REPORT AND FINANCIAL STATEMENTS OF THE PARENT BANK AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED ON DECEMBER 31, 2006
nd (142 YEAR OF OPERATION)
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Banca Popolare Italiana Società cooperativa Listed in the Register of Cooperative Companies Registered and executive offices: Lodi 26900 - Via Polenghi Lombardo, 13 Share capital on December 31, 2006: €2,047,081,617 fully paid in Tax code, VAT number, and registration in the Lodi Business Register: 00691360150 Member of the Interbank Fund for the Protection of Deposits
2 Listed in the Register of Banks Parent Bank of Gruppo Creditizio Banca Popolare Italiana Listed in the Register of Banking Groups
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Contents
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT BODIES OF THE BANK 7
GRUPPO BANCA POPOLARE ITALIANA THROUGH DECEMBER 31, 2006 10
CONSOLIDATED REPORT ON OPERATIONS 11
2006 FINANCIAL REVIEW 14
GRUPPO BANCA POPOLARE ITALIANA 2006 BUSINESS REVIEW 16
THE ROAD TOWARDS THE MERGER 30
IMPORTANT DEVELOPMENTS OCCURRING AFTER DECEMBER 31, 2006 34
BUSINESS OUTLOOK 37
STRUCTURE OF GRUPPO BANCA POPOLARE ITALIANA 38
OPERATING AGGREGATES 57
CONSOLIDATED FUNDS UNDER ADMINISTRATION 57
CONSOLIDATED LOANS 60
PERFORMANCE OF BANCA POPOLARE ITALIANA STOCK 63
RATING AGENCY ASSESSMENT 65
SHAREHOLDERS’ EQUITY 66
REGULATORY CAPITAL 66
INCOME TRENDS 67
QUARTERLY CHANGES IN THE INCOME STATEMENT 71
PERFORMANCE OF THE MAIN COMPANIES 73
CORPORATE GOVERNANCE 88
FINANCIAL STATEMENTS 109
CONSOLIDATED BALANCE SHEET 111
CONSOLIDATED INCOME STATEMENT 113
STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY 114
CONSOLIDATED CASH FLOW STATEMENT 116
CONSOLIDATED NOTES 118
PART A - ACCOUNTING POLICIES 118
PART B - INFORMATION ON THE CONSOLIDATED BALANCE SHEET 133
PART C - INFORMATION ON THE CONSOLIDATED INCOME STATEMENT 186
PART D - SEGMENT REPORTING 207
4 PART E - INFORMATION ON RISKS AND ON THE RELATED HEDGING POLICIES 213
PART F - INFORMATION ON SHAREHOLDERS' EQUITY 269
PART G - COMBINATION TRANSACTIONS INVOLVING BUSINESSES OR BUSINESS 274
DIVISIONS
PART H - RELATED PARTY TRANSACTIONS 277
PART I - PAYMENT AGREEMENTS BASED ON OWN CAPITAL INSTRUMENTS 278
INDEPENDENT AUDITORS' REPORT 279
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Contents
INDIVIDUAL FINANCIAL STATEMENTS 283
REPORT ON OPERATIONS 285
FINANCIAL HIGHLIGHTS 286
BANCA POPOLARE ITALIANA 2006 REVIEW 287
THE ROAD TOWARDS THE MERGER 299
IMPORTANT DEVELOPMENTS OCCURRING AFTER DECEMBER 31, 2006 303
BUSINESS OUTLOOK 306
PERFORMANCE OF BANCA POPOLARE ITALIANA 307
FUNDS UNDER ADMINISTRATION 307
LOANS 309
SHAREHOLDERS’ EQUITY 311
REGULATORY CAPITAL 311
INCOME TRENDS 312
ADDITIONAL INFORMATION 315
PROPOSED RESOLUTION 316
FINANCIAL STATEMENTS 317
SEPARATE BALANCE SHEET 319
SEPARATE INCOME STATEMENT 321
SEPARATE STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 322
SEPARATE CASH FLOW STATEMENT 324
NOTES TO THE FINANCIAL STATEMENTS: 326
PART A - ACCOUNTING POLICIES 326
PART B - INFORMATION ON THE SEPARATE BALANCE SHEET 338
PART C - INFORMATION ON THE SEPARATE INCOME STATEMENT 377
PART D - SEGMENT REPORTING 392
PART E - INFORMATION ON RISKS AND ON THE RELATED HEDGING POLICIES 393
PART F - INFORMATION ON SHAREHOLDERS' EQUITY 443
PART G - COMBINATION TRANSACTIONS INVOLVING BUSINESSES OR BUSINESS DIVISIONS 452
PART H - RELATED PARTY TRANSACTIONS 456
PART I - PAYMENT AGREEMENTS BASED ON OWN CAPITAL INSTRUMENTS 464
APPENDICES: 465
6 STATEMENT OF CHANGES IN THE DEFINED-CONTRIBUTION PENSION FUND 465
BOARD OF STATUTORY AUDITORS' REPORT 467
INDEPENDENT AUDITORS' REPORT 475
7 NOTICE OF SHAREHOLDERS' MEETING
The Bank's Shareholders are invited to attend the Ordinary Shareholders' Meeting to be held at first call on Monday, April 30, 2007 at 9.30 a.m. at the Bank's registered office (Via Polenghi Lombardo 13, Lodi) and, if necessary, at second call on
SATURDAY MAY 5, 2007
at 9.30 am at the Bipitalia City Auditorium (Via Polenghi Lombardo 13, Lodi) to discuss the following:
AGENDA
1. Examination of the Financial Statements for the year ended December 31, 2006, after hearing the reports of the Board of Directors and the Board of Statutory Auditors; related business. 2. Determination of the unit share value pursuant to Art. 6, subsections 1 and 2, of the Articles of Association. 3. Appointment (by well-founded proposal of the Board of Statutory Auditors) of the independent auditing firm to audit the Financial Statements of the Bank and the Consolidated Financial Statements and Semi-Annual Report of the Gruppo Banca Popolare Italiana from 2007 to 2015 in accordance with article 159 of Legislative Decree no. 58 of 1998, and the approval of the associated fees. Related business. 4. Fixing of Directors’ fees for 2007. 5. Election of the Board of Arbitrators for the three-year period 2007-2009.
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INDEPENDENT AUDITORS
The individual and consolidated financial statements have been audited by Deloitte & Touche S.p.A. pursuant to Art. 155 of Legislative Decree no. 58 of February 24, 1998 and in fulfilment of the resolution of the Shareholders' Meeting held on April 24, 2004, which appointed the independent auditors for the three-year period 2004/2006.
9 MANAGEMENT BODIES OF THE BANK
Members of the Board of Directors CHAIRMAN DINO PIERO MARIO GIARDA CHIEF EXECUTIVE OFFICER DIVO GRONCHI SENIOR DEPUTY CHAIRMAN ENRICO PEROTTI DEPUTY CHAIRMAN VITTORIO CODA DIRECTOR GUIDO CASTELLOTTI DIRECTOR PIERANTONIO CIAMPICALI DIRECTOR COSTANTINO COCCOLI DIRECTOR MARIA LUISA DI BATTISTA DIRECTOR BRUNO GIOVANNI GIUFFRÈ DIRECTOR ANDREA GUIDI DIRECTOR AUGUSTO MACHIRELLI DIRECTOR PIETRO MANZONETTO DIRECTOR ROBERTO NICOLA ALBINO MARTONE DIRECTOR MARIO MINOJA DIRECTOR GIORGIO OLMO DIRECTOR ROBERTO SCHMID
Members of the Board of Statutory Auditors CHAIRMAN GIANANDREA GOISIS STATUTORY AUDITOR LUIGI CORSI STATUTORY AUDITOR GABRIELE CAMILLO ERBA STATUTORY AUDITOR GIORDANO MASSA STATUTORY AUDITOR GIANPAOLO FORNASARI
ALTERNATE AUDITOR MASSIMO MUSTARELLI ALTERNATE AUDITOR PAOLO PEROLINI
Members of the Board of Arbitrators CHAIRMAN VITTORIO LOCATELLI STATUTORY ARBITRATOR GIUSEPPE BUSSI STATUTORY ARBITRATOR GAETANO CORNALBA STATUTORY ARBITRATOR ATTILIO GARBELLI STATUTORY ARBITRATOR GIOVANNI MOLINARI ALTERNATE ARBITRATOR BRUNO PEZZINI
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General Management GENERAL MANAGER FRANCO BARONIO
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Report on operations
Consolidated Financial Statements for the year ended December 31, 2006
13 BANCA POPOLARE ITALIANA Soc. Coop.
94,47% Banca Popolare 100% 100% Bipitalia Ducato S.p.A. Bipielle ICT S.p.A. di Crema S.p.A.
99,51% Banca Popolare Bipitalia 96,96% 100% Bipitalia Broker S.r.l. di Cremona S.p.A. Gestioni SGR S.p.A.
51,00% 80,00% Bipitalia 20,00% 100% Banca CARIPE S.p.A. Bipielle Real Estate S.p.A. put 44,00% Alternative SGR S.p.A.
55,01% Banca Popolare Italfortune International 100% 100% Basileus S.p.A. di Mantova S.p.A. Advisors S.A.
85,02% Bipielle Fondi Immobiliari 100% 100% Banca Valori S.p.A. Lido dei Coralli S.r.l. SGR S.p.A.
100% 99,61% 100% Nazionale Fiduciaria S.p.A. Efibanca S.p.A. Sirio Immobiliare S.r.l.
100% 50,00% Efibanca Palladio Finanziaria 100% Critefi SIM S.p.A. Nadir Immobiliare S.r.l. SGR S.p.A.
72,26% Cassa di Risparmio di Lucca 51,00% 8 società immobiliari AB Capital S.p.A. put 6,66% Pisa e Livorno S.p.A. non operative
34,00% 21,51% 100% (*) Assipromos S.r.l. Tortella S.p.A. Royle West Ltd
100% 100% Gruppo Acque Minerali Cartesio Alternative 40,00% Castimm S.r.l. Riunite Investments SGR S.p.A.
100% Bipielle Società di Gestione 28,35% Gruppo Partecipazioni 99,10% (*) Ali S.p.A del Credito S.p.A. Italiane
60,00% 29,86% Tiepolo Finance II S.r.l. Gruppo Comital Saiag
100% Bipielle International 5,00% Glass Italy BV Holding S.A.
5,00% 86% 50,00% Bipielle Bank (Suisse) S.A Finoa S.r.l.
10,00% 72% 81,14% B.P.I. International UK Ltd Eurovita Assicurazioni S.p.A.
Area Life International 100% 100% Aviva Previdenza S.p.A. Assurance Ltd
99,63% 24% (*) Banca Bipielle Network S.p.A Unione Fiduciaria S.p.A.
Bipielle Previdenza 100% 22,35% (*) Centrosim S.p.A. Assicurativa S.r.l.
100% Banca Popolare di Lodi 20,71% (*) Arca SGR S.p.A. Capital Company L.L.C.
100% Banca Popolare di Lodi Capital Company L.L.C. II LEGENDA 100% Banca Popolare di Lodi Capital Company L.L.C. III Fully consolidated companies Companies carried at equity 60,00% Tiepolo Finance S.r.l. (*) % owned by Gruppo BPI CONSOLIDATED REPORT ON OPERATIONS
15 16 GROUP FINANCIAL HIGHLIGHTS
31/12/2005 31/12/2006 % change Pro forma Balance sheet Total assets 46,787,071 47,322,515 -1.13% Total loans 33,569,379 32,412,055 3.57% of which customer loans 28,735,907 27,955,054 2.79% Financial assets 4,785,796 5,421,044 -11.72% Shareholdings 151,168 487,644 -69.00% Total payables 38,135,411 39,172,974 -2.65% of which customer accounts and debt securities in issue 32,138,095 34,384,923 -6.53% Indirect deposits 33,260,783 34,642,883 -3.99% of which assets under management 18,575,664 18,294,066 1.54% Net interbank position -1,163,844 -331,050 -251.56% Shareholders' equity attributable to the Group and minority 4,103,419 3,247,975 26.34% interests (including profit/loss) of which Shareholders' equity attributable to the Group (incl. profit/loss) 3,955,825 2,786,311 41.97% Income statement Net interest income 840,100 758,189 10.80% Total income 1,500,738 1,277,565 17.47% Net adjustments to loans and financial assets -432,468 -968,457 -55.34% Administrative expenses -999,363 -982,078 1.76% Profit (loss) from continuing operations before tax 142,564 -822,841 117.33% Net profit (loss) (excluding minority interests) 3,421 -699,879 100.49% Net profit (loss) attributable to the Group -39,861 -743,893 94.64% Operating structure Number of employees 8,579 8,384 Number of branches 973 979 Ratios ROE n/a n/a ROA n/a n/a Net interest income/Total income 55.98% 59.35% Administrative expenses/Total income 66.59% 76.87% Gross financial assets/Total assets 10.23% 11.46% Non-performing loans/Customer loans 1.02% 1.08%
Net adjustments for impairment of loans/Customer loans (*) 1.16% 2.65%
The figures for 2005 have been restated to incorporate the effects of the changes in the scope of consolidation which have taken place in 2006 arising from the sale of the subsidiaries Bipielle Leasing and Società Riscossione Tributi Lucca e Cremona and the reclassification of the contribution made by the affiliated companies Bipielle Network, Bipielle Previdenza, and Area Life
17 International Assurance among "Non-current assets/liabilities classified as held for sale" and "Profit/loss from disposal groups classified as held for sale after tax".
(*) Adjustments to loans, excluding extraordinary adjustments, were equal to 0.81% of the total loan portfolio on December 31, 2006.
18 2006 FINANCIAL REVIEW
On the whole, 2006 was a year of positive performances by the main countries in the world economic system, with developed nations showing a hint of moderation and emerging markets displaying remarkable vitality. Commodity market trends played a strong role in shaping developments. Oil prices were especially significant, hitting a new record high of $73.7 a barrel in July (Brent quality) only to fall to $62.6 a barrel at the end of the year. The average price for 2006 ($65.2) was still up 19.7% from the 2005 figure. However, the latest developments in the commodity markets point to decreased instability and a positive influence on the economic climate. The United States economy showed signs of a widespread but moderate slowdown against the backdrop of a trend towards a slower increase in consumer prices; unconfirmed Gross Domestic Product figures indicate a growth rate of 3.3% in 2006, more or less unchanged from 3.2% in 2005; the clear cyclical downturn that occurred half-way through the year now seems destined to be gradually offset by the positive performance of the disposable incomes of families. The headline inflation index fell from an average of 3.4% in 2005 to 3.2% in 2006. In response to these trends, the Federal Reserve target rate was increased on four occasions to the level of 5.25% recorded in June, although it has remained unchanged since then. Most indicators point towards a possible slackening of US monetary policy towards mid-2007 given that growth could soon drop below potential. The US unemployment rate fell steadily throughout the year to hit a low of 4.5% in December. Japan's economy delivered a relatively flat performance, with average GDP growth of 2.2% in solar 2006, a slight improvement over the 1.9% recorded in 2005. Prices rose by the slightest of margins (0.3%), following on deflation of 1.3% in 2005. The Bank of Japan deemed this limited turnaround adequate, and in March 2006 announced that it would put an end to its loose monetary policy (in effect since 2001) and launch a series of adjustments that led to an initial increase in the official overnight rate from zero to 0.25% in July. Monetary policies also shifted in China, where the benchmark interest rate on loans at one year underwent two increases, rising to 6.12%; the People’s Bank also revised the mandatory reserve requirement ratio on three occasions, bringing it up to 9% at the end of 2006, followed by further adjustments at the beginning of 2007 to 10%. Chinese economic growth, a factory of primary importance to the world economy, continued the trend towards double-digit figures recorded over the past four years, reaching 10.7% in 2006 (up from the revised 10.4% in 2005), with consumer price inflation averaging 1.5% for the year. In Great Britain, the Bank of England adjusted its benchmark interest rate twice in August and November 2006, raising it to 5%, followed by a further adjustment to 5.25% at the beginning of 2007, against the backdrop of increased average inflation of 2.3% in 2006 (2% in 2005). As for economic growth, provisional figures show a considerable year-on-year increase of 2.7% in 2006. In its most recent quarterly Inflation Report, the Bank of England projected that inflation would slow in 2007, whilst growth is forecast to continue at current rates.
The Italian economy in its Eurozone context
Turning to the euro area, the European Central Bank raised rates on as many as five occasions in March, June, August, October and December of the reporting period, bringing the ECB benchmark rate to 3.50% (against 2.25% at the end of 2005). Most observers believe that further decisions will be forthcoming from the ECB in 2007 following its initial rate increase (+0.25%) in March. Unemployment fell to an all-time low (7.5% in December); taking a more long-term view, around 12 million new jobs have been created in the eight years since the euro was introduced (1999- 2006), compared to approximately 2 million over the previous eight years. Provisional national growth figures for Eurozone countries in 2006 (on January 1, 2007 the Eurozone expanded to 13
19 nations with the entrance of Slovenia) point to an overall increase of 2.6%; of the region’s largest countries, Germany (+2.7%) and Spain (+3.9%) contributed to this result, whereas France's turnaround was merely relative (+2.0%). According to these estimates, Italy’s economy grew by 1.9% owing to a solid turnaround in the manufacturing sector, due especially to a strengthening of the “Made in Italy” image abroad. A comparison of year-on-year growth figures for Eurozone countries points to a considerable improvement over the modest 1.4% recorded in 2005 (when Italy registered growth of close to zero, i.e. 0.1%). Consumer price inflation averaged 2.2%, unchanged from the previous year. The corresponding figure for Italy mirrored the Eurozone average, holding steady at 2.2%; during the last four months of the year, however, Italy's inflation trends once more outpaced the Europe- wide average. As regards public finances, despite the favourable trend in tax revenues, a judgment on VAT by the Court of Justice in Luxembourg (1.1% of GDP) and a reclassification of items pertaining to Railways (0.9%) contributed to a budget deficit of nearly 4.4% of GDP in 2006, compared with 4.1% in 2005. The share attributed to debt stock at the end of the year was up slightly to 106.8%, compared with 106.2% twelve months earlier, a negative trend that was attenuated by growth of the Italian economy that exceeded expectations.
Finance and credit markets
The Italian stock market showed positive developments in various areas in 2006: the value of assets traded reached a new all-time high of €1,141 billion, up 21% year-on-year, putting Italy in fourth place after Euronext (the company that brings together the stock markets of Paris, Amsterdam, Brussels, and Lisbon), London and Deutsche Börse. In terms of trading prices, the MIB index posted a year-on-year increase of 18.8%, and the capitalisation of listed Italian companies was estimated at 52.6% of GDP. At the end of 2006, the number of listed companies totalled 311 (against 282 on December 31, 2005), of which 21 were listed on the international segment; in terms of the placement of securities, the capital stock issue of Banca Popolare Italiana in July (€720 million) was the second-largest on the Italian market by size. Trading on the equity derivatives market climbed 23.5% to reach a notional total of €1,196 billion. The national banking sector is starting to enjoy a better economic cycle, with loans to private customers rising by +10.7% during the calendar quarter ending in December 2006 (+8.5% since the end of 2005). Breaking customers down by category, the corporate segment showed renewed vitality, with annualised growth of 10.9% in the fourth quarter of 2006; the family segment performed even better (+12.0%), although it has lately given clear signs of slowing down. Turning to domestic bank deposits and savings, deposits were up 7.2% in the fourth quarter of 2006 (fully in line with the figure of 7.2% for the end of 2005), whereas bonds surged by 12.2% (against 8.8% for December 2005).
The gross profitability of the banking sector in Italy is projected to perform well in 2006, with a favourable contribution by net interest income and a balanced service revenue component, despite some weakness in assets under management. On the whole, in 2006 net deposits in Mutual Funds were down sharply by €17.9 billion; this decrease (€26.3 billion in absolute terms) would seem to reflect the growing impact of taxation on Italian companies in a scenario of more direct international competition. In a like manner, gross deposit inflows for the various types of asset management showed an across-the-board decrease from €38.1 billion in 2005 to €2.2 billion in 2006.
20 GRUPPO BANCA POPOLARE ITALIANA 2006 BUSINESS REVIEW
In 2006 Gruppo BPI was committed to executing its revival project through achieving the objectives outlined in the new 2006-2009 Business Plan, which was presented to the market at the start of April. The requirements for the merger with Gruppo BPVN were also satisfied during the year; the purpose of this operation is to create a leading Italian banking group. As already reported, the merger was approved by the Shareholders' Meetings of BPI and BPVN on March 10, 2007 and will take effect on July 1, 2007. The following section contains a summary of the main corporate events that took place in 2006.
Corporate governance actions and management change On January 28, 2006, during the Shareholders' Meeting called for the replacement of the outgoing Board of Directors, the number of members of the Board of Directors was determined to be 16 and the following were elected as Directors: Guido Duccio Castellotti, Pier Antonio Ciampicali, Costantino Coccoli, Vittorio Coda, Maria Luisa Di Battista, Dino Piero Giarda, Bruno Giuffrè, Divo Gronchi, Andrea Guidi, Augusto Machirelli, Pietro Manzonetto, Roberto Nicola Martone, Mario Minoja, Giorgio Olmo, Enrico Perotti and Roberto Schmid. Furthermore, the Shareholders also formed the Board of Statutory Auditors by electing the following as Statutory Auditors: Gabriele Camillo Erba, Luigi Corsi and Giordano Massa; and the following as Alternate Auditors: Gianpaolo Fornasari and Massimo Mustarelli. Subsequently, following the resignation of Paolo Giacinto Bonazzi, in the Shareholders' Meeting of July 29, the Board of Statutory Auditors was amended with the appointment of Gianpaolo Fornasari as statutory auditor and Paolo Perolini as alternate auditor. In its meeting on January 30, 2006, the Board of Directors appointed a Chairman, Dino Piero Giarda, lecturer at Milan Catholic University, former Treasury Under Secretary from 1995 to 2001 and Chairman of the sub-holding Bipielle Investimenti, and appointed Divo Gronchi as Chief Executive Officer. On March 9, 2006, the Board of Directors appointed Enrico Perotti and Vittorio Coda as Senior Deputy Chairman and Deputy Chairman, respectively, of the Parent Bank's Board of Directors. Lastly, on December 13, 2006 the Board of Directors of Banca Popolare Italiana established the Executive Committee in accordance with article 37 of the articles of association. The Executive Committee consists of the Chairman, Dino Piero Giarda, the Senior Deputy Chairman, Enrico Perotti, the Deputy Chairman, Vittorio Coda, the Chief Executive Officer, Divo Gronchi, and the Directors Andrea Guidi and Maria Luisa Di Battista. The structure of general management, following the initial appointments decided in 2005, was progressively redesigned over the subsequent months with the recruitment of other managers from outside. The Board of Directors' appointment of the General Manager, Franco Baronio, former Deputy Chairman of the consultancy firm Bain & Company, with significant experience in banking consultancy, completed the picture. The respective responsibilities were assigned: the Chief Executive Officer is responsible for strategy, administration and control and the General Manager is responsible for the "operating machine" and all other duties. Other appointments included the Deputy General Manager Giuseppe Malerbi, with responsibilities in the Credit and Finance area, and the Deputy General Manager Apicella Guerra, with responsibilities in the Operation area (Organisation, IT and Operational Services).
21 The Banca delle Piazze project Significant initiatives were introduced with regard to the development of traditional banking activity, the Group's core business. The Banca delle Piazze project, presented in Lodi on June 21, aims to re-establish the bank's ties with the local areas and economic operators and companies where the Group is present. The initiative, aimed at all of the provinces in which the Gruppo BPI operates with banks and brands strongly rooted in the local area, involves public events and actions designed to promote not only the Group's network and products but also the socio- economic characteristics of the individual areas. In this regard, the Business Plan sets out a new distribution network model (with the introduction of Districts, the strengthening of the sales network and the recruitment of specialist professionals for each customer segment) and a thorough review of the range of Group products (with the launch of innovative and highly competitive products). The reader is referred to subsequent sections of this Report for further information on the new network model and commercial innovations.
Disposals of non-strategic assets
Assets sold during the period were as follows:
• the 99.74% stake in the share capital of Bipielle Leasing, sold to Banca Italease for €51 million, around 1.5 times its net worth. The consolidated financial effect of the sale was around €19 million. For the Gruppo Banca Popolare Italiana, the sale of Bipielle Leasing is, on the one hand, part of the process of streamlining its investments and, on the other hand, is part of the process of commercial strengthening, thanks to the agreement with the Banca Italease Group, whose level of efficiency and technical expertise make it one of the leading companies in Italy in the leasing sector. Banca Italease has signed a three-year operational agreement with the Gruppo Banca Popolare Italiana involving the introduction (via its distribution network) of finance leasing opportunities to the Banca Italease Group on an exclusive basis nationwide. • a portfolio of non-performing loans worth €924 million sold without recourse to the ABN Amro Group; the financial effect of the operation is reflected in item 100 "profit from the sale of loans" (around €69 million) and in item 130 "net adjustments for impairment of loans" (around €44 million). In detail, on May 26, 2006, Bipielle SGC, the Gruppo company responsible for managing anomalous loans, together with other Group banks, sold without recourse (within the meaning of Arts. 1 and 4 of Law 130/1999) to two special purpose vehicles indicated by ABN Amro, a portfolio of non-performing mortgage and unsecured loans. The portfolio sold includes around 23 thousand positions relating to retail and corporate clients with a total nominal value of €924 million. The operation complies with the objectives set in the 2006-2009 Business Plan with regard to optimising the quality of assets, reducing the risk profile and achieving capital strengthening. • the 70.12% stake in the share capital of S.R.T. - Lucca e Cremona S.p.A (formerly Bipielle Riscossioni), sold to the public company Riscossione S.p.A. This sale is part of the process of withdrawing the current system of concession for the national collection service, as prescribed by Art. 3 of Law no. 248 of December 2, 2005. Under this legislation, the duties relating to national collection will be assigned to the Revenue Office, which will perform these via the company Riscossione S.p.A., created jointly with the INPS. On September 28, 2006, the final contract of sale was signed and the transfer of ownership of the shareholding took effect from September 30, 2006. The amount payable for the shareholding will be determined by an auditor appointed by the parties on the basis of the net worth as at September 30, 2006 adjusted by the net profit for the period until the closing date and will be paid by means of the assignment of Riscossione S.p.A. shares to Banca Popolare Italiana. Riscossione S.p.A. has already decided upon a share capital
22 increase reserved for the transferor companies. The Riscossione S.p.A. shares received by BPI must subsequently be sold to the public shareholders of this company (currently Revenue Office and INPS) by December 31, 2010. • the sale of 10% of the share capital of Cassa di Risparmio di Bolzano (equal to 360,000 shares) by BPI to Fondazione Cassa di Risparmio di Bolzano, which may assign these to a third party to be identified, at a price of €320.00 per share, in line with the book value. The transfer of the shares, for a total price of €115.2 million, in line with the book value, was carried out on December 22, 2006, when the deal closed. Fondazione Cassa di Risparmio di Bolzano also undertook to pay Banca Popolare Italiana the equivalent of 11/12 of any dividends distributed by Cassa di Risparmio di Bolzano in 2006. In addition, on June 16, 2006, the agreement to sell 79.73% of Banca Bipielle.Net and the whole of Area Life, for the sum of €107 and €23.5 million, respectively, was finalised, contingent on the approval and authorisation of the competent authorities. The buyers are Sopaf S.p.A., Aviva Italia Holding S.p.A. and De Agostini Invest S.p.A. The agreement to sell Bipielle.Net incorporates put and call agreement over the 19.9% that remains with BPI, according to which Sopaf will be entitled to buy this stake for a price of €30 million from the 36th to the 48th month of the effective date of the agreement. The seller is entitled, as from the 48th month, to sell a19.9% stake to the buyers at the same price. In response to a request by the promissory buyers, the Board of Directors of Banca Popolare Italiana moved to grant an extension for the transfer of said shareholdings pending the authorisation of the sale of the Banca Bipielle Net shareholding by the Bank of Italy. This extension is contingent upon the completion of the extension request by the buyers and the amendment of certain aspects of the agreements. All of the operations mentioned form part of the Group's strategy of focussing its presence on areas of activity considered to have greater strategic importance.
Restructuring of the real estate segment
On March 15, 2006, Bipielle Real Estate and Bipielle Immobili Strumentali signed the deed of merger by absorption of Bipielle Immobili Strumentali into Bipielle Real Estate with the cancellation without exchange of the shares representing the entirety of the capital stock of Bipielle Immobili Strumentali. On the same date, Bipielle Real Estate and Basileus signed a partial proportional spin-off agreement transferring assets of Basileus S.p.A. to Bipielle Real Estate S.p.A. The spin-off resulted in a reduction of the shareholders’ equity of Basileus S.p.A. of €19 million, which was subtracted from share capital by cancelling 19 million shares of common stock. The merger and spin-off described above took effect in relation to third parties on April 1, 2006.
Investment in Partecipazioni Italiane On April 11, 2006, Glass Italy BV, a company incorporated under Dutch law and controlled by BPI, purchased 13,288,096 shares of common stock issued by Partecipazioni Italiane S.p.A. representing 1.2064% of the latter’s share capital. As a result of this purchase, the total investment held by BPI and Glass Italy BV in the common stock of Partecipazioni Italiane represented 91.2062% of the latter’s share capital, corresponding to 1,004,645,389 shares of PIT common stock, of which 80,643,008 shares were held directly by BPI, and 924,002,381 by Glass Italy BV. Consequently, by virtue of the provisions of articles 108 and 109, subsection 1b), of Legislative Decree no. 58/1998, since BPI and Glass had collectively exceeded the threshold of 90% of the share capital of Partecipazioni Italiane, they were required to make a compulsory public tender
23 offer on all outstanding shares of the common stock of Partecipazioni Italiane at the price set by Consob, or, alternatively, to restore free-float sufficient to ensure the regular trading of Partecipazioni Italiane stock within 120 days' time from April 11, 2006. BPI then announced that, in accordance with article 50 of the Regulation for Issuers, it did not intend to restore free-float sufficient to ensure regular trading of Partecipazioni Italiane stock; consequently, Glass Italy BV, in its capacity as jointly liable party, made a public tender offer on all outstanding voting shares of Partecipazioni Italiane stock at the price set by Consob. From October 2 to October 20, 2006, Glass Italy BV: (i) made a compulsory public tender offer on the remaining 83.934,827 shares of Partecipazioni Italiane common stock; (ii) made a voluntary public tender offer on 1,350,000 savings shares of Partecipazioni Italiane stock. The price per share under the offer was €0.2079. The following shares were acquired during the period for subscribing to the offers: (i) 74,970,281 shares of Partecipazioni Italiane common stock, equal to 6.798% of the total share capital of Partecipazioni Italiane; (ii) 285,785 savings shares of Partecipazioni Italiane stock, equal to 0.026% of the total share capital of Partecipazioni Italiane. Partecipazioni Italiane stock was de-listed on October 30, 2006.
Securitisation of consumer loans On October 12, 2006, Gruppo BPI securitised €501 million in performing consumer loans. The transaction was structured by Banca Popolare Italiana, as Sole Arranger, and the notes were marketed by Banca IMI and Calyon as Joint Lead Managers and Bookrunners of the issue. The vehicle company Ducato Consumer issued four classes of notes with the following characteristics: (i) €461.5 million Class A notes rated Aaa/AAA (Moody's and Fitch), (ii) €28.1 million Class B notes rated A1/A (Moody's and Fitch), (iii) €9 million Class C notes rated Baa2/BBB (Moody's and Fitch), and (iv) €2.9 million Class D notes, not rated and fully subscribed by the originator. The pool of securitised loans is made up of 58,118 consumer loans issued by Bipitalia Ducato, of which around 70% are personal loans, 17.3% loans for second-hand cars, 3% loans for new cars and 9.7% specific loans with a weighted average maturity of around 10 months. With regard to the geographical distribution of the placement, interest came predominantly from French investors (around 30%) followed by German (20%) and Irish investors (around 15%). The issue was also well received by Italian investors who subscribed around 15% of the notes. The good quality of the loans and the confidence shown by investors in Bipitalia Ducato, in its fourth securitisation transaction, meant that significant orders could be gathered and that the transaction could be priced at low spread levels.
The creation of Cassa di Risparmio di Lucca Pisa Livorno
During 2006, the project that led to the merger by absorption on June 30, 2006 of Cassa di Risparmio di Pisa and Cassa di Risparmi di Livorno into Cassa di Risparmio di Lucca was completed, after having been approved by the respective Boards of Directors in March and by the Shareholders' Meetings on June 9, 2006. The company resulting from the merger is called Cassa di Risparmio di Lucca Pisa Livorno S.p.A. The newly formed Bank is the third-largest bank in Tuscany, with 223 branches and 1,600 employees, enabling it to compete with the main competitors in its areas of operation. The operation is one of the key parts of the plan to develop local banks as specified in the Business Plan and follows the sale by the Parent Bank to Cassa di Risparmio di Lucca of the 26 branches that belonged to BPI's regional network (sale which took place on January 1, 2006).
24
Capital increase of Banca Popolare Italiana
In the months of July and August, the capital strengthening operation of the Parent Bank, Banca Popolare Italiana, was successfully completed. During the offer period, from July 3, 2006 to July 21, 2006, over 104 million shares (98.4% of the total) were subscribed (at a price of €6.80, of which €3.80 was premium), raising a total amount of around €707.6 million. Subsequently, after the offer of unexercised options in the Stock Exchange sessions from July 28 to August 3, 2006, a further 1,733,634 shares were subscribed. The share issue therefore concluded with the entire subscription of the 105,795,900 shares issued, raising a total of €719.4 million, without it being necessary to use the guarantee offered by Mediobanca – Banca di Credito Finanziario S.p.A.
Outcomes of the Banca d'Italia inspection report
The Board meeting of August 2, 2006 heard the contents of the report prepared following the completion of the inspections conducted by Banca d'Italia between June 20, 2005 and May 11, 2006. These inspections underlined that certain actions performed by the previous management had reflected a Group conduct not based on the criteria of sound and prudent management. They also pointed out that aspects of significant weakness remained which required suitable intervention to ensure the recovery of strong technical balances and the necessary organisational consolidation. The Supervisory Board took note of the new course of action and recognised that the Company had already, during the inspection, taken initiatives to implement an extensive action of internal renewal. Significant examples include the complete replacement of the management and control bodies, the appointment of new managers, the revising of mid-term objectives, the revision of the Group structure and the disposal of non-strategic assets. It also took note of the recovery seen in the strengthening of the capital ratios and the start of recovery of equilibrium in technical and organisational situations, the new focus on commercial activity and the value of the new business plan, although this was seen rather optimistically.
Exercising of Deutsche Bank options
The Board of Directors of BPI, in its meeting of September 20, 2006, decided to exercise the call options contractually agreed with Deutsche Bank A.G. London (hereinafter DB) on June 5, 2003, June 30, 2003 and November 4, 2004 respectively.
Banca Popolare Italiana and DB had entered into two contracts in June 2003 regarding the transfer to DB of a total of 49,386,411 Bipielle Investimenti shares owned by BPI. On the same date, BPI and DB had entered into two call option contracts and two put option contracts in relation to the above 49,386,411 Bipielle Investimenti shares. On November 4, 2004, BPI and DB had entered into a further call option contract and a put option contract in relation to 429,662 Reti Bancarie shares. Owing to the partial spin-off of Bipielle Investimenti in favour of BPI and Reti Bancarie, completed on December 31, 2003, and to the consolidation of Bipielle Investimenti shares and the simultaneous increase in their nominal value, the aforementioned put and call options concerned the following shares: 4,632,445 BPI shares, 1,288,985 Reti Bancarie shares and 12,346,602 Bipielle Investimenti shares. The call options were exercised on September 30, 2006 by means of physical settlement (4,632,445 BPI shares, for a total consideration of €78.7 million, 859,323 Reti Bancarie shares for a total consideration of €69.5 million and 12,346,602 Bipielle Investimenti shares for a total consideration of €165.3 million) whereas for the option taken out in 2004 relating to 429,662 Reti Bancarie shares, for reasons of economic advantage, the cash settlement option was chosen. In
25 addition to the prices indicated above, interest accrued from the date of entering into the Put / Call contracts until the date of transfer of the shares was paid in the total amount of around €26 million.
The merger of Reti Bancarie and Bipielle Investimenti into Banca Popolare Italiana
The third quarter of 2006 saw the completion of the process for the merger of the subsidiaries Reti Bancarie and Bipielle Investimenti, a process that began in May and June 2006 when the Boards of Directors of Banca Popolare Italiana, Reti Bancarie and Bipielle Investimenti approved a corporate merger programme aimed at simplifying the Group structure and optimising the financial structure of the company emerging from the merger.
The main phases of this process are summarised below: • approval of the proposed merger by the Boards of Directors of Banca Popolare Italiana on June 21, 2006 and of Reti Bancarie and Bipielle Investimenti on June 23, 2006;
• approval of the proposed merger by the Extraordinary Meetings of Shareholders of Banca Popolare Italiana on July 29, 2006, and of Reti Bancarie and Bipielle Investimenti on July 28, 2006; • merger by absorption of Reti Bancarie and Bipielle Investimenti into Banca Popolare Italiana with effect, for administrative and tax purposes, from January 1, 2006, together with the simultaneous issue of new shares for the exchange and cancellation of the shares of the merged companies;
As regards the exchange ratios for the merger, Reti Bancarie shareholders were offered 5 Banca Popolare Italiana ordinary shares for each Reti Bancarie ordinary share, and Bipielle Investimenti shareholders were offered 6 Banca Popolare Italiana ordinary shares for 5 Bipielle Investimenti ordinary shares. Banca Popolare Italiana then increased its share capital by €273,496,308 to finance the merger by issuing 64,597,250 new ordinary shares to the minority shareholders of Reti Bancarie and 26,568,186 ordinary shares to the minority shareholders of Bipielle Investimenti. Accounting effects of the merger The mergers by absorption in question involved acquiring additional interests after obtaining control and therefore fall outside the scope of application of International Financial Reporting Standard IFRS 3 (Business combinations). The acquisitions of the remaining shares of the merged companies by exchanging these with newly-issued shares of the absorbing company are classified as the acquisition of remaining minority shares, which is not governed by IFRS 3 or by other IFRS standards. These transactions were accounted for in compliance with IFRS according to the following criteria: 1. by adopting the principle of continuity of the values of the accounting entries between the financial statements of the absorbed companies and of those of the absorbing company; 2. by identifying the date June 30, 2006 (closest date to the decisions approving the proposed merger on which the companies involved drew up an interim report subject to limited audit by the independent auditors) as the acquisition date. This choice was based on the fact that, after this date, the market values of the shares of the companies involved in the merger were fully aligned with the fixed exchange values, and to take account of the fact that minorities, with the approval of the proposed mergers, transferred full control to Banca Popolare Italiana as confirmed by the total absence of minorities in the Extraordinary Meetings held in July in which the proposed merger was approved (on this subject, it is underlined that in the Bipielle Investimenti and Reti Bancarie meetings held in April 2006 to approve the financial statements for the year ended December 31, 2005, the presence
26 of minority shareholders compared with the parent company was very low in terms of number and percentage); 3. by considering the cancellation deficit exceeding the current values expressed in the consolidated financial statements as reducing the reserves of profits, insofar as the merger by absorption involves no financial exchange with third party economies (apart from the stake relating to the minority shareholders of the merged company specified in the point below). Consequently, the emergence of higher goodwill values than the values in the consolidated financial statements does not appear justified; 4. by adopting the economic entity approach which considers the group as a whole, and exchanges between shareholders as equity transactions. Consequently, applying this theory to the transaction of acquiring additional interests after obtaining control, the differences between the acquisition cost and book value of the minority shares acquired, i.e. exchange deficit, were recognised in equity, i.e. reducing the share premium reserve. Finally, the cancellation difference between the cost of the shareholding and the corresponding fraction of net worth of the merged company was allocated to the shareholdings of the merged companies but not to an extent greater than the corresponding values in the consolidated financial statements.
The difference resulting from the exchanges, i.e. between the current values of the shares bought and the net worths acquired, including the results pertaining to minority interests as at June 30, 2006, were recognised both in the consolidated quarterly report and in the separate quarterly report as reducing the share premium reserve while the differences from cancellation of the shareholdings were recorded among Reserves of Profits under Shareholders' Equity for the part exceeding the consolidated values. In particular, these surpluses had been fundamentally generated by the goodwill amortisations made, in previous years, for consolidation purposes alone on the basis of previous national accounting standards. The acquisition of the assets and liabilities of the merged companies took place, for the purposes of the separate financial statements, according to the percentages held prior to the merger, at the book vales taken from the financial statements for the year ended December 31, 2005 prepared in accordance with IFRS standards.
As regards the income statement, the costs and income of Reti Bancarie and Bipielle Investimenti are merged into the separate financial statements of Banca Popolare Italiana with effect from January 1, 2006 and the dividends collected in 2006 from Bipielle Investimenti shares (insofar as Reti Bancarie has not distributed dividends in 2006) were eliminated and carried to adjust the shareholders' equity. Profits and/or losses accrued up until the acquisition date and belonging to minority interests have been entered in the income statement, as a cost component, by way of an adjustment to the profit for the year of Banca Popolare Italiana with a balancing entry in the shareholders' equity reserves (when the cancellation deficit has also been recorded). To summarise, the accounting treatment described has had the following effects:
- in the Gruppo Banca Popolare Italiana's consolidated financial statements the mergers have had no effect on the consolidation ratios and, therefore, no further goodwill has been recorded. As previously stated, the differences resulting from the exchanges (around €241 million) were recorded as reducing the share premiums under shareholders' equity; - in Banca Popolare Italiana's separate financial statements, the difference from cancellation of the shareholdings held in the merged companies (around €1,383 million) was allocated to the shareholdings already held by the merged companies (€1,097 million). The difference (€286 million) was subtracted from the share premiums under shareholders’ equity (€45 million) and from reserves of profits (€241 million).
27 The exchange of branches with the Gruppo Banco Popolare di Verona Novara As part of the process of streamlining the distribution network, with focus and consolidation of the areas where the Group has an historical presence, the Gruppo BPI signed an agreement with Banco Popolare di Verona e Novara (BPVN) for the exchange of a number of branches (effective from October 2006), which was wholly distinct from the strategic BPI-BPVN business combination plan conceived at a later date. In detail, under the agreement, BPVN will acquire 18 BPI branches located in Trentino Alto Adige, including the brand name “Banca Popolare del Trentino”, and BPI will simultaneously acquire 18 BPVN Group branches located in Tuscany, Umbria, Marche and Lazio, the areas where the Gruppo BPI has an historical presence. The operation was completed on October 1, 2006.
Magiste Group's outstanding debt to BPI and enforcement of the guarantee on Magiste
The Magiste Group’s outstanding debt to BPI comprises four main positions (in addition to other lesser debt) in relation to Magiste S.p.A., Magiste International S.A., Garlsson Real Estate S.A., and Magiste Real Estate S.p.A.
With regard to Magiste S.p.A., on September 28, 2005, following the maturity of certain forward exchange transactions (USD/euro), BPI consequently informed Magiste S.p.A. of the conclusion of said transactions, which resulted in a negative balance of the current account in USD of $74.4 million, and a negative balance of the current account in euro of €1 million. In the same letter, Magiste S.p.A. was asked to repay the above debts. On October 14, 2005, since no payment had been received from Magiste S.p.A., BPI enforced the guarantee provided by Bipielle Bank Suisse for the debt owed by Magiste S.p.A. for a total amount of €64 million. It should be noted that Bipielle Bank Suisse itself had provided said guarantee on the engagement of Magiste International S.A. (parent company of Magiste S.p.A.), the latter having deposited 7,937,371 shares in Banca Popolare Italiana with Bipielle Bank Suisse as collateral. Following the enforcement of said guarantee, Bipielle Bank Suisse paid BPI approximately €54 million, claiming that the remaining sum of approximately €10 million was not due since the agreements between Bipielle Bank Suisse and BPI had limited the amount due under the guarantee to a sum corresponding to the proceeds from the sale of said 7,937,371 BPI shares (€54 million). On December 29, 2005, BPI sent Magiste S.p.A. a formal notice of default for the remaining debt outstanding on that date ($9.8 million and €1.2 million). The debt owed by Magiste International S.A. consists of BPI's credit exposure deriving from the loan of €730 million it disbursed on August 3, 2005. Under the agreement, collateral for the loan was provided in the form of securities worth 110% of the amount disbursed; on August 4, 2005 pledges were provided consisting of "S&PMIB40" securities, shares in Magiste Real Estate S.p.A. and quotas of Tundra S.r.l. The securities provided as collateral for the loan were as follows: 4,000,000 shares of Magiste Real Estate S.p.A., 100% of the capital stock of Tundra S.r.l., 8,421,606 shares of common stock in Monte dei Paschi di Siena, 99,906,610 shares of common stock of RCS Mediagroup (of which 5,234,116 were seized by the Public Prosecutor’s Office of Rome on February 10, 2006), and 10,175,000 shares of common stock of Capitalia. In letters posted on August 10 and 12, 2005, BPI informed Magiste International S.A. that the value of the “S&PMIB40” securities pledged had decreased considerably, thereby resulting in a reduction of the guarantee to less than the aforementioned 110%, and that by virtue of the pledge agreement BPI was proceeding to reduce the loan from €730 million to €665 million in proportion to the reduction in the guarantees. Magiste International S.A. did not supplement the collateral following the aforementioned letters. In the absence of further guarantees, BPI became entitled to immediate collection of the sum of €65 million in cash (the difference between €730 million and €665 million), whereas the outstanding credit line was to expire on November 7, 2005.
28 On October 14, 2005, after inconclusive contact with its debtor’s representatives and solicitors, BPI proceeded to set off its credit of €65 million against a counter-credit of Magiste International S.A. (deriving from the positive balance of a current account held by the latter) of €60.1. On December 29, 2005, BPI sent Magiste International S.A. a formal notice of default for the remaining debt outstanding on that date (€681.7 million in connection with the loan, plus accrued interest, and an additional €0.6 million on the negative balance of a current account).
On February 28, 2006, BPI sent Magiste International S.A. formal advance notice of its intention to proceed with the sale of the aforementioned 8,421,606 shares of common stock of Monte dei Paschi di Siena and 10,175,000 shares of common stock of Capitalia, which had been pledged to BPI. In March 2006, BPI sold the aforementioned shares of common stock of Monte dei Paschi di Siena and Capitalia for a total amount of €101 million, and the 454,000 shares in BPI owned by Magiste International, for a total amount of €4.1 million (in accordance with article 7 of the Articles of Association, which states that shareholders’ shares shall always be considered bound to guarantee all obligations of any sort that the shareholders have towards the company), for a total amount of €105.2 million (net of expenses). Garlsson Real Estate S.A. owes BPI a total of approximately €100 million, plus interest, in relation to a loan granted by BPI to said Garlsson Real Estate S.A. on June 20, 2005 (with maturity on September 20, 2005). This loan was secured by a pledge consisting of 9,674,000 shares of common stock of Capitalia (of which 8,253,146 shares were seized by the Public Prosecutor’s Office of Rome on December 19, 2005) and 8,876,260 shares of common stock of RCS Mediagroup. On December 29, 2005, BPI sent Garlsson Real Estate S.A. a formal notice of default for the remaining debt outstanding on that date (€102.2 million). On February 28, 2006, BPI sent Garlsson Real Estate S.A. formal advance notice of its intention to proceed with the sale of the aforementioned 1,420,854 shares of common stock of Capitalia, which had been pledged to BPI and had not been seized. During the first few days of March 2006, BPI sold the aforementioned shares in Capitalia for a total amount of €9.1 million (net of expenses). The debt owed by Magiste Real Estate S.p.A. consists of BPI's credit exposure deriving from a current account overdraft for approximately €10 million. On December 29, 2005, BPI sent Magiste Real Estate S.p.A. a formal notice of default for the remaining debt outstanding on that date (approximately €10.4 million). It should be noted that on March 31, 2006 the debt exposure to Magiste S.p.A., Magiste International S.A., Garlsson Real Estate S.A., and Magiste Real Estate S.p.A. came to a total of €693 million; write-downs to said debt exposure totalled €150.3 million, and the net balance was €542.7 million.
On March 23, 2006, BPI’s Board of Directors moved to enforce the pledge provided by Magiste International S.A. and Garlsson Real Estate S.A. on a total of 103,548,754 shares of RCS Mediagroup common stock. It accordingly authorised the company’s Chief Executive Officer to proceed with the sale of the aforementioned shares, further moving that BPI was itself authorised to acquire said shares of RCS Mediagroup common stock. On May 18, 2006 BPI then lodged a petition with the Public Prosecutor’s Office of Rome to release the seizure of 8,253,146 shares of Capitalia common stock and 5,234,116 shares of RCS Mediagroup common stock.
On May 26, 2006 the Public Prosecutor’s Office of Rome granted the petition to release seizure lodged by BPI as limited to the 5,234,116 shares of RCS Mediagroup common stock and denied the request to release the seizure of the 8,253,146 shares of Capitalia common stock.
29 On May 30, 2006 BPI engaged Credit Suisse Securities (Europe) Limited to act as sole bookrunner and place 108,782,870 shares of RCS Mediagroup common stock, representing 14.847% of RCS common stock, for the sum total of the shares of RCS Mediagroup common stock provided to BPI as a pledge by Magiste International S.A. and Garlsson Real Estate S.A.
The placement was concluded on May 31, 2006 at a price of €4.51 per share. Upon conclusion of the placement, BPI had been assigned 33,215,924 shares, equating to 4.53% of RCS common stock. The remaining 75,566,946 shares, representing 10.31% of RCS common stock, were assigned to unrelated institutional investors, or entities that otherwise may be considered qualified operators in accordance with applicable regulations. The transfer of the shares to their respective purchasers took place on June 5, 2006. The placement of the shares of RCS Mediagroup common stock was also exposed to certain legal risks, mainly relating to the possibility that precautionary legal proceedings may be initiated concerning the sale, as well as the possibility that once the Magiste group companies have been declared bankrupt, proceedings may be initiated to revoke or at least dispute the validity of the sale of the shares. BPI has obtained releases from all of the assignees of the placement in relation to any damages, costs, fees, or expenses that the latter may incur due to any lawsuits, petitions, investigations or proceedings of any sort aimed at recovering the shares or the equivalent value. It should be noted that upon the conclusion of the placement of shares of RCS Mediagroup common stock, the debt exposure to Magiste S.p.A., Magiste International S.A., Garlsson Real Estate S.A., and Magiste Real Estate S.p.A. came to a gross total of €202.5 million; accordingly, value adjustments were made to the 2005 financial statements for a total of €150.3 million, resulting in a total residual balance of €52.2 million.
It should also be noted that in June 2006 Magiste International S.A., Garlsson Real Estate S.A., Magiste Real Estate S.p.A. and Magiste S.p.A. proposed an agreement, which was then accepted by BPI in June 2006, aimed at defining all of Magiste Group's debts to BPI. It should be emphasised that BPI's admission to the preventative agreement with Magiste International and the approval of the agreement were indicated as a condition precedent to the settlement. In January 2007, however, Magiste International S.A. was declared bankrupt. Consequently, the contents of the aforementioned agreement are currently to be considered void. In consideration of the foregoing, it may not be excluded that revocation actions will be initiated regarding the deeds of pledge signed on August 4 2005 for the “S&PMIB40” securities, shares in Magiste Real Estate S.p.A. and quotas in Tundra S.r.l., nor may it be excluded that bankruptcy procedure bodies for Magiste International S.A. will undertake further legal measures against BPI.
Under the above circumstances, BPI decided to take preventative action by contacting the bankruptcy receiver for Magiste International S.A. in order to reach an out-of-court definition of the complex situation involving BPI and the Magiste Group companies, as described above. Negations are still in progress. In preparing its 2006 financial statements, BPI’s Board of Directors made a further prudential write-down of the value of the sums owed it by Magiste Real Estate S.p.A. (€10.5 million) and Garlsson Real Estate S.A. (€4.5 million).
The agreement concerning the RCS shares
On November 29, Banca Popolare Italiana and Pandette Finanziaria S.r.l. signed an option agreement with the following conditions: (i) a put option for BPI on 25,300,000 ordinary shares of RCS MediaGroup S.p.A. with a strike price of €4.51 per share, for a total price of €114,103,000; (ii) a call option for Pandette on the same shares with a strike price of €4.20 per share, for a total price of €106,260,000.
30 Both options may only be exercised for the entirety of the shares involved (representing 3.32% of all share capital and 3.453% of ordinary shares of RCS MediaGroup S.p.A.) from February 24 to February 27, 2009 (inclusive). BPI registered all the shares covered by the option agreement to a trust in the name of Sirefid S.p.A. and undertook to exercise the voting rights of these shares through Sirefid S.p.A. in line with the instructions provided by Pandette Finanziaria S.r.l. until the shares are transferred (or, if the options are not exercised, until the exercised period for the options has expired).
The suspension and reinstatement of the Chief Executive Officer
On December 7, 2006, the Court of Brescia handed down a judgement of first instance concerning the Italcase-il Bagaglino-Bertelli bankruptcy convicting the chief executive officer of Banca Popolare Italiana, Divo Gronchi, of the offence of participation in simple bankruptcy (article 217 of Royal Decree no. 267 of 1942, the bankruptcy law). At the meeting of the Board of Directors of Banca Popolare Italian held on December 13, Mr. Gronchi was consequently suspended from his duties as director in accordance with article 6 of Ministerial Decree no. 161 of 1998. On January 20, 2007, the Ordinary Shareholders’ Meeting called to deal with the issue voted by a large majority (1,885 votes in favour out of 2,847 votes in attendance) not to remove Mr. Gronchi from the position of director in accordance with article 6, subsection 2 of Ministerial Decree no. 161 of 1998. Mr. Gronchi has consequently been fully reinstated as Chief Executive Officer.
Investment in Hopa
The Parent Bank holds an equity investment in Hopa S.p.A. (101,019,756 shares), corresponding with 7.4% of share capital, which is disclosed among "available-for-sale assets". The original book value of this investment was €2.76 per share; this value was justified by the Bank’s participation in a shareholders’ agreement. On December 31, 2005, this investment was tested for impairment. The assessment ordered by Hopa's directors established a value per share from €1.44 to €2.04 for shareholders' participating in the shareholders' agreement, leading BPI to adjust its book value to €1.80 per share and record a write-down of €97 million on its income statement. During the preparation of the 2006 semi-annual report, the bank had already written the book value of the investment down for a further €34 million, resulting in a book value of €1.46 per share, recording changes in fair value disclosed in a specific shareholders' equity reserve and not on the income statement, as required by accounting standards. The change in fair value was largely due to the drop in the trading price of Telecom Italia stock in 2006, the latter being a significant asset held by Hopa. According to the current status of the planned merger between Mittel and Hopa, as well as the measurement of the company’s net asset value through December 31, 2006 provided by consultants engaged for this purpose, the directors have valued Hopa shares at €1 each. On the basis of this new value, the book value of the investment was further written down on the financial statements to December 31, 2006, entering a write-down of €81 million to the income statement and bringing the book value per share down to €1.
Valuation of assets deriving from BPI’s investment in the Barilla Group’s plan to acquire Kamps and Harry’s
The Gruppo Banca Popolare Italiana, along with other financial partners, provided the Barilla Group with support for its project of international expansion in the bakery sector, particularly the process of acquiring the Kamps Group (2002) and the Harry's Group (2003).
31 The Kamps operation took the form of financing provided to the Barilla Group through the acquisition of equity investments and the disbursement of loans. As befitting the different roles played by the financial partners and the industrial partner (Barilla), and in keeping with very common practice in similar operations, the agreements provided for a “way out” clause in favour of the financial partners. Specifically, the financial partners have a put option entitling them to sell the Barilla Group all shares held by all financial partners, whether directly or indirectly, in the various vehicles that control the Kamps Group and the Harry's Group (Bakery Equity SA, Finba Bakery Holding Gmbh, and Finbakery Netherlands BV) should certain events occur, such as the failure of the two companies to obtain a listing within a given period of time. Contractual agreements set the strike price at the value of the investment plus a spread on the Euribor rate. In accordance with the situation described above, these investments were recognised at their historical cost until the financial statements to December 31, 2004. When IAS/IFRS were applied, in the financial statements to December 31, 2005, the equity investments in the Kamps and Harry’s Groups were classified among “available-for-sale assets”, and as such were written down for a total of €42 million in consideration of the difficult financial situation of Kamps, which became more evident in the second half of 2005, as well as the difficulties in the management of the company by the Barilla Group, as indicated by the repeated changes in the top management of the German group. In the light of the deterioration of relations with the counterparty, and with the assistance of the consulting firm Tamburi & Associati, who conducted a specific assessment, the Directors, although they considered all contractual clauses with the Barilla Group to be valid, decided nonetheless to account for the significant devaluation of the Kamps Group. In the financial statements to December 31, 2005, in keeping with the treatment of equity investments and the consultants’ opinions, the financing provided to the Kamps Group through a foundation incorporated in Holland, classified among “customer loans”, was written down for a total of €97 million. In April 2006, in a further sign of the deteriorating state of relations between the financial and industrial partners, Barilla Holding S.p.A. disputed certain aspects of the established contractual agreements, specifically the efficacy of the put option. Later in 2006, BPI and the Barilla Group initiated a series of legal proceedings in court and through arbitration concerning the interpretation of the contractual agreements between the parties and the accounting treatment to be applied to the transaction. More specifically, BPI initiated the arbitration procedure set out in the agreements entered into with Barilla with the aim of establishing the validity of the put option and the occurrence of the conditions upon which the latter was contingent according to the agreements in effect, including the possibility that business mismanagement had occurred. The Barilla Group, in addition to opposing BPI in the arbitration procedure, initiated two separate legal proceedings: (i) contestation of financial statements (Court of Lodi, General Ledger No. 2648 of 2006), in which the applicant petitions that the shareholders’ resolution approving BPI’s 2005 statutory financial statements be declared without effect and that BPI’s 2005 consolidated financial statements be declared in violation of the regulations governing the criteria for the preparation thereof due to alleged defects in the criteria adopted by BPI in its accounting treatment of its shareholdings in Kamps and Harry’s, and, by way of subordinate request, that BPI be ordered to compensate the applicant for damages (to be settled in a separate proceeding) in accordance with articles 2377 and 2043 and/or 2049 of the Italian Civil Code; and (ii) a lawsuit aimed at establishing the invalidity and inefficacy of the arbitration clauses contained by the contractual agreements governing the acquisition of Kamps and Harry's. The bank, with the assistance of its legal counsel, convinced that the counterparty’s claims were utterly unfounded, took legal action, lodging well-argued statements of defence with the various courts of jurisdiction, as well as legally contesting the Barilla Group's conduct, as appropriate.
32 In preparing its quarterly report through September 30, 2006, BPI decided that it did not run any risk of incurring further losses beyond those disclosed in the financial statements through December 31, 2005, although it had continued to write down all interest on the sums owed to it due to the situation of conflict described above.
The Board of Directors, in the light of the events described in the preceding paragraphs concerning the relations between the industrial and financial partners and the further deterioration of the financial condition of the companies Kamps and Harry's, has continued to investigate and assess the situation in further detail as appropriate, thoroughly analysing the series of dealings with the Barilla Group in connection with the Kamps operation.
The detailed evaluations conducted by the directors, borne out by the updated version of the assessment prepared by the consulting firm Tamburi & Associati, led to the adoption of the evaluation parameters arising from the development of a situation deemed more appropriate in prudential terms, which calls for obtaining a listing for the two companies on a leading international stock exchange between January 1, 2010 and July 31, 2010, while continuing to assert the validity of the put option for the financial partners, and consequently the concrete possibility of exercising the put option from January 1, 2008 (indicatively), or at the very least from August 1, 2010.
The debt and equity assets deriving from BPI’s participation in the Barilla Group's plan to acquire Kamps and Harry's were evaluated collectively; likewise, the amounts written down and set aside as reserves in the financial statements through December 31, 2006 were allocated proportionally and homogeneously among the various assets.
It should be noted that the fair value assessments provided by the consulting firm and prepared by the Directors were obtained (i) using estimates for years subsequent to 2006 on the basis of projections calling for a dramatic recovery of profitability and significant improvement in the operating companies’ earnings and financial position over the budget estimates through the completion of a specific turnaround process by the industrial partner over the following three- year period (the industrial partner had indicated that such a process was already underway); (ii) supposing that operating companies will obtain a better valuation from the market during their IPOs given the growth trend to which the restructuring plan is projected to give rise; and (iii) supposing, lastly, that BPI will not sell its investments during the IPO, but will instead keep them for an additional two or three years in order to await any further revaluation of the assets in question.
In further detail, the value of the equity investments in Finba Bakery Holding Gmbh, Bakery Equity Lux SA and FInbakery Netherlands BV, recorded in the financial statements through December 31, 2005 at a total of €93 million, net of write-downs totalling €42 million, is largely in line with BPI’s stake in the possible value of discounted economic capital through December 31, 2006 attributed to the industrial assets underlying Kamps and Harry’s. The possible value of economic capital was estimated by the consulting firm Tamburi & Associates, which, in spite of the various considerations and critical issues discussed in their analysis, provided a minimum value of €85 million and a maximum value of €97 million, to which the directors referred by situating their position within this range. Consequently, in preparing the 2006 financial statements, the equity investments were not written down, but rather maintained at their book value of €93 million. The amount of the sums claimed from the Dutch foundation is also in line with the fair value indicated by the consulting firm as the possible "capacity" deriving from the sale of the assets in the foundation's portfolio. In fact, the foundation, in order to pay the debt it owes BPI, will be forced to draw on resources deriving from divesting itself of its investment in Bakery Equity Lux, the foundation’s sole asset; consequently, the valuation of this investment, calculated according to the net equity method and adjusted on the basis of the figures from the financial statements through December 31, 2005 (the last approved statements) and on the basis of the valuations conducted under the assumption that the underlying industrial companies will turn their profitability around, represents the benchmark used to assess the foundation’s capacity to pay off
33 its debt. The consulting firm also estimated the possible value of economic capital of this latter asset, for which it provided a minimum value of €323 million and a maximum value of €365 million, to which the directors referred by choosing a value in the middle of this range. When preparing the financial statements through December 31, 2006, the loan was therefore written down by €104 million, reducing the disclosed loan value to €344 million, bringing the item into line with the fair value range established by the consulting firm. Compound interest on the loan according to the agreement totalled €21.9 million for 2006, and was written off in its entirety.
It should also be noted that the Bank expects that it will recover a considerable sum upon the conclusion of pending litigation and arbitration. If its arbitration petitions are granted in full, the possible realisable vale of the assets deriving from the Gruppo BPI’s participation in the Barillla Group's plan to acquire Kamps and Harry's would total €1,036 million. In further detail, the possible value of the equity investments held directly and indirectly by BPI, discounted through December 31, 2006, totalled €223 million, and would lead to the realisation of a total capital gain of €10 million, including €42 million in write-backs to correct previous write-downs, and €88 million in realised capital gains. The possible value of the sum claimed from the foundation, discounted through December 31, 2006, totalled €813 million, and would lead to the realisation of a total capital gain of €469 million, including €201 million in write-backs to correct previous write-downs, and €268 million in realised capital gains. The evaluations conducted by the directors for the purposes of the financial statements, although guided by the criterion of necessary prudence, do not imply that the Bank has ceased to believe in the reasons that led it to undertake arbitration proceedings against the Barilla Group in the interest of asserting and enforcing its contractual rights to exit from the investments as described above.
34 THE ROAD TOWARDS THE MERGER
Start of the assessment of the merger proposals
In the summer months, the Bank received expressions of interest for potential mergers with other banks.
On August 2, 2006, the Board of Directors emphasised that its priority was to continue independently in accordance with the 2006-2009 business plan. However, in view of the market situation, the Board decided to commission both Mediobanca and Rothschild to provide a comparative assessment of the prospects for continuing along the road of independence compared with the potential mergers with other cooperative banks. The aim of the Board's decision was to ascertain whether the conditions existed for implementing a project that was appropriate for BPI. The task entrusted to the advisors, which involved exclusively exploratory duties, was to prepare a comparative analysis of the industrial, organisational and administrative structures relating to the potential mergers with BPER, BPM and BPVN, subsequently enlarged to include BPU. On August 31, 2006, the Board of Directors examined the first results of the business plan currently being implemented and started to examine the bids made by BPER, BPM and BPVN, as well as the bid received subsequently from BPU, in the analyses prepared by the advisors. At that time the Board of Directors appointed the Chairman and Chief Executive Officer to assess the compatibility and synergies of these bids with the Gruppo BPI's strategic development. The Board of Directors also decided to call on the assistance of legal experts in order to look into the issue of the interests of the local area and shareholders being represented in the possible governance configurations being considered.
Development of the merger process and the choice of the bid made by Gruppo Banco Popolare di Verona e Novara
On October 4, 2006, the Board of Directors of BPI, with the help of the advisors, examined the information supplied by each of the banks (BPER, BPM, BPVN and BPU). At the end of the meeting, the Board decided to ask Banco Popolare di Verona e Novara and Banca Popolare dell'Emilia Romagna to each submit a binding offer. To this end, the Board authorised the Chairman and Chief Executive Officer to hold technical and information meetings immediately and separately with representatives of the above banks, whilst observing strict confidentiality and equal treatment, in order to provide these banks with the information that, in the Board's opinion, is important in making a final assessment of the proposed merger. In particular, the Board indicated that reference must be made to the development of BPI and to the specific capacity to implement the business plan and achieve the respective synergies, all whilst ensuring that the interests of the local area and shareholders are fully represented, by adopting a shared governance. Finally, on October 15, 2006, the Board of Directors of Banca Popolare Italiana decided to accept the bid submitted by Banco Popolare di Verona e Novara Scarl for the merger of the two banking groups. The merger, which was approved by the respective shareholders’ meetings in March 2007, will take place between the two parent banks and a new listed bank holding company in the form of a cooperative company will be established. On November 1, 2006, the Board of Directors of Banca Popolare Italiana approved the text of the Memorandum of Understanding between BPI and Banco Popolare di Verona e Novara.
On December 13, 2006, the Boards of Directors of Banca Popolare Italiana (BPI) and Banco Popolare di Verona e Novara (BPVN) approved the proposed merger of the two banks.
35 At the simultaneous meetings held on December 19, 2006, the Boards of Directors of BPI and BPVN approved the text of the Articles of Association of Banco Popolare, which the Extraordinary Shareholders’ Meeting held on March 10, 2007 then confirmed by approving the proposed merger.
Characteristics of the proposed merger with BPVN The bank that will be created from the merger will be the largest cooperative bank in Italy in terms of size and market capitalisation and will head the third-largest Banking Group in Italy in terms of number of branches and fourth-largest in terms of market capitalisation (€15.5 billion excluding synergies), with over 3 million customers. The new bank will be called BANCO POPOLARE Soc. Coop. The geographical complementarity and the "close-knit" distribution networks will allow the newly- formed entity to substantially dominate the region, with major synergies in terms of revenue and development of capacity to offer services, whilst also leveraging the excellence of its product companies. The new Group - on the basis of the proforma figures to June 30, 2006 - will have 2,183 branches (holding market share of 9% in Lombardy, Veneto and Piedmont, over 12% in Tuscany, 7.3% in Emilia and 13.7% in Liguria), total assets of €111 billion, customer loans of €72 billion (5th-largest in Italy), direct deposits of €73 billion (5th-largest in Italy), assets under management of €48 billion (4th-largest in Italy), consumer credit volumes (including associates) of €1.8 billion (4th- largest in Italy). Net non-performing loans will account for 1.14% of loans. In all of these indicators, the Group will be the largest of the Cooperative Banks. The degree of capitalisation will be entirely adequate, especially considering the splitting of the risks that arises from the clear predominance of retail customers and small businesses in the new Group. Furthermore, the new Group will feature a finely tuned capital management policy aimed at optimising its capital profile. The strategic plans of both banks aim to consolidate their regional presence, maximise customer satisfaction and optimise the cost-income ratio. The network models and customer segmentation are similar. The merger involves, in particular, the following stages.
• Before the merger, but within the same process, BPI and BPVN will spin off the respective banks into wholly owned joint-stock companies, which, as a result of the merger, will become subsidiaries of the Parent Bank.
• The exchange ratio is set at 0.43 shares of the new bank holding company for each BPI share and 1 share of the new bank holding company for each BPVN share.
• BPI shareholders will receive an extraordinary dividend in a total amount of €1.5 billion (equivalent to €2.17 per share) deriving from the distribution of part of the share premium reserve. • All shareholders properly entered into the shareholders’ ledgers of BPI and BPVN will be entered into the shareholders’ ledger of the holding company by effect of the merger with full administrative rights. • The ordinary shareholders’ meetings called to approve the allocation of profit for the year and appoint the members of the Supervisory Board will be held alternately in Lodi and Verona.
• The new bank holding company will maintain its registered offices in Verona and will have branches in Lodi and Verona. Verona is to host the holding company’s executive offices, the Retail Division, and the Operating Division; Lodi will be home to the Corporate Division
36 (including the offices of Nuova Efibanca) and the Finance Division, and Novara will host the Specialised Outside Networks and Online Banking. • The new banking group will rely on a dual governance system comprising a Supervisory Board and a Management Board, which, along with the Shareholders’ Meeting, will be the top management bodies.
• The Supervisory Board, in addition to its legal duties, will be responsible for the approval of business plans and the main extraordinary transactions; once fully operational, it will have 20 members, of which 8 will come from the BPI area and 12 from the BPVN area. In order to acknowledge regional presences, 5 members must be resident in Lodi province, 5 in Verona province and 3 in Novara province. • The Management Board will consist of 12 members, of which at least two-thirds will be chosen from the new group's managers and one-fourth will be independent.
• BPVN has proposed Carlo Fratta Pasini as Chairman of the Supervisory Board and Maurizio Comoli as Deputy Chairman. BPI has proposed Dino Piero Giarda as Senior Deputy Chairman of the Supervisory Board and Divo Gronchi as Chairman of the Management Board. • The other members of the Supervisory Board will be as follows: Marco Boroli, Giuliano Buffelli, Guido Castellotti, Pietro Manzonetto, Maurizio Marino, Mario Minoja, and Claudio Rangoni Machiavelli. • Fabio Innocenzi, current Chief Executive Officer of BPVN, will be appointed as Chief Executive Officer of the Management Board. Franco Baronio, current General Manager of BPI, and Massimo Minolfi, current General Manager of BPVN, will occupy the positions of General Managers with responsibilities for the Retail and Corporate areas of the new Banco Popolare, respectively.
Local strategy and presence Banco Popolare plans to create a corporate structure and corporate governance system aimed at achieving the following goals:
• reconciling the need for closely-knit management and governance with the need to represent the original components within the bank resulting from the merger and with the principles of economic democracy for which the cooperative bank model is known; • maintaining the original cooperative framework while developing mutualistic relationships with customers and encouraging local presence in the respective areas of opportunity; these qualities will be combined with increased efficiency of the distribution processes and a shared business plan geared towards innovation and a market orientation. The strategy of the newly formed Banco Popolare will leverage the development of traditional core business, exploiting the geographical complementarity of the distribution networks, with a strong local presence, and the excellence of the product companies, allowing for the generation of greater revenue synergies than cost synergies for the first time in a bank consolidation process.
The “Banca delle Piazza” strategy, which is shared by the two Groups, is based on a local presence, and will further support growth in the retail and small and medium-size company segments.
The ambitious objectives set in the 2007-2010 Business Plan of Banco Popolare will be achieved by leveraging the following points of excellence: • Strength of the distribution network – Banca delle Piazze Strategy • Efficiency and solidity • Business portfolio
37 • Capital management In order to maximise its local presence, the company will dedicate special attention to areas where its main subsidiaries operate and where the network of its operating branches is most highly developed in traditionally served economic areas. With the aim of maintaining a constant commitment to this value, it has been decided that a portion of net profit, up to 7.50%, will be set aside for assistance, charity and socio-economic development of local areas, divided on a geographic basis as follows: • 8/24 to the Fondazione BPI; • 6/24 to the Fondazione Banca Popolare di Novara per il Territorio; • 1/24 to the Fondazione di culto Banco S. Geminiano e S. Prospero; • 9/24 to the Fondazione BP.
The new local joint-stock (S.p.A.) banks The management and control model of the subsidiary banks will be the traditional type. The boards of directors will comprise non-executive members and managers of the new Group. The non-executive members representing the regions will account for at least two thirds of the Directors. In terms of organisational structure, Nuova BPL will have a network comprising 530 branches spread out over its area of historical operation; furthermore, it will control the local banks Banca Popolare di Crema S.p.A., Banca Popolare di Cremona S.p.A., Banca Popolare di Mantova S.p.A. and Banca Caripe S.p.A. The two new banks will operate in considerable autonomy within the framework of the Group's guidelines both in terms of lending procedures and sales policies.
The Board of Directors of Nuova BPL and Nuova BPV-SGSP shall consist of 12 to 16 executive and non-executive members with a three-year term of office. At least two-thirds of the directors shall be chosen from representatives of historical areas of the new BPL and BPVN groups, respectively, and shall not have executive duties. At least one-fourth of the members of the board of Nuova NPL and Nuova BPV-SGSP shall be executive directors. The first non-executive directors of Nuova BPL and Nuova BPV-SGSP shall be chosen and appointed in the deed of incorporation of the banks by the boards of BPI and BPVN, respectively. The executive directors shall be chosen by common agreement. Banca Popolare di Novara S.p.A., Credito Bergamasco S.p.A., and Cassa di Risparmio di Lucca, Pisa e Livorno S.p.A. shall maintain their current offices in Novara, Bergamo, and Lucca, respectively.
38 IMPORTANT DEVELOPMENTS OCCURRING AFTER DECEMBER 31, 2006
Banca d’Italia authorises the proposed merger
On January 26, 2007, Banca d’Italia authorised the merger of the two banks that will lead to the creation of Banco Popolare.
Bancassurance agreements
In order to complete the agreements currently being implemented, Gruppo BPI and Gruppo BPVN, excluding the banks bound by exclusive agreements with the insurance company Aurora, entered into agreements in March 2007 and for 2007: • with Fondiaria SAI for the distribution of life-insurance products (Banca Popolare Italiana for branch III);
• with the English company Aviva for the distribution of non-life policies for credit protection and personal protection products.
The two insurance companies enjoy longstanding positive operating relationships with the two banking groups that have borne highly favourable results.
