SUPPLEMENT DATED 18 APRIL 2007 TO THE PROSPECTUS DATED 5 APRIL 2007
BANCA DELLE MARCHE S.P.A.
(incorporated with limited liability in the Republic of Italy)
€3,500,000,000 Euro Medium Term Note Programme
This Supplement (the “Supplement”) to the Prospectus (the “Prospectus”) dated 5 April 2007 which comprises a base prospectus, constitutes a supplement, for the purposes of Article 16 of the Prospectus Directive as implemented by Article 13 of Chapter 1 of Part II of the Luxembourg Act dated 10 July 2005 on prospectuses for securities, to the Prospectus and is prepared in connection with the €3,500,000,000 Euro Medium Term Note Programme (the “Programme”) established by Banca delle Marche S.p.A. (the “Issuer”). Terms defined in the Prospectus have the same meaning when used in this Supplement.
This Supplement should be read in conjunction with, the Prospectus and any other supplements to the Prospectus issued by the Issuer.
The Issuer accepts responsibility for the information contained in this Supplement. To the best of the knowledge of the Issuer (which has taken all reasonable care to ensure that such is the case) the information contained in this Supplement is in accordance with the facts and does not omit anything likely to affect the import of such information.
To the extent that there is any inconsistency between (a) any statement in this Supplement and (b) any other statement in or incorporated by reference in the Prospectus, the statements in (a) above will prevail.
This Supplement contains certain corrections to the section “Banca delle Marche S.p.A.” contained in the Prospectus. The section “Banca delle Marche S.p.A.” is restated in full in this Supplement, as amended by the corrections noted in this Supplement and investors should read the restatement in this Supplement as a replacement for the equivalent section in the Prospectus.
Save as disclosed in this Supplement, no other significant new factor, material mistake or inaccuracy relating to information included in the Prospectus has arisen or been noted, as the case may be, since the publication of the Prospectus.
Copies of this Supplement and the Prospectus are available during usual business hours or any weekday (Saturday or public holidays excepted) at the office of the Paying Agent in Luxembourg and on the Luxembourg Stock Exchange’s website: www.bourse.lu.
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Corrections to the Prospectus
On page 43:
• non-consolidated shareholders’ equity (after distribution of dividends) as at 31 December 2005, was Euro 791,301,963, not Euro 823,780,485.
• 0.08 per cent. of the share capital was held in the Bank’s own portfolio as at 31 December 2005, not 31 December 2004.
• as at 31 December 2005 the Bank had five wholly or majority owned subsidiaries, not four.
• Medioleasing S.p.A. was a 100% owned subsidiary as at 31 December 2005
On page 46:
• the holding in S.E.D.A. S.p.A. as indicated on the Group structure chart is 41.42%, not 36.06%.
On page 47:
• net income of Carilo for the year ended 31 December 2005 was Euro 3.6 million, not Euro 2.4 million.
On page 49:
• reference to notes (3), (4), (5), (6), (7), (8), (9) and (10) in the table of certain non-consolidated balance sheet data and ratios of the Bank as at 31 December 2005 and 2004 are deleted.
• net income per share as at 31 December 2004 was Euro 0.018, not Euro 0.081.
• risk-weighted assets as at 31 December 2004 were 9,786,925 thousand Euro, not 9,788,978 thousand Euro.
On page 50:
• consolidated operating income of the Group as at 31 December 2005 was 68,694 thousand Euro, not 68,940 thousand Euro.
• outstanding loans to customers represented 78.8 per cent. of the Bank’s total assets as at 31 December 2004, not 69.6 per cent.
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On page 52:
The following table replaces the table of the Bank’s lending to non-financial and family businesses as at 31 December 2005 and 2004:
As at 31 December
2005 2004
Amount Composition Amount Composition
(EUR/000) % (EUR/000) %
Retail and wholesale trade, recovery and repair services...... 637,828 9.50 702,488 10.48
Construction and public works...... 1,033,953 15.40 1,055,073 15.74
Other marketable services ...... 980,241 14.60 998,767 14.90
Textiles, leather, footwear, clothing ...... 248,417 3.70 311,696 4.65
Other industrial products...... 261,845 3.90 319,740 4.77
Other types of business ...... 3.551,695 52.90 3,315,370 49.47
Total ...... 6,713,979 100.00 6,703,134 100.00
On page 58:
• fee income of Euro 9 million was generated for the year ended 31 December 2005, not Euro 4.2 million.
• the Bank sold policies for a total value of Euro 700 million during 2005, not Euro 649 million.
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Set out below is the complete section “Banca delle Marche S.p.A.” incorporating the corrections outlined in this Supplement:
“BANCA DELLE MARCHE S.P.A.
Introduction
Banca delle Marche S.p.A. (the “Bank”) was established as a joint stock company (società per azioni) on 1 November 1994, with a duration until 31 December 2090 as result of the merger between Banca Carima S.p.A. (established in 1846 as Cassa di Risparmio della Provincia di Macerata) and Cassa di Risparmio di Pesaro S.p.A. (established in 1841). On 31 December 1995, Cassa di Risparmo di Jesi S.p.A. (established in 1844) was merged into the Bank. On 30 June 2003, Mediocredito Fondiario Centroitalia S.p.A., a subsidiary of the Bank, merged with the Bank.
The Bank is one of the major banks in terms of total assets in central Italy. The Bank’s activities are concentrated in the Marche region, on the east side of central Italy. As at 31 December 2005 the Bank had 265 branches, located in the regions of Marche (226 branches), Lazio (13 branches), Umbria (11 branches), Emilia-Romagna (7 branches) and Abruzzo (8 branches). The Bank is domiciled in the Republic of Italy and it is registered in the Register of Banks at no. 5236.5 and in the Register of Banking Groups at no. 6055.8. Its registered office is at Via Menicucci, 4/6 in Ancona, with telephone number +3907315391 (switchboard), and its Head Office is at Via Alessandro Ghislieri 6, in Jesi, Ancona.
The Bank’s traditional customer base comprises principally retail customers, small and medium-sized businesses and sole traders in the Marche region.
The Bank is a full-service bank providing a wide range of services and products to its customers, including current and savings accounts, secured and unsecured loan facilities, mortgage lending, import and export financing facilities, asset management and other investment and savings products.
As at 31 December 2005 the Bank’s non-consolidated total assets were Euro 13,700 million (Euro 12,171 million as at 31 December 2004) and its non-consolidated shareholders’ equity (after distribution of dividends for the year 2005) was Euro 791,301,963. As at 31 December 2005, the Bank had issued and fully paid share capital of Euro 386,476,841 held by Fondazione Cassa di Risparmio della Provincia di Macerata (20.94 per cent.), Fondazione Cassa di Risparmio di Pesaro (20.94 per cent.), Fondazione Cassa di Risparmio di Jesi (10.03 per cent.), Commercial Union Italia S.p.A. (2.49 per cent.), Aviva Italia Holding S.p.A.(5.80 per cent.), San Paolo IMI (7.00 per cent.) and with the remainder held by a large number of private shareholders (32.70 per cent.). As at 31 December 2005, 0.08 per cent. of the share capital was held in the Bank’s own portfolio. The Bank’s shares are not listed on any stock exchange, but they are traded through an organised trading system.
As at the date of this Prospectus, the following rating was assigned to the Bank by Moody’s:
Long-term: Baa1
Short-term: P-2
In addition to being the principal operating entity, the Bank is also the holding company in the banking group (the “Group”), which comprised, as at 31 December 2005, the Bank and its five wholly or majority owned subsidiaries: Focus Gestioni SGR S.p.a. (98.00 per cent.), Marcheriscossioni S.p.a. (100.00 per cent.), Medioleasing S.p.A. (100.00 per cent), Carilo-Cassa di Risparmio di Loreto S.p.A. (“Carilo”) (78.81 per cent.) and Banca Marche Gestione Internazionale Lux S.A. (99.98 per cent).
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These five subsidiaries are fully consolidated with the Bank for the purposes of the Bank’s consolidated financial statements.
Strategy
In 2005 the Bank began work on the projects identified in the Bank’s Strategic Plan, which had been approved in November 2004 for the three years 2005-2007 and which reaffirmed the value of the Bank’s independence and of maximum management efficiency in maintaining the role of the Banking Group in the service of the territory and its customer segments. The actions identified – which aim to define new priorities for intervention, lines of development and organisational and managerial measures capable of ensuring balanced and sustainable growth prospects – fit into the framework of the industrial and operational synergies with Banca Marche’s banking and insurance partners, further enhancing the Bank’s active participation in the productive, commercial and social events that express the vitality and character of the territories in which it works. The emphasis put on commercial strategies and the establishment of structured and shared working methods is translated into information, instruments and systems of management and monitoring in support of new service models that take account of the specific nature of the various customer segments, and develop, in a logic of multi-channelling, more efficient and better structured relationships. The structural processes (distribution, organisation, information systems, auditing and personnel systems) have been the subject of significant actions, carried out in a laboratory of development of new criteria and distribution models. Starting out from an analysis of internal and external benchmarks, the Bank first identified possible directions of improvement and opportunities, and then improved structures and operational instruments, with the aim of integrating a slimmer administration with more fruitful orientation to commercial relations. With the subsequent revision of the distribution model, finally, the Bank activated resources specialised in relations with uniform customer portfolios, whose satisfaction was also optimised with the support of the new working instruments identified and investments in computer technology and training.
