers, namely life policies with profit participation clauses, index linked and unit-linked policies, pension funds and casualty policies. Life policies with profit participation clauses offer the insured the ability to receive a share of the profit from the fund management (the segregated fund) and a minimum guaranteed level, and therefore generate proprietary market and credit risks for the insurance company. Index linked and unit-linked policies, which usually do not present direct risks, are monitored with regard to reputation risks. As of December 31, 2019 and December 31, 2020, the investment portfolios of Group companies, recorded at book value, amounted, respectively, to €170,555 million and €179,570 million. Of these, the portion regarding life policies, non-life policies and free capital (“portfolio at risk”) amounted, respectively, to €86,360 million and €92,344, while the other component (“portfolio with total risk retained by the insured”) mostly comprised investments related to index- and unit-linked policies and pension funds equal to €84,195 million and €87,226. Considering the various types of risks, the analysis of investment portfolios, described below, concentrates on the assets held to cover traditional revaluable life policies, non-life policies and free capital. In terms of breakdown by asset class, net of derivative financial instruments, as of December 31, 2019 and December 31, 2020 84.0% and 84.1% of assets consisted of bonds, respectively, whereas assets subject to equity risk represented 1.7% and 1.9% of the respective totals. The remaining (14.3% for December 31, 2019 and 14.0% for December 31, 2020) consisted of investments relating to UCI, private equity and hedge funds. As of December 31, 2020, the carrying value of derivatives amounted to €413 million, almost entirely relating to hedging derivatives, while the portion of effective management derivatives recorded a negative value for €37
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million. Investments made with the free capital of Intesa Sanpaolo Vita and Fideuram Vita amounted to €1,832 million at market value, and presented a risk in terms of VaR (99% confidence level, 10-day holding period) of €18 million. The investment portfolio had a high credit rating. As of December 31, 2019 and December 31, 2020, bonds with very high ratings (AAA/AA) represented, respectively, 7.2% and 5.5% of total investments, while 6.0% and 5.7% had A ratings. The securities in the low investment grade area (BBB) represented 84.8% and 70.7% of the respective totals, while the share of speculative grade or unrated was minimal (1.6% for December 31, 2019 and 2.2% for December 31, 2020). The high level of credit quality also emerges from the breakdown by issuer/counterparty: securities issued by governments, central banks and other public entities represented approximately 80.4% and 80.9% of the total as of December 30, 2019 and December 31, 2020, respectively, while corporate securities made up approximately 19.6% and 19.1% as of those dates. As of December 31, 2019 and December 31, 2020, the book value sensitivity of bonds to a change in issuer credit rating (i.e., a market credit spread shock of +100 basis points), was €3,956 million and €4,744 million, respectively, with €3,345 million and €4,102 million due to government issuers and €611 million and €642 million to corporate issuers, namely financial institutions and industrial companies, respectively. See also “Risk Factors—We are exposed to risks relating to our insurance operations”. Strategic risk Our Group defines current or prospective strategic risk as risk associated with a potential decrease in profits or capital due to changes in the operating environment of the Group, misguided Group decisions, inadequate implementation of decisions, or an inability to sufficiently react to competitive forces. Our Group’s response to strategic risk is represented first and foremost by policies and procedures that call for the most important decisions to be deferred to the Board of Directors, supported by a current and forward- looking assessment of risks and capital adequacy. The high degree to which strategic decisions are made at the central level, with the involvement of the top corporate governance bodies and the support of various corporate functions as described above under “—General overview”, is intended to help ensure that strategic risk is mitigated. Reputational risk Our reputational risk is defined as the current and prospective risk of a decrease in profits or capital due to a negative perception of the Bank’s image by customers, counterparties, shareholders, investors and Supervisory Authorities. The Group actively manages its image in the eyes of all stakeholders, by engaging all its organisational units and seeking robust, sustainable growth capable of creating value for all stakeholders. In addition, the Group seeks to minimise possible negative effects on its reputation through rigorous and comprehensive governance, proactive risk management and guidance and control of its activities. The overall management of reputational risk is pursued primarily:
through compliance with standards of ethics and conduct and self-goverance policies. The Code of Ethics adopted by the Group contains the core values that the Group intends to commit itself to and sets out the voluntary principles of conduct for dealings with all stakeholders (customers, employees, suppliers, shareholders, the environment and, more generally, the community) with even broader objectives than those required by current legislation. The Group has also issued voluntary conduct policies (human rights policy, environmental policy and arms industry policy) and adopted international principles (UN Global Compact, UNEP FI, Equator Principles) aimed at pursuing respect for the environment and human rights; systematically and independently by the corporate structures with specific tasks aimed at preserving corporate reputation, through a structured system of organizational monitoring measures;
across the various corporate functions, through the Reputational Risk Management processes governed by the Chief Risk Officer Governance Area; and
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through an integrated monitoring system for primary risks, to limit exposure to those risks, and compliance with the related limits contained in the Risk Appetite Framework. We aim to continually improve our reputational risk governance through an integrated compliance risk management system, as we consider compliance with applicable regulations and fairness in business to be fundamental to the conduct of banking operations, which, by nature, are founded on trust. In order to safeguard customers’ interests and our reputation, specific attention is also devoted to establishing and managing customers’ risk appetite, pursued through the identification of the subjective and objective traits of each customer. Adequacy assessments during the process of structuring products and rendering advisory services are supported by objective information, through which we consider the true nature of the risks borne by customers when they undertake derivative transactions or make financial investments. More specifically, the marketing of financial products is also governed by specific advance risk assessment both from our standpoint (along with risks, such as credit, financial and operational risks, that directly affect the owner) and that of the customer (portfolio risk, complexity and frequency of transactions, concentration on issuers or on foreign currency, consistency with objectives and risk tolerance profiles, and knowledge and awareness of the products and services offered). The abovementioned Reputational Risk Management (RRM) processes are coordinated by the Chief Risk Officer Governance Area and involve control, specialist and business functions, for various purposes. These processes include:
Reputational Risk Assessment, which seeks to identify the most significant reputational risk scenarios to which the Intesa Sanpaolo Group is exposed. This process is implemented annually and is aimed at gathering the opinion of management regarding the potential impact of these scenarios on the Group’s image, in order to identify appropriate communication strategies and specific mitigation actions, where necessary;
ESG and Reputational Risk Clearing, which is aimed at the ex-ante identification and assessment of the potential reputational risks associated with the most significant business operations, the main capital budget projects and the selection of the Group’s suppliers/partners; and
Reputational Risk Monitoring, aimed at monitoring the evolution of Intesa Sanpaolo’s reputational positioning (on the web, for example) also with the aid of external analyses. ESG (Environmental, Social and Governance) risks The ESG risk stems from potential negative impacts on the environment, people and communities and also includes risks related to the corporate governance. The ESG risk may therefore affect profits, reputational profile and credit quality and it may lead to legal consequences. Our Group is aware of its influence on the short/long term sustainability and pays particular attention to environmental, social and governance risks associated with the activities of its corporate customers and related to sectors considered sensitive. Environmental protection and attention to climate change are a key dimension of our commitment to responsibility, as clarified in our Code of Ethics, in the Rules for the environmental and energy policy, in the Guidelines for the governance of environmental social and governance risks regarding lending operations and, in order to support the transition to a low-carbon economy, also in the Rules for the coal sector. Our key activities in climate risk management concern: (i) the identification, assessment and measurement of such risks; and (ii) the implementation, development and monitoring of a risk management framework. For instance, within the Risk Appetite Framework (RAF), we have introduced a specific reference to climate risk and we aim to integrate it into the existing risk management framework with particular reference to credit risk and reputational risk. Our ESG risk management model consists of:
a reference regulatory framework, based on the Group’s general values and principles, set out in particular in the “Code of Ethics” and the “Principles of Human Rights”, which defines the general criteria for limiting and excluding lending for business sectors considered most sensitive to the ESG risks. This is accompanied by self-governance policies (“Rules for lending operations in the coal sector”
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and “Rules for operations in the armaments sector”) introducing specific criteria for operations in certain sensitive sectors; and
a process for assessing the ESG risks associated with the Group’s operations, with specific reference to the financing of corporate customers. In this context, particular attention is paid to loans subject to “equator principles” and to transactions classified as “most significant transactions”. One of the most important ESG risks is represented by the climate change risk, in relation to which we started several projects for its integration into the overall risk management framework, in response to the ongoing regulatory developments. See “Risk Factors—Risks related to our business—We are exposed to risks arising from climate change either directly through its own operations or indirectly through its financing and investment activities.” Risk on owned real estate assets The risk on owned real estate assets is defined as risk associated with the possibility of suffering financial losses due to an unfavorable change in the value of such assets. Real estate management is highly centralized and represents an investment that is largely intended for use in company operations. The degree of risk in the portfolio of owned properties is represented by calculating an economic capital based on the volatility observed in the past in indexes of mainly Italian real estate prices, the main type of exposure associated with the Group’s real estate portfolio, with a degree of granularity of geographical location and intended use appropriate to the real estate portfolio at the reporting date. Absorption of Economic Capital by Business Unit The absorption of economic capital by business unit reflects the distribution of the Group’s various activities and the specializations of the individual business areas. As of December 31, 2020, the majority of risk is concentrated in the Corporate & Investment Banking business unit (30.8% of the total economic capital as of December 31, 2020 compared to 33.1% as of December 31, 2019), mainly attributable to the type of customers served and the capital markets activities. The Corporate & Investment Banking business unit is assigned a significant share of credit risk and trading book risk. The Banca dei Territori business unit (15.8% of the total economic capital as of December 31, 2020, compared to 15.6% as of December 31, 2019) is assigned a sizeable portion of the credit risk and operational risk, in line with its role as our core business (retail, private and small/middle corporate customers). Most of the insurance risk is assigned to the Insurance business unit (12.0% of the total economic capital as of December 31, 2020, compared to 14.5% as of December 31, 2019). The International Subsidiary Banks business unit is assigned 8.6% of the total risk, predominantly credit risk, as of December 31, 2020, compared to 10.7% as of December 31, 2019. In addition to credit risk, the Corporate Centre is attributed with the risks typical of this business unit, namely those resulting from investments, the risks pertaining to the Capital Light Bank, the banking book interest rate and exchange rate risk, the risks arising from the management of the Issuer’s FVTOCI portfolio (20.2% of the total economic capital as of December 31, 2020, compared to 23.3% as of December 31, 2019). Absorption of economic capital by the Private Banking and Asset Management business units is marginal (1.9% and 0.5%, respectively, as of December 31, 2020, compared to 2.2% and 0.6%, respectively, as of December 31, 2019) due to the nature of their businesses, which are mainly aimed at asset management activities. The remaining capital absorption (10.2%) is attributable to the UBI Banca group.
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SELECTED STATISTICAL INFORMATION The following tables set forth certain selected statistical and other information regarding our banking operations. The Bank of Italy requires us to present certain financial information solely with respect to our banking activities, referred to as the “Banking Group”, rather than the consolidated Group as a whole. For each of the tables below, we specify whether the information provided is based on the “Banking Group Financial Information” or on the “Financial Information”. The Banking Group Financial Information and the Financial Information differ in the following ways:
the Financial Information includes non-banking, financial and special purpose companies (primarily related to our insurance business segment) in our Group, while these are not consolidated into the Banking Group for the Banking Group Financial Information;
jointly controlled entities conducting banking, financial and instrumental business are consolidated at equity into our Group for the Financial Information, while they are consolidated only on a proportional basis into the Banking Group for the Banking Group Financial Information; and
intragroup transactions are netted in the Financial Information, while the Banking Group Financial Information includes intragroup (on and off balance sheet) asset and liability and income and expense transactions with other Group companies. Prospective investors may find it difficult to make comparisons between the Banking Group Financial Information and the Financial Information and are therefore cautioned against placing undue reliance on such comparisons. See “Risk factors—Risks related to the presentation of financial information—Much of the financial information used as the basis for discussion and analysis in this Offering Memorandum is unaudited and has been reclassified and/or restated, and because our financial information is presented in different ways, prospective investors may find it difficult to make comparisons”, “Risk factors—The introduction of new accounting principles and changes to applicable accounting principles may have an adverse impact on our financial statements” and Annex A and Annex B. Additionally, the December 31, 2020 figures presented include the effects deriving from the UBI Banca Acquisition. For an illustration of the December 31, 2020 data aggregated without UBI Banca, please refer to our reclassified financial information set out in our 2020 Annual Report in section “Income statement and balance sheet aggregates”. For more information about the UBI Banca Acquisition, see the section “Overview of 2020” of our 2020 Annual Report or “UBI Banca Acquisition” set forth herein. Average balances and interest rates The following tables, based on the Financial Information, presents average balances of assets, liabilities and shareholders’ equity of our Group for the years ended December 31, 2020, 2019 and 2018, and for interest earning assets and interest bearing liabilities, provides the amount of interest earned or paid and the average rate of such interest for such asset or liability, as applicable for each period.
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For the years ended December 31, 2020 2019 Average Average Average Average balance(1) Interest(2) yield/rate (%) balance(1) Interest(2) yield/rate (%) (in € millions, except for percentages) Assets Interest earning assets: Financial instruments excluding loans(3) ...... 125,916 842 0.67% 103,941 1,015 0.98% Due to banks ...... 73,921 329 0.45% 70,101 630 0.90% Loans to customers...... 430,837 9,190 2.13% 394,764 9,065 2.30% Financial assets pertaining to insurance companies measured pursuant to IAS 39 76,349 1,590 2.08% 71,471 1,706 2.39% Total interest earning financial instruments ...... 707,023 11,951 1.69% 640,277 12,416 1.94% Other assets(4) ...... 197,597 830 0.42% 182,487 507 0.28% Total assets ...... 904,620 12,781 1.41% 822,764 12,923 1.57% Liabilities Interest bearing liabilities: Deposits from banks ...... 113,305 238 0.21% 114,873 508 0.44% Deposits from customers, securities issued and financial liabilities designated at fair value ...... 473,852 2,106 0.44% 423,524 2,637 0.62% Financial liabilities pertaining to insurance companies measured pursuant to IAS 39 75,195 54 0.07% 73,064 41 0.06% Total interest bearing liabilities ... 662,352 2,398 0.36% 611,461 3,186 0.52% Other liabilities(4) ...... 180,792 1,115 0.62% 156,007 1,148 0.74% Shareholders’ equity ...... 61,476 n/a n/a 55,296 n/a n/a Total liabilities and shareholders’ equity ...... 904,620 3,513 0.39% 822,764 4,334 0.53% Net interest income/interest margin(5)...... - 9,268 1.02% (5) - 8,589 1.04% (5) Loan deposit rate spread (customers and securities)(6) ...... 1.69% (6) 1.68% (6) Interest bearing asset and liability spread(7) ...... 1.33% (7) 1.42% (7) ______(1) Average balances for the year ended December 31, 2020 and 2019 have been determined using quarterly balances prepared by the company from its accounting records where such balances were subject to restatements to account for changes in the scope of consolidation, the implementation of required changes in accounting principles and any items that were recorded under noncurrent assets held for sale and discontinued operations. (2) Figures from, respectively, the 2020 Unaudited Restated and Reclassified Financial Information and the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Financial instruments include debt securities from the following line items of 2020 Unaudited Restated and Reclassified Financial Information and the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020: financial assets measured at amortized cost which do not constitute loans, financial assets at fair value through profit or loss and financial assets designated at fair value through other comprehensive income. (4) Hedging derivatives (and related interest income effects) are included in “ other assets” or “ other liabilities” depending upon whether they have a positive or negative fair value. (5) Net interest margin refers to the ratio between net interest income and total average assets. (6) Difference between average yield/rate on loans to customers and on deposits from customers (and Securities). (7) Difference between average yield/rate on total interest earning financial instruments and on total interest bearing liabilities.
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For the years ended December 31, 2019 2018 Average Average Average yield/rate Average yield/rate balance(1) Interest(2) (%) balance(1) Interest(2) (%) (in € millions, except for percentages) Assets Interest earning assets: Financial instruments excluding loans(3) ...... 103,941 1,015 0.98% 85,185 884 1.04% Due to banks...... 70,101 630 0.90% 70,422 690 0.98% Loans to customers ...... 394,764 9,065 2.30% 397,803 9,370 2.36% Financial assets pertaining to insurance companies measured pursuant to IAS 39 71,471 1,706 2.39% 68,373 1,781 2.60% Total interest earning financial instruments ..... 640,277 12,416 1.94% 621,783 12,725 2.05% Other assets(4) ...... 182,121 507 0.28% 172,641 524 0.30% Total assets ...... 822,398 12,923 1.57% 794,424 13,249 1.67% Liabilities Interest bearing liabilities: Deposits from banks...... 114,873 508 0.44% 102,579 433 0.42% Deposits from customers, securities issued and financial liabilities designated at fair value. 423,524 2,637 0.62% 423,861 2,927 0.69% Financial liabilities pertaining to insurance companies measured pursuant to IAS 39 73,064 41 0.06% 70,466 60 0.09% Total interest bearing liabilities...... 611,461 3,186 0.52% 596,906 3,420 0.57% Other liabilities(4) ...... 155,868 1,148 0.74% 144,053 766 0.53% Shareholders’ equity ...... 55,069 n/a n/a 53,465 n/a n/a Total liabilities and shareholders’ equity ...... 822,398 4,334 0.53% 794,424 4,186 0.53% Net interest income/interest margin(5) - 8,589 1.04%(5) - 9,063 1.14%(5) Loan deposit rate spread (customers and securities)(6) ...... 1.68%(6) 1.67%(6) Interest bearing asset and liability spread(7) ...... 1.42%(7) 1.48%(7) ______(1) Average balances for the years ended December 31, 2019, and 2018 have been determined using quarterly balances prepared by the company from its accounting records where such balances were subject to restatements to account for changes in the scope of consolidation, the implementation of required changes in accounting principles and any items that were recorded under noncurrent assets held for sale and discontinued operations. (2) Figures from, respectively, the 2019 Unaudited Reclassified Financial Information and the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. (3) Financial instruments include debt securities from the following line items of 2019 Unaudited Reclassified Financial Information and the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019: financial assets measured at amortized cost which do not constitute loans, financial assets at fair value through profit or loss and financial assets designated at fair value through other comprehensiv e income. (4) Hedging derivatives (and related interest income effects) are included in “ other assets” or “ other liabilities” depending upon whether they have a positive or negative fair value. (5) Net interest margin refers to the ratio between net interest income and total average assets. (6) Difference between average yield/rate on loans to customers and on deposits from customers (and Securities). (7) Difference between average yield/rate on total interest earning financial instruments and on total interest bearing liabiliti es. Interest rate data Changes in interest income and expenses—Volume and rate analysis
The following table, based on the Financial Information sets forth, by category of interest earning assets and interest bearing liabilities, changes in our Group’s net interest income among changes in average volume, changes in average rate and changes due to the effects of both rate and volume for the periods indicated.
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Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities.
Year ended December 31, 2020 compared to year ended December 31, 2019 Yield/ Volume and Total net Volume(1) rate (2) yield/rate(3) change (4) (in € millions) Interest earning assets Financial instruments excluding loans ...... 215 (322) (66) (173) Loans and receivables with banks...... 34 (315) (20) (301) Loans and receivables with customers ...... 830 (671) (34) 125 Financial assets pertaining to insurance companies measured pursuant to IAS 39 117 (222) (11) (116) Total interest earning assets...... 1,196 (1,530) (131) (465) Interest bearing liabilities Deposits from banks ...... (7) (264) 1 (270) Deposit from customers and securities issued and financial liabilities designated at fair value...... 312 (762) (81) (531) Financial liabilities pertaining to insurance companies measured pursuant to IAS 39 1 7 5 13 Total interest bearing liabilities ...... 306 (1,019) (75) (788) Total interest earning assets/bearing liabilities ...... 890 (511) (56) 323 Other assets/liabilities and Shareholders’ equity ...... n/a n/a n/a 356 Net interest income (*) ...... 679 (*) Of which loan deposit customers, securities and financial liabilities designated at fair value...... 518 91 47 656 ______(1) “Volume” refers to the average balance for the period minus the average balance for the previous period multiplied by the average yield for such period. (2) “Yield/Rate” refers to the average yield/rate for the period minus the average yield/rate for the previous period multiplied by the average balance for such period. The figure for the period has not been annualized. (3) “Volume and Yield/Rate” refers to “Total Net Change” minus “Volume” minus “Yield/Rate”. (4) “Total Net Change” refers to net interest income for the period minus net interest income for the previous period.
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Year ended December 31, 2019 compared to year ended December 31, 2018 Yield/ Volume and Total net Volume(1) rate (2) yield/rate(3) change (4) (in € millions) Interest earning assets Financial instruments excluding loans ...... 195 (51) (13) 131 Loans and receivables with banks...... (3) (56) (1) (60) Loans and receivables with customers ...... (72) (239) 6 (305) Financial assets pertaining to insurance companies measured pursuant to IAS 39 81 (144) (12) (75) Total interest earning assets...... 201 (490) (20) (309) Interest bearing liabilities Deposits from banks ...... 52 21 2 75 Deposit from customers and securities issued and financial liabilities designated at fair value...... (2) (297) 9 (290) Financial liabilities pertaining to insurance companies measured pursuant to IAS 39 2 (21) - (19) Total interest bearing liabilities ...... 52 (297) 11 (234) Total interest earning assets/bearing liabilities ...... 149 (193) (31) (75) Other assets/liabilities and Shareholders’ equity...... n/a n/a n/a (399) Net interest income(*) (474) (*) Of which loan deposit customers, securities and financial liabilities designated at fair value...... (70) 58 (3) (15) ______(1) “ Volume” refers to the average balance for the period minus the average balance for the previous period multiplied by the average yield for such period. (2) “ Yield/Rate” refers to the average yield/rate for the period minus the average yield/rate for the previous period multiplied by the average balance for such period. (3) “ Volume and Yield/Rate” refers to “ Total Net Change” minus “ Volume” minus “ Yield/Rate”. (4) “ Total Net Change” refers to net interest income for the period minus net interest income for the previous period. The following table, based on the Financial Information, sets forth our Group’s average interest earning assets, average interest bearing liabilities and interest margin and sets forth the comparative net interest margin ratio and net interest spread for the periods indicated.
For the years ended December 31, 2020 2019(1) 2019(2) 2018 (in € millions, except for percentages) Total average interest earning assets ...... 707,023 640,277 640,277 621,783 Total average interest bearing liabilities ...... 662,352 611,461 611,461 596,906 Net interest and similar income...... 9,268 8,589 8,589 9,063 Average yield on average interest earning assets 1.69% 1.94% 1.94% 2.05% Average rate on average interest bearing liabilities...... 0.36% 0.52% 0.52% 0.57% (1) Net interest spread ...... 1.33% 1.42% 1.42% 1.48% (2) Net interest margin ratio ...... 1.02% 1.04% 1.04% 1.14% ______(1) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (2) Figures from the 2019 Unaudited Reclassified Financial Information. (3) Net interest spread refers to the difference between the average yield of interest earning assets and average rate payable by us on interest bearing liabilities. (4) Net interest margin ratio refers to the ratio between net interest income and total average assets. Investment portfolio As of December 31, 2020, the book value of our securities portfolio increased by 7.3% to €314,879 million, representing 31.4% of our total assets, from €293,447 million as of December 31, 2019, when it represented 35.9% of our total assets. The following table, based on the Financial Information, provides a breakdown of our Group’s securities portfolio as of the dates indicated.
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As of December 31, December 31, 2020(1) 2019(2) (in € millions) Debt Securities ...... 210,497 194,004 Financial assets measured at fair value through profit or loss ...... 22,921 18,249 Financial assets measured at fair value through other comprehensive income (excluded insurance companies) ...... 53,885 68,987 Financial assets measured at amortized cost which do not constitute loans ...... 47,102 25,888 Financial assets pertaining to insurance companies pursuant to IAS 39 ...... 79,395 75,039 Loans to customers...... 7,194 5,841 Equity Instruments and Investment Fund Units...... 104,382 99,443 Financial assets measured at fair value through profit or loss ...... 4,245 3,985 Financial assets measured at fair value through other comprehensive income (excluded insurance companies) ...... 3,498 3,059 Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39 ...... 96,639 92,399 Total Securities Portfolio ...... 314,879 293,447 Financial assets measured at fair value through profit or loss ...... 27,166 22,234 Financial assets measured at fair value through other comprehensive income (excluded insurance companies) ...... 57,383 72,046 Financial assets pertaining to insurance companies pursuant to IAS 39 ...... 176,034 167,438 Financial assets measured at amortized cost which do not constitute loans ...... 47,102 25,888 Loans to customers...... 7,194 5,841 ______(1) 2020 Unaudited Restated and Reclassified Financial Information. (2) 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. Bond portfolio by maturity
The following tables, based on the Banking Group Financial Information, set forth the book value of the Banking Group’s debt securities by maturity based on residual life as of December 31, 2020 and 2019. During this period, our holdings of government bonds have increased with respect to the previous period, and they represent a substantial majority of our bond portfolio.
(1) As of December 31, 2020 Between Between 7 15 days Between 1 Between 3 Between Between 1 On Between 1 and and and and 6 months and Over Unspecifie demand and 7 days 15 days 1 month 3 months 6 months and 1 year 5 years 5 years d maturity (in € millions) On-balance sheet exposures(2) Government bonds...... 73 251 283 813 2,785 6,183 4,558 19,140 48,975 - Other debt securities ...... 210 384 731 3,162 282 692 1,013 11,643 20,506 4 Total...... 283 635 1,014 3,975 3,067 6,875 5,571 30,783 69,481 4 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. (2) Includes all on-balance sheet bonds, irrespective of their portfolio of allocation.
(1) As of December 31, 2019 Between Between 7 15 days Between 1 Between 3 Between Between 1 On Between 1 and and and and 6 months and Over Unspecifie demand and 7 days 15 days 1 month 3 months 6 months and 1 year 5 years 5 years d maturity (in € millions) On-balance sheet exposures(2) Government bonds...... 40 78 290 1,982 2,583 5,812 7,385 25,959 36,972 - Other debt securities ...... 127 725 683 4,758 189 464 692 9,329 16,219 - Total...... 167 803 973 6,740 2,772 6,276 8,077 35,288 53,191 - ______(1) Figures from the 2019 Audited Consolidated Financial Statements. (2) Includes all on-balance sheet bonds, irrespective of their portfolio of allocation. For a detailed description of our country risk exposure, see “Risk Management — Country Risk — Risk Exposure by country—Generally”. Bond portfolio by currency
The following tables, based on the Banking Group Financial Information, set forth the book value of the Banking Group’s debt securities by currency as of December 31, 2020 and 2019.
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As of December 31, 2020(1) O ther Euro currencies (in € millions) On-balance sheet exposures(2) Government bonds ...... 68,817 14,244 Other debt securities ...... 32,782 5,845 Total ...... 101,599 20,089 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. (2) Includes all on-balance sheet bonds, irrespective of their portfolio of allocation.
As of December 31, 2019(1) O ther Euro currencies (in € millions) On-balance sheet exposures(2) Government bonds ...... 66,077 15,024 Other debt securities ...... 28,522 4,664 Total ...... 94,599 19,688 ______(1) Figures from the 2019 Audited Consolidated Financial Statements. (2) Includes all on-balance sheet bonds, irrespective of their portfolio of allocation. Loan portfolio As of December 31, 2020, the Group’s loan portfolio included loans due from banks of €108,040 million, representing 10.8% of our total assets and loans to customers equal to €461,572 million, representing 46% of our total assets. As of December 31, 2020, our loan portfolio increased by 28.8% to €569,612 million from €442,399 million as of December 31, 2019. The following table, based on the Financial Information, presents a breakdown of our Group’s loan portfolio as of December 31, 2020, December 31, 2019 and December 31, 2018.
As of Change December 31, December 31, 2020(1) 2019(2) Amount % (in € millions, except for percentages) Loan portfolio Due from banks ...... 108,040 47,170 60,870 129.0 Loans to customers ...... 461,572 395,229 66,343 16.8 Total ...... 569,612 442,399 127,213 28.8 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020.
As of Change December 31, 2019(1) January 1, 2019(2) Amount % (in € millions, except for percentages) Loan portfolio Due from banks ...... 47,170 68,723 (21,553) (31.4) Loans to customers ...... 395,229 393,550 1,679 0.4 Total ...... 442,399 462,273 (19,874) (4.3) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting stan dard.
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Loan portfolio by type of facility
Our Group’s principal lending instruments are medium-term loans, mortgages, other non-overdraft lending and bank account overdraft facilities. The following table, based on the Group Financial Information, presents our Group’s loan portfolio by type of facility, net of write-downs, as of December 31, 2020 and December 31, 2019.
December 31, As of January 1, 2020(1) 2019(2) 2019(3) 2019(4) (in € millions) Loan portfolio by type of facility Bank accounts ...... 20,948 20,455 20,455 21,927 Mortgages ...... 248,327 176,640 176,640 176,821 Advances and other loans ...... 157,496 148,540 148,540 139,458 Commercial banking loans...... 426,771 345,635 345,635 338,206 Repurchase agreements ...... 16,864 29,531 29,531 33,641 Loans represented by securities(5)...... 7,194 5,841 5,841 5,112 Non-performing loans...... 10,743 14,222 14,222 16,591 Total (book value)...... 461,572 395,229 395,229 393,550 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. (5) Represents securities classified as loans. Loan portfolio by contractual maturity
The following tables, based on the Banking Group Financial Information, provide a breakdown of the Banking Group’s loans to banks and customers by maturity based on residual life as of December 31, 2020 and 2019.
(1) As of December 31, 2020 Between Between Between Between Between Between 15 days 1 and 3 and 6 month Between Unspecif On 1 and 7 and and 3 month 6 month s and 1 and Over ied demand 7 days 15 days 1 month s s 1 year 5 years 5 years maturity (in € millions) On-balance sheet exposures(2) Loans to banks...... 18,385 5,605 3,693 613 1,836 805 4,480 1,204 472 73,404 Loans to customers ...... 52,098 9,864 7,023 9,341 24,037 22,513 35,064 186,888 142,944 280 Total...... 70,483 15,469 10,716 9,954 25,873 23,318 39,544 188,092 143,416 73,684 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. (2) Include all on-balance sheet bonds, irrespective of their portfolio of allocation.
(1) As of December 31, 2019 Between Between Between Between Between Between 15 days 1 and 3 and 6 month Between Unspecif On 1 and 7 and and 3 month 6 month s and 1 and Over ied demand 7 days 15 days 1 month s s 1 year 5 years 5 years maturity (in € millions) On-balance sheet exposures(2) Loans to banks...... 14,508 3,900 1,260 1,244 4,517 2,097 3,318 2,131 242 14,401 Loans to customers ...... 45,559 17,215 7,620 13,409 20,251 20,159 26,443 133,904 111,369 89 Total...... 60,067 21,115 8,880 14,653 24,768 22,256 29,761 136,035 111,611 14,490 ______(1) Figures from the 2019 Audited Consolidated Financial Statements. (2) Include all on-balance sheet bonds, irrespective of their portfolio of allocation. Risk elements in the loan portfolio: Loan classification We analyze the risk elements in our loan portfolio in accordance with IFRS, GAAP, applicable Italian regulations (or other local regulations) and industry practices. See “Risk Management—Credit risk”. Loan Classification
Bad loans (sofferenze) These loans include on- and off-balance sheet exposures to borrowers in a state of insolvency (even if not recognized in a court of law) or in a substantially similar situation, regardless of any loss forecasts made by the bank, irrespective, therefore, of whether any collateral or guarantees have been established to cover the exposures. Exposures whose anomalous situation may be attributed to “country risk” are excluded from this category.
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“Unlikely to pay” (inadempienze probabili) These loans include exposures for which – according to the judgment of the creditor bank – full repayment is unlikely (in terms of capital or interest, and without considering recourse to actions such as enforcement of collateral arrangements). This assessment is conducted regardless of the presence of any amounts (or instalments) due and unpaid. As the assessment of unlikelihood of repayment is at the discretion of the bank, it is not necessary to await an explicit symptom of anomaly (non-repayment), when there are elements that imply a risk of non-compliance by the borrower (for example, a crisis in the industrial sector in which the borrower operates). The set of on- and off-balance sheet exposures toward the same debtor in said situation is therefore classified under the category “unlikely to pay” (unless the conditions for classification of the debtor among bad loans exist). Loans classified as “unlikely to pay” should include exposures to issuers who have not regularly honored their repayment obligations (either for capital or interest) relating to listed debt securities, unless they meet the conditions for classification as bad loans. To this end, the “grace period” established by the contract is recognized or, in its absence, the period recognized by the market listing the security. The Intesa Sanpaolo Group’s policy – in addition to what is expressly and specifically indicated by Circular No. 272 – envisages that exposures classified as “unlikely to pay” also include non-performing, past due or overdrawn loans renegotiated and which, following restructuring, no longer have past due days. As provided for in the reference regulations, classification in the non-performing category is maintained for twelve months following the signing of any restructuring. Past due and/or overdrawn exposures (crediti scaduti/sconfinanti) These are on- and off-balance sheet exposures, other than those classified as bad or unlikely to pay that, as of the reporting date, are past due or overdrawn by over 90 days on a continuous basis. This is irrespective of whether any collateral or guarantees have been established to cover the exposures. Forborne assets The concept of forbearance has also been introduced into supervisory regulations. In this context, the notion of “forborne assets”, introduced by European provisions, transversally applies to the loan classification macro- categories (performing and non-performing). The exposures subject to forbearance are subdivided into:
non-performing exposures subject to forbearance measures, which correspond to the “Nonperforming exposures with forbearance measures” pursuant to the aforementioned ITS. These exposures represent a feature, depending on the case, of loans classified as bad, unlikely to pay, or non-performing past due and/or overdrawn exposures; therefore, they do not form their own category of non-performing exposures; and
other exposures subject to forbearance measures, which correspond to the “Forborne performing exposures” pursuant to the ITS. The definition of “forborne exposures” is directly connected to that of forbearance measures. The latter represent concessions for a borrower that is facing, or is about to face, difficulties in meeting its payment obligations (troubled debt). The term “forbearance measures” indicates contractual modifications granted to the borrower suffering financial difficulties (modification), as well as the disbursement of a new loan in order to satisfy and discharge the preexisting obligation (refinancing). “Forbearance measures” include contractual modifications, which may be freely requested by a borrower with regard to an already-signed contract, but only if the lender believes the borrower to be in financial difficulty (the so-called “embedded forbearance clauses”). Credit risk management policies For a discussion of our Group’s policies on credit risk, see “Risk Management—Credit risk” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies”.
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Quality of loan portfolio The following tables, based on the Banking Group Financial Information, set forth information about the quality of the Banking Group’s credit exposures by portfolio classification and credit quality as of December 31 2020 and 2019. Breakdown of financial assets by portfolio classification and credit quality (gross and net values) - Excluding insurance companies
Non-performing Assets Performing Assets Collective Collective Gross adjustment Net Gross adjustment Net Total (Net Portfolios (1) exposure s exposure exposure s exposure exposure) (in € millions) Financial assets measured at amortized cost...... 20,982 (10,217) 10,765 607,436 (2,941) 604,495 615,260 Financial assets measured at fair value through other comprehensive income...... 49 (48) 1 54,202 (45) 54,157 54,158 Financial assets designated at fair value...... - - - X X 3 3 Other financial assets mandatorily measured at fair value...... 81 (24) 57 X X 1,642 1,699 Non-current financial assets held for sale ...... 5,424 (3,337) 2,087 24,178 (125) 24,053 26,140 Total—As of December 31, 2020...... 26,536 (13,626) 12,910 685,816 (3,111) 684,350 697,260 Total—As of December 31, 2019...... 31,890 (17,297) 14,593 524,877 (1,895) 524,633 539,226 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. Breakdown of financial assets by portfolio classification and credit quality (gross and net values) – Insurance companies
Non-performing Assets Performing Assets Individual Individual Gross adjustment Net Gross adjustment Net Total (Net Portfolios (1) exposure s exposure exposure s exposure exposure) (in € millions) Financial assets available for sale...... - - - 74,928 - 74,928 74,928 Investments held to maturity ...... ------Due from banks ...... - - - 1,180 - 1,180 1,180 Loans to customers ...... - - - 31 - 31 31 Financial assets designated at fair value...... - - - X X 4,920 4,920 Non-current financial assets held for sale ...... ------Total—As of December 31, 2020...... - - - 76,139 - 81,059 81,059 Total—As of December 31, 2019...... - - - 70,692 - 76,022 76,022 ______(1) Figures from the 2020 Audited Consolidated Financial Statements. Credit exposures by customer group and economic sector
The following tables, based on the Banking Group Financial Information, set forth information about our balance sheet exposures by (i) governments and other public entities, (ii) financial institutions and insurance companies, and (iii) non-financial companies and other counterparties as of December 31, 2020 and 2019, according to the rules established by the Bank of Italy.
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Public administration Total Captions(1) Net exposure adjustments (in € millions) A. O n-balance sheet exposures A.1 Bad Loans ...... 143 (93) - of which forborne exposures...... - - A.2 Unlikely to pay ...... 53 (37) - of which forborne exposures...... 15 (30) A.3 Non-performing past due exposures ...... 2 - - of which forborne exposures...... - - A.4 Performing exposures ...... 114,408 (105) - of which forborne exposures...... 52 - Total (A) ...... 114,606 (235) B. O ff-balance sheet exposures B.1 Non-performing exposures ...... 3 (3) B.2 Performing exposures ...... 38,835 (6) Total (B) ...... 38,838 (9) Total (A+B)—As of December 31, 2020 ...... 153,444 (244) Total (A+B)—As of December 31, 2019 ...... 137,248 (298) ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
Financial companies Insurance companies Total Total Captions(1) Net exposure adjustments Net exposure adjustments (in € millions) A. O n-balance sheet exposures A.1 Bad Loans ...... 73 (223) - - - of which forborne exposures...... 20 (98) - - A.2 Unlikely to pay ...... 241 (181) - - - of which forborne exposures...... 60 (82) - - A.3 Non-performing past due exposures ...... 33 (5) - - - of which forborne exposures...... - - - - A.4 Performing exposures ...... 68,442 (196) 1,676 (1) - of which forborne exposures...... 215 (6) - - Total (A) ...... 68,789 (605) 1,676 (1) B. Off-balance sheet exposures B.1 Non-performing exposures ...... 24 (2) - - B.2 Performing exposures ...... 54,880 (48) 8,592 - Total (B) ...... 54,904 (50) 8,592 - Total (A+B)—As of December 31, 2020 ...... 123,693 (655) 10,268 (1) Total (A+B)—As of December 31, 2019 ...... 128,779 (610) 13,272 (4) ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
Non-financial companies Households Total Total Captions(1) Net exposure adjustments Net exposure adjustments (in € millions) A. O n-balance sheet exposures A.1 Bad Loans ...... 3,503 (6,289) 1,299 (2,132) - of which forborne exposures...... 654 (775) 245 (193) A.2 Unlikely to pay ...... 5,208 (3,881) 2,026 (672) - of which forborne exposures...... 2,614 (1,293) 937 (191) A.3 Non-performing past due exposures ...... 81 (16) 410 (90) - of which forborne exposures...... 9 (1) 24 (3) A.4 Performing exposures ...... 228,141 (1,797) 179,803 (978) - of which forborne exposures...... 3,828 (247) 1,485 (66) Total (A) ...... 236,933 (11,983) 183,538 (3,872) B. Off-balance sheet exposures B.1 Non-performing exposures ...... 2,208 (295) 57 (14) B.2 Performing exposures ...... 213,248 (194) 16,105 (35) Total (B) ...... 215,456 (489) 16,162 (49) Total (A+B)—As of December 31, 2020 ...... 452,389 (12,472) 199,700 (3,921) Total (A+B)—As of December 31, 2019 ...... 357,033 (14,735) 153,885 (3,957) ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
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Borrower concentrations and large exposures
According to regulatory provisions, “large exposures” refer to unweighted “exposures” in excess of 10% of eligible capital as defined by Regulation (EU) No. 575/2013 (CRR). As of December 31, 2020 we had seven large exposures equal to €232,932 million, compared to eight large exposures equal to € 137,898 million as of December 31, 2019. Foreign country outstandings
The following tables, based on the Banking Group Financial Information, show the geographic breakdown of the Banking Group’s exposures based on the country of the borrower or ultimate guarantor of the exposure as of the dates indicated. For a detailed description of our country risk exposure, see “Risk Management—Country Risk”. Credit exposures by country: Customers
Italy Other European countries America Asia Rest of the world Total Total Total Total Total Net adjustment Net adjustment Net adjustment Net adjustment Net adjustment Captions (1) exposure s exposure s exposure s exposure s exposure s (in € millions) On-balance sheet exposures: customers Bad Loans ...... 4,786 (8,081) 225 (531) - (48) 3 (30) 4 (47) Unlikely to pay...... 7,019 (4,404) 384 (229) 32 (80) 51 (20) 42 (38) Non-performing past due exposures...... 428 (64) 82 (37) 2 - - - 14 (10) Performing exposures .. 434,825 (2,312) 113,417 (597) 21,060 (72) 13,635 (25) 7,857 (70) Total—As of December 31, 2020 447,058 (14,861) 114,108 (1,394) 21,094 (200) 13,689 (75) 7,917 (165) ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
Italy Other European countries America Asia Rest of the world Total Total Total Total Total Net adjustment Net adjustment Net adjustment Net adjustment Net adjustment Captions (1) exposure s exposure s exposure s exposure s exposure s (in € millions) On-balance sheet exposures: customers Bad Loans ...... 6,500 (12,039) 245 (589) 1 (53) 1 (6) 9 (82) Unlikely to pay...... 6,707 (3,984) 396 (262) 63 (90) 5 (1) 60 (42) Non-performing past due exposures...... 679 (109) 58 (31) - - 2 - 5 (2) Performing exposures .. 336,077 (1,288) 106,125 (456) 24,789 (45) 11,539 (18) 7,510 (60) Total—As of December 31, 2019 349,963 (17,420) 106,824 (1,338) 24,853 (188) 11,547 (25) 7,584 (186) ______(1) Figures from the 2019 Audited Consolidated Financial Statements. Credit exposures by country: Banks
Italy Other European countries America Asia Rest of the world Total Total Total Total Total Net adjustment Net adjustment Net adjustment Net adjustment Net adjustment Captions (1) exposure s exposure s exposure s exposure s exposure s (in € millions) On-balance sheet exposures: customers Bad Loans ...... - - - (1) - - - (3) - - Unlikely to pay...... - - - - 65 (14) - - - - Non-performing past due exposures...... ------Performing exposures .. 76,623 (9) 33,849 (17) 2,594 (2) 2,233 (5) 2,038 (6) Total—As of December°31, 202 0 ...... 76,623 (9) 33,849 (18) 2,659 (16) 2,233 (8) 2,038 (6) ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
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Italy Other European countries America Asia Rest of the world Total Total Total Total Total Net adjustment Net adjustment Net adjustment Net adjustment Net adjustment Captions (1) exposure s exposure s exposure s exposure s exposure s (in € millions) On-balance sheet exposures: customers Bad Loans ...... - - - (1) - - - (3) - - Unlikely to pay...... - - - - 82 (14) - - - - Non-performing past due exposures...... ------Performing exposures .. 18,962 (7) 30,181 (14) 2,959 (4) 2,638 (2) 2,344 (8) Total—As of December°31, 201 9 ...... 18,962 (7) 30,181 (15) 3,041 (18) 2,638 (5) 2,344 (8) ______(1) Figures from the 2019 Audited Consolidated Financial Statements. Loan loss experience Total adjustments to non-performing loans
For a more detailed description of how we assess impairment of financial assets and intangible assets see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies”. The following tables, based on the Banking Group Financial Information, show details of the changes in total adjustments relating to non-performing loans for the periods indicated. Credit exposures to customers: changes in total adjustments (the allowances made for exposures).
As of December 31, 2020(1) Of which: Of which: Non Of which: forborne Unlikely to forborne performing forborne Bad loans exposures pay exposures Past due exposures (in € millions) Initial total adjustments 12,769 1,635 4,379 1,540 142 14 Adjustments to purchased or originated credit-impaired assets...... 352 X 275 X 7 X Other adjustments ...... 2,236 293 1,885 590 122 5 Losses on disposal...... 209 30 53 13 - - Transfers from other non- performing exposure categories ...... 445 127 141 18 11 - Other increases ...... 195 142 110 290 42 1 Changes in contracts without derecognition...... - - 28 28 - - Total Increases ...... 3,437 592 2,492 939 182 6 Recoveries on impairment losses ...... (413) (73) (330) (177) (40) - Recoveries on repayments ...... (193) (16) (163) (76) (12) (1) Profits on disposal...... (42) (8) (31) (12) - - Write-offs ...... (2,376) (348) (392) (120) (2) - Transfers to other non- performing exposure categories ...... (30) (6) (435) (126) (132) (13) Other decreases...... (4,415) (710) (741) (364) (27) (2) Changes in contracts without derecognition...... - - (8) (8) - - Total Decreases ...... (7,469) (1,161) (2,100) (883) (213) (16) Final total adjustments...... 8,737 1,066 4,771 1,596 111 4 ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
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As of December 31, 2019(1) Of which: Of which: Non Of which: forborne Unlikely to forborne performing forborne Bad loans exposures pay exposures Past due exposures (in € millions) Initial total adjustments 14,666 1,616 5,462 2,238 121 8 Adjustments to purchased or originated credit-impaired assets...... 6 X 1 X - X Other adjustments ...... 1,333 260 1,774 611 359 42 Losses on disposal...... 32 1 38 19 - - Transfers from other non- performing exposure categories ...... 855 263 372 54 6 - Other increases ...... 244 22 71 55 40 - Changes in contracts without derecognition...... ------Total Increases ...... 2,470 546 2,256 739 405 42 Recoveries on impairment losses ...... (380) (84) (398) (206) (16) (1) Recoveries on repayments ...... (167) (16) (142) (89) (6) - Profits on disposal...... (31) (4) (53) (28) - - Write-offs ...... (3,294) (360) (287) (150) (2) - Transfers to other non- performing exposure categories ...... (46) (11) (849) (254) (338) (33) Other decreases...... (449) (52) (1,600) (700) (22) (2) Changes in contracts without derecognition...... - - (10) (10) - - Total Decreases ...... (4,367) (527) (3,339) (1,437) (384) (36) Final total adjustments...... 12,769 1,635 4,379 1,540 142 14 ______(1) Figures from the 2019 Audited Consolidated Financial Statements.
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Credit exposures to banks: changes in total adjustments (the allowances made for exposures)
As of December 31, 2020(1) Of which: Of which: Non Of which: forborne Unlikely to forborne performing forborne Bad loans exposures pay exposures Past due exposures (in € millions) Initial total adjustments 4 - 14 14 - - Adjustments to purchased or originated credit-impaired assets...... - X - X - X Other adjustments ...... 1 - - - - - Losses on disposal...... ------Transfers from other non- performing exposure categories ...... ------Other increases ...... ------Changes in contracts without derecognition...... ------Total Increases ...... 1 - - - - - Recoveries on impairment losses ...... (1) - - - - - Recoveries on repayments ...... ------Profits on disposal...... ------Write-offs ...... ------Transfers to other non- performing exposure categories ...... ------Other decreases...... ------Changes in contracts without derecognition...... ------Total Decreases ...... (1) - - - - - Final total adjustments...... 4 - 14 14 - - ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
As of December 31, 2019(1) Of which: Of which: Non Of which: forborne Unlikely to forborne performing forborne Bad loans exposures pay exposures Past due exposures (in € millions) Initial total adjustments 4 - - - - - Adjustments to purchased or originated credit-impaired assets...... - X - X - X Other adjustments ...... - - 14 14 - - Losses on disposal...... ------Transfers from other non- performing exposure categories ------Other increases ...... 1 - - - - - Changes in contracts without derecognition...... ------Total Increases ...... 1 - 14 14 - - Recoveries on impairment losses . (1) - - - - - Recoveries on repayments ...... ------Profits on disposal...... ------Write-offs ...... ------Transfers to other non-performing exposure categories...... ------Other decreases...... ------Changes in contracts without derecognition...... ------Total Decreases ...... (1) - - - - - Final total adjustments...... 4 - 14 14 - - ______(1) Figures from the 2019 Audited Consolidated Financial Statements.
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Credit quality Credit quality analysis is performed with respect to loans to customers. The allowance for loan losses as of December 31, 2020 was €13 billion, as compared to €18,808 million as of December 31, 2019. As of December 31, 2020, the Group’s NPLs, net of adjustments and excluding the stock of €401 million deriving from the UBI Banca group, already net of the component held for sale, decreased by 27.3% compared to December 31, 2019. Non-performing assets also decreased as a percentage of total net loans to customers, down to 2.6%, in line with the de-risking strategy set out in the Business Plan, while the coverage ratio for non- performing loans was 48.6% (49.4% excluding UBI Banca and 50.2% not taking account of the effects of the UBI Banca purchase price allocation). In detail, bad loans equalled €4,003 million (of which €91 billion related to UBI Banca), net of adjustments and represented 0.9% of total loans, decreasing by 42% compared to € 6,740 million as of December 31, 2019. Excluding the UBI Banca component of €91 million, bad loans equalled €3,912 million, net of adjustments, and represented 1% of total loans, decreasing by 42% compared to € 6,740 million as of December 31, 2019. The coverage ratio was 58.8%, compared to 65.3% as of December 31, 2019. Loans included in the unlikely to pay category amounted to €6,223 million (of which €278 million related to UBI Banca), accounting for 1.3% of total loans to customers, decreasing by 7.6% compared to €6,738 million as of December 31, 2019. Excluding the UBI Banca component of €278 million, loans included in the unlikely to pay category amounted to €5,945 million accounting for 1.5% of total loans to customers, decreasing by 11.8% compared to €6,738 million as of December 31, 2019, with a coverage ratio was 42.6%. Past due loans totalled €517 million (of which €32 million related to UBI Banca) decreasing by 30.5% compared to December 31, 2019. Excluding the UBI Banca component of €32 million, past due loans totalled €485 million, with a coverage ratio of 18.2%, decreasing by 34.8% compared to December 31, 2019. Overall, the coverage ratio of performing loans amounted to 0.6%, compared to 0.5% as of December 31, 2019. Loans to customers: credit quality
The following tables, based on the Financial Information, show a breakdown of the credit quality of our Group’s loans to customers as of December 31, 2020 and December 31, 2019, and as of January 1, 2019 and December 31, 2019.
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As of December 31, 2020(1) December 31, 2019(2) Total Total Changes Gross adjustm Net Gross adjustm Net net exposure ents exposure exposure ents exposure exposure (in € millions) Bad loans...... 9,594 (5,591) 4,003 19,418 (12,678) 6,740 (2,737) Unlikely to Pay ...... 10,678 (4,455) 6,223 10,995 (4,257) 6,738 (515) Past due loans ...... 627 (110) 517 886 (142) 744 (227) Non-performing loans ...... 20,899 (10,156) 10,743 31,299 (17,077) 14,222 (3,479) stage 3 non-performing loans (subject to impairment)...... 20,818 (10,132) 10,686 31,257 (17,062) 14,195 (3,509) non-performing loans measured at fair value through the profit and loss account ...... 81 (24) 57 42 (15) 27 30 Performing loans ...... 446,420 (2,807) 443,613 376,839 (1,697) 375,142 68,471 stage 2 ...... 71,037 (2,014) 69,023 41,146 (1,068) 40,078 28,945 stage 1 ...... 374,305 (793) 373,512 334,973 (629) 334,344 39,168 performing loans measured at fair value through the profit and loss account..... 1,078 - 1,078 720 - 720 358 Performing loans represented by securities ...... 7,231 (37) 7,194 5,875 (34) 5,841 1,353 stage 2 ...... 3,090 (30) 3,060 2,972 (30) 2,942 118 stage 1 ...... 4,141 (7) 4,134 2,903 (4) 2,899 1,235 Loans held for trading...... 22 - 22 24 - 24 (2) Loans to customers...... 474,572 (13,000) 461,572 414,037 (18,808) 395,229 66,343 of which forborne performing ...... 5,560 (304) 5,256 5,918 (255) 5,663 (407) of which forborne non-performing ...... 5,902 (2,360) 3,542 7,157 (3,119) 4,038 (496) Loans to customers classified among non-current assets held for sale and discontinued operations(3) ...... 29,602 (3,462) 26,140 475 (93) 382 25,758 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) As at December 31, 2020, this caption included the portfolio of bad/unlikely to pay loans (gross exposure of €3,956 million, adjustments of €2,767 million and net exposure of €1,189 million; of which gross exposure of €801 million, adjustments of €59 million and net exposure of €742 million pertaining to the UBI Banca group), together with the non-performing and performing loans included in the going concerns to be sold to BPER Banca S.p.A. and BPPB (gross exposure of €25,646 million, adjustments of €695 million and net exposure of €24,951 million; of which gross exposure of €24,196 million, adjustments of €686 million and net exposure of €23,510 million pertaining to the UBI Banca group).
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As of December 31, 2019(1) January 1, 2019(2) Total Total Changes Gross adjustm Net Gross adjustm Net net exposure ents exposure exposure ents exposure exposure (in € millions) Bad loans...... 19,418 (12,678) 6,740 21,734 (14,596) 7,138 (398) Unlikely to Pay ...... 10,995 (4,257) 6,738 14,268 (5,167) 9,101 (2,363) Past due loans ...... 886 (142) 744 473 (121) 352 392 Non-performing loans ...... 31,299 (17,077) 14,222 36,475 (19,884) 16,591 (2,369) stage 3 non-performing loans (subject to impairment)...... 31,257 (17,062) 14,195 36,396 (19,865) 16,531 (2,336) non-performing loans measured at fair value through the profit and loss account ...... 42 (15) 27 79 (19) 60 (33) Performing loans ...... 376,839 (1,697) 375,142 373,877 (2,105) 371,772 3,370 stage 2 ...... 41,146 (1,068) 40,078 43,880 (1,316) 42,564 (2,486) stage 1 ...... 334,973 (629) 334,344 329,555 (789) 328,766 5,578 performing loans measured at fair value through the profit and loss account..... 720 - 720 442 - 442 278 Performing loans represented by securities ...... 5,875 (34) 5,841 5,131 (19) 5,112 729 stage 2 ...... 2,972 (30) 2,942 986 (16) 970 1,972 stage 1 ...... 2,903 (4) 2,899 4,145 (3) 4,142 (1,243) Loans held for trading...... 24 - 24 75 - 75 (51) Loans to customers...... 414,037 (18,808) 395,229 415,558 (22,008) 393,550 1,679 of which forborne performing ...... 5,918 (255) 5,663 8,322 (385) 7,937 (2,274) of which forborne non-performing ...... 7,157 (3,119) 4,038 9,192 (3,755) 5,437 (1,399) Loans to customers classified among non-current assets held for sale and discontinued operations(3) ...... 475 (93) 382 1,244 (310) 934 (552) ______(1) Figures from the 2019 Unaudited Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. The following table, based on the Financial Information, shows certain credit quality ratios referred to loans to customers as of the dates indicated.
As of December 31, As of January 1, 2020(1) 2019(2) 2019(3) 2019 (4) Loan loss allowance for non-performing loans as percentage of total non-performing loans ...... 48.6 54.6 54.6 54.5 Loan loss allowance for bad loans as percentage of total bad loans ...... 58.3 65.3 65.3 67.2 Loan allowance for all loans as percentage of total loans...... 2.7 4.5 4.5 5.3 Non-performing loans as percentage of loans: Total loans (gross)...... 4.4 7.6 7.6 8.8 Net loans ...... 2.3 3.6 3.6 4.2 Bad loans as percentage of loans: Total loans (gross)...... 2.0 4.7 4.7 5.2 Net loans ...... 0.9 1.7 1.7 1.8 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first-time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard.
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Deposits Customer deposits, securities and interbank borrowings
The principal components of our funding are customer deposits (bank accounts or demand deposits and savings accounts), repurchase agreements, certificates of deposit (“CDs”), bonds, subordinated debt, and interbank funding. Domestic bank and savings accounts are primarily interest bearing accounts. For more information, see also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. Funding by type The following tables, based on the Financial Information, presents a breakdown of amounts due to banks, due to customers and securities issued as of December 31, 2020 and December 31, 2019.
As of Change December 31, 2020(1) December 31, 2019(2) Amount % Amount % Amount % (in € millions, except for percentages) Current accounts and deposits.. 407,832 56.7 316,810 52.3 91,022 28.7 Repurchase agreements and securities lending ...... 944 0.1 4,505 0.7 (3,561) (79.0) Bonds ...... 70,060 9.8 65,485 10.9 4,575 7.0 Certificates of deposit...... 3,976 0.6 4,574 0.8 (598) (13.1) Subordinated liabilities...... 11,786 1.6 9,308 1.5 2,478 26.6 Other deposits ...... 30,401 4.2 24,830 4.1 5,571 22.4 Direct deposits from banking business ...... 524,999 73.0 425,512 70.3 99,487 23.4 Financial liabilities of the insurance business designated at fair value (IAS 39)(3) ...... 77,149 10.7 75,886 12.5 1,263 1.7 Other deposits from insurance companies(4) ...... 1,319 0.2 816 0.1 503 61.6 Direct customer deposits(5) .... 603,467 83.9 502,214 82.9 101,253 20.2 Due to banks ...... 115,943 16.1 103,316 17.1 12,627 12.2 Total Funding...... 719,410 100.0 605,530 100.0 113,880 18.8 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures included in the balance sheet under financial liabilities designated at fair value through profit and loss. (4) Figures included in the Balance Sheet under Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39. This line item includes subordinated liabilities. (5) Figures do not include technical reserves relating to the insurance business, which represent the amounts owed to customers subscribing to traditional policies or policies with significant insurance risk.
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As of Change December 31, 2019(1) January 1, 2019(2) Amount % Amount % Amount % (in € millions, except for percentages) Current accounts and 290,587 deposits ...... 316,810 52.3 49.1 26,223 9.0 Repurchase agreements and 24,105 securities lending ...... 4,505 0.7 4.1 (19,600) (81.3) Bonds ...... 65,485 10.9 62,312 10.5 3,173 5.1 Certificates of deposit...... 4,574 0.8 5,151 0.9 (577) (11.2) Subordinated liabilities...... 9,308 1.5 10,782 1.8 (1,474) (13.7) Other deposits ...... 24,830 4.1 22,145 3.7 2,685 12.1 Direct deposits from banking business ...... 425,512 70.3 415,082 70.1 10,430 2.5 Financial liabilities of the insurance business designated at fair value (IAS 39)(3) ...... 75,886 12.5 67,756 11.5 8,130 12.0 Other deposits from insurance companies(4) .... 816 0.1 805 0.1 11 1.4 Direct customer deposits(5) ...... 502,214 82.9 483,643 81.7 18,571 3.8 Due to banks ...... 103,316 17.1 107,982 18.3 (4,666) (4.3) Total Funding...... 605,530 100.0 591,625 100.0 13,905 2.4 ______(1) Figures from the 2019 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first-time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. (3) Figures included in the balance sheet under financial liabilities designated at fair value through profit and loss. (4) Figures included in the Balance Sheet under Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39. This line item includes subordinated liabilities. (5) Figures do not include technical reserves relating to the insurance business, which represent the amounts owed to customers subscribing to traditional policies or policies with significant insurance risk. Funding: average balances The following tables, based on the Financial Information, present average balances of our Group’s total funding as of December 31, 2020 and December 31, 2019, and as of December 31, 2019 and December 31, 2018.
For the year For the year ended ended December 31, December 31, 2020 2019 Average Average balance (1) balance (1) (in € millions) Bank accounts and deposits ...... 360,872 302,884 Bonds ...... 65,180 63,461 Subordinated liabilities...... 10,639 10,473 Repurchase agreements and securities lending, certificates of deposit and other deposits .... 37,162 46,706 Direct deposits from banking business...... 473,853 423,524 Financial liabilities designated at fair value(2) ...... 73,687 72,164 Deposits from insurance companies(3) ...... 1,071 833 Direct customer deposits ...... 548,611 496,521 Due to banks ...... 113,305 114,840 Total Funding...... 661,916 611,361 ______(1) Average balances for the year ended December 31, 2020 and December 31, 2019 have been determined using quarterly balances as reported in, respectively, our 2020 Annual Report and our 2019 Annual Report, where such balances were subject to restatements to account for changes in the scope of consolidation, the implementation of required changes in accounting principles and any items that were recorded under noncurrent assets held for sale and disco ntinued operations. (2) Figures included in the balance sheet under financial liabilities designated at fair value through profit and loss. (3) Figures included in the balance sheet under due to customers and securities issued.
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For the year ended December 31, 2019 2018 Average Average balance (1) balance (1) (in € millions) Bank accounts and deposits ...... 302,884 291,720 Bonds ...... 63,461 65,550 Subordinated liabilities...... 10,473 11,883 Repurchase agreements and securities lending, certificates of deposit and other deposits ...... 46,706 54,708 Direct deposits from banking business...... 423,524 423,861 Financial liabilities designated at fair value(2) ...... 72,164 69,248 Deposits from insurance companies(3) ...... 833 1,163 Direct customer deposits ...... 496,521 494,272 Due to banks ...... 114,840 102,579 Total Funding...... 611,361 596,851 ______(1) Average balances for 2019 and 2018 have been determined using quarterly balances prepared by the company from its accounting records where such balances were subject to restatements to account for changes in the scope of consolidation, the implementation of required changes in accounting principles and any items that were recorded under noncurrent assets held for sale and discontinued operations. (2) Figures included in the balance sheet under financial liabilities designated at fair value through profit and loss. (3) Figures included in the balance sheet under due to customers and securities issued.
Funding by maturity As a financial institution, our Group’s sources of funding are the principal components of its obligations and commitments to make future payments under contracts. The following table, based on the Banking Group Financial Information, sets forth the principal components of the Banking Group’s sources of funding by maturity as of December 31, 2020 and 2019.
