ANNUAL REPORT 2007 REPANNUAL ORT
ANNUAL REPORT 2007 Banco Popolare Società Cooperativa
Registered and Head offices: Piazza Nogara, 2 - 37121 Verona Share capital as at 31 December 2007: euro 2,305,732,770 fully paid Tax code, VAT no. and enrollment no. in the Verona Enterprise Registry: 03700430238 Member of the Interbank Fund for Deposit Protection and of the National Guarantee Fund Parent company of the Banking Group Banco Popolare Registered in the Banking Groups Registry
2 CORPORATE BOARDS, MANAGEMENT AND AUDITING COMPANY
Supervisory Board
Chairman Carlo Fratta Pasini Deputy Vice Chairman Dino Piero Giarda Vice Chairman Maurizio Comoli Directors Marco Boroli Giuliano Buffelli Guido Duccio Castellotti Pietro Manzonetto Maurizio Marino Mario Minoja Claudio Rangoni Machiavelli
Management Board
Chairman Vittorio Coda Chief Executive Officer with Vice-Chairman functions Fabio Innocenzi Directors Franco Baronio (*) Alfredo Cariello (*) Luigi Corsi Domenico De Angelis (*) Maurizio Di Maio (*) Enrico Fagioli Marzocchi (*) Maurizio Faroni (*) Emma Marcegaglia Massimo Alfonso Minolfi (*) Roberto Romanin Jacur (*) Directors with executive offices
Board of Advisors
Standing Marco Cicogna Luciano Codini Giuseppe Bussi
Alternate Aldo Bulgarelli Vittorio Cocito
Corporate General Manager
Massimo Alfonso Minolfi
Retail General Manager
Franco Baronio
Manager in charge of preparing corporate accounting documents
Gianpietro Val
Auditing company
Reconta Ernst & Young S.p.A.
3 TABLE OF CONTENTS
Notice to convene ...... 6
REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
Group Structure ...... 10 Group Geographical Network ...... 12 Group financial highlights and ratios ...... 14
Report on Group Operations ...... 17 Economic backdrop ...... 18 The merger ...... 20 Other noteworthy events ...... 25 Banking activities ...... 29 Retail ...... 30 Corporate ...... 38 Finance ...... 43 Results ...... 48 Credit intermediation ...... 53 Financial assets ...... 57 Equity investments ...... 58 Shareholders’ equity and solvency ratios ...... 59 Consolidated Income statement ...... 60 Rating and stock performance ...... 64 Risk management ...... 66 Planning, auditing and service activities ...... 72 Human resources ...... 72 Internal audit ...... 74 Compliance ...... 75 Technological and administrative services ...... 75 Technological projects and investments ...... 76 Communications ...... 80 Performance of the main companies of the Group ...... 83 Mutuality and public interest initiatives ...... 111 Operational outlook ...... 118
Statement of the Chief Executive Officer and of the Manger in charge of preparing accounting documents ...... 121
Independent Auditors’ Report ...... 125
Consolidated financial statements ...... 129 Consolidated Balance sheet ...... 131 Consolidated Income statement ...... 132 Statement of Changes in consolidated Shareholders’ equity...... 133 Consolidated statement of cash flows ...... 135
Notes to the consolidated accounts ...... 137 Chapter A – Accounting policies ...... 139 Chapter B – Notes to the consolidated Balance sheet ...... 158 Chapter C – Notes to the consolidated Income statement ...... 210
4 Chapter D – Segment reporting ...... 229 Chapter E – Risks and associated hedging policies ...... 233 Chapter F – Consolidated shareholder’s equity ...... 303 Chapter G – Business combinations ...... 309 Chapter H – Transactions with related parties ...... 313 Chapter I – Share-based payments ...... 322
Attachments ...... 325
5 SPECIAL AND GENERAL SHAREHOLDERS’ MEETING NOTICE TO CONVENE
Pursuant to art. 22 of the Articles of Association, the Special and General Shareholders’ meeting shall be convened on first call on Friday, May 2nd, 2008, at 9 o’clock, at the company’s head offices (Piazza Nogara n. 2) to discuss the following AGENDA
SPECIAL MEETING 1) a) Proposal to change articles 4, 6, 32.3, 33.2, 35, 39.1, 39.2, 39.13, 41.2, 41.4.3, 42, 52 of the Articles of Association and add a new article 4 bis, regarding mutuality b) Associated and consequent resolutions; power delegations
GENERAL MEETING 1) Report of the Management Board, the Supervisory Board and the Auditing company on financial year 2007; approval of the annual report as at 31 December 2007, under articles 20 and 41.2 letter a) of the Articles of Association; presentation of the Consolidated Financial Statements and the Social Report 2) Resolutions on profit allocation and distribution and on the distribution of available reserves 3) Auditing firm Reconta Ernst & Young S.p.A. in charge of the accounting audit between 2007 and 2015: remuneration integration and consequent resolutions 4) Appointment of five additional members of the Supervisory Board for the three-year period from 2008 to 2010 5) Supervisory Board: members’ remuneration, including the consideration for Directors with special assignments; determination of attendance counters; associated and consequent resolutions.
Should the meeting fail to reach the legal number, in compliance with art. 22 of the Articles of Association, it shall be held on second call on Saturday, May 3rd, 2008 at 9:30 a.m. in Verona at the Verona Fair Grounds (Pavilion n. 10) - Ente Autonomo Fiere di Verona, Viale del Lavoro, 8, to resolve on the above agenda in compliance with articles 24 and 25 of the Articles of Association. ------Meeting attendance (art. 23 of the Articles of Association) Shareholders who were entered in the Shareholders’ record at least 90 (ninety) days before and who, at least 2 (two) working days before the meeting’s first call, namely by Tuesday, April 29th, 2008, have given “notice” to Banco Popolare through their authorized intermediaries as provided for by art. 2370of the civil code and by Consob’s Resolution 11768/98 and following amendments, have the right to participate in the Shareholders’ meeting. Shareholders - whose shares are already deposited in a custody and administration account with the Banks of the Group, and precisely - Banca Popolare di Verona – S.Geminiano e S.Prospero - Banca Popolare di Lodi - Banca Popolare di Novara - Banca Popolare di Crema - Credito Bergamasco - Banca Popolare di Cremona - Banca Aletti & C. - Banca Popolare di Mantova - Cassa di Risparmio di Lucca Pisa Livorno - Banca Caripe and as such have already been dematerialized - must in any case give specific instructions that the “notice” be executed, and obtain an immediate copy thereof, to be used as admission ticket to the Shareholder’s meeting. Shareholders whose shares are deposited with other authorized intermediaries, must instruct the latter to execute the above “notice” under the mentioned Consob Resolution, and obtain the relevant copy thereof. Shareholders in possession of shares that have not been dematerialized yet, must turn them in to Banco Popolare, to the above banks of the Group or to other authorized intermediary for their dematerialization, and give instructions for the execution fo the necessary “notice” to participate in the Shareholders’ meeting. Each Shareholder is entitled to one single vote, irrespective of the number of shares in his/her possession. Shareholders are entitled to be represented by another shareholder at the meeting, provided the latter is not a member of the Supervisory or Management boards, or employee of Banco Popolare or member of the managing or auditing boards or employee of the companies directly or indirectly controlled by Banco Popolare, or does not fall under one of the incompatibility cases envisaged by law, and who is in possession of a written proxy valid under the law, duly filled out and whose signature has been authenticated by a public officer or by an employee of Banco Popolare or of one of the above mentioned banks of the Group. Each Shareholder may represent only one other Shareholder by proxy, with the exception of trustees. Pursuant to art. 26 of the Articles of Association, the Chairman of the Supervisory Board has full powers to verify the validity of the proxies, and in general the shareholders’ actual right to attend the Shareholders’ Meeting, so as to verify whether the meeting has been duly formed, and if the legal number necessary to pass resolutions has been reached. To this purpose, all Shareholders concerned may submit their proxies at Banco Popolare’s Head offices, also by way of the Group’s bank branches, by April 24th, 2008. Proxies submitted after the above deadline or at the Shareholders’ meeting must in any case be filled out and authenticated along the same modalities described above.
6 Appointment of 5 additional Members of the Supervisory Board: presentation of the slates of candidates (art. 39 of the Articles of Association) In compliance with art. 38.1.2 of the Articles of Association, the Shareholders’ meeting must appoint 5 (five) additional members to supplement the Supervisory Board, of which: – 2 (two) shall be appointed among shareholders residing in the provinces of BPI’s Original Franchise: the provinces of Lombardy (other than Brescia, Bergamo and Mantua), Tuscany, Liguria, Lazio, Abruzzo, Sicily and the province of Bologna (area of Imola); – 3 (three) shall be appointed outside BPI’s Original Franchise, among shareholders residing in the provinces of BPVN’s Original Franchise: the provinces of Veneto, Emilia Romagna (other than Bologna, area of Imola), Piedmont and Valle d’Aosta.
They shall remain in office for three years, and their term of office shall expire upon the following General Meeting’s date as provided for under paragraph two of art. 2364 bis of the civil code, and they may be re-elected. The members of the Supervisory Board are elected based on lists pursuant to the Articles of Association and in compliance with existing laws and regulations. Now, therefore, under art. 39.1 of the Articles of Association, the new Board members shall be elected in compliance with the by- law articles that have been recently amended by the Supervisory Board, which made use of the faculty provided for under art. 41.2 letter f) of the Articles of Association, and made them compliant with the new regulations issued by Consob. Each list must be filed directly, or jointly with the Supervisory Board, by at least 500 Shareholders with voting rights, irrespective of the share capital percentage they hold as a whole, or by shareholders, who individually or altogether hold an interest representing at least 0.30% of Banco Popolare’s share capital. Upon penalty of inadmissibility: a) candidate lists must be arranged in numerical sequence and, on penalty of nullity, must be filed with Banco Popolare’s registered offices at least fifteen days before the date of the General meetings first call, namely by April 17th, 2008. In order to give evidence of the ownership of the number of shares necessary to present the lists, the shareholders must sign the list and present a copy of the certificates issued in compliance with existing laws and regulations. The signature of each presenting shareholder must be certified under the law or the shareholder must sign before an employee of Banco Popolare, duly authorized by the Supervisory Board; b) in compliance with article 38.1.1 of the Articles of association, in the event that five Members of the Supervisory Board are to be elected, the lists shall provide for the first candidate of the list to be designated among shareholders residing in BPVN’s Original Franchise (resident in the province of Verona), the second in BPI’s Original Franchise (resident in the province of Lodi), the third in BPVN’s Original Franchise (resident in the province of Novara), the fourth in BPI’s Original Franchise, the fifth in BPVN’s Original Franchise; c) each shareholder may only present and vote one list of candidates, and each candidate may only run in one list, under penalty of ineligibility; d) the lists must indicate at least two names and in any case a number of candidates not exceeding the number of Board Members to be elected; e) each list must be supplemented by the relevant documentation, to be filed at the Company’s registered offices within the same term envisaged for the lists (17 April 2008), illustrating the candidates’ personal and professional characteristics, the statements with which the single candidates accept their candidacy, and state on their own responsibility that no ineligibility and incompatibility causes exist, that they meet the requirements prescribed for the office of Supervisory Board Member by the applicable laws, regulations and corporate governance provisions, and specify any other management and control offices filled in other Companies.
Any presented list failing to comply with the above procedures shall be deemed as not filed. In compliance with existing regulations, the lists that have been regularly filed shall be made available to the public, without delay, and in any case at least ten days before the General Meeting, at Banco Popolare’s registered office, with Borsa Italiana S.p.A., and shall also be published on the Company’s website (www.bancopopolare.it). Pursuant to art. 39.8 of the Articles of association, in the event that no list is presented within the specified term, the Shareholders’ meeting shall decide by relative majority of the attending Shareholders. Without prejudice to the compliance with by-law provisions, with the aim of harmonizing the activities necessary to prepare and present candidate slates for the appointment of Supervisory Board Members, Banco Popolare approved an operational procedure whose text has been filed with Banco Popolare’s registered offices, in Verona Piazza Nogara, 2 (Ufficio Soci e Azioni – Shareholders’ office – tel. 045/867.5226), where it is available to Shareholders, and published on the Company’s website (www.bancopopolare.it).
In compliance with the existing laws, fifteen day before the General Meeting the executive reports and the required documentation covering the proposals on the agenda shall be filed with the registered offices and with Borsa Italiana S.p.A.; moreover, the report on Banco Popolare’s acceptance of the Code of Conduct for Listed Companies in compliance with the existing regulations and laws shall be made available. The above documentation shall also be published on the Company’s website (www.bancopopolare.it). Once filed, Shareholders have the faculty to obtain a copy.
Verona, 29 March 2008
For the SUPERVISORY BOARD For the MANAGEMENT BOARD The Chairman The Chairman (Carlo Fratta Pasini) (Vittorio Coda)
Published on the Official Gazette of the Italian Republic, in compliance with the company Articles of Association - Section II n. 39 on April 1st, 2008 (S-082686)
7
REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR FINANCIAL YEAR 2007
Head offi ce Banco Popolare e BPV-SGSP, Verona Gruppo Banco Popolare
Aletti & C. Banca di Banca Popolare di Verona - SGSP Investimento Mobiliare Banca Popolare di Lodi Banca Valori Banca Popolare di Novara Aletti Gestielle SGR Credito Bergamasco Bipitalia Gestioni SGR Cassa di Risparmio di Lucca Pisa Livorno Aletti Gestielle Alternative SGR Banca Caripe Bipitalia Alternative SGR Banca Popolare di Crema Banca Aletti & C. (Suisse) Banca Popolare di Cremona Bipielle Bank (Suisse) Banca Popolare di Mantova Efi banca Banco Popolare Luxembourg Aletti Private Equity SGR Banco Popolare Croatia Efi gestioni SGR Banco Popolare Hungary Italfortune International Advisors Banco Popolare Ceská Republika B.P.I. International (UK) Aletti Fiduciaria Nazionale Fiduciaria Critefi SIM
Bipitalia Ducato Bipielle International Holding Easynetwork Società Gestione Crediti BP Soluzioni Finanziarie Società Gestione Servizi BP Holding di Partecipazioni Finanziarie Popolare di Verona e Novara Bipielle Real Estate Immobiliare BP Tecmarket Servizi Core commercial banks
Investment & Private Banking, Asset Management
Consumer Credit
Others GROUP GEOGRAPHICAL NETWORK
Branches of Gruppo Banco Popolare in Italy
Trentino Alto Adige: 23 Lombardia: 559
Valle d’Aosta: 6 Friuli-Venezia Giulia: 16
Piemonte: 236 Veneto: 317
Emila-Romagna: 256
Liguria: 137 Marche: 9 Toscana: 263 Umbria: 9
Abruzzo: 44
Lazio: 69 Molise: 8
Puglia: 6
Campania: 57
Basilicata: 3
Calabria: 3
Sicilia: 143
Sardegna: 1
Foreign operations
The Group’s foreign network comprises the subsidiaries BP Luxembourg, BP Croatia, BP Ceska Republika, BP Hungary, AT Leasing Romania, a London branch and Banca Aletti Suisse.
In Asia, the Group is present with Representative offices in India (Mumbai) and China (Beijing, Shanghai and Hong Kong).
12 BRANCHES OF GRUPPO BANCO POPOLARE* N
BANCA POPOLARE DI VERONA – S.GEMINIANO E S.PROSPERO 557 CREDITO BERGAMASCO 246 BANCA POPOLARE DI NOVARA 418 BANCA CARIPE 50 BANCA POPOLARE DI LODI 498 CASSA DI RISPARMIO DI LUCCA PISA LIVORNO 236 BANCA POPOLARE DI CREMA 43 BANCA POPOLARE DI MANTOVA 8 BANCA POPOLARE DI CREMONA 70 BANCA ALETTI 32 EFIBANCA 6 BANCA VALORI 1 TOTAL 2165
(*) Excluding treasury branches
13 GROUP FINANCIAL HIGHLIGHTS AND RATIOS
Financial highlights
Shown below are the Group’s main financial highlights and ratios.
(in million euro) 2007 2007 (*) 2006 (**) Changes over 2006
Income statement Net interest, dividend and similar income 1,716.6 2,196.2 2,275.2 -3.5% Net commission income 1,022.0 1,209.9 1,241.3 -2.5% Total income 3,370.5 4,280.8 4,224.1 1.3% Operating costs 1,894.2 2,425.4 2,343.6 3.5% Profit from operations 1,476.3 1,855.5 1,880.5 -1.3% Income before tax from continuing operations 1,336.3 1,669.5 1,652.2 1.0% Net income for the year 617.2 731.9 975.2 -25.0% (*) Inclusive of the 1H07 contribution from Gruppo Banca Popolare Italiana adjusted for comparison to take account of changes in consolidation scope and classification criteria and excluding the impact from the purchase price allocation for Gruppo Banca Popolare Italiana. (**) Data resulting from the combination of the consolidated profit and loss of Gruppo Banco Popolare di Verona e Novara and of Gruppo Banca Popolare Italiana adjusted for comparison.
31/12/2006 (in million euro) 31/12/2007 Changes over 2006 pro-forma
Balance sheet Total assets 128,392.7 119,748.6 7.2% Loans to customers (gross) 86,871.6 76,116.7 14.1% Financial assets and hedging derivatives 13,497.2 15,632.7 -13.7% Shareholders’ equity 10,672.0 11,733.5 -9.0% Customer financial assets Direct customer funds 93,229.1 82,712.1 12.7% Indirect customer funds 96,328.1 112,627.9 -14.5% - Assets under management 45,050.1 49,611.1 -9.2% - Mutual funds and Sicav 19,471.5 21,306.7 -8.6% - Managed accounts in securities and funds 17,479.8 20,113.7 -13.1% - Insurance policies 8,098.8 8,190.8 -1.1% - Assets under custody 51,278.0 63,016.8 -18.6% Operational structure Average number of employees (**) 21,813 21,098 3.4% Bank branches 2,254 2,223 1.4% (**) Monthly arithmetic mean
14 Financial ratios and other data
2007
Profitability ratios (%) ROE 6.1% Net interest, dividend and similar income / Total income 50.9% Net commission income / Total income 30.3% Operating costs / Total income 56.2%
Operational productivity (€/1000) Customer loans (gross) per employee 3,982.6 Total income per employee 154.5 Operating costs per employee 86.8
Credit quality ratios (%) Net NPLs/ Customer loans (net) 1.04% Net watchlist loans / Customer loans (net) 1.52% Net NPLs / Shareholders’ equity 8.26%
15
REPORT ON GROUP OPERATIONS
Head offi ce Banca Popolare di Lodi, Lodi Report on group operations
ECONOMIC BACKDROP
World scenario
In 2007, the world economy reported an altogether solid growth, despite some signs of slowdown in the fourth quarter, thanks to the mounting contribution of emerging Countries, in particular China and India, which continued to report very high growth rates. The global economic development rate, exceeding 4%, contributed to lifting the price of raw materials further up, especially agricultural and energy products. Still, 2007 will be most remembered as the year of a deep and persistent crisis – which worsened during the summertime – of the US subprime mortgage market. The crisis quickly spread onto international monetary and financial markets, causing soaring risk premiums, a marked liquidity crunch and a growing cautiousness among lending intermediaries in granting loans, with all the related consequences on real economy. In 2007, the US economy went through alternating phases of slowdown and recovery, and it experienced a period of weakening, mainly caused by the downturn of the real estate market, as well as by the evolution of other variables, such as the tension on financial markets and consumption slowdown. The expansion of GDP was mainly driven by the strong acceleration of exports, which benefited from the dollar’s depreciation. As a whole, based on the latest estimates, in 2007 economic growth in the US stood at 2.2%, as compared with 2.9% in 2006. Also in Japan GDP decelerated (+1.9%, as compared with +2.1% the previous year). In the Euro area, based upon preliminary estimates, on a yearly average GDP increased by 2.6% (+2.8% in 2006), despite the standstill reported in the second and more so in the fourth quarters, when the effects of the financial crisis showed up with greater intensity. For the first time since 2001, the Euro area economy over twelve months grew at a higher pace that the United States. Private consumption during the year reported a rather stable growth rate. A major contribution to the Euro area economic growth came from gross fixed investments, despite their deceleration at the end of 2007; positive, albeit modest, was the growth rate of net exports, which were affected by an unfavorable exchange rate. Inflationary tensions emerged, in particular in the last quarter, which caused the consumer price index to report an average annual increase of +2.1%. In the Eastern European Countries where Gruppo Banco Popolare is active, worth mentioning is the marked growth of GDP in Croatia and Romania (both reported a 6% increase) and in the Czech Republic (+5.8%). On the contrary, in Hungary growth was much more contained (+1.4%).
The Italian scenario
The change in international backdrop negatively affected the Italian economy, intensifying the growth slowdown that was already underway. The modest recovery observed in 2006 – marked by the interruption of a long phase of stagnation in industrial output – gradually dwindled in 2007 and the household consumption growth, penalized by the flaring of inflation, sent clear signs of weakening. In particular, in the fourth quarter of the year, consumption prices soared suddenly, pushing the headline inflation rate well above 2.5%, while in the previous years it had remained stable under 2%. On a yearly average, the Italian economic growth rate stood at +1.5%, reporting a decrease as compared with the previous year (1.8%) due to the standstill reported in the fourth quarter. Household expenditure growth in 2007 was in line with GDP total growth. On the contrary, the growth in investments (+1.2%) slowed down over the previous year, barely supported by a sound performance of the residential building compartment; the contribution made to growth by net exports was slightly positive (0.1%), despite the unfavorable exchange rate, thus confirming the trend reversal in 2006. Industrial output, which suffered from a major slowdown in the last quarter, remained basically stable (roughly +0.4%), thus interrupting the good progress made the previous year (+2.2%). On the labor market, the unemployment rate further decreased, running at 5.6% in the third quarter. Public expenditure achieved positive results, by containing the Budget deficit to 1.9% of GDP; the tax pressure rose to 43.3% and public debt should have decreased to about 105%.
Financial and money markets
The continuous signs of slowdown reported by the US economy – which grew stronger in the second half of 2007 – prompted the Federal Reserve to intervene three times on the Fed Funds rate, with a 50 basis point cut in September, and two 25 basis point cuts in October and December, to 4.25%. The European Central Bank instead took a prudent attitude, due to worries about growing inflationary pressures: the minimum bid rate rose to 3.75% in March and to 4% in June, where it remained unchanged until the end of the year.
The tensions ensued from the summer financial crisis pushed interbank market rates way up to unusually high levels with respect to the monetary policy base rates. As of the outbreak of the crisis in August, despite the marked liquidity injections by the ECB, the three-month Euribor ranged between 4.40% and 4.85%, the latter being the December peak. On the contrary, longer term yields in the US and in the Eurozone were on the rise in the first half of the year, then suddenly plunged. In 2007, the US dollar gradually and almost constantly depreciated against the Euro, mainly as a result of the US economy slowdown and of the different monetary policy approaches adopted by the US and Euroland Central Banks during the year. The Euro-Dollar exchange rate went from 1.32 at year start to 1.47 at the end of 2007, reporting an +11.8% variation.
18 Report on group operations
The main world equity markets experienced a rather volatile performance, going through periods of strong downward movements followed by recoveries. 2007 closed on the downside for many world indexes, among which the S&P Mib (- 7%), Mibtel (-7.8%) and Japan’s Nikkei (-11.1%). Among the Stock Exchanges that could close the period with a positive sign, it is worth mentioning the noticeable yearly progress achieved by the German market index (+22.3%), by the Spanish index (+7.3%), by the Dow Jones (+6.4%) and the NASDAQ (+9.8%).
Domestic banking sector
The Italian banking industry was only partially affected by the credit crunch that developed from the losses suffered on the equity markets as a result of subprime mortgage securitizations, and that badly hit the banking industries of some industrialized Countries. The growth in intermediated volumes remained positive throughout the entire 2007, reporting satisfactory growth rates despite the slowdown signals experienced by the Italian economy. Italian banks funding in 2007 reported a fair expansionary trend: according to the statistics published by the Bank of Italy, total direct customer funds reported trend growth rates ranging between 6.8 and 9.5 percent, closing at an annual growth rate of 7.4%. Among the various funding classes, the most significant progress was reported by bonds, which across the whole period remained above the 11.4% growth rate; total deposits gradually decreased to +4.2% at year-end, with checking accounts reporting a more marked deceleration (+2.9%).
Worth mentioning is the dynamic of total loans to customers, which throughout the period reported trend growth rates ranging between 9.8 and 11.7 percent. In particular, above 5 year term loans kept a double-digit growth pace, on average of 13%; below 12 month term loans on the contrary slowed down during the last months of the year (closing 2007 at +7.5%), as compared with a sharp recovery of loans with a 1 to 5 year term (+11% in December).
Loan quality in the Italian banking industry remained on rather good levels: according to the Italian Banking Association, ABI, in December 2007 gross non-performing loans – also as a result of the numerous non-performing loan securitizations – reported a trend growth rate of only 0.5%. The NPL to total loans ratio decreased from 1.25% at the end of 2006 to 1.11% at the end of 2007. Still, we should not forget that during loan expansionary periods, non-performing loan dynamics generally lag behind a couple of years, and are bound to be better appreciated in decelerating phases of loan assets.
With regard to banking interest rates, according to the Italian Banking Association, ABI, in 2007 the average return from loans increased by 65 basis points, going from 5.52% at year start, to 6.17% in December. Also the average cost of customer deposits (Households and non-financial Businesses) reported a growth trend, and over the year increased by 60 basis points, from 2.33% at year start, to 2.93% in December. The interest spread at the end of 2007 stood at 3.24%, 5 basis points higher than at year start.
