AnnualRelazioni Reporte bilancio 2006consolidato 20055th Financial Year 4° Esercizio
Annual Report 2006 5th Financial Year
Anniversary of Banca Mutua Popolare di Verona - June 21st, 1867 Banco Popolare di Verona e Novara Limited liability cooperative company
Registered offices and Headquarters: Piazza Nogara, 2 – 37121 Verona Share capital as of 31-12-2006: 1,351,181,934.00 euro fully paid Tax code, VAT no. and enrollment no. in the Verona Enterprise Registry: 0323127 023 6 Member of the Interbank Fund for Deposit Protection Member of the Banks’ Registry Parent company of the Banking Group Banco Popolare di Verona e Novara Member of the Banking Groups’ Registry
4 Corporate boards, Management and Auditing Company
Board of Directors
Chairman: Carlo Fratta Pasini
Deputy Vice-Chairman: Maurizio Comoli
Vice Chairman: Alberto Bauli
Chief Executive Offier: Fabio Innocenzi
Directors: Marco Boroli Pietro Buzzi, Valentino Campagnolo, Vittorio Corradi, Ugo Della Bella, Giuseppe Fedrigoni, Federico Guasti, Sergio Loro Piana, Maurizio Marino, Giuseppe Nicolò, Gian Luca Rana, Claudio Rangoni Machiavelli, Fabio Ravanelli, Luigi Righetti, Gian Carlo Vezzalini, Franco Zanetta
Board of Statutory Auditors
Chairman: Flavio Dezzani
Standing auditors: Giuliano Buffelli Maurizio Calderini Carlo Gaiani Giovanni Tantini
Alternate auditors: Bruno Anti Emilio Rossi
Board of Advisors
Standing: Marco Cicogna Luciano Codini Sergio Mancini
Alternate: Aldo Bulgarelli Vittorio Cocito
General Manager Massimo Minolfi
Auditing Company Reconta Ernst & Young S.p.A.
5 6 Table of Contents
Group Structure ...... pag. 8 Group financial highlights ...... pag. 12
Report on Group operations ...... pag. 15 The economic backdrop ...... pag. 17 Results, policies and strategies ...... pag. 22 Planning, auditing and service activities ...... pag. 65 Banking activities ...... pag. 81 Performance of the main companies of the Group ...... pag. 124 Operational outlook ...... pag. 148
Independent Auditors’ Report ...... pag. 151
Consolidated financial statements ...... pag. 155 Consolidated balance sheet ...... pag. 157 Consolidated income statement ...... pag. 159 Statement of changes in consolidated shareholders’ equity ...... pag. 160 Consolidated statement of cash flows ...... pag. 162
Notes to the consolidated accounts ...... pag. 165 Parte A – Accounting policies ...... pag. 167 Parte B – Notes to the consolidated balance sheet ...... pag. 197 Parte C – Notes to the consolidated income statement ...... pag. 284 Parte D – Segment reporting ...... pag. 312 Parte E – Risks and associated hedging policies ...... pag. 318 Parte F – Regulatory capital ...... pag. 386 Parte G – Business combinations ...... pag. 394 Parte H – Transactions with related parties ...... pag. 399 Parte I – Share-based payments ...... pag. 407
7 Group Banco Popolare di Verona e Novara
Banco Popolare di Verona e Novara Banca Popolare di Novara Credito Bergamasco
BPV Vita (1) BPVN (Luxembourg) Novara Vita (1) Aletti Merchant Linea (1) Arena Broker Banka Sonic
Banca Aletti & C. Banca Aletti & C. (Suisse) Società Gestione Servizi - BPVN Aletti Gestielle SGR Holding di Partecipazioni Finanziarie Aletti Gestielle Alternative SGR Popolare di Verona e Novara Aletti Fiduciaria BPVN Immobiliare Aletti Private Equity SGR Immobiliare BPV TecMarket Servizi Other companies
(1) Jointly controlled or associated company, carried at equity. Corporate
Retail
Private & Investment Banking & Asset Management
Other
Geographical network of Group branches
Trentino Alto Adige: 21 Lombardia: 300
Valle d’Aosta: 6 • • Friuli-Venezia Giulia: 14
Piemonte: • 220 • • Veneto: 284 • • Emilia-Romagna: 168 •
Liguria: 50 • Marche: 1 Toscana: 40 •
Lazio: 32 • • Puglia: 6
Campania: 42 •
Sicilia: 17
•
The Group’s foreign network is made up of BPVN’s branch in London, Banka Sonic 27 branches, the head offices of foreign companies and by the representative offices in Mumbai (India), Hong Kong and Shanghai (China). Group Financial Highlights
Financial highlights
2006 2005 (*) Changes
Income statement (million euro) Net interest, dividend and similar income 1,485.5 1,265.1 17.4% Net commission income 844.1 799.6 5.6% Total income (net interest and other banking income) 2,752.4 2,393.7 15.0% Operating costs 1,330.8 1,339.5 -0.7% Profit from operations 1,421.6 1,054.2 34.9% Income before tax from continuing operations 1,545.8 970.6 59.3% Net income for the year 1,032.9 597.1 73.0%
31-12-2006 31-12-2005 Changes
Balance sheet (million euro) Total assets 68,694.9 59,758.4 15.0% Customer loans (gross) 46,123.9 41,308.6 11.7% Financial assets and hedging derivatives 10,771.0 10,099.3 6.7% Shareholders' equity 4,872.0 4,021.0 21.2%
Customer financial assets (million euro) Direct customer funds 50,574.0 42,984.1 17.7% Indirect customer funds 74,374.5 73,004.1 1.9% - Assets under management 31,144.1 31,897.6 -2.4% - Mutual funds and Sicav 13,460.6 13,375.5 0.6% - Managed accounts in securities and funds 11,405.3 12,251.8 -6.9% - Insurance policies 6,278.2 6,270.3 0.1% - Assets under custody 43,230.4 41,106.5 5.2%
Operational structure Average number of employees (**) 12,677 12,367 2.5% Bank branches 1,250 1,190 5.0%
(*) Pro-forma data (**) Monthly arithmetic mean
12 Financial ratios and other data
31-12-2006 31-12-2005
Profitability ratios (%) ROE 26.9% 17.4% Net intr., dividend & similar inc./ Total income 54.0% 52.9% Net commission income/ Total income 30.7% 33.4% Operating costs/ Total income 48.4% 56.0%
Operational productivity Customer loans (gross) per employee ( /1000) 3,638.4 3,340.2 Total income per employee ( /1000) 217.1 193.6 Operating charges per employee ( /1000) 105.0 108.3
Credit quality ratios (%) Net NPLs / Customer loans (neti) 1.2% 1.6% Net watchlist loans / Customer loans (net) 1.0% 1.3% Net NPLs / Shareholders' equity 11.3% 16.0%
BPVN stock Outstanding shares 375,328,315 372,935,815 of which: treasury shares - - Official closing share price - Max 23.420 17.293 - Min 17.351 13.753 - Average 21.188 15.047 Basic EPS 2.573 1.499 Diluted EPS 2.545 1.470
13
Report on Group operations
Carlo Scarpa - Verona - BPV Palace Report on Group operations
16 Report on Group operations
The economic backdrop
World scenario
The world economy continued to follow a high-growth track also in 2006. How- ever, a number of new elements emerged compared with the previous years. In the United States, although on a yearly average the economy reported a strong progress, yet in the mid quarters it experienced a harsh slowdown. On the con- trary, Euroland put an end to a long period of stagnation and confirmed the re- covery of the economic cycle starting from the second half of 2005. Oil prices reached a new peak in the first half of the year, but then started to creep down- wards, and closed at slightly lower levels than at the beginning of the year.
In the United States, Gross Domestic Product (GDP) in the first quarter reported at first an annual growth rate of 5.6%, and then started to slow down around mid-year as a result of decreasing consumption and investment rates, especially in the residential sector. Preliminary data point at an annual average growth rate of 3.3%, which is but a fraction higher than in 2005. The trade deficit contin- ued to widen, although at a slower pace compared with the recent past: as a percentage of GDP it remained stable with respect to the previous year (5.8%).
In Asia, the Chinese and Indian economies maintained highly sustained growth rates. The good performance enjoyed by Latin American countries continued, fa- vored by the high prices of raw materials on international markets.
In 2006, the Euro Area consolidated the economic recovery that had started in the second half of the previous year: the annual average GDP growth rate should be around 2.6%, close to its growth potential. Inflation, which in autumn was curbed by the oil price decrease, started to accelerate once again towards the end of the year. On a yearly average, the HCPI (harmonized consumer price index) grew by 2.2%.
For 2007, most economic projections point at a continuation of the economic expansionary phase, albeit at a slightly slower rate. In the United States the real estate market outlook is raising concerns, as after a few years of staggering growth, it started to show some signs of weariness. Euroland’s economy is ex- pected to go on growing, as in 2006, close to its full potential.
Italy
The Italian economy got through a very difficult 2005 and started to grow again. The growth gap with the other main European economies narrowed significant- ly, although a slightly negative differential persists.
In 2006, GDP is expected to have increased by 1.9%, while in the previous year growth had been practically equal to zero. The economic expansion was partic- ularly strong in the first quarter (+0.8% as compared with the previous quarter), as well as in the fourth quarter of the year (+1.1% based on the economic cy- cle and +2.9% in terms of growth trend). This result was favored in particular by the recovery of household spending, just as in the past its weakness had been
17 Report on Group operations
one of the main causes underlying economic stagnation. Fixed investments, af- ter being quite lively at the beginning of the year, started to slow down from summer on. Exports kept on satisfactory growth levels throughout the year.
The manufacturing industry made its contribution to the positive economic cy- cle. In 2006, the industrial output index adjusted for working days increased by 2.4%. Particularly buoyant dynamics were reported by the transportation means, household appliances, precision tools and mechanical sectors.
Inflation in Italy has remained in line with the Euro Area. The harmonized con- sumption price index grew by 2.2%.
The labor market benefited from the favorable economic performance. On a yearly average, employment grew by 1.9%, i.e., 425,000 employees more as compared with 2005, and the unemployment rate decreased to 6.8%.
The estimated debt to GDP ratio in 2006 for Public Administration entrenched at 4.4%, despite the strong increase in tax proceeds (+7.7% as compared with 2005); in November the public debt totaled 1,607 billion euro (107.1% of GDP).
According to forecasts, in 2007 the expansionary phase of the Italian economy should continue, favored by the recovery of domestic private consumption. Yet the stricter fiscal policy, possible further interest rate increases by the ECB and a possible slower growth of international trade might gradually restrain its progress.
The economy in our business regions
In 2006, Banco’s main business regions, namely Veneto, Piedmont, Emilia Ro- magna and Lombardy, reported a marked economic improvement when com- pared with the previous year, in line with the national economic performance. According to Unioncamere, based on the projections for local economies, the GDP growth rate should brush 2% in all four regions. The most significant ele- ment in any case is the recovery of domestic demand, driven by household spending and by fixed investments.
In Veneto the economic growth that had started in the second half of 2005 con- tinued and gained momentum. The Veneto economy benefited from the lively foreign demand, as well as from the recovery of domestic consumption. The im- proved consumer confidence, which was favored by a more lively labor market, had a positive effect on household spending. In the first nine months of the year the manufacturing industry reported a 3.4% in production year on year. Worth mentioning in particular are the metallurgic and metal product sectors. Foreign trade figures for the first half of the year reported a growth trend in exports of 8.2% and in imports of 9.7%. In the first six months of the year even the build- ing and construction sector reported a positive performance, sustained by the housing demand as well as by the recovery of production investments. In the re- al estate sector, prices kept showing a lively dynamic. The service industry con-
18 Report on Group operations
tributed to the positive performance of the regional economy. In particular trade was positively affected by an increasing household spending.
In Piedmont, as of the fourth quarter of 2005 and throughout 2006, the indus- trial output posted a positive dynamic, following eighteen negative rate adjust- ments in a row as of the second quarter of 2001. As a result, 2006 posted a +3.1% rate, while 2005 had closed with a 2.6% decrease. At a closer analysis of the trends of the single manufacturing industries, in the fourth quarter the output of the automobile industry reported an annual increase of 4.9%, thus confirming the encouraging performance shown in the previous quarters. Also the growth rate adjustments of the electronic sector (+7%), metals (+6.1%) and mechanic (+4.2%) sectors, which play a major role in the Piedmont manufac- turing arena, stood above the regional average. The textile and apparel sectors, following a temporary sagging in the third quarter (-2.9% yearly), started to grow again (+0.8% growth trend). The food industry reported a 1.4% increase. The building and construction sector, following a few years of high investment and activity levels, started to slow down: the value added decreased by 1.2%. On the contrary, the real estate sector remained positive. The preliminary year- end data reveal this has been a good time for the service industry, in particular trade and tourism, the latter particularly benefited from the Winter Olympic Games held in Turin.
In the first half of the year, the manufacturing industry in Emilia Romagna sent positive signals, that seemed to hint at a final trend reversal after a long rough period of distress between 2002 and 2005. In the second quarter the output growth rate reached 2.7%, and sales grew by 3%. The mechanical, electric and transportation means sectors, which between April and June reported a 4% out- put growth rate, acted as a major driver for the whole manufacturing industry in the Emilia region. On the contrary, the wood and furniture sector reported a negative performance, with an output decreasing by almost 3%. With regard to the other economic sectors, building and construction continued to grow. In re- tailing, growth was recorded by both large retailers and for the first time since 2002 also by small and medium retailers.
The economic performance in Lombardy is fairly in line with the other three re- gions described above. In particular, it is worth mentioning the strong progress reported by investments in plants and equipment. According to Unioncamere es- timates, during the year they increased by 2.3%. The manufacturing industry showed that recovery is underway: in the fourth quarter industrial output grew by 4.2% as compared with the same quarter 2005 and by 1.7% as compared with the third quarter 2006. The industrial output index, calculated by Union- camere in Lombardy, reached its highest level since 2000. Among the various sectors, the steel, chemical and mechanical industries are the most outstanding. In the building and construction sector, the slowdown in public works was off- set by the increase in the demand for private housing.
19 Report on Group operations
Monetary and financial markets
In the first six months of 2006, the Federal Reserve continued to nudge the cost of capital, raising the refinancing rate to 5.25% at the end of June. In the sec- ond half of the year, as a result of the economic slowdown, the US central bank changed its monetary policy attitude, and left interest rates unchanged.
In the Euro Area, the European Central Bank raised the cost of capital also in the second part of the year, aiming at keeping price increases under control during a favorable economic cycle. The five monetary adjustments introduced by the ECB in 2006 raised the discount rate to 3.50%, from 2.25% at year start.
In keeping with the monetary policy direction adopted by ECB, interest rates on the European monetary market increased across all maturities.
Long term treasury bond yields in the Euro Area grew substantially in the first four months of 2006; then, as of May they started to decrease, albeit gradually. In December yields started to grow once again. As a whole, the yield curve flat- tened out conspicuously during the year.
After a rather marked drop in the second quarter of the year, the main world stock markets started to grow once again, restoring the positive trend started in 2003. The stock price increase was more sustained in the Euro Area and in Japan, where actually the spring dip had been steeper.
The domestic banking industry
In 2006, the growth rate of performing loans issued by the Italian banking in- dustry reported a renewed momentum, and by year end stood at +11.2% (+8.6% in December 2005). This vitality was triggered once again by medium/long term loans (+11.6% at the end of 2006, +13.0% the previous year), even though also short term loans gradually took off, going from +2% at the end of 2005, up to +10.5% at the end of 2006, revived by the economic re- covery. In particular, total loans to households and non-financial firms reported a growth trend of +11.4%, well above the nominal GDP growth and the in- vestment growth rate.
The gradual softening of the reference macroeconomic scenario made it possi- ble to limit the development of new non-performing loans, thus ensuring a high credit quality: indeed, in 2006 gross non-performing loans persistently de- creased, ranging from -15% in January to –12.8% in November. The growth in loans led to a further decrease in the risk ratio, which went down to 3.5% gross at the end of 2006 from 3.66% in December 2005; the net risk ratio stood un- changed at 1.25%, as compared with twelve months before.
20 Report on Group operations
Customer portfolio allocations have been consistently driven by a high liquidity demand, further fed by the expectation of a progressive increase in market rates. However, in the second half of the year, traditional customer deposits and funds (net of repurchase agreements and bonds) set back to more balanced growth rates (+5.1% at the end of 2006, from +7.5% in December 2005). The aggre- gate growth continued to be sustained by checking accounts, that in effect re- ported decreasing rates (from +9.1% at the end of 2005, down to +6.4% at the end of 2006), also due to the brilliant performance of stock markets and to the actual interest rate raises. The evolution of the other funding constituents points at a renewed vitality of bonds (+11.4%, as compared with +10.3% at year-end 2005) and a comeback of repurchase agreements with retail customers (+21.7%, as compared with the 0.5% decrease at year-end 2005), as a result of the trend reversal reported by interest rates.
With regard to the organizational structure of the Italian banking industry, data as of September 2006 show that the growth trend in the number of branches is still ongoing: total branches at national level went up to 31,973. The annual in- crease is equal to 738 units (+2.4%), of which 223 in the North West, 206 in the North East, 179 in Central Italy, 102 in the South and 28 in the islands.
In 2006, the change in monetary policy adopted by the European Central Bank interrupted the long-lasting descent of bank rates characterizing the period be- tween January 2001 and December 2005. Annual average loan rates increased by 66 basis points (to 5,92%) as compared with 2005 and deposit rates in- creased by 50 basis points to 1.45%; as a result the average spread increased by 16 basis points in the course of the year.
21 Report on Group operations
Results, policies and strategies
Consolidated balance sheet
ASSETS 31-12-2006 31-12-2005 Changes (thousand euro)
Cash and cash equivalents 360,546 339,356 21,190 6.2% Financial assets and hedging derivatives 10,770,971 10,099,336 671,635 6.7% Due from banks 8,680,735 5,848,353 2,832,382 48.4% Due from customers 45,244,563 40,275,893 4,968,670 12.3% Equity investments 796,935 431,025 365,910 84.9% Property. plant and equipment 538,047 535,999 2,048 0.4% Intangible assets 447,753 395,589 52,164 13.2% Non-current assets held for sale and discontinued operations 239 27,073 (26,834) (99.1%) Other assets 1,855,146 1,805,763 49,383 2.7%
Total 68,694,935 59,758,387 8,936,548 15.0%
LIABILITIES 31-12-2006 31-12-2005 Changes (thousand euro)
Due to banks 8,116,144 8,099,580 16,564 0.2% Due to customers, debt securities in issue and financial liabilites measured at fair value 50,574,033 42,984,131 7,589,902 17.7% Financial liabilities and hedging derivatives 1,899,375 1,587,488 311,887 19.6% Provisions for liabilities 619,152 576,923 42,229 7.3% Other liabilities 2,469,452 2,372,167 97,285 4.1% Minority interest 144,761 117,065 27,696 23.7%
Shareholders' equity 4,872,018 4,021,033 850,985 21.2% - Share capital and reserves 3,839,104 3,423,979 415,125 12.1% - Net income for the year 1,032,914 597,054 435,860 73.0%
Total 68,694,935 59,758,387 8,936,548 15.0%
22 Report on Group operations
Consolidated income statement
INCOME STATEMENT 2006 2005 (*) Changes (thousand euro)
Net interest income 1,340,744 1,209,637 131,107 10.8% Profit (loss) from equity investments carried at equity 144,787 55,470 89,317 161.0%
Net interest, dividend and similar income 1,485,531 1,265,107 220,424 17,4%
Net commission income 844,086 799,601 44,485 5.6% Other revenues 177,492 162,882 14,610 9.0% Net financial income 245,283 166,085 79,198 47.7% Insurance income - - -
Other operating income 1,266,861 1,128,568 138,293 12,3%
Total income (Net interest and other banking income) 2,752,392 2,393,675 358,717 15,0%
Personnel expenses (884,265) (889,172) (4,907) (0.6%) Other administrative expenses (361,449) (364,251) (2,802) (0.8%) Impairment/write-backs on PPE and intangible assets (85,070) (86,101) (1,031) (1.2%)
Operating costs (1,330,784) (1,339,524) (8,740) (0,7%)
Profit from operations 1,421,608 1,054,151 367,457 34,9%
Net write-downs for loan impairments. guarantees and commitments (99,809) (72,944) 26,865 36.8% Net write-downs for the impairment of other assets (2,195) (2,140) 55 2.6% Net provisions for risks and charges (58,762) (29,855) 28,907 96.8% Profit/Loss on disposal of investments and shareholdings 284,991 21,367 263,624 1233.8%
Income/Loss before tax from continuing operations 1,545,833 970,579 575,254 59,3%
Tax on income from continuing operations (488,062) (365,564) 122,498 33.5%
Income/Loss after tax from continuing operations 1,057,771 605,015 452,756 74,8%
Loss after tax from discontinued operations 6,225 7,726 (1,501) (19.4%)
Net income for the period 1,063,996 612,741 451,255 73,6%
Minority interest (31,082) (15,687) 15,395 98.1%
Net income attributable to the Parent company 1,032,914 597,054 435,860 73,0%
(*) Restated for comparability
23 Report on Group operations
Listed below are the items that have been reclassified with respect to the bal- ances shown in the face of the income statement required by the Bank of Italy: • dividends from shares classified among assets available for sale and assets held for trading (shown under item 70) have been combined under net fi- nancial income; • net trading income and fair value adjustments in hedge accounting (items 80 and 90), together with profit or loss on financial assets and liabilities des- ignated at fair value (item 110) have been recognized in net financial in- come; • profit or loss on disposal of loans (item 100) has been consolidated with net write-downs/write-backs on impaired loans, guarantees, commitments and credit derivatives; • profit or loss on disposal or repurchase of financial assets available for sale and financial liabilities (envisaged under item 100) have been posted under net financial income; • tax and other expense recoveries (item 230) have been directly deducted from administrative expenses instead of being itemized under other oper- ating income; • the depreciation of expenses for improvements to third party assets (ac- counted for under item 230) was combined with impairment/write-backs on PPE and intangible assets, instead of appearing with other operating in- come and expense; • the share of profit of associates carried at equity (item 240) was posted with dividends from equity investments.
Shown below is a summary table illustrating the impact on the profitability of the two periods under comparison with regard to significant non-recurring events or transactions.
24 Report on Group operations
INCOME STATEMENT 2006 2005 Recurr. (thousand euro) Recurring Non Recur. Total Recurring Non Recur. Total % change
Net interest income 1,340,744 1,340,744 1,209,637 1,209,637 10.8% Profit (loss) from equity investments carried at equity 85,359 59,428 144,787 55,470 55,470 53.9%
Net interest, dividend and similar income 1,426,103 59,428 1,485,531 1,265,107 - 1,265,107 12.7%
Net commission income 844,086 844,086 799,601 799,601 5.6% Other revenues 149,809 27,683 177,492 154,512 8,370 162,882 (3.0%) Net financial income 233,066 12,217 245,283 166,085 166,085 40.3%
Other operating income 1,226,961 39,900 1,266,861 1,120,198 8,370 1,128,568 9.5%
Total income (Net interest and other banking income) 2,653,064 99,328 2,752,392 2,385,305 8,370 2,393,675 11.2%
Personnel expenses (884,265) (884,265) (874,668) (14,504) (889,172) 1.1% Other administrative expenses (361,449) (361,449) (352,731) (11,520) (364,251) 2.5% Impairment/write-backs on PPE and intangible assets (85,070) (85,070) (86,101) (86,101) (1.2%)
Operating costs (1,330,784) - (1,330,784) (1,313,500) (26,024) (1,339,524) 1.3%
Profit from operations 1,322,280 99,328 1,421,608 1,071,805 (17,654) 1,054,151 23.4%
Net write-downs for loan impairments, guarantees and commitments (99,809) (99,809) (72,944) (72,944) 36.8% Net write-downs for the impairment of other assets (2,195) (2,195) (2,140) (2,140) 2.6% Net provisions for risks and charges (58,762) (58,762) (29,855) (29,855) 96.8% Profit/Loss on disposal of investments and shareholdings - 284,991 284,991 - 21,367 21,367
Income/Loss before tax from continuing operations 1,161,514 384,319 1,545,833 966,866 3,713 970,579 20.1%
Tax on income from continuing operations (445,407) (42,655) (488,062) (374,696) 9,132 (365,564) 18.9%
Income/Loss after tax from continuing operations 716,107 341,664 1,057,771 592,170 12,845 605,015 20.9%
Loss after tax from discontinued operations - 6,225 6,225 - 7,726 7,726
Net income for the period 716,107 347,889 1,063,996 592,170 20,571 612,741 20.9%
Minority interest (19,368) (11,714) (31,082) (15,687) (15,687) 23.5%
Net income attributable to the Parent company 696,739 336,175 1,032,914 576,483 20,571 597,054 20.9%
25 Report on Group operations
The item “Profit (loss) of associates carried at equity” includes the share of profit pertaining to the Group generated in the course of the year by the as- sociate Cornel s.a r.l. amounting to 59.4 millions. The proceeds were generat- ed by the disposal of the equity interest held by Cornel s.a r.l. in Theme Parks Holding S.p.A., a company which in turn controlled Gardaland S.p.A.. Net of taxes and minority interest, the finalization of the merchant banking transac- tion generated a positive impact on the net income for the year amounting to 56.3 millions.
The item “other net operating income” includes the capital gain of 27.7 millions generated by the disposal of the business line comprising 18 bank branches to Banca Popolare Italiana. This transaction is part of the “branch swap” plan that was finalized on October 1st, 2006. After tax, the transaction had a positive im- pact on the net income for the year of 18.5 millions. The same item in the in- come statement of the previous year recognized a non-recurring income gener- ated by the subsidiary Seefinanz amounting to 8.4 millions.
The item “net financial income” includes the capital gains generated by the sale of some equity investments belonging to financial assets available for sale, to- taling 12.2 millions. Said profits were reported as a result of the sale of the eq- uity interest in S.I. Holding (+7.4 millions) and Cattolica Aziende and Cattolica Assicurazioni (+4.8 millions). After tax, the sale generated a positive impact on the net income for the year of 8.2 millions.
The items comprising the aggregate “operating charges” in the previous finan- cial year included non-recurring items for 26.0 millions. Specifically, the item “personnel expenses” included the charge associated with the redundancy fund initiated by the subsidiary Banca Popolare di Novara for its employees and total- ing 14.5 millions, while the item “other administrative expenses” included the cost incurred for the early termination of the rental contract for a large building located in Milan, amounting to 11.5 millions. After tax, the non-recurring items described above had a total negative impact on the 2005 net income of 16.9 millions.
In 2006 several shareholdings and investments have been disposed of, generat- ing total net capital gains for 285.0 millions recognized under item “Profit on disposal of shareholdings and investments”. In detail, the above capital gains re- fer mainly to the following transactions: • in November the share of the stake held in Banca Italease that is not locked up by the shareholders’ agreement, equal to 4.26% of the share capital, was sold for 128.5 millions. The deal led to a capital gain of 97.6 millions, and after tax it had a positive impact on the net income for the year of 94.2 millions; • the merger by acquisition of Leasimpresa S.p.A. into Banca Italease, which was approved during the general shareholders’ meetings of the two com- panies on November 9th and 10th and came into effect on December 31st, 2006. In compliance with IAS/IFRS, the merger generated a capital gain from share exchange of 149.0 millions, net of the portion written off as in-
26 Report on Group operations
tercompany profit. Net of taxes and minority interest, the deal generated a positive impact on the net income for the year of 130.0 millions; • in the course of the year, several buildings were sold, generating a total net capital gain of 41.8 millions. After tax, said transactions had a positive im- pact on the net income for the year of 26.2 millions.
Also in 2005 some shareholdings and investment disposals had been finalized, generating a total net capital gain of 21.4 millions recognized under the item “profit on disposal of shareholdings and investments”.
The net income generated in 2006 from discontinued operations, which are by nature non-recurring, amounted to 6.2 millions (7.7 millions in the previous year.). This income component is almost totally represented by the results realized by the subsidiaries that managed the tax collection business, which were sold at the end of the third quarter 2006.
During the administrative periods under comparison, no other material atypical or unusual transactions occurred. However it should be noted, that as part of the management and recovery of impaired loans, during the year non-performing loans were sold without recourse, leading to the recognition of profit on dis- posals of 36.4 millions. Said profit has been recognized in the reclassified income statement under “net write-downs/write-backs on loans, guaranteed and com- mitments”.
27 Report on Group operations
Shown below is the quarterly profitability evolution during the year.
INCOME STATEMENT IV Q III Q II Q I Q (thousand euro) 2006 2006 2006 2006 (*)
Net interest income 350,748 343,245 327,071 319,680 Profit (loss) from equity investments carried at equity 88,973 20,198 20,318 15,298
Net interest, dividend and similar income 439,721 363,443 347,389 334,978
Net commission income 198,409 205,834 215,013 224,830 Other revenues 65,254 35,195 36,729 40,314 Net financial income 67,710 51,791 58,234 67,548
Other operating income 331,373 292,820 309,976 332,692
Total income (Net interest and other banking income) 771,094 656,263 657,365 667,670
Personnel expenses (233,248) (222,113) (209,303) (219,601) Other administrative expenses (74,898) (90,093) (99,549) (96,909) Impairment/write-backs on PPE and intangible assets (15,016) (25,317) (21,527) (23,210)
Operating costs (323,162) (337,523) (330,379) (339,720)
Profit from operations 447,932 318,740 326,986 327,950
Net write-downs for loan impairments, guarantees and commitments (45,355) (27,450) (6,068) (20,936) Net write-downs for the impairment of other assets (1,726) (466) (3) - Net provisions for risks and charges (28,099) (8,341) (7,517) (14,805) Profit/loss on financial assets designated at fair value Profit/Loss on disposal of investments and shareholdings 236,635 8,750 3,790 35,816
Income/Loss before tax from continuing operations 609,387 291,233 317,188 328,025
Tax on income from continuing operations (134,104) (112,173) (105,751) (136,034)
Income/Loss after tax from continuing operations 475,283 179,060 211,437 191,991
Loss after tax from discontinued operations 6,250 (3,070) 1,276 1,769
Net income for the period 481,533 175,990 212,713 193,760
Minority interest (17,688) (4,326) (4,692) (4,376)
Net income attributable to the Parent company 463,845 171,664 208,021 189,384
(*) Restated for comparability
28 Report on Group operations
Credit intermediation
Direct customer funds
On December 31st, 2006 direct customer funds reached 50,574.0 millions from 42,984.1 millions on December 31st, 2005, up by 17.7% as compared with the previous year and by 7.7% during the last quarter.
Direct customer funds
60,000
50,000 50,574,0
€ 40,000 42,984.1
30,000 in mln di 20,000
10,000
0 31-12-2005 31-12-2006
(thousand euro) 31-12-2006 31-12-2005 Changes
Due to customers 28,905,375 24,768,824 4,136,551 16.7% - checking accounts and demand deposits 22,080,458 20,212,412 1,868,046 9.2% - term deposits 2,065,334 830,036 1,235,298 148.8% - repurchase agreements 3,548,946 2,382,140 1,166,806 49.0% - other 1,210,637 1,344,236 -133,599 -9.9% Debt securities in issue 16,334,515 12,932,148 3,402,367 26.3% Financial liabilities measured at fair value 5,334,143 5,283,159 50,984 1.0%
Total 50,574,033 42,984,131 7,589,902 17.7%
Excluding repurchase agreements, direct customer funds grew by 15.8% as compared with the previous year. Specifically, debt securities in issue and finan- cial liabilities measured at fair value increased by 19.0%, going from 18,215.3 millions on December 31st, 2005 up to 21,668.7 millions on December 31st, 2006. Also all the other constituents making up direct customer funds showed a positive performance, with a total growth rate of 16.7%, from 24,768.8 mil- lions on December 31st, 2005 to 28,905.4 millions at year-end 2006.
29 Report on Group operations
Indirect customer funds
The market value of indirect customer funds amounts to 74,374.5 millions, up by 1.9% from 73,004.1 millions in the previous year.
Indirect customer funds
80,000
60,000 74,374.5 € 73,004.1 40,000
in mln di 20,000
0 31-12-2005 31-12-2006
The growth however was the result of the two separate aggregates making up indirect customer funds: administered versus managed assets. Assets under cus- tody posted a 5.2% growth rate, going from 41,106.5 millions on December 31st, 2005 to 4,230.4 millions at year-end 2006. In a year characterized by a net fund outflow for mutual funds as a whole at in- dustry level, affecting in particular Italian mutual funds (-42,493.9 millions), as- sets under management held back to a 2.4% decrease from 31,897.6 millions on December 31st, 2005. The last quarter of the year returned positive and posted an increase in managed assets of 1.1%.
(thousand euro) 31-12-2006 31-12-2005 Changes
Assets under management 31,144,121 31,897,623 -753,502 - 2.4% - mutual funds and SICAV 13,460,644 13,375,503 85,141 0.6% - managed accounts inv, in securities & in mutual funds 11,405,265 12,251,805 -846,540 -6.9% - insurance policies 6,278,212 6,270,315 7,897 0.1% Assets under custody 43,230,363 41,106,495 2,123,868 5.2%
Total indirect customer funds 74,374,484 73,004,118 1,370,366 1.9%
Excluding institutional customer funds (mutual funds, banking foundations, merchant banks, lease and factoring companies, investment companies - SIM, SICAV, fund managers, insurance companies, pension funds and other superan- nuation funds, central supervisory authorities and banking associations) on De- cember 31st, 2006 indirect customer funds totaled 56,916.8 millions, up by 5.1% from 54,152.5 millions on December 31st, 2005.
30 Report on Group operations
As a result, total customer funds (direct + indirect) went up to a total of 124,948.5 millions, from 115,988.2 millions on December 31st, 2005, reporting an increase of 7.7%.
Customer loans
Financial year 2006 was characterized by a particularly high increase in loan vol- umes supporting the companies and territories covered by the Group. Gross loans to customers reached 46,123.9 millions, up by 11.7% from 41,308.6 mil- lions on December 31st, 2005. Note, however, that as a result of Leasimpresa’s merger by acquisition into Banca Italease, the assets and liabilities as at Decem- ber 31st, 2006 do not include the loans associated with the subsidiary’s finance lease contracts. On December 31st, 2005 loans under finance lease contracts amounted to 2,489.1 millions. If for the sake of a like to like comparison we ex- clude the 2005 figure, the loan increase reported in 2006 totals 18.8%.
Gross customer loans 50,000
40,000 46,123.9 30,000 € 41,308.6
20,000
in mln di 10,000
0 31-12-2005 31-12-2006
Net of total write-downs, loans amounted to 45,244.6 millions, up by 12.3% from 40,275.9 millions on December 31st, 2005. Specifically, it is worth highlighting the 30.8% increase reported by mortgages, that went from 13,835.2 millions at the end of 2005 to the current 18,092.1 millions. The loan book recomposition process started a few years ago is still un- derway: mortgages on December 31st, 2006 accounted for 40.0% of total net loans.
31 Report on Group operations
(thousand euro) 31-12-2006 31-12-2005 Changes
Mortgages 18,092,144 13,835,282 4,256,862 30.8% Checking accounts 10,318,965 9,452,039 866,926 9.2% Financial leases 48 1,783,358 -1,783,310 -100.0% Repurchase agreements 514,744 247,912 266,832 107.6% Loans and other advances 16,318,662 14,957,302 1,361,360 9.1%
Total net loans to customers 45,244,563 40,275,893 4,968,670 12.3%
Total impaired loans to customers are constantly decrementing. Gross of write- downs, they amounted to 1,754.4 millions from 2,148.5 millions on December 31st, 2005, down by 18.3%.
31-12-2006 Gross Individual Collective Net (thousand euro) exposure write- write- exposure downs downs
Impaired loans 1,754,394 -607,930 -1,553 1,144,911 Non-performing loans 1,064,495 -514,842 -2 549,651 Watchlist loans 553,048 -83,387 -881 468,780 Restructured loans 59,437 -9,701 -24 49,712 Past due 77,414 - -646 76,768
Performing loans 44,369,511 - -269,859 44,099,652 Country risk 5,359 - -273 5,086 Other performing loans 44,364,152 - -269,586 44,094,566
Total 46,123,905 -607,930 -271,412 45,244,563
31-12-2005 Gross Individual Collective Net (thousand euro) exposure write- write- exposure downs downs
Impaired loans 2,148,491 -782,166 -2,699 1,363,626 Non-performing loans 1,327,722 -683,310 -1 644,411 Watchlist loans 598,702 -87,818 -2,059 508,825 Restructured loans 82,379 -10,916 - 71,463 Past due 139,688 -122 -639 138,927
Performing loans 39,160,153 - -247,886 38,912,267 Country risk 10,259 - -389 9,870 Other performing loans 39,149,894 - -247,497 38,902,397
Total 41,308,644 -782,166 -250,585 40,275,893
32 Report on Group operations
The aggregate decrease during the year is mainly attributable to the fall in gross non-performing loans, which went from 1,327.7 millions on December 31st, 2005 to the current 1,064.5 millions, down by 19.8%.
The impaired loans to total customer loans ratio, gross of write-downs, was run- ning down at 3.80% on December 31st, 2006 from 5.20% on December 31st, 2005. This downtrend is further confirmed by the same ratio net of write- downs, which went from 3.39% on December 31st, 2005 down to 2.53% on December 31st, 2006.
Gross NPLs / Gross loans 3.21%
2.31%
31-12-2005 31-12-2006
The NPL to loans ratio, again gross of write-downs, amounted to 2.31% from 3.21% on December 31st, 2005. Net of write-downs, the ratio stood at 1.21% from 1.60% on December 31st, 2005.
Write-downs of impaired loans on December 31st, 2006 accounted for 34.74% of their gross total amount as compared with 36.53% on December 31st, 2005. Specifically, write-downs of non-performing loans on December 31st, 2006 ac- counted for 48.37% of their gross total amount as compared with 51.46% on December 31st, 2005.
Write-downs of performing loans accounted for 0.61% of their total gross amount, as compared with 0.63% on December 31st, 2005.
33 Report on Group operations
Financial assets
On December 31st, 2006 the Group’s financial assets stood at 10,732.1 millions, up by 6.3% from 10,099.3 millions on December 31st, 2005.
(thousand euro) 31-12-2006 31-12-2005 Changes
Financial assets held for trading 8,424,623 7,908,135 516,488 6.5% Financial assets designated at fair value 314,430 292,662 21,768 7.4% Financial assets available for sale 1,053,752 1,021,750 32,002 3.1% Financial assets held to maturity 939,319 876,714 62,605 7.1%
Total 10,732,124 10,099,261 632,863 6.3%
On December 31st, 2006 financial assets held for trading accounted for 78.5% of the Group’s financial assets.
Financial assets held for trading grew by 6.5% over the year. Shown below is the breakdown of trading assets by type of financial instrument.
(thousand euro) 31-12-2006 31-12-2005 Changes
Debt securities 2,816,831 3,244,428 -427,597 -13.2% Equity securities 599,449 257,366 342,083 132.9% UCITS units 951,844 765,373 186,471 24.4% Assets sold and not derecognized 2,488,331 2,063,033 425,298 20.6% Financial and credit derivatives 1,568,168 1,577,935 -9,767 -0.6%
Total 8,424,623 7,908,135 516,488 6.5%
Financial assets sold and not derecognized refer to securities sold in reverse re- purchase agreements.
Financial assets measured at fair value are mainly represented by UCITS invest- ments.
(thousand euro) 31-12-2006 31-12-2005 Changes
Debt securities 3,789 1,938 1,851 95.5% Equity securities 9,901 4,170 5,731 137.4% UCITS units 300,740 286,554 14,186 5.0%
Total 314,430 292,662 21,768 7.4%
34 Report on Group operations
Financial assets held to maturity are represented exclusively by debt securities, of which part is being used in reverse repurchase agreements.
(thousand euro) 31-12-2006 31-12-2005 Changes
Debt securities 79,502 134,738 -55,236 -41.0% Assets sold and not derecognized 859,817 741,976 117,841 15.9%
Total 939,319 876,714 62,605 7.1%
Shown below is the breakdown of financial assets available for sale.
(thousand euro) 31-12-2006 31-12-2005 Changes
Debt securities 496,147 373,491 122,656 32.8% Equity securities 492,777 409,199 83,578 20.4% UCITS units 22,688 30,633 -7,945 -25.9% Assets sold and not derecognized 42,140 208,427 -166,287 -79.8%
Total 1,053,752 1,021,750 32,002 3.1%
Equity investments
On December 31st, 2006, aggregate investments in companies under significant influence and in jointly controlled companies amounted to 796.9 millions, from 431.0 millions on December 31st, 2005. The list of companies under significant influence is reported in the Explanatory notes, Chapter B, Section 10.
Illustrated below are the main changes occurred in the course of the year, which were not attributable to adjustments of associate valuations as a result of changes in their shareholders’ equity.
• As at December 31st, 2006 the Group held a 30.72% interest in the share capital of Banca Italease. The stake recognized in the consolidated accounts as at December 31st, 2006 amounted to 455.6 millions, compared to 189.6 millions recognized on December 31st, 2005. As already explained, in the month of November the Group sold the share of the stake held in Banca Italease that is not locked up by the shareholders’ agreement, equal to 4,01% of the share capital, for 128.5 millions. The deal generated a capital gain of 97.6 millions, and after tax it led to a positive impact on the net in- come for the year of 94.2 millions. On the following December 31st, the merger by acquisition of Leasimpresa into Banca Italease came into effect. This transaction gave rise to the assignment of a share exchange with the
35 Report on Group operations
companies of the Group that held an interest in Leasimpresa of 7,325,500 newly issued shares of Banca Italease, accounting for 8.77% of the new share capital. The new assigned shares have been recognized in the finan- cial accounts at a unit price of 44.14 euro, which corresponds to the share price quoted on December 29th, 2006, this being the last quotation before the coming into effect of the merger. The transaction gave rise to the recog- nition of a share exchange capital gain, net of the portion written-off as in- tercompany profit, amounting to 149.0 millions. Concurrently, the carrying value of the shareholding in Banca Italease increased by 257.3 millions. Net of taxes and of minority interest, the positive impact on the net income for the year amounted to 130.0 millions. • On December 31st, 2005 the Group held a 32,20% stake in Linea S.p.A., recognized in the financial accounts at a value of 26.2 millions. With the aim of strengthening its position in the strategic sector of consumer credit, in the course of the year the Group purchased from the French company Cofinoga (associate of the Lafayette Group and the Bnp Paribas Group) an additional 15.76% stake in Linea, amounting to 47.3 million euro. As a re- sult, the stake held by the Group in the associate Linea went from 32.20% at yearend 2005 to the current 47.96%. The deal was performed jointly with Banca Popolare di Vicenza, which purchased an equivalent stake from the same French shareholder, bringing its stake up to 47.96%. Banco and Banca Popolare di Vicenza agreed that the existing shareholders’ agreement shall not be changed, except for the exit of the French partner from the agreement. As a result, Linea S.p.A. is now jointly controlled by the Parent Company and by Banca Popolare di Vicenza. • Again with the aim of strengthening its position in the sector of consumer credit, on February 16th, 2006 the Group acquired a 10% stake in Delta S.p.A. from Estuari S.p.A., the founding partner of the Delta Group with Cassa di San Marino. This initial investment in September was followed by the purchase of an additional 10% stake from Sopaf S.p.A.. The total in- vestment amounted to 40.3 millions. • During the year, the merchant banking deal concerning Gardaland S.p.A. was successfully finalized. The associate Cornel s.a r.l. sold its stake in Theme Parks Holding S.p.A., a company that in turn controlled Gardaland S.p.A. As a result of the above sale, Cornel s.a r.l. has been liquidated and in 2006 has already distributed to its partners most of the generated earn- ings and has returned all the initial investment made by the Group, amount- ing to 23.9 millions. The carrying value of the stake held in the associate as at December 31st, 2006 was 1.9 millions. As already illustrated, the “Gardaland” deal generated a profit of 59.4 millions. Net of taxes and mi- nority interest, the positive impact on the net income for the year totaled 56.3 millions. • In January the Group had participated in the capital increase of BPV Vita S.p.A. with a total additional investment of 7.5 millions.
36 Report on Group operations
Shareholders’ equity and solvency ratios
On December 31st, 2006, the consolidated shareholders’ equity, including valu- ation reserves and net income for the period, totaled 4,872.0 millions, up by 21.2% from 4,021 millions on December 31st, 2005.
Consolidated shareholders’ equity
5,000
4,000 4,872.0 4,021.0 € 3,000
2,000 in mln di 1,000
0 31-12-2005 31-12-2006
On December 31st, 2006, the consolidated regulatory capital amounted to 5,058.7 millions, from 3,811.7 millions in the previous year. After the application of prudential filters, core capital totaled 3,907,2 millions from 3,290.6 millions at year-end 2005. The Group’s TIER 1 capital ratio (core capital over RWA) on December 31st, 2006 came in at 7.66% from 7.39% on December 31st, 2005. On December 31st, 2006 the “total capital ratio” (regulatory capital plus third level subordinated debt securities issued to cover market risks on risk weighted assets) came in at 9.92% from 8.55% in the previous year.
37 Report on Group operations
Treasury shares owned, purchased and sold
Parent company’s common shares Number Face value Turnover (in €)
Balance as at 31 December 2005 - - - Purchase 13,813 49,727 291,844 Sale -13,813 -49,727 -291,674 Profit (loss) from trading - - -170 Profit (loss) from valuation - - Balance as at 31 December 2006 - - -
Consolidated income statement
Profit from operations
Profit from operations reached 1,421.6 millions, up by 34.9% from 1,054.2 mil- lions in the previous year. Excluding non-recurring items, the aggregate grew by 23.4%, driven by both the actions taken to support the development of the in- termediation business, and the search for efficiency gains through a strict cost control.
Net interest income stood at 1,340.7 millions, up by 131.1 millions with respect to the net interest income of 1,209.6 millions reported in the income statement as of December 31st, 2005. The 10.8% annual growth rate was driven by the expansion of assets, especially loans, as well as by the slight increase in customer spreads. Specifically, loans to customers – in terms of yearly average liquid capi- tals – rose to 45.4 billions, posting a 17.5% increase, mainly as a result of the good performance of medium/long term loans, that grew at an annual growth rate of 23.3%. Customer funds – again in terms of yearly average liquid capitals – reached 44.9 billions, reporting an annual growth rate of 13.4%. This change however, as already illustrated, is mainly attributable to our London branch op- erations (+34.9%), and to the issue of bonds for institutional investors (+77.2%). If we exclude these constituents, the more specifically commercial component of the Group’s direct customer funds grew at an annual rate of 3.6%. Against this backdrop, customer spreads increased by 4bps, from 3.01% in 2005 to 3.05% in 2006: the rise of monetary market rates (the 1 month Eu- ribor rate went from 2.17% in 2005 up to 2,98% in 2006), given the different speed at which assets and liabilities are re-priced, brought about a substantial in- crease in mark down (from 0.73% in 2005 to 1.06% in 2006, namely + 33bps) which more than offset the decrease in mark up (from 2.28% in 2005 to 1.99% in 2006, namely -30bps). The latter was affected by the increase in monetary market rates and by the mounting competitive pressure, as well as by the re- composition of loans, with a greater weight lent to medium/long term loans (medium/long term loans as a percentage of total interest bearing loans – based on the average stock – went from 44% in 2005 to 47% in 2006), which are in-
38 Report on Group operations
herently characterized by narrower spreads compared to short term loans. The estimated impact of said recomposition on loan mark up is about 3bps/4bps. It is worth mentioning, that the customer spread increase was even more signifi- cant when referring to the more specifically commercial portion, namely net of bonds placed on the market of institutional investors, which factor in the cost of our creditworthiness (from 3.11% to 3.28%, with an annual growth rate of 17 bps). In the fourth quarter net interest income reached 350.7 millions, up by 2.2% from 343.2 millions in the third quarter.
Net interest income 1,500
1,300 1,340.7
1,100 € 1,209.6
900 in mln di 700
500 31-12-2005 31-12-2006
The contribution made by the share of profit of associates carried at equity amounted to 144.8 millions, 89.3 million more than the 55.5 millions posted in 2005.
(thousand euro) 31-12-2006 31-12-2005 Changes
Cornel 59,430 - 59,430 - Banca Italease 48,035 26,238 21,797 83.1% BPV Vita 12,052 12,686 -634 -5.0% Novara Vita 10,472 6,593 3,879 58.8% I.C.B.P.I. 7,042 5,518 1,524 27.6% Linea 6,423 4,371 2,052 46.9% Delta 473 - 473 - Other companies 860 64 796 1243.8%
Total 144,787 55,470 89,317 161.0%
39 Report on Group operations
Note, that the fourth quarter contribution, amounting to 89.0 millions, includes the share of profit of the Group from the associate Cornel S.a.r.l. following the disposal of the 59.4 million controlling stake it held in Theme Parks Holding S.p.A.(company which in turn controlled Gardaland S.p.A.). Excluding this com- ponent, which is by nature non-recurring, the contribution made in the fourth quarter was 29.6 millions, as compared with 20.2 millions in the third quarter.
Net interest, dividend and similar income as a result came in at 1,485.5 millions, up by 17.4% from 1,265.1 millions December 31st, 2005 (+12.7% net of non- recurring components).
Net commission income on December 31st, 2006 amounted to 844.1 millions, up by 5.6% from 799.6 millions in the same period the previous year.
Net commission income
900
800
844.1 700 799.6 € 600
500 in mln di
400
300 31-12-2005 31-12-2006
Growth was mainly driven by indirect customer funds, which benefited from the greater intermediated volumes of administered assets and the higher unit per- centage profitability of managed assets. The unit percentage profitability of in- termediated assets was 0.76%, basically in line with the previous year (0.75%), as the growth of assets belonging to the less profitable class (administered as- sets as a percentage of total indirect customer funds grew from 55% to 58%) was offset by the higher unit profitability of managed assets, which further ben- efited from the recomposition of indirect managed assets towards financial products granting a higher unit percentage profitability (balanced/equity funds as a percentage of total managed assets went from 48% in 2005 up to 51% in 2006), as well as from the growing placement of front-load products, such as, for example, flexible funds and policies. To this regard, one-off commissions ac- count for little more than 6% of total proceeds.
40 Report on Group operations
(thousand euro) 31-12-2006 31-12-2005 Changes
Management, brokerage and advisory services 588,291 559,179 29,112 5.2% Recovery of expenses on customer checking accounts and other deposits 101,307 95,049 6,258 6.6% Payment and collection services 90,063 86,615 3,448 4.0% Guarantees given 29,097 26,016 3,081 11.8% Other services 35,328 32,742 2,586 7.9%
Total 844,086 799,601 44,485 5.6%
With respect to commissions from management, brokerage and advisory servic- es, asset management services grew by 8.5%, thus offsetting the drop suffered by securities placement, advisory services and currency trading, as detailed in the table below.
(thousand euro) 31-12-2006 31-12-2005 Changes
Asset management 301,756 280,154 21,602 7.7% Distribution of third party services 122,156 111,037 11,119 10.0% Securities placement 79,259 85,157 -5,898 -6.9% Custodian bank 27,658 26,624 1,034 3.9% Order collection 26,386 21,236 5,150 24.3% Securities trading 17,557 15,985 1,572 9.8% Currency trading 11,113 15,520 -4,407 -28.4% Securities custody and administration 1,125 1,502 -377 -25.1% Advisory services 4,765 8,609 -3,844 -44.7% Off-branch sale of securities, products and services -3,484 -6,645 3,161 -47.6%
Total 588,291 559,179 29,112 5.2%
In the fourth quarter, commissions amounted to 198.4 millions, slightly below the 205.8 millions in the previous quarter, mainly due to a slowdown of distri- bution of third party services.
Other revenues as of December 31st, 2006 stood at 177.5 millions, up by 9.0% from 162.9 millions reported at the end of the previous year. The 2006 item in- cludes however a capital gain of 27.7 millions, generated by the sale of a busi- ness line to Banca Popolare Italiana as part of a bank branch swap operation. Ex- cluding said capital gain, at the end of 2006 the aggregate under examination totaled 149.8 millions, slightly below the 154.5 millions in the previous year, once again stripped of any non-recurring items. Net of non-recurring compo-
41 Report on Group operations
nents, the fourth quarter contribution came in at 37.6 millions from 35.2 mil- lions in the third quarter.
Net financial income, which combines the net profit from assets and liabilities held for trading, for hedging, measured at fair value, profit on disposal and re- purchase of financial assets and liabilities and dividends from shares classified as financial assets held for trading and available for sale, totaled 245.3 millions, up by 47.7% with respect to 166.1 millions in 2005. Net of non-recurring compo- nents, which in 2006 were represented by the capital gains generated by the dis- posal of shareholdings held in S.I. Holding (+7.4 millions) Cattolica Aziende and Cattolica Assicurazioni (+ 4.8 millions) and other companies, the growth rate is 40.3%. This increase was driven by higher dividends received from equity secu- rities held in the portfolio of assets available for sale and by the insourcing of the production service for financial products distributed by the sales network to re- tail and corporate customers.
Net of non-recurring items, the fourth quarter contribution was 62.9 millions from 51.8 millions in the third quarter.
(thousand euro) 31-12-2006 31-12-2005 Changes
Net trading income 106,555 86,134 20,421 23.7% Fair value adjustments in hedge accounting 1,029 506 523 103.4% Profit/Loss on purchase / disposal: 18,886 13,607 5,279 38.8% - financial assets available for sale 16,919 11,647 5,272 45.3% - financial assets held to maturity - 1,675 -1,675 - financial liabilities 1,967 285 1,682 590.2% Profit/Loss on financial A/L designated at fair value 29,219 10,593 18,626 175.8% Dividend income and similar revenues on AFS assets 89,594 55,245 34,349 62.2%
Total 245,283 166,085 79,198 47.7%
As a result, other operating income (operating income other than interest, divi- dend and similar income) totaled 1,266.9 millions, up by 12.3% from 1,128.6 millions in the same period the previous year (+ 9.5% net of non-recurring items).
Total income, resulting from the sum of interest, dividend and similar income and other operating income, totaled 2,752.4 millions, up by 15.0% with respect to 2,393.7 millions in the previous year (+11.2% net of non-recurring items).
42 Report on Group operations
Total income 3,000
2,700 2,752.4
€ 2,400
2,100 2,393.7 in mln di 1,800
1,500 31-12-2005 31-12-2006
Personnel expenses amounted to 884.3 millions, down by 0.6% from 889.2 mil- lions in the previous year. It is worth underlining that 2005 personnel expenses included a non-recurring component of 14.5 millions, namely the cost associat- ed with the redundancy fund set up by Banca Popolare di Novara. On the con- trary, the 2006 expense benefited from the positive effect produced by the ad- justment to the discount rate expressed by the market, which is used to value li- abilities associated with termination benefits, supplementary pension plan ben- efits and deferred compensations. Net of said components, personnel expenses would have increased by 16.5 millions, or 1.9%. Personnel expenses in the fourth quarter amounted to 233.2 millions, up from 222.1 millions in the third quarter mainly due to the recognition of the impact of personnel incentive schemes on income as a result of the positive performance achieved.
Other administrative expenses for the year totaled 361.4 millions, down by 0.8% from 364.2 millions on December 31st, 2005. Note, that the 2005 ex- pense included a non-recurring item of 11.5 millions resulting from the charge for the early termination of a rental contract. Net of non-recurring items, other administrative expenses grew by 2.5%.
Depreciation and amortization stood at 85.1 millions from 86.1 millions on De- cember 31st, 2005. As a result, operating costs came in at 1,330.8 millions, for- mally down by 0.7% from 1,339.5 millions in the previous year. However, net of non-recurring items and of the impact generated by the changed discount rate, operating costs would total 1,337.7 millions, up by 1.8%. Thanks to profit growth and cost containment, the cost income ratio was substantially reduced from 56.0% at the end of 2005 to 48.4%. The structural efficiency gain achieved by the Group’s operational platform was confirmed also by the cost in- come ratio net of non-recurring income and expense, which was cut back by 5 percentage points, going from 55.1% in the previous year to the current 50.2%.
43 Report on Group operations
Write-downs and provisions for risks and charges
Net write-downs for impaired loans amounted to 99.8 millions from 72.9 mil- lions in the previous year. 19.8 millions out of the 26.9 million increase were due to higher write-downs associated with increasing performing loans. Note, that in the second quarter a sale without recourse to third parties of a pool of non- performing loans was finalized, corresponding to a total gross book value of about 174 millions. The sale gave rise to the recognition of net write-backs, in- clusive those generated by discounting, of about 36 millions. Stripped of the time value effect associated with the valuation of impaired loans, the net cost of lending was 29 b.p.. Net of the positive impact resulting from the loan sale, the net cost of lending was 33 b.p., as compared to 34 b.p. in 2005.
Net provisions for risks and charges amounted to 58.8 millions from 29.9 mil- lions in the previous year. Provisions were mainly justified by a prudential as- sessment of risks associated with so-called clawback actions commenced against banks of the Group and with other outstanding disputes, including customer complaints for interest compounding and assets associated with securities of is- suers which subsequently defaulted.
Profit (loss) on disposal of investments
In the course of the year a number of investments and shareholdings were dis- posed of, allowing the Group to recognize a total net profit of 285.0 millions. In particular, in the fourth quarter the above mentioned disposal of the share of the stake held in Banca Italease that is not locked up by the shareholders’ agreement led to the recognition of a capital gain of 97.6 millions, whilst the following merger by acquisition of the subsidiary Leasimpresa S.p.A. in Banca Italease gen- erated a capital gain from share exchange of 149.0 millions. Said non-recurring profit, in addition to profits from other minor sales, added up to the profits re- ported in the previous quarters and associated with the sale of some real estate investments amounting to 41.8 millions. In the same period of the previous year, the disposal of some shareholdings gen- erated the recognition of 21,4 million worth of profits.
44 Report on Group operations
Income from continuing operations
Income before tax of continuing operations came in at 1,545.8 millions, up by 59.3% from 970.6 millions in 2005 (+20.5% net of non-recurring items). To this regard, the retail business segment contributed with 626.4 millions, up by 34.7% compared to the previous year, mainly as a result of the net interest in- come growth. The corporate business segment contributed with 322.8 millions, up by 43,7% compared to the previous year. However said growth goes down to +17.3% if we strip out the non-recurring proceeds generated by the Garda- land merchant banking deal performed by our associate Aletti Merchant. Final- ly, the finance business segment confirmed the results attained the previous year, thus offsetting the higher financing costs (interbanking and EMTN programs) with the performance of other operating income (commissions and earnings).
Net income for the year
Net income from discontinued operations totaled 6.2 millions compared to 7.7 millions in the previous year, and it is almost completely represented by the con- tribution made by tax collection activities before the disposal which took place at the end of the third quarter. After an income tax for the period of 488.1 mil- lions and a minority interest of 31.1 millions, net income for the year added up to 1,032.9 millions, up by 73.0% from 597.1 millions in the previous year. Net of non-recurring items, net income grew by 21.2 %.
Net income
1,200
900
€ 1,032.9 600
597.1 in mln di 300
0 31-12-2005 31-12-2006
Proposed dividend pay out
Taking into account the capital management policies aimed at positioning the Group’s tier 1 ratio (core capital over risk weighted assets) resulting from the in- tegration with Banca Popolare Italiana within a range of 6.0% and 6,5%, while maintaining the total capital ratio (regulatory capital over risk weighted assets) within the limits recommended by regulatory authorities, the proposed dividend to be distributed in 2006 amounts to 0.83 euro, which in absolute terms corre- sponds to a dividend pay-out of about 45% of the consolidated net income, net of non-recurring items, in line with the previous year.
45 Report on Group operations
Reconciliation between the Parent company’s and the consolidated sharehol- ders’ equity and net income
(thousand euro) Shareholders’ Net income equity for the period
Balance as at 31-12-2006 as in Parent Company's accounts 3,967,812 587,831
Derecognition of intercompany dividends collected in the period from fully consolidated companies and carried at equity (223,829)
Derecognition of intercompany capital gains from discontinuing and contributing operations (165,012) (64,225)
Differences between the shareholders' equity of consolidated associates and their carrying value, net of minority interest 917,752
Net income for the period of consolidated associates, net of minority interest 602,492
Differences between the pro-rata value of the shareholders' equity and the carrying value of equity investments carried t equity 151,466
Group's share of profit for the period of associates carried at equity 130,645
Balance as at 31-12-2006 as in consolidated accounts 4,872,018 1,032,914
Rating and stock performance
The BPVN stock on the market
The chart below show a comparison (with indices based on 1/1/2006 = 1) be- tween the stock performance of the Group listed companies in 2006 and the as- sociated performance of the S&P Mib, Mib 30 and banking Mib indices.
46 Report on Group operations 02-01-2006 16-01-2006 30-01-2006 13-02-2006 27-02-2006 13-03-2006 27-03-2006 10-04-2006 24-04-2006 08-05-2006 22-05-2006 05-06-2006 19-06-2006 03-07-2006 17-07-2006 31-07-2006 14-08-2006 28-08-2006 11-09-2006 25-09-2006 09-10-2006 23-10-2006 06-11-2006 20-11-2006 04-12-2006 18-12-2006
Ratings
In 2006, BPVN met with the rating firms Moody’s and Standard & Poor’s for the annual due diligence. Both the top management and the heads of the main Group functions took a very active part in these meetings, in order to satisfy the information requirements raised by the rating agencies. The table below illustrates the ratings assigned to BPVN, Creberg and Banca Aletti as at December 31st, 2005 and at year-end 2006.
Ratings BPVN Ratings Creberg Ratings Aletti 31 Dec. 2006 31 Dec. 2005 31 Dec. 2006 31 Dec. 2005 31 Dec. 2006 31 Dec. 2005
MOODY’S - Long term A2 * A2 (stable) - Short term P-1 * P-1 - Financial Strength C + * C+
S&P - Long term A ** A (stable) A ** A (stable) A ** A (stabile) - Short term A-1 ** A-1 A-1 ** A-1 A-1 ** A-1
FITCH - Long term (Issuer Default Rating) A+ * A+ (stable) - Short term F1 F1 - Individual B * B - Support 3 3
* On creditwatch for a possible downgrading (negative creditwatch) since October 2006 ** S&P, after placing the ratings on creditwatch for a possible downgrading in October 2006, it raised the creditwatch in March 2007 and confirmed the former ratings.
47 Report on Group operations
Following the announcement of the merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana (October 16th, 2006) the ratings marked with a star (*) in the table above have been placed on creditwatch for a possi- ble downgrading as a result of the lower ratings assigned to Banca Popolare Ital- iana, (long term rating: BBB for Fitch, Baa2 for Moody’s and BBB for Standard & Poor’s). Both Standard & Poor’s and Fitch specified that in the case of a down- grading - and the decision shall be made to the latest by the coming into legal effect of the merger - it would be limited to a single notch. After BPVN’s Special Shareholders’ meeting on March 12th, 2007 S&P raised its creditwatch, confirming the former ratings for BPVN and its subsidiaries, and as- signed a Stable outlook.
Merger plan between BPI and BPVN
On December 13th, the Boards of Directors of Banca Popolare Italiana (BPI) and Banco Popolare di Verona e Novara (BPVN), approved the merger plan between the two Banks, envisaging the creation of a new banking organization, called Ban- co Popolare, a cooperative company acting as a Holding Parent Bank. Banco Popo- lare shall be operational as of July 1st, 2007 and shall be listed at Borsa Italiana.
The two merging Banks have also envisaged the creation of two new banking corporations, fully controlled by Banco Popolare: “Banca Popolare di Lodi S.p.A.”, which shall be contributed a business line belonging to BPI, basically comprised of the network of branches located mainly in its original franchise and by the controlling stakes in Banca Popolare di Crema S.p.A., Banca Popolare di Cremona S.p.A., Banca Popolare di Mantova S.p.A. and Caripe S.p.A.; and “Banca Popolare di Verona - San Geminiano e San Prospero S.p.A.”, which shall be contributed a business line belonging to BPVN, basically comprised of the branch network.
The combination of the two Groups, Popolare Italiana and Popolare di Verona e Novara, shall give rise to a new country-wide Group, marked by a strong strate- gic position in Northern Italy, a stronger coverage of Central Italy and an inter- esting presence in the Southern regions, susceptible of strategic speculations. The new Group shall be characterized by a special focus on households, Small and Medium-sized Enterprises, and by excellent value creation capabilities to the benefit of its shareholders and territories.
The business combination shall follow a complex procedure which should last about six months. The main procedural milestones are the authorization by the Bank of Italy for the entire merger plan (which was granted on January 26th, 2007); the merger approval in the special shareholders’ meetings of Popolare Verona e Novara and Popolare Italiana (held on March 10th); the identification of the business lines to be contributed to the two new public companies by the Board of Directors of BPVN and BPI; the application for admission to listing of the shares of the new cooperative bank and the appointment of the auditing company; the approval of the prospectus by the Boards of Directors of BPI and BPVN, and finally the approval of the admission to listing by Borsa Italiana.
48 Report on Group operations
In parallel, the organizational and operational integration, to be implemented in compliance with the structure and the governance rational set out in the Busi- ness Plan, is expected to require about 12 to 18 months and dedicated teams. The implementation macro-activities shall involve many crucial aspects of the new Group: • integration of the Head Office functions in the new Holding company and creation of the Head offices of Banca Popolare di Verona-San Geminiano e San Prospero and Banca Popolare di Lodi, based on the governance model identified for the new Group and effective for all the “Banche del territo- rio”; • reorganization of the distribution network in compliance with the organi- zational rational and the operational modalities defined for the commercial organization of the new Group; • adoption of the IT system of Popolare di Verona e Novara across the new Group, complemented with the top-grade modules characterizing BPI’s sys- tem; • integration and multi-polarization of centralized back-offices; • integration of Consumer credit, Corporate Finance, Asset management and Private banking, and arrangement of retail products, with the most appro- priate business deals, if necessary; • revision of existing purchasing contracts under a Group perspective, in or- der to generate savings and get rid of any duplications; • harmonization of Group reporting systems.
The estimated time horizon of 12 to 18 months for the implementation of the merger and the reorganization of the new Group is based on three factors: the first lies in the experience accrued by the two Groups in the field of integration plans; the second refers to the choice of the target IT system for the new Group, which has already been made upon adopting the Business Plan; the third is rep- resented by the appointment of the management team that shall be in charge of the integration and of the new Group, which has already been identified.
Based on available information, the implementation process is subdivided into five macro-phases: 1. the first phase, which was completed in March, focused on the precise def- inition of the activities to be developed by the merger date (for example ac- counting, reporting etc.) in order to ensure a correct implementation. The management modalities of current operations were also defined in this phase. In particular, various potential criticalities were analyzed in depth, among which: • how to manage investments at best, that were already planned/re- solved separately by the two Banks, avoiding duplications; • how to guarantee a strong and close focus on the market throughout the integration process, and in particular on all those offer and service level-related elements that may change or deteriorate during the deli- cate transition period; • also in this phase, the IT system migration strategy and model were an- alyzed.
49 Report on Group operations
2. the second phase, from March to June, is dealing with the detailed planning of the new Holding company, the Head offices of Banca Popolare di Verona - San Geminiano e San Prospero, of Banca Popolare di Lodi and of the “Banche del territorio”, i.e. banks enjoying very strong and close ties with the local territory; the software programs required by the Regulatory Au- thorities for the status of single Group are being developed, as well as to support the migration of the Head office functions and the integration of the product factories; moreover, the integration of the IT and Back-Office activities in SGS (Società Gestione Servizi - Bpvn Spa) is being analyzed. In this phase, planning covers the migration of BPI branches towards the tar- get information system of BPVN, in close interaction with the harmoniza- tion of service models and the range of products across the various seg- ments; 3. the third phase, from June to the end of 2007, is when the functions of the Holding company and of the Head offices of the Banks (“Banche del terri- torio”), shall be fully operational, and the organizational structure necessary to implement it shall be put in place; the IT migration of head office pro- cedures shall be carried out, together with a large part of the IT migration of BPI’s network; the integration of product factories shall be started, the first marketing campaigns aimed at obtaining revenue synergies shall be launched, and the harmonization of the range of products and the of the service models shall be started; 4. a fourth phase, from January 2008 to February 2008, shall see the full mi- gration of the BPI branches on BPVN’s information system; 5. a following fifth phase shall put in place the final branch organization (so- called “territorial rearrangement”) of the new Group.
Side by side with these activities, a dedicated team shall delve into the area of human resources, to select the most suited mechanisms to manage personnel mobility, retraining/training and possible redundancies, and to deal with the as- sociated contract and administrative issues.
The level of complexity required to implement the merger is going to call for a major effort on the part of all the corporate boards and management, as well as a management and planning modality based on a clear sense of responsibility and on a rigorous control to verify that results have been attained and deadlines met.
In the course of the various phases, the planning organization shall evolve to ad- just to the number and type of activities to be carried out, the deployable re- sources and the time schedules of corporate operations, and in any case it shall comprise: • a steering committee, in charge of making key integration-related deci- sions. It shall lay out the plan’s strategic course to be followed to achieve the targets defined in the Business plan, and it shall approve the related budgets. The Committee is made up of the Chief Executive Officers, the General Managers and by the top managers of the two Groups involved in the plan operations;
50 Report on Group operations
• an integration team. It shall assist the steering committee in the planning of the activities of the various Workgroups, it shall solve whenever possible all the technicalities and specific issues brought forth by the various Work- groups, prepare all the necessary material for the required resolutions, co- ordinate and control the work in progress, monitor the accomplishment of the Business plan objectives, support the steering committee in the alloca- tion of the integration budget, and coordinate the management of redun- dancies/retraining/mobility; • dedicated Workgroups following the subprojects forming the integration plan. The workgroups shall report to the future heads of the various activi- ties/functions. They shall plan and implement all the necessary actions to make the New group, the support functions and the integrated product fac- tories operational.
Branch swap between Gruppo BPVN and Gruppo BPI
As of October 1st, 2006, the swap of bank branches between Gruppo BPVN and Gruppo BPI was successfully accomplished. The operation had started in May af- ter an agreement was reached with the top management of Gruppo Banca Popolare Italiana for the joint sale and purchase of business lines comprising 18 bank branches.
The line of business the Group sold is made up of 9 branches belonging to Ban- co and 9 branches belonging to Banca Popolare di Novara, located in the March- es region, in the provinces of Ancona and Macerata; in Tuscany, in the provinces of Florence, Livorno, Arezzo and Massa; in Umbria, in the province of Terni and in the Lazio region, in the provinces of Frosinone, Rome and Latina.
The line of business acquired by Banco is made up of 18 branches, all located in Trentino Alto Adige, in the province of Trento, together with the brand-name “Banca Popolare del Trentino”. In keeping with the guidelines of the Group Strategic Plan, which identifies the expansion of the sales network into nearby areas, in particular in neighboring regions, as one of the possible pathways for growth, this transaction shall allow the Group to count on a significant number of branches in the region of Trentino Alto Adige, concentrated exclusively in the province of Trento.
All the actions necessary to accomplish the branch swap have been combined in a complex plan subdivided into sub-projects (so-called operational working sites), staffed by Group representatives side by side with similar workgroups set up in Banca Popolare Italiana; in particular, in order to tackle all the issues asso- ciated with the migration and to guarantee the fulfillment of all the defined ob- jectives, the following “working sites” have been created: loans, corporate ac- tions, legal affairs, administration and taxes, organization, information technol- ogy, human resources, commercial actions.
To guarantee a seamless and full operation of the bank branches from day one under the new management, a detailed training plan for newly acquired per-
51 Report on Group operations
sonnel has been set up, together with a communication plan addressing both new customers and “relocated” customers, to provide them with all the neces- sary information to maintain their business relations under the new ownership. New customers have also been offered a series of particularly favorable and competitive terms compared to market benchmarks.
The alignment with the organizational model in use in Gruppo BPVN gave rise to the creation of the new “Trentino Business Area” (Area Affari del Trentino) and to the appointment of the local Loan Committee, in order to promote and leverage the bank’s local franchise.
The strategic plan
The Group’s 2005-2014 Strategic plan, which was presented in November 2004, laid the groundwork for a further strengthening of our distinctive identity as “banca del territorio”, namely the bank of choice on the territory, and for the development of important initiatives addressing expected growth areas in the future. The project is organized along various intervention areas, which are each headed by Group top managers, and it is subdivided into sub-projects managed by workgroups staffed by personnel belonging to the different commercial banks, so as to ensure the highest involvement and sharing of decisions across the Group.
In 2006, the Plan is now deep into the implementation phase, and it is achiev- ing significant results both form a planning and economic point of view. Based on this, the strategic profit and loss/asset and liability objectives have been defined for each intervention area, and said objectives have been integrated in the Group’s 2007-2009 three-year Business Plan. Illustrated below are the project objectives and the most noteworthy results achieved in 2006 across the various intervention areas.
Corporate
The aim of the project is to provide companies, in particular the mid corporate segment, which in the coming years shall face deep changes, with a qualified partner, capable of standing by their side and supporting them throughout their growth process, thanks to a “think-tank” producing consistent and custom-built solutions.
Described below are the main results attained in the various sub-projects: • the dedicated sales network is being further developed, also thanks to the recruitment of “corporate developers” in the three commercial banks of the Group and to the issue of a new sale supporting software application (namely, the Corporate portal called “GIOCO” - Gestione Integrata del- l’Operatività COrporate - integrated management of corporate operations – devoted to corporate managers), and the recruitment of “corporate de- velopers- managers” for BPVN and BPN has started; • with regard to medium/long term loans, a temporary joint-venture was set
52 Report on Group operations
up, so called Raggruppamento Temporaneo d’Impresa (R.T.I.), in collabora- tion with Europrogetti and Finanza e Veneto Sviluppo, to be active in the field of subsidized loans governed by Law 488/92 – Depressed Areas; inter- nal communication and training activities have been implemented across the banking network, and a Group web site devoted to subsidized loans has gone live on the web (www.agevolati.it); • in order to lend the best service to companies during special corporate fi- nance operations, new possible Corporate Finance business areas have been identified, training actions for the sales networks are being rolled out, and Business Committees have been set up in the commercial banks and the merchant banking organization; • as to related financial services, a project has been defined, whereby the BPVN Group shall provide its corporate customers with a distinctive risk management service in addition to the current derivative offer, while new corporate liquidity investment products have already been released; • the range of insurance related services has been complemented with a D&O policy (namely, a policy that protects the personal assets of managing di- rectors, statutory auditors and executives); • as to “Foreign Business” – “Estero”, a new Foreign business procedure called “PREMIA” was rolled out across BPVN and BPN, together with the new Estero Merci procedure (Foreign Business – Commodities), while for Banca Aletti and Creberg it is slated to be released by the beginning of 2007; with regard to the support lent to corporate globalization, the “India Desk” and a portal devoted to commercial transactions with China in col- laboration with SACE (www.cina.bpvn.it) have been implemented; as to communications, a dedicated Group Newsletter was created, called “Inter- national News”; significant correspondent banking agreements have been finalized (15 new partnership agreements with foreign banks were entered into) and with regard to corporate “Cash Management / Cash Pooling” services, the new service called “Global Cash Manager” (GCM) was imple- mented; • with regard to Public Agencies, in some Business Areas of BPN and CB ac- tions were launched to make contact with and acquire suppliers and former utilities; in BPN a number of training actions were carried out devoted to Corporate Managers; finally, actions have been taken to enhance and strengthen the central units supporting the banks’ commercial operations in the development and management of the Public Agencies segment.
Specialized external networks
The aim of the project is the sale of mortgages to retail customers by way of spe- cialized third party organizations (for ex., property agent networks) with whom the Group signed business and shareholding agreements: • Essere S.p.A., of which the Group acquired an 8% stake, is a company spe- cializing in the sale of mortgages to retail customers through 300 exclusive agents and 42 points of sale; • UBH SpA is a holding group engaging in real estate franchising and financ- ing even with prestigious brands (Professionecasa, Grimaldi, etc), of which
53 Report on Group operations
the Group holds a 15% share, with which (non-exclusive) agreements were entered envisaging a progressive increase in the granting activities in favor of the commercial banks; • business agreements were defined with Banca Italease SpA, Delta SpA and Linea SpA aiming at broadening the existing range of products.
The results in terms of mortgage sales have been particularly interesting, and have made a substantial contribution to the growth of the Group’s market share.
Retail loans
The aim of the plan is to pursue an aggressive strategy to improve the Group’s business results in mortgages and personal loans, bridging the gap between the current market share and the natural market share, given the number of branch- es located across the territory, by becoming the partner of choice for families who wish to accomplish their projects.
Illustrated below are the main results achieved: • distribution of the “Alberto” mortgage, the first offset mortgage in Italy, which has already has already topped a significant share of the mortgages sold in the year; • completion of the analysis and development stage for the introduction of payment flexibility options for floating mortgages and personal loans, which are slated to be launched in the first part of 2007, side by side with the definition of the new mortgage catalogue; • the training program involving about 550 mortgage sale specialists across the BPVN branches has been completed, aiming at appointing at least one “Mortgage sale specialist” per branch, so as to adopt a structured selling process, focusing on customer needs; • release of the new front-end software application to support “Home mort- gage specialists”; an analysis was launched to implement the tool, with a pre-authorization immediate verification and the issue of the conditional mortgage promise (to be confirmed by the following inquiry); • release of a basic version of the above front-end application for the Contact Center, with the aim of turning contacts with new customers into actual ap- pointments at the branch; • definition of the pre-assessment model for the Group’s retail customers, for loans up to 20 thousand euro without prior inquiry; launch of a number of successful marketing campaigns, based among other things on the scoring of customer purchasing propensity.
Pension products
The project aims at seizing the opportunities offered by the pension reform un- derway, by evolving products, the offer and the distribution to both retail and corporate customers. In 2005, all the projects dealing with the definition of the product range and the distribution model were completed, while the associated customer-oriented
54 Report on Group operations
marketing and communication actions were called off in November 2005 due to the postponement of the pension reform to January 1st, 2008. Since the pension reform is now expected to be launched in 2007, as approved in the Financial Budget on December 2006, at yearend the project was started again, based on marketing actions with specific market penetration campaigns and the associated training programs, focusing on the contents of the new products and on communication campaigns.
Retail segments
This project aims at improving our commercial approach towards some customer segments - Immigrants, Seniors and Women, which, according to social and de- mographic studies, are expected to show very interesting evolutions in the com- ing years. Shown below are some of the main actions taken with regard to the project ded- icated to ‘Immigrants’: • broadening of the money transfer service (called “Formula Friend Trans- fer”), through agreements with correspondent banks. To date, the service covers 15 Countries and additional agreements are being signed with for- eign banks to extend the service onto 10 more Countries; • hiring of foreign staff and opening of branches in “immigration-intensive” districts; • marketing launch of the dedicated checking account called “Formula Friend Account” across the whole Group; • preparation of a significant communication plan covering the “BPV Formu- la Friend Service” range of products and services; • definition of collaboration agreements with foreign consulates, envisaging the preparation of promotional material covering the “Formula Friend Ser- vice” in different languages, to be distributed to non-Italian communities living in our business territories; • preparation and roll out of a training program aiming at improving and tai- loring the relational approach and reception modalities to the specificities of immigrant customers.
With regard to the Senior segment: • definition of collaboration agreements with some associations close to the senior world; • definition and promotion of dedicated arrangements; • creation of a dedicated program, aiming at identifying a product portfolio and a timetable of events associated with promotional actions for the Se- nior segment.
With regard to the Women segment the main results are: • launch of the “Exclusive” logo, identifying the line of products, services and initiatives devoted to Women. • sponsoring of events closely connected with the women’s world (in partic- ular, the Salone Nazionale dell’Imprenditoria Femminile in Turin – National Women Entrepreneurship Exhibit), during which a dedicated range of prod-
55 Report on Group operations
ucts was promoted; distribution of questionnaires to survey women’s pref- erences in terms of banking relations; • launch of specific initiatives targeting female customers; • creation of a fidelity card to be associated with promotional events for the acquisition of new customers.