The dimensional growth along internal lines outlined in the Strategic Plan, such as to guarantee a significant increase in total deposits and current accounts and an adequate territorial diversification of businesses and markets, was assisted by specific geomarketing studies which aimed to identify the attractiveness of homogenous micromarkets, in the Marche region and in surrounding regions into which the Bank has recently expanded (Lazio, Abruzzo, Umbria and Emilia Romagna). These studies have enabled tailor-made intervention in towns where the Bank is already present and in those with the greatest potential, leading to a planned further development of the distribution network through the opening of 10 new branches in 2006 and a further 40 in the year 2007.
In 2005 the Bank’s commercial orientation was characterised by specialisation of service models and the launch of new products differentiated by customer segment, in line with the indications of the 2005-2007 Strategic Plan. In the early months of 2005 the Bank began an important project to reorganise the commercial network (the “Growth” Project), with the objective of establishing more direct and transparent relationships with customers and guaranteeing a better level of service. To this end, in the first half of the year the Bank drew up the guidelines of the new distribution model which, starting out from an analysis of the Bank’s current customers and through a refining of their segmentation, identified the common needs of the segments of private and corporate customers, before going on to design specific service models capable of meeting these needs in the best possible way, through a proactive and differentiated commercial approach. The service models identified were implemented with the indentification within Branches of new professional figures, who will work alongside the existing staff of the Mobile Channels, Corporate, Private and Institutional Customer Advisors, with the task of managing directly the commercial relationship with the customers assigned to them.
Organisation
In 2005 the Bank adopted an organisational model capable of adapting and evolving to keep up with the needs of the market, which is increasingly oriented to the dynamics of process and service. Banca Marche was also among
5 the first banks to set up a Compliance and Quality Service, an independent unit of the Head Office Organisation and Information Systems Department, with responsibility for indentifying, evaluating and monitoring the Bank’s compliance risk, that is the potential risk of sanctions, financial losses or losses of reputation in relation to compliance with the laws, regulations, codes of conduct and best practice rules; this department directs the other company departments that take part in the compliance process, with the role of “process owner” and “sensor” for the top management.
The following chart illustrates the organisational structure of the Bank:
The General Manager’s staff is composed of the Institutional Relations Department, the Audit Area, the Strategic Planning and Management Control Area, the Human Resources Department, the Secretariat Department, the Supply Department and the Legal Department.
Divisions and Areas directly under the authority of the General Manager
The Audit Area is split into two departments: the Group’s Internal Auditing Department and the Branch Network Control Department.
The Strategic Planning and Management Control Area is split into two departments: the Planning and Strategic Marketing Department and the ALM and Risk Management Department.
The Credit Division is composed of one area that arranges the necessary documentation to grant credit where the amount exceeds the authorised limit of a particular branch and deals with credit analyses and control, and of two departments that monitor outstanding credits, manage problem loans and recover credits.
The Administrative and Logistic Division is composed of the Balance Sheet and General Accounting Area and the Services Area. The first area is split into two departments: the General Accounting Department and the Balance
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Sheets and Taxation Items Department, the second one is divided into the Collection and Payment Department, the Technical Department and a department that deals with “other items”.
Within the IT and Organisation Division there are two departments: the ICT Governance Department responsible for the Bank’s Disaster Recovery Plan and the Technical Secretariat Department. Within the IT and Organisation Division there are the Organisation Area which deals with internal rules, the System Area which is concerned with software design for accounting and products, data processing, internal software running and supporting activities and two departments: the Quality and Compliance Departments with responsibility for identifying, evaluating and monitoring the Bank’s compliance risk and the Strategic Plans Department.
Divisions and Areas under the authority of the Deputy General Manager
The Finance and Commercial Area is composed of the Marketing Area, the Finance Area and the Distribution Area.
The Marketing Department is split into the Products and Distribution Channels concerned with new banking products, insurance services for family, internet banking and the Operative Marketing and Commercial Planning Department which deals with territorial planning. The Finance Area is split into: the Treasury Department which deals with financial market activities in relation to its assets, funding on inter-bank and international financial markets, interest rate and exchange rate risk hedging for corporate customers and structured finance transactions for corporate clients; the Asset Management Department which is concerned with management of clients’ funds and financial advice; and the Middle Office which is concerned with administrative functions relating to the Finance Division’s activities. There is also the Distribution Area composed of the Companies Department which deals with corporate business, large corporate business and local authorities; and the Private Department which is concerned with the administration of clients’ funds. Under the authority of the Deputy General Manager, at the regional level, there are regional offices corresponding to the three traditional geographic areas of the Bank (Macerata, Pesaro and Jesi) and Rome. The regional offices are responsible for their local branches. The corporate and retail Client Managers, the local entities Managers and the Financial Advisors report directly to these Areas.
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Group Structure
The following chart shows the structure of the Group and associated companies as at 31 December 2005:
BANCA DELLE MARCHE S.p.A.
CARILO S.P.A. FOCUS GESTIONA CASSA DI RISPARMIO DI SGR S.p.A. LORETO 98% 78.81%
BANCA DELLE MARCHE GESTIONE MARCHERISCOSSIONI S.p.A MEDIOLEASING S.p.A. INTERNAZIONALE LUX 100% 100% S.A. 99.98%
INTEGRAL CONSOLIDATION
INFLUENCE > 20%
C.U. Life S.p.A. 9.17% 32.25% 50% S.E.D.A. S.p.A. 41.42% C.U. ASSICURAZIONI S.P.A. 50%
11% S.E.B.A. S.p.A. 34% 45% MONTEFELTRO LEADER SCRL 27%
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Subsidiaries and Associated Companies
In order to provide its clients with a broad range of financial products and services, the Bank has established subsidiaries and forged alliances with other organisations for the joint development and distribution of products.
Subsidiaries
As at 31 December 2005 the Bank had the following subsidiaries:
Carilo – Cassa di Risparmio di Loreto S.p.A. (“Carilo”), based in Loreto, Ancona, is a local savings bank, concentrating on small- and medium-sized customers. It has 15 branches concentrated in the province of Ancona. The registered and head offices of the company are at Via Solari, 21 in Loreto, Ancona. As at 31 December 2005 it had total assets of Euro 680,437,518 and net income for the year that ended was about Euro 3.6 million.
In October 2004 Banca delle Marche exercised its “call” option on 50,000 ordinary shares issued by its subsidiary Carilo S.p.A., after which on 30 September 2005 it purchased a tranche of 16.55 per cent. of the capital of Carilo S.p.A. taking its total holding up to 78.81 per cent. of this subsidiary.
In February 2005 “Medioleasing S.p.A.” – a company wholly owned by Banca delle Marche – was set up with an initial share capital of Euro 600,000. Subsequently, with effect from 1 June, the Bank underwrote a capital increase for up to 60,000,000 Euro through conferment of the company division involved in the leasing business. In return for this, Banca delle Marche obtained shares in the new company with a nominal value of 59,400,000 with possession from the date of effectiveness of the conferment (1st June 2005).
The new company Medioleasing S.p.A. achieved profit for the period (of seven months) of Euro 2,927 thousand (+31.8 per cent. compared with the “pro forma” result of 2004). In 2005 Medioleasing operations in the leasing sector increased by 97.83 per cent. compared with 2004 in terms of value of contracts signed (from Euro 256,981 to Euro 508,386 thousand), while the number of contracts was down (1,619-11.67 per cent.), reflecting the weak performance of the regional economy, in line also with trends at the national level.
Despite being inevitably influenced by the complex organisational process of demerger of the company division, business constantly showed a notable growth trend, from both an operational and an economic point of view. The company, in fact, achieved better figures than the forecasts in the industrial plan, so much so as to require an adequate revision of the year-end targets; these elements enable us to stress, with some satisfaction, the wisdom of the strategic decisions taken at the time by the Parent Bank. This enabled Medioleasing S.p.A. to gain an extremely significant position among the 75 leasing companies operating in Italy, members of Assilea, taking the company up to tenth place in the national tables for leasing of properties to be built, overtaking much more consolidated and older companies. The business was carried on mainly with customers operating in our core territory: in this context the company gained regional leadership with a turnover of contracts signed of more than 330 million Euro which, on the basis of the figures currently available, represents a market share of more than 30 per cent., compared with 20 per cent. in the previous year, which was already considered a very good result.
Marcheriscossioni S.p.A., with head office in Jesi, Ancona, is involved in tax collection and was established on 1 May 2003 with the merger of two tax collection subsidiaries: Se.Ri.Ma. S.p.A., with head office in Macerata and Se.Ri.T. S.p.A., with head office in Pesaro.
Banca delle Marche Gestione Internazionale Lux SA, set up in October 2004, manages funds established under the Laws of Luxembourg and 99.98 per cent. of the shares of this company are owned by the Bank. The result achieved in the first year of business is notable above all as a base for growth. By the end of the year investments managed had reached more than Euro 600 million, enabling the company to play a visible role in the field of management companies. For 2006 the policy of developing savings in the core market of the
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Banca delle Marche Group will continue and investments are expected to reach a figure of about Euro 900 million by the end of the year.
Focus Gestioni, Società di Gestione del Risparmio S.p.A., based in Ancona, is an asset management company involved in the management of a closed end investment fund.
