Annual General Meeting
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LIMITED COMPANY SHARE CAPITAL € 443,616,723.50 HEAD OFFICE: PIAZZETTA ENRICO CUCCIA 1, MILAN, ITALY REGISTERED AS A BANK. PARENT COMPANY OF THE MEDIOBANCA BANKING GROUP. REGISTERED AS A BANKING GROUP Annual General Meeting 28 October 2020 www.mediobanca.com translation from the Italian original which remains the definitive version This document was submitted to the approval of the Board of Directors of Mediobanca on 16 September 2020. Please note that the Bank’s external auditors, PricewaterhouseCoopers S.p.A., are still in the process of completing the activities necessary in order to release the statement required under Article 14 of Italian Legislative Decree 39/10 and by Article 10 of Regulation (EU) no. 575/2013. The individual and consolidated financial statements for the year ended 30 June 2020, plus the reports by the external auditors and Statutory Audit Committee, will be made available to shareholders and investors for purposes of the Annual General Meeting on 28 October 2020 by the terms set by law. BOARD OF DIRECTORS Term expires Renato Pagliaro Chairman 2020 * Maurizia Angelo Comneno Deputy Chairman 2020 Alberto Pecci Deputy Chairman 2020 * Alberto Nagel Chief Executive Officer 2020 * Francesco Saverio Vinci General Manager 2020 Marie Bolloré Director 2020 Maurizio Carfagna Director 2020 Maurizio Costa Director 2020 Angela Gamba Director 2020 Valérie Hortefeux Director 2020 Maximo Ibarra Director 2020 Alberto Lupoi Director 2020 Elisabetta Magistretti Director 2020 Massimo Tononi Director 2020 * Gabriele Villa Director 2020 * Member of Executive Committee STATUTORY AUDIT COMMITTEE Natale Freddi Chairman 2020 Francesco Di Carlo Standing Auditor 2020 Laura Gualtieri Standing Auditor 2020 Alessandro Trotter Alternate Auditor 2020 Barbara Negri Alternate Auditor 2020 Stefano Sarubbi Alternate Auditor 2020 * * * Massimo Bertolini Secretary of the Board of Directors Emanuele Flappini Head of Company Financial Reporting CONTENTS Page Review of operations 6 Declaration by head of company financial reporting 74 Consolidated financial statements 75 Notes to the accounts 84 Part A – Accounting policies 87 Part B – Notes to the consolidated balance sheet 148 Part C – Notes to the consolidated profit and loss account 218 Part D – Consolidated comprehensive income 239 Part E – Information on risks and related hedging policies 240 Part F – Information on consolidated capital 338 Part G – Combination involving Group companies or business 348 units Part H – Related party disclosure 349 Part I – Share-based payment schemes 351 Part L – Segment reporting 355 Part M – Disclosure on leasing 361 – 4 REVIEW OF OPERATIONS MEDIOBANCA GROUP – 5 REVIEW OF GROUP OPERATIONS The twelve months under review reflect the unprecedented shock caused by the Covid-19 epidemic, which caused the leading global economies to stall rapidly and enter recession. Stock markets lost more than 30% in March 2020 compared to the start of the year, before gradually recovering by-end June. The most recent estimates for 2020 suggest global GDP will fall on average by 6.5%, Eurozone GDP by 9.2%, and Italian GDP by 11.6%, with the expectation that growth could resume from as early as 2021, but uncertainty over when end-2019 levels will be recovered. Prompt intervention by the main central banks and extraordinary fiscal policy measures implemented by the governments of individual countries and by the European Union through the Next Generation EU recovery facility helped markets remain under control. The initiatives promoted by the Italian government, with the “Cura Italia”, “Liquidità” and “Rilancio” decrees, have helped business’s production capacity and household spending to recover, with clear benefits not only to the cost of risk, but also to business volumes in terms of new loans. The set of measures adopted will start to affect public finance indicators as from this year, increasing public borrowing substantially, but in this Italy is in fundamentally the same situation as all the other main global economies. The Mediobanca Group went into this severe crisis scenario better placed than the 2008 and 2011 crises: more solid capital position (CET1 ratio near all-time highs), lower exposure to leverage lending, government bonds and trading activities, higher average corporate loan book rating, householder risk (mortgage lending and consumer credit) reflecting continuous improvement over the years, and strongly reduced exposure to equity compared to 2011. The Covid-19 crisis is only in part reflected in the Group’s accounts for the twelve months, which were helped by the solid results posted by the Group in the first eight months of the year, plus the healthy trend recorded in June 2020, Net profit totalled €600.4m, 27% lower than last year (€823m), with just €132.8m added in 2H (vs €467.6m in 1H) but 6 strongly impacted by various one-off items (including the RAM goodwill impairment charge). Revenues