As to the asset management market, in 2007 there was a further deterioration of the crisis of mutual funds that had started to unfold in 2006. According to Assogestioni, asset management instruments as a whole suffered from a major investment outflow, running at –87.6 billions. It is certainly worth highlighting the positive dynamic reported by hedge funds, that attracted significant investments (+ 6.2 billions in 2007), although this market is still marked by high growth prospects and by stringent regulations that limit its appeal.
19 Report on group operations
THE MERGER
Description of the merger
Financial year 2007 was primarily characterized by numerous initiatives aiming at forming Banco Popolare, which became operational as of July 1st, 2007, as a result of the merger between Banco Popolare di Verona e Novara (hereinafter BPVN) and Banca Popolare Italiana (hereinafter BPI), hence the implementation of an integration plan of great moment, which positions Banco among the top leaders in the domestic and international lending and financial arena. Gruppo BPVN and Gruppo BPI, each with its own identity and history, contributed to the creation of a new major entity, one of the leading banking groups in Italy, and number one among cooperative banks for the number of branches, a symbol of the cooperative experience, which for almost 150 years has been growing steadily, with positive results, and without relinquishing its strong ties with its territory and its original identity. Illustrated below is a summary of the main events that led to the formation of Banco Popolare. The Board of Directors of Banco Popolare Verona e Novara and of Banca Popolare Italiana on December 13th, 2006 resolved to form a new banking group; the merger was authorized by the Bank of Italy on January 26th, 2007. The Shareholders of the two bank parent companies, which convened in a special meeting on March 10th, 2007, approved the merger plan and defined some operational details, among which: x the assignment of 1 share of Banco Popolare with a nominal value of euro 3.60 each for every 1 old share to the shareholders of Banco Popolare di Verona e Novara and the assignment of 0.43 shares of Banco Popolare with a nominal value of euro 3.60 each for every 1 old share with a nominal value of euro 3.00 to the shareholders of Banca Popolare Italiana; x the approval of the articles of association characterized by the adoption of the dual corporate governance system under art. 2409 octies and following of the civil code; x the indication of the main corporate offices of Banco Popolare, more precisely the Supervisory Board and the Management Board; x the hiring of the auditing firm Reconta Ernst & Young S.p.A. as auditor of Banco Popolare, under art. 159 of Legal Decree n. 58/1998, from 2007 to 2015; x the application for admission to listing of the shares of Banco Popolare, as well as of the convertible bonds and “Common share warrants” already issued by Banca Popolare Italiana and whose obligations, as a result of the merger, shall be taken over by the newly formed Banco Popolare; x the go-ahead as part of the merger finalization, within the limits and forms permitted by law, to the purchase of max 20,400,000 BPVN common shares and 37,000,000 BPI common shares. Pursuant to art. 3 of the EC Regulation 2273/2003, this transaction was part of the capital management initiatives associates with the merger. The buy-back ended on June 27th, 2007, also to comply with the technical times required to bring the new Banco Popolare into operation, which was formed on July 1st, 2007. As a whole, the program led to the purchase on regulated markets of 13,507,829 BPVN shares, equal to a total value of 320.1 million euro, and of 32,209,000 BPI shares, equal to a total value of 380.1 millions. The total investment amounted to 700.2 millions. Since all BPVN and BPI shares purchased as part of the above program were held by the two entities taking part in the merger, the shares were cancelled without exchange; x the authorization, granted to the Management Board of Banco Popolare, to purchase max. 660,000 common shares of Banco Popolare, accounting for 0.10% of the share capital, in compliance with the limits set by art. 2357, paragraph 1, of the Civil Code. The thus purchased treasury shares shall then be used by the Management Board for incentive schemes in favor of executives, managers and employees of Banco Popolare and its subsidiaries (mainly non-beneficiaries of the existing stock option plan), through the award of shares at no charge.
On July 1st, 2007, the deed of merger between Banca Popolare Italiana and Banco Popolare di Verona e Novara was registered with the Verona and Lodi Enterprise Registries, and as a result as of said date the merger went into legal, accounting and fiscal effect. The dividend entitlement of Banco Popolare shares given in exchange started regularly on July 1st, 2007. Again on July 1st, yet right before the merger finalization, the transfer came into effect, whereby BPVN and BPI transferred to “Banca Popolare di Verona San Geminiano e San Prospero” and “Banca Popolare di Lodi” part of their banking units mainly consisting of the branch networks located in their original franchise, and in the case of Banca Popolare di Lodi also the equity investments banks among which Banca Popolare di Crema, Banca Popolare di Cremona, Banca Popolare di Mantova and Banca Caripe. The demerger of the above business lines shall strengthen the banks’ presence and ties on their territory of belonging. Later on, on July 5th, 2007, Banco Popolare paid the special dividend amounting to 2.17 euro per share to the shareholders and convertible-bond holders of Banca Popolare Italiana. The total distributed amount was 1,399 million euro.
The Business plan
The new group, originating from the above described merger, enjoys a national footprint with a strong strategic positioning in the regions of Northern Italy, a strengthened position in the regions of Center Italy and an interesting presence in Southern regions. It is also characterized by an important presence in the area of Retail customers and of Small and Medium
20 Report on group operations
Enterprises and by an excellent capability of generating a stable value over time for shareholders, investors and its territories in a sustainable and sound way. The Merger Plan was founded on the consistency existing between Gruppo BPI’s Business Plan, named “Banca delle Piazze”, and Gruppo BPVN’s business plan, with the goal of maintaining: x a strong territorial franchise, with a close-knitted geographical coverage in our original territories; x a clear focus on the needs and requirements of retail and corporate customers, based on a distribution model organized by customer segmentations, manned by segment specialists, and tailored to fit the branches size; x development and growth objectives focused on “commercial banking”; x a competitive cost position, suited to compete in the Italian banking arena; x a strong focus on small shareholders and on the promotion and development of local specificities (“cooperative” bylaws and culture).
On July 1st, 2007, in line with the Integration Plan, the new organizational structure of Banco Popolare was made operational, with the Parent company called Banco Popolare, a listed banking cooperative company, which coordinates the Group by controlling the main Network Banks, Specialized Banks, Operating Companies and service companies. The Group governance is organized along the two-tier system: the Supervisory Board and the Management Board, together with the Shareholders’ Meeting, represent the summit of corporate boards. Based on this system, Banco Popolare intends to pursue the following goals: x temper the need for a stringent management and governance unity with the need for representing all the original components of the banking agglomeration, based on the typical economic democracy principles underlying the cooperative credit model; x preserve the original cooperative matrix, develop mutualistic relations with customers, favor the development of deep territorial roots in the various original franchises; all these elements shall go along with a greater efficiency of distribution processes and with a shared business project characterized by innovation and market orientation.
The Integration Plan
In order to meet the goals defined in the Business Plan, after the Merger Plan was approved, the Integration Plan between the two Groups ex BPVN and ex BPI was launched right from the first months of 2007. The Integration Plan is marked by a high complexity, due to the number and scope of actions to be taken, and to the fixed timetables and goals. The chosen approach is based upon a matrix project organization, characterized by a double responsibility view: the horizontal view, whereby the ownership of the attainment of the results associated with the individual projects is assigned to corporate cross-functions (in particular Organization, IT and Human Resources); the vertical view, whereby the responsibility for the attainment of the projects’ economic goals (cost and revenue synergies) is assigned to the management and business functions. In particular, the management and the monitoring of the Integration Plan have been entrusted to ad hoc officers and boards that especially in the preparatory phase before the formal merger of the original Groups ensured a unitary management of the integration activities and a more rapid achievement of the new Group’s first results. In particular: x The Steering committee is the Plan’s management board and it covered this role also in the phase preceding the formal merger of the two Groups. Among its duties worth mentioning are: laying out the strategic plan to reach the Business Plan objectives, solving strategic issues and defining guidelines to tackle any criticalities reported by the Head of Integration, as well as approving the plan budget together with any associated changes, upon proposal of the Head of Integration. The composition of the Steering committee practically mirrors the Top Management and the Executive board of the new Group; x The Head of Integration is the officer managing the entire Integration project, and he reports directly to the managing board; x The Heads of Operations and Human Resources ensure that the Industrial Plan’s goals are complied with by coordinating the “Corporate Cross-functions” (Organization, IT, Human Resources); x The Special Project Function must prepare project budget proposals and the associated changes, coordinate projects and make sure they are in line with the Industrial Plan, from a qualitative standpoint, and also with regard to the achievement of synergy goals, it must identify and monitor any risk areas, helping the workgroups assigned to the single projects to put together any required corrective actions, as well as support a smooth internal and external communication; x The Project Leader must act along the vertical axis, and he has the overall responsibility over the single project; Project Leaders coordinate implementation Project, guaranteeing their consistency and alignment with the various “Corporate Cross-functions” (Organization, IT, Human Resources).
The master Integration Plan has been broken down into 40 projects that can be subdivided into the following theme areas: Start (Integration start), Retail, Corporate, Res (Reti Esterne Specializzate – Specialized External Networks), Finance, Rationalization of the Head Offices of Banche del Territorio, Migration of Bank Systems, Parent Company Functions.
In brief, the main macro objectives assigned to the various projects are: x the definition of the organizational model of the new structures and the rationalization of any function duplication caused by the merger of the two Groups;
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x the rationalization of some compartments, specifically Finance, Merchant Banking and Information Technology, of corporate structures (through mergers, sale of business segments, etc.), and of the associated organizational structures, so as to open the way to the rationalization of the product range and get around the presence of more companies having the same sphere of action with cost synergy objectives; x the migration of former BPI Banks onto the target information system; x the centralization of some activities within the Group to achieve cost synergies; x the launch of business development activities in the areas that must generate revenue synergies.
Described below are the main results achieved during the Integration Project.
Organizational structures
With regard to the organizational structure, first of all on July 1st the Parent Company Banco Popolare was formed and made operational and on the same date it was listed on the Italian Stock Exchange. Contemporaneously, the two new Banche del Territorio BPV-SGSP S.p.A. and BPL S.p.A. were formed The Project named “Kick-off of the Parent Company and of the New Banks” aimed at forming the new parent company Banco Popolare and at turning the former BPVN and BPI into Banche del Territorio, by transferring their branch networks directly to them. In view of its complexity, the project was organized in various workgroups (legal and corporate, accounting and fiscal, organization, IT, Human resources and back-office). During the weekend between June 30th and July 1st, 2007, the actions required to start the Parent company (which entailed also the adoption of the target information system) as well as the new banks BPV-SGSP S.p.A. and BPL S.p.A. were regularly performed. The implementation of this project allowed the Group to start a common database and to introduce the principle of Group loan limits right from startup. The Group regulations for Governance, Loans, Internal Audit, Organization, Purchasing and Use of Company Signature Rights were also approved and issued, and they were disseminated through the Group’s regulatory system and published on the Intranet portals of the Parent Company and of the individual banks. Moreover, Banco Popolare’s Treasury functions became fully operational, they took over the Group’s activity and fully implemented the Finance target model, whereby the Parent company and Banca Aletti are the only market operators. Contemporaneously, the projects regarding the Parent company functions were launched, with the aim of designing and implementing the organizational structures, the operational processes, the relations model with the Parent company, the Banks and the Group companies. All the Banks’ Head Offices were involved in projects aiming at rationalizing their structures and achieving synergies by centralizing activities into the Parent company, as well as at bringing efficiency indicators in line across the Group. At this stage, the main organizational actions required to meet the goals have been outlined; moreover, with regard to the former BPI Banks that have migrated onto the information system, the new Head office organizational structures have been defined, right-sized and put in place, and the Network model has been adjusted accordingly.
Rationalization of corporate structures
With regard to equity investments and the rationalization of subsidiaries corporate structures, the project focused mainly on the asset management and merchant banking arms – the latter includes also a revision of corporate banking activities -, on real estate (which shall be dealt with in greater detail in section “Other noteworthy events”) and on Group services. Below is a description of how the integration was implemented.
Integration of the Asset management segment
In the merger Business Plan, a special emphasis is given to the rationalization of the asset management arm. From a corporate viewpoint, the integration approach chosen was to vest the business segments of Bipitalia Gestioni and Bipitalia Alternative in Banca Aletti, Aletti Gestielle and Aletti Gestielle Alternative. As a result of this process, Bipitalia Gestioni must waive its authorization to provide investment services and turn into a financial holding company. The business segments under transfer comprise the total assets, liabilities and agreements organized for the discretionary asset management activity, and the total assets, liabilities and agreements organized for the promotion and management of mutual and pension funds. In particular, with regard to discretionary asset management, on June 13th, 2007 the Board of Directors of Banca Aletti approved the transfer by Bipitalia Gestioni of its business line comprising discretionary managed assets and the associated capital increase. Based on the appraisal prepared as at March 31st, 2007, transferred assets totaled Euro 62.8 million, while transferred liabilities totaled Euro 15 million; in exchange for the transfer of net assets amounting to Euro 47.8 million, Bipitalia Gestioni acquired an interest in Banca Aletti for an equivalent amount. With regard to the transfer of the business line to Aletti Gestielle, on June 13th, 2007, the Board of Directors of Aletti Gestielle approved the transfer by Bipitalia Gestioni of the business line comprised of collective managed assets and pension funds, and the associated capital increase. Based on the appraisal covering the above transfer, total assets to be transferred amount to Euro 29.5 million, while total liabilities amount to Euro 10 million. In exchange for the transfer of net assets totaling Euro 19.5 million, Bipitalia Gestioni shall acquire an interest in Aletti Gestielle. In August, the Bank of Italy granted the authorizations required for the implementation of the transfers described above.
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A rationalization and integration project covering the UCITS range managed by Bipitalia Gestioni and by Aletti Gestielle has been launched as a groundwork for the transfer of the mutual fund arm to Aletti Gestielle. The project shall lead to the merger of various mutual funds and the harmonization of all the prospectuses along Aletti Gestielle’s prospectus. On September 12th, the Bank of Italy authorized the harmonization of the funds created by Bipitalia Gestioni with Aletti Gestielle’s funds and the ensuing prospectus amendments, which shall come into effect on the same day of the transfer, namely December 29th, 2007. The new organization of the Group asset management, which has become operational as scheduled in the integration plan, leads to a further service quality improvement thanks to the strong organizational, product and professional synergies, as a guarantee of a management capability in line with the highest market standards.
Integration of the Merchant and corporate banking segment
On September 7th, 2007, the Special shareholders’ meetings of Efibanca and Aletti Merchant unanimously approved the merger by acquisition of Aletti Merchant into Efibanca. The deed of merger, signed on September 26th, fixed the legal effectiveness date of the merger on October 1st; the exchange ratio was fixed at 0.22 Efibanca common shares for each common share of Aletti Merchant. As of the effective date of the merger, also the registered office of Efibanca changed, and was moved from Rome to Lodi. With respect to the business plan of Gruppo Bancario Banco Popolare, this transaction represents the rationalization and valuation stage of all the group structures and competencies devoted to Corporate Finance & Merchant Banking combined in one single entity, that can provide corporate customers with a high value added financial product and service offer. As such, Efibanca will be able to increase its productivity in its specific business sectors thanks to the contribution of the professional skills and competencies of Aletti Merchant, as well as to the well-established relations the latter entertains with the other banks operating in the area and with the corporate customers of Gruppo Banco Popolare.
Integration of the Group service segment
On December 5th the merger between SGS and Bipielle ICT has come into effect, whereby Bipielle ICT has been acquired by SGS S.p.A. The aim of the merger is to centralize the management of the Banking Group’s technological and application platform into one single entity, which can count on 1,548 resources mainly located in the hubs of Guamo, Modena, Novara, Milan, Lodi, Rome and Verona. By joining the single wealth of professional skills and competences together, it is possible to pursue the economies of scale generated by the new size and best integrate the technical and information media that up to now have been developed separately by SGS and Bipielle ICT. The corporate structure rationalization process includes also the partial demerger from BPL S.p.A. and BPV-SGSP S.p.A., respectively, of their London branches, which as of January 1st, 2008 have been merged into the Parent company. This transaction is described in greater detail in the Consolidated Explanatory Notes, Chapter A, section 4 – Events following the balance sheet date.
Migration of Bank systems
The Project to migrate the Banks of the former Gruppo BPI onto the Group’s target system aims at harmonizing the operational procedures of the two Banking groups as rapidly as possible and at launching common strategic and business policies. In compliance with the Business plan, and in order to achieve the strategic targets that provided for the migration of the information system of a “pilot” Bank (namely, Banca Popolare di Crema) and of Banca Popolare di Lodi by the end of 2007, the following Migration plan was predisposed: x Banca Popolare di Crema (identified as Pilot Bank): weekend 8-9 September 2007; x Banca Popolare di Lodi: weekend 3-4 November 2007; x Cassa di Risparmio di Lucca, Pisa e Livorno and Banca Popolare di Mantova: weekend 2-3 February 2008; x Banca Popolare di Cremona and Cassa di Risparmio di Pescara: weekend 1-2 March 2008.
The Migration plan was based on a “Big Bang” approach, whereby all the Head Office and Branch procedures were to be changed contemporaneously in each Bank under migration. All the necessary activities were implemented to adjust the branch platform, convert workstations and enable them to run the new software (in 2007, more than 4,000 workstations were replaced). The migrations were preceded by complete simulation tests (warm up) reproducing all that would happen during the migration week end, so as to anticipate activities as much as possible, detect any possible criticalities and solve them in advance. Moreover, to accelerate the integration process, a specific initiative was launched, aiming at bringing all the Banks of the former Gruppo BPI immediately in line with the group best practices in terms of organization (structures, governance), people (roles, right-sizing) and business practices (monitoring, campaigns). This initiative, which was called the “Create” project, was started at the end of first half 2007, with the aim of making sure that the synergies envisaged in the Business plan be achieved, in close connection with the master Migration plan of former BPI onto the Target platform of former BPVN.
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To support the System migration plan, a manifold Training and kick-off support plan has been set up, involving about 60,000 man days both in terms of training of the users of the ex BPI Banks and in terms of lecturers, tutors and champions belonging to the Banks of the ex BPVN and ex BPI Group. As a result of all these activities, the migration of about 600 ex BPI branches was successfully achieved after only 4 months from the formation of the new Group: on September 10th, 2007, Banca Popolare Crema was fully operational on the target information system, and on November 5th, 2007 also Banca Popolare di Lodi started to run the new system successfully, with no inconvenience for the customers. The migration plan was completed when also Cassa di Risparmio di Lucca Pisa Livorno went live with the new system, one month ahead of the original plan, Banca Popolare di Mantova on February 4th, 2008, Banca Popolare di Cremona and Banca Caripe as of March 3rd, 2008.
Centralization
With regard to the Investment Banking segment, as of June 2007 the trading activities of the former BPI banks have been consolidated into Banca Aletti, acting as single Group trader. The investment and hedging product and service offer has been harmonized, maintaining the existing range in Banca Aletti. As to Group Finance, the centralization of the proprietary securities portfolio into the Parent company was completed in 2007, to the advantage of more streamlined treasury operations and management. All non-performing loan recovery activities have been centralized in BP Società di Gestione del Credito S.p.A, while previously they were carried out by different structures within the Banks of the former Gruppo BPVN; the pricing and business model was defined, operational modalities across the companies have been harmonized, with a special focus on the adoption of efficient organizational and IT solutions, to be achieved also through the reallocation of bad debts across the territorial ambits. As of December 1st, 2007, the Custodian bank function was set up at the Parent company Banco Popolare. The newly formed structure relies on the same approach and follows the same IT procedures of the ex BPVN’s corresponding function and it is in charge of overseeing all the activities that under the current law are entrusted to a custodian bank for the mutual funds promoted and managed by Aletti Gestielle Sgr, with the exception of those funds where the custodian bank function is performed by Credito Bergamasco. The Strategic plan also provides for a gradual centralization into the Parent company of the residual custodian bank assignments that BPL SPA and BPV-SGSP SPA perform on behalf of other SGR, be it “third parties” or belonging to the Group. The centralization process of Back and Middle Office activities was completed; the consolidation of the activities for all the ex BPI Banks ended in March 2008, when the migration of all the ex-BPI Banks completed their migration on the target system. Side by side with the system migration, also the Special Credit activities of the ex BPI Banks that had already migrated have been centralized.
Commercial activities
In order to boost the accomplishment of revenue synergies, also the commercial area was involved in a number of projects. In the Bancassurance sector, two joint-ventures (effective as of January 1st, 2008) were set up with Fondiaria-SAI in the life segment and with Aviva in the non-life protection segment, respectively, and the marketing of the related products was launched. The bancassurance agreements shall be described in greater detail later on in the section devoted to “Other noteworthy events”. In the Consumer Credit sector, the main business development and collaboration guidelines between Ducato S.p.A. and the Banche del Territorio have been defined; the necessary IT measures have been taken to allow the banks of the former Gruppo BPVN to sell the Ducato products and to carry out selling tests on “pilot” Business Areas of Banca Popolare di Verona, Banca Popolare di Novara and Credito Bergamasco. Since January 2008 the selling activity of Ducato products has reached a full-fledged development across the entire Group. With regard to the Specialized External Networks (RES - Reti Esterne Specializzate), which represent an alternative form and a complementary sales channel to the retail bank networks for the distribution of the Group’s Retail loan products, the first actions have been taken to expand the territorial coverage of the agency network to the areas where Banca Popolare di Lodi is active, so as to put the bank into a position to develop cross-selling actions and attain operational efficiency gains. As to the Private Clients of the former BPI Banks, the target model was adopted, whereby they shall be managed by Banca Aletti, which during the year opened 9 new branches specifically devoted to private banking activities; 6 additional branches were opened at the beginning of March 2008, thus completing the migration process of the former BPI Banks.
Other projects and results
To manage and control the rationalization of the activities and the efficiency gains in the Main Head Office structures, an organizational worksite was set up, which cuts across all the integration projects, so as to take consistent organizational actions and rationalize activities along tangible and practical aims. Additional important initiatives were launched in the Human Resource area; in particular preliminary trade union agreements were signed in May, which led to the approval of the framework agreement with Trade Unions, entered on July 7th, 2007. The agreement governs a number of aspects, among which the possibility for eligible employees (no longer than 60 months from retirement) to voluntarily participate in the “Solidarity Fund to support income, employment and the
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professional requalification and re-orientation of employees of credit companies” and the adoption of an early retirement plan for employees who are already qualified to retire. The Solidarity Fund represents the best tool to solve human resource rebalancing and right-sizing issues by mutual consent; the voluntary participation in the extraordinary benefits granted by the “Solidarity Fund”, together with early retirement incentives shall ease the exit of about 1,000 employees from the Group, of which 600 already at the end of 2007.
OTHER NOTEWORTHY EVENTS
Events that were not directly associated with the merger, and which took place in financial year 2007, are illustrated below.
Purchase of Banco Popolare Hungary Zrt
On October 18th, 2006, the Parent company signed a preliminary agreement for the purchase of 100% of the share capital of IC Bank Zrt in Budapest (now Banco Popolare Hungary), a bank focusing on small-medium enterprises and retail customers, with a Head office and 6 branches. The bank also fully owns the company ICB Service (now Banco Popolare Service), which manages the branches and the property of the Hungarian bank. On May 14th, 2007, the purchase of the equity investment was finalized, leading to a total investment of 18.7 million euro.
Purchase of Banco Popolare Ceskà Republika a.s.
On October 18th, 2006, the Parent company signed a preliminary agreement for a call option on 100% of the share capital of IC Banka a.s. in Prague, (now Banco Popolare Ceská Republika), a bank focusing on small-medium sized enterprises and retail customers, with 2 branches. The bank has no equity investments. On May 14th, 2007, the purchase was finalized and the first installment of 24.2 million euro of the fixed price (28.1 millions). The second installment, amounting to 3.8 million euro, shall be paid within 12 months of the closing date.
Insurance partnership with Fondiaria-SAI
On May 31st, 2007, Banco Popolare di Verona e Novara and Banca Popolare Italiana signed an exclusive strategic bancassurance partnership agreement with Fondiaria-Sai (“FonSAI”) for the development of Banco Popolare’s Life and Pension business. The Group held 50% of BPV Vita through Banco Popolare (with a 35% stake) and Credito Bergamasco (with a 15% stake). An additional 50% stake of the company had been acquired on August 31st, 2007 from Società Cattolica di Assicurazione, after having received the required authorizations, through the subsidiary Holding di Partecipazioni Finanziarie Popolare di Verona e Novara, with a total investment of 64.2 millions.
Under this agreement, finalized on September 7th, 2007, FonSAI purchased 50% of BPV Vita’s share capital plus one share from Banco Popolare and its subsidiary Credito Bergamasco. BPV Vita is the special purpose vehicle through which the partnership was made operational. The total purchase price paid by FonSAI was 530 millions, leading to the generation in Q3 of a capital gain of 433 millions, net of fiscal effects and of minority interest. Upon preparing the quarterly report on operations as at September 30th, 2007, said capital gain had been fully carried at income, because at the time the price purchase allocation process (PPA) under IFRS 3 had not been completed yet. Upon preparing the annual report, the process had been completed, therefore the data shown in the quarterly report as at September 30th had to be revised and the capital gain carried at income had to be adjusted by 102.5 millions gross of fiscal effects. This value adjustment represents the goodwill portion paid for the acquisition of Gruppo Banca Popolare Italiana performed as part of the deal under examination. Illustrated below is an overview of the main contract provisions included in the agreements making up the deal. The shareholders’ agreement provisions vest FonSAI with a controlling interest in BPV Vita and foresee mutual put&call options in the event that the partnership is terminated. On the same date the parties signed a distribution agreement for “life-pension” insurance products, with a ten year term and renewable every five years, starting from January 1st, 2008 (without prejudice to existing distribution agreements with Aviva and Aurora). In particular, under the shareholders’ agreement, Fondiaria-Sai may sell its 50% interest plus one share in BP Vita back to Banco Popolare, should the following conditions occur: x a change in control at Banco’s; x breach of the exclusive distribution rights granted to Banco Popolare under the distribution agreement and/or serious breach of the latter by Banco; x failure to renew the distribution agreement by Banco; x failure to renew the distribution agreement by BPV Vita as a result of a decision made under the favorable vote of Fondiaria-SAI; x Banco, by way of its subsidiary Holding di Partecipazioni Finanziarie Popolare di Verona e Novara, no longer holds an interest below 50% less one share in BPV Vita.
