REPORT AND FINANCIAL STATEMENTS 2018
Banca Sella S.p.A. Head office: Piazza Gaudenzio Sella, 1 - 13900 BIELLA (BI) - Tel. +39 015.35011 - Fax +39 015.351767 Share Capital and Reserves € 789,928,058 - ABI Code 3268 Listed on the Chamber of Commerce Companies Register of Biella and Vercelli - Tax ID Number 02224410023 - Member company of the VAT Group Maurizio Sella S.A.A., VAT no. 02675650028 - SWIFT: SELB IT 2B - Member of the Interbank Deposit Protection Fund and National Guarantee Fund Listed on the Register of Banks and Banking Groups - Subject to Management and Coordination by Banca Sella Holding S.p.A. - Website: www.sella.it - Institutional Website: www.sellagroup.eu – E-mail: [email protected] - PEC (Certified Email): [email protected]
Contents
Map of the Sella Group at 31 December 2018 ...... 3
Corporate Officers ...... 4
Report on Operations ...... 5
Financial Statement Schedules at 31 December 2018 ...... 62
Notes to the Financial Statements ...... 71
Part A – Accounting Policies ...... 72
Part B – Information on the balance sheet Assets ...... 130
Part B – Information on the balance sheet Liabilities ...... 167
Part C - Information on the Income Statement ...... 192
Part D - Comprehensive income ...... 216
Part E – Information on risks and related hedging policies ...... 218
Part F – Information on consolidated equity ...... 299
Part G Aggregation Operations Regarding Companies or Business Lines ...... 305
Part H Transactions with related parties ...... 307
Part I Payment Agreements Based on Own Equity Instruments ...... 311
Part L Segment Reporting ...... 312
Other information ...... 313
Report of the Board of Statutory Auditors 317
BANCA SELLA | 2 REPORT AND FINANCIAL STATEMENTS 2018
Map of the Sella Group at 31 December 2018
BANCA SELLA HOLDING S.P.A.
BANCA PATRIMONI BANCA SELLA FABRICK S.P.A. SELIR S.r.l. S.P.A. SELLA & C. S.P.A.
Banca Sella Chennai FAMILY ADVISORY SIM SELLA & PARTNERS VIPERA PLC AXERVE S.P.A. SELLA Branch TECHNOLOGY
SELLA FIDUCIARIA SELLA LEASING VIPERA KUBIQUE S.P.A. S.P.A. S.P.A. IMMOBILIARE VIPERA LANIFICIO CODD&DATE Srl SELLA PERSONAL SELLA SGR S.P.A. CREDIT S.P.A. CODD&DA HI‐MTF SIM VIPERA Srl SELLA BROKER S.P.A. S.P.A. DPIXEL Srl VIPERA Services Srl SMARTIKA S.P.A. BEESY Srl Private banking and investment services Services Open banking Commercial banking
Operating companies of Sella Group Related companies of Sella Group Other fully consolidated companies: Finanziaria 2010 S.p.A.; Miret S.A.; Sella Synergy India P.LTD; Mars 2600 S.r.l (special purpose vehicle for Group securitisation transactions); Vipera GmbH (in liquidation) Investee companies consolidated at Net Equity: S.C.P. VDP 1; Enersel S.p.A.
BANCA SELLA | 3 REPORT AND FINANCIAL STATEMENTS 2018
Corporate Officers
BOARD OF DIRECTORS in office up to the approval of the 2019 financial statements Chairman Maurizio Sella
Deputy Chairman Franco Sella
Managing Director Claudio Musiari
Director Elisabetta Galati
“ Viviana Barbera
“ Andrea Lanciani
“ Ferdinando Parente
“ Maria Clara Covini
“ Pietro Sella
“ Sebastiano Sella
“ Helga Garuzzo
“ Paolo Tosolini
“ Attilio Viola
BOARD OF STATUTORY AUDITORS in office up to the approval of the 2019 financial statements Regular Auditor - Chairman Paolo Piccatti
“ Claudio Sottoriva
“ Carlo Ticozzi Valerio
Alternate Auditor Daniele Frè
“ Michela Rayneri
GENERAL MANAGEMENT Director General and CEO Claudio Musiari
Co-General Manager and Deputy CEO Giorgio De Donno
BANCA SELLA | 4
Report on Operations
BANCA SELLA | 5 REPORT AND FINANCIAL STATEMENTS 2018
I. Main figures and indicators
Rating The agency DBRS assigns the bank the following ratings:
Rating - DBRS
Long-term rating for deposits BBB
Short-term rating for deposits R-2 (high)
Trend Stable
Staff and branches
Staff and branches Changes Items 31/12/2018 31/12/2017 absolute %
Employees 2,878 2,862 16 0.6% Branches 283 283 - -
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Summary data (amounts in thousands of euro) (*) Changes BALANCE SHEET DATA 31-12-2018 31-12-2017 absolute % Total assets 11,811,040.3 11,753,678.0 57,362.4 0.5% Financial assets (1) 1,677,342.4 1,174,896.1 502,446.3 42.8% Cash loans, excluding reverse repurchase agreements 6,986,839.5 7,001,626.4 (14,787.0) -0.2% reverse repurchase agreements - 2,135.8 (2,135.8) -100.0% Total cash loans (2) 6,986,839.5 7,003,762.2 (16,922.8) -0.2% Sureties issued 236,346.3 200,154.9 36,191.5 18.1% Equity investments 105,236.2 88,536.0 16,700.2 18.9% Tangible and intangible fixed assets 108,403.3 101,366.3 7,037.0 6.9% Direct deposits, excluding repurchase agreements payable 9,955,775.9 9,778,674.0 177,101.9 1.8% repurchase agreements payable 4,373.0 6,783.3 (2,410.3) -35.5% Total direct deposits (3) 9,960,148.9 9,785,457.3 174,691.60 1.8% Direct deposits from credit institutions 11,532.2 14,366.7 -2,834.55 -19.7% Indirect deposits valued at market prices 15,551,800.2 16,080,289.3 -528,489.15 -3.3% Global deposits valued at market prices (4) 25,523,481.3 25,880,113.4 -356,632.10 -1.4% Shareholders’ equity 750,667.6 797,404.6 (46,736.9) -5.9% Common Equity Tier 1 (CET1) 730,623.4 735,162.8 (4,539.5) -0.6% Tier 2 Capital (T2) 171,081.7 214,467.8 (43,386.0) -20.2% Total own funds 901,705.1 949,630.6 (47,925.5) -5.1% Changes RECLASSIFIED ECONOMIC DATA (5) 31-12-2018 31-12-2017 absolute % Net interest income 145,693.6 141,631.6 4,062.0 2.9% Gross income from services 289,944.5 288,934.7 1,009.8 0.3% Fee expenses (80,078.2) (74,455.2) (5,623.0) 7.6% Net revenues from services (net of fee expenses) (6) 209,866.4 213,848.0 (3,981.6) -1.9% Net banking income 355,560.0 355,479.6 80.4 0.0% Operating expenses net of recovery of stamp duties and other taxes (283,988.6) (273,761.6) (10,227.0) 3.7% Operating profit (loss) 71,571.4 81,718.0 (10,146.6) -12.4% Net value adjustments for credit risk (31,941.9) (33,885.2) 1,943.3 -5.7% Other income statement items (6,023.0) (26,730.8) 20,707.8 -77.5% Income taxes (8,461.5) (4,030.8) (4,430.7) 109.9% Profit (Loss) for the period 25,144.9 14,116.4 11,028.5 78.1%
(*) Assets and liabilities held for sale and the relative economic results have been transferred to the relevant asset, liability and income statement items for better comparison between the two years; (1) Obtained from the sum of items 20, 30 and 40, only debt securities from Balance Sheet Assets; (2) Obtained from item 40 b) of the Balance Sheet Assets, excluding debt securities; (3) Obtained from the sum of items 10 b) and 10 c) of the Balance Sheet Liabilities; (4) The aggregate (stated at market prices) includes administered securities and funds and the insurance funding component and, in contrast to other funding aggregates, refers to the management parameter on a like for like basis. The figures at 31 December 2017 differ from those published as, following a revision in the indirect funding calculations, it was deemed appropriate to also consider portions of pension funds placed by the Group company Sella Gestioni SGR, previously excluded. As a consequence, the comparison period was recalculated. (5) Items from the Reclassified Income Statement; (6) The aggregate represents the sum of the following items in the Reclassified Income Statement: net fees, net gains/(losses) on trading and hedging activities, gain (loss) from sale or repurchase of financial assets measured at amortised cost and assets measured at fair value through other comprehensive income; (7) Obtained from the sum of the following items: 160, 180, 190 and 200 of the Reclassified Income Statement.
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Alternative performance indicators
PROFITABILITY RATIOS (%) 31/12/2018 31/12/2017
R.O.E. (return on equity) (1) 3.4% 1.8% R.O.E. (return on equity) before corporate events 3.4% 1.8% R.O.A. (return on assets) (2) 0.2% 0.1% R.O.A. (return on assets) before corporate events 0.2% 0.1% Net interest income (3) / Net banking income (3) 41.0% 39.8% Net income from services (3) / Net banking income (3) 59.0% 60.2% Cost to income (4) 78.7% 75.7% Cost to income net of National Resolution Fund contribution (5) 76.4% 73.9%
PRODUCTIVITY RATIOS (amounts in thousands of euro) 31/12/2018 31/12/2017
Net banking income (3) / Average no. of employees 123,421.6 122,178.9 Operating result (3) / Average no. of employees 24,470.8 28,086.6 Cash loans / No. of employees at year end 2,427.7 2,401.9 Direct deposits / No. of employees at year end 3,459.3 3,419.1 Direct deposits / No. of employees at year end 8,868.5 9,001.7
EQUITY AND LIQUIDITY RATIOS (%) 31/12/2018 31/12/2017
Cash loans (8) / Direct deposits 70.2% 71.6% Cash loans (8) / Total assets 59.2% 59.6% Direct deposits / Total assets 84.3% 83.2% Liquidity Coverage Ratio (LCR) (6) 197.2% 194.1% Net stable funding ratio (NSFR) (7) 153.8% 154.4%
CREDIT RISK RATIOS (%) 31/12/2018 31/12/2017
Net non-performing loans / Cash loans - (net non-performing loans ratio) (8) 4.5% 6.4% Gross non-performing loans / Cash loans (8) - (gross non-performing loans ratio) 9.0% 11.8% Net bad loans / Cash loans (8) 2.6% 3.8% Gross bad loans / Gross Cash loans (8) 6.3% 8.5% Net loan loss provisions (9) / Cash Loans (8) - (Cost of credit %) 0.45% 0.53% Non-performing loans coverage ratio 52.5% 48.9% Coverage rate for bad loans 61.6% 58.3% Texas ratio (10) 63.8% 75.0%
SOLVENCY RATIOS (%) 31/12/2018 31/12/2017
CET1 ratio 14.63% 15.10% Tier 1 ratio 14.63% 15.10% Total capital ratio 18.06% 19.50%
(1) Ratio between “Profit for the year” and the sum of items 140, 150, 160 of the Balance Sheet Liabilities. (2) Ratio between “Net profit” and “Total assets”. (3) As in the Reclassified Income Statement. (4) Ratio between operating expenses, after deducting IRAP on personnel costs and net of losses connected to operating risks and net banking income. (5) Cost to income ratio calculated by subtracting the component relating to the National Resolution Fund from operating expenses. (6) LCR: minimum limit 100% as of 1 January 2018. (7) NSFR: officially effective as of 1 January 2018, with a minimum limit of 100%. (8) Loans are all net of reverse repurchase agreements. (9) Obtained from the sum of items 130 a) and 100 a) in the reclassified income statement. (10) Ratio between gross non-performing exposures and tangible shareholders’ equity, understood as the sum of shareholders’ equity and writedowns of non-performing exposures, and net of intangible assets (item 90 of balance sheet assets).
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Summary of performance
The 2018 Financial Statements for Banca Sella show net profit of € 25.1 million, up with respect to the € 14.1 million the previous year. The equity position is solid, with CET1 at 14.63% (15.10% at the end of 2017) and a Total Capital Ratio of 18.06% (19.50% at the end of 2017). Liquidity ratios are also positive: the LCR is 197.2%, while the NSFR is 153.8% (for both ratios, the minimum limit established is 100%).
The Bank continued its satisfactory performance with net interest income increasing to € 145.7 million (+2.9%) and net banking income stable at € 355.6 million. Net revenues from services fell slightly to € 209.9 million (-1.9%), while net fees grew by 3%, reaching € 206.3 million.
Direct deposits increased by 1.8%, reaching € 10 billion, while global deposits at market value came to € 25.5 billion, down slightly by 1.4%, due to the decrease in the prices of securities in customer portfolios, due to negative market performance. Loans were stable at € 7 billion, confirming the bank's support for household and business activities. All ratios relative to credit quality saw further improvement and the net NPL ratio fell to 4.5%. The Texas Ratio, which measures the strength of equity and provisions with respect to credit risks, improved to 63.8%, compared to 75% in 2017, continuing to be one of the best in the Italian banking sector.
Operating expenses increased by 3.7%, in part due to contributions paid to system resolution funds. During the year, the bank continued to invest in innovation and in transforming its customer service model, ever more focussed on consulting and technology. In particular, Banca Sella was one of the first European banks to make instant bank transfers available to its customers and implemented an innovative voice banking system that makes it possible to access internet banking through intelligent smart speakers.
II. Reference macroeconomic scenario
World context During 2018, the expansive phase continued in the main global economies. Nonetheless, growth took on a less homogeneous and synchronised character, reflecting the varying levels of support offered by domestic policies and the emergence of specific risk factors by area or country. The final projection for world growth in 2018 made by the International Monetary Fund (IMF) in its January 2019 update was 3.7%, compared to 3.8% in 2017 and is the combination of the 2.3% increase seen in advanced economies and the 4.6% figure seen in the emerging countries.
The US economy, continuing with one of the longest expansive cycles in the history of the country, ended 2018 with growth of 2.9%, based on the data available at present and the most recent IMF forecasts, exceeding the 2.2% seen in 2017. Significant support for growth during the year from the Trump administration's tax policy, with its decidedly expansive stance, including tax cuts and greater public spending, directly benefiting internal demand components. Private consumption, with growth rates of just under 3%, provided the main contribution to the trend in GDP, in a context of progressive strengthening of
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the job market, which returned to levels compatible with full employment. A significant improvement trend was seen in fixed private investments, outside of the residential segment. Public spending, which was neutral in 2017, represented an additional element supporting growth, while net foreign demand, as in the previous year, took value from the American economy, amidst confirmations of solidity in terms of imports and despite the recovery seen in the export of US goods and services. In terms of consumer prices, strengthening of core inflation and acceleration in the food item translated to an increase in inflation, which rose from 2.1% in 2017 to 2.5% in 2018. In contrast to what occurred in 2017, the trend for the energy component, which slowed during the year, did not support price trends on average. The consumption deflator, an inflation index monitored by the US central bank, simultaneously showed a change of 2.1%, compared with 1.8% the previous year. Guided by the dual objectives of supporting solidity on the job market and keeping inflation stable at around 2%, the Federal Reserve, as part of the cycle of increases begun in December 2015 starting from zero rates, increased the cost of money in increments of 25 basis points in 2018, at its meetings in March, June, September and December, bringing Fed funds to a range of 2.25-2.50%. The central bank also continued the process of resizing its own budget, based on a plan to gradually reduce the amounts reinvested relative to securities maturing, which had been acquired in the years following the major international crisis. The Federal Reserve intends to continue with this policy until it mainly holds public debt securities, in an amount no greater than that required to carry out activities associated with the implementation of monetary policy.
The economy in the euro zone saw progressive moderation of growth rates in 2018 which, based on the most recent IMF updates, likely ended with a 1.8% increase in GDP, down from 2.4% in 2017. A multitude of factors, in part temporary, contributed to the slowdown seen during the year: after 2017, which saw particularly strong growth, the economy in the euro zone is plausibly converging on growth rates in line with potential; the decreased dynamism in global commerce saw foreign demand contribute less to growth; while in the first quarter a particularly cold winter and strikes in the industrial sector slowed growth in certain countries within the area, national accounting figures for the third quarter suffered from the difficulties seen in the automobile sector, above all for Germany, following the introduction of new regulations for emissions. With reference to Italy, progressive weakening of the economic cycle was seen, initially driven by lower support from net exports and subsequently by the slowing of internal demand items, in a situation of decreased consumer optimism and, above all, lower business optimism. Based on the most recent forecasts from the International Monetary Fund, Italy ended 2018 with 1% growth in GDP, down from 1.6% the previous year. The climate of heightened uncertainty was fed, not only by an international situation that was less favourable, but by the internal political context, with a new administration taking office, following the elections of 4 March, and the subsequent definition of a public finance structure for upcoming years that was in breach of the fiscal regulations shared by countries in the euro zone. This led to a significant increase in Italian government interest rates and led EU institutions to request an adjustment to the 2019 budget, in the absence of which the beginning of an infraction procedure for Italy would have been considered. The agreement reached between the Italian government and the European Commission at the end of the year, implemented in the budget law approved by Parliament, downsized the expansive reach of the budget with respect to the initial version, leading to decreases in budget balances for 2019. With regards to consumer prices, the increase in energy prices supported the inflation trend, which between May and November oscillated around 2%. Core inflation,
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calculated net of the most volatile components, continued to be modest. The average inflation rate for 2018 in the region was 1.7%, compared to 1.5% in 2017. In Italy, where the inflation trend was similar to that described for the aggregate euro zone, the harmonised consumer price index saw an average change of 1.3%, in line with the previous year. Comforted by signs of a recovery for inflation, the European Central Bank (ECB) announced the end of the securities purchasing programme carried out under the quantitative easing plan in December 2018. At the same time, it emphasised its intention to continue a widely accommodating stance, confirming its policy of reinvesting for maturing securities and specifying that policy rates would remain at current levels at least through the summer of 2019 and, in any case, as long as necessary to guarantee convergence of inflation at levels in line with its objective.
In Asia, based on International Monetary Fund estimates, Japan ended 2018 with 0.9% growth, lower than the 1.9% seen in 2017, penalised by the lack of important fiscal stimulus effects implemented by the Abe government the previous year, and by lower international demand and natural disasters. Relative to consumer prices, the change in the index after the removal of fresh food products (Bank of Japan information) was on average 0.9% in 2018, compared to 0.5% in 2017, thanks to a favourable trend in energy prices expressed in Yen with reference to the previous year, as well as the recovery, even if modest and just slightly higher than zero, in the trend of the components most associated with the performance of the economy. During 2018, with the explicit intention of making it possible to stably achieve the target inflation rate of 2%, the BOJ continued the exceptionally accommodating policies it had begun in April 2013, confirming both the securities purchase programme and its objective of controlling the return rate curve (introduced in September 2016). Its willingness, relative to the latter objective, to accept variations from the declared benchmarks, indicated as of the July meeting, established the foundation for the sustainability of this policy over time.
In the emerging economies, despite widely varying macroeconomic conditions, 2018 saw a generalised tendency towards moderation in terms of growth. In China, gross domestic product grew by 6.6% (from 6.9% in 2017). Based on the most recent International Monetary Fund estimates, in India growth likely accelerated to 7.3% (6.7% in 2017). In Russia, performance is estimated at 1.7% (1.5% in 2017). For Brazil, the IMF estimates that 2018 ended with growth of 1.3%, an improvement with respect to the 1.1% recorded the previous year.
The financial markets
Long-term interest rates in the US ended 2018 at 2.7%, thirty basis points higher than those seen at the end of 2017. For most of the year, returns alternated between stable and increasing phases, reaching values of around 3.2% between October and November, due to confirmations of the solidity of the US economy and the Federal Reserve continuing to normalise monetary policy. Fears linked to developments in the commercial negotiations between the United States and China, the situation in Italy and the United Kingdom, the global economic cycle and the worsening of financial conditions led to a downward revision during the final months of the year for both growth prospects for the American economy and for interventions relative to the cost of money by the Federal Reserve, triggering the downward trend for long- term rates.
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After an initial upward phase, German return rates mainly trended towards stable or decreases during 2018. The average level seen during the year was 0.46%, just higher than the average of 0.37% seen in 2017. Various factors contributed to keeping German rates at historically low levels, from fears about trends in global growth, to uncertainties associated with the political situation in Italy, to signs of slowing in the European structure with the relative implications for ECB monetary policy management. Italian government interest rates instead saw a higher average value with respect to 2017 (2.6% in 2018, 2.1% the previous year), reflecting investor worries about the expansive stance of the budget policy proposed by the administration which took office after the elections on 4 March.
In 2018, the stock markets saw a decline of approximately 10,4% (MSCI World). The adjustment in prices affected all the main indexes and occurred in a situation characterised by contrasting signals coming from global economy activity and the gradual but persistent worsening of financial conditions during the year. Lower visibility of results due to trade tensions contributed to a reduction in assessments, bringing them to values close to historic averages.
The euro depreciated slightly in effective nominal terms during 2018 (-0.6%). The weakening of the shared currency was more significant relative to the US dollar (-4.5%).
Italian banking system
During the first 11 months of 2018, lending activity in the Italian banking system continued along the path of moderate expansion, with volumes benefiting from credit offer conditions that as a whole were relatively lenient during the first three quarters. On the other hand, the differential between interest receivable and payable rates become even smaller. During the first 11 months of 2018, the persistent low level of interest rates and competitive pressure on pricing of loans to customers were only partially balanced by a reduction in the cost of institutional funding. Banks continued to reduce their stock of impaired items, thanks to significant development on the secondary market, supported by use of the government program (GACS) which guarantees impaired securitisations and the decrease in the amounts of new impaired items, benefiting the cost of credit. Hence, profits for Italian banks in the first three quarters of 2018 improved, net of extraordinary income.
Italian bank loans to resident private customers came to € 1,328 billion in November 2018, with an annual drop of 3.2%. Loans to non-financial companies continued to decline in 2018, settling at € 697 billion at the end of November (-6%). The stock of loans to households remained substantially stable during the twelve month period, amounting to € 631 billion at the end of November. Nonetheless, once corrected for securitisations and disposals, system statistics show an upward trend of 2.31% for loans in November, with positive trends for both loans to households (+2.71%) and for loans to businesses (+1.06%), with varying trends by economic sector, size of loan, and business size and credit rating.
In 2018, credit quality continued to improve. In addition to the decrease in the flow of new impaired loans, a decrease in the amount of impaired exposures was also seen, hoped for by the ECB and supported by the possibility of making use of public guarantees for senior securities coming from impaired securitisations (GACS). In November, the stock of gross bad loans came to € 118 billion, with a downward trend of 32%, and accounting for 6.5% of gross total loans (9.1% at the end of 2017) and a ratio of net bad
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loans and loans of 2.18% (3.7% at the end of 2017). The switch to the IFRS9 accounting regime in 2018, in particular the First Time Adoption rules, gave banks the possibility to raise their coverage rates for impaired items, bringing financial statement values closer to disposal amounts and thereby reducing the future cost of credit, benefiting future profits.
At the end of November 2018, Italian bank deposits in euro, represented by residents from residents, non-residents and bonds, reached the level of € 2,218 billion, down by 0.3% on an annual basis. The bond component ended the year at € 441 billion, showing a decrease of 11.1%, against a 3.4% increase in total deposits, at € 1,722 billion. Hence, the restructuring of the funding mix continued for banks, with maturing bonds being replaced by deposits.
The profitability of the major banking groups during the first nine months of the year saw good recovery, net of extraordinary income associated with the consolidation operations carried out in the sector by some significant groups the previous year. The ROE for groups classified as significant, measured net of extraordinary components, rose from 4.4% in the first nine months of 2017 to 6.1%. Net banking income rose during the period by 4.3%, benefiting from progress seen in both net fees (+3%) and in net interest income (+5.8%). Lower operating expenses (-3.5%) and the reduction in net adjustments on receivables (-41%) also helped to improve profitability during the period with respect to the previous year.
The level of capitalisation for Italian banks fell slightly from the beginning of the year, suffering from the reduction in reserves of government securities measured at fair value. At the end of the third quarter, the CET1 ratio for significant groups was 12.7%, compared to 13.3% at the end of 2017.
III. Significant events during the year
Below are the most important events that occurred during financial year 2018 for Banca Sella.
On 1 January, accounting standard IFRS 9 took effect. For details about application and impacts please see the accounting policies, in part A of the notes to these financial statements, starting on page 81.
In June, Banca Sella and the B2Holding Group signed a contract to transfer non-performing exposures for around € 180 million (total accounting value). This transaction, which had a positive impact on the income statement of around € 0.3 million and further improved Banca Sella capital ratios, included both secured and unsecured positions.
On 24 July, Banca Sella Holding—both on its own behalf and representing Banca Sella—and the Group's Union Representatives signed an Agreement to access extraordinary benefits from the Solidarity Fund for professional retraining and requalification and to support employment and income for loan personnel (“early departure”) and to make use of expanded solidarity contracts, which involved a provision of around € 2.9 million.
In December, the Banca Sella Board of Directors resolved to transfer the Banca Sella Information Technology (IT) and Business Process Outsourcing (BPO) business unit to Sella Technology Solutions
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(hereafter, STS). Following this operation, which has been submitted to Bank of Italy for the regulatory authorisation process, Banca Sella will hold an equity investment in STS capital equal to 84%.
On 14 December, the Bank received the report from Bank of Italy after follow up inspection visits, relative to transparency issues, carried out at 5 branches between February and April 2018, following the inspection on the same issue in 2016 regarding remuneration for credit and overdrafts. The Supervisory Body indicated certain anomalies associated with procedural issues which were subsequently examined in depth, also with reference to the existence of analogous cases, and relative to which corrective actions were adopted, in some cases already executed and in other cases already planned and still to be implemented. On 13 March 2019, an appropriate response was sent to Bank of Italy by the Bank, the content of which was examined by and shared with the administrative bodies of the Bank and the parent company. IV. Significant events after year end
Effective as of 1 January 2019, Banca Sella took part in the establishment of the VAT Group headed by the final parent company, Maurizio Sella S.A.p.A. In accordance with the provisions of the law, all the Italian companies controlled by the final parent adhered to this group, with the exception of a company operating in the agricultural sector which obtained derogation of said provisions, after an appeal. The new legal entity is governed by title V-bis of Presidential Decree 633 of 1972, as amended. Adherents to the VAT Group lose autonomous subjectivity relative to value added tax and constitute an autonomous taxpaying entity identified with its own VAT number, which must be used by all adhering companies for which the individual VAT number is suspended, as the VAT Group is in effect. Transactions occurring between subjects in the same Group are irrelevant for VAT purposes. When the VAT Group opts for separation of assets, as in the case of the Maurizio Sella S.A.p.A. Group, internal transfers of goods and services from one business to another constitute VAT-relevant transactions, in some cases.
As of 1 March 2019, Sella Technology Solution (STS) became operational, created to provide technology and administrative services to all companies in the Group and to third party customers, pursuing the strategy of openness to third party customers, taking advantage of the skills and services characterising ICT and BPO, to grow and improve the capacity to create and manage services for internal and external customers. 412 colleagues in Italy are part of this new company, coming from various services provided by Banca Sella and Banca Sella Holding. The controlling interest in Selir was transferred to STS. This is a Group company responsible for developing IT products and providing administrative services. V. Outlook The external scenario
The global economy should show a trend towards moderate growth during 2019, more pronounced in the advanced economies, but which will still affect the aggregate of emerging economies.
In the United States, growth is expected to slow, while still remaining at an average rate during the year above its long-term potential. The slowdown will manifest as the temporary effects of the fiscal stimulus seen in 2018 are reduced and as the Federal Reserve continues with the gradual process of normalising monetary policy which began at the end of 2014. Additionally, the protectionist measures
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adopted and presented during 2018 by the same American administration relative to trade will have negative implications for the prospects of the US economy in 2019, as well as the wide-ranging indicators of growth losing strength at the global level. The euro zone economy is predicted to continue on a path of growth, at levels that could be close to or slighter lower than those seen during the second half of 2018. Domestic demand will continue to be the main motor driving the euro zone economy, in a situation characterised by the continuing orientation of an accommodating fiscal and, above all, monetary policy. In particular, private consumption should benefit from favourable conditions on the job market, from inflation returning to levels of under 2% and the continuation of widely expansive financial conditions. With regards to Italy, growth is expected to remain at modest levels, in consideration of the less benign international situation with respect to the recent past and of uncertainties with regards to internal policies.
Emerging countries should see GDP growth rates slow slightly, albeit with significant differences in the prospects of the individual economies, in any case remaining at levels higher than those of the advanced economies.
In terms of consumer prices, in the US it is expected that inflation will be at levels just slightly lower than those seen in 2018, as a consequence of the negative contribution from the energy component and stabilisation of core items. In the euro zone, inflation is expected to be at lower levels than in 2018, below the ECB's 2% target. The ECB will continue to reinvest the maturing securities it holds and will assess the possibility schedules for beginning the process of raising policy rates as a function of developments in the reference framework and prospects for inflation returning to levels in line with its objective rate. The Federal Reserve will also continue with its normalisation of monetary conditions. The guidelines for the official rate continue to signal the central bank's desire to gradually move towards raising rates, guided by its dual mandate of supporting employment and price stability, without losing sight of the implications developments in the global situation and international financial markets may have for the US economy: given the average judgement of the Monetary Policy Committee members at the meeting in December, the official rate will be between 2.75% and 3.0% at the end of 2019, i.e., 50 basis points higher than the current level. The Federal Reserve will also move forward with its gradual and predictable reduction of securities held.
In line with the expected developments for the Italian macroeconomic situation in 2019, credit provided to the non-financial private sector by banks could resize its path of growth with respect to 2018.
The tensions seen in 2018 on the sovereign debt market worsened financing conditions for banks which, as a consequence, reacted by making general terms and conditions stricter for loans granted towards the end of the year. The continuation in 2019 of higher levels of sovereign returns with respect to the average in recent years would strengthen the transmission of greater wholesale funding costs to rates applied to loans. The nearing of the TLTRO II deadlines (June 2020-March 2021) is likely to increase the cost of funding. Additionally, on 7 March 2019 the ECB announced the new long-term financing programme (TLTRO III), which will begin in September 2019. The programme, which will end in March 2021, involves a series of financing operations, all with a duration of two years, which will be carried out on a quarterly basis. The reference rate will be the Main Refinancing Operation rate, but with the inclusion of a mechanism to encourage credit disbursement by banks. The ceiling will be equal to 30% of total eligible
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TLTRO loans. In the coming months, the ECB will publish the details relative to the methods to be used for the financing operations. The project is aimed at reducing the cost of wholesale funding and impeding credit restrictions at a time of growing macroeconomic risks.
Credit quality, meaning the ratio of impaired loans relative to total loans, should further improve, despite the likely increase in the flow of new impaired items due to the weakened economic situation. The ECB's recent stance on coverage of impaired loans for Italian banks under direct supervision (for which progressive attainment of a level of coverage for impaired stock in line with that indicated for flows in the Addendum to the ECB Guidelines is required), should favour an additional decrease in impaired loans, encouraging disposals and active management of impaired portfolios. The already high coverage rates should also limit the impact on the cost of credit in 2019, which in any case will likely remain above pre- crisis levels.
Modest growth in credit volumes, accompanied by a slight increase in rates receivable and less favourable funding conditions should limit growth for net interest income. Revenues could continue to benefit from the effects of the restructuring of household financial assets towards the insurance and managed savings segment. Again in 2019, attention to innovation, efficiency in operating structures and cost containment will remain high. The level of capitalisation for Italian banks, lower with respect to the European average, will be supported by the result for the period and the reduction in risk weighted assets deriving from the disposal of NPLs and changes to European regulations.
Internal situation
The 2018-2020 Strategic Plan is structured around the following guidelines:
solidity liquidity and prudence; growth; profits; efficiency and innovation.
Solidity, liquidity and prudence are areas that have always distinguished the bank's management and will continue to be essential requirements that serve as the foundation for the growth-based goals in the strategic plan.
The growth strategies plan focus not only on development of new customers, but also on the bank's ability to reduce customer churn, thanks to better services offered to customers. To that end, the completion of the new service model (portfolio segmentation), expected for 2020, will lead to greater perceived quality and greater monitoring of customers thanks to: dedicated managers able to offer personalised consulting services, integrated relationships, using various interaction channels, optimised by a multichannel customer relationship management (CRM) platform, and a revision of the methods used to understand and analyse the customer experience in the various contact points (branches, call centers, etc.), ensuring an excellent customer experience.
The business strategies involve expanding available offerings with innovative services,
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increasingly using open architecture, as well as constant monitoring of product quality. Services should be simple, available via mobile and conceived on the basis of customer-centric design (CCD). Growth in volumes will be supported by making innovative technological solutions available, such as dedicated apps, digitalised products and services and the services offered to the banking and financial sector through outsourcing.
In a macroeconomic and financial situation that involves uncertainty and a decrease in the expectations for economic growth, an increase in profitability will be pursued through: the evolution of the mix in the loan portfolio, offering consulting for liabilities, to meet all the third capital requirements that businesses have, and development of investment consulting (accelerating the conversion from direct to indirect funding). Relative to pricing, the search for the right price for each customer should guide the way. For example, for credit pricing logics should be developed making use of automatic scoring algorithms for acceptance and pricing, as a function of the cost-to-serve for the relationship, risk and proper remuneration of capital absorbed.
To compensate for the increase in costs deriving from business growth, a focus on improving efficiency is fundamental. During the three years of the plan, efficiency will be recovered through innovative digitalisation activities, Robot Process Automation (RPA), as well as through adoption of Agile and customer-centric design methodologies in revising the customer relationship process (e.g., digitalisation of offers whether on-site, off-site or online) and territorial reorganisation.
Business continuity, strategy and profitability for the Bank
With reference to the Bank of Italy, CONSOB and ISVAP documents No. 2 of 6 February 2009 and No. 4 of 3 March 2010, in relation to information to be provided in financial reports on business prospects, with a particular focus on the company's ability to continue as a going concern, on the financial risks, on tests to reduced the value of assets (impairment tests) and on uncertainties in the use of estimates, the Board of Directors confirms that it has a reasonably expectation that the Bank can continue its operations in the foreseeable future and therefore attests that the annual financial statements have been prepared on the basis of this going concern assumption. There are no elements or signs in the Bank's equity and financial structure or in its operating trends that would lead to uncertainties regarding the company as a going concern. Therefore, in compliance with that envisaged in accounting standard IAS 1, the financial statements at 31 December 2018 were prepared with the assumption of business continuity.
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VI. Income Data Reclassified income statement (amounts in thousands of euro) (1) % change 31/12/2018 31/12/2017 over Bank of Italy Bank of Italy Items Circular 262/05 Circular 262/05 31/12/2017 5th update (IFRS 4th update (IAS 9 criteria) 39 criteria) 10. Interest receivable and similar income 193,608.7 193,847.6 -0.1% 20. Interest payable and similar expenses (51,226.7) (52,408.3) -2.3% 70. Dividends and similar income 3,311.6 192.4 1621.2% NET INTEREST INCOME AND DIVIDENDS 145,693.6 141,631.6 2.9% 40. Fee income 293,793.2 278,393.9 5.5% 50. Fee expenses (80,078.2) (74,455.2) 7.6% Other operating income - recovery of expenses and other services 23,885.8 21,767.0 9.7% (1) Variable administrative expenses (1) (31,293.9) (25,353.2) 23.4% Net fees 206,306.9 200,352.5 3.0% 80. Net gains/(losses) on trading activities 4,362.0 6,830.9 -36.1% 90. Net gains/(losses) on hedging activities 102.5 126.4 -18.9% 100. Income (losses) from sale or repurchase of: b) Financial assets measured at fair value through other (371.9) 6,547.4 -105.7% comprehensive income c) Financial liabilities - (9.0) -100.0% 110. Net gains/(losses) on other financial assets and liabilities measured (533.2) - - at fair value through profit and loss NET REVENUES FROM SERVICES 209,866.4 213,848.0 -1.9% NET BANKING INCOME 355,560.0 355,479.6 0.0% 160. Administrative expenses a) personnel expenses (158,904.9) (158,515.3) 0.2% IRAP on net personnel and seconded personnel expenses (1) (472.6) (452.4) 4.5% Total personnel and IRAP expenses (159,377.5) (158,967.7) 0.3% b) Other administrative expenses (other variable expenses (130,571.9) (124,555.0) 4.8% deducted) Recovery of stamp duty and other taxes (1) 36,630.0 36,969.5 -0.9% Total administrative expenses and recovery of taxes (93,941.9) (87,585.5) 7.3% 180. Writedowns on tangible fixed assets (8,113.0) (7,913.7) 2.5% 190. Writedowns on intangible fixed assets (15,119.1) (14,315.5) 5.6% 200. Other operating expenses/income (after deducting “Recovery of (7,437.1) (4,979.2) 49.4% stamp duty and other taxes”) Operating expenses (283,988.6) (273,761.6) 3.7% OPERATING PROFIT (LOSS) 71,571.4 81,718.0 -12.4% 170. Net provisions for risks and charges (3,880.4) (16,141.2) -76.0% 130. Net value adjustments for credit risk relative to: - - a) Financial assets measured at amortised cost (31,941.9) (33,885.2) -5.7% b) Financial assets measured at fair value through other 21.9 (3,228.1) -100.7% comprehensive income 140. Profit/loss from contractual changes without write-offs (661.3) - - 220. Income/(losses) from equity investments - - - Profit (loss) from goodwill, investments and measurements of tangible (163.1) (327.3) -50.2% and intangible assets
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PROFIT FROM CONTINUING OPERATIONS BEFORE NON- 34,946.6 28,136.4 24.2% RECURRING EFFECTS
Reclassifications from non-recurring effects (1) 100. Income (losses) from sale or repurchase of: a) Financial assets measured at amortised cost 271.5 (2,954.8) -109.2% 110. Net gains/(losses) on other financial assets and liabilities measured (1,611.6) (7,034.2) -77.1% at fair value through profit and loss PROFIT FROM CONTINUING OPERATIONS BEFORE TAXES 33,606.4 18,147.2 85.2% 270. Income taxes for the period on continuing operations - (after deducting “IRAP on net personnel and seconded personnel (8,461.5) (4,030.8) 109.9% expenses”) PROFIT FROM CONTINUING OPERATIONS NET OF TAXES 25,144.9 14,116.4 78.1% PROFIT (LOSS) FOR THE YEAR 25,144.9 14,116.4 78.1%
(1) The items affected were reclassified base on more appropriate recognition criteria to represent the content of the items based on principles of management homogeneity. Reclassifications are explained in the section following “Income Statement reclassification criteria”.
(1) Income Statement reclassification criteria In order to provide a more easily understandable representation of the income results, an Income Statement has been prepared on the basis of criteria which represent the content of the items based on principles of management homogeneity. Additionally, the phrasing and figures exposed at 31 December 2018 comply with the 5th update to Bank of Italy Circular 262/2005, amended after accounting standard IFRS 9 took effect, while the column relative to 31 December 2017 shows the figures based on the 4th update to Bank of Italy Circular 262/2005 which followed the old accounting standard IAS 39. The reclassifications involved: item 70. “Dividends and other income”, which was included within net interest income; IRAP on the costs for personnel, which was separated from “Income taxes for the period on continuing operations", and included in personnel expenses; “Recovery of stamp duties and other taxes”, which was separated from item 200. "Other operating expenses/income" and included in item 150 b) "Other administrative expenses"; the component “of which interest income on impaired financial assets” relative to writebacks due to discounting of interest accrued on impaired assets was reclassified from item 10 to item 130 a); the item "net value adjustments for financial assets available for sale" in 2017 was reclassified to item 110 in the income statement; certain items relative to variable administrative expenses were separated from administrative expenses and included in net banking income; certain items relative to other operating income were separated from operating income and included in net banking income; the item "Profit (loss) from goodwill, investments and measurements of tangible and intangible assets" is given by the sum of items 230, 240 and 250 of the income statement; economic components relative to assets held for sale (transfer to STS) were returned to the pertinent income statement items for better comparison of the two financial years.
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Profitability
Banca Sella ended 2018 with net profit of € 25.1 million, an improvement of € 11 million with respect to 2017 (78.1%). Profit from current operations before taxes increased by € 15.4 million with respect to December 2017. Below are the most significant items within the Reclassified Income Statement, indicating their contribution to the final result and associated comments: Net interest income € 4.1 million (2.9%); Net fees € 6 million (3.0%); Financial assets measured at fair value € -6.9 million (-105.7%); Net gains/(losses) on trading activities € -2.5 million (-36.1%); Operating expenses € -10.2 million (3.7%); Net provisions for risks and charges € 12.3 million (-76.0%); Loan loss provisions € 1.9 million (-5.7%); Value adjustments on financial assets € 3.2 million (-100.7%); Non-recurring events € 8.6 million (-86.6%).
Net interest income Net interest income at 31 December 2018 was € 145.7 million, a 2.9% increase with respect to 2017. This was due to dividends (€ 3.1 million, essentially deriving from the interest in Sella Leasing, acquired in 2017) and from lower interest payable (€ 1.2 million) due to lower deposit volumes reaching maturity (time deposits and bonds). Interest receivable remained substantially stable, in that the drop in rates on commercial loans was compensated for by greater interest from the securities portfolio and infragroup loans.
Net revenues from services The reclassified income statement shows a reduction in revenues from services of € 4 million (- 1.9%). This result saw a positive contribution from net fees which increased by € 6 million (3.0%), mainly thanks to good performance from traditional and electronic payment systems, investment services (placement of funds and insurance products) and greater recovery of expenses for services provided to companies in the group. The negative trend in net revenues was instead due to the negative performance of the own securities portfolio totalling € 9.9 million less than the end of 2017, due to tensions on the financial markets which led to lower profits from trading and losses from the disposal of financial assets measured at fair value.
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Net revenues from services: main components (in thousands of euro)
Changes Items 31/12/2018 31/12/2017 absolute %
Payment services 95,876.1 88,628.4 7,247.7 8.2%
Trading for third parties, order collection and placement 13,069.8 26,553.2 -13,483.4 -50.8%
Asset management 30,434.0 15,683.3 14,750.7 94.1%
Insurance products placement 13,473.7 12,563.7 910.0 7.2%
Trading and hedging activities 4,464.5 6,957.2 -2,492.7 -35.8%
Holding and management of current accounts 20,724.6 21,382.1 -657.5 -3.1%
Management of loans granted 26,025.4 27,421.1 -1,395.7 -5.1% Profit (loss) from sales or repurchases of loans, financial -371.9 6,538.4 -6,910.3 -105.7% assets/liabilities Reclassification of other income and variable expenses -7,408.1 -3,586.2 -3,821.9 106.6% Other 13,578.3 11,706.5 1,871.8 16.0%
Total 209,866.4 213,848.1 -3,981.3 -1.9%
Economic results for the securities portfolio 2018 saw high volatility on the Italian market. The downward trend in Italian public and private debt rates was brusquely inverted and during the year they saw levels close to the highest seen between 2013 and 2014. This inversion of the trend affected both short and long-term rates and led to an overall increase in the spread with respect to European guaranteed securities. In this context, the economic result of the securities portfolio, while negatively influenced by a derisking project begun for the portfolio measured at fair value through other comprehensive income, was still positive by around € 12.5 million, with an annualised return of around 0.93%. Performance consisted of gross interest for around 15.4 million and total adjustments of around € 2.9 million. Gross interest accrued was supported by the change in Italian inflation which was higher than expected, and to which Italy BTPs are indexed. Writedowns for the most part were due to the increase in rates and consequent deterioration of the prices for securities in the portfolio.
Net banking income The trends described led to total profits of € 355.6 million in terms of net banking income, stable with respect to 31 December 2017.
Operating expenses Operating expenses, totalling € 284 million, increased by 3.7% (€ 10.2 million) compared to the same period in the previous year. This increase was affected by the increase in other administrative expenses (€ 6 million), greater other operating expenses (€ 2.5 million) and writedowns on tangible and intangible fixed assets (€ 1 million). The increase in other administrative expenses was due to greater costs, supporting growth, for the creation of products and services (€ 3.4 million), from greater contributions to guarantee funds (€ 1.8 million) and greater legal expenses for fees for credit recovery (€ 0.5 million).
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The increase in other operating expenses is due for € 1 million to greater depreciation of leased assets, following the restructuring of branches carried out in 2017 and, for € 0.7 million, due to commercial reconveyances which became uncollectable. The increase in value adjustments on fixed assets was due for € 1 million to investments for growth which, over the last few years, have continued to be significant and constant.
Breakdown of operating expenses (in thousands of euro) Changes Items 31/12/2018 31/12/2017 absolute %
Personnel expenses -158,904.9 -158,515.3 -389.6 0.2%
IRAP on net personnel and seconded personnel expenses -472.6 -452.4 -20.2 4.5%
Total personnel and IRAP expenses -159,377.5 -158,967.7 -409.8 0.3% b) Other administrative expenses (other variable expenses -130,571.9 -124,555.0 -6,016.9 4.8% deducted) Recovery of stamp duty and other taxes 36,630.0 36,969.5 -339.5 -0.9%
Total administrative expenses and recovery of taxes -93,941.9 -87,585.5 -6,356.4 7.3%
Writedowns on tangible fixed assets -8,113.0 -7,913.7 -199.3 2.5%
Writedowns on intangible fixed assets -15,119.1 -14,315.5 -803.6 5.6%
Other operating expenses/income (after deducting “Recovery of -7,437.1 -4,979.2 -2,457.9 49.4% stamp duty and other taxes”)
Operating expenses -283,988.6 -273,761.6 -10,227.0 3.7%
Allocations to provisions for risks and charges The lower provisions for risks and charges for € 12.3 million are mainly due to lower provisions for refunds to customers relative to fast investigation fees on overdrafts deriving from the use of debit cards (€ -12.9 million), to lower provisions for legal disputes and customer complaints (€ -3.1 million), despite the increase in provisions made against redundancy incentives for personnel (€ +3.1 million).
Value adjustments As a whole, net value adjustments on financial assets measured at amortised cost were € 31.9 million, down by € 1.9 million compared to 31 December 2017, considering the new regulatory context (IFRS 9 took effect 1 January 2018, replacing IAS 39 for the classification and measurement of financial assets). The trend during the period showed that credit quality was substantially maintained, with limited new entries into the impaired category. Additionally, after IFRS 9 took effect, losses were recognised due to contractual amendments without write-offs, following the reduction in contractual cash flows which do not give rise to accounting write-offs, for € 0.7 million. At the end of the year, the annualised "Net loan loss provisions/Cash loans (net of repurchase agreements receivable)” came to 0.45%, an improvement compared to the 0.53% seen at 31 December 2017.
Non-recurring events
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Economic performance in 2018 was influenced by non-recurring events such as the disposal of impaired loans and writedowns on the amounts paid to the voluntary Interbank Deposit Protection Fund. The overall effect of non-recurring items showed an improvement of € 8.6 million when compared to the same effects in 2017.
Income taxes
Income tax impact on profits from current operations before tax was 25.2%. Taxes are net of IRAP for personnel expenses, which were reclassified, increasing this component (calculated considering the amendments introduced in Law 190 of 23/12/2014 regarding the deductibility of IRAP for expenses sustained in relation to employees with permanent contracts).
It should be remembered that the 2016 Stability Law (Law 208 of 28/12/2015) reduced the IRES rate from 27.5% to 24%, effective as of 1 January 2017, with the introduction of additional IRES for the banking sector of 3.5%. The same law also established full deductibility of interest expense following the abolition of the so-called "Robin Hood tax", which had been introduced by Italian Decree Law 112/2008.
Income taxes were influenced positively by:
- the evaluations relative to the opinion proceedings relative to the 2017 tax period, with a request made to the Central Regulatory Office, for the purposes of recognising the existence of the requirements necessary to not apply article 10, paragraph 3, letter e) of the ACE Decree; - the portion of company revenues made up of dividends on investments having the features provided under article 89, paragraphs 2 and 87, Italian Presidential Decree 917/86, which are almost totally tax-free; - the use of the so-called "super-amortisation" subsidy, as amended by Law 205/2017 (2018 Budget Law); - the release in the income statement of deductible effects associated with the provisions of the Budget Law relative to deferred taxes regarding the adoption of IFRS 9 on LLP as of 1.1.18 (that is the deductibility of IFRS 9 effects from 1 year, as originally envisaged, to 10 years) which also generated a positive economic effect on IRAP for 2018 equal to around € 0.96 million.
Banca Sella, as a subsidiary, adheres to the tax consolidation system adopted by Banca Sella Holding as its controlling and consolidating company.
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Comprehensive Statement of Income Items 31/12/2018 31/12/2017
10. Profit (Loss) for the period 25,144,941 14,116,444 Other income components net of taxes without reversal to income statement 1,221,232 219,806 20. Equity securities measured at fair value through other comprehensive income 1,329,833 - 70. Defined benefit plans (108,601) 219,806 Other income components net of taxes with reversal to income statement (9,261,034) 1,084,951 Financial assets (other than equity securities) measured at fair value through other 140. comprehensive income (9,261,034) -
100. Financial assets available for sale - 1,084,951 170. Other comprehensive income, net of tax (8,039,802) 1,304,757 180. Comprehensive income (Items 10 +170) 17,105,139 15,421,201
The positive change associated with equity securities (item 20) refers to the improvement in the fair value measurement of the equity investment held in Visa Inc. following an increase in the market prices of the security.
The negative change associated with debt securities refers both to the worsening in the fair value measurement of debt securities in the portfolio "financial assets measured at fair value through other comprehensive income", following a decrease in the market value of the securities, and to the maturation of securities which had a positive valuation reserve as of the end of 2017. In particular, the decrease involved around € 6.3 million in securities issued by central administrations and around € 2.8 million in securities issued by other issuers.
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VII. Balance Sheet Data
Reclassified balance sheet (in thousands of euro)
Assets 31/12/2018
Financial assets (1) 1,677,342.4
Due from banks 2,281,698.9
Cash loans (2) 6,986,839.5
Equity investments 105,236.2
Tangible and intangible fixed assets (3) 92,794.2
Tax assets 176,321.9
Non-current assets and asset groups held for sale 17,132.2
Other assets (4) 456,542.8
TOTAL ASSETS 11,811,040.3
Liabilities and Shareholders’ equity 31/12/2018
Due to banks 720,366.3
Direct deposits, excluding repurchase agreements payable (5) 9,955,775.9
Repurchase agreements payable 4,373.0
Total direct deposits 9,960,148.9
Financial liabilities 11,500.2
Tax liabilities 9,674.6
Other liabilities (6) 310,628.8
Provisions for specific purposes (7) 40,768.5
Liabilities associated to groups of assets being divested 7,285.4
Shareholders' equity (8) 750,667.6
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 11,811,040.3
(1) Obtained from the sum of items 20, 30 and 40, only debt securities from Balance Sheet Assets; (2) Obtained from item 40 b) of the Balance Sheet Assets, excluding debt securities; (3) Obtained from the sum of items 80 and 90 of the Balance Sheet Assets; (4) Obtained from the sum of items 10, 50 and 120 of the Balance Sheet Assets; (5) Obtained from the sum of items 10 b) and 10 c) of the Balance Sheet Liabilities, net of repurchase agreements; (6) Obtained from items 40 and 80 of the Balance Sheet Liabilities; (7) Obtained from the sum of items 90 and 100 of the Balance Sheet Liabilities; (8) Obtained from the sum of items 110, 130, 140, 150, 160 and 180 of the Balance Sheet Liabilities.
Analysis of equity figures shows total assets at 31 December 2018 essentially in line with 2017, amounting to € 11,753.7 million. Banking business with customers saw loans amount to € 6,986.8 million, substantially in line with respect to the € 7,001.6 million recorded at the end of the previous financial year. Direct deposits grew by 1.8%, reaching € 9,960.1 million, thanks to an increase in short-term customer deposits, against a decrease in securities in circulation due to the non-renewal of securities reaching maturity. Amounts due to banks were substantially stable with respect to 2017, characterised by the targeted long-term refinancing operation (TLTRO) carried out through Banca Sella Holding, which was again repeated in 2018.
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Finally, shareholders' equity at 31 December 2018 amounted to € 750.7 million, down by 5.9%, in particular due to the recognition of negative reserves associated with first time application of accounting standard IFRS 9.
Funding Policies and ALM (Asset Liability Management)
In regards to funding policies, during 2018 the Bank continued to operate under its normal policy of healthy and prudent management. Specifically, it acted to maintain a solid liquidity position, which originates from and is based on the ratio, considerably lower than one, between cash loans and direct deposits. The surplus of direct deposits not used in sales assets is allocated to senior bonds (mainly Government) and on sight deposits with the banking parent company, as well as certain short-term deposits with selected banking counterparties, constituting a significant buffer of high quality and easily liquidated assets.
The Bank's cash and cash equivalents
During 2018, liquidity at Banca Sella remained at high levels. At 31 December, both of the regulatory ratios, Liquidity Coverage Ratio and Net Stable Funding Ratio, were well above the minimum regulatory thresholds and prudential limits defined in the Risk Appetite Framework, both under ordinary and stress conditions. The other management ratios used to monitor liquidity risk also gave no signs of problems. Banca Sella's operational liquidity, in consideration of the amount of refinanceable securities available, was high throughout the year.
Further information is provided on liquidity risk in section 3 of part E of the Notes to the Accounts.
Securities portfolio
At 31 December 2018, the Bank held a portfolio of securities and UCITS units of € 1,609.4 million, which was divided into the following categories, in accordance with accounting standard IFRS 9: DEBT SECURITIES and UCITS PORTFOLIO (amounts in millions of euro) 31/12/2018 Financial assets measured at fair value held for trading 23.5 Financial assets necessarily measured at fair value 12.0 Financial assets measured at fair value through other comprehensive income 435.1 Financial assets measured at amortised cost 1,138.8 TOTAL 1,609.4
IFRS 9 securities reclassification
Implementation of the new accounting standard IFRS 9 led to the reclassification of financial assets into new accounting categories. In transfers that involved a change of accounting methodology, first time adoption was applied with the creation of specific reserve accounts. Below, we indicate reclassification changes involving transfers from the IAS 39 accounting categories to the new IFRS 9 accounting categories.
Securities held for trading at 31/12/2017 totalled € 7.1 million. These securities were entirely
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reclassified to financial assets measured at fair value held for trading.
Securities available for sale at 31/12/2017 totalled € 1,040.1 million. These securities were reclassified among financial assets measured at amortised cost for € 284.0 million, among financial assets necessarily measured at fair value (for securities that could not be classified at amortised cost) for € 43.7 million, among financial assets measured at fair value held for trading for € 16.5 million and among financial assets measured at fair value through comprehensive income for € 695.9 million.
Securities held to maturity at 31/12/2017 totalled € 90.6 million. These securities were entirely reclassified to financial assets measured at amortised cost.
Financial assets measured at fair value through profit and loss
Financial assets held for trading mainly consist of debt securities, in particular Italian government securities and bank and corporate bonds. The total at 31 December 2018 is € 23.5 million, and the division of securities is as follows:
Italian government bonds 3.2%; Senior bank bonds 10.5%; Bonds issued by banks in the Group 25.3% Corporate bonds 61.0%.
Regarding asset allocation, the variable component was almost entirely eliminated, and almost all of the category is invested in medium-term fixed rate securities.
Other financial assets necessarily measured at fair value
The securities in this category are UCITS units for around € 12 million. This accounting category also includes loans classified as receivables measured at fair value, specifically mortgages which, with the introduction of IFRS 9, could no longer be measured at amortised cost and were therefore classified as necessarily measured at fair value.
Financial assets measured at fair value through other comprehensive income
This category consists entirely of bonds, mainly Italian government securities and investment grade bank and corporate bonds. At 31 December 2018, the breakdown of various types of securities was as follows:
CCT (Certificati di Credito del Tesoro - Italian Treasury Credit Certificates) 41.6%; BTP (Buoni del Tesoro Poliennali - Medium-Long Term Italian Treasury Bonds) 14.5%; Inflation-indexed BTP 13.4%; Senior bank bonds 24.1%; Senior corporate bonds 6.4%.
During 2018, the size of this segment decreased significantly, to € 435.1 million at 31 December. To reduce the impact of higher market volatility, an effort was made to decrease the portion of the portfolio
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measured at fair value through other comprehensive income in favour of the component measured at amortised cost.
Financial assets measured at amortised cost
This segment includes instruments held for long-term investment purposes and complies with the size parameters established by the Board of Directors.
Securities in this category and regarding amounts due from banks and customers are bonds broken down into the following categories:
Government securities at 92.5%; Senior bank bonds at 3.9%; Senior corporate bonds at 3.6%.
During 2018, the size of this segment increased by around € 1,050 million, with purchases mainly focussed on long-term Italian government securities during the first part of the year and on medium-length maturities during the second half of 2018. The total at 31 December was € 1,139 million, with an average duration of around 3.4 years. The "loans" sub-item is mainly composed of reciprocal accounts with the Group banks.
Minority interests
Minority interests are considered equity securities, and at 31 December 2018, as required by the IFRS standards, were measured at fair value. The main ones are reported below:
VISA INC.: Visa Inc. class C shares, for a value net of the lock-up clauses of € 15.9 million, for which a positive equity reserve was recognised, compared to initial recognition on 21 June 2016, amounting to roughly € 5,762,000; Funivie Madonna di Campiglio (measurement method, shareholders' equity and market multiples): the value remained constant compared to 31 December 2017 at around € 235,000; Funivie Folgarida Marilleva (measurement method, shareholders' equity and market multiples): value remained constant compared to 31 December 2017 at around € 120,995.
Controlling interests
The item investments amounts to € 105.2 million and includes controlling interests in the companies Sella Leasing and Sella Personal Credit, as well as the equity investment in Fabrick, over which Banca Sella exercises significant influence.
Sella Leasing, which provides financial and operating leasing services primarily to corporate customers, particularly SMEs, relies on affiliated agents and credit brokers, Group banks and Companies and affiliated banks and financial intermediaries. The main distribution channel continues to be that of Agents and credit brokers, with a strong drive towards integration within the Group’s commercial bank. Within a market context showing 5.3% growth in terms of value financed, in December 2018 Sella Leasing had stipulated 5,148 contracts, compared to 4,844 during 2017, showing an increase of 6.28%, for an
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amount financed of € 362,626,950, compared to € 338,520,045 in 2017, an increase of 7.12%. The economic result generated in 2018 was net profit of € 8,698,336, down by € 1,470,018, or 14.46%, with respect to the result of € 10,168,354 registered in 2017. Nonetheless, the 2018 result was 0.86% better than the profit envisaged in the budget, totalling € 7,557,647.
Sella Personal Credit, a company operating in consumer credit, relies on direct branches, financial agents and more than 3,500 affiliated points of sale. In 2018 it saw a progressive result of € 9.73 million, compared to profit of € 8.14 million in 2017. In terms of sales, the company saw overall growth of +10.3% in volumes disbursed with respect to 2017, bringing amounts disbursed during the period to a total of € 571.6 million. The slight increase in interest receivable (+1.3%) can essentially be ascribed to the increase in performing loans with respect to the previous year. The reduction in interest payable (-5.3%) was determined by the decrease in the existing volumes relative to hedging derivatives and the decrease in the average overall cost of funding. Structural costs fell by 3.9%. Employees fell from 192 at 31/12/2017 to 188 at 31 December 2018, or from 192 to 189 if counted net of seconded personnel. The cost of credit at 31 December 2018 was 0.80%, down with respect to 2017. The decrease in the cost of credit can mainly be attributed to operations to dispose of impaired loans occurring during the year.
Regulatory capital
Within Banca Sella, capital adequacy is ensured through Capital Management activities.
The Capital Management plan is defined together with the strategic plan and the Risk Appetite Framework (RAF) and is made concrete through assessing the impact of ordinary operations and defining any extraordinary operations with an eye to meeting the capitalisation objectives (represented by the Common Equity Tier 1 ratio) held to be necessary and adequate to ensure the Bank has a solid and sustainable situation, both now and in the future.
The Capital Management plan is systematically monitored by the Parent Company Risk Management area, through activities that supervise capital amounts and absorption, including:
monthly calculation of final figures, based on operating profit achieved; quarterly simulation of future trends, aimed at preventing any situations in which the established levels are not respected.
The Bank’s solvency ratios are included in the monthly reports prepared for the Board of Directors and for the Group’s Alignment and Trend Verification Meeting.
As of 1 January 2014, under the new harmonised regulations for banks and investment companies contained in Directive 2013/36/EU (CRD IV) and in EU Regulation 575/2013 (CRR) of 26 June 2013, which transfer the standards defined by the Basel III Committee to the European Union, and on the basis of Bank of Italy Circulars no. 285 and 286 and the update to Bank of Italy Circular 154, a new definition of own funds has taken effect, consisting of:
Common equity tier 1, i.e. the main capital component generally represented by ordinary capital paid in, the relative share premium reserve, profit for the period, reserves and other regulatory adjustments;
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Additional Tier 1 capital; Tier 2 capital, represented by subordinated loans.
Based on prudential regulatory provisions, the total requirement is equal to the sum of the capital requirements prescribed against adjustment of credit measurement, credit and counterparty, regulatory, market and operating risks.
In general, methods used to calculate capital requirements refer to the standardised approach and basic indicator approach (BIA), in terms of operational risk.
At 31 December 2018, the capital ratios exceeded the minimum requirements set forth in the regulations in effect as of the reporting date:
Common Equity Tier 1 ratio: 14.63%, against a minimum level of 6.375%; Tier 1 ratio: 14.63%, against a minimum level of 7.875%; Total Capital ratio: 18.06%, against a minimum level of 9.875%.