Ordinary and extraordinary shareholders’ meeting of March 10: approval of the proposed merger with Banco Popolare di Verona e Novara by establishing Banco Popolare As anticipated, the Extraordinary and Ordinary Shareholders’ Meeting of Banca Popolare Italiana held on March 10, 2007, approved the proposed merger of Banca Popolare Italiana and Banco Popolare di Verona e Novara by forming a new listed cooperative company called “Banco Popolare - Società Cooperativa”. The resolution was passed with 4,441 votes for the measure, 522 votes against it, and 59 abstentions, resulting in a majority greater than that required by the articles of association (two-thirds of non-abstaining voters). In further detail, the proposed merger calls for:
• the assignment of 1 share of the newly formed Banco Popolare with face value of €3.60 to shareholders of Banco Popolare di Verona e Novara per 1 old share held and the assignment of 0.43 shares of the newly formed Banco Popolare with face value of €3.60 each to shareholders of Banca Popolare Italiana per 1 old share with face value of €3.00 held;
• the approval of the articles of association establishing a dualistic administration and control system in accordance with article 2409 octies et seq. of the Italian Civil Code;
• the indication of the following members of the Supervisory Board of the newly-formed Banco Popolare: Carlo Fratta Pasini (Chairman), Dino Piero Giarda (Senior Deputy Chairman), Maurizio Comoli (Deputy Chairman); Marco Boroli, Giuliano Buffelli, Guido Castellotti, Pietro Manzonetto, Maurizio Marino, Mario Minoja, and Claudio Rangoni Machiavelli (directors); • with regard to the Management Board, the indication that Mr. Divo Gronchi will be appointed Chairman and Mr. Fabio Innocenzi Managing Director; the other members of the Management Board will be indicated in the deed of merger and will include the current general managers of Banca Popolare Italiana and Banco Popolare di Verona e Novara, Mr. Franco Baronio and Mr. Massimo Minolfi;
• the appointment of the auditing firm Reconta Ernst & Young S.p.A. as the independent auditors for the first nine financial years of the newly-formed Banco Popolare;
39 • the application for admission to listing of Banco Popolare stock on the stock exchange, along with convertible bonds and warrants for ordinary shares already issued by Banca Popolare Italiana, whose obligations will be assumed by the newly formed Banco Popolare by effect of the merger.
The Shareholders’ Meeting also approved the other business on the agenda, all of which concerned the proposed merger. In particular: • the extraordinary session approved the annulment of the resolution indicated in item 5 on the agenda for the extraordinary Meeting of the Bank’s shareholders held on March 3, 2003 (as amended by the extraordinary Meeting held on June 2, 2005) concerning the issue of subordinated convertible bonds with a total par value of no more than €1.5 billion and concurrent increase of capital stock to service the conversion of bonds;
• the ordinary session approved the extraordinary allocation of part of the share premium reserve up to a maximum of €1,521,000,000 (€2.17 per each BPI share), excluding treasury shares held by BPI, resulting in the distribution of an amount determined in accordance with article 7 of the bond issue regulations for the 2000-2010 4.75% convertible bond loan (CBL), ISIN IT0001444360 to the bondholders, within the limit of the above overall total. The resolution authorising extraordinary allocation is (i) contingent upon the establishment and certification by the Board of Directors of Banca Popolare Italiana that as at June 30, 2007 no negative events had occurred such as to have an impact on the amount of the reserves to be distributed and prevent the distribution to BPI shareholders and the CBL bondholders to the extent approved, and (ii) contingent upon the execution of the Merger; • the ordinary session also approved the authorisation to acquire a maximum of 37,000,000 ordinary shares of BPI stock, representing around 5.4% of the latter's share capital, as part of the Merger process, within the limits and according to the methods established by the law. The authorisation to acquire the shares will enter into effect concurrent with the Merger. Any shares that are acquired under the above resolution shall be cancelled without exchange as part of the merger; • the extraordinary session also approved a management and staff incentive programme. This programme calls for the Management Board of Banco Popolare to receive authorisation to acquire a maximum of 660,000 ordinary shares of Banco Popolare stock representing 0.10% of share capital while complying with the limits set by article 2357, subsection 1, of the Civil Code. Any treasury shares acquired under the programme may be used by the Management Board for the purposes of incentive programmes aimed at rewarding executive directors, managers and employees of Banco Popolare and its subsidiaries (largely those who are not already covered by the current stock option programme) by free assignment of the shares to said personnel. The loyalty and incentive programme aims to support the integration of management with a “team” mentality, establish a relationship between the overall economic compensation for upper management positions and the appreciation of the stock on the market and the value of Banco Popolare and the new group over the long term, and, lastly, increase retention of key personnel by decreasing the propensity of valued staff members to resign from the new group. The minimum price at which the acquisition may be executed was determined to be the face value of ordinary shares of Banco Popolare stock (€3.60 per share); the maximum price is the average trading price of the stock at the end of the three days of trading prior to each individual purchase, plus a maximum of 15%.
Sale of investments
40 On February 27, 2007, the subsidiary Efibanca closed the sale of the entirety of its investment (20%) in the share capital of the affiliate IGLI S.p.A. for a price of €38.3 million, realising a capital gain of €14.3 million. Furthermore, on March 13, 2007, Efibanca sold its entire equity investment in Generale de Santé (4,292,680 shares or 8% of share capital) for the price of €32.5 per share, realising a total capital gain of €77.1 million.
New limits of the Finance Division
At the meeting held on March 21, 2007, the Board of Directors approved a new proposal setting operating limits in relation to market risk in line with the regulations provided by the Supervisory Board. The purpose of this change was to permit monitoring of the ordinary operations of the Finance Division and to provide adequate oversight of market risk, ensuring that it is always kept within proper and sustainable levels. In this connection, a complex system of authorisations has been defined to cover the Trading Room to replace the current temporary limit of a total of €10 million of VaR (limited to the bond, listed equity, and money market segments only) for the Finance Division, established on October 27, 2005 and followed since, despite particularly significant operational and management risks in terms of both total value and VaR. At a preliminary stage, the Board of Directors had passed a resolution on February 15, 2007, establishing limit structures for “Country Risk” and “Credit Risk”.
41 BUSINESS OUTLOOK
The larger economic scenario seems destined to show across-the-board improvement in the growth trends of the various business segments, which have already allowed Italy to outperform expectations in the first few months of 2007. Turning to official interest rates, a pause in the series of adjustments carried out by the European Central Bank seems likely to follow on the moderate rate increases planned for the first few months of the year.
On the whole, this economic scenario should create positive conditions for the lending market in terms of the overall net interest income profile, whilst the share of revenues from services may be reduced by increasing competitive pressure, especially on retail markets. As anticipated above, the approval by the two Shareholders' Meetings on March 10, 2007 formally fulfilled the conditions for the establishment of Banco Popolare, which will lead to the creation of Italy’s largest cooperative banking group. On the basis of combined financial statement figures through September 30, 2006, Banco Popolare: • will occupy third place among Italy’s distribution networks, with around 2,200 branches and a market share of 10% in North Italy; • will have a total customer portfolio of more than 3 million customers, mainly families and small/medium companies from North Italy; • will draw on €79 billion in direct customer deposits, €107 billion in indirect deposits, and €74 billion in loans.
The subsequent stages of the business combination plan involve: • filing an application for admission to listing of the financial instruments of the newly formed Banco Popolare on a schedule suitable to ensure the start of trading of listed securities without interruption when the merger is closed; • signing the merger deed by June 30, 2007 and registration by July 1, 2007;
• payment by the newly formed Banco Popolare of an extraordinary dividend to the shareholders of the former BPI, with an indicative value date of July 5, 2007, in execution of the aforementioned resolution concerning the distribution of the share premium reserve and contingent upon the fulfilment of the conditions listed above.
Immediately before the merger takes effect, the business divisions of Banca Popolare di Verona - S. Geminiano e S. Prospero S.p.A. and Banca Popolare di Lodi S.p.A. will be transferred. Work towards the integration of the two groups continues in a number of areas; part of this process involves bringing the IT system of Gruppo BPI into line with the target system of Gruppo Banco Popolare di Verona e Novara. The switch will be made on one separate occasion for each bank through an “on-off” procedure substantially resembling past processes. Immediately following the summer months, a pilot bank, Banca Popolare di Crema, will carry out migration in order to complete all of the relevant procedures; the newly formed Banca Popolare di Lodi S.p.A. is scheduled to adopt this system by the end of 2007.
42 STRUCTURE OF GRUPPO BANCA POPOLARE ITALIANA
HUMAN RESOURCES
At Group level, the total number of employees as at December 31, 2006 was 8,636. Compared with the end of the previous year, when the workforce totalled 8,598, the net change is therefore an increase of 38 employees. Considering the effects of the disposals of corporate assets that occurred in the reporting period or are currently closing, involving Bipielle.Net, Bipielle Previdenza Assicurativa, S.R.T. Lucca e Cremona, Area Life, and Bipielle Leasing, human resources totalled 8,579 at the end of 2006, compared with 8,384 at the end of 2005 for the same corporate perimeter, resulting in an increase of 195 employees. During 2006, 475 employees left the group (of which 104 were admitted to the Solidarity Fund or pensioned). A total of 630 employees were hired (mainly by the Parent Bank, Bipitalia Ducato, and CR Lucca Pisa Livorno, which added 292, 119, and 103 new staff members, respectively), partly with the aim of enhancing and supporting the new network model. Rationalisation and reorganisation processes affected some group companies following on intercompany transfers and/or outside hirings in connection with incoming employees due to the exchange of branches with BPVN (93 staff members). The most significant events that occurred in 2006, mainly related to the innovation of the network organisation model and the definition of a new central office organisation, involved: • Updating skills present in the Group
• Hiring and transferring personnel
• Establishing the Award and Recognition Committee
• 2006 Bipitalia Incentive Programme – Network • Evaluation system
• Labour union agreements
Skills update During 2006, skills were updated in two areas (specialist knowledge and professional aptitudes), the first time in February and March, and the second time in August and September.
This survey involved the companies that use the SR2000 System (Banca Popolare Italiana, Cassa di Risparmio di Lucca Pisa Livorno, Banca Popolare di Crema, Banca Popolare di Cremona, Banca Popolare di Mantova, and Banca Valori) and covered a total of 6,600 employees, allowing the Group to update its figures concerning its human resource assets.
This project was of crucial importance to making the right decisions as to which personnel to assign to the roles introduced as part of the new network organisational model (District Manager, Credit Manager, Corporate Manager, Affluent Customer Management, and Small Business Manager) and to create appropriate training processes in order to fill any resulting gaps. In this connection, an ad hoc training programme was launched in the second half of 2006 geared towards the more than 600 newly selected and appointed managers. Given the significance of their role, the selection process for District Managers, on the other hand, involved specific assessment days (or Development Center Days) held in collaboration with a consulting firm, during which 141 Group managers (102 from Banca Popolare Italiana) had the chance to establish their skill levels through a personalised feedback system.
43 An additional assessment process was launched in collaboration with the consulting firm Egon Zehnder, also providing personalised feedback, and involving around 60 top managers from the branches and central offices.
Staff recruitment and transfer
Because of the organisational innovations involving the Network and the companies’ Group Head Office we have had to improve the structures by taking on a significant number of new staff, especially at Banca Popolare Italiana (292 out of a total of 630).
Recruitment became necessary because we needed either to readjust the structures to the scheduled growth in numbers or add on the professions needed for the new Network model. As a result, recruitment was equally distributed between junior staff (299 on work introduction, apprenticeship and fixed-term contracts, 158 in BPI) and senior profiles (331 jobs, 134 in BPI). Most of the new recruitment was in the Network structures (424 out of 630, of which 201 in BPI) and the regions where the Group has its historic roots (224 in Lombardy, including 43 in Lodi, Province, 143 in Tuscany). This recruitment, in conjunction with the new professional opportunities offered by the new Head Office and Network structure, contributed to numerous transfers, involving about 4400 people at Group level, including 2400 at Banca Popolare Italiana.
Setting up the Rewards and Awards Committee
In July, the first meeting of the Rewards and Awards Committee was held to analyse and discuss the proposals for recognition put forward by the company divisions. This Committee was set up for the following purposes: • To ensure the efficiency and objectivity of the method used to propose and discuss staff awards, selecting a specific and particular period in the year.
• To ensure that the award proposals reflect company budgets.
• To analyse and assess the recognition proposals in order to identify a priority rating in a clear and transparent way.
Bipitalia Incentive 2006 - Network
The Network incentive system has been radically changed. The following new Guidelines have been defined to implement the new organisational model adopted: • Single system: all the rewards for individual commercial initiatives, previously managed outside the system, have been brought back into it. • Increase in access possibilities through the duplication of the Basic System, identifying economic performance alone, and the Top Performer system, identifying quantitative and qualitative economic performances.
• Increase in the number of Subsidiaries participating in the System through its extension to Banca Popolare di Cremona e Caripe.
Assessment system
As from 2006, the Professional Assessment System is based on policies that are more in line with the new organisational structure.
44 In particular, Group employees have been divided into 20 Professional Groups, with each one traceable to one of the roles identified within the reorganisation of the Network and Head Office. Objectives/assessment scales are used to determine membership of a Professional Group, based on results, quality, relationships and staff management, as well as improvement objectives in terms of skills/specialist knowledge and attitudes. The company issues its professional opinion each year following an assessment by the heads of human resources on the basis of the objectives indicated above.
Union agreements
In the course of 2006, a total of 36 agreements were signed with the Unions by both the Parent Bank and the Group companies. The main agreement related to the merger of Cassa di Risparmio di Pisa and Cassa di Risparmiio di Livorno into Cassa di Risparmio di Lucca, involving a total of about 1700 staff, which went through with no labour disputes. Another agreement relating to the sale and acquisition of branches between the Banca Popolare Italiana Group and the BPVN Group, which involved a smaller number of resources (166 in all), but which was particularly complex given the involvement of 5 companies governed by very different regulations.
THE DISTRIBUTION NETWORK Bank branches 31/12/2006 31/12/2005 Change Banca Popolare Italiana 539 586 - 47 Banca Popolare di Mantova 8 8 Cassa di Risparmio di Lucca Pisa Livorno 244 203 + 41 Banca Popolare di Crema 44 44 Banca Popolare di Cremona 73 76 - 3 Banca Valori 1 1 Banca Caripe 56 50 + 6 Reti Bancarie 1 - 1 Efibanca 6 7 - 1 Banca Bipielle.Net 1 - 1 Bipielle Bank (Suisse) 1 1 London Branch 1 1 TOTAL 973 979 - 6
Including treasury and cash branches (°) Il figure at 31.12.2005 represents the Cassa di Risparmio di Lucca, Cassa di Risparmio di Pisa, and Cassa di Risparmi di Livorno.
On 31 December 2006, there were a total of 973 bank branches, as against 979 in December 2005. The removal of 6 units was due to a comprehensive internal restructuring trend in the distribution of the operating outlets for each bank, as summarised below. For the Parent Bank, BPI, a reduction of 47 branches due to:
• the sale of the 26 branches of the former Area Toscana to Cassa di Risparmio di Lucca Pisa Livorno; closure of the Milan branches; • the closure of 8 branches (Milan 12 br., Bronte 1, Godrano, Erbusco, Catania Ospedale, Sigonella Aeroporto, Mazara del Vallo, Siracusa Ospedale), for 3 of which (Milan. 12 br.,
45 Bronte 1, Mazara del Vallo), the banking concession was used for the opening of the Cassa di Risparmio di Lucca Pisa Livorno; • the opening of the Milano Fiera; branch;
• acquisition of the incorporated Reti Bancarie [Banking Networks] branch, in Rome; • the branch swap with Banco Popolare Verona e Novara, previously described, which included the sale of 18 branches located in Trentino (four in Trento, Ala, Arco, Borgo Valsugana, Canazei, Cavalese, Cles, Malè, Mezzolombardo, Pergine Valsugana, Pinzolo, Predazzo, Riva del Garda, Rovereto, Tione di Trento) and the acquisition of the Cassino, Formia and Civitavecchia subsidiaries.
Cassa di Risparmio di Lucca Pisa Livorno: as compared with the situation in December 2005 (when the Casse di Pisa e Livorno were still in existence), there was a total increase of 41 operating outlets: • 26 were branches sold by Banca Popolare Italiana;
• 11 resulted from the swap with Banco Popolare di Verona e Novara (Cecina, Amelia, Arezzo, Ferentillo, Lugnano in Teverina, Montevarchi, Sangemini, 2 in Terni, Empoli, Marina di Carrara); • 3 openings with concessions from branches closed by BPI: Chianciano Terme, Foligno and Cortona; • the opening of the Casciana Terme branch. Banca Popolare di Cremona has lost three operating outlets due to the closure of the cash and treasury branches in Cingia de Botti and Celle Dati and the Matignana subsidiary.
The Banca Caripe distribution network has seen an increase of 6 units: • 4 branches as a result of the swap operation with Banco Popolare di Verona e Novara;
• 2 branches due to the opening of the cash and treasury branches in Collecorvino and Chieti, at the Local Health Authority. Finally, Efibanca’s Lucca branch has closed down, as has the Bipielle.Net branch (company in the process of divestment) and the Reti Bancarie branch, following its incorporation into BPI.
OPERATIONS ON FINANCIAL MARKETS
In the course of 2006, the qualitative-quantitative characteristics of the ownership portfolio regained a more consistent and appropriate risk-return profile for the remit of a commercial bank with the cooperative structure of Banca Popolare Italiana. After the gradual liquidation of particularly risky complex financial products, special attention was paid to selecting the portfolio’s asset allocation. This process was particularly profitable during the whole of 2006: a total return approach to portfolio management led to positive results, independent of market performance. In particular, our over-exposure to the equity market enabled us to fully exploit the upward trend of the global markets, while our under-exposure to fixed rates ensured that we maintained capital in an environment in which central banks were aiming for an increase in interest rates. In addition, both equity and bond trading constantly guaranteed positive returns without increasing results volatility. Trading on behalf of our customers satisfied the Network’s requirements by placing UCI - Ascopiave, Cobra, Gas Plus, Banca Generali, Poltrona Frau, Elica, Polynt, Piaggio, Api, Value Partners, Bolzoni, Pierrel, Saras, Eems Italia, Ansaldo Sts, Marazzi –, Certificates - Pepp Telecom e Twin Win DJ EStoxx50 – and certain bonds issued by third parties – Banca Italease Tv 15/5/2011,
46 Merrill Lynch TV 5/10/2014. Furthermore, the creation of Paniere Operazioni Pct rationalised and simplified futures trading for customers in both gross and net terms.
The ALM Division was particularly committed to managing out-of-the-ordinary finance operations that the Establishment had put in place in 2005. The three warehouse programmes undertaken the previous year through the sale of residential and commercial mortgages and consumer credit were totally restructured; it should be emphasised that the financial counterparty was replaced by various primary credit establishments, which provided far cheaper portfolio finance than did the previous one. We then completed the securitisation of consumer credit, taking the operation onto the market and placing asset-backed securities with institutional investors at historically low spread levels for our Group. The whole operation was organised by the ALM Division Capital Management team. As regards the operating ALM, in the short term we will be issuing application ALMPRO3 to support of the ALM management processes. In 2006, the ALM Division was heavily involved in implementing the regulations set out in the legislation relating to the issue and placing of Group debenture loans. In 2006, the Global Relationship Management business carried out by the Financial Institution Unit, an in-staff unit within the Finance Division, continued for the BPI Group institutional counterparties. In this context, particular attention has been paid to external communication operations, intended to keep the counterparties duly updated on the reorganisation and the new operating strategy introduced by BPI; information has been extended to the counterparty’s credit analysts as well, in order to maintain and increase the credit lines granted to our Group. At the same time, we intensified inter-bank marketing activities, in order to select international banking products and services that are more likely to satisfy the requirements of BPI Group’s corporate and retail customers.
CASH AND TREASURY SERVICES OF PUBLIC BODIES
As already described, in the course of 2006, the acquired company, Bipielle Riscossioni SpA (subsequently called S.R.T. Lucca e Cremona SpA) was sold to Riscossioni SpA, as part of the process of withdrawing the current system of concession for the national collection service, as provided for by law. Following this, as from June 2006, the activities of the Cash and Treasury Services Division were brought back into the Parent Company’s Internal Office Department. During the year, a total of about 3,400,000 operations were carried out, with income and expenditure flows worth more than € 21,000 million. At the end of 2006, a total of 952 Entities were managed directly by the various Group banks (Regions, Provinces, Districts, National Health Service, Schools and others), distributed as follows: Banca Popolare Italiana 409; Banca Popolare di Crema: 42; Banca Popolare di Mantova: 7; Banca Popolare di Cremona: 61; Cassa di Risparmio di Lucca Pisa Livorno: 329; Banca Caripe: 104. During the year, the Group banks participated in 280 tenders for the allocation of the services in question. In detail, Banca Popolare Italiana participated in 124 tenders, Banca Popolare Crema in 5 tenders, Banca Popolare Cremona in 25 tenders, Banca Popolare Mantova in 3 ; Cassa Di Risparmio di Lucca Pisa Livorno in 82 and Banca Caripe in 41. After completing a trial for the Siope project promoted by Banca d’Italia on behalf of the Ministry of the Economy and Finance in 2005 (a project in which the Group participated with 7 entities managed at international level), as from the start of 2006 the on-line monitoring system of Public Entities’ accounts was applied to 34 managed Entities (provinces, municipalities with a population of over 20,000 inhabitants, universities); as from 1/1/2007 this monitoring system was extended to a further 257 managed municipalities.
During 2006, operations for the introduction of the IT digital signature system continued, with the specific objective of reducing data entry costs for accounting documents generated by managed
47 entities. In October 2006, to conclude a complex procedure, the ARTEA (Regional Tuscan Agency for Agricultural Allocations) IT system was finally activated; subsequently, the Cremona and Seriate Municipalities’ systems were activated in January 2007; two further activations are scheduled over the next few months, for Pescara Province (April 2007) and the University of Pisa (June 2007). Overall about twenty entities will be activated in 2007. During the year, specialised seminars will be organised in Lodi, Lucca, Chiavari and Pescara to provide managed entities with information on this fundamental technological innovation. It should also be remembered, as mentioned in the section on Process Innovations, that in December work started with the U.F Quality System and with an external consultant on a “Quality Management System” to promote a process for the constant improvement of our services and it was decided to validate its compliance with voluntary standard UNI EN ISO 9001/2000; at the end of the procedure (scheduled for May 2007) the “Management of the Cash and Treasury Services” will be the first procedure in the Banca Popolare Italiana Group to obtain an ISO 9001/2000 quality certificate.
RISK MANAGEMENT AND CONTROL SYSTEM
Internal control system and the auditing division In 2006, the internal control system was involved in a variety of strengthening actions as part of the comprehensive response to requirements that emerged from serious problems that arose in 2005 and in compliance with the instructions issued by the Supervisory Board.
The parties involved in these initiatives were corporate governance bodies, the risk management divisions and the line structures responsible for first level controls and internal auditing. In the BPI Group, internal auditing is conducted by the Controls Division, which is responsible for supervising the correct performance of the network’s operations and corporate procedures and also for evaluating the functionality of the whole system of internal controls for protection against risks.
In 2006, the Auditing and Internal Control Division undertook some internal reorganisation, mainly to increase the efficiency of its auditing of the central structures and processes, including:
• revision of the organisation model, in the context of the new BPI General Regulations, defined the four divisions dedicated to and specialising in the network, the central structures, property and financial activities and strategic auditing;
• the development of the quality and quantity of the human resources, with the arrival of parties with specific skills in finance and central processes, in addition to the human resources already in the company; • revision and update of support methodologies and instruments, with the introduction of specific projects. The Controls Division has also taken part in significant company-wide projects to improve the entire system of internal controls, such as the creation of the new “Organisation, management and control model” to control the risk of crime as defined in Legislative Decree 231/2001, approved by the Board of Directors’ meeting of 24/01/2007, the mapping of processes, risks and controls in line with a specific application (SIPA) and acceptance of the internal regulations on market abuse.
In the course of 2006, the Auditing and Internal Control Department continued to audit the serious irregularities that emerged in BPI in 2005 and to provide relevant support for the Bank’s Supervisory and Administrative and Audit Bodies and external lawyers, enabling us to put in place a series of initiatives to identify internal and external responsibilities and to legally protect the bank in civil and criminal terms.
48 We also carried out ordinary audits, planned and approved by the Board of Directors, of interest to the various corporate environments, for the branch network, the central structures and company procedures and the management audit activities. The controls directly involved the Parent company and certain associated companies, for which there is now an internal audit service contract and/or the control function pursuant to Consob Regulation No. 11522/98; for the other Group companies, we carried out an operation to coordinate and control local auditing functions and also certain direct audit operations in our capacity as the Parent Bank.
Appropriate corrective action and subsequent follow-up inspections have been arranged to remedy any identified failings, after notification of the competent divisions. In BPI, in particular, the activities of the Controls Division, together with the valuable work of the Banca d’Italia and the decisive contribution of the new Administrative and Control Bodies, have helped to reveal persistent problems and the Bank has defined and set up a comprehensive system of change and improvement plans to solve them.
The Board of Directors, Senior Management, the Audit Committee, the Internal Controls Committee and the Supervisory Body are kept regularly informed of the results of the activity of the Controls Division, pursuant to Legislative Decree No. 231/2001.
Market, interest rate and liquidity risk.
The Risk Management Division measures market risk for management purposes, using an internal model based on Value at Risk (VaR), estimating the maximum loss in value that the proprietary portfolio may see in one day, with a 99% confidence interval, when faced with unexpected fluctuations in interest and exchange rates and equity prices.
The daily results are sent to the Finance Division and, periodically, to the Audit and Internal Control Division and to the Board of Directors. The scheduled procedures will be implemented if these limits are exceeded. While waiting for completion of the implementation project for the new front-office application, the findings are currently being recalculated to measure risk.
Maturity and Sensitivity Analysis methodologies based on Asset & Liability Management (ALM) procedures are used to monitor interest and liquidity risks. This activity is centralised with the Parent Bank and checks compliance with the internal limits system adopted by each company on the instructions of the Parent Bank. During the financial year, verification of the efficiency of the interest rate risk hedges continued, on the basis of the methods set out in the new IAS/IFRS international accounting standards. Section E of the Notes to the Accounts (Information on risks and relevant hedge policies) provides further details of the methodologies used and quantitative information on financial risk profiles.
Credit risk control As part of the operation to align with the Basel 2 requirements for measuring credit risk, in 2006 the BPI Group continued to develop an internal system for measuring risk.
In particular, the activities to assess Loss Given Default (LGD) and Exposure at Default (EaD) models were completed and 2007 will see the start of the activities required for their use in managing the former. Activities for the development of rating models (probability of default) for the companies segment continued in 2006 and were completed in the first few months of the following financial period.
49 Rating models have been developed at the consolidated level to ensure that counterparties to which the banking Group companies are most exposed are processed in the same way. For these models too, the use of estimates in the processes for the granting and renewal of credit has been scheduled for 2007. For prudential purposes, Banca Popolare Italiana, in its capacity as the Parent Bank, taking advantage of the facility provided by the EU standards accepted by the Supervisory Body, has decided to apply the prudential regulations hitherto in force for the whole of 2007 (Basel 1).
Line controls
As examined in depth in the section relating to process innovations, 2006 saw the introduction of a detailed mapping methodology for all company process phases, with particular reference to control points and organisational and functional responsibilities.
New model of organisation, management and control pursuant to Legislative Decree 231/01 After the completion of a comprehensive study and definition project, the Parent Bank has adopted a new “Management and Control Organisation Model” pursuant to Legislative Decree 231/01. The formalisation of the “Model” (drafting and adoption) has been the final act in the accurate mapping of company risks, which has involved all the process owners and the respective Divisions and Central Departments in the Parent Bank in identifying the operations conducted, validating the risks encountered and selecting the control methods and processes. This has enabled the Bank to adopt a “Model”, which, aside from complying with the legislative provisions, acting in accordance with the principles that inspired the legislator, the codes of self- discipline, the recommendations of the Supervisory and Control Authorities, and making its Corporate Governance more effective, will reinforce the control system and make it more relevant, so that it is able to prevent the committing of crimes, as provided for by the legislation.
Code of Ethics
The Parent Bank has adopted an updated version of the Code of Ethics. The Code contains the fundamental ethical principles and rules that must govern the conduct of all those who work in the Bank and in the Group’s other companies, so that their conduct – both within the same company and with third parties and in particular customers, investors and institutional bodies – conforms not only to the law, but also to the basic principles of ethics and honesty, transparency, impartiality and confidentiality.
Market Abuse The Parent company’s Board of Directors has deliberated on the acceptance of the updates of the “Management and Organisation Model” pursuant to Legislative Decree 231/2001, and to the Code of Ethics, intended to introduce the legislative measures to combat market abuse crimes. To ensure that the legislation is immediately and rigorously applied, four new organisational procedures have been introduced (Management of privileged information, Management of communication to the public, Management of suspect operations and Internal dealing) to comply with the obligation: • to set up (for listed issuers and for parties in contact with them) a “Register of persons with access to privileged information”;
50 • to inform the Consob and the public of operations whose purpose relates to shares issued by the issuer and implemented by parties that potentially have access to privileged information and are in a position to take decisions that may influence the activities of the listed issuer (Internal dealing);
• to identify and notify the Consob of operations that, because of particular characteristics and in accordance with criteria indicated by the Consob itself, may be deemed to constitute possible market abuse.
January 2007 saw the introduction of a system to identify operations to be notified, managed by an appropriate IT process.
This innovation makes it possible to comply with the Consob’s requirements.
51 OPERATING MECHANISMS In this financial year of profound change, the operating mechanisms and processes have been involved in radical changes, all of which are intended to innovate and improve internal and customer service functionalities. Here we will summarise the main operations on the basis of their different organisational, commercial and quality aspects.
Organisational innovations New Model for distribution networks
2006 saw the approval and introduction of the new organisational/commercial model for the distribution network (“Network Model”), whose main objectives are:
• the re-launch of the commercial development operation through a specialised approach for each customer segment; • better local management of commercial activity, with particular reference to support for Medium-sized/Small Subsidiaries;
• increased efficiency of the credit process and commercial processes used to control the Distribution Network.
The commercial model for the parent company and the Group’s network Banks is laid down on the basis of local focus and specialised customer management, depending on the sector to which it belongs. The purpose of specialisation of the professionals operating in the Network by segment is: • to offer comprehensive services and products for the segment to which the customer belongs; • to evaluate the opportunities in the individual local areas on the basis of the size and activity of professionals defined as “tailor -made” for the reference market;
• to guarantee that the levels of customer service are constantly respected and improved. The implementation of the new commercial model is based on:
• the reorganisation of the Subsidiaries into Districts on the basis of a criterion of “local” homogeneity” (distance and local features), each with a commercial District Manager, belonging to Local Areas, with an Area Director above him;
• the introduction of professionals to manage the different customer segments, both in the Subsidiaries and in the Districts, and an increase in the size of the Network on the basis of the real requirements and commercial opportunities offered by the “local areas”;
• differentiation of the Subsidiary model, with a distinction made between Large Subsidiaries with a workforce of over 5 units (separated into three business segments: Companies, Private and Operations) and Small Subsidiaries, those with a workforce of between 2 and 5 units (organised according to three key roles: Subsidiary Manager, Deputy and Operating Specialist); • optimisation and increased efficiency of the credit granting and management process through the creation of a Credit Laboratory set up as part of the Credit Division, and review of the authorisations structure.
This represent a definitive break with the previous structure: the new network model has made commercial processes more flexible, significantly developing the network’s sales, so that, in comparison with the past, it is now boosted by the existence of professionals both at the District and Subsidiary levels, on the basis of the needs of the reference markets, no longer on the basis of the product, but the segment.
52 The new and improved organisational structure has required an obvious commitment from the Group Networks Coordination Division to the process of creating, coordinating, monitoring and providing assistance. In particular, in collaboration with the other authorised Divisions, this Division has organised and coordinated the establishment of 61 districts, 95% of the Group’s subsidiaries. From the perspective of human resources, the implementation of the new network model has become a concrete reality with the selection of segment managers: these have now been appointed for Banca Popolare Italiana, Cassa di Risparmio di Lucca Pisa Livorno, Banca Popolare di Crema and Banca Caripe, a total of 67 corporate managers, 302 small business managers and 247 wealth managers The process will be extended in 2007 to involve the other Group banks too. Setting up the Retail Division
In the second half of 2006, in line with the strategic applications indicated in the industrial plan and with the implementation of the Network’s new organisational structure, a service was set up specialising in the development of the Retail segment - the Retail Division.
Three business units have been created to respond as effectively as possible to customer needs: Family (customers with assets under or equal to 150 thousand euros), Small Business (companies with sales under or equal to 5 million euros) and Wealth Management (private customers with assets over 150 thousand euros). The following were the three cornerstones of the activities carried out in 2006: definition of customer service conditions consistent with the main market trends; rationalisation and enrichment of the product range through the launch of commercial initiatives and, finally, the organisation of commercial action support tools for the sales Network. In this context, a new model of service for Retail customers has been developed and this is being extended to the sales network. The objective of the New Service Model is to define a series of policies that will fully prepare Network professional profiles to carry out their business and “to re- launch the commercial machine”, while at the same time identifying behaviour “rules” and processes capable of reinforcing interaction with the reference customers During the second half of the year, the model was shared across the board with the entire commercial network. To support the new commercial policies, high-powered training courses (with top-level partners) have been set up to ensure that all network professionals have appropriate technical and managerial skills. In line with the Retail Department reorganisation conditions, new and better products were researched and developed for customers. As soon as they were set up, the individual Business Units launched projects and initiatives that achieved excellent results. Below, you will find a summary of the main areas of intervention and the results achieved by each segment. Family
The positive performance trends in the segment continued thanks to the implementation of a “value for money” policy, which, in the second half, led to the launch of two new accounts that turned around the negative trend in the current accounts net balance at the beginning of the year: a low-cost DoppioZero account (20,000 accounts sold) and a high return account, the Conto Bot (5,000 accounts sold). We also reviewed the mortgage range with the launch of new offers such as “Muto Dinamico / Stabile Plus”, financing the entire amount of purchased property and “Mutuo Dinamico Certo”, which keeps the reimbursement instalment interest rate fixed (only the duration varies with the variation in rates). As a result of these operations, there was a 35% growth in mortgage approvals on the previous year.
53 Particular attention was paid to the development of business through improvements in synergies with the Ducato consumer credit company, which led to a rise of 30% in personal loans and 20% in the Group’s credit card stock. In the insurance sector, the best performances were seen in the loss and damages line, with an increase of 50% thanks to restyling and a broader family range (Third Party liability, Housing, Accidents and Assistance).
Commercial activity was sustained by intense communication campaigns for new products; at the same time, a renewed effort was made in local areas, with offers dedicated to employees/company associates and agreed entities that were in line with the “Banca delle Piazze” project. As for the remote channels, new functionalities were introduced (such as consultation, filing and printing of bank statements and securities dossiers on line) and aggressive pricing policies were adopted, leading to excellent performances in 2006: more than 18,500 new contracts, with 45% growth across the total stock. Wealth Management
The wealth segment, too, saw positive performances, thanks to the launch, in the final quarter of the year, of initiatives to acquire customers and retain their loyalty, supported by appropriate sales tools, such as the Client Plan, and new personal financial planning functionalities.
Initiatives to reorganise the sales Network, the introduction of a new service model and the start of a major training programme have contributed decisively to growth in the segment. The private bankers’ network manages 40% of overall volume in the Private Segment. In 2006, the development trend seen in previous years was confirmed and strengthened: the number of private bankers rose from 71 to 74 and about 4500 new customers took advantage of the service. Managed funds saw a rise of 15%, as did managed savings, where net deposits grew by 10% on the stock at the start of 2006. Some basic personal financial planning functionalities were introduced to support the activities of the private bankers and subsidiaries during the year. In terms of offer, some open architecture initiatives were undertaken (re-styling of the GPF Selection Class and re-launch of the distribution agreement with JPM Flemings); the restyling of the Tailor Made management for “Top” customers, enabling them to choose several diversified investment strategies for each geographic area / section, and the release of a dedicated monthly IT medium is also planned. Small Business
The main developments in the segment have been the new offer range (current accounts and finance) and the huge leap in the signing of agreements with Credit Line Consortiums and Category Associations (more than 50 agreements at local/regional level). These initiatives have led to an increase of 17% in deposits and an increase in jobs, which saw a rise of 5.6% in the second half of the year, as opposed to a fall of 4.2% in the first half. The product range saw the arrival of new dedicated offers (current account and exclusive loans) for specific customer targets, such as Shopkeepers, Professionals, Pharmacies and a change in the range of finance on offer: “financing for investments” (technology, quality, research, logistics), “financing to support employment” (in the event of new recruitment), “new company finance”, “thirteenth /fourteenth month personnel liabilities and income tax and other taxes”, “employee severance fund financing” and “solar energy financing”, which has aroused enormous interest amongst operators in the sector and support from numerous customer companies, to such an extent that it is considered to be the best financing available on the market. Particular attention has been paid to electronic payment systems: 10,000 full sign-ups to the Internet Banking Levis service, which has more than doubled the number of activated firms and
54 1,440 full-sign-ups to the POS service has seen a rise of 8%, more than double that of the two previous years and much higher than market growth (+2%). Setting up of the Corporate Division
The Corporate Division was set up in 2006 to implement the organisational provisions contained in the Industrial Plan decided by the Bank.
The role entrusted to the Division was to run the Companies Clientele Segment with annual sales of more than € 5 million, ensuring the development of commercial planning, dealing with the maintenance and development of the products portfolio, managing exceptional pricing, coordinating the Corporate Managers in terms of function and, finally, directly managing Large Corporate customers.
The operations referred to above are carried out by five Divisions: Mid Corporate, Large Corporate, Corporate Services, Foreign and Agriculture. The new Corporate Commercial Model, and in particular the Network Model, provides for the creation of professionals, the Corporate Managers, answerable in hierarchical terms to the Districts and Areas/Banks and in functional terms to the Mid Corporate Division, to which is allocated a portfolio of customers in order to ensure commercial development and monitor credit worthiness. For customers with sales of over € 100 million a year, the same tasks are carried out by Managers with special skills and professional experience, directly answerable to the Large Corporate Division within the Corporate Division. As from April 2006 the Department’s operations have focused on three main objectives: • setting up of the Large Corporate Division, selecting Managers and Assistants through an internal and external selection process and the putting into operation of their commercial activities in the region; • basic and advanced training of Corporate Managers and implementation of the Centre- Network and Customer-Network Service Model; • review of the Bank’s products portfolio and creation of tools to support commercial operations and monitoring of the results obtained.
As regards the first operations, 10 Relationship Managers and 5 Assistants have been selected, subdivided into four Teams based in Milan, Bologna, Florence and Rome; they have been assigned customer portfolios and have been supplied with an IT profile appropriate to the tasks to be carried out.
The training procedure for Corporate Managers has been divided into three macro-categories basic training in analysis of financial statements, credit worthiness and analysis of corporate cases, run by external instructors from SDA Bocconi, Bank product and service training, in particular derivatives to cover risks, foreign operations and medium-long-term operativeness, run by the Mid Corporate, Corporate and Foreign Services, and implementation of the Service Model; particular attention is paid to instruction on commercial planning techniques, customer relations and commercial monitoring, again run by the Mid Corporate Division with the help of specialist consultants. As for reviewing the products/services portfolio and Bank support tools, three new products with highly innovative content have been launched (Step up, Innovazione and Amico capitale); the medium-long term basic product, Levimpresa, has been updated by the addition of schedules of contributions to interest accounts on a regional basis (Finlombarda) and of instruments for risk mitigation through Mediocredito Centrale guarantees; IT tools have been developed, which enable Managers to reactivate dormant credit lines and to optimise existing commercial lines; systems for monitoring the economic and financial performance of portfolios and the competitive position of the clientele have been developed.
55 Finally, the Corporate Division has made numerous visits to customers during the year, either directly or to back up the regional structures, to encourage an increase in ordinary commercial work with the Group and to try to set up out-of-the-ordinary financial operations. Organisational operations instigated by the Finance Division
Two major operations to reorganise the Finance Division took place in 2006. With the first reorganisation in January 2006, amongst other things, we built up the ALM Division (Asset Liabilities Management) from scratch, as well as a unit for financial product planning (the so- called “product factory”). With the second restructuring operation, we re-grouped all “non- operating” activities carried out within the Finance Division in a new Division called Monitoring & Operations Support, with staff headed by the Division Manager. This second restructuring operation, with the reallocation of roles and responsibilities, was accepted by the new General regulations of the Banca Popolare Italiana with approval given by the Board of Directors on 31 October 2006 and the issue of the new organisational strategy, coming into operation on 9 January 2007.
Process innovations System for managing company processes
2006 saw the implementation of the BPI Company Architecture System, called Easys, with the aim of mapping all the operations in the individual processes, the control points and the related functional responsibilities, the date and IT requirements in detail at the point of input of the processes, their results and the beneficiaries of this output. This System represents the company’s descriptive standard: • Processes and Procedures: shown in picture mode and with different levels of detail, developed progressively for all the processes and procedures of the Bank and the Group companies; • Organisation structures: updated organisational chart, missions and objectives, processes and procedures in which each unit participates or for which it is responsible; • Sites: all the geographical elements of the Group entities, as head offices / areas / districts / subsidiaries that can be browsed in graphic mode, together with the correlations with the company processes and hosted infrastructures; • ICT: list of all the applications, services and functionalities offered, with the related impacts on processes, browsable list of infrastructures and of the City Planning IT; • Control systems: Reference standards, assessment of the risks involved in the processes, operating and compliance controls etc., information on risk processing; • Company regulations organised by process: it is possible to view and consult all the Internal Rules and Regulations (Operating Arrangements); • Glossary: general banking and corporate; • Products: tree diagram of the company products, progressively linked, where necessary, to the related business processes. Each of the items contained in the aforementioned categories is shown in the Easys system, in a controlled and integrated way, can be accessed from various aspects and can be browsed at any level of detail by all the Group’s staff. Strategic Performance Management
The purpose of the project is to integrate and certify the data in the Group IT system Gruppo in order to process them in accordance with specific methodologies and metrics, into information
56 that is useful for directing company decisions towards value creation for "stakeholders" (shareholders, market, customers and employees), to measure return on the basis of the risks accepted and the capital received /allocated, to value the contribution of every Business Unit against the Group’s results, to optimise management and operating processes in order to make them more coherent and effective for the achievement of the company objectives, and to facilitate internal communication and market information.
In this context, the following have been achieved:
• design of a process to prepare the Business Plan for all the Group Companies/Banks, which involved the introduction of a new methodology, a review of the processes and the introduction of new qualifying technological platforms; • development of Asset & Liability Management both for the “interest and exchange rate" component (ALM Strategic) and for the "cash and treasury" (ALM Operative) component;
• the new product/customer data base, the new management data mart and the new architecture for the production and distribution of the Commercial Network Financial Management reports, through the development of more robust multi-dimensional architecture for the analysis of data from the different prospecting aspects;
• the new "Cost Allocation" engine, consistent with the requirements for the allocation of costs to the Business Segment, able to deal with the requirements for the allocation and control of administrative costs, a parametric system to manage cost allocation and service invoicing. Cost regulations
The purpose of the new Cost Management Regulations is to optimise the processes and instruments for controlling and managing operating costs and for constantly revising and increasing the efficiency of the consumption models. For this purpose, five principal initiatives have been put in place: • new Regulation of Expenditure, adopted by all the Group Banks. Companies, in order to set up a common regulatory framework and to harmonise operating practices;
• total centralisation of acquisitions with the Central Purchases Division and broadening of responsibility to guarantee economies of scale, improved supplier quality, an increase in control and better expenditure planning; • focus on “cost management” as the main leverage for excellence in the control and management of operating costs;
• definition of new cost and spending powers and authorities at Group level, with clear attribution of responsibilities, in order to ensure effective and harmonious management for the entire perimeter of the Group; • installation of a new IT system for the specific management of “variable quantity” and to obtain cost synergies through the centralisation of common operations. Cost excellence Project
In 2006 a project called “cost excellence”, was set up, its objectives being the identification and achievement of savings on administrative costs and a change in the structures and tools for controlling and managing costs. The action taken aimed to reduce major inefficiencies in the expenditure process, guarantee structural control of costs (involving the organisational structures, the expenditure processes and the tools) and to ensure that the cost of service guaranteed the customer value for money. The main work stages involved the following: • Gathering and mapping of data (in its turn broken down into: Construction of a database of expenditure on the perimeter of the group; Identification of cost trends; Understanding
57 of cost structures and processes at Group level; Gathering of data on suppliers; Gathering of data useful for benchmarks); • Reclassification of expenses on the basis of a plan for planned accounts useful for benchmarking competitors and a change in cost control policies;
• Analysis of current purchase processes through a breakdown into stages.
The following projects were considered to be a priority due to the amount of work carried out on some of the project strands:
• Stewardship (selection of an integrated supplies provider, capable of supplying purchase, storage and transport of the material on a “just in time” basis and introduction of a system to manage and control orders by cost centres through e-procurement systems and electronic catalogues); • Top of the Range and network info provider (Auditing of the distribution policy for workstations and introduction of new consumption profiles);
• Insurance (allocation of consultancy mandates to external Brokers for assessment of the Group’s insurance cover, analysis of the cover documents and conditions, gathering of the availability of insurance companies and placing of risks); • Telecommunications (improvement in supply strategy through overall tender for allocation of data and phone transmission); an annual saving of 7 million euros has been estimated for the Group, once these come into operation. Other areas of intervention have also been indicated (the main one concerns the Group’s real estate), from which overall savings of over € 24 million a year can be expected once these become operational. Credit process
In terms of loans, the area of organisational operations has been divided into two main strands. On the one hand, project strands have been put in place intended for “Compliance – Basel II Credit Risk”, on the basis of the standard method, with particular reference to credit risk mitigation, in order to take advantage of the opportunities offered by the new legislation on guarantees, thus completing deposit, management and monitoring activities. The “standard” methodology adopted (in line with the banking system in general) is, in any case, backed by statistical analysis, in conjunction with Risk Management, Organisation and external consultancy firms, in order to ensure the correct calculation and quantitative reliability of the models for the adoption of the “advanced” method for the next financial period. On the other hand, in a credit environment that is both complex and comprehensive, various activities have been put in place for the planning and organisational development of the credit processes intended to optimise the levels of service to the Network and to monitor and control credit risk.
The credit-granting processes have been reviewed, both in terms of regulation and operation, in order to improve response times for customers, while focusing strongly on credit worthiness through initiatives involving procedures, process stages and organisation. In this respect, note the development of electronic allocation of credit, the fine-tuning of the decision-making system (Matrix) and the structuring of the Credit Laboratories, in addition to the new credit regulations and the new levels of authorisation. Furthermore, the aggregate qualitative-quantitative measurement of credit policy has been improved, and not only in terms of sector; it has also been differentiated geographically in relation to the various “industrial districts” where the Group Network operates. Furthermore, with the new Organisation Chart, the Group’s Credit Supervision Division is finally operational , radically improving the connection between the credit policies of the Group Banks
58 and playing a role in coordinating overall risks and ensuring homogeneous management of shared relationships. All this can be seen in the Regulations on Group credit, approved in the first quarter of this year by the Board of Directors, and on the formalised principle in the “prior opinion on the grounds” issued by the Parent Company, and in new and more frequent information on the Group’s Major Risks. Finally, the “PEM Electronic Monitoring Practice” was launched, for the purpose of organising an effective and innovative management system to support the credit management monitoring processes and management of the anomalies section, to be accessible to the entire organisation in the course of 2007. Improvement of credit management and of the credit culture has been a constant priority objective of the daily management of the Group Credit Division. We have thus developed human resources and fine- tuned the methodologies, indicators, predictive statistical models and, above all, the processes with the network, in order to reduce the stages of “inertia” and absence of decision-making to a minimum. This has led to an increasingly more rigorous analysis of the credit portfolio, which had already occurred during the inspection by the Supervisory Body in the first half of 2006, especially as regards so-called “micro-credit”, giving rise also to rigorous behaviour in situations of doubt and increased risk. This prudent management has had an effect on the number of micro-credit practices used for abnormal items, but has confirmed the increased effectiveness of the credit monitoring system. This policy and the adoption of new criteria has led to a modification of the Abnormal Credit Regulations, (approved by the Board of Directors in the first quarter of 2007), and to the introduction of the Group Credit Monitoring Regulations, to harmonise and improve the valuation criteria of all the Banks in the Group. Finance
During the year, a new application has been introduced intended for the purchase of OTC derivatives contracts (interest rates and securities), entered in the front office systems, in order to manage the entire life cycle automatically, thereby minimising manual operations by the Department, especially during the phase of accounting system input. The last month of the year saw the completion of the module for the automatic management of the product range to cover interest rate risk connected with residential mortgages and revolving credit: It is scheduled for operation at the beginning of 2007. The Repurchase agreement product has also been entered in the Organised Swaps System for management of the offer. This has made it possible to reduce the amount of manual work in the central offices significantly and to simplify the process of responding to Network requests from customers, who are immediately informed of the security used for the execution of the transaction. The following initiatives have been taken as a result of the changes in legislation and/or business: • replacement of the registration procedure for telephone orders made by customers; • implementation of an ad hoc procedure for the management of taxation problems related to the processing of ETF with consequent elimination of manual processes; • completion of integration with brokers for automatic acquisition of contracts for the Ownership of regulated securities and derivatives.
The plan for the recovery and transfer of the data in the Position-Keeping Kondor + application has been completed, through the generation and maintenance of the management P&L for the business carried out within the Financial Markets Division and daily revaluation of the positions and control of the market data used by the system. The "New Finance” project, which partially replaces the Position-Keeping Kondor+ application is underway with Murex; proprietary portfolios will be managed on Murex, while Forex and Treasury business will continue to be conducted on Kondor+. The SIA-Eagle application, which complies with the regulations on Market Abuse, has
59 been released and put into production. The release of the new application, Area Finanza-CAD, for managing the basket, collecting orders and trading on behalf of third parties, has been released, as has the new application, CLM, for management settlement flows on national and international payment systems. The valuation process for the input of financial instruments into the accounts systems in Proprietary positions has been redefined, while the preparation of the documentation providing details of the calculation methodologies and the sources for the acquisition of market data is in its closing stages. Bank notices
The procedure for managing bank notices on the basis of the criteria required by the Italian Revenue Office and agreed with the Italian bankers’ Association has been implemented.
The new procedure provides for the registration of the requested transactions settled by account or off account with customers, with identification of the selling party and an exchange of information with the Italian Revenue Office through a certified electronic mailbox.
Governance Systems Area Human Capital Management
An analysis and reporting system has been set up as part of Human Resources, implementing a solution for the identification and monitoring of skills and behaviours, which can be used for the rewards/incentives scheme. Intranet Portal
The content of the Intranet portal has been reorganised and optimised, with special attention paid to the improvement of user-friendliness and to the level of integration of the applications. Customer Relationship Management (CRM)
The Bank has introduced a set of commercial initiatives (tactical CRM) focusing, in the short term, on putting together objectives for comparing the retention phenomenon, the increase in the acquisition of new customers (acquisition) and the growth in the average number of products owned by each customer (Cross-Selling) based on Next Product).
At the same time, activities to designate, develop and consolidate an integrated CRM model that can cope with the Bank’s organic growth objectives in the medium term (total CRM Model). E-Learning
The need to introduce a new approach for training services and internal communication has made a new and more flexible service model necessary, which is closer to the needs of individuals and can involve the whole organisation more closely in professional growth activities. Document management (ECM3)
A document management platform has been installed for company contents, to manage the creation and circulation of all the information that is currently not managed by the transactional systems.
60 Organisational and Security Structure Areas Logics security
A new “identity management” IT application has been installed, intended for integral management of information and work-flow user qualification, which has had significant results in raising the Group’s logics security. Innovation in the peripheral technology platform
The stock of peripheral technology equipment has been renewed; the innovations have completely replaced office and network PCs, increased video contact workstations in the subsidiaries and introduced palm tops. Development of tools to support commercial action
CRM initiatives have given central management sophisticated customer-analysis tools and the sales network applications that can support/direct commercial action. In detail, we have integrated customer information into a single Marketing database, containing 700 features for each customer, organised analyses for the development of new products and commercial activities, defined targeting algorithms for specific initiatives to encourage the achievement of commercial objectives for single quarters, with the issue of target lists for specific initiatives launched in the final quarter of 2006. From time to time, we also monitored the performance of sales activities and developed tools to support commercial activity on the Network (scheduling of contacts, relationship management and results monitoring).
Quality management systems Memorandum of understanding with consumer associations
The Banca Popolare Italiana Group has shown that it intends to commit itself to improving its relationships with its customers by facilitating the understanding of the products and services offered and by reviewing its contractual documents.
In order to identify the priorities and most frequent problems encountered by customers, the Banca Popolare Italiana Group and certain Consumer Associations have collaborated to identify and solve problems between the bank and its customers.
The Retail Division has coordinated the signing of a memorandum of understanding between the Consumer Associations, Adiconsum, Movimento Difesa del Cittadino and FederConsumatori and the Banca Popolare Italiana Group.
The main purpose of the agreement is to build the foundations of a stable and transparent relationship between the Banca Popolare Italiana Group and its customers, protecting their rights and expectations thanks to the experience of the Consumer Associations and to the initiatives that will be implemented. This agreement has the following objectives: 1. Banking and financial education of citizens (preparation of a Guide for citizens to be distributed to our Subsidiaries, publication of a periodic on-line newsletter, experiment with the presence of associations with a dedicated corner in the Group’s retail points, free phone number for banking and financial information); 2. Strengthening of the relationship of trust with consumers (a charter of rights for the Group’s customers, a review of contract for greater simplicity and transparency, shared product planning for “weak” categories, e.g. atypical workers and migrants); 3. Transparency and effectiveness of communication to the market (protective information for associations through advertising campaigns); 4. Introduction of a priority channel for managing claims;
61 5. Training for Group staff and association executives (training meetings, printed guide). Clear agreements
Banca Popolare Italiana has decided to adhere to the system “PattiChiari in citta” (“ClearAgreements in the Cities”), in line with the philosophy of the Banche delle Piazze strategy, aimed at upgrading the relationship between all the Group Banks and the individual reference Regions. The Group has participated in “PattiChiari in città” through five banks (Banca Popolare Italiana, Banca Valori, Banca Caripe, Banca Popolare di Mantova, Cassa di Risparmio di Lucca Pisa Livorno), which have been present with their own representatives in the 12 pre-selected areas: in Milan in Lombardy, Lodi, Brescia, Mantova and Varese; in Toscana in Florence, Livorno and Lucca; in Liguria in Genoa; in Abruzzo in Pescara and also in Parma and Catania in Sicily. In each city, Banca Popolare Italiana Group experts, in collaboration with those of the PattiChiari Consortium and the Consumer Associations, were there to welcome customers at the “info points”, where it was possible to browse www.pattichiari.it, to receive more detailed information on the project’s initiatives three years after its inception, but, above all, to take part in meetings on credit, savings and services. The PattiChiari consortium comprises 167 Italian banks and a total of 26 thousand branches in the country (84% of the entire Italian banking system), promoted by Associazione Bancaria Italiana in September 2003.
The objective is to offer simple, modern tools to facilitate understanding of financial products and to choose those most appropriate to the individual customer.
The project’s philosophy is to build a new relationship between the banks and citizens, families and companies, based on greater trust and a clear dialogue, which is comprehensible and transparent. In this way, the PattiChiari brand name represents the commitment that the banks themselves have made to their customers, in order to establish a new “pact” with society so that they are seen as companies offering services to the market. With the coordination of the Quality System Functional Unit, Banca Popolare Italiana, Banca Popolare di Cremona, Banca Popolare di Crema, Banca Popolare di Mantova, Banca Valori, Banca Caripe and Cassa di Risparmio di Lucca Pisa Livorno have concluded the process of certification of initiatives on a positive note: • General criteria to assess the credit worthiness of small and medium enterprises; • Clear information on structured and/or subordinated bank bonds; • Comparison between current accounts; • Fixed period for availability of funds paid in by cheque.
Following the results of the audit of the General Divisions, Regional Areas and the Branches, the Certification Entity, Certiquality, has decided that these operations will operate in compliance with the requirements specified in the PattiChiari Consortium agreements that are the subject of certification.
January and February 2007 saw the start of the process of maintaining this certification through inspections by the Certification Entity. The procedure for maintaining certification of the initiative, “Clear information on Efibanca structured and/or subordinated bank bonds” saw a positive conclusion. Following the results of the audit of the General Divisions, Regional Areas and the Subsidiaries of Efibanca, the Certification Entity, Certiquality, decided that it had operated in compliance with the requirements specified in the PattiChiari Consortium agreements to be certified. The new certification campaigns for which the Certiquality Entity is responsible will begin at the same time as the maintenance process. These are two new environments in which the Group
62 intends to continue certification on behalf of the PattiChiari Consortium: "FARO - Online Working ATM signal" and "Basic Banking Service". November 2006 saw a new plan for economic education in schools, called "Io e l'economia", whose aim is to involve urban primary and middle schools. In particular, experts from the Banca Popolare Italiana Group came to visit schools in Lodi, Genoa, Varese, Pisa and Pescara. Since 2006, the Banca Popolare Italiana Group, in collaboration with the PattiChiari Consortium, has been active in various Italian cities, distributing financial information to citizens, using direct, simple and immediate language. This initiative is based on the profound conviction of the need to “re-value” the reciprocal strategic agreement of trust and growth between the Banks and their Regions, becoming aware of their role as an instigator of the economy and production in the regions. UNI EN ISO 9001:2000 certification. Process for managing Treasury and Cash services in the Entities
In line with the determination to continue to improve the quality of the service provided, we have decided to undertake certain certification procedures. The Quality Management systems are models codified by voluntary standards to organise, manage and control a company’s operations in order to guarantee customer satisfaction. The application of these standards makes it possible to obtain recognition (certification) of the company’s method of operating (e.g. UNI EN ISO 9001:2000, PattiChiari certification etc…). In the banking world, various entities at the national and international level have adopted or are adopting this certification standard to certify to their customers and to the market the quality of one or more of the processes relating to their sphere of activity.
In particular, as regards the management of cash and treasury services, calls for tenders are increasingly demanding quality certification as one of the items qualifying assessment, if not purely and simply as a requirement for participation. We have therefore decided to proceed with obtaining certification of the Quality Management System, in compliance with the criteria for UNI EN ISO 9001:2000, and of the Entities’ Treasury and Cash Services management procedure for the Banca Popolare Italiana Group.
63 OPERATING AGGREGATES CONSOLIDATED FUNDS UNDER ADMINISTRATION
% Pro forma Customer accounts 31/12/2006 % change breakdown 31/12/2005 Current accounts and demand deposits 12,346,645 79.09% 12,269,180 0.63% Savings accounts and time deposits 101,865 0.65% 126,153 -19.25% Third-party funds under administration 4,955 0.03% 4,384 13.02% Loans: 155,765 1.00% 143,740 8.37% Finance leases 7,046 0.05% Other 148,719 0.95% 143,740 3.46% Liabilities from assets sold but not eliminated: 2,974,828 19.06% 1,496,624 98.77% Repurchase agreements 2,594,101 16.62% 1,226,181 111.56% Other 380,727 2.44% 270,443 40.78% Other payables 26,793 0.17% 64,692 -58.58% Total 15,610,851 100.00% 14,104,773 10.68% Debt securities in issue 16,527,244 20,280,150 -18.51% Total customer accounts and debt securities in issue 32,138,095 34,384,923 -6.53% Discretionary Accounts 8,708,398 46.88% 8,138,961 7.00% Mutual Funds and SICAV 7,954,693 42.82% 8,629,162 -7.82% Insurance Products 1,912,573 10.30% 1,525,943 25.34% Total assets under management 18,575,664 100.00% 18,294,066 1.54% Third-party securities of ordinary customers under custody and 14,685,119 16,348,817 -10.18% administration Total indirect customer deposits 33,260,783 34,642,883 -3.99% Deposits from banks 5,997,316 4,788,051 25.26% Third-party securities under custody and administration of banks 20,306,109 22,210,402 -8.57% and institutional investors Total funds under administration of banks and institutional 26,303,425 26,998,453 -2.57% investors Grand total funds under administration 91,702,303 96,026,259 -4.50%
In order to compare the results at 31 December 2006 on a standard basis, the values for 31 December 2005 have been restated to include the impact of the extraordinary transactions, which, as regards the aggregate lendings, concern Bipielle.Net and Area Life (reclassified as Assets/Liabilities held for sale) and the reclassification of Bipielle Bank (Switzerland), with the transfer of a large part of its volumes from managed portfolio to third party securities under custody and administration.
The grand total of the administrative volume stood at € 91,702.3 million, with a slight fall of 4.5%, due both to the customer component, which has fallen from € 34,642.9 million to € 33,260.8 million (-4%), and to banks and institutional investors, fallen to € 26,303.4 million (-2.6%), for a reduction in the component related to third party securities under custody and administration by banks and institutional investors. Overall, direct customer deposits (amount of customer accounts and Securities in issue) ended 2006 down by 6.5%, standing at € 32,138.1 million. This reflex movement can be attributed to the Securities in issue, which fell to € 16,527.2 million (-18.5%), mainly because of repurchases and subsequent cancellations of securities from securitization worth about € 2,500 million.
The reduction in Debt securities in issue also arose from the partial renewal of the Group's bond maturities with a view to obtaining a more favourable economic mix.
64 In this regard, the significant increase in amounts due to customers, which stood at € 15,610.9 million (+10.7%), mainly due to the growth in repurchase agreements, which more than doubled (from € 1,226.2 million to € 2,594.1 million), also thanks to significant interest from customers. The current account and demand deposit component was fairly stable, € 12,346.6 million (+0.6%), representing almost 80% of the aggregate. Savings accounts were down (€ 101.9 million, -19.3%). Total indirect deposits stood at € 33,260.8 million, a decrease of 4%, due to third party securities under custody and administration, which fell to € 14,685.1 million (-10.2%), especially for the outflow of certain institutional positions, which, in December 2005, led to commitments to Antonveneta securities, which then flowed back in after the takeover bid completed by ABN Amro in 2006.
Assets under management rose slightly to € 18,575.7 million (+1.5%), thanks in particular to the positive performance of discretionary accounts and insurance products. The former rose to € 8,708.4 million (+7%), thanks to the positive performance of Bipitalia Gestioni SGR (€ 8,499.7 million, +7.8%). The insurance sector stood at € 1,912.6 million, very much up on the same period the previous year (+25.3%), both as regards the placement of supplementary pension products and the ever-growing demand from the market for a fairly low risk-return profile during particularly uncertain periods in the financial markets.
The mutual fund segment, however, saw a negative trend, falling to a 7,954.7 million (-7.8%, on December 2005 PF). Bipitalia Gestioni SGR stood at € 5,797.9 million, in comparison with € 6,496.8 million at the end of 2005. The following tables show the classification of deposits (direct deposits excluding repurchase agreements and debenture issues) of the Group's banks by sector and by region.
Deposits by institutional Sector 2006 % comp. 2005 % comp. Government Bodies 3.59% 2.66% Households 63.11% 61.75% Financial Companies 8.93% 10.47% Non-Financial Companies 19.24% 19.25% Not-for-Profit Organisations 2.08% 2.05% Rest of the World and Other 3.05% 3.82% Total 100.00% 100.00%
Source: Banca d'Italia Financial Statements matrix
The leading institutional sector, namely "households", showed an increase in the total amount of deposits made to Gruppo Banca Popolare Italiana (from 61.8% to 63.1%). The companies not in individual form (“non-finance companies”) remained stable at 19.2%, while the financial companies fell from 10.5% to 8.9%. On the way up were Government bodies, which now represent 3.6% of the total.
65
DEPOSITS BY REGION 2006 % comp. 2005 % comp. Lombardy 33.46% 33.42% Tuscany 25.88% 27.25% Liguria 9.97% 9.63% Sicily 8.75% 8.32% Abruzzo 6.82% 6.64% Lazio 4.80% 5.75% Emilia Romagna 4.52% 4.43% Molise 2.22% 1.56% Piedmont 1.26% 0.85% Veneto 0.69% 0.52% Campania 0.62% 0.60% Umbria 0.50% 0.08% Marches 0.19% 0.08% Basilicata 0.15% 0.16% Calabria 0.11% 0.10% Sardinia 0.05% 0.03% Friuli Venezia Giulia 0.01% 0.01% Trentino Alto Adige 0.00% 0.57% TOTAL 100.00% 100.00%
Source: Banca d'Italia Financial Statements matrix
The composition of the main Italian regions in the Banca Popolare Italiana Group deposits confirms the predominant role of Lombardy (stable with one third of the total) and Tuscany (down by 27.2% to 25.9%), while Liguria, Sicily and Abruzzo have progressed.
66 CONSOLIDATED LOANS
% Pro forma Customer loans 31/12/2006 % change breakdown 31/12/2005 Current accounts 7,641,432 26.59% 7,676,519 -0.46% Repurchase agreements 30,274 -100.00% Mortgages 10,607,254 36.92% 9,233,325 14.88% Credit cards, personal loans and "fifth of salary" loans 2,564,572 8.92% 1,700,135 50.85% Debt securities: 170 -100.00% Other 170 -100.00% Other transactions 3,655,868 12.72% 4,910,477 -25.55% Impaired assets 1,048,220 3.65% 1,040,557 0.74% Assets sold but not eliminated 3,218,561 11.20% 3,363,597 -4.31% Total 28,735,907 100.00% 27,955,054 2.79%
In December 2006, the total customer loans stood at € 28,736 million, as compared with € 27,955 million on 31 December 2005 pro forma, equal to a +2.8%. The comments on the total amount of customer funds also apply to the pro forma. Going on to the details of the technical forms, the current accounts, worth € 7,637 million (corresponding to about 26.6% of the total) remained positioned on the values of the previous financial year, while mortgages, which represented more than a third of total loans (36.9%) made significant progress, rising from € 9,233 million to € 10,587 million, equal to 14.7%; this rise was in line with the high rates of development that were seen at market level for long-term financing.
Particularly outstanding was the performance of Credit cards and personal loans, reflecting the activities of Bipitalia Ducato. In 2006, the stock of consumer credit increased from € 1,700 million to € 2,808 million (increase of more than 51%). The reduction in other transactions (€ 3,656 million, -25.5%), was a result of the re-entry from exposure to the Magiste Group of around € 605 million (following the enforcement of the guarantee comprising mainly RCD shares, at the end of May 2006) and by the re-entry of certain institutional customer positions in the amount of about € 500 million, following the takeover by ABN of the Antonveneta securities. In the same way as for deposits, the following tables show the breakdown of customer loans made by the Group's banks according to sector and region.
Loans by institutional Sector 2006 % comp. 2005 % comp. Government Bodies 1.94% 2.26% Households 18.06% 16.21% Financial Companies 13.66% 11.94% Non-Financial Companies 59.73% 60.24% Not-for-Profit Organisations 0.43% 0.41% Rest of the World and Other 6.18% 8.94% Total 100.00% 100.00%
Source: Banca d'Italia Financial Statements matrix
Breakdown of customers by institutional categories shows that shares were up for Households (from 16.2% to 18.1%) and financial Companies (up to 13.7% from 11.9%), while non-financial Companies, confirming themselves as the main economic sector involved in borrowing, contracted
67 slightly to 59.7%. The residual component was also down, containing, as in the case of deposits, customers who are not resident in Italy. The following table provides details of the economic activity carried out by the professional sector clientele (non-financial companies and productive households). The main branches of economic activity represented by services and the tertiary sector were relatively stable, as were construction and public works. Loans per branch of economic activity 2006 % comp. 2005 % comp. Other market services 32.29% 33.57% Commerce, salvage and repair services 12.29% 11.95% Building and public works 12.11% 12.32% Agriculture, forestry and fishing products 5.09% 4.94% Hotels, bars and restaurants 4.44% 4.23% Foodstuffs 3.82% 3.71% Textiles 3.07% 3.39% Metal products 2.59% 2.26% Energy products 2.52% 2.83% Minerals and ferrous and non-ferrous metals 2.43% 1.61% Agricultural and industrial machinery 2.39% 2.63% Non-metallic minerals-based products and minerals 2.14% 2.24% Transport-related services 1.95% 1.62% Sea and air transportation services 1.89% 2.16% Rubber and plastic products 1.77% 1.26% Paper, paper products 1.69% 1.82% Electrical materials and supplies 1.56% 1.28% Other industrial products 1.47% 1.63% Means of transport 1.44% 1.44% Chemical products 1.43% 1.25% Domestic transport services 1.05% 1.17% Office and EDP machines 0.33% 0.35% Communications services 0.24% 0.34% TOTAL 100.00% 100.00%
68
Loans by Region 2006 % comp. 2005 % comp. Lombardy 34.28% 36.43% Tuscany 25.23% 23.80% Lazio 20.29% 21.92% Abruzzo 4.81% 3.94% Liguria 4.73% 3.77% Emilia Romagna 3.84% 4.38% Sicily 2.92% 2.53% Veneto 1.88% 1.09% Piedmont 0.78% 0.59% Umbria 0.36% 0.13% Marches 0.34% 0.10% Molise 0.24% 0.26% Campania 0.14% 0.14% Basilicata 0.04% 0.04% Calabria 0.04% 0.03% Sardinia 0.04% 0.02% Trentino Alto Adige 0.02% 0.82% Friuli Venezia Giulia 0.02% 0.01% TOTAL 100.00% 100.00%
Source: Banca d'Italia Financial Statements matrix Finally, as regards the breakdown of the credit distributed amongst the Italian regions present, Lombardy’s weighting fell (although it was far ahead of the other regions with 34.3%) as did Lazio’s, from 21.9% to 20.3%, while Tuscany stood at 25.2%, up 23.8% on 2005.
69 THE PERFORMANCE OF THE BANCA POPOLARE ITALIANA SHARE
The BPI share ended 2006 with an excellent annual performance, + 46%, amongst the best Italian and European shares, outperforming the S&P/MIB 40 benchmark index, which was up 16%.
In the course of 2006 the BPI varied between a minimum of € 6.91 (21/06/2006) and a maximum of € 11.04 (16/10/2006). In the first months of 2006, the price continued the upward trend seen at the end of 2005, rising to levels just above € 9, up from € 7 at the beginning of the year. After a short period of stability, in May, following the downward trend in the markets and the announcement of the increase in capital, prices began to fall, culminating in June 2006 with the lowest seen in the year, at around € 7.
With the increase in capital, (July 2006) and thanks to the support of the continuous rumours as to the probable merger of the BPI Group, the share price started to rise, bringing the price to around € 11. The price rose further upon the announcement of the merger of BPI with BPVN (15/10/2006). On 16/10/2006, the BPI share reached its historic record for daily trading, with more than 80 shares traded. In the final quarter, the average trading volume doubled from 5.1 million to 11.2 million shares.
Overall, the average daily trading per year was about 6.7 million shares. At 31 December 2006, the total amount of BPI shares in circulation was 682,360,539, with capitalisation of € 7.2 billion.
Note that in July the Banca Popolare Italiana warrant was listed with a strike price of € 11.00, a ratio of 1:1, and can be exercised between July 1, 2008 and December 21, 2010. The number of warrants in issue was 94,028,397. Furthermore, from 18 September 2006 the BPI share became part of the basket that comprises the S&P/MIB 40. Note also that, following their incorporation into Banca Popolare Italiana (effective from 30/9/2006), the Banking Network and Bipielle Investimenti shares stopped trading on 29 September 2006, with closing prices standing at € 47.64 euro and € 11.41. Over nine months, the performance of Reti Bancarie had been 36% and that of Bipielle Investimenti 91%.
Performance of Banca Popolare Italiana shares in 2006
12.00
11.00
10.00
9.00
8.00
7.00
6.00
6 6 6 6 6 6 6 6 6 6 6 6 6 6 /0 /0 /06 /0 /0 /0 /0 /06 /0 /0 /06 /0 /0 /0 /0 1 1 3 3 5 6 7 7 9 9 0 1 2 /0 /0 0 /0 1 /1 2/01/06 6/0 0 3/0 7 8/05/06 2/0 7/0 1 1/0 5/0 6/11/06 0/1 4 0 1 3 13/02/0 27/02/06 1 2 10/04 24/04/06 0 2 05/ 19/06/06 03/07/06 1 3 14/08 28/08/06 1 2 09/ 23/10/06 0 2 0 18/12/0
70 The growing interest of the markets in the BPI Group could be seen in both the growing number of share analysts performing constant fundamental analysis and the high percentage of institutional investors, which hit summits of more than 50% of the capital. SHAREHOLDERS WITH OVER 2% SHARES % HELD Stichting Pensioenfonds ABP 2.215 Franklin Mutual Advisors LLC 2.079 Julius Baer Investment Manag. 2.075 Fidelity International Limited 2.073 Credit Suisse 2.053 Cheyne Capital Management Limited 2.027 Total more than 2% shareholding 12.522
Source: Consob on 8/03/2007
In detail, in 2006 Fox Pitt, Deutsche Bank, Merrill Lynch, Exane BNP Paribas and KBW started to cover BPI shares, joining Euromobiliare, Banca Akros, Intermonte, Actinvest, UBM, HSBC and Rasbank with their official cover. Financial communication was developed through presentation of the Industrial Plan to the market in April 2006, a quarterly conference call to communicate the results, participation in conferences organised by the main commercial banks and road shows in Italy and abroad. The main international cities addressed were London, the East Coast in the USA, Paris and Madrid. Senior Management made a huge commitment to communication to the markets; in 2006 Investor Relations organised more than 200 events aimed at the institutional market, up 65% on 2005.
Communication to the financial markets has been backed up by the website, with the ad hoc section, Investor Relations, being one of the most frequently visited areas on the Group site, with more than 73,000 visits to the Home page in 2006, as against 59,000 in 2005 and 29,000 in 2004.
71 RATING AGENCY ASSESSMENTS
Currently, the BPI Group is monitored by the three most important rating agencies on the market: Standard & Poor’s Rating Services, FitchRatings and Moody’s. In the first half of 2006, following falling expectations for the 2005 annual results, both FitchRatings and Moody’s lowered the rating of Banca Popolare Italiana by one notch (level), to BBB. Standard & Poor’s, however, published the BPI Group ratings for the first time on 24 July 2006 with the following assessment: BBB/A-2 (respectively long and short term) and a ‘stable’ outlook. On 17 October 2006, the rating agencies Moody's, Fitch and Standard & Poor's gave a positive assessment to the new proposed merger with the banking group Banco Popolare di Verona e Novara and assigned Banca Popolare Italiana a positive credit-watch. On 21 February and 6 March 2007 respectively, Fitch and Standard & Poor’s confirmed the positive rating watch for BPI.
Furthermore, on 12 March 2007, Standard & Poor’s gave Banca Popolare Italiana a positive rating watch; it allocated BPI an A/A-1 rating with a stable outlook, aligning it with that of Banco Popolare Verona e Novara. The ratings assigned to the Gruppo Banca Popolare Italiana's debt are currently as follows:
MEDIUM/LONG- OUTLOOK RATING ACTION TERM DEBT
MOODY'S Issuer Rating Baa2 Long Term Bank Deposits Baa2 Senior Unsecured Debt Baa2 6 February 2006 Stable Subordinated Debt T2 Ba1 17/10/06 - Possible upgrade Bank Financial Strength D Short Term Debt P-2 FITCH RATINGS Issuer Rating BBB Short Term Debt F3 30 March 2006 Stable Individual (as an independent entity) C 21/02/07 - Positive Rating Watch Preferred Stock BB+ STANDARD & POOR'S Issuer Rating A Stable 12 March 2007 Short Term Debt A-1
72 SHAREHOLDERS EQUITY
The Group shareholders’ equity at 31 December 2006, inclusive of the result for the financial year, was € 3,956 million, as compared with € 2,786 million at 31 December 2005, following the Parent Bank’s increase in capital in July and August for a total of € 719.4 million and as a result of the merger operations involving Reti Bancarie and Bipielle Investimenti in BPI for the amount of 486.8 million.