In the event that the option is exercised, the price would be determined based on current market methods by an independent expert appointed by the parties.
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The distribution agreement between BPV VITA, which shall acquire Novara Vita, and Banco Popolare’s distribution networks shall have a ten year term and be renewable every 5 years, without prejudice to the residual distribution agreements with Aviva (non-exclusive agreement expiring at the end of 2009) and Aurora (exclusive agreement expiring on May 2009) outstanding with ex-BPI branches. When fully operative, BPV Vita distribution shall count on a total network of about 2,200 branches, with total annual written premiums of about 6 billions. In order to maximize the operating effectiveness and efficiency and the resulting value creation for partners, BPV Vita is to adopt an organizational solution based on an in-house operational structure located at the Verona head offices, while various functions are to be outsourced to partners. In particular, the company shall resort to the asset management services provided by Banca Aletti and to the insurance services offered by FonSAI. For Banco Popolare this agreement represents the first step in its long-term bancassurance restructuring plan, as well as a key element of the actions aimed at strengthening the capital base under the capital management plan. From a business viewpoint, the agreement developed in the frame of a long-standing partnership between BPVN and FonSAI, and it represents an opportunity to strengthen Banco Popolare’s competitive position in the Italian Life Bancassurance market.
Insurance partnership with Aviva
On June 20th, 2007, Banco Popolare di Verona e Novara, Banca Popolare Italiana and Aviva had signed an agreement for the development of a strategic bancassurance partnership for Banco Popolare in the Protection/Non-life business. Under said agreement, after receiving the authorization from the competent authorities, Banco Popolare had to sell to Aviva a 50% shareholding (plus one share) in the share capital of Novara Assicura (now AviPop Assicurazioni), of which the Group had acquired the 100% stake on October 11th, 2007 against a total investment of 15.6 millions. The sale was finalized on December 14th, 2007 for 250 millions. Taking into account the data resulting from the completed price purchase allocation process (PPA) under IFRS 3, the capital gain carried at income amounted to 165.2 millions, gross of fiscal effects. The goodwill portion paid for the acquisition of Gruppo Banca Popolare Italiana performed as part of the deal under examination totaled 77 millions. Illustrated below is an overview of the main contract provisions included in the agreements making up the deal. Banco Popolare and Aviva entered a shareholders’ agreement aiming at regulating the partnership’s business aspects and the corporate governance rules of Novara Assicura. The agreement includes, among others, specific provisions allowing Aviva to fully consolidate the company, as well as put&call options in the event that the partnership is terminated. In particular, under the shareholders’ agreement, Aviva Italia Holding may sell its 50% share (plus one share) in Novara Assicura back to Banco Popolare, should the following conditions occur: x a change in control at Banco’s; x serious breach by Banco of the exclusive distribution rights granted under the distribution agreement; x failure to renew the distribution agreement by Banco; x failure to renew the distribution agreement by AviPop as a result of a decision made under the favorable vote of Aviva Holding; x the coming into effect of a law and/or the issuing of an order, within the first expiry date of the Shareholders’ agreement, making the exclusive restriction foreseen by the distribution agreement void; x the issuing of an order, within the first expiry date of the Shareholders’ agreement, obliging Banco to distribute non-life insurance products to entities other than AviPop; x in the event of underperformance (i.e., in any three year period as of January 1st, 2009, total product sales volume in terms of premiums written – gross of redemptions – 20% below the amount projected for the same three year period by the business plan).
In the event that the option is exercised, the price would be determined based on current market methods by an independent expert appointed by the parties. The General and Special Shareholders’ meeting of Novara Assicura on December 14th, 2007 approved the appointment of a new Board of Directors, a new Board of Statutory Auditors and the change of the company name in AviPop Assicurazioni S.p.A., with registered offices in Milan. A distribution agreement was signed, with a ten year term and renewable every 5 years, effective as of January 1st, 2008. Said agreement shall give Aviva access for the “Protection/Non-Life” business to the distribution network comprising about 2,200 branches, mainly located in Northern Italy (Lombardy, Veneto, Piedmont and Tuscany) and Sicily, where Banco Popolare has a 10% market share. The agreement also includes the Ducato network, one of the leading consumer credit companies in Italy, fully owned by Banco Popolare. In order to maximize the operating effectiveness and efficiency and the resulting value creation for partners, the company shall resort to the financial services provided by Banca Aletti. For Banco Popolare, this agreement represents the capping of its long-term bancassurance restructuring plan, as well as a key element of the actions aimed at strengthening the capital base under the capital management plan. From a business viewpoint, the agreement developed in the frame of a long-standing partnership between BPI and Aviva and it represents a major opportunity to strengthen Banco Popolare’s competitive position in the Italian Protection/Non-Life Bancassurance market.
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Purchase of Auto Trading Leasing
On July 18th, after receiving the relevant authorizations from the competent authorities, Banco Popolare and Holding di Partecipazioni Finanziarie Popolare di Verona e Novara finalized the purchase of 100% of the share capital of Auto Trading Leasing IFN s.a., with stakes of 99.80% and 0.20%, respectively. The new subsidiary is based in Bucharest (Romania) and the transaction entailed an initial investment of 5.9 million euro. On July 27th, Banco Popolare subscribed a capital increase totaling 5.1 millions, which raised the interest held to 99.95%. As a result, the stake held by Holding di Partecipazioni Finanziarie Popolare di Verona e Novara decreased to 0.05%.
Subscription of Italease’s capital increase
On July 20th, the Board of Directors of Banca Italease approved a capital increase of 600 millions, scalable up to 700 millions. The goal of the capital increase is to put the associate in a position to face the contingent situation with adequate capital resources and to carry on its business development projects in line with the new business plan that is now being defined. The shareholders who entered into the stability agreement, among which also Banco Popolare, confirmed their firm commitment to the associate, in particular with regard to the necessary financial support. Said shareholders subscribed the share capital increase pro rata in relation to their respective shareholdings. The share subscribed by the Group amounts to roughly 215 millions.
Merger between the London Stock Exchange and Borsa Italiana
On August 8th, the Special Shareholders’ Meeting of the London Stock Exchange Plc. approved the merger with Borsa Italiana S.p.A. through an OPS (Public Offering with exchange of shares), after the prior approval of the merger by the latter’s shareholders. Based on the merger plan, which became effective on October 1st, 2007, Borsa Italiana shareholders have been offered 4.9 London Stock Exchange Plc. shares for each outstanding common share of Borsa Italiana S.p.A.. Banco Popolare held 1,155,252 common shares, accounting for 7.119% of Borsa Italiana’s share capital. The transaction generated a capital gain of 127.1 millions (120 millions, et of the fiscal effect), which was carried at income in Q4 2007.
Sale of Banca Bipielle Net and of Area Life International Assurance
On September 26th, 2007, further to the authorization issued by Supervisory Authorities on June 25th, 2007, the sale was finalized, of 79.73% of the share capital of Banca Bipielle Net S.p.A. (a previous investee of the former Banca Popolare Italiana) from Banco Popolare to Sopaf S.p.A., De Agostini Invest S.A. and Aviva Italia Holding S.p.A. for 104.7 millions. Banco shall retain a stake of 19.90%. No Put and/or Call options in favor of the contract parties are envisaged. A business agreement between Banco e Banca Bipielle Net for the provision of services and products shall be implemented. Again on September 26th, 2007, the sale was finalized, of 100% of the share capital of Area Life International Assurance Ltd from Banco Popolare to Sopaf S.p.A. and Aviva Italia Holding S.p.A. for 18.3 millions.
Agreement reached on Barilla-Kamps transaction
On November 6th, 2007, Barilla and Banco Popolare finalized an agreement aiming at settling any dispute associated with the acquisition by Gruppo Barilla and former Banca Popolare Italiana of the German company Kamps, and subsequently of the French company Harry’s. The agreements provides for: x the purchase by a subsidiary of Gruppo Barilla of the entire shareholding directly and indirectly held by Gruppo Banco Popolare and by the Dutch Foundation Stichting Bakery Finance in the groups Harry’s (41.22%) and Kamps (41.22%) at an agreed price of 434 million Euro, which shall not give rise to any further negative impacts on Banco Popolare’s income statement other than the write-downs that were already recognized as at June 30th, 2007; x the repayment of loans by Gruppo Barilla to Gruppo Banco Popolare totaling 70 million Euro; x the termination by mutual consent of the shareholders’ agreement between Gruppo Barilla and Gruppo Banco Popolare; x the settlement of all disputes associated with the performance and interpretation of the agreement between Gruppo Barilla and Gruppo Banco Popolare in relation to Kamps and Harry’s; x the extension by Gruppo Banco Popolare of a 506 million euro loan, with a 13-year term, through the opening of a medium/long term revolving credit line to the benefit of GELP S.p.A., a company fully owned by CO.FI.BA S.r.l. (Gruppo Barilla).
By way of the above transaction, Gruppo Barilla purchases and settles all equity and financial assets associated with the Kamps and Harry’s transaction, including the loans granted by the Group as part of the transaction.
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Sale of Cassa di Risparmio di Bolzano to Fondazione CR Bolzano
On December 20th, 2007, Banco Popolare finalized the sale to Fondazione Cassa di Risparmio di Bolzano of a 9.99% stake in Cassa di Risparmio di Bolzano, amounting to 359,640 shares. The shareholding was sold at a price of euro 321.00 per share, amounting to a total value of 115.4 millions, in line with the carrying value. The Foundation made a down payment of 40 million euro and the balance shall be settled by March 2008. This transaction falls within the scope of the restructuring and rationalization of minority interests held by Banco Popolare and follows the sale of a 10% stake finalized between Fondazione Cassa di Risparmio di Bolzano and the former Banca Popolare Italiana in December 2006.
Sale of Linea S.p.A. to Gruppo Mediobanca
On December 24th, 2007, Banco Popolare signed an agreement with Compass (Gruppo Mediobanca) for the sale, subject to the prior authorization of the Bank of Italy and the Anti-trust authorities, of 47.96% of Linea for 194.2 millions, corresponding to a total company valuation of 405 millions. Linea is the consumer credit company held by Banco Popolare and Banca Popolare di Vicenza, each with an identical stake of 47.96%, and for the remaining part by Popolare di Sondrio, Popolare dell'Emilia Romagna, Popolare del Lazio and Popolare di Marostica. Popolare di Vicenza has entered into a similar agreement with Compass on the same date. The sale generated a capital gain before-tax of about 95 millions (about 93 millions after tax), that shall be accounted for on the date of execution of the agreement, expected by the first quarter of FY 2008. The Group is still active in the consumer lending sector through Ducato, a fully owned company. Banco also holds a minority stake in Delta.
Real estate valorization
On December 27th, 2007, the notarial deed was signed, through which Banco Popolare Soc. Coop. transferred its business line, comprised of a body of assets, resources and juridical relations functionally organized to manage its operating real estate property, to its subsidiary Immobiliare BPV s.r.l.. The above transaction represents the first step along the plan to rationalize the entire real estate assets of Gruppo Banco Popolare, that envisages the transfer of similar business lines, belonging to other Group companies, or other extraordinary transactions aiming at valorizing the property, at achieving an efficiency gain with regard to its management and at maximizing the economic return on capital employed. The transferee is fully owned by Banco Popolare Soc. Coop.; on the same date of the transfer, which came into legal, accounting and fiscal effect as of December 30th, 2007, the transferee changed its name into “Immobiliare BP s.r.l.”. Based on the financial situation as at September 30th, 2007, the business assets under transfer include property for 319.8 millions, represented by buildings and land, together with other minor payables and receivables associated with the property management, totaling about 1 million. The business line under transfer also includes employment relations with 7 employees. The economic value of the business line under transfer was fixed at € 720 millions, and an appraisal report was prepared by the auditing firm KPMG S.p.A. in its capacity as expert appointed by the transferor Banco Popolare under art. 2465 of the Civil Code. In view of the business line transfer, the transferee approved a capital increase of 720 millions, of which 348,9 millions as nominal value and 371,1 millions as share premium. Since this transaction was performed between companies “under common control”, it shall not give rise to the recognition of any capital gain by Banco Popolare.
Note, that on December 14th, 2007, the mergers of the companies B.S.R. Gestioni Turistiche Immobiliari S.r.l. and Lisbona Immobiliare S.r.l. into Bipielle Real Estate were finalized. These transactions fall within the master plan to rationalize the Group’s real estate segment.
Changes in corporate board offices
On December 6th, 2007, the Supervisory Board of Banco Popolare acknowledged the resignations of Divo Gronchi from the office of Chairman of the Management Board. Hence, the Board unanimously appointed Vittorio Coda to the position of Chairman of the Management Board. Vittorio Coda is professor emeritus at the Bocconi University in Milan and a preeminent figure of the economic and business world. Prof. Coda, a former Director of ex Banca Popolare Italiana and then of Banco Popolare, is also the Chairman of the Board of Directors of Arca SGR. The office of independent director, made vacant due to the resignation of Mr. Divo Gronchi and the subsequent appointment of Prof. Coda, was filled with the unanimous approval of the Supervisory Board by Emma Marcegaglia, Managing Director of the Marcegaglia Group, and at the time Vice President of Confindustria.
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Subprime loans
With regard to the issues associated with the international subprime mortgage crisis and the resulting financial market turbulences, please note that Gruppo Banco Popolare is not affected by this phenomenon.
BANKING ACTIVITIES
Gruppo Banco Popolare can count on a nation-wide distribution network, through which it can implement business development programs that leverage the synergies obtainable from a large banking group, while promoting and valuing the deep-rooted ties with its territory through the strengthening of its historical brands. The Group is active also in Europe, with some subsidiaries and branches, and in Asia, with representative offices.
The banking activity on the domestic territory is entrusted firstly to the so called Banche del Territorio: Banca Popolare di Verona – SGSP, Banca Popolare di Lodi, Credito Bergamasco, Banca Popolare di Novara, Cassa di Risparmio di Lucca Pisa Livorno, Cassa di Risparmio di Pescara, Banca Popolare di Cremona, Banca Popolare di Crema, Banca Popolare di Mantova. Thanks to the territorial complementarity enjoyed by the Banche del Territorio, the product offer can be developed to suit the specific requirements of the various geographical areas. The retail banks Banche del Territorio each operate with their own brand in specific local areas, reflecting their original franchise, but they are all joined under the Group brand, the new logo of Banco Popolare. The Banche del Territorio also operate through specific “local” brands: Banca Popolare di Verona - SGSP operates also through the brands Banco S. Geminiano e S. Prospero in Emilia Romagna, Banco San Marco in Venice and Banca Popolare del Trentino in Trentino, affording an even more specific identification in terms of geographical franchise and historical tradition. Also Banca Popolare di Lodi is revitalizing some brands that were originally present in some of its geographical franchises. The Group’s specialized bank branches complement the distribution structure: Banca Aletti, in particular, enjoys a good presence of “private banking” branches in the main provincial towns of the Group’s franchise.
On December 31st, 2007, the Group’s distribution network in Italy comprised 2,165 branches located in 20 Regions: in the North there are 1,552 branches, accounting for 71.6% of total branches, in the Center 402 branches, equal to 18.6%, in the South and Islands 213 branches, equal to 9.8%. It is worth highlighting the prevalence in the franchise Regions, such as Veneto, Lombardy, Piedmont, Tuscany, Emilia Romagna, Liguria and Abruzzo and a noteworthy presence in Sicily. To this, we should add also 50 treasury branches, mainly related to the companies of former Gruppo BPI.
Shown below is a breakdown of domestic branches* of the single banks of the Group:
Banca Popolare di Verona – SGSP 557 Banca Popolare di Lodi 498 Banca Popolare di Novara 418 Credito Bergamasco 246 Cassa di Risparmio di Lucca Pisa Livorno 236 Banca Popolare di Cremona 70 Cassa di Risparmio di Pescara 50 Banca Popolare di Crema 43 Banca Aletti - “private banking” branches 32 Banca Popolare di Mantova 8 Efibanca 6 Banca Valori 1 Total 2,165 * Excluding treasury branches
In 2007, the Italian geographical network was influenced by the merger. Among the various actions, worth mentioning is the further expansion of Banca Popolare di Verona – SGSP and of Credito Bergamasco, which opened 10 and 5 branches in their franchises, respectively, while Banca Popolare di Novara opened 5 branches in new areas in the Center and South of Italy. The rationalization of the banks of the former Group BPI continued, with the closedown of 2 branches, 1 belonging to Cassa di Risparmio di Pescara and 1 to Banca Popolare di Cremona, and the opening of 2 new ones, 1 under Banca Popolare di Lodi and 1 under Banca Popolare di Mantova.
Foreign operations are organized through the subsidiaries Banco Popolare Luxembourg, Banca Aletti & C. (Suisse), Banco Popolare Croatia, BP Ceská Republika, Banco Popolare Hungary, Auto Trading Leasing in Romania and two London branches. In Asia, the Group’s presence is assured by Representative Offices in India (Mumbai) and China (Beijing, Shanghai and Hong Kong), which play a key role as communication channels and facilitators for the promotion of the business activities of both the Group and its customers.
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Retail
Organizational and strategic approach
Following the formation of the new Group, the Retail Head Office in charge of the Retail customer segment has been set up within the Parent Company. Its task is to define market strategies for its specific segment and to support and coordinate the retail Banks. The Head Office activity focuses in particular on product innovation, with the goal of building a product and service offer tailored to customer needs.
The Retail Head Office must also supervise commercial initiatives shared across the Group’s Banche del Territorio and coordinate the consumer credit and bancassurance (life and non-life) operating companies, with the goal of maximizing the value creation and the profit contribution of the Retail segment, while valuing and promoting the specificities of the individual entities located in the different territories.
In line with the above goals, the following product and service areas have been developed: x checking accounts; x household credit; x payment instruments; x SMEs credit and services; x Wealth Management products and services; x Direct Banking products and services.
To support and complement innovation initiatives, the Head Office is also active in the following areas: product communication, planning for the local Banche del Territorio, market analysis, customer satisfaction actions and Group Customer Relationship Management (CRM).
Illustrated below are the main initiatives carried out in the various areas of competence of the Retail Head Office.
Customer composition
The product and service range of Gruppo Banco Popolare’s Retail segment is geared to Retail customers (excluding Private clients, with more than 1 million euro assets, who are offered a specific product and service model jointly coordinated by the retail banks and Banca Aletti) and to Small Enterprises, namely business entities with sales up to 2.5 million euro.
Retail customers are broken down in to two main segments: Universals, namely customers with assets below 100 thousand euro, and Affluents, with assets between 100 thousand and 1 million euro.
A special attention is devoted to specific customer sub-segments, for example: registered shareholders, households, young, women, foreigners and senior customers within the Retail customer segment; firms, shopkeepers, artisans, professionals, women businesses within the Small Enterprise segment.
The Retail segment accounts for about 2.3 million customers, including individuals and firms (checking account holders). Shown below is their breakdown among the Group’s Banche del Territorio.
Retail customer breakdown by Retail Bank (Banca del Territorio) (Counterparties in Retail portfolio)
CR Lucca Pisa Livorno 12%
BPV-SGSP 27% BPL* 28%
BPN CREBERG 21% 12%
* BPL and subsidiary Banche del Territorio
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The table below illustrates the traditional retail customer distribution (Universals, Affluents, Small Enterprises), accounting for about 95% of total retail customers.
Customer segment as a % of total Retail customers
Universals 69% Affluents 19% Small Enterprises 12%
The Retail segment involves also the Group operating companies, called “product factories”, which mainly focus on satisfying Retail customer needs, in particular: x BPV Vita, insurance company (as of January 1st, Popolare Vita) formed by the joint venture between Gruppo Banco Popolare and Gruppo Fondiaria SAI and in charge of Life insurance products; x AviPop, insurance company stemming from the joint venture between Gruppo Banco Popolare and Gruppo AVIVA, engaging in protection insurance products; x Bipitalia Ducato, consumer credit company, specializing in personal loans, consumer credit and payment instruments (credit, charge & revolving cards and prepaid cards).
Checking accounts
The number of retail checking accounts opened with the Banche del Territorio by traditional retail customers as at December 31st, 2007 totaled 1.76 millions, and they break down as follows:
Breakdown of checking accounts by Banca del Territorio (Counterparties in traditional retail segment portfolio)
CR Lucca Pisa Livorno 12%
BPV-SGSP 27% BPL* 28%
BPN CREBERG 21% 12%
* BPL and subsidiary Banche del Territorio
Within the Checking Account offer, a special focus was devoted to the launch of the range called Specchio (which means mirror), with four offer profiles specifically designed to satisfy the different transactional needs of the customers. Each profile is associated with different checking account needs, habits and goals. Specchio is aimed at “mirroring” these needs by proposing different solutions: x Conto Tuttofare: aimed at customers who regularly use their checking account for normal transactions, going from depositing their salary to charging home bills; in this solutions all transactions are included in the monthly fee, without limits and additional charges; x Conto Tuttoperuno: geared to customers who rarely use their checking account for their transactions; in this case the account charges depend exclusively on its actual use; x Conto Tuttonline: aimed at customers who prefer using their checking account irrespective of the point of sale; this solution has no monthly fee or additional commissions if transactions are executed on-line; x Conto Tuttotasso: for customers who have no particular transaction needs, and who consider the account a savings and capital accumulation instrument.
The attention that the Group devotes to its Registered shareholders is confirmed by the product “Insieme Soci”, a manifold package which includes a wide rage of banking services, like for example a fixed-fee checking account, or again the package “Insieme Soci Giovani”, for Young registered shareholders under 36 years of age, characterized by even greater benefits.
Continuing with the product offer for Registered Shareholders, the innovative loyalty-building point rewards program called “Valore Insieme Soci” that was launched in October 2006 was operational also in 2007. It is characterized by an exclusive point earning program dedicated to the holders of the checking accounts Insieme Soci and Insieme Soci Giovani, rewarding the ownership and utilization of given banking products and services, and it envisages a loyalty bonus to reward shareholding seniority. This initiative also features a social solidarity twist, as it gives the opportunity to donate the earned points to Fondazione Zanotto, Unicef or Fondazione Exodus.
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At the end of 2007, more than 35,000 registered shareholders were holders of the packages Insieme Soci, and their persistent growth confirms the validity of the offer. Among the initiatives geared to younger customers, the following checking account are worth mentioning: “Conto !GO!”, “Conto Teenagers”, “Conto Giovani“ and the “Young.net” account.
The Group devotes a special attention to foreign citizens who live and work in Italy, and surveys were conducted to better understand the needs of this specific customer segment, so as to set up a dedicated product offer and launch specific human resources training initiatives. Worth mentioning is the program “Formula Friend”, proposed by Banca Popolare di Verona – S.Geminiano e S.Prospero, Banca Popolare di Novara and Credito Bergamasco, which features: x Formula Friend Account: a monthly “all inclusive” fee which includes a health care insurance policy and a free access to employment and business advisory and information services ; x Formula Friend Transfer: one of the most inexpensive “money transfer” services on the market, allowing foreign citizens residing in Italy to send their savings directly to their family in their home country in a reliable, simple and convenient way; x Formula Friend TwinAccount: thanks to the agreement signed with Groupe Société Générale, Romanian customers can open a checking account in their home country at no charge (with BRD Groupe Société Générale) just with a phone call.
Household loans and payment instruments
This product segment includes mortgages to retail customers, personal loans and payment instruments, like credit cards and pre-paid cards, together with the promotion of new salary- or pension-backed loan products, (so called “cessione del quinto”, or wage assignment).
In 2007, this product segment could benefit from the synergies stemming from the formation of Gruppo Banco Popolare, with the extension of Ducato’s product range and service model to all the Banks of the Group. Ducato is a leading consumer credit company, characterized by an exceptional commercial dynamism and a strong focus on product innovation.
Illustrated below are the main initiatives conducted in the various Business areas.
Consumer Credit
Personal Loans granted through the retail networks of Banche del Territorio (in million euro)
Bank loans 422 Linea Loans 113 Ducato Loans 380 Total Banche del Territorio 915
A first initiative covered the extension of Ducato’s offer model to Banca Popolare di Verona – S.Geminiano e S.Prospero, Banca Popolare di Novara and Credito Bergamasco. In addition to a comprehensive product range, this model is characterized by a commercial approach whereby there are dedicated Ducato marketing people providing operational and sales support to the Group’s banking branches on the territory. Thanks to this synergy, the customers’ borrowing needs can be satisfied at best, with benefits also to the profitability of this segment, as evidenced by the significant commercial performance reported in financial years 2006 and 2007 by the Networks of the ex Gruppo Banca Popolare Italiana.