were unchanged at €2.5bn, and operating efficiency remained healthy (cost/income ratio 47.3%); profitability too continued to reflect satisfactory levels (ROAC for banking activities above 10%, ROTE 7%, which rises to 10% net of the one-off items), on a significantly improved capital position (CET1 ratio 16%). The results, as mentioned, reflect a series of one-off items, attributable in particular to the increase in the cost of risk deriving from recalculation of the expected loss based on the new macroeconomic scenario (which is particularly severe for 20201), plus the impairment charge to the RAM investment (approx. €65m) which became necessary following the sharp contraction in the company’s profitability as a result of redemptions by institutional clients and the reduced growth prospects. In view of the most recent ECB recommendations, the Board has decided not to propose a dividend for the financial year under review. For the coming years, however, if the gradual recovery expectations for the world’s economies are confirmed, the Group may resume its dividend policy and its capital optimization plans, with a target annual CET1 ratio level of 13.5%, to be achieved inter alia through share buybacks and net of the capital used to strengthen the business lines. Revenues for the twelve months remained at last year’s levels at €2,512.9m (30/6/19: €2,524.7m) following the reduction posted in the last four months. The main income items performed as follows: — Net interest income was up 3.3% (from €1,395.6m to €1,442.2m), on higher contributions from Consumer Banking (up 5.5%, from €898.8m to €948m) and Wealth Management (up 4.2%, from €260.2m to €271m), while Corporate and Investment Banking effectively matched last year’s performance with €271.4m (30/6/19: €272.7m); — Net fee and commission income rose by 3.1%, from €611.2m to €630.2m, on a good performance by Wealth Management (fees up 9%, from €280.9m to €306.1m) which now accounts for virtually half the Group’s total; Corporate and Investment Banking’s contribution was virtually unchanged from last year, at €225.8m (€227.6m), following the consolidation of Messier Maris et Associés for the full twelve months (adding €33.8m), which was largely responsible for the impressive growth in fees earned from advisory business (up 28.4%, from €87.5m to €112.4m); 1 The internal scenario estimates an 11.6% reduction in Italian GDP in 2020, with a recovery of 0.8% in 2021 and of 5.2% in 2022; these figures are -9.2%, +0.1% and +4.7% respectively for the Eurozone, and -10.8%, +7.6% and +6.0% for the 7 — Net treasury income fell from €196.7m to €136.3m, on reduced contributions from activities with CMS clients of €86m (€122m) and the proprietary portfolio (trading and banking book), reflecting the sharp market correction which was only in part made up by end-June 2020; the Covid-19 impact may be quantified at approx. €45m, mostly due to the effects of postponement or cancellation of 2019 dividends on equity derivative valuations; — The equity-accounted companies’ contribution to net profit decreased from €321.2m to €304.3m, with the 4Q contribution of €54.8m reflecting the profits delivered by Assicurazioni Generali in 1Q 2020.2 The increase in costs (up 2.3%, from €1,161.9m to €1,188.9m), chiefly reflects the consolidation of Messier Maris et Associés (up €18.8m, €14m of which in labour costs), enhancement of the commercial network in Wealth Management (up €14m), and the Group’s IT initiatives. The heading also includes extraordinary expenses linked to the Covid-19 emergency totalling €3.8m; while €2.6m has also been donated to charitable initiatives. Loan loss provisions were nearly 70% higher than last year (up from €222.6m to €374.9m), translating to a cost of risk for the Group of 82 bps (vs 52 bps last year); the increase was concentrated in 4Q, due to the deterioration in households’ risk profile, and the worsening macroeconomic scenario. The Covid-19 effect can be estimated at €113m, around 30% of the total provisioning taken for the twelve months. The performance in Consumer Banking reflects the operating difficulties encountered in credit recovery and collection activities during the months of April and May in particular, plus a prudent valuation of the share of the portfolio involved in the moratoria: the increase in provisioning (up 36.5%, from €237.8m to €324.7m, €63.9m of which Covid-related) is reflected in the upward trend in the cost of risk (from 185 bps to 247 bps, with a high of 361 bps recorded in 4Q). Corporate and Investment Banking charged writedowns of €20m (compared with net writebacks of €36.2m last year), due to provisioning being recalculated on the basis of the new macroeconomic scenario for the wholesale portfolio (impact quantifiable as €37m). The increase in provisioning in Wealth Management was smaller in absolute terms, with adjustments increasing from €11.8m to €20.5m, concentrated in CheBanca! (up 41.6%, from €13.7m to €19.4m, €4.4m of which Covid-related).