During 2005, finally, Banca delle Marche underwrote 25 per cent. of the share capital of the new company “Banca di Credito dei Farmacisti S.p.A.”, which is not yet included in the Banking Group because it is waiting for the permits required to carry on a banking business. This company is classifiable as a “single profession bank”, in keeping with the service model adopted by Banca delle Marche, which envisages specialisation of the products offered in relation to the specific features of the customer segments served.
Associated Companies
The Bank has a significant influence (i.e. at least one fifth of the voting rights in the ordinary shareholders’ meeting are controlled by the Bank) over the following companies:
– Commercial Union Life S.p.A., based in Milan, a life insurance company, and Commercial Union Assicurazioni S.p.A., based in Milan, a non-life insurance company. In September 1999, the Bank and Aviva Italia Holding S.p.A. entered into a joint venture arrangement for the management of two insurance companies. These arrangements originate insurance and savings products under the management of Commercial Union which are distributed through the Bank’s branch network. They also provide the Bank with the opportunity to sell its banking products to the clients of the insurance companies. Since 1 March 2006, Commercial Union Life S.p.A. and Commercial Union Assicurazioni S.p.A. have been called respectively Aviva Life S.p.A. and Aviva Assicurazioni S.p.A.;
– Se.ba. Servizi Bancari S.p.A., which provides services to banks;
– S.e.da. Società Elaborazione Dati S.p.A., involved in software development and IT services;
– Montefeltro Leader SCRL, involved in promoting a European Union Leader II programme.
Summary Financial Information
The summary financial information presented below should be read in conjunction with the Bank’s audited non- consolidated financial statements and the notes thereto contained in the Bank’s Annual Reports for the year ended 31 December 2005 and 2004.
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The following table set forth the summary non-consolidated statement of income of the Bank for the years ended 31 December 2005 and 2004:
As at 31 December
2005 2004(*) Changes
Amount/000 Comp. % Amount/000 Comp. % Amount/000 Comp. %
Interest Margin...... 288,003 72.72 256,715 70.64 31,288 12.19
Net Commissions ...... 91,256 23.04 81,694 22.48 9,562 11.70
Result from disposal or repurchase of credits, of financial assets available for sale or held to maturity and of financial liability ...... 11,823 2.99 16,248 4.47 (4,426) (27.24)
Dividend and results from equity 4,942 1.25 8,762 2.41 (3,820) (43.59) interests ......
Gross earning margin ...... 396,024 100.00 363,419 100.00 32,605 8.97
Net writedowns for deterioration of (35,731) (9.92) (44,588) (12.27) 8,857 (19.86) loans ......
Net writedowns for deterioration of (164) (0.045) (615) (0.17) 451 (73.30) other financial assets ......
Results of financial operations ...... 360,129 90.94 318,216 87.56 41,913 13.17
Personnel expenses...... (185,564) (46.86) (184,327) (50.72) (1,237) 0.67
Other administrative expenses...... (75,006) (18.94) (71,561) (19.69) (3,445) 4.81
Net writedrowns of tangible and (16,465) (4.16) (16,998) (4.68) (533) (3.14) intangible assets ......
Operating expenses ...... (277,035) (69.95) (272,886) (75.09) (4,149) 1.52
Other operating income and expenses.. 29,511 7.45 28,172 7.75 1,339 4.75
Gains on disposal of investments ...... 6,859 1.73 109 0.03 6,750 n.a.
Net provisions for risks and charges.. (2,839) (0.72) (41,701) (11.47) 38,862 (93.19)
Pre-taxes profit from current 116,625 29.45 31,910 8.78 84,715 265.48 operations......
Income taxes for the period...... (56,492) (14.26) (18,525) (5.10) (37,967) 204.95
Net profit...... 60,133 15.18 13,385 3.68 46,748 349.25
_____ (*) IAS Compliant balances (so-called full IAS) including an estimate of the effects of the transition to IAS 32 and 39 (financial instruments).
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The following table sets out certain non-consolidated balance sheet data and ratios of the Bank as at 31 December 2005 and 2004:
As at 31 December
2005 2004(*)
(EUR thousand except ratios, percentages and per share data)
Total assets at the beginning of period ...... 12,171,526 10,954,138
Total assets at the end of period ...... 13,699,667 12,097,021
Average total assets...... 12,935,597 11,525,580
Bad and doubtful loans after provisions ...... 503,400 403,371
Total loans to customers...... 11,227,388 9,942,350
Shareholders’ equity...... 823,780 797,353
Total cash dividends (paid) ...... 32,701 25,270
Net Income...... 60,134 13,385
Per share data:
Net income per share...... 0.081 0.018
Cash dividend per share ...... 0.044 0.034
Ratios:
Return on average total assets ...... 0.46 0.12
Return on shareholders’ equity...... 7.29 1.68
Shareholders’ equity/total assets ...... 6.01 6.59
Income from services/Gross Earning margin ...... 26.03 26.95
Administrative costs/Results of financial operations...... 72.35 80.41
Employee costs/Results of financial operations ...... 51.53 57.93
Income before taxes/Results of financial operations ...... 32.38 10.03
Bad to doubtful loans after provisions/total loans to customers ...... 4.48 4.06
Risk ratios:
Solvency ratio for regulatory purposes...... 8.25 8.81
Total regulatory capital ...... 900,124 862,409
Risk-weighted assets ...... 10,904,001 9,786,925
_____ (*) IAS Compliant balances (so-called full IAS) including an estimate of the effects of the transition to IAS 32 and 39 (financial instruments), except for “Total assets at the beginning of period, Total assets at the end of period, and Average total assets” for the year 2004.
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The reconciliation between the consolidated shareholders’ equity and distributable net profit of the Bank as at 31 December 2005 with the corresponding values of the Bank on a non-consolidated basis, is shown in the table below:
As at 31 December 2005
Shareholders’ Distributable Equity net profit
(EUR/000) (EUR/000)
Balances from the individual financial statement...... 823,780 60,134
Effect of consolidating subsidiaries on a line-by-line basis...... 12,914 6,410
Effect of valuing associated companies at net equity ...... 3,830 2,149
Balance pertaining to the Group...... 840,524 68,693
Profit pertaining to Minority Interests...... 10,424 1,287
Total Group and Minority Interests ...... 850,948 69,980
The following table shows the contribution of the Bank and its subsidiaries to total assets and operating income of the Group as at 31 December 2005.
As at 31 December 2005
Total assets Operating income
Sector/Company Amount Percentage of Amount Percentage of total total
(EUR/000) % (EUR/000) %
Banking:
Banca delle Marche S.p.a...... 13,699,667 88.64 60,134 84.95
Carilo-Cassa di Risparmio di Loreto S.p.a...... 680,438 4.40 3,587 5.07
Medioleasing S.p.a...... 980,675 6.34 2,927 4.13
Marcheriscossioni S.p.a...... 90,225 0.58 3,328 4.70
Focus Gestioni Sgr S.p.a...... 1,588 0.01 (69) (0.10)
BDM Gestione Internazionale LUX S.A...... 2,466 0.02 877 1.24
Total aggregated values ...... 15,455,059 100.00 70,784 100.00
Consolidation adjustments ...... (1,165) (2,090)
Consolidated values ...... 14,289,791 68,694
Competition
As a regional bank, the Bank’s principal competitors are other regional banks with operations in the Marche region and in the central Italy area, to a lesser extent, certain national banking groups which have established limited operations in that area. The operations of the other national banking groups in the Marche region are generally
13 focused on a specific customer segment, principally major corporate customer and, accordingly, the Bank believes that the activities of those banks do not presently pose a significant threat to the Bank’s traditional target customer base.
The Bank believes that its comprehensive regional branch network is a significant competitive advantage as compared with other banks operating in the Marche region which do not have such a developed network.
Based on figures published by the Bank of Italy, the Bank estimates that at 30 September 2006 its loan portfolio amounted to approximately 25.44 per cent. of total loans outstanding by banks in the Marche region and that total customer deposits amounted to approximately 29.34 per cent. of total bank customer deposits in the region.
The Bank believes that its traditional presence in the Marche region has enabled it to establish long-standing relationships with the local communities in which it operates. The Bank believes that through its branch network in the Marche region and in neighbouring regions there is further scope for growth both in the Bank’s traditional business areas and through the development and distribution of new products and services.
Lending
Loan Portfolio
As of 31 December 2005, the Bank had outstanding loans to 178,325 customers (compared to 163,318 customers as at 31 December 2004) totalling Euro 10,724 million (as at 31 December 2004, Euro 9,538.9). This figure represented 78.3 per cent. of the Bank’s total assets as at 31 December 2005 (78.8 per cent. as at 31 December 2004). According to statistics produced by the Bank of Italy, the Bank accounted for 25.44 per cent. of lending in the Marche region in September 2006.
The following table sets forth the composition of the Bank’s outstanding loan portfolio as at 31 December 2005 and 2004:
As at 31 December 2005 As at 31 December 2004*
(EUR/000) (%) (EUR/000) (%)
Current accounts...... 2,958,084 27.58 2,835,395 29.72
Repurchase agreement assets ...... 0 0.00 0 0.00
Mortgage loans...... 5,895,066 54.97 4,494,656 47.19
Credit cards, personal loans and assignments of salaries...... 173,691 1.62 127,278 1.33
Leasing...... 0 0.00 774,863 8.12
Other transactions...... 1,688,842 15.75 1,297,589 13.60
Debt securities...... 8,305 0.08 9,198 0.10
Total performing loans ...... 10,723,988 100.00 9,538,979 100.00
Deteriorated assets ...... 503,400 4.48 403,371 4.06
Total ...... 11,227,388 9,942,350
_____
(*) IAS Compliant balances (so-called full IAS) including an estimate of the effects of the transition to IAS 32 and 39 (financial instruments).