Based on this approach, in November and December 2007 “pilot” initiatives were launched on the territory, that elicited a positive response from customers and a significant increase in commercial productivity in the personal loan segment. As a result, resources and activities have been put in place to fully extend this model to all the Group branches (to be fully operational at the beginning of 2008).
Contemporaneously, the Group further improved the operational procedures aiming at achieving an efficiency gain in sales activities and in the granting “response” time to customers, while pursuing an even greater credit quality control.
The second Consumer credit initiative regards the strengthening of the personal loan offer. In line with our customer profiles, product lines have been differentiated and dedicated product ranges have been matched to fit specific needs, so as to meet the demand raised by customers who find it more difficult to gain access to credit, while ensuring an adequate management of the associated risks.
Also in the personal loan segment, the attention devoted by the Group to its Registered shareholders is evidenced by the distribution of specific products dedicated to the financing of the educational needs of our Shareholders and their family members.
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Credit Cards
31/12/2007 31/12/2006 changes
Total credit cards 589,403 553,392 6.5% of which MasterCard 175,699 160,261 9.6% of which Visa 413,704 393,131 5.2% Total prepaid cards 269,901 238,239 13.3%
In view of the rationalization of the offer in line with the Group’s “best practices” and with a constant commitment towards product innovation, in the last quarter of 2007 the new version of the credit cards Carta Electa and Carta Extra has been added to the Group’s product catalog. These are credit cards issued by Ducato, that becomes the Group’s primary card issuer. As a result, in addition to improving business coordination and ensuring a greater focus on the innovation process, a significant profit “in-sourcing” was achieved, thus contributing to the development of synergies associated with the merger that gave rise to Gruppo Banco Popolare.
In financial year 2007, a non-binding agreement was entered aiming at distributing MasterCard credit products and characterized by initiatives in terms of training and motivational support involving the sales network, marketing and product innovation. These actions contributed to further improve the Group’s performance in the Credit Card segment, to the advantage of profitability.
Mortgages
Home mortgage loans outstanding as at December 31st, 2007 totaled 11,462.3 millions, equal to 161,780 contracts, and they broke down as follows:
Outstanding home mortgage loans (Breakdown by number of contracts)
CR Lucca Pisa Livorno 11%
BPV-SGSP 30% BPL* 23%
CREBERG BPN 14% 22%
* BPL and subsidiary Banche del Territorio
The “mortgage” segment in financial year 2007 benefited from the extension to all the Group Banks of the possibility of granting home mortgages for up to 100% of the pledged property value. From an operational viewpoint, this possibility is backed by an adequate insurance coverage aiming at controlling and limiting the risk taken by the Bank within the parameters fixed in the Group’s lending policies. In the last months of the year, a major effort was devoted to designing solutions aiming at satisfying “portability” issues (subrogation and renegotiation) for outstanding mortgages, in line with regulatory changes, and the ongoing projects should be completed at the beginning of 2008.
As to specific activities performed in this business segment, worth mentioning is the efficiency gain action involving the arrangement, management and monitoring process with the “bank allies channel” (ex. real estate agencies, finance brokers) aiming at strengthening the commercial action on this channel, to improve the commercial positioning of external partners, together with a strong focus on productivity and credit quality. Finally, worth mentioning is the opportunity offered to Registered shareholders to gain access to credit facilities to purchase their home under special favorable terms.
Loans and services to Small Enterprises
In 2007, the Group devoted a special attention to the needs raised by Small Enterprises, in particular by defining a strategy to reposition the product range, with the goal of meeting customer needs through a comprehensive and consistent approach. Hence, the product catalog was revised, and an in-depth analysis was conducted to identify success factors on the domestic and international markets and maintain the best characteristics already featured by the products offered by the various retail
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banks of the Group, i.e. Banche del Territorio. Moreover, by releasing the same products across all the banks of the Group, important synergies were generated in terms of external communication and implementation. The new offer, which shall be available as of January 2008, is highly competitive, thanks to an excellent relation between price and service offered, and it is designed for the typical sub-segments of small enterprises, namely professionals, artisans, storekeepers and businesses.
Loans to small businesses grew substantially, followed by a concomitant decrease in the total NPL rate; in addition, a general increase in long term transactions over short term loans was reported.
In agreement with the dynamics reported in the medium to long term loan development for small enterprises, the product catalog was supplemented with new loans that suit market trends and customer needs, while fully complying with the Group’s lending policies, the pricing strategies (Basel 2 and Rating) and with the economy’s performance in this sector. Among the various innovations introduced in 2007 in the Small Enterprise product catalog, it is worth mentioning the following loans: Exclusive, Tredicesima/Quattordicesima Mensilità, Imposte e Tasse, Finanziamento Sostegno Occupazione, Finanziamento Fotovoltaico, Finanziamento Risparmio Energetico, and finally Insieme Soci Impresa.
Exclusive is devoted to women businesses, and gives them access to credit facilities for their sundry medium term financial needs (investments, acquisitions, internationalization, etc.). It is an unsecured loan, with a maximum 60-month term and a possible preamortization period of maximum 9 months, it is characterized by having no surcharges or charges associated with early settlement, and it has narrow spreads, albeit in line with the customer risk profile.
Finanziamento Tredicesima / Quattordicesima Mensilità, Imposte e Tasse aims at satisfying the special cash requirements of companies that have to pay taxes, or the periodic payment of thirteenth and fourteenth month’s salaries. It features favorable economic terms and a high user-friendliness for the execution of all the payment transactions associated with taxes, duties, bank transfers for wages, especially when executed electronically.
Finanziamento Sostegno Occupazione, which is distributed in specific areas, aims at supporting local businesses that intend hiring new employees under a permanent or temporary contract (in this case for at least 18 months), and it helps companies in the early stages of the working relation, when usually the productivity of the newly hired employee has not reached optimal levels yet.
In the course of the year, two new loans have been introduced aiming at favoring the spreading of alternative energy sources and energy saving: Finanziamento Fotovoltaico and Finanziamento Risparmio Energetico. With the same goal, in particular addressing the implementation of energy generated by photovoltaic plants, the Ministry for Productive Activities introduced “Conto Energia” for the separate remuneration of power generated by solar photovoltaic panels. As a result, a loan structure has been set up in the Group, with distinctive characteristics with respect to competitive offerings, aiming at strongly supporting customers – retail, businesses and condos – who wish to install a photovoltaic plant and have already received the approval by the Power Services Operator, and are therefore qualified to receive the expected incentives. The loan, which fully covers the plant value, provides for a specifically designed repayment schedule, aiming at reducing the installment amount for the customer, by adjusting the loan term to the incentives due by the Power Services Operator; it also features particularly competitive economic terms. The Group also set up the mortgage Risparmio Energia, for retail customers, condos and companies, to help them carry out energy requalification operations on existing or new buildings - as well as energy saving actions in general – and benefit from the subsidies introduced by the 2007 Budget Law. This solution allows the beneficiaries to take advantage of the lower tax burden (thanks to deductions) to repay the loan interests and the mortgaged capital in full or partially.
In addition to the listed initiatives, a special focus was devoted to small enterprises that are registered shareholders of the Group. They were dedicated a checking account offer that is by all means more favorable compared to normal customers, and it reflects the offer made to retail registered shareholders: Insieme Soci Impresa. The offer, which is reserved to companies recorded in the Shareholders’ Register (excluding S.p.A., Public Agencies and Companies belonging to the Group) and subordinated to the ownership of at least 150 shares, comes in two versions, with different monthly fees, number of included transactions and type of services included at no charge.
Note, that in second half 2007, important innovative projects were implemented that shall be launched on the market in first half 2008, among which the project “Banca Energia”, featuring the possibility of selling contracts to supply electric power and natural gas to residential customers through the Group Branches, and the project “Credito Piccole Imprese”, aiming at optimizing and streamlining the lending process for this customer segment.
Wealth Management Products and Services
This segment covers the products and services of Gruppo Banco Popolare dealing with: x Bonds; x Asset management (mutual funds, SICAV, Managed Accounts); x Life insurance; x Protection of Group customers (through Life and Non-life insurance coverage).
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Financial year 2007 was marked by an important project aimed at managing the implications associated with the coming into effect of the Markets in Financial Instruments Directive, MiFid.
Bonds
In 2007, bonds were issued to satisfy the different customer requirements and the growing need for security and protection. The Group’s commercial policy for retail customers responded to the requests of investors, who are on average still characterized by a low risk propensity and prefer simple products. The performance of financial markets pushed investors towards investments that can be easily liquidated, like plain vanilla bonds (fixed rate, floating rate and zero coupon). Bonds with structures linked to interest rates, like for example step-up bonds or long-term rate indexed bonds and structures linked to indexes or baskets of stock indexes, either issued by the Group or by Third Parties, met the favor of investors.
Asset Management
As described in greater detail in the introductory notes of the Report devoted to the merger, in the course of 2007 an important rationalization and streamlining effort was made on Asset Management products, favored by the integration of the Group Asset Management Companies (Aletti Gestielle SGR and Bipitalia Gestioni SGR) and by the need to bring the new product range in line with the new Markets in Financial Instruments Directive, MiFid.
In particular, the entire range of mutual funds was revised, and the most innovative solutions present in the offer of the two SGRs were picked (39 funds for Aletti Gestielle SGR and 34 for Bipitalia Gestioni SGR, adding up to 73 funds). The new product range features 41 funds, of which 2 have been recently launched on the market (Gestielle MT Cedola and Gestielle Cash Cedola).
The Asset Management segment underwent a complex process to redefine and renew the product range, also in view of the coming into effect of the Market in Financial Instruments Directive – MiFid. Actions were aimed at setting up a complete and neat series of “MiFid compliant” Asset Management products, that could suit all the types of customers of Gruppo Banco Popolare and adequately meet their investment needs. More precisely, the choice to use a single “Multi-line” contract gives branch employees a greater simplicity in terms of offer and of sales process. The new range, shared by all the Banks of the Group, shall be available as of March 2008.
Life Bancassurance
Among the initiatives aiming at generating synergies and at strengthening the commercial actions of Gruppo Banco Popolare, in 2007 a process was launched to reorganize and rearrange the Life bancassurance agreements of the new Group, that led to the multi-year partnership with Gruppo Fondiaria Sai, described above, and to the Popolare Vita joint venture, effective as of January 1st, 2008.
The primary objective of Popolare Vita is to develop innovative solutions for its product range, while harmonizing the Group’s Life insurance product catalog. In particular, the product solutions developed by the joint venture, available as of January 2008, include: x a new Line I product under discretionary management, featuring one of the highest minimum guaranteed return; x a new Line V Product for corporate customers, for liquidity investments; x a new multi-line Unit Linked product, with different “MiFid compliant” risk profiles.
A new product is in the pipeline, to be launched in 2008, designed for the pension segment (multi-line FIP).
With regard to Index Linked products, in the second half of 2007 a manifold product offer with different structures and underlying financial assets was available.
Protection Bancassurance
Similarly to what explained for the Life Bancassurance sector, with regard to the Group’s “protection” line (Non-life and Life guarantees), a partnership agreement was signed with Gruppo Aviva, aiming at the sale of new products in second half 2007, called Creditor Protection Insurance (hereinafter CPI) on newly granted mortgages and loans. For our customers these products represent an important tool to safeguard their ability to repay loans outstanding with the Group, and the offered insurance guarantees make it possible to protect individuals against unexpected circumstances that may occur, affecting a person physically, or his or her job, and therefore also his or her ability to pay the residual debt and/or financial installments.
Again in the second half 2007 the Group planned to complete the CPI product range, to be launched on the market as of the first months of 2008, through the introduction of insurance solutions targeting specific customer segments, in particular: x single or recurring premium CPI, protecting customers who hold already granted mortgages; x specific CPI for the Small Enterprise segment, to protect customers with mortgages or unsecured loans.
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Within the “Protection” range, with regard to “off-the-shelf” and/or “shrink-wrapped” non-life insurance products, for example integrated in other banking products such as checking accounts, the Group pursued a double objective: first, achieve a complete rationalization of the offer across the various Banche del Territorio, by simplifying and harmonizing the product range; then, complement and broaden the product range while fully leveraging the commercial skills of the Group structures and the technical and insurance expertise of our partner Aviva. In particular, the main development lines being planned are: x insurance coverage aiming at protecting customers’ family assets from risks associated with compensation of damages caused by third parties; x insurance coverage for account holders’ accident; x insurance coverage for risks associated with property (ex. building damaged or destroyed by fire).
MiFid
Banco Popolare promptly complied with the requirements raised by MiFid, which internally translated into organizational, procedural, legal and personnel training aspects; externally it involved customer relations and external communication.
Efforts were aimed at setting up an advisory service and an offer in line with MiFid’s principles. In particular, the Group classified customers into three macro-categories, namely “professional customers”, “qualified counterparties” and “retail customers”, depending on their specific investment knowledge, competence and experience. In order to better appreciate the needs and command of our customers with regard to these issues, so as to be able to provide a targeted and effective advice, a specific questionnaire was prepared for “investor customers”, surveying three key factors: x investment goals; x financial situation; x financial experience/knowledge.
The questionnaire made it possible to assess the adequacy and appropriateness of the transactions required by single customers. Then, numerous information actions were taken with customers, as well as training actions with the Group’s human resources in charge of business relations.
Contracts and explanatory notes were completely revised and simplified, to make it easier for customers to assess the characteristics and the risks of the offered investment products/services. In particular, an “advisory agreement” has been prepared at Group level, that the “investor customer” signs with the Bank before purchasing financial products, with the aim of clarifying the terms and conditions and the modalities through which investment services are provided.
Direct Banking Products and Services
This business covers the offer of “multi-channel” products and services devoted to the Group’s different customer segments: Retail, Small Enterprises, Corporate, Large Corporate.
The table below shows the main size indicators of the Direct Banking business.
2007
Contact center (n. customers) 182,607 Web (n. customers) 185,616 On line Trading (n. customers) 33,216 Mobile (n. customers) 122,371 Remote banking (n. customers) 177,987 Pos (n. Terminals) 52,321 Atm (n. Terminals) 2,456
In the second half of 2007, this segment was involved in complex operational activities associated with the integration and migration of the banks belonging to the former scope of Banca Popolare Italiana onto technological platforms and target services of Gruppo Banco Popolare. The operational continuity on electronic channels for the customers of the former BPI banks was ensured despite this background activity, allowing them to perform their transactions on “direct channels”, and to use their existing products and services (for ex. POS, Remote Banking, Voice) and the different Direct Banking platforms (for ex. Home Banking, Online trading, Mobile).
A special attention was devoted to the Direct Banking structure of banks involved in “migration” processes, in order to guarantee operational continuity and adequate service levels to customers, while setting up a support action for migrating branches and for their customers.
The second half of 2007 was also marked by the strengthening of service level monitoring activities and tools, by the supervision and marketing support of the Direct Banking offer (also through the creation of new specialized centers on the territory), and by the evolution of the product range.
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With regard to the offered products and service, summarized below are the main actions implemented in the period under examination.
Internet Banking
The activities performed in this business segment aimed at constantly improving the services offered to customers, in line with the evolution of their “multi-channel” operational needs. The quality of the actions is evidenced by the constant increase in the number of Internet Banking service users and subscribers, that went up by about 25%.
Specifically, actions were taken to improve the “graphic” layout, so as to simplify web navigation through the various services, as well as customer communications and transactions, and to conform the “Banking” and “On Line Trading” sections; to further strengthen the security levels for users and to offer a set of new functionalities to all the customers of the Group, for example: tax return payment, bill payment, information and transaction services on foreign markets, payment of the state television fee (RAI).
Remote Banking
This service reported a marked increase in the number of subscribers, which grew by about 40% with respect to the previous year. In particular the “Vantaggio” service has been identified as the benchmark solution and its offer was extended to all the Banks of Gruppo Banco Popolare. Worth mentioning are the constant functionality add-ons, such as: x new Cash Management services; x adoption of the CBI standard (Interbank Corporate Banking – where the Group banks have been among the pilot banks to adopt the new electronic flow exchange procedures); x dematerialization of F24 (tax return) settlement receipt; x new “one to one” electronic communication methodology with customers.
POS
In the course of 2007, the number of subscribers of the POS service increased, also thanks to the adoption of innovative customer solutions (for ex. specific initiatives for large Groups).
In order to strengthen service levels, the processes and procedures used by the commercial Networks were further enhanced and the replacement of obsolete terminals continued, shifting to new microchip solutions that guarantee high security levels.
At the end of the year, the agreement with the POS acquirer Key Client became operational; the consolidation of this partnership shall produce marked economic improvements and shall permit the adoption of sophisticated acquiring services for special customer categories who require “tailored” services.
ATM
The installation of Fast Point ATMs (ATM Punto Veloce) continued, namely machines installed in branches that in addition to traditional withdrawals, offer also the possibility of performing deposits, with immediate crediting of the customer’s checking account.
Contact Center
With an increase of the number of subscribers of about 34%, also this service segment was marked by a significant business growth; both the phone and e-mail channels reported high utilization levels. In particular, customers showed a growing propensity towards the use of e-mails to manage information and transaction requests.
Among the main initiatives, worth mentioning are: x launch of the Phone Banking and web customer services for the customers of Banca Aletti; x launch of a new Customer Care service linked to the offer of Ducato credit cards, targeting both the Group’s customers and branches; x support to the TwinAccount offer for foreign customers; x support to customers and Group branches for the adoption of the new directive, MiFid; x support for the adoption and use of the new On Line Trading platform.
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Summarized below are the main operational indicators of the Contact Center segment.
Inbound Activities
Inbound calls 1,544,664 Operator calls 487,010 % Operator calls 31.53 Average call time (seconds) 195 % Answers 90.60 Average answer time (seconds) 35
E-mail management
Number of e-mails received 15,086 Number of e-mails sent 15,057
Market surveys and customer care initiatives
One of the Group’s primary objectives in its business activity is to acquire a good knowledge of the characteristics of its customers and the markets it operates in. The market surveys that have been conducted were useful to gain an insight as to the main ongoing trends in banking services, to analyze the dynamics among competitors and identify best practices, especially on foreign markets.
The results from the market surveys have been investigated further through specific customer analyses across the Group, whereby customer needs were thoroughly examined, the favorable reception of new products could be verified to the advantage of the product range innovation process, and customer satisfaction levels were assessed with respect to the products and services offered by Gruppo Banco Popolare.
As part of the Customer Relationship Management (CRM), customer financial behavior analysis systems were implemented (for ex. Next Product, Defection Indicator, …), aiming at lending a practical support to the branch network personnel to manage their customer relationships. These tools made it possible to better gear our offer to our customers, by identifying the most suited solutions to be offered to each customer to better meet his or her specific needs; as well as to anticipate sub-optimal situations in terms of customer satisfaction, and to proactively take action to retain and improve the Bank-customer relationship.
Finally, among customer care initiatives, a reporting system has been implemented aiming at managing customer remarks and reports in order to monitor the impact of the various business initiatives and assess the associated customer satisfaction level.
Corporate
Corporate Head Office
Mission and organizational model
Under the organizational project of Banco Popolare, the Corporate Head Office is in charge of overseeing the entire product and service range for the corporate segment (which comprises non-financial companies with sales in excess of € 2.5 mln) in Italy and abroad, with the goal of maximizing value creation and the profit contribution of the Corporate business at Group level. The Corporate Head Office reports directly to the Group Managing Director, and it is at the head of Corporate Services, Loans and Lending Policies, International Network and the subsidiary Efibanca, a company specializing in Corporate and Investment banking.
The main goals of the Corporate Head Office are: x define Corporate market strategies, coordinate and support the Banche del Territorio; x guarantee the availability of an innovative offer, with products and services in line with Corporate market needs; x define Corporate price policies, in line with the development and profitability targets projected by the Group; x guarantee the development of Group lending policies, seeking the best total loan portfolio composition; x direct and coordinate foreign business units (Branches, Representative offices and Foreign banks) within the fixed budget and strategic plans; x coordinate Efibanca and the other operating companies (product factories) engaging in corporate finance.
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Corporate Service
Organizational model
The Corporate Service of the Corporate Head Office has been assigned two main objectives: ensure the compliance with the segment’s business guidelines, in coordination with the Banche del Territorio, and increase the commercial effectiveness and the value proposition for customers. This goal is pursued by: x innovating/maintaining the product and service portfolio and by keeping it constantly up to date with regulations, with regard to both the traditional commercial banking segment, as well as high value added areas (Foreign Operations, Risk Hedging and Corporate Finance); x disseminating across the whole Group the skills, tools and best practice behaviors identifiable both internally and externally on the market; x promoting the Group’s offer model among the main interest groups, also by organizing events and initiatives on the territory.
Corporate Service is made up of the following functions: Planning and Reporting, Product and Service Marketing, Foreign Operations, Risk Hedging, Corporate Finance, Corporate Public Entities and the Corporate Lab Office. They all support and coordinate the corresponding functions located in the organizational structure of the Banche del Territorio. The business service model chosen by the Group, which is gradually going to be adopted by all the Banks, is based upon a dedicated commercial network, represented by the Corporate Centers (Centri Imprese) that from an organizational point of view are linked to the Retail branches, but from an operational viewpoint make autonomous decisions as to the commercial policy to be adopted. This arrangement values and promotes the expertise and skills of Corporate Managers, and allows them to meet the needs of a sophisticated customer segment with professional and tailored solutions. As at December 31st, 2007, 68 Corporate Centers were operational, with 358 Corporate Managers with corporate customer portfolios.
At Corporate Head Office level, all retail banks are equipped with specialized organizational units that manage high value added Corporate activities, namely Foreign Operations, Risk Hedging and Corporate Finance, in addition to a Corporate Public Entities function that deals with Local Public Entities, Health Care Organizations and public utilities. Dedicated resources are made up of qualified product and service specialists who assist managers by visiting customers together, by managing complex transactions, and training branch personnel.
Strategic plan
Gruppo Banco Popolare is comprised of banks that enjoy very deep ties with their franchises, whose vocation is to support the growth of local economies, and whose main competitive edge lies in the solidity and long duration of their relations with household and corporate customers. Against this backdrop, the strategic mission of the Corporate segment is to maintain and strengthen its positioning as banking partner of choice for the companies operating in its territories. In order to reach this goal, an innovative and professional range of more highly qualified and specialized banking services was added to traditional banking transactions.
The Group has long been investing in structures, professional skills and training activities, so as to be able to offer products and services – especially to small and medium-sized companies - covering the following business areas: x foreign operations: broadening and enhancement of traditional import-export payment and collection systems, structuring of medium/long term Export Credit transactions with country risk taken over by the Bank with or without Sace coverage, operational assistance in internationalization processes through Banco’s Foreign network and agreements with local partners; x corporate risk hedging: in compliance with MiFid regulations, broadening and enhancement of advisory services to manage interest rate, exchange rate and commodity risks; x cash management: extension of domestic and international cash pooling functions and launching of initiatives to implement financial value chain processes; x corporate finance: offer of products and services for special corporate actions, such as structured finance (pool, acquisition and project financing), generational transitions and opportunities of equity investments by third- parties.
In summary, the Group’s strategic goal is to maintain and strengthen its function as traditional and reliable financial supporter for companies operating on its territories, while at the same time growing as professional partner for local companies across all their innovative issues and needs.
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Corporate customer composition
As at December 31st, 2007 the Group’s Corporate customers were 60 thousand, of which one third belonged to BPV.
Breakdown of Corporate customers by Bank (Counterparties in Large and Mid-size Corporate portfolios – excluding Public Entities)
CR Lucca Pisa Livorno 10%
BPV-SGSP BPL* 34% 22%
CREBERG BPN 17% 17%
* BPL and subsidiary Banche del Territorio
The breakdown of customers by sales classes reveals a significant concentration on lower classes.
Corporate customer breakdown by sales classes (in millions)
21% 0-2.5 mln 36% 2.5-5 mln 5-25 mln 25-50 mln 50-100 mln
6% 100-150 mln 4% 30% 150-250 mln 1% >250 mln 1% 1%
The customer breakdown by business sectors shows a prevalence of Services (50% of counterparties).
Corporate Customer breakdown by Business sector
3% 2% Trade service 2% 3% 2% 2% Other service 2% 5% 8% Building and construction 2% 5% 2% Metal products 8% 6% 2% Industial and agricultural machinery 2% Textile and Apparel 2% Food 22% 22% 10% Mineral-based products 28% Eletric materials and supplies 10% Rubber and plastics 6% Paper 5% Other industrial products 5% Agriculture 3% 28% Other 3%
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Average loans to customers at the end of December 2007 stood at 36.4 billions.
Breakdown of Corporate Customer Loans by Banca del Territorio (average annual balance)
CR Lucca Pisa Livorno 10%
BPL* BPV-SGSP 17% 37%
CREBERG 19% BPN 17%
Direct Corporate customer funds at the end of 2007 came in at 7.8 billions.
Direct Customer Fund Breakdown by Banca del Territorio (average annual balance)
CR Lucca Pisa Livorno 5% BPV-SGSP BPL* 27% 22%
CREBERG BPN 25% 21%
Medium to long term loans totaled 11.1 billions, accounting for 31% of total loans.
M/L term loan breakdown by Banca del Territorio (average annual balance)
CR Lucca Pisa Livorno 11%
BPL* BPV-SGSP 16% 43%
CREBERG 13%
BPN 17%
* BPL and subsidiary Banche del Territorio
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Short term loans amounted to 25.3 billions.