Cost cutting and operational innovation
The project identified a series of actions to improve productivity and efficiency, aimed at building an even stronger and effective relation with customers. The main results achieved in the various sub-projects are illustrated below: •Efficiency Gains across the Network (+20 Project): the following new pro- cedures were released: • “VE.RA.” (Vendita Rapporti): it guides and simplifies the sale of products to Private Customers, with automatic printing of contracts (indication of “missing products”, single contract summarizing the specific terms, with pre-printed attachment illustrating the general terms governing the agree- ment); • “SIGNEO”: it makes it possible to display the signature specimen filed by customers, thus streamlining and speeding up the workload of branches; • “VISUALASSE”: it makes it possible to display and check on a daily basis the images of checks issued from own branches and paid by third party branch- es; the procedure has already been released in all three Banks.
Services offered via virtual channels are being further evolved, for both corpo- rate customers (for ex. through the additions to the product “VANTAGGIO”) and retail customers (for ex. with the evolution of online trading).
As to actions aimed at increasing sales productivity, the Corporate portal called “GIOCO” (Gestione Integrata dell’Operatività COrporate, i.e., integrated man- agement of corporate operations) was extended also to BPN and CB. Finally, the enhancement and upgrading of branch hardware and technological infrastructures has been completed (for example, by replacing obsolete person- al computers, introducing LCD screens, adding scanners to electronically log cus- tomer signatures, extension of the broadband to CB and BPN). As a result of the above actions, we were able to satisfy the defined objective of freeing up 20% of the branch operational and administrative time.
• Self-service” branches: the new service called “PUNTO VELOCE” was im- plemented in the first 50 Branches of the three Banks. The various compo- nents of the service model have been completed together with the model to monitor customer satisfaction. • New Branch lay-out: project guidelines and main objectives have been agreed upon, to define the target layout of branches, with a special focus on accessibility and customer service, business needs, security (enhanced re- mote security systems) and cost cutting. A pilot layout branch is being test- ed in Padua, while with regard to security, a pilot experiment has been con- ducted in Novara with the use of “smart” cameras.
56 Report on Group operations
• Rationalization of Head offices: a number of actions have been completed, among which worth mentioning are the transfer of Special Loans from BPVN to SGS, the outsourcing of BPN logistics, the centralization in SGS of the banks’ safety systems and the simultaneous creation of a Group Oper- ating Center, as well as the centralization of the management of credit lines and pledges in BPN. • New “back office” model: the project aimed at identifying and getting rid of process wastes was launched, along the “lean” approach followed in the manufacturing industry.
Environmental indicators
In financial year 2006 the Energy Project was launched in BPVN and BPN, aimed at optimizing the use of environmental resources within the corporate bound- aries. A new Group agreement was entered in 2006 for the collection of wastepaper to be recycled, which to date involves BPVN and BPN. Thanks to the new type of service, the environmental situation in branches and in the other or- ganizational units concerned shall improve as a result of a more regular and ef- ficient collection of wastepaper and of the other waste materials to be recycled or disposed of.
Group BPVN (*) 2006 2005
Electric power Kwh/year 82,496,795 81,348,949 Natural gas Mc/year 3,086,005 4,233,306 Diesel fuel Liters 554,812 770,404 Water Liters 197,941 329,096
* Data referring to BPVN, BPN and CB Stated consumption is calculated based on the average cost per consumption unit reported by individual municipalities.
Basel II Project
In 2006, the activities making up the Basel 2 Project progressed. The project aims at setting the conditions to obtain the Bank of Italy’s validation of the advanced IRB approach to determine the Group’s capital requirements,
On December 31st, 2006 the various sub-projects had reached the following re- sults:
Credit Risk
The Group’s goal is to progressively adopt the advanced Internal Rating Based approach starting from “Corporate” portfolios.
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Credit risk assessment models
In 2006, the “Probability of Default” (PD) internal rating models have been es- timated anew in order to refine the models currently in use for “Corporate” portfolios. The process of internal and supervisory validation of rating models (so-called pre-validation of rating models) has been put in place. The above ac- tivities are supported by a preliminary assessment of data used for statistical analyses, which made it possible to set up a continuous data quality assessment process (so called “Data Quality”).
Credit risk management processes
In 2006, actions have been put in place to make a “full use” of rating in the “Corporate” lending process throughout the networks of the Group Banks. List- ed below are the new features that were introduced: • introduction of a compulsory comment on rating in the inquiry procedure; • introduction of the process to manage exceptions to the system’s automat- ic outcome when proposed by the analyst (so called “override”); • fine-tuning of the performance management system with the introduction of mitigating guarantees; • revision of the watchlist process and introduction of the “past due” grade (exceeding 180 days).
The above actions have been supported by a specific training program, aimed at consolidating the skills and knowledge of the Network and Head office re- sources with regard to Basel 2 issues and at providing an update on the latest novelties: at Group level in 2006 some 30,000 training hours have been deliv- ered to network personnel.
The activities to comply with “Credit Risk Mitigation” requirements have pro- gressed, especially with regard to property collateral management procedures.
Risk measurement and capital assessment
Illustrated below are the results obtained in this field: • insourcing of calculation logics for minimum capital requirements; • in June 2006, first simulation of “Parallel Calculation” of consolidated Group capital requirements; • progress of activities to comply with the “Second Pillar” of the New Basel Capital Accord and to define the internal capital adequacy assessment pro- cedure (so called I.C.A.A.P); • the fine-tuning of internal risk measurement models is underway, in line with the new Basel 2 requirements.
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Validation of credit risk models and procedures
The internal validation of Rating Systems (for “Corporate, “Banks and Coun- tries” rating models) and of organizational and IT systems has been launched, in line and in cooperation with internal revision activities.
Throughout the year, the Top Management and the Corporate Boards have con- stantly participated in the definition of the operational plans and in the sharing of results.
Operational risks
The activities to comply with the Standard methodology are well under way. In particular, the activities to fine-tune the Loss Collection processes have pro- gressed, as illustrated below: • full-fledged process implementation in the functional areas that had been started in 2005 (“Estero Merci” (Foreign Business - Commodities), “Finance Middle and Back Office”, “Payment and Collection Back Office”, IT and SGS); • automation of the authorization procedure for Loss accounting; • creation of “Data quality” and setting up of “line” controls on collected data; • specific training programs for users concerned.
Other completed activities: • enhancement of the “Risk Assessment” activity (IT assessment and defini- tion of the methodology to analyze the risk level of new products); • definition of the global reporting model (management and function) and implementation of the information system for line function reporting; • definition of the methodology and completion of the first self-assessment cycle for the operational risk management system under the “Standard- ized” approach.
As part of Risk Management, methodological analyses were carried on to devel- op methods and tools to calculate capital requirements along the so called Ad- vanced Measurement Approach (A.M.A.).
With regard to “Credit Risk” and “Operational Risk” projects, in 2006 results, following activities and the timetable for the adoption of the new Accord were discussed and analyzed with the Bank of Italy’s supervisory board.
Other projects
In addition to the projects that are more closely related to the implementation of the Strategic Plan and to the compliance to capital requirement regulations, many other noteworthy organizational actions were launched, carried on or completed during the year.
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In 2006, pursuant to specific regulations (law 62 of 18/4/2005, law 262 of 28/12/2005, law 146 of 16/3/2006, law 7 of 9/1/2006), which extended the Bank’s administrative responsibilities, the Organizational Model was revised, and two new Special Chapters were added: Market Abuse and Crossborder Crimes. The revision was approved by BPVN’s Board of Directors and has already come into effect. It shall be extended to the other banks by the first half of 2007.
Pursuant to Consob’s regulations aimed at punishing insider trading, a proce- dure was introduced to manage corporate and privileged information (Corpo- rate and privileged information management procedure), aimed at regulating the internal use of information and its public disclosure. In specific, a register was introduced, listing all the people who are authorized to access privileged in- formation, be it occasionally or permanently (Register of people authorized to access privileged information).
Following the coming into effect of Law Decree 223 of July 4th, 2006 n. 223 (so called “Decreto Bersani”), the necessary adjustments required by law have been performed, especially with regard to the contract terms of bank checking ac- counts.
As part of the project to rationalize the Group’s distribution network, the fol- lowing activities have been carried out: • extension of the Parent company’s organizational model to the Branches ac- quired from Banca Popolare Italiana (SWAP project); • performance of specific organizational analyses at Branch/Business Area lev- el to verify the correct organizational structure; • implementation of a system to measure the efficiency index of Branches/ Business Areas (S.D.R., Sistema Dimensionamento Rete), by identifying the workload associated with each role; • reorganization of Foreign Business, by identifying the “Branches of refer- ence” within each Business Area, where all the activities of the Branches of the Business Area of belonging have been centralized.
At Head office level, the rationalization of the Group’s organizational structures aiming at achieving optimal efficiency levels has progressed.
In collaboration with Banca Aletti, a financial investment advisory service has been set up, geared to the Bank’s Private clients. The goal of this activity, which is supported by specific contracts, is to provide useful guidance to make investment decisions which are consistent with the cus- tomer’s objectives and financial situation.
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Project for the development of the auditing model for the preparation of cor- porate accounting documents (Law 262/2005)
Law 262 of December 28th, 2005, called “Savings Protection” law, introduced a new function in charge of the preparation of the corporate accounting docu- ments. Hence, a project was launched to develop an internal auditing model for the administrative processes underlying the preparation of financial statements.
Project for the validation of the market risk model
The implementation of the project is progressing. The goal is the validation of in- ternal capital requirement calculation method based on market risks. The orga- nizational, process and system interventions required to ensure the compliance with the quantitative and qualitative requirements prescribed by the Regulatory authorities have been defined.
Described below are the main activities currently under way: • VaR calculation method: the changeover from the current variance-covari- ance parametric approach to the historical simulation approach is under way, whereby the new model is going to be introduced gradually across the various financial and risk instruments (plain instruments, equity, interest rate and currency options) together with a specific risk assessment for equity and debt securities and for vega risk; • approval of risk limit regulations and monitoring activities: the risk limit reg- ulation has been approved. To date it covers market risk ceilings in terms of VaR (as well as interest rate risks for the banking book); gradually said lim- its shall be extended to credit and operational risks as well. Monitoring ac- tivities have also been launched; • arrangement of stress tests: a significant number of risk factors are to be identified (interest and exchange rates, stock prices, volatility and correla- tions) to assess the impact of extreme events and scenarios on the value of open positions, hence on the capital adequacy of the Group and of the in- dividual banks; • layout of the methodology underlying back testing analysis: guidelines have been defined for the creation of a back testing system to assess the diver- gences between the portfolio’s actual value and the VaR-based risk esti- mate, so as to confirm the high predictivity of the adopted model. The sys- tem is being implemented and tested.
Risk management
Main risks and uncertainties facing the Group
The activities performed by the Group expose the latter to the following main risk classes: credit risk, market risk, liquidity risk, operational risk and business risk.
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Credit risk is the risk that a borrower or an issuer of financial instruments held by the Group may fail to perform on an obligation, or that their credit standing deteriorates. The assessment of possible losses that could be incurred with re- gard to a single credit exposure or to the total loan portfolio is an inherently un- certain activity and depends upon many factors, among which, the general eco- nomic performance, or the economic performance of single manufacturing sec- tors, the change in the rating of single counterparties, structural and techno- logical changes within borrowing companies, a deterioration of the competitive position of counterparties, the possible mismanagement of companies or of the borrowing counterparties, the growing indebtedness of households and other exogenous factors, such as legal and regulatory requirements.
The lending policy adopted by the banking Group focuses a strong attention on containing risk through a stringent credit analysis at the time of granting the loan, geographical and sector diversification of loans, acquisition of guarantees, whenever necessary, securing the granted loan, and an accurate monitoring of the evolution of the lending relation. In general, the Group’s lending activity is mainly performed in areas characterized by a diversified business and entrepre- neurial structure. As a result, the loan book risk is spread across various business sectors. The banking Group keeps its loan book under constant monitoring, an- alyzing the evolution of its risk-profile, of lines of credit, and line utilization by economic sector, region, customer segment and type of loan. Specifically, in 2006 40% of gross average loans were retail loans, directed to households and small firms (sales up to 2.5 million euro), while about 30% were extended to medium-sized companies (sales below 250 million euro).
Market risk is represented by the possibility that the Group may generate less revenues than expected, depreciation of balance sheet items or capital losses from financial open positions, due to sharp and adverse movements in market rates or prices, in particular interest rates, stock prices, exchange rates, and the associated volatilities. Said losses depend on the presence of asset and liability misalignments in terms of item maturity, duration and level of risk coverage. Market risks can materialize both with regard to the trading portfolio, which in- cludes trading and treasury financial instruments and the associated derivative instruments, and with regard to the banking book, which includes all other fi- nancial assets and liabilities.
With regard to trading books, it is worth pointing out that the market risks stem- ming from the commercial activities performed by the Group banks are system- atically transferred over to the subsidiary Banca Aletti. The residual risk exposures falling on the commercial banks are associated with the investment portfolios, whose sub-advisory is delegated to Banca Aletti. The main risk factor is the in- terest rate associated with bond portfolios, most of which have a floating rate or are hedged by asset swap structures, with a very contained total duration. Al- so the risk associated with single equity or bond issuers is managed very con- servatively. The main market risks taken on by Banca Aletti are associated with interest rate and equity risk exposures as part of the trades carried out on cash and derivative markets. The exposure to the exchange rate risk is marginal.
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As to the interest rate risk associated with banking books, the Group is exposed to the risk of a possible sharp reduction in interest rates, which, as a result of the significant weight of demand deposits which generate a low interest income that can hardly be further compressed, would have a strong narrowing impact on the interest rate spread, hence on the Group’s net interest, dividend and oth- er banking income. This risk is managed and minimized by progressively imple- menting a demand deposit hedging policy, which, depending on interest rate projections, guarantees a partial income stabilization.
Liquidity risk is represented by a possible instability suffered by the Group Banks, as a result of a negative mismatch between incoming and outgoing cash flows, which may take place in the very short term (up to one month), and that are not covered by liquidity reserves represented by on hand securities and eligible for refinancing with the European Central Bank. This risk, which may possibly ma- terialize mostly in the presence of exceptional events, such as market liquidity crunches, may result in the Group having problems or being unable to fulfill on time and to pay out due payment obligations upon expiration.
In specific, the Group is exposed to the risk of a possible, albeit unlikely, hefty withdrawal of demand deposits by customers or the failure to renew short term financings by banking counterparties. This risk is managed and minimized by changing the funding source mix, selecting those which privilege a progressive extension of interbank fund maturities at three/four months and a greater re- course to bond issues with maturities at between five and seven years.
Operational risk is the risk of incurring losses as a result of the inappropriateness or the malfunctioning of procedures, of mistakes or shortcomings of human re- sources and internal systems, or external events. The legal risk is included, while the strategic and reputational risks are not. Among the main sources of opera- tional risk there are: the instability of operational processes, insecure information systems, a growing use of automation, the outsourcing of corporate functions, the use of a small number of suppliers, strategy changes, frauds, mistakes, per- sonnel recruitment, training and retention, and finally social and environmental impacts. It is not possible to identify a prevailing source of operational risk con- stantly present within the Group, since said risk is inherent in all corporate processes and activities. This leads to the implementation of widespread risk mit- igation and management actions, in particular by transferring the risk over by way of insurance instruments and/or outsourcing, and by constantly improving process efficiency (control enhancement and re-engineering).
Business risk is the risk of incurring losses, in terms of a decrease in non-interest income, due to changes in the macro- or micro-economic environments, leading to a volume reduction and/or income squeeze, that may weigh down on the bank’s ability to make profits.
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To this regard, the Group is exposed to the risk of fluctuations of commission in- come from investment services. This risk is managed and minimized through commercial policies and actions aimed at building customer loyalty, so as to fa- vor a stable service provision activity with a constant income flow, and at main- taining a high value added and innovative business offer, in line with our cus- tomers’ present and future needs.
Risk-taking, management and hedging objectives and policies
Gruppo BPVN and the companies of belonging conform their activities to the cri- teria of prudence and low risk exposure, with regard to: • the need for stability with respect to its banking activities; • its cooperative origin; • its investors’ profile.
In keeping with its risk propensity, Gruppo BPVN pursues the following objec- tives: • stable growth, that is, characterized by highly repeatable results, hence steady corporate value growth; • shareholders value creation as compared to financial investments having a comparable risk-return profile; • strong credit risk distribution, in line with the objective of financing prevail- ingly small and medium enterprises and households; • contained level of exposure to the structural interest rate risk to be pursued also through a progressive hedging of risks associated with items repayable on demand; • market risk-taking is closely related to commercial needs; • exclusion of risks that are unrelated to core activities and accurate assess- ment of initiatives that introduce new types of risks; • development of more and more accurate and comprehensive risk monitor- ing methodologies, also in view of the validation of internal models for su- pervisory purposes; • active management of corporate risks, based on state of the art techniques; • utmost risk exposure transparency to the market.
Gruppo BPVN can count on an organizational structure, corporate processes, human resources and skills that are well suited to guarantee the identification, monitoring, control and management of the sundry risks characterizing its busi- ness activity, where the main objective is to protect the financial solidity and rep- utation of the Group against adverse events. The entire risk management and control process is coordinated by Banco Popo- lare di Verona e Novara, in its twin capacity as Parent company and entity in which all the joint and mutual interest functions are combined. The risk management process runs at different levels of the organizational struc- ture.
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The main role in risk management and control is played by the Boards of Direc- tors of the Parent company and of the subsidiaries, which define the risk-taking strategic courses and approaches and approve the strategic and operational lim- its and the guidelines. The Risk Management policy is developed by the Risk Management Committee and the Group Finance Committee. An important role is played by the Risk Man- agement Function and the Group Auditing Function, which are part of the Par- ent company’s Governance structure reporting directly to the Chief Executive Of- ficer.
The Risk Management Committee, comprised of the representatives of the main functions of the Parent company and the Group Banks’ top managements, sup- ports the Boards of Directors, assisting them with the definition of risk policies and intervening in case of inconsistencies with said policies. The Group Finance Committee meets periodically and supervises actions in the field of market, transformation and liquidity risk management. It also defines the Group’s funding policies.
Planning, auditing and service activities
Human resources
On December 31st, 2006, the total headcount for the Group’s Italian companies added up to 12,460 people, slightly below the previous year’s figure (-136 em- ployees) due to companies that are not included in the consolidation scope any- more (Leasimpresa and Sestri). On a like-to-like basis, total hires (674 units) con- firm the positive growth trend when compared to exits (363 units), leading to a positive balance of 311 employees.
The higher number of hires made it possible to support the growth plans of the Group Companies, namely the opening of new branches (28 in 2006) and the launch of Group strategic projects. Said development plans favored the profes- sional growth and promotion of our collaborators. The stronger focus devoted to Banco’s local franchises acted as a new professional stimulus for internal re- sources, and at the same time it favored the entry of personnel coming from the areas where new branches were opened, through a strong external selection and recruitment activity.
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Described below are the types of employment contracts applied when hiring: • 312 permanent employment contracts; • 137 orientation contracts, so called “contratti di inserimento”; • 117 vocational training contracts; • 108 temporary contracts.
156 temporary contracts expired during the year, 42 of which were turned into permanent employment contracts.
Development and training
Illustrated below are the most noteworthy development projects implemented in 2006 and aimed at promoting internal professional skills: • adoption of the appropriate training and assessment structure required to carry out hires under a “vocational training” contract; • the definition of “career paths”, allowing employees to acquire more com- prehensive professional skills thanks to a more suited and focused training; • the continuation of the initiative called “Skill development center” carried out in SGS; • the continuation of the activity aimed at promoting potential high-fliers.
In particular, each company defines specific training, learning, assessment, pro- fessional development and career “paths” for the apprentices. BPVN and SGS designed a specific assessment system, which leverages the experience accrued by the Group with regard to skill assessment systems, in abidance by regulatory requirements. The apprentice assessment process, based on a new software ap- plication (Personale Web), was started in November 2006, and it involved 74 front-office employees, 4 administration-accounting employees and 63 tutors, who were asked to assess the progress and results achieved by the apprentices. As specific training program was designed and implemented for apprentices, which was mainly delivered in class or by e-learning; tutors received a specific 3- day training.
The adoption of “career paths” by Banco, namely a coherent series of jobs, pro- fessional experiences, training initiatives and assessments, gives employees the opportunity to develop the technical and behavioral skills that are required to properly step on to higher and more complex positions. This is achieved by de- livering the appropriate training, envisaging both in-class and hand-on training experiences, and a precise assessment of potentials, which further highlights ex- isting abilities and develops specific skills for the different roles and positions.
The SGS initiative aimed at identifying strong points and areas to be improved in one’s work, thus building a greater awareness of one’s role. Each of the 23 participants followed a tailored professional development pathway, aimed at en- hancing key skills through specific training experiences.
The post-assessment process in Banco proceeded, and participating colleagues were involved in training activities, as well as in the preparation and discussion
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of a final report, while in BPN “high-fliers” followed the Base Master 2006 pro- gram.
The main goal of the training initiatives is to provide an excellent course cata- logue from both the qualitative and quantitative point of view, and the offer is constantly complemented with new programs. Ad hoc projects were designed to meet specific requirements brought forward by regulatory, organizational or procedural changes. With regard to “bespoke” training, it is important to highlight the experience re- peated in 2006 with regard to the individual assessment of training needs for corporate managers, corporate developers and branch managers.
In 2006, at Group level a total of 11,566 employees participated in training ini- tiatives, receiving a total of 386,953 training hours, of which 378,096 in-house and 8,857 externally. With regard to subject matters, 32% of training was de- voted to a more advanced understanding of finance and lending; 19% to mar- keting and sales, 21.50% to technical-professional areas, 19.50% to manageri- al, legal-fiscal, linguistic and information technology subjects, while the remain- ing 8% was devoted to new employees. 87% of training hours were delivered in class, 11% through e-learning and 2% in stages or shadowing.
Remuneration policies and incentive schemes
The main goal of the incentive and retention system dedicated to top manage- ment is to bring managerial culture closer to the entrepreneurial culture, with a strong drive towards the achievement of objectives, but maintaining a strong re- spect for our founding cooperative values. The system is based on the motiva- tion to foster corporate value growth over time, by linking it to the variable com- pensation component, while at the same time providing an effective loyalty- building tool. Managers participating in this system are assessed and monitored based on the objectives they have been assigned and related to financial and profitability aspect, customer service quality, as well as development of mana- gerial skills. Management is also assessed and incentivized with regard to the contribution made in the achievement of the targets defined in the main orga- nizational and business development processes set forth in the strategic plan. The positive assessment of the “service quality” element has become an essen- tial pre-requisite for all managers to obtain their bonus. In practice, even an out- standing financial and profitability performance is not rewarded if it is not at- tained though a clear respect for the service levels provided to internal and ex- ternal customers, which is the key distinctive element contributing to distin- guishing the value of business organizations on the market.
While considering the value of employees’ development potentials, the main fo- cus of remuneration and incentive policies lies however on fulfillment capabili- ties, in line with the Group strategy, which aims at a sustainable value creation. In any case, the resulting definition of remuneration procedures and mechanisms in keeping with this rational still lends the proper consideration to the impor-
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tance remuneration policies play among the management policies aiming at per- sonnel motivation, behavioral orientation towards corporate values and at the constant promotion and growth of the value inherent in human resources.
Comparability analyses were carried out with regard to the domestic and inter- national labor market to define the most efficient practices that may help iden- tify remuneration policies aiming at guaranteeing at the same time internal fair- ness and equity and the competitiveness with the external labor market. To as- sess internal compensation equity, a strong focus was devoted to the compari- son between the “weight” of different positions, that is, the level of responsi- bility and the contribution to the achievement of results associated with each role, and the corresponding compensation. The variable compensation component was linked even further to mechanisms comparing objectives and results, in particular by using incentive systems for both the branch network personnel and in the head offices. In addition to in- centive schemes which have a direct impact on the variable compensation com- ponent, in 2006 a greater momentum was lent to non-monetary rewards grant- ed when marketing campaign targets are met. For the first time the incentive travel, which is the reward for best performers in marketing campaigns, turned into a Group event, involving the best marketing and salespeople in Banco, Ban- ca Popolare di Novara, Credito Bergamasco and Banca Aletti.
Relations with trade unions
New organizational structures and the role of negotiations
In 2006, relations with Trade unions progressed, based on the promotion of di- alogue with employee representatives in a time of significant reorganization of the Companies of the Group.
To this regard, agreements were signed to manage the impact on employees of the reorganization of the Special Finance and the Group Safety and Security functions, of the complex restructuring of Group Finance activities, as well as of the transfer of the supply and warehouse offices from BPN to Step Logistica. The negotiations associated with the branch swap between our Group and Ban- ca Popolare Italiana and the agreement related to the impact on employees af- fected by the merger of Leasimpresa into Banca Italease were particularly im- portant.
Also our talks with unions covering headcount, environment and working con- ditions progressed, privileging decentralized negotiations and the involvement of local representatives. After intensive talks with trade unions, a pilot project was launched, extending the opening hours of ten branches of the Parent com- pany located in the Bank’s main marketplaces.
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Supplementary company contract in SGS
In 2006, the supplementary company contract for SGS was finalized. It is appli- cable to all the employees of the company and it is the first supplementary com- pany contract to define a harmonized procedure (employment classifications, training paths, mobility, involvement of the trade unions in the main corporate organizational issues, etc.) for all the employees coming from the various Banks of the Group.
Permanent training fund and Solidarity fund: Fondo paritetico interprofessiona- le nazionale per la formazione continua (For.te.) and Fondo di solidarietà per il settore del credito
Union agreements were finalized to promote training programs aiming at con- solidating and developing skills for personnel requalification and retraining, thus promoting also the permanent training of human resources.
Labor disputes and disciplinary actions
Labor disputes remained on contained levels and the trend of positive results ob- tained in the previous year continued also this year: this further corroborates the choice of anticipating or settling possible disputes out-of-court, which in any case are well below the average dispute rate reported by the lending sector. Dis- ciplinary actions, by mutual consent with controlling functions, were managed along the well established and beaten path of rigorous and careful effectiveness, confidentiality and safeguard of both individual rights and corporate interest.
Health and safety
Health care actions, from prevention campaigns to the work of professional physicians, to training and information campaigns organized in collaboration with the Group Training School (Scuola di Formazione di Gruppo), in particular First Aid courses and “Emergency Behavioral Management in case of Robbery”, are but some of the numerous initiatives that were carried out to support and promote awareness to important signals conveyed by society.
In particular, in 2006 health care and safety actions focused on the following as- pects: • collaboration with the real estate arm for the development of the “new branch project”, based on ergonomic criteria to the benefit of the well be- ing of employees and customers; • survey analyzing the consequences of mental fatigue, monotony and repet- itivity delivered across a sizable sample of employees of the sales network; • ongoing construction of a company nursery school; • improved working stations; • checkup and training actions carried out by the prevention and protection service in collaboration with professional physicians.
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Internal audit
In 2006, the Group Auditing activities were carried out in keeping with the de- fined objectives, that were adjusted to account for the structural reorganization implemented at of the year start. Said objectives basically translate into periodi- cal checks to verify that the internal audit system is compliant with Regulatory requirements as well as with internal operational and business needs, that in turn give rise to information, assessments and recommendations with regard to the accuracy of operations and the effectiveness of the global auditing system, and identifying possible improvement areas and actions.
In the course of the year, the Group Audit Function performed a remote moni- toring of the Parent company’s sales network, covering various risk profiles (lend- ing, accounting-operational, anti-money laundering and finance). For some ar- eas also the other Banks of the Group were included in the monitoring activity (Banca Popolare di Novara, Credito Bergamasco and Banca Aletti).
Additional audits at group level were carried out, in particular in the field of in- vestment services (as required by art. 57 of Consob’s Regulation n. 11522/98), EDP, bank central structures and the other Companies of the Group which out- sourced their auditing activities to the Parent company’s Internal Audit Function through specific outsourcing agreements.
A strong focus was devoted to the methodological and operational coordination of auditing activities at Parent company level, as well as for the companies of the Group, with a special emphasis on audit-related internal reporting procedures. The Audit Function showed a particularly significant commitment in its constant support lent to the other corporate functions, the collaboration in analyzing and checking regulations under issue, the analysis of the assessment process to ver- ify the adequacy of insurance products, the internal reorganization of the finan- cial complaint management procedure, the implementation of the audits asso- ciated with the inclusion within the Group of the branches under the Banca Popolare del Trentino brand. As significant were the cooperation with the Board of Statutory Auditors and the support given to the Auditing company with re- gard to the obligations associated with the certification of financial statements and the adequacy assessment of the Internal auditing system under the “Finan- cial Statements Auditing Standards for Intermediaries” (in keeping with Con- sob’s Communication n. DEM/1058048), as well as to the fiscal treatment of in- come of US origin (Qualified Intermediary) for the companies of the Group un- dergoing this audit, the participation in the due diligence processes for possible combinations with other intermediaries, activities associated with the “Patti Chiari” Initiative.
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With regard to the management of complaints on banking products and servic- es and on investment services, in 2006 Gruppo BPVN was filed a total of 5,695 complaints, of which 1,199 relating to investment services and 4,496 to bank- ing services (checking accounts, bank transfers, checks, payment cards, etc.). Compared to 2005, complaints on banking services increased (+592 com- plaints), mainly due to the growing and sweeping problem of electronic card cloning, which is affecting the entire banking industry. In order to thwart and limit, at least partially, the damages caused by cloning, our Group launched a system to detect potentially fraudulent transactions with the issue of specific in- structions for the Networks and for the central functions concerned. All the nec- essary papers were prepared for the refund of damaged customers - when ap- propriate, by applying to the specific guarantee funds. To this regard, during the year the internal documentation processing procedure was streamlined, in order to minimize the time necessary to be refunded.
It is worth noting, that complaints on investment service decreased (-153 com- plaints). The positive trend reported during the year reversed in December, when the number of complaints for Argentina’s default escalated due to the need to interrupt and/or suspend the five year term under the statute of limitations, or else be barred from enforcing any rights against the issuer. Investors were most likely prompted to action by the intensive information campaign conducted by mass communication means, in particular trade press. The banks of the Group are in any case assisting customers with all the necessary documents and papers required to recover their investments, as part of international judicial actions. As a rule, during the preparation and management of all the complaint files, checks are carried out to identify any possible procedural and/or organizational flaws that may have caused malfunctions leading to customer complaints. In 2006 no anomalies were identified in the adopted procedures or in the behav- ior of employees.
The Group Audit Function also gave operational and specialized assistance to the Supervisory Boards set up in the single Group Companies, in keeping with Law Decree 231/01, by verifying the protocols pertaining to the Head Office functions of the Parent company and of some Group Companies, and monitor- ing the relevant data collected during the audits performed on the sales Net- works of the Group Banks, as well as the participation in specific training pro- grams by employees. The Function also cooperated to the update of the differ- ent Organizational Models with the Group Organization Function.
In addition to advisory and training services provided to the different depart- ments of Banks and Group Companies, Internal Audit devoted a special atten- tion to the assessment of the project dealing with the application of the guide- lines set forth in the relevant supervisory regulations with regard to credit and operational risks, with the aim of verifying the system compliance to minimum requirements set for banks, as well as with regard to market risks, with the aim of obtaining the validation of an internal model to measure capital requirements.
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Technological and administrative services
Technological and administrative services are mainly concentrated in Società di Gestione dei Servizi S.p.A. (S.G.S), which is the Group’s “operational engine”.
In 2006, S.G.S. underwent significant organizational changes: in keeping with the Group strategy, activities that do not belong to the Banks’ core business have been transferred over to S.G.S. In August the Special Loans Function (Crediti Speciali) became part of S.G.S., which thus expanded its business area.
As to ordinary business activities and projects, described below are some of the major initiatives that had a significant impact in 2006.
Technological development
The use of processing resources by applications was constantly monitored. At the same time, a better performance of applications was pursued by limiting as much as possible the use of processors and networks. This joint effort, which had already started in 2004, went on reaping tangible results and even in 2006 it held the demand for processing power down compared to volume growth (which was particularly high).
Among the most noteworthy activities performed in 2006, it is worth mention- ing: • deployment of two new central processors with a processing power of al- most 9,000 mips; • rationalization of departmental processors based on the upgrade of the hardware and of the entire architectural design; • the new MPLS data transmission network, which, as soon as operational on all work stations, it produced a better performance, less idle time on the net, the support of new web-oriented applications (for example, Ve.Ra); • technological-intensive actions on storage (both in terms of disks of central processors, and the set of disks in departmental systems), with was re- freshed with the introduction of new technologies and underwent a man- agement redesign (groundwork activities for Business Continuity and Disas- ter Recovery); • revamping of work stations in head offices and branches through the re- placement of about 5,000 Personal Computers (replaced with Pentium4 processors) and about 13,000 monitors (replaced with TFT 17” flat screens).
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Centralized administrative services
The activities of centralized administrative services were regularly performed, without however being confined to current operations. Here again, innovation has been the watchword throughout 2006. The management of the changes caused by new applications was sided by the ability to interpret stable and well established processes under an innovative light.
Noteworthy is the effort devoted to the following ordinary activities (other than projects) referring to the Finance area: • hired as Custodian Bank for the new speculative Fund Aliseo 4 of Azimut SGR, for the MID-Capital Mezzanine Fund of AF Mezzanine SGR and for 4 new funds of Aletti Gestielle SGR; • significant operational increase in securities lending; • increasing number of Institutional customers making use of the Company’s services; • operational support to Aletti Gestielle SGR for the implementation of more beneficial fiscal regulations conducive to the recovery of past positions; • special actions to permit individual owners of Argentinean securities to sue the Argentinean government; • support given to the branch swap with Banca Popolare del Trentino and to additional important projects, such as “Estero-Premia”, Risk Management, “Anagrafica unica”, “Valutazioni strumenti finanziari”, and in general to all the application developments in the Finance Area; • management of a generalized volume increase.
Illustrated below are the most significant activities in the field of Payment and Collection: • following the Bersani decree, a new tax collection procedure by way of F24 tax returns, that was implemented without increasing resources; • launch of the “Outsourcing Tesorerie Enti” project and the definition of the implementation stage through the identification of possible efficiency gains within S.G.S.; • support given to the branch swap with Banca Popolare del Trentino and to additional important projects, such as “Estero-Premia” and “Documentate Auto” (the collection of receivables originated from vehicles bought by Dealers, against declarations of conformity); • centralization at the Novara center of minor activities which used to be per- formed in Credito Bergamasco, with no personnel increase in Novara and a positive impact on Credito Bergamasco in terms of resource utilization; • management of a generalized volume increase.
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Application and project development
“New Foreign Business platform”
The project, which is part of the Group Strategic Plan, mainly covered the first half of 2006, although activities continued for the whole year. The goal of the project is to create a new Group-wide “Estero” platform, followed by a new “Es- tero Merci” solution (Foreign Business – Commodities) The “Foreign Business” project shall proceed also in 2007 with the implementa- tion of enhancements and the new functionality “Estero Merci”
“SWAP” Project
The SWAP project, started in 2006 and completed in the last quarter, led to the acquisition of 18 branches of Banca Popolare Italiana and the simultaneous transfer of the same number of branches to the latter. The acquired branches have been operated under the brand ”Banca Popolare del Trentino” and were smoothly migrated onto our information system on the last weekend of Sep- tember with no disservice or service interruption for customers.
“Lean Organization” Project
This Project, which is unusual for administrative organizations, was started in 2006. Based on the “Lean Organization” approach followed by the Japanese manufacturing sector, a pilot project was launched, aiming at streamlining the monthly balance accounting process in the centralized administration services. With a bottom up approach, starting from the needs of the end customer (in this case the urgency for Banks to receive the balance account data as soon as pos- sible), all internal processes have been revised, and all the necessary changes and enhancements were introduced to make things as simple as possible. The new streamlined and more efficient balance accounting process has been made op- erational at the end of 2006, and immediate proved its efficacy.
“Single Securities Data Record” Project
This application-related project led to the centralized management of the data records of all the financial instruments of the Group. By modifying the applica- tion structure, a single securities data record for all the Banks of the Group was predisposed. The project rationalized and simplified the work of the centralized administrative services, with a positive impact also in terms of less operational risks.
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“Nonregulated derivatives – exchange and interest rate modules” Project
This application development project was launched in 2006, and it called for a large amount of work in terms of analysis and implementation. The project is the continuation of an activity that had started in 2005 on nonregulated equity de- rivatives. Thanks to the release in 2006 of the application module for the man- agement of exchange rate derivatives, the limitations inherent in the previous application in use. In particular, an appropriate pricing model was added, to- gether with the integrated management of the operating process. The module was released on June 1st, 2006, followed by the implementations for the “Non- regulated interest rate derivatives” module, that shall be released in the first half of 2007.
“New Finance Platform” Project
Through a generalized and targeted upgrade of the Finance application plat- form, this project produced new implementations and enhancing functions. The development and implementation of applications started in the second half of 2006 and as of the end of November, new functionalities have been released across the network of all the Banks of the Group and to the Back Office struc- tures. As a result of the actions taken, the securities lending management oper- ability and the institutional customer management operability were broadened. These activities laid the groundwork for the deployment of additional new func- tionalities in 2007 (for ex. “single custodian” and IX Patti Chiari initiative). An- other result produced by the project is a more rational management of process- ing resources.
“Back-Office Internal Audit” Project
The project was launched in the previous year and aims at rationalizing audit ac- tivities on processes delegated by the Banks of the Group. It breaks down into three main arms: • mapping of lie audits on Back Office and Middle Office activities; • analysis of the Accounting Agencies used by the Centralized Administration Services; • Back Office as active part in the management of business activities, by lim- iting idle liquidity at the branches, minimizing value-date losses on negoti- ated checks and penalties paid for failure to fulfill the terms under the ABI agreement “Patti Chiari”.
The project was completed during the year and produced a tool (new Check Point dashboard) that provides the Banks with a view on the performance and the situation of outstanding audits.
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“Self Service” Project and new Branch Layout
As part of the Self Service project, S.G.S. activated new Self Service kiosks in 50 branches across the networks of Banca Popolare di Verona, Credito Bergamasco and Banca Popolare di Novara. The activation of the new machines followed a rollout plan jointly agreed with the Banks, following a first successful pilot phase. The deployment of the Self Service kiosks is associated with the activities to be conducted in 2007 related to the new branch layout. This project shall produce an extensive network innovation and shall deeply change the branch operations as well as the way customers relate with the branch and with services.
Microcircuit Technology
The necessary standardization of the “issuing and acquiring” microcircuit processes in the Banks of the Group and in SGS has been completed, in line with the microcircuit technology of payment systems. Also other applications were conformed, in particular the application “Carte” (Cards) in S.G.S. and other ap- plications related with the management of payment systems in the Seceti Appli- cation Center. In 2006, a centralized plan to replace VisaElectron ATM cards with new integrated circuit products was launched. A total of about 50,000 smart cards have been distributed among customers of Banca Popolare di Verona and Credito Bergamasco. In 2007 the first smart cards shall be distributed also to customers of Banca Popolare di Novara (certification to be obtained within the first quarter) and by the month of April all VisaElectron cards are expected to have been replaced.
“Business Continuity” Project
The implementation project linked to the Business Continuity Plan, i.e. the set of measures aimed at managing system and process continuity in case of disaster, gave rise to numerous activities and actions in compliance with the timetable set by the Bank of Italy. In 2006, an updated version of the operational continuity Plan was prepared, together with the associated Operational Manuals (one for each building hosting critical or vital Organizational Units), providing a detailed description of what has to be done in case of emergency. Information system infrastructures, be they centralized or departmental, have been further enhanced to increase their availability to meet future levels expect- ed by the new Plan. Important actions were taken to minimize idle times as much as possible, reducing interruptions to few minutes – and in any case less than an hour – as a result of the failure of one single device. Considering that the adopted solution in case of disaster is planned to recover and continue busi- ness operations at the Emergency Processing Center at Settimo Milanese in max- imum eight hours (target: 4 hours), in 2006, an intensive testing activity was car- ried out to verify recovery times. A rigorous and structured test and simulation program was implemented to verify the accuracy and the effectiveness of emer- gency processes. At the end of the summertime period on October 28th, a global check was car- ried out to verify the successful deployment of the whole geographical network
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on the new node of the Disaster Recovery site in Milan. The test was successful. At the end of November a disaster simulation was conducted on the primary center, and important tests were carried out on IBM’s alternative site in Milan to verify: • system and service recovery procedures; • procedures to move the Data Transmission network connections from the Verona site to the Milan site; • business recovery with no data losses.
All tests proved successful and the service recovery time (excluding IBM times) was about 2 hours, much below the project maximum time (4 hours). In particular, with the participation of Internal Audit, a system recovery test was conducted, during which, after a forced interruption, a branch verified that the data provided upon the recovery of the system (within 2 hours) were correctly updated, and things were back exactly as at the time of the interruption.
Test were not restricted to information systems. Simulations were carried out in some critical Organizational Units, pretending the absence of critical personnel and unavailability of rooms, which had to be dealt with by complying with the procedures described in the operational manuals. Even in this case, the tests on the behavior of “backup” Organizational Units, that under the Plan must step in and replace the unavailable ones, were successful.
Communications
Investor relations
In 2006 Banco was deeply involved in the management of relations with insti- tutional investors and financial analysts. Several high-profile activities and events were carried out.
Ordinary activities included four webcast phone conferences for an update on the results and strategy of Gruppo BPVN. In October a floor presentation was held, during which the top management of BPVN and BPI jointly illustrated the merger plan of the two banks to the market. On December 14th, 2006 the two banks held a webcast phone conference to illustrate the business Plan of Banco Popolare, the new group originating from the merger.
During the year, a total of 26 roadshows were conducted, of which three in Italy, four in the UK (England and Scotland), two in the United States and seventeen in other European countries.
Banco confirmed its participation in ten trade conferences organized by special- ized brokerage firms and by Borsa Italiana and it organized a series of one-to- one meetings, conferences and videoconferences with investors and analysts. As a whole, in 2006, including direct meetings (“one-to-one” and with a select group of investors), as well as video and phone conferences, Banco contacted and reached more than 450 between analysts and institutional managers, with
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a strong commitment and participation of the Group’s top management.
In 2006, the BPVN stock was followed and actively covered by about 25 equity research firms, with which Banco entertained an open dialogue.
In addition to traditional communication channels, our Internet website proved to be an important route of communication to keep in touch with the financial community. The Investor Relations section on the corporate site gave access to updated key information on top management presentations, press releases, Group financial and profitability data (annual, half-year and quarterly reports), as well as the yearly calendar of the most important corporate events and other market-oriented information.
Institutional investors
BPVN’s first 10 institutional investors hold about 12% of shares outstanding, while the first 20 hold about 17%. As a whole, institutional investors hold about 45% of the shares of Banco Popolare di Verona e Novara. The geographical dis- tribution of institutional investors is evenly distributed across Italy, United King- dom, other European Countries, United States and other nations. Based on public information available on Consob’s website, as of February 2007 the following institutional investors held an equity interest above 2%: • T. Rowe Price International Inc (2.104%) • Barclays Global Investors NA (2.044%) • Fidelity International Limited (2.010%)
Group Communications and Institutional relations
In 2006 relations with the press were very intensive. 116 press releases were is- sued, dealing with institutional and price sensitive matters, products and servic- es, grants, finance, covering Banco and the other companies of the Group. The number of issues increased by 23% compared to the previous year.
In the course of the year, 21 press meetings were organized, covering topics and corporate events involving the different arms of the Group’s multifaceted or- ganization. Local TV and radio broadcasters are often used as a means to dis- seminate product and market information across Banco’s business territory. Every day, articles are produced and sent to the press to be included in special columns dealing with private banking, mutual funds and banking products, and Banco’s coverage is ensured in TV programs on finance channels or in radio and TV pro- grams.
On the Group’s website, www.BPV.it, the bank gives access to all press releases issued and provides information on conferences that have been organized.
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With regard to external relations, in 2006 the Group, in particular Banco, or- ganized and sponsored a variety of cultural events on the territory, such as shows, concerts and exhibitions, thus consolidating its important role and voca- tion in the promotion of culture and in organizing occasions to meet for the civ- il society of its franchise. With regard to exhibitions, the highly praised Manteg- na exhibit at Palazzo della Gran Guardia was organized for the fifth centennial of the artist’s death. In cooperation with the Municipality of Verona and with Riello Group, the photographic show “Il Profilo delle Nuvole” was organized at the Scavi Scaligeri, exhibiting a collection of photographs by the Italian photog- rapher Luigi Ghirri. In Venice Banco S. Marco reconfirmed its sponsorship to the initiative “Salotti di San Marco”, in collaboration with Fondazione Giorgio Cini, on “Il Mito e…” (Myths and…) by Massimiliano Finazzer Flory.
In 2006 the Group confirmed the well established collaborations with I Solisti Veneti conducted by Claudio Scimone, with Accademia I Filarmonici di Verona for the Sunday concerts “I concerti della domenica”, in collaboration with Ban- ca Aletti, and with La Corale Rossini di Modena for the traditional Christmas Concert offered every year by Banco S. Geminiano e S. Prospero and Banca Alet- ti to the citizens of Modena.
Both Credito bergamasco and Banca Popolare di Novara promoted several ini- tiatives on the territory, among which the sponsorship by Credito Bergamasco of the twenty-second edition of the literary award “Premio Nazionale di Narrativa Bergamo”, many sports initiatives (Scuola Calcio Atalanta for soccer, Gran Fon- do Internazionale Felice Gimondi for bicycle racing) and many other pop-cultur- al events. Banca Popolare di Novara sponsored the concert “Metti una stella sot- to la cupola”, held in Novara at the Basilica di San Gaudenzio, featuring the vi- olinist Salvatore Accardo and the orchestra Solisti Veneti, as well as the exhibi- tion “Russia & URSS. Arte, letteratura, teatro 1905-1940” in Genoa at Palazzo Ducale. BPN sponsored also many sports events.
As part of the corporate service activities devoted to globalizing companies, in its Representative offices at Palazzo Altieri in Rome Banco held a press confer- ence to present its specialized website devoted to China (www.cina.bvn.it) in collaboration with SACE, KPMG and S.A.INT..
As to sponsorships, it is worth mentioning the long standing business relations entertained with Ente Verona Fiere, for the sponsoring of well established ex- hibits as “Vinitaly”, “Fieragricola” and “Fieracavalli”, and with “Acquario di Genova”, together with BPN and Fondazione Credito Bergamasco. With regard to sports, the role of “Main Sponsor” of l’AC Chievo has been confirmed, and a new sponsorship was granted to the team BlueVolley, the Verona volley team playing in the highest national league. Sports sponsorships are a distinctive char- acteristic of BPN and Credito Bergamasco as well. In particular, it is worth men- tioning the numerous local non-professional sports initiatives or events to pro- mote specific sports, like for example track events for Credito Bergamasco or roller hockey for BPN.
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Internal communications focused on tools aiming at favoring the exchange of opinions among staff, so as to strengthen interpersonal ties among employees and foster a positive corporate climate.
Most communication activities were channeled through the company Portal, in particular by managing the information windows on the home page, which made it possible to develop a greater integration among the different compo- nents making up the portal. In addition to the portal, Group internal communi- cations were conducted also by way of a bimonthly magazine, “Banco&Noi”, that has a circulation of 20,000 copies and is sent to all our employees, be they active or retired. The magazine provides a global overview of the Group, with close-ups on single areas, products, services, distribution networks and local ini- tiatives.
Much effort was devoted also to the setting up and organization of corporate conventions, aiming at bringing our people together while gaining a more in- depth knowledge of the company, whereby the primary aim is to promote the quality of our decision-making processes by fostering the sharing of experiences and knowledge.
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Banking activities
Retail business segment
Geographical footprint
The Group’s Italian branch network comprises 1,201 branches. BPVN has 547 branches, mainly located in Veneto and Emilia Romagna, Banca Popolare di No- vara has 413 branches mainly in Piedmong, and Credito Bergamasco has 241 branches, mainly located in Lombardy.
GROUP BPVN CB BPN
Branches* 1,201 547 413 241
Branches CB 20%
BPVN 44%
BPN 36%
* The number of branches does not include the London branch and the 16 private banking units of Banca Aletti
In order to meet the Group’s growth targets, 29 net openings were carried out in 2006 (i.e., the balance between 52 new branches opened and 23 closed. Openings were concentrated in specific areas neighboring the original franchise. An “aggressive” business development action was carried out by BPVN (BPV network) in the province of Padua, leading to the opening of 15 branches since the launch of the project (of which 7 in 2006). Also the province of Bologna, with 7 openings by BPVN (BSGSP network) and the province of Genoa, with 5 openings by BPN, in 2006 were involved in a strong business development ac- tion. The branch plan is complemented by other projects: the streamlining of op- erations, strengthening of the support mechanisms from the head offices, as well as the development of a more effective business development method for retail managers.
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In 2006, the Bank acquired a business line comprising 18 branches from Banca Popolare Italiana, to which it concurrently transferred the same number of branches (9 belonging to Banco Popolare di Verona e Novara and 9 to Banca Popolare di Novara). The acquired branches operate under the brand ”Banca Popolare del Trentino”. As a result, each bank involved in the deal could extend its footprint in its business territory, creating an even more close-knit branch net- work in its franchise and in neighboring areas.
The strategic decision to keep separate and distinctive brands by geographical segment was reaffirmed, as a tangible sign of the Group’s close ties to its fran- chise: Banca Popolare di Verona (BPV) mainly in Veneto, Banco S. Geminiano e S. Prospero (BSGSP) mainly in Emilia, Banco San Marco (BSM) in the province of Venice, Banca Popolare del Trentino in the province of Trento, Banca Popolare di Novara mainly in Piedmont and Liguria, Credito Bergamasco in Lombardy.
The Group’s foreign branch network comprises 27 branches belonging to Ban- ka Sonic, in Croatia, the London Branch, a Subsidiary in Luxembourg and three representative offices in high-growth countries (Mumbai in India, Hong Kong and Shanghai in China).
Market research and customer relationship management
In 2006, research activities have been further developed also by taking part in industry surveys so as to gain a more in-depth knowledge of market needs and their correlation with the financial industry. In particular, the Group analyzed: • propensities and behaviors of Italian households and companies in money management; • the “recollection” of advertising by Italian households; • the financial needs and habits of companies and private individuals in spe- cific areas (for example, e-money, savings, securities brokerage, mortgages and consumer credit), analyzed from different perspectives.
Also customer satisfaction and retention with regard to the banking industry was measured, by assessing the following aspects: • satisfaction of retail customers and of small/medium enterprises with regard to branches, personnel, services and products; • Banco’s ranking in terms of level of penetration of different product fami- lies owned by retail and corporate customers with respect to ABI’s average and to the other banking organizations.
Focus groups were organized with existing and prospective customers, to better define the Group offer based on the favor with which new products or their cre- ativity have been greeted. For example, during Immigrant Focus Groups, some representatives of the target group were interviewed on whether they liked and understood the new ads devoted to immigrants.
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In 2006, the Group further developed its technological infrastructure supporting CRM processes (Customer Relationship Management), to guarantee a better sat- isfaction of customer needs. The entire cycle of activities included in CRM processes were efficiently managed: first of all the identification and analysis of customer needs, aimed at defining more accurate targets; then, the manage- ment of campaigns, availability of updated information to customer contact em- ployees, reporting of sales results, and finally feedback on the market response to the above initiatives.
The CRM system was equipped with expert tools for the analysis of the cus- tomer’s financial behavior, that help the sales network to recognize signals pre- dictive of the customer’s desire to pull out, as well as the propensity of each cus- tomer to purchase the products offered in the various marketing campaigns planned along the year.
In the course of the year, an event management project was launched, aiming at taking immediate action and submitting proposals upon the occurrence of events signaling the appearance of behavioral changes and new customer needs.
Product marketing
Checking accounts
The checking account offer is built and offered based onto the needs raised by customers and considering different age brackets and different behavioral mod- els. Shown below is the breakdown of Retail customers across the Group:
Nr. Customers GROUP BPVN CB BPN
Nr. Retail Customers 1,374,794 622,783 263,985 488,026
Nr. Customers
BPN 35%
BPVN 46%
CB 19%
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The relational program “Insieme Soci” was set up in 2003 with the goal of strengthening the bond between Registered shareholders and Gruppo BPVN. In 2006 it has been further enhanced and developed. Insieme Soci is a fixed-fee checking account program, which includes a wide choice of banking and non- banking services. At the end of 2006, about 27.000 Registered shareholders held an Insieme Soci checking account, up by more than 40% as compared with 2005.
The same three contests for Registered shareholders set up in 2005 were re-pro- posed in 2006. In October, an innovative loyalty-building point rewards program called “Valore Insieme Soci” ws launched. It is an exclusive point earning pro- gram (called “carats”) dedicated to holders of the checking account Insieme So- ci and Insieme Soci Giovani, rewarding the ownership and utilization of given banking products and services, and at it launch it included a loyalty bonus to re- ward shareholding seniority.
Brucoconto, the savings program for children between 0 and 10 years of age, has been enjoying a wide success also in 2006 thanks to “Brucoraccolta”, the special point rewards program devoted to children. With Brucoraccolta in 2006 the Group distributed about 9,737 rewards to 4,941 customers, with the in- volvement of 851 branches. In addition to the rewards program, our mascot “Bruky” took part in many sponsored events for children, and these initiatives produced a strong increase in the number of accounts, with 11,928 new ac- counts opened in 2006. In December, Credito Bergamasco launched a new promotion of Brucoconto with a special Christmas initiative linked to new openings. Banco Popolare di Novara replaced its old savings book called “Babyteen” with Brucoconto, as a first step towards a complete overhaul of products dedicated to the “Young” segment. To this end, BPN launched an intensive research activ- ity.
In 2006, a special focus was devoted to foreign customers, with the new pro- gram “Formula Friend Service”. The offer includes the checking account “For- mula Friend Account”, geared to satisfy the special needs of immigrants, with a very convenient all inclusive fixed monthly fee (only 6 ?) and a special no-charge insurance policy called “Formula Friend Insurance”, designed to protect non-EU citizens in healthcare, bureaucracy and labor areas. Formula Friend also offers the “Transfer” service, namely a money transfer service which allows foreigners residing in Italy to send their savings directly to their families in their home coun- try in a reliable, convenient and inexpensive way. The service is active in 15 coun- tries and can be used also if the receiver of the money being transferred has no bank account. The offer comes with merchandising supports translated into 9 languages.
In order to favor communications with foreign customers, personnel from Sri Lanka, India, Romania, Ghana and Mozambique was hired and a specific train- ing course was launched addressing all branch employees (opening of 1,387 ac- counts).
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With the support of SGS, the new procedure called VE.RA. was adopted, for the sales and post-sales management of package checking accounts and off-the- counter retail services. The goal of the new procedure is to simplify and minimize the administration work necessary to finalize new customer accounts. With VE.RA, through a single access transaction which can be performed from the corporate Portal, it is possible to: • open one or even two concurrent Customer accounts, through a simple guided navigation within the Bank’s product catalog; • include accounts, just opened or already existing, in the Special terms fore- seen for package accounts; • automatically print the relevant contracts related to the finalized transaction upon confirmation of the sales transaction; - prepare a single “multiple” modular contract, that can be assembled in different ways based on the newly opened accounts; - print a regulatory contract (Multiple Regulatory Contract), containing all the regulations and practices governing the business relation, to complement the contract described above.
In September 2006, two BPVN contests that had been launched in 2005 closed. They were linked to the holders of Formula and Go! products and offered the possibility of winning numerous prizes on quarterly prize draws (portable com- puters, digital cameras, Aprilia motor scooter, Class A Mercedes, micro hi-fi, Smart car, travels etc.).
Among package accounts, namely checking accounts with an all inclusive fixed monthly fee, a special mention goes to the “BPVFormula” range in its three ver- sions Base, Plus and Valor, which proved very successful in Banco Popolare di Verona e Novara, and exceeded 108,000 accounts by the end of 2006, posting an increase of about 8%. It is an outstanding result for a product that was launched in June 1998, and which is still proving to be one of the most com- petitive products on the market, also thanks to the “all inclusive - no closing charges” approach. In 2006, the “price freeze until June 2008” initiative continued, confirming Ban- co’s strong focus on product transparency and cost-competitiveness.
Within the “Women” segment, on March 8th, Credito Bergamasco launched Beauty, the package designed for new female customers with bespoke insur- ance policies and non-banking benefits: the launch was tied in with a commu- nication campaign on local media. In October, during the Exhibitions ‘Fiera del Fitness’ and ‘Fiera Campionaria’ in Bergamo, a new promotion of the Beauty package was carried out, linked to various initiatives aiming at acquiring new customers.
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Based upon an in-depth analysis of its existing offer, in July Banca Popolare di Novara introduced a new Checking account Catalog, that aims at streamlining its offer, improve business development efficiency and monitor the product prof- itability. The new Catalog and its congruous application are a first step along a more widespread checking account rationalization process, which should be completed by next year with the creation of new current account packages geared to retail customers.
As part of its participation in the Progetto Patti Chiari, as of October 2006 Ban- ca Popolare di Novara took part in the initiative called “Cambio Conto - Come cambiare il conto corrente” (Checking account change – how to change one’s checking account). The goal is to provide more information on transfer proce- dures, based on: • a transparent explanation of the procedure; • a simple and efficient service closing and transfer procedure.
With regard to the “Small Business” segment, the Group started an important project designed for women entrepreneurs, called “Exclusive”. During the inter- national women entrepreneurship Exhibition “Gamma Donna” in Turin, Banco launched an initiative geared to women entrepreneurs, self-employed and man- agers, comprising BPVFormula and Binomio at no fee until June 2007 and a spe- cial credit line of up to 20 million euro for nonspecified use, devoted to the so called “Pink Enterprises”. Also Banca Popolare di Novara in the first days of De- cember launched the same initiative geared to women entrepreneurs, self-em- ployed and managers, which comprised a checking account (Duplice and Du- plice Personale) at no fee until June 30th, 2007, and a similar credit line devot- ed to “pink enterprises”. These two special loan formulas are characterized by a deferred amortization until 30/06/2007, low fringe charges and spreads and no closing charges.
Banco Popolare di Verona e Novara’s Binomio checking account range were con- firmed as the most favored product, going from 21,000 accounts at the end of 2005 to 25,000 in 2006 (+19%). In 2006, the 4 versions Giallo, Verde, Arancio and Azzurro have been supplemented with two new products: “Binomio Arti & Professioni” and “Binomio Arti & Professioni.Net”, designed for the banking needs of self-employed and small businesses. The two new Binomio versions, which feature a very inexpensive monthly fee (15.00€ per month for A&P and 25.00€ per month for A&P.Net) complement the product range devoted to the small business segment and reflect Banco Popolare di Verona e Novara’s interest for the specific customer requirements produced by the Bersani Decree in terms of fiscal transparency.
As to new products devoted to specific customer targets, Credito Bergamasco launched “Professionista Più”, devoted to Self-employed. Also Banca Popolare di Novara designed two new types of checking accounts, “Conto Professione A/B”, geared to self-employed and aiming at satisfying all their needs. The prod- uct launch was boosted by an intensive mailing and direct contact marketing campaign directed to the target segment in the Bank’s franchise.
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In November, Banca Popolare di Novara’s first package account for enterprises and entrepreneurs was launched: “Duplice”. The account offers many banking and nonbanking services that were based on the outcome of an in-depth analy- sis of the small business world. One month after the launch, the account proved to satisfy customer needs, fostering a constant and progressive growth of the “Bank/customer relationship”. The launch of “Duplice” shall be supported throughout 2007 by an intensive marketing action; specific campaigns shall help the sales network to acquire new customers and to sell the package to existing customers.
Payment cards
At the end of 2006, the Group had a total of 933,588 payment cards out- standing, as illustrated below:
GROUP BPVN CB BPN
Debit 522,127 242,459 92,907 186,761 Electron 73,791 47,027 26,764 - Credit 264,578 125,286 53,946 85,346 Revolving* 42,383 21,072 2,092 19,219 Prepaid 30,709 17,037 4,792 8,880
Total 933,588 452,881 180,501 300,206
* emesse dalla partecipata Linea S,p,A,
Payment cards
BPN 32%
BPVN 49%
CB 19%
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Payment cards continued to grow at Group level, also thanks to the broadening of the card range and the introduction of the Microcircuit technology. In the “e- money and security” field, in 2006 the new sms alert message system “Info Carte” was introduced to protect debit cards. New protocols were designed to carry out an early diagnosis of card clones. A new promotion of the disposable prepaid reloadable card Carta Chiara was carried out during Christmas time, through a marketing campaign in points of sale based on merchandising sup- ports created by Giorgio Forattini. In BPVN the new international debit card based on Microcircuit technology and the introduction of the “SMS Alert” sys- tem were greeted with much favor by customers, and a sustained growth rate was reported in the sale of debit cards in general (+30%).
Also in 2006, Banco Popolare di Verona e Novara’s Charge cards reported a sub- stantial growth (+20%), especially in the CartaSi Classic, CartaSi Oro Insieme So- ci and Platinum products, which increased by 22%, 38% and 27%, respective- ly. Revolving credit cards reported a constant performance, and in 2006 the range was broadened with the introduction of the Microcredit service, a soft loan available directly at the branch, geared to meet small cash needs between 1,000 and 3,000?. In 2006, the prepaid reloadable card “Carta Chiara Prepaga- ta Ricaricabile” launched at the end of 2005 proved very successful. The card is immediately available at the branch, has a maximum card balance of 3,000 € and a 4 year validity, and it was highly appreciated as a valid alternative to cash and a useful tool for shopping on the Internet.
In 2006, the new international debit card based on Microcircuit technology was introduced in BPVN and Credito Bergamasco, to replace Visa Electron cards. More than 110,000 customers were reached by marketing campaigns.
In June, Banca Popolare di Novara introduced Carta Viva Mille to broaden its credit card offer. It is a Revolving credit card, issued by Linea Spa, designed to meet medium financing needs and providing customers with the following ad- vantages: • plan purchases, paying them in monthly installments without the need to apply for a loan; • immediately purchase a coveted good, use an expensive service or meet un- foreseen necessities; • availability of a revolving credit (which builds up again every time the uti- lized line is repaid); • granting of a loan that must not be repaid fully upon the first account state- ment, but can be refunded in a deferred and diluted way over time.
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Bond issues
In 2006, the offer of financial products was geared to the growing need for se- curity and protection felt by customers, who exhibit a persistent low risk propen- sity.
Bond placements GROUP BPVN CB BPN (thousand euro)
Bond placements 3,559,254 1,488,000 903,285 1,167,969 - of which: structured 1,858,000 1,054,000 447,118 356,882
Bond placements
CB 25%
BPVN 42%
BPN 33%
In order to allow Customers to invest while being provided with capital protec- tion and enjoying better returns, in 2006 Banco Popolare di Verona e Novara is- sued 26 structured bond programs.
Customers primarily favored bonds linked to a basket of international equity in- dexes and steepener note. Investors also gave a positive feedback on CPPI notes (Constant Proportion Portfolio Insurance), that offer a guaranteed return and an additional premium upon maturity, based on the final value of a benchmark In- dex (comprised by Mutual funds), while providing capital protection.
The placement of notes issued by BPVN and third party issuers in 2006 exceed- ed 1,488 million euro, of which 1,054 millions related to structured notes.
Credito Bergamasco issued fixed and variable rate notes and structured notes in order to meet the investment demands of its customers, whose risk profile re- mains conservative. The offer hinged on products providing capital protection, and are mainly characterized by fixed coupon structures or linked to the per- formance of given indexes or correlated baskets.
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Banca Popolare di Novara offered notes linked to interest rates and to baskets of equity indexes issued by BPN and by third party issuers.
Mutual funds and Asset Management
Following the reorganization of the fund range at the beginning of 2006, the Group organized the launch of two innovative funds: Gestielle Global Asset Plus 1 and Gestielle Global Asset Plus 2. They are among the first funds in Italy to of- fer the possibility of investing part of the assets (max 20%) in hedge funds. This component, which is characterized by a low market correlation, represents an effective investment diversification tool and a good portfolio stabilizer. The two new funds launched in July 2006 were very successful with an inflow of more than 225 million euro. The new fund range of Aletti Gestielle is now comprised of 36 funds.
In 2006, the range of capital guaranteed asset management products was com- plemented with two new lines featuring innovative investment solutions: • GPS Soluzione Protetta 0-30, characterized by the gradual construction of the equity portfolio in the first three months of management; • GPS Step Crescita Protetta 0-40, featuring an accumulation mechanism which allows to build up a target capital by making an initial payment and 16 subsequent quarterly payments. As a result, this secured asset manage- ment service is accessible to all customer segments.
Our asset management choices were rewarded by customers, who are increas- ingly asking for this type of products: the three capital guaranteed product lines reported an inflow of more than 430 million euro, as opposed to the negative trends reported by the other asst management lines. In October 2006, six new lines were added to the asset management products invested in funds, that are characterized by a greater equity weight and by a growing exposure to European markets.
BPVN customers can now find the best suited solution to their investment needs in a range featuring: • 17 GPF lines – namely managed accounts invested in mutual funds (inclu- ding 6 new balanced and equity lines, of which 4 specializing in the Euro- pean area for an all-around range); • 7 GPM lines – managed accounts invested directly in securities; • 8 GPS lines – special managed accounts, of which 4 with capital guaran- teed.
With regard to managed accounts, Credito Bergamasco reported a negative trend of the Mutual funds component, mainly due to the penalizing market per- formance as a result of the steep interest rate rise and the ups and downs of eq- uity markets. This industry-wide phenomenon affected the whole asset man- agement sector, including Managed Accounts which however are still reporting a positive performance.
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The offer of programmed accumulation plans gained momentum. These plans have been offered also to targeted Small Businesses, who wish to build a sav- ings pool to be used as a buffer against unexpected events affecting company cash flows.
While revising its product offer, Banca Popolare di Novara deemed it appropriate to revise also the management fee levels of the GPF range.
Certificates
In order to complement its choice of market correlated financial instruments, Banca Aletti launched a new Certificates issue and listing program.
These innovative financial instruments track the performance of the main index- es or single stocks, with a lower risk profile than the underlying securities, as a result of protection formulas that minimize risks in case of downside move- ments, without precluding profit-making opportunities. The two main factors turning them into successful instruments is that they have a low minimum in- vestment and are actively and constantly traded on the stock exchange.
Customers greeted with favor the placement of these instruments, that were of- fered as investment strategy rather than speculative. Certificates offer the op- portunity to diversify portfolios even with minimum investments and to hold in- vestments with a high participation in capital market performance, with a bet- ter risk/return profile than a direct investment. The placements performed by the Banks of the Group reached 285.4 million euro.
Covered warrants
Euribor Cap Covered Warrant finance products have been structured to offer Group customers a protection against the interest rate risk. The product is specif- ically geared to customers who have entered a floating rate mortgage and that by purchasing a warrant can fix a cap to their financing costs.
In 2006, in collaboration with Banca Aletti, a series of targeted actions have been performed aiming at hedging/managing interest rate risk. The activity was significantly expanded with the proposal of “Covered Warrants Euribor cap” to Small Businesses, similarly to what had been proposed to Retail customers: these simple investment products are structured in such a way as to “neutralize” the undesired effects of in interest risk increase, without requiring to enter any de- rivative contract or apply for specific credit lines. Thanks to these products, the banks of the Group offered to their customers the opportunity to hedge the risk associated with more than 770 million euro worth of mortgages.
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Insurance products
(thousand euro) GROUP BPVN CB BPN
Insurance products 1,608,374 534,020 214,499 859,855
Insurance products
BPVN 33%
BPN 54%
CB 13%
At the end of 2006, in the light of the budget law provisions on supplementary pension schemes, the Group set out to prepare a manifold proposal involving the bank’s corporate and retail structures. It is a simple and comprehensive program, featuring a soft financing of termination benefit flows (Tfr), as well as an offer of open-end pension funds to manage employee pension assets, and of banking services and products at advantageous terms. On the commercial side, a training program was launched for the sales network, and marketing and communication activities have been developed to boost business development actions.
In 2006, Banco Popolare di Verona e Novara continued to offer products de- signed to provide customers with a total and complete asset and personal pro- tection. The asset protection side features Unit and Index Linked product lines combining different asset management solutions to the advantages of insurance coverage. The personal protection offer includes the Long Term Care Policy “Fonte Sicura” in case of significant deficiencies with activities of daily living and inability to care for oneself for a long period of time, as well as home and car protection policies “Polizza Tutela Casa” and “Polizza Spider Vip.
Since January, Credito Bergamasco has been offering Index, in keeping with new regulations (Circular 551 ISVAP), to meet the clients’ demand for products with a high security content. In February, Unit linked Multicrescita New was launched, to offer insurance products with a highly-market correlated performance. Later along the year, the new versions of Financial Capitalization were designed, namely TFM (trattamento di fine mandato – termination benefits for executives) and LTC (Long Term Care) for more select customer segments.
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As to the performance of the Bank-assurance sector, which is characterized by a more reflective market, product trends denoted higher growth rates than in past years, although customer portfolios are showing some degree of saturation.
In 2006, Banca Popolare di Novara started to distribute non-life insurance prod- ucts of Compagnia Novara Assicura, an associate of Gruppo Fondiaria Sai. The collaboration generated a better understanding of Customer needs and a more suited answer to their insurance needs. One of the first opportunities to collab- orate was offered by the implementations added to the Spider/Spider Vip prod- uct (distributed since December 31st, 2005): a new “version” called Spider Plus was made available to the network. It is a more comprehensive product, featur- ing a greater insurance coverage: personal care and home protection were added to the car service guarantee. The customer also benefits from a series of advantages/discounts included in a “basic package”, in addition to five more services specifically picked by the customer herself from a wide customized choice of products.
The healthcare coverage products “Atlantide Care” and “Olimpo Care”, includ- ed in the fees of the related checking accounts Atlantide, Olimpo and Olimpo Oro, were among the insurance products offered in collaboration with the new Compagnia Novara Assicura.
Motor TPL insurance policies called Caraauto started to be distributed. They are sold to customers by branch employees directly from the Novara Assicura web- site through the Corporate Portal. The new software application allows to pre- pare a quotation for the customer, to issue the policy (if the customer accepts the quotation) and to renew the policy upon expiry.
With regard to life-insurance, the range of traditional insurance products was supplemented with three more policies: • BPN Risparmio Previdente, with a 2% minimum guaranteed revaluation for the first 10 years, whole life insurance with annual principal revaluation and annual or monthly recurring premiums and the possibility of changing the frequency on an annual basis; • BPN Risparmio Serenità & Futuro, a whole life insurance, single premium and supplements, 2% minimum guaranteed return (renegotiable after 10 years); a bonus triggers every five years from the contract inception, provi- ded there have been no redemptions; upon inception the policy-holder can activate accessory guarantees with no need for a medical checkup; • BPN Unit Velvet, an insurance policy featuring a single premium (and sup- plements), annual performance consolidation and 2% minimum guaran- teed return (renegotiable after 10 years).
Additional insurance policies distributed in the course of the year were: Index Policies with financial structures linked to baskets of equities or indexes of world Stock markets.
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Personal loans
Personal loans GROUP BPVN CB BPN (thousand euro)
Personal loans* 394,362 195,752 54,800 143,000
* Compreso l’ammontare collocato per conto di Linea SpA
Personal loans
BPN 36%
BPVN 50%
CB 14%
In 2006, the Group broadened its range of loans devoted to its Registered share- holders and made it even more cost beneficial.
In order to help customers finance their consumption needs, last year Banco Popolare di Verona e Novara overhauled its range of personal loans and added various formulas designed to satisfy any financing need, from large sums, with “Pronto 60 mesi” or “Pronto 72 mesi”, whereby the family’s economic commit- ment is diluted over time, to needs associated with small offhanded or cyclical expenses, with “Pronto 12 mesi”, featuring especially favorable economic terms. The range has also been streamlined and made more cost beneficial, by getting rid of any accessory expense. Bearing in mind our customers’ protection, all products can be combined with an insurance policy, called “Copertura Rischi”, which covers the risk of death, accident, sickness and unemployment and gives the option to pay premiums by installments.
As to the Young, Banco is keeping up its offer of lines of credit for educational needs, such as paying for school or university tuition and fees, textbooks, or oth- er. Moreover, in collaboration with the University of Verona, a personal loan is offered to students enrolled in the “Fondazione Zanotto Master”. Other educa- tion and training finance initiatives have been developed in collaboration with industry associations and other local agencies and organizations. The more than 30% growth rate enjoyed by personal loans, which totaled 195 million euro, gives evidence of the favor with which the new products are looked.
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Banca Popolare di Novara recorded a substantial growth in personal loans, ex- ceeding 55%, as a result of the targeted initiatives conducted on its sales net- work.
Also the year on year growth rates reported by Credito Bergamasco are ex- tremely significant, with the number of personal loans increasing by 64%, and volumes by 46%, as a result of specific business development and marketing campaigns.
An intensive cross selling activity on personal loans produced several personal loan massive pre-approval actions: particularly noteworthy is the excellent result of “camomile cap”, a coverage proposal for floating rate mortgage holders, with the possibility of paying by installments. The pre-approval process starts with a customer pre-qualification based on a qualitative/financial profile, then targets are shared with branches, and all the loan documents are prepared au- tomatically: in order to maximize the commercial effect, the operational phase is supported by mailing and telemarketing actions.
Finally, in collaboration with Linea spa, two massive marketing campaigns have been conducted on select customers to promote the personal loan Presto.
Home mortgages
Home mortgages GROUP BPVN CB BPN (thousand euro)
Mortgages to private individuals 2,304,768 1,099,878 440,202 764,688
Home mortgages
BPN 33%
BPVN 48%
CB 19%
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After examining the various financial needs associated with the purchase of a home by each customer segment, the Group remodeled the range of its mort- gage products.
At the end of 2005, the Group was the first on the Italian market to launch an innovative mortgage product, “Mutuo Alberto”, which links the home loan to a checking account, and allows customers to earn the same interest rate on de- posits as they pay on the mortgage. The interest accrued on the checking ac- count decreases the time length of the mortgage or the installment amount. In 2006, Mutuo Alberto was highly favored by customers, so much so that it now accounts for 25% of home mortgages extended by the Group.
Aiming at strengthening the bond between Gruppo BPVN and our Registered Shareholders, and as a token of the high consideration we have for them, since 2006 they have been offered the entire home mortgage range at very special conditions, in particular Mutuo Alberto. Registered shareholders have access to the entire product range and can choose the one that best suits their needs.
As part of the “Capri” project, a methodology was developed to cluster retail customers in terms of pre-assessed loan ceilings based on various identified pro- files.
New and innovative financing products are being vetted (Mutuo 100% and Mu- tuo 35 anni), together with new flexibility features for home loans that would for example change the term during the life of the mortgage.
Banco Popolare di Verona e Novara and Credito Bergamasco are also offering their home renovation loan, Ratarinnova, dedicated to customers who wish to take advantage of the tax relieves envisaged by the current regulations for build- ing renovations and improvements.
With regard to retail loans, Credito Bergamasco launched a series of initiatives aiming at boosting the number and the volumes of loans extended to private in- dividuals. A special mention goes to the performance of Home Mortgages, that reported a yoy increase of 13.7% in the number of loans and of 32% of vol- umes.
In September, Banca Popolare di Novara launched Mutuo Progetto Casa - For- mula Giovani, a special floating rate mortgage dedicated to customers between 18 and 35 years of age, specifically designed to meet the financing needs of young home owners who want low payments in the early years, when they al- ready have to sustain considerable costs to furnish their new home. The mort- gage offers contained spreads, long terms, no accessory charges and a deferred amortization of maximum 3 years, during which the interest-only payments are much lower than with conventional mortgages. With Progetto Casa formula ”Giovani” it is also possible for the customer to switch at any time from a float- ing to a fixed rate.
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Another mortgage for the young is Mutuo progetto casa “Soci Banco” - formu- la giovani: “Soci Giovani” customers, namely young registered shareholders, can count on this new product, that offers contained spreads and no charges for in- quiries, payment collection or early settlement.
In order to come in contact with the highest number possible of new customers looking for a home mortgage, agreements were signed with real estate agen- cies and networks.
In the first months of 2007, a useful Mortgage sales support tool called “Casa Tua” shall be made available to the BPN network: by way of a guided interview, this software application prepares a home mortgage quotation to suit the needs which came to light during the meeting with the customer and shall facilitate fu- ture contacts with prospective customers that come to the branches to inquire about our Home Mortgage products.
Small business loans
Loans to small enterprises GROUP BPVN CB BPN (thousand euro)
Loans to small enterprises 8,473,630 5,037,708 1,881,165 1,554,757
Loans to small-sized enterprises
BPN 18%
BPVN 60%
CB 22%
The group devoted a special consideration to women entrepreneurship with the new Finanziamento Exclusive, featuring a first payment deferred to 2007, ad- vantageous economic terms and privileged access to retail and business check- ing accounts.
With regard to the Small Business range, Banco Popolare di Verona e Novara in- troduced Mutuo Impresa Multifasce, a medium/long term loan with a special in- novative structure: a graduated amortization for a more “contained” initial fi- nancial commitment, that becomes higher with time, in line with the progres- sive increase in the production capacity of the new investments. Based on this type of capital refund, subdivided into predefined brackets, it is possible to com-
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bine the mortgage with another innovative transaction, namely an interest rate risk hedging, perfectly correlated in terms of amount and payment schedule. Mutuo Jet con Garanzia Sace was introduced to meet the financing needs of business customers that are going global. This product makes it possible to ex- tend “substantial” sums without necessarily resorting to mortgage collaterals. Another new product complementing BPVN’s range of loans for small business- es is Mutuo “Crescita Garantita”. It meets the funding needs associated with business investment programs as well as special financial requirements, and it is linked to a credit guarantee granted by the Guarantee Fund for Small and Medi- um-sized Enterprises.
In the course of the year, Banca Popolare di Novara focused on the Small Busi- ness segment by entering business agreements and acting on its products. “En- ergie Verdi” is a new product for the agricultural sector. It is dedicated to agri- cultural businesses who wish to replace or install alternative power plants. In case of special weather events (drought in rice-growing areas in North-East Pied- mont and in Lomellina/ floods in Ponente ligure), ad hoc plafonds have been im- mediately set up to help affected business with very favorable terms.
Banca Popolare di Novara also strengthened its relations with loan guarantee consortia, and created two plafonds for the Piedmont region: in particular with Confartigianato Fidipiemonte and Cogart, that represent the primary craftsman association (Confartigianato/Cna). Finally, loan brokerage agreements, which were available only for the retail sector, are now regulated and possible also for the business sector, leading to a substantial broadening of our operating plat- form.
Group Direct Banking
The Group’s Direct banking product range covers all customer segments: private individuals, small and medium enterprises and Large Corporations.
The number of customers subscribing to direct banking services is constantly growing:
Customers INTERNET MOBILE PHONE REMOTE on 31.12.06 BANKING BANKING BANKING BANKING
BPVN 51,219 15,095 71,352 47,725 CREBERG 25,154 6,633 11,131 26,132 BPN 19,807 34,706 37,936 25,330
Total 96,180 56,434 120,419 99,187
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Internet/Web services
The web service reported a positive growth in the number of subscribers, con- firming customer interest. New functionalities were introduced during the year, providing customers with the possibility of paying bills and postal payment slips (mav, rav and freccia). Customers can also take advantage of the new Pixbuster agreement, whereby they can purchase cameras or digital prints at very com- petitive prices.
Subscriptions to the ‘posta personale web’ service launched in 2005 are in- creasing: total subscribers receiving their bank statements and notices directly on the website private section are now almost 5,000.
At midyear the On Line Trading service was further improved with a new tech- nological platform and with IT operations that allowed our customers to work with greater efficiency, speed and simplicity. Customers have also been provided with a new financial info provider solution.
The substantial growth in the number of users of the web service (+20%) is tell- tale of the success of the functionalities offered, and in general of the service it- self.