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The increase of 12.42 per cent. in lending as at 31 December 2005 as compared with 31 December 2004 resulted mainly from the increase in medium and long terms loans, granted both to individual customers and to businesses. In relation to the former, mortgages were granted to first time home buyers and to home owners for the renovation of existing buildings. The conditions offered by the Bank were attractive and flexible enough to meet individual needs, providing innovative mortgage loans and long term competitive rates. To the latter, medium and long term loans were granted to increase customers’ investments in buildings and fixed assets by businesses. Whereas in the past, companies resorted to short term lending for financing investment in buildings and fixed assets, there is now a growing tendency to resort to medium and long term lending for this kind of investment. Medium and long term loans were granted on both secured and unsecured basis.
The following table shows the Bank’s loan portfolio broken down by type of borrower as at 31 December 2005 and 2004:
As at 31 December
2005 2004
(EUR/000) % (EUR/000) %
Non-financial businesses...... 6,377,156 56.80 6,423,752 64.61
Public administrations...... 291,912 2.60 232,650 2.34
Families...... 3,413,125 30.40 2,914,102 29.31
Financial institutions ...... 1,100,284 9.80 325,114 3.27
Non-profit bodies serving families...... 33,682 0.30 32,809 0.33
Rest of the word ...... 11,227 0.10 12,925 0.13
Unclassifiable and unclassified units...... 0 0.00 994 0.01
Total loans to customers ...... 11,227,388 100.00 9,942,350 100.00
The following table shows the Bank’s lending to non-financial and family businesses (mostly small to medium sized enterprises) and sole traders by market area, in accordance with Bank of Italy guidelines as at 31 December 2005 and 2004:
As at 31 December
2005 2004
Amount Composition Amount Composition
(EUR/000) % (EUR/000) %
Retail and wholesale trade, recovery and repair services...... 637,828 9.50 702,488 10.48
Construction and public works...... 1,033,953 15.40 1,055,073 15.74
Other marketable services ...... 980,241 14.60 998,767 14.90
Textiles, leather, footwear, clothing ...... 248,417 3.70 311,696 4.65
Other industrial products...... 261,845 3.90 319,740 4.77
Other types of business ...... 3.551,695 52.90 3,315,370 49.47
Total ...... 6,713,979 100.00 6,703,134 100.00
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The Bank’s main clients are retail customers and small to medium sized businesses employing up to 300 people and with an annual turnover up to Euro 50 million, reflecting the economic activity and structure of the Marche region.
The Bank has no specific policy on lending levels to any particular sector of the economy. Credit decisions are taken on a case by case basis, although the Bank monitors the economic trends in the sectors to which it lends.
The following table shows the Bank’s loan portfolio by size of customers (excluding governments, public agencies and financial institutions), based on amounts outstanding to such customers, as at 31 December 2005 and 2004:
31 December
2005 2004
20 largest customers...... 3.77% 4.13%
30 largest customers...... 4.84% 5.31%
50 largest customers...... 6.61% 7.11%
The Bank believes it has a diversified loan portfolio in terms of sectors to which it lends and the number of its customers. As at 31 December 2005, the Bank has two “large exposures”, defined by the Bank of Italy as loans whose value is greater than 10 per cent. of the Bank’s regulatory capital, for a total of Euro 284,630. In addition 45.2 per cent. of the Bank’s loans are for an amount less than Euro 516,000 reflecting the Bank’s traditional customer base of retailers and small and medium-sized businesses.
A procedure aimed at evaluating and controlling customers’ credit risk has been developed. The risk attributable to each individual customer, with or without loans in progress, is evaluated with a score between zero and one hundred and classified in one of the six predefined risk brackets. On a monthly basis, the Bank sends to each branch a report identifying loans which are still considered performing but which present a higher than normal level of risk. The branches then conduct a careful analysis of the loans and report to the Loan Monitoring Service on the corrective measures they have taken. This procedure also enables the Bank better to evaluate the risk-return profile of each loan in order to ensure the best capital allocation in its lending activity.
Security
Of the Bank’s total outstanding loans (Euro 11,227.4 million), Euro 7,884.9 million (73.5 per cent.) are secured by mortgages, pledges over cash deposits, securities or other assets or guaranteed by public agencies, banks or other enterprises.
Apart from those lending activities where the Bank is required to obtain security by law (for example, loans to finance real estate acquisitions), the Bank’s policy is to require security and guarantees on a case by case basis.
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The following tables give a breakdown of the security and guarantees obtained by the Bank in respect of its loan portfolio as at 31 December 2005 and 2004:
As at 31 December 2005
Gross Real Personal sureties Total amount securities (2) (1)+(2) (1)
Endorsement Loans
Buildings Securities Other Govern- Other Banks Other assets ments public subjects bodies
EUR/000
Secured exposures to customers: ...... 8,063,372 5,446,397 28,613 131,599 — 5,560 6,635 2,266,179 7,884,983 totally secured ...... 7,622,167 5,407,756 24,389 102,439 — 4,996 5,307 2,077,280 7,622,167 partially secured ...... 441,205 38,641 4,224 29,160 — 564 1,328 188,899 262,816
Consolidated Loan Portfolio
The following table sets forth information in respect of the Group’s consolidated loan portfolio, as at 31 December 2005 and 2004:
As at 31 December
2005 2004(*) Change
Amount Composition Amount Composition Amount Composition
(EUR/000) (%) (EUR/000) (%) (EUR/000) (%)
Banca delle Marche S.p.a...... 11,227,387 94.71 9,942,350 95.46 1,285,037 12.92
Carilo – Cassa di risparmio 577,442 4.87 502,843 4.83 74,599 14.83 di Loreto S.p.a...... Medioleasing S.p.a...... 962,458 8.12 — — — n.a.
Marcheriscossioni S.p.a...... 1,255 0.01 426 0.004 829 n.a.
Focus Sgr ...... — — — — — n.a.
BDM Lux S.A...... 1,355 0.01 — — — n.a.
Consolidation adjustments ...... (915,493) (7.72) (30,617) (0.29) (884,876) n.a.
Total ...... 11,854,404 100.00 10,415,002 100.00 1,439,402 13.82
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(*) IAS Compliant balances (so called full IAS) including an estimate of the effects of the transition to IAS 32 and 39 (financial instruments).
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Loan Classification
The Supervisory Authorities of the Bank of Italy relating to problem loans identify five categories:
– loans in the course of restructuring (crediti in corso di ristrutturazione);
– restructured loans (crediti ristrutturati);
– loans subject to country risk (crediti soggetti a rischio paese);
– impaired loans (partite incagliate); and
– bad and doubtful loans (crediti in sofferenza).
Loans in the course of restructuring
These are loans where the counterparty is indebted to a large number of banks and the debtor has presented a petition of consolidation in the previous 12 months. The debts relating to the restructured part have to be disclosed but do not have to be classed as bad and doubtful loans or impaired loans. Where more then 12 months since the presentation of the petition have passed, the banks must disclose the exposure as being either a bad and doubtful loan or an impaired loan. As at 31 December 2005, the Bank held no such loans.
Restructured loans
These are loans made by a pool of banks (or just one bank) where a moratorium has been granted and the rate of interest has been renegotiated at a lower rate or at market rate. Loans to companies which have ceased trading or are insolvent are excluded from this category. The restructured part of the loan does not have to be disclosed as a bad and doubtful loan or an impaired loan. It only needs to be disclosed when the renegotiated terms are no longer compatible with the market. As at 31 December 2005 the Bank held no such loans.
Loans subject to country risk
“Country risk” is related to problems of solvency in countries where there are difficulties in respect of the service of debt. There are four categories of risk: zero, low, medium and high.
For each of these groups, all Italian banks must monitor the percentage of devaluation (0 per cent., 15 per cent., 30 per cent. and 40 per cent.) which has to be applied to loans which are not specifically guaranteed against political or economic risk. All Italian banks must report monthly to the Bank of Italy on their positions for each country. The Bank holds no such loans.
Impaired loans
Pursuant to guidelines established by the Bank of Italy, the Bank must classify a loan as an “impaired loan” when the Bank determines that the borrower is experiencing financial or economic difficulties that are likely to be temporary. At 31 December 2005, the Bank’s impaired loans were equal to Euro 206.7 million, net of adjustments of Euro 133.2 million, and represented 1.8 per cent. of the Bank’s total loan portfolio.
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Bad and doubtful loans
Bad and doubtful loans are loans where the borrower is in a state of insolvency (whether or not proceedings have been commenced). This is a subjective test. The Bank decides whether a state of insolvency exists. At 31 December 2005, bad and doubtful loans (loans outstanding to insolvent debtors) amounted to Euro 279.5 million, net of writedowns of 18.3 million, and represented 2.5 per cent. of the Bank’s total loan portfolio. Most of the Bank’s impaired and bad and doubtful loans are loans to sole traders and non-financial institutions.