Short term loan breakdown by Banca del Territorio (average annual balance)
CR Lucca Pisa Livorno 9%
BPL* BPV-SGSP 17% 36%
CREBERG 21% BPN 17%
* BPL and subsidiary Banche del Territorio
In Corporate Service, the Planning and Reporting Function is in charge of preparing business reports and of monitoring the performance of the Corporate segment, while the Service and Product Marketing Function is in charge of innovating and maintaining the Group’s product portfolio. Together, they jointly see to two important activities supporting the network’s business proposition, that is, the organization of commercial initiatives and the updating and development of sales support applications (G.I.O.C.O.) Illustrated below are the main activities performed in the second half of 2007: x preparation of a quarterly Corporate Segment commercial analysis; x identification of 2008 commercial initiatives and sharing with the banks of the Group, and drawing of target customer lists; x harmonization process involving the product catalogs and the economic terms of the two merging Groups; x availability, extended to all the banks of the group that have already migrated onto the target system, of products that were previously accessible only to one of the two groups; x analysis of the main and most common corporate needs (for example: internationalization, innovation, brand development) as a groundwork for the preparation and launch at the beginning of 2008 of dedicated loan products; x market and functional analyses to develop funding products for Corporate customers to be released in the first quarter of 2008.
Again in Corporate Service, the Risk Hedging Function is in charge of corporate hedging derivative products, and it manages and updates the product catalog, keeping the commercial processes and methodologies abreast with market changes and with regulatory or legal developments. To this regard, as a result of the organizational changes caused by the merger and even more so by the introduction of MiFid as of November 2nd, 2007 governing the provision of investment services to customers, the commercial model and the selling modalities followed by the OTC derivative product network have undergone deep changes. In particular, a new Group commercial and operational model has been designed and implemented, whereby bank customers are supervised by managers, who in turn are assisted by a Customer Desk at each single bank, which provides commercial support and operational prices to the network, while the operating company Banca Aletti is in charge of market risk management. Through a dedicated Large Corporate Desk, Banca Aletti is to manage a restricted number of customers who are particularly active in risk management. In compliance with MiFid, a Group selling policy has been defined, the product catalog has been rationalized and renewed and a common single plafond has been fixed for all the banks.
Among the activities focusing on the product offer, the Foreign Operations function introduced a new product for the whole Group, allowing the bank to advance payment commitments to customers against documented letters of credit, the new mortgage product Mutuo JET backed by Sace was expanded to the BPL network, and the technical modalities for a correct silent confirmation of export letters of credit in favor of customers were defined. Among network training actions, numerous update technical meetings were held, together with meetings to share commercial policies and actions pertaining to this segment. An operating handbook was prepared, to support managers in the area of International Guarantees.
The main activities in Corporate Finance ranged from supporting and assisting banks in the negotiation and closing of corporate finance deals, to the launch of a process to define common best practices covering the drawing up of offers and mandates with customers, the management of contract forms, and agency and post-sale activities, and finally the promotion of the new Alternative Capital Market (Mercato Alternativo del Capitale - MAC). To this regard, specific product managers have been identified in each bank, training meetings were held, explanatory material was prepared, and numerous customer calls were made to promote the bank as Market Sponsor.
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By creating the Corporate Public Entities function, the Group could constantly track and service the public sector, from Local Authorities, Health care organizations to public utilities. In many cases, our local retail banks entertain close relationships with these entities, acting as their treasury facility or as financing bank. Now they intend proposing themselves as long-term suppliers of high value added products and services. In the second half, activities mainly focused on setting operations in motion in banks, by helping in the creation of the dedicated structures at Corporate Head Office level, supervising the segmentation and portfolio classification of target customers and seeing to the technical and commercial training of the identified specialized resources. Numerous joint visits were made to customer public entities in various regions, which gave rise to interesting prospective business opportunities.
Corporate Lab
The mission of the structure called Corporate Lab (Laboratorio delle Imprese) is to develop contacts and relations with primary local entrepreneurs and with trade associations to favor an exchange of opinions on the main issues influencing the key economic sectors of the Group’s main franchises. The main activities are: x analysis of the production system in the Group’s franchises to identify strategic issues; x analysis of innovative solutions to issues affecting company competitiveness, corporate governance and their financial structure; x creation of mixed research groups to assess and develop joint innovation projects; x organization of meetings and round tables with local entrepreneurs.
By meeting together it is possible to identify actions and proposals to act on the weak points of the analyzed sectors. In order to turn the solutions shared in the workshops into tangible results, further checks and in-depth analyses are developed, and in the process a deeper and deeper relationship develops between the bank and the enterprise. During the year, workshops and roundtables have been organized for the following industries: vine growing and wine making, Parmigiano Reggiano cheese, Grana Padano cheese, fruit and vegetables, and tanning. Specific projects have been put forward for the Veneto marble, tanning and graphics sectors, for the Verona cooperative wineries, fruit and vegetables cooperatives, and for small truck drivers. Finally, an important seminar on innovation and internationalization has been organized in Lodi, catering to small and medium entrepreneurs customers of the banks of the Group. Finance
Finance Department
The Private and Finance activities are mainly performed by the Parent company with regard to the structural risk management, while the subsidiary Banca Aletti engages in private and investment banking, Efibanca in merchant banking, Aletti Gestielle manages mutual funds, Aletti Gestielle Alternative manages funds of hedge funds and Aletti Fiduciaria manages fiduciary mandates.
The Parent company coordinates and supervises the management policies of its asset and liability structural items, as well as those of the other companies of the Group, with the aim of optimizing disposable capital, identifying the most suited funding transactions and strategies for the Group on domestic and international markets, and carefully monitoring liquidity requirements. Following the merger between BPVN and BPI, also this business segment underwent an internal reorganization process. In particular: x the investment securities portfolios of the Banche del Territorio were centralized in the Parent company, and the organizational model adopted by the former BPI Group was extended to Gruppo Banco Popolare; x as already mentioned, the traditional fund management business of the subsidiary Aletti Gestielle SGR was strengthened through the acquisition of the business segment made up of the collective management assets and supplementary pension assets of Bipitalia Gestioni SGR, while the funds of hedge funds management business of the subsidiary Aletti Gestielle Alternative was made stronger by the acquisition of the business segment of Bipitalia Alternative SGR; all individual asset management assets were transferred from Bipitalia Gestioni SGR to Banca Aletti.
Illustrated below are the main business segments making up the Finance Department.
Private banking – commercial network
With regard to private banking activities, the constant positive trend reported by total income coupled with the strong focus on increasing assets and broadening our customer base confirm that also in 2007 the subsidiary Banca Aletti continued to consolidate its business. In the second half of the year the integration processes with the former BPI Group began. Net customer funds (totaling about 1.36 billions in the private segment alone) proved particularly noteworthy and well above the 2007 business plan targets. At year end, the subsidiary Banca Aletti reported total assets under management (administered and managed) of about 34 billions, of which 12.2 billions pertaining to private customers and the remaining 21.8 billions to institutional customers.
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Table: administered assets
Banca Aletti - Asset Under Management (administered and managed) (in million euro)
Private Customers 12,200 Institutional Customers (including proprietary portfolio) 21,800 Total 34,000
The products sold by the Group retail banks are managed centrally by the subsidiary Banca Aletti. All the activities previously performed by Bipitalia Gestioni SGR have been turned over to Banca Aletti through a progressive integration of the operating structures and of managed assets, which was completed in September 2007.
The business plan associated with the merger between the BPVN Group and the former BPI Group provided for all the individual asset management activities to be transferred from Bipitalia Gestioni SGR to Banca Aletti SpA. As a result of the transfer of the business segment of Bipitalia Gestioni SGR, total Individually Managed Assets as at December 31st, 2007 came in at about 23,5 billions. Similarly to financial year 2006, returns on individually managed assets (invested in securities or in mutual funds - GPM and GPF), were in line with benchmark indexes, and in absolute terms they came in at more contained levels as compared to previous years. Customers definitely favored products characterized by more innovative management approaches. Positive inflows were reported on capital protection products, as well as on investment lines characterized by a particularly active management approach. The evolution of the product range was influenced by the regulatory changes introduced by the adoption of MiFid. In order to comply with said directive, in 2007 a limited number of MiFid-compliant asset management lines were created, while a new product catalog was being prepared. The catalog is going to be submitted to all customers and is going to replace outstanding contracts by June 30th, 2008.
Investment banking
In the course of 2007 the demand for equity-linked investment products reported a strong increase, driven by the good performance of equity markets in the previous years and in the first half of 2007, as well by the new flows originated by the integration of the banks belonging to former Gruppo BPI.
The position of the subsidiary Banca Aletti as market maker of volatility products and in general of structured products was further consolidated. Compared with the previous year, volumes on the IDEM market increased, and with regard to positions on the SEDEX market, in 2007 the subsidiary Banca Aletti received the Italian Certificate Awards as issuer of the best leverage certificate of the year and as the number two issuer of leverage certificates. With regard to the Italian market of Certificates, Banca Aletti confirmed its role as one of the leading players, with an annual average market share of 19% (+3% over 2006), 119 quoted certificates and 548 million euro traded.
Market Making on single stock futures reported a further volume increase, allowing the subsidiary Banca Aletti to be number one in terms of market share, with a 23.18% share. As to the proprietary portfolio, worth noting is the start of basket trading in April, while in Securities Lending bond lending was added on to stock, with an average outstanding of 1.85 million euro.
Also the demand for retail products linked to exchange rates reported a positive trend. Interest rate derivatives in 2007 were driven by the increase in interest rate risk hedging by the Group’s corporate customers, urged by the need to hedge their exposure to rising rates. The same necessity led to the increase in structured products to hedge interest rate risks (Euribor covered warrants) for retail investors.
After a very promising year start, in the second half equity markets reported a strong slowdown, caused by a loss of confidence for stock listings by investors, triggered also by the subprime mortgage crisis. Although in absolute terms total volumes traded reported an increase of about 25%, and despite the flows originated by the integration with the former BPI group, the subsidiary Banca Aletti suffered a slight drop of its market share, from 1.59% in 2006 to 1.45% in 2007 (source Assosim). The squeeze was more marked on foreign equity markets, where volumes went to 3.8 billion euro in 2007 from 4.6 billion euro in 2006. Listed derivatives reported a positive performance, with a 14% increase in 2007 in traded lots over 2006.
In 2007, the US subprime mortgage crisis strongly affected bond markets. The corporate bond market (especially with banking or financial issuers) suffered a general widening of spreads, reflecting a substantial decrease in quotations. This situation, coupled with an ebbing of liquidity, caused a substantial reduction in intermediated volumes. The government bond market in the first half suffered a major downturn driven by the increases in refinancing rates made by the ECB; in the second half of the year the reallocation of risk towards more conservative investments rekindled the demand for these instruments. With regard to activities performed by the Group branch networks for retail customers, in October 2007 Banca Aletti activated the new Organized Trade System to trade financial instruments issued and sold by the Group to its customers.
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In the course of the year, the integration of the centralized Group Treasury was completed, and the function became operational as of July. The money market has been characterized throughout the year by a strong volatility of interest rates caused by the uncertainty for the US macroeconomic scenario and the credit crisis. In terms of volumes traded, business activities reported a squeeze, which however did not prevent our facility from replicating the trading performance of the year before. The decrease in unsecured instruments (-20% over 2006) was offset by an increase in short term derivative trading (53% over 2006), while secured instruments consolidated the strong trading volume reported the year before (357 billions).
Institutional Sales in 2007 was marked by the broadening of its investment product catalog for the banks of the Group, by the acquisition of new customers and of a greater market share in the non-captive segment, and by the development of the institutional customer portfolio onto the Equity business. Total structured investment products for the banks of the Group slightly exceeded 5 billion euro (+8% over 2006). With respect to previous years, the product mix geared to institutional customers changed: a marked increase in index- linked policies (+64%) and Certificates (+87%) went hand in hand with a volume reduction of structured bond issues (-7%) and capital guaranteed products (-44%).
The Corporate segment was characterized by two completely different semesters. In the first half, customers showed a growing interest for OTC derivative products to hedge and manage the interest rate risk, as a result of the interest rate hikes introduced by the ECB over the period. On the contrary, in the second half the summer turbulences affecting the financial markets and in particular derivatives, caused companies to be more conservative, and to cut back on OTC derivative products. In 2007, in addition to increased underwritings of interest rate risk hedging instruments driven by market performance, also exchange rate risk hedging instruments, mainly plain vanilla, were in high demand, where synthetic forwards, and in general highly flexible products suited to most types of companies, met the customer favor. Also conditional hedge products and actively managed products were met with a fairly good interest, and they offered many companies the opportunity to decrease their funding costs below current market rates, and to cash in from positive spreads.
The regulatory changes introduced in the second half by MiFid and by the new internal Group Policy regulating the negotiation of derivative financial instruments contributed to the slight slowdown in OTC derivative underwriting on behalf of corporate customers.
It is worth highlighting the effort the Group and the single Banche del Territorio have been making in the last few years to further improve the transparency of OTC derivative trading for corporate customers. In particular Banca Aletti, the investment bank of the Group, introduced deep changes to the OTC Derivative Product Catalog used by the commercial bank networks, to make it simpler and more rational. This also went to the benefit of the branch network and it improved the effectiveness of commercial actions.
In 2007 retail customers confirmed their interest for structured investment products, mainly linked to interest rates and equities, joined also by products linked to new parameters and indices, in particular exchange rates, to satisfy the expectations also of more sophisticated and demanding customers. A large part of bonds sold to customers involved primary European banks with a high credit standing. Customers were particularly interested in rights and other instruments protecting from adverse market movements, as well as capital protection/guarantee products that adopt mathematical/statistical management methods (for example CPPI-based guaranteed/protected asset management). For example, the fear triggered by the interest rate rise caused an increase in the demand for interest rate risk hedging instruments (Euribor covered warrants). The requirements of clients with a higher risk appetite were satisfied by offering them special asset management profiles and certificates and covered warrants issued by Banca Aletti. With regard to asset management products with a lower market correlation and to hedge funds, 2007 confirmed the positive dynamics reported in the previous year.
During the year, the subsidiary Banca Aletti took part in 6 Group bond issues, and distributed a total of 200 million euro worth of securities. In 2007, 29 Companies went public in Italy, 8 IPO more compared to 2006 (+38%). Twenty companies listed on the MTA and 9 on Expandi, of which 4 sold exclusively to institutional investors. Banca Aletti took part in all Public Offerings held in Italy in 2007, for a total underwriting value of 32.6 millions. It was also very active as Co-Lead Manager in institutional distributions of new share offerings, for example Prysmian, Zignago Vetro etc. In 2007 only 12 listed companies carried out capital increases, as compared with 23 del 2006, with total proceeds of 3.9 billions, compared to 5.1 billions in 2006.
Asset Management
Managed assets invested in traditional mutual funds and funds of hedge funds distributed by the Group retail banks have been centralized respectively in the subsidiaries Aletti Gestielle SGR and Aletti Gestielle Alternative SGR, following the integration with the former Gruppo BPI. Against a particularly bleak backdrop, Aletti Gestielle SGR reported a reduction in assets under management invested in mutual funds of about 11.769 millions at the end of December 2007, equal to a 19% drop. In spite of this, considering the performance of managed funds in 2007 Gruppo Banco Popolare ranked fifth among asset management groups.
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As a confirmation to its unwavering commitment, also in 2007 Aletti Gestielle was awarded the Premio Alto Rendimento organized by Gruppo Il Sole 24-Ore CSF Rating as: x 2nd ranking as Best Italian Mutual Fund Manager in the BIG group; x Best geographical Equity Fund in the Emerging Equity class with its Fund Gestielle East Europe; x Best Fixed Income America Fund with its Fund Gestielle Bond Dollars.
As to hedge funds, the Group subsidiary Aletti Gestielle Alternative SGR at year end had assets under management amounting to 2,846 million euro from 1,802 millions on December 31st, 2006. Also thanks to the acquisition of the business segment of Bipitalia Alternative SGR, effective as of December 2007, the subsidiary ranks first in terms of market share among Italian SGRs with regard to Italian speculative funds (source: Mondohedge).
Aletti Fiduciaria confirmed the growth trend of the past years, with n. 448 fiduciary mandates and 732 millions worth of assets under management. The past financial year was characterized by an important and profitable service offered to Banca Aletti’s Private network, which allowed Aletti Fiduciaria to develop and consolidate its presence in the area of trust execution and advisory services. The company obtained 9 mandates as trustee and holds assets under management of more than 68 million euro.
Group Finance
Capital Management activities were primarily conducted in the first part of the year, in anticipation of the merger between BPVN and BPI. BPVN was interested by transactions aiming at increasing its economic and regulatory capital, as well as by a buy-back program, planned during the merger, of BPVN as well as of BPI shares. The main goal of said deals was to optimize secured and unsecured assets, also through two performing residential mortgage securitizations totaling about 3 billion euro, leading to a capital release of about 90 million euro.
Capital management transactions also involved the transfer of credit risk to external counterparties, through “single name CDS” hedges, with a total notional value of about 2 billion worth of loans originated by ex BPVN, Creberg and BPN.
Banco also issued fixed income instruments that increased its capitalization level, distributing on the institutional market a subordinated floating rate Tier III bond issue through the EMTN program listed on the Luxembourg Stock Exchange with a nominal value of 350 million euro, a ten-year floating rate Lower Tier II bond issue - callable after five years – of about 600 millions and two fixed rate Tier I tranches totaling 650 millions, of which a first perpetual tranche of 350 millions - callable after ten years or else kicking in coupon increases under a step-up clause, and a second perpetual tranche of 300 millions - callable after ten years – without step-up clause.
In the second half of 2007 regulatory calls were exercised, causing the redemption of about 210 million worth of subordinated Lower Tier II bonds and about 100 million worth of subordinated Tier III bonds expired.
Following the merger, balance sheet items exposed to structural interest rate risk were transferred to the newly formed BPL S.p.A. and BPV-SGSP S.p.A.. International funding deals represented by EMTN issues already originated by BPVN and BPI were centralized at the Parent company’s.
Structural interest rate risk management and control policies followed the same strategies adopted in the past, in particular, with regard to fixed rate bond issues, some of them continue to act as natural hedge instruments for some assets fixed rate items. Bond issues featuring structured pay-offs instead have been specifically hedged in keeping with fair value option criteria.
In order to stabilize interest income and in particular the cost of floating rate funds raised by way of issues on the international market, swap contracts were executed, classified as macro cash flow hedges.
Also in 2007 the exposure to the short term interest rate risk, which is mainly generated by the aggregate of on demand deposits, continued to undergo econometric and statistical analyses. In view of the high stability of the assets under examination, whose economic expiry is still about three years while the contract expiry date is generally f one day, and considering the basic stability of this aggregate with respect to interest rates, the plain vanilla swap hedges created in 2005 were maintained.
As to the liquidity risk, in the second half of the year the “liquidity management” project was sped up, and the Group’s liquidity risk management, monitoring and control procedures were redefined. The new organizational model assigned the operating management of the treasury of all the Group banks to Banca Aletti. The Group Finance Service is in charge of monitoring the operating liquidity as a first level control, by verifying on a daily basis that the Group’s liquidity position complies with the treasury liquidity risk limits. The second level control over the compliance with the above limits is a responsibility of the Risk Control and Research Service (Servizio Controllo dei Rischi e Studi).
The Group Finance Service is in charge of measuring and managing the structural and medium to long term liquidity risk, both statically, by examining liquidity requirements based on the single time frames of the liquidity gap (difference between
46 Report on group operations
loans and deposits under expiration), and dynamically, by identifying liquidity requirements under different settings, where the financial factors that may affect the time profile of liquidity are varied.
The creation of the new Banking group and the liquidity pressure that mounted on markets driven by the so called “US subprime mortgage crisis” that broke out during the summer, both contributed to the speeding up of the project that was already underway.
Banco Popolare, as Parent company, faced the market liquidity crisis, which at first was deemed to be short-lived, by adopting strict liquidity control measures and by partially replacing wholesale funding with retail funding. Alternative financing facilities were activated and ECB-eligible (collateral) securities portfolios were progressively scaled up. Since the liquidity crunch persisted, the Group decided to privilege retail funding against institutional funding, and adopted the relevant strategies in line with said goal. A careful daily monitoring of deposits and loans favored a balanced growth of the two aggregates, thus permitting the rebalancing of short term funding.
Following the merger between Banco Popolare Verona e Novara and the former Gruppo BPI, and in order to optimize the securities segment, the investment securities portfolios of the retail banks were centralized at the Parent company Banco Popolare. In 2007, the proprietary portfolio management policy developed amidst a high uncertainty as to the business cycle outlook in industrialized economies. This uncertainty reverberated onto the equity market, which closed the year on a downswing. The fixed income market went through alternating phases of yield rises followed by sudden drops. Yield curves were basically lateral, however they were associated with significant bond price corrections. Against this backdrop, the proprietary bond portfolio management policy kept to a conservative strategic approach when it comes to interest rate risk management. The average duration of government bond assets during the year remained rather contained. With regard to the corporate segment, the adopted strategy led to a reduction of the heavy weight of this asset class over total invested assets, from above 50% at the beginning of 2007 to about 35% at year end. The equity portfolio, whose risk level was kept low, was managed in particular towards the end of the year based on the assumption of a trading range period on the market. The chosen approach was diversification, avoiding accumulation of significant exposures on single sectors. Investments in alternative assets, amounting to about 500 millions, remained stable throughout the first half of the year, and the approach based on low and medium volatility strategies was maintained. Upon merging with BPI, overlapping positions belonging to the acquired company were brought in, slightly increasing the portfolio’s overall risk profile. In second half, the exposure to alternative assets started to be reduced. For further details please refer to Section E of the Explanatory Notes of this Annual Report.
With regard to Held to Maturity (HTM) portfolios, the same strategy adopted in the previous years was followed, whereby Banco Popolare and Banca Popolare di Novara were to replace expiring assets with fixed income notes issued by governments and high credit standing financial corporations, so as to achieve a stable capital remuneration. The Group’s Available for Sale (AFS) bond portfolio has a nominal value of about 900 million euro. It holds corporate bonds almost entirely represented by floating rate notes or asset swap structures and structured securities. The management approach of the AFS portfolio, which was defined in previous years, is such that most securities fall under hedge accounting, with a general smoothing out of pay-offs which are indexed to the three month Euribor. As to bonds held in the AFS portfolio, they almost entirely come from BPI’s portfolio that was acquired upon merging; worth mentioning is the contribution of positions generated by the unwinding of the Café V conduit, mainly represented by structured credit paper. In addition to bond positions classified as HTM and AFS, the Held for Trading portfolio (HFT) includes additional positions in mutual funds and Sicav, with a very limited risk profile, as they are invested in the liquidity and money markets and feature only a very limited equity investment. Alternative assets portfolios from the merger with BPI are still in existence, but their disposal had already started before the merger, and there is a position in RCS Mediagroup securities.
47 Report on group operations
RESULTS
Consolidated Balance sheet
The reclassified balance sheet simply aggregates the items required in the balance sheet face under the Bank of Italy’s circular letter N. 262 dated December 22nd, 2005.
Reclassified assets 31/12/2007 31/12/2006 Changes (in thousand euro)
Cash and cash equivalents 692,029 360,546 91.9% Financial assets and hedging derivatives 13,497,222 10,770,971 25.3% Due from other banks 14,189,365 8,680,735 63.5% Customer loans 84,551,034 45,244,563 86.9% Equity investments 870,477 796,935 9.2% Property and equipment 1,505,608 538,047 179.8% Intangible assets 6,433,928 447,753 n.s. Non-current assets held for sale and discontinued operations 880,524 239 n.s. Other assets 5,772,554 1,855,146 211.2% Total 128,392,741 68,694,935 86.9%
Reclassified liabilities 31/12/2007 31/12/2006 Changes (in thousand euro)
Due to other banks 13,107,806 8,116,144 61.5% Due to customers, debt securities in issue and financial liabilities measured at fair value 93,229,068 50,574,033 84.3% Financial liabilities and hedging derivatives 3,158,172 1,899,375 66.3% Provisions 1,262,221 619,152 103.9% Liabilities associated with discontinued operations 416,158 - Other liabilities 6,144,528 2,469,452 148.8% Minority interest 402,756 144,761 178.2% Shareholders’ equity 10,672,032 4,872,018 119.0% - Share capital and reserves 10,054,809 3,839,104 161.9% - Net income for the period 617,223 1,032,914 -40.2% Total 128,392,741 68,694,935 86.9%
48 Report on group operations
Consolidated income statement
Reclassified income statement 2007 (*) 2006 (**) Changes 2007 (in thousand euro) A B A / B
Net interest income 1,839,138 2,322,428 2,144,899 8.3% Profit (loss) on equity investments carried at equity -122,520 -126,185 130,323 Net interest, dividend and similar income 1,716,618 2,196,243 2,275,222 -3.5% Net commission income 1,021,974 1,209,890 1,241,250 -2.5% Other revenues 171,511 250,832 299,263 -16.2% Net financial income 460,391 623,873 408,353 52.8% Other operating income 1,653,876 2,084,595 1,948,866 7.0% Total income 3,370,494 4,280,838 4,224,088 1.3% Personnel expenses -1,210,264 -1,490,442 -1,405,084 6.1% Other administrative expenses -546,286 -761,436 -776,617 -2.0% Net impairment of property and equipment and intangible assets -137,688 -173,509 -161,911 7.2% Operating costs -1,894,238 -2,425,387 -2,343,612 3.5% Profit from operations 1,476,256 1,855,451 1,880,476 -1.3% Net impairment of loans, guarantees and commitments -327,998 -545,811 -334,076 63.4% Net impairment of other financial transactions -107,897 -111,241 -101,621 9.5% Net provisions for risks and charges -106,421 -139,336 -111,071 25.4% Goodwill and equity investment impairments -170,409 -171,487 -46,962 265.2% Profit (Loss) on disposal of equity and other investments 572,758 781,916 365,468 113.9% Income before tax from continuing operations 1,336,289 1,669,492 1,652,214 1.0% Tax on income from continuing operations -568,116 -742,609 -574,850 29.2% Income after tax from continuing operations 768,173 926,883 1,077,364 -14.0% Income (Loss) after tax from discontinued operations 15,081 -4,360 -28,451 -84.7% After tax integration charges -123,949 -148,335 - Net income for the period 659,305 774,188 1,048,913 -26.2% Minority interest -42,082 -42,310 -73,707 -42.6% Net income for the period attributable to the Parent Company 617,223 731,878 975,206 -25.0% (*) Inclusive of the 1H07 contribution of Gruppo Banca Popolare Italiana, which does not include the PPA impact (purchase price allocation) for the sake of comparability with the previous year (**) Data derived from the combination of the consolidated income statements of Gruppo Banco Popolare di Verona e Novara and Gruppo Banca Popolare Italiana adjusted for comparison
Note, that in preparing the annual report, the effects of the merger were recognized in compliance with international accounting standards, in particular IFRS 3, since the allocation of acquisition costs (so called PPA) has been completed and at the date of effectiveness of the merger (July 1st, 2007) they amounted to 5.9 billions. The difference between the acquisition costs and the book value of the acquired assets and liabilities was 3.2 billions. 0.8 billion euro (difference between the fair value and the book value of the above balance sheet items) were allocated in Banco’s balance sheet under acquired assets and liabilities, and the remaining 2.5 billions were posted under the item “goodwill”.