After the merger, BPI's share capital amounted to € 2,047,081,617 and was made up of 682,360,539 shares with a unit face value of €3.
A statement of comparison between the shareholders' equity and the net profit of Banca Popolare Italiana and the consolidated figures is shown below. Shareholders' (Amounts in Euro/000) Net profit equity Balance as at 31/12/2006 - Parent Bank -101,464 4,371,221 Effects of fully consolidated subsidiaries 224,711 -455,693 Effects of subsidiaries consolidated according to the equity method -2,409 44,136 Reversal of intragroup dividends -156,860 Consolidation adjustments -3,840 -3,840 Balance as at 31/12/2006 - Consolidated Financial Statements -39,861 3,955,825
REGULATORY CAPITAL
The regulatory capital at 31 December 2006, following the increase in capital during the financial year is € 4,246.6 million, as compared with € 3,215.9 million in 2005, with a Tier1 of 7.57% and a Total capital ratio of 12.98%.
73 INCOME TRENDS Consolidated income statement results for the year 2006
The following table and related comments analyse the results of the Income Statement at 31 December 2006, drawn up in accordance with IAS/IFRS standards, and compared with those of the previous financial year. The figures for the 2005 financial year have been restated to accommodate the changes in the scope of consolidation which took place in 2006, arising from the sale of the subsidiaries Bipielle Leasing and Società Riscossione Tributi Lucca e Cremona and the reclassification among “Non-current Assets/liabilities held for sale” and “Profit/loss activity groups held for sale after tax” of the contribution of the affiliated companies Area Life International Assurance, Bipielle Network and Bipielle Previdenza. A number of items have also been appropriately reclassified in order to apply international accounting standards more precisely to certain companies that come under the scope of consolidation.
31/12/2005 Absolute 31/12/2006 % change Pro forma change Net interest 840,100 758,189 81,911 10.80% Dividends and similar income 29,631 61,983 -32,352 -52.19% Gains (losses) from investments 45,608 -6,112 51,720 n/a Net commissions 400,692 316,703 83,989 26.52% Net income from trading and hedging activities 89,646 -1,485 91,131 n/a Profit (loss) from sale of loans 68,775 68,775 n/a Profit/loss from sale of financial assets and liabilities 77,955 47,938 30,017 62.62% Net income from financial assets and liabilities designated at fair -6,061 94,237 -100,298 -106.43% value Other operating income (expenses) 181,691 213,825 -32,134 -15.03% Net operating income 1,728,037 1,485,278 242,759 16.34% Net adjustments to loans -333,042 -739,461 -406,419 -54.96% Net adjustments to assets and other financial transactions -99,426 -228,996 -129,570 -56.58% Personnel expenses -528,965 -539,743 -10,778 -2.00% Administrative expenses -470,398 -442,335 28,063 6.34% Provisions for contingencies and charges -53,376 -233,486 -180,110 -77.14% Net adjustments to intangible assets and property, plant and -77,418 -82,906 -5,488 -6.62% equipment Operating expenses -1,562,625 -2,266,927 -704,302 -31.07% Operating profit 165,412 -781,649 947,061 121.16% Net adjustments to goodwill -46,962 -42,035 4,927 11.72% Profit (loss) from sale of investments 24,114 843 23,271 n/a Income from continuing operations before tax 142,564 -822,841 965,405 117.33% Income taxes on continuing operations -97,058 156,091 253,149 162.18% Profit (loss) from disposals of activities groups classified as held -42,085 -33,129 8,956 27.03% for sale after tax Profit (loss) for the period attributable to minority interests -43,282 -44,014 732 1.66% Net profit -39,861 -743,893 704,032 94.64%
2006 is characterized on the one hand by the overlapping of the good performance of ordinary activities, marked by the growth in net operating income in line with that scheduled in the industrial plan and, on the other hand, by a series of adjustments of an extraordinary nature, amounting to more than € 240 million after tax, relating to investments (loans, available financial activities for sale, goodwill) made in previous financial periods. This negative effect is accentuated
74 by the losses, also of an extraordinary nature, recorded by companies classified as held for sale, but which were not in fact sold, contrary to expectations.
75 Below are the main items in the income statement. As at December 30 2006, interest income was € 840.1 million, a 10.8% increase on the figure of € 758.2 million at September 30, 2005. In general, the increase in net interest income was influenced by a context of constantly rising market rates. The increase in net interest income was a result of the rise in interest income of € 284 million (16%) as a result of a commercial policy that restored the Group to full commercial competitiveness, only in part absorbed by an increase in interest expense of €202 million (19.9%). Net interest income also benefited from an increase of € 26.9 million arising from previous dividends not yet paid, relating to the "Tiepolo Finance 2 - mezzanine tranche" security, which were recorded by virtue of the trend in the underlying transaction. The increase in interest expense originated principally from the increased volume of deposits as a result of issues of subordinated and senior debenture issues in the final part of 2005. Profit from the sale of investments was € 45.6 million and included the profit from the sale of the investments held in Fidia Farmaceutici (€ 27.2 million), Bipielle Leasing (€ 19.1 million), Palladio Finanziaria (€ 5 million), Buon Viaggio (€ 1.3 million), Cassa di Risparmio di Bolzano (€ 0.9 million), losses from the sale of Warrant Reti Bancarie - prior to its merger with the parent company - (€ 2.8 million), and the effect of the valuation of the investments by the equity method, negative for a total of € 5.1 million.
Net commissions amounted to € 294.5 million as compared with €316.7million in the same period in 2005. Commission income decreased by € 66.7 million (-12%) due chiefly to the reduction in commissions applied to customer current accounts and commissions arising from brokerage, management and distribution services. The decrease in commission income was more than offset by the decrease of € 150.7 million in commission expense (-63.1%). This reduction stemmed essentially from the non-emergence of the extraordinary components present at September 30, 2005, associated with the Antonveneta takeover for a total of € 118 million. Net income from trading activities showed a positive balance of € 53.6 million at September 30, 2006, while net income from hedging activities was €36.1 million. The profit for the period in question was due to the favourable trend of the markets, which had a positive effect on the equities and OICR [collective managed funds] units in the portfolio. Net profit from hedging operations, in particular, in comparison with the € 47.4 million in 2005. As indicated above, the rise in the interest rate curve was a contributory factor in this result. These positive results, which do not include capital losses stemming from the closure of certain derivatives transactions in previous periods, combined with repositioning on a controlled risk profile. Profit from the sale of loans, amounting to € 68.8 million comprised the profit from the former sale of loans classified as non-performing.
Profit from the disposal of financial assets and liabilities amounted to € 78 million and chiefly comprised profit from the sale of held for sale financial assets, including the interests held in Banca Italease (€ 28.8 million), Area Giochi (€ 15.5 million), Ferfina (€ 4.9 million), CIM Italia (€ 3 million), SI Holding (€ 2 million), Moby (€ 2 million) and minor interests relating chiefly to the merchant banking activities of the subsidiary, Efibanca. Also included was the profit from the sale of the Fingruppo bonds, themselves classified as financial assets held for sale, for an amount of € 11.6 million and the income from the sale of financial liabilities amounting to € 6.5 million.
The balance of the item other operating income and expenses was positive at € 181.7 million, down € 32.1 million (-15%) on 2005, as a result of a more marked fall in other operating income in comparison with other operating expenses. A number of extraordinary expenses have impacted on the performance of this item, notably the loss of around € 12 million recorded by the affiliated company, Bipitalia Gestioni, following the sale of an investment in structured securities, which was performed to avoid impairing the managed portfolio to which they had been added. Further expenses emerged from the settlement of tax obligations relating to transactions that occurred in the previous years and from extraordinary costs incurred in the completion of real estate
76 initiatives. Finally, it should be noted that in 2005 an extraordinary profit of around €15 million was recorded as a result of the settlement of a dispute. Other expenses also included contingent liabilities of € 13.8 million. Other income included costs recovered from customers on overdrawn current accounts and deposits worth €83.8 million, income from securitisation transactions prior to January 1, 2004 of € 20.1 million, income generated from supplementary insurance cover on consumer loans disbursed by the subsidiary Bipitalia Ducato for an amount of €36.5 million and contingent assets worth €24 million.
As a result of these trends, net operating income was € 1,728 million, an increase of 16.3% on 2005. Net adjustments to loans amounted to € 333 million, as opposed to 739.5 million in 2005, of which € 191 million related to impaired loans (including € 169 million net adjustments for non- performing loans, € 50 million for net adjustments to problem loans and restructured exposures and € 28 million recovered on expired loans over 180 days) and € 142 million for performing loans. The figure for the current period includes a writeback of around € 44 million, represented by the profit arising from the reversal of the discounting effect recorded last year on the non- performing loans sold in the first half of 2006. The net adjustments to impaired loans are attributable both to the prudent valuations made on the loan portfolio, following in-depth analyses focusing on the micro-credit funds, and to the significant discounting effect, amounting to €90 million, on the basis of IAS/IFRS standards. As regards the situation last year, the loans expired for over 180 days, at December 31, 2006 were significantly reduced and this had a positive effect with a net recovery in value of €28 million. Amongst the writedowns on non-performing loans, we note the further adjustment of € 25 million in total from disbursements to the Magiste group. The net adjustment to performing loans includes 104 million for the writedown of the disbursement for the financing of the project for the acquisition of the Barilla di Kamps Group and Harry’s, in addition to the adjustment of € 21.9 million for capitalized interest in the year on the same position, as described in more detail in the section relating to the year’s events (The 2006 financial year for the Gruppo Banca Popolare Italiana). The effects of the adjustments in value for loans fell from 2.65% in December 2005 to the current 1.16% (1.31% without taking into account this increase in value and 0.81% without taking into account the extraordinary adjustments such as Gruppo Barilla and Magiste). The adjustments in value for activities and other financial operations amounted to 99.4 million and include the writedown of the Parent Company’s holding in Hopa for €81 million, and the adjustments in value of €14 million for mezzanine securities held by BPI and relating to the Tiepolo II securitization, the value of which reflects the trend in the underlying securitisation.
The section personnel and administrative expenses overall showed an increase of 1.8% on 2005. Personnel expenses saw a decrease of about 2%, at €529 million. Other administrative expenses increased by 6.3% from €442.3 million to €470.4 million. The increase is attributable to higher costs due to the reorganization and commercial re-launch of the Group, such as: additional costs for investment in the company’s IT system, significant advertising and promotion, consultancy and legal costs. The increase in costs was, however, balanced by a careful policy of controlling overheads, in line with the industrial plan. At 31 December 2006 appropriations to provisions for contingencies and charges were 53.4 million, significantly down on 2005, at € 233.5 million. Recall that the charges recorded in 2005 were due to non-recurring items, such as provisions relating to the Parmalat revocatory action, charges connected to the Antonveneta takeover and charges connected to potential contingencies in the finance area. Amongst the appropriations for the 2006 financial year, we note the appropriations
77 for €10 million for personnel expenses, € 4.7 million for pension disputes and € 24.2 million for various disputes. Net adjustments to intangible assets and property, plant and equipment totalled €77.4 million, a fall of 6.6% on the figure of €82.9 million in 2005, chiefly due to the effect of the harmonisation of depreciation rates on buildings at Group level. Note too that adjustments amounting to a total of 5 million have been made to the value of a group of buildings belonging to the subsidiary Bipielle Real Estate in order to line up the accounts figure with the valuation value. Standing at €1,526.6 million, operating expenses were €704 million lower than the figure for 2005. This produces a positive Operating Profit of €165.4 million, compared with the loss of €781.6 million at September 30, 2005.
The item adjustments to goodwill value amounted to €47 million, €14.1 million of which refers to the impairment of the subsidiary, whose sale was in progress, Area Life International Assurance, and €32.5 million to the cancellation of the goodwill originally recorded for Banca Popolare del Trentino, following the sale of the branches in Trentino and the related brand name, as explained more fully in “Events during the period” section in the present Report. Balancing this adjustment, the item profit from the sale of investments recorded a capital gain of €24.1 million, realized from the sale of the branches in Trentino and of the related brand name. The Income from continuing operations before tax was € 142.6 million, as against a loss of 822.8 million in 2005.
Losses from activity groups held for sale after tax show a negative balance of €42 million, which includes income and expenses, net of the related intragroup relationships, the controlled subsidiaries, Bipielle Net, Bipielle Previdenza, Area Life International Assurance and some minority holdings (Glass Italy BV and Gruppo Acque Minerali Riunite) in the process of being sold, held by Efibanca as part of its merchant banking business. The peculiar nature of the item and the fact that it lies outside the Group's usual field of activity means that any comparison with the figure recorded in the same period of 2005 is meaningless.
The item loss for the period attributable to minority interests includes the share of income attributable to minority interests on the basis of equity ratios. The figure for September 30, 2006 is affected by the changes in the equity ratios calculated for the third quarter of 2006 following the merger of the sub-holdings Bipielle Investimenti and Reti Bancarie into the Parent Bank. If the above mergers had taken place at the start of the year, the profit attributable to minority interests as at September 30, 2006 would have amounted to € 21 million compared with the figure of € 20.3 million in September 2005, recalculated on the basis of consistent criteria. Finally, this produces a Net profit for the period of €150.6 million, compared with a loss of €153 million in the same period of 2005.
78
QUARTERLY CHANGES IN THE QUARTERLY INCOME STATEMENT
fourth third quarter second first quarter Income Statement items quarter 2006 2006 quarter 2006 2006 FP
10. Interest income and similar revenue 620,227 504,260 506,861 423,008 20. Interest expense and similar charges -395,631 -289,741 -287,517 -241,367 30. Net interest income 224,596 214,519 219,344 181,641 40. Commission income 134,333 113,935 113,424 127,240 50. Commission expense -28,123 -20,147 -20,642 -19,328 60. Net commissions 106,210 93,788 92,782 107,912 70. Dividends and similar income 8,117 1,124 20,360 30 80. Net income from trading activities -3,737 36,109 -14,594 35,789 90. Net income from hedging activities 8,275 13,617 8,475 5,712 100. Profit (loss) from the sale or repurchase of: 39,998 4,693 73,760 28,279 a) loans 1 -309 69,083 b) available-for-sale financial assets 34,512 5,575 2,724 28,279 c) held-to-maturity financial assets d) financial liabilities 5,485 -573 1,953 Net income from financial assets and liabilities designated at fair 110. -2,953 -3,108 value 120. Total income 380,506 363,850 397,019 359,363 130. Net adjustments for impairment of: -336,050 -37,384 -22,000 -37,034 a) loans -240,905 -41,441 -13,459 -37,237 b) available-for-sale financial assets -95,540 1,943 -5,316 c) held-to-maturity financial assets d) other financial transactions 395 2,114 -3,225 203 140. Net income from financial operations 44,456 326,466 375,019 322,329 170. Net income from financial and insurance operations 44,456 326,466 375,019 322,329 180. Administrative expenses: -286,124 -242,465 -255,863 -214,911 a) personnel expenses -147,482 -127,115 -134,056 -120,312 b) other administrative expenses -138,642 -115,350 -121,807 -94,599 190. Net provisions for contingencies and charges -21,874 2,012 -32,489 -1,025 200. Net adjustments to property, plant and equipment -19,754 -12,020 -12,851 -10,005 210. Net adjustments to intangible assets -4,911 -7,664 -4,650 -5,563 220. Other operating income/expenses 57,602 45,059 26,806 52,224 230. Operating costs -275,061 -215,078 -279,047 -179,280 240. Gains (losses) from investments 8,682 14,242 21,429 1,255 260. Net adjustments to goodwill -38,696 -8,203 -63 270. Profit (loss) from sale of investments 24,082 28 4 280. Profit (loss) from continuing operations before tax -236,537 117,455 117,342 144,304 290. Income taxes on continuing operations 38,250 -41,578 -34,611 -59,119 300. Profit (loss) from continuing operations after tax -198,287 75,877 82,731 85,185
Profit (loss) from groups of activities classified as held for sale after 310. -14,339 3,772 -26,474 -5,044 tax 320. Profit (loss) for the period -212,626 79,649 56,257 80,141
79 330. Profit (loss) for the period attributable to minority interests 22,124 -20,977 -15,988 -28,441 340. Profit (loss) for the period attributable to parent bank -190,502 58,672 40,269 51,700
The figures have been restated to accommodate the changes in the scope of consolidation which took place in 2006, arising from the reclassification of the contribution made by the affiliated companies Area Life International Assurance, Società Riscossione Tributi Lucca e Cremona, Bipielle Network and Bipielle Previdenza among Profit/loss from discontinued operations after tax. A number of items have also been appropriately reclassified in order to apply international accounting standards more precisely to certain companies that come under the scope of consolidation. Certain figures for the third quarter of 2006 have been reclassified to harmonise them with the accounting arrangements adopted on the basis of the drawing up of the accounts for the 2006 financial period. From an analysis of the quarterly changes, note that the fourth quarter of 2006, it emerges that the net interest income, the net commissions and the total income are up on previous quarters. This growth is even more accentuated if we remove the extraordinary item figures that have positively affected the second quarter (€27 million over the interest income from previous dividends for Tiepolo II securities and €69 million from profits from the sale of loans) and the figures for the trend in finance volatility in the different quarters. The adjustments in value made in the last quarter for a total amount of 336 million, both from loans and from other financing activities held for sale, refer chiefly to the extraordinary events previously mentioned, such as the writedown of the loan for the acquisition of Gruppo Barilla di Kamps and Harry’s (€104 million), the writedown of the loan to Magiste (€25 million in total), the writedown of Hopa (€81 million) and the writedown of mezzanine securities held by BPI for the Tiepolo II securitisation (€14 million). Furthermore, again in the final quarter, writedowns of the micro-credit funds were made following a more prudent valuation of the loans portfolio. The total operating costs for the final quarter also remain substantially in line with previous quarters, recording an increase in administrative costs due to higher legal and consultancy costs and appropriations to provisions for contingencies and charges.
Adjustments to the value of goodwill and losses from group activities held for sale recorded in the final quarter, both chiefly relating to Area Life, have increased the losses for the quarter itself.
ADDITIONAL INFORMATION
With regard to related party transactions, refer to Section H of the notes.
The Group does not carry out research and development activities.
As regards the own shares held in the portfolio, refer to the notes.
80 THE PERFORMANCE OF THE PRINCIPAL COMPANIES
To supply further analytical detail, a summary of the performance for the financial year of the Group's principal companies is shown below.
With regard to the Parent Bank, Banca Popolare Italiana, you are referred to the separate individual financial statements provided in this dossier.
Banca Popolare di Crema
Financial statements figures 31/12/2006 31/12/2005 changes % Total assets 1,680,261 1,493,706 12.49% Total receivables 1,414,197 1,255,516 12.64% of which customer loans 1,064,628 939,453 13.32% Financial assets 65,404 38,277 70.87% Shareholdings 4,779 4,779 Total payables 1,337,063 1,161,568 15.11% of which due to customers and securities in circulation 790,546 940,030 -15.90% Indirect deposits 1,335,488 1,198,755 11.41% of which under management 691,251 554,543 24.65% Net inter-bank position -196,948 94,525 -308.36% Shareholders' equity (including profit/loss) 278,086 274,165 1.43% Economic data Interest margin 39,847 39,362 1.23% Total income 56,473 58,351 -3.22% Net value adjustments for deterior. of loans and financial assets -4,197 -2,485 68.89% Administrative expenses (*) -33,499 -33,135 1.10% Profit (loss) from current operations before taxation 24,489 24,949 -1.84% Net profit (loss) (*) 14,744 14,384 +2.50% Operating structure Number of employees 264 260 Number of bank branches 44 44 Financial statements ratios ROE 5.30% 5.25% ROA 0.88% 0.96% Interest margin/Total income 70.56% 67.46% Administrative expenses/Total income 59.32% 56.79% Total financial assets/Total assets 3.89% 2.56% Non-performing loans/Customer loans 0.35% 0.23%
Net adjustments for deterioration of loans/Customer loans 0.39% 0.26%
(*) The figures for the 2005 financial year were reclassified taking into account the distribution of profits to employees.
The total customer loans was 1,064.6 million, an increase of 13.3% compared to last year, thanks above all to the marked growth in mortgages, which rose from 230 million in 2005 to 379 million (+64.8%).
Direct deposits (due to customers and securities in circulation) were 790 million, down by 15.9%. In particular, the amount due to customers fell from 741.5 million to 585.3 million, a decrease of
81 21%, against a slight increase in securities in circulation, which reached 205.1 million, up by 3.3% on December 2005.
Total indirect deposits reached 1,335.5 million, up by 11.4%, thanks to the marked improvement in the assets under management component, which rose by 24.6% reaching a total of 691.2 million.
2006 ended with a net profit of 14.7 million, substantially stable with respect to the previous financial year.
The total income, which was 56.4 million, fell by 3.2% with respect to the figure at December 2005, with an interest margin substantially in line with last year (+1.2%) and net commissions dropped by 10.3% (-1.7 million), only partially compensated by higher dividends, which rose to 1.3 million (+47.1%).
The net value adjustments to loans were 4.2 million, higher than that of the 2005 financial year, following the transfer of a significant amount to problem loans. Administrative expenses rose slightly to 33.5 million (+1.1%), off-set by an increase of 1.7 million in other operating income that took current pre-tax operating profit to 24.5 million (-1.8%).
Banca Popolare di Cremona
Financial statements figures 31/12/2006 31/12/2005 changes % Total assets 1,964,646 1,693,410 16.02% Total receivables 1,836,326 1,567,353 17.16% of which customer loans 1,609,791 1,296,176 24.20% Financial assets 47,201 43,889 7.55% Shareholdings 5,070 5,070 0.00% Total payables 1,633,122 1,349,432 21.02% of which due to customers and securities in circulation 1,309,099 1,346,849 -2.80% Indirect deposits 1,760,670 1,741,542 1.10% of which under management 1,051,030 1,041,239 0.94% Net inter-bank position -97,487 268,595 -136.30% Shareholders' equity (including profit/loss) 225,112 222,701 1.08% Economic data Interest margin 51,309 46,268 10.90% Total income 79,982 85,355 -6.30% Net value adjustments for deterior. of loans and financial assets -5,532 -1,603 245.10% Administrative expenses -53,059 -57,257 -7.33% Profit (loss) from current operations before taxation 25,527 20,695 23.35% Net profit (loss) 14,752 13,225 11.55% Operating structure Number of employees 449 459 Number of bank branches 73 76 Financial statements ratios ROE 6.55% 5.94% ROA 0.75% 0.78% Interest margin/Total income 64.15% 54.21% Administrative expenses/Total income 66.34% 67.08% Total financial assets/Total assets 2.40% 2.59%
82 Net non-performing loans/Net customer loans 0.41% 0.13%
Net adjustments for deterioration of loans/Customer loans 0.34% 0.12%
By analysing the equity structure, a substantial increase is observed in exposure to customer loans, which reached a total of 1,609.8 million, up by 24.2% with respect to the previous financial year. Amongst the technical forms, the opening of overdrafts reached 630.6 million, equal to about 39% of the total net loans, an increase of 32.3% over December 2005.
The mortgages dynamics were also positive at 577.8 million, up by 7.3% on an annual basis. Overall indebtedness, which was 1,633.1 million, is up by 21%, against substantial stability of the direct deposits (-2.8%) and indirect deposits (+1.1%). The increase in repurchase agreements is noted, these rose from 67.7 million to 134.1 million, up by 98%, mainly due to the transfer of liquidity from the monetary funds.
The 2006 financial year ended with a positive trend in corporate profitability, with the achievement of a profit for the year of 14.7 million, up by 11.55% with respect to the 2005 figure.
The interest margin rose from 46.2 million to 51.3 million, an improvement of 10.9%, correlated to the increase in customer loans, net commissions (-2.8%) fell slightly compared to the previous period, while the total income was 79.9 million, a fall of 6.3% with respect to the figure at December 2005.
Net adjustments to loans totalled 5.5 million, raising the ratio between adjustments to loans and customer loans to 0.34% from 0.12% in the last financial year. Administrative expenses fell by 7.3% from the 2005 figure, mainly thanks to the reduction of personnel expenses, which were 27.5 million, a drop of15.6% with respect to the previous period.
Allocations to the provisions for contingencies and other charges were lower, contributing to the considerable improvement in the operating costs that reduced by 22.4%.
83 Cassa di Risparmio Lucca Pisa Livorno
31/12/2005 31/12/2005 Pro forma % 31/12/2006 Pro forma CRLU change
Financial statements figures Total assets 9,502,777 8,615,439 5,131,233 10.30% Total receivables 8,265,039 7,461,572 3,892,217 10.77% of which customer loans 7,286,789 6,599,237 3,629,844 10.42% Financial assets 240,426 167,718 129,508 43.35% Shareholdings 4,642 35,275 833,900 -86.84% Total payables 7,814,615 6,969,153 3,664,504 12.13% of which due to customers and securities in circulation 6,138,339 6,250,624 3,496,800 -1.80% Indirect customer deposits 5,592,227 4,969,687 3,105,194 12.53% of which: asset management 3,407,492 3,095,068 2,041,286 10.09% Net inter-bank position -698,027 143,806 94,669 immaterial Shareholders’ equity (including profit/loss) 1,281,457 1,242,041 1,228,511 3.17% Economic data Interest margin 258,749 248,505 138,340 4.12% Total income 383,232 350,952 205,101 9.20% Net value adjustments for deterioration of loans and other -71,822 -62,889 -22,391 14.20% financial assets Administrative expenses -209,429 -191,855 -98,001 9.16% Profit (loss) from current operations before taxation 135,722 94,473 75,582 43.66% Profit (Loss) for the year 93,130 47,003 43,069 98.14% Operating structure Number of bank branches 235 203 97 Number of employees 1,771 1,464 722 Financial statements ratios ROE 7.26% 3.78% 3.63% ROA 0.98% 0.50% 0.84% Interest margin/Total income 67.51% 70.81% 67.44% Administrative expenses/Total income 54.64% 54.67% 47.78% Total financial assets/Total assets 2.53% 1.95% 2.52% Net non-performing loans/Customer loans 0.46% 0.42% 0.43% Net adjustments for deterioration of loans/net customer loans 0.98% 0.90% 0.56%
Comments on the evolution of the equity magnitudes and profitability are based on the comparison with the pro forma figures for the 2005 financial year, prepared to take into account the merger of the Lucca, Pisa e Livorno “Casse” during the course of the 2006 financial year.
Direct customers deposits (due to customers and securities in circulation) totalled 6,138.3 million, a slight fall with respect to the figure at the end of 2005, while overall indirect deposits reached 5,592.2 million that, compared to 4,969.6 million at the end of 2005, to registered an increase of 12.5%. Assets under management also progressed, rising to 3,407.5 million, +10% on the December 2005 figure.
Net customer loans totalled 7,286.8 million and showed an increase of 10.4% with respect to last December, supported by overdrafts and mortgages.
84 The trend of the total interest-bearing funds under administration brokered is only partially reflected by the entity of the interest margin, which rose to 258.7 million compared to 248.5 at December 2005 (+4.1%). The reduction in net commissions, which amounted to about 82.1 million compared to 87.2 million for the 2005 financial year, discounts the different recording criterion for some income (on-off commissions on financial and insurance products, commissions on mortgages). Net of this effect, there was a substantial stability of the figure.
The total income grew by 9.2% to 383.2 million, mainly attributable to the profits realised from the assignment of non-performing loans (about 5 million) and financial assets available for sale, particularly the SI Holding (approximately 1 million) and Italease shares (28 million overall). Net Value adjustments to loans amounted to 71.8 million euro, up by 20.8 with respect to last year’s amount, while the write-down of financial assets available for sale relating to the accrual on the Tiepolo securities, was more than off-set by the value recoveries from the guarantee provision relating to the securitisation transaction on non-performing loans, taking the net result of financial management to 311.5 million (+8.1%).
Administrative expenses rose overall from 191.8 million to 209.4 million, a 9.2% increase, which included the consequence of the larger corporate size and costs connected to the restructuring process taking place.
The profit from the sale of the equity investment in Bipielle SGC, which amounted to 13.6 million, contributed to achieving a brilliant corporate result of 93.1 million, almost doubling the performance of 47 million in the previous financial year.
Banca Caripe
Financial statements figures 31/12/2006 31/12/2005 changes % Total assets 1,496,268 1,316,384 13.67% Total receivables 1,411,529 1,208,214 16.83% of which customer loans 1,277,667 991,865 28.81% Financial assets 3,569 2,008 77.79% Total payables 1,327,783 1,161,836 14.28% of which due to customers and securities in circulation 1,237,351 1,068,653 15.79% Indirect deposits 567,479 637,375 -10.97% of which under management 194,843 184,610 5.54% Net inter-bank position 43,430 123,166 -64.74% Shareholders’ equity (including profit/loss) 109,515 104,677 4.62% Economic data Interest margin 45,941 43,252 6.22% Total income 60,446 55,604 8.71% Net value adjustments for deterior. of loans and financial assets -8,608 -4,179 105.98% Administrative expenses -44,700 -46,308 -3.47% Profit (loss) from current operations before taxation 13,350 8,499 57.08% Profit (Loss) for the year 6,838 6,949 -1.60% Operating structure Number of employees 399 382 Number of bank branches 51 47 Financial statements ratios
85 ROE 6.24% 6.64% ROA 0.46% 0.53% Interest margin/Total income 76.00% 77.79% Administrative expenses/Total income 73.95% 83.28% Total financial assets/Total assets 0.24% 0.15% Non-performing loans/Customer loans 0.20% 0.83%
Net adjustments for deterioration of loans/Customer loans 0.67% 0.42%
86 The 2006 financial year recorded a substantial expansion of net customer loans, which amounted to 1,277.6 million, up by 28.8% compared to the figures at the end of 2005, thanks to the good performance of the technical forms of a commercial nature and mortgages. Direct customer deposits were 1,237.3 million, up by 15.8% with respect to the previous period, while indirect deposits registered an overall fall of a little less than 11% to 567.4 million. Only the managed deposits of 194.8 million showed an opposite trend, with an improvement of 5.5% with respect to the figure at the year-end.
With regard to the income statement, the total income was 60.4 million, up by 8.7% with respect to the previous period, thanks to the positive trend of the interest margin, which was up by 6.2% and the positive contribution from the cessions of non-performing loans, while net commissions were substantially stable at the same levels as last year.
The value adjustments to loans showed a net increase at 8.6 million euro, while administrative expenses showed an opposite trend with a fall of 3.5%, as did allocations to the provisions for contingencies and other charges, allowing the overall operating costs for the period to be contained to 38.4 million, a reduction of 10.3% with respect to December 2005.
The period recorded a good maintenance of corporate profitability with a net profit of 6.8 million, substantially stable compared to last year.
Banca Valori
Financial statements figures 31/12/2006 31/12/2005 change % Total assets 199,719 187,344 6.61% Total receivables 154,211 136,034 13.36% of which customer loans 92,871 114,588 -18.95% Financial assets 25,94 31,331 -17.21% Shareholdings 17,185 17,185 0.00% Total payables 135,250 123,538 9.48% of which due to customers and securities in circulation 110,062 73,326 50.10% Indirect deposits 741,006 873,003 -15.12% of which under management 23,016 30,537 -24.63% Net inter-bank position 36,152 -28,766 225.68% Shareholders’ equity (including profit/loss) 58,070 57,859 0.36% Economic data Interest margin 3,980 4,096 -2.83% Total income 5,190 6,001 -13.51% Net value adjustments for deterior. of loans and financial assets -180 23 immaterial Administrative expenses -2,415 -2,733 -11.64% Profit (loss) from current operations before taxation 2,295 3,229 -28.92% Net profit (loss) 1,522 1,998 -23.82% Operating structure Number of employees 5 6 Number of bank branches 1 1 Financial statements ratios ROE 2.69% 3.58% ROA 0.76% 1.07% Interest margin/Total income 76.69% 68.26%
87 Administrative expenses/Total income 46.53% 45.54% Total financial assets/Total assets 12.99% 16.72% Non-performing loans/Customer loans 0.00% 0.00%
Net adjustments for deterioration of loans/Customer loans 0.19% -0.02%
88 The 2006 financial year registered a drop in net loans to customers of 18.9%, above all as an effect of the contraction in overdrafts.
Customer deposits (meaning the sum of the amounts Due to customers and Securities in circulation) totalled 110 million, up by 50.1% on December 2005. This trend is explained by the notable growth in repurchase agreement transactions, which rose to 31.2 million (+126%), and current accounts, up by 78.8 million (+32.6%).
Indirect deposits, the bank’s core business, suffered a fall of 15.1% to 741 million, with a significant reduction in both the securities in safe-keeping and administration and assets under management component (-24.6%) due to the contraction relating to managed portfolios (-26.2%) and mutual funds (-27.9%). Insurance products, by contrast, improved. The interest margin declined slightly from 4 million to 3.9 million (-2.8%), following the trend of the aggregates shown above.
Net commissions show a regression from 1.3 million euro in 2005 to 0.7 million in 2006, a trend attributable above all to the contraction recorded in some components of the investment management, broking and consultancy services, which fell from 1.1 million to 0.4 million euro. Administrative expenses totalled 2.4 million, a notable reduction of 11.6% of the 2005 figure, due to an improvement in corporate efficiency.
Based on the above, the income statement shows a fall in profit, down from about 2 million for the last financial year to a little more than 1.5 million.
89 Banca Popolare di Mantova
Financial statements figures 31/12/2006 31/12/2005 change % Total assets 250,063 214,014 16.84% Total receivables 244,148 208,004 17.38% of which customer loans 202,619 163,828 23.68% Financial assets 162 132 22.73% Total payables 214,613 185,789 15.51% of which due to customers and securities in circulation 154,760 150,423 2.88% Indirect deposits 152,173 126,699 20.11% of which under management 16,381 13,910 17.76% Net inter-bank position -18,324 8,810 -307.99% Shareholders’ equity (including profit/loss) 22,176 22,159 0.08% Economic data Interest margin 4,728 4,504 4.95% Total income 6,306 5,903 6.83% Net value adjustments for deterior. of loans and financial assets -1,040 -699 48.78% Administrative expenses -5,276 -5,044 4.60% Profit (loss) from current operations before taxation 340 547 -37.84% Net profit (loss) for the year 17 157 -89.17% Operating structure Number of employees 34 31 Number of bank branches 8 8 Financial statements ratios ROE 0.08% 0.71% ROA 0.01% 0.07% Interest margin/Total income 74.98% 76.30% Administrative expenses/Total income 83.67% 85.45% Total financial assets/Total assets 0.06% 0.06% Deterioration of assets/Customer loans 0.07% 0.06%
Net adjustments for deterioration of loans/Customer loans 0.51% 0.42%
An analysis of the substantiality of the equity shows how 2006 was characterised by a decisive expansion in net customer loans, which totalled 202.6 million, an increase of around 23.7% with respect to last year, witnessing the ever stronger role played by the bank in support of the local economy.
Overall debt was up by 15.5% with respect to last year: Against a substantial stability of the direct customer deposits, indirect deposits to registered a decisive increase (+20.1% compared to last year), mainly thanks to the positive trend in funds under administration and assets under management that totalled 16.4 million, +17.7% on the December 2005 figure.
Under the economic profile, a 6.8% progression is noted in the total income, which reached 6.3 million, thanks to the improvement in the interest margin (+4.9%) and net commissions (+4.5%).
Other operating income showed substantial stability, while value adjustments to loans were a little more than a million euro, pushing the ratio between net adjustments and loans from 0.42% in the last financial year to 0.51% and contributing to the reduction in net profit for the period.
90 Administrative expenses amounted to 5.27 million, up by 4.6% a progression of about 8.5% in personnel expenses and 2% in other administrative expenses.
91 Efibanca
Financial statements figures 31/12/2006 31/12/2005 change % Total assets 5,255,965 5,755,516 -8.68% Total receivables 4,242,530 4,737,203 -10.44% of which customer loans 4,080,910 4,474,072 -8.79% Financial assets 272,185 286,169 -4.89% Shareholdings 94,648 248,614 -61.93% Total payables 4,022,895 4,646,940 -13.43% of which due to customers and securities in circulation 2,806,075 3,059,249 -8.28% Indirect deposits 1,356,251 1,432,001 -5.29% of which under management 5,002 4,283 16.79% Net inter-bank position -1,055,200 -1,324,560 20.34% Shareholders’ equity (including profit/loss) 902,254 805,326 12.04% Economic data Interest margin 61,491 78,563 -21.73% Total income 123,388 138,426 -10.86% Net value adjustments for deterior. of loans and financial assets -20,475 -15,234 34.40% Administrative expenses -38,037 -37,351 1.84% Profit (loss) from current operations before taxation 109,742 87,645 25.21% Net profit (loss) 81,942 63,193 29.67% Operating structure Number of employees 237 233 Number of bank branches 6 7 Financial statements ratios ROE 9.08% 7.85% ROA 1.56% 1.10% Interest margin/Total income 49.84% 56.75% Administrative expenses/Total income 30.83% 26.98% Total financial assets/Total assets 5.18% 4.97% Non-performing loans/Customer loans 0.95% 0.00%
Net adjustments for deterioration of loans/Customer loans 0.24% 0.28%
Net customer loans totalled 4,080.9 million at 31 December 2006, an 8.8% drop on the figure at the end of 2005. The principal reasons for containment in 2006 are specifically ascribable to the early extinctions of loans of 635 million and disbursements of loans falling by 7.4% with respect to the same period of last year (1,517 million against 1,639 million last year). The aforesaid must also be evaluated in light of the market problems connected with the negative events that affected the BPI Group in 2005.
Direct deposits (the sum of amounts due to customers and securities in circulation) also suffered a contraction from 3,059.2 million at end 2005 to 2,806 million at 31 December 2006 (-8.3%), almost entirely attributable to the performance of securities in circulation (above all comprising structured bonds), which fell to 2,782 (-8.5%). Bonds were issued during the course of 2006 for an overall amount of 738 million.
With regard to the merchant bank area, the Private Equity business contracted by around 20% in managed shareholdings with respect to the figure at the end of 2005. The net balance between
92 investments made and disinvestments of various types, including therein the adjustments relative to some enduring value losses on shareholdings held was a negative amount of about 73 million euro. Under the disposals profile, the 2006 financial year recorded the definitive sales of interests in Bormioli Rocco e Figli Spa, Fidia Spa, Sisal Spa, Palladio Finanziaria Spa and Moby Spa for a total of 188.3 million euro. Capital gains of approximately 62 million arose from these disposals.
The M&A Advisory activity also recorded a positive result of about 3.8 million in the period. Amongst the main truly consultancy activities, Efibanca assisted the listed company Reno de Medici in its non-instrumental property spin-off and Partecipazioni Italiane Spa (formerly Necchi Spa) in its delisting from the Italian stock market. Furthermore, it was the consultant to Aerosoft, a Trefin Group company, in its acquisition of the majority holding in Nautica and received a mandate from Abacus sicar, together with its advisor Pigreco Capital Partners, for the equity restructuring of Phard Spa.
The income statement records an interest margin of 61.5 million, down 21.7% with respect to last year, due to the non-positive performance of net loans to customers and banks, which reduced by almost 550 million euro over twelve months. Furthermore, the economic benefit linked to the progressively greater recourse to short-term funding, rather than the more onerous medium to long-term funding by means of bonds that contributed, in the past, to the growth trend of the margin, did not occur in 2006 as in the more recent financial years.
Net commissions amounted to 27.5 million, showing a fall of 7% compared to 29.7 million in 2005, due to the reduction in commissions related to the Loans, Debt and Equity Capital Market activities, only partly compensated by the rise in net commissions from guarantees given/received and the increase in commissions arising from derivative business with customers. Administrative expenses were substantially stable compared to 2005, while contributions deriving from the sales of shareholdings in connection with the Private Equity activities were significant. The latter contributed to taking net profit for the period to 81.9 million, an increase of 29.6% with respect to last year.
93 BIPIELLE BANK (SUISSE)
Financial statements figures 31/12/2006 31/12/2005 change % Total assets 328,146 753,068 -56.43% Total receivables 281,462 679,534 -58.58% of which customer loans 118,916 369,943 -67.86% Financial assets 41,825 69,019 -39.40% Total payables 252,442 665,404 -62.06% of which due to customers and securities in circulation 62,706 98,321 -36.22% Indirect deposits 249,409 1,395,015 -82.12% of which under management 249,409 298,097 -16.33% Net inter-bank position -27,190 -257,492 89.44% Shareholders’ equity (including profit/loss) 36,790 34,219 7.51% Economic data Interest margin 3,615 7,012 -48.45% Total income 13,422 21,147 -36.53% Net value adjustments for deterior. of loans and financial assets 287 -8,134 -103.53% Administrative expenses -8,784 -10,686 -17.80% Profit (loss) from current operations before taxation 4,061 6,748 -39.82% Net profit (loss) 3,754 5,256 -28.58% Operating structure Number of employees 45 53 Number of bank branches 1 1 Financial statements ratios ROE 10.20% 15.36% ROA 1.14% 0.70% Interest margin/Total income 26.93% 33.16% Administrative expenses/Total income 65.44% 50.53% Total financial assets/Total assets 12.75% 9.17% Non-performing loans/Customer loans immaterial immaterial
Net adjustments for deterioration of loans/Customer loans immaterial 2.20%
The financial statements total was 328 million euro (753 million in 2005). Both loans to banks (- 45.7%) and customer loans (-66.4%) diminished.
The loan policy was directed towards the concession of Lombard loans for facilitations supported by a guarantee of immediate liquidity. The stringency adopted in the granting of credit has avoided the emergence of criticality situations. Particular attention was paid to termination of previous outstanding legal matters; allocations for other risks for the financial year continued in parallel. The interest margin amounted to 3.6 million (7 million in 2005) and reflects the aforesaid contraction in net loans; net commissions amounted to 6.9 million against 12.3 million in 2005, the total income deriving therefrom fell by 36.5% with respect to the 2005 figure. Operating costs totalled 9.6 million (6.3 million in 2005); in fact, despite the reduction in administrative expenses, extraordinary gains relative to the income received from a civil dispute, which positively influenced last year’s result, were down.
94 Gross profit, as a result of the aforesaid effects, was 4.1 million (6.7 million in 2005), a reduction of about 40% after value adjustments and provisions of 1.5 million. The net profit for the year amounted to 3.8 million, a 28.6% drop on last year (5.3 million). The ROE at the end of 2006 was around 10.2%, including following an increase in shareholder’s equity that at the financial year-end totalled 36.8 million (34.2 in 2005). The equity increase was in order to respond to market objectives and as a guarantee against any further critical factors.
Bipitalia Ducato
Financial statements figures 31/12/2006 31/12/2005 change % Total assets 4,126,653 3,041,588 35.67% Total receivables 3,754,603 2,690,265 39.56% of which customer loans 3,749,033 2,673,728 40.22% Financial assets 20,839 10,719 94.41% Total payables 3,665,755 2,592,202 41.41% of which due to customers and securities in circulation 981,704 823,768 19.17% Indirect deposits 793 478 65.90% of which under management 793 478 65.90% Net inter-bank position -2,678,481 -1,751,897 -52.89% Shareholders’ equity (including profit/loss) 346,536 342,086 1.30% Economic data Interest margin 124,687 100,282 24.34% Total income 143,329 101,105 41.76% Net value adjustments for deterior. of loans and financial assets -43,653 -37,516 16.36% Administrative expenses -70,333 -61,202 14.92% Profit (loss) from current operations before taxation 73,298 73,177 0.17% Net profit (loss) 41,660 42,372 -1.68% Operating structure Number of employees 623 575 Financial statements ratios ROE 12.02% 12.39% ROA 1.01% 1.39% Interest margin/Total income 86.99% 99.19% Administrative expenses/Total income 49.07% 60.53% Total financial assets/Total assets 0.50% 0.35% Non-performing loans/Customer loans 0.80% 0.00%
Net adjustments for deterioration of loans/Customer loans 1.16% 1.40%
Customer loans amounted to 3,749 million, up by 40.2% on last year, to registering, in particular, a considerable progression in the disbursement of consumer credit that reached 2,528.2 million, a 54.6% increase. This result was achieved also through an increasingly greater collaboration with the Group's banks. The more significant increases were recorded in the uncompleted loans sector that comprise the technical forms of personal and revolving loans, which showed a 34.7% growth with respect to the previous period, car purchase loans (+4.4%) and credit cards (+15%).
95 The income statement presents a considerable increase in the interest margin, up by 24.3%, and total income, which registered a notable improvement from 101.1 million to 143.3 million (+41.7%). A marked increase is noted in value adjustments to loans, up from 37.5 to 43.6 million in consequence of the expansion in loans granted, and administrative expenses (+14.9%), both for personnel expenses, with the number of employees up from 575 in 2005 to 623 at December 2006, and other expenses,, with expenses for advertising campaigns being particularly prominent (+3.3 million).
The overall net profit at 41.6 million against 42.3 for the prior financial year was slightly down as a consequence.
Bipitalia Gestioni SGR
Financial statements figures 31/12/2006 31/12/2005 change % Total assets 118,995 149,338 -20.32% Total receivables 39,724 73,983 -46.31% of which customer loans 35,755 58,926 -39.32% Financial assets 28,589 27,905 2.45% Shareholdings 1,600 1,600 0.00% Total payables 27,549 32,337 -14.81% of which due to customers and securities in circulation 5,430 8,028 -32.36% Indirect deposits 12,798,586 12,932,728 -1.04% of which under management 12,798,586 12,932,728 -1.04% Net inter-bank position 2,755 14,692 -81.25% Shareholders’ equity (including profit/loss) 77,883 91,563 -14.94% Economic data Interest margin 1,131 347 225.94% Total income 49,008 62,461 -21.54% Administrative expenses -10,825 -10,188 6.26% Profit (loss) from current operations before taxation 26,265 52,396 -49.87% Net profit (loss) 16,320 31,019 -47.39% Operating structure Number of employees 51 49 Financial statements ratios ROE 20.95% 33.88% ROA 13.71% 20.77% Interest margin/Total income 2.31% 0.56% Administrative expenses/Total income 22.09% 16.31% Total financial assets/Total assets 24.03% 18.69%
Indirect deposits, representing assets under management, were 12,798.5 million, slightly down with respect to the figure for the previous period of 12,932.7 million. Specifically, against an increase in managed portfolio products, a more than proportional reduction in mutual fund investments was registered.
96 Collective investment management (mutual funds) reduced from 6,497 million at 31 December 2005 to 5,746 million, a total decrease of 751 million (equal to 11.5%) and net negative deposits of 892 million. With regard to managed portfolios, these were up from 7,886 million at the end of 2005 to 8,549 million at 31 December 2006, a total increase of 663 million, equal to 8.4%. Net deposits were positive at 492 million.
With reference to the income statement, the total income amounted to 49 million, a 21.5% drop compared to the figure at 31 December 2005, due to a marked fall in commissions receivable (- 10%), down from 160 million in 2005 to 143.9 million. This result is attributable to the commissions receivable from fund management of 60.9 million (19 million relating to the Gpf- Gpm funds), fund subscription commissions of 1.7 million and commissions due on the Gpm-Gpf funds of 63.2 million; the performance commissions on the mutual funds were 15.4 (37.1 million in 2005) while fund management commissions amounted to 1.5 million (3.3 million in 2005), a total of 17 million (40.4 million in 2005). Commissions payable instead remained substantially stable with respect to the last financial year at 97.5 million (98.3 million in 2005). Commissions payable for funds maintenance were 46.4 million (50.2 million in 2005); those for fund subscriptions were 1.2 million, while fund management commissions payable amounted to 38.7 million (30.9 million in 2005).
Administrative expenses totalled 10.8 million (10.2 million in 2005), slightly up with respect to the prior period (+6.2%), while the considerable increase in other operating charges of 12.8 million is attributable to the loss incurred on disposal of an investment in structured securities carried out for the purpose of limiting deterioration of the managed portfolios holding these. This extraordinary cost contributed to the significant reduction of the profit for the period that was 16.3 million, down with respect to last year (31 million).
Bipielle Real Estate
Balance sheet figures 31/12/2006 31/12/2005 PF change % Total assets 869,184 988,236 -12.05% Non-current assets 770,985 806,748 -4.43% Total property investments 612,959 650,749 -5.81% Equity investments 40,704 36,419 11.77% Financial assets 100,666 110,388 -8.81% Current assets 98,198 181,488 -45.89% of which cash on hand and deposits with central bank 2,417 70,103 -96.55%. and post offices Non-current liabilities 46,995 48,666 -3.43% of which due to banks and other financiers 34,628 37,800 -8.39% Total current liabilities 435,536 538,691 -19.15% of which due to banks and other financiers 391,600 449,589 -12.90% Shareholders’ equity (including profit/loss) 386,653 400,879 -3.55% Economic data Total production value 82,971 76,907 7.88% Total production costs 74,845 75,447 -0.80% Operating profit 8,126 1,460 456.58% Financial loss -16,597 -12,726 -30.42% Profit (loss) from current operations before taxation -8,471 -11,266 24.81% Net profit (loss) -14,226 -16,351 13.00%
97 Operating structure Number of employees 86 98
Comments on movements in balance sheet and profitability figures are based on the comparison with the pro forma figures for the 2005 financial year, prepared to take into account the merger of Bipielle Immobili Strumentali and spin-off of Basileus.
Property investments totalled 613 million at 31 December 2006. During the course of the financial year the Company sold property, mainly non-instrumental, for an overall counter value of about 73 million. Purchases for the financial year amounted to about 27 million, mainly referring to the exercise by the Group's banks of the pre-emption rights relating to property adapted for bank branches for which the Company was designated as buyer and, in connection with the “exchange” of bank branches with the Banco Popolare di Verona e Novara Group, the acquisition of the related property.
With particular reference to the property initiatives in progress, the property development initiative called “Santa Giulia” with a book value of 100 million at 31 December 2006 is noted for its significance. This derives from preliminary contracts signed in 2005 (included in the item “Financial assets”). The total cost of the initiative is 203 million and its completion is anticipated for the end of 2008, with the respective deeds of sale being signed during 2009. For the purpose of verifying the sustainability of the book values an appraisal was obtained from a leading property consultancy company. The total value of residential buildings and bank agencies when the initiative is completed will be 105 million, which is fully supported by the professional valuation. The total value of the tertiary complex with compatible functions when the initiative is completed will be 98 million, which is within the range of values given from two alternative valuation scenarios: the “base” scenario that, considering the current market conditions, estimates an overall value of around 74 million and the “best” scenario that, commencing from the prerequisite that the intervention will be successful in meeting the fixed objectives and be as successful as expected, estimates an overall value of some 99 million. Considering that the property scenario has not changed from last financial year and that the initiative is progressing according to the planned timescale, it is considered that the objectives that will make it an overall success are fully realisable and therefore, on the basis of the “best” scenario indicated by the professional appraisal, it is considered that it is unnecessary to make value adjustments to the book values of the initiative.
Passing on to the income statement an 83 million increase in the production value is recorded, mainly generated by the capital gain (6 million) on the sale of non-instrumental property situated in Viale Forlanini, Milan. Despite the increase in depreciation of some 6.2 million, as an effect of the depreciation of all property owned at the same rate (3%), there was an operating profit of 8.1 million, a significant increase with respect to the figure last financial year.
The negative financial result was higher following the greater financial exposure to the Group's banks during the year.
98 CORPORATE GOVERNANCE
The Parent Bank Banca Popolare Italiana’s overall “Corporate Governance” Self-regulatory framework, namely the system of rules and procedures to which the corporate bodies refer for their conduct and in order to fulfil their various responsibilities to the shareholders, was defined by taking into account the prevailing regulations and recommendations contained in the Self- regulatory code for Listed Companies promulgated by Borsa Italiana S.p.A. (Italian stock market), using the forms and methods described below.
The code’s objectives include that of increasing the clarity and substance of certain figures and roles, such as that of the independent directors and internal advisory committees, which by the experience gained over time have seen their duties grow. The Banca Popolare Italiana Group prepares and presents its Corporate Governance Report, drawn up pursuant to Section IA.2.6 of the Instructions to the Regulations for Markets Organised and Managed by Borsa Italiana S.p.A., and it is also prepared on the basis of the indications contained in the “Guide to the compilation of the Corporate Governance Report” by Assonime ed Emittenti Titoli S.p.A., as recommended by Borsa Italiana S.p.A. The Report covers the implementation of the Self-regulatory Code in the 2006 financial year and describes the Company’s current governance system.
Borsa Italiana S.p.A. promulgated the new Self-regulatory Code for listed companies in March 2006. However, in accordance with the specifications in the joint Borsa Italiana – Assonime note of 16 November 2006, the Corporate Governance Report for the financial year commenced in 2006 may refer, alternatively, to the Self-regulatory Code published in March 2006 or to the preceding version of 2002. Listed companies that chose the latter option are required to supply information on their application of the Code published in March 2006 by the end of the 2006 financial year. In particular, in observance of the principle defined as “comply or explain”, in the case of failure to adopt the new Code or apply the individual recommendations, the issuer must clarify their reasons in the report.
Given the above, this report refers to the 2002 version of the Self-regulatory Code (updated in July 2002). Failure to adopt the March 2006 Self-regulatory Code is due to the transition phase that the company is going through. In fact, as known, the proposed merger between Banca Popolare Italiana and Banco Popolare di Verona e Novara was approved at the Extraordinary Shareholders’ Meeting held on 10 March 2007. The merger will result in the creation of a banking Group directed by a Parent Bank called Banco Popolare Società Cooperativa, with a dual governance system. The new Banco Popolare’s governance structure will be created in conformity with the provisions contained in the Self-regulatory Code promulgated by Borsa Italiana in March 2006.
The Parent Bank’s governance structure
Pursuant to art. 20 of the Articles of Association the Bank’s corporate bodies are: the Shareholders' Meeting, Board of Directors, Executive Committee, if appointed, the Chief Executive Officer, if appointed, Board of Statutory Auditors, Arbitration Board and the General Management.
Shareholders' Meeting
Only those who have been recorded in the shareholders' register for at least ninety days and have deposited their shares, or a communication of the intermediary that keeps the relevant accounts, at the Company’s Head Office or branches, or at the entities indicated in the notice of the meeting, at least two working days before that fixed for the meeting, have the right to take part in a Shareholders' Meeting and exercise voting rights therein. Every shareholder has one vote, whatever the number of shares registered in their name may be. Another shareholder, having the right to take part in and vote at a Shareholders' Meeting, may represent a shareholder within the
99 limits indicated above, provided that they are not a director, statutory auditor or employee of the Company or its subsidiaries. No shareholder can represent more than one other shareholder. Representation by a person who is not a shareholder is not permitted, even if they have a general proxy. The aforesaid limitations are not applied in the case of legal representation.
An Ordinary Shareholders' Meeting: i) discusses and approves the financial statements, after hearing the Directors’ and Board of Statutory Auditors’ reports; ii) appoints and removes Directors and determines their remuneration; iii) appoints the Board of Statutory Auditors, designates the Chairman and determines the emoluments of the Statutory Auditors; iv) appoints the independent auditors and arbitrators; v) passes resolutions on the responsibilities of the Directors and Statutory Auditors; vi) passes resolutions on the other matters attributed to the Shareholders' Meeting by the law, as well as any authorisations required by the Articles of Association for completion of acts by Directors, the latter in any case remaining responsible for their acts; vii) approves the Regulations for procedures at meetings. Furthermore, on the proposal of the Directors, the Shareholders' Meeting determines annually, at the time of approval of the financial statements, the amount that must be paid up as an additional subscription to the book value of every new share, as well as the amount of the interest due as indicated in art. 18 of the Articles of Association (art. 6); the sum thus determined for subscription to new shares is also valid for reimbursement of the shares in each case of dissolution of the partial corporate relationship during the course of the financial year.
An Extraordinary Shareholders' Meeting has sole authority to approve a share capital increase when new shares are issued in an extraordinary manner. It can approve share capital increases that can be carried out also by transfers of assets in kind or loans (art. 22). Election to corporate appointments takes place, unless otherwise provided for in the Articles of Association, by an absolute majority of votes at a Shareholders' Meeting. These appointments are made from a list by secret vote (art. 26).
The Board of Directors, delegated boards and committees
The Board of Directors is composed of a number of members from fourteen to twenty, as determined by the Shareholders' Meeting. There are presently 16 Directors, 7 of whom are non- executive and independent. The Board of Directors is vested with all the powers for ordinary and extraordinary management of the Company, save for those matters reserved exclusively for a Shareholders’ Meeting. In addition to duties that cannot be delegated by law, the Board of Directors has sole responsibility for resolutions concerning the determination of general strategic guidelines and the Bank’s general organisational set-up.
The Board is also responsible for resolutions concerning:
- mergers in the cases indicated in Articles 2505 and 2505 bis of the Italian Civil Code;
- resolutions for spin-off, in the cases where the law allows application of art. 2505 bis; - Articles of Association compliance with regulatory directives;
- opening or closing of secondary offices;
- appointment, removal and determination of the remuneration package of the General Manager and of the other members of General Management;
- acquisition and sale of equity investments that determine changes in the Group;
- institution, transfer and closing of agencies and representative offices;
- any constitution of commissions and/or committees, which can include members who are external to the Company with exclusively consultative functions;
100 - the determination of the criteria for both co-ordination and management of the Group's companies and execution of the instructions promulgated by the Supervisory Body.
The Board of Directors can delegate part of its duties to one of its members (“Chief Executive Officer”) determining the limits of the delegated authority, always subject to the aforesaid limits.
The Board of Directors elected on the occasion of the Shareholders’ Meeting held on 28 January 2006 arranged, on 30 January 2006, to appoint Mr. Divo Gronchi as Chief Executive Officer, who was given specific powers to: i) oversee the implementation of the Bank’s strategies, on the basis of the general guidelines determined by the Board of Directors and decisions of the Executive Committee, for the purpose of ensuring their optimal achievement; ii) oversee the co-ordination of the activities of the companies forming part of the banking Group and monitor their development; iii) formulate proposals to the Board of Directors and Executive Committee for resolutions on all matters for which the aforesaid boards are responsible. The Board of Directors can also confer special responsibilities on other Directors, other than the Chief Executive Officer predetermining their fee and/or the criteria for its determination (art. 36). On 23 March 2006, the Board of Directors decided to delegate special authority, to the Chairman and, in the event of the latter’s absence or impediment or vacant office, in order, to the Deputy Chairman and Vice Chairman, in cases of absolute and non-deferrable urgency, on the proposal of the Chief Executive Officer or, in the case of the latter’s absence or impediment, on the proposal of the General Manager, to adopt resolutions for which the Board of Directors, Executive Loans Committee or Executive Committee, where instituted, has competence, whenever it is impossible for the latter to meet in a timely manner and always providing that these are decisions relating to advisory powers eligible for delegation based on both the law and Articles of Association that have not already been delegated to other individual Directors or the General Manager.
Finally, the Board of Directors, in compliance with the directives of the law and Articles of Association, may delegate part of its responsibilities to an Executive Committee, composed of the Chairman, Deputy Chairman and the other Vice Chairman, if appointed, and other Directors, including the Chief Executive Officer, if appointed, so that the total number of the members is not less than five and not more than nine, determining the limits of the delegation. The Executive Committee operates in accordance with regulations approved by the Board of Directors. The Board of Directors is provided with information on resolutions adopted by the Committee in the first subsequent Board meeting. The Board of Directors approved the establishment of an Executive Committee at a meeting held on 13 December 2006. In addition to the members by right, the Directors Maria Luisa Di Battista and Andrea Guidi are presently members of this Committee. Also constituted and functioning are a Strategic Planning Committee and an Executive Loans Committee.
Directors to whom powers have been delegated and the Executive Committee must report to the Board of Directors and Board of Statutory Auditors, in accordance with the timing and methods established by the Board itself and, in any case, at least every three months, on the general trend of the operations, the outlook and most significant transactions, by reason of their size or characteristics, carried out by the Company or its subsidiaries. On matters of loan appraisal and current operations the Board of Directors may delegate, and effectively has delegated, approval powers to the General Manager and other members of the General Management, as well as to employees with particular functions and branch managers, within predetermined limits of amount. Discount Committees may also be constituted, with appropriate advisory regulations, for loan appraisal, which may also be decentralised for individual areas (art. 38).
The members of the Board of Directors are appointed for three financial years and are eligible for re-election. However, if a Director is elected as Chairman or Vice Chairman, the appointment ceases after three years from the date of their appointment. With regard to the members whose mandates have expired, the Board of Directors is partially reappointed every year. In the case of a
101 simultaneous appointment of the entire Board, half of the Directors, designated by lot, resign after two financial years (art. 29 of the Articles of Association). The Directors’ appointments expire at the Shareholders' Meeting called for the approval of the financial statements for the last financial year of their appointment.
If, during the course of the financial year one or more Directors are no longer serving for any reason, the others arrange for their replacement by co-opting, on condition that the majority is always constituted by Directors appointed at a Shareholders' Meeting. Directors thus appointed remain in office until the next Shareholders’ Meeting. Directors elected at a Shareholders’ Meeting to replace those no longer serving resign at the same date as that anticipated for those they have substituted. Should the majority of the members of the Board of Directors no longer be serving due to resignation or other causes, the entire Board lapses, nevertheless it remains in office up to the time of its reconstitution with the power of concluding acts of ordinary administration only and duty to call a Shareholders’ Meeting as soon as possible for its reconstitution (art. 30).
Directors must be shareholders and must have the prescribed requisites of respectability, professionalism and independence (art. 29). The members of the Board of Directors are eligible for re-election. The meetings of the Board of Directors may be held by video conference call or conference call on condition that all the participants can be identified and that they are allowed to follow the discussions, receive, transmit or view documents and intervene orally and in real time on all subjects. If these requisites are met, the Board Meeting is considered as held in the place where the Chairman and Secretary of the meeting are located.
Committees
The Bank has decided not to form an Appointments or Remuneration Committee. Conversely, the following committees have been constituted:
- Executive Committee
- Executive Loans Committee
- Strategic Planning Committee - Internal Control Committee
- Supervisory Board pursuant to Legislative Decree no. 231/2001.
The Board of Statutory Auditors
An Ordinary Shareholders’ Meeting appoints, for the duration established by the law, five serving statutory auditors and two alternate auditors and designates the Chairman of the Board of Statutory Auditors. The Statutory Auditors are eligible for re-election.
The Board of Statutory Auditors supervises observance of the law, Articles of Association, regulations and corporate resolutions, compliance with the principles of correct administration; adequacy of the organisational, administrative and accounting set-up adopted by the Company and its concrete functioning; other acts and facts specified by law (art. 43). The entire Board of Statutory Auditors is appointed on the basis of lists presented by the shareholders as more fully illustrated in Section II.
General Management
The General Management is composed of the General Manager and other members appointed by the Board of Directors, which determines its responsibilities (art. 46). It looks after the executive part of the corporate operations; it has the power to make proposals on matters of staff
102 recruitment and promotion and removal; it can temporarily suspend any employee, referring to the Board of Directors for the consequent resolutions. The General Manager, and, where applicable, other members of the General Management, take part in meetings of the Board of Directors and Executive Committee, if appointed, with a consultative vote and supervise the Bank’s functioning, conduct of operations and services, in accordance with the directives of the Board of Directors; they autonomously institute legal actions that appear appropriate to ensure recovery of loans (art. 47). It should be recalled that the Board of Directors approved the appointments of Franco Baronio as the new General Manager and Giuseppe Malerbi and Giuseppe Apicella Guerra as managers of the deputy Loans and Finance and Operations management, respectively, in February 2006.
103 The Board of Arbitrators
The Ordinary Shareholders’ Meeting appoints five serving and two alternate arbitrators from the shareholders. They remain in office for three financial years, are eligible for re-election and conduct their duties free of charge, except for reimbursement of expenses. The Board elects a Chairman from its members, who arranges to call meetings when necessary and directs the proceedings. The alternates substitute the absent serving arbitrator in order of age up to the subsequent meeting in any event, and, from time to time, whoever cannot take part in decisions due to a family relationship, affinity or legitimate impediment (art. 44).
The Board of Arbitrators decides by an absolute majority, without the possibility of appeal, in accordance with equity and without the restraint of procedural formalities, on the claims against the decisions to exclude from the Company those who have forced the Bank to take legal action for fulfilment of the contracted obligations, or else those who are made responsible for acts that are damaging to the interests and prestige of the Company (art. 45).
Legal status, group and shareholder agreements
The Company is a community bank with the legal status of a cooperative. There are no controlling shareholders. The Company is the Parent Bank of the banking Group Banca Popolare Italiana. In the exercise of its management and co-ordination activities, it issues directives to the Group’s members concerning the principles of management and execution of the instructions given by the Bank of Italy in the interests of the Group's stability.
It should be noted that there is a shareholder agreement signed by Aviva Italia Holding S.p.A. and Banca Popolare Italiana on 1 April 2004, which provides for – amongst other things – Aviva’s commitment to retain, directly and/or through Aviva Group companies, ownership of 2,327,992 Banca Popolare Italiana shares, with only the sale by Aviva of not exceeding 30% (thirty percent) of the equity investment held at the date of the agreement being allowed. The agreement is for three years commencing from the date of signing, with a tacit renewal at the end of each three-year period for a further three years, up to the maximum term of 31 December 2009, without prejudice to the facility of early notice of termination. Shareholders' value is pursued in compliance with the specific legal regulations for community banks.
Levels of implementation of the Self-regulatory Code
The Bank considers, based on the details given in this report, that the initiatives to update the structures and processes presently in progress as well as the corrective actions already put into place or programmed, are consistent with an adequate level of implementation of the 2002 version of the Code. The Board of Directors in office also conducts a continuous and careful monitoring of the concrete functioning methods of the governance system, gradually applying, where considered necessary, the recommendations of the Self-regulatory Code (institution of the Executive Committee by board resolution of 13 December 2006). This is also in light of the extraordinary merger transaction between the Bank and the Banco Popolare di Verona e Novara S.c.a.r.l., currently taking place.
The Bank has decided not to constitute a Remuneration or Appointments Committee, retaining these tasks for the entire Board of Directors. There are no further organisational solutions worthy of note other than those recommended by the Code.
104 Information on the implementation of the Self-regulatory Code provisions Role of the Board of Directors
In accordance with the provisions of the Bank’s Articles of Association, the Board of Directors is one of the corporate bodies. An Executive Committee, Chief Executive Officer and General Manager may also be appointed. On 31 March 2007, the Chief Executive Officer, General Manager and two deputy General Managers were in office. The following Committees had been constituted: - Executive Committee, composed of Dino Piero Giarda, Enrico Perotti, Vittorio Coda, Divo Gronchi (members by right), Maria Luisa Di Battista and Andrea Guidi. The Committee was instituted by a resolution of the Board of Directors on 13 December 2006 and as a norm meets in the presence of the Board of Statutory Auditors every fifteen days. It is specified that this Committee has regulations adopted by a Board of Directors’ resolution and commenced operating with effect from January 2007. Amongst other things, it is responsible for disbursement of loans (up to the maximum limit of 250 million euro) and management thereof; personnel management and administration, equity investments and property;
- An Executive Loans Committee, composed of Divo Gronchi, Guido Castellotti, Maria Luisa Di Battista and Augusto Machirelli. The Committee, which meets at least monthly in the presence of the Board of Statutory Auditors, is completed by two members of the Bank’s organisational structure and has specific responsibility for matters of loan disbursements (up to an amount of 80 million euro). During the course of 2006 it met 19 times; - Strategic Planning Committee, composed of Dino Piero Giarda, Divo Gronchi, Enrico Perotti, Vittorio Coda and Andrea Guidi, for the purpose of supporting the Chief Executive Officer in defining the Group's strategic planning. During the course of 2006 it met 14 times;
- Internal Control Committee, composed of Pietro Manzonetto, Pierantonio Ciampicali and Mario Minoja. The Chairman of the Board of Statutory Auditors or another Statutory Auditor designated by the latter participates in meetings of the Internal Control Committee. By a Board of Directors’ resolution of 8 February 2006, the General Manager and Controls Manager are also invited to these meetings. The Committee met 11 times during the course of 2006, twice, during the month of January 2006, in its composition prior to the appointment of its current members;
- Supervisory Board pursuant to art. 6 of Legislative Decree 231/2001, composed of Bruno Giuffré, Chairman, Costantino Coccoli (in substitution of Prof. Maria Luisa Di Battista from 13 December 2006) and Pierantonio Ciampicali. It met 10 times during the course of 2006 (following renewal of the corporate appointments). The number of members of this Board was increased to five by a resolution on 24 January 2007: Mauro Zanni, Controls Management Manager, was consequently appointed to the Supervisory Board. The fifth member has not yet been appointed.
The following Committees were also established within the Bank’s structure and at least one Director participates in each of them:
- Risks Committee;
- Finance Committee; - Agriculture Committee;
- Parent Bank Property Disposal Committee;
- Central South Committee (activities ceased on 31 December 2006);
- Adriatic Area Committee. Pursuant to the Articles of Association, Committee meetings of the Board of Directors are usually held monthly. The examination and approval of the more significant loan transactions (meaning
105 those that in any event exceed an amount of 250 million euro) is reserved for the Board of Directors. The Board is also the authority for: (a) the examination and approval of the Bank’s strategic, business and financial plans and the Group's corporate structure; (b) all extraordinary transactions; (c) transactions provided for by art. 36 of the Articles of Association (that is, amongst other things, a merger in the circumstances indicated in Articles 2505 and 2505 bis of the Italian Civil Code; resolutions for a spin-off, in those circumstances where the law allows application of Article 2505 bis; compliance of the Articles of Association with regulatory provisions; the institution or closing of secondary offices; acquisition and sale of equity investments that determine changes in the Group; the institution, transfer and closing of branches and representative offices); (d) transactions mentioned in article 136 of the Consolidated Banking Law, for which the favourable vote of the entire Board of Statutory Auditors is also required; (e) transactions with non-ordinary related parties (as identified in art. 11 of the Regulations on matters of transactions with related parties that is annexed to this report) and inter-group transactions.
Ordinary transactions with related parties, involving assets of a current nature and carried out in accordance with standard conditions are subject to the approval of the delegated bodies, in accordance with the prevailing regulations. Every quarter the Board of Directors is provided with a report on the ordinary transactions with related parties recorded in the preceding period, evidencing the aggregate figure relating to ordinary transactions.
A comparison between the programmed operating results and those effectively achieved is conducted, amongst others, by a presentation of long-term Business Plans to the Board. The Board of Directors is updated by the corporate structure regarding the state of the legislation on companies and banking.
38 board meetings were held during the course of 2006 (3 of which in the composition prior to the renewal of the administrative bodies) and 2 meetings of the Executive Committee (the latter in the composition prior to the renewal of the administrative bodies).
Composition of the Board of Directors
The Company’s Articles of Association states that the number of directors can vary between a minimum of 14 and a maximum of 20, as determined by the Shareholders’ Meeting. The composition of the Board of Directors during the 2005 financial year and up to 28 January 2006, except as specifically indicated for the individual directors, was as follows: Giovanni Benevento (Chairman of the Board of Directors); Desiderio Zoncada (Deputy Vice Chairman of the Board of Directors); Giorgio Olmo (Vice Chairman of the Board of Directors; Chief Executive Officer from 03/08/2005); Gianpiero Fiorani (Director and Chief Executive Officer. The following resigned from all appointments with the Bank Popolare Italiana Group on 16 September 2005: Guido Castellotti (Director); Giorgio Chiaravalle (Director); Francesco Ferrari (Director); Carlo Gattoni (Director); Domenico Lanzoni (Director). The following resigned on 27 December 2005: Erich Mayr (Director); Amato Luigi Molinari (Director); Carlo Pavesi (Director); Antonio Premoli (Director); Osvaldo Savoldi (Director); Enrico Tessera (Director); Giammaria Visconti di Modrone (Director). Domenico Zucchetti (Director) resigned on 27 November 2005.
The following directors were co-opted in December 2005: Dino Piero Giarda (Director); Divo Gronchi (Director). Following the resignations of the majority of the directors in office at that time, pursuant to art. 30 of the Articles of Association and the provision mentioned in Article 2386 of the Italian Civil Code, the Shareholders’ Meeting held on 28 January 2006 appointed a new Board of Directors that presently is composed of 16 members.
The Directors’ names and expiry dates of their appointments in office on 31 March 2007, as well as their appointments as Director or Statutory Auditor in other companies listed in regulated
106 markets in Italy and abroad, in financial, banking, and insurance companies, or those of a significant size, are communicated below:
- Dino Piero Giarda: Chairman of the Board of Directors – term of office expires following approval of the 2008 financial statements. Executive Director, being Chairman and having powers for urgent matters;
- Divo Gronchi: Director and Chief Executive Officer – term of office expires following approval of the 2007 financial statements. Executive Director, being Chief Executive Officer;
- Guido Duccio Castelletti: Director – term of office expires following approval of the 2008 financial statements. Executive Director, being a member of the Executive Loans Committee;
- Pierantonio Ciampicali: Director – term of office expires following approval of the 2008 financial statements. Non-executive and independent Director; - Costantino Coccoli: Director – term of office expires following approval of the 2007 financial statements. Non-executive and independent Director;
- Vittorio Coda: Vice Chairman of the Board of Directors – term of office expires following approval of the 2007 financial statements. Executive Director, being Vice Chairman and equipped with powers for urgent matters, as well as being a member of the Executive Committee and Strategic Planning Committee;
- Maria Luisa Di Battista: Director – term of office expires following approval of the 2007 financial statements. Executive Director, being a member of the Executive Committee and Executive Loans Committee;
- Bruno Giovanni Giuffrè: Director – term of office expires following approval of the 2007 financial statements. Non-executive and independent Director;
- Andrea Guidi: Director – term of office expires following approval of the 2008 financial statements. Executive Director, being a member of the Executive Committee and Strategic Planning Committee;
- Augusto Machirelli: Director – term of office expires following approval of the 2008 financial statements. Executive Director, being a member of the Executive Loans Committee;
- Pietro Manzonetto: Director – term of office expires following approval of the 2007 financial statements. Non-executive and independent Director;
- Roberto Martone: Director – term of office expires following approval of the 2008 financial statements. Non-executive and not an independent Director as an exponent of a company financed to a significant extent;
- Mario Minoja: Director – term of office expires following approval of the 2007 financial statements. Non-executive and independent Director;
- Giorgio Olmo: Director – term of office expires following approval of the 2008 financial statements. Non-executive and independent Director; - Enrico Perotti: Deputy Vice Chairman of the Board of Directors – term of office expires following approval of the 2007 financial statements. Executive Director, being Deputy Vice Chairman and having powers for urgent matters, as well as being a member of the Executive Committee and Strategic Planning Committee;
- Roberto Schmid: Director – term of office expires following approval of the 2008 financial statements. Non-executive and independent Director.