The following table shows, as at 31 December 2005, a breakdown of the Bank’s loan portfolio (after provisions have been made):
As at 31 December 2005
Gross Specific Portfolio Net exposure Exposure writedowns writedowns
EUR/000 EUR/000 EUR/000 EUR/000
CASH EXPOSURE a) Impaired Loans ...... 339,895 133,199 — 206,696 b) Bad and Doubtful Loans ...... 297,789 18,284 — 279,505 c) Restructured Loans ...... 0,000 — — 0,000 d) Expired Loans ...... 17,338 139 — 17,199 e) Country Risk Loans ...... — — — f) Other Assets ...... 11,955,764 — 70,972 11,884,792
Total A ...... 12,610,786 151,622 70,972 12,388,192
International activities
During 2005, the foreign trading transactions handled by the Bank amounted to Euro 3,658 million with an increase of Euro 528 million (16.88 per cent.) compared to 2004, as a result of the increase in exports (10.1 per cent.) and in import activity (30.7 per cent.). As a result of the above increase, the Bank’s market share of regional foreign trading settlements increased by 12.7 per cent. compared to 2004.
The following table shows a breakdown of the Bank’s foreign trading transactions, as at 31 December 2005 and 2004:
As at 31 December
2005 2004 Change
(EUR/000) (EUR/000) (EUR/000) (%)
Exports and services ...... 2,317 2,104 213 10.13
Imports and services ...... 1,342 1,027 315 30.71
Total ...... 3,659 3,131 528 16.88
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In line with the Bank’s objective to put in place an operating structure aimed at simplifying the operations of the Bank and at reducing the operating costs, all foreign trading activities, before partially carried out by the Territorial Areas, have been centralised in the Head Office.
In addition, agreements were made and signed with San Paolo IMI to try and take advantage of all the opportunities that the international presence of this partner can offer to assist companies (primarily SMEs) with their internationalisation needs.
Work in developing correspondent relationships with foreign banks has resulted in the number of the Bank’s correspondents being further increased, enabling the Bank to cover all geographical areas of interest to our customers. With a view to providing cross-border payment services in line with the major European banks, since July 2005 the Bank has participated directly in the “EBA STEP2” European Clearing House for the exchange of commercial bank transfers, which is a fundamental step in the creation of a Single Euro Payment Area (SEPA). During the year, finally, advisory work on the theme of internationalisation continued to be provided by the International Desk; the level of customer satisfaction was shown by the increase of foreign trading transactions which, as already noted, ensure that the Bank has a leading role in the geographical areas where it is strongest.
Treasury Activities
Financial operations involve, besides seeking, selecting and acquiring monetary resources, lending and investing these resources in compliance with the overall risk limits, pursuing at the same time objectives of organisational and operational efficiency for the entire Banca delle Marche Group, guaranteeing direct access to the money, spot cash exchange and securities markets. The management of our liquidity policy is carried on through direct intervention on the money market and preparation for transactions on the international capital market.
The trend towards diversifying financing sources continued in 2005 with a reinforcement of the institutional component which increased by Euro 815 million, from 1,986 million at the end of 2004 to 2,801 million, thanks to the completion of new issues on the international and domestic markets.
The issues placed on the international market were made as part of the Bank’s EMTN (Euro Medium Term Notes) programme, of which Euro 2,050 million had been utilised by the end of the year. In the second half of 2005, as a result of implementation of European Directive 71/03 – the “Prospectus Directive” which governs the methods of issue and placing of securities on regulated markets in the European Union – and while awaiting a coherent operational definition on the methods of updating issue programmes, the Banca had recourse to domestic Private Placements with institutional investors, carefully diversifying the maturities, in particular an issue of Euros 50 million with a two-year maturity, one of Euros 150 million with three-year maturity and one of Euros 100 million with five-year maturity. In order to reinforce asset ratios, as well as pursuing funding aims, a domestic subordinated loan of Euros 65 million was issued in December.
In accordance with the provisions of the EU directive, Banca delle Marche proceeded to update the aforementioned EMTN programme, increasing the nominal amount up to a maximum of Euro 3,000 million.
A significant contribution was again made by funds drawn directly from the EIB, with which Banca delle Marche has medium- and long-term credit lines, earmarked for financing of investments planned by small and medium- sized companies, of Euro 205 million. These Global Loans already in existence have been supplemented with a new global loan of Euro 100 million, designed to finance infrastructure projects presented by local councils and/or public bodies and promoted by the Marche Region. This funding is the fruit of the direct relationship the Bank has had with the European institution for several years now.
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Overall, institutional funding, besides underpinning the growth of loans, tends prospectively to replace the Euro- loans coming to maturation that were acquired with the incorporation of Mediocredito Fondiario Centroitalia in June 2003.
Funding from institutional customers makes a positive contribution to the maintenance of medium/long term financial equilibrium counterbalancing, in terms of transformation of maturities, the traditional lively trend of loans in the longer term component.
As regards the management of short-term liquidity, during the year Banca delle Marche maintained appropriate indebtedness towards the market, to which the Treasury had recourse according to the net imbalances of short-term liquidity and following a policy of diversification of funding and maturities.
The Parent Bank also manages the treasury and direct financing operations of its subsidiaries Carilo and Medioleasing.
A consistent and articulated funding system enabled us to acquire the resources needed to sustain the Bank’s growth on the lending side.
The low average balance characterising the trading portfolio and the high level of its liquidity enabled it to be managed in a manner consistent with its purpose. The average holding time of the positions remained substantially at a low level and in line with that of 2004. Profits in 2005 came essentially from earnings on securities in the insurance sector and in general from transactions in the area of non-government securities, mainly banking stocks. In general, the securities position was managed with a view to short-term trading rather than a constant strategic directional position; in the last quarter of the year this approach was accomplished through positioning giving the ability to exploit the rise in interest rates at the long end of the curve. As regards asset consumption generated by the securities portfolio, the risk associated with market volatility remained stable at low levels, while those associated with the credit standing of issuers increased slightly on average compared with the previous year.
The securities portfolio was almost completely made up of variable-rate securities issued by governments or banks, with a view to minimising the interest rate risk, most of which were used in spot against forward transactions with customers. In several periods of the year, positioning on long-term interest rates was oriented towards an increase in these rates, which finally happened at the end of the year. Activity in futures and options on bonds focused on short-term operations, which generated no significant interest rate risks. The composition of the trading swap account also changed little from the previous year, and the work consisted mostly of transactions to hedge interest rate risk for corporate customers, offset specifically with institutional counterparties. In brief, then, the strategy of trading for our own account involved buying and selling on a short-term basis, monitoring performance and risk thresholds, with the aim of making gains on a portfolio stock of mostly variable-rate securities.
As at 31 December 2005 the Bank had no significant exposure to emerging markets and high-risk sectors.
Funding
Total Funding
As at 31 December 2005, the Bank’s total direct and indirect funding amounted to Euro 19,957.3 million.
Direct funding represented 56.06 per cent. of the total and the remaining 43.94 per cent. represented assets under administration, assets under management and insurance products.
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The following table shows a breakdown by type of the Bank’s funding as at 31 December 2005 and 2004:
As at 31 December
2005 2004* Change
(EUR/000) (EUR/000) (%)
Direct funding ...... 11,187,726 9,873,065 13.3
Indirect funding ...... 8,769,559 8,010,568 9.5
Total ...... 19,957,285 17,883,633 11.6
_____
(*) IAS Compliant balances (so-called full IAS) including an estimate of the effects of the transition to IAS 32 and 39 (financial instruments).
Direct Funding
The following table shows the breakdown of the Bank’s direct funding (customer funding and funding represented by bonds) by type, as at 31 December 2005 and 2004:
As at 31 December
2005 2004 Change
Amount Composition Amount Composition Amount Per cent.
(EUR/000) (%) (EUR/000) (%) (EUR/000) (%)
Current accounts and free deposits .... 4,494,996 40.18 4,153,858 42.07 341,138 8.21
Deposits received in administration and other funding ...... 310,767 2.78 187,866 1.90 122,901 65.42
Repurchase agreements payable ...... 512,875 4.58 472,386 4.78 40,489 8.57
Other debts ...... 44,542 0.40 5,372 0.05 39,170 729.22
Time deposits ......
Bonds ...... 4,468,244 39.94 3,758,611 38.07 709,633 18.88
Other securities ...... 1,356,302 12.12 1,294,973 13.12 61,329 4.74
Total ...... 11,187,726 100.00 9,873,066 100.00 1,314,660 13.32
______Note: (1) Excludes Euro 150,000,000 lower tier 2 notes issued in June 2002.
One of the main components of the Bank’s direct funding is represented by current accounts from its customers for a total amount of Euro 4,495 million as at 31 December 2005 (Euro 4,153.8 as at 31 December 2004).
According to statistics of the Bank of Italy, as at September 2006, the Bank held 29.34 per cent. of total customer deposits in the Marche region on a non-consolidated bases. Management believes that the Bank has a stable base of small and medium-sized business customers which provides it with a reliable source of funding for the Bank’s activities as such customers are less inclined to move their deposits frequently.
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Although the Bank expects that customer accounts attracted through its branch network will continue to be one of its principal sources of direct funding, its strategy has been to increase the level of medium and long-term funding in order to match the growing demand for medium and long-term lending, particularly mortgage lending driven by the reduction in interest rates. In the context of institutional deposits (institutional and inter-bank customers), funding through the issue of Eurobonds, besides underpinning the growth in the loan portfolio enables the Bank to refinance maturing interbank funding gradually coming to maturity.
In addition to customer deposits and funding by Eurobond issuance, the Bank raises funds on the domestic interbank market and through institutional repurchase agreements with Italian banks and financial institutions.