As a result, the 2007 bottom line was impacted by the differences carried at income, measured as at July 1st, 2007, between the value at which the acquired assets and liabilities were recognized in the financial statements of the individual companies belonging to Gruppo Banca Popolare Italiana, and their fair value assigned upon allocating the acquisition costs.
Note, that in compliance with IFRS 3, the 2007 income statement includes the profit contributions of the companies belonging to Gruppo Banca Popolare Italiana only as of July 1st, 2007.
For the sake of comparability between the 2007 consolidated income statement and the profitability data of the year before, a pro-forma income statement was prepared, which includes the first half 2007 contribution of Gruppo Banca Popolare Italiana and does not include PPA impacts.
The table below shows the reconciliation between the consolidated income statement as at December 31st, 2007 and the pro-forma income statement reclassified for comparison.
49 Report on group operations
Reclassified income statement Book PPA without PPA I half BPI Pro forma (in thousand euro)
Net interest income 1,839,138 -58,513 1,897,651 424,777 2,322,428 Profit (loss) on equity investments carried at equity -122,520 -122,520 -3,665 -126,185 Net interest, dividend and similar income 1,716,618 -58,513 1,775,131 421,112 2,196,243 Net commission income 1,021,974 1,021,974 187,916 1,209,890 Other revenues 171,511 -22,350 193,861 56,971 250,832 Net financial income 460,391 -18,523 478,914 144,959 623,873 Other operating income 1,653,876 -40,873 1,694,749 389,846 2,084,595 Total income 3,370,494 -99,386 3,469,880 810,958 4,280,838 Personnel expenses -1,210,264 -1,210,264 -280,178 -1,490,442 Other administrative expenses -546,286 -546,286 -215,150 -761,436 Net impairment of property and equipment and intangible assets -137,688 2,055 -139,743 -33,766 -173,509 Operating costs -1,894,238 2,055 -1,896,293 -529,094 -2,425,387 Profit from operations 1,476,256 -97,331 1,573,587 281,864 1,855,451 Net impairment of loans, guarantees and commitments -327,998 59,505 -387,503 -158,308 -545,811 Net impairment of other financial transactions -107,897 -107,897 -3,344 -111,241 Net provisions for risks and charges -106,421 -106,421 -32,915 -139,336 Goodwill and equity investment impairments -170,409 54 -170,463 -1,024 -171,487 Profit (Loss) on disposal of equity and other investments 572,758 -188,300 761,058 20,858 781,916 Income before tax from continuing operations 1,336,289 -226,072 1,562,361 107,131 1,669,492 Tax on income from continuing operations -568,116 135,486 -703,602 -39,007 -742,609 Income after tax from continuing operations 768,173 -90,586 858,759 68,124 926,883 Income (Loss) after tax from discontinued operations 15,081 15,081 -19,441 -4,360 After tax integration charges -123,949 -123,949 -24,386 -148,335 Net income for the period 659,305 -90,586 749,891 24,297 774,188 Minority interest -42,082 -6,239 -35,843 -6,467 -42,310 Net income for the period attributable to the Parent Company 617,223 -96,825 714,048 17,830 731,878
Shown below are the main reclassifications with respect to the balances illustrated in the income statement face as required by the Bank of Italy: x the figurative cost to fund the financial assets purchased by the Group investment bank to produce structured financial products for trading was reclassified from interest expense (item 20) to Net financial income; x dividends from shares classified among assets available for sale and assets held for trading (shown under item 70) have been reclassified under Net financial income; x net trading income and fair value adjustments in hedge accounting (items 80 and 90) as well as profit (loss) on financial assets and liabilities measured at fair value (item 110) have been reclassified under Net financial income; x profit (loss) on disposal of loans (item 100) have been consolidated with net write-downs/write-backs on impairment of loans, guarantees and commitments and credit derivatives; x profit or loss on disposal or repurchase of financial assets available for sale and financial liabilities (to be found under item 100) have been reclassified under Net financial income; x tax and other expense recoveries (under item 230) have been directly deducted from G&A expenses instead of being itemized under other operating income; x the depreciation of expense for improvements to third party assets (accounted for under item 230) was recognized in combination with impairment of property and equipment and intangible assets, instead of being itemized under other operating income and expense; x the share of profit of associates carried at equity (item 240) was recognized in combination with dividends on equity investments; x integration charges were shown in a specific item called “After-tax integration charges” instead of the relevant items making up the aggregate of operating costs and the associated tax.
Attached to this Report, is a chart comparing the income statement items required by the Bank of Italy’s Circular n. 262, of December 22nd, 2005 with the reclassified income statement.
The table below summarizes the impact on the consolidated income of the periods under comparison caused by significant non-recurring events or transactions. In order to give a comparative representation on a like-to-like basis with the operating results of the previous year, income statements have been prepared, that include the contribution of Gruppo BPI over the whole financial year. The analysis of non-recurring items illustrated below makes reference to pro-forma data.
50 Report on group operations
2007 (*) 2006 (**) Recurr. Total Reclassified income statement Non Non % % (in thousand euro) Recurring Total Recurring Total Recur. Recur. Change Change
Net interest income 2,322,428 - 2,322,428 2,117,999 26,900 2,144,899 9.7% 8.3% Profit (loss) on equity investments carried at equity 34,391 -160,576 -126,185 82,288 48,035 130,323 -58.2% Net interest, dividend and similar income 2,356,819 -160,576 2,196,243 2,200,287 74,935 2,275,222 7.1% -3.5% Net commission income 1,209,890 - 1,209,890 1,241,250 - 1,241,250 -2.5% -2.5% Other revenues 272,710 -21,878 250,832 291,331 7,932 299,263 -6.4% -16.2% Net financial income 329,621 294,252 623,873 351,749 56,604 408,353 -6.3% 52.8% Other operating income 1,812,221 272,374 2,084,595 1,884,330 64,536 1,948,866 -3.8% 7.0% Total income 4,169,040 111,798 4,280,838 4,084,617 139,471 4,224,088 2.1% 1.3% Personnel expenses -1,504,531 14,089 -1,490,442 -1,405,084 - -1,405,084 7.1% 6.1% Other administrative expenses -761,436 - -761,436 -776,617 - -776,617 -2.0% -2.0% Net impairment of property and equipment and intangible -168,467 -5,042 -173,509 -154,165 -7,746 -161,911 9.3% 7.2% assets Operating costs -2,434,434 9,047 -2,425,387 -2,335,866 -7,746 -2,343,612 4.2% 3.5% Profit from operations 1,734,606 120,845 1,855,451 1,748,751 131,725 1,880,476 -0.8% -1.3% Net impairment of loans, guarantees and commitments -353,969 -191,842 -545,811 -354,473 20,397 -334,076 -0.1% 63.4% Net impairment of other financial transactions -12,850 -98,391 -111,241 -11,137 -90,484 -101,621 15.4% 9.5% Net provisions for risks and charges -72,897 -66,439 -139,336 -102,296 -8,775 -111,071 -28.7% 25.4% Goodwill and equity investment impairments - -171,487 -171,487 - -46,962 -46,962 Profit (Loss) on disposal of equity and other investments 14,303 767,613 781,916 27,227 338,240 365,467 -47.5% 113.9% Income before tax from continuing operations 1,309,193 360,299 1,669,492 1,308,072 344,141 1,652,213 0.1% 1.0% Tax on income from continuing operations -554,714 -187,895 -742,609 -529,099 -45,751 -574,850 4.8% 29.2% Income after tax from continuing operations 754,479 172,404 926,883 778,973 298,390 1,077,363 -3.1% -14.0% Income (Loss) after tax from discontinued operations - -4,360 -4,360 - -28,451 -28,451 -84.7% After tax integration charges - -148,335 -148,335 - - - Net income for the period 754,479 19,709 774,188 778,973 269,939 1,048,912 -3.1% -26.2% Minority interest -36,447 -5,863 -42,310 -61,993 -11,714 -73,707 -41.2% -42.6% Net income for the period attributable to the Parent 718,032 13,846 731,878 716,980 258,225 975,205 0.1% -25.0% Company (*) Inclusive of the 1H07 contribution of Gruppo Banca Popolare Italiana, adjusted to account for changes in consolidation scope and in classification criteria (**) Data derived from the combination of the consolidated income statements of Gruppo Banco Popolare di Verona e Novara and of Gruppo Banca Popolare Italiana adjusted for comparison
Note, that in general the following criteria were followed to identify non-recurring items: x profit from the disposal of all fixed assets is considered non-recurring (equity investments, tangible assets, financial assets available for sale, financial assets held to maturity and NPL portfolios); x profit and loss on non-current assets held for sale are considered non-recurring; x income components associated to combination or restructuring transactions (for ex. redundancy fund charges) are considered non-recurring); x material income components that are not destined to repeat frequently (for ex. sanctions, impairment of fixed assets, effects caused by changes in regulations, exceptional results, etc.) are considered non-recurring; x in contrast, material income effects generated by measurement aspects and/or by changes in the parameters used to apply lasting measurement methodologies are considered recurring.
Upon preparing the 2007 annual report, in view of the importance of the merchant banking activity performed by the Group, profit generated by said business was considered a recurring item. Data referring to previous periods have been reclassified accordingly, to guarantee a like-to-like comparison.
Shown below are the main income components for the first nine months of 2007, which were considered non-recurring.
The item Profit (loss) on equity investments carried at equity for the year included the share of loss attributable to the Group (-160.6 millions), and considered a non-recurring item, reported by Gruppo Banca Italease as at December 31st, 2007. As a result, for the sake of comparability also the 2006 share of profit attributable to the Group (48 millions) was reclassified as a non-recurring item. The share of profit attributable to the Group reported in 2006 by the associate Cornel, amounting to 59.4 millions, generated by the sale of the equity investment held in Theme Parks Holding, a company which in turn owned Gardaland, was reclassified from non-recurring to recurring.
Other revenues include non-recurring items referring to the 21.9 million cost primarily attributable to the early termination of an agreement signed by BPI with Aviva in the light of the new bancassurance agreements entered by Gruppo Banco Popolare, as well as 1.7 million operational charges on non-operating property of the subsidiary Basileus. This item also
51 Report on group operations
benefited from 2.7 million refunds from ex-BPI customers as litigation settlement. Note that the previous year’s data had been negatively affected by a loss of about 12 million euro reported by the associate Bipitalia Gestioni for the disposal of an investment in structured securities and by non-recurring charges of 7.8 millions to bring non-operating property initiatives of the subsidiary Basileus to completion.
The net financial income includes a 127.1 million share exchange capital gain as a result of the merger of Borsa Italiana with the London Stock Exchange, a 9.6 million profit on the sale of BPI’s interest in Unipol Assicurazioni and other minor capital gains. The item also includes the impact from the impairment of financial liabilities in issue measured at fair value caused by credit risk deterioration, totaling 155.7 million euro. In 2006, this item included a 28.8 million profit on the sale of BPI’s interest in Banca Italease and a 21.5 million profit on the sale of other shareholdings by BPI or other banks of the Group, as well as a 6.1 million loss on assets and liabilities measured at fair value per 6.1 millions. Profit from merchant banking activities were classified under non-recurring items in compliance with the new classification standard adopted as of December 31st, 2007.
Personnel expenses include positive non-recurring items of 14.1 millions, as a consequence of 35.5 million less expenses as a result of the change in the method followed to measure termination benefits introduced by the supplementary pension reform, coupled with 21.,4 million charges more, generated by the renewal of the national bargaining agreement, the payment of the figurative amount of 3% of BPI’s 2006 net income to the employees of the former Gruppo BPI, and the incentive scheme allocation. In particular, with regard to the incentive scheme, in addition to the charge referring to last year, also the 2007 bonus was set aside (to be paid in June 2008) in the assumption of meeting budget targets.
Net impairment of property, plant and intangible assets include the 5.0 million depreciation associated with the property initiatives of the subsidiary Lido dei Coralli.
Net impairment of loans, guarantees and commitments include the 192 million non-recurring impairment losses recognized on specific loans belonging to the large corporate segment held by BPI and now belonging to Banca Popolare di Lodi. The adoption also in the banks belonging to Gruppo BPI of the performing loan valuation method used by Banco Popolare di Verona e Novara caused a non-recurring charge to income totaling 59.5 millions. Whereas the item benefited from the effect from a 3 million profit on sale of loans, inclusive of the time value effect. To be noted that the 2006 data benefited from the profit on the sale of non-performing loans and from the time value effect for a total of 20 million euro.
Net impairment on other financial transactions include the write-downs of the stakes held in Hopa of 78.9 million (whose unit average carrying value is now 0.22 euro per share), in Finbakery Netherlands B.V. of 4.5 millions, in Fidia S.p.A. of 1 million. They also include the write-down of the stake held in Alpi Eagles and in a series of securities acquired at year-end upon the early termination of the relations with the Café V conduit, totaling 14.9 millions. In 2006 non-recurring items were primarily associated with the 80.8 million shareholding held by BPI in Hopa and with the 18 million write-downs of securities related to securitizations.
In 2007 net provisions for risks and charges were burdened by non-recurring allowances totaling 66. 4 millions, of which 30.6 for specific litigations involving the former BPI, 20 millions for guarantees given by Bipielle SGC for loan sales performed in previous years, 6.3 millions for the unfavorable court decision related to a tax proceeding involving Bipielle Real Estate and 2 millions for costs at completion related to non-operating property owned by the subsidiary Basileus. In the previous year, only non-recurring costs on property initiatives related to Basileus were reported.
Impairment of goodwill and equity investments totaled 171.5 millions and include a 170.4 million impairment of the interest in Banca Italease following the alignment of the unit average carrying amount to a value of 7.66 euro per share. This value corresponds to the subsidiary’s consolidated book shareholders’ equity as at December 31st, 2007, net of intangible assets represented by goodwill. The impairment recognized in 2006 was mainly related to the goodwill associated with Banca Popolare del Trentino (Gruppo ex-BPI) amounting to 32.5 millions and to the associate Area Life totaling 14.1 millions.
Profit (loss) on disposal of equity and other investments, that is non-recurring by nature, totaled 752.9 millions and it included the 476.2 million profit generated by the sale to Gruppo Fondiaria SAI of 50% of BPV Vita’s share capital as part of the strategic partnership agreement in the Life insurance sector, the 242.2 million capital gain from the sale to Gruppo Aviva of 50% of Novara Assicura’s share capital as part of the strategic partnership agreement in the Non-life insurance sector, as well as the profit on the sale of other minor equity investments and property. In 2006 this item totaled 365.5 millions, and it included profit on equity investments of 291.9 millions (worth mentioning the 149 million share exchange capital gain, net of intra-group relations, as a result of the merger between Banca Italease and Leasimpresa, and the 97.6 million capital gain on the sale of the share not falling under the shareholders’ agreement held in Banca Italease) and profit on sale of other fixed assets and investments totaling 73.6 millions, primarily related to non-operating property of the Group.
Losses after tax from discontinued operations, non-recurring by nature, amounted to 4.4 millions (28.5 millions in 2006) and include revenues and charges, net of intragroup relations, of associates under disposal.
52 Report on group operations
The new item after tax integration charges include the integration costs incurred by the Group in the third and fourth quarter of the year, amounting to 148.3 millions, primarily related to the redundancy plan.
Income tax on continuing operations includes the negative fiscal effect on the non-recurring items illustrated above (about 98.8 millions), as well as the additional net non-recurring negative impact of 112.1 millions generated by the write-down of deferred tax assets and liabilities caused by the decrease in the IRES and IRAP tax rates and by the redefinition of IRAP’s taxable base.
Taking minority interest into account, the contribution of non-recurring items to the 2007 net income was 13.8 millions, as compared to 258.2 millions the year before.
Credit intermediation
Direct customer funds
As at December 31st, 2007, direct customer funds reached 93,229.1 millions from 82,712.1 millions on December 31st, 2006, showing a 12.7% increase over the year before.
Direct customer Funds
100,000
80,000 93,229.1 82,712.1 60,000
40,000 (millions of euros)
20,000
0 31/12/2006 pro-forma 31/12/2007
Net of issued bonds (debt securities in issue and financial liabilities measured at fair value), direct customer funds reported a 14.8% growth rate over the year before. Specifically, debts securities in issue and financial liabilities measured at fair value grew by 3,907 millions, or 10.2%, surpassed in performance by checking accounts, that grew by 3,901.7 millions (+11.3%) and by repurchase agreements that went from 7,921.9 millions up to 9,695.6 millions (+22.4%).
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Due to customers 51,126,139 44,516,226 6,609,913 - checking accounts and demand deposits 38,328,794 34,427,103 3,901,691 - time deposits 3,101,754 2,167,199 934,555 - repurchase agreements and other payables 9,695,591 7,921,924 1,773,667 Debt securities in issue 30,151,847 32,861,759 -2,709,912 Financial liabilities measured at fair value 11,951,082 5,334,143 6,616,939 Total direct customer funds 93,229,068 82,712,128 10,516,940
53 Report on group operations
Indirect customer funds
The market value of indirect customer funds amounted to 96,328.1 millions, down by 14.5% from 112,627.9 millions the year before.
Indirect customer Funds
120,000
112,627.9 80,000 96,328.1
40,000 (millions of euros)
0 31/12/2006 pro-forma 31/12/2007
This drop was caused by the dynamics reported by both assets under custody and under management. Assets under custody decreased by 18.6%, from 63,016.8 millions on December 31st, 2006 down to 51,278 millions at the end of 2007. Assets under management reported a more limited fall, from 49,611.1 millions to 45,050.1 millions (-9.2%), in accord with the overall industry performance that in 2007 was characterized by a net outflow across mutual funds.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Assets under management 45,050,103 49,611,116 -4,561,013 - mutual funds and SICAV 19,471,523 21,306,668 -1,835,145 - managed accounts invested in securities and in funds 17,479,762 20,113,663 -2,633,901 - insurance policies 8,098,818 8,190,785 -91,967 Assets under custody 51,278,038 63,016,827 -11,738,789 Total indirect customer funds 96,328,141 112,627,943 -16,299,802
Excluding institutional customer funds (mutual funds, banking foundations, merchant banks, leasing and factoring companies, investment companies, SICAV, fund managers, insurance companies, pension and other superannuation funds, central supervisory authorities and banking trade associations), indirect customer funds as at December 31st, 2007 totaled 78,695.7 millions, down 6.5% from 84,138 millions on December 31st, 2006.
Total customer funds (direct customer funds + indirect customer funds) added up to 189,557.2 millions, from 195,340.1 millions on December 31st, 2006, down by 3%.
54 Report on group operations
Loans to customers
Financial year 2007 was marked by a particularly conspicuous increase in loans to support companies and served territories. Gross loans ran up to 86,871.6 millions, up 14.1% from 76,116.7 millions in December 31st, 2006 adjusted for comparison.
Gross loans to customers
100,000
80,000 86,871.6 76,116.7 60,000
40,000 (millions of euros)
20,000
0 31/12/2006 pro-forma 31/12/2007
Net of total write-downs, loans stood at 84.551 millions, up 14.4% from 73,932.9 millions in December 31st, 2006.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Mortgages 31,823,680 28,699,398 3,124,282 Checking accounts 17,710,129 17,960,397 -250,268 Finance leases 11,971 48 11,923 Repurchase agreements 1,882,482 514,744 1,367,738 Assets sold and not derecognized 6,309,960 3,218,561 3,091,399 Credit lines and other loans 26,812,812 23,539,706 3,273,106 Total net loans to customers 84,551,034 73,932,855 10,618,179
Specifically, it is worth highlighting the 3,273.1 millions growth (+13.9%) reported by credit lines and the 10.9% increase in mortgages, from 28,699.4 millions at the end of 2006 to the current 31,823.7 millions. The loan book recomposition started a few years ago is still underway: mortgages on December 31st, 2007 accounted for 37.6% of total net loans. Impaired loans to customers grew by 397.1 millions, or 10.4%, from 3,836.1 millions on December 31st, 2006. Worth mentioning is the 523.3 million increase (+45%) in watchlist loans mainly due to the restatement of the exposure to Gruppo Coppola as watchlist loan. Net of write-downs, impaired loans grew by 18.5%, from 2,248.9 millions on December 31st, 2006 to 2,665 millions at the end of 2007.
55 Report on group operations
The tables below show cash loans to customers as at December 31st, 2007 compared to the same exposure as at December 31st, 2006 adjusted for comparison.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Gross impaired loans 4,233,176 3,836,117 397,059 Non-performing loans 2,012,492 2,075,789 -63,297 Watchlist loans 1,686,503 1,163,234 523,269 Restructured loans 145,348 169,306 -23,958 Past dues 388,833 427,788 -38,955 Gross performing loans 82,638,464 72,280,619 10,357,845 Country risk 7,781 47,672 -39,891 Other performing loans 82,630,683 72,232,947 10,397,736 Total gross loans 86,871,640 76,116,736 10,754,904 Write-downs of impaired loans -1,568,133 -1,587,242 -19,109 Non-performing loans -1,131,111 -1,231,796 -100,685 Watchlist loans -405,118 -286,333 118,785 Restructured loans -20,359 -16,616 3,743 Past dues -11,545 -52,497 -40,952 Write-downs of performing loans -752,473 -596,639 155,834 Country risk -166 -273 -107 Other performing loans -752,307 -596,366 155,941 Total write-downs -2,320,606 -2,183,881 136,725 Net impaired loans 2,665,043 2,248,875 416,168 Non-performing loans 881,381 843,993 37,388 Watchlist loans 1,281,385 876,901 404,484 Restructured loans 124,989 152,690 -27,701 Past dues 377,288 375,291 1,997 Net performing loans 81,885,991 71,683,980 10,202,011 Country risk 7,615 47,399 -39,784 Other performing loans 81,878,376 71,636,581 10,241,795 Total net loans 84,551,034 73,932,855 10,618,179
Gross impaired Loans
5,000
4,000 4,233.2
3,836.1 3,000
2,000 (millions of euros)
1,000
0 31/12/2006 pro-forma 31/12/2007
The impaired loans to total customer loans ratio, gross of write-downs, as at December 31st, 2007 was running at 4.87% from 5.04% on December 31st, 2006. Net of write-downs, the ratio went from 3.04% on December 31st, 2006 to 3.15% on December 31st, 2007.
56 Report on group operations
The NPL to loans ratio, gross of write-downs, was 2.32% from 2.73% on December 31st, 2006. Net of write-downs this ratio came in at 1.04% from 1.14% on December 31st, 2006.
Gross NPL / Gross Loans
2.73%
2.32%
31/12/2006 pro-forma 31/12/2007
Write-downs of impaired loans as at December 31st, 2007 accounted for 37.04% of total gross impaired loans, compared to 41.38% on December 31st, 2006. In particular, write-downs of non-performing loans on December 31st, 2007 accounted for 56.20% of their gross value, compared to 59.34% on December 31st, 2006.
Write-downs of performing loans accounted for 0.91% of their total value, compared to 0.83% on December 31st, 2006.
Financial assets
On December 31st, 2007, Group financial assets totaled 13,453.5 millions, down 13.2% from 15,490.9 millions on December 31st, 2006.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Financial assets held for trading 10,039,860 12,026,108 -1,986,248 Financial assets measured at fair value 888,437 314,430 574,007 Financial assets available for sale 1,812,657 2,127,327 -314,670 Financial assets held to maturity 712,527 1,023,013 -310,486 Total 13,453,481 15,490,878 -2,037,397
Shown below is the breakdown of the single classes of financial assets:
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Debt securities 2,938,943 5,048,765 -2,109,822 Equity securities 2,251,410 2,259,950 -8,540 UCITS units 805,781 1,605,987 -800,206 Assets sold and not derecognized 5,185,696 4,502,548 683,148 Trading derivatives 2,271,651 2,073,628 198,023 Total 13,453,481 15,490,878 -2,037,397
Financial assets held for trading as at December 31st, 2007 accounted for 74.6% of Group financial assets.