Deposits
Direct deposits (amounts in millions of euro)
Proportion Proportion Changes Items 31/12/2018 31/12/2017 (%) of total (%) of total absolute % Due to customers (excluding repurchase 9,610,898.0 96.5% 9,368,109.8 95.7% 242,788.2 2.6% agreements) - Current accounts and demand deposits 8,893,353.0 89.3% 8,520,909.8 87.1% 372,443.2 4.4% - Time deposits 448,079.0 4.5% 571,641.1 5.8% (123,562.1) -21.6% - Other loans and advances 34,909.0 0.4% 47,837.3 0.5% (12,928.3) -27.0% - Other payables 234,557.0 2.4% 227,721.6 2.3% 6,835.4 3.0% Securities in issue 344,878.0 3.5% 410,564.2 4.2% (65,686.2) -16.0% TOTAL DIRECT DEPOSITS 9,955,776.0 100.0% 9,778,674.0 99.9% 177,102.0 1.8% Repurchase agreements payable 4,373.0 0.0% 6,783.3 0.1% (2,410.3) -35.5% TOTAL DIRECT DEPOSITS (INCLUDING 9,960,149.0 100.0% 9,785,457.3 100.0% 174,691.7 1.8% REPURCHASE AGREEMENTS)
Indirect deposits (amounts in thousands of euro)
Proportion Proportion Changes Items 31/12/2018 (%) of 31/12/2017 (%) of absolute % total total
Managed portfolios 1,179,715.6 7.6% 1,589,908.9 9.9% -410,193.3 -25.8%
Administered deposits 8,625,011.0 55.5% 8,830,573.1 54.9% -205,562.1 -2.3%
Insurance funding 1,834,593.1 11.8% 1,609,478.0 10.0% 225,115.1 14.0%
Pension funds 124,147.0 0.8% 117,188.8 0.7% 6,958.2 5.9%
Administered funds 3,788,333.5 24.4% 3,933,140.5 24.5% -144,807.0 -3.7%
Total indirect deposits 15,551,800.2 100.0% 16,080,289.4 100.0% -528,489.1 -3.3%
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Total deposits (amounts in thousands of euro)
Proportion Proportion Changes Items 31/12/2018 31/12/2017 (%) of total (%) of total absolute %
Direct deposits from credit institutions 11,532.2 0.0% 14,366.8 0.1% -2,834.6 -19.7% Direct deposits (excluding repurchase 9,955,775.9 39.0% 9,778,674.0 37.8% 177,101.9 1.8% agreements payable) Repurchase agreements payable 4,373.0 0.0% 6,783.3 0.0% -2,410.3 -35.5%
Indirect deposits at market prices 15,551,800.2 60.9% 16,080,289.4 62.1% -528,489.2 -3.3%
Total deposits at market prices 25,523,481.3 100.0% 25,880,113.4 100.0% -356,632.1 -1.4%
Managed and administered deposits
The trend in the stock of managed deposits was influenced negatively in 2018 by the difficult situation on the financial markets. The figure at year end was negative at 323 million, net of price effects.
Administered deposits, consisting of third party securities on deposit, reached € 8,625 million at 31 December 2018, an approximately 2.3% decrease with respect to December 2017, when the figure was € 8,831 million. The main underlying trends showed growth in the bond component (€ +107 million) and a decrease in the stock component (€ -347 million), with respect to December 2017. The price effect had a negative impact on deposits of around € 700 million.
Investment funds
Net deposits during the year were positive, in the amount of 126 million. Flows were concentrated primarily on the stock and balanced segments, to the detriment of monetary and bond funds. Foreign funds were purchased to a greater extent than Italian funds. At the end of December 2018, fund volumes came to 3,788 million, a 3.7% decrease with respect to the previous year. The decrease in volumes is due to negative pricing effects of around € 262 million.
Asset Management
Asset management ended the year with negative deposits by 347 million. The divestment of 108 million relative to a single managed account for an institutional client had a disproportionate effect. At the end of December 2018, asset management volumes fell to € 1.2 billion, of which € 820 million (64%) placed by the Private Banking service, € 175 million (14%) by the branch network and € 280 million (22%) by the network of financial advisors authorised for off-site sales by Banca Patrimoni Sella & C.
Aggregate volumes showed a decrease of about 25,8% compared to 31 December 2017. The decrease in volumes was affected by negative pricing effects of around € 62 million. Management activities regarding the Banca Sella portfolios are delegated to Banca Patrimoni Sella & C. for € 1,173.3 million and to Moneyfarm LTD for € 6.4 million.
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Payment Systems
With regard to the Point of Sale (POS) service, payment card acquiring activities recorded a generally positive trend, characterised by an increase in transactions carried out with debit cards on the domestic circuit (+6% with respect to the previous year), and with credit cards (+21% with respect to the previous year). Growth figures further confirm the growing propensity of the population to use electronic payment tools.
Overall volumes grew with respect to the previous year, also thanks to strong sales activities in terms of signing agreements with new merchants, carried out by both the branch network and the network of agents authorised by the Bank. Comprehensive income from margins fell (-11% with respect to the previous year), mainly due to a decrease in average fees.
Volumes transacted in the e-commerce sector rose (+10% compared to the previous year), but profitability, as was seen for the acquiring POS service indicated above, fell by 5% with respect to the previous year.
Activities relating to the debit and credit cards issued by the Bank were stable in terms of amounts spent and withdrawn with debit cards on the domestic circuit, while a significant increase was seen in amounts spent with cards on international circuits (+24% compared to the previous year). Sums spent with credit cards increased by 7% for the consumer segment with respect to the previous year, and by 11% for the business segment. Profitability rose by 10% over the previous year.
Credit policies and products
In 2018, the Credit Products Service continued to add innovation to its range of offerings and update existing ones to further satisfy the requirements of private customers and businesses.
In particular:
a further push was given to mortgages offered to households: o through the Branch channel, activating specific promotional offers; o online, leveraging the possibility of obtaining a mortgage digitally end to end; o by preparing a new product that combines a home mortgage with insurance protection; a new lending product was activated, aimed at supporting companies in the activation of Corporate Welfare programmes, which provide fiscal advantages for both the company and the employee; management of advances on invoices was improved, extending functions for customers and increasing internal efficiency for process management; additional steps are in progress that will lead to full digitalisation of operations associated with the product; training activities focussed on the network continue, to offer ever better information to customers about the advantages associated with the use of the Innovfin guarantee (part of the Horizon 2020 program for loans which support business research and innovation); support for customers in the agricultural segment was improved, in part through: o the revision of loans offered as an advance on PAC contributions (Municipal Agricultural Policy);
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o the signing of a new agreement with Finlombardia for operating loans, to support the liquidity requirements of companies, through the granting of low-interest loans; adhesion to financial support initiatives for populations affected by natural disasters continued. In particular, the process of adhering to all the measures envisaged by CDP was begun; the process of digitalising information exchanged with the Ministry of Economic Development (MISE) was begun for guarantees issued by the SME Guarantee Fund, also in terms of the upcoming changes to the regulatory framework; as of February, a new agreement became operational with a new specialised partner, to increase support for customers who intend to divest themselves of tax receivables and relative to the public administration; placement of personal loans provided by Sella Personal Credit continued (around € 69.1 million); offerings of loans provided end-to-end through digital channels also saw a push; during the year leasing contracts were stipulated through Sella Leasing for a total value of around € 34 million; analysis and development of innovative credit products relative to supply chain finance and instant credit continued, with the aim of enhancing and refining the offerings through digital channels. Banca Sella continued to participate as a partner in the Finance Supply Chain Observatory of the School of Management at Milan Polytechnic, which aims to identify solutions and best-case scenarios for meeting the growing interest expressed by Italian companies relative to the expediency of optimising working capital and improving credit access processes.
Cash loans
At 31 December 2018, cash loans to ordinary customers came to € 6,986.8 million (€ 7,003.7 million at 31 December 2017) with a negative change of around € 17 million with respect to the previous year. As concerns unsecured loans, the total amount is € 236.3 million (€ 200.1 million at 31 December 2017), showing 18% growth.
In a still weak economic situation, the Bank has continued the support it provides to households, offering mortgages to purchase or remodel homes, and to companies that have demonstrated appropriate economic prospects and business continuity, disbursing short-term loans to support the carrying out of current activities and medium/long-term loans for new investments.
Also during 2018 cooperation with Group companies continued in a synergistic manner, with: Sella Leasing for financing to companies through financial and operating leases and with Sella Personal Credit, a consumer loan company, to provide loans to private individuals.
As in the previous year, the funds made available by the European Investment Bank, Cassa Depositi e Prestiti and the European Investment Fund were used to support international growth for customer businesses.
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Loans portfolio quality
On 1 January 2018, IFRS 9 took effect, replacing accounting standard IAS 39 for the classification and measurement of financial assets.
During 2018, provisioning policies for adjustment criteria relative to non-performing secured loans were also reviewed, with a double haircut established for new entries to disputes (non-payment subject to revocation and/or bad loans) based on the precautionary value of the guarantee (43.75%).
In addition, at the end of the year policies used to determine writedowns on loans classified as overdue and probable default without revocation with overall total exposures of less than € 25,000 were revised, introducing the application of lump sum ratios based on loss given default calculated by the Risk Management department.
In June, a significant disposal operation regard bad loans was completed, which involved unsecured loans for around 110 million of gross exposure and secured loans for around 70 million of gross exposure.
Additionally, two disposals of bad loans classified as non-performing for no more than 7 months were completed, totalling 5.2 million of gross exposure.
As a whole, two transfers without recourse were carried out for a total of 185 million in gross exposure, compared to a forecast amount of 120 million, with a positive economic result of 0.3 million.
During the year, after a first half which did not see any significant changes, signs of deterioration in credit quality were seen, with higher numbers of new impaired loans with respect to forecasts, which led to new actions taken in order to increase awareness of monitoring risk, customer relations and the ability to take action at the first indications of deterioration of credit worthiness. As a whole, the results obtained for impaired loans were very positive, due to the cited massive disposals of bad loans, which made it possible to significantly improve ratios on impaired loans. All indicators improved: net non-performing loans relative to net cash loans at 4.5% (6.4% in 2017); gross non-performing loans relative to gross cash loans (NPL ratio) at 9.0% (11.8% in 2017); net bad loans relative to net loans at 2.6% (3.8% in 2017); gross bad loans relative to gross loans at 6.3% (8.5% in 2017); Texas ratio at 63.8% (75.0% in 2017). The coverage rate for non-performing loans was 52.5%, up compared to 48.9% at 31/12/2017. The change is associated with the adoption of accounting standard IFRS 9, which led to an increase of 6 percentage points, changes in measurement parameters used for impaired loans and significant disposals of unsecured bad loans with higher writedown percentages which instead decreased coverage by 4.1 percentage points.
In line with strategic guidelines and the information referenced by the national and European supervisory bodies, activities carried out during 2018 were heavily focused on reducing the amount of bad
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loans, in respect of which the trend, compared to 2017, is falling for both gross bad loans (-26%) and net bad loans (-32% after application of IFRS 9).
Bad loans
Net bad loans at the end of the period amounted to € 179.3 million (including securitisation volumes), down by 32% compared to 31/12/2017 (263.8 million). The impact on cash loans was 2.6% (3.8% at 31/12/2017).
After the first half, with a downward trend, the amount of gross new bad loans was higher with respect to the previous year. Gross new bad loans amounted to € 66.3 million, while they came to € 57.4 million the previous year. During the last quarter, certain large positions were classified as bad loans, classified among non-performing loans for some time, which generated minimal effects on the income statement, given that adequate writedowns had already been carried out.
Collections recorded on bad loans, including collections of “end-of-life” positions transferred, amounted to € 73.4 million, a 27.4% increase with respect to 2017, when the figure was € 57.6 million. This improvement is associated with an increase in receipts deriving from disposals and good performance from collections deriving from in and out-of-court resolutions.
In 2018, various significant without recourse transfers of bad loans were carried out, with various characteristics: loans with open insolvency proceedings, mortgage loans, unsecured loans very limited impairment and unsecured loans with in-court collection actions complete. As a whole, 185 million in gross loans was transferred, at a higher amount compared to the strategic forecasts.
At 31 December 2018, the number of bad loans stood at 4,244: 54.1% were less than € 50,000 and 13.4%under than € 5,000.
In December 2018, the coverage ratio for bad loans was 61.6%, compared to 58.3% at the end of the previous year, showing a change of 3.3 percentage points, which, as already noted, derives from an increase in the coverage ratio due to the application of IFRS 9, using first-time application for 6.9 percentage points and from a decrease of 3.6 percentage points mainly deriving from the significant transfers of unsecured positions featuring high coverage percentages.
The coverage ratio for bad loans net of interest on arrears on the capital portion was equal to 56.2%, with a differential of 5.4 percentage points.
Probable default positions
Probable default positions totalled € 128.3 million at the end of the year (net cash exposures including securitisations), down 28.5% compared to 31 December 2017 (179.5 million). The number of customers classified as ‘probable default’ was 4,428 (2,594 with an exposure of less than € 5,000).
In December 2018, loans secured by a mortgage guarantee amounted to a net total of € 91.2 million. Positions with revocation of credit totalled 908, equal to € 15.4 million in net exposure.
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The coverage ratio for probable default positions was 31.2%, whilst at the end of last year it was 25%, an increase of 6.2 percentage points. Also for defaults, the change in coverage was affected by the FTA of IFRS 9 by 4 percentage points and change made to the provisioning policy which involved raising writedowns for unsecured non-revoked loans and for secured loans at the time of revocation.
The actions of the Non-Performing Exposures service relative to probable defaults were aimed at allowing resolution of problems in trends in the ratio for those returning to performing status, granting of tolerance measures for renegotiation of exposures, the acquisition of new collateral and supporting the customer in identifying possible financial solutions in order to return to regular repayment. In the case of non-positive results, the collection process is promptly begun.
Past-due loans
At the end of 2018, positions classified as past due and in excess of thresholds granted totalled € 7.3 million (net cash exposures including securitisations).
The number of customers with past due loans and loans in excess of threshold totalled 4,525. The portfolio of past due exposures is highly fragmented: 4,344 positions were less than € 5,000.
At 31 December 2018, loans secured by a mortgage guarantee amounted to a net total of € 5.6 million.
Measurements performed by the Non-Performing Exposures service are aimed at determining whether there is a real possibility of positions being reclassified as performing and, if there are doubts over the realisation, quantifying possible losses, in general taking into account capitalisation, income- generating capacity, financial balance, prospects in the relative sector, managerial and entrepreneurial skills, regularity of managing counterparty bank relations and any guarantees present.
On the whole, analytical adjustments applied to the total of past due loans and loans in excess of thresholds amounted to € 1.6 million. The coverage ratio for past due exposures was 18.2%, up by 3.75 percentage points compared to the previous year.
Forborne loans
Total volumes due from customers with forbearance status at 31 December 2018 amounted to € 229.6 million gross (gross exposures, € 304.9 million at 31 December 2017), broken down as follows: € 148.7 million in non-performing loans (€ 192.5 million at 31 December 2017); € 80.9 million in performing loans (€ 112.4 million at 31 December 2017). The trend in 2018 was characterised by a reduction in forborne positions, in both the performing and non-performing segments. During the period, the reduction came to 24.7%, an extremely positive result for forborne performing due to monitoring and management actions proposed and coordinated by the Credit Quality Service.
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VIII. Sales Model - Integrated Report
As part of Commercial Bank activities, three years ago the organisational steps were taken to adopt a customer relationship model based on dedicated salespeople and consultants (portfolio segmentation model), which has provided extensive advantages in terms of customer satisfaction. The commercial model is therefore an Integrated Relationship model, based on the simultaneous and integrated offering of a digital service par excellence in support of a network of dedicated and highly skilled Sales Consultants. This service is accompanied by the Online Bank model adopted as the sole method of relations for retail customers. The following table shows the geographic distribution of Banca Sella at 31 December 2018.
Subdivision of branches by region and geographic area
31/12/2018 31/12/2017
Region Number of branches Weight % Region Number of branches Weight % Region Out of total Out of total
Piedmont 130 45.9% 130 45.9%
Sardinia 3 1.1% 3 1.1%
Tuscany 8 2.8% 9 3.2%
Valle d'Aosta 7 2.5% 7 2.5%
Emilia Romagna 13 4.6% 13 4.6%
Lazio 17 6.0% 17 6.0%
Liguria 9 3.2% 9 3.2%
Lombardy 20 7.1% 19 6.7%
Veneto 10 3.5% 10 3.5%
Friuli Venezia Giulia 1 0.4% 1 0.4%
Abruzzo 1 0.4% 1 0.4%
Marches 3 1.1% 3 1.1%
Molise 1 0.4% 1 0.4%
Campania 14 4.9% 14 4.9%
Puglia 27 9.5% 27 9.5%
Sicily 19 6.7% 19 6.7%
Total 283 100.0% 283 100.0% ITALY North 190 67.1% 189 66.8%
Center 71 25.1% 72 25.4%
South and Islands 22 7.8% 22 7.8%
Total 283 100.0% 283 100.0%
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Business finance and services business in 2018
During 2018, following the creation of the Group's cross-cutting business line, Corporate Investment Banking, Banca Sella's Business Finance Service also changed its name to Corporate & Investment Banking, while maintaining its objective of offering support to the commercial network in identifying and carrying out extraordinary finance operations, both those to obtain capital (in particular through the structuring of bond issues, or the acquisition of stakes in customer companies by specialised funds or industrial operators) and those associated with mergers and acquisitions.
Growth in the structuring and placement of bond loans issued by customer companies continued (“mini-bonds”), with the results achieved in 2017 improved upon both in terms of the number of issues and total value. Banca Sella accompanied issuing companies in structuring 12 mini-bond operations, for a total value in terms of issue volumes of € 22.6 million.
This generated fees payable for the Bank of € 650 thousand and net banking income, including interest income relative to the portion of the mini-bond directly subscribed by Banca Sella, of over € 1.2 million.
Additional, the internal authorisation process to create the new "Leveraged Finance" product was begun, regarding operations to acquire "target" businesses or business units making use of debt to finance part of the acquisition price (typically 60-70%). Repayment of the sums loaned by the borrower company is done through the future cash flows of the same. In this type of operation, Banca Sella subscribes a portion of the total loan provided by a group of credit institutions, benefiting from the interest income received.
The objective for 2019 is to further strengthen mini-bond business and the origination of M&A operations, increasing both the fee component and net banking income. To that end, during 2018 the organisational chart of the Service was strengthened, in particular to increase commercial presence in northern Italy (with a specific focus on Lombardy, due to its location and the previous working experience of the employee in question).
Households and Private Market
The Households and Private Market represents private customers with total assets held at the Bank of up to € 100 thousand. The main task is to define and monitor the offer guidelines, as well as coordinating commercial development activities using various contact channels (both online and physical). The target customers served are minors, young people, families and pensioners. The segment is supervised at the commercial level by Household and Private Sales Professionals, incorporating “non- dedicated” and “support” roles.
2018 saw the digital component of the commercial relationship strengthened: campaigns using digital engagement exceed 50% of total campaigns, while total commercial customer contact initiatives went from 24 to 37.
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Digital engagement led to a significant increase in the forms of contact typical of this channel, including DEM (1,800,000 sent, with 170% growth), personalised banners in the authenticated section of the sella.it website (2,270,000 banners, with 660% growth) and text messages (450,000 sent, with 2800% growth).
Multi-step campaigns were begun, which offer automated integration of customer contact channels, improving relationships with customers and making the commercial engagement process more efficient.
The social channels (Facebook, Instagram, Twitter, LinkedIn and Google Plus) saw increased use for offering insurance and credit products, generating around 15,000 interactions.
Centralised engagement was strengthened through the dedicated structure Retail Desk, which led to evolution in the service model, above all for customers who are mainly digital. At 31 December 2018, the number of customers service rose to around 200,000, compared to around 56,000 the previous year.
The main variables seen in 2018 showed growth in customer stock, the total figure was 415,635 units, up by around 8,200 units. The increase of active catalogued customers (including performing) was around 8,100 units.
Net insurance funding from private consumers increased (+394%), in particular the managed savings component (+219%), but with a limited impact on the Bank's total (around 47 million in absolute value) and with the life insurance component accounting for a significant portion.
The initial amounts resulting from the placement agreement with the Sella Leasing and Sella Personal Credit agent networks were seen, which led to new mortgage disbursements of around € 5 million.
The liability insurance segment saw 5.6% growth in gross premiums received. However, the amount was lower than the objectives set.
The main sales projects and the 2018 product of the year were:
multichannel commercial campaigns regarding all the main KPIs of the market: mortgages, loans, non-life insurance, customer development, managed assets; sales campaigns to support the new products Gestioni Sella Evolution and Fondo Bond Cedola 2023; activation of offers for employees of major companies, including current accounts, mortgages and loans at subsidised rates; the continuation of competitive prices of mortgages with a promotion dedicated to floating rates; recurring promotional campaign (approximately every 2 months) for the sella.it personal loan which can be subscribed digitally; a contest for auto insurance products; improvements on the liability insurance product (conditional mortgage policy, estimates, online offers with fees differentiated by car).
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Training, carried out in cooperation with the Training department, was focussed on constantly providing colleagues in the Market sector with news about products and the market with a specific focus on the most innovative aspects, specifically analytics, through ad hoc sessions.
Local presence was strengthened through periodic meetings. Specifically, relative to liability insurance an "Insurance Tour" was carried which saw the presence of a member of the Market segment in all Bank districts, to offer support for commercial development and collect information from colleagues within the network.
Private and Affluent Market
The customers of the private and affluent market are divided into two segments, identified using the following criteria:
Private: households with financial assets held with the Bank exceeding € 300,000; Affluent: households with financial assets held with the Bank falling between € 100,000 and € 300,000.
The service model involves the assignment of almost all target customers to a dedicated consultant who, based on the skills they have acquired and specialist and sales training, can provide quality consulting for requirements that grow every more complex. Customers with assets are concentrated in the ranges of 46-65 years and over 65.
The objective is to extend the offerings of advanced and personalised consulting, able to identify the objectives and needs of customers in the target market, guiding them towards financial and hereditary planning through comprehensive analysis of personal, family and business assets. Collecting this information makes it possible to develop appropriate solutions.
To ensure adequate support for our consultants, during the second half of 2018 a project was launched to give the network of private bankers a Wealth Management platform. This will launch in the spring of 2019, with the initial version allowing real estate, business (unlisted equity investments) and hereditary analysis.
Much of the training provided in 2018 was focussed on ensuring all dedicated private and affluent consultants are MiFID certified, hence ensuring in-depth knowledge of regulatory changes which implementation of the ESMA directive involved for the world of financial investments. This also included implementation of the IDD Directive (in October 2018) which involved all of the insurance sector (both life and liability) and required ad hoc training.
In 2019, training will be focussed on developing asset consulting and the role of the consultant, with various levels of engagement for the two professional families, accompanied by the usual continuing education courses for professionals required by MiFID and IVASS.
The sales network of dedicated consultants for this market rose to 230 units at the end of 2018 (112 dedicated to the affluent segment and 118 private banking employees, including the territorial managers).
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Recruiting for specialists continued, with the insertion of a team of 5 bankers in Puglia, one banker in Genoa, one in Saronno and one in Rome.
It is expected that new dedicated affluent bankers will be appointed in the first few months of 2019, to ensure coverage of the segment with dedicated consultants. During the year additional new bankers will be hired, both as employees and with agent contracts.
The insurance savings offer range was enriched by a segment I product, Amissima Valore Private (from the Amissima Insurance Group, owned by Apollo Global Mgmt), to meet the increasingly requested desire to protect capital for the private segment.
At the end of the year, the cooperative agreement with FARAD International S.A, was finalised. This is an insurance broker specialising in Private Life Insurance. The goal is to broker policies issued by companies based in Ireland and Luxembourg. The first two have been identified, Cardif Private Insurance Italia and Calie Life Excellence 2, through which the private bankers will be able to offers solutions to high net worth individual customers in 2019.
The array of alternative investment funds (AIFs) was also renewed through direct presentations to interested customers of certain projects involving start-ups, with the cooperation of ClubDealOnline (an operator specialised in managing equity crowdfunding portals), as well as with the insertion of private equity, private debt and private equity real estate products with the assistance of Fenera Holdings Spa.
The Private segment
Total deposits at 2018 settled at € 8.125 billion. Total net deposits decreased by € 81 million, while private deposits grew by 86 million. The final figure for managed savings was essentially equal in its traditional technical forms (insurance savings was very positive, as were UCITS offerings, while the contribution from managed assets was decidedly negative), while fee only consulting began to garner interest from both bankers and customers. The managed savings component came to 42% of total deposits, substantially unchanged with respect to the previous year. Net banking income (including credit risk) closed with a 6% increase over the previous year, at € 37.8 million. Revenues from investment services came to € 32.6 million, up by 3% compared to the previous year. Profitability from indirect deposits was 0.44%.
The Affluent segment
This segment, served by a dedicated consultant, reached global deposits of € 3.54 billion at the end of 2018, also following the process of assignment for target customers that continued throughout the year. The total for the segment comes to € 5.3 billion.
2018 ended with total net deposits for the segment up by € 31.6 million, with the use of insurance savings prevalent.
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Corporate and Small Business Market
Effective as of 3 April 2018, the Banca Sella Board of Directors approved the establishment of the Corporate and Small Business Market.
It serves and develops customers in the business segment, with a particular focus on the Small Business (small economic operators, small and micro-businesses) and Corporate sectors (medium enterprises, corporate and large corporate), as well as start-Ups, condominiums and associations.
Functionally, it is responsible for: Small Business Sales Professionals (dedicated and non-dedicated), on the basis of the principles of the service model, defined within the context of the New Commercial Model; Corporate Sales Professionals, organised in teams for each of the Bank's territories, coordinated by a Team Leader; Agriculture, Food and Alternative Energy Specialists; Digital Economy Specialists; Foreign Specialists.
The areas of specialisation in 2018 were the following: knowledge about the business supported and appropriate provision of tailor-made financial advice, not just with reference to the numbers seen in the financial statements but above all to the future prospects and dynamic evolution of the business, with a particular focus on the size, assets, and profitability on one hand and the opportunities offered by the digital economy and internationalisation on the other; in this framework, to complete the range of offers and to meet customer requests for digital technology, increasingly urgent, relationships with other companies in the Sella group became more profitable. In particular, this included the subholding Fabrick and, within this relationship, with Fintech District and Sellalab (the internal Sella group research and development organisation, including development of local open innovation centers); internationalisation continues to be one of the main areas of action used to support small and medium enterprises and corporate and large corporate businesses. In fact, the foreign offerings available to business customers range from foreign goods to the forex risk management service and possible insurance coverage; the revision of the offerings aimed at businesses was a process begun in the second half of 2018, which will see results during 2019 and has already involved the ideation of new products and services with a customer-centric design viewpoint; the agreement signed with FEI in 2016 (called Innovfin), continued its positive trend again in 2018, showing a significant amount disbursed, all of which relative to the so-called "Junker plan". In the area of small and medium enterprises (up to 499 employees), Innovfin assists companies investing in innovation, partially guaranteeing medium/long-term financing for productive investments, supporting and completing the array of subsidised finance for businesses associated with the historic agreement with MCC relative to the Central Guarantee Fund, which has very successfully
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survived the difficult situation seen over the last 10 years, during which gross domestic product fell by a two digit percentage.
This initiative was supported by the Instrumental Goods Credit Line, also known as “New Sabatini”, thanks to an agreement that allows disbursement of loans with special conditions specified in Ministerial provisions.
The sectors that most appreciated these development activities were food and agricultural, “green” - i.e. energy savings and new alternative sources, and the entire segment of small artisans and freelance professionals, as well as services.
Additionally, the acquisition of new POS businesses was improved, assisted by a structured offer range and close partnership with Axerve, a group company and subsidiary of Fabrick.
Various sales initiatives were implemented, targeted, on the one hand, at improving retention of existing customers (in particular in the credit and payment systems and digital innovation segments) and, on the other, broadening the customer base. In addition, Corporate and Small Business sales professionals also made proposals:
to trade associations, through the stipulation of new offers and renewal of existing agreements; to support the financial needs of businesses, in particular during periods of greater focus on products associated with financing holiday pay and stocks.
The use of the three sales Communities (one dedicated to small business sales professionals, one to corporate and red sales professionals and the last to the world of green businesses) and the three dedicated Yammer groups for sales professionals made it possible to share best practices and successes.
In terms of training, the following were worthy of note:
the consolidation of a very important training path, known as "Master Small Business", aimed at newly appointed small business sales agents with the involvement of experienced professionals known as mentors; monthly alignments aimed at the communities of corporate and small business sales professionals.
The training of sales professionals also continued, overseeing professional growth in various fields, such as regulatory, insurance, digital economy, investments, product and offerings updates and in the credit sector.
Also in 2018, sponsorship of the important event “Milano Unica” was confirmed, the international Textiles fair held in Milan in February and July. The involvement of SellaLab continued, supporting foreign specialists and business consultants in positioning innovation and consulting relative to these companies, which relative to the Biella area, are part of our historic core business. This commitment is a testament to the Bank's desire to support development of the textile sector and "Made in Italy" excellence.
In 2019, as noted above, the significant project to revise offerings will continue, accompanied by more detailed classification of customers aimed, above all, at ensuring the provision of quality consulting.
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Marketing The Marketing office supported the Bank's commercial development through communication initiatives, sales and institutional events, competitions and the promotion of products and services using both traditional and digital channels.
The Websella account was the main reference product in acquiring new private customers, to which the Conta Sella account was added during the year, for customers with higher numbers of branch transactions. Promotional campaigns and prize contests were held, aimed both at acquiring new online customers and at increasing interest in the branches. Digital acquisition activities relative to the Websella account were continuously optimised and monitored, succeeding in acquiring around 10,100 customers with savings of around 42% on cost per lead. Over 9,300 Sella accounts were opened, a 75% increase with respect to 2017, without any erosion effects for online accounts.
The main competitions held in 2018 saw the Bank's brand accompanied by significant businesses in the digital/leisure segments, such as lastminute.com and tantosvago, as well as retail giants such as IKEA. The concepts for the initiatives involved, in addition to a focus on acquisition, various aspects aimed at helping customers move towards digitalisation, including incentive mechanisms relative to activation of internet banking services, Sellabox and the provision of customer email addresses.
For online trading, participation in the main sector events was important, supported by a media plan. These events included the TOL Expo and ITF in Rimini, as well as training sessions for trading, thanks to courses on various aspects held in the most important Italian cities.
Again in 2018 the Bank continued to offer local sponsorships and support, associating its brand with the historic Biella volleyball team, and supporting its participation in the championship. Partnership with Milano Unico also continued, always with an eye to supporting the local community and extracting value from the partnership and associates.
2018 also saw the issue and application of the new brands in the Sella group. An important "rebranding" project was begun, involving adjustments to the Bank's marketing and communication materials, with the goal of providing the customer with an identity that is up to date and focussed on the future, while still maintaining solid roots.
Finally, customers were offered training courses and dedicated events, with the goal of offering them skills in terms of digitalisation, company finance and investments.
IX. Human resources
Management and development
As at 31 December 2018, the bank staff totalled 2,878 employees (including 280 employees of BSE Chennai Branch), in line with the figure the previous year.
New employees hired numbered 152, of whom:
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68 in Italy: 29 with open-ended contracts, 21 on fixed-term contracts and 18 with professional apprenticeship contracts; 71 in BSE Chennai Branch; 13 for transfers from other Group companies. Employees leaving numbered 137, of whom: 53 in Italy, of which 26 due to resignations, 8 for retirement and 19 for other reasons; 63 in BSE Chennai Branch; 21 for transfers to other Group companies. At the end of the year: 17.7% of personnel are on part-time hours; the average age of employees in Italy is 45 years, with average length of service (considering the date hired by a Sella Group company) of 17 years; the average age at BSE Chennai Branch is 31 years, while average length of service is 4 years. Note the following agreements: Transfer from Banca Sella S.p.A. to Sella Open Fintech Platform S.p.A. of the business unit "Platfr.io”; Group agreement of corporate welfare premium; Group agreement on video surveillance; Group agreement on agile and smartworking; Group agreement on access to extraordinary services from the solidarity fund for income and employment support and for professional reconversion and requalification for credit personnel, expansive solidarity contracts (early retirement).
The Group's 2018-2020 "Open to Grow" strategic plan was presented to the unions. Additionally, during the year the Training Commission and the Commercial Policies and Work Organisation Commission met, which in particular has the aim, at the sector level, of confirming the central nature of the banking sector and the fundamental role it plays in supporting the economy of Italy and protecting savings, in the interest of households, businesses and local areas.
Training
In 2018, Corporate University activities continued, with volumes higher than those the previous year. 138,504 person hours were disbursed (+10% with respect to 2017). Classroom-based training activities increased, both with regards to virtual classroom activities (which doubled with respect to 2017, representing 12% of total training activities with 16,600 person hours), and with regards to physical classroom training (+2% with 54,301 person hours, representing 39% of total training provided). The volumes of training provided via the e-learning platform confirmed growth (+7% with 65,920 person hours, accounting for 48% of total training provided), while on-the-job training fell (-41%, with 1,613 person hours, 1% of the total). Employees involved in training courses during the year totalled 2,822 (including employees of BSE Chennai Branch), of which 2,761 in the workforce at 31 December 2018 (96% of total staff). The average number of training hours per employee was around 48, up compared to the previous year.
The programmes offered in 2018 were developed around 5 main guidelines.
Sales training:
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o projects aimed at updating and developing technical and commercial skills and regulatory knowledge needed to provide information and/or provide professional consulting to customers, also on the basis of regulatory requirements;
o projects to assist in role changes, for example: masters in small business (an annual master's program aimed at small business dedicated professionals), training to support branch layout changes.
Managerial training:
o continuation of managerial training;
o continuation of training courses for newly appointed managers.
IT training and training for innovation and efficiency:
o technical training;
o meetings aimed at increasing skills relative to innovation and digital issues (including, Artificial Intelligence, Design Thinking, Customer Centric Design, Open innovation, Cryptocurrencies and Blockchain) and on the Agile Scrum methodology.
Regulatory training:
o to spread specific and up to date knowledge about the main sector regulations (e.g. GDPR, anti-money laundering, transparency).
Specialist and cross-cutting training:
o development of specialised skills for roles, in particular for head office personnel;
o induction courses for new hires, aimed ensuring the main technical and regulatory knowledge is acquired, as well as offering information about the working context and overall scenario; these courses also include training aimed at strengthening communication and people skills;
o training to support the introduction of Smart Working, with the aim of supporting participants in the change process and making them aware of the advantages as well as the organisational and personal consequences that this new method of working involves;
o language training.
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X. Information technology and Research and Development activities
The Information Technology department provided Facility Management, Application Management and full outsourcing services to all Banks and companies in the Group.
The Facility Management service is provided by the infrastructure positioned within the two Data Centers owned by the Group; the infrastructure managed is primarily Open, without the presence of a Mainframe. Some of the distinctive factors are listed below:
the percentage of use of virtual solutions within the Private Cloud reached a penetration of 81.5% and total servers managed came to just over 1,700 units; disk space managed exceeds 2.4 petabytes; total work stations managed now exceed 8,000, with a sharp rise in mobile devices (laptops and tablets), which now amount to roughly 33% of the total; infrastructure functions primarily in “active-active” mode between the two data centers, which are therefore simultaneously both active and operating; at data level, operations are carried out with synchronous replication, and therefore with an RPO (Recovery Point Objective) of zero (the highest possible service level).
Disaster Recovery tests during the year involved all systems, with the Multibank IT System operation on a single location, in terms of processing, for a weekend. These were completed according to plan without any operational anomalies identified.
Some of the distinctive factors of the Multibank IT System are:
Native multibank (logical and/or physical); Online 24/7; Based on Open technologies; Service-oriented (exposure of SOA services inside the bank and API services outside the bank).
The Multibank system is currently in use at all Group banks to manage their specific features and at an electronic money institution invested in by the Group; the service provided manages more than 2.3 million accounting movements every day, with high guaranteed service levels, and is quantified at around 1.45 million function points.
The applications that make up the Multibank system are one of the Group's distinctive competitive advantages and, as such, are for the most part developed internally. The portion of applications acquired externally and then integrated into the system is currently equal to around 20% of the total. Application development is also mainly handled by internal resources located in Italy, through the company Selir in Galati, Romania, and the Indian branch of Banca Sella, located in Chennai.
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IT personnel dedicated to Group Facility Management and the management and evolution of the Multibank IT System numbers roughly 560 resources, in addition to external consultants, increasing the availability of resources by roughly 12%. Limited recourse to external suppliers, in specialised areas and in any event to a significantly lesser extent than the market average, constitutes a further distinctive feature of the Group; 70% of resources are dedicated to the implementation of the yearly project plan.
The focus on continuous innovation for the Multibank IT system can also be seen in the significant investments made, both in terms of infrastructure and application development.
Being able to count on internal resources, proprietary software and a firm grasp on technological infrastructure and IT system governance, within the current challenging context of digital evolution, makes it possible to provide an excellent, innovative service to its customers inside and outside the Group.
Relative to planned projects, note the main activities carried out. In the context of the evolution of Data Center infrastructure and technological infrastructure relative to individual productivity:
the introduction of an infrastructural solution to manage the release of applications based on containers, in order dynamically manage auto-scaling logics in a simplified manner, with automated manage of work peaks. During the year, the release of the first application using this architecture occurred, opening the way for future solutions based on Devops and Continuous Integration); the introduction of an infrastructural solution to automate infrastructure components with an "infrastructure as script" logic, with the aim of completing systemic automations with improvements in terms of the time to create new infrastructure, while optimising management time for repetitive activities, while simultaneously reducing the number of possible human errors; the revision of IT tools used at work stations, with the annual roll out leading to an increase in the use of laptops with respect to desktops, also to support SmartWorking strategies, with improvement in technical characteristics and a consequent positive impact on individual employee productivity; the completion of the project to update the new geographical interconnection network, which improved the quality of the connection of all central offices, branches and geographical offices abroad, increasing the dedicated connection channels, most of which are fibre; strengthening of the video communication suite and the extension of internal meeting rooms, equipped to support the customer relationship model and aimed at optimising the functioning of meetings throughout the areas served, as well as for all employees, to increase efficiency and promptness in communication; the renewal of company data warehouse infrastructure, to support increased Group data and processing requirements.
In the context of the Application and Architecture Development: the development and release of banking services available on the internet continued, with the goal of being directly integrated into customer IT systems (API), and the strategy to display these on the platform was finalised (Platfr.io); some innovative projects were developed, targeted at positively handling the digital disruption brought about by the external scenario, including: o strengthening infrastructure dedicated to studying and fully implementing solutions based on
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machine learning methods, using open source libraries; o the first application based on containers was released for use and use of the same was extended to the development environment in order to increase productivity and improve flexibility during development phases; o technological instruments continued to be implemented, targeted at boosting the productivity of the development teams, rendering them, in observance of security constraints, more autonomous as regards the management of the system configurations needed to carry out their activities; the platform which manages security for user authentication and authorisation relative to the use of IT applications was updated and revised architecturally, with the introduction and increased use of token software, separating them from the application domains in order to better manage the exponential increases in volume seen for certain applications; investments were made in training for specialised roles such as solution architects, to accelerate the introduction of cutting edge technologies when designing IT solutions; activities to monitor cyber-security risks were strengthened, increases verification cycles performed by third parties regarding application vulnerabilities, in addition to the cycle carried out continuously upon every application release in order to further increase the security of applications and IT services; all necessary activities to adjust to regulatory changes required during the year were completed, MiFID II was an area requiring particularly significant efforts in terms of investment; the onboarding process was revised, with significant improvements implemented and using RPA techniques for non-automated phases (making it possible to adequately handle the increase in customer coming from Hype); also relative to onboarding, an additional review cycle was begun, aimed at optimising operational management of off-site sales for those operating in mobility format within the network; additional chatbot solutions were introduced for customer relations with the use of semantic motors which send them to the operation requested by the customer within the MobileBanking app; the same solution was also implemented relative to VoiceBanking solutions, with the use of Framework to integrate it with IOT modules; the new version of the Mobile Banking app for the MultiBank system was issued for beta testing, a solution that made it possible to significantly optimise performance and simplify and improve customer experience, introducing innovative technological and interaction solutions; relative to robotic process automation (RPA) techniques, this arena saw increase both in terms of use in highly repetitive processes and those with rapid increases in volumes handled (the number of automated flows quadrupled with respect to the previous year, leading to operational benefits). Execution was handled by the Group by the Specialised Center established with the Group's Romanian company, Selir.
In terms of the IT organisational structure and ICT governance: o the IT processes and associated internal regulations were reviewed and brought into line with the international industry standards, first and foremost ITIL (Information Technology Infrastructure Library), in order to make them more efficient and consistent with the best practices;
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o the use of "agile" techniques was increased to further boost the efficiency of the development process by focusing on ensuring that IT services meet business requirements. 12% of total projects involved these techniques in 2018; o the domain of coverage of electronic procedures was further extended, aimed at measuring data quality; o the annual IT training plan was mainly focused on enhancing skills in relation to the objectives of architectural development, technological innovation and increase in the efficiency of the internal processes of the information systems; o the corporate Change Management Data Base (CMDB) was constantly updated and extended, including additional information useful to complete the Knowledge Base; o updates to the IT Governance and Management Policies were issued, as well as for standards for SOA development and guidelines for proper adoption of cloud-based solutions; o IT risk validation activities continued, with the aim of directing actions regarding areas of attention identified for applications. In terms of Innovation, internal scouting and pilot activities were carried out during the year targeted at extending their use intensively on the different applications and operating areas: o Machine Learning and Artificial Intelligence - scouting activities were conducted on Open solutions present area and testing was completed on some algorithms available on the cloud rather than commercial tools; the first operating usage scenarios were identified as pilot projects and other possible usage scenarios are being extended and experimented with, which are intended to become pervasive during the 2019-2021 period; o DLT and IOT are both being studied to identify the UseCase application on IOT. A framework was released for internal use which saw its first operational use in the solution issued for Voice Banking, while relative to DLT, the Abilab pilot project for the Spunta Banche process was actively participated in. The themes selected for new scouting activities involve the areas of Devops, OpenStack and experimentation with Automatic Coding Generation and Automatic Testing Generation techniques (in both cases with methods based on artificial intelligence logics).
XI. Internal audit system
Credit risk
The lending policies and processes for the disbursement and monitoring of loans are defined in order to combine positive responses to customers’ needs and business needs with the need to ensure the maintenance of high quality for the lending business in a still difficult economic situation.
Credit risk monitoring and control is outsourced to the Risk Management functions of the Parent Company and of Banca Sella and to the Credit Quality and Control service of Banca Sella.
The Parent Company’s Risk Management Service has the task of monitoring and quantifying the credit risk assumed by the Group companies, assessing its sustainability and, through the use of
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shared instruments, facilitating effective and proactive management. The Credit Control service of Banca Sella is focused on more traditional monitoring activities, mainly aimed at credit quality analysis.
In reference to the activities performed by the Parent Company’s Risk Management function, the evolutionary maintenance of the IT processes and procedures which support credit risk evaluation continued throughout 2018, including:
the evolution of all assessment logics relative to writedowns, in order to implement IFRS 9, which took effect on 1 January 2018; performance of second level controls on credit risk, pursuant to Bank of Italy Circular 285 (formerly the 15th update to Bank of Italy Circular 263/2006); annual updating of risk parameters, including Loss Given Default (LGD), Probability of Default (PD), default rates (TD), and Loss Identification Period (LIP); development of trend reporting and monitoring of the main variables that impact credit risk, concentration risk and residual risk; analysis and investigations of specific risk profiling issues; providing support for the definition of the Capital Management plan and measuring current and prospective adequacy, as well as efficient allocation on a risk adjusted return basis; definition of forecast analysis methodologies, preparation of forecasts and analysis of changes when compared with final figures; monitoring the cost of credit for all Group companies, aimed at analysing the variables that affect the final figure on a monthly basis; assessment of the consistency between the RAF for significant operations and loan disbursement/renewal applications under the responsibility of the Board of Directors; cooperation with the Credit Area and the Network, aimed at achieving better integration of ratings models in credit processes (disbursement, monitoring, decision making powers), in definition of pricing and strategic capital allocation decisions continued in all the companies of the Banca Sella Group; procedures to check the admissibility requirements of credit risk mitigation techniques.
Monitoring and management of credit risk, concentration risk and residual risk is formalised in the respective Policies, which contain both details on risk indicators and on the actions to be taken in the case the thresholds identified in the Risk Appetite Framework (RAF) are exceeded.
Interest rate, market, and liquidity risk
Interest-rate risk, understood as the risk of a change in the interest rate reflecting negatively on the Bank’s financial and economic situation, is internally monitored both in terms of the banking book and the trading book.
The market risk, meaning potential losses connected to adverse changes in the price of shares, interest rates, and exchange rates, as well as volatility of the same, is measured using the standard Bank of Italy methodology.
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Market risk management and control is governed by Group Regulations and a specific Policy, documents that define the rules by which each individual company in the Group may expose themselves to various types of risk.
The Parent Company's Risk Management department carries out controls regarding whether the limits established in the above-mentioned internal documents are respected as well as, for management purposes, identifying the VaR for the Bank's own portfolios (ten-day and three-month time horizons and 99% confidence margin) and analysis of sensitive factors, such as portfolio duration and effects of sudden interest rate shocks.
Liquidity monitoring and management operations for Banca Sella are formalised in the Group’s Risk Control Policy, which contains both liquidity risk management guidelines and the strategies to be followed in critical situations.
The process for the management and control of the interest-rate risk on the banking book is formalised by a Risk Control Policy, with the purpose of disciplining the rules and the management, measurement and control methods linked to the interest-rate risk, in order to guarantee effective management of the conditions for the economic and financial balance of the Sella Group.
The policies were implemented by the Bank’s Board of Directors.
Operational risk
With the aim of constantly improving the culture and management of operating risks and to ensure adequate information flows, Banca Sella, like the other Group companies, for several years has used the organisational process known as the “Control Cycle” for the regulation of anomalies/observations, the removal of the effects and causes generating them.
During 2018, Banca Sella took particular care in handling operating risks, participating in the kick-off of the Controlli 3.0 initiative to define a new risk framework that offers a dynamic and integrated overview. The achievement of this objective is pursued through the dissemination of a risk culture and awareness, starting from the same business areas, and through the implementation of an integrated automated platform that manages data collected relative to operational risk. The constant strengthening of organisational safeguards and tools for mitigation and control continued, including:
the revaluation of processes through the performance of Risk Self Assessments (RSA) with the involvement of the process owner; the assessment of operating risk relating to the company’s new initiatives; the assessment of IT risk relating to the applications under the responsibility of the company; certification and summary of service levels and line controls.
Monitoring of the risk translates also into specific reporting functions at all levels of the corporate organisation, in accordance with the legislation which states that timely information must be provided on the subject of operational risks. The Control Cycle provides the information basis
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which, at the occurrence of the anomaly/observation reported and according to a precise escalation, generates and sends communication flows to the parties concerned.
In addition, in order to ensure an assessment of the performance of the management of operating risk, the Parent Company Risk Management function produces regular summary and detailed statements which summarise, for the Bank, the degree of risk assumed in relation to:
anomalous events/observations and operating losses reported in the Audit Cycle database (highlighting the more serious anomalies); the outcome of line audits; the trend in service levels; monitoring compliance with the RAF (Risk Appetite Framework) thresholds for the operating risk indicators.
Compliance risk The Compliance Department is responsible for managing the risk of non-compliance with regulations (compliance risk), both external regulations (laws, regulations, provisions of the supervisory authorities) and self-regulation (internal rules, codes of conduct, codes of ethics, etc.). The Department is responsible, in particular, for: implementing the methods of assessment of risks of non-compliance with the regulations, defined by the Parent Company’s Compliance Department in collaboration with the other company control functions and the other company departments, consistent with the company’s strategies and operations; identifying the appropriate procedures for preventing the risk detected, with the possibility of requesting their adoption, as well as verifying their adequacy and correct application; continuously identifying the applicable regulations and measuring and assessing their impact on company processes and procedures; verifying that the processes, procedures, products and services offered comply with the external and self-regulatory provisions; proposing organisational and procedural amendments targeted at ensuring adequate monitoring of the risks of non-compliance identified; verifying the effectiveness of the organisational adjustments (structures, processes, procedures, including operating and commercial) recommended for preventing the risk of non-compliance with the regulations; assessing the adequacy of the bonus system; evaluating the policies governing risk activities and conflicts of interests with related parties; providing an ex-ante assessment of compliance with the regulations applicable to the prevention and management of conflicts of interest, both in relation to the various activities carried out and employees and company representatives; providing advisory services and assistance to company bodies on all matters in relation to which the risk of non-compliance assumes significance; preparing the flows of information on the activities performed, aimed at the company bodies and structures concerned;
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annually presenting the company bodies with the plan of activities, which sets out the relevant initiatives involving the assessment and verification of compliance, taking into account both any deficiencies in the controls, and any new risks identified; presenting the company bodies with a report on the activities carried out, which outlines the assessments and checks performed, the results, areas of weakness identified and proposes measures to be adopted to remedy these; reporting to company bodies, for aspects within their competence, on the completeness, adequacy, functionality and reliability of the internal audit system.
Legal risk
Risks associated with legal disputes were carefully and specifically analysed by the Bank. Relative to disputes for which a payment is probable, and if its possible to make a reliable estimate of the relative amount based on the guidelines contained in the Group policy, adopted by the Bank, on evaluating risks of legal losses, an allocation is made to the provision for risks and charges.
The Bank is the defendant in some legal disputes originating from its ordinary business. In particular, as of 31 December 2018 there were 244 legal proceedings (other than fiscal, bankruptcy revocations and those relative to credit collection, relative to which counterclaims or appeals have been raised relative to the Bank's claims) pending with regards to the Bank.
To protect against possible liabilities and costs that could derive from the pending legal cases, at 31 December 2018 the Bank has a provision for risks and charges equal to € 3.5 million.
The Bank assesses each position on a case by case basis, in terms of facts and laws, taking careful attention with documents and factual aspects. After this analysis, when appropriate the provisions are allocated, deemed congruent with relationship to the specific circumstances of the case in question (and adjusted over time, when necessary). All the cases in question are monitored constantly and the resulting risks estimated, against which specific allocations are made to the provision for risks and charges, applying that envisaged under IAS 37.
Below is a description of the disputes, broken down by area of activity. If the relative liability is deemed probable, an allocation is made to the provision for risks and charges.
Branch operations: these are disputes in which the Bank may involved due to the normal execution of typical bank operations; in particular, this includes all cases originating from facts/events directly associated with the customer relationship within the branch such as, for example, protested cheques, handling of loans, issuing/enforcing of sureties, management of hereditary issues, execution of bank transfer instructions, management of positions subject to garnishing relative to third parties, etc. The total amounts claimed come to around € 44 million, for 84 positions. These include:
Case put forward by Cassa Depositi e Prestiti spa (hereafter, CDP) in November 2014 for around € 18.4 million in relation to a loan granted by CDP to a municipalised company with an account opened with Banca Sella and the asserted requirement, regarding the Bank, of paying the residual debt owed by the municipalised company based on the payment delegation signed. As the Bank does not believe this obligation exists, it duly presented itself to the court and proceeded to assess the position, taking care in assessing the documents and factual evidence, while also acquiring an opinion from an
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authoritative independent legal firm, as an additional source of information, which confirmed the assessments expressed by the Bank. Case put forward by AFK srl In June 2018, with an appeal and request for around € 10 million, against the decision of the Court of Lecce, partially against the Bank. The case revolves around asserted irregularities in operations executed relative to the customer company's account. At present, all the factual and legal elements have been assessed, also in the light of the first level judgement which was only partially against the Bank.
Investment services: these are disputes, relative to derivatives and bonds in default, which with respect to previous years have fallen in absolute numbers. The total amount requested is € 43.3 million, of which € 34 million concentrated within 2 cases brought by the same entity, with ordinary and administrative jurisdiction, and for the same type, for which the first level judgement has already been issued in favour of the Bank, with an order to pay expenses. The entity has appealed it to the Court of Messina.
Compound interest: disputes regarding compound interest saw an increase, with a total of 102 positions and total amount claimed of around € 8 million. For each position specific assessments were carried out, also making use of technical consultants and provisioning was carried out deemed congruent to cover the risks of the cases.
Finally, there are also less significant disputes regarding payment services, employment cases and request for compensations for damages, in relation to which the Bank has examined each individual position and carried out provisioning deemed congruent to cover the risks of the cases.
Finally, relative to the case filed with the Court of Lecce by certain minority shareholders of Banca Sella Sud Arditi Galati, in relation to the merger by incorporation with Banca Sella, aimed at ascertaining the asserted right to withdrawal exercised by these same shareholders, citing the claimed violation of the right to invest, the Bank appealed the first level judgement which had accepted the plaintiff's requests.
On 21 March 2017, the Appeals Court confirmed the first level judgement but accepted one of Banca Sella's grounds for appeal. Additionally, the Bank, firmly convinced of the correctness of the position it has taken, also in light of a recent judgement issued by the Court of Cassation, which confirmed the accuracy of the more stringent interpretation of regulations regarding the right of withdrawal, appealed the second level judgement with the Court of Cassation and filed its appeal on 13/10/2017. The hearing for discussion was held on 5 February 2019 and the decision is awaited. XII. Other information
Report on corporate governance and ownership structure
Banca Sella's business involves the collection of savings and provision of credit in its various forms in Italy and abroad. It may also provide banking and financial services in outsourcing, as well as services associated or instrumental to the same. Always in compliance with the provisions in force and subject to obtaining the prescribed authorisations, when necessary, the Company may perform all banking and financial and intermediation operations and services allowed, those contemplated among
BANCA SELLA | 55 REPORT AND FINANCIAL STATEMENTS 2018
the activities admitted for the benefit of the mutual recognition, and every other activity connected or instrument to the achievement of the Company's purpose, with the traditional exclusion, however, of every operation that is merely risky.
The fully subscribed and paid-up share capital is € 334,228,084.00, represented by 668,456,168 shares of a face value of € 0.50 (zero point fifty) each, of which:
563,193,010 shares with multiple votes, each granting 3 votes (P category shares); 105,263,158 ordinary shares, each granting 1 vote per share (S category shares).
Shares with multiple votes give holders the right to convert them into ordinary shares in the case of transfer, to be completed on penalty of inefficacy within thirty days of the date the declaration of conversion is communicated. In the case of the joint ownership of one or more shares, the rights of the joint owners must be exercised by only one of the joint owners who shall represent the others.
In conformity with the provisions of section 123-bis, subparagraph 2, point b) of Legislative Decree 58/98, the information on the main features of existing risk management and internal control systems concerning the accounting and financial information process is reported below.
As regards administration and accounting activities connected with the preparation of the financial statements, the Bank has adopted specific company processes, aimed at supervising the correct preparation of financial statements, as provided for in the legislative, regulatory, civil and fiscal rules. The Banca Sella Compliance and Internal Audit services ensure the conformity and adequacy of these processes, within the scope of their activity.
The control system was reinforced in accordance with a detailed action plan that has been constantly updated from time to time taking into account the experience acquired and best practices at a system level. It operates according to four directives:
a) supervision of rules and processes; b) continuous inspection of the adequacy of rules; c) growth of professional skills and control culture; d) controls and checks on compliance with rules.
The model used therefore allows a reasonable guarantee to be obtained for the reliability of the accounting and financial information prepared. For more details, please see Chapter XI, Internal Audit System.
Banca Sella is subject to management and coordination by Banca Sella Holding.
Self-assessment of bank and banking group decision-making bodies
The regulatory context outlined in the Bank of Italy's 1st update on corporate governance of 6 May 2014 to Circular 285 "Supervisory provisions for banks" paid particular attention to the self- assessment process for top decision-making bodies within banks and banking groups, to be carried out in-depth and rigorously.
Self-assessment activities for the Board of Directors were completed, as has been done every year since 2009.
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The provisions of the Self-Assessment Process Regulations were followed, adopted at the Group level in 2015.
The Directors filled out a questionnaire which included the following sections:
self-assessment of Directors; composition of the Board of Directors and Board activities; assessment of the Chairman of the Board of Directors; assessment of the CEO; self-assessment of the Chairman of the Board of Directors; self-assessment of the CEO.
The results and observations obtained with the questionnaires, which were examined during a board meeting, confirmed the adequacy of the qualitative/quantitative structure and operations of the Board.
Non-financial disclosure
We note that, as permitted under article 6, paragraph 1 of Legislative Decree 254/2016 "An entity of public interest falling within the scope of application of this Legislative Decree is not required to prepare the declaration pursuant to article 3 of said entity of public interest prepares a consolidated non-financial disclosure pursuant to article 4, or if said entity and its subsidiaries (if present) are included in a consolidated non-financial disclosure issued:
a) by another parent company subject to the same requirements or b) by a European parent company which issues said disclosures pursuant to and in compliance with articles 19-bis and 29-bis of Directive 2013/34/EU". The non-financial disclosure is issued at a consolidated level by Banca Sella Holding, the parent company of the banking group, and will be approved by its Board of Directors on 25 March 2019 and made available on the Sella Group's website at: https://sellagroup.eu/investor-relations.
Treasury and parent company’s shares During the period, the Bank did not hold, nor does it currently hold, any treasury shares, nor any shares of the parent company Banca Sella Holding.
Equity investments and transactions with the Group companies The following tables show the relations between Banca Sella and the other Group companies, from an equity and economic point of view. Banca Sella supplies most of the outsourced services to the Group companies; it receives outsourced services from the parent company as concerns the services headed by it, in particular: Inspectorate, IT security and the issue of debenture loans.
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Relations with Group companies: balance sheet figures
Provisions for risks Other Assets - Other Liabilities - Due from and charges - Securities Due from banks Due to banks Due to customers other other customers commitments and issued guarantees given
Banca Sella Holding 2.353 3.967 2.237.703 - - 686.249 - 1.442 Sella sgr 2.435 - - 1 - - 5.044 - Sella Capital Management in liquidation ------Sella Leasing 324 61 - 725.083 2 - 4.415 - Immobiliare Lanificio Maurizio Sella 18 89 - - - - 21.463 - Fiduciaria Sella 22 3 - 0 - - 1.618 - Sella Personal Credit 458 34 - 792.103 1 - 71 - Banca Patrimoni Sella & C. 1.836 2.487 6.014 - - 1 - - Axerve 4.312 1.745 - 10.794 - - 1.625 - Sella Broker 28 2 - - - - 6.142 - Selir 54 869 - - - - 4.285 - Family advisory sim 5 - - 4 - - 128 - Miret ------65 - Finanziaria 2010 2 - - - - - 806 - Fabrick 242 745 - - - - 1.431 - Sella Technology ------90 - Sella Ventures ------448 - Smartika 124 - - - - - 867 - Vioera PLC ------51 - Vipera Services - 92 - 2 - - 335 - Kubique - 51 ------Overall total 12.215 10.156 2.243.717 1.532.900 3 686.250 49.006 1.442
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Relations with Group companies: economic figures
income expenses expenses expenses Fee income Fee expenses expenses Fee employees on employees on secondment to Other operating Other operating Other operating similar expenses income - services Net provisions for risks and charges: commitments and Net gains/(losses) Net gains/(losses) rendered to Group Group to rendered guarantees issued and similar income income and similar Interest receivable secondment within on trading activities Recovery of costs of Recovery of costs of Interest payable and Other administrative on hedging activities
Banca Sella Holding - 26 1.714 1.317 238 5.535 10.388 6.349 7.130 3.562 2.723 1.485 2.634
Sella SGR - - 132 113 9.858 ------Sella capital management in liquidation - - 1 6 ------
Sella Leasing 2 - 210 295 504 40 8.377 - - 33 - 1 426 57 Immobiliare Lanificio Maurizio Sella - - 5 3 1 - - 8 - - 4.386 21 -
Fiduciaria Sella - - 11 27 1 3 - 1 - - - 1 39 - Sella Personal Credit 1 - 176 212 3.544 7 9.419 - - - - 3 66 115 Banca Patrimoni Sella & C. - 591 1.623 1.768 3 14.374 22 - - - 316 152 17
Axerve - - 3.809 1.257 190 45 97 - - - 9.992 520 28
Sella Broker - - 45 25 - - - 2 - - 23 - -
Selir - - 30 87 - - - 2 - - 4.091 - 26
Family advisory sim - - 3 6 1 - - - - - 183 - -
Miret ------
Finanziaria 2010 - - 3 - 14 ------
Fabrick - - 42 214 2 - 259 - - - 600 745 69 -
Sella Technology ------
Sella Ventures ------
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Smartika - - 1 - - - 8 - - - - 5 149 -
Vioera PLC ------
Vipera Services ------
Kubique ------
Overall total 3 617 7.812 5.330 14.358 20.004 28.606 6.364 7.130 2.995 22.585 2.926 2.877
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XIII. Proposed allocation of profit
Dear Shareholders, the Balance Sheet and Income Statement at 31 December 2018, presented in euro units in accordance with current legislation, after all the necessary depreciation, amortization and provisions, show a net profit for the year of € 25,144,941.30 which we propose to allocate as follows:
Profit for the year € 25,144,941.30
- to the "Legal Reserve" pursuant to the Articles of Association € 3,017,392.96
- to the "Statutory Reserve" pursuant to the Articles of Association € 5,028,988.26
remaining € 17,098,560.08
for Shareholders:
- dividend of € 0.012 for each of the
668,456,168 shares € 8,021,474.02
to the “Fund for charity and sundry donations” € 70,000.00 and the remainder to the “Extraordinary reserve” € 9,007,086.06
Biella, 25 March 2019
In the name of and on behalf of the Board of Directors
The Chairman
(Maurizio Sella)
BANCA SELLA | 61
Financial Statement Schedules at 31 December 2018
At 31 December 2018, the financial statement schedules were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the schedules dictated by the above circular were duly modified through the addition of items intended to facilitate comparison with the previous year, the latter prepared in compliance with that established in standard IAS 39 and stated in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Again pursuant to the stated circular, the financial statement schedules were prepared in euro, unless otherwise indicated.