107 Independent Directors
The evaluation of the independence of the individual non-executive Directors is carried out by the Board of Directors by a resolution adopted subject to the absence of the person concerned from the meeting.
The Board declares a Director’s independence after having ascertained that the person concerned: (i) does not have, directly, indirectly or on behalf of third parties, nor has recently had, a financial relationship with the Bank, its subsidiaries or Executive Directors of such significance as to affect autonomous judgement; (ii) is not the owner, directly, indirectly or on behalf of third parties, of equity investments of such an amount as to permit them to exercise control of, or notable influence on, the Company, nor participates in shareholder agreements for control of the Company itself; (iii) is not a close family relation of the Company’s Executive Directors or parties in the situations indicated in sub (i) or (ii); (iv) in any event there are none of the circumstances provided for in art. 31. of the Self-regulatory Code.
In any case only those Directors can be declared as independent who: (1) are not executive directors; (2) are not employees of either the Company or its subsidiaries; (3) do not receive professional appointments from the Company or its subsidiaries; (4) are not parties to shareholder agreements relating to voting rights on the Bank’s shares and are not directors, senior managers of legal persons party to said shareholder agreements; (5) have not been appointed in execution of shareholder agreements; (6) do not have co-habiting relations who are employees of either the Company or its subsidiaries; (7) are not spouses, or else relations or similar in the second degree, or in any event co-habiting, of executive directors; (8) have not received from the Bank or its subsidiaries loans or guarantees on other than market conditions; (9) are not directors or senior managers of companies that have received from the Bank or its subsidiaries loans or guarantees on other than market conditions.
Prior to leaving the meeting, the parties concerned supply any appropriate information to the Board of Directors. The result of the independence evaluation is communicated to the market. No Director has to date been elected on the basis of shareholder agreements designed for control of the Bank.
On the occasion of the Board of Directors’ meeting held on 16 March 2006, which dealt with the evaluation of the independence of the directors appointed at the Shareholders’ Meeting held on 28 January 2006, it was considered that, in addition to the appointment of the Chairman of the Board of Directors and Chief Executive Officer, those to be excluded from appointment as a non- executive Director should also include members of the Strategic Planning Committee, (composed of Dino Piero Giarda, Divo Gronchi, Enrico Perotti, Vittorio Coda and Andrea Guidi) and Executive Loans Committee, (composed of Divo Gronchi, Duccio Castellotti, Maria Luisa Di Battista and Augusto Machirelli) as the former Committee, though not having a directly executive nature, does play a special role in the preparation of corporate strategies, and the second, due to its authority on the concession of loans up to 80 million euro, determines an involvement of its members in the current management of Bank operations. Consequently, on the basis of this notion of a non- executive director (which functions as the necessary prerequisite for qualification as independent) the following Directors were declared independent:: Pierantonio Ciampicali; Costantino Coccoli; Bruno Giuffrè; Pietro Manzonetto; Mario Minoja; Giorgio Olmo; Roberto Schmid. The evaluation of the requisites of independence for the members of the Board of Directors was communicated to the market on the same date.
The subsequent constitution of the Executive Committee (13 December 2006, composed of Dino Piero Giarda, Enrico Perotti, Vittorio Coda, Divo Gronchi, Maria Luisa Di Battista and Adrea Guidi) has not led to changes in the aforesaid independence evaluations.
108 Chairman of the Board of Directors
The Chairman takes the chair at Shareholders’ Meetings; convenes and chairs Board of Directors’ meetings. The Chairman represents the Bank, with full signing authority, with third parties and legally, both jurisdictionally and administratively, including in Cassation and revocation proceedings.
Furthermore, pursuant to art. 33, paragraph 6, of the Articles of Association, the Chairman or whoever deputises for him/her, fixes the agenda for board meetings and ensures that adequate information on the matters it contains is provided to all Directors in a timely manner; he/she also coordinates the Board proceedings, verifying that a meeting is properly called and ascertains the identity and legitimacy of those present and the voting results. At a meeting on 23 March 2006, the Board of Directors delegated special authority to the Chairman and, in the event of his/her absence or impediment or vacant office, in order, the Deputy Chairman and Vice Chairman, to adopt , in cases of absolute and non-deferrable urgency, on the proposal of the Chief Executive Officer or, in the case of his/her absence or impediment, on the proposal of the General Manager, resolutions for which the Board of Directors, Executive Loans Committee or Executive Committee, where instituted, has authority, whenever it is impossible for the latter to meet in a timely manner and always providing that these are decisions relating to board powers eligible for delegation based on both the law and Articles of Association that have not already been delegated to other individual Directors or the General Manager. The decisions thus taken take immediate effect including in connection with third parties and, without the need for ratification, are communicated to the Board of Directors or, for matters of its respective authority, to the Executive Loans Committee, at the first subsequent meeting. The signatures of the Chairman and proposer constitute full proof to third parties of the existence of the prerequisites of urgency, of the impossibility of calling a timely meeting of the Board of Directors, Executive Loans Committee or Executive Committee, where instituted, and the fact that these are resolutions not already delegated by the Board or Committee to other directors or to the General Manager. The General Manager’s signature as proposer constitutes full proof to third parties of the absence or impediment of the Chief Executive Officer. The signature of whoever deputises for the Chairman constitutes proof to third parties of the latter’s absence or impediment.
Information for the Board of Directors
Regarding information for the Board of Directors, you are referred to the contents of Section I of this Report. The Chief Executive Officer or the directors to whom powers were given must in any case report to the Board of Directors at least quarterly (except for the Chairman who must report to the first subsequent Board, for the exercise of urgent powers).
The Chief Executive Officer represents the Company, within the limits of the powers conferred on him, both with third parties and legally (art. 39), with the authority to confer delegated powers and mandates. He administers the Company, executing the directives of the Board of Directors and Executive Committee within the sphere of ordinary management, coordinates compliance with the resolutions of the corporate bodies and supervises the Company’s functioning, carrying out all the necessary acts for that purpose and settling the respective expenses; he also ensures that the Company’s equity is conserved and the Company’s tangible assets maintained.
On 25 May 2005 the Board of Directors adopted Regulations which specify, amongst other things, the information elements to be reported in connection with transactions that are atypical, unusual or with related parties, the examination and approval of which is not reserved for the Board of Directors.
109 Processing of confidential information
The members of the Bank’s corporate bodies are required to comply rigorously with the principle of confidentiality and respect, and have respected, the authority of the corporate and company bodies that contribute to the dissemination of information. A similar duty of confidentiality is incumbent on all the Bank’s employees and collaborators.
The Bank, conforming with the provisions of the regulations on adoption of the directives regarding prevention of market abuses, promulgated new procedural directives during 2006 on: i) management of privileged information, ii) communication of privileged information to the public and iii) communication of transactions made by the significant parties identified pursuant to the law (so-called “internal dealers”). With specific reference to the management and communication of privileged information to the public (as defined in art. 181 of the Consolidated Finance Law), a register of the parties that have access to privileged information has been set up and a communication procedure has been formalised that provides for a clear division of roles between the different parties involved ( corporate structures to which the information to be disseminated refers, structures responsible for preparing the communication and structures responsible for authorising its dissemination). In particular, the preparation of the text of the communication is a responsibility of the External Communications and Relations Division, established within the Legal and Corporate Affairs Department. The Board of Directors (or, in the cases of urgency, the Bank’s Chairman or Chief Executive Officer) approves the communication before its release to the market.
The parties identified pursuant to the law (that is, as far as recorded here, the members of the administration and control boards, parties who carry out management functions and executives who have regular access to privileged information and have management powers such as to impact on the Company’s evolution and future prospects) are required to give information to the Bank, Consob and the Market on the significant transactions (as defined by law) carried out by them and/or persons closely related to them, in connection with the so-called internal dealing regulation, pursuant to art. 114, paragraph 7 of the Consolidated Finance Law. The abovementioned procedure identifies the Bank structures delegated to receive the information in question, originating from the significant parties, and transmit this to the market and the Authorities.
Appointment of directors
The Bank’s Directors are appointed at an Ordinary Shareholders’ Meeting. The Shareholders’ Meeting regulations, approved at the Shareholders’ Meeting held on 2 June 2005, lay down the provisions regarding shareholder admission formalities and identification and carrying out of the electoral procedures at the meeting itself (the regulations can be consulted in the Investor relations section of site www.bancapopolareitaliana.it).
The Bank has decided not to constitute a special Appointments Committee, but has entrusted the entire Board of Directors with the evaluation of proposals for the nomination of a director. When the respective discussion takes place, directors with a potential conflict of interest leave the hall. The requisites of respectability, professionalism and independence and their verification are regulated by the law, as well as by Ministerial Decree 161 of 1998 and the Supervisory Instructions of the Banca d’Italia. In relation to the shareholders’ information theme, based on the Shareholders’ Meeting regulations, the passes for admission to the meeting are made available to the public at the Bank’s registered office and branches at least 10 days before the date of the meeting. To assist printing of the voting forms, Shareholders who intend to present proposals for the appointment of the Directors are entitled to put forward their respective candidates ten days before the date of
110 the first call for the Shareholders’ Meeting, without prejudice to the right to propose candidates directly during the Shareholders’ Meeting.
The Articles of Association (art. 26) provides that an absolute majority of the votes and voting by forms subject to secret scrutiny is required for the appointment of the Directors. However, at present the appointments of so-called minority directors is not provided for.
On the occasion of the Shareholders’ Meeting of 28 January 2006, the candidates for the appointment of Director were invited to deposit their curriculum vitae 10 days before the first call. The curricula of the candidates indicated by the outgoing Board of Directors (who were then elected at the Shareholders’ Meeting of 28 January 2006) were made public by depositing their names at the registered office in the ten days prior to the Shareholders’ Meeting.
Remuneration of directors
The Bank has decided not to constitute a special Remuneration Committee, but has entrusted the entire Board of Directors with the task of discussing and evaluating, after consulting the Board of Statutory Auditors, the problems related to the remuneration of directors having particular responsibilities. When such matters are discussed by the Board, the Directors whose remuneration is being discussed leave the hall where the meeting is being held.
The fees paid to senior executives are related to the corporate results achieved and the meeting of specific targets, in accordance with the indications given by the Board of Directors from time to time. The Shareholders’ Meeting of 6 November 2000 approved a stock option plan, which has not been activated to date.
The internal control system
There were significant reinforcement interventions to BPI’s internal control system during the course of 2006, above all in response to the requirements emerging from the noted critical events of 2005 and in conformity with the indications of the Supervisory Body, as well as in connection with an overall corporate revival.
The Board of Directors, which is responsible for the internal control system, paid particular attention to this theme, assisted by the Control Bodies and competent corporate functions, defining and commencing an intricate combination of change and reinforcement projects. The parties involved in these initiatives were accordingly the corporate governance bodies, process owners, line structures responsible for first level controls, the functions established to manage risks and internal auditing.
In this context, the internal auditing function - assigned to Controls Management in BPI – has responsibility for evaluating the functionality of the overall internal control system protecting against risks, as well as supervising that the network and processes are operating in a fully effective manner. The Controls Department is classified as Chief Executive Officer’s staff, and therefore does not hierarchically report to any manager of the operating areas. It reports on its activities to the Board of Directors, Internal Control Committee, the Board of Statutory Auditors and, to the extent of its authority, the Supervisory Board pursuant to Legislative Decree no. 231/2001.
The activities are carried out on the basis of an Annual Programme approved by the Board of Directors, and may be supplemented during the year with further checks as a result of events arising or specific requests, and are reported quarterly to the Administrative and Control Bodies, except for cases that require more timely reporting. The controls are conducted in a direct manner on BPI and some subsidiaries (under service contracts for internal audit and/or the control function pursuant to Consob Regulation no. 11522/98), as well as by the co-ordination and
111 control of existing local auditing functions at the other Group companies; in any case the Parent Bank also conducts specific controls on the latter.
In 2006, for the purpose of reinforcing the effectiveness of the Controls Department and to ensure it has suitable resources to perform its duties, an intricate combination of re- organisational interventions took place, including:
- the appointment of Mauro Zanni as the new manager, who has significant experience in internal audit with the Unicredit Group, with effect from 1 October 2006;
- the revision of the Controls Department organisational model that, under BPI’s new General Regulations, is now divided into four divisions, dedicated respectively - in a specialist manner - to the network, the central structures, investment and financial activities, Group auditing of its subsidiaries;
- the qualitative/quantitative strengthening of human resources, with the employment of persons with specific competences in the finance and central processes areas, in addition to those already in the establishment;
- the revision and updating of the support methodologies and instruments, with the start-up of specific projects.
Audits were conducted over the financial year that involved the different corporate areas, with regard to both the branch network and central structures as well as the corporate processes, combined with audits of subsidiaries; appropriate corrective actions were indicated against any inadequacies recorded, the execution of which was verified with subsequent follow-up actions. It should also be recorded that during the course of 2006 the Controls Department was once again significantly committed in investigations in relation to the well-known legal events of 2005; the findings were brought to the attention of the Administrative and Control Bodies, then transmitted to the Bank’s internal and external lawyers for appropriate penal protection and evaluation of civil compensation actions, as well as transmitted to the competent corporate functions so that any responsibility of the personnel involved could be ascertained.
The internal control system was also involved in various important reinforcement and implementation projects, including:
- the achievement of the new “Organisation, management and control model” for protection from the risks of offences defined in Legislative Decree no. 231/2001 approved by the Board of Directors on 24/01/2007;
- the adoption of a new Code of Ethics, containing the fundamental ethical principles and rules that must govern the conduct of the parties who work for the Bank and the Group;
- the introduction of a mapping of the corporate processes, with particular regard to the organisational and functional responsibilities, risks and control points, through a specific methodology and dedicated application (SIPA);
- the evolution of the measuring tools available for risk management, in particular regarding the measurement of credit risk consistent with the requisites of Basle 2;
- the adoption of new legislation on market abuse, including through the definition of new organisational procedures regarding management of privileged information, management of public communications, management of suspect transactions and internal dealing;
- the start-up of a series of projects designed to reinforce technological and control supports connected to the finance area in particular.
Internal Control Committee
112 The Shareholders’ Meeting of 28/01/2006 appointed the new Board of Directors of Banca Popolare Italiana, which, at its meeting of 8 February 2006, nominated the “Internal Control Committee” in its current composition, to which the authorities mentioned in art. 10 of the Self- regulatory Code for Listed Companies prevailing at that time were attributed.
In this meeting, it was considered expedient, in connection with the restructuring of the overall controls system, to separate the responsibilities on internal control matters that were previously assigned to a single Committee from supervisory ones pursuant to Legislative Decree no. 231/2001; therefore distinct bodies were constituted, with a link provided by one of the members sitting on both bodies.
The “Internal Control Committee” currently comprises: Prof. Pietro Manzonetto, Chairman; Pierantonio Ciampicali and Prof. Mario Minoja. All the members of the Committee are non- executive and independent Directors; Pierantonio Ciampicali was also designated as a member of the Supervisory Board pursuant to Legislative Decree. no. 231/2001.
The Chairman of the Board of Statutory Auditors or another Statutory Auditor designated by the latter attends meetings of the Internal Control Committee. By a Board of Directors’ resolution of 8 February 2006, the General Manager and Controls Manager are also invited to these meetings. Finally, the Chairman of the Board of Directors, Chief Executive Officer and Chairman of the Supervisory Board were systematically informed of the proceedings at meetings of the Committee pursuant to Legislative Decree no. 231/2001.
The Committee met eleven times during the course of 2006, twice during the month of January 2006, in its composition prior to the appointment of its current members. In relation to the various matters discussed, the Committee has met, during the course of its meetings, the Chief Executive Officer and General Manager, the Deputy Manager of the Functions Area, the Manager of the Controls Department, the Manager of the Internal Control Function pursuant to Consob Regulation no. 11522/98, the Manager of the Financial Statements and Tax Department, the Manager of the Legal and Corporate Affairs Department, the Manager of the Industrial Relations Department, Managers of the External Auditors, as well as the Board of Statutory Auditors.
During the 2006 financial year, the Internal Control Committee conducted enquiries, recommendatory and consultative functions on behalf of the Board of Directors with regard to the evaluations and decisions regarding the internal control system, approval of the Financial Statements and Interim and Quarterly Reports, as well as relations between Banca Popolare Italiana and the External Auditors, and specifically:
- examined the results of the checks and findings reported by the Controls Department and Internal Control Function mentioned in art. 57 of Consob Regulation no. 11522/98, verifying progress with respect to the audit programme for 2006;
- examined, together with the Manager of the Financial Statements and Tax Department and Managers of Deloitte & Touche SpA, the Bank’s External Auditors, matters relating to the preparation of the accounting documents, particularly evaluating the correct utilisation of accounting standards as well as their homogeneous application to the Company and the Group; - periodically met the Managers of the External Auditors to monitor progress on the audit programme, supervise the effectiveness of the audit and examine the results of the checks made by the auditors on the most significant areas of the financial statements;
- examined the results shown in the audit reports on the individual and consolidated financial statements as at 31/12/2005; - liaised systematically and continuously with the Board of Statutory Auditors, assisted by the attendance at Committee meetings of the Chairman of the Board of Statutory Auditors and/or
113 other members of the same Board, in order to ensure that the proper links were maintained for optimum performance of the respective institutional control duties;
- examined the Bank’s existing procedures for the approval and execution of the transactions in which a director has an interest, on his/her own behalf or on behalf of third parties, as well as transactions made with related parties;
- reported to the Board of Directors half-yearly on the activities conducted and adequacy of the internal control system;
- carried out a specific task on behalf of the Board of Directors regarding the respective resolutions on the adoption of the new edition of the Self-regulatory Code for Listed Companies dated March 2006.
On 8 February 2006 the Board of Directors also appointed the Supervisory Board pursuant to Legislative Decree no. 231/2001, with the following composition: Bruno Giuffrè, Chairman, non- executive and independent Director; Prof. Maria Luisa Di Battista, executive Director, Pierantonio Ciampicali, non-executive and independent Director.
From the date of its constitution, the Supervisory Board has, amongst other matters, coordinated the project for updating the Organisation, Management and Control Model pursuant to Legislative Decree no. 231/2001 designed by the Bank, with the support of professional external consultants
The project’s objective was the overall revision of the Model following: the coming into effect of the new legislation on market abuses, the well-known events that involved the Bank in 2005 and changes made to its organisation and governance in 2006. This work led to the adoption of a new Ethical Code, approved by the Board of Directors on 29/11/2006 and a new edition of the Organisation, Management and Control Model, approved by the Board of Directors on 24/01/2007. Following the appointment of Prof. Maria Luisa Di Battista to the Executive Committee, which took place by a resolution of the Board of Directors on 13 December 2006, the Supervisory Board presently comprises: Bruno Giuffrè, Chairman; Pierantonio Ciampicali, Costantino Coccoli and Mauro Zanni. All members of the Supervisory Board are non-executive and independent Directors, apart from Mauro Zanni who has the role of Manager of the Bank’s Controls Department.
Transactions with related parties
The Board of Directors adopted regulations on transactions with related parties on 25 May 2005, for the purpose of ensuring substantial and procedural transparency and correctness of the aforesaid transactions. Specifically, these regulations govern transactions with related parties in terms of decision-making authority, motivation and documentation, and are drawn up on the basis of the general principles indicated by the National Commission for Companies and the Stock Market.
Following the coming into force of paragraph 2-bis of art. 136 of Legislative Decree no. 385/1993 (initiated by Law no. 262/2005, the so-called “investment law), during 2006 the area of application of the approval procedure mentioned in art. 136 itself (“Obligations of banking exponents”) was significantly extended. Consequently, the Board of Directors, in compliance with the legal obligations, passed resolutions relating to the obligations between the Bank and companies in which its corporate exponents held administration, management or control appointments, as well as between the Bank and companies controlled by the aforesaid, or associated with them, and finally between the Bank and companies controlled by its corporate exponents. Legislative Decree no. 303 of 29 December 2006, finally changed the wording of the abovementioned paragraph 2-bis, removing from its area of application: - obligations between companies belonging to the same banking group;
- obligations between banks for transactions on the inter-bank market;
114 - obligations between banks and companies associated to those where the corporate exponents of the banks themselves hold administration, management or control appointments, or else are associated with those controlled by the corporate exponents.
Relationships with institutional investors and other shareholders
The Investor Relator, consistent with the principles contained in the market information guide, ensures an adequate, continuous and timely communication of the strategies and financial and equity performance of the Bank and the Group to the Financial Community, actively managing relationships with the investors, analysts and shareholders, in compliance with the principle of information parity and symmetry, in liaison with the Press Office (telephone contact: 03717580036, web site: www.bancapopolareitaliana.it - Investor Relations section).
Overall the Investor Relations activity was very intense in 2006. The major extraordinary transactions and merger proposal that involved BPI and BPVN attracted significant interest from investors and analysts who requested numerous meetings with the Group's Top Management and Investor Relations Office. Communications directed to the Rating Agencies were also significant, requiring meetings and conference calls during the year focused on clarifying points such as equity solidity and the effects of the extraordinary transactions carried out in 2006.
Shareholders' meetings
The Company has implemented the shareholders’ meetings regulations prepared by ABI, in agreement with Assonime, coordinating these with the specific details of the previously existing regulations and making the consequent additions. The said regulations were approved by the Board of Directors at a meeting on 28 February 2001 and amended at a board meeting on 19 June 2003. On 2 June 2005 the shareholders’ meetings regulations (available on the Bank’s site: www.bancapopolareitaliana.it, in the Investor Relations section) were approved at the Ordinary Shareholders’ Meeting, in compliance with the requirements of the new Company Law.
The notice convening Shareholders’ Meetings was published in the Official Gazette of the Italian Republic, the daily newspaper “Il Sole 24 Ore” or the daily newspaper “Finanza Mercati”, in the terms and in compliance with the methods fixed by the legal and regulatory provisions applicable (art. 21).
The Chairman of the Shareholders’ Meeting has full powers to direct proceedings, as well as to substantiate whether the meeting is properly constituted and has a valid number for a quorum. The formalities for admission of the shareholders and in general for the conduct of the meeting, identification of the electoral operations and other activities of the meeting are established by the regulations.
Three shareholders' Meetings were convened by the Bank during the course of 2006: - on 28 January 2006, the Ordinary Shareholders’ Meeting, amongst other matters, appointed a new Board of Directors, reconstituted the Board of Statutory Auditors and approved new financial statements for the 2004 financial year. Following this new approval, the Lodi Court declared an end to the dispute regarding the proceedings challenging the 2004 financial statements brought by the National Commission for Companies and the Stock Market;
- on 29 April 2006, an Extraordinary and Ordinary Shareholders’ Meeting, amongst other matters, authorised the Board of Directors to increase the share capital for a maximum of 800 million euro (completed between July and August 2006) and reconstituted the Board of Statutory Auditors; - on 29 July 2006, an Extraordinary and Ordinary Shareholders’ Meeting approved the merger of Bipielle Investimenti and Reti Bancarie (implemented with legal effect on 30 September
115 2006) and the related share capital increase to service the merger, as well as the reconstitution of the Board of Statutory Auditors.
Statutory Auditors
The Shareholders’ Meeting of 28 January 2006 appointed Giordano Massa, Luigi Corsi and Gabriele Camillo Erba as serving auditors (who therefore joined auditors Gianandrea Goisis and Paolo Giacinto Bonazzi, who were already in office) and Giampaolo Fornasari and Massimo Mustarelli as alternate auditors, up to the Meeting convened to approve the 2007 financial statements. These appointments formally reconstituted the Board of Statutory Auditors, appointed to serve in office – by list voting – at the Ordinary Shareholders’ Meeting of 30 April 2005.
On 12 December 2005 the Chairman of the Board of Statutory Auditors, Prof. Gianandrea Goisis, and serving auditor, Mr. Paolo Giacinto Bonazzi, tendered their resignations with effect from the Shareholders’ Meeting convened to approve the 2005 financial statements. On 16 March 2006, the Chairman of the Board of Statutory Auditors, Prof. Gianandrea Goisis, revoked his resignation. The Shareholders’ Meeting of 29 April 2006 reconstituted the Board of Statutory Auditors, through the appointment of Prof. Pietro Mazzola as serving auditor, who thereafter stated that he could not accept the position: his place was therefore taken at the next shareholders’ meeting by alternate auditor Giampaolo Fornasari. The Shareholders’ Meeting of 29 July 2006 reconstituted the Board of Statutory Auditors by nominating the aforesaid Giampaolo Fornasari as serving auditor and Paolo Perolini as alternate auditor.
On the date of this report the serving auditors in office hold the following positions: Prof. Goisis, a position in an unlisted company of the Banca Popolare Italiana Group; a position in a listed Company (the Bank); Mr. Massa: a position in unlisted companies of the Banca Popolare Italiana Group; a position in a listed Company (the Bank); ten positions overall in unlisted companies; Mr. Erba: two positions in unlisted companies of the Banca Popolare Italiana Group; a position in listed Companies (the Bank); twenty positions overall in unlisted Companies; Mr. Fornasari: nine positions in unlisted companies of the Banca Popolare Italiana Group; one position in a listed Company (the Bank); seventeen positions overall in unlisted companies; Mr. Corsi: no position in unlisted companies of the Banca Popolare Italiana Group; one position in a listed Company (the Bank); eleven positions overall in unlisted companies.
All Statutory Auditors have to be selected from persons registered with the register of auditors. At least three serving auditors and one alternate auditor have to be selected from persons who have also been employed on the legal audit of accounts in the banking, financial or insurance sectors for a period of at least three years. The serving auditors and alternate auditor who do not possess the requisite indicated above must however be selected from amongst persons who have gained an overall experience of at least three years in the administration or control function or management responsibilities in limited companies having a capital of at least two million euro, operating in the banking, financial or insurance sector or from amongst persons who have worked professionally or in a permanent university teaching role in the legal, economic or financial fields.
In addition to the requirements laid down by the law, persons already serving as serving auditors in more than five listed Companies or their parent companies and/or subsidiaries or are members of boards of directors or supervisory boards of other banks may not serve as statutory auditors, unless the entities concerned are central entities for the category or investee Companies. The statutory auditor is disbarred from office if the requisites laid down by legislation and the Articles of Association cease to apply.
Lists are submitted for the appointment of the Board of Statutory Auditors. These lists have to indicate seven candidates in descending order. The lists have to be lodged with the registered office and published in at least two daily newspapers, one of which is distributed nationally, at least ten days before the date fixed for the first call Shareholders’ Meeting. Each shareholder may
116 submit or contribute to the submission of just one list and each candidate may be included on just one list or risk being in-eligible.
Shareholders entitled to submit lists, who are properly registered in the shareholders’ register three months before the date fixed for the first call Shareholders’ Meeting, may not number less than three hundred and represent at least one million euro of share capital. These limits are notified in the notice convening the meeting. This provision appears to be consistent with the spirit of the rules on listed companies, since the quorums facilitate the submission of the lists and make the eligibility requirements less dependent on changes in share capital.
The declarations, in which the individual candidates accept their own candidature and certify under their own responsibility that there are no causes of ineligibility and incompatibility and that the requisites as prescribed by current legislation and these Articles of Association to serve as a statutory auditor exist, must be lodged, together with each list, by the lodging deadline. The curriculum vitae of candidates for the Board of Statutory Auditors, in the same way as applies for the Bank’s Directors, are lodged at the Registered Office before the shareholders’ meeting. This is a practice followed voluntarily by the Bank. Every person entitled to vote may vote for only one list. Members of the Board of Statutory Auditors are elected as follows: a) three serving auditors and one alternate auditor are drawn from the list that has obtained the majority of votes from the shareholders, in the descending order in which they are listed therein; b) as regards the remaining lists, two serving auditors and one alternate auditor are drawn from the list that has obtained the most votes, in the descending order in which they are placed therein. No consideration will be given for scrutiny purposes to lists that have not reached at least 10% of all the votes at the Shareholders’ Meeting; where just one list has exceeded this limit all the serving and alternate auditors will be drawn therefrom.
If several lists obtain the same number of votes, voting by ballot will be conducted for candidates on these lists in order to fill the positions of statutory auditor. Should a single list be proposed the first five candidates will be elected as serving auditors in descending order whilst the next candidates will be elected alternate auditors. The person at the top of the list who has obtained the majority of votes will be appointed Chairman of the Board of Auditors. If a statutory auditor taken from the list with the majority of votes is replaced the alternate auditor on the same list takes his/her place; if an auditor drawn from another list is replaced the alternate auditor elected as indicated in point b) above takes his/her place.
The Shareholders’ Meeting nominates the serving and/or alternate auditors required to reconstitute the Board of Statutory Auditors pursuant to article 2401 of the Italian Civil Code as described below:
- if the auditors elected in the list that has obtained most votes have to be replaced, the Auditor or Auditors are nominated, with any indication by the Chairman of the Board of Statutory Auditors, by majority vote, without any restriction as to list;
- if, instead, the serving auditor designated by the other list who has obtained the most votes on the remaining lists has to be replaced, the Shareholders’ Meeting will replace him/her, by relative majority vote, selecting from the candidates on the list containing the Auditor to be replaced, who have confirmed their candidature at least ten days before the date fixed for the first call Shareholders’ Meeting, together with the declarations certifying that no causes exist for their ineligibility or incompatibility, and that all the requisites laid down for the office exist. The Shareholders’ Meeting will vote by legal majority without any restriction as to list for the nomination of Auditors who are for any reason are not nominated in accordance with the above. (art. 40).
117
Appointments Committee Executive Board of Directors: BANCA POPOLARE ITALIANA Soc. Coop. Internal Control Committee (1) Remuneration Committee (2) Committee (where applicable) (3) (where applicable)
Office Members Executive Non-executive Independent **** Number of other positions ** *** **** *** **** *** **** *** ****
Chairman Giarda Dino Piero X 100% 3 X
Chief Executive Officer (where applicable) Gronchi Divo X 91%(C) 5 X
Director Perotti Enrico X 100% 3 X Director Coda Vittorio X 91% 5 X Director Castellotti Guido X 97% 2 Director Ciampicali Pierantonio X X 74% 2 X 90% Director Coccoli Costantino X X 86% 1 Director Di Battista Maria Luisa X 100% = X Director Giuffré Bruno X X 97% = Director Guidi Andrea X 91% 1 X Director Machirelli Augusto X 94% 3 Director Manzonetto Pietro X X 91% 10 X 100% Director Martone Roberto X X 71% 2 Director Minoja Mario X X 94% 9 X 100% Director Olmo Giorgio X X 91% 1 Director Schmid Roberto X X 86% =
(1) Summary of reasons for absence of the Committee or composition different from the Code’s recommendations: (2) Summary of reasons for absence of the Committee or composition different The Committee was not established. from the Code’s recommendations: The Board of Directors carried out the Committee’s functions itself. (3) Summary of reasons for absence of the Committee or composition different The Committee was not established. from the Code’s recommendations: The Board of Directors carried out the Committee’s functions itself.
Remuneration Appointments Executive Board of Directors: Internal Control Committee: Committee : Committee: Committee:
Number of meetings held during the year 38 (D) 9(B) 2(A)
(A) The Executive Committee met twice in January 2006, in the composition prior to the election of new Directors by the Shareholders’ Meeting on 28 January 2006, namely in the persons of: Giovanni Be Desiderio Zoncada, Giorgio Olmo, Francesco Ferrari, Dino Piero Giarda, Duccio Castellotti, Domenico Zucchetti. The Executive Committee was reformed by Board resolution of 13 December 2006 not meet after that date during 2006. (B) During January 2006, the previous Committee held two meetings, attended by all the members (Directors Antonio Premoli, Enrico Tessera and Carlo Gattoni). The Board of Directors also passed a r to form the Supervisory Board pursuant to Legislative Decree n° 231/2001, which met 9 times during 2006. (C) Mr. Divo Gronchi was suspended from the office of Director on 13 December 2006 and reinstated to all his functions on 20 January 2007. (D) It should be noted that 3 of the 38 Board of Directors’ meetings held during 2006 concerned the composition prior to the renewal of the management boards and so have not been considered for the of this table. * An asterisk indicates whether the director has been designated through list submitted by the minority. ** This column indicates the number of director or statutory auditor positions held by the person involved in other companies listed in regulated markets, including foreign markets, financial, banking, i companies or companies of significant size. *** An “X” in this column indicates that the Board member serves on the Committee. **** This column indicates the attendance rate of the directors at the Board of Directors’ and Committee meetings respectively.
118
Office Members Attendance rates at Board meetings Number of other positions held**
Chairman Goisis Gianandrea 100% = Serving auditor Massa Giordano 100% = Serving auditor* Erba Gabriele Camillo 100% = Serving auditor Corsi Luigi 94% = Serving auditor Bonazzi Paolo Giacinto (1) 12% (5) = Serving auditor Mazzola Pietro (2) = = Serving auditor Fornasari Gianpaolo (3) 56% (6) = Alternate auditor Fornasari Gianpaolo (3) = = Alternate auditor Mustarelli Massimiliano = = Alternate auditor Perolini Paolo (4) = = Number of meetings held during the calendar year: 34 Indicate the quorum required to submit the lists by the minorities for the election of one or more serving members (as per art. 148 TUF(Finance Act): at least 300 shareholders representing one million euro of share capital NOTES * An asterisk indicates whether the auditor has been designated through lists submitted by the minority. ** This column indicates the number of director or statutory auditor positions occupied by the person involved in other companies listed on Italian regulated markets. The above information does not take account of the Board and committee meetings and inspections at the Bank’s central and peripheral organisations (1) Mr. Paolo Giacinto Bonazzi tendered his resignation as from the shareholders’ meeting held on 29 April 2006 to approve the financial statements as at 31 December 2005. (2) Prof. Pietro Mazzola, appointed serving auditor by the Shareholders’ Meeting of 29 April 2006, subsequently announced that he could not accept the position. (3) Mr. Gianpaolo Fornasari, appointed alternate auditor by the Shareholders’ Meeting of 28 January 2006, substituted Prof. Mazzola as serving auditor up to the next shareholders’ meeting. Mr. Fornasari was then nominated serving auditor by the Shareholders’ Meeting held on 29 July 2006. (4) Mr. Paolo Perolini was appointed alternate auditor by the Shareholders’ Meeting held on 29 July 2006. (5) The weighted percentage relating to the meetings to be attended by Dr. Bonazzi is 44%. (6) The weighted percentage relating to the meetings to be attended by Dr. Fornasari is 83%.
Summary of the reasons for any non-compliance with Code YES NO recommendations System of delegated powers and transactions with related parties Has the Board of Directors vested delegated powers and defined: a) their limits X b) the ways in which they are exercised X c) and their reporting intervals? X
Has the Board of Directors retained responsibility for examining and approving transactions of particular economic, X capital and financial importance (including transactions with related parties)?
Has the Board of Directors defined guidelines and criteria for the identification of “significant” transactions"? X Are the above guidelines and criteria described in the report? X Has the Board of Directors defined special procedures for the examination and approval of the transactions with X related parties? Are the procedures for approving transactions with related parties described in the report? X Procedures followed in the most recent appointment of directors and statutory auditors Have the candidatures for the position of director been lodged at least ten days in advance? X Have the candidatures for the position of director been accompanied by full disclosure of information? X Have the candidatures for the position of director been accompanied by the declaration of fitness to serve in an The independence profile is verified by the Board of X independent capacity? Directors at a later date Have the candidatures for the position of statutory auditor been lodged at least ten days in advance? X Have the candidatures for the position of statutory auditor been accompanied by full disclosure of information? X Shareholders’ Meetings Has the company approved Regulations for Shareholders’ Meetings? X Are the Regulations enclosed with the report (or an indication given of where they can be obtained/downloaded)? X Internal control Has the company appointed those responsible for internal control? X Do those responsible for internal control not report in hierarchical terms to operational area managers? X Organisational unit responsible for internal control (pursuant to art. 9.3 of the Code) Internal Controls Group Investor relations Has the company appointed an investor relations manager? X Investor Relations Banca Popolare di Lodi – Mrs. Nicoletta Zangrandi - tel. Organisational unit and contact details (address/telephone/fax/email) of the investor relations manager 0371/580036 - telefax 0371/580880 - e-mail: [email protected]
119
Internal Control Strategic policy Executive Loans Board of Directors: BANCA POPOLARE ITALIANA Soc. Coop. Body (Legislative committee Decree 231 Committee Non- Number of other Office Members Executive Independent **** *** **** *** **** *** **** executive offices held ** Chairman Giarda Dino Piero X 100% 3 X 93% Chief Executive Officer (where applicable) Gronchi Divo X 91%(A) 5 X 100%(A) X 76%(A) Director Perotti Enrico X 100% 3 X 93% Director Coda Vittorio X 91% 5 X 93% Director Castellotti Guido X 97% 2 X 90% Director Ciampicali Pierantonio X X 74% 2 X 67% Director Coccoli Costantino X X 86% 1 Director Di Battista Maria Luisa X 100% = X 100% X 86% Director Giuffré Bruno X X 97% = X 100% Director Guidi Andrea X 91% 1 X 93% Director Machirelli Augusto X 94% 3 X 71% Director Manzonetto Pietro X X 91% 10 Director Martone Roberto X X 71% 2 Director Minoja Mario X X 94% 9 Director Olmo Giorgio X X 91% 1 Director Schmid Roberto X X 86% =
Supervisory Board Leg. Dec. Number of meetings held during the financial year Board of Directors: Strategic Policy Committee Executive Committee 231 38 (B) 14 9 21 NOTES: (A) Mr. Divo Gronchi was suspended from the office of Director on 13 December 2006 and reinstated to all his functions on 20 January 2007. (B) It should be noted that 3 of the 38 Board of Directors’ meetings held during 2006 concerned the composition prior to the renewal of the management boards and so have not been considered for the of this table. * An asterisk indicates whether the director has been designated through lists submitted by the minority. ** This column indicates the number of director or statutory auditor positions held by the person involved in other companies listed in regulated markets, including foreign markets, financial, banking, i companies or companies of significant size. *** An “X” in this column indicates that the Board member serves on the Committee. **** This column indicates the attendance rate of the directors at the Board of Directors’ and Committee meetings respectively.
120
FINANCIAL STATEMENTS
109 110 CONSOLIDATED BALANCE SHEET
Assets 31/12/2006 31/12/2005
10. Cash on hand and deposits with central bank and post offices 248,988 237,423
20. Financial assets held for trading 3,601,485 4,068,043
30. Financial assets at fair value 716,378
40. Available-for-sale financial assets 1,100,617 1,095,710
50. Held-to-maturity financial assets 83,694 84,630
60. Due from banks 4,833,472 4,457,197
70. Customer loans 28,735,907 27,968,762
80. Hedge derivatives 102,927 185,988
100. Shareholdings 151,168 487,644
120. Property, plant and equipment 947,078 932,065
130. Intangible assets 2,221,173 2,057,370
of which:
- Goodwill 2,169,865 2,010,018
140. Tax assets 1,222,348 1,305,546
a) current 179,627 243,161
b) prepaid 1,042,721 1,062,385
150. Non-current assets and discontinued operations 1,391,248 1,401,931
160. Other assets 2,146,966 2,323,828
Total assets 46,787,071 47,322,515
111 CONSOLIDATED B CONSOLIDATED BALANCE SHEET ALANCE SHEET
Liabilities and shareholders’ equity 31/12/2006 31/12/2005
10. Due to banks 5,997,316 4,791,619
20. Due to customers 15,610,851 14,356,069
30. Securities in issue 16,527,244 20,281,134
40. Financial liabilities held for trading 498,859 713,354
50. Financial liabilities at fair value 316,281
60. Hedge derivatives 204,574 195,621
80. Tax liabilities 277,646 299,481
a) current 142,081 159,518
b) deferred 135,565 139,963
90. Liabilities associated with discontinued operations 1,269,425 613,509
100. Other liabilities 1,723,479 1,752,879
110. Employee severance payment provision 173,128 164,778
120. Provisions for contingencies and charges 401,130 504,596
a) pension provision 139,642 139,885
b) other provisions 261,488 364,711
130. Technical reserves 85,219
140. Valuation reserves 91,549 50,705
160. Capital instruments 3,048 3,048
170. Reserves (749,540) (375,825)
180. Share premiums 2,682,267 2,487,324
190. Share capital 2,047,082 1,456,498
200. Own shares (-) (78,720) (91,546)
210. Minority interests (+/-) 147,594 461,664
220. Profit (loss) for the year (39,861) (743,893)
Total liabilities and shareholders’ equity 46,787,071 47,322,515
112 CONSOLIDATED INCOME STATEMENT
Items 31/12/2006 31/12/2005 10. Interest income and similar revenues 2,054,356 1,777,679 20. Interest expense and similar charges (1,214,256) (1,016,846) 30. Net interest income 840,100 760,833 40. Commission income 488,932 580,867 50. Commission expense (88,240) (281,495) 60. Net commissions 400,692 299,372 70. Dividends and similar income 29,631 62,026 80. Net income from trading activities 53,567 (47,687) 90. Net income from hedging activities 36,079 47,356 100. Profit (loss) from the sale or repurchase of: 146,730 47,938 a) loans 68,775 b) available-for-sale financial assets 71,090 47,938 c) held-to-maturity financial assets d) financial liabilities 6,865 110. Net income from financial assets and liabilities designated at fair value (6,061) 93,053 120. Total income 1,500,738 1,262,891 130. Net adjustments for impairment of: (432,468) (981,994) a) loans (333,042) (752,998) b) available-for-sale financial assets (98,913) (226,217) c) held-to-maturity financial assets d) other financial transactions (513) (2,779) 140. Net income from financial operations 1,068,270 280,897 150. Net premiums 6,254 160. Balance of other income/expense from insurance operations 5,421 170. Net income from financial and insurance operations 1,068,270 292,572 180. Administrative expenses: (999,363) (1,004,204) a) personnel expenses (528,965) (543,918) b) other administrative expenses (470,398) (460,286) 190. Net provisions for contingencies and charges (53,376) (261,406) 200. Net adjustments to property, plant and equipment (54,630) (59,614) 210. Net adjustments to intangible assets (22,788) (25,028) 220. Other operating income/expenses 181,691 223,088 230. Operating costs (948,466) (1,127,164) 240. Gains (losses) from investments 45,608 (6,021) 260. Net adjustments to goodwill (46,962) (42,035) 270. Profit (loss) from sale of investments 24,114 824 280. Profit (loss) from continuing operations before tax 142,564 (881,824) 290. Income taxes on continuing operations (97,058) 165,208 300. Profit (loss) from continuing operations after tax 45,506 (716,616) 310. Profit (loss) from discontinued operations after tax (42,085) 16,737 320. Profit (loss) for the year 3,421 (699,879) 330. Period profit (loss) of minority interests (43,282) (44,014) 340. Period profit (loss) of parent bank (39,861) (743,893)
113 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
December 31, 2006
Shareholders’ Shareholders’ Allocation of period income Change in Change in Equity at Equity at opening balance Dividends and reserves 31/12/2005 01/01/2006 Reserves other distrib.
Share capital a) ordinary shares 1,456,498 1,456,498 b) other
Share premiums 2,487,324 2,487,324 (512,493)
Reserves a) retained earnings (577,291) (577,291) (134,432) (108,630) b) other 201,466 201,466 (96,968) (33,685)
Capital instruments 3,048 3,048
Valuation reserves: a) available-for-sale 32,440 32,440 40,844 financial assets b) cash flow hedge c) other 18,265 18,265
Own shares (91,546) (91,546)
Period income (743,893) (743,893) 743,893
Total Parent Bank 2,786,311 2,786,311 (101,471) Minority interests 461,664 461,664 (357,352) Total 3,247,975 3,247,975 (458,823)
December 31, 2005
Shareholders’ Shareholders’ Allocation of period income Change in Change in Equity restated at Equity restated at opening balance Dividends and reserves 31/12/2004 (*) 01/01/2005 Reserves other distrib.
Share capital a) ordinary shares 885,127 885,127 b) other
Share premiums 1,532,100 1,532,100
Reserves a) retained earnings (278,134) (196,633) (474,767) 14,521 (86,288) (1,715) b) other 165,950 165,950 35,516
Capital instruments 3,048 3,048
Valuation reserves: a) available-for-sale 2,653 2,653 29,787 financial assets b) cash flow hedge c) other 18,265 18,265
Own shares (80,653) (80,653)
Period income (14,521) (14,521) 14,521
Total Parent Bank 2,228,134 (190,932) 2,037,202 (86,288) 63,58 Minority interests 1,040,965 (562,421) 478,544 (60,894) Total 3,269,099 (753,353) 2,515,746 (86,288) 2,694
(*) Resulting from the application of IAS (excluding IAS 32 and 39)
114
Shareholders' equity transactions performed in the period Shareholders’ Distribution of Change in Profit as at Issue of new Purchase of own Derivatives on Stock Equity at extraordinary capital 31/12/2006 shares shares own shares Options 31/12/2006 dividends instruments
590,884 (300) 2,047,082
708,176 (740) 2,682,267
(820,353) 70,813
3,048
73,284
18,265
13,398 (572) (78,720)
(39,861) (39,861)
1,312,458 (1,612) (39,861) 3,955,825 43,282 147,594 1,312,458 (1,612) 3,421 4,103,419
Shareholders' equity transactions performed in the period Shareholders’ Distribution of Change in Profit as at Issue of new Purchase of own Derivatives on Stock Equity restated at extraordinary capital 31/12/2005 shares shares own shares Options 31/12/2005 dividends instruments
571,371 1,456,498
955,224 2,487,324
(577,291) 201,466
3,048
32,440
18,265
(10,893) (91,546)
(743,893) (743,893)
1,526,595 (10,893) (743,893) 2,786,311 44,014 461,664 1,526,595 (10,893) (699,879) 3,247,975 (*) Resulting from the application of IAS standards (excluding IAS 32 and 39)
115 CONSOLIDATED CASH FLOW STATEMENT
Direct method 31/12/2006 31/12/2005 A. OPERATING ACTIVITIES 1. Operating activities 546,249 625,360 interest income collected 2,054,356 1,777,679 interest expense paid 1,214,256 1,016,846 dividends and similar income 29,631 62,026 net commissions 400,692 299,372 personnel expenses 528,965 543,918 net premiums collected 6,254 other insurance income/expenses -5,421 other costs 277,304 456,693 other revenues 221,238 310,120 taxes 97,058 -165,208 costs/revenues relating to discontinued operations, net of the tax effect -42,085 16,737 2. Cash generated/absorbed by financial assets -86,272 -4,951,104 financial assets held for trading financial assets at fair value 1,182,936 1,401,867 available-for-sale financial assets -63,489 -1,287,563 customer loans -1,100,187 -3,231,788 due from banks -376,275 -955,875 other assets 270,743 -877,745 3. Cash generated/absorbed by financial liabilities -1,388,156 2,394,517 due to banks 1,205,697 -391,124 due to customers 1,254,782 -246,860 securities in issue -3,744,937 3,546,027 financial liabilities held for trading -214,495 712,170 financial liabilities at fair value -316,281 41,659 other liabilities 427,078 -1,267,355 Net cash generated/absorbed by operating activities -928,179 -1,931,227 B. INVESTING ACTIVITIES 1. Cash generated by: 420,473 744,993 sales of shareholdings 336,476 688,521 dividends collected on shareholdings sales/redemptions of held-to-maturity financial assets 83,997 56,472 sales of property, plant and equipment sales of intangible assets sales of subsidiaries and business branches 2. Cash absorbed by: -279,082 -249,017 purchases of shareholdings purchases of held-to-maturity financial assets purchases of property, plant and equipment 45,529 38,664 purchases of intangible assets 233,553 210,353 purchases of subsidiaries and business branches Net cash generated/absorbed by investing activities 141,391 495,976 C. FINANCING ACTIVITIES issue/purchases of own shares 1,310,846 1,515,702 issue/purchases of capital instruments dividends and other distributions -512,493 -86,288 Net cash generated/absorbed by financing activities 798,353 1,429,414 NET CASH GENERATED/ABSORBED IN THE PERIOD 11,565 -5,837
116 Reconciliation
Balance sheet items 31/12/2006 31/12/2005 Cash on hand and deposits with central bank and post offices at the start of the year 237,423 243,260 Total net cash generated/absorbed in the year 11,565 -5,837 Cash on hand and deposits with central bank and post offices: effect of exchange rate changes Cash on hand and deposits with central bank and post offices at the end of the year 248,988 237,423
117 CONSOLIDATED NOTES Part A - ACCOUNTING POLICIES A.1 - GENERAL Section 1 - Statement of conformity with international accounting standards
The consolidated financial statements for the year ended December 31, 2006 have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB) and the relevant interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the European Commission, as specified in Regulation (EC) no. 1606 of 19 July 2002, requiring all companies in the European Union that are listed on regulated markets to prepare consolidated financial statements in accordance with IAS/IFRS from 2005.
The IAS/IFRS standards in force as at December 31, 2006 (Including the SIC and IFRIC interpretation documents), as adopted by the European Commission, have been applied in the preparation of these financial statements. In respect of those used at December 31, 2005, it should be noted that IRFS 7 (Financial Instruments: Disclosures) has been adopted (EC Regulation no. 108/2006).
The consolidated financial statements are prepared in accordance with the provisions enacted under article 9 of Legislative Decree no. 38/2005, namely:
Consob Resolution no.15519 of 27/7/06 - "Directives on the matter of financial statements";
Consob Resolution no. 15520 of 27/7/06 - "Amendments and additions to the Listed Companies Regulations adopted with Resolution no. 11971/99";
Consob Communication no. 6064293 of 28/7/06 - "Company information required pursuant to article 114, subsection 5, Legislative Decree 58/98";
Banca d’Italia Circular no. 262 of 22/12/05 - "Bank financial statements: layouts and rules for preparation".
Section 2 - General basis of preparation
The consolidated financial statements are prepared on a going concern basis, according to the accrual basis of accounting, in observance of the principle of relevance and significance of information, consistent with the application of substance over form and with a view to promoting consistency with future presentations. Each material class of similar items is presented separately in the financial statements. Items of a dissimilar nature or function are presented separately unless they are immaterial. Offsetting of assets with liabilities or income with expenses is not carried out unless it is explicitly permitted or required by a standard or an interpretation.
In accordance with Art. 5 of Legislative Decree no. 38 of February 28, 2005 and IAS 1/46, the financial statements are prepared with the euro used as the currency of account. The amounts in the financial statements, where not specified otherwise, are stated in thousands of euro.
The statements present, not only the amounts relating to the year in question, but also the corresponding comparative figures for the year ended December 31, 2005. It should be noted that some of the figures relating to December 31, 2005 have been reclassified to apply more accurately the international accounting standards for certain companies included in the consolidation scope.
The notes do not include tables that have zero balances both for the year to which the financial statements relate and for the previous year.
118 Section 3 - Scope and methods of consolidation
1. Shareholdings in wholly and jointly owned companies (the latter consolidated proportionally) Type of Availability of Put % Company names Head office relation- Shareholding company % held votes % held ship A.1 Fully consolidated companies – Banca Popolare di Lodi Capital Company LLC New York 1 Banca Popolare Italiana 100.00 100.00 – Banca Popolare di Lodi Capital Company LLC II New York 1 Banca Popolare Italiana 100.00 100.00 – Banca Popolare di Lodi Capital Company LLC New York 1 Banca Popolare Italiana 100.00 100.00 III – Bipielle I.C.T. S.p.A. Lodi 1 Banca Popolare Italiana 100.00 100.00 – Bipitalia Broker S.p.A. Milan 1 Banca Popolare Italiana 100.00 100.00 – Banca Popolare di Crema S.p.A. Crema 1 Banca Popolare Italiana 94.47 94.47 – Banca Popolare di Cremona S.p.A. Cremona 1 Banca Popolare Italiana 99.51 99.51 – Banca Popolare di Mantova S.p.A. Mantova 1 Banca Popolare Italiana 55.01 55.01 – Banca Valori S.p.A. Brescia 1 Banca Popolare Italiana 85.02 85.02 – Bipielle Società di Gestione del Credito S.p.A. Lodi 1 Banca Popolare Italiana 100.00 100.00 – Bipielle International Holding S.A. Lugano 1 Banca Popolare Italiana 100.00 100.00 – Cassa di Risparmio di Lucca Pisa Livorno S.p.A. Lucca 1 Banca Popolare Italiana 72.26 72.26 6.66 – Banca Caripe S.p.A. Pescara 1 Banca Popolare Italiana 51.00 51.00 44.00 Bipielle International – Bipielle Bank (Suisse) S.A. Lugano 1 86.00 86.00 Holding 1 Banca Popolare Italiana 5.00 5.00 Bipielle International – B.P.I. International (UK) Ltd. London 1 72.00 72.00 Holding 1 Banca Popolare Italiana 10.00 10.00 – Banca Bipielle Network S.p.A. Lodi 1 Banca Popolare Italiana 99.63 99.63 – Bipitalia Alternative SGR S.p.A. Lodi 1 Banca Popolare Italiana 20.00 20.00 1 Bipitalia Gestioni SGR 80.00 80.00 – Bipitalia Ducato S.p.A. Lucca 1 Banca Popolare Italiana 100.00 100.00 – Bipitalia Gestioni SGR S.p.A. Lodi 1 Banca Popolare Italiana 96.96 96.96 – Bipielle Real Estate S.p.A. Lodi 1 Banca Popolare Italiana 100.00 100.00 – Bipielle Fondi Immobiliari SGR S.p.A. Lodi 1 Banca Popolare Italiana 100.00 100.00 – Efibanca S.p.A. Rome 1 Banca Popolare Italiana 99.61 99.61 – Italfortune International Advisors S.A. Luxembourg 1 Banca Popolare Italiana 100.00 100.00 Conegliano – Tiepolo Finance S.r.l. 1 Banca Popolare Italiana 60.00 60.00 Veneto (TV) Bipielle Società di Gestione – Tiepolo Finance II S.r.l. Lodi 1 60.00 60.00 del Credito – Nazionale Fiduciaria S.p.A. Brescia 1 Banca Valori 100.00 100.00 – Critefi SIM S.p.A. Brescia 1 Nazionale Fiduciaria 100.00 100.00 – AB Capital S.p.A. Pescara 1 Efibanca 51.00 51.00 – Gruppo Acque Minerali Riunite Rome 1 Efibanca 100.00 100.00 – Glass Italy B.V. Amsterdam (NL) 1 Efibanca 5.00 5.00 – Gruppo Partecipazioni Italiane Milan 1 Glass Italy 91.78 91.86 1 Banca Popolare Italiana 7.31 7.32 Bipielle International – Area Life International Assurance Ltd Dublin 1 100.00 100.00 Holding – Bipielle Previdenza Assicurativa S.r.l. Lodi 1 Banca Bipielle Network 100.00 100.00 – Basileus S.p.A. Lodi 1 Bipielle Real Estate 100.00 100.00 S. Teresa – Lido dei Coralli S.r.l. 1 Bipielle Real Estate 100.00 100.00 Gallura (SS) – Nadir Immobiliare S.r.l. Lodi 1 Bipielle Real Estate 100.00 100.00 – Sirio Immobiliare S.r.l. Lodi 1 Bipielle Real Estate 100.00 100.00 (1) Type of relationship: 1 = majority of voting rights in ordinary meeting 2 - dominant influence in ordinary meeting 3 = agreements with other shareholders 4 = other forms of control 5 = individual management pursuant to Art. 26, subsection 1, of Legislative Decree no. 87/92 6 = individual management pursuant to Art. 26, subsection 2, of Legislative Decree no. 87/92
119 7 = joint control
120 Scope of consolidation
The consolidated financial statements include the financial statements of Banca Popolare Italiana and those of all the companies directly or indirectly controlled by the latter.
The scope of consolidation is determined in accordance with the provisions contained in IAS 27. This also includes all the companies considered to be associates based on IAS 28 and 31.
Investments held for sale are treated in accordance with IFRS 5 which governs the treatment of non- current assets held for sale, both for the preparation of the 2006 annual accounts and for the figures relating to previous periods presented for comparative purposes.
To determine the change in the scope of consolidation arising from the standards described above, a relevance factor was applied based on the simultaneous existence of exclusion thresholds equal to the lesser of 1% of the Parent Bank's book value and €10 million as an individual threshold and 5 times these limits as total thresholds.
Companies in liquidation or not operating are also excluded. For consolidation purposes, shares received in pledge are not considered as they are not held in order to exercise control over or influence the company's management policies.
The following changes have taken place to the scope of consolidation compared with December 31, 2005:
- the subsidiary Bipielle Leasing is no longer included in the full consolidation scope following the sale of the whole stake on June 6, 2006;
- the subsidiary S.R.T. Lucca e Cremona S.p.A. (formerly Bipielle Riscossioni S.p.A.), previously consolidated with the full consolidation method , is no longer included in the scope of consolidation as a result of its sale on September 30, 2006;
- the investee company Buon Viaggio S.r.l., previously valued using the equity method, was sold in full on April 14, 2006;
- the investee company Palladio Finanziaria S.p.A., previously valued with the equity method, was partially sold on May 16, 2006. The remaining 10.61% holding is stated in financial assets held for sale;
- the partial sale of 10% of the share capital of Cassa di Risparmio di Bolzano S.p.A., previously valued using the equity method, was completed on December 22, 2006. This was hence deconsolidated and the remaining holding stated under financial assets held for sale;
- the partial sale of the 10% stake in Fidia Farmaceutici S.p.A., previously consolidated using the equity method, also took place on the same date. The residual holding was hence deconsolidated and stated under financial assets held for sale;
- the investment held in Deroma S.p.A., previously valued using the equity method, has been deconsolidated and shown under item 150 of the consolidated assets “Non-current assets and discontinued operations”. In fact, the sale of the entire shareholding to third parties was formalised on January 25, 2007;
- similarly, the holding in IGLI S.p.A., previously valued using the equity method, has been deconsolidated and shown under item 150 of the consolidated assets “Non-current assets and discontinued operations”. In fact, the entire shareholding was sold to third parties on February 27, 2007.
It should also be noted that the investee companies Banca Bipielle Network S.p.A., Bipielle Previdenza Assicurativa S.r.l., Area Life International Assurance Ltd as well as some of the subsidiaries of Efibanca S.p.A. held within the merchant banking operation, consolidated using the
121 full consolidation method, are included in the consolidated financial statements under items 150 of assets (Non-current assets and discontinued operations, 90 of liabilities (Liabilities associated with discontinued operations) and 310 of the income statement (Profit/loss from discontinued operations after tax) since they are held for sale.
Date of consolidation
The balance sheet date coincides with the date on which the Parent Bank, Banca Popolare Italiana, prepares its financial statements. Companies that end the period on a different date from that of the Parent Bank must prepare a balance sheet and income statement for the reference date.
Financial statements used for consolidation
The consolidated financial statements are prepared on the basis of the financial statements of the individual consolidated companies, prepared and approved by the competent company bodies, before approval of the consolidated financial statements by the Parent Bank's Board of Directors. For the consolidation of subsidiaries not required to apply IAS/IFRS, the recent financial statements approved by the companies themselves and prepared according to national accounting standards (in particular, reference is made to the industrial shareholdings of the subsidiary Efibanca held under its merchant banking activities) have been used. As regards the consolidation of the shareholding in Eurovita S.p.A., the financial statements prepared according to national accounting standards have been used. Based on the simulations made, if these financial statements had been prepared according to IAS/IFRS, this would not have caused any significant impact on the consolidated financial statements of the Gruppo Banca Popolare Italiana.
Consolidation methods Full consolidation
The financial statements of the Parent Bank and of its subsidiaries are consolidated item by item by adding together the corresponding values of the assets, liabilities, shareholders' equity, income and expenses. So that the consolidated financial statements present group accounting data as if the group were an individual company, the book value of the shareholdings in each subsidiary and the corresponding part of the shareholders' equity of each subsidiary are eliminated. Any positive differences emerging from this elimination, determined on the basis of equity ratios, are recognised, after any allocation to the assets or liabilities of the subsidiary, as goodwill under the item "Intangible Assets". Negative differences are charged to the income statement. The item "goodwill" is not subject to amortisation but, where the conditions apply, is subject to specific adjustments (impairment test). The shares in the net period profit of the subsidiaries and the stakes in the share capital and reserves that do not belong to the group are identified and allocated to third parties on the basis of equity ratios. These stakes in the profit and in the shareholders' equity are presented separately from those pertaining to the Parent Bank's shareholders. Intra-group transactions and balances and the respective income and expenses are fully eliminated.
Consolidation according to the equity method
Under the equity method, the shareholding is initially stated at cost and the book value is increased or decreased in recognition of the stakeholder’s share in the associate's profits or losses which are realised after the acquisition date. This share is recognised in a specific item of the consolidated income statement. The differences between the value of the shareholding and the shareholders' equity of the affiliated company are included in the book value of the affiliated company.
SECTION 4 – EVENTS AFTER THE BALANCE SHEET DATE
122 Reference is made, for events after the balance sheet date, to the contents of the section “Significant events after December 31, 2006” of the Directors’ Report and, with particular reference to the merger with the BPVN group approved by the Shareholders’ Meeting of March 10, 2007, to section G of these Notes.
Note that, pursuant to IAS 10, the date on which the financial statements were authorised for publication by the bank's Board of Directors was March 28, 2007.
SECTION 5 - OTHER ASPECTS
There are no further aspects to be reported.
123 A.2 - PART RELATING TO THE MAIN FINANCIAL STATEMENT AGGREGATES
The accounting standards adopted to prepare the financial statements, with reference to the classification, recognition, valuation and derecognition of the various asset and liability items, as well as the methods used to recognise revenues and costs, are the same as those adopted for the 2005 financial statements and are detailed below. .
1 - Financial assets held for trading Recognition criteria
The initial recognition of these financial assets takes place on the settlement date for debt and equity securities, and on the subscription date for derivatives. At the time of initial recognition, financial assets held for trading are measured at cost, understood to mean the fair value of the instrument, without considering the transaction expenses or income directly attributable to the instrument. Any embedded derivatives in combined contracts not strictly correlated to these and whose characteristics meet the definition of a derivative are separated from the host contract and measured at fair value, whilst, for the host contract, the accounting criterion of its classification category is applied.
Classification criteria
This category exclusively consists of debt and equity securities and the positive value of derivatives held for trading. Derivatives include those embedded in combined financial instruments which are measured separately because:
- their economic risks and characteristics are not closely related to those of the host contract;
- the embedded instruments, even if separate, meet the definition of a derivative;
- the hybrid instruments to which they belong are not measured at fair value with the respective changes recognised in the income statement..
Valuation and measurement criteria
Following the initial recognition, financial assets held for trading are measured at fair value. To determine the fair value of financial instruments listed on an active market, quoted market prices for the last day of the period in question are used. If there is no active market, it is necessary to use estimates and valuation techniques that take account of all risk factors correlated to the instruments and which are based on market data such as: methods based on the valuation of listed instruments that have similar characteristics, discounted cash flow analyses, option pricing models and values measured in recent comparable transactions. Equity securities and the associated derivatives for which it is not possible to determine the fair value reliably according to the guidelines indicated above, are measured at cost.
Derecognition criteria
Financial assets are derecognised when the contractual rights to the cash flows from the assets themselves expire or when the financial asset is sold and all the risks/rewards related thereto are substantially transferred.
2 - Available-for-sale financial assets Recognition criteria
The initial recognition of the financial asset takes place on the settlement date for debt or equity securities.
124 At the time of initial recognition, the assets are measured at fair value, including the transaction income or expenses directly attributable to the instrument itself. If recognition takes place as a result of reclassification from held-to-maturity assets, the value recognised is the fair value at the time of the transfer.
Classification criteria
This category includes non-derivative financial assets not classified as Loans, Assets held for trading or Held-to-maturity assets. In particular, this item includes not only bonds that are not held for trading and are not classified as held-to-maturity assets or as loans but also shareholdings not held for trading which cannot be categorised as investments in subsidiaries, associates and joint ventures.
Valuation and measurement criteria
Following the initial recognition, Available-for-sale assets are measured at fair value, with the corresponding value being recognised in income at amortised cost, whereas the gains or losses arising from a change in fair value are recognised in a special shareholders’ equity reserve until the financial asset is derecognised or an impairment is recorded. At the time of disposal or recognition of impairment, the cumulative gain or loss is reversed to the income statement. Fair value is determined on the basis of the criteria already outlined for financial assets held for trading. Equity securities for which it is not possible to determine the fair value reliably are measured at cost. At the end of each financial year or interim period, the existence of objective evidence of impairment is checked. If such evidence exists, the amount of impairment to be charged to income is measured as being the cumulative change previously entered in the special shareholders' equity reserve.
If the reasons for the impairment no longer apply as a result of an event occurring after the recognition of the impairment loss, the impairment is reversed and recognised in income, in the case of loans or debt securities, and in equity in the case of equity securities. The amount of the reversal cannot under any circumstances exceed the amortised cost that the instrument would have had in the absence of previous write-downs.
Derecognition criteria
Financial assets are derecognised when the contractual rights to the cash flows from the assets themselves expire or when the financial asset is sold and all the risks and rewards of ownership of the financial asset are substantially transferred.
3- Held-to-maturity financial assets Recognition criteria
The initial recognition of the financial asset takes place on the settlement date. At the time of initial recognition, the financial assets classified in this category are measured at fair value, including any directly attributable income and expenses. If recognition in this category takes places as a result of reclassification from Available-for-sale assets, the asset's fair value on the reclassification date is taken as its new amortised cost.
Classification criteria
This category includes debt securities with fixed or determinable payments and fixed maturity, for which there is a positive intent and ability to hold to maturity. If, due to a change of intent or ability, it is no longer appropriate to carry an investment as held-to-maturity, this is reclassified amongst Available-for-sale assets.
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Valuation and measurement criteria
After the initial recognition, Held-to-maturity financial assets are measured at amortised cost, using the effective interest rate method. Gains or losses relating to held-to-maturity assets are recognised as income at the time the assets are derecognised or suffer an impairment, as well as through the process of amortising the difference between the recognition value and the value payable on maturity. At the end of each financial year or interim period, the existence of objective evidence of impairment is checked. If such evidence exists, the amount of impairment is measured as being the difference between the carrying amount of the asset and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of impairment is recognised in the income statement. If the reasons for the impairment no longer apply as a result of an event occurring after the recognition of the impairment loss, the impairment is reversed and recognised in the income statement..
Derecognition criteria
These financial assets are derecognised when the contractual rights to the cash flows from the assets themselves expire or when the financial asset is sold and all the risks and rewards related thereto are substantially transferred.
4 - Loans
Recognition criteria
The initial recognition of a loan takes place on the disbursement date or, in the case of a debt security, on the settlement date, on the basis of the fair value of the financial instrument, equal to the amount disbursed, or subscription price, including the income/expenses directly attributable to the individual loan and which are determinable right from the start of the transaction, even if paid off at a later date. This excludes costs that, despite having the above characteristics, are to be repaid by the debtor or can be classified amongst normal internal administration costs. For any lending transactions carried out under conditions other than market conditions, the fair value is determined by using special valuation techniques. The difference in relation to the amount disbursed or the subscription price is charged directly to the income statement.. Swaps and repurchase agreements with a repurchase or resale obligation at the end of the agreement are recognised as deposits or loan transactions. In particular, repos are recognised as payables for the amount received spot whereas reverse repos are recognised as loans for the amount paid spot.
Classification criteria
Loans include customer and bank loans that have fixed or determinable payments, which are not quoted in an active market and which were not originally classified as Available-for-sale financial assets. This also includes commercial loans and repurchase agreements.
Valuation and measurement criteria
After the initial recognition, loans are measured at amortised cost, equal to the amount initially recognised minus/plus capital repayments, write-downs/write-backs and amortisation - calculated according to the effective interest rate method - of the difference between the amount disbursed and the amount repayable on maturity, typically attributable to the income/expenses directly attributed to the individual loan. The effective interest rate is identified by calculating the rate that makes the present value of the future cash flows from the loan, in terms of capital and interest, equal to the amount disbursed including income/expenses attributed to the loan. This method of
126 accounting, using a financial logic, means that it is possible to distribute the economic effect of the income/expenses throughout the expected remaining life of the loan.
At the end of each financial year or interim period, a recognition of loans is performed aimed at identifying those that, following the occurrence of events after their recognition, show objective evidence of a possible impairment loss. This applies to loans that have been given the status of non-performing, problem or restructured loans according to the current rules applied by Banca d'Italia, consistent with IAS standards. These non-performing loans undergo a process of analytical valuation and the amount of the write-down of each loan is equal to the difference between its carrying amount at the time of the evaluation (amortised cost) and the present value of the expected future cash flows, calculated by applying the original effective interest rate. The expected cash flows take account of the expected recovery times, the estimated realisable value of any guarantees and the costs that are expected to be incurred in recovering the credit exposure. The cash flows relating to loans expected to be recovered in the short term are not discounted. The original effective rate of each loan remains unchanged over time even in the event of a restructuring of the loan that involves a change in the contractual rate and even if the loan, in practice, no longer bears any contractual interest. The write-down is charged to the income statement. The original value of the loans is restored in subsequent years if the reasons for the adjustment no longer apply, provided that this appraisal can be objectively connected to an event that occurs after the adjustment itself. The reversal is recognised in the income statement and cannot under any circumstances exceed the amortised cost that the loan would have had in the absence of previous adjustments. Loans for which there is no objective evidence of impairment, i.e. generally speaking, performing loans, including those to counterparties residing in risk countries and those that falling due/exceeding more than 180 days, are subject to an estimated collective impairment. This appraisal is made for homogeneous categories of loans in terms of credit risk and the respective impairment percentages are estimated by taking into account historic experience, based on elements observable on the appraisal date, thus allowing for an estimate of the value of the impairment existing in each category of loans. Write-downs determined collectively are charged to income. At the end of each financial year and interim period, any additional write-downs or write- backs are recalculated differently with reference to the entire portfolio of performing loans on the same date.
Derecognition criteria
Ceded loans are eliminated from the balance sheet only if the cession involved the substantial transfer of all the risks and rewards connected to the loans. However, if the risks and rewards relating to the ceded loans are maintained, these will continue to be recognised as assets, even though legally the ownership of the loan has been effectively transferred. If it is not possible to ascertain that the risks and rewards have been actually transferred, the loans are eliminated from the balance sheet if no type of control over these is maintained. However, if control is maintained, even partly, this means that the loans are maintained in the balance sheet to the extent equal to the remaining involvement, measured by the exposure to changes in value of the transferred loans and changes in their cash flows. Finally, the transferred loans are eliminated from the balance sheet if the contractual rights to receive the respective cash flows are preserved with the simultaneous assumption of an obligation to pay these flows, and only these, to other third parties.
5 - Financial assets at fair value Recognition criteria
At the time of initial recognition, financial instruments measured at fair value are recognised at cost, understood to be the fair value of the instrument, without considering the transaction costs or
127 income directly attributable to the instrument itself, which are charged to the income statement. This designation can be used when this involves more relevant information because:
- it eliminates or significantly reduces a lack of uniformity in the measurement or recognition (often described as "accounting asymmetry"), which would other result from measuring assets or liabilities or recognising the respective profits and losses on different bases.
- the management and performance of a set of financial assets and/or financial liabilities is measured on the basis of fair value according to a documented risk management methodology or investment strategy and the reporting arising therefrom is more significant.
- this is an instrument containing an embedded derivative that satisfies particular conditions. In this case, however, the fair value option cannot be applied if:
- the derivative does not significantly alter the cash flows of the host instrument, or it is clear, without the need for thorough analyses, that the derivative should not be separated
The application of the Fair Value Option (FVO) extends to all financial assets and liabilities that cause distortion in the accounts and to all instruments that are managed and measured from a fair value perspective.
Classification criteria
This item includes all financial assets and liabilities of different technical form (debt securities, equity securities, loans, etc.) measured at fair value with the valuation results recognised in the income statement, on the basis of the right granted to companies ("fair value option") by IAS 39.
Valuation and measurement criteria
After the initial recognition, financial assets and financial liabilities at fair value continue to be measured at fair value. Market prices are used to determine the fair value of financial instruments listed on an active market.. If there is no active market, it is necessary to use generally accepted estimates and valuation techniques based on market data such as: methods based on the valuation of listed instruments that have similar characteristics, discounted cash flow analyses, option pricing models and values measured in recent comparable transactions.
Profits and losses arising from the change in fair value of financial assets and liabilities are recognised in the item "Net income from financial assets and liabilities at fair value” in the income statement.
Derecognition criteria
Financial assets are derecognised when the contractual rights to the cash flows from the assets themselves expire or when the financial asset is sold and all the risks/rewards related thereto are substantially transferred. Financial liabilities are derecognised when they are paid off or when the obligation specified in the contract is fulfilled, cancelled or expires.
6 - Hedging transactions Recognition criteria
Derivative hedging instruments, like all derivatives, are initially recognised and then measured at fair value.
The derivative is designated as a hedge if formalised documentation exists of the relationship between the hedged item and the hedging instrument and if it is effective at the time the hedge starts, and continues, throughout the life of the hedge.
128 The effectiveness of the hedge depends on the extent to which the changes in fair value of the hedged item or the expected cash flows are offset by those affecting the hedging instrument. Therefore, effectiveness can be measured by comparing the above changes, bearing in mind the company's intention at the time the hedge was put in place.
It is effective (within the 80 - 125% range) if the changes in fair value (or cash flows) of the hedging instrument almost totally offset the changes in the hedged item, in terms of the risk being hedged.
Effectiveness is measured on each balance sheet date by using:
- prospective tests, which justify the application of hedge accounting, insofar as they demonstrate its expected effectiveness;
- retrospective tests, which show the degree of effectiveness of the hedge achieved in the period in question. In other words, they measure the extent to which the actual results deviate from the perfect hedge.
Only instruments involving a counterparty external to the Group are classified as hedging instruments.
Classification criteria
Risk- hedging transactions are aimed at neutralising potential losses measurable on a specific hedged item or specific group of hedged items, attributable to a specific risk (for example, a rise in interest rates), through the profits measurable on a different item or group of items (hedging instrument) in the event that this particular risk should actually materialise.
The types of hedges used are as follows:
- fair value hedge: seeks to hedge the exposure to the change in fair value of an item attributable to a particular risk;
- cash flow hedge: seeks to hedge the exposure to changes in future cash flows attributable to particular risks associated with balance sheet items.
“Hedge derivatives” items under balance sheet assets and liabilities include the positive and negative value of the derivatives that are part of effective hedge positions; if checks fail to confirm the effectiveness of the hedge, the hedge derivative contract is reclassified under trading instruments.
Valuation and measurement criteria
Hedge derivatives are measured at fair value. In particular, they are recognised as follows:
- in the case of fair value hedging, the change in the fair value of the hedged item is offset by the change in the fair value of the hedging instrument. This offsetting is recognised through the recognition of any changes in value in the income statement, both in relation to the hedged item (in terms of changes caused by the underlying risk factor) and to the hedging instrument. Any difference, which represents the partial ineffectiveness of the hedge, therefore constitutes the net economic effect;
- in the case of cash flow hedging, the changes in the fair value of the derivative are reported in equity, for the effective proportion of the hedge, and in the income statement only if, with regard to the hedged item, the change in the cash flows to be offset takes place.