Internet transactions GROUP BPVN CB BPN
Internet transactions 1,019,572 560,479 181,897 277,196 - of which on line trading 337,341 194,078 50,733 92,530 - other transactions 682,231 366,401 131,164 184,666
Internet transactions
BPN 27%
BPVN 55%
CB 18%
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Mobile Banking
The Mobile Banking service (SMS messages from or to the mobile phone) was highly appreciated due to its usefulness and simple use.
Customers holding our debit cards can subscribe to our ‘Infocarte Sms’ service, and receive in real time sms messages on card use in case of payments and with- drawals. With almost 60,000 subscribers, the service was a great success.
The Anti-fraud Mobile Banking initiative is part of a series of activities aiming at assisting customers who might be potential victims of card frauds.
Mobile Service customers
BPVN 27%
BPN 61%
CB 12%
Contact Center
Voice Service customers
BPN 32%
BPVN 59%
CB 9%
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Several initiatives were launched during the year. Described below are the most noteworthy: • the new single toll-free number (800.027.027) for registered shareholders, providing information on positions and initiatives under the package ‘Insie- me Soci’; • the fraud detection service, for a rapid detection of possible card fraud. The Contact Center detects ongoing potential frauds and by alerting the custo- mer immediately, prevents the fraud from repeating. The service won im- mediately the favor of the customers, who feel more secure and assisted in the management of this delicate situation;
In 2006, inbound calls totaled 1,187,949, of which 24% managed by operators. The number of equity trades via the Voice channel keeps high.
Equity trades GROUP BPVN CB BPN
Nr. of equity trades 35,586 21,207 5,111 9,268
Nr. of equity trades
BPN 26%
BPVN 60%
CB 14%
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Equity trades GROUP BPVN CB BPN (thousand euro)
Volumes 280,629,677 203,985,555 36,023,142 40,620,980
Equity trades BPN 14%
CB 13%
BPVN 73%
Contact center 2006
Inbound calls 1,187,949 Operator calls 285,171 % Operator calls 24% Average call time (seconds) 193 % Answers 96.62% Average answering time (seconds) 20 E-mail management Number of inbound e-mails 5,882 Number of outbound e-mails 5,731
During the year, outbound activities to support branches on their territories were boosted, and a phone call program on newly acquired customers (retail and cor- porate) was started, to verify their satisfaction with regard to the bank offer and service.
Corporate services
As part of the structural organization development on the territory, new spe- cialist centers have been set up for customers in Central Italy (located in Pisa and Rome) and in Friuli. The centers are staffed with highly specialized resources in the field of corporate electronic services.
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Remote Banking
Gruppo BPVN is among the pilot banks at national level participating in the new Interbanking Corporate Banking project, which is going to produce structural changes to multi-bank Remote Banking services.
A great focus was devoted to broadening the services offered through our tech- nological platform ‘Vantaggio’.
Illustrated below are the new functionalities added to our service: • functionalities (MT101) giving online access to account balances and move- ments, Elcos and Euroincassi for customers with international operations; • an English version and a specific customer profiling were developed for ‘Correspondent Banking’; • Public Agencies were provided with a new specific version, aiming at ma- naging electronic flows and “IT orders”.
The service recorded a marked increase in the number of subscribers, which peaked at yearend, especially due to the obligation introduced by law for VAT holders to pay their tax returns electronically. In virtue of the experience accrued in this area, we could be very helpful to our customers, assisting them through- out the procedure.
REMOTE BANKING Customers with products directly proposed by the Group
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In order to meet the market demand and to satisfy the huge volume increase, the Help desk service dedicated to corporate customers has been widely ex- panded.
Some Large Corporate customers asked for customized, very sophisticated elec- tronic services. Hence, the Group launched a new “electronic service line” geared to this class of customers, giving proof of our ability to heed market needs and satisfy even the more complicated demands.
At yearend, the number of corporate customers with an electronic connection with BPVN were 99,187, of which 68,951 preferred the services provided directly by our bank, compared to so called “passive” connection modalities.
Remote Banking Connections
Remote Banking GROUP BPVN CB BPN
Remote Banking customers 99,187 47,725 26,132 25,330 - of which with our Products 68,951 32,372 17,559 19,020
Remote Banking customers
BPN 26%
BPVN 48%
CB 26%
The number of transactions grew by 8%.
POS
The Pos service evolved, through the adoption of particularly innovative solu- tions, which were appreciated by our large corporate customers (Amusement parks and Large Retailers). Also the installation, maintenance and monitoring processes have been im- proved, so as to guarantee a more rapid customer service and service quality. To this end, a dedicated organization team was set up at the Bank.
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Public Agencies were provided with dedicated electronic solutions to pay mu- nicipality fees and school canteen fees from our Pos, as part of the municipal service integration project (reloadable cards).
In order to better guarantee the security of our customers’ terminals, gradually the Pos fleet is being replaced with more innovative technological solutions. During the year, Pos “at risk” were replaced, in keeping with Cogeban guide- lines, both at Large Retailers and for single points of sale solutions.
Nr. POS GROUP BPVN CB BPN
Nr. POS 28,181 14,466 4,303 9,412
Nr. POS
BPN 33% BPVN 52%
CB 15%
ATM
The range of services offered from ATM kiosks has been further expanded. To date it is possible to: • pay “mav” slips from an ATM (a functionality required by the municipalities of our territories) • make donations to Nonprofit organizations through the Donamat service; • reload Mediaset smart cards.
Corporate business sector
Organizational model
Banco Popolare di Verona e Novara and Banca Popolare di Novara serve their Corporate customers through a dedicated sales network, called “Centri Imp- rese” (hereinafter Corporate Centers), which are organizational units that are closely connected to the Retail Branches but retain their own autonomous de- cision making power in terms of marketing policies. This separation from the tra- ditional branch network is grounded in the desire to bring together and promote
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the special know-how existing in Banks, and represented by Corporate Mangers, to better respond to the growing and more sophisticated needs of this class of customers.
Banco’s Corporate Managers are 166 (147 in 2005), organized in 22 Corporate Centers and 4 Districts, while BPN has 85 Corporate Managers (78 in 2005), or- ganized in 17 Corporate Centers and 7 Divisions. From a technical and com- mercial point of view, Corporate Managers are supported by Branch resources (International operations and Special credit experts, liaisons with public agen- cies), as well as by dedicated central functions, and the add-on of the peripher- al structures of operating companies (so called product factories), depending on the required services (Estero Merci, Crediti Speciali, Derivati, Enti pubblici, Finan- za d’Impresa, namely Foreign business – Commodities, Special Loans, Deriva- tives, Public Agencies, Corporate Finance).
Credito Bergamasco serves its Corporate customers through a sales network made up of “Aree Affari” (Business Areas) and Branches, supported by Execu- tive Specialists and by the various Product Factories present in the Banking Group, to better respond to the more and more sophisticated requests of this class of customers. As at 31/12/2006 Credito Bergamasco had 241 Branches (235 in 2005), coordinated by 8 Business Areas, supported by Experts in Inter- national Operations, Special Loans, Leasing, Factoring, Derivatives, Public Agen- cies.
In order to expand our operations to neighboring markets and to support the SME internationalization project, Banco Popolare di Verona e Novara acquired a controlling stake in Banka Sonic, based in Zagreb, Croatia, which is one of the most interesting markets in Central East Europe. The bank has 27 branches. Oth- er three contracts were signed in 2006 to acquire three foreign financial institu- tions, and we are waiting for the necessary authorizations from the relevant au- thorities: IC Bank Zrt., in Hungary, IC Banka a.s., in the Czech Republic and Au- to Trade Leasing IFN S.A. in Romania. Once the acquisitions are finalized, they shall allow the Group to expand its foreign network in areas characterized by very intensive trade relations with the Group’s corporate customers.
The foreign operations of our corporate clients are also supported by the Lon- don branch, BPVN Luxembourg e three representative offices in high-growth countries entertaining important trade relations with Italy (Mumbai in India, Hong Kong and Shanghai in China).
The Group has 96 correspondent banks in the Euro area and 57 in the rest of the world. Banco can handle payments and collections to about 5.300 banks worldwide through the SWIFT network.
In order to assist our customers with their thriving trade activities with India, in 2006 an Indian desk (“Desk India”) was set up, in support to the existing Rep- resentative office in Mumbai.
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Our agreement with the Austrian banking Group RZB, signed in 2003, is still op- erational. The aim is to provide our customers with first rate banking services in Eastern Europe, where RZB can count on a network of more than 700 branches in 15 Countries.
Strategy
Fully aware of the challenges that a lending institution must face in its everyday business, in 2006 the Group kept on revamping its operational processes and structure, so as to make sure of keeping always abreast of the latest market de- velopments.
The strategic goal of the Group Corporate sector for 2006 focused on improv- ing the service quality to corporate clients by innovating the product range, as well as the sales analysis tools provided to Corporate managers.
In 2006 a new Operational Portal was developed, again with the aim of im- proving customer service. The portal collects all the most important data on in- dividual customers and their managed portfolios in one single application, along a functional organization that makes the sales management more efficient and effective.
The demand for more and more qualified product and services calls for a con- stant technical and IT upgrade of the Sales Network. To this end, also in 2006 the Group increased its training investments to update and expand the techni- cal knowledge of its Corporate managers.
The impact of Basel II on banking competition, the growing expectations in terms of service quality by bank corporate customers, together with the ten- dency to rationalize banking relations, are all phenomena that make the im- provement of customer relations a strategic priority. The Group is determined to do all that is necessary to acquire the ability to anticipate customer needs, thus changing our role from generic banking “assistance” into a professional and qualified full-ranging service. The enhancement of some central and peripheral structures (Corporate Agencies, Corporate finance, Lending Secretaries), the adoption of measures aimed at increasing cross-selling rates based on more a so- phisticated sub-segmentation, the full deployment of our sales methodology, the ongoing organizational improvements (foremost, more efficient Foreign Business Commodities operations at sales network level), together with the re- lease of new products are the main levers that are being pulled to attain our am- bitious short and medium term targets.
Products
Loans
In 2006 our commitment to product innovation continued unflaggingly. The range of medium/long term loans was expanded, with the double target of im-
107 Report on Group operations
proving the correlation between collection flows from corporate investments and payment flows from refunds, while increasing the correlation between the type of loan and its purpose or destination.
At local level, agreements with guarantee consortia were carried on with the is- sue of special ceilings at favorable terms for the development of local business- es. The close collaboration with the Research function paved the way to the cre- ation of new financing forms dedicated to the financial needs of specific local industrial sectors.
Payment and collection
With the goal of being one of the pilot banks in the Sepa project, the Group re- tail domestic bank transfers were migrated onto the new Step 2 platform by Eba Clearing. The projects that had been launched to innovate payment and collec- tion systems, both at domestic and international level, are in progress.
Foreign Business
In 2006 the Group continued to actively support the internationalization of lo- cal companies. In particular, a new agreement with SACE S.p.A. shall lead to the expansion of the product range geared to customers with foreign opera- tions, in particular in Non-OECD countries.
Worth mentioning are: • “Joint Export Target – J.E.T.”, an unsecured medium term loan secured by SACE for 70% of the extended amount; • the policy Multimarket globale, to insure operations associated with the sa- le of goods and services to both Italian and foreign buyers under deferred payment. It is a global insurance, in that the whole turnover is insured and the policyholder need not select the risks to be covered; • the policy Multiexport, an instrument designed to satisfy the needs of Ita- lian companies which perform repeated transactions with one or more fo- reign buyers. This type of policy is suited to the insurance of exports of goods and services to all the foreign countries eligible for coverage by SA- CE S.p.A.. This policy introduces important novelties, and in particular it co- vers OECD as well as Non-OECD countries, while the coverage rate was rai- sed at 90%; • the policy “Credito Fornitore - Sconto con Voltura di Polizza”, namely, fac- toring with insurance policy transfer, targeted to manufacturing companies of capital and semi-capital goods which intend proposing a payment defer- ral to foreign customers to ease the conclusion of business negotiations; • the policy “Credito Fornitore - Sconto con procedura semplificata”, namely, fast-track factoring, through which it is possible to insure capital goods, se- mi-capital goods, plants and equipment by way of a simplified procedure and a rapid response time by Sace.
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Corporate Customers
As of December 31st, 2006, the Group had 29,500 corporate customers.
Corporate Customers
CB 32% BPVN 38%
BPN 30%
By breaking customers down by sales brackets, in 2006, 60% of customers (17,576) had a sales volume below 8 million euro, 24% ( 7,047 customers) had sales ranging between 8 and 25 million euros, 11% (3,144 customers) between 25 and 80 million euros and 6% (1,733 customers) above 80 million euro.
> 80 mln 6% 25-80 mln 11%%
< 8 mln 60% 8-25 mln 24%
Primary sector 2% Other services 17% Mechanical sector 7% Metal products 8% Food 4% Textile 4% Trade 23%
Other 26% Bulding and construction 9%
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Corporate lending activities
With regard to corporate lending and financial services, the Group focused on bringing customer needs, both financial and operational, favoring integration and cultural exchange among local businesses.
Set out below, is a quantitative snapshot of the Group’s relations with corporate customers: • total corporate customer funds (on average) at the end of December 17,869 million euro, up by 13.7% as compared wit 15,742 million euro on December 31st, 2005;
Total corporate funds
CB BPVN 24% 19%
BPN 57%
Total gross interest-bearing loans to customers (on average) at the end of De- cember 2006 amounted to 23,210 million euro, up by 16% from 20,003 million euro on December 31st, 2005.
Total loans CB 25%
BPVN 53%
BPN 22%
In keeping with our business plan guidelines, the loan increase made it possible to: • increase our penetration in local businesses, as demonstrated by the rising market shares; • acquire new customers in developing areas (BPVN 1,344; BPN 1,005; CB 1,000); • consolidate our total income.
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Analysis of the single operational areas
Liquidity management Liquidity management GROUP BPVN BPN CB (billion euro)
Total funding 4.8 2.1 1.3 1.4
Total funding
CB 29% BPVN 44%
BPN 27%
With regard to liquidity management, total corporate funds amounted to about 4.8 billion euro (average annual data), with deposits taking the lion’s share.
ML/T Loans GROUP BPVN BPN CB (million euro)
Gross interest-bearing loans 6,414 3,686 1,487 1,241
Gross interest-bearing loans
CB 20%
BPVN 57% BPN 23%
In spite of the strong pricing competition, we are I line with the growth targets fixed by the Business Plan, with a volume increase of 21.2% for BPVN, 26.8% for CB and 50.3% for BPN.
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The rating system relating to this business area is being fine-tuned and impor- tant implementations are being carried out to provide our customers with new highly flexible products, geared to suit the specific needs of the economic sec- tors they belong to.
S/T Loans GROUP BPVN BPN CB (million euro)
Gross interest-bearing loans 16,796 8,493 3,666 4,637
Gross interest-bearing loans
CB 28%
BPVN 50%
BPN 22%
Leasing GROUP BPVN BPN CB (million euro)
Nr. of Leasing 2,323 1,032 623 668
Nr. of Leasing
CB 29%
BPVN 44%
BPN 27%
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Lease turnover GROUP BPVN BPN CB (million euro)
Lease turnover 465 237 153 75
Lease turnover CB 16%
BPVN 51%
BPN 33%
With regard to short term loans, in 2006 BPVN reported a loan increase of 6.4%, CB of 17% and BPN of 21.9%.
With regard to leases, in 2006 the Group executed 2,323 transactions, with a turnover of 465 million euro, of which 53% were Real estate leases, 38% Equip- ment leases and 9% Car/ship leases.
Factoring
In 2006, Banco confirmed the tendency towards a growing use of factoring, re- porting a 63.5% growth over the previous year.
Volume growth continued also in Credito Bergamasco, reaching + 53% as com- pared with 2005; also BPN reported a significant development of factoring ac- tivities, with an increase of 32% with respect to the previous year.
International operations
With regard to international operations, flows intermediated by the Group ex- ceeded 37 billion euro, of which the corporate segment accounts for more than 90% of operations. As part of the groundwork for Sepa (Single European Pay- ment Area), the Group migrated retail domestic bank transfers on the new Eu- ropean platform Step2 by Eba Clearing. In 2006, the new operational/management procedure was successfully launched in BPVN and BPN, while in Creberg the launch is slated in the first months of 2007.
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Payment and Collection in Italy
With regard to payments and collection in Italy, in 2006 the Group confirmed the tendency towards a greater use of the electronic channel by corporate cus- tomers for their transactional flows.
Banco Popolare di Verona a Novara processed 98% of collection transactions and 85% of payment collections. With regard to transacted volumes, Banco re- ported about 63 billion euro for 19,800,000 transactions. With regard to the ex- pansion of the product range, it is worth mentioning Banco’s participation in ABI (Italian Banking Association) projects for Interbanking Corporate Banking – Step2: in 2006 all network architecture innovations were completed, together with the implementation of new application functions envisaged for 2007. With regard to so called Documentate Auto, namely the collection of receivables originated from vehicles bought by Dealers, against declarations of conformity, Banco confirmed its leadership on the market, with 35% of the Italian market intermediated in 2005, and the collection of 500,000 certificates for more than 8.3 billion euro - and standing out as partner of choice for the best car manu- facturers and their local dealers. In view of its significant position, Banco also participated in the pilot project on the digitalization of certificates promoted by UNRAE, the trade association representing foreign car manufacturers , which was launched in the late months of 2006.
Credito Bergamasco confirmed the number of transactional flows by Corporate customers, adding up to about 10,000,000 transactions.
Also BPN confirmed the tendency towards a greater use of the electronic chan- nel by Corporate customers (+19.1% in the number of Internet-based transac- tions, and a 30.6% in transacted amounts).
Private and finance business sector
The Finance business is mainly performed at the Parent company’s for the man- agement of structural risk. Banca Aletti engages with private and investment banking, Aletti Merchant with structured finance and mergers and acquisitions. Aletti Gestielle Sgr deals with the management of traditional mutual funds, while Aletti Gestielle Alternative Sgr takes care of the management of funds of hedge funds. Aletti Fiduciaria offers fiduciary services.
Private banking – sales network
The consolidation of the subsidiary Banca Aletti in the private banking sector continued with success also in 2006.
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Banca Aletti Managed Assets (under management and number custody) (million euro)
Private Customers 11,478 Retail Customers 6,294 Institutionals (including proprietary portfolio) 8,258
Total 26,030
2006 was characterized by the confirmation of the growth of total income and by a strong drive to increment assets under management and broaden the num- ber of customers.
Banca Aletti’s sales network was expanded with three new units opened in Flo- rence, Padua and Udine. As a whole, Banca Aletti can count on 19 units, or- ganized in 7 areas covering 33 provinces. The Milan unit, called “Top Private and Institutional” tops up the network. The total headcount is 110 private bankers Net inflows (Euro 1.4 billions in the private segment alone) were particularly sig- nificant and exceeded business plan expectations. Strategies were designed to generate new contact opportunities with prospective customers, in order to fos- ter business development opportunities. The selected strategy is to go for a “Family Business” integrated approach, standing to the side of entrepreneurs al- so and foremost in times of family and business discontinuity – when transfer- ring the family business to the next generation or in case of changes in the own- ership structure.
Company Product Gross AuM (million euro)
Aletti Gestielle SGR Italian open-end compliant UCITS 14,509 GPP Open-end pension funds 19 Total 14,528
Banca Aletti GPF retail 3,026 GPM retail 5,243 GPP other pension products 507 GPA Unit linked 964 GPA discretionary manag, 2,370 Other 5,361 Total 17,471
Aletti Gestielle Alternative Italian Hedge UCITS (fund of fund) 2,127 Total 2,127
Grand Total 34,126
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Managed accounts
During the year, the performance of managed accounts (GPM – managed ac- counts invested directly in securities, and GPF – managed accounts invested in mutual funds), placed by the commercial banks of the Group and centrally man- aged by the subsidiary Banca Aletti, was in line with the benchmark. However, returns were below those of the previous year. At the end of 2006, assets under management totaled 17,471 million euro, reporting a downturn with respect to 2005, as well as an important change in asset composition. Customers chose products characterized by more innovative management approaches and with capital protection.
An intensive overhaul and extension of the investment product range character- ized the activities carried out in 2006 within this business segment.
The insurance product range was deeply revised in 2006, as a result of the important regulatory changes introduced in particular with Isvap’s circulars, defining new distribution procedures, as well as the Government’s decision to advance the pending pension reform to January 2007. Building on the need to make products compliant with new regulations, the product range was completely renovated and upgraded to the most advanced investment tech- niques. A special focus was devoted to the risk management development project. Ban- ca Aletti received also in 2006 the GIPS certification of conformity.
Mutual funds
Through the subsidiaries Aletti Gestielle and Aletti Gestielle Alternative, the Group reported a decrease in assets under management from 17,741 million eu- ro in 2005 to 16,655 million euro in 2006.
With regard to Aletti Gestielle, managed funds reported an AuM decrease of 1.37%, from 15,456 million at the end of 2005 to 14,509 million euro at yearend 2006. It is worth recalling that, based on Assogestioni data, the entire Italian fund management industry in 2006 lost about 4.22% of its assets on the domestic market. Gruppo BPVN also in 2006 ranked number seven among Ital- ian asset management groups.
In line with market trends, Aletti Gestielle innovated its product range.
As a token of the constant effort devoted to the asset management business, even in 2006 Aletti Gestielle won the approval of the asset management world for its fund “Gestielle Pacifico”, which was awarded the “Triple A 2005 Award”, assigned by Milano Finanza – Global Awards 2006 to Italian mutual funds in the Pacific Equity Funds class, as well as the special Triple A award for its rating con- tinuity; the Gestielle World Utilities Fund received the Triple A Award in the cat- egory Azionari Altri Settori – Equity Other Sectors. The Open Pension Fund Gestielle Pensione e Previdenza reported an increase in
116 Report on Group operations
Net Assets Destined to Benefits from 11.731 million euro of the previous year to 13.997 million euro in 2006, up by 19.32%, with more than 1,300 investors.
As to alternative investments, the funds managed by Aletti Gestielle Alternative at year-end amounted to 1,856 million euro, from 1,368 millions in 2005. The company confirmed its position among market leaders, ranking also in 2006 number four in terms of market share (7,9%). The company managers twelve funds of funds, of which six are duplicates of operational funds that had been closed to new investors having reached the maximum ceiling (200).
Investment banking
Derivative instruments and structured products
2006 confirmed Banca Aletti’s ability to provide customers with sophisticated in- vestment and risk hedging products across al main asset-classes.
Product structuring for the retail networks of the banks of the Group proceed- ed at the same levels of the previous year. A special focus was devoted to prod- uct innovation, both in terms of structure and underlying. With regard to equi- ty index products, Banca Aletti offered customers sector and specialty indexes, as well as indexes linked to emerging markets.
The increase in interest rates propelled interest rate risk management products for corporate customers, with about € 4.5 billion worth of structured products sold, as well as for retail customers, with Euribor covered warrants.
The securities and equity index volatility trading platform completed in the pre- vious year allowed Banca Aletti to operate on the Certificates market as issuer and market maker (Sedex) and to expand as market maker on the equity deriv- atives market (IDEM) in 2006. As to Certificates, Banca Aletti added up an open interest of about 300 million euro in the first seven months of operations and reported average daily trades generating a turnover of about 40 million euro. On IDEM, Banca Aletti doubled the number of securities on which it quotes options, going from 6 to 12, and added also the SPMib index.
The trading activity was characterized by a change in the fixed income segment compared to past years, with increased interest rates, especially short term rates, and by a concurrent flattening of the yield curve. From a strategic and organizational viewpoint, also in 2006 investments and much effort were devoted to the enhancement of the trading and risk manage- ment systems.
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Stock and bond markets
Italian Stock Market 2005 2006 % increase
Market share of Banca Aletti 1.32% 1.59% 0.27%
Assosim Data.
Equity trading was positively affected by the economic cycle and by the uninter- rupted acquisition of new Italian and international institutional customers. In 2006, Banca Aletti reported a marked market share increase on the Italian eq- uity market as compared to the previous year.
A marked volume increase was reported on the foreign equity market, from € 3.2 billion euro in 2005 to € 4.6 billion euro in 2006, and on Italian and foreign derivatives, which almost doubled with respect to the previous year, so much so as to justify our direct admission to the Eurex market, finalized on January 2nd, 2007.
As to fixed income securities, the market offered interesting movements both on Government and on Corporate bonds.
A strong focus was devoted to the qualitative level of the securities trading help desk service offered by Banca Aletti to the Group sales networks.
Market Making on single Stock Futures reported a further volume increase, con- firming our number 2 ranking among the most active market makers of the year.
Securities lending, which was launched in 2005 and was fully operational in 2006, reported a noticeable volume growth, reaching an average volume of lent securities brushing € 800 millions.
Forex and money market
On money markets, Banca Aletti pursued a double goal: • help the retail network of the commercial banks trade short term financial products (derivatives, interest and exchange rates); • optimize flow and risk management.
In particular, the focus was directed on two main aspects: • looking for operational models and procedures linked to collateral mana- gement both in terms of business and service; • analyze and revise liquidity management and Group Treasury processes.
118 Report on Group operations
Said issues shall be further analyzed in 2007, with the aim of enhancing finan- cial planning processes, by optimizing short term risk management through the availability of a wider range of tools and products and the adoption of more and more sophisticated liquidity policies. From an operational point of view, 2006 was characterized by a fairly good short term curve volatility, especially euro and dollar, that made it possible to leverage their alternate mispricing phases through a careful, combined and coordinated management of different short term financial instruments. Intermediated volumes reported a significant increase with respect to the previ- ous year, with secured trading up by 58% (total transacted volumes 356 billion euro) and short term derivative trading up by 75% (total transacted volumes 8 billion euro).
The forex market in 2006 has been characterized by two major phases, one at the beginning and one at the end of the year, featuring a marked Euro appreci- ation against the dollar. At the end of the year our currency had appreciated about 12% against the US currency.
Our membership to the CLS circuit – Continuous Linked Settlement, which elim- inates the risk of time lags inherent in the settlement of foreign exchange trans- actions, produced a noticeable delivery risk reduction, with about 80% of traded volumes channeled onto this system.
Institutional sales
In 2006, the institutional function furthered the development of the guidelines set forth in 2005: quantitative and qualitative development of the investment and hedging product catalog for the Banks of the Group; acquisition of new cus- tomers and non-captive market share in the segment of investment and hedg- ing derivative products; expansion of the Equity weight in the institutional cus- tomer portfolio.
With regard to investment products, in particular bonds, regulatory changes and the introduction of the new Law on Investment Protection caused a slowdown in issues in the first part of the year throughout the whole industry.
Among the various initiatives aiming at innovating and expanding our product catalog, a special mention should go to the entry of Banca Aletti on the Securi- tized Derivatives segment: • in a few months time the project to issue and list Certificates, which was launched in April, allowed Banca Aletti to become one of the leaders on the Italian Certificates market, with a market share of about 25% of traded vo- lumes, whereby it ranks number four among certificates issuers. As a result, the Banca Aletti brand enjoyed an even greater visibility on the market, al- so thanks to an intensive communication campaign on the press and on specialized websites; • in May another distinctive initiative was launched concerning product inno- vation: the issue of Euribor CAP Covered Warrants by Banca Aletti, to pro-
119 Report on Group operations
vide customers holding a floating rate mortgage to hedge against the ex- posure to interest rate risk.
With regard to non-captive business development, insurance companies, with which Banca Aletti cooperated for bond structuring, have been particularly ac- tive. In the course of the year the volumes transacted with these customers al- most doubled with respect to 2005.
Marketing actions mostly focused on equity derivatives for what concerns insur- ance companies, and on securitized derivatives with regard to banks. Towards the end of the year, the first certificates and Euribor cap covered warrants start- ed to be placed to third party networks.
Also Institutional Equity Investments reported a marked increase in the number of open accounts (15 of which 9 non Italian).
The activities of interconnected retail intermediaries benefited from the general- ized volume increase on equity markets.
Corporate Desk
In 2006 this segment reported a strong business increase in interest rate hedg- ing derivatives with respect to the previous year. The hike in interest rates prompted companies to accelerate the hedging of their financial risks.
Customers mainly favored IRS and CAP Capital Guaranteed products, that capped either medium/long term rates or maximum cost levels down to very contained values, so as to limit the weight of financial charges in the balance sheet. Also Conditional Coverage and Active Management products raised a fair interest, as many companies can decrease their funding costs as compared with current market rates, and cash in the positive spread.
Strong expectations were developed by corporations in terms of financial risk coverage, which led to an additional broadening and sophistication of our Prod- uct Catalog, offering a comprehensive choice of structures, topped by new fi- nancial instruments designed to manage and optimize corporate liquidity. The project goal is to give deep-pocketed companies the possibility of correlating their liquidity to “new” underlying instruments, such as exchange and interest rates, equity indexes and in the near future also commodities.
120 Report on Group operations
Capital markets
In 2006 Banca Aletti took part in all retail IPOs, acting as Member of the Retail Underwriting Syndicate. Banca Aletti also acted as Co-Manager in the Capital In- crease of Lottomatica, this being the most important deal in 2006.
Merchant banking
In private equity, the subsidiary Aletti Merchant in 2006 invested a total of € 37.8 millions in new shareholdings or in stakes and Funds already included in its portfolio. A total of € 25.0 million worth of shareholdings and other securities were disposed of, € 23.5 million worth of convertible bond redemptions were collected and € 1.5 million worth of refunds from invested closed-end Funds. Among the main private equity deals finalized during the year it is worth men- tioning: • the disposal of 92.2% of Theme Parks Holding S.p.A., controlling company of Gardaland, by Cornel S.à.r.l., 40.5% held by Aletti Merchant, • acquisition of 4.5% stake in Merlin Entertainments Italy 3 S.r.l., the new controlling company of Gardaland, by way of the subsidiary Parchi del Gar- da S.p.A.; • the acquisition of a shareholding of about 45% in Estates Venture Capital S.à.r.l., a real estate company; • acquisition of a 49% stake in Triera S.p.A., which engages in bio-energy, by way of the subsidiary Bio Energy International S.A.; • acquisition of a shareholding of about 21% in Bertani Holding S.p.A., a wi- ne-making company; • subscription of shares of the Mid-capital Mezzanine fund managed by AF Mezzanine SGR, 50% held by Aletti Merchant; • Aletti Merchant also undertook investment commitments adding up to about € 62 million euro associated with the future capitalization of two shareholdings acquired during the year (Bio Energy, Estates Capital Ventu- re) and with the Mid-Capital Mezzanine fund.
During the year, the total revenues generated by private equity amounted to € 64.0 millions: € 58.6 millions worth of dividends (mainly from Cornel’s liquida- tion), € 2.9 millions worth of capital gains, € 1.4 millions worth of interest in- come on convertible bonds and loans and ?1.1 millions worth of other proceeds. Corporate finance activities to support the customers of the Group Banks fo- cused on structured finance transactions, generating about 6 millions worth of revenues. In the course of the year, a corporate finance transaction was finalized with the direct granting of € 10 millions.
The subsidiary Aletti Private Equity SGR managed the “Dimensione Impresa” Fund, at its third operational year, which disposed of two shareholdings and as a result made an early refund of the generated proceeds to fund investors, and the “Dimensione Network” Fund, at its third operational year, with about € 6.3 million worth of investments.
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Group Finance
Structural risk
Interest rate risk
During the year the Group reported a very contained net structural imbalance in the time bracket above one year in fixed rate assets.
In order to contain the interest rate risk, part of the fixed rate bond issues, hav- ing a maturity ranging between three and five years, were not immediately hedged and were therefore used as a natural hedge for fixed rate imbalances. Specific and timely hedges were carried out on bond issues characterized by structured pay-offs.
Macro-hedging strategies – interest income stabilization
In order to stabilize the cost of its floating rate funds, the group carried out hedges for 60 million euro classifying them as Macro Cash Flow Hedges.
The exposure to the short term interest rate mainly due to the portfolio of de- mand deposits underwent an econometric and statistical analysis. Both initial and following analyses showed that the above mentioned assets are character- ized by a high stability, that the economic maturity of these portfolios is differ- ent from their contract maturity (which is generally fixed on a given date), and that part of said assets are practically insensitive to interest rate movements. Based on the above evidence, an interest income stabilization policy was adopt- ed on part of the analyzed deposits using max three-year plain vanilla swaps.
With regard to the structural liquidity risk, the bank structure presents a short term deficit, which is completely absorbed over the medium/long term. In order to keep up with the growth in assets and to optimize the correlation be- tween loans and deposits, in addition to the usual internal funding sources, a 2.775 billion euro bond program was issued directed to institutional investors, linked to the E.M.T.N. program, with maturity ranging between 2 and 10 years.
The evolution of liquidity aggregates and the structural interest rate risk have been closely and constantly monitored along the Strategic Asset & Liability Man- agement (ALMS) procedure. The reports of the ALMS procedure are drawn up in the form of gap analysis.
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Proprietary portfolio
In 2006, the backdrop to the proprietary portfolio management policy, based on “absolute return” objectives, was that of European official interest rates in- creasing gradually but constantly. As a result, the market yield curve of euro de- nominated bonds reported a substantial upward movement, particularly con- centrated in the short and medium curve maturities, until it brushed 4% for 3 to 5 year notes. This caused important bond price adjustments, down to lower prices than those reported in the previous year.
Against this backdrop, the strategic approach followed by the proprietary port- folio management policy remained overall conservative with regards to interest rate risk. The average duration of bond assets over the year remained basically contained, and preserved the global profitability of the bond component, albeit in the presence of strong and repeated depreciations of government bond prices.
The favored sectors in equity portfolio management were US technology and the European telephone. The oil and raw material sectors were overlooked because the global portfolio was already fairly exposed to performance of equities be- longing to these sectors as a result of investments in alternative assets.
As to alternative asset investments, the approach remained that of privileging low and medium volatility strategies. The long/short equity exposure was broad- ened, while medium volatility exposure was slightly reduced, in the light of a positive performance of equity investments.
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Performance of the main companies of the Group Lending Institutions Banca Popolare di Novara
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Net interest, dividend and similar income 396.4 343.6 15.4% Net commission income 213.3 199.7 6.8% Total income 702.6 622.5 12.9% Operating costs 390.3 414.5 -5.8% Profit from operations 312.4 207.9 50.3% Income/Loss before tax from continuing operations 256.1 166.2 54.1% Income/Loss after tax from continuing operations 146.2 91.0 60.7% Net income for the year 146.2 91.0 60.7%
Balance sheet Total assets 16,842.0 15,035.2 12.0% Gross customer loans 10,694.0 8,268.2 29.3% Financial assets and hedging derivatives 3,390.6 3,506.8 -3.3% Shareholders' equity 1,032.7 931.8 10.8%
Customer financial assets Direct customer funds 10,994.8 10,317.7 6.6% Indirect customer funds 31,786.2 32,228.7 -1.4% - Assets under management 9,120.9 8,899.2 2.5% - Mutual funds and Sicav 3,542.0 3,705.8 -4.4% - Managed accounts inv, in securities or in mutual funds 3,398.3 3,441.4 -1.3% - Insurance policies 2,180.6 1,752.0 24.5% - Assets under custody 22,665.3 23,329.5 -2.8%
Other data Average number of employees (*) 3,447 3,500 -1.5% Bank branches 413 417 -1.0%
(*) Monthly arithmetic mean
Credit intermediation
In 2006, direct customer funds reported an appreciable increase, coming in at 10,995 million (+677 millions, +6.6% year on year) on 31.12.2006. The aggre- gate includes due to customers, debt securities in issue and financial assets (bonds) measured at fair value. The increase in direct customer funds was en- tirely driven by the dynamics of short term instruments, in particular checking ac- counts and repurchase agreements, while debt securities are decreasing due to a marketing policy oriented towards a reduction in the issue of bonds and cer- tificates of deposit.
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Subordinated liabilities on 31.12.2006 amounted to about 18 millions, down by some 49% with respect to the previous year, as a result of the refund of the an- nual payment on the only outstanding loan of this type.
The massive hedging of demand deposits, started in 2005, gave rise to a total annual fair value change of about –16.1 millions euro (recognized in the balance sheet under the item “fair value change of assets in hedged portfolios”, now to- taling –22.9 million euro), which was offset by a change of opposite side of the associated derivatives.
As to lending activities, the adoption of various marketing actions and the trend reversal of the economic cycle and the recovery of production activities con- tributed to a very satisfactory growth in customer loans.
Gross loans to customers on 31.12.2006 amounted to 10,694 million euro as compared with 8,268 millions on December 31st, 2006 (+2,426 millions, +29.3%). Write-downs stood at 215 millions, down by 2.7 millions from 31.12.2005 (-1.2%): as a result, net customer loans totaled 10.479 million eu- ro, up by 2,428 millions, +30,2%, with respect to 31.12.2005.
Performing loans totaled 10,275 million euro gross of write-downs, 10,194 mil- lions net of write-downs (+2,443 millions, +31.5% as compared with 31.12.2005); impaired loans – the aggregate of doubtful debts strictly speaking (non-performing loans, watchlist, restructured loans or under restructuring) and past due loans – stood at 419 millions gross and 285 millions net of write-downs (-15.3 millions, -5.1% as compared with 31.12.2005).
The percentage of performing loans over total net loans was 97.28%, up from 96.27% on December 31st, 2005. Hence, the weight of net impaired loans fell to 2.72%, from 3.73% at the end of 2005.
The coverage ratio of impaired loans, namely the write-down/discounting to to- tal gross loan ratio was 32.01%, basically unchanged with respect to December 2005.
Gross non-performing loans amounted to 245.2 million euro, down by 2.2 mil- lions as compared with 31.12.2005.
Net non-performing loans increased by 7.1 millions, to 140.0 millions; hence the net risk ratio (NPL to total loans) was 1.34%, down from 1,65% at the end of December 2005.
Gross watchlist loans (147.1 millions) grew by 1.8 millions as compared with the end of the previous year (145.3 millions); net of write-downs (119.9 millions) the aggregate decreased by 1.5 millions as of the end of 2005.
125 Report on Group operations
Note, that as a result of the massive hedging of customer loans (mortgages), started in 2005, in the previous year a fair value change of about –3.1 millions had been recognized (posted in the balance sheet under the item “fair value change of assets in hedged portfolios”, amounting on December 31st, to –4.1 millions), that was more than offset by a change of opposite sign of greater amount (by about 576,000 euro) of the associated derivatives.
(thousand euro) 31-12-2006 31-12-2005 Changes
Impaired loans 419,108 441,141 -22,033 - 5.0% - non-performing 245,191 247,374 -2,183 - 0.9% - watchlist 147,063 145,285 1,778 1.2% - restructured loans 14,113 18,775 -4,662 - 24.8% - past due 12,741 29,707 -16,966 - 57.1% Performing loans 10,274,881 7,827,048 2,447,833 31.3% Country-risk 536 257 279 108.6% Other performing loans 10,274,345 7,826,791 2,447,554 31.3%
Total gross loans 10,693,989 8,268,189 2,425,800 29.3%
Individual loan impairments -134,055 -140,934 -6,879 - 4.9% Collective loan impairments -81,011 -76,517 4,494 5.9%
Total net loans 10,478,923 8,050,738 2,428,185 30.2%
Indirect customer funds
Asset management dynamics turned out positive as a result of the important contribution made by Bancassurance products, as part of a marketing policy that won the favor of our customers, prompted by the need to find suitable financial products capable of guaranteeing appealing returns while protecting their in- vested capital.
On December 31st, 2006, total assets invested in Funds, Managed asset, Sicav and Insurance products added up to 9.121 billion euro, up by 222 millions (+2.5%) with respect to the end of the previous year. Bancassurance Premiums written amounted to 882 millions, driven by the sale of capital guaranteed products that have been raising much interest among our customers: specifically, Index Linked Policies “Calliope”, “Topazio”, “Ambra” “Onice” and “Ametista” made a total contribution in terms of premiums writ- ten of 796 millions. Hence, on December 31st, 2006, the total stock of ban- cassurance products stood at 2.181 billion euro. On 31.12.2006, customer assets under custody totaled 22.665 billion euro (23.330 at the end of 2005). This amount includes 7.353 billion worth of mu- tual funds distributed by Azimut SGR, for whom as of March 2004 BPN acts as Custodian Bank. Net of the Azimut component (down by 15% in twelve months), the increase would be of 4,3%. Note, that Retail assets under custody
126 Report on Group operations
stood at 4.786 billions in terms of average monthly volumes, up by 2.4% year on year; Corporate assets under custody came in at 8.663 billions. Basically in line with yearend 2005.
Operating performance
In 2006, money management revenues reported a positive dynamic, especially thanks to the favorable evolution of loans, which showed a remarkable increase. Net interest, dividend and similar income came in at 396.4 million euro (up by 15.4% year on year), as a result of an interest income of 659.5 millions and an interest expense of 263.1 millions. Commission income reached 245.0 millions (a 24.2 million increase year on year), and are mainly made up of management, brokerage and advisory service commissions (168.9 million euro), accounting for about 69% of total commis- sions. Commission expense (31.7 millions, +10.6 millions as compared with 31.12.2005) are made up of management and brokerage service charges (36% - 11.5 millions), mostly represented by payments to other Companies of the Group in exchange for activities they had been delegated. The remaining part refers to commissions for other services (15.6 millions, of which 2.5 millions from ATM services and credit cards), commissions from payment and collection serv- ices (4.1 millions) and guarantees received (0.5 millions). As a result, net com- mission income came in at 213.3 millions (199.7 millions on December 31st, 2005). Net Financial income in 2006 stood at 16.2 millions, up by 1.9 millions compared to the previous year (+13.7%). The aggregate includes unrealized net capital gains on Hedge Funds of about 8.6 million euro, and on the Azimut convertible bond program of 4.3 millions. Other operating income totaled 76.8 million euro (64.9 on December 31st, 2005). Said revenues have been mainly generated by recoveries on customer overdrawn deposits and checking accounts (61.4 million euro), with a significant contribution also by capital gains from disposal of the business line comprising 9 branches to Banca Popolare Italiana (about 18 millions). As a result, total income came in at 702.6 million euro (622.5 millions twelve months before). Operating costs totaled 390.3 million euro, with a year on year decrease of 24.3 millions. They break down in Personnel costs of 217.7 millions (a strong decrease from 239.6 millions on December 31st, 2005), other administrative expenses of 170.3 millions (down by 3.1 millions yoy) and net amortization and depreciation of tangible and intangible assets of 2.2 millions. Profit from operations totaled 312.4 million euro, up by 104.4 millions with re- spect to a year before (+50,2%). Net write-downs for loan impairment and provisions for guarantees and com- mitments amounted to –42.6 millions, as a result of write-downs and provisions of 66.6 millions and write-backs of 24.0 millions. On December 31st, 2006, net write-downs stood at –37.3 millions, which is the balance between write-downs and provisions of 71.2 millions minus write-backs of 33.9 millions.
127 Report on Group operations
Provisions for risks and charges totaled 13.7 millions (4.6 millions on December 31st, 2005). Income before tax from continuing operations, net of the above write-downs, came in at 256.1 million euro (166.2 millions in 2005). After accounting for income taxes of 109.8 millions, net income for the 2006 to- taled 146.2 millions, posting a 60.7% growth rate from 91.0 millions in 2005.
Credito Bergamasco
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Net interest, dividend and similar income 368.5 301.1 22.4% Net commission income 136.4 131.6 3.6% Total income 544.3 462.2 17.8% Operating costs 240.3 233.6 2.9% Profit from operations 303.9 228.6 32.9% Income/Loss before tax from continuing operations 335.3 202.2 65.8% Income/Loss after tax from continuing operations 241.6 126.1 91.6% Net income for the year 241.6 126.1 91.6%
Balance sheet Total assets 13,595.2 11,968.7 13.6% Gross customer loans 10,178.3 9,143.7 11.3% Financial assets and hedging derivatives 698.7 764.4 -8.6% Shareholders' equity 1,167.1 980.7 19.0%
Customer financial assets Direct customer funds 9,702.2 8,540.3 13.6% Indirect customer funds 11,554.0 11,046.5 4.6% - Assets under management 4,346.6 4,797.2 -9.4% - Mutual funds and Sicav 1,511.5 1,568.2 -3.6% - Managed accounts inv, in securities or in mutual funds 1,769.5 2,103.6 -15.9% - Insurance policies 1,065.6 1,125.4 -5.3% - Assets under custody 7,207.4 6,249.3 15.3%
Other data Average number of employees (*) 2,084 2,038 2.3% Bank branches 241 235 2.6%
(*) Monthly arithmetic mean
128 Report on Group operations
Credit intermediation
On 31.12.2006 Credito Bergamasco reported direct customer funds, made up of due to customers, debt securities in issue and financial liabilities (bonds) meas- ured at fair value – of 9,702.3 million euro, up by 13.6% from 8,540.3 at yearend 2005.
At the end of December, indirect customer funds reached 11,554 million euro, up by 4.6% from 11,046.5 millions on 31.12.2005. Among indirect customer fund components, managed assets – also as a result of the favor with which customers greeted products that best suited their needs and their risk profile, such as bond programs (issued by the bank and by third parties) – added up to 4,346.6 million euro, down by 9.4% with respect to the previous year. Indirect customer funds under custody stood at 7,207.4 million euro, up by 15.3% compared with 2005. As a result, total customer funds added up to 21,256.3 million euro, up by 8.5% from 19,586.8 millions on 31.12.2005. On the asset side, the constant strengthening of the Bank’s ties with their cus- tomers and territory, as well as the support lent to the development of its local economy, heaved net loans to customers to 10,040.3 million euro, up by 11.4% (9,.009,3 millions at yearend 2005). Among the different loan products, it is worth mentioning the growth of cus- tomer mortgages, which went from 3,012.9 millions at the end of 2005 up to 3,648.8 millions at the end of 2006, and posted an annual growth rate of 21.1%.
(thousand euro) 31-12-2006 31-12-2005 Changes
Impaired loans 280,730 325,111 -44,381 - 13.7% - non-performing 124,814 119,506 5,308 4.4% - watchlist 116,852 160,291 -43,439 - 27.1% - restructured loans 14,056 13,546 510 3.8% - past due 25,008 31,768 -6,760 - 21.3% Performing loans 9,897,558 8,818,619 1,078,939 12.2% Country-risk 411 30 381 1270.0% Other performing loans 9,897,147 8,818,589 1,078,558 12.2%
Total gross loans 10,178,288 9,143,730 1,034,558 11.3%
Individual loan impairments -65,616 -73,181 -7,565 - 10.3% Collective loan impairments -72,334 -61,213 11,121 18.2%
Total net loans 10,040,338 9,009,336 1,031,002 11.4%
129 Report on Group operations
A disciplined and unrelenting risk monitoring and control by the relevant bank functions absorbed the impact on the loan book of the flagging domestic eco- nomic performance experienced in the past, which generally causes a time lag affecting the performance of impaired loans. On 31.12.2006, gross non-performing loans totaled 124.8 million euro; net of write-downs, they reached 70.1 million euro, accounting for 0.70% of total net loans (0.69% at yearend 2005). Also the composite made up of watchlist loans, restructured and past due loans, reported a positive evolution, decreasing by 24.2% gross and by 23.2% net as compared to one year before. Gross impaired loans (280.7 million euro) posted an annual decrease of 13.7%, while net impaired loans (213.9 millions) decreased by 14.3% with respect to 31.12.2005.
Operating performance
On 31.12.2006, as a result of the constant growth of our business activity with customers, as well as of the interest rate rise, net interest income stood at 312.1 million euro, up by 15.7% from 269.7 millions on 31.12.2005. Profit from eq- uity investments valued at equity added up to 56.4 million euro, from 31.5 mil- lions in the previous year (+79.2%). It is worth specifying, that this figure in- cludes the 22.6 million euro share pertaining to Credito Bergamasco of the cap- ital gain generated by the subsidiary Aletti Merchant S.p.A. from the disposal of 92.2% of Theme Parks Holding S.p.A. (controlling company of Gardaland) by Cornel S.a.r.l. (39.9% held by Aletti Merchant) and from the following liquida- tion of Cornel. Net interest, dividend and similar income came in at 368.5 million euro, up by 22.4% from 301.1 millions on 31.12.2005 (345.9 millions net of the non-recur- ring item described above, +14.9% yoy). Other revenues reached 175.8 million euro (+9.1% from 161.1 millions on 31.12.2005). In particular, at the end of 2006 net service commission income to- taled 136.4 million euro, up by 3.6% from 131.6 millions one year before. Oth- er operating income amounted to 31.4 million euro (31 millions the year before) and net financial income totaled 8 million euro. Note, that this figure includes a capital gain of 2.2 millions generated by the sale of a 4.29% shareholding in Cim Italia S.p.A. to Gruppo ICBPI (Credito Bergamasco retained a 3.93% stake in the company). Total income thus reached 544.3 million euro, up by 17.7% from 462.2 millions in the previous year. Net of non-recurring items, total income was 519.4 million euro, up by 12.4% year on year.
130 Report on Group operations
On 31.12.2006, operating costs added up to 240.3 million euro, reporting an annual growth rate of 2.9%. Personnel expenses stood at 152.3 million euro, up by 2.6% yoy mainly as a result of the staff increase that was made necessary to implement the “Retail” and “Corporate” strategic plans; other administrative expenses (net of recoveries) totaled 82 million euro (+3.4%), while depreciation and amortization amounted to 6.1 million euro (5.9 millions the previous year). Profit from operations came in at 303.9 million euro, up by 32.9% from 228.6 millions on 31.12.2005; net of non-recurring components, profit from opera- tions reached 279.1 million euro, up by 22.1% year on year. The cost/income ratio – resulting from operating costs over total income – was 44.2%, reporting a substantial decrease from 50.5% one year before; net of non-recurring components, cost/income was 46.3%. Net write-downs for loan impairment reached 33.4 million euro (up from 26.5 millions on 31.12.2005, also due to the significant loan growth reported in the period and to conservative provisions on performing loans), while provisions for risks and charges amounted to 5.9 million euro (2.8 millions one year before). The income statement recognized also profit on disposal of shareholdings and investments of 70.7 million euro, as compared with 2.9 millions in the previous year. The figure refers almost completely to the gross capital gain of 70,6 million euro generated by Creberg on the merger by acquisition of the associate Leasim- presa S.p.A. in Banca Italease, that from a legal, accounting and fiscal viewpoint came into effect on December 31st, 2006. As a result of this operation, Credito Bergamasco acquired a 2.923% interest in Banca Italease. Income before tax from continuing operations stood at 335.3 million euro, up by 65.8% yoy (239.9 millions net of non-recurring components, +20.2% with respect to 200 millions at yearend 2005 on a like-to-like comparison). Income tax totaled 93.7 million euro as compared with 76.2 millions on 31.12.2005, and net income reached 241.6 million euro, up by 91.7% from 126.1 millions on 31.12.2005; net of non-recurring components, net income came in at 151.2 million euro, up by 22% from 123.9 millions at yearend 2005, on a like-to-like comparison. Year-end R.O.E., resulting from the ratio between net income and equity plus re- serves, reached 26.1%, as compared with 14.8% in the previous year; net of non-recurring income, R.O.E. was 16.3%.
131 Report on Group operations
Banca Aletti & C.
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Total income 220.9 173.2 27.5% Operating costs 80.5 70.2 14.7% Profit from operations 140.4 103.0 36.3% Net income for the year 95.1 77.3 23.0%
Balance sheet Indirect customer funds 14,105.9 14,343.9 -1.7% Total assets 14,729.8 10,854.3 35.7% Shareholders' equity 291.6 229.8 26.9%
Other data Average number of employees (*) 380 330 15.2% Bank branches 20 16 25.0%
(*) Monthly arithmetic mean
Aletti & C. Banca di Investimento Mobiliare, for short “Banca Aletti & C.”, is owned by the Parent company with a 74.225% stake and by Credito Bergam- asco with the remaining 25.775%.
The subsidiary is organized along three departments that work in close synergy with the Group’s sales networks: • Private Banking; • Investment Management; • Investment Banking.
Private Banking
At the end of 2006, Banca Aletti reported total assets under management and custody of Euro 26.03 billion euro, of which 11.48 billion euro come from pri- vate customers, and the remaining 14.55 billion euro from institutional cus- tomers. 2006 confirmed the growth in total income and the strong focus devoted to in- creasing our managed assets and expanding our customer base. Net customer funds (1.4 billion euro in the private segment alone) were partic- ularly significant and much higher than expected in the business plan. In order to maximize growth opportunities, specific strategies were put in place to promote contact occasions with prospective customers. Several events were organized that gave Private Bankers the opportunity to sig- nificantly increase contacts with prospective customers. In addition, during the year a new “private - corporate cross selling” project was launched, in collaboration with the external consultant Boston Consulting Group, in accord and in teamwork with the Group Networks.
132 Report on Group operations
The project goal is to identify and meet entrepreneurs whose companies enter- tain business relationships with the Commercial Banks of the Group, who how- ever have not turned to the Group to manage their personal wealth. The selected strategy is to go for a “Family Business” integrated approach, standing to the side of entrepreneurs also and foremost in times of family and business discontinuity. The extensive training program planned at the end of 2005 is being rolled out with this goal in mind. In 2006 the project was launched by all the Units. The project is supported and closely monitored by the Group Top Management. 2006 was also characterized by an intensive selection activity to hire new Private Bankers boasting high standing professional profiles and destined to strengthen the sales structures in some high- potential provinces. All the necessary actions have been implemented to open three new Units in Flo- rence, Padua and Udine. A new software application called “Aletti R-evolution” (Aletti Relationship Evo- lution) for the analysis and accounting of customer assets was put on stream. With this new “Front End” application, the Private Network can retrieve cus- tomer accounts more easily and with a greater quality level, and they can also carry out in-depth portfolio analyses rapidly and at a much deeper level than it was possible with the previous application, to as to free up some precious time for Private Bankers to better concentrate on business development strategies.
Investment Management
2006 was characterized by an intensive activity to overhaul and extend the in- vestment product range.
The insurance product range was deeply revised in 2006, as a result of the im- portant regulatory changes introduced in particular with Isvap’s circulars, defin- ing new distribution procedures, as well as the Government’s decision to ad- vance the pending pension reform to January 2007. Building on the need to make products compliant with new regulations, the product range was com- pletely renovated and upgraded to the most advanced investment techniques.
The most important novelties are a multi-line unit-linked product and the launch of a pension product with an embedded fund managed along a total return ap- proach. In 2007 additional new products are slated to be launched, and a product de- signed to meet specific needs of the more sophisticated private clients is being analyzed. With regard to managed account products, in 2006 the catalog underwent many important changes. First of all, a project was started to revise processes and prod- ucts, aiming at achieving a greater asset management efficiency. The initial goal was to favor and accelerate the convergence of customers towards management lines present in the catalog, which paved the way to a second stage, namely an- alyze the consistency between the offer and investor needs, which in 2007 shall lead to a more organic revision of the entire product catalog.
133 Report on Group operations
2006 also saw the creation of new investment products based on specific re- quirements raised by the networks: • a line dedicated to private clients and characterized by an extremely active management approach in the framework of a close control on trading ac- tivities based on a careful monitoring of risk parameters; • two new products complementing the range of capital protected and secu- red products, that are very much favored by retail customers; • new GPF lines, complementing the existing range and introduce a new ran- ge focusing on Europe.
The product range revamping was sided by an efficiency gain process, through the completion of the Risk Management project, in keeping with the expected time-schedule, covering the entire managed account segment, which also in 2006 was granted the GIPS certification of conformity. By the first days of 2007, also the last two distribution agreements with foreign management companies shall come into effect. Together with the three agree- ments that had already come into operation in 2006 they will allow the private network to top up the Group UCITS offer with SICAVs managed by leading in- ternational investment firms. With regard to private equity investments, in mid December the private equity fund of fund, accessible by Banca Aletti customers, was definitely closed. Other agreements are being finalized so as to be operational during 2007.
Assets under management at the end of 2006 added up to about 17.5 billion euro, reporting a downturn with respect to the beginning of the year, but fore- most signaling an important change in asset composition. The growing favor won by products featuring a non traditional management ap- proach, in particular secured products with capital protection, counterpointed the growing lack of interest for traditional products, designed along a gradual risk profile approach. In addition to this, there was also the rescission of the management agreement for the managed account lines distributed by Azimut’s network of financial advisors (former Aletti Invest Sim network). Finally, last year institutional managed assets grew considerably, reaching 25% of total AuM by yearend.
In the second half of 2006, a reorganization process was launched, to increase the function’s focus on core asset management activities as well as customer and network advisory services, and to create a separate structure exclusively dedicat- ed to the design and creation of innovative financial instruments and solutions. As a result, the structure dedicated to managed accounts is now called “Invest- ment Management”, and the existing Advisory Desk was maintained and it re- ports directly to the Head of Investment Management. The design and creation of new financial products for all the group networks and of services for the pri- vate network are now the focus of the new function, called “Aletti Lab”, which reports directly to the General Manager.
134 Report on Group operations
With regard to Wealth Management services, worth mentioning are the follow- ing actions: A) as part of the Private-Advisory Project, the business platform ded- icated to the Private Network has recently gone on stream. This is a fundamen- tal step along the strategy to improve our customer service quality and to opti- mize the daily activities of our Private Network. In the second half of the year, the remaining procedural implementations have been released, aimed at com- plementing and updating the software application. The Advisory Desk launched last November is a direct service offered to Private clients. The two last months of the year have been devoted to completing tests and checks, and the service was operational only for a limited number of clients, so as to verify the complex management system; B) as to Art, an All Risks policy was designed in collabora- tion with Arena Broker and Willis, to insure the works of art held in their homes by private clients. The product was launched last February; C) with regard to re- al estate, a partnership agreement was signed with Property Capital, to train our Private Network and to provide our customers with property fiscal and financial advice. Part of the agreement hinges also on the creation and launch of new re- al estate products and services with a high commercial value added.
Investment Banking
Derivative and structured products: 2006 confirmed Banca Aletti’s ability to pro- vide customers with sophisticated investment and risk hedging products across al main asset-classes. Product structuring for the retail networks of the banks of the Group proceeded at the same levels of the previous year. A special focus was devoted to product innovation, both in terms of structure and underlying. With regard to equity index products, Banca Aletti offered customers sector and spe- cialty indexes, as well as indexes linked to emerging markets. The increase in in- terest rates propelled interest rate risk management products for corporate cus- tomers, with about € 4.5 billion worth of structured products sold, as well as for retail customers, with Euribor covered warrants. The securities and equity index volatility trading platform completed in the previous year allowed Banca Aletti to operate on the Certificates market as issuer and market maker (Sedex) and to expand as market maker on the equity derivatives market (IDEM) in 2006. As to Certificates, Banca Aletti added up an open interest of about 300 million euro in the first seven months of operations and reported average daily trades of about 40 million euro. On IDEM, Banca Aletti doubled the number of securities on which it quotes options, going from 6 to 12, and added also the SPMib index. The trading activity was characterized by a change in the fixed income segment compared to past years, with increased interest rates, especially short term, and by a concurrent flattening of the yield curve. Towards the middle of the year this change affected also stock markets, producing a considerable retracing in May and June and an increase in volatility and correlations, that returned to normal in the second half of the year. From a strategic and organizational viewpoint, al- so in 2006 much effort and investments were devoted to the enhancement of the trading and risk management systems: the completion of the currency op- tion trading platform at midyear and the development of new interest rate de- rivatives systems, which are expected to be completed during 2007.
135 Report on Group operations
Stock and bond markets: Equity trading was positively affected by the econom- ic cycle and by the uninterrupted acquisition of new Italian and international in- stitutional customers. As a result, it reported a considerable increase over the previous year, leading to the acquisition of a greater market share: on the Italian equity market Banca Aletti’s market share went from 1.32% in 2005 to 1.59% in 2006 (source -Assosim). A marked volume increase was reported also on the foreign equity market, from € 3.2 billion euro in 2005 to € 4.6 billion euro in 2006, and on Italian and foreign derivatives, which almost doubled with respect to the previous year, so much so as to justify our direct admission to the Eurex market, finalized on January 2nd, 2007. As to fixed income securities, the market offered interesting movements both on Government and on Corporate bonds. The introduction of the new Law on In- vestment Protection at the end of 2005 affected the business operations of the sales networks, as it engendered a cautious attitude on the part of banks with regard to non-government notes. A strong focus was devoted to the qualitative level of the securities trading help desk service offered by Banca Aletti to the Group sales networks. Market Mak- ing on single Stock Futures reported a further volume increase, confirming our number 2 ranking among the most active market makers of the year. Securities lending, which was launched in 2005 and was fully operational in 2006, report- ed a noticeable volume growth, reaching an average volume of lent securities brushing € 800 millions.
Capital Market: In 2006, 21 Companies went public, 6 more compared to 2005 (+40%), of which 14 through IPOs on major Stock Markets (MTA, STAR, BLUE CHIP) and 7 on the Expandi market segment, of which 4 exclusively reserved to institutionals. Funds raised totaled 4.8 billion euro, as compared with 2.6 billion euro in 2005 (+84.6%), the highest turnover since 2000. The liquidity crisis that hit the Market in May as a result of the sudden market retracement, caused 5 of the Companies that had been admitted to listing by Consob during the year to suspend or cancel their IPO: 3 Italia, Api, Italtel, Pirelli Tyre, Value Partners. Banca Aletti took part in all retail IPOs, acting as Member of the Retail Under- writing Syndicate. In 2006, 15 take-over bids were carried out, amounting to 7.1 billion euro, as compared with 2005 with 23 take-over bids for 19.8 billion eu- ro (-64.1%). In 2006, 23 listed companies conducted Share Capital Increases, raising 5.1 billion euro, in 2005 there were 21 with 12.1 billion euro funds raised (-57.9%). Banca Aletti also acted as Co-Manager in the Capital Increase of Lottomatica, this being the most important deal in 2006.
136 Report on Group operations
Forex and Money Market: The Group function in charge of managing short term liquidity during the year pursued the optimization of cash flow and risk man- agement. From an operational point of view, 2006 was characterized by a fairly good short term curve volatility, especially euro and dollar, that made it possible to leverage their alternate mispricing phases through a careful, combined and coordinated management of BT (treasury notes), repurchase agreements and BT derivatives. Intermediated volumes reported a significant increase with respect to the previous year, with secured trading standing at 356 bln (+ 58% ) and short term derivative trading at 8 bln ( + 75 % ). The forex market in 2006 has been characterized by two major phases: the first was characterized by sudden Euro appreciations at the start and at the end of the year, which caused our domestic currency to appreciate about 12% against the dollar; the second was range trading at midyear. As a result, short term trad- ing was fairly profitable. The constant monitoring of the currency market and the careful management of trade flows, in addition to a wider range of traded currencies, paved the way to important results, with the acquisition of a greater market share. Traded volumes increased by about 28% over the previous year, reaching a turnover of 100 bln euro. Also the number of developed transactions increased substantially, ex- ceeding 68 thousand (+ 20% ). An intensive relationship activity was developed with market counterparties, exchanging new mandates that contributed to con- solidate Banca Aletti’s role as marker maker for a growing number of counter- parties, even international ones. Our membership to the CLS circuit – Continu- ous Linked Settlement, which eliminates the risk of time lags inherent in the set- tlement of foreign exchange transactions, produced a noticeable delivery risk re- duction, with about 80% of traded volumes channeled onto this system.
Institutional Sales: In 2006, the institutional function furthered the development of the guidelines set forth in 2005: quantitative and qualitative development of the investment and hedging product catalog for the Banks of the Group; acqui- sition of new customers and non-captive market share in the segment of in- vestment and hedging derivative products; deepening of the Equity weight in the institutional customer portfolio. With regard to investment products, in par- ticular bonds, the new Law on Investment Protection introduced the Prospectus obligation also for banking issues, which took both the market and regulatory authorities by surprise, and certainly caused a slowdown in issues in the first part of the year throughout the whole industry. Among the various initiatives aiming at innovating and expanding our product catalog, a special mention should go to the entry of Banca Aletti on the Securitized Derivatives segment. With regard to volumes, investment products structured for the Banks of the Group totaled 4.653 million euro, up by 8% with respect to 2005. In particular, structured bonds amounted to 2,152 millions and index linked policies to 1,178 million eu- ro. A special mention should go to managed asset volumes invested in capital guaranteed/protected instruments, totaling 1,037 millions, up by 196%, as compared with 528 millions in 2005.
137 Report on Group operations
With regard to our business development with non-captive customers:
With regard to the intermediary sector (banks and insurance companies), the number of customers trading derivative and structured products rose to 31, of which a significant percentage is represented by insurance companies. Traded volumes with intermediaries during the year almost doubled as compared with 2005, and margins increased by more than 250%, thanks to the greater weight of equity and structured derivatives to the detriment of plain vanilla interest rate constituents. Marketing actions mostly focused on equity derivatives for what concerns insur- ance companies, and on securitized derivatives with regard to banks. Towards the end of the year, the first certificates and Euribor cap covered warrants start- ed to be placed to third party networks.
Also Institutional Equity Investments reported a marked increase in the number of open accounts (15 of which 9 non Italian), together with a hefty increase in commission income (+420% as compared with 2005). The quality of the re- search product (credits came both from surveys among international operators, and from statistics processed by Borsa Italiana), as well as the intensive market- ing activity generated new important contacts and relations.
The activities of interconnected retail intermediaries benefited from the general- ized volume increase on equity markets.
Corporate Desk: In 2006 this activity reported a strong increase in derivative products to hedge and manage interest rate risk, as compared with the previous year, based on a few key guidelines: A. constant market rate rise; B. companies highly sensitive to financial risks; C. manifold choice of products.
Financial Engineering: In 2006, the activities performed by the Financial Engi- neering Function represented a continuum of the projects launched in 2005, which made it possible to meet deadlines and further improve the quality of services provided to the other Functions of the Bank. The Function worked in close cooperation and target sharing with the Derivatives and Structured Prod- ucts Function. In the first part of 2006, some pricing models for currency deriv- atives were developed, allowing for the full migration of foreign-exchange desk activities onto the current trading system, and for an in-house and dynamic risk management. With regard to the fixed income market, for the first time ever a set of pricing models were developed, designed to manage the risks inherent in almost all traded contracts. The new models have been integrated in the trad- ing system and they include various state of the art algorithms, such as the libor market model and tree models for early exercise options. Throughout 2006 the market has been actively and intensively searched for new trading opportunities, and a major effort was made to identify and assimilate market changes as rap- idly as possible. As to the equity segment, 15 new pricing models were devel- oped, which significantly raised the number of risks managed through propri- etary models. In the second half of 2006, a new pricing model for equity deriv- atives based on a stochastic volatility process entered the development pipeline.
138 Report on Group operations
This work led to the completion of a pricing algorithm prototype, that, in col- laboration with market operators, led to a deep understanding of the dynamics of the cliquet equity index option market. As a result, in 2007 it will be possible to approach the cliquet market with con- fidence, which shall significantly increase the Bank’s business opportunities, as well as its visibility on the market.
Operating performance for the period
At year-end 2006, Banca Aletti reported an increase in net income of 23.0%, from 77,262 thousand euro on December 31st, 2005 to 95,055 thousand euro on December 31st, 2006. The net income increase is a confirmation to the con- solidation of the Bank’s operational structure both in Financial intermediation and in Private Banking.
The result corresponds to a growth in total income of 27.5%, which reached 220,901 thousand Euro (173,154 thousand euro on December 31st, 2005). Net interest income reported a considerable drop, mainly due to the higher cost of funding generated by the increase in equity securities held in portfolio re- ported in 2006. Other Revenues as a whole increased by 38.4%, driven by a marked dividend growth, which went from 42,571 thousand euro on December 31st, 2005 to 74,412 thousand euro on December 31st, 2006 and by net trading income, go- ing from 61,917 thousand euro in 2005 to 77,841 thousand euro, up by 25.7%. This dynamic followed the coming into operation of market making on deriva- tives listed on regulated markets. The item “Net trading income” benefited from a growing in-house manage- ment of trading books, associated with a solid selling activity by all the networks of the Group. Net commission income increased by 28.1%, from 70,960 on December 31st, 2005 to 90,928 on December 31st, 2006, also thanks to the consolidation of the Asset Management and Private Banking structures. Operating costs increased by 14.7%, from 70,203 thousand euro on December 31st, 2005, to 80,533 thousand euro on December 31st, 2006, also thanks to the opening of four new Private Banking branches. Tax provisions, based on the net income for the period, totaled 45,313 thousand euro (22,679 thousand on December 31st, 2005), and it benefited from the change in the taxation of equity proceeds.
139 Report on Group operations
Banco Popolare di Verona e Novara (Luxembourg)
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Total income 7.9 8.6 -8.1% Profit from operations 2.5 4.3 -41.9% Net income for the year 1.8 2.9 -37.9%
Balance sheet Direct customer funds 935.2 505.6 85.0% Indirect customer funds 1,817.1 1,076.2 68.8% Total assets 1,240.9 817.3 51.8% Shareholders' equity 50.1 48.4 3.5%
Other data Average number of employees (*) 36 37 -2.7%
(*) Monthly arithmetic mean
Illustrated below are the most important events in 2006 for the subsidiary BPVN Luxembourg: • strengthening of the bank’s managerial structure, in particular the com- mercial, private banking and asset management segments, as part of the development policy promoted by the Parent company. This policy produced an appreciable increase in assets under management or custody and in ex- tended loans; • the acquisition on March 23rd, 2006 of a 100% stake in Compagnie d’An- gely held by our subsidiary VN (France) S.A.. On November 8th 2006, the stake was then disposed of, generating a capital gain of 46,981 euro; • decrease in the carrying value of our shareholding in VN (France) S.A. from 17 million euro to 6 million euro on December 20th, 2006 by way of the company’s capital reduction. This transaction, which was associated with the sale of the real estate it owned in Paris, in keeping with the promise to sell signed on December 18th, 2006, allowed us to substantially increase our regulatory capital. The proceeds on this disposal shall generate a signi- ficant capital gain for VN (France) SA, that shall put the company in a posi- tion to pay off the bridge loan we granted to finance the capital refund th- rough the buy-back and canceling of treasury shares; • discontinuation of the corporate utility bill payment and account keeping services, as part of the rationalization of our operations and in considera- tion of the marginal weight of these services for our structure.
140 Report on Group operations
Our lending policy is still strongly skewed towards the Parent company, which represents our major borrower with 792 million euro worth of loans. Cash cred- it lines to customers amounted to 217 million euro at the end of 2006, from 96 million euro in 2005, while guarantees and commitments totaled 41 millions. Most of our customers are companies that have been introduced by our Parent company or by the other banks of the group, and any favorable terms are based on prudential criteria in line with the Group’s lending policy. Direct customer funds stood at 935.2 million euro at the end of the year, as com- pared with 505.6 million euro in 2005. At the end of the year, securities accounts (under custody and management) amounted to 1,817 millions, with respect to 1,077 millions in 2005. The share of Novara Aquilone Sicav went from 554 millions in 2005 to 1,119 millions at the end of the year, while our customer’s share went from 523 millions in 2005 to 698 millions on December 31st, 2006.
Financial year 2006 closed with a profit from operations of 2.5 million euro. Net of a prudential provision for AGDL (Luxembourg deposit guarantee fund) of 100 thousand euro, net income came in at 1.8 million euro, of which 5% shall be al- located to the legal reserve and 95% to the free reserve.
141 Report on Group operations
Aletti Gestielle S.G.R.
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Total income 27.9 27.0 3.3% Profit from operations 7.8 6.7 16.4% Net income for the year 4.2 3.5 20.0%
Balance sheet Total assets 119.4 120.8 -1.2% Shareholders' equity 35.5 34.6 2.6%
Business volumes NAV of managed funds 14,508.9 15,456.4 -6.1% Subscriptions 9,245.5 8,559.7 8.0% Redemptions 10,541.4 9,146.2 15.3%
Other data Average number of employees (*) 96 95 1.1%
(*) Monthly arithmetic mean
Financial year 2006 reported a moderate growth in assets under management in Italy (4.22%), which at yearend reached 609,200.7 million euro, mainly driv- en by the general positive market performance, as opposed to net outflows of –17,866.2 million euro, of which Italian fund outflows proved particularly nega- tive (-42,493.9 million euro) as compared with the positive inflow of foreign and roundtrip funds (+24,627.8 million euro).
Aletti Gestielle S.G.R reported an asset decrease from 15,456.4 million euro at year-end 2005 to 14,508.9 million euro at year-end 2006, down by 6.1%.
Still, as a sign of the unrelenting effort devoted to managing assets, also in 2006 the Company won the credit of the asset management industry for the fund “Gestielle Pacifico”, which received from Milano Finanza – Global Awards 2006 the Award “Premio 2005 Tripla A” among Italian mutual funds in the Equity Pa- cific Class, and the special Triple A award for rating continuity; the Gestielle World Utilities fund won the Triple A Award for the Equity Other Sectors Class. With regard to net flows for the year, a net outflow of 1,296 million euro was reported out of the 38 funds managed by Aletti Gestielle.
142 Report on Group operations
The table below shows the breakdown of assets under management by type of fund:
(million euro) 31-12-2006 31-12-2005 Changes
Equity funds 2,947 2,932 15 0.5% Fixed income funds 10,492 11,856 -1,364 - 11.5% Balanced funds 512 599 -87 - 14.5% Flexible funds 558 69 489 708.7%
Net AuM 14,509 15,456 -947 - 6.1%
The bottom line evidences a marked improvement over the previous year, driv- en by an increase in net commissions from managed funds and a decrease in op- erating costs.
Commission income amounted to 174 millions and commission expense stood at 148.4 millions. At the end of 2006, Shareholders’ equity came in at euro 36 millions; the fi- nancial position recognized cash and cash equivalents for 1 million euro and Treasuries for 92 million euro.
The service provision agreement covering services outsourced by Aletti Gestielle Alternative SGR S.p.A., a company of the Group specializing in Speculative Funds, was extended to include also activities of the Sales and Marketing Office as well as Back-Office activities.
Listed below are intercompany relations with Banco and the other companies falling under the same management and coordination scope: • Banco Popolare di Verona e Novara Scarl, as well as the other companies of the Group, namely Credito Bergamasco S.p.A., Banca Aletti & C S.p.A. and Banca Popolare di Novara S.p.A were in charge of distributing managed funds; • Banco Popolare di Verona e Novara Scarl and Credito Bergamasco S.p.A. ac- ted as Custodian Banks for the managed funds.
As to intercompany outsourcing activities, it is worth mentioning that: • the outsourcing service provision agreement with Aletti Gestielle Alternati- ve SGR S.p.A., a company of the Group specializing in Speculative Funds, was revised as a result of a resolution made by the latter to insource Back- Office activities and outsource the Compliance function; • the service provision agreement for IT procedures and the management of the website outsourced to SGS BPVN SpA, another company of the Group, was still in effect; • Internal Audit services continued to be provided by the Parent company’s Auditing function;
143 Report on Group operations
• the Risk Management Office of the SGR was still in charge of performing the monitoring of portfolio management risks outsourced by Banca Aletti.
Aletti Gestielle Alternative S.G.R.
Financial year 20065 closed with a net income of 2.,85 million euro, up from 2.3 millions in 2005. Commission and fee income amounted to 37.4 million euro, reporting a significant increase with respect to the previous year, driven by in- flows from managed funds and an over-performance as compared with 2005. As to costs not correlated to managed assets, the increase was particularly mod- erate.
(million euro) 31-12-2006 31-12-2005 Changes
Management fee income 24.2 15.9 8.3 52.2% Performance fee income 10.3 6.6 3.7 56.1% Front-load fee income 2.9 2.5 0.4 16.0%
Intercompany relations with Banco and the other companies subject to the same management and coordination scope were related to the distribution of man- aged funds by the Parent company and by the other companies of the Group, namely Credito Bergamasco S.p.A., Banca Aletti S.p.A., and Banca Popolare di Novara S.p.A..
The service provision agreement with Aletti Gestielle SGR S.p.A., the asset man- agement company of the Group, was extended to include also activities of the Compliance function, while the outsourcing of back- and middle-office activities was discontinued. Internal Audit services continued to be provided by the Auditing function of Ban- co Popolare di Verona e Novara S.c.a.r.l., equal to all the other companies be- longing to Gruppo Bancario Popolare di Verona e Novara.
144 Report on Group operations
Aletti Merchant
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Net commission income 2.4 6.6 -63.6% Profit from operations 55.8 6.9 708.7% Net income for the year 51.9 5.3 879.2%
Balance sheet Total assets 132.6 147.9 -10.3% Shareholders' equity 121.9 65.8 85.3%
In 2006, Aletti Merchant invested a total of 34.5 million euro in new sharehold- ings and in shareholdings and Funds already held in its portfolio. It also disposed of shareholdings and other securities for a total of 24.9 million euro, 23.2 mil- lion worth of Poc refunds were collected, together with refunds from invested closed funds of 1.9 millions. 2.9 million euro worth of write-downs were charged to income. Changes in fair value carried at equity amounted to + 4.2 millions. Described below are the main transactions finalized during the year: • disposal of a 92.2% stake in Theme Parks Holding S.p.A., controlling com- pany of Gardaland, by Cornel S.a.r.l., 39.9% held by Aletti Merchant, and the subsequent liquidation of the company and distribution of disposal pro- ceeds to shareholders; • acquisition of the relevant share (4.05%) in Merlin Entertainments Italy 3 S.r.l., new controlling company of Gardaland, through the subsidiary Parchi del Garda S.p.A.; • acquisition of an interest of about 45% in Estates Capital Venture S.A., a real estate company which owns land neighboring the Gardaland park area; • redemption upon maturity of the Promatech convertible bonds; • acquisition of a 49% interest in Triera S.p.A., a company engaging in bio- energy, and belonging to the energy sector considered as one of the most important for merchant activities, by way of the subsidiary Bio Energy In- ternational S.A.; • acquisition of an interest of about 19.7% in Bertani Holding S.p.A., com- pany engaging in wine-making, with a brand that is among the most re- nowned in Banco Popolare di Verona e Novara’s franchise; • acquisition of an 8% stake in Miro Radici AG.
145 Report on Group operations
In 2006, by managing its investment portfolio, Aletti Merchant generated a to- tal capital gain of 63.9 millions, which breaks down as follows: • 57.6 million capital gain on the liquidation of Cornel S.a.r.l.; • 2.5 million capital gain on the refund of the Italian Lifestyle Partners II fund, also associated with the liquidation of Cornel S.a.r.l.; • other proceeds totaling 1.2 millions; • dividends from investee companies of about 1.1 millions, of which about 0.2 millions from Cartiere Burgo S.p.A. and about 0.9 from Phoenix S.p.A.; • interest income from POC and financings of about 1.5 millions.
During the year, corporate finance activities aimed at supporting the customers of the Group Banks were focused on structured finance transactions, originating a gross commission incombe of about 6.0 million euro, as a result of managing 80 deals, of which 29 acting as Arranger, managing the participation of Banco Popolare di Verona e Novara in deals organized by third parties, as well as post- selling activities associated with structured transactions outstanding.
The income statement for the year reports a net income of 51,9 million euro.
With regard to the close-end funds managed by the associate SGRs: • the subsidiary Aletti Private Equity SGR managed the Fund “Dimensione Im- presa” which, in its third operational year, participated successfully to the disposal of two shareholdings, leading to the early redemption of proceeds to shareholders, and the Fund “Dimensione Network”, which in its second operational year made an additional investment of 6.3 million euro and conducted an early redemption as a result of the partial disposal of a sha- reholding; • at the end of 2006, AF Mezzanine SGR, a company equally held by Aletti Merchant and Gruppo Fineurop, become operational after the Bank of Italy approved the prospectus of the Mid-Capital Mezzanine fund; • by implementing this project, Aletti Merchant has successfully entered a market sector that after enjoying a strong development in Europe, is now raising a growing interest also in Italy; • the Mid-Capital Mezzanine fund, one of the two fully operational in Italy, carried out the first closing after having raised 60 million euro, of which 34 millions subscribed by Aletti Merchant, and on the balance sheet date had already performed two investments.