As of December 31, 2020 Between Between 1 Between 3 Between Between 1 Between 7 15 days and and and 6 months Between 1 Over Unspecified On demand and 7 days and 15 days 1 month 3 months 6 months and 1 year and 5 years 5 years maturity (in € millions) On-balance sheet exposures(1) Deposits and bank accounts ...... 420,267 2,844 1,634 3,863 4,958 4,715 4,624 9,189 956 - Of which: ...... – Banks ...... 5,351 872 260 1,021 608 290 200 1,897 410 - – Customers ...... 414,916 1,972 1,374 2,842 4,350 4,425 4,424 7,292 546 - Debt securities...... 154 564 684 3,390 8,099 3,449 5,342 50,691 27,580 - ______(1) Figures from the 2020 Audited Consolidated Financial Statements.
As of December 31, 2019 Between Between 1 Between 3 Between Between 1 Between 7 15 days and and and 6 months Between 1 Over Unspecified On demand and 7 days and 15 days 1 month 3 months 6 months and 1 year and 5 years 5 years maturity (in € millions) On-balance sheet exposures(1) Deposits and bank accounts ...... 301,325 1,812 1,975 2,898 3,906 3,212 4,507 6,763 1,305 - Of which: ...... – Banks ...... 4,406 595 507 643 282 940 190 973 553 - – Customers ...... 296,919 1,217 1,468 2,255 3,624 2,272 4,317 5,790 752 - Debt securities...... 56 681 2,221 1,481 7,015 7,268 6,863 42,620 23,006 - ______(1) Figures from the 2019 Audited Consolidated Financial Statements.
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Return on equity and assets The following table, based on the Banking Group Financial Information, provides a summary of the main profitability indicators for the years ended December 31, 2020 and 2019.
For the years ended December 31, 2020 2019 (in € millions, except for percentages) Net income...... 3,277 4,182 Total assets ...... 1,002,614 816,102
Shareholders’ equity ...... 65,871 55,968
Adjusted net income as a percentage of total assets (ROA(1))...... 0.3% 0.5% Adjusted net income as a percentage of shareholders’ equity (ROE(2))...... 5.9% 8.8% Shareholders’ equity as a percentage of total assets...... 6.6% 6.9% Pay-out Ratio (Dividend as a percentage of net income(3))...... 21% 0% ______(1) Ratio between net income and total assets. (2) Ratio of net income to shareholders’ equity at the end of the period. Shareholders’ equity does not take account of AT 1 capital instruments or the income for the period. government contribution is included. (3) Subject to the developments in the guidance from the Supervisory Authority after 30 September 2021, and in line with the 2018-2021 Business Plan, a distribution of reserves is envisaged, from the results for 2020, which should lead to the payment of a total amount of 3,505 million euro of adjusted consolidated net income corresponding to a payout ratio of 75%. The following table, based on the Banking Group Financial Information, provides a summary of the main profitability indicators for the years ended December 31, 2019 and 2018.
For the years ended December 31, 2019 2018 (in € millions, except for percentages) Net income ...... 4,182 4,050 Total assets ...... 816,102 787,790 Shareholders’ equity...... 55,968 54,024 Adjusted net income as a percentage of total assets (ROA) ...... 0.5% 0.5% Adjusted net income as a percentage of shareholders’ equity (ROE) ...... 8.8% 8.8% Shareholders’ equity as a percentage of total assets ...... 6.9% 6.9% Pay-out Ratio (Dividend as a percentage of net income) ...... 0%% 85%
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BUSINESS The financial information used in the discussion below is based on our 2020 Unaudited Restated and Reclassified Financial Information, our 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020, our 2019 Unaudited Reclassified Financial Information and our 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019 which is derived from our Consolidated Financial Statements and should be read together with our Consolidated Financial Statements. This chapter refers to the business of the Issuer as of this date taking into consideration the impact of the UBI Banca Acquisition. For more information on the UBI Banca Acquisition, see “UBI Banca Acquisition.” We are an Italian and European banking and financial services leader, offering a wide range of banking, financial and related services throughout Italy and internationally. Our international focus is primarily on Central Eastern Europe, the Middle East and North Africa. Our activities include deposit taking, lending, asset management, securities trading, investment banking, trade finance, corporate finance, leasing, factoring and the distribution of life insurance and other insurance products. As of December 31, 2020, we served approximately 21.8 million customers worldwide, of which approximately 14.7 million were located in Italy and approximately 7.1 million were located outside Italy through a network of (i) 5,299 branches in Italy, (ii) 1,015 branches of our commercial and retail banking subsidiaries operating in 12 countries outside Italy and an international network supporting the cross border activities of our corporate customers in 25 countries through 14 wholesale branches, 10 representative offices and four subsidiaries, (iii) a network of private bankers operating in Italy, and (iv) internet and telephone banking. The Group is the largest banking group in Italy by number of branches with a 21% market share of banking branches (source: Bank of Italy, as of December 31, 2020), no lower than 12% in 19 out of 20 Italian regions, and one of the leading banking groups in Italy by number of clients. Based on total assets of €1,002,614 million as of December 31, 2020 (€816,570 million as of December 31, 2019), we were the largest Italian bank, and as of December 31, 2020 the fifth largest bank in the Eurozone by market capitalization (source: Bloomberg). As of December 31, 2020, we had 105,615 employees, of which 82,778 in Italy and 22,837 outside Italy. For the years ended December 31, 2020 and 2019, we recorded operating income of €19,023 million and €18,167 million, respectively, and had a net income of €3,277 million and €4,182 million, respectively. Our business is operated through the following six business segments: Banca dei Territori (domestic commercial banking), IMI Corporate & Investment Banking, International Subsidiary Banks, Private Banking, Asset Management, and the Insurance. In addition, there is the Corporate Center, which provides guidance, coordination and control for the entire Group. The financial information used in the discussion below is based on our Unaudited Restated and Reclassified Financial Information, which is derived from and should be read together with our Financial Statements. The restatements and reclassifications are detailed in Annex A and Annex B. For a summary of such restatements and reclassifications, see “Presentation of Financial Information”. The tables below set forth the breakdown of our operating income, net income, loans to customers and direct deposits from our banking business by business segment for the periods indicated:
Direct deposits from banking Operating Income Net Income Loans to customers business For the year ended For the year ended % December 31, % December 31, % As of December 31, Chan As of December 31, % 2020(1) 2019(2) Change 2020(1) 2019(2) Change 2020(1) 2019(2) ge 2020(1) 2019(2) Change (€ millions, except percentages) Business Segment: Banca dei Territori ...... 8,083 8,392 (3.7) (677) 1,000 (167.7) 207,533 194,358 6.8 229,677 199,256 15.3 IMI Corporate and Investment Banking ...... 4,325 4,105 5.4 1,875 1,830 2.5 135,004 131,884 2.4 88,183 86,850 1.5 International Subsidiary Banks...... 1,908 1,998 (4.5) 473 723 (34.6) 36,079 34,038 6.0 46,308 43,420 6.7 Private Banking...... 1,944 1,971 (1.4) 873 918 (4.9) 9,853 9,329 5.6 41,145 39,537 4.1 Asset Management ...... 867 840 3.2 519 518 0.2 452 435 3.9 14 10 40.0 Insurance...... 1,257 1,216 3.4 686 661 3.8 ------Corporate Center ...... (975) (355) n.s. (1,578) (1,468) 7.5 12,903 25,185 (48.8) 51,642 56,439 (8.5) 17,409 18,167 (4.2) 2,171 4,182 (48.1) 401,824 395,229 1.7 456,969 425,512 7.4 Total...... UBI Group ...... 1,614 0 n.s. 1,106 0 n.s. 59,748 0 n.s. 68,030 0 n.s. Total...... 19,023 18,167 4.7 3,277 4,182 (21.6) 461,572 395,229 16.8 524,999 425,512 23.4
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Direct deposits from banking Operating Income Net Income Loans to customers business For the year ended For the year ended December 31, December 31, As of, As of As of As of Decemb % % % er 31, January Chan December January 1, % 2019(3) 2018(4) Change 2019(3) 2018(4) Change 2019(3) 1, 2019(4) ge 31, 2019(3) 2019(4) Change (€ millions, except percentages) Business Segment: Banca dei Territori ...... 8,473 8,825 (4.0) 1,551 1,256 23.5 186,354 196,093 (5.0) 199,256 190,960 4.3 Corporate and Investment Banking...... 4,162 3,915 6.3 1,932 1,902 1.6 131,543 124,232 5.9 96,550 102,449 (5.8) International Subsidiary Banks...... 1,998 1,988 0.5 723 676 7.0 34,038 31,538 7.9 43,420 39,384 10.2 Private Banking...... 1,971 1,874 5.2 919 848 8.4 9,329 9,530 (2.1) 38,737 32,103 20.7 Asset Management ...... 840 716 17.3 518 454 14.1 435 228 90.8 10 6 66.7 Insurance...... 1,132 1,106 2.4 661 648 2.0 0 0 0 0 0 0 Corporate Center ...... (493) (611) (19.3) (2,122) (1,734) 22.4 33,530 31,929 5.0 47,539 50,180 (5.3) Total...... 18,083 17,813 1.5 4,182 4,050 3.3 395,229 393,550 0.4 425,512 415,082 2.5 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first-time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. Our business is conducted principally in Italy, which accounted for 79.9% of our operating income, 85.0% of our loans to customers and 86.3% of our direct customer deposits as of and for the year ended December 31, 2020. For the year ended December 31, 2019, Italy accounted for 79.5% of our operating income, 81.7% of our loans to customers and 82.7% of our direct customer deposits, while for the year ended December 31, 2018, Italy accounted for 79.4% of our operating income, 83.2% of our loans to customers and 84.5% of our direct customer deposits. The table below sets forth the breakdown of our operating income, loans to customers and direct deposits by geographic area for the periods indicated:
Operating Income Loans to customers Direct deposits from banking business For the year ended As of As of As of As of December 31, December 31 December 31 December 31 December 31 (1) (2) (1) (2) (1) (2) 2020 2019 % Change , 2020 , 2019 % Change , 2020 , 2019 % Change (€ millions, except percentages) Geographic Area(5): Italy ...... 15,193 14,438 5.2 392,185 322,977 21.4 453,127 351,849 28.8 Europe ...... 3,072 2,952 4.1 53,987 54,694 (1.3) 64,215 65,056 (1.3) Rest of the World ...... 758 777 (2.4) 15,400 17,558 (12.3) 7,657 8,607 (11.0) Total...... 19,023 18,167 4.7 461,572 395,229 16.8 524,999 425,512 23.4
Operating Income Loans to customers Direct deposits from banking business For the year ended As of As of December 31, 2019, December 31 January 1, December 31 January 1, (3) (4) (3) (4) (3) (4) 2019 2018 % Change , 2019 2019 % Change , 2019 2019 % Change (€ millions, except percentages) Geographic Area(5): Italy ...... 14,354 14,160 1.4 322,977 327,336 (1.3) 351,849 350,585 0.4 Europe ...... 2,952 2,950 0.1 54,694 51,214 6.8 65,056 55,681 16.8 Rest of the World ...... 777 703 10.5 17,558 15,000 17.1 8,607 8,816 (2.4) Total...... 18,083 17,813 1.5 395,229 393,550 0.4 425,512 415,082 2.5 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first-time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. (5) Geographic area determined based on the place of incorporation of the relevant Group entities. Overall Group strategy and Business Plan We have achieved excellent results to date under our 2018-2021 business plan (the “Business Plan”), which seeks to maintain solid and sustainable value creation and distribution for shareholders and to become one of the top banks in Europe. At the same time, we also aim to strengthen our leadership in corporate social responsibility and leave a positive impact on society, while also increasing inclusion internally, without any discrimination. The pillars of the Business Plan are:
significantly reduce our risk profile, without additional cost to our shareholders;
reduce cost through further rationalization of our operating model; and
achieve sustained revenue growth, including by seizing new business opportunities;
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Our people, who are our most important resource, and the completion of the digital transformation are the key drivers that we believe will enable us to meet our goals. Risk reduction
Under the Business Plan, reducing our risk profile is the first pillar. This means we aim to reduce the level of gross non-performing loans as a proportion of total loans, at no cost to shareholders. One initiative we have introduced to reduce our risk profile is a state-of-the-art loan recovery platform (the “Pulse platform”) for servicing bad loans that we established through a joint venture with Intrum. Following the finalization of the transaction with Intrum in 2018, the joint venture has been providing management and recovery services on the annual flows of the Group’s NPLs. Our efforts to sell NPLs at book value aims to achieve a significant deleveraging of the non-performing loans at no extraordinary cost to shareholders. In 2019, the sale of a portfolio of bad loans of the Group (gross value of €10.8 billion) to the joint venture with Intrum at a price in line with our book values (around €3.1 billion) caused NPLs before adjustments to decrease to €34.8 billion, bringing their ratio to total loans to 8.4%. In 2020, our cooperation continued with Intrum Italy, a company jointly owned by the Issuer with respect to the management and recovery of the Group’s bad loans. In 2020, our gross stock of NPLs decreased to €25.5 billion, while the gross NPL ratio fell to 4.9%. The Pulse platform also introduced a centralized method of prevention and management of loan impairment in the retail segment with the aim of proposing solutions to customers experiencing financial difficulty. In 2019, we began to utilize the platform for individual customers and we subsequently extended it, on a trial basis, to retail businesses. The Pulse platform enabled us to both collect and negotiate more effectively with retail customers in arrears. In 2020, its scope of activities was extended to include the granting of moratoria to customers in difficulty due to circumstances connected with a novel coronavirus pandemic (“COVID-19 Pandemic”), a service previously only provided by the Banca dei Territori branches. Our proactive credit portfolio management aims better control debt positions at the end of the Business Plan period in order to prevent significant increases in risk or transition into non-performing status. As part of the active management of the loan portfolio, and with a view to creating value for the Group, the active credit portfolio steering structure has been set up, which has carried out significant credit risk transfers aimed at facilitating access to credit for businesses, by reducing the capital absorption. The activities carried out in 2019 included developing and monitoring control instruments, completing the second wave of measures dedicated to portfolios in stage 1 and 2 and launching mitigation measures on overdrafts. As a result of our efforts, during 2020, the amount of gross unlikely-to-pay loans of businesses/corporations fell by around €0.6 billion compared to 2019, to approximately €7.1 billion. Our unlikely-to-pay business loans has been progressively reduced due to the scale-up of proactive credit portfolio management, which, from 2020, has also been supported by Prelios S.p.A. With the finalization of the agreement with Intrum at the end of 2018, more than 60% of the objective of reducing NPLs set forth in the Business Plan for the entire four-year period 2018-2021 was achieved. In 2020, we continued to make progress toward our goal. Non-performing loans before adjustments amounted to €20.5 billion, excluding the contribution of Unione di Banche Italiane S.p.A. (“UBI Banca”) (-€31.6 billion since the beginning of the Business Plan), bringing the ratio of non-performing loans before adjustments to total loans to 4.9% excluding the contribution of UBI Banca (11.9% since the beginning of the Business Plan) and 4.4% including its contribution. The annualized cost of risk rose to 104 basis points (of which 54 basis points related to the COVID-19 Pandemic). Cost reduction
The second pillar of the Business Plan is to reduce the level of both fixed and variable costs of the Group. Under this pillar, we have taken action with respect to personnel, our branch network, the use of digital channels, our real estate holdings, our corporate structure, and administrative costs. Under the Business Plan, there are a series of objectives related to staff reduction and renewal, which include goals for reduction in labor costs (from €6 billion to €5.8 billion) and personnel (from 97,400 to 90,888 people), reskilling (for around 5,000 people) and staff renewal (1,650 new hires). In 2020, labor costs amounted to approximately €5.5 billion and the total workforce stood at 105,615 people.
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The reskilling process involved over 1,428 people, while the renewal process resulted in the hiring of over 350 specialist professionals. During the same period, there were 400 flexible work employment contracts in place and around 300 active internships. Within the framework of the strategic guidelines for the integration of UBI Banca into the Group, we reached an agreement with the trade unions on the basis of which we accepted more than 7,200 applications for voluntary exit due to retirement or access to the Solidarity Fund by December 2023 and at the same time planned 3,500 hires by the first half of 2024. Another 5,107 people of UBI Banca are included in the branches of the going concern to be sold to BPER Banca. The branch strategy project involves the streamlining and renewal of the network of bank branches, accompanied by the integration with alternative physical and virtual channels and third-party networks (open banking). Overall, these initiatives contributed to extending the Group’s coverage of the total Italian population from 75% at the end of 2017 to the current 96%. With regard to the digital channels, the development of our multi-channel platform and virtual operations continued with the introduction of new customer journeys, as well as the strengthening of the online branch, with the opening of new bases and the consolidation of the existing ones. Work on our digital channels included the expansion of the “XME” product line, the completion of the migration from the physical O-Key to the virtual O-Key, accompanied by the process of certifying mobile phones of customers (both individuals and legal entities), the expansion of operations of the online branch, the development of the Remote Relationship Manager project, the development of Digital Advertising and Proximity Marketing, consisting of a new series of products and services for business customers, and the launch of the investment section for Individual customers in the Investo App. With regard to the physical channels, the number of retail branches fell to 2,940 in 2020 while the expansion of the self-banking network continued (ATMs, cash and deposit machines, self-service tills). In relation to the integration with non-captive networks, the Group has implemented a series of initiatives to expand its partnership with Poste Italiane, while the agreement between SisalPay and Banca 5 has led to the creation of Mooney, which is Italy’s leading Proximity Banking & Payments company with over 45,000 points of sale nationwide. The real estate scaleback project aims to optimize our physical presence in Italy through the disposal of redundant spaces, transfer to less costly locations, and renegotiation of leases for existing premises. In 2018, the corporate simplification process continued with five mergers into Intesa Sanpaolo (Banca Nuova, Cassa di Risparmio del Friuli Venezia Giulia, Cassa di Risparmio del Veneto, Banco di Napoli and Cassa dei Risparmi di Forlì e della Romagna), eight rationalizations of subsidiaries not specifically included in the Business Plan (IMI Investimenti, Servizi Bancari, Fideuram Fiduciaria, Consumer Financial Holding - Slovenia, VUB Factoring - Slovenia, Veneto Banka Albania, Veneto Banka Croatia and the former Veneto Banka Romania Branches) and two sales to third parties (SEC Servizi and Galileo Network). In 2019, we merged Cassa di Risparmio di Pistoia e della Lucchesia S.p.A., Banca CR Firenze S.p.A., Cassa di Risparmio in Bologna S.p.A., Banca Apulia S.p.A., Banca Prossima S.p.A., Intesa Sanpaolo Group Services S.c.p.A., Mediocredito Italiano, Intesa Sec. 3 and Intesa Sec. NPL into the Issuer. The process of our corporate simplification continued with the merger of Banca IMI into the Issuer, which was completed on July 20, 2020. See “—Recent developments—IMI Corporate & Investment Banking Division.” The reduction of administrative expenses project aims to cut administrative expenses over the Business Plan period by creating and enabling a unit at Group level headed by the chief cost management officer that is responsible for reducing administrative expenses. Actions taken in 2019 to reduce administrative expenses included the completion of the migration of the ICT systems of the former Veneto Banks and the progressive centralization of purchasing and the management of relations with suppliers. In 2020, our plan to reduce administrative expenses resulted in the achievement of ICT synergies, the improvement in the efficiency of structure costs, the control of advisory fees, the centralization of purchasing decisions, and the extension of internal best practice to our Group’s international subsidiary banks. Revenues
The third pillar of the Business Plan is to seek increased operating income by capturing significant business opportunities in all our divisions. In particular, under this pillar, we are taking action with respect to our
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insurance division, private banking division, asset management division, marketing capabilities, digital channels, and our international affiliates. It is our goal to become one of the top four Italian P&C insurance companies and the first in non-motor retail. To realize that goal, we are currently reviewing its strategies for the offering of products, their distribution and after-sales, and claim management. A new multichannel offering called XME Protezione was launched in 2018. It offers multiple non-motor insurance cover for customers and their families. The product has a modular approach providing the possibility of customizing the cover also based on the prioritization of areas of need, both during the initial sale and over the life of the contract. In addition, starting from 2018, the offering for SMEs was enhanced with the launch of the new “Tutela Business Manifattura” product and the release of the “Pronto Intervento Service”, and additional services launched with “XME Salute”. In 2020, the focus remained on the non-motor offering for retail and SME customers, which also included updating the health, home and accident modules of the XME Protezione policy. The new service model provides for the re-evaluation of the central role of the relationship manager, whose expertise in insurance is ensured through specific training and coaching programs. The efficiency improvement of processes is continuing through the dematerialization of documents, which has already been completed for the motor sector. To support our efforts in the insurance market, we have taken steps to improve the skills and the level of service offered by the relationship managers of the Banca dei Territori. We also took steps to improve the marketing of our insurance services. A communication plan for the P&C offering was launched and the brand identity was strengthened, with the placement of “Banca Assicurazione” window stickers on the branches of the banks of the Group. We also launched numerous initiatives to promote better after-sales management in the non-life business. Such initiatives include the strengthening of the organizational structure (500 additional FTEs by the end of 2021), using instant customer feedback to continuously and immediately record customer satisfaction, and providing assistance to managers and customers on operating and process issues. Furthermore, the integration of RBM Salute is ongoing, following its acquisition in May 2020. This transaction will enable us to significantly strengthen our position in the health business. The company will operate with the new name Intesa Sanpaolo RBM Salute and will target both traditional customers of RBM Assicurazione Salute (health funds, companies and public entities) and our retail and business customers. We are a recognized leader in the private banking market. With a view to consolidating our leadership in the market, we completed an analysis of international best practices to determine the best course of action with respect to the development of new digital channels. We also conducted a feasibility study to identify strategic options and related business cases. We also took steps to improve our private banking offerings internationally. Internationally, we expanded our sales force, completed the acquisition of the Morval Group as well as its integration with Intesa Sanpaolo Private Bank (Suisse), the migration of the U.K. branch under the umbrella of the “International Swiss Hub” and the transfer of Private Banking operations to Luxembourg. As a result of our efforts, operating income from our private bank division increased 5.2% during the year ended December 31, 2019 and decreased by 1.4% during the year ended December 31, 2020. The international growth of private banking has been boosted in 2020 by launching the advisory services in Latin America, making the product offering for the Middle East market fully operational and developing the target service and operating model for the Luxembourg operations. With a view to the international growth of the private banking division, a strategic partnership has been established with Reyl, a Swiss asset management bank. This initiative is part of the broader process of strengthening and repositioning the private banking division international operations, particularly in Switzerland, the main market for international business. Once the acquisition has been completed, Fideuram- Intesa Sanpaolo Private Banking will bring the assets under management in Switzerland to over CHF 18 billion. In the final months of the year, the applications were sent to the regulatory bodies for the necessary authorizations to start the integration process. Our Asset Management division represents a small, but growing part of our business. The evolution of the branch strategy is based in large part on the strengthening of the non-captive channel through the continuation of the partnership with the Poste Group; the expansion of distribution through digital channels, including the development of the “Risparmio Digitale” services to allow customers to invest in mutual funds via apps; and the gradual extension of the flexible work employment contract, which increases business effectiveness thanks to a more entrepreneurial approach to work management. We have also taken steps to introduce our asset management services to existing customers of our other divisions. For example, the offering for Banca dei Territori customers has been enhanced with flexible solutions aimed at capital protection or currency
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diversification, while the offering for Private Bank customers has been expanded with multi-strategy/multi-asset products and investment solutions based on ESG investment criteria. We have supported these introductions by making improvements to our marketing capabilities. We have scaled up with new hires and the introduction of the flexible banking contract, which combines two types of employment contract (employee and financial advisor). The marketing of new products and services has been successfully launched, with the placement of alternative funds and products dedicated to international customers. The service models are also being upgraded for the various customer segments of Intesa Sanpaolo Private Banking and Fideuram. While introducing our asset management services to new and existing customers, we have also improved our asset management product offerings. We have introduced and upgraded our advanced consulting platform “Valore Insieme” (which, as of December 31, 2020 already had over 100,000 contracts). We also introduced the new “Risparmio Digitale” smart services, the “Robo-4-Advisor” and “Robo Advisory” infrastructure, which represent important developments in our advice offerings. Across our divisions, we have sought to connect with our customers through new and upgraded digital channels. With regard to the development of the new digital channels, with a view to creating the Digital Bank model, activities continued for the migration of banking services to the target platform, both for the Private Bank and for Fideuram. Specifically, for the Private Bank the planned operations were completed to provide Group internet banking customers with the necessary customized features and assistance and training of customers and the network were managed. In connection with the release of the new app, Private Bank customers who previously had a MyKey contract were migrated to the new platform. With regard to Fideuram customers, a similar integration is under way. Across our divisions, we have introduced initiatives aimed at increasing our revenues from corporate customers. The activities for business and corporate customers focused on the development of a separate offering to support the growth of SMEs. The marketing was launched for “Digifattura”, the new service that enables Banca dei Territori customers to meet the legal requirements for electronic invoicing and the activities were initiated for the renewal of “Impresa 4.0” (which aims to increase the disbursement of loans also thanks to tax incentives), in addition to the extension of the expiry date of the free current account offering for innovative start-ups. “Convertible Impresa”, a new medium/long-term product for innovative start-ups with the option for the Group to convert the debt into an equity investment in the company, has been launched. The new “Dialogo Industriale” platform was completed and released on all branches in support of the new model for relations with corporate customers. The new “Originate to Share” model and the related processes have been approved by the Board of Directors and have already been implemented. The development of new digital services led to the release, from July, of “Smart Save”, the first “Risparmio Digitale” service for investing in mutual funds via app. The separate offering for corporates in Italy involved the establishment of two new teams (global strategic coverage and network origination coverage) with the aim of identifying and promoting new opportunities for target customers and possible strategic deals. With regard to the growth of the international business, preliminary operating committee meetings were held to monitor the progress of the development plan, and further marketing plans have been developed and implemented for each of the key initiatives of this business, while hiring of staff has been completed for the strengthening of the coverage and the enhancement of skills in the international network of the IMI Corporate & Investment Banking Division. In particular, in 2020, to develop international business, the IMI Corporate & Investment Banking Division, in addition to enhancing the marketing for selected customers, hired 74 specialists and is identifying other priority positions to be filled in order to strengthen the coverage and skills of the international network. We have adopted an approach (the “HUB approach”) under which we organize international subsidiaries according to their geographic location (e.g., Central Europe, Southeast Europe, etc.). As part of the process of extending the HUB approach, we completed the integration of Intesa Sanpaolo Banka Bosna i Hercegovina into the PBZ Group (Croatia), the integration of the Moldovan subsidiary Eximbank into the Issuer, and the relocation of Intesa Sanpaolo Bank Slovenia in the Southeast Europe HUB. The new governance model for the Central Europe HUB was established at the time of the set-up of the HUB and the strategic partnership has been created between Slovakia, the Czech Republic and Hungary. The progress of the activities is in line with the new priorities established in 2020 in light of COVID-19.
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Within our international subsidiaries, we are working to improve the diversity and quality of product offerings. The activities of the constellation (core banking system) and cooperation (centralization of IT infrastructures) projects continued and the work relating to customer relationship management (CRISP) has been completed. The program is being implemented for the adoption of the Group’s target distribution model throughout the entire sales network in Slovakia, Croatia, Serbia, Hungary and Slovenia. The Group’s target distribution model will also be extended to Romania. The adoption of the advanced advisory model in wealth management has been progressively extended to the customer segments with more sophisticated investment needs. The activation of new functionalities and services of the digital channels is also continuing at the participating banks (Croatia, Hungary, Egypt, Albania and Slovenia) and initiatives have been implemented to encourage the use of digital services during the health emergency. With regard to the development of the wealth management services in China, after having obtained a license for the distribution of mutual funds and a business permit, Yi Tsai has started its business activities. The first phase comprised interacting with clients via app only with the implementation of a smart advice system, allowing a relationship between financial advisors and customers on the interface. The sales network in Qingdao has since been expanded and recruitment has begun in two more cities (Beijing and Jinan). We also are seeking the establishment of a securities trading company related to the development of wealth management, and the procedure with the Bank of Italy/ECB to obtain authorization to operate in China has been completed and the application submitted to the Chinese regulator the China Securities Regulatory Commission (“CSRC”), for the necessary licenses has been approved. In 2020, as part of the process of extending the HUB approach, the repositioning of Intesa Sanpaolo Bank Slovenia in the SEE HUB continued, with the activation of digital and CRM services for all customers. Work is also continuing on aligning the operating model and strengthening commercial synergies for the EC HUB. Implementation of the repositioning plan in Ukraine also continued. People and digital transformation
Our people continue to be our most important resource and, in line with the Business Plan strategy, during the year we implemented a series of initiatives dedicated to them. The process was completed for the subscription/assignment of the POP incentive plan (for top managers, top risk takers and key managers) and the LECOIP 2.0 plan (for managers and professionals) linked to the main Business Plan indicators and aimed at strengthening employee involvement in the pursuit of corporate objectives. The “International Talent Program” for the development of the next generation of middle management continued with training programs, managerial mentoring and personalized career paths. After the selection of the first participants in 2017, in 2018 the selection was completed for the new group of talent for the second edition, bringing the number of employees involved to over 200. The job rotation continued for the approximately 250 people involved in the various editions of the International Talent Program aimed at developing the next generation of middle management through training programs, managerial mentoring and personalized career paths. We believe that this method of working improves employee productivity and satisfaction, strengthening their sense of responsibility and promoting a better work-life balance, while also optimizing use of company spaces. The development also continued with other flexibility initiatives (“lavoro misto” flexible employment contract, part-time work, etc.), aimed at maximizing the relationship between remuneration and profitability and also at facilitating new recruitment to partially cover voluntary redundancies. A specific organizational unit has been created for people and process care, representing one of the first actions aimed at improving employee satisfaction, by mapping the internal offering, the main needs expressed by colleagues and the best experiences at both the national and international level. Projects have been launched to strengthen the spread of a global company culture, with the creation of uniform human resource management systems at the Group level, which ensure greater attractiveness and retention for talented individuals and top management, in addition to reducing organizational complexity and providing greater internal flexibility. In particular, the People Care project aims to ensure the effective design, implementation and (where necessary) direct management of services and initiatives aimed at improving quality of life and well-being within the company, by enhancing employee engagement and sense of belonging. A service model has been created, which is underpinned by four pillars: (i) enhancement of the offering of services
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to the people within our Group; (ii) active consultation and analysis of the needs of Group’s employees; (iii) monitoring of the leading companies in People Care systems at an international level in order to identify best practices; and (iv) implementation and development of the offering of new services. The second and most recent innovation is the launch of CareLab, an expert-created portal dedicated to personal wellbeing that provides access to multimedia content, instruments and initiatives to promote or consolidate healthy lifestyles and habits and is divided into three areas: Nutrition, Movement, and Energy and Emotional Wellbeing. Around 25,000 Group employees have used the services offered so far. As of December 31, 2020, the enhancement of skills involved the provision of more than 11.8 million training hours, an increase of 10% compared to 2019. Major investments in training enabled the strengthening of the distinctive leadership of the managers and the extension of the digital training offering to all Group employees. Specifically, the introduction of new information content (around 2,500 learning objects added in the second quarter, around 8,000 in total) has enabled greater access to the training platforms (Apprendo, App MyLa for the staff of Banca dei Territori and the Management School). Particular attention was given to implementing solutions designed to ensure managerial continuity in the event of termination of employment relationships for any reason, in order to avoid operational, economic and reputational repercussions. In addition, specific and innovative recruitment and training initiatives were launched and aimed at hiring staff under the flexible employment contract. Lastly, in response to the emergence of the COVID-19 Pandemic, the use of remote working was strengthened: organizational processes were revised and specific regulations were adopted, together with technological and IT measures, to enable the extension of remote working within the Group, and also to the personnel of the local network and the online branches. To date, around 65,500 staff (around 80,500 with UBI Banca) have the ability to engage in remote working. The “Diversity & Inclusion” structure has been set up with the aim of enhancing the wealth of multicultural backgrounds, experiences and different qualities of our people. Its task will be to foster an inclusive approach, by encouraging respect and appreciation of diversity, through the implementation of projects addressing its various dimensions. Building on the significant investments made in the previous business plan, we have continued the digital development strategy in harmony with customer needs. As a result, we have retained our position as the number one digital bank in Italy. As of December 31, 2020, our multi-channel customers amounted to 10.3 million (over 12 million with UBI Banca), of which around 6.5 million were app users. This represents an increase of 2.8 million multi-channel customers and 1 million app users since December 31, 2019. As of December 31, 2020 products available on multi-channel platforms accounted for around 85% of the total offering, while sales through remote channels reached around 26.4% (around 9.2% at the end of 2019). The many innovative products/services made available to customers included the payment services via Apple Pay, contactless services for the Milan metro lines and electronic invoicing for SMEs. The projects in the area of data management also continued, aimed at evolving the IT infrastructure for both regulatory and business purposes and, in particular, at developing and disseminating innovative advanced analytics solutions and advanced data science methods. The data management projects, in particular the advanced analytics and artificial intelligence projects, pursue objectives strictly coordinated with commercial objectives, such as service customization, process automation (for example for the Robot Process Automation for asset management) and de-risking. During 2020, digital transformation projects were developed in support of all the main action areas of the Business Plan. The digital evolution of the retail and corporate channels continued, as did the end-to-end design and digitization of selected high-impact processes, reaching a level of around 60% of activities digitized as of December 31, 2020. This is nearly double the 34% of activities that were digitized as of the end of 2019. Special attention has also been given to our relationship with FinTech and its evolution, in order to identify best practices and possible innovative partners for the development of products and services. We have established partnerships including our investments in Yolo (insurtech), BacktoWork24 (equity crowdfunding), Diamanti Inc. (containers for cloud and open source environments), and MatiPay (online payments from vending machines).
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History and organization of the Group Our banking origins
We are the result of the merger by incorporation of Sanpaolo IMI S.p.A. with and into Banca Intesa S.p.A. (effective January 1, 2007). The surviving entity changed its name to Intesa Sanpaolo S.p.A., the parent company of our Group. Banca Intesa S.p.A. Banca Intesa S.p.A. was originally established in 1925 under the name of La Centrale and invested in the business of the production and distribution of electricity. After the nationalization of companies in this sector in the early 1960s, the company changed its name to La Centrale Finanziaria Generale, acquiring equity investments in various companies in the banking, insurance and publishing sector. The company merged with Nuovo Banco Ambrosiano in 1985 and assumed its name and constitutional objects. Following the acquisition of Cassa di Risparmio delle Provincie Lombarde S.p.A. (“Cariplo”) in January 1998, the Group’s name was changed to Gruppo Banca Intesa. Then, in 2001, Banca Commerciale Italiana S.p.A. was merged into the Gruppo Banca Intesa and the Group’s name was changed to “Banca Intesa Banca Commerciale Italiana S.p.A.” On January 1, 2003, the corporate name was changed to “Banca Intesa S.p.A.”. Sanpaolo IMI S.p.A. Sanpaolo IMI S.p.A. (“Sanpaolo IMI”) was formed in 1998 through the merger of Istituto Mobiliare Italiano S.p.A. (“IMI”) with and into Istituto Bancario San Paolo di Torino S.p.A. (“Sanpaolo”). Sanpaolo originated from the “Compagnia di San Paolo” brotherhood, which was set up in 1563 to help the needy. The “Compagnia di San Paolo” began undertaking credit activities and progressively developed into a banking institution during the nineteenth century, becoming a public law credit institution (Istituto di Credito di Diritto Pubblico) in 1932. Between 1960 and 1990, Sanpaolo expanded its network nationwide through a number of acquisitions of local banks and medium-sized regional banks, ultimately reaching the level of a multifunctional group of national importance in 1991 after its acquisition of Crediop. On December 31, 1991, Sanpaolo became a stock corporation (società per azioni) with the name Istituto Bancario San Paolo di Torino Società per Azioni. IMI was established as a public law entity in 1931 and during the 1980s it developed its specialist credit and investment banking services and, with Banca Fideuram, its professional asset management and financial consultancy services. IMI became a stock corporation (società per azioni) in 1991. Recent Developments For a discussion of certain recent developments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The aftermath of the COVID-19 Pandemic
The COVID-19 Pandemic has massively disrupted the global economy. The containment measures adopted triggered a recession of unprecedented severity and speed in the first half of 2020, followed by a major rebound and another slowdown in the fourth quarter. Although the COVID-19 Pandemic did not lead to the suspension of the Group’s activities or the disappearance of the reference markets in which it operates, it nevertheless contributed to creating a climate of extreme uncertainty. In particular, the COVID-19 Pandemic caused a significant threat to the resilience of the companies in the Group’s loan portfolio. On the other hand, a series of unprecedented government measures were implemented to support the economy, which must be considered in assessing risk. With regard to business areas, the Banca dei Territori Division, which accounts for half of the fee and commission income of the business units, recorded a decrease (-6.4%, or €269 million) in fee and commission income, affected by the abrupt slowdown in the first six months of 2020 associated with containment of the COVID-19 Pandemic, to be attributed to both the management, dealing and financial consultancy and commercial banking segments. The COVID-19 Pandemic also affected the Group’s results for the year ended December 31, 2020. With regard to the most significant impacts of the COVID-19 Pandemic on the operating income of the Group, the increases
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in intermediated volumes related to the legislative and non-legislative measures implemented to combat crisis situations connected with the COVID-19 Pandemic – together with the contribution from the TLTROs with the ECB, which amounted to €82.9 billion as at December 31, 2020 (of which €12 billion related to UBI Banca) – had a positive impact on net interest income, amounting to €7,783 million (of which €713 million related to UBI Banca) over the twelve months, an increase of 11.1% on the like-for-like figure of €7,005 million for 2019. Moreover, net fee and commission income was positively affected, increasing to €8,303 million in 2020 (of which €721 million related to UBI Banca), compared to €7,962 million in 2019 (+4.3%, amounting to €341 million). Net fee and commission income for 2020, excluding the contribution of €721 million attributable to UBI Banca, came to €7,582 million, down by 4.8% compared to 2019 on a like-for-like basis. Despite the recovery in the third and fourth quarters, the result was severely influenced by the performance in the first half of the year, marked by the lockdown and by the financial market collapse at the height of the COVID-19 pandemic. However, the gradual easing of restrictions from May, enabled a considerable recovery in net fee and commission income in the following months, with a rise in the last quarter equal to 14.6% on the previous three months of 2020 and more than 22% on the second quarter (+€272 million and +€389 million respectively), returning to levels close to those earned in the same period of 2019 (-€33 million, or -1.5%). However, the most significant effect related to the considerable increase in the annualized cost of risk, which rose to 104 basis points in December 2020 from 53 basis points at the end of 2019, due to the adoption within the projection models of the ECB – Bank of Italy scenarios and the managerial overlays, which led to an increase in ECL and macro-scenario add-ons, despite default rates still remaining low. The annualized cost of risk rose to 104 basis points (of which 54 basis points related to the COVID-19 Pandemic). In general, in terms of impacts on the Group’s risks, it should be noted that, in view of the tension seen in the early months of the year some indicators already reflected the negative effects of the COVID-19 Pandemic, whereas for others, such as certain metrics related to credit risk, for now the negative impacts have not yet fully manifested themselves also thanks to the effects of the extraordinary measures adopted. See “Risk Factors—We are subject to the risks related to the spread of contagious diseases” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors affecting our business—The aftermath of the COVID-19 Pandemic” for further information. IMI Corporate & Investment Banking Division
On July 20, 2020, the merger by incorporation of Banca IMI into the Issuer became effective in accordance with the Shareholders’ Meeting and Board of Directors’ resolutions passed by the two companies and the provisions of the deed of merger dated June 19, 2020. The integration of Banca IMI into the Issuer has led to the creation of a new department, IMI Corporate & Investment Banking Division, as set forth in the Business Plan and which was the key driver of the merger. The new IMI Corporate & Investment Banking Division maintains a clear reference to Banca IMI and its brand, emphasizing that the integration represents the continuation of a process of excellence that has existed for years and is being further reinforced. The creation of the new IMI Corporate & Investment Banking Division will allow our Group to serve its corporate, public administration and financial institution customers even more effectively by drawing on a unique business model, specialist expertise and top-tier professionalism, in addition to a brand that represents Italian excellence in capital markets and investment banking. Strategic Agreement with Nexi
On July 1, 2020, we finalized a strategic agreement with Nexi S.p.A. (“Nexi”) entered into on December 19, 2019. This agreement provides for the transfer by the Issuer to Nexi of its activities that it carries our at 380,000 points of sale. Our Group will retain the sales force dedicated to acquiring new customers. Through this long- term partnership, Nexi will become the sole partner of the Issuer in the acquiring activities and we will distribute the acquiring services provided by Nexi while maintaining the existing relationship with its customers. We sold the shares received from the contribution to Nexi and used part of the consideration to purchase shares of Nexi from its key shareholder, Mercury UK HoldCo Limited, equal to a 9.9% shareholding of Intesa Sanpaolo in the share capital of Nexi. The finalization of the transaction generated a net capital gain of around €1.1 billion for our consolidated income statement in the second quarter of 2020. This figure has been calculated including
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the effect attributable to the difference between the purchase price of the 9.9% of the Nexi share capital and the corresponding value resulting from the stock exchange price of the Nexi shares. Synthetic Securitization in collaboration with the EIB Group
In the second half of 2020, we launched a new synthetic securitization in collaboration with the European Investment Fund (“EIF”) and the European Investment Bank (“EIB”), of a portfolio of loans amounting to approximately €2 billion under the Active Credit Risk Management program. With this operation, our Group continues with its efforts to support businesses affected by the emergency caused by the Covid-19 Pandemic: the resources made available through the EIF guarantee on the mezzanine tranche will be used to provide new loans to SMEs, including micro-enterprises. The initiative is primarily intended for investments by businesses involved in the production chains and to support investments in digitization and sustainability, in order to support the relaunch of the Italian productive economy. This transaction will allow businesses to access new loans for a total amount of €450 million, of which €100 million have already been stipulated at particularly favorable conditions. The new loans may also be granted in combination with the government decree measures issued to address the pandemic emergency with guarantees from the Central Fund and SACE. Participating in the financing for the acquisition of the Italian Stock Exchange
In the second half of 2020, we participated in the acquisition of 100% of the Borsa Italiana Group by Euronext N.V. (“Euronext”) from London Stock Exchange Group Holdings Italia S.p.A. for a cash consideration of €4.3 billion. The financing is fully secured through a bridge loan facility underwritten by a group of banks (Bank of America Merrill Lynch International Designated Activity Company, Crédit Agricole Corporate and Investment Bank, HSBC France and J.P. Morgan Securities plc.) and it includes approximately €2.4 billion of new equity to be issued, including: (i) a private placement (of approximately €0.7 billion) to CDP Equity and Intesa Sanpaolo and (ii) a rights offer to Euronext existing shareholders (including CDP Equity and Intesa Sanpaolo). CDP Equity and our Group will join the group of Euronext’s long-term reference shareholders through the subscription of a private placement, taking place in connection with the completion of the transaction, with CDPE acquiring a stake of approximately 7.3%, while we will own approximately a 1.3% stake. As part of the transaction, we intend to become long-term reference shareholders of Euronext. Integration of UBI Banca
On February 17, 2020, we announced our intention to launch a voluntary public exchange offer (the “Exchange Offer”) with respect to all ordinary shares of UBI Banca, an Italian bank headquartered in Bergamo, Italy, and listed for trading on the Mercato Telematico Azionario (the “MTA”) organized and managed by Borsa Italiana S.p.A. (“Borsa Italiana”), with the aim of delisting UBI Banca’s ordinary shares from the MTA and merging UBI Banca with and into our business (the “UBI Banca Acquisition”). The total consideration paid by us in connection with the UBI Banca Acquisition represented 0.5% of our total assets as of December 31, 2019. UBI Banca’s pre-tax operating income represented 7% of our pre-tax operating income for the year ended December 31, 2019 and UBI Banca’s total assets represented 15.5% of our total assets as of December 31, 2019. For every ten UBI Banca shares tendered to us, we offered 17 of our shares. At then-current market prices, the exchange ratio of 1.7x represented a significant premium to UBI Banca shareholders. The shares offered in the exchange were issued by virtue of a capital increase and offered exclusively to those tendering their UBI Banca shares to us (i.e., our shareholders had no preemptive rights with respect to the offering). The capital increase was approved by our Board of Directors on June 16, 2020, and our extraordinary shareholders’ meeting held on April 27, 2020. On July 17, 2020, with a view toward overcoming UBI Banca shareholder divisions and on the basis of updated valuations, we revised the terms of the offer by adding cash consideration equal to €0.57 per share to the initial offer terms. At the same time, the offer period was extended by Consob from the initial deadline of July 28, 2020 to July 30, 2020. We announced to the market on August 3, 2020 that approximately 90.2% of the shares subject to the offer were tendered and we came to hold 91.0% of UBI Banca’s share capital. As through the Exchange Offer we received higher than 90% but lower than 95% of UBI Banca’s share capital, pursuant to Italian law, we met the conditions
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to launch the procedure for a compulsory squeeze-out, pursuant to which we were required to purchase the remaining ordinary shares from the shareholders of UBI Banca who requested it. The compulsory squeeze-out procedure resulted in sale requests for a total of 90,691,202 shares, representing 7.9256% of the share capital of UBI Banca. As a result of the compulsory squeeze-out, since we owned more than 95% of UBI Banca’s share capital, we reserved the right granted under Italian law to exercise the squeeze-out shareholders of UBI Banca that request it through a specific joint procedure that was agreed with CONSOB and Borsa Italiana (the “Joint Procedure”), targeting all of the remaining outstanding UBI Banca ordinary shares. On October 5, 2020, we made the payment of the consideration for the Joint Procedure through (i) the issuance of 17,055,121 new Intesa Sanpaolo shares, representing 0.09% of our share capital and the payment of a consideration of €5,718,482.25 to the accepting shareholders who chose the consideration established for the offer and to the shareholders that did not submit any sale requests and (ii) the payment of €9,217,655.24 for the accepting shareholders that requested the cash consideration in full. Following the conclusion of the Joint Procedure, we came to hold 100% of the share capital of UBI Banca. After the completion of the steps described above, Borsa Italiana ordered the delisting of UBI Banca shares from trading on the MTA as of October 5, 2020 subject to suspension of the share during the sessions of October 1-2 2020. Lastly, on January 29, 2021, the plan for the merger by incorporation of UBI Banca into us was filed with the Torino Company Register. The merger was then approved by our Board of Directors on March 2, 2021. For more information about the anticipated benefits of the UBI Banca Acquisition, see “UBI Banca Acquisition”. Our business Our business is operated through the following six business divisions: Banca dei Territori (domestic commercial banking), IMI Corporate & Investment Banking, International Subsidiary Banks, Private Banking, Asset Management, and Insurance. In addition, our Corporate Center (our Group’s head office) provides guidance, coordination and control for each business segment.
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An organizational chart, as of May 14, 2021 showing our business segments is provided below:
The following table sets forth the branch network in Italy of our Issuer and principal subsidiaries as of December 31, 2020.
North North Southern( Branches in Italy Bank Name West(1) East(2) Centre(3) 4) Islands(5) Total Intesa Sanpaolo S.p.A...... 967 811 701 609 216 3,304 Banca 5 ...... 1 - - - - 1 Fideuram ...... 98 56 40 26 10 230 IWBank ...... 9 - 6 7 - 22 UBI Banca ...... 852 101 486 302 1 1,742 Total ...... 1,927 968 1,233 944 227 5,299 ______(1) Lombardy, Piedmont, Liguria, Valle d’Aosta. (2) Emilia-Romagna, Veneto, Trentino-Alto Adige, Friuli-Venezia Giulia. (3) Tuscany, Marche, Umbria, Lazio. (4) Abruzzi, Molise, Campania, Apulia, Basilicata, Calabria. (5) Sicily, Sardinia. The following table sets forth our branch network outside of Italy as of December 31, 2020.
Branches Outside of Italy Bank Name Country Branches Intesa Sanpaolo S.p.A...... China 2 France 2 Germany 1 Japan 1 Poland 1 Qatar 1 Singapore 1 Spain 1
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Branches Outside of Italy Bank Name Country Branches Turkey 1 United Arab Emirates 2 United Kingdom 1 United States 1 Banca Intesa ...... Russian Federation 28 Banca Intesa Beograd...... Serbia 155 Bank of Alexandria ...... Egypt 176 CIB Bank...... Hungary 63 Eximbank ...... Moldova 17 Fideuram Bank Luxembourg ...... Luxembourg 1 Intesa Sanpaolo Bank ...... Slovenia 46 Intesa Sanpaolo Bank Albania ...... Albania 35 Intesa Sanpaolo Bank Ireland ...... Ireland 1 Intesa Sanpaolo Bank Luxembourg...... Luxembourg 1 Intesa Sanpaolo Bank Luxembourg...... The Netherlands 1 Intesa Sanpaolo Bank Romania ...... Romania 32 Intesa Sanpaolo Banka Bosna i Hercegovina ...... Bosnia and Herzegovina 47 Intesa Sanpaolo Brazil...... Brazil 1 Intesa Sanpaolo Private Bank (Suisse) Morval ...... Switzerland 2 Intesa Sanpaolo Private Bank (Suisse) Morval ...... United Kingdom 1 Pravex Bank ...... Ukraine 45 Privredna Banka Zagreb ...... Croatia 161 VUB Banka ...... Slovakia 186 VUB Banka ...... Czech Republic 1 Total ...... 1,015 In addition, we operate through 18 representative offices around the world: (i) 17 of these offices support the international activities of our corporate clients in Europe (Moscow), the Americas (Washington D.C., New York and São Paulo), Asia (Beirut, Dubai, Ho Chi Minh City, Hong Kong, Jakarta, Mumbai, Beijing, Seoul, Shanghai and Singapore), Africa (Cairo and Casablanca) and Oceania (Sydney), and (ii) one office for European regulatory & public affairs (Brussels). Banca dei Territori
Overview The Banca dei Territori business segment operates in Italy and is our primary banking business. This business segment engages in traditional lending, deposit taking and associated financial services (including mortgages) through a distribution network of 3,280 retail and business branches throughout Italy. It includes the activities in industrial credit, leasing and factoring previously carried out through Mediocredito Italiano. For the year ended December 31, 2020, the Banca dei Territori business segment provided its services to approximately 11.8 million Italian retail customers, small businesses and SMEs, through Intesa Sanpaolo branches and our network banks (including the former Veneto Banks). This business segment’s business model is designed to maintain and enhance regional brands and strengthen local commercial coverage and relationships with our household, personal and SME customers in Italy. The Banca dei Territori business segment comprises eight regional governance centers, each of which directly reports to the Regional Manager. There are three commercial managers (one specialist for each business area (i.e., Retail, Exclusive and SME)), coordinating approximately 400 commercial areas in order to improve commercial focus and ensure the best possible service levels. As of December 31, 2020, our eight regional governance centers are: (i) Piedmont, Valle d’Aosta and Liguria (governing 360 branches), (ii) Lombardy (governing 366 branches), (iii) Milan and Province (governing 233 branches), (iv) Veneto, Friuli-Venezia Giulia and Trentino-Alto Adige (governing 584 branches), (v) Emilia-Romagna and Marche (governing 323 branches), (vi) Tuscany and Umbria, (governing 351 branches), (vii) Lazio, Sardinia, Sicily, Abruzzo and Molise (governing 530 branches), and (viii) Campania, Basilicata, Calabria, and Puglia (governing 533 branches). For the year ended December 31, 2020, this business segment recorded a decrease in operating income of 3.7% to €8,083 million, accounting for 42.5% of our operating income, as compared to €8,392 million in 2019, which accounted for 46.2% of our operating income for that period, and incurred operating costs of €5,065 million (compared to €5,291 million in 2019).
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As of December 31, 2020, the Banca dei Territori business segment had 41,863 employees. The following table sets forth the composition of the Banca dei Territori business segment’s direct deposits from banking business and loans to customers as of the dates indicated:
As of December 31, December 31, 2020(1) 2019(2) (€ millions) Direct deposits from banking business ...... 229,677 199,256 Loans to customers...... 207,533 194,358
As of December 31, January 1, 2019(3) 2019(4) (€ millions) Direct deposits from banking business ...... 199,256 190,960 Loans to customers...... 186,354 196,093 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard. The 2018-2021 Business Plan envisages a significant simplification of the Group’s corporate structure. The activities identified include the achievement of a gradual and significant reduction in the number of legal entities and, to this end, the merger by incorporation of Banca IMI S.p.A. into Intesa Sanpaolo S.p.A. was carried out, in addition to the merger of the securitization vehicle Intesa Sanpaolo Sec SA into Intesa Sanpaolo S.p.A. Activities The operations of the Banca dei Territori business segment are divided into: Individuals and Retail Companies Sales & Marketing and SME Sales & Marketing; Banca 5; and Impact Department. Individuals and Retail Companies Sales & Marketing and SME Sales & Marketing segment oversees the following: the retail sector, which consists of retail individuals, affluent and retail businesses; the exclusive area (individual customers with high asset and wealth standing and complex financial needs); and the SME area (small businesses, businesses and top businesses with high complexity and potential for growth) as well as multi-channel services for customers and the network. Our product offerings cover a broad range of financial services, including the following: Retail Banking (current accounts, prepaid cards, credit and debit cards): these services include current accounts, prepaid cards, credit and debit cards, and brokerage services. “Conto Facile” (launched in 2011) was our first “tailor made” consumer product, using a single sales platform to customize the offer based on customers’ characteristics, specific needs and operations. “BancoCard Basic” and “BancoCard Plus” are the two new debit cards that combine normal functionality with the ability to make contactless payments of up to €25 without entering a pin. During the COVID-19 Pandemic, in line with the continuous evolution of digital payment systems, our digital wallet was automatically made available in the Intesa Sanpaolo Mobile App, for all multi-channel customers, through the new brand “XME Wallet”. To support the widespread use of cards and digital payments, their features were upgraded, increasing the security of e-commerce payments for Intesa Sanpaolo customers, and developing new services, both for buyer customers and business customers, increasing the speed of the user experience of payment. Mortgage Lending: we offer standard fixed and floating rate mortgages, as well as specialized products, including flexible and personalized mortgages, which includes products such as “MutuoUp” and “Mutuo Giovani”, aimed at younger clients purchasing their first home. A free new service, “Mutuo In Tasca”, is also available to customers interested in purchasing a home and not having chosen a property
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yet, while “Mutuo Exclusive” is a new fixed-rate mortgage targeted to customers with advanced needs, aimed at facilitating investments in real estate assets. Confirming that the environment is a strategic issue and a priority for the Group, at the end of May 2020, we launched an environmentally friendly service, “Green - Mutuo Domus”. During the COVID-19 Pandemic, the offering of mortgages was modified, implementing a contingency process that permits the phases of offering and application to be executed through a telephone interview with the customers and the exchange of documents via email.
Consumer Lending: in addition to credit cards, we also provide other special purpose loans and personal loans, including “PerTe Prestito Diretto”, which can be purchased online by current account holders with a multi-channel contract and enables customers to buy goods and/or services through a loan disbursed directly to the merchant, and the “APE Volontariato” program, which provides cash advances to workers wishing to retire early. During the COVID-19 Pandemic, numerous extraordinary measures have been implemented to meet the needs of customers, including measures to support individuals that needed to open a current account and to speed up the opening of new accounts for companies and businesses, sending payment cards to customers’ homes while extending the possibility of using them to one month after expiry, emergency management of the disbursement of the extraordinary redundancy fund, with a fully online process for applying for crediting of those amounts, and the elimination of fees for sending money through the Money Transfer service. Small Business Services: we offer small businesses loans without collaterals to support their business plans. For companies registered in the specific register of “innovative start-ups”, our “Convertibile Impresa” program is now available to support their growth processes. This is a medium/long-term loan, the terms of which grant us the right, on the occurrence of a specific trigger event, to convert the credit into an equity investment in the company. As a result of the COVID-19 Pandemic, to provide the utmost support to Italian businesses and enable them to overcome difficulties while waiting for government action, we activated the option to suspend instalments of mortgages and loans and allocated a ceiling of €50 billion for new credit lines with a duration of 18 months (less one day) and dedicated €10 billion to our customers, who benefit from previously approved large credit lines, made available for wider, more flexible purposes, such as managing urgent payments.
Savings and brokerage services: we provide customers with savings, trading and security account solutions that can be tailored to an individual client’s available funds, investment objectives and risk profile. Our range of investment products was expanded to include new solutions designed to meet customers’ needs such as investing liquidity, gradually investing in equities, diversification by currency, protection of invested capital and new products with an ESG and megatrend focus (for instance, “Prospettiva Sostenibile” and “Valore Pro Insurance”). Lastly, the multimanager line of funds reserved to “Valore Insieme Exclusive” was extended to the entire network and the offer dedicated to legal persons was expanded. In the area of bancassurance, the unit-linked policies “Prospettiva Sostenibile”, with ESG features, and “Valore Pro Insurance”, dedicated solely to customers of Valore Insieme, were launched, along with the new tranches of the class I policy “Obiettivo Sicurezza Insurance”, subject to a ceiling. The Intesa Sanpaolo Mobile app includes “Smart Save”, Intesa Sanpaolo’s first digital investment service, which makes it possible to make periodic or unplanned contributions of €5 or more by smartphone to four Eurizon funds, offered in relation to the investor's financial profile.
Insurance Protection: we provide XME Protezione, the insurance solution which, in a single policy, protects the most important areas of life – health, home and household. We are also offer “XME Salute,” which allows customers to book medical services and quickly receive confirmation of the booking with discounted prices. Our “Tutela Business” for SMEs is designed to ensure the daily operations and protect their capital in case of unexpected events. It was recently expanded with the new “Pronto Intervento Aziende” service to manage and limit damages caused by unpredictable events and enable companies to restart business operations as soon as possible. To meet the needs arising due to the COVID-19 Pandemic, extensions of the health coverage offered have been made, also to new subscribers, for Proteggi Salute and XME Protezione Interventi Chirurgici for 12 months, in the event of contracting the Coronavirus, for the same amount as the premium paid.
Multichannel Project: we offer digital service, including “OkeySmart”, the new one-time-password software for the payment services in the internet market. Furthermore, the development of multi-
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channel and digital banking continued, reaching 10.3 million multichannel customers (87.7% of total customers) and 6.5 million active users on the App at the end of December 2020.
Agreements: through specific agreements with the European Investment Bank and European Investment Fund, we developed multiple lines of action which will allow us to provide end beneficiaries with new loans of over €2.8 billion, primarily intended for the Italian economy, with the goal of financing Italian small and medium enterprises and mid-caps, for new investments, particularly investments in innovative research and investment projects and permanent working capital and liquidity needs to overcome the COVID-19 Pandemic. To this end, in 2020, we reached agreements with the main Italian associations and organizations dedicated to specific industry and business types (Confcommercio, Confartigianato Imprese, Confapi - Confederazione italiana della piccola e media industria privata, Federalberghi, Federturismo, Confindustria Alberghi and Federterme, ANCE - Associazione Nazionale Costruttori Edili, Federlegno Arredo, Anima - Federazione delle Associazioni Nazionali dell’Industria Meccanica Varia e Affine, Confindustria Intellect, Assopellettieri - Associazione Italiana Pellettieri, CDO – Compagnia delle Opere, FINCO - Federazione Industria Prodotti Impianti e Servizi ed Opere Specialistiche per le Costruzioni e la Manutenzione).
Banking services for young people: we offer a wide range of products dedicated to those under the age of 18, including “Per Merito” loans targeted to students resident in Italy who intend to continue their education beyond high school. Banca 5: Banca 5 is the first online bank in Italy to operate in the payments system sector and is exclusively dedicated to a non-captive network of sales points. It is authorized for deposit-taking activity and to exercise various lending activities, for all the financial and banking operations and services permitted. Banca 5 provides three categories of services: services for individuals (postal and bank bill payment slips, F24 tax forms, car property tax, mobile phone and prepaid card top-ups). In 2019, Intesa Sanpaolo, through Banca 5, and Sisal Group, through SisalPay, signed an agreement to set up a NewCo, which will permit the offering of banking products and payment and transactional services at over 40,000 merchants located throughout the entire country. The new network has been operational since the beginning of 2020 and adds to the offering of products and services of Banca 5 and SisalPay. Moreover, during 2020 the merchants in the former SisalPay network have also begun to provide certain services of Banca 5, including withdrawals and bank transfers (reserved to customers of Intesa Sanpaolo). To strengthen the NewCo’s sales network, the “Smart POS” offer ensures that authorized merchants can even more widely distribute the range of products and services of Banca. As at December 31, 2020 around 42,000 non-captive points of sale were authorized to offer Banca 5 services. Moreover, during the second half of 2020 the merchants in the former SisalPay network began to provide certain services of Banca 5, including withdrawals and bank transfers (reserved to customers of Intesa Sanpaolo). To strengthen Mooney’s sales network, the “Smart POS” offer ensures that authorized merchants can even more widely distribute the range of products and services of Banca 5: at year-end there were 1,043 non-captive points of sale participating in the “Smart POS” offer. There are also around 71,000 retail customers using the Banca 5 app, with 41,500 cards sold and 3,000 active payment accounts. In order to better present the new organization of Banca 5, we present certain figures differently from our 2018 Unaudited Restated and Reclassified Financial Information. Impact Department: the Impact Department, a new unit of Banca dei Territori, operates in the non-profit sector, managing non-profit customers and coordinating the activation and management of social impact funds. In January 2020, the network was expanded to 90 branches and the organizational structure was revised, establishing the “Non-Profit Sector Commercial Department” to oversee the network. The acquisition of non- profit customers from other commercial areas of the Banca dei Territori Division, with dedicated welcome initiatives, was completed. At the end of December 2020, the number of customers totaled over 90,000, financial assets amounted to €7.3 billion, of which €5.5 billion in direct deposits, while lending operations presented an approved amount of €3.3 billion (of which €2.3 billion had been used). Based on the Business Plan, initiatives were realized to develop the relationship with non-profit organizations and better meet their needs. Starting in March, as a result of the COVID-19 Pandemic, two agreements were activated, one with ACRI and the other with Fondazione ONC. Both involved setting up guarantee funds to support the liquidity needs of non-profit sector entities in response to the healthcare crisis period and a mechanism for partial rebates of financial charges. In addition, the entire sales network sought to facilitate access to government credit measures.