Derecognition criteria
129 Financial assets and liabilities for hedging are derecognised when the contractual rights to the cash flows from the assets themselves expire or when the financial asset/liability is sold and all the risks/rewards related thereto are substantially transferred.
7 - Shareholdings Recognition criteria
The initial recognition of the financial asset takes place on the settlement date. At the time of initial recognition, the financial assets classified in this category are stated at cost..
Classification and measurement criteria
This item includes interests held in associates, which are stated according to the equity method. Associates are considered to be those in which 20% or more of the voting rights are held and those that, as a result of specific legal connections, such as participation in shareholder agreements, have to be considered as being subject to considerable influence.
Derecognition criteria
Shareholdings are derecognised when the contractual rights to the cash flows from the assets themselves expire or when the shareholding is transferred and all the risks and rewards related thereto are substantially transferred.
8 - Property, plant and equipment Recognition criteria
Property, plant and equipment are initially recorded at cost which includes not only the original purchase price but also any incidental expenses directly attributable to the purchase and commissioning of the asset. Extraordinary maintenance costs that involve an increase in the future economic benefits are recognised as increasing the value of the assets, whilst other ordinary maintenance costs are recognised in the income statement..
Classification criteria
Property, plant and equipment include land, buildings, real estate investments, technical installations, furniture and furnishings and equipment of any kind. These are tangible assets held for use in the production or supply of goods and services, to be leased to third parties, or for administrative purposes, and which are expected to be used for more than one period. This item also includes assets used in finance leases and the restructuring costs of branches and other buildings not owned.
Valuation and measurement criteria
Property, plant and equipment, including buildings, are recorded at cost less depreciation and impairment. These assets are systematically depreciated on a straight-line basis over their useful life, with the exception of land, whether purchased separately or incorporated into the value of buildings, because this has an indefinite useful life. If the value of land is included in the value of the building, by virtue of the application of the components approach, it is considered to be an asset separable from the building. The division between the value of the land and the value of the building is made on the basis of independent appraisals. At the end of each financial year or interim
130 period, if there is any indication that an asset may have been impaired, a comparison is made between the carrying amount of the asset and its recoverable amount. Any write-downs are recognised in the income statement. If the reasons that led to the impairment being recognised no longer apply, the impairment is reversed and the amount of this reversal cannot exceed the value that the asset would have had, net of depreciation calculated in the absence of previous impairment losses. The costs of renovating buildings not owned are capitalised in consideration of the fact that throughout the duration of the lease, the company using the building has control of the assets and can derive future economic benefits from these. The costs of renovating leased buildings are depreciated over a period not exceeding the duration of the lease.
Derecognition criteria
An item of property, plant and equipment is removed from the balance sheet on disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
9 - Intangible assets Classification criteria
IAS 38 defines intangible assets as identifiable non-monetary assets without physical substance. The necessary characteristics to meet the definition of intangible assets are:
- identifiability
- control of the asset in question
- existence of future economic benefits.
In the absence of one of the above characteristics, the expense to purchase or generate the asset internally is recorded as a cost in the year in which it was incurred.
Intangible assets include goodwill and application software used over several years.
Goodwill included in intangible assets represents the positive difference between the purchase cost and the fair value of the assets and liabilities acquired.
Other intangible assets are recorded as such if they are identifiable and arise from legal or contractual rights.
Recognition and valuation criteria
An intangible asset can be entered as goodwill if the positive difference between the fair value of the assets acquired and the purchase cost of the shareholding (including incidental expenses) is representative of the future income-producing capabilities of the shareholding (goodwill).
If this difference is negative (badwill) or in the event that goodwill finds no future income- producing capabilities of the investee company, the difference is directly charged to the income statement..
On an annual basis (or whenever there is evidence of impairment), a test is performed to check the adequacy of the goodwill value. To this end, the cash-generating unit to which to allocate goodwill is identified.
The amount of any impairment is determined on the basis of the difference between the carrying amount of goodwill and its recoverable value, if lower. This recoverable value is equal to the lesser of the fair value of the cash-generating unit, less any costs to sell, and its respective value in use. The resulting value adjustments are charged to the income statement..
131 Other intangible assets are stated at cost, adjusted for any incidental expenses only if it is likely that the future economic benefits attributable to the asset will be realised and if the cost of the asset itself can be reliably measured.
The cost of intangible assets is amortised on a straight-line basis over their respective useful life. If an intangible asset has an indefinite useful life, it is not amortised but regularly tested to ensure that the carrying amount is adequate. The costs of renovating leased buildings are amortised over a period not exceeding the duration of the contract.
At the end of each financial year, if there is evidence of impairment, an estimate is made of the recoverable value of the asset. The amount of the impairment, charged to the income statement, is equal to the difference between the carrying amount of the asset and its recoverable amount..
Derecognition criteria
An intangible asset is eliminated from the balance sheet on disposal and if no future economic benefits are expected.
10 - Non-current assets and liabilities, discontinued operations Classification, recognition and valuation criteria
This item includes non-current assets intended for sale and discontinued assets and liabilities, in accordance with the provisions of IFRS 5.
These assets are measured at the lesser of carrying value and their fair value, net of selling costs, and the respective balance sheet and income statement entries are recorded separately in the financial statements as provided by IFRS 5.
The respective income and expenses (net of the tax effect) are disclosed separately in the income statement..
11 - Current and deferred taxation Classification, recognition and valuation criteria
Current and prepaid taxes are recognised on the basis of current tax legislation. Income taxes are recognised in the income statement except for those relating to items charged or credited directly to shareholders’ equity. The provision for income taxes is determined on the basis of an estimate of current, prepaid and deferred taxes. In particular, prepaid and deferred taxes are determined on the basis of the timing differences, without time restrictions, between the value allocated to an asset or liability according to statutory criteria and the corresponding tax values. Prepaid tax assets are recognised in the balance sheet to the extent that their recovery is probable, assessed on the basis of the capacity of the company in question and of the Parent Bank, following exercise of the "tax consolidation" option, to generate positive taxable income. Deferred tax liabilities are stated in the balance sheet, with the sole exceptions of the higher asset values in tax relief reserves, insofar as the amount of the available reserves already subject to taxation allows for the reasonable expectation that transactions liable for taxation will not be carried out. Prepaid and deferred taxes are stated in the balance sheet with open balances and without offsetting, with the former entered under the item "Tax assets" and the latter under the item "Tax liabilities". These items are systematically assessed to take account of any changes in regulations or in the rates and any different subjective situations affecting the Group's companies. The amount of tax liabilities is also adjusted to meet the expenses that might arise from notices of assessment already notified or from disputes with the tax authorities.
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12 - Provisions for contingencies and charges and employee severance payment provision 1) Employee severance payment provision Classification, recognition and valuation criteria
The employee severance payment provision is measured on the basis of its actuarial value, certified by actuaries outside the Group.
It is measured on the basis of IAS 19 because the employee severance payment provision can be treated like a "post-employment benefit" of the "defined-benefit" type, the amount of which already accrued must be future-projected in order to estimate the amount to be paid upon the termination of the employment contract and then discounted, using the Projected Unit Credit Method, to take account of the time that will elapse before actual payment..
In the case of a defined-benefit plan, according to IAS 19, the company's obligation is to provide the agreed benefits to employees in service and to previous employees. Actuarial risk and investment risk fall, in effect, upon the company, which might be required to increase the regular contributions in the case of actuarial and investment risk that reduce employees' expected benefits.
For discounting purposes, future disbursements are projected on the basis of statistical historical analyses and the demographic curve and discounted on the basis of a market interest rate.
The service costs of the plan are recorded under personnel expenses as an amount net of contributions paid, contributions relating to previous periods not yet accounted for, accrued interest, expected revenues arising from plan assets, and actuarial gains and losses.
2) Provisions for contingencies and charges Classification criteria
Provisions for contingencies and charges include provisions for present obligations arising from a past event for which it is likely that economic resources will have to be spent in order to discharge the obligation, always providing that the amount in question can be estimated reliably.
These provisions include provisions for long-term benefits and post-employment benefits covered by IAS 19 and the provisions for contingencies and charges covered by IAS 37.
Recognition criteria A provision must be recognised if:
- a company has a present obligation (legal or constructive) as a result of a past event;
- it is likely that resources suitable for producing economic benefits will need to be employed to meet the obligation;
- the amount of the obligation can be reliably estimated.
If these conditions are not met, no provision should be recognised.
Valuation and measurement criteria
The process of allocating value to provisions is based on the "best estimate" concept. Indeed, IAS 37 defines best estimate for quantifying an obligation as the amount that an enterprise would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party on that date.
Where the effect of the present value of money is material, the amount of a provision is represented by the present value of the outflows that are deemed necessary to settle the obligation.
133 Obligations for which a provision is made may have different maturities and, therefore, in all cases where there is a long postponement, it is necessary to discount the estimated amount by using a reference rate aligned to the rates in force at the time of the estimate.
Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
Derecognition criteria
If it is no longer likely that an outflow of resources will be required to settle the obligation, the liability is eliminated from the financial statements; moreover, a provision is used to meet those outflows for which it was originally recognised.
13 - Payables and securities in issue Recognition criteria
The initial recognition of these financial liabilities takes place upon receipt of the sums collected or upon the issue of debt securities and is made on the basis of the fair value of the liabilities, which is normally equal to the amount collected or to the issue price, plus any additional income/expenses directly attributable to the individual borrowing or issue transaction and which are not repaid by the creditor. Internal administration costs are excluded.
Classification criteria
Due to banks, Due to customers and Securities in issue, which include Subordinated liabilities, cover the various forms of interbank and customer borrowing and deposits made through certificates of deposit and outstanding bonds, net of any amounts repurchased. These also include payables recognised by the lessee under finance lease transactions.
Valuation and measurement criteria
After the initial recognition, financial liabilities are measured at amortised cost according to the effective interest rate method. The exception is short-term liabilities, where the time factor is negligible, which continue to be shown at the value collected.
Derecognition criteria
Financial liabilities are eliminated from the financial statements when they expire or are paid off. Derecognition also occurs when securities previously issued are repurchased. The difference between the carrying amount of the liability and the amount paid on purchase is charged to the income statement..
14 - Financial liabilities held for trading Recognition criteria
This item includes the negative value of derivatives held for trading purposes and the negative value of embedded derivatives present in combined contracts but closely related to these. It also includes the liabilities that arise from technical overdrafts generated by the trading of securities.
Valuation and measurement criteria
The gains and losses arising from the change in fair value and/or the sale of trading instruments are charged to the income statement..
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15 - Financial liabilities at fair value Classification criteria
This category includes the financial liabilities that the management decides to measure at fair value during initial recognition, when this designation eliminates or significantly reduces a lack of uniformity in the measurement or recognition (often described as "accounting asymmetry") which would otherwise result from measuring assets or liabilities or recognising the respective profits and losses on different bases. It also includes financial liabilities that, together with financial assets, come under a group whose management and performance is measured on the basis of the fair value according to a documented risk management methodology or investment strategy.
Valuation and measurement criteria
The gains and losses arising from the change in fair value and/or the sale of these financial liabilities are charged to the income statement..
16 - Foreign currency transactions Recognition criteria
Foreign currency transactions are recorded, at the time of initial recognition, in the currency of account, by applying the rate of exchange at the date of the transaction to the foreign currency amount..
Valuation and measurement criteria
At the end of each financial year or interim period, foreign currency items are recorded as follows:
- monetary items are translated at the exchange rate in force on the period-end date;
- non-monetary items carried at historical cost are translated at the exchange rate in force on the date of the transaction;
- non-monetary items carried at fair value are translated by using the exchange rates in force on the period-end date.
Exchange differences arising on the settlement of monetary items or translating monetary items at rates different from those at which they were translated when initially recognised, or in previous financial statements, are recognised as income in the period in which they arise.
17 - Other information 1) Insurance assets and liabilities
Insurance products are classified under financial contracts and insurance contracts on the basis of the level of significance of the insurance risk inherent in those contracts. For these products, IFRS 4 stipulates:
• the recording of gross premiums in the income statement under revenues. These include all the amounts accrued during the year as a result of the signing of insurance contracts net of cancellations. Similarly, the premiums transferred to reinsurers are recorded under costs for the year;
• an appropriation to the actuarial reserves, which corresponds to the amount of the commitments to insured parties, calculated separately for each contract using the prospective method on the basis of the demographic/financial hypotheses currently used by the market.
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2) Other liabilities - Adjustments for other financial transactions
The liabilities that come under this item also include write-downs relating to the estimated possible outlays associated with the credit risk in relation to the guarantees and commitments determined individually. These write-downs are determined by applying the same criteria previously described in relation to loans.
3) Own shares
Own shares held are used to reduce shareholders' equity. Similarly, the original cost of these and the gains or losses arising from their subsequent sale are recorded as changes in shareholders' equity.
4) Revenue recognition
Revenue is recognised when it is received, or when it is probable that future benefits will be received, and these benefits can be measured reliably.
In particular, default interest, where specified contractually, is recorded in the income statement only at the time of its actual collection and dividends are recognised as income at the time that their distribution is decided. 5) Segment reporting
"Segment reporting" means the representation of a company's economic and financial information by segment.
Business segment means a component of an enterprise that is separately identifiable and which provides a group of related services/products and is subject to risks and returns that are different from those of other business segments.
Geographical segment means a component of an enterprise that is separately identifiable and which provides a group of related services/products and is subject to risks and returns that are different from those of components operating in other economic environments.
In this regard, the Gruppo Banca Popolare Italiana has opted for primary segment reporting.
The identification of business segments is consistent with the current system of reporting to the management which is essentially based on a management analysis of the legal entities. 6) Methods for determining Fair Value for disclosure purposes
The fair value of floating-rate instruments is approximated according to the corresponding book value and, therefore, in the case of loans, it does not reflect the changes in credit quality because the impact of credit risk is recognised separately by deducting the amount of provisions for loan losses both from fair value and from book value.
The fair value of short-term loans and payables is equal to the corresponding book value by virtue of the short-term nature of these instruments.
For fixed-rate instruments, the expected future cash flows are discounted to the present value by using current interest rates.
The impact of credit risk is recognised separately by deducting the amount of provisions for loan losses both from fair value and book value. 7) Share-based payments
136 Employee share-based remuneration plans are recognised in the income, statement with a corresponding increase in shareholders’ equity, based on the fair value of the financial instruments granted at the assignment date and spreading the expense throughout the period of the plan.
In the case of options, the fair value of these is calculated using a model that considers not only information such as option exercise price and life, current price of the shares and their expected volatility, expected dividends and risk-free interest rate, but also the specific features of the plan in place.
The valuation model separately evaluates the option and the likelihood of the conditions under which the options have been granted being achieved. The combination of the two values provides the fair value of the instrument assigned. Any reduction in the number of financial instruments assigned is accounted for as an elimination of a portion thereof.
In the BPI group the subsidiary Efibanca S.p.A. is the only company to have employee remuneration plans in place based on own shares.
137 Part B - INFORMATION ON THE CONSOLIDATED BALANCE SHEET
Pursuant to Banca d’Italia circular no. 262 of December 30, 2006, set out below are the tables to the notes, showing the contribution of the banking group, insurance companies and other companies separately
For the BPI Group the insurance companies’ contribution refers solely to the subsidiary Area Life International Assurance Ltd which was consolidated using the full consolidation method up to December 31, 2005 whilst for the current year the overall contribution to the consolidated financial statements relates to items150 under assets (Non-current assets and discontinued operations), 90 under liabilities (Liabilities associated with discontinued operations) and 310 in the income statement (Profit (loss) from discontinued operations after tax) since it is available for sale. For this reason the tables relating to the insurance companies’ contribution, which show no values for 31 December, 2006 are presented solely for purposes of comparison with the previous year’s figures, where these are given.
ASSETS Section 1 - Cash on hand and deposits with central bank and post offices - Item 10 1.1 Cash on hand and deposits with central bank and post offices: breakdown
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies Cash on hand 245,244 1 245,245 222,325 Demand deposits with central banks 3,743 3,743 15,098 Total 248,987 1 248,988 237,423
Section 2 - Financial assets held for trading - Item 20 2.1 Financial assets held for trading: breakdown by category
Banking group Insurance companies Other companies 31/12/2006 31/12/2005 Listed Unlisted Listed Unlisted Listed Unlisted A. Cash assets 1. Debt securities 1,075,453 407,287 3,353 1,486,093 1,365,439 1.1 Structured securities 53 53 13,460 1.2 Other debt securities 1,075,453 407,234 3,353 1,486,040 1,351,979 2. Equities 166,939 18 166,957 471,508 3. Units in OICR 244,651 86,064 330,715 644,285 4. Loans 4.1. Repurchase agreements 4.2 Other 5. Impaired assets 6. Assets sold but not eliminated 908,693 203,567 1,112,260 1,053,752 Total A 2,395,736 696,936 3,353 3,096,025 3,534,984 B. Derivative instruments 1. Financial derivatives: 897 504,411 505,308 532,875 1.1 used for trading activities 897 492,471 493,368 529,077 1.2 associated with the fair value
option 1.3 other 11,940 11,940 3,798 2. Credit derivatives: 152 152 184 2.1 used for trading activities 152 152 184 2.2 associated with the fair value
option 2.3 other Total B 897 504,563 505,460 533,059
138 Total A+B 2,396,633 1,201,499 3,353 3,601,485 4,068,043
The item "Assets sold but not eliminated" includes underlying securities in repurchase agreements without the option of forward repurchase for the seller.
139 2.2 Financial assets held for trading: breakdown by debtors/issuers
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies A. CASH ASSETS 1. Debt securities 1,482,740 3,353 1,486,093 1,365,439 a) Governments and central banks 998,365 998,365 915,187 b) Other public entities 7,143 7,143 8,170 c) Banks 156,342 156,342 59,409 d) Other issuers 320,890 3,353 324,243 382,673 2. Equities 166,957 166,957 471,508 a) Banks 37,537 37,537 174,595 b) Other issuers: 129,420 129,420 296,913 - insurance companies 13,155 13,155 14,047 - financial companies 11,777 11,777 16,785 - non-financial companies 88,188 88,188 263,414 - other 16,300 16,300 2,667 3. Units in OICR 330,715 330,715 644,285 4. Loans a) Governments and central banks b) Other public entities c) Banks d) Other entities 5. Impaired assets a) Governments and central banks b) Other public entities c) Banks d) Other entities 6. Assets sold but not eliminated 1,112,260 1,112,260 1,053,752 a) Governments and central banks 858,807 858,807 517,895 b) Other public entities c) Banks 174,712 174,712 277,533 d) Other issuers 78,741 78,741 258,324 Total A 3,092,672 3,353 3,096,025 3,534,984 B. DERIVATIVE INSTRUMENTS a) Banks 365,988 365,988 440,988 b) Customers 139,472 139,472 92,071 Total B 505,460 505,460 533,059 Total (A + B) 3,598,132 3,353 3,601,485 4,068,043
140 2.3 Financial assets held for trading: derivative instruments used for trading activities
2.3.1 relating to the banking group
Interest Currencies Banking group Equities Loans Other 31/12/2006 31/12/2005 rates and gold A) Listed derivatives 1) Financial derivatives: 866 31 897 22 with exchange of capital - options purchased - other derivatives without exchange of capital - options purchased - other derivatives 866 31 897 22 2) Credit derivatives with exchange of capital without exchange of capital Total A 866 31 897 22 B) Unlisted derivatives 1) Financial derivatives: 193,596 37,766 263,297 9,752 504,411 532,853 with exchange of capital - options purchased 1,191 111,207 112,398 27,330 - other derivatives 36,575 36,575 40,263 without exchange of capital - options purchased 25,095 152,070 177,165 306,181 - other derivatives 168,501 20 9,752 178,273 159,079 2) Credit derivatives 152 152 184 with exchange of capital 184 without exchange of capital 152 152 Total B 193,596 37,766 263,297 9,904 504,563 533,037 Total A + B 194,462 37,797 263,297 9,904 505,460 533,059
2.3.2 relating to insurance companies
There is no value for this item and so the respective table is omitted.
2.3.3 relating to other companies
There is no value for this item and so the respective table is omitted.
The instruments in question relate exclusively to the companies belonging to the Banking Group.
141 2.4 Financial assets held for trading (other than assets sold and not eliminated and impaired assets): Changes over the year
2.4.1 relating to the banking group Banking group Debt securities Equities Units in O.I.C.R. Loans Total A. Opening balances 1,365,210 471,508 644,285 2,481,003 B. Increases 17,033,736 909,403 277,434 18,220,573 B.1 Purchases 16,535,798 865,094 240,224 17,641,116 B.2 Positive changes in fair value 10,610 13,975 24,209 48,794 B.3 Other changes 487,328 30,334 13,001 530,663 C. Decreases -16,916,206 -1,213,954 -591,004 -18,721,164 C.1 Sales -12,835,510 -1,084,411 -529,825 -14,449,746 C.2 Redemptions -1,183,065 -1,183,065 C.3 Negative changes in fair value -18,218 -4,153 -11,492 -33,863 C.4 Other changes -2,879,413 -125,390 -49,687 -3,054,490 D. Closing balances 1,482,740 166,957 330,715 1,980,412
2.4.2 relating to insurance companies
There is no value for this item and so the respective table is omitted.
2.4.3 relating to other companies Banking group Debt securities Equities Units in O.I.C.R. Loans Total A. Opening balances 229 229 B. Increases 3,353 3,353 B.1 Purchases B.2 Positive changes in fair value B.3 Other changes 3,353 3,353 C. Decreases -229 -229 C.1 Sales C.2 Redemptions C.3 Negative changes in fair value C.4 Other changes -229 -229 D. Closing balances 3,353 3,353
142 Section 3 - Financial assets at fair value - Item 30 3.1 Financial assets at fair value: breakdown by category
Banking group Insurance companies Other companies 31/12/2006 31/12/2005
Listed Unlisted Listed Unlisted Listed Unlisted
1. Debt securities 174,681 1.1 Structured securities 1.2 Other debt securities 174,681 2. Equities 285,743 3. Units in O.I.C.R. 255,954 4. Loans 4.1 Structured 4.2 Other loans 5. Impaired assets 6. Assets sold but not eliminated Total 716,378
Financial assets at fair value for 2005 refer primarily to the Antonveneta securities held by the Parent Bank and to the securities in Area Life’s portfolio.
3.2 Financial assets at fair value: breakdown by debtors/issuers Banking group Insurance companies Other companies 31/12/2006 31/12/2005 1. Debt securities 174,681 a) Governments and central 105,629 banks b) Other public entities c) Banks 9,287 d) Other issuers 59,765 2. Equities 285,743 a) Banks 284,362 b) Other issuers: 1,381 - insurance companies 400 - financial companies - non-financial companies - other 981 3. Units in OICR 255,954 4. Loans a) Governments and central
banks b) Other public entities c) Banks d) Other entities 5. Impaired assets a) Governments and central
banks b) Other public entities c) Banks d) Other entities 6. Assets sold but not eliminated a) Governments and central
banks b) Other public entities c) Banks d) Other entities Total 716,378
143 3.3 Financial assets at fair value: changes over the year
3.3.1 relating to the banking group Banking group Debt securities Equities Units in O.I.C.R. Loans Total A. Opening balances 284,067 284,067 B. Increases 45,992 45,992 B.1 Purchases 45,992 45,992 B.2 Positive changes in fair value B.3 Other changes C. Decreases -330,059 -330,059 C.1 Sales -121,909 -121,909 C.2 Redemptions C.3 Negative changes in fair value C.4 Other changes -208,150 -208,150 D. Closing balances
3.3.2 relating to insurance companies Insurance companies Debt securities Equities Units in O.I.C.R. Loans Total A. Opening balances 174,681 1,676 255,954 432,311 B. Increases B.1 Purchases B.2 Positive changes in fair value B.3 Other changes C. Decreases -174,681 -1,676 -255,954 -432,311 C.1 Sales C.2 Redemptions C.3 Negative changes in fair value C.4 Other changes -174,681 -1,676 -255,954 -432,311 D. Closing balances
3.3.3 relating to other companies
This item is not applicable and so the respective table is omitted.
144 Section 4 - Available-for-sale financial assets - Item 40 4.1 Available-for-sale financial assets: breakdown by category
Banking group Insurance companies Other companies 31/12/2006 31/12/2005
Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted
1. Debt securities 63,368 19,341 19,341 63,368 13,778 293,671 1.1 Structured securities 1.2 Other debt securities 63,368 19,341 19,341 63,368 13,778 293,671 2. Equities 463,737 554,171 463,737 554,171 296,159 492,102 2.1 measured at Fair 463,737 321,525 463,737 321,525 296,159 18,604 Value 2.2 measured at cost 232,646 232,646 473,498 3. Units in OICR 4. Loans 5. Impaired assets 6. Assets sold but not
eliminated Total 463,737 617,539 19,341 483,078 617,539 309,937 785,773
This item includes shareholdings totalling €1,051.1 million not held for trading and which cannot be categorised as interests in subsidiaries, associates and joint ventures. In particular, it includes shareholdings of less than 20%, controlling interests held in companies not yet operational as at December 31, 2006 and companies in liquidation.
4.2 Available-for-sale financial assets: breakdown by debtors/issuers
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Debt securities 63,368 19,341 82,709 307,449 a) Governments and central
banks b) Other public entities c) Banks 8,818 8,818 8,818 d) Other issuers 54,550 19,341 73,891 298,631 2. Equities 1,017,908 1,017,908 788,261 a) Banks 267,668 267,668 171,372 b) Other issuers: 750,240 750,240 616,889 - insurance companies 140,226 140,226 130,712 - financial companies 295,710 295,710 278,653 - non-financial companies 313,040 313,040 205,808 - other 1,264 1,264 1,716 3. Units in OICR 4. Loans a) Governments and central
banks b) Other public entities c) Banks d) Other entities 5. Impaired assets a) Governments and central
banks b) Other public entities c) Banks d) Other issuers 6. Assets sold but not
eliminated a) Governments and central
banks
145 b) Other public entities c) Banks d) Other issuers Total 1,081,276 19,341 1,100,617 1,095,710
4.3 Available-for-sale financial assets: hedged assets
4.3.1 relating to the banking group Hedged assets Banking group 31/12/2006 31/12/2005 Fair value Cash flow Fair value Cash flow 1. Debt securities 2. Equities 58,186 3. Units in O.I.C.R. 4. Loans 5. Portfolio Total 58,186
These refer to some of the RCS shares held by the Parent Bank, which are hedged.
4.3.2 relating to insurance companies
This item does not apply and so the respective table is omitted.
4.3.3 relating to other companies
This item does not apply and so the respective table is omitted.
4.4 Available-for-sale financial assets: assets to be micro-hedged
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Financial assets subject to micro fair value 58,186 58,186 hedge a) interest rate risk b) price risk 58,186 58,186 c) exchange risk d) credit risk e) multiple risks 2. Financial assets subject to micro cash flow
hedge a) interest rate risk b) exchange risk c) other Total 58,186 58,186
146 4.5 Available- for- sale financial assets (other than assets sold and not eliminated and impaired assets): changes over the year
4.5.1 relating to the banking group Banking group Debt securities Equities Units in O.I.C.R. Loans Total A. Opening balances 307,449 786,166 1,093,615 B. Increases 25,983 488,880 514,863 B.1 Purchases 8,905 211,079 219,984 B.2 Positive changes in fair value 91,150 91,150 B.3 Recoveries in value 937 937 - charged to the income statement X - charged to shareholders’ equity 937 937 B.4 Transfers from other portfolios 114,843 114,843 B.5 Other changes 17,078 70,871 87,949 C. Reductions -270,064 -257,138 -527,202 C.1 Sales -242,891 -127,537 -370,428 C.2 Redemptions -8,000 -21 -8,021 C.3 Negative changes in fair value -26,019 -26,019 C.4 Impairment write-downs -61 -80,983 -81,044 - charged to the income statement -61 -80,983 -81,044 - charged to shareholders’ equity C.5 Transfers from other portfolios -2,500 -2,500 C.6 Other changes -19,112 -20,078 -39,190 D. Closing balances 63,368 1,017,908 1,081,276
4.5.2. relating to insurance companies
This item is not applicable and so the respective table is omitted.
4.5.3 relating to other companies Other companies Debt securities Equities Units in O.I.C.R. Loans Total A. Opening balances 2,095 2,095 B. Increases 19,341 19,341 B.1 Purchases B.2 Positive changes in fair value B.3 Recoveries in value - charged to the income statement - charged to shareholders’ equity B.4 Transfers from other portfolios B.5 Other changes 19,341 19,341 C. Reductions -2,095 -2,095 C.1 Sales C.2 Redemptions C.3 Negative changes in fair value C.4 Impairment write-downs - charged to the income statement - charged to shareholders’ equity C.5 Transfers from other portfolios C.6 Other changes -2,095 -2,095 D. Closing balances 19,341 19,341
147 Section 5 - Held-to-maturity financial assets - Item 50 5.1 Held-to-maturity financial assets: breakdown by category
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies Book Fair Book Fair Book Fair Book Fair Book Fair value value value value value value value value value value 1. Debt securities 83,694 83,342 83,694 83,342 84,630 85,543 1.1 Structured 1.2 Other debt securities 83,694 83,342 83,694 83,342 84,630 85,543 2. Loans 3. Impaired assets 4. Assets sold but not
eliminated Total 83,694 83,342 83,694 83,342 84,630 85,543
5.2 Held-to-maturity financial assets: debtors/issuers
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Debt securities 83,694 83,694 84,630 a) Governments and central 82,980 82,980 83,916 banks b) Other public entities c) Banks d) Other issuers 714 714 714 2. Loans a) Governments and central
banks b) Other public entities c) Banks d) Other entities 3. Impaired assets a) Governments and central
banks b) Other public entities c) Banks d) Other entities 4. Assets sold but not
eliminated a) Governments and central
banks b) Other public entities c) Banks d) Other entities Total 83,694 83,694 84,630
5.3 Held-to-maturity financial assets: hedged assets
There are no held-to-maturity financial assets that are hedged and so the respective table is omitted.
148 5.4 Held-to-maturity financial assets: changes over the year
Debt securities Loans Total A. Opening balances 84,630 84,630 B. Increases 519 519 B.1 Purchases B.2 Recoveries in value B.3 Transfer from other portfolios B.4 Other changes 519 519 C. Decreases -1,455 -1,455 C.1 Sales C.2 Redemptions C.3 Adjustments in value C.4 Transfer from other portfolios C.5 Other changes -1,455 -1,455 D. Closing balances 83,694 83,694
Section 6 - Due from banks - Item 60 6.1 Due from banks: breakdown by category
6.1.1 relating to the banking group Banking group 31/12/2006 31/12/2005 A) Due from central banks 275,554 229,587 1. Savings accounts 2. Mandatory reserve 275,554 229,587 3. Repurchase agreements 4. Other B) Due from banks 3,943,191 3,660,533 1. Current accounts and demand deposits 746,030 918,122 2. Savings accounts 649,405 1,994,530 3. Other loans 2,547,756 725,361 3.1 repurchase agreements 2,518,236 660,700 3.2 finance leases 3.3 other 29,520 64,661 4. Debt securities 22,520 4.1 structured 4.2 other 22,520 5. Impaired assets 6. Assets sold but not eliminated Total (book value) 4,218,745 3,890,120 Total (fair value) 4,219,127 3,890,120
The above repurchase agreements include not only repurchase transactions for loan purposes but also purchases of securities through repo agreements serving repurchase transactions for bank and customer deposits.
149 6.1.2 relating to insurance companies Insurance companies 31/12/2006 31/12/2005 A) Due from central banks 1. Savings accounts 2. Mandatory reserve 3. Repurchase agreements 4. Other B) Due from banks 89 1. Current accounts and demand deposits 89 2. Savings accounts 3. Other loans 3.1 repurchase agreements 3.2 finance leases 3.3 other 4. Debt securities 4.1 structured 4.2 other 5. Impaired assets 6. Assets sold but not eliminated Total (book value) 89 Total (fair value) 89
6.1.3 relating to other companies Other companies 31/12/2006 31/12/2005 A) Due from central banks 757 1. Savings accounts 2. Mandatory reserve 3. Repurchase agreements 4. Other 757 B) Due from banks 613,970 566,988 1. Current accounts and demand deposits 459,947 159,475 2. Savings accounts 3. Other loans 154,023 3.1 repurchase agreements 3.2 finance leases 3.3 other 154,023 4. Debt securities 4.1 structured 4.2 other 5. Impaired assets 6. Assets sold but not eliminated 407,513 Total (book value) 614,727 566,988 Total (fair value) 614,727 566,988
6.2 Due from banks: assets to be micro-hedged This category does not exist.
6.3 Finance leases The Bank does not perform finance leasing activities.
150 Section 7 - Customer loans - Item 70 7.1 Customer loans: breakdown by category
7.1.1 relating to the banking group Banking group 31/12/2006 31/12/2005 1. Current accounts 7,635,939 7,686,753 2. Repurchase agreements 30,274 3. Mortgages 10,607,254 9,233,325 4. Credit cards, personal loans and "fifth of salary" loans 2,564,572 1,700,135 5. Finance leases 6. Factoring 7. Other transactions 3,655,868 4,910,477 8. Debt securities 170 8.1 Structured 8.2 Other 170 9. Impaired assets 1,048,220 1,040,557 10. Assets sold but not eliminated 3,218,561 3,363,597 Total (Book value) 28,730,414 27,965,288 Total Fair value 29,091,573 28,278,210
Assets sold but not eliminated essentially consist of home and commercial mortgage agreements that were securitised in the years 2004, 2005 and 2006. For further details, refer to section E of these notes.
7.1.2 relating to insurance companies Insurance companies 31/12/2006 31/12/2005 1. Current accounts 2. Repurchase agreements 3. Mortgages 4. Credit cards, personal loans and "fifth of salary" loans 5. Finance leases 6. Factoring 7. Other transactions 3,447 8. Debt securities 8.1 Structured 8.2 Other 9. Impaired assets 10. Assets sold but not eliminated Total (Book value) 3,447 Total Fair value 3,447
151 7.1.3 relating to other companies Other companies 31/12/2006 31/12/2005 1. Current accounts 5,493 27 2. Repurchase agreements 3. Mortgages 4. Credit cards, personal loans and "fifth of salary" loans 5. Finance leases 6. Factoring 7. Other transactions 8. Debt securities 8.1 Structured 8.2 Other 9. Impaired assets 10. Assets sold but not eliminated Total (Book value) 5,493 27 Total Fair value 5,493 27
7.2 Customer loans: breakdown by debtors/issuers
7.2.1 relating to the banking group Banking group 31/12/2006 31/12/2005 1. Debt securities issued by: 370,216 a) Governments b) Other public entities c) Other issuers 370,216 Non-financial companies Financial companies Insurance companies Other 370,216 2. Loans to: 24,462,355 23,189,758 a) Governments 208,515 193,015 b) Other public entities 385,462 425,773 c) Other entities 23,868,378 22,570,970 Non-financial companies 14,420,778 14,358,708 Financial companies 3,359,054 2,865,060 Insurance companies 15,341 14,426 Other 6,073,205 5,332,776 3. Impaired assets: 1,048,221 1,040,556 a) Governments b) Other public entities 24,620 22,114 c) Other entities 1,023,601 1,018,442 Non-financial companies 727,839 659,687 Financial companies 33,794 10,696 Insurance companies 6 35 Other 261,962 348,024 4. Assets sold but not eliminated: 3,219,838 3,364,758 a) Governments b) Other public entities c) Other entities 3,219,838 3,364,758 Non-financial companies 733,308 1,082,446 Financial companies 72,949 Insurance companies 496,616 171 Other 1,916,965 2,282,141 Total 28,730,414 27,965,288
152 153 7.2.2 relating to insurance companies Insurance companies 31/12/2006 31/12/2005 1. Debt securities issued by: 3,447 a) Governments b) Other public entities c) Other issuers 3,447 Non-financial companies Financial companies Insurance companies Other 3,447 2. Loans to: a) Governments b) Other public entities c) Other entities Non-financial companies Financial companies Insurance companies Other 3. Impaired assets: a) Governments b) Other public entities c) Other entities Non-financial companies Financial companies Insurance companies Other 4. Assets sold but not eliminated: a) Governments b) Other public entities c) Other entities Non-financial companies Financial companies Insurance companies Other Total 3,447
154 7.2.3 relating to other companies Other companies 31/12/2006 31/12/2005 1. Debt securities issued by: a) Governments b) Other public entities c) Other issuers Non-financial companies Financial companies Insurance companies Other 2. Loans to: 5,493 27 a) Governments b) Other public entities c) Other entities 5,493 27 Non-financial companies Financial companies 5,493 27 Insurance companies Other 3. Impaired assets: a) Governments b) Other public entities c) Other entities Non-financial companies Financial companies Insurance companies Other 4. Assets sold but not eliminated: a) Governments b) Other public entities c) Other entities Non-financial companies Financial companies Insurance companies Other Total 5,493 27
7.3 Customer loans: assets to be micro-hedged
7.3.1 relating to the banking group Banking group 31/12/2006 31/12/2005 1. Loans subject to micro fair value hedge 318,392 181,275 a) interest rate risk 318,392 181,275 b) exchange rate risk c) credit risk d) several risks 2. Loans subject to micro cash flow hedge a) interest rate risk b) exchange rate risk c) other Total 318,392 181,275
These relate to loans provided by the subsidiary Efibanca, which are hedged by IRS agreements.
155 7.3.2 relating to insurance companies
This category does not exist and so the respective table is omitted.
7.3.3. relating to other companies
This category does not exist and so the respective table is omitted.
7.4 Financial leases
The group does not perform finance leasing activities.
Section 8 – Hedge derivatives – Item 80 8.1 Hedge derivatives: breakdown by type of contracts and underlying assets
8.1.1 relating to the banking group Interest Currencies Banking group Equities Loans Other 31/12/2006 rates and gold A. Listed 1) Financial derivatives with exchange of capital - options purchased - other derivatives without exchange of capital - options purchased - other derivatives 2. Credit derivatives with exchange of capital without exchange of capital Total A) B) Unlisted 1) Financial derivatives 72,577 14,710 15,640 102,927 with exchange of capital - options purchased 51 14,710 14,761 - other derivatives 4,067 4,067 without exchange of capital - options purchased 2 2 - other derivatives 68,457 15,640 84,097 2. Credit derivatives with exchange of capital without exchange of capital Total B) 72,577 14,710 15,640 102,927 Total (A+B) 31/12/2006 72,577 14,710 15,640 102,927 Total (A+B) 31/12/2005 119,203 471 66,314 185,988
8.1.2 relating to insurance companies
This category does not exist and so the respective table is omitted.
8.1.3 relating to other companies
This category does not exist and so the respective table is omitted.
156 8.2 Hedge derivatives: breakdown by hedged portfolios and by type of hedge (carrying value) 8.2.1 relating to the banking group
Fair Value Cash flow Micro Banking group interest exchange multiple credit risk price risk Macro Micro Macro rate risk rate risk risk 1. Available-for-sale financial assets 14,710 2. Loans 20,421
3. Held-to-maturity financial assets
4. Portfolio Total assets 20,421 14,710 1. Financial liabilities 48,089 19,707 2. Portfolio Total liabilities 48,089 19,707
8.2.2 relating to insurance companies
This category does not exist and so the respective table is omitted.
8.2.3 relating to other companies
This category does not exist and so the respective table is omitted.
Section 9 - Adjustment to the value of financial assets to be macro-hedged - Item 90
At the balance sheet date, this item has no value. Therefore, the presentation of the respective section of the notes is omitted.
Section 10 – Shareholdings – Item 100
10.1 Shareholdings in companies subject to significant influence: information on shareholding relationships Head Type of Shareholding Availability Names % stake office relationship company of votes % B. Imprese significant – Arca SGR S.p.A. Milan Banca Popolare Italiana 10.28 10.28 influence Banca Popolare di Crema 5.12 5.12 Banca Popolare di Cremona 5.31 5.31 – Cartesio Alternative Investments SGR significant Milan Banca Popolare Italiana 40.00 40.00 S.p.A. influence significant – Centrosim S.p.A. Milan Banca Popolare Italiana 5.00 5.00 influence Banca Popolare di Crema 4.85 4.85 Banca Popolare di Cremona 2.50 2.50 Cassa di Risparmio di Lucca 10.00 10.00 Pisa Livorno significant – Unione Fiduciaria S.p.A. Milan Banca Popolare Italiana 4.00 4.00 influence Banca Popolare di Crema 20.00 20.00 significant Cassa di Risparmio di Lucca – Assipromos S.r.l. Livorno 34.00 34.00 influence Pisa Livorno significant Cassa di Risparmio di Lucca – Castimm S.r.l. Livorno 100.00 100.00 influence Pisa Livorno significant – Finoa S.r.l. Milan Banca Popolare Italiana 50.00 50.00 influence – Royle West Ltd Dublin significant Banca Popolare Italiana 99.00 99.00
157 influence significant Bipielle Previdenza 1.00 1.00 influence Assicurativa significant – Ali S.p.A. Rome Efibanca 28.35 28.35 influence Volpiano significant – Gruppo Comital Saiag Efibanca 29.86 30.98 (TO) influence significant – Gruppo Deroma Malo (VC) Efibanca 66.29 38.71 influence – Efibanca Palladio Finanziaria SGR significant Milan Efibanca 50.00 50.00 S.p.A. influence significant – Tortella S.p.A. Ortona (CH) AB Capital 21.51 21.51 influence 10.2 Shareholdings in companies subject to significant influence: accounting information
Consolidated Total Shareholders' Names Total assets Profit (loss) carrying Fair value revenues equity value A. Companies valued at shareholders’ equity A.1 subject to significant influence – Arca SGR S.p.A. 210,433 331,813 16,587 97,899 20,275 – Cartesio Alternative Investments SGR S.p.A. 3,638 1,715 242 2,991 1,202 – Centrosim S.p.A. 51,711 28,237 1,067 21,554 6,104 – Unione Fiduciaria S.p.A. 35,444 20,561 2,101 25,703 6,169 – Assipromos S.r.l. 122 40 -16 30 10 – Castimm S.r.l. 1,264 88 -44 1,088 1,199 – Finoa S.r.l. 185,812 1,598 1,286 146,445 89,695 – Royle West Ltd 292 173 -8 -153 – Ali S.p.A. 24,129 80,320 -310 3,532 4,698 – Gruppo Comital Saiag 476,857 520,890 -14,141 26,544 16,909 – Efibanca Palladio Finanziaria SGR S.p.A. 6,762 4,381 950 3,445 3,818 – Tortella S.p.A. 14,676 9,764 -232 5,062 1,089 Total 151,168
10.3 Shareholdings: changes over the year Insurance Banking group Other companies 31/12/2006 companies A. Opening balances 487,644 487,644 B. Increases 68,193 68,193 B.1 Purchases 19,498 19,498 B.2 Write-backs B.3 Write-ups B.4 Other changes 48,695 48,695 C. Decreases 404,669 404,669 C.1 Sales 180,075 180,075 C.2 Adjustments in value C.4 Other changes 224,594 224,594 D. Closing balances 151,168 151,168 E. Total revaluations F. Total adjustments
Purchases refer to Efibanca’s subscription to the capital increase of Comital Saiag.
Other increases include gains of 14.2 million arising from the valuation using the equity method (including 7.1 million for the Finoa Group, 4.7 million for Arca SGR and 1.5 million for Unione Fiduciaria) as well as the proceeds from realising the shareholdings totalling 34.5 million (including 27.2 million for Fidia Farmaceutici, 5 million for Palladio Finanziaria, 1.3 million for Buon Viaggio and 0.9 million for Cassa di Risparmio di Bolzano).
158 Sales represent the value of transfers during the year. They include 117.5 million for the Cassa di Risparmio di Bolzano, 35 million for Fidia Farmaceutici, 26.1 million for the Palladio Finanziaria group and 1.5 million for Buon Viaggio.
Other decreases include losses arising from the valuation using the equity method amounting to 29 million (26.5 for Comital Saiag and 2.5 million for Efibanca Palladio Finanziaria) as well as the effects of the deconsolidation of the reclassified shareholdings under item voce 40 “Financial assets available for sale” (Cassa di Risparmio di Bolzano for 90.7 million and Palladio Finanziaria group for 57.7 million) and 150 “Non-current assets and discontinued operations” (Deroma for 12.2 million, Fidia Farmaceutici for 9.2 million and IGLI for 24 million) following the termination of the investment’s long-term link.
10.4 Commitments relating to shareholdings in jointly controlled companies
10.5 Commitments relating to shareholdings in companies subject to significant influence
There are no remaining commitments relating to shareholdings. Section 11 – Reinsurers’ share of technical reserves – Item 110
This item has no value and so the respective table is omitted.
Section 12 - Property, plant and equipment - Item 120
12.1 Property, plant and equipment: breakdown of assets valued at cost Banking Insurance Other 31/12/2006 31/12/2005 group companies companies A. Functional assets 1.1 owned 830,447 47,056 877,503 806,034 a) land 220,373 19,754 240,127 190,508 b) buildings 547,236 26,415 573,651 548,083 c) furniture 26,895 26,895 29,567 d) electronic equipment 27,034 27,034 26,653 e) other 8,909 887 9,796 11,223 1.2 acquired under finance leases 47,538 47,538 58,576 a) land 10,552 10,552 10,411 b) buildings 32,746 32,746 40,757 c) furniture d) electronic equipment e) other 4,240 4,240 7,408 Total A 877,985 47,056 925,041 864,610 B. Assets held for investment purposes 2.1 owned 22,037 22,037 67,455 a) land b) buildings 22,037 22,037 67,455 c) other 2.2 acquired under finance leases a) land b) buildings c) other Total B 22,037 22,037 67,455 Total (A + B) 877,985 69,093 947,078 932,065
12.2 Property, plant and equipment: breakdown of assets measured at fair value or written-up amounts
159 There are no items of property, plant and equipment measured at fair value and so the respective table is omitted.
160 12.3 Functional items of property, plant and equipment: changes over the year
12.3.1 relating to the banking group
Electronic Banking group Land Buildings Furniture Other 31/12/2006 equipment A. Gross opening balance 200,856 549,349 115,778 122,092 84,616 1,072,691 A.1 Total reductions in value, net -5,139 -86,211 -95,439 -66,379 -253,168 A.2 Net opening balance 200,856 544,210 29,567 26,653 18,237 819,523 B. Increases 69,101 145,033 6,754 11,414 2,493 234,795 B.1 Purchases 48,548 110,683 6,754 10,612 1,919 178,516 B.2 Capitalised improvement costs 6,760 6,760 B.3 Write-backs B.4 Increases in fair value charged to: a) shareholders' equity b) income statement B.5 Exchange gains
B.6 Transfers from buildings held for investment purposes
B.7 Other increases 20,553 27,590 802 574 49,519 C. Decreases -39,032 -109,261 -9,426 -11,033 -7,581 -176,333 C.1 Sales -21,044 -46,961 -1,097 -2,645 -2,312 -74,059 C.2 Depreciation -23,740 -6,019 -8,096 -3,360 -41,215 C.3 Write-downs for impairment charged to: a) shareholders' equity b) income statement C.4 Decreases in fair value charged to: a) shareholders' equity b) income statement C.5 Exchange losses C.6 Transfers to: a) PPE held for investment purposes b) discontinued operations C.7 Other decreases -17,988 -38,560 -2,310 -292 -1,909 -61,059 Closing balance 230,925 579,982 26,895 27,034 13,149 877,985 D.1 Total reductions in value, net -8,178 -77,185 -148,517 -64,455 -298,335 D.2 Gross closing balance 230,925 588,160 104,080 175,551 77,604 1,176,320 E. Measurement at cost
161 12.3.2 relating to insurance companies
Electronic Insurance companies Land Buildings Furniture Other 31/12/2006 equipment A. Gross opening balance 63 63 A.1 Total reductions in value, net A.2 Net opening balance 63 63 B. Increases B.1 Purchases B.2 Capitalised improvement costs B.3 Write-backs B.4 Increases in fair value charged to: a) shareholders' equity b) income statement B.5 Exchange gains
B.6 Transfers from buildings held for investment purposes
B.7 Other increases C. Decreases -63 -63 C.1 Sales C.2 Depreciation C.3 Write-downs for impairment charged to: a) shareholders' equity b) income statement C.4 Decreases in fair value charged to: a) shareholders' equity b) income statement C.5 Exchange losses C.6 Transfers to: a) PPE held for investment purposes b) discontinued operations C.7 Other decreases -63 -63 Closing balance D.1 Total reductions in value, net D.2 Gross closing balance E. Measurement at cost
162 12.3.3 relating to other companies
Electronic Other companies Land Buildings Furniture Other 31/12/2006 equipment A. Gross opening balance 44,630 394 45,024 A.1 Total reductions in value, net A.2 Net opening balance 44,630 394 45,024 B. Increases 19,754 2,292 609 22,655 B.1 Purchases 1,086 609 1,695 B.2 Capitalised improvement costs B.3 Write-backs B.4 Increases in fair value charged to: a) shareholders' equity b) income statement B.5 Exchange gains
B.6 Transfers from buildings held for investment purposes
B.7 Other increases 19,754 1,206 20,960 C. Decreases -20,507 -116 -20,623 C.1 Sales C.2 Depreciation -737 -116 -853 C.3 Write-downs for impairment charged to: a) shareholders' equity b) income statement C.4 Decreases in fair value charged to: a) shareholders' equity b) income statement C.5 Exchange losses C.6 Transfers to: a) PPE held for investment purposes b) discontinued operations C.7 Other decreases -19,770 -19,770 Closing balance 19,754 26,415 887 47,056 D.1 Total reductions in value, net D.2 Gross closing balance 19,754 26,415 887 47,056 E. Measurement at cost
163 12.4 Property, plant and equipment held for investment purposes: changes over the year
Banking group Insurance companies Other companies 31/12/2006 Land Buildings Land Buildings Land Buildings Land Buildings A. Opening balance 67,455 67,455 B. Increases 4,625 4,625 B.1 Purchases 4,468 4,468 B.2 Capitalised improvement costs B.3 Increases in fair value B.4 Write-backs B.5 Exchange gains
B.6 Transfers from functional buildings
B.7 Other increases 157 157 C. Decreases -50,043 -50,043 C.1 Sales -49,532 -49,532 C.2 Depreciation -511 -511 C.3 Decreases in fair value
C.4 Write-downs for impairment
C.5 Exchange losses C.6 Transfers from other portfolios of
assets a) functional buildings b) non-current assets and
discontinued operations C.7 Other decreases D. Closing balance 22,037 22,037 E. Measurement at fair value
12.5 Commitments to buy property, plant and equipment
There are no commitments to buy property, plant and equipment and so the respective tables are omitted.
164 Section 13 - Intangible assets - Item 130
13.1 Intangible assets: breakdown by type of asset
Banking group Insurance companies Other companies 31/12/2006 31/12/2005
Limited Unlimited Limited Unlimited Limited Unlimited Limited Unlimited Limited Unlimited duration duration duration duration duration duration duration duration duration duration
A.1 Goodwill: 2,159,469 9,372 1,024 2,169,865 2,010,018 A.1.1 pertaining to the group 2,159,469 9,372 1,024 2,169,865 2,010,018 A.1.2 pertaining to minority interests A.2 Other intangible assets:
A.2.1 Assets measured at cost 51,308 51,308 47,298 54 a) Intangible assets
generated internally b) Other assets 51,308 51,308 47,298 54 A2.2 Assets measured at fair value: a) Intangible assets
generated internally b) Other assets Total 51,308 2,159,469 9,372 1,024 51,308 2,169,865 47,298 2,010,072
Goodwill includes consolidation gains arising from the difference between the carrying value and the shareholders' equity of the companies whose financial statements have been fully consolidated, as broken down: Investee company 31/12/2006 Banca Caripe S.p.A. 148,362 Banca Caripe S.p.A. (Fondazione Caripe put) 16,233 Banca Popolare di Crema S.p.A. 77,188 Banca Popolare di Cremona S.p.A. 306,545 Banca Popolare di Mantova S.p.A. 1,463 Banca Valori S.p.A. 14,110 Bipielle Network S.p.A. – Bipielle Previdenza S.r.l. 15,651 Cassa di Risparmio di Lucca Pisa e Livorno S.p.A. 595,869 Cassa di Risparmio di Lucca Pisa e Livorno S.p.A. (Fondazione Pisa put) 30,905 Efibanca S.p.A. 160,141 Bipitalia Gestioni S.G.R. S.p.A. 96,914 Gruppo Bipielle International Holding 34,830 Bipitalia Ducato S.p.A. 290,087 Italfortune International Advisor S.A. 325 Tiepolo Finance S.r.l. 2 AB Capital S.p.A. 128 Nazionale Fiduciaria S.p.A. - Critefi Sim S.p.A. 13,089 Gruppo Acque Minerali Riunite 1,025 Area Life International Assurance Ltd 9,372 Total 1,812,239
165 13.2 Intangible assets: changes over the year 13.2.1 relating to the banking group
31/12/2006 Other intangible assets: Banking group Other intangible assets: other Total Goodwill generated internally Limited Unlimited Limited Unlimited A. Gross opening balance 2,016,944 71,403 4 2,091,351 A.1 Total reductions in value, net -28,969 -24,788 -1 -53,758 A.2 Net opening balance 1,987,975 46,615 3 2,034,593 B. Increases 221,601 27,483 249,084 B.1 Purchases 61,033 27,423 88,456 B.2 Increases in internal intangible assets B.3 Write-backs B.4 Increases in fair value - to shareholders' equity - to income statement B.5 Exchange gains B.6 Other increases 160,568 60 160,628 C. Decreases -50,107 -22,790 -3 -72,900 C.1 Sales C.2 Write-downs -32,473 -22,788 -55,261 - amortisation -22,788 -22,788 - write-downs -32,473 -32,473 - shareholders' equity - income statement -32,473 -32,473 C.3 Decreases in fair value - to shareholders' equity - to income statement C.4 Transfers to non-current assets and
discontinued operations C.5 Exchange losses C.6 Other decreases -17,634 -2 -3 -17,639 D. Net closing balance 2,159,469 51,308 2,210,777 D.1 Total net write-downs -61,442 -22,788 -84,230 E Gross closing balance 2,220,911 74,096 2,295,007 F. Measurement at cost
Movements in “Goodwill” during the year were as follows:
- purchases relate to the acquisition of branches from the Banco Popolare Verona Novara group amounting to 28,513 thousand euro, the 23.7% stake in Banca Valori totalling 14,110 thousand euro acquired from minority interests, the 5% stake in Bipielle Bank (Suisse) acquired from minority interests amounting to 2,104 thousand, the minor acquisitions of Banca Popolare di Cremona amounting to 2,795 thousand and the increase in the consolidation gain recorded for Cassa di Risparmio di Lucca Pisa Livorno amounting to 11,367 thousand euro;
- other increases refer primarily to the increase in the consolidation gains arising from the change in the consolidation ratio as a result of the incorporation of the sub-holdings Reti Bancarie and Bipielle Investimenti in the Parent Bank which, at 30 September 2006, directly controlled the Group’s main investee companies;
- write-downs relate to the elimination of goodwill originally recorded for Banca Popolare del Trentino, as a result of the transfer of the branches located in Trentino and the associated brand;
- other decreases refer primarily to the reclassification amongst non-current assets and discontinued operations of the residual consolidated value of the goodwill of the subsidiary Bipielle.Net.
166 Other intangible assets purchased during the year refer to the investments made by certain group companies relating to software licenses for long-term use.
167 13.2.2 relating to insurance companies 31/12/2006 Other intangible assets: Insurance companies Other intangible assets: other Total Goodwill generated internally Limited Unlimited Limited Unlimited A. Gross opening balance 24,919 4,934 29,853 A.1 Total reductions in value, net -7,646 -4,251 -11,897 A.2 Net opening balance 17,273 683 17,956 B. Increases 6,221 6,221 B.1 Purchases B.2 Increases in internal intangible assets B.3 Write-backs B.4 Increases in fair value - to shareholders' equity - to income statement B.5 Exchange gains B.6 Other increases 6,221 6,221 C. Decreases -14,122 -683 -14,805 C.1 Sales C.2 Write-downs -14,122 -14,122 - amortisation - write-downs -14,122 -14,122 - shareholders' equity - income statement -14,122 -14,122 C.3 Decreases in fair value - to shareholders' equity - to income statement C.4 Transfers to non-current assets and
discontinued operations C.5 Exchange losses C.6 Other decreases -683 -683 D. Net closing balance 9,372 9,372 D.1 Total net write-downs -21,768 -21,768 E Gross closing balance 31,140 31,140 F. Measurement at cost
The amount shown for goodwill for the insurance sector refers to the consolidation gain recognised for the investee company Area Life International Assurance.
Other changes include the effect of recalculating the same value as a result of the change in the consolidation ratio following the incorporation of Reti Bancarie in the Parent Bank which, as at 30 September 2006, directly controlled the investee company.
Write-downs to the Income Statement refer to the impairment test on residual goodwill at the balance sheet date.
168 13.2.3 relating to other companies 31/12/2006 Other intangible assets: Other companies Other intangible assets: other Total Goodwill generated internally Limited Unlimited Limited Unlimited A. Gross opening balance 10,190 63 10,253 A.1 Total reductions in value, net -5,420 -12 -5,432 A.2 Net opening balance 4,770 51 4,821 B. Increases 449 449 B.1 Purchases 367 367 B.2 Increases in internal intangible assets B.3 Write-backs B.4 Increases in fair value - to shareholders' equity - to income statement B.5 Exchange gains B.6 Other increases 82 82 C. Decreases -4,195 -51 -4,246 C.1 Sales C.2 Write-downs -367 -367 - amortisation - write-downs -367 -367 - shareholders' equity - income statement -367 -367 C.3 Decreases in fair value - to shareholders' equity - to income statement C.4 Transfers to non-current assets and
discontinued operations C.5 Exchange losses C.6 Other decreases -3,828 -51 -3,879 D. Net closing balance 1,024 1,024 D.1 Total net write-downs -5,787 -5,787 E Gross closing balance 6,811 6,811 F. Measurement at cost
The amount recognised for goodwill for other companies refers to the consolidation gains recorded for the consolidation of the Gruppo Partecipazioni Italiane e di Glass Italy.
Other changes include the effect of recalculating these values as a result of the change in the consolidation ratio following the incorporation of Bipielle Investimenti in the Parent Bank which, up to 30 September 2006, directly controlled the investee companies.
169 Section 14 – Tax assets and liabilities– Item 140 in assets and Item 80 in liabilities
14.1 Prepaid tax assets: breakdown
14.1.1 relating to the banking group
balancing entry in income statement balancing entry Banking group Writedown of in shareholders' 31/12/2006 31/12/2005 Tax losses Other loans equity - IRES 143,772 338,947 257,147 9,002 748,868 742,459 - IRAP 317 10,063 1,159 11,539 12,670 - OTHER 271,057 271,057 292,012 Total 143,772 339,264 538,267 10,161 1,031,464 1,047,141
14.1.2 relating to insurance companies
balancing entry in income statement balancing entry Insurance companies Writedown of in shareholders' 31/12/2006 31/12/2005 Tax losses Other loans equity - IRES 1,662 - IRAP 731 - OTHER 602 Total 2,995
14.1.3 relating to other companies
balancing entry in income statement balancing entry Other companies Writedown of in shareholders' 31/12/2006 31/12/2005 Tax losses Other loans equity - IRES 11,257 11,257 11,735 - IRAP 514 - OTHER Total 11,257 11,257 12,249
Prepaid and deferred taxes have been calculated applying to taxable income the rates estimated to be in force in the periods in which timing differences are expected to be reversed. More specifically, the rate used was 33% for the timing differences relevant for IRES purposes, and 4.25%, increased, where applicable, by the additional regional requirements applicable, for timing differences significant for IRAP purposes.
Prepaid taxes amounting to euro 898,9 million refer to timing differences arising in 2006 and in previous years, net of reversals in the year, and euro 143.8 million for tax assets on the tax losses that can be carried forward under the National Tax Consolidation regime pursuant to art. 117 of the Consolidated Tax Law, amounting to euro 435.7 million. It should also be noted that these tax losses, in the region of euro 193.2 million, will be utilised when the national tax consolidation return is submitted for 2006 to offset the revenues generated by the companies included in group taxation. Following this utilisation tax losses in the region of 242.5 million will remain that can be carried forward.
In accordance with the provisions of IAS 12 the realisation of the prepaid taxes derived from the tax losses as well as the timing differences has been determined assuming the BPI Group to be on a “stand alone” basis within the current national tax consolidation regime, without hence taking account of the envisaged aggregation with the BPVN Group which will be finalised only in the course of 2007. In particular, taking account of the future earnings forecast in the BPI Group’s 2006-2009 business plan, it has been estimated that future taxable earnings will be available- under the
170 national tax consolidation regime - to utilise all the tax losses and other deferred tax assets.
171 It should also be noted that BPI together with BPVN, in accordance with current legislation, has already lodged a special appeal with the Agenzia delle Entrate (Collector of Taxes), concerning the continuation of the tax consolidation regime for the new Group on a seamless basis, and, based on previous decisions on similar operations, a favourable opinion is expected to be given.
14.2 Deferred tax liabilities: breakdown
14.2.1 relating to the banking group 31/12/2006 Banking group balancing entry in balancing entry in 31/12/2005 Total income statement shareholders' equity - IRES 137,986 14,535 152,521 147,901 - IRAP 19,205 2,023 21,228 21,801 - Other -38,184 -38,184 -30,161 Total 119,007 16,558 135,565 139,541
12.2.2 relating to insurance companies
This category does not exist and so the respective table is omitted.
12.2.3 relating to other companies 31/12/2006 Other companies balancing entry in balancing entry in 31/12/2005 Total income statement shareholders' equity - IRES 375 - IRAP 47 - Other Total 422
Deferred taxes represent income taxes falling due in future years relating to taxable timing differences.
14.3 Changes in prepaid taxes (balancing entry in income statement)
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Opening balance 918,127 2,995 12,249 933,371 623,116 2. Increases 369,738 2,894 372,632 533,243 2.1 Prepaid taxes recorded during the year 248,643 2,894 251,537 532,410 a) relating to previous years 8,275 8,275 2,621
b) due to the change in accounting policies 29,142
c) write-backs 1,535 d) other 240,368 2,894 243,262 499,112 2.2 New taxes paid in the year 187 187 2.3 Other increases 120,908 120,908 833 3. Decreases -266,562 -2,995 -3,886 -273,443 -223,036 3.1. Prepaid taxes paid during the year -175,129 -723 -175,852 -98,852 a) reversals -172,937 -723 -173,660 -93,625 b) write-downs for irrecoverability -2,192 -2,192 -5,157 c) change in accounting policies -70
172 3.2 Reduction in tax rates -1 -1 -193 3.3 Other decreases -91,432 -2,995 -3,163 -97,590 -123,991 4. Closing balance 1,021,303 11,257 1,032,560 933,323
173 14.4 Changes in deferred taxes (balancing entry in income statement)
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Opening balance 73,497 417 73,914 30,323 2. Increases 104,305 -3 104,302 57,167 2.1 Deferred taxes advanced during the year 51,214 51,214 25,696 a) relating to previous years 6,714 6,714 191 b) due to the change in accounting policies 11,423 c) other 44,500 44,500 14,082 2.2 New taxes or increases in tax rates 257 257 1,071 2.3 Other increases 52,834 -3 52,831 30,400 3. Decreases -58,795 -414 -59,209 -13,608 3.1 Deferred taxes paid during the year -35,977 -96 -36,073 -12,836 a) reversals -31,715 -96 -31,811 -11,132 b) due to the change in accounting policies -797 -797 c) other -3,465 -3,465 -1,704 3.2 Reduction in tax rates 25 3.3 Other decreases -22,818 -318 -23,136 -797 4. Closing balance 119,007 119,007 73,882
14.5 Changes in prepaid taxes (balancing entry in shareholders' equity)
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Opening balance 129,014 129,014 78,759 2. Increases 3,756 3,756 230,042 2.1 Prepaid taxes recorded during the year 224,227 a) relating to previous years b) due to the change in accounting policies 196,046 c) other 28,181 2.2 New taxes or increases in tax rates 4 4 2.3 Other increases 3,752 3,752 5,815 3. Decreases -122,609 -122,609 -179,787 3.1. Prepaid taxes paid during the year -177,903 a) reversals -177,903 b) write-downs for irrecoverability c) due to the change in accounting policies 3.2 Reduction in tax rates 3.3 Other decreases -122,609 -122,609 -1,884 4. Closing balance 10,161 10,161 129,014
174 14.6 Changes in deferred taxes (balancing entry in shareholders' equity)
Banking Insuran Other
group ce companies companies 31/12/2006 31/12/2005 1. Opening balance 66,044 5 66,049 71,707 2. Increases 2,847 2,847 129,655 2.1 Prepaid taxes recorded during the year 2,672 2,672 128,398 a) relating to previous years b) due to the change in accounting policies 122,521 c) other 2,672 2,672 5,877 2.2 New taxes or increases in tax rates 175 175 556 2.3 Other increases 701 - 3. Decreases -52,333 -5 -52,338 135,313 - -1,668 -1,668 3.1. Prepaid taxes paid during the year 132,536 - -556 -556 a) reversals 132,536 b) due to the change in accounting policies c) other -1,112 -1,112 3.2 Reductions in tax rates 3.3 Other decreases -50,665 -5 -50,670 -2,777 4. Closing balance 16,558 16,558 66,049
175 Section 15 - Non-current assets, discontinued operations and associated liabilities - Assets item 150 and Liabilities item 90 15.1 Non-current assets and discontinued operations: breakdown by type of asset
Insurance Other Banking group 31/12/2006 31/12/2005 companies Companies A. Individual assets A.1 Shareholdings A.2 Property, plant and equipment A.3 Intangible assets A.4 Other non-current assets Total A B. Groups of assets (units disposed of)
B.1 Financial assets held for trading 62,256 258 62,514
B.2 Financial assets at fair value B.3 Available-for-sale financial assets 39,585 39,585
B.4 Held-to-maturity financial assets
B.5 Due from banks 1,485 4 1,489 28,452 B.6 Customer loans 12,376 12,376 101,282 B.7 Shareholdings 7,236 B.8 Property, plant and equipment 9,406 9,406 281,027 B.9 Intangible assets 5,051 5,051 24,105 B.10 Other assets 62,778 444,751 753,298 1,260,827 959,829 Total B 192,937 444,751 753,560 1,391,248 1,401,931 C. Liabilities associated with individual
discontinued operations C.1 Payables C.2 Securities C.3 Other liabilities Total C D. Liabilities associated with
discontinued operations D.1 Due to banks 357 357 155,456 D.2 Due to customers 209,379 209,379 63,495 D.3 Securities in issue 987 987 D.4 Financial liabilities held for trading D.5 Financial liabilities at fair value D.6 Provisions 36,582 836 37,418 110,903 D.7 Other liabilities 31,237 456,746 533,301 1,021,284 283,655 Total D 278,542 456,746 534,137 1,269,425 613,509
Non-current assets and liabilities and discontinued operations include shareholdings, property, plant and equipment, intangible assets, financial assets and liabilities, net of the corresponding intragroup relations, relating to the shareholdings held by Efibanca S.p.A. in relation to its merchant banking activities.
176 Section 16 – Other assets
16.1 Other assets: breakdown
31/12/2006 31/12/2005 Assets in transit 137,862 223,763 Bills and other securities for collection 65,802 78,345 Items in progress 84,237 79,552 Current account cheques drawn on a third party 3,430 1,496 Current account cheques drawn on the bank 136,058 13,241 Advances paid by tax authorities on behalf of third parties 101,278 82,626 Security deposits 96,893 95,518 Accrued revenues to be collected 36,820 51,361 Costs of improvements to third party assets 8,390 27,606 Other tax items 388,537 Other 1,087,659 1,670,320 Total 2,146,966 2,323,828
The sub-item "security deposits" includes the capital gain realised in 2005 from the sale of Banca Antonveneta shares paid into an account available to the Milan Public Prosecutor.
The sub-item “Other tax items” consists primarily of tax credit refunds claimed and respective accrued interest, including 335 million relating to the subsidiary Bipielle Investimenti, which merged with the Parent Bank during the year.
Other items include prepayments of 41.9 million, receivables for outstanding invoices totalling 133.6 million, assets relating to pension fund investments amounting to 79.2 million, items in progress at group bank branches and relating to securities transactions completed at the beginning of 2007 totalling 238 million, foreign exchange differentials on portfolio transactions of 78.9 million, deposits and advance payments made by the subsidiary Basileus in relation to the property initiative in Milan - Santa Giulia amounting to 100.2 million and the sums made available to the Fondazione Caripe for the exercise of the put option to buy 44% of Banca Caripe’s share capital.
177 LIABILITIES Section 1 - Due to banks - Item 10
1.1 Due to banks: breakdown by category Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Due to central banks 394,356 394,356 2. Due to banks 5,585,063 17,897 5,602,960 4,791,619 2.1 Current accounts and demand deposits 1,407,013 7,734 1,414,747 1,530,383 2.2 Savings accounts (including time deposits) 1,320,680 1,320,680 2,168,359 2.3. Loans 347,454 347,454 534,535 2.3.1 finance leases 1,452 1,452 1,924 2.3.2 other 346,002 346,002 532,611 2.4 Commitments to buy back own capital
instruments 2.5. Liabilities for assets sold but not eliminated 2,505,777 2,505,777 545,332 from the balance sheet 2.5.1 repurchase agreements 2,505,777 2,505,777 545,332 2.5.2 other 2.6 Other payables 4,139 10,163 14,302 13,010 Total 5,979,419 17,897 5,997,316 4,791,619 Fair value 5,979,419 17,897 5,997,316 4,791,619
1.2 Breakdown of item 10 "Due to banks": subordinated debts
There are no subordinated debts in the liabilities section of the balance sheet.
1.3 Breakdown of item 10 "Due to banks": structured debts
There are no structured debts in the liabilities section of the balance sheet.
1.4 Breakdown of item 10 "Due to banks": liabilities to be micro-hedged.
As at December 31, 2006, there are no amounts due to banks to be hedged.
1.5 Finance leasing debts
In 2001, the Parent Bank entered into a finance lease agreement in relation to a building situated in Catania, used as a Regional Headquarters. The present value of the amount payable to Banca Italease, due in 2008, was €1.5 million as December 31, 2006.
Pursuant to IAS 17, the buildings in question have been entered among the company’s assets and depreciation is calculated on the basis of the remaining useful life.
178 Section 2 - Due to customers - Item 20
2.1 Due to customers: breakdown by category breakdown by category Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Current accounts and demand deposits 12,346,645 12,346,645 12,520,293 2. Savings accounts and time deposits 101,865 101,865 126,153 3. Third-party funds under administration 4,955 4,955 4,384 4. Loans 155,765 155,765 143,740 4.1 finance leases 7,046 7,046 4.2 other 148,719 148,719 143,740 5. Commitments to buy back own capital
instruments 6. Liabilities for assets sold but not eliminated from 2,974,828 2,974,828 1,496,807 the balance sheet 6.1 repurchase agreements 2,594,101 2,594,101 1,226,364 6.2 other 380,727 380,727 270,443 7. Other payables 26,365 428 26,793 64,692 Total 15,610,423 428 15,610,851 14,356,069 Fair value 15,610,423 428 15,610,851 14,356,069
2.2 Breakdown of item 20 "Due to customers": subordinated debts
There are no subordinated debts in the liabilities section of the balance sheet.
2.3 Breakdown of item 20 "Due to customers": structured debts
There are no structured debts in the liabilities section of the balance sheet.
2.4 Breakdown of item 20 "Due to customers": liabilities to be micro-hedged
As at December 31, 2006, there are no amounts due to customers to be hedged.
2.5 Finance leasing debts
In 2003, the subsidiary Bipitalia Ducato entered into a lease agreement in relation to a building situated in Lucca, used for company offices. The contract, which expires in 2013, is recorded in the company’s accounts in accordance with IAS 17. The present value of the amount payable to the leasing company was €7 million as at December 31, 2005. The building in question is entered among the company’s assets and depreciation is calculated on the basis of the remaining useful life.
179 Section 3 - Securities in issue - Item 30
3.1 Securities in issue: breakdown by category Insurance Banking group Other companies 31/12/2006 31/12/2005 companies BV FV BV FV BV FV BV FV BV FV A. Listed securities 1,583,160 1,355,739 1,583,160 1,355,739 2,079,858 2,075,469 1. Bonds 1,583,160 1,355,739 1,583,160 1,355,739 2,079,858 2,075,469 1.1 structured 1,509,369 1,355,739 1,509,369 1,355,739 1.2 other 73,791 73,791 2,079,858 2,075,469 2. Other securities 2.1 structured 2.2 other B) Unlisted securities 12,745,468 12,674,454 2,198,616 2,386,590 14,944,084 15,061,044 18,201,276 18,084,056 1. Bonds 11,946,496 12,011,628 996,650 996,650 12,943,146 13,008,278 13,237,279 13,073,837 1.1 structured 1,953,109 2,015,952 1,953,109 2,015,952 1,184,125 1,184,125 1.2 other 9,993,387 9,995,676 996,650 996,650 10,990,037 10,992,326 12,053,154 11,889,712 2. Other securities 798,972 662,826 1,201,966 1,389,940 2,000,938 2,052,766 4,963,997 5,010,219 2.1 structured 35,854 35,854 35,854 35,854 35,013 35,013 2.2 other 763,118 626,972 1,201,966 1,389,940 1,965,084 2,016,912 4,928,984 4,975,206 Total 14,328,628 14,030,193 2,198,616 2,386,590 16,527,244 16,416,783 20,281,134 20,159,525
Legend BV = book value FV = fair value
Securities in issue declined by around €3.8 million, due both to the redemption of some bonds placed mainly with institutional investors which were due for repayment, and to the consolidated cancellation of securities bought back during the year by the Parent Bank for almost €2 billion, relating to the issues of Bipitalia Residential which financed securitisations in “warehouse” phase.
Securities in issue which were issued by other companies refer substantially to notes issued by vehicles as part of securitisation transactions performed by the Group.
3.2 Breakdown of item 30 "Securities in issue": subordinated notes 31/12/2006 31/12/2005 - subordinated notes 2,711,657 2,810,443 Total 2,711,657 2,810,443
Refer to part F for details and conditions of the notes indicated above.
3.3 Breakdown of item 30 "Securities in issue": securities to be micro-hedged 31/12/2006 31/12/2005 1. Securities subject to micro fair value hedge 6,193,659 7,229,421 a) interest rate risk 6,115,725 7,229,421 b) exchange rate risk d) several risks 77,934 2. Securities subject to micro cash flow hedge a) interest rate risk b) exchange rate risk c) other Total 6,193,659 7,229,421
180 Securities for which there is micro-hedging of the interest rate risk amount to around €6,115.7 million and the respective fair value, including the credit risk of the issuer, is around €6,158.6 million.