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Balance Sheet Assets
31/12/2018 31/12/2017
Bank of Italy Circular Bank of Italy Circular Assets 262/05 5th update 262/05 4th update (IAS (IFRS 9 criteria) 39 criteria)
10. Cash and cash equivalents 147,815,288 139,631,271 20. Financial assets measured at fair value through profit and loss 86,157,986 - a) financial assets held for trading 36,981,204 - c) other financial assets necessarily measured at fair value 49,176,782 - 20. Financial assets held for trading - 23,282,075 Financial assets measured at fair value through other comprehensive 30. 452,408,810 - income 40. Financial assets available for sale - 1,060,967,620 40. Financial assets measured at amortised cost 10,407,313,965 - a) Due from banks 2,326,562,751 - b) Due from customers 8,080,751,214 - 50. Financial assets held to maturity - 90,646,368 60. Due from banks - 2,787,881,318 70. Due from customers - 7,003,762,241 50. Hedging derivatives 1,974,083 3,714,514
60. Value adjustment of financial assets subject to macro hedging (+/-) 78,926,668 87,203,484
70. Equity investments 105,236,149 88,536,000 80. Tangible assets 36,907,199 46,768,660 90. Intangible assets 55,887,003 54,597,645 of which: - goodwill 12,992,423 13,181,423 100. Tax assets 176,321,872 157,915,979 a) current 40,412,232 44,278,141 b) deferred 135,909,640 113,637,838 110. Non-current assets and asset groups held for sale 17,132,247 - 120. Other assets 244,959,047 208,770,791 Total assets 11,811,040,317 11,753,677,966
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Balance Sheet Liabilities
31/12/2018 31/12/2017 Bank of Italy Circular Bank of Italy Circular Liabilities and shareholders’ equity 262/05 5th update 262/05 4th update (IAS (IFRS 9 criteria) 39 criteria) 10. Financial liabilities measured at amortised cost 10,680,515,172 - a) Due to banks 720,366,287 - b) Due to customers 9,615,270,799 - c) Securities in issue 344,878,086 -
10. Due to banks - 738,902,027 20. Due to customers - 9,374,893,087 30. Securities in issue - 410,564,233 20. Financial liabilities held for trading 11,500,196 16,032,618 40. Hedging derivatives 81,562,579 90,492,818 60. Tax liabilities 9,674,594 8,831,132 a) current 3,114,392 2,201,529 b) deferred 6,560,202 6,629,603 70. Liabilities associated with assets held for sale 7,285,438 - 80. Other liabilities 229,066,236 260,852,570 90. Provision for severance indemnities 24,071,612 29,583,164 100. Provisions for risks and charges 16,696,855 26,121,765 a) commitments and guarantees given 3,533,719 - c) other provisions for risks and charges 13,163,136 26,121,765 110. Valuation reserves (6,037,593) 1,682,974 140. Reserves 31,241,720 81,286,567 150. Share premiums 366,090,483 366,090,483 160. Capital 334,228,084 334,228,084 180. Profit (Loss) for the year (+/-) 25,144,941 14,116,444 Total liabilities and shareholders’ equity 11,811,040,317 11,753,677,966
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Income Statement
31/12/2018 31/12/2017 Bank of Italy Bank of Italy Items Circular 262/05 5th Circular 262/05 4th update (IFRS 9 update (IAS 39
10. Interest receivable and similar income 203,740,941 193,847,559 of which: interest income calculated using the effective interest 194,699,506 - method 20. Interest payable and similar expenses (51,226,663) (52,408,342)
30. Net interest income 152,514,278 141,439,217
40. Fee income 293,659,535 278,393,883
50. Fee expenses (80,048,965) (74,455,227)
60. Net fees 213,610,570 203,938,656
70. Dividends and similar income 3,311,572 192,378
80. Net income from trading 4,472,219 6,830,858
90. Net gains/(losses) on hedging activities 102,521 126,357
100. Income (losses) from sale or repurchase of: (100,410) 3,583,562
a) financial assets measured at amortised cost 271,451 -
a) receivables - (2,954,801)
b) financial assets measured at fair value through other comprehensive (371,861) - income
b) financial assets available for sale - 6,547,363
d) financial liabilities - (9,000)
Net gains/(losses) on other financial assets and liabilities measured at 110. (2,144,765) - fair value through profit and loss
b) other financial assets necessarily measured at fair value (2,144,765) -
120. Net banking income 371,765,985 356,111,028
130. Net loan loss provisions: (42,052,243) (44,147,480)
a) financial assets measured at amortised cost (42,074,121) -
a) receivables - (33,885,220)
b) financial assets measured at fair value through other comprehensive 21,878 - income
b) financial assets available for sale - (7,825,807)
d) other financial transactions - (2,436,453)
140. Profit/loss from contractual changes without write-offs (661,276) -
150. Net financial operating gains (losses) 329,052,466 311,963,548
160. Administrative expenses: (291,521,292) (308,423,491)
a) personnel expenses (137,732,317) (158,515,277)
b) other administrative expenses (153,788,975) (149,908,214)
170. Net provisions for risks and charges (3,880,974) (16,141,164)
a) commitments and securities issued (222,920) -
b) other net provisions (3,658,054) -
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180. Net value adjustments on tangible assets (4,191,993) (7,913,718)
190. Net value adjustments on intangible assets (13,146,069) (14,315,452)
200. Other operating expenses/income 47,713,827 53,757,246
210. Operating expenses (265,026,501) (293,036,579)
240. Value adjustments on goodwill (189,000) (350,000)
250. Income (losses) from the disposal of investments 25,899 22,655
260. Profit (Loss) on continuing operations before tax 63,862,864 18,599,624
270. Income taxes for the period on continuing operations (17,874,099) (4,483,180)
280. Profit/(Loss) on continuing operations after tax 45,988,765 14,116,444
290. Profit/(loss) from discounted operations after tax (20,843,824) -
300. Profit (Loss) for the period 25,144,941 14,116,444
Comprehensive Statement of Income Items 31/12/2018 31/12/2017
10. Profit (Loss) for the period 25,144,941 14,116,444 Other income components net of taxes without reversal to income statement 1,221,232 219,806 20. Equity securities measured at fair value through other comprehensive income 1,329,833 - 70. Defined benefit plans (108,601) 219,806 Other income components net of taxes with reversal to income statement (9,261,034) 1,084,951 Financial assets (other than equity securities) measured at fair value through other 140. comprehensive income (9,261,034) -
100. Financial assets available for sale - 1,084,951 170. Other comprehensive income, net of tax (8,039,802) 1,304,757 180. Comprehensive income (Items 10 +170) 17,105,139 15,421,201
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Statement of Changes in Shareholders' Equity at 31-12-2017
allocation of previous Comprehensive income year’s profit dividends reserves and other operations on shareholders’ equity allocations
balances at 31/12/2016 31/12/2016 at balances 01/01/2017 balances at shares Reserves changes in reserves Change to opening balances purchase of purchase instruments instruments issue of new stock options extraordinary distribution of derivatives on Dividends and treasury shares treasury shares shareholders’ equity 31/12/2017 at change in equity in change other allocations Comprehensive income 2017 2017 income Comprehensive Share capital: a) ordinary shares 334,228,084 - 334,228,084 ------334,228,084 b) other shares ------Share premiums 366,090,483 - 366,090,483 ------366,090,483 Reserves: a) from profits 168,613,286 - 168,613,286 51,067,083 - (101,173) ------219,579,196 a.1) from previous year profits (4,542,710) - (4,542,710) ------(4,542,710) b) other (133,749,918) - (133,749,918) ------(133,749,918) Valuation reserves: a) financial assets available for 5,890,702 - 5,890,702 ------1,084,951 6,975,653 d) other (5,512,485) - (5,512,485) ------219,806 (5,292,679) Profit (Loss) for the period 58,536,893 - 58,536,893 (51,067,083 (7,469,810) ------14,116,444 14,116,444 Shareholders’ equity 789,554,334 - 789,554,334 - (7,469,810) (101,173 ------15,421,201 797,404,552
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Statement of Changes in Shareholders' Equity at 31-12-2018
allocation of previous Comprehensive income year’s profit dividends reserves and other operations on shareholders’ equity allocations
balances at 31/12/2017balances balances at 01/01/2018 at balances shares Reserves changes in reserves Change to opening balances purchase of purchase instruments instruments issue of new stock options extraordinary distribution ofdistribution derivatives on Dividends and treasury shares treasury shares shareholders’ equity at 31/12/2018 change in equity in change other allocations Comprehensive income 2018 2018 income Comprehensive Share capital: a) ordinary shares 334,228,084 - 334,228,084 ------334,228,084 b) other shares ------Share premiums 366,090,483 - 366,090,483 ------366,090,483 Reserves: a) from profits 219,579,196 (58,369,515) 161,209,681 6,639,949 - 1,684,717 ------169,534,347 a.1) from previous year profits (4,542,710) - (4,542,710) ------(4,542,710) b) other (133,749,918) - (133,749,918) ------(133,749,918) Valuation reserves: 1,682,974 319,235 2,002,209 8,039,802 6,037,593 Profit (Loss) for the period 14,116,444 - 14,116,444 (6,639,949) (7,476,494) ------25,144,941 25,144,941 Shareholders’ equity 797,404,552 (58,050,280) 739,354,272 - (7,476,494) 1,684,717 ------17,105,139 750,667,635
The amounts in the column changes in opening balances are those deriving from first time application of accounting standard IFRS 9. For details, please see Part A of the Notes below.
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Consolidated cash flow statement - Direct method
A. OPERATING ACTIVITIES 31/12/2018 1. Operations 92,866,985 Interest income collected (+) 206,378,550 Interest expense paid (-) (51,226,663) Dividends and similar income (+) 200,056 Net fees (+/-) 213,715,028 Personnel expenses (-) (158,478,746) Other costs (-) (169,411,829) Other revenues (+) 60,624,688 Taxes and duties (-) (8,934,099) costs/revenues for asset groups held for sale and net of the tax effect (+/-) - 2. Cash generated/(absorbed) by financial assets (149,912,567) Financial assets held for trading 1,894,433 Financial assets carried at fair value - Other assets necessarily measured at fair value 38,258,141 Financial assets measured at fair value through other comprehensive income 247,855,309 Financial assets measured at amortised cost (411,514,783) Other assets (26,405,666) 3. Cash generated/(absorbed) by financial liabilities 111,169,630 Financial liabilities measured at amortised cost 157,405,203 Financial liabilities held for trading (2,942,046) Financial liabilities carried at fair value - Other liabilities (43,293,526) Net cash generated/(used) by operating activities 54,124,050 B. INVESTMENT ACTIVITIES 31/12/2018 1. Cash generated by: 3,499,832 Sales of equity investments - Dividends collected on equity investments 3,111,516 Sales of tangible assets 170,704 Sales of intangible assets 217,612 Sales of business units - 2. Cash absorbed by: (41,963,371) Purchases of equity investments (11,142,900) Purchases of tangible assets (9,825,527) Purchases of intangible assets (20,994,944) Purchases of business units - Net cash generated/(used) by investing activities (38,463,539) C. FUNDING ACTIVITIES 31/12/2018 Issue/purchase of treasury shares - Issue/purchase of equity instruments - Distribution of dividends and other purposes (7,476,494) Net cash flow generated /used) by financing activities (7,476,494) NET LIQUIDITY GENERATED/(ABSORBED) IN THE PERIOD 8,184,017 RECONCILIATION 31/12/2018 Cash and cash equivalents at start of year 139,631,271 Total net liquidity generated/(absorbed) in the period 8,184,017 Cash and cash equivalents: effect of foreign exchange changes - Cash and cash equivalents at end of year 147,815,288 Key: (+) generated (-) absorbed
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Consolidated cash flow statement - Direct method
A. OPERATING ACTIVITIES 31/12/2017 1. Operations 98,560,695 Interest income collected (+) 205,541,005 Interest expense paid (-) (52,408,342) Dividends and similar income (+) 192,378 Net fees (+/-) 203,938,656 Personnel expenses (-) (158,068,854) Other costs (-) (156,054,133) Other revenues (+) 59,903,165 Taxes and duties (-) (4,483,180) Costs/revenues for asset groups held for sale and net of the tax effect (+/-) - 2. Cash generated/(absorbed) by financial assets (363,928,185) Financial assets held for trading 30,948,917 Financial assets available for sale 427,793,998 Due from customers (55,008,813) Due from banks (725,667,854) Other assets (41,994,433) 3. Cash generated/(absorbed) by financial liabilities 491,747,436 Due to banks 332,419,200 Due to customers 120,759,848 Securities in issue (40,503,512) Financial liabilities held for trading (4,485,564) Other liabilities 83,557,464 Net cash generated/(used) by operating activities 226,379,946 B. INVESTMENT ACTIVITIES 31/12/2017 1. Cash generated by: 311,552 Sales of equity investments - Dividends collected on equity investments - Sales/redemptions of financial assets held to maturity - Sales of tangible assets 126,877 Sales of intangible assets 184,675 Sales of subsidiaries and business units - 2. Cash absorbed by: (206,156,988) Purchases of equity investments (88,536,000) Purchases of financial assets held to maturity (90,646,368) Purchases of tangible assets (10,143,984) Purchases of intangible assets (16,830,636) Sales of subsidiaries and business units - Net cash generated/(used) by investing activities (205,845,436) C. FUNDING ACTIVITIES 31/12/2017 Issue/purchase of treasury shares - Issue/purchase of equity instruments - Distribution of dividends and other purposes (7,469,810) Net cash flow generated/(used) by financing activities (7,469,810) NET LIQUIDITY GENERATED/(ABSORBED) IN THE PERIOD 13,064,700 RECONCILIATION 31/12/2017 Cash and cash equivalents at start of year 126,566,571 Total net liquidity generated/(absorbed) in the period 13,064,700 Cash and cash equivalents at end of year 139,631,271
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Notes to the Financial Statements
BANCA SELLA | 71
Part A
Accounting Policies
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A.1 – General section
Section 1 – Declaration of compliance with international accounting standards
This financial report has been drawn up according to the international accounting standards IAS/IFRS (including the SIC and IFRIC interpretation documents) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union as of 31 December 2018, pursuant to Community Regulation no. 1606 of 19 July 2002. Schedules and tables are prepared in application of Bank of Italy decrees, exercising the powers established by Article 43 of Italian Legislative Decree 136/2015, with the 5th update to Bank of Italy Circular no. 262/05. In order to facilitate interpretation of the international accounting standards reference was also made to the documents prepared by the OIC (Italian Accounting Body) and the ABI (Italian Bank Association).
The financial statements, therefore, are clearly set out and give a true and fair picture of the economic and financial situation of Banca Sella.
Section 2 – General drafting principles
The financial statements consist of the Balance Sheet, the Income Statement, the Comprehensive Income Statement, Statement of Changes in Shareholders’ Equity, the Cash Flow Statement, and these Notes to the Financial Statements, and are accompanied by the Directors’ Report on Operations, in continuity with respect to 31 December 2017, with the exception of first time application of accounting standard IFRS 9. The notes to the financial statements are stated in thousands of euro. They are prepared in compliance with the general standards provided for in IAS 1 and in accordance with the general assumptions envisaged in the Systematic Framework.
The schedules in the financial statements at 31 December 2018 were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017), stating the comparison of the results with the amounts at 31 December 2017. Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the schedules dictated by the above circular were duly modified through the addition of items intended to facilitate comparison with the previous year, the latter prepared in compliance with that established in standard IAS 39 and stated in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015).
If, in exceptional cases, the application of one of the provisions of the international accounting standards is incompatible with providing a true and fair view of the situation, the provision is not applied. The reasons for any exception and its impact on the presentation of the assets and liabilities, financial position and earnings are explained in the Notes to the Financial Statements.
Section 3 - Events subsequent to the balance sheet date
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After 31 December 2018, no significant events occur which would require adjustment of the results shown in the accounting schedules as of the same date.
Section 4 – Other issues
During 2018, new accounting standards, interpretations or revisions of the same took effect:
IFRS 9 - Financial Instruments (Regulation EU 2016/2067); IFRS 15 - Revenue from Contracts with Customers (Regulation EU 2016/1905); IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (Regulation EU 2018/519);
Amendments to IAS40: Transfers of investment property (Regulation EU 2018/400); Amendments to IFRS2: Share-based payments (Regulation EU 2018/289); Annual Improvements to IFRS 2014-2016 Cycle (Regulation EU 2018/182); Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Regulation EU 2017/1988);
Clarifications to IFRS 15: Revenue from Contracts with Customers (Regulation EU 2017/1987).
With reference to effects consequent to adoption of IFRS 9 and IFRS 15, please see the specific portions of this section, found below. With reference to other new accounting standards other than IFRS 9 and IFRS 15, note that their adoption did not cause any substantial effects on current equity and economic balances.
As of 31 December 2018, the European Commission had approved the following accounting standards which will take effect as of 2019 financial statements, with the exception of early application:
IFRS16 - Leasing (Regulation EU 2017/1986); Amendments to IFRS 9: Prepayment features with negative compensation (Regulation EU 2018/498).
IFRS 16, applicable as of 1 January 2019, and approved by the European Union on 31 October 2017, modifies the current set of international accounting standards and interpretations relative to leasing and, in particular, IAS 17. IFRS 16 introduces a new definition of leasing and confirms the current distinction between the two types of leasing (operating and financial) with reference to the accounting model which the lessor must apply. With reference to the accounting model to be applied by the tenant, the new standard establishes that for all types of leasing an asset must be recognised, recognising the right of use over the asset leased and, simultaneously, a payable relative to the fees established in the leasing contract.
At the time the asset is initially recognised, it is measured on the basis of the cash flows associated with the leasing contract including, in addition to the current value of the leasing fees, direct initial costs associated with the lease and any other costs necessary to restore the asset upon conclusion of the contract. After initial recognition, the asset will be measured on the basis of that established for tangible
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assets and, therefore, at cost net of amortisation and any other reductions in value, at the "redetermined value" or at fair value, based on that established in IAS 16 or IAS 40.
In this arena, the Bank has begun activities aimed at guaranteeing full compliance with the new accounting standard, in particular with reference to calculating and recognising the right of use and associated leasing liabilities, the aspects which represent the main changes with respect to the accounting model found in IAS 17. These activities involve identifying leasing contracts, developing rules, standards and IT systems appropriate to guarantee proper calculation of the new assets and liabilities, subsequent measurement and determination of the correlated effects on the income statement. Taking into account the extent the Bank makes use of leasing contracts and total usage rights, amounting to around € 89.1 million, it is expected that adoption of the new accounting standard will lead to an increase in both assets and liabilities following recognition of the aforementioned usage rights and associated liabilities and, consequently, in RWAs. Given the need to apply prudential rules to newly recognised assets, an impact of -0.17 basis points is expected on CET 1.
Finally, at 31 December 2018, the IASB issued the following accounting standards and interpretations or amendments to the same, application of which is, however, subordinate to completion of the approval process by the relevant European Union bodies:
IFRS 17 - Insurance Contracts (May 2017); IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (June 2017); Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (October 2017); Annual Improvements to IFRS 2015-2017 Cycle (December 2017); Amendments to IAS 19: Plan Amendment, Curtailment or Settlement (February 2018); Amendments to the Conceptual Framework for Financial Reporting (March 2018).
Transition to “IFRS15: Revenue from Contracts with Customers"
IFRS 15, in effect as of 1 January 2018 and approved by the European Union on 22 September 2016 with Regulation EU 2016/1905 (published on 29 October 2016), amends the previous set of international accounting standards and interpretations on recognition of revenues and, in particular, IAS 18. IFRS 15 involves:
• two approaches for recognising revenues (“at point in time” or “over time”); • a new model for analysing transactions (the "five steps model") focussed on the transfer of control;
Adoption of the new accounting standard may have reclassification effects on items in the income statement used to present revenues, changes on the accrual process for these revenues (if the contract with the customer contains various performance obligations which require separate recognition based on the new accounting standard), and lead to different measurement of revenues in order to reflect issues of variability relative to the same. Based on the analysis done, no significant impacts deriving from the
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adoption of IFRS 15 were seen on the current equity and economic figures, as it did not involve any changes with respect to IAS 18.
Transition to “IFRS9: Financial Instruments" 1. Summary of impacts As of 1 January 2018, the Bank adopted accounting standard "IFRS 9: Financial Instruments". Adoption of the standard was the result of a multi-year project with the objective of creating accounting and risk monitoring methodologies harmonised among the various companies in the Group, guaranteeing full compliance with the provisions of the accounting standard, while also updating governance and monitoring processes in the light of the relative regulatory changes. The project was organised at the Group level through specific work groups and in order to achieve regulatory compliance the project identified three specific working areas (i) Models (ii) Operational Aspects and (iii) Implementation Aspects.
For each of the first two working areas, an assessment phase has been defined in preparation for the phase of defining the methodology and functional requirements (design phase) for the purpose of implementation. The entire project was developed with the involvement of the reference departments of the Bank and the active participation of the Board of Directors and Top Management.
Note that the new accounting standard: • introduced significant changes with respect to IAS 39 with regards to rules used to classify and measure financial instruments. With reference to loans and debt securities, classification and subsequent measurement of these instruments is based on the business model and the features of the cash flows associated with the financial instrument (the SPPI criteria, Solely Payments of Principal and Interests). With reference to equity instruments, these are classified at fair value with differences recognised in the income statement (through profit and loss) or in other comprehensive income. In the second case, in contrast to what was established in IAS 39 for financial assets available for sale, IFRS 9 eliminated the requirement to recognise lasting impairment losses and established that, in the case of disposal of the instrument, profits and losses must be reclassified to other shareholders' equity reserves and not to the income statement. Finally, with reference to financial liabilities measured at fair value, "own credit risk" was changed, that is changes in the value of the liability measured at fair value attributable to changes in the entity's own credit standing. The new standard establishes that these changes must be recognised in a shareholders' equity reserve, rather than in the income statement as occurred under standard IAS 39, thereby eliminating a source of volatility in the economic results.
• provided for the determination of writedowns on financial assets based on the expected credit losses model established in the new standard, which constitutes the result of a complex estimation process including numerous subjective variables regarding the criteria used to identify a significant increase in credit risk, in order to classify financial assets in the stages established under the Standard, and the definition of models to measure expected losses, using assumptions
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and parameters, which take current and prospective macroeconomic information into account (forward looking);
• introduced guidelines intended to clarify under which circumstances write-offs must be carried out of financial instruments, specifying that a write-off involves accounting derecognition;
• included provisions regarding hedge accounting, rewriting the rules for designating a hedge relationship and for verifying its effectiveness, with the aim of guaranteeing greater alignment between the accounting representation of hedges and the underlying management logic. To that end, note that the Bank made use of the possibility of continuing to apply the existing hedge accounting requirements under IAS 39 for all hedge relationships until the IASB has completed the process of defining rules with regards to recognising hedging of portfolios of financial instruments ("macro hedging"). The Bank also decided to take advantage of the possibility offered in the financial standard to not redetermine comparative figures from the previous years. As a result, the first time application date for the standard is 1 January 2018.
2. Classification and measurement As an effect of the new accounting standard, the Bank reclassified the financial assets and liabilities existing at 1 January 2018 into the newly established categories.
Business model analysis was done by mapping the portfolios contained in the Bank's banking and trading books and assigning a business model to each one. To that end, we note that financial instruments in the Bank's banking book were assigned the business models of "held to collect" or "held to collect and sell", based on the purpose for which they are held and expected turnover from the assets.
We also note that any disposals of financial instruments are in any case be held compatible with the "held to collect" business model in the cases of (i) securitisation transactions that do not involve accounting derecognition of the receivable, (ii) transfers determined by adverse changes in the credit risk of the counterparty and (iii) any infrequent or insignificant disposals, to be evaluated on a case by case basis. An "other" business model was assigned to the business structures that make up the Bank’s trading portfolio, in order to reflect trading intentions.
For the purposes of classifying financial instruments into the new categories envisaged in IFRS 9, the business model analysis was supported through analysis of contractual flows ("SPPI Test") for financial instruments in the held to collect and held to collect and sell portfolios. To that end, the Bank has developed systems and processes to analyse the portfolio of existing debt securities and loans in order to determine whether the characteristics of the contractual cash flows allow for measurement at the amortised cost (held to collect portfolio) or at fair value through other comprehensive income (held to collect and sell portfolio). This analysis was done contract by contract (or instrument by instrument) through the definition of specific clusters based on the homogeneous features of the transactions and through the use of an internally developed tool for mass analysis of the characteristics of contracts with respect to the requirements of IFRS 9.
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The Bank has not established a requirement to measure significant amounts of financial assets at fair value through profit and loss, which are currently measured at amortised cost or at fair value through comprehensive income, as the relative contractual flows cannot be considered remunerative only of principal and interest.
Lastly, we note that equity securities are measured at fair value through profit and loss or through other comprehensive income as a function of their features and the reason for which they were acquired. UCITS units are measured at fair value through profit and loss, following regulatory specifications which exclude the possibility of classifying these instruments as equity instruments.
With reference to the models being developed, and relative to the impairment requirements introduced by the standard, the Bank has developed its own models in order to comply with the dictates of the new accounting standard.
The scope of exposures subject to impairment was also extended in order to include, in addition to other financial instruments measured at amortised cost and significant off-balance sheet exposures, credit exposures measured at fair value through other comprehensive income (OCI).
Additionally, specific adjustments were made to the parameters of probability of default (PD), loss given default (LGD) and exposure at default (EAD), used to calculate expected credit loss (ECL), and a new model was developed to assess stage allocation for non-impaired exposures between Stage 1 and Stage 2.
Lifetime PD curves, obtained by combining observed default rates with macroeconomic forecasts, were calibrated to reflect point in time and forward-looking characteristics regarding expected portfolio default rates.
The recovery rate incorporated in LGD through the cycle was adjusted in order to remove the margin of conservatism and reflect more current recovery rates, as well as expectations for future trends and discounted at the effective interest rate or the best approximation of the same.
Lifetime EAD was calculated starting with the book values of the amortised cost and cash flows until maturity of the exposures, considering the possibility of conversion when using the agreed upon margins.
The process identified to include macroeconomic scenarios in the risk parameters is also consistent with the macroeconomic forecast processes used by the Group for other risk management purposes (such as the processes adopted to create the budget, define the Risk Appetite Framework and calculate capital requirements relative to credit risk in ICAAP stress tests). For more details, please see part E - Information on risks and related hedging policies.
A key aspect deriving from the new accounting model required to calculated expected credit losses is represented by the Stage Allocation model used to transfer exposures between Stage 1 and Stage 2 (with Stage 3 equivalent to non-performing loans), in which Stage 1 mainly includes (i) newly disbursed loans, (ii) exposures with no significant impairment of credit risk with respect to initial recognition and (iii)
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exposures with low credit risk exemption at the reporting date. For more details please see part E - Information on risks and related hedging policies.
For the Bank, the stage allocation assessment model is based on a combination of relative and absolute elements. The main elements are:
comparison of credit rating at the time of disbursement with that at the reporting date at a transaction level, both quantified using internal models, with the use of thresholds set so as to consider all the key variables in each transaction that could influence the bank's expectations regarding changes in creditworthiness over time (e.g. age, maturity, rating at time of disbursement);
absolute elements such as the backstops established in the regulations (e.g. overdue by more than 30 days);
additional internal evidence (e.g. forborne classification).
The Bank has opted to apply the low credit risk exemption on investment securities for debt securities, in full compliance with the accounting standard.
Impairment calculated on non-performing exposures was also calculated in line with the requirements of the new accounting standard in order to include (i) adjustments necessary to calculate point in time and forward-looking expected losses and (ii) the multiple scenarios applicable to this type of exposure.
Solely at first time adoption of IFRS 9, for the entire portfolio of bad and probable default loans subject to contract termination, Banca Sella introduced a "disposal" logic to determine impairment. Therefore, the recoverable value of individual loans was updated as the average of expected recoverable amounts through the internal work-out process and sales prices seen on the market, weighted based on probability of occurrence.
Finally, regarding hedge accounting, the Bank has decided to make use of the option to continue applying the existing IAS 39 hedge accounting requirements for all hedging operations until the IASB has completed the macro-hedging accounting rules project.
The main impacts IFRS 9 had on the Bank, beyond the above referenced disposal logic, derived from application of the new expected loss impairment model, which led to an increase in writedowns on performing exposures (in particular loans to customers), as well as the application of new rules to transfer positions between different classification stages, as established in the new standard.
Finally, regarding hedge accounting, the Bank has decided to make use of the option to continue applying the existing IAS 39 hedge accounting requirements for all hedging operations until the IASB has completed the macro-hedging accounting rules project.
The main impacts IFRS 9 had on the Bank derived from greater writedowns on impaired loans (bad and probable default loans subject to contract termination) following application of the "disposal" scenario
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referenced above, as well as from introduction of the new expected loss impairment model, which led to an increase in writedowns on performing exposures (in particular loans to customers), as well as the application of new rules to transfer positions between different classification stages, as established in the new standard.
Greater volatility was generated in economic and equity results in various reporting periods, due to dynamic movements between the various Stages for financial assets recognised (in particular between Stage 1, which mainly includes newly disbursed positions and all fully performing positions, and between Stage 2, which includes financial instrument positions that have seen a decrease in credit with respect to initial recognition).
Changes in the accounting value of financial instruments due to the transition to IFRS 9 were recognised as a contra-entry to shareholders' equity at 1 January 2018. Overall effects deriving from the adoption of IFRS 9 in terms of classification and measurement and impairment on CET1, net of fiscal effects were around 121 bps.
Revision of the prudential rules (CRD/CRR) used to calculate capital absorption also occurred as a consequence of IFRS 9 taking effect. To that end, Regulation EU 2017/2395, published on 27 December 2017, establishes the option for financial institutions to adopt a transitional regime in which the writedowns consequent to the adoption of the impairment model found in the new standard can be added to CET1 over a phase-in period of 5 years, starting in 2018. The Banca Sella Group has adopted this transitional regime to measure the impacts of the new standard on its regulatory capital. The adoption of this phase- in period involved an improvement in the impact on CET 1 of around 93 bps, for a residual impact of 28 bps. Specifically, IFRS 9 led to a net € 58 million decrease on shareholders' equity, after tax effects. With regards to other numerical impacts, please see the tables below and the relative comments on reclassifications, measurements and other changes.
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Transition to the new accounting standard IFRS9
Analytical Other Reclassifications Collective valuations valuations measurements Balance IAS39 Balance IFRS Balance IFRS Assets - IAS 39 Items IFRS 9 Items 31-12-2017 9 01-01-2018 9 portfolio portfolio portfolio Securities Securities Other reclassifications* Loan portfolio Loan portfolio Loan portfolio Impaired loans 10. Cash and 10. Cash and cash cash equivalents 139.631.271 ------139.631.271 equivalents 139.631.271 20. Financial assets measured at fair value through profit 20. Financial assets and loss a) held held for trading 23.282.075 16.502.436 ------39.784.511 for trading 39.784.511 Financial assets measured at fair value through profit and loss - held Financial assets for trading - held for trading - other 7.167.527 16.502.436 ------23.669.963 other 23.669.963 Financial assets measured at fair value through profit and loss - held Financial assets for trading - held for trading - Equity Equity investments ------investments -
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Financial assets measured at fair value through profit Financial assets and loss - held held for trading - for trading - derivatives 16.114.548 ------16.114.548 derivatives 16.114.548 Financial assets measured at fair value through profit Financial assets and loss - held held for trading - for trading - Subordinate ------Subordinated - 20. Financial assets measured at fair value through profit and loss c) other financial assets necessarily measured at 30. Financial assets fair value - carried at fair value - 43.684.934 44.512.347 - - - 1.382.407 - 89.579.688 other 89.579.688 20. Financial assets measured at fair value through profit and loss c) other financial assets necessarily ------measured at -
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fair value - equity investments
30. Financial assets measured at fair value through other 40. Financial assets comprehensive available for sale 1.060.967.620 ------716.713.427 income 716.713.427 Financial assets measured at fair value through other Financial assets comprehensive available for sale - Other 1.040.984.984 -344.254.193 ------696.730.791 income - other 696.730.791 Financial assets measured at fair value Other financial through other assets available for sale - comprehensive Equity Investments - income - Equity Carried at fair value 19.982.636 ------19.982.636 investments 19.982.636 50. Financial assets held to maturity 90.646.368 -90.646.368 ------40. Financial assets measured at amortised cost - a) Due from 60. Due from banks 2.787.881.318 36.568.442 - -108.913 -310.861 - - - 2.824.029.986 banks 2.824.029.986 Financial assets measured at amortised cost Due from central - Due from banks 673 ------673 banks - Due 673
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from central banks
Financial assets measured at amortised cost - Due from banks - Due Due from banks 2.787.880.645 - - - -310.861 - - - 2.787.569.784 from banks 2.787.569.784 Financial assets measured at amortised cost - Debt Due from banks for securities - securities - 36.568.442 - -108.913 - - - - 36.459.529 Banks - Other 36.459.529 40. Financial assets measured at amortised cost 70. Due from - b) Due from customers 7.003.762.241 337.852.078 -44.509.512 -137.102 -13.564.999 -53.255.751 -7.066.370 -11.117.668 7.211.962.917 customers 7.211.962.917 Financial assets measured at amortised cost - Loans to customers - Due from Due from customers 7.003.722.214 - -44.469.485 - -13.564.999 -53.255.751 -7.066.370 -11.117.668 6.874.247.941 customers 6.874.247.941 Financial assets measured at amortised cost - Debt securities - Due from Customers - customers for securities 40.027 337.852.078 -40.027 -137.102 - - - - 337.714.976 Other 337.714.976 80. Hedging 50. Hedging derivatives 3.714.514 ------3.714.514 derivatives 3.714.514
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60. Value adjustment of 90. Value adjustment of financial financial assets subject 87.203.484 ------87.203.484 87.203.484 assets subject to macro hedging (+/-) to macro hedging (+/-) 100. Equity 70. Equity investments 88.536.000 ------88.536.000 investments 88.536.000 Equity Equity investments: investments: control - full 88.536.000 ------88.536.000 control - full 88.536.000 Equity investments: significant Equity investments: influence - significant influence - measured with measured with the equity the equity method ------method - 90. Tangible 120. Tangible assets 46.768.660 ------46.768.660 assets 46.768.660 100. Intangible 130. Intangible assets 54.597.645 ------54.597.645 assets 54.597.645
140. Tax assets 157.915.979 69.102 -780 168.566 4.515.081 14.692.936 2.335.436 12.532.006 192.228.326 110. Tax assets 192.228.326 Tax assets - Tax assets - 44.278.141 103.071 -780 168.566 3.730.374 14.645.332 - 2.620.006 65.544.710 current 65.544.710 Tax assets - Tax assets - deferred - deferred - other than Law other than Law 214/2011 13.623.191 -33.969 - - 784.707 47.604 2.335.436 9.912.000 26.668.969 214/2011 26.668.969 Tax assets - Tax assets - deferred - of deferred - of which Law which Law 214/2011 100.014.647 ------100.014.647 214/2011 100.014.647 150. Non-current 120. Non- assets and asset groups current assets held for sale ------and asset -
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groups held for sale
130. Other 160. Other assets 208.770.791 ------208.770.791 assets 208.770.791
Total assets 11.753.677.966 -223.569 2.055 -77.449 -9.360.779 -38.562.815 -3.348.527 1.414.338 11.703.521.220
Analytical Other Reclassifications Collective valuations valuations measurements Saldo IAS39 Saldo IFRS 9 Balance IFRS Liabilities - IAS 39 Items IFRS 9 Items 31-12-2017 01-01-2018 9 portfolio portfolio portfolio Securities Securities Other reclassifications * Loan portfolio Loan portfolio Loan portfolio Impaired loans 10. Financial liabilities measured at amortised cost - 10. Due to banks 738.902.027 ------738.902.027 a) Due to banks 738.902.027 10. Financial liabilities measured at amortised cost - 20. Due to customers 9.374.893.087 ------9.374.893.087 b) Due to customers 9.374.893.087 10. Financial liabilities measured at amortised cost - c) Securities in 30. Securities in issue 410.564.233 ------410.564.233 issue 410.564.233 20. Financial 40. Financial liabilities held liabilities held for for trading 16.032.618 ------1.590.376 14.442.242 trading 14.442.242 Financial liabilities Financial liabilities held held for trading - for trading - other ------other -
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Financial liabilities Financial liabilities held held for trading - for trading - derivatives 16.032.618 ------1.590.376 14.442.242 derivatives 14.442.242 30. Financial 50. Financial liabilities liabilities carried at carried at fair value ------fair value - 40. Hedging 60. Hedging derivatives 90.492.818 ------90.492.818 derivatives 90.492.818 50. Value adjustment of 70. Value adjustment of financial liabilities financial liabilities subject to subject to macro macro hedging (+/-) ------hedging (+/-) -
80. Tax liabilities 8.831.132 -5.033 157 100.912 -752.858 -2.955.694 456.886 10.340.23 16.015.737 60. Tax liabilities 16.015.737 Tax liabilities - Tax liabilities - current 2.201.529 - 157 - -752.858 -2.955.694 - 10.340.235 8.833.369 current 8.833.369 Tax liabilities - Tax liabilities - deferred 6.629.603 -5.033 - 100.912 - - 456.886 - 7.182.368 deferred 7.182.368
70. Liabilities 90. Liabilities associated associated with with assets held for sale ------assets held for sale -
100. Other liabilities 260.852.570 - - - -1.011.492 - - - 259.841.078 80. Other liabilities 259.841.078 90. Provision for 110. Provision for severance severance indemnities 29.583.164 ------29.583.164 indemnities 29.583.164 120. Provisions for risks 100. Provisions for and charges 26.121.765 - - - 3.166.763 144.035 - - 29.432.563 risks and charges 29.432.563 Provisions for risks Provisions for risks and and charges - charges - commitments and commitments and guarantees given - - - - 3.166.763 144.035 - - 3.310.798 guarantees given 3.310.798
Provisions for risks and Provisions for risks charges - other 26.121.765 ------26.121.765 and charges - other 26.121.765
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provisions for risks and charges
120. Valuation 140. Valuation reserves 1.682.974 53.194 - 266.041 - - - - 2.002.209 reserves 2.002.209 Valuation reserves: equity securities measured at fair Valuation reserves of value through other Financial Assets available for comprehensive sale 6.975.653 -2.958.530 ------4.017.123 income 4.017.123 Valuation reserves: financial assets (other than equity securities) measured at fair Valuation reserves of value through other Financial Assets available for comprehensive sale - 3.011.724 - 266.041 - - - - 3.277.765 income 3.277.765 Valuation reserves: actuarial profit/losses in relation to defined Valuation reserves: benefit pension other -5.292.679 ------5.292.679 plans -5.292.679
170. Reserves 81.286.567 -271.730 1.898 - -10.763.192 -35.751.156 -3.805.413 -7.335.521 22.917.051 150. Reserves 22.917.051 Reserves - Profit reserves: legal Legal reserve 43.412.105 ------43.412.105 reserve 43.412.105 Reserves - Profit reserves: statutory Statutory reserves 106.480.769 ------106.480.769 reserves 106.480.769 Reserve - Profit reserves: profit Profit (loss) carried (loss) carried forward -4.542.710 ------4.542.710 forward -4.542.710
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Reserves - Profit reserves: other Reserves: other -132.563.040 ------132.563.040 reserves -132.563.040 Reserves - Profit reserves: extraordinary Extraordinary reserve 68.499.443 ------68.499.443 reserve 68.499.443 Reserves - FTA Reserves - FTA reserves - IFRS 9 - -271.730 1.898 -444.402 -10.763.192 -35.751.156 -3.805.413 -7.335.521 -58.369.516 reserves - IFRS 9 -58.369.516 160. Share 180. Share premiums 366.090.483 ------366.090.483 premiums 366.090.483
190. Capital 334.228.084 ------334.228.084 170. Capital 334.228.084 180. Treasury 200. Treasury shares (+/-) ------shares - 190. Equity 210. Equity belonging to belonging to third third parties ------parties - 200. Operating 220. Operating profit (loss) 14.116.444 ------14.116.444 profit (loss) 14.116.444
Total liabilities 11.753.677.966 -223.569 2.055 -77.449 -9.360.779 -38.562.815 -3.348.527 1.414.338 11.703.521.220
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Reclassifications
First time application of accounting standard IFRS 9 required appropriate reclassification of financial assets, transferring them from the previous portfolios established in accordance with accounting standard IAS 39 to the current portfolios recognised pursuant to IFRS 9.
Reclassifications involved amounts due from banks and customers as well as bank-issued securities.
The "Reclassifications" column in the table shown here illustrates the transfers made between the various financial asset portfolios from 31 December 2017 to 1 January 2018.
In some cases, transfers involved a change in the measurement criteria used for the reclassified assets, with a consequent change in their value which, at first time application, was recognised through specific shareholders' equity reserves or adjustment in the relative valuation reserves.
The overall effect of reclassifications between the various portfolios involved recognition of a negative shareholders' equity reserve of around € 270 thousand (net of tax effects of around € 100 thousand), partially compensated for by an increase in valuation reserves of around € 50 thousand (net of tax effects of around € 30 thousand).
Measurement
First time application of accounting standard IFRS 9 also required reviewing measurement criteria for financial assets, switching from a measurement criteria based on incurred losses to measurement based on expected future losses.
Again in this case, the revision of the measurement criteria involved amounts due from banks and customers and bank-issued securities.
The columns "Collective Measurements" and "Analytical Measurements" in the table here illustrate the impacts which the various measurement criteria had on financial assets from 31 December 2017 to 1 January 2018, respectively for performing and impaired financial assets.
As with the reclassifications, the change in the measurement criteria used for the assets led to a change in their value which, at first time application, was recognised through specific shareholders' equity reserves or adjustment in the relative valuation reserves.
The total effect of the change in measurement criteria for financial assets led to the recognition of:
for bank-issued securities: a negative shareholders' equity reserve of around € 0.4 million (net of tax effects of around € 0.2 million), partially compensated for by an increase in valuation reserves of around € 0.3 million (net of tax effects of around € 0.1 million);
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for non-impaired loans: a negative shareholders' equity reserve of around € 10.8 million (net of tax effects of around € 5.3 million); for impaired loans: a negative shareholders' equity reserve of around € 35.8 million (net of tax effects of around € 17.6 million).
Other Changes
In addition to reclassification and measurement, the new accounting standard also required adjusting other recognition methods for financial assets, in order to comply with the new provisions of the standard.
These changes mainly involved amounts due from banks and customers and the derivative contracts associated with them.
The columns "Other Measurements" and "Other Reclassifications" in the table here illustrate the impacts which the different recognition method had on financial assets from 31 December 2017 to 1 January 2018.
The change in the recognition method used for financial assets again in this case involved changes in their value which, at first time application, was recognised through specific shareholders' equity reserves.
In particular:
the fair value measurement of certain loans, which could not be recognised at amortised cost, involved recognition of a positive shareholders' equity reserve of around € 0.9 million (net of tax effects of around € 0.45 million); recognition of contractual changes applied to loans during their life involved recognition of a negative shareholders' equity reserve of around € 4.7 million (net of tax effects of around € 2.3 million); the need to reincorporate certain derivative contracts within the main financial asset involved recognition of a negative shareholders' equity reserve of around € 6.4 million (net of tax effects of around € 3.1 million); partial non-deductibility of IRAP taxes on certain shareholders' equity reserves associated with first time application of IFRS 9 involved, as a consequence of negative future IRAP tax bases, recognition of a negative shareholders' equity reserve of around € 0.96 million. Subsequently, when the Budget Law took effect it changed the deductibility rules for writedowns on loans deriving from adoption of IFRS 9 (that is changing deductibility of IFRS 9 effects from 1 year - as originally established - to 10 years) involved, for future years, a positive IRAP taxable base and, consequently, the recognition of a revenue in the income statement for 2018, equal to recovery of the same amount, that is € 0.96 million.
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A.2 – Main accounting items
1 - Financial assets measured at fair value through profit and loss (FVTPL)
Classification criteria
Financial assets not classified among financial assets measured at fair value through other comprehensive income or financial assets measured at amortised cost are classified in this category. In particular, the item includes: financial assets held for trading, essentially represented by debt and equity securities and the positive value of derivative contracts held for trading purposes;
financial assets obligatorily measured at fair value, represented by financial assets which do not meet requirements to be measured at amortised cost or at fair value through other comprehensive income. These are financial assets for which the contractual terms do not involve solely payments of principal and interest (they do not pass the SPPI test) or which are not held within a business model with the objective of possessing an asset to collect contractual cash flows ("Hold to Collect" business model) or with the objective of obtaining profit either through contractual cash flows or the sale of financial assets ("Hold to Collect and Sell" business model); financial assets measured at fair value, that is financial assets defined in this way at initial recognition, when the requirements are met. In relation to these types, an entity may irrevocably designate at initial recognition a financial asset as measured at fair value through profit and loss if, and only if, by doing so it eliminates or significantly reduces a measurement inconsistency. Hence, this item includes: debt securities and loans included in the Trading business model (i.e. not associated with Hold to Collect or Hold to Collect and Sell business models) or which do not pass the SPPI test;
equity instruments - not classifiable as controlling, associated or under joint control - held for trading purposes or for which at initial recognition the choice was made to not measure them at fair value through other comprehensive income;
UCITS units. Additionally, the item includes derivatives contracts recognised among financial assets held for trading, represented as assets if the fair value is positive, and as liabilities if the fair value is negative. It is possible to offset current positive and negative values deriving from existing operations with the same counterparty only if there is a current legal right to offset the amounts recognised in the accounts and the intention is to settle them on a net basis. Derivatives also include those incorporated within complex financial contracts - in which the primary contract is a financial liability - subject to separate recognition due to the fact that: their economic characteristics and risks are not closely related to those of the host contract;
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a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative;
the hybrid instruments they belong to are not measured at fair value with the associated changes recognized in the Income Statement. Reclassifications
Based on the general rules established under IFRS 9 for reclassification of financial assets (with the exception of equity securities, for which no reclassification is allowed), no reclassifications to other categories of financial assets are allowed unless the entity changes its business model for management of the financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified to from the category measured at fair value through profit and loss to one of the other two categories established under IFRS 9 (financial assets measured at amortised cost or financial assets measured at fair value through other comprehensive income ). The transfer value is represented by the fair value at the time of reclassification, and the effects operate in a prospective manner starting from the date of reclassification. In this case, the effective interest rate for the reclassified financial asset is determined on the basis of its fair value on the reclassification date. This date is then considered the initial recognition date for allocation within the various credit risk stages for impairment purposes.
Recognition criteria
Initial recognition of financial assets takes place on the settlement date for debt and equity securities, on the disbursement date for loans and on the signing date for derivative contracts. At initial recognition, financial assets measured at fair value through profit and loss are recognised at fair value, without considering transaction costs or revenues directly attributable to the instrument itself.
Assessment criteria
After initial recognition, financial assets measured at fair value through profit and loss are measured at fair value. The effects of applying this measurement criteria are recognised in the income statement. In determining the fair value of financial instruments quoted on an active market, market listings are used. In the absence of an active market, commonly used estimate methods and measurement models are adopted, which take into account all risk factors associated with the instruments, based on market data such as: prices of listed instruments with similar features, calculation of discounted cash flows, models used to determine option prices, values from recent comparable transactions, etc. For equity securities and derivatives associated with equity securities, not listed on an active market, the cost criteria is used as a fair value estimate only in a residual manner and limited to a few circumstances, in the case that all the above measurement methods cannot be used or in the presence of a wide array of possible fair value measurements, in which context cost represents the most significant estimate.
2 - Financial assets measured at fair value through other comprehensive income - (FVOCI with recycling)
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Classification criteria
This category includes financial assets which meet both of the following conditions: the financial asset is held under a business model which achieves its purpose through both receipt of contractually established cash flows and through sale (Hold to Collect and Sell business model), and
the contractual terms of the financial asset establish cash flows at pre-established dates represented solely by payments of principal and interest (SPPI test passed). This item also includes equity instruments not held for trading purposes, for which the option to measure them at fair value through other comprehensive income was chosen at initial recognition. In particular, this item includes: debt securities associated with a Hold to Collect and Sell business model and which have passed the SPPI test;
equity interests, which cannot be classified as controlling, associated or joint control, not held for trading purposes and for which the option to measure them at fair value through other comprehensive income was exercised;
loans associated with a Hold to Collect and Sell business model and which have passed the SPPI test. Reclassifications
Based on the general rules established under IFRS 9 for reclassification of financial assets (with the exception of equity securities, for which no reclassification is allowed), no reclassifications to other categories of financial assets are allowed unless the entity changes its business model for management of the financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified to from the category measured at fair value through other comprehensive income to one of the other two categories established under IFRS 9 (financial assets measured at amortised cost or financial assets measured at fair value through profit and loss). The transfer value is represented by the fair value at the time of reclassification, and the effects operate in a prospective manner starting from the date of reclassification. In the case of reclassification from the category in question to that of amortised cost, the accumulated profit (loss) recognised in the valuation reserve will serve to adjust the fair value of the financial asset at the reclassification date. On the other hand, in the case of reclassification to the category of fair value through profit and loss, the accumulated profit (loss) recognised in the valuation reserve is reclassified from shareholders' equity to profit (loss) for the year.
Recognition criteria
Initial recognition of financial assets takes place on the settlement date for debt and equity securities and at the disbursement date for loans. At the moment of initial recognition these assets are recognised at fair value, inclusive of transaction costs or revenues directly attributable to the instrument itself.
Assessment criteria
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After initial recognition, financial assets measured at fair value through other comprehensive income, other than equity securities, are measured at fair value, with the impacts deriving from application of amortised cost, impairment effects and exchange effects, if applicable, recognised in the income statement. Other profits or losses deriving from fair value changes are recognised in a specific shareholders' equity reserve until the financial asset is derecognised. At the time of disposal, whether total or partial, the profit or loss accumulated in the valuation reserve is recycled, entirely or partially, to the income statement. Equity securities for which the decision was made to classify them in this category are measured at fair value and the amounts recognised in the balancing entry in shareholders' equity (Comprehensive Statement of Income) are not to be subsequently transferred to the income statement, even in the case of disposal. The sole component relative to the equity securities in question subject to recognition in the income statement are the associated dividends. Fair value is determined on the basis of the criteria already outlined for financial assets measured at fair value through profit and loss. For equity securities in this category, not listed on an active market, the cost criteria is used as a fair value estimate only in a residual manner and under limited circumstances, when all the previously stated measurement methods cannot be used, or when there is a wide range of possible fair value measurements, in the context of which cost represents the most significant estimate. Financial assets measured at fair value through other comprehensive income - whether in the form of debt securities or loans - are subject to impairment tests under IFRS 9, similar to assets at amortised cost, with consequent recognition of a writedown covering the expected losses in the income statement. More specifically, for instruments classified in stage 1 (financial assets at the time of origination, when not impaired, and for instruments that have not seen a significant increase of credit risk with respect to initial recognition) expected losses at one year are recognised at initial recognition and at every subsequent reporting date. For instruments classified in stage 2 (performing but with a significant increase in credit risk with respect to initial recognition) and stage 3 (impaired exposures), expected losses for the entire residual life of the financial instrument are recognised. Vice versa, equity securities are not subject to the impairment process.
Derecognition criteria
Financial assets are derecognised from balance sheet only if the disposal has entailed the substantial transfer of all the risks and benefits associated with them. On the other hand, if a significant portion of the risks and benefits associated with the disposed of financial assets still remain, they are still recognised in the balance sheet, even if for legal purposes ownership of the assets has been effectively transferred. If it is impossible to ascertain the substantial transfer of the risks and benefits, the financial assets are derecognised from the balance sheet when no control over them remains. On the contrary, if even partial control over credit is maintained, the assets are kept in the balance sheet to an extent equal to the remaining involvement, measured in terms of exposure to changes in the value of the assets disposed of and changes in the relative cash flows. Finally, financial assets disposed of are derecognised when the contractual rights to receive the associated cash flows are kept, with the assumption at the same time of an obligation to pay these flows, and only these, without any significant delay, to third parties.
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3 - Financial assets measured at fair value through other comprehensive income - (FVOCI without recycling)
Classification criteria
This item includes equity instruments not held for trading purposes, for which the option to measure them at fair value through other comprehensive income was chosen at initial recognition. In particular, this item includes equity interests, which cannot be classified as controlling, associated or joint control, not held for trading purposes and for which the option to measure them at fair value through other comprehensive income was exercised.
Reclassifications
Based on the general rules established under IFRS 9 for reclassification of financial assets, no reclassification of equity securities is allowed.
Recognition criteria
Initial recognition of financial assets takes place on the settlement date for debt and equity securities and at the disbursement date for loans. At the moment of initial recognition these assets are recognised at fair value, inclusive of transaction costs or revenues directly attributable to the instrument itself.
Assessment criteria
After initial recognition, equity securities for which the decision was made to classify them in this category are measured at fair value and the amounts recognised in the balancing entry in shareholders' equity (Comprehensive Statement of Income) are not to be subsequently transferred to the income statement, even in the case of disposal. The sole component relative to the equity securities in question subject to recognition in the income statement are the associated dividends. Fair value is determined on the basis of the criteria already outlined for financial assets measured at fair value through profit and loss. For equity securities in this category, not listed on an active market, the cost criteria is used as a fair value estimate only in a residual manner and under limited circumstances, when all the previously stated measurement methods cannot be used, or when there is a wide range of possible fair value measurements, in the context of which cost represents the most significant estimate.
4- Financial assets measured at amortised cost
Classification criteria
This category includes financial assets (in particular loans and debt securities) which meet both of the following conditions: the financial asset is held under a business model which achieves its purpose through the collection of contractually established cash flows (Hold to Collect business model), and
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the contractual terms of the financial asset establish cash flows at pre-established dates represented solely by payments of principal and interest (SPPI test passed). More specifically, this item includes: loans to banks in their various technical forms meeting the requirements illustrated in the previous paragraph;
loans to customers in their various technical forms meeting the requirements illustrated in the previous paragraph;
debt securities meeting the requirements indicated in the previous paragraph. This category also includes functional loans associated with the provision of financial activities and services as defined under TUB and TUF (Consolidated Banking Law and Consolidated Finance Law), for example distribution of financial products and servicing activities. With reference to the classification rules established by the Supervisory Body, Banca Sella’s exposures are classified as follows:
performing exposures: exposures with subjects considered solvent, that have no significant anomalies nor past-due positions for more than 90 days with the exception of the materiality thresholds in effect at the time. Exposures are in turn grouped into two stages: o stage 1 (performing loans): this includes performing exposures at origination or which have not suffered a significant increase in credit risk with respect to origination. Additionally, it includes exposures in the class of "low credit risk" as of the observation date; o stage 2 (underperforming loans): this includes performing exposures which have suffered a significant increase in credit risk with respect to initial recognition non performing exposures (stage 3) can be further classified as: Past Due: cash exposures past due and/or overdue for at least 90 consecutive days, taking into account offsetting with any margins available on other credit lines in the name of the same debtor and on the condition that the entire past-due amount exceeds 5% of the higher amount of the average of past-due and/or overdue amounts of the entire exposure surveyed on a daily basis in the previous quarter and the past-due and/or overdue amount of the entire exposure referring to the reference reporting date. Unlikely to pay: cash and off-balance sheet exposures (loans, securities, derivatives), for which it is deemed unlikely that, without the use of actions such as enforcement of guarantees, the debtor will fully meet their credit obligations (in terms of capital and/or interest), independent of the presence of guarantees or any amounts past-due and unpaid, in line with an approach of the utmost promptness in classifying and managing customers with loans with a decline in their creditworthiness. In the context of unlikely to pay, and without prejudice to the single nature of the classification, a distinction is made for revoked unlikely to pay, relative to which the bank has formally revoked the loans and applied arrears for the entire amount due.
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Bad loans: cash and off-balance sheet exposures (loans, securities, derivatives) with respect to a party in a state of insolvency (even not confirmed in the courts) or in substantially equivalent situations, irrespective of any loss forecasts formulated by the lender.
Exposures classified as performing or non-performing, as described above, may be subject to forbearance measures (forborne) granted by the creditor to its debtors to enable them to overcome difficulties in the fulfilment of their financial commitments which have already arisen or which are imminent. The fundamental element used to identify forborne loans is the difficulty the debtor was in at the time the forbearance measures were granted. For the above, performing exposures subject to forbearance are classified as "forborne performing", while non-performing exposures subject to forbearance are classified as "forborne non-performing".
Reclassifications
Based on the general rules established under IFRS 9 for reclassification of financial assets, no reclassifications to other categories of financial assets are allowed unless the entity changes its business model for management of the financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified to from the category measured at amortised cost to one of the other two categories established under IFRS 9 (financial assets measured at fair value through other comprehensive income or financial assets measured at fair value through profit and loss). The transfer value is represented by the fair value at the time of reclassification, and the effects operate in a prospective manner starting from the date of reclassification. Profits or losses resulting from the difference between the amortised cost of the financial asset and the relative fair value are recognised in the income statement in the case of reclassification to financial assets measured at fair value through profit and loss and to shareholders' equity, in the specific valuation reserve, in the case of reclassification among financial assets measured at fair value through other comprehensive income.
Recognition criteria
Initial recognition of financial assets takes place on the settlement date for debt securities and at the disbursement date in the case of loans. At the moment of initial recognition these assets are recognised at fair value, inclusive of transaction costs or revenues directly attributable to the instrument itself. In particular, relative to loans, the disbursement date normally coincides with the date the contract was signed. If these dates do not coincide, a commitment to disburse funds is signed when the contract is signed, which is resolved on the day the loan is disbursed. Recognition of the loan is done on a fair value basis, equal to the amount disbursed, or the subscription price, including any costs/revenues directly associated with the individual loan and which can be determined from the start of the transaction, even if liquidated at a later time. Costs which, while having the above characteristics, are refunded by the debtor counterparty, or are classifiable as normal administrative overheads, are excluded.
Assessment criteria
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After initial recognition, financial assets in question are measured at the amortized cost, using the effective interest rate method. In these terms, the assets are recognised in the balance sheet in an amount equal to the initial recognition value minus any capital repayments, plus or minus cumulative amortisation (calculated using the referenced effective interest rate method) from the difference between the initial amount and the amount at maturity (typically associated with costs/revenues directly associated with the individual asset) and adjusted for any provisions to cover losses. The effective interest rate is found by calculating the rate that makes the present value of future flows of the asset, for principal and interest, equal to the amount disbursed inclusive of the costs/revenues associated with the financial asset. This accounting method, using a financial logic, makes it possible to distribute the economic effect of the costs/revenues directly attributable to a financial asset throughout its expected residual life. The amortised cost method is not used for assets (measured at historic cost) which have such a brief duration as to make the effect of applying discounting measures negligible, for those without defined maturity and for revoked loans. Measurement criteria are closely associated with the instrument's classification in one of three stages established under IFRS 9, the last of which (stage 3) includes impaired financial assets, while the other two (stages 1 and 2) refer to performing financial assets. With reference to the accounting representation of the stated measurement effects, writedowns relative to this type of assets are recognised in the income statement: at initial recognition, in an amount equal to expected losses at twelve months; at the time of subsequent measurement of the asset, when credit risk has not increased significantly with respect to initial recognition, in relation to changes in the amounts of writedowns for expected losses in the next twelve months;
at the time of subsequent measurement of the asset, when credit risk has increased significantly with respect to initial recognition, in relation to changes in the amounts of writedowns for expected losses relative to the entirely contractually established residual life of the asset;
at the time of subsequent measurement of the asset when, after a significant increase in credit risk has occurred with respect to initial recognition, the "significance" of this increase no longer exists, in relation to the adjustment in total writedowns, to take into account the switch from expected lifetime losses to losses at twelve months. The financial assets in question, when performing, are subject to measurement aimed at determining writedowns to be recognised in the balance sheet at the level of an individual lending relationship (or "tranche" of a security), on the basis of risk parameters represented by probability of default (PD), loss given default (LGD) and exposure at default (EAD), derived from AIRB models and appropriately corrected to take into account the provisions of accounting standard IFRS 9. If, in addition to a significant increase in credit risk, objective evidence of a loss in value is found, the amount of the loss is measured as the difference between the book value of the asset - classified as "impaired", as are all other relationships with the same counterparty - and the current value of estimated future cash flows, discounted at the original effective interest rate. In this context, at FTA a specific methodology was developed for the accounting treatment of a portfolio of loans classified as bad or
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unlikely to pay and disposed of at 01/01/2018, for which a disposal measurement logic was used. This method considered various scenarios to estimate the recoverable value of the exposures on the basis of the combination and probability of occurrence of these scenarios, as well as the relative estimated cash flows. Loans classified as impaired during the year are inserted in the ordinary collection process established for non-performing loans, with assessment of the disposal process at the end of work-out, with the exception of a cluster of loans specifically identified for which the expediency of disposal against a market listing is held suitable and beneficial. Unsecured positions, for which realisation through disposal is planned, are adjusted to the recovery value specifically envisaged in the credit regulations, calculated on the presumed market price deriving from historic series of disposals carried out in recent years. For secured loans, outside of the scope of FTA, the probability of the disposal scenario is not done. In the case the disposal of a group included secured loans is considered, this would be done through evaluation by the Board of Directors on the basis of the expected price. Impaired assets also include financial instruments classified as non-performing, unlikely to pay or overdue/in excess of thresholds for over ninety days based on Bank of Italy rules, in line with IAS/IFRS and European regulations. Expected cash flows take expected recovery times into account as well as the presumable realisable value of any collateral. The original effective interest rate of each asset remains unchanged over time even if the position has been rescheduled entailing a change in the contractual interest rate and even if the position, in practice, no longer earns contractual interest. If the reasons for the impairment cease following an event that occurs after recognition of the loss, write-backs are recognised in the Income Statement. Writebacks cannot exceed the amortised cost the financial instrument would have in the absence of previous writedowns. Writebacks associated with the passage of time are recognised within net interest income. Loans classified as bad, unlikely to pay or past due, based on current Bank of Italy rules, in line with IFRS 9 and the guidelines for NPLs issued by the Bank of Italy for less significant banks, are the subject of a measurement process which involves application of the following criteria: Positions classified as Non-revoked past due and unlikely to pay: a) lump sum method for: - exposures of amounts less than or equal to € 25,000; - unsecured loans without consortium guarantees. The writedown percentages applied are based on LGD on homogeneous lines of credit.
b) analytical method for: - exposures exceeding € 25,000 supported by collateral; - exposures exceeding € 25,000 unsecured and supported by consortium guarantees; - restructured loans or loans being restructured; - endorsement loans; The possibility of analytical measurement always remains in place of lump sum if deemed more suitable. In this case, cash flows which can be realised through out of court liquidation
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of guarantees or the real estate/movable assets and income sources of joint debtors are assessed.
Positions classified as revoked unlikely to pay: a) Lump sump method for exposures of amounts less than or equal to € 10,000, applying a percentage that takes into account out of court collection of the loan or the disposal price for unsecured loans with collection processes in course;
b) Analytical method for positions with exposure exceeding € 10,000.
Positions classified as bad: analytical method, without distinctions based on amount The measurement is done at the time of classification among bad loans and at each change in the impairment class and, in the case of analytical measurement, when need and significant events occur which make a revision in the collection prediction necessary; this is calculated taking into account the presumable realisable value of liquidation of collateral either through enforcement or with consent on the basis of the state of impairment, as well as the relative collection costs and time, estimated on the basis of retrospective tests. Analytical measurement parameters for positions classified as unlikely to pay and bad are differentiated on the basis of the following loan characteristics: Mortgage loans with application of haircuts which are increasingly prudential as credit standing falls, commensurate with average statistical differentials in guarantee values, immediate sale values and values through seizure. Loans with other real guarantees Unsecured loans to private individuals/companies holding assets which can be usefully enforced; Unsecured loans to private individuals/companies without assets which can be usefully enforced; Loans with planned return to regular payments with extension of payments or settlement; Unsecured loans relative to subjects in bankruptcy proceedings; Loans measured at the presumed realisable value of disposal transactions at the end of the collection process, to be submitted to the Board of Directors for approval; Endorsement loans.