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IMI Corporate & Investment Banking
Overview The IMI Corporate & Investment Banking business segment seeks to act as a global partner supporting the development of Italian and international corporate and financial institutions, public administrations, public utilities and infrastructure. As of December 31, 2020, this business segment serves over 17,000 customers through a specialist network composed of 25 domestic branches, 14 wholesale branches, 10 representative offices and 4 international corporate subsidiaries in 25 countries. The business segment engages in both investment banking activities (including the creation of structured finance products and M&A consultancy services) and capital markets activities for our Group’s clients and market participants. For the year ended December 31, 2020, the IMI Corporate & Investment Banking Division recorded an increase in operating income of 5.4% to €4,325 million, accounting for 22.7% of our total operating income, as compared to €4,105 million in 2019, which accounted for 22.6% of our total operating income for that period, and operating costs of €1,098 million (compared to €1,148 million in 2019). As of December 31, 2020, the IMI Corporate & Investment Banking business segment had 3,985 employees. The following table sets forth the composition of the IMI Corporate & Investment Banking business segment’s direct deposits from banking business and loans to customers as of the dates indicated:
As of As of December 31, December 31, 2020(1) 2019(2) (in € millions) Direct deposits from banking business ...... 88,183 86,850 Loans to customers...... 135,004 131,884
As of December 31, As of January 1, 2019(3) 2019(4) (in € millions) Direct deposits from banking business 96,550 102,449 Loans to customers 131,543 124,232 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard.
Activities The operations of the IMI Corporate & Investment Banking business segment are divided into five departments: Global Corporate Department, International Department, Financial Institutions Department, Global Transaction Banking Department and Global Markets and Investment Banking. Global Corporate Department: this department develops and manages relationships with Italian and foreign corporates with diverse needs and multinational presence, and with domestic public entities. It ensures the provision of a global, integrated offering of products and services by specific economic sector for customers under its remit, integrating traditional commercial banking products and services with those of investment banking and capital markets, pursuing cross-selling of products and services overseen by the IMI Corporate & Investment Banking Division, by other Divisions and by the Group’s product companies, availing itself centrally of the commercial action of the Industry units, and locally of the Italian network (Areas) and of the international network of the International Department. The coverage is also completed through two units specifically dedicated to strategic investment banking deals to support industries (Global Strategic Coverage) and geographical areas (Network Origination Coverage). The specialist coverage by industry includes all industrial sectors: Automotive & Industrials; Basic Materials & Healthcare; Energy; Food & Beverage and Distribution; Infrastructure & Real Estate Partners; Public Finance; Retail and Luxury; Telecom, Media and Technology.
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The Business Solutions industry also manages highly complex customers, transversally across the various sectors. In 2020, the Global Corporate Department continued to support both corporate and public customers, carrying out a number of investment banking transactions. The specialist skills acquired contributed to make the commercial activity more effective, adjusting it to the customers’ specific needs. In accordance with the International Growth project, which makes part of the Business Plan, international commercial growth efforts continued in support of important international counterparties. In 2020, the Global Corporate Department confirmed its role as strategic and financial partner to its Italian and international customers, supporting them by organizing and participating in a number of financing and investment banking transactions. During 2020, measures were implemented to support corporate customers to manage the economic and financial consequences of the COVID-19 Pandemic, including dedicated remote processes to enable full operations of customers. In 2020, support was given in numerous syndicated loans (e.g., Esselunga, Davide Campari Milano, General Motors, WIGA, Leonardo, Nordex, Reliance Industries, EP Infrastructure, Cerved, Polynt and Ulker Biskuvi Sanayi A.S. (Yildiz Group), acquisition financing (e.g., the acquisition of Bindi by BC Partners), as well as in M&A deals and debt and equity capital markets operations. In particular, a loan to FCA Italy and other Italian FCA group companies was finalized, which incorporates an innovative system for controlling flows to be allocated to payment of Italian employees, the supply chain and expenditure for investments in Italy on new vehicle models with less polluting engines. International Department: this department manages relationships with Italian and international customers and focuses on investments in high-potential markets. The Department aims to optimize synergies and opportunities for cross-selling corporate and investment banking products, ensures the international development of the Division in harmony with our other departments, ensures the proper management of operational and commercial activities of the international branches and representative offices and oversees the management of the international subsidiary banks (Intesa Sanpaolo Bank Luxembourg, Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Brazil - Banco Multiplo and Banca Intesa - Russia and Intesa Sanpaolo IMI Securities Corp.). In 2020, this department continued the development of its international network by focusing on monitoring relations with Italian and international customers and on investments in high-potential markets. As part of our projects aimed at increasing our competitiveness with respect to customers, coverage and products in markets of strategic interest, the department defined specific interventions to optimize synergies and opportunities for cross-selling. As of December 31, 2020, the network ensured direct coverage in 25 countries through 14 wholesale branches, 10 representative offices and 4 subsidiary banks (Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Luxembourg, Intesa Sanpaolo Brazil and Banca Intesa – Russia) and Intesa Sanpaolo IMI Securities Corporation. During 2020, the International Department managed the COVID-19 Pandemic over the international network of the IMI Corporate & Investment Banking Division, by activating all the technological and organizational solutions necessary to protect the health of colleagues and stakeholders, as well as for business continuity on the international markets and leveraging the “Accelerate program”. This initiative was launched in the second half of 2019 with the goal of boosting business with international customers, as part of the International Growth strategic initiative. In this phase characterized by an economic downturn due to the national and global spread of the pandemic, the program focused on forward looking analyses of various industrial sectors in the post- COVID-19 Pandemic scenario, to contribute to the restart of the economy in the geographical areas where the Division operates. Financial Institutions Department: this department is responsible for servicing Italian and international financial institutions. This department’s approach to relations with such customers focuses on the cross-selling of capital markets and investment banking products. In 2020, this department continued to assist Italian and international financial institutions in particularly complex and strategically important operating and extraordinary finance deals in a market which, specifically in the second quarter, was impacted by the effects of the COVID-19 Pandemic. In the domestic and international banking sectors, the Group provided advice and financing in transactions to optimize and strengthen capital
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structure, both on the equity and debt markets, as well as in the restructuring and sale of problematic assets and/or refinancing of performing assets. The level of activities with financial sponsors (such as private equity funds, special purpose acquisition companies and sovereign wealth funds) remained high, with a trend of Italian and international investors being interested in Italian companies. Global Transaction Banking Department: this department is responsible for transaction banking products and services for the entire Group. In 2020, the Global Transaction Banking Department strengthened its commercial coverage of transactional products, such as instant payment and GPI, expanding its network of specialists both in Italy and abroad. Numerous initiatives were launched on traditional and innovative transactional products to support the Group. New products for cash management and trade finance solutions were released, as were strategic development solutions to expand the offering. New services were developed and new cash management and trade finance solutions were finalized. The Department also actively participates in events to promote transaction banking products and services to customers. During 2020, constant assistance to customers was guaranteed, by making available services for remote operations on the corporate banking portal (Inbiz), enabling customers to continue conducting business and guaranteeing access to and signing of documents and contracts. Support was also provided for purchases and sales of goods and services with international suppliers, also through the companies in the Exetra Group, launched last year. In addition, solutions also continued to be developed for the public authorities and citizens with services such as IBAN Check PagoPA through Open Banking and the PagoPA solution for inputting data into the IO app. Global Markets and Investment Banking: this department includes capital markets activities, including management of the portfolio and ownership risk through direct or indirect access to markets, structured finance, M&A advisory and primary markets (equity and debt capital markets). In 2020, the Global Market Securities area, intense market making activity (Sales and Trading) in all asset classes (Rates, FX, Commodity, Equity and Credit) and the liquidity provider activity of Brokerage allowed the IMI C&IB Division to meet the customers’ demands in all situations, generating value for them. The Division ensured efficiency and market coverage during the COVID-19 Pandemic, while also strengthening remote working and internal control and safety systems and promoting a constantly faster transition to electronic service, in line with the Group’s digitalization targets. In the Equity Capital Markets segment, it maintained its customary coverage of the Italian market, playing leading roles in the ABBs of Nexi and in the sale of a stake in Inwit. On the international front, IMI Corporate & Investment Banking Division was involved in the JDE Peet’s IPO, in the capital increase by Cellnex, in the convertible bond issues by STM, Falck Renewables and Pirelli and as selling agent for Carnival on the NYSE. In the M&A Advisory segment, it held significant roles in some of the most important transactions announced in Italy in 2020, including the acquisition by the private equity funds NB Renaissance and Bain Capital of Engineering and the sale by TIM of a minority interest in Inwit to a consortium led by Ardian. In the Debt Capital Markets segment, it strengthened its position among European and international corporate issuers, with growth in volumes considerably greater than the market average. Our IMI Corporate & Investment Banking Division consolidated its position on the domestic market, bringing the Group to a top position among competitors in terms of volumes placed. In the Corporate Investment Grade and High Yield segment, the Division acted as joint bookrunner in the bond issues of leading issuers in various currencies (euro, sterling, dollars). In the Financial Institutions area, it acted as joint bookrunner in covered, senior unsecured, senior preferred and non-preferred, subordinate issues of leading Italian and foreign issuers. In the sovereign issuers segment, it was joint bookrunner for the Republic of Italy in various issues, including BTP Futura, BTP Italia and the Poste Italiane dual tranche issue. The Bank continued to occupy a position of undisputed leadership in business with Italian public sector issuers. At the same time, 2020 was marked by the COVID-19 Pandemic, whose effects on the markets were mitigated by significant actions by the governments and central banks. As a result, for the Global Market Securities area, business in fixed income products was marked by extremely high volumes, with positive profitability, while the equity business recorded a period of very high volatility and, in the commodities business, oil fell to negative
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values. The Finance & Investments area focused its strategy on significant derisking, both in the banking book and trading book, risk mitigation strategies and actions aimed at managing the exceptional circumstances on the markets. Management of the liquidity position was assured in view of optimal net interest income in accordance with the Liquidity Policy. International Subsidiary Banks
Overview The International Subsidiary Banks business segment supports the Group’s activities in non-Italian markets through its (mostly retail) commercial subsidiary banks and affiliates described below. As of December 31, 2020, we have a presence in selected countries of South Eastern Europe, Central Europe, Albania, Romania, Serbia, Egypt, Moldova and Ukraine, with approximately 7 million customers and a distribution network of 964 branches in 12 countries. The business segment has a territorial presence in three different areas in the world:
the South Eastern Europe HUB (“SEE HUB”): presence in Croatia, Bosnia and Herzegovina, and Slovenia;
the Central Europe HUB (“CE HUB”): presence in Slovakia, Hungary and Czech Republic; and
other banks: presence in Albania, Romania, Serbia, Egypt, Ukraine and Moldova. The International Subsidiary Banks business segment recorded a decrease in operating income of 4.5% to €1,908 million for the year ended December 31, 2020, accounting for 10.0% of our operating income, as compared to €1,998 million in 2019, which accounted for 11.0% of our operating income for that period, and operating costs of €981 million (compared to €991 million in 2019). As of December 31, 2020, the International Subsidiary Banks business segment had 21,677 employees. The following table sets forth the composition of the International Subsidiary Banks’ direct deposits from banking business and loans to customers as of the dates indicated:
As of As of December 31, December 31, 2020(1) 2019(2) (in € millions) Direct deposits from banking business ...... 46,308 43,420 Loans to customers...... 36,079 34,038
As of December 31, As of January 1, 2019(3) 2019(4) (in € millions) Direct deposits from banking business ...... 43,420 39,384 Loans to customers...... 34,038 31,538 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. 2018 comparative figures presented as at January 1, 2019 in order to take into account the effects of the first -time adoption of IFRS 16, permitting a consistent comparison for the line items affected by the new financial reporting standard.
Activities The entities comprising our International Subsidiary Banks engage predominantly in retail banking, including traditional lending, deposit taking and associated financial services (including mortgages, insurance and pension products). The staff of our International Subsidiary Bank supports our subsidiary banks by developing and implementing strategic improvement projects for key aspects of the subsidiaries’ businesses, including product offerings, IT systems and administrative and operational improvements.
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Set forth below is a brief description of the banks forming part of our International Subsidiary Banks business segment. It is worth mentioning that figures of total asset by subsidiary banks are reported according to Reclassified Balance Sheet. South Eastern Europe HUB (SEE HUB) Privredna Banka Zagreb d.d.: As of December 31, 2020, we own 97.5% of the share capital of Croatia’s Privredna Banka Zagreb d.d. (“Privredna Banka Zagreb”). Privredna Banka Zagreb is the second largest commercial bank in Croatia by total assets. For the year ended December 31, 2020, the operating income of the Privredna Banka Zagreb group, was €429 million, a decrease of 15.6% as compared to 2019. For the year ended December 31, 2020, operating costs were €185 million, a decrease of 4.4% compared to 2019, due to savings on all three components of expenditure. Gross income amounted to €174 million, a decrease of 34.9% compared to 2019, due to the reduction of operating income and higher adjustments to loans. For the year ended December 31, 2020, net income was €114 million, a decrease of 43.1% compared to 2019. As of December 31, 2020, Privredna Banka Zagreb had total assets of approximately €13,282 million, 3,851 employees and a network of 161 branches, as compared to €12,393 million in total assets, 3,879 employees and 181 branches as of December 31, 2019. Intesa Sanpaolo Banka d.d. Bosna i Hercegovina: As of December 31, 2020, we own 99.99% of the share capital of Intesa Sanpaolo Banka d.d. Bosna i Hercegovina (“Intesa Sanpaolo Banka Bosna i Hercegovina”), which is one of the leading banks in Bosnia and Herzegovina. For the year ended December 31, 2020, Intesa Sanpaolo Banka Bosna i Hercegovina had an operating margin of €22 million, a decrease of 11.4% as compared to 2019. Gross income for the year ended December 31, 2020 was €12 million, a 41.4% decrease as compared to 2019. As of December 31, 2020, Intesa Sanpaolo Banka Bosna i Hercegovina had total assets of approximately €1,193 million, 562 employees and a network of 47 branches, as compared to €1,192 million in total assets, 555 employees and 48 branches as of December 31, 2019. Intesa Sanpaolo Bank Slovenia: As of December 31, 2020, we own 99.1% of the share capital of Banka Intesa Sanpaolo d.d. (“Intesa Sanpaolo Bank Slovenia”). For the year ended December 31, 2020, Intesa Sanpaolo Bank Slovenia recorded operating income of €68 million, a decrease of 7.6% as compared to 2019, due to a drop in net interest income, other net operating income and, to a lesser extent, net fee and commission income. For the year ended December 31, 2020, net income amounted to €13 million, a decrease of 45.9% as compared to 2019. As of December 31, 2020, Intesa Sanpaolo Bank Slovenia had total assets of approximately €2,939 million, 669 employees and a network of 46 branches, as compared to €2,690 million in total assets, 698 employees and 49 branches as of December 31, 2019. Central Europe HUB (CE HUB) VUB Banka Group: As of December 31, 2020, we own 97.0% of the share capital of Vseobecna Uverova Banka a.s (“VUB Banka”), the second largest bank in Slovakia by total assets. For the year ended December 31, 2020, operating margin decreased by 2.3% to €229 million, as compared to 2019, due entirely to a reduction in operating income only partially offset by a decrease in operating costs. For the year ended December 31, 2020, gross income decreased by 18.9% to €159 million, as compared to 2019. As of December 31, 2020, VUB Banka had total assets of €20,169 million, 4,045 employees and a network of 187 branches, as compared to €17,626 million in total assets, 4,151 employees and 193 branches as of December 31, 2019. CIB Bank Group: As of December 31, 2020, we own 100% of the share capital of CIB Bank Ltd. (“CIB Bank”). CIB Bank is the seventh largest bank by total assets and one of the largest banking groups in Hungary. For the year ended December 31, 2020, the CIB Bank group recorded operating income of €177 million, an increase of 4.8% as compared to 2019, primarily due to the positive performance of net interest income and profits (Losses) on financial assets and liabilities designated at fair value. For the year ended December 31, 2020, net income amounted to €21 million as compared to a net income of €41 million recorded in 2019. As of December 31, 2020, CIB Bank had total assets of €6,577 million, 2,319 employees and a network of 63 branches, as compared to €6,034 million in total assets, 2,368 employees and 64 branches as of December 31, 2019.
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Other banks Intesa Sanpaolo Bank Albania Sh.A. (including Vento Banka Sh.A.): As of December 31, 2020, we own 100% of the share capital of Intesa Sanpaolo Bank Albania Sh.A. (“Intesa Sanpaolo Bank Albania”). Intesa Sanpaolo Bank of Albania is one of the largest commercial banks in Albania. For the year ended December 31, 2020, Intesa Sanpaolo Bank of Albania reported an operating margin of €17 million, a significant decrease of 17.9% as compared to 2019. Gross income for the year ended December 31, 2020 amounted to €16 million, a decrease of 20% as compared to 2019. As of December 31, 2020, Intesa Sanpaolo Bank of Albania had total assets of approximately €1,525 million, 657 employees and a network of 35 branches, as compared to €1,455 million in total assets, 663 employees and 35 branches as of December 31, 2019. Intesa Sanpaolo Bank Romania: As of December 31, 2020, we own 100% of the share capital of Intesa Sanpaolo Romania S.A. Commercial Bank (“Intesa Sanpaolo Bank Romania”). For the year ended December 31, 2020, Intesa Sanpaolo Bank Romania, recorded a total operating margin of €13 million, a significant decrease of 20.3% as compared to 2019. This decrease was due to the reduction in operating income, attributable mainly to lower interest income. The bank ended 2020 with a substantial break-even against a net income of €12 million in 2019. As of December 31, 2020, Intesa Sanpaolo Bank Romania had total assets of approximately €1,331 million, 580 employees and a network of 32 branches, as compared to €1,381 million in total assets, 564 employees and 33 branches as of December 31, 2019. Banca Intesa a.d. Beograd (including Intesa Leasing Beograd): As of December 31, 2020, we own 100% of the share capital of Banca Intesa a.d. Beograd (“Banca Intesa Beograd”). Banca Intesa Beograd is the largest bank by assets in Serbia. For the year ended December 31, 2020, Banca Intesa Beograd, including Intesa Leasing Beograd, reported an operating margin of €158 million, a decrease of 5.2% as compared to 2019. For the year ended December 31, 2020, gross income was €118 million, a decrease of 17.6% as compared to the same period in 2019. For the year ended December 31, 2020, net income was €82 million (down 23.1%). As of December 31, 2020, Banca Intesa Beograd had total assets of approximately €6,174 million, 3,106 employees and a network of 155 branches, as compared to €5,618 million in total assets, 3,109 employees and 155 branches as of December 31, 2019. Bank of Alexandria S.A.E.: As of December 31, 2020, we own 80.0% of Bank of the voting share capital of Alexandria S.A.E. (“Bank of Alexandria”). For the year ended December 31, 2020, Bank of Alexandria recorded operating margin of €213 million, in line to 2019. For the year ended December 31, 2020, operating income increased by 3.3% to €364 million due to the positive performance of net interest income. For the year ended December 31, 2020, net income came to €125 million, a decrease of 26.3% as compared to 2019 (a 29.3% decrease at fixed exchange rates). As of December 31, 2020, Bank of Alexandria had total assets of €5,462 million, 4,274 employees and a network of 176 branches, as compared to €5,945 million in total assets, 4,494 employees and 175 branches as of December 31, 2019. Pravex: As of December 31, 2020, we own 100.0% of Pravex. For the year ended December 31, 2020, Pravex recorded a negative operating margin of €4.9 million as compared to €4.2 million in 2019, decreasing by 16.7%. For the year ended December 31, 2020, operating income decreased by 18.3%, attributable to the negative performance of the net interest income. As of December 31, 2020, Pravex had total assets of approximately €219 million, 828 employees and a network of 45 branches, as compared to approximately €214 million in total assets, 884 employees and 45 branches as of December 31, 2019. Eximbank: As of December 31, 2020, we own 100.0% of Eximbank. For the year ended December 31, 2020, Eximbank recorded an operating margin of €0.9 million, (down 13.1%). For the year ended December 31, 2020, Eximbank registered a net loss of €1.3 million, as compared to the net income of €2.2 million for the year ended December 31, 2019. As of December 31, 2020, Eximbank had total assets of approximately €218 million, 355 employees and a network of 17 branches, as compared to approximately €224 million in total assets, 359 employees and 17 branches as of December 31, 2019. Private Banking
The Private Banking Division provides services to the top customers segment (Private and High Net Worth Individuals), aiming at increasing the profitability of assets managed through the development of our range of products and the provision of high service-content products. The head of the Private Banking Division coordinates the subsidiaries Fideuram, Fideuram Investimenti (Fideuram Asset Management SGR with effect
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from January 1 2021), Intesa Sanpaolo Private Banking, SIREF Fiduciaria, Intesa Sanpaolo Private Bank (Suisse) Morval, Fideuram Asset Management Ireland, Fideuram Bank (Luxembourg) and Financière Fideuram. As of December 31, 2020, this segment provides financial services to approximately 95,000 customers through 230 branches with 5,741 financial advisors and private bankers. For the year ended December 31, 2020, the Private Banking Division recorded a decrease in operating income of 1.4% to €1,944 million, accounting for 10.2% of our total operating income, as compared to €1,971 million in 2019, which accounted for 10.8% of our total operating income for that period, and operating costs of €604 million (compared to €614 million for 2019). In addition, gross income decreased by 3.9% to €1,282 million as compared to 2019. Net income decreased by 4.9% to €873 million as compared to 2019. As of December 31, 2020, assets gathered amounted to €213.9 billion, an increase of €10.4 billion as compared to the end of 2019. As of December 31, 2020, Private Banking Division had 3,107 employees. Asset Management
The Asset Management Division is tasked with developing the best asset management solutions for both retail customers and institutional customers by offering a wide range of tailored investment products and services (mutual funds and portfolio management schemes) through our subsidiary Eurizon Capital. Eurizon Capital is a leading asset management company in Italy (source: Assogestioni), with €273.3 billion of assets under management as of December 31, 2020, up 2.8% as compared to December 31, 2019. As of December 31, 2020, Eurizon Capital’s market share of assets under management was 14.8% (gross of duplications and excluding the closed-end funds segment, in which the company operates only through the equity fund “Eurizon Italian Fund – Eltif”). For the year ended December 31, 2020, the Asset Management Division recorded an increase in operating income of 3.2% to €867 million, which accounted for 4.6% of our total operating income as compared to €840 million in 2019, which accounted for 4.6% of our total operating income for that period. The overall increase was primarily due to higher fee and commission income. In addition, operating costs recorded a decrease of 0.6% to €156 million, as compared to €157 million for the year ended December 31, 2019. As of December 31, 2020, the Asset Management business segment had 580 employees. Activities Eurizon Capital offers a wide range of products, under both Italian and Luxembourg law, differentiated by management philosophy, style, and risk/return profile. This enables Eurizon Capital to offer investment solutions to meet the different needs of its customers: multi-asset, multi-style, and multi-product portfolios; LTE (Limited Tracking Error) products, managed by the Luxembourg-based subsidiary Eurizon Capital SA; quantitatively managed structured products, managed by Epsilon SGR. Eurizon Capital distributes its products on the retail market both through Intesa Sanpaolo Group and non-captive distributors. As of December 31, 2020, based on market share, Eurizon Capital is one of the most prominent institutional asset managers in Italy. The company has achieved this through a dedicated structure formed by two closely integrated units: the Investment unit, and the Sales unit. Also, through a dedicated sales team, Eurizon Capital offers fund-users its best management expertise in the institutional class. Eurizon Capital is also active in Eastern Europe with a network of asset management companies controlled with a 100.0% stake by Eurizon Capital SGR. The network includes VUB Asset Management, one of the leading Slovakian firms in the industry, which controls the Hungarian asset management firm CIB Investment Fund Management, and Croatian firm PBZ Invest. Eurizon Capital is also active in Asia, through a 49.0% stake in Penghua Fund Management Co. Ltd., one of the leading Chinese asset management companies based on assets under management, and through the wholly-owned Eurizon Capital (HK) Ltd. Eurizon Capital expanded its operations by incorporating the Chinese wealth management company Yicai, headquartered in Qingdao, which is now a wholly owned company of Intesa Sanpaolo. Insurance
The Insurance business segment oversees management of the subsidiaries Sanpaolo Vita, Intesa Sanpaolo Life, Fideuram Vita, Intesa Sanpaolo Assicura and Intesa Sanpaolo RBM Salute with the mission of further developing the insurance product mix targeting Group customers. As of December 31, 2020, direct deposits
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from insurance business increased by 4.0% to €172,609 million as compared to the end of 2019. For the year ended December 31, 2020, the Insurance business segment recorded an increase in operating income of 3.4% to €1,257 million, accounting for 6.6% of our total operating income, as compared to €1,216 million in 2019, which accounted for 6.7% of our total operating income for that period. In addition, operating costs increased to €241 million (up 7.6% as compared to the year ended December 31, 2019). In addition, net income increased by 3.8% to €686 million as compared to December 31, 2019. As of December 31, 2020, the Insurance Division had 994 employees. Activities The Insurance business segment develops insurance products for the Group’s customers through four subsidiaries.
Intesa Sanpaolo Vita: Insurance parent company specialized in offering insurance, pension and personal and asset protection services within the Banca dei Territori. The Company owns 100% of Intesa Sanpaolo Life, Intesa Sanpaolo Assicura and has a 49.0% stake in Intesa Sanpaolo Smart Care, a 51.0% owned subsidiary of Intesa Sanpaolo (Banca dei Territori Division) that markets hardware and software and provides remote assistance services. In May 2020, Intesa Sanpaolo Vita acquired control of RBM Assicurazione salute.
Intesa Sanpaolo Life: Specialized in life insurance products with a higher financial content, such as unit-linked products.
Intesa Sanpaolo Assicura: Dedicated to the non-life business, it offers customers a wide range of products capable of covering personal injury, damage to vehicles and to the home and loan protection.
Intesa Sanpaolo RBM Salute: Specialized in the health care business.
Fideuram Vita: Specialized in offering insurance, pension and personal and asset protection products in service of the Private Banking Division. Corporate Center
The Corporate Center’s mission is to provide guidance, coordination and control of the whole Group as well as for treasury operations, asset and liability management for our Group (i.e. management of our Group’s interest rate risks), cash pooling for members of the Group and IT services (including IT emergency and disaster recovery planning). The Corporate Center includes the central structures that perform holding company activities and support operating units through centralized services. For the year ended December 31, 2020, the Corporate Center generated a negative operating margin of €1,916 million, compared to negative €1,337 million in 2019. In addition, the Corporate Center recorded a net loss of €1,578 million, as compared with a loss of €1,468 million for the year ended December 31, 2019. Treasury operations The Treasury Department includes services in both Euro and foreign currencies, and the integrated management of liquidity requirements/surpluses, financial risks and settlement risks. In 2020, Intesa Sanpaolo confirmed its role as a “critical participant” in the Eurosystem by maintaining its market share of payments made on the Eurosystem’s Target2 and Target2 Securities platforms. Moreover, Intesa Sanpaolo has cooperated to create infrastructures for the settlement of instant payments in the market. Treasury operations also include our funding activities, which is one of the primary functions of the Corporate Center. Yet, the outstanding amount of our euro and foreign currency short-term securities funding programs decreased during the year due to the cautious behavior of investors in relation to the Italian market, characterized by volatility and uncertainty regarding the fiscal package. As of December 31, 2020, we placed total securities of €5.15 billion in domestic Italian transactions, as well as €7.14 billion of unsecured institutional funding transactions in international markets.
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Strategic Asset and Liability Management The Corporate Center manages the interest rate risks associated with our banking book through our Group’s Asset and Liability Management (ALM) department, supervised by our Group’s Financial and Market Risk department. Interest rate risk is monitored and managed primarily by examining the sensitivity of the market value of the various positions in the banking book to parallel shifts in the interest rate curve at various maturity levels. Strategic choices on interest rate risk are made by our Group’s Financial Risks Committee, within limits established by our Management Board. The structural component of liquidity risk is managed by identifying expected liquidity mismatches by maturity bands, on the basis of liquidity policies defined internally at the Group level. Mismatch analysis on medium and long term maturities provides input for planning bond funding, in order to anticipate possible pressures on short-term funding. Chief IT, Digital and Innovation Officer Governance Area
The Chief IT, Digital and Innovation Officer Governance Area (the “CITDIO”“) is tasked with identifying, analyzing and developing innovation activities, guaranteeing their monitoring, coordination and consistency at the Group level, searching for innovative solutions on the national and international markets to identify development opportunities for the Group and its customers. The area defines, in line with business strategies and objectives, the guidelines and policies on Group’s innovation, proposing new projects that are in line with the main innovation trends, so that they can be translated into actions to support the achievement of the Bank’s growth objectives. This structure governs innovation initiatives and the related investments, along with the competent company structures, taking on the most appropriate role each time to achieve successful projects. The area, in partnership with the other Group structures, also acts as the driver of innovation initiatives throughout the country, building a national and international network of relations with the ecosystem, promoting valuable partnerships with companies, incubators, research centers, universities and other institutions. The structure also pursues the objective of disseminating the culture of innovation within the Group. UBI Banca
Following the UBI Banca Acquisition, we started to consolidate UBI Banca within the Group in August 2020. The results of UBI Banca are subject to consolidation from the UBI Banca Acquisition date and thus starting in August 2020.
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The following table sets forth the income statement figures for UBI Banca from August 2020 to December 31, 2020.
For the period ended December 31, 2020 (in € millions) Net interest income ...... 713 Net fee and commission income ...... 721 Income from insurance business ...... 10 Profits (losses) on financial assets and liabilities designated at fair value...... 131 Other operating income (expenses) ...... 39 O perating income...... 1,614 Personnel expenses ...... (608) Other administrative expenses ...... (219) Adjustments to property, equipment and intangible assets...... (58) O perating costs...... (885) O perating margin...... 729 Net adjustments to loans...... (54) Other net provisions and net impairment losses on other assets ...... (8) Other income (expenses) ...... - Income (Loss) from discontinued operations ...... - Gross income (loss)...... 667 Taxes on income ...... (170) Charges (net of tax) for integration and exit incentives ...... (1,387) Effect of purchase price allocation (net of tax) ...... 2,062 Levies and other charges concerning the banking industry (net of tax) ...... (47) Impairment (net of tax) of goodwill and other intangible assets...... - Minority interests...... (19) Net income (loss) ...... 1,106 The following table sets forth the balance sheet figures for UBI Banca from August 2020 to December 31, 2020.
For the period ended December 31, 2020 (in € millions) Loans to customers...... 59,748 Direct deposits from banking business ...... 68,030 Risk-weighted assets ...... 60,193 Absorbed capital ...... 5,386 The results of UBI Banca are temporarily represented as a separate business unit and will be assigned to divisions at a later date, as integration of the processes moves ahead. See “UBI Banca Acquisition” for further information. Employees Headcount
As of December 31, 2020, we had 105,615 employees, representing an increase of approximately 18.5% from 89,102 as of December 31, 2019. The following table sets out the number of employees of the Group for the years ended December 31, 2020, 2019 and 2018, respectively, divided by geographical area.
As of December 31, 2020(1) 2019(2) 2019(3) 2018(4) Italy...... 82,778 65,705 65,705 68,435 Outside Italy ...... 22,837 23,397 23,397 23,806 Number of employees ...... 105,615 89,102 89,102 92,241 ______(1) Figures from the 2020 Unaudited Restated and Reclassified Financial Information. (2) Figures from the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. (3) Figures from the 2019 Unaudited Reclassified Financial Information. (4) Figures from the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019.
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Labor relations
In Italy, national collective bargaining agreements for the banking sector are negotiated between the national association of banks (“ABI”“) and the national unions. The relationships of the individual banks with their employees must be based on and comply with the guidelines set out by the national collective bargaining agreements. The national collective bargaining agreement for non-management staff (which covers almost all of our employees) was renewed in January 2012. Most of our Italian employees belong to one of the eight national unions, representing both employees and middle management, which we believe to be in line with the average for the Italian banking sector. Over the last three years we have experienced few significant work stoppages, most of which have been of a national nature, either due to the Italian economy or the banking sector as a whole, and not the result of in-house labor disputes. We consider our overall relations with employees to be good, and we have successfully negotiated several agreements with the trade unions, such as an agreement (Protocollo per lo sviluppo sostenibile) of February 1, 2017 concerning work-life balance, an agreement of March 15, 2017, concerning remote control of workers (controllo a distanza dei lavoratori) and an agreement of May 24, 2017 concerning commercial policies and working environment. On September 29, 2020, we entered into an agreement with trade unions which aims at enabling generational change at no social cost while continuing to ensure an alternative to the possible paths for staff re-skilling and redeployment as well as the enhancement of the skills of the people of the Intesa Sanpaolo Group resulting from the acquisition of UBI Banca. On December 30, 2020, we entered into the trade union agreement regulating the transfer of personnel to BPER Banca, as part of the fulfilment of the requirements established by the antitrust authority following the completion of the public exchange offer through which we acquired control of UBI Banca. On January 14, 2021, Intesa Sanpaolo announced that it would hire 1,000 people, in addition to the 2,500 already provided for in the trade union agreement of September 29, 2020. This decision confirms the effective progress of the process for the integration of UBI Banca into the Intesa Sanpaolo Group. Competition In recent years, the Italian banking market has been characterized by structural changes that have facilitated the establishment of an efficient and highly competitive market. The banking market in Europe and in Italy, in light of the continuing reduction of economic and regulatory barriers, has been driven by increased competition and strong consolidation, with a significant reduction in the number of financial services providers. In recent years, the consolidation trend has expanded to smaller, cooperative-type banks with strong presences in confined geographic areas, thereby adding to the overall competitive pressure in the market. The consolidation trend has resulted in a higher volume of diversified services and new products being offered to customers in various areas of financial intermediation, as banks seek to increase financial revenues while reducing operational costs. The aim of such consolidations has been an increase in financial revenues accompanied by a reduction in operational costs. Increased competition in the Italian banking market has also brought a higher degree of specialization of banks, which now tend to organize their activities and structure to provide dedicated services to their categories of clients. In this respect, management believes that through our internal reorganization following the merger of Banca Intesa and Sanpaolo IMI, we were among the first to adopt a client segment focused organization in Italy. The success of phone and Internet banking has contributed to increase the competitive pressure in the Italian market, by lowering traditional barriers to new entrants. According to the Bank of Italy, the number of customers using phone banking and internet banking services has increased significantly in recent years. Competition has also grown in the private banking sector, a highly fragmented market, where the large international and domestic full service banks have maintained the competitive lead. In certain cases, the main players in the private banking market offer their services through internal departments, while in other cases, through dedicated structures, such as our Banca dei Territori. Given that banks provide private banking services to customers based on different minimum asset value thresholds (ranging from €300,000 to €1 million), it is difficult to assess market shares in the private banking sector.
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In Italy, we primarily compete with the largest full service banks having a nation-wide presence, which include the UniCredit group and, although smaller, the Banca Monte dei Paschi di Siena, Banco BPM and BNP Paribas groups. We compete with these institutions in substantially all of our Italian areas of activity. Market Share Based on Bank of Italy data as of December 31, 2020 (unless otherwise stated) and including UBI Banca in its configuration as at December 31, 2020 we had a market share in Italy of 22% of total loans and 24% of total deposits and securities, as compared to 17% and 18%, respectively, as of December 31, 2019. We are also the largest bank by banking branches in Italy with a market share of 21% as of December 31, 2020 (down from 15% as of December 31, 2019) and in all of Italy’s four macro-regions of Northwest Italy, Central Italy, Southern Italy (including Sardinia and Sicily) and Northeast Italy with market shares no lower than 12% in 19 out of 20 Italian regions (source: Bank of Italy). As of December 31, 2020 (unless otherwise stated), we had a market share of 24.7% of asset management (mutual funds) (source: Assogestioni), 15.3% of gross-premiums related to the life insurance sector (compared to 15.0% as of December 31, 2019) (source: ANIA), 23.2% of pension funds (compared to 22.9% as of December 31, 2019) (source: Covip), 27.1% of total factoring (compared to 23.7% as of December 31, 2019) (source: Assifact) and 5.2% of leasing (compared to 4.1% as of December 31, 2019) (source: Assilea). Assets, Property and Equipment As of December 31, 2020, we had property and equipment worth €10,850 million, the entirety of which was property and equipment used in our operations. We own the majority of our offices and branches. Intellectual Property We utilize and own several trademarks, which are registered in Italy, EU-wide and internationally. The most significant institutional trademark owned by the Group is “Intesa Sanpaolo”. Litigation and Other Proceedings The Intesa Sanpaolo Group is subject to a number of claims, and is a party to a number of legal proceedings, in the normal course of its business, including proceedings related to labor and employment, tax matters and arbitrations. Although it is difficult to determine the outcome of such claims and proceedings with certainty, we believe that liabilities related to such claims and proceedings are unlikely to have, individually or in the aggregate, a material adverse effect on our Group’s financial condition, results of operations or financial condition. Legal risks are analyzed by the Intesa Sanpaolo Group and provisions are made for risks and charges where there are legal obligations for which it is likely that funds will be disbursed to meet such obligations and where it is possible to make a reliable estimate of the amount. As of December 31, 2020, provisions made by our Group to cover risks and charges for lawsuits and claw-back claims (excluding employment, tax and credit recovery lawsuits) amounted to €765 million, compared to €588 million as of December 31, 2019. The material legal proceedings are described below. See “Risk factors—We are subject to legal risk, including the risk of class action lawsuits, which could have a material adverse effect on our business, results of operations or financial condition”. Offering of diamonds
In October 2015, we signed a partnership agreement with Diamond Private Investment (“DPI”) governing how diamond offerings were made by DPI to the customers of the Intesa Sanpaolo and of the banks of the Banca dei Territori division. In 2017, Italian Competition Authority brought proceedings against companies that marketed diamonds alleging unfair business practices and against the banks that recommended their services, including Intesa Sanpaolo. Later, in February 2019, we were served with an order for preventive criminal seizure of €11.1 million, corresponding to the fee and commission income received by DPI. The relevant offense, alleged by the Public Prosecutor’s Office of Milan, is self-laundering under Legislative Decree No. 231 of June 8, 2001. In October 2019, following the end of the preliminary investigation, such allegation was confirmed. In
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September 2020, we learned from press sources of the conclusion of the preliminary investigations by the Milan Public Prosecutor’s Office within the framework of an additional pending criminal proceeding relating to this affair, in which neither the Group nor its management board members and key function holders/employees have been involved to date. As of December 31, 2020, a total of 6,725 repurchase requests had been received from customers and housed by us, for a total value of €114.3 million. Claims connected with the Veneto Banks Acquisition
As part of the Veneto Banks Acquisition, we acquired selected assets, liabilities and legal relationships of the Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. (“Veneto Banks”), including liabilities which include civil claims relating to judgements which were pending as of the date of the Veneto Banks Acquisition (the “Acquired Claims”), while other claims, including (but not limited to) (i) claims by shareholders and convertible and subordinate bondholders of the Veneto Banks, (ii) claims relating to non-performing loans and (iii) claims following the Veneto Banks Acquisition relating to acts or events occurring prior to the Veneto Banks Acquisition, remained under the responsibility of the Veneto Banks, each now in compulsory administrative liquidation (the “Excluded Claims”). In connection with the Veneto Banks Acquisition, we also received, together with the Acquired Claims, the respective legal reserves. In the event that such legal reserves are insufficient, the Veneto Banks Acquisition Agreement provides that we are entitled to receive an indemnification by the Veneto Banks for such Acquired Claims, which will be secured by a €1.5 billion (post tax) public guarantee. After the date of the Veneto Banks Acquisition (i.e. June 26, 2017), a number of claims under the Excluded Claims were initiated or resumed against us. With regard to these claims, we are pleading our non-involvement and lack of capacity to be sued. In the event there were rulings against us (or, in general, for any costs incurred by us in connection with our involvement in any such Excluded Claims), we would still be entitled to be fully indemnified by the Veneto Banks which, in turn, have contractually acknowledged their capacity to be subject to claims as regards the Excluded Claims. The Veneto Banks have already stepped into various proceedings initiated (or re-initiated) against us, or in any case included in the Excluded Claims, requesting that they be subject to such claim, and that we be excluded from such claims. In June 2019, the Issuer sent the Veneto Banks involved in compulsory administrative liquidation a number of letters containing claims for compensation of already incurred or potential damages, which the Issuer is entitled to under the sale agreement (compensation obligation secured by government guarantee). To enable the Veneto Banks to perform a more thorough examination of the claims made, the Issuer granted an extension of the contractual deadline to November 30, 2020. The indemnity claims relating to the previous disputes and excluded disputes, for the charges accrued through June 30, 2020, were submitted to the banks in compulsory administrative liquidation on January 22, 2021. Disputes relating to loans in CHF against the Croatian subsidiary Privredna Banka Zagreb Dd Privredna Banka Zagreb (“PBZ”) and seven other Croatian banks were jointly sued by the plaintiff Potrošač (Croatian Union of the Consumer Protection Association), which claimed - in relation to loans denominated or indexed in Swiss francs granted in the past - that the defendants engaged in an unfair practice by allegedly using unfair contractual provisions on variable interest rate changed unilaterally by the banks and by linking payments in local currency to Swiss franc, without (allegedly) appropriately informing the consumers of all the risks prior to entering into a loan agreement. In September 2019, the Croatian Supreme Court rendered a ruling in the collective action proceedings, rejecting the appeals filed by the sued banks against the High Commercial Court ruling from 2018 and confirming the position of courts of lower instance that banks had breached collective interests and rights of consumers by incorporating unfair and null and void provisions on CHF currency clause. The decision of the Supreme Court was challenged by PBZ before the Constitutional Court, which rejected the claim at the beginning of 2021. In connection with the mentioned proceedings for the protection of the collective interests of consumers, numerous individual proceedings have been brought by clients against PBZ, despite the fact that most of them voluntarily accepted the offer to convert their CHF loans into EUR denominated loans retroactively, in accordance with the Act on the Amendments to the Consumer Credit Act (Croatian Official Gazette 102/2015).
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In March 2020, the Croatian Supreme Court, within model case proceedings (a Supreme Court proceedings with obligatory effect on lower instance courts with the aim of unifying/harmonising case law), ruled that the conversion agreements concluded between banks and borrowers under the Croatian Conversion Law of 2015 produce legal effects and are valid even in the case when the provisions of the underlying loan agreements on variable interest rate and currency clause are null and void. Such decision will positively impact the individual proceedings related to converted loans in Swiss francs (or indexed to that currency), which should ultimately be settled, then, in favor of the Croatian subsidiary. In 2020 the number of individual lawsuits filed against PBZ increased. At the end of 2020, the total pending cases still amounted to a few thousand. The possibility that additional lawsuits might be filed against PBZ in the future in connection with CHF loans cannot be excluded. The amount of provisions recognized as at December 31, 2020 is reasonably adequate – according to available information – to meet the obligations arising from the claims filed against the subsidiary so far. The evolution of the overall matter is carefully monitored in order to take appropriate initiatives, if necessary, consistent with any future developments. Energy S.r.l. Energy S.r.l., to which the bankruptcy receiver of C.I.S.I. S.r.l. transferred all its rights towards third parties, brought a claim before the Court of Rome against Intesa Sanpaolo seeking to quash the revocation of the subsidized loan of approximately €22 million granted to C.I.S.I. S.r.l. in 1997 pursuant to Law 488/92 and a judgment ordering the Ministry of Economic Development, the Group (as the concessionaire for the procedural application process) and Vittoria Assicurazioni (guarantor of the payment of the second instalment of the loan), jointly and severally between them, to provide compensation for damages allegedly incurred, quantified at a total of €53 million. Energy S.r.l. justified its claim by citing a favorable judgment rendered in criminal proceedings originating from a complaint filed against C.I.S.I. S.r.l. and its director alleging material irregularities and breach in the execution of the business plan to which the loan referred – proceedings that had led to the revocation of the subsidized loan. We have denied that there was any basis for the adverse parties’ claims, arguing that all claims for compensation against the Bank had become time barred, the claims were groundless on the merits and the damages had been represented inappropriately. Previous legal initiatives taken by C.I.S.I. S.r.l. and then by its bankruptcy receiver against us before the administrative and ordinary courts were rejected (in particular, a claim for compensation against the Group for alleged damages). Despite the favorable outcome of the previous disputes and the defenses presented, it is too early to predict the outcome and therefore it may be possible that there will be a ruling against us. Metropolitan City of Rome the Capital (formerly the Province of Rome) Criminal proceedings are pending before the Rome Public Prosecutor’s Office against a former Banca IMI manager for co-commission of aggravated fraud against the Metropolitan City of Rome. The proceedings relate to a transaction involving the purchase by the local authorities, through the real estate fund Fondo Immobiliare Provincia di Roma (fully owned by the Province of Rome), of the new EUR premises. The real-estate transaction received financing of €232 million from UniCredit, BNL and Banca IMI (each with a 1/3 interest). The former Banca IMI employee is accused of having misled – with three other managers of the two other lending banks, seven managers of the asset management company that manages the provincial fund and two public officials – the fund’s internal control bodies and representatives of the Metropolitan City of Rome, allowing the lending banks to obtain an unjust profit and thus causing significant damages to the public authority. In addition, the Public Prosecutor claims that the lending banks and the Fondo Immobiliare Provincia di Roma entered into a loan under different, more burdensome conditions than those provided for in the call for tenders held by the public entity for the transaction. The Group is being investigated in the criminal proceeding pursuant to Legislative Decree 231/01 together with the other two lending banks and the real-estate fund management company.
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Based on early indications, we believe it is possible that all of the Group’s actions will be confirmed as legitimate, however, it is too early to confirm with certainty. Disputes regarding tax-collection companies In the context of the government’s decision to re-assume responsibility for tax collection, we sold to Equitalia S.p.A., now the Italian Revenue Agency - Collections Division, full ownership of Gest Line and ETR/ESATRI, companies that managed tax-collection activities, undertaking to indemnify the buyer against any expenses associated with the collection activity carried out up to the time of purchase of the equity interests. In particular, such expenses refer to liabilities for disputes (with tax authorities, taxpayers and employees) and out-of-period expenses and capital losses with respect to the financial situation at the time of the sale. Overall, the claims made amount to approximately €80 million. A technical roundtable has been formed with the Italian Revenue Agency - Collections Division in order to assess the parties’ claims. Civil Proceedings
Selarl Bruno Raulet (formerly Dargent Tirmant Raulet) dispute In 2001, the trustee in bankruptcy for the bankruptcy of the real estate entrepreneur Philippe Vincent (the “Trustee in Bankruptcy”) filed a claim before the French Court. The Trustee in Bankruptcy made a request to the Group for a compensation of €56.6 million for the alleged “improper financial support” provided to the entrepreneur Philippe Vincent. The claim of the Trustee in Bankruptcy has consistently been rejected by the courts of different instance, which dealt with the case over 17 years. However, on May 23, 2018, the Court of Colmar, ordered the Group to pay a sum of around €23 million. The Colmar judgment was appealed before French Supreme Court of Cassation, which in January 2020 overturned the decision of the Court of Appeal of Colmar and referred the matter to the Court of Appeal of Metz. Consequently, the first quarter of 2020, the Group obtained a refund of the approximately €23 million paid according to the ruling of the Court of Appeal of Colmar in 2018. At the end of July, the bankruptcy receiver referred the dispute to the Court of Appeal of Metz, requesting payment of €55.6 million (equal to the entire amount of insolvency liabilities, minus the amount obtained from the sale of the property whose purchase was financed by the Bank). In turn, the Group filed an appearance and challenged the opposing party’s claims. We expect a ruling to arrive in mid to late May. Ruling of the EU Court of Justice of September 11, 2019 on credit agreements for consumers (“Lexitor Ruling”)
The Lexitor ruling has a significant impact as the Court of Justice interpreted a provision related to loans for consumers that on early repayment, the consumer has the right to a reduction in the total cost of the credit includes all the costs incurred by the consumer and therefore also includes the costs relating to services prior to or connected with the signing of the contract (upfront costs such as processing costs or agency fees). Following the Lexitor judgment, a question has arisen as to whether the Italian Consolidated Law on Banking should be interpreted in accordance with the principle laid down therein or whether the new interpretation requires a legislative amendment. In December 2019 the Bank of Italy issued “guidance” for the implementation of the principle established by the EU Court of Justice, to the effect that all costs (including upfront costs) should be included among the costs to be refunded in the event of early repayment, both for new relationships and for existing relationships. We have decided to follow the Bank of Italy “guidance”, even though we believe that Article 125 sexies of the Consolidated Law on Banking cannot be interpreted in a manner that complies with the Lexitor Ruling. Accordingly, Intesa Sanpaolo reserves the right to reconsider this operational stance in the light of future developments. In 2020, 1,062 suits were brought concerning early termination of salary-backed loans (417 for the UBI Group), for a total remedy sought of €2.6 million (of which €1.1 million for the UBI Group). In 2019,
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924 were brought (382 for UBI Banca), for a total remedy sought of €2.4 million (of which €1.1 million was at UBI Banca). A provision has therefore been made in the allowance for risks and charges corresponding to the estimated higher charges resulting from the decision to follow the Bank of Italy “guidance”. Judgement of the Court of Cassation on derivatives with local entities On May 12, 2020, the Court of Cassation affirmed the nullity of several OTC derivative contracts (interest rate swaps with upfront payments) entered into by an Italian bank and a Municipality of Mogliano Veneto (the “Municipality”), essentially establishing that:
the upfront payment was a type of new debt resulting in long-term expenditure borne by the entity and, therefore, derivative contracts that comprise an upfront payment require the authorization of the Municipal Council (not the Municipal Executive Committee), which, if lacking, shall invalidate the derivatives;
swap contracts constitute a “legal bet”, permitted only in the amount in which these contracts acquire the form of a “rational bet”, concluded in terms which enable both parties to understand the risks underlying the contract, which thus, must indicate the mark to market, implicit costs and probabilistic scenario. The decision has been criticized by many authors and several lower courts have already deviated from the principles confirmed by the Court of Cassation. In September, two decisions unfavorable to the bank in this sense were issued: (i) the Court of Pavia ordered the Bank to refund approximately €9.3 million, in addition to ancillary charges, to the Province of Pavia; (ii) the Court of Appeal of Milan rejected the appeal lodged by the Bank in the proceedings promoted by the Municipality of Mogliano Veneto. This ruling (which is only partially based on the arguments of the Court of Cassation) confirmed the first instance ruling which had ordered the Bank to refund the Municipality €5.8 million, a payment made in 2018. Both decisions were appealed. Moreover, despite referring to a Municipality, the decision contains some general principles on the case and the subject - matter of the swaps, which could be deemed applicable to all derivative contracts. Within this framework, in order to assess the impact of the decision of ongoing disputes in light of the evolution of case- law, a specific reassessment was conducted of risks connected with the proceedings regarding derivative contracts entered into with entities, companies controlled by entities and private parties and, where deemed appropriate, specific provisions were allocated. Fondazione Monte dei Paschi di Siena (“FMPS”)
In 2014, FMPS brought an action for compensation for the damages allegedly suffered as a result of a loan granted in 2011 by a pool of 13 banks and intended to provide it with the resources to subscribe for a capital increase of FMPS. The damages claimed were allegedly due to the reduction in the market value of the FMPS shares purchased with the sums disbursed by the banks. In the proceedings, FMPS summoned eight former directors of FMPS that were in office in 2011 and the 13 banks in the pool (including Intesa Sanpaolo and Banca IMI). The banks have been charged due to their participation in the alleged violation by the former directors of the debt-equity ratio limit set in the charter. The claim for damages has been quantified at around €286 million, jointly and severally for all the defendants. The defense adopted by the banks included the argument that the alleged breach of the aforementioned charter limit did not apply, because it was based on an incorrect valuation of the FMPS’s balance sheet items. In addition, in the loan agreement, FMPS itself assured the banks that the charter limit had not been breached and, therefore, any breach of the charter would at most give rise to the sole responsibility of the former directors of the Foundation. In November 2019, the Court of Florence, before which the trial is currently pending, handed down a preliminary judgment rejecting certain initial arguments/arguments as to jurisdiction raised by the banks, while reserving the parties’ preliminary applications for decision. The banks appealed the judgment before the Florence Court of Appeal in respect of the rejection of the argument as to lack of jurisdiction, finding there to
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be solid arguments for the judgment in question to be overturned. The first hearing for appearance has been set for May 2021. The judge of the court of first instance admitted court-appointed expert witness testimony requested by FMPS on exceeding the debt limit set by the Articles of Association when the loan was granted. The trial was then declared stayed due to the death of one of the defendants. It is too early for us to be able to understand the likely outcome of this dispute, as we believe expert witness testimony will be necessary for a thorough assessment of the risk of the case, therefore it may be possible that we face a materially adverse ruling. Private banker (Sanpaolo Invest) An inspection conducted by the Audit function identified serious irregularities by a private banker of Sanpaolo Invest. The inspection carried out revealed serious irregularities affecting several customers, including misappropriation of funds and reports with false incremental amounts. On June 28, 2019, the Group terminated the agency contract with the private banker due to just cause and communicated the findings to the Judicial Authority and the Supervisory Body for financial advisors, which first suspended and then removed the private banker from the Register of Financial Advisors in December 2019. Following the unlawful actions, the Group received a total of 276 compensation claims (including complaints, mediation proceedings and lawsuits), for a total amount of approximately €62 million, mostly based on alleged embezzlement, losses due to disavowed transactions in financial instruments, false account statements and the debiting of fees relating to advisory service. There are currently 173 pending claims, with a present value of approximately €51 million, following the resolution of 103 positions (34 settled and 69 withdrawn or resolved by virtue of commercial agreements). The total amount of €4.2 million was recovered from the improperly credited customers (and already returned to the customers harmed) and there are pending attachments of approximately €4 million. A precautionary attachment was ordered against the private banker for an amount equal to the balance found in the accounts and deposits held with credit institutions and the social-security position with Enasarco. In the ensuing case on the merits, the former private banker filed a counterclaim in the total amount of €0.6 million by way of non-payment of indemnity for termination of the relationship. Another lawsuit was also brought against former private bankers to recover the claims arising from withdrawal from the agency contract, in the total amount of €1.6 million, in addition to interest by way of indemnity in lieu of notice, penalty relating to a loan agreement and reimbursement of advances of bonuses. The Group has set aside adequate provisions for the risks associated with the unlawful conduct discussed above, in the light of its foreseeable outlays, without considering the cover provided for in the specific insurance policy. Gruppo Elifani In 2009, Edilizia Immobiliare San Giorgio 89 S.r.l., San Paolo Edilizia S.r.l., Hotel Cristallo S.r.l. and the guarantor-shareholder Mario Elifani (“Gruppo Elifani”) filed a suit seeking compensation for damages suffered due to alleged unlawful conduct by us for having requested guarantees disproportionate to the credit granted, enforced pledge guarantees, applied usurious interest to mortgage loans and submitted erroneous reports to the Central Credit Register. The initially claimed amount was approximately €116 million. As the claim relates to facts already litigated and settled in early 2014, we had favorable outcomes at the trial court and first appeal, but by an order of December 27, 2019, the Court of Cassation partially granted a final appeal and remanded the matter. Gruppo Elifani resumed the lawsuit before the Milan Court of Appeal, requantifying the claim at approximately €72 million plus interest and inflation, for a total of approximately €100 million. The hearing for the submission of final arguments has been set for June 2021. We believe we have a valid basis for our defense given our previous successes on the merits. However, we cannot be certain of a positive outcome of the trial at this time.
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Litigation regarding compound interest and other current account and credit facility conditions, as well as usury Lawsuits regarding the capitalization of interest and the legitimacy of the practice have been a significant part of the civil claims brought against Italian banking groups in the past few years and therefore some of these have involved the banks of the Group as well. In the beginning of 2014, a new version of Article 120 of the Banking Act was issued, banning the compounding of interest in banking transactions and delegating the Interdepartmental Committee for Credit and Savings (CICR) to regulate this matter. In 2015 the Consumers Movement Association (AMC) sued various banks, including Intesa Sanpaolo, claiming that the ban on compounding was immediately applicable, contrary to the position taken by the banking industry, i.e. that the implementing resolution by the CICR was necessary. During the trial, Court of Milan handed down an order on July 1, 2015 against Intesa Sanpaolo enjoining it from compounding interest payable by its consumer customers. In October 2017, the Italian Antitrust Authority ruled that we implemented an “aggressive” policy by soliciting our customers through various means of communications and fined us €2 million. We filed an appeal with the Lazio Regional Administrative Court, on the grounds that the ruling was unfounded. The decision regarding this appeal is still pending. In 2020, the number of disputes, including mediations, with likely risk amounted to 3,800 (of which 900 related to UBI Banca). The remedy sought amounted to €637 million (of which €108 million related to UBI Banca), with provisions of €199 million (of which €47 million related to UBI Banca). As is the case for the other civil disputes, the assessment of the risk related to this type of litigation is carried out individually, taking into account the claims made, the defenses submitted, the progress of the proceedings and case-law decisions, for each dispute. The overall economic impact of any individual claim in this area remains non material for the Group, and any such related risks are covered by specific and adequate provisions made for risks and charges. Litigation regarding investment services In 2020, the number of disputes relating to investment services decreased in terms of total number. There was an increase in the number of disputes concerning derivatives, but the amounts involved were insignificant. In 2020, the total number of disputes with likely risk for this type of litigation amounted to around 580 (of which 180 related to UBI Banca). The total remedy sought amounted to around €272 million (of which €87 million related to UBI Banca) with provisions of €129 million (of which €49 million related to UBI Banca). Significant disputes involving UBI Banca
Eugenio Tombolini S.p.A. bankruptcy receiver and others In 2016, Eugenio Tombolini S.p.A. and its shareholders and guarantors sued Nuova Banca delle Marche, claiming that it had not fulfilled a restructuring agreement pursuant to Article 182-bis of the Bankruptcy Law and that it had applied unlawful interest on current accounts and loans, quantifying its claim at €94 million. The bank objected that some of the claimants lacked standing to sue and that it lacked standing to be sued in respect of some of the disputed relationships, since they were outside the scope of the acquisition. In addition, it was argued that some claims had become time barred and that the reconstruction of the facts by the adverse party regarding the restructuring agreement pursuant to Article 182-bis of the Bankruptcy Act was groundless, as were the claims regarding the interest applied. Nuova Banca delle Marche thus requested the authorization to summon the third party REV Gestione Crediti S.p.A. (fully owned by the Bank of Italy) to the proceedings, as it is party to some of the disputed relationships. The trial, which was suspended due to the bankruptcy of Eugenio Tombolini S.p.A. and of some of the other claimants, was resumed. UBI Banca appeared in lieu of Nuova Banca delle Marche and Rev Gestione Crediti S.p.A. In June 2020, the Court ordered an accounting expert review, which is still ongoing. While it is too early to understand the final outcome of the trial, we believe it is possible the bank may be found liable.
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Fondazione Cassa Risp. di Pesaro In 2018, Fondazione Cassa di Risparmio di Pesaro brought a compensation claim against UBI Banca (as the alleged successor-in-interest to Banca Marche S.p.A.) and PwC (the auditing firm that certified all the financial statements and the figures presented in the relevant prospectus in question) alleging that the defendants published data and information regarding the financial performance and position of Banca delle Marche S.p.A. that later proved to be incorrect and misleading. This information, contained in the financial statements as at December 31, 2010 and June 30, 2011 and included in the relevant prospectus, is claimed to have led the Foundation to invest in the bank’s shares issued as part of its capital increase in March 2012. The value of these shares then fell to zero, resulting in a loss quantified at approximately €52 million. During the trial, the Bank of Italy joined the suit, upholding the lack of capacity to be sued invoked by UBI Banca. The Court rejected all preliminary applications filed and adjourned the case to June 8, 2021 for the entry of conclusions. While it is too early to make predictions about the outcome of this trial, we believe it is possible the bank will be found liable. Mariella Burani Fashion Group S.p.A. in liquidation and bankruptcy (“MBFG”) In January 2018, the receiver to MBFG. sued the former directors and statutory auditors of MBFG, its auditing firm and UBI Banca (as the company that absorbed Centrobanca), seeking a judgment ordering compensation for alleged damages suffered due to the many acts of mismanagement of the company while in good standing. According to the claimant’s arguments, Centrobanca, which was merged into UBI Banca, continued to provide financial support to the parent company of the bankrupt company (Mariella Burani Holding S.p.A.), despite signs of insolvency that began to show in September 2007, causing damages quantified at approximately €94 million. The bank argued that the receiver lacked capacity to sue since the disputed loan had been disbursed to the parent company of MBFG. Moreover, the alleged damages for which the receiver claims compensation were argued to have been in fact sustained by the company’s creditors (and not by the procedure). As regards the merit of the claims, the bank stressed that it had acted properly and the borrower in good standing was solely liable since it bore exclusive responsibility for preparing the untrue financial statements, circulating the misinformation and continuing to operate the company in an alleged situation of insolvency. We believe it is too early to make predictions about the outcome of this trial. Proceedings Related to Actions by the Bank of Italy We are subject to a significant degree of regulation and supervision by the Bank of Italy, which has resulted in investigations, some of which are still pending as of the date of this Offering Memorandum. In such circumstances, we have endeavored to demonstrate the correctness of our conduct. We believe these pending investigations are unlikely to have a material adverse effect on our business, results of operations or financial condition. Tax litigation
The overall risks associated with tax litigation are covered by specific provisions for risks and charges. As of December 31, 2020, the Issuer was party to tax litigation proceedings in which a total of €211 million was at issue. We estimate that the actual risk of these proceedings is approximately €74 million. Tax disputes at our Italian subsidiaries totaled €63 million at issue, covered by specific provisions of €10 million. Tax disputes at our international subsidiaries totaled €9 million, covered by specific provisions of €7 million. Tax proceedings related to Intesa Sanpaolo As of December 31, 2020, Intesa Sanpaolo had 687 pending litigation proceedings (612 as of December 31, 2019) for a total amount claimed (taxes, penalties and interest) of €139 million (€111 million as of December 31, 2019), considering both administrative and judicial proceedings at various instances. In relation to these proceedings, the actual risks were quantified at €57 million as at December 31, 2020 (€54 million as at December 31, 2019). In 2020, 212 disputes were closed at the level of Intesa Sanpaolo for a total of €13.8 million with a disbursement of around €9 million.