146 Report on Group operations
Società Gestione Servizi – BPVN
(million euro) 31-12-2006 31-12-2005 Changes
Income statement Value of production 225.7 225.0 0.3% Cost of production 220.1 221.4 -0.6% Income from ordinary activities 5.8 3.6 61.1% Net income for the year 2.0 0.6 233.3%
Balance sheet Total assets 292.3 287.1 1.8% Shareholders' equity 106.1 104.6 1.4%
Other data Average number of employees (*) 970 927 4.6%
(*) Monthly arithmetic mean
The main activities characterizing the subsidiary’s operations in 2006 have al- ready been described in the section devoted to planning, auditing and service activities.
147 Report on Group operations
Operational outlook
The economic outlook for Italy in 2007 hint at a prolongation of the expansion- ary phase, albeit tempered by more restrictive fiscal and monetary policies with respect to last year. The impact of economic growth on credit intermediation could be partly dampened by the watchful attitude of the European Central Bank, which may act as a restraint on lending assets, slowing down their ex- pansion after several years of sustained growth.
Against this backdrop, Gruppo Banco Popolare di Verona e Novara intends to consolidate the high profitability levels attained. In particular, on the revenue side it shall devote a special attention to products featuring higher growth rates (mortgages, consumer credit and pension products), as well as to new needs and propensities expressed by a changing clientele (immigration, seniors, women), while on the cost side, all the current efficiency levels shall be further raised by fully leveraging the potentials of our distribution model, based on re- gions and organized by customer segments, supported by high-standing “prod- uct factories”.
The merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana well suits this strategic vision in terms of compatibility of development models and geographical fit, aiming at preserving the vocation of cooperative banks, whose characteristics are serving local economies and enjoying very strong local ties in their franchise.
The implementation phase of the integration plan is based on a manifold proj- ect, whose main objectives are: • obtaining total revenue and cost synergies as foreseen by the industrial plan of 500 mln euro, of which 227 mln euro are pure cost synergies (lower co- sts than projected in the plans of the two separate groups, mainly deriving from the integration of the head offices, back-offices, information systems and operating companies – so called product factories), 146 mln euro worth of revenue synergy (higher revenues than projected in the plans of the two separate groups, mainly generated by the insourcing of the production pi- peline for financial products that can be sold to customers, by releasing the full potential inherent in product factories and in the partnership agree- ments with some important networks specializing in the sale of residential networks to retail customers) and 127 mln euro from a productivity align- ment (profitability alignment between the two groups in various business sectors with retail, private and corporate customers); • managing budgeted integration costs of about 300 mln euro, mainly re- presented by charges incurred to manage the voluntary turnover of human resources, IT integration investments, and the extraordinary support requi- red by the organizational change (training, communications, advisory servi- ces, … etc); • involving the corporate management so as to guarantee the actual attain- ment of revenue and cost synergies and of the economic results envisaged by the business plan of the new group, without neglecting the manage- ment of current business activities.
148 Report on Group operations
149
Independent auditors’ Report
Massimiliano Fuksas - Maranello - Ferrari’s Product Development Center
Consolidated financial statements
Santiago Calatrava - Venice - New Bridge Consolidated financial statements
156 Consolidated financial statements
CONSOLIDATED BALANCE SHEET 31-12-2006 31-12-2005 Changes ASSETS (thousand euro)
10 CASH AND CASH EQUIVALENTS 360,546 339,356 21,190 6.2%
20 FINANCIAL ASSETS HELD FOR TRADING 8,424,623 7,908,135 516,488 6.5%
30 FINANCIAL ASSETS MEASURED AT FAIR VALUE 314,430 292,662 21,768 7.4%
40 FINANCIAL ASSETS AVAILABLE FOR SALE 1,053,752 1,021,750 32,002 3.1%
50 FINANCIAL ASSETS HELD TO MATURITY 939,319 876,714 62,605 7.1%
60 DUE FROM OTHER BANKS 8,680,735 5,848,353 2,832,382 48.4%
70 LOANS TO CUSTOMERS 45,244,563 40,275,893 4,968,670 12.3%
80 HEDGING DERIVATIVES 38,847 75 38,772 51696.0%
90 FAIR VALUE CHANGE OF ASSETS IN HEDGED PORTFOLIOS (4,093) (1,014) 3,079 303.6%
100 EQUITY INVESTMENTS 796,935 431,025 365,910 84.9%
120 PROPERTY. PLANT AND EQUIPMENT 538,047 535,999 2,048 0.4%
130 INTANGILE ASSETS 447,753 395,589 52,164 13.2% OF WHICH: GOODWILL 413,027 362,617 50,410 13.9%
140 FISCAL ASSETS 661,465 698,307 (36,842) (5.3%) a) current 290,397 354,628 (64,231) (18.1%) b) deferred 371,068 343,679 27,389 8.0%
150 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 239 27,073 (26,834) (99.1%)
160 OTHER ASSETS 1,197,774 1,108,470 89,304 8.1%
Total 68,694,935 59,758,387 8,936,548 15,0%
157 Consolidated financial statements
LIABILITIES AND SHAREHOLDERS' EQUITY 31-12-2006 31-12-2005 Changes (thousand euro)
10 DUE TO BANKS 8,116,144 8,099,580 16,564 0.2%
20 DUE TO CUSTOMERS 28,905,375 24,768,824 4,136,551 16.7%
30 DEBT SECURITIES IN ISSUE 16,334,515 12,932,148 3,402,367 26.3%
40 FINANCIAL LIABILITIES HELD FOR TRADING 1,844,528 1,585,687 258,841 16.3%
50 FINANCIAL LIABILITIES MEASURED AT FAIR VALUE 5,334,143 5,283,159 50,984 1.0%
60 HEDGING DERIVATIVES 54,847 1,801 53,046 2945.4%
70 FAIR VALUE CHANGE OF LIABILITIES IN HEDGED PORTFOLIOS (57,936) (16,652) 41,284 247.9%
80 TAX LIABILITIES 416,354 306,904 109,450 35.7% a) current 192,554 158,797 33,757 21.3% b) deferred 223,800 148,107 75,693 51.1%
100 OTHER LIABILITIES 2,111,034 2,081,915 29,119 1.4%
110 EMPLOYEE TERMINATION BENEFITS 350,079 354,171 (4,092) (1.2%)
120 PROVISIONS FOR RISKS AND CHARGES 269,073 222,752 46,321 20.8% a) retirement and similar obligations 25,964 27,343 (1,379) (5.0%) b) other provisions 243,109 195,409 47,700 24.4%
140 VALUATION RESERVES 240,820 163,118 77,702 47.6%
170 RESERVES 2,044,798 1,734,261 310,537 17.9%
180 SHARE PREMIUMS 202,304 184,031 18,273 9.9%
190 SHARE CAPITAL 1,351,182 1,342,569 8,613 0.6%
210 MINORITY INTEREST 144,761 117,065 27,696 23.7%
220 NET INCOME FOR THE YEAR 1,032,914 597,054 435,860 73.0%
Total 68,694,935 59,758,387 8,936,548 15.0%
158 Consolidated financial statements
INCOME STATEMENT 2006 2005(*) Changes (thousand euro)
10 Interest income and similar revenues 2,596,175 2,032,493 563,682 27.7% 20 Interest expense and similar charges (1,255,431) (822,856) 432,575 52.6% 30 Net interest income 1,340,744 1,209,637 131,107 10.8% 40 Commission income 948,185 893,398 54,787 6.1% 50 Commission expense (104,099) (93,797) 10,302 11.0% 60 Net commission income 844,086 799,601 44,485 5.6% 70 Dividend and similar income 89,594 55,245 34,349 62.2% 80 Net trading income 106,555 86,134 20,421 23.7% 90 Fair value adjustments in hedge accounting 1,029 506 523 103.4% 100 Profit (Loss) on disposal or repurchase of: 55,248 13,850 41,398 298.9% a) loans 36,362 243 36,119 14863.8% b) financial assets available for sale 16,919 11,647 5,272 45.3% c) financial assets held to maturity - 1,675 (1,675) d) financial liabilities 1,967 285 1,682 590.2% 110 Profit (Loss) on financial assets and liabilities designated at fair value 29,219 10,593 18,626 175.8% 120 Total income 2,466,475 2,175,566 290,909 13,4% 130 Net write-downs / write-backs on impairment of: (138,366) (75,327) 63,039 83.7% a) loans (133,820) (73,862) 59,958 81.2% b) financial assets available for sale (2,194) (2,140) 54 2.5% c) financial assets held to maturity - - - d) other financial activities (2,352) 675 (3,027) 140 Net income from banking activities 2,328,109 2,100,239 227,870 10.8% 170 Net income from banking and insurance activities 2,328,109 2,100,239 227,870 10.8% 180 Administrative expenses: (1,354,565) (1,354,287) 278 0.0% a) personnel expenses (884,265) (889,172) (4,907) (0.6%) b) other administrative expenses (470,300) (465,115) 5,185 1.1% 190 Net provisions for risks and charges (58,762) (29,855) 28,907 96.8% 200 Impairment/write-backs on PPE (46,728) (43,238) 3,490 8.1% 210 Impairment/write-backs on intangible assets (29,912) (33,719) (3,807) (11.3%) 220 Other operating income (loss) 277,913 254,602 23,311 9.2% 230 Operating costs (1,212,054) (1,206,497) 5,557 0.5% 240 Share of profit of associates 387,980 76,275 311,705 408.7% 270 Profit (Loss) on disposal of investments 41,798 562 41,236 7337.4% 280 Income (Loss) before tax from continuing operations 1,545,833 970,579 575,254 59.3% 290 Tax on income from continuing operations (488,062) (365,564) 122,498 33.5% 300 Income (Loss) after tax from continuing operations 1,057,771 605,015 452,756 74.8% 310 Income (Loss) after tax from discontinued operations 6,225 7,726 (1,501)
320 Net income for the year 1,063,996 612,741 451,255 73.6% 330 Minority interest (31,082) (15,687) 15,395 98.1%
340 Parent company's share of profit 1,032,914 597,054 435,860 73.0%
(*) Restated for comparability
159 Consolidated financial statements -- -- 3,022 214 66,679 - Closing Balance 240,820171,119 1,843 1,629 1,351,182 24,389 for the year Income (Loss) 1,032,914 31,082 1,032,914 31,082 - 202,304 3,319 1,911 1,032,914 31,082 4,872,018 144,761 Stock options shares Derivatives on treasury com. stock Changes in equivalents dividend Extraordin. distribution ----- Changes in shareholders’ equity Changes in shareholders’ shares Purchase of treasury Purchase Changes over the year ---- 3--- - Group part. Third Group part. Third Group part. Third Group part. Third Issue of new shares Group part. Third Changes in reserves and other Dividends allocations from previous year previous from Reserves Allocation of net income Opening balance Group part. Third Group part. Third Statement of changes in consolidated shareholders’ equity Statement of changes in consolidated shareholders’ available for sale 94,459 689 76,660 940 2006 (thousand euro) a) retained earningsa) retained b) other 1,461,068 73,325 273,193 307,877 3,187 7,943 -1,981 -327 2,730 ------1,911 1,766,964 80,941 277,834 3,187 b) other ------other a) common sharesb) - 1,342,569 22,869 -- -a) financial assets - lawsb) special revaluation c) other 69,409 - -750 1,520 8,613 - - - -2,730 - - 3,772 214 - 1,351,182 24,389 Reserves: reserves:Valuation 1,734,261 76,512 163,118 307,877 689 7,943 749 -327 77,702 - 1,154 - - - 1,911 2,044,798 84,128 Share premiumShare 184,031 1,308 - - 2,011 18,273 - Share capital:Share 1,342,569 22,869 - - 1,520 8,61 Net income (loss) for the year equityShareholders' 597,054 15,687 4,021,033 -307,877 117,065 -15,687 -289,177 - -7,744 -289,177 78,451 4,358 26,886 - Common stock equivalents sharesTreasury - - - -
160 Consolidated financial statements -- -- -750 - 94,45969,409 689 - Closing Balance 163,118 689 273,193 3,187 for the year Income (Loss) 597,054 15,687 597,054 15,687 7,910 184,031 1,308 3,674 1,342,569 22,869 11,584 597,054 15,687 4,021,033 117,065 Stock options shares Derivatives on treasury com. stock Changes in equivalents dividend Extraordin. distribution ----- Changes in shareholders’ equity Changes in shareholders’ shares Purchase of treasury Purchase Changes over the year ---- 4--- Group part. Third Group part. Third Group part. Third Group part. Third Issue of new shares 4--- - - Group part. Third Changes in reserves and other Dividends allocations from previous year previous from Reserves Allocation of net income at January 1st Opening balance Changes balances in opening Opening balance Group part. Third Group part. Third Group part. Third 2005 (thousand euro) available for sale - - 55,047 55,047 642 39,412 47 a) financial assets a) common shares 1,333,301 22,873 1,333,301 22,873 - - -4 5,59 a) retained earningsa) retained b) other 1,461,606 65,697 271,219 -233,266 3,187 1,228,340 60,641 - 224,517 271,219 11,192 3,187 - 8,211 1,492 - 1,97 - - - 1,461,068 73,325 b) other ------other -----b) - -- b) cash flow hedges lawsc) special revaluation 71,383 - - - - - 71,383 - - - -1,974 -750 - - Net income (loss) for the year equityShareholders' 437,161 19,213 3,739,357 - 112,278 437,161 -178,219 3,561,138 19,213 107,950 -224,517 -19,213 - -212,644 -8,021 -212,644 46,873 1,535 17,028 - Common stock equivalents sharesTreasury ------Valuation reserves:Valuation 71,383 - 55,047 126,430 642 36,688 47 Share capital:Share 1,333,301 22,873 1,333,301 22,873 - - -4 5,594 - - - 3,674 1,342,569 22,869 Reserves: 1,732,625 68,884 -233,266 1,499,559 63,828 224,517 11,192 10,185 1,492 - - - - - 1,734,261 76,512 Share premiumShare 164,687 1,308 164,687 1,308 - - 11,434 -
161 Consolidated financial statements
Consolidated statement of cash flows
OPERATING ACTIVITIES 31-12-2006 31-12-2005 (thousand euro)
1, Cash flow from operations 1,199,398 719,553 Interest income (+) 2,596,175 2,032,493 Interest expense (-) -1,255,431 -822,856 Dividend and similar income 89,594 55,245 Net commission (+/-) 844,086 799,601 Personnel expenses -884,265 -889,172 Net premium income (+) - - Other insurance income/expense (+/-) - - Other costs (-) -602,441 -532,716 Other revenues (+) 899,742 442,522 Taxes and other duties -488,062 -365,564
2, Cash flow from / used in financial assets -8,888,620 -6,324,235 Financial assets held for trading -516,488 -1,590,375 Financial assets measured at fair value -21,768 -13,007 Financial assets available for sale -32,002 236,715 Loans to customers -4,968,670 -3,709,948 Due from banks -2,832,382 -1,706,243 Other assets -517,310 458,623
3, Cash flow from / used in financial liabilities 7,995,719 6,352,492 Due to other banks 16,564 2,230,079 Due to customers 4,136,551 534,465 Debt securities in issue 3,402,367 2,668,286 Financial liabilities held for trading 258,841 416,513 Financial liabilities measured at fair value 50,984 249,397 Other liabilities 130,412 253,752
Net cash flow from / used in operating activities 306,497 747,810
162 Consolidated financial statements
INVESTING ACTIVITIES 31-12-2006 31-12-2005 (thousand euro)
1, Cash flow from: 266,994 21,496 Sale of equity investments 215,468 20,610 Dividends collected on equity investments - - Sale of investments held to maturity - - Sale of property, plant and equipment 51,059 886 Sale of intangible assets 467 - Sale of subsidiaries and business lines - -
2, Cash flow used in: -370,372 -657,233 Purchase of equity investments -124,248 -73,864 Purchase of investments held to maturity -107,978 -486,535 Purchase of property, plant and equipment -55,308 -68,319 Purchase of intangible assets -82,838 -28,515 Purchase of subsidiaries and business lines - -
Net cash flow from / used in investing activities -103,378 -635,737
FINANCING ACTIVITIES 31-12-2006 31-12-2005 (thousand euro)
Issue/purchase of treasury shares 107,248 75,485 Issue/purchase of common stock equivalents - - Dividend distribution and other -289,177 -212,644
Net cash flow from / used in financing activities -181,929 -137,159
Net cash flow generated / used in the period 21,190 -25,086
RECONCILIATION 31-12-2006 31-12-2005 (thousand euro)
Cash and cash equivalents at beginning of year 339,356 364,442 Net cash flow generated / used during the year 21,190 -25,086
Cash and cash equivalents at end of year 360,546 339,356
163
Notes to the consolidated accounts
Mario Botta - Rovereto - Mart “Museum of Modern and Contemporary Art” Notes to the consolidated accounts
166 Notes to the consolidated accounts
Chapter A – Accounting Policies Section 1 Statement of conformity with International Accounting Standards
A.1 In general
These consolidated financial statements were prepared in keeping with the IAS/IFRS international standards approved by the European Union and effective as at the time of approving this report. These financial statements give a consolidated representation of the financial and profitability position of Banco Popolare di Verona e Novara and of its sub- sidiaries. The financial statements used to prepare these consolidated financial statements were delivered by the subsidiaries and refer to their position as of De- cember 31st, 2006, adjusted if necessary to comply with IAS/IFRS.
Section 2 General accounting standards
This report is comprised by the balance sheet, the income statement, the state- ment of changes in shareholders’ equity, the cash-flow statement and these ex- planatory notes, and it is supplemented by the Executive report on operations and on the general performance of the companies falling under the consolida- tion scope.
The consolidated financial statements are expressed in thousand of Euros.
The consolidated financial statements were drawn up so as to provide a clear, fair and correct representation of the assets and liabilities, the profits and losses and the financial performance generated during the year.
Should the information required by the international accounting standards and by the directives spelled out in the Bank of Italy’s Circular n. 262 of December 22nd, 2005 not suffice to provide a truthful and correct representation, the notes to the accounts provide relevant supplementary information.
If, in exceptional cases, the adoption of a provision under the international ac- counting standards is incompatible with a truthful and correct representation of the assets and liabilities, profits and losses and financial performance, said pro- vision shall not be applied. The notes shall give an explanation for this possible deviation and the impact on the representation of the assets and liabilities, prof- its and losses and the financial performance.
The financial statements were drawn up in compliance with the following gen- eral principles:
Going concern: the financial statements are drawn up on the assumption that the Group shall continue as a going concern;
167 Notes to the consolidated accounts
Accrual basis of accounting: the financial statements are prepared under the ac- crual basis of accounting, except for cash flow information;
Consistency of presentation: the presentation and classification of items in the financial statements are retained from one financial year to the next, unless a standard or an interpretation require a presentation change, or a different pres- entation or classification proves to be more appropriate under IAS 8. In this case, the notes to the financial statements shall contain due disclosure of the changes introduced as compared with the previous year.
Materiality and aggregation: the faces of the balance sheet and income state- ments are made up of items (marked by Arabic numerals), by sub-items (marked by letters) and by further details (“of which” in items and sub-items). Items, sub- items and details make up the financial accounts. The charts comply with the guidelines released by the Bank of Italy in Circular n. 262 of December 22nd, 2005. Additional items can be added to these charts if their content cannot be associated with any of the items already shown in the charts and only if they rep- resent significant amounts. The sub-items envisaged in the charts can be grouped together when one of the two following conditions occurs: a) the sub-item amount is immaterial; b) the aggregation favors a clear financial statement presentation; in this case in the notes to the accounts the sub-items that had been grouped togeth- er shall be presented separately. The balance sheet and the income statement do not include accounts that show no amounts for the current balance sheet year, nor for the previous year.
Offsetting: assets and liabilities, revenues and costs shall not be offset except when offsetting is permitted or required by an international accounting standard or its interpretation, or by the prescriptions contained in the above mentioned Circular released by the Bank of Italy;
Comparative information: each item in the balance sheet and income statement is matched with a comparative item referring to the previous year. In case the ac- counts are not comparable, the previous year’s accounts shall be reclassified. In case of non-comparability, adjustments, or failure to do so, said events shall be disclosed and commented upon in the notes to the accounts.
Section 3 Consolidation scope and methods
The consolidated annual report illustrates the financial position, financial per- formance and cash-flows of the Parent company and its direct and indirect sub- sidiaries.
The concept of control goes beyond the percentage interest in the share capital of an investee, and is rather defined as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
168 Notes to the consolidated accounts
Full consolidation is the line-by-line combination of assets, liabilities, profit and loss of subsidiaries. Upon the identification and recognition of minority interests in net assets and net income under a specific item, the carrying amount of the in- vestment is eliminated as an offset to the residual portion of the subsidiary’s eq- uity. Any difference resulting from the above operation, if positive – after being accounted for under the subsidiary’s assets or liabilities – shall be initially recog- nized as goodwill under the item “Intangible assets” upon the first consolidation, and then under “Other reserves”. Negative differences are charged to income.
Assets, liabilities, revenues and expenses among consolidated companies are eliminated in full.
The results of operations of a subsidiary acquired during the period are included in- to the consolidated financial statements as from the date of acquisition. The results of operations of a subsidiary which has been disposed of are included in the consol- idated financial statements until the date of disposal. The difference between the proceeds from the disposal and its carrying amount as of the date of disposal (in- cluding any exchange rate difference recognized period by period in equity upon consolidation), is recognized in the income statement. If necessary, the financial statements of consolidated companies, when prepared in compliance with different accounting standards, shall be uniformed to the Group’s accounting procedures.
Investees on which the Group exercises a significant influence (called “associ- ates”), that is, enterprises in which the Group has the power to participate in the financial and operating policy decisions, but is not in control over those policies, and which are neither a subsidiary nor a joint venture, are carried at equity. If an associate applies other accounting standards than those used by the Group, ad- justments are made to the associate’s financial statements used by the Group to apply the equity accounting method.
Under the equity method, the investment is initially recognized at cost and the carrying amount is then adjusted based on the proportionate interest in the in- vestee. The difference between the carrying amount of the investment and the investee’s equity is treated similarly to the line-by-line consolidation differences described above. In computing the share of net assets, potential voting rights are not considered. The pro-rata share of net income from the associate is recog- nized under a specific item of the consolidated income statement.
Investments in jointly controlled companies are recognized under the propor- tionate consolidation method. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when a unanimous consen- sus by all venturers (i.e., the parties to a joint venture, having joint control over it) is required to make strategic financial and operational decisions.
The financial, balance sheet, and P&L statements of the consolidated companies whose money of account is not the Euro, are translated based on the following rules: • balance sheet assets and liabilities are translated at the exchange rate in ef- fect at year-end;
169 Notes to the consolidated accounts
• P&L revenues and costs are translated at the year’s average exchange rate; • all exchange rate differences originated by the conversion are recognized in a specific and separate reserve under shareholder’s equity. Said reserves are eliminated by charging or crediting them to income when the equity inter- est is disposed of.
Equity investments in subsidiaries, associates and joint ventures (proportionate consolidation method)
Type of Shareholding (thousand euro) Headoffice relation Voting (a) Company % Share rights %
A. Companies A.1 Fully consolidated Banco Popolare di Verona e Novara S.c.r.l. Verona Parent company Aletti & C. Banca di Investimento Mobiliare S.p.A. Milan (1) BPVN 74.349% 74.349% Credito Bergamasco 25.651% 25.651% Aletti Fiduciaria S.p.A. Milan (1) Aletti & C. Banca 100.000% 100.000% Aletti Gestielle SGR S.p.A. Milan (1) BPVN 32.612% 32.612% Credito Bergamasco 19.591% 19.591% Holding di Partecip. 47.797% 47.797% Aletti Gestielle Alternative SGR S.p.A. Milan (1) Holding di Partecip. 70.800% 70.800% Credito Bergamasco 29.200% 29.200% Aletti International S.A. L - Luxembourg (1) Aletti Merchant 99.677% 99.677% Aletti Merchant S.p.A. Verona (1) BPVN 60.000% 60.000% Credito Bergamasco 40.000% 40.000% Aletti Private Equity SGR S.p.A. Verona (1) Aletti Merchant 99.860% 99.860% Holding di Partecip. 0.140% 0.140% Arena Broker S.r.l. Verona (1) Holding di Partecip. 57.300% 57.300% Banca Aletti & C. (Suisse) S.A. CH - Lugano (1) BPVN Luxemborg 100.000% 100.000% Banca Popolare di Novara S.p.A. Novara (1) BPVN 100.000% 100.000% Banka Sonic d.d. HR - Zagreb (1) BPVN 78.431% 78.431% Bio Energy International S.A. L - Luxembourg (1) Aletti Merchant 99.998% 99.998% BPVN Immobiliare S.r.l. Verona (1) BPVN 100.000% 100.000% BPVN (Luxembourg) S.A. L - Luxembourg (1) BPVN 99.969% 99.969% Holding di Partecip. 0.031% 0.031% Compagnia Finanziaria Ligure Piemontese S.p.A. (in liq.) Milan (1) BPVN 100.000% 100.000% Credito Bergamasco S.p.A. Bergamo (1) BPVN 87.719% 87.769% FIN.E.R.T. S.p.A (in liquidazione) Marano (NA) (1) SE.RI. 100.000% 100.000% Holding di Partecipazioni Finanziarie Popolare di Verona e Novara S.p.A. Verona (1) BPVN 100.000% 100.000% Immobiliare BPV S.r.l. Verona (1) BPVN 100.000% 100.000% Milano Leasing S.p.A. (in liquidazione) Milan (1) Aletti Merchant 99.999% 99.999% Novara Invest SIM S.p.A. (in liquidazione) Milan (1) BPVN 99.000% 99.000% Aletti Gestielle SGR 1.000% 1.000% Parchi del Garda S.p.A. Milano (1) Aletti Merchant 73.636% 73.636% Seefinanz S.A. (in liquidazione) CH - Lugano (1) BPVN 100.000% 100.000% Servizi Riscossione Imposte SE.R.I. S.p.A. (in liq.) Naples (1) BPVN 80.000% 80.000% Società Gestione Servizi - BPVN S.p.A. Verona (1) BPVN 75.490% 75.490% Credito Bergamasco 24.510% 24.510% Tecmarket Servizi S.p.A. Verona (1) BPVN 47.500% 47.500% SGS 52.500% 52.500% Verona e Novara France S.A. F - Paris (1) BPVN Luxemborg 99.888% 99.888% A.2 Proportionate consolidation - - - - - (a) Type or relation: (1) Control under art. 2359 civil code, paragraph 1, n. 1, (majority of voting rights in GAM)
170 Notes to the consolidated accounts
Section 4 Noteworthy events after the balance sheet date
Illustrated below are the most significant events occurred between the balance sheet date and its approval by the Board of Directors.
Merger between Banco Popolare di Verona e Novara and Banca Popolare Italia- na – Banca Popolare di Lodi
On March 10th, 2007, shareholders at the special meetings of Banco Popolare di Verona e Novara (BPVN) and Banca Popolare Italiana (BPI) approved the merg- er plan of the two lending institutions, that shall lead to the incorporation of a new company called “Banco Popolare”. From a statutory point of view, the merger shall be executed in compliance with articles 2501 and following of the civil code and in keeping with the modalities and terms set forth in the merger plan included in the Prospectus prepared in compliance with art. 70, paragraph 4, of Consob’s Regulation n. 11971 of May 14th, 1999 and following amendments. See the Prospectus for more detailed in- formation. When effective, on July 1st, 2007, the merger shall cause the discontinuation of BPVN and BPI and the transfer of all assets, rights and duties of BPI and BPVN to Banco Popolare. In concomitance with the merger, prior to its coming into effect, BPVN and BPI shall immediately contribute part of their banking companies, that are basically comprised of the branch networks located in their franchises, to “Banca Popo- lare di Verona San Geminiano e San Prospero” (BPV-SGSP) and to “Banca Popo- lare di Lodi” (BPL), respectively, and with respect to BPL also the shareholdings in the Lombardy cooperative banks and in Caripe. The spin-off of the above business lines shall further their penetration and strengthen the banks’ local bonds in their franchises. Transfers shall take place based on the financial accounts of BPI and BPVN as at December 31st, 2006 and the value of their company organizations, under art. 2343 of the civil code, shall be assessed by the auditing company KPMG S.p.A., the joint expert appointed for BPI by the Lodi Court and for BPVN by the Verona Court. BPV-SGSP and BPL shall take the form of public limited liability banks, based in Verona and Lodi, respectively, fully controlled by Banco Popolare and falling un- der the latter’s management and coordination scope.
The industrial plan shall foster the value of the Group’s resources located in Lo- di, Verona and Novara. Group functions and activities are to be equally distrib- uted between Lodi and Verona.
The Corporate Governance of Banco Popolare shall be double-tiered. The Gen- eral Annual Meeting shall approve the annual report and the distribution of earnings, and it shall appoint the members of the Supervisory Board. The latter
171 Notes to the consolidated accounts
shall be in charge of all the duties assigned under the law, and it shall also ap- prove industrial plans and major extraordinary transactions.
Mr. Carlo Fratta Pasini, current Chairman of BPVN, shall be the Chairman of the Supervisory Board. Messrs. Dino Piero Giarda, current Chairman of BPI, and Di- vo Gronchi, current CEO of BPI shall be respectively the Deputy Vice-Chairman of the Supervisory Board and the Chairman of the Management Board. Mr. Maurizio Comoli, current Vice Chairman of BPVN, shall also be the Vice-Chair- man of the Supervisory Board.
Fabio Innocenzi, current CEO of BPVN, shall be the CEO of the New Group. The Management Board shall also include Messrs. Franco Baronio, current General Manager of BPI and Massimo Minolfi, current General Manager of BPVN, who shall jointly hold this same office also in Banco Popolare.
The Corporate Governance of subsidiary banks shall be based on the tradition- al model. The Board of directors shall be comprised of non-executive members and by managers of the Group. The non-executive directors, selected among the areas of belonging of the various banks, shall represent at least two thirds of the Board.
The exchange ratio shall be 1 share of Banco Popolare for each BPVN share and 0.43 shares of Banco Popolare for each BPI share.
Prior to the coming into effect of the merger, BPI’s shareholders convened at the General Annual Meeting, contingent on and as part of the merger finalization, shall be called to approve the extraordinary pro-rata distribution of total euro 1,521 millions from the share premium reserve to BPI shareholders and to hold- ers of the POC convertible bonds, and to establish the price, under art. 7 letter C of the POC terms and conditions, for each unconverted bond. Said resolution shall be contingent on BPI Board of Directors verifying that as at June 30th, 2007 no such events have occurred, that may negatively affect the amount of reserves to be distributed, so as to prevent the allocation of the approved sums to BPI shareholders and to POC bond holders. The payment of the amounts due to BPI shareholders and POC bond holders shall be carried out directly by Banco Popo- lare on July 5th, 2007.
When finalizing the merger, BPI and BPVN shareholders shall also be called un- der articles 2357 and 2357-ter of the civil code to authorize the purchase of maximum 37 million BPI common shares and 20.4 million common BPVN shares, respectively, against a maximum outlay totaling 437 and 486.5 million euro. Said authorizations shall be valid in the period between the date the BPI and BPVN Boards of Directors shall disclose the 2006 dividend to the market and the date of inception of the merger, and they are part of a suite of initiatives aiming at optimizing the capital structure and providing Banco Popolare with a regula- tory capital profile that will satisfy the Regulatory Authorities and the stakehold- ers, while maximizing added value creation for the Group’s shareholders.
172 Notes to the consolidated accounts
Finally, upon finalizing the merger, the Management Board of Banco Popolare should be authorized to purchase maximum 660,000 common shares of Banco Popolare to be destined to the incentive scheme for directors, managers and em- ployees of Banco Popolare and its subsidiaries, chosen among executives, man- agers or employees of Banco Popolare or among new managers or employees of the Group (mostly non-beneficiaries of the existing stock option plan), by way of free share grants.
Redefinition of existing relations with Società Cattolica di Assicurazione
On January 25th, 2007, a new shareholders’ agreement regulating the joint shareholding in the subsidiary BPV Vita among Banco Popolare di Verona e No- vara (BPVN) , Credito Bergamasco and Società Cattolica di Assicurazione was en- tered into, providing for a call option in favor of BPVN and Società Cattolica di Assicurazione on their respective shareholdings in BPV Vita. Based on the agree- ment, BPVN has the preemptive right to exercise the call option at a price to be established by two experts jointly appointed with Cattolica Assicurazioni, based on shareholders’ equity plus the embedded value of outstanding policies as at December 31st, 2006. Following the price definition by the two jointly appointed experts, on March 27th, 2007, BPVN exercised its call option on the shares accounting for 50% of BPV Vita’s equity held by Società Cattolica di Assicurazioni. The purchase, which is conditional on prior authorization by the regulatory authorities, shall call for a total investment of about 64 millions. The shareholding transfer should take place by June 30th, 2007.
On January 25th, 2007 the distribution agreements between BPV Vita and the companies BPVN, Credito Bergamasco and Banca Aletti have been postponed to June 30th, 2007, with an additional six-month postponement option, while the distribution agreements between Società Cattolica di Assicurazione and BPVN covering life insurance products shall expire on December 31st, 2007.
On the same date, BPVN committed itself to purchasing 323,859 common shares of Credito Bergamasco at the price of 30.74 euro each from Cattolica by March 31st, 2007. BPVN purchased said shares on February 2007 against a to- tal outlay of about 10 millions. The purchased shares have been sold on the same month for 32.65 euro, generating a profit of about 0.6 millions.
Subscription to Banca Italease’s capital increase
In January, Banca Italease approved the capital increase of the company by issu- ing 7,958,364 shares at a subscription price of 37.6 euro per share. The Group exercised the option on all due shares for a total investment of 91.6 millions. As a result, the Group now holds 28,115,748 shares, accounting for 30.72% of Banca Italease share capital.
173 Notes to the consolidated accounts
Securitization of performing residential mortgages
As part of the capitalization objectives set forth for the Group originating from the merger and in order to strengthen its solvency ratio, on January 23rd, 2007, BPVN’s Board of Directors approved a securitization of performing residential mortgages, pursuant to law 130/99, in the amount of about 1.5 billion euro. The deal was finalized at the end of March 2007, an it led to the transfer by BPVN of loans associated with land and housing mortgages (for the purchase and/or restructuring of houses) to the special purpose vehicle specifically set up for this purpose, against 1,451.7 millions. The investment grade notes were placed with institutional investors, while junior notes were fully subscribed by BPVN.
Disposal of real estate
On February 14th, 2007, a promise to sell for the premises located in Modena, Viale Alfeo Corassori 110 (former service center of Banco San Geminiano e San Prospero) was signed between Banco and the company Petra S.r.l., against a to- tal price of 33 million euro. Upon signing the promise to sell, the acquiring com- pany made a down payment of 6.6 million, while the balance shall be paid up- on signing the final notary act by next December 20th, 2007. The promise to sell also provides for the acquiring company to make a space on the ground floor available for a Banco bank branch for 9 years (plus 9 more) at a preset rent. The premises were posted under item 110 “Property, Plant and Equipment” of the Balance sheet Assets as at December 31st, 2006 against a net book value of 31.6 million euro (of which 22.8 million euro as “building” and 8.8 million eu- ro as “land – development sites”), therefore the sale shall generate the recogni- tion of a capital gain, gross of the relevant tax effects, totaling 1.4 million euro, that shall be posted to income in 2007.
174 Notes to the consolidated accounts
Section 5 Other aspects
Changes in consolidation scope
Illustrated below are the changes in consolidation scope reported in 2006 with respect to financial year 2005: • Sestri S.p.A. e SA.RI. S.p.A. – following the merger by acquisition of SA.RI. into Sestri, the latter was sold on September 20th, 2006 to Riscossione S.p.A.. As a result, the consolidated balance sheet as at December 31st, 2006 does not include the balances of the former subsidiaries, while the consolidated income statement for 2006 includes their first nine months’ contribution under the item “Profit/Loss after tax from discontinued opera- tions”. Pursuant to IFRS 5, Sestri e SA.RI.’s contribution posted to income in 2005 was reclassified under the same item “Profit/Loss after tax from dis- continued operations” for the sake of comparability. No reclassification was made to the balance sheet as at December 31st, 2005. • Leasimpresa S.p.A. – the subsidiary was merged into the associate Banca Italease S.p.A. on December 31st, 2006. As a result, the consolidated bal- ance sheet as at December 31st, 2006 does not include Leasimpresa’s bal- ances, while the 2006 consolidated income statement includes all the net income for the year of the former subsidiary allocated to the specific ac- count items. No reclassifications were made to the 2005 balance sheet and income statement for the sake of comparability. • Compagnie d’Angely S.A. – the subsidiary was sold on November 8th, 2006 to the company Redilco Real Estate S.p.A.. As a result, the consolidated bal- ance sheet as at December 31st, 2006 does not include Compagnie d’Angely’s balances, while the 2006 consolidated income statement in- cludes the first 10 months’ contributions of the former subsidiary allocated to the specific account items. No reclassifications were made to the 2005 balance sheet and income statement for the sake of comparability. • Assisebino s.r.l. – the subsidiary was merged into Arena Broker s.r.l., effec- tive December 1st, 2006. • Banka Sonic d.d – On July 6th, 2006, Banco Popolare di Verona e Novara fi- nalized the purchase of 52,256 shares of Banka Sonic, a Croatian bank based in Zagreb, mainly engaging in retail banking, with a branch network of 27 branches in the main towns of Croatia, and about 40,000 customers. The deal concerned 49,568 common shares, equal to 80.207% of this class of shares and 2,688 preference shares, equal to 14.769% of the same class. Since Banka Sonic is listed on the Croatian Stock Exchange in Varazdin, at the end of the deal Banco launched the compulsory take-over bid on the re- maining common shares, and in December, when the bid was completed, it had acquired additional 10,489 common shares. As at December 31st, 2006, the Group held 78.43% of Banka Sonic’s share capital (97.18% of common shares and 14.77% of preference shares). The total investment amounted to 36.7 million euro. The difference between the price paid and the value as- signed to Banka Sonic’s equity, in compliance with IFRS 3, in the amount of 28.9 million, was allocated to goodwill under intangible assets. As a result,
175 Notes to the consolidated accounts
the consolidated balance sheet as at December 31st, 2006, includes Banka Sonic’s balances (total balance sheet assets: 137.2 millions) while the 2006 consolidated income statement includes the net income generated by the subsidiary only in the second half of the year (0.1 million net income). • Parchi del Garda S.p.A. – The company was incorporated on November 3rd, 2006. Its purpose is to carry out industrial and commercial initiatives in the show and entertainment sector, in particular, the management of amuse- ment theme parks, directly or by way of shareholdings in companies be- longing to this sector. The Group used the company as a vehicle to purchase a minority stake in Merlin Entertainments Group 3 s.r.l., the new controlling company of Gardaland, with an investment of 6.2 millions. On December 31st, 2006, the group held a 73.64% stake in the new subsidiary, which has a shareholders’ equity of 8.2 millions and balance sheet assets worth 8.3 millions. Its income contribution to the 2006 consolidated results was neg- ligible. • Bio Energy International S.A. – The company was incorporate on November 24th, 2006 to act as a vehicle for the implementation of a plan to produce bio-ethanol. On December 31st, 2006, the group held a 99,99% stake in the new subsidiary, which has a shareholders’ equity of 1.2 millions and bal- ance sheet assets worth 1.3 millions. Its income contribution to the 2006 consolidated results was negligible.
Changes in the scope of companies carried at equity
Set out below are the main changes reported in financial year 2006:
• Linea S.p.A. – On February 23rd, 2006, Banco acquired an additional 15.76% stake in in the share capital of Linea S.p.A. from the French com- pany Cofinoga (a company associated with the Lafayette Group and to the Bnp Paribas Group) for 47.3 million Euro. Following this deal, the stake held by Banco went from 32.20% on December 31st, 2005 to 47.96%. The deal was performed jointly with Banca Popolare di Vicenza, which acquired an equivalent stake from the same French shareholder, bringing its sharehold- ing up to 47.96%. Banco and Banca Popolare di Vicenza agreed that the existing shareholders’ agreement shall not be changed, except for the exit of the French partner from the agreement. As a result, Linea S.p.A. is now jointly controlled by the Parent Company and by Banca Popolare di Vicen- za.
• Delta S.p.A. – On February 16th, 2006, Banco finalized the purchase from Estuari S.p.A. of an equity interest of 10% in Delta S.p.A., the holding com- pany of a Group set up at the end of 2002, which includes companies en- gaging in consumer credit, as well as distribution and service companies. This initial investment was followed at the end of September by the pur- chase of an additional 10% stake from Sopaf S.p.A.. The total investment was worth 40.3 millions.
176 Notes to the consolidated accounts
• Banca Italease S.p.A. – As at December 31st, 2006 the Group held a 30.72% interest in the share capital of Banca Italease. As already explained, in the month of November the Group sold the share of the stake held in Banca Italease that is not locked up by the shareholders’ agreement, equal to 4,01% of the share capital, for 128.5 millions. The deal generated a cap- ital gain of 97.6 millions, and after tax it led to a positive impact on the net income for the year of 94.2 millions. On the following December 31st, the merger by acquisition of Leasimpresa into Banca Italease came into effect. This transaction gave rise to the assignment of a share exchange with the companies of the Group that held an interest in Leasimpresa of 7,325,500 newly issued shares of Banca Italease, accounting for 8.77% of the new share capital. The new assigned shares have been recognized in the finan- cial accounts at a unit price of 44.14 euro, which corresponds to the share price quoted on December 29th, 2006, this being the last quotation before the coming into effect of the merger. The transaction gave rise to the recog- nition of a share exchange capital gain, net of the portion written-off as in- tercompany profit, amounting to 149.0 millions. Concurrently, the carrying value of the shareholding in Banca Italease increased by 257.3 millions. Net of taxes and of minority interest, the positive impact on the net income for the year amounted to 130.0 millions.
• MAA Assicurazioni Auto e Rischi diversi S.p.A. – on December 1st, 2006, the liquidation financial statements of the associate were prepared, whose stake we acquired as part of our loan recovery business. The final liquida- tion accounts have been approved by the shareholders, together with the distribution plan. The last installment of the share due to the Parent com- pany was collected after the end of the financial year.
• Abitando S.p.A. – the company was incorporated on September 7th, 2006. It engages in the retail and wholesale distribution of furniture, household appliances and other items for home and office. By way of our subsidiary Aletti Merchant, the Group acquired a 20% stake in the associate, against an investment of 40 thousand euro.
• Estates Capital Venture S.A. – during the year, the subsidiary Aletti Mer- chant acquired an interest of about 45% in Estates Capital Venture S.A., a real estate company which owns land neighboring the Gardaland park area The investment was worth 14 thousand euro.
• Triera S.p.A. – during the year, a 49% stake was acquired in Triera S.p.A., a vehicle entity which shall develop a project to build bio-ethanol production plants, by way by way of the subsidiary Bio Energy International S.A.. The total investment was worth 1 million euro.
177 Notes to the consolidated accounts
Changes in financial accounting standards and to measurement and recognition criteria
The financial statements as at December 31st, 2006 were prepared in keeping with the same accounting standards used to prepare the financial statements of the previous year.
With regard to specific to measurement and recognition criteria, some changes were made to the classification modalities used in account items and detail ta- bles in the explanatory notes. In particular: in the second quarter 2006, some companies of the Group replaced their de- partmental software application dedicated to the recognition of foreign curren- cy transactions. By doing so, it was possible to make the account-taking of ex- change derivatives (outright, domestic currency swap, etc.) compliant with IAS/IFRS recognition criteria. With respect to the former accounting standards, the spread between the spot exchange rate at the time of the agreement and the exchange rate agreed upon under the contract has been reclassified under item 80 ”net financial income” from net interest income (items 10 “interest in- come” and item 20 “interest expense” of the income statement). For the sake of comparability, the same reclassification was carried out on all past adminis- trative periods starting from the first quarter 2005. Following a more in-depth interpretation of the directives issued by the Bank of Italy in Circular 262 of December 2005, as of this financial year, the criteria used in the detail tables of the explanatory notes to represent reverse repurchase agreements have been changed. Treasury shares sold spot as part of repos out- standing at the balance sheet date have been recognized as assets sold and not derecognized in the relevant items of the tables required by circular n. 262/2005. For the sake of comparability, also the previous year’s data in the detail tables were reclassified As of financial year 2006, it has been possible to change the balance sheet recognition criteria of derivative contracts. According to the new procedure, each derivative is recognized under one single asset or liability item based on its fair value, or based upon a measurement inclusive of accrued interest and/or premiums paid/collected. In 2005, upon the first application of IAS/IFRS, it had not been possible to retrace the single interest and/or premiums paid/collected and associate them wit their specific derivatives. As a result, interest, paid/col- lected premiums and the measurement of derivatives net of said items had been separately recognized, based on their specific sign, in the relevant balance sheet items. Data as at December 31st, 2005 were not reclassified for the same rea- sons that made it impossible to adopt the more suited recognition modality al- ready in the previous year.
178 Notes to the consolidated accounts
It should be highlighted, that in compliance with the temporary guidelines re- leased by the Bank of Italy upon releasing Circular n. 262 of December 22nd, 2005, when preparing 2005 annual report, the Group made use of the follow- ing balance sheet-related options: • no details as to the types of operations in charts covering the product com- position of balance sheet balances; • no charts or information on the annual changes within the various financial portfolios; • discretionary information on hedged financial assets and liabilities; • provide information on the consolidated group of companies with no fur- ther breakdown between companies belonging to the banking group, in- surance companies and other consolidated companies.
With regard to the charts in the explanatory notes that according to the Bank of Italy’s Circular n. 262 of December 22nd, 2005 require a distinction between “attributable to the banking group”, “attributable to insurance companies” and “attributable to other companies”, note that insurance companies have not been mentioned as they do not fall under the consolidation scope. Moreover, in case data referring to “other companies” were not material for the financial year under examination as well as for the previous one, the information has been ex- plained in the notes and not represented in a table or chart.
With reference to the income statement, the Group made use of the following options: • no details on hedging differentials; • show only “total revenues/charges from hedging transactions”; • provide information on the consolidated group of companies with no fur- ther breakdown between companies belonging to the banking group, in- surance companies and other consolidated companies.
With regard to information presented under section E covering risks and the as- sociated hedging policies, the Group made use of the following options: • with regard to notes on credit risk, prepare only charts from A.1.1 to A.1.8; • with regard to notes on derivative instruments, prepare only charts A.1, A.2.1. A.2.2, A.3, A.4, A.5, B.1, B.2 and B.3. • The other quantitative information has been provided either in the form of a chart or explanation.
179 Notes to the consolidated accounts
A.2 Section devoted to the main account items
1 – Cash and cash equivalents
This item includes legal currencies, including foreign paper notes and coins and demand deposits with the Central Banks of the Country or Countries where the Group is active with companies or branches. The item is recognized at its face value. For foreign currencies, the face value is translated into Euro at the closing exchange rate in effect at year-end.
2 – Financial assets held for trading
This category includes only debt and equity securities and the positive value of derivatives that are held for trading. Derivative contracts include those embed- ded in structured financial instruments that have been recognized separately from their host contract because: • their economic characteristics and risks are not closely related to those of the host contract; • a separate instrument with the same terms as the embedded derivative would meet the definition of derivative; • the hybrid instruments to which they belong are not measured at fair value with changes in fair value through profit or loss.
Financial assets are initially recognized on the settlement date in case of debt and equity securities, and on the subscription date for derivative contracts. Upon their initial recognition, financial assets held for trading are measured at cost, meaning the instrument’s fair value. Any embedded derivative in complex contracts, which is not closely related to its host contract and qualifies as deriv- ative, is separated from its host contract and measured at fair value, while the host contract is accounted for along its relevant accounting standard.
Subsequently to initial recognition, financial assets held for trading are measured at fair value.
To determine the fair value of financial assets quoted in an active market, quot- ed market prices are used (bid-ask prices or average prices). In the absence of an active market, estimate methods and valuation models are used, that take into account all the risk factors associated with the instruments and that are based on market inputs, such as: methods based on the fair value of other quoted in- struments that are substantially the same, discounted cash flow analysis, option pricing models, recent arm’s length market transactions.
In case no reliable estimate of the fair value is possible in keeping with the above guidelines, equity instruments and related derivatives are measured at cost.
180 Notes to the consolidated accounts
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is dis- posed of, and all risks and rewards of ownership of the assets have been sub- stantially transferred.
3 – Financial assets measured at fair value
A financial asset is measured at fair value through profit or loss upon initial recognition only when: 1. it is a hybrid contract containing one or more embedded derivatives, and the embedded derivative significantly changes the financial flows that would otherwise be expected from the contract; 2. the measurement at fair value through profit or loss makes it possible to provide a more reliable information as: i) it eliminates or considerably reduces a lack in homogeneity in meas- urement or recognition, that would otherwise be caused by measuring assets or liabilities or recognizing the associated profit and loss along different approaches; or ii) a group of financial assets, or financial liabilities, or both is managed and its performance measured at fair value based on a documented risk management or investment strategy, and group reporting is pro- vided internally to managers in charge of strategic functions based on this approach.
These financial assets are designated on initial recognition to be measured at fair value. Initial revenues and costs are directly recognized in profit or loss.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is dis- posed of, and all risks and rewards of ownership of the assets have been sub- stantially transferred.
4 – Financial assets available for sale
This category includes non-derivative financial assets not designated as Loans, Held for trading assets, Held to maturity assets or Assets measured at fair value. In particular, this category includes also shareholdings that are not held for trad- ing and do not qualify as interests in subsidiaries, associates and joint ventures, including private equity investments, as well as the portion of subscribed syndi- cated loans that had been designated at origin as available for sale. Financial assets are initially recognized on the settlement date in case of debt and equity securities, and on the origination date in case of other financial as- sets not classified as loans.
181 Notes to the consolidated accounts
Upon their initial recognition, assets are measured at cost, meaning their fair val- ue, inclusive of transaction costs or proceeds directly associated with the instru- ment itself. If recognition follows a reclassification of Assets held to maturity, as- sets will be recognized at their fair value at the time of reclassification. Subsequently to initial recognition, available for sale assets go on being meas- ured at fair value through recognition of the corresponding amortized cost val- ue in income, while profits or losses generated by changes in fair value are rec- ognized in a specific Equity reserve until the financial asset is derecognized or an impairment loss is recognized. Upon derecognition, the cumulative gain or loss is recognized in profit or loss.
In case no reliable estimate of the fair value is possible in keeping with the above guidelines, equity securities and related derivatives are measured at cost and written down in case of impairment. The assessment of objective evidence of impairment losses is carried out at each balance sheet or interim reporting date. If the reasons for an impairment loss are no more valid due to an event occurring after the impairment was originally rec- ognized, write-backs are recognized through profit and loss. The write-back in any case cannot exceed the instrument’s amortized cost in the absence of previ- ous adjustments.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is dis- posed of, and all risks and rewards of ownership of the assets have been sub- stantially transferred.
5 – Financial assets held to maturity
This category includes debt securities with fixed or determinable payments and fixed maturity date, that the Group has the positive intention and ability to hold to maturity. If a held-to-maturity investment must be sold as a consequence of a reconsideration or of an event beyond the entity’s control, the asset is reclas- sified as available for sale.
Financial assets are initially recognized on the settlement date. Upon initial recognition, financial assets designated as held to maturity are measured at cost, including any directly associated costs or revenues. If the recognition in this cat- egory follows a reclassification from Assets available for sale, the fair value of the asset at the time of reclassification is recognized at the asset’s new amortized cost.
Subsequently to initial recognition, financial assets held to maturity are meas- ured at amortized cost, using the effective interest method. Gains or losses from fair value changes in assets held to maturity are recognized through profit and loss at the time of derecognition. Impairment losses are charged to income at the time of occurrence. The assessment of objective evidence of impairment losses is carried out at each balance sheet or interim reporting date. In case of objective evidence, the impairment is computed as the difference between the
182 Notes to the consolidated accounts
asset’s carrying value and the present value of estimated future cash flows, dis- counted at the original effective interest rate. The impairment loss is recognized through profit and loss. If the reasons for an impairment loss are no more valid due to an event occurring after the impairment was originally recognized, write- backs are recognized through profit and loss.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is dis- posed of, and all risks and rewards of ownership of the assets have been sub- stantially transferred.
6 – Loans to banks and customers
Loans include loans to customers and to banks, either originated or acquired, with fixed or determinable payments, that are not quoted in an active market and that were not designated from inception as financial assets Available for sale. Loans include receivables, repurchase agreements, loans originating from financial leases and securities acquired as a result of a private placement or sub- scription, with fixed or determinable payments, not quoted in an active market. As to loans acquired without recourse, they are classified as loans, provided there are no contract provisions significantly changing the risk exposure of the assignee company.
Loans are initially recognized on the origination date or, in case of debt security, on the settlement date, based on the fair value of the financial instrument, the recognition being equal to the extended amount, or subscription price, includ- ing costs/revenues directly associated to the individual loan and that can be de- termined from the start of the transaction, although settled later on. Costs are excluded, that, although carrying the above characteristics, are refunded by the borrowing counterparty or fall under normal internal administrative costs. For loans that are not negotiated at arm’s length market conditions, the fair value is computed using specific valuation techniques; the difference with the extended amount or the subscription price is charged directly to income. Buyback and re- purchase agreements or reverse repurchase agreements are recognized in the balance sheet as loans payable or receivable. In particular, securities sold subject to repurchase agreements (repos) are recorded as loans payable with respect to the amount received spot, while securities purchased under agreements to resell (reverse repos) are recorded as loans receivable with respect to the amount paid spot.
After initial recognition, loans are valued at amortized cost, equal to the initial recognition value decreased/increased by capital refunds, write-down/write- backs and the amortization – computed along the effective interest rate method – of the difference between the extended amount and the amount repayable at maturity, typically comparable to the costs/revenues directly associated to the in- dividual loan. The effective interest rate is determined by computing the rate that equals the loan’s present value of future principal and interest cash flows, to the extended amount including costs/rewards associated with the loan. This
183 Notes to the consolidated accounts
accounting method, based on a financial logic, spreads the economic effect of costs/revenues throughout the loan’s expected residual life. The amortized cost method is not used for short-term loans, whose limited life span makes the dis- counting effect immaterial. Said loans are measured at historical cost and their costs/revenues are recognized in the income statement linearly throughout the loan contract life.
The same measurement criterion is used for demand loans. At each balance sheet or interim report date, loans are reviewed to identify loans that due to events occurred after their initial recognition, show objective evidence of an im- pairment loss. These are loans classified as non-performing, watchlist or restruc- tured under the current rules of the Bank of Italy, in line with IAS regulations.
Said impaired loans undergo an analytical, or individual valuation, whereby the write-down of each loan is equal to the difference between the loan’s book val- ue at the time of measurement (amortized cost) and the present value of ex- pected future cash flows, using the original effective interest rate. Expected cash flows factor in the expected recovery time, the estimated realizable value of col- laterals, and possible costs incurred to recover the credit exposure. The cash flows of loans that are expected to be recovered within a short period of time are not discounted. The original effective interest rate of each loan remains un- changed over time, unless a loan restructuring or workout agreement has been negotiated that changes the contractual interest rate, or unless in practice the transaction bears no contractual interest.
The write-down is charged to income. The original loan value is reinstated in fol- lowing financial years whenever the reasons for their original write-down no longer apply, provided said evaluation is objectively correlated to an event oc- curred after the write-down. Write-backs are recognized in the income state- ment and in any case cannot exceed the loan’s amortized cost had no write- downs been carried out in the past.
Individual loans that give no objective evidence of impairment, that is generally speaking performing loans, including loans to counterparties residing in coun- tries at risk, undergo a collective valuation. This valuation is carried out by loan classes carrying similar credit risk characteristics and their percentage loss is es- timated by taking into account their historical loss experience, adjusted on the basis of current observable data, so as to estimate the loss latent in every loan group. Collectively determined write-downs are charged to income. At each bal- ance sheet and interim report date, any additional write-down or write-back is recalculated differentially making reference to the entire performing loan book on the same date.
184 Notes to the consolidated accounts
Sold loans are derecognized only if the sale entails the substantial transfer of all risks and rewards associated to the loans. On the contrary, should the risks and rewards associated with the sold loans be retained, the loans will continue to be recognized, although from a legal point of view the loan ownership has been ac- tually transferred. In case the substantial transfer of risks and rewards cannot be verified, loans are derecognized if control of the loans has been relinquished. Otherwise, if be it even a partial control has been retained, the loans will con- tinue to be recognized to the extent of the Group’s residual involvement, based on the exposure to the changes in value of the sold loans and to their changes in cash flows. Finally, sold loans are derecognized in case the contractual rights to receive the relevant cash flows are retained, with the concurrent obligation to pay said flows, and nothing more, to third parties.
7 – Hedging derivatives
Assets and liabilities include hedging credit and financial derivatives, which at the balance sheet date reported a positive and negative fair value, respectively.
A hedge aims at neutralizing potential losses associated with a given financial in- strument or a group of financial instruments, attributable to a specific risk, by offsetting them with the profit associated with a different financial instrument or group of financial instruments in case that given risk should actually materi- alize. IAS 39 provides for the following categories of hedges: • a fair value hedge, that is, a hedge of the exposure to changes in fair value of a recognized asset or liability attributable to a particular risk; • cash flow hedge is a hedge of the exposure to variability in cash flows at- tributable to a particular risk associated with a recognized asset or liability; • A hedge of foreign currency transactions or operations.
With regard to the consolidated financial statements, only instruments involving an external counterparty to the group may be designated as hedging instru- ments. Any result associated with intragroup internal transactions is eliminated.
The derivative instrument can be designated as a hedge provided that the hedg- ing relationship between the hedged and the hedging instruments is formally documented, and it is effective at the time of origination and prospectively throughout its entire life. The hedge effectiveness depends on the extent to which the changes in the fair value or in the expected cash flows of the hedged item are actually offset by those of the hedging instrument. As a result, effec- tiveness is measured by comparing said changes, while considering the aim pur- sued by the company when the hedge was established.
185 Notes to the consolidated accounts
A hedge is effective (within a range of 80 to 125%) when changes in the fair value (or in the cash flows) of the hedging instrument neutralize almost com- pletely the changes in the hedged item attributable to the hedged risk. Hedge effectiveness is assessed at each reporting date, using: • prospective tests, that justify the application of hedging accounting in that they demonstrate its expected effectiveness; • retrospective tests, demonstrating the hedge’s actual effectiveness achieved over the period being examined. In other words, they measure to what ex- tent actual results diverge from a perfect hedge.
Should the above tests give evidence of a hedge ineffectiveness, hedge ac- counting, as described above, is suspended and the hedging derivative is reclas- sified among trading instruments (HfT).
Hedges are measured at fair value; in particular: • in case of a fair value hedge, the change in fair value of the hedged item is offset against the change in fair value of the hedging instrument. Said off- set is recognized by recognizing in profit or loss the value changes referring both to the hedged item (referring to the changes generated by the under- lying risk factor), as well as to the hedging instrument. Any resulting differ- ence, which reflects the partial hedge ineffectiveness, represents a net in- come effect; • in case of cash flow hedge, the portion of changes in the fair value of the derivative that are determined to be an effective hedge is recognized di- rectly in equity, while it is recognized in the income statement only when the hedged cash transaction affects profit or loss; • hedges of foreign currency transactions are accounted for similarly to cash flow hedges.
8 – Value change of financial assets and liabilities under macrohedging (hedged portfolios)
These items indicate the positive or negative balance of value changes of assets in hedged portfolios (macrohedging) and the positive or negative balance of val- ue changes of liabilities in portfolios hedged against interest rate risk, in compli- ance with IAS 39, paragraph 89A.
186 Notes to the consolidated accounts
9 – Investments in associates
This item includes interest held in associate companies, which are carried at eq- uity. Associate companies are enterprises on which the Group has a significant influence and are not subsidiaries. By significant influence we assume all cases in which the Group holds 20% or more of voting the power of the investee, and, irrespective of the shareholding percentage, whenever it can partake in business and financial decisions of the investees.
Financial assets are initially recognized on the settlement date. Upon initial recognition, financial assets classified under this category are recognized at cost.
If there is any indication that an investment in an associate may be impaired, the recoverable value of the associate is estimated, including the present value of fu- ture cash flows expected to be generated by the associate, and the proceeds on the ultimate disposal of the investment. Should the resulting recoverable amount be lower than the carrying amount, the difference is recognized in the income statement. Whenever the reasons of the impairment loss are no longer valid due to an event occurring after the recognition of said impairment, write- backs are recognized in the income statement.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is dis- posed of, and all risks and rewards of ownership of the assets have been sub- stantially transferred.
10 – Tangible assets (PPE)
Tangible assets include land, core property, real estate investments, technical plants, furniture, fittings and equipment of any type. Said tangible assets are held to be used for the production or provision of goods and services, to be rent- ed to third parties, or for administrative use, and they are expected to be used for more than one period. This item includes also assets associated with finance lease contracts, provided that the legal ownership of the assets rests within the leasing company. Said item also includes improvements and incremental ex- penses incurred on third party assets that do not fall under “other assets”.
Tangible assets are initially recognized at cost, which includes the purchase price and all expenditures directly attributable to the acquisition of the item and to bring the asset to working conditions. Non-recurring maintenance costs entail- ing probable future economic benefits are included in the asset’s carrying amount, while other repairs and maintenance are charged to income.
187 Notes to the consolidated accounts
Tangible assets, including “non-core” property, are measured at cost, less any depreciation and impairment. Tangible assets are systematically depreciated throughout their useful life, along the straight-line method, with the exception of: • land, whether purchased separately or as part of the buildings standing on it, in that land has an unlimited life. In case its value is embedded in the val- ue of the buildings built on it, in virtue of the application of the approach by components, land is considered a separate asset from the building; the separation between the land and the building values is based on the survey of independent experts only for “detached” property; • works of art, because the useful life of a masterpiece cannot be estimated and its value normally is destined to increase with time.
At each balance sheet date, if there is an indication that an asset may be im- paired, the asset’s carrying amount is compared with its recoverable amount, that is equal to the lower of the asset’s fair value, net of sale costs, and its val- ue in use, meaning the present value of future cash flows originated by the as- set. Any write-downs are charged to income. Whenever the reasons of the im- pairment loss are no longer valid, write-backs are recognized, that must not ex- ceed the asset’s value had no impairment taken place in the past, net of accrued depreciation.
A tangible asset is derecognized from the balance sheet at the time of disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
11 – Intangible assets
Intangible assets include goodwill, costs to restructure branches and other rent- ed buildings, and software applications to be used for several years. Goodwill is the positive difference between the cost of the acquisition and the fair value of the acquired assets and liabilities. Other intangible assets are recognized as such if identifiable and if originating from legal or contractual rights.
An intangible asset can be recognized as goodwill when the positive difference between the cost of the acquisition (including accessory charges) and the fair value of the acquired assets and liabilities is representative of future economic benefits to be generated by the subsidiary (goodwill). Should this difference be negative (badwill) or in the assumption that goodwill is not justified by the an- ticipated future economic benefits generated by the subsidiary, the difference is directly recognized in the income statement. Other intangible assets are carried at cost including any accessory charges only if it is probable that the future economic benefits that are attributable to the as- set will be realized and if the cost of the asset can be measured reliably. Other- wise, the cost of the intangible asset is recognized in the income statement of the year in which it was incurred.
188 Notes to the consolidated accounts
Goodwill is tested any time there is evidence of an impairment, and in any case at least once a year following the preparation of the three-year plan an impair- ment test is carried out. To this end, the cash-generating unit to which the good- will is allocated is identified. The impairment amount is calculated based on the difference between the goodwill’s carrying amount and its recoverable amount, if lower. Said recoverable amount is equal to the lower of the fair value of the cash-generating unit, net of selling costs, and its value in use. The value in use is the current value of future financial flows expected from cash-generating units to which goodwill was allocated. Any resulting write-down is charged to in- come.
The cost of intangible assets is amortized on a straight-line basis over its useful life. If their useful life is not definable, amortization will not be applied, and pe- riodically the assets will be tested for impairment. At each balance sheet date, if there is evidence of impairment losses, the asset’s recoverable amount is esti- mated. The loss, which is charged to income, is equal to the difference between the asset’s carrying amount and its recoverable amount.
An intangible asset is derecognized from the balance sheet at the time of dis- posal and whenever no more future economic benefits are expected.
12 – Tax assets and liabilities
Said items include current and deferred tax assets, and current and deferred tax liabilities.
Income tax is recognized in the income statement, with the exception of taxes on items credited or debited directly to equity. Income tax provisions are based on a conservative projection of the current tax burden, together with deferred tax assets and liabilities.
Deferred tax assets and liabilities are based on temporary differences arising be- tween the tax base of assets and liabilities and their carrying amounts in the con- solidated financial statements, without any time limits.
Deferred tax assets are recognized when it is probable that they can be recov- ered. Deferred tax liabilities are always recognized, with the exception of higher assets under tax suspension represented by equity investments and reserves un- der tax suspension, as it is reasonable to believe that no operations will be per- formed deliberately that would trigger taxation. Recognized deferred tax assets and liabilities are systematically measured to account for any regulatory or tax rate changes. The tax provision also accounts for charges associated with possi- ble litigations with fiscal authorities.
189 Notes to the consolidated accounts
13 – Non-current assets held for sale and discontinued operations and liabilities associated with assets under disposal
This item includes non-current assets and liabilities and disposal groups (discon- tinued operations). In specific, said assets and liabilities are measured at the low- er of fair value less costs to sell and their carrying amount. Any gain or charges are presented in the income statement under a separate item, net of fiscal ef- fects.
14 – Other assets
This item includes assets that do not belong to the other balance sheet assets items. This item for example may include: a) gold, silver and precious metals; b) the positive value of management contracts (so called “servicing assets”) under IAS 39; c) accrued income other than those that are to be capitalized onto the asso- ciated financial assets; d) any inventories under IAS 2; e) improvements and incremental expenses incurred on third party assets oth- er than those associated with the item “tangible assets”.
Also balances (“debit balance”) of temporary or suspense items that have not been allocated to the relevant accounts can be presented under this item, but only if the amount is immaterial.
15 – Due to banks and customers and debt securities in issue
The items “Due to banks”, “Due to customers” and “Debt securities in issue” include various forms of interbank and customer loans and proceeds raised through certificates of deposit and bonds outstanding, net of any repurchased amount. Also loans registered by lessees as part of financial leases are included.
These financial liabilities are first recognized when the raised amounts are re- ceived or the debt securities issued. The initial recognition is based on the fair value of liabilities, generally the consideration received or the issue price, plus any additional costs/revenues directly attributable to the single funding or issue operation and not refunded by the lending counterparty. Internal administrative costs are excluded.
190 Notes to the consolidated accounts
After initial recognition, financial liabilities are measured at amortized cost along the effective interest rate method. Short term liabilities are an exception, if the time factor is immaterial: they are stated at their received value and any incurred costs are charged to income on a straight-line basis over the liability contract life. Note, that Funding instruments under an effective hedge are measured along the standards governing hedges.
For structured instruments, provided that the requirements under IAS 39 are sat- isfied, the embedded derivative is separated from the host contract and meas- ured at fair value as a trading liability. In this case the host contract is recognized at the amortized cost.
Financial liabilities are derecognized when expired or exhausted. Removal takes place also in case of repurchases of securities issued. The difference between the carrying amount of liabilities and the consideration paid is registered in the in- come statement. The subsequent sale of own shares following their repurchase is considered as a new issue, recognized at the new selling price, with no effect on the income statement.
16 – Trading liabilities
This item includes the negative amount trading derivative contracts measured at fair value and financial liabilities held for trading. It also includes embedded derivatives, which were separated from their host fi- nancial instruments under IAS 39.
Gains and losses from changes in the fair value and/or from the sale of trading instruments are stated in the income statement.
Trading liabilities are derecognized when expired or exhausted.
17 – Trading liabilities measured at fair value
A financial asset is measured at fair value through profit or loss upon initial recognition only when: 1. it is a hybrid contract containing one or more embedded derivatives, and the embedded derivative significantly changes the financial flows that would otherwise be expected from the contract; 2. the measurement at fair value through profit or loss makes it possible to provide a more reliable information as: i) it eliminates or considerably reduces a lack in homogeneity in meas- urement or recognition, that would otherwise be caused by measuring assets or liabilities or recognizing the associated profit and loss along different approaches; or ii) a group of financial assets, or financial liabilities, or both is managed and its performance measured at fair value based on a documented risk management or investment strategy, and group reporting is pro-
191 Notes to the consolidated accounts
vided internally to managers in charge of strategic functions based on this approach.
The financial liabilities under examination are measured at fair value right from the initial recognition. Initial revenues and charges are immediately charged or credited to income.
Financial liabilities are derecognized when expired or exhausted.
18 – Other liabilities
This item includes liabilities that cannot be associated with other balance sheet liability items. For example, this item may include: a) payment agreements that under IFRS 2 must be classified as debts; b) the negative value of management contracts (so called “servicing liabili- ties”) under IAS 39; c) the initial recognition of guarantees issued and the equated credit deriva- tives under IAS 39, as well as the following impairment write-downs; d) payables associated with the payment of received goods or services; e) accrued liabilities others than those to be capitalized onto the relevant fi- nancial liabilities.
19 – Provisions for risks and charges
Other provisions for risks and charges include the provisions related to present obligations originated from past events where it is more likely than not that an outflow of resources will be required to settle the obligation, provided the amount can be reliably estimated.
The sub-item “retirement provisions and similar obligations” show only defined- benefit and defined-contribution supplementary pension funds backed by a le- gal or secured guarantee issued by Banco on the capital repayment and/or on the return in favor of beneficiaries, classified as “internal provisions” under the current pension regulations. The item also includes “external provisions”, backed by a guarantee on capital repayment and/or the return in favor of ben- eficiaries.
The sub-item “other provisions” show the provisions for risks and charges that were set aside in compliance with international accounting standards, except for impairments caused by the deterioration of guarantees issued and for equated credit derivatives under IAS 39, that are shown under the item “other liabilities”.
192 Notes to the consolidated accounts
Provisions for risks and charges are recognized only if: • there is a present obligation (legal or constructive) as a result of past events; • it is likely that an outflow of resources will be required to produce economic benefits to settle the obligation; and; • the obligation amount can be reliably estimated.
Whenever the time factor is significant, provisions are discounted using current market rates. The effect of discounting to net present value is recognized in the income statement.
20 – Valuation reserves
Said item includes valuation reserves for financial assets available for sale, for foreign investment hedging, cash flow hedging, and for translation exchange differences, as well as for “individual assets” under disposal and disposal groups. It also includes the revaluation reserves recognized in compliance with special revaluation regulations, also if fiscal exempt.
21 – Redeemable shares
This item includes shares entailing the obligation for the issuer to redeem/repur- chase the shares at a preset price in favor of the shareholder.
22 – Common stock equivalents
This item includes shareholders’ equity components other than capital and re- serves.
23 – Reserves
This item includes retained earnings.
24 – Capital stock and treasury stock
The capital stock item includes common and preferred stock issued by the bank net of any capital already subscribed but not yet paid in at the balance sheet date. This item includes any treasury stock held by the bank. The latter are shown with a minus sign in the item bearing their name under balance sheet li- abilities. The original cost of repurchased treasury shares and the gain or loss originated by their subsequent sale are recognized as changes to shareholders’ equity.
193 Notes to the consolidated accounts
25 – Minority interest
This item shows the portion of consolidated shareholders’ equity attributable to shares owned by minority shareholders based on equity ratios.
The amount is net of any treasury shares repurchased by consolidated compa- nies.
26 – Foreign currency transactions
Upon initial recognition, foreign currency transactions are recognized in the money of account, and the exchange rate applied to the amount expressed in foreign currency is the one in effect at the date of the transaction.
At each balance sheet date, items expressed in foreign currencies are measured as follows: • cash items are translated at the exchange rate in effect at the closing date; • non-cash items measured at their historical cost are translated at the ex- change rate in effect at the date of transaction; • non-cash items measured at fair value are translated based on the exchange rates in effect at the closing date.
Exchange rate differences originated by the settlement of cash items, or by the translation of cash items at rates other than the initial ones, or by the conver- sion of the previous financial statements, are recognized in the income state- ment at the time of their accrual.
When a gain or loss from a non-cash item is carried at equity, the relevant ex- change rate difference is also carried at equity. Conversely, when a gain or loss is carried at income, also the associated exchange rate difference is carried at in- come.
194 Notes to the consolidated accounts
27 – Other information
Securitizations
In 2001 and 2002 the Group finalized two securitizations through which the Parent company sold a pool of performing loans to the special purpose vehicle BPV Mortgages S.r.l. and the subsidiary Leasimpresa S.p.A. sold the cash flows generated by a pool of lease contracts to the special purpose vehicle Leasimpre- sa Finance S.r.l..
The loans included in the securitization finalized through the special purpose ve- hicle BPV Mortgages S.r.l. were not recognized in the financial accounts as of June 30th, 2005, because the Group made use of the exemption under IFRS 1 from reinstating financial assets/liabilities sold or written off before January 1st, 2004.
The loans included in the securitization finalized through the special purpose ve- hicle Leasimpresa Finance S.r.l. have been reinstated in the consolidated ac- counts because, since it was a revolving transaction, loans cannot be considered written off before January 1st, 2004.
Employee Benefit Plans
Employee termination benefits are stated at their actuarial value. The determi- nation of the net present value is based on the projected unit credit method, where future obligations are projected based on statistical historical analyses and demographic curves, and cash flows are discounted based on a market interest rate.
Pension plans and liabilities associated with the so called “personnel seniority premiums” are classified either as defined benefit plans or defined contribution plans. Under defined contribution plans, the charge associated with the contributions to be paid under the plan is recognized in the income statement, under defined benefit plans, the burden of insufficient contributions or an insufficient return from the assets contributions have been invested in falls onto the company. The liability calculation is based on the actuarial methodology defined in IAS 19.
Share based payments
Under IFRS 2, stock options granted to employees are measured at their fair val- ue at grant date. The cost of the granted options, represented by the periodi- cally measured fair value, is recognized in profit or loss throughout its vesting pe- riod, and offset in a specific equity reserve, in case of equity-settled transactions, or in a liability item in case of cash-settled transactions.
195 Notes to the consolidated accounts
Dividends and revenue recognition
Revenues are recognized when received or in any case when it is likely that fu- ture benefits will be received and that said benefits can be reliably measured. In particular: default interests, if provided for by the contract, are recognized in the income statement only when actually collected; dividends are recognized in the income statement when their distribution is rat- ified; revenues from the brokerage of trading financial instruments, represented by the difference between the transaction price and the instrument fair value, are recognized in the income statement when the transaction is recognized if the fair value can be measured based on recent parameters or transactions per- formed on the same market on which the instrument is traded. Proceeds from financial instruments that cannot be measured along the above procedure are taken to the income statement throughout the transaction’s life.
196 Notes to the consolidated accounts
Chapter B – Notes to the consolidated balance sheet Assets Section 1 Cash and cash equivalents - Item 10
1.1 Cash and cash equivalents: breakdown
(thousand euro) Banking Other Total Total group companies 31-12-2006 31-12-2005
a) Cash 360,357 1 360,358 339,353 b) Demand deposits with Central Banks 188 - 188 3
Total 360,545 1 360,546 339,356
Section 2 Financial assets held for trading - Item 20
2.1 Financial assets held for trading: breakdown by instrument
(thousand euro) Banking group Other companies Quoted Unquoted Quoted Unquoted 31-12-2006 31-12-2005
A. Cash assets
1. Debt securities 2,154,398 662,433 - - 2,816,831 3,244,428 1.1. Structured securities 29 31,799 - - 31,828 1,264 1.2. Other debt securities 2,154,369 630,634 - - 2,785,003 3,243,164 2. Equity securities 599,371 78 - - 599,449 257,366 3. UCITS units 7,871 943,973 - - 951,844 765,373 4. Loans ------4.1. Repurchase agreements ------4.2. Other ------5. Impaired assets ------6. Assets sold and not derecognized 2,334,048 154,283 - - 2,488,331 2,063,033
Total A 5,095,688 1,760,767 - - 6,856,455 6,330,200
B. Derivatives
1. Financial derivatives 163,034 1,405,134 - - 1,568,168 1,577,919 1.1 trading 163,034 1,298,286 - - 1,461,320 1,339,405 1.2 fair value option - 84,787 - - 84,787 39,075 1.3 other - 22,061 - - 22,061 199,439 2. Credit derivatives - - - - - 16 2.1 trading - - - - - 16 2.2 fair value option ------2.3 other ------
Total B 163,034 1,405,134 - - 1,568,168 1,577,935
Total (A+B) 5,258,722 3,165,901 - - 8,424,623 7,908,135
197 Notes to the consolidated accounts
Financial assets held for trading as at December 31st, 2006 amounted to 8,424.6 millions, up by 6.5% as compared with 7,908.1 million euro on De- cember 31st, 2005. Cash assets as at December 31st, 2006 accounted for 81.4% of total financial assets held for trading. The sub-item “UCITS units” comprises 296.7 million worth of equity funds, 549.6 million bond funds and 105.6 million worth of other fund classes. Assets sold and not derecognized are entirely represented by securities sold through reverse repurchase agreements. Derivatives associated with the fair value option are represented by derivatives that are linked to assets and/or liabilities measured at fair value, in compliance with IAS 39, paragraph 9. Under the category “quoted” we have indicated financial instruments whose price is quoted on an active market, under IAS 39 and as illustrated in Chapter A – Accounting Policies.
198 Notes to the consolidated accounts
2.2 Financial assets held for trading: breakdown by debtor/issuer
(thousand euro) Banking Other 31-12-2006 31-12-2005 group companies
A. CASH ASSETS 1. Debt securities 2,816,831 - 2,816,831 3,244,428 a) Governments and Central banks 779,756 - 779,756 628,808 b) Other public entities 229 - 229 1,264 c) Banks 1,173,975 - 1,173,975 1,330,186 d) Other issuers 862,871 - 862,871 1,284,170 2. Equity securities 599,449 - 599,449 257,366 a) Banks 84,973 - 84,973 15,920 b) Other issuers: 514,476 - 514,476 241,446 - insurance companies 18,940 - 18,940 24,722 - financial companies 79,255 - 79,255 5,798 - non-financial companies 416,281 - 416,281 210,926 - other - - - 3. Units in UCITS 951,844 - 951,844 765,373 4. Loans - - - a) Governments and Central banks - - - b) Other public entities - - - c) Banks - - - d) Other counterparties - - - 5. Impaired assets - - - a) Governments and Central banks - - - b) Other public entities - - - c) Banks - - - d) Other counterparties - - - 6. Assets sold and not derecognized 2,488,331 - 2,488,331 2,063,033 a) Governments and Central banks 2,119,365 - 2,119,365 2,057,727 b) Other public entities - - - c) Banks 75,316 - 75,316 877 d) Other counterparties 293,650 - 293,650 4,429
Total A 6,856,455 - 6,856,455 6,330,200
B. DERIVATIVES a) Banks 1,206,509 - 1,206,509 1,250,148 b) Customers 361,659 - 361,659 327,787
Total B 1,568,168 - 1,568,168 1,577,935
Total (A+B) 8,424,623 - 8,424,623 7,908,135
199 Notes to the consolidated accounts
2.3 Financial assets held for trading: trading derivatives
2.3.1 Banking group
(thousand euro) Interest Currency Equity Loans Other 31-12-2006 31-12-2005 rates and gold securities
A. Quoted derivatives 1. Financial derivatives: 64 - 162,970 - - 163,034 58,106 a) With exchange of capital - - 11,616 - - 11,616 58,068 - purchased options - - 11,616 - - 11,616 58,068 - other derivatives ------b) Without exchange of capital 64 - 151,354 - - 151,418 38 - purchased options 64 - 151,354 - - 151,418 23 - other derivatives ------15 2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------
Total A 64 - 162,970 - - 163,034 58,106
B. Unquoted derivatives 1. Financial derivatives: 738,148 127,960 507,114 - 31,912 1,405,134 1,519,813 a) With exchange of capital - 123,033 7,653 - - 130,686 185,732 - purchased options - 73,071 7,653 - - 80,724 94,286 - other derivatives - 49,962 - - - 49,962 91,446 b) Without exchange of capital 738,148 4,927 499,461 - 31,912 1,274,448 1,334,081 - purchased options 46,400 4,659 499,461 - 31,912 582,432 566,663 - other derivatives 691,748 268 - - - 692,016 767,418 2. Credit derivatives: ------16 a) With exchange of capital ------16 b) Without exchange of capital ------
Total B 738,148 127,960 507,114 - 31,912 1,405,134 1,519,829
Total (A+B) 738,212 127,960 670,084 - 31,912 1,568,168 1,577,935
The derivatives listed in the table are broken down by type of underlying risk. The column “interest rates” by convention includes also financial derivatives with debt securities as underlying. The column “equity securities” includes also trades on equity indexes. The column “other” includes also derivatives on com- modities, precious metals (except gold) and structured derivatives entailing mul- tiple types of risk.