As at 31 December 2005, net interbank funding amounted to Euro 1018.6 million, while as at 31 December 2004 it amounted to Euro 820.8 million.
A significant contribution was again made by funds drawn directly from the European Investment Bank (EIB), with which Banca delle Marche has medium- and long-term credit lines, earmarked for financing of investments planned by small and medium-sized companies, of Euro 205 million. These Global Loans already in existence have been supplemented with a new global loan of Euro 100 million, designed to finance infrastructure projects presented by local councils and/or public bodies and promoted by the Marche Region. This funding is the fruit of the direct relationship the Bank has had with the European institution for several years now.
Assets under Management and Assets under Administration
The Bank provides asset administration and asset management services and insurance products. Total indirect funding of the Bank amounted to Euro 8,769.6 million as at 31 December 2005.
The following table shows the breakdown of the Bank’s customer funding by type as at 31 December 2005 and 2004:
As at 31 December
2005 2004 Change
Amount Composition Amount Composition Amount Per cent.
(EUR/000) (%) (EUR/000) (%) (EUR/000) (%)
Asset administration ...... 5,843,023 66.63 5,749,747 71.78 93,276 1.62
Asset management ...... 2,926,535 33.37 2,260,821 28.22 665,714 29.45 of which:
Mutual funds ...... 531,518 6.06 505,226 6.31 26,292 5.20
Asset management ...... 1,694,759 19.33 1,106,369 13.81 588,390 53.18
Insurance products ...... 700,258 7.98 649,226 8.10 51,032 7.86
Total ...... 8,769,558 100.00 8,010,568 100.00 758,990 9.47
Asset administration services comprise custody and collection services for customers’ individual investments. Assets held under administration amounted to Euro 5,843 million as at 31 December 2005 (Euro 5,749.7 million as at 31 December 2004) and generated fee income of Euro 1 million for the year then ended (Euro 1.11 million for 2004).
23
Assets under management amounted to Euro 2,926.535 million as at 31 December 2005 (Euro 2,260.8 million as at 31 December 2004) and generated fee income of Euro 9 million for the year then ended (Euro 3.5 million for 2004).
The Bank’s strategy in indirect funding is to develop and increase its fee-based income through the provision of asset administration and asset management services and also through the distribution of investment and savings products. In order to implement this strategy the Bank has concluded important arrangements with Aviva Italia Holding S.p.A. During 2005, the Bank sold policies for a total value of Euro 700 million.
Asset management and insurance products are distributed by traditional branches and private account managers. The latter, who are also financial advisers, have been given a portfolio of customers whom they will assist personally with regard to investment decisions.
The Bank is boosting its asset management business by offering customers an actively managed portfolio investment service. The Bank splits its customers into three groups (private customers, affluent customers and mass market), in line with their needs. The Bank has launched a variety of new portfolio management schemes with different risk return profiles and introduced a process to verify the value at risk of each scheme. The Bank has also entered into partnerships for the use of its products in the packaging of the Bank’s portfolio management schemes. Finally, in terms of organisation, the Bank strengthened the asset management team by splitting into two groups, the former involved with asset management activity and the latter with advisory activity.
Asset and Liability and Risk Management
The Bank’s asset and liability management is the responsibility of the Board of Directors, which delegates its authority to the Asset and Liability Committee (the “Committee”).
The Board of Directors determines the risk limits of the Bank based on recommendations of the Committee. The Committee monitors various divisions and departments of the Bank to which risk limits apply. The Committee consists of the General Manager, the Deputy General Manager, the Manager of the Finance and Commercial Division, the Manager of the Finance Area, the Manager of the Strategic Planning and Management Control Area, and the Manager of the Credit Division.
The Bank monitors financial risk according to two main categories: commercial activities and financial markets activities. In commercial activities the main risk is credit risk relating to the counterparty’s ability to fulfil its obligations and interest rate risk relating to mismatching between assets and liabilities maturities. In financial markets activities the Finance Division must act within limits established by the Board of Directors in relation to market risk and foreign exchange risk.
The Bank’s risk management function has developed different models to evaluate the current interest rate risk position (static analysis) and the potential effect of the asset-liability strategy (dynamic analysis). The risk measurement principles and methodologies employed in these models are the same as those on which the Bank of Italy “standard” model is based. Models based on gap and duration analysis are also used. These risk identification techniques are flexible enough to be reviewed and updated dynamically whenever rules and regulations change.
The constant monitoring of interest rate and market risk allows the Bank to control and limit capital requirements within the parameters approved by the Board of Directors. The Committee meets monthly to review the Bank’s interest rate and risk policy as well as the latest trends in deposit and loan mix.
Derivative transactions are effected principally for hedging purposes. The Bank uses interest rate swaps and overnight interest rate swaps in order to hedge assets and liabilities denominated both in Euro and in foreign currencies. It also enters into put and call options in the management of its securities portfolio in relation to Italian Government fixed rate bonds and it uses currency options to hedge foreign exchange exposure.
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The Bank’s internal policies limit the Bank’s total exposure to interest risk, market risk and exchange risk, taking into account the Bank’s positions in the underlying assets and liabilities and in derivatives.
Trading positions in derivatives are marked to market on a daily basis.
Credit Risk
Credit risk is the risk that a counterparty to a transaction with the Bank will fail to perform its contractual obligations and thereby cause the Bank to suffer a loss. The Bank actively manages its credit risk at all stages of the loan process, beginning with the credit application, continuing during the term of the loan and through to repayment and maturity or restructuring. The credit risk evaluation process involves the various levels of the Bank’s employees and management, acting pursuant to specific delegation of powers from the Bank’s Board of Directors.
When an application for credit is received by the Bank, detailed information regarding the credit risk involved and the value of security or guarantees which may be taken in respect of the loan is gathered and submitted for evaluation to the department empowered to approve the particular type of credit. The following approval procedures are applied with regard to the global exposure of each customer:
– up to Euro 900,000 Branch Credit Official;
– up to Euro 1,500,000 Local Area Credit Office;
– up to Euro 3,000,000 Area Manager;
– up to Euro 4,000,000 Head of the Credit Area;
– up to Euro 7,000,000 Head of the Credit and Legal Division;
– up to Euro 8,000,000 Vice-General Manager;
– up to Euro 14,000,000 General Manager;
– up to Euro 100,000,000 Executive Committee; and
– over Euro 100,000,000 Board of Directors.
Once granted the quality of each loan is periodically monitored on the basis of the systematic analysis of business, economic and asset indicators. The Bank has implemented a scoring system whereby points are attributed to customers on the basis of their historical performance, financial status and other economic criteria.
The Bank monitors loans and overdrafts in order to identify structural and operational problems with customers to prevent the onset of insolvency. The Bank uses PUARC Risk Scoreproblems on defaults to establish an Internal Rating which is requested by the Bank of Italy, in accordance with the Directives of the Basle Committee, and should introduce a highly developed model of Credit Risk Management.
On a monthly basis, the Bank reviews its total loan portfolio on the basis of geographical area, industry sector, amount of loan, customer sector, categories of branches and single branches. Reports showing performing loans, loans under observation, impaired loans and bad or doubtful loans are prepared and reviewed.
The policy implemented to limit credit risks continues to be based on increasing the professional skills of the staff involved in the process of granting and disbursing loans, and the Bank invests in providing training. Credit risk is limited by requesting additional security and/or guarantees in support of the loans granted. In particular, that most medium- and long-term loans are backed by mortgaged residential properties.
25
In 2005 the Bank continued its credit risk management and control activities, with the start of two projects in preparation for alignment with Basel II, a process that has accelerated during 2005. The first project involves credit monitoring and the management of non-performing loans (bad and doubtful loans), the second involves creating a credit database to store information required for the calculation of the risk indicators provided for in Basel II.
Credit Process
Work on development of the new credit management process, in keeping with the provisions of the Basle Accord rules and at the same time seeking improvements in the process, have specifically involved three interconnected projects, in relation to:
• a new electronic overdraft procedure developed on a Web platform (PEF) and a scoring module for first applications from small business customers;
• monitoring of loans and management of non-performing loans (doubtful and bad loans), which is coming to completion;
• creation of a credit database to store information needed to calculate the risk indicators envisaged in the Basle Accord (PD, LGD, EAD and M) and using forms for assessment of the portfolio credit risk (VaR), beginning with the standard method and then moving on to more sophisticated methods based on internal assessment of the rating (IRB).
Interest Rate Risk
Central to the Bank’s asset and liability management is the analysis of interest rate sensitivity of commercial activities, the relationship between market interest rates and net interest income due to the repricing characteristics of interest-earning assets and interest-bearing liabilities, respectively granted and funded by the branches.
The interest rate risk on the Bank’s assets and liabilities is valued, on a monthly basis, using an “asset and liability management” model developed by the Planning and Risk Management Control Area. The model assigns each commercial asset and each commercial liability to the corresponding temporal range in accordance with its maturity (fixed income assets and liabilities) or repricing characteristic (variable income assets and liabilities). For each class, the model makes a gap analysis and an interest rate sensitivity analysis.
The gap position is discussed during meetings of the Committee, which takes appropriate decisions relating to the mismatching. The gap analysis usually shows a mismatching between assets and liabilities assigned to each maturity; such mismatching is managed by entering into hedging derivatives as well as by maintaining an appropriate level of investment securities.
The Finance Division applies the same assets and liabilities model to assets and liabilities of the Bank and its subsidiaries for operating purposes, for example to define the maturity of hedging swaps.