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There were no new material disputes initiated during the year. However, due to the extension of the terms of forfeiture and time bar, imposed by the legislative measures pertaining to the COVID-19 Pandemic, the notices of tax assessment, payment due, claims and penalties, expiring between from March 9 and December 31, 2020 and issued by the tax authorities by December 31, 2020, will be validly served on the taxpayers during the period from January 1, 2021 to December 31, 2021. Tax proceedings related to Group companies With regard to Group companies, the following developments occurred during the applicable period in the tax proceedings in which we are a party. In all cases, we have determined the amounts not to be material and therefore have not made any specific provisions. The tax audit on Intesa Sanpaolo IMI Securities Corp. (“IMI SEC”) is still underway for the years 2015 through 2017, for which the US tax authorities are contesting the composition of IMI SEC’s revenues, which have a high level of income originating from outside the State of New York and would therefore be subject to lower tax. In 2019, the audit was also extended to 2017. The tax disputes pending at December 31, 2020 involving UBI Banca and its subsidiaries as defendants primarily derive from the former “Good Banks” acquired in 2017. The total value of the disputes for the Group is €9.9 million (of which €6.5 million for UBI Banca) and the provisions amount to €2.7 million (of which €1.1 million for UBI Banca).
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THE NEW YORK BRANCH Overview of the New York Branch and the Section 3(a)(2) Notes The New York Branch provides a full range of commercial banking services to corporate customers, institutional investors and financial institutions and is particularly active in the area of commercial lending. It funds itself by taking corporate and bank deposits, borrowing in the interbank market and issuing certificates of deposit. The New York Branch maintains a securities portfolio for liquidity and regulatory purposes. The liquidity portion of the portfolio, consisting of obligations issued or guaranteed by the U.S. government, agency, supra- national, and corporate bonds and other government guarantees, is pledged to the Federal Reserve Board (as defined below). A smaller portion of the portfolio, maintained for regulatory purposes and consisting of eligible assets, is pledged to the Superintendent of Financial Services of the State of New York (the “Superintendent”), as further described below. The New York Branch is licensed by the Superintendent and is regulated by the State of New York Department of Financial Services (the “Department of Financial Services”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) on a basis substantially equivalent to New York State chartered banks. The Rule 144A Notes, the Section 3(a)(2) Notes and the obligations of the New York Branch in respect of the Section 3(a)(2) Notes are not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other governmental agency or authority in the United States, Italy or elsewhere. The New York Branch is located at 1 William Street, New York, NY 10004, United States. The telephone number of the New York Branch is (212) 607-3500. Overview of certain New York laws and regulations applicable to the New York Branch Although the Issuer’s New York Branch is not a legal entity separate from the Issuer, under applicable laws and regulations and the “quasi-separate entity” approach that applies to foreign banks’ branches and agencies under U.S. law for certain legal and regulatory purposes, the New York Branch is able to guarantee obligations, including obligations of the Issuer’s head office, and such guarantees are deemed to be part of its liabilities. In the event the Issuer is in liquidation at its domicile or elsewhere, or upon a finding that, among other things, the Issuer has violated any law, is conducting its business in an unauthorized or unsafe manner or cannot with safety and expediency continue business, has an impairment of capital, has suspended payment of its obligations or there is reason to doubt the Issuer’s ability or willingness to pay in full the claims of the creditors of the New York Branch, the Superintendent would be authorized, pursuant to New York Banking Law Section 606(4), to take possession of the business and property in the State of New York of the Issuer, and title to the following assets (collectively, the “New York Assets”) would vest in the Superintendent:
all assets of the New York Branch wherever located; and
any other assets of the Issuer that were located in the State of New York. Upon taking title to the New York Assets, the Superintendent would have the power, in most instances upon the order of the New York Supreme Court, to compromise the liabilities of the New York Branch (other than deposit liabilities) and sell the New York Assets to pay the claims (the “Accepted Claims”) of holders of obligations of the New York Branch, including holders of Section 3(a)(2) Notes, who have provided the necessary evidence of their claims to the Superintendent (i.e. New York Branch creditors). Payment of claims by the Superintendent out of the New York Assets would be limited to claimants that are New York Branch creditors, and creditors of other offices of the Issuer (including investors who hold Rule 144A Notes) would not be entitled to receive payment of their claims out of the New York Assets. The Superintendent would not accept claims or pay any amounts due in respect of any liabilities of the New York Branch to other offices, agencies, branches or affiliates of the Issuer or claims that would not represent an enforceable legal obligation against the New York Branch if such Branch were a separate and independent legal entity. Once all Accepted Claims, together with any interest thereon, and the expenses of the liquidation have been paid in full, and assuming that the Issuer at that time had no other offices in liquidation in the United States, the Superintendent would, upon the order of the New York Supreme Court, be required to turn over any remaining New York Assets to the Issuer or to its duly appointed liquidator or receiver in Italy. If at such time the Issuer did have another office in liquidation in the United
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States, the Superintendent would upon the order of the New York Supreme Court be required, after satisfying the claims of New York Branch creditors but prior to turning over any remaining New York Assets to the head office of the Issuer or to its liquidator or receiver in Italy, to turn over any remaining New York Assets to the other offices, if any, of the Issuer that were being liquidated in the United States, upon the request of the liquidators of those offices, in amounts which the liquidators of those offices demonstrate to the Superintendent were needed to pay the claims accepted by those liquidators and any expenses incurred by the liquidators. Therefore, holders of Section 3(a)(2) Notes constituting Accepted Claims would have a claim on the assets of the New York Branch while holders of Rule 144A Notes would only have a claim on the assets of the New York Branch that remained after satisfaction of the claims of New York Branch creditors and that had been turned over by the Superintendent to the head office of the Issuer or to the Issuer’s liquidator or receiver in Italy. For a discussion of certain other regulatory matters applicable to the New York Branch, see “Supervision and Regulation—Supervision and Regulation in the United States” and “Risk factors—Claims of Noteholders are structurally subordinated to claims of creditors of the Issuer’s branches and claims of holders of Rule 144A Notes are structurally subordinated to claims of holders of Section 3(a)(2) Notes”.
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SUPERVISION AND REGULATION Overview of regulations applicable to banks Since the early 1990s, the Italian banking industry has been transformed through a process of reorganization and consolidation initiated by regulatory changes and increased competition that resulted from liberalization of the European financial markets (through, inter alia, privatization procedures and allowing non-Italian banks established in the European Union to conduct banking and other activities subject to mutual recognition in Italy under the European passport in accordance with the relevant provisions of EU law), introduction of the Euro and, more generally, the impact of the EU legal framework for banking and financial services on Italian domestic rules. A significant portion of current Italian banking regulations is based on a harmonized framework of existing EU provisions. In particular, a number of significant reforms have been approved in recent years at the EU level, some of which are still due to be fully implemented under Italian law, as described below. The following paragraphs provide a summary of the most relevant laws and regulations governing the performance of banking and financial services in the Italian territory, considering both the national and EU regulatory framework. Overview of Italian laws and regulations applicable to banks The main national provisions governing the conduct of banking activity in Italy are contained in Legislative Decree No. 385 of September 1, 1993, as amended (the “Consolidated Banking Act”). The Consolidated Banking Act defines the role of supervisory authorities in Italy and contains provisions on the definition of banking business, the authorization required for the performance of banking and other financial activities, the acquisition of relevant shareholdings in Italian banks, the scope of banking supervision and powers of supervisory authorities, the regime applying to foreign banks intending to operate in Italy, special insolvency and administration procedures for banks, “special” credit transactions, transparency obligations applying to the provision of banking and financial services and activities, supervision of banking groups and other types of financial institutions (including, inter alia, electronic money and payment institutions as well as financial intermediaries specialized in financing activities which are enrolled in the register kept by the Bank of Italy pursuant to Section 106 of the Consolidated Banking Act). Additional provisions have been introduced in the Consolidated Banking Act through Legislative Decree No. 181 of November 16, 2015 for the purpose of implementing Directive 2014/59/EU (the “BRRD”). In addition to the Consolidated Banking Act, the most relevant provisions governing the performance of financial services by Italian banks are those set forth in (i) the Legislative Decree No. 58 of February 24, 1998, as amended (the “Consolidated Financial Act”), which defines, inter alia, the rules governing the performance of investment services and activities – as defined under Directive 2004/39/EC (“MiFID”), as replaced by Directive 2014/65/EU (“MiFID II”) – and the regime applying to regulated markets and Italian listed companies, (ii) the Legislative Decree No. 218 of December 15, 2017 (the “PSD II Decree”), implementing the “Payment Services Directive II” (Directive (EU) 2015/2366), (iii) the Legislative Decree No. 231 of November 21, 2007, as amended, on the prevention of anti-money laundering and terrorism financing (the “AML Decree”), implementing Directives No. 2005/60/EC and No. 2006/70/EC, as recently amended by the Legislative Decree No. 90 of May 25, 2017, implementing Directive (EU) No. 2015/849, (iv) the Law No. 108 of March 7, 1996, as amended (the “Usury Law”), and (v) the Legislative Decree No. 209 of September 7, 2005, as amended (the “Code of Private Insurance”), which govern the performance of insurance, reinsurance and insurance distribution activities (including insurance distribution activities performed by banks). Additional rules are then included in other laws and regulations aimed at implementing EU legislation on banking matters, as also detailed below. The provisions of the Consolidated Banking Act, the Consolidated Financial Act, the PSD Decree, the Usury Law and the Code of Private Insurance are further supplemented by the regulations issued by Italian supervisory authorities (as listed below), which include, inter alia, (i) decrees issued by the Ministry of Economy and Finance (“MEF”), (ii) resolutions adopted by the Interministerial Committee for Credit and Savings (“Comitato Interministeriale per il Credito e il Risparmio” or “CICR”), (iii) regulations adopted by the Bank of Italy, i.e. Italy’s central bank, which participates to the European System of Central Banks (“ESCB”), (iv) resolutions and regulations adopted by the Italian securities regulator (“Commissione Nazionale per le Società e la Borsa”
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or “CONSOB”), and (v) resolutions and regulations issued by the Italian insurance regulator (“Istituto per la Vigilanza sulle Assicurazioni” or “IVASS”). Regarding banking activities, the second level provisions implementing the Consolidated Banking Act are contained in the CICR resolutions and Bank of Italy Regulations mentioned under (ii) and (iii) above. The main CICR resolutions concern (i) relevant shareholdings in banks, financial institutions, electronic money and payment institutions (resolution No. 675 of July 27, 2011), (ii) the shareholdings that may be held by banks and banking groups (resolution No. 276 of July 29, 2008), (iii) rules on related party transactions (resolution No. 277 of July 29, 2008) and (iv) rules on transparency of banking and financial services and products (resolution No. 286 of March 4, 2003). The most relevant regulations of the Bank of Italy which apply to Italian banks include (i) Circular No. 285/2013, setting out the supervisory provisions for banks (“Disposizioni di Vigilanza per le Banche”) (the “Circular No. 285”) which is mostly aimed at implementing Directive 2013/36/EU (the “CRD IV”) and Regulation (EU) No. 575/2013 (the “CRR”) and contains certain additional rules that are not harmonized at the EU level, (ii) Circular No. 263/2006 (the “Circular No. 263”) which has been largely replaced and partially recast in Circular No. 285 but still contains some provisions applicable to Italian banks (e.g. rules on related party transactions), and (iii) Circular No. 229/1999, which has also been largely replaced by and partially recast in Circular No. 285. Italian regulatory and supervisory authorities Under the Italian regulatory framework the following authorities are in charge of regulation and supervision of Italian banks:
the MEF, who is entrusted under the Consolidated Banking Act with the power to: (i) determine the eligibility requirements applying to shareholders of (and prospective purchasers of relevant shareholdings in) Italian banks; (ii) determine the eligibility requirements for the members of supervisory, management and control bodies and general managers of Italian banks, and (iii) upon proposal of the Bank of Italy, adopt certain resolution measures, including the imposition of extraordinary administration (“amministrazione straordinaria”) or compulsory liquidation (“liquidazione coatta amministrativa”); the CICR, which is composed of the MEF and other ministers responsible for economic matters, and has certain policy-making and guidance powers and responsibilities;
the Bank of Italy, which is the authority having the broadest supervisory powers over Italian banks and operates as national resolution authority under the Italian provisions implementing the BRRD;
CONSOB, with respect to the provision of investment services and listed companies; and
IVASS, with respect to the performance by banks of insurance distribution activities. In particular, pursuant to the Consolidated Banking Act, the Bank of Italy is responsible for the adoption of regulations and instructions (for both individual banks and banking groups) in the following areas: (i) capital requirements; (ii) risk management; (iii) shareholdings that may be acquired and held by Italian banks or banking groups; (iv) corporate governance, administrative and accounting functions and internal audit and remuneration policies; and (v) the bank’s public disclosure requirements with respect to the above matters. The provisions related to the powers of the Bank of Italy included in the Consolidated Banking Act must be interpreted in the light of, and are applicable to the extent that they do not conflict with, the rules governing the “Single Supervisory Mechanism” or “SSM” (as set forth in the Council Regulation (EU) No. 1024/2013 (the “SSM Regulation”) and the Regulation (EU) No. 468/2014 (the “SSM Framework Regulation” and, together with the SSM Regulation, the “SSM Regulations”) issued by the ECB, as described below). The Bank of Italy is also entrusted with certain responsibilities connected with the enforcement of the Usury Law, by conducting quarterly surveys to measure the “average overall percentage rate of charge” (“tasso effettivo globale medio”) applied by banks and financial intermediaries according to the Usury Law. The MEF publishes the results of these surveys, which are used as the basis for the calculation of the interest rate limits (beyond which interest rates are considered usurious, which may trigger criminal sanctions).
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In addition, the Financial Information Unit (Unità di Informazione Finanziaria) of the Bank of Italy is in charge of preventing money laundering and the financing of terrorist activities in accordance with the AML Decree. Overview of the EU legal framework New EU legislation has been enacted in recent years to regulate a number of significant aspects of the activities conducted by EU credit institutions (including Italian banks). The implementation of such EU legislation is still on-going, and it is expected that the Italian regulatory framework will be further amended in the future. However, some of these EU provisions – in particular, those included in EU regulations, which are directly applicable in all EU Member States – do not require the adoption of any national implementing laws and regulations. In such respect, the main EU provisions directly applicable to Italian banks which were introduced are those set forth in the CRR, which set out the prudential requirements for credit institutions and investment firms. The CRD IV and the CRR form the so-called “CRD IV Package”, which is aimed at implementing in Europe the rules defined under the Basel III framework. The CRD IV Package is part of the “Single Rulebook”, i.e. a set of harmonized rules applying at EU level representing the legal framework of the EU “Banking Union”. The EU Banking Reform Package (as defined below), a new “banking package” amending, inter alia, CRR and CRD, was recently introduced and entered into force on June 27, 2019. The first pillar of the Banking Union consists of the Single Supervisory Mechanism. The second pillar consists of the “Single Resolution Mechanism” or “SRM”, established under Regulation (EU) No. 806/2014 (the “SRM Regulation”), which operates in accordance with the BRRD framework. The third pillar will consist of the European Deposit Insurance Scheme (“EDIS”), which is still to be established. A proposal for a regulation establishing the EDIS was published by the European Commission on November 24, 2015 and revised in 2017, currently still under discussion with the EU legislators. National deposit guarantee schemes are already regulated under the Deposit Guarantee Schemes Directive No. 2014/49/EU, superseding Directive No. 94/19/EC (the “DGSD”). The SRM Regulation, the BRRD and the DGSD form part of the Single Rulebook. The three pillars of the Banking Union are briefly described below. European regulatory and supervisory authorities
Under the European framework the following authorities may exercise certain regulatory powers in the field of banking supervision:
the ECB, which is the entity ultimately responsible for the supervision of all credit institutions established in Member States of the Eurozone (or other Member States that enter into close cooperation agreements with the SSM) in accordance with the framework set out under the SSM Regulations. In addition, the ECB plays a key role for the functioning of the ESCB, especially with respect to monetary policy transactions; and
the European Banking Authority (“EBA”), whose functions and powers are governed by Regulation (EU) No. 1093/2010 of the European Parliament and of the Council of November 24, 2010 (as amended). In particular, the EBA is in charge of the development of the Single Rulebook, mainly through the preparation of regulatory and implementing technical standards (which are then endorsed by the EU Commission by means of EU regulations). The EBA may also conduct certain tests involving the European banking and financial system. The EBA forms part of the European System of Financial Supervision (“ESFS”) and, in particular, is one of the European Supervisory Authorities (“ESAs”) in charge of micro-prudential supervision of financial institutions. The other ESAs are the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). In addition, within the context of the ESFS, the European Systemic Risk Board (“ESRB”) – established under the aegis of the ECB – is in charge of the macro-prudential oversight of the financial system as a whole.
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Banking activity authorization
Pursuant to Article 10 of the Consolidated Banking Act, deposit taking from the public and lending constitute banking activities which are subject to licensing requirements. According to the Consolidated Banking Act and the SSM Regulations, the authorization is granted by the ECB, based on a proposal of the Bank of Italy. The Bank of Italy holds a register of banks authorized to conduct banking activities in Italy. Banks can be established as joint stock companies (“società per azioni”) or, provided that certain restrictions and conditions are complied with, limited liability co-operatives (“banche popolari” and “banche di credito cooperativo”). CRD IV Package and capital adequacy requirements
In the wake of the global financial crisis that began in 2008, the Basel Committee on Banking Supervision approved, in the fourth quarter of 2010 and in January 2011, revised global regulatory standards under the Basel III rules on bank capital adequacy and liquidity, higher and better-quality capital, better risk coverage, measures to promote the build-up of capital that can be drawn down in periods of stress and the introduction of a leverage ratio as a backstop to the risk-based requirement as well as two global liquidity standards. In particular, the Basel III rules determined an increase of the quantity and quality of the CET1 capital that must be held by banks and introduced requirements for Additional Tier 1 and Tier 2 Capital instruments to have a mechanism that requires them to be written off or converted into ordinary shares at the point of non-viability. The Basel III rules also introduced two global minimum liquidity standard and a new leverage ratio for the banking sector. The Basel III framework has been implemented in Europe through the CRD IV Package. Full implementation began on January 1, 2014, with certain provisions being phased in over a period of time (the requirements are largely fully effective and some minor transitional provisions provide for their phase-in up to 2024). The CRD IV Package has been implemented in Italy through Circular No. 285 and the Legislative Decree No. 72 of May 12, 2015, which amended a number of provisions included in the Consolidated Banking Act and the Consolidated Financial Act. Some of the rules introduced by the CRD IV are still due to be fully implemented (for example, as regards the new eligibility requirements applying to relevant shareholders or members of corporate bodies). Based on the framework mentioned above, Italian banks are required to comply with (i) a minimum CET1 capital ratio of 4.5%, (ii) a Tier 1 Capital ratio of 6.0%, and (iii) a Total Capital Ratio of 8.0%. These minimum ratios are complemented by the following capital buffers, to be met with CET1 capital items:
Capital conservation buffer: the capital conservation buffer applying to Italian banks (on a standalone and consolidated basis) is set at 2.5%; Counter-cyclical capital buffer: this is set by each Relevant Authority between 0%-2.5% (but may be set higher than 2.5% where the competent authority considers that this is justified by the economic conditions of the Member State), with gradual introduction from January 1, 2016 and applying temporarily in the periods when the Relevant Authority considers the credit growth to be excessive. In particular, the relevant ratio for the calculation of exposures related to Italian counterparties was kept at 0% by the Bank of Italy for 2020 and for the first half of 2021;
Capital buffers for globally systemically important banks (“G-SIBs”): is set as an additional loss absorbency capacity buffer ranging from 1.0% to 3.5% determined in accordance with specific indicators (e.g. size, interconnectedness, etc.), implemented on January 1, 2019, which does not apply to us; and
Capital buffer for other systemically important banks at a domestic level (“O-SIIs”): up to 2.0% of the RWAs as set by the relevant competent authority (and reviewed at least annually starting from January 1, 2016) to compensate for the higher risk that O-SIIs represent to the financial system. On November 30, 2016, the Bank of Italy identified Intesa Sanpaolo Group as an O-SII authorized to operate in Italy in 2017, and has imposed on the Group a capital buffer for an O-SII of 0.75%, to be achieved within a four-year transitional period, as follows: (i) 0% from January 1, 2017 until December 31, 2017; (ii) 0.19% from January 1, 2018 until December 31, 2018; (iii) 0.38% from January 1, 2019 until December 31, 2019; (iv) 0.56% from January 1, 2020 until December 31, 2020; and (v) 0.75% from January 1, 2021 until December 31, 2021.
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The Relevant Authorities, as part of the Supervisory Review and Evaluation Process (“SREP”), may require higher capital requirements compared to those resulting from the application of the regulatory provisions (Pillar 2 requirement). Failure to comply with combined buffer requirements triggers restrictions on distributions and the need for the bank to adopt a capital conservation plan on necessary remedial actions (Articles 141 and 142 of CRD IV). In addition to the above listed capital buffers, under Article 133 of the CRD IV each Member State may introduce a Systemic Risk Buffer of CET1 capital for the financial sector or one or more subsets of the sector, in order to prevent and mitigate long term non-cyclical systemic or macro-prudential risks not covered by the CRR – i.e. any risk of disruption in the financial system with the potential to have serious negative consequences to the financial system and the real economy in a specific Member State. The Member States setting the buffer will have to notify the Commission, the EBA and the ESRB and the competent designated authorities of the Member States concerned. For buffer rates between 3% and 5%, the Commission will provide an opinion on the measure decided and if the opinion is negative the Member States will have to “comply or explain”. Buffer rates above 5% will need to be authorized by the Commission through an implementing act, taking into account the opinions provided by the ESRB and the EBA. At this stage, no provision is included in the systemic risk buffer under Article 133 of the CRD IV and the Italian rules on this point have not been enacted. On November 23, 2020, the Issuer received notification of the ECB’s final decision concerning the capital requirement that the Issuer has to meet, on a consolidated basis, as of January 1, 2021 following the results of the SREP. The overall capital requirement the Issuer has to meet in terms of Common Equity Tier 1 ratio is 8.44% under the transitional arrangements for 2020 and 8.63% on a fully loaded basis. The quantum of any Pillar 2 requirement imposed on a bank, the type of capital which it must apply to meeting such capital requirements, and whether the Pillar 2 requirement is “stacked” below the capital buffers (i.e. the bank’s capital resources must first be applied to meeting the Pillar 2 requirements in full before capital can be applied to meeting the capital buffers) or “stacked” above the capital buffers (i.e. the bank’s capital resources can be applied to meeting the capital buffers in priority to the Pillar 2 requirement) may all impact a bank’s ability to make discretionary payments on its Tier 1 capital, including interest payments on Additional Tier 1 instruments. The interaction between Pillar 2 requirements and the Maximum Distributable Amount restriction has been the subject of much debate. As set out in the “Opinion of the European Banking Authority on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions” published on December 16, 2015, in the EBA’s opinion competent authorities should ensure that the Common Equity Tier 1 Capital to be taken into account in determining the Common Equity Tier 1 Capital available to meet the combined buffer requirement for the purposes of the Maximum Distributable Amount calculation is limited to the amount not used to meet the Pillar 1 and Pillar 2 Own Funds requirements of the institution. In effect, this would mean that Pillar 2 capital requirements would be “stacked” below the capital buffers, and thus a firm’s CET1 resources would only be applied to meeting capital buffer requirements after Pillar 1 and Pillar 2 capital requirements have been met in full. However, the above has been more clearly regulated in the EBA Guidelines on SREP published in July 2018. The EBA guidelines define a distinction between the “Pillar 2 Requirement” (stacked below the capital buffers and thus directly affecting the application of a Maximum Distributable Amount) and “Pillar 2 Guidance” (stacked above the capital buffers). In cases where a “Pillar 2 Guidance” is provided, that guidance will not be included in the calculation of the Maximum Distributable Amount, but competent authorities would expect banks to meet that guidance. Moreover, the EU Banking Reform Package further clarifies the distinction between the “Pillar 2 Requirement” and “Pillar 2 Guidance”. In particular, “Pillar 2 Guidance” refers to the possibility for competent authorities to communicate to an institution their expectations for such institution to hold capital in excess of its capital requirements (Pillar 1 and Pillar 2) and combined buffer requirement in order to address forward-looking and remote situations. Under the CRD Reform Package (and as described above), only the “Pillar 2 Requirement”, and not “Pillar 2 Guidance”, will be relevant in determining whether an institution meets its combined buffer requirement for the purposes of the Maximum Distributable Amount restrictions.
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In addition to the above, the Maximum Distributable Amount restrictions are extended in order to encompass also the minimum Leverage Ratio requirement and the MREL requirement. Within the CRD Reform Package a new Article 141b is included in the CRD IV Directive which introduces restrictions on distributions in the case of failure to meet the Leverage Ratio buffer requirement (i.e. G-SIB buffer), thus introducing a new Leverage Ratio Maximum Distributable Amount (“L-MDA”). The BRRD II also contains a new Article 16a that clarifies the stacking order between the combined buffer requirement and the MREL requirements (including the Pillar I MREL requirement). Pursuant to this new provision the resolution authority shall have the power to prohibit an entity from distributing more than the Maximum Distributable Amount for the Minimum Requirement for Own Funds and Eligible Liabilities (“MREL”) (calculated in accordance with the proposed Article 16a(4) of the BRRD II, the “M-MDA”) where the combined buffer requirement is not met when considered in addition to the MREL requirement. Article 16a envisages a potential nine month grace period whereby the resolution authority assesses on a monthly basis whether to exercise its powers under the provision, before such resolution authority is compelled to exercise its power under the provisions (subject to certain limited exceptions). The M-MDA and L-MDA shall both limit the same distributions as the “maximum distributable amount” and so may limit the aggregate amount of interest payments and redemption amounts that may be payable on any Additional Tier 1 instruments. Under the CRD IV Package, the recognition of regulatory capital instruments that will no longer be included in Tier 1 capital or Tier 2 capital will be gradually phased out over an eight-year period, which began on January 1, 2014. From 2014, the grandfathered amount (as determined on the basis of a one-time calculation) of those regulatory capital instruments that may be recognized will be reduced in steps of 10% per annum from 80% (in 2014) to 10% (in 2021) (currently at 20%), with the grandfathering to end at the beginning of 2022. Under the CRD IV Package, banks are also required to meet two new liquidity standards: a liquidity coverage ratio (“LCR”) and a net stable funding ratio (“NSFR”); the NSFR has been introduced as a minimum standard by way of a national provision, pending its revision and introduction as a binding requirement. The LCR requires banks to hold an amount of unencumbered, high quality liquid assets that can be used to offset the net cash outflows the bank would encounter under an acute short-term stress scenario. The NSFR measures the amount of longer-term, stable sources of funding employed by a bank relative to the liquidity profiles of the assets funded and the potential for contingent calls on liquidity arising from off-balance sheet commitments and obligations. The LCR was introduced on January 1, 2015. The minimum LCR requirement began at 60%, rising in equal annual steps of 10 percentage points, reaching 100% on January 1, 2018. The CRR also includes a requirement to report on a bank’s leverage ratio (the “Leverage Ratio”) from January 1, 2015. The details of the leverage ratio remain to be determined following an observation period. EU Banking Reform Package
On November 23, 2016, the European Commission presented the “risk reduction measures”, a package of reforms aimed at reducing risks in the banking sector and strengthening the resilience of EU banks (the “EU Banking Reform Package”). The proposal contained a series of amendments to certain provisions of the CRD IV (the “CRD V”) and CRR (the “CRR II”) as well as of the BRRD (the “BRRD II”) and SRM (the “SRM II”) Regulation. After a legislative procedure of more than two years, the EU Banking Reform Package has been adopted by the European Parliament and the Council of the EU in the second quarter of 2019 and the final text was published in the Official Journal of the EU on June 7, 2019, entering into force on June 27, 2019. Most of the provisions of the CRR II apply as of June 28, 2021, with some exceptions listed in article 3 of the new Regulation, while the SRM II will apply as of December 28, 2020. The CRD V and the BRRD II need to be transposed into national legislation and Member States must comply with their provision by December 28, 2020. More precisely, with respect to capital adequacy and prudential requirements, the EU Banking Reform Package provides for: (i) the application of more risk-sensitive capital requirements, in particular in the area of market risk, counterparty credit risk, and for exposure to central counterparties and collective investment undertakings, together with a revision of the large exposures regime; (ii) the implementation of methodologies that are able to reflect more accurately the actual risks to which banks are exposed; (iii) the imposition of a binding leverage ratio to prevent institutions from excessive leverage; (iv) a binding NSFR to address the excessive reliance on short-term wholesale funding and reduce long-term funding risk; and (v) new reporting and disclosure requirements. Additional measures are connected with the requirements to hold a minimum amount of loss-
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absorbing instruments and liabilities in accordance with the BRRD and SRM Regulation, as better detailed below. With respect to the requirements summarized above, the EU Banking Reform Package introduces a minimum binding Leverage Ratio of 3% as well as a binding detailed NSFR – which will require credit institutions and systemic investment firms to finance their long-term activities (assets and off-balance sheet items) with stable sources of funding (liabilities) in order to increase banks’ resilience to funding constraints. Under the EU Banking Reform Package, the Leverage Ratio requirement is set at a minimum of 3.0% of the Tier 1 capital and is added to the own funds requirements which institutions must meet in parallel with their risk-based requirements. The Leverage Ratio will apply to all credit institutions and investment firms that fall under the scope of the CRR II, subject to selected adjustments. Moreover, a Leverage Ratio buffer requirement has only been introduced for G-SIIs equal to the G-SIIs total exposure measure referred to multiplying by 50% the G-SII buffer rate. The Commission is called to analyze by 2022 whether the buffer requirement should be extended to systemically important institutions other than G-SIIs. Under the CRR II, the NSFR requirement is a ratio of an institution’s amount of available stable funding to its amount of required stable funding over the one-year horizon of the NSFR. The amount of required stable funding should be calculated by multiplying the institution’s liabilities and own funds by appropriate factors that reflect their degree of reliability over the one- year horizon of the NSFR, while on the other hand by multiplying the institution’s assets and off-balance-sheet exposures by appropriate factors that reflect their liquidity characteristics and residual maturities over the same one-year horizon. Binding requirement for NSFR at EU level and required stable funding will be calculated by multiplying an institution’s liabilities and regulatory capital by appropriate factors that reflect their degree of reliability over a year. The NSFR is expressed as a percentage and set at a minimum level of 100%, which indicates that an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. The NSFR will apply at a level of 100%, with no transition period included, to credit institutions and systemic investment firms two years after the date of entry into force of the proposed amendments to the CRR, i.e. as of June 28, 2021. Single Supervisory Mechanism
On October 15, 2013, the Council of the European Union adopted the SSM Regulation, establishing a Single Supervisory Mechanism for Eurozone banks. As a consequence of the establishment of the SSM, starting from November 4, 2014, the ECB undertook supervisory responsibilities with respect to all banks established in Eurozone states. These supervisory responsibilities are exercised directly by the ECB for “significant” banks or banking groups, in cooperation with national competent authorities of the relevant Eurozone state. The day-to-day supervision of less significant banks or banking groups established in Eurozone states is exercised by national competent authorities, although the ultimate responsibility lies with the ECB. The cooperation arrangements between the ECB and national competent authorities are defined in the SSM Regulations. Significant banks that are subject to the direct supervision of the ECB include, inter alia, any Eurozone bank that has: (i) assets greater than €30 billion; (ii) assets constituting at least 20% of its home country’s gross domestic product; or (iii) requested or received direct public financial assistance from the European Financial Stability Facility or the European Stability Mechanism. The ECB also has the right to impose pecuniary sanctions and set binding regulatory standards. We are considered to be a “significant bank” subject to the ECB’s supervision under the SSM Regulation as per the list published by the ECB on September 4, 2014, as amended. The SSM Regulation is complemented by the SSM Framework Regulation. The ECB also adopted ancillary legislation on the bodies that operate in the framework of the Single Supervisory Mechanism (e.g. the Supervisory Board, the Governing Council, the Mediation Panel and the Administrative Board of Review) and a guide to banking supervision describing the modalities of the new supervision under the SSM through dedicated joint supervisory teams (one for each significant supervised entity) acting under tailored supervisory examination processes and defined cycles of supervision. National competent authorities continue to remain responsible for supervisory matters not conferred on the ECB, such as investment services, consumer protection, money laundering, payment services, and branches of third
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country banks. The ECB, on the other hand, is exclusively responsible for prudential supervision, which includes, inter alia, the power to: (i) authorize and withdraw authorization from all credit institutions in the Eurozone; (ii) assess acquisition and disposal of holdings in banks; (iii) ensure compliance with prudential requirements laid down in the CRD Package; (iv) set, where necessary, higher prudential requirements for certain banks to protect financial stability under the conditions provided by EU law; (v) impose robust corporate governance practices and internal capital adequacy assessment controls; and (vi) intervene at the early stages when risks to the viability of a bank exist, in coordination with the relevant resolution authorities. The ECB has issued certain regulations and guidelines aimed at harmonizing the legal framework concerning the exercise of national options and discretions in accordance with the CRD IV Package. In particular, on March 14, 2016 and March 24, 2016, the ECB adopted, respectively, the Regulation (EU) 2016/445 on the exercise of options and discretions (the “ECB Regulation”), and the ECB Guide on options and discretions available in European Union law, as supplemented by the Addendum published on August 10, 2016 (the “ECB Guide”). These documents apply exclusively to significant credit institutions under the SSM Regulations. The ECB Regulation entered into force on October 1, 2016, while the ECB Guide became applicable immediately after its publication. The issue of the ECB Regulation and ECB Guide affected the way in which national options and discretions were previously applied by national competent authority. The exercise of these powers may accordingly have an impact on the capital adequacy of significant credit institutions, for instance by affecting the calculation of risk-weighted assets or own funds of the relevant bank or banking group. Recovery and Resolution under the BRRD and SRM Regulation
The BRRD framework The BRRD introduces a harmonized framework for the recovery and resolution of credit institutions and certain investment firms within the EU. The BRRD, inter alia, (i) provides the Relevant Authorities (“resolution authorities” and the “competent authorities” as defined therein) with common tools and powers to pre-emptively address banking crises in order to safeguard financial stability and minimize taxpayers’ exposure to losses, and (ii) establishes mutualized national financing arrangements to provide financial support in resolution scenarios. The BRRD has been implemented in Italy through the adoption of two Legislative Decrees by the Italian Government, namely, Legislative Decrees No. 180/2015 and 181/2015 (together, the “BRRD Decrees”), both of which were published in the Italian Official Gazette (Gazzetta Ufficiale) on November 16, 2015. Legislative Decree No. 180/2015 is a stand-alone law which implements the provisions of BRRD relating to resolution actions, while Legislative Decree No. 181/2015 amends the Consolidated Banking Act and deals principally with recovery plans, early intervention and changes to the creditor hierarchy. The BRRD Decrees entered into force on November 16, 2015, save that: (i) the Bail-In Tool (as defined below) applied from January 1, 2016; and (ii) a “depositor preference” granted for deposits other than those protected by the deposit guarantee scheme and those of individuals and SME’s applies from January 1, 2019. The BRRD provides for the possible application of four resolution tools by resolution authorities, which may be used alone or in combination where the Relevant Authorities consider that (i) an institution is failing or likely to fail, (ii) there is no reasonable prospect that any alternative private sector measures would prevent the failure of such institution within a reasonable timeframe, and (iii) a resolution action is in the public interest. With respect to condition (i), an institution is considered as failing or likely to fail when one or more of the following criteria are met: (a) it is, or is likely in the near future to be, in breach of its requirements for continuing authorization; (b) its assets are, or are likely in the near future to be, less than its liabilities; (c) it is, or is likely in the near future to be, unable to pay its debts or other liabilities as they fall due; and (d) it requires extraordinary public financial support (except in limited circumstances). The resolution tools are: (i) the sale of business tool – which enables resolution authorities to direct the sale of the firm or the whole or part of its business on commercial terms; (ii) the bridge institution – which enables resolution authorities to transfer all or part of the business of the firm to a “bridge institution” (i.e. an entity created for this purpose that is wholly or partially in public control); (iii) the asset separation tool – which enables resolution authorities to transfer impaired or problem assets to one or more publicly owned asset management vehicles to allow them to be managed with a view to maximizing their value through the possible sale or orderly wind-down (this tool can be used together with another resolution tool only); and (iv) bail-in – which gives resolution authorities the power to write down the Bail-inable Liabilities (as defined below) of the failing institution and to convert such liabilities into CET1 instruments of the institution (the “Bail-In Tool”).
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The exercise of the Bail-In Tool is a resolution action and as such is subject to the resolution criteria set out in the BRRD. Subject to certain preferred liabilities specified in the BRRD, it is intended that all liabilities of an institution (including senior or subordinated debt) (“Bail-inable Liabilities”) should potentially be subject to the general Bail-In Tool. We expect the Notes and the Guarantee will be Bail-inable Liabilities. The powers under the BRRD include the power to write down or convert Bail-inable Liabilities into CET1 instruments, as well as to cancel any debt instrument evidencing an Bail-inable Liability. In addition to the general Bail-In Tool, the BRRD provides that resolution authorities shall have the additional power to permanently write down / convert into CET1 instruments any regulatory capital instruments issued by a credit institution in order to fully absorb losses at the point at which the issuing institution is no longer viable (the “Point of Non-Viability”). The power to write down or convert these types of capital instruments (the “Regulatory Capital Write-Down Power”) may also be exercised independently of resolution actions provided that the resolution authority determines that, unless these powers are exercised, the institution will reach the Point of Non-Viability. The Regulatory Capital Write-Down Power and the general Bail-In Tool described above are each referred to as a “Bail-In Power” and, collectively, are referred to herein as the “Bail- In Powers”. The BRRD provides that a write-down/conversion resulting from the use of any of the Bail-In Powers would, in summary, follow the ordinary allocation of losses and ranking in an insolvency of the relevant institution, meaning, inter alia, that the authorities shall exercise write-down powers in a way that results in CET1 instruments being written down first in proportion to the relevant losses and, thereafter, the principal amount of other regulatory capital instruments or, in case of the Bail-In Tool, Bail-inable Liabilities being written down on a permanent basis (with Additional Tier 1 Capital instruments being written down before Tier 2 Capital instruments, Tier 2 Capital instruments being written down before other subordinated debt, and subordinated debt being written down before senior unsecured debt). Once the amount of losses is covered, the Relevant Authorities may exercise the Bail-In Powers to impose the conversion into CET1 instruments of regulatory capital instruments or, in the case of the Bail-In Tool, Eligible Liabilities until the regulatory capital of the institution is restored. The Bail-In Tool does not apply to (i) liabilities that are excluded from the notion of Bail-inable Liabilities under Article 44(2) of the BRRD (such as secured liabilities, bank deposits guaranteed under an EU member state’s deposit guarantee scheme, liabilities arising by virtue of holding of client money, liabilities to other non-group banks or investment firms that have an original maturity date of less than seven days and certain other exemptions), or (ii) liabilities that are otherwise excluded from the application of the Bail-In Tool by the Relevant Authority in accordance with Article 44(3) of the BRRD. Exclusion from the Bail-In Tool entails that pari passu ranking liabilities may be treated unequally. Accordingly, holders of Notes of a Series may be subject to write-down/conversion upon the application of the Bail-In Tool while other Series of pari passu Notes or other pari passu ranking liabilities are partially or fully excluded from the application of the Bail-In Tool. Although the BRRD provides a safeguard in respect of shareholders and creditors upon application of the resolution tools, Article 75 of the BRRD sets out that such protection is limited to the incurrence by shareholders or, as appropriate, creditors, of greater losses as a result of the application of the relevant tool than they would have incurred in a winding-up under normal insolvency proceedings. It is therefore possible not only that the claims of the holders of junior or pari passu liabilities may have been excluded from the application of the Bail- In Tool and therefore the holders of such claims receive a treatment which is more favorable than that received by holders of a Series of Notes, but also that the safeguard referred to above does not apply to ensure equal (or better) treatment compared to the holders of such fully or partially excluded claims because the safeguard is not intended to address such possible unequal treatment but rather to ensure that shareholders or creditors do not incur greater losses in a bail-in scenario (or other a scenario where another resolution tool is applied) than they would have received in a winding-up under normal insolvency proceedings. The Bail-In Tool must be applied in accordance with national insolvency rules on creditors’ hierarchy. In this respect, Article 108 of the BRRD requires EU Member States to modify their national insolvency regimes such that deposits of natural persons and micro, small and medium sized enterprises (“SMEs”) in excess of the coverage level contemplated by the deposit guarantee schemes created pursuant to the DGSD have a ranking in normal insolvency proceedings which is higher than the ranking which applies to claims of ordinary, unsecured, non-preferred creditors, such as holders of Unsubordinated Notes. In addition, the BRRD does not prevent EU Member States from amending national insolvency regimes to provide other types of creditors, with rankings in insolvency higher than ordinary, unsecured, non-preferred creditors. In this respect, the rules on creditors’
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hierarchy set forth in the Consolidated Banking Act have been amended by Legislative Decree No. 181/2015 by providing that, as from January 1, 2019, all deposits other than those protected by the deposit guarantee scheme and excess deposits of individuals and SMEs (which benefit from the super-priority required under Article 108 of the BRRD) benefit from priority over senior unsecured liabilities, though with a ranking which is lower than that provided for individual/SME deposits exceeding the coverage limit of the deposit guarantee scheme. In this respect, following the EU Banking Reform Package proposals published by the European Commission of November 23, 2016, Directive (EU) 2017/2399 (the “Creditor Hierarchy Directive”) came into force, amending the BRRD as regards the ranking of unsecured debt instruments in the insolvency hierarchy. The Creditor Hierarchy Directive introduced a new creditor hierarchy for unsecured debt instruments with the inclusion of a new MREL/TLAC eligible subordinated debt class. The Creditor Hierarchy Directive enables banks to issue debt in a new statutory category of unsecured debt available in all EU Member States (so called “senior non-preferred” debt instruments), ranking just below the most senior debt and other senior liabilities for the purposes of liquidation, while still being part of the senior unsecured debt category (but as a lower tier of senior debt). The new creditor hierarchy only applies to new issuances of bank debts and does not have retroactive application to pre-existing issuances. In Italy, senior non-preferred debt instruments (strumenti di debito chirografario di secondo livello) were introduced by Article 12-bis of Law No. 2015 of December 27, 2017 on the budget of the Italian Government for 2018 (the “2018 Budget Law”), which entered into force on January 1, 2018. In order to qualify as strumenti di debito chirografario di secondo livello, these instruments must possess the following features: (i) the maturity date must not fall earlier than twelve months after the issue date; (ii) the instrument cannot be a derivative and cannot contain embedded derivatives or have derivative features; (iii) the relevant contractual documentation must explicitly refer to the lower ranking of these claims vis à vis the other unsecured claims; (iv) the minimum denomination must be at least €250,000; and (v) the distribution must be to qualified investors only. In addition to the foregoing, the BRRD and the SRM Regulation provide Relevant Authorities with broader powers to implement other resolution measures with respect to distressed banks which satisfy the conditions for resolution, which may include (without limitation) the replacement or substitution of the bank as obligor in respect of debt instruments, modification to the terms of debt instruments (including altering the maturity and/or the amount of interest payable and/or imposing a temporary suspension of payments) and discounting the listing and admission to trading of financial instruments. Finally, according to the BRRD each bank must prepare a recovery plan and submit it to the national competent authority. Furthermore, the Relevant Authority must prepare a resolution plan for each bank. MREL requirements under the BRRD and TLAC implementation Under the BRRD, credit institutions are also required to comply at all times with a minimum requirement for own funds and eligible liabilities (“MREL”). According to Article 45 of the BRRD, the MREL shall be calculated as the amount of own funds and eligible liabilities expressed as a percentage of the total liabilities and own funds of the credit institution. Unlike the “Pillar I” minimum capital requirements set forth in the CRR, the appropriate MREL requirement shall be determined by the competent resolution authorities on an institution- by-institution basis. Such determination shall be made by the resolution authority taking into account, inter alia, the resolvability, risk profile, systemic importance and other characteristics of any such institution. Based on work conducted by the EBA, on May 23, 2016, the European Commission enacted the Commission Delegated Regulation (EU) No. 2016/1450, containing the regulatory technical standards specifying the criteria relating to the methodology for setting the MREL (the “MREL RTS”). According to the MREL RTS, the default loss absorption amount to be held by each credit institutions must be at least equal to the capital requirements applying under the CRD IV and CRR (including the combined buffer requirements as well as any firm-specific own funds requirements imposed by the competent authority). However, subject to certain conditions, the loss absorption amount determined by the relevant resolution authority may be higher (or lower) than the default loss absorption amount, based on the specific circumstances of the case (e.g. considering the business model, funding model or risk profile or the existence of any impediment to resolvability). In addition to the loss absorption amount, the MREL RTS also define the methods for calculating the recapitalization amount (meaning the amount necessary to continue to comply with conditions for authorization and to carry out
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activities and sustain market confidence in the institution) and other aspects connected with MREL calculation, including the related adjustments. The minimum MREL requirements may be met through any items that are eligible for inclusion in the credit institution’s own funds under the CRR and the Bail-inable Liabilities meeting the requirements set forth in the BRRD and related implementing provisions (such as, in particular, the liabilities that are issued and fully paid up, have a remaining maturity of at least one year, do not arise from derivatives, etc.) (the “Eligible Liabilities”). Resolution authorities may provide for the application of a transitional period in order to allow credit institutions to satisfy the applicable minimum MREL requirements. On May 4, 2018, the Issuer received the decision regarding its applicable minimum MREL requirements, which are binding on the Issuer and with which the Issuer already complies. A key aspect of the debate on MREL requirements is related to the interactions between the BRRD framework and the final principles regarding the total loss-absorbing capacity (“TLAC”) standard for G-SIBs published by the Financial Stability Board (“FSB”) on November 9, 2015. Similarly to the MREL, the TLAC standard is aimed at ensuring that G-SIBs have sufficient loss absorbing capacity available in case of resolution in order to minimize the impact on financial stability, ensure the continuation of critical functions and avoid exposing taxpayers to loss. However, unlike in the case of the MREL requirements under the BRRD, the FSB proposals define the “Pillar 1” minimum TLAC requirements to be met by all G-SIBs. As part of the EU Banking Reform Package, BRRD II entered into force on June 27, 2019 and Member States have now 18 months for the conversion into national law of the BRRD II, expected before December 28, 2020. BRRD will continue to apply until BRRD II is transposed while some provisions of the CRR II entered into force on June 27, 2019. BRRD II contains a number of provisions amending the BRRD, with a view to implementing the TLAC requirement. This requirement has now been integrated into the general MREL rules, so that there are no duplications deriving from the application of two parallel systems. BRRD II amends certain important aspects related to: the minimum harmonized “Pillar 1” MREL requirement (the “Pillar 1 MREL Requirement”), applicable to G-SIB and so called “top-tier banks” and its level of subordinated liabilities (article 45); the contractual recognition of bail-in (article 55); and the regime applicable to holdings of Eligible Liabilities by retail investors; moratorium and suspension powers attributed to resolution authorities. We are a “top tier bank” and, accordingly, we will be subject to the related Pillar 1 MREL Requirement. In addition to the minimum harmonised MREL requirement (also referred to as the Pillar 1 MREL Requirement), to be satisfied only with Own Funds and Eligible Liabilities subordinated to excluded liabilities (even if, under specific conditions, part of the requirement may be satisfied with non-subordinated liabilities), all EU banks will be required to comply with a bank specific (in terms of calibration) MREL requirement (a “Pillar 2 MREL Requirement”), which can be satisfied also through the use of non subordinated liabilities, for the amount exceeding a minimum subordination level equal to 8% of TLOF (Total Liabilities and Own Funds) and applicable to G-SIBs and “Top Tier” banks (assets > 100 €/bn) only. However, if a bank is identified among the “riskiest” EU institutions, the resolution authority can decide to discretionally raise the applicable subordination requirement beyond the minimum level, in any case subject to the resolution authority assessment and determination. In line with the TLAC proposal, BRRD II also provides for the introduction of an internal MREL requirement applying to entities belonging to a banking group. The Single Resolution Mechanism The SRM Regulation applies analogous tools and powers primarily in the same area to which the Single Supervisory Mechanism applies and, inter alia, confers on a Single Resolution Board (the “SRB”) (which is considered a resolution authority) the tools and powers of national resolution authorities under the BRRD. The SRM became operational on January 1, 2016 and is based on a decision-making process entailing the involvement of the European Commission and the Council of the European Union, as well as the ECB and national resolution authorities.
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Resolution Funds The BRRD requires all Member States to create national resolution funds reaching a level of at least 1% of covered deposits within 10 years. The national resolution fund for Italy was created in November 2015 and required both ordinary and extraordinary contributions to be made by Italian banks and certain investment firms. As part of the Banking Union, the national resolution funds set up under the BRRD were replaced by a Single Resolution Fund managed by the SRB (the “SRF”) as of January 1, 2016. The resources of the national resolution funds will be gradually unified into the SRF. The SRF is intended to ensure the availability of funding support while a bank is resolved and will contribute to resolution if at least 8% of the total liabilities (including own funds) of the bank have been subject to the Bail- In Tool. The SRB calculates the amount of annual contributions of all institutions authorized in the Member States participating in the SRM. The SRF is to be built up over eight years, beginning in 2016, to the target level of 1% of the covered deposits of banks established in Eurozone states. Once this target level is reached, the banks will have to contribute only, in theory, if the SRF resources are exhausted in resolving other institutions. DGSD and deposit insurance Pursuant to Article 96 of the Consolidated Banking Act, all Italian banks must be members of a deposit guarantee fund, which preserves guaranteed deposits in case of insolvency of any authorized Italian bank. Under Italian law, two guarantee funds are currently established: the Interbank Deposit Guarantee Fund (Fondo Interbancario di Tutela dei Depositi), and the Guarantee Fund of Depositors of Co-operative Credit (Fondo di Garanzia dei Depositanti del Credito Cooperativo) (together the “Guarantee Funds”). The Guarantee Funds cover losses up to €100,000 per depositor held in the form of deposits, bank drafts and other similar instruments. The Guarantee Funds do not cover, inter alia, bearer deposits, bonds, credit institutions’ deposits made for their own account and in their own name (including deposits from certain companies in a banking group) and deposits of the government and local authorities. The regulatory framework which applies to Guarantee Funds has changed as a consequence of the transposition of the DGSD. The DGSD was implemented in Italy by Legislative Decree No. 30 of February 15, 2016, which came into force on March 9, 2016 (the “DGSD Decree”). The DGSD Decree confirmed that the maximum limit of coverage by the Guarantee Funds shall be equal to €100,000 per depositor. In addition, it established the funding requirements for Guarantee Funds, regulated the repayment methods to depositors if the bank is insolvent and identified other intervention measures that may be undertaken by Guarantee Funds. Specifically, the DGSD Decree introduces the possibility for Guarantee Funds to create special arrangements funded on a voluntary basis by members of the Guarantee Scheme. Acquisition of relevant shareholdings in banks
Directive 2007/44/EC (implemented by Legislative Decree No. 21 of January 27, 2010) and Article 19 of the Consolidated Banking Act – as implemented by CICR resolution No. 675 of July 27, 2011 – require that persons, whether acting alone or in concert, obtain prior authorization before acquiring equity interests in banks or bank holding companies which would result in such person (or persons) owning 10% or more of the share capital or voting rights of any such bank or bank holding company or otherwise controlling or exercising significant influence over such entity. Prior authorization is also required to obtain an ownership stake of (or higher than) 20%, 30% or 50% of the banks’ share capital or its voting rights or any other stake which would result in a change of control of the bank. Any such authorization is granted by the ECB in cooperation with the Bank of Italy. The ECB’s authorization is also required for transactions involving an irrevocable commitment by an individual or a group to purchase a material equity interest in a bank or in the parent company of a banking group (such as auctions, public tender offers, or transactions that would result in an obligation to conduct a public tender offer). In addition, parties must disclose to the Bank of Italy and the ECB any agreement to jointly exercise voting rights in a bank or in the parent company of such bank. Authorization requirements in relation to certain transactions
Pursuant to the provisions set forth in Circular No. 285 and related implementing regulations the perfection of certain transactions by Italian banks is subject to the prior authorization or non-objection by the Relevant
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Authority. These transactions include, in particular, the approval of amendments to the by-laws of the bank, the purchase of a business (or parts thereof) as a going concern (if certain conditions are met), mergers and de- mergers involving Italian banks. Equity investments by banks
Banks are permitted to make investments in both financial and non-financial companies in compliance with the rules and subject to the limits provided by Circular No. 285. The equity investments undertaken by a bank may not exceed, in total, the margin available for investments in equity holdings and real estate (the available margin is determined as the difference between the regulatory capital and the sum of the equity holdings and real estate, in whatever form they are held). A prior authorization of the Relevant Authority is required before a bank may acquire equity interests in other banks, financial companies, insurance companies and instrumental companies (i) if the equity interest exceeds 10% of the consolidated regulatory capital of the acquiring bank’s group or, as applicable, of the acquiring bank or (ii) if the equity interest would result in an acquisition of control over the acquired company where the latter is incorporated in a non-EU country other than those indicated in the list included in Circular No. 285. In addition, for investments in non-financial companies, the overall amount of the relevant shareholdings may not exceed 60% of the permissible capital (i.e. the sum of the Tier 1 Capital and Tier 2 Capital as provided by the CRR) of the bank and, in relation to the investments in each non-financial company, a bank is not permitted to hold a relevant shareholding for an amount exceeding 15% of the permissible capital. In this respect, Circular No. 285 provides specific rules regarding the shareholdings held in the context of the placement and underwriting activities of companies in financial difficulties and for debt collection as well as with reference to the indirect investments in equity. Changes in European Laws and Regulations in Response to Covid-19 Pandemic The severe economic repercussion caused by the COVID-19 Pandemic and the consequent containment measures disrupted the European economy. European institutions played a key role in mitigating the negative downturn caused by the COVID-19 Pandemic and are contributing to the economic recovery even from a legislative standpoint. In particular, the Commission, the European Central Bank and the European Banking Authority have provided clarity in relation to the application of the flexibility already embedded in Regulation (EU) No 575/2013, on the establishment of the European Supervisory Authority, by issuing interpretations and guidance on the application of the prudential framework in the context of COVID-19 Pandemic. Such guidance includes the interpretative communication of the Commission of April 28, 2020 on the application of the accounting and prudential frameworks to facilitate EU bank lending, supporting businesses and households amid the COVID-19 Pandemic. In reaction to the COVID-19 Pandemic, the Basel Committee has also provided some flexibility in the application of international standards. On June 24, 2020 the European Union Council adopted the Regulation (EU) 2020/873 (the “CRR Quick Fix”), which amended Regulation (EU) No 575/2013 and Regulation (EU) 2019/876. In particular, the CRR Quick Fix extended certain IFRS 9 transitional arrangements until 2024 in order to mitigate the significant increase in expected credit loss provisions deriving from the application of the IFRS 9 during the economic downturn caused by the Covid-19 Pandemic. Key aspects of the changes introduced by the CRR Quick Fix are: (i) moving the reference date for any expected credit loss provisions to January 1, 2020; (ii) adjusting the formula for the calculation of expected credit loss provisions; and (iii) the temporary exclusion of certain exposures to central banks, subject to certain conditions. Finally, during the during the interinstitutional negotiation process additional measures were introduced by the co-legislators (i.e., the European Parliament and the Council of the EU), such as the reintroduction of the prudential filter for unrealized gain/losses from sovereign exposures valued at fair value through other comprehensive income; the exclusion of overshootings from the calculation of the back-testing; credit risk and large exposure transitional treatment of euro-denominated public debt issued by non-euro Member States. The measures enacted by the CRR Quick Fix will improve the banking institutions’ ability to lend to solvent and valuable undertakings and to actively partake in the rehabilitation of the European economy.