181 Section 4 - Financial liabilities held for trading - Item 40
4.1 Financial liabilities held for trading: breakdown by category
Banking group Insurance companies Other companies 31/12/2006 31/12/2005 FV FV FV FV FV NV FV* NV FV* NV FV* NV FV* NV FV* L UL L UL L UL L UL L UL A. Cash liabilities 1. Due to banks 2. Due to customers 3. Debt securities 51,806 51,801 63 3.1 Bonds 51,806 51,801 3.1.1 Structured 3.1.2 Other 51,806 51,801 bonds 3.2 Other securities 63 3.2.1 Structured 3.2.2 Other 63 Total A 51,806 51,801 63 B. Derivative instruments 1. Financial 511 493,343 511 493,343 22 645,609 derivatives 1.1 Used for trading 511 493,343 511 493,343 22 626,489 activities 1.2 Associated with the fair value option 1.3 Other 19,120 2. Credit derivatives 5,005 5,005 15,657 2.1 used for trading 2,036 2,036 5,675 activities 2.2 Associated with the fair value option 2.3 Other 2,969 2,969 9,982 Total B 511 498,348 511 498,348 22 661,266 Total 511 498,348 511 498,348 51,823 661,329
Legend FV = fair value FV* = fair value calculated by excluding the changes in value due to the change in the issuer's credit rating since the issue date. NV = nominal or notional value L = listed UL = unlisted
4.2 Breakdown of item 40 "Financial liabilities held for trading": structured debts Subordinated liabilities
On the balance sheet date, there are no liabilities of this kind.
4.3 Breakdown of item 40 "Financial liabilities held for trading": structured debts
On the balance sheet date, there are no liabilities of this kind.
182 4.4 Financial liabilities held for trading: derivative instruments
4.4.1 Pertaining to the banking group
Banking group Currencies Type of derivatives/Underlying assets Interest rates Equities Loans Other 31/12/2006 31/12/2005 and gold A) Listed derivatives 1. Financial derivatives: 218 14 292 524 22 with exchange of capital 218 292 510 - options issued - other derivatives 218 292 510 without exchange of capital 14 14 22 - options issued 0 - other derivatives 14 14 22 2. Credit derivatives: with exchange of capital without exchange of capital Total A 218 14 292 524 22 B) Unlisted derivatives 1. Financial derivatives: 163,879 34,355 295,096 493,330 645,609 with exchange of capital 32,891 114,298 147,189 35,459 - options issued 1,173 114,298 115,471 10,857 - other derivatives 31,718 31,718 24,602 without exchange of capital 163,879 1,464 180,798 346,141 610,150 - options issued 27,198 0 151,764 178,962 367,678 - other derivatives 136,681 1,464 29,034 167,179 242,472 2. Credit derivatives: with exchange of capital 205 without exchange of capital 2,036 2,969 5,005 15,452 Total B 163,879 34,355 295,096 2,036 2,969 498,335 661,266 Total A+B 164,097 34,369 295,388 2,036 2,969 498,859 661,288
4.4.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
4.4.3 Pertaining to other companies
This Item does not exist. The relevant table is therefore omitted.
4.5 Financial cash liabilities (excluding "technical overdrafts") held for trading: changes over the year
No movements are reported for this item as it relates exclusively to technical overdrafts.
183 Section 5 - Financial liabilities at fair value - Item 50
5.1 Financial liabilities at fair value breakdown by category Banking group Insurance companies Other companies 31/12/2006 31/12/2005 FV FV FV FV FV NV FV* NV FV* NV FV* NV FV* NV FV* L UL L UL L UL L UL L UL 1. Due to banks 1.1 Structured 1.2 Other 2. Due to customers 316,281 316,281 1.1 Structured 1.2 Other 316,281 316,281 3. Securities in issue 1.1 Structured 1.2 Other TOTAL 316,281 316,281
Legend FV = fair value FV* = fair value calculated by excluding the changes in value due to the change in the issuer's credit rating since the issue date. NV = nominal or notional value L = listed UL = unlisted
The amount entered as at December 2005 referred to liabilities held by Area Life International Assurance Ltd.
5.2 Breakdown of item 50 “Financial liabilities at fair value”: subordinated liabilities
This Item does not exist.
5.3 Financial liabilities at fair value changes over the year Due to Securities in Due to banks Total customers issue A. Opening balance 316,281 316,281 B. Increases B1. Issues B2. Sales B3. Increases in fair value B4. Other changes C. Decreases -316,281 -316,281 C1. Purchases C2. Repayments C3. Decreases in fair value C4. Other changes -316,281 -316,281 D. Closing balance
184 Section 6 - Hedge derivatives - Item 60 6.1 Hedge derivatives: breakdown by type of contracts and underlying assets
6.1.1 Pertaining to the banking group
Interest Currencies Banking group Equities Loans Other Total rates and gold A) Listed derivatives 1) Financial derivatives: with exchange of capital - options issued - other derivatives without exchange of capital - options issued - other derivatives 2) Credit derivatives: with exchange of capital without exchange of capital Total A B) Unlisted derivatives 1) Financial derivatives: 177,477 27,097 204,574 with exchange of capital 452 452 - options issued - other derivatives 452 452 without exchange of capital 177,025 27,097 204,122 - options issued 74 74 - other derivatives 176,951 27,097 204,048 2) Credit derivatives: with exchange of capital without exchange of capital Total B 177,477 27,097 204,574 Total (A+B) 31/12/06 177,477 27,097 204,574 Total (A+B) 31/12/2005 157,281 38,340 195,621
6.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
6.1.3 Pertaining to other companies
This Item does not exist. The relevant table is therefore omitted.
185 6.2 Hedge derivatives: breakdown by portfolios hedged and by types of hedge
6.2.1 Pertaining to the banking group
Fair value hedge Cash flow hedge
Banking group Micro Interest rate Exchange rate Macro Micro Macro Credit risk Price risk Several risks risk risk 1. Available-for-sale financial assets 2. Loans 13,059 3. Held-to-maturity financial assets 4. Portfolio Total assets 13,059 1. Financial liabilities 163,966 27,549 2. Portfolio Total liabilities 163,966 27,549
6.2.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
6.2.3 Pertaining to other companies
This Item does not exist. The relevant table is therefore omitted.
Section 7 - Adjustment to the value of financial liabilities to be macro-hedged - Item 70
This section is omitted because there are no liabilities of this kind.
Section 8 - Tax liabilities - Item 80
Refer to section 14 of the assets section.
Section 9 - Liabilities associated with discontinued operations - Item 90
Refer to section 15 of the assets section.
186 Section 10 − Other liabilities − Item 100
10.1 Other liabilities: breakdown 31/12/2006 31/12/2005 Liabilities in transit 19,603 36,078 Security deposits received from third parties 5,897 1,493 Amounts payable to tax authorities on behalf of third parties 70,857 48,322 Differential adjustments relating to the portfolio 114,696 81,731 Sums available to customers 312,943 126,208 Items under construction 308,161 321,899 Trade payables 201,301 201,344 Personnel expenses 56,924 68,962 Accrued costs payable 6,367 5,907 Guarantees and commitments 14,719 66,279 Other liabilities 612,011 794,656 Total 1,723,479 1,752,879
Other items include transfers to be settled amounting to €194.6 million, payables for indirect taxes of €36.5 million, liabilities relating to Fondo di Solidarietà expenses of €18.2 million, items generated since the start of the year and settled in the first few days of 2007 of €41.4 million, deferred income of €9.1 million and liabilities arising from the recording of the pro-rata temporis charge concerning the investment agreement with Aviva Italia Holding, entered into on 31 March 2004, of €25.8 million.
Section 11 − Employee severance payment fund − Item 110
11.1 Employee severance payment fund: changes over the year Insurance Banking group Other companies 31/12/2006 companies A. Opening balance 164,720 58 164,778 B. Increases 31,289 61 31,350 B.1 Provisions 20,508 19 20,527 B.2 Other increases 10,781 42 10,823 C. Decreases -22,940 -60 -23,000 C.1 Payments made -12,104 -2 -12,106 C.2 Other decreases -10,836 -58 -10,894 D. Closing balance 173,069 59 173,128
11.2 Other information The valuation of the Employee Severance Payment Fund was carried out by applying the principles established by IAS 19. The Employee Severance Payment Fund can be assimilated to a "post- employment benefit" of the "defined-benefit" type, the amount of which already accrued must be future-projected in order to estimate the amount to be paid upon the termination of the employment contract and must then be updated, using the Projected Unit Credit Method, to take account of the time that will lapse before actual payment.
In the case of the defined-benefit plan, according to IAS 19, the company's obligation is to provide the agreed benefits to employees in service and to previous employees. Actuarial risk and investment risk fall, in short, upon the company, which might be required to increase the regular contributions in the case of actuarial and investment risk that reduce employees' expected benefits.
For updating purposes, future contributions are projected on the basis of statistical analyses and the demographic curve and these contributions are updated on the basis of a market interest rate.
187 As from 1 January 2007, the Finance Act and its relevant implementing decrees have introduced significant amendments to the regulations governing employee severance pay, including provision for employees to choose how their maturing severance pay is allocated. In particular, employees can allocate new Employee Severance Fund contributions to preselected pension funds or keep them within the company (in which case the company will pay Employee Severance Fund contributions into a cash account established with the INPS (National Social Insurance Institute). At the present time, the state of uncertainty in the interpretation of this new legislation, the possibility of different interpretations of the qualification of maturing employee severance payment funds under IAS 19, and the consequent modifications to actuarial calculations of matured severance payment funds, together with the impossibility of estimating employees' decisions on the allocation of maturing severance payment funds (each employee has until 30 June next to decide) render any proposal for actuarial adjustment of the calculation of the Employee Severance Payment Fund as at 31 December 2006 premature.
The actuarial calculation of the Bank’s Employee Severance Payment Fund has been prepared by external actuaries on the basis of the new legislation in force as at 31 December 2006.
Section 12 - Provisions for contingencies and charges - Item 120
12.1 Provisions for contingencies and charges: breakdown Insurance Other Banking group 31/12/2006 31/12/2005 companies companies 1. Company pension funds 139,642 139,642 139,885 2. Other provisions for contingencies and charges 250,154 11,334 261,488 364,711 2.1 legal disputes 90,891 90,891 163,089 2.2 personnel charges 19,467 19,467 20,753 2.3 other 139,796 11,334 151,130 180,869 Total 389,796 11,334 401,130 504,596
12.2 Provisions for contingencies and charges: changes over the year Banking group Insurance companies Other companies Total Pension Other Pension Other Pension Other Pension Other funds provisions funds provisions funds provisions funds provisions A. Opening balance 139,885 350,490 14,221 139,885 364,711 B. Increases 22,741 63,645 9,061 22,741 72,706 B.1 Amounts set aside in the year 11,342 48,661 9,061 11,342 57,722
B.2 Changes over time 2,018 2,018
B.3 Changes due to changes in the discount rate B.4 Other decreases 11,399 12,966 11,399 12,966 C. Decreases -22,984 -163,981 -11,948 -22,984 -175,929 C.1 Amounts used in the year -8,237 -124,717 -8,618 -8,237 -133,335 C.2 Changes due to changes in the -1,489 -1,489 discount rate C.3 Other decreases -14,747 -37,775 -3,330 -14,747 -41,105 D. Closing balance 139,642 250,154 11,334 139,642 261,488
As far as pension funds are concerned, the item "Amounts used" refers to pension benefits paid out in the year. The item "Amounts set aside" includes not only the charge for the adjustment of the actuarial reserves of defined-benefit funds but also contributions payable by the company and by employees for defined-contribution funds, contributions from other companies for external staff who keep their position in the Bank's internal contribution fund and provisions arising from operating profits.
188 With respect to other provisions, amounts set aside include appropriations of €10 million for lawsuits with personnel, €4.7 million for pension disputes, and €24.2 million for miscellaneous disputes.
The decreases include amounts of around €60 million used from other provisions for the settlement agreement with the Extraordinary Administration of the Parmalat Group, €11.8 million for refunds to customers, €19.4 million relating to the destructuring by the Parent Bank of the Alexandria 2004 Special Purpose Vehicle and €32.5 million for various lawsuits.
12.3 Defined-benefit company pension funds
1. Description of the funds
The Group offers its employees a number of defined-benefit benefits managed through internal funds.
For the Parent Bank in particular, the defined-benefit funds are made up of:
- the value of the commitments in relation to Banca Popolare Italiana staff covered by the staff pension provisions referred to in the "additional retirement pay" regulation of June 17, 1992. This fund is divided into two sections: one relating to pension benefits relating to staff who are in retirement on the date of entry into force of Legislative Decree no. 124/93 on the reform of supplementary pension provision. The other section relates to staff who are still in employment and who, at the time that the defined-contribution internal funds were set up, opted to maintain their previous pension status. The value of this actuarial reserve is determined at the end of each year on the basis of specific actuarial calculations;
- the value of the commitments payable to staff transferred from the former Bipielle Adriatico (incorporated into the Parent Bank in 2003) on the basis of the agreements of July 29, 1998. This fund is set up both for retired staff and for employees still in active employment. The value of this actuarial reserve is determined at the end of each year on the basis of specific actuarial calculations;
- the value of the commitments accrued at the balance sheet date payable both to retired employees and those still in employment, for the supplementary pension provision of the incorporated bank Banca Industriale Gallaratese. The amount of the respective actuarial reserve, calculated on the basis of the remuneration received by staff and on accumulated length of service, is updated annually on the basis of specific actuarial calculations;
- the value of commitments payable to staff pursuant to Regulation 1961 in settlement of INPS (National Social Insurance Institute) supplement for staff of Banca Mutua Agricola di Lodi, and pursuant to Regulation 1973 “new supplementary pension” for the Banca Agricola Popolare di Lodi. The amount is updated annually on the basis of specific actuarial calculations;
- The company pension funds of the incorporated bank Reti Bancarie arise from companies that were in turn merged, specifically the mergers of Banco di Chiavari e della Riviera Ligure in 2003 and Banca Eurosistemi in 2005. In particular, Reti Bancarie, in its capacity as the acquiring company in the merger by incorporation of the company Banca Eurosistemi, is the legal sucessor, pursuant to Article 2504 bis of the Italian Civil Code, to the acquired Banca Eurosistemi, assuming all the rights and obligations of the acquired company, including its supplementary pension provision committments to the staff in retirement. Therefore, the pension fund of staff of the ex ICCRI was transferred to Banca Popolare Italiana.
On the basis of the supplementary agreements originally signed within ICCRI, the pension fund in question is made up, pursuant to Legislative Decree no. 124/93, of two sections, the first a "defined- benefit" plan and the second a "defined-contribution" plan. To date, Section 1 includes only staff who
189 were former employees of the company ICCRI and who are now in retirement. Reti Bancarie, which took over all the obligations relating to the fund in question, on the basis of the specific regulations, pays out the respective benefits to beneficiaries. The value of the commitments assumed is determined annually on the basis of the actuarial assessments prepared for the fund's technical budget. In accordance with collective agreements, Section 2 includes staff of the former ICCRI who are now employees of Gruppo Banca Popolare Italiana companies. The respective commitments represent the assets constituting the contributions from the employer companies, contributions from the registered staff and returns from financial transactions.
As well as the above-mentioned pension fund, there is the pension fund for staff of the former Banco di Chiavari e della Riviera Ligure which operates on a "defined-benefit" basis in accordance with the specific regulations. The Fund includes only staff who were former employees of Banco di Chiavari e della Riviera Ligure and who are now in retirement. BPI, on the basis of the specific regulations, pays out the respective benefits to beneficiaries. The value of the commitments assumed is determined annually on the basis of the actuarial assessments prepared for the technical budget.
In addition to the parent bank, the Cassa di Risparmio di Lucca Pisa Livorno also grants its staff the benefits of the Staff Pension Fund that, since 23 February 2000, has been registered at no. 9183 of Special Section III of the Register of Pension Funds which includes existing pension funds supervised by authorities other than Covip.
The Fund is divided into two separate sections which differ from a legal/financial and accounting perspective:
- defined-benefit section: for pensioners who were retired by August 6, 1999;
- defined-contribution section: for staff in active employment, i.e. retired after August 6, 1999.
The Fund does not have independent legal personality. The respective balance sheet item covers the prospective expense of supplementing the pensions of those registered to the defined-benefit section and the proportion of assets, allocated for pension purposes in accordance with Article 2117 of the Civil Code, relating to the defined-contribution section.
As every year, the Cassa has employed an actuary to determine the necessary actuarial reserves to meet the requirements, accrued as at December 31, 2006, of the Fund's defined-benefit section.
As a result of the merger by incorporation of Cassa di Risparmio di Pisa S.p.A. and Cassa di Risparmi di Livorno S.p.A. into Cassa di Risparmio di Lucca S.p.A., which took place on December 31, 2003, with accounting and tax effects as from January 1, 2003, the ordinary and capitalisation section of the Pension Fund of Cassa di Risparmio di Pisa S.p.A. and Cassa di Risparmi di Livorno S.p.A. was transferred to Cassa di Risparmio di Lucca S.p.A. The capitalisation section was subsequently cleared in 2004 after it was used for redemptions and transfers. The defined-contribution section has been liquidated with the individual positions being transferred to an open pension fund.
12.4 Provisions for contingencies and charges - other provisions
190 The other provisions include allocations of €94.3 million, made by the Parent Bank for legal contingencies associated with the Antonveneta transaction, provisions of €15.8 million relating to completion costs and development charges for property initiatives being carried out for the subsidiary Basileus, and the following allocations: €10.7 million for risks connected to disputes, €2.2 million for risks for legal disputes with employees, €3 million for lapsed, stolen and lost cheques, €1.9 million for refunds owed to current account holders, €4.1 million for risks and disputes with the tax authorities, and €1.1 million as an allocation for additional expenses of agents of the subsidiary Bipitalia Ducato. Section 13 - Technical reserves - Item 130
13.1 Technical reserves: breakdown Direct labour Indirect labour 31/12/2006 31/12/2005 A. Non-life A1. premium reserves A2. claim reserves A3. other reserves B. Life 85,219 B1. actuarial reserves 81,568 B2. Reserves for sums payable 3,651 B3. Other reserves C. Technical reserves when the investment risk is borne by underwriters C1. reserves relating to contracts whose services are connected with investment funds and market indices C2. reserves arising from the management of pension funds D. Total technical reserves 85,219
13.2 Technical reserves: changes over the year
This item, which in the previous year was increased by the contribution of the subsidiary Area Life International Assurance, no longer exists as the subsidiary, which is available for sale, as at 31 December 2006 contributes summarily to asset item 150 “Non-current assets and discontinued operations” and liability item 90 “Liabilities associated with discontinued operations”.
Section 14 - Redeemable Shares - Item 150
This section is omitted because the Group has not issued securities of this kind.
Section 15 - Group shareholders' equity - Items 140, 160, 170, 180, 190, 200 and 220
15.1 Group shareholders' equity: breakdown 31/12/2006 31/12/2005 1. Share capital 2,047,082 1,456,498 2. Issue premiums 2,682,267 2,487,324 3. Reserves -749,540 -375,825 4. (Own shares) -78,720 -91,546 a) Parent bank -78,720 -89,822 b) Subsidiaries -1,724 5. Valuation reserves 91,549 50,705 6. Capital instruments 3,048 3,048 7. Group profit (loss) for the period -39,861 -743,893 3,955,825 2,786,311
191 15.2 "Share capital" and "Own shares": breakdown Types Amount A. Share capital 2,047,082 A.1 Ordinary shares 2,047,082 A.2 Other shares B. Own shares -78,720 A.1 Ordinary shares -78,720 A.2 Other shares
The share capital is made up of 682,360,539 ordinary shares with a face value of €3.00.
The following capital operations were made during the year:
- BPI capital increase: in the months of July and August, a capital increase of the parent bank was concluded, with full subscription of the 105,795,900 issued shares at a price of €6.80 per share, of which €3.80 is premium, with a total value of €719.4 million;
- capital increase serving the mergers of Reti Bancarie and Bipielle Investimenti, totalling:
o €193.8 million by issuing 64,597,250 new ordinary shares with a face value of €3.00 each, assigned to third party shareholders of Reti Bancarie;
o €79.4 million by issuing 26,568,186 new ordinary shares with a face value of €3.00 each, assigned to third party shareholders of Bipielle Investimenti.
On the balance sheet date the Group held €78.7 million own shares arising from the exercise of put options entered into during previous years with Deusche Bank Ag London whose underlying shares are Banca Popolare Italiana.
During the year own shares totalling €11.1 million were sold, corresponding to around 1.7 million units.
192 15.3 Share capital - Number of shares belonging to the parent bank: changes over the year Items/Types Ordinary Other A. Shares existing at the start of the year 485,499,203 - fully paid-up 485,499,203 - not fully paid-up A.1 Own shares (-) (6,336,448) A.2 Shares in issue: opening balance 479,162,755 B. Increases 198,665,339 B.1 New issues - for cash: - business combination transactions 91,165,436 - conversion of bonds - exercise of warrants - other 105,795,900 - free: - for employees - for directors - other B.2 Sale of own shares 1,704,003 B.3 Other decreases C. Decreases 100,000 C.1 Cancellation 100,000 C.2 Purchase of own shares C.3 Business transfer transactions C.4 Other decreases D. Shares in issue: closing balance 677,728,094 D.1 Own shares (+) 4,632,445 D.2 Shares existing at the end of the year 682,360,539 - fully paid-up 682,360,539 - not fully paid-up
15.4 Share capital: other information 15.5 Profit reserves: other information
The profit reserves at the end of the year are broken down as follows:
- legal reserve: amounts to €52.9 million and did not increase during the year;
- reserve for own shares: amounts to €91.5 million, of which €12.7 million is undistributable as it represents the value of the shares legally owned by the bank; during the year it increased by €16.5 million as stated the shareholders’ meeting resolution to approve the 2005 financial statements;
- the distributable reserve of the Parent Bank totalling €125.9 million, down by €112.5 million: in detail, €86.3 million following the distribution of the 2004 dividend as approved by the shareholders' meeting of April 30, 2005, and €26.2 million to cover the 2004 loss as approved by the shareholders' meeting of January 28, 2006;
- the reserve for compliance with Legislative Decree no. 124/1993 totalling €0.4 million consisting of profit allocations in compliance with the provisions of the decree;
- "first-time adoption" reserve, which includes the changes in shareholders' equity arising from the first-time adoption of international financial reporting standards. This reserve, formed in 2005, has a negative balance of €340.9 million, net of the general banking risks fund of €5 million, subject to appropriate reclassification arising from the first-time adoption of international accounting standards.
193 The profit reserves also include the capital effects arising from the consolidation of shareholdings in subsidiaries and associates.
Refer to the notes on the individual financial statements for information required by current legislation on the distribution of the parent bank’s reserves.
194 Capital instruments: breakdown and changes over the year
The item relates to the valuation of the separation of the embedded option to convert the lower tier II subordinated bond 01.06.2010, in accordance with IAS 39. No conversion requests were made and therefore the amount of the item is unchanged from the previous year’s figure.
15.6 Valuation reserves: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Available-for-sale financial assets 72,571 72,571 32,440 2. Property, plant and equipment 3. Intangible assets 4. Foreign investment hedge 5. Cash flow hedge 6. Exchange differences 7. Non-current assets and discontinued operations 713 713 8. Special revaluation laws 18,265 18,265 18,265 Total 91,549 91,549 50,705
15.7 Valuation reserves: changes over the year
15.7.1 Pertaining to the banking group
Non-current Available-for- Property, Foreign Special Intangible Cash flow Exchange assets and sale financial plant and investment revaluation assets hedge differences discontinued assets equipment hedge laws operations A. Opening balance 32,440 18,265 B. Increases 81,875 713 B1. Increases in fair value 73,313 713 X B2. Other changes 8,562 C. Decreases -41,744 C1. Decreases in fair value -26,920 X C2. Other changes -14,824 D. Closing balance 72,571 713 18,265
15.7.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
15.7.2 Pertaining to other companies
This Item does not exist. The relevant table is therefore omitted.
195 15.8 Valuation reserve for available-for-sale financial assets: breakdown Banking group 31/12/2006 31/12/2005 Assets/Values Positive Negative Negative Positive Negative Positive reserve reserve reserve reserve reserve reserve 1. Debt securities 2. Equities 99,597 -27,026 99,597 -27,026 58,009 -25,569 3. Units in OICR 4. Loans Total 99,597 -27,026 99,597 -27,026 58,009 -25,569
15.9 Valuation reserve for available-for-sale financial assets: changes over the year
15.9.1 Pertaining to the banking group
Debt securities Equities Units in OICR Loans 1. Opening balance 32,440 2. Increases 81,875 2.1 Increases in fair value 73,313 2.2 Transfer of negative reserves to income statement - by impairment - by realisation 1,371 2.3 Other increases 7,191 3. Decreases -41,744 3.1 Decreases in fair value -26,920 3.2 Transfer of positive reserves to income statement by realisation -13,126 3.3 Other increases -1,698 4. Closing balance 72,571
During 2006 the valuation reserve for available-for-sale assets increased by €71 million and decreased by €26.9 million following the valuation at fair value of equities listed and classified among available-for-sale financial assets. The transfers by realisation to income statement include the reversal of the group’s proportion, amounting to €13.1 million, of the reserve recorded in the previous year on shareholdings held in Banca Italease, which were fully transferred during the year.
15.9.2 Pertaining to insurance companies
This category does not exist. The relevant table is therefore omitted.
15.9.3 Pertaining to other companies
This category does not exist. The relevant table is therefore omitted.
196 Section 16 - Minority interests - Item 210
16.1 Minority interests: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Share capital 163,810 176,517 340,327 783,366 2. Issue premiums 54,230 54,230 965,676 3. Reserves -68,222 -223,794 -292,016 -1,347,350 4. (Own shares) 5. Valuation reserves 1,771 1,771 15,958 6. Capital instruments 7. Period profit (loss) of minority interests 52,742 -9,460 43,282 44,014 Total 204,331 -56,737 147,594 461,664
16.2 Valuation reserves: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Available-for-sale financial assets 931 931 11,651 2. Property, plant and equipment 3. Intangible assets 4. Foreign investment hedge 5. Cash flow hedge 6. Exchange differences 7. Non-current assets and discontinued operations 3 3 8. Special revaluation laws 837 837 4,307 Total 1,771 1,771 15,958
16.3 Capital instruments: breakdown and changes over the year
This category does not exist. The relevant table is therefore omitted.
16.4 Valuation reserve for available-for-sale financial assets: breakdown Banking group 31/12/2006 31/12/2005 Assets/Values Negative Negative Negative Positive reserve Positive reserve Positive reserve reserve reserve reserve 2. Debt securities 3. Equities 931 931 12,597 -946 5. Units in OICR 6. Loans Total 931 931 12,597 -946
197 16.5 Valuation reserves: changes over the year
16.5.1 Pertaining to the banking group
Non-current Special Available-for- Property, Foreign Intangible Cash flow Exchange assets and revaluation sale financial plant and investment assets hedge differences discontinued laws assets equipment hedge operations
A. Opening balance 11,651 4,307 B. Increases 1,516 3 B1. Increases in fair value 1,087 3 X B2. Other changes 429 C. Decreases -12,236 -3,470 C1. Decreases in fair value X C2. Other changes -12,236 -3,470 D. Closing balance 931 3 837
16.5.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
16.5.3 Pertaining to other companies
This Item does not exist. The relevant table is therefore omitted.
Other information
1. Guarantees given and commitments
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1) Financial guarantees given 834,544 834,544 1,745,008 a) banks 21,271 21,271 374,548 b) customers 813,273 813,273 1,370,460 2) Commercial guarantees given 1,152,626 1,152,626 1,356,910 a) banks 20,506 20,506 61,182 b) customers 1,132,121 1,132,121 1,295,728 3) Irrevocable commitments to lend funds 4,203,421 4,203,421 3,192,849 a) banks 170,593 170,593 120,156 i) certain to be called on 159,128 159,128 101,351 ii) not certain to be called on 11,465 11,465 18,805 b) customers 4,032,828 4,032,828 3,072,693 i) certain to be called on 108,318 108,318 26,941 ii) not certain to be called on 3,924,510 3,924,510 3,045,752 4) Commitments underlying credit derivatives: 205,232 205,232 585,032 sales of protection 5) Assets given as collateral for third party 6 obligations 6) Other commitments 349,846 349,846 479,379 Total 6,745,670 6,745,670 7,359,184
198 2. Assets given as collateral for own liabilities and commitments 31/12/2006 31/12/2005 Financial assets held for trading 2,376,536 1,710,863 Financial assets at fair value Available-for-sale financial assets 2,924 Held-to-maturity financial assets 50,639 49,633 Due from banks 583,932 590,561 Customer loans Property, plant and equipment Total 3,011,107 2,353,981
3. Information on operational leasing
On the balance sheet date the group is not undertaking lease transactions.
4. Breakdown of investments in terms of unit-linked and index-linked policies.
This category does not exist.
5. Administration and brokerage for third parties: banking group Banking group 31/12/2006 1. Trading of financial instruments on behalf of third parties a) Purchases 1. settled 2. not settled b) Sales 1. settled 2. not settled 2. Discretionary accounts 18,575,664 a) Individual 8,708,398 b) Collective 9,867,266 3. Custody and administration of securities 84,841,400 a) Third-party securities deposited: connected with the duties of custodian bank (excluding discretionary accounts) 13,947,019 1. securities issued by companies included in the scope of consolidation 20,271 2. other securities 13,926,748 b) other third-party securities deposited (excluding discretionary accounts): other 33,677,146 1. securities issued by companies included in the scope of consolidation 7,862,188 2. other securities 25,814,958 c) Third-party securities deposited with third-parties 30,068,634 d) own securities deposited with third parties 7,148,601 4. Other transactions Total 103,417,064
6. Administration and brokerage for third parties: insurance companies
This Item does not exist. The relevant table is therefore omitted.
7. Administration and brokerage for third parties: other companies
This Item does not exist. The relevant table is therefore omitted.
199 Part C - INFORMATION ON THE CONSOLIDATED INCOME STATEMENT Section 1 - Interest - Items 10 and 20
1.1 Interest income and similar revenue: breakdown
1.1.1 Pertaining to the banking group
Performing financial assets Impaired Other Banking group Debt financial 31/12/2006 31/12/2005 Loans assets securities assets 1. Financial assets held for trading 77,938 15 77,953 98,674 2. Financial assets at fair value 3. Available-for-sale financial assets 49,295 49,295 11,270 4. Held-to-maturity financial assets 3,125 3,125 2,411 5. Due from banks 2,922 128,683 31 131,636 82,832 6. Customer loans 1,451,281 17,626 1,468,907 1,418,431 7. Hedge derivatives 134,207 134,207 57,494 8. Financial assets sold but not eliminated 31,208 113,077 144,285 71,504 9. Other assets 7,798 7,798 7,496 Total 164,488 1,693,041 17,626 142,051 2,017,206 1,750,112
1.1.2 Pertaining to insurance companies
Performing financial assets Impaired Other Insurance companies Debt financial 31/12/2006 31/12/2005 Loans assets securities assets 1. Financial assets held for trading 3,490 2. Financial assets at fair value 3. Available-for-sale financial assets 4. Held-to-maturity financial assets 5. Due from banks 6. Customer loans 7. Hedge derivatives 8. Financial assets sold but not eliminated 9. Other assets Total 3,490
1.1.3 Pertaining to other companies
Performing financial assets Impaired Other Other companies Debt financial 31/12/2006 31/12/2005 Loans assets securities assets 1. Financial assets held for trading 2. Financial assets at fair value 3. Available-for-sale financial assets 4. Held-to-maturity financial assets 857 857 5. Due from banks 2 4,798 4,800 22,674 6. Customer loans 9,474 21,960 31,434 7. Hedge derivatives 8. Financial assets sold but not eliminated 9. Other assets 59 59 1,403 Total 859 9,474 21,960 4,857 37,150 24,077
200 1.2 Interest income and similar revenue: differentials relating to hedging transactions
Insurance Banking group Other companies 31/12/2006 companies A. Positive differentials relating to: A.1 Micro fair value hedge of assets 38,189 38,189 A.2 Micro fair value hedge of liabilities 464,777 464,777 A.3 Macro hedge of interest rate risk A.4 Micro hedge of asset cash flow A.5 Micro hedge of liability cash flow A.6 Macro hedge of cash flow Total positive differentials (A) 502,966 502,966 A. Negative differentials relating to: B.1 Micro fair value hedge of assets -12,689 -12,689 B.2 Micro fair value hedge of liabilities -356,069 -356,069 B.3 Macro hedge of interest rate risk B.4 Micro hedge of asset cash flow B.5 Micro hedge of liability cash flow B.6 Macro hedge of cash flow Total negative differentials (B) -368,758 -368,758 Balance (A-B) 134,208 134,208
1.3 Interest income and similar revenue: other information
1.3.1 Interest income on foreign currency financial assets 31/12/2006 - on foreign currency assets 324,313
1.3.2 Interest income on finance leasing transactions
The Bank does not perform finance leasing activities.
1.3.3 Interest income on loans with third-party funds under administration 31/12/2006 - on loans with third-party funds under administration 2
1.4 Interest expense and similar charges: breakdown
1.4.1 Pertaining to the banking group Banking group Payables Securities Other liabilities 31/12/2006 31/12/2005 1. Due to banks 141,732 141 141,873 127,162 2. Due to customers 145,100 145,100 126,111 3. Securities in issue 708,382 708,382 637,669 4. Financial liabilities held for trading 11,934 4,385 16,319 11,104 5. Financial liabilities at fair value 6. Financial liabilities from assets sold but not 48,075 48,075 27,718 eliminated 7. Other liabilities and provisions 2,087 2,087 781 8. Hedge derivatives 11,407 Total 286,832 720,316 54,688 1,061,836 941,952
201 1.4.2 Pertaining to insurance companies Insurance companies Payables Securities Other liabilities 31/12/2006 31/12/2005 1. Due to banks 2. Due to customers 2,031 3. Securities in issue 4. Financial liabilities held for trading 5. Financial liabilities at fair value 6. Financial liabilities from assets sold but not
eliminated 7. Other liabilities and provisions 8. Hedge derivatives Total 2,031
1.4.3 Pertaining to other companies Other companies Payables Securities Other liabilities 31/12/2006 31/12/2005 1. Due to banks 446 446 966 2. Due to customers 34,497 56,451 90,948 23,416 3. Securities in issue 31,679 31,679 28,275 4. Financial liabilities held for trading 5. Financial liabilities at fair value 6. Financial liabilities from assets sold but not
eliminated 7. Other liabilities and provisions 29,347 29,347 8. Hedge derivatives 20,206 Total 34,943 31,679 85,798 152,420 72,863
1.5 Interest expense and similar charges: differentials relating to hedging transactions The balance of differentials relating to hedging transactions is positive. Therefore refer to table 1.2.
1.6 Interest expense and similar charges: other information
1.6.1 Interest expense on foreign currency liabilities 31/12/2006 on foreign currency financial liabilities 78,813
1.6.2 Interest expense on finance lease liabilities 31/12/2006 on finance lease transactions 756
1.6.3 Interest expense on third party funds under administration 31/12/2006 on third-party funds under administration 26
202 Section 2 - Commissions - Items 40 and 50
2.1 Commission income: breakdown
2.1.1 Pertaining to the banking group Banking group 31/12/2006 31/12/2005 a) guarantees given 17,655 22,888 b) credit derivatives 119 c) management, brokerage and consulting services: 267,730 314,522 1. trading of financial instruments 10,246 10,582 2. foreign currency trading 6,357 7,877 3. discretionary accounts 149,390 170,696 3.1. individual 60,458 53,772 3.2. collective 88,932 116,924 4. custody and administration of securities 8,316 11,277 5. custodian bank 9,251 9,648 6. securities placement 32,166 46,603 7. acceptance of instructions 20,999 24,683 8. consulting activities 2,996 2,764 9. distribution of third-party services 28,009 30,392 9.1. discretionary accounts 19 4,591 9.1.1. individual 19 4,591 9.1.2. collective 9.2. insurance products 13,998 12,867 9.3. other products 13,992 12,934 d) collection and payment services 67,629 72,872 e) servicing for securitisation transactions 3,937 6,289 f) services for factoring transactions g) tax collection services h) other services 130,765 160,112 Total 487,716 576,802
The “other services” item includes commissions on current accounts of €61.1 million and loans of €33.9 million.
2.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
203 2.1.3 Pertaining to other companies Other companies 31/12/2006 31/12/2005 a) guarantees given b) credit derivatives c) management, brokerage and consulting services: 2,980 1. trading of financial instruments 2. foreign currency trading 3. discretionary accounts 3.1. individual 3.2. collective 4. custody and administration of securities 5. custodian bank 6. securities placement 7. acceptance of instructions 8. consulting activities 9. distribution of third-party services 2,980 9.1. discretionary accounts 9.1.1. individual 9.1.2. collective 9.2. insurance products 2,980 9.3. other products d) collection and payment services e) servicing for securitisation transactions f) services for factoring transactions g) tax collection services h) other services 1,216 1,085 Total 1,216 4,065
2.2 Commission income: distribution channels for products and services: banking group Banking group 31/12/2006 31/12/2005 a) own branches: 60,772 60,889 1. Discretionary accounts 658 857 2. Securities placement 32,105 33,516 3. Third-party products and services 28,009 26,516 b) cold calling: 148,793 186,802 1. Discretionary accounts 148,732 169,839 2. Securities placement 61 13,087 3. Third-party products and services 3,876 c) other distribution channels: 1. Discretionary accounts 2. Securities placement 3. Third-party products and services
204 2.3 Commission expense: breakdown
2.3.1 Pertaining to the banking group Banking group 31/12/2006 31/12/2005 a) guarantees received 695 74,894 b) credit derivatives 1,460 1,486 c) management, brokerage and consulting services: 40,723 107,124 1. trading of financial instruments 5,580 8,334 2. foreign currency trading 179 64 3. discretionary accounts 38 3.1. own portfolio 38 3.2. third-party portfolio 4. custody and administration of securities 287 5,511 5. placing of financial instruments 34,677 46,073 6. Cold calling to offer securities, products and services 47,104 d) collection and payment services 16,790 16,722 e) other services 27,623 78,777 Total 87,291 279,003
The “other services” item includes commissions on loans of €7.2 million, on brokerage activities of €6.1 million, and on other relations with banks of €1.1.
2.3.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
2.3.3 Pertaining to other companies Other companies 31/12/2006 31/12/2005 a) guarantees received b) credit derivatives c) management, brokerage and consulting services: 497 1. trading of financial instruments 2. foreign currency trading 3. discretionary accounts 3.1. own portfolio 3.2. third-party portfolio 4. custody and administration of securities 5. placing of financial instruments 6. Cold calling to offer securities, products and services 497 d) collection and payment services e) other services 949 1,995 Total 949 2,492
205 Section 3 - Dividends and similar income - Item 70
3.1 Dividends and similar income: breakdown
Banking group Insurance companies Other companies 31/12/2006 31/12/2005
Income Income Income Income Income Dividends from units Dividends from units Dividends from units Dividends from units Dividends from units in OICR in OICR in OICR in OICR in OICR
A. Financial assets held for trading 5,904 87 5,904 87 49,374 42 B. Available-for-sale financial assets 23,640 23,640 12,567 C. Financial assets at fair value 43 D. Shareholdings X X X X X Total 29,544 87 29,544 87 61,984 42
Section 4 - Net income from trading activities - Item 80
4.1 Net income from trading activities: breakdown
4.1.1 Pertaining to the banking group
Trading profits Capital losses Trading losses Net income Banking group Capital gains (A) (B) (C) (D) (A+B)-(C+D) 1. Financial assets held for trading 50,947 61,408 -32,640 -33,024 46,691 1.1 Debt securities 11,337 23,253 -17,084 -23,261 -5,755 1.2 Equities 13,979 28,803 -4,065 -9,490 29,227 1.3 Units in OICR 24,211 9,352 -11,491 -196 21,876 1.4 Loans 1.5 Other 1,420 -77 1,343 2. Financial liabilities held for trading 4,931 4,931 2.1 Debt securities 5,035 5,035 2.2 Payables 2.3 Other -104 -104 3. Other financial assets and liabilities: X X X X 1,799 exchange differences 4. Derivative instruments 260,788 1,006,395 -260,585 -991,580 2,829 4.1 Financial derivatives: 239,592 994,410 -243,847 -990,368 -12,402 - Debt securities and interest rates 162,824 656,178 -165,902 -593,082 60,018 - Equities and stock indices 76,768 334,608 -77,945 -397,286 -63,855 - Currencies and gold X X X X -12,189 - Other 3,624 3,624 4.2 Credit derivatives 21,196 11,985 -16,738 -1,212 15,231 TOTAL 311,735 1,067,803 -293,225 -1,019,673 56,250
4.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
206 4.1.3 Pertaining to other companies
Trading profits Capital losses Trading losses Net income Other companies Capital gains (A) (B) (C) (D) (A+B)-(C+D) 1. Financial assets held for trading 2,501 2,501 1.1 Debt securities 2,501 2,501 1.2 Equities 1.3 Units in OICR 1.4 Loans 1.5 Other 2. Financial liabilities held for trading 2.1 Debt securities 2.2 Payables 2.3 Other 3. Other financial assets and liabilities:
exchange differences 4. Derivative instruments 336 -5,520 -5,184 4.1 Financial derivatives: 336 -4,902 -4,566 - Debt securities and interest rates 336 -4,902 -4,566 - Equities and stock indices - Currencies and gold - Other 4.2 Credit derivatives -618 -618 TOTAL 2,837 -5,520 -2,683
Section 5 - Net income from hedging activities - Item 90
5.1 Net income from hedging activities: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies A. Income relating to: A.1 Fair value hedge derivatives 23,513 A.2 Financial assets hedged (fair value) 8,398 8,398 A.3 Financial liabilities hedged (fair value) 94,366 94,366 12,395 A.4 Cash flow hedge financial derivatives 10,800 A.5 Foreign currency assets and liabilities 70,142 Total income from hedging activities (A) 102,764 102,764 116,850 B. Expenses relating to: B.1 Fair value hedge derivatives -54,750 -54,750 -9,473 B.2 Financial assets hedged (fair value) -6,312 -6,312 -3,981 B.3 Financial liabilities hedged (fair value) -5,623 -5,623 -20,177 B.4 Cash flow hedge financial derivatives -19,889 B.5 Foreign currency assets and liabilities -15,974 Total expenses from hedging activities (B) -66,685 -66,685 -69,494 C. Net income from hedging activities (A-B) 36,079 36,079 47,356
207 Section 6 - Profit (Loss) from disposal/repurchase - Item 100
6.1 Profit (Loss) from disposal/repurchase: breakdown Banking group Insurance companies Other companies 31/12/2006 31/12/2005 Net Net Net Profi Los Profit Loss Profit Loss profi Profit Loss Net profit Profit Loss Net profit profit profit t s t Financial assets 1. Due from banks 2. Customer loans 70,013 -1,238 68,775 70,013 -1,238 68,775 3. Available-for-sale financial 71,103 -13 71,090 71,103 -13 71,090 50,632 -2,694 47,938 assets 3.1 Debt securities 11,609 11,609 11,609 11,609 3.2 Equities 59,494 -13 59,481 59,494 -13 59,481 50,632 -2,651 47,981 3.3 Units in OICR 3.4 Loans -43 -43 4. Held-to-maturity financial assets Total assets 141,116 -1,251 139,865 141,116 -1,251 139,865 50,632 -2,694 47,938 Financial liabilities 1. Due to banks 2. Due to customers 3. Securities in issue 9,734 -2,869 6,865 9,734 -2,869 6,865 Total liabilities 9,734 -2,869 6,865 9,734 -2,869 6,865
Net profits from the sale of available-for-sale financial assets, which amounted to €71,090 thousand, are mainly composed of gains recognised following the sale of interests held in Banca Italease (€28,789 thousand), Area Giochi (€15,481 thousand), Ferfina (€4,869 thousand), CIM Italia (€3,038 thousand), SI Holding (€2,031 thousand), Moby (€2,010 thousand) and other minor interests mainly relating to the merchant banking activities of the subsidiary Efibanca. Also included are profits of €11,609 thousand arising from the realisation of Fingruppo bonds, which were also classified among available-for-sale financial assets.
Section 7 - Net income from financial assets and liabilities at fair value - Item 110
7.1 Net change in the value of financial assets/liabilities at fair value: breakdown
7.1.1 Pertaining to the banking group Net income Banking group Capital gains Profits from sale Capital losses Losses from sale (A) (B) (C) (D) (A+B)-(C+D) 1. Financial assets -2,953 -2,953 1.1 Debt securities 1.2 Equities -2,953 -2,953 1.3 Units in OICR 1.4 Loans 2. Financial liabilities 2.1 Debt securities 2.2 Due to banks 2.3 Due to customers 3. Foreign currency financial assets and X X X X liabilities: exchange differences 4. Derivative instruments 4.1 Financial derivatives - debt securities and interest rates - equities and stock indices - currencies and gold - other
208 4.2 Credit derivatives Total derivatives TOTAL -2,953 -2,953 7.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
7.1.3 Pertaining to other companies Net income Other companies Capital gains Profits from sale Capital losses Losses from sale (A) (B) (C) (D) (A+B)-(C+D) 1. Financial assets -3,108 -3,108 1.1 Debt securities -3,108 -3,108 1.2 Equities 1.3 Units in OICR 1.4 Loans 2. Financial liabilities 2.1 Debt securities 2.2 Due to banks 2.3 Due to customers 3. Foreign currency financial assets and X X X X liabilities: exchange differences 4. Derivative instruments 4.1 Financial derivatives - debt securities and interest rates - equities and stock indices - currencies and gold - other 4.2 Credit derivatives Total derivatives TOTAL -3,108 -3,108
Section 8 - Net adjustments for impairment - Item 130
8.1 Net adjustments for impairment of loans: breakdown
8.1.1 Pertaining to the banking group
Writedowns (1) Writebacks (2) Banking group Specific Specific Portfolio 31/12/2006 31/12/2005 Portfolio Write-offs Other A B A B A. Due from banks -32,096 -79 63,923 31,748 B. Customer loans -16,375 -397,063 -70,733 43,399 62,882 8,887 5,677 -363,326 -752,998 C. Total -16,375 -429,159 -70,812 107,322 62,882 8,887 5,677 -331,578 -752,998
Legend A = from interest B = other writebacks
8.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
8.1.3 Pertaining to other companies
Other companies Writedowns (1) Writebacks (2) 31/12/2006 31/12/2005 Specific Portfolio Specific Portfolio
209 Write-offs Other A B A B
A. Due from banks B. Customer loans -1,593 129 -1,464 C. Total -1,593 129 -1,464
Legend A = from interest B = other writebacks
Adjustments to loans amounted to a total of €333 million, compared with €739.5 million in 2005. Of these, €219 million relate to impaired loans (of which €169 million were non-performing and €50 million were problem and restructured loans) and €114 million relate to performing loans. The figure for the current period includes a writeback of around €44 million, represented by the benefit deriving from the transfer to the income statement of the updating effect recorded in the last year on non-performing loans that were transferred in the first half of 2006.
Adjustments to impaired loans are due to prudent assessments made of the loan portfolio, as a result of in-depth analyses which were specifically concentrated on the micro-loan funds. The significant positions include the write-down of €25 million in respect of funds granted to the Magiste Group. Adjustments in bonis include €104 million relating to funds granted in the context of the proposed takeover of Kamps and Harry’s by the Barilla Group, as indicated in the report on operations, where more details are provided.
Adjustments to loans fell from 2.65% in December 2005 to 1.16% (1.31% without considering the aforementioned writeback).
8.2 Net adjustments for impairment of available-for-sale financial assets: breakdown
8.2.1 Pertaining to the banking group
Writedowns (1) Writebacks (2) Banking group Specific Specific 31/12/2006 31/12/2005 other Write-offs Other from interest writebacks A. Debt securities -17,993 -17,993 -118,896 B. Equities -80,920 -80,920 -107,255 C. Units in OICR D. Loans to banks E. Loans to customers Total -98,913 -98,913 -226,151
8.2.2 Pertaining to insurance companies
This category does not exist. The relevant table is therefore omitted.
8.2.3 Pertaining to other companies
Writedowns (1) Writebacks (2) Other companies Specific Specific 31/12/2006 31/12/2005 other Write-offs Other from interest writebacks A. Debt securities B. Equities -66 C. Units in OICR D. Loans to banks E. Loans to customers Total -66
210
Adjustments to assets and other financial transactions amount to €99.4 million and include the writedown of €81 million recognised on the parent bank’s shareholding in Hopa, and the adjustments of €14 million on mezzanine notes held by BPI relating to the Tiepolo II securitisation, the value of which reflects the performance of the underlying securitisation.
8.3 Net adjustments for impairment of held-to-maturity financial assets: breakdown
This Item has no value. The relevant table is therefore omitted.
211 8.4 Net adjustments for impairment of other financial transactions: breakdown
8.4.1 Pertaining to the banking group
Writedowns (1) Writebacks (2) Banking group Specific Specific Portfolio 31/12/2006 31/12/2005 Portfolio Write-offs Other A B A B A. Guarantees given 2,521 2,521 -2,076 B. Credit derivatives C. Commitments to lend funds D. Other transactions -596 -596 -2,188 Total -596 2,521 1,925 -4,264
Legend A = from interest B = other writebacks
8.4.2 Pertaining to insurance companies
This category does not exist. The relevant table is therefore omitted.
8.4.3 Pertaining to other companies
Writedowns (1) Writebacks (2) Other companies Specific Specific Portfolio 31/12/2006 31/12/2005 Portfolio Write-offs Other A B A B A. Guarantees given B. Credit derivatives C. Commitments to lend funds D. Other transactions -2,438 -2,438 1,485 Total -2,438 -2,438 1,485
Legend A = from interest B = other writebacks
Section 9 - Net premiums - Item 150
9.1 Net premiums: breakdown Direct labour Indirect labour 31/12/2006 31/12/2005 A. Life A.1 Gross premiums collected (+) 9,852 A.2 Premiums transferred to reinsurers (-) -3,598 A.3 Total 6,254 B. Non-life B.1 Gross premiums collected (+) B.2 Premiums transferred to reinsurers (-) B.3 Change in the gross amount of the premium reserve (+/-) B.4 Change in the premium reserve payable by reinsurers (+/-) B.5 Total C. Total net premiums 6,254
Section 10 - Balance of other income and expense from insurance operations - Item 160
10.1 Balance of other income/expenses from insurance operations: breakdown 31/12/2006 31/12/2005 1. Net change in technical reserves 2. Claims paid out during the year -117
212 3. Other income and expenses from insurance operations 5,538 Total 5,421
10.2 Breakdown of the sub-item “Change in technical reserves”
This Item has no value. The relevant table is therefore omitted.
10.3 Breakdown of the sub-item "Claims paid out during the year" 31/12/2006 31/12/2005 Life: claim expenses, net of transfers to reinsurers A. Amounts paid -1,947 A.1 Gross annual amount 33 A.2 Reinsurers' share(-) -1,980 B. Change in the reserve for sums payable 2,064 B.1 Gross annual amount 1,959 B.2 Reinsurers' share (-) 105 Total life claims 117 Non-life: claim expenses, net of recoveries and transfers to reinsurers C. Amounts paid C.1 Gross annual amount C.2 Reinsurers' share (-) D. Change in recoveries net of reinsurers' share E. Change in the claims reserve E.1 Gross annual amount E.2 Reinsurers' share (-) Total non-life claims
10.4 Breakdown of the sub-item "Other income and expenses from insurance operations"
10.4.1 Life
31/12/2006 31/12/2005 LIFE Income 8,053 - Other technical income net of transfers to reinsurers - Income and unrealised capital gains relating to investments benefiting policyholders bearing the risk 6,861 thereof - Change in commissions and other purchase costs to be written off 1,192 - Commissions and profit-sharings received by reinsurers Expenses -2,515 - Other technical expenses, net of transfers to reinsurers - Expenses and unrealised capital losses relating to investments benefiting policyholders bearing the risk
thereof - Purchasing commissions - Other purchase costs -2,515 - Collection commissions Total Life 5,538 NON-LIFE Income - Other technical income net of transfers to reinsurers - Change in commissions and other purchase costs to be written off - Commissions and profit-sharings received by reinsurers Expenses - Other technical expenses, net of transfers to reinsurers - Purchasing commissions
213 - Other purchase costs - Collection commissions Total non-life
214 10.4.2 Non-life
This Item does not exist. The relevant table is therefore omitted.
Section 11 - Administrative expenses - Item 180
11.1 Personnel expenses: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1) Employees 518,576 319 518,895 534,227 a) Wages and salaries 358,868 206 359,074 370,077 b) Social security contributions 95,097 65 95,162 99,148 c) Employee severance payment 545 545 1,944 d) Pension costs 1,072 1,072 e) Provision to the employee severance 26,754 19 26,773 27,778 payment fund f) Provision to the pension fund: 9,192 9,192 12,818 - defined contribution 4,082 4,082 7,687 - defined benefit 5,110 5,110 5,131 g) Payments to external supplementary 5,641 5,641 5,147 pension funds: - defined contribution 5,641 5,641 5,144 - defined benefit 3 h) Costs arising from payment agreements 2,719 2,719 2,471 based on own capital instruments i) Other employee benefits 18,688 29 18,717 14,844 2) Other personnel 428 428 417 3) Directors 9,607 35 9,642 9,274 Total 528,611 354 528,965 543,918
11.2 Average number of employees by category: banking group
Employees:
a) Executives 111
b) Total managers 2,347
- 3rd and 4th level 1,023
c) Other employees 5,963
total 8,421
11.3 Defined-benefit company pension funds: total costs total costs
The costs relating to the defined-benefit funds described in section 12 of the assets total €5.1 million, in relation to the actuarial adjustment of the actuarial reserves entered in the liabilities. In particular, these costs correspond to the Pension Fund pursuant to Regulation 1992 (€3.4 million), the Pension Fund of the former Banca Industriale Gallaratese (€0.4 million) and the Pension Fund for employees of the former Bipielle Adriatico (€71 thousand), and the defined-benefit fund of the subsidiary Cassa di Risparmio di Lucca Pisa Livorno (€1.29 million).
11.4 Other employee benefits
215 This item includes costs relating to restaurant vouchers (€5.9 million), staff insurance costs (€4.4 million), and training and professional courses (€1.6 million).
216 11.5 Other administrative expenses
Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1) Indirect taxes 74,145 258 74,403 73,121 - Stamp duty and stock exchange taxes 42,124 42,124 44,608 - Substitute tax (Presidential Decree 601/73) 9,222 9,222 7,975 - Municipal property tax 2,127 256 2,383 2,039 - Other indirect taxes 20,672 2 20,674 18,499 2) Rents payable 112,587 10 112,597 106,630 - Buildings 51,241 10 51,251 52,285 - Electronic equipment and software 58,774 58,774 54,146 - Other 2,572 2,572 199 3) Maintenance costs and overheads 34,599 111 34,710 27,543 - owned properties 5,446 107 5,553 4,710 - leased properties 8,926 3 8,929 6,760 - movable property 7,495 1 7,496 7,194 - software 12,732 12,732 8,879 4) Cleaning of premises 6,578 6,578 6,319 5) Electricity, heating and water 10,643 8 10,651 10,945 6) Printing and stationery 2,963 6 2,969 4,732 7) Postal and telephone 32,516 7 32,523 31,283 8) Security 2,800 2,800 2,703 9) Transport 10,455 10,455 10,926 10) Insurance premiums 9,039 33 9,072 6,397 11) Advertising, publicity and publications 31,557 31,557 22,022 12) Entertainment expenses 765 765 2,032 13) Membership fees 3,629 3 3,632 3,014 14) Contributions to organisations and associations 4,663 4,663 5,700 15) Subscriptions to journals, reviews and 1,043 1,043 1,737 publications 16) Costs of professional services: 83,042 402 83,444 89,087 - Consultancy 55,453 386 55,839 63,808 - Legal expenses 18,137 16 18,153 15,244 - Commercial information and searches 9,270 9,270 9,837 - Other indirect taxes 182 182 198 17) Costs of IT services and outsourcing 17,341 17,341 9,827 18) Auditors' fees 1,431 53 1,484 2,194 19) Other expenses 29,447 264 29,711 44,074 Total 469,243 1,155 470,398 460,286
The personnel and administrative expenses segment shows an overall decrease of 0.4% with respect to the 2005 figure. It should however be pointed out that the figures for December 2005 included the contribution of the companies Area Life International Assurance, Bipielle Network and Bipielle Previdenza, which during 2006 contributed summarily to the “profit/loss from discontinued operations after tax” item of the consolidated income statement.
Personnel costs were down by 2.7% to €529 million. These costs include provision for renewal of the National Collective Labour Agreement for credit institutions. With regard to this matter, it should be pointed out that the National Collective Labour Agreement for credit institutions expired on 31 December 2005 and negotiations for its renewal are still at the embryonic stage, although it is expected that they will reach a conclusion by the end of 2007. Banking institutions within the group have made provision according to their best estimate of the charge to be sustained, on the basis of analyses of the historic data on previous contractual renewals and inflation in the intervening period.
217 Other administrative costs rose by 2.2%, from €460.3 million to €470.4 million. The increase is attributable to higher charges arising from the reorganisation and relaunch of the Group, such as: incidental expenses to investments in the corporate information technology systems, substantial advertising and promotional costs, consultancy and legal expenses. The increased costs of these items should be seen in the light of the fact that the 2005 figure included around €40 million of charges relating to the Antonveneta operation. The increase in costs has, however, been balanced by a policy of thoroughly controlling general costs in accordance with the business plan.
Section 12 - Net provisions for contingencies and charges - Item 190
12.1 Net provisions for contingencies and charges: breakdown 31/12/2006 31/12/2005 Net provisions for contingencies for outstanding lawsuits and revocatory actions -40,335 -140,051 Interest expense from updating provision for outstanding lawsuits and revocatory actions 244 4,578 Reallocation to income statement relating to provisions for contingencies for outstanding lawsuits and 5,767 3,858 revocatory actions Appropriations to other provisions -19,921 -129,791 Reallocation to income statement relating to other provisions 869 Total -53,376 -261,406
At December 2006, provisions for contingencies and charges totalled €53.4 million, a sharp decrease from the 2005 figure, which totalled €233.5 million. It should be recalled that the 2005 charges were attributable to non-recurring items such as allocations in relation to the potential revocatory action against Parmalat, charges relating to the Antonveneta affair and charges connected to potential risks in the finance area. Provisions for 2006 include appropriations of €10 million for lawsuits with personnel, €4.7 million for pension disputes, and €24.2 million for miscellaneous disputes.
Section 13 - Net adjustments to property, plant and equipment - Item 200
13.1.1Net adjustments to property, plant and equipment: breakdown
13.1 Pertaining to the banking group
Writedowns for Banking group Depreciation (a) Writebacks (c) 31/12/2006 31/12/2005 impairment (b)
A. Property, plant and equipment A.1 Owned -46,526 -5,806 -52,332 -43,246 - functional use -46,526 -5,806 -52,332 -43,246 - for investment A.2 Acquired under finance leases -934 -934 -3,222 - functional use -934 -934 -3,222 - for investment Total -47,460 -5,806 -53,266 -46,468
13.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
13.1.3 Pertaining to other companies
218 Writedowns for Other companies Depreciation (a) Writebacks (c) 31/12/2006 31/12/2005 impairment (b)
A. Property, plant and equipment A.1 Owned -1,364 -1,364 -13,146 - functional use -1,095 -1,095 -8,392 - for investment -269 -269 -4,754 A.2 Acquired under finance leases - functional use - for investment Total -1,364 -1,364 -13,146
Adjustments to property, plant and equipment amounted to €77.4 million, a decrease of 6.6% from the 2005 figure of €82.9 million. The change is mainly due to the effect of the harmonisation of property amortisation rates at Group level. It should also be noted that adjustments totalling €5 million were made of a group of instrumental properties of the subsidiary Bipielle Real Estate in order to bring their book value into line with their valuation.
Section 14 - Net adjustments to intangible assets - Item 210
14.1 Net adjustments to intangible assets: breakdown
4.1.1 Pertaining to the banking group
Writedowns for Banking group Depreciation (a) Writebacks (c) 31/12/2006 31/12/2005 impairment (b)
A. Intangible assets A.1 Owned -22,788 -22,788 -25,016 - Generated internally by the company - Other -22,788 -22,788 -25,016 A.2 Acquired under finance leases Total -22,788 -22,788 -25,016
14.1.2 Pertaining to insurance companies
This Item does not exist. The relevant table is therefore omitted.
14.1.3 Pertaining to other companies
Writedowns for Other companies Depreciation (a) Writebacks (c) 31/12/2006 31/12/2005 impairment (b)
A. Intangible assets A.1 Owned -12 - Generated internally by the company 0 - Other -12 A.2 Acquired under finance leases Total -12
Section 15 - Other operating income and expenses - Item 220
15.1 Other operating expenses: breakdown
219 31/12/2006 31/12/2005 Repayment of interest 3,363 1,594 Contingent liabilities 13,753 8,416 Losses from lawsuits 20,154 4,576 Other expenses 54,642 131,340 Total 91,912 145,926
The trend in this item has been influenced by some extraordinary effects, including the loss of around €12 million to the subsidiary Bipitalia Gestioni from its disposal of an investment in structured securities in order to avoid prejudicing the managed portfolios of which they formed part. Further expenses arose from the settlement of tax obligations relating to transactions in preceding years and extraordinary costs for the completion of existing property initiatives. Other expenses include contingent liabilities of €13,753 thousand, and a pro-rata temporis charge of around €3 million concerning the investment agreement with Aviva Italia Holding, entered into on 31 March 2004.
220 15.2 Other operating income: breakdown 31/12/2006 31/12/2005 Rents receivable 8,646 5,870 Charges payable by third parties 88,922 82,961 - recoveries of taxes 51,960 53,725 - insurance premiums 36,962 29,236 Recovery of expenses from customers 84,107 49,358 Recovery of loans already paid off 3,535 14,118 Contingent liabilities 24,023 12,921 Other income 64,370 203,786 Total 273,603 369,014
Other income includes proceeds of €20,143 thousand from securitisation transactions before 1 January 2004.
Section 16 - Gains (losses) from investments - Item 240
16.1 Gains (losses) from investments: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1) Jointly controlled entities A. Income 1. Revaluations 2. Profits from sale 3. Writebacks 4. Other increases B. Expenses 1. Writedowns 2. Writedowns for impairment 3. Losses from sale 4. Other decreases Total 2) Companies subject to significant influence A. Income 1. Revaluations 12,478 12,478 19,459 2. Profits from sale 34,490 34,490 2,033 3. Writebacks 4. Other increases 39 39 B. Expenses 1. Writedowns -14,890 -14,890 -386 2. Writedowns for impairment -73,520 3. Losses from sale 4. Other decreases Total 32,117 32,117 -52,414 3) Subsidiaries A. Income 1. Revaluations 2. Profits from sale 19,049 19,049 50,852 3. Writebacks 4. Other increases B. Expenses 1. Writedowns 2. Writedowns for impairment 3. Losses from sale -5,558 -5,558 -4,459 4. Other decreases Total 13,491 13,491 46,393 Total 45,608 45,608 -6,021
221 This item includes gains recognised from the sale of shareholdings in Fidia Farmaceutici (€27,227 thousand), Bipielle Leasing (€19,051 thousand), Palladio Finanziaria (€5,025 thousand), Buon Viaggio (€1,348 thousand), Cassa di Risparmio di Bolzano (€890 thousand), losses from the sale of Reti Bancarie warrants – before its merger with the parent bank – (€2,864 thousand), and the net effect of the valuation of shareholdings according to the equity method, which was negative by a total of €5,069 thousand.
Section 17 - Net income from the fair value measurement of property, plant and equipment and intangible assets - Item 250
The Group does not own property, plant and equipment or intangible assets at fair value and therefore the respective breakdown is not provided.
Section 18 - Net adjustments to goodwill - Item 260
18.1 Net adjustments to goodwill: breakdown
Adjustments to goodwill amount to €46,962 thousand, of which €14,122 thousand related to the impairment recorded on the discontinued subsidiary Area Life International Assurance, and €32,473 thousand related to the derecognition of goodwill originally recorded on the Banca Popolare del Trentino following the transfer of branches in the Trentino region their relevant trademark.
Section 19 - Profit (Loss) from sale of investments - Item 270
19.1 Profit (loss) from sale of investments: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies A. Buildings 881 - Profits from sale 881 - Losses from sale B. Other assets 24,114 24,114 -57 - Profits from sale 24,388 24,388 85 - Losses from sale -274 -274 -142 Net profit 24,114 24,114 824
The capital gain of €24.1 million was realised following the aforementioned sale of branches in the Trentino region with their relevant trademark.
Section 20 - Income taxes on continuing operations - Item 290
20.1 Income taxes on continuing operations: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies 1. Current taxes (-) -151,798 -744 -152,542 -175,741 2. Change in current taxes from previous years (+/- 3,827 -252 3,575 -8,511 ) 3. Reduction in current taxes for the year (+) 8,493 4. Change in prepaid taxes (+/-) 70,009 7,087 77,096 237,425 5. Change in deferred taxes (+/-) -25,284 97 -25,187 103,542 6. Taxes for the Year (-) -103,246 6,188 -97,058 165,208 (-1+/-2+3+/-4+/-5)
222 Income taxes on continuing operations posted a negative balance of €97.1 million as at December 31, 2006 which included the effect of recognition of deferred tax assets calculated not only on the temporary differences between the book and tax bases of assets and liabilities but also on the end- of-year tax losses. The tax asset was recorded in view of the extraordinary nature of such losses which are therefore expected to be reabsorbed through lower payment of taxes in future years on the basis of the profits that emerge from the business plan over the forthcoming years, and also in consideration of the national tax consolidation to which the Parent Bank and almost all of the subsidiaries have subscribed.
The changes in prepaid and deferred taxes relate to the amounts used and released, as better described in section 14 "tax assets and liabilities".
Section 21 - Profit (Loss) from discontinued operations after tax - Item 310
21.1 Profit (loss) from discontinued operations (assets/liabilities) after tax: breakdown Insurance Banking group Other companies 31/12/2006 31/12/2005 companies Set of financial assets 1. Income 39,583 14,680 2,795 57,058 14,188 2. Expenses -73,855 -13,332 -5,367 -92,554 3. Result of the valuations of associated assets
and liabilities 4. Profits (loss) from sale 2,549 5. Taxes 353 -7,128 186 -6,589 Profit (loss) -33,919 -5,780 -2,386 -42,085 16,737
This item includes the income and expenses, net of the related intragroup relations, relating to the subsidiaries Bipielle Net, Bipielle Previdenza, Area Life International Assurance, and to some subsidiaries held by Efibanca and in the process of being sold in the context of its merchant banking activities.
Section 22 - Period profit (loss) of minority interests - Item 330
22.1 Breakdown of item 330 - "period profit of minority interests" Company 31/12/2006 Banca Popolare di Crema S.p.A. 791 Banca Popolare di Cremona S.p.A. 70 Banca Popolare di Mantova S.p.A. 9 Banca Valori S.p.A. 146 Nazionale Fiduciaria S.p.A. 57 Critefi Sim S.p.A. 25 Bipielle Alternative Investments SGR S.p.A. 27 Bipielle Bank (Suisse) S.A. 338 Bipitalia Gestioni S.G.R. S.p.A. 472 Bipielle Network S.p.A. -47 Bipielle International UK 38 Cassa di Risparmio di Lucca S.p.A. 21,916 Cassa di Risparmio di Pescara S.p.A. 342 Efibanca S.p.A. 377 AB Capital S.p.A. -67 Tiepolo S.p.A. 0 Tiepolo II S.p.A. 12
223 Bipielle Previdenza Assicurativa S.r.l. -2 Gruppo Acque Minerali Riunite -9 Glass Italy BV -9,434 Gruppo Partecipazioni Italiane -11 Minority interests Bancarie S.p.A. and Bipielle Investimenti S.p.A.at 30/06/2006 28,232 Total 43,282
224 Section 24 - Earnings per share
31/12/2006 31/12/2005 Consolidated net profit for the year (in thousands of Euro) -39,861 -743,893 Weighted average ordinary shares in issue: 547,738,410 383,226,514 Net loss per share: -0,0728 -1,941 Weighted average ordinary shares in issue + warrants: 660,159,179 445,154,480 Diluted net loss per share: -0,0604 -1,671
The dilutive effect on the number of ordinary shares in issue is the result of the conversion option embedded in the subordinated bond, which matures in June 2010 for 18,390,805 shares, and of the issue of the Warrants for 94,029,964 assigned to subscribers of the capital increase completed during the year.
225 Part D - SEGMENT REPORTING SEGMENT REPORTING
This section shows the consolidated results divided according to business segment in accordance with IAS 14. In particular, the Gruppo BPI has chosen the following means of presenting its results:
• Primary reporting: consolidated results broken down by business segment
• Secondary reporting: results broken down by geographical area
1. PRIMARY SEGMENT REPORTING Procedure for determining segment results
Business segments are categorised by classifying the various group companies according to the primary activity performed by each. The results of each segment are therefore obtained by adding together the individual financial statements of the legal entities allocated to each segment.
Breakdown of business segments
The segments identified are as follows:
• Retail Banking
• Asset Management
• Investment Bank
• Product Companies
• Real Estate
• Other Activities
A breakdown is given below of the group's legal entities whose results count towards the result of each segment:
Retail banking Asset management Investment Bank Product Companies Real Estate Other Activities
Banca Pop. Italiana Soc coop. C.R. di Lucca Pisa Livorno S.p.A. Banca Pop. di Crema S.p.A. Banca Pop. di Cremona S.p.A. Bipitalia Gestioni SGR S.p.A. Bipielle ICT S.p.A. Banca Caripe S.p.A, Bipitalia Alternative S.G.R. Bipielle Real Estate S.p.A. Bipielle Int. holding SA Banca Pop. di Mantova S.p.A. Bipitalia Ducato S.p.A. S.p.A. Bipielle Fondi Immobiliari Banca Pop. di Lodi Banca Valori S.p.A. Efibanca S.p.A. Critefi Sim S.p.A. Basileus S.p.A. SGR S.p.A. Capital Company L.L.C. Bipielle Società di Gestione del AB Capital S.p.A. Bipielle Consumer ABS 2004 Nadir S.r.l. Nazionale Fiduciaria S.p.A. Banca Pop. di Lodi Credito S.p.A. Bipielle Consumer ABS 2005 Sirio S.r.l. Capital Company II L.L.C. Italfortune International Bipielle Bank (Suisse) S.A. Advisor S.A. Lido dei Coralli S.r.l. Banca Popolare di Lodi Tiepolo Finance S.r.l. Capital Company III L.L.C. Bipielle Int. UK S.A Tiepolo Finance 2 S.r.l. Bipitalia Residential RMBS 2004 Bipitalia Residential RMBS 2005 Bipitalia Residential CMBS 2005
226 Segment results for the year ended December 31, 2006: income statement
A breakdown is given below of the income statement results for the year 2006.
For each segment, a comparison with the previous year is also given.
Retail Invest. Product Other Intercompany Income statement Asset Mng Real Estate Net estra Consol. Banking Bank comps. Activities entries Net interest income 667,505 1,539 61,500 131,963 -23,334 -3,333 4,260 840,100 Net commissions 321,128 51,527 27,514 1,285 -97 1,213 -1,878 400,692 Net income from trading activities 29,140 729 4,932 11,230 2,501 5,035 53,567 Other costs/revenues 335,143 980 29,495 -3,108 -156,131 206,379 Total income 1,352,916 54,775 123,441 144,478 -23,431 -2,727 -148,714 1,500,738 Writedowns -375,945 -61 -20,490 -43,653 -20,821 -264,000 292,502 -432,468 Net income from financial operations 976,971 54,714 102,951 100,825 -44,252 -2,727 -120,212 1,068,270 Net income from financial and insurance operations 976,971 54,714 102,951 100,825 -44,252 -2,727 -120,212 1,068,270 Operating costs and other costs/revenues -850,658 -25,271 6,656 -27,237 11,923 -15,858 -22,600 -2,661 -925,706
Profit (loss) from continuing operations before tax 126,313 29,443 109,607 73,588 -32,329 -18,585 -145,473 142,564
Segment results for the year ended December 31, 2006: balance sheet
A breakdown is given below of the balance sheet figures for the year 2006.
Retail Product Other Intercompany Balance Sheet Asset Mng Invest. Bank Real Estate entries and Consol. Banking comps. Activities others Due from banks 11,613,345 23,971 161,643 223,266 2,866 12,819 -7,204,438 4,833,472 Customer loans 23,538,000 39,221 4,080,910 4,713,303 -3,635,527 28,735,907 Shareholdings 5,095,237 2,633 95,648 4,084 37,784 248,642 -5,332,860 151,168 Other assets 9,486,621 80,517 919,539 1,199,929 993,938 1,440,929 -1,054,949 13,066,524 Total assets 49,733,203 146,342 5,257,740 6,140,582 1,034,588 1,702,390 -17,227,774 46,787,071 Due to banks 9,550,669 22,888 1,217,062 2,694,214 512,021 87,674 -8,087,212 5,997,316 Due to customers 16,414,668 7,303 23,902 1,119,795 428 -1,955,245 15,610,851 Securities in issue 14,448,818 2,782,173 996,650 621,998 -2,322,395 16,527,244 Shareholders' equity 6,445,283 79,708 813,691 374,798 409,766 284,224 -4,411,784 3,995,686 Other liabilities 2,873,765 36,443 420,912 955,125 112,801 708,066 -451,138 4,655,974 Total liabilities 49,733,203 146,342 5,257,740 6,140,582 1,034,588 1,702,390 -17,227,774 46,787,071
1) This figure does not include minority interests and profit for the year.
227 Retail Banking
The Retail Banking segment, as configured here, is responsible for commercial banking activities and for the centralised group management of banking, administrative and financial services.
The tables below show extraordinary balance sheet items referring, as illustrated in detail in the report on operations, to adjustments to loans to the Magiste Group, financing of the the Barilla Group’s proposed takeover of Kamps and Harry’s, adjustments to the shareholding in Hopa, and finally to adjustments to goodwill.