Financial assets held for trading during the year reported a 16.5% fall. Shown below is the breakdown by type of financial instrument.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Debt securities 2,080,684 4,302,924 -2,222,240 Equity securities 1,113,898 766,406 347,492 UCITS units 278,103 1,282,559 -1,004,456 Impaired loans and assets - - Assets sold and not derecognized 4,295,524 3,600,591 694,933 Financial and credit derivatives 2,271,651 2,073,628 198,023 Total 10,039,860 12,026,108 -1,986,248
Assets sold and not derecognized are represented by securities sold in customer repurchase agreements.
57 Report on group operations
Financial assets measured at fair value are primarily represented by investments in Undertakings for Collective Investments in Transferable Securities (UCITS).
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Debt securities 425,200 3,789 421,411 Equity securities 35,345 9,901 25,444 UCITS units 427,892 300,740 127,152 Total 888,437 314,430 574,007
Shown below is the breakdown of financial assets available for sale.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Debt securities 299,239 578,856 -279,617 Equity securities 1,102,167 1,483,643 -381,476 UCITS units 99,786 22,688 77,098 Assets sold and not derecognized 311,465 42,140 269,325 Total 1,812,657 2,127,327 -314,670
Financial assets held to maturity are represented exclusively by debt securities, of which part was used for customer repurchase agreements.
31/12/2006 (in thousand euro) 31/12/2007 Changes pro-forma
Debt securities 133,820 163,196 -29,376 -18.0% Assets sold and not derecognized 578,707 859,817 -281,110 -32.7% Total 712,527 1,023,013 -310,486 -30.4%
Equity investments
Equity investments in companies under a significant influence and in jointly controlled companies as at December 31st, 2007 totaled 870.5 millions, from 990.1 millions on December 31st, 2006. The detailed analysis of companies under a significant influence is illustrated in the Explanatory Notes, Chapter B, Section 10.
As compared with December 31st, 2006, the following changes in the consolidation scope and in shareholders’ equity occurred: • Aletti Merchant on February 5th, 2007 increased it share in Bertani Holding to 22.33%. On December 31st, 2006 it held a stake of 18.999% and shares were classified under financial assets available for sale (item 40 of assets). As of financial year 2007, the associate is carried at equity; • upon formation, on May 15th, 2007, the Group subscribed a stake of 25% in the share capital of HI-MTF, that consequently is carried at equity; • in June, part of the stake held in Pama was sold. As a result, the Group share decreased to 12%, and the stake, which was previously carried at equity, was deconsolidated and shares are classified under item 40 of assets “financial assets available for sale”; • In the first half of 2007 the liquidation of the company Cornel was completed. Previously it was carried at equity, and now it was deconsolidated; • as of July 1st, 2007 the following shareholdings held by the former BPI group were included among companies carried at equity: - Arca SGR - Centrosim - Unione Fiduciaria - Assipromos - Gruppo Finoa - Ali - Gruppo Comital - Efibanca Palladio Finanziaria SGR - Evoluzione 94 - Tortella - CF Assicurazioni - Alfa Iota - Black & Blue
58 Report on group operations
- Bussentina - Coima - Eurocasse SIM - Finanziaria ICCRI BBL - Plastisud - Portone - Qualiter - Quantoro - Tre Pi; • on October 11th, 2007, the Group acquired 100% of the share capital of Novara Assicura (now AviPop Assicurazioni) by way of Banco Popolare and Holding di Partecipazioni Finanziarie Popolare di Verona e Novara, each with a 50% stake. After that, based on the insurance partnership agreements with Gruppo Aviva, on December 14th, 2007, Banco Popolare sold its 50% share, while Holding di Partecipazioni Finanziarie Popolare di Verona e Novara sold one share of its stake. As a result of said transactions, the Group through Holding di Partecipazioni holds a 50% share less one share of the company, that is carried at equity; • on December 19th, 2007, following the capital increase in which the Group did not take part, its shareholding in Delta decreased from 20% to 13.293%. The interest, which previously was carried at equity, was recognized in the consolidated annual report under financial assets available for sale; • on December 27th, 2007 the liquidation of Assipromos was closed, and as a result the company was no more part of the consolidation scope.
Shareholders’ equity and solvency ratios
The consolidated shareholders’ equity as at December 31st, 2007, inclusive of valuation reserves and net income for the year, totaled 10,672 millions, with a decrease of 1,061.5 millions compared to 11,733.5 millions on December 31st, 2006.
Consolidated shareholders equity
12,000
10,000 11,733.5 10,672.0 8,000
6,000
(millions of euros) 4,000
2,000
0 31/12/2006 pro-forma 31/12/2007
On December 31st, 2007, the consolidated regulatory capital stood at 8,069 millions, while core capital amounted to 4,775 millions. The Group’s TIER 1 capital ratio (core capital over RWA) on December 31st, 2007 acme in at 5.16%, while the total capital ratio (regulatory capital plus third level subordinated debt securities issued to cover market risks over risk weighted assets) was 8.72%.
59 Report on group operations
Reconciliation between the Parent company’s and the consolidated shareholders’ equity and net income
Net income for the (in thousand euro) Shareholders’ equity period
Balance as at 31/12/2007 as in Parent company’s accounts 9,635,662 483,281 Write-off of dividends collected in the period from fully consolidated companies and companies carried at equity -255,662 Derecognition of intercompany capital gains from discontinuing and contributing operations -197,254 -958 Difference between the shareholders’ equity of consolidated associates and their carrying amount, net of minority interest 1,422,705 Net income for the period of consolidated associates, net of minority interest 681,745 Difference between the pro-rata value of the shareholders’ equity and the carrying amount of equity investments carried at equity -189,081 Group’s share of profit for the period of associates carried at income -291,183 Balance as at 31/12/2007 as in consolidated accounts 10,672,032 617,223
Consolidated income statement
Illustrated below, are the dynamics of the key profitability highlights for financial year 2007. In order to provide a like-to- like comparative basis with the profit and loss results of the year before, the operating report refers to pro-forma income statements for the years 2007 and 2006. For comparative reasons, the pro-forma data for 2007 do not include the impact from the allocation of acquisition costs described above.
Net interest income came in at 2,322.4 millions, up 177.5 millions from 2,144.9 millions the year before. The 8.3% growth rate was driven by the growth in intermediated volumes, for both deposits and loans, as well as by interest rate dynamics.
Net Interest income
2,400
2,100 2,322.4 2,144.9 1,800
1,500
1,200
(millions of euros) 900
600
300
0 2006 pro-forma 2007 pro-forma
Associates carried at equity made a negative contribution of 126.2 millions. This dynamic was primarily due to the negative effect of Gruppo Banca Italease’s valuation according to the equity method, amounting to 160.6 millions, while the other associates made a positive contribution of 34.4 millions, as compared with 82.3 millions the year before. To be noted, however, that the latter included 59.4 millions representing the share of profit attributable to the Group reported by the associate Cornel s.a.r.l. as a result of the sale of the controlling stake held in Theme Parks Holding, which in turn controlled Gardaland.
60 Report on group operations
Net interest, dividend and similar income added up to 2,196.2 millions. Net of non-recurring items, it totaled 2,356.8 millions, up 7.1% compared to December 31st, 2006.
Net commission income stood at 1,209.9 millions, down 2.5% from 1,241.3 millions the year before, as a result of the general crisis affecting the asset management industry at large.
Net Commission income
1,400
1,200 1,241.3 1,209.9 1,000
800
600 (millions of euros)
400
200
0 2006 pro-forma 2007 pro-forma
2007 2007 2006 2007 Changes (in thousand euro) pro-forma pro-forma
Management, brokerage and advisory services 658,816 768,575 816,706 -48,131 -5.9% Expense recovery on checking accounts and other Loans to retail customers 143,556 182,060 196,279 -14,219 -7.2% Payment and collection services 111,101 134,043 139,900 -5,857 -4.2% Guarantees given 38,650 47,331 46,414 917 2.0% Other services 69,851 77,881 41,951 35,930 85.6% Net commission income 1,021,974 1,209,890 1,241,250 -31,360 -2.5%
The table below shows a breakdown of net commissions on management, brokerage and advisory services.
2007 2007 2006 2007 Changes (in thousand euro) pro-forma pro-forma
Asset management 329,316 394,684 451,146 -56,462 -12.5% Distribution of third party services 196,643 223,176 151,645 71,531 47.2% Securities sale and distribution 55,672 53,917 76,748 -22,831 -29.7% Custodian bank 26,419 30,735 36,909 -6,174 -16.7% Order collection 31,063 39,872 47,385 -7,513 -15.9% Trading of financial instruments 19,466 20,174 22,223 -2,049 -9.2% Currency trading 6,126 9,083 17,291 -8,208 -47.5% Securities custody and administration 1,462 2,388 9,154 -6,766 -73.9% Advisory services 1,905 3,826 7,761 -3,935 -50.7% Off-branch sale of securities, products and services -9,256 -9,280 -3,556 5,724 161.0% Total 658,816 768,575 816,706 -48,131 -5.9%
Other revenues stood at 250.8 millions. Net of non-recurring items, they totaled 272.7 millions, compared to 291.3 millions the year before.
61 Report on group operations
Net financial income added up to 623.9 millions. Net of non-recurring items, primarily represented by a share exchange capital gain from the merger of Borsa Italiana into the LSE and by the effect from the book value impairment of financial liabilities in issue measured at fair value, net financial income came in at 329.6 millions, down 6.3% compared to December 31st, 2006, affected also by financial market tensions. The main components making up net financial income are illustrated in the table below.
2007 2007 2006 2007 Changes (in thousand euro) pro-forma pro-forma
Net trading income 6,114 41,929 132,021 -90,092 -68.2% Fair value adjustments in hedge accounting -199 2,445 37,108 -34,663 -93.4% Profit/loss from purchase / sale: 142,940 252,255 96,841 155,414 160.5% - financial assets available for sale (AFS) 140,947 249,146 88,009 161,137 183.1% - financial assets held to maturity (HTM) -565 -565 - -565 - financial liabilities 2,558 3,674 8,832 -5,158 -58.4% Profit/loss on financial assets and liabilities measured at fair 172,919 170,658 23,158 147,500 636.9% value Dividend and similar income from financial assets 138,617 156,586 119,225 37,361 31.3% Total 460,391 623,873 408,353 215,520 52.8%
Other operating income (operating income other than interest, dividend and similar income) was 2,084.6 millions. Net of non-recurring items, it totaled 1,812.2, down 3.8% over the year before.
Total income (net interest, dividend and similar income + other operating income) added up to 4,280.8 millions. Net of non-recurring items, it totaled 4,169 millions, up 2.1% from 4,084.6 millions on December 31st, 2006.
Total Income
4,800
4,000 4,224.1 4,280.8
3,200
2,400
(millions of euros) 1,600
800
0 2006 pro-forma 2007 pro-forma
Personnel expenses stood at 1,490.4 millions. Net of non-recurring items, mainly represented by the impact from the change in the method used to measure termination benefits as a result of the supplementary pension reform, they amounted to 1,504.5 millions, up 7.1% compared to the year before.
Other administrative expenses totaled 761.4 millions, down 2.0% from 776.6 millions on December 31st, 2007.
Net impairment of property, equipment and intangible assets totaled 173.5 millions. Net of non-recurring items, they amounted to 168.5 millions from 154.2 millions the year before.
Net impairment of loans, guarantees and commitments totaled 545.8 millions. Excluding profits on the finalization of sales without recourse and non-recurring write-downs carried out by companies belonging to Gruppo Banca Popolare Italiana, net write-downs for loan impairment amounted to 354.0 millions, in line with 354.5 millions reported on December 31st, 2006. With regard to loan quality, the net non-performing loan to loan ratio was 1.04% compared to 1.14% on December 31st, 2006, while the watchlist loan to net loan ratio increased from 1.19% to 1.52%. Net write-downs on impairment of other assets totaled 111.2 millions, and are almost totally represented by write-downs of financial assets available for sale, including the interest held in Hopa (post-impairment, the shareholding is recognized at an average value per share of 0.22 euro). Net of said items, they came in at 12.8 millions from 11.1 millions on December 31st, 2006.
Net provisions for risks and charges added up to 139.3 millions. Net of non-recurring provisions mainly recognized by companies belonging to the former BPI Group, they amounted to 72.9 millions from 102.3 millions the year before.
62 Report on group operations
Impairment of goodwill and equity investments, by definition a non recurring item, amounted to 171.5 millions, of which 170.4 millions due to the write-down of the carrying amount of the stake in Banca Italease. The latter was adjusted to the fair value conservatively estimated based on the shareholders’ equity book value of the associate reported in the consolidated annual report as at December 31st, 2007, net of goodwill. Following said write-down, the shareholding was recognized in the financial statements at a value corresponding to an average value per share of 7.66 euro. In the third and fourth quarters, as part of the strategic partnership agreements signed with Gruppo Fondiaria SAI and with Gruppo Aviva, the sales of 50% of the share capital of BPV Vita and of Novara Assicura were finalized, these being the special purpose vehicles for the operational implementation of the partnerships. These sales generated a total capital gain of 727.7 millions for the Group. In the course of the year other property and equity investment sales were finalized, leading to the recognition for the Group of an additional net capital gain of 54.2 millions. The year before net capital gains totaled 365.5 millions.
Income before tax from continuing operations totaled 1,669.5 millions. Net of non-recurring items it came in at 1,309.2 millions.
The loss after tax from discontinued operations amounted to 4.4 millions, and it includes the revenues and charges, net of intragroup relations, of equity investments under disposal. The peculiarity of this item and the fact that it is unrelated to the Group’s usual core business make any comparison with the same item shown in 2006 meaningless.
During the year the group fully expensed all integration charges primarily attributable to the redundancy plan that generated a negative impact on the income for the period of 148.3 millions after tax.
Tax on income from continuing operations totaled 742.6 millions, and include 98.8 million taxes on the above mentioned non-recurring items, and the negative impact caused by the tax rate reduction and the change in IRAP’s taxable base introduced by the 2008 Budget Law amounting to 112.1 millions (554.7 millions net of non-recurring items).
Net of a minority interest of 42.3 millions (36.4 millions net of non-recurring items), the pro-forma net income for the year came in at 731.9 millions.
To guarantee a full disclosure as required by Consob’s Regulation n. 11971 dated May 14th, 1999 and following amendments, covering the preparation of quarterly reports, shown below is the quarterly evolution of operating results in financial year 2007. It should be noted, that the comparison with the first quarters of the year is invalidated by the merger, as the data referring to the third and fourth quarter include the contribution of the former Gruppo BPI.
Reclassified income statement IV Q 2007 III Q 2007 II Q 2007 I Q 2007
Net interest income 587,254 539,281 357,989 354,614 Profit (loss) on equity investments carried at equity -10,295 24,646 -157,596 20,725 Net interest, dividend and similar income 576,959 563,927 200,393 375,339 Net commission income 284,201 291,577 230,351 215,845 Other revenues 47,359 58,177 31,606 34,369 Net financial income 302,653 20,072 67,411 70,255 Other operating income 634,213 369,826 329,368 320,469 Total income 1,211,172 933,753 529,761 695,808 Personnel expenses -404,396 -392,971 -188,246 -224,651 Other administrative expenses -160,180 -190,244 -96,744 -99,118 Net impairment of property, equipment and intangible assets -47,890 -42,654 -23,999 -23,145 Operating costs -612,466 -625,869 -308,989 -346,914 Profit from operations 598,706 307,884 220,772 348,894 Net impairment of loans, guarantees and commitments -196,181 -68,574 -49,010 -14,233 Net impairment of other financial transactions -106,534 -534 -827 -2 Net provisions to risks and charges -88,571 -11,922 -3,187 -2,741 Goodwill impairment -135,160 -35,249 - - Profit (loss) on disposal of equity and other investments 191,865 371,872 6,468 2,553 Income before tax from continuing operations 264,125 563,477 174,216 334,471 Tax on income from continuing operations -170,465 -145,878 -125,817 -125,956 Income after tax from continuing operations 93,660 417,599 48,399 208,515 Profit (loss) after tax from discontinued operations 12,388 - 676 2,017 After tax integration charges -6,280 -114,745 -2,924 - Net income for the period 99,768 302,854 46,151 210,532 Minority interest -16,015 -21,891 1,564 -5,740 Net income for the period attributable to the Parent company 83,753 280,963 47,715 204,792
63 Report on group operations
Net Income
1,200
1,000
800 975.2
600 731.9
(millions of euros) 400
200
0 2006 pro-forma 2007 pro-forma
Rating and stock performance
Group rating
The table below summarizes the long term and short term ratings assigned to Banco Popolare at the date of merger, comparing them with those that had been assigned to Banca Popolare di Verona e Novara (BPVN) and to Banca Popolare Italiana (BPI) before the merger plan was announced.
Rating of Banco Popolare (July 1st, 2007) and comparison with previous ratings
BPVN BPI Banco Popolare Rating firm Rating pre-merger post-merger (rating and outlook)
Long term (IDR) A+ BBB A (stable) Fitch Short term (IDR) F1 F3 F1 Long term A2 Baa2 A2 (positive) Moody’s Short term P-1 P-2 P-1 Long term A BBB A (stable) S&P Short term A-1 A-2 A-1 Long term ratings refer to senior debt.
This comparison illustrates that despite the fact that before the merger BPI’s ratings were lower than BPVN’s, the new Banco Popolare basically maintained the same levels of the former BPVN. The only exception was the long term rating assigned by Fitch, where Banco Popolare was downgraded by one notch compared to former BPVN, but it was upgraded 3 notches compared to former BPI.
The table below summarizes the ratings assigned to Gruppo Banco Popolare and to its subsidiaries in February 2008, including ratings other than those based on short and long term debt.
Rating of Gruppo Banco Popolare (updated at February 19th, 2008)
Banco Credito Banca Ducato Efibanca Popolare Bergamasco Aletti
Long term (IDR) A (stable) A (stable) Short term (IDR) F1 F1 Fitch Individual B/C Support 2 1 Long term A2 (positive) Baa1 (stable) Moody’s Short term P-1 P-1 Financial Strength C- D+ Long term A (negative) A (negative) A (negative) S&P Short term A-1 A-1 A-1 Long term ratings refer to senior debt.
64 Report on group operations
In 2007, the Group was in constant contact with rating firms and held four inquiry meetings to analyze in detail the strategic plan, the financial profile and the risk profile of the two banks before the merger and of the new Group.
Banco Popolare stock
Banco Popolare’s stock is listed on Borsa Italiana; trading started on July 2nd, 2007. When the merger was finalized, all outstanding BPVN and BPI shares were cancelled and 640,480,035 Banco Popolare common shares were issued, with a nominal value of Euro 3.60 each, leading to a total value of Euro 2,305,728,126.00, to be assigned to BPVN and BPI shareholders based on the exchange ratio. Once listed, Banco Popolare was added to 125 Italian and international Indices. The table below summarizes the weight of Banco in the main Italian and international indices where the stock was represented in February 2008: Weight of Banco Popolare in stock market indexes (updated February 20th, 2008)
Index Peso
S&P/MIB 2.335% MIB Banks 4.496% DJ Euro Stoxx Banks 0.766% S&P Euro Index 0.272% MSCI Euro 0.317% NB: weighted values were updated on February 20th, 2008 (source: Bloomberg).
The chart below shows the performance of the shares of Banco and of Credito Bergamasco, also listed on Borsa, as of 02/07/2007, compared to the performance of the indices S&P/Mib and Mib Italian banks.
Banking stocks have been penalized by the crisis triggered by the US sub-prime mortgage market, and in addition to this Banco shares were also affected by the integration process and by the well-known facts involving the associate Banca Italease.
Banco Popolare an Credito Bergamasco stock performance and comparison with S&PMIB40 and banking MIB indexes (01/07/2007 - 10/02/2008)
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
-35.0%
-40.0%
-45.0%
-50.0%
07 08 2/2007 1 /02/2008 02/07/200709/07/200716/07/200723/07/200730/07/200706/08/200713/08/200720/08/200727/08/200703/09/200710/09/200717/09/200724/09/200701/10/200708/10/200715/10/200722/10/200729/10/200705/11/200712/11/200719/11/200726/11/2003/12/200710/ 17/12/200724/12/200731/12/200707/01/200814/01/200821/01/2028/01/200804/02/200811/02/200818
Banco Popolare Credito Bergamasco SPMIB40 MIB BANCHE
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RISK MANAGEMENT
Generic risks
Main risks and uncertainties facing the Group
The activities performed by the Group expose the latter to the following main risk classes: credit risk, market risk, liquidity risk, operational risk, business risk, strategic risk and reputational risk.
Credit risk is the risk that a Group borrower (which includes also counterparties in derivative transactions) may fail to perform on an obligation, or that his or her credit standing deteriorates. The assessment of possible losses that could be incurred with regard to a single credit exposure or to the total loan portfolio is an inherently uncertain activity and depends upon many factors, among which, the general economic performance, or the economic performance of single manufacturing sectors, the change in the rating of single counterparties, structural and technological changes within borrowing companies, a deterioration of the competitive position of counterparties, the possible mismanagement of companies or of the borrowing counterparties, the growing indebtedness of households and other exogenous factors, such as legal and regulatory requirements. The lending policy adopted by the banking Group devotes a strong attention to containing risk through a stringent credit analysis at the time of granting the loan, geographical and sector diversification of loans, acquisition of guarantees, whenever necessary, securing the granted loan, and an accurate monitoring of the evolution of the lending relation. In general, the Group’s lending activity is mainly performed in areas characterized by a diversified business and entrepreneurial structure. As a result, the loan book risk is spread across various business sectors. The banking Group keeps its loan book under constant monitoring, analyzing the evolution of its risk-profile, of lines of credit, and line utilization by economic sector, region, customer segment and type of loan.
A special focus was devoted by Gruppo Banco Popolare to the assessment of creditworthiness of banks and institutional counterparties (investment banks and financial companies), in particular with regard to financial transactions (trading of derivatives and money market instruments, lending, investments in bonds). The key principles underlying the management of risk originated by these counterparties are: • centralization of the lending process at the Parent company’s; • internal system for rating assignment and periodic revision (supplementing the rating assigned by international rating firms); • daily measurement and control systems monitoring credit exposure and the compliance with ceilings; • minimization of the risk generated by OTC derivative trading by making a wide use of mechanisms documenting collateral arrangements (Credit Support Annex agreements with all the main counterparties).
Market risk is represented by the possibility that the Group may generate less revenues than expected, or suffer from depreciation of balance sheet items or capital losses from financial open positions, due to sharp and adverse movements in market rates or prices, in particular interest rates, stock prices, exchange rates, and the associated volatilities. Said losses depend on the presence of asset and liability misalignments in terms of item maturity, duration and level of risk coverage. Market risks can materialize both with regard to the trading portfolio, which includes trading and treasury financial instruments and the associated derivative instruments, and with regard to the banking book, which includes all other financial assets and liabilities. With regard to trading books, it is worth pointing out that the market risks stemming from the commercial activities performed by the Group banks are systematically transferred over to the subsidiary Banca Aletti. The residual risk exposures falling on the commercial banks are associated with the investment portfolios, whose sub-advisory is delegated to Banca Aletti. The main risk factor is the interest rate associated with bond portfolios, most of which have a floating rate or are hedged by asset swap structures, with a very contained total duration. Also the risk associated with single equity or bond issuers is managed very conservatively. The main market risks taken on by Banca Aletti are associated with interest rate and equity risk exposures as part of the trades carried out on cash and derivative markets. The exposure to the exchange rate risk is marginal. In order to ensure an effective risk management of the trading book, in particular with regard to derivatives trading, Gruppo Banco Popolare makes use of a risk management system with the following features: state of the art financial instrument management and valuation application, validation processes and control of valuation models for complex financial instruments and their market parameters, constantly evolving risk assessment methodologies in line with the financial innovation level of our business offering, strategic and operational limit system in each bank of the group, control units separate from operating units. As to the interest rate risk associated with banking books, the Group adopted a system of prudential limits, targeted for the single companies and approved by the competent corporate Boards, aiming at pegging the possible impact from sudden hikes or drops of market interest rates on interest income and on capital value.
Liquidity risk is represented by a possible instability suffered by the Group Banks, as a result of a negative mismatch between incoming and outgoing cash flows, which may take place in the short term, and that are not covered by liquidity reserves represented by on hand securities and eligible for refinancing with the European Central Bank. This risk, which may possibly materialize mostly in the presence of exceptional events, such as market liquidity crunches, may result in the
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Group having problems or being unable to fulfill on time and to pay out due payment obligations upon expiration. This risk is managed and minimized by changing the funding source mix, and by increasing the reserves of securities eligible for refinancing to counter unexpected cash outflows. The liquidity risk is monitored on a daily basis through a limit system aimed at guaranteeing a financial surplus condition for an appropriate period of time.
Operational risk is the risk of incurring losses as a result of the inappropriateness or the malfunctioning of procedures, of mistakes or shortcomings of human resources and internal systems, or external events. The legal risk is included, while the strategic and reputational risks are not. Among the main sources of operational risk there are: the instability of operational processes, insecure information systems, a growing use of automation, the outsourcing of corporate functions, the use of a small number of suppliers, strategy changes, frauds, mistakes, personnel recruitment, training and retention, and finally social and environmental impacts. It is not possible to identify a prevailing source of operational risk constantly present within the Group, since said risk is inherent in all corporate processes and activities. This leads to the implementation of widespread risk mitigation and management actions, in particular by transferring the risk over by way of insurance instruments and/or outsourcing, by constantly improving process efficiency (control enhancement and re-engineering) and by checking that the latter are compliant with the existing regulations.