200 Notes to the consolidated accounts
2.3.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
2.3.3 Other companies
There were no derivative instruments under item “financial assets held for trad- ing” Other companies at the balance sheet date, or at the end of the previous financial year.
2.4 Financial assets held for trading (other than sold and not derecogni- zed as well as impaired): annual changes
2.4.1 Banking group
(thousand euro) Debt Equity Units in Loans Total securities securities UCITS
A. Opening balance 3,244,428 257,366 765,373 - 4,267,167
B. Increases 59,959,771 5,350,504 1,152,404 - 66,462,679 1. Purchases 58,458,314 5,261,590 1,134,912 - 64,854,816 (of which for business combinations) - - - - - 2. Positive fair value changes 6,286 34,094 13,209 - 53,589 3. Other changes 1,495,171 54,820 4,283 - 1,554,274
C. Decreases (60,387,368) (5,008,421) (965,933) - (66,361,722) 1. Sales (57,164,729) (4,902,386) (956,376) - (63,023,491) (of which for business combinations) - - - - - 2. Redemptions (1,246,950) - - - (1,246,950) 3. Negative fair value changes (29,183) (3,781) (2,598) - (35,562) 4. Other changes (1,946,506) (102,254) (6,959) - (2,055,719)
D. Closing balance 2,816,831 599,449 951,844 - 4,368,124
Sub-items “B.3 – Increases: other changes” and “C.4 – Decreases: other changes” include profit or loss on trading, accrued interest, technical overdraft and reverse repurchase agreements.
2.4.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
201 Notes to the consolidated accounts
2.4.3 Other companies
No increases or decreases in “financial assets held for trading” Other companies were reported.
Section 3 Financial assets measured at fair value - Item 30
3.1 Financial assets measured at fair value: breakdown by instrument
(thousand euro) Banking group Other companies Quoted Unquoted Quoted Unquoted 31-12-2006 31-12-2005
1. Debt securities 8 3,781 - - 3,789 1,938 1.1 Structured securities - - - - - 1 1.2 Other debt securities 8 3,781 - - 3,789 1,937 2. Equity securities - 9,901 - - 9,901 4,170 3. Units in UCITS - 300,740 - - 300,740 286,554 4. Loans ------4.1 Structured ------4.2 Other ------5. Impaired assets ------6. Assets sold and non derecognized ------
Total 8 314,422 - - 314,430 292,662
Cost 8 281,437 - - 281,445 273,379
Financial assets measured at fair value as at December 31st, 2006 increased by 7.4% compared to December 31st, 2005. The increase concerned all instru- ments.
UCITS units are mainly represented by shares in hedge funds, while equity secu- rities include insurance contracts whose benefits are linked to stock perform- ance. The designation at fair value of hedge funds lies on the need to manage and represent a portfolio of financial instruments in consistency with a given in- vestment strategy and based upon a performance target.
Insurance contracts recognized under “equity securities” are designed to build up the provision required to pay out supplementary pension benefits to some managers upon their retirement. The fair value designation of this investments is linked to the cost of employee benefits, that is recognized under retirement provisions in compliance with IAS 19.
202 Notes to the consolidated accounts
As at December 31st, 2006 the difference between the book value and the cost of financial assets designated at fair value was 33 millions.
3.2 Financial assets designated at fair value: breakdowns by debtor/is- suer
(thousand euro) Banking Other 31-12-2006 31-12-2005 group companies
1. Debts securities 3,789 - 3,789 1,938 a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks 1,714 - 1,714 - d) Other issuers 2,075 - 2,075 1,938
2. Equity securities 9,901 - 9,901 4,170 a) Banks - - - - b) Other issuers: 9,901 - 9,901 4,170 - insurance companies 2,514 - 2,514 4,170 - financial companies - - - - - non-financial companies - - - - - other 7,387 - 7,387 -
3. Units in UCITS 300,740 - 300,740 286,554
4. Loans - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
5. Impaired assets - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
6. Assets sold and not derecognized - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
Total 314,430 - 314,430 292,662
203 Notes to the consolidated accounts
3.3 Financial assets measured at fair value (other than sold and not de- recognized and impaired): annual changes
3.3.1 Banking group
(thousand euro) Debt Equity Units in Loans Total securities securities UCITS
A. Opening balance 1,938 4,170 286,554 - 292,662
B. Increases 14,682 6,173 60,189 - 81,044 1. Purchases 11,240 4,704 41,222 - 57,166 (of which for business combinations) - - - - - 2. Positive fair value changes 57 1,469 17,349 - 18,875 3. Other changes 3,385 - 1,618 - 5,003
C. Decreases (12,831) (442) (46,003) - (59,276) 1. Sales (11,554) - (45,986) - (57,540) (of which for business combinations) - - - - - 2. Redemptions (363) - - - (363) 3. Negative fair value changes (914) - (17) - (931) 4. Other changes - (442) - - (442)
D. Closing balance 3,789 9,901 300,740 - 314,430
Sub-item “B.1 – Purchases” and C.2 – Sales” represent the accounting value of purchase and sale transactions reported upon settling the transactions. In par- ticular, with regard to equity issues, “purchases” include also the value of in- vestments carried out during the year to increase the nominal value of insurance contracts against as a result of additional benefits assigned to managers during 2006.
Sub-items “B.2 – Positive fair value changes” e “C.3 – Negative fair value changes” include the capital gains and losses reported in the income statement under item 110 “Profit/Loss on financial assets and liabilities designated fair value”.
3.3.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
3.3.3 Other companies
No increases or decreases in “financial assets measured at fair value” Other com- panies were reported.
204 Notes to the consolidated accounts
Section 4 Financial assets available for sale - Item 40
4.1 Financial assets available for sale: breakdown by instrument
(thousand euro) Banking group Other companies 31-12-2006 31-12-2005 Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted
1. Debt securities 161.690 334,457 - - 161,690 334,457 114,574 258,917 1.1 Structured securities ------93026,037 1.2 Other debt securities 161,690 334,457 - - 161,690 334,457 113,644 232,880 2. Equity securities 114,042 370,485 - 8,250 114,042 378,735 105,668 303,531 2.1 Measured at fair value 114,031 318,848 - - 114,031 318,848 43,031 45,337 2.2 Measured at cost 11 51,637 - 8,250 11 59,887 62,637 258,194 3. UCITS units 910 21,778 - - 910 21,778 807 29,826 4. Loans ------5. Impaired assets ------6. Assets sold and not derecognized 42,140 - - - 42,140 - 103,645 104,782
Total 318,782 726,720 - 8,250 318,782 734,970 324,694 697,056
Financial assets available for sale as at December 31st, 2006 amounted to 1,053.8 million, up by 3.1% from 1,021.7 millions in the previous year.
Equity securities are represented by shares and units in immaterial companies.
Assets sold and not derecognized are entirely represented by securities sold through reverse repurchase agreements.
Fair value changes of “financial assets available for sale” are offset with the shareholders’ equity item “valuation reserves”, net of deferred tax.
205 Notes to the consolidated accounts
4.2 Financial assets available for sale: breakdown by debtor/issuer
(thousand euro) Banking Other 31-12-2006 31-12-2005 group companies
1. Debts securities 496,147 - 496,147 373,491 a) Governments and Central Banks 117,584 - 117,584 24,284 b) Other public entities - - - - c) Banks 208,570 - 208,570 139,714 d) Other issuers 169,993 - 169,993 209,493
2. Equity securities 484,527 8,250 492,777 409,199 a) Banks 115,316 - 115,316 105,581 b) Other issuers: 369,211 8,250 377,461 303,618 - insurance companies 48,206 - 48,206 64,600 - financial companies 149,600 - 149,600 102,562 - non-financial companies 124,465 - 124,465 93,803 - other 46,940 8,250 55,190 42,653
3. Units in UCITS 22,688 - 22,688 30,633
4. Loans - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
5. Impaired assets - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
6. Assets sold and not derecognized 42,140 - 42,140 208,427 a) Governments and Central Banks 20,439 - 20,439 113,567 b) Other public entities - - - - c) Banks 21,701 - 21,701 82,638 d) Other counterparties - - - 12,222
Total 1,045,502 8,250 1,053,752 1,021,750
206 Notes to the consolidated accounts
4.3 Financial assets available for sale: hedged assets
4.3.1 Banking group
Hedged assets 31-12-2006 31-12-2005 (thousand euro) Fair value Cash Fair value Cash flow flow
1. Debt securities 168,258 - 204,235 - 2. Equity securities - - 8 - 3. Units in UCITS 910 - 807 - 4. Loans - - - - 5. Portfolio - - - -
Total 169,168 - 205,050 -
4.3.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
4.3.3 Other companies
At the balance sheet date and at the end of the previous financial year no “fi- nancial assets available for sale, hedged” Other companies were reported.
4.4 Financial assets available for sale: assets under specific hedging
(thousand euro) Banking Other 31-12-2006 31-12-2005 group companies
1. Financial assets under specific fair value hedging: 169,168 - 169,168 196,671 a) interest rate risk 168,258 - 168,258 196,671 b) price risk - - - - c) exchange rate risk 910 - 910 - d) credit risk - - - - e) multiple risks - - - -
2. Financial assets under specific - - - 6 cash flow hedging: a) interest rate risk - - - - b) exchange rate risk - - - - c) other - - - 6
Total 169,168 - 169,168 196,677
207 Notes to the consolidated accounts
Financial assets available for sale under specific hedging are represented by fixed income debt securities, for which it was decided to hedge the risk of fair value changes linked to interest risks. The fair value change reported by said securities was recognized in the income statement under item 90 “Fair value adjustments in hedge accounting”.
4.5 Financial assets available for sale (other than sold and not dereco- gnized, and impaired): annual changes
4.5.1 Banking group
(thousand euro) Debt Equity Units in Loans Total securities securities UCITS
A. Opening balance 373,491 409,199 30,633 - 813,323
B. Increases 246,214 124,511 15,032 - 385,757 1. Purchase 8,482 25,903 12,503 - 46,888 (of which for business combinations) - - - - - 2. Positive fair value changes 56 72,017 2,529 - 74,602 3. Write-backs - 22,853 - - 22,853 - carried at income ------carried at equity - 22,853 - - 22,853 4. Transfers from other portfolios - - - - - 5. Other changes 237,676 3,738 - - 241,414
C. Decreases (123,558) (49,183) (22,977) - (195,718) 1. Sales (14) (37,910) - - (37,924) (of which for business combinations) - (14) - - (14) 2. Redemptions (39,177) - (1,945) - (41,122) 3. Negative fair value changes (1,128) (8,443) (883) - (10,454) 4. Impairment (10,013) (2,360) - - (12,373) - carried at income - (2,198) - - (2,198) - carried at equity (10,013) (162) - - (10,175) 5. Transfers to other portfolios - - (20,149) - (20,149) 6. Other changes (73,226) (470) - - (73,696)
D. Closing balance 496,147 484,527 22,688 - 1,003,362
Sub-items “B.1 – Purchases” and “C.1 – Sales” represent the accounting value of the purchase and sale transactions reported upon settling the transactions. In particular, “purchases” of equity securities include the acquisition of shares of Società Cattolica di Assicurazione worth 5.4 millions, shares of S.I.A. Parteci- pazioni for 5.2 millions, of CIR Food Scrl for 1 million, of Sofinco S.p.A for 0.8 millions, of Nuova Cooperativa Casearia for 0.5 millions.
208 Notes to the consolidated accounts
Sub-items “B.2 – Positive fair value changes” and “C.3 – Negative fair value changes” include the capital gains and losses, gross of their relevant fiscal effect, recognized in the shareholders’ equity under item 130 “Valuation reserves” in the balance sheet liabilities, net of the portion referring to securities under spe- cific hedging, which was recognized under item 90 “Fair value adjustments in hedge accounting”, as illustrated above.
Sub-item “B.5 – Increases: other changes” includes accrued interest credited to income under item 10 “interest income on securities”, as well as trading profit entered under item 100 “profit/loss on disposal of financial assets available for sale” in the income statement.
Sub-item “C.6 – Decreases: other changes” include accrued coupon interest charged to income under item 20 “interest expense on securities”, the write- down for the recognition of securities at amortized cost, and trading losses charged to income under item 100 “profit/loss on disposal of financial assets available for sale”.
4.5.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
4.5.3 Other companies
The only change in financial assets available for sale attributable to other com- panies refers to equity securities purchases for 8.2 millions.
Section 5 Financial assets held to maturity - Item 50
5.1 Financial assets held to maturity: breakdown by instrument
(thousand euro) Banking group Other companies 31-12-2006 31-12-2005 Book value Fair value Book value Fair value Book value Fair value Book value Fair value
1. Debt securities 79,052 77,671 450 450 79,502 78,121 134,738 136,217 1.1 Structured securities ------1.2 Other debt securities 79,052 77,671 450 450 79,502 78,121 134,738 136,217 2. Loans ------3. Impaired assets ------4. Assets sold and not derecognized 859,817 840,773 - - 859,817 840,773 741,976 737,483
Total 938,869 918,444 450 450 939,319 918,894 876,714 873,700
209 Notes to the consolidated accounts
On December 31st, 2006, financial assets held to maturity amounted to 939.3 millions, up by 7.1% from 876.7 millions at the end of 2005.
Investments belonging to this portfolio fall under a balanced asset and liability management strategy, designed to create a minimum income floor, by stabiliz- ing part of the interest income and the return on capital. Debt securities includ- ed in this item at the time of purchase generally have a fixed rate and a maxi- mum five year term.
Most securities included in this portfolio are used in repurchase agreements.
The criteria used to measure the fair value are illustrated in Chapter A of these explanatory notes.
(thousand euro) Banking Other 31-12-2006 31-12-2005 group companies
1. Debt securities 79,052 450 79,502 134,738 a) Governments and Central banks 60,789 - 60,789 6,139 b) Other public entities - - - - c) Banks 18,263 450 18,713 29,920 d) Other issuers - - - 98,679
2. Loans - - - - a) Governments and Central banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
3. Impaired assets - - - - a) Governments and Central banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - -
4. Assets sold and not derecognized 859,817 - 859,817 741,976 a) Governments and Central banks 731,071 - 731,071 741,976 b) Other public entities - - - - c) Banks 26,679 - 26,679 - d) Other counterparties 102,067 - 102,067 -
Total 938,869 450 939,319 876,714
210 Notes to the consolidated accounts
5.2 Financial assets held to maturity: breakdown by debtor/issuer
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
5.3 Financial assets held to maturity: hedged assets 1. Exchange rate risk 806 - 806 - 2. Credit risk - - - - 3. Multiple risks - - - -
Total 806 - 806 -
5.4 Financial assets held to maturity: annual changes
(thousand euro) Debt Loans Total securities
A. Opening balance 134,738 - 134,738
B. Increases 535,811 - 535,811 1. Purchase 107,978 - 107,978 (of which for business combinations) 740 - 740 2. Write-backs - - - 3. Transfers from other portfolios - - - 4. Other changes 427,833 - 427,833
C. Decreases (591,047) - (591,047) 1. Sales - - - (of which for business combinations) - - - 2. Redemptions (33,922) - (33,922) 3. Write-downs - - - 4. Transfers to other portfolios - - - 5. Other changes (557,125) - (557,125)
D. Closing balance 79,502 - 79,502
Sub-items “B.1 – Purchases” and “C.1 – Sales” represent the accounting values of purchase and sale transactions reported upon settling the transactions.
Sub-item “B.4 – Increases: other changes” include coupon accrued interest cred- ited to income under item 10 “interest income on securities”.
Sub-item “C.4 – Decreases: other changes” include the coupon accrued interest charge to income under item 20 “interest expense on securities”, as well as the write-down for the recognition of securities at amortized cost, charged under the same income item.
211 Notes to the consolidated accounts
Section 6 Due from banks - Item 60
6.1 Due from banks: breakdown by instrument
6.1.1 Banking group
(thousand euro) 31-12-2006 31-12-2005
A. Due from Central banks 685,660 1,523,991 1. Time deposits - - 2. Compulsory reserve 685,178 1,523,602 3. Repurchase agreements - - 4. Other 482 389
B. Due from other banks 7,994,821 4,323,565 1. Checking accounts and demand deposits 1,369,768 323,780 2. Time deposits 1,833,738 1,557,301 3. Other loans 4,791,315 2,442,484 3.1 Repurchase agreements 3,677,572 1,994,824 3.2 Finance lease - - 3.3 Other 1,113,743 447,660 4, Debt securities - - 4.1 Structured securities - - 4.2 Other securities - - 5. Impaired assets - - 6. Assets sold and not derecognized - -
Total (book value) 8,680,481 5,847,556
Total (fair value) 8,680,487 5,847,556
Due from banks as at December 31st, 2006 came in at 8,680.5 millions, up by 48.4% from 5,847.6 millions in the previous year. The breakdown analysis high- lights a strong increase in checking accounts and deposits, as well as a big growth in other loans, whose increase is attributable also to the transfer of loans outstanding with Leasimpresa S.p.A. (included and eliminated in item 70 “due from customers”), which, as a result of the merger by acquisition conducted at the end of 2006 with Banca Italease S.p.A., have been transferred to the latter.
The criteria used to measure the fair value are illustrated in Chapter A of these explanatory notes. Since the counterparties have a high standing and since most loans are short term, the fair value of due from banks is basically in line with the book value.
212 Notes to the consolidated accounts
6.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
6.1.3 Other companies
At the balance sheet date due from banks attributable to other companies amounted to 254 thousand euro, down from 797 thousand on December 31st, 2005, and are exclusively represented by checking accounts and deposits.
6.2 Due from banks: assets under specific hedging
6.2.1 Banking group
No due from banks under specific hedging attributable to the banking group have been reported.
6.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
6.2.3 Other companies
No due from banks under specific hedging attributable to other companies have been reported.
6.3 Finance lease
The Group reported no finance lease receivables from banks.
213 Notes to the consolidated accounts
Section 7 Loans to customers - Item 70
7.1 Loans to customers: breakdown by instrument
7.1.1 Banking group
(thousand euro) 31-12-2006 31-12-2005
1. Checking accounts 10,318,965 9,452,039 2. Repurchase agreements 514,744 247,912 3. Mortgages 18,092,144 13,835,282 4. Credit cards, personal loans and payroll secured loans 467,672 295,307 5. Finance leases 48 1,783,358 6. Factoring 307,166 39,654 7. Other 14,339,636 12,561,736 8. Debt securities 59,937 48,952 8.1 Structured securities - - 8.2 Other debt securities 59,937 48,952 9. Impaired assets 1,144,205 1,358,386 10. Assets sold and not derecognized - 653,267
Total (book value) 45,244,517 40,275,893
Total (fair value) 46,528,076 41,081,248
On December 31st, 2006 gross loans to customers totaled 46,123.9 millions, up by 11.7% from 41,308.6 millions on December 31st, 2005. Net of total write- downs, loans at the end of 2006 stood at 45,244.6 millions, up by 12.3% with respect to the previous year. Note, that 2006 data do not include loans to Leasimpresa (merged into Banca Italease alt the end of 2006) as well as other equity investments sold during the year. As at December 31st, 2005, the loans to these companies were repre- sented by finance leases worth 1,783.4 millions and other loans for 836.2 mil- lions. Net of these components for comparability reasons, gross loans report a 19.3% increase, while net of write-downs, total loans grew by 20.2%. Sub-item “debt securities” includes the junior notes from the securitization con- ducted by the Parent company in 2001 totaling 3.1 million, as well as accrued interest income generated by the higher yield recognized to the note, which at the balance sheet date totaled 7.7 millions (8.3 million as at December 31st, 2005). The sub-item also includes 47.4 million worth of floating rate corporate bonds subscribed by the Group to guarantee its credit support to the issuing companies. The greater exposures regard Marka Finance for 27.7 millions and Seci for 15 millions.
214 Notes to the consolidated accounts
The decrease in impaired assets, in the amount of 214.2 millions, is due in par- ticular to non-recurring disposals of non-performing land loans. Profit on dis- posal of assets performed during the year totaled 36.4 millions, and was recog- nized under item 100 “profit on disposal of loans” in the income statement. All assets sold and not derecognized as at December 31st, 2005 refer to Leasim- presa.
The criteria used to measure the fair value are illustrated in Chapter A of these explanatory notes. For “impaired loans”, please refer to Chapter E – Risks and associated hedging policies, Section 1 – Credit risk.
7.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
7.1.3 Other companies
At the balance sheet date, customer loans pertaining to other companies totaled 46 thousand euro, and referred to sub-item “other”. At the end of the previous year, no loans attributable to other companies were reported.
215 Notes to the consolidated accounts
7.2 Loans to customers: breakdown by debtor/issuer
7.2.1 Banking group
(thousand euro) 31-12-2006 31-12-2005
1. Debt securities 59,937 48,952 a) Governments - - b) Other public agencies - - c) Other issuers 59,937 48,952 - non-financial companies 48,089 43,802 - financial companies 11,848 3,141 - insurance companies - - - other - 2,009
2. Loans to 44,040,374 38,215,288 a) Governments 22,187 90,002 b) Other public agencies 233,626 223,075 c) Other counterparties 43,784,561 37,902,211 - non-financial companies 31,307,478 28,390,928 - financial companies 4,195,115 3,144,761 - insurance companies 581 134 - other 8,281,387 6,366,388
3. Impaired assets 1,144,206 1,358,386 a) Governments - - b) Other public agencies 6,397 7,074 c) Other counterparties 1,137,809 1,351,312 - non-financial companies 925,196 1,048,795 - financial companies 6,563 14,803 - insurance companies 36 - - other 206,014 287,714
4. Assets sold and not derecognized - 653,267 a) Governments - - b) Other public agencies - - c) Other counterparties - 653,267 - non-financial companies - 624,167 - financial companies - 1,008 - insurance companies - - - other - 28,092
Total 45,244,517 40,275,893
All assets sold and not derecognized as at December 31st, 2005 refer to Leasim- presa.
216 Notes to the consolidated accounts
7.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
7.2.3 Other companies
Loans attributable to other companies fall under the class “other counterpar- ties”.
7.3 Loans to customers: assets under specific hedging
7.3.1 Banking group
(thousand euro) 31-12-2006 31-12-2005
1. Loans under specific fair value hedging 84,713 - a) interest rate risk - - b) exchange rate risk - - c) credit risk - - d) multiple risks 84,713 - 2. Loans under specific cash flow hedging - 89,856 a) interest rate risk - - b) exchange rate risk - - c) other - 89,856
Total (book value) 84,713 89,856
7.3.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
7.3.3 Other companies
No customer loans under specific hedging attributable to other companies were reported.
217 Notes to the consolidated accounts
7.4 Finance lease
As at December 31st, 2006, the Group reported no finance lease receivables.
Illustrated below is the information required by IAS 17 on finance lease receiv- ables as at December 31st, 2005, entirely referred to Leasimpresa. Figures in- clude also impaired loans and assets sold and not derecognized for 28.4 million and 653.2 million euro, respectively.
Minimum payments Gross investment 31-12-2005 Principal (thousand euro) Explicit loans of which: Times frames of which: secured Interest unsecured residual value residual value
Up to 3 months 3,652 374,404 31,111 405,515 1,168 Between 3 months and 1 year 6,228 326,191 61,188 387,379 5,880 Between 1 year and 5 years 11,006 1,178,108 175,401 1,353,509 83,111 Beyond 5 years 983 564,737 46,347 611,084 193,054 Undefined term 8,568 17,238 - 17,238 970
Gross total 30,437 2,460,678 314,047 2,774,725 284,183
Write-downs (3,878) (22,203)
Net total 26,559 2,438,475 314,047
218 Notes to the consolidated accounts
Section 8 Hedging derivatives - Item 80
8.1 Hedging derivatives: breakdown by type of contract and underlying asset
8.1.1 Banking group
(thousand euro) Interest Currency Equity Loans Other 31-12-2006 rates and gold securities
A. Quoted derivatives 1. Fìnancial derivatives: ------a) With exchange of capital ------purchased options ------other derivatives ------b) Without exchange of capital ------purchased options ------other derivatives ------2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------
Total A ------
B. Unquoted derivatives 1. Fìnancial derivatives: 38,847 ----38,847 a) With exchange of capital ------purchased options ------other derivatives ------b) Without exchange of capital 38,847 ----38,847 - purchased options ------other derivatives 38,847 ----38,847 2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------
Total B 38,847 ----38,847
31/12/2006 38,847 ----38,847
31/12/2005 75 ----75
Positive values of hedging derivatives are illustrated in this Section, while fair val- ue changes of hedged assets and liabilities are illustrated in Section 9 of assets “fair value change of assets in hedged portfolios” and in Section 7 of liabilities “fair value change of liabilities in hedged portfolios”.
219 Notes to the consolidated accounts
8.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
8.1.3 Other companies
No hedging derivatives attributable to other companies were reported.
8.2 Hedging derivatives: breakdown by hedged portfolio and by type of hedge (book value)
8.2.1 Banking group
Fair Value Cash flow Specific (thousand euro) Interest Exchange Credit Price Multiple Generic Specific Generic rate risk rate risk risk risk risk
1. Financial assets avaialbe for sale 22 - - - -X-X 2. Loans and receivables - - -X-X-X 3. Financial assets held to maturity X - -X-X-X 4. Portfolio XXXXX-X-
Total assets 22 ------
1. Financial liabilities 28,801 - -X-X-X 2. Portfolio XXXXX8,422 X 1,602
Total liabilities 28,801 ----8,422 - 1,602
Positive values of derivatives “fair value – specific” refer to hedging derivatives for the securities illustrated in Section 4 illustrated above.
8.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
8.2.3 Other companies
No hedging derivatives attributable to other companies were reported.
220 Notes to the consolidated accounts
Section 9 Fair value change of assets in hedged portfolios - Item 90
9.1 Fair value change of hedged assets: breakdown by hedged portfolios
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Positive fair value changes - - - - 1.1 in specific portfolios - - - - a) loans and receivables - - - - b) assets available for sale - - - - 1.2 Aggregate - - - -
2. Negative fair value changes (4,093) - (4,093) (1,014) 2.1 in specific portfolios (4,093) - (4,093) (1,014) a) loans and receivables (4,093) - (4,093) (1,014) b) financial assets available for sale - - - - 2.2 Aggregate - - - -
Total (4,093) - (4,093) (1,014)
The negative fair value change of assets in hedged portfolios refers to mortgages recognized under item loans to customers. Assets under macrohedging are il- lustrated in table 9.2. below.
9.2 Banking group assets under macrohedging of interest rate risk: breakdown
(thousand euro) 31-12-2006 31-12-2005
1. Loans 114,309 139,800 2. Assets available for sale - - 3.. Portfolio - -
Total 114,309 139,800
221 Notes to the consolidated accounts
Section 10 Equity investments - Item 100
10.1 Equity investments in jointly controlled companies (carried at equi- ty) and in companies under a significant influence: shareholding in- formation
Type of Shareholding (thousand euro) Head office relation Voting (a) Company % share rights %
A. Companies under joint control
AF Mezzanine SGR S.p.A. Milan (7) Aletti Merchant 50.000% 50.000% Linea S.p.A. Milan (7) BPVN 47.957% 47.957% Novara Vita S.p.A. Novara (7) BPVN 50.000% 50.000% Polo Finanziario S.p.A. Verona (7) BPVN 33.333% 33.333%
B. Companies under a significant influence
Abitando S.p.A. Milan (8) Aletti Merchant 20.000% 20.000% Banca per il Leasing - Italease S.p.A. Milan (8) BPVN 13.139% 13.139% Holding 14.657% 14.657% Credito Bergamasco 2.923% 2.923% BPV Vita S.p.A. Verona (8) BPVN 35.000% 35.000% Credito Bergamasco 15.000% 15.000% Cornel S.a.r.l. L - Luxembourg (8) Aletti Merchant 39.900% 39.900% Estates Capital Venture S.A. L - Luxembourg (8) Aletti Merchant 45.000% 45.000% Delta S.p.A. Bologna (8) BPVN 20.000% 20.000% G.I. Holding S.p.A. Milan (8) Aletti Merchant 29.346% 30.412% GEMA Magazzini Generali BPV-BSGSP S.p.A. Castelnovo Sotto (RE) (8) BPVN 33.333% 33.333% Gruppo Operaz. Underwriting Banche Popolari S.r.l. Milan (8) Banca Aletti 22.500% 22.500% IPL I S.C.A., SICAR L - Luxembourg (8) Aletti Merchant 21.620% 21.620% IPL II S.C.A., SICAR L - Luxembourg (8) Aletti Merchant 20.830% 20.830% Istituto Centrale delle Banche Pop. Italiane S.p.A. Rome (8) BPVN 15.000% 15.000% Holding 7.089% 7.089% Novara Promuove S.r.l. Novara (8) BPN 49.000% 49.000% Pama S.p.A. Rovereto (TN) (8) Aletti Merchant 24.000% 24.000% Phoenix S.p.A. Verona (8) Aletti Merchant 40.000% 40.000% Soc. Coop. fra le Banche Pop. "L.Luzzatti" S.c.r.l. Rome (8) BPVN 25.100% 25.100% Triera S.p.A. Rovigo (8) Bio Energy 49.000% 49.000% Veronagest S.A. L - Luxembourg (8) Aletti Merchant 37.150% 37.150%
(a) Type of relationship: (7) Joint control (8) Associate
222 Notes to the consolidated accounts
10.2 Equity investments in jointly controlled companies and companies under a significant influence: financial highlights
(thousand euro) Total Total Net income Sharehold. Book Fair assets revenues (Loss) Netto value value
A. Companies carried at equity
A.1 Under joint control 138.978
AF Mezzanine SGR S.p.A. 1,417 724 (134) 1,267 637 X Linea S.p.A. (1) 3.322.623 368.985 16.719 95.312 82.068 X Novara Vita S.p.A. - 401,504 20,943 90,401 41,260 X Polo Finanziario S.p.A. (2) 45.133 299 20 45.038 15.013 X
A.2 Under significant influence 657,957
Abitando S.p.A. 50 - - 50 40 * Banca per il Leasing - Italease S.p.A. (1) 24.023.586 1.117.668 178.236 1.146.241 455.609 1.111.684 BPV Vita S.p.A. 3,720,080 803,916 25,026 119,639 53,903 * Cornel S.a.r.l. 7,350 155,657 150,893 4,418 1,872 * Estates Capital Venture S.A. 31 - - 31 14 * Delta S.p.A. (1) 3.282.666 445.656 20.681 169.315 40.781 * G.I. Holding S.p.A. ----779 * GEMA Magazzini Generali BPV-BSGSP S.p.A. 4,800 1,606 (251) 4,124 835 * Gruppo Operaz. Underwriting Banche Popolari S.r.l. 84 17 (9) 77 18 * IPL I S.C.A., SICAR 21,642 - (41) 17,978 3,881 * IPL II S.C.A., SICAR 98,845 - (87) 98,845 20,171 * Istituto Centrale delle Banche Pop. Italiane S.p.A. 4,494,984 368,302 31,879 285,065 62,969 * Novara Promuove S.r.l. ----41 * Pama S.p.A. (3) 56,077 40,759 558 5,430 1,560 * Phoenix S.p.A. 351 1 (43) 222 187 * Soc. Coop. fra le Banche Pop. "L.Luzzatti" S.c.r.l. (4) 257 17 - 248 63 * Triera S.p.A. (5) 13,733 274 (316) 11,953 1,019 * Veronagest S.A. (3) 121,694 37,314 4,028 51,220 14,215 *
B. Companies under proportionate consolidation
* Unlisted company (1) Data refer to consolidated financial statements (2) Shareholders' equity is net of subscribed but not paid in capital (3) Data refer to financial statements as at 31/12/2005 (4) Data refer to financial statements as at 30/09/2006 (5) Shareholders' equity does not include commitments for capital payments
223 Notes to the consolidated accounts
10.3 Equity investments: annual changes
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
A. Opening balance 431,025 - 431,025 334,271
B. Increases 606,503 1,019 607,522 120,745 B.1 Purchases 123,229 1,019 124,248 73,864 B.2 Write-backs - - - - B.3 Revaluations - - - - B.4 Other changes 483,274 - 483,274 46,881
C. Decreases (241,612) - (241,612) (23,991) C.1 Sales (215,468) - (215,468) (20,610) C.2 Write.downs - - - - C.3 Other changes (26,144) - (26,144) (3,381)
D. Closing balance 795,916 1,019 796,935 431,025
E. Total revaluations - - - -
F. Total impairments - - - -
The main increases occurred during the year refer to: • Linea S.p.A.: purchase of an additional 15.755% stake with a total outlay of 47.7 millions, inclusive of accessory charges; • Delta S.p.A.: subscription of a 10% stake and option exercise on an addi- tional 10% stake, against a total cost of 40.3 million euro; • BPV Vita S.p.A.: subscription of the capital increase for 7.5 millions; • Banca Italease S.p.A.: increase in the shareholding value as a result of the merger by acquisition of Leasimpresa.
The main decrease occurred during the year refers to the disposal of a 4.01% stake in Banca Italease. The deal generated the recognition of a proceed worth 97.6 millions, before tax;
Please refer to the Report on operations for further details on the deals con- ducted during the year.
10.4 Commitments relating to investments in jointly controlled companies
No commitments relating to investments in jointly controlled companies were re- ported.
10.5 Commitments relating to investments in companies under a signif- icant influence
No commitments relating to investments in companies under a significant influ- ence were reported.
224 Notes to the consolidated accounts
Section 11 Technical insurance reserves reassured with third parties - Item 110
The Group has no shareholding in insurance companies.
Section 12 Property, Plant and Equipment - Item 120
As at December 31st, 2006, PPE amounted to 538 millions, up by 0.4% from 536 millions at the end of the previous year.
12.1 Property, plant and equipment: breakdown of assets measured at cost
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
A. Operational property 1. Owned 484,131 2,098 486,229 481,429 a) land 72,733 - 72,733 74,023 b) buildings 347,739 1,692 349,431 352,255 c) furniture 19,566 49 19,615 16,802 d) electronic systems 34,703 357 35,060 31,726 e) other 9,390 - 9,390 6,623 2. Under financial lease 19,463 599 20,062 19,157 a) land - - - - b) buildings 19,463 473 19,936 19,053 c) furniture - - - - d) electronic systems - - - 5 e) other - 126 126 99
Total A 503,594 2,697 506,291 500,586
B. Investment property 1. Owned 31,756 - 31,756 35,413 a) land 14,406 - 14,406 15,510 b) buildings 17,350 - 17,350 19,903 2. Under financial lease - - - - a) land - - - - b) buildings - - - -
Total B 31,756 - 31,756 35,413
Total (A+B) 535,350 2,697 538,047 535,999
225 Notes to the consolidated accounts
Set out below is the estimated useful life of depreciated property, plant and equipment, by class of asset: • land indefinite • buildings 33 years • investment property 33 years • furniture 7-9 years • equipment 3-7 years.
12.2 Property, plant and equipment: breakdown of assets measured at fair value or revalued
The Group has no tangible assets measured at fair value or revalued.
226 Notes to the consolidated accounts
12.3 Property, plant and equipment used in operations: annual changes
12.3.1 Banking group
(thousand euro) Land Buildings Furniture Electronic Other Total systems
A. Gross opening balance 74,023 713,229 98,021 189,394 51,756 1,126,423 A.1 Net write-downs - (343,751) (81,278) (157,940) (45,137) (628,106) A.2 Net opening balance 74,023 369,478 16,743 31,454 6,619 498,317
B. Increases: 371 66,122 6,598 20,892 5,996 99,979 B.1 Purchase 41 22,192 6,553 20,142 5,935 54,863 (of which for business combinations) 41 1,428 266 801 641 3,177 B.2 Capitalized expenditure on improvements - 337 - - 31 368 B.3 Write-backs ------B.4 Positive fair value changes carried at: ------a) net equity ------b) income ------B.5 Positive exchange differences - - 2 11 - 13 B.6 Transfer from investment properties B.7 Other changes 330 43,593 43 739 30 44,735
C. Decreases (1,661) (68,398) (3,775) (17,643) (3,225) (94,702) C.1 Sale (867) (45,243) (338) (1,232) (423) (48,103) (of which for business combinations) (737) (1,546) (310) (372) (367) (3,332) C.2 Depreciation - (22,606) (3,434) (16,257) (2,748) (45,045) C.3 Impairment losses charged to - (7) - (140) - (147) a) net equity ------b) income - (7) - (140) - (147) C.4 Negative fair value changes charged to: ------a) net equity ------b) income ------C.5 Negative exchange differences - - (2) (10) - (12) C.6 Transfer to: ------a) investment property b) discontinued operations ------C.7 Other changes (794) (542) (1) (4) (54) (1,395)
D. Net closing balance 72,733 367,202 19,566 34,703 9,390 503,594 D.1 Total net write-downs - (351,160) (80,522) (158,483) (45,196) (635,361) D.2 Gross closing balance 72,733 718,362 100,088 193,186 54,586 1,138,955
E. Measured at cost ------
227 Notes to the consolidated accounts
12.3.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
12.3.3 Other companies
(thousand euro) Land Buildings Furniture Electronic Other Total systems
A. Gross opening balance - 2,319 392 1,097 1,418 5,226 A.1 Net write-downs - (489) (333) (820) (1,315) (2,957) A.2 Net opening balance - 1,830 59 277 103 2,269
B. Increases: - 707 16 270 79 1,072 B.1 Purchase - 277 16 270 79 642 (of which for business combinations) - (1) 11 - - 10 B.2 Capitalized expenditure on improvements ------B.3 Write-backs ------B.4 Positive fair value changes carried at: ------a) net equity ------b) income ------B.5 Positive exchange differences ------B.6 Transfer from investment properties B.7 Other changes - 430 - - - 430
C. Decreases - (372) (26) (190) (56) (644) C.1 Sale ----(4)(4) (of which for business combinations) ------C.2 Depreciation - (50) (26) (190) (52) (318) C.3 Impairment losses charged to ------a) net equity ------b) income ------C.4 Negative fair value changes charged to: ------a) net equity ------b) income ------C.5 Negative exchange differences ------C.6 Transfer to: - (233) - - - (233) a) investment property b) discontinued operations - (233) - - - (233) C.7 Other changes - (89) - - - (89)
D. Net closing balance - 2,165 49 357 126 2,697 D.1 Total net write-downs - (787) (103) (349) (95) (1,334) D.2 Gross closing balance - 2,952 152 706 221 4,031
E. Measured at cost ------
228 Notes to the consolidated accounts
12.4 Investment property: annual changes
Banking group Other companies (thousand euro) Land Building Land Building Land Building
A. Opening balance 15,510 19,903 - - 15,510 19,903
B. Increases 279 427 - - 279 427 B.1 Purchase - 197 - - - 197 (of which for business combinations) ------B.2 Capitalized expenditure on improvements ------B.3 Positive fair value changes ------B.4 Write-backs ------B.5 Positive exchange differences ------B.6 Transfers from operational property ------B.7 Other changes 279 230 - - 279 230
C. Decreases (1,383) (2,980) - - (1,383) (2,980) C.1 Sale (1,380) (1,572) - - (1,380) (1,572) (of which for business combinations) (185) (956) - - (185) (956) C.2 Depreciation - (1,133) - - - (1,133) C.3 Negative fair value changes ------C.4 Impairment losses ------C.5 Negative exchange differences ------C.6 Transfers to other asset portfolios ------a) operational property ------b) non-current assets available for sale ------C.7 Other changes (3) (275) - - (3) (275)
D. Closing balance 14,406 17,350 - - 14,406 17,350
E. Measured at fair value 29,496 53,060 - - 29,496 53,060
12.5 Commitments to purchase property, plant and equipment (IAS 16/74.c)
As at December 31st, 2006, commitments to purchase property amounted to 87 thousand, to purchase equipment 213 thousand.
229 Notes to the consolidated accounts
Section 13 Intangible assets - Item 130
13.1 Intangible assets: breakdown by type of asset
Banking group Other companies 31-12-2006 31-12-2005 (thousand euro) Limited Unlimited Limited Unlimited Limited Unlimited Limited Unlimited useful life useful life useful life useful life useful life useful life useful life useful life
A.1 Goodwill X 412,832 X 195 X 413,027 X 362,617 A.1.1 Attributable to the group X 412,832 X 195 X 413,027 X 362,617 A.1.2 Attributable to third parties X - X - X - X - A.2 Other intangible assets 34,282 - 444 - 34,726 - 32,972 - A.2.1 Assets measured at cost: 34,282 - 444 - 34,726 - 32,972 - a) Internally generated intangible assets ------b) Other assets 34,282 - 444 - 34,726 - 32,972 - A.2.2 Assets measured at fair value ------a) Internally generated intangible assets ------b) Other assets ------
Total 34,282 412,832 444 195 34,726 413,027 32,972 362,617
An impairment test was carried out on goodwill, that is, we verified that the val- ues were lower than the recoverable value of all cash flow generating units in- cluded in the accounts, to which goodwill was attributed. The test reference date is June 30th, 2006. To define the recoverable value of the above mentioned units we used the “fair value” method, namely taking market multiples of a group of peer companies, listed on the Italian electronic market, engaging in the commercial and invest- ment banking activities and in asset management. The peer group and the as- sociated market prices were derived also from independent external databanks. Multiples were calculated based on the average daily closing prices in the 12 months before the test date; the analytical data of the sample were derived from official account reports. Finally, the fair value, that was calculated based on the mean of the sample’s multiples, was incremented by the minority discount, which is generally expressed by market prices. The tests conducted in compliance with the above procedure did not highlight any impairment loss.
230 Notes to the consolidated accounts
13.2 Intangible assets: annual changes
13.2.1 Banking group
Other intangible assets (thousand euro) Goodwill Internally generated Other Total Lim. Unlim. Lim. Unlim.
A. Opening balance 362,617 - - 43,343 - 405,960 A.1 Total net write-downs - - - (10,829) - (10,829) A.2 Net opening balance 362,617 - - 32,514 - 395,131
B. Increases 50,309 - - 31,971 - 82,280 B.1 Purchase 50,309 - - 31,948 - 82,257 (of which for business combinations) 28,779 - - 703 - 29,482 B.2 Increase in internal intangible assets X ----- B.3 Write-backs X ----- B.4 Positive fair value changes: ------net equity X ------income X ----- B.5 Positive exchange differences - - - 23 - 23 B.6 Other changes ------
C. Decreases (94) - - (30,203) - (30,297) C.1 Sale (38) - - (429) - (467) (of which for business combinations) (38) - - (429) - (467) C.2 Write-downs - - - (29,737) - (29,737) - Amortization X - - (29,737) - (29,737) - Write-downs ------+ net equity X ----- + income ------C.3 Negative fair value changes ------carried at equity X ------carried at income X ----- C.4 Transers to non-current assets available for sale ------C.5 Negative exchange differences - - - (23) - (23) C.6 Other changes (56) - - (14) - (70)
D. Net closing balance 412,832 - - 34,282 - 447,114 D.1 Total net write-downs - - - (6,504) - (6,504)
E. Gross closing balance 412,832 - - 40,786 - 453,618
F. Measured at cost ------
231 Notes to the consolidated accounts
13.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
13.2.3 Other companies
Other intangible assets (thousand euro) Goodwill Internally generated Other Total Lim. Unlim. Lim. Unlim.
A. Opening balance - - - 585 - 585 A.1 Total net write-downs - - - (127) - (127) A.2 Net opening balance - - - 458 - 458
B. Increases 195 - - 386 - 581 B.1 Purchase 195 - - 386 - 581 (of which for business combinations) 195 ----195 B.2 Increase in internal intangible assets X ----- B.3 Write-backs X ----- B.4 Positive fair value changes: ------net equity X ------income X----- B.5 Positive exchange differences ------B.6 Other changes ------
C. Decreases - - - (400) - (400) C.1 Sale ------(of which for business combinations) ------C.2 Write-downs - - - (400) - (400) - Amortization X - - (400) - (400) - Write-downs ------+ net equity X ----- + income ------C.3 Negative fair value changes ------carried at equity X ------carried at income X ----- C.4 Transers to non-current assets available for sale ------C.5 Negative exchange differences ------C.6 Other changes ------
D. Net closing balance 195 - - 444 - 639 D.1 Total net write-downs - - - (152) - (152)
E. Gross closing balance 195 - - 596 - 791
F. Measured at cost ------
232 Notes to the consolidated accounts
13.3 Other information
As at December 31st, 2006 no commitments referring to intangible assets were reported.
Section 14 Tax assets and liabilities - Item 140 of assets and Item 80 of liabilities
14.1 Deferred tax assets: breakdown
14.1.1 Banking group
(thousand euro) IRES IRAP Other 31-12-2006 31-12-2005
A. Through profit and loss Impairment of loans deductible in coming financial years 65,754 - - 65,754 89,615 Provisions and value adjustments deductible in coming financial years 79,617 2,365 - 81,982 83,841 Fair value measurement of financial assets and liabilities deductible in coming financial years 68,835 8,663 - 77,498 65,321 Deferred taxes on infragroup capital gains eliminated upon consolidation 27,579 - - 27,579 27,648 Personnel costs and termination benefit provisions deductible in coming financial years 47,160 - - 47,160 23,306 Impairment of equity investments deductible in coming financial years 7,927 - - 7,927 15,972 Depreciation of non core property deductible in coming financial years 5,583 66 - 5,649 4,945 Other 42,793 3,530 889 47,213 21,326
Total A 345,248 14,624 889 360,761 331,974
B. Through net equity Fair value measurement of financial assets available for sale 10,076 - 223 10,299 11,250 Other 7 - - 7 455
Total B 10,083 - 223 10,306 11,705
Total (A+B) 355,331 14,624 1,112 371,067 343,679
14.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
233 Notes to the consolidated accounts
14.1.3 Other companies
No deferred tax assets attributable to other companies were reported.
14.2 Deferred tax liabilities: breakdown
14.2.1 Banking group
(thousand euro) IRES IRAP Other 31-12-2006 31-12-2005
A. Through profit and loss Fair value measurement of financial instruments taxable in coming financial years 63,340 8,806 - 72,146 69,395 Goodwill impairments deducted but not yet charged to income 25,072 3,393 - 28,465 25,372 Other write-downs deducted but not yet charged to income 30,770 2,325 - 33,095 33,705 Deferred taxes on retained earnings of companies carried at equity 7,543 - - 7,543 2,187 Capital gains taxable in coming years 11,870 1,452 - 13,322 1,724 Other 41,905 5,427 191 47,523 1,294
Totale A 180,500 21,403 191 202,094 133,677
B. Through net equity Fair value measurement of financial assets available for sale 15,156 49 - 15,205 11,410 Other 5,313 148 951 6,412 2,962
Totale B 20,469 197 951 21,617 14,372
Totale (A+B) 200,969 21,600 1,142 223,711 148,049
14.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
234 Notes to the consolidated accounts
14.2.3 Other companies
(thousand euro) IRES IRAP Other 31-12-2006 31-12-2005
A. Through profit and loss Fair value measurement of financial instruments taxable in coming financial years ----- Goodwill impairments deducted but not yet charged to income ----- Other write-downs deducted but not yet charged to income 19 2 - 21 8 Deferred taxes on retained earnings of companies carried at equity ----- Capital gains taxable in coming years ----- Other 7 - - 7 35
Totale A 26 2 - 28 43
B. Through net equity Fair value measurement of financial assets available for sale ----- Other 54 7 - 61 15
Totale B 54 7 - 61 15
Totale (A+B) 80 9 - 89 58
235 Notes to the consolidated accounts
14.3 Changes in deferred tax assets (through profit and loss)
(thousand euro) Banking Other group companies 2006 2005
1. Opening balance 331,974 - 331,974 403,325
2. Increases 163,949 1 163,950 122,995 2.1 Deferred taxes assets for the year 159,807 1 159,808 121,602 a) for prior years 14,214 1 14,215 394 b) due to changes in accounting standards - - - 868 c) write-backs 45 - 45 1,966 d) other 145,548 - 145,548 118,374 2.2 New taxes or tax rate increases 110 - 110 1,014 2.3 Other increases 4,032 - 4,032 379 (of which for business combinations) 472 - 472 -
3. Decreases (135,162) - (135,162) (194,346) 3.1 Deferred taxes assets derecognized over the year (80,246) - (80,246) (140,837) a) transfers (80,246) - (80,246) (139,132) b) write-down of non-recoverable items - - - (1) c) changes in accounting standards - - - (1,704) 3.2 Tax rate reductions (381) - (381) - 3.3 Other decreases (54,535) - (54,535) (53,509) (of which for business combinations) (5,881) - (5,881) -
4. Closing balance 360,761 1 360,762 331,974
236 Notes to the consolidated accounts
14.4 Changes in deferred tax liabilities (through profit and loss)
(thousand euro) Banking Other group companies 2006 2005
1. Opening balance 133,677 43 133,720 166,933
2, Increases 160,426 16 160,442 67,748 2.1 Deferred taxes assets for the year 145,315 16 145,331 66,985 a) for prior years 13,909 - 13,909 377 b) due to changes in accounting standards 109 - 109 15 c) other 131,297 16 131,313 66,593 2.2 New taxes or tax rate increases 64 - 64 549 2.3 Other increases 15,047 - 15,047 214 (of which for business combinations) - - - -
3. Decreases (92,009) (31) (92,040) (100,961) 3.1 Deferred taxes assets derecognized over the year (90,400) - (90,400) (100,961) a) transfers (64,669) - (64,669) (90,379) b) changes in accounting standards - - - (268) c) other (25,731) - (25,731) (10,314) 3.2 Tax rate reductions (528) - (528) - 3.3 Other decreases (1,081) (31) (1,112) - (of which for business combinations) (364) (31) (395) -
4. Closing balance 202,094 28 202,122 133,720
237 Notes to the consolidated accounts
14.5 Changes in deferred tax assets (offset in equity)
(thousand euro) Banking Other group companies 2006 2005
1. Opening balance 11,705 - 11,705 12,006
2. Increases 1,608 - 1,608 4,236 2.1 Deferred taxes assets for the year 1,606 - 1,606 4,235 a) for prior years - - - - b) due to changes in accounting standards - - - - c) other 1,606 - 1,606 4,235 2.2 New taxes or tax rate increases 2 - 2 1 2.3 Other increases - - - - (of which for business combinations) - - - -
3. Decreases (3,007) - (3,007) (4,537) 3.1 Deferred taxes assets derecognized over the year (96) - (96) (3,101) a) transfers (96) - (96) (3,101) b) write-down of non-recoverable items - - - - c) changes in accounting standards - - - - 3.2 Tax rate reductions - - - - 3.3 Other decreases (2,911) - (2,911) (1,436) (of which for business combinations) - - - -
4. Closing balance 10,306 - 10,306 11,705
238 Notes to the consolidated accounts
14.6 Changes in deferred tax liabilities (offset in equity)
(thousand euro) Banking Other group companies 2006 2005
1. Opening balance 14,372 15 14,387 4,064
2. Increases 9,835 6 9,841 13,018 2.1 Deferred taxes assets for the year 9,229 - 9,229 10,325 a) for prior years - - - 1,305 b) due to changes in accounting standards - - - 152 c) other 9,229 - 9,229 8,868 2.2 New taxes or tax rate increases 171 6 177 2,693 2.3 Other increases 435 - 435 - (of which for business combinations) - - - -
3. Decreases (2,590) - (2,590) (2,695) 3.1 Deferred taxes assets derecognized over the year (2,477) - (2,477) (2,695) a) transfers (585) - (585) - b) changes in accounting standards (152) - (152) - c) other (1,740) - (1,740) (2,695) 3.2 Tax rate reductions - - - - 3.3 Other decreases (113) - (113) - (of which for business combinations) - - - -
4. Closing balance 21,617 21 21,638 14,387
239 Notes to the consolidated accounts
14.7 Other information
Fiscal position of Banco Popolare di Verona e Novara
On the balance sheet date, only fiscal years 2003, 2004, 2005 and 2006 are still open from the point of view of direct taxes and VAT.
In 2004, Banco had decided to exercise the options made available by Law n. 289 of December 27th, 2002 and following amendments and supplements, and as a result: • it closed fiscal years 1999, 2000 and 2001 for former Banca Popolare di No- vara S.c.r.l under art. 9 for the purpose of direct taxes; • it closed the fiscal position of Banco for fiscal year 2002 under art. 9 for the purpose of direct taxes; • it settled under art. 16 the pending dispute on INVIM due for the disposal of property in Bologna by former Banco S. Geminiano e S. Prospero S.p.A.; • it closed fiscal year 2002 under art. 9 for the purposes of VAT.
Fiscal position of Banca Popolare di Verona - Banco S.Geminiano e S. Prospero
As at December 31st, 2006 there were no outstanding disputes with regard to direct, indirect taxes or withholding agent obligations.
Fiscal position of the consolidated Banco S.Geminiano e S.Prospero
On December 31st, 2006, only fiscal year 1987 is still open. The original claims of IRS amounted to ?678 thousand, inclusive of penalties. Following the peti- tions filed by Banco with the Provincial, Regional and Central Tax Commissions, the inland revenue claims were cut down to ?36 thousand. The definitive deci- sion is still pending at the Supreme Court of Cassation, further to the appeal filed by the Tax Department.
240 Notes to the consolidated accounts
Fiscal position of Banca Popolare di Novara scarl
As a result of the automatic settlement illustrated above, no fiscal years are open for the purpose of direct taxes or VAT, nor with regard to withholding agent ob- ligations.
National Consolidation and Fiscal Transparency
In the second half of 2004, the Group opted for the new fiscal regime envisag- ing a national consolidation of the income tax of groups of companies under ar- ticles from 117 to 129 of DPR n. 917 of December 22nd, 1986.
This option, covering fiscal periods 2004-2006, was exercised jointly by the Par- ent company and the companies of the Group that meet the requirements set forth by the above regulation, namely:
• Aletti Fiduciaria S.p.A.; • Aletti Gestielle SGR S.p.A.; • Aletti Gestielle Alternative SGR S.p.A.; • Aletti Merchant S.p.A.; • Aletti Private Equity SGR S.p.A.; • Banca Aletti & C. S.p.A.; • Banca Popolare di Novara S.p.A.; • BPVN Immobiliare S.r.l.; • Credito Bergamasco S.p.A.; • Holding di Partecipazioni Finanziarie; • Immobiliare BPV S.r.l.; • Leasimpresa S.p.A.; • Società Gestione Servizi S.p.A.; • Tecmarket Servizi S.p.A.
241 Notes to the consolidated accounts
As a result of corporate events occurred during 2006, SA.RI Sannitica Riscossioni Spa and SESTRI Spa are no more part of the consolidation scope . The advantages of exercising the option for national consolidation are mainly linked to the fact that taxes are levied on one single taxable income, resulting from the summation of the taxable income of the above companies that exer- cised the option, that intercompany dividends are exempted from income taxes, and that there is the possibility of transferring assets other than those generat- ing tax-free revenues and capital gains among consolidated companies in a tax- neutral environment.
With Banco’s adoption of Group taxation and the fiscal consolidation of the above mentioned subsidiaries, its administrative responsibilities and duties have increased, as illustrated below: • exclusive responsibility for the fulfillment of duties associated with the cal- culation of the group’s total consolidated income; • joint responsibility for any increased tax, sanctions and interest on the total taxable income of each consolidated company; • joint responsibility with all the relevant companies for the failure to pay what due based on the consolidated income tax return.
To this end, Banco prepared the “consolidation agreements” governing Banco’s relations with the above mentioned subsidiaries that joined the consolidated tax- ation treatment. The agreements were approved by the individual Boards of Di- rectors.
The agreement specified the modalities regulating the transfer of fiscal credits and debits between Banco and the fiscally consolidated companies, as well as the modalities by which the advantages enjoyed by the Parent company are passed over to the subsidiaries. In particular, among other things, it was speci- fied that: • the tax credit associated with fiscal losses, that were incurred by each indi- vidual entity partaking in the consolidated taxation treatment and that were included in the group taxation, shall be paid by the consolidating entity to the entity that suffered said losses only if said losses shall be offset against the group’s taxable income and proportionally to the actual fiscal benefit enjoyed by the group; • dividends received by the entities which opted for Group taxation give the collecting entity the right to receive a remuneration from the consolidating entity equal to the fiscal saving enjoyed by the subsidiary as a result of the tax reduction carried out when calculating total income, equal to the tax- able amount of said dividends; said remuneration is recognized only if the subsidiary qualifies for group taxation as consolidating entity with the con- solidated associates that distribute the dividends; • in case of suspension of consolidation, the fiscal losses posted in the group return, the refund applications for tax credits and surpluses carried forward shall remain with the consolidating entity.
242 Notes to the consolidated accounts
Banco also made use of the option under art. 115 of DPR n. 917 of December 22nd, 1986, governing transparent taxation: • in the second half of 2004 with BPV Vita S.p.A.; • in the second half of 2005 with Novara Vita S.p.A.
This option brings with it a number of advantages, like for example total ex- emption for dividends distributed by the associate company whose income is transparently taxed.
Since also transparent taxation caused Banco’s administrative responsibilities to- wards Tax Authorities to increase, in this case with regard to fiscal obligations to which the transparently-taxed associate is bound, Banco entered into a specific framework agreement regulating the relevant relations with the associate com- pany.
243 Notes to the consolidated accounts
Section 15 Non current assets available for sale and discontinued operations, and associated liabilities - Item 150 of assets and item 90 of liabilities
15.1 Non current assets available for sale and discontinued operations: breakdown by type of asset
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
A. Individual assets A.1 Equity investments - - - - A.2 Property, Plant and Equipment - 239 239 27,073 A.3 Intangible assets - - - - A.4 Other non-current assets - - - -
Total A - 239 239 27,073
B. Discontinued operations B.1 Financial assets held for trading - - - - B.2 Financial assets measured at fair value - - - - B.3 Financial assets available for sale - - - - B.4 Financial assets held to maturity - - - - B.5 Due from banks - - - - B.6 Loans to customers - - - - B.7 Equity investments - - - - B.8 Property, Plant and Equipment - - - - B.9 Intangible assets - - - - B.10 Other assets - - - -
Total B - - - -
C. Liabilities associated with non-current assets available for sale C.1 Payables - - - - C.2 Securities - - - - C.3 Other liabilities - - - -
Total C - - - -
D. Liabilities associated with discontinued operations D.1 Due to banks - - - - D.2 Due to customers - - - - D.3 Debt securities in issue - - - - D.4 Trading financial liabilities - - - - D.5 Financial liabilities measured at fair value - - - - D.6 Provisions - - - - D.7 Other liabilities - - - -
Total D - - - -
244 Notes to the consolidated accounts
15.2 Other information
No other material information is reported.
15.3 Information on equity investments in companies under significant influence not carried at equity
There are no associate companies under significant influence not carried at equity.
Section 16 Other assets - Item 160
16.1 Other assets: breakdown
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
A. Loans and Receivables 146,467 3,517 149,984 234,834 1. Receivables for advances associated with the tax collection service 37,617 330 37,947 112,616 2. Commission receivables 106,777 1,587 108,364 103,252 3. Other receivables 2,072 1,600 3,672 18,966
B. Other items 1,046,236 1,554 1,047,790 873,636 1. Cash and other valuables 112,838 - 112,838 133,274 2. Items still under processing 418,793 - 418,793 331,530 3. Securities and coupons yet to be settled 229,411 - 229,411 59,329 4. Other transactions yet to be settled 108,030 - 108,030 64,661 5. Improvements and similar expenses on third party assets 19,334 - 19,334 16,401 6. Other items 157,830 1,554 159,384 268,441
Total 1,192,703 5,071 1,197,774 1,108,470
Items still under processing include account debit entries for utility bills and for POS payments.
Improvements and similar expenses on third party assets refer to the restructur- ing of third party property, which enjoy no operating autonomy. During the year this item increased by roughly 2.9 million euro (inclusive of 0.5 million euros for improvements associated with the line of business comprise by the branches ac- quired by Banca Popolare Italiana as part of the “branch swap” transaction de- scribed in the following Chapter G of these explanatory notes), while over the same period 8.4 million euro worth of depreciation has been entered under item 220 of the income statement “Other operating income/expense”. The use-
245 Notes to the consolidated accounts
ful life of these improvements is deemed to be 5 years and in any case it does not exceed the term of the lease contract on the third party property for which the aforesaid expenses have been incurred. The item “other entries” include receivables for collaterals, sundry receivables and pending items under allocation to their destination accounts.
Liabilities
Section 1 Due to banks - Item 10
1.1 Due to banks: breakdown by instrument
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Due to Central banks 6,386 - 6,386 -
2. Due to other banks 8,109,475 283 8,109,758 8,099,580 2.1 C/accounts and demand deposits 188,094 - 188,094 1,253,343 2.2 Time deposits 3,981,477 - 3,981,477 3,614,959 2.3 Loans 3,482,979 283 3,483,262 2,922,160 2.3.1 finance lease 16,169 - 16,169 14,943 2.3.2 other 3,466,810 283 3,467,093 2,907,217 2.4 Commitments to repurchase own shares - - - - 2.5 Liabilities associated with assets sold and not derecognized 317,940 - 317,940 299,071 2.6 Other payables 138,985 - 138,985 10,047
Total 8,115,861 283 8,116,144 8,099,580
Fair value 8,115,232 283 8,115,515 8,099,580
As at December 31st, 2006, due to banks totaled 8,116.1 million euro, down by 0.2% with respect to the previous year. For due to banks also the fair value measurement is almost identical to the book value, since they are mostly short term loans.
246 Notes to the consolidated accounts
1.2 Breakdown of item 10 “Due to banks”: subordinated loans
At the balance sheet date as well as in the previous year no subordinated loans payable to banks were reported.
1.3 Breakdown of item 10 “Due to banks”: structured debts
At the balance sheet date as well as in the previous year no structured debts payable to banks were reported.
1.4 Breakdown of item 10 “Due to banks”: debts under specific hedging
(thousand euro) 31-12-2006 31-12-2005
1. Liabilities under specific fair value hedging - - a) interest rate risk - - b) exchange rate risk - - c) multiple risk - -
2. Liabilities under specific cash flow hedging 189,266 - a) interest rate risk 189,266 - b) exchange rate risk - - c) multiple risk - -
Total 189,266 -
1.5 Finance lease payables
Due to banks for finance leases shown in table 1.1 “Due to banks: breakdown by instrument” are represented by the payable to Banca Italease S.p.A. for the purchase under lease of some buildings, recorded under item 120 “Property, plant and equipment” of assets for a residual value, net of accrued amortization as at the date of the balance sheet, of 20.1 millions (Chapter B, Section 12, of these explanatory notes).
247 Notes to the consolidated accounts
Section 2 Due to customers - Item 20
2.1 Due to customers: breakdown by instrument
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Checking accounts and demand deposits 22,080,458 - 22,080,458 20,212,412 2. Time deposits 2,065,334 - 2,065,334 830,036 3. Third party assets under custody 47,553 - 47,553 46,363 4. Loans 2,242,419 131 2,242,550 761,008 4.1 Finance lease - - - - 4.2 Other 2,242,419 131 2,242,550 761,008 5. Commitments to repurchase own shares - - - - 6. Liabilities associated with assets sold and not derecognized 1,306,527 - 1,306,527 2,325,002 6.1 Repurchase agreements 464,014 - 464,014 1,678,483 6.2 Other 842,513 - 842,513 646,519 7. Other payables 1,162,953 - 1,162,953 594,003
Total 28,905,244 131 28,905,375 24,768,824
Fair Value 28,905,401 131 28,905,532 24,768,824
As at December 31st, 2006, due to customers stood at 28,905.4 million euro, up by 16.7% with respect to the previous year.
248 Notes to the consolidated accounts
2.2 Breakdown of item 20 “Due to customers”: subordinated loans
At the balance sheet date as well as in the previous year no subordinated loans payable to customers were reported.
2.3 Breakdown of item 20 “Due to customers”: structured debts
At the balance sheet date as well as in the previous year no structured debts payable to customers were reported.
2.4 Breakdown of item 20 “Due to customers”: debts under specific hed- ging
No debts under specific hedging payable to customers were reported.
2.5 Finance lease payables
As at December 31st, 2006, no finance lease payables to customers were re- ported.
249 Notes to the consolidated accounts
Section 3 Debt securities in issue - Item 30
3.1 Debt securities in issue: breakdown by instrument
Banking group 31-12-2006 31-12-2005 (thousand euro) VB FV VB FV VB FV
A. Quoted securities ------1. Bonds ------1.1 structured ------1.2 other ------2. Other securities ------2.1 structured ------2.2 other ------
B. Unquoted securities 16,334,515 16,334,297 16,334,515 16,334,297 12,932,148 12,941,582 1. Bonds 8,704,569 8,704,182 8,704,569 8,704,182 7,054,107 7,063,541 1.1 structured 245,143 245,143 245,143 245,143 - - 1.2 other 8,459,426 8,459,039 8,459,426 8,459,039 7,054,107 7,063,541 2. Other securities 7,629,946 7,630,115 7,629,946 7,630,115 5,878,041 5,878,041 2.1 structured ------2.2 other 7,629,946 7,630,115 7,629,946 7,630,115 5,878,041 5,878,041 -- Total 16,334,515 16,334,297 16,334,515 16,334,297 12,932,148 12,941,582
BV = book value FV = fair value
As at December 31st, 2006 debt securities in issue came in at 16,334.5 million euro, up by 26.3% as compared with the prior year.
For the bond component of debt securities in issue, the fair value is measured by discounting the residual cash flows that the Banks of the Group could obtain by issuing at the balance sheet date loans sharing the same characteristics. For the other securities, represented by certificates of deposit, the fair value is as- sumed to be reasonably close to their carrying value, since they are short term liabilities. The increase in the item “other securities” with respect to the prior year is mainly due to the growth of certificates placed with foreign banks.
250 Notes to the consolidated accounts
3.2 Breakdown of item 30 “Debt securities in issue”: subordinated loans
At the balance sheet date, Subordinated debt securities in issue totaled 1,777.9 millions, up by 64.9% from 1,077.9 millions in the previous year. The change is basically due to three new bond issues on the EMTN market, with a nominal value of one billion euro, to the redemption of two convertible bond programs, with a nominal value of 244.4 millions, outstanding at the end of 2005, and to redemption portions of other loans in keeping with their amortization scheme.
The characteristics of subordinated loans outstanding as at December 31st, 2006 are illustrated in Chapter F, Section 2 “Regulatory capital and solvency ra- tios”.
3.3 Debt securities in issue: securities under specific hedging
(thousand euro) 31-12-2006 31-12-2005
1. Liabilities under specific fair value hedging - - a) interest rate risk - - b) exchange rate risk - - c) multiple risk - -
2. Liabilities under specific cash flow hedging 138,330 125,237 a) interest rate risk 138,330 125,237 b) exchange rate risk - - c) multiple risk - -
Totale 138,330 125,237
251 Notes to the consolidated accounts FV* QNQ X---X X---X X---X X---X FV* VN ------QNQ 291,156 1,528,713291,154 1,528,039 X X X X 32,100 1,543,220 32,100 1,541,044 X X 291,156 1,528,719308,182 1,536,346 X X X 32,100 1,543,232 X 42,455 1,543,232 X X 2,543 7,029 9 7,038 129 8,482 - 8,482 20,184 17,026 7,627 24,653 628 10,355 - 10,355 17,641 9,997 7,618 17,615 499 1,873 - 1,873 FV* VN date QNQ ------5---- 8---- XXXXXX XXXXXX FV* VN 9XXXXXX 6XXXXXX FV FV FV FV QNQ Banking group Other companies 31-12-2006 31-12-2005 ------VN 3.1.2 Other bonds - - - X - X - X - - - 3.1.1 Structured - - - X - X - X - - - fair value option X - 28 X X X X X X - 28 X X - 1,876 X fair value option X - - X X X X X X - - X X - - X 3.2.1 Structured - - - X - X - X - - - 3.2.2 Other - - - X - X - X - - - (thousand euro) 1.1 Trading1.2 Associated with 1.3 Other2.1 Trading2.2 Associated with X2.3 Other 291,154 1,528,039 X X 2 - X 646 6 - X X - X X X X X X X X X X X X X X X 2 646 - X X 6 - X X - - X X 300 - X X 12 - X - X 3.1 Bonds - - - 3.2 Other securities ------2. Due to customers 2,543 7,029 9 7,03 2. Credit derivatives2. Credit X - 6 X X X X X X - 6 X X - 12 X 1. Financial derivatives X 291,156 1,528,713 3. Debt securities Total ATotal 20,184 17,026 7,627 24,653 BTotal (A+B)Total X X 291,156 1,528,71 308,182 1,536,34 1. Due to banks 17,641 9,997 7,618 17,61 FV = Fair value FV* to the issue standing with respect = Fair value calcolato excluding changes caused by a change in the issuer's credit NV = Nominal value Quoted Q = UQ = Unquoted A. Cash liabilities B. Derivatives X X X X X X X X X X Section 4 Financial liabilities held for trading - Item 40 by instrument 4.1 Financial liabilities held for trading: breakdown
252 Notes to the consolidated accounts
4.2 Breakdown of item 40 “Financial liabilities held for trading”: subor- dinated liabilities
At the balance sheet date as well as in the previous year no subordinated liabil- ities were reported.
4.3 Breakdown of item 40 “Financial liabilities held for trading”: structu- red debts
At the balance sheet date as well as in the previous year no structured debts were reported under financial liabilities held for trading.
4.4 Financial liabilities held for trading: derivative instruments
4.4.1 Banking group
(thousand euro) Interest Currency Equity Loans Other 31-12-2006 31-12-2005 rates and gold securities
A. Quoted derivatives 1. Fìnancial derivatives: - - 328,018 - - 328,018 32,100 a) With exchange of capital - - 21,767 - - 21,767 32,069 - purchased options - - 21,767 - - 21,767 32,069 - other derivatives ------b) Without exchange of capital - - 306,251 - - 306,251 31 - purchased options - - 306,249 - - 306,249 - - other derivatives - - 2 - - 2 31 2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------
Total A - - 328,018 - - 328,018 32,100
B. Unquoted derivatives 1. Fìnancial derivatives: 649,333 102,114 646,502 - 93,902 1,491,851 1,543,220 a) With exchange of capital - 101,352 66,992 - 35,390 203,734 190,111 - purchased options - 58,358 66,992 - - 125,350 166,940 - other derivatives - 42,994 - - 35,390 78,384 23,171 b) Without exchange of capital 649,333 762 579,510 - 58,512 1,288,117 1,353,109 - purchased options 139,830 - 579,510 - 58,512 777,852 767,901 - other derivatives 509,503 762 - - - 510,265 585,208 2. Credit derivatives: - - - - 6 6 12 a) With exchange of capital ------b) Without exchange of capital - - - - 6 6 12
Total B 649,333 102,114 646,502 - 93,908 1,491,857 1,543,232
Total (A+B) 649,333 102,114 974,520 - 93,908 1,819,875 1,575,332
253 Notes to the consolidated accounts
4.4.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
4.4.3 Other companies
Not present for other companies.
4.5 Cash financial liabilities (excluding “technical overdraft”) held for tra- ding: annual changes
No cash financial liabilities held for trading are present, because due to banks are entirely represented by technical overdrafts and there were no changes dur- ing the year.
254 Notes to the consolidated accounts FV* QNQ FV* VN QNQ 4,265,990 - 4,105,398 X 5,190,969 - 5,172,457 X 5,494,706 - 5,334,143 5,334,179 5,299,943 - 5,283,159 5,288,432 5,494,706 - 5,334,143 5,334,179 5,299,943 - 5,283,159 5,288,432 FV* VN QNQ ------X---X FV* VN FV FV FV FV QNQ Banking group Other companies 31-12-2006 31-12-2005 ------VN (thousand euro) 3.1 Structured3.2 Other 1,228,716 4,265,990 - 1,228,745 - 4,105,398 X - - - X 1,228,716 - 1,228,745 X 108,974 - 110,702 X . tutrd---X---X---X---X ---X---X---X---X ---X---X---X---X ---X---X---X---X Structured Other Structured Other 1.1 1.2 2.1 2.2 Total 5,494,706 - 5,334,143 5,334,179 FV = Fair value FV* to the issue date standing with respect = FV excluding value changes cause by a change in the issuer's credit NV = nominal value Q = Quoted 2. Due to customers 3. Titoli di debito 5,494,706 - 5,334,143 5,334,179 1. Due to banks Section 5 Financial liabilities measured at fair value - Item 50 Section 5 Financial liabilities measured by instrument at fair value: breakdown 5.1 Financial liabilities measured
255 Notes to the consolidated accounts
5.2 Breakdown of item 50 “Financial liabilities measured at fair value”: subordinated debts
As at December 31st, 2006 as well as at the end of the previous year there were no financial liabilities measured at fair value represented by subordinated debts.
5.3 Financial liabilities measured at fair value: annual changes
(thousand euro) Due to Due to Debt securities Total banks customers in issue
A. Opening balance - - 5,283,159 5,283,159
B. Increases - - 2,079,368 2,079,368 B.1 Issues - - 1,564,794 1,564,794 B.2 Sale - - 376,755 376,755 B.3 Positive fair value changes - - 8,115 8,115 B.4 Other changes - - 129,704 129,704
C. Decreases - - (2,028,384) (2,028,384) C.1 Purchase - - (440,398) (440,398) C.2 Redemption - - (1,301,488) (1,301,488) C.3 Negative fair value changes - - (110,515) (110,515) C.4 Other changes - - (175,983) (175,983)
D. Closing balance - - 5,334,143 5,334,143
Items B.3 and C.3 include, respectively, the positive and negative fair value an- nual changes that were recorded under Item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement. The same item includes the fair value changes of derivatives under the fair value option, whose positive and negative changes at the balance sheet date are shown in tables 2.1 of Section 2 of the balance sheet assets and 4.1 of Section 4 of balance sheet li- abilities in Chapter B – Notes to the consolidated balance sheet.
Item B.4 “Increases: other changes” includes accrued interest as at December 31st, 2006, recognized under item 20 “interest expense on financial liabilities measured at fair value” of the income statement, as well as losses on the dis- posal or extinguishment of said financial liabilities, recorded under item 110 “profit/loss on financial assets and liabilities designated at fair value” of the in- come statement.
256 Notes to the consolidated accounts
Item C.5 “Decreases: other changes” includes deducted accrued interest as at December 31st, 2006, recognized under item 20 “interest expense on financial liabilities measured at fair value” of the income statement, as well as profits on the disposal or extinguishment of said financial liabilities, recorded under item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement.
Section 6 Hedging derivatives - Item 60
6.1 Hedging derivatives: breakdown by type of contracts and underlying assets
6.1.1 Banking group
(thousand euro) Interest Currency Equity Loans Other 31-12-2006 rates and gold securities
A. Quoted derivatives 1. Financial derivatives: ------a) with exchange of capital ------issued options ------other derivatives ------b) without exchange of capital ------issued options ------other derivatives ------2. Credit derivatives ------a) with exchange of capital ------b) without exchange of capital ------
Total A ------
B. Unquoted derivatives 1. Financial derivatives: 54,847 - - - - 54,847 a) with exchange of capital ------issued options ------other derivatives ------b) without exchange of capital 54,847 - - - - 54,847 - issued options ------other derivatives 54,847 - - - - 54,847 2. Credit derivatives ------a) with exchange of capital ------b) without exchange of capital ------
Total B 54,847 - - - - 54,847
31/12/2006 54,847 - - - - 54,847
31/12/2005 1,801 - - - - 1,801
257 Notes to the consolidated accounts
6.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
6.1.3 Other companies
No hedging derivatives associated with other companies were reported.
6.2 Hedging derivatives: breakdown by hedged portfolios and by type of hedge
6.2.1 Banking group
Fair value Cash flow (thousand euro) Specific Generic Interest Exchange Credit Price Multiple Specific Generic rate risk rate risk risk risk risk
1. Financial assets available for sale 2,286 ----X-X 2. Loans - - - X - X - X 3. Financial assets held to maturity X - - X - X - X 4. Portfolio XXXXX -X -
Total Assets 2,286 ------
1. Financial Liabilities 36,863 ----X-X 2. Portfolio XXXXX15,698 X -
Total Liabilities 36,863 ----15,698 - -
6.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
6.2.3 Other companies
No hedging derivatives associated with other companies were reported.
258 Notes to the consolidated accounts
Section 7 Fair value change of liabilities in hedged portfolios - Item 70
7.1 Fair value change of liabilities in hedged portfolios
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Positive changes to financial liabiltiies - - - - 2. Negative changes to financial liabilities (57,936) - (57,936) (16,652)
Total (57,936) - (57,936) (16,652)
This item refers to the fair value change recorded on the funding of payable checking accounts under item due to customers, that were put under a fair val- ue derivative macrohedging. Profit or loss on value adjustments referring to hedging derivatives and to the hedged portfolio are recognized under item 90 “Fair value adjustments in hedge accounting”.
7.2 Liabilities under macrohedging of interest rate risk: breakdown
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Deposits and payables 5,299,000 - 5,299,000 1,492,739 2. Debt securities in issue - - - 125,000 3. Financial liabilities - - - -
Total 5,299,000 - 5,299,000 1,617,739
Section 8 Tax liabilities - Item 80
This Section was illustrated in Section 14 of the balance sheet assets in Chapter B – Notes to the consolidated balance sheet.
Section 9 Liabilities associated with non-current assets held for sale and discontinued operations - Item 90
As at December 31st, 2006 as well as at the end of the previous year no liabili- ties associated with non-current assets held for sale and discontinued operations were reported.
259 Notes to the consolidated accounts
Section 10 Other liabilities - Item 100
10.1 Other liabilities: breakdown
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
A. Payables 412,438 800 413,238 513,848 Due to Inland revenue for sums to be paid on behalf of third parties 56,462 1 56,463 57,441 Due for sundry items related to tax collection service 46,100 - 46,100 98,780 Due to Personnel 187,266 - 187,266 164,706 Due to Suppliers 122,610 799 123,409 192,921
B. Other items 1,693,299 4,497 1,697,796 1,568,067 Items in transit between branches not yet allocated to destination accounts 193,096 - 193,096 80,514 Amounts available to be paid to third parties 78,292 - 78,292 68,493 Bank transfers to be cleared 568,577 - 568,577 282,207 Adjustments for illiquid portfolio entries 180,468 - 180,468 221,345 Other items 672,866 4,497 677,363 915,508
Total 2,105,737 5,297 2,111,034 2,081,915
Section 11 Employee termination benefits - Item 110
11.1 Employee termination benefits
(thousand euro) Banking Other group companies 2006
A. Opening balance 353,745 426 354,171
B. Increases: 35,024 112 35,136 B.1 Provisions for the year 32,420 112 32,532 B.2 Other increases 2,604 - 2,604
C. Decreases (39,231) 3 (39,228) C.1 Termination benefits paid (23,551) 3 (23,548) C.2 Other decreases (15,680) - (15,680)
D. Closing balance 349,538 541 350,079
260 Notes to the consolidated accounts
Accounting recognition and measurement modalities
With respect to IAS 19, employee termination benefits have been considered as “post employment benefits”, as they are due irrespective of the reason for the employment termination, and have been classified as a defined benefit plan.
In accounting for defined benefit plans, it is necessary to use actuarial tech- niques to make a reliable estimate of the benefits accrued by employees in re- turn for the services provided in the current and prior periods, and to determine the present value of the company’s obligations.
