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June 30, 2017 Consolidated financial statements June 30, 2017 2017 Consolidated Interim Financial Report Iccrea Banca S.p.A. Iccrea Banca S.p.A. Central Credit Institution of the Mutual Banking Industry Parent Company of the Iccrea Banking Group Registered office and Headquarters: Via Lucrezia Romana 41/47 - 00178 Rome Share capital: €1,151,045,403.55 fully paid up Company Register and Tax ID no. 04774801007 - R.E.A. of Rome no. 801787 Entered in the register of banking groups at no. 20016 Entered in the register of banks at no. 5251 ABI ID no. (8000) CONTENTS Consolidated Report on Operations 5 Consolidated financial statements at June 30, 2017 31 Balance sheet 32 Income statement 33 Statement of comprehensive income 34 Statement of changes in shareholders’ equity 2017 35 Statement of changes in shareholders’ equity 2016 36 Statement of cash flows 37 Notes to the financial statements 39 Part A – Accounting policies 41 Part B – Information on the consolidated balance sheet 81 Part C – Information on the consolidated income statement 133 Part D – Statement of consolidated comprehensive income 155 Part E – Risks and risk management policies 157 Part F – Information on consolidated capital 199 Part G – Business combinations 213 Part H – Transactions with related parties 215 Part I – Share-based payments 217 Part L – Operating segments 219 Report of the audit firm 225 Consolidated Interim Financial Report June 30, 2017 Contents Consolidated Report on Operations at June 30, 2017 1. INTRODUCTION ........................................................................................................................................................ 7 2. ECONOMIC DEVELOPMENTS ............................................................................................................................... 7 3. THE ICCREA GROUP’S STRATEGIC LINES OF BUSINESS ........................................................................... 10 4. CREATING VALUE FOR THE MUTUAL BANKS ............................................................................................... 16 5. DEVELOPMENTS IN GROUP OPERATIONS .................................................................................................... 17 6. MAIN RISKS AND UNCERTAINTIES TO WHICH THE ICCREA BANKING GROUP IS EXPOSED ........ 22 7. INTERNAL CAPITAL AND LIQUIDITY ASSESSMENT PROCESS .................................................................. 25 8. INTERNAL CONTROL SYSTEM............................................................................................................................ 25 9. SIGNIFICANT EVENTS IN THE FIRST HALF OF 2017 ................................................................................... 25 10. SUBSEQUENT EVENTS AND OUTLOOK .......................................................................................................... 29 ICCREA BANCA S.P.A. – CONSOLIDATED REPORT ON OPERATIONS AT JUNE 30, 2017 GDP growth is expected to slow gradually, in keeping 1. INTRODUCTION with the government’s policy of reabsorbing the The Consolidated Financial Report at June 30, 2017 existing economic and financial imbalances. consists of the consolidated interim report on Consumer price inflation decreased slightly in the operations and the interim consolidated financial main advanced economies; in the United States it statements, comprising the financial statements and returned below 2 per cent in May. The exception is the the explanatory notes to the financial statements. United Kingdom, where the Bank of England expects In application of Legislative Decree 38 of February inflation to remain above target for some time, also 28, 2005, the interim consolidated financial statements owing to the depreciation of the pound. Core inflation at June 30, 2017, have been prepared in accordance remains very low in the advanced economies and with the provisions of the international accounting negative in Japan. The emerging economies are also standards (IAS/IFRS) issued by the International displaying moderate price growth. Accounting Standards Board and the related The global economic recovery remains shadowed interpretations of the International Financial Reporting by a number of sources of uncertainty, primarily Interpretations Committee (IFRIC) and approved by associated with US economic policy intentions, the European Commission, as established under although in May US economic policy uncertainty Regulation (EC) no. 1606 of 19 July 2002. declined further, although the year-on-year rate of More specifically, the interim consolidated financial change continued to show an inertial increase statements, which undergo a limited audit only, have (+28.6% year-on-year, down from +232.6%). been prepared in compliance with the provisions of IAS 34, which