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The European legislator is also following a softlaw approach to provide additional guidance and support to banking institutions. On July 28, 2020, the ECB published a letter addressing the operational capacity to deal with distressed debtors in the context of the COVID-19 Pandemic. According to the ECB states banks should provide sustainable solutions or support in an efficient and timely manner which also requires them to have effective risk management practices. Furthermore, banks should take timely action to minimise any cascade effects as the moratoria measures expire. The ECB also expects banks to clearly understand the risks they are facing and devise an appropriate strategy, with both a short and medium-term focus. It is expected that all the European legislative bodies will provide further guidance and enact new legislative measures to foster the economic recovery of the European Union. The Issuer is evaluating the implications of all of these actions for its operations in Italy and in Europe at this time and will consider the implications of any subsequent actions. Corporate governance, administrative and accounting organization and internal control Circular No. 285 contains rules designed to achieve more efficient organization of the corporate governance structure of Italian banks. The available governance models are: (i) the traditional model (composed of a board of directors and a board of statutory auditors), (ii) dualistic (composed of a management board and a supervisory board) or (iii) monistic (composed of a board of directors and an internal control committee). Basic principles were adopted to distinguish the functions of the various corporate bodies for strategic supervision, management and control to achieve the appropriate balance of powers and responsibilities. In addition, a number of provisions have been introduced in compliance with the CRD IV in order to regulate the compensation and incentives provided to members of banks’ management and governance bodies and other risk takers or employees of the banks in line with the regulatory framework applicable at EU level. New remuneration provisions have also been introduced by the CRD V entering into force on June 27, 2019, which needs to be transposed into national legislation by December 28, 2020. Moreover, for banks publicly traded on regulated markets, the Consolidated Financial Act provides specific requirements for the composition of management and governance bodies in order to protect the interests of investors and minority shareholders. In addition, the Consolidated Financial Act sets forth disclosure rules that govern the financial information that listed banks must publicly disclose to the market, the annual corporate governance report in which listed banks must describe their corporate governance model and ownership structures and the remuneration report in which listed banks must describe their remuneration policies and the remunerations paid to directors and managers. Securities markets control and legislation The Consolidated Financial Act contains general principles on the supervision of intermediaries that provide investment services (including investor protections against an intermediary’s insolvency) and of intermediaries that offer collective investment management services (including through mutual funds and closed-ended or open-ended investments companies). In particular, the Bank of Italy is responsible for issues related to risk limitation and financial stability, while CONSOB is responsible for issues related to market disclosure and proper business conduct. The Consolidated Financial Act also provides standards for the organization and management of financial markets, centralized management of financial instruments, methods for soliciting investments and corporate governance of listed companies. The legal framework for investment services is established by the MiFID Directive, which was implemented in Italy on November 1, 2007. The MiFID Decree and relevant implementing measures have had a significant impact on the Italian securities market and conduct of business by Italian intermediaries. The rules provided under the Italian provisions implementing the MiFID apply to the following investment services and activities: (i) reception and transmission of orders in relation to one or more financial instruments; (ii) execution of orders on behalf of clients; (iii) dealing on its own account; (iv) portfolio management; (v) investment advice; (vi) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; (vii) placing of financial instruments without a firm commitment; and (viii) operation of multilateral trading facilities. Article 21 of the Consolidated Financial Act defines the general rules of conduct that must be complied with by banks and other intermediaries in the performance of the services and activities referred to above. These rules
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of conduct are further detailed in the implementing regulations issued by CONSOB and require, inter alia, the disclosure of certain information to clients, the performance of a suitability or appropriateness test, depending on the circumstances, with respect to transactions entered into by the clients through the relevant intermediary and certain additional obligations concerning relationships with clients. On June 12, 2014, the MiFID II (repealing MiFID) and the Regulation (EU) No. 600/2014 (“MiFIR”) were published in the EU Official Journal. The new framework aims to make financial markets more efficient, resilient and transparent. MiFID II and MiFIR introduce a market structure which ensures that trading, wherever appropriate, takes place on regulated platforms. In addition, they introduce rules on high frequency trading, improve the transparency and oversight of financial markets – including derivatives markets – and address the issue of excessive price volatility in commodity derivatives markets. The new framework aims at improving conditions for competition in the trading and clearing of financial instruments. MiFID II also strengthens the protection of investors by introducing organizational and conduct requirements or by strengthening the role of management bodies. The new framework also increases the role and supervisory powers of regulators and establishes powers to prohibit or restrict the marketing and distribution of certain products in well-defined circumstances. The power to implement the MiFID II / MiFIR rules has been delegated to the Italian government through Law No. 114 of July 9, 2015. The rules contained in the MiFID II and in the MiFIR have been transposed into the Italian framework by the Legislative Decree No. 129 of August 3, 2017, published in the Italian Official Gazette (Gazzetta Ufficiale) on August 25, 2017. The Legislative Decree amended various provisions contained into the Consolidated Financial Act and is supported by a series of implementing provisions. In this regard, the regulation of intermediaries in Italy was amended by Regulation No. 20307 issued by CONSOB on February 15, 2018, in view of the implementation of the MiFID II, providing also an updated definition of qualified investors (investitori qualificati). Financial conglomerates Legislative Decree No. 142 of May 30, 2005 (implementing Directive 2002/87/EC) provides for additional supervision (“supplementary supervision”) of banks, insurance companies and investment firms that are part of a “financial conglomerate”. The supplementary supervision rules seek to safeguard the stability of financial conglomerates as well as the stability of the single entities within financial conglomerates, regardless of whether they are regulated entities. These rules seek to prevent destabilizing effects on the financial system that can arise from problems with individual entities within a financial conglomerate. On November 16, 2005, the Bank of Italy entered into an agreement with IVASS to regulate, in accordance with Legislative Decree No. 142/2005, the capital adequacy requirements of financial conglomerates. In accordance with this agreement, the Bank of Italy is primarily responsible for supervising financial conglomerates (like our Group) that have a bank as the parent company. On November 16, 2011 the EU adopted Directive 2011/89/EU which amends Directives 98/78/EC, 2002/87/EC, 2006/48/EC and 2009/138/EC, regarding the supplementary supervision of financial entities in a financial conglomerate. The Directive, inter alia, (i) includes asset management companies in the threshold tests for identifying a financial conglomerate, (ii) allows for both sector-specific (banking and insurance) supervision and supplementary supervision of a financial conglomerate’s parent entity, (iii) introduces a waiver for smaller groups if the relevant supervisor deems the group’s risks to be negligible and (iv) allows for risk- based assessments, in addition to existing definitions relating to size, in identifying financial conglomerates. Directive 2011/89/EU has been implemented by Legislative Decree No. 53 of March 4, 2014. The Legislative Decree No. 53/2014 amended the definition of “financial conglomerate” provided under the Legislative Decree No. 142/2005. In line with the definition set out under the relevant EU framework, the definition of financial conglomerate set forth in Legislative Decree No. 142/2005 includes any group or subgroup, which meets the following conditions: (a) there is a regulated entity at the head of the group or subgroup: (i) such entity is a parent undertaking of an entity in the financial sector, an entity which holds a participation in an entity in the financial sector, or an entity linked with an entity in the financial sector by a relationship resulting in such entities being subject to the direction of the same entity by virtue of agreements or by-laws’ provisions or where the majority of the members of the management, supervisory and control bodies
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of such entities are the same; (ii) at least one of the entities in the group or subgroup is within the insurance sector and at least one is within the banking or investment services sector; and (iii) the consolidated or aggregated activities of the entities in the group or subgroup within the insurance sector and of the entities within the banking and investment services sector are both significant; or (b) where there is no regulated entity at the head of the group or subgroup: (i) the group’s or subgroup’s activities occur mainly in the financial sector; (ii) at least one of the entities in the group or subgroup is within the insurance sector and at least one is within the banking or investment services sector; and (iii) the consolidated or aggregated activities of the entities in the group or subgroup within the insurance sector and of the entities within the banking and investment services sector are both significant. Anti-money laundering regulation Banks are subject to anti-money laundering rules and regulations, mainly set forth in the AML Decree. Under current anti-money laundering rules and regulations, banks are required to: (i) identify and properly verify their customers (using more rigorous procedures in circumstances with a heightened risk of money laundering or terrorism financing); (ii) set up a consolidated computer archive (Archivio Unico Informatico, or “AUI”); (iii) record and preserve identifying data and other information related to relationships and transactions in the AUI; (iv) transmit a statistical flow to UIF (Unità di Informazione Finanziaria or “UIF”) and manage certain related issues; (v) report suspicious transactions; and (vi) establish internal control measures and ensure adequate training of employees to prevent money laundering transactions. The Italian anti-money laundering requirements have been recently changed through Legislative Decree No. 90 of May 25, 2017, implementing Directive (EU) No. 2015/849, which, inter alia, (i) extended the scope of application of the notion of politically exposed persons, (ii) amended the requirements applicable to certain non- banking intermediaries or in relation to the performance of payment services or distribution of e-money, (iii) specified certain aspects concerning the modalities to be followed in order to comply with customer due diligence obligations, (iv) amended certain provisions on reporting obligations to the UIF and sanctions which apply in cases of breach of applicable requirements. Other regulatory developments In addition to the substantial changes provided under the EU Banking Reform Package and arising as a consequence of the MiFID II / MiFIR implementation, there are several other initiatives, in various stages of finalization, which will yield additional regulatory pressure over the medium term and will impact the EU’s future regulatory direction. These initiatives include, among others, a new EU securitization framework, adopted on December 12, 2017, and published in the Official Journal of the EU as Regulation (EU) 2017/2402 (the “STS Regulation”). The STS Regulation entered into force on January 17, 2018, and became applicable to securitization transactions as of January 1, 2019. The STS Regulation expands requirements for banks under the CRR, like due diligence and risk retention, also to the other institutional investors and creates a new category of Simple Transparent and Standardized securitizations proposed by the European Commission within the scope of the Capital Market Union project. The STS Regulation was amended on March 31, 2021 by Regulation (EU) 2021/557 entered into force on April 9, 2021, which aims to introduce targeted measures to support economic recovery from the COVID-19 Pandemic, by, inter alia, (i) removing regulatory obstacles to the securitization of NPLs; and (ii) extending the STS Regulation framework to on-balance-sheet synthetic securitization. Moreover, in December 2017, the Basel Committee completed the revisions of Basel III framework. The main changes are introduced with regard to the standardized approach for calculating required minimum regulatory capital on credit, operational risk, and the restricting of the use of internally modeled approaches, including establishing a capital output floor of 72.5% calculated on the standardized approach. A key objective of Basel III was to reduce excessive variance in risk-weighted assets (“RWA”) by establishing prudent and credible
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calculation of RWAs through enhanced robustness and risk sensitivity. The Basel Committee set January 1, 2022 as the implementation date for the new measures which are expected to have a significant impact on risk modelling, both directly on the exposures assessed via standardized approaches and also indirectly on RWA calculated under the IRB approach as a result of the introduction of a capital floor applicable to banks applying the IRB approach that requires capital levels at least equal to minimum requirements under the revised standardized approaches. The Basel Committee has established minimum requirements for supervisory approval and permitted the use of the IRB approach and has divided the use of the IRB approach into two broad approaches including a foundation approach that relies on supervisory estimates of certain components of credit risk, in each case, with the goal of limiting the use of internal models to reduce the variability of capital requirements for credit risk. In this respect, the ECB has undertaken a Targeted Review of Internal Models (“TRIM”) that is being conducted in accordance with a guide on TRIM issued by the ECB in at the beginning of 2016 that sets out the criteria that will be followed by the ECB in evaluating internal models in general and with respect to credit, market and counterparty credit risk. On November 21, 2019, the ECB provided its third update on the TRIMs and in April 2021 it published its report of the TRIM’s key activities and results. For counterparty exposures (generated by derivatives) the use of internal models is also permitted, but is generally subject to a floor based on a percentage of the applicable standardized approach, as well as to a floor on the risk weight of collateral for the collateralized portion of an exposure. Furthermore, in the context of the revision of Credit Valuation Adjustment (“CVA”) risk framework, the option of adopting the internal model approach has been removed. The framework also replaces existing standardized and IRB approaches for calculating the operational risk with a single standardized approach based on financial statement measurements of operational risk that establish a single non-model-based method for estimating operational risk and required capital to support that risk. On July 8, 2020 the Basel Committee published an updated standard for the regulatory capital treatment of CVA risk for derivatives and securities financing transactions, which includes (i) recalibrated risks weights; (ii) different treatment of certain client cleared derivatives; and (iii) an overall recalibration of the standardized and basic approach. Finally, the Basel Committee also revised the 2016 market risk framework (fundamental review of the trading book), publishing final amendments on January 14, 2019 and on February 25, 2019. In line with the finalization of the full Basel III package, these requirements will apply as of January 1, 2022. According to the recently adopted post-crisis regulatory reforms referred to as EU Banking Reforms Package, market risk requirements were introduced as reporting requirements as of June 27, 2019, as, during the EU legislative procedure for the adoption of the CRR II, the Basel Framework was not finalized yet. On March 27, 2023 the EBA published its final draft Regulatory Technical Standards on the new Internal Model Approach under the Fundamental Review of the Trading Book (“FRTB”). These technical standards conclude the first phase of the EBA roadmap towards the implementation of the market and counterparty credit risk frameworks in the EU. The FRTB own funds requirement will apply from 2023, which will allow EU banks to benefit from a longer implementation time. Supervision and Regulation of the New York Branch in the United States The following summary of certain aspects of the regulation and supervision of the New York Branch in the United States is based upon applicable laws, rules and regulations in effect as of the date of this Offering Memorandum, all of which are subject to change. This discussion does not purport to be a comprehensive description of all the regulatory and supervisory considerations that may be applicable to the New York Branch. Additionally, except where otherwise noted, this discussion does not cover U.S. laws and regulations applicable to the Issuer or its subsidiaries that do not involve the New York Branch. Banking Activities
The Issuer is licensed by the Superintendent under the New York Banking Law (the “NYBL”) to maintain a branch office in New York State. Under that license, the New York Branch is authorized to engage in banking, including “the business of buying, selling, paying or collecting bills of exchange, or of issuing letters of credit or of receiving money for transmission or transmitting the same by draft, check, cable or otherwise, or of making loans, or of receiving deposits”. The New York Branch must maintain regular records of its assets and liabilities and submit written reports as to them and other matters, to the extent that the Superintendent and the Federal Reserve Board require the filing of these reports. The New York Branch is examined by the Department of Financial Services and the Federal
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Reserve Board. The nature and extent of the state and federal regulation of the New York Branch are substantially equivalent to that applicable to a bank chartered under the laws of the State of New York. Under the NYBL and implementing regulations, the New York Branch must maintain on deposit with a bank in the State of New York certain eligible assets (which may include U.S. Treasury securities, other obligations issued or guaranteed by the U.S. government or agencies or instrumentalities thereof, obligations of the New York State government and local governments within New York State, and numerous other assets meeting the criteria established in the NYBL and applicable regulations), which are pledged to the Superintendent. The amount of eligible assets required to be pledged is equal to 1% of the New York Branch’s third-party liabilities. Under the NYBL, the Superintendent is also empowered to require branches of foreign banks to maintain in New York specified assets equal to such percentage of the branches’ liabilities, excluding liabilities to other offices, agencies, branches and affiliates of the Issuer, as the Superintendent may designate. At present, the Superintendent has set this percentage at 0%, although specific asset maintenance requirements may be imposed upon individual branches on a case-by-case basis. The Superintendent has not prescribed such a requirement for the New York Branch. The NYBL authorizes the Superintendent to take possession of the business and property in New York State of a foreign bank that is licensed by the Superintendent to maintain a New York branch or agency under circumstances similar to those that would permit the Superintendent to take possession of the business and property of a New York State-chartered bank, including, among other things, the violation of any law, conduct of business in an unauthorized or unsafe manner, capital impairments, or the suspension of payment of obligations. Additionally, the NYBL authorizes the Superintendent to take possession of such a foreign bank’s business and property in New York State upon a finding that the foreign bank is in liquidation in the jurisdiction of its domicile or elsewhere or that there is reason to doubt the foreign bank’s ability or willingness to pay in full the claims of the creditors of the bank’s New York branch or agency. Pursuant to the NYBL, when the Superintendent takes possession of a New York branch or agency of a foreign bank, the Superintendent succeeds to the branch or agency’s assets wherever situated and all other assets of the foreign bank located in New York State. Upon taking title to such assets, the Superintendent would have the power, in most instances upon the order of the New York Supreme Court, to compromise the liabilities of the New York branch or agency (other than deposit liabilities) and sell the assets to pay the claims of holders of obligations of the New York branch or agency who have provided the necessary evidence of their claims to the Superintendent. In liquidating or dealing with the New York branch or agency’s business after taking possession of the branch or agency, the Superintendent is authorized to accept for payment out of the foreign bank’s business and property in New York State only those claims that arose out of transactions with the branch or agency, and is not authorized to accept (1) claims that would not represent an enforceable legal obligation against the branch or agency if it were a separate and independent legal entity, or (2) amounts due and other liabilities to other offices, agencies or branches of, and affiliates of, the foreign bank. The NYBL provides that acceptance or rejection of claims by the Superintendent shall not prejudice the rights of such creditors to have their claims satisfied out of other assets of the foreign bank. After accepted claims are paid, together with any interest thereon, and the expenses of the liquidation have been paid in full or properly provided for, the Superintendent upon the order of the New York Supreme Court would turn over the remaining assets, if any, to any other U.S. offices that may be maintained by the foreign bank and that are being liquidated, upon the request of the liquidators of those offices and in amounts which the liquidators of those offices demonstrate to the Superintendent are needed to pay the claims accepted by those liquidators and any expenses incurred by the liquidators in liquidating those other offices of the foreign bank. After such payments, if any, have been made, any assets of the foreign bank remaining in the possession of the Superintendent would be turned over to the head office of the foreign bank or to the foreign bank’s duly appointed domiciliary liquidator or receiver. The Superintendent may also issue an order to a foreign bank’s New York branch or agency to appear and explain an apparent violation of law and to discontinue unauthorized or unsafe practices. In addition to being subject to New York laws and regulations, the New York Branch is also subject to federal regulation, primarily under the International Banking Act of 1978, as amended (the “IBA”), and in particular the amendments to the IBA made pursuant to the Foreign Bank Supervision Enhancement Act of 1991 (the “FBSEA”), and to examination by the Federal Reserve Board, which is the Issuer’s primary federal bank regulator in the United States. Under the IBA, as amended by the FBSEA, all U.S. branches and agencies of foreign banks, such as the New York Branch, are subject to examination by the Federal Reserve Board and
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reporting requirements similar to those imposed on domestic U.S. banks. Additionally, most U.S. branches and agencies of foreign banks, including the New York Branch, are subject to reserve requirements and related requirements pursuant to regulations of the Federal Reserve Board and certain and limitations on the acceptance and maintenance of deposits. Deposits held at the New York Branch are not, and are not required or eligible to be, insured by the FDIC. In general, under the IBA, the New York Branch is not permitted to accept domestic retail deposits having an initial balance of less than US$250,000. Among other things, the IBA and its implementing regulations provide that a state-licensed branch or agency of a foreign bank may not engage as principal in any type of activity that is not permissible for a federally- licensed branch of a foreign bank unless the Federal Reserve Board has determined that such activity is consistent with sound banking practice. The IBA also requires that a state-licensed branch or agency of a foreign bank comply with the single-borrower (or issuer) lending and investment limits applicable to national banks. These limits, which are expressed as a percentage of capital and surplus, are based on the capital and surplus of the foreign bank on a global basis. The Dodd-Frank Act, as defined below, amended the federal lending limits to take into account any credit exposure arising from derivative transactions, repurchase or reverse repurchase agreements, or securities lending or borrowing transactions with counterparties. The New York Branch also is also subject to certain quantitative limits and qualitative restrictions under sections 23A and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve Board on the extent to which it may extend credit to or engage in certain other “covered transactions” with any affiliates that may be engaged in securities underwriting, insurance underwriting or certain “merchant banking” investment activities in the United States or with any portfolio company that may be directly or indirectly controlled by the Issuer pursuant to the Federal Reserve Board’s “merchant banking” investment regulations, or with a subsidiary of any such affiliate. In general, in addition to the quantitative limits that apply to covered transactions, the New York Branch’s transactions with such affiliates must be on terms that would ordinarily be offered to unaffiliated entities and are subject to volume limits and other requirements, and any such transactions that involve extensions of credit or credit exposure by or for the New York Branch must be secured by designated amounts of specified collateral. In addition, the IBA authorizes the Federal Reserve Board to terminate the activities of a U.S. branch or agency of a foreign bank if it finds that (i) the foreign bank is not subject to comprehensive supervision or regulation on a consolidated basis in its home country and the home country supervisor is not making demonstrable progress in establishing arrangements for such supervision or regulation, (ii) there is reasonable cause to believe that such foreign bank or an affiliate of the foreign bank has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result, continued operation of the branch or agency would be inconsistent with the public interest or with the purposes of the U.S. federal banking laws, or (iii) in the case of a foreign bank that presents a risk to the stability of the U.S. financial system, the home country of the foreign bank has not adopted, or made demonstrable progress toward adopting, an appropriate system of financial regulation to mitigate such risk. If the Federal Reserve Board were to use this authority to close the New York Branch, creditors of the New York Branch would have recourse only against the Issuer, unless the Superintendent were to seize the property of the New York Branch as described above or the Superintendent or other regulatory authorities were to make alternative arrangements for the payment of the liabilities of the New York Branch. The Issuer is subject to the same types of conditions and limitations under federal law as are applicable to domestic U.S. banks with regard to the establishment of new branches or the acquisition of subsidiary banks outside its “home state” which, in the case of the Issuer, is New York. Additionally, the New York Branch is restricted under federal banking law, in the same general manner as domestic U.S. banks, from engaging in certain “tying” arrangements involving its products and services and/or those of its affiliates. The Gramm-Leach-Bliley Act (the “GLBA”) and the regulations issued thereunder contain a number of provisions that affect the Issuer’s U.S. banking operations and the operations of all U.S. financial institutions generally. One such provision relates to the financial privacy of consumers. In addition, the so called “push- out” provisions of the GLBA limit the exclusion of banks (including the New York Branch) from the definitions of “broker” and “dealer” under the Exchange Act. Pursuant to the “push-out” provisions, banks are required to conduct their securities dealing and brokerage activities through registered broker-dealers, unless an exemption applies. The Securities and Exchange Commission (the “SEC”) has adopted rules implementing certain exemptions from the “dealer” push-out requirement, and the SEC and the Federal Reserve Board have jointly adopted Regulation R, which sets forth the conditions under which banks may engage in certain types of
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securities-related activities without being deemed to be a “broker” and thereby being required to register with the SEC. Intesa Sanpaolo IMI Securities Corp. (“IMI Securities”), a subsidiary of the Issuer, is a registered broker-dealer in the United States. The Issuer’s U.S. operations are also subject to other federal laws and regulations, including the Bank Holding Company Act of 1956, as amended (the “BHCA”), which imposes significant restrictions on the Issuer’s U.S. non-banking activities and on its worldwide holdings of voting securities of and “control” relationships with companies which directly or indirectly engage in business in the United States. In general, the activities conducted by a foreign bank’s non-bank subsidiaries in the United States are limited to those activities determined by the Federal Reserve Board to be closely related to banking. Qualifying bank holding companies and foreign banks that elect to be treated as a “financial holding company,” such as the Issuer, are also permitted to engage through U.S. non-bank subsidiaries in a broader range of activities that are financial in nature in the United States, including, among other things, underwriting, dealing in and making a market in securities; providing financial, investment and other advisory services, including to investment companies; acting as principal, agent or broker in connection with insurance activities; engaging in merchant banking activities, including acquiring shares or ownership interests of a company engaged in any non-banking activity; and other financial activities provided under Section 4(k) of the BHCA. The Issuer became a financial holding company in October 2019. To qualify as a financial holding company, the Issuer was required to certify and demonstrate that the Issuer was “well capitalized” and “well managed” (in each case, as defined by Federal Reserve Board regulations). These standards, as applied to the Issuer, are comparable to the standards U.S. domestic bank holding companies must satisfy to qualify as financial holding companies. If, at any time, the Issuer were no longer to be well capitalized or well managed or otherwise were to fail to meet any of the requirements for the Issuer to maintain its financial holding company status, then the Issuer may be required to discontinue certain activities, to cease engaging in new activities that are financial in nature or in making new investments or to terminate its U.S. banking operations. The Federal Reserve Board may consider a financial holding company not to be well managed as a result of any enforcement action taken against the financial holding company, such as any further written agreements or consent orders of the type that were entered into by the Issuer and the New York Branch prior to the Issuer becoming a financial holding company, as discussed under “— Laws Prohibiting Money Laundering and Terrorist Financing and Enforcing U.S. Sanctions” below. Under the BHCA, the Issuer is required to obtain the prior approval of the Federal Reserve Board before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting securities of any U.S. bank, bank holding company or certain other types of U.S. depository institutions or depository institution holding companies. Laws Prohibiting Money Laundering and Terrorist Financing and Enforcing U.S. Sanctions
For the last two decades, a major focus of U.S. policy and regulation of financial institutions has been the combatting of money laundering and terrorist financing and assuring compliance with U.S. economic sanctions regarding designated countries, individuals or entities. With regard to combating money laundering and terrorist financing, on October 26, 2001, in response to the events of September 11, the President of the United States signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”). Title III of the USA PATRIOT Act amended the principal federal anti-money laundering statute, known as the “Bank Secrecy Act” (the “BSA”), by significantly expanding the responsibility of financial institutions in preventing the use of the U.S. financial system for money laundering or terrorist financing. Among other provisions, Title III of the USA PATRIOT Act and the BSA require each bank in the United States, including a U.S. branch, agency or representative office of a foreign bank, to adopt a risk-based, written anti-money laundering program that includes the following components: (i) a system of internal controls to ensure ongoing compliance with applicable laws and regulations; (ii) the designation of an individual or individuals responsible for coordinating and monitoring day- to-day compliance; (iii) independent testing of compliance by internal audit or by qualified outside parties; and (iv) a training program for appropriate personnel. The anti-money laundering program must be approved by the foreign bank’s board of directors or by a delegate acting under the express authority of the board of directors. As part of its anti-money laundering program, the New York Branch must also include policies and procedures for, among other things, identifying and verifying the identity of customers, exercising due diligence reasonably designed to detect and report money laundering, and enhanced due diligence with regard to certain types of
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customers and accounts, monitoring and reporting suspicious activity and reporting certain transactions involving currency and monetary instruments. Additionally, since May 2018, the New York Branch has been required to have procedures in place that are reasonably designed to identify and verify the identity of the beneficial owners of legal entity customers (other than those that are excluded) at the time a new account is opened, except for accounts that are exempted under the regulations. Additionally, those regulations require that the New York Branch’s anti-money laundering program provide for appropriate risk-based procedures for conducting ongoing customer due diligence, including (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information (including information regarding the beneficial owners of legal entity customers). The New York Branch is also prohibited from entering into specified financial transactions and account relationships with, among others, those designated as a primary money laundering concern by the Secretary of the U.S. Treasury Department. The Anti-Money Laundering Act of 2020, which was enacted as part of the National Defense Authorization Act for Fiscal Year 2021, modernized and made a number of other changes to the anti-money laundering provisions of the BSA and the USA PATRIOT Act, including requiring the U.S. Treasury Department to identify and to update periodically its national anti-money laundering priorities and requiring financial institutions to incorporate those priorities in their compliance programs, clarifying the applicability of the BSA with regard to virtual currency, increasing the amount of penalties to be imposed for violations and enhancing protections for whistleblowers. Included in the Anti-Money Laundering Act of 2020 was the Corporate Transparency Act, which provides for the establishment of a national registry of beneficial ownership information for corporations, limited liability companies and similar entities formed or registered to do business in the United States. The Corporate Transparency Act authorizes the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to collect that information and share it with authorized government authorities and financial institutions, subject to effective safeguards and controls, and financial institutions will remain subject to the currently applicable beneficial owner identification requirement. FinCEN has requested public comment on the procedures and standards to be adopted for companies to submit information about their beneficial owners and regarding FinCEN’s maintenance of the national registry and disclosure of the beneficial ownership information. The U.S. bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications for approval of expansions, business combinations or new non-banking activities. The USA PATRIOT Act, as amended by the Anti-Money Laundering Act of 2020, also provides for the facilitation of information sharing among governmental entities and financial institutions, as well as information and resource sharing among financial institutions, for the purpose of combating terrorism and money laundering. The New York Branch must also comply with OFAC regulations. OFAC administers and enforces economic and trade sanctions against targeted foreign countries, individuals, entities and organizations in order to carry out U.S. foreign policy and national security objectives. Generally, the regulations require that property and interests in property of specified targets be blocked and prohibit direct and indirect trade and financial transactions relating to sanctioned countries or sanctioned parties unless a license has been issued by OFAC. Blocked assets and rejected transactions must be reported to OFAC. The Issuer’s other U.S. operations, including a representative office of the Issuer in Washington, D.C. and the Issuer’s broker-dealer subsidiary, IMI Securities, are also subject to anti-money laundering and sanctions compliance obligations under U.S. law and regulation similar to those applicable to the New York Branch. Additionally, since January 2017, certain New York financial institutions, including New York-licensed branches and agencies of foreign banks, such as the New York Branch, have been required under a regulation of the Department of Financial Services to maintain a risk-based program reasonably designed to monitor and filter transactions for potential BSA and anti-money laundering violations and suspicious activity reporting and to prevent transactions with sanctioned entities. The regulation also requires regulated institutions to submit to the Department of Financial Services a board resolution or senior officer compliance finding on an annual basis confirming that all necessary steps have been taken to ascertain compliance with the regulation and certifying that the program complies with the requirements of the regulation. See “Risk factors—We may be subject, from time to time, to investigations or proceedings brought by authorities in the U.S.”.
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U.S. Financial Regulatory Reform
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in the United States. The Dodd-Frank Act provides a broad framework for sweeping financial regulatory reforms designed to enhance supervision and regulation of financial firms and promote stability in the financial markets. The legislation established a new regulator, the Financial Stability Oversight Council, to monitor systemic risks posed by financial services companies and their activities. In addition to the statutory requirements imposed by the Dodd-Frank Act, the legislation also delegated authority to U.S. banking, securities and commodities regulators, such as the Federal Reserve Board (the Issuer’s primary U.S. federal banking regulator), to adopt rules imposing additional restrictions. The Dodd-Frank Act directed the Federal Reserve Board to establish enhanced prudential standards for bank holding companies with US$50 billion or more in total global consolidated assets, including foreign banks treated as bank holding companies under the IBA, as well as certain non-bank financial institutions designated as systemically important. In 2014, the Federal Reserve Board issued rules to implement these requirements, which generally became effective with respect to the Issuer on July 1, 2016. The applicable requirements have varied based upon the size of the foreign bank’s U.S. assets, including the assets of its branches and agencies and its non-branch operations in the United States. Because the Issuer’s combined U.S. branch and non-branch assets (calculated as the average of the total combined assets of a foreign bank’s U.S. operations for the four most recent consecutive quarters) are less than US$50 billion, the Issuer has been required under the final rules to (i) certify to the Federal Reserve Board that it meets capital adequacy standards on a consolidated basis under its home country rules that are broadly consistent with the Basel capital framework, including Basel III, (ii) establish a U.S. risk committee of the Issuer’s board of directors (or equivalent thereof), on a standalone basis or as part of its enterprise wide risk committee (or equivalent thereof), to oversee the risk management policies of the Issuer’s combined U.S. operations, (iii) conduct at least annually internal capital stress tests, or be subject to supervisory stress tests, in either case under home country requirements that are comparable to U.S. standards and meet any minimum standards set by the home-country supervisor with respect to the stress tests, and (iv) report to the Federal Reserve Board on an annual basis the results of internal liquidity stress testing on a group- wide or combined U.S. operations level that is conducted consistently with the Basel Committee principles for liquidity risk management. Under the 2014 rules, a large foreign bank with combined U.S. branch and non-branch assets of US$50 billion or more is, in addition to the home country capital standards certification and home country capital stress test requirements noted above, required to comply with enhanced liquidity requirements, involving compliance with a qualitative liquidity framework, U.S. liquidity stress testing and a U.S. liquidity buffer requirement for its U.S. branches and agencies that must be sufficient to meet the projected net stressed cash-flow need of the U.S. branches and agencies over the first 14 days of a liquidity stress test with a 30-day planning horizon. Such a foreign bank has also been required to comply with enhanced risk management requirements, including (among other things) employing a U.S. chief risk officer meeting certain requirements and adopting a risk management framework for the foreign bank’s combined U.S. operations. In addition, the final rules have required a foreign bank with U.S. non-branch assets of US$50 billion or more to establish a separately capitalized top-tier U.S. intermediate holding company to hold all direct and indirect U.S. subsidiaries of the foreign bank. The U.S. intermediate holding company would be subject to enhanced capital, liquidity, risk management and stress testing requirements. The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCP Act”), which was the U.S. regulatory relief legislation signed into law in May 2018, raised the Dodd-Frank Act’s threshold of total global consolidated assets of bank holding companies and foreign banks subject to the enhanced prudential standards discussed above to US$250 billion. Under the EGRRCP Act, the Federal Reserve Board is authorized but not required to impose enhanced prudential standards for bank holding companies and foreign banks with total global consolidated assets between US$100 billion and US$250 billion. In October 2019, the Federal Reserve Board issued amendments to the original final rules for enhanced prudential standards to implement the EGRRCP Act for domestic bank holding companies and for foreign banks with a U.S. banking operations, such as the Issuer. The amended rule increases the threshold for application of enhanced prudential standards to foreign banks with US$100 billion or more in total global consolidated assets and tailors the stringency of those standards according to the particular risk category to which the foreign bank is assigned, which is based on the amount of the foreign bank’s combined U.S. branch and non-branch assets as well as the risk profile of its U.S. operations (as measured by cross-jurisdictional activity, nonbank assets, weighted short-term wholesale
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funding and off-balance sheet exposures). The amended rule does not change the threshold for when a foreign bank must establish a U.S. intermediate holding company, as discussed above. The amended rule applies the most stringent enhanced prudential standards to foreign banks with U.S. operations of a global scale – at least US$700 billion or more in combined U.S. assets or at least US$75 billion in cross-jurisdictional activity. A foreign bank with at least US$250 billion in combined U.S. assets, or a foreign bank with at least US$100 billion in combined U.S. assets and whose U.S. operations exceed specified risk-based thresholds, is required under the amended rule to comply with more stringent requirements than would apply to a foreign bank with a smaller U.S. presence, including enhanced liquidity requirements, with the particular requirements determined according to the risk category to which the foreign bank is assigned. Based on the Issuer having combined U.S. branch and non-branch assets (calculated as the average of the total combined assets of its U.S. operations for the four most recent consecutive quarters) of less than US$50 billion, the Issuer is no longer required under the amended rule to establish and maintain a U.S. risk committee, but continues to be required to comply with the other provisions of the original final rules as outlined above. In June 2018, as part of the implementation of the enhanced prudential standards required by the Dodd-Frank Act, the Federal Reserve Board published a final rule implementing single counterparty credit limits (“SCCLs”) that requires compliance in 2020 in accordance with a tiered compliance schedule. The final SCCL rule applies to U.S. globally systemically important banks and bank holding companies with US$250 billion or more in total consolidated assets, as well as to the combined U.S. operations of a foreign bank with US$250 billion or more in total global consolidated assets and to the U.S. intermediate holding company of a foreign bank. The SCCL rule generally requires a foreign bank subject to its requirements to limit the aggregate net credit exposure of its combined U.S. operations to a single counterparty to no more than 25% of the foreign bank’s Tier 1 capital, and the final rule imposes more stringent limits on foreign banks that have been identified as global systemically important banking organizations. A foreign bank otherwise subject to the SCCL rule would be deemed in compliance the SCCL rule if it certifies to the Federal Reserve Board that it meets large exposure standards on a consolidated basis established by its home-country supervisor that are consistent with the large exposures framework published by the Basel Committee on Banking Supervision, unless the Federal Reserve Board notifies the foreign bank that compliance with the Board’s SCCL rule is required for that foreign bank. As the Issuer has US$250 billion or more in total global assets, the Issuer will be required either to certify that it complies with home country SCCL limits or to comply with the SCCL requirements of the final SCCL rule in respect of its U.S. operations. In May 2020, the Federal Reserve Board extended the initial compliance for foreign banks to comply with the final SCCL rule to July 1, 2021 for foreign banks that have the characteristics of a global systemically important bank and to January 1, 2022 for all other foreign banks subject to the final SCCL rule. Also in connection with the implementation of the enhanced prudential standards required by the Dodd-Frank Act, the Federal Reserve Board has proposed but not yet finalized requirements relating to an “early remediation” framework under which the Board may impose prescribed restrictions and penalties against a foreign bank and its U.S. operations (including the termination of U.S. operations under certain circumstances) and certain of its officers and directors if the foreign bank and/or its U.S. operations experience financial stress and fail to meet certain requirements. If the Issuer were unable to satisfy any of the applicable enhanced prudential standard requirements, the Issuer and its U.S. operations could become subject to additional requirements, conditions or restrictions under the final rules. The Issuer also could be subject to debt-to equity limits for its U.S. operations if those operations are deemed by the U.S. federal financial regulators to pose a grave threat to U.S. financial stability. The enhanced prudential standards requirements could result in additional costs, or restrict or otherwise affect the way the Issuer conducts its business, which could materially and adversely affect the Issuer’s U.S. business and the financial condition and results of operations of its U.S operations, including the New York Branch. In addition to the enhanced prudential standards requirements, the Dodd-Frank Act required U.S. banks and bank holding companies with total consolidated assets of US$50 billion or more, as well as foreign banks that have U.S. banking operations and total consolidated assets of US$50 billion or more (including the Issuer) and certain other financial companies, to prepare plans describing how they would deal with a severe worsening of their financial condition, including voluntary liquidation. The EGRRCP Act raised the threshold for application of this requirement to US$250 billion in total global consolidated assets, but permitted the Federal Reserve Board to continue to require such plans for U.S. banks, bank holding companies and foreign banks that have at
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least US$100 billion in total consolidated assets. In October 2019, the Federal Reserve Board and the FDIC issued amended regulations for resolution plans to implement the EGRRCP Act’s thresholds for application of the resolution plan requirements and to streamline, clarify, and improve the resolution plan submission and review processes and timelines. Under those amended regulations, the frequency and content requirements of a foreign bank’s resolution plan submissions is determined according to the particular category to which the foreign bank is assigned for purposes of the enhanced prudential standards requirements discussed above. For a foreign bank with less than US$100 billion in combined U.S. assets, such as the Issuer, the amended regulations require the foreign bank to submit a “reduced content” resolution plan to the Federal Reserve Board and the FDIC once every three years that is limited largely to material changes to the foreign bank’s resolution plan since its previous filing. If the Issuer’s combined U.S. assets were to increase to at least US$100 billion, it could become subject under the amended regulations to a requirement to submit more complete resolution plans, with the particular requirements being determined based on the amount of the Issuer’s combined U.S. assets and whether the Issuer’s U.S. operations had at least US$75 billion in cross-jurisdictional activity, nonbank assets, weighted short-term wholesale funding or off-balance sheet exposures. The Issuer has made resolution plan filings for its U.S. operations, which will be updated as required. If the Federal Reserve Board determines that the Issuer’s resolution plan is not credible, and the Issuer fails to cure the deficiencies in a timely manner, then the Federal Reserve Board may impose on the Issuer, including the New York Branch and any U.S. subsidiary, more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations, or require the divestment of certain assets or operations. The Dodd-Frank Act also restricts the ability of banking entities to sponsor or invest in private equity or hedge funds (referred to in the implementing regulations as “covered funds”) or to engage in certain proprietary trading activities involving securities, derivatives (including, among other things, swaps and forward contracts), commodity futures, and options on those instruments for their own account (these restrictions being commonly referred to as the “Volcker Rule”). Credit, derivative and other transactions by banking entities with covered funds with which they have certain relationships, including acting as sponsor, investment manager or investment adviser, are also subject to significant limitations or prohibited. Final regulations implementing the Volcker Rule were issued in December 2013 and amended in October 2019 and June 2020. The final rules, as amended, provide exemptions for certain trading activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and for organizing and offering covered funds, as well as for a foreign bank such as the Issuer conducting trading and fund activities solely outside the United States. The final rules also clarify that certain trading activities are not prohibited, including any purchase or sale of financial instruments by a banking entity that is acting solely as agent, broker, or custodian. The October 2019 amendments to the final rules, which became effective January 1, 2020, clarify certain aspects of the application of the Volcker Rule, including the definition of proprietary trading and the scope of the exemption for trading activities conducted solely outside the United States, and tailor Volcker Rule compliance program requirements based on the trading assets and liabilities of a banking entity. The June 2020 amendments to the final rules, which became effective as of October 1, 2020, provide new regulatory exclusions to the definition of “covered fund” for credit funds, venture capital funds and certain other types of funds, as well as to provide permanent regulatory relief for qualifying foreign excluded funds that are treated as banking entities for purposes of the Volcker Rule. Other changes made by the June 2020 amendments include, among other things, clarifying the definition of “ownership interest” to exclude certain senior loans, and senior debt interests, as well as other debt interests that have voting rights associated with certain creditor rights, and in connection with the removal and replacement of the investment manager in certain instances. The amendments also expand the assets that an exempt loan securitizations may hold to include a small percentage of non-loan assets such as debt securities, clarify the scope of parallel investments that are permitted and exclude certain transactions between a banking entity and a related covered fund from the prohibition on covered transactions under the so-called “Super 23A” provisions of the Volcker Rule. In addition, the Dodd-Frank Act has enhanced the regulation of the over-the-counter derivatives market, including, among other things, broadening the scope of derivatives instruments subject to regulation, subjecting certain derivatives market participants, including swap dealers, major swap participants, security-based swap dealers and major security-based swap participants (“swap entities”) to registration, regulation and supervision, requiring clearing and exchange trading and imposing capital and margin requirements on certain derivatives market participants. The Dodd-Frank Act also provided for a prohibition on the provision of certain types of “Federal assistance” for financial institutions (including Federal Reserve Bank discount window advances) to registered swaps entities, requiring those entities that rely on Federal assistance and have significant swaps
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business to move aspects of that business into non-bank affiliates or to terminate them. There were a number of exceptions to this prohibition for FDIC-insured depository institutions, including with regard to hedging and risk-mitigating activities involving swaps based on rates or reference assets that are permissible investments for a national bank, although the statute inadvertently did not provide comparable treatment for U.S. branches and agencies of foreign banks. In December 2013, the Federal Reserve Board issued final rules that define an uninsured U.S. branch or agency of a foreign bank as an “insured depository institution” for purposes of these provisions, thereby putting a foreign bank on equal footing with a U.S. bank for these purposes and allowing uninsured U.S. branches and agencies of a foreign bank that is a swaps dealer to continue to access the discount window provided the foreign bank “pushed out” certain otherwise prohibited swaps activities to affiliates other than its U.S. branches or agencies. In December 2014, amendments to the swaps “pushout” requirement of the Dodd-Frank Act were enacted into law, which codified the Federal Reserve Board’s rule that uninsured branches and agencies of foreign banks benefit from the same exceptions as insured depository institutions from the pushout requirement, and which eliminated from the pushout requirement most of the swaps that were subject to pushout under the original statute, other than certain structured finance swaps. On July 12, 2013, the Commodity Futures Trading Commission (“CFTC”) issued final interpretive cross border guidance on the extra-territorial applicability of the provisions of the Commodity Exchange Act as modified by the Dodd-Frank Act. This final guidance is a statement of the CFTC’s general policy regarding cross-border swap activities. It includes a definition of “US person” and provides guidance on which swap transactions are to be counted in the swap dealer and major swap participant de minimis threshold calculations as well as, in the case of swap dealer determinations, how to aggregate across entities. On July 23, 2020, the CFTC approved final rules dealing with the cross-border application of the swap dealer and major swap participant de minimis registration thresholds and certain other requirements applicable to swap dealers and major swap participants. The final rules, on the specified compliance date, will supersede the CFTC’s final cross border interpretative guidance with respect to the matters covered by such rules. The specified compliance date is September 14, 2021. The SEC has also adopted rules addressing cross-border security-based swap activities. On June 25, 2014 the SEC adopted final rules and interpretive guidance on the application of the security-based swap dealer and major security-based swap participant definitions to non-US persons engaged in security-based swap activities. On February 10, 2016, the SEC voted to adopt cross-border security-based swap rules regarding activity in the United States, requiring a non-US person that uses (or whose agent uses) personnel located in a U.S. branch or office to arrange, negotiate or execute a security-based swap transaction to include such transactions in its calculation of whether the non-US person qualifies for the de minimis exception to security-based swap dealer status. As in the case of the CFTC’s final interpretive cross border guidance and final cross border rule, the SEC’s rules include a definition of “US person” and requirements as to which security-based swaps are to be included in the security-based swap dealer and major security-based swap participant determinations. In addition, in December 2019, the SEC released final rules to amend its existing framework for regulating cross- border security-based swaps transactions and market participants. The rules are intended to address implementation issues and efficiency concerns and in some cases harmonize the regulatory regime governing security-based swaps administered by the SEC with the regulatory regime governing swaps administered by the CFTC. Under the CFTC’s final cross border rule, and under analogous SEC rules, the New York Branch is not a separate legal entity from the Issuer and the Issuer is not a US person. Further, the Issuer is not required at this time to register as a swap dealer, a major swap participant, a security-based swap dealer or a major security-based swap participant. The Issuer is unable to say whether it will in the future need to register in any such capacity and will continue to monitor its compliance with these registration requirements. Furthermore, regulations requiring the posting of initial and variation margin on uncleared swap transactions and uncleared security-based swap transactions entered into by entities, such as the Issuer, are effective in the United States for all registered swap dealers and certain security-based swap dealers with respect to variation margin and are being phased-in with respect to initial margin. While transactions existing prior to the relevant implementation date are generally not subject to the applicable initial and variation margin requirements, new uncleared transactions, depending on the identity of the parties to such transactions, may be subject to the initial and variation margin requirements, as might certain existing uncleared transactions that undergo a material amendment, based on guidance provided and positions taken by United States regulators in other contexts.
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In May 2016, the Federal Reserve Board re-proposed a rule regarding incentive compensation paid by covered financial institutions, including the U.S. operations of foreign banks such as the Issuer. The proposed rule, which would be issued jointly by the Federal Reserve Board with other U.S. financial regulatory authorities, would prohibit incentive compensation that encourages inappropriate risk-taking or that could lead to material financial loss by providing excessive compensation. In January 2018, the Federal Reserve Board proposed guidance on core principles for effective management of business lines, independent risk management and controls for large financial institutions, including the U.S. operations of foreign banks with combined U.S. branch and non-branch assets of US$50 billion or more. The proposed guidance would establish supervisory expectations for management of business lines, and the adequacy of resources and infrastructure, business controls and accountability. The Dodd-Frank Act also granted the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers and expanded the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions in the Securities Act, the Exchange Act and the Investment Advisers Act. In June 2019, the SEC adopted a rule, known as Regulation Best Interest, to establish the standard of conduct for broker-dealers and their associated persons when making recommendations to retail customers (including high-net-worth natural persons) of any securities transaction or investment strategy involving securities that would require a broker-dealer to act in the best interest of the retail customer at the time the recommendation is made without placing the financial or other interest of the broker-dealer or its associated persons ahead of the interests of the retail customer. Broker-dealers have been required to be in compliance with Regulation Best Interest since June 30, 2020. Almost all of the rules and regulations implementing the Dodd-Frank Act are in effect and have resulted in or are anticipated to result in additional costs and impose certain limitations on the business activities of the Issuer and the New York Branch. It is not possible at this stage to determine the impact that the new U.S. Presidential administration’s policy goals or any new or proposed legislation could have on the regulatory requirements currently imposed on the Issuer and the New York Branch. The Issuer has approved and implemented an internal procedure to ensure compliance with applicable Dodd- Frank Act provisions. Cybersecurity Regulation
The Department of Financial Services has promulgated cybersecurity regulations, which became effective in 2017 and apply to financial institutions regulated by the Department of Financial Services, including the New York Branch. The cybersecurity regulations impose strict cybersecurity compliance requirements that include, among other things, cybersecurity program and procedures implementation requirements, cybersecurity personnel-related requirements (including the naming of a qualified individual as a chief information security officer), requirements concerning penetration testing and vulnerability assessments, reporting and recordkeeping requirements, audit trail requirements, and a compliance certification requirement. The certification is required to be made by the financial institution’s board of directors or a senior officer and filed by the institution with the Department of Financial Services on an annual basis. The cybersecurity regulations also require the New York Branch to notify the Superintendent within 72 hours of a determination that a cybersecurity event has occurred that requires notice to any governmental, self-regulatory or supervisory body or that has a reasonable likelihood of materially harming any material part of the normal operations of the New York Branch. In December 2020, the federal bank regulatory agencies issued a proposed rule that would require a bank to promptly notify its primary federal regulator in the event of a computer security incident that could result in a banking organization’s inability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of a banking organization, or impact the stability of the financial sector. Changes in Laws and Regulations in Response to Covid-19
In response to the economic and financial market uncertainty and dislocation arising from the novel coronavirus (“Covid-19 Pandemic”) pandemic, U.S. policymakers have enacted and are likely to continue to enact changes to laws and regulations, and official interpretations thereof, at the federal, state, and local levels.
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The U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which became law on March 27, 2020. The CARES Act provided for $2.2 trillion in emergency aid to ease the financial impact of the pandemic, including through authorizations for the U.S. Treasury Department to make investments in troubled industries and in Federal Reserve facilities intended to support businesses, households, and financial markets. The CARES Act also made temporary changes to U.S. federal banking law. In addition, the U.S. Congress passed a series of other laws related to key programs under the CARES Act, including the Paycheck Protection Program (“PPP”), small business disaster loans and grants, hospitals and health care providers and testing. More recently, the U.S. Congress passed, as part of a larger legislative package on December 21, 2020, $900 billion in Covid-19 relief. Among other provisions, the legislation: (i) allows for second draw PPP loans for certain businesses; (ii) expands the list of expenses PPP funds may cover; (iii) makes certain tax clarifications; (iv) sets aside funds for certain businesses; (v) provides for simplified forgiveness applications for certain PPP loan recipients; and (vi) provides certain limitations on enforcement actions against lenders that meet specified criteria. In March of 2021, the U.S. President signed into law the American Rescue Plan Act of 2021, a $1.9 trillion pandemic relief and economic stimulus package that also provides funding and legislative authorization for other priorities of the current Presidential administration. In addition, the Federal Reserve Board has implemented certain facilities and programs under its emergency powers pursuant to section 13(3) of the Federal Reserve Act (“emergency powers”). Certain facilities, specifically, the Main Street Lending Program, the Municipal Liquidity Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, and the Term Asset-Backed Securities Loan Facility have ceased extending credit at the request of the U.S. Treasury Secretary as of December 31, 2020, and in the case of the facilities under the Main Street Lending Program, January 8, 2021. Others facilities remain in effect under the Federal Reserve Board’s emergency powers. Federal regulators, including the Federal Reserve Board, have enacted interim final rules intended to encourage banking organizations to continue lending to households and businesses during the pandemic by granting relief from certain aspects of regulatory capital requirements. Such regulators have also, for example, issued guidance encouraging banking organizations to make credit available to customers during the pandemic and to take actions, consistent with safety and soundness, to accommodate customers affected by the pandemic. State regulators, including the Department of Financial Services, have taken similar actions. The Issuer is evaluating the implications of all of these actions for its operations in the United States at this time and will consider the implications of any subsequent actions.
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MANAGEMENT Our Group operates under a one-tier corporate governance model since April 27, 2016. Under the one-tier system, the Board of Directors performs management and strategic supervision functions, while the control functions are centralized within the Management Control Committee set up within the Board itself. The Board of Directors The Board of Directors performs strategic supervision and management functions. The Board of Directors confers and revokes related powers to/from the Managing Director and CEO and sets the compensation of the CEO and the other members to whom it has assigned additional specific duties, in line with the remuneration policies approved at the Shareholders’ meeting. On April 30, 2019, our Shareholders resolved to set the number of the members of the Board of Directors at 19 and, in accordance with the provisions of Article 14 of the Articles of Association, appointed the Board of Directors for financial years 2019, 2020, and 2021. The Board of Directors must be composed of between a minimum of 15 (fifteen) and a maximum of 19 (nineteen) members, including non-shareholders, appointed at the Shareholders’ meeting for a three-year term of office. In accordance with the Articles of Association, candidates appointed have been drawn from the lists submitted by shareholders owning at least 0.5% of the Bank’s ordinary share capital. The candidates below have declared their compliance with the requirements of professionalism, integrity, independence, competence, fairness, time commitment, and the limits on the total number of directorships prescribed by the law and the current regulations. The following table sets forth the name, age, position and year of appointment of the current members of the Board of Directors:
Name Position Place and Date of birth Date of appointment Gian Maria Gros-Pietro ...... Chairman Turin - Italy, February 4, 1942 April 30, 2019 Paolo Andrea Colombo(1)(2) ...... Deputy Chairman Milan - Italy, April 12, 1960 April 30, 2019 Managing Director Carlo Messina(*) ...... and CEO Rome - Italy, April 6, 1962 April 30, 2019 Franco Ceruti ...... Director Brunate (Como) - Italy, June 13, 1952 April 30, 2019 Gallarate (Varese) - Italy, May 5, Rossella Locatelli(2)...... Director 1960 April 30, 2019 Palestro (Pavia) - Italy, September 1, Luciano Nebbia...... Director 1953 April 30, 2019 Paesana (Cuneo) - Italy, March 30, Bruno Picca(1) ...... Director 1950 April 30, 2019 Livia Pomodoro(2) ...... Director Molfetta (Bari) - Italy, April 21, 1940 April 30, 2019 Maria Alessandra Stefanelli(2) ...... Director Bologna - Italy, January 27, 1964 April 30, 2019 Guglielmo Weber(2) ...... Director Florence - Italy, September 14, 1958 April 30, 2019 Daniele Zamboni(1)(2)(3)...... Director Milan - Italy, July 21, 1959 April 30, 2019 Maria Mazzarella(2)(3) ...... Director Naples - Italy, August 10, 1950 April 30, 2019 Anna Gatti(2)(3) ...... Director Pavia - Italy January 30, 1972 April 30, 2019 Andrea Sironi(2)(5)...... Director Milan - Italy, May 13, 1964 April 27, 2020 Fabrizio Mosca(1)(2)(4) ...... Director Turin - Italy, June 7, 1968 April 30, 2019 Cassano d’Adda (Milan) - Italy, Milena Teresa Motta(1)(2)(4) ...... Director March 29, 1959 April 30, 2019 Maria Cristina Zoppo(1)(2)(4) ...... Director Turin - Italy, November 14, 1971 April 30, 2019 Alberto Maria Pisani(1)(2)(3)(4)...... Chairman of the MCC Rome - Italy, February 8, 1955 April 30, 2019 Southampton - United Kingdom, Roberto Franchini(1)(2)(4)(6)...... Director May 23, 1955 April 27, 2020 ______(*) Executive member. (1) Enrolled with the Italian Register of Statutory Auditors. (2) Independent Board member in accordance with the Articles of Association, the Corporate Governance Code and Article 148, third paragraph, of the Italian Unified Financial Act. (3) Representative of the minority shareholders. (4) Member of the Management Control Committee. (5) Was appointed as a Director at the Shareholders’ Meeting of April 27, 2020, following co-option by the Board of Directors on December 2, 2019. (6) Was appointed as a Director at the Shareholders’ Meeting of April 27, 2020 replacing Corrado Gatti who had ceased to hold office. The business address of each member of the Board of Directors is Intesa Sanpaolo, Piazza San Carlo 156, 10121 Turin, Italy.