Updates are made each year to historic series for the own portfolio of disputed loans, to verify the congruence of the measurement criteria relative to various parameters, including discounting times for real estate enforcement, enforcement of consortium guarantees, estimated costs for court ordered seizure. Writedowns are approved by the managers of the NPL Service offices, which manage impaired positions in line with the rules found in the Credit Regulations. In certain cases, during the life of the financial assets in question and, in particular, loans, the original contractual conditions are subsequently changed by the parties to the contract. When contractual
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changes occur during the life of the instrument, it is necessary to determine whether the original asset should continue to be recognised in the balance sheet or whether, on the contrary, the original instrument must be derecognised and a new financial instrument recognised. In general, changes to a financial asset lead to derecognition and subsequent recognition of a new asset when the changes are "substantial". Determination of whether a change is "substantial" must be done on the basis of both qualitative and quantitative elements. In fact, in certain cases it may be clear without any complex analysis that the changes substantially modify the characteristics and/or flows associated with the contract of a given asset while, in other cases, additional analysis is needed (also quantitative) to appreciate the effects of the changes and determine whether or not it is necessary to derecognise the asset and recognise a new financial instrument. The qualitative and quantitative analysis done to determine the "substantial" nature of changes made to a financial asset must therefore consider: · the reasons for which the changes were made: for example, renegotiations for commercial reasons or concessions made due to financial difficulties suffered by the counterparty: · the first, aimed at "keeping" the customer involve a debtor who is not suffering financial difficulties. These cases include all renegotiation transactions aimed at adjusting the cost of debt to market conditions. These involve a change in the original conditions of the contract, generally requested by the debtor, regarding aspects associated with the cost of the debt, with consequent economic benefits for the debtor. In general, it is held that every time the bank renegotiations in order to retain its customer, it must be considered as substantial in that, if it were not carried out, the customer could choose to obtain financing from another entity and the bank would suffer a decrease in future expected revenues; the second case, carried out for "credit risk reasons" (forbearance measures), are associated with the bank attempting to maximum recovery of cash flows from the original loan. The underlying risks and benefits following the changes are, as a rule, not substantially transferred and, consequently, the representation which offers the most relevant information for readers of the financial statements (with the exception of that noted below in terms of objective elements) is achieved through "modification accounting", which involves recognising in the income statement the difference between the book value and current value of the modified cash flows discounted at the original interest rate, rather than derecognition; · the presence of specific objective elements ("triggers") which impact the characteristics and/or cash flows associated with the financial instrument contract (by way of example, changes in the currency or changes in the type of risk to which it is exposed, when associated with equity or commodity parameters), which it is held require derecognition of their impact (expected to be significant) on original contractual cash flows. Derecognition criteria Financial assets are derecognised from balance sheet only if the disposal has entailed the substantial transfer of all the risks and benefits associated with them. On the other hand, if a significant portion of the risks and benefits associated with the disposed of financial assets still remain, they are still recognised in the balance sheet, even if for legal purposes ownership of the assets has been effectively transferred.
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If it is impossible to ascertain the substantial transfer of the risks and benefits, the financial assets are derecognised from the balance sheet when no control over them remains. On the contrary, if even partial control over credit is maintained, the assets are kept in the balance sheet to an extent equal to the remaining involvement, measured in terms of exposure to changes in the value of the assets disposed of and changes in the relative cash flows. Finally, financial assets disposed of are derecognised when the contractual rights to receive the associated cash flows are kept, with the assumption at the same time of an obligation to pay these flows, and only these, without any significant delay, to third parties. For each type of exposure included in the disposal portfolio, three different scenarios are envisaged, which have certain shared assumptions, including a percentage of positions not disposed of within the planned time frame, for which it is hypothesised write-offs with no collection will be made. In particular, during the last year of the plan, no disposal is planned, but a write-off on the residual stock.
5 – Hedging transactions
The Bank decided to apply the option offered in paragraph 7.2.21, fully maintaining the rules relative hedge accounting as established under IAS 39 (carve out), hence without applying the new standard IFRS 9 relative to general hedging. In compliance with paragraph 7.2.21, instead of apply the provisions pursuant to chapter 6 of the standard (Hedge Accounting), the Bank chose to continue to apply the provisions for hedge accounting pursuant to IAS 39. In this case, the references contained in the standard in chapter 6 relative to hedge accounting do not apply. The provisions on hedge accounting included in IAS 39 were applied again.
Classification criteria: types of hedging
Assets and liabilities include hedging derivatives which at the balance sheet date present positive and negative fair value respectively.
Transactions to hedge risks are designed to offset potential losses on a specific financial instrument or on a group of financial instruments, attributable to a specific risk, with the profits recognisable on a different financial instrument or group of financial instruments if that particular risk should actually occur.
IAS 39 describes the following types of hedges:
fair value hedge: hedging exposure to changes in the fair value of an accounting item attributable to a particular risk;
cash flow hedge: hedging the exposure to fluctuations in future cash flows attributable to particular risks associated with accounting items;
foreign currency investment hedge: hedging the risks of an investment in a foreign operation expressed in a foreign currency.
Recognition criteria
A derivative instrument is designated as a hedge if there is formal documentation of the relation between the hedged instrument and the hedging instrument and if the hedge is effective at the moment
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in which the hedging begins and, prospectively, throughout its entire life. The effectiveness of the hedging depends on the extent to which the fair value changes of the hedged instrument or of its expected cash flows are offset by those of the hedging instrument. The effectiveness is therefore measured by comparing the above changes, taking into account the goal pursued by the company at the moment in which the hedge is put in place.
The hedge if effective (within the 80-125% range) when the changes in fair value (or cash flows) of the hedging financial instrument almost completely offset the changes in the hedged instrument, for the hedged risk element. The assessment of effectiveness is carried out every six months using:
prospective tests, which justify the application of hedge accounting, as they show the expected effectiveness;
retrospective tests, which show the degree of effectiveness of the hedge achieved in the period to which they refer. In other words, they measure the gap between the actual results and a perfect hedge.
If the tests do not confirm the effectiveness of the hedge, in accordance with the rules outlined above hedge accounting is discontinued and the hedging derivative contract is reclassified as a trading instrument.
Assessment criteria
Hedging derivatives are carried at fair value, and therefore, in the case of fair value hedging, the change in the fair value of the hedged element is offset by the change in the fair value of the hedging instrument. This offsetting is recognised by booking the value changes to the Income Statement, with reference both to the element hedged (as regards the changes produced by the underlying risk factor), and to the hedging instrument. Any difference, which represents the partial ineffectiveness of the hedge, consequently constitutes its net economic effect.
The fair value measurement of hedged fixed-rate loans requires financial consistency between hedged assets and the IRSs agreed upon for the hedge. At every measurement of the fair value, the cumulative stock of hedging IRSs and the cumulative stock of hedged loans are prepared, making sure that the amortization profile of the IRSs corresponds to the amortization profile of the hedged loans.
Subsequently, the weighted average fixed rate of hedging IRSs is calculated. Said rate represents the average effective market rate at the time of the agreement of the various IRSs and reflects the interest that was meant to be hedged at the time of loan hedging. In other words, the rate represents the actual part of interest hedged by the IRS, distinguishing it from the part of interest that is not hedged and corresponds to the spread (expressing customer risk rather than rate risk).
At this point, it is appropriate to prepare, beginning from the residual amortisation plan of the principal of all loans hedged, the amortisation plan of loans to be used for measuring the fair value. This plan shall be made up of loan principal flows (the difference between the residual debt of a period and the residual debt of the previous period according to the contractual amortisation plan) and the interest obtained applying the weighted average rate of hedging IRSs (expressing the hedged interest) to the residual debt for the period.
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The instalments obtained can then be updated adopting the same yield curve used for measuring the fair value of hedging IRSs, and brought down in proportion to the actual hedging percentage at the date of the valuation (ratio between the “surfaces” - i.e. the sum of remaining principals for the respective duration days - of amortisation plans for the remaining IRS amount divided by the remaining loan credit), so as to obtain the current value of hedged loans. The remaining credit (multiplied by the hedging percentage) at the date of loan valuation shall be deducted from this value.
According to this procedure (current value of the instalments minus residual debt brought down according to the hedging percentage), the fair value at the end of financial year T and the fair value at the end of financial year T-1 is calculated. The difference between these two figures is the fair value delta of the loans, which is then compared with the fair value delta of the IRSs.
The fair value delta of the IRSs is calculated with the following methods:
fair value is calculated through discounting future cash flows (Net Present Value – NPV): this method involves discounting estimated cash flows at a current rate that expresses the intrinsic risk of the instrument being measured;
for IRSs hedging loans that already existed at the end of the previous financial year, the fair value delta is given by the difference between the fair value at the end of the year and the fair value at the end of the previous year;
for IRSs hedging loans contracted during the financial year, the fair value delta is the fair value of the IRS at the end of the year;
both the market values and the intrinsic values of all IRSs are calculated.
6 – Equity investments
Classification criteria
This item includes interests held in associated companies and subsidiaries. Companies are considered affiliates if they are not controlled but significant influence is exercised over them. It is assumed that the company exercises significant influence in all cases in which it holds 20% or more of voting rights and, irrespective of the stake held, if it has the power to take part in the operational and financial decisions of the investee companies.
Recognition criteria
Initial recognition of such financial assets takes place on the settlement date. At the moment of initial recognition financial assets classified in this category are recognised at cost.
Assessment criteria
If there is evidence that the value of an equity investment may have suffered impairment, the recoverable value of this equity investment is estimated, taking into account the present value of the future
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cash flows that the equity investment may generate, the transaction multiples, the shareholders’ equity and the actuarial method, including the value on final disposal of the investment. If the recovery value is less than the book value, the difference between them is recognised in the Income Statement. If the reasons for the impairment cease following an event that occurs after recognition of the loss, write-backs are recognised in the Income Statement.
7 – Tangible assets
Classification criteria
Tangible assets include technical systems, furniture and fittings and equipment of all kinds. These are tangible assets held to be used in the production or supply of goods and services or for administrative purposes, or to be rented out to third parties, and which are likely to be used for more than one period. Improvements made to third party assets included in these items are improvements and extra costs in relation to identifiable and separable tangible assets. These investments are usually made to ensure that the property rented from third parties is suitable for use.
Improvements and incremental costs in relation to identifiable and non-separable tangible assets are instead included under item 160 “Other assets”.
Recognition criteria
Items of tangible assets are initially recognised at cost, which includes, besides the purchase price, any and all the ancillary charges directly attributable to the purchase and commissioning of the asset. Extraordinary maintenance expenses which lead to an increase in future economic benefits are recognised as an increase in the value of the assets, while other ordinary maintenance costs are booked to the Income Statement.
Assessment criteria
Items of tangible assets are carried at cost, after deducting any depreciation and impairment losses. These fixed assets are systematically depreciated over their useful life, adopting as the depreciation criterion the straight line method.
At every balance sheet date, if there is any indication that an asset may have suffered a loss in value, the carrying value of the asset is compared with its recoverable amount, which is the greater between the fair value and the use value of the asset, understood as the present value of the future flows originating from the item. Any adjustments are recognised in the Income Statement. If the reasons for recognition of the loss no longer apply, a writeback is made, which may not exceed the value that the asset would have had, net of the depreciation calculated, if the previous writedowns had not been made.
Derecognition criteria
A tangible fixed asset is derecognised from the Balance Sheet upon disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
8 – Intangible assets
Classification criteria
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Intangible assets include goodwill and application software with multi-annual use. Goodwill represents the positive difference between the purchase cost and the fair value of assets and liabilities purchased. Other intangible assets are recognised as such if they are identifiable and arise from legal or contractual rights.
Recognition criteria
An intangible asset may be recognised as goodwill when the positive difference between the fair value of the asset items purchased and the cost of the equity interest represents the future earning capacity of the interest (goodwill). If this difference is negative (badwill) or in cases when the goodwill cannot be justified by the future earning capacity of the interest, the difference itself is recognised directly in the Income Statement.
Other intangible assets are recognised at cost, inclusive of any ancillary charges, only if it is probable that the future economic benefits attributable to the asset will be realised and if the cost of the asset itself can be measured reliably. Otherwise the cost of the intangible asset is recognised in the Income Statement in the year in which it is incurred.
Assessment criteria
As regards goodwill, whenever there is evidence of a loss of value and in any case at least once a year following the preparation of the three-year plan, a check is performed on the non-existence of lasting reductions in value. To this end it is first necessary to identify the cash flow generating unit to which to attribute the goodwill. The amount of any reduction of value is determined on the basis of the difference between the book value of the goodwill and its recovery value, if less. This recovery value is the greater of the fair value of the cash flow generating unit and its use value. The use value is the present value of the future cash flows expected from the generating units to which the goodwill has been attributed. The consequent writedowns are recognised in the Income Statement.
The cost of intangible fixed assets is amortised on a straight line basis over their useful life. If the useful life is unlimited amortisation is not applied; instead adequacy of the book value of the fixed assets is checked regularly. At every balance sheet date, if there is evidence of impairment losses, the recoverable amount of the asset is estimated. The amount of the loss, which is recognised in the Income Statement, is the difference between the carrying amount of the asset and the recoverable amount.
Derecognition criteria
An intangible fixed asset is derecognised from the Balance Sheet when it is disposed of or when future economic benefits are not expected.
9 - Other assets
Other assets essentially include items awaiting processing and items not associated with other items in the balance sheet. These include receivables deriving from the supply of non-financial goods and services, tax items other than those recognised under the relative item (e.g. those associated with substitute tax), gold, silver and precious metals and accruals other than those capitalised on relative
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financial assets, including those deriving from contracts with customers relative to IFRS 15, paragraph 116 and subsequent.
10 - Financial liabilities measured at amortised cost
Classification criteria
Amounts due to banks, amounts due to customers and securities in issue include the various types of interbank funding and customer deposits, repurchase agreements and funding obtained through certificates of deposits, bonds and other funding instruments in issue, net of any amounts repurchased. They also include payables recognised by the company as tenant relative to financial leasing.
Recognition criteria
These financial liabilities are initially recognised at the moment the contract is signed, which normally coincides with the moment the sums are received or the debt securities are issued. Initial recognition is performed on the basis of the fair value of the liabilities, which is normally equivalent to the amount collected or the issue price, increased by any additional costs/revenues directly attributable to the single issue or funding operation. Internal costs of an administrative nature are excluded.
Assessment criteria
After initial recognition, these financial liabilities are measured at the amortised cost, using the effective interest rate method. Short-term liabilities are an exception, given that the time factor is negligible. These are recognised for the amount collected.
Derecognition criteria
Financial liabilities are derecognised when they have expired or have been settled. Derecognition also occurs if bonds previously issued are repurchased. The difference between the book value of the liability and the amount paid to purchase it is entered in the Income Statement. Re-placing on the market of own securities after their repurchase is considered a new issue with recognition at the new placement price.
11 – Financial liabilities held for trading
Classification criteria
The financial instruments in question are recognised at the subscription or issue date at a value equal to the fair value of the instrument, without considering any transaction costs or revenues directly attributable to the instrument. In particular, this category of liabilities includes derivative trading contracts with a negative fair value, as well as implicit derivatives with a negative fair value included in complex contracts, in which the
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primary contract is a financial liability, which are not strictly associated with the same. It also includes liabilities originating from technical overdrafts generated through securities trading.
Assessment criteria
All trading liabilities are measured at fair value with allocation of the results of the valuation in the income statement.
Derecognition criteria
Financial liabilities held for trading are derecognised from the financial statements when the contractual rights over the relative financial flows expire or when the financial liability is sold, with the substantial transfer of all the risks and benefits deriving from ownership of the same.
12 - Financial liabilities measured at fair value
Classification criteria
Financial liabilities carried at fair value charged to the income statement are part of the present item, on the basis of the right given to companies (the so-called “fair value option”) by IFRS 9, in respect of the cases provided for under the laws of reference.
Recognition criteria
These liabilities are recognised on the issue date in an amount equal to their fair value, including the value of any embedded derivative and net of placement fees paid.
Assessment criteria
These liabilities are carried at fair value with allocation of the results based on the following rules, as established in IFRS 9: · fair value changes due to changes in own credit standing must be recognised in the Comprehensive Statement of Income (shareholders' equity); · remaining fair value changes must be recognised in the income statement. Amounts recognised in the comprehensive statement of income are not subsequently reversed to the income statement. This accounting method is not used when recognition of the effects of own credit standing in shareholders' equity leads to or increases an accounting mismatch in the income statement. In this case, the profits or losses associated with the liability, including those determined as an effect in changes in own credit standing, must be recognised in the income statement.
Derecognition criteria
Financial liabilities carried at fair value are derecognised from the financial statements when the contractual rights over the relative financial flows expire or when the financial liability is sold, with the substantial transfer of all the risks and benefits deriving from ownership.
13 – Current and deferred taxation
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These headings include respectively the current and deferred tax assets, and the current and deferred tax liabilities.
Income taxes are recognised in the Income Statement with the exception of those relating to items debited or credited directly to shareholders’ equity. Provisions for income taxes are determined on the basis of a prudential forecast of the current tax liability, and of deferred tax assets and liabilities.
Prepaid and deferred taxes are calculated on the temporary differences, with no time limit, between the book value and the tax value of the individual assets or liabilities.
Deferred tax assets are booked to the financial statements if they are likely to be recovered. In this regard, please note that on 28/07/2016 the tax consolidator Banca Sella Holding Spa opted to maintain the application of the provisions on the transformation of deferred tax assets into tax credits set forth in Art. 11 of Law Decree no. 59 of 03/05/2016, converted, with amendments, by Law no. 119 of 30 June 2016, for the Companies participating in the tax consolidation. The result being the maintenance, as set out in Italian Law no. 225 of 2010, Art., paragraphs from 55 to 56-bis, of the convertibility into tax credits of prepaid taxes recognised in the financial statements against writedowns of loans and goodwill, in particular when the individual financial statements show a loss for the year. This convertibility allows an additional and supplementary method of recovery, which is capable of ensuring the recovery of these types of prepaid taxes in every situation, irrespective of the future profitability of the company. This convertibility is therefore, in every case, a sufficient condition for the recognition and maintenance in the financial statements of these kinds of prepaid taxes.
Deferred tax liabilities are recognised, with the sole exceptions of assets recognised for a higher amount than the fiscally recognised value and of reserves in tax suspension, for which it is reasonable to believe that no operations will be initiated such as to entail their taxation. The deferred tax assets and liabilities recognised are evaluated systematically to take account of any changes made to legislation or tax rates.
14 – Provisions for risks and liabilities
Other provisions for risks and charges refer to amounts set aside for current obligations deriving from a past event, where compliance with the said obligations will probably require the outlay of economic resources, provided that an accurate estimate of the amount of these obligations can be made.
The sub-item “Other provisions” contains provisions for risks and charges set aside in compliance with the International Accounting Standards, with the exception of write-downs due to impairment of guarantees given recognised under “Other liabilities”.
Provisions are set aside for risks and liabilities only when:
there is a current obligation (legal or implied) resulting from a past event;
it is likely that resources will have to be used to produce economic benefits to settle the obligation;
an accurate estimate of the amount of the obligation can be made.
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The amount set aside represents the best estimate of the charge necessary to extinguish the obligation; this estimate takes into account the risks and uncertainties relating to the facts and circumstances in question.
If a significant period of time is expected to pass before the charge is incurred, the amount of the provision is the present value of the charge expected to be required to extinguish the obligation. In this case the discounting rate used is such as to reflect the current market valuations of the present value of the money.
The congruity of these amounts is also reviewed regularly.
If new, more or further information is acquired on the risk event, such as to lead to an update of the estimates originally made, the associated provisions are immediately adjusted.
Provisions are used only on occurrence of the risk events for which they were originally set aside.
15 – Foreign currency transactions
Initial recognition
Foreign currency transactions are entered, on initial recognition, in the accounting currency, applying to the foreign currency amount the exchange rate current at the time of the transaction.
Subsequent recognitions
At every balance sheet date, the accounting items in foreign currency are measured as follows:
monetary items are converted at the exchange rate on the balance sheet date;
non-monetary items carried at their historical cost are translated at the exchange rate in force at the time of the operation; to translate the revenue and cost items an exchange rate that approximates the exchange rates at the transaction dates is often used, for example an average exchange rate for the period;
non-monetary items carried at fair value are translated at the exchange rates obtaining at the balance sheet date.
Exchange rate differences deriving from the settlement of monetary items or from the translation of monetary items at rates different from the initial ones or from those of translation of the previous financial statements, are charged to the Income Statement of the period in which they arise.
When a gain or loss relating to a non-monetary item is booked to shareholders’ equity, the exchange difference relating to this item is also recognised in shareholders’ equity. On the contrary, when a gain or loss is recognised in the Income Statement, the associated exchange difference is also booked to the Income Statement.
16 - Other information
Employee benefits
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Employee severance indemnities are entered on the basis of their actuarial value. For the purposes of discounting to the present, the projected unit credit method is used; this involves the projection of the future outflows on the basis of historical statistical analyses and of the demographic curves, and the financial discounting of these flows on the basis of a market interest rate. The difference between actuarial gains and losses is recognised directly in Shareholders’ equity, while the remaining components (the discounting effect) are recognised in the Income Statement.
According to IAS 19, provisions for severance indemnities represent post-employment defined benefits, which must be recognised making use of actuarial methods.
In the light of the rules laid down in the 2007 Budget Law, severance indemnities accrued from 1 January 2007 destined for complementary pension funds and the INPS Treasury Fund are to be considered a “defined contribution plan” and are, therefore, no longer the subject of actuarial valuation.
According to the international accounting standards, in fact, severance indemnities may not be recognised for an amount corresponding to that accrued (assuming that all the employees leave the company at the balance sheet date); instead the liability in question must be calculated projecting the amount already accrued to the future moment of termination of the employment relationship and then discounting this amount to the present at the balance sheet date using the actuarial “Projected Unit Credit Method”.
Recognition of revenues and costs
Revenues are recognised at the moment in which they are received or at least, in the case of sale of goods or products, when it is probable that the future benefits will be received and these benefits can be quantified in a reliable manner, in the case of performance of services, at the moment in which they are rendered. In particular:
interest received is recognised pro rata temporis on the basis of the contractual or effective interest rate in the case of application of the amortized cost;
any contractually envisaged default interest is accounted for in the income statement only at the moment in which it is actually collected;
dividends are recognised in the income statement during the period in which their distribution is approved;
fees received for services are recognised, on the basis of the existence of contractual agreements, in the period in which these services are rendered;
gains and losses deriving from the trading of financial instruments are recognised in the income statement at the moment of conclusion of the sale, on the basis of the difference between the price paid or collected and the carrying amount of the instruments themselves;
revenues deriving from the sale of non-financial assets are recognised at the moment of conclusion of the sale, unless most of the risks and benefits associated with the assets are maintained.
Costs are recognised in the income statement in the periods in which the associated revenues are accounted for. If the costs and revenues can be associated in a generic and indirect manner, the costs are
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booked over several periods with rational procedures and on a systematic basis. Costs which cannot be associated with revenues are immediately recognised in the income statement.
Accruals and deferrals
Accruals and deferrals that include charges and revenues accruing in the period to assets and liabilities are recognised to adjust the assets and liabilities to which they refer.
Expenses for improvements to third-party properties
The costs of renovating properties not owned are capitalised in consideration of the fact that for the duration of the rental contract the user company has control over the assets and can draw future economic benefits from them. The above costs, classified among Other assets as provided for in the Instructions of the Bank of Italy, are amortised for a period equivalent to the duration of the rental contract.
Provisions for guarantees issued and commitments
Provisions on a collective basis, in relation to the estimate of the possible outflows connected with the credit risk relating to the guarantees, determined applying the same criteria previously explained with reference to loans and receivables, are classified among Other liabilities, as envisaged in the instructions of the Bank of Italy.
Use of estimates and assumptions in the preparation of the annual financial statements
In drafting the financial statements, the Bank made use of estimates and assumptions which can have effects on the amounts recognised in the balance sheet and income statement. These estimates are prepared:
using the information available;
adopting measurements, based also on historical experience, used in formulating rational assumptions for the recognition of operating data.
In future periods the current values recognised may differ, even significantly, following changes in the valuations used, because, by their very nature, the estimates and assumptions used may vary from one year to another.
The main cases which most require the use of valuations are:
for the reduction of the value of loans and other financial assets, the determination of losses;
in determining the fair value of financial instruments not quoted on active markets, the use of valuation models;
for goodwill and other intangible assets, the estimate of the congruity of the value;
for provisions for personnel and for risks and charges, estimates of their value;
for deferred tax assets, estimates and assumptions on their recoverability.
Definition and criteria for fair value measurement
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On 12 May 2011, the IASB published IFRS 13 “Fair Value Measurement", which provides a complete guide on how to measure the fair value of financial and non-financial assets and liabilities and the relative disclosure. IFRS 13 was approved by EU Regulation 1255/2012, issued by the Commission on 11 December 2012. The new standard applies every time that another accounting standard requires measuring an asset or liability at fair value or requires additional information about the measurement of fair value. On the basis of that envisaged in IFRS 13, fair value is defined as the “price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The standard establishes that when transactions that can be directly observed on the market exist, the determination of fair value is immediate. In the absence of these conditions, it is necessary to make use of measurement techniques. IFRS 13 identifies three widely used measurement techniques and establishes that each entity, to measure fair value, must use measurement techniques that are in line with one or more of these methods: Market approach: with this technique, prices and other information relative to transactions that involved identical or comparable financial assets or liabilities are made use of. Measurements based on determining market multiples fall within this category.
Cost approach: the fair value is represented by the replacement cost of a financial asset.
Income approach: the fair value is equal to the current value of future flows. These techniques can be based on current value.
In calculating fair value of a financial asset, IFRS 13 provides for the insertion of a credit value adjustment factor (CVA) which identifies the counterparty risk. This credit risk must be quantified as it would be determined by a market operator in defining the purchase price of a financial asset. In determining the fair value of a financial liability, IFRS 13 envisages that a debt value adjustment factor (DVA) must also be quantified, which refers to own credit risk. As already noted previously, on the basis of IFRS 13 the determination of fair value of financial instruments should use measurement techniques that maximise the use of inputs based on observable market data. To that end, IFRS 13 establishes a hierarchy of fair value techniques, that classifies the input used for the techniques adopted to measure the fair value into three levels:
Level 1: quoted prices (not corrected) in active markets for identical assets and liabilities to which the entity has access at the measurement date. Level 2: input other than quoted prices included in Level 1, directly or indirectly observable for the asset or liability. The prices of the assets or liabilities are inferred from listings on similar asset markets or through measurement techniques in which all the significant factors (credit spreads and liquidity) are inferred from observable market data. Level 3: unobservable data for the asset or liability. The prices of the assets or liabilities are inferred using measurement techniques based on data processed using the best available information in regard
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to assumptions that market operators would use them to determine the price of the asset or liability (it involves, therefore, estimates and assumptions by management). IFRS 13 defines an active market as “a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis”.
Input for the determination of fair value Below are illustrated the various levels of input to use for determination of the fair value of the financial instruments to be measured at fair value: (L1) Instruments whose fair value corresponds to the market value (instruments quoted on an active market): Securities listed on a regulated market or a multilateral trading facility (in which one or more market markets act continuously);
Securities quoted on Bloomberg provided that the amount issued is higher than or equal to Euro 500 million and at least one market maker with regularly available prices exists;
Funds for which the daily NAV or daily quotation are available;
Investments listed on a regulated market;
Derivatives quoted on regulated markets.
An “active market” means: - A regulated market on which the instrument is traded and regularly listed;
- A multilateral trading facility on which one or more market makers act continuously;
- Those on Bloomberg provided that the amount issued is higher than or equal to Euro 500 million and at least one market maker with regularly available prices exists.
(L2) Instruments whose fair value is determined using inputs differing from the prices quoted in an active market, which are directly (as prices) or indirectly (derived from prices) observable in the market: Securities for which Bloomberg gives a quotation featuring an issued amount lower than € 500 million or securities for which, although featuring issued amounts higher than € 500 million, there is no Bloomberg market maker with regularly available prices.
Securities listed on a multilateral trading facility on which there are no market makers with prices regularly available.
Bonds issued by the Sella Group, which are measured using the methods indicated below, used widely within the market:
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Fixed rate bonds: “asset swap spread”;
Variable rate bonds: “discount margin”;
Structured bonds: “net present value” (for the bond component).
Structured bonds which, in addition to the bond component also incorporate an optional component (derivative), foresee the measurement of the latter on the basis of both prices used by market counterparties and on the basis of external (e.g. Black-Scholes) or proprietary measurement models. Securities defined as illiquid, explicitly measured using the model of input observable directly or indirectly on the market.
Funds for which no daily NAV or daily quotation is available, but which periodically express a NAV or a reliable quotation.
Investments that do not have an active market, for which a limited yet recurring number of transactions are known.
OTC derivatives for which market parameters for measurement are available.
(L3) Instruments whose fair value is determined using input data that are not based on observable market values: Default or delisted securities, in the case in which the price communicated by the reference provider for the individual security is greater than 0. If, instead, this price is equal to 0, said securities are considered “not measured at fair value”.
Securities defined as illiquid, explicitly measured using the model of non-observable input;
Securities deriving from Mars 2600 and other ABS securitisations;
Funds or Sicav specialising in ABS;
Unlisted closed-end funds;
Private equity funds;
Investments that do not have an active market for which single transactions are carried out or for which valuation methods are used;
OTC derivatives for which market parameters for measurement are not available.
Assessments regarding the congruence of the classification of the instrument with respect to the assigned input level are done on a half-yearly basis, in June and December, by the Securities Records Unit,
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which also ensures that any necessary changes are made to the specific information found in the securities records. In order to determine the fair value of OTC derivatives according to accounting standard IFRS 13, they are divided into two levels: L2: plain vanilla OTC derivatives for which market parameters for measurement are available; L3: OTC derivatives for which market parameters for measurement are not available. In order to apply the regulations foreseen in Regulation EU no. 575/2013, issued by the European Parliament and Council on 26 June 2013, relative to prudential requirements for credit institutions and investment companies (CRR), both OTC derivatives included in L2 and L3, as above, are to be measured using a mark-to-model procedure. In relation to Regulation (EU) no. 648/2012, issued by the European Parliament and Council on 4 July 2012, on OTC derivatives, central counterparties and trade repositories (“EMIR”), only OTC derivatives in L3, as above, are measured using a model.
Measuring counterparty risk In calculating fair value of a financial asset, IFRS 13 provides for the insertion of a credit value adjustment factor (CVA) which identifies the counterparty risk. This credit risk must be quantified as it would be determined by a market operator in defining the purchase price of a financial asset. In determining the fair value of a financial liability, IFRS 13 envisages that a debt value adjustment factor (DVA) must also be quantified, which refers to own credit risk. Relative to the bonds issued by the Sella Group (structured and non-structured), the counterparty risk for the issuer is included in the spread. Relative to exposure to OTC derivatives, quantification of the CVA correctives (for exposures receivable) and DVA correctives (for exposures payable) is done by Dealer Wizard for all contracts, with the exception of those covered by netting and collateralisation agreements (e.g. ISDA, CSA, etc.). The method used to calculate CVA/DVA correctives implemented in Dealer Wizard is based on the Discounted cash flows approach. This method, applied to all the types of derivatives used by the Group, foresees the application of a credit spread to discounting of expected cash flows and leads to the generation of a Fair Value Risk Adjusted. The difference between this and the Fair Value Risk Free is represented by the CVA/DVA. The selection of the credit spread to be applied in discounting of the expected cash flows is connected to the direction of the flows, as well as the counterparty type. Specifically, based on whether the flows are “receive" or "pay", the spread applied must take into account the counterparty credit risk (in the case of receive) or the size (in the case of payment). Relative to the types of counterparties, we list the possible reference cases used in attributing the relative credit spread: Institutional counterparty WITHOUT a stipulated CSA: the CDS quote taken from Bloomberg is used for the credit spread. If there is no specific quote for the counterparty the CDS quote for a counterparty considered to be comparable in terms of sector, size and rating is used;
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Institutional counterparty with a stipulated CSA: in this case, the spread assigned is zero, as counterparty risk is mitigated by the collateralisation contract, meaning the Fair Value Risk Adjusted is the same as the Fair Value Risk Free;
BSG Customer (retail or corporate): the internal rating provided by Risk Management - Credit Risk is used. Specifically, the internally estimated credit spread represents the return rate required to cover the two loss components (expected and unexpected) that determine credit risk. To quantify the impact of the expected loss, the default probability value associated with the specific customer's rating class is used (if the customer is subject to internal rating calculation), or the average default rate recorded over the last 24 months within the bank's loan portfolio (if the customer is not subject to internal rating calculation). To quantify the impact of the unexpected loss, the value of the equity required to satisfy the profit objective required by the shareholders is estimated, in the case of a current account loan with a one year maturity.
Relative to the Sella Group, the credit spread necessary as an input parameter to calculate the DVA corrective is determined in accordance with the spread applied on the same date to the ordinary bonds issued by the Group. Measurement of the CVA/DVAs is done daily by the Banca Sella OTC Trading Unit. Risk Management carries out second level controls on a sampling basis, validating the methodology and market parameters used after the fact (shared with the Finance Unit). For measurements relative to implicit caps, while awaiting full automation of measurements by the Banca Sella Credit area and the relative Group companies, the Parent Company's Finance Area uses the discounted cash flows approach. As these are options sold to customers (implicit in mortgages with the maximum interest rate), the corrective DVA is determined by applying the credit spread relative to the Sella Group as reported above.
Frequency of fair value measurement Measurement of fair value following the rules dictated in the Group Policy is generally done on a daily basis (generally weekly for bonds issued by the Group due to their limited volatility, unless a need for greater frequency is determined).
Loans: hedged fixed-rate loans Relative to hedged fixed-rate loans, fair value measurement requires financial consistency between the assets hedged and the IRSs agreed upon for the hedge. At every measurement of the fair value, the cumulative stock of hedging IRSs and the cumulative stock of hedged loans are prepared, making sure that the amortization profile of the IRSs corresponds to the amortization profile of the hedged loans. Subsequently, the weighted average fixed rate of hedging IRSs is calculated. Said rate represents the average effective market rate at the time of the agreement of the various IRSs and reflects the interest that was meant to be hedged at the time of loan hedging. In other words, such rate represents the actual
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part of interest hedged by the IRS, distinguishing it from the part of interest that is not hedged and corresponds to the spread (expressing customer risk rather than rate risk). At this point, it is appropriate to prepare, beginning from the residual amortisation plan of the principal of all loans hedged, the amortisation plan of loans to be used for measuring the fair value. This plan shall be made up of loan principal flows (the difference between the residual debt of a period and the residual debt of the previous period according to the contractual amortisation plan) and the interest obtained applying the weighted average rate of hedging IRSs (expressing the hedged interest) to the residual debt for the period. The instalments obtained can then be updated adopting the same yield curve used for measuring the fair value of hedging IRSs, and decreased in proportion to the actual hedging percentage at the date of the valuation (ratio between the “surfaces” – i.e. the sum of remaining principals for the respective duration days – of amortisation plans for the remaining IRS amount divided by the remaining loan credit), so as to obtain the current value of hedged loans. The remaining credit (multiplied by the hedging percentage) at the date of loan valuation shall be deducted from this value. According to this procedure (current value of the instalments minus residual debt reduced by the hedging percentage), the fair value at the end of financial year T and the fair value at the end of financial year T-1 is calculated. The difference between these two figures is the fair value delta of the loans, which is then compared with the fair value delta of the IRSs.
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A.3 – Disclosure on transfers between financial asset portfolios
At the end of the year, no transfers of portfolios existed.
A.4 – Fair value disclosure
Qualitative information
A.4.1 Fair value levels 2 and 3: measurement techniques and input used Relative to the measurement techniques, input and relative adjustments used in measuring the fair value of instruments in level 2 and level 3, below we provide an extract of that specified in the Fair Value Policy adopted by the Group and currently in effect. The asset swap spread model is used for the valuation of fixed-rate bonds, while the discount margin model is adopted for floating rate bonds. Having recourse to said models is motivated by the consideration that they represent the market standard for these types of securities in Europe. The Euro swap rate curve used as the pricing input for fixed-rate bonds derives from the info- providers used in the Bank, while the spread levels used derive from the elaboration of variables connected with credit spread reported by info-providers. The purpose of such processing is to consider various variables that may affect pricing processes. If the bonds contain an optional component, when possible the Bloomberg pricing model is used, so as to guarantee an estimate based on the method most widely used on the market. For this purpose, similarly to the previous cases, the option-adjusted-spread (OAS) used is the spread level deduced from the elaboration of variables connected with credit spreads reported by info-providers. The bonds with a structure that cannot be priced with Bloomberg models are priced by dividing their structure into simpler components. The valuation of said components is carried out using some valuations deduced from those provided by counterparties for the hedging instrument or, if they are not available, Monte Carlo simulations, using as inputs the values of the variables reported by the main info-providers.
The OTC derivatives that can typically be found in the financial statements concern swaps, rate options and exchange options. Rate swaps are evaluated according to the discounted cash flow (DCF) method, which is the market standard and uses the swap rate curve relative to the contact currency as the input data. This curve is periodically drawn from the curve published by the main info-providers (Bloomberg/Reuters) in the Bank. If the swap structure is more complex, and such as to prevent a reasonable certainty in the estimate of the contract value, a valuation of the contract is requested to the counterparty of the transaction. At present, rate options for BSG include only caps and floors and are measured using the Black model. This choice is based on the consideration that alternative models would present the problem of adjusting pricing parameters and would not provide significant improvement of the price estimate. Further
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elements supporting this choice are connected with the consideration that a wide amount of implicit volatility is reported by the main info-providers, together with the price of options themselves for standard maturity dates. Both “plain vanilla” and “exotic” exchange options (European or American barrier options) are evaluated according to the Black & Scholes model. The necessary volatility curves for the calculation of implicit volatility for each option as well as the market rate and exchange quotations used for contract valuations are taken from the main info-providers in the Bank (Bloomberg). In the case of exotic options structures that are more complex and do not allow reasonable certainty about the value of the contract, when possible a measurement algorithm is developed internally or, when possible, an evaluation of the same is requested from a third party external to the transaction. These evaluations, when available, are part of the determination of the price together with the measurement provided by the counterpart in the transaction.
The fair value of ABS securities in the portfolio is measured according to Bloomberg pricing models. These models are based on a DCF (Discounted Cash Flow) method, using as input data the latest data provided by the company in charge of the securitisation. The discount margin level used is deduced from the one reported by research, according to secondary market spreads for similar securities as to underlying security, country and rating. This level may be rectified to take into consideration external factors (and typical factors of the security) such as the different quality of assets, the performance of the underlying security, etc.
The techniques adopted to measure investments in FVTOCI each time are: the income approach, which determines the value of the company on the basis of its ability to yield income; to that end, the value of the company is calculated by discounting the expected income; average future earnings are estimated on the basis of corporate data (financial statements, interim reports, budgets, industrial plans); in addition to risk-free securities, the discount rate considers a premium for investments in business activities;
multiple of earnings, which determines the company value on the basis of specific indicators relating market prices to financial statement values; multiple of earnings are expressed by a sample of quoted companies as similar as possible to the company to be evaluated; a number of factors are taken into account to establish sample homogeneity: belonging to the same economic sector, the size of the company, financial risks deriving from the corporate financial structure, market shares, geographical diversification, and so on.
other measurement techniques commonly used by those participating in the market to give a price to companies if these techniques have demonstrated that the provide reliable estimates of the prices practices in current market transactions (these include the use of the equity method, which determines the value of the company on the basis of the algebraic balance between assets and
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liabilities; analysis on the basis of historic data obtained from company information; financial statements, half-yearly reports, budgets, industrial plans).
Unquoted close-end funds and private equity funds are evaluated on the basis of the data provided by the issuer or, if these data are not provided, according to the amount appropriated to the fund. Special attention will be paid to ABS funds where, as far as possible, the investor reports for the individual ABS will be analysed, which are available for individual funds in most cases.
In relation to the loans issued by each Bank in the Group and that subject to hedging, the determination of the fair value for the purposes of evaluating the efficacy of the same is done by using the discounted cash flow method. To that end, the same risk-free curve utilised to measure the hedges is used, and the spread paid is obtained from the security coupon according to that indicated in the hedging contract.
Relative to hedged fixed-rate loans, fair value measurement requires financial consistency between the assets hedged and the IRSs agreed upon for the hedge. At every measurement of the fair value, the cumulative stock of hedging IRSs and the cumulative stock of hedged loans are prepared, making sure that the amortization profile of the IRSs corresponds to the amortization profile of the hedged loans.
Subsequently, the weighted average fixed rate of hedging IRSs is calculated. Said rate represents the average effective market rate at the time of the agreement of the various IRSs and reflects the interest that was meant to be hedged at the time of loan hedging. In other words, such rate represents the actual part of interest hedged by the IRS, distinguishing it from the part of interest that is not hedged and corresponds to the spread (expressing customer risk rather than rate risk).
At this point, it is appropriate to prepare, beginning from the residual amortisation plan of the principal of all loans hedged, the amortisation plan of loans to be used for measuring the fair value. This plan shall be made up of loan principal flows (the difference between the residual debt of a period and the residual debt of the previous period according to the contractual amortisation plan) and the interest obtained applying the weighted average rate of hedging IRSs (expressing the hedged interest) to the residual debt for the period.
The instalments obtained can then be updated adopting the same yield curve used for measuring the fair value of hedging IRSs, and decreased in proportion to the actual hedging percentage at the date of the valuation (ratio between the “surfaces” – i.e. the sum of remaining principals for the respective duration days – of amortisation plans for the remaining IRS amount divided by the remaining loan credit), so as to obtain the current value of hedged loans. The remaining credit (multiplied by the hedging percentage) at the date of loan valuation shall be deducted from this value.
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According to this procedure (current value of the instalments minus residual debt reduced by the hedging percentage), the fair value at the end of financial year T and the fair value at the end of financial year T-1 is calculated. The difference between these two figures is the fair value delta of the loans, which is then compared with the fair value delta of the IRSs.
A.4.2 Measurement processes and sensitivity The use of the above described measurement techniques and models requires the selection and quantification of certain parameters, which vary based on the financial instrument to be measured.
These parameters are chosen and set up on the calculation software at the moment of a request for measurement of a new instrument. The Risk Management service is responsible for validating the parameters defined. Every time the fair value of the financial instrument is calculated, the above parameters are rechecked and updated both by the area that performs the calculation and by the Risk Management service.
By way of example, the main observable parameters can be linked to: Rate Curve This is a combination of yield rates for zero coupon synthetic securities, ordered in increasing order relative to the maturity dates of the same. These rates are obtained using consolidated “bootstrapping” methods from the market rates for deposits (for maturities no greater than 12 months) and market rates for IRSs (for maturities of no less than 2 years). For the purposes of the measurements, the mid rates are used. This is at the base of the measurement of all OTC derivatives. Volatility Matrix This consists of a table that indicates, for every maturity date and strike for the options considered, the relative value of the mid volatility quoted on the market. This table is the same for all cap/floor type options. Spread To measure bonds issued by the Group (structured or not), two types of spread are taken into consideration: Rate spread: represents the margin on the variable rate subject to indexing (for variable rate securities) or the IRS rate for the same maturity dates (for fixed rate securities).
Price spread: represents the differential to be subtracted from the theoretical price to take into account the riskiness of the structure.
Implicit Volatility This is the volatility of the option prices quoted for a specific underlying instrument. For every maturity date, the value of the at-the-money options is considered, or a weighted average of the volatility of the prices of the options quoted (even with different strikes) for the same maturity date.
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Dividend Yield In the measurement methodologies, this is obtained as the annualised logarithm of the ratio between dividend and price, as reported by the main information providers (Bloomberg, Reuters, etc.), for maturity dates analogous to those of the derivative in question. By way of example, the main non-observable parameters can be linked to: Correlations To calculate correlations, the logarithmic variations in the prices of the two assets (exchange rate and price of the underlying instrument) considered are used. To that end, data relative to the last 6 months is generally used. Historic Volatility In the case that the implicit volatility of the options is not quoted, the historic volatility of the underlying instrument is used, measured on the basis of the standard deviation of the logarithmic variations of the prices of the same. There is no significant observable input used for fair value measurement of assets and liabilities in level 3.
A.4.3 Fair value hierarchy Any transfer from a fair value hierarchy level to another occurs as a function of the evolution of the characteristics of each security and in relation to the criteria which determine classification in the various levels of the fair value hierarchy. They are identified twice a year, at the time of the half-yearly and annual financial statements. The input levels which determine classification in a given fair value level are listed in these financial statements, in Part A.2 - The Main Accounting Items, in the section Input for the determination of fair value. At 31 December 2018, there were no securities that improved or worsened their liquidity and had changed their fair value hierarchy level with respect to 31 December 2017.
A.4.4 Other information The Bank does not manage groups of financial assets or liabilities on the basis of their net exposure to market risks or credit risk.
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Quantitative information A.4.5 Fair value hierarchy
A.4.5.1 Assets and liabilities carried at fair value on a recurring basis: breakdown by fair value levels
31/12/2018 Financial assets/liabilities measured at fair value L1 L2 L3
1. Financial assets measured at fair value through profit and loss 9,629 29,763 46,766 a) Financial assets held for trading 7,218 29,763 - b) Financial assets carried at fair value - - - c) Other financial assets necessarily measured at fair value 2,411 - 46,766
2. Financial assets measured at fair value through other comprehensive income 435,141 - 17,268
3. Hedging derivatives - 1,974 -
4. Tangible assets - - - 5. Intangible assets - - - Total 444,770 31,737 64,034
1. Financial Liabilities Held for Trading - 11,500 -
2. Financial liabilities carried at fair value - - -
3. Hedging derivatives - 81,563 -
Total - 93,063 -
Key L1=Level 1 L2=Level 2 L3=Level 3
A.4.5.1 Assets and liabilities carried at FV on a recurring basis: breakdown by fair value levels
31/12/2017 Financial assets/liabilities measured at fair value L1 L2 L3
1. Financial assets held for trading 6,967 16,315 -
2. Financial assets carried at fair value - - - 3. Financial assets available for sale 1,021,426 13,662 25,880 4. Hedging derivatives - 3,715 - 5. Tangible assets - - - 6. Intangible assets - - - Total 1,028,393 33,692 25,880 1. Financial Liabilities Held for Trading - 16,032 - 2. Financial liabilities carried at fair value - - - 3. Hedging derivatives - 90,493 - Total - 106,525 -
Key L1 = Level 1 L2 = Level 2 L3 = Level 3
At 31 December 2018, there were no securities that have changed their fair value hierarchy level with respect to 31 December 2017.
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The table below summarises the impacts of application of IFRS 13, divided by derivative type:
Net impact at 31 December 2018
CVA DVA
IRS (10) 358 CAP_FLOOR - 26 COLLAR - - OPTCCY (6) 1 NDF (51) 7 OUTRIGHT (70) 140 IMPLICIT OPTIONS ON MORTGAGES - - Total (137) 532
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Annual changes in financial assets at fair value on a recurring basis (level 3)
Financial assets measured at fair value through profit and loss Financial assets measured at fair value through other Total
comprehensive Tangible assets Intangible assets assets Intangible income Hedging derivatives held for trading assets necessarily of which: b) financial measured at fair value fair measured at assets carried at value fair of which: c) other financial of which: financiala) assets 1. Opening ------balance Adjustment of 51,213 - - 51,213 20,525 - - - initial balances 2. Increases 9,732 - - 9,732 5,648 - - - 2.1. Purchases 9,579 - - 9,579 595 - - - 2.2. Profits 104 - - 104 - - - - allocated to: 2.2.1. Income 104 - - 104 - - - - Statement - of which 104 - - 104 - - - - capital gains 2.2.2. Shareholders’ - X X - - - - - equity 2.3. Transfers ------from other levels 2.4. Other 49 - - 49 5,053 - - - increases 3. Decreases 14,179 - - 14,179 8,905 - - - 3.1. Sales 343 - - 343 5,241 - - - 3.2. Repayments 11,903 - - 11,903 242 - - - 3.3. Losses 1,933 - - 1,933 14 - - - allocated to: 3.3.1. Income 1,933 - - 1,933 - - - - Statement - of which 1,933 - - 1,933 - - - - capital losses 3.3.2. Shareholders’ - X X - 14 - - - equity 3.4. Transfers ------from other levels 3.5. Other - - - - 3,408 - - - decreases 4. Closing balance 46,766 - - 46,766 17,268 - - -
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A.4.5.4 Assets and liabilities not measured at fair value or measured at fair value on a non-recurring basis: breakdown by fair value levels
31/12/2018 Assets/liabilities not measured at fair value or measured at fair value on a non-recurring basis BV L1 L2 L3
1. Financial assets measured at amortised cost 10,407,314 1,117,061 9,984,714 2. Tangible assets held for investment 5,031 7,241 3. Non-current assets and asset groups held for sale 17,132
Total 10,429,477 1,117,061 - 9,991,955
1. Financial liabilities measured at amortised cost 10,680,515 98,193 242,792 10,335,637 2. Liabilities associated with assets held for sale 7,285
Total 10,687,800 98,193 242,792 10,335,637
Key: BV = book value L1 = Level 1 L2 = Level 2 L3 = Level 3
A.4.5.4 Assets and liabilities not measured at fair value or measured at fair value on a non-recurring basis: breakdown by fair value levels Assets/liabilities not measured at fair value or measured at 31/12/2017 fair value on a non-recurring basis BV L1 L2 L3
1. Financial assets held to maturity 90,646 90,659 - -
2. Due from banks 2,787,881 - - 2,787,881
3. Due from customers 7,003,762 - 40 7,092,911 4. Tangible assets held for investment 5,256 - - 7,283 5. Non-current assets and asset groups held for sale - - - - Total 9,887,545 90,659 40 9,888,075 1. Due to banks 738,902 - - 738,902
2. Due to customers 9,374,893 - - 9,374,893
3. Securities in issue 410,564 105,856 316,968 - 4. Liabilities associated with assets held for sale - - - - Total 10,524,359 105,856 316,968 10,113,795
Key VB = book value L1 = Level 1 L2 = Level 2 L3 = Level 3
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A.5 - “Day one profit/loss” disclosure
IFRS 9 requires financial instruments to initially be recognised in the financial statements at fair value, the latter usually coinciding with the price at which the purchase transaction is concluded. IFRS 7 then sets forth that, where the security forming the object of the transaction is level 3, there is greater freedom in the evaluation of the price, given there is no fixed and specific frame of reference for the fair value. In that case, the initial recognition must always occur at the price at which the purchase/sale is completed, recognising the subsequent valuation as day one profit/loss with respect to fair value. This norm is clearly applicable, specifically with reference to the Bank's balance sheet, to securities in the category of financial assets measured at fair value through profit and loss (held for trading).
That being said, in 2018, amounts to be recognised as day one profit/loss as part of the purchase of securities not listed on an active market and in the category of financial assets measured at fair value through profit and loss (held for trading) were not identified.
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Part B
Information on the balance sheet Assets
At 31 December 2018, the tables in the Notes were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the tables dictated by the above circular were duly modified through the omission of the comparison column, and to facilitate comparison with the previous year, tables prepared in line with that envisaged under IAS 39 were added and shown in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Any opening balances found in the tables in the Notes are those deriving from first time application of accounting standard IFRS 9. Again pursuant to the stated circular, the tables in the Notes were prepared in thousands of euro, unless otherwise indicated.
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Section 1 – Cash and cash equivalents - item 10
1.1 Cash and cash equivalents: breakdown
Total Total 31/12/2018 31/12/2017 a) Cash on hand 147,815 139,631 b) Demand deposits at Central Banks - - Total 147,815 139,631
Section 2 - Financial assets measured at fair value through profit and loss - Item 20
2.1 Financial assets held for trading: Product breakdown
Total Item/Value 31/12/2018 L1 L2 L3 A. Cash assets 1. Debt securities 7,218 16,258 - 1.1 Structured securities - - - 1.2 Other debt securities 7,218 16,258 - 2. Equity securities - - - 3. UCITS units - - - 4. Loans and advances - - - 4.1 Repurchase agreements - - - 4.2 Others - - - Total (A) 7,218 16,258 - B. Derivative instruments 1. Financial derivatives - 13,505 - 1.1 for trading - 13,500 - 1.2 linked to fair value option - - - 1.3 other - 5 - 2. Credit derivatives - - - 2.1 for trading - - - 2.2 linked to fair value option - - - 2.3 other - - - Total (B) - 13,505 - Total (A+B) 7,218 29,763 -
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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2.1 Financial assets held for trading: Product breakdown
Total 31/12/2017
Item/Value
Level 1 Level 2 Level 3
A. Cash assets 1. Debt securities 6,967 200 - 1.1 Structured securities - - - 1.2 Other debt securities 6,967 200 - 2. Equity securities - - - 3 UCITS units - - - 4. Loans and advances - - - 4.1 Reverse repurchase agreements - - - 4.2 Others - - - Total A 6,967 200 - B. Derivative instruments 1. Financial derivatives: - 16,115 - 1.1 for trading - 16,104 - 1.2 linked to fair value option - - - 1.3 other - 11 - 2. Credit derivatives: - - - 2.1 for trading - - - 2.2 linked to fair value option - - - 2.3 other - - - Total B - 16,115 - Total (A+B) 6,967 16,315 - Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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2.2 Financial assets held for trading: breakdown by debtors/issuers/counterparties
Total Item/Value 31/12/2018
A. CASH ASSETS
1. Debt securities 23,476 a) Central banks - b) Public administrations 994 c) Banks 3,298 d) Other financial companies 1,438 of which: insurance companies - e) Non-financial companies 17,746
2. Equity securities - a) Banks - b) Other financial companies - of which: insurance companies - c) Non-financial companies - d) Other issuers -
3. UCITS units -
4. Loans and advances - a) Central banks - b) Public administrations - c) Banks - d) Other financial companies - of which: insurance companies - e) Non-financial companies - f) Households -
Total (A) 23,476
B. DERIVATIVE INSTRUMENTS a) Central Counterparties - b) Other 13,505
Total (B) 13,505
Total (A+B) 36,981
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2.2 Financial assets held for trading: breakdown by debtors/issuers
Total Item/Value 31/12/2017
A. CASH ASSETS 1. Debt securities 7,167 a) Governments and Central Banks 6,758 b) Other public bodies - c) Banks 209 d) Other issuers 200 2. Equity securities - a) Banks - b) Other issuers: - - insurance companies - - financial companies - - non-financial companies - - others - 3. UCITS units - 4. Loans and advances - a) Governments and Central Banks - b) Other public bodies - c) Banks - d) Other subjects - Total A 7,167 B. DERIVATIVE INSTRUMENTS a) Banks 4,990 b) Customers 11,125 Total B 16,115 Total (A + B) 23,282
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2.5 Other financial assets necessarily measured at fair value: product breakdown Total Item/Value 31/12/2018 L1 L2 L3 1. Debt securities - - - 1.1 Structured securities - - - 1.2 Other debt securities - - - 2. Equity securities - - 2,225 3. UCITS units 2,411 - 9,571 4. Loans and advances - - 34,970 4.1 Repurchase agreements - - - 4.2 Others - - 34,970 Total 2,411 - 46,766
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
2.6 Other financial assets obligatorily measured at fair value: breakdown by borrowers/issuers
Total
31/12/2018
1. Equity securities 2,225 of which: banks - of which: other financial companies 2,225 of which: non-financial companies -
2. Debt securities - a) Central banks - b) Public administrations - c) Banks - d) Other financial companies - of which: insurance companies - e) Non-financial companies -
3. UCITS units 11,982
4. Loans and advances 34,970 a) Central banks - b) Public administrations 1,746 c) Banks - d) Other financial companies - of which: insurance companies - e) Non-financial companies 18,570 f) Households 14,654
Total 49,177
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Section 3 - Financial assets measured at fair value through other comprehensive income - Item 30
3.1 Financial assets measured at fair value through other comprehensive income: product breakdown
Total Item/Value 31/12/2018 L1 L2 L3 1. Debt securities 435,141 - - 1.1 Structured securities - - - 1.2 Other debt securities 435,141 - - 2. Equity securities - - 17,268 3. Loans and advances - - - Total 435,141 - 17,268
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
3.2 Financial assets measured at fair value through other comprehensive income: product breakdown by debtor/issuer
Total Item/Value 31/12/2018
1. Debt securities 435,141 a) Central banks - b) Public administrations 302,342 c) Banks 91,996 d) Other financial companies 13,923 of which: insurance companies - e) Non-financial companies 26,880 2. Equity securities 17,268 a) Banks - b) Other issuers: 17,268
- other financial companies 16,038 of which: insurance companies -
- non-financial companies 259
- others 971 3. Loans and advances - a) Central banks - b) Public administrations - c) Banks - d) Other financial companies - of which: insurance companies - e) Non-financial companies - f) Households -
Total 452,409
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3.3 Financial assets measured at fair value through other comprehensive income: gross value and total value adjustments
Gross value Total value adjustments
Total partial of which: write-offs* Stage 1 Instruments Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 with low credit risk
Debt 435,486 - - - 345 - - - Loans and ------advances
Total 31/12/2018 435,486 - - - 345 - - X of which: impaired financial assets, purchased or X X - - X - - - originated
* Value to be shown for disclosure purposes
4.1 Financial assets available for sale: product breakdown
31/12/2017 Item/Value Level 1 Level 2 Level 3 1. Debt securities 982,750 13,662 - 1.1 Structured securities - - - 1.2 Other debt securities 982,750 13,662 - 2. Equity securities - - 20,629 2.1 Carried at fair value - - 14,630 2.2 Carried at cost - - 5,999 3. UCITS units 38,676 - 5,009 4. Loans and advances - - 242 Total 1,021,426 13,662 25,880
5.1 Financial assets held to maturity: Product breakdown
Total 31/12/2017
FV BV Level 1 Level 2 Level 3 1. Debt securities 90,646 90,659 - - - structured - - - - - others 90,646 90,659 - - 2. Loans and advances - - - -
As required by the IFRS, equity investments were subjected to impairment tests in order to ascertain
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whether there was objective evidence that might indicate that the book value of such assets was not fully recoverable. The impairment test aims at assessing the existence of impairment indicators. In particular, the impairment test is carried out on companies that reported negative economic results in the last financial year and/or companies whose Shareholders’ Equity is lower than the carrying amount. Below is a list of the companies subject to impairment tests (figures in thousands of euro):
Companies subject to impairment testing (figures in thousands of euro)
Carrying value (before any Shareholders’ equity Company CGU adjustments at end of year) amount Difference B-A A B
Sella Leasing CGU 1 45,288 41,327 -3,961 Sella Ventures SGR CGU 2 45 39 -6 Fabrick CGU 3 16,700 5,561 -11,139
The accounting standards of reference state that the impairment test must be carried out comparing the book value of the CGU with its recoverable value. If this value is found to be less than the book value, a value adjustment must be recognised. The recoverable value of the CGU is the greater of its fair value net of selling costs and its value in use. Below is a list of methods to calculate the recoverable amount of the CGU and the results of the impairment tests:
Impairment test: CGU subject to further analysis
Recoverable CGU Method of calculation used Result of impairment test value
CGU 1 Value in use Dividend discount model (excess capital version) The impairment test detected no loss in value CGU 2 Value in use Dividend discount model (excess capital version) The impairment test detected no loss in value CGU 3 Fair value Adjusted Equity Method The impairment test detected no loss in value
Methods used Fair value is defined as the “price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The adjusted shareholders' equity method was used to determine fair value, which involves considering the portion of shareholders' equity held (capital, reserves, profit/loss for the year), adjusted by any equity capital gains or the differences between current values of elements in the assets and liabilities calculated using appropriate criteria (market value) and corresponding carrying values. The Value in use is defined as the present value of future cash flows expected to derive from an asset. To determine the value in use the DDM (dividend discount model) was used, which involves discounting distributable income flows after meeting the prescribed minimum capital requirement (excess capital). The estimate of value in use incorporates the following elements: estimation of future cash flows the company expects deriving from continuous use of the asset and its final disposal, calculated with reference to the most recent budget/plans relative to the CGU and
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cash flow projections after the period of the plan, estimated using a stable growth rate (g), in line with the forecast inflation rate trend (2%);
discount rate (Ke): calculated according to the Capital Asset Pricing Model (CAPM). Below is the formula used: Ke = Rf + Beta * (Rm - Rf), where:
- Rf is the risk-free rate determined using the average return on ten-year BTPs during the course of 2018. The value used was 2.59%;
- Rm - RF is the premium for market risk, given by the difference between the yield of a diversified portfolio made up of all risky investments available in the market and the yield of a risk-free security. The value used was 5.61%;
- Beta is the ratio which expresses the amount of systematic risk for an investment, that is the trend for the returns from an asset to change as a consequence of market variations. The value used was 1.05.
capitalisation requirement for the purposes of estimating distributable cash flows, defined with reference to that established in the regulatory provisions.
Future cash flows were determined by using multi-year plans for each CGU. These plans were defined on the basis of hypothesis in line with the financial and economic projection assumptions for the Sella Group and refer to a forecast scenario. The main amounts are indicated in the table below:
Scenario forecasts for main indicators
Euro zone 2018 2019 2020 2021
Real GDP 1.9 1.3 1.6 1.5 Consumer price index 1.7 1.4 1.7 1.7
Official rates 0.00 0.25 0.50 1.00
Short-term interest rates (Euribor 3 m) -0.32 -0.27 0.04 0.30
Italy 2018 2019 2020 2021 Real GDP 1.0 0.4 1.0 1.0 Consumption 0.7 0.5 1.0 1.0 Consumer price index 1.3 1.1 1.3 1.5
During the three-year period, the international context should show growth that is slowing with respect to values seen in 2018. In terms of consumer prices, the moderate growth should justify the continued lack of inflationary tension in developed countries. As for Italy, growth prospects in the three-year period 2019-2021 appear below the euro area average. With reference to the financial segment, the scenario assumes a low level of money market interest rate, increasing slightly towards the end of the three years.
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The companies' multi-year plans were prepared using reasonable and consistent preconditions representing the best estimate that the corporate management could make within the range of possible economic conditions that may occur during the useful life of each entity. The table below shows the elements considered for each CGU in calculating the recoverable amount: The notes on the side are an integration, where necessary, to the general guidelines described above.
CGU: elements used to calculate recoverable value
CGU Basic assumptions Method of determination Note
Economic and balance - Forecast data estimate profits falling with respect Three-year plan (2019-2021) sheet variables to 2018, although recovering towards the end of the three years, mainly due to lower net interest
CGU 1 Calculated according to the Capital income and a greater impact coming from credit Discount rate Asset Pricing Model (CAPM) risk writedowns - The discount rate used was 8.47%, with a Beta of Profitability beyond the Constant annual growth rate at 2% 1.05 forecast period
Economic and balance - The first year of the plan for the recently Three-year plan (2019-2021) sheet variables established company was influenced by the impact operating costs to start up the business had on the Calculated according to the Capital CGU 2 Discount rate income statement, which is expected to be entirely Asset Pricing Model (CAPM) up and running by the end of the three years. Profitability beyond the - The discount rate used was 8.47%, with a Beta of Constant annual growth rate at 2% forecast period 1.05
Shareholders’ Equity Book value at 31/12/2018
The value of equity investments held Appraisals of the value of equity investments held CGU 3 Value of corporate equity was measured on the basis of recent were prepared by an independent appraiser. investments held appraisals.
Conclusions The analysis done indicates no writedowns are required on the carrying value of the CGUs. The sensitivity analysis also revealed no indications of reduction in value.