govern interim financial reporting. As expected, at its March 15 meeting the US Federal Reserve increased the target range for the federal funds rate by 25 basis points, bringing it to 0.75- 1.00%, citing improvement in the labour market and signs of recovery in investment. The forecasts for GDP growth in 2017 were revised upwards (to +2.2% from 2. ECONOMIC DEVELOPMENTS 1 2.1%), while unemployment should fall by more than The international macroeconomic environment expected (to 4.3% from 4.5%) in 2017. Inflation will continue to be monitored closely. More than half of The international economic cycle is strengthening: firms expect the rise in rates to continue. the acceleration of investment in most of the economies is driving trade, which has been picking up By contrast, the European Central Bank remained rapidly since the end of 2016. very cautious about any reduction in the current monetary stimulus, especially in view of global The recovery proceeded in the advanced uncertainty, which according to President Draghi in economies. In the United States, after a slowdown in recent remarks “remains elevated”. The tapering of the the first quarter, the latest indicators point to stronger quantitative easing program from €60 billion a month growth driven by domestic demand. will be assessed by the Governing Council in its World output consolidated the strong growth rates coming meetings, bearing in mind the downward seen at the end of 2016, thanks to the acceleration revision of inflation forecasts (1.2% in 2017, down posted in the advanced economies. Among the latter, from 1.4%). especially strong performances were registered by the United States (+2.1% year-on-year, from 1.3%) and Japan (+7.2% from +3.4%). In the United Kingdom, the purchasing managers’ indices (PMI) continued to signal solid economic conditions despite the ongoing uncertainty connected to Brexit. Definitive figures on the United Kingdom’s GDP growth in the first quarter of 2017 were released in June. According to the Office for National Statistics, British GDP rose by 0.2% on the previous quarter. In the emerging countries, the picture remained positive overall. In China, growth strengthened at the beginning of the year thanks to fiscal expansion and a revival in foreign demand; in the upcoming quarters 1 Source: Economic Bulletin of the Bank of Italy, no. 3/2017 and Punto Macro Internazionale – Federcasse, no. 7/2017 7 ICCREA BANCA S.P.A. – CONSOLIDATED REPORT ON OPERATIONS AT JUNE 30, 2017 Macroeconomic conditions in Italy 2 The expansion in lending to the non-financial private sector continued until May. The rise in According to the most recent figures, economic mortgage lending slowed slightly (to 2.5%), while activity appears to be gradually accelerating. consumer lending strengthened. In the second quarter, GDP continued to expand, Loans to firms stagnated both quarter-on-quarter rising by about 0.4% on the previous period. and year-on-year (0.2 and 0.3%, respectively). While Industrial production increased by 1.0% year-on- the cost of credit is low and the outlook for growth has year in April (from +2.9%, -0.4% month-on-month, gradually improved, the demand for bank credit on the compared with +0.4%), while in the second quarter of part of firms has been dampened by firms’ ample 2017 capacity utilization rose from 75.7% to 76.5%. liquidity. Turnover in April showed more rapid growth, although Developments in lending to firms vary considerably it slowed from the previous period (+4.0% year-on- by sector of economic activity. Growth has been rapid year, down from +7.2%), while industrial orders in services, slightly positive in manufacturing and decreased (-2.2% from +9.2%, -0.7% month-on- negative in construction. Lending growth remains month from -4.3%). In June, the confidence index for stronger for larger firms (0.7%) than for smaller manufacturing firms remained above the threshold enterprises (-3.1%). indicating an expansion, rising to 107.3 from 106.9 points, as did the manufacturing PMI (from 55.1 to Between February and May, total funding by Italian 55.2 points). banks increased. An increase in deposits by residents and greater recourse to refinancing transactions with In the labor market, the unemployment rate started the Eurosystem more than offset the decline in rising again in May (11.5%, up from 11.2% in April). In wholesale funding and bond placements through bank parallel, preliminary estimates point to a contraction in branches. the number of people in employment (-55 thousand and -0.2% compared with April), with the employment The default rate returned to pre-crisis levels for rate slipping to 57.7% (down about 0.1 percentage exposures to households, while it rose slightly for loans points). Despite the decrease in the last month,
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