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Set out below are brief biographies of the members of our Board of Directors. Gian Maria Gros-Pietro (Turin, 1942). Chairman of the Board of Directors of the Issuer since April 2016 after having been Chairman of the Management Board of the Issuer from May 2013. He currently serves as member of the Executive Committee of the Italian Banking Association (the ABI). He chairs the Committee of Market Operators and Investors at Consob and is a member of the Corporate Governance Committee of Borsa Italiana. He was the (non-executive and independent) Chairman of ASTM (2012-2020), Lead Independent Director of Edison S.p.A until April 2019 an Independent Director of Fiat (2005-2014), where he was also Chairman of the Audit Committee, Chairman of Atlantia (2002–2010), Chairman of ENI (1999-2002) and of IRI (1997-1999), Senior Advisor for Italy for Société Générale Corporate & Investment Banking (2005-2009), and a member of the European Advisory Board of Rothschild & Cie Banque (2002-2005). At Luiss University, where he currently sits on the Board of Directors, he served as Head of the Department of Economics and Business from 2004 to 2011. Previously, he was a Full Professor of Business Economics, first at the University of Turin and then at Luiss University. From 1974 to 1995, he was the Director of the Institute for Economic Research on Firms and Growth, the main body of the CNR (the Italian National Research Council) in the field of economics. Paolo Andrea Colombo (Milan, 1960). He received a degree in Business Economics from the Bocconi University in Milan in 1984. He was a research fellow in Accounting and Financial Reporting at that university, where he is currently a Senior visiting professor. From 2006 to 2012, he was a Founding Member and Managing Director of Borghesi Colombo & Associati. Since 2012, he has been a Founding Member and Chairman of Colombo & Associati, a corporate and financial consultancy firm, of which he was Chairman until June 2019. He was Chairman of Saipem, Chairman of Enel and sat on the Boards of Directors and the Boards of Statutory Auditors of several industrial and financial companies, including ENI, Mediaset, Interbanca, Pirelli Pneumatici, RCS Quotidiani, Tim, Publitalia ‘80, Ansaldo STS, Stream, GE Capital Interbanca, Aviva Vita, Winterthur, Credit Suisse, Banca Intesa, Credit Agricole Assicurazioni Italia, Techint Finanziaria, Alitalia and Montedison. He has been a Board of Director of the Issuer since 2016. Carlo Messina (Rome, 1962). Managing Director and Chief Executive Officer of Intesa Sanpaolo since 29 September 2013. A graduate of Economics and Business from Luiss University of Rome, he began his career at Banca Nazionale del Lavoro in 1987, where he held the position of Manager in charge of the Corporate Finance and Primary Markets Department. While developing his professional career, he carried out intense academic activities as Professor of Economics of Financial Intermediaries at the Business Administration Master of the Luiss School of Management and as Professor of Corporate Finance at the Department of Economics and Business of the University of Ancona. In 1992 he joined Bonifiche Siele Finanziaria (parent company of the Banca Nazionale dell’Agricoltura banking group), where he held the position of Manager in charge of the Planning and Strategic Control Department. In 1996 he took on the role of Manager in charge of Planning at Banco Ambrosiano Veneto and, in 2012, he became the Head of the Planning and Control Head Office Department at the Issuer. At the Issuer, in 2007, he became Head of the Value Creation Governance Area and then, in 2008, Chief Financial Officer and, in 2012, General Manager and Chief Financial Officer. In 2013, he took on the role of General Manager of the Issuer, Head of the Chief Financial Officer Governance Area and Head of the Banca dei Territori Division. In September of the same year, he became Managing Director and CEO, while maintaining the position of General Manager. Since April 2016, within the one-tier corporate governance system, he has held the positions of Managing Director and CEO, General Manager and sole executive Board Director. He is currently a member of the Executive Committee of the Italian Banking Association (the ABI), a Fellow of the Foreign Policy Association of New York and a Visiting Fellow at Oxford University. Since November 2014, he has been a member of the Bocconi University Board. In 2017, Carlo Messina was awarded the “Cavaliere del Lavoro” knighthood for his services to industry by the President of the Italian Republic, Sergio Mattarella. Franco Ceruti (Brunate, 1952). He joined Cariplo in 1973 and has spent his entire professional carrier with us. He started to hold management positions in 1982 and gained experience mainly in the local network as Manager at a number of Branches and Offices, as well as Regional Areas of Lombardy, Veneto, Trentino Alto Adige and Friuli. He was a Regional Manager at the Issuer from 2002, and, in 2008, he took up the position of Manager of the Regional Governance Centre for Milan and its Province. He was President of the Lombardy Regional Commission of the Italian Banking Association (the ABI) from 2008 to 2014. In 2011, by decree signed by the President of the Italian Republic, he was honored with the long-service star and awarded the title of Master of Labor. A former Board Director of Banca Prossima and of Intesa Sanpaolo Assicura and
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Mediocredito Italiano, he currently sits on the Board of Directors of Intesa Sanpaolo Private Banking, and of Intesa Sanpaolo Expo Institutional Contact of which he is Chairman. He also chairs the Board of Directors of Società Benefit Cimarosa 1. He has been a member of the Board at the Milan Chamber of Commerce, Industry, Handicraft and Agriculture since 2012 and Chairman of Fondazione Innovazione Terzo Settore (FITS) since 2018. He has been a Board Director of the Issuer since 2016. Rossella Locatelli (Gallarate, 1960). She graduated with a degree in Economics and Banking from Università Cattolica of Milan, where she was a research fellow until 1998. She is currently a Full Professor of Economics of Financial Intermediaries at the University of Insubria, where she was also Dean of the Department of Economics. She is Deputy Director of Centro di Ricerca sull’Etica degli Affari e sulla Responsabilità Sociale di Impresa (CreaRes) and Director of Centro per l’Internazionalizzazione delle Economie Locali (CRIEL). Over the years, she has held various professional positions as a Board Director of financial companies and institutions. She has been a member of the supervisory committee, appointed by the Bank of Italy, in several special administration and compulsory liquidation procedures for asset management companies and banks. She was a member of the Supervisory Board of the Issuer in the three-year period 2013-2016; she has been a Board Director of the Issuer since 2016. She is currently Chairperson of the Board of Directors of BF, a listed company, and of B.F. Agricola S.r.l. – Società Agricola, a director of Società per la Bonifica dei Terreni Ferraresi e per Imprese Agricole, a Board Director of CAI – Consorzi Agrari d’Italia, and a member of the Supervisory Committee of Darma Asset Management SGR in administrative compulsory liquidation. She is the author of papers and studies on various subjects, including the management and regulation of banks and insurance companies. She has been President of the Association of Lecturers of Economics of Financial Intermediaries and Financial Markets (ADEIMF) and is currently a member of the Scientific Committee of the journal Banca Impresa Società. Luciano Nebbia (Palestro, 1953). He began his professional career in 1973 at Istituto Bancario San Paolo di Torino within the local branch network. Subsequently, he held increasingly senior positions at Leasint (a leasing company owned by the San Paolo Group and other leading banks) until he became general manager in 1995. From 1995 to 1998, he was country manager for Italy at the real estate leasing commission, on behalf of Assilea (an association of Italian leasing companies linked to the Italian banking association – the ABI), and became its vice president at European level. In 1999, he took over responsibility for the Turin area at Sanpaolo IMI. Subsequently, he was head of the Milan province area at the Issuer until 2008. From 2009 he was regional manager of the Tuscany-Umbria area and from 2012 regional manager for Tuscany, Umbria, Lazio and Sardinia. From 2008 to 2011 he was also general manager of Banca CR Firenze. He subsequently became a board director of Banca CR Firenze and then its deputy chairperson, a position he held until February 2019 when he also ceased to hold the same position at Cassa di Risparmio di Pistoia e della Lucchesia following the merger by incorporation of the two subsidiaries into the Issuer. He was Deputy Chairperson of Intesa Sanpaolo Casa until April 2021 and currently holds the same position at Equiter as. In 2010, he was awarded the title of Commander of the Order of Merit of the Italian Republic (Commendatore). Bruno Picca (Paesana, 1950). Chartered Account in Turin and Registered Auditor. Board Director of the Issuer and Deputy Chairman of the Voluntary Scheme of the Interbank Deposit Protection Fund. After working as a researcher at the Turin-based Fondazione Giovanni Agnelli (1971-1974) and following an assignment at SIP S.p.A. (now Telecom) in the management control sector (1974-1976), he worked for all of his professional career at Sanpaolo (now the Issuer), where he held several positions first in the territorial branches and then at the Head Office in the sectors of General Secretariat, Shareholdings, Management Control, Finance and Branch coordination. In 1997, he was appointed Deputy General Manager “Financial” at Sanpaolo IMI. From 2001 to 2004, he was the Manager of the Italy Banking Network of Sanpaolo IMI Group and also held the position of Managing Director of Banco di Napoli. From the end of 2004 until the end of 2006, he was Chief Financial Officer of the Sanpaolo IMI Group. In 2007, after the merger with Intesa, he was Head of the Administration Governance Area and the Manager responsible for preparing the Group’s financial reports. From 16 June 2008 he served as Chief Risk Officer of the Group and, in May 2013, he joined the Management Board of the Issuer. In April 2016, he left the operational role and was appointed Board Director of the Issuer. He has held positions in several companies of the Group, including: Managing Director Banco di Napoli, Deputy Chairman Banque Sanpaolo (France), Chairman Sanpaolo Immobiliare, Chairman Sanpaolo Imi International SA (Lux), Board Director Cardine Banca, Board Director Crediop, Board Director Sanpaolo IMI Wealth Management, Chairman of the Board of Statutory Auditors SEP, Chairman of the Board of Statutory Auditors Fispao, Standing Auditor Immobiliare Colonna, Standing Auditor Lingotto Uffici. He was member of the Board and of the Executive
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Committee of the Italian Banking Association (the ABI). From October 2020, until the merger into Intesa Sanpaolo, he served as Deputy Chairman of Unione di Banche Italiane (UBI Banca). Livia Pomodoro (Molfetta, 1940). After graduating with a degree in Law from the University of Bari, she entered the judiciary in 1965 and was Judge and Deputy Prosecutor General at the Milan Court of Appeals, Public Prosecutor at the Milan Juvenile Court, Head of Staff for the Ministry of Justice, President of the Milan Juvenile Court, and Presiding Judge of the Court of Milan. She was also Deputy Chairperson of the Milan Provincial Tax Commission, a Board Director of Il Sole 24 ORE and of the University of Milano-Bicocca, as well as Deputy Chairperson of the Internationalization Advisory Board of Banca Prossima. In January 2018, she was awarded the UNESCO Chair for “Food: Access and Law” at La Statale University of Milan. She is currently a member of the Board of Director of FEBO, President of the Milan Center for Food Law and Policy, President of the Brera Academy of Fine Arts, President of the NPO Cultural Association “Spazio Teatro No’hma Teresa Pomodoro”, and a Board member of Touring Club Italiano. She is also a member of the Scientific Committee of the Research Centre for Inter-cultural Relations at Università Cattolica of Milan and a member of the Executive Committee of the Italian Chapter of the Women Corporate Directors Association. She also sits on the Board of Directors of Fondazione Sodalitas. In 2013, she received an honorary diploma from the School of Culture and Art and was awarded the Grand-Croix of the Legion of Honour. In 2015, she was appointed as a Knight Grand Cross (Cavaliere di Gran Croce) of the Order of Merit of the Italian Republic by the President of the Italian Republic. She has been a Board Director of the Issuer since 2016. Maria Alessandra Stefanelli (Bologna, 1964). She graduated with a degree in Economics from the University of Bologna and in Law from the University of Camerino and began her academic career at the University of Bologna, becoming a research fellow in 1992 and an associate professor of Business Law in 1999. In 2011, she became full professor of Business Law at the Department of Economics of the University of Bologna. In the academic field, she has held executive positions (including head of department) and she has been a member of scientific commissions and committees (among others, she is currently director of the Italian Centre for advanced studies for small and medium enterprises, a member of the PhD board in European Law of the University of Bologna, and a member of the Council of the Department of Sociology and Business Law of the University of Bologna). At the University of Bologna, she currently teaches Credit Law and Financial Intermediaries Law. She participates in various research projects, is a speaker at research conferences and seminars, and she is the author of numerous publications. Her scientific work focuses on numerous research topics, including the analysis of functions and instruments issued by public regulators and supervisors for the banking and financial market, the study of the public regulation of business and industrial activity and of the economic and social effects on the market and the production environment. She is a founding member of the A.D.D.E. (the national association of lecturers in Business Law). Guglielmo Weber (Florence, 1958). He graduated with a degree in Economics from the University of Siena and then received a Master of Science in Econometrics and Mathematical Economics and a PhD in Economics from the London School of Economics in London. He was a lecturer at University College London from 1987 to 1992. In 1993, he became an associate professor at the Department of Economics of Ca’ Foscari University of Venice. Since 1994, he has been a full professor of Econometrics at the University of Padua, where he has been head (twice) of the Department of Economics and Management. He has been responsible for numerous research projects, funded by the Italian Ministry of Education, universities and research, the CNR (Italian National Research Council) and the European Commission. He is the author of several publications, mainly in international journals. The main focus of his research is the analysis of the economic consequences of patterns of population ageing and the study of possible solutions in terms of welfare policies and instruments. He was a Board Director of Intesa Sanpaolo Vita from 2007 to 2018 and Deputy Chairman of Intesa Sanpaolo Assicura from 2018 to May 2019. Daniele Zamboni (Milan, 1959). He graduated with a degree in Economics and Business from Bocconi University of Milan, he is enrolled in the Register of Independent Auditors. He started working at Ernst & Young in 1985. He joined the partnership in 1999 and, in the FSO (Financial Services Organization) sector, he held the position of Person in charge of the audit of the consolidated financial statements of Italian and international banks, insurance companies and asset management companies. He also carried out due diligence activities for acquisition transactions and the issue of fairness opinions in relation to capital increases and mergers. In the FSO sector, he also held the position of Head of the Assurance Division from 2005 to 2010, and Head of the Business Development Division from 2013 to 2016. In 2014, he coordinated the activities – performed jointly with the Bank of Italy - connected to the Comprehensive Assessment, specifically with
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reference to the Asset Quality Review. Until 2016, he responsible for ISAE 3402 certification at Ernst & Young, in addition to being a member of Ernst & Young’s FSO EMEIA (Europe-Middle East-India-Africa) Supervisory Partner Forum and a Board Director of Reconta Ernst & Young. He has been a freelance professional since 2016. He has been a Board Director of the Issuer since 2016. Maria Mazzarella (Naples, 1950). After receiving a degree in Law from La Sapienza University of Rome in 1972, she gained most of her professional experience at Consob from 1978 to 2015. In particular, from 1986 to 1990 she was the Manager of the Office for Controlling Interests, from 1990 to 1993 the Manager of the Office for Coordination and Problems of a general nature, from 1993 to 1994 the Manager of the Public Solicitation and Quotation Office, from 1995 to 2001 the Manager of the Office for Solicitation, Take-over bids and Ownership structures, from 2001 to 2004 the Manager of the Market Information Office, from 2005 to 2011 the Manager of the Office for Take-over bids and Ownership structures and from 2011 to 2015 the Manager of the Regulatory Strategy Division. From 2013 to 2014, she was a professor at LUISS University of Rome for the Master for company lawyers and at Università Cattolica of Milan for the Master in corporate criminal law. From July 2012 to July 2015, she was the President of the Conciliation and Arbitration Chamber at Consob and, in this role, she took part in projects examining the regulations regarding the out-of-court settlement of disputes between savers and intermediaries. She has been a Board Director of the Issuer since 2016. Anna Gatti (Pavia, 1972). She graduated with a degree in Business Economics from Bocconi University of Milan, where she subsequently received a PhD in Business Administration and Management. She continued her education at Stanford University in Palo Alto (Post-doctoral program in Organizational Behavior) and at the University of Trento (PhD in Criminology) and in 2002 she worked as a research fellow at the University of California Berkeley. She was a senior economist for the World Health Organization from 2002 to 2004 and a partner of Myqube from 2004 to 2007. From 2007 to 2012, she subsequently held the positions of head of international consumer operations at Google, head of international online sales and operations and head of strategic partnership operations at YouTube, and senior director of advertising and new monetization at Skype/MSFT. In 2012, in San Francisco, she co-founded an artificial intelligence startup, which she headed as CEO until 2015. She worked as a consultant for Last minute Group and other international companies from 2016 to 2018. Since 2016, she has been operating as an angel investor in Silicon Valley. She was a board director of Buongiorno from 2007 to 2012 and of listed companies Piquadro from 2013 to 2016, Gtech/IGT from 2014 to 2015, and Banzai from 2014 to 2015 and Ray Way from 2014 until April 2020. She currently sits on the Boards of Directors of Lastminute Group, WiZink Bank and Fiera Milano. Since October 2020, as an Associate Professor at the SDA “Bocconi”, she has directed a research center on innovation in Life Sciences and Biotechnology. She is a member of the Italian Association of Professional Journalists.. Andrea Sironi (Milano, 1964). After earning a degree in Economics from Bocconi University of Milan in 1989, Mr. Sironi was a financial analyst at The Chase Manhattan Bank in London from 1989 to 1990 and took part in the Saloman Brothers Center for the Study of Financial Institutions at the New York University Stern School of Business in 1993. In 1995, Professor Sironi joined Bocconi University as a Researcher. Since then, he had held various positions at the university, and currently serves as Professor of Financial Markets and Institutions. Professor Sironi’s research interests include risk management in financial institutions and international banking supervision and regulation. He has published and edited many books and articles in Italian and international refereed journals on these subjects. He has held visiting positions at the Department of Finance of the Stern School of Business at New York University, the Research and Statistics Division of the Federal Reserve Board in Washington, and the Department of Economics of Sciences Po, Paris. In 2013, he was a member of the Group of experts for the valuation of the Bank of Italy’s capital. From 2013 to 2016, he was a member of the strategic committee of FSI (Fondo Strategico Italiano). Professor Sironi has also been an independent Board Director of major industrial and financial listed companies and a consultant of leading national and international financial institutions. From 2014 to 2016, he was Chairman of CEMS – The Global Alliance in Management Education. From 2018 to 2019, he was a Board Director of UniCredit Group. He is Chairman of the Board of Directors of Borsa Italiana and of London Stock Exchange Group Holding Italia. He currently sits on the boards of Istituto di Studi di Politica Internazionale (ISPI) and EASL International Liver Foundation (Geneva), and is a member of the International Advisory Council of Stockholm School of Economics, the Advisory Board of Nova School of Business and Economics (Lisbon), the Advisory Board of Cometa, a non-profit organisation, and the Board of Directors of Fondazione Italia Sociale. Fabrizio Mosca (Turin, 1968). He graduated with a degree in Economics from the University of Turin, and subsequently received a PhD in Business Economics from Bocconi University of Milan. He is currently an
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Associate Professor of Economics and Business Management at the Department of Management of the University of Turin. He has been a lecturer in the Master’s course in Business Administration at the School of Economics of the University of Turin and at the School of Business Administration of Turin. He has also been a lecturer of the Il Sole 24 Ore Master’s course and for the Master in European Business (MEB) at the European School of Management - EAP Europe. He has been a member of the scientific committee of various university master’s courses, the lead lecturer of the Marketing and Business Strategies course at the University and the School of Business Administration of Turin, and a visiting professor at several foreign universities. He is a Chartered Accountant, Independent Auditor and Court-Appointed Expert. In addition to university teaching, his professional work is focused on corporate advisory services, business valuation, M&A and tax advice for Italian and multinational companies and groups. He is a founding partner of Studio SGVM and has held positions as a member of the board of statutory auditors, independent auditor and independent director at several companies, including TRW Automotive Holding Italia and TRW Automotive Italia (ZF Group). He is currently Chairman of the Board of Statutory Auditors of Bolaffi, Aste Bolaffi, Bolaffi Metalli Preziosi and Olivetti. Milena Teresa Motta (Cassano d’Adda, Milan, 1959). She graduated with a degree in Economics and Business from Università Cattolica of Milan and she is an Independent Auditor enrolled in the Register of Chartered Accountants. Since 1982, she has provided corporate consultancy services on competitive strategy, marketing and innovation. In particular, she deals with instruments and methods for the systematic analysis of the market and the competitive environment in order to identify opportunities and threats, as well as with intelligence supporting competitive positioning and the innovation process. Since 1997, she has been a lecturer in Strategic Analysis of the Competition, Market & Competitive Intelligence and Technology Intelligence at leading universities, including SDA Bocconi, the Scuola Superiore Sant’Anna in Pisa, and LIUC University in Castellanza. Since 2009, she has been working with the Institute for Manufacturing of the University of Cambridge on topics such as Strategic Road Mapping and Technology Intelligence to align strategy, market and innovation, and she is an Industrial Fellow at that University. She is a lecturer in Patent&Technology Intelligence and a member of the Faculty of the ICI-Institute for Competitive Intelligence (Butzbach, Germany). She has served as a Standing Statutory Auditor at Atlantia, Damiani and Brembo. She is currently a Board Director of Strategie e Innovazione. She has been a Board Director of Intesa Sanpaolo, appointed as a member of the Management Control Committee, since 2016. Maria Cristina Zoppo (Turin, 1971). She graduated with a degree in Economics and Business from the University of Turin and she is a Chartered Accountant enrolled in the Register of Independent Auditors, as well as a court-appointed expert. Since 1996, she has gained extensive experience in corporate and tax matters by working as a consultant for medium and large-sized listed companies belonging to multinational corporate groups (such as General Motors, SKF, L’Oréal, Avio, Reply Group and Johnson Electric). In performing these activities, she has become an expert in extraordinary transactions, loan contracts, tax disputes, also at international level, and debt restructuring transactions, gaining in-depth knowledge on the sector regulations. She has been a member of Boards of Statutory Auditors, also as Chairperson, at various companies, also belonging to international groups, as well as a member of Supervisory Bodies pursuant to Legislative Decree 231/2001. She is currently a partner of BDO Tax & Law, a member of the international BDO network of auditing and consultancy firms, a Board Director of Newlat Food, Chairperson of the Board of Statutory of Schoeller Allibert, and a Statutory Auditor of Cooper-Standard Automotive Italy. She has been a Board Director of the Issuer, appointed as a member of the Management Control Committee, since 2016. Alberto Maria Pisani (Rome, 1955). He graduated with a degree in Economics and Business from La Sapienza University of Rome and he is a Chartered Accountant as well as an Independent Auditor enrolled in the relevant professional registers. From 1982 to 2016, he worked at Ernst & Young, where he became a partner in 1995. Until 2015 he was a Board Director for the Financial Services Organization (FSO) sector and a member of the Partner Supervisor Board. He also served as COO for Italy in the banking and insurance sector. While working at Ernst & Young, he held the position of partner responsible for the independent audit of leading Italian banking groups. He gained experience in due diligence activities and in securitizations carried out by prominent Italian banking groups. He was also responsible for the control and the independent audit of asset management and real estate fund management companies, as well as companies operating in the factoring and leasing sectors. He has been a Board Director of the Issuer, appointed as a member of the Management Control Committee, since 2016. Roberto Franchini (Southampton, 1955). He graduated in Economics from the University of Salford and he worked at Ernst & Young (formerly Ernst & Whinney) for over 40 years in Italy, the United Kingdom and the
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United States, holding progressively important positions and as a partner for 27 years until June 2018. From 1992 to 1995 he worked in Ernst & Young’s Global headquarters in New York, focusing on audit methodology and international accounting principles. From 1995 to 2018, he worked as an audit partner, responsible for the audit of multinational companies operating in a variety of industrial and commercial sectors and listed on Italian and U.S. stock exchanges. A member of the committee that drafted the Italian Standard on auditor independence (Principio sull’indipendenza del revisore – Document 100 of 2004). Director of Independence for Ernst & Young EMEIA (Europe, Middle East, India and Africa) and Asia-Pacific/Japan (2008-2018). As a member of IESBA (International Ethics Standards Board for Accountants), he contributed to defining ethics standards and auditor independence requirements for the accountancy profession worldwide (2008-2013). He served as a member of the board of statutory auditors in many Italian companies and gained extensive experience dealing with regulators and IGOs (Consob, US SEC, UE, OCSE). Registered Auditor in Italy and Fellow of the ICAEW (Institute of Chartered Accounts in England and Wales), he currently serves as Treasurer and a Director of The British Chamber of Commerce for Italy, is the President of the College of Auditors of Fondazione per l’Infanzia Ronald McDonald Italia and is a member of Disciplinary Committee of the ICAEW. Conflicts of interest As of the date hereof and to Intesa Sanpaolo’s knowledge, the members of the Board of Directors do not have potential conflicts of interests between their obligations arising out of their office or employment with the Issuer or the Intesa Sanpaolo Group and any personal or other interests. Intesa Sanpaolo Group has special controls in place to manage the risk deriving from potential conflicts of interest connected with the particular proximity of certain parties to its decision-making centers. See “Risk Management—Management, measurement and control systems”. Management Control Committee
The Management Control Committee, appointed by the Shareholders’ Meeting and established within the Board of Directors in accordance with the Articles of Association, is composed of five independent non-executive directors. Such Committee performs the legal duties assigned to the control body of the parent company of a banking group heading a financial conglomerate and issuing listed shares as provided for by – in addition to the legal and regulatory provisions – the Articles of Association and by its own Regulations which was approved on May 24, 2016, having obtained the favorable opinion of the Board of Directors. By the aforementioned regulations, the Management Control Committee governs its operations and its organization, in compliance with legal and regulatory provisions and the provisions of the Articles of Association and, to the extent applicable, with the provisions of the corporate governance code. The Management Control Committee also operates as Internal Control and Audit Committee in accordance with Article 19, paragraph 2, letter c) of Legislative Decree No. 39/2010, as amended by Italian Legislative Decree No. 135/2016. The Management Control Committee is entrusted with a vast set of powers, including those of inspection and reporting to the authorities. The other Board Committees
The Board of Directors established four internal committees described below. Such Committees are composed of five non-executive directors with a majority of independent members, except for the Committee for Transactions with Related Parties of the Issuer and Associated Entities of the Group whose members are all independent. All committee Chairs are independent. The powers and responsibilities of the committees are in accordance with the provisions of the Articles of Association and supervisory regulations in force. Each Committee performs its activity according to a specific procedure approved by the Board of Directors. The following table sets forth the name, position and year of appointment of the current members of the Management Control Committee:
Name Position Date appointed Alberto Maria Pisani(1)(2) ...... Chairman April 30, 2019 Roberto Franchini(1) (2)...... Member April 27, 2020 Fabrizio Mosca(2) ...... Member April 30, 2019 Milena Teresa Motta(2) ...... Member April 30, 2019 Maria Cristina Zoppo(2) ...... Member April 30, 2019 ______(1) Representative of the minority shareholders. (2) Enrolled with the Italian Register of Statutory Auditors.
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Nomination Committee
The following table sets forth the name, position and date of appointment of the current Members of the Nomination Committee:
Name Position Date appointed Livia Pomodoro(1) ...... Chairman May 7, 2019 Paolo Andrea Colombo(1)(2) ...... Member May 7, 2019 Maria Mazzarella(1)(3) ...... Member May 7, 2019 Bruno Picca(2) ...... Member May 7, 2019 Gian Maria Gros-Pietro ...... Member May 7, 2019 ______(1) Independence requirements as set forth by our Articles of Association, the Corporate Governance Code and by Article 148, paragraph three of the Unified Financial Act. (2) Enrolled with the Italian Register of Statutory Auditors. (3) Representative of the minority shareholders. The Nomination Committee performs investigative and consulting functions to support the Board of Directors in the process of its appointment or co-option to ensure that the its composition, in terms of size and professionalism, makes it possible to fulfil its duties efficiently. The Nomination Committee supports the Board of Directors in: (i) the activity aimed at identifying the optimal composition of the Board of Directors, both qualitatively and quantitatively, including the profile of the candidates to be presented to the Shareholders’ meeting in time for the appointment; (ii) the verification of the fulfilment of the requirements laid down by the applicable regulations and the Articles of Association by members of the Board of Directors; (iii) the appointment of the Managing Director and of the heads of the Compliance, Risk Management, Internal Validation and Internal Auditing departments; and (iv) the evaluation of the proposals to designate the members of the corporate bodies of the main subsidiaries. Remuneration committee
The following table sets forth the name, position and date of appointment of the current members of the Remuneration Committee:
Name Position Date appointed Paolo Andrea Colombo(1)(2) ...... Chairman May 7, 2019 Franco Ceruti ...... Member May 7, 2019 Anna Gatti(1)(3) ...... Member May 7, 2019 Andrea Sironi(1)(4)...... Member May 4, 2020 Luciano Nebbia...... Member May 7, 2019 ______(1) Independence requirements as set forth by our Articles of Association, the Corporate Governance Code and by Article 148, paragraph three of the Unified Financial Act. (2) Enrolled with the Italian Register of Statutory Auditors. (3) Representative of the minority shareholders. (4) Member of the committee with effect from December 18, 2019 following co-option by the Board of Directors on December 2, 2019. He was appointed as Board Director at the Shareholders’ Meeting held on April 27, 2020 and was confirmed member of the committee by the Board of Directors on May 4, 2020. The Remuneration Committee has propositional, advisory, inquiry functions with regard to remuneration and incentive systems and performs the additional duties assigned to it by applicable laws and regulations or the Board of Directors. The Remuneration Committee submits proposals to the Board of Directors, among others (i) with regard to the members of the Board of Directors’ remuneration policies, to be submitted to the Shareholders’ meeting, also taking into account risk management, business strategies and the payment of a variable component; (ii) with regard to the remuneration payable to the Management Control Committee, Chairman, Deputy Chairpersons, Managing Director, executive members, and Board of Directors vested with special offices, duties or powers, on the basis of remuneration policies approved by the Shareholders’ meeting and any plans based on financial instruments. The Remuneration Committee also performs the duties of the RPT Committee in accordance with the provisions of the related-parties transactions procedures, with regard to transactions with related parties of the Issuer and Group associated entities concerning remuneration.
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Risk Committee
The following table sets forth the name, position and date of appointment of the current members of the Risk Committee:
Name Position Date appointed Rossella Locatelli(1)...... Chairman May 7, 2019 Franco Ceruti ...... Member May 7, 2019 Bruno Picca(2) ...... Member May 7, 2019 Guglielmo Weber(1)...... Member May 7, 2019 Daniele Zamboni(1)(2)(3)...... Member May 7, 2019 ______(1) Independence requirements as set forth by our Articles of Association, the Corporate Governance Code and by Article 148, paragraph three of the Unified Financial Act. (2) Enrolled with the Italian Register of Statutory Auditors. (3) Representative of the minority shareholders. The Risk Committee proposes, advises and inquires on relevant risk-related matters, submitting opinions where required by applicable laws. It pays special attention to instrumental activities to enable the Board to come to a fair and efficient determination of the risk appetite framework (“RAF”) and the risk governance policies, as well as the further determinations regarding risk reserved to it by the applicable regulations. The committee supports the Board of Directors in improving risk monitoring, effectively implementing the RAF, and performing strategic supervisory duties with regard to: (i) the business model, strategic guidelines and risk appetite, in order to make the Board aware of the risks to which this model exposes us and understand the methods through which risks are recognized and assessed; (ii) the corporate governance and organizational structure of the Issuer and the Group, in order to verify consistency with the activity carried out and the business model adopted; (iii) the accounting and budget administrative system and statutory auditing process for the purposes of approving the accounting and reporting systems and evaluating the proper implementation of the accounting principles and their consistency with reference to the preparation of the individual and Consolidated Financial Statements; (iv) the internal control system, for the purposes of defining and approving the guidelines of the internal control system as well as checking the effectiveness in capturing the evolution of business risks and the interaction between them. It submits proposals for the appointment and removal of the heads of the Compliance, Risk Management, Internal Validation and Internal Auditing departments to the Board of Directors. Furthermore, it supports the Board of Directors in the examination of proposals relating to the appointment of the head of the anti-money laundering department and the head of the business continuity plan; (v) risk governance and management, performing support functions, including with specific regard to all corporate social responsibility matters. It provides support in defining and approving risk governance policies at Group level, including those related to liquidity risk, so as to implement an integrated and coherent risk management policy; it performs the necessary evaluation and propositional activities to enable the Board to define and approve, taking into account the Managing Director’s proposals, risk objectives (“risk appetite”) and, where deemed appropriate, the tolerance threshold (“risk tolerance”) as well as the liquidity risk tolerance threshold; (vi) information systems, for the purposes of approval of information system development strategies and the IT security policy; and (vii) business continuity, for the purposes of defining and approving business continuity objectives and strategies, approving the business continuity plan proposed by the Managing Director and assessing residual risks not managed by the business continuity plan, which must be explicitly accepted by Board of Directors.
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Committee for Transactions with Related Parties of Intesa Sanpaolo and Associated Entities of the Group
The following table sets forth the name, position and date of appointment of the current members of the Committee for transactions with related parties of the Issuer and associated entities of the Group (the “RPT Committee”):
Name Position Date appointed Daniele Zamboni(1)(2)(3)...... Chairman May 7, 2019 Andrea Sironi(1)(4)...... Member May 4, 2020 Rossella Locatelli(1)...... Member May 7, 2019 Maria Mazzarella(1) ...... Member May 7, 2019 Maria Alessandra Stefanelli(1) ...... Member May 7, 2019 ______(1) Independence requirements as set forth by our Articles of Association, the Corporate Governance Code and by Article 148, paragraph three of the Unified Financial Act. (2) Enrolled with the Italian Register of Auditors. (3) Representative of the minority shareholders. (4) Member of the committee with effect from December 18, 2019 following co-option by the Board of Directors on December 2, 2019. He was appointed as Board Director at the Shareholders’ Meeting held on April 27, 2020 and was confirmed member of the committee by the Board of Directors on May 4, 2020. The RPT Committee performs the duties assigned to it by the CONSOB regulation on related parties, Bank of Italy provisions and other regulations with regard to transactions with related parties of Intesa Sanpaolo and associated entities of the Group carried out by the us or our subsidiaries. The RPT Committee does not oversee our transactions with related parties concerning remuneration issues; this role is left to the Remuneration Committee. In exercising its duties, the RPT Committee, in particular, (i) expresses an opinion on the interest in carrying out the transaction, as well as on the suitability and fairness of the related conditions; (ii) expresses an opinion on whether the transaction involves subsidiaries and management and coordination activities; (iii) where envisaged by applicable regulations, in accordance with the applicable provisions, participates in the negotiation and analysis phases of any proposed transaction, receiving a complete and timely flow of information, with the power to request information and submit comments to the delegated bodies and to the parties conducting the negotiations or preliminary activities; (iv) receives a report regarding the transaction if the same falls under Article 136 of the Consolidated Banking Act; and (v) in accordance with the applicable provisions, receives a report on decisions regarding the classification of positions with related parties associated entities as unlikely to pay or doubtful. Finally, the RPT Committee provides assessments, support and proposals on the organization and conduct of internal controls over the overall activities relating to the assumption and management of risks vis-à-vis associated entities, as well as performing an overall check of consistency of the activities with the strategic and management guidelines.
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Senior management
The Board of Directors appoints the key executives responsible for managing our day-to-day operations, as led by the CEO. Name Position Place and Date of Birth Date first appointed Chairman of the Board of Gian Maria Gros-Pietro Directors Torino (Italy), 1942 April, 2016 Managing Director and Carlo Messina ...... CEO Rome (Italy), 1962 September 29, 2013 Davide Alfonsi Chief Risk Officer Turin (Italy), 1963 May 1, 2016 Paola Angeletti...... Chief Operating Officer Jesi (Italy), 1964 January 1, 2020 Head of Banca dei Stefano Barrese ...... Territori Division Rome (Italy), 1970 January 15, 2016 Chief Compliance Rivoli - Torino (Italy), Piero Boccassino ...... Officer 1964 July, 2015 Head of the Private Tommaso Corcos...... Banking Division Rome (Italy), 1962 January 1, 2020 Stefano Del Punta ...... CFO Roma (Italy), 1960 May 22, 2013 Head of Insurance Nicola Maria Fioravanti Division Rome (Italy), 1962 July 1, 2015 Paolo Maria Vittorio Chief Governance Grandi ...... Officer Milan (Italy), 1954 May 22, 2013 Chief Cost Management Alfonso Guido ...... Officer Cosenza (Italy), 1966 January 1, 2018 Chief Institutional Affairs and External Stefano Lucchini ...... Communication Officer Roma (Italy), 1962 January, 2018 Chief of IMI Corporate & Investment Banking Desenzano del Garda – Mauro Micillo...... Division Brescia (Italy), 1970 April 27, 2016 Head of the Asset Saverio Perissinotto .... Management Division Venezia (Italy), 1962 January 1, 2020 Chief IT, Digital and Krudesdorp (South Massimo Proverbio ..... Innovation Officer Africa), 1958 January 1, 2018 Head of the International Subsidiary Banks Marco Elio Rottigni .... Division Milano (Italy), 1961 January 1, 2020 Raffello Ruggieri...... Chief Lending Officer San Severo (Italy), 1970 January 1, 2020 Galliate - Novara (Italy), Claudio Testa...... Chief Audit Officer 1963 January 1, 2018 Executive Director Paolo Bonassi ...... Strategic Support Genova (Italy), 1964 January 1, 2018 Head of Safety and Fabio Rastrelli...... Protection Naples (Italy), 1960 July 1, 2016 To our knowledge, none of the members of the senior management has, over the past five years, been convicted in relation to acts of fraud or bankruptcy or has been associated in the discharge of his or her duties in procedures for bankruptcy, receivership or involuntary liquidation, or has been subject to official charges and/or sanctions by statutory or regulatory authorities (including designated professional bodies) or has been disqualified by a court from acting as a member of our administrative, management or supervisory bodies or from acting in the management or conduct of the affairs of any other issuer. Set out below are brief biographies of the members of our senior management. Gian Maria Gros-Pietro (Torino, 1942). See above, “—The Board of Directors”. Carlo Messina (Rome, 1962). See above, “—The Board of Directors”.
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Davide Alfonsi (Turin, 1963). A graduate in Economics from the University of Turin in 1988, he is enrolled in the Register of Chartered Accountants and in the Register of Statutory Auditors. Chief Risk Officer from May 2016, he started his career with Arthur Andersen, where he built up significant experience in auditing and consulting during his 10 years, working principally in the financial sector. He joined Sanpaolo in 1988 and in the same year he was appointed Head of Risk Control of Sanpaolo IMI. In 2004 he became Head of the Group Risk Management function. In January 2007, after the merger between Intesa and Sanpaolo, he was appointed head of the Group Risk Management Department and in June 2015 he became Group Risk Manager, deputy to the Chief Risk Officer. Among other relevant experiences, he was a member of the CEBS’ Consultative Panel (now EBA) from 2006 to 2010 and was a member of GEBI (Group of Experts in Banking Issues) for the European Commission from May 2010 to October 2011. Since February 2013 he has been the Chairman of AIFIRM (Italian Association of Financial Industries Risk Managers). Paola Angeletti (Jesi, 1964). She graduated ‘cum laude’ in Economics at the Bocconi University in 1989. Before graduation, she spent a semester at the New York University and then began her working experience in the credit department of the Italian branch of a US commercial bank. After graduation, she worked in advisory and corporate finance in a consultancy firm and then in a UK investment bank. In 1994, she joined the Group as a Senior Investment Manager for the Merchant Banking Department of Mediocredito Lombardo and then within the Private Equity Department of IntesaBci. In 2002, she was appointed Head of Corporate Development in the Shareholdings Department of Banca Intesa. From 2007 to 2014, within the General Secretariat of the Intesa Sanpaolo Supervisory Board, she was Head of the Unit with planning and technical support functions to the Board and its Committees (Strategy Committee, Remuneration Committee, Financial Statements Committee, Related Party Transactions Committee, Control Committee, Supervisory Body ex D.Lgs. 231/01). In 2015, she became Head of the M&A Department of Intesa Sanpaolo and, in this role, she completed a number of extraordinary transactions, disposals and acquisitions relating to banks, financial and operating companies in Italy and abroad. In 2018, she broadened her responsibility as Head of the Shareholdings Department. In 2019, she became Head of the International Subsidiary Banks Division, coordinating 11 banks in Central-Eastern Europe and in North Africa, with 22,000 people, 1,000 branches and over 7 million customers. Over the years, she has been a Board Director of a number of companies of the Group engaged in leasing, consumer finance and banking. Stefano Barrese (Rome, 1970). A graduate in Economics and Business from the LUISS University of Rome in 1993, he was enrolled in the Register of Chartered Accountants and the Register of Official Auditors in Rome. He started his career in 1995 with Arthur Andersen before moving on to Erg Petroli. He joined the Planning Department of Banca Intesa in 1998. After the merger between Banca Intesa and Sanpaolo IMI, he held several positions, including Head of Capital Management in the Planning, Capital Management and Synergy Control Department and Head of Planning in the Planning and Control Head Office Department. Mr. Barrese has been with the Banca dei Territori Division since 2013. He was Head of the Planning and Control Department, the Marketing Department and, subsequently, the Sales and Marketing Area. He currently sits on the Boards of ABI (Italian Banking Association), Bancomat, SSD LUISS and Intesa Sanpaolo Innovation Center.. Piero Boccassino (Rivoli - Torino, 1964). Graduated in Economics from Turin University in 1988, with a participation in an advanced banking course at INSEAD in 1996, he is a Chartered Accountant and a Statutory Auditor. After a working experience in a professional firm, in 1990 Mr Boccassino joined the Studies and Research Department of Istituto Bancario San Paolo and in 1991 became a member of the General Manager’s staff. From the following year until 2001, he worked in the areas of financial statements, planning and control. In 1999, he became a senior manager at Sanpaolo IMI, first as head of planning and control for the branch network, then as CFO of Eurizon Vita and, finally, as head of the Group’s cost management. In 2007, following the creation of Intesa Sanpaolo, he was appointed head of administrative and financial governance and, in 2008, head of the newly formed compliance function. From 2011 to June 2013, he was in charge of the Valle d’Aosta and North-East Piedmont branch network area. In July 2013, he took on the responsibility for the compliance function once more, and, in July 2015, he became the Group’s Chief Compliance Officer. Tommaso Corcos (Rome, 1962). A graduate in Business Administration from the University of Rome “La Sapienza”, he holds a Master in Financial Advisory, and participated in the Harvard Business School Advanced Management Program. He began his career in 1987 in BNL’s foreign shareholding office. Between 1990 and 2001, he held several positions with Intesa Asset Management SGR/Nextra Investment Management SGR as Market Manager, rising to Head of Investment Management for the bond, equity and currency sectors. In September 2002, he joined Fideuram as Chief Executive Officer of Fideuram Investimenti SGR S.p.A. –
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formerly Fideuram Capital. From 2006 to 2013, he was Vice President and Chief Executive Officer of Fideuram Asset Management Ireland and Vice President of Fideuram Gestions, and was a member of the Board of Interfund Sicav and Eurizon Alternative Investments SGR S.p.A. Since January 2014 to February 2020, he was Chief Executive Officer and General Manager of Eurizon Capital SGR and Chairman of Eurizon Capital S.A. and Epsilon SGR. Since March 2016 Corcos has been Chairman of Assogestioni. Since 2019 he has been Chairman of Eurizon Capital Real Asset. In February 2020, he was appointed Managing Director of Fideuram ISPB and General Manager of Intesa Sanpaolo Private Banking. Stefano Del Punta (Rome, 1960). A graduate in Economics at the University of Rome, in 1988, he joined the Finance and Investment Division of IMI S.p.A. In 1992, he was transferred to IMI Securities Ltd in London and, at the end of the same year, he became General Manager of IMI-CPR in Paris. In 1994, Stefano Del Punta was appointed Head of Risk Control and Planning at IMI Bank Luxembourg. In 1995, he became Managing Director of Mabon Securities (IMI Group) in New York. In 1997, he was appointed General Manager of Turis A.G. (IMI Group) and, in April 1998, he returned to the IMI headquarters in Rome as Head of the International Loans Department. After the merger with Sanpaolo Bank, he was appointed Head of the International Corporate and Structured Finance Division. After a short period at Banco di Napoli as Head of Planning & Control, in April 2002 Stefano Del Punta became Head of Group Finance of Sanpaolo IMI. In 2007, after the merger with Banca Intesa, he became Treasurer of Intesa Sanpaolo. He was a member of the Management Board of Intesa Sanpaolo from May 2014 to April 2016. He is a member of the Board of Fondo Interbancario di Tutela dei Depositi. Nicola Maria Fioravanti (Rome, 1962). A graduate, magna cum laude, in Economics and Business from the University of Rome “La Sapienza”, he was responsible for Budget, Planning and Control at Telecom Italia from 1988 to 1992, and for Strategic Planning at Bonifiche Siele from 1992 to 1996. In 1996, he entered the banking sector and, over time, held positions at Banco Ambrosiano Veneto and Banca Intesa in the area of Planning, Research and Management Control. From 2006, he held various positions in the Chief Financial Officer Area, Strategic Planning of Intesa Sanpaolo, the most recent of these being Head of the Planning, Strategic ALM and Capital Management Head Office Department from 2013 to 2014. Since October 30, 2014, he has been Managing Director of Intesa Sanpaolo Vita and Chairman of the Board of Directors of Intesa Sanpaolo Assicura. Paolo Maria Vittorio Grandi (Milan, 1954). A graduate, cum laude, in Political Science from the Sacred Heart Catholic University, completed postgraduate studies at the International Centre for Monetary and Banking Studies in Geneva. From 1979 to 1982, he worked at the Headquarters of Credito Italiano. In 1982, he joined Mediocredito Lombardo where, from 1990, he organized and developed the activities of the bank and its parent company Cariplo in the merchant banking business as head of private equity, acquisition finance and corporate finance activities. In December 2000, he moved to Banca Intesa as co-head of the Private Equity Department. In June 2002, he became responsible for the Shareholdings Department, reporting directly to the CEO of Banca Intesa, a position that included - inter alia - the responsibility for the Group’s Mergers & Acquisitions. In that period Mr. Grandi was also a board director of Telecom, SIA S.p.A., Eurizon Capital, Agos S.p.A. and of some Companies within Intesa Sanpaolo Group. He is currently a board member of the following companies: Fideuram - ISP Private Banking (Chairman, since April 20, 2018) Banca Prossima (Chairman since October 16, 2007), Intesa Sanpaolo Holding International SA Lussemburgo (Chairman since March 22, 2004), Banca IMI (since April 23, 2013), ABI - the Italian Banking Association (since July 10, 2014), Istituto Europeo di Oncologia (since April 20, 2006), PFH Palladio Holding S.p.A. - previously Palladio Finanziaria S.p.A. (since May 7, 2014), Fondazione Cerba (since June 27, 2016), Consorzio PAN (since March 15, 2004). Alfonso Guido (Cosenza, 1966). A graduate in Banking, Financial and Insurance Economics from the University of Messina, Mr. Guido began his career at Cassa di Risparmio of Calabria and Lucania (Cariplo Group) in 1991 (securing a position reserved for accounting graduates who achieved full marks in the regions of Calabria and Basilicata), performing the roles of banking counter operator, secretary officer and treasury officer. Following this experience in the network, in 1994 he took on a role as mortgages specialist in the MLT Loans Department. In the second half of the same year, he became a sales network trainer and the sales manager in the North Area of Cosenza at Cassa di Risparmio di Calabria e di Lucania (which became Banca Carime) for insurance products of Carivita (insurance company of the Cariplo Group). In 1998, he became senior officer in the Planning and Studies Department of Banca Intesa, focusing in particular on strategic simulations and monitoring of individual regulatory capital ratios of all Group banks. In 2001, he was appointed Head of the Service Company Office of the Management Control Department of Banca Intesa to oversee the activities of management and planning control of Intesa Sistemi e Servizi (ISS) and Intesa Gestione Crediti (IGC). In 2007,
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he became Head of the Budget Operating Costs Office of the Capital Budget and Cost Control Department of Intesa Sanpaolo, within the staff serving the Chief Financial Officer. In October 2014, he became Head of the Coordination Unit of Project Initiatives, reporting directly to the Managing Director and CEO, with the task of overseeing and monitoring strategic projects, carrying out, on behalf of the Managing Director and CEO, relationships with the Business Units and the Head Office Departments. In August 2016, he was appointed Chief of the CEO project office. From January 2018 to January 2019 he was Managing Director of Intesa Sanpaolo Group Services. Stefano Lucchini (Roma, 1962). After graduating in Economics and Business Administration from the Luiss University of Rome, in 1987 he joined the studies’ department at Montedison, where he eventually became Manager for Corporate Communication and Investor Relations at Montedison USA. In 1997, he joined Enel and was appointed Director of External Relations of the group. He also served as Director of External Relations in Confindustria. In 2002, he joined the Banca Intesa group as Director of External Relations. In 2005, he served as Senior Executive Vice President for International Public Affairs and Communication of the Eni group and as Chairman of Eni USA. From September 2014 to December 2017, he served as Head of International and Regulatory Affairs of the Intesa Sanpaolo group. Within the Intesa Sanpaolo group, he serves as a board member of Intesa Sanpaolo Innovation Center and Intesa Sanpaolo Highline. He serves on the Board of Directors of the Luiss University and he is a member of the Board of Evaluation of the Università Cattolica, where he also teaches as a Guest Lecturer. He is also a member of the Board of Directors of the American Chamber of Commerce in Italy, the Scientific Committee of the “Fondazione Osservatorio sulla Criminalità nell’Agricoltura e sul Sistema Agroalimentare” (Association against organized crime in Farming and in Food Farming) and a member of the International Advisory Council and the Foreign Policy Leadership Council of the Brookings Institution in Washington D.C. He also serves as Chairman of the Jury Panel of the Marisa Bellisario Award. He is a representative of the Ministry of Foreign Affairs and International Cooperation within the “Italy-Israel Foundation for Culture and the Arts”, a Visiting Fellow at the Oxford University (Green Templeton College), and is a board member of ABI (Italian Banking Association) and a member of its Executive Committee. He was knighted “Cavaliere di Gran Croce” for Services to the Italian Republic. Mauro Micillo (Desenzano del Garda - Brescia, 1970). A graduate of Business and Administration in 1994 at the Statale University in Brescia, Italy, Mr. Micillo subsequently specialized in “Currency Management and International Finance” and started his career first with Fineco Sim before moving to IMI Fideuram Asset Management. Later, he moved to Fineco Investimenti SGR as Fixed Income Director. In 2000 he was appointed CIO (Chief Investment Officer) of Banca Esperia and a member of the Board of Directors of Duemme Hedge SGR. In 2002, he joined the Capitalia Group as Holding Director (in charge of Group Finance) and in 2005, he was appointed Chief Executive Officer of the Group’s asset management companies. At the end of 2007, he became Deputy General Manager and CFO (Chief Financial Officer) of the BPVi group. He joined the Intesa Sanpaolo Group in October 2009 as Chief Executive Officer and General Manager of Eurizon Capital SGR, Chairman of Eurizon Capital S.A. and of Epsilon SGR. In January 2014, he was appointed General Manager of Banca IMI, the Intesa Sanpaolo Group’s investment bank, where he became Chief Executive Officer in April 2015. He was formerly a Member of the European Commission’s Expert Group on Market Efficiency and also served as Vice Chairman of Assogestioni (from 2009 to 2013) and Chairman of All funds Bank (from 2009 to 2014). Moreover, he was a member of the Board of Directors of MTS from 2014 to 2015. Alongside his professional activity, he has also been active in academia, first as Lecturer at the SDA Bocconi (1996-2002), then as Adjunct Professor at the University of Brescia (2004-2005). Since 2006, he has also held the position of Adjunct Professor of the “Asset Management” course at the LUISS Guido Carli University in Rome. Currently. He is the Chief of the IMI Corporate & Investment Banking Division of Intesa Sanpaolo. Saverio Perissinotto (Venezia, 1962). He graduated in Economics from the Ca’ Foscari University of Venice, he began his professional career in 1986 at Banque Indosuez Paris, where he worked for three years as a financial analyst in the Investment Research Department before moving on to head Banque Indosuez Jakarta until 1991. He subsequently returned to Banque Indosuez Paris, from 1991 to 1995, where he began working in Wealth Management for international customers and Wealth Engineering. In 1995, he attended the International Executive Programme at INSEAD (Fontainbleau - France), subsequently becoming Managing Director of Fiduciaria Indosuez SIM S.p.A. and Managing Director and General Manager of Crédit Agricole Indosuez Private Banking S.p.A. until 2005. At the same time, he took on the role of Managing Director of Finanziaria Indosuez Ltd. in Lugano. He was Deputy General Manager of Intesa Sanpaolo Private Banking S.p.A. from 2005 to 2015 and Managing Director of Sirefid S.p.A. from 2005 to 2010. He was appointed Chairman of the Board of Directors of Intesa Sanpaolo Private Banking Suisse S.A. for two years, from 2011 to 2012. From
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2015 to February 2020 he was Managing Director of Intesa Sanpaolo Private Banking S.p.A. Since February 2020 he has been Chief Executive Officer and General Manager of Eurizon Capital SGR, Chairman of Epsilon SGR, Chairman of Eurizon SLJ Capital and also Deputy Chairman of Eurizon Capital S.A.. Massimo Proverbio (Krugesdorp, 1958). After earning his Bachelor of Engineering degree at Politecnico di Milano University in 1985, he joined IBM as a system engineer. In 1988, he entered Accenture Italia as project manager within the banking sector, focusing on the branche network. From 1991 to 1994 he worked for Accenture in Belgium, Hungary and South Africa managing IT systems architecture, IT transformation and merger planning projects. In 1994, he returned to Accenture Italia and till 1999 he managed planning and integration projects regarding the main Italian banking groups, in addition to cost reduction and multi-channel solutions and core banking systems set-up projects. In 1999, he was appointed as an Accenture Partner. Since that year he became responsible for various Accenture clients and led different Accenture offer areas development, like Merger and Acquisition, Digital transformation and CRM and Cost restructuring. Starting from 2003 he also took on the Italian Banking industry responsibility (offer, service quality, customer satisfaction). In 2007, he was appointed Accenture Financial Services (Banks and Insurance) Lead for Italy, Central Europe, Russia, Greece, Turkey and Middle East and entered the Accenture Italia and Accenture Financial Services Europe and Latin America Executive Committees. In 2012, he was nominated Accenture Senior Managing Director and also became Accenture Payment Services Global Lead; then, in 2015, he was appointed as Europe and Latin America Banking Industry and Practice Lead. In December 2017, he left Accenture to join Intesa Sanpaolo. Marco Elio Rottigni (Milano, 1961). He began his professional career in 1982 at Banca Commerciale Italiana as a financial analyst, following a path that brought him to hold various positions in the commercial and credit field. In 1998, he was appointed Manager of main branch (serving corporate, private banking and retail segments) and of two subsidiary branches. From 2000 to 2004, he was a Large Corporate Global Relationship Manager at Banca Intesa, in the sectors of Buildings & Constructions and Telecom & Media. In 2005, he became Head of the North East Area of the Mid Corporate Department within the Corporate and Investment Banking Division of Intesa Sanpaolo; four years later, in April 2009, he was appointed Head of the Italian Mid Corporate Department. In 2013, he also became responsible for the Public Finance segment (formerly BIIS), in the Corporate and Public Finance Department, supporting companies during the years of major changes linked to economic trends and the internationalization processes of Italian industry. In the summer of 2016, he was appointed Head of the Global Corporate Department, which manages relationships with about 2,000 Italian and foreign groups with turnover of over €350 million, as well as those with all Public Administrations. He served as a board director and a member of the Executive Committee of Mediofactoring S.p.A. (2010 - 2011), as a board director and a member of the Executive Committee of Leasint S.p.A. (2010 - 2013), as a board director and a member of the Executive Committee of Société Européenne de Banque SA (2011 - 2014). He has been a member of the Credit Committee of Mediocredito Italiano since 2014 and, since April 2016, he has been a board director of Intesa Sanpaolo Private Banking. Raffaello Ruggieri (San Severo, 1970). He started his professional career at IBM Italia, with the Quality and Re-engineering Department, before completing his Master’s degree in Business Administration, graduating summa cum laude. At IBM Italia, he was involved in process innovation, in financings supporting technology innovation and in the introduction of ERP information systems. In 2003, he completed the Corporate Coaching Program with Coach U Italia, performing team building and executive coaching activities. He joined the Group in 1999. While covering different roles and responsibilities, including Corporate Turnaround, Project & Industry Specialised Lending, Structured Finance, Investment Banking and Coverage of the main domestic and international clients, he was also in charge of several projects aiming at the strengthening of the capital structure of major clients, through Equity issues. From 1999 to 2002, he was part of the Banca Commerciale Italiana’s HR and Organization team and was involved in several organizational projects, jointly with business teams, dealing also with the Comit-Intesa amalgamation. From 2002 to 2005, he was involved in the most critical corporate turnarounds and in the international network reorganisation, supporting directly the Head of the Investment Banking Division. From 2005 to 2009, he was part of the Financial Restructuring team within Intesa Sanpaolo, starting up the M&A activities and being involved in the most important Investment Banking and Structured Finance deals. From 2009 and 2011, he had responsibility over the most important Corporate Restructuring projects within Banca IMI’s Structure Finance Unit. In 2015, he was given the responsibility for the International Structure Finance business of the Group after having been responsible for the Project & Industry Specialised Lending Italia team, from 2011, and for the international Project Finance business (London, New York and Hong Kong), from 2013. In January 2018, he became responsible for the Global Corporate
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Department within the Corporate & Investment Banking Division, managing approximately 14,000 clients, both domestic and international, after having been in charge of the Corporate & Strategic Finance Business Unit within Banca IMI from 2016, with responsibility over the Investment Banking (Equity Capital Markets, Debt Capital Markets, M&A) as well as the Structured Finance for Intesa Sanpaolo Group. From December 2015 to May 2017, he was a director of the Nuovo Trasporto Viaggiatori S.p.A. (Italo - NTV) Board. Claudio Testa (Galliate - Novara, 1963). A graduate of Economics and Business from the University of Turin, he began his career at Nuovo Banco Ambrosiano in 1987 as Internal Auditor with growing responsibilities in different areas until 1996 when he took on the role of Manager in charge of Audit and Administration Services of Banco Ambrosiano Veneto. In 1999, he held the position of Manager in charge of the Audit activities concerning the project for the merger between Banca Intesa and Banca Commerciale Italiana. In 2003, at Banca Intesa, he became Head of Audit Planning and Control. In 2007, at Intesa Sanpaolo, he took on the role of Head of Audit Coordination and Development and, in July 2015, he became the Group’s Head of Internal Auditing. In January 2018, the function evolved into Chief Audit Officer. Mr. Testa is currently a member of the Board of AIIA (Italian Internal Auditors Association). Paolo Bonassi (Genova, 1964). A graduate of Economics and Business from the University of Genova, he began his career at Banca Commerciale Italiana in 1989 with a role in Back Office & Front Office with growing responsibilities in different areas until 1999 when he took on the role of Head of Strategy and Control Office. From 2001 to 2006, he held the position of Head of Division Controller Service of Banca Intesa e Tableau de Bord Banca Intesa. In 2006, at Intesa Sanpaolo, he took on the role of Head of Division Controller Service and Budget and, in October 2013, he became the Head of Management Control. In January 2018, the function evolved into Executive Director Strategic Support. Fabio Rastrelli (Naples, 1960). A graduate in Law at the University of Naples Federico II, he joined the Group in 1987, where he dealt with legal issues related to the acquisition of equity investments (in Italy and abroad) and with general corporate affairs. In 2007, he took on the role of Head of Corporate Secretariat Service of the Group. In July 2016, he became Head of Safety and Protection dealing with occupational and environmental safety-related issues and privacy matters. He also holds the role of Employer pursuant to Legislative Decree No. 81 of April 9, 2008 and of Data Protection Officer of the Group. Compensation Remuneration and Incentive Policies
On March 27, 2014 our remuneration and incentive policies, including a new incentive system applicable to part of the Group’s management and principal “risk takers”, were approved. Such policies went into effect following the favorable advisory vote of the Shareholders’ meeting held on May 8, 2014. We believe that our remuneration and incentive policies are fully consistent with the applicable national and international regulations. In particular, we believe they are consistent with the “Provisions regarding remuneration and incentive policies” issued by the Bank of Italy through the Circular No. 285 of December 17, 2013, in order to implement the provisions of Directive 2013/36/EU of June 26, 2013. Since April 27, 2016, we have employed a one-tier governance system, where our Board of Directors simultaneously exercises strategic supervision and control. Key Managers include not only management and members of the Board of Directors, but also General Managers, the Manager responsible for preparing our financial reports, the Heads of business segments, the Heads of governance areas, the Heads of our Head Office Departments that report directly to the CEO and the Chairman, and the Head of strategic operations and special projects.
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The following table shows the compensation and benefits paid to our Board of Directors and Management Control Committee members (under the former two-tier system) and other key managers for the year ended December 31, 2020:
Management Bodies / Control Bodies(1) Other Managers(2) Total Amount Amount Amount Amount Amount Amount due paid due paid due paid (in € millions) Short-term benefits(3) ...... 19 15 45 39 64 54 Post-employment benefits(4)...... - - 7 6 7 6 Other long-term benefits(5) ...... - - 4 - 4 - Termination benefits(6)...... ------Share-based payments(7) ...... - - 16 - 16 - Total remuneration paid to Key Managers...... 19 15 72 45 91 60 ______(1) Figures referring to 430 positions. The table does not include approximately €1.2 million relating to 85 positions on the Boards of Directors (or similar bodies), as this was fully transferred to other Group companies. (2) Figures referring to 89 positions. The table does not include approximately €2.9 relating to 7 general manager positions (or similar positions), as this was fully transferred to other Group companies. (3) Includes fixed and variable compensation of directors that may be assimilated with labor cost and social security charges paid by the company for its employees. (4) Includes company contribution to pension funds and allocation to employee termination indemnities pursuant to law and company regulations. (5) Includes estimate of allocations for length of service awards for employees. (6) Includes benefits due under employment contracts for termination of employment. (7) The cost refers to the variable portion of short -/long-term remuneration which will be paid in Intesa Sanpaolo shares/through LECOIPs. Compensation plan based on financial instruments for the Group’s employees
On April 27, 2018, our shareholders approved a Leveraged Employee Co-Investment Plan (“LECOIP”) which has been offered to all employees and was launched concurrently with the Business Plan. Loans and guarantees
As of December 31, 2020, there were outstanding loans or guarantees issued by Group entities to our managers, key managers and their related parties totaling €10 million. See “Related-Party Transactions”. External auditors
Our annual Consolidated Financial Statements must be audited by external auditors appointed by the shareholders. The external auditors, among other things, examine our annual Consolidated Financial Statements and issue an opinion regarding whether our annual Consolidated Financial Statements comply with the Italian regulations governing their preparation (i.e. whether they are clearly stated and give a true and fair view of the financial position and results of our Group). Their opinion is made available to our shareholders prior to the annual general shareholders’ meeting. The mandate of our auditors, KPMG S.p.A., was granted on May 10, 2011 and expired upon the approval of our Consolidated Financial Statements as of December 31, 2020. The mandate of our auditors, EY S.p.A., was granted on April 30, 2019 and will expire upon the approval of our Consolidated Financial Statements as of December 31, 2029.
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RELATED-PARTY TRANSACTIONS The Board of Directors of the Issuer adopted, in compliance with the procedures set out pursuant to applicable regulation, the Group procedures regulating the conduct of transactions with Related Parties of the Issuer (as defined below), Associated Entities of the Group (as defined below) and relevant persons pursuant to article 136 of the Consolidated Banking Act (the “RPT Procedures”). The RPT Procedures take into account both the rules issued by CONSOB, pursuant to article 2391-bis of the Italian Civil Code, and the supervisory provisions introduced by the Bank of Italy on December 12, 2011 in terms of risk and conflicts of interest by banks and banking groups with respect to “associated entities”, issued in accordance with article 53, paragraphs 4 et seq. of the Consolidated Banking Act and CICR (Interdepartmental committee for credit and savings) Resolution 277 of July 29, 2008, as well as the rules established by article 136 of the Consolidated Banking Act. The RPT Procedures apply to the entire Group with respect to the following aspects:
the criteria for identifying Related Parties and associated entities;
the process of analysis, decision-making and information for corporate bodies in connection with transactions with Related Parties and Associated Entities;
market disclosure for transactions with Related Parties;
the prudential limits and obligations for periodic reporting to the Bank of Italy for activities at risk in relation to Associated Entities;
the rules governing organizational controls and safeguards;
the general rules for disclosure and abstention about the management of the personal interests by board members and general managers, employees and company staff, including other than associated entities. Pursuant to the RPT Procedures, the following are considered related parties of the Issuer: parties that exercise control or significant influence, subsidiaries and associates, joint ventures, pension funds of the Group, Board Directors and key managers of the Issuer and their close family members and significant shareholdings (the “Related Parties”). The set of Associated Entities of the Group consists of the associated entities of each bank of the Group (including the Issuer) and each monitored significant intermediary with own funds greater than 2% of the total of consolidated own funds. Each of i) shareholders that exercise control, significant influence or that are required to request authorization pursuant to article 19 of the Consolidated Banking Act or that may appoint a member of the management or strategic supervisory body and the relative corporate groups; ii) subsidiaries, associated companies under joint control and associated companies, as well as the companies controlled by the latter, also jointly with others; iii) board members and general managers and their relative close family members up to the second degree and significant subsidiary entities, can be considered to be associated entities for each monitored bank or intermediary of the Group (the “Associated Entities”). As a form of self-regulation, the Issuer has extended the regulations on transactions with Related Parties, as well as those on activities involving risk and conflicts of interest with respect to Associated Entities, to: i) its shareholders and to the relative corporate groups with an equity investment in the Issuer’s voting capital greater than the minimum threshold set out in regulations on communications of significant shareholdings in listed companies calculated only based on shares owned or under management, as well as the companies jointly controlled by them; ii) the companies in which close family members of board members and general managers of the banks and the monitored significant intermediaries of the Group hold executive offices; iii) the companies which the Group has notable investments in and financial links with, because they meet the conditions of at least two of the following indicators:
the counterparty holds a stake in the Issuer’s capital with an amount between 1% and the minimum threshold set out in regulations on the communication of significant shareholdings in listed companies;
an entity of the Group holds a stake in the counterparty exceeding 10% of the voting rights;
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significant credit exposure of the Group to the counterparty. This approach allows closer monitoring of transactions with the main entities in potential conflict of interest risk, by subjecting them to the same requirements for analysis, decision-making process and subsequent disclosure to the corporate bodies and the market as transactions with Related Parties and Associated Entities, and keeps the risk activities carried out by the Group with the Related Parties and the Associated Entities within the prudential limits set by the Bank of Italy. The RPT Procedures set forth the assessment process that must be followed by the Issuer and the subsidiary companies when carrying out transactions with Related Parties of the Issuer, Associated Entities of the Group and “relevant persons” pursuant to article 136 of the Consolidated Banking Act, to ensure appropriateness of the transactions. The RPT Procedures also require detailed examination of the reasons and interests behind the transactions, their effects on the Issuer’s financials and the terms of the transaction. In line with the regulations implemented by CONSOB and by the Bank of Italy, a set of full or partial exemptions from the application of the regulations is also included. With regard to the decision-making for transactions with Related Parties of the Issuer and Associated Entities of the Group, the RPT Procedure distinguishes between:
transactions involving lower amounts: with a value of less than or equal to €250,000 for individuals and €1 million for persons other than natural persons to which the RPT Regulations do not apply; less significant transactions: with a value higher than the small amount thresholds (€250,000 for individuals and €1 million for persons other than natural persons) but lower than or equal to the most significant thresholds indicated below;
more significant transactions: with a value higher than the threshold of 5% of the indicators defined by CONSOB and by the Bank of Italy (approximately €3.4 billion for the Group); and
transactions attributed to the shareholders’ meeting, in accordance with the law or with the Articles of Association. An important role is reserved for the Committee for transactions with related parties of the Issuer and Associated Entities of the Group in the process of approval of any such transactions. For most significant transactions, the Committee must be promptly involved in the analysis and negotiation phases, receiving a complete and timely flow of information, with the right of the Committee to request additional information and make observations. All transactions, other than those which are exempt based on the RPT Procedures undertaken by the Issuer with one of its Related Parties or Associated Entities, are subject to approval by the Board, upon recommendation by the Committee for transactions with related parties. The RPT Procedures set out specific controls in the event that a less significant or most significant transaction is approved despite the negative opinion of the independent Committee. Transactions undertaken by subsidiaries with Related Parties of the Issuer and Associated Entities of the Group must be approved by the Board of Directors of the subsidiaries concerned, subject to prior authorization from the Issuer released in accordance with the RPT Procedures described above. Transactions undertaken by Italian subsidiary banks with Related Parties and Associated Entities of the Group that have not been considered exempt must, subject to authorization by the Issuer, be approved by the relative Board of Directors, upon obtaining the opinion of a Committee of independent directors set up within the Board of Directors of the bank itself. Furthermore, specific reporting rules apply to transactions by the Issuer’s Bodies. The RPT Procedures also define the general criteria for the information to be provided, at least quarterly, as also provided for under Article 150 of the Consolidated Law on Finance, to the directors and the control body
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regarding transactions with Related Parties and Associated Entities completed in the reference period by the Issuer or by its subsidiaries. The RPT Procedures also apply to transactions with “relevant persons” pursuant to article 136 of the Consolidated Banking Act, which must be applied by all the Italian banks of the Group, including the Issuer. This provision requires the adoption of a more thorough decision-making procedure (unanimous decision by the management body, excluding the vote of the interested member, and favorable vote of members of the control body) in order to allow the bank officers to contract obligations, directly or indirectly, with the bank of which they act as officers. Furthermore, the requirements envisaged by the Italian Civil Code (article 2391) and article 53 of the Consolidated Banking Act governing directors’ personal interests are confirmed. In particular, article 2391 of the Italian Civil Code requires each board member to report every interest, held in his / her own name or on behalf of third parties, that may be significant in carrying out his / her management function, with reference to a specific transaction subjected to the Board of Directors. In accordance with the above-mentioned provision, the Board of Directors has jurisdiction over decisions regarding transactions, including those with Related Parties, in which the Managing Director possesses an interest on his / her own account or through a third party and must therefore abstain from the decision, entrusting the Board of Directors as per article 2391 of the Italian Civil Code. In addition, article 53 of the Consolidated Banking Act requires banks’ directors to abstain from voting on resolutions where they have a conflict of interest on their own behalf or on behalf of third parties. See “Part H—Information on compensation and transaction with related parties—Transaction with Related Parties” included in the F-Pages hereto.
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The following tables set out the assets, liabilities and guarantees as of December 31, 2020, 2019 and 2018, for each category of related parties.
As of December 31, 2020 Financial Financial Financial assets assets Financial assets pertaining to pertaining to liabilities measured at insurance insurance Financial attributable Financial fair value companies, Financial companies Investments Financial liabilities to insurance assets at fair through measured at assets measured at in associates liabilities attributable Financial companies Guarantees Guarantees value other fair value measured at amortized Other and measured at to insurance Financial liabilities measured at Other and and through comprehensiv pursuant to amortized cost pursuant financial companies to amortized companies liabilities held designated at fair value financial commitments commitments profit or loss e income IAS 39 cost to IAS 39 assets joint control cost IAS 39 for trading fair value IAS 39 liabilities given received (in € millions) Subsidiaries not included on a line-by- line basis ...... 2 - - 2 - 7 46 32 - - - - 4 24 - Companies subject to joint control and their subsidiaries...... - - - 49 - - 44 12 - - - - - 25 16 Associates and their subsidiaries...... 57 - - 744 - 353 1,914 861 - - - - 41 1,29 31 Board Members, general managers, key managers, and their related parties ...... - - - 9 - - - 23 - - - - 16 1 5 Pension Funds ...... - - - - - 1 - 241 - - - - 518 1 - Total...... 59 - - 804 - 361 2,004 1,169 - - - - 579 1,341 52 Shareholders (1)...... 805 22 250 3,487 - 204 - 1,15 - 3,658 - 46 131 1,15 34 Companies with which the Group has notable investment in and financial links(2)...... 1,292 4 24 1,939 - 7 - 353 - 1,328 - 3 921 1,398 722
As of December 31, 2019 Financial assets measured at fair Investments in Financial assets value through associates and Financial Financial measured at fair other Financial assets companies liabilities Financial liabilities Guarantees and Guarantees and value through comprehensive measured at subject to joint measured at liabilities held for designated at Other financial commitments commitments profit or loss income amortized cost Other assets control amortized cost trading fair value liabilities given received (in € millions) 100%-owned subsidiaries belonging to the banking group ...... 7,441 610 102,603 2,972 18,410 76,12 9,729 1 5,832 91,232 410 Subsidiaries not 100%- owned and belonging to the banking group 391 - 388 38 1,068 304 1 - 7 1,977 - Subsidiaries not belonging to the banking group ...... 177 - 7,141 293 4,208 435 - - 10 7,037 3 Total...... 8,009 610 110,132 3,303 23,686 76,859 9,730 1 5,849 100,246 413 Companies subject to joint control and their subsidiaries ...... - - 50 - 9 6 - - - 26 17 Associates and their subsidiaries ... 147 - 281 11 716 838 4 - 51 512 215 Board Members and General Managers, Key Managers and their related parties ...... - - 8 - - 15 - - - - 14 Pension Funds ...... - - - 1 - 102 - - 2 1 - Total...... 8,156 610 110,471 3,315 24,411 77,820 9,734 1 5,902 100,785 659 Shareholders (1)...... - - 1 - - 146 - - 3 5 1 Companies with which the Group has notable investment in and financial links(2)...... 673 - 1,301 113 - 538 425 - 842 1,346 526
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As of December 31, 2018 Financial Financial Financial Financial assets assets assets liabilities Financial measured at attributable attributable Investments Financial attributable assets fair value to insurance Financial to insurance in associates Financial liabilities to insurance measured at with impact companies assets companies and liabilities attributable Financial companies Guarantees Guarantees fair value on measured at measured at measured at Other companies measured at to insurance Financial liabilities measured at Other and and through comprehensiv fair value amortized amortized financial subject to amortized companies liabilities held designated at fair value financial commitments commitments profit or loss e income (IAS 39) cost cost (IAS 39) assets joint control cost (IAS 39) for trading fair value (IAS 39) liabilities given received (in € millions) Subsidiaries not included on a line-by- line basis ...... 3 - - 1 - 5 33 130 - - - - 3 - - Companies subject to joint control and their subsidiaries...... 1 - - 52 - - 54 1 - - - - - 21 85 Associates and their subsidiaries...... 153 - 3 359 - 4 856 668 - - - - 12 11 187 Board Members, general managers, key managers, and their related parties ...... - - - 8 - - - 15 - - - - 7 - 19 Pension Funds ...... - - - - - 2 - 222 - - - - 501 - - Total...... 157 - 3 420 - 11 943 1,036 - - - - 523 32 291 Shareholders (1...... ) 1 20 1 24 - - - 364 - - - - 2 - 1 Companies with which the Group has notable investment in and financial links(2)...... 2,231 45 238 3,650 - 86 - 1,465 - 3,885 - - 11 203 492 ______(1) Shareholders and their groups that hold a stake in our voting share capital exceeding 3% (calculated considering only shares owned or under management). See “Principal Shareholders.” (2) Companies that have at least two of the following: (i) hold a stake in Intesa Sanpaolo between 1% and the minimum threshold set out in regulations on the communication of significant shareholdings in listed companies; (ii) are an entity of the Group that holds a stake in our voting rights exceeding 10%; and (iii) the Group has a significant credit exposure towards them.