The balance recognized in the financial statements as of December 31st, 2006 represents the average present value at the same date of defined benefit obli- gations accrued by employees entitled to termination benefits for the services rendered in the current and prior years.
Benefits have been calculated only as a proportion of the accrued seniority at the balance sheet date and discounted to the same date. All available information has been used at individual level without any grouping by age and seniority.
The present value of defined benefit obligations was measured based on the “projected unit credit method”, which sees each period of service by the em- ployee as giving rise to an additional unit of benefit entitlement.
All possible service discontinuation events are regulated by appropriate proba- bilities, and for each possible event triggering the payment of the termination benefit the payable amount is calculated, pro-rated based on the ratio between the actual years of service as of December 31st, 2006 and the seniority accrued at the date of estimated settlement of the termination benefits (“pro-rated on service”) and discounted as at December 31st, 2006.
In each measurement period, for each employee, the calculation of the yearly in- crease in termination benefits, as a result of the regulatory revaluation, is carried out net of the 11% substitutive tax.
Illustrated below are the demographic assumptions employed: • probabilities of canceling assets due to death, classified by age and gender, calculated by curtailing the death probability of the 2002 Italian population (source ISTAT – Italian Statistical Yearbook 2005) based on the experience with the employee community in the years from 1999 to 2006; • probabilities of canceling assets due to sundry reasons (resignations, dis- missals), classified by age and gender, derived from the experience devel- oped in the years from 1999 to 2006; • probabilities of receiving applications for an advanced payment of part of the termination benefits, classified by seniority, derived from the experience from 1999 to 2006.
261 Notes to the consolidated accounts
The frequency of service terminations for resignations notified by the employees when eligible for INPS old-age retirement was considered equal to 100%. The old age threshold is the one fixed by INPS regulations, namely 65 years for men and 60 for women.
The size of the groups of employees has been assumed as being constant and no career advancements have been factored in. Two salary lines were designed: one for male employees and one for female employees. Said salary lines change depending on seniority, and they take into account seniority increases, promo- tions within the same category, and promotions to a higher category, while they do not include future contractual increases.
Finally, illustrated below are the economic assumptions adopted: • average annual inflation rate set at 2% for the whole measurement period; • average annual salary increase for contract renewals set at 2% for all cate- gories and for the whole measurement period.
It should be noted, that in the absence of interpretations thereof, the liability as- sociated with termination benefits was measured without taking into account the directives provided by the Budget Law 296/2006, which as of January 1st, 2007 introduced the obligation for all employees of private companies with more than 50 employees to deposit the termination benefits accrued as of that date either in external supplementary pension funds, or in a specific fund set up at the Social Security Agency (INPS). These new provisions may have a significant impact on the amount of out- standing liabilities as at December 31st, 2006 when estimated along the above rules. In particular, depending on employee decisions, the amount of liabilities borne by the companies of the group recognized in the financial statements as at December 31st, 2006 may significantly decrease.
Changes in the period
Item B.1 “provisions for the year” includes the interest cost of liabilities out- standing on December 31st, 2005 (measured based on the residual liability from the prior year net of utilizations and calculated based on the technical nominal discount rate of 3.5%, which had been used the previous year), the current serv- ice cost, provisions calculated based on the regulations set forth by the civil code with regard to the termination benefits accrued during the year and deposited by December 31st, 2006 in the external pension fund for all employees who opt- ed to destine part of their termination benefits to supplementary pension schemes, and finally, early retirement incentives associated with the payment of termination benefits. Said amounts have been recognized under item 150 a) “personnel expenses”.
262 Notes to the consolidated accounts
Item B.2 “other increases” is comprised of 1.2 million worth of termination ben- efits of employees who joined the Group on October 1st, 2006 as a result of the acquisition of the business line made up of 18 bank branches of Banca Popolare Italiana.
Item C.1 “termination benefits paid” include amounts paid to terminated em- ployees, early retirement incentives and the deposit into the external pension fund of the quotas accrued during the year destined by decision of the employ- ees to supplementary pension schemes.
Item C.2 “other decreases” include the termination benefits of employees of the Group belonging to the business line made up of the 18 bank branches trans- ferred on October 1st, 2006 to Banca Popolare Italiana. The item also includes the “write-back” credited to income for the year as a decrement of personnel expenses resulting from the change in the discount rate used to measure esti- mated liabilities associated with termination benefits. Said rate as of the end of the second quarter 2006 was raised from the previously used 3.5% to 4%.
Section 12 Provisions for risks and charges - Item 120
12.1 Provisions for risks and charges: breakdown
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Post employment benefits 25,964 - 25,964 27,343 2. Other provisions for risks and charges 242,972 137 243,109 195,409 2.1 legal disputes 188,906 - 188,906 148,896 2.2 personnel charges 5,713 - 5,713 2,307 2.3 other 48,353 137 48,490 44,206
Total 268,936 137 269,073 222,752
Item “2.1 legal disputes” under provisions for risks and charges includes 136.6 million euro set aside to provide for clawback actions, and 49.1 millions for on- going actions and other proceedings. Item 2.2 “Personnel charges” includes the provisions for the company supple- mentary employment contract, while item “2.3 others” includes mainly the Par- ent companies charity fund, which received 12.7 millions upon allocating the net income for the year, and 20.4 million euro worth of projected liabilities as a re- sult of complaints filed.
263 Notes to the consolidated accounts
12.2 Provisions for risks and charges: annual changes
Banking group Other companies Totale (thousand euro) Post empl. Other Post empl. Other Post empl. Other benefits provisions benefits provisions benefits provisions
A. Opening balance 27,343 195,409 - - 27,343 195,409
B. Increases 1,194 88,041 - 137 1,194 88,178 B.1 Provisions for the year 441 65,202 - - 441 65,202 B.2 Time-value changes 487 250 - - 487 250 B.3 Discount rate - related changes - 153 - - - 153 B.4 Other increases 266 22,436 - 137 266 22,573
C. Decreases (2,573) (40,478) - - (2,573) (40,478) C.1 Utilization during the year (82) (15,522) - - (82) (15,522) C.2 Discount rate - related changes (906) (639) - - (906) (639) C.3 Other decreases (1,585) (24,317) - - (1,585) (24,317)
D. Closing balance 25,964 242,972 - 137 25,964 243,109
Items B.1, B.2 and B3 represent the total impact on income of changes in provi- sions for risks and charges in 2006. The most significant component of provi- sions charged to income in 2006 has been the adjustment to loss projections on clawback actions, totaling 34.8 millions, and on other ongoing actions for 21.,2 millions.
Item B.4 “other increases” referring to other provisions includes the allocation of the 2005 net income for the year to the charity fund of the Parent company, in the amount of 21.4 millions. The charity fund utilizations recognized as a re- sult of the charity grants given in 2006 and totaling to 19.5 million euro have been recorded under item C.3 “other decreases”.
Item C.1 “utilization during the year” includes mainly the utilization of provi- sions for clawback actions to cover for loan losses charged to income after clos- ing transactions with bankruptcy trustees. The residual utilization refers to the coverage of transactions settled upon closing legal disputes and litigations with employees.
264 Notes to the consolidated accounts
12.3 Defined benefit pension plans
The Group has no defined benefit pension plans.
The item “post employment benefits and similar obligations” is mainly the result of liabilities borne by the parent company and by the subsidiary Credito Berga- masco due to the commitments illustrated below.
Banco must guarantee the defined benefits specified below to the following groups of retired employees: • 41 former employees (43 on December 31st, 2005) of Banco S. Geminiano e S. Prospero, who benefit from the supplementary pension under the “Pension supplementary agreement for the Employees of Banco S. Gemini- ano e S. Prospero” dated July 30th, 1976; • 11 former managers (as on December 31wt, 2005) of Banco S. Geminiano e S. Prospero, who benefit from a supplementary pension under individual agreements; • 43 former employees (44 on December 31st, 2005) of Banca Popolare di Verona, who retired under a defined benefit scheme of the Pension Fund for the employees of Banca Popolare di Verona – Banco San Geminiano e S. Prospero, including an active employee who opted for the “defined ben- efits” of the same Fund; • 7 former managers (as on December 31st, 2005) of Banca Popolare di Verona, who are entitled to a pension paid by Banco under individual agree- ments; • 888 (they were 948 on December 31st, 2005) retirees who receive an equalizing check.
The liability was calculated as the average present value of future charges in re- lation to retirees outstanding on December 31st, 2006, including pensions for surviving dependants. The technical and financial methodology used is the full capitalization, that re- quires to follow the fund members from the measurement date to expiration. We adopted the MAGIS method of measuring each unit separately and by draw, that is used also to estimate the liabilities associated with termination benefits.
The probability of death of retirees and their relatives has been calculated by cur- tailing the probability of death of the 2002 Italian population (source ISTAT – Ital- ian Statistical Yearbook 2005) based on the experience of the lending sector be- tween 1999 and 2004. The average residual life at 65 years of age is 18.4 years for men and 21.9 for women.
Economic assumptions led us to adopt the following framework: • 2% annual inflation rate throughout the entire measurement period; • 0.5% annual wage increase rate for employment contract renewals for ac- tive members throughout the entire measurement period; • annual benefit increase based on the automatic equalization (provided by art. 34, paragraph 1, law 448/1998, and amended by art.69, paragraph 1,
265 Notes to the consolidated accounts
law 388/2000) linked to the assumed inflation rate rise, while for benefici- aries of pension benefits under individual agreements (7 former managers) it is based upon the annual inflation rate; for the equalizing check, no in- crease is provided for throughout the measurement period.
The technical discount rate was 4% (it had been 3.5% on December 31st, 2005) for the entire measurement period.
Based on the above assumptions, liabilities added up to a total of 13.8 millions. After deducting the portion deposited in external funds as at December 31st, 2006, amounting to 1.9 millions, the estimated liability borne by Banco as at De- cember 31st, 2006 totaled 11.9 million euro.
On December 31st, 2005, Banco had entered into an individual agreement with a former manager for the payment of a supplementary annuity. The liability as- sociated with said commitment (about 0.5 millions) was fully paid in 2006. Again in 2005 Banco undertook itself to pay supplementary pension benefits to the chairman of the Board of Directors. As at December 31st, 2006 said com- mitment amounted to 0.1 millions.
As at December 31st, 2006, Credito Bergamasco bore the following obligations: • supplement the assets making up the external “Pension Fund for employ- ees of Credito Bergamasco” as a result of possible increases in require- ments, measured based on specific actuarial calculations, associated with the commitment to pay defined benefits to entitled retired personnel who meet the requirements set forth in earlier company agreements; • obligations towards a group of former bank employees, entitled to pension benefits under an earlier company agreement; • obligations towards another group of former employees entitled to a com- pany donation resolved by the Bank’s Board of Directors in the past; • obligations towards executive managers and directors the “supplementary pension scheme” aiming at strengthening their loyalty and ensuring their retention.
12.4 Provisions for risks and charges – other provisions
As mentioned above, the main portion of said provisions is represented by the allowances set aside in 2006 and in prior financial years to account for estimat- ed losses that may ensue from clawback actions against the banks of the group.
Illustrated below are the main proceedings instructed against the banks of Ban- co’s group as at December 31st, 2006:
266 Notes to the consolidated accounts
Clawback action instructed by Italgest bankruptcy trustees against former Ban- ca Popolare di Novara s.c. a. r.l.
On November 12th, 2004 the Naples Court pronounced its decision in first in- stance on the clawback action under examination. In first instance the court con- demned Banco to pay ?129.2 million plus any interest and legal expenses. To be noted, that the actual contingent liability shall not in any case exceed the net bankruptcy liability balance. At present, bankruptcy assets are still being meas- ured. Total loans included in bankruptcy liabilities, net of the partaking parent company credit, amount to ?51.3 million, already admitted to bankruptcy, while the request for a late admission of about 9 million euro is still pending. Note that various court denials of insolvency are pending against the Municipalities, re- garding the preemptive rights of the admitted credits. Banco also instructed an equal number of clawback actions under art. 102 of the bankruptcy act (now art. 98) against the Municipalities to which the Treasuries belonged (represent- ing credits accounting for about 80% of the admitted bankruptcy liabilities), since criminal procedures ascertained the non liability of Banco’s officers on the one side, and on the other the criminal liability of most Municipal officers. Dur- ing said clawback proceedings, upon instruction of the Court, the Official Re- ceiver ordered the trustees to take part in the proceedings, to require the revo- cation of credits. All revocation requests filed up to now refer to credits includ- ed in the bankruptcy liabilities for a total amount of 44.8 million euro. Consid- ering the temporary negative evolution of the legal action under examination, Banco filed an appeal. The relevant allowance in the provisions under examina- tion as at December 31st, 2006 totaled 43.3 million euro. The Bankruptcy trustees also instructed a legal proceeding against Banco, in- voking the latter’s responsibility, also under art. 2049 c.c., on the assumption that Banco and its officers contributed to causing the insolvency by keeping up the lines of credit with Italgest. The required claims are equal to the entire bank- ruptcy liabilities outstanding at the time of application (55.3 million euro), We deem this legal action (the proceeding is still in first instance) to be groundless, supported also by the criminal court decisions acquitting Banco’s employees and condemning Municipal employees. No provision has been set aside against this claim, in that the clawback action and the claim for damage do not represent a risk duplication. Should the latter claim be accepted, either entirely or partly, au- tomatically the bankruptcy assets would be increased correspondingly and as a result the revocable amounts would be reduced.
267 Notes to the consolidated accounts
Clawback action instituted against the banking industry by the Bankruptcy Com- missioner of Parmalat S.p.A.
Towards the end of 2004, Parmalat S.p.A.’s Bankruptcy Commissioner filed a class clawback action against all the banks that entertained business relations with Parmalat. S.p.A.. The clawback action covered all the credit recovery pro- cedures against the Collecchio company, extending the “suspicious” period to December 18th, 2002. The claims add up to more than 170 million euro for Ban- co Popolare di Verona e Novara and about 185 million euro at Group level. According to the banking industry at large, the above clawback action appears to be illicit and groundless, lacking the necessary pre-requisites. In specific, no liquidation procedure was started as a result of an irreversible insolvency, and the action itself was filed by the insolvent debtor. It should also be noted, that the time window covered by the legal action appears irregular, in that the claim that the insolvency could be or was known before the actual financial crack came to light is inadmissible. In keeping with the line of procedure shared by the entire banking industry, the Group started all the defensive actions to protect its rights. At present the pro- ceeding is being examined by the Constitutional Court to decide on its legiti- macy. In the certainty that our actions were always fully compliant with the ap- plicable laws, with regard to the contingent liabilities that could be generated by the settlement of the initiated action, as at December 31st, 2006 by reason of prudence the Group set aside an amount deemed appropriate.
Illustrated below are the main outstanding legal proceedings as at December 31st, 2006:
Lawsuit over claims promoted by the Consorzio Lazio di Mutualità fra Coopera- tive Edilizie di Abitazione and other S.c.ar.l. into receivership
Consorzio Lazio di Mutualità fra Cooperative Edilizie di Abitazione and other S.c.ar.l. into receivership, filed a lawsuit in 2005 against Banco and Banca Popo- lare di Novara S.p.A., in the name and on behalf of an alleged group of compa- nies comprising some cooperatives, among which Palocco 84 S.c.a r.l. and Cyn- thia S.c.a r.l., complaining that as of 1997 the former Banca Popolare di Novara S.c.a r.l. has been extending loans in favor of companies belonging to the above alleged group and, in particular, to the two cooperatives expressly mentioned above, in spite of the fact that it knew that they were insolvent, thus inducing third parties to rely on their solvency and allowing said companies to continue with their business activities, and deteriorating their liabilities even further. The claimant required 46.4 million euro worth of claims. The proceeding appears to be null and void due to the claimant’s lack of active legitimacy, in that the claimant acts in the name of other companies without having the necessary powers. The groundlessness of the claim is manifest if we consider that the claiming company has no relationship with Banco and has no right as a creditor to the two Cooperatives with which Banco entertained relations (Balocco 84 S.c.a r.l. and Cynthia S.c.a r.l.), on the contrary, it is the latter who are creditors to the claimant for an amount equal to the claim raised against Banco. As a re-
268 Notes to the consolidated accounts
sult, to date we do not deem that the lawsuit shall give rise to liabilities for Ban- co and therefore no provisions have been set aside.
Legal actions started by Florio Fiorini against the former Banca Popolare di No- vara s. c. a r.l.
The litigation started by Fiorini against former Banca Popolare di Novara s.c.a r.l. and other banks is still open, aiming at being saved harmless if sentenced to pay more than ?163 million for the criminal proceedings started against Fiorini as part of the Bankruptcy of De Angeli Frua S.p.A.. It should be noted, that the Mi- lan Court and the Milan Court of Appeal in 2002 and 2003 respectively reject- ed Fiorini’s requests, and the latter in 2004 appealed to the Court of Cassation. The litigation started by Florio Fiorini against the former Banca Popolare di No- vara s.c.a r.l. and its subsidiary Seefinanz A.G. together with other banks and companies regarding the sentence to pay claims in excess of ?67 million as a re- sult of various bankrupt companies was recently closed in first instance with a favorable decision to Banco. Based also on the favorable outcome of the deci- sions passed up to now, no liabilities for Banco should emerge from the settle- ment of the above legal proceedings and therefore no provision has been set aside.
Litigation with Istituto Nazionale della Previdenza Sociale (social security agency) for the alleged failure to pay social security contributions on the spread between the legal interest rate and the actual interest rate imposed on mortgages exten- ded to employees by Banca Popolare di Verona – BSGSP.
The petition filed by the bank against the audit report with which I.N.P.S. ob- jected against the failure to pay social security contributions on the spread be- tween the legal and the actual interest rate imposed on mortgages extended to employees was rejected by I.N.P.S. itself on August 29th, 2000. Following the above objection, Banco received tax rolls amounting to ?2.9 million. Banco filed an appeal against said injunctions and the Labor court suspended their enforce- ability. On October 4th, 2005, the Court of Verona passed its decision 390/95 in favor of Banco, published on January 31st, 2006. INPS filed an appeal against this court decision, and the hearing was fixed for September 25th, 2008. Con- sidering the favorable outcome of the first court decision and since we deem INPS’s claim totally groundless, no provision has been set aside.
The reasons for the slew of claims received with regard to general events con- cerning the entire banking industries are illustrated below: Complaints and litigations related to the court decisions n. 21095 of November 4th, 2004 by the Cassation Court, and n. 425 of October 9th, 2000 by the Con- stitutional Court with regard to interest compounding (taking interest on ac- crued interest).
269 Notes to the consolidated accounts
With decision n. 21095 of November 4th, 2004 the Court of Cassation declared the provisions covering the quarterly compounding of interest receivable intro- duced by lending institutions in checking account contracts even before 1999 to be void (in 1999 the Supreme Court had already declared their illegitimacy).
As a result of the above court decision, extrajudicial claims filed by customers for the repayment of the amounts debited as a result of the application of interest compounding soared rapidly and added up to those that had already been filed after the prior decision n. 425 of October 9th, 2000 expressed by the Constitu- tional Court. Although we consider the past behavior of the banks of the Group as legitimate and in line with the entire banking industry, and while taking into account the indications and the initiatives put on by the Italian banking association (ABI) to defend our rights, by reason of prudence the banks of the Group deemed it ap- propriate to set aside the necessary provisions to cover probable estimated con- tingent liabilities.
Complaints and litigations filed by customers in connection to securities issued by defaulted issuers (“Argentina”, “Parmalat” and “Cirio”).
In line with the approach illustrated in prior annual reports, the Group is pro- ceeding with the analytical assessment, on a case by case basis, of claims that are being filed by customers, although their number is subsiding with respect to prior years. This analysis led to the identification of a few cases eligible for compensation, while only very few claims resulted in judicial suits.
In the certainty that we have always performed our duties in full compliance with the applicable regulations and in full consideration of the interest of our customers, in any case we conservatively decided to set aside an appropriate al- lowance against the contingent liabilities that could be generated by the settle- ment of the legal actions and complaints illustrated above in the provisions un- der examination as at December 31st, 2006.
With reference to additional risks associated with sanction procedures brought by the Regulatory and Supervisory Authorities, on April 28th and 29th, 2006 CONSOB informed Banco and some corporate officers of an objection raised against the intermediation activity with customers performed by Banca Popolare di Verona – S.Geminiano e S.Prospero between January 1st, 2001 and Decem- ber 31st, 2001. The objection refers to shortcomings in the procedures related to the provision of investment services, and alleged omissions of information to investors. On June 23rd, 2006, in compliance with the time granted to bring defensive de- ductions, Banco, on its own behalf and on behalf of the corporate officers con- cerned, informed CONSOB of its own deductions with regard to the objected events.
270 Notes to the consolidated accounts
On November 24th, 2006, CONSOB informed Banco and the corporate officers concerned that the inquiry had started with regard to the sanction procedure, and Banco, on its own behalf and on behalf of the corporate officers concerned, on December 28th, 2006 submitted to CONSOB additional defensive evidence. To be noted, that the charges raised in the above described procedure have been challenged against Banco, under art. 195, paragraph 9, of TUF, in its capacity as entity of belonging of the authors of the alleged breaches, who are jointly and severally liable for the payment of any sanctions that should be inflicted as a re- sult of the administrative proceeding. Assuming that Banco pays the sanctions inflicted by CONSOB, Banco in turn would have to bring an action of recourse against the authors of the offences under art. 195, paragraph 9 CIT. No provision was set aside as at December 31st, 2006.
Section 13 Insurance reserves - Item 130
The Group has no shareholdings in insurance companies falling under its con- solidation scope.
Section 14 Redeemable shares - Item 150
14.1 Redeemable shares: breakdown
At the balance sheet date, as well as on December 31st, 2005 the Group held no redeemable shares.
271 Notes to the consolidated accounts
Section 15 Group Shareholders’ equity - Items 140, 160, 170, 180, 190, 200 and 220
15.1 Group Shareholders’ equity: breakdown
(thousand euro) 31-12-2006 31-12-2005
1. Share capital 1,351,182 1,342,569 2, Share premiums 202,304 184,031 3. Reserves 2,044,798 1,734,261 4. (Treasury shares) - - 5. Valuation reserves 240,820 163,118 6. Common stock equivalents - - 7. Group net income (loss) for the year 1,032,914 597,054
Total 4,872,018 4,021,033
As at December 31st, 2006, the Group’s shareholders’ equity stood at 4,872.0 million euro, up by 31.2%, and characterized in particular by the growth in net income for the year by 73 percentage points. Please, refer to the “Statement of changes in Shareholders’ equity” for a more detailed analysis.
15.2 “Share capital” and “Treasury shares”: breakdown
(thousand euro) 31-12-2006 31-12-2005
A. Share capital 375,328,315 372,935,815 Common shares 375,328,315 372,935,815 Other shares - -
B. Treasury shares - - Common shares - - Other shares - -
Total 375,328,315 372,935,815
As at December 31st, 2006, the Group’s share capital was made up of 375,328,315 common shares with a par value of 3.6 million euro. As at December 31st, 2006, no treasury shares were held in portfolio.
272 Notes to the consolidated accounts
15.3 Share capital – Parent company shares: annual changes
Common Other
A. Shares outstanding at the beginning of the year 372,935,815 - - fully paid-in 372,935,815 - - not fully paid-in - - A.1 Treasury shares ( - ) - - A.2 Outstanding shares: opening balance 372,935,815 -
B. Increases 2,406,313 - B.1 New issues 2,392,500 - - against payment: 2,392,500 - - business combinations - - - converted bonds - - - exercised warrates - - - other 2,392,500 - - scrip issues: - - - to employees - - - to directors - - - other - - B.2 Sale of Treasury Shares 13,813 - B.3 Other changes - -
C. Decreases (13,813) - C.1 Cancellation - - C.2 Purchase of Treasury Shares (13,813) - C.3 Business transfers - - C.4 Other changes - -
D. Shares outstanding: closing balance 375,328,315 - D.1 Treasury shares (+) - - D.2 Shares outstanding at year-end 375,328,315 - - fully paid-in 375,328,315 - - not fully paid-in - -
15.4 Share capital: other information
All common shares outstanding as at December 31st, 2006 are authorized and fully paid in. Shares are bound by no constraints or privilege of any kind and each share has the same rights in terms of dividend payment and capital re- demption. At the balance sheet date, Banco held no treasury shares. With re- gard to rights assigned under the stock option plan, see Chapter I – “ Share- based payments“ of these explanatory notes.
273 Notes to the consolidated accounts
15.5 Retained earnings: other information
(thousand euro) 31-12-2006 31-12-2005
Legal reserves 380,399 339,963 Statutory reserves 629,555 588,430 Other reserves 757,010 532,675
Total 1,766,964 1,461,068
15.6 Valuation reserves: breakdown
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Financial assets available for sale 171,119 - 171,119 94,459 2. Property, plant and equipment - 217 217 - 3. Intangible assets - - - - 4. Hedges of foreign investments - - - - 5. Cash flow hedges 2,805 - 2,805 (750) 6. Exchange differences - - - - 7. Non-current assets available for sale - - - - 8. Special revaluation laws 66,679 - 66,679 69,409
Total 240,603 217 240,820 163,118
274 Notes to the consolidated accounts
15.7 Valuation reserves: annual changes
15.7.1 Banking group
Financial Property Hedges Exchange Non-current Special (thousand euro) assets Intangible Cash flow assets available for plant and assets of foreign hedges rate available for revaluation sale equipment investments differences sale laws
A. Opening balance 94,459 - - - (750) - - 69,409
B. Increases 97,994 - - - 3,787 - - - B.1 Fair value increases 94,345 - - - 3,787 - - X B.2 Other changes 3,649 ------(of which for business combinations) ------
C. Decreases (21,334) - - - (232) - - (2,730) C.1 Fair value decreases (9,578)------X C.2 Other changes (11,756) - - - (232) - - (2,730) (of which for business combinations) ------
D. Closing balance171,119 - - - 2,805 - - 66,679
15.7.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
275 Notes to the consolidated accounts
15.7.3 Other companies
Financial Property Hedges Non-current Special (thousand euro) assets Intangible Cash flow Exchange assets available for plant and assets of foreign hedges rate available for revaluation sale equipment investments differences sale laws
A. Opening balance ------
B. Increases - 217 ------B.1 Fair value increases - 104 -----X B.2 Other changes - 113------(of which for business combinations) - 113 ------
C. Decreases ------C.1 Fair value decreases ------X C.2 Other changes ------(of which for business combinations) ------
D. Closing balance - 217 ------
15.8 Valuation reserves for financial assets available for sale: breakdown
Banking group Other companies 31-12-2006 31-12-2005 (thousand euro) Positive Negative Positive Negative Positive Negative Positive Negative reserve reserve reserve reserve reserve reserve reserve reserve
1. Debt securities 7,078 (19,642) - - 7,078 (19,642) 20,651 (28,926) 2. Equity securities 192,620 (8,612) - - 192,620 (8,612) 108,680 (4,601) 3. Units in UCITS 1,120 (1,445) - - 1,120 (1,445) - (1,345) 4. Loans ------
Total 200,818 (29,699) - - 200,818 (29,699) 129,331 (34,872)
276 Notes to the consolidated accounts
15.9 Valuation reserves for financial assets available for sale: annual changes
15.9.1 Banking group
(thousand euro) Debt Equity Units in Loans securities securities UCITS
1. Opening balance (8,275) 104,079 (1,345) -
2. Positive changes 2,815 99,771 2,015 - 2.1 Positive fair value changes 2,770 93,029 2,015 - 2.2 Reclassification to profit or loss of negative provisions: 45 - - - - due to impairment ---- - due to disposal 45 - - - 2.3 Other changes - 6,742 - - (of which for business combinations) ----
3. Negative changes (7,104) (19,842) (995) - 3.1 Negative fair value changes (4,005) (8,044) (995) - 3.2 Impairment losses ---- 3.3 Reclassification to profit or loss of positive provisions: due to disposal (46) (9.046) - - 3.4 Other changes (3,053) (2,752) - - (of which for business combinations) ----
4. Closing balance (12,564) 184,008 (325) -
15.9.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
277 Notes to the consolidated accounts
15.9.3 Other companies
(thousand euro) Debt Equity Units in Loans securities securities UCITS
1. Opening balance ----
2. Positive changes ---- 2.1 Positive fair value changes ---- 2.2 Reclassification to profit or loss of negative provisions: ---- - due to impairment ---- - due to disposal ---- 2.3 Other changes ---- (of which for business combinations) ----
3. Negative changes ---- 3.1 Negative fair value changes ---- 3.2 Impairment losses ---- 3.3 Reclassification to profit or loss of positive provisions: due to disposal ---- 3.4 Other changes ---- (of which for business combinations) ----
4. Closing balance ----
Section 16 Minority interest - Item 210
16.1 Minority interest: breakdown
(thousand euro) 31-12-2006 31-12-2005
1. Share capital 24,389 22,869 2. Share premiums 3,319 1,308 3. Riserve 84,128 76,512 4. (Treasury shares) -- 5. Valuation reserves 1,843 689 6. Common stock equivalents - - 7. Minority interest 31,082 15,687
Total 144,761 117,065
278 Notes to the consolidated accounts
As at December 31st, 2006, minority interest amounted to 144.8 million euro, up by 23.7% with respect to the previous year.
16.2 Valuation reserves: breakdown
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Financial assets available for sale 1,629 - 1,629 689 2. Property, plant and equipment - 161 161 - 3. Intangible assets - - - - 4. Hedges of foreign investments - - - - 5. Cash flow hedges 53 - 53 - 6. Exchange differences - - - - 7. Non-current assets available for sale - - - - 8. Special revaluation laws - - - -
Total 1,682 161 1,843 689
16.3 Common stock equivalents: breakdown and annual changes
The Group has no common stock equivalents.
16.4 Valuation reserves for financial assets available for sale: breakdown
Banking group Other companies 31-12-2006 (thousand euro) Positive Negative Positive Negative Positive Negative reserve reserve reserve reserve reserve reserve
1. Debt securities ------2. Equity securities 1,643 (6) - - 1,643 (6) 3. Units in UCITS 39 (47) - - 39 (47) 4. Loans ------
Total 1,682 (53) - - 1,682 (53)
279 Notes to the consolidated accounts
16.5 Valuation reserves: annual changes
16.5.1 Banking group
Financial Property Hedges Non-current Special (thousand euro) assets Intangible Cash flow Exchange assets available for plant and assets of foreign hedges rate available for revaluation sale equipment investments differences sale laws
A. Opening balance 689 ------
B. Increases 1,119 - - - 85 - - - B.1 Fair value increases 1.117 - - - 85 - - X B.2 Other changes 2 ------
C. Decreases (179) - - - (32) - - - C.1 Fair value decreases (54) ------X C.2 Other changes (125) - - - (32) - - -
D. Closing balance 1,629 - - - 53 - - -
16.5.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
16.5.3 Other companies
Financial Property Hedges Non-current Special (thousand euro) assets Intangible Cash flow Exchange assets available for plant and assets of foreign hedges rate available for revaluation sale equipment investments differences sale laws
A. Opening balance ------
B. Increases - 161 ------B.1 Fair value increases - 161 -----X B.2 Other changes ------
C. Decreases ------C.1 Fair value decreases ------X C.2 Other changes ------
D. Closing balance - 161 ------
280 Notes to the consolidated accounts
Other information 1. Guarantees given and commitments
(thousand euro) Banking Other group companies 31-12-2006 31-12-2005
1. Financial guarantees given 1,586,986 - 1,586,986 1,145,111 a) Banks 106,697 - 106,697 25,240 b) Customers 1,480,289 - 1,480,289 1,119,871 2. Commercial guarantees given 4,879,004 - 4,879,004 3,619,260 a) Banks 994,475 - 994,475 183,374 b) Customers 3,884,529 - 3,884,529 3,435,886 3. Irrevocable commitment to grant credit lines 2,825,160 - 2,825,160 2,436,102 a) Banks 319,754 - 319,754 345,388 i) certainty of utilization 168,594 - 168,594 342,370 ii) uncertainty of utilization 151,160 - 151,160 3,018 b) Customers 2,505,406 - 2,505,406 2,090,714 i) certainty of utilization 293,813 - 293,813 211,022 ii) uncertainty of utilization 2,211,593 - 2,211,593 1,879,692 4. Commitments underlying credit derivatives: protective puts - - - - 5. Assets pledged to secure third party obligations 7 - 7 25 6. Other commitments 1,891,757 - 1,891,757 1,692,215
Total 11,182,914 - 11,182,914 8,892,713
2. Assets pledged as collateral for own liabilities and commitments
(thousand euro) 31-12-2006 31-12-2005
1. Financial assets held for trading 2,894,013 2,715,755 2. Financial assets measured at fair value - - 3. Financial assets available for sale 114,821 207,867 4. Financial assets held to maturity 862,857 528,098 5. Due from Banks 123,890 - 6. Loans to Customers - - 7. Property, plant and equipment - -
Total 3,995,581 3,451,720
281 Notes to the consolidated accounts
3. Information on operating lease
As at December 31st, 2006, there were no operating lease assets and liabilities.
4. Breakdown of investments associated with unit-linked and index linked policies
On December 31st, 2006, the Group held no investments associated with unit and index linked policies.
5. Asset management and brokerage on behalf of third parties: banking group
(thousand euro) Amounts
1. Trading of financial instruments on behalf of third parties 15,454,042 a) Purchase 7,750,814 1. Settled 7,739,413 2. Unsettled 11,401 b) Sale 7,703,228 1. Settled 7,699,935 2. Unsettled 3,293
2. Managed accounts 17,677,788 a) individual 17,675,169 b) collective 2,619
3. Securities custody and administration 140,949,080 a) non-proprietary securities on deposit: as custodian bank (excluding managed accounts) 7,594,615 1. Securities issued by the bank preparing the financial statements 3,945,846 2. Other securities 3,648,769 b) other non-proprietary securities on deposit (excluding managed accounts): other 64,870,571 1. Securities issued by the bank preparing the financial statements 9,249,823 2. Other securities 55,620,748 c) non-proprietary securities deposited with others 58,733,821 d) proprietary securities deposited with others 9,750,073
4. Other transactions 2,577,082
282 Notes to the consolidated accounts
6. Asset management and brokerage on behalf of third parties: insu- rance companies
There are no insurance companies falling under the consolidation scope.
7. Asset management and brokerage on behalf of third parties: other companies
No asset management and brokerage activities on behalf of third parties were performed by other companies.
283 Notes to the consolidated accounts
Chapter C – Notes to the consolidated income statement Section 1 Interest income and expense - Items 10 and 20
1.1 Interest income and similar revenues: breakdown
1.1.1 Banking group
Performing fin. assets Impaired Other (thousand euro) financial 2006 2005 Debt assets Loans assets securities
1. Financial assets held for trading 170,465 - - 2,447 172,912 143,929 2. Financial assets measured at fair value 104 - - - 104 107 3. Financial assets available for sale 21,673 - - 4 21,677 27,299 4. Financial assets held to maturity 25,647 - - - 25,647 17,054 5. Due from banks - 184,571 - 3,446 188,017 115,415 6. Due from customers 1,672 2,064,024 60,663 5,427 2,131,786 1,647,859 7. Hedging derivatives X X X 11,451 11,451 47,424 8. Financial assets sold and not derecognized - 40,727 - - 40,727 29,656 9. Other assets X X X 3,839 3,839 3,735
Total 219,561 2,289,322 60,663 26,614 2,596,160 2,032,478
Interest income reported in the sub-item “Hedging derivatives” represents the balance of all spreads accrued on asset and liability hedging contracts and on derivatives classified as belonging to the trading portfolio, but associated with li- abilities measured at fair value or assets classified as available for trading.
For the sake of comparability, spreads accrued on derivatives associated with li- abilities measured at fair value or assets classified as available for trading, which in 2005 had been reported in items “Financial assets held for trading” and “ Other assets”, have been reclassified in sub-item “Hedging derivatives”.
284 Notes to the consolidated accounts
1.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
1.1.3 Other companies
Performing fin. assets Impaired Other (thousand euro) financial 2006 2005 Debt assets Loans assets securities
Total 9 3 - 3 15 15
1.2 Interest income and similar revenues: spreads on hedging transac- tions
(thousand euro) Banking Other 2006 group companies
A. Positive differentials on: A.1. Specific fair value hedging of assets 42,511 - 42,511 A.2. Specific fair value hedging of liabilties 145,131 - 145,131 A.3. Macrohedging of interest rate risk 93,668 - 93,668 A.4. Specific cash flow hedging of assets - - - A.5. Specific cash flow hedging of liabilities 1,839 - 1,839 A.6. Macrohedging of cash flows 2,893 - 2,893
Total positive differentials (A) 286,042 - 286,042
B. Negative differentials on: B.1. Specific fair value hedging of assets (50,991) - (50,991) B.2. Specific fair value hedging of liabilties (123,026) - (123,026) B.3. Macrohedging of interest rate risk (95,043) - (95,043) B.4. Specific cash flow hedging of assets - - - B.5. Specific cash flow hedging of liabilities (2,253) - (2,253) B.6. Macrohedging of cash flows (3,278) - (3,278)
Total negative differentials (B) (274,591) - (274,591)
C. Balance (A-B) 11,451 - 11,451
285 Notes to the consolidated accounts
1.3 Interest income and similar revenues: other information
1.3.1 Interest income on financial assets denominated in foreign currency
(thousand euro) 2006 2005
Interessi attivi su attività in valuta 33,077 33,851
1.3.2 Interest income on finance lease receivables
(thousand euro) 2006 2005
Interessi attivi su operazioni di leasing finanziario 94,855 92,575
1.3.3 Interest income on loans with third party assets under custody
(thousand euro) 2006 2005
Interessi attivi su fondi di terzi in amministrazione 152 44
1.4 Interest expense and similar charges: breakdown
1.4.1 Banking group
(thousand euro) Deposits/ Securities Other 2006 2005 payables liabilities
1. Due to banks 254,611 X - 254,611 145,103 2. Due to customers 391,988 X - 391,988 239,187 3. Debt securities in issue X 432,319 - 432,319 324,809 4. Financial liabilities held for trading 1,000 - - 1,000 3,930 5. Financial liabilities measured at fair value - 160,157 - 160,157 92,251 6. Financial liabilities associated with assets sold and not derecognized 14,751 - - 14,751 17,069 7. Other liabilities X X 597 597 505 8. Hedging derivatives X X---
Total 662,350 592,476 597 1,255,423 822,854
286 Notes to the consolidated accounts
1.4.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
1.4.3 Other companies
(thousand euro) Deposits/ Securities Other 2006 2005 payables liabilities
Total 15 - - 15 2
1.5 Interest expense and similar charges: spreads on hedging transac- tions
See item 1.2 above, as the spread balance is positive.
1.6 Interest expense and similar charges: other information
1.6.1 Interest expense on liabilities denominated in foreign currency
(thousand euro) 2006 2005
Interest expense on foreign currency liabilities 40,691 27,878
1.6.2 Interest income on finance lease payables
(thousand euro) 2006 2005
Interest expense on finance lease payables 573 213
As at December 31st, 2006, interest expense on finance lease payables totaled 573 thousand euro and were reported on line 7 “other liabilities” of table 1.4.
1.6.3 Interest expense on third-party assets under custody
(thousand euro) 2006 2005
Interest expense on third party assets under custody 160 46
287 Notes to the consolidated accounts
Section 2 Fees and commissions
2.1 Commission income: breakdown
2.1.1 Banking group
(thousand euro) 2006 2005
a) guarantees given 29,826 26,592 b) credit derivatives - 81 c) management, brokerage and advisory services: 623,921 588,316 1. Trading of financial instruments 34,405 27,913 2. Currency trading 11,375 16,075 3. Managed accounts 301,757 280,244 3.1 individual 88,085 82,566 3.2 collective 213.672 197.678 4. Securities administration and custody 8,679 7,392 5. Custodian bank 27,658 26,624 6. Securities placement 92,864 94,985 7. Order collection 26,386 21,236 8. Advisory services 4,765 8,609 9. Distribution of third party services 116,031 105,238 9.1 managed accounts - 4,219 9.1.1 individual - 4,219 9.1.2 collective - - 9.2 insurance products 87,152 75,281 9.3 other products 28,879 25,738 d) payment and collection services 117,319 115,531 e) securitization servicing 188 219 f) factoring services 3 - g) tax collection services - 1 h) other services 170,803 156,859
Total 942,060 887,599
During the year no credit derivative transactions were performed, therefore Item b) “credit derivatives” is not populated. Item h) “other services” includes in particular checking account recoveries for 69.8 million euro, on mortgages and other loans for 31.6 million euro, on ATM and credit card services for 29.1 million euro, commissions on foreign transac- tions and services for 4.0 million euro, fees for safe deposit boxes for 3.1 million euro.
288 Notes to the consolidated accounts
2.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
2.1.3 Other companies
(thousand euro) 2006 2005
c) management, brokerage and advisory services: 6,125 5,799 9. Distribution of third party services 6,125 5,799 9.1 managed accounts - - 9.1.1 individual - - 9.1.2 collective - - 9.2 insurance products 6,125 5,799 9.3 other products - -
Total 6,125 5,799
2.2 Commission income: distribution channels of products and services
2.2.1 Banking group
(thousand euro) 2006 2005
a) Through own branches: 299,294 284,079 1. managed accounts 90,416 84,555 2. securities placement 92,864 94,690 3. third party services and products 116,014 104,834
b) Off-branch distribution: 211,358 196,388 1. managed accounts 211,341 195,689 2. securities placement - 295 3. third party services and products 17 404
c) Other distribution channels: - - 1. managed accounts - - 2. securities placement - - 3. third party services and products - -
289 Notes to the consolidated accounts
2.3 Commission expense: breakdown
2.3.1 Banking group
(thousand euro) 2006 2005
a) Guarantees given 729 576
b) Credit derivatives - 7,548
c) Management and brokerage sevices: 41,176 34,417 1. Trading of financial assets 16,848 11,928 2. Currency trading 262 555 3. Asset management: 1 90 3.1 proprietary portfolio 1 - 3.2 non-proprietary portfolio - 90 4. Securities custody and administration 7,554 5,890 5. Placement of financial instruments 13,606 9,828 6. Off-branch distribution of financial instruments, products and services 2,905 6,126
d) Payment and collection services 27,256 28,916
e) Other services 34,313 21,773
Total 103,474 93,230
During the year no credit derivative transactions were performed, therefore Item b) “credit derivatives” is not populated.
2.3.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
2.3.3 Other companies
(thousand euro) 2006 2005
c) Management and brokerage sevices: 579 519 6. Off-branch distribution of financial instruments, products and services 579 519 e) Other services 46 48
Total 625 567
290 Notes to the consolidated accounts units Profit from UCITS from Dividends units Profit from UCITS from Dividends units Profit from UCITS from Dividends units Profit from UCITS from Banking group Other companies 2006 2005 Dividends Total 89,514 80 - - 89,514 80 55,220 25 (thousand euro) A. Financial assets held for tradingB. Financial assets available for sale at fair valueC. Financial assets measured investmentsD. Equity 74,434 14,076 - 3 77 - 1,004 - - - X - - - 74,434 14,076 - - 3 77 X 45,939 9,279 1,004 - 25 - X - 2 - X Section 3 Dividend income and similar revenues - Item 70 Section 3 Dividend income and similar revenues breakdown 3.1 Dividend income and similar revenues:
291 Notes to the consolidated accounts
Section 4 Net trading income - Item 80
4.1 Net trading income: breakdown
4.1.1 Banking group
Capital Trading Capital Trading Net profit (thousand euro) gains income losses losses (loss) (A) (B) (C) (D) (A+B)–(C+D)
1. Financial assets held for trading 53,824 69,795 (35,171) (70,736) 17,712 1.1 Debt securities 6,654 19,169 (29,315) (22,664) (26,156) 1.2 Equity securities 33,961 43,257 (3,258) (41,304) 32,656 1.3 UCITS units 13,209 4,248 (2,598) (6,768) 8,091 1.4 Loans ----- 1.5 Other - 3,121 - - 3,121
2. Financial liabilities held for trading 115 152 (289) (3,016) (3,038) 2.1 Debt securities ----- 2.2 Deposits and payables 115 152 (289) (3,016) (3,038) 2.3 Other -----
3. Other financial assets and liabilities: XXXX26,748 exchange differences
4. Derivatives 592,631 2,104,778 (298,615) (2,345,911) 65,133 4.1 Financial derivatives 592,631 2,104,778 (298,615) (2,345,785) 53,009 - on debt securities and interest rates 417,534 1,976,004 (226,727) (2,077,427) 89,384 - on equity securities and equity indices 175,057 128,298 (71,888) (267,946) (36,479) - on currencies and gold XXXX12,250 - other 40 476 - (412) 104 4.2 Credit derivatives - - - (126) (126)
Total 646,570 2,174,725 (334,075) (2,419,663) 106,555
4.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
4.1.3 Other companies
No profit or loss on trading was reported by other companies.
292 Notes to the consolidated accounts
Section 5 Fair value adjustments in hedge accounting - Item 90
5.1 Fair value adjustments in hedge accounting
(thousand euro) Banking Other 2006 2005 group companies
A. Income on: A.1 Fair value hedging derivatives 13,244 - 13,244 2,408 A.2 Hedged financial assets (fair value) 1,119 - 1,119 4,934 A.3 Hedged financial liabilities (fair value) 48,105 - 48,105 6,820 A.4 Cash flow hedging derivatives - - - - A.5 Foreign currency assets and liabilities - - - -
Total hedging income (A) 62,468 - 62,468 14,162
B. Expense on: B.1 Fair value hedging derivatives (41,390) - (41,390) (11,418) B.2 Hedged financial assets (fair value) (13,230) - (13,230) (2,238) B.3 Hedged financial liabiltiies (fair value) (6,819) - (6,819) - B.4 Cahs flow hedging derivatives - - - - B.5 Foreign currency assets and liabilities - - - -
Total hedging expense (B) (61,439) - (61,439) (13,656)
C. Net profit/loss from hedging activities (A-B) 1,029 - 1,029 506
293 Notes to the consolidated accounts Net Result 1,682 -7 1,675 Profit Loss Net Result 2,071 -104 1,967 509 -224 285 2,071 -104 1,967 509 -224 285 2,503 -2 2,501 67 -20 47 17,506 -587 16,919 13,106 -1,459 11,647 77,074 -23,793 53,281 15,031 -1,466 13,565 59,568 -23,206 36,36214,970 243 -556 14,414 - 8,008 243 -1 8,007 Profit Loss Net Result ------Profit Loss Net Banking group Other companies 2006 2005 ------Profit Loss 3.3 UCITS units 2,503 -2 2,501 3.1 Debt securities3.2 Equity securities 14,970 33 -556 -29 14,414 4 - - - - 33 -29 4 5,031 -1,438 3,593 available for sale 17,506 -587 16,919 held to maturity 3.4 Loans Total AssetsTotal 77,074 LiabilitiesTotal -23,793 53,281 2,071 -104 1,967 Financial liabilities 1, Due to banks 2, Due to customers 3, Debt securities in issue 2,071 -104 1,967 3. Financial assets (thousand euro) Financial assets 1. banks Due from 2. Customer loans 59,568 -23,206 36,362 4. Financial assets Section 6 Profit (Loss) on disposal/repurchase - Item 100 (Loss) on disposal/repurchase Section 6 Profit (Loss) on disposal/repurchase 6.1 Profit
294 Notes to the consolidated accounts
Section 7 Profit/Loss on financial assets and liabilities designated at fair value – Item 110
7.1 Fair value change in financial assets and liabilities designated at fair value: breakdown
7.1.1 Banking group
Capital Trading Capital Trading Net profit (thousand euro) gains income losses losses (loss) (A) (B) (C) (D) (A+B)–(C+D)
1. Financial assets 19,585 4,578 (1,090) (105) 22,968 1.1 Debt securities 767 2,075 (1,073) (105) 1,664 1.2 Equity securities 1,469 - - - 1,469 1.3 UCITS units 17,349 2,503 (17) - 19,835 1.4 Loans -----
2. Financial liabilities 111,875 18,086 (8,328) (683) 120,950 2.1 Debt securities in issue 111,871 18,086 (8,328) (683) 120,946 2.2 Due to banks 4 - - - 4 2.3 Due to customers -----
3. Financial assets and liabilities in foreign currency: exchange differences XXXX -
4. Derivative instruments 25,893 15,464 (150,999) (5,025) (114,699) 4.1 Financial derivatives 25,893 15,464 (150,999) (5,025) (114,699) - on debt securities and interest rates 20,713 14,853 (144,993) (5,025) (114,452) - on equity securities and equity indices 5,168 611 (6,006) - (227) - on currencies and gold XXXX(32) - other 12 - - - 12 4.2 Credit derivatives -----
Total 157,353 38,128 (160,417) (5,813) 29,219
7.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
295 Notes to the consolidated accounts
7.1.3 Other companies falling under the consolidation scope
No profit or loss from financial assets and liabilities designated at fair value were reported by other companies.
Section 8 Net write-downs/write-backs on impairment - Item 130
8.1 Net impairment losses on loans: breakdown
8.1.1 Banking group
Write-downs Write-backs (thousand euro) Individual Individual Collective 2006 2005 Collective Write-offs Other ABAB
A. Due from banks - - (280) - - - 4 (276) 551 B. Due from customers (76,088) (183,846) (43,062) 79,583 89,586 - 161 (133,666) (74,416)
C. Total (76,088) (183,846) (43,342) 79,583 89,586 - 165 (133,942) (73,865)
A = interest-related B = other
8.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
296 Notes to the consolidated accounts
8.1.3 Other companies
Write-downs Write-backs (thousand euro) Individual Individual Collective 2006 2005 Collective Write-offs Other ABAB
A. Due from banks ------3 B. Due from customers - (14) - - 136 - - 122 -
C. Total - (14) - - 136 - - 122 3
A = interest-related B = other
8.2 Net impairment losses on financial assets available for sale: break- down
8.2.1 Banking group
Write-downs Write-backs (thousand euro) Individual Individual 2006 2005 Write-offs Other A B
A. Debt securities - - - - - (101) B. Equity securities (2,170) (24) X X (2,194) (51) C. UCITS units - - X - - (1,988) D. Loans to banks ------E. Loans to customers ------
F. Total (2,170) (24) - - (2,194) (2,140)
A = interest-related B = other
8.2.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
297 Notes to the consolidated accounts
8.2.3 Other companies
No impairment losses on financial assets available for sale were reported by other companies.
8.3 Net impairment losses on financial assets held to maturity: break- down
No impairment losses on financial assets held to maturity were reported during the year
8.4 Net impairment losses on other financial transactions: breakdown
8.4.1 Banking group
Write-downs Write-backs (thousand euro) Individual Individual Collective 2006 2005 Collective Write-offs Other ABAB
A. Guarantees given - (1,750) (1,011) - 406 - 4 (2,351) 675 B. Credit derivatives ------C. Commitments ------D. Other transactions - (1) -----(1)-
E. Total - (1,751) (1,011) - 406 - 4 (2,352) 675
A = interest-related B = other
8.4.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
8.4.3 Other companies falling under the consolidation scope
No impairment losses on other financial transactions were reported by other companies.
Section 9 Net premiums - Item 150
Not material for the Group.
298 Notes to the consolidated accounts
Section 10 Other insurance revenues and charges - Item 160
Not material for the Group.
Section 11 Administrative expenses - Item 180
11.1 Personnel expenses: breakdown
(thousand euro) Banking Other 2006 2005 group companies
1. Employees under payroll 867,899 2,688 870,587 876,390 a) wages and salaries 593,426 1,971 595,397 582,021 b) social security charges 162,173 572 162,745 155,458 c) termination benefits 629 145 774 5,919 d) pension expenses 201 - 201 281 e) provisions for employee termination benefits 26,752 - 26,752 50,546 f) provisions for post-employment benefits and similar: 1,836 - 1,836 3,052 - defined contribution 1,824 - 1,824 1,669 - defined benefit 12 - 12 1,383 g) payments to external supplementary pension funds: 16,328 - 16,328 17,323 - defined contribution 5,553 - 5,553 17,323 - defined benefit 10,775 - 10,775 - h) costs associated with share- based payments 1,911 - 1,911 2,690 i) other employee benefits 66,568 - 66,568 60,416 l) expense recovery for detached personnel (1,925) - (1,925) (1,316) 2. Other staff 6,527 530 7,057 6,227 3. Directors 6,477 144 6,621 6,555
Total 880,903 3,362 884,265 889,172
Item h) “costs associated with share-based payments” includes charges on op- tions issued in favor of employees covering the portion pertaining to the current financial year. For more information on the existing stock option plan, see Chap- ter I of these explanatory notes.
299 Notes to the consolidated accounts
11.2 Average number of employees – Banking group
(thousand euro) 2006 2005
Employees 12,364 12,090 a) senior management 213 195 b) total managers 4,678 4,496 of which: 3° and 4° level 2,208 2,098 c) remaining staff 7,473 7,399 Other staff 137 116
Total 12,501 12,206
The average number of employees related to 2005 is restated excluding the em- ployees of the companies Sestri and Sari.
11.3 Post-employment defined benefit plans: total costs
(thousand euro) 2006 2005
a) Pension costs related to current employment service - - b) Pension costs related to past employment service (113) (467) c) Financial charges - - d) Expected return on plan assets - - e) Actuarial gains and losses - 547 f) Profit and losses on curtailments or settlements 467 -
Total 354 80
11.4 Other benefits in favor of employees
In the item referring to other benefits in favor of employees, whose costs are shown in the previous table 11.1, item “i) other employee benefits” includes charges associated with loyalty bonuses, illustrated in Chapter B, Section 12.3, of these explanatory notes (liabilities).
300 Notes to the consolidated accounts
11.5 Other administrative expenses: breakdown
(thousand euro) Banking Other 2006 2005 group companies
a) Property expenses 79,264 116 79,380 87,753 - rental and maintenance 52,400 72 52,472 63,345 - cleaning of premises 8,565 29 8,594 8,310 - energy, water and heating 18,299 15 18,314 16,098 b) direct and indirect taxes 102,313 17 102,330 95,223 c) postage, telephone, print-outs and other office expenses 50,546 144 50,690 50,202 d) maintenance and rents for furnitre, plant and equipment 47,577 25 47,602 54,453 e) fees to external professionals 44,521 25 44,546 46,267 f) information and survey expenses 25,872 3 25,875 26,526 g) security and armored truck guards 12,544 - 12,544 12,281 h) third party services 34,508 1,115 35,623 26,753 i) advertising, entertainment and gifts 20,868 53 20,921 15,757 l) insurance premiums 11,266 60 11,326 10,836 m) rentals and other travel expenses 8,522 19 8,541 13,936 n) Other sundry costs and expenses 30,324 598 30,922 25,128
Total 468,125 2,175 470,300 465,115
Section 12 Net provisions for risks and charges - Item 190
12.1 Net provisions for risks and charges
(thousand euro) Provisions Reallocated surplus 2006 2005
1. Provisions to post-employment benefit plan 354 X 354 80 2. Provisions for other risks and charges: (65,100) 5,984 (59,116) (29,935) a) legal disputes (56,333) 610 (55,723) (27,151) b) personnel costs ---- c) other (8,767) 5,374 (3,393) (2,784)
Total (64,746) 5,984 (58,762) (29,855)
301 Notes to the consolidated accounts
With regard to the impact on income of net provisions for risks and charges, see the comment to table 12.2 of “Annual changes” in Section 12 “Provisions for risks and charges” of liabilities in Chapter B – Notes to the consolidated balance sheet of these explanatory notes.
Section 13 Impairments/write-backs on property, plant and equipment - Item 200
13.1 Net impairments/write-backs on property, plant and equipment: breakdown
13.1.1 Banking group
Depre- Impairment Write- Net (thousand euro) ciation losses backs result (A) (B) (C) (A+B-C)
A. Property, plant and equipment A.1 Owned (45,705) (148) - (45,853) - operational (44,571) (148) - (44,719) - investment (1,134) - - (1,134) A.2 Finance lease (595) - - (595) - operational (595) - - (595) - investment ----
Total (46,300) (148) - (46,448)
13.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
302 Notes to the consolidated accounts
13.1.3 Other companies
Depre- Impairment Write- Net (thousand euro) ciation losses backs result (A) (B) (C) (A+B-C)
A. Property, plant and equipment A.1 Owned (221) - - (221) - operational (221) - - (221) - investment ---- A.2 Finance lease (59) - - (59) - operational (59) - - (59) - investment ----
Total (280) - - (280)
Section 14 Impairments/write-backs on intangible assets - Item 210
14.1 Net impairments/write-backs on intangible assets: breakdown
14.1.1 Banking group
Depre- Impairment Write- Net (thousand euro) ciation losses backs result (A) (B) (C) (A+B-C)
A. Intangible assets A.1 Owned (29,495) - - (29,495) - generated in-house ---- - other (29,495) - - (29,495) A.2 Finance lease ----
Total (29,495) - - (29,495)
14.1.2 Insurance companies
There are no insurance companies falling under the consolidation scope.
303 Notes to the consolidated accounts
14.1.3 Other companies
Depre- Impairment Write- Net (thousand euro) ciation losses backs result (A) (B) (C) (A+B-C)
A. Intangible assets A.1 Owned (417) - - (417) - generated in-house ---- - other (417) - - (417) A.2 Finance lease ----
Total (417) - - (417)
Section 15 Other operating income and expense - Item 220
15.1 Other operating expense: breakdown
(thousand euro) Banking Other 2006 2005 group companies
b) amortization of expenses for leasehold improvements (8,430) - (8,430) (9,144) c) other (21,637) (113) (21,750) (12,590)
Total (30,067) (113) (30,180) (21,734)
15.2 Other operating income: breakdown
(thousand euro) Banking Other 2006 2005 group companies
a) charges attributable to third parties debited on receivable deposits and checking accounts 135,650 - 135,650 137,392 b) tax recoveries 90,211 - 90,211 84,072 c) recovery of expenses 18,629 11 18,640 16,792 d) proceeds from securitizations 3,295 - 3,295 2,799 e) rent income on property 2,869 10 2,879 2,443 f) other 53,050 4,368 57,418 32,838
Total 303,704 4,389 308,093 276,336
304 Notes to the consolidated accounts
Section 16 Share of profit/loss of associates - Item 240
16.1 Share of profit/loss of associates: breakdown
(thousand euro) Banking Other 2006 2005 group companies
1. Companies under joint control A. Income 118,253 - 118,253 17,099 1. Write-ups 18,370 - 18,370 11,147 2. Gains upon disposal 99,711 - 99,711 5,952 3. Write-backs 172 - 172 - 4. Other positive changes - - - - B. Expense (1,532) - - - 1. Write-downs (1,532) - (1,532) 7,411 2. Impairment losses - - - - 3. Losses upon disposal - - - (1,236) 4. Other negative changes - - - (6,175)
Net profit 116,721 - 116,721 9,688
2. Companies under significant influence A. Income 353,120 - 353,120 67,186 1. Write-ups 234,478 - 234,478 44,507 2. Gains upon disposal 102,815 - 102,815 8,748 3. Write-backs 14,561 - 14,561 3 4. Other positive changes 1,266 - 1,266 13,928 B. Expense (81,861) - (81,861) (599) 1. Write-downs (13,492) - (13,492) (599) 2. Impairment losses - - - - 3. Losses upon disposal (5,990) - (5,990) - 4. Other negative changes (62,379) - (62,379) -
Net profit 271,259 - 271,259 66,587
Total 387,980 - 387,980 76,275
305 Notes to the consolidated accounts
Section 17 Fair value changes (or revaluation) of tangible and intangible assets - Item 250
17.1 Fair value changes (or revaluation) of tangible and intangible as- sets: breakdown
The Group has no tangible or intangible assets measured at fair value or revalued.
Section 18 Goodwill impairment - Item 260
The impairment tests conducted on goodwill recognized in the consolidated bal- ance sheet as at December 31st, 2005, as already illustrated in Section 13 of Chapter B of theses explanatory notes, did not give rise to the need for good- will impairment.
Section 19 Profit (loss) on disposal of investments - Item 270
19.1 Profit (loss) on disposal of investments: breakdown
(thousand euro) Banking Other 2006 2005 group companies
A. Property 42,346 - 42,346 364 - Gains upon disposal 42,354 - 42,354 364 - Losses upon disposal (8) - (8) - B. Other assets (548) - (548) 198 - Gains upon disposal 314 - 314 215 - Losses upon disposal (862) - (862) (17)
Net profit 41,798 - 41,798 562
306 Notes to the consolidated accounts
Section 20 Tax on income from continuing operations - Item 290
20.1 Tax on income from continuing operations: breakdown
(thousand euro) Banking Other 2006 2005 group companies
1. Current tax ( - ) (458,393) (1,432) (459,825) (322,360) 2. Changes in current tax in prior years (+/-) (7,118) - (7,118) 25 3. Reduction in current tax for the year(+) - - - 6,189 4. Changes in deferred tax assets (+/-) 28,392 - 28,392 (72,118) 5. Changes in deferred tax liabilities (+/-) (63,732) (15) (63,747) 22,700 6. Income tax for the year (-) (-1 +/- 2 + 3 +/- 4 +/- 5) (486,615) (1,447) (488,062) (365,564)
20.2 Reconciliation between theoretical and effective tax charges recog- nized in the financial statements
2006 2005 (thousand euro) % % Income Tax of gross Income Tax of gross before tax income before tax income
Income before tax 1,545,833 981,436
IRES tax 394,561 25.52% 282,343 28.77% IRAP tax 93,501 6.05% 84,856 8.65% Other taxes (foreign taxes, substitutive taxes, etc) - - 1,314 0.13%
Total 488,062 31.57% 368,513 37.55%
307 Notes to the consolidated accounts
20.2.1 Reconciliation between nominal and actual tax rate
2006 2005 IRES Gross income % Gross income % (thousand euro) / Taxable Tax of gross / Taxable Tax of gross income (1) income income (1) income
Theoretical tax 1,545,833 510,125 33.00% 981,436 323,874 33.00% Actual tax 1,195,639 394,561 25.52% 855,585 282,343 28.77%
Change under reconciliation (350,194) (115,564) (7.48%) (125,851) (41,531) (4.23%)
IRES % % (thousand euro) Tax of gross Tax of gross income income
Undeductible taxes (ICI, undeductible foreign taxes, etc) 1,459 0.09% 3,139 0.32% Undeductible costs, contingent liabilities and losses 2,626 0.17% 1,801 0.18% Undeductible capital losses associated with tax-exempted equity investments 2,152 0.14% 1,454 0.15% Other increases 13,518 0.87% 4,373 0.45% Undeductible capital losses under DL 203/05 13,274 0.86% - Adjustment of deferred tax assets and liabilities from prior years 9,347 0.60% (1,690) (0.17%) Changes in equity investments carried at equity net of changes for deferred taxes on distributable earnings (17,537) (1.13%) (11,882) (1.21%) Dividends excluded (36,765) (2.38%) (11,557) (1.18%) Tax-exempted capital gains associated with tax-exempted equity investments (91,855) (5.94%) (5,751) (0.59%) Losses and profits of foreign companies not deductible/taxable under IRES (172) (0.01%) (3,756) (0.38%) Profit allocated to tax deductible charity (4,664) (0.30%) (3,391) (0.35%) Tax-free UCITS proceeds (1,713) (0.11%) (3,109) (0.32%) Benefits from consolidated tax treatment (2,870) (0.19%) (2,828) (0.29%) Tax-free contingent assets (250) (0.02%) (2,621) (0.27%) Other decreases (2,115) (0.14%) (5,713) (0.58%)
Reconciled Total (115,564) (7.48%) (41,531) (4.23%)
(1) Taxable income net of temporary tax changes and tax changes in current year
308 Notes to the consolidated accounts
2006 2005 IRAP Gross income % Gross income % (thousand euro) / Taxable Tax of gross / Taxable Tax of gross income (1) income income (1) income
Theoretical tax (2) 1,545,833 74,200 4.80% 981,436 47,109 4.80% Actual tax 1,947,938 93,501 6.05% 1,767,833 84,856 8.65%
Change under reconciliation 402,105 19,301 1.25% 786,397 37,747 3.85%
IRAP % % (thousand euro) Tax of gross Tax of gross income income
Undeductible own and third party personnel expenses, and collaboration expenses 39,315 2.54% 38,231 3.90% Loan impairment and provisions for risks and charges, net of utilizations 7,929 0.51% 6,141 0.63% Undeductible non-recurring charges 318 0.02% 2,394 0.24% Other increases 381 0.02% 507 0.05% Adjustment for deferred tax assets and liabilities from prior years (1,495) (0.10%) (283) (0.03%) Dividends excluded (5,574) (0.36%) (2,620) (0.27%) Tax-free non recurring revenues (6,372) (0.41%) (1,733) (0.18%) Other decreases (15,201) (0.98%) (4,890) (0.50%)
Total 19,301 1.25% 37,747 3.85%
(1) Taxable income net of temporary tax changes and tax changes in current year (2) Weighted average rate as a function of the geographical distribution of taxable income of the main companies of the Group
The reconciliation of the tax charges referring to 2005 includes the contribution by SA.RI. and Sestri, since the gross income in item “Income (Loss) after tax from discontinued operations” as provided by IFRS 5 has not been restated.
309 Notes to the consolidated accounts
Section 21 Income (Loss) after tax from discontinued operations - Item 310
21.1 Income (Loss) after tax from discontinued operations: breakdown
(thousand euro) Banking Other 2006 2005 group companies
Discontinued operations and associated liabilities 1. Income 36,662 - - 36,662 48,605 2. Expense (27,520) - (35) (27,555) (37,962) 3. Valuation differences on discontinued operations and associated liabilities - - - - (48) 4. Profit (loss) on disposal - - - - - 5. Tax (2,882) - - (2,882) (2,868)
Income (Loss) 6,260 - (35) 6,225 7,727
21.2 Breakdown of income tax on discontinued operations
(thousand euro) 2006 2005
1. Current tax ( - ) (2,882) (2,868) 2. Changes in deferred tax assets ( +/- ) - - 3. Changes in deferred tax liabilities ( -/+ ) - - 4. Income tax for the year (-1 +/- 2 +/- 3) (2,882) (2,868)
310 Notes to the consolidated accounts
Section 22 Minority interest - Item 330
22.1 Breakdown of item 330 “minority interest”
(thousand euro) 2006 2005
Credito Bergamasco S.p.A. 24,498 12,044 Banca Aletti S.p.A. 2,994 2,434 Aletti Merchant S.p.A. 2,507 262 Leasimpresa S.p.A. 657 583 Arena Broker S.r.l. 103 - Aletti Gestielle S.G.R. S.p.A. 102 85 Aletti Gestielle Alternative S.G.R. S.p.A. 102 82 Other 119 197
Total 31,082 15,687
Item Other includes non material minority interest.
Section 23 Other information
No additional material information is available other than what illustrated in the previous sections.
Section 24 Earnings per share
Annualized share Weighted average euro of profit (euro) of common shares
Basic EPS 962,675,848 374,122,233 2.573 Diluited EPS 960,198,304 377,360,836 2.545
311 Notes to the consolidated accounts
24.1 Average number of diluted common shares
In the course of the year the number of common shares changed as a result of the exercise of stock options at the end of the vesting period.
The weighted average of common shares used for the calculation of basic earn- ings per share was 374,122,233.
The weighted average of common shares used for the calculation of diluted earnings per share was 377,360,836. As at December 31st, 2006, the only po- tential common shares that might have a dilutive effect are the 3,247,500 shares to be issued in case the stock options are exercised.
24.2 Other information
No additional material information is available other than what illustrated in the previous sections.
Chapter D – Segment reporting
A. Primary format
Gruppo Banco Popolare di Verona e Novara decided to adopt the “business seg- ment” as its primary reporting format.
Business sector definition in the primary format
The segment reporting of financial and profitability information under IAS-14 for Gruppo BPVN for the primary format is comprised of three Business Segments and a residual segment (Other): • Commercial Banking – Retail: it includes the business activities of the three commercial banks serving the Retail customer segments (private and small- sized enterprises) and the business activities of the Group companies en- gaging in bancassurance; • Commercial Banking – Corporate: it includes the business activities of the three commercial banks serving the Corporate customer segments (mid and large corporations) and the business activities of the Group companies en- gaging in leasing, factoring, merchant banking and insurance brokerage; • Investment Banking, Private Banking and Asset Management – Finance and Private Banking: it includes portfolio management for Private customers, as- set management, Treasury, proprietary portfolio management and access to financial markets; • Other: which includes: - other companies whose business activities do not belong to the Group’s Core Business (Real estate etc.);
312 Notes to the consolidated accounts
- Corporate Center, that includes all the items associated with the man- agement of the company and all those items that are not directly linked to the business activities of the three business areas described above, as well as special non-performing items that are not directly attributa- ble to the retail or corporate activities; - any balance sheet or income statement inter-segment elimination, as provided in standards, that has not been allocated to the relevant seg- ments of belonging.
The three commercial banks have been allocated to the business segments based on the outcome of the business reporting system, while the other com- panies of the group were assigned to the business segments based on the main business activity they engage in.
Finally, in order to give a better representation of the operating results achieved by Gruppo BPVN in each single business segment, the values referring to finan- cial year 2005, that are shown for comparative reasons, have been restated on a like-to-like basis with the current year. More precisely, P&L data referring to December 2005 factored in: • the adoption of the new accounting criteria, as explained already in the oth- er sections of the financial statements; • the effect of the rearrangement of customer portfolios carried out by the commercial banks at the end of the previous year. At the end of each year, commercial banks reclassify their customers based on the evolution of quantitative (sales) and commercial (sector, type of banking transactions,... etc) parameters which are generally used to assign each single customer to his or her segment of belonging. In order to carry out intra-annual com- parisons on a like-to-like basis, the operating reporting function restates the comparative data referring to the prior year based on the customer seg- mentation in use in the current year; • the progressive enhancement of cost-allocation models and of the alloca- tion criteria of net loan write-downs.
Balance sheet data as at December 31st, 2005 already factored in the effects of customer portfolio rearrangements carried out by the commercial banks at the end of the previous year, as well as the progressive enhancement of operating accounting models.
Criteria used to prepare the income statement by Business Sectors in the primary report
The income statement by business sector was prepared along the following cri- teria: • the net interest income allocated to the business segments was determined by comparing the actual revenues/costs of each item with the correspon- ding figurative values that were calculated based on Internal Rates of Trans- fer (I.R.T.) distinguished by maturity, type of product and currency; • other operating income was calculated by aggregating the total real com-
313 Notes to the consolidated accounts
mission amount by single transaction based on the segment of belonging (retail, corporate, private etc.) of the customer performing the transaction; • the aggregation of interest income and other operating income with total dividends allocated to the corporate center give rise to total operating in- come as illustrated in the chart below; • operating costs are allocated along a full costing model, that assigns all the costs (personnel expenses, administrative expenses, amortization associated with deferred costs) of the commercial banks to the business areas; • loan impairment losses and provisions for risks and charges are allocated to their relevant business segments, while the other value adjustments and profits or losses from disposal of investments are allocated to the “Other” segment; • the income or loss before tax from continuing operations is thus calculated for each business segment, as illustrated in the segment reporting chart.
Criteria used to prepare the balance sheet by Business Sectors in the primary report
The balance sheet by business sector was prepared along the following criteria: customer assets/liabilities are allocated to the business segments based on the results of the customer monitoring business systems; balance sheet items related to due to and from banks are allocated to the “pri- vate and finance” segment; the securities portfolio (both banking book and trading book) is allocated to the “private and finance” segment; the other items, either because they refer to decisions made by the Corporate Center (Equity investments, provisions etc.). or because they are residual items (Other assets/liabilities), in keeping with the income statement model adopted, are allocated to the “other” segment.
A.1 Segment reporting by business sector: P&L data
Invest. Bank., 31-12-2006 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
1. Net interest, dividend and similar income 923,134 546,877 -55,436 70,956 1,485,531 2. Other operating income 722,878 156,696 324,413 62,874 1,266,861 3. Total income (1+2) 1,646,012 703,573 268,977 133,830 2,752,392
4. Operating charges -960,434 -281,353 -111,455 22,458 -1,330,784 5. Profit from operations (3+4) 685,578 422,220 157,522 156,288 1,421,608
6. Write-downs and provisions -59,218 -99,427 -33 282,903 124,225 7. Income before tax from continuing operations 626,360 322,793 157,489 439,191 1,545,833
Capitalized cost 3,822 1,392 1,210 103,338 109,762
314 Notes to the consolidated accounts
Invest. Bank., 31-12-2005 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
1. Net interest, dividend and similar income 775,805 432,162 9,792 47,348 1,265,107 2. Other operating income 687,485 147,138 251,495 42,450 1,128,568 3. Total income (1+2) 1,463,290 579,300 261,287 89,798 2,393,675
4. Operating charges -952,247 -276,333 -103,400 -7,544 -1,339,524 5. Profit from operations (3+4) 511,043 302,967 157,887 82,254 1,054,151
6. Write-downs and provisions -46,071 -78,392 -1,454 42,345 -83,572 7. Income before tax from continuing operations 464,972 224,575 156,433 124,599 970,579
Capitalized cost - 795 474 95,564 96,833
A.2 Segment reporting by business segment: balance sheet data
Values as at December 31st, 2006
Invest. Bank., 31-12- 2006 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
Customer loans 18,922,093 25,309,852 833,807 178,811 45,244,563
Total assets 19,320,152 27,244,242 19,089,150 3,041,391 68,694,935
Invest. Bank., 31-12-2006 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
Due to customers and debt securities in issue 24,386,395 16,109,473 9,890,789 187,376 50,574,033
Total liabilities 24,741,843 16,678,833 20,736,006 6,538,253 68,694,935
Values as at December 31st, 2006 - Equity investments in associates and joint ventures
Invest. Bank., 31-12-2006 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
Jointly controlled 123,328 636 - 15,013 138,977 Under significant influence 94,684 499,347 18 63,909 657,958
315 Notes to the consolidated accounts
Values as at December 31st, 2005
Invest. Bank., 31-12-2005 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
Customer loans 15,246,958 24,023,399 581,616 423,920 40,275,893
Total assets 15,645,696 25,136,607 15,715,228 3,260,856 59,758,387
Invest. Bank., 31-12-2005 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
Due to customers and debt securities in issue 23,493,842 12,586,644 6,725,428 178,217 42,984,131
Total liabilities 23,751,196 14,997,854 17,337,314 3,672,023 59,758,387
Values as at December 31st, 2005 - Equity investments in associates and joint ventures
Invest. Bank., 31-12-2005 Retail Corporate Priv. Bank., Other Total (thousand euro) Asset Man.
Jointly controlled 69,481 699 - 15,007 85,187 Under significant influence 43,851 255,896 22 46,069 345,838
B. Secondary format
The secondary segment reporting format is the “geographical segment”.
Business sector definition in the secondary format
The segment reporting of financial and profitability information under IAS-14 for Gruppo BPVN for the secondary format is comprised of two Business Segments: • Italy: it refers to the business activities of the operational offices of the three commercial banks and the companies of the group whose registered offices are in Italy; • Abroad: it includes the business activities of the companies of the group whose registered offices are in foreign countries, as well as the business ac- tivities of foreign operational offices of Italian companies; • Other: it includes intra-segment relations, which, in compliance with the regulations, have been segregated in a separate column for the reconcilia- tion with the group’s consolidated results.
316 Notes to the consolidated accounts
Criteria for the preparation of the income statement and the balance sheet for Business Segments in the secondary format
Both the balance sheet and the income statement have been prepared by refer- ring to the accounting values of total income and total assets of the companies allocated in the two segments mentioned above. Any intra-segment relation has been segregated, as required by the regulations, in a separate column for the reconciliation with the group’s consolidated results.
B.1 Segment reporting by geographical location: P&L data
31-12-2006 (thousand euro) Italy Abroad Other Total
2,727,020 26,240 -868 2,752,392
Total income 2,727,020 26,240 -868 2,752,392
Total capitalized cost 105,791 3,971 109,762
31-12-2005 (thousand euro) Italy Abroad Other Total
2,366,678 28,206 -1,209 2,393,675
Total income 2,366,678 28,206 -1,209 2,393,675
Total capitalized cost 96,726 107 96,833
B.2 Segment reporting by geographical location: balance sheet data
31-12-2006 (thousand euro) Italy Abroad Other Total
67,425,690 8,921,923 -7,652,678 68,694,935
Total assets 67,425,690 8,921,923 -7,652,678 68,694,935
31-12-2005 (thousand euro) Italy Abroad Other Total
58,805,718 6,169,119 -5,216,450 59,758,387
Total assets 58,805,718 6,169,119 -5,216,450 59,758,387
317 Notes to the consolidated accounts
Chapter E - Risks and associated hedging policies
Section 1 Risks for the Banking Group
1.1 CREDIT RISK
Qualitative information
1. In general
In addition to traditional areas of intervention, it is our banking Group’s inten- tion to cater to the new needs characterizing our society, such as loans to for- eign workers, to young and women entrepreneurship, without however divert- ing our focus from the containment of risks levels through a strict loan selection upon approval, through geographical and sector diversification, the request of collateral guarantees, whenever necessary, and the implementation of an effec- tive performance management.
With regard to corporate customers, in keeping with the banking group’s vo- cation and its strong and deep ties with its territory, our policy aims at support- ing local economic businesses, especially small and medium-sized enterprises. In particular, a program has been launched to broaden our lending product range, featuring a diversified line of medium and long term loans specifically designed to improve the financial structure of business companies and meet their evolv- ing operating needs. The Group is also focused on lending a financial support to companies whose business plans target production and financial efficiency gains and development. Our lending activity is mainly performed in areas characterized by a lively entre- preneurial community, well prepared from a professional viewpoint and prone to innovation, which is key in global competition. A distinctive characteristic of our Group’s customer relations, is the flexibility and the ability not only to adapt our products, but also to identify customer needs anticipating the instruments that best suit their financial necessities, also by way of special finance.
With regard to the retail segment, specific marketing actions have been launched, especially in the residential mortgage sector and for personal loans, aiming at positioning our Group as the partner of choice for households. In par- ticular, with regard to home mortgages, on the one side we offered our cus- tomer new products, and on the other, in order to gain momentum, we entered into alliances with important external partners in order to complement our sales network. Our banking Group systematically and carefully monitors its loan book, with pre- cise analyses of the performance of risk profiles, credit lines and utilizations by economic sectors, geographical areas, customer segments and type of instru- ment. In particular, in case of projections or special negative events that might affect specific sectors, the necessary actions are immediately taken at central level.
318 Notes to the consolidated accounts
With regard to portfolios, our loans are well diversified in terms of sectors, and the counterparty risk is well spread. Over time, internal models have been de- veloped to assign a counterparty rating, which vary depending upon the cus- tomer segment. Said models, that were developed also in view of the applica- tion of the new regulatory provisions issued by the Bank of Italy (which in turn endorse “Basel II” regulations), are adopted in the procedures of new loan ap- provals or renewal/change of existing loans, in performance management processes and in risk measurement and capital absorption measurement processes.
2. Credit risk management policies
2.1 Organizational aspects
The loan book risk profile is sensitive to the general economic performance or the performance of specific manufacturing sectors, structural and technological changes within the borrowing companies, the change in the competitive posi- tion of counterparties, structural macroeconomic factors (for example, the grow- ing indebtedness of households) and other external factors, such as the existing legal and regulatory framework. With regard to the organizational structures in charge of managing and con- trolling credit risk, specific roles and competences have been identified. The Head office is in charge of planning and control, of approving larger loans and managing bad loans, besides setting loan thresholds. The network, depending upon the roles and responsibilities assigned to business areas and branches, is in charge of managing the positions from an operational viewpoint (in keeping with the instructions issued by the head office) and of keeping an updated, con- stant and correct information flow as to the business events characterizing their clientele, in order to identify events that may impair the favorable outcome of the loans. The lending power is based on a “cascading” limit process, whereby lending powers decrease top down from the head office corporate boards down to the branch decision-making committees. In keeping with the regulations of the supervisory authorities, lending guidelines and general principles have been defined at Group level, to be complied with by all structures, be it central or peripheral, that take part in loan approval and man- agement. The banks of the group endorsed said principles, while retaining their autonomy and preserving any technical-organizational specificities, by issuing specific internal instructions. For the retail customers of the commercial banks of the Group, a specific man- agement procedure has been developed.