Market Risk
Central to the Bank’s asset and liability management is also the analysis of trading securities’ value at risk in case of interest rate fluctuations.
The market risk on the Bank’s trading securities is valued using a model according to the “standardised” approach of the Bank of Italy. The model assigns each security to the corresponding temporal range in accordance with its maturity (fixed income securities) or repricing characteristic (variable income securities). For each class, the model makes an interest rate sensitivity analysis to determine the value at risk in case of negative interest rate fluctuations.
26
The model also evaluates the settlement risk relating to the possibility of unsuccessful or delayed settlement and the counterparty risk associated with the credit standing of the issuer.
The value at risk is managed through entering into derivatives products and it is discussed during meetings of the Committee.
Exchange Rate Risk
The foreign exchange dealing structure comprises two desks, one aimed at assisting the Bank’s customers and the other trading for the Bank itself. The former desk supplies customers with foreign exchange brokerage services such as currency buying and selling and deals with clients through the branch network. This desk does not take its own positions on the foreign exchange market. The other desk trades in currencies on behalf of the Bank. As at 31 December 2005, Euro 109 million of the Bank’s assets and Euro 1,030.3 million of the Bank’s liabilities were denominated in currencies other than the Euro. The risk management policies ensure exchange rate exposure is monitored on a daily basis, ensuring that the exchange rate risk does not exceed the limit defined by the Board of Directors. To monitor the Bank’s exposure the “standardised” approach of the Bank of Italy is used. In addition, the Bank has developed a model to evaluate the exchange rate risk at any time and its potential impact on the assets and liabilities of the Bank.
Operational Risk
In order to provide the Bank with suitable instruments for monitoring and managing the different kinds of operational risk to which it is potentially exposed, and to control their possible impact on the Bank’s assets, profits and reputation, the appropriate organisational actions were taken. These mainly involved the implementation of a system for the systematic representation and management of company processes, which consists of a database containing all the company processes, appropriately codified, to facilitate the rationalisation of the internal rule system. This system will subsequently be upgraded, in order to ensure that it provides valid support in the work of managing business risks as well as reinforcing, if necessary, the auditing levels activated. In order to improve the monitoring of operational risks in the Bank’s Information & Communication Technology (ICT) Department, a policy for monitoring and managing ICT risks has been established. Ever since its creation the Bank has been a member of the Italian Database of Operational Losses (DIPO) Observatory set up by ABI (Italian Bankers Association). Besides offering a further opportunity to supplement the information in the Bank’s possession with the performance data of most of the banking system, this is also a useful step forward towards more advanced systems of assessing operational risk. Other systems used to monitor operational risks are: the Errors Portfolio, which systematically detects all the effects on the profit and loss account caused by mistakes made in the transmission to counterparts of financial instrument purchase and sales orders; the Ge.Re Refund Management protocol implemented for the management of refunds to customers following mistakes or for reasons of commercial opportunity; and the customer complaint archive.
Capital Adequacy
The Bank of Italy has adopted risk-based capital ratios (“Capital Ratios”) pursuant to the EU capital adequacy directives. Italy’s current capital requirements are in many respects similar to the requirements imposed by the international framework for capital measurement and capital standards of banking institutions of the Basle Committee on Banking Regulations and Supervisory Practices. The Capital Ratios set forth core (“Tier I”) and supplementary (“Tier II” and “Tier III”) capital requirements relative to a bank’s assets and certain off-balance sheet items weighted according to risk (“Risk-Weighted Assets”). In addition to adopting Capital Ratios for credit risk, the Bank of Italy requires application of its standard approach in order to calculate, among other things, the market risk exposure of a bank’s trading portfolio.
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As at 31 December 2005
Bank Group
Capital Adequacy Ratios ......
Tier I Capital Ratio (Tier I Capital to total Risk-Weighted Assets) ...... 6.10 5.99
Total Capital Ratio (Total Capital to total Risk-Weighted Assets) ...... 8.25 8.78
In accordance with Bank of Italy regulations, the Bank (as capogruppo, or the Group’s parent bank) is required to calculate and report its Capital Ratios quarterly on a consolidated basis and semi-annually on a non-consolidated basis. The Bank is required to maintain a total capital ratio for the Group (total capital to total Risk-Weighted Assets) of at least 8.0 per cent. and on a non-consolidated basis of at least 7.0 per cent.
The Bank had a non-consolidated capital adequacy ratio of 8.25 per cent. as at 31 December 2005, well in excess of the required 7.0 per cent.
The following table sets forth the Tier I, Tier II and total capital levels and the relative ratios of the Bank and the Group as at 31 December 2005. According to Bank of Italy regulations, the ratios set forth below in respect of the capital of the Bank and the Group have been calculated net of any dividend distributions. The Bank does not presently have any Tier III capital.
As at 31 December 2005
Bank Group
(EUR/000)
Tier I Capital ...... 665,184 659,372
Tier II Capital ...... 261,693 334,839
Less elements to be deducted:
Participation in financial institutions of more than 10 per cent...... 26,753 26,892
Total regulatory capital ...... 900,124 967,319
Total Risk-Weighted Assets ...... 10,904,001 11,010,580
In accordance with the regulations of the Bank of Italy, the Bank calculates, among other things, its exposure to market risk. The following table shows the breakdown of Bank’s value at risk as at 31 December 2005 and 31 December 2004:
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As at 31 December
2005 2004 Change
Amount Composition Amount Composition Amount Per cent.
(EUR/000) (%) (EUR/000) (%) (EUR/000) (%)
Credit risk...... 746,836 97.94 666,665 97.41 80,171 12.03
Market risk ...... 15,682 2.06 17,735 2.59 2,053 (11.56)
on trading portfolio ...... 15,682 15,867 (185)
on exchange position...... — 1,868 (1,868)
Other risks...... — 0.0 — 0.00 — 0.00
Total ...... 762,518 100.0 684,400 100.00 78,118 11.41
Lending activity absorbs most of the Bank’s risks and accounted for 97.94 per cent. as at 31 December 2005. This accords with the fact that lending activity is the most important business of the Bank, with a weight on total assets of 82 per cent. as at 31 December 2005.
Guarantees and Commitments
The Bank has incurred guarantees and commitments in the ordinary course of its business, including the provision of guarantees and letters of credit. Outstanding guarantees amounted to Euro 481 million (Euro 400 million as at 31 December 2004) and commitments of the Bank amounted to Euro 1,144.2 million as at 31 December 2005 (Euro 1,163.5 million as at 31 December 2004).
Information Technology
Information technology has always been an integral part of the Bank’s activities, in particular in treasury operations, general risk management, regulatory compliance programmes and commercialisation efforts.
Among the services offered by the Bank, the development of electronic distribution channels represents a very important objective in a market that has strong potential for growth. Consequently, the Bank continues the expansion of its distribution channels to improve the facilities offered to customers. Currently, the distribution channels used by the Bank consist of:
– ATM;
– Point of sale (“POS”) terminals (for the retail/private customer sector);
– Electronic commerce (for the retail trade/private customer sector);
– Monetics: debit and credit cards (private customer and companies);
– Internet Banking (private customers and small companies);
– Remote Banking (companies);
– Trading Online (private customers and companies); and
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– Bancamarche.it and Bymarche.it websites.
During 2005 the Bank continued its work of rationalising and expanding its distribution network with a view to reviewing and expanding its products. Special attention was paid to consulting and service activities in order to meet the investment and funding needs expressed by customers.
The following table shows the Bank’s distribution channels as at 31 December 2005 and 2004, by type:
As at 31 December
2005 2004 Change
(EUR/000) (EUR/000) (EUR/000) (%)
POS ...... 9,300 8,390 910 10.85
Bancomat and Pagobancomat ...... 203,908 191,477 12,431 6.49
Credit cards ...... 130,684 116,924 13,760 11.77
ATM...... 275 264 11 4.17
Internet Banking...... 9,200 8,000 1,200 15.00
Home Banking Small Business and Corporate...... 6,260 5,470 790 14.44
Payment cards
During 2005, the number of POS terminals increased by 11 per cent. to 9,300; at the same time, volumes increased by 17.3 per cent. to Euro 486 million and the number of transactions grew by 15.8 per cent. to more than 6,240,800. As at 31 December 2005, the Bank had issued 203,908 Bancomat/Pagobancomat cash cards and 130,684 credit cards.
Internet Banking
The types of remote banking services offered to customers by the Bank underwent a complete revision in 2005, involving a migration to new products managed internally with the aim of providing functions for customers (in terms of both information and instructions), making the software more flexible and reducing running costs. The results achieved were the following:
● Inbank families, an internet banking service for families, has 9,200 registered users (+15 per cent. over 2004);
● Inbank imprese, an internet banking service for companies, has 6,260 registered users (+27.23 per cent. over 31 December 2004), with around 936,000 orders (+64.6 per cent. over 2004) and turnover of Euro 1,467,836 thousand (+57.2 per cent.). In the pursuance of a cross-selling strategy, this service was included in the offer of current account packages designed for the small business segment (lmpiù e dedi.CO);
● Inbank imprese no-web, another remote banking service for companies, has 489 companies connected, with about 1 million orders (+37.5 per cent. compared with 2004) and turnover of Euro 2,672,197 thousand (+41 per cent. compared with 2004);
● Inbank enti pubblici, the service made available to public bodies and agencies whose treasury and/or cash desk service is managed by the Bank, through which the institution can manage its transactions directly
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via the web for the exchange of flows and online monitoring of the treasury and collections, at the end of 2005 had 305 registered institutions.