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During the years ended December 31, 2020, 2019 and 2018, the Group did not carry out any transactions that qualified as non-ordinary “more significant transactions” at non-market or non-standard conditions that would have resulted, in accordance with our RPT Regulations, in an obligation to publish a market disclosure document. Ordinary or recurring transactions entered into with related parties in 2020, 2019 and 2018 fall within the scope of the Group’s ordinary activities and are usually entered into on arm’s length terms in line with our internal procedures. Transactions with subsidiaries which are not consolidated on a line-by-line basis and transactions with associates reflect normal internal business activities of a multifunctional banking group such as the Group. Transactions during the applicable period undertaken with bank managers, their close family members and entities controlled by them, were attributable to the Group’s normal operations and were in compliance with applicable legislation. The scope of related parties considered for the tables has been adjusted to take account of the revised version of IAS 24 and consequently also includes the subsidiaries of the associates and the companies subject to joint control of Intesa Sanpaolo. For the year ended at December 31, 2020, with regard to companies carried at equity, adjustments were posted in the equity investments in Destination, Oval, Rainbow, Cassa di Risparmio di Fermo, Mir Capital, Matipay and RSCT Fund - Comparto Crediti. For pension funds benefiting the Group’s employees in which the Group companies are co-obliged by virtue of guarantees given, payments of immaterial amounts were made during the period for the settlement of the technical imbalance of the funds concerned. During 2019, adjustments to the counterparties Rainbow, Ideami and Mir Capital (consolidated according to the equity method) were posted. For pension funds benefiting the Group’s employees in which the Group companies are co-obliged by virtue of guarantees given, payments were made during the period for the settlement of the technical imbalance of the funds concerned. During 2018, no significative negative impacts deriving from equity investments valued at equity were recorded on the income statement relating to Class Digital Service S.r.l., Autostrada Pedemontana Lombarda S.p.A., Immobiliare Novoli S.p.A. and Varese Investimenti S.p.A. For pension funds benefitting the Group’s employees, we made payments for the settlement of a technical imbalance of the Cariplo Pension Fund for the employees of the Issuer. Allowances for risks and charges include the provisions made against any outstanding disputes. Loans and renewals were granted at market interest rates to Euromilano S.p.A. The maturity date of the €13 million loan by the Issuer to RCN Finanziaria S.p.A. was also extended. Transactions during the year undertaken with bank managers, their close family members and entities controlled by them, were attributable to the Group’s normal operations and were in compliance with applicable legislation. Moreover, transactions with subsidiaries which are not consolidated on a line-by-line basis and transactions with associates reflect normal internal business activities of a multifunctional banking group such as the Group.
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PRINCIPAL SHAREHOLDERS As of May 20, 2021 Intesa Sanpaolo’s capital stock totaled €10,084,445,147.92 and comprised 19,430,463,305 ordinary shares with no nominal value. Intesa Sanpaolo’s shares are listed on the Mercato Telematico Azionario. Principal shareholders The table below sets forth the principal shareholders of Intesa Sanpaolo (holders of ordinary shares exceeding 3.0% of the voting share capital) as of May 20, 2021.
% of O rdinary Shareholder(*) Ordinary shares shares Compagnia di San Paolo ...... 1,188.947,304 6.119% BlackRock Inc...... 972,416,733 5.005% Fondazione Cariplo ...... 767,029,267 3.948% ______(*) Figures updated based on the results from the register of shareholders and the latest communications received by us. None of the Shareholders could individually control Intesa Sanpaolo S.p.A. To the knowledge of Intesa Sanpaolo, there are no shareholder agreements.
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TERMS AND CONDITIONS [Redacted Text]
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SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY NOTES [Redacted Text]
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BOOK-ENTRY, DELIVERY AND FORM [Redacted Text]
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DESCRIPTION OF BOOK-ENTRY INTERESTS AND THE DEPOSIT AGREEMENT [Redacted Text]
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TRANSFER RESTRICTIONS [Redacted Text]
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TAXATION [Redacted Text]
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ERISA CONSIDERATIONS [Redacted Text]
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PLAN OF DISTRIBUTION [Redacted Text]
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LEGAL MATTERS Certain legal matters with respect to U.S. Federal and New York State and Italian law will be passed upon for us by White & Case LLP, our U.S. and Italian legal counsel. Certain legal matters with respect to U.S. Federal and New York State law will be passed upon for the Dealers by Clifford Chance LLP, legal counsel to the Dealers as to U.S. law and certain matters with respect to Italian law, including Italian tax law, will be passed upon for the Dealers by Clifford Chance Studio Legale Associato, legal counsel to the Dealers as to Italian law.
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INDEPENDENT AUDITORS The Consolidated Financial Statements of Intesa Sanpaolo Group as of and for the years ended December 31, 2020 and 2019, included elsewhere in this Offering Memorandum, have been audited by KPMG S.p.A., independent auditors, as stated in their reports appearing herein. KPMG S.p.A.’s registered office is Via Vittor Pisani 25, Milan, Italy and it is registered under No. 70623 in the Register of Accountancy Auditors (Registro dei Revisori Legali) held by the Italian Ministry of Economy and Finance (“MEF”) in compliance with the provisions of Legislative Decree No. 39, January 27, 2010. KPMG S.p.A., which was appointed to act as our external auditor for the period 2012-2020 on May 10, 2011, has no material interest in Intesa Sanpaolo or any companies of our Group. On April 30, 2019 we appointed EY S.p.A. as our external auditor for the period 2021-2029. EY S.p.A. has no material interest in Intesa Sanpaolo or any companies of our Group. EY S.p.A., with registered offices at via Lombardia 31, 00187 Rome, Italy, is registered under No. 70945 in the Register of Accountancy Auditors (Registro Revisori Legali) by the MEF, in compliance with the provisions of Legislative Decree No. 39 of January 27, 2010.
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GENERAL INFORMATION Intesa Sanpaolo is a bank under Italian banking law provisions set forth in the Consolidated Banking Act. It is registered on the national register of banks held by the Bank of Italy under No. 5361 and is the parent company of Intesa Sanpaolo Group registered on the national register of banking groups. Intesa Sanpaolo is registered with the Companies’ Registry of Turin under registration number 00799960158. Intesa Sanpaolo was created on January 1, 2007, following the merger by incorporation of Sanpaolo IMI with and into Banca Intesa. Authorization [Redacted Text] Registered office Intesa Sanpaolo’s registered office is at Piazza San Carlo 156, 10121 Turin and its telephone number is +39 0115551. Intesa Sanpaolo’s secondary office is at Via Monte di Pietà 8, 20121 Milan. Purpose The purpose of Intesa Sanpaolo is deposit taking and the carrying-on of all forms of lending activities, including through its subsidiaries. Intesa Sanpaolo may also, in compliance with laws and regulations applicable from time to time and subject to obtaining the required authorizations, provide all banking and financial services, including the establishment and management of open-ended and closed ended supplementary pension plans, as well as the performance of any other transactions that are incidental to, or connected with, the achievement of its objects. Listing [Redacted Text]
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APPENDIX A FORM OF FINAL TERMS [Redacted Text]
A-1
APPENDIX B [Redacted Text]
B-1
INDEX TO FINANCIAL STATEMENTS
F-1
Annex A
CONSOLIDATED RECONCILIATION STATEMENTS OF FIGURES APPEARING IN 2020 AUDITED FINANCIAL STATEMENTS AND F-PAGES TO THIS OFFERING MEMORANDUM
Page Attachments 2020 Introduction to Annex A...... A-2 Table 1: December 31, 2019 Balance Sheet reconciliation ...... A-4 Table 2: 2019 Income Statement Reconciliation ...... A-6 Table 3: 2020 Income Statement Reconciliation ...... A-8 Table 4: Balance Sheet Comparison, as restated for 2020 ...... A-9 Table 5: Income Statement Comparison, as restated for 2020...... A-11 Table 6: Reclassification of Balance Sheet ...... A-13 Table 7: Reclassification of Income Statement ...... A-16 Table 8: 2020 Unaudited Restated and Reclassified Financial Information ...... A-22 Table 9: 2020 Unaudited Restated and Reclassified Financial Information ...... A-23
ANNEX A-1
Introduction to Annex A: Consolidated Reconciliation Statements of Figures Appearing in 2020 Audited Consolidated Financial Statements and F-pages to this Offering Memorandum
Our Consolidated Financial Statements are prepared in accordance with IFRS as adopted by the European Union and in accordance with the instructions of the Bank of Italy set forth in Circular No. 262 of December 22, 2005, as amended. See “Presentation of Financial Information” in this Offering Memorandum for a general description of our Consolidated Financial Statements and of our Unaudited Restated and Reclassified Financial Information. This Annex A describes the restatements and reclassifications undertaken with respect to our 2020 Audited Consolidated Financial Statements and our 2019 Audited Consolidated Financial Statements to create our 2020 Unaudited Restated and Reclassified Financial Information and our 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020. As noted in “Presentation of Financial Information”, we restated (i) the income statement of our 2020 Audited Consolidated Financial Statements, (ii) the consolidated balance sheet of our 2019 Audited Consolidated Financial Statements and (iii) the income statement of our 2019 Audited Consolidated Financial Statements. A summary of the tables in this Annex A is below. December 31, 2019 Balance Sheet reconciliation: Table 1 illustrates the restatement to the balance sheet as at January 1, 2020, as a result of the inclusion in the Group of the company RBM Assicurazione Salute S.p.A. 2019 Income Statement Reconciliation: Table 2 illustrates the restatement to the income statement for 2019 as a result of the inclusion in the Group of the company RBM Assicurazione Salute S.p.A. and effect related to the fees due to Prelios following the UTP loans servicing agreement, effective from the end of 2019. 2020 Income Statement Reconciliation: Table 3 illustrates the restatement to income statement for 2020 as a result of the restatement referred to the economic results of the first four months of 2020 of RBM Assicurazione Salute S.p.A.. Balance Sheet Comparison, as restated for 2020: Table 4 presents the 2020 balance sheet as it appears in the 2020 Audited Consolidated Financial Statements (not restated, as presented in the F-pages) compared to the 2019 balance sheet as it appears in the 2019 Unaudited Consolidated Financial Statements (following the reclassifications done in Table 1).
Income Statement Comparison, as restated for 2020: Table 5 presents the 2020 and 2019 income statement as they appear in the 2020 Unaudited Consolidated Financial Statements (following the restatements done in Table 3).
Reclassification of Balance Sheet: Table 6 describes the reclassification to the balance sheet, which figures, as of December 31, 2020 were not restated and which figures, as of December 31, 2019, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or movement amount to different line items;
Reclassification of Income Statement: Table 7 describes the reclassification to the income statement, which figures, as of December 31, 2020, were restated and which figures, as of December 31, 2019, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or moving amount to different line items. 2020 Unaudited Restated and Reclassified Financial Information: Tables 8 and 9 present the resulting figures of the restatements done in Tables 1 and 3 and the reclassifications done in Tables 6 and 7. The balance sheet and income statement as so restated and reclassified appear in our discussion of the balance sheet and income statement in this Offering Memorandum in the 2020 Unaudited Restated and Reclassified Financial Information and the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020.
ANNEX A-2
Attachments
Table 1: December 31, 2019 Balance Sheet reconciliation Table 1 illustrates the restatement to the balance sheet as at December 31, 2019, as a result of the inclusion in the Group of the company RBM Assicurazione Salute S.p.A..
December 31, Changes in the 2019 scope of December 31, Assets Published consolidation(a) 2019 Restated (in € millions) 10. Cash and cash equivalents ...... 9,745 - 9,745 Financial assets measured at fair value through profit 20. or loss...... 49,414 - 49,414 a) financial assets held for trading...... 45,152 - 45,152 b) financial assets designated at fair value ...... 195 - 195 c) other financial assets mandatorily measured at fair value...... 4,067 - 4,067 Financial assets measured at fair value through other 30. comprehensive income ...... 72,410 - 72,410 Financial assets pertaining to insurance companies, 35. measured at fair value pursuant to IAS 39 ...... 168,202 31 168,233 40. Financial assets measured at amortized cost ...... 467,815 - 467,815 a) due from banks ...... 49,027 - 49,027 b) loans to customers ...... 418,788 - 418,788 Financial assets pertaining to insurance companies 45. measured at amortized cost pursuant to IAS 39 ...... 612 37 649 50. Hedgin g derivatives ...... 3,029 - 3,029 Fair value change of financial assets in hedged portfolios 60. (+/-)...... 1,569 - 1,569 Investments in associates and companies subject to joint 70. control ...... 1,240 - 1,240 80. Technical insurance reserves reassured with third parties.... 28 - 28 90. Property and equipment...... 8,878 4 8,882 100. Intangible assets...... 9,211 - 9,211 of which: - goodwill ...... 4,055 - 4,055 110. Tax assets ...... 15,467 9 15,476 a) current...... 1,716 - 1,716 b) deferred ...... 13,751 9 13,760 Non-current assets held for sale and discontinued 120. operations ...... 494 - 494 130. Other assets ...... 7,988 387 8,375 Total Assets ...... 816,102 468 816,570 ______(a) The restatement refers to the inclusion in the Group of the company RBM Assicurazione Salute S.p.A.
ANNEX A-3
December 31, Changes in the 2019 scope of December 31, Liabilities and Shareholders’ Equity Published consolidation(a) 2019 Restated (in € millions) 10. Financial liabilities measured at amortized cost...... 519,382 — 519,382 a) due to banks ...... 103,324 — 103,324 b) due to customers ...... 331,181 — 331,181 c) securities issued ...... 84,877 — 84,877 Financial liabilities pertaining to insurance companies 15. measured at amortized cost pursuant to IAS 39 ...... 826 — 826 20. Financial liabilities held for trading ...... 45,226 — 45,226 30. Financial liabilities designated at fair value...... 4 — 4 Financial liabilities pertaining to insurance companies 35. measured at fair value pursuant to IAS 39 ...... 75,935 — 75,935 40. Hedgin g derivatives ...... 9,288 — 9,288 Fair value change of financial liabilities in hedged portfolios 50. (+/-)...... 527 — 527 60. Tax liabilities...... 2,321 1 2,322 a) current ...... 455 — 455 b) deferred...... 1,866 1 1,867 Liabilities associated with non-current assets held for sale 70. and discontinued operations...... 41 — 41 80. Other liabilities ...... 12,070 52 12,122 90. Employee termination indemnities ...... 1,134 — 1,134 100. Allowances for risks and charges...... 3,997 1 3,998 a) commitments and guarantees given ...... 482 — 482 b) post-employment benefits ...... 232 — 232 c) other allowances for risks and charges ...... 3,283 1 3,284 110. Technical reserves ...... 89,136 107 89,243 120. Valuation reserves ...... -157 — -157 125. Valuation reserves pertaining to insurance companies ...... 504 — 504 130. Redeemable shares ...... - — - 140. Equity instruments ...... 4,103 — 4,103 150. Reserves...... 13,279 — 13,279 160. Share premium reserve...... 25,075 — 25,075 170. Share capital ...... 9,086 — 9,086 180. Treasury shares (-) ...... -104 — -104 190. Minority interests (+/-)...... 247 307 554 200. Net income (loss) (+/-)...... 4,182 — 4,182 Total Liabilities and Shareholders’ Equity ...... 816,102 468 816,570 ______(a) The restatement refers to the inclusion in the Group of the company RBM Assicurazione Salute S.p.A.
ANNEX A-4
Table 2: 2019 Income Statement Reconciliation Table 2 illustrates the restatement to income statement for 2019 as a result of the inclusion in the Group of the company RBM Assicurazione Salute S.p.A. and effect related to the fees due to Prelios following the UTP loans servicing agreement, effective from the end of 2019.
Change in the scope of consolidation Servicing UTP 2019 2019 Published (a) (b) Restated (millions of euro) 10. Interest and similar income ...... 10,193 — — 10,193 of which: interest income calculated using the effective interest rate method...... 10,565 — — 10,565 20. Interest and similar expense ...... -3,269 — — -3,269 30. Interest margin ...... 6,924 — — 6,924 40. Fee and commission income...... 9,658 — — 9,658 50. Fee and commission expense ...... -2,159 — — -2,159 60. Net fee and commission income ...... 7,499 — — 7,499 70. Dividend and similar income...... 117 — — 117 80. Profits (Losses) on trading ...... 506 — — 506 Fair value adjustments in hedge 90. accounting ...... -61 — — -61 Profits (Losses) on disposal or 100. repurchase of: 1,385 — — 1,385 a) financial assets measured at amortized cost...... 97 — — 97 b) financial assets measured at fair value through other comprehensive income ...... 1,218 — — 1,218 c) financial liabilities ...... 70 — — 70 Profits (Losses) on other financial assets and liabilities measured at 110. fair value through profit or loss...... 123 — — 123 a) financial assets and liabilities designated at fair value ...... -103 — — -103 b) other financial assets mandatorily measured at fair value...... 226 — — 226 Profits (Losses) on financial assets and liabilities pertaining to insurance 115. companies pursuant to IAS 39 ...... 3,991 — — 3,991 Net interest and other banking 120. income ...... 20,484 — — 20,484 Net losses/recoveries for credit risks 130. associated with: -2,201 — — -2,201 a) financial assets measured at amortized cost...... -2,175 — — -2,175 b) financial assets measured at fair value through other comprehensive income ...... -26 — — -26 Net losses/recoveries pertaining to insurance companies pursuant to 135. IAS39 ...... -9 — — -9 Profits (Losses) on changes in 140. contracts without derecognition ...... -6 — — -6 150. Net income from banking activities .. 18,268 — — 18,268 160. Net insurance premiums...... 10,147 441 — 10,588 170. Other net insurance income (expense) . -12,673 -357 — -13,030 Net income from banking and 180. insurance activities ...... 15,742 84 — 15,826 190. Administrative expenses: -9,692 -19 -98 -9,809 a) personnel expenses...... -5,825 -4 — -5,829 b) other administrative expenses ...... -3,867 -15 -98 -3,980 200. Net provisions for risks and charges .... -73 — — -73 a) commitments and guarantees given. 23 - — 23 b) other net provisions...... -96 — — -96 Net adjustments to / recoveries on 210. property and equipment ...... -523 — — -523
ANNEX A-5
Change in the scope of consolidation Servicing UTP 2019 2019 Published (a) (b) Restated (millions of euro) Net adjustments to / recoveries on 220. intangible assets ...... -692 — — -692 230. Other operating expenses (income)...... 774 — — 774 240. O perating expenses ...... -10,206 -19 -98 -10,323 Profits (Losses) on investments in associates and companies subject to 250. joint control ...... 53 — — 53 Valuation differences on property, equipment and intangible assets 260. measured at fair value ...... -13 — — -13 270. Goodwill impairment ...... - — — - Profits (Losses) on disposal of 280. investments...... 96 — — 96 Income (Loss) before tax from 290. continuing operations...... 5,672 65 -98 5,639 Taxes on income from continuing 300. operations ...... -1,564 -19 32 -1,551 Income (Loss) after tax from 310. continuing operations...... 4,108 46 -66 4,088 Income (Loss) after tax from 320. discontinued operations ...... 64 — — 64 330. Net income (loss) ...... 4,172 46 -66 4,152 340. Minority interests...... 10 -46 66 30 350. Parent Company’s net income (loss). 4,182 — — 4,182 ______(a) The restatement refers to the economic results of 2019 of RBM Assicurazione Salute S.p.A. (b) Effect related to the fees due to Prelios following the UTP loans servicing agreement, effective from the end of 2019.
ANNEX A-6
Table 3: 2020 Income Statement Reconciliation Table 3 illustrates the restatement to income statement for 2020 as a result of the restatement refers to the economic results of the first four months of 2020 of RBM Assicurazione Salute S.p.A. Changes in the scope of consolidation 2020 Published (a) 2020 Restated (millions of euro) 10. Interest and similar income 10,183 — 10,183 of which: interest income calculated using the effective interest rate method ...... 10,277 — 10,277 20. Interest and similar expense ...... -2,451 — -2,451 30. Interest margin ...... 7,732 — 7,732 40. Fee and commission income...... 10,312 — 10,312 50. Fee and commission expense ...... -2,334 — -2,334 60. Net fee and commission income ...... 7,978 — 7,978 70. Dividend and similar income...... 86 — 86 80. Profits (Losses) on trading ...... 628 — 628 90. Fair value adjustments in hedge accounting ...... 71 — 71 100. Profits (Losses) on disposal or repurchase of: 633 — 633 a) financial assets measured at amortized cost...... -193 — -193 b) financial assets measured at fair value through other comprehensive income ...... 870 — 870 c) financial liabilities ...... -44 — -44 Profits (Losses) on other financial assets and liabilities 110. measured at fair value through profit or loss ...... -9 — -9 a) financial assets and liabilities designated at fair value ..... 57 — 57 b) other financial assets mandatorily measured at fair value -66 — -66 Profits (Losses) on financial assets and liabilities pertaining 115. to insurance companies pursuant to IAS 39...... 3,463 — 3,463 120. Net interest and other banking income...... 20,582 — 20,582 130. Net losses/recoveries for credit risks associated with: -4,364 — -4,364 a) financial assets measured at amortized cost...... -4,356 — -4,356 b) financial assets measured at fair value through other comprehensive income ...... -8 — -8 Net losses/recoveries pertaining to insurance companies 135. pursuant to IAS39 ...... -81 — -81 Profits (Losses) on changes in contracts without 140. derecognition...... -29 — -29 150. Net income from banking activities ...... 16,108 — 16,108 160. Net insurance premiums...... 10,842 165 11,007 170. Other net insurance income (expense) ...... -12,802 -88 -12,890 180. Net income from banking and insurance activities...... 14,148 77 14,225 190. Administrative expenses: -12,160 -7 -12,167 a) personnel expenses ...... -7,562 -2 -7,564 b) other administrative expenses...... -4,598 -5 -4,603 200. Net provisions for risks and charges ...... -793 — -793 a) commitments and guarantees given ...... 4 — 4 b) other net provisions ...... -797 — -797 210. Net adjustments to / recoveries on property and equipment .. -578 — -578 220. Net adjustments to / recoveries on intangible assets...... -818 — -818 230. Other operating expenses (income)...... 3,347 — 3,347 240. O perating expenses ...... -11,002 -7 -11,009 Profits (Losses) on investments in associates and companies 250. subject to joint control ...... -16 — -16 Valuation differences on property, equipment and intangible 260. assets measured at fair value ...... -42 — -42 270. Goodwill impairment ...... -981 — -981 280. Profits (Losses) on disposal of investments ...... 101 — 101 290. Income (Loss) before tax from continuing operations ...... 2,208 70 2,278 300. Taxes on income from continuing operations ...... -59 -21 -80 310. Income (Loss) after tax from continuing operations ...... 2,149 49 2,198 320. Income (Loss) after tax from discontinued operations ...... 1,136 - 1,136 330. Net income (loss) ...... 3,285 49 3,334 340. Minority interests...... -8 -49 -57 350. Parent Company’s net income (loss)...... 3,277 - 3,277 ______(a) The restatement refers to the economic results of the first four months of 2020 of RBM Assicurazione Salute S.p.A.
ANNEX A-7
Table 4: Balance Sheet Comparison, as restated for 2020 Table 4 presents the 2020 balance sheet as it appears in the 2020 Audited Consolidated Financial Statements (not restated, as presented in the F-pages) compared to the 2019 balance sheet as it appears in the 2019 Unaudited Consolidated Financial Statements (following the reclassifications done in Table 1).
Assets 31.12.2020 31.12.2019 CHANGES Published Restated amount % (millions of euro) 10. Cash and cash equivalents ...... 9,814 9,745 69 0.7 Financial assets measured at fair value through profit 20. or loss ...... 58,246 49,414 8,832 17.9 a)financial assets held for trading ...... 53,165 45,152 8,013 17.7 b)financial assets designated at fair value...... 3 195 -192 -98.5 c) other financial assets mandatorily measured at fair value ...... 5,078 4,067 1,011 24.9 Financial assets measured at fair value through other 30. comprehensive income...... 57,858 72,410 -14,552 -20.1 Financial assets pertaining to insurance companies, 35. measured at fair value pursuant to IAS 39...... 177,170 168,233 8,937 5.3 40. Financial assets measured at amortized cost ...... 615,260 467,815 147,445 31.5 a)due from banks ...... 110,095 49,027 61,068 b)loans to customers ...... 505,165 418,788 86,377 20.6 Financial assets pertaining to insurance companies 45. measured at amortized cost pursuant to IAS 39 ...... 1,211 649 562 86.6 50. Hedgin g derivatives ...... 1,134 3,029 -1,895 -62.6 Fair value change of financial assets in hedged 60. portfolios (+/-) ...... 2,400 1,569 831 53.0 Investments in associates and companies subject to 70. joint control ...... 1,996 1,240 756 61.0 Technical insurance reserves reassured with third 80. parties ...... 93 28 65 90. Property and equipment...... 10,850 8,882 1,968 22.2 100. Intangible assets...... 8,194 9,211 -1,017 -11.0 of which: - goodwill ...... 3,154 4,055 -901 -22.2 110. Tax assets ...... 19,503 15,476 4,027 26.0 a)current ...... 2,326 1,716 610 35.5 b)deferred...... 17,177 13,760 3,417 24.8 Non-current assets held for sale and discontinued 120. operations...... 28,702 494 28,208 130. Other assets ...... 10,183 8,375 1,808 21.6 Total assets ...... 1,002,614 816,570 186,044 22.8
ANNEX A-8
Liabilities and Shareholders’ Equity 31.12.2020 31.12.2019 CHANGES Published Restated amount % (millions of euro) 10. Financial liabilities measured at amortized cost...... 630,146 519,382 110,764 21.3 a)due to banks ...... 115,947 103,324 12,623 12.2 b) due to customers ...... 422,365 331,181 91,184 27.5 c) securities issued ...... 91,834 84,877 6,957 8.2 Financial liabilities pertaining to insurance companies 15. measured at amortized cost pursuant to IAS 39 ...... 1,935 826 1,109 20. Financial liabilities held for trading ...... 59,033 45,226 13,807 30.5 30. Financial liabilities designated at fair value...... 3,032 4 3,028 Financial liabilities pertaining to insurance companies 35. measured at fair value pursuant to IAS 39...... 77,207 75,935 1,272 1.7 40. Hedgin g derivatives ...... 7,088 9,288 -2,200 -23.7 Fair value change of financial liabilities in hedged 50. portfolios (+/-) ...... 733 527 206 39.1 60. Tax liabilities...... 3,029 2,322 707 30.4 a) current ...... 284 455 -171 -37.6 b) deferred...... 2,745 1,867 878 47.0 Liabilities associated with non-current assets held for 70. sale and discontinued operations ...... 35,676 41 35,635 80. Other liabilities ...... 14,439 12,122 2,317 19.1 90. Employee termination indemnities ...... 1,200 1,134 66 5.8 100. Allowances for risks and charges...... 5,964 3,998 1,966 49.2 a) commitments and guarantees given ...... 626 482 144 29.9 b) post-employment benefits ...... 324 232 92 39.7 c) other allowances for risks and charges ...... 5,014 3,284 1,730 52.7 110. Technical reserves ...... 96,811 89,243 7,568 8.5 120. Valuation reserves ...... -515 -157 358 125. Valuation reserves pertaining to insurance companies .. 809 504 305 60.5 130. Redeemable shares ...... - - - 140. Equity instruments ...... 7,441 4,103 3,338 81.4 150. Reserves...... 17,461 13,279 4,182 31.5 160. Share premium reserve...... 27,444 25,075 2,369 9.4 170. Share capital ...... 10,084 9,086 998 11.0 180. Treasury shares (-) ...... -130 -104 26 25.0 190. Minority interests (+/-)...... 450 554 -104 -18.8 200. Net income (loss) (+/-)...... 3,277 4,182 -905 -21.6
Total liabilities and shareholders’ equity ...... 1,002,614 816,570 186,044 22.8
ANNEX A-9
Table 5: Income Statement Comparison, as restated for 2020 Table 5 presents the 2020 and 2019 income statement as they appear in the 2020 Unaudited Consolidated Financial Statements (following the restatements done in Table 2).
2020 2019 CHANGES Restated Restated amount % (millions of euro) 10. Interest and similar income ...... 10,183 10,193 -10 -0.1 of which: interest income calculated using the effective interest rate method ...... 10,277 10,565 -288 -2.7 20. Interest and similar expense ...... -2,451 -3,269 -818 -25.0 30. Interest margin ...... 7,732 6,924 808 11.7 40. Fee and commission income...... 10,312 9,658 654 6.8 50. Fee and commission expense ...... -2,334 -2,159 175 8.1 60. Net fee and commission income ...... 7,978 7,499 479 6.4 70. Dividend and similar income...... 86 117 -31 -26.5 80. Profits (Losses) on trading ...... 628 506 122 24.1 90. Fair value adjustments in hedge accounting ...... 71 -61 132 100. Profits (Losses) on disposal or repurchase of: ...... 633 1,385 -752 -54.3 a) financial assets measured at amortized cost...... -193 97 -290 b) financial assets measured at fair value through other comprehensive income ...... 870 1,218 -348 -28.6 c) financial liabilities ...... -44 70 -114 Profits (Losses) on other financial assets and liabilities 110. measured at fair value through profit or loss ...... -9 123 -132 a) financial assets and liabilities designated at fair value ...... 57 -103 160 b) other financial assets mandatorily measured at fair value ...... -66 226 -292 Profits (Losses) on financial assets and liabilities 115. pertaining to insurance companies pursuant to IAS 39. 3,463 3,991 -528 -13.2 120. Net interest and other banking income...... 20,582 20,484 98 0.5 130. Net losses/recoveries for credit risks associated with: -4,364 -2,201 2,163 98.3 a) financial assets measured at amortized cost...... -4,356 -2,175 2,181 b) financial assets measured at fair value through other comprehensive income ...... -8 -26 -18 -69.2 Net losses/recoveries pertaining to insurance 135. companies pursuant to IAS39 ...... -81 -9 72 Profits (Losses) on changes in contracts without 140. derecognition...... -29 -6 23 150. Net income from banking activities ...... 16,108 18,268 -2,160 -11.8 160. Net insurance premiums...... 11,007 10,588 419 4.0 170. Other net insurance income (expense) ...... -12,890 -13,030 -140 -1.1 Net income from banking and insurance 180. activities ...... 14,225 15,826 -1,601 -10.1 190. Administrative expenses: -12,167 -9,809 2,358 24.0 a) personnel expenses ...... -7,564 -5,829 1,735 29.8 b) other administrative expenses ...... -4,603 -3,980 623 15.7 200. Net provisions for risks and charges ...... -793 -73 720 a) commitments and guarantees given ...... 4 23 -19 -82.6 b) other net provisions ...... -797 -96 701 Net adjustments to / recoveries on property and 210. equipment...... -578 -523 55 10.5 220. Net adjustments to / recoveries on intangible assets...... -818 -692 126 18.2 230. Other operating expenses (income)...... 3,347 774 2,573 240. O perating expenses ...... -11,009 -10,323 686 6.6 Profits (Losses) on investments in associates and 250. companies subject to joint control...... -16 53 -69 Valuation differences on property, equipment and 260. intangible assets measured at fair value...... -42 -13 29 270. Goodwill impairment ...... -981 - 981 280. Profits (Losses) on disposal of investments ...... 101 96 5 5.2 Income (Loss) before tax from continuing 290. operations ...... 2,278 5,639 -3,361 -59.6 300. Taxes on income from continuing operations ...... -80 -1,551 -1,471 -94.8 Income (Loss) after tax from continuing 310. operations ...... 2,198 4,088 -1,890 -46.2 320. Income (Loss) after tax from discontinued operations ... 1,136 64 1,072
ANNEX A-10
2020 2019 CHANGES Restated Restated amount % (millions of euro) 330. Net income (loss) ...... 3,334 4,152 -818 -19.7 340. Minority interests...... -57 30 -87 350. Parent Company’s net income (loss)...... 3,277 4,182 -905 -21.6
ANNEX A-11
Table 6: Reclassification of Balance Sheet Table 6 describes the reclassification to the balance sheet, which figures, as of December 31, 2020 were not restated and which figures, as of December 31, 2019, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or movement amount to different line items.
31.12.2020 31.12.2019 Assets Restated (millions of euro) Due from banks 108,040 47,170 Financial assets measured at amortized cost - Due from Caption 40a (partial) banks...... 108,015 47,164 Caption 20a (partial) Financial assets held for trading - Due from banks...... — — Financial assets designated at fair value – Due Caption 20b (partial) from banks ...... — — Other financial assets mandatorily measured at fair value - Caption 20c (partial) Due from banks ...... 25 6 Financial assets measured at fair value through other Caption 30 (partial) comprehensive income - Due from banks ...... — — Loans to customers 461,572 395,229 Loans to customers measured at amortized cost 460,143 394,093 Financial assets measured at amortized cost - Loans to Caption 40b (partial) customers ...... 452,918 388,881 Financial assets measured at amortized cost - Loans to Caption 40b (partial) customers (transfer of non-trade receivables) ...... — —670 Financial assets measured at amortized cost - Debt securities (public entities, non-financial companies and Caption 40b (partial) others) ...... 7,225 5,882 Loans to customers at fair value through other comprehensive income and through profit or loss 1,429 1,136 Financial assets held for trading - Loans to Caption 20a (partial) customers ...... 21 24 Financial assets designated at fair value - Loans to Caption 20b (partial) customers ...... — — Other financial assets mandatorily measured at fair value - Caption 20c (partial) Loans to customers ...... 1,135 748 Financial assets measured at fair value through other Caption 30 (partial) comprehensive income - Loans to customers ...... 273 364 Financial assets measured at amortized cost which do not constitute loans 47,102 25,888 Financial assets measured at amortized cost - Debt Caption 40a (partial) securities (banks) ...... 2,080 1,863 Financial assets measured at amortized cost - Debt securities (governments, financial and insurance Caption 40b (partial) companies) ...... 45,022 24,025 Financial assets at fair value through profit or loss 57,065 48,636 Caption 20a (partial) Financial assets held for trading ...... 53,143 45,128 Financial assets designated at fair value - Caption 20b (partial) Debt securities ...... 3 195 Other financial assets mandatorily measured at Caption 20c (partial) fair value ...... 3,919 3,313 Financial assets at fair value through other comprehensive income 57,585 72,046 Financial assets measured at fair value through other Caption 30 (partial) comprehensive income...... 57,585 72,046 Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39 177,170 168,233 Financial assets pertaining to insurance companies Caption 35 measured at fair value pursuant to IAS 39...... 177,170 168,233 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39 1,211 649 Financial assets pertaining to insurance companies Caption 45 measured at amortized cost pursuant to IAS 39 ...... 1,211 649 Investments in associates and companies subject to joint control 1,996 1,240 Investments in associates and companies subject to joint Caption 70 control...... 1,996 1,240 Property, equipment and intangible assets 19,044 17,157 Assets owned 17,238 15,659 Caption 90 (partial) Property and equipment ...... 9,044 7,384
ANNEX A-12
31.12.2020 31.12.2019 Assets Restated (millions of euro) Caption 100 Intangible assets ...... 8,194 9,211 Intangible assets (concession rights - intangible Caption 100 (partial) component) ...... — —936 Rights of use acquired under leases 1,806 1,498 Caption 90 (partial) Property and equipment ...... 1,806 1,498 Tax assets 19,503 15,476 Caption 110 Tax assets ...... 19,503 15,476 Non-current assets held for sale and discontinued operations 28,702 494 Non-current assets held for sale and discontinued Caption 120 operations...... 28,702 494 Other assets 23,624 24,352 Caption 10 Cash and cash equivalents...... 9,814 9,745 Financial assets measured at amortized cost - Loans to + Caption 40b (partial) customers (transfer of non-trade receivables) ...... — 670 Caption 50 Hedgin g derivatives...... 1,134 3,029 Fair value change of financial assets in hedged portfolios Caption 60 (+/-) ...... 2,400 1,569 Technical insurance reserves reassured with Caption 80 third parties ...... 93 28 Intangible assets (concession rights - intangible Caption 100 (partial) component) ...... — 936 Caption 130 Other assets...... 10,183 8,375 Total assets ...... 1,002,614 816,570
ANNEX A-13
Liabilities 31.12.2020 31.12.2019 Restated (millions of euro) Due to banks at amortized cost 115,943 103,316 Caption 10 a) Financial liabilities measured at amortized cost - Due to banks ..... 115,947 103,324 Financial liabilities measured at amortized cost - Due to banks (of - Caption 10 a) (partial) which lease payables) ...... -4 -8 Due to customers at amortized cost and securities issued 512,463 414,578 Caption 10 b) Financial liabilities measured at amortized cost - Due to customers 422,365 331,181 Caption 10 c) Financial liabilities measured at amortized cost - Securities issued. 91,834 84,877 Financial liabilities measured at amortized cost - Due to customers - Caption 10 b) (partial) (of which lease payables)...... -1,736 -1,480 Financial liabilities held for trading 59,033 45,226 Caption 20 Financial liabilities held for trading ...... 59,033 45,226 Financial liabilities designated at fair value 3,032 4 Caption 30 Financial liabilities designated at fair value ...... 3,032 4 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39 1,928 818 Financial liabilities pertaining to insurance companies measured at Caption 15 amortized cost pursuant to IAS 39 ...... 1,935 826 Financial liabilities pertaining to insurance companies measured at - Caption 15 (partial) amortized cost pursuant to IAS 39 (of which lease payables) ... -7 -8 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39 77,207 75,935 Financial liabilities pertaining to insurance companies measured at Caption 35 fair value pursuant to IAS 39 ...... 77,207 75,935 Tax liabilities 3,029 2,322 Caption 60 Tax liabilities ...... 3,029 2,322 Liabilities associated with non-current assets held for sale and discontinued operations 35,676 41 Liabilities associated with non-current assets held for sale and Caption 70 discontinued operations ...... 35,676 41 Other liabilities 24,007 23,433 Caption 40 Hedging derivatives...... 7,088 9,288 Caption 50 Fair value change of financial liabilities in hedged portfolios (+/-) . 733 527 Caption 80 Other liabilities ...... 14,439 12,122 Financial liabilities measured at amortized cost - Due to banks (of Caption 10 a) (partial) which lease payables) ...... 4 8 Financial liabilities measured at amortized cost - Due to customers Caption 10 b) (partial) (of which lease payables)...... 1,736 1,480 Financial liabilities pertaining to insurance companies measured at Caption 15 (partial) amortized cost pursuant to IAS 39 (of which lease payables) ... 7 8 Technical reserves 96,811 89,243 Caption 110 Technical reserves...... 96,811 89,243 Allowances for risks and charges 7,164 5,132 Caption 90 Employee termination indemnities...... 1,200 1,134 Allowances for risks and charges - Loan commitments and Caption 100 a) guarantees given ...... 626 482 Caption 100 b) Allowances for risks and charges - Post-employment benefits ...... 324 232 Allowances for risks and charges - Other allowances for risks and Caption 100 c) charges ...... 5,014 3,284 Share capital 10,084 9,086 Caption 170 Share capital ...... 10,084 9,086 Reserves 44,775 38,250 Caption 130 Redeemable shares ...... - - Caption 150 Reserves...... 17,461 13,279 Caption 160 Share premium reserve...... 27,444 25,075 - Caption 180 Treasury shares...... -130 -104 Valuation reserves -515 -157 Caption 120 Valuation reserves...... -515 -157 Valuation reserves pertaining to insurance companies 809 504 Caption 125 Valuation reserves pertaining to insurance companies ...... 809 504 Equity instruments 7,441 4,103 Caption 140 Equity instruments ...... 7,441 4,103 Minority interests 450 554 Caption 190 Minority interests ...... 450 554 Net income (loss) 3,277 4,182 Caption 200 Net income (loss) (+/-) ...... 3,277 4,182 Total Liabilities and Shareholders’ Equity ...... 1,002,614 816,570
ANNEX A-14
Table 7: Reclassification of Income Statement Table 7 describes the reclassification to the income statement, which figures, as of December 31, 2020, were restated and which figures, as of December 31, 2019, were restated to provide a more immediate understanding
ANNEX A-15
of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or moving amount to different line items.
Captions 2020 2019 Restated (millions of euro) Net interest income 7,783 7,005 Caption 30 Interest margin ...... 7,732 6,924 Interest margin - Intragroup transactions between Banks/Other companies - Caption 30 (partial) and the Insurance Segment ...... -32 -31 Interest margin - Reclassification of operations of entities not subject to - Caption 30 (partial) management and coordination...... 81 115 - Caption 30 (partial) Interest margin (Effect of purchase price allocation) ...... 77 91 Dividend and similar income on equity instruments held for trading, designated at fair value through profit or loss or for which the option has been exercised of their designation at fair value through other comprehensive income (Dividends received and paid within securities - Caption 70 (partial) lending operations) ...... 4 15 + Caption 80 (partial) Hedging swap differentials ...... -61 -79 + Caption 190 a) Personnel expenses (Time value employee termination indemnities and (partial) other) ...... -18 -28 Net provisions for risks and charges (Time value allowances for risks and + Caption 200 (partial) charges)...... - -2 Net fee and commission income 8,303 7,962 Caption 60 Net fee and commission income ...... 7,978 7,499 - Caption 60 (partial) Net fee and commission income - Contribution of insurance business ...... 235 290 Net fee and commission income - Reclassification of operations of - Caption 60 (partial) entities not subject to management and coordination ...... 3 25 - Caption 60 (partial) Net fee and commission income (Effect of purchase price allocation) ...... 1 - + Caption 80 (partial) Profits (Losses) on trading (Placement of Certificates) ...... 39 197 Profits (Losses) on other financial assets and liabilities measured at fair + Caption 110 a) value through profit or loss (a) financial assets and liabilities (partial) designated at fair value (Placement of Certificates) ...... 93 - Profits (Losses) on financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily measured + Caption 110 b) at fair value (Return components of insurance policies taken out for the (partial) benefit of financial advisor networks)...... 3 6 + Caption 190 b) (partial) Other administrative expenses (Recovery of other expenses) ...... -49 -55 Income from insurance business 1,353 1,268 Profits (Losses) on financial assets and liabilities pertaining to insurance Caption 115 companies pursuant to IAS 39...... 3,463 3,991 Caption 160 Net insurance premiums...... 11,007 10,588 Caption 170 Other net insurance income (expense)...... -12,890 -13,030 Interest margin - Intragroup transactions between Banks/Other companies + Caption 30 (partial) and the Insurance Segment ...... 32 31 + Caption 60 (partial) Net fee and commission income - Contribution of insurance business ...... -235 -290 Intragroup transactions between Banks/Other companies and the + Caption 80 (partial) Insurance Segment...... 42 -14 Impairment of securities through other comprehensive income - share + Caption 135 (partial) attributable to insured parties ...... -63 -6 + Caption 210 (partial) Net adjustments to / recoveries on property and equipment ...... -3 -2 Profits (Losses) on financial assets and liabilities designated at fair value 1,572 1,928 Caption 80 Profits (Losses) on trading ...... 628 506 Caption 90 Fair value adjustments in hedge accounting ...... 71 -61 Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss (a) financial assets and liabilities Caption 110 a) designated at fair value ...... 57 -103 Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily Caption 110 b) measured at fair value ...... -66 226 Profits (Losses) on disposal or repurchase of financial assets measured at Caption 100 b) fair value through other comprehensive income...... 870 1,218 Caption 100 c) Profits (Losses) on disposal or repurchase of financial liabilities ...... -44 70 Dividend and similar income on equity instruments held for trading, designated at fair value through profit or loss or for which the option has been exercised of their designation at fair value through other + Caption 70 (partial) comprehensive income (including dividends on UCIs)...... 87 117 Dividend and similar income on equity instruments held for trading, designated at fair value through profit or loss or for which the option has been exercised of their designation at fair value through other comprehensive income (Dividends received and paid within securities - Caption 70 (partial) lending operations) ...... -4 -15 - Caption 80 (partial) Profits (Losses) on trading (Placement of Certificates) ...... -39 -197 Intragroup transactions between Banks/Other companies and the - Caption 80 (partial) Insurance Segment...... -42 14 - Caption 80 (partial) Hedging swap differentials ...... 61 79
ANNEX A-16
Captions 2020 2019 Restated (millions of euro) Profits (losses) on trading (Components relating to Profits (losses) on investments in associates and companies subject to joint control - Caption 80 (partial) (carried at equity) ...... -47 - - Caption 80 (partial) Profits (Losses) on trading (Effect of purchase price allocation) ...... 18 - Fair value adjustments in hedge accounting - Reclassification of - Caption 90 (partial) operations of entities not subject to management and coordination ...... 4 11 Profits (Losses) on disposal or repurchase of financial assets measured at + Caption 100 a) amortized cost - Debt securities (governments, financial and insurance (partial) companies) - Effect associated with profits (losses) on trading ...... 87 103 Profits (Losses) on disposal or repurchase of financial assets measured at - Caption 100 b) fair value through other comprehensive income (Effect of purchase (partial) price allocation) ...... -4 - Profits (Losses) on other financial assets and liabilities measured at fair - Caption 110 a) value through profit or loss (a) financial assets and liabilities (partial) designated at fair value (Placement of Certificates) ...... -93 - Profits (Losses) on financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily measured - Caption 110 b) at fair value (Return components of insurance policies taken out for the (partial) benefit of financial advisor networks)...... -12 -23 Profits (Losses) on other financial assets and liabilities measured at fair - Caption 110 b) value through profit or loss (b) other financial assets mandatorily (partial) measured at fair value (Charges concerning the banking industry)...... 31 -13 Profits (Losses) on disposal or repurchase of financial liabilities - - Caption 100 c) Reclassification of operations of entities not subject to management (partial) and coordination (Effect of purchase price allocation)...... — -13 + Caption 200 b) Net provisions for risks and charges (Charges related to the (partial) sale of NTV) ...... — 9 Other operating expenses (income) (Trading and valuation of other + Caption 230 (partial) assets) ...... 9 —
Captions 2020 2019 Restated (millions of euro) Other operating income (expenses) 12 4 Caption 70 Dividend and similar income ...... 86 117 Caption 230 Other operating expenses (income) ...... 3,347 774 Interest margin - Reclassification of operations of entities not subject to + Caption 30 (partial) management and coordination...... -81 -115 Net fee and commission income - Reclassification of operations of + Caption 60 (partial) entities not subject to management and coordination ...... -3 -25 Dividend and similar income on equity instruments held for trading, designated at fair value through profit or loss or for which the option has been exercised of their designation at fair value through other - Caption 70 (partial) comprehensive income (including dividends on UCIs)...... -87 -117 Profits (losses) on trading (Components relating to Profits (losses) on investments in associates and companies subject to joint control (carried + Caption 80 (partial) at equity) ...... 47 — Fair value adjustments in hedge accounting - Reclassification of + Caption 90 (partial) operations of entities not subject to management and coordination ...... -4 -11 Profits (Losses) on financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily measured at + Caption 110 b) fair value (Return components of insurance policies taken out for the (partial) benefit of financial advisor networks)...... - - - Caption 230 (partial) Other operating expenses (income) (Recovery of expenses) ...... -19 -16 - Caption 230 (partial) Other operating expenses (income) (Recovery of indirect taxes) ...... -845 -738 - Caption 230 (partial) Other operating expenses (income) (Non -recurring expenses) ...... 18 50 - Caption 230 (partial) Other operating expenses (income) (Valuation effects of other assets) ..... 66 25 Other operating expenses (income) (Impairment losses on repurchased - Caption 230 (partial) property and equipment) ...... — — Other operating expenses (income) (Profits/losses on disposal of - Caption 230 (partial) repurchased property and equipment) ...... — — - Caption 230 (partial) Other operating expenses (income) (Charges/revenues from integration) .. — -1 - Caption 230 (partial) Other operating expenses (income) (Effect of purchase price allocation) .. -2,505 — Other operating expenses (income) (Trading and valuation of other - Caption 230 (partial) assets) ...... -9 — Profits (losses) on investments in associates and companies subject to + Caption 250 (partial) joint control (carried at equity) ...... 1 61 Operating income ...... 19,023 18,167 Personnel expenses ...... -6,139 -5,748 Caption 190 a) Personnel expenses ...... -7,564 -5,829 - Caption 190 a) (partial) Personnel expenses (Charges for integration and exit incentives) ...... 1,406 52
ANNEX A-17
Captions 2020 2019 Restated (millions of euro) - Caption 190 a) Personnel expenses (Time value employee termination indemnities and (partial) other) ...... 18 28 + Caption 230 (partial) Other operating expenses (income) (Recovery of expenses) 1 1 Other administrative expenses -2,679 -2,601 Caption 190 b) Other administrative expenses ...... -4,603 -3,980 - Caption 190 b) (partial) Other administrative expenses (Charges for integration)...... 269 45 - Caption 190 b) Other administrative expenses (Resolution fund and deposit guarantee (partial) scheme) ...... 710 526 - Caption 190 b) (partial) Other administrative expenses (Recovery of other expenses)...... 49 55 - Caption 190 b) (partial) Other administrative expenses (Effect of purchase price allocation)...... 33 - + Caption 230 (partial) Other operating expenses (income) (Recovery of indirect taxes) ...... 845 738 + Caption 230 (partial) Other operating expenses (income) (Recovery of expenses) ...... 18 15 Adjustments to property, equipment and intangible assets ...... -1,153 -1,058 Caption 210 Net adjustments to / recoveries on property and equipment ...... -578 -523 Caption 220 Net adjustments to / recoveries on intangible assets...... -818 -692 - Caption 210 (partial) Net adjustments to / recoveries on property and equipment ...... 3 2 Net adjustments to / recoveries on property and equipment (Charges for - Caption 210 (partial) integration) ...... 27 20 Net adjustments to / recoveries on property and equipment - Caption 210 (partial) (Impairment) ...... 7 4 Net adjustments to / recoveries on property and equipment (Effect of - Caption 210 (partial) purchase price allocation)...... -2 - Net adjustments to / recoveries on intangible assets (Entities not subject - Caption 220 (partial) to management and coordination - concession rights) ...... 14 19 Net adjustments to / recoveries on intangible assets (Charges for - Caption 220 (partial) integration) ...... 117 48 - Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Impairment) ...... - 3 Net adjustments to/recoveries on intangible assets (Effect of purchase - Caption 220 (partial) price allocation) ...... 77 61 Operating costs ...... -9,971 -9,407 Operating margin ...... 9,052 8,760 Net adjustments to loans...... -4,214 -2,089 Caption 140 Profits/losses from changes in contracts without derecognition ...... -29 -6 Net provisions for risks and charges for credit risk related to Caption 200 a) commitments and guarantees given ...... 4 23 + Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured at (partial) amortized cost – Loans ...... -274 -14 Profits (Losses) on disposal or repurchase of financial assets measured at + Caption 100 a) amortized cost - Debt securities (public entities, non-financial companies (partial) and others) ...... -1 8 + Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured at (partial) amortized cost - Loans (Effect of purchase price allocation)...... 34 28 + Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost – Loans ...... -4,356 -2,119 Net losses/recoveries for credit risk associated with financial assets + Caption 130 a) measured at amortized cost - Debt securities (public entities, non- (partial) financial companies and others)...... - -15 - Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost (Charges for integration)...... 21 6 - Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost - (Effect of purchase price allocation)...... 428 — + Caption 130 b) Net losses/recoveries for credit risk associated with financial assets (partial) measured at fair value through other comprehensive income – Loans ...... -7 — + Caption 200 b) Net provisions for risks and charges (Provisions for non-recurring (partial) expenses) ...... -34 —
ANNEX A-18
Captions 2020 2019 Restated (millions of euro) Other net provisions and net impairment losses on other assets -346 -254 Net losses/recoveries pertaining to insurance companies pursuant to IAS Caption 135 39 ...... -81 -9 Valuation differences on property, equipment and intangible assets Caption 260 measured at fair value ...... -42 -13 Caption 200 b) Net provisions for risks and charges - Other net provisions...... -797 -96 Profits (Losses) on financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily measured at + Caption 110 b) fair value (Return components of insurance policies taken out for the (partial) benefit of financial advisor networks) ...... 9 17 Net losses/recoveries for credit risk associated with financial assets measured at amortized cost - Debt securities (governments, financial and + Caption 130 a) (partial) insurance companies)...... 1 -41 Net losses/recoveries for credit risk associated with financial assets + Caption 130 a) (partial) measured at amortized cost - Debt securities (Banks) ...... -1 - Net losses/recoveries for credit risk associated with financial assets + Caption 130 b) measured at fair value through other comprehensive income - Debt (partial) securities ...... -1 -26 Impairment of securities through other comprehensive income - share - Caption 135 (partial) attributable to insured parties...... 63 6 Net provisions for risks and charges (Time value allowances for risks - Caption 200 b) (partial) and charges)...... - 2 Net provisions for risks and charges (Effect of purchase - Caption 200 b) (partial) price allocation) ...... 109 — Net provisions for risks and charges (Charges related to the sale of - Caption 200 b) (partial) NTV)...... — -9 Net provisions for risks and charges - Other net provisions (Charges for - Caption 200 b) (partial) integration) ...... 450 -29 Net provisions for risks and charges - Other net provisions (settlement of - Caption 200 b) (partial) tax litigation)...... 5 -9 Net provisions for risks and charges (Provisions for non-recurring - Caption 200 b) (partial) expenses)...... 34 — Net adjustments to / recoveries on property and + Caption 210 (partial) equipment (Impairment) ...... -7 -4 + Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Impairment) ...... — -3 Other operating expenses (income) (Impairment losses on repurchased + Caption 230 (partial) property and equipment)...... — — Other operating expenses (income) (Valuation effects of + Caption 230 (partial) other assets) ...... -66 -25 Profits (Losses) on investments in associates and companies subject to joint control (Adjustments/recoveries due to impairment of + Caption 250 (partial) associates) ...... -22 -15 Other income (expenses)...... 64 55 Profits (Losses) on investments in associates and companies subject to Caption 250 joint control ...... -16 53 Caption 280 Profits (Losses) on disposal of investments ...... 101 96 Profits (Losses) on disposal or repurchase of financial assets measured at amortized cost - Debt securities (governments, financial and insurance Caption 100 a) (partial) companies) ...... 82 103 Profits (Losses) on disposal or repurchase of financial assets measured at Caption 100 a) (partial) amortized cost - Debt securities (Banks) ...... — — Profits (Losses) on disposal or repurchase of financial assets measured at amortized cost - Debt securities (governments, financial and insurance - Caption 100 a) (partial) companies) - (Effect of purchase price allocation) ...... — — Profits (Losses) on disposal or repurchase of financial assets measured at amortized cost - Debt securities (governments, financial and insurance - Caption 100 a) (partial) companies) - Effect associated with profits (losses) on trading ...... -87 -103 + Caption 200 b) Net provisions for risks and charges - Other net provisions (settlement of (partial) tax litigation)...... -5 9 Net adjustments to / recoveries on intangible assets (Entities not subject + Caption 220 (partial) to management and coordination - concession rights) ...... -14 -19 Other operating expenses (income) (Profits/losses on disposal of + Caption 230 (partial) repurchased property and equipment)...... — — + Caption 230 (partial) Other operating expenses (income) (Non -recurring expenses) ...... -18 -50 Profits (Losses) on investments in associates and companies subject to - Caption 250 (partial) joint control (carried at equity)...... -1 -61 Profits (Losses) on investments in associates and companies subject to - Caption 250 (partial) joint control (Adjustments/recoveries due to impairment of associates) ... 22 15 Profits (Losses) on disposal of investments (Effect of purchase price - Caption 280 (partial) allocation) ...... - 12 Income (Loss) from discontinued operations 1,163 88 Caption 320 Income (Loss) after tax from discontinued operations...... 1,136 64 + Caption 320 (partial) Income (Loss) after tax from discontinued operations (Taxes)...... 27 24 Gross income (loss) ...... 5,719 6,560 Taxes on income ...... -1,360 -1,825
ANNEX A-19
Captions 2020 2019 Restated (millions of euro) Caption 300 Taxes on income from continuing operations...... -80 -1,551 - Caption 300 (partial) Taxes on income from continuing operations (Charges for integration) ... -729 -35 Taxes on income from continuing operations (Effect of purchase price - Caption 300 (partial) allocation) ...... -226 -62 Taxes on income from continuing operations (Resolution fund and - Caption 300 (partial) deposit guarantee scheme) ...... -229 -153 Taxes on income from continuing operations (Impairment of goodwill - Caption 300 (partial) and other intangible assets) ...... -69 - - Caption 320 (partial) Income (Loss) after tax from discontinued operations (Taxes)...... -27 -24 Charges (net of tax) for integration and exit incentives...... -1,561 -106 Net losses/recoveries for credit risk associated with financial assets - Caption 130 a) (partial) measured at amortized cost (Charges for integration) ...... -21 -6 + Caption 190 a) (partial) Personnel expenses (Charges for integration and exit incentives) ...... -1,406 -52 + Caption 190 b) (partial) Other administrative expenses (Charges for integration) ...... -269 -45 + Caption 200 (partial) Net provisions for risks and charges (Charges for integration)...... -450 29 Net adjustments to / recoveries on property and equipment (Charges for + Caption 210 (partial) integration) ...... -27 -20 Net adjustments to / recoveries on intangible assets (Charges for + Caption 220 (partial) integration) ...... -117 -48 + Caption 230 (partial) Other operating expenses (income) (Charges/revenues from integration). — 1 + Caption 300 (partial) Taxes on income from continuing operations (Charges for integration) ... 729 35
Captions 2020 2019 Restated (millions of euro) Effect of purchase price allocation (net of tax) 1,960 -117 + Caption 30 (partial) Interest margin (Effect of purchase price allocation) ...... -77 -91 + Caption 60 (partial) Net fee and commission income (Effect of purchase price allocation) .... -1 - - Caption 80 (partial) Profits (Losses) on trading (Effect of purchase price allocation) ...... -18 - Profits (Losses) on disposal or repurchase of financial assets measured + Caption 100 a) (partial) at amortized cost - Loans (Effect of purchase price allocation) ...... -34 -28 Profits (Losses) on disposal or repurchase of financial assets measured at amortized cost - Debt securities (governments, financial and - Caption 100 a) (partial) insurance companies) - (Effect of purchase price allocation)...... — — Profits (Losses) on disposal or repurchase of financial assets measured at fair value through other comprehensive income (Effect of purchase + Caption 100 b) (partial) price allocation) ...... 4 — Profits (Losses) on disposal or repurchase of financial liabilities - Reclassification of operations of entities not subject to management and + Caption 100 c) (partial) coordination (Effect of purchase price allocation) ...... — 13 Net losses/recoveries for credit risk associated with financial assets + Caption 130 a) (partial) measured at amortized cost - (Effect of purchase price allocation) ...... -428 - + Caption 190 b) (partial) Other administrative expenses (Effect of purchase price allocation) ...... -33 - Net provisions for risks and charges (Effect of purchase price + Caption 200 b) (partial) allocation) ...... -109 - Net adjustments to / recoveries on property and equipment (Effect of + Caption 210 (partial) purchase price allocation) ...... 2 - Net adjustments to / recoveries on intangible assets (Effect of purchase + Caption 220 (partial) price allocation) ...... -77 -61 - Caption 230 (partial) Other operating expenses (income) (Effect of purchase price allocation) 2,505 - Profits (Losses) on disposal of investments (Effect of purchase price + Caption 280 (partial) allocation) ...... — -12 Taxes on income from continuing operations (Effect of purchase price + Caption 300 (partial) allocation) ...... 226 62 Levies and other charges concerning the banking industry (net of tax) -512 -360 Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily + Caption 110 b) (partial) measured at fair value (Charges concerning the banking industry) ...... -31 13 Other administrative expenses (Resolution fund and deposit guarantee + Caption 190 b) (partial) scheme)...... -710 -526 Taxes on income from continuing operations (Resolution fund and + Caption 300 (partial) deposit guarantee scheme) ...... 229 153 Impairment (net of tax) of goodwill and other intangible assets -912 — Caption 270 Goodwill impairment ...... -981 — Taxes on income from continuing operations (Impairment of goodwill + Caption 300 (partial) and other intangible assets) ...... 69 — Minority interests -57 30 Caption 340 Minority interests ...... -57 30 Net income (loss) 3,277 4,182
ANNEX A-20
Table 8: Unaudited Restated and Reclassified Financial Information: Balance Sheet Table 8 presents the resulting figures of the restatement done in Table 1 and the reclassification done in Table 6. The balance sheet as so restated and reclassified appears in our discussion of the balance sheet in this Offering Memorandum in the 2020 Unaudited Restated and Reclassified Financial Information and the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020.