319 Notes to the consolidated accounts
2.2 Management, measurement and rating systems
In keeping with the requirements set forth by the new prudential regulations is- sued by the supervisory authorities, the Parent company is setting up an Inter- nal Rating System, which by now is well along the implementation stage. An Internal Rating System is a structured and documented suite of methodolo- gies, organizational and auditing processes, and database organizational modal- ities for the collection and processing of material information leading to the gen- eration of concise ratings of the creditworthiness of borrowers and of the risks inherent in each lending transaction. Based on the Internal Rating System, borrowers are assigned a concise evaluation of their creditworthiness (rating), and lending risk components are estimated. The internal rating of creditworthiness represents a quantitative and qualitative evaluation over a given time horizon and based on all available information, ex- pressed by classifying the ability of a borrower or prospective borrower to deliv- er on contract obligations along a predefined scale.
Each rating class is linked to a probability of default (PD). Rating classes must be arranged depending on their credit risk. This means that by shifting from a low risk class to a higher risk class, the probability of borrowers defaulting is greater. In the development stage, the loan book was segmented based on size and record criteria, in order to maximize the models’ discriminating ability and pre- dictive power. With regard to corporate customers, in general our models are based on the summary of evaluations regarding two different risk profiles.
The first covers the corporate profile and is subdivided into three areas of inquiry: • financial statements: if the company is not required to prepare financial statements, a simplified operating and financial performance analysis is per- formed; • qualitative data: the position manager enters this data by filling in the cus- tomer id record; • environmental data: identified through a geographical and sector-related score that combines the sector risk level with the geographical area where the company operates.
The second is the behavioral profile, subdivided into two areas of inquiry: • performance of the business relationship between bank and customer (analysis of the bank’s internal data); • performance of the business relationship between the banking industry at large and the customer (analysis of the “Centrale dei Rischi”, namely the banking exposure database).
320 Notes to the consolidated accounts
By combining the corporate score with the behavioral score, we get a global score. The analysis of the distribution of scores assigned to customers led to the definition of rating classes. For banks, a model was developed based on a system that when assigning a rat- ing takes into consideration the ratings of major rating firms, the operating and financial performance of the counterparties compared to the aggregates of the banking industry of belonging, the size and the qualitative data entered by the analyst. The rating expressed by the model is verified by an analyst, who shall validate it or change it based on the information gathered and/or on a detailed analysis, providing a concise explanation thereof. The country rating procedure is based on a score obtained by normalizing and weighing the ratings expressed by major rating and research firms. The internal analyst validates, or corrects, the score based on the precise analysis of macro- economic data and on a close monitoring of national and international events concerning the country under examination. Based on the final rating, countries are arranged according to a top-down ranking which is then related back to rat- ing classes.
While waiting for an internal rating system to be developed also for the retail segment, for the time being a specific credit scoring system is used. It is an op- erating system for the approval of retail customer loans, that can assess the re- payment ability of the applicant after a preliminary investigation to verify if there are any negative events and the level of indebtedness with the banking industry at large. If the evaluation expressed by the system is not positive, it shall decrease the ordinary loan threshold. For customers who borrow from various banks of our Group, in order to guar- antee a univocal rating, the system verifies the amount of loans outstanding with the banks concerned: the prevailing rating shall be the one determined by the bank that has the higher loan utilization (rating spreading rule).
A system has long been available to support the auditing and control activities at branch and head office level, which expresses a score on all customers, utiliz- ing credit lines based on the performance of the credit relationship, and lists any identified deviations by area of inquiry. The score expressed by this system is used when no rating is available.
The recent regulations issued by the supervisory authorities require that the adoption of advanced risk analysis methodologies be subordinated to the full use of rating in lending processes, that must constantly support the position manager, on whom lies the ultimate responsibility for the position. In order to ensure that rating is central within lending processes, in 2006 pre-ex- isting processes have been fine-tuned and new processes have been imple- mented, that defined: • the assessment and verification of rating by loan officers; • the modalities to revise ratings assigned by the model; • cases in which it is possible to deviate from the rating process results.
321 Notes to the consolidated accounts
Within the loan granting process, the rating must be necessarily approved by the position manager, who must provide a comment on the evaluation ex- pressed by the system. The manager can ask the relevant head office function to change the rating (so called “override”), given the occurrence of specific cases. Again, in order to make a full use of rating in lending processes, the evaluation supplied by the system is used by the relevant functions to decide on loan ap- provals and has an influence on the application of the automatic renewal mech- anism for positions with revocable credit lines.
The key position played by rating in lending processes is reflected also in the monitoring and management of the position performance, as a tool that guides the decisions of managers when classifying positions. This process, when referred to the performing loan book, is based on the predictivity of rating, hence on its ability to identify in advance deteriorating positions. As a result, due corrective actions can be taken on time, prior to the actual occurrence of a de- fault.
The goals of performance management are: • to reduce the cost of risk, by identifying in advance a limited number of de- teriorating positions, that must be closely monitored and managed, follow- ing predefined operational rules; • to highlight and promote low risk loans, for the development of marketing initiatives.
According to operational rules, for customers belonging to the worst classes there are specific risk reduction targets and predefined time limits for staying in said low-end classes, under the supervision of specific business area and head office professionals. In particular, there is a cycle of activities that starts as soon as the position man- ager views the positions that show a marked credit risk deterioration and ends with the assignment of the operational classification. The classification and definition of actions are guided by a system of operational rules and a system of decision-making responsibilities that allocates the decision making power among branches, business areas and head office, depending on the type of proposal put forward by the system and on the time or amount limits. Rating is also a parameter used to define the objectives of the incentive sys- tem with regard to the loan portion.
As at December 31st, 2006, about 97% of the corporate portfolio had been rat- ed in terms of exposure. For the retail segment, an approval system has been im- plemented to support the Branches with the granting of new loans. Models gen- erating the first loss estimates in case of default (loss given default - LGD) and exposure at default (EAD) have been implemented. In order to avoid high levels of credit risk concentration, the Parent company sets lending ceilings both for retail customers with credit lines exceeding given amounts, as well as for country risk. Said thresholds are then distributed across the various companies of the Group.
322 Notes to the consolidated accounts
The portfolio risk monitoring is based on a default model, that is applied on a monthly basis to the loan exposure of the commercial banks of the Group (Ban- co Popolare di Verona e Novara, Credito Bergamasco, Banca Popolare di No- vara), with regard to performing loans, cash loans and guarantees and commit- ments, and on resident and non resident retail customers. This model allows to estimate operating capital absorption, taking into account the portfolio concentration and the assumption of a joint default of counter- parties, in a predefined context of significant macroeconomic variables. The rate of confidence used is 99.96% and the time frame is one year. The probability of default values (PD) used by the model are derived from the new rating systems developed under the Basel II Project. The portfolio model is integrated with a Montecarlo simulation model, that was developed in-house, to monitor the credit risk of the loan portfolio outstanding with interbank counterparties.
2.3 Credit risk mitigation techniques
The Group has always kept a watchful eye on the so called “second defense line”, namely the collection of loan collaterals and securities, i.e. the use of tools and techniques that mitigate credit risk. When deemed necessary, the typical bank guarantees are required, namely collaterals based on property or financial instruments, as well as personal securities. In general, the decision to require a collateral is based on the customer’s credit- worthiness and on the characteristics of the transaction. Following this analysis, it may be deemed appropriate to require additional guarantees to mitigate cred- it risk, considering the estimated recoverable value offered by the collateral. The assessment of loss given default (LGD) gave evidence of the good credit re- covery capability, also thanks to the effective collateralization policy adopted by the Group. In 2006, under the Basel II project – CRM, a new system was put on stream that improves the recording of collateral property, displays the market value of the property, allows to periodically revaluate the property, to manage property frac- tioning, view filed cadastral surveys referring to the property. The value of the financial collaterals is constantly and automatically monitored, so as to compare the present value of the collateral to the initial one, and to al- low the manager to act on time in case the collateral suffers from a significant impairment loss. With regard to derivative transactions with market counterparties, we favor en- tities with which we have entered into agreements requiring the posting of col- lateral, especially ISDA - Credit Support Annex, so as to obtain a significant re- duction of credit risk.
323 Notes to the consolidated accounts
2.4 Impaired loans
The Group avails itself of special organizational units in charge of the manage- ment of impaired loans, which apply predefined management and recovery methodologies, that differ based on the type of loan by amount and risk profile. Loan classifications follow fixed precautionary criteria, based on objective risk parameters. In general, impaired loans cover loans that give rise to a severely abnormal evo- lution of the business relations between the customer and the Group, serious ir- regularities evidenced in the reports sent to the Centrale Rischi, (i.e. the data- bank managed by the Bank of Italy that gathers information on the solvency of banking customers), a worrisome situation of financial accounts, the onset of negative events that may decrease the value of the accessory securities or that in any case may impair loans. Write-downs are measured on an individual basis for each single position, they are based on precautionary criteria based on the actual recovery likelihood, also in association with the existence of collateral securities, and they are regularly verified. In particular, with regard to non-performing loan management, an organiza- tional revision has been put in place aiming at setting up specialized processes, in order to increase our recovery capability and to optimize the ratio between costs and recovery percentages. As a result, the purely “administrative”, prevail- ingly court-oriented approach has been discarded, in favor of a more profitabil- ity-oriented approach. Said profitability objective is within reach also thanks to the strong orientation towards out-of-court settlements and to the strong focus on the recoverable amount, with a great emphasis on the timeliness and speed of the recovery action.
324 Notes to the consolidated accounts Total Impaired Other 38,847 - - 38,847 Other assets 314,430 - - 314,430 938,869 - 450 939,319 1,045,502 - 8,250 1,053,752 Risk 6,329 8,674,152 - 254 8,680,735 Country loans Past due Banking group Other companies loans tured tured Restruc- 1,950 - - 3,404 8,418,422 - - 8,424,623 ------NPLs Watchlist edit quality (book values) 549,651 468,780 49,712 76,768 5,087 44,094,519 - 46 45,244,563 550,498 470,730644,412 515,392 49,712 73,530 76,768 138,927 14,820 63,524,741 13,989 54,836,535 - - 9,000 64,696,269 797 56,223,582 tfolio and cr mation eakdown of financial assets by por 31/12/2006 31/12/2005 7. assets available for sale Non-current 8. Hedging derivatives 5. Customer loans 6. at fair value Financial assets measured 4. banks Due from 3. Financial assets held to maturity (thousand euro) 1. Financial assets held for trading2. Financial assets available for sale 847 Quantitative infor quality A. Credit A.1 Impaired and performing loans: amounts, write-downs, dynamics, economic geographical distribution A.1.1 Br
325 Notes to the consolidated accounts Total Net exposure Collective write-downs Gross 1.046.168 (666) 1,045,502 1,045,502 exposure Net exposure Collective write-downs Impaired assetsImpaired Other assets oss and net values) Individual write-downs Gross exposure edit quality (gr tfolio and cr eakdown of financial assets by por Total ATotal BTotal 31/12/200631/12/2005 1,761,706 (612,445) (1,553) 1,147,708 55,035,337 (270,879) 63,539,561 64,687,269 1,761,706 (612,445) 2,161,806 - (786,846) (1,553) 1,147,708 (2,699) 55,044,337 1,372,261 - (270,879) 46,907,052 63,548,561 (247,968) 64,696,269 54,851,321 - 56,223,582 - 9,000 - 9,000 9,000 1. Financial assets held for trading2. Financial assets avaiable for sale 2. Financial assets held to maturity banks4. Due from 5. Customer loans at fair value6. Financial assets measured assets available for sale7. Non-current 8. Hedging derivatives 7,312 (4,515) - - - - 1,754,394 - - (607,930) - 2,797 - (1,553) - - 1,144,911 - - 44,369,464 X - (269,858) 44,099,606 - - 45,244,517 - - X 938,869 - 8,421,826 - 8,424,623 X - - - 8,680,836 - 938,869 X (355) 938,869 314,430 - 8,680,481 8,680,481 X 314,430 - X 38,847 - 38,847 1. Financial assets held for trading2. Financial assets available for sale3. Financial assets held to maturity banks4. Due from 5. Customer loans at fair value6. Financial assets measured assets available for sale7. Non-current 8. Hedging derivatives ------8,250 - - X 450 - X - - X - - - - 8,250 X 254 46 - 450 - 8,250 X - - 450 - - - X 254 - 46 - 254 - 46 - (thousand euro) A. Banking group B. Other consolidated companies A.1.2 Br
326 Notes to the consolidated accounts
A.1.3 Cash and off-balance sheet exposure to banks: gross and net values
Individual Collective Gross Net (thousand euro) write- write- exposure exposure downs downs
A. Cash exposure A.1 Banking group a) Nonperforming loans - - - - b) Watchlist loans - - - - c) Restructured loans - - - - d) Overdue loans - - - - e) Country risks 6,684 X (355) 6,329 f) Other assets 10,400,659 X - 10,400,659
Total A.1 10,407,343 - (355) 10,406,988
A.2 Other companies a) Impaired - - - - b) Other 704 X - 704
Total A.2 704 - - 704
Total A 10,408,047 - (355) 10,407,692
B. Off-balance sheet exposure B.1 Banking group a) Impaired - - - - b) Other 2,666,340 X (58) 2,666,282
Total B.1 2,666,340 - (58) 2,666,282
B.2 Other companies a) Impaired - - - - b) Other - X - -
Total B.2 - - - -
Total B 2,666,340 - (58) 2,666,282
327 Notes to the consolidated accounts
A.1.4 Cash and off-balance sheet exposure to banks: evolution of gross impai- red exposures subject to “country risk”
Restructured Past due Country (thousand euro) NPLs Watchlist loans loans risk
A. Gross opening balance - - - - 792 - of which: loans sold and not derecognized - - - - -
B. Increases - - - - 5,896 B.1 Transfers from performing loans - - - - 5,130 B.2 Transfers from other impaired loans - - - - - B.3 Other increases - - - - 766
C. Decreases - - - - (4) C.1 Transfers to performing loans - - - - - C.2 Write-offs - - - - - C.3 Collections - - - - (4) C.4 Gains upon disposal - - - - - C.5 Transfers to other impaired loans - - - - - C.6 Other decreases - - - - -
D. Gross closing balance - - - - 6,684 - of which: loans sold and not derecognized - - - - -
A.1.5 Cash exposure to banks: evolution of total write-downs
Restructured Past due Country (thousand euro) NPLs Watchlist loans loans risk
A. Total opening write-downs - - - - 78 - of which: loans sold and not derecognized - - - - -
B. Increases - - - - 281 B.1 write-downs - - - - 273 B.2 transfers from other impaired loans - - - - x B.3 other increases - - - - 8
C. Decreases - - - - (4) C.1 write-backs from valuation - - - - - C.2 write-backs from collection - - - - (4) C.3 write-offs - - - - - C.4 transfer to other impaired loans - - - - x C.5 other decreases - - - - -
D. Total closing write-downs - - - - 355 - of which: loans sold and not derecognized - - - - -
328 Notes to the consolidated accounts
A.1.6 Cash and off-balance sheet exposures to customers: gross and net values
Individual Collective Gross Net (thousand euro) write- write- exposure exposure downs downs
A. Cash exposure A.1 Banking group a) Nonperforming loans 1,064,495 (514,842) (2) 549,651 b) Watchlist loans 553,048 (83,387) (881) 468,780 c) Restructured loans 59,437 (9,701) (24) 49,712 d) Overdue loans 77,414 - (646) 76,768 e) Country risks 9,364 X (873) 8,491 f) Other assets 51,790,116 X (270,252) 51,519,864
Total A.1 53,553,874 (607,930) (272,678) 52,673,266
A.2 Other companies a) Impaired - - - - b) Other 8,296 X - 8,296
Total A.2 8,296 - - 8,296
Total A 53,562,170 (607,930) (272,678) 52,681,562
B, Off-balance exposure B.1 Banking group a) Impaired 35,822 (7,199) - 28,623 b) Other 8,203,526 X (266) 8,203,260
Total B.1 8,239,348 (7,199) (266) 8,231,883
B.2 Other companies a) Impaired - - - - b) Other - X - -
Total B.2 - - - -
Total B 8,239,348 (7,199) (266) 8,231,883
329 Notes to the consolidated accounts
A.1.7 Cash exposures to customers: evolution of gross impaired exposures subject to “country risk”
Restructured Past due Country (thousand euro) NPLs Watchlist loans loans risk
A. Gross opening balance 1,329,229 599,001 82,379 139,688 14,265 - of which: loans sold and not derecognized 2,405 4,230 - 824 -
B. Increases 321,725 712,250 25,133 308,731 676 B.1 Transfers from performing loans 94,689 435,166 13,064 240,013 - B.2 Transfers from other impaired loans 172,242 58,405 5,008 6,772 - B.3 Other increases 54,794 218,679 7,061 61,946 676
C. Decreases (586,459) (758,203) (48,075) (371,005) (5,577) C.1 Transfers to performing loans (813) (111,042) (7,361) (266,418) (5,535) C.2 Write-offs (292,286) (629) (420) - - C.3 Collections (139,547) (422,238) (28,869) (44,789) - C.4 Gains upon disposal (131,889) ---- C.5 Transfers to other impaired loans (356) (180,217) (4,038) (57,818) - C.6 Other decreases (21,568) (44,077) (7,387) (1,980) (42)
D. Gross closing balance 1,064,495 553,048 59,437 77,414 9,364 - of which: loans sold and not derecognized -----
A.1.8 Cash exposures to customers: evolution of total write-downs
Restructured Past due Country (thousand euro) NPLs Watchlist loans loans risk
A. Total opening write-downs 683,591 89,993 10,916 761 990 - of which: loans sold and not derecognized - 569 - - -
B. Increases 282,796 64,468 7,985 583 49 B.1 write-downs 238,326 62,897 6,992 583 49 B.2 transfers from other impaired loans 43,406 710 454 - x B.3 other increases 1,064 861 539 - -
C. Decreases (451,543) (70,193) (9,176) (698) (166) C.1 write-backs from valuation (68,981) (13,578) (5,829) (211) (164) C.2 write-backs from collection (85,984) (9,182) (306) - - C.3 write-offs (289,860) (290) (1,842) - - C.4 transfer to other impaired loans (606) (42,825) (1,138) - x C.5 other decreases (6,112) (4,318) (61) (487) (2)
D. Total closing write-downs 514,844 84,268 9,725 646 873 - of which: loans sold and not derecognized -----
330 Notes to the consolidated accounts
A.2 Classification of exposures based on internal and external ratings
A.2.1 Distribution of cash and off-balance sheet exposures by external rating classes (book values)
External ratings AAA A+ BBB+ BB+ B+ Below Unrated Total (thousand euro) to AA- to A- to BBB- to BB- to B- B-
Exposure A. Cash exposures 1,098,750 10,608,412 302,147 9,883 1,325 0 51,068,736 63,089,253 B. Financial derivatives 39,366 1,106,849 0 94,992 0 0 365,808 1,607,015 C. Guarantees given 45,889 3,966,385 93,128 8,391 0 835 5,374,845 9,489,473 D. Commitments 81,781 130,322 113,112 24,311 0 0 2,475,635 2,825,160
Total 1,265,786 15,811,968 508,387137,576 1,325 835 59,285,024 77,010,901
The analysis of total cash and off-balance sheet exposures show that the “no- rating” category positions for about 82% of the total, and is almost entirely at- tributable to exposures to customers, totaling 60,913.4 millions, of which 4% is attributable to counterparties who have been rated by specialized firms, and whose rating is within investment grade. As to interbank loans, the ratings assigned to the market counterparties by spe- cialized rating agencies are within investment grade.
A.2.2 Distribution of cash and “off-balance sheet” exposures by internal rating classes (book values)
Shown below, broken down by single corporate customer segment (large cor- porate, corporate and small business), is the distribution by rating class of per- forming loans. The Group’s counterparty rating system comprises nine classes for each individual segment, going from the less risky (n.1) to the most risky (n. 9). For the purpose of this illustration, rating classes refer exclusively to the same segment of belonging.
331 Notes to the consolidated accounts Unrated Total Unrated Total 123456789 123456789 Large corporate (thousand euro) Middle corporate (thousand euro) A. Cash exposures Exposure derivativesCash A. B.1given Financial C. Guarantees D. Commitments Total 9,047 - 519 12,783 4,049 1,212 97,117 1,604,780 2,531,228 3,127,704 1,110,180 25,500 643,986 789,645 475,728 306,953 821 1,625 4,706 61,573 308,695 24,103 108,376 - 41,823 67,986 169,201 109,837 1,875 2,389,434 59,551 1,001 7,901 - 30,807 1,531,020 372,481 65,926 3,785,416 12,490,687 7 0 25,203 3,393,566 1,875 809,925 - 456,560 2,358,767 9,287,135 Exposure derivatives exposures A. - 293,807 17,467 154,245 788,915 Cash B.1given 34,405 48,816 28,574 81,330 25,559 11,272 Financial 6,116 C. 5,192 270,571 Guarantees 20,926 D. 8,380 398,698 460,130 232,389 198,320 148,782 Commitments 20,771 2,307,228 3,733,329 2,498,796 2,690,948 2,901,148 1,988,462 5,333 112,042 Total 411,087 589,558 218,103 193,893 118,659 89,090 12,269 714,399 141,853 461,815 130,653 279,739 16,268,084 99,417 51 11,294 997,423 34,474 39,702 2,839,748 4,372,927 3,221,575 3,089,257 3,164,579 684,591 633,870 956,374 153,353 408,266 19,524,540
332 Notes to the consolidated accounts Unrated Totale 123456789 AAA AA A BBB BB B CCCTotale Unrated BanKs (thousand euro) Small Business (thousand euro) Exposures associated with portfolios not covered by rating models amount to 18,024.2 millions. associated with portfolios not covered Exposures B.1 Financial derivatives - 929,126 287,068 27,764 1,359 - - 39 1,245,356 39 1,359 - 27,764 287,068 derivatives 929,126 Exposure exposures A. Cash - B.1given Financial C. Guarantees D. Commitments 1,827,874 509,534 438,003 135,897 Total 801,896 3,811,994 4,699,634 18,158 4,124,655 602,433 1,044 92,453 1,194,145 - 10,842 28,093 22,500 17,445 17,909 520 10,407,692 16,097,453 - 319,754 224,991 387,921 1,162,231 549,260 164,648 8,815 - 18,678 397,819 6,842,669 6,160,257 801,896 Exposure Exposure derivatives exposures A.4,064 3,759 1,849 2,122 1,851 2,388 4,317 929 Cash 28,657 given B.1 Financial C.172,917 60,942 35,686 30,048 39,200 24,365 2,817 2,364 5,013 Guarantees 4,299 536,192 D. Commitments 2,081,699 1,150,063 1,155,139 122,499 905,272 1,174,299 43,420 Total 298,824 1,269,820 981,118 130,870 141,488 54,522 31,098 38,585 25,348 17,136 137,780 209 14,248 9,284,883 497,812 135,247 39,932 2,400,168 1,269,286 1,223,772 976,028 1,240,697 1,025,007 384,540 1,532,579 138,213 157,256 10,347,545
333 Notes to the consolidated accounts Total (1)+(2) 31-12-2006 159,441 4,389,088 terparties Other coun- Banks entities Other public Guarantees and commitments 10,000 29,942 1,489,324 26,457,434 74,141,675 States terparties Other coun- Banks Credit Ferivatives Credit entities Other public States ------5---- Other assets Collateral guarantees (1) Personal guarantees (2) Property Securities Exposure 2.1. Totally secured 25,134,465 43,916,104 1,171,099 780,668 - - - - - 17,322 1,451,493 25,938,172 73,274,858 25,938,172 866,817 1,451,493 519,262 37,831 17,322 12,620 780,668 - 10,000 1,171,099 60,237 - secured43,916,104 111,908 secured114,959 Totally 25,134,465 Partly 1,562,027 2.1. 2.2. 1.1. Totally secured 4,232,059 - 4,229,647 ------159,441 4,389,088 159,441 securedsecured4,229,647 - Totally 4,232,059 - Partly 1.1. 1.2. - Total 30,928,551 44,031,063 5,512,654 840,905 - - - - 10,000 29,942 1,489,324 26,616,875 78,530,763 26,616,875 1,489,324 29,942 10,000 840,905 - Total5,512,654 44,031,063 30,928,551 to banks: 4,232,059 - 4,229,647 to customers: 26,696,492 44,031,063 1,283,007 840,90 (thousand euro) 1. exposures Secured 2. exposures Secured A.3 Breakdown of secured exposures by type of security exposures of secured A.3 Breakdown A.3.1 Secured cash exposure to banks and customers
334 Notes to the consolidated accounts 467 663 , , Total 412 (1)+(2) , 31-12-2006 662 2 , 830 , terparties Other coun- 601 - 785 571 1 , , 6,904 - 6,904 49,697 - 778,563 Banks 634 102 , 3,634 159,172 1,830,662 3,198,130 3,359 93,986 1,779,512 2,319,014 entities Other public Guarantees and commitments States terparties Other coun- Banks Credit Ferivatives Credit entities Other public ------States 560------56 264-----3 , , Other assets 306 706 800 208 , , ------732 143 , Collateral guarantees (1) Personal guarantees (2) Property Securities 793 - 22 056 123 , , 774 , Exposure to customers: 1 to banks: 739 Totale 2,513,849 123,732 166,106 914,824 1.1. Totally secured1.1. Totally 1.2. Partly secured 731,367 8,426 - 22,306 706,560 2.1. Totally secured2.1. Totally 1,418,496 123,732 123,325 195,100 2.2. Partly secured 355,560 - 20,475 13,164 - - - - - 275 8,585 51,150 93,649 2. exposures Secured (in migliaia di euro) 1. exposures Secured A.3.2 Secured off-balance sheet exposure to banks and customers
335 Notes to the consolidated accounts value, guarantee Excess fair Total Total group Banking terparties Other coun- Non- financial companies Insurance companies 4,448 - 10,314 37,592 84,203 2,655 Financial companies Banks entities Other public banks central Govern. and Personal guarantee terparties Other coun- Non- financial companies Guarantees (fair value) Insurance companies Financial companies Guarantees and commitments Banks ------516 entities Other public ------34 7,634 73,003 765 604,034 1,247,198 3,247,361 2,643,394 banks central Govern. and Other assets ------Collateral guarantees Property Securities amount Secured ------Exposure A.3.3 Impaired cash exposure to banks and customers 2.4 up to 50% 292,693 17,359 8,175 555 198 ------19 42 - 1,550 6,822 17,361 2 to banks:1.1 over 150%1.2 between 100% and 150%1.3 between 50% and 100% - - -to customers: - 2.1 over 150% - - 941,163 476,666 897,199 1,442,843 603,967 1,290,472 16,153 13,953 12,214 10,268 - - - 81 - 5,263 7,620 - 99 8,169 82,787 765 636,804 1,385,197 3,597,995 2,700,796 1.4 up to 50% - - 2.2 between 100% and 150%2.3 between 50% and 100% 116,127 194,325 55,677 114,355 81,548 924 29,841 977 721 771 - - - - 81 - 5,263 7,620 - 65 - 5,294 - 20,906 93,585 249,070 54,745 Total 941,163 897,199 1,442,843 16,153 12,214 - - - 81 - 5,263 7,620 - 99 8,169 82,787 765 636,804 1,385,197 3,597,995 2,700,796 (thousand euro) 1. exposures Secured 2. exposures Secured
336 Notes to the consolidated accounts 559 , value, guarantee Excess fair 719 21 , Total Total group Banking 692 27 , 1,412 1,918 544 16,754 23,859 20,821 terparties Other coun- 921 18 , Non- financial companies Insurance companies Financial companies Banks entities Other public banks central Govern. and Personal guarantee terparties Other coun------502701------1-5,509 ----25--282 Non- financial companies Guarantees (fair value) Insurance companies Financial companies Guarantees and commitments Banks entities Other public banks central Govern. and Other assets 478813-----174615--251-5 , ------Collateral guarantees Property Securities 160 - 1 , amount Secured ------279 6 , Exposure A.3.4 Impaired off-balance sheet exposure to banks and customers 2.4 up to 50% 14,834 701 - - 199 - - - - - 2.1 over 150%2.2 between 100% and 150%2.3 between 50% and 100% 1,047 1,380 1,047 3,018 1,374 3,038 - - - 142 10 1,326 156 189 269 ------174 615 - - - - - 130 24 1,241 194 to banks: 1.2 between 100% and 150%1.3 between 50% and 100% -to customers: - 20 1.1 over 150%1.4 up to 50% - - - - Total 20,279 6,160 - 1,478 813 - - - - - 174 615 - - 25 1 - 5,921 18,692 27,719 21,559 (thousand euro) 1. exposures Secured 2. exposures Secured
337 Notes to the consolidated accounts Net exposure ties Collective write-downs Individual write-downs Gross Gross exposure Net 420,394 9,890,984 X (50,890) 9,840,094 exposure 804) 32,341,300 10,220,361 (118,217) (51,108) 10,051,036 Collective write-downs Individual write-downs 6 (488,117) (198,919) 38,596,720 10,817,094 (118,217) (51,108) 10,647,769 3,727 - - 3,727 186 - - 186 17,389 (1,568) - 15,821 402 - - 402 52,05857,241 (8,882) (24) - 43,152 (515) 135 56,726 20,114 (1) - - (131) 134 19,983 Gross Gross 845,358 (397,604)448,823 (74,765) (2) (782) 447,752 373,276 207,254 101,874 (110,104) (8,112) - (87) 97,150 93,675 exposure Net exposure Collective write-downs (46) - - 12,931 (5,298) - 7,633 161 - - 161 Individual write-downs ------Gross Gross exposure Net exposure Collective write-downs Individual write-downs Gross Gross exposure Net exposure Collective write-downs - Individual write-downs 2,711 (1,552)5,292 - (41) 1,159 - 9,172 5,251 (5,582) 1,952 - (777) 3,590 - 1,175 Gross Gross exposure - Net exposure Collective write-downs Individual write-downs Governments and central banks Other public entities Financial companies Insurance companies Non-financial companies Other counterpar ------1--158--58------22--2246 ------958(288)-670 Gross Gross exposure B. Exposure distribution and concentration B. Exposure B.1 Sector distribution of cash and “off-balance sheet” exposures to customers A.5 Other exposure 3,884,171 X (27) 3,884,144 239,336 X (1,614) 237,722 6,071,003 X (21,113) 6,049,890 96,111 X - 96,111 31,617,875 X (197,481) 31, A.3 Restructured loans A.3 Restructured A.4 Past due loans B.3 Other impaired assets B.3 Other impaired A.2 Watchlist loansA.2 Watchlist - - - - 644 (208) - 436 1,707 (301) (13) 1,393 B.1 Non-performing loans B.2 Watchlist loans B.2 Watchlist B.4 Other exposures 178 X - 178 32,445 X - 32,445 1,339,222 X (26) 1,339,196 7,344 X (125) 7,219 6,228,354 X (115) 6,228,239 595,984 X - 595,984 A.1 Non-performing loans Total 3,884,171 -Total (27)31/12/2006 3,884,144 247,984 (1,801) (1,614) 3,884,349 178 244,569 6,083,892 (6,660) - - (21,126) 6,056,106 (27) - 3,884,322 96,111 280,429 178 (1,801) - 32,445 (1,614) 277,014 - 7,423,136 - 96,111 (6,660) 33,021,355 (21,152) (481,251) - 7,395,324 (198, 32,445 104,459 1,339,244 (334) - (125) 104,000 (26) 39,283,75 1,339,218 8,348 (334) (125) 7,889 6,262,401 (6,866) (115) 6,255,420 596,733 - - 596,733 (thousand euro) B, sheet exposure Off-balance - A. Cash exposure
338 Notes to the consolidated accounts
31/12/2005 are not shown, in that, in keeping with the temporary instructions issued by the Bank of Italy upon publishing Circular n. 262 of December 22nd, 2005, last year the Group made use of the option not to show the sector distri- bution of cash and off-balance sheet exposures to customers.
B.2 Distribution of exposures to non-financial resident business compa- nies
(thousand euro) 31-12-2006
a) other services for sale 8,192,088 b) wholesale and retail trade, recovery and repairs 5,036,972 c) construction and public works 3,739,034 d) metal products, excluding cars and means of transportation 1,441,688 e) food products, beverages and tobacco-based products 1,355,770 f) other 11,818,521
Total 31,584,073
339 Notes to the consolidated accounts Net exposure ribution of of Italy upon Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Italy Countries Other european America Asia Rest of the World Gross exposure B.3 Other impaired assetsloansloans3,916 - impaired 7,735 - 3,916 Non-performing 13,079 Total Watchlist 16,971 - Other exposures 18,827 B.1 B.2 Other B.3 715,499 70,755 70,739 715,503 3,172 7,387,845 3,172 26,048 26,014 B.4 1,902,624 351,320 350,585 125,031 124,851 7,388,056 31,143 1,926,397 24,634 50,270,572 Total 51,119,983 31/12/20062,618,123 422,075 421,324 128,203 128,023 57,191 2,641,900 50,648 715,499 70,755 70,739 57,687,039 715,503 3,172 7,416,467 3,172 26,048 26,014 58,543,861 7,423,878 A.4 Past due loansloans3,569 loans- - 1 212 - 5,110 233 due 465,209 120 22 35 49,500 Watchlist 120 1 76,590 1 Restructured 547,936 59,204 77,236 Past A.1 Non-performing loansA.2 exposureA.3 Other 1,037,658 A.4 1,891,994 350,862 350,532 124,995 124,815 24,092 1,901,582 A.5 24,003 542,262 49,137,011 49,397,949 19,352 6,729 436 31 - - 7,049 629 (thousand euro) B.3 to banks (book values) sheet” exposures Geographical distribution of cash and “off-balance not shown, in that, keeping with the temporary instructions issued by Bank to 31/12/2005 are Comparative data referring publishing Circular n. 262 of December 22nd, 2005, last year the Group made use of the option not to show geographical dist n. 262 of December 22nd, 2005, last year the Group publishing Circular to customers. sheet exposures cash and off-balance A. Cash exposure B. sheet exposure Off-balance
340 Notes to the consolidated accounts Net exposure ribution of of Italy upon Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Italy Countries Other european America Asia Rest of the World Gross exposure B.3 Other impaired assetsloansloans impaired Non-performing - Total Watchlist Other - B.1 B.2 - B.3 B.4 Other exposures3,328,032 130,616 130,605 185,043 184,832 Total3,328,161 9,110 6,754,409 9,110 6,754,413 31/12/2006 1,383,454 1,383,454 1,146,872 1,146,839 17,336 4,474,871 147,952 147,941 294,523 294,303 18,712 4,475,033 18,695 8,137,867 17,336 8,137,867 1,383,454 1,146,872 1,146,839 17,336 109,480 17,336 109,480 109,471 109,471 9,602 9,602 9,585 9,585 A.4 Past due loansloansloansloansdue Non-performing Watchlist Restructured - Past - A.1 A.2 exposure - - A.3 Other A.4 A.5 3,328,032 130,616 130,605 185,043 184,832 3,328,161 9,110 6,754,409 9,110 6,754,413 (thousand euro) B.4 Geographical distribution of cash and “off-balance sheet” exposures to banks sheet” exposures B.4 Geographical distribution of cash and “off-balance not shown, in that, keeping with the temporary instructions issued by Bank to 31/12/2005 are Comparative data referring publishing Circular n. 262 of December 22nd, 2005, last year the Group made use of the option not to show geographical dist n. 262 of December 22nd, 2005, last year the Group publishing Circular to banks. sheet exposures cash and off-balance B. sheet exposure Off-balance A. Cash exposure
341 Notes to the consolidated accounts
B.5 Major risks (under the Bank of Italy’s regulations)
Three major risks are reported, totaling 2,185,935 thousand euro.
C. Securitizations and sales
C.1 Securitizations
Qualitative information
Transactions with proprietary underlying assets
The Group performed a single securitization deal acting as originator. More pre- cisely, On December 13th, 2001 a securitization transaction pursuant to Act n. 130/1999 on performing residential mortgages extended to individuals was fi- nalized. Said transaction fell within the strategies aiming at cost-efficiently satisfying the double need of raising funds on the international and institutional market at a low cost, while freeing up enough capital to take advantage of profitable lend- ing transactions, generating a greater return than the cost of funds burdened by operating and credit risk costs.
Set out below is a brief illustration of the transaction: • on December 5th, 2001, Bpv Mortgages S.r.l. entered into a sales contract with the Parent company according to which the bank - without recourse to the Issuer, under and pursuant to articles 1 and 4 of the Securitization Act and binding for the parties as of December 1st, 2001 - sold a pool of loans deriving from mortgages secured by collaterals and guarantees, qual- ifying as performing loans under the Bank of Italy’s instructions. The pur- chase price of the pool was set at 512,495 thousand euro, corresponding to the net book value of loans upon valuation date, charged with accrued interest that at the date of transaction were still uncollected. As a result, the sale transaction did not give rise to either profits or losses; • together with the aforesaid loans, also all collaterals and guarantees, privi- leges, accessories, and, in general, all rights, actions, options or pre-emp- tion, also from the standpoint of legal proceedings, relative to the above loans have been transferred to BPV Mortgages, with no need for any for- mality or notes, in keeping with paragraph 3 of article 58 of TUB (to which art 4 of the Securitization Act makes reference); • in compliance with art. 1 and 4 of the Securitization Act, and art. 58, para- graphs 2, 3 and 4, of TUB, BPV Mortgages financed the purchase of the above mortgage pool by issuing: - 92 million Class A1 Residential Mortgage Backed Floating Rate Notes due 2021 (Class A1 Securities). On December 31st, 2006 said notes had been fully redeemed; - 392 million Class A2 Residential Mortgage Backed Floating Rate Notes due 2021 (Class A2 Securities). On December 31st, 2006 said notes amounted to 163.9 million euro.
342 Notes to the consolidated accounts
- 26 million Class B Residential Mortgage Backed Floating Rate Notes due 2021 (Class B Securities, concurrently to Class A1, A2 and B, Se- nior Securities); - 2.5 million Class C Residential Mortgage Backed Variable Return Notes due 2021 (Class C – junior notes).
All notes have a limited recourse, as stated in their individual regulations; Class C notes have no rating. At the issue date, the Senior Notes were entirely under- written by J.P. Morgan Securities Ltd. and Banca Aletti & C. S.p.A. acting as un- derwriters, then they have been offered to Italian and foreign professional in- vestors, while Class C Notes have been subscribed by the Bank as a long term investment, and therefore they have been classified under due from customers.
Pursuant to the Securitization Act, the amounts paid by the transferred borrow- ers in association with the loans transferred to the Issuer and included in the Se- curitization are fully allocated to cover the rights inherent in said Notes, and to pay for the transaction costs, along the priority line illustrated in the Intercredi- tor Agreement and in the Notes offering circulars.
The residual risk borne by the Group in case of a total default of the borrowers is equal to the sum of the Class C notes that were subscribed above par at the price of 130.75 euro for each nominal 100 euro and classified under item 70 “due from customers” of the balance sheet assets. These Notes shall be repaid only after all the other notes of Class A1, A2 and B have been redeemed, as well as all the other senior creditors indicated in the intercreditor agreement. These notes have a minimum return equal to 3% over the Euribor rate. An additional variable return may add on to this return depending on the actual profitability results generated by the SPV on the securitized portfolio. The additional return credited to income in financial year 2006 under “other operating income” to- taled 3.3 millions. The total additional return accretive to the value of the subscribed financial as- sets as at December 31st, 2006 amounted to 7.7 millions (8.3 millions as at De- cember 31st, 2005). On December 31st, 2006 Junior notes subscribed by the Group have not been written down in that, based on the currently available information, there are no such elements that may lead to anticipate a failure to repay the nominal value of the notes, or the interest accrued by year-end.
On December 13th, 2001, the Group entered into an interest rate swap contract with a primary international bank. The contract’s notional value is variable, be- cause it is represented by the “performing” portion of the secured loan pool outstanding at the SPV’s. Pursuant to the contract, the balance of the following interest flow shall be settled on a quarterly basis among the parties: • interest accrued over the quarter on the performing portion of the secured loans, net of 148 basis points shall be paid to the Group; • three month Euribor interest on the notional value of the contract shall be paid to the counterparty.
343 Notes to the consolidated accounts
The Group is committed to granting any financing to BPV Mortgages that may be necessary to allow the company to avoid any of the situations that would trigger the instruction of any kind of legal action against the company itself.
Transactions with third party underlying assets
As at December 31st, 2006, the nominal value of notes originated by securiti- zations of third party assets held in the Group’s proprietary portfolio amounted to about 449.1 millions. Most of the above securities are senior tranches with AAA ratings and with underlying assets characterized by a high diversification level, almost completely performing, and backed by a collateral highly in excess of the nominal value of the issued securities. The main objective is to invest in low risk securities, with a very high rating and a coupon yield greater than the return on securities having the same rating and the same average duration. This type of investment guarantees a greater port- folio diversification, higher return levels and a significant rise of the portfolio’s average rating. Mezzanine tranches are characterized by an interest and principal payment guar- antee by the European Investment Fund in case of non-performance of the un- derlying leasing assets and that an important percentage of the investments within this segment is represented by securitized notes where the originator is the Italian State. A summary report on single issues is used to monitor the risk of the asset port- folios underlying the securitized notes, regularly produced by Moody’s or by oth- er agencies, at times the counterparties acting as lead managers for the issues.
344 Notes to the consolidated accounts Net exposure Gross Gross exposure Net exposure Gross Gross exposure Net exposure Gross Gross exposure Net exposure Gross Gross exposure Net exposure Gross Gross exposure Net exposure Gross Gross exposure Net exposure Gross Gross exposure Net exposure Cash exposure Guarantees given Lines of credit Gross Gross exposure Net exposure Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Gross Gross exposure mation a) ImpairedOthera) b) Impaired27,731 - Other10,806 - 27,731 - 10,806 a) 14,086 b) - 14,092 84,222 - 323,033 84,232 323,164 (tousand euro) Originated A. Underlying assets: party Third B. Underlying assets: Quantitative infor C.1.1 Exposures resulting from securitizations broken down by quality of underlying assets
345 Notes to the consolidated accounts backs Write- downs/ Book value backs Write- downs/ ure Book value backs Write- downs/ Book value backs Write- downs/ Book value backs Write- downs/ Book value backs Write- downs/ Book value backs Write- downs/ 6------10,80 Book value backs Write- downs/ Cash exposure Guarantees given Lines of credit Book value backs Write- downs/ ------Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Book value B. Partly derecognized (thousand euro) Securitized assets: A. Fully derecognized C. Not derecognized C.1.2 Exposures deriving from major “proprietary” securitizations broken down by type of securitized asset and expos
346 Notes to the consolidated accounts backs Write- downs/ Book value backs Write- downs/ Book value e backs Write- downs/ Book value backs Write- downs/ Book value backs Write- downs/ ------Book value backs Write- downs/ ------Book value ------backs Write- downs/ 7,731 - - - Book value backs Write- downs/ Cash exposure Guarantees given Lines of credit Book value ------backs Write- downs/ Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior ----2 Book value C.1.3 Exposures deriving from major third party securitizations broken down by type of securitized asset and exposur Progr cedulas tda fondo tituliz activos tv 08.03.06-08.04.16Progr lease tv 29.10.01-30.07.2011Lombarda Mutui 12,081 Leasing home 03-10/27 tv eurVelah 2,014 (2) 1,007 -Soc.di cart.inps 06.12.05-31.07.2008 tv Mutui - sa eur tv 10.11.05-16.07.2012Silver arrow - 13,324Beluga bv eur tv 28.11.2006-28.10.2096 classe a1 Altro (15) - Mutui - Leasing - 34,509 - 3 20,071 13,220 - - 1 ------Bancaja fondo de tit.de activos serie 6 class a2 03/20.02.36Bankinter fondo de titulizacion hipotecarino ppo-supFondo de titulizacion activos tda c.2a 03/32 eur tv MutuiFdo de titulizacion activos eur tv 14.10.03-26.07.2035 de tit.activos hipocat 6 tv 18.09.03-31.12.34 F.do Mutui Mutui Mutui 16,484 lease tv 29.10.01-28.07.2011Lombarda MutuiSecursel srl 02/20 eur tv classe b (2) 13,708 srl 28.03.02-20.04.36 classe a serie 1 tv%Grecale 13.372 10.539 funding srl 02/09 tv classe a serie 1Credico - 3 inps 18.07.02-31.07.2007Soc.di cartolizzazione dei crediti (3) (4) 2,165 Siena mortgages tv 27.11.02-15.11.2037 2002-3 a2 LeasingIntesabci sec 2 tv 27.02.03-28.08.2023 a2 Mutui - - Altro -Mutina srl tv 20.03.03-09.08.2009 - Titoli Leasing - - Mutui Tv 22.07.03-31.07.2008Inps -soc. Cart. Cred. - - 4,855Intesa lease sec tv 26.02.04-30.12.2015 callable 40,154 - tv 09.06.04-30.10.2018F-e green - Mutui - (12) -Scic 04-09/08 tv eu / 3731410 25,073 (31) 10,673Scic tv 30.09.04-22.09.2023 - - Altro inps tv 30.11.04-31.07.2009Soc.cart. Crediti Mutui (15) - (6) - Leasing 8,059 - 12,303 -Delphinus 2001- eur tv 25.06.01-25.06.2066 - (8) - - -Arms ii 12/11/02-10/11/2033 serie e5 class a - eur 5,020 (11) - 33,526 13,779 4,841 bv eur tv 18.06.04-25.05.2036Saecure Leasing Altro - - - - - 2 (11) - - (11) FinanziamentiMarka fin jn 23/01/7 Mutui Mutui Finanziamenti 14,065 - - - - - 14,078 - - - - 15,215 19,046 (4) Mutui - - 11 ------11,517 - 9,641 3 - (21) ------(12) - - - - 6,968 ------(thousand euro) cedulas cajas eur tv 14.12.2005-14.12.2012Ayt Mutui 20,034 (2) ------
347 Notes to the consolidated accounts
C.1.4 Exposures resulting from securitizations broken down by financial asset portfolio and type
Financial Financial Financial Financial (thousand euro) assets assets assets held measured at available for assets held Loans 31/12/2006 31/12/2005 for trading fair value sale to maturity
1. Cash exposure 421,341 - - - 38,537 459,878 482,004 - Senior 407,255----407,255 445,561 - Mezzanine 14,086 ----14,086 25,187 - Junior ----38,537 38,537 11,256
2. Off-balance sheet exposure ------Senior ------Mezzanine ------Junior ------
C.1.5 Total amount of securitized assets underlying junior notes or other forms of lending support
Traditional Synthetic (thousand euro) securitization securitization
A. Originated underlying assets: 251,344 - A.1 Fully derecognized 251,344 X 1. NPLs 3,014 X 2. Watchlist 1,777 X 3. Restructured loans - X 4. Past due loans 732 X 5. Other assets 245,821 X A.2 Partly derecognized - X 1. NPLs - X 2. Watchlist - X 3. Restructured loans - X 4. Past due loans - X 5. Other assets - X A.3 Not derecognized - - 1. NPLs - - 2. Watchlist - - 3. Restructured loans - - 4. Past due loans - - 5. Other assets - - B. Third party underlying assets: - - B.1 NPLs - - B.2 Watchlist - - B.3 Restructured loans - - B.4 Past due loans - - B.5 Other assets - -
348 Notes to the consolidated accounts
C.1.6 Stakes in Special Purpose Vehicles
The Group has no sharing in the SPV BPV Mortgages S.r.l.. The Group has the right to exercise a call option to buy the interest representing the entire share capital of BPV Mortgages from the foreign foundations that at present hold the stakes, at a total price of 10,000 euro. The option may be exercised only on 60% of BPV Mortgages’ share capital until Class A1, A2 and B notes are fully repaid. After that date, the option may be exercised also on the remaining 40% share capital of BPV Mortgages.
The Group has no sharing in third party securitization special purpose entities.
C.1.7 Servicer activities – collection of securitized loans and redemption of secu- rities issued by the special purpose entity
Securitized assets Collections of loans Percentage of reimbursed securities (end-of-period) (end-of-period) in the year SPV Senior Mezzanine Junior (thousand euro) Impaired Performing Impaired Performing Impaired Performing Impaired Performing Impaired Performing assets assets assets assets assets assets
BPV Mortgages S.r.l. 6,518 188,634 939 55,253 38.05% - -
Under a servicing contract between BPV Mortgages and the Parent company, acting as Servicer, on December 5th, 2001 the Group is committed to adminis- ter, manage, collect and recover (even with recourse to legal proceedings) the transferred loans. Said activities are conducted in keeping with the “Credit and Collection Policies”, that are basically similar to those adopted by the transferor for the loans and positions under its responsibility. The fee defined for the loan management activity is equal to 0.125% of collections, while the fee defined for the loan recovery activity is equal to 0.00625% of collections. The Group must prepare monthly, quarterly and annual reports covering all collections and re- coveries.
C.1.8 Special purpose entities belonging to the Banking group
The Group has no securitization special purpose entities.
349 Notes to the consolidated accounts 1,945,170 32,818 5,306 Total Total 3,357,470 1,939,864 3,390,288 ------XXXXXXXXX XXXXXXXXX - - Financial assets held to maturity banks Due from Loans to customers for sale Financial assets available ----- at fair value XXXXXXXXXXXXXXX - - Financial assets measured Financial assets measured for trading ------Financial assets held ABCABCABCABCABCABC31-12-200631-12-2005 C.2 Sales C.2.1 Financial assets sold and not derecognized 2. Equity securities 32,818 - - - 1. Debt securities 2,455,513 - - - - - 42,140 - - 859,817 - - 31/12/200631/12/2005 2,488,331 1,416,735 ------42,140 - 115,867 - - - 859,817 - 412,568 - - - - 3. UCITS 4. Loans 5. Impaired assets 5. Impaired (thousand euro) A. Cash assets (book value) A = financial assets sold and fully derecognized B (book value) = financial assets sold and partly derecognized (full value) C = financial assets sold and partly derecognized B. Derivatives - - -
350 Notes to the consolidated accounts Total Loans to customers banks Due from Due from Financial assets held to maturity Financial assets available for sale value Financial assets measured at fair measured Financial assets held for trading 31/12/200631/12/20051,697,096 473,873 - 5,455,833 1,223,223 - 5,455,833 - a) fully derecognized assetsassets1,233,082 derecognized derecognized 413,017 - 820,065 - fully partly assetsa) fully derecognized - assetsb) partly derecognized a) b) 403,158 - 0 0 - - 60,856 - - - - 464,014 - - (thousand euro) C.2.2 Financial liabilities associated with financial assets sold and not derecognized A. Due to customersbanksto 464,014 to 60,856 - A. Due 403,158 - 1,233,082 B. Due 413,017 - 820,065 -
351 Notes to the consolidated accounts
D. Credit risk assessment models
To assess the credit and the portfolio risks, the Risk Management function avails itself of an operational model fed with risk variables, that is now being fine- tuned. For this reason no comparison was made between actual losses and the losses derived from the internal model, as the latter are not considered perfectly stable yet.
1.2 MARKET RISKS
1.2.1 Interest rate risk – regulatory trading book
Qualitative information
A. In general
Following the centralization of risk positions and operating flows associated with securities and currency trading in the subsidiary Banca Aletti, the main source of interest rate risk related to the trading portfolio of the commercial banks of the Group is represented by their individual “investment portfolios” managed by Banca Aletti. The main constituent of said portfolios is bonds, characterized by a limited interest risk exposure. The main interest rate risk exposures within the trading portfolio of Banca Alet- ti are connected with trades performed by the Investment Banking function on the money market and on the associated quoted or plain vanilla derivative mar- kets covered by the Forex and Money Market function and by the Fixed Income Desk, as well as on the OTC structured products and derivative market and quot- ed derivative markets covered by the Derivatives & Structured Products function. With reference to the portfolios of commercial banks, the main source of inter- est rate risk associated with the trading book is represented by the investment portfolio managed by Banca Aletti. The main constituent of said portfolios is bonds, characterized by a limited interest risk exposure. The management man- date is due to the centralization of risk positions and operational flows associat- ed with securities and currency trading in the investment bank of the Group, namely Banca Aletti, that was carried out in previous years. The delegated port- folio represents almost the entire investment portfolio of the commercial banks of the Group. At the end of 2006, the bond portfolio managed by Banca Aletti comprised floating rate notes, accounting for about 52% (50% for Banco Popolare di Verona e Novara, 52% for Credito Bergamasco and 54% for Banca Popolare di Novara), asset swap structures hedged against interest rate risk through deriva- tives accounting for 13% (14% for Banco Popolare di Verona e Novara, 10% for Banca Popolare di Novara and 19% for Credito Bergamasco); and the remaining 35% is made up of fixed rate notes (36% for Banco Popolare di Verona e No- vara, 36% for Banca Popolare di Novara and 29% for Credito Bergamasco). The average duration of the portfolio, considering the interest rate derivative
352 Notes to the consolidated accounts
transactions used in the investment strategy (interest swap and futures), is 0.52 years (0.53 Banco Popolare di Verona e Novara, 0.53 Banca Popolare di Novara and 0.44 Credito Bergamasco) and its sensitivity, estimated on a sideways move- ment of 100 basis points of the yield curve, is equal to about 23.6 million euro at Group level, to 9.7 million euro for the Parent company and 2.5 and 11.4 mil- lion euro, respectively, for the subsidiaries Credito Bergamasco and Banca Popo- lare di Novara. Additional risk positions, for Banco and Popolare di Novara, are represented by the residual portfolio of floating rate securities from corporate issuers that were not transferred over to Banca Aletti for their management as they are linked to the commercial activities, and the floating rate bonds issued by the subsidiary Credito Bergamasco under the EMTN (Euro Medium Term Notes) program. An additional residual risk is represented by the securities trading baskets made available to the branch network, that on December 31st, 2006 had a worth of about 10 million euro (4 millions Banco Popolare di Verona e Novara, 3 millions Credito Bergamasco, 3.7 millions Banca Popolare di Novara). The directional portfolio of monetary and bond mutual funds set up for the in- vestment of short term liquidity is comparable to interest rate risk positions. The portfolio totaled about 264 million euro for Banco Popolare di Verona e Novara and about 80 million euro for Banca Popolare di Novara as at December 31st, 2006, and is characterized by an average duration of 1.6 years for Banco Popo- lare di Verona e Novara and 4 years for Banca Popolare di Novara. The main interest rate risk exposures within the trading portfolio of Banca Alet- ti are connected with trades on the money and listed and unlisted derivatives markets. In particular: • for trades on the money and currency market, total interest rate risk expo- sures as at December 31st, 2006, amounted to about 4.3 million euro, as- suming a 100 basis points parallel change in the interest rate curve. Also short term Government bond exposures fall within this class. At yearend they totaled about 400 million euro, their average duration was 0.5 years, and they are mainly used for repurchase agreements; • bond portfolios and the associated listed derivatives held by the Equity and Fixed Income function are characterized by a prudential management of the interest rate risk; specifically, with regard to year-end positions, the invest- ment portfolio included mainly floating rate securities (42%) or hedged against the interest rate risk being part of asset swaps (13%), with an av- erage duration of the portfolio of 0.30 years. The trading portfolio, which as at 31-12-2006 had an exposure for only 16 million euro, is almost en- tirely comprised of floating rate securities (92%) and has an average dura- tion of 0.32 years; • trades in structured instruments and in listed and unlisted derivatives, in- cluding trades on the secondary market of structured products issued or dis- tributed by the banks of the Group, represent the third type of trading ac- tivity. The breakdown of complex trades based on the underlying allows for a central management of the interest rate, exchange rate and price risks based on sophisticated position keeping systems In particular, the sensitivi- ty (delta and gamma) to the total interest rate risk at year-end totaled
353 Notes to the consolidated accounts
roughly 3.1 million euro. This exposure takes into account also the risks as- sociated with Banca Aletti’s fixed price hedging commitments in favor of the Banks of the Group or of issuers of securities being placed by the branch network, and it is based on the changes in value of the financial instruments in the portfolio, assuming two market scenarios whereby all measurable market rates undergo a 100 basis point upward or downward movement.
Banca Aletti’s risk positions are monitored on a daily basis to verify their compli- ance with the operating thresholds set by the Board of Directors on the entire portfolio and on the single underlying assets. In particular, for derivative trades, exposures (delta-gamma and vega) are also weighted against the volatility levels of the single underlying instruments and against their reciprocal intercorrela- tions. For information on the objectives and strategies underlying the trading activity, see the Report on operations.
B. Interest rate risk management process and assessment methods
The function in charge of controlling the financial risk management for all the banks of the Group, with the aim of identifying the type of risks, define the methods to assess risks, control limits at strategic level and verify the consisten- cy between trade limits and the risk/return targets assigned, is the Risk Man- agement function of Banco Popolare di Verona e Novara. Single trading limits are then applied, acting as a guideline for market activities, and their monitoring and control is a responsibility of the Financial Controlling & Planning function, which is part of the Parent company’s Private and Finance De- partment. For the operating control of the risk positions of Banco Popolare di Verona e Novara, the Private and Finance Department and Banca Aletti make use of sophisticated position keeping systems and risk control systems that provide a constant control over exposure levels and over the compliance with the oper- ating limits defined by the Board of Directors. Trading activities in listed and unlisted derivatives and in structured products, de- pending on the main underlying asset class, are based on two specific applica- tions specializing in interest/exchange rate derivatives and equity instruments. In case of very complex and innovative structures, these models are complement- ed by pricing and sensitivity measurement models developed by Gruppo Bpvn, that were validated by a Validation Group coordinated by the Parent company’s Risk Management function, after all the necessary operating tests mainly con- ducted by the Private and Finance Department under the supervision of aca- demic experts. Said position keeping models, automatically fed by market platforms and by the sales networks in case of trades in cash and in listed derivatives, are constantly aligned with accounting procedures and guarantee the constant measurement and control of position indicators, sensitivity and operational results. They are al- so complemented by Value at Risk control systems, developed by the Risk Man- agement Function. Financial risks are monitored on a daily basis by using deterministic indicators (risk exposure, duration, sensitivity) as well as probabilistic indicators (VaR).
354 Notes to the consolidated accounts
Value at Risk (VaR), indicating the maximum potential loss associated with mar- ket movements in unexceptional conditions, represents a synthetic risk meas- urement. The method used to calculate VaR belongs to the variance-covariance methods, that assume that the risk factors affecting the distribution of value changes (the adopted matrix provides the levels, volatility and correlations on daily and monthly valuation timeframes, for more than 470 risk factors) follow a normal distribution. The estimated values are a function of a 99% confidence level and a time interval of 10 days, based on 250 days of observation. Said ob- servations are weighed along an exponential method. The reference aggregate for the VaR calculation is the trading portfolio and all positions sensitive to the exchange rate risk. The current model fully covers generic position risks and exchange rate risks, while the specific risk is calculat- ed only for equity securities. Risk factors are aggregated with the correlations of the variance/covariance matrix, which is updated very day. The VaR on options is calculated using the present value, which is defined based on the most popular valuation models and by using models developed in-house by the Group. The risk is calculated by multiplying the present value of the underlying instru- ment times the delta coefficient, that indicates the price sensitivity of the deriv- ative instrument with respect to its underlying instrument. Interest rate risk ex- posures are aggregated on fixed maturities. As to exotic options, VaR is calcu- lated by technically managing these instruments, for example plain vanillas are assigned present values and Greeks generated by the systems used by the Fi- nance Department. VaR reports are prepared, providing information at Group level, and at single bank level, both by organizational unit, and by single trading portfolio. Said re- ports are sent to the Bank Head Office, the Finance Department and to Internal Audit. With regard to back testing, aiming at verifying the reliability of VaR estimates, the general approach and the methodological, organizational, IT and process re- quirements have been defined, and are now being assessed by the Bank of Italy. The system is being implemented and tested. As to scenario analyses (“stress testing”), aiming at verifying the exposure to extreme events or factors and the relevant capital adequacy, the general approach and the methodological, orga- nizational, IT and process requirements have been defined, and are soon going to be submitted to the Bank of Italy. The VaR model we are using internally at present is not utilized to calculate cap- ital requirements in association with market risks.
355 Notes to the consolidated accounts
Quantitative information
Regulatory trading book: internal models and other sensitivity analysis methods
Shown below are the VaR for financial years 2005 and 2006, referring to the regulatory trading portfolios of Banco Popolare di Verona e Novara, Banca Popo- lare di Novara, Credito Bergamasco, Banca Aletti and BPVN Luxembourg, cover- ing almost all the market risks for the Group. The analysis includes also the bank- ing book of Banca Aletti, in view of the interbank-relations of the assets and li- abilities of said portfolio.
Trading VaR broken down by type of risk
Financial year 2006 Financial year 2005 (million euro) 31 December Average Maximum Minimum 31 December Average
Interest rate risk 3.2 7.9 20.8 3.2 12.0 6.1 Exchange rate risk 2.8 1.5 4.5 0.4 1.2 1 Equity risk 13.4 8.8 19.0 4.6 6.4 5.2 Diversification effect -4.2 -5.9 n.s. n.s. -7.1 -4.2
Correlated Total 15.2 12.3 23.2 6.5 12.4 8.1
The numeric chart specifies the correlation impact among risk factors. Shown below is a chart depicting the weekly data for 2006, in terms of component-VaR (obtained by distributing the correlation effect across interest rate, exchange rate and equity risk factors) and total VaR (correlated total in the above table).
356 Notes to the consolidated accounts
Group VaR and associated risk factors
1.2.2 Interest rate risk – banking book
Qualitative information
A. General issues, management procedures and interest rate risk assessment methods
The interest rate risk borne by the Group in correlation with its banking book is mainly associated with the core activity performed by banks, namely acting as an intermediaries in the process of transformation of maturities, and in particu- lar it is caused by the mismatch between assets and liabilities in terms of amounts, maturity, duration and interest rate. Under IAS, issues of fixed rate bonds, commercial fixed rate mortgages and loans, and funding through demand deposits are a source of fair value interest rate risk; while the issue of floating rate bonds are a source of cash flow inter- est rate risk. The Parent company’s Risk Management function is in charge of monitoring and controlling the interest rate risk inherent in the banking books. It performs this function based on specific agreements also for the subsidiary banks. The oper- ating management of the interest rate risk is a responsibility of the Parent com- pany’s ALMO and Capital Management function, which carries out this task al- so on behalf of the subsidiary banks, and pursues the optimization of the eco- nomic return on absorbed capital. The interest rate risk is measured and controlled by way of spreadsheets pre- pared by Strategic Asset & Liability Management procedure (ALMS): the most important is gap analysis, which is used to analyze mismatches between deposits and loans and to measure and manage the interest rate risk generated by the
357 Notes to the consolidated accounts
net imbalance by aggregating the various positions. The monitoring and control activities are conducted on a monthly basis, with intra-monthly updates in case of large transactions or significant events. During the year, the interest rate risk generated by exposures concentrated in the short term was reduced by way of specific swap-based hedging activities for both fixed rate deposits and loans. As to the structural liquidity risk, the Group structure to date is still showing a short term mismatch, which is reabsorbed on the medium/long term. The evo- lution of aggregates is analyzed and constantly monitored with the gap analysis method and it shows a good correlation between loans and deposits. Htm (Held to maturity) and Afs (Available for sale) securities portfolios represent significant constituents of the Group’s banking book. An Htm portfolio was set up at Group level, comprised of fixed rate government bonds and financial corporate bonds eligible of refinancing with the European Central Bank, totaling about 900 million euro. Afs portfolios as a whole correspond to a market value of about 500 millions in terms of good credit standing and have been hedged against the interest rate risk with swaps for about 260 millions.
B. Fair value hedging
During the year the Group adopted the strategy to retain and manage a net fixed rate structural mismatch on the assets side for maturities exceeding one year. Said mismatch, thanks to the hedging activity described In order to contain the interest rate risk, fixed rate bond issues with maturities generally ranging be- tween three and five years have not been duly hedged, and were therefore used as natural hedges for the fixed rated mismatches between assets and liabilities. On the contrary, as usual structured bond issues have always been duly hedged. Gruppo Banco Popolare di Verona e Novara fully hedged all early repayment op- tions embedded in debt securities issued, by selling corresponding options to fi- nancial intermediaries. The exercise of the above options triggers the contem- porary exercise of the options embedded in the debt securities issued by Banco Popolare di Verona e Novara, leading to the advanced repayment to customers. The exposure to the short term interest rate risk is generated mainly by demand deposits. Econometric and statistical analysis were conducted to assess this ex- posure. The outcome was a stability of the assets under examination and a cer- tain resilience to interest rate movements, which means that the economic ma- turity of these aggregates (three years) differs from the contract term (generally set at one day). The stabilization of interest income generated by these items was based on macro-hedges mainly with plain vanilla swaps. This activity gave rise to a posi- tive economic result and shall continue also in the coming years.
358 Notes to the consolidated accounts
C. Cash flow hedging
In order to stabilize the cost of its floating rate deposits, Gruppo Banco Popolare di Verona e Novara resorted to swap-based hedges, classified as macro cash flow hedges. Said hedges are fully covered in terms of amount by the notional amounts of FRN (Floating Rate Notes) issued on international markets.
Quantitative information
Banking book: internal models and other sensitivity analysis methods
The Group makes use of a strategic asset/liability management procedure to measure every month the impact (“sensitivity”) on the expected net interest, div- idend and similar income and on the economic value of capital related to the banking and trading books that may occur through changes in interest rates. With regard to the expected net interest, dividend and similar income, the ALM system estimates its changes on a one year horizon in the assumption of deter- ministic shocks of the interest rate curves (+/-100 basis points applied to all the interest rate curves as if it were a sudden, single and parallel change), shocks to adjust to the forward rates implied in money market rates, and again shocks from projections that reflect alternative scenarios. Estimates are based on the as- sumption that the capital structure remains unchanged in terms of aggregate as- sets and liabilities, as well as in terms of financial characteristics (rates, spreads, duration). With regard to the economic value of capital, the same assumptions on the in- terest rate curve changes are applied, measuring the change in present value of all transactions and comparing it with the economic value of capital. Shown below are the main sensitivity data for financial years 2005 and 2006 with regard to the banking books and the trading portfolios of Banco Popolare di Verona e Novara, Banca Popolare di Novara, Credito Bergamasco, Bpvn Lux- embourg and Leasimpresa. Banca Aletti is not included in the analysis due to the interbanking nature of the assets and liabilities of its banking book. On the con- trary, the regulatory trading portfolios are included in that they represent an es- sential component in the matching of banking accounts.
359 Notes to the consolidated accounts
Financial year 2006 Financial year 2005 Risk ratios (%) 31 December Average Maximum Minimum 31 December Average
Per shitft +100 bp Net interest, dividend and similar income at risk / Net interest, dividend and similar income 4.4 5.3 6.5 4.3 6.2 8.2 Economic value at risk / Capital Economic Value 1.9 1.8 2.4 1.4 2.5 3.1 Per shitft –100 bp Net interest, dividend and similar income at risk /Net interest, dividend and similar income -5.1 -7.2 -5.1 -8.4 -5.1 -7.2 Economic value at risk /Capital Economic Value -2.3 -2.9 -1.9 -3.6 -2.3 -2.9
Sensitivity analyses are complemented by gap analyses (decalage), that are ap- plied to the fixed rate component of the banking book, together with the rele- vant hedges, so as to monitor the net imbalance for each term structure and to provide the relevant operating units with an analytical tool to support interest rate risk management strategies, with the aim of mitigating this risk on the medium and long term.
1.2.3 Price risk – regulatory trading book
Qualitative information
A. In general
Price risk positions in the portfolios of the commercial banks of the Group are represented by the investment portfolios managed by Banca Aletti. For further details, see the Report on operations. The main price risk exposures within the trading portfolio of Banca Aletti are connected with trades on the money and listed and unlisted derivatives markets. In particular: • equity portfolios and associated listed derivatives held for trading, as mar- ket maker on single stock futures and as specialist for liquidity-service ac- tivities, are characterized by contained net daily exposures; • trades in structured instruments and in listed and unlisted derivatives, in- cluding trades on the secondary market of structured products issued by the banks of the Group take place by breaking down complex transactions based on their underlying instruments. Total price risk exposure for the as- sociated derivative portfolio at the end of the period amounted to roughly 3.8 million euro, net of hedges with derivatives and cash financial assets.
360 Notes to the consolidated accounts
The above risk exposures are monitored on a daily basis to verify their compli- ance with the operating thresholds set by the Board of Directors on the entire portfolio and on the single underlying assets, along similar modalities to those described for the interest rate risk.
B. Price risk management processes and measurement methods
The price risk of the trading book is monitored and controlled by using the in- ternal VaR model extensively described in section 1.2.1 Interest rate risk – Regu- latory trading portfolio’.
Quantitative information
1. Regulatory trading portfolio: cash exposures in equity securities and UCITS
(thousand euro) Book value Quoted Unquoted
A. Equity securities 632,189 78 A.1 Shares 632,189 1 A.2 Innovative common stock equiv. 0 0 A.3 Other equitties 0 77
B. UCITS 7,871 943,973 B.1 Italian 32 791,173 - open-end compliant - 791,173 - open-end non-compliant - - - closed-end 32 - - reserved - - - speculative - - B.2 Other EU States 7,839 152,800 - open-end compliant 7,467 152,800 - open-end non-compliant - - - closed-end non-compliant 372 - B.2 Non EU States - - - open-end - - - closed-end - -
Total 640,060 944,051
361 Notes to the consolidated accounts
2. Regulatory trading portfolio: distribution of exposures in equity securities and equity indices for the main listing Countries
(thousand euro) Quoted Italy Other Unquoted
A. Equity securities 184,627 437,600 77 - long position 181,437 435,192 77 - short position 3,190 2,408 -
B. Unsettled trades on equity securities 20,004 10,725 - - long position 14,450 6,014 - - short position 5,554 4,711 -
C. Other equity derivatives 77,311 - 316,361 - long position 10,135 - 45,982 - short position 67,176 - 270,379
D. Equity index derivatives 9,563 444,302 978,015 - long position 1,276 54,265 521,007 - short position 8,287 390,037 457,008
3. Regulatory trading book: internal models and other sensitivity analysis metho- dologies
The price risk of the trading book is monitored and controlled by using the in- ternal VaR model extensively described in section 1.2.1 Interest rate risk – Regu- latory trading portfolio’.
1.2.4 Price risk – banking book
Qualitative information
A. General issues, management processes and price risk assessment measures
There is a portfolio mainly comprised of equity securities classified as available for sale and of funds of hedge funds, held for strategic reasons, namely to achieve a low market correlation of the entire portfolio.
362 Notes to the consolidated accounts
B. Price risk hedging
The price risk of the banking book, which is monitored on a daily basis, is not hedged.
Quantitative information
1. Banking book: cash exposures in equity securities and UCITS
(thousand euro) Book value Quoted Unquoted
A. Equity securities 114,042 388,636 A.1 Shares 114,033 371,156 A.2 Innovative common stock equiv, 0 0 A.3 Other equitties 9 17,480
B. UCITS 910 322,518 B.1 Italian - 318,801 - open-end compliant - - - open-end non-compliant - - - closed-end - 15,006 - reserved - - - speculative - 303,795 B.2 Other EU States 910 3,717 - open-end compliant 910 - - open-end non-compliant - - - closed-end non-compliant - 3,717 B.2 Non EU States - - - open-end - - - closed-end - -
Total 114,952 711,154
2. Banking book: internal models and other sensitivity analysis methods
The price risk of the banking book made up of funds of hedge funds is moni- tored and controlled by using the internal VaR model extensively described in section ‘2.1 Interest rate risk – Regulatory trading portfolio’. The risk is estimat- ed by tracing each hedge fund back to a mix of risk factors representing man- agement strategies. The risk inherent in each strategy is estimated based on the volatility of the associated risk factors, and volatilities are updated on a month- ly basis. Equity securities classified as available for sale are represented by stakes of less than 20%, whose price risk at the present time is not being specifically moni- tored.
363 Notes to the consolidated accounts
1.2.5 Exchange rate risk
Qualitative information
A. General issues, management procedures and exchange rate risk assessment methods
Exchange rate risks ensuing from the commercial activities of the banks of the Group have been transferred and centralized in Banca Aletti, which acts as the Group’s investment bank. As to any foreign currency position set up by the commercial banks in the in- vestment portfolios managed by Banca Aletti, they are directly funded by the Group’s integrated Treasury department in the settlement currency. The exchange rate risk management for Banca Aletti is associated with very small positions, regarding major currencies, in particular the US dollars, Japan- ese yens, Swiss francs and English pounds. As to trades in exchange rate derivatives, exposures are basically closed down every day.
B. Exchange rate risk hedging
Exposures, which are very limited, refer to primary currencies, in particular the US dollars, Japanese yens, Swiss francs and English pounds. As to trades in ex- change rate derivatives, exposures are basically closed down every day.
364 Notes to the consolidated accounts
Quantitative information
1. Distribution by currency of denomination of assets and liabilities and derivatives
(thousand euro) US GB Swiss Yen Krone Other Dollars Pounds Francs currencies
A. Financial assets 1,338,002 557,129 326,618 214,799 44,030 36,732 A.1 Debt securities 38,236 54,770 13,123 244 - - A.2 Equity securities 143,451 2,612 57,790 89,141 - 506 A.3 Due from banks 703,213 388,066 168,789 79,694 15,969 25,328 A.4 Loans to customers 453,102 111,681 86,916 45,720 28,061 10,898 A.5 Other financial assets ------
B. Other assets 3,667 904 2,493 136 2,670 798
C. Financial liabilities 2,272,186 1,330,547 463,538 440,462 61,054 153,395 C.1 Due to banks 896,958 120,253 125,066 100,261 961 43,585 C.2 Due to customers 779,983 150,383 31,683 62,443 60,093 108,782 C.3 Debt securities 590,712 1,059,317 304,893 277,712 - - C.4 Other financial liabilities 4,533 594 1,896 46 - 1,028
D. Other liabilities 2,871 260 693 27 - 100
E. Financial derivatives 442,906 36,180 40,636 396,920 - 76,559 - Options 155,910 11,397 33,163 63,216 - 1 + long positions 51,746 8,027 25,790 31,864 - - + short positions 104,164 3,370 7,373 31,352 - 1 - Other 286,996 24,783 7,473 333,704 - 76,558 + long positions 69,626 23,698 2,035 284,514 - 56,080 + short positions 217,370 1,085 5,438 49,190 - 20,478
Total assets 1,463,041 589,758 356,936 531,313 46,700 93,610
Total liabilities 2,593,720 1,335,002 476,349 521,004 61,054 173,874
Imbalance (assets - liabilities) -1,130,679 -745,244 -119,413 10,309 -14,354 -80,264
2. Internal models and other sensitivity analysis methods
The exchange rate risks generated by the trading portfolio and the banking book are monitored through an internal VaR model extensively described in section ‘2.1 Interest rate risk – Regulatory trading portfolio’. As to the estimate of the exchange rate risk, see table 2 of the same section, under quantitative informa- tion.