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Section 4 - Financial assets measured at amortised cost - Item 40
4.1 Financial assets measured at amortised cost: product breakdown of due from banks
Total
31/12/2018 Book value Fair value
Type of transaction/Value
2 L1 L2 L3 Stage 3 Stage originated purchased or Stage 1 and Stage of which impaired, A. Due from Central Banks ------1. Time deposits - - - X X X
2. Mandatory reserve - - - X X X
3. Repurchase agreements - - - X X X
4. Other - - - X X X
B. Due from banks 2,326,563 - - 43,343 - 2,281,699 1. Loans and advances 2,281,699 - - - - 2,281,699 1.1 Current accounts and demand 2,077,877 - - X X X deposits 1.2. Time deposits 125,154 - - X X X 1.3. Other loans and advances: 78,668 - - X X X - Reverse repurchase agreements - - - X X X - Financial leasing - - - X X X
- Others 78,668 - - X X X
2. Debt securities 44,864 - - 43,343 - -
2.1 Structured securities ------
2.2 Other debt securities 44,864 - - 43,343 - -
Total 2,326,563 - - 43,343 - 2,281,699
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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6.1 Loans to banks: product breakdown
Total 31/12/2017 Type of transaction/Value FV BV Level 1 Level 2 Level 3 A. Due from Central Banks 1 - - 1 1. Time deposits - X X X 2. Mandatory reserve 1 X X X 3. Reverse repurchase agreements - X X X 4. Other - X X X B. Due from banks 2,787,880 - - 2,787,880 1. Loans and advances 2,787,880 - - 2,787,880 1.1 Current accounts and demand deposits 2,579,177 X X X 1.2 Time deposits 111,323 - - - 1.3. Other loans and advances: 97,380 X X X - Reverse repurchase agreements - X X X - Financial leasing - X X X - Others 97,380 X X X 2. Debt securities - - - - 2.1 Structured securities - X X X 2.2 Other debt securities - X X X Total 2,787,881 - - 2,787,881
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4.2 Financial assets measured at amortised cost: product breakdown of due from customers
Total
31/12/2018
Book value Fair value Type of transaction/Value
L1 L2 L3 Stage 2 Stage 3 of which impaired, originated Stage 1 and Stage 1 purchased or
1. Loans and advances 6,672,529 314,310 6,251 - - 7,325,997
1.1. Current accounts 631,839 62,787 874 X X X
1.2. Reverse repurchase agreements - - - X X X
1.3. Mortgages 3,528,678 195,463 - X X X
1.4. Credit cards, personal loans and 236,057 3,342 - X X X loans on wage assignments
1.5. Financial leasing - - - X X X
1.6. Factoring - - - X X X
1.7. Other loans and advances 2,275,955 52,718 5,377 X X X
2. Debt securities 1,093,912 - - 1,073,718 - -
2.1. Structured securities ------
2.2. Other debt securities 1,093,912 - - 1,073,718 - -
Total 7,766,441 314,310 6,251 1,073,718 - 7,325,997
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7.1 Loans to customers: product breakdown
Total 31/12/2017 Book value Fair Value Impaired
Type of transaction/Value Non-impaired L1 L2 L3 Other Purchased
Loans and advances 6,555,944 - 447,778 - - 7,092,911 1. Current accounts 622,287 - 95,706 X X X 2. Reverse repurchase agreements 2,136 - - X X X 3. Mortgages 3,738,168 - 267,045 X X X 4. Credit cards, personal loans and loans on wage 223,279 - 4,337 X X X assignments 5. Financial leasing - - - X X X 6. Factoring - - - X X X 7. Other loans and advances 1,970,074 - 80,690 X X X Debt securities 40 - - - 40 - 8. Structured securities - - - X X X 9. Other debt securities 40 - - X X X Total 6,555,984 - 447,778 - 40 7,092,911
4.4 Financial assets measured at amortised cost: product breakdown of due from customers by debtor/issuer
Total 31/12/2018
Type of transaction/Value Of which: impaired Stage 1 and Stage 2 Stage 3 assets, purchased or originated
1. Debt securities 1,093,912 - - a) Public administrations 1,052,855 - - b) Other financial companies 10,753 - - of which: insurance companies - - - c) Non-financial companies 30,304 - - 2. Loans to: 6,672,529 314,310 6,251 a) Public administrations 11,891 29 - b) Other financial companies 1,590,411 571 - of which: insurance companies 12 - - c) Non-financial companies 2,459,619 184,967 5,966 d) Households 2,610,608 128,743 285 Total 7,766,441 314,310 6,251
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4.5 Financial assets measured at amortised cost: gross value and total value adjustments
Gross value Total value adjustments
Total partial of which: write-offs* Stage 1 Instruments Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 with low credit risk
Debt securities 1,139,088 - - - 312 - - - Loans and 8,685,108 3,780,084 299,390 662,195 18,920 11,350 347,885 38,508 Total 31/12/2018 9,824,196 3,780,084 299,390 662,195 19,232 11,350 347,885 X of which:impaired financial X X - 7,569 X - 1,318 - assets, purchased or
ii d *values to be shown for disclosure purposes
Section 5 - Hedging derivatives - Item 50
5.1 Hedging derivatives: breakdown by hedge type and level
FV 31/12/2018 FV 31/12/2017 NV NV 31/12/2018 31/12/2017 L1 L2 L3 L1 L2 L3
A. Financial derivatives 1. Fair Value - 1,974 - 44,884 - 3,715 - 80,385 2. Cash flows ------3. Foreign investments ------B. Credit derivatives 1. Fair Value ------2. Cash flows ------Total - 1,974 - 44,884 - 3,715 - 80,385
Key: NV = notional value L1 = Level 1 L2 = Level 2 L3 = Level 3
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5.2 Hedging derivatives: breakdown by hedged portfolio and type of hedge
Fair Value Cash flows
Micro
Transaction/Type of debt equity Foreign hedging securities securities investments currencies and and credit commodities others and gold interest equity rates indices Macro Micro Macro 1. Financial assets measured at fair value - - - - X X X - X X through other comprehensive income 2. Financial assets measured at amortised - X - X X X X - X X cost 3. Portfolio X X X X X X 825 X - X
4. Other transactions ------X - X -
Total assets ------825 - - -
Financial liabilities 1,149 X - - - - X - X X
Portfolio X X X X X X - X - X
Total liabilities 1,149 ------X
1. Expected transactions X X X X X X X - X X
2. Portfolio of financial X X X X X X - X - - assets and liabilities
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Section 6 – Fair value adjustment of financial assets in hedged portfolios – Item 60
6.1 Fair value adjustments of hedged assets: breakdown by hedged portfolio Total Value adjustments of hedged assets / Values 31/12/2018
1. Increases 78,927
1.1 of specific portfolios: 78,927 a) financial assets measured at amortised cost 78,927 b) financial assets measured at fair value through other comprehensive income -
1.2 total -
2. Decreases -
2.1 of specific portfolios: - a) financial assets measured at amortised cost - b) financial assets measured at fair value through other comprehensive income -
2.2 total -
Total 78,927
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Section 7 – Equity investments – Item 70
7.1 Equity investments: information on equity investments
Registered Operational Name Equity interest % Voting rights % office headquarters
A. Solely-controlled companies
SELLA LEASING SPA Biella Biella 51%
SELLA PERSONAL CREDIT SPA Turin Turin 51%
C. Companies subject to significant influence FABRICK SPA Biella Biella 14%
7.2 Significant equity investments: book value, fair value and dividends received
Name Book value Fair value Dividends received
A. Solely-controlled companies
Sella Personal Credit Spa 45,288
Sella Leasing Spa 43,248
C. Companies subject to significant influence Fabrick Spa 16,700
Total 105,236 - -
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7.3 Significant equity investments: accounting information
Name (1)+(2) (1)+(2) after tax (2)after tax Total revenues Financial assets Financial liabilities operations after tax Net interest income Non-financial assets operations before tax tax before operations Non-financial liabilities Profit (Loss) on continuing Cash and equivalentscash Profit/(Loss) on continuing groups held for sale after tax heldfor groups Comprehensive income (3) = Profit (Loss) for the period (1) for the periodProfit (Loss) Profit/(loss) onasset disposal tangible and intangible assets Adjustmentsand write-backs on Total of other income components other income Total of
A. Solely-controlled companies Sella Leasing Spa 1 1,031,703 24,659 939,185 38,015 40,205 23,237 (2,492) 12,997 8,698 8,698 8,698
Sella Personal Credit Spa 1 974,278 54,155 916,539 27,519 78,949 38,783 (3,827) 15,372 9,727 9,727 9,727
C. Companies subject to significant influence Fabrick Spa - 3,515 53,238 14,153 2,620 1,145 - - (4,301) (3,437) - (3,437) (3,437)
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7.5 Equity investments: annual change
Total Total 31/12/2018 31/12/2017
A. Opening balance 88,536 88,536
B. Increases 16,700 88,536
B.1 Purchases 11,143 -
B.2 Writebacks - -
B.3 Revaluations - -
B.4 Other changes 5,557 88,536
C. Decreases - -
C.1 Sales - -
C.2 Value adjustments - -
C.3 Writedowns - -
C.4 Other changes - - D. Closing balance 105,236 88,536
E. Total revaluations - -
F. Total adjustments - -
Section 8 – Tangible assets – Item 80
8.1 Property and equipment used in operations: breakdown of assets measured at cost
Total Total Asset/Amount 31/12/2018 31/12/2017
1. Owned assets 31,876 41,513 a) land 4,901 4,917 b) buildings 14,604 15,336 c) furniture 1,173 1,132 d) electronic equipment 5,816 15,397 e) others 5,382 4,731
2. Assets purchased under finance leases - - a) land - - b) buildings - - c) furniture - - d) electronic equipment - - e) others - -
Total 31,876 41,513 of which: obtained through enforcement of guarantees received - -
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8.2 Tangible assets held for investment: breakdown of assets measured at cost
Total Total 31/12/2018 31/12/2017
Asset/Amount Fair value Fair value Book Book value L1 L2 L3 value L1 L2 L3
1. Owned assets 5,031 - - 7,241 5,255 - - 7,283 a) land 2,726 - - 3,183 2,720 - - 3,195 b) buildings 2,305 - - 4,058 2,535 - - 4,088
2. Assets purchased under ------finance leases a) land ------b) buildings ------
Total 5,031 - - 7,241 5,255 - - 7,283 of which: obtained through enforcement of guarantees 1,018 1,018 ------received
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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8.6 Tangible assets used in operations: annual changes
Electronic Land Buildings Furniture Other Total equipment
A. Gross opening balance 4,917 24,987 17,734 105,132 45,914 198,684 A.1 Total net reductions in value - (9,651) (16,602) (89,735) (41,183) (157,171) A.2 Net opening balance 4,917 15,336 1,132 15,397 4,731 41,513 B. Increases: - 59 360 7,270 2,109 9,798 B.1 Purchases - 59 360 7,270 2,107 9,796 B.2 Capitalised improvement ------B.3 Writebacks ------
B.4 Increases in fair value charged to ------a) shareholders’ equity ------b) income statement ------B.5 Positive exchange differences ------B.6 Transfers from properties held for ------investment B.7 Other changes - - - - 2 2 C. Decreases: 16 791 319 16,851 1,458 19,435 C.1 Sales 16 - - - 1 17 C.2 Depreciation - 748 265 1,643 1,302 3,958
C.3 Impairment losses charged to ------a) shareholders’ equity ------b) income statement ------C.4 Reductions in fair value charged ------to a) shareholders’ equity ------b) income statement ------C.5 Negative exchange differences - - 2 3 3 8 C.6 Transfers to: - - 48 15,166 136 15,350 a) property, plant and equipment held ------for investment b) non-current assets and asset - - 48 15,166 136 15,350 groups held for sale C.7 Other changes - 43 4 39 16 102 D. Net closing balance 4,901 14,604 1,173 5,816 5,382 31,876 D.1 Total net reductions in value - (10,400) (16,827) (60,679) (38,430) (126,336) D.2 Gross closing balance 4,901 25,004 18,000 66,495 43,812 158-.212 E. Carried at cost ------
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8.7 Tangible assets held for investment: annual changes
Total
Land Buildings A. Opening balance 2,720 2,536 B. Increases 13 16 B.1 Purchases 13 16 B.2 Capitalised improvement expenses - - B.3 Increases in fair value - - B.4 Writebacks - - B.5 Positive exchange differences - - B.6 Transfers from buildings for business purposes - - B.7 Other changes - - C. Decreases 7 246 C.1 Sales 7 12 C.2 Depreciation - 234 C.3 Reductions in fair value - - C.4 Impairment losses - - C.5 Negative exchange differences - - C.6 Transfers to: - - a) buildings for business purposes - - b) non-current assets and asset groups held for sale - - C.7 Other changes - - D. Closing balance (2,726) (2,305) E. Carried at fair value 3,185 4,063
Section 9 – Intangible assets - Item 90
9.1 Intangible assets: breakdown by type of asset
Total Total 31/12/2018 31/12/2017 Asset/Amount Defined Indefinite Defined Indefinite duration duration duration duration
A.1 Goodwill X 12,992 X 13,181
A.2 Other intangible assets 42,895 - 41,417 -
A.2.1 Assets carried at cost 42,895 - 41,417 - a) Intangible assets generated internally 8,846 - 8,626 - b) Other assets 34,049 - 32,791 -
A.2.2 Assets carried at fair value - - - - a) Intangible assets generated internally - - - - b) Other assets - - - -
Total 42,895 12,992 41,417 13,181
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9.2 Intangible assets: annual changes
Other intangible Other intangible assets: internally assets: other Goodwill Total generated
DEF INDEF DEF INDEF
A. Opening balance 13,531 22,560 - 180,551 - 216,642 A.1 Total net reductions in value (350) (13,934) - (147,760) - (162,044) A.2 Net opening balance 13,181 8,626 - 32,791 - 54,598 B. Increases - 3,663 - 17,332 - 20,995 B.1 Purchases - 3,663 - 17,332 - 20,995 B.2 Increases in internal intangible assets X - - - - - B.3 Writebacks X - - - - - B.4 Increases in fair value ------at shareholders’ equity X ------to income statement X - - - - - B.5 Positive exchange differences ------B.6 Other changes ------C. Decreases 189 3,443 - 16,074 - 19,706 C.1 Sales ------C.2 Value adjustments 189 3,161 - 9,985 - 13,335 - Amortisation/depreciation X 3,161 - 9,985 - 13,146 - Write-downs 189 - - - - 189 + shareholders’ equity X - - - - - + income statement 189 - - - - 189 C.3 Reductions in fair value: ------at shareholders’ equity X ------to income statement X - - - - - C.4 Transfers to non-current assets held for - 282 - 5,871 - 6,153 sale C.5 Negative exchange differences - - - 2 - 2 C.6 Other changes - - - 216 - 216 D. Net closing balance 12,992 8,846 - 34,049 - 55,887 D.1 Total net writedowns (189) (16,558) - (142,488) - (159,235) E. Gross closing balance 13,181 25,404 - 176,537 - 215,122 F. Carried at cost ------
Key: DEF = defined duration INDEF= indefinite duration
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9.3 Intangible assets: other information International Accounting Standards 36 (“IAS 36”) establishes the accounting and information principles for the financial statements relative to impairment of certain types of assets, including goodwill, illustrating the principles that a company must follow to ensure that their assets are registered in the financial statements (carrying value) at a value that does not exceed the recoverable value. On the basis of that required under IAS 36, it is necessary to compare the carrying value of the goodwill with its recoverable value each time there is an indication that the asset may have been subject to impairment and, in any case, at least once per year, at the time the financial statements are prepared (Impairment Test). The recoverable value of the goodwill is estimated in reference to the business units (Cash Generating Unit - CGU) in as much as the goodwill is not able to produce cash flow in an autonomous manner. The CGU is the smallest identifiable group of assets able to generate financial inflows independent of incoming financial flows generated by other assets or groups of assets for which the Group has independent detection of the results through the management reporting systems. Below are indicated, with the aid of an appropriate summary table, the following: - the CGUs identified and hence subjected to impairment tests with the relative goodwill allocated; - the calculation methods used and the results of the impairment tests for each CGU; - the description of the methods used; - the elements used to calculate the recoverable value for each CGU; - the sensitivity analysis performed; - the conclusions obtained.
Entity subjected to impairment test and relative goodwill allocated (figures in thousands of euro)
Goodwill allocated (before any writedowns at Company CGU end of year)
Milan branch, Via Gonzaga(1) CGU 1 542
former Cram branches (2) CGU 2 3,001
S.Michele and Fasano branches (3) CGU 3 1,384
Branches formerly Banca Generoso Andria (4) CGU 4 8,066
Total 12,993
(1)The entity subject to impairment test is the branch of Milan, Via Gonzaga, purchased by the Banco di Chiavari e della Riviera in 1999. (2)The entity subject to impairment test is the group of branches purchased by the former-CRA Monreale in 1997. (3)The entity subject to impairment test is the group of branches purchased by Credito Cooperativo di Ostuni in 2000. (4)The entity subject to impairment test is the group of branches purchased by the former-Banca Generoso Andria in 2001.
The accounting standards of reference state that the impairment test must be carried out comparing the book value of the CGU with its recoverable value. If this value is found to be less than the book value, a value adjustment must be recognised. The recoverable value of the CGU is the greater of its fair value net of selling costs and its value in use.
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Below is a list of the CGU that were analysed and, on the side, the recoverable value calculation methods used and the results of the impairment test:
Impairment test: CGU subject to further analysis
Recoverable CGU Method of calculation used Result of impairment test value
Dividend discount model (excess capital CGU 1 Value in use The impairment test detected no loss in value version)
Dividend discount model (excess capital CGU 2 Value in use The impairment test detected no loss in value version)
Dividend discount model (excess capital CGU 3 Value in use The impairment test detected no loss in value (1) version)
Dividend discount model (excess capital CGU 4 Value in use The impairment test detected no loss in value version)
(1) At the midway point, the impairment rest led to a writedown totalling around € 189,000.
Method used
The Value in use is defined as the present value of future cash flows expected to derive from an asset. The model used to determine the value in use is DDM (dividend discount model), to discount back distributable income flows after meeting the prescribed minimum capital requirement (excess capital).
The estimate of value in use incorporates the following elements: estimation of future cash flows the company expects deriving from continuous use of the asset and its final disposal, calculated with reference to the most recent budget/plans relative to the CGU and cash flow projections after the period of the plan, estimated using a stable growth rate (g), in line with the forecast inflation rate trend (2%);
discount rate (Ke): calculated according to the Capital Asset Pricing Model (CAPM). Below is the formula used: Ke = Rf + Beta * (Rm - Rf), where:
- Rf is the risk-free rate determined using the average return on ten-year BTPs during the course of 2018. The value used was 2.59%;
- Rm - RF is the premium for market risk, given by the difference between the yield of a diversified portfolio made up of all risky investments available in the market and the yield of a risk-free security. The value used was 5.61%;
- Beta is the ratio which expresses the amount of systematic risk for an investment, that is the trend for the returns from an asset to change as a consequence of market variations. The value used was 1.05.
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capitalisation requirement for the purposes of estimating distributable cash flows, defined with reference to that established in the regulatory provisions.
Future cash flows were determined by using three-year plans for each CGU. These plans were prepared using reasonable and consistent preconditions representing the best estimate that the corporate management could make within the range of possible economic conditions that may occur during the useful life of each entity. The table below shows the elements used for calculating the recoverable amount:
CGU: elements used to calculate recoverable value
CGU Basic assumptions Method of determination Note
Economic and balance Three-year plan (2019-2021) - Forecast figures consider gradual recovery in sheet variables profitability of retail bank business to which the CGUs CGU 1 Estimated using the Capital Asset belong, mainly deriving from an increase in revenues CGU 2 Discount rate Pricing Model (CAPM) from services and a recovery in net interest income CGU 3 associated with the expected increase in market rates CGU 4 Profitability beyond the Constant annual growth rate at - The discount rate used was 8.47%, with a Beta of forecast period 2% 1.05
Sensitivity analysis Since the value in use is determined by using estimates and assumptions that may contain some level of uncertainty, sensitivity analyses to verify the sensitivity of the results obtained to changes in the parameters and in the underlying hypotheses were carried out, as required by the IFRS. In particular, the impact on the value in use of an increase in discounting rates and a decrease in the growth rate for terminal value purposes was verified. The table below shows the sensitivity of the value in use of the various CGU to the increase/decrease in the discount rate or growth rate “g” to +/- 25 bps.
Sensitivity analysis
Change in discount rate Change in profit growth rate
CGU % sensitivity of the value in % sensitivity of the value in Change considered Change considered use use
CGU 1 + 25 b.p. -4.76% - 25 b.p. -4.0%
CGU 2 + 25 b.p. -9.12% - 25 b.p. -7.8%
CGU 3 + 25 b.p. -9.13% - 25 b.p. -7.6%
CGU 4 + 25 b.p. -6.91% - 25 b.p. -5.8%
In addition, analyses aimed at highlighting the value limits beyond which impairment testing of the CGU in question would require recognition of a writedown. To this end the table below illustrates the “g” rate and the discount rate that would lead, assuming the same cash flows to be discounted, to values in use that are aligned to the book values.
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Sensitivity analysis
CGU Discount rate “G” rate CGU 1 N.S. (> 25%) N.S. (<-25%)
CGU 2 9.0% 1.4%
CGU 3 8.8% 1.6%
CGU 4 8.9% 1.5%
Conclusions The analysis done indicates no writedowns are required on the carrying value of the goodwill with reference to Banca Sella branches. The sensitivity analysis also revealed no indications of reduction in value.
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Section 10 – Tax assets and liabilities – Item 100 of the assets and
60 of the liabilities
10.1 Deferred tax assets: breakdown
IRES IRAP OTHER 31/12/2018 31/12/2017
- Writedowns on loans 91,109 8,267 - 99,376 99,376 - Provisions for other risks and charges 3,686 282 - 3,968 7,323 - Depreciation and valuation, tangible assets 2,049 123 105 2,277 2,167 - Other administrative expenses 132 - - 132 154 - Personnel expenses 725 - 231 956 772 - Collective measurements, guarantees and 934 109 - 1,043 278 commitments to disburse funds - Writedowns on loans to customers and debt securities - amounts deductible in tenths IFRS 9 16,682 3,360 - 20,042 - Law 145/18 - Financial assets and liabilities obligatorily 27 5 - 32 - measured at FV - Goodwill and costs related to purchase of 288 58 - 346 346 company branch - Measurement of financial assets measured at - - - - 35 fair value through other comprehensive income - Consolidated goodwill release 43 9 - 52 52 - Additional IRES tax losses - transformable to 53 - - 53 119 tax credits pursuant to Law 214/11 - Value of negative production IRAP transformable to tax credits pursuant to Law - 8 - 8 121 214/11 - Other 2,286 380 50 2,716 1,029
Total deferred tax assets (charged to income 118,014 12,601 386 131,001 111,772 statement)
Depreciation and valuation of properties 1,525 307 - 1,832 1,832 Measurement of financial assets measured at 2,560 517 - 3,077 34 fair value through other comprehensive income
Total deferred tax assets (charged to 4,085 824 - 4,909 1,866 shareholders’ equity)
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10.2 Deferred tax liabilities: breakdown
IRES IRAP OTHER 31/12/2018 31/12/2017
Gain on sale of financial assets available for 312 63 - 375 - sale
Different calculation of amortisation of tangible 449 90 - 539 540 assets Goodwill 2,932 590 - 3,522 3,293
Other liabilities 612 123 - 735 114
Total deferred taxes (charged to Income 4,305 866 - 5,171 3,947 Statement)
Measurement of equity and debt securities at 173 320 - 493 1,787 fair value through other comprehensive income
Depreciation and valuation of properties 746 150 - 896 896 Other liabilities - - - - -
Total deferred taxes (charged to 919 470 - 1,389 2,683 Shareholders' Equity)
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10.3 Changes in deferred tax assets (charged to income statement)
Total Total 31/12/2018 31/12/2017
Initial balance 111,772 120,835 Change in initial balance 13,080 - 1. Opening amount 124,852 120,835 2. Increases 23,569 6,172 2.1 Prepaid taxes during the year 23,559 6,172 a) relating to previous years 69 36 b) due to changes in accounting policies - - c) write-backs - - d) other 23,490 6,136 2.2 New taxes or increases in tax rates - - 2.3 Other increases 10 - 3. Decreases 17,420 15,235 3.1 Prepaid taxes cancelled during the year 17,129 15,210 a) reversals 17,033 14,904 b) writedowns for unrecoverable items 96 234 c) due to changes in accounting criteria - - d) other - 72 3.2 Reductions in tax rates - - 3.3 Other decreases: 291 25 a) change in tax credits as per Italian Law 214/2011 227 - b) other 64 25 4. Closing amount 131,001 111,772
The significant increase in deferred tax assets is attributable, for around € 20 million, to the provisions in the 2019 budget law (Italian Law 145 of 30 December 2018) which, under Article 1, paragraphs 1067-1069, establish that income components deriving from adoption of the loan loss recognition model with regards to customers, as defined in paragraph 5.5 of IFRS 9, recognised in the balance sheet at first-time adoption are deductible for IRES and IRAP purposes for (i) 10% of their amount during the tax period of first-time adoption (2018) and (ii) the remaining 90%, in equal portions during the nine subsequent tax periods (2019- 2027).
In compliance with IAS 12, the amount of prepaid tax assets must be tested to determine whether there is a qualified probability of achieving their recovery, hence justifying their recognition and continuing appearance in the balance sheet (“probability test”).
The processing done showed a forecast future taxable base that is more than able to absorb the tax assets recognised in the present balance sheet, also taking into account that most of the prepaid tax assets refer to Italian Law 214 of 2011 and hence if necessary can be converted into tax credits (see table 13.3-bis below and the relative comment).
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10.3-bis Changes in prepaid tax pursuant to Italian Law no. 214/2011
Total Total 31/12/2018 31/12/2017
Initial balance 100,015 108,912 Change in initial balance - - 1. Opening amount 100,015 108,912 2. Increases 60 241 3. Decreases 240 9,138 3.1 Reversals - 9,138 3.2 Transformation into tax credits 227 - a) deriving from period losses - - b) deriving from tax losses 227 - 3.3 Other decreases 13 - 4. Closing amount 99,835 100,015
Italian Law no. 225 of 2010, Art. 2, paragraphs from 55 to 56-bis, provided for the convertibility into tax credits of prepaid taxes recognised in the financial statements against writedowns of loans and goodwill, in particular when the individual financial statements show a loss for the year. This convertibility introduced an additional and supplementary method of recovery, which is capable of ensuring the recovery of these types of prepaid taxes in every situation, irrespective of the future profitability of the company. This convertibility is therefore, in every case, a sufficient condition for the recognition and maintenance in the financial statements of these kinds of prepaid taxes. The above arrangement was also confirmed in the joint Bank of Italy, CONSOB and ISVAP Document no. 5 of 15 May 2012 (issued in the context of the Coordination Forum on Application of the IASs/IFRSs), in relation to the “Accounting Treatment of Deferred Tax Assets deriving from Italian Law 214/2011”.
10.4 Changes in deferred taxes (charged to income statement)
Total Total
31/12/2018 31/12/2017
Initial balance 3,947 5,413
Change in initial balance 457 - 1. Opening amount 4,404 5,413 2. Increases 1,443 301 2.1 Deferred taxes recognized during the year 1,443 301 a) relating to previous years - - b) due to changes in accounting policies - - c) others 1,443 301 2.2 New taxes or increases in tax rates - - 2.3 Other increases - - 3. Decreases 676 1,767 3.1 Deferred taxes cancelled during the year 676 1,767 a) reversals 676 1,748 b) due to changes in accounting policies - - c) others - 18 3.2 Reductions in tax rates - - 3.3 Other decreases - 1 4. Closing amount 5,171 3,947
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10.5 Changes in deferred tax assets (charged to shareholders’ equity)
Total Total 31/12/2018 31/12/2017
Opening balance 1,866 1,900 Change in initial balances 34 - 1. Opening amount 1,832 1,900 2. Increases 3,078 - 2.1 Prepaid taxes during the year 3,078 - a) relating to previous years - - b) due to changes in accounting policies - - c) others 3,078 - 2.2 New taxes or increases in tax rates - - 2.3 Other increases - - 3. Decreases 1 34 3.1 Prepaid taxes cancelled during the year 1 34 a) reversals 1 - b) writedowns for unrecoverable items - - c) due to changes in accounting policies - - d) other - - 3.2 Reductions in tax rates - - 3.3 Other decreases - - 4. Closing amount 4,909 1,866
10.6 Changes in deferred tax liabilities (charged to shareholders’ equity)
Total Total 31/12/2018 31/12/2017
Opening balance 2,683 3,582 Change in initial balances 96 - 1. Opening amount 2,779 321 2. Increases 103 321 2.1 Deferred taxes recognized during the year 103 321 a) relating to previous years - - b) due to changes in accounting policies - - c) others 103 321 2.2 New taxes or increases in tax rates - - 2.3 Other increases - - 3. Decreases 1,493 1,220 3.1 Deferred taxes cancelled during the year 1,493 1,220 a) reversals 1,493 1,220 b) due to changes in accounting policies - - c) others - - 3.2 Reductions in tax rates - - 3.3 Other decreases - - 4. Closing amount 1,389 2,683
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Section 11 - Non-current assets and groups of assets held for sale and associated liabilities - Item 110 in Assets and Item 70 in Liabilities
11.1 Non-currents assets and groups of assets being divested: breakdown by type of asset
31/12/2018 31/12/2017
A. Assets held for sale
A.1 Financial assets - -
A.2 Equity investments - -
A.3 Tangible assets - -
of which: obtained through enforcement of guarantees received - -
A.4 Intangible assets - -
A.5 Other non-current assets - -
Total A - -
of which measured at cost - -
of which measured at fair value level 1 - -
of which measured at fair value level 2 - -
of which measured at fair value level 3 - -
B. Discontinued assets
B.1 Financial assets measured at fair value through profit and loss - -
- Financial assets held for trading - -
- Financial assets measured at fair value - -
- Other financial assets obligatorily measured at fair value - -
B.2 Financial assets measured at fair value through other - - comprehensive income
B.3 Financial assets measured at amortised cost - -
B.4 Equity investments - -
B.5 Tangible assets 11,429 -
of which: obtained through enforcement of guarantees received - -
B.6 Intangible assets 4,180 -
B.7 Other assets 1,523 -
Total B 17,132 -
of which measured at cost 17,132 -
of which measured at fair value level 1 - -
of which measured at fair value level 2 - -
of which measured at fair value level 3 - -
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C. Liabilities associated with assets held for sale
C.1 Debts - -
C.2 Securities - -
C.3 Other liabilities - -
Total C - -
of which measured at cost - -
of which measured at fair value level 1 - -
of which measured at fair value level 2 - -
of which measured at fair value level 3 - -
D. Liabilities associated with discontinued assets
D.1 Financial liabilities measured at amortised cost - - D.2 Financial liabilities held for trading - -
D.3 Financial liabilities measured at fair value - -
D.4 Provisions - -
D.5 Other liabilities 7,285 -
Total D 7,285 -
of which measured at cost 7,285 -
of which measured at fair value level 1 - -
of which measured at fair value level 2 - -
of which measured at fair value level 3 - -
BANCA SELLA | 165 REPORT AND FINANCIAL STATEMENTS 201
Section 12 – Other assets – Item 120
12.1 Other assets: breakdown
Total Total 31/12/2018 31/12/2017 Balance of non-cash portfolio items 785 - Customers for securities and currency purchases not yet charged 17 21 Cheques - own current accounts 85 1,506 Value of trading in securities and derivatives in the course of settlement 35,852 - Credits for withholding tax 49,604 50,022 Volumes and stock 1,250 756 Debt for disputed items not deriving from lending transactions 853 859 Improvements to leased third-party properties 5,879 5,034 Accrued income - 249 Prepaid expenses 1,196 2,669 Payment orders to sundry others being debited 56,120 62,270 Current account cheques drawn against third parties 36,428 24,675 Regional contributions on employee work contracts 172 239 Fees, commissions and other income being debited 39,711 41,033 Advances and receivables/suppliers 3,461 4,244 Charges/invoices to be issued to customers 3,013 5,033 Provisional payments guaranteeing pending judgements 188 188 Residual items 10,345 9,973 Total 244,959 208,771
BANCA SELLA | 166
Part B
Information on the balance sheet Liabilities
At 31 December 2018, the tables in the Notes were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the tables dictated by the above circular were duly modified through the omission of the comparison column, and to facilitate comparison with the previous year, tables prepared in line with that envisaged under IAS 39 were added and shown in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Any opening balances found in the tables in the Notes are those deriving from first time application of accounting standard IFRS 9. Again pursuant to the stated circular, the tables in the Notes were prepared in thousands of euro, unless otherwise indicated.
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Section 1 - Financial liabilities measured at amortised cost –
Item 10
1.1 Financial liabilities measured at amortised cost: product breakdown of amounts due to banks
Total 31/12/2018 Type of transaction/Value Fair Value BV L1 L2 L3
1. Due to central banks - X X X
2. Due to banks 720,366 X X X
2.1 Current accounts and demand deposits 16,262 X X X
2.2 Time deposits 684,058 X X X
2.3 Loans and advances 20,024 X X X
2.3.1 Repurchase agreements - X X X
2.3.2 Others 20,024 X X X
2.4 Liabilities for repurchase commitments of own equity instruments - X X X
2.5 Other payables 22 X X X
Total 720,366 - - 720,366
Key: BV = book value L1 = Level 1 L2 = Level 2 L3 = Level 3
1.1 Due to banks: breakdown
Type of transaction/Value 31/12/2017
1. Due to central banks - 2. Due to banks 738,902 2.1 Current accounts and demand deposits 23,985 2.2 Time deposits 686,857 2.3 Loans and advances 27,012 2.3.1 Repurchase agreements - 2.3.2 Others 27,012 2.4 Liabilities for repurchase commitments of own equity instruments - 2.5 Other payables 1,048 Total 738,902 Fair value - level 1 - Fair value - level 2 - Fair value - level 3 738,902 Total fair value 738,902
BANCA SELLA | 168 REPORT AND FINANCIAL STATEMENTS 201
1.2 Financial liabilities measured at amortised cost: product breakdown of amounts due to customers
Total 31/12/2018 Type of transaction/Value Fair Value BV L1 L2 L3
1. Current accounts and demand deposits 8,893,353 X X X
2. Time deposits 448,079 X X X
3. Loans and advances 39,282 X X X
3.1 Repurchase agreements 4,373 X X X
3.2 Others 34,909 X X X
4. Liabilities for repurchase commitments of own equity instruments - X X X
5. Other payables 234,557 X X X
Total 9,615,271 - - 9,615,271
Key: BV = book value L1 = Level 1 L2 = Level 2 L3 = Level 3
2.1 Due to customers: breakdown
Type of transaction/Value 31/12/2017
1. Current accounts and demand deposits 8,520,910 2. Time deposits 571,641 3. Loans and advances 54,620 3.1 Repurchase agreements 6,783 3.2 Others 47,837 4. Liabilities for repurchase commitments of own equity instruments - 5. Other payables 227,722 Total 9,374,893 Fair value - level 1 - Fair value - level 2 - Fair value - level 3 9,374,893 Fair value 9,374,893
BANCA SELLA | 169 REPORT AND FINANCIAL STATEMENTS 201
1.3 Financial liabilities measured at amortised cost: product breakdown of securities in issue
31/12/2018 Total Fair Value BV L1 L2 L3
A. Securities
1. Bonds 344,878 98,193 242,792 -
1.1 structured - - - -
1.2 others 344,878 98,193 242,792 -
2. Other securities - - - -
2.1 structured - - - -
2.2 others - - - -
Total 344,878 98,193 242,792 -
Key: BV = book value L1 = Level 1 L2 = Level 2 L3 = Level 3
3.1 Securities issued: breakdown
Total 31/12/2017 Type of securities / Values Fair Value Book Value Level 1 Level 2 Level 3
A. Securities 1. Bonds 410,564 105,856 316,968 - 1.1 structured - - - - 1.2 others 410,564 105,856 316,968 - 2. Other securities - - - - 2.1 structured - - - - 2.2 other - - - - Total 410,564 105,856 316,968 -
BANCA SELLA | 170 REPORT AND FINANCIAL STATEMENTS 201
1.4 Breakdown: subordinated debts/securities
31/12/2018 31/12/2017
A.1 Subordinated debts - -
- banks - -
- customers - -
A.1 Non-subordinated debts - -
- banks - -
- customers 10,335,637 10,113,795
B.1 Subordinated securities 318,888 -
- banks - -
- customers 318,888 -
B.1 Non-subordinated securities 25,990 -
- banks - -
- customers 25,990 -
Total 344,878 -
BANCA SELLA | 171 REPORT AND FINANCIAL STATEMENTS 201
Section 2 - Financial liabilities held for trading - Item 20
2.1 Financial liabilities held for trading: product breakdown
Total 31/12/2018
Type of transaction/Value Fair Value NV Fair Value * L1 L2 L3
A. Cash liabilities 1. Due to banks - - - - - 2. Due to customers - - - - - 3. Debt securities - - - - 3.1 Bonds - - - - 3.1.1 Structured - - - - X 3.1.2 Other bonds - - - - X 3.2 Other securities - - - - X 3.2.1 Structured - - - - X 3.2.2 Others - - - - X Total A - - - - - B. Derivative instruments 1. Financial derivatives X - 11,500 - X 1.1 Held for trading X - 11,500 - X 1.2 linked to fair value option X - - - X 1.3 Others X - - - X 2. Credit derivatives X - - - X 2.1 Held for trading X - - - X 2.2 linked to fair value option X - - - X 2.3 Others X - - - X Total B X - 11,500 - X Total (A+B) X - 11,500 - X
Key: NV = nominal or notional value L1 = Level 1 L2 = Level 2 L3 = Level 3 Fair value* = fair value calculated excluding changes in value due to changes in credit worthiness of the issuer after the issue date.
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4.1 Financial liabilities held for trading: product breakdown
Total 31/12/2017 Type of transaction/Value FV NV FV* L1 L2 L3 A. Cash liabilities 1. Due to banks - - - - - 2. Due to customers - - - - - 3. Debt securities - - - - - 3.1 Bonds - - - - - 3.1.1 Structured - - - - x 3.1.2 Other bonds - - - - x 3.2 Other securities - - - - - 3.2.1 Structured - - - - x 3.2.2 Others - - - - x Total A - - - - - B. Derivative instruments 1. Financial derivatives x - 16,033 - x 1.1 Held for trading x - 16,033 - x 1.2 linked to fair value option x - - - x 1.3 Others x - - - x 2. Credit derivatives x - - - x 2.1 Held for trading x - - - x 2.2 linked to fair value option x - - - x 2.3 Others x - - - x Total B x - 16,033 - x Total (A+B) x - 16,033 - x Key FV = fair value FV* = fair value calculated excluding changes in value due to changes in credit worthiness of the issuer after the issue date NV = nominal or notional value L1 = Level 1 L2 = Level 2 L3 = Level 3
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Section 4 - Hedging derivatives - Item 40
4.1 Hedging derivatives: breakdown by hedge type and hierarchy level
NV Fair value 31/12/2018 NV Fair value 31/12/2017
31/12/2018 L1 L2 L3 31/12/2017 L1 L2 L3
A) Financial derivatives 348,072 - 81,563 - 379,561 - 90,493 -
1) Fair value 348,072 - 81,563 - 379,561 - 90,493 -
2) Cash flows ------
3) Foreign investments ------
B. Credit derivatives ------
1) Fair value ------
2) Cash flows ------
Total 348,072 - 81,563 - 379,561 - 90,493 -
Key NV = nominal or notional value
L1 = Level 1
L2 = Level 2
L3 = Level 3
BANCA SELLA | 174 REPORT AND FINANCIAL STATEMENTS 201
4.2 Hedging derivatives: breakdown by hedged portfolio and type of hedge
Fair Value Cash Micro
Transaction/Type Debt Equity Foreign of hedging securities securities Currencies investments
Receivables Commodities Other Micro and and and gold Macro Macro interest equity rates indices 1. Financial assets measured at fair value through - - - - X X X - X X other comprehensive income
2. Financial assets measured at - X - - X X X - X X amortised cost
3. Portfolio X X X X X X 81,563 X - X 4. Other ------X - X - transactions Total assets ------81,563 - - - 1. Financial - X - - - - X - X X liabilities 2. Portfolio X X X X X X - X - X
Total liabilities ------1. Expected X X X X X X X - X X transactions 2. Portfolio of financial assets X X X X X X - X - - and liabilities
BANCA SELLA | 175 REPORT AND FINANCIAL STATEMENTS 201
Section 6 – Tax liabilities – Item 60 See section 10 of the assets.
Section 7 – Liabilities associated with assets held for sale – Item
70 See section 11 of the assets.
Section 8 – Other liabilities – Item 80
8.1 Other liabilities: breakdown
Total Total 31/12/2018 31/12/2017
Amounts available to customers and banks for ongoing operations 2,749 1,521 Amounts payable to tax authorities on behalf of third parties 22,020 30,684 Accrued liabilities 2 - Deferred income 1,706 1,388 Daily margins on derivatives contracts traded on regulated markets awaiting 25 - settlement Bank transfers and other payments due 143,522 166,255 Due from suppliers and fees to be charged to sundry 33,664 30,331 Debts for personnel expenses 21,459 17,098 Fees payable to statutory auditors and directors 506 Contributions payable to sundry entities 92 8,134 Advances and deposits from customers 519 Debts to collective valuations of guarantees and commitments - 1,011 Residual items 2,802 4,431 Total 229,066 260,853
BANCA SELLA | 176 REPORT AND FINANCIAL STATEMENTS 201
Section 9 - Provision for employee severance pay - Item 90
9.1 Employee severance pay: annual changes
Total Total 31/12/2018 31/12/2017 A. Opening balance 29,583 33,097 B. Increases 852 555 B.1 Provisions for the year 519 446 B.2 Other changes 333 109 C. Decreases (6,363) (4,069) C.1 Liquidations paid (802) (3,304) C.2 Other changes (5,561) (765) D. Closing balance 24,072 29,583 Total 24,072 29,583
9.2 Other information As required under IAS 19R, for purposes associated with disclosure, sensitive analysis was done regarding changes in the main parameters used in actuarial assessment as well as a projection of future cash flows. Additionally, the duration of future cash flows associated with the liability been evaluated is reported, as well as the breakdown of the defined benefit cost and remeasurement of the items of which it is composed. Specifically, paragraph 57 of IAS 19R establishes that accounting for a defined benefit obligation involves: "using an actuarial technique, the projected unit cost method, to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the current and prior periods";
"to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will affect the cost of the benefit";
“discounting that benefit in order to determine the present value of the defined benefit obligation and the current service cost." The projected unit cost method or the benefit/years of work method is indicated below with the abbreviation PUC. The model adopted can be summarised as a series of simulation methods applied to each employee of the company, aimed at identifying future expenses, which will arise due to the employee leaving due to various causes (death, illness, withdrawal, etc.) in each of the subsequent years, as of the measurement date. The IAS value of the company expense to be included in the financial statements corresponds with the current value of said future expenses. Obviously, this discounting is done not only from a financial point of view but also from a demographic one, to take into account the probability for each employee of them
BANCA SELLA | 177 REPORT AND FINANCIAL STATEMENTS 201
leaving the company prior to the natural maturation of their right to receive the benefit (that is prior to reaching the age of old age pensioning). In summary, making use of the demographic and economic data for the group, the model operates at the individual level, with the following processing stages: determination - for each future year until the right to the benefit is achieved - of severance indemnity (TFR) amounts due upon the occurrence of various events such as death, illness, withdrawal and survival;
estimation of the probabilistic values of the amounts pursuant to point a) making use of appropriate technical foundations of a demographic (for the events indicated above) and economic nature (for inflation and salary increase);
calculation of the current values of the values pursuant to the previous point (on the basis of an appropriate financial market rate) and any other indicators functional to objective evaluations made by the model, which also make it possible to establish congruence and consistency. The current value for each employee obtained in this matter is then rendered proportional to the years of service accrued as indicated in paragraph 68 of IAS 19R (PUC method). Finally, the sum indicates the total result for the company as a whole.
BANCA SELLA | 178 REPORT AND FINANCIAL STATEMENTS 201
Section 10 - Provisions for risks and charges - Item 100
10.1 Provisions for risks and charges: breakdown
Total Item/Value 31/12/2018
1.Provisions for credit risk relative to financial commitments and guarantees 2,243
2.Provisions for other commitments and guarantees given 1,291
3. Company pension funds - 4. Other provisions for risks and charges 13,163 4.1 Legal and tax disputes 6,574 4.2 Personnel expenses 4,086 4.3 Others 2,503
Total 16,697
12.1 Provisions for risks and charges: breakdown
Total Item/Value 31/12/2017
1. Company pension funds - 2. Other provisions for risks and charges 26,122 2.1 legal disputes and customer complaints 8,741 2.2 personnel expenses 2,518 2.3 operational risks 644 2.4 supplementary customer allowance and goodwill compensation for termination 340 of agency relationship 2.5 other 13,879 Total 26,122
A list is provided below of the most significant contingent liabilities – deriving from disputes and litigation of a fiscal nature – which the Bank has assessed as possible but not probable and with reference to which, therefore, no provisions have been set aside:
Banca Sella (former Banca Sella Sud Arditi Galati, merged by incorporation in 2011): assessment notice with findings regarding the deductibility for IRES purposes of value adjustments on loans. Period 2005. Total disputed amount (including taxes, interest and fines): approximately € 0.7 million. Amounts paid provisionally while judgement is pending: approximately € 0.2 million. Judgment of first instance in the Bank's favour. Judgment of second instance in the tax authority's favour: an appeal was filed with the Court of Cassation. This decision was also supported by an opinion supporting the Bank's actions issued by a major tax studio.
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10.2 Provisions for risks and charges: annual changes
Provisions for other Other provisions commitments Pension funds for risks and Total and guarantees charges given
Opening balance - - 26,122 26,122
Adjustment of initial balances 1,060 - - 1,060 A. Opening balance 1,060 - 26,122 27,182 B. Increases 546 - 6,412 6,958 B.1 Provisions for the year 546 - 6,300 6,846 B.2 Changes due to passing of time - - - -
B.3 Changes due to fluctuations in discount rate - - 1 1 B.4 Other changes - - 111 111 C. Decreases 315 - 19,371 19,686 C.1 Utilization in the period - - 19,361 19,361 C.2 Changes due to fluctuations in discount rate - - - - C.3 Other changes 315 - 10 325 D. Closing balance 1,291 - 13,163 14,454
10.3. Provisions for credit risk relative to financial commitments and guarantees given
Provisions for credit risk relative to financial commitments and guarantees given
Stage 1 Stage 2 Stage 3 Total
1. Commitments to disburse funds 1,849 106 136 2,091 2. Financial guarantees issued 141 6 5 152 Total 1,990 112 141 2,243
BANCA SELLA | 180 REPORT AND FINANCIAL STATEMENTS 201
Section 11 – Redeemable shares – Item 120 11.1 Redeemable shares: breakdown This item indicates shares relative to which the issuer has taken on obligations relative to the shareholder of redemption/repurchasing at a pre-set price. Banca Sella has not taken on any such obligations.
Section 12 - Corporate Equity - Items 110, 130, 140, 150, 160, 170 and
180
12.1 "Capital” and “Treasury shares": breakdown
Total Total 31/12/2018 31/12/2017
A. Capital
A.1 Ordinary shares 334,228 334,228
A.2 Savings shares - -
A.3 preference shares - -
A.4 Other shares - -
B. Treasury shares
B.1 Ordinary shares - -
B.2 Savings shares - -
B.3 preference shares - -
B.4 Other shares - -
BANCA SELLA | 181 REPORT AND FINANCIAL STATEMENTS 201
12.2 Capital - Number of shares: annual changes
Item/Type Ordinary Other
A. Total shares at start of period 668,456,168 -
- fully paid up 668,456,168 -
- not fully paid up - -
A.1 Treasury shares (-) - -
A.2 Shares outstanding: opening 668,456,168 -
B. Increases - -
B.1 New issues - -
- for payment: - - - business combinations - - - conversion of bonds - -
- exercise of warrants - -
- other - -
- free of charge: - -
- for employees - -
- for directors - -
- other - -
B.2 Sale of treasury shares - -
B.3 Other changes - -
C. Decreases - -
C.1 Cancellation - -
C.2 Purchase of treasury shares - -
C.3 Business sale transactions - -
C.4 Other changes - -
D. Shares outstanding: closing 668,456,168 -
D.1 Treasury shares (+) - - D.2 Total shares at end of period 668,456,168 - - fully paid up 668,456,168 -
- not fully paid up - -
BANCA SELLA | 182 REPORT AND FINANCIAL STATEMENTS 201
12.3 - other information
Total Total 31/12/2018 31/12/2017 Par value per share (zero if the shares have no nominal value) 0.5 0.5 - Fully paid up: Number 668,456,168 668,456,168 Value 334,228,084 334,228,084 Contracts in place for the sale of shares: Number of shares under contract - - Total value - -
Following the capital increase, note that the 105,263,158 shares subscribed all have "single votes", while the previous 563,193,010 shares were converted into "multiple vote" shares (3 votes per share).
At the end of the financial year, the share capital requirements due to the suspended tax regime were € 8,235 thousand, illustrated below: Restrictions deriving from the incorporation of Banca Sella Sud Arditi Galati made in 2011 of € 5,784 thousand, consisting of:
- revaluation reserve under law no. 266 of 2005, art. 1, paragraph 469: € 5,090 thousand; - revaluation reserve under law no. 413 of 1991: € 694 thousand Restrictions deriving from the incorporation of Banca Sella Nord Est Bovio Calderari made in 2012 of € 2,451 thousand, consisting of:
o Property revaluation reserve under Law no. 413 of 1991; € 1,457 thousand;
o Revaluation reserve under Law no. 72/83: € 62 thousand;
o Revaluation reserve under Law no. 576/75: € 28 thousand;
o Realignment reserve under Law no. 266 of 2005, art. 1, paragraph 469: € 904 thousand.
BANCA SELLA | 183 REPORT AND FINANCIAL STATEMENTS 201
12.4 Retained earnings: other information
of profits: 31/12/2018 31/12/2017
Legal Reserve 45,106 43,412 Statutory Reserve 109,304 106,481 Extraordinary reserve 70,622 68,499 Extraordinary unrestricted reserve 69,477 67,354 Extraordinary reserve restricted under the terms of Law 218/90 Art 7 1,145 1,145 Application reserve, IAS 8 (1,103) (1,102) IAS/IFRS adoption reserve (58,370) (1) Losses carried forward in application of IAS 8 (4,197) (4,197) Deficits from previous years (416) (416) Profits carried forward following adoption of IAS/IFRS - - Reserve for purchase of business units from Group companies (1,275) (1,275) Profits carried forward in application of IAS 8 70 70 Reserve from the transfer of business units to Group companies 267 267 Reserve for conferment from company division to Group companies 1,130 - Reserve from transfer of properties from Group companies 3,298 3,298 Total profit reserves 164,436 215,036
other reserves: 31/12/2018 31/12/2017
Reserve from transfer of business units from Group companies (63,380) (63,380) Group company merger surpluses 151 151 Reserve from the transfer of investments to Group companies 244 244 Reserve from the acquisition of business units from Group companies (70,765) (70,765) Total other reserves (133,750) (133,750)
The Bank does not hold, nor has it held, nor bought or sold during the period, any treasury shares or shares of the parent company Banca Sella Holding.
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Proposed allocation of profit
31/12/2018 31/12/2017
Profit for the year 25,145 14,116 to the Statutory reserve, pursuant to Articles of Association 5,029 2,823 to the Legal Reserve, pursuant to Articles of Association 3,017 1,694 to Shareholders dividends 0.0120 0.01108 number of shares 668,456,168 668,456,168 to the Fund for charity and sundry donations 70 70 the remainder to the Extraordinary reserve 9,007 2,123
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Breakdown of Reserves use (prepared pursuant to Article 2427, paragraph 7-bis of the Italian Civil Code)
Summary of utilisations in the three Amount Possibility of Proportion previous years utilization (*) available for To cover losses For other reasons distribution Capital 334,228 Equity reserves Share premium reserve 366,090 A - B - C 366,090 - - Profit reserves Legal reserve 45,106 A (1) - B - - - Statutory reserve 109,304 B - - - Extraordinary unrestricted reserve 69,477 A - B - C 69,477 - - Extraordinary reserve restricted under the terms of Law 218/90 Art 7 1,145 A - B - C(3) 1,145 - - Other profit reserves for realisation of equity securities 555 --- 555 - - Reserve from the transfer of business units to Group companies 267 --- 267 - - Reserve from application of IAS 8 (1,103) --- (1,103) - - Reserve for conferment from company division to Group companies 1,130 --- 1,130 Losses carried forward from application of IAS 8 (4,197) --- (4,197) - - Deficits from previous years (416) A - B - C (416) - - IAS/IFRS adoption reserve (58,370) A - B(2) - C(3) (58,370) - - Profits carried forward from application of IAS 8 70 A - B - C 70 - - Reserve for purchase of business units from Group companies (1,275) --- (1,275) - - Reserve from transfer of properties from Group companies 3,298 A - B - C 3,298 - - Valuation reserves
FVOCI valuation reserve pursuant to Legislative Decree 38/05, article 7, paragraph 2 (636) ---(5) - - - Valuation reserve: actuarial profit/losses in relation to defined benefit pension plans (see table for details) (5,401) \ (5,401) - - Other reserves Reserve from the transfer of investments to Group companies 244 A - B(2) - C(3) 244 - - Reserve from transfer of business units from Group companies -63,380 --- (63,380) - - Group company merger surpluses 151 A - B - C 151 - - Reserve from the acquisition of business units from Group companies (70,765) --- (70,765) - - Total 725,522 237,520 Proportion not available for distribution pursuant to article 2426, no. 5, Italian Civil Code - Remainder of proportion available for distribution 237,520
BANCA SELLA | 186 REPORT AND FINANCIAL STATEMENTS 201
Other information
1. Financial commitments and guarantees given (other than those measured at fair value)
Nominal value of financial commitments Total and guarantees given 31/12/2018
Stage 1 Stage 2 Stage 3
Commitments to disburse funds 3,278,506 20,900 9,203 3,308,609 a) Central banks - - - - b) Public administrations 36,938 - - 36,938 c) Banks 8,128 - - 8,128 d) Other financial companies 315,322 133 6 315,461 e) Non-financial companies 2,362,862 14,597 8,488 2,385,947 f) Households 555,256 6,170 709 562,135
Financial guarantees issued 45,077 122 245 45,444 a) Central banks - - - - b) Public administrations 156 - - 156 c) Banks 64 - - 64 d) Other financial companies 3,949 - - 3,949 e) Non-financial companies 36,565 104 209 36,878 f) Households 4,343 18 36 4,397
2. Other commitments and guarantees given
Nominal value Nominal value
Total Total
31/12/2018 31/12/2017
Other guarantees issued of which: non-performing 1,713 - a) Central banks - - b) Public administrations 8 - c) Banks 1,655 - d) Other financial companies 11,988 - e) Non-financial companies 158,930 - f) Households 18,322 - Other commitments of which: non-performing - - a) Central banks - - b) Public administrations - - c) Banks 8,512 - d) Other financial companies 16,312 - e) Non-financial companies - - f) Households - -
BANCA SELLA | 187 REPORT AND FINANCIAL STATEMENTS 201
1. Guarantees issued and Commitments
Amount Transactions 31/12/2017
1) Financial guarantees issued 34,816 a) Banks 64 b) Customers 34,752 2) Commercial guarantees issued 165,339 a) Banks 676 b) Customers 164,663 3) Irrevocable commitments to disburse funds 167,387 a) Banks 5,274 i) usage certain 5,274 ii) usage uncertain - b) Customers 162,113 i) usage certain 28,775 ii) usage uncertain 133,338 4) Commitments underlying credit derivatives: protection sales - 5) Assets used in guarantee of third-party obligations - 6) Other commitments - Total 367,542
3. Assets pledged as collateral against own liabilities and commitments
Amount Amount Portfolios 31/12/2018 31/12/2017
1. Financial assets measured at fair value through profit and loss - -
2. Financial assets measured at fair value through other comprehensive income 129,102 -
3. Financial assets measured at amortised cost 795,456 -
4. Tangible assets - - of which: tangible assets that constitute inventory - -
2. Assets pledged as collateral against own liabilities and commitments
Amount Portfolios 31/12/2017 1. Financial assets held for trading - 2. Financial assets carried at fair value - 3. Financial assets available for sale 622,506 4. Financial assets held to maturity 63,270 5. Due from banks 97,350 6. Due from customers 137,940 7. Tangible assets -
4. Disclosure on operating leases The Bank has no operating leases.
BANCA SELLA | 188 REPORT AND FINANCIAL STATEMENTS 201
5. Management and broking for third parties
Amount Amount Type of services 31/12/2018 31/12/2017
1. Orders executed on behalf of customers - - a) purchases - - 1. settled - - 2. not settled - - b) sales - - 1. settled - - 2. not settled - - 2. Individual portfolio management 1,181,071 1,590,688 3. Custody and administration of securities 22,343,659 21,179,824 a) third-party securities on deposit as custodian bank (exclusive of portfolios - - managed)
1. securities issued by the reporting bank - - 2. other securities - - b) third party securities on deposit (excluding portfolio management): other 9,915,110 9,463,487 1. securities issued by the reporting bank 180,232 234,485 2. other securities 9,734,878 9,229,002 c) third-party securities deposited with third parties 10,507,131 10,330,085 d) own securities deposited with third parties 1,921,418 1,386,252 4. Other transactions 99,947,020 83,478,113
The item Other transactions includes the volume of work of receiving and sending orders, which is divided as follows: - purchases: 50,802,090 thousand - sales: 49,144,929 thousand
6. Financial assets subject to netting in the balance sheet, or subject to framework netting agreements or similar
Related amounts not Net amount subject to netting in Net amount Net amount Net amount of financial balance sheet Gross of financial (f=c-d-e) (f=c-d-e) assets amount of liabilities Technical types shown in Cash financial offset in the the balance Financial deposits assets (a) balance sheet (c=a- instruments received as 31/12/2018 31/12/2017 sheet (b) b) (d) collateral (e)
1. Derivatives (7,473) - (7,473) (7,473) - - - 2. Repurchase ------agreements 3. Securities lending ------4. Other ------Total 31/12/2018 (7,473) - (7,473) (7,473) - - X Total 31/12/2017 8,704 - 8,704 8,704 - X -
BANCA SELLA | 189 REPORT AND FINANCIAL STATEMENTS 201
7. Financial liabilities subject to netting in the balance sheet or subject to framework netting agreements or similar
Related amounts not Net amount Net amount subject to netting in of financial Net amount Gross of financial balance sheet liabilities Net amount amount of assets (f=c-d-e) Technical types reported in Cash financial netted in the Financial the balance deposits liabilities (a) balance instruments sheet (c=a- made as 31/12/2018 31/12/2017 sheet (b) (d) b) collateral (e) 1. Derivatives 89,203 - 89,203 7,473 78,638 3,092 - 2. Repurchase ------3. Securities lending ------4. Other ------Total 31/12/2018 89,203 - 89,203 7,473 78,638 3,092 X Total 31/12/2017 101,983 - 101,983 8,704 93,279 X -
Within the derivatives item found in the previous tables, OTC contracts consisted of swap, options on rates and options on currencies. Rate swaps are evaluated according to the discounted cash flow (DCF) method, which is generally the market standard and uses the swap rate curve relative to the contact currency as the input data. This curve is periodically drawn from the curve published by the main info-providers (Bloomberg/Reuters) in the Bank. If the swap structure is more complex, and such as to prevent a reasonable certainty in the estimate of the contract value, a valuation of the contract is requested to the counterparty of the transaction. The rate options are only represented by cap and floor, and are evaluated according to the Black & Scholes model. This choice is based on the consideration that alternative models would present the problem of adjusting pricing parameters and would not provide significant improvement of the price estimate. Further elements supporting this choice are connected with the consideration that a wide amount of implicit volatility is reported by the main info-providers, together with the price of options themselves for standard maturity dates. Both “plain vanilla” and “exotic” exchange options (European or American barrier options) are evaluated according to the Black & Scholes model. The necessary volatility curves for the calculation of implicit volatility for each option as well as the market rate and exchange quotations used for contract valuations are taken from the main info-providers in the Bank (Bloomberg). In the case of exotic options structures that are more complex and do not allow reasonable certainty about the value of the contract, when possible a measurement algorithm is developed internally or an evaluation of the same is requested from a third party external to the transaction. These evaluations are part of the determination of the price together with the measurement provided by the counterpart in the transaction. Relative to exposure to OTC derivatives, quantification of the CVA correctives (credit value adjustment) for exposures receivable and DVA (debit value adjustment) for exposures payable is carried out for all contracts, with the exception of those covered by netting and collateralisation agreements (e.g. ISDA, CSA, etc.).
BANCA SELLA | 190 REPORT AND FINANCIAL STATEMENTS 201
Based on that established in IAS 32, paragraph 42: "An asset and a financial liability must be offset and the net balance shown in the balance sheet when and only when an entity: (a) currently has an exercisable right to offset for amounts recognised for accounting purposes; and (b) intends to settle net or realise the asset and simultaneously settle the liability. In recognising an operation to transfer a financial asset that does not meet the conditions required for its elimination, the entity must not offset the asset transferred and the associated liability (see IAS 39, paragraph 36)”. The Bank does not make use of such netting and therefore does not hold it necessary to provide the information requested in Bank of Italy Circular 262/05 and subsequent updates.
8. Securities loan transactions Securities loan transactions did not occur in significant amounts during the year.
9. Disclosure on assets under joint control The Bank has no assets under joint control.
10. Disclosure on transparency requirements relative to the system of public subsidies (Law 124/2017, article 1, paragraph 125-129)
As required under the regulations on transparency for public subsidies introduced under article 1, paragraph 125-129 of Law 124/2017, subsequently integrated by the "Safety" Decree Law (113/2018) and the "Simplification" Decree Law (135/2018), note that in 2018 the Bank received contributions for training from interprofessional funds for an amount equal to € 441,236. For more details about the contributions received, please see the website of the National Registry of Government Aid to Businesses, using the following link www.rna.gov.it/sites/PortaleRNA/it_IT/home.
BANCA SELLA | 191 REPORT AND FINANCIAL STATEMENTS 201
Part C
Information on the Income Statement
At 31 December 2018, the tables in the Notes were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the tables dictated by the above circular were duly modified through the omission of the comparison column, and to facilitate comparison with the previous year, tables prepared in line with that envisaged under IAS 39 were added and shown in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Any opening balances found in the tables in the Notes are those deriving from first time application of accounting standard IFRS 9. Again pursuant to the stated circular, the tables in the Notes were prepared in thousands of euro, unless otherwise indicated.