Figures relating Extraordinary Thousands of EURO to the Retail 2006 amounts items Banking segment Net interest income 667,505 667,505 Net commissions 321,128 321,128 Net income from trading activities 29,140 29,140 Other costs/revenues 335,143 335,143 Total income 1,352,916 1,352,916 Writedowns -111,945 -264,000 -375,945 Net income from financial operations 976,971 976,971 Net income from financial and insurance operations 976,971 976,971 Operating costs -828,058 -22,600 -850,658 Profit (loss) from continuing operations before tax 126,313 126,313
Figures relating Extraordinary Thousands of EURO to the Retail 2005 amounts items Banking segment Net interest income 531,837 70,000 601,837 Net commissions 100,921 118,000 218,921 Net income from trading activities -136,325 90,000 -46,325 Other costs/revenues 695,749 -248,000 447,749 Total income 1,222,182 1,222,182 Writedowns -1,825,186 737,000 -1,088,186 Net income from financial operations 133,996 133,996 Net income from financial and insurance operations 133,996 133,996 Operating costs -1,287,459 288,000 -999,459 Profit (loss) from continuing operations before tax -865,463 -865,463
Retail Banking Retail Banking segment segment % Change 31/12/0206 31/12/2005 Net interest income 667,505 531,837 25.51% Net commissions 321,128 100,921 218.20% Net income from trading activities 29,140 -136,325 121.38% Other costs/revenues 335,143 695,749 -51.83% Total income 1,352,916 1,222,182 10.70% Writedowns -111,945 -1,825,186 93.87% Net income from financial operations 976,971 133,996 ns Net income from financial and insurance operations 976,971 133,996 ns Operating costs -828,058 -1,287,459 35.68% Profit (loss) from continuing operations before tax 126,313 -865,463 114.59%
228 Asset Management
Asset Management is specifically responsible for the activities of asset management companies (SGR).
This segment includes the following companies: Bipitalia Gestioni SGR, Bipitalia Alternative SGR, Bipielle Fondi Immobiliari SGR, Nazionale Fiduciaria, Italfortune International Advisors and Bipielle International UK. Asset Investment Bank Management Asset segment % Change Management
31/12/2006 31/12/2005 Net interest income 1,539 711 116.46% Net commissions 51,527 68,147 -24.39% Net income from trading activities 729 736 -0.95% Other costs/revenues 980 150 ns Total income 54,775 69,744 -21.46% Writedowns -61 -44 -38.64% Net income from financial operations 54,714 69,700 -21.50% Net income from financial and insurance operations 54,714 69,700 -21.50% Operating costs -25,271 -13,275 -90.37% Profit (loss) from continuing operations before tax 29,443 56,425 -47.82%
Investment Bank
Investment Bank is responsible for the activities of companies that provide specialist services for businesses, from merchant banking to lending to consultancy.
This segment includes the following companies: Efibanca and AB Capital.
The results achieved by Efibanca account for the positive segment result. Investment Bank Investment Bank segmento segment % Change
31/12/2006 31/12/2005 Net interest income 61,500 78,592 -21.75% Net commissions 27,514 29,748 -7.51% Net income from trading activities 4,932 -1,275 486.82% Other costs/revenues 29,495 31,439 -6.18% Total income 123,441 138,504 -10.88% Writedowns -20,490 -15,234 -34.50% Net income from financial operations 102,951 123,270 -16.48% Net income from financial and insurance operations 102,951 123,270 -16.48% Operating costs 6,656 -35,853 118.56% Profit (loss) from continuing operations before tax 109,607 87,417 25.38%
229 Product companies
Product companies are responsible for the activities of the Group that provide specialist credit services (Consumer credit).
This segment includes Bipitalia Ducato, Critefi Sim, Bipielle Consumer ABS 2004 and Bipielle Consumer ABS 2005.
The constant growth in consumer credit is the major contributory factor behind the segment result. Product Investment Bank company segment % Change segment 31/12/2006 31/12/2005 Net interest income 131,963 116,212 13.55% Net commissions 1,285 9,073 -85.84% Net income from trading activities 11,230 6,562 71.14% Other costs/revenues -10,230 100.00% Total income 144,478 121,617 18.80% Writedowns -43,653 -51,053 14.49% Net income from financial operations 100,825 70,564 42.88% Net income from financial and insurance operations 100,825 77,961 29.33% Operating costs -27,237 -45,164 39.69% Profit (loss) from continuing operations before tax 73,588 32,797 124.37%
Real Estate Service
The Real Estate segment is responsible for managing the Group's property assets.
This segment includes Bipielle Real Estate, Basileus, Lido dei Coralli, Nadir Immobiliare and Sirio Immobiliare.
Real Estate Investment Bank Service Service segment % Change segmento 31/12/2006 31/12/2005 Net interest income -23,334 -22,264 -4.81% Net commissions -97 -160 39.38% Net income from trading activities -1,250 100.00% Other costs/revenues 20,790 -100.00% Total income -23,431 -2,884 ns Writedowns -20,821 -29,505 29.43% Net income from financial operations -44,252 -32,389 -36.63% Net income from financial and insurance operations -44,252 -32,389 -36.63% Operating costs 11,923 8,469 40.78% Profit (loss) from continuing operations before tax -32,329 -23,920 -35.15%
Other Activities
The Other Activities segment includes companies that carry out servicing, control, governance and coordination activities to support the activities performed by the operating structures. This includes the Group’s Information Technology companies (Bipielle ICT), Bipielle International Holding, Banca Popolare di Lodi Capital Company I, Banca Popolare di Lodi Capital Company II and Banca Popolare di Lodi Capital Company III.
Other Activities Other Activities segment segment % Change 31/12/2006 31/12/2005 Net interest income -3,333 -1,394 -139.10% Net commissions 1,213 -16 ns Net income from trading activities 2,501
230 Other costs/revenues -3,108 83,210 -103.74% Total income -2,727 81,800 -103.33% Net income from financial operations -2,727 81,800 -103.33% Net income from financial and insurance operations -2,727 81,800 -103.33% Operating costs -15,858 16,555 -195.79% Profit (loss) from continuing operations before tax -18,585 98,355 -118.90%
2. SECONDARY SEGMENT REPORTING
As a basis for secondary segment reporting, the Gruppo BPI has chosen to break down its results by Geographical Area. The Gruppo BPI is present over almost all of the domestic market with a particular concentration in centre north areas. The identified segments are therefore: Italy, Abroad.
The legal entities Banca Pop. di Lodi Capital Company L.L.C, Banca Pop. di Lodi Capital Company II L.L.C, Banca Pop. di Lodi Capital Company III L.L.C, Italfortune International Advisor S.A., Bipielle Bank (Suisse) S.A., Bipielle International Holding S.A. and Bipielle International U.K. S.A. contribute to the result of the "Abroad" segment.
The remaining legal entities belong to the "Italy" segment. Italy Abroad Total Group Net interest income 876,037 -35,937 840.100 Total income 1,523,842 -23,104 1.500.738 Net income from financial operations 1,091,087 -22,817 1.068.270 Net income from financial and insurance operations 1,091,087 -22,817 1.068.270 Other operating costs -899,878 -25,828 -925.706 Profit (loss) from continuing operations before tax 191,209 -48,645 142.564
231 PART E – INFORMATION ON RISKS AND ON THE RELATED HEDGING POLICIES
This section contains information on the risk profiles relating to credit risk, market risks (interest rate, price, and exchange rate risks), liquidity risk and operational risks.
SECTION 1 – BANKING GROUP RISKS
1.1 CREDIT RISK Qualitative information
1. General aspects
On the basis of the 2006-2008 3-Year Business Plan, with the indicators resulting from the Banca d’Italia’s inspection of the Parent Bank, and in the context of the guidelines of the Credit Policy approved by the BPI Board of Directors, the Group’s credit policy has focused on Banca Popolare’s traditional activities, oriented towards families and small and medium-sized companies.
To this end a strategy of renewal of operating support to credit processes has been adopted.
Streamlining and reorganisation measures have been implemented in a pragmatic and commercially flexible manner, in line with Basilea 2 requirements, with the objective of achieving a progressive distribution of credit and reducing the relevant risk levels.
Credit management has accounted for a downward trend in the level of concentration and amount of loans granted, always subject to selective valuation methods based on a close analysis of the repayment capacity and resources of individual counterparties.
The following operational parameters have been adopted for sectoral credit policies: maintenance of exposure to public authorities, large companies and non-resident entities and an increase in small and medium-sized companies and producer and consumer households.
2. Credit risk management policies
Organisational aspects
The organisational structure of credit management has been reassessed: at the head is the Credit and Finance Management Team, which implements credit policy and strategies through the Group Credit Division, which in turn is organised into four divisions that supervise the Valuation and disbursement of Banca Popolare Italiana Credit, Valuation of Group Loans, Monitoring of Loans disbursed, compilation of the Credit Bureau register, and the components of the General Register.
In order to improve service levels (Management – Network – Clients), a new Commercial Network model has been introduced which divides the Regional Headquarters into Commercial Zones, grouping together a wider network of branches and combining client management functions with fund managers specialising in each commercial segment, from private individuals-families, to small and medium-sized enterprises, and up to corporate enterprises and large corporations.
Executive Bodies at Head Office have been restructured to perform a more collective role in efficiently supporting to the new commercial organisation and provide sound and prudent credit management, while ‘Credit Laboratories’ have been introduced into the Retail Banking Network to provide specialised support for Commercial Zones, Branches and Fund Managers in the preliminary phase of examination of credit proposals and first-level monitoring of disbursed loans.
A comprehensive training programme has been introduced, which aims to foster the creation of a unified credit culture throughout the Commercial Network structure and develop sufficient in-depth specialist expertise at the fundamental organisational junctures of the loan process.
232 Credit risk supervision is carried out, under the auspices of the Credit Department, by the Credit Monitoring Division which uses its resources both at the General Management level and in the various Regional Headquarters that make up the territorial structure of the parent bank.
The Credit Monitoring Division comprises the following Functional Units:
• Support Office for Management of Problem Loans;
• Loan Trends Monitoring Office;
• Group Loans Monitoring Office.
The functions that they perform are as follows:
• identifying risk indicators to be employed in the provision, management and monitoring of loans;
• defining methods and gathering information for analyses of the quality of the loan portfolios throughout the entire Banking Group in order to detect trends in portfolio risks;
• Evaluating and optimising methods for limiting loan risks;
• monitoring the overall performance of loan portfolio quality by identification and systematic supervision of trends in inherent risk indicators;
• preventing anomalous situations in loans granted by systematic gathering and interpretation of all necessary data;
• identifying greater risk positions and, within the limits of its powers, taking action or proposing actions to superior bodies , with independent authority with regard to re-entry plans and designation of problem or non-performing loans;
• Supervising specific anomalous items individually: restructured loans; interbank agreements, financial restructuring plans,
• providing branches, banks and group companies with assistance on client positions that may adversely affect the risk ratings;
• Ensuring uniformity and coherence in the categorisation of common positions with other banks and group companies and assessment of the relevant implementation measures;
• Developing training and educational courses in collaboration with the competent departments of Personnel Department, with a view to continuously updating skills in managing problems of credit risk.
Management, measurement and control systems
Prudent loan disbursement evaluation policies are associated with constant monitoring of the credit quality of all counterparties in order to identify risk situations as promptly as possible and enable the necessary actions to be taken to prevent the onset of more critical situations.
In addition to the refinement of assessment of evaluative criteria for management of Credit risk and policies for commercial diversification of loan clients, constant and detailed control of the loan portfolio has been achieved through the systematic use of the automatic risk analysis procedure shared at Group level, called Credit Position Control (CPC), which is dedicated to monitoring risks for loans that are classified as performing.
Management, measurement and control systems
Prudent loan disbursement evaluation policies are associated with constant monitoring of the credit quality of all counterparties in order to identify risk situations as promptly as possible and enable the necessary actions to be taken to prevent the onset of more critical situations.
233 In addition to the refinement of assessment of evaluative criteria for management of Credit risk and policies for commercial diversification of loan clients, constant and detailed control of the loan portfolio has been achieved through the systematic use of the automatic risk analysis procedure shared at Group level, called Credit Position Control (CPC), which is dedicated to monitoring risks for loans that are classified as performing;
The credit risk control system is based on analysis models that use internal and external information sources to highlight anomalies detected at the following levels:
• system (source: Credit Bureau); • operations internal to the Bank (source: procedures of IT subsystems );
• prejudicial actions (source: Prejudicial Events procedure), which, when analytically assessed by the relevant organizational structure, enables the most appropriate corrective action to be adopted in order to correct anomalies.
The Credit Position Control analysis procedure enables containment and settlement of risk positions by identifying persistently overdrawn client current accounts and loan repayments outstanding by more than 180 days.
Credit risk mitigation policies
During 2006 particular attention has been focused on encouraging the Commercial Network to prioritise the use of operational-type credit lines, characterised by a lower level of risk and greater propensity to generate related workflow due to their position in corporate financial circuits between revenue from clients and payments to suppliers. This trend has been consolidated in the preference given to self-liquidating lines and loan liquidation to support the operating cycle of small and medium-sized enterprises, and medium-long term lines supporting the SME investment cycle and family home investments. Market pressure to support up to 100% of the cost of family home investments has been accommodated by adding a guarantee from a leading insurance company, limited to 20% of the debt, to the mortgage agreement.
The containment of purely financial lines is evident in the requirement that these positions be supported by collateral or personal guarantees.
Agreements with first and second level Underwriting Syndicates have been redefined and implemented in support of loans to small and medium-sized enterprises. A risk hedging agreement has been initialled with Medio Credito Centrale for medium and long term investment loans granted to small and medium-sized enterprises.
A review has commenced of all contracts involving personal guarantees and pledges of collateral in order to bring the contents into line with the most recent case law.
Impaired financial assets
Classifications of non-performing positions are made according to the gravity of the anomaly detected, in compliance with both International Accounting Standards and regulations and instructions issued by the Banca d'Italia.
In addition to the above information, which refers to the commercial banking activities of the main banks of the group, the most significant risk management guidelines for consumer credit and merchant banking activities, carried out respectively by the subsidiaries Bipitalia Ducato an Efibanca are set out below.
With respect to consumer credit, the main risk factors in granting credit can be associated with the bodies that the enterprise has relations with in the performance of its activities: clients and
234 approved dealers.
Advanced instruments for assessment of applying clients are prepared from the preliminary phase of loan applications. Both scoring instruments and assessments of the probability of default (PD) and loss given default (LGD) have been fully operational since 2004, allowing efficient selection of new clients.
The extensive use of information already available to the firm or originating from Credit Bureaus available on the market enables important indicators to be obtained on the prior conduct of the applicant in over 90% of positions under assessment. Anti-fraud instruments are also made available by Credit Bureaus during the preliminary phases of financing.
The overall supervision of credit risk at the application stage is carried out by the Central Loan Disbursement Department, which has corresponding structures in each of the Regional Headquarters. The main function of this office is to carry out risk assessment and control with advanced statistical analysis instruments and to prepare regulatory and operational interventions for credit management.
All the company’s structures, each within the limits of its powers, are involved in monitoring the risk performance associated with loan-disbursing entities: partners, agents, subsidiaries, etc.
The technical and statistical instruments available to the competent bodies provide a summarised view of performance (indicators), or detailed information on individual impaired positions.
Continuous monitoring and recovery interventions on positions that show arrears in payments are the responsibility of the Loan Management and Monitoring Department, which features internal structures that specialise in recovering loans at the Regional Headquarters of the company, and external structures for the phone collection and home recovery phases.
Form an operational standpoint, automatic IT instruments working within the general procedures of the IT system enable each management body to be notified of any overdue position occurring within its own area of competence.
Overdue positions are subject to telephone or letter notification, or direct contact at domicile on the basis of a “standard procedure” for treatment of positions to be recovered as set out in the relevant manual of credit recovery.
Qualified personnel are responsible for carrying out specific analyses of interventions or managing legally disputed positions. Ad hoc statistical instruments allow continuous monitoring of recovery performance for each entity or category of positions managed.
Credit risk control and default detection over the life of loans is fundamental for the proper functioning of the company. The Loan Management and Monitoring Department has developed appropriate loan control and assessment procedures that are based on three criteria:
- analysis of the performance of loans over time;
- historical assessment of the results of recovery actions;
- attribution of the writedowns for loan segments.
The entire loan portfolio is divided into homogeneous categories of risk types on the basis of the technical form of the loan (credit card or consumer credit), the number of instalments in arrears and whether or not it has been placed in default or acceleration clauses activated.
Positions with over ten unpaid instalments or, regardless of the number of unpaid instalments, those that have been placed in default or for which acceleration clauses have been activated are classified as non-performing and further classified taking account of the type of action taken by credit recovery operators. The purpose of this further subdivision is to form homogenous classes
235 on the basis of the level of credit risk: around thirty classes of non-performing positions are formed for consumer credit, and another thirty for credit card positions.
Transfers between classes are possible for positions that have not reached the default or activation of acceleration clause phases. The mechanism applied provides for coherent monitoring of the class that corresponds to the number of instalments in arrears at the time of assessment.
Each risk class is given a percentage writedown, determined with reference to company precedents, maintaining constant control of losses recorded in various categories of loans between the commencement of activities and the present.
Finally, with regard to the merchant banking activities of the subsidiary Efibanca, in view of the type of transaction which is typically with corporate clients, the decision-making process for loans is based on a complete analysis of the loan, without using credit scoring processes or client segmentation models.
Typical preliminaries consist of a detailed analysis of the debtor and its parent company, its competitive position, guarantees, its business plan and forecasts, carried out on the basis of prudential criteria which are subjected to a sensitivity analysis.
This minimum base may be extended – in form and content – with further analytical elements (technical opinions, segment reporting, etc.) according to the specific features of each type of transaction (shipping, property, leveraged buyouts etc.).
A simplified preliminary process, particularly with regard to forecast analysis, can be used for ‘Sabatini’ transactions of limited amounts.
The Management, Measurement and Control system also provides that loan monitoring and supervision is carried out – within the Loan Department – by a Monitoring and Agency Operating Unit, which is distinguishes between actual Monitoring and Agency activities, the latter being particularly responsible for examination of waivers, covenants and amendments in the context of pooled transactions. Credit quality assessment is carried out by means of 2 procedures, the first automatic and the second of an analytical and selective nature:
• automatic assessment: The Credit Position Control (CPC) system allows the Parent Bank to provide assistance to retail banks. An early warning system that analyses problem creditors on the basis of a statistical analysis of the internal and external database of the Credit Bureau;
• analytical assessment: acquires and examines the latest financial statements and other preliminary information. Clients with original debts of €1,000,000 or more, all of which relate to leading bank transactions, are subject to analysis, while positions referring to public counterparties, bank issues, Sabatini credit limits and foreign transactions are excluded.
With respect to credit risk mitigation techniques, Efibanca uses a detailed system of guarantees that are assessed and valued by computerised resources. In addition to these procedures, attention is drawn to the protection provided in standard precautionary clauses annexed to loan agreements, regarding the preservation of properties, the replenishment of guarantees when decreases in value occur, and the insurance of mortgages properties (with obligations in our favour). Furthermore, where necessary the Monitoring and Agency Operating Unit verifies mortgage and collateral guarantees when re-examining the position.
This monitoring can be supplemented by an updated valuation by a Bank-approved surveyor, both where the counterparty requests a partial release from the guarantee or in some situations (for example some transactions under special supervision) in which the risk profile has deteriorated, making the results of previous surveys obsolete.
The Litigation Committee is responsible for decisions on the extent and timing of loss provisions, and is composed of 8 members: the Chief Executive Officer, the Heads of the Loan Department, the representative of the Group Credit Management Company, the Heads of the Contracts and Credit
236 Management Departments, Loan Management Operating Unit Problem Loan Operating Unit and the Parent Bank’s Head of Group Loans.
On the proposal of the Loan Management and Monitored Risks Operating Unit in relation to restructured positions, and the Group Credit Management Company in relation to non-performing loans, the Litigation Committee, meeting on a quarterly basis, analyses the practices for which, as a result of insufficient guarantees or objective difficulty in recovering the credit, it is advisable to make provision for losses.
237 Quantitative information CREDIT QUALITY A.1 IMPAIRED AND PERFORMING EXPOSURES: VALUES, ADJUSTMENTS, TREND, ECONOMIC AND REGIONAL DISTRIBUTION
A.1.1 Breakdown of financial assets according to portfolios and credit quality (book values)
Banking group Other companies Non- Problem Restructured Expired Other TOTAL performing Country risk Impaired Others loans exposures exposures assets loans 1. Financial assets held for trading 12 3,598,120 3,353 3,601,485 2. Available-for-sale financial assets 1 1,081,275 19,341 1,100,617 3. Held-to-maturity financial assets 83,694 83,694 4. Due from banks 2,936 4,215,809 614,727 4,833,472 5. Customer loans 294,342 407,879 102,978 295,076 42,313 27,587,826 5,493 28,735,907 6. Financial assets at fair value 7. Discontinued operations 242 3,447 112,013 262 115,964 8. Hedge derivatives 102,927 102,927 Total at 31/12/2006 294,342 408,134 102,978 298,523 45,249 36,781,664 643,176 38,574,066 Total at 31/12/2005 300,617 377,399 114,240 385,381 123,297 36,363,418 1,042,211 38,706,563
A.1.2 Breakdown of financial assets according to portfolios and credit quality (gross and net values) Impaired assets Other assets
Gross Specific Portfolio Gross Portfolio Total (net Net exposure Net exposure exposure adjustments adjustments exposure adjustments exposure)
A. Banking group 1. Financial assets held for trading 12 12 3,598,120 3,598,120 3,598,132 2. Available-for-sale financial assets 1 1 1,081,275 1,081,275 1,081,276 3. Held-to-maturity financial assets 83,694 83,694 83,694 4. Due from banks 4,218,824 -79 4,218,745 4,218,745 5. Customer loans 2,076,496 -835,641 -140,580 1,100,275 27,956,919 -326,780 27,630,139 28,730,414 6. Financial assets at fair value 7. Discontinued operations 5,227 -1,538 3,689 112,220 -207 112,013 115,702 8. Hedge derivatives 102,927 102,927 102,927 Total A 2,081,736 -835,641 -142,118 1,103,977 37,153,979 -327,066 36,826,913 37,930,890 B. Other companies included in the scope of consolidation 1. Financial assets held for trading 3,353 3,353 3,353 2. Available-for-sale financial assets 19,341 19,341 19,341 3. Held-to-maturity financial assets 4. Due from banks 614,727 614,727 614,727 5. Customer loans 5,493 5,493 5,493 6. Financial assets at fair value 7. Available-for-sale financial assets 262 262 262 8. Hedge derivatives Total B 643,176 643,176 643,176 Total at 31/12/2006 2,081,736 -835,641 -142,118 1,103,977 37,797,155 -327,066 37,470,089 38,574,066 Total at 31/12/2005 2,119,856 -798,822 -143,397 1,177,637 38,056,316 -527,355 37,528,961 38,706,598
238 A.1.3 Cash and off-balance-sheet exposures to banks: gross and net values
Gross Specific Portfolio Net
exposure adjustments adjustments exposure
CASH EXPOSURES A.1 Banking group a) Non-performing loans b)Problem loans c) Restructured exposures d) Expired exposures e) Country risk 3,015 79 2,936 f) Other assets 6,681,779 6,681,779 Total A.1 6,684,794 79 6,684,715 A.2 Other companies a) Impaired b) Other 614,727 614,727 Total A.2 614,727 614,727 Total A 7,299,521 79 7,299,442 B. OFF-BALANCE-SHEET EXPOSURE B.1 Banking group a) Impaired b) Other 1,089,533 1,089,533 Total B.1 1,089,533 1,089,533 B.2 Other companies a) Impaired b) Other Total B.2 Total B 969,361 969,361
Cash exposures to banks include all financial cash assets, regardless of allocated accounting portfolio: held for trading, available-for-sale, held-to-maturity and loans.
A.1.4 Cash exposures to banks: trend of impaired and "country risk" exposures, gross Non-performing Restructured Expired Problem loans Country risk loans exposures exposures A. Opening gross exposure 668 1,177 - of which: exposures sold but not eliminated B. Increases 2,452 B.1 Inflows from performing exposures 2,452 B.2 Transfers from other impaired exposures B.3 Other increases C. Decreases -668 -614 C.1 Outflows to performing exposures -69 C.2 Write-offs -340 C.3 Collections -489 C.4 Disposals -328 C.5 Transfers to other impaired exposures C.6 Other decreases -56 D. Closing gross exposure 3,015 - of which: exposures sold but not eliminated
239 A.1.5 Cash exposures to banks: trend in gross adjustments Non-performing Restructured Expired Problem loans Country risk loans exposures exposures A. Gross opening adjustments -668 - of which exposures sold but not eliminated B. Increases -79 B.1 Writedowns -79 B.2 Transfers from other impaired exposures B.3 Other increases C. Decreases 668 C.1 Writebacks from valuation C.2 Writebacks from collection C.3 Write-offs 340 C.4 Transfers to other impaired exposures C.5 Other decreases 328 D. Closing gross exposure -79 - of which: exposures sold but not eliminated
A.1.6 Cash and off-balance-sheet exposures to customers: gross and net values
Specific Portfolio Gross exposure Net exposure adjustments adjustments
A. CASH EXPOSURE A.1 Banking group a) Non-performing loans 1,011,294 643,372 73,580 294,342 b)Problem loans 610,186 185,587 16,478 408,121 c) Restructured exposures 109,869 6,891 102,978 d) Expired exposures 350,374 51,851 298,523 e) Country risk 42,313 42,313 f) Other assets 32,984,409 327,492 32,656,917 TOTAL 35,108,445 835,850 469,401 33,803,194 A.2 Other companies a) Impaired b) Other 5,493 5,493 TOTAL A.2 5,493 5,493 TOTAL A 35,113,938 835,850 469,401 33,808,687 B. OFF-BALANCE-SHEET EXPOSURES B.1 Banking group a) Impaired b) Other 4,716,928 4,716,928 TOTAL 4,716,928 4,716,928 B.2 Other companies a) Impaired b) Other TOTAL B.2 TOTAL B 4,716,928 4,716,928
Cash exposures to customers include all financial cash assets, regardless of their allocated accounting portfolio of held for trading, available-for-sale, held-to-maturity or loans.
240 A.1.7 Cash exposures to customers: trend of impaired and "country risk" exposures, gross Non-performing Restructured Expired Problem loans Country risk loans exposures exposures A. Opening gross exposure 927,894 572,193 143,319 475,782 141,313 - of which exposures sold but not eliminated 646 3,697 144,689 B. Increases 1,269,475 550,307 25,631 223,819 12,477 B.1 Inflows from performing exposures 906,080 436,016 17,437 214,883 12,477 B.2 Transfers from other impaired exposures 332,311 72,769 6,695 B.3 Other increases 31,084 41,522 1,499 8,936 C. Decreases -1,186,075 -512,314 -59,081 -349,227 -111,477 C.1 Outflows to performing exposures -62,889 -5,549 -185,954 C.2 Write-offs -280,496 -5,584 -15,266 C.3 Collections -688,603 -144,398 -29,520 -37,274 -111,360 C.4 Disposals -202,532 C.5 Transfers to other impaired exposures -287,136 -5,621 -119,018 C.6 Other decreases -14,444 -12,307 -3,125 -6,981 -117 D. Closing gross exposure 1,011,294 610,186 109,869 350,374 42,313 - of which: exposures sold but not eliminated 29,721 22,047 29,032
A.1.8 Cash exposures to customers: trend in gross adjustments Non-performing Restructured Expired Problem loans Country risk loans exposures exposures A. Gross opening adjustments -627,277 -194,794 -29,079 -90,401 -19,193 - of which exposures sold but not eliminated -319 -14 -1,415 B. Increases -509,831 -68,407 -2,515 -2,336 B.1 Writedowns -284,297 -58,231 -2,353 -2,339 B.2 Transfers from other impaired exposures -53,941 -266 -12 B.3 Other increases -171,593 -9,910 -150 3 C. Decreases 420,156 61,136 24,703 40,886 19,193 C.1 Writebacks from valuation 32,595 5,596 4,174 33,687 46 C.2 Writebacks from collection 76,831 5,065 4,180 195 C.3 Write-offs 280,496 5,593 15,266 178 C.4 Transfers to other impaired exposures 34,168 1,083 17 18,952 C.5 Other decreases 30,234 10,714 7,004 D. Total closing adjustments -716,952 -202,065 -6,891 -51,851 - of which: exposures sold but not eliminated -6,367 -10,959 -2,736
A.2 CLASSIFICATION OF EXPOSURES BASED ON EXTERNAL AND INTERNAL RATINGS
A breakdown of exposures based on external ratings is largely insignificant for the Group, given that its customers principally consist of unrated entities.
With regard to the use of internal credit risk models, internal rating models are currently being developed, aimed at estimating the risk to be associated with each individual relationship by determining a "probability of default". In particular, provision has been made for the implementation of a single model for all the banks of the Gruppo BPI.
241 A.3 DISTRIBUTION OF GUARANTEED EXPOSURES BY TYPE OF GUARANTEE
A.3.1 Cash exposure to banks and guaranteed customers
Personal guarantees Collateral securities Value of Credit derivatives Endorsement credits Total exposure Other Other Securitie Other Other Buildings Other assets Govt public Banks Govt public Banks s entities entities entities entities 1. Exposure to guaranteed banks: 25,755 16 1 25,772
1.1 totally guaranteed
1.2 partially guaranteed 25,755 16 1 25,772
2. Exposure to guaranteed customers: 14,080,663 15,048,252 583,596 1,182,490 2,721 54,797 172,436 11,848,467 42,973,422
2.1 totally guaranteed 9,381,744 14,378,103 336,559 1,046,514 2,721 44,244 154,379 11,469,502 36,813,766
2.2 partially guaranteed 4,698,919 670,149 247,037 135,976 10,553 18,057 378,965 6,159,656
A.3.2 Off-balance-sheet exposures to banks and guaranteed customers
Personal guarantees Collateral securities Value of Credit derivatives Endorsement credits Total exposure Other Other Securitie Other Buildings Other assets Govt public Banks Govt public Banks Other entities s entities entities entities 1. Exposure to guaranteed banks: 60,086
1.1 totally guaranteed
1.2 partially guaranteed 60,086
2. Exposure to guaranteed customers: 1,361,077 3,390 42,468 58,527 34,735 327,886 12,441 418,785 898,232
2.1 totally guaranteed 419,455 3,332 27,846 32,035 309,058 10,944 405,242 788,457
2.2 partially guaranteed 941,622 58 14,622 26,492 34,735 18,828 1,497 13,543 109,775
A.3.3 Cash exposure to banks and guaranteed customers
Guarantee (fair value)
Personal guarantees Collateral securities Credit derivatives Endorsement credits
Total S ec Ba
Value of exposure of exposure Value Buildi Other Amount guaranteed guaranteed Amount uri nk
ngs Banks entities tie s Surplus value, fair guarantees Other assets assets Other s Other entities Other public entities entities public Other entities public Other Financial companies companies Financial Financial companies companies Financial Insurance companies companies Insurance Insurance companies companies Insurance Govts & Central Banks Govts & Central Banks Govts & Central Non-financial companies companies Non-financial Non-financial companies companies Non-financial
1. Exposure to guaranteed
banks;
1.1 over 150% 1.2 between 100% and
150% 1.3 between 50% and
100% 1.4 under 50%
2. Exposure to guaranteed
customers:
2.1 over 150% 300,599 401,739 1,241,308 7,854 736 14 65,569 68,751 12,056 707,632 2,103,920 2.2 between 100% and 82,760 146,148 64,963 11,325 109 97 195 12,827 2,858 85,563 177,937 150% 2.3 between 50% and 123,627 220,594 105,280 8,207 865 5 1,978 18,160 132,435 266,930 100% 2.4 under 50% 486,557 17,554 4,503 4,853 17 52 318 96 5,799 15,638
A.3.4 Off-balance-sheet impaired exposures to banks and guaranteed customers
This category does not exist. The relevant table is therefore omitted.
242 B. CREDIT DISTRIBUTION AND CONCENTRATION
B.1 Distribution of cash and “off-balance-sheet” exposures to customers
Governments and central banks Other public entities Financial companies
Portfolio Portfolio Portfolio Gross Specific Net Gross Specific Net Gross Specific Net value value value exposure adjustments exposure exposure adjustments exposure exposure adjustments exposure adjustments adjustments adjustments
A. Cash exposures A.1 Non- 11 -9 2 performing A.2Problem 4,115 -3,956 159 loans A.3 Restructured
exposures A.4 Expired 129 -9 120 1 1 exposures A.5 Other 2,602,58 2,163,898 -3 2,163,895 441,838 -2,600 439,238 2,827,373 -224,785 exposures 8 2,602,74 Total 2,163,898 -3 2,163,895 441,978 -9 -2,609 439,360 2,831,489 -3,956 -224,785 8 B. Off-balance- sheet” exposures B.1 Non- performing loans B.2 Problem
loans B.3 Other impaired assets B.4 Other 129 129 19,685 19,685 937,910 937,910 exposures
Total 129 129 19,685 19,685 937,910 937,910
3,540,65 Total at 31/12/2006 2,164,027 -3 2,164,024 461,663 -9 -2,609 459,045 3,769,399 -3,956 -224,785 8
Insurance companies Non-financial companies Other entities
Portfolio Portfolio Portfolio Gross Specific Gross Specific Gross Specific Net value Net exposure value Net exposure value exposure adjustments exposure adjustments exposure adjustments exposure adjustments adjustments adjustments
A. Cash exposures
A.1 Non- 32 -27 5 499,027 -322,823 176,204 512,224 -320,513 -73,580 118,131 performing A.2 Problem 410,957 -162,078 248,879 195,114 -19,553 -16,478 159,083 loans A.3 Restructured 69,255 -4,288 64,967 40,614 -2,603 38,011 exposures A.4 Expired 1 1 228,068 -33,605 194,463 122,175 -18,237 103,938 exposures A.5 Other 172,961 -85 172,876 16,632,197 -62,754 16,569,443 10,793,948 -37,265 10,756,683 exposures
Total 172,994 -27 -85 172,882 17,839,504 -489,189 -96,359 17,253,956 11,664,075 -342,669 -145,560 11,175,846 B. “Off-balance- sheet” exposures B.1 Non- performing loans B.2 Problem
loans B.3 Other impaired assets B.4 Other 13,487 13,487 3,338,008 3,338,008 407,709 407,709 exposures Total 13,487 13,487 3,338,008 3,338,008 407,709 407,709
Total at 31/12/2006 186,481 -27 -85 186,369 21,177,512 -489,189 -96,359 20,591,964 12,071,784 -342,669 -145,560 11,583,555
243 B.2 Distribution of loans to non-financial companies Branch of economic activity amount Other market services 5,235,482 Commerce, salvage and repair services 2,051,308 Building and public works 2,021,671 Hotels, bars and restaurants 783,442 Agriculture, forestry and fishing products 742,932 Other branches 5,463,229 Total 16,298,064
B.3 Territorial distribution of cash and “off-balance-sheet” exposures to customers (book value) OTHER EUROPEAN ITALY AMERICA ASIA REST OF THE WORLD COUNTRIES Gross Gross Gross Gross Gross Net exposure Net exposure Net exposure Net exposure Net exposure exposure exposure exposure exposure exposure
A. Cash exposures A.1 Non-performing 819,365 265,488 139,280 6,471 52,648 22,382 1 1 A.2 Problem loans 589,915 391,694 20,271 16,427 A.3 Restructured exposures 100,479 96,139 9,390 6,839 A.4 Expired exposures 349,556 297,869 800 640 16 13 2 1 A.5 Other operations 30,456,958 30,156,969 2,384,252 2,364,586 89,923 89,923 41,826 33,989 59,256 59,256
TOTAL A 32,316,273 31,208,159 2,553,993 2,394,963 142,587 112,318 41,826 33,989 59,259 59,258
B. “Off balance sheet” exposures B.1 Non-performing B.2 Problem loans B.3 Other impaired assets B.4 Other exposures 4,764,357 4,764,357 -19,034 -19,034 -25,518 -25,518 -1,246 -1,246 -1,631 -1,631 TOTAL B 4,764,357 4,764,357 -19,034 -19,034 -25,518 -25,518 -1,246 -1,246 -1,631 -1,631 TOTAL (A+B) al 31/12/2006 37,080,630 35,972,516 2,534,959 2,375,929 117,069 86,800 40,580 32,743 57,628 57,627
B.4 Distribution of cash and “off-balance-sheet” exposures to banks OTHER EUROPEAN ITALY AMERICA ASIA REST OF THE WORLD COUNTRIES Gross Gross Gross Gross Gross Net exposure Net exposure Net exposure Net exposure Net exposure exposure exposure exposure exposure exposure
A. Cash exposures A.1 Non-performing A.2 Problem loans A.3 Restructured exposures A.4 Expired exposures A.5 Other exposures 5,955,579 5,955,579 1,257,706 1,257,706 15,471 15,471 70,182 70,103 583 583 TOTAL A 5,955,579 5,955,579 1,257,706 1,257,706 15,471 15,471 70,182 70,103 583 583
B. “Off balance sheet” exposures B.1 Non-performing B.2 Problem loans B.3 Other impaired assets B.4 Other exposures 899,385 899,385 186,483 186,483 108 108 2,894 2,894 663 663
TOTAL B 899,385 899,385 186,483 186,483 108 108 2,894 2,894 663 663 TOTAL (A+B) at 31/12/2006 6,854,964 6,854,964 1,444,189 1,444,189 15,579 15,579 73,076 72,997 1,246 1,246
B.5 Major risks (according to supervisory regulations)
Description Amount a) sum 1,454,534 b) number 2
244
245 C SECURITISATION AND ASSET TRANSFER TRANSACTIONS
C.1 Securitisation transactions
Qualitative information
In recent years the securitisation instrument has become a strategic channel for deposits in the context of the plan of action established to satisfy Group financial requirements.
The main objectives of current Group operations in the securitisation market are the obtention of significant medium-long term deposits at competitive cost, together with the release of assets for use in new investment operations.
To this end, the Group has established a structure within the Parent banks’ Finance Division which independently structures securitisation transactions on its own income.
The collateral portfolios of transactions made are subject to constant monitoring through the production of monthly and quarterly reports indicating the performance of capital and interest revenue and the status of loans.
In order to immunise the vehicle and therefore investors from the rate risk inherent in the collateral portfolio, an interest rate Swap contract with the back to back market is stipulated for each operation with the Parent bank BPI.
1) Assignment without recourse of non-performing loans to Maja Finance Srl and Teseo Finance Srl
During the year, the Group concluded two assignments of non-performing loans as part of two securitisation transactions carried out according to Law No. 130 of 30 April 1999.
The assignments were concluded in bulk pursuant to Articles 1 and 4 of Law 130/1999, with economic effects to commence from 1 January 2006, and involve for the Banca Popolare Italiana Group the real and definitive transfer of credit risks connected with the assigned items, without requiring any further intervention on the part of the Group.
The portfolio was acquired by Maja Finance Srl and Teseo Finance Srl, companies established pursuant to Law 130/1999.
Following the assignment without recourse of the loans, the Group Banks that played “originator” roles have no residual risk exposure from the transaction. In fact, the total absence of involvement and risks regarding the operation enables them not to proceed to “recognition” of the assigned loans, which have been fully removed from the balance sheet.
The operation is in line with the objectives established in the Group’s 2006-2009 Business Plan of improving the quality of assets, reduction of the risk profile, and strengthening Group capital to support the planned operational growth. Specifically, the operation significantly reduces the non- performing loans/net loans ratio, facilitating the management of litigation and generating liquidity to allocate to profitable activities.
The transaction was concluded following a competitive bidding process coordinated by Bipielle SGC with the assistance of JP Morgan as financial adviser, KPMG Advisory as operating consultant and Clifford Chance responsible for legal aspects.
The details of the two transactions are set out below:
1.1) Summary table of transaction accounting effects: Gross Gross book accounting Net balance at Transaction Profit/loss from Counterparty balance at balance at 31/12/2005 price transaction 31/12/2005 31/12/2005
246 Maja Finance Srl 740,174,263 351,607,622 115,505,736 188,100,000 66,381,280 Teseo Finance Srl 164,177,404 121,408,932 93,428,725 97,000,000 2,310,116 TOTAL 904,351,667 473,016,554 208,934,461 285,100,000 68,691,396
The profit/loss from the assignment includes the contractually established reconveyance of proceeds.
247 1.2) Distribution of securitisation activities by regional headquarters: a) Counterparty Maya Finance Srl: North Centre South & Islands Abroad TOTAL Geographical area (data in Euro/000) Gross Net Gross Net Gross Net Gross Net Gross Net balance balance balance balance balance balance balance balance balance balance Gruppo Banca Popolare 170,889 55,871 97,275 29,790 83,397 29,842 46 2 351,608 115,506 Italiana
b) Counterparty Teseo Finance Srl: North Centre South & Islands Abroad TOTAL Geographical area (data in Euro/000) Gross Net Gross Net Gross Net Gross Net Gross Net balance balance balance balance balance balance balance balance balance balance Banca Popolare Italiana 57,363 46,369 39,667 31,823 20,483 13,455 3,896 1,782 121,409 93,429
1.3) Breakdown by sectors of economic activity: a) Counterparty Maya Finance Srl: Branch of economic activity GROSS ACCOUNTING NET BALANCE (data in Euro/000) BALANCE Other financial intermediaries 1,155 461 Banks 668 Financial auxiliaries 1,469 343 Households 10 2 Consumer households 76,232 26,151 Productive households 56,017 21,192 Private companies 166,124 51,226 Public companies 1,587 31 Not-for-Profit Organisations 823 281 Other non-financial quasi-corporations 28,289 9,853 Craft non-financial quasi-corporations 18,871 5,930 Non-Financial Companies 34 Unclassifiable and unclassified units 329 36 TOTAL Maya 351,608 115,506
b) Counterparty Teseo Finance S.r.l.: GROSS ACCOUNTING Sector of economic activity NET BALANCE BALANCE Consumer households 35,308 30,229 Other financial intermediaries 4,062 1,782 Financial auxiliaries 278 274 Unclassifiable and unclassified units 18 10 Productive households 16,691 12,505 Private companies 49,624 36,426 Other non-financial quasi-corporations 10,221 7,783 Craft non-financial quasi-corporations 5,207 4,420 TOTAL TESEO 121,409 93,429
2) Securitisation of non-performing loans - S.P.V. Tiepolo Finance
During the second half of 2000, some Group banks carried out a securitisation transaction involving non-performing mortgage and ordinary loans, under the provisions of Law No.130 of April 30, 1999.
248 In particular, on December 30, 2000, some Banks assigned non-performing loans to a vehicle company, Tiepolo Finance S.r.l., incorporated pursuant to Art. 1 of Law no. 130/99 and entered on the list referred to in Art. 107 of Legislative Decree no. 385 of September 1, 1993. The Parent Bank acquired control of the vehicle company in the first half of 2001.
The vehicle company financed the acquisition of the loans by issuing notes belonging to three classes: A, B and C.
The characteristics of the three types of notes issued are as follows:
1) Class A notes (senior notes): floating-rate bonds (6-month Euribor plus an annual spread of 0.58%) with a value of €75 million, which were given the following ratings: AAA (Fitch) and Aaa (Moody's);
2) Class B notes (mezzanine notes): fixed-rate bonds (5.5% p.a.) with a value of €30 million, which were given the following ratings: AA- (Fitch) and Aa3 (Moody’s);
3) Class C notes (junior notes): floating-rate bonds (6-month Euribor plus an annual spread of 0.40%) with a value of €50.5 million, subscribed upon issue by the originators.
Class A and Class C notes were issued at par, while Class B notes had an issue discount of 0.43%. Class A and Class B notes are listed on the Luxembourg Stock Exchange.
The various types of notes were allocated a different level of subordination, which reflects the priority they have in the payment of capital and interest. For example, Class A notes have priority over Class B notes, while Class C notes have the greatest degree of subordination.
As a further guarantee for the payment of capital and interest on the Class B notes, the Parent Bank granted a limited-recourse mortgage in the form of a securities loan for €33 million. Third parties granted the vehicle company a €12 million credit line, which the Bank guaranteed by granting a subordinated loan in the form of a securities loan for €13.2 million. The other Group banks that took part in the transaction, which are now merged into the Cassa di Risparmio di Lucca Pisa e Livorno, agreed to contribute, pro-rata, to the expenses that arose from the use of the guarantees.
Throughout the entire transaction, the Parent Bank also played the role of Servicer, responsible for debt recovery and collection, as well as that of Cash Manager.
The risks remaining with the Banks as a result of the transaction described above are therefore the subordinated bonds (Class C notes) and the pro-rata contribution to expenses arising from the use of the guarantees that assist the granting of the subordinated loan and the guaranteed recourse mortgage.
The Banks have subscribed the Class C (junior) notes pro rata for the entire amount of €50.5 million. In accordance with international accounting standards, these notes are classified under "Available-for-sale financial assets".
Based on the overall outcome of the securitisation transaction, in relation to the Class C notes in the portfolio, the entire value of the note was written down in previous years as was the amount of the coupons and interest accrued at year-end.
The main characteristics of the loans transferred are as follows (figures in euro):
Table 1 BREAKDOWN OF LOANS BY ORIGINATOR (changes)
Value on % Portfolio at Value on % Portfolio at Bank 31/12/2006 31/12/2006 31/12/2005 31/12/2005 Banca Popolare Italiana 13,273,479 39.46% 20,464,190 42.15% Cassa di Risparmio di Lucca Pisa Livorno 20,366,770 60.54% 28,088,396 57.85% Total 33,640,249 100.00% 48,552,586 100.00%
249
The overall cost of purchasing the loans was €153,463,469, with €33,640,249 remaining on December 31, 2006.
Table 2 CLASSIFICATION OF LOANS TRANSFERRED BY TECHNICAL FORM (trend)
Value on % Portfolio at Value on % Portfolio at Bank 31/12/2006 31/12/2006 31/12/2005 31/12/2005 Current accounts 12,322,366 36.63% 17,009,518 35.03% Ordinary mortgages 18,660,575 55.47% 27,369,214 56.37% Ordinary loans 2,356,707 7.01% 3,722,110 7.67% Portfolio 300,600 0.89% 451,744 0.93% Total 33,640,248 100.00% 48,552,586 100.00%
3) Securitisation of home mortgage loans - S.P.V. Bipitalia Residential
In the first half of 2004 and in accordance with Law no. 130/99, some Banks carried out a securitisation of loans granted in the technical form of home mortgage loans, and classified as performing loans.
In more detail, in May the Group Banks transferred at nominal value mortgages totalling around €1,002 million to the vehicle company Bipielle Residential which financed the purchase by issuing notes.
The notes, issued on June 30, 2004, are divided into 5 different classes: A1, A2, B, C and D and have the following characteristics:
1) Class A1 notes (senior notes): bonds with return linked to the Euribor plus 10 basis points per annum, issued at par in the nominal amount of €230,000,000, to which the following ratings were assigned: AAA (Fitch) and Aaa (Moody's);
2) Class A2 notes (senior notes): bonds with return linked to the Euribor plus 17.5 basis points per annum, issued at par in the nominal amount of €733,000,000, to which the following ratings were assigned: AAA (Fitch) and Aaa (Moody's);
3) Class B notes (mezzanine notes): bonds with return linked to the Euribor plus 30 basis points per annum, issued at par in the nominal amount of €16,000,000, to which the following ratings were assigned: AAA (Fitch) and Aa2 (Moody's);
4) Class C notes (mezzanine notes): bonds with return linked to the Euribor plus 80 basis points per annum, issued at par in the nominal amount of €19,000,000, to which the following ratings were assigned: BBB (Fitch) and Baa1 (Moody's);
5) Class D notes (junior notes): bonds with return equal to 2 per cent per annum plus any "Additional Return", issued at par in the nominal amount of €4,500,000, subscribed pro-rata by the transferees.
With the exception of the first two classes, which have an equal degree of subordination, the other bonds have a gradually increasing degree of subordination in the order of payments.
As part of the transaction, the Parent Bank also granted a limited-recourse subordinated loan of €12 million as a liquidity reserve. The Junior notes were fully subscribed by the transferor banks on the basis of loans transferred
In the securitisation transaction, the Parent Bank also acts as Servicer of the portfolio and Administrative Servicer, with other group banks acting as Sub-Servicer and Bipielle S.G.C. as Special Servicer for insolvent loans.
250 The transaction was completed in 2 stages: the first on May 17, 2004 with the signing of contracts for sale without recourse of a portfolio of financial loans in the form of a mortgage loan. Subsequently on June 30, 2004 the bonds that financed the purchase of the loans were issued.
The transferors are: Banca Popolare Italiana Soc. Coop., Cassa di Risparmio di Lucca Pisa Livorno S.p.A and Banca Popolare di Crema S.p.A.
At the same time as the issue of notes, the company concluded a swap agreement with Dresdner Bank AG for the purpose of hedging the mismatching risk between the rates of securitised loans and yields of the bonds issued.
As a result of the introduction of international financial reporting standards, as provided for in SIC 12, the assets transferred are entered in these financial statements among "Customer loans: assets sold but not eliminated”.
The main characteristics of the loans transferred are as follows (figures in euro):
Table 1 BREAKDOWN OF LOANS BY ORIGINATOR (changes)
Value on % Portfolio at Value on % Portfolio at Value on % Portfolio at Bank 17/05/2004 17/05/2004 31/12/2005 31/12/2005 31/12/2006 31/12/2006 Banca Popolare Italiana 576,175,759 57.47% 457,548,414 57.80% 392,736,727 58.27% Cassa di Risparmio di Lucca Pisa Livorno 375,327,384 37.44% 295,600,232 37.34% 250,222,122 37.12% BP Crema 50,986,641 5.09% 38,501,431 4.86% 31,053,440 4.61% Total 1,002,489,784 100.00% 791,650,077 100.00% 674,012,289 100.00%
The overall cost of purchasing the loans was €1,002,489,784, with €674,012,289 remaining on December 31, 2006.
251 Table 2
CLASSIFICATION OF LOANS TRANSFERRED BY TYPE OF MORTGAGE
Value on Bank % Portfolio Number of loans % of the Total 17/05/2004 Indexed rate 923,078,363 92.1% 16,043 87.8% Fixed rate 74,172,998 7.4% 2,136 11.7% Mixed rate 5,238,423 0.5% 91 0.5% Total 1,002,489,784 100.00% 18,270 100.00%
The transaction started during 2004 and was completed in the same year with the issue of the notes that financed the purchase of the loans. As at December 31, 2006, collections show a regular trend, the percentage of early repayments is normal, as is the case for mortgages with late payments, while problem and non-performing loans are those shown in the table below: Non-performing % non- Problem loans as % problem loans Bank loans at performing loans at 30/09/2006 as at 30/09/2006 31/12/2006 as at 31/12/2006 Banca Popolare Italiana 2,216,144 62.80% 2,571,340 63.08% Cassa di Risparmio di Lucca Pisa Livorno 1,066,930 30.24% 1,241,482 30.46% Banca Popolare di Crema 245,679 6.96% 263,287 6.46% Total 3,528,753 100.00% 4,076,109 100.00%
4) Securitisations of home and commercial loans in "warehouse" phase - S.P.V. Bipitalia Residential
In 2005 some Group banks assigned a number of commercial and home loans in order to securitise the respective assets. The transactions took place in successive stages and allowed two portfolios to be created during the year. These are currently financed by the issue of unrated notes which were repurchased by Banca Popolare Italiana Soc. Coop, which then proceeded to repurchase them with intermediaries outside the Group.
The value of the loans transferred is shown in the following tables:
Table 1 BREAKDOWN OF LOANS BY ORIGINATOR (changes)
Residential 2: home mortgages 2005
Cumulative % of portfolio Value on % Portfolio on Value on % Portfolio on Bank transfer value transferred 31/12/2005 31/12/2005 31/12/2006 31/12/2006
Banca Popolare di Crema 53,329,085 4.78% 50,227,835 4.76% 43,562,776 4.71% Banca Popolare di Cremona 112,915,474 10.11% 108,734,335 10.30% 97,213,964 10.52% Banca Popolare Italiana 614,139,646 55.00% 578,945,779 54.86% 503,124,230 54.44% Cassa di Risparmio di Lucca Pisa Livorno 336,223,652 30.11% 317,496,498 30.08% 280,267,943 30.33% Total 1,116,607,857 100.00% 1,055,404,447 100.00% 924,168,913 100.00%
Residential 3: commercial mortgages 2005
Cumulative % of portfolio Value on % Portfolio on Value on % Portfolio on Bank transfer value transferred 31/12/2005 31/12/2005 31/12/2006 31/12/2006
Banca Popolare di Crema 113,784,515 13.13% 105,540,635 12.95% 80,354,227 11.91% Banca Popolare di Cremona 48,210,725 5.56% 46,669,710 5.73% 33,267,870 4.93% Banca Popolare Italiana 270,175,013 31.18% 256,935,473 31.52% 215,586,036 31.94% Cassa di Risparmio di Lucca Pisa Livorno 434,293,511 50.13% 405,959,439 49.80% 345,737,120 51.22% Total 866,463,764 100.00% 815,105,257 100.00% 674,945,253 100.00%
252 As at December 31, 2006, collections show a regular trend, the percentage of early repayments is normal, as is the case for mortgages with late payments, while problem and non-performing loans are those shown in the table below.
253 Residential 2: home mortgages 2005: impaired loans Non- % non- Non- % non- Problem loans % problem Problem loans % problem performing performing performing performing Bank as at loans as at as at loans as at loans as at loans as at loans as at loans as at 31/12/2005 31/12/2005 31/12/2006 31/12/2006 31/12/2005 31/12/2005 31/12/2006 31/12/2006 Banca Popolare di Crema 141,999 8.10% 601,295 9.43% Banca Popolare di Cremona Banca Popolare Italiana 288,850 61.45% 1,369,333 78.08% 337,857 100% 2,414,700 37.87% Cassa di Risparmio di Lucca 181,212 38.55% 242,278 13.82% 3,359,940 52.70% Pisa Livorno Total 470,062 100.00% 1,753,610 100.00% 337,857 100.00% 6,375,935 100.00%
Residential 3: home mortgages 2005: impaired loans Non- % non- Non- % non- % problem % problem performing performing performing performing Problem loans Problem loans Bank loans as at loans as at loans as at loans as at loans as at loans as at as at 31.12.05 as at 31/12/06 31.12.05 31/12/06 31.12.05 31.12.05 31/12/06 31/12/06 Banca Popolare di Crema 59,818 37.64% 446,076 5.57% 59,277 1.96% Banca Popolare di Cremona 87,437 1.09% 0.00% Banca Popolare Italiana 4,626,050 57.81% 442,714 14.63% Cassa di Risparmio di Lucca 99,469 62.36% 2,842,089 35.52% 2,524,895 83.41% Pisa Livorno Total 159,287 100.00% 8,001,652 100.00% 3,026,886 100.00%
For the duration of the "warehouse" period, a Total Return Swap contract has been drawn up between the Parent bank and the originators (nominal value equal to the relevant amount of transferred loans) that provides for the repayment to the originators of the performance of the securities against the floating refinancing rate.
Additionally, the originators agree to buy back the transferred assets if, at the end of the “warehouse” period, the conditions for completing the transaction by issuing the aforementioned rated notes are not fulfilled.
As a result of the introduction of international financial reporting standards, the TRS stipulated between the parent bank and the other group banks were destructured, revealing the economic essence of the transaction, i.e. the purchase of securities financed by the counterparty.
The securities issued in respect of the original transfer of loans that were then partially cancelled are therefore recorded in the various banks as "financial assets held for trading", according to the provisions of SIC 12, as a balancing entry to the assets transferred which were recorded in the previous years as “Customer loans: assets sold but not eliminated”.
5) Securitisation of non-performing loans - S.P.V. Tiepolo Finance 2
During 2002, Bipielle Società di Gestione del Credito carried out a securitisation transaction involving non-performing mortgage and ordinary loans, under the provisions of Law no.130 of April 30, 1999.
Specifically, during 2002, some Group banks of the assigned non-performing loans to BPL Sgc, who on 30 December assigned them to a vehicle company, Tiepolo Finance 2 S.r.l., established pursuant to Article1 of Law 130/99 and registered in the list as established by Article 107 of Legislative Decree No. 385 of 1 September 1993.
The vehicle company financed the acquisition of the loans by issuing notes belonging to four classes: A, B, C and D.
254 The characteristics of the four types of notes issued are as follows:
1. Class A notes (senior notes): floating-rate bonds (3-month Euribor plus a spread of 1.15%) with a value of €170,000,000, which were rated as follows: AA (Fitch) and Aa2 (Moody's);
2. Class B notes (senior notes): floating-rate bonds (3-month Euribor plus a spread of 1.85%) with a nominal value of €150,000,000, which were rated as follows: A- (Fitch) and A2 (Moody's);
3. Class C notes (mezzanine notes): fixed-rate bonds (7% p.a.) with nominal value of €151,000,000 which were not given any rating;
4. Class D notes (junior notes) fixed-rate bonds (2% p.a.) with nominal value of €150,030,000 which were not given any rating.
The Junior notes were fully subscribed by the banks that were the original holders of the securitised loans.
All the notes issued are limited-recourse on the loans acquired on other rights connected to any supplementary guarantees formed to support the transaction.
The unlisted ‘Class D’ junior notes issued by Tiepolo Finance II Srl, were subscribed by the Parent bank Banca Popolare Italiana and other Group banks who were originators of the transaction.
The transaction also involved the issue of €151 million "Class C" (mezzanine) notes with a lower degree of subordination compared with the "Class D" notes in the portfolio. The notes are in the portfolio of the Parent bank.
The payment of the coupon on such notes, which has priority over repayment of capital, is however subject to the full repayment of the senior notes.
As at December 31, 2006, these notes and the Class D notes were entered among "Available-for- sale financial assets".
As an additional credit enhancement instrument serving the securitisation transaction, the Parent bank provided a liquidity line up to a maximum of €90 million in order to guarantee, for the issuer of the Notes, the necessary liquidity to enable the vehicle to meet the obligations for the Senior class notes (Class A notes worth €170 million and Class B notes worth €15 million).
The main characteristics of the loans transferred are as follows (figures in euro):
Table 1 BREAKDOWN OF LOANS BY ORIGINATOR (changes)
Value on % Portfolio on Value on % Portfolio on Bank 31/12/06 31/12/06 31/12/05 31/12/05 Banca Popolare Italiana 77,621,655 61.72% 104,309,678 61.90% Efibanca 17,612,269 14.01% 23,216,646 13.78% CR Lucca Pisa Livorno 28,765,449 22.88% 38,280,544 22.72% Banca Popolare Mantova 34,095 0.03% 59,819 0.04% Banca Popolare Crema 1,712,555 1.36% 2,650,214 1.56% Total 125,746,023 100.00% 168,516,901 100.00%
The overall cost of purchasing the loans, which had a nominal value of €815,701,783 is of €486,028,574. At 31 December 2006 their residual value was €125,746,023
255 Table 2 CLASSIFICATION OF LOANS TRANSFERRED BY TECHNICAL FORM (TREND)
Value on % Portfolio on Value on % Portfolio on Technical Form 31/12/06 31/12/06 31/12/05 31/12/05 Current Accounts 61,097,566 48.59% 78,781,294 46.75% Mortgage Loans 48,476,254 38.55% 65,134,570 38.65% Ordinary Loans 12,765,875 10.15% 19,782,902 11.74% Portfolio 3,406,328 2.71% 4,818,135 2.86% Total 125,746,023 100.00% 168,516,901 100.00%
Securitised assets underlying the notes generated by the securitisation transaction
The balances, net of adjustments, are indicated below at the date of disposal and at the end of each year. Net value Transfer value 486,029 31 December 2003 427,630 31 December 2004 369,457 31 December 2005 168,516 31 December 2006 125,746
Based on the overall outcome of the securitisation transaction, in relation to the Class D notes in the portfolio, the entire value of the note was written down in previous years as was the amount of the coupons and interest accrued at year-end.
The “mezzanine” notes in the portfolio at 31 December 2006, for a nominal €151 million, were subject to a further adjustment totalling €118, €13.6 million of which was in 2006 and the remainder in previous years.
6) Securitisations of home and commercial loans – S.P.V. Sintonia Finance Srl.
The characteristics of the securitisation transaction carried out in 2002 by the Banca Popolare di Cremona pursuant to Law 130/99 consisting of performing loans secured by mortgages granted to individuals and companies, are described below.
In order to minimise the relevant costs, the transaction was carried out together with Centrobanca S.p.A.
The transaction was arranged with advice from Arca Bim S.p.A, Finanzattiva SIM S.p.A. and Schroder Salomon Smith Barney as Arrangers.
The rating agencies appointed to carry out the due diligence for the transaction were Standard and Poor's and Fitch Ratings.
The securitisation transaction began in the second half of 2002 with the sale without recourse of loans to a specially created vehicle company called Sintonia Finance Srl, of which the Bank holds 5% of the capital, and entered under number 34481 on the general list of financial intermediaries established by Art. 106 of Legislative Decree no. 385/93.
The transfer agreement was signed on December 23, 2002: Sintonia Finance Srl paid Banca Popolare di Cremona, as the transfer price for the portfolio of loans, a sum of €166.919 million, of which €157,520,000 was the nominal value of the loans transferred, and €9,399,000 was the excess spread.
As a further guarantee for the transaction, the vehicle company received a subordinated loan from the originator, the residual value of which was €5,565,000 as at 31 December 2006
256 As a guarantee the successful outcome of the transaction and the repayment of the bonds issued, the originator signed an indemnity and guarantee agreement, releasing the issuer from any risks arising from any lack of requirements for the originally transferred loans and any failure to repay the Junior Notes.
257 The characteristics of the notes issued, in relation to the portfolio of the entire transaction, are as follows: Tranches S&P / Fitch Rating ISIN CODE Amount Senior Notes Class A AAA / AAA XS0163298432 302,790 Senior Notes Class B AA / AA XS0163298515 21,040 Junior Notes Class C1 XS0163325268 9,399 Junior Notes Class C2 XS0163325854 7,984 Totals 341,213
All the notes underlying the securitisation transaction were issued and subscribed on March 14, 2003, within the terms of the termination clause. The Banca Popolare di Cremona fully subscribed to the Junior tranche, totalling €9.4 million, relating to the excess spread, while a portion of €7.9 million was subscribed by Centrobanca S.p.A.
The tranche of Junior notes subscribed by Banca Popolare di Cremona is recorded under trading activities in the financial statement as at 31 December 2006 with a residual value of €6.1 million.
The Banca Popolare di Cremona has assumed the role of servicer for its own securitised loans, by virtue of which it manages, administers and collects the transferred loans and receives a commission of 0.1%, which amounted to €29,203 as at 31.12.2006.
As at December 31, 2006, the portfolio of loans amounted to €72.853 million.
The balances of the transferred loan portfolio, at the date of disposal and at the end of each year, are set out below. Value Transfer value 157,520 31 December 2003 129,880 31 December 2004 112,982 31 December 2005 90,648 31 December 2006 72,853
The assets subject to securitisation are performing loans, problem loans and non-performing loans, according to the following distribution: LOANS Value Non-performing loans 1,558 Problem loans 716 Performing loans 70,579
7) Securitisation with the vehicle DU.CA. SPV
During 2001 the vehicle company Du.Ca. SPV, incorporated pursuant to Art. 1 of Law no. 130 of 13 April 1999 and entered on the list established by in Art. 107 of Legislative Decree no. 385 of September 1, 1993, financed the acquisition of loans originating from special-purpose loans and personal loans, by the issue of notes divided into four classes:
- Class A notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.42%) with a value of €467,280,000, which were given the following ‘Aaa’ (Moody’s) and ‘AAA’ (Fitch) ratings;
- Class B notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.90%) with a value of €25,120,000, which were rated ‘A2’ (Moody’s) and ‘A’ (Fitch);
- Class C notes: floating-rate bonds (3-month Euribor plus an annual spread of 1.80%) with a value of €6,020,000, which were rated ‘Baa2’ (Moody’s) and ‘BBB’ (Fitch);
258 - Class M notes (unrated): fixed-rate bonds (annual 4% plus an Additional Return to be calculated on the basis of the amounts collected) with a value of €5,817,619, fully subscribed by Ducato at the time of issue.
The various types of notes were allocated a different level of subordination, which reflects the priority they have in the payment of capital and interest. In particular, Class A notes have priority over Class B notes, Class B notes have priority over Class C notes and, finally, Class M notes have the highest degree of subordination.
Bipitalia Ducato S.p.A. originator of the transaction carried out monthly alterations to the portfolio until 31 August 2005, according to the trend in collections and in the role of Servicer is responsible for collecting and recovering the transferred loans, on the basis of procedures analysed and shared by the contractual counterparties in the transaction.
The revolving period ended on 31/08/2005 and the operation then entered the redemption period. Collections received since 01/09/2005 are used for repayment of the bonds, in observance of the rights of the Noteholders according to the payment priority order set down in the contracts.
As at 31/12/2006 the portfolio of transferred loans, amounting to €216,367,822.21, comprised 26.99% new car loans, 21.75% used car loans, 20.38% other loans and 30.87% personal loans. 78.92% of the loans originated from the Bipitalia Ducato S.p.A. subsidiaries located in southern Italy and the islands, and the remaining 21.08% originated from Bipitalia Ducato S.p.A. subsidiaries located in northern and central Italy. In terms of the payment types of the transferred loans, 46.85% were by postal payment, and 53.15% were by current account debit.
The transferred loans were not undergone any value adjustment by the vehicle company and Bipitalia Ducato S.p.A. does not have any interests in the vehicle company Du.Ca. S.r.l.
As at 31/12/2006, the total amount of the transferred loans stood at €1,456,264,246.66 and the total default amounts to €56,054,474.13. The level of default reached by the transaction up to that moment is well within the forecasts of default trends. In fact, the First Delinquency Ratio was 5.73%, and the Second Delinquency Ration was 3.03%. As at 31/12/2006 the First Default Ratio and the Second Default Ratio were 3.34% and 3.85% respectively.
The securitised positions produced an additional return of €5.5 million to the income statements for 2006.
8) Securitisation no. 1 with the vehicle Bipielle Consumer
During 2002 the vehicle company BPL Consumer, incorporated pursuant to Art. 1 of Law no. 130 of 13 April 1999 and entered on the list established by in Art. 107 of Legislative Decree no. 385 of September 1, 1993, acquired from Ducato the credits originating from loans special-purpose loans and personal loans by the issue of notes divided into four classes:
- Class A notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.38%) with a value of €470,030,000, which were given the following ‘Aaa’ (Moody’s) and ‘AAA’ (Fitch) ratings:
- Class B notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.80%) with a value of €20,000,000, which were rated ‘A1’ (Moody’s) and ‘A’ (Fitch);
- Class C notes: floating-rate bonds (3-month Euribor plus an annual spread of 1.50%) with a value of €7,000,000, which were rated ‘Baa1’ (Moody’s) and ‘BBB’ (Fitch);
- Junior Class notes (unrated): fixed-rate bonds (annual 4% plus an Additional Return to be calculated on the basis of the amounts collected) with a value of €3,000,000, fully subscribed by Ducato at the time of issue.
259 The various types of notes were allocated a different level of subordination, which reflects the priority they have in the payment of capital and interest. In particular, Class A notes have priority over Class B notes, Class B notes have priority over Class C notes and, finally, Junior Class notes have the highest degree of subordination.
Bipitalia Ducato S.p.A. originator of the transaction, carried out monthly alterations to the portfolio until 10 October 2005, according to the trend in collections, and in the role of Servicer is responsible for collecting and recovering the transferred loans on the basis of procedures analysed and shared by the contractual counterparties in the transaction.
At 10/10/2005 the revolving period ended and the operation then entered the redemption period. Collections received since 11/10/2005 are used for repayment of the bonds, in observance of the rights of the Noteholders according to the payment priority order set down in the contracts.
As at 10 January 2007 the portfolio of transferred loans, amounting to €202,217,327.51, comprised 19.53% new car loans, 32.73% used car loans, 12.49% other loans and 35.25% personal loans. 76.88% of the loans originated from the Bipitalia Ducato S.p.A. subsidiaries located in southern Italy and the islands, and the remaining 23.12% originated from Bipitalia Ducato S.p.A. subsidiaries located in northern and central Italy. In terms of the payment types of the transferred loans, 35.05% were by postal payment, and 64.95% were by current account debit.
The transferred loans did not undergo any value adjustment by the vehicle company and there are no interests in the vehicle company BPL Consumer S.r.l.
Specifically, as at 10/01/2007 total loans transferred by the closing date amounted to €1,246,093,820.13, while the total default on that date amounted to €33,799,488.21. Consequently the level of default reached up to that moment in the transaction is well within the forecasts for default trends, and they are below the maximum threshold for the entire revolving period. At 10/01/2007 the Delinquency Ratio stood at 2.59%, below the maximum threshold of 6%.
The securitised positions produced an additional return of €13.4 million to the income statements for 2006.
9) Securitisation no. 2 with the vehicle Bipielle Consumer
On 29 June 2004, Bipitalia Ducato Spa completed the third revolving securitisation transaction involving a portfolio of performing loans, as the originator, in order to diversify sources of financing, in accordance with the provisions of Law no. 130 of April 30, 1999.
On June 14, 2004, the Company transferred consumer loans with a capital value of €500,998,101.22 million to a vehicle company, BPL Consumer S.r.l., incorporated pursuant to Art. 1 of Law no. 130/99 of 30 April 1999 and entered on the list referred to in Art. 107 of Legislative Decree no. 385 of September 1, 1993. As a result of the proceeds made on the loans involved in the transaction, the Company will, on a half-yearly basis, transfer further loans as contractually agreed for the alteration of the portfolio and as required for the continuation of the transaction. The revolving period of the transaction will end in October 2007.
The vehicle company financed the acquisition of the loans by issuing notes belonging to four classes:
- Class A notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.22%) with a value of €466,400,000, which were given the following ‘Aaa’ (Moody’s) and ‘AAA’ (Fitch) ratings:
- Class B notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.50%) with a value of €29,600,000, which were rated ‘A1’ (Moody’s) and ‘A’ (Fitch);
- Class C notes: floating-rate bonds (3-month Euribor plus an annual spread of 1.00%) with a value of €2,000,000, which were rated ‘Baa1’ (Moody’s) and ‘BBB’ (Fitch);
260 - Junior Class notes (unrated): floating-rate bonds (3-month Euribor plus an annual spread of 1.50% plus an Additional Return to be calculated on the basis of the amounts collected) with a value of €2,950,000, fully subscribed by Bipitalia Ducato S.p.A. at the time of issue.
The various types of notes were allocated a different level of subordination, which reflects the priority they have in the payment of capital and interest. In particular, Class A notes have priority over Class B notes, Class B notes have priority over Class C notes and, finally, Junior Class notes have the highest degree of subordination.
Bipitalia Ducato S.p.A. has also assumed the role of Servicer, responsible for collecting and recovering the loans transferred, on the basis of procedures analysed and shared by the contractual counterparties in the transaction.
As the transaction is of a revolving nature, periodic alterations have been made to the portfolio.
As at 15.12.06 the portfolio of transferred loans, amounting to €499,864,499.51, comprised 8.78% new car loans, 28.81% used car loans, 11.10% other loans and 51.32% personal loans. 62.21% of the transferred loans relate are to residents in southern Italy and the islands, and the remaining 37.79% relates to residents in central and northern Italy. In terms of the payment types of the transferred loans, 36.18 % were by postal payment, and 63.82% were by current account debit.
The percentage composition of the portfolio is in accordance with the conditions set out in the offering circular as set out in the table below: Personal loans Portfolio composition <= 53% Used cars Portfolio composition <= 31% New car Portfolio composition at least 8% Other special-purpose loans Portfolio composition at least 8% Loans originating in southern Italian and island branches Portfolio composition <= 65% Payment by direct debit Portfolio composition at least 60%
The transferred loans have not undergone any value adjustment by the vehicle company and Bipitalia Ducato S.p.A. does not have any interests in the vehicle company BPL Consumer S.r.l.
After the alteration on 15/12/2006, the portfolio amounted to €499,684,500, while the total default at that date stood at €16,730,519.35. The level reached by the Cumulative Default Trigger was 3.34822%, while the maximum threshold provided by the contracts for the period between September 2006 and December 2006 was 4.60%. Consequently the level of default reached until that moment in the transaction is well within the forecasts for default trends, and is below the maximum threshold for the observation period. At 15/12/2006 the Delinquency Ratio Rolling Average stood at 4.83 %, below the maximum threshold of 6%. The Collateral Ratio stood at 99.747%, within the threshold of 95%.
Until this moment in the transaction, the repayment of the ABS securities has not started. This will start in the redemption period, in observance of the rights of the Noteholders according to the payment priority order set down in the contracts.
The securitised positions produced an additional return of €12,600 million to the income statements for 2006.
10) Securitisation no. 3 with the vehicle Bipielle Consumer
In June 2005, Bipitalia Ducato completed a warehouse securitisation transaction involving a portfolio of performing loans, as the Originator, in order to diversify sources of financing, in accordance with the provisions of Law no. 130 of April 30, 1999.
261 On June 19 and 26, 2005, the Company transferred consumer loans with a capital value of €200,079,893.48 to a vehicle company, BPL Consumer S.r.l., incorporated pursuant to Art. 1 of Law no. 130 of 30 April 1999 and entered on the list referred to in Art. 107 of Legislative Decree no. 385 of September 1, 1993. As a result of the proceeds made on the loans involved in the transaction, the Company transferred, on a half-yearly basis, further loans as stipulated in the Framework Agreement for the Transfer of the loans for the alteration of the portfolio. Specifically, three transfers were made: on 15/10/2005 for a value of €100,029,004.22; on 15/04/2006 for a value of €150,033,541.01; and on 15/07/2006 for a value of €160,079,199.44. These transfers are required for the continuation of the transaction and are the instrument through which the portfolio of loans must reach an aggregate value of €500,000,000.00 by the end of the warehouse period. On 19/10/2006 the unrated securities were entirely transferred to a new vehicle company, Ducato Consumer srl, incorporated pursuant to Art. 1 of Law no. 130 of 30 April 1999 and entered in the list established by Art. 107 of Legislative Decree no. 385 of 1 September 1993, which proceed to issue the notes. As in all other public securitisation transactions, the Notes were rated following an analysis by the rating agencies Fitch and Moody’s, and were then placed on the international market. The Notes were then issued on 19 October 2006 for a value of €501,623,000 and the revolving phase commenced.
The Notes are divided into four classes:
- Class A notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.16%) with a value of €461,500,000, Issue Price 100% of the nominal value, which were given the following ‘Aaa’ (Moody’s) and ‘AAA’ (Fitch) ratings:
- Class B notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.30%) with a value of €28,100,000, Issue Price 100% of the nominal value, which were rated ‘A1’ (Moody’s) and ‘A’ (Fitch);
- Class C notes: floating-rate bonds (3-month Euribor plus an annual spread of 0.60%) with a value of €9,050,000, Issue Price 100% of the nominal value, which were rated ‘Baa1’ (Moody’s) and ‘BBB’ (Fitch);
- Junior Class notes (unrated): floating-rate bonds (3-month Euribor plus an annual spread of 1.50% plus an Additional Return to be calculated on the basis of the amounts collected) with a value of €2,973,000, fully subscribed by Ducato at the time of issue.
The various types of notes were allocated a different level of subordination, which reflects the priority they have in the payment of capital and interest. In particular, Class A notes have priority over Class B notes, Class B notes have priority over Class C notes and, finally, Junior Class notes have the highest degree of subordination.