Assets 31.12.2020 31.12.2019 Due from banks...... 108,040 47,170 Loans to customers...... 461,572 395,229 Loans to customers measured at amortized cost ...... 460,143 394,093 Loans to customers designated at fair value through other comprehensive income and through profit or loss ...... 1,429 1,136 Financial assets measured at amortized cost which do not constitute loans ...... 47,102 25,888 Financial assets at fair value through profit or loss ...... 57,065 48,636 Financial assets at fair value through other comprehensive income ...... 57,585 72,046 Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39 ...... 177,170 168,233 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 1,211 649 Investments in associates and companies subject to joint control...... 1,996 1,240 Property, equipment and intangible assets ...... 19,044 17,157 Tax assets ...... 19,503 15,476 Non-current assets held for sale and discontinued operations ...... 28,702 494 Other assets ...... 23,624 24,352 Total Assets ...... 1,002,614 816,570 Liabilities Due to banks at amortized cost ...... 115,943 103,316 Due to customers at amortized cost and securities issued ...... 512,463 414,578 Financial liabilities held for trading...... 59,033 45,226 Financial liabilities designated at fair value ...... 3,032 4 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 1,928 818 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39 ...... 77,207 75,935 Tax liabilities ...... 3,029 2,322 Liabilities associated with non-current assets held for sale and discontinued operations ...... 35,676 41 Other liabilities ...... 24,007 23,433 Technical reserves...... 96,811 89,243 Allowances for risks and charges ...... 7,164 5,132 of which allowances for commitments and financial guarantees given...... 626 482 Share capital ...... 10,084 9,086 Reserves ...... 44,775 38,250 Valuation reserves...... -515 -157 Valuation reserves pertaining to insurance companies ...... 809 504 Equity instruments ...... 7,441 4,103 Minority interests ...... 450 554 Net income (loss) ...... 3,277 4,182 Total liabilities and shareholders’ equity ...... 1,002,614 816,570
ANNEX A-21
Table 9: Unaudited Restated and Reclassified Financial Information: Income Statement Table 9 presents the resulting figures of the restatement done in Table 3 and the reclassification done in Table 7. The income statement as so restated and reclassified appears in our discussion of the income statement in this Offering Memorandum in the 2020 Unaudited Restated and Reclassified Financial Information and the 2019 Unaudited Restated and Reclassified Financial Information Presented in 2020.
2020 2019 Net interest income ...... 7,783 7,005 Net fee and commission income ...... 8,303 7,962 Income from insurance business ...... 1,353 1,268 Profits (Losses) on financial assets and liabilities designated at fair value...... 1,572 1,928 Other operating income (expenses) ...... 12 4 O perating income 19,023 18,167 Personnel expenses ...... -6,139 -5,748 Other administrative expenses ...... -2,679 -2,601 Adjustments to property, equipment and intangible assets...... -1,153 -1,058 O perating costs...... -9,971 -9,407 O perating margin...... 9,052 8,760 Net adjustments to loans...... -4,214 -2,089 Other net provisions and net impairment losses on other assets ...... -346 -254 Other income (expenses) ...... 64 55 Income (Loss) from discontinued operations ...... 1,163 88 Gross income (loss)...... 5,719 6,560 Taxes on income ...... -1,360 -1,825 Charges (net of tax) for integration and exit incentives ...... -1,561 -106 Effect of purchase price allocation (net of tax) ...... 1,960 -117 Levies and other charges concerning the banking industry (net of tax) ...... -512 -360 Impairment (net of tax) of goodwill and other intangible assets...... -912 — Minority interests ...... -57 30 Net income (loss) ...... 3,277 4,182
ANNEX A-22
ANNEX B
CONSOLIDATED RECONCILIATION STATEMENTS OF FIGURES APPEARING IN 2019 AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND F-PAGES TO THIS OFFERING MEMORANDUM
Page Attachments 2019 Introduction to Annex B ...... B-2 Table 1: 2018 Balance Sheet...... B-4 Table 2: 2018 Income statement ...... B-6 Table 3: January 1, 2019 Balance Sheet reconciliation...... B-7 Table 4: 2019 Income Statement Reconciliation ...... B-9 Table 5: Balance Sheet Comparison, as restated for 2019 ...... B-11 Table 6: Income Statement Comparison, as restated for 2019...... B-13 Table 7: Reclassification of Balance Sheet ...... B-14 Table 8: Reclassification of Income Statement ...... B-17 Table 9: 2019 Unaudited Restated and Reclassified Financial Information ...... B-24 Table 10: 2019 Unaudited Restated and Reclassified Financial Information ...... B-25
ANNEX B-1
Introduction to Annex B: Consolidated Reconciliation Statements of Figures Appearing in 2019 Audited Consolidated Financial Statements and F-pages to this Offering Memorandum
Our Consolidated Financial Statements are prepared in accordance with IFRS as adopted by the European Union and in accordance with the instructions of the Bank of Italy set forth in Circular No. 262 of December 22, 2005, as amended. See “Presentation of Financial Information” in this Offering Memorandum for a general description of our Consolidated Financial Statements and of our Unaudited Restated and Reclassified Financial Information. This Annex B describes the restatements and reclassifications undertaken with respect to our 2019 Unaudited Consolidated Financial Statements and our 2018 Audited Consolidated Financial Statements to create our 2019 Unaudited Restated and Reclassified Financial Information and our 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019. As noted in “Presentation of Financial Information”, we restated (i) the income statement of our 2019 Unaudited Consolidated Financial Statements, (ii) the consolidated balance sheet of our 2018 Audited Consolidated Financial Statements and (iii) the income statement of our 2018 Unaudited Consolidated Financial Statements. A summary of the tables in this Annex B is below. 2018 Balance Sheet: Table 1 Reconciliation between the published consolidated balance sheet as at 31.12.2018 and the adjusted consolidated balance sheet as at 31.12.2018 2018 Income statement: Table 2 Reconciliation between published consolidated income statement for 2018 and adjusted consolidated income statement for 2018 January 1, 2019 Balance Sheet reconciliation: Table 3 illustrates the restatement to the balance sheet as at January 1, 2019, as a result of effect of IFRS 16. 2019 Income Statement Reconciliation: Table 4 illustrates the restatement to income statement for 2019 as a result of effect of IFRS 16 and reclassification Deposit Protection Funds of the international subsidiary banks. Balance Sheet Comparison, as restated for 2019: Table 5 presents the 2019 balance sheet as it appears in the 2019 Audited Consolidated Financial Statements (not restated, as presented in the F-pages) compared to the 2018 balance sheet as it appears in the 2018 Unaudited Consolidated Financial Statements (following the reclassifications done in Table 3).
Income Statement Comparison, as restated for 2019: Table 6 presents the 2019 and 2018 income statement as they appear in the 2019 Unaudited Consolidated Financial Statements (following the restatements done in Table 2).
Reclassification of Balance Sheet: Table 7 describes the reclassification to the balance sheet, which figures, as of December 31, 2019 were not restated and which figures, as of December 31, 2018, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or movement amount to different line items;
Reclassification of Income Statement: Table 8 describes the reclassification to the income statement, which figures, as of December 31, 2019, were restated and which figures, as of December 31, 2018, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or moving amount to different line items. 2019 Unaudited Restated and Reclassified Financial Information: Tables 9 and 10 present the resulting figures of the restatements done in Tables 3 and 4 and the reclassifications done in Tables 7 and 8. The balance sheet and income statement as so restated and reclassified appear in our discussion of the balance sheet and income statement in this Offering Memorandum in the 2019 Unaudited Restated and
ANNEX B-2
Reclassified Financial Information and the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019.
ANNEX B-3
Attachments
Table 1: 2018 Balance sheet
Effect of 31.12.2018 application of 31.12.2018 Assets Published IFRS 3 (a) Adjusted (millions of euro) 10. Cash and cash equivalents ...... 10,350 - 10,350 Financial assets measured at fair value through profit 20. or loss ...... 42,115 - 42,115 a) financial assets held for trading...... 38,806 - 38,806 b) financial assets designated at fair value ...... 208 - 208 c) other financial assets mandatorily measured at fair value ...... 3,101 - 3,101 Financial assets measured at fair value through other 30. comprehensive income...... 60,469 - 60,469 Financial assets pertaining to insurance companies, 35. measured at fair value pursuant to IAS 39...... 149,546 - 149,546 40. Financial assets measured at amortized cost ...... 476,503 - 476,503 a) due from banks ...... 69,307 - 69,307 b) loans to customers ...... 407,196 - 407,196 Financial assets pertaining to insurance companies measured 45. at amortized cost pursuant to IAS 39 ...... 952 - 952 50. Hedgin g derivatives ...... 2,993 - 2,993 Fair value change of financial assets in hedged 60. portfolios (+/-) ...... 124 - 124 Investments in associates and companies subject to joint 70. control...... 943 - 943 80. Technical insurance reserves reassured with third parties...... 20 - 20 90. Property and equipment...... 7,372 - 7,372 100. Intangible assets...... 9,077 64 9,141 of which: - goodwill ...... 4,163 64 4,227 110. Tax assets ...... 17,253 5 17,258 a) current...... 3,320 - 3,320 b) deferred ...... 13,933 5 13,938 Non-current assets held for sale and discontinued 120. operations...... 1,297 - 1,297 130. Other assets ...... 8,707 - 8,707
Total assets 787,721 69 787,790 ______(a) Final purchase price allocation of Autostrade Lombarde
ANNEX B-4
Effect of 31.12.2018 application of 31.12.2018 Liabilities and Shareholders’ Equity Published IFRS 3 (a) Adjusted (millions of euro) 10. Financial liabilities measured at amortized cost ...... 513,775 167 513,942 a) due to banks...... 107,815 167 107,982 b) due to customers ...... 323,900 - 323,900 c) securities issued ...... 82,060 - 82,060 Financial liabilities pertaining to insurance companies 15. measured at amortized cost pursuant to IAS 39 ...... 810 - 810 20. Financial liabilities held for trading...... 41,895 - 41,895 30. Financial liabilities designated at fair value ...... 4 - 4 Financial liabilities pertaining to insurance companies 35. measured at fair value pursuant to IAS 39...... 67,800 - 67,800 40. Hedgin g derivatives ...... 7,221 - 7,221 Fair value change of financial liabilities in hedged portfolios 50. (+/-) ...... 398 - 398 60. Tax liabilities ...... 2,433 -42 2,391 a) current...... 163 - 163 b) deferred ...... 2,270 -42 2,228 Liabilities associated with non-current assets held for sale 70. and discontinued operations ...... 258 - 258 80. Other liabilities ...... 11,645 25 11,670 90. Employee termination indemnities...... 1,190 - 1,190 100. Allowances for risks and charges ...... 5,064 - 5,064 a) commitments and guarantees given...... 510 - 510 b) post-employment benefits ...... 261 - 261 c) other allowances for risks and charges ...... 4,293 - 4,293 110. Technical reserves...... 80,797 - 80,797 120. Valuation reserves...... -913 - -913 125. Valuation reserves pertaining to insurance companies ...... 9 - 9 130. Redeemable shares...... - - - 140. Equity instruments ...... 4,103 - 4,103 150. Reserves ...... 13,006 - 13,006 160. Share premium reserve ...... 24,768 - 24,768 170. Share capital ...... 9,085 - 9,085 180. Treasury shares (-) ...... -84 - -84 190. Minority interests (+/-) ...... 407 -81 326 200. Net income (loss) (+/-) ...... 4,050 - 4,050 Total liabilities and shareholders’ equity ...... 787,721 69 787,790 ______(a) Final purchase price allocation of Autostrade Lombarde
ANNEX B-5
Table 2: 2018 Income statement
Effect of 2018 application of 2018 Published IFRS 5 (a) Adjusted (millions of euro) 10. Interest and similar income ...... 10,486 — 10,486 of which: interest income calculated using the effective interest rate method ...... 10,814 — 10,814 20. Interest and similar expense ...... -3,144 — -3,144 30. Interest margin ...... 7,342 — 7,342 40. Fee and commission income ...... 9,911 -363 9,548 50. Fee and commission expense ...... -2,308 285 -2,023 60. Net fee and commission income...... 7,603 -78 7,525 70. Dividend and similar income ...... 94 — 94 80. Profits (Losses) on trading ...... 442 3 445 90. Fair value adjustments in hedge accounting ...... -111 — -111 100. Profits (Losses) on disposal or repurchase of: 549 — 549 a) financial assets measured at amortized cost ...... -19 — -19 b) financial assets measured at fair value through other comprehensive income ...... 508 — 508 c) financial liabilities...... 60 — 60 Profits (Losses) on other financial assets and liabilities 110. measured at fair value through profit or loss...... 298 — 298 a) financial assets and liabilities designated at fair value...... 28 — 28 b) other financial assets mandatorily measured at fair value. 270 — 270 Profits (Losses) on financial assets and liabilities pertaining 115. to insurance companies pursuant to IAS 39 ...... 3,240 — 3,240 120. Net interest and other banking income ...... 19,457 -75 19,382 130. Net losses/recoveries for credit risks associated with: -2,509 — -2,509 a) financial assets measured at amortized cost ...... -2,507 — -2,507 b) financial assets measured at fair value through other comprehensive income ...... -2 — -2 Net losses/recoveries pertaining to insurance companies 135. pursuant to IAS39 ...... -26 — -26 Profits (Losses) on changes in contracts without 140. derecognition ...... -11 — -11 150. Net income from banking activities ...... 16,911 -75 16,836 160. Net insurance premiums ...... 8,180 — 8,180 170. Other net insurance income (expense) ...... -9,968 — -9,968 180. Net income from banking and insurance activities ...... 15,123 -75 15,048 190. Administrative expenses: -10,002 2 -10,000 a) personnel expense ...... s -5,932 1 -5,931 b) other administrative expenses ...... -4,070 1 -4,069 200. Net provisions for risks and charges ...... -35 — -35 a) commitments and guarantees given ...... 88 — 88 b) other net provisions ...... -123 — -123 210. Net adjustments to / recoveries on property and equipment ... -383 — -383 220. Net adjustments to / recoveries on intangible assets ...... -597 1 -596 230. Other operating expenses (income) ...... 732 1 733 240. O perating expenses...... -10,285 4 -10,281 Profits (Losses) on investments in associates and companies 250. subject to joint control...... 177 — 177 Valuation differences on property, equipment and intangible 260. assets measured at fair value...... -9 — -9 270. Goodwill impairment...... - — — 280. Profits (Losses) on disposal of investments...... 452 — 452 290. Income (Loss) before tax from continuing operations...... 5,458 -71 5,387 300. Taxes on income from continuing operations...... -1,386 23 -1,363 310. Income (Loss) after tax from continuing operations ...... 4,072 -48 4,024 320. Income (Loss) after tax from discontinued operations ...... - 48 48 330. Net income (loss)...... 4,072 — 4,072 340. Minority interests ...... -22 — -22 350. Parent Company’s net income (loss) ...... 4,050 — 4,050 ______(a) 2018 Income Statement figures relating to the business line to be contributed to Nexi, pursuant to the agreement signed in December 2019.
ANNEX B-6
Table 3: January 1, 2019 Balance Sheet reconciliation Table 3 illustrates the restatement to the balance sheet as at January 1, 2019, as a result of effect of IFRS 16.
December 31, 2018 Effect of January 1, Assets Adjusted IFRS 16 (a) 2019 Restated (in € millions) 10. Cash and cash equivalents ...... 10,350 — 10,350 20. Financial assets measured at fair value through profit or loss ...... 42,115 — 42,115 a) financial assets held for trading ...... 38,806 — 38,806 b) financial assets designated at fair value...... 208 — 208 c) other financial assets mandatorily measured at fair value ...... 3,101 — 3,101 30. Financial assets measured at fair value through other comprehensive income ...... 60,469 — 60,469 35. Financial assets pertaining to insurance companies, measured at fair value pursuant to IAS 39 ...... 149,546 — 149,546 40. Financial assets measured at amortized cost ...... 476,503 — 476,503 a) due from banks ...... 69,307 — 69,307 b) loans to customers ...... 407,196 — 407,196 45. Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 952 — 952 50. Hedgin g derivatives ...... 2,993 — 2,993 60. Fair value change of financial assets in hedged portfolios (+/-) ...... 124 — 124 70. Investments in associates and companies subject to joint control ..... 943 — 943 80. Technical insurance reserves reassured with third parties ...... 20 — 20 90. Property and equipment ...... 7,372 1,607 8,979 100. Intangible assets ...... 9,141 — 9,141 of which: - goodwill ...... 4,227 — 4,227 110. Tax assets...... 17,258 — 17,258 a) current ...... 3,320 — 3,320 b) deferred...... 13,938 — 13,938 120. Non-current assets held for sale and discontinued operations ...... 1,297 — 1,297 130. Other assets ...... 8,707 -12 8,695 Total Assets ...... 787,790 1,595 789,385
ANNEX B-7
Changes in December 31, the scope of 2018 consolidation January 1, Liabilities and Shareholders’ Equity Adjusted (a) 2019 Restated (in € millions) 10. Financial liabilities measured at amortized cost ...... 513,942 1,590 515,532 a) due to banks...... 107,982 — 107,982 b) due to customers ...... 323,900 1,590 325,490 c) securities issued ...... 82,060 — 82,060 Financial liabilities pertaining to insurance companies measured at 15. amortized cost pursuant to IAS 39 ...... 810 9 819 20. Financial liabilities held for trading...... 41,895 — 41,895 30. Financial liabilities designated at fair value ...... 4 — 4 Financial liabilities pertaining to insurance companies measured at 35. fair value pursuant to IAS 39 ...... 67,800 — 67,800 40. Hedgin g derivatives ...... 7,221 — 7,221 50. Fair value change of financial liabilities in hedged portfolios (+/-) ... 398 — 398 60. Tax liabilities ...... 2,391 — 2,391 a) current...... 163 — 163 b) deferred ...... 2,228 — 2,228 Liabilities associated with non-current assets held for sale and 70. discontinued operations ...... 258 — 258 80. Other liabilities ...... 11,670 -4 11,666 90. Employee termination indemnities...... 1,190 — 1,190 100. Allowances for risks and charges ...... 5,064 — 5,064 a) commitments and guarantees given...... 510 — 510 b) post-employment benefits ...... 261 — 261 c) other allowances for risks and charges ...... 4,293 — 4,293 110. Technical reserves...... 80,797 — 80,797 120. Valuation reserves...... -913 — -913 125. Valuation reserves pertaining to insurance companies ...... 9 — 9 130. Redeemable shares...... — — — 140. Equity instruments ...... 4,103 — 4,103 150. Reserves ...... 13,006 — 13,006 160. Share premium reserve ...... 24,768 — 24,768 170. Share capital ...... 9,085 — 9,085 180. Treasury shares (-) ...... -84 — -84 190. Minority interests (+/-) ...... 326 — 326 200. Net income (loss) (+/-) ...... 4,050 — 4,050 Total Liabilities and Shareholders’ Equity ...... 787,790 1,595 789,385
ANNEX B-8
Table 4: 2018 Income Statement Reconciliation Table 4 illustrates the restatement to income statement for 2018 as a result of effect of IFRS 16 and reclassification of Deposit Protection Funds of the international subsidiary banks.
Reclassificati on Deposit Protection Changes in Fund Effect of the scope of International 2018 transition to consolidation Subsidiary Adjusted IFRS 16 (a) Banks (b) 2018 Restated (millions of euro) 10. Interest and similar income ...... 10,486 — 5 — 10,491 of which: interest income calculated using the effective interest rate method ...... 10,814 — — — 10,814 20. Interest and similar expense ...... -3,144 -27 -101 — -3,272 30. Interest margin ...... 7,342 -27 -96 — 7,219 40. Fee and commission income...... 9,548 — 6 — 9,554 50. Fee and commission expense...... -2,023 — -2 — -2,025 60. Net fee and commission income ...... 7,525 — 4 — 7,529 70. Dividend and similar income ...... 94 — — — 94 80. Profits (Losses) on trading ...... 445 — 1 — 446 90. Fair value adjustments in hedge accounting . -111 — — — -111 Profits (Losses) on disposal or repurchase 100. of: 549 — — — 549 a) financial assets measured at amortized cost ...... -19 — — — -19 b) financial assets measured at fair value through other comprehensive income ...... 508 — — — 508 c) financial liabilities ...... 60 — — — 60 Profits (Losses) on other financial assets and liabilities measured at fair value 110. through profit or loss ...... 298 — — — 298 a) financial assets and liabilities designated at fair value ...... 28 — — — 28 b) other financial assets mandatorily measured at fair value...... 270 — — — 270 Profits (Losses) on financial assets and liabilities pertaining to insurance 115. companies pursuant to IAS 39 ...... 3,240 — — — 3,240 120. Net interest and other banking income .... 19,382 -27 -91 — 19,264 Net losses/recoveries for credit risks 130. associated with: -2,509 — — — -2,509 a) financial assets measured at amortized cost ...... -2,507 — — — -2,507 b) financial assets measured at fair value through other comprehensive income ...... -2 — — — -2 Net losses/recoveries pertaining to 135. insurance companies pursuant to IAS39... -26 — — — -26 Profits (Losses) on changes in contracts 140. without derecognition ...... -11 — — — -11 150. Net income from banking activities ...... 16,836 -27 -91 — 16,718 160. Net insurance premiums ...... 8,180 — — — 8,180 170. Other net insurance income (expense) ...... -9,968 — — — -9,968 Net income from banking and insurance 180. activities ...... 15,048 -27 -91 - 14,930 190. Administrative expenses: -10,000 231 -42 -47 -9,858 a) personnel expenses ...... -5,931 - 26 - -5,905 b) other administrative expenses ...... -4,069 231 -68 -47 -3,953 200. Net provisions for risks and charges ...... -35 — — — -35 a) commitments and guarantees given ...... 88 — — — 88 b) other net provisions ...... -123 — — — -123 Net adjustments to / recoveries on property 210. and equipment ...... -383 -213 -1 — -597 Net adjustments to / recoveries on 220. intangible assets...... -596 — -18 — -614 230. Other operating expenses (income) ...... 733 — 89 47 869 240. Operating expenses...... -10,281 18 28 — -10,235 Profits (Losses) on investments in associates and companies subject to joint 250. control ...... 177 — — — 177 Valuation differences on property, equipment and intangible assets measured 260. at fair value...... -9 — — — -9 270. Goodwill impairment ...... — — — — — 280. Profits (Losses) on disposal of investments . 452 — — — 452
ANNEX B-9
Reclassificati on Deposit Protection Changes in Fund Effect of the scope of International 2018 transition to consolidation Subsidiary Adjusted IFRS 16 (a) Banks (b) 2018 Restated
(millions of euro) Income (Loss) before tax from continuing 290. operations...... 5,387 -9 -63 — 5,315 Taxes on income from continuing 300. operations...... -1,363 3 15 — -1,345 Income (Loss) after tax from continuing 310. operations...... 4,024 -6 -48 — 3,970 Income (Loss) after tax from discontinued 320. operations...... 48 — — — 48 330. Net income (loss) ...... 4,072 -6 -48 — 4,018 340. Minority interests ...... -22 6 48 — 32 350. Parent Company’s net income (loss) ...... 4,050 — — — 4,050
ANNEX B-10
Table 5: Balance Sheet Comparison, as restated for 2019 Table 5 presents the 2019 balance sheet as it appears in the 2019 Audited Consolidated Financial Statements (not restated, as presented in the F-pages) compared to the 2018 balance sheet as it appears in the 2018 Unaudited Consolidated Financial Statements (following the reclassifications done in Table 3).
Assets 31.12.2019 01.01.2019 CHANGES Published Restated amount % (millions of euro) 10. Cash and cash equivalents...... 9,745 10,350 -605 -5.8 20. Financial assets measured at fair value through profit or loss ...... 49,414 42,115 7,299 17.3 a) financial assets held for trading ...... 45,152 38,806 6,346 16.4 b) financial assets designated at fair value ...... 195 208 -13 -6.3 c) other financial assets mandatorily measured at fair value...... 4,067 3,101 966 31.2 Financial assets measured at fair value through other 30. comprehensive income ...... 72,410 60,469 11,941 19.7 Financial assets pertaining to insurance companies, measured at fair value 35. pursuant to IAS 39 ...... 168,202 149,546 18,656 12.5 40. Financial assets measured at amortized cost ...... 467,815 476,503 -8,688 -1.8 a) due from banks...... 49,027 69,307 -20,280 -29.3 b) loans to customers ...... 418,788 407,196 11,592 2.8 Financial assets pertaining to insurance companies measured at amortized 45. cost pursuant to IAS 39 ...... 612 952 -340 -35.7 50. Hedging derivatives...... 3,029 2,993 36 1.2 60. Fair value change of financial assets in hedged portfolios (+/-)...... 1,569 124 1,445 70. Investments in associates and companies subject to joint control ...... 1,240 943 297 31.5 80. Technical insurance reserves reassured with third parties ...... 28 20 8 40.0 90. Property and equipment...... 8,878 8,979 -101 -1.1 100. Intangible assets...... 9,211 9,141 70 0.8 of which: - goodwill ...... 4,055 4,227 -172 -4.1 110. Tax assets ...... 15,467 17,258 -1,791 -10.4 a) current ...... 1,716 3,320 -1,604 -48.3 b) deferred...... 13,751 13,938 -187 -1.3 120. Non-current assets held for sale and discontinued operations ...... 494 1,297 -803 -61.9 130. Other assets ...... 7,988 8,695 -707 -8.1
Total assets ...... 816,102 789,385 26,717 3.4
ANNEX B-11
Liabilities and Shareholders’ Equity 31.12.2019 1.1.2019 CHANGES Published Restated amount % 10. Financial liabilities measured at amortized cost ...... 519,382 515,532 3,850 0.7 a) due to banks ...... 103,324 107,982 -4,658 -4.3 b) due to customers...... 331,181 325,490 5,691 1.7 c) securities issued ...... 84,877 82,060 2,817 3.4 Financial liabilities pertaining to insurance companies measured at 15. amortized cost pursuant to IAS 39 ...... 826 819 7 0.9 20. Financial liabilities held for trading ...... 45,226 41,895 3,331 8.0 30. Financial liabilities designated at fair value ...... 4 4 — - Financial liabilities pertaining to insurance companies measured at 35. fair value pursuant to IAS 39...... 75,935 67,800 8,135 12.0 40. Hedgin g derivatives...... 9,288 7,221 2,067 28.6 50. Fair value change of financial liabilities in hedged portfolios (+/-) ... 527 398 129 32.4 60. Tax liabilities ...... 2,321 2,391 -70 -2.9 a) current ...... 455 163 292 b) deferred ...... 1,866 2,228 -362 -16.2 Liabilities associated with non-current assets held for sale and 70. discontinued operations...... 41 258 -217 -84.1 80. Other liabilities...... 12,070 11,666 404 3.5 90. Employee termination indemnities ...... 1,134 1,190 -56 -4.7 100. Allowances for risks and charges ...... 3,997 5,064 -1,067 -21.1 a) commitments and guarantees given ...... 482 510 -28 -5.5 b) post-employment benefits...... 232 261 -29 -11.1 c) other allowances for risks and charges...... 3,283 4,293 -1,010 -23.5 110. Technical reserves ...... 89,136 80,797 8,339 10.3 120. Valuation reserves ...... -157 -913 -756 -82.8 125. Valuation reserves pertaining to insurance companies...... 504 9 495 130. Redeemable shares ...... — — — 140. Equity instruments...... 4,103 4,103 — — 150. Reserves ...... 13,279 13,006 273 2.1 160. Share premium reserve ...... 25,075 24,768 307 1.2 170. Share capital...... 9,086 9,085 1 0.0 180. Treasury shares (-)...... -104 -84 20 23.8 190. Minority interests (+/-) ...... 247 326 -79 -24.2 200. Net income (loss) (+/-) ...... 4,182 4,050 132 3.3
Total liabilities and shareholders’ equity...... 816,102 789,385 26,717 3.4
ANNEX B-12
Table 6: Income Statement Comparison, as restated for 2019 Table 6 presents the 2019 and 2018 income statement as they appear in the 2019 Unaudited Consolidated Financial Statements (following the restatements done in Table 4).
2019 2018 CHANGES Published Restated amount % (millions of euro) 10. Interest and similar income 10,193 10,491 -298 -2.8 of which: interest income calculated using the effective interest rate method ...... 10,565 10,814 -249 -2.3 20. Interest and similar expense...... -3,269 -3,272 -3 -0.1 30. Interest margin...... 6,924 7,219 -295 -4.1 40. Fee and commission income ...... 9,658 9,554 104 1.1 50. Fee and commission expense...... -2,159 -2,025 134 6.6 60. Net fee and commission income ...... 7,499 7,529 -30 -0.4 70. Dividend and similar income ...... 117 94 23 24.5 80. Profits (Losses) on trading...... 506 446 60 13.5 90. Fair value adjustments in hedge accounting...... -61 -111 -50 -45.0 100. Profits (Losses) on disposal or repurchase of: 1,385 549 836 a) financial assets measured at amortized cost ...... 97 -19 116 b) financial assets measured at fair value through other comprehensive income ...... 1,218 508 710 c) financial liabilities ...... 70 60 10 16.7 Profits (Losses) on other financial assets and liabilities measured at 110. fair value through profit or loss ...... 123 298 -175 -58.7 a) financial assets and liabilities designated at fair value ...... -103 28 -131 b) other financial assets mandatorily measured at fair value ...... 226 270 -44 -16.3 Profits (Losses) on financial assets and liabilities pertaining to 115. insurance companies pursuant to IAS 39...... 3,991 3,240 751 23.2 120. Net interest and other banking income 20,484 19,264 1,220 6.3 130. Net losses/recoveries for credit risks associated with: -2,201 -2,509 -308 -12.3 a) financial assets measured at amortized cost ...... -2,175 -2,507 -332 -13.2 b) financial assets measured at fair value through other comprehensive income ...... -26 -2 24 Net losses/recoveries pertaining to insurance companies pursuant 135. to IAS39...... -9 -26 -17 -65.4 140. Profits (Losses) on changes in contracts without derecognition ...... -6 -11 -5 -45.5 150. Net income from banking activities...... 18,268 16,718 1,550 9.3 160. Net insurance premiums ...... 10,147 8,180 1,967 24.0 170. Other net insurance income (expense)...... -12,673 -9,968 2,705 27.1 180. Net income from banking and insurance activities ...... 15,742 14,930 812 5.4 190. Administrative expenses: -9,692 -9,858 -166 -1.7 a) personnel expenses...... -5,825 -5,905 -80 -1.4 b) other administrative expenses...... -3,867 -3,953 -86 -2.2 200. Net provisions for risks and charges...... -73 -35 38 a) commitments and guarantees given...... 23 88 -65 -73.9 b) other net provisions...... -96 -123 -27 -22.0 210. Net adjustments to / recoveries on property and equipment...... -523 -597 -74 -12.4 220. Net adjustments to / recoveries on intangible assets ...... -692 -614 78 12.7 230. Other operating expenses (income) ...... 774 869 -95 -10.9 240. O perating expenses ...... -10,206 -10,235 -29 -0.3 Profits (Losses) on investments in associates and companies 250. subject to joint control ...... 53 177 -124 -70.1 Valuation differences on property, equipment and intangible assets 260. measured at fair value ...... -13 -9 4 44.4 270. Goodwill impairment ...... - - - 280. Profits (Losses) on disposal of investments ...... 96 452 -356 -78.8 290. Income (Loss) before tax from continuing operations ...... 5,672 5,315 357 6.7 300. Taxes on income from continuing operations ...... -1,564 -1,345 219 16.3 310. Income (Loss) after tax from continuing operations...... 4,108 3,970 138 3.5 320. Income (Loss) after tax from discontinued operations...... 64 48 16 33.3 330. Net income (loss) ...... 4,172 4,018 154 3.8 340. Minority interests ...... 10 32 -22 -68.8 350. Parent Company’s net income (loss) ...... 4,182 4,050 132 3.3
ANNEX B-13
Table 7: Reclassification of Balance Sheet Table 7 describes the reclassification to the balance sheet, which figures, as of December 31, 2019 were not restated and which figures, as of December 31, 2018, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or movement amount to different line items.
Assets 31.12.2019 01.01.2019 Restated (millions of euro) Due from banks 47,170 68,723 Caption 40a (partial) Financial assets measured at amortized cost - Due from banks ...... 47,164 68,721 Caption 20a (partial) Financial assets held for trading - Due from banks ...... - - Caption 20b (partial) Financial assets designated at fair value - Due from banks ...... - - Other financial assets mandatorily measured at fair value - Due from Caption 20c (partial) banks ...... 6 2 Financial assets measured at fair value through other comprehensive Caption 30 (partial) income - Due from banks ...... - - Loans to customers...... 395,229 393,550 Loans to customers measured at amortized cost...... 394,093 392,945 Caption 40b (partial) Financial assets measured at amortized cost - Loans to customers ...... 388,881 388,448 Financial assets measured at amortized cost - Loans to customers - Caption 40b (partial) (concession rights - financial component) ...... -670 -654 Financial assets measured at amortized cost - Debt securities (public Caption 40b (partial) entities, non-financial companies and others) ...... 5,882 5,151 Loans to customers at fair value through other comprehensive income and through profit or loss ...... 1,136 605 Caption 20a (partial) Financial assets held for trading - Loans to customers ...... 24 75 Caption 20b (partial) Financial assets designated at fair value - Loans to customers ...... - - Other financial assets mandatorily measured at fair value - Loans to Caption 20c (partial) customers ...... 748 502 Financial assets measured at fair value through other comprehensive Caption 30 (partial) income - Loans to customers ...... 364 28 Financial assets measured at amortized cost which do not constitute loans ...... 25,888 14,183 Caption 40a (partial) Financial assets measured at amortized cost - Debt securities (banks) ...... 1,863 586 Financial assets measured at amortized cost - Debt securities Caption 40b (partial) (governments, financial and insurance companies) ...... 24,025 13,597 Financial assets at fair value through profit or loss ...... 48,636 41,536 Caption 20a (partial) Financial assets held for trading...... 45,128 38,731 Caption 20b (partial) Financial assets designated at fair value - Debt securities...... 195 208 Caption 20c (partial) Other financial assets mandatorily measured at fair value ...... 3,313 2,597 Financial assets at fair value through other comprehensive income 72,046 60,441 Financial assets measured at fair value through other comprehensive Caption 30 (partial) income...... 72,046 60,441 Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39...... 168,202 149,546 Financial assets pertaining to insurance companies measured at fair value Caption 35 pursuant to IAS 39 168,202 149,546 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 612 952 Financial assets pertaining to insurance companies measured at amortized Caption 45 cost pursuant to IAS 39 ...... 612 952 Investments in associates and companies subject to joint control...... 1,240 943 Caption 70 Investments in associates and companies subject to joint control...... 1,240 943 Property, equipment and intangible assets ...... 17,153 17,145 Assets owned 15,655 15,516 Caption 90 (partial) Property and equipment...... 7,380 7,350 Caption 100 Intangible assets...... 9,211 9,141 - Caption 100 (partial) Intangible assets (concession rights - intangible component)...... -936 -975 Rights of use acquired under leases...... 1,498 1,629 Caption 90 (partial) Property and equipment...... 1,498 1,629 Tax assets 15,467 17,258 Caption 110 Tax assets ...... 15,467 17,258 Non-current assets held for sale and discontinued operations ...... 494 1,297 Caption 120 Non-current assets held for sale and discontinued operations ...... 494 1,297 Other assets ...... 23,965 23,811 Caption 10 Cash and cash equivalents ...... 9,745 10,350
ANNEX B-14
Assets 31.12.2019 01.01.2019 Restated (millions of euro) + Caption 40b Financial assets measured at amortized cost - Loans to customers (partial) (concession rights - financial component) ...... 670 654 Caption 50 Hedgin g derivatives ...... 3,029 2,993 Caption 60 Fair value change of financial assets in hedged portfolios (+/-) ...... 1,569 124 Caption 80 Technical insurance reserves reassured with third parties...... 28 20 +Caption 100 (partial) Intangible assets (concession rights - intangible component)...... 936 975 Caption 130 Other assets ...... 7,988 8,695 Total Assets ...... 816,102 789,385
ANNEX B-15
Liabilities 31.12.2019 01.01.2019 Restated
(millions of euro) Due to banks at amortized cost ...... 103,316 107,982 Caption 10 a) Financial liabilities measured at amortized cost - Due to banks...... 103,324 107,982 Financial liabilities measured at amortized cost - Due to banks (of - Caption 10 a) (partial) which lease payables) ...... -8 - Due to customers at amortized cost and securities issued ...... 414,578 405,960 Caption 10 b) Financial liabilities measured at amortized cost - Due to customers ..... 331,181 325,490 Caption 10 c) Financial liabilities measured at amortized cost - Securities issued ...... 84,877 82,060 Financial liabilities measured at amortized cost - Due to customers (of - Caption 10 b) (partial) which lease payables) ...... -1,480 -1,590 Financial liabilities held for trading...... 45,226 41,895 Caption 20 Financial liabilities held for trading 45,226 41,895 Financial liabilities designated at fair value...... 4 4 Caption 30 Financial liabilities designated at fair value...... 4 4 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39...... 818 810 Financial liabilities pertaining to insurance companies measured at Caption 15 amortized cost pursuant to IAS 39 ...... 826 819 Financial liabilities pertaining to insurance companies measured at - Caption 15 (partial) amortized cost pursuant to IAS 39 (of which lease payables) ...... -8 -9 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39...... 75,935 67,800 Financial liabilities pertaining to insurance companies measured at Caption 35 fair value pursuant to IAS 39...... 75,935 67,800 Tax liabilities ...... 2,321 2,391 Caption 60 Tax liabilities...... 2,321 2,391 Liabilities associated with non-current assets held for sale and discontinued operations ...... 41 258 Liabilities associated with non-current assets held for sale and Caption 70 discontinued operations...... 41 258 Other liabilities...... 23,381 20,884 Caption 40 Hedgin g derivatives ...... 9,288 7,221 Caption 50 Fair value change of financial liabilities in hedged portfolios (+/-)...... 527 398 Caption 80 Other liabilities ...... 12,070 11,666 Financial liabilities measured at amortized cost - Due to banks (of Caption 10 a) (partial) which lease payables) ...... 8 - Financial liabilities measured at amortized cost - Due to customers (of Caption 10 b) (partial) which lease payables) ...... 1,480 1,590 Financial liabilities pertaining to insurance companies measured at Caption 15 (partial) amortized cost pursuant to IAS 39 (of which lease payables) ...... 8 9 Technical reserves ...... 89,136 80,797 Caption 110 Technical reserves ...... 89,136 80,797 Allowances for risks and charges ...... 5,131 6,254 Caption 90 Employee termination indemnities ...... 1,134 1,190 Allowances for risks and charges - Loan commitments and guarantees Caption 100 a) given ...... 482 510 Caption 100 b) Allowances for risks and charges - Post-employment benefits ...... 232 261 Allowances for risks and charges - Other allowances for risks and Caption 100 c) charges ...... 3,283 4,293 Share capital...... 9,086 9,085 Caption 170 Share capital ...... 9,086 9,085 Reserves...... 38,250 37,690 Caption 130 Redeemable shares ...... - - Caption 150 Reserves...... 13,279 13,006 Caption 160 Share premium reserve...... 25,075 24,768 - Caption 180 Treasury shares...... -104 -84 Valuation reserves...... -157 -913 Caption 120 Valuation reserves ...... -157 -913 Valuation reserves pertaining to insurance companies...... 504 9 Caption 125 Valuation reserves pertaining to insurance companies ...... 504 9 Equity instruments...... 4,103 4,103 Caption 140 Equity instruments 4,103 4,103 Minority interests...... 247 326 Caption 190 Minority interests...... 247 326 Net income (loss) ...... 4,182 4,050 Caption 200 Net income (loss) (+/-)...... 4,182 4,050 Total Liabilities and Shareholders’ Equity ...... 816,102 789,385
ANNEX B-16
Table 8: Reclassification of Income Statement Table 8 describes the reclassification to the income statement, which figures, as of December 31, 2019 and as of December 31, 2018, were restated to provide a more immediate understanding of our results by aggregating and/or changing certain line items and, in some instances, by creating new line items or moving amount to different line items.
Captions 2019 2018 Restated (millions of euro) Net interest income 7,005 7,271 Caption 30 Interest margin ...... 6,924 7,219 - Caption 30 (partial) Interest margin (Effect of purchase price allocation)...... 91 112 + Caption 80 (partial) Components of profits (losses) on trading relating to net interest...... 15 4 + Caption 80 (partial) Hedgin g swap differentials ...... -79 -128 - Caption 30 (partial) Charges related to the disposal of loans...... - 19 + Caption 190 a) Personnel expenses (Time value employee termination indemnities and (partial) other)...... -28 -27 Net provisions for risks and charges (Time value allowances for risks + Caption 200 (partial) and charges)...... -2 -3 Interest margin - Intragroup transactions between Banks/Other - Caption 30 (partial) companies and the Insurance Segment ...... -31 -43 Interest margin - Reclassification of operations of entities not subject to - Caption 30 (partial) management and coordination ...... 115 118 Net fee and commission income 7,962 7,952 Caption 60 Net fee and commission income ...... 7,499 7,529 - Caption 60 (partial) Net fee and commission income - Contribution of insurance business .... 290 328 - Caption 60 (partial) Net fee and commission income - Reclassification of operations of entities not subject to management and coordination ...... 25 4 - Caption 60 (partial) Net fee and commission income - Share of the certificates issue premium paid to the placement agent ...... 197 140 + Caption 110 b) Profits (Losses) on financial assets and liabilities measured at fair value (partial) through profit or loss (b) other financial assets mandatorily measured at fair value (Return components of insurance policies taken out for the benefit of financial advisor networks) ...... 6 - + Caption 190 b) (partial) Other administrative expenses (Recovery of other expenses) ...... -55 -49 Income from insurance business ...... 1,184 1,084 Caption 160 Net insurance premiums ...... 10,147 8,180 Caption 170 Other net insurance income (expense)...... -12,673 -9,968 Impairment of securities through other comprehensive income - share + Caption 135 (partial) attributable to insured parties...... -6 -21 + Caption 60 (partial) Net fee and commission income - Contribution of insurance business .... -290 -328 Profits (Losses) on financial assets and liabilities pertaining to insurance Caption 115 companies pursuant to IAS 39 ...... 3,991 3,240 Interest margin - Intragroup transactions between Banks/Other + Caption 30 (partial) companies and the Insurance Segment ...... 31 43 Intragroup transactions between Banks/Other companies and the + Caption 80 (partial) Insurance Segment ...... -14 -62 + Caption 210 (partial) Net adjustments to / recoveries on property and equipment...... -2 - Profits (Losses) on financial assets and liabilities designated at fair value ...... 1,928 1,472 Caption 80 Profits (Losses) on trading...... 506 446 Caption 90 Fair value adjustments in hedge accounting...... -61 -111 Caption 110 a) Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss (a) financial assets and liabilities designated at fair value...... -103 28 Caption 110 b) Profits (Losses) on other financial assets and liabilities measured at fair value through profit or loss (b) other financial assets mandatorily measured at fair value ...... 226 270 Caption 100 b) Profits (Losses) on disposal or repurchase of financial assets measured at fair value through other comprehensive income ...... 1,218 508 Caption 100 c) Profits (Losses) on disposal or repurchase of financial liabilities ...... 70 60 + Caption 60 (partial) Net fee and commission income - Share of the certificates issue premium paid to the placement agent ...... -197 -140 + Caption 70 (partial) Dividend and similar income on equity instruments held for trading, designated at fair value through profit or loss or for which the option 117 82
ANNEX B-17
Captions 2019 2018 Restated (millions of euro) has been exercised of their designation at fair value through other comprehensive income (including dividends on UCIs) ...... + Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost - Debt securities (governments, financial and insurance companies) - Effect associated with profits (losses) on trading ...... 103 - - Caption 80 (partial) Components of profits (losses) on trading relating to net interest...... -15 -4 - Caption 80 (partial) Intragroup transactions between Banks/Other companies and the Insurance Segment ...... 14 62 - Caption 80 (partial) Hedgin g swap differentials ...... 79 128 - Caption 80 (partial) Profits (Losses) on trading (Effect of purchase price allocation)...... - - - Caption 90 (partial) Fair value adjustments in hedge accounting (Autostrade Lombarde - Transfer of the Revaluation Reserve) ...... - 86 - Caption 90 (partial) Fair value adjustments in hedge accounting - Reclassification of operations of entities not subject to management and coordination...... 11 - - Caption 100 c) Profits (Losses) on disposal or repurchase of financial liabilities - -13 (partial) Reclassification of operations of entities not subject to management and coordination (Effect of purchase price allocation)...... - - Caption 100 b) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at fair value through other comprehensive income (Effect of purchase price allocation) ...... - -5 - Caption 110 b) Profits (Losses) on financial assets and liabilities measured at fair value (partial) through profit or loss (b) other financial assets mandatorily measured at fair value (Return components of insurance policies taken out for the benefit of financial advisor networks) ...... -23 - - Caption 110 b) Profits (Losses) on other financial assets and liabilities measured at fair (partial) value through profit or loss (b) other financial assets mandatorily measured at fair value (Charges concerning the banking industry) ...... -13 72 + Caption 200 b) Net provisions for risks and charges (Charges related to t he sale of (partial) NTV)...... 9 -10
ANNEX B-18
Captions 2019 2018 Restated (millions of euro) O ther operating income (expenses) 4 34 Caption 70 Dividend and similar income ...... 117 94 Caption 230 Other operating expenses (income) ...... 774 869 Interest margin - Reclassification of operations of entities not subject to + Caption 30 (partial) management and coordination ...... -115 -118 Net fee and commission income - Reclassification of operations of + Caption 60 (partial) entities not subject to management and coordination ...... -25 -4 Fair value adjustments in hedge accounting - Reclassification of + Caption 90 (partial) operations of entities not subject to management and coordination...... -11 Dividend and similar income on equity instruments held for trading, designated at fair value through profit or loss or for which the option has been exercised of their designation at fair value through other - Caption 70 (partial) comprehensive income (including dividends on UCIs) ...... -117 -82 - Caption 230 (partial) Other operating expenses (income) (Recovery of expenses)...... -16 -13 - Caption 230 (partial) Other operating expenses (income) (Recovery of indirect taxes) ...... -738 -744 - Caption 230 (partial) Other operating expenses (income) (Non-recurring expenses)...... 50 - - Caption 230 (partial) Other operating expenses (income) (Valuation effects of other assets).... 25 - Other operating expenses (income) (Impairment losses on repurchased - Caption 230 (partial) property and equipment)...... - - Other operating expenses (income) (Profits/losses on disposal of - Caption 230 (partial) repurchased property and equipment)...... - - Other operating expenses (income) (Charges/revenues from - Caption 230 (partial) integration) ...... -1 3 Profits (losses) on investments in associates and companies subject to + Caption 250 (partial) joint control (carried at equity) ...... 61 29 O perating income...... 18,083 17,813 Personnel expenses ...... -5,744 -5,812 Caption 190 a) Personnel expenses ...... -5,825 -5,905 - Caption 190 a) (partial) Personnel expenses (Charges for integration and exit incentives) ...... 52 66 - Caption 190 a) Personnel expenses (Time value employee termination indemnities and (partial) other)...... 28 27 + Caption 230 (partial) Other operating expenses (income) (Recovery of expenses)...... 1 - Other administrative expenses ...... -2,488 -2,618 Caption 190 b) Other administrative expenses ...... -3,867 -3,953 - Caption 190 b) (partial) Other administrative expenses (Charges for integration) ...... 45 60 - Caption 190 b) Other administrative expenses (Resolution fund and deposit guarantee (partial) scheme) ...... 526 469 - Caption 190 b) (partial) Other administrative expenses (Recovery of other expenses) ...... 55 49 + Caption 230 (partial) Other operating expenses (income) (Recovery of indirect taxes) ...... 738 744 + Caption 230 (partial) Other operating expenses (income) (Recovery of expenses)...... 15 13 Adjustments to property, equipment and intangible assets ...... -1,058 -1,057 Caption 210 Net adjustments to / recoveries on property and equipment...... -523 -597 Caption 220 Net adjustments to / recoveries on intangible assets ...... -692 -614 - Caption 210 (partial) Net adjustments to / recoveries on property and equipment...... 2 - Net adjustments to / recoveries on intangible assets (Entities not subject - Caption 220 (partial) to management and coordination - concession rights) ...... 19 18 Net adjustments to / recoveries on property and equipment (Charges for - Caption 210 (partial) integration) ...... 20 29 Net adjustments to / recoveries on intangible assets (Charges for - Caption 220 (partial) integration) ...... 48 35 Net adjustments to / recoveries on property and equipment - Caption 210 (partial) (Impairment)...... 4 36 - Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Impairment) ...... 3 3 Net adjustments to/recoveries on intangible assets (Effect of purchase - Caption 220 (partial) price allocation) ...... 61 33 O perating costs...... -9,290 -9,487 O perating margin...... 8,793 8,326 Net adjustments to loans ...... -2,089 -2,394 + Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost – Loans ...... -14 -40 Profits (Losses) on disposal or repurchase of financial assets measured + Caption 100 a) at amortized cost - Debt securities (public entities, non-financial (partial) companies and others) ...... 8 -1
ANNEX B-19
Captions 2019 2018 Restated (millions of euro) + Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost – Loans...... -2,119 -2,519 Net losses/recoveries for credit risk associated with financial assets + Caption 130 a) measured at amortized cost - Debt securities (public entities, non- (partial) financial companies and others) ...... -15 5 + Caption 130 b) Net losses/recoveries for credit risk associated with financial assets (partial) measured at fair value through other comprehensive income – Loans..... - - - Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost - Loans (Charges for integration) ...... 6 - Caption 140 Profits/losses from changes in contracts without derecognition ...... -6 -11 Net provisions for risks and charges for credit risk related to Caption 200 a) commitments and guarantees given...... 23 88 + Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost - Loans (Effect of purchase price allocation)...... 28 84
ANNEX B-20
Captions 2019 2018 Restated (millions of euro) O ther net provisions and net impairment losses on other assets -254 -187 + Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost - Debt securities (governments, financial and insurance companies) ...... -41 8 + Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost - Debt securities (Banks)...... - -1 + Caption 130 b) Net losses/recoveries for credit risk associated with financial assets (partial) measured at fair value through other comprehensive income - Debt securities ...... -26 -2 Caption 135 Net losses/recoveries pertaining to insurance companies pursuant to IAS 39 ...... -9 -26 Caption 260 Valuation differences on property, equipment and intangible assets measured at fair value...... -13 -9 Caption 200 b) Net provisions for risks and charges - Other net provisions ...... -96 -123 + Caption 110 b) Profits (Losses) on financial assets and liabilities measured at fair value (partial) through profit or loss (b) other financial assets mandatorily measured at fair value (Return components of insurance policies taken out for the benefit of financial advisor networks)...... 17 - - Caption 135 (partial) Impairment of securities through other comprehensive income - share attributable to insured parties ...... 6 21 - Caption 200 b) Net provisions for risks and charges (Time value allowances for risks (partial) and charges) ...... 2 3 - Caption 200 b) Net provisions for risks and charges (Effect of purchase price (partial) allocation) ...... - 14 - Caption 200 b) Net provisions for risks and charges (Charges related to the sale of (partial) NTV) ...... -9 10 - Caption 200 b) Net provisions for risks and charges - Other net provisions (Charges for (partial) integration)...... -29 -36 - Caption 200 b) Net provisions for risks and charges - Other net provisions (settlement (partial) of tax litigation)...... -9 - + Caption 210 (partial) Net adjustments to / recoveries on property and equipment (Impairment) ...... -4 -36 + Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Impairment) ...... -3 -3 + Caption 230 (partial) Other operating expenses (income) (Impairment losses on repurchased property and equipment) ...... - - + Caption 230 (partial) Other operating expenses (income) (Valuation effects of other assets) ...... -25 + Caption 250 (partial) Profits (Losses) on investments in associates and companies subject to joint control (Adjustments/recoveries due to impairment of associates) .. -15 -7 Other income (expenses) 55 506 Caption 100 a) (partial) Profits (Losses) on disposal or repurchase of financial assets measured at amortized cost - Debt securities (governments, financial and insurance companies) ...... 103 8 Caption 100 a) (partial) Profits (Losses) on disposal or repurchase of financial assets measured at amortized cost - Debt securities (Banks) ...... - 14 - Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost - Debt securities (governments, financial and insurance companies) - (Effect of purchase price allocation) ...... - -9 - Caption 30 (partial) Charges related to the disposal of loans ...... - -19 Caption 250 Profits (Losses) on investments in associates and companies subject to joint control...... 53 177 Caption 280 Profits (Losses) on disposal of investments...... 96 452 + Caption 90 (partial) Fair value adjustments in hedge accounting (Autostrade Lombarde - Transfer of the Revaluation Reserve) ...... - -86 - Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost - Debt securities (governments, financial and insurance companies) - Effect associated with profits (losses) on trading -103 - + Caption 200 b) Net provisions for risks and charges - Other net provisions (settlement (partial) of tax litigation)...... 9 - + Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Entities not subject to management and coordination - concession rights) ...... -19 -18 + Caption 230 (partial) Other operating expenses (income) (Profits/losses on disposal of repurchased property and equipment) ...... - - + Caption 230 (partial) Other operating expenses (income) (Non-recurring expenses) ...... -50
ANNEX B-21
Captions 2019 2018 Restated (millions of euro) - Caption 250 (partial) Profits (Losses) on investments in associates and companies subject to joint control (carried at equity)...... -61 -29 - Caption 250 (partial) Profits (Losses) on investments in associates and companies subject to joint control (Adjustments/recoveries due to impairment of associates) .. 15 7 - Caption 250 (partial) Profits (Losses) on investments in associates and companies subject to joint control (Charges for integration - IFRS 5 measurement of SEC Servizi) ...... - 9 - Caption 280 (partial) Profits (Losses) on disposal of investments (Effect of purchase price allocation) ...... 12 - Income (Loss) from discontinued operations ...... 88 71 Caption 320 Income (Loss) after tax from discontinued operations ...... 64 48 + Caption 300 (partial) Taxes on income from continuing operations (Discontinued operations) ...... 24 23 Gross income (loss) 6,593 6,322 Taxes on income -1,838 -1,650 Caption 300 Taxes on income from continuing operations...... -1,564 -1,345 - Caption 300 (partial) Taxes on income from continuing operations (Discontinued operations). -24 -23 - Caption 300 (partial) Taxes on income from continuing operations (Charges for integration) .. -35 -46 - Caption 300 (partial) Taxes on income from continuing operations (Effect of purchase price allocation) ...... -62 -73 - Caption 300 (partial) Taxes on income from continuing operations (Resolution fund and deposit guarantee scheme) ...... -153 -163 Charges (net of tax) for integration and exit incentives -106 -120 - Caption 130 a) Net losses/recoveries for credit risk associated with financial assets (partial) measured at amortized cost - Loans (Charges for integration)...... -6 - + Caption 190 a) (partial) Personnel expenses (Charges for integration and exit incentives) ...... -52 -66 + Caption 190 b) (partial) Other administrative expenses (Charges for integration) ...... -45 -60 + Caption 200 (partial) Net provisions for risks and charges (Charges for integration)...... 29 36 + Caption 210 (partial) Net adjustments to / recoveries on property and equipment (Charges for integration)...... -20 -29 + Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Charges for integration)...... -48 -35 + Caption 230 (partial) Other operating expenses (income) (Charges/revenues from integration) 1 -3 + Caption 250 (partial) Profits (Losses) on investments in associates and companies subject to joint control (Charges for integration - IFRS 5 measurement of SEC Servizi) ...... - -9 + Caption 300 (partial) Taxes on income from continuing operations (Charges for integration) .. 35 46
ANNEX B-22
Captions 2019 2018 Restated (millions of euro) Effect of purchase price allocation (net of tax) ...... -117 -156 + Caption 30 (partial) Interest margin (Effect of purchase price allocation)...... -91 -112 + Caption 100 b) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at fair value through other comprehensive income (Effect of purchase price allocation) ...... - 5 - Caption 80 (partial) Profits (Losses) on trading (Effect of purchase price allocation)...... - - + Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost - Loans (Effect of purchase price allocation)...... -28 -84 - Caption 100 a) Profits (Losses) on disposal or repurchase of financial assets measured (partial) at amortized cost - Debt securities (governments, financial and insurance companies) - (Effect of purchase price allocation)...... - 9 + Caption 100 c) Profits (Losses) on disposal or repurchase of financial liabilities - (partial) Reclassification of operations of entities not subject to management and coordination (Effect of purchase price allocation)...... 13 - + Caption 200 b) Net provisions for risks and charges (Effect of purchase price (partial) allocation)...... - -14 + Caption 220 (partial) Net adjustments to / recoveries on intangible assets (Effect of purchase price allocation) ...... -61 -33 + Caption 280 (partial) Profits (Losses) on disposal of investments (Effect of purchase price allocation)...... -12 - + Caption 300 (partial) Taxes on income from continuing operations (Effect of purchase price allocation)...... 62 73 Levies and other charges concerning the banking industry (net of tax) ...... -360 -378 + Caption 110 b) Profits (Losses) on other financial assets and liabilities measured at fair (partial) value through profit or loss (b) other financial assets mandatorily measured at fair value (Charges concerning the banking industry) ...... 13 -72 + Caption 190 b) Other administrative expenses (Resolution fund and deposit guarantee (partial) scheme) ...... -526 -469 + Caption 300 (partial) Taxes on income from continuing operations (Resolution fund and deposit guarantee scheme) ...... 153 163 Impairment (net of tax) of goodwill and other intangible assets - Caption 270 Goodwill impairment ...... - - Minority interests...... 10 32 Caption 340 Minority interests ...... 10 32 Net income (loss) 4,182 4,050
ANNEX B-23
Table 9: Unaudited Restated and Reclassified Financial Information: Balance Sheet Table 9 presents the resulting figures of the restatement done in Table 3 and the reclassification done in Table 7. The balance sheet as so restated and reclassified appears in our discussion of the balance sheet in this Offering Memorandum in the 2019 Unaudited Reclassified Financial Information and the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019.
Assets 31.12.2019 01.01.2019 Due from banks...... 47,170 68,723 Loans to customers...... 395,229 393,550 Loans to customers measured at amortized cost ...... 394,093 392,945 Loans to customers designated at fair value through other comprehensive income and through profit or loss ...... 1,136 605 Financial assets measured at amortized cost which do not constitute loans ...... 25,888 14,183 Financial assets at fair value through profit or loss ...... 48,636 41,536 Financial assets at fair value through other comprehensive income ...... 72,046 60,441 Financial assets pertaining to insurance companies measured at fair value pursuant to IAS 39...... 168,202 149,546 Financial assets pertaining to insurance companies measured at amortized cost pursuant to IAS 39 612 952 Investments in associates and companies subject to joint control...... 1,240 943 Property, equipment and intangible assets ...... 17,153 17,145 Tax assets ...... 15,467 17,258 Non-current assets held for sale and discontinued operations ...... 494 1,297 Other assets ...... 23,965 23,811 Total Assets ...... 816,102 789,385 Liabilities Due to banks at amortized cost ...... 103,316 107,982 Due to customers at amortized cost and securities issued ...... 414,578 405,960 Financial liabilities held for trading...... 45,226 41,895 Financial liabilities designated at fair value ...... 4 4 Financial liabilities pertaining to insurance companies measured at amortized cost pursuant to IAS 39 ...... 818 810 Financial liabilities pertaining to insurance companies measured at fair value pursuant to IAS 39 ...... 75,935 67,800 Tax liabilities ...... 2,321 2,391 Liabilities associated with non-current assets held for sale and discontinued operations ...... 41 258 Other liabilities ...... 23,381 20,884 Technical reserves...... 89,136 80,797 Allowances for risks and charges ...... 5,131 6,254 of which allowances for commitments and financial guarantees given 482 510 Share capital ...... 9,086 9,085 Reserves ...... 38,250 37,690 Valuation reserves...... -157 -913 Valuation reserves pertaining to insurance companies ...... 504 9 Equity instruments ...... 4,103 4,103 Minority interests ...... 247 326 Net income (loss) ...... 4,182 4,050 Total liabilities and shareholders’ equity ...... 816,102 789,385
ANNEX B-24
Table 10: Unaudited Restated and Reclassified Financial Information: Income Statement Table 10 presents the resulting figures of the restatement done in Table 4 and the reclassification done in Table 8. The income statement as so restated and reclassified appears in our discussion of the income statement in this Offering Memorandum in the 2019 Unaudited Reclassified Financial Information and the 2018 Unaudited Restated and Reclassified Financial Information Presented in 2019.
2019 2018 Net interest income ...... 7,005 7,271 Net fee and commission income ...... 7,962 7,952 Income from insurance business ...... 1,184 1,084 Profits (Losses) on financial assets and liabilities designated at fair value...... 1,928 1,472 Other operating income (expenses) ...... 4 34 O perating income...... 18,083 17,813 Personnel expenses ...... -5,744 -5,812 Other administrative expenses ...... -2,488 -2,618 Adjustments to property, equipment and intangible assets...... -1,058 -1,057 O perating costs...... -9,290 -9,487 O perating margin...... 8,793 8,326 Net adjustments to loans...... -2,089 -2,394 Other net provisions and net impairment losses on other assets ...... -254 -187 Other income (expenses) ...... 55 506 Income (Loss) from discontinued operations ...... 88 71 Gross income (loss)...... 6,593 6,322 Taxes on income ...... -1,838 -1,650 Charges (net of tax) for integration and exit incentives ...... -106 -120 Effect of purchase price allocation (net of tax) ...... -117 -156 Levies and other charges concerning the banking industry (net of tax) ...... -360 -378 Impairment (net of tax) of goodwill and other intangible assets...... - - Minority interests ...... 10 32 Net income (loss) ...... 4,182 4,050
ANNEX B-25
ISSUER Intesa Sanpaolo S.p.A. Piazza San Carlo, 156 10121 Turin Italy ARRANGERS [Redacted Text] DEALERS [Redacted Text]
LEGAL ADVISORS TO INTESA SANPAOLO As to U.S. and Italian law White & Case LLP 5 Old Broad Street Piazza Diaz, 2 London, EC2N 1DW 20123 Milan United Kingdom Italy
LEGAL ADVISORS TO THE ARRANGERS AND TO THE DEALERS As to U.S. and Italian law and Italian tax law Clifford Chance LLP Clifford Chance Studio Legale Associato 10 Upper Bank Street Piazzetta M. Bossi, 3 London E14 5JJ 20121 Milan United Kingdom Italy INDEPENDENT AUDITORS From 2012 to 2020 From 2021 to 2029 KPMG S.p.A. EY S.p.A. Via Vittor Pisani, 25 Via Lombardia 31 20124 Milan 00187 Rome Italy Italy
TRUSTEE, RECEIPT PAYING AGENT AND NO TE REGISTRAR Citibank, N.A., London Branch Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom RECEIPT ISSUER Citibank, N.A. 388 Greenwich Street 14th Floor New York, NY 10013 United States of America TAX CO MPLIANCE AGENTS Monte Titoli S.p.A. Acupay System LLC Piazza degli Affari, 6 30 Broad Street, 46th Floor 20123 Milan New York, NY 10004 Italy United States of America