BANCA SELLA | 192 REPORT AND FINANCIAL STATEMENTS 201
Section 1 - Interest - Items 10 and 20
1.1 Interest receivable and similar income: breakdown
Debt Loans and Other Total Item/Technical type securities advances transactions 31/12/2018
1. Financial assets measured at fair value through profit 1,068 10 5,958 7,036 and loss 1.1 Financial assets held for trading 1,066 - 5,958 7,024 1.2 Financial assets carried at fair value - - - -
1.3 Other financial assets necessarily measured at fair 2 10 - 12 value
2. Financial assets measured at fair value through other 3,612 2 X 3,614 comprehensive income
3. Financial assets measured at amortised cost 10,658 180,590 - 191,248 3.1 Due from banks 562 7,075 X 7,637
3.2 Due from customers 10,096 173,515 X 183,611
4. Hedging derivatives X X 1,783 1,783
5. Other assets X X 36 36
6. Financial liabilities X X X 24
Total 15,338 180,602 7,777 203,741 of which: interest receivable on impaired financial assets - 8,137 - 8,137
1.1 interest receivables and similar income: breakdown
Total Loans and Other Item/Technical type Debt securities advances transactions 31/12/2017
1. Financial assets held for trading 263 - 2,429 2,692 2. Financial assets available for sale 12,533 7 - 12,540
3. Financial assets held to maturity 277 - - 277
4. Due from banks 50 5,266 - 5,316
5. Due from customers 5 169,181 - 169,186
6. Financial assets carried at fair value - - - -
7. Hedging derivatives x x 3,796 3,796
8. Other assets x x 41 41
Total 13,128 174,454 6,266 193,848
BANCA SELLA | 193 REPORT AND FINANCIAL STATEMENTS 201
1.2 Interest and similar income: other information
Items 31/12/2018 31/12/2017
Interest income on financial assets in foreign currencies 8,732 4,195 Interest income on financial leases - - Total 8,732 4,195
1.2.1 Interest income on financial assets in foreign currencies
Items 31/12/2018 31/12/2017
Interest income on financial assets in foreign currencies 8,732 4,195
1.3 Interest payable and similar income: breakdown
Other Total Item/Technical type Payables Securities transactions 31/12/2018
1. Financial liabilities measured at amortised cost 8,547 14,793 X 23,340
1.1 Due to central banks - X X -
1.2 Due to banks 98 X X 98
1.3 Due to customers 8,449 X X 8,449 1.4 Securities in issue X 14,793 X 14,793
2. Financial liabilities held for trading - - 5,667 5,667
3. Financial liabilities carried at fair value - - - -
4. Other liabilities and provisions X X 1 1
5. Hedging derivatives X X 18,253 18,253
6. Financial assets X X X 3,966
Total 8,547 14,793 23,921 51,227
BANCA SELLA | 194 REPORT AND FINANCIAL STATEMENTS 201
1.4 Interest liabilities and similar expenses: breakdown
Other Total Item/Technical type Payables Securities transactions 31/12/2017
1. Due to central banks - x - - 2. Due to banks 81 x - 81 3. Due to customers 10,226 x - 10,226 4. Securities in issue x 13,716 - 13,716 5. Financial liabilities held for trading - - 2,277 2,277 6. Financial liabilities carried at fair value - - - - 7. Other liabilities and provisions x x 5,151 5,151 8. Hedging derivatives x x 20,957 20,957 Total 10,307 13,716 28,385 52,408
1.4 Interest liabilities and similar expenses: other information
31/12/2018 31/12/2017
Interest expense on financial liabilities in foreign currencies (6,508) (2,994) Interest expense on financial leases - - Total (6,508) (2,994)
1.4.1 Interest expense on liabilities in foreign currencies
Items 31/12/2018 31/12/2017
Interest expense on financial liabilities in foreign currencies 6,508 2,994
1.5 Differentials on hedging transactions
Total Total Items 31/12/2018 31/12/2017
A. Positive differentials on hedging transactions: 1,783 3,796 B. Negative differentials on hedging transactions: (18,253) (20,957) C. Balance (A-B) (16,470) (17,161)
BANCA SELLA | 195 REPORT AND FINANCIAL STATEMENTS 201
Section 2 - Fees and commission - Items 40 and 50
2.1 Commission income: breakdown
Total Total Type of service/Value 31/12/2018 31/12/2017 a) sureties issued 3,399 3,340 b) credit derivatives - - c) asset management, brokerage and advisory services 83,669 83,603
1. financial instruments trading - -
2. currency trading 1,415 1,335
3. portfolio management 13,212 15,684
4. custody and administration of securities 1,375 1,467
5. depositary bank - -
6. placement of securities 33,468 32,078
7. activities related to receiving and sending orders 16,572 16,874
8. consultancy activities 400 95
8.1 regarding investments 400 95
8.2 regarding financial structure - -
9. distribution of third-party services 17,227 16,069
9.1 portfolio management - -
9.1.1. individual - -
9.1.2. collective - -
9.2 insurance products 13,474 12,564
9.3 other products 3,753 3,505 d) Collection and payment services 139,332 125,546 e) servicing of securitisation transactions - - f) services for factoring transactions - - g) tax collection services - - h) activities for management of multilateral trading facilities - -
i) current account keeping and management 20,725 21,382 j) Other services 46,534 44,524
Total 293,659 278,394
BANCA SELLA | 196 REPORT AND FINANCIAL STATEMENTS 201
Below is the breakdown of the subitem relative to other services:
Fee and commission income: detail of the item “Other services”
31/12/2018 31/12/2017
- expense recovery on loans to customers 857 961 - commission from credit cards and debit cards 11,811 11,230 - fees and commissions on relations with credit institutions 611 575 - safe deposit box leasing 242 233 - recovery of postal, printing and similar expenses 2,064 1,501 - fees on loans to customers 25,168 24,959 - fees for services provided to investee companies 3 - - others 5,778 5,065 Total “other services” 46,534 44,524
2.2 Commission income: product and service distribution channels
Total Total Channel/Amount 31/12/2018 31/12/2017 a) at own branches: 62,866 63,251 1. portfolio management 13,175 15,648 2. placement of securities 33,421 32,042 3. third party products and services 16,270 15,561 b) off-site sales: 238 217 1. portfolio management - - 2. placement of securities 47 37 3. third party products and services 191 180 c) other distribution channels: 803 363 1. portfolio management 37 36 2. placement of securities - - 3. third party products and services 766 327
BANCA SELLA | 197 REPORT AND FINANCIAL STATEMENTS 201
2.3 Fee expense: breakdown
Total Total Service/Amount 31/12/2018 31/12/2017 a) sureties received 431 358 b) credit derivatives - - c) asset management and brokerage services: 22,754 24,278 1. financial instruments trading 4,639 4,532 2. currency trading - - 3. portfolio management: 5 - 3.1 own 5 - 3.2 delegated to third-parties - - 4. custody and administration of securities 536 531 5. placement of financial instruments - 12 6. off-site sales of financial instruments, products and 17,574 19,203 services d) collection and payment services 55,268 48,147 e) other services 1,596 1,672 Total 80,049 74,455
Fee expense: breakdown of sub-item “Other services”
31/12/2018 31/12/2017
- brokering 8 - - credit and debit cards 708 - - fees and commissions on relations with credit institutions 231 342 - loans - 30 - others 649 1,300 Total “Other services” 1,596 1,672
BANCA SELLA | 198 REPORT AND FINANCIAL STATEMENTS 201
Section 3 - Dividends and similar income - Item 70
3.1 Dividends and similar income: breakdown
Total 31/12/2018 Item/Income
Dividends Similar Income
A. Financial assets held for trading - -
B. Other financial assets necessarily measured at fair value - 70
C. Financial assets measured at fair value through other comprehensive income 130 -
D. Equity investments 3,112 -
Total 3,242 70
The Bank holds investments in Sella Personal Credit and in Sella Leasing and minority interests classified among financial assets.
3.1 Dividends and similar income: breakdown
Total 31/12/2017
Item/Income Income from Dividends UCITS units
A. Financial assets held for trading 25 - B. Financial assets available for sale 152 16 C. Financial assets carried at fair value - - D. Equity investments - x Total 177 16
BANCA SELLA | 199 REPORT AND FINANCIAL STATEMENTS 201
Section 4 - Net income/(losses) from trading activities - Item 80
4.1 Net gains/(losses) on trading activities: breakdown
Net gains Capital gains Trading Capital losses Trading Transactions/Income components (losses) (A) profits (B) (C) losses (D) [(A+B) - (C+D)] 1. Financial liabilities held for trading 3 123 (877) (351) (1,102) 1.1 Debt securities 3 102 (877) (351) (1,123) 1.2 Equity securities - 21 - - 21 1.3 UCITS units - - - - - 1.4 Loans and advances - - - - - 1.5 Others - - - - - 2. Financial liabilities held for trading - - - - - 2.1 Debt securities - - - - - 2.2 Payables - - - - - 2.3 Others - - - - - Financial assets and liabilities: foreign X X X X 5,063 exchange gains (losses) 3. Derivative instruments 2,614 4,669 (2,594) (5,753) 511 3.1 Financial derivatives: 2,614 4,669 (2,594) (5,753) 511 - On debt securities and interest rates 2,614 4,669 (2,594) (5,753) (1,064) - On equity securities and stock indices ------On currencies and gold X X X X 1,575 - Others - - - - - 3.2 Credit derivatives - - - - - of which: natural hedges associated with X X X X - the fair value option
Total 2,617 4,792 (3,471) (6,104) 4,472
BANCA SELLA | 200 REPORT AND FINANCIAL STATEMENTS 201
Section 5 – Net income/(losses) from hedging activities - Item 90
5.1 Net gains/(losses) on hedging activities: breakdown
Total Total Income components/Amounts 31/12/2018 31/12/2017 A. Income from: A.1 Fair value hedging derivatives 8,745 20,828 A.2 Hedged financial assets (fair value) - - A.3 Hedged financial liabilities (fair value) 1,249 2,460 A.4 Cash flow hedging derivatives - - A.5 Assets and liabilities in foreign currencies - - Total hedging income (A) 9,994 23,288 B. Expenses from: B.1 Fair value hedging derivatives (1,614) (2,321) B.2 Hedged financial assets (fair value) (8,277) (20,841) B.3 Hedged financial liabilities (fair value) - - B.4 Cash flow hedging derivatives - - B.5 Assets and liabilities in foreign currencies - - Total expenses for hedging activities (B) (9,891) 23,162 C. Net gains/(losses) on hedging activities (A - B) 103 126 of which: result of hedges on net positions - -
BANCA SELLA | 201 REPORT AND FINANCIAL STATEMENTS 201
Section 6 - Profits (losses) from dismissal/buy-back - Item 100
6.1 Profit/(Loss) from sales/repurchases: breakdown
Total 31/12/2018 Item/Income component
Gains Losses Net gains/losses
A. Financial assets 1. Financial assets measured at amortised cost 4,743 (4,472) 271
1.1 Due from banks - - -
1.2 Due from customers 4,743 (4,472) 271
2. Financial assets measured at fair value through other 4,262 (4,634) (372) comprehensive income
2.1 Debt securities 4,262 (4,634) (372)
2.2 Loans and advances - - -
Total assets (A) 9,005 (9,106) (101)
B. Financial liabilities measured at amortised cost
1. Due to banks - - -
2. Due to customers - - -
3. Securities in issue 107 (107) -
Total liabilities (B) 107 (107) -
6.1 Profit (Loss) from sales/repurchases: breakdown
Total 31/12/2017 Item/Income component Net Gains Losses gains/losses Financial assets 1. Due from banks - - - 2. Due from customers 2,990 5,945 (2,955) 3. Financial assets available for sale 15,255 8,708 6,547 3.1 Debt securities 15,213 8,681 6,532 3.2 Equity securities 15 - 15 3.3 UCITS units 27 27 - 3.4 Loans and advances - - - 4. Financial assets held to maturity - - - Total assets 18,245 14,653 3,592 Financial liabilities 1. Due to banks - - - 2. Due to customers - - - 3. Securities in issue 149 158 (9) Total liabilities 149 158 (9)
BANCA SELLA | 202 REPORT AND FINANCIAL STATEMENTS 201
Section 7 - Net gains/(losses) on other financial assets and liabilities measured at fair value through profit and loss - Item 110
7.2 Net change in value of other financial assets and liabilities measured at fair value through profit and loss: breakdown of other financial assets necessarily measured at fair value
Transactions/Income components (B) (D) (C+D)] (C+D)] Net gains Realised profit Realised losses (losses) [(A+B) - - [(A+B) (losses) Capital gains (A) Capital losses (C) 1. Financial liabilities held for trading 104 - (2,032) (217) (2,145) 1.1 Debt securities - - - - -
1.2 Equity securities - - (1,612) - (1,612)
1.3 UCITS units 104 - (173) (217) (286)
1.4 Loans and advances - - (247) - (247)
2. Financial assets in other currencies: foreign X X X X -
Total 104 - (2,032) (217) (2,145)
BANCA SELLA | 203 REPORT AND FINANCIAL STATEMENTS 201
Section 8 - Net value adjustments for credit risk - Item 130
8.1 Net value adjustments for credit risk for financial assets measured at amortised cost: breakdown Writedowns (1) Writebacks (2) Total Stage 3 Transactions/Income components Stage 1 and Stage 1 and Stage 3 Stage 2 Write-off Other Stage 2 31/12/2018
A. Due from banks (112) - - 134 - 22 - loans (105) - - 129 - 24 - debt securities (7) - - 5 - (2) of which: impaired loans, purchased or ------originated B. Due from customers (3,423) (1,832) (79,190) 9,850 32,499 (42,096) - loans (3,320) (1,832) (79,190) 9,811 32,499 (42,032) - debt securities (103) - - 39 - (64) of which: impaired loans, purchased or ------originated Total (3,535) (1,832) (79,190) 9,984 32,499 (42,074)
8.1 Net value adjustments for impairment of loans: breakdown
Value adjustments Write-backs Total (1) (2) Transactions/Income components Specific Specific Portfolio Portfolio 31/12/2017 Write-offs Other To B To B
A. Due from banks - Loans ------16 16 - Debt securities ------B. Due from customers Impaired loans acquired - Loans - - x - - x x - - Debt securities - - x - - x x - Other receivables - Loans (1,691) (83,344) - 15,412 29,428 - 6,294 (33,900) - Debt securities ------C. Total (1,691) (83,344) - 15,412 29,428 - 6.31 (33,885)
BANCA SELLA | 204 REPORT AND FINANCIAL STATEMENTS 201
8.2 Net value adjustments for credit risk relative to financial assets measured at fair value through other comprehensive income: breakdown
Writedowns (1) Writebacks (2) Total
Stage 3 Transactions/Income components Stage 1 Stage 1 and Stage and Stage Stage 3 31/12/2018 2 2 Write-off Other A. Debt securities (236) - - 258 - 22 B. Loans ------To customers ------To banks ------
of which: impaired financial assets, ------purchased or originated
Total (236) - - 258 - 22
Section 9 - Profit/loss from contractual changes without write- offs - Item 140
9.1 Profit (Loss) from contractual changes: breakdown
Total Total Items 31/12/2018 31/12/2017
Profit from contractual changes without write-offs - - Losses from contractual changes without write-offs (661) - Total (661) -
BANCA SELLA | 205 REPORT AND FINANCIAL STATEMENTS 201
Section 10 - Administrative Expenses - Item 160
10.1 Expenses for personnel: breakdown
Total Total Type of expense/Amount 31/12/2018 31/12/2017
1) Employees 136,463 157,877 a) Wages and Salaries 93,487 114,422 b) Social security contributions 28,010 28,099 c) Severance indemnities 3,036 3,098 d) Pension expenses 1,267 1,317 e) Provision for severance indemnities 314 446 f) Provision for retirement and similar obligations: - -
– defined contribution - -
- defined benefit - - g) Payments into external supplementary pension funds: 5,571 5,487
– defined contribution 5,571 5,487
- defined benefit - - h) Costs deriving from share-based payment agreements - - i) other employee benefits 4,777 5,008
2) Other current personnel 806 457
3) Directors and auditors 602 611
4) Retired personnel expenses - -
5) Recovery of costs of employees on secondment to other companies (2,926) (3,310)
6) Recovery of costs of employees on secondment within the Company 2,786 2,880
Total 137,732 158,515
BANCA SELLA | 206 REPORT AND FINANCIAL STATEMENTS 201
10.2 Average number of employees per category
Total Total 31/12/2018 31/12/2017
1) Employees 2,674 2,554 a) executives 37 36 b) middle managers 702 708 c) remaining employees 1,935 1,810
2) Other personnel 29 28
Total 2,703 2,582
10.4 Other employee benefits
Total Total Type of expense/Amount 31/12/2018 31/12/2017 - early retirement incentives and provision to support income 15 186 - benefits for dependent children 113 103
- benefits in kind 1,934 1,764
- insurance expenses 1,503 1,509
- professional training courses 720 616
- travel expenses - 108
Other 492 722
Total 4,777 5,008
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10.5 Other administrative expenses: breakdown
Total Total Type of service/Value 31/12/2018 31/12/2017 Professional services (legal and notary) 6,080 5,765 IT assistance and sundry advice 3,973 2,957 Sundry rentals and expenses for services provided by third 50,493 43,192 parties Hardware and software leasing fees 1,197 1,266 Rent of premises 16,477 17,570 Cleaning of premises 1,009 856 Electricity, heating and water 2,243 2,770 Fees for data transmission and telephone 2,836 3,413 Expenses for interbank network service 872 681 Website expenses - 6 Postal 2,470 2,340 Printing and stationery 376 385 Subscriptions and books 101 85 Transport expenses 583 586 Surveillance and escort of valuables 2,536 2,529 Sundry insurance policies 895 900 Advertising and promotion 2,032 2,130 Entertainment expenses 384 274 Donations 195 243 Membership fees 1,016 877 Information and inspections 1,905 1,704 Travelling expenses 1,340 1,395 Pension expenses for financial promoters 138 133 Other 2,546 2,169 Maintenance and repair expenses 5,362 10,341 - Real estate 340 432 Hardware and software 1,915 4,225 - Other assets 3,107 5,684 Indirect taxes 46,730 45,341 - Stamp duty 35,785 36,348 - Substitute tax Pres. Dec. 601/73 1,591 1,436 - Single municipal tax (IMU) 300 313 - DGS and SRF contribution 8,269 6,480 - Other indirect taxes and duties 785 764 Total 153,789 149,908
In accordance with Art. 2427, paragraph 16-bis of the Italian Civil Code, the information required in relation to fees paid to the independent auditing firm are disclosed in the Explanatory Notes to the consolidated financial statements of the Sella Group.
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Section 11 - Net allocations to provisions for risks and charges - Item 170
11.1 Net provisions for credit risk relative to commitments to disburse funds and financial guarantees given: breakdown
Balances as of Balances as of 31/12/2018 31/12/2017
Allocations for financial commitments and guarantees given (739) -
Reallocations for financial commitments and guarantees given 748 -
Total 9 -
11.2 Net provisions relative to other commitments and guarantees given: breakdown
Balances as of Balances as of
31/12/2018 31/12/2017
Allocations for other commitments and guarantees given (546) -
Reallocations for other commitments and guarantees given 315 -
Total (231) -
11.3 Net provisions for other provisions for risks and charges: breakdown
Balances as of Balances as of 31/12/2018 31/12/2017
Provisions for risks and charges for revocations (429) (150)
Provisions for legal disputes (780) (3,383)
Provisions for customer complaints (330) (169)
Provisions for personnel expenses (3,279) (551)
TAX Provisions (107) (75)
Other allocations to provisions for risks and charges (1,377) (13,654)
Reallocations for provisions for risks relative to revocations 100 40
Reallocations for legal disputes 1,293 507
Reallocations for customer complaints 273 463
Reallocations for provisions for personnel expenses 160 646
Other reallocations for provisions for risks and charges 818 185
Total (3,658) (16,140)
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Section 12 - Net value adjustments on tangible assets - Item 180
12.1. Net value adjustments on tangible assets: breakdown
Impairment Amortisation/depreciation Write-backs Net gains/losses Asset/Income component writedown
(a) (b) (c) (a+b-c)
A. Tangible assets A.1 Company owned (4,192) - - (4,192)
- For business purposes (3,959) - - (3,959)
- For investment (233) - - (233)
- Inventories X - - - A.2 Assets acquired through financial - - - - leasing - For business purposes - - - -
- For investment - - - -
Total (4,192) - - (4,192)
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Section 13 - Net value adjustments on intangible assets - Item 190
13.1 Net value adjustments on intangible assets: breakdown
Impairment Net Amortisation/depreciation Write-backs writedown gains/losses Asset/Income component (a) (b) (c) (a+b-c)
A. Intangible assets A.1 Company owned (13,146) - - (13,146) - Generated internally by the company (3,161) - - (3,161) - Other (9,985) - - (9,985) A.2 Assets acquired through financial - - - - leasing Total (13,146) - - (13,146)
Section 14 - Other operating income and expenses - Item 200
14.1 Other operating expenses: breakdown
Total Total 31/12/2018 31/12/2017 Amortisation of expenses for improvements on third party assets 1,923 969 Losses connected to operating risk 3,759 4,229 Penalties payable for contract defaults 28 83 Other charges 1,608 865 Total 7,318 6,146
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14.2 Other operating income: breakdown
Total Total 31/12/2018 31/12/2017 Rents and instalments receivable 445 364 Charges to third parties and refunds received: 37,056 37,125 - taxes recovered 36,627 36,970 - insurance premiums and refunds 429 155 Expenses recovered and other revenues on current accounts and deposits 346 2,916 Income for software services 1,979 5,241 Recoveries of interest on collection and payment transactions 16 4 POS fees receivable 3,336 2,973 Administrative services rendered to third parties 2,745 4,410 Penalties receivable for contract defaults 104 123 Expenses recovered for services rendered in relation to credit recovery 2,415 2,611 Recovery of other expenses 1,093 (1,997) Other income 5,496 2,139 Total 55,031 59,903
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Section 17 - Value adjustments on goodwill - Item 240
17.1 Value adjustments on goodwill
31/12/2018 31/12/2017
Impairment of branch goodwill 189 350
Total 189 350
The item includes the effects of the writedown of goodwill relative to the branches in Fasano and S.Michele acquired in 2000 from the credit cooperative of Ostuni. For details, please see part B - Assets, section 12, specifically the information regarding the impairment test for goodwill.
Section 18 - Income (losses) from disposal of investments - Item 250
18.1 Gains/(losses) on sales of investments: breakdown
Total Total Income component/Amount 31/12/2018 31/12/2017
A. Properties 25 10 - Gains on sales 26 10 - Losses on sales (1) - B. Other assets 1 13 - Gains on sales 1 13 - Losses on sales - - Net gains/losses 26 23
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Section 19 – Income taxes on continuing operations for the period - Item 270
19.1 Income taxes for the year on continuing operations: breakdown
Total Total Income components/Amounts 31/12/2018 31/12/2017
1. Current taxes (-) (24,069) (733)
2. Change in current taxes of previous years (+/-) 380 3,033
3. Decreases in current taxes for the period ( + ) 195 789 3-bis. Reduction in current taxes for the year for tax credits pursuant to 227 - Law 214/2011 (+) 4. Changes in deferred taxes (+/-) 6,160 (9,038) 5. Changes in deferred taxes (+/-) (767) 1,466
6. Taxes for the year (-) (-1+/-2+3+3bis+/-4+/-5) (17,874) (4,483)
19.2 Reconciliation between theoretical tax burden and actual tax burden in the financial statements
taxable Income description rate amount taxes
Pre-tax profit from continuing operations 34,079
Nominal rate (1) 33.06% 11,266
Capital gains and dividends, not taxed for IRES purposes 3,080 -2.49% 847
Negative and positive components not relevant for IRES purposes 2,484 2.00% 683
Investment concession - “super-amortisation” - 1,372 -1.11% - 377
lower or higher taxes of previous years -ACE - 1,360 -1.10% - 374
foreign taxes, tax credits and other components of previous tax years 0.04% 13 effects of transferring IRAP tax adjustments to income statement from FTA of IFRS 9 recognised in shareholders' equity -2.83% - 957
Adjusted rate 27.58% 9,406
Untaxed dividends - IRAP - 1,621 -0.26% - 90
Personnel costs - non-deductible IRAP (item 150) 8,503 1.39% 473
Other components not relevant for IRAP purposes -15,352 -2.49% - 855
Effective rate 26.22% 8,934 1): IRES rate + average IRAP rate weighted on the basis of the territorial distribution of the taxable base.
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Section 20 - Profit/(loss) from discounted operations after tax - Item 290
20.1 Profit/(loss) from discounted operations after tax: breakdown
Total Total Income components/Amounts 31/12/2018 31/12/2017
1. Income 5,727 -
2. Expenses (35,511) -
3. Result of group evaluations of associated assets and liabilities - -
4. Realised income (losses) - -
5. Taxes and duties 8,940 -
Income (loss) (20,844) -
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Part D
Comprehensive income
At 31 December 2018, the tables in the Notes were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the tables dictated by the above circular were duly modified through the omission of the comparison column, and to facilitate comparison with the previous year, tables prepared in line with that envisaged under IAS 39 were added and shown in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Any opening balances found in the tables in the Notes are those deriving from first time application of accounting standard IFRS 9. Again pursuant to the stated circular, the tables in the Notes were prepared in thousands of euro, unless otherwise indicated.
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COMPREHENSIVE INCOME BREAKDOWN
Items 31/12/2018
10. Profit (Loss) for the period 25,145
Other comprehensive income without transfer to income statement 1,221
20. Equity securities measured at fair value through other comprehensive income: 1645
a) changes in fair value 1,645
b) transfers to other shareholders' equity components -
70. Defined benefit plans (150) Income taxes relative to other income components without transfer to income 100. statement (274)
Other comprehensive income with transfer to income statement (13,831)
Financial assets (other than equity securities) measured at fair value through 150. other comprehensive income: (13,831)
a) fair value changes (11,095)
b) transfer to income statement (2,736)
- writedowns for credit risk (22)
- realized income/losses (2,714)
c) other changes - Income taxes relative to other income components with transfer to income 180. statement 4,570
190. Total other comprehensive income (8,040)
200. Comprehensive income (Items 10 +190) 17,105
COMPREHENSIVE INCOME BREAKDOWN at 31 December 2017
Items Gross amount Income taxes Net amount
10. Profit (Loss) for the period X X 14,116 Other comprehensive income without transfer to income
statement 40. Defined benefit plans 303 (83) 220 Other comprehensive income with transfer to income statement 100. Financial assets available for sale: (191) 1,276 1,085 a) fair value changes 6,576 (959) 5,617 b) transfer to income statement (6,767) 2,235 (4,532) - impairment losses 87 (29) 58 - realized income/losses (6,854) 2,264 (4,590) c) other changes - - - 130. Total other comprehensive income 112 1,193 1,305 140. Comprehensive income (Items 10 +130) 15,421
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Part E
Information on risks and related hedging policies
At 31 December 2018, the tables in the Notes were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the tables dictated by the above circular were duly modified through the omission of the comparison column, and to facilitate comparison with the previous year, tables prepared in line with that envisaged under IAS 39 were added and shown in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Any opening balances found in the tables in the Notes are those deriving from first time application of accounting standard IFRS 9. Again pursuant to the stated circular, the tables in the Notes were prepared in thousands of euro, unless otherwise indicated.
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Introduction
Banca Sella attaches great importance on the management and control of risk, as a condition to guarantee sustainable value creation in a context of controlled risk. Risk management and control are carried out by the corporate second level (Compliance and Risk Management) and third level (Internal Audit) control departments. Specifically, the Parent Company’s Risk Management department has the mission of actively contributing to the achievement of effective risk management and an efficient risk/return profile, through the identification, measurement and control of the First and Second Column Risks under Basel III, operating in close connection with the management of economic and equity variables and in constant respect for adaptation to changes imposed through the regulations and in line with system best practices.
The risk objectives consistent with the maximum risk that can be assumed, the business model and the strategic guidelines are a key element in determining a risk governance policy and a risk management process geared towards the principles of sound and prudent company management. These objectives are formalised through the Risk Appetite Framework (hereinafter also “RAF”) which is brought to the attention of the competent bodies for final definition and subsequent approval.
In addition to the definition of the risk objectives and thresholds, in defining its RAF, the Group proposes to:
integrate the RAF with the other Group governance processes in order to pursue the strategic objectives;
strengthen the ability to take early action, through the incorporation of forward-looking elements;
simplify the monitoring and communication of compliance with the risk objectives;
identify the unique metrics of each business model through the active involvement of Group companies.
The Risk Management function is distinct and independent from the corporate functions assigned to manage operating risk and reports directly to the Managing Director.
The Sella Group’s culture of control and risk is widespread at all levels. Corporate strategies focus on careful training work and continuous professional updating. Particular attention is paid to resources, whether directly operating as audits or in operative departments, ensuring constant professional growth through the use of external training and constant professional and regulatory updates, also through participation in inter-banking work groups.
During recent years, special importance has been placed on developing a culture of risk and disseminating the necessary safeguards at all levels.
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Dissemination is achieved through periodic opportunities for discussion and alignment under the responsibility of the Business Credit department, aimed at employees of the head office and within the network, responsible for disbursing credit.
Monthly training activities have both operational and educational aspects and are aimed at decision-making figures and roles which both disburse credit and monitor credit risk locally. There are additional half-yearly training sessions, aimed at a wider audience, including management and coordination roles within the sales network and head office, with the addition of strategic aspects and information about developments in the credit situation.
The objectives of ensuring there is an established risk culture in company policies is also pursued through continuous activities by the Credit Quality Service, identifying positions with problems, to be managed, monitored and resolved in cooperation with customers, which also may be identified through activities to audit existing processes and controls, in order to improve risk monitoring tools.
When a loan is classified as impaired and is transferred to the NPE Service for management, activities to monitor the risk culture continue through monthly meetings to further focus on the positions in question, in order to manage problems and create experience and knowledge relative to risk management.
The NPE service monitors non-performing loans in all the various categories of criticality, managing and assessing impaired loans.
Relative to this latter aspect, the NPE service uses a structured combination of parameters to assess non-performing loans classified as past due, unlikely to pay and bad loans.
This combination of non-performing loan assessment parameters includes:
specific lump-sum adjustments applied exclusively to smaller loans in the categories of impaired, past due and unlikely to pay specific analytical adjustments to be applied to larger loans in the categories of impaired, past due and unlikely to pay and all bad loans.
These parameters, disseminated through the Credit Regulations, make it possible to identify the elements to be evaluated to express the recoverability of the credits, the methods to evaluate these elements, and the frequency with which the evaluation of the credits should be updated in a detailed and careful way, so as to update the allocations made to the relative adjustment provisions in a timely manner.
On an annual basis, the Banca Sella Loan Administration service verifies the congruence of these evaluation parameters, through statistical checks on the own portfolio. It then submits the results to top management to allow them to assess the adequacy of the policies used and to adopt any necessary changes. This activity makes it possible to refine the combined assessment parameters and establish an appropriate provisioning policy that takes into account the conditions in the external situation, various macroeconomic factors, and organisational and process changes that may be adopted over time.
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Section 1 – Credit risk
Qualitative information
1 General aspects Banca Sella considers the measurement and management of credit risk to be fundamentally important. The activity of loan supplies has always looked towards traditional business forms, supporting household financing needs and providing the necessary support to businesses - in particular small and medium sized enterprises - in order to support growth projects, consolidation phases and financial needs during negative phases of the economic cycle. With regard to the credit risk, at present no operations are present in innovative or complex financial products. The lending policies and processes for the disbursement and monitoring of loans are consequently defined so as to combine customer needs with the need to ensure the maintenance of quality for the lending business. In addition, in drawing up the policies for monitoring credit risks, special attention is paid to maintaining an adequate risk/return profile and assuming risks consistently with the propensity to risk defined and approved by the competent bodies.
2 Credit risk management policies 2.1 Organisational Aspects In the process of credit disbursement, applications must first be assessed by a specific decision- making structure in the branch. In support of the assessment process, the bank is equipped with scoring and rating systems which are applied differently to the different customer classes: retail, small business, small/medium enterprises and Corporate. In accordance with the limits of its autonomy, the branch may accept the application, reject it or, sometimes, modify it (for example requesting further guarantees or proposing a reduction in the amount applied for or a different type of loan or advance).
With specific reference to credit risk control activities, these are the responsibility of the Risk Management department and Credit Area of Banca Sella.
Within the Risk Management Service, activities are structured as follows: The mission of the Parent Company’s Credit Risk Office is to quantify and monitor credit risk at portfolio level. Monitoring is performed also with benchmarking tools aimed at assessing positioning with respect to system figures. In addition, on the basis of the evidence resulting from analysis, risk management guidelines are identified. The mission of Banca Sella’s Credit Risk Control Office is to perform accurate controls on the credit risk of credit portfolios from time to time, in order to give assurances to the management and strategic supervision bodies regarding the consistency between the practices adopted regarding the classification, valuation of guarantees, adequacy of the adjustments and effectiveness of the dispute processes, and the provisions of the applicable legislation and internal regulations.
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The parent company's Risk Models Office has the mission of implementing, at a consolidated level and within the individual companies of the Sella Group, quantitative methods to measure risk and continuous verification of their reliability, accuracy and consistency in relation to risk appetite and current regulations. The mission of the parent company's Internal Validation Office is to validate the statistical models used for forecasting by the Group. The Credit Area is responsible for credit disbursement policies, product development, credit support system development, management of performing and impaired loans, as well as being responsible for monitoring credit risk through specific organisational structures (the Banca Sella Quality and Credit Control Service). This monitoring involves traditional first-level checks, mainly focused on ensuring effective application of the bank’s policies, analysing individual positions and trend analysis of variables held to be significant for the purposes of controlling credit risk. 2.2 Systems of management, measurement and control The Parent Company’s Risk Management Service has the task of developing credit risk measurement methods and developing specific models for the assessment of risk components on the individual loan portfolios.
The Risk Management Service also prepares reports on trends and monitors compliance with RAF metrics. In addition, the activities performed by the Risk Management Service include defining forecast analysis methods, preparing forecasts and analysing differences with respect to final figures, as well as carrying out analysis and research on specific risk profiling issues and preparing metrics for the Risk Appetite Framework and the risk limits system.
In terms of assessing insolvency risk, there are management processes and analysis tools which are selected on the basis of internal customer segmentation. The segmentation of customers enables, amongst other aspects, the distinguishing between businesses into four different dimension classes, based on their exposure and turnover, referred to in increasing order: small business, small/medium enterprises, corporate business and large corporate business.
Each company is assigned a summary risk judgement which is attributed through the use of one of the two internal ratings model in use at Banca Sella. One is for small business and small/medium businesses and the other for corporate and large corporate customers. The internal rating in place at Banca Sella is an automatic judgement integrated into the company information systems and consists of the following components that are measured differently in measurement according to the type of counterparty (small business and small and medium enterprises or corporate and large corporate): Financial information (accounting data);
Qualitative information through the compilation of the appropriate questionnaire by the relationship manager;
Performance information (the bank’s internal data and Central Credit Register data).
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Additionally, trend models are used to monitor PD for private customers, as well as specific models used to assess counterparties at the time new loans are granted ("acceptance scoring").
During 2018, activities continued aimed at achieving better integration of ratings models in credit processes (disbursement, monitoring, decision making powers) in the definition of pricing and strategic capital allocation decisions continued in all the companies of the Banca Sella Group.
In 2018, the Credit Risk Control Committee also continued its activities, with the objective of favouring coordinated monitoring of the credit risk profile of all the entities with credit exposure within the Sella Group. During committee meetings, trends and forecasts for macroeconomic variables are discussed in relation to the evolution of loan risk profiles and risk metrics. The committee monitors differences between final monthly figures and expected figures relative to the Risk Appetite Framework (RAF) forecasts and for loan adjustments. It maintains a register which shows any major issues identified and responsibilities assigned, monitors respect for deadlines and the effectiveness of corrective actions for anomalies or after controls carried out pursuant to Bank of Italy Circular 285 (former 263/2006). It plans research in regards to specific areas requiring attention and verifies whether the entities comply with the governance rules established in the Parent Company's risk management policy.
During the course of 2018 the work of the Ratings Committee also continued, providing both advice and making decisions and whose main functions include resolving to override the rating assessment of business customers. Override resolutions take place in accordance with the powers assigned to the Committee and in compliance with specific guidelines. Causes must lie in a specific list of grounds and there will be an audits system in place in order to guarantee the homogeneity, integrity and efficiency of these measures, in any case only to be implemented with regard to residual cases that are not easy to standardise or not considered by the model. The Models Committee, established in April 2017, continued its activities in 2018. The mission of the Committee is to analyse results obtained from validating the statistical forecast models used by the Group (prior to utilisation in the case of new models and on a periodic basis for existing models), guiding necessary corrective actions in order to minimise model risk as defined within the RAS;
The supervisory regulations, known as Basel III, were immediately interpreted as an opportunity to refine the credit risk measurement techniques and to ensure supervision through the use of techniques with a growing degree of sophistication. Banca Sella is also aware of the importance of all the risk factors that are connected with credit risk but not measured by the instruments provided in Pillar 1 of Basel III, such as the concentration risk (in its dual single-name and segment meaning) and residual risk (the risk that credit mitigation techniques prove to be less effective than expected). Alongside scrupulous observance of the supervisory legislation on the subject of large risks and the quantification of internal capital to cover concentration risk under the terms of Pillar 2 of Basel III, the Parent Company has defined precise guidelines designed to mitigate concentration risk through fragmentation, both at the level of single entities, and in terms of product sector. The loan disbursement process also provides for growing decision-making limits on the basis of the amounts being lent. Individual loan applications for which the total exposure of the debtor and of any group of customers associated with it exceeds certain thresholds are always examined by the Parent Company.
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At the same time as drafting the ICAAP Report (analysis of capital adequacy in accordance with Pillar 2 of Basel III) and therefore at least once a year, the Parent Company carries out stress tests on the consolidated loan portfolio and on the individual Group companies. The stress test procedures consist of analysing the sensitivity of internal capital against the credit risk should specific negative events occur that, although extreme, are plausible (such as, for example, a deterioration in the decline rate of the loans portfolio).
During 2018, activities continued to ensure full implementation of the 19th update to Bank of Italy Circular 263/2006, now included in Bank of Italy Circular 285/2013, specifically:
implementation of second level controls on credit risk by Banca Sella’s Risk Management Service;
assessment of the coherence between the RAF for significant operations and loan disbursement/renewal under the responsibility of the Board of Directors.
As of 1 January 2018, when the accounting standard IFRS 9 took effect, the methods used to measure credit were adjusted in line with the new regulations.
Banca Sella has equipped itself with an Anomalous Credit Managers service, included in the Non- Performing Exposures area, which assists branches in managing relations with clientèle that have high levels of credit anomalies.
The Banca Sella BSE Credit Quality service carries out actions to verify the adequacy of credit risk supervision, with constant monitoring of performance and customer data and with controls on the operations of the Banca Sella distribution network and the Credit Area services assigned to disburse credit.
More specifically, the service operates through:
remote control of the correct supply of loans and management of branches in most anomalous trends;
control of the correct exercise of delegated powers;
control of compliance with internal regulations on the disbursement and management of loans;
systematic controls on customer positions with anomalous trends and monitoring the timeliness of interventions by the distribution network and the Credit area services responsible for managing non-performing loans, requesting resolution and if necessary beginning escalation processes;
sharing actions and schedules for resolving identified anomalies with managers responsible for customer relations;
identifying proactive and early actions and associated procedure management;
managing follow-ups on activities performed.
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The various monitoring purposes, the different areas to be observed and reporting timing are such as to require the adoption of different and complementary instruments, whose use and specific operation techniques are such as to avoid report overlaps.
Within the scope of its trend monitoring work, the Credit Quality Service employs the following information procedures:
ARC - AUTOMATIC RISK CLASSIFICATION Procedure
The procedure classifies all positions in the Credit Portfolio of the Group Banks (borrowers or with overdrafts in use) into 4 classes on the basis of the credit risk:
ARC class 1 (green): positions with no anomalies and positions with a low level of anomalies;
ARC class 2 (yellow): positions with more serious anomalies, not such as to jeopardise continuation of the relationship, but which need to be remedied;
ARC class 3 (red): anomalous positions which provide for action on the basis of the type of anomaly in being, the amount of the exposure and the amount past-due understood as the sum of instalments unpaid and unauthorised current account overdraft;
ARC class 4 (black): positions with significant anomalies such as to require immediate action to remedy them.
The ARC procedure is aimed at:
classifying the loan portfolio according to the credit risk associated with customers;
making available a customer risk record useful for monitoring and managing credit risk; the record is integrated into the platform in CRM and enables all the indicators used to calculate policies to be displayed on one screen, together with other information useful for managing the position.
Data update frequency: once a week.
The credit risk management process is carried out on the CRM platform, where there is a section devoted to monitoring credit risk, referred to as “Credit Alarms”.
The contacts are included with anomalies relating to: ARC risk and the exceeding of current account thresholds and unpaid instalments.
Through CRM, timely contact is provided to work to reduce the risk of losses on credits, reporting information about customers, including commercial information, thereby ensuring a complete overview of the customer. The following are involved in the CRM monitoring process: the branch, phone collection, anomalous loan auditors and decision-makers.
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Performance anomaly classes aim to immediately identify any customer positions showing significant performance anomalies within the classifications already made by the ACR - Automatic Risk Classification procedure. They make it possible to:
define the seriousness of the relationships;
set action priorities.
The 12 classes represent probability of default in the short term. A higher class corresponds to a more critical customer relationship. Class 12, in fact, includes all positions marked as “Unlikely to pay, without revocation”. The class can be viewed in the ARC risk record integrated into the CRM.
Data update frequency: once a week.
TABLEAU DE BORD
This tool enables viewing of the trend of specific performance data with the possibility of segmenting the portfolio reports at the level of the Bank, a Territory, a District and a Branch.
The Tableau de Bord has the purpose of monitoring the trend of specific performance anomalies and measuring the achievement of the targets assigned (unauthorised current account overdrafts, Frozen current accounts, Delinquency Ratio, Past-due invoices, Past-due resolutions, Past-due foreign loans, Subject-to-collection portfolio non-payments, Loan performance by ARC risk classes, non-revoked unlikely to pay, Past-due, loans classified in stage 2).
Users: the data contained in the Tableau de Bord are available to the internal Offices and the Distribution Network.
Data updating period: the data are updated every month and refer to the figures in being at the end of the month. Unauthorised overdrafts and Delinquency ratios are instead updated daily.
The BSE Credit Quality Service takes particular care in monitoring signals of tensions represented by overdrafts of current accounts and payments in arrears, through specific activities that notify the network of these aspects, with the aim of preventing transfers to impaired classification and guaranteeing prompt intervention. This safeguard ensures that, when possible, anomalies are resolved and the best solution is found with the customer to return to regular payment of exposures, while consequently safeguarding against credit risk for the portfolio.
2.3 Expected loss measurement methods Accounting standard IFRS 9, published by the IASB, replaced IAS 39 as of 1 January 2018. The new standard involved a complete revision of the methods used to recognise, measure and writedown financial instruments. In particular, in compliance with the classification and measurement requirements, IFRS 9 envisages the following as measurement methods for financial instruments:
measurement at amortised cost (AC);
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measurement at fair value through profit and loss (FVTPL) or through other comprehensive income (FVOCI). The new models used to determine collective measurements is shared for all financial instruments not measured at FVTPL and is based on expected lifetime losses (ECL lifetime), in order to allow for prompt recognition of writedowns.
Accounting standard IFRS 9 introduced certain significant changes:
introduction of Stage 2: IAS 39 involved classification of financial instruments as either performing or in default. Under the new standard IFRS 9, financial instruments are classified into three stages, based on the impairment of credit quality with respect to initial recognition. On the basis of this new classification, performing exposures can be further distinguished as either Stage 1 or Stage 2, with the level of provisioning changing accordingly;
perimeter of application of impairment: in the light of the new standard, the following are also included in the scope of impairment application
o exposures relative to other Group companies o available margins relative to credit granted and not used o securities valued at AC or at FVTOCI switch to an expected loss model: replacing the incurred loss model used under IAS 39, based on which losses were recognised following a trigger event, standard IFRS 9 introduced an expected loss impairment model based on the use of forward looking information, to obtain recognition of losses in advance.
With reference specifically to the first point, the distinction between performing exposures classified as Stage 1 and Stage 2 is associated with a significant increase in credit risk seen for each transaction relative to the origination date. For financial instruments classified in Stage 1 and 2, expected losses are calculated at 12 months and over the entire lifetime, respectively.
The collective valuation of performing loans takes place by subdividing the clientèle into homogeneous segments in terms of credit risk. The relative loss percentages are estimated by applying the probability of insolvency (PD – Probability of Default) and the loss rate in the case of insolvency (LGD - Loss Given Default) and exposure at default (EAD).
Exposure at default is the book value at amortised cost, with the exception of the component of the commitment to disburse credit relative to which the exposure is the off-balance sheet amount weighted by the credit conversion factor (CCF).
With specific reference to the PD variable, this is determined on the basis of internal rating models when available, and all other cases on the basis of default entry historic data.
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Relative to LGD, the Sella Group has provided itself with a Workout Loss Given Default estimate model, on the basis of internal data. The estimate sample has been divided into subgroups with similar risk characteristics, and the resulting LGD for each subgroup is used as an estimate for future LGDs for all loans with the same characteristics.
Finally, with reference to the CCF, there is no internal model. Therefore, the parameter was defined on the basis of the values envisaged in the prudential regulations, applying a floor of 10%.
Writedowns determined collectively are recognised in the Income Statement. At every annual or interim balance sheet date any additional writedowns or writebacks are recalculated in a differential manner with reference to the entire portfolio of performing loans.
2.4 Credit risk mitigation techniques In the light of the significant attention paid to the work of loan disbursement, approval for credit is granted only after a particularly detailed initial selection of possible borrowers. In the first place, the assessment of creditworthiness is founded on the actual ability of borrowers to fulfil the commitments assumed exclusively on the basis of their capacity to generate adequate cash flows. However, in the process of disbursement and monitoring of loans, forms of protection from credit risk given by the technical type and by the presence of sureties are not neglected, above all with reference to customers associated with a higher probability of default.
The guarantees normally acquired from counterparties are those typical of the banking business, primarily: personal guarantees and real guarantees on property and financial instruments. Banca Sella does not have recourse to the use of netting agreements related to balance-sheet and “off-balance-sheet” transactions nor to the purchase of credit derivatives.
Banca Sella is well aware that credit risk mitigation techniques are more effective if they are acquired and managed so as to comply with the requirements of the Basel III standard in all its aspects: legal, rapid realisation, organisational and specific to each guarantee. Effective compliance with the admissibility requisites is the result of a complex process, which is differentiated on the basis of the type of credit risk attenuation technique, which involves numerous players: from the Network staff who deal with the guarantee acquisition process, to the Quality and Credit Control service which conducts first-level controls on the comprehensiveness and accuracy of documentation, to the Parent Company’s Risk Management Service which handles the stage of verifying the admissibility of these guarantees. With specific reference to the guarantee acquisition stage, the process is backed by a special software procedure which intervenes between the approval stage and the stage of disbursement of the loan and manages acquisition of the guarantees (pledges, mortgages and sureties), tying disbursement to a positive outcome of the controls envisaged.
As regards the guarantee admissibility verification stage, starting out from the input data from the software procedure supporting the acquisition of new guarantees, the Parent Company’s Risk Management Service works in two ways:
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statistical revaluations (known as surveillance) of the value of properties mortgaged for all contracts for which the Regulation 575/2013 permits recourse to this type of valuation. To this end the Group makes use of a database on property market trends divided by geographical area and type of property acquired from an external supplier;
checks on the general and specific admissibility of all credit risk mitigation tools. To this end a special software procedure has been developed which, for each guarantee, certifies compliance with the general and specific admissibility requisites at each date of calculation of capital requirements.
With specific reference to personal guarantees, the specific admission requirements for guarantors are quite strict and, substantially, they exclusively recognise guarantees issued by sovereign states, public bodies, multilateral development banks, supervised brokers and companies with good credit rating for the purposes of capital requirement mitigation against credit risk. Banca Sella has continued, also in 2018, to make use of, when possible, the guarantees issued by the Guarantee Fund for SMEs, which, thanks to the presence of the Italian State as counter-guarantor, allow for mitigating the credit risk to comply with regulatory ratios. With the belief that the personal guarantees issued by entities that do not fall within the standard list may as well provide effective credit risk mitigation for management purposes, it shall be common practice to also accept individual persons or companies without external rating as guarantors, if necessary.
No concentration conditions were recognised for guarantee categories.
3 Impaired credit exposures The activities performed by the Non-Performing Exposures service are aimed at meeting the need to achieve effective management of non-performing loans, harmonising and integrating actions, starting from the moment the initial signs of impairment are seen, through to situations with more serious and/or irreversible problems.
The Non-Performing Exposures service is responsible for non-performing loans in all the various categories, managing and assessing impaired loans.
The structure within Banca Sella carries out activity for Banca Sella itself and, for collection activities for disputed loans relative to revoked unlikely to pay positions and bad loans, it provides services through outsourcing to Banca Patrimoni Sella & C.
The Non-Performing Exposures Service is divided into 4 services:
. Anomalous Loan Managers Service: composed of local specialised workers who manage relationships with non-performing customers classified as unlikely to pay and past due with amounts exceeding € 10,000, supporting and cooperating with the Distribution Network. Similar figures at the head offices provide coordination and control activities;
. Phone Collection Service: composed of individuals located at the head offices and the Group's Services Center, managing phone collection for non-performing loans of non-significant amounts;
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. Restructured Loans and Large Exposures Service: composed of specialised workers at the head office responsible for significant positions, with exposures that involve multiple credit institutions or exposures that have special legal/economic aspects. They also work with customers in cooperation with the Anomalous Loan Managers and corporate employees in the Distribution Network;
. Dispute Service: composed of workers at the head office responsible for all positions for which a forced recovery stage has been begun, as the actions of the previous services did not obtain definitive resolution of the customer’s problems.
Relative to the category of customers with lower exposures, support from Phone Collection makes it possible to manage a high number of customers effectively and continuously, as soon as the initial signs of impairment appear, while also allowing the Distribution Network to maintain focus on developing sales. The Phone Collection structure makes use of the Group’s Services Center with personnel working throughout the day, with consequent improvement in collection performance for smaller overdue amounts.
Where do not appear to be concrete prospects to return positions to performing, the transfer to the dispute service is made, to begin foreclosures.
For the positions involving larger exposures, the Anomalous Loan Managers from the Non- Performing Exposures have the objective of working with the Distribution Network, promptly taking on direct management of impaired customers to resolve problems and identifying solutions to return these exposures to performing status.
In particular, management of these positions by Anomalous Loan Managers and the Restructured Loans and Large Exposures sector is intended to:
assess debtors’ future prospects;
adjusting the due dates of financial commitments to adjust them to situations of temporary difficulty;
contribute to resolving performance anomalies identified;
acquiring guarantees that mitigate credit risk;
participate at the negotiating table with customers and the banking structure;
analyse the documents provided by the customer and appointed consultants, in order to assess business and financial plans proposed to restore the debts;
prepare appropriate investigations in the electronic credit line system to be submitted to the relevant decision-making bodies, with the solutions identified or being prepared by the customers;
guarantee pricing adequate to the risk profile;
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not increasing the overall risk level when concrete prospects for recovery do not exist;
determine proper impairment classification for the loan during negotiations;
assess proper recoverability, applying the provisioning policies;
assessing whether to start collections on the loan when performance and the overall situation for the customer lead to the decision to extricate the bank from the relationship.
In this latter case, and every time the requirements are met, non-performing positions must be transferred to the dispute office, which has the task of:
revoking credit lines;
acting in a timely manner to recover loans in default and acquiring further guarantees to cover exposure;
beginning foreclosures in order to enforce guarantees, when the requirements to grant adjustments to payment schedules and/or other similar actions are no longer met;
promptly calculating expected losses in an analytical manner at the level of individual customer accounts;
periodically checking the adequacy of the recovery forecasts and the terms of recoverability of the credit;
optimising the costs/results of the legal measures taken to recover the credit;
making losses recorded at the end of court and out-of-court procedures definitive
assessing without recourse transfers of bad loans, achieving the best price based on the characteristics of the portfolio and the NPL market at that moment in time, in order to accelerate the collection process and reducing the time frame for bad loans
Decision-making responsibilities relative to the assessment of collections for non-performing customers and settlement proposals, in regards to Banca Sella, are granted directly to the manager of the service, and his employees, with powers conferred on an individual basis and, for transactions for a larger amount, to the CEO and the other monocratic bodies as part of the powers conferred by with the Board of Directors.
Forecasts for the collection of disputed credit is subject to analytical evaluations for the more significant amounts while for loans of lesser amount, during 2018 lump sum measurement methods were developed, with the application of writedown percentages based on LGD as calculated by Risk Management for homogeneous clusters of credit lines.
Analytical evaluation is differentiated in relation to the features of individual loans, taking into account any collateral present and/or acquirable and any agreements made with customers.
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In particular, this evaluation takes the following into consideration:
the amount of the recovery value as the sum of the expected cash flows estimated on the basis of the types of guarantees given and/or acquirable, their estimated realisation value, the costs to be sustained and the debtor’s willingness;
the recovery times estimated on the basis of the types of guarantees, the in-court or out-of-court liquidation methods for the guarantees, bankruptcy proceedings and the geographical area to which the loan belongs;
discounting rates; for all credits measured at the amortised cost the original effective rate of return is used, whereas for revocable credit lines the interest rate considered is that at the moment of default.
3.1 Management strategies and policies Management strategies for non-performing loans are continuously monitored and updated in order to guarantee risk is monitored and the main economic and equity objectives are achieved
Banca Sella's NPLs reached their highest point at the end of 2015. Subsequently, a continuously improving downward trend was seen, thanks to a reduction in new entries to the category and greater efficiency in out of court actions, as well as the use of options to dispose of the portfolio of bad loans, as the most important part of the NPL management model.
The lower flow of incoming impaired loans seen in recent years involved both loans to households and to businesses and was supported by economic growth and a more prudential risk appetite.
Below are the main ratios which indicate achievement of the objectives in terms of reducing NPLs, in line with the company's strategic plan.
2018 2017 Change
Coverage NPL 52.5% 48.9% 3.6%
Coverage Bad Loans 61.6% 58.3% 3.3%
Gross NPL ratio 9.0% 11.8% -2.8%
Net NPL ratio 4.5% 6.4% -1.9%
Texas ratio 63.8% 75.0% -11.2%
Cost of credit risk 0.5% 0.5% -0.0%
Again in 2019 a further reduction in NPLs is expected, in part through the tool of disposing of loans in the portfolio held for sale at the time of FTA.
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With the adoption of accounting standard IFRS 9, the level of provisioning for the NPL portfolio with revocation was revised, both for secured and unsecured loans, taking into account probabilistic scenarios of the occurrence of disposal events based on hypothesized market price scenarios. New unsecured impaired positions, identified for disposal, are adjusted to the recovery value specifically envisaged in the credit regulations, calculated on the presumed market price deriving from historic series of disposals carried out in recent years.
For secured loans, outside of the scope of FTA, no disposal scenario is envisaged. In the case the disposal of a group included secured loans was assessed, this would be adjusted to the expected price, after evaluation by the Board of Directors
This was a fundamental step for strategic management of NPLs in 2018 and, looking forward, for the following years of the plan, making it possible to accelerate the process of reducing impaired loans. In particular, in 2018 a bad loan portfolio was disposed of at a gross book value 1.5 times the figure forecast in the budget (€ 185 million against € 120 million).
3.2 Write-off As part of the annual review of the policy for credit management and assessment, criteria were identified for the application of partial write-offs.
Triggers were identified to be used in selecting bad loans to be evaluated for write-offs, associated with the writedown percentage applied, the age of the loan, absence of payments, near-null value of collateral and new collection actions not being cost effective.
Loans subject to partial write-offs without renunciation of the loan amounted to € 6.35 million in 2018. As a whole and also carried out in previous years, the amount of losses relative to write-offs due to uncollectability without renunciation of the loan comes to € 38.5 million.
3.3 Impaired financial assets, purchased or originated During the year, the Bank did not have this type of asset.
4 Financial assets subject to renegotiation and forborne exposures
There are a series of typical cases of contractual changes, here provided by way of example and not exhaustive, which require identifying whether the change is substantial or not, in order to understand whether the requirements relative to derecognition or modification apply: Reduction in spread. Change in duration. Change from floating to fixed rate. Change from fixed to floating rate. Change from floating rate to another type of floating rate. Change in payment frequency. Extension of pre-amortisation period.
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Acceptance of one additional instalment at maturity. Change in the amortisation plan (for example, from Italian to French). Introduction or elimination of ceilings or floors. The changes listed are substantially applied for two basic reasons: a) commercial: a regularly performing customer is granted contractual changes to impede full repayment of the debt (derecognition) or subrogation suffered (derecognition). The method of renegotiation, with the aim of not causing the customer to pay additional expenses deriving from repayment of the debt and consequent stipulation of a new contract, is a practical tool to align contractual terms and conditions with changed market conditions. It can therefore be assumed that the instrument modified is substantially modified with respect to the original one, and the financial instrument is derecognised.
b) granting of forbearance: Forbearance (as defined in Bank of Italy Circular 272) consists in concessions—in terms of changes and/or refinancing of a pre-existing debt contract—relative to a debtor who is or is likely to find themselves in difficulty in terms of respecting their financial commitments, which would otherwise not be considered by the creditor. These are contractual changes aimed at facilitating payment from the customer following a change (i.e. reduction) in their repayment capacity. In this case, additional examples are possible such as i) reduction in the interest rate; ii) delaying maturity, iii) suspension of capital payments; iv) suspension of all payments. In this case, it is assumed that derecognition does not occur, also for the purposes of not recognising the financial asset in Stage 1, given that the loan will be classified in Stage 2 (with application of lifetime credit expected losses), following a significant increase in the credit risk, or if the requirements are already met, classified in Stage 3. Therefore, the accounting standard applies which requires that if contractual cash flows deriving from the financial asset are renegotiated or otherwise modified, the entity must recalculate the gross book value of the financial asset and recognise a profit or loss deriving from the change in the income statement. The gross book value of the financial asset must be recalculated as the current value of the renegotiated or modified cash flows, discounted at the effective original interest rate for the financial asset (or the corrective effective interest rate for the amount of impaired financial assets acquired or originated). Any cost or fee paid will adjust the book value of the changed financial asset and are amortised throughout the course of the remaining maturity of the changed financial asset.
At FTA of accounting standard IFRS 9, 659 lines of credit were identified within the loan portfolio with a negative differential equal to 7.06 million at FTA. During the year, a positive economic effect was generated for these positions due to payments and early repayments equal to around € 1.2 million.
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New loans granted with modification effects involved 63 lines of credit in 2018, with a negative impact of around € 0.6 million in costs, recognised in the income statement for the year.
Quantitative information
A. Credit quality
Equity securities and UCITS units are excluded.
The term "cash credit exposures" means all cash financial assets held relative to banks or customers, regardless of what accounting portfolio they are classified within (measured at fair value through profit and loss, measured at fair value through other comprehensive income, measured at amortised cost, financial assets held for sale).
The term “off-balance sheet credit exposures” means all non-cash financial exposures (financial guarantees given, revocable and irrevocable commitments, derivatives, etc.) which involve taking on credit risk, whatever the purpose of said transactions (trading, hedging, etc.). Among off-balance sheet credit exposures, counterparty risk associated with security loan transactions is also included, both by the lender and the borrower. Counterparty risk associated with exposures regarding repurchase agreements or commodities lending, as well as financing with margins which can be classified as Securities Financing Transactions (SFT) should also be noted, as defined in the prudential regulations.
Impaired credit exposures (cash or off-balance sheet) do not include financial assets held for trading and hedging derivatives, which are therefore conventionally recognised among non-impaired credit exposures.