Bipitalia Ducato has assumed the role of Servicer, responsible for collecting and recovering the loans transferred, on the basis of procedures analysed and shared by the contractual counterparties in the transaction.
The risk to the company of the transaction is constantly monitored on the basis of the performance of collections that are accounted for using reporting tools and subjected to specific verification by internationally renowned independent auditors.
The transaction, which was supervised in the role of Arranger by the Banca Popolare Italiana, enabled the company to activate a substantial independent line of credit, in parallel and as an alternative to those already used and in conditions aligned to the market, which is of particular strategic importance in view of the future expansion of loan disbursement
262 In the period between 01/01/2006 and 31/12/2006 the following further loan transfers were made (of which the transfer on 15/10/2006 was the first of the revolving period): Date Amount 15/04/2006 150,033,541,01 15/07/2006 160,079,199,44 15/10/2006 43,184,225,35
From To Capital amount collected in quarter 16/01/2006 15/04/2006 24,590,161,73 16/04/2006 15/07/2006 34,647,472,86 16/07/2006 15/10/2006 43,283,342,00 16/10/2006 15/01/2007 46,692,058,77
The transferred loans have not undergone any value adjustment by the vehicle company and Bipitalia Ducato S.p.A. does not have any interests in the vehicle company BPL Consumer S.r.l.
On 15 January 2007 Defaults amounting to €3,437.49 were declared, with Delinquency loans broken down as follows: Breakdown of securitised loans with over 1 overdue instalment (situation at 15 January 2007) Overdue and Overdue and Total overdue and Capital unpaid capital unpaid interest unpaid 2 overdue instalments 6,106 268 98 366 3 overdue instalments 2,596 168 62 230 4 overdue instalments 1,834 159 59 218 5 overdue instalments 1,039 105 42 147 6 overdue instalments 874 105 39 144 7 overdue instalments 541 75 28 103 8 overdue instalments 9 overdue instalments Total 12,990 880 328 1,208
As at 15 January 2007 the servicing fees received for servicing the transaction amount to €276,247.80.
The securitised positions produced an additional return of €19.364 million to the income statements for 2006.
Quantitative information
C.1.1 Exposures from securitisation transactions broken down by quality of the underlying assets
Cash exposures Guarantees given Lines of credit Quality of underlying Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior assets/Exposures Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net A. With own underlying assets :
a) impaired 151,000 33,065 200,530 136,200 128,077 b) other 21,290 17,565 2,011,704 2,008,405 B. With third party underlying assets:
a) impaired b) other
263 C.1.2 Exposures arising from the main “own” securitisation transactions broken down by type of securitised asset and type of exposures
Cash exposures Guarantees given Lines of credit
Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior
Type of securitised assets/Exposures
cks cks cks cks cks cks cks cks cks Book value Book value Book value Book value Book value Book value Book value Book value Book value Book value Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba Writedowns/Writeba
A. Subject to full derecognition
A.1 Tiepolo 1 - Non-performing loans 38,077 2,463 A.2 Tiepolo 2 - Non-performing loans 33,065 -13,558 90,000 A.3 Sintonia Finance - home mortgages 3,761 4,123 - commercial mortgages 1,804 1,977
B. Subject to partial derecognition
B.1 name of security. 1 - type of assets C. Not eliminated from balance sheet C.1 Residential 2004 - home mortgages 12,000 4,500 C.1 Residential 2005 - home mortgages 1,116,600 C.1 Residential 2005 - commercial mortgages 866,464
C.1.3 Exposures arising from the main “third party” securitisation transactions broken down by type of securitised asset and type of exposures
This Item does not exist. The relevant table is therefore omitted.
C.1.4 Exposures to securitisations broken down by financial asset portfolio and type
Available-for- Financial assets Financial assets Held-to-maturity Exposure/portfolio sale financial Loans 31/12/2006 held for trading at fair value financial assets assets
1. Cash exposures 33,065 33,065 - senior - mezzanine 33,065 33,065 - junior 2. “Off-balance-sheet” exposures 128,077 128,077 - senior - mezzanine 128,077 128,077 - junior
264 C.1.5 Total amount of securitised assets underlying junior notes or other forms of support
Traditional synthetic Assets/values securitisations securitisations A. Own underlying assets A.1 Fully derecognised 1.Non-performing loans 179,010 x 2. Problem loans x 3. Restructured exposures x 4. Expired exposures 7,434 x 5. Other assets 457,043 x A.2 Partially derecognised 1. Non-performing loans x 2. Problem loans x 3. Restructured exposures x 4. Expired exposures x 5. Other assets x A.3 Not eliminated 1. Non-performing loans 26,645 2. Problem loans 13,429 3. Restructured exposures 4. Expired exposures 31,617 5. Other assets 3,202,175 B. Third party underlying assets 1. Non-performing loans 2. Problem loans 3. Restructured exposures 4. Expired exposures 5. Other assets
On the balance sheet date the group is not undertaking synthetic securitisations.
C.1.6 Interests in vehicle companies Name Head office % Interest Conegliano Tiepolo Finance S.r.l. 60 Veneto (TV) Bipielle Residential S.r.l. Lodi 4 Tiepolo Finance II S.r.l.* Lodi 60 * shareholding through the parent bank Bipielle Società di Gestione del Credito S.p.A.
C.1.7 Servicer activities – collections from securitised loans and redemptions of securities issued by the vehicle company Debt collection during year Securitised assets (end- Debt collection during year of-period figure) senior mezzanine junior Vehicle company
Impaired Performing Impaired Performing Perform Perfor Impaired Performing Impaired Impaired ing ming assets assets assets assets assets assets Tiepolo Finance 26,533 14,166 84.31% Tiepolo II 109,949 35,877 79.12% Residential I 10,919 659,237 1,022 117,695 33.03% Residential II 16,620 902,069 2,082 128,416 Residential III 25,064 643,376 256 139,568 Du.Ca. 27,656 212,753 6,517 209,775 46.60% Consumer 2002 22,306 244,290 4,443 196,028 47.90%
265 Consumer 2004 19,089 495,971 2,398 284,168 Consumer 2006 501,522 125,944
266 C.2 TRANSFER TRANSACTIONS
C.2.1 Financial assets sold but not eliminated
Financial assets held for Financial assets at fair Available-for-sale Held-to-maturity Technical Due from banks Customer loans trading value financial assets financial assets 31/12/2006 forms/portfolio A B C A B C A B C A B C A B C A B C a. Cash assets 1. Debt securities 1,896,367 1,896,367 2. Equities 3. O.I.C.R.s 4. Loans 583,932 1,366,611 1,950,543
5. Impaired assets 29,743 29,743 b. Derivative instruments Total 1,896,367 583,932 1,396,354 3,876,653
Total 2006
LEGEND: A = financial assets transferred fully recognised (book value) B = financial assets transferred partially recognised (book value) B = financial assets transferred partially recognised (entire value)
Debt securities refer to underlying securities in repurchase agreements without the option of forward repurchase for the seller, while loans impaired assets refer to credits subject to securitisation and to impaired customer loans sold without recourse to a factoring company in previous years that, under this ‘without recourse’ clause, were entered among "Assets sold but not eliminated" in the amount of €2 million. At the same, a liability of the same amount was recorded under amounts due to customers as “Liability associated with assets sold but not eliminated”.
C.2.2 Financial liabilities from financial assets sold but not eliminated
Held-to- Financial Financial Available-for- maturity Due from Customer Liability/asset portfolios assets held assets at fair sale financial Total financial banks loans for trading value assets assets
1. due to customers 1,492,744 411,648 1,904,392 a) for fully recognised assets 1,492,744 411,648 1,904,392 b) for partially recognised assets 2. due to banks 3,631,889 3,631,889 a) for fully recognised assets 3,631,889 3,631,889 b) for partially recognised assets Total 2006 5,124,633 411,648 5,536,281
267 D. CREDIT RISK MEASUREMENT MODELS
1.2 MARKET RISKS
1.2.1 INTEREST RATE RISK – REGULATORY TRADING BOOK
QUALITATIVE INFORMATION
A. General aspects
Exposure to interest rate risk originates from the specific activity of brokerage between "lenders" and "borrowers". In carrying out this activity, banks collect funds and disburse loans with various maturity characteristics and types of rates thereby exposing themselves to the risk that changes in market risks may limit their profit-making capacity, causing a fall in net interest income.
For this reason, the Banks aim to constantly monitor this risk by using special Asset & Liability Management (ALM) tools to measure and analyse the risk. Furthermore, given that behind every risk lies an opportunity, the Banks tend to implement specific interest rate management strategies, with the aim of seizing the opportunities to increase profits while always keeping the risks within acceptable limits.
B. Processes for managing and methods for measuring interest rate risk
The Parent bank measures and monitors the maturity transformation risk (or interest rate risk) according to the most recent gap analysis and duration analysis methods, which it carries out by using the ALMPro procedure in centralised mode for all of the Group's banks.
The activity, which involves measuring and quantifying the effects that changes in market rates have on net interest income and on the value of the company's balance sheet items, is controlled and coordinated, at Group level, by the Risks Committee, a board set up by the Board of Directors of Banca Popolare di Lodi, now Banca Popolare Italiana, in September 2001, which is responsible, inter alia, for managing this aspect for the whole Group.
Interest risk is measured on a monthly basis, in centralised mode, by Banca Popolare Italiana's Risk Management Department, by means of a sensitivity analysis on the basis of which interest risk is measured as the change ( MI) in the expected net interest income, seen as an achievable margin in the twelve months following the date of analysis on the assumption that volumes and rates remain unchanged, in the event of a parallel shift in the yield curve of 100 basis points.
In accordance with the requirements laid down by the Basel Committee, interest rate risk is also understood in terms of the change in the value of shareholders' equity ( VA) in the event of a parallel shift in the yield curve of 200 basis points.
Risk and control limits
The risk limits adopted are part of a policy of controlling the Group risk and they assimilate the applicable provisions given by the Supervisory Boards and by the Rating Agencies by juxtaposing, but not replacing, the system of limits imposed by Banca d’Italia regulations (Basel 1), the observance of which remains binding and mandatory.
The system of limits, approved by the Parent Bank's Risks Committee, consists of 3 specific indicators which determine the stability requirements for net interest income (Limit 1: internal operating and performance requirement), operating income (Limit 2: operating requirement indicated by the Rating Agencies) and solvency (Limit 3: capital requirement indicated by the Basel Committee), the percentage limits of which are set out below:
- Limit 1: impact on net interest income: MI / EMI >= - 7%
- Limit 2: impact on operating income: MI / RO >= - 10%
268 - Limit 3: adequacy of Regulatory Capital: VA / (Tier 1 + 2) >= - 20%
The Risks Committee analyses the reports produced, checks that the limits assigned are being observed and decides on the strategies for re-admission, should the limits be exceeded.
C. Fair value hedging activities
Interest rate risk is mitigated principally by using micro fair value hedging instruments. During 2006 the Group, in view of the risk profile assumed within the assigned limit and of the expectations of a rise in interest rates which soon occurred, did not always hedge new issues of fixed-rate bonds, preferring, in some cases, to avail of the opportunity for its exposure to risk arising from the rising rate.
269 The table below shows the representative risk values measured as at December 31, 2005 for the aggregate subject to monitoring. Interest Rate Risk Indicators
31/12/2006 Impact on Impact on Impact on Impact on (amounts in Euro) Shareholders' Shareholders' Shareholders' Shareholders' Equity Equity Equity Equity (shock +1%) (shock +1%) (shock +1%) (shock +1%) Gruppo BPI Aggregate 215,995,502 -246,662,754 29,978,651 -24,907,930
QUANTITATIVE INFORMATION
Regulatory trading book 1. Regulatory trading book: breakdown by remaining maturity (repricing date) of financial cash and financial derivative assets and liabilities
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and EURO months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option 571 7,095 131,963 173,507 14 3 - other 51,307 700,910 1,284,725 57,029 460,438 299,541 76,563 1.2 Other assets 2,298,476 40,045 208,441 3,656 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 35,405 544 2.2 Other liabilities 4,910,776 439,008 141,211 136,200 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions 186,544 93,180 1,353 125,972 1,135 597 +- Short positions 256,023 143,499 1,667 5,766 1,227 597 3.2 Without underlying security - Options + Long positions 1 181,067 280,081 162,448 349,697 142,261 31,696 +- Short positions 120,673 324,771 162,236 363,016 40,826 31,913 - Other + Long positions 27,560 8,744,986 3,712,609 3,038,159 4,316,365 1,087,402 134,832 +- Short positions 148,475 10,443,068 3,115,578 1,882,676 4,193,453 1,196,706 254,388
270
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and USD months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 495 6,869 1.2 Other assets 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 2.2 Other liabilities 3,982 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions 2,851 49 1,090 68 57 +- Short positions 2,851 49 1,090 68 57 3.2 Without underlying security - Options + Long positions 1,901 3,584 2,503 5,503 253 +- Short positions 3,943 3,695 2,502 5,503 253 - Other + Long positions 1,386,533 111,814 94,867 48,272 22,794 1,012 +- Short positions 1,369,280 96,569 104,650 48,128 28,615 1,012
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and YEN months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2 Other assets 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 2.2 Other liabilities 1,343 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 153,940 2,986 3,059 +- Short positions 148,724 5,348 9,849
271
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and GBP months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 4,575 7,524 1.2 Other assets 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 2.2 Other liabilities 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions 224 12 190 22 +- Short positions 224 12 190 22 3.2 Without underlying security - Options + Long positions 63,887 58,078 +- Short positions 63,887 58,078 - Other + Long positions 115,313 17,128 3,063 16,850 +- Short positions 72,580 12,831 2,555 16,850
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and CHF months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2 Other assets 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 2.2 Other liabilities 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 16,988 3,105
272 +- Short positions 50,816 3,093
273
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and CZECH KORUNA months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2 Other assets 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 2.2 Other liabilities 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 7,445 49,118 +- Short positions 8,746
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and OTHER CURRENCIES months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2 Other assets 11,185 2. Cash liabilities 2.1 Debt securities in issue - with prepayment option - other 2.2 Other liabilities 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions 641 3 174 459 4 +- Short positions 641 3 174 459 4 3.2 Without underlying security - Options + Long positions 14,648 17,625 19,195 +- Short positions 14,648 17,625 19,195 - Other + Long positions 102,273 11,092
274 +- Short positions 77,294 23,251 1.2.2 INTEREST RATE RISK – BANKING BOOK
QUALITATIVE INFORMATION
A. General aspects
See the corresponding section 2.1: Interest rate risk – trading book
B. Fair value hedging activities
See the corresponding section 2.1: Interest rate risk – trading book
B. Hedging of financial derivatives
See the corresponding section 2.1: Interest rate risk – trading book
QUANTITATIVE INFORMATION
1. Banking book: distribution by remaining maturity (repricing date) of financial assets and liabilities
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and EURO months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 3,625,687 714 238,586 1.2. Loans to banks 1,325,034 406,912 95,926 156,404 56,881 284,493 5,255 130,965 1.3. Loans to customers - current account 6,279,108 1,171 19,507 26,732 228,763 70,327 28,470 6,270 - other loans - with prepayment option - other 1,714,198 2,796,268 338,623 329,548 3,398,494 3,030,019 4,841,281 250,335 2. Cash liabilities 2.1 Due to customers - current account 10,896,431 159,581 1,118 3 3,092 253 1,082 - other payables - with prepayment option - other 2,882,381 651,069 182,840 133,276 522,466 7,383 2.2 Due to banks - current account 331,856 245 251 524 6,714 - other payables 19,552 466,151 190,662 38,866 11,200 103,353 2.3 Debt securities - with prepayment option 138,172 498,650 - other 57,815 2,308,938 3,538,531 3,906,592 3,840,640 906,981 16,868 25,000 2.4 Other liabilities - with prepayment option - other 189,048 429,877 3. Financial derivatives 3.1 With underlying security - Options + Long positions 50,000 19,000 24,811 +- Short positions 50,000 20,280 23,531 - Other + Long positions 42,204 29,916 +- Short positions 40,802 31,320 3.2 Without underlying security - Options + Long positions 5,000 10,000 44,419 124,220 2,394 +- Short positions 102,578 36,120 10,000 680 1,714
275 - Other + Long positions 1 648,186 491,226 1,486,602 3,540,852 313,879 10,000 +- Short positions 41,116 2,992,024 3,335,815 81,249 95,063 750
276
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and USD months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2. Loans to banks 152,437 33,424 42,169 1.3. Loans to customers - current account 2,135 - other loans - with prepayment option - other 3,181 36,824 71,163 211,709 2. Cash liabilities 2.1 Due to customers - current account 97,949 - other payables - with prepayment option - other 17,150 2,626 13,059 58 2.2 Due to banks - current account 5,314 - other payables 83,202 252,266 18,975 76,970 2.3 Debt securities - with prepayment option - other 1,101 219 282 8,158 2.4 Other liabilities - with prepayment option - other 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 12,148 240 7,593 +- Short positions 77,449
277
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and YEN months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2. Loans to banks 917 4,557 1.3. Loans to customers - current account 221 - other loans - with prepayment option - other 487 8,547 1,113 689 117 127 2. Cash liabilities 2.1 Due to customers - current account 22,320 - other payables - with prepayment option - other 2.2 Due to banks - current account 39 - other payables 2.3 Debt securities - with prepayment option - other 2.4 Other liabilities - with prepayment option - other 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 18,671 +- Short positions 12,107
278
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and GBP months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2. Loans to banks 8,165 59,824 38,333 14,884 1.3. Loans to customers - current account 1 - other loans - with prepayment option - other 729 1,026 98 99,705 29,442 2. Cash liabilities 2.1 Due to customers - current account 36,521 - other payables - with prepayment option - other 1,146 2,434 2.2 Due to banks - current account 95 - other payables 61,499 196,308 37,527 2.3 Debt securities - with prepayment option - other 188 46 2.4 Other liabilities - with prepayment option - other 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions
279
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and CHF months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2. Loans to banks 475 43,868 1.3. Loans to customers - current account 125 - other loans - with prepayment option - other 4,432 2,264 311 24 14,019 2. Cash liabilities 2.1 Due to customers - current account 5,603 - other payables - with prepayment option - other 2.2 Due to banks - current account 480 - other payables 103,010 2.3 Debt securities - with prepayment option - other 2.4 Other liabilities - with prepayment option - other 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 4,356 32,213 498 +- Short positions 31,116
280
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and CZECH KORUNA months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2. Loans to banks 352 2,587 1.3. Loans to customers - current account - other loans - with prepayment option - other 2. Cash liabilities 2.1 Due to customers - current account - other payables - with prepayment option - other 245 2.2 Due to banks - current account - other payables 1,349 2.3 Debt securities - with prepayment option - other 53,402 2.4 Other liabilities - with prepayment option - other 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 49,118 +- Short positions
281
Between 3 Between 6 Currency of denomination Up to 3 Between 1 Between 5 More than 10 Unspecified On demand and 6 months and OTHER CURRENCIES months and 5 years and 10 years years maturity months 1 year 1. Cash assets 1.1 Debt securities - with prepayment option - other 1.2. Loans to banks 5,297 696 3 1.3. Loans to customers - current account 913 - other loans - with prepayment option - other 1,425 44,731 8,798 2. Cash liabilities 2.1 Due to customers - current account 31,537 - other payables - with prepayment option - other 47 2.2 Due to banks - current account 847 - other payables 5,242 2.3 Debt securities - with prepayment option - other 2.4 Other liabilities - with prepayment option - other 3. Financial derivatives 3.1 With underlying security - Options + Long positions +- Short positions - Other + Long positions +- Short positions 3.2 Without underlying security - Options + Long positions +- Short positions - Other + Long positions 256 6,689 +- Short positions 1,327
282 1.2.3 PRICE RISK – REGULATORY TRADING BOOK
QUALITATIVE INFORMATION
A./B. Aspects and processes for managing and methods for measuring price risk
The Risk Management Department measures price risk on the equity and equity index derivatives portfolio of Banca Popolare Italiana Using an internal model that is based on Value at Risk (VaR) methodology, given that, as a result of the centralisation of Finance activities, the other banks do not own equities nor have they entered into derivative contracts for trading purposes.
Exposure to the general risk of the proprietary portfolio is measured every day. This represents an estimate of the maximum loss in value that this can undergo, over a period of one day and with a confidence level of 99%, in response to unexpected changes in share prices.
Measurement methods are currently being recalibrated, as the implementation of a new front-office application for risk measurement is now completed.
QUANTITATIVE INFORMATION
Regulatory trading book
1. Regulatory trading book: cash exposures in equities and OICRs. Book value Type of exposure/Values Listed Unlisted A. Debt securities A.1 Shares 163,137 18,309 A.2 Innovative capital instruments A.3 Other equities B. O.I.C.R. B.1 Under Italian law - harmonised open 4,094 - non-harmonised open 12,260 - closed 342 5,550 - reserved - speculative B.2 Of other EU states - harmonised open 18,434 5,118 - non-harmonised open - closed B.3 Of non EU states - open 47,645 - closed 1,636 Total 181,913 94,612
283 2. Regulatory trading book: breakdown of exposures in equities and stock indices for the main countries of stock listing
LISTED OTHER Type of transaction/Listing index UNITED UNLISTED ITALY USA FRANCE GERMANY SPAIN SWITZ. COUNTRIE KINGDOM S A. Debt securities - Long positions 163,137 609 37,418 29,018 881 6,093 1,124 - Short positions
B. Unsettled transactions in equities
- Long positions - Short positions 1,584 C. Other equity derivatives - Long positions - Short positions 2 40,000 D. Stock index derivatives - Long positions 324,108 792,447 - Short positions 425,766 41,113 3,205,086 TOTAL 914,597 609 37,418 70,131 881 6,093 4,038,657
1.2.4 PRICE RISK – BANKING BOOK QUALITATIVE INFORMATION
A./B. Aspects and processes for managing and methods for measuring price risk
See section 2.3 Price risk – regulatory trading book
QUANTITATIVE INFORMATION
1. Banking book: cash exposures in equities and OICRs Book value Type of exposure/Values Listed Unlisted A. Debt securities A.1 Shares 330,662 5,522,209 A.2 Innovative capital instruments A.3 Other equities 5 B. O.I.C.R. B.1 Under Italian law - harmonised open - non-harmonised open - closed - reserved - speculative B.2 Of other EU states - harmonised open - non-harmonised open - non-harmonised open B.3 Of non EU states - open - closed Total 330,662 5,522,214
284 1.2.5 EXCHANGE RATE RISK QUALITATIVE INFORMATION
A/B General aspects, management processes and measurement methods of the exchange rate risk and hedging of exchange rate risk.
The risk associated with assets and liabilities expressed in currencies other than the euro, arising from fluctuations in the exchange rates of the applicable currencies, is closely monitored, even though activities of this kind occupy just a small part in the Bank's financial statements and in terms of the respective risk.
In particular, by means of the ALM procedure, the gaps in each currency are monitored by time bands, in order to check their consistency and to intervene in a timely manner with possible hedging transactions.
A table is given below showing the values of the five major currencies as at December 31, 2006.
QUANTITATIVE INFORMATION
1. Breakdown by currency of denomination of assets, liabilities and derivatives
CURRENCY OTHER Items CZECH USD YEN CHF GBP CURRENCIE KORUNA S A. Valuation reserves: A.1 Debt securities 7,323 257 796 A.2 Equities 32,197 693 A.3 Loans to banks 48,777 6,947 36,106 18,534 2,934 22,926 A.4 Loans to customers 314,561 39,087 35,661 103,952 47,279 A.5 Other financial assets 9,446 42 42,855 267 179 B. Other assets 7,575 241 1,238 1,422 1 719 C. Financial liabilities C.1 Due to banks 96,145 9,872 95,778 257,180 1,346 6,108 C.2 Due to customers 168,493 23,188 6,164 41,451 243 31,481 C.3 Debt securities 22,352 7,402 49,118 D. Other liabilities 2,633 125 240 30 E. Financial derivatives - Options + Long positions 8,682 + Short positions 10,835 Tot. Options -2,153 - Other + Long positions 1,120,999 160,873 20,093 137,599 105,680 113,664 + Short positions 1,118,474 164,800 53,909 90,076 8,746 100,821 Tot. Other 2,525 -3,927 -33,816 47,523 96,934 12,843 Total assets 1,549,560 207,447 135,953 262,570 108,615 185,460 Total liabilities 1,418,932 197,985 156,091 396,139 59,453 138,410 Imbalance (+/-) 130,628 9,462 -20,138 -133,569 49,162 47,050
285 1.2.6 DERIVATIVE FINANCIAL INSTRUMENTS
A. FINANCIAL DERIVATIVES
A.1 Regulatory trading book: notional end-of-period and average values
Debt securities and interest Equities and equity Exchange rates and gold Other instruments Total 31/12/2006 Total 31/12/2005 rates indices
Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted
1. Forward rate agreements 20,751 20,751 2. Interest rate swaps 15,863,588 15,863,588 8,045,279 3. Domestic currency swaps 135,628 4. Currency interest rate swaps 357,134 357,134 55,661 5. Basis swaps 2,612,850 2,612,850 1,789,231 6. Equity index swaps 7. Real index swaps 8. Futures 3,983,838 41,113 4,024,951 523,926 9. Cap options 1,677,753 1,677,753 815,631 - Purchased 731,719 731,719 442,280 - Issued 946,034 946,034 373,351 10. Floor options 986,445 986,445 462,543 - Purchased 510,180 510,180 403,671 - Issued 476,265 476,265 58,872 11. Other options 300,000 4,361,109 16,400 53,441 316,400 4,414,550 9,112 10,657,265 - Purchased 200,000 1,873,485 8,200 30,728 208,200 1,904,213 4,556 5,390,182 - Plain Vanilla 200,000 1,873,485 8,200 21,690 208,200 1,895,175 4,556 438,960 - Exotic 9,038 9,038 4,951,222 - Issued 100,000 2,487,624 8,200 22,713 108,200 2,510,337 4,556 5,267,083 - Plain Vanilla 100,000 2,487,624 8,200 13,675 108,200 2,501,299 4,556 237,451 - Exotic 9,038 9,038 5,029,632 12. Forward agreements 415,336 1,583 4,990,961 5,407,880 442,490 - Purchases 242,470 1,511,525 1,753,995 221,245 - Sales 172,866 1,583 1,392,522 1,566,971 221,245 - Currency against currency 2,086,914 2,086,914 13. Other derivative contracts 360,000 322 360,322 66,893 Total 4,283,838 21,936,723 41,113 4,363,014 16,400 5,401,536 4,341,351 31,701,273 533,038 22,470,621 Average values 2,251,119 19,292,432 23,320 8,252,271 2,774,457 2,274,439 30,319,160
286 A.2 Banking book: notional end-of-period and average values
A.2.1 Hedging
Debt securities and interest Equities and equity Exchange rates and gold Other instruments Total 31/12/2006 Total 31/12/2005 rates indices
Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted
1. Forward rate agreements 2. Interest rate swaps 6,121,007 6,121,007 2,945,221 3. Domestic currency swaps 4. Currency interest rate swaps 200,510 200,510 56,133 5. Basis swaps 1,023,009 1,023,009 110,539 6. Equity index swaps 7. Real index swaps 8. Futures 9. Cap options 247,957 247,957 19,228 - Purchased 74,397 74,397 819 - Issued 173,560 173,560 18,469 10. Floor options 164,387 164,387 49,255 - Purchased 164,387 164,387 49,255 - Issued 11. Other options 1,300 3,185,292 3,186,592 3,953,917 - Purchased 1,300 3,018,458 3,019,758 3,238,369 - Plain Vanilla 1,300 2,944,452 2,945,752 3,189,840 - Exotic 74,006 74,006 48,529 - Issued 166,834 166,834 715,548 - Plain Vanilla 166,834 166,834 595,456 - Exotic 120,092 12. Forward agreements - Purchases - Sales - Currency against currency 13. Other derivative contracts 955,727 Total 7,557,660 3,185,292 200,510 10,943,462 8,090,020 Average values 4,660,744 1,387,980 50,714 6,099,438
287 A.2.2 Other derivatives
Debt securities and interest Equities and equity Exchange rates and gold Other instruments Total 31/12/2006 Total 31/12/2005 rates indices
Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted
1. Forward rate agreement
2. Interest rate swap
3. Domestic currency swap
4. Currency interest rate swap
5. Basis swap 6. Equity index swaps 7. Real index swaps 8. Futures 9. Cap options - Purchased - Issued 10. Floor options - Purchased - Issued 11. Other options 2,578,441 2,578,441 - Purchased 206,673 206,673 - Plain Vanilla 206,673 206,673 - Exotic - Issued 2,371,768 2,371,768 - Plain Vanilla 2,297,762 2,297,762 - Exotic 74,006 74,006 12. Forward agreements - Purchases - Sales - Currency against currency 13. Other derivative contracts Total 2,578,441 2,578,441 Average values 2,501,438 2,501,438
288 A.3 Financial derivatives: purchase and sale of underlying securities
Debt securities and interest Equities and equity Exchange rates and gold Other instruments Total 31/12/2006 Total 31/12/2005 rates indices
Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted
A. Regulatory trading book
1. Transactions with exchange of capital 331,883 415,336 2,365,922 17,991 3,226,056 349,874 6,007,314 530,991 999,288 - Purchases 198,797 242,470 1,108,451 8,973 1,637,140 207,770 2,988,061 55,904 998,422 - Sales 133,086 172,866 1,257,471 9,018 1,521,227 142,104 2,951,564 475,087 866 - Currency against currency 67,689 67,689 2. Transactions without exchange of 3,951,955 18,908,535 41,113 1,996,470 2,019,225 3,993,068 22,924,230 72,653 20,774,613 capital - Purchases 1,313,955 9,536,143 723,216 1,313,955 10,259,359 19,053 11,506,859 - Sales 2,638,000 9,372,392 41,113 1,273,254 2,679,113 10,645,646 53,600 9,267,754 - Currency against currency 2,019,225 2,019,225 B. Banking book: B.1 Hedging 1. Transactions with exchange of capital 108,402 200,510 308,912 304,144 - Purchases 108,402 68,421 176,823 168,516 - Sales 132,089 132,089 135,628 - Currency against currency 2. Transactions without exchange of 6,375,348 3,185,292 9,560,640 87,929 3,953,202 capital - Purchases 5,687,923 3,185,292 8,873,215 87,929 3,732,534 - Sales 687,425 687,425 220,668 - Currency against currency B.2 Other derivatives 1. Transactions with exchange of capital 50,903 69,003 119,906 - Purchases 49,603 49,603 - Sales 1,300 69,003 70,303 - Currency against currency 2. Transactions without exchange of 2,509,438 2,509,438 960,308 capital - Purchases 494,769 - Sales 2,509,438 2,509,438 465,539 - Currency against currency
289 A.4 Over the counter financial derivatives: positive fair value - counterparty risk Different underlying Debt securities and interest rates Equities and equity indices Exchange rates and gold Other instruments securities
Gross Gross Future Gross Gross Gross Future Gross Gross Gross Gross Future Gross Gross matched unmatched matched exposure unmatched matched unmatched exposure unmatched matched unmatched matched exposure unmatched
A. Regulatory trading book: A.1 Governments and
central banks A.2 Public entities A.3 Banks 114,223 18,571 107,018 57,795 29,574 19,203 A.4 Financial 33,042 12,721 25,042 10,064 2,379 3,302 companies A.5 Insurance
companies A.6 Non-financial 6,855 984 15,556 38,462 4,109 1,454 companies A.7 Other entities 52 9,617 2,622 1,704 111 Total A at 31/12/2006 154,172 32,276 157,233 108,943 37,766 24,070 Total at 31/12/2005 885 142 3,488 1,095 B. Banking book: B.1 Governments and
central banks B.2 Public entities B.3 Banks 85,919 5,709 105,727 136,246 4,047 1,807 B.4 Financial 4,928 292 15,043 6,000 companies B.5 Insurance
companies B.6 Non-financial
companies B.7 Other entities Total B at 31/12/2006 90,847 6,001 120,770 142,246 4,047 1,807 Total at 31.12.05 9,315 594
A.5 Over the counter financial derivatives: negative fair value - financial risk Different underlying Debt securities and interest rates Equities and equity indices Exchange rates and gold Other instruments securities
Gross Gross Future Gross Gross Gross Future Gross Gross Gross Gross Future Gross Gross matched unmatched matched exposure unmatched matched unmatched exposure unmatched matched unmatched matched exposure unmatched
A. Regulatory trading book: A.1 Governments and
central banks A.2 Public entities 2 122 A.3 Banks 123,490 46,382 61,414 21,246 16,762 6,241 A.4 Financial 28,505 8,979 36,741 1,252 10,978 11,485 companies A.5 Insurance
companies A.6 Non-financial 7,294 8,595 60,914 256 112 companies A.7 Other entities 256 87 285 37,550 4,893 80 Total A at 31/12/2006 159,547 64,165 159,354 60,048 32,889 17,918 Total at 31/12/2005 885 142 3,488 1,095 B. Banking book: B.1 Governments and
central banks B.2 Public entities B.3 Banks 206,597 21,997 100,865 80,757 454 843 1,321 B.4 Financial 1,855 500 143 200 companies B.5 Insurance
companies B.6 Non-financial 40 companies B.7 Other entities Total B at 31/12/2006 208,452 22,537 101,008 80,957 454 843 1,321 Total at 31/12/2005 9,315 594
290 A.6 Residual maturity of over the counter financial derivatives: notional values
Residual maturity of over the counter financial derivatives: Less than 1 year Total notional values Between 1 and 5 More than 5 years years A. Regulatory trading book A.1 Financial derivatives on debt securities and interest rates 6,407,112 8,359,969 4,488,557 19,255,638 A.2 Financial derivatives on equities and stock indices 2,040,189 1,762,820 91,040 3,894,049 A.3 Financial derivatives on exchange rates and gold 4,955,754 218,638 39,201 5,213,593 A. 4 Financial derivatives on other values B. Banking book B.1 Financial derivatives on debt securities and interest rates 2,009,424 3,125,253 309,488 5,444,165 B.2 Financial derivatives on equities and stock indices 2,277,901 2,790,873 80,000 5,148,774 B.3 Financial derivatives on exchange rates and gold 68,421 68,421 B.4 Financial derivatives on other values Total 17,690,380 16,325,974 5,008,286 39,024,640
B. CREDIT DERIVATIVES
B1. Credit derivatives: notional end-of-period and average values
Regulatory trading book Other transactions
On an individual On several On an individual On several entity entities (basket) entity entities (basket) Notional value Notional value Notional value Notional value 1. Purchases of protection 1.1 With exchange of capital (specifically indicating the contractual
forms) 1.2 Without exchange of capital (specifically indicating the 43,791 325,030 contractual forms) Total at 31/12/2006 43,791 325,030 Total at 31/12/2005 396,758 150,257 Average values 220,275 237,530 2. Sales of protection 2.1 With exchange of capital (specifically indicating the contractual 10,000 forms) 2.2 Without exchange of capital (specifically indicating the 33,169 contractual forms) Total at 31/12/2006 33,169 10,000 Total at 31/12/2005 542,673 27,359 Average values 295,421 13,638
291 B2. Credit derivatives: positive fair value - counterparty risk Positive fair Type of transaction/Values Notional value Future exposure value A. REGULATORY TRADING BOOK A.1. Purchases of protection with counterparties 1. Governments and central banks 2. Other public entities 3. Banks 4. Financial companies 5. Insurance companies 6. Non-financial companies 7. Other entities A.2. Sales of protection with counterparties 1. Governments and central banks 2. Other public entities 3. Banks 33,169 152 3,503 4. Financial companies 5. Insurance companies 6. Non-financial companies 7. Other entities B. BANKING BOOK B.1 Purchases of protection with counterparties 1. Governments and central banks 2. Other public entities 3. Banks 4. Financial companies 5. Insurance companies 6. Non-financial companies 7. Other entities B.2. Sales of protection with counterparties 1. Governments and central banks 2. Other public entities 3. Banks 4. Financial companies 5. Insurance companies 6. Non-financial companies 7. Other entities Total at 31/12/2006 33,169 152 3,503 Total at 31/12/2005 149,803 185 549
292 B3. Credit derivatives: negative fair value - financial risk Negative fair Type of transactions/Values Notional value value REGULATORY TRADING BOOK 1. Purchases of protection with counterparties 1.1. Governments and central banks 1.2. Other public entities 1.3. Banks 43,791 148 1.4. Financial companies 1.5. Insurance companies 1.6. Non-financial companies 1.7. Other entities Total at 31/12/2006 43,791 148 Total at 31/12/2005 114,151 608
B4. Residual maturity of credit derivative contracts: notional values Between 1 and 5 More than 5 Underlying/Residual maturity Less than 1 year Total years years A. Regulatory trading book A.1 Credit derivatives with "qualified reference obligation" 10,000 19,463 29,463 A.2 Credit derivatives with "unqualified reference obligation" 57,497 57,497 B. Banking book B.1 Credit derivatives with "qualified reference obligation" 175,000 175,000 B.2 Credit derivatives with "unqualified reference obligation" 150,030 150,030 Total at 31/12/2006 160,030 251,960 411,990
1.3 - LIQUIDITY RISK QUALITATIVE INFORMATION
Liquidity risk means the risk arising from the difficulty that the bank may face in meeting its cash payments in a timely and economic manner and this arises from the financial characteristics of the bank balance sheet where part of the assets is normally invested in non-negotiable instruments on the secondary markets and the liabilities consist primarily of instruments immediately convertible into cash.
To tackle this risk, banks may operate with various instruments such as selling assets on efficient secondary markets, performing securitisation transactions, issuing bonds, using the interbank market and through direct indebtedness with the central bank, as the final creditor.
The liquidity risk is measured through the gap analysis obtained from the ALM procedure followed by the Parent Bank's Risk Management Department. With this representation, the bank can gain advance insight into the trend in future cash flows and, therefore, set the most appropriate financing policies in the medium/long term.
As with market risks, the strategic management of the liquidity risk is coordinated by the Parent Bank's Risks Committee.
During 2006 strong emphasis has been placed on the plan for implementation of a new application which, besides offering a strategic vision, provides even greater operational risk management by enabling measurement on a daily basis.
293 QUANTITATIVE INFORMATION
1. Distribution over time and by currency of denomination of remaining maturity of assets and liabilities
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and EURO and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities 13,871 32,424 328 237,102 514,316 858,953 26,273 A.2 Listed debt securities 2 3,013 7,892 716 225,213 370,428 A.3 Other debt securities 899,697 91 62 207,647 1,094,748 308,454 A.4 Units in OICR 12,872 A.5 Loans - Banks 2,578,562 1,328,301 577,116 2,614,810 496,752 1,041,177 320,122 61,036 16,727 - Customers 10,469,535 309,241 147,783 454,075 1,512,109 604,338 902,032 5,269,530 4,788,250 Cash liabilities B.1 Deposits - Banks 1,847,273 719,020 756,534 2,616,367 2,268,463 877,681 147,059 7,402 103,237 - Customers 13,694,559 434,468 468,806 599,718 297,704 90,466 131,085 1 5,726 B.2 Debt securities 282,780 17,318 77,766 55,098 689,051 1,293,198 3,587,342 7,510,965 2,596,765 B.3 Other liabilities 630,835 11 2 19 20,546 62,964 948 2,844 115 Off balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 1,577,441 2,055 18,606 1,356,305 969,618 204,823 206,242 193,471 19,600 - Short positions 1,577,390 2,055 18,606 1,356,305 969,618 204,830 206,242 193,514 19,602 C.2 Deposits and loans to be
received - Long positions 22,199 362,940 - Short positions 49,717 394,348 C.3 Irrevocable commitments to lend funds - Long positions 345,623 225 546 2,275 57,134 138,176 64,409 582,720 4,646,842 - Short positions 5,157,563 48,175 122,888
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and USD and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities A.2 Listed debt securities 1,569 2,894 245 251 6,918 46 A.3 Other debt securities 543 26 837 1,451 44 A.4 Units in OICR A.5 Loans - Banks 160,834 39,251 2,760 3,176 47,648 77,055 - Customers 2,509 3,485 311 2,488 33,641 70,955 211,622 Cash liabilities B.1 Deposits - Banks 101,795 113,923 8,297 131,083 75,177 102,917 75,901 - Customers 116,307 1,643 326 24 12,560 B.2 Debt securities 1,197 8 72 142 239 8,100 B.3 Other liabilities Off balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 23,157 1,890 854 2,694 1,269 106,561 45,508 25,893 19,600 - Short positions 23,157 1,890 854 2,694 1,269 106,561 45,508 25,893 19,600 C.2 Deposits and loans to be received - Long positions 69,856 12,225 - Short positions 76 82,005 C.3 Irrevocable commitments to
lend funds - Long positions 240 33,169 - Short positions 240 33,169
294
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and YEN and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities A.2 Listed debt securities 116 A.3 Other debt securities 141 A.4 Units in OICR A.5 Loans - Banks 1,361 828 2,550 1,179 9,558 - Customers 228 529 8,502 1,111 689 116 127 Cash liabilities B.1 Deposits - Banks 1,576 - Customers 22,320 B.2 Debt securities B.3 Other liabilities Off balance sheet transactions C.1 Financial derivatives with
exchange of capital - Long positions 5,906 2,986 - Short positions 5,906 2,986 C.2 Deposits and loans to be
received - Long positions 12,107 18,671 - Short positions 30,778 C.3 Irrevocable commitments to
lend funds - Long positions - Short positions
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and GBP and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities A.2 Listed debt securities 4,575 7,524 A.3 Other debt securities 805 A.4 Units in OICR A.5 Loans - Banks 14,947 15,928 75 22,568 96,224 44,508 14,884 - Customers 677 719 1 998 26 96 99,060 29,423 Cash liabilities B.1 Deposits - Banks 62,516 109,086 43,187 37,230 - Customers 37,666 45 1,042 1,348 B.2 Debt securities 189 46 B.3 Other liabilities Off balance sheet transactions C.1 Financial derivatives with
exchange of capital - Long positions 244,562 18,913 6,996 - Short positions 244,562 18,913 6,996 C.2 Deposits and loans to be
received - Long positions - Short positions C.3 Irrevocable commitments to
lend funds - Long positions - Short positions
295
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and CHF and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities A.2 Listed debt securities A.3 Other debt securities A.4 Units in OICR A.5 Loans - Banks 711 23,244 9,293 13,198 41,537 20,412 - Customers 1,444 4,315 10 1,516 68,034 310 24 14,019 Cash liabilities B.1 Deposits - Banks 868 49,163 66,092 21,159 14,017 - Customers 5,603 B.2 Debt securities B.3 Other liabilities Off balance sheet transactions C.1 Financial derivatives with
exchange of capital - Long positions 1,503 - Short positions 1,503 C.2 Deposits and loans to be
received - Long positions 4,854 - Short positions 4,854 C.3 Irrevocable commitments to
lend funds - Long positions 1,097 - Short positions 1,097
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and CZECH KORUNA and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities A.2 Listed debt securities A.3 Other debt securities A.4 Units in OICR A.5 Loans - Banks 419 2,583 - Customers Cash liabilities B.1 Deposits - Banks 27 1,345 - Customers 245 B.2 Debt securities 53,402 B.3 Other liabilities Off balance sheet transactions C.1 Financial derivatives with
exchange of capital - Long positions 45,000 - Short positions 45,000 C.2 Deposits and loans to be
received - Long positions - Short positions C.3 Irrevocable commitments to
lend funds - Long positions - Short positions
296
Between 15 Between 1 Between 3 Between 6 Currency of denomination Between 1 Between 7 Between 1 More than 5 On demand days and 1 and 3 and 6 months and OTHER CURRENCIES and 7 days and 15 days and 5 years years month months months 1 year Cash assets A.1 Government securities A.2 Listed debt securities A.3 Other debt securities A.4 Units in OICR A.5 Loans - Banks 6,224 2,576 352 523 12,525 - Customers 1,025 1,082 343 44,696 8,720 Cash liabilities B.1 Deposits - Banks 1,639 3,788 43,545 - Customers 31,583 B.2 Debt securities B.3 Other liabilities Off balance sheet transactions C.1 Financial derivatives with
exchange of capital - Long positions 102,194 24,349 112 - Short positions 102,194 24,349 112 C.2 Deposits and loans to be
received - Long positions 1,327 6,945 - Short positions 8,272 C.3 Irrevocable commitments to
lend funds - Long positions - Short positions
2. Distribution of financial liabilities by segment
Governments Other public Financial Insurance Non-financial and central Other entities entities companies companies companies banks
1. Due to customers 46,301 509,326 3,155,523 275,489 3,798,017 110,480,740 2. Securities in issue 49 6,331 2,554,383 13,458 344,839 15,930,579 3. Financial liabilities held for trading 2 79,335 68,465 49,350,982 4. Financial liabilities valued at fair value Total 46,350 515,659 5,789,241 288,947 4,211,321 175,762,301
3. Geographical distribution of financial liabilities
Other European Rest of the Italy America Asia Countries world 1. Due to customers 117,928,728 313,135 14,668 4,488 4,377 2. Due to banks 425,331,644 1,714,478 7,113 75 3. Securities in issue 17,733,903 505,045 610,025 168 498 4. Financial liabilities held for trading 49,372,934 123,701 2,149 5. Financial liabilities valued at fair value Total 610,367,209 2,656,359 633,955 4,731 4,875
297 1.4 - OPERATIONAL RISKS QUALITATIVE INFORMATION
The Operational Risks management programme, started in 2002 by the Group, has various strategic and regulatory objectives:
• to allow the inclusion of exposure to operational risks in the capital allocation processes applied to the various business lines, for management and supervisory purposes;
• to provide the Group with the appropriate tools and procedures for effective management of risks, through internal prevention/protection actions and external transfer/transformation actions (e.g. use of insurance, outsourcing of activities, etc);
• to spread the culture of process quality and control in the operating structures at all levels;
• to comply progressively with the organisational and methodological requirements indicated by the Basel Agreement and its primary and secondary implementing regulations.
Operational Risk Management activities, assigned initially to the Auditing and Internal Control Division, are now the responsibility of the Risk Management Department. The Parent bank’s new Group Organisation Chare and General Regulations, which entered into force in November 2006, provided for a new ‘Operational Risk’ functional unit within the Risk Management Department.
The ‘policy rules’ or guidelines for managing operational risks to be applied by the Banca Popolare Italiana Group were approved by the Parent bank’s Board of Directors in the month of April 2005. The document defines the objectives and principles of operational risk management for all Group activities. Furthermore, roles and responsibilities were assigned to the various units involved and the operational phases of the Operational Risk Management process were defined.
The Risk Policy applies to all the commercial and financial activities of the various organisational units that make up the Group.
The validity of the Risk Policy is subject to developments in national and international banking regulations and to the strategies implemented by the Group.
The risk policy of the BPI Group has adopted the operational risk control measures contained in the Basel Agreement, defining operational risk as “the risk of losses arising from the inadequacy or malfunction of procedures, human resources and internal systems, or exogenous events. This definition expressly includes legal risks. However, the definition excludes strategic risks (losses suffered due to erroneous strategic valuations by management) and reputational risks (losses of market share because the name of the Group is associated with negative events)”
A summary is given below of the various phases of activity of the operational risk management process as established in the risk policy: a) Operational risks are identified by using methods that allow for the mapping of processes and therefore their association with the various types of effective/potential operational risks. b) The assessment of operational risks, which involves 3 main sub-activities:
o Self Risk Assessment (SRA) is the instrument used to assess operational risks aimed at supplementing, from a forward-looking and historical perspective, the loss data collected in the Loss Data Collection (LDC) processes.
o The Loss Data Collection procedure, which originates from regulatory and administrative requirements. With respect to regulatory requirements, the New Supervisory Instructions for banks provide, specifically for Banks that intend to adopt standard or advanced methods for the calculation of the capital requirement, the obligation to systematically record at least the most significant losses (and the relevant recoveries). The BPI Group, adopting the recommendations of the DIPO Consortium (Italian Operational Losses Database), has placed
298 the threshold over which the loss is considered significant at €5,000.
It should be noted in this point that the BPI Group joined the DIPO Consortium at its establishment, and since 2003 has undertaken to provide half-yearly reports of significant losses (>=€5,000) recorded in the income statement according to the Consortium rules on Group companies that exceed the established minimum thresholds (5% of total Group income, or 5% of total Group administration costs).
o The calculation of the capital requirement, determined for regulatory and administrative purposes. c) monitoring, i.e. constant supervision, of the bank’s level of vulnerability to potential operational risks, through the establishment of integrated “risk key indicator” systems. d) Operational risks are mitigated by transferred the risk to third parties, through the adoption of improvements to the internal control system or through streamlining of operational processes. e) the regular preparation of adequate reports, their characteristics differentiated according to the requirements of the different users.
With respect to reporting of operational losses, since the month of September 2006 the tables of analysis and valuation of significant operational losses (and the relevant recoveries), concerning Group companies that report for DIPO purposes are regularly brought to the attention of the Group Risks Committee.
QUANTITATIVE INFORMATION
With regard to quantitative aspects, the operational risk management model works to manage and maintain the impact of operational risks to a level below the tolerance threshold considered adequate in terms of strategic planning. Given the size and variety of the BPI Group’s business, potential events can a priori concern any type of legally-defined operational risk and be caused by any risk factor indicated in the definition of risk.
From a reference sample of individual losses exceeding the thresholds provided by the Consortium (see above) and notified to DIPO by Group companies in 2006, it can be seen that the most frequent type of loss is external fraud, representing 78.05% of the total number of events recorded (within this category thefts constituted 92.71% of cases), followed by the execution, delivery and process management category, which made up 15.45% of the total.
Section 2 – Risks of insurance companies
The BPI Group controls the insurance company Area Life International Assurance Ltd (which appears in the consolidated financial statements with a summarised contribution of its assets, liabilities, costs and revenues to the “Discontinued non-current assets/liabilities” and “Profit/loss from discontinued operations after tax”) and exercise joint control with the Aviva Group of insurance companies Eurovita S.p.A. and Aviva Previdenza S.p.A. through the holding company Finoa S.r.l. (consolidated according to the equity method and entered in the balance sheet assets with a value of €89.7 million).
On December 23 and 30, 2005, ISVAP issued Circular no. 574/D on passive reinsurance and Circular no. 577/D on risk management and internal control systems.
Italian insurance companies, subject to control by Isvap, are taking steps to comply as best as possible with the instructions issued by the Supervisory Board by preparing a comprehensive operating plan, in such a way as to consider the close correlation between the above circulars and to plan all the necessary organisational, procedural and managerial adjustments that these require.
299 As regards Circular no. 577/D in particular, in view of the scope and complexity of the measures envisaged, which are part of the development of the European regulatory framework, oriented increasingly towards Solvency II, an ad hoc project was launched with a dedicated working group.
In this project, in view of the dates set in the Circular and the reports to be sent to ISVAP, the necessary measures are being completed.
As regards these risks, it is specified that the impact of the companies in question on the total consolidated assets is scarcely significant.
Section 3 – Risks of other companies
There are no further risks to be reported in relation to the other companies included in the scope of consolidation that do not form part of the banking group nor the insurance companies.
Specifically, with regard to the Group's property companies, it should be noted that almost all investments concern operating Group properties and that specific valuations of the property assets, carried out at the end of 2006, showed that their values were significantly higher than the book values.
300 Part F – INFORMATION ON SHAREHOLDERS' EQUITY Section 1 – Consolidated shareholders' equity
Management of the group's capital has a very important role within operational activities.
The concept of "capital" corresponds to the regulatory definition. In particular, according to the Supervisory Authority, this concerns the core capital (Tier 1), the supplementary capital (Tier 2) and Tier 3 for the part eligible to cover market risks.
Management and allocation of the regulatory capital falls under the planning, analysis and control process.
The regulatory capital is illustrated in the following section. As regards the composition of the Bank's shareholders' equity, the type of capital instruments and the composition of capital and reserves, refer to the appropriate section in Part B.
Section 2 – Regulatory capital and capital-adequacy ratios
2.1 Regulatory capital
A. Qualitative information
The group has issued a series of subordinated liabilities which can be included in the supplementary capital, and a number of hybrid capital instruments and innovative capital instruments, which are illustrated below:
301 Subordinated liabilities
Curre Maturity Conversion right / Book value Issuer nominal value Interest rate Coupon Issue date Prepayment ncy date other clauses 31/12/2006 The Bank has the right Option to convert into fixed rate of 4.75% to prepay the loan as shares at the ratio of Banca Popolare 299,954,030 euro p.a. for the term of yearly 20/03/2000 01/06/2010 from June 15, 2005, if one share for each 303,653 Italiana the loan authorised by Banca bond as from the 40th d'Italia day after issue Floating - linked to Banca Popolare Repayment in full at No option to convert 150,000,000 euro the 3-month Euribor + yearly 16/11/2000 16/11/2007 149,933 Italiana maturity into capital 1.15% per annum fixed rate of 6.75% Banca Popolare Repayment in full at No option to convert 20,000,000 euro p.a. for the term of quart. 10/01/2001 10/01/2008 20,301 Italiana maturity into capital the loan Floating - linked to Banca Popolare Repayment in full at No option to convert 25,000,000 euro the 3-month Euribor quart. 10/01/2001 10/01/2008 25,245 Italiana maturity into capital +1% per annum Repayment with Floating-rate issues made in the years 2001/2003 with final maturity No option to convert Efibanca 20,400,000 euro constant 5-year 20.488 in 2008 into capital repayment plan 3.60% the first coupon to mature Banca Popolare payable 27/6/03. For half- Repayment in full at No option to convert 109,036,000 euro 27/12/2002 27/12/2012 109,087 Italiana the others, rate linked yearly maturity into capital to Euribor 0.75% spread Fixed rate of 4.50% p.a. until 27/12/2007; Banca Popolare half- Repayment in full at No option to convert 100,000,000 euro Fixed rate of 5% p.a. 27/12/2002 27/12/2012 100,621 Italiana yearly maturity into capital from 27/6/2008 until maturity Floating - linked to half- Repayment in full at No option to convert Caripe 35,000,000 euro the 3-month Euribor 03/11/2003 03/11/2008 34,974 yearly maturity into capital +0.50% per annum
Repayment in full at Floating - linked to maturity (the Bank has Banca Popolare di the 6-month Euribor + half- the option of prepaying No option to convert 5,000,000 euro 03/12/2004 03/12/2014 4,975 Mantova 0.50% (step up yearly the loan as from into capital clause after 5th year) December 3, 2009 if authorised by Banca d'Italia) floating - linked to the Banca Popolare half- Repayment in full at No option to convert 173,736,000 euro 3-month Euribor plus 29/04/2005 29/04/2015 172,251 Italiana yearly maturity into capital 60 bp Floating, linked to the Banca Popolare Repayment in full at 3rd level subordinated 100,000,000 euro 3-month Euribor + 65 quart. 18/05/2005 18/11/2007 99,878 Italiana maturity loan bp
302 Hybrid capital instruments (Upper Tier II)
Conversion Nominal Maturity Book value Issuer Currency Interest rate Coupon Issue date Prepayment option / various value date 31/12/2006 clauses floating - linked to the 6-month Repayment in full No option to Banca Popolare Italiana 219,500,000 euro Euribor plus a half-yearly 24/02/2000 30/06/2010 219,538 at maturity convert into capital spread of no less than 80 bp fixed rate of Repayment in full No option to Banca Popolare Italiana 100,000,000 euro 6.75% p.a. for the quart. 15/12/2000 15/12/2010 100,206 at maturity convert into capital term of the loan floating - linked to Repayment in full No option to Banca Popolare Italiana 50,000,000 euro the 3-month quart. 15/12/2000 15/12/2010 50,100 at maturity convert into capital Euribor + 1% fixed rate of ex-Reti Bancarie (now Banca Repayment in full No option to 50,000,000 euro 5.75% p.a. for the half-yearly 14/12/2001 14/12/2011 50,134 Popolare Italiana) at maturity convert into capital term of the loan Floating, linked to ex-ca Eurosistemi/Reti Bancarie Repayment in full No option to 75,000,000 euro the 3-month quart. 14/12/2001 14/12/2011 70,156 (now Banca Popolare Italiana) at maturity convert into capital Euribor +100 bp 3.40% the first coupon to mature payable 27/6/03. Repayment in full No option to Banca Popolare Italiana 182,417,000 euro For the others, half-yearly 27/12/2002 27/12/2012 162,490 at maturity convert into capital rate linked to Euribor + 0.50% spread fixed rate of Repayment in full No option to Banca Popolare Italiana 100,000,000 euro 5.30% p.a. for the half-yearly 27/12/2002 27/12/2012 100,058 at maturity convert into capital term of the loan fixed rate of 4.625% p.a. for Repayment in full No option to Banca Popolare Italiana 300,000,000 euro half-yearly 23/03/2005 23/03/2015 308,706 the term of the at maturity convert into capital loan
Innovative capital instruments
Conversion nominal Maturity Book value Issuer Currency Interest rate Coupon Issue date Prepayment option / various value date 31/12/2006 clauses Repayment, after rate linked to 3- Banca Popolare di Lodi Investor irredeemabl authorisation of 25,000,000 euro month Euribor + quart. 06/03/2000 Preference shares 25,416 Trust 1 e the Banca d’Italia 325 bp from 06/03/2010 Repayment, after rate linked to 3- Banca Popolare di Lodi Investor irredeemabl authorisation of 75,000,000 euro month Euribor quart. 06/03/2000 Preference shares 75,028 Trust 2 e the Banca d’Italia +300 bp from 06/03/2010 6.742% until Repayment, after Banca Popolare di Lodi Investor 30/06/2015, rate irredeemabl authorisation of 500,000,000 euro yearly 30/06/2005 Preference shares 508,419 Trust 3 linked to 3-month e the Banca d’Italia Euribor + 525 bp from 30.06.15
303 B. Quantitative information 2006 2005 A. Core capital before the application of prudential filters 2,215,551 1,414,652 Core capital prudential filters: - Positive IAS/IFRS prudential filters 323,900 915,545 - Negative IAS/IFRS prudential filters -3,061 -477,798 B. Core capital after the application of prudential filters 2,536,390 1,852,399 C. Supplementary capital before the application of prudential filters 2,039,001 1,876,262 Supplementary capital prudential filters: - Positive IAS/IFRS prudential filters - Negative IAS/IFRS prudential filters -37,109 -23,863 D. Supplementary capital after the application of prudential filters 2,001,892 1,852,399 E. Total core and supplementary capital after the application of filters 4,538,282 3,704,798 Deductions from the total core and supplementary capital -291,728 -488,929 F. Regulatory capital 4,246,554 3,215,869
304 1.3. Capital adequacy
As shown in the table below, the solvency ratio is 13% compared with a minimum group regulatory requirement of 8%. Amount 31/12/2006 Amount 31/12/2005 Weighted Categories/Values Non-weighted Non-weighted Non-weighted amounts / amounts amounts amounts requirements A RISK ASSETS (tab. 2.3 B of the financial statements) A.1 CREDIT RISK (standard approach) 38,198,402 31,288,970 38,573,114 32,294,976 CASH ASSETS 33,889,233 29,235,728 35,587,745 29,910,560 1. Exposures (other than equities and other subordinated assets) to (or guaranteed 28,380,714 24,923,711 30,343,697 26,218,278 by): - 1.1 Governments and central banks 2,568,974 6 1,274,683 - 1.2 Public entities 420,638 85,645 458,505 91,701 - 1.3 Banks 678,241 125,768 3,106,055 622,123 - 1.4 Other entities (other than mortgage loans on residential and non-residential 24,712,861 24,712,292 25,504,454 25,504,454 properties) 2. Mortgage loans on residential properties 2,054,744 1,027,371 1,624,602 821,785 3. Mortgage loans on non-residential properties 244,962 196,823 574,934 543,451 4. Shares, shareholdings and subordinated assets 1,160,537 1,508,533 840,257 871,726 5. Other cash assets 2,048,276 1,579,290 2,204,255 1,455,320 OFF-BALANCE-SHEET ASSETS 5,554,419 3,158,881 4,191,154 3,567,071 1. Guarantees and commitments to (or guaranteed by): 5,169,794 3,075,744 3,679,399 3,455,567 - 1.1 Governments and central banks 12,275 2 289 - 1.2 Public entities 51,798 3,652 23,926 - 1.3 Banks 375,707 60,720 256,336 51,267 - 1.4 Other entities 4,730,014 3,011,370 3,441,286 3,399,514 2. Derivative contracts to (or guaranteed by): 384,625 83,137 469,317 111,504 - 2.1 Governments and central banks - 2.2 Public entities - 2.3 Banks 308,767 61,733 - 2.4 Other entities 75,858 21,404 469,317 111,504 DOUBTFUL ITEMS 1,245,250 1,105,639 1,205,785 1,182,655 B CAPITAL REQUIREMENTS (tab. 2.3 B of the financial statements) 2,578,799 2,670,580 B1 CREDIT RISK 2,503,518 2,583,598 B2 MARKET RISKS 52,660 60,271 1. STANDARD APPROACH 152,660 371,107 of which: - risk of position in debt securities 59,911 104,209 - risk of position in equities 84,049 254,930 - exchange risk 2,166 209 - other risks 6,534 11,759 2. INTERNAL MODELS of which: - risk of position in debt securities - risk of position in equities - exchange risk B3 OTHER CAPITAL REQUIREMENTS 23,021 26,711 B4 TOTAL CAPITAL REQUIREMENTS (B1+B2+B3) 2,578,799 2,670,580 C RISK ASSETS AND CAPITAL ADEQUACY RATIOS C1 Risk-weighted assets (*) 33,484,983 37,267,701 C2 Core capital/risk-weighted assets (Tier 1 capital ratio) 7.57% 4.97% C3 Regulatory capital/risk-weighted assets (Total capital ratio) 12.98% 9.46%
(*) Total capital requirements multiplied by the reciprocal of the compulsory minimum ratio for credit risks.
305 Part G – COMBINATION TRANSACTIONS INVOLVING BUSINESSES OR BUSINESS DIVISIONS
Section 1 – Transactions made out during the year
1.1 Combination transactions
No significant transactions for the purposes of the IFRS 3 (Business Combinations) were made during the year.
There were some extraordinary transactions that concerned Group companies. A summarised description of the transactions is set out below.
On 29 September 2006, Banca Popolare Italiana entered into agreements relating to a sale/purchase of branches with the Banco Popolare di Verona e Novara Group.
The transaction, effective on 1 October 2006, provided for the sale to the Banco Popolare di Verona e Novara of 18 Banca Popolare Italiana branches and the Banca Popolare del Trentino trademark, with the simultaneous acquisition of an equal number of branches. Of the latter, 4 branches were purchased by the Cassa di Risparmio di Pescara, 11 branches by the Cassa di Risparmio di Lucca Pisa Livorno S.p.A., and 3 branches by the Banca Popolare Italiana.
The transaction, which referred to broadly similar assets, was treated as a sale/purchase of groups of assets and liabilities, excluding it from the scope of application of the IFRS 3.
After the transaction, the revenues of the Banca Popolare Italiana Group were substantially in line with the situation prior to the transaction and therefore, given the smallness of the impact on total revenues, no comparative figures have been provided
On 30 June 2006 the three Tuscan “Casse” were involved with the Parent bank in the development and implementation of a plan to strengthen the Tuscan banking centre. The plan led to a combination and the creation of Cassa di Risparmio di Lucca Pisa Livorno S.p.A. The combined companies were controlled by the acquiring company Cassa di Risparmio di Lucca and already belonged to the Banca Popolare Italiana Group and were therefore subject to common control.
On 30 September 2006 the combination was implemented in a merger by incorporation between Banca Popolare Italiana and the subsidiaries Reti Bancarie and Bipielle Investimenti.
Even though they involved the acquisition of further shares after control was obtained, the mergers by incorporation in question are, pursuant to letter b) of paragraph 3 of IFRS 3 (Business Combinations), excluded from the scope of application of the provision.
The purchase of residual shares in the acquired companies by exchange with newly-issued shares in the acquiring company’s shares is classed as the purchase of minority shares. Such a transaction is not governed by either the IFRS 3 or other IFRS principles.
See the Report on Operations for an analytical description of the accounting treatment of this transaction and the relevant effects.
1.2 Other information on combination transactions
1.2.1 Annual changes in goodwill
The sale price of the aforementioned corporate assets was provisionally determined as a whole, on the basis of their management situation as at 31 December 2005 and calculated as the sum of the net value of the complexes themselves and their commercial goodwill. Goodwill was determined by applying certain valuation coefficients to direct and indirect deposits existing on 31 December 2005 resulting from the aforementioned management situation.
306 By virtue of these procedures the Group has collected provisional goodwill of €24.3 million in the sale of 18 branches to Banco Popolare di Verona e Novara, while it paid €18.1 million for the acquisition of the 18 branches.
On the basis of the final balance sheets of the sale dated 30 September 2006 and compiled in January 2007, the provisional goodwill values for the exchanged branches are still being assessed, as provided by the contractual clause, and therefore the provisionally determined amounts may undergo adjustments during 2007.
The profit from the sale of the bank branches, amounting to €24.3 million, has been charged to item 270 “Profit from the sale of investments” of the income statement.
Taking account of the fair value of the net assets acquired, the goodwill charged by the Group to item 120 “intangible assets” for the transaction amounted to €27.7 million. This figure was then increased by €0.8 million in incidental expenditure directly connected to the purchase transaction.
See section 12 of the Notes on consolidated assets for a more detailed analysis of changes during the year.
Section 2 – Transactions made after the balance sheet date
2.1 Combination transactions
On 10 March 2007 shareholders’ meetings of Banca Popolare Italiana and Banco Popolare di Verona e Novara were held in the cities of Lodi and Verona to approve the merger plan presented by the Boards of Directors of the banks. The date of effect of the merger is planned for 1 July 2007. With the respective approvals, the shareholders of the two Parent banks have confirmed the validity of the plan developed in 2006 and formally approved on 13 December 2006 pursuant to Article 2501—ter of the Civil Code. At the said meetings, shareholders in the banks resolved to buy back the respective shares up to a maximum of 5.4% of the respective share capitals. For more details see the Information Document prepared pursuant to Article 70, paragraph 4 of the Regulations approved by CONSOB resolution 11971 of 14 May 1999, as amended.
The merger, which involved the amalgamation of two separate corporate entities into a single entity required to prepare financial statements, represents a method for creating a “business combination” according to the provisions of international financial reporting standards. According to these standards, the methods for recording business combinations are governed by IFRS 3.
Even though the merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana was conceived as a merger “between equals”, it is necessary, solely for the purpose of accounting registration of the transaction, to identify the “purchaser”. Given that in this case it is not immediately possible to identify the entity that in the context of the transaction has the power to determine financial and management policies of the Banco Popolare (the new company arising from the merger), the purchaser must be identified on the basis of available evidence. The main indicators to be considered in this regard are:
the existence of a differential between the number of new ordinary shares issued by the Banco Popolare that are assigned to the two entities that participate in the merger; the existence of a significant differential between the fair values of one of the two entities subject to combination; the ability of one of the two combined entities to supervise the selection of the management team of the entity resulting from the combination; the existence of a significant differential between the sum of assets or revenues of one of the two entities subject to combination. These indicators lead to the conclusion that the Banco Popolare di Verona e Novara is the purchaser.
307 The method prescribed by IFRS 3 for recognition is the so-called ‘purchase method’ which, after the purchaser has been identified, provides for the determination of the cost of the business combination.
In this case, the cost of the business combination in question will be represented at fair value on the date of the exchange of shares in the Banco Popolare issued and assigned in a share swap to the shareholders of the Banca Popolare Italiana plus costs directly attributable to the business combination such as, for example, professional fees for valuations, opinions on appropriateness, and other consultancy regarding the "combination”.
The fair value on the date of exchange will in fact coincide with the first stock exchange listing of shares in the new entity that emerges from the combination.
The cost of the business combination thus determined must finally be allocated, on the date of acquisition, to the assets and liabilities and potential liabilities of the "purchased" company, i.e. Banca Popolare Italiana. This allocation must occur on the basis of the fair value of the assets, liabilities and potential liabilities on the date of effect of the merger. The proportional of the cost of the combination as determined above that exceeds the net summation of the fair value of the assets, liabilities and potential liabilities of the Banca Popolare Italiana may be attributed to any intangible assets not recorded in the balance sheet of the purchased company. The residual difference may be recorded as goodwill.
The procedure described must be followed both for the recording of the transaction in the financial statements of the Banco Popolare and for the separate accounting of the transaction in the consolidated financial statements of the Group.
On the date of compilation of this document, both the cost of the combination and the fair value of the assets, liabilities and potential liabilities of the Banca Popolare Italiana may be estimated or in any case determined provisionally. These values, and the consequent amount of goodwill, will be definitively determined only at the end of 2007, or within the following twelve months, if at the end of 2007 there are still grounds to consider the values provisional.
The operational methods of the merger make it impossible to objectively determine the fair values of participants, and therefore the goodwill. Therefore, for information purposes, it should be recalled that the Boards of Directors of the two banks have resolved to propose the following financial conditions to their respective shareholders’ meetings: 0.43 shares in Banco Popolare for each BPI share, subject to distribution to shareholders of the share premium account in the sum of €2.17 per share, corresponding to an implicit valuation of the BPI share at €12.00 on the basis of the listing of BPVN shares at 13 October 2006 (the trading day before the resolution). These conditions were equivalent to a share swap (excluding any cash component) of 0.526 shares in Banco Popolare for each BPI share.
As a result of the merger, all BPVN and BPI shares not held respectively by them will be cancelled and, on the basis of the aforementioned exchange ratios replaced with ordinary shares in Banco Popolare. Any shares held by participants will on the other hand be cancelled without a share swap. At the moment of assignation, the newly-issued shares in Banco Popolare will be listed.
To this end, all shares in BPVN and BPI in circulation on the date of effect of the merger will be cancelled, and simultaneously the capital of the newly-established Banco Popolare will be composed of: a) a maximum of 375,328,315 ordinary shares of a nominal €3.60 each, to be assigned to BPVN shareholders. This figure may, however, rise to a maximum of 378,575,815 ordinary shares with a nominal value of €3.60 each in the event of the full exercise of options allocated to BPVN Group managers under the stock option plan, which may be exercised until the date of effect of
308 the merger, or reduced following the cancellation, without a share swoop, of any own shares held by BPVN; b) a maximum of 293,415,032 ordinary shares of a nominal €3.60 each, to be assigned to BPI shareholders. This figure may, however, rise to a maximum of 301,323,079 ordinary shares with a face value of €3.60 each, in the event of the full exercise of all conversion rights arising from the convertible bonds indicated in the POC, or be reduced following the cancellation without a share swap of any own shares held by BPI.
Shareholders will not be charged for share swap transactions.
309 Part H – RELATED PARTY TRANSACTIONS
The companies of the Bipielle Group have adopted procedural and substantial rules in relation to so called “related party transactions” through the establishment of a Group system aimed at keeping a constant watch over the aforesaid transactions.
A board regulation has therefore been adopted and a Group database has been implemented on the basis of statements made by individual company representatives.
The Boards of Directors of Group companies are informed periodically about the conclusion of related party transactions in reports which show aggregate data (if the above-mentioned transactions are ordinary and significant) or specific data in the case of unusual or atypical transactions.
It is important to underline that, in this context, the Group has decided, from an increasingly prudential perspective, that the "related parties" of each Group company should include entities that are a "related party" for the company itself and entities that are a "related party" at Group level.
As regards related party transactions, as defined pursuant to IAS 24, Art. 2359 “Subsidiaries and associated companies” of the Italian Civil Code and Consob Regulation No. 11971/99 (as amended by Consob Communication No. 14,990 of 14 April 1990), it should be noted that transactions during the year with such counterparties fall within the normal operations of the company, in whose interest they were performed, and that they were performed in a timely manner and under free market conditions.
1. Information on remuneration of directors and managers
For information on the remuneration paid to directors and managers with strategic responsibilities, refer to the appropriate section of the Notes on the Individual Financial Statements of the Parent Bank.
2. Information on related party transactions
The following tables summarise the capital relationships in existence as at 31 December 2006. ITEMS amounts in Euro/000 agreed investments 927,018 Investments used 951,312 Settlements on proposals for increased credit limits 204,256 Settlements on proposals for reduced credit limits 482,230 Guarantees received 228,726 Endorsement credits - agreed 95,689 Endorsement credits - used 89,206 Direct deposits 283,255 Indirect deposits 899,559 Interest received 88,504 Interest paid 5,474 Commission income 2,242 Commission expense 9,690 Administrative expenses 7,631 Other operating income: 941 Balance sheet purchases/sales for services rendered -464
With respect to the corresponding balance sheet items, the lending indicated above represents 3.31% of customer loans, 0.88% of direct deposits, 4.31% of interest received, 0.45% of interest
310 paid, 0.46% of commission income, 10.98% of commission expense and 1.62% of administrative expenses.
311 Part I – PAYMENT AGREEMENTS BASED ON OWN CAPITAL INSTRUMENTS
As at the balance sheet date, the Parent bank had not made any decision regarding transactions of this kind.
The stock option plan adopted by Efibanca S.p.A. is described below.
A. QUALITATIVE INFORMATION
1. Description of the payment agreements based on own capital instruments.
The shareholders' meeting of September 23, 2004 resolved on a divisible capital increase, without pre-emptive right, from €89,353,504.00 to a maximum of a further €3,723,062.00 corresponding to the issue of a maximum of 3,723,062.00 ordinary shares, to be allocated towards a stock option plan for the Chief Executive Officer and bank employees with managerial duties.
The aim of the plan is to secure the medium-term loyalty of the plan's beneficiaries and to involve them in the process of increasing the value of the company.
The issue of each new share was set, on the basis of an external valuation, at €7.83, of which €6.83 is premium.
The option rights given to beneficiaries can only be exercised when both of the following conditions occur:
• the Chief Executive Officer must remain in his post for the three-year period 2004 - 2006. Other beneficiaries must continue to be employed until the period when the option rights can be exercised (1.4.2007 - 30.6.2007);
• the value of the bank, calculated by multiplying the Gross Operating Income taken from the financial statements for the year ending December 31, 2006 by a factor of 9, is at least €792 million.
The shareholders’ meeting of 19 December 2006 resolved to issue the beneficiaries with “put option” on the shares according to the plan, the exercise price of which is correlated to the value of the bank and in any case not exceeding €9.82 per share.
B. QUANTITATIVE INFORMATION 1. Changes over the year
31/12/2006 31/12/2005 Items/Number of options and exercise prices Number of Average option Average Number of Average option Average options prices maturity options prices maturity A. Opening balance 3,723,062 30/06/2007 B. Increases B.1 New issues 3,723,062 30/06/2007 B.2 Other increases C. Decreases C.1 Cancelled C.2 Exercised C.3 Expired C.4 Other changes 100,000 D. Closing balance 3,623,062 9.82 30/06/2007 3,723,062 30/06/2007 E. Options exercisable at end of year
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