365 Notes to the consolidated accounts Other valuables 31/12/2006 31/12/2005 and gold Exchange rates Equity securities and equity indices Debt securities and interest rates and interest tfolio: end-of-period and average notional amounts Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted y trading por Total 8,586,509 72,903,558 8,039,935 11,083,474 6,531 7,271,427 - 2,870,722 16,632,975 94,129,181 721,723 91,581,729 - Purchased- Issued- Purchased- Issued- Purchased -- plain vanilla- exotic 1,683,489- Issued - -- plain vanilla 16,683,707- exotic 2,594,905 - - - - Purchase - 4,691,557- Sale - against currency- Currency 303,565 - - 3,056,756 ------303,565 3,818,412 1,202,757 3,056,756 - - 5,000 4,446,938 5,550,094 - 4,446,938 - - 1,197,757 - - 1,714,968 - - - 7,262 - - 1,349,666 7,262 - 3,811,150 - - - - - 1,707,706 - - - - - 864,855 - - 251,897 - - 99,977 1,097,769 - 172,820 - - - 3,056,756 692,736 - - - - 692,035 5,571,620 145,780 - - - 509,178 129,250 1,293,801 - 179,295 99,977 4,446,938 - 3,056,756 - 6,564,554 - - 4,291,758 - 2,376,225 9,551 - - - - 359,136 509,178 88,396 16,829,487 3,212,767 - 4,446,938 10,370,901 179,295 3,888,706 10,588,042 - - 3,118,226 1,834,588 185,082 - - - 6,197,854 - - - 88,396 14,208,975 5,212,484 4,106,676 2,987,230 - 2,641,024 6,598,040 - - - - 3,446,328 - - 3,990,002 - 9,551 3,212,767 - 1,834,588 - - 2,118,878 67,699 - 1,791,496 (thousand euro) 1. rate agreement Forward 2. rate swap Interest 3. swap Domestic currency 4. rate swap interest Currency 5. - Basis swap6. Equity index swap7. - - Real index swap -8. Futuresoptions9. Cap 32,973,221 - - - -10. Floor options - - - - 8,586,509 12,770,35711. - Other options - - - 18,367,196 ------536,241 6,531 - - 7,286,462 - - - - -12. contracts Futures - 1,506,322 - - 7,503,694 - - - - -13. Other derivative contracts - 5,533,380 5,550,094 ------2,214,521 ------6,531 ------32,973,221 - - 609,155 - - - 7,503,694 - 838,516 1,423,051 - - - - 9,863,378 - - 35,542,509 9,122,750 267,691 - - - - - 17,152,596 - - 12,770,357 19,205,712 - - - 14,259,607 - 5,056,906 - - - 454,032 - - - - - 20,406,829 6,752 - - 8,689,737 5,628,254 - 176,734 ------5,056,906 - - 3,978,073 - - 245 1.2.6 Financial derivative instruments A. Financial derivatives A.1 Regulator
366 Notes to the consolidated accounts Other valuables 31/12/2006 31/12/2005 and gold Exchange rates Equity securities and equity indices Debt securities and interest rates and interest Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Total - 19,254 ------19,254 - 939,254 - Purchased- Issued- Purchased- Issued- Purchased -- plain vanilla- exotic- Issued - -- plain vanilla- exotic - - - - Purchase - -- Sale - against currency- Currency ------A.2 Banking book: end-of-period and average notional amounts A.2.1 Hedging derivatives (thousand euro) 1. rate agreement Forward 2. rate swap Interest 3. swap Domestic currency 4. rate swap interest Currency 5. - Basis swap6. Equity index swap7. - - Real index swap -8. Futuresoptions9. Cap - 19,254 - - -10. Floor options - - - -11. - Other options ------12. contracts Futures ------13. - Other derivative contracts ------19,254 ------939,254 ------
367 Notes to the consolidated accounts Other valuables 31/12/2006 31/12/2005 and gold Exchange rates Equity securities and equity indices Debt securities and interest rates and interest Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted - Purchased- Issued- Purchased- Issued- Purchased -- plain vanilla- exotic- Issued 181,551 - -- plain vanilla- exotic - - - Purchase - - -- Sale - against currency- Currency ------154,477 ------35,737 - - 5,737 ------30,000 58,360 - - - - 82,090 - 23,730 ------181,551 - - - - - 154,477 ------386,758 - - - 35,737 - - - - 366,747 - 5,737 - - 30,000 - - 58,360 - 82,090 - - - 515,081 - 23,730 491 - 491 - 11,904 151,730 - - 38,076 100,711 363,351 93,765 - - - 62,635 ------Total - 673,135 - 272,304 - - - - - 945,439 491 4,035,795 (thousand euro) A.2.2 Other derivatives 1. rate agreement Forward 2. rate swap Interest 3. swap Domestic currency 4. rate swap interest Currency 5. - Basis swap6. Equity index swap7. - - Real index swap -8. Futuresoptions9. Cap - 491,584 - - -10. Floor options - - - -11. - Other options - - - - - 181,551 ------12. contracts - Futures - - - 154,477 - -13. - Other derivative contracts ------117,827 ------491,584 ------336,028 - 2,560,829 ------753,505 ------117,827 - - - 491 - - - - 615,792 - - - - 105,669 ------
368 Notes to the consolidated accounts Other valuables 31/12/2006 31/12/2005 and gold Exchange rates Equity securities and equity indices Debt securities and interest rates and interest chase and sale of underlying assets Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted currency------urny------currency--- urny------currency--- urny------currency--- - Purchase- Sale against - Currency - 439,070 - 90,051 - - 187,501 581,582 - - 5,950 ------632,521 - - 671,633 3,466,700 - 587,586 - Purchase- Sale against - Currency ------exchange- Purchase- Sale against - Currency ------939,254 795,000 - 144,254 - Purchase- Sale against - Currency ------currency - - - - - 141,633 - - - 141,633 - 91,828 currency - - - - - 25,593 - 24,981 - 50,574 - 1,306,949 2.Without capital exchange - 529,121 - 769,083 - 5,950 - - - 1,304,154 - 4,054,286 1. With capital exchange ------2. Without capital 1. With capital exchange ------Purchase- Sale against - Currency - 691,555 - 1,738,470 887,466 1,144,836 129,033 625,036 - - 4,307,201 3,161,403 - - - 1,738,470 - 5,127,789 1,144,836 382,414 4,673,905 5,773,356 334,032 4,866,472 exchange- Purchase- Sale against - Currency 8,586,509 1,366,671 67,590,374 33,008,781 6,864,336 3,084,737 7,219,838 34,581,593 8,725,220 3,779,599 3,689,379 5,035,841 - - - 72,257 3,716 42,948 - - 2,870,722 15,450,845 2,086,514 - 79,258,573 4,451,408 759,227 38,788,390 10,999,437 5,277 74,977,934 40,419,609 5,277 42,366,025 - 31,304,960 portfolio1. With capital exchange - 8,586,509 1,579,021 69,169,395 2,883,306 9,747,642 9,479,289 754,069 - - 7,682,494 7,610,237 - - 2,870,722 18,334,151 89,201,900 - 721,723 2,883,306 85,709,590 9,943,327 716,446 10,731,656 B.2 Other derivatives - 529,121 - 769,083 - 5,950 - - - 1,304,154 - 4,054,286 2. Without capital B.1 Hedging ------939,254 (thousand euro) A.3 Financial derivatives: pur A. Regulatory trading B. Banking book - 529,121 - 769,083 - 5,950 - - - 1,304,154 - 4,993,540
369 Notes to the consolidated accounts Future Future exposure Sundry underlyings Settled Future Future exposure Gross Gross settled ------Gross unsettled Future Future exposure Gross Gross settled ------Gross unsettled Future Future exposure Gross Gross settled ty risk ------Gross unsettled Future Future exposure Gross Gross settled ------Debt securities and interest rateDebt securities and interest Equity securities and equity indices Exchange rates and gold Other valuables Gross unsettled Central Banks companiescompanies 70,023companies 9,374 4,130 38,080 86,781 4,130 72,222 1,038 72,222 - 21,132 22,181 7,221 6,147 - 4,607 - 69 - 61 67,134 21 54,068 - 18,269 253 Central Banks companiescompanies 2,074 - 188 companies trading book: A.1 Governments and A.2 Public EntitiesA.3 BanksA.4 Financial 219A.5 Insurance 640,336 240,894A.6 Non-financial - 94,533 391,350 44 391,325 177,310 55,943 29,915 14,393 31,843 31,843 9,764 269,240 736 A.7 Other entities 320 - 268 1,872 - 3,361 27,626 166 3,192 A. Regulatory 31/12/200631/12/2005 801,809 254,398B.1 Governments and 722,735 156,144 135,936 465,444 138,172 463,547 337,004 201,803 157,924 93,822 219,562 36,228 173,237 40,461 15,960 31,912 82,05431/12/2006 31,904 80,26031/12/2005 9,785 5,921 323,308 36,975 30,539 43,860 989 51,358 - 86,409 5,678 2,197 8,696 20,779 - - 33,018 - 2,400 722 - 74 B.2 Public Entities B.3 Banks 34,901 - 2,009 - - 2,400 B.4 Financial B.5 Insurance B.6 Non-financial B.7 Other entities (thousand euro) A.4 OTC financial derivatives: positive fair value – Counterpar B. Banking book
370 Notes to the consolidated accounts Future Future exposure Sundry underlyings Settled Future Future exposure Gross Gross settled ------Gross unsettled Future Future exposure Gross Gross settled Gross unsettled ------Future Future exposure Gross Gross settled ------Gross unsettled Future Future exposure Gross Gross settled ------Debt securities and interest rateDebt securities and interest Equity securities and equity indices Exchange rates and gold Other valuables Gross unsettled companies 36,632 - 13,926 - - - 16,120 - 6,407 companiescompanies 91,410 105,589 19,759 105,589 8,288 15,205 19,042 284,096 284,096 2,215 - 10,799 7,536 8,062 66 31 21 19,979 844 and Central Banks companies companies companies and Central Banks A.7 Other entities 14,560 13,866 243 61,104 54,256 363 21,756 569 741 A.6 Non-financial A.2 Public Entities 65 - 59 A.3 BanksA.4 Financial A.5 Insurance 517,924 165,260 30,932 261,566 54,210 - 63,988 32,975 4,630 58,446 2,825 9,764 154,344 8,839 trading book: A.1 Governments B.4 Financial B.2 Public Entities B.3 BanksB.5 Insurance B.6 Non-financial 2,313B.7 Other entities - 400 31/12/200631/12/2005 766,180 304,474B.1 Governments 810,885 68,653 149,395 625,808 129,224 394,777 559,353 25,668 363 13,654 112,663 135,744 41,080 7,947 19,84031/12/2006 38,983 58,512 54,13831/12/2005 2,856 53,210 2,313 9,785 174,323 34,214 406 34,794 9,683 - 97 26,790 400 7,634 417 300 1,886 567 - 43 A.5 OTC financial derivatives: negative fair value – Financial risk (thousand euro) A.Regulatory B. Banking book
371 Notes to the consolidated accounts
A.6 Residual life of OTC financial derivatives: notional values
(thousand euro) Up to Between1 Over Total 1 year and 5 years 5 years
A. Regulatory trading book 36,580,919 68,090,006 17,352,986 122,023,911 A.1 Financial derivatives on debt securitiesand interest rates 20,567,560 52,176,638 15,378,942 88,123,140 A.2 Financial derivatives on equity securities and equity indices 5,017,529 12,232,591 1,974,044 19,224,164 A.3 Financial derivatives on exchange rates and gold 10,727,597 1,078,288 - 11,805,885 A.4 Financial derivatives on other valuables 268,233 2,602,489 - 2,870,722
B. Banking book 1,288,559 3,805,201 567,890 5,661,650 B.1 Financial derivatives on debt securities and interest rates 1,179,841 3,143,886 562,890 4,886,617 B.2 Financial derivatives on equity securities and equity indices 107,893 656,190 5,000 769,083 B.3 Financial derivatives on exchange rates and gold 825 5,125 - 5,950 B.4 Financial derivatives on other valuables ----
31/12/2006 37,869,478 71,895,207 17,920,876 127,685,561
Comparative data referring to 31/12/2005 are not shown, in that, in keeping with the temporary instructions issued by the Bank of Italy upon publishing Cir- cular n. 262 of December 22nd, 2005, last year the Group made use of the op- tion not to show the residual life of over the counter financial derivatives.
372 Notes to the consolidated accounts
B. Credit derivatives
B.1 Credit derivatives: end-of-period and average notional amounts
Regulatory trading book Other transactions
(thousand euro) multiple multiple one counter- counter-par- one counter- counter-par- party ties (basket) party ties (basket)
1. Protective calls 1.1 With exchange of capital - - - - - Total rate of return swap - - - - - Credit default swap - - - - - Other - - - - 1.2 Without exchange of capital - - - - - Total rate of return swap - - - - - Credit default swap - - - - - Other - - - -
Total 31/12/2006 - - - -
Total 31/12/2005 - - - -
AVERAGE VALUE - - - -
2. Protective puts 2.1 With exchange of capital - - - - - Total rate of return swap - - - - - Credit default swap - - - - - Other - - - - 2.2 Without exchange of capital - - 400 - - Total rate of return swap - - - - - Credit default swap - - - - - Other - - 400 -
Total 31/12/2006 - - 400 -
Total 31/12/2005 - - - -
AVERAGE VALUE - - - -
B.2 Credit derivatives: positive fair value – Counterparty risk
The Group has no credit derivatives with a positive fair value.
373 Notes to the consolidated accounts
B.3 Credit derivatives: negative fair value – Financial risk
(thousand euro) 2006
Regulatory trading book
1. Protective calls with counterparties 1.1 Governments and Central Banks - - 1.2 Other public entities - - 1.3 Banks 276 10 1.4 Financial companies - - 1.5 Insurance companies - - 1.6 Non-financial companies - - 1.7 Other counterparties - -
31/12/2006 276 10
31/12/2005 - -
B.4 Residual life of credit derivatives
(thousand euro) Up to Between1 Over Total 1 year and 5 years 5 years
A. Regulatory trading book ---- A.1 Credit derivatives with "qualified reference obligation" ---- A.2 Credit derivatives wtih "unqualified reference obligation" ----
B. Banking book 400 - - 400 B.1 Credit derivatives with "qualified reference obligation" 400 - - 400 B.4 Credit derivatives wtih "unqualified reference obligation" ----
31/12/2006 400 - - 400
Comparative data referring to 31/12/2005 are not shown, in that, in keeping with the temporary instructions issued by the Bank of Italy upon publishing Cir- cular n. 262 of December 22nd, 2005, last year the Group made use of the op- tion not to show the residual live of credit derivatives.
374 Notes to the consolidated accounts
1.3 LIQUIDITY RISK
Qualitative information
A. General issues, management procedures and liquidity risk assessment methods
Liquidity risk comes from the time mismatch between expected cash in- and out- flows in a very short time horizon. In addition to the difficulty/impossibility of hedging such mismatches, the liquidity risk can also entail an interest rate risk caused by the need to raise/lend funds at unknown rates that could be poten- tially unfavorable. The first defense line against liquidity risk in commercial banks is the daily mon- itoring and control of the liquidity imbalance accrued over 14 days (calendar days from the overnight value date) by the treasury. This mismatch is measured by the difference between treasury cash inflows and outflows, that are summed algebraically based on the progressive gap analysis technique. In case of a negative liquidity gap, Banca Aletti verifies that it does not exceed the amount that would be made available through refinancing with the Central Bank by presenting the eligible securities of each bank, also those whose man- agement was delegated to Banca Aletti. Banca Aletti, who was committed by the banks of the Group with the integrat- ed management of treasury and forex activities, immediately reports any break- out of said threshold to the Parent company, which in turn immediately informs the Finance Committee of each bank so as to discuss and approve the necessary corrective actions to bring the situation back to balance. The agreement between Banca Aletti and the Parent company sets specific ceil- ings for the maximum negative liquidity gap at the overnight value date deter- mined by the daily transactions of the investment bank on its books, net of the amount that would be made available through refinancing with the Bank of Italy by presenting the available eligible debt securities. The second defense line against liquidity risk is the monitoring and active man- agement of any liquidity mismatch in the medium and long term through the adoption of appropriate funding policies, also by way of funding programs. These policies are defined during the monthly and quarterly meetings of the Fi- nance Committees, upon the proposal of the Parent Company’s Structured Plan- ning and Finance Function. The main instrument used to finance a surge in loan demand exceeding the com- mon internal funding sources and to optimize the correlation between loans and deposits is the issue of bonds destined to institutional investors as part of the Eu- ro Medium Term Notes (EMTN) program, with maturities at 5, 7 and 10 years. The third defense line against liquidity risk is the monitoring activity performed by the Parent company’s Risk Management function. Pursuant to the specific powers delegated to this function by the banks of the group, it measures the liq- uidity term structure of all the transactions in the banking book and in the trad- ing portfolio, using the ALM-related gap analysis technique, and it sends the rel- evant reports to the head offices of the banks, in particular duplicating the dai- ly control of the liquidity mismatch accrued in 14 days.
375 Notes to the consolidated accounts
Quantitative information
1. Time distribution of financial assets and liabilities by residual contract life.
Currency of denomination: On between 1 between between between between between between over Euro demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 22,329,535 960,363 860,825 2,848,276 3,216,298 3,005,027 3,417,852 13,835,386 9,472,747 A.1 Government bonds 164,048 - 28,611 14,171 236,941 364,779 1,069,053 1,438,812 155,091 A.2 Listed debt securities 96,237 - 9,461 93,623 86,352 97,747 260,650 944,395 644,589 A.3 Other debt securities 20,358 5,163 33 27,992 6,634 5,146 80,374 340,984 513,100 A.4 UCITS units 1,274,525 ------A.5 Loans: 20,774,367 955,200 822,720 2,712,490 2,886,371 2,537,355 2,007,775 11,111,195 8,159,967 - Banks 2,732,871 545,837 250,494 759,424 1,188,892 1,013,530 154,283 782,720 147,406 - Customers 18,041,496 409,363 572,226 1,953,066 1,697,479 1,523,825 1,853,492 10,328,475 8,012,561
Cash liabilities 23,747,402 6,212,762 2,422,617 3,566,022 3,409,689 1,073,315 760,833 9,287,699 3,815,082 B.1 Deposits 22,994,407 3,921,897 2,247,877 2,071,853 627,452 458,178 129,677 19,739 4,692 - Banks 581,481 3,839,526 445,067 1,279,242 297,703 216,020 45,414 1,269 903 - Customers 22,412,926 82,371 1,802,810 792,611 329,749 242,158 84,263 18,470 3,789 B.2 Debt securitis 235,429 775,812 146,198 1,480,023 2,774,172 590,231 598,324 9,241,063 3,594,695 B.3 Other liabiltiies 517,566 1,515,053 28,542 14,146 8,065 24,906 32,832 26,897 215,695
Off-balance sheet transactions 3,224,260 2,886,349 489,273 980,848 2,696,894 1,102,092 1,531,989 923,348 594,440 C.1 Financial derivatives with exchange of capital 153,829 1,189,610 198,044 937,527 2,636,536 779,766 1,221,257 47,321 - - Long positions 92,239 465,088 96,323 208,516 1,182,515 203,732 704,262 21,058 - - Short positions 61,590 724,522 101,721 729,011 1,454,021 576,034 516,995 26,263 - C.2 Deposits and loans to be settled 604,469 1,275,323 288,553 10,969 11,030 180,794 - - - - Long positions 604,469 475,427 - 9,761 5,515 90,397 - - - - Short positions - 799,896 288,553 1,208 5,515 90,397 - - - C,3 Irrevocable commitments 2,465,962 421,416 2,676 32,352 49,328 141,532 310,732 876,027 594,440 - Long positions 228,913 211,232 2,676 32,352 49,328 141,532 310,732 876,027 594,440 - Short positions 2,237,049 210,184 ------
376 Notes to the consolidated accounts
Currency of denomination: between between between between between between US Dollar On between 1 over demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 270,518 93,762 57,629 86,649 95,533 134,479 138,465 153,732 9,737 A,1 Government bonds ------6,533 7,837 35 A.2 Listed debt securities - - - - - 23,020 - 51 477 A.3 Other debt securities - - - - 138 7 8 137 - A.4 UCITS units 747 ------A.5 Loans: 269,771 93,762 57,629 86,649 95,395 111,452 131,924 145,707 9,225 - Banks 15,815 85,033 21,021 7,162 75,857 107,656 120,338 69,657 1,898 - Customers 253,956 8,729 36,608 79,487 19,538 3,796 11,586 76,050 7,327
Cash liabilities 574,125 119,190 89,561 671,258 193,811 167,471 200,880 26,554 11,193 B.1 Deposits 531,677 62,464 89,561 221,212 119,028 162,233 200,880 26,541 11,147 - Banks 16,183 26,887 55,921 169,886 114,821 161,905 169,973 - - - Customers 515,494 35,577 33,640 51,326 4,207 328 30,907 26,541 11,147 B.2 Debt securitis 4,557 56,726 - 449,462 74,783 5,192 - - - B.3 Other liabiltiies 37,891 - - 584 - 46 - 13 46
Off-balance sheet transactions 150,419 367,070 143,998 438,344 909,628 204,194 319,795 40,228 - C.1 Financial derivatives with exchange of capital 7,033 361,312 143,619 420,500 813,853 202,354 305,194 25,644 - - Long positions 184 281,336 64,654 371,375 330,392 118,028 62,856 14,839 - - Short positions 6,849 79,976 78,965 49,125 483,461 84,326 242,338 10,805 - C.2 Deposits and loans to be settled - 2 - 17,150 ------Long positions - 1 - 8,575 ------Short positions - 1 - 8,575 - - - - - C.3 Irrevocable commitments 143,386 5,756 379 694 95,775 1,840 14,601 14,584 - - Long positions 7,758 2,878 379 694 95,775 1,840 14,601 14,584 - - Short positions 135,628 2,878 ------
377 Notes to the consolidated accounts
Currency of denomination: between between between between between between GB Pound On between 1 over demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 42,113 370,180 16,281 4,631 10,341 4 720 46,109 59,287 A.1 Government bonds ------A.2 Listed debt securities ------52 2 54,098 A.3 Other debt securities ------608 - A.4 UCITS units ------A.5 Loans: 42,113 370,180 16,281 4,631 10,341 4 668 45,499 5,189 - Banks 17,445 325,325 7,924 1,589 7,665 - - 22,338 - - Customers 24,668 44,855 8,357 3,042 2,676 4 668 23,161 5,189
Cash liabilities 68,347 567,136 2,610 279,323 254,901 112,586 1,671 4 1 B.1 Deposits 63,686 113,189 2,610 8,530 36,341 896 1,671 - - - Banks 26,372 9,674 808 4,791 33,302 - 1,671 - - - Customers 37,314 103,515 1,802 3,739 3,039 896 - - - B.2 Debt securitis 4,326 453,947 - 270,793 218,560 111,690 - - - B.3 Other liabiltiies 335 ------4 1
Off-balance sheet transactions 21,260 126,117 1,594 185,393 314,357 157,686 5,255 18,039 - C.1 Financial derivatives with exchange of capital 104 119,561 1,594 185,393 314,357 156,321 5,082 - - - Long positions 52 116,017 849 184,648 275,268 134,860 4,550 - - - Short positions 52 3,544 745 745 39,089 21,461 532 - - C.2 Deposits and loans to be settled ------Long positions ------Short positions ------C.3 Irrevocable commitments 21,156 6,556 - - - 1,365 173 18,039 - - Long positions 789 3,278 - - - 1,365 173 18,039 - - Short positions 20,367 3,278 ------
378 Notes to the consolidated accounts
Currency of denomination: between between between between between between Swiss franc On between 1 over demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 51,210 19,627 21,641 15,716 47,951 5,139 6,579 48,477 824 A.1 Government bonds ------636 2,624 - A.2 Listed debt securities ------9,863 - A.3 Other debt securities ------A.4 UCITS units ------A.5 Loans: 51,210 19,627 21,641 15,716 47,951 5,139 5,943 35,990 824 - Banks 7,840 18,857 11,763 5,136 34,499 3,340 - 28,028 - - Customers 43,370 770 9,878 10,580 13,452 1,799 5,943 7,962 824
Cash liabilities 50,054 441 484 83,952 132,261 187,605 1,022 - - B.1 Deposits 47,628 441 484 83,952 15,285 910 1,022 - - - Banks 20,931 441 484 83,952 15,135 910 1,022 - - - Customers 26,697 - - - 150 - - - - B.2 Debt securitis 1,234 - - - 116,965 186,695 - - - B.3 Other liabiltiies 1,192 - - - 11 - - - -
Off-balance sheet transactions 13,925 104,139 62 106,867 104,354 190,455 11 632 12 C.1 Financial derivatives with exchange of capital 16 77,015 62 104,689 104,354 190,455 - - - - Long positions 8 1,250 - 41,364 95,257 190,455 - - - - Short positions 8 75,765 62 63,325 9,097 - - - - C.2 Deposits and loans to be settled - 23,026 ------Long positions - 11,513 ------Short positions - 11,513 ------C.3 Irrevocable commitments 13,909 4,098 - 2,178 - - 11 632 12 - Long positions 5,538 2,049 - 2,178 - - 11 632 12 - Short positions 8,371 2,049 ------
379 Notes to the consolidated accounts
Currency of denomination: between between between between between between Yen On between 1 over demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 46,239 8,771 4,964 5,859 9,362 14,621 23,368 7,345 197 A.1 Government bonds ------4 - A.2 Listed debt securities ------A.3 Other debt securities ------240 - A.4 UCITS units ------A.5 Loans: 46,239 8,771 4,964 5,859 9,362 14,621 23,368 7,101 197 - Banks 23,165 4,636 3,481 2,934 8,375 6,765 21,416 3,823 - - Customers 23,074 4,135 1,483 2,925 987 7,856 1,952 3,278 197
Cash liabilities 157,907 79,110 22,084 49,331 66,644 39,532 16,697 1 5 B.1 Deposits 70,970 54,069 705 8,543 2,330 - 16,576 - - - Banks 8,751 54,069 705 8,339 2,330 - 16,576 - - - Customers 62,219 - - 204 - - - - - B.2 Debt securitis 86,561 25,041 21,379 40,788 64,314 39,532 121 - - B.3 Other liabiltiies 376 ------1 5
Off-balance sheet transactions 2,919 156,426 24,195 56,589 289,635 73,696 116,209 1,171 - C.1 Financial derivatives with exchange of capital 261 31,094 24,195 54,040 289,635 73,661 116,209 1,171 - - Long positions 261 25,587 21,964 45,077 226,115 53,039 52,221 1,171 - - Short positions - 5,507 2,231 8,963 63,520 20,622 63,988 - - C.2 Deposits and loans to be settled - 120,436 ------Long positions - 60,218 ------Short positions - 60,218 ------C.3 Irrevocable commitments 2,658 4,896 - 2,549 - 35 - - - - Long positions 37 2,448 - 2,549 - 35 - - - - Short positions 2,621 2,448 ------
380 Notes to the consolidated accounts
Currency of denomination: between between between between between between Norwegian Krone On between 1 over demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 3,014 ------A.1 Government bonds ------A.2 Listed debt securities ------A.3 Other debt securities ------A.4 UCITS units ------A.5 Loans: 3,014 ------Banks 3,014 ------Customers ------
Cash liabilities 3,591 ------B.1 Deposits 3,591 ------Banks 69 ------Customers 3,522 ------B.2 Debt securitis ------B.3 Other liabiltiies ------
Off-balance sheet transactions - 118 - - 120,620 - - - - C.1 Financial derivatives with exchange of capital - 118 - - 120,620 - - - - - Long positions - 82 - - 46,242 - - - - - Short positions - 36 - - 74,378 - - - - C.2 Deposits and loans to be settled ------Long positions ------Short positions ------C.3 Irrevocable commitments ------Long positions ------Short positions ------
381 Notes to the consolidated accounts
Currency of denomination: between between between between between between Other currencies On between 1 over demand and 7 days 7 and 15 15 days and 1 and 3 3 and 6 6 months 1 and 5 years (thousand euro) dats 1 month months months and 1 year 5 years
Cash assets 17,963 8,309 110 2,514 15,868 4 18,530 12,869 - A.1 Government bonds ------806 - - A.2 Listed debt securities ------A.3 Other debt securities 1,706 ------A.4 UCITS units ------A.5 Loans: 16,257 8,309 110 2,514 15,868 4 17,724 12,869 - - Banks 7,561 8,227 - - 3,913 - 7,771 3,747 - - Customers 8,696 82 110 2,514 11,955 4 9,953 9,122 -
Cash liabilities 117,998 24,335 - - 11,000 - 15,144 9,623 1,888 B.1 Deposits 117,069 24,335 - - 11,000 - 15,144 9,623 1,888 - Banks 13,919 24,335 - - 953 - - - - - Customers 103,150 - - - 10,047 - 15,144 9,623 1,888 B.2 Debt securitis ------B.3 Other liabiltiies 929 ------
Off-balance sheet transactions 4,972 65,938 1,328 10,140 68,820 6,538 8,488 168 - C.1 Financial derivatives with exchange of capital 54 3,476 1,328 6,516 68,820 6,538 8,488 - - - Long positions 27 2,011 631 4,727 16,924 4,434 4,226 - - - Short positions 27 1,465 697 1,789 51,896 2,104 4,262 - - C.2 Deposits and loans to be settled - 57,992 ------Long positions - 28,996 ------Short positions - 28,996 ------C,3 Irrevocable commitments 4,918 4,470 - 3,624 - - - 168 - - Long positions 647 2,235 - 3,624 - - - 84 - - Short positions 4,271 2,235 - - - - - 84 -
382 Notes to the consolidated accounts
2. Breakdown of financial liabilities by sector
Gov. and Other public Financial Insurance Non-financial Other (thousand euro) Central Banks entities companies companies companies counterparties
1. Due to customers 32,808 222,091 4,397,261 244,937 10,165,960 13,842,187 2. Securities issued 20,893 3,020 168,438 129 255,837 15,886,198 3. Financial liabilities held for trading - 64 985,312 390,182 60,594 408,376 4. Financial liabilities measured at fair value - - 23,278 166,651 323,212 4,821,002
31/12/2006 53,701 225,175 5,574,289 801,899 10,805,603 34,957,718
Comparative data referring to 31/12/2005 are not shown, in that, in keeping with the temporary instructions issued by the Bank of Italy upon publishing Cir- cular n. 262 of December 22nd, 2005, last year the Group made use of the op- tion not to show the sector distribution of financial liabilities.
3. Geographical breakdown of financial liabilities
Italy Other European America Asia Rest of the (thousand euro) countries world
1. Due to customers 26,369,551 2,265,990 225,965 7,358 36,380 2. Due to banks 4,642,345 2,950,172 31,758 34,787 456,799 3. Securities issued 9,823,050 6,429,013 156 1,602 80,694 4. Financial liabilities held for trading 1,029,146 736,765 78,617 - - 5. Financial liabilities measured at fair value 5,316,945 17,153 - - -
31/12/2006 47,181,037 12,399,093 336,496 43,747 573,873
Comparative data referring to 31/12/2005 are not shown, in that, in keeping with the temporary instructions issued by the Bank of Italy upon publishing Cir- cular n. 262 of December 22nd, 2005, last year the Group made use of the op- tion not to show the geographical distribution of financial liabilities.
383 Notes to the consolidated accounts
1.4 OPERATIONAL RISKS
Qualitative information
A. General issues, management procedures and operational risk assessment methods
Operational risk is the risk of suffering losses caused by inadequacy or failure at- tributable to procedures, human resources and internal systems, or caused by external events. The legal risk is included, while the strategic and reputational risks are not. The main sources of operational risk are: low reliability of operational processes, insufficient IT security, growing recourse to automation, outsourcing of corpo- rate functions, a limited number of suppliers, changes in strategies, frauds, mis- takes, staff recruitment, training and retention/loyalty-building, and finally social and environmental impacts. In order to correctly identify and assess operational risks, Gruppo Bpvn defined a methodology based on a qualitative analysis (Risk Assessment) and on a quan- titative analysis (Loss Collection). The qualitative risk assessment is carried out when there are no historical loss da- ta that may evidence the risk level associated with specific risk events (for ex- ample, low frequency and high impact events) or when the corporate business is being reorganized and revised in such a way as to change its risk level. Risk Assessment data is collected by regularly interviewing the heads of the various organizational departments, it is then codified and filed in a database function- al to statistical analysis. Loss Collection data is filed in a loss database as soon as the reporting function recognizes the loss event to be accounted for. In 2006, a system was implemented to verify and certify the operational risk database, to guarantee the quality and the formal accuracy of the input data. As part of Loss Collection, a system was developed to automate the manage- ment and accounting process of commercial refunds and operating losses for the branch network structures. A reporting system was then set up for commercial refunds and operating loss- es to be used by the Head offices of Gruppo Banco Popolare di Verona e Novara and by all the operating structures concerned. The aim of the above activities is to ensure the adoption of the standardized model as of the introduction of the New Capital Accord, to then change over to the adoption of the internal operational risk management model of Gruppo Bpvn (Advanced Measurement Approach). In order to implement the standardized model, followed by the AMA model, Gruppo Bpvn intends setting up a business organizational model centralized in the Parent company, which acts directly on behalf of the three commercial banks, Banca Aletti and SGS, and defines and regularly updates the objectives and the guidelines for the Group’s product factories. From an operational point of view, each product factory shall set up an internal organizational unit in charge of endorsing and implementing the targets fixed by the Parent company, and of providing a regular feedback on operational risk management.
384 Notes to the consolidated accounts
For outstanding legal proceedings and contingent losses, see Chapter B – Liabil- ities - Section 12 “Provisions for risks and charges”.
Quantitative information
Capital requirements, calculated along the Standardized method, are based on the average capital requirements referring to the last three annual observations carried out at yearend.
Shown below is an estimate of capital absorption of Gruppo Banco Popolare di Verona e Novara as at December 31st, 2006, calculated on an annual basis as the average capital absorption levels at the end of 2004, 2005, 2006:
Business Line Absorption (thousand euro)
Corporate Finance 1,656 Trading and sales 47,008 Retail Banking 101,676 Commercial Banking 121,791 Payment and Settlement 28 Agency Service 8,313 Asset Management 6,182 Retail Brokerage 35,779
Total 322,432
Section 2 Insurance company risks
The Group has no shareholdings in insurance companies falling under the con- solidation scope.
Section 3 Other company risks
The Group has no significant risks associated with “other companies” falling un- der the consolidation scope.
385 Notes to the consolidated accounts
Chapter F - Regulatory capital Section 1 Consolidated shareholders’ equity
A. Qualitative information
The corporate shareholders’ equity is made up of the sum of the balances of the following items of the balance sheet liabilities: • Capital net of repurchased treasury shares • Share premiums • Reserves • Valuation reserves • Common stock equivalents • Net income for the period
The description of the modality followed by the Group to pursue its capital man- agement objectives is provided in the following section 2.2.
B. Quantitative information
As at December 31st, 2006 the Group’s shareholders’ equity totaled 4,872.0 mil- lion euros, showing a net increase of 851 millions (+21.2%). Stripped of the net income for the period of 1,032.9 millions, shareholders’ equity went down by 289.2 millions as a result of the distribution of the prior year’s income, and it in- creased by 107.3 millions mainly as a result of the fair value change as at De- cember 31st, 2006 of financial assets available for sale and for the issue of new shares following the exercise of stock options by employees.
Section 2 Banking regulatory capital and solvency ratios
2.1 Regulatory scope of application
In keeping with the instructions issued by the Bank of Italy in its letter dated De- cember 1st, 2005, the consolidated regulatory capital must be calculated along the guidelines illustrated in circular n. 155 of December 18th, 1991, with spe- cific adjustments (so called “prudential filters) to endorse the international ac- counting standards (IAS /IFRS) in the measurement of the regulatory capital. By way of letter n. 7948 dated January 3rd, 2007, the Regulatory authority issued the new circular n. 263 – New prudential regulatory guidelines for Banks, im- plementing the Directives of June 14th, 2006, namely 2006/48/EC on the taking up and pursuit of the business of credit institutions and 2006/49/EC on the cap- ital adequacy of investment firms and credit institutions, based on the Basel II agreement. At national level, the law decree approved on December 22nd, 2006 introduced the necessary amendments and supplements to the Banking and Fi- nance single acts so as to extend the regulatory competences of the Lending au-
386 Notes to the consolidated accounts
thorities and make the domestic regulations compliant with EC regulations. The Minister for Economy and Finance, Chairman of CICR, on December 27th 2006 adopted an urgent decree laying out the general criteria of the new regulations, containing specific indications as to some regulatory choices, while it left it to the Bank of Italy to define prudential regulatory issues. The structure of the new prudential regulations is based on “three pillars”. The first introduces a capital requirement to face the typical risks inherent in the banking and financial activity (credit, counterparty, market and operational risks); to this end, alternative capital requirement calculation methods are envis- aged, characterized by different levels of complexity with regard to risk meas- urement and in terms of organizational and auditing requirements. The second requires intermediaries to put in place a capital adequacy control strategy and process, with both a current and future perspective, while it leaves it to the su- pervisory authorities to check the reliability and the consistency of the attained results and to adopt all the necessary corrective actions. The third pillar intro- duces public disclosure requirements, covering capital adequacy, risk exposure and the general characteristics of the relevant management and control systems.
The above regulations shall come into effect as of January 1st, 2007, however banks and banking groups that make use of the option provided by the EC reg- ulations to keep (max until January 1st, 2008) the prior credit risk prudential sys- tem, shall be subject to the directives on solvency ratios, market risks, total cap- ital requirements and risk concentration set forth in the present document on “Supervisory Instructions for Banks”. Throughout the same time frame, the above entities shall not be subject to the new regulations spelled out in Circular n. 263, with the exception of the regu- latory capital regulation, which in any case must be immediately applied.
Gruppo Banco Popolare di Verona e Novara exercised the option provided by the EC regulations, and shall therefore apply the new rules as of January 1st, 2008.
2.2 Banking regulatory capital
A. Banking regulatory capital
1. Tier 1 (Core capital) our Tier 1 capital did not include innovative common stock equivalents, or hy- brid instruments. In keeping with the instructions spelled out in the Bank of Italy’s circular n. 155 of December 18th, 1991, supplemented by the guidelines of the letter of December 1st, 2005 covering the calculation of the so called “prudential filters”, our core capital mainly comprises the share capital and eq- uity reserves net of intangible assets recognized under item 120 of assets.
387 Notes to the consolidated accounts
2. Tier 2 (Supplementary capital)
Our supplementary capital comprises undisclosed valuation reserves and subor- dinated liabilities, in the proportion allowed by the above mentioned regula- tions, and 50% of the valuation reserves stemming from the fair value meas- urement of assets belonging to the A.F.S. portfolio.
3. Tier 3 capital
As at December 31st, 2006, Banco’s regulatory capital included a Tier 3 compo- nent, represented by the 250 million subordinated debt issued at par on De- cember 5th, 2006, at a floating Euribor rate plus a 25 b.p. spread, with a bullet payment on June 5th, 2009. The debt was stated under the item 30 “Debt se- curities in issue” of the balance sheet liabilities as at December 31st, 2006 at a book value of 250.4 million euro (inclusive of the accrued interest of 0.7 million euro).
Described below are the main contract characteristics of the instruments included in the calculation of the Tier 2 capital: • bearer bonds for 125 million euro issued at par on March 30th, 2001. Bonds shall be repaid with a bullet payment on January 15th, 2007. The floating interest rate can be adjusted every three months along the three month interbank Euribor rate; • debt securities for 93.3 million euro issued at par on January 15th, 2002. Bonds shall be repaid with a bullet payment on April 15th, 2012 unless 63 months after the issue Banco decides to exercise the option of early re- demption. The program provides for a step-up clause: the floating interest rate can be adjusted every three months along the three month interbank Euribor rate up to the 21st coupon, while from the 22nd coupon it can be adjusted every three months along the three month interbank Euribor rate plus 60 b.p.; • debt securities for 100 million euro, issued at par on May 9th. 2002. Bonds shall be repaid in five proportional annual shares equal to 20% of the total liability. The interest rate was fixed throughout the duration of the borrow- ing, and was equal to a gross annual 4.7% rate; • debt securities for 25 million euro issued at par on June 20th, 2002. Bonds shall be repaid in five proportional annual shares; the issuer has the faculty of early redemption at par, exercisable as of the 24th month from the issue date. The interest rate can be adjusted every six months along the six month interbank Euribor rate plus 62.5 b.p.; • debt securities for 66.5 million euro, issued at par on June 12th, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted every three months along the three month in- terbank Euribor rate up to the 21st coupon, from the 22nd coupon on- wards it can be adjusted every three months along the three month inter- bank Euribor rate plus 50 b.p.; • debt securities for 15 million euro, issued at par on August 20th, 2002.
388 Notes to the consolidated accounts
Bonds shall be repaid in five proportional annual shares as of August 20th, 2003. The interest rate can be adjusted every six months along the six month interbank Euribor rate plus 62.5 b.p.; • debt securities for 80 million euro, issued at par on March 21st, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted along the interbank Euribor rate plus 80 b.p. un- til 04/08, and subsequently along the interbank Euribor rate plus 140 b.p.; • debt securities for 50 million euro, issued at par on May 23rd, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year follow- ing that of issue; the program provides for a step-up clause: the interest rate can be adjusted along the interbank Euribor rate plus 70 b.p. until 05/08, and subsequently along the interbank Euribor rate plus 130 b.p.; • debt securities for 20 million euro, issued at par on June 20th, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year follow- ing that of issue; the program provides for a step-up clause: the interest rate can be adjusted along the interbank Euribor rate plus 80 b.p. until 06/08, and subsequently along the interbank Euribor rate plus 135 b.p.; • debt securities for 20 million euro, issued at par on July 11th, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year follow- ing that of issue; the program provides for a step-up clause: the interest rate can be adjusted along the interbank Euribor rate plus 60 b.p.; • debt securities for 50 million euro, issued at par on October 2nd, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted along the interbank Euribor rate plus 50 b.p. un- til 10/08, and subsequently along the interbank Euribor rate plus 110 b.p.; • debt securities for 30 million euro, issued at par on November 20th, 2003. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted along the interbank Euribor rate plus 55 b.p. un- til 11/08, and subsequently along the interbank Euribor rate plus 115 b.p.; • debt securities for 28.5 million euro, issued at par on June 10th, 2004. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted every three months along the interbank three month Euribor until the 21st coupon, then it can be adjusted every three months along the interbank three month Euribor rate plus 60 b.p; • debt securities for 150.2 million euro, issued at par on June 4th, 2004. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted along the interbank Euribor rate plus 45 b.p. callable until 04/06/09; • debt securities for 20 million euro, issued at par on September 28th, 2004. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue; the program provides for a step-up clause: the in- terest rate can be adjusted along the interbank Euribor rate plus 45 b.p. un- til 09/09, and subsequently along the interbank Euribor rate plus 105 b.p.;
389 Notes to the consolidated accounts
• debt securities for 500 million euro, issued at par on June 15th, 2006. Bonds shall be repaid in five proportional annual shares as of the fifth year following that of issue. The interest rate can be adjusted along the inter- bank three month Euribor rate plus 40 b.p. until 15/06/2011, then it floats based on the interbank Euribor rate plus 105 b.p.; • debt securities for 250 million euro, issued at par on November 22nd, 2006. Bonds shall be repaid with a bullet payment in November 2016. The inter- est rate is floating and it is linked to the three month Euripor plus a 45 b.p. spread until November 2011, then it shall go up to 105 b.p.; the issuer may call an early redemption as of 2011. • Banca Popolare di Novara s.p.a. debt securities for 90.5 million euro issued at par on May 9th, 2002. Bonds shall be repaid in five proportional annual shares; the program provides no step-up clause and the interest rate paid is the three month Euribor rate; • subordinated bonds issued at par by Linea s.p.a. for 22 million euro on No- vember 30th, 1999. Bonds shall be repaid with a bullet payment. The pro- gram provides for a step-up clause: the interest rate can be adjusted along the six month interbank Euribor rate plus 60 b.p. for the first five years, and subsequently along the six month Euribor rate plus 110 b.p..
For all the above debt securities, subordination requires that, in the event of liquidation or receivership, bonds be repaid only after all other debts with a higher claim have been satisfied.
390 Notes to the consolidated accounts
B. Quantitative information
(thousand euro) 31-12-2006 31-12-2005
A. Tier 1 capital prior to adoption of prudential filters 3,925,729 3,290,552 Tier 1 capital prudential filters - positive IAS/IFRS prudential filters 786 - - negative IAS/IFRS prudential filters 19,278 -
B. Tier 1 capital after the adoption of prudential filters 3,907,237 3,290,552
C. Tier 2 capital prior to adoption of prudential filters 1,493,030 871,629 Tier 2 capital prudential filters - positive IAS/IFRS prudential filters 180,024 46,855 - negative IAS/IFRS prudential filters 90,012 -
D. Tier 2 capital after the adoption of prudential filters 1,583,042 918,483
E. Total Capital (Tier 1 + Tier 2) after the adoption of prudential filters 5,490,279 4,209,035 Total capital deduction items 681,292 397,344
F. Regulatory capital 4,808,987 3,811,691 Subordinated debts associated with the coverage of market risks 249,676 -
G. Reference capital for the calculation of the Total capital ratio 5,058,663 3,811,691
2.3 Capital adequacy
A. Qualitative information
The goal of the capital management policies pursued by Gruppo Banco Popo- lare di Verona e Novara prior to the start of the integration process with Grup- po Banca Popolare Italiana was on the one side to guarantee that the capital base be consistent with the global risk level, with regulatory constraints, with the objective rating, and with corporate development plans, and on the other side to optimize the capital makeup itself, namely the set of elements constituting the regulatory capital, by selecting a mix of financial instruments best suited to minimize the cost of capital. To this end, Gruppo Banco Popolare di Verona e No- vara intended to position its tier 1 ratio (the tier 1 to total risk weighted assets ratio) in a range between 6.0% and 7.5%, and its total capital ratio (the regu- latory capital to total risk weighted assets ratio) on levels compatible with the guidelines issued by the regulatory authorities by making use of the debt instru- ments permitted by the regulatory authorities. The Tier 1 target was in line with the Group’s prudent risk profile, thanks to its focus on retail customers, a geo- graphical coverage mainly concentrated in Northern-Italy, the high level of di- versification of borrowers and sectors, as well as the progressive improvement of
391 Notes to the consolidated accounts
our credit quality. The level was also in line with the objective rating as well as with current long term stable growth plans.
As already disclosed to the market, the merger with Gruppo Banca Popolare Ital- iana approved by shareholders in the Special General Meetings on March 10th, 2007 called for a confirmation of the capital management policies described above, by leveraging the range so as to make sure that, in addition to pursuing a prudent management, the merger shall be accretive in terms of earnings per share.
392 Notes to the consolidated accounts
B. Quantitative information
Category / Valuables 31-12-2006 31-12-2005 (thousand euro) Non-weighted Weighted Non-weighted Weighted amounts amounts amounts amounts
A. RISK ASSETS A.1 Credit risk 59,564,328 46,690,825 51,274,078 40,531,986 Standard method Cash assets 55,268,051 43,066,990 49,316,109 39,085,067 1. Exposures (other than equity securities and subordinated assets) with (or secured by): 1.1 Governments and Central Banks 3,487,888 - 4,075,573 - 1.2 Public entities 294,458 58,892 96,336 55,500 1.3 Banks 5,547,168 1,085,144 3,888,884 789,956 1.4 Other entities (other than mortgages on residential and non-residential real estate) 36,273,928 36,273,928 33,236,595 33,235,102 2. Mortgages on residential real estate 6,764,502 3,382,251 4,997,118 2,498,559 3. Mortgages on non-residential real estate 1,527,696 1,013,272 1,159,313 1,159,313 4. Shares, equity investments and subordinated assets 556,088 557,559 317,144 341,308 5. Other assets 816,323 695,944 1,545,146 1,005,329 Off-balance sheet assets 4,296,277 3,623,835 1,957,969 1,446,919 1. Guarantees and commitments with (or secured by): 1.1 Governments and Central Banks 89,203 - 61,816 39 1.2 Public entities 19,437 3,888 18,030 4,403 1.3 Banks 587,883 136,684 371,461 68,974 1.4 Other entities 3,439,896 3,439,896 1,328,321 1,328,321 2. Derivative contracts with (ore secured by): 2.1 Governments and Central Banks - - - - 2.2 Public entities - - - - 2.3 Banks 121,739 29,788 160,247 35,235 2.4 Other entities 38,119 13,579 18,094 9,947
B. CAPITAL ADEQUACY REQUIREMENTS B.1 Credit risk 3,735,266 3,242,559 B.2 Market risk 336,099 319,139 1. Standard method X X of which: - position risk on debt securities X 234,491 X 129,852 - position risk on equity securities X 64,573 X 14,332 - exchange rate risk X 7,365 X 1,974 - other risks X 29,670 X 172,981 2. Internal models X X of which: - position risk on debt securities X X - position risk on equity securities X X - exchange rate risk X X B.3 Other capital adequacy requirements X 9,400 X 3,106 B.4 Total capital adequacy requirements (B1+B2+B3) X 4,080,765 X 3,564,804
C. RISK ASSETS AND SOLVENCY RATIOS C.1 Risk weighted assets X 51,009,563 X 44,560,050 C.2 Tier 1/ Risk weighted assets (Tier 1 Capital Ratio) X 7.66% X 7.39% C.3 Regulatory capital / Risk weighted assets (Total Capital Ratio) X 9.92% X 8.55%
393 Notes to the consolidated accounts
Chapter G – Business combinations Section 1 Business combinations performed during the year
1.1 Business combinations
Total Income (Loss) Transaction Transaction Total Net income (loss) (million euro) acquired interest recognized upon date (1) cost (2) income (4) for the year (5) (%) (3) acquisition (6)
Banka Sonic 36.7 78.431% 7.9 0.9 0.2 97.18% common shares 14.769% privileged shares (7)
06-07-2006 30.5 80.207% common share 14.769% privileged shares (7)
19-12-2006 6.2 16.97% common shares
Acquisition of business line from Banca Popolare Italiana 01-10-2006 25.4 100% 14.2 2.0
1 Date of acquisition of the controlling interest 2 Cost inclusive of accessory charges 3 Percentage interest acquired with voting rights, without voting rights and as a percentage of total equity 4 [Item 120] of the Income Statement pertaining to the entire financial year 2006 5 Net income (Loss) reported by the investee company for the entire FY 2006 6 Income reported after the acquisition date and included in the consolidated results 7 Croatian shares
In addition to the above transactions and with reference to companies already belonging to the Group, during the year an additional 6.3% share in Arena Bro- ker was acquired, which caused the total shareholding to go up to 57.3%.
(million euro) Banca Sonic Acquisition of business line Total (*) from Banca Popolare Italiana
Shareholding cost 35.9 24.3 60.1 Costs directly associated with the transaction 0.8 1.1 1.9 Transaction cost 36.7 25.4 62.1
(*) With regard to the purchase performed on 06/07/2006, 80% of the price was paid upon purchase; the remaining 20% shall be paid in 3 years.
394 Notes to the consolidated accounts
1.2 Other information on business combinations
Acquisition of Banka Sonic d.d., Croatia
On February 21st, 2006, the Parent company signed an option agreement to ac- quire a controlling interest in the Croatian company Banka Sonic d.d., listed on the stock exchange of VaraÏdin. On July 6th, 2006 the option was exercised and the purchase of 49,568 com- mon shares was finalized (equal to 80.207% of total common shares outstand- ing) and 2,688 privileged shares (equal to 14.769% of total privileged shares outstanding). The transaction called for the purchase of a 65.32% share in Ban- ka Sonica d.d.’s equity and an outlay, inclusive of accessory charges, of 30.5 mil- lion euro.
In the first days of November, the Parent company launched a Take-Over Bid on the total common shares still outstanding. The bid closed on December 6th, 2006 with the purchase of additional 10,489 common shares, equal to 16.972% of total outstanding common shares (13.11% of Banka Sonic’s equi- ty). The transaction called for an outlay of 6.2 million euro and came into effect on December 19th, 2006.
As a whole, the two transactions led to an outlay of 36.7 millions and the ac- quisition of 97.18% of common shares and 14.769% of privileged shares, ac- counting for 78.431% of Banka Sonic’s equity.
Shown below are the assets and liabilities of Banka Sonic upon acquisition, based on IAS/IFRS international accounting standards and referring to July 6th, 2006.
395 Notes to the consolidated accounts
Book Fair (thousand euro) value value
Assets 10 Cash 4,759 4,759 50 Financial assets held to maturity 744 744 60 Due from banks 53,440 53,440 70 Loans to customers 78,182 78,182 120 Property, plant and equipment 3,430 2,989 130 Intangible assets 713 713 140 Tax assets 612 700 160 Other assets 290 290
Total assets 142,169 141,816
Liabilities 10 Due to banks 23,908 23,908 20 Due to customers 105,470 105,470 80 Tax liabilities 206 206 100 Other liabilities 1,979 1,979 120 Provisions for risks and charges 270 270
Total liabilities 131,832 131,832
Shareholders' equity 10,337 9,984
Purchase of a line of business from Banca Popolare Italiana
On September 29th, 2006, the Group signed the preliminary agreements for a branch swap with Gruppo Banca Popolare Italiana. The transaction covered the purchase of a business line comprised of 18 branches located in the province of Trento, together with the brand name “Banca Popolare del Trentino” and the concurrent sale to Gruppo Popolare Italiana of a business line comprised of 18 branches of Gruppo BPVN, of which 5 in Tuscany and 4 in Marches, belonging to the Parent company, 6 in Umbria and 3 in Lazio, belonging to the subsidiary Banca Popolare di Novara. From an accounting, legal and fiscal point of vies, the deal shall come into effect at 00:00 of October 1st, 2006. The total income of the business lines sold by the Group at the end of the first nine months of the year totaled 10.6 millions, while the total income generated by the acquired business line in the fourth quarter 2006 amounted to 2 millions.
The selling price of the above business lines has been preliminarily based on the operating accounts of the business lines as at December 31st, 2005, and it was calculated as the sum of the net value of the operational structures and of good- will. The latter was calculated by applying given valuation ratios to direct and in- direct customer funds outstanding as at December 31st, 2005, derived from the operating accounts. Based on this and taking into account the net fair value of assets, liabilities and of potential liabilities of the acquired business line, on De- cember 31st, 2006 a preliminary goodwill of 20.5 millions was recognized un-
396 Notes to the consolidated accounts
der item 100 “intangible assets” of the balance sheet assets, and a gross income of 27.7 millions was carried to income in 2006, under item 90 “other operating income and expense”.
The above business lines have been identified within the set of organized assets by the selling banks for the performance of banking activities in the branches under disposal. Shown below are the disposal and acquisition assets and liabili- ties prepared in keeping with IAS/IFRS international accounting standards and referring to September 30th, 2006.
Disposal balance sheet as at September 30th, 2006 for the Business line comprising 18 branches sold by Gruppo Banco Popolare di Verona e Novara
Book Fair (thousand euro) value value
Assets 10 Cash 723 723 20 Financial assets held for trading 601 601 70 Loans to customers 186,857 186,857 110 Property, plant and equipment 232 232 120 Intangible assets 27,876 27,876 150 Other assets 9,429 9,429
Total assets 225,718 225,718
Liabilities 10 Due to banks 70,591 70,591 20 Due to customers 108,063 108,063 30 Debt securities in issue 2,828 2,828 40 Financial liabilities held for trading 12 12 100 Other liabilities 13,070 13,070 110 Termination benefits 3,266 3,266 120 Provisions for risks and charges 12 12
Total liabilities 197,842 197,842
Shareholders' equity 27,876 27,876
All assets and liabilities included in the disposal balance sheet have been deter- mined in compliance with IAS/IFRS. In particular, cash, due to banks, due to cus- tomers, other assets and other liabilities at nominal value; loans to customers at amortized cost net of individual and collective write-downs; financial assets held for trading at fair value us at the coming into effect of the sale; debt securities in issue at amortized cost; termination benefits at the actuarial value, approxi- mated to the statutory value; property, plant and equipment does not include property and has been sold at the price agreed for each single element included in the list of movable property, electronic equipment and systems belonging to
397 Notes to the consolidated accounts
the branches being transferred. Since the net balance sheet shows an imbalance equal to zero, the acquisition cost is equal to the paid goodwill.
Acquisition balance sheet as at September 30th, 2006 for the Business line comprising 18 branches acquired by Gruppo Banco Popolare di Verona e Novara
Book Fair (thousand euro) value value
Assets 10 Cash 1,290 1,290 70 Loans to customers 140,830 144,630 110 Property, plant and equipment 228 228 120 Intangible assets 24,260 20,460 150 Other assets 9,216 9,216
Total assets 175,824 175,824
Liabilities 10 Due to banks 70,530 70,530 20 Due to customers 69,909 69,909 30 Debt securities in issue 4,499 4,499 100 Other liabilities 5,455 5,455 110 Termination benefits 1,171 1,171
Total liabilities 151,564 151,564
Shareholders' equity 24,260 24,260
The fair value of assets, liabilities and potential liabilities of the business line ac- quired by the Group is basically the result of the book values shown in the final acquisition balance sheet, with the exception of loans to customers, whose final fair value was 3.8 million greater (as a result only of the share of granted mort- gages included in the business line). As a result, upon recognizing acquired as- sets, the posted loans to customers were equal to the book value of the busi- ness line plus the above mentioned fair value, while the paid goodwill was decremented by an equal amount.
398 Notes to the consolidated accounts
1.2.1 Goodwill annual changes
(thousand euro) 2006
Goodwill as at 31 December 2005 362,617 Increases 50,410 Goodwill recognized during the year: 50,410 - Banca Sonic 28,867 - acquisition of business line from Banca Popolare Italiana 21,530 - other 13 Decreases - Goodwill impairment during the year - Disposals -
Goodwill as at 31 December 2006 413,027
Section 2 Business combinations after the end of the year
2.1 Business combinations
No business combinations were finalized after the close of the year.
However, on March 10th, 2007, the Shareholders of Banco Popolare di Verona e Novara and of Banca Popolare Italiana approved the merger by incorporation of the two Banking Groups. For a detailed analysis of the business plan and the implementation modalities, please refer to the relevant published Prospectus.
Chapter H - Transactions with related parties
Remuneration of Directors and Top Managers
Pursuant to art. 78 of the Enacting regulation of L.D. n. 58 of February 24th, 1998 covering the code of conduct of issuers, the table below illustrates indi- vidually the remuneration paid to Directors, Statutory Auditors and the General Mangers of Banco. The remuneration of Directors include the 1% share of net profit pertaining to financial year 2005, to be distributed to the members of the Board of Directors under art. 57 of the Articles of Association.
399 Notes to the consolidated accounts
Remuneration of Directors and Statutory Auditors
COMPENSATION (thousand euro) OFFICER OFFICE DESCRIPTION Emoluments Non Bonuses Other remuneration Name and Surname Office (1) Term for the monetary and other (4) office (2) benefits (3) incentives (3) Amount Reason
Carlo Fratta Pasini Chairman of the Board of Directors* 2005/2007 682 179 (a) - 112 (b) 59 (c) 4 (d) Maurizio Comoli Deputy Vice Chairman* 2005/2007 388 - - 58 (e) 57 (f) 10 (g) Alberto Bauli Vice Chairman* 2005/2007 357 - - 21 (h) Fabio Innocenzi Chief Executive Officer* 2005/2007 1,140 771 (i) - 116 (j) 243 (k) 41 (l) 2 (m) 9 (n) (5) Marco Boroli Director* 2005/2007 188 - - - Pietro Buzzi Director 2004/2006 180 - - - Valentino Campagnolo Director 2006/2008 189 - - - Vittorio Corradi Director 2006/2008 193 - - - Ugo Della Bella Director 2006/2008 192 - - 57 (o) Giuseppe Fedrigoni Director 2004/2006 184 - - - Federico Guasti Director* 2006/2008 198 - - - Sergio Loro Piana Director 2004/2006 181 - - - Maurizio Marino Director 2006/2008 194 - - - Giuseppe Nicolò Director* 2004/2006 232 (x1) - - 11 (p) Gianluca Rana Director 2005/2007 182 - - - Claudio Rangoni Machiavelli Director 2004/2006 193 - - 49 (q) Fabio Ravanelli Director 2005/2007 188 - - - Luigi Righetti Director * 2004/2006 206 - - - Gian Carlo Vezzalini Director * 2005/2007 220 (x2) - - - Franco Zanetta Director 2006/2008 189 - - 367 (r) - (s) 52 (t) Flavio Dezzani Chairman of the Board of Statutory Auditors 2005/2007 135 - - - Giuliano Buffelli Standing Statutory Auditor 2005/2007 90 - - - Maurizio Calderini Standing Statutory Auditor 2005/2007 90 - - 45 (u) 20 (v) 2 (w) 20 (x) Carlo Gaiani Standing Statutory Auditor 2005/2007 90 - - 21 (y) Giovanni Tantini Standing Statutory Auditor 2005/2007 90 - - 51 (z) Massimo Minolfi General Manager until 31-12-2007 907 404 (aa) - - (6)
Other managers with Other managers with strategic indefinite strategic responsibilities responsibilities 1,433 (ab) 596 (aa) - 77 (ac) (1) (*) Members of the Executive Committee (2) Emoluments for the office include the due share of profit (3) Estimated value (4) Reason for granting other remuneration: (a) Health and welfare insurance and accident insurance (b) Vice Chairman and member of the Executive Committee of Credito Bergamasco until approval of the 2007 financial statements. The amount includes the share of profit for 2006 (c) Director and member of the Executive Committee of Banca Popolare di Novara until approval of the 2007 financial statements (d) Director of Aletti Merchant S.p.A. until approval of 2006 financial statements (e) Vice Chairman and member of the Executive Committee of Banca Popolare di Novara S.p.A. until 18/04/2005 then Director until approval of the 2007 financial statements (f) Chairman of Aletti Gestielle S.p.A. until approval of 2007 financial statements (g) Chairman of BPVN Immobiliare S.r.l. until approval of 2007 financial statements (h) Director of Banca Aletti & C. S.p.A. until approval of 2008 financial statements (i) amount inclusive of car, lodging, pension fund, SI.PRE, health insurance and accident insurance (j) Vice Chairman and member of the Executive Committee of Banca Popolare di Novara S.p.A. (k) Deputy Vice Chairman and member of the Executive Committee of Credito Bergamasco S.p.A until approval of 2007 financial statements. The amount includes the share of profit for 2006 (l) Vice Chairman of Banca Aletti & C. S.p.A. until approval of 2008 financial statements (m) Director of Aletti Merchant S.p.a. until approval of 2006 financial statements (n) Director of Aletti Gestielle SGR S.p.A. until approval of 2007 financial statements (o) Director of Banca Popolare di Novara S.p.A. from 27 January 2005 and until approval of 2007financial statements (p) Director of Leasimpresa S.p.A. until approval of 2007 financial statements (q) Director of Credito Bergamasco S.p.A. until approval of 2007 financial statements (r) Chairman and member of the Executive Committee of Banca Popolare di Novara S.p.A. until approval of 2007 financial statements (s) Director of Verona e Novara (France) S.A. (t) Chairman of Novara Vita S.p.A. until approval of 2007 financial statements (u) Standing Statutory Auditor of Banca Popolare di Novara S.p.A. until approval of 2007 financial statements (v) Standing Statutory Auditor of Sestri S.p.A. (w) Chairman of the Board of Statutory Auditors of Novara Invest SIM S.p.A. until approval of 2008 financial statements (x) Standing Statutory Auditor of Novara Vita S.p.A. until approval of 2007 financial statements (y) Chairman of the Board of Statutory Auditors of Holding di Partecipazioni Finanziarie Popolare di Verona e Novara S.p.A. until approval of 2008 financial statements (z) Chairman of the Board of Statutory Auditors of Credito Bergamasco S.p.A. until approval of 2007 financial statements (aa) amount inclusive of car, lodging, pension fund, SI.PRE, health insurance, accident insurance (ab) amount inclusive of the gross annual salary and termination benefits (ac) for offices filled in companies of the Group (5) For the offices of Director of BPV Vita S.p.A. the due remuneration was paid to Banco, for Banca Sonic d.d. Zagreb no remuneration is envisaged (6) For the offices of Director of Banca Popolare di Novara S.p.A., Credito Bergamasco S.p.A., Banca Aletti & C., S.G.S.-BPVN S.p.A. and Aletti Merchant S.p.A., the due remunerations are paid to Banco Popolare di Verona e Novara x1: amount inclusive of the remuneration for the participation in the property commission x2: amount inclusive of the remuneration for the participation in the property commission
400 Notes to the consolidated accounts
Remuneration of managers with strategic responsibilities
(thousand euro) Managers with strategic Directors responsibilities (*) (**)
Total annual gross compensations 3,145 1,305
Share of profit 170 3,234
Total compensation gross for offices filled for the interest of the group 488 856
Short-term benefits - car 76 - - lodging 59 - - accident insurance 10 - - health insurance 15 -
Post-employment benefits - pension fund 31 - - supplementary pension scheme 1,580 -
Long-term benefits
Termination benefits - termination benefits 165 -
Share-based payments - stock options assigned during the year - - - share-based rewards - -
(*) 6 executives:managing director, general manager, 3 vice general managers and the head of the planning function (**) for a detailed illustration of directors' compensation see the previous table
401 Notes to the consolidated accounts date expiration price exercise average of the year Options held at the end 350,000 13.64 June-07 570,000 11.248 June-07 170,000 13.59 June-07 Options nr. optionsnr. options nr. ing the year expired dur- expired date expiration price the year exercise average Options exercised during Options exercised nr. options nr. date expiration price the year exercise average ------Options assigned during nr. options nr. date expiration price exercise average of the year Options held at the start nr. options nr. 350,000 13.64 June-07 205,000 13.64170,000 13.59 June-07 June-07 - - - 205,000 13.64 June-07 with strategic with responsibilities 65,000 11.248 June-06 115,000 10.83 June-06 - - - - - 65,000 11.248 - June-06 115,000 10.83 June-06 ------Officer 570,000 11.248 June-07 Name and surname Office Fabio Innocenzi Chief Executive 600,000 11.248 June-06 - - - 600,000 11.248 June-06 - - - - Other managers Other managers 30,000 13.40 June-06 - - - 30,000 13.40 June-06 - - - - Massimo Minolfi General Manager 250,000 9.83 June-06 - - - 250,000 9.83 June-06 - - - - Information required under art. 78 of Consob’s Resolution n.11971 of May 14th, 1999 under art. 78 of Consob’s Information required
402 Notes to the consolidated accounts
2. Transactions with related parties
Financial and commercial relations with subsidiaries, with companies under a si- gnificant influence and with jointly controlled companies
Financial and commercial relations with subsidiaries, companies under a signifi- cant influence and jointly controlled companies fall under the normal course of business and are carried out at arm’s length.
The table below shows the assets and liabilities as at December 31st, 2006 and the income components of financial year 2006 associated with companies un- der a significant influence and jointly controlled companies.
(thousand euro) Companies under Jointly controlled a significant influence companies
Cash and cash equivalents Financial assets held for trading 45,746 3,304 Due from banks 1,514,469 - Loans to customers 4,068 536,541 Other assets 16,675 5,072
Total assets 1,580,958 544,917
Due to banks 2,707 - Due to customers 48,972 111,802 Financial liabilities held for trading 175,939 239,339 Financial liabilities measured at fair value 279,333 133,710 Other liabilities 794 2
Total liabilities 507,745 484,853
Total guarantees given and commitments 53,618 316
Interest income and similar revenues 4,318 15,965 Interest expense and similar charges (1,087) (43) Commission income 37,274 17,448 Commission expense 295 - Dividend income and similar revenues 858 7,343 Administrative expenses (745) - Other operating income (expense) 83 121 Share of profit (loss) of associates 57,556 -
Total Profit and Loss 98,552 40,834
403 Notes to the consolidated accounts
Loans and guarantees given to other related parties
Pursuant to the instructions issued by the Bank of Italy on December 22nd, 2005 for the preparation of the financial accounts and consolidated accounts of banks in compliance with the international accounting standards IAS/IFRS, and which are applicable as of the financial statements as at December 31st, 2005, the ta- bles below provide the required information on key managers of Banco and of its associates and subsidiaries.
The table below illustrates the loans and guarantees given to related parties un- der IAS 24, with the exception of subsidiaries and companies under a significant influence. Loans have been resolved in compliance with art. 136 of L.D. n. 385/93.
(thousand euro) Cash Guarantees & Commitment Total Credit line Utilization Credit line Utilization Credit line Utilization
a) Directors 1,178 452 - - 1,178 452 of which: -- from Banco Popolare di Verona e Novara 727 64 from Credito Bergamasco from Banca Popolare di Novara 451 388
b) Managers with strategic responsibilities 1,917 866 - - 1,917 866 of which: from Banco Popolare di Verona e Novara 1,491 750 from Credito Bergamasco 89 79 from Banca Popolare di Novara 337 37
c) Close relative of individuals under items a) and b) 465 788 - - 465 788 of which: from Banco Popolare di Verona e Novara 464 788 from Credito Bergamasco 1 from Banca Popolare di Novara
d) Subsidiary or associated company, or under significant influence of individuals under items a) and b) 1,234,544 129,442 112,959 76,933 1,347,503 206,375 of which: from Banco Popolare di Verona e Novara 402,695 63,898 61,141 53,274 from Credito Bergamasco 55,226 2,629 from Banca Popolare di Novara 776,623 62,915 51,818 23,659
404 Notes to the consolidated accounts
Other transactions with related parties
The table below illustrates other transactions – provision of goods, services and leases – conducted with related parties under IAS 24, with the exception of sub- sidiaries and companies under a significant influence.
(thousand euro) Purchase and sale Lease of goods and services
a) Directors - -
b) Managers with strategic responsibilities - -
c) Close relative of individuals under items a) and b) - -
d) Subsidiary or associated company, or under significant influence of individuals under items a) and b) 789 59 of which: from Banco Popolare di Verona e Novara 295 52 from Credito Bergamasco 134 from Banca Popolare di Novara 360 7
Transactions with related parties are not material to the financial, operating and profitability results and to the financial flows of the companies and of the group.
Information on the ownership of shares by directors, statutory auditors, general manager and managers with strategic responsibilities
In keeping with art. 79 of Consob’s Resolution n. 11971 of May 14th, 1999, the following table shows the shares of Banco Popolare di Verona e Novara and of its subsidiaries held by Directors, Statutory Auditors, the General Manager and the Top managers with strategic responsibilities, as well as their spouses, if not legally separated, and minor children, either directly or through subsidiaries, fi- duciary companies or through a nominee.
405 Notes to the consolidated accounts
Owned shares Purchased Sold Owned shares Name as at 31-12-2005 shares shares as at 31-12-2006 and surname Investee company direct indirect direct indirect direct indirect direct indirect
Carlo Fratta Pasini Banco Popolare di Verona e Novara 76,119 42,119 5,000 81,119 42,119 Credito Bergamasco 200 - 200 - Maurizio Comoli Banco Popolare di Verona e Novara 46,500 25,040 46,500 25,040 Alberto Bauli Banco Popolare di Verona e Novara 64,081 122,416 64,081 122,416 Fabio Innocenzi Banco Popolare di Verona e Novara 162,700 - 850,000 (a) 600,000 412,700 - Credito Bergamasco 200 - 200 - Marco Boroli Banco Popolare di Verona e Novara 2,549 - 2,549 - Pietro Buzzi Banco Popolare di Verona e Novara 2,219 - 2,219 - Valentino Campagnolo Banco Popolare di Verona e Novara 55,650 1,695 9,700 490 65,350 2,185 Vittorio Corradi Banco Popolare di Verona e Novara 40,000 - 40,000 - Credito Bergamasco 100 - 100 - Ugo Della Bella Banco Popolare di Verona e Novara 12,700 - 12,700 - Giuseppe Fedrigoni Banco Popolare di Verona e Novara 11,250 - 18,750 30,000 - Federico Guasti Banco Popolare di Verona e Novara 35,000 5,000 35,000 5,000 Sergio Loro Piana Banco Popolare di Verona e Novara 16,125 1,900 16,125 1,900 Maurizio Marino Banco Popolare di Verona e Novara 497 7,553 497 7,553 Giuseppe Nicolò Banco Popolare di Verona e Novara 35,000 2,800 35,000 2,800 Gianluca Rana Banco Popolare di Verona e Novara 1,500 - 1,000 1,000 1,000 1,500 1,000 Claudio Rangoni Machiavelli Banco Popolare di Verona e Novara 130,000 7,680 140 130,000 7,820 Credito Bergamasco 200 - 200 - Fabio Ravanelli Banco Popolare di Verona e Novara 5,000 - 2,000 7,000 - Luigi Righetti Banco Popolare di Verona e Novara 20,000 - 1,500 21,500 - Gian Carlo Vezzalini Banco Popolare di Verona e Novara 10,000 - 10,000 - Credito Bergamasco 2 - 2 - Franco Zanetta Banco Popolare di Verona e Novara 5,339 433 5,339 433 Flavio Dezzani Banco Popolare di Verona e Novara 12 - 12 - Giuliano Buffelli Banco Popolare di Verona e Novara 1,000 45,070 18,930 1,000 64,000 Credito Bergamasco 30 500 30 500 Maurizio Calderini Banco Popolare di Verona e Novara 3,533 121 3,533 121 Carlo Gaiani Banco Popolare di Verona e Novara 32,086 - 32,086 - Giovanni Tantini Banco Popolare di Verona e Novara 2,324 700 450 150 2,324 1,000 Massimo Minolfi Banco Popolare di Verona e Novara - - 365,000 (b) 250,000 115,000 - Credito Bergamasco 50 - 50 - Maurizio Faroni Banco Popolare di Verona e Novara 27,600 - 210,834 (c) 150,834 87,600 - Francesco Minotti – ------Giorgio Papa Banco Popolare di Verona e Novara 1,460 - 89,750 (d) 65,000 26,210 Marco Franceschini Banco Popolare di Verona e Novara 4,150 - 17,730 (e) 12,500 - 9,380
Note: all shares are fully owned (a) of which: n. 600,000 for stock option exercise and n. 250,000 for purchase of shares for membership in SI.PRE (b) of which: n. 250,000 for stock option exercise and n. 115,000 for membership in SI.PRE (c) of which: n. 132,500 for stock option exercise and n. 60,000 for membership in SI.PRE (d) of which: n. 65,000 for stock option exercise and n. 24,750 for membership in SI.PRE (e) of which: n. 12,500 for stock option exercise and n. 5,100 for membership in SI.PRE
406 Notes to the consolidated accounts
Information on bonds held by directors, statutory auditors, the general manager and top managers with strategic responsibilities
Since as at December 31st, 2006 there were no outstanding convertible bonds, this item is not applicable. Bonds outstanding on December 31st, 2005 expired on January 1st, 2006.
Chapter I – Share-based payments
Qualitative information
1. Description of share-based payments
The stock option plan
During the special meetings of Banca Popolare di Verona – Banco S.Geminiano e S.Prospero and of Banca Popolare di Novara, upon approving the merger plan, shareholders had given mandate to Banco’s Board of Directors to launch a stock option plan for the managers of Banco and its subsidiaries, after approving its main guidelines and characteristics. In that same occasion, shareholders had granted Banco’s Board of Directors the faculty to carry out a dedicated share capital increase, exclusively to service the stock option plan, for a maximum nominal amount of 26,431,362 euro, through the issue of maximum 7,342,045 common shares. In compliance with the above mentioned mandates, on July 2nd, 2002 the Reg- ulations of the stock option plan of Banco Popolare di Verona e Novara were ap- proved. The plan aims at fostering a teamwork approach across its manage- ment, with a strong focus on the Group’s strategic objectives, as well as at in- creasing the Group’s ability to retain its most valuable human resources and to cater for the best talents present on the market. The plan provides for the grant of registered, personal and non transferable rights to subscribe newly issued Banco common shares to those managers who, according to the Board of Di- rectors’ undisputable opinion, may have a relevant impact upon the success and the results achieved by Banco and by the Group at large. The plan envisages three yearly grant cycles. Granted options can be exercised later after three years from the grant and within the following three years thereon, provided that on the exercise date there is still an outstanding employment relationship with any one company of the Group. The option exercise price shall not be lower than the greater between the share normal and nominal values. The normal value is the mean of the prices registered by the Milan Stock Exchange in the time window between the option grant date and the same date of the solar month before the grant.
407 Notes to the consolidated accounts
On the same date, the validity was confirmed – and hence the suspension clause discontinued – of the effects of a total of 2,668,000 options already granted on January 26th, 2002 to managers of Gruppo Banca Popolare di Verona - Banco S.Geminiano e S.Prospero, based upon the resolutions passed by its Board of Di- rectors. As a result, said options shall still bear their effects on Banco Popolare di Verona e Novara upon a one to one exchange ratio between shares of Banca Popolare di Verona - Banco S.Geminiano e S.Prospero and those of Banco Popo- lare di Verona e Novara. The exercise price of said options is that fixed at the time of their original grant, equal to €11.248 per share. On the same date, the com- pletion of the first grant cycle was approved, with the grant of further 1,122.000options, with an exercise price of €13.4 per share.
The second grant was carried out in financial year 2003, with the grant of 1,241,000 new options at the average exercise price of 10.554 euro, while 823,500 options expired because the managers to whom they had been grant- ed have left the company.
In financial year 2004, 2,572,000 additional new shares have been granted at the exercise price of 13.726 euro, while again as a result of the resignation of granted managers, 21,000 have expired.
In May 2005, a total of 1,020,500 options were exercised; during the year, 70,000 options expired and no new grants were carried out.
During 2006 the vesting period for the second tranche of the plan ended and as a result between June 1st and 30th, 2006 (calendar month following the month in which the General Meeting was held) beneficiaries could exercise the above options and the residual options from the first tranche that had not been exer- cised yet. On said occasion, a total of 2,392,500 options were exercised. More- over, in 2006, n. 28,000 options expired and no new grants were carried out. As to exercised options, on July 3rd, 2006, n. 2,392,500 new shares were issued.
In 2005, the Board of Directors resolved to adopt a new Supplementary Pension Scheme (Sistema di Previdenza Integrativa - S.I.Pre.) with the aim of promoting retention rates and reinforcing loyalty. The plan provides for premiums to be paid by Banco for a collective insurance policy in favor of managers who decide to invest in Banco shares at least 80% of the total profit they earn by exercising all their stock options. Said shares shall be bound by a lock-up, that is, they shall be available to the beneficiary only at the lock-up expiration date and only if at that date the manager is still in service with the Group; the vesting period shall last maximum five years, and it shall au- tomatically decrease every year at a constant rate. The insurance policy in favor of the participants in S.I.Pre. shall in turn invest its assets exclusively in Banco shares. Those managers, who shall participate in the Plan and shall also remain in service with the Group until retirement, shall thus benefit from a supplemen- tary pension benefit whose amount shall depend on the long term value cre- ation to which these managers themselves have contributed.
408 Notes to the consolidated accounts
It is worth pointing out, that during 2005 and 2006 the Chief Executive Officer and the top managers of the Group to whom it has been proposed have ac- cepted to join the Plan; this is telltale of their long term commitment and their loyalty to the Group. This system, which is being introduced for the first time in Italy, is linked to the share appreciation throughout the manager’s career path. As a result, the Manager’s interest is intertwined with the “cooperative” spirit of the Group and with its mission: a stable value creation over time for all Share- holders, Customers and Employees.
Quantitative information
1. Annual changes
31-12-2006 31-12-2005
Number Average Average Number Average Average of options prices maturity of options prices maturity
A. Opening balance 5,668,000 12,225 9.34 months 6,758,500 12,380 15.75 months
B. Increses ------B.1 new issues ------B.2 other changes ------
C. Decreases 2,420,500 - - 1,090,500 - - C.1 cancelled 28,000 - - 70,000 - - C.2 exercised 2,392,500 11,351 - 1,020,500 11,351 - C.3 expired ------C.4 other changes ------
D. Closing balance 3,247,500 13,132 5 months 5,668,000 12,225 9.34 months
E. Options exercisable at the end of the year 3,247,500 13,132 5 months 1,417,500 11,711 -
409 Notes to the consolidated accounts
2. Other information
The stock option plan described above is part of share-based payment transac- tions. As the plan is directed to employees, the estimate of fair value of the services re- ceived was measured at fair value by referring to the fair value of the granted options at grant date. As there was no reference market price available for the fair value of the granted options, the latter was estimated by using generally ac- cepted methods and by taking into due account all factors and assumptions that would be considered by market operators. Since the granted options vest only at the end of a specific period of service pro- vision, the cost of provided services was distributed along said vesting period. The cost charged to income for 2006 through a corresponding increase in shareholders’ equity, amounted to 1,911 million euro. There was no impact on the capital and financial position of the company.
Shown below is the information required by Consob with resolution n. 11508 of February 15th, 2000.
31-12-2006 31-12-2005
Number Average Number Average of shares exercise price Market price of shares exercise price Market price
1) Options outstanding at start of period 5,668,000 12,225 17,090 6,758,500 12,380 14,960
2) New options assigned in the period ------
3) Options exercised in the period 2,392,500 11,238 20,430 1,020,500 11,351 14,758
4) Options expired in the period ------
5) Options extinguished in the period 28,000 (*) - - 70,000 (*) - -
6) Options outstanding at end of period 3,247,500 13,132 21,720 5,668,000 12,225 17,090 of which: exercisable 3,247,500(**) 13,132 21,720 1,417,500(***) 11,711 17,090
The market price is the average of the different dates, weighted for the amounts of shares for (2), (3), (4) and (5), spot for (1) and (6), In case of assignment of free shares, options shall have an exercise price equal to zero, (*) Extinguished options as the managers to which they had been assigned are not working with the Group anymore (**) of which: n. 55,000 exercisable in 2007 and 2008, n. 697,500 exercisable in 2007, 2008 and 2009 e n. 2,495,000 exercisable in 2007, 2008, 2009 and 2010 (***) exercisable in 2006, 2007 and 2008
410 Notes to the consolidated accounts
Options assigned as at 31/12/2006 of which exercisable Residual contract life (vested) Exercise price (in euro) Average Up to 1 year Between 1 Over 3 years Total Total residual and 3 years contract life
Below or equal to 10 ------Above 10 and below or equal to 12 752,500 (*) - - 752,500 752,500 (*) Above 12 and below or equal to 15 2,495,000 (**) - - 2,495,000 - - Above 15 ------
Total 3,247,500 - 3,247,500 752,500 -
(*) of which n. 55,000 options assigned in 2002 exercisable in 2007 and 2008 of which n. 697,500 options assigned in 2003, exercisable in 2007, 2008 and 2009 (**) third tranche options assigned in 2004
With regard to the Supplementary Pension Plan - Sistema di Previdenza Integra- tiva (S.I.Pre.), as illustrated in Section 12 Provisions for Risks and Charges of the balance sheet liabilities in Chapter B of these Explanatory Notes, the actuarial es- timate of liabilities totaled 1.1 million euro on December 31st, 2006. As a result of charges generated by this liability, Banco subscribed in insurance policy, whose value at the balance sheet date was recognized under item 30 “Financial assets measured at fair value” of the balance sheet assets. For period changes on said assets, see the comments illustrated in section 3 of assets in Chapter B of these Explanatory Notes.
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Anniversary of Banca Mutua Popolare di Verona - June 21st, 1867 ADDRESS Piazza Nogara, 2 37121 Verona Italy
INVESTOR RELATIONS phone number +39-0458675537 e-mail [email protected] fax +39-0458675131 Internet www.bpv.it (Investor Relations section)
WEB SITES OF COMPANIES OF THE GROUP www.bpv.it Banca Popolare di Verona www.bsgsp.it Banco S.Geminiano e S.Prospero www.bancosanmarco.it Banco San Marco www.bptrentino.it Banca Popolare del Trentino www.bpn.it Banca Popolare di Novara S.p.A. www.creberg.it Credito Bergamasco S.p.A. www.alettibank.it Banca Aletti & C. S.p.A. www.alettimerchant.it Aletti Merchant S.p.A. www.alettiprivateequity.it Aletti Private Equità S.p.A. www.gestielle.it Aletti Gestielle SGR S.p.A. www.arenabroker.it Arena Broker S.r.l.
Images page 2-3 Anniversary of Banca Mutua Popolare di Verona - June 21st, 1867 page 14-15 Carlo Scarpa - Verona - BPV Palace page 150-151 Massimiliano Fuksas - Maranello - Ferrari’s Product Development Center page 154-155 Santiago Calatrava - Venice - New Bridge page 164-165 Mario Botta - Rovereto - Mart “Museum of Modern and Contemporary Art”
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Photolith and Print EBS – Editoriale Bortolazzi-Stei Verona
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