In April the Bank launched a new Online Trading service, “Inbank i Mercati a portata di Mouse” (“Markets within reach of a Mouse”), which offers customers the information, instruments, assistance and advice on how to trade on the financial markets via the Internet in a more knowledgeable way. Besides enabling remote buying and selling of financial instruments, the service provides news on the financial world, prices and charts of shares on the major stock exchanges, and financial advice with analysis and indications on trading and investment portfolios. The service has 668 registered users, with around 37,800 orders executed and turnover of more than Euro 501 million (28 per cent. of the total traded).
ATMs
As of 31 December 2005 the Bank managed 275 operational ATMs (264 in 2004), with more than 5,300,000 withdrawals and an average withdrawal of Euro 149. In 2005 the Bank ATMs were updated with new functions in addition to mobile phone top-ups: telephone tele-topups (top-ups made by mobile phones after first registration at an ATM) with the major telephone providers, payment of the RAI television licence and top-ups of the Shop & Go prepaid card. Mobile phone top-ups with the providers Tim, Vodafone, Wind and H3G during 2005 totalled 466,900, worth 19 million Euro.
Litigation
The Bank and other members of the Group are involved in litigation in the ordinary course of their business. Neither the Bank nor any other member of the Group is currently involved in any litigation (actual or pending) which could, if adversely determined against the Bank or any member of the Group, have a material adverse effect on the financial condition or operations of the Bank or the Group or which could otherwise be material in the context of the issue of Notes, nor is the Bank aware that any such litigation is pending or threatened.
Subsequent Events and outlook for the future
The operational strategy to create specialised centres in order to increase profit led to the separation of the Bank’s leasing business. All leased assets have been transferred to a new company, Medioleasing S.p.a., which was established in February 2005 with a head office in Jesi. Medioleasing S.p.a. is wholly owned by the Bank.
With a resolution of 22 February 2006 the Board of Directors laid down a detailed plan of action on the assets and liquidity in support of commercial development policies and capital ratios. The main lines of action, which will be implemented through operational plans within the appropriate deadlines, provide for:
● the issue of innovative capital instruments and subordinated loans calculable as regulatory capital;
● the issue of bonded loans destined for institutional investors;
● other actions, including securitisation transactions and sales of bad loans.
The Bank also began to implement actions to update the auditing of business risks, which were divided into six subject areas corresponding to the divisions of the perimeter of the assessment performed of the internal auditing system:
● governance;
● management of the credit risk;
● management of the operational and legal risk;
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● management of the market risk and the other financial risks;
● auditing;
● group companies.
The Bank accepted the international arbitration promoted by the Task Force Argentina (TFA) to protect, free of charge, investors in Argentinean bonds who did not accept the public exchange offer concluded in February 2005.
The operating figures for the beginning of 2006 show results in line with the budget objectives. In particular, the trend in turnover (deposits and loans) and in the contribution margins generated by the commercial network, enable the Bank to have confidence that it can achieve the growth outlined in the three-year strategic plan for the current year, and indeed that the Bank can aim to better it if all the effects of the commercial and organisational actions introduced with the “Crescita” project come into play.
As far as technological renewal is concerned, the Bank is continuing the plan of implementing many software applications in distributed environments and replacing the hardware at branches, with the purpose of making transactions faster and further improving the service model, as part of a systems plan which is full of initiatives, including as regards improvement of the structures and most important functions.
Management and Employees
Board of Directors; Chairman; Executive Committee
The Board of Directors of the Bank is required by the Bank’s by-laws to be comprised of between 15 and 21 members as may be decided by the shareholders. Currently the Board of Directors comprises 17 members. The Board of Directors is responsible for the management of the business and activities of the Bank and has full power to do so, with the exception of such powers as have been reserved to the shareholders by law or by the Bank’s by- laws. Directors are elected for three year terms by the shareholders with the next elections scheduled to take place in April 2006. Retiring Directors are eligible for re-election.
The Board of Directors elects from among its members a Chairman and two Deputy Chairmen, and may delegate its powers to one or more of its members. The Board of Directors may also elect from among its members an Executive Committee comprising between six and 10 members (presently seven members) to which the Board may delegate certain of its powers. The Board of Directors also appoints the General Manager (chief executive).
The Chairman of the Board of Directors legally represents the Bank vis à vis third parties and in judicial proceedings, and has the power to sign for and on behalf of the Bank.
The current General Manager is Massimo Bianconi who took office on 10 April 2004.
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The current members of the Bank’s Board of Directors are: As at 31 December 2006
Name Title Principal outside interests relevant to the Issuer
Lauro Costa...... Chairman Chairman of Marcheriscossioni S.p.A. Director of Commercial Union Life S.p.A. Director of Commercial Union Assicurazioni S.p.A.
Tonino Perini ...... Deputy-Chairman Chairman of SE.DA S.p.A. Chairman of Banca Marche Gestione Internazionale Lux S.A. Chairman of Medioleasing S.p.A.
Bruno Brusciotti...... Deputy-Chairman Chairman of Focus Gestioni S.p.A. Director of Commercial Union Life S.p.A. Director of Commercial Union Assicurazioni S.p.A.
Michele Ambrosini ...... Director Director of Marcheriscossioni S.p.A.
Giuliano Bianchi...... Director Director of Marcheriscossioni S.p.A.
Aldo Birrozzi ...... Director Director of Tekne Italia S.r.l. Director of Edima S.p.A. Director of San Catervo Immobiliare S.r.l. Chairman of Z.L. Engineering & Consulting S.r.l.
Pio Bussolotto...... Director Director of Sanpaolo IMI S.p.A. Director of Cassa di Risparmio di Firenze S.p.A. Director of Cassa di Risparmio di Padova e Rovigo S.p.A. Director of AIP Torino
Francesco Calai...... Director None
Roberto Civalleri ...... Director Director of Cassa di Risparmio di Forlì Director of Banco Desarrollo
Massimo Cremona...... Director Director of Aviva Italia Holding S.p.A. Director of Aviva Italia S.p.A. Director of Aviva Vita S.p.A. Director of GIVI Holding S.p.A. Director of UBS Securities Italia Finanziaria S.p.A. Board of Auditors Chairman of Thyssenkrupp Acciai Speciali
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Name Title Principal outside interests relevant to the Issuer
Terni Board of Auditors Chairman of Morgan Stanley SGR Board of Auditors Chairman of UBS Fonspa S.p.A. Board of Auditors Auditor of Navigazione Montanari S.p.A.
Stefane Clementoni...... Director Director of Clementoni S.p.A. Chairman of Artelito S.p.A.
Eliseo Di Luca ...... Director None
Stefano Gentili...... Director Director of Aviva Italia Holding S.p.A. Director of Aviva S.p.A. Director of Aviva Vita S.p.A. Director of Aviva Italia S.p.A. Director of Aviva Assicurazioni S.p.A. Director of Aviva Italia Life S.p.A. Director of Eurovita Assicurazioni S.p.A. Managing Director of Aviva Previdenza S.p.A. Managing Director of Finoa S.r.l.
Marcello Gennari...... Director None
Mario Volpini...... Director Chairman of Ascom Servizi S.r.l. Chairman of Cat S.r.l. Deputy-Chairman of Camera di Commercio of Macerata Deputy-Chairman of Macerata Confcommercio of Macerata Deputy-Chairman of Cassadi Risparmio di Loreto
Walter Darini ...... Director President of Sile S.p.A.
Dario Zini ...... Director None
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The current members of the Bank’s Executive Committee are:
Lauro Costa Bruno Brusciotti Tonino Perini Michele Ambrosini Giuliano Bianchi Pio Bussolotto
The business address of each of the Directors is Banca delle Marche S.p.A., Centro Direzionale Fontedamo, Via Ghislieri 6, 60035 Jesi (Ancona).
Employees
The following table shows the total number of Bank employees and the grade and location of employees at the dates indicated.
As at 31 December
2005 2004
Grade
Managers...... 48 49
Middle Managers...... 784 781
Other ...... 1,740 1,742
Total ...... 2,572 2,572
Statutory Board of Auditors
Under Italian law, the Bank is required to have a Statutory Board of Auditors (the “Board of Auditors”). The Board of Auditors has a duty to the Bank’s shareholders, to the Bank and to the Bank’s creditors. The Board of Auditors acts as a body of control over the management and financial reporting and condition of the Bank. The Board of Auditors reviews the administration of the Bank, its compliance with the law and its by-laws, ensures that the Bank’s accounting records are regularly maintained, considers the consistency of balance sheets and statements of income with the accounting records of the Bank and ascertains, at least on a quarterly basis, the cash balance of the Bank.
The shareholders meeting elects five auditors and two alternate auditors to serve on the Board of Auditors for a three year term, and appoints the Chairman thereof.
The current members of the Board of Auditors are:
Piero Valentini Chairman
Agostino Cesaroni Auditor
Franco D’Angelo Auditor
Michele Giannattasio Auditor Pietro Paccapelo Alternate auditor
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External auditors
PricewaterhouseCoopers S.p.A. was appointed as external auditor of the Bank pursuant to a resolution of the shareholders’ meeting of the Bank passed on 29 April 2004.
Until that date, Deloitte & Touche S.p.A. were the Bank’s external auditors.”
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