A.1 Non-performing and performing loans: amounts, adjustments, trend and economic distribution
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A.1.1 Distribution of financial assets by portfolio and credit quality (book values)
Portfolio/Quality Total Total loans Bad loans exposures Past due NPLs Unlikelypay to Other performing Performing past-due
1. Financial assets measured at amortised cost 179,375 127,735 7,200 104,477 9,988,527 10,407,314 2. Financial assets measured at fair value through other - - - - 435,141 435,141 comprehensive income
3. Financial assets carried at fair value ------4. Other financial assets necessarily measured at fair value - 567 62 261 34,080 34,970 5. Financial assets held for sale ------Total 31/12/2018 179,375 128,302 7,262 104,738 10,457,748 10,877,425 Total 31/12/2017 263,789 179,558 6,512 109,821 10,319,262 10,878,942
A.1.2 Distribution of financial assets by portfolio and credit quality (gross and net values)
Non-performing Performing
Portfolio/Quality offs* Net exposure Net exposure Gross exposure Gross exposure Total (net exposure) Total writedowns Total writedowns Total partial write-
1. Financial assets measured at 662,195 347,885 314,310 38,508 10,123,586 30,582 10,093,004 10,407,314 amortised cost 2. Financial assets measured at fair value through other comprehensive - - - - 435,486 345 435,141 435,141 income 3. Financial assets carried at fair value - - - - X X - - 4. Other financial assets necessarily 629 - 629 - X X 34,341 34,970 measured at fair value
5. Financial assets held for sale ------
Total 31/12/2018 662,824 347,885 314,939 38,508 10,559,072 30,927 10,562,486 10,877,425 Total 31/12/2017 879,976 430,117 449,859 - 10,451,727 22,644 10,429,083 10,878,942
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Assets with evident low creditworthiness Other assets Portfolio/Quality Cumulative capital losses Net exposure Net exposure
1. Financial assets held for trading - - 36,981
2. Hedging derivatives - - 1,974
Total 31/12/2018 - - 38,955 Total 31/12/2017 - - 26,997
A.1.3 Distribution of financial assets by past-due segment (book values)
Stage 1 Stage 2 Stage 3 days days days days days days days to 90 days to 90 days to 90 1 day to 30 1 day to 30 1 day to 30
Over 90 days Over 90 days Over 90 days More than than 30 More than 30 More than 30 More 1. Financial assets measured at 38,332 2,415 2,164 31,153 22,768 7,644 11,639 12,398 225,442 amortised cost 2. Financial assets measured at fair value through other ------comprehensive income Total 31/12/2018 38,332 2,415 2,164 31,153 22,768 7,644 11,639 12,398 225,442
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PART 1 A.1.4 Financial assets, commitments to disburse funds and financial guarantees given: trend of total writedowns and total provisions Total writedowns Assets in stage 1 Assets in stage 2
Cause/risk stage income income amortised cost amortised cost amortised Financial assets measured at Financial assets measured at of which: individual writedowns of which: individual writedowns of which: collective writedowns of which: collective writedowns Financial assets measured at fair Financial assets measured at fair valueother through comprehensive value through other comprehensive Opening balance 22,644 ------Adjustment of initial balances (2,619) 367 - 20,392 16,741 - - 16,741 Opening balance 20,025 367 - 20,392 16,741 - - 16,741
Increases in financial assets 6,216 115 - 6,331 3,159 - - 3,159 acquired or originated
Derecognitions other than write- (4,363) (175) - (4,538) (5,244) - - (5,244) offs Net value adjustments for credit (3,065) 54 - (3,011) (2,217) - - (2,217) risk (+/-) Contractual changes without - - - - 14 - - 14 write-offs Changes from estimate 419 (16) - 403 (1,103) - - (1,103) methodology Write-off ------Other changes ------Closing balance 19,232 345 - 19,577 11,350 - - 11,350
Recoveries from amounts collected on financial assets ------subject to write-offs
Write-offs recognised directly in ------income statement
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PART 2 A.1.4 Financial assets, commitments to disburse funds and financial guarantees given: trend of total writedowns and total provisions Total writedowns Total provisions on commitments to Assets in stage 3 disburse funds and financial guarantees
Of which:imp aired Cause/risk stage financial Total assets, purchased cost Stage 1 Stage or 2 Stage 3 Stage originated of which: individual writedowns of which: collective writedowns through other comprehensive income Financialassets measured at fair value Financial assets measured at amortised Opening balance 429,361 - 420,835 8,526 - - - - 452,761 Adjustment of initial 53,256 - 53,256 - 1,087 1,944 163 144 69,240 balances Opening balance 482,617 - 474,091 8,526 1,087 1,944 163 144 522,001 Increases in financial assets acquired or - - - - - 977 48 - 10,515 originated
Derecognitions other (143,636) - (143,636) - - (525) (75) - (154,018) than write-offs
Net value adjustments 25,724 - 24,450 1,274 231 (323) (14) (3) 20,155 for credit risk (+/-)
Contractual changes ------1 - 15 without write-offs
Changes from estimate - - - - - (82) (11) - (793) methodology
Write-off (16,820) - (16,820) - - - - - (16,820) Other changes - - 8,488 (8,488) - - - - - Closing balance 347,885 - 346,573 1,312 1,318 1,991 112 141 381,055 Recoveries from amounts collected on ------financial assets subject
Write-offs recognised directly in income ------statement
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A.1.5 Financial assets, commitments to disburse funds and financial guarantees given: transfers between different credit risk stages (gross and nominal values)
Gross values/nominal value
Transfers between Transfers between Transfers between stage 1 stage 2 and 3 stage 1 and stage 3 and stage 2
Portfolio/risk stage
From From From From From stage From stage stage 2 to stage 2 to stage 3 to stage 1 to 1 to stage 2 3 to stage 1 stage 1 stage 3 stage 2 stage 3
1. Financial assets measured at amortised cost 144,968 143,964 27,673 15,800 23,036 6,755
2. Financial assets measured at fair value through ------other comprehensive income
3. Commitments to disburse funds and financial 9,961 36,532 263 203 4,684 311 guarantees given
Total 31/12/2018 154,929 180,496 27,936 16,003 27,720 7,066
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A.1.6 Credit exposure of cash and off-balance sheet to banks: gross and net amounts
Gross exposure Total value Total partial Type of exposure/amounts adjustments and Net exposure Non- write-offs* Performing provisions performing
A. Cash credit exposures a) Bad loans - X - - - - of which: exposures subject to - X - - - concessions b) Unlikely to pay - X - - - - of which: exposures subject to - X - - - concessions c) Past-due NPEs - X - - - - of which: exposures subject to - X - - - concessions d) Non-impaired past-due loans X - - - - - of which: exposures subject to X - - - - concessions e) Other non-impaired exposures X 2,422,563 705 2,421,858 - - of which: exposures subject to X - - - - concessions TOTAL (A) - 2,422,563 705 2,421,858 -
B. Off-balance sheet loan exposures
a) NPEs - X - - -
b) non-impaired X 17,319 2 17,317 -
TOTAL (B) - 17,319 2 17,317 -
TOTAL (A+B) - 2,439,882 707 2,439,175 -
* Value to be shown for disclosure purposes
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A.1.7 Credit exposure of cash and off-balance sheet to customers: gross and net amounts
Gross exposure Total value Total partial Type of exposure/amounts adjustments Net exposure Non- write-offs* Performing and provisions performing
A. CASH CREDIT EXPOSURES a) Bad loans 467,368 X 287,993 179,375 38,508 - of which: exposures subject to 30,534 X 17,390 13,144 360 concessions b) Unlikely to pay 186,578 X 58,276 128,302 - - of which: exposures subject to 117,674 X 31,256 86,418 - concessions c) Past-due NPEs 8,878 X 1,616 7,262 - - of which: exposures subject to 485 X 21 464 - concessions d) Non-impaired past-due loans X 107,778 3,040 104,738 - - of which: exposures subject to X 15,525 1,056 14,469 - concessions e) Other non-impaired exposures X 8,086,548 27,182 8,059,366 - - of which: exposures subject to X 65,386 4,448 60,938 - concessions TOTAL A 662,824 8,194,326 378,107 8,479,043 38,508 B. OFF-BALANCE SHEET LOAN
EXPOSURES a) NPEs 11,161 X 194 10,967 - b) non-impaired X 3,556,777 3,338 3,553,439 - TOTAL B 11,161 3,556,777 3,532 3,564,406 - TOTAL A+B 673,985 11,751,103 381,639 12,043,449 38,508 * Value to be shown for disclosure purposes
Gross exposures relative to non-performing loans and specific value adjustments also include interest on arrears deemed non-recoverable totalling € 52 million.
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A.1.9 Cash credit exposure to customers: trend of gross impaired loans
Description/Category Bad loans Unlikely to pay Past due NPLs
Initial gross exposure 632,810 239,555 7,612
- Change to opening balances - (2,072) (16)
A. Initial gross exposure 632,810 237,483 7,596 - of which: exposures sold but not derecognised 4,733 5,830 170 B. Increases 84,747 140,270 34,752 B.1 inflows from performing exposures 100 112,274 31,696 B.2 inflows from impaired financial assets, purchased or originated - - - B.3 transfers from other categories of impaired loans 57,726 8,636 48 B.4 contractual changes without write-offs - - - B.5 other increases 26,921 19,360 3,008 C. Decreases 250,189 191,175 33,470 C.1 outflows to performing exposures - 76,284 18,219 C.2 write-offs 16,656 733 - C.3 collections 37,664 52,738 3,509 C.4 realizations through sales 35,802 - - C.5 losses on disposal 4,466 - - C.6 transfers to other categories of impaired loans 20 56,234 10,156 C.7 contractual changes without write-offs - 661 - C.8 other decreases 155,581 4,525 1,586 D. Final gross exposure 467,368 186,578 8,878 - of which: exposures sold but not derecognised 2,632 2,620 149
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A.1.9bis Cash loan exposure to customers: trend in gross exposures subject to forbearance, broken down by credit quality
Exposures subject Exposures subject Cause/Quality to forbearance: to forbearance: impaired non-impaired
A. Initial gross exposure 385,064 224,850 - of which: exposures sold but not derecognised 1,410 10,074 B. Increases 69,791 41,159 B.1 incoming from performing non-forborne exposures 41,940 26,173 B.2 incoming from performing forborne exposures 16,389 X B.3 incoming from non-performing forborne exposures X 14,644 B.4 other increases 11,462 342 C. Decreases 113,632 72,671 C.1 outgoing to performing non-forborne exposures X 50,085 C.2 outgoing to performing forborne exposures 14,644 X C.3 outgoing to non-performing forborne exposures X 16,389 C.4 write-offs 3,125 - C.5 collections 26,161 5,284 C.6 realizations through sales 3,688 - C.7 losses on disposal 174 - C.8 other decreases 65,840 913 D. Final gross exposure 148,691 80,913 - of which: exposures sold but not derecognised 1,167 -
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A.1.11 Impaired cash credit exposure to customers: trend of total writedowns
Bad loans Unlikely to pay Past due NPLs
Description/Category of which: of which: of which: exposures exposures exposures Total Total Total subject to subject to subject to forbearance forbearance forbearance
A. Initial total adjustments 369,020 20,229 59,997 37,111 1,100 -
- Change to opening balances 44,117 4,843 9,485 4,128 - -
- of which: exposures sold but not 1,165 - 476 59 15 - derecognised
B. Increases 79,880 7,349 35,056 7,097 1,548 21
B.1 writedowns on impaired financial assets, - X - X - X purchased or originated B.2 other writedowns 48,780 4,107 34,872 7,097 1,528 21
B.3 losses on disposal 4,466 174 - - - -
B.4 transfers from other categories of 26,334 3,068 184 - 20 - impaired loans
B.5 contractual changes without write-offs - X - X - X
B.6 other increases 300 - - - - -
C. Decreases 205,024 15,032 46,263 17,079 1,032 -
C.1 write-backs on valuation 16,750 2,217 16,684 12,750 439 -
C.2 write-backs on collection 7,195 1,430 1,608 916 62 -
C.3 gains on disposals 4,738 653 - - - -
C.4 write-offs 16,656 3,022 733 103 - -
C.5 transfers to other categories of impaired 19 - 25,989 3,068 530 - loans
C.6 contractual changes without write-offs - X - X - X
C.7 other decreases 159,666 7,710 1,249 242 1 -
D. Final total adjustments 287,993 17,389 58,275 31,257 1,616 21
- of which: exposures sold but not 1,187 - 517 93 9 - derecognised
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A.2 Classification of financial assets, commitments to disburse funds and financial guarantees given based on external and internal ratings Banca Sella makes use of the external credit rating agencies Fitch Rating Ltd and Cerved Rating Agency, the latter solely for determining weighting ratios when calculating capital requirements for exposures with companies classified as capital companies. The table below shows the distribution of exposures by external rating classes assigned by Fitch and by Cerved of the customers of Banca Sella.
A.2.1 Distribution of financial assets, commitments to disburse funds and financial guarantees given: by external rating class (gross values) External rating classes
Without Exposures Total rating class 1 class 5 class 2 class class 3 class 6 class 4
A. Financial assets measured at 1,575 317,138 874,166 189,946 13,923 5,479 9,383,554 10,785,781 amortised cost
- Stage 1 1,575 316,792 864,114 176,647 8,871 2,051 8,454,146 9,824,196
- Stage 2 - 346 7,348 12,316 1,764 1,102 276,514 299,390
- Stage 3 - - 2,704 983 3,288 2,326 652,894 662,195 B. Financial assets measured at fair value through other comprehensive - 13,385 323,808 20,608 - - 77,685 435,486 income - Stage 1 - 13,385 323,808 20,608 - - 77,685 435,486
- Stage 2 ------
- Stage 3 ------
Total (A+B) 1,575 330,523 1,197,974 210,554 13,923 5,479 9,461,239 11,221,267
of which: impaired financial assets, ------7,569 7,569 purchased or originated
C. Commitments to disburse funds and financial guarantees given
- Stage 1 2,200 580,794 607,962 81,707 4,206 444 2,046,270 3,323,583
- Stage 2 - 1,174 112 1,310 100 75 18,251 21,022
- Stage 3 - - 19 72 1,710 1,501 6,146 9,448
Total (C) 2,200 581,968 608,093 83,089 6,016 2,020 2,070,667 3,354,053
Total (A+B+C) 3,775 912,491 1,806,067 293,643 19,939 7,499 11,531,906 14,575,320
Banca Sella makes use of the external credit rating agencies Fitch Rating and Cerved Rating Agency, the latter solely for determining weighting ratios when calculating capital requirements for exposures with companies classified as capital companies. The table below shows the distribution of exposures by external rating classes assigned by Fitch and by Cerved of the customers of Banca Sella.
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External rating classes are shown based on the ECAI rating maps recognised by the Bank of Italy. The mapping shown in the table is relative to the long-term ratings assigned by Fitch Ratings and Cerved Rating Agency: creditworthiness class 1 includes Fitch ratings from AAA to AA- and Cerved ratings from A1.1 to A1.3; creditworthiness class 2 includes Fitch ratings from A+ to A- and Cerved ratings from A2.1 to A3.1; creditworthiness class 3 includes Fitch ratings from BBB+ to BBB- and Cerved ratings from B1.1 to B1.2;
creditworthiness class 4 includes Fitch ratings from BB+ to BB- and Cerved ratings from B2.1 to B2.2; creditworthiness class 5 includes Fitch ratings from B+ to B- and Cerved ratings C1.1; creditworthiness class 6 includes Fitch ratings CCC+ and lower and Cerved ratings from C1.2 to C2.1.
Note that 87% of exposures with counterparts rated by Fitch Ratings or Cerved Rating Agency have ratings equal to or better than investment grade. Additionally, we note that 40% of Banca Sella’s unrated exposures are associated with companies within the Sella Group scope of consolidation.
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A.2.2 Prudential consolidation - Distribution of financial assets, commitments to disburse funds and financial guarantees given: by internal rating class (gross values)
Internal rating classes Exposures Total AAA/SA1 AA/SA2 A/SA3 BBB/SA4 BB/SA5 B/SA6 CCC/SA7 CC/SA8 C/SA9
A. Financial assets measured at 480,831 874,557 1,432,930 832,196 511,251 207,141 88,382 23,587 21,845 4,472,720 amortised cost
- Stage 1 479,846 867,637 1,419,661 813,193 422,228 147,783 35,276 7,540 603 4,193,767 - Stage 2 985 6,920 13,269 19,003 89,023 59,358 53,106 16,047 21,242 278,953 - Stage 3 ------B. Financial assets measured at fair 6,764 11,778 8,164 2,018 2,190 690 87 9 - 31,700 value through other
- Stage 1hi 6,764 11,778 8,164 2,018 2,190 690 87 9 - 31,700 - Stage 2 ------Stage 3 ------Total (A+B) 487,595 886,335 1,441,094 834,214 513,441 207,831 88,469 23,596 21,845 4,504,420 of which:impaired financial assets, ------purchased or originated
C. Commitments to disburse funds and
-f Stage 1 63,339 47,344 49,101 56,623 23,152 12,425 1,054 205 (22) 253,221 - Stage 2 - 2 11 58 498 177 415 211 (114) 1,258 - Stage 3 ------Total (C) 63,339 47,346 49,112 56,681 23,650 12,602 1,469 416 (136) 254,479
Total (A+B+C) 550,934 933,681 1,490,206 890,895 537,091 220,433 89,938 24,012 21,709 4,758,899
With regard to internal ratings, almost all banks of the Group have an internal model for assigning corporate and large corporate companies a creditworthiness rating, a scoring model for small business and SMEs and private customers, and a financial statement model for holdings, corporate real estate and large corporate, factoring, leasing and financial. These models are used to calculate the collective measurements of Banca Sella performing positions. The internal rating system includes, for terminological conformity with the scale adopted by external rating agencies, nine credit rating classes for creditworthy customers, from AAA/SA1/SP1 (the least risky) to C/SA9/SP9 (the riskiest). At present, internal ratings are not used for calculating capital requirements. The table below shows the distribution of exposures by rating classes for credit counterparties for which a rating is calculated. The “No rating” column includes both exposures to counterparts with no internal rating and exposures to customers belonging to segments for which there is no ratings model. Also note that within Banca Sella the portion of the portfolio measured using ratings models is equal to around 42%.
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A.3 Distribution of guaranteed exposures by type of guarantee
A.3.2 Secured cash and off-balance sheet credit exposures relative to customers
Personal guarantees Collateral securities (1) (2) Credit derivatives Other derivatives Net exposure Gross exposure CLN CLN Securities Mortgages Real estate - Real estate - arties Other collateral Central financial leasing Counterp 1. Guaranteed cash credit 4,001,799 3,758,023 2,669,309 - 150,513 29,157 - - 1.1. totally guaranteed 3,881,547 3,652,223 2,666,423 - 135,412 24,457 - -
- of which impaired 467,507 253,736 198,300 - 928 738 - -
1.2. partially guaranteed 120,252 105,800 2,886 - 15,101 4,700 - -
- of which impaired 22,330 8,372 2,768 - 278 237 - - 2. Off-balance sheet guaranteed 102,452 101,803 4,098 - 12,665 10,234 - - credit exposures: 2.1. totally guaranteed 83,191 82,620 4,098 - 10,282 7,253 - -
- of which impaired ------
2.2. partially guaranteed 19,261 19,183 - - 2,383 2,981 - -
- of which impaired 22 21 - - 2 5 - -
A.3.2 Secured cash and off-balance sheet credit exposures relative to customers part 2
Personal guarantees (2)
Credit derivatives Endorsement loans Total
Other derivatives (1)+(2) anies anies Public Banks p Other Banks companies financial financial Other entitiesOther Other financial com administrations Other entities 1. Guaranteed cash credit - - - 1,562 23,855 33,301 799,019 3,706,716 1.1. totally guaranteed - - - 954 21,794 15,144 770,093 3,634,277
- of which impaired - - - 189 116 - 51,515 251,786
1.2. partially guaranteed - - - 608 2,061 18,157 28,926 72,439
- of which impaired ------4,308 7,591
2. Off-balance sheet guaranteed - - - - 381 - 64,955 92,333 credit exposures:
2.1. totally guaranteed - - - - 381 - 60,456 82,470
- of which impaired ------
2.2. partially guaranteed ------4,499 9,863
- of which impaired ------6 13
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A.4 Financial and non-financial assets obtained through enforcement of collateral received
Book value Credit Total exposures Gross value writedowns of which obtained written off during the year
A. Tangible assets 1,626 1,705 687 1,018 - A.1. For business purposes - - - - - A.2. For investment purposes 1,626 1,705 687 1,018 - A.3. Inventories - - - - - B. Equity and debt securities 500 449 94 355 - C. Other assets 47 47 15 32 -
D. Non-current assets and asset groups held for sale - - - - -
D.1. Tangible assets - - - - - D.2. Other assets - - - - - Total 31/12/2018 2,173 2,201 796 1,405 -
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B. Distribution and concentration of credit exposures
B.1 Sectoral distribution of credit exposure of cash and off-balance sheet to customers (book value) part 1
Financial companies (of Public administrations Financial companies which: insurance companies) Exposure/Counterparty Net Total Net Total Net Total exposure writedowns exposure writedowns exposure writedowns
A. Cash credit exposures
A.1 Bad loans - - 325 783 - - - of which exposures subject to ------concessions A.2 Unlikely to pay 339 44 245 103 - - - of which exposures subject to - - 121 63 - - concessions A.3 Impaired past-due loans ------of which exposures subject to ------concessions A.4 Non-impaired loans 1,369,518 264 1,616,525 529 12 - - of which exposures subject to - - 13 2 - - concessions
Total A 1,369,857 308 1,617,095 1,415 12 -
B. Off-balance sheet loan exposures
B.1 Impaired loans - - 8 - - -
B.2 Non-impaired loans 37,083 19 347,526 155 37 -
Total B 37,083 19 347,534 155 37 -
Total (A+B) 31/12/2018 1,406,940 327 1,964,629 1,570 49 -
Total (A+B) 31/12/2017 881,745 281 1,570,934 1,575 108 -
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B.1 Sectoral distribution of credit exposure of cash and off-balance sheet to customers (book value) part 2
Non-financial companies Households
Exposure/Counterparty Net exposure Total writedowns Net exposure Total writedowns
A. Cash credit exposures A.1 Bad loans 114,564 185,200 64,486 102,010 - of which exposures 6,265 9,889 6,879 7,501 subject to
A.2 Unlikely to pay 67,590 43,526 60,128 14,603
- of which exposures subject to 48,331 23,839 37,966 7,354 concessions
A.3 Impaired past-due 2,843 641 4,419 975 loans - of which exposures 293 8 171 13
A.4 Non-impaired loans 2,553,089 19,361 2,624,973 10,068
- of which exposures 31,047 2,875 44,347 2,627 subject to Total A 2,738,087 248,728 2,754,005 127,656
B. Off-balance sheet loan exposures
B.1 Impaired loans 10,069 179 893 15
B.2 Non-impaired loans 2,574,730 2,492 585,589 672
Total B 2,584,798 2,671 586,482 687
Total (A+B) 31/12/2018 5,322,885 251,399 3,340,487 128,343
Total (A+B) 31/12/2017 3,352,371 346,639 2,532,085 105,189
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B.2 Sectoral distribution of cash and off-balance sheet exposures to customers part 1
ITALY OTHER EUROPEAN AMERICA
Exposure/Geographical area Net Total Net Total Net exposures writedowns exposures writedowns exposures
A. Cash credit exposures A.1 Bad loans 179,174 287,846 89 79 5 A.2 Unlikely to pay 120,494 54,193 7,798 4,077 10 A.3 Impaired past-due loans 7,256 1,614 2 1 3 A.4 Non-impaired loans 8,078,187 29,792 59,609 258 13,362 TOTAL A 8,385,111 373,445 67,498 4,415 13,380 B. Off-balance sheet loan
exposures B.1 Impaired loans 10,882 192 84 2 1 B.2 Non-impaired loans 3,520,958 3,314 9,406 7 2,084
TOTAL B 3,531,840 3,506 9,490 9 2,085
TOTAL (A+B) 31/12/2018 11,916,951 376,951 76,988 4,424 15,465
TOTAL (A+B) 31/12/2017 8,253,610 449,337 58,441 4,174 9,603
B.2 Sectoral distribution of cash and off-balance sheet exposures to customers part 2 AMERICA ASIA REST OF THE WORLD
Exposure/Geographical area Total Net Total Net Total writedowns exposures writedowns exposures writedowns
A. Cash credit exposures A.1 Bad loans 14 - - 107 54 A.2 Unlikely to pay 6 - - - - A.3 Impaired past-due loans 1 1 - - - A.4 Non-impaired loans 85 4,696 4 8,250 83 TOTAL A 106 4,697 4 8,357 137 B. Off-balance sheet loan exposures B.1 Impaired loans - - - - - B.2 Non-impaired loans 3 399 1 12,081 13 TOTAL B 3 399 1 12,081 13 TOTAL (A+B) 31/12/2018 109 5,096 5 20,438 150 TOTAL (A+B) 31/12/2017 46 4,799 5 10,790 122
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B.2 Sectoral distribution of cash and off-balance sheet exposures to customers
North West Italy North East Italy Central Italy Southern Italy and
Exposure/Geographical area Net exposure Net exposure Net exposure Net exposure Total writedowns Total writedowns Total writedowns Total writedowns
A. Cash credit A.1 Bad loans 62,804 111,772 25,746 41,948 31,918 47,287 58,706 86,839 A.2 Unlikely to pay 45,607 23,858 17,550 10,651 20,985 7,547 36,352 12,137 A.3 Impaired past-due 3,483 756 486 117 1,507 351 1,780 390 loans
A.4 Non-impaired loans 4,255,719 14,317 603,754 4,118 2,021,252 3,743 1,197,462 7,614
Total (A) 4,367,613 150,703 647,536 56,834 2,075,662 58,928 1,294,300 106,980 B. Off-balance sheet
B.1 Impaired loans 6,625 112 2,523 29 918 30 816 21
B.2 Non-impaired 2,127,170 1,850 482,926 403 396,024 436 514,838 625 loans Total (B) 2,133,795 1,962 485,449 432 396,942 466 515,654 646 Total (A+B) 31/12/2018 6,501,408 152,665 1,132,985 57,266 2,472,604 59,394 1,809,954 107,626 Total (A+B) 31/12/2017 4,544,058 179,660 671,717 72,358 1,669,074 69,055 1,368,761 128,264
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B.3 Sectoral distribution of cash and off-balance sheet exposures to banks part 1
ITALY OTHER EUROPEAN AMERICA
Exposure/Geographical area Total Total Total writedowns writedowns writedowns Net exposures Net exposures Net exposures A. Cash credit exposures A.1 Bad loans - - - - -
A.2 Unlikely to pay - - - - -
A.3 Impaired past-due loans - - - - -
A.4 Non-impaired loans 2,380,203 639 36,844 30 45
TOTAL A 2,380,203 639 36,844 30 45
B. Off-balance sheet loan exposures
B.1 Impaired loans - - - - -
B.2 Non-impaired loans 9,072 - 3,100 - 750
TOTAL B 9,072 - 3,100 - 750
TOTAL A+B 31/12/2018 2,389,275 639 39,944 30 795
TOTAL A+B 31/12/2017 2,911,711 18 21,065 67 843
B.3 Sectoral distribution of cash and off-balance sheet exposures to banks part 2
AMERICA ASIA REST OF THE WORLD
Exposure/Geographical area Total Total Total Total writedowns writedowns writedowns Net exposures Net exposures A. Cash credit exposures A.1 Bad loans - - - - - A.2 Unlikely to pay - - - - - A.3 Impaired past-due loans - - - - - A.4 Non-impaired loans - 2,544 34 2,222 2 TOTAL A - 2,544 34 2,222 2 B. Off-balance sheet loan exposures B.1 Impaired loans - - - - - B.2 Non-impaired loans - 3,375 2 1,020 - TOTAL B - 3,375 2 1,020 - TOTAL A+B 31/12/2018 - 5,919 36 3,242 2 TOTAL A+B 31/12/2017 3 654 - 1,966 -
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B.3 Sectoral distribution of cash and off-balance sheet exposures to banks NORTHWEST NORTHEAST SOUTHERN ITALY CENTRAL ITALY ITALY ITALY AND ISLANDS
Exposure/Geographical area Net exposures Net exposures Net exposures Net exposures Total writedowns Total writedowns Total writedowns Total writedowns
A. Cash credit exposures A.1 Bad loans ------
A.2 Unlikely to pay ------
A.3 Impaired past-due loans ------
A.4 Non-impaired loans 2,356,990 545 - - 23,213 94 - -
TOTAL A 2,356,990 545 - - 23,213 94 - -
B. Off-balance sheet loan
B.1 Impaired loans ------
B.2 Non-impaired loans 9,072 ------
TOTAL B 9,072 ------
TOTAL A+B 31/12/2018 2,366,062 545 - - 23,213 94 - -
TOTAL A+B 31/12/2017 2,873,010 8 3,002 10 35,699 - - -
B.4 Large exposures
31/12/2018 a) amount (book value) 5,677,936 b) amount (value weighted) 117,473 c) number 2
The two positions refer to Group companies and the Tesoro dello Stato (State Treasury).
BANCA SELLA | 256 REPORT AND FINANCIAL STATEMENTS 2018
C. Securitisations
Qualitative information This section does not include securitisation transactions in which banks from the same banking group were the originators or the total liabilities issued (e.g. ABS, loans in the “warehousing” phase) by vehicle companies, or subscribed at the time of issue by one or more companies in the same banking group (e.g. parent company bank).
The role of servicer in various securitisation transactions was always played by the originators (Banca Sella S.p.A.). Banca Sella S.p.A, as the originator of the operations, subscribed the entire amount of the junior titles issued in relation to the various securitisations. Junior securities for the existing operation are still held by the same. In addition, in regard to the securitisations of 2008, 2009 and 2012, the Bank subscribed the entire amount of the securities issued. In relation to the 2014 operation, the Bank fully subscribed the fixed rate senior tranche, while the variable rate senior tranche was placed on the market with institutional investors. The securities subscribed by the originator can be used as collateral for repurchase agreements with the ECB.
The risk of the assets sold is still borne by Banca Sella S.p.A., which, consequently, monitor performance constantly, preparing also regular reports.
The assets sold continue to be represented in the financial statements in that the sale did not substantially transfer the risks to third-parties.
Banca Sella S.p.A. securitisation of performing loans - Mars 2600 Series V
The transaction was completed at two subsequent moments: the purchase of the loans was completed by the special purpose vehicle Mars 2600 S.r.l. on 9 April 2014, while the securities were issued on 12 June 2014.
The portfolio, which was sold without recourse, consisted of performing residential mortgage loans granted by Banca Sella S.p.A. to residents of Italy.
The transaction entailed the sale without recourse to the special purpose vehicle, of receivables guaranteed by mortgages for a total of around € 489.0 million, inclusive of the principal amount of the loans and the interest accrued up to the date of sale.
In exchange for this transaction, Mars 2600 S.r.l. issued class A1 notes amounting to € 216.0 million, class A2 notes amounting to € 216.0 million, and Class D notes in the amount of € 67.7 million.
The Class A1 and A2 notes are quoted on the Luxembourg stock exchange. Moody's currently gives the following ratings: Aa3 both for class A1 and class A2 notes. The same securities have the following ratings from DBRS: AAA both for class A1 and class A2 notes. Class D notes are not listed and have no rating.
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Banca Sella subscribed the fixed rate class A2 securities, and the class D securities, while the variable rate class A1 securities were placed on the market with institutional investors. The sum paid for the subscription of the class D securities was used for the creation of a cash reserve.
At 31 December 2018, the Class A1 and A2 notes earned interest of about € 1.9 million. In financial year 2018, class D securities earned interest for € 3.1 million. Banca Sella S.p.A. is responsible for collecting the receivables sold and for the cash desk and payment services, as well as collecting disputed receivables, under the terms of a servicing agreement which as consideration provides for a servicing fee, to be paid quarterly, equivalent to 0.45% of the amount of the collections of the performing pecuniary loans and 0.05% of the amount of collections relative to disputed receivables achieved by Banca Sella S.p.A. during the reference quarter.
Quantitative information
C.1 Exposures deriving from main “own” securitisation operations divided by type of securitised assets and type of exposures part 1
CASH EXPOSURES
Senior Mezzanine Junior Type of securitised assets/Exposures Write- Write- Write- Book Book Book downs/Write- downs/Write- downs/Write- value value value backs backs backs
A.1 Subject to total cancellation in the financial ------
statements
B. Subject to partial cancellation in the financial ------
statements
C. Not cancelled from the financial statements
C.1 Mars 2600 S.r.l.
- Performing 58,893 - - - 67,700 (244)
loans
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C.1 Exposures deriving from main “own” securitisation operations divided by type of securitised assets and type of exposures part 2
Sureties issued
Senior Mezzanine Junior Type of securitised assets/Exposures Write- Write- Write- Book Book Book downs/Write- downs/Write- downs/Write- value value value backs backs backs
A.1 Subject to total
cancellation in the ------financial
B. Subject to partial cancellation in the ------financial
C. Not cancelled from the financial
statements C.1 Mars 2600 S.r.l.
- Performing ------loans
C.1 Exposures deriving from main “own” securitisation operations divided by type of securitised assets and type of exposures part 3
Credit lines Senior Mezzanine Junior Type of securitised Write- Write- Write- assets/Exposures Book Book Book value downs/Write- downs/Write- downs/Write- value value backs backs backs
A.1 Subject to total cancellation in the ------financial statements
B. Subject to partial cancellation in the ------financial statements
C. Not cancelled from the financial statements
C.1 Mars 2600 S.r.l. - Performing ------loans
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C.3 Special purpose vehicle for the securitisation
Assets Liabilities Registered Company name Consolidation Debt office Receivables Other Senior Mezzanine Junior securities
Mars 2600 s.r.l. Treviso Yes 196,737 - 20,718 117,698 - 67,700
D. Disclosure on structured entities not consolidated for accounting purposes (other than special purpose vehicles for the securitisation)
Qualitative information The Bank has exposures with non-consolidated structured entities due to investments in units issued by investment funds (UCITS), which are classified as structured entities under IFRS 12. Quantitative information Disclosure on structured entities not consolidated for accounting purposes (other than special purpose vehicles for the securitisation)
difference maximum balance sheet total accounting net book between exposure accounting portfolio of total exposure to item/type of assets portfolio of value to risk of loss and assets liabilities (B) risk of loss structured entity (A) liabilities (C=A-B) book value (E=D- (D) C)
Financial assets UCITS necessarily measured 11,982 - - 11,982 11,982 - at fair value
E. Disposals
The disclosure pursuant to this part regards all the sale transactions (including securitisation operations).
A. Financial assets sold but not fully derecognised Qualitative information With the exception of amounts due from customers, “financial assets sold but not fully derecognised,” refer to repurchase agreements with customers (with underlying debt securities issued by the parent company or Italian government securities).
BANCA SELLA | 260 REPORT AND FINANCIAL STATEMENTS 2018
Quantitative information
E.1 Financial assets sold and fully recognized and associated financial liabilities: book value
Financial assets sold and fully recognised Associated financial liabilities of which: of which: subject to subject to of which: of which: sales sales Book subject to of which Book subject to contracts contracts value securitisation impaired value securitisation with with transactions transactions repurchase repurchase agreements agreements
A. Financial assets held for - - - X - - - trading
1. Debt securities - - - X - - -
2. Equity securities - - - X - - -
3. Loans and advances - - - X - - -
4. Derivatives - - - X - - - B. Other financial assets necessarily measured at fair ------value 1. Debt securities ------
2. Equity securities - - - X - - -
3. Loans and advances ------C. Financial assets carried at ------fair value 1. Debt securities ------
2. Loans and advances ------D. Financial assets measured at fair value through other 419 - 419 - 411 - - comprehensive income 1. Debt securities 419 - 419 - 411 - -
2. Equity securities - - - X - - -
3. Loans and advances ------E. Financial assets measured 197,405 194,565 2,840 3,688 61,655 58,805 - at amortised cost 1. Debt securities 2,840 - 2,840 - 2,850 - -
2. Loans and advances 194,565 194,565 - 3,688 58,805 58,805 -
Total 31/12/2018 197,824 194,565 3,259 3,688 62,066 58,805 -
BANCA SELLA | 261 REPORT AND FINANCIAL STATEMENTS 2018
E.1 Financial assets sold but not cancelled: book value and full value part 1
Financial assets held for trading Financial assets carried at fair value
Technical type/Portfolio
To B C To B C
A. Cash assets ------1. Debt securities ------2. Equity securities ------3. UCITS ------4. Loans and ------B. Derivative - - - x x x Total 31/12/2017 ------of which impaired ------
A = financial assets sold and fully recognized (book value) B = financial assets sold and partially recognized (book value) C = partially recognized financial assets (full value)
E.1 Financial assets sold but not cancelled: book value and full value part 2
Financial assets available for sale Financial assets held to maturity
Technical type/Portfolio
To B C To B C
A. Cash assets 4,613 - - - - - 1. Debt securities 4,613 - - - - - 2. Equity securities - - - x x x 3. UCITS - - - x x x 4. Loans and ------B. Derivative x x x x x x Total 31/12/2017 4,613 - - - - - of which impaired ------
A = financial assets sold and fully recognized (book value) B = financial assets sold and partially recognized (book value) C = partially recognized financial assets (full value)
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E.1 Financial assets sold but not cancelled: book value and full value part 3
Due from banks Due from customers Total
Technical type/Portfolio
To B C To B C 31/12/2017
A. Cash assets - - - 242,850 - - 247,463
1. Debt ------4,613 2. Equity x x x x x x - 3. UCITS x x x x x x - 4. Loans and - - - 242,850 - - 242,850 B. Derivative instruments x x x x x x - Total 31/12/2017 - - - 242,850 - - 247,463 of which impaired - - - 4,538 - - 4,538 A = financial assets sold and fully recognized (book value) B = financial assets sold and partially recognized (book value) C = partially recognized financial assets (full value)
E.2. Financial liabilities against financial assets sold but not derecognised: book value
Financial Financial Financial Financial assets assets Due from Due from Liability/Asset portfolio assets held assets held Total carried at available for banks customers for trading to maturity fair value sale
1. Due to customers - - 4,617 - - 82,771 87,388 a) against fully recognized assets - - 4,617 - - 82,771 87,388 b) against partially recognized ------assets
2. Due to banks ------a) against fully recognized assets ------b) against partially recognized ------assets Total 31/12/2017 - - 4,617 - - 82,771 87,388
BANCA SELLA | 263 REPORT AND FINANCIAL STATEMENTS 2018
E.3 Sale transactions with liabilities having recourse only to the assets sold, not fully derecognised: fair value
Recognised Partially Total
in full recognised 31/12/2018
A. Financial assets held for trading - - -
1. Debt securities - - -
2. Equity securities - - -
3. Loans and advances - - -
4. Derivatives - - -
B. Other financial assets necessarily measured at fair value - - -
1. Debt securities - - -
2. Equity securities - - -
3. Loans and advances - - -
C. Financial assets carried at fair value - - -
1. Debt securities - - -
2. Loans and advances - - -
D. Financial assets measured at fair value through other 419 - 419
1. Debt securities 419 - 419
2. Equity securities - - -
3. Loans and advances - - -
E. Financial assets measured at amortised cost (fair value) 197,405 - 197,405
1. Debt securities 2,840 - 2,840
2. Loans and advances 194,565 - 194,565
Total financial assets 197,824 - 197,824
Total associated financial liabilities 62,066 - X
Net value at 31/12/2018 135,758 - 197,824
BANCA SELLA | 264 REPORT AND FINANCIAL STATEMENTS 2018
E.3 Sale transactions with liabilities having recourse only to the assets sold: fair value part 1
Held-to- maturity Financial assets held for Financial assets carried Financial assets financial Technical type/Portfolio trading at fair value available for sale assets (fair value)
To B To B To B To A. Cash assets - - - - 4,613 - - 1. Debt securities - - - - 4,613 - - 2. Equity securities ------3. UCITS ------4. Loans and ------B. Derivative ------Total Assets - - - - 4,613 - - C. Associated - - - - 4,617 - - liabilities
1. Due to customers - - - - 4,617 - - 2. Due to banks ------Total Liabilities - - - - 4,617 - - Net Value 31/12/2017 - - - - (4) - - A = financial assets disposed of recognised fully B = financial assets disposed of recognised partially
E.3 Sale transactions with liabilities having recourse only to the assets sold: fair value part 2
Total
Technical type/Portfolio value) value) (fair value) value) (fair Held-to-maturity Loans to banks (fair Loans to customers financial assets (fair
B To B To B 31/12/2017 A. Cash assets - - - 242,850 - 247,463 1. Debt securities - - - - - 4,613 2. Equity securities x x x x x - 3. UCITS x x x x x - 4. Loans and - - - 242,850 - 242,850 B. Derivative x x x x x - Total Assets - - - 242,850 - 247,463
C. Associated - - - 82,771 - x liabilities
1. Due to customers - - - 82,771 - x
2. Due to banks - - - - - x
Total Liabilities - - - 82,771 - 87,388
Net Value 31/12/2017 - - - 160,079 - 160,075
A = financial assets disposed of recognised fully B = financial assets disposed of recognised partially
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B. Financial assets sold and cancelled fully with recognition of continuing involvement During the year, the Bank did not have this type of asset.
F. Models for measuring credit risk The Bank does not use internal portfolio models to measure exposure to credit risk.
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Section 2 - Market risks
Market risk relates to unexpected variations in market factors such as interest rates, exchange rates and share prices that may cause fluctuations in the value of a position held in the trading book and in the values of investments arising from commercial operations and strategic choices (banking book).
2.1 Interest-rate risk and price risk – regulatory trading book
For the compilation of this section we consider only financial instruments (assets and liabilities) held in the “regulatory trading book”, as defined in the provisions on market risk regulatory reporting (see Bank of Italy Circular no. 286 of 17 December 2013).
Qualitative information
A. General aspects The Bank’s trading book is mainly composed of listed bonds, equities, UCITS and derivatives for the hedging of positions. The bond component of the portfolio is made up primarily of short-term bonds issued by the Italian Republic. The prevailing portion of portfolio risk is composed of issuer risk.
The goals and strategies underlying the trading activity involving the own securities portfolio aim to limit risks and maximise returns on the portfolio itself in the field of action laid down in the Group rules on the subject.
B. Management processes and methods for measuring interest rate risk and price risk The process of managing the market risk of the trading book is governed by a specific company regulation, approved by the Board of Directors and periodically reviewed. This regulation formalises the performance of Risk Management activities regarding market risk, defines the tasks and responsibilities assigned to the different organisational units responsible for the matter and outlines, among other things, the methods of measurement, exposure limits, information flows and any mitigation actions. Investment and trading activities are therefore carried out in compliance with the aforementioned regulation and incorporated in a system of delegation of management powers and within the framework of a regulation that sets forth operating limits that are defined in terms of instruments, amounts, investment markets, issue and issuer types, sector and rating.
The Risk Management Service monitors the exposure to market risk and verifies its consistency with the propensity to risk defined by the company bodies as part of the Risk Appetite Framework and the compliance with the system of limits. Exposure to market risk, in line with the Risk Appetite Framework adopted by the Sella Group, is monitored with reference to the current portfolio (consisting of financial instrument classified at fair value through profit and loss and at fair value through other comprehensive income) held for medium/long-term investment purposes and, when necessary, tactical short-term investment.
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Adequate information flows are provided regularly and promptly to the company bodies and management departments.
For prudential purposes, to measure the interest rate and price risks inherent in the regulatory trading book, the Sella Group applies the “standardized approach” defined in Bank of Italy Circular no. 285/2013, and subsequent updates. Hence, capital absorption to cover market risk is represented by the sum of the capital requirements for each individual risk that makes up market risk, on the basis of the so-called building block approach.
At the same time as drafting the ICAAP Report (analysis of capital adequacy in accordance with Pillar 2 of Basel III) and therefore at least once a year, the Parent Company carries out stress tests on the working portfolios. The stress test procedures consist of analysing the economic results upon an occurrence of specific negative events, which are extreme but plausible, (such as, for example, a deterioration in the creditworthiness of issuers of securities in the portfolio).
Quantitative information
1. Regulatory trading book: distribution for remaining duration (re-pricing date) of the financial assets and liabilities in cash and financial derivatives
As allowed by Bank of Italy Circular 262/2005 and subsequent updates, this table was not prepared as, in the Notes, an analysis of the sensitivity to interest-rate risk is provided on the basis of internal models or other methodologies.
2. Regulatory trading book: distribution of exposures in equity securities and equity indices by main quotation market countries
As allowed by Bank of Italy Circular 262/2005, this table was not prepared as, in the Notes, an analysis of the sensitivity to price risk is provided on the basis of internal models or other methodologies.
3. Regulatory trading book - internal models and other methods used for sensitivity analysis
For management purposes, the trading book market risk is measured and monitored on the basis of the VaR (value at risk), which is basically assessed according to the historical simulation approach. VaR measures the maximum potential loss which, within a certain confidence interval, may occur if a certain portfolio is kept unchanged for a certain period of time. Historical simulation involves daily revaluation of position based on the market price trends over an appropriate time interval. The empirical distribution of gains/losses that results is analysed to determine the effect of extreme market swings on the portfolios. The percentile distribution corresponding to the confidence interval set gives the VaR.
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Risk Management carries out checks on VaR trends (time horizon: 3 months and confidence interval: 99%) for own portfolios and performs sensitivity analysis including portfolio duration and instantaneous rate shocks. Finally, operating limits on securities investments are also continuously monitored.
The duration of the Banca Sella working portfolio at 31/12/2018 was equal to 1.81 years while sensitivity, estimated on a parallel movement of +100 basis points in the interest rate curve, is approximately € 8.5 million (about 1.81% of the portfolio).
The trend in the VaR of Banca Sella (confidence interval 99%, time horizon of 3 months) is shown in the chart below.
During the course of the year, the prudential limits approved by the Bank were not exceeded.
Banca Sella - Working Portfolio Market Risks VaR (time horizon three months - confidence interval 99%)
70
60 Millions 50
40
30
20
10
0
VaR 3 months Risk Appetite Limit
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2.2 Interest rate and price risks – banking book
The banking book consists of all the financial instruments (assets and liabilities) not included in the trading book, pursuant to section 2.1, mainly receivables and payables due from and to banks and customers and securities not belonging to the regulatory trading book.
Qualitative information
A. Interest-rate risk and price risk: general aspects, management processes and measurement methods The main sources of interest rate risk generated in the banking book can be traced back to:
• maturity mismatches (risk connected with the exposure of positions to changes in the slope and the shape of the yield curve); • mismatches arising from the imperfect correlation between changes in charged and paid interest rates on the various instruments (indexing risk). Interest rate risk is mainly generated by customer funding and lending transactions, fixed and variable rate securities of the banking book, interbank deposits (assets and liabilities), as well as derivative instruments contracted to mitigate exposure to interest rate risk. The Group’s policy is to provide elevated hedging of items, while strategic and management choices are aimed at minimising the volatility of the total economic value when the rate structure changes.
Internal interest rate risk management processes are based on an organisational structure, which provides that the information is analysed at operational level and critically assessed by the Group’s ALM Committee every month. This Committee also provides appropriate operational guidelines.
The Risk Management Service monitors exposure to interest rate risk on a monthly basis and verifies its consistency with the risk appetite defined by the corporate bodies within the Risk Appetite Framework and compliance with the system of limits. Adequate information flows are provided regularly and promptly to the company bodies and management departments.
The interest rate risk of the banking book is measured through the quantification of the interest rate risk coefficient, equal to the ratio between the change in the economic value of the banking book following interest rate shocks and regulatory capital.
The risk coefficient is calculated using different methods, depending on the purposes:
compliance test purposes: measurement based on the standard methodology specified by the Bank of Italy in annex C of Bank of Italy Circular no. 285/2013. The standard methodology measures the impact of a hypothetical change in rates equal to +/- 200 basis points1 on exposure to interest rate risk. The interest rate risk coefficient thus calculated should not
1 In compliance with the constraint regarding non-negative rates defined in Bank of Italy Circular 285/2013, Title III, chapter 1, annex C.
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exceed 20%2, the limit beyond which the Bank of Italy discusses the results with the bank and reserves the right to take the appropriate measures.
RAF and ICAAP measurement purposes: internal methodology that calls for the use of modelling for “on demand items” and the adjustment of positions to take into account the phenomenon of prepayment. The internal methodology follows the standard methodology pursuant to the previous point, without prejudice to the representation of the risk profile generated by the sight items and the prepayment effect. The methodology adopted for the modelling of sight items (so-called ‘sight items model’), developed in- house by the Parent Company’s Risk Management Service, makes provision for the use of an econometric model which reflects the behavioural characteristics of sight deposits in terms of the persistence (stability over time) and riskiness (reactiveness of the cost of sight deposits to a change in the market rates).
For management purposes, in addition to the risk indicator limit envisaged for the compliance test, internal provisions have been made for more prudential danger thresholds, which, when exceeded, lead to the assessment of operational strategies aimed at mitigating said risk.
The Sella Group carries out, at the consolidated level, stress tests to measure and control interest-rate risk for the banking book at least once a year, at the time the ICAAP Report is prepared. The variables used for stress tests were processed internally by the Group's Financial Analysis Service. Stress tests may envisage parallel and immediate shock situations on the rate curve, impacts that may exceed 200 basis points, and non-parallel shock situations that are structural in terms of interest rates.
B. Fair value hedging activities
Hedging transaction strategies are mainly aimed at mitigating the exposure to interest-rate risk inherent in financial instruments, deriving predominantly from forms of disbursement of credit (general hedges, such as mortgage loans) or bonds issued (specific hedges).
Exposure to interest-rate risk inherent in the disbursement of loans is hedged by derivative instruments such as amortising interest rate swaps and cap options, on the basis of the amount of the loan portfolio disbursed and the average maturities of this portfolio. Other interest rate swaps are implemented when fixed-rate bond loans are issued. Additional hedges are established with the goal of mitigating interest- rate risk generated by the forms of funding. Further hedging is put in place to mitigate interest-rate risk or exchange rate risk through simple derivative products such as domestic currency swaps, currency options, or overnight interest swaps traded by customers of the Group's banks.
The Bank generally adopts measurement methods and techniques based on the Black & Scholes, Monte Carlo and Net Present Value models using a number of parameters, which vary depending on the financial instrument to be measured. These parameters, which are approved by the Parent Company Risk Management Service, are chosen and set up on the calculation software at the moment of a request for
2CRD IV, Article 97, paragraph 5;
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measurement of a new derivative instrument. At every periodic calculation of the fair value of the financial instrument, first and second level controls are carried out on the aforesaid parameters.
C. Cash flow hedging activities
Due to the substantial balance of assets and liabilities, no hedging is provided for interest-rate risk on cash flow generated by variable rate items.
D. Foreign investment hedging activities Due to the minor amount of foreign investments, no hedging is provided for the interest-rate risks arising from them.
Quantitative information
1. Banking book: distribution for remaining duration (re-pricing date) of the financial assets and liabilities
As allowed by Bank of Italy Circular 262/2005 and subsequent updates, this table was not prepared as, in the Notes, an analysis of the sensitivity to interest-rate risk is provided on the basis of internal models or other methodologies.
2. Banking book: internal models and other methods used for sensitivity analysis
As indicated in the section relating to “Qualitative information”, the rate risk is measured using proprietary models for the processing of items in liabilities with undefined contractual due dates (sight items) and for the measurement of prepayments. For all other assets and liabilities items, the rules defined by Bank of Italy Circular no. 285/2013, as subsequently amended, are used. The audit is carried out taking into consideration all the positions assumed on and off the balance sheet, but limited to interest-bearing assets and liabilities.
To calculate the internal capital, parallel shifts are assumed relative to the rate curve, respectively of +200 basis points (rise) and -40 basis points (fall, compatible with the constraint of a non-negativity of rates).
The sensitivity analysis figures at 31/12/2018 show a low risk for the Banca Sella banking book (see the table below for total and percentage impact on the economic value).
Shift Total Sensitivity Regulatory Capital Sensitivity %
+200 bps / -40 bps 21.60 901.7 2.39% Amounts in Euro millions The price risk of the portfolio is attributable primarily to the equity interests held for permanent investment purposes. These are positions assumed directly on the basis of resolutions authorised by the Board of Directors and operationally managed by the Finance Department of the Parent Company. The price risk for these financial instruments is monitored using the investment management approach.
2.3 Exchange rate risk
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All the assets and liabilities (both on and “off-balance-sheet”) in currencies fall under this risk profile, including operations in Euro indexed to the performance of currency exchange rates. Operations in gold are considered as similar to currency operations.
Exchange rate risk is monitored in relation to the entire balance sheet.
Qualitative information
A. General aspects, management processes and methods of managing the risk of exchange rate Foreign exchange risk is monitored with the “standardized method” indicated by the Bank of Italy in Circular No. 285/2013.
During 2018, foreign exchange exposures were identified as being slightly higher than the regulatory limit of 2% of regulatory capital (with a maximum exposure of 2.25%), which involved the presence of capital requirements against exchange risk. At 31/12/2018, capital absorption amounted to € 1,650,662.
The Risk Management Department monitors exchange risk exposure values and reports them to the Group’s ALM Committee. This committee, with the assistance of the Parent Company Treasury, assesses possible hedging action, should the exposures to given currencies be considered significant.
B. Exchange rate risk hedging activities Banca Sella hedges transactions in foreign currency daily. The Bank activity typically subject to this risk is lending, customer deposits and bank-issued securities denominated in foreign currency.
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Quantitative information
1. Distribution by currency of denomination of assets, liabilities and derivatives Currency Items OTHER USD CAD CHF GBP NOK CURRENCIES A. Financial assets 135,216 117 3,925 5,336 658 10,552 A.1 Debt securities 8,680 A.2 Equity securities 15,928 A.3 Loans and advances to 95,303 111 1,632 4,798 658 5,981 banks A.4 Loans and advances to 15,305 6 2,293 538 4,571 customers A.5 Other financial assets B. Other assets 1,907 206 1,185 894 86 740 C. Financial liabilities 118,054 269 5,118 6,130 735 8,209 C.1 Due to banks 542 82 3 - 2,110 C.2 Due to customers 117,512 187 5,115 6,130 735 6,099 C.3 Debt securities C.4 Other financial liabilities D. Other liabilities 488 54 2 49 4 781 E. Financial derivatives - Options + Long positions 40,302 1,776 6,862 9,798 + Short positions 40,266 1,790 6,872 9,787 - Other derivatives + Long positions 146,882 19,557 3,831 30,135 24,176 + Short positions 147,412 19,646 3,836 30,166 23,485 Total assets 324,307 19,880 10,717 43,227 744 45,266 Total liabilities 306,220 19,969 10,746 43,217 739 42,262 Imbalance (+/-) 18,087 -89 -29 10 5 3,004
2. Internal models and other methods used for sensitivity analysis Please see that stated previously.
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Section 3 - Derivatives and hedging policies
3.1 Trading derivatives This sub-section also includes notional values for derivatives with a fair value of zero at 31 December 2018. A. Financial derivatives
A.1 Financial derivatives for trading: notional values at end of period
Total 31/12/2018
Over the counter
Without central counterparties Underlying assets/Type of derivatives Central Without clearing Organised markets Counterparties agreements agreements With clearing 1. Debt securities and interest rates - 429,753 149,250 - a) Options - 292,473 46,293 - b) Swaps - 102,957 102,957 - c) Forward - - - - d) Futures - 34,323 - - e) Other - - - -
2. Equity securities and equity indices - - - - a) Options - - - - b) Swaps - - - - c) Forward - - - - d) Futures - - - - e) Other - - - -
3. Currencies and gold - 320,721 319,104 - a) Options - 115,623 112,282 - b) Swaps - 2,672 53,195 - c) Forward - 202,426 153,627 - d) Futures - - - - e) Other - - - -
4. Commodities - - - -
5. Other - - - -
Total - 750,474 468,354 -
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A.1 Regulatory trading book: notional amounts at the end of the period Total 31/12/2017 Underlying assets/Type of derivatives Over the counter Central Counterparties
1. Debt securities and interest rates 331,871 - a) Options 74,457 - b) Swaps 257,414 - c) Forward - - d) Futures - - e) Other - - 2. Equity securities and equity indices - - a) Options - - b) Swaps - - c) Forward - - d) Futures - - e) Other - - 3. Currencies and gold 689,089 - a) Options 384,516 - b) Swaps 26,175 - c) Forward 278,398 - d) Futures - - e) Other - - 4. Commodities - - 5. Other underlying - - Total 1,020,960 -
A.2.2 Other derivatives
Total 31/12/2017 Underlying assets/Type of derivatives Over the counter Central Counterparties
1. Debt securities and interest rates 1,634,159 - a) Options 1,634,159 - b) Swaps - - c) Forward - - d) Futures - - e) Other - - 2. Equity securities and equity indices - - a) Options - - b) Swaps - - c) Forward - - d) Futures - - e) Other - - 3. Currencies and gold 861 - a) Options 861 - b) Swaps - - c) Forward - - d) Futures - - e) Other - - 4. Commodities - - 5. Other underlying - - Total 1,635,020 -
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A.2 Financial derivatives for trading: gross positive and negative fair value - breakdown by product
31/12/2018
Over the counter
Without central counterparties
Derivative type Organised markets agreements agreements agreements Central Counterparties With clearing Without clearing
1. Positive fair value a) Options - 2,497 1,970 - b) Interest Rate Swaps - 7 3,908 - c) Cross currency swap - - - - d) Equity Swap - - - - e) Forward - 2,931 1,727 - f) Futures - - - - g) Other - 63 402 -
Total - 5,498 8,007 -
2. Negative fair value a) Options - 2,076 966 - b) Interest Rate Swaps - 3,564 3 - c) Cross currency swap - - - - d) Equity Swap - - - - e) Forward - 1,959 2,165 - f) Futures - - - - g) Other - 40 726 -
Total - 7,639 3,860 -
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A.3 OTC financial derivatives for trading - notional values, positive and negative gross values by counterparty
Central Other financial Underlying assets Banks Other entities Counterparties companies Contracts not covered by netting agreements 1) Debt securities and interest rates - notional value X - 3,000 146,250 - positive fair value X - 28 3,924 - negative fair value X - - 166 2) Equity securities and stock indices - notional value X - - - - positive fair value X - - - - negative fair value X - - - 3) Currencies and gold - notional value X - 24,283 294,821 - positive fair value X - - 4,055 - negative fair value X - 265 3,429 4) Commodities - notional value X - - - - positive fair value X - - - - negative fair value X - - - 5) Other - notional value X - - - - positive fair value X - - - - negative fair value X - - - Contracts covered by netting agreements 1) Debt securities and interest rates - notional value - 429,753 - - - positive fair value - 1,600 - - - negative fair value - 3,607 - - 2) Equity securities and stock indices - - notional value - - - - - positive fair value - - - - - negative fair value - - - - 3) Currencies and gold - - notional value - 320,720 - - - positive fair value - 3,898 - - - negative fair value - 4,032 - - 4) Commodities - - notional value - - - - - positive fair value - - - - - negative fair value - - - - 5) Other - - - - - notional value - - - - - positive fair value - - - - - negative fair value - - - -
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A.4 Residual life of OTC financial derivatives for trading: notional values
From 1 year to 5 More than 5 Underlying asset/Residual life Up to 1 year Total years years
A.1 Financial derivatives on debt 69,907 174,872 334,224 579,003 securities and interest rates
A.2 Financial derivatives on equity - - - - securities and equity indices
A.3 Financial derivatives on currencies 632,838 6,987 - 639,825 and gold A.4 Financial derivatives on - - - - commodities
A.5 Other financial derivatives - - - -
Total 31/12/2018 702,747 181,859 334,224 1,218,830
B. Credit derivatives
The Bank does not hold this type of derivative.
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3.2 Accounting hedges
Qualitative information
A. Fair value hedging activities
The bank carries out fair value hedges in relation to a single category of hedged risk - specifically, interest rate risk. The strategy underlying hedging transactions involves sterilising interest rate risk relative to certain assets and liabilities in the Bank's balance sheet. Specifically, this involves the interest rate risk implicit in the Bank's issuing of bonds which are not plain vanilla floating rate and the disbursement of fixed rate loans by the Bank. The portion of bond issues and of loans subject to hedging varies based on strategic assessments and the market situation. The goal of the hedging strategy is to compensate for any changes in the fair value of the hedged assets and liabilities through corresponding changes in the fair value of the hedging instruments. For hedging instruments, unlisted interest rate swap (IRS) contracts are generally used, with a nominal bullet (without amortisation) or amortising, in line with the structure and temporal profile of the amortisation of the item being hedged. With regards to the methods used to implement hedging:
hedging of a bond issue is generally achieved through the stipulation of an IRS contract, on which the Bank pays a floating rate and receives a fixed rate.
Hedging of a bond issue generally occurs through the stipulation of a single derivative contract (coverage 1:1), but it is also possible that hedging is achieved through multiple subsequent derivatives (coverage 1:n);
hedging of fixed rate loans is structured around an n:m ratio. Stipulation of each IRS, in which the Bank pays a fixed rate and receives a floating rate, generally occurs in the following ways:
o determination of a basket of loans the Bank intends to cover;
o definition of a nominal amortised amount of the IRS, consisting in the aggregation of the amortisation plans for the loans being hedged.
Hedging of bond issues is specific in nature, while hedging of fixed rate loans is generic.
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B. Cash flow hedging activities The Bank does not have this type of hedge. C. Foreign investment hedging activities
The Bank does not have this type of hedge. D. Hedging instruments Relative to the single category of risk hedged against (interest rate risk), with reference to hedging instruments, these may be inefficient sources of coverage in the case in which the counterparty does not comply with their contractual commitments (i.e., not paying that contractually envisaged in the IRS). The effect of this possibility on total income is minimised through existing securitisation agreements with IRS counterparties. E. Elements hedged
Hedging of bond issues and fixed rate loans does not cover all the risks to which these items are exposed, but solely interest rate risk. Hedging is generally done through the stipulation of IRS contracts, following the methods described above. The economic relationship between the element hedged and the hedging instrument consists of:
the correspondence between the nominal values of the assets/liabilities hedged and the relative derivative hedging instruments;
the correspondence between the residual duration and amortisation profile of the assets/liabilities hedged and the relative derivative hedging instruments.
The consequent assessment of efficacy on the basis of a comparison between the fair value changes in the interest portion of the item hedged and the fair value changes in the fixed rate component of the hedging derivative. Assessment of the efficacy of the hedging is done both on a prospective and retrospective basis. The hedging ratio is defined starting from a comparison between the amortisation profiles (bullet or amortising) of the assets/liabilities hedged and the corresponding amortisation profiles of the hedging derivatives. The following are possible sources of inefficacy in hedging:
for bond issues, possible changes in the nominal value of the issue, such as early redemption;
for fixed rate loans, partial or total pre-payments, renegotiation of one type of loan to another type, for example a fixed rate mortgage becoming a variable rate mortgage.
The bank determines the interest rate risk component covered starting from the level swap rates in effect at the time of the hedge, considering any additional interest rate spread relative to the assets/liabilities
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hedged, as an element remunerating other risk factors (credit, liquidity, etc.). With reference to the relationship between the risk component hedged and the asset/liability covered as a whole, this is such as to cause:
for fixed rate loans, a positive change in the fair value of the assets hedged as the interest rate falls;
for bond issues, a negative change in the fair value of the liabilities hedged as the interest rate falls.
The risk component hedged against has historically been demonstrated to be responsible for a significant portion of fair value changes in the element being hedged.
Quantitative information
A. Hedging financial derivatives
A.1 Hedging financial derivatives: notional values at end of period
Total 31/12/2018
Over the counter
Without central counterparties Underlying assets/Type of derivatives Organised markets Central Without With clearing Counterparties clearing agreements agreements
1. Debt securities and interest rates - 392,956 - - a) Options - - - - b) Swaps - 392,956 - - c) Forward - - - - d) Futures - - - - e) Other - - - - 2. Equity securities and equity indices - - - - a) Options - - - - b) Swaps - - - - c) Forward - - - - d) Futures - - - - e) Other - - - - 3. Currencies and gold - - - - a) Options - - - - b) Swaps - - - - c) Forward - - - - d) Futures - - - - e) Other - - - - 4. Commodities - - - - 5. Other - - - - Total - 392,956 - -
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A.2.1 For hedging
Total 31/12/2017 Underlying assets/Type of derivatives Over the counter Central Counterparties
1. Debt securities and interest rates 459,947 - a) Options - - b) Swaps 459,947 - c) Forward - - d) Futures - - e) Other - - 2. Equity securities and equity indices - - a) Options - - b) Swaps - - c) Forward - - d) Futures - - e) Other - - 3. Currencies and gold - - a) Options - - b) Swaps - - c) Forward - - d) Futures - - e) Other - - 4. Commodities - - 5. Other underlying - - Total 459,947 -
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A.2 Hedging financial derivatives: gross positive and negative fair value - breakdown by product
Change in value used to Positive and negative fair value identify inefficacy of coverage
Total 31/12/2018 Total 31/12/2017
Over the counter Over the counter Total
Derivative type Without central Without central 31/12/2018 counterparties counterparties Organised markets agreements agreements agreements agreements With clearing With clearing Central Counterparties Central Counterparties Without clearing Without clearing Organised markets Positive fair value a) Options ------b) Interest Rate - 1,974 ------Swaps c) Cross currency ------d) Equity Swap ------e) Forward ------f) Futures ------g) Other ------
Total - 1,974 ------
Negative fair value a) Options ------b) Interest Rate - 81,563 ------Swaps c) Cross currency ------d) Equity Swap ------e) Forward ------f) Futures ------g) Other ------
Total - 81,563 ------
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A.3 OTC hedging financial derivatives - notional values, positive and negative gross values by counterparty
Central Other financial Underlying assets Banks Other entities Counterparties companies
Contracts not covered by netting agreements 1) Debt securities and interest rates
- notional value X - - -
- positive fair value X - - -
- negative fair value X - - -
2) Equity securities and stock indices
- notional value X - - -
- positive fair value X - - -
- negative fair value X - - -
3) Currencies and gold
- notional value X - - -
- positive fair value X - - -
- negative fair value X - - -
4) Other values
- notional value X - - -
- positive fair value X - - -
- negative fair value X - - -
5) Other
- notional value X - - -
- positive fair value X - - -
- negative fair value X - - -
Contracts covered by netting agreements
1) Debt securities and interest rates
- notional value - 392,956 - -
- positive fair value - 1,974 - -
- negative fair value - 81,563 - -
2) Equity securities and stock indices
- notional value - - - -
- positive fair value - - - -
- negative fair value - - - -
3) Currencies and gold
- notional value - - - -
- positive fair value - - - -
- negative fair value - - - -
4) Other values
- notional value - - - -
- positive fair value - - - -
- negative fair value - - - -
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A.4 Residual life of OTC hedging financial derivatives: notional values
From 1 year to 5 More than 5 Underlying asset/Residual life Up to 1 year Total years years
A.1 Financial derivatives on debt 39,575 157,918 195,463 392,956 securities and interest rates A.2 Financial derivatives on equity - - - - securities and equity indices A.3 Financial derivatives on currencies - - - - and gold A.4 Financial derivatives on - - - - commodities
A.5 Other financial derivatives - - - -
Total 31/12/2018 39,575 157,918 195,463 392,956
B. Hedging credit derivatives
At 31 December 2018 and during the year, the Bank did not have any operations of this type.
C. Non-derivative hedging instruments
The Bank does not apply hedge accounting rules pursuant to accounting standard IFRS 9. Therefore, this section was not completed. For more details on hedging, please see the Accounting Policies in Part A of the Notes.
D. Instruments hedged
At 31 December 2018 and during the year, the Bank did not have any operations of this type.
BANCA SELLA | 286 REPORT AND FINANCIAL STATEMENTS 2018
Section 4 - Liquidity risk
Qualitative information
A. General aspects, management processes and methods for measuring liquidity risk
Liquidity risk corresponds to the risk arising from the inability to meet promises to pay, which may be caused by the inability to raise funds (funding liquidity risk) or by the presence of asset liquidity limits (market liquidity risk).
The Sella Group’s liquidity risk management ensures the maintenance of conditions of economic and financial balance for the Group, and guarantees the pursuit of the objectives of sound and prudent management. The governance model defined for managing the Sella Group’s liquidity risk is based on the following principles:
prudent management of liquidity risk to ensure solvency, including under stress conditions;
conformity of liquidity risk management and monitoring processes and methods with prudential regulatory indications;
decision sharing and distinction of responsibilities among management, controlling and operating bodies.
The liquidity level is managed by the Banca Sella Holding Finance Department. The Finance Department’s objective is to direct, coordinate and control the Sella Group’s financial activities, through careful management of risk and a solid liquidity position. In particular, Banca Sella Holding’s ALM and Treasury service holds a central role in this area, which engages in careful management of the Group’s liquidity, helping, in observance of the risk parameters set in the Risk Appetite Framework, to increase the value of the company over time. The ALM and Treasury service also contributes to the valuation of liquidity reserves. The Group’s Treasuries, where present, are responsible for liquidity management in accordance with the principles and strategic guidelines that apply to the Group.
Banca Sella Holding’s Risk Management Service is responsible for measuring the liquidity risk, determining the liquidity situation at consolidated level, both under ordinary operating conditions and under stress conditions, defining the risk objectives in terms of the Risk Appetite Framework, their monitoring and the related reporting and warning activities. Banca Sella Holding’s Risk Management Service is also responsible for the valuation of the liquidity reserves. The Risk Management Departments of the Group companies are delegated the responsibility for controlling and monitoring liquidity risk, verifying compliance with the approved limits consistent with the Group levels and adequate reporting to its company bodies.
BANCA SELLA | 287 REPORT AND FINANCIAL STATEMENTS 2018
In addition, the liquidity position is examined and critically evaluated on a monthly basis by the Group’s ALM Committee. This Committee also provides appropriate operational guidelines.
The Sella Group employs a Contingency Funding Plan (CFP) to manage liquidity risk under stress conditions. The CFP is the plan for managing liquidity contingency situations in order to deal with adverse situations in obtaining funds and to guarantee the prompt economic and financial stability of the Sella Group.
Liquidity risk is measured on various time horizons: intraday, short-term and structural. The Group also autonomously performs activities involving the evaluation of the degree of liquidity of financial instruments held as liquidity reserve.
The measurement involves a broad set of indicators focused on systemic and specific liquidity situation trends, including the LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) regulatory indicators.
In addition to the information provided by liquidity indicators, Banca Sella Holding’s Risk Management service and the Finance Department of Sella Group are responsible for carrying out stress analyses on the liquidity reserve of the Group itself.
The approach underlying the stress analysis consists in assessing, through the use of a Maturity Ladder3, the ability to withstand a liquidity crisis (measured in days), of the entire Sella Group if a systemic or specific crisis situation arises. The ability to withstand is calculated under the assumption that the business structure and the capital profile of the Group will not be altered.
The Maturity Ladder is realised through the time-band mapping (horizon up to 3 months) of current and expected cash flows, together with items regarded as “potential liquidity reserves”. This instrument allows assessing in various operational scenarios (business as usual and stress scenario) the net financial position as to liquidity in different time buckets.
The stress test has always demonstrated cash and cash equivalents or easily cashed assets for the Group that are adequate to face any crises, of either systemic or specific origin.
The trend in the short-term liquidity ratio (LCR) of Banca Sella is reported below, which gives an indication of the Bank’s ability to deal with net cash outflows over a period of 30 days with a stock of high quality liquid assets. The minimum regulatory limit of this ratio is 100%.
3 A Maturity Ladder is a projection of the net financial position over time.
BANCA SELLA | 288 REPORT AND FINANCIAL STATEMENTS 2018
Liquidity Coverage Ratio 240,00%
220,00%
200,00%
180,00%
160,00%
140,00%
120,00%
100,00%
80,00%
LIQUIDITY COVERAGE RATIO REGULATORY LIMIT
The trend in Banca Sella’s structural liquidity ratio (NSFR) is reported below, calculated at management level, which gives an indication of Banca Sella's capacity to ensure an adequate level of stable funding to finance medium/long-term lending. The minimum regulatory limit is 100%.
Net Stable Funding Ratio 180,00%
160,00%
140,00%
120,00%
100,00%
80,00%
NET STABLE FUNDING RATIO REGULATORY LIMIT
BANCA SELLA | 289 REPORT AND FINANCIAL STATEMENTS 2018
Quantitative information
1. Time distribution of financial assets and liabilities by residual contractual term - EURO
More than More than More than More than More than 3 More than 6 More than 1 More than 5 Item/ Time band On demand 1 day to 7 7 days to 15 days to 1 month to months to 6 months to 1 year to 5
years term
days 15 days 1 month 3 months months year years No fixed
A. Cash assets 3,316,939 69,476 83,371 242,391 732,767 496,954 813,697 3,210,986 2,153,015 629 A.1 Government securities - - 1 14,995 47,035 30,415 246,923 579,585 452,409 - A.2 Other debt securities 1 - 109 15,928 5,883 6,328 20,895 144,456 42,851 - A.3 UCITS units 11,982 ------A.4 Loans and advances 3,304,956 69,476 83,261 211,468 679,849 460,211 545,879 2,486,945 1,657,755 629 - Banks 2,207,023 - - 93,967 14,068 - - - 16,100 - - Customers 1,097,933 69,476 83,261 117,501 665,781 460,211 545,879 2,486,945 1,641,655 629 B. Cash liabilities 8,986,734 21,010 11,032 27,431 102,296 143,879 216,664 898,364 165,120 - B.1 Deposits and current accounts 8,819,081 4,672 10,983 21,204 86,221 126,276 103,408 753,695 - - - Banks 13,526 ------690,000 - - - Customers 8,805,555 4,672 10,983 21,204 86,221 126,276 103,408 63,695 - - B.2 Debt securities - 13,743 49 5,287 15,010 11,676 59,622 115,100 132,638 - B.3 Other liabilities 167,653 2,595 - 940 1,065 5,927 53,634 29,569 32,482 - C. Off-balance sheet operations C.1 Financial derivatives with equity swaps - Long positions - 6,973 6,236 19,411 111,267 34,503 46,062 3,028 - - - Short positions - 15,543 5,415 18,424 82,741 34,745 49,253 3,016 - - C.2 Financial derivatives without equity
swaps - Long positions 4,147 - 34 106 95 237 465 215 1,848 - - Short positions 3,773 2,235 - - 1,922 4,065 7,726 41,998 25,384 - C.3 Deposits and loans receivable - Long positions ------Short positions ------C.4 Commitments to disburse funds - Long positions 135,348 2,989 138 1,449 5,431 8,413 10,231 33,877 67,362 - - Short positions 135,348 2,989 138 1,449 5,431 8,413 10,231 33,877 67,362 -
BANCA SELLA | 290 REPORT AND FINANCIAL STATEMENTS 2018
C.5 Financial guarantees issued 4 - - - - 4 11 23 190 - C.6 Financial guarantees received ------C.7 Credit derivatives with equity swaps - Long positions ------Short positions ------C.8 Credit derivatives without equity
swaps - Long positions ------Short positions ------
BANCA SELLA | 291 REPORT AND FINANCIAL STATEMENTS 2018
1. Time distribution of financial assets and liabilities by residual contractual term - OTHER CURRENCIES
More than More than More than More than More than 3 More than 6 More than 1 More than 5 Item/ Time band On demand 1 day to 7 7 days to 15 days to 1 month to months to 6 months to 1 year to 5 years days 15 days 1 month 3 months months year years No fixed term
A. Cash assets 110,954 1,252 976 9,417 5,346 3,238 351 1,223 7,424 -
A.1 Government securities ------
A.2 Other debt securities - - - - - 165 135 1,223 7,424 -
A.3 UCITS units ------
A.4 Loans and advances 110,954 1,252 976 9,417 5,346 3,073 216 - - -
- Banks 108,636 ------
- Customers 2,318 1,252 976 9,417 5,346 3,073 216 - - -
B. Cash liabilities 106,355 - 384 830 7,076 13,587 10,472 - - -
B.1 Deposits and current accounts 106,330 - 384 830 7,076 13,587 10,472 - - -
- Banks 2,765 ------
- Customers 103,565 - 384 830 7,076 13,587 10,472 - - -
B.2 Debt securities ------
B.3 Other liabilities 25 ------
C. Off-balance sheet operations
C.1 Financial derivatives with equity swaps
- Long positions - 8,109 5,785 20,910 84,986 57,979 61,416 3,181 - -
- Short positions - 8,016 6,565 21,889 113,349 57,627 58,116 3,182 - -
C.2 Financial derivatives without equity
swaps BANCA SELLA | 292 REPORT AND FINANCIAL STATEMENTS 2018
- Long positions 465 ------
- Short positions 767 ------
C.3 Deposits and loans receivable
- Long positions ------
- Short positions ------
C.4 Commitments to disburse funds
- Long positions - - 98 ------
- Short positions - 98 ------
C.5 Financial guarantees issued ------
C.6 Financial guarantees received ------
C.7 Credit derivatives with equity swaps
- Long positions ------
- Short positions ------
C.8 Credit derivatives without equity
swaps
- Long positions ------
- Short positions ------
BANCA SELLA | 293 REPORT AND FINANCIAL STATEMENTS 2018
Section 5 - Operational risk
Qualitative information A. General aspects, management processes and methods of measuring operating risk
Operational risk is the risk of suffering losses deriving from the inadequacy or failure of procedures, human resources and internal systems, or from external events. This type includes, among others, losses deriving from internal/external fraud, human errors, business interruptions, unavailability of systems, contractual non-fulfilment and natural catastrophes. Operating risk includes legal risk, but does not include strategic and reputational risks.
The Parent Company Banca Sella Holding, more specifically the Risk Management Service, fulfils the function of management and coordination for the control of exposure to the risks assumed by the Sella Group companies in carrying out their ordinary and extraordinary business, delegating the specific operational aspects to the Bank’s Risk Management service. This service is responsible for measuring, monitoring and managing the Bank’s exposure to the risks indicated under Pillars 1 and 2 of Basel III and, in particular, verifying compliance with the regulations, the guidelines provided by the Parent Company and the propensity to operating risk defined by the body responsible for strategic supervision.
The operational risk measurement, management and control systems adopted by the Sella Group can be summed up in the operational risk management framework, which is made up of:
collection of quantitative data related to operating loss and the income statement;
mitigation and control organisational structures;
operating risk exposure assessment;
output and tools to assist in managing operating risk.
Through the data collection activity the necessary information is collected to assess the exposure to operational risk of the individual companies. In addition, the data collection activity allows to promptly inform the Risk Management service about operating risks taking place inside the company and the respective operating loss, in order to take remedial action. The operating risk detection instruments include:
the computer applications for the collection of operating losses (Anomaly Detection procedure to support the “Control Cycle”);
BANCA SELLA | 294 REPORT AND FINANCIAL STATEMENTS 2018
operating risk loss data from external sources (DIPO – Italian Operational Loss Database, joined by the Sella Group)4;
the factors of the operating context and the internal control system, that is specific KPIs (Key Performance Indicators) or KRIs (Key Risk Indicators) that reflect improvement or worsening of the bank/group's risk profile following actions taken or reinforcement of controls (e.g.: service level indicators, anomalies and inspection findings, process ratings).
The Control Cycle is an internal process that has been effectively adopted by the entire Group for several years for the processing of anomalies and removing the effects and the causes that generated them. This process, through the use of a specific software application, presides over the work of surveying, monitoring and managing all the anomalous events that occur in all the Group companies, so as to facilitate the consequent follow-up activities.
Ex ante and ex post organisational protections, established to mitigate and control operating risk, make it possible to monitor and limit the occurrence of operating risk events and their associated losses. In fact, effective organisational protections allow for timely identification of any inefficiencies and the establishment of appropriate mitigation strategies.
The main organisational controls adopted by the Sella Group and, more specifically, Banca Sella, to mitigate and control operating risk, in addition to the above-mentioned Control Cycle process, incorporate the assessment of the risk of new initiatives and IT risk, mapping and validating company processes, certifying and reporting service levels and line controls, and controls by means of the “alarm bells” (automatic processing and/or KRIs relative to accounting, movement of accounts, use of products and access to services with the goal of identifying and/or preventing possible operational anomalies, generated by subjects outside and/or inside the company).
The assessment of new initiatives is performed through the ex-ante analysis of the risks that may be determined by the creation of new products/services or entry into new businesses and markets. This assessment permits the assignment of a “risk exposure” indicator on a normal scale with values ranging from 1 (minimum risk) to 5 (maximum risk), and favours the implementation of mitigating actions to ensure the risk assumed is in line with the risk appetite profiles approved by the Board of Directors.
As regards the monitoring of IT risk, evaluations are carried out to determine the ICT risk profile of the intermediary, linking IT risk with the organisational context. In respect of which, for each ICT resource, its risk is calculated as a combination of the probability of occurrence of the risk scenarios identified and the impact in critical terms on a scale of 1 (minimum risk) to 5 (maximum risk).
In the context of company process validation, each process is “assigned” a rating of the operational risk inherent in a process (which assesses the risk factors on the process without taking into account the mitigating effect of existing audits) and a rating of the residual operational risk of the process (obtained by assessing the mitigating effect of audits of the inherent risks). The risk ratings are measured on a discrete
4DIPO information also allow comparing internal operating loss data and system operating loss data (DIPO – Italian Operational Loss Database). BANCA SELLA | 295 REPORT AND FINANCIAL STATEMENTS 2018
scale with values from 1 (minimum risk) to 5 (maximum risk). In order to intercept symptoms of process vulnerability in advance and having an immediate perception of the areas most greatly exposed to risks, mapping of business processes was carried out. end to end5.
In the case of the assessments of both new initiatives, of IT risk and of processes with a residual operating risk of equal to or higher than 4, before any action is taken, the Committee for the Assumption of Operating risk must first perform an examination and evaluation, as the Parent Company’s approval mechanism.
In addition, the activities carried out by the Banca Sella “Network Controls” function also contribute to the mitigation of operating risk, aimed at maintaining adequate supervision of operating risk control. The activities carried out by this service consist in centralised and second level controls of the activities carried out by the Banca Sella network.
Monitoring of the risk translates also into specific reporting functions at all levels of the corporate organisation, in accordance with the legislation which states that timely information must be provided on the subject of operational risks. The Control Cycle provides the information basis which, at the occurrence of the anomaly and according to a precise escalation, generates and sends communication flows to the parties concerned.
In addition, in order to ensure an assessment of the performance of the management of operating risk, the Risk Management service produces regular summary and detailed statements which summarise for each Group company, the degree of risk assumed in relation to:
anomalous events and operating losses reported in the Audit Cycle database (highlighting the more serious anomalies);
the outcome of line audits;
the trend in service levels;
This evidence is disclosed, at different levels of details and according to severity, to the managers overseeing risks, the CEOs, appointed committees and corporate bodies.
Regarding legal issues, note that the Bank is involved in a number of legal proceedings of various types and legal proceedings originating from the ordinary performance of their activities. In as much as it is not possible to predict the final results with certainty, it is held that any unfavourable results of said proceedings would not have, either singularly or as a whole, important negative effects on the financial and economic situation of the Bank.
5The process is defined as end-to-end when it is set up in such a way as to form a “value flow” in complete logic of satisfying the intended purposes of the customer, whether internal or external, starting from the request and running through to delivery of the service. BANCA SELLA | 296 REPORT AND FINANCIAL STATEMENTS 2018
For the purposes of calculation of the capital requirement to cover exposure to operational risk, the method adopted is the Basic Indicator Approach (BIA). In the basic approach, capital requirements are calculated by applying a fixed regulatory ratio of 15% to the three-year average of the relative indicator6.
Quantitative information
The graphs below, resulting from the processing of the information contained in the Loss Data Collection, illustrate the operating loss data relevant to the period 1/1/2018–31/12/2018, classified by type of event according to Basel II and subdivided in terms of impact and frequency.
Banca Sella breakdown of gross losses ET7 - EXECUTION, ET6 - DELIVERY AND INTERRUPTIONS PROCESS OF OPERATIONS MANAGEMENT ET1 - INTERNAL AND SYSTEM 2% FRAUD MALFUNCTIONS 13% ET5 - DAMAGES 0% ET2 - EXTERNAL TO TANGIBLE FRAUD ASSETS 7%ET3 - 0% EMPLOYMENT RELATIONSHIP AND WORKPLACE SECURITY ET4 - 0% CUSTOMERS, PRODUCTS AND PROFESSIONAL PRACTICES 78%
6 Article 316 - Title III - PART THREE of Regulation EU 575/2013 of the European Parliament and Council of 26 June 2013 details the elements to be added together to calculate the indicator in question. Table 1 of this article indicates: 1) interest and similar income; 2) interest and similar expense, 3) Income from shares, units and other securities with variable/fixed income; 4) income from fees/commissions; 5) expense from fees/commissions; 6) gains (losses) from financial transactions; 7) other operating income. BANCA SELLA | 297 REPORT AND FINANCIAL STATEMENTS 2018
Banca Sella breakdown of frequency ET2 - EXTERNAL ET3 - FRAUD EMPLOYMENT 9% RELATIONSHIP ET1 - INTERNAL AND WORKPLACE FRAUD SECURITY ET4 - 1% 0% CUSTOMERS, PRODUCTS AND ET7 - EXECUTION, PROFESSIONAL DELIVERY AND PRACTICES 7% PROCESS ET5 - DAMAGES MANAGEMENT TO TANGIBLE 39% ASSETS 0% ET6 - INTERRUPTIONS OF OPERATIONS AND SYSTEM MALFUNCTIONS 44%
BANCA SELLA | 298
Part F
Information on consolidated equity
At 31 December 2018, the tables in the Notes were prepared making use of the instructions for bank financial statements included in Bank of Italy Circular 262 of 22 December 2005 (5th update of 22 December 2017). Note, in the light of accounting standard IFRS 9 taking effect and the Bank's decision to not redetermine values from the previous year, the tables dictated by the above circular were duly modified through the omission of the comparison column, and to facilitate comparison with the previous year, tables prepared in line with that envisaged under IAS 39 were added and shown in accordance with Bank of Italy Circular 262 (4th update of 15 December 2015). Any opening balances found in the tables in the Notes are those deriving from first time application of accounting standard IFRS 9. Again, pursuant to the stated circular, the tables in the Notes were prepared in thousands of euro, unless otherwise indicated.
BANCA SELLA | 299 REPORT AND FINANCIAL STATEMENTS 2018
Section 1 - Corporate equity
A. Qualitative information
As of 1 January 2014, the new harmonised regulations for banks and investment companies took effect, as contained in Regulation (EU) No. 575/2013 (“CRR”) and Directive 2013/36/EU (“CRD IV”), which transfer to the European Union the standards defined by the Basel Committee for bank regulation (Basel III). To implement and support the application of the new EU regulations, as well as to fully revise and simplify supervisory regulations for banks, the Bank of Italy issued Circular 285 “Supervisory provisions for banks” and subsequent updates which: i) implemented the provisions of CRD IV, for which implementation is the responsibility of the Bank of Italy pursuant to the Consolidated Banking Act; ii) indicates the methods through which the national discretion attributed to national authorities in the EU regulations was exercised; iii) outlines a complete, organic and rational regulatory framework, integrated with the directly applicable EU provisions, so as simplify use by operators. Within Banca Sella, capital adequacy is ensured through Capital Management activities. The Capital Management plan is defined together with the strategic plan and the Risk Appetite Framework (RAF) and is made concrete through assessing the impact of ordinary operations and defining any extraordinary operations with an eye to meeting the capitalisation objectives (represented by the Common Equity Tier 1 ratio) held to be necessary and adequate to ensure the Bank has a solid and sustainable situation, both now and in the future. The Capital Management plan is systematically monitored by the Parent Company Risk Management area, through activities that supervise capital amounts and absorption, including: i) monthly calculation of final figures, based on operating profit achieved; ii) quarterly simulation of future trends, aimed at preventing any situations in which the established levels are not respected. The Bank’s solvency ratios are included in the monthly reports prepared for the Board of Directors and for the Group’s Alignment and Trend Verification Meeting.
BANCA SELLA | 300 REPORT AND FINANCIAL STATEMENTS 2018
B. Quantitative information
B.1 Corporate equity: breakdown
Amount Amount Item/Value 31/12/2018 31/12/2017
1. Capital 334,228 334,228
2. Share premiums 366,090 366,090
3. Reserves 31,242 81,287
- from profits 164,992 213,850
a) legal 45,106 43,412
b) statutory 109,304 106,481
c) treasury shares - -
d) other 10,582 63,957
- other (133,750) (132,563)
4. Equity instruments - -
5. (Treasury shares) - -
6. Valuation reserves: (6,037) 1,683
Equity securities measured at fair value through other comprehensive income (636) 6,976
- Financial assets measured at fair value through other comprehensive income - -
- Actuarial profits (losses) in relation to defined benefit pension plans (5,401) (5,293)
7. Profit (Loss) for the period 25,145 14,116
Total 750,668 797,405
B.2 Valuation reserves for financial assets measured at fair value through other comprehensive income: breakdown
Total 31/12/2018 Total 31/12/2017
Asset/Amount Positive Negative Positive Negative reserve reserve reserve reserve
1. Debt securities 231 6,214 3,027 - 2. Equity securities 5,347 - 4,018 - 3. Loans and advances - - - - Total 5,578 6,214 7,045 -
BANCA SELLA | 301 REPORT AND FINANCIAL STATEMENTS 2018
B.3 Valuation reserves for financial assets measured at fair value through other comprehensive income: annual changes
Debt Equity Loans and securities securities advances
Initial balance 3,027 4,018 -
Change to opening balances 251 - - 1. Opening balance 3,278 4,018 - 2. Increases 1,902 1,329 - 2.1 Increases in fair value - 1,329 - 2.2 Writedowns for credit risk - X - 2.3 Reversal to income statement from negative reserves from realization 28 X - 2.4 Transfers to other shareholders' equity components (equity securities) - - - 2.5 Other changes 1,874 - - 3. Decreases (11,163) - - 3.1 Reductions in fair value (7,430) - - 3.2 Writebacks for credit risk (16) - - 3.3 Reversal to income statement from positive reserves: following realization (1,843) X - 3.4 Transfers to other shareholders' equity components (equity securities) - - - 3.5 Other changes (1,874) - - 4. Closing balance (5,983) 5,347 -
B.4 Revaluation reserves related to defined benefit plans: annual changes
31/12/2018
1. Opening balance -5,293
2. Increases 2.1 Positive valuation component -
2.2 New entries
3. Decreases
3.1 Negative valuation component -109
3.2 New exits
4. Closing balance -5,401
BANCA SELLA | 302 REPORT AND FINANCIAL STATEMENTS 2018
Section 2 - Own funds and capital adequacy ratios
Based on Bank of Italy Circular 262/2005, as updated, in this section we refer the reader to the disclosures regarding own funds and capital adequacy found in the Pillar 3 disclosure published on the Group's website www.sellagroup.eu
Nonetheless, for the sake of completeness, we provide the main quantitative figures.
Regulatory capital - B. Quantitative information
Total Total 31/12/2018 31/12/2017
A. Common Equity Tier 1 – CET1 before application of prudential filters 742,576 789,928
of which CET1 instruments subject to transitional provisions - - B. CET1 prudential filters (+/-) (990) (134) C. CET1 gross of elements to be deducted and the effects of the transitional 741,586 789,794 regime (A +/- B) D. Elements to be deducted from CET1 56,483 51,236 E. Transitional regime – Impact on CET1 (+/-) 45,520 (3,396)
F. Total Common Equity Tier 1 (Common Equity Tier 1 – CET1) (C – D +/- E) 730,623 735,162
G. Additional Tier 1 – AT 1, gross of elements to be deducted and the effects of - - the transitional regime of which AT1 instruments subject to transitional provisions - - H. Elements to be deducted from AT1 - - I. Transitional regime – Impact on AT1 (+/-) - -
L. Total Additional Tier 1 (Additional Tier 1 – AT1) (G – H +/- I) - -
M. Tier 2 – AT 2, gross of elements to be deducted and the effects of the 171,082 214,020 transitional regime of which T2 instruments subject to transitional provisions 4,000 7,159 N. Elements to be deducted from T2 - - O. Transitional regime - Impact on T2 (+/-) - 448 P. Total Tier 2 – T2 (M - N +/- O) 171,082 214,468 Q. Total own funds (F + L + P) 901,705 949,630
BANCA SELLA | 303 REPORT AND FINANCIAL STATEMENTS 2018
2.2 Capital adequacy - B. Quantitative information
Non-weighted amounts Weighted amounts / requirements Categories/Amounts 31-12-2018 31-12-2017 31-12-2018 31-12-2017 A. RISK ASSETS A.1 Credit and Counterparty Risk 11,666,240 11,705,462 4,224,002 4,155,259 1. Standardised method 11,666,240 11,705,462 4,224,002 4,155,259 2. Internal rating-based methodology - - - - 2.1 Basic - - - - 2.2 Advanced - - - - 3. Securitisations - - - - B. REGULATORY CAPITAL REQUIREMENTS B.1 Credit and Counterparty Risk 337,920 332,421 B.2 Credit evaluation adjustment risk - 4 B.3 Regulatory Risk 1 - B.4 Market risks 3,761 245 1. Standardised method - 245 2. Internal models - - 3. Concentration risk 3,761 - B.5 Operational risk - 56,888 1. Basic method - 56,888 2. Standardised method - - 3. Advanced method - - B.6 Other calculation elements 57,806 - B.7 Total prudential requirements 399,488 389,558 C. RISK ASSETS AND CAPITAL RATIOS C.1 Risk-weighted assets 4,993,600 4,869,471 C.2 Tier 1 capital/Risk-weighted assets (CET1 capital 14.63% 15.10% ratio) C.3 Tier 1 capital/Risk weighted assets (Tier 1 capital ratio) 14.63% 15.10% C.4 Total own funds//Risk-weighted assets (Total capital ratio) 18.06% 19.50%
BANCA SELLA | 304 REPORT AND FINANCIAL STATEMENTS 2018
Part G
Aggregation Operations Regarding Companies or Business Lines
BANCA SELLA | 305 REPORT AND FINANCIAL STATEMENTS 2018
Section 1 - Operations carried out during the year
In 2018, no business combination transactions occurred.
Section 2 - Operations completed after year end
No business combination transactions occurred after the end of financial year 2018.
Section 3 - Retrospective adjustments
During 2018, as no business combination transactions occurred, there were no retrospective adjustments.
BANCA SELLA | 306
Part H Transactions with related parties
BANCA SELLA | 307 REPORT AND FINANCIAL STATEMENTS 2018
1. Information on the remuneration of managers with strategic responsibility In accordance with IAS 24, the types of related parties, with reference to the specific organisational structure and governance, comprise: a) Banca Sella Holding S.p.A. the controlling parent company; b) directors, statutory auditors and top management of Banca Sella Holding S.p.A. (managers with strategic responsibilities); c) companies controlled by or associated with one of the subjects referred to in point b); d) close family members of one of the subjects referred to in point b); e) directors, statutory auditors and top management of the controlling company Banca Sella Holding (managers with strategic responsibilities); f) the companies of the Group, as subject to management and coordination of Banca Sella Holding S.p.A. The regulation of related-party transactions aims to monitor the risk that the nearness of some subjects to the bank’s decision-making units may compromise the objectivity and impartiality of the decisions relating to the granting of loans and other transactions with regards to said subjects, with possible distortion of the resource allocation process, exposure of the bank to risks that have not been adequately measured or monitored and potential damages for investors and shareholders. As parent company, Banca Sella Holding S.p.A. has prepared suitable group procedures to ensure compliance with the above provisions, the general rules of which are dictated by two internal regulatory documents: the “Group Regulation for the management of related party transactions” and the “Internal Controls Policies”. The table below indicates the fees received by managers with strategic responsibilities. The managers with strategic responsibilities also include directors and statutory auditors.
Fees paid to managers with strategic responsibilities
Items Total 31/12/2018
a) Short-term employee benefits 1,252 b) Post-employment benefits - c) Other long-term benefits 340 d) Severance indemnities - e) Share-based payments - Total 1,592
Fees paid to the members of the Board of Directors’ and of the Board of Auditors
Items Total 31/12/2018
Directors 400 Statutory Auditors 112 Total 512
BANCA SELLA | 308 REPORT AND FINANCIAL STATEMENTS 2018
2. Information on transactions with related parties Transactions with related parties were carried out, as a rule, based on terms equivalent to those applied for transaction performed with independent third parties. The transactions based on the FINREP reporting scheme are reported below, with a rationale that involves different drafting criteria from those relating to the preparation of the table of relations with Group companies in the Report on Operations. Therefore, there could be some differences, including the one relating to the item “Due from banks” concerning the security deposit at the Parent Company, paid as guarantee for derivative transactions, not recorded as a related party given classified in the notes to the financial statements under other receivables and is not included in the details of related parties “Loans and advances”. Managers Parent Affiliates with company and other Associates strategic Other and entities in and joint responsibilit related entities the same ventures ies for the parties with group entity or its control parent
Selected financial assets - 3,771,704 - 2,604 1,386
Equity instruments - - - - -
Debt securities - - - - -
Loans and advances 4,392 3,771,644 - 2,604 1,386
of which: non-performing - - - - -
Selected financial liabilities - 730,529 - 4,337 852
Deposits - 729,087 - 4,331 852
Debt securities issued 5 1,442 - 6 - Nominal amount of commitments to disburse loans, financial guarantees and other commitments given - 217,649 - 8,985 1,172
of which: non-performing - - - - -
Notional number of derivatives - 500,878 - - -
BANCA SELLA | 309 REPORT AND FINANCIAL STATEMENTS 2018
Parent company Managers with and entities that Affiliates and Associates strategic have joint Other related other entities in and joint responsibilities for control or parties the same group ventures the entity or its significant parent influence
Interest income 12,171 18,218 10 399
Interest expense 24,601 14 15 40
Income from dividends 3,111
Revenues - fees and compensation 238 14,120 29 808
Expenses - fees and compensation 5,535 14,469 184 716
Sundry fees Banca Sella offered various services and outsourcing. The services relating to Corporate Secretary, Inspectorate, IT Security and Bond Loan Issues are handled by Banca Sella Holding. These activities, which are governed by specific contracts, are carried out following assessments of mutual benefit, in line with market terms, with the aim of creating value within the Group. Banca Sella received various fees, mainly for administrative services, as well as minor amounts for IT services. The amount of these fees was around € 3.8 million. The most significant amounts were received from Banca Sella Holding, € 1.7 million and from Banca Patrimoni, € 1.4 million, while the other fees amounted to € 100 thousand or less. Banca Sella also paid various fees for services and payment circuit costs to Axerve for € 9.5 million and paid € 4.1 million to Selir for administrative and IT services. Finally, it paid € 1 million to Banca Sella Holding for accessory treasury and market costs.
BANCA SELLA | 310
Part I Payment Agreements Based on Own Equity Instruments
The Bank does not use this type of agreement.
BANCA SELLA | 311
Part L Segment Reporting
Segment reporting, as provided under Bank of Italy Circular 262/05, as updated, is optional for Banca Sella and is prepared at the Group level. Please see the consolidated financial statements for the Sella Group.
BANCA SELLA | 312
Other information
BANCA SELLA | 313 REPORT AND FINANCIAL STATEMENTS 2018
Parent company or community credit enterprise
Company name
Banca Sella Holding S.p.A.
Registered Office
Piazza Gaudenzio Sella no. 1 - BIELLA Biella Companies Register number and Tax Code 01709430027 Enrolled on the Register of Banking Groups under no. 03311
BANCA SELLA | 314 REPORT AND FINANCIAL STATEMENTS 2018
Financial statements of the company exercising management and co-ordination
Attached are the Balance Sheet and Income Statement of Banca Sella Holding S.p.A. relating to financial years 2017 and 2016, as the company which at 31 December 2017 performed management and coordination.
Balance Sheet Assets
Assets 31/12/2017 31/12/2016 Difference %
10. Cash and cash equivalents 1,949,956,667 1,414,984,278 37.81% 20. Financial assets held for trading 422,235,425 549,884,355 -23.21% 40. Financial assets available for sale 627,553,595 556,810,722 12.71% 50. Financial assets held to maturity 35,347,207 - - 60. Due from banks 941,069,509 631,700,124 48.97% 70. Due from customers 344,231,091 300,193,728 14.67% 100. Equity investments 809,363,912 817,002,760 -0.93% 110. Tangible assets 34,713,610 35,778,880 -2.98% 120. Intangible assets 4,012,186 2,645,607 51.65% of which: - - goodwill - - - 130. Tax assets 27,720,717 26,710,114 3.78% a) current 13,903,952 12,191,815 14.04% b) deferred 13,816,765 14,518,299 -4.83% of which Law 214/2011 9,456,551 9,588,096 -1.37% 150. Other assets 11,512,581 10,002,259 15.10% Total assets 5,207,716,500 4,345,712,827 19.84%
Balance Sheet Liabilities
Liabilities and shareholders’ equity 31/12/2017 31/12/2016 Difference %
10. Due to banks 4,097,353,544 3,194,989,103 28.24% 20. Due to customers 91,274,664 82,155,840 11.10% 30. Securities in issue - 90,955,167 -100.00% 40. Financial liabilities held for trading 259,964,625 256,504,739 1.35% 80. Tax liabilities 3,489,897 2,346,002 48.76% a) current 516,276 63,341 715.07% b) deferred 2,973,621 2,282,661 30.27% 100. Other liabilities 35,296,654 41,880,398 -15.72% 110. Provision for severance indemnities 2,987,455 2,956,644 1.04% 120. Provisions for risks and charges: 24,107,448 20,611,732 16.96% a) retirement and similar obligations - - - b) other provisions 24,107,448 20,611,732 16.96% 130. Valuation reserves 14,276,099 11,890,163 20.07% 160. Reserves 423,360,485 422,147,647 0.29% 170. Share premiums 105,550,912 105,550,912 0.00% 180. Capital 107,113,603 107,113,603 0.00% 200. Profit (Loss) for the year (+/-) 42,941,114 6,610,877 549.55% Total liabilities and shareholders’ equity 5,207,716,500 4,345,712,827 19.84%
BANCA SELLA | 315 REPORT AND FINANCIAL STATEMENTS 2018
Income Statement
Items 31/12/2017 31/12/2016 Difference %
10. Interest receivable and similar income 31,203,073 27,876,889 11.93% 20. Interest payable and similar expenses (18,793,907) (10,884,848) 72.66% 30. Net interest income 12,409,166 16,992,041 -26.97% 40. Fee income 14,284,933 13,656,167 4.60% 50. Fee expenses (7,909,115) (8,285,051) -4.54% 60. Net fees 6,375,818 5,371,116 18.71% 70. Dividends and similar income 12,460,409 10,065,780 23.79% 80. Net gains/(losses) on trading activities 13,519,792 5,735,208 135.73% 100. Income (losses) from sale or repurchase of: 9,106,046 4,712,555 93.23% a) receivables - 822 -100.00% b) financial assets available for sale 9,106,046 4,711,938 93.25% d) financial liabilities - (205) -100.00% 120. Net banking income 53,871,231 42,876,700 25.64% 130. Net value adjustments for impairment of: (5,046,654) (5,627,010) -10.31% a) receivables (2,530) 24,990 -110.12% b) financial assets available for sale (4,987,861) (4,909,850) 1.59% d) other financial transactions (56,263) (742,150) -92.42% 140. Net financial operating gains (losses) 48,824,577 37,249,690 31.07% 150. Administrative expenses: (42,694,979) (44,083,813) -3.15% a) personnel expenses (24,875,519) (21,635,578) 14.98% b) other administrative expenses (17,819,460) (22,448,235) -20.62% 160. Net provisions for risks and charges (4,207,575) (1,089,113) 286.33% 170. Net value adjustments on tangible assets (2,270,771) (2,172,844) 4.51% 180. Net value adjustments on intangible assets (1,061,113) (955,535) 11.05% 190. Other operating expenses/income 4,104,530 2,188,890 87.52% 200. Operating expenses (46,129,908) (46,112,415) 0.04% 210. Income (Losses) from equity investments 38,584,763 10,518,933 266.81% 240. Income (losses) from the disposal of investments 1 9,279 -99.99% 250. Profit (Loss) on continuing operations before tax 41,279,433 1,665,487 2378.52% 260. Income taxes for the period on continuing operations 1,661,681 4,945,390 -66.40% 270. Profit/(Loss) on continuing operations after tax 42,941,114 6,610,877 549.55% 290. Profit (Loss) for the period 42,941,114 6,610,877 549.55%
BANCA SELLA | 316 REPORT AND FINANCIAL STATEMENTS 2018
REPORT OF THE BOARD OF STATUTORY
AUDITORS
BANCA SELLA | 317 REPORT AND FINANCIAL STATEMENTS 2018
BANCA SELLA S.P.A.
Head office: Piazza Gaudenzio Sella, I, Biella, Italy Share capital: 334,228,084 Euro fully paid up Register of Companies of Biella: 02224410023 Register of Banks: 5626; ABI Code: 03268 Subject to management and coordination by BANCA SELLA HOLDING S.P.A.
BOARD OF AUDITORS’ REPORT TO THE SHAREHOLDERS’ MEETING OF 30 APRIL 2019
Dear Shareholders,
Please find enclosed a summary of the content and result of the activities carried out during the second year of our three-year term, which also involves serving as the body pursuant to Legislative Decree 231/2001, during which we obviously continued to monitor general compliance with laws and regulations, including those of BANK OF ITALY, CONSOB and IVASS, as well as the provisions contained in the Articles of Association.
Again, through the informed preparation and participation in the work of the Shareholders' Meeting and the Board of Directors – carried out, as a rule, at least once a month, in compliance with the precepts of article 2381 of the Italian Civil Code, with the usual methods and contents, given the directors' knowledge of the need to make known their own interests or those they have on the account of third parties, and in the presence of measures suitable to exclude any consequent issues – we acquired information about the execution of ordinary activities and performance during the year, as well as about other initiatives of greater economic, financial and equity importance.
We hold that the actions approved and those implemented are in compliance with the aforementioned provisions and are not manifestly imprudent or ventured, in a way that could compromise the integrity of the equity, nor are they unusual in terms of their nature, size, content, conditions or timing.
We continued to monitor application of the CONSOB Regulation for transactions with related parties and the associated corporate procedure, which can be consulted on the website, through: the acquisition of the envisaged quarterly reports issued by the relative committee - also responsible for issues associated with related and significant parties as governed by BANK OF ITALY -; participation in some of their meetings; so as to converse with them and directly acquire information about the operating methods followed and the content examined during the work; reading minutes of other sessions.
BANCA SELLA | 318 REPORT AND FINANCIAL STATEMENTS 2018
We recall that the relationships established and decisions made led to the issuing of five information documents prepared by the directors who, obviously, in the relative paragraph in the Report on Operations, provide the tables illustrating the equity and economic results of relationships with companies within the group. They also summarise, in the Notes to the Financial Statements, transactions with related parties, noting again that these were normally carried out at market conditions and following assessments of reciprocal economic expediency.
Recalling that the company - whose shares are traded on the order driven multilateral facility HI-MTF - is subject to the regulations for issuers of financial instruments widely distributed among the public and is listed on the relative register, we note, relative to the most significant aspects, that during the course of our eighteen meetings we:
o ensured the preparation of periodic reports on operations; o acquired the results of the calculation of regulatory capital and capital ratios; o followed the proceedings to prevent, manage and mitigate the main risks to which the bank is exposed - illustrated in the draft financial statements - including monitoring the risk appetite framework; o conversed, at times, with the Chief Executive Officer and General Manager; o continued to constantly interact with managers and employees responsible for internal auditing and compliance, in their various and specific aspects, as well as with risk management and anti-money laundering employees and, at times, with the manager of the same, who holds a similar role in the parent company, so as to take the operating results, guidelines for actions determined when necessary, and progress in implementation of those worthy of note into constant consideration; o acquired information from managers or other members of additional company departments and from others within BANCA SELLA HOLDING who also work for the company, including: general affairs, legal services and corporate secretary, budget and reporting, outsourced services coordination, loans, human resources management, development and training, complaints, network, investment services and private banking, physical security, privacy and cash management;, as well as, in the context of the necessary informational and consequent operating connection, jointly communicating with them; o taken into account the annual reports issued by the owners of the activities called upon by the supervisory authorities to draft them, formalised and issued our considerations regarding externalised significant operating or control functions; o received confirmation of existing measures with regards to EU Regulation 596/2014 and the implementation regulations regarding market abuse, substantially unchanged and still externalised with the parent company, which identifies and assesses operations and orders regarding financial instruments issued by customers, so as to identify those which could constitute an attempt at or actual abuse of privileged information and/or market manipulation; o monitored the actions of the group after the General Data Protection Regulation took effect; o maintained systematic contact with the shareholder responsible for the task and the manager of reference from the auditing firm, who participated in most of our sessions, pursuant to Legislative Decree 39/2010 and in relation to Legislative Decree 135/2016: o to monitor the execution of our reciprocal programs - relative to which no additional unexpected or critical issues arose which required additional audits worthy of mention; o to exchange information about our respective actions - which naturally also involved preparation for and adoption of IFRS 9 - and to make use of the results of the same, relative
BANCA SELLA | 319 REPORT AND FINANCIAL STATEMENTS 2018
to which and in the absence of other issues of which we are aware, no events or omissions worthy of note arose; o to monitor its independence, relative to which, also with reference to fees for additional services provided to BANCA SELLA (activities relative to the EMTN-EURO MEDIUM TERM NOTE Programme for the issuing of a comfort letters) and to other companies in the Group, now acquired through financial statements and reports from the parent company, we do not have reserves in any case, similar to the Board of the same; o participated in the 2018 and 2019 annual meetings of our colleagues of other Group companies and had an autonomous similar session on 6 March with those - which auditor Sottoriva is also part of - of the subsidiaries SELLA LEASING and SELLA PERSONAL CREDIT, in any case cultivating information relationships with our counterparts at BANCA SELLA HOLDING, who also serve as a supervisory body; o made reference - although in the context of the different presuppositions and consequently varying prospectives - to the knowledge acquired in the role of supervisory body; o obtained confirmation, in the absence of evidence to the contrary, that the administrative and accounting system is able to ensure compliance with the principles of proper conduct, as well as to adequately represent management events within the context of the financial reporting process; o excluded, again, having taken in the positive assessments received from the directors and formulating our own, any elements of a significance to affect the overall adequacy of the organisational structure and internal audit system, understood, simplifying greatly, as all the means, procedures and rules appropriate to allow, in the execution of activities, both observance of the laws, provisions and company rand group rules regarding operations, administration and accounting, and the identification and management of the main risks, while in the presence of actions under way, suggestions made by ourselves and the auditing firm and the always auspicious margins for appropriate and continuous improvement, we recall that on 1 March 2019 SELLA TECHNOLOGY SOLUTIONS began operating, to which BANCA SELLA transferred the business unit operating in the areas of information technology and business process outsourcing; o monitored measures adopted against money laundering and financing of terrorism and prepared requests, also in the context of the continuous and necessary research for improvement, to ensure constant attention to the execution of safeguards, beginning with aspects relative to know your customer; o sent the Board the results of our activities, summarised in quarterly reports, holding this to be a useful practice to systematically make them aware of all of our recommendations to eliminate flaws and problems as well as all suggestions, hopefully appreciated in terms of preventing similar situations, made to the relative company representatives, while continuing to follow the parent company's indications and observing that in the parent company the chairman and a director of BANCA SELLA hold a similar role and that of chief executive officer; o completed the procedure for the most recent and positive self-assessment of the congruence of the structure of the administrative body, characterised by professionalism and diversified skills, also with the intention of monitoring its development, in part due to the intrinsic subjectivity of the process, which also considered a prohibition on taking on roles in competitor companies and groups; o prior to formalising our report, carried out, with entirely similar purposes, results and limits, an additional functional and operational review of the Board of Statutory Auditors and its effective components, as well as the independence requirements for each member, without identifying any relationships creating issues.
BANCA SELLA | 320 REPORT AND FINANCIAL STATEMENTS 2018
______
We did not identify any other aspects that require note, beyond those referenced by the directors who, naturally, report on the inspections carried out by the Authorities.
We have not received any complaints, either directly or through the company, pursuant to article 2408 of the civil code and recognised.
______
Recalling that BANCA SELLA takes advantage of the right to deliver the consolidated accounts, prepared by the parent company, which also sees to the publication of the Non-Financial Declaration, we considered the structure of the draft financial statements at 31 December 2018.
The balance sheet comes to € 11,811,040,317 showing a final profit of € 25,144,941, compared to the figure of € 14,116,444 in 2017.
The Report on Operations, among other news provided, highlights the factors that most significantly affected the year; summarises the outlines of the activity and the components which forms it; comments on economic, financial and equity figures; focuses on developments in the commercial model; discusses human resources; provides information about the disclosure system; provides a summary of the possible risks to which the company is subject, including special disputes.
The Notes to the Financial Statements indicate the main accounting figures and the criteria used to determine the items in the balance sheet and income statement, which the directors state were followed with an eye to the business as a going concern; they also describe the structure and changes occurring in items; accompany data with explanatory elements; further discuss the issue of risks and hedging policies; provide information about equity; propose destination of the profits for the year; discuss other issues and; make reference to the NATIONAL REGISTER OF GOVERNMENT AID website.
Due to our direct and reported activities regarding its structure and preparation - and the professional judgement issued by DELOITTE & TOUCHE, anticipated to us today verbally, while awaiting formalisation of the report, having just completed the final procedural actions, which will indicate the key aspects of the audit, including: first time application of IFRS 9; classification of non- impaired loans to customers measured at amortised cost, classification and measurement of impaired loans to customers measured at amortised cost - we hold that the draft financial statements can be approved.
In today's conversation summarising the respective activities regarding the past year, we also obtained more information about the consideration the auditors will outline in their Additional Report.
BANCA SELLA | 321 This, among other things, will not indicate any significant flaws in the internal audit system relative to the financial reporting process.
The proposal for destination of the profits appears to us to be compliant with the constraints upon the same, while also observing that the instructions found in the most recent recommendation issued by the EUROPEAN CENTRAL BANK on 7 January 2019, as repeated by the BANK OF ITALY on 18 March, do not substantially differ from those provided in recent years.
We do not hold that further comments or proposals are necessary in regard to the additional items placed on the agenda for the Shareholders' Meeting.
12 April 2019
The Board of Statutory Auditors
Paolo Piccatti
Claudio Sottoriva
Carlo Ticozzi Valerio
BANCA SELLA | 322 REPORT AND FINANCIAL STATEMENTS 2018
INDEPENDENT AUDITOR'S REPORT Deloitte & Touche S.pA Galleria San Federico. 54 10121 Torino Deloitte Italia
-el: +39011 55971 www.deloine.it
INDEPENDENT AUDITOR'S REPORT PURSUANT TO ARTICLE 14 OF LEGISLATIVE DECREE No. 39 OF JANUARY 27, 2010 AND ARTICLE 10 OF THE EU REGULATION 537/2014
To the Shareholders of Banca Sella S.p.A.
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
Opinion
We have audited the financial statements of Banca Sella S.p.A. (the "Bank"), which comprise the balance sheet as at December 31, 2018, the income statement, the statement of comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Bank as at December 31, 2018, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of national regulations issued pursuant to art. 43 of Italian Legislative Decree no. 136/15.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISA Italia). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the ethical requirements applicable under Italian law to the audit of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
First time adoption of IFRS 9
Description of the The first time adoption, at January pt 2018, of the International Financial key audit matter Reporting Standard IFRS 9 "Financial instruments" (the "Standard"), has led to the classification and measurement of the Bank's financial assets and liabilities according to the new accounting categories envisaged by the Standard and the definition of a new methodology for determining the impairment of the financial assets in scope based on an expected losses model (expected credit losses).
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It norm' De!clla! s· dens(e d l4nJ 0 PII:. !JeJle~.eguen[1 ent,:a Detc.:1tte Tcu("ne Tuhmalsl.. llrn:ted. U'la SOCle'.3Ingle!.!? a rc·sponsablh:d I,·mtata rDn:..~).1[> memuer fIrm ader('rltl al suo :'l~twork e 1(' er.hld iJ ('I~~,t·(orn.'liHt;' on:.. t.' (l(ls(ur'cl (1fiie SUP rnerr.Der hrm serIO emlla glur-cl.rarr.fntl? ~E'pariltE' e Ind:;::lendEnt. ,'a I::uo DnL {Ci?norOlnala anche ~Deioltlf' Glcbaf') nor' (orn s:.t:>serVlil it' ch('l)l1. <;. n'l,~a il 'pge~re 1'lnformr1llva (Cf1)plo:'~arelatiVi:I al:J JeSCIW:.Jnc- dC.l~l strUl:lJr~llcgille d. Delo He- Touche iohmats..J llm,!c·d e d('II(' S'.JC mcrrbc-r firm il!1',ndlrIZZQ ,,~.u.dclo:tte (:.::m/about Deloitte
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First time adoption of IFRS 9
The Bank has exercised the option, allowed by the Standard, to continue applying the existing lAS 39 hedge accounting requirements for all its hedging relationships (carve-out).
In addition, the Bank has decided to elect the option provided by the Standard not to restate comparative figures of the previous year.
In Part A - Accounting Policies of the notes to the financial statements the information required by International Financial Reporting Standards is reported, including the main methodological choices made by the Bank. In particular, the IFRS 9 first application determined, at January 1'1, 2018, a negative effect on the Bank's net equity equal to 58.050 thousands Euro net of tax.
These effects were determined as a result of the implementation of the reqUirements of the Standard that has significantly affected the various aspects of the Bank's internal control system.
In this context, the determination of impairment provisioning of the financial assets according to the expected losses model introduced by the Standard constitutes the result of a complex estimation process that includes numerous subjective variables regarding the criteria used to identify the significant increase in credit risk, that has been used for the purpose of allocating the financial assets in the different stages provided by the Standard, and the definition of the models used for measuring the expected credit losses, using assumptions and parameters which have to take into account current and future macroeconomic information ("forward-looking"), including possible selling scenarios where the Bank's strategy is to recover the loan through disposal operations for non-performing loans (bad loans and revoked unlikely to pay).
In relation to the significance of the above mentioned effects, of the pervasive operational complexities connected to the transition and of the inherent subjectivity of the estimation processes adopted by the Bank in the valuation of financial assets according to the new impairment methodology, we considered that the first time adoption of the Standard, was a key audit matter for the Bank's financial statements.
Audit procedures While performing our audit procedures we have preliminarily examined, also performed supported by the specialists of the Deloitte network, the Bank's transition and implementation project with particular reference to the application choices adopted, in order to verify their appropriateness and compliance with the requirements of the Standard, and the related impacts.
The main procedures carried out as part of our audit work have included, among the others, the following:
• obtaining and analysing the minutes of the Bank's Governance and Control Bodies and any other documentation developed and made available, with particular reference to the areas of interpretation, also through information gathering and interviews with the relevant functions of the Bank; Deloitte
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First time adoption of IFRS 9
• analysis of the technical-methodological documentation underlying the identification of the Bank's business models with particular reference to the classification criteria for financial assets in such business models;
• identification and understanding of the design - also supported by the specialists of the Deloitte network - of certain key controls, including IT controls, which are driving the classification and valuation of the Bank's financial assets, by verifying the correct implementation and the operational effectiveness;
• verification for a sample of loans and debt securities of the correctness of the results of test SPPI carried out by the Bank during the first application of the Standard;
• analYSis of the impairment models developed by the Bank and verification of the reasonableness of the assumptions and parameters used for stage allocation and estimation of expected credit losses, also through the support of the Deloitte network specialists, and of the correctness of the related calculations;
• verification of the coherence between the information used for calculating expected credit losses and those used in the other main decision-making, budget and assessment processes of the Bank with particular reference to macroeconomic indicators and forward-looking information.
Finally, as far as the impact deriving from the first application of the Standard is concerned, we have acquired the details of the relative quantification and verified its mathematical accuracy. We have also verified the compliance and completeness of the disclosures provided in Part A - Accounting Policies of the notes to the financial statements with respect to the requirements of the applicable International Financial Reporting Standards.
Classification of performing loans and advances to customers measured at amortised cost
Description of the As highlighted in the notes to the financial statements - Part B - Information key audit matter on the balance sheet - Assets, at December 31, 2018 the net performing financial assets, measured at amortised cost, due from customers of the Bank amount to Euro 7.766.441 thousands, including Euro 6.672.529 thousands of performing loans and advances to customers.
As indicated in the "Section 1 - Credit Risk" qualitative information of Part E - Information on risks and related hedging poliCies of the notes to the financial statements as at December 31, 2018, as part of its policies for managing loans and advances to customers, the Bank has adopted different processes and analysis tools based on homogeneous risk categories.
Given the materiality of performing loans and advances to customers measured at amortised cost in the financial statements, the structure and the complexity of the classification process of these loans, we considered that the Deloitte
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Classification of performing loans and advances to customers measured at amortised cost
classification of performing loans and advances to customers measured at amortized cost was a key audit matter for the Bank's financial statements.
Audit procedures The main procedures carried out as part of our audit work have included, among performed the others, the following:
• understanding of the managing processes and analysis tools set up by Bank in relation to the monitoring of performing loans and advances to customers measured at amortised cost to ensure their classification in accordance with the applicable policy framework; verification of the implementation and operating effectiveness of the relevant controls identified in relation to the processes above, also with the support of IT experts belonging to Deloitte network; • verification, on a sample basis, of the classification of performing loans and advances to customers measured at amortised cost according with the applicable policy framework; • check that the accuracy and completeness of the disclosures provided in the financial statements comply with the policy framework and the applicable accounting standards.
Classification and measurement of non-performing loans and advances to customers measured at amortised cost
Description of the As highlighted in the notes to the financial statements - Part B - Information key audit matter on the balance sheet - Assets, and Part E - Information on risks and related hedging policies, at December 31, 2018 the gross non-performing loans and advances to customers measured at amortised cost amount to Euro 662.195 thousands, the connected specific write-downs amount to EUro 347.885 thousands and the related net exposure amounts to Euro 314.310 thousands.
In addition, the paragraphs entitled "I. Main figures and indicators" and "VII. Balance sheet data" of the Report on Operations and the "Section 1 - Credit Risk" qualitative information of Part E - Information on risks and related hedging policies of the notes to the financial statements show a coverage ratio of 52,5% related to non-performing loans and advances to customers measured at amortised cost at December, 31 2018. In addition, the above mentioned non-performing exposures, classified according to the International Financial Reporting Standard IFRS 9 "Financial instruments" in the so-called "Stage 3", include net bad loans for Euro 179.375 thousands with a coverage ratio of 61,6%, net unlikely to pay loans for Euro 127.735 thousands with a coverage ratio of 31,2% and net impaired past-due loans for Euro 7.200 thousands with a coverage ratio of 18,2%.
The notes to the financial statements - Part A - Accounting PoliCies - A. 2 4- Receivables show: Deloitte
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Classification and measurement of non-performing loans and advances to customers measured at amortised cost
• the classification rules of non-performing loans and advances to customers measured at amortised cost adopted by the Bank, according with the applicable banking regulations and in compliance with the accounting standards;
• the procedures used in determining the recoverable amount of the above loans, based on an estimate of present value of future cash flows that are the result of an analytic valuation of bad loans, an analytic valuation of unlikely to pay loans and impaired past-due loans with specific characteristics and exposure greater than specific thresholds, and a collective valuation of the remaining non-performing loans and advances to customers measured at amortised cost.
Given the materiality of non-performing loans and advances to customers measured at amortised cost recorded in the financial statements, the complexity of the estimation processes adopted by the Bank, which have involved a detailed classification of such loans in homogeneous credit quality categories, as well as the relevance of the discretionary components inherent in the estimated nature of recoverable amount (i.e. estimates of expected cash flows, the related expected recovery times, the value of any collateral and the possible recovery strategies) we considered that the classification and measurement of non-performing loans and advances to customers measured at amortised cost were a key audit matter for the Bank's financial statements.
Audit procedures The main procedures carried out as part of our audit work have included, among performed the others, the following:
obtaining an understanding of the rules and the managing processes set up by Bank in relation to the classification and recoverable amount estimation of non-performing loans and advances to customers measured at amortised cost in accordance with the policy framework and the applicable accounting standards;
• verification of the implementation and operating effectiveness of the relevant controls identified in relation to the above processes;
comparative analytical procedures, in relation to the previous years, with focus on changes in non-performing loans and advances to customers measured at amortised cost and relative impairment losses;
• verification, on a sample basis, of the classification and recoverable amount estimation of non-performing loans and advances to customers measured at amortised cost according with the applicable policy framework and accounting standards, also by obtaining and examining written confirmations by the external lawyers appointed by the Bank to support the recovery of credit exposures;
• check that the accuracy and completeness of the disclosures provided in the financial statements comply with the policy framework and the applicable accounting standards. Deloitte
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Responsibilities of the Directors and the Board of Statutory Auditors for the Financial Statements
The Directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of national regulations issued pursuant to art. 43 of Italian Legislative Decree no. 136/15 and, within the terms established by law, for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they have identified the existence of the conditions for the liquidation of the Bank or for the termination of the operations or have no realistic alternative to such choices.
The Board of Statutory Auditors is responsible for overseeing, within the terms established by law, the Bank's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (ISA Italia) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with International Standards on Auditing (ISA Italia), we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, deSign and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the Circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast Significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Deloitte
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We communicate with those charged with governance, identified at an appropriate level as required by ISA Italia, regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence applicable in Italy, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report.
Other information communicated pursuant to art. 10 of the EU Regulation 537/2014
The Shareholders' Meeting of Banca Sella S.p.A. has apPOinted us on May 2, 2011 as auditors of the Bank for the years from December 31, 2011 to December 31, 2019.
We declare that we have not provided prohibited non-audit services referred to in art. 5 (1) of EU Regulation 537/2014 and that we have remained independent of the Bank in conducting the audit.
We confirm that the opinion on the financial statements expressed in this report is consistent with the additional report to the Board of Statutory Auditors, in its role of Audit Committee, referred to in art. 11 of the said Regulation.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Opinion pursuant to art. 14, paragraph 2 (e), of Legislative Decree 39/10 and art. 123-bis, paragraph 4, of Legislative Decree 58/98
The Directors of Banca Sella S.p.A. is responsible for the preparation of the report on operations and of certain information required by art. 123-bis, paragraph 2 letter b), of Italian Legislative Decree n. 58/98 included in the specific section of the report on corporate governance and ownership structure of Banca Sella S.p.A. as at December 31, 2018, including their conSistency with the related financial statements and their compliance with the law.
We have carried out the procedures set forth in the Auditing Standard (SA Italia) n. 7208 in order to express an opinion on the consistency of the report on operations and of certain information required by art. 123-bis, paragraph 2 letter b), of Italian Legislative Decree n. 58/98 included in the specific section of the report on corporate governance and the ownership structure with the finanCial statements of Banca Sella S.p.A. as at December 31, 2018 and on their compliance with the law, as well as to make a statement about any material misstatement.
In our opinion, the above-mentioned report on operations and certain information required by art. 123-bis, paragraph 2 letter b), of Italian Legislative Decree n. 58/98 included in the specific section of the report on corporate governance and the ownership structure are consistent with the financial statements of Banca Sella S.p.A. as at December 31, 2018 and are prepared in accordance with the law.
With reference to the statement referred to in art. 14, paragraph 2 (e), of Legislative Decree 39/10, made on the basis of the knowledge and understanding of the entity and of the related context acquired during the audit, we have nothing to report. Deloitte
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Exemption from the preparation of the non financial statements
As outlined in the report on operations, the Directors of Banca Sella S.p.A. used the exemption from the preparation of the non financial statements pursuant to art. 6, paragraph 1, of Legislative Decree of December 3D, 2016, n. 254.
DELOITIE & TOUCHE S.p.A.
Signed by Claudio Crosio Partner
Turin, Italy Aprile 15, 2019
This report has been translated into the English language solely for the convenience of international readers.