Business risk is the risk of incurring losses, in terms of a decrease in non-interest income, due to changes in the macro- or micro-economic environments, leading to a volume reduction and/or income squeeze, that may weigh down on the bank’s ability to make profits. To this regard, the Group is exposed to the risk of fluctuations of commission income from investment services. This risk is managed and minimized through commercial policies and actions aimed at building customer loyalty, so as to favor a stable service provision activity with a constant income flow, and at maintaining a high value added and innovative business offer, in line with our customers’ present and future needs.
In addition to the above risks, covered by quantitative assessment processes, there are other risk classes, provided for in supervisory regulations with regard to the capital adequacy valuation process, that are now undergoing a qualitative analysis and valuation and for which quantitative valuation methodologies are being developed. In particular, worth mentioning are the strategic risk and the reputational risk.
Strategic risk is the current or prospective risk of suffering from a decrease in income or capital as a result of changes in the competitive scenario or of wrong strategic business decisions, of an inappropriate implementation of strategic decisions, of a poor or missing reaction to changes in the competitive scenario. For example, the risk may come from having based the strategic plan on an assumed evolution of key indices (for example projected levels of GDP or inflation, household savings, expected corporate investments in different economic sectors or geographical areas, etc.) that does not match market expectations, expecting a positive impact on Group results, which at the end may not be fully realized. The constant monitoring of operating performance, of the company’s key financials and of all the other important variables, be they internal or external to the Group, allows corporate boards in charge of making strategic decisions to minimize this risk, making it possible to take timely corrective and/or adjustment actions should competitive or market circumstances change.
Reputational risk is the current or prospective risk of suffering from a decrease in income or capital as a result of a negative perception of the bank’s image in the eyes of customers, counterparties, bank shareholders, investors or supervisory authorities, as a result of specific critical events hitting for example given operational, product or process areas.
Risk-taking, management and hedging objectives and policies.
Gruppo Banco Popolare and the companies of belonging conform their activities to the criteria of prudence and low risk exposure, with regard to: x the need for stability with respect to its banking activities; x its investors’ profile; x its cooperative origin.
In keeping with its risk propensity, the Group and its subsidiaries pursue the following goals: x stable growth, that is, characterized by a limited variability of results and of corporate value; x shareholders value creation as compared to financial investments having a comparable risk-return profile; x strong credit risk distribution, in line with the objective of financing prevailingly small and medium enterprises and households; x exposure to the structural interest rate risk tendentially in line with the industry best practice, to be pursued also through a progressive hedging of risks associated with items repayable on demand; x market risk-taking closely related to commercial needs; x exclusion of risks that are unrelated to core activities and accurate assessment of initiatives that introduce new types of risks; x development of more and more accurate and comprehensive risk monitoring methodologies, also in view of the validation of internal models for supervisory purposes; x active management of corporate risks, based on state of the art techniques;
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x disclosure of decision-making and negotiation processes, also based on a clear assignment of competences and responsibilities; x utmost risk exposure transparency to the market.
The Group can count on an organizational structure, corporate processes, human resources and skills that are well suited to guarantee the identification, monitoring, control and management of the sundry risks characterizing its business activity, where the main objective is to protect the financial solidity and reputation of the Group against adverse events. The entire risk management and control process is coordinated by Banco Popolare, in its twin capacity as Parent company and entity in which all the joint and mutual interest functions are combined. The risk management, control and hedging process runs at different levels of the organizational structure. The Supervisory Board approves the strategic plans and the risk management policies, and in particular it verifies that the adopted methodologies and the pursued goals are consistent with the Group’s risk profile. The Management Board implements the decided plans, making sure that the operational decisions be communicated to all the units concerned. The Audit Committee, made up of members of the Supervisory Board, is in charge of watching over the functionality of the complex internal audit system and it supervises the entire process, verifying its formal and substantial adequacy. The Risk Management policy is developed by the Risk Management Committee and the Group Finance Committee. An important role is played by the Risk Control and Research Unit and by the Group Auditing Function, that are part of the Parent company’s Governance structure. With regard to market risks and to the counterparty risk control, the Parent company’s Finance Head department contains a special function called Financial Monitoring, which is in charge of the first level operational monitoring. The Risk Committee supports the Supervisory Board, the Management Board and the Audit Committee. It is convened every three months, it is made up of representatives of the main Parent company services and functions, it helps corporate board to manage and control risks, in particular to set forth strategies, to define measurement techniques and to monitor mandates and power delegations. Finally, it may also propose actions to maintain conditions of stability. The Finance Committee meets every month and it supervises market, transformation and liquidity risk management actions. It also defines the Group’s funding policies. For further information on the risk management and control system, please see Section E of the Explanatory Notes.
Other risk factors
Illustrated below are the risk factors and/or criticalities, both generic and specific, to which Banco Popolare and the Group it heads may be exposed to.
Risks associated with the merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana
The Merger between BPVN and BPI exposed Banco Popolare to the risks and complexities typical of integration processes between credit organizations that in the past used to do business in an autonomous and independent way. As a result, in keeping with the business plan approved on December 13th, 2006 by the Boards of Directors of the two banks, the integration called for a stringent coordination of the management, the strategies and the business activities of the various entities. Among other things, the merger requires information systems and operational models to be harmonized and to converge into a single model. This process brings with it the typical risks of business combinations. However, it should be highlighted that both BPVN and BPI in the last few years have been managing various important processes of this kind and in doing so they acquired the necessary specific expertise.
As it shall be described in greater detail in the relevant sections of this report, in order to minimize the risks associated with platform integration, a special project structure has been created, aiming at guaranteeing the control quality over the migration of customer administrative data, and processes have been put in place to mitigate operational risks, for instance: x the adoption of simulation/test procedures for each single migration event, to prevent and correctly manage possible criticalities; x the adoption of data reconciliation and certification related to migrated customers.
Risks associated with shareholding caps and with the exercise of the voting rights
Art. 30 of the Single Banking Act states that in a cooperative bank no shareholder may possess an interest exceeding 0.50% of the share capital. The above mentioned cap does not apply to UCITS, that are subject to the limits set by their own specific regulations. Should Banco Popolare determine that said limit has been exceeded, and in any case in compliance with existing regulations, it shall give immediate notice of the breaching to the shareholder and the intermediary. Excess shares must be alienated within one year of the objection, after which the relevant capital rights accrued until their alienation are acquired by Banco Popolare. Art. 30 of the Single Banking Act states that the registered shareholders of cooperative banks are entitled to only one vote, under the “one member – one vote” rule, irrespective of the number of shares they hold. Art. 23 of the Articles of Association states that each registered shareholder may represent under a written proxy only one other registered shareholder, provided he/she is not a member of the supervisory or management boards, or a Company employee, or a
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member of the administrative and auditing boards or employee of the companies directly or indirectly controlled by Banco Popolare.
Risks associated with pending legal proceedings
1) Former Banco Popolare di Verona e Novara Group
Described below are the risk factors associated with pending court proceedings against BPVN and/or its subsidiaries, and that as a result of the merger, upon its coming into effect shall be pending against Banco Popolare.
Banco Popolare di Verona e Novara in a party in some clawback actions instructed as part of bankruptcy procedures. Illustrated below are the main clawback actions instituted against BPVN:
Clawback action instructed by Italgest bankruptcy trustees against former Banca Popolare di Novara S.c. a r.l. On November 12th, 2004 the Naples Court pronounced its decision in first instance on the clawback action under examination. In first instance the court condemned Banco to pay €129.2 million plus any interest and legal expenses. Against this decision Banco Popolare filed an appeal (still pending). To be noted, that the actual contingent liability shall not in any case exceed the net bankruptcy liability balance. At present, bankruptcy assets are still being measured. Total loans included in bankruptcy liabilities, net of Banco Popolare’s credit (amounting to about 4.5 millions) total 59.5 millions. Note that various court denials of insolvency are pending against the Municipalities, regarding the preemptive rights of the admitted credits. Banco also instructed an equal number of clawback actions under art. 102 of the bankruptcy act (now art. 98) against the Municipalities to which the Treasuries belonged (representing credits accounting for about 72% of the admitted bankruptcy liabilities), since criminal procedures ascertained the non liability of former BPVN’s officers on the one side, and on the other the criminal liability of most Municipal officers.. During said clawback proceedings, upon instruction of the Court, the Official Receiver ordered the trustees to take part in the proceedings, to require the revocation of credits. All revocation requests filed up to now refer to credits included in the bankruptcy liabilities for a total amount of about 44.9 millions. Italgest Bankruptcy trustees also instructed a legal proceeding against former Banco Popolare di Verona e Novara (now Banco Popolare) invoking the latter’s responsibility, also under art. 2049 c.c., on the assumption that ex BPVN and its officers contributed to causing the insolvency by keeping up the lines of credit with Italgest. The required claims are equal to the entire bankruptcy liabilities outstanding at the time of application (lire 107 billion, equivalent to Euro 55,260,888.21). We deem this legal action (the proceeding is still in first instance) to be groundless, supported also by the criminal court decisions acquitting BPVN’s employees and condemning Municipal employees, as well as by the dismissal of the counterparty’s requests for inquiry to demonstrate the extent of the alleged suffered damages. Banco Popolare decided not to set aside any provision against the requested claims, in keeping with the counsel expressed by defendant’s lawyers. On May 22nd, 2007, a third party filed a bankruptcy agreement proposal for the Italgest S.p.A. Bankruptcy which may have met the approval of most creditors (but the Court order has not been issued yet).
Clawback action instituted against the banking industry by the Bankruptcy Commissioner of Parmalat S.p.A. Towards the end of 2004, Parmalat S.p.A.’s Bankruptcy Commissioner filed a class clawback action against all the banks that entertained business relations with Parmalat. The clawback action covered all the credit recovery procedures against the Collecchio company, extending the “suspicious” period to December 18th, 2002. The claims add up to more than 170 million euro for Banca Popolare di Verona – SGSP S.p.A. in its capacity as transferee of Banco Popolare di Verona e Novara S.c.ar.l. and to about 15 millions for Credito Bergamasco. According to the banking industry at large, the above clawback action appears to be illicit and groundless, lacking the necessary pre-requisites. It should also be noted, that the time window covered by the legal action appears irregular, in that the claim that the insolvency could be or was known before the actual financial crack came to light is inadmissible. In keeping with the line of procedure shared by the entire banking industry, Banco started all the defensive actions to protect its rights. At present the proceeding are still in a preliminary phase.
2) Former Banca Popolare Italiana Gruppo
Illustrated below are the risk factors associated with pending legal proceedings against BPI and/or its subsidiaries and still pending against Banca Popolare di Lodi S.p.A. following the transfer of the business segment by Banca Popolare Italiana Soc. Coop.
BPI and the Group companies are involved in various legal proceedings that are also associated with the Group’s ordinary business. The main risk positions are illustrated below.
Litigation between Banca Popolare Italiana and Dresdner Bank AG With letter dated April 26th, 2006, Banca Popolare Italiana demanded Dresdner Bank AG (hereafter called “Dresdner”) to pay a Euro 38,066.508.22 claim (plus monetary revaluation and legal interests as of April 30th, 2003) as compensation for the damage suffered by BPI as a result of a series of structured finance deals between BPI (back then called Banca Popolare di Lodi) and Dresdner in April 2003.
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On June 7th, 2006, Dresdner requested the London Commercial Court to ascertain the lack of whatsoever contract liability on the part of Dresdner with regard to the above mentioned structured finance deals. To date, the court decision is still in its preliminary phase. Moreover, on April 5th, 2007 BPI filed with the Public prosecutor’s office at the Court of Lodi a denunciation-action against some former BPI officers and Dresdner officers in relation to irregularities identified in the above mentioned structured finance deals.
Litigation against Giovanni Cerea On January 23rd, 2001, Mr. Giovanni Cerea filed a civil action with the Civil Court of Milan demanding to condemn BPI to pay a 38.5 million euro claim for an alleged mandate the plaintiff would have received from BPI in relation to the acquisition of the controlling stake of Banca Popolare di Crema. The plaintiff also required to be paid claims in relation to the failure to fulfill the alleged commitment to appoint the same Mr. Cerea in the Board of Directors of Banca Popolare Italiana e di Crema post-takeover, and in relation to the groundless annulment of an additional mandate for Banca Popolare di Cremona; according to the adverse party, the claim relating to corporate offices should be tantamount the remuneration he would have received plus an additional amount (to be equitably determined) for the loss of prestige that he would otherwise have acquired by filling said offices; as to the mandate for the acquisition of Banca Popolare di Cremona, the claim would amount to 10% plus VAT and accessories of the value of the bank upon finalization of the acquisition. BPI appeared before the court and challenged all the plaintiff’s claims, for being groundless and used as a pretext, and made a counter-claim for condemning Mr. Cerea to pay damages for reckless action at law. On January 2nd, 2002, Mr. Ernesto Preatoni and the company Parin S.r.l. appeared before the court and filed claims both against the plaintiff and the defendant. With decision n. 7332/04, the first instance Court accepted the defensive argument of BPI, rejected all the claims by the plaintiff and successive third parties, and condemned the latter to refund the trial expenses to BPI. This decision was impugned by all losing parties, who in July 2004 served BPI with two summons to appear in appeal court for a full reversal of judgment n. 7332/04, based on the same reasons put forward as ground for the claims at first instance. The actions, which were instituted separately, were joined in the II Section of the Appeal Court of Milan, and in the hearing held on February 8th, 2005, the court adjourned the case to illustrate its conclusions. On June 8th, 2005, BPI signed an out-of-court agreement with Parin S.r.l. and Mr. Preatoni, based on which Parin S.r.l. and Mr. Preatoni waived the legal action and the associated claims (compensation and annulment of takeover) and in turn BPI waived its claim for compensation against Parin S.r.l. and Mr. Preatoni. Under said agreement, BPI paid Euro 200,000.00 to Parin S.r.l. and to Mr. Preatoni and undertook to hold them harmless, up to Euro 53,209.68, for possible claims they would have to pay in favor of Mr. Cerea as trial expenses, with regard to the first instance and the appeal trials. The sum due as trial expenses was requested in first half 2006 directly by Mr. Cerea; in the course of the same year, Parin S.r.l. invited BPI to pay the trial expenses, under the above agreement. To be noted that under the above agreement, Parin and Preatoni waived their requests also against Mr. Cerea, who in turn accepted to waive his action against them; as a result the Appeal court, with judgment 2392/05, declared the action and legal proceedings between Preatoni, Parin and BPI (on the one side) and between Preatoni, Parin and Cerea (on the other side) to be extinguished. The only action still outstanding is the suit between BPI and Mr. Cerea, and as a result the legal expenses of Preatoni and Parin’s defense are due (under the above agreement). As to the suit still pending between BPI and Cerea with the Appeal Court, on March 27th, 2007 the hearing to illustrate conclusions took place. On said occasion, Mr. Cerea’s defendant produced statements, deeds and documents, acquired during the criminal proceeding n. 19195/05 pending in the Milan Court (legal proceeding covering the so called “hostile takeover of Antonveneta”), and dealing with circumstances regarding the acquisition of Banca Popolare di Crema by the then Banca Popolare di Lodi. The proceedings were repeatedly adjourned to view said documents, and finally the trial was scheduled for May 20th, 2008. The outcome of the decisions being highly uncertain (which makes it impossible to make predictions or assumptions), BPI, in keeping with international accounting standards, deemed it unnecessary to set aside any provisions for risks and charges.
Parmalat and Cirio positions With regard to investigations underway at the Public prosecutor’s offices of Parma and Milan as a result of the financial crack of Gruppo Parmalat, on March 6th, 2004, a memorial was filed with the above prosecutor’s offices to clarify that BPI and its boards had no part in the facts under investigation. In particular, clarifications were provided with regard to (i) a real estate deal regarding the land owned by the company Eurolat and located in the municipalities of Lodi, Tavazzano and Montanaso; (ii) a loan granted to Mr. Calisto Tanzi, in 2003, that Mr. Calisto Tanzi should have used to subscribe a capital increase in Parmatour; and (iii) the facts associated with BPI’s purchase in October 2003 of the Euro 100.000.000,00 bond issue by Parmalat Finance Corporation at the price of Euro 102,187,200.00. With regard to the latter fact, on November 30th, 2004 and December 15th, 2004, BPI filed by way of its lawyers a denunciation-action and a subsequent integration against Mr. Tanzi and Mr. Ferrari charging them of aggravated fraud. The pending proceeding with the Public prosecutor’s office of Parma is at its preliminary hearings. Although a civil action was instituted against the former directors of BPI, it was revoked on account of the previous settlement with the Parmalat group. Similarly, with regard to investigations underway at the Public prosecutor’s offices of Rome as a result of the financial crack of Gruppo Cirio, a memorial was filed with the above prosecutor’s offices illustrating the lending relations between BPI and Gruppo Cirio to clarify once again that BPI and its boards had no part in the facts under investigation. The proceeding is at its preliminary hearings.
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To date it is impossible to make a precise assessment of BPI’s possible risk profiles, in terms of liabilities. Note, that in case its officers should be condemned, BPI may be considered liable under civil liability and may have to pay damages. However, it should be noted that on February 2008 the Civil Court of Rome totally rejected the claim for compensation filed in the Cirio action against Banco and BPI, while it condemned other defendants.
Residual legal risks associated with Antonveneta and BNL events It should be noted that also under Law D. n. 231/2001, Banca Popolare di Lodi S.p.A. is still facing a residual legal risk with regard to the Antonveneta and BNL events (criminal proceedings n. 844/07 and n. 3686 R.G. G.I.P. – Milan Court). As regards said residual risk, the Board of Directors of Banca Popolare di Lodi deemed it appropriate to set aside an allowance for risks and charges totaling euro 7.5 millions.
Gian Paolo Zini Litigation With summons dated July 21st, 2004, Parmalat Finanziaria S.p.A. ("Parmalat Finanziaria") and Parmalat S.p.A. ("Parmalat") summoned Lawyer Gian Paolo Zini and Messrs. Calisto Tanzi, Stefano Tanzi, Luciano Del Soldato, Giovanni Tanzi, Giovanni Bonici, Gianfranco Bocchi, Claudio Pessina, Franco Gorreri and Fausto Tonna. Parmalat Finanziaria and Parmalat instituted an action for compensation (under articles 2392, 2393, 2394, 2447, 2448, 2449 of the civil code, as well as for contract and out-of-contract liability under article art. 2043 of the civil code) against the defendants, stating that in their various capacities they were responsible for the default of the two companies of the Group owned by Mr. Calisto Tanzi. Hence, a claim for damages of 2.63 billions in favor of Parmalat and 9.273 billions in favor of Parmalat Finanziaria. In the course of the trial, the newco Parmalat S.p.A., being the “assumptor” of the judicial compositions, joined the claims and submitted the same requests. With summons on third party complaint, Lawyer Zini summoned a number of entities to appear in court, among which also BPI, asking for the alleged joint liability of the defendants to the alleged plaintiffs to be ascertained. With deed dated January 4th, 2005, BPI appeared before the court asking that the third party summons issued by Lawyer Zini against BPI be verified and declared inadmissible, as it fails to meet legal requirements and/or for lack of passive legitimacy. To this regard BPI also requested that all the adversary claims be rejected, since they are totally groundless in fact and by right. In the joint hearing held on May 26th, 2006, some of the parties summoned by Parmalat and Parmalat Finanziaria raised the objection to extinguish the judgment under art. 8 of Law D. 5/2003 as the plaintiffs had not duly and/or regularly sent them the notification of the date of the hearing. A new hearing was therefore fixed on September 20th, 2006 for the oral discussion of said objections. In this hearing, the Court decided to suspend the judgment. In particular, since the Court attested that Parmalat S.p.A. under extraordinary administration acted as a plaintiff for damages in a criminal proceeding for the same events, which were objected in the case under examination (thus unequivocally transferring the civil action in a criminal case), it declared: 1. the extinguishment of the civil action promoted by Parmalat S.p.A. under extraordinary administration; 2. the suspension of the civil case under examination, determining that it may resume between the assumptor (newco Parmalat S.p.A. which as we said stepped in the civil action but did not formally institute a civil action in a criminal case), the defendants and third parties (among which BPI), only upon resolution of the criminal case. The reason is that, in consideration of the preliminary nature of one case over the other, the judgment resolving the criminal proceeding may be material and opposable in the civil action.
To date, the civil action is suspended until the resolution of the criminal proceeding. Without prejudice to what illustrated above with regard to BPI’s defense and the entity of the claims put forward by Lawyer Zini (who asked that the joint liability of BPI be ascertained with regard to the 2.63 billion claim in favor of Parmalat and the 9.273 billion claim in favor of Parmalat Finanziaria), it is impossible to predict the possible outcome of the court decision. BPI’s Board of Directors, in keeping with international accounting standards, deemed it unnecessary to set aside any provisions for risks and charges.
Viatel Litigation Banca Bipielle Network S.p.A ("Bipielle Network") is a defendant in a high number of civil actions regarding the default of Viatel’s bonds. In the various actions, bond holders complained that Area Banca S.p.A. (now Bipielle Network) would have traded Viatel’s bonds in breach, in particular, of the rules of conduct under art. 21 of the single finance act (TUF) and articles 26, 27, 28, 29 and 30 of Consob’s regulation n. 11522 dated July 1st, 1998, and following amendments. The overall claim of the various instituted actions totals about 45.2 millions, against a discounted provision of Euro 18,199,354. With regard to said proceedings, many are well in progress, others have gone through the first instance phase, and few are in the appeal phase. For the sake of completeness, it may be added that at the end of an inspection of Area Banca S.p.A., on April 28th, 2005, Consob issued a sanction against the then members of the corporate boards, company managers and employees of Area Banca S.p.A., as well as of Bipielle Network (former Area Banca S.p.A.) for the operating management of Area Banca S.p.A. (in particular, for the provision of investment services). As a result of said sanction, Bipielle Network paid all that was due in terms of sanction and interest, and at the same time sent the relevant notices to refund the due amounts to the Bank vis-à-vis the sanctions issued by the Ministry of Economy and Finance to the individuals who actually committed the violations and are therefore liable for the single sanctions.
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It cannot be ruled out that the objections raised in Consob’s report, together with the order issued by the Ministry of Economy and Finance, may have negative effects on the development of the ongoing proceedings instituted by the holders of Viatel bonds against Bipielle Network. Note, that the controlling stake in Banca Bipielle Network was transferred in September 2007, and therefore this company does not fall within the civil liability and supervisory scope of Gruppo Banco Popolare.
PLANNING, AUDITING AND SERVICE ACTIVITIES
Human resources
Human Resource Development
Illustrated below are the most noteworthy employee development projects in 2007, aiming at promoting and valorizing people and their knowledge and experience: x preparation of a new “Integrated Index of Competencies”, to be used across the whole Gruppo Banco Popolare, and the definition of a new Group performance assessment system; x organization of “Managerial alignment meetings”, a program aiming at favoring the integration among managers of all the companies of Banco Popolare; x designing of the “Talent Project”, to identify resources that in the next future shall fill key offices within the Group.
The New Integrated Index is the result of the comparative analysis between the Index of Dispositions SR2000 of former Gruppo BPI and the Index of Competencies of former Gruppo BPVN and it includes 32 competencies. Distinctive competencies and their relative expected level have been identified for each new “professional family”. The set of expected competencies and behaviors associated with one’s role make up the basic rules that shall drive the working performance of all colleagues in Banco Popolare. Accordingly, the performance of one’s staff shall be analyzed and assessed along uniform and objective parameters, and it will be possible to provide them useful indications to develop behaviors that are befitting with the professional role of belonging.
After the merger, in order to favor the integration between managers of Banco Popolare, ”Managerial Alignment Meetings” have been organized. Said meetings involved a total of about 260 people, subdivided in homogeneous professional groups, with the goal of building a climate of participation and trust among people and to train some competencies that are key to the achievement of business results, such as: x leadership x effective communication x problem solving ability x team work.
As of March 2008, additional meetings shall be organized aiming at accelerating the managerial integration process under way, at building and consolidating operational excellence and unity as well as speed of implementation and finally at training other important skills.
A strong message of change is represented by the “Project to Identify and Enhance Talents”. The goal is to identify and train in-house people showing a strong motivation and a high potential, allowing them to fill in the next future roles of greater responsibility, up to the top. The project starts with an initial selection process that goes through a number of steps: from meeting objective criteria up to assessment tests assessing performance, potentials and finally motivation. Starting from an initial pool of about 2,700 colleagues, a select group of “talents” shall be identified, and they shall benefit from specific and innovative managerial development actions. Training development activities of course shall not be restricted to talents, in fact it shall involve most participants. Thanks to the feedback they receive, they shall be able to acquire an increased awareness of their strong points and opportunities for improvement.
Training
Numerous training initiatives have been launched, aiming primarily at supporting the organizational changes underway in 2007. They spanned from in-class courses, e-learning programs, and hand-on experiences devoted to the different roles at Network and Head Office level. A great care was devoted to the planning of supporting actions, that is, operational support activities by expert colleagues, at the organizational units affected by change, as well as to the activation of a dedicated help desk service.
In 2007, about 106,600 total training days were delivered for the whole Gruppo Banco Popolare, be it in-class or e- learning. In-class training accounted for 72.2%, e-learning for 22.3% and the remaining 5.5% regarded supervised practical training/shadowing.
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A special attention was devoted to training for roles that involved managerial responsibilities, with the goal of improving leadership abilities. Among the most important projects, worth mentioning is the program called “Corporate Learning”, dedicated to all the employees of the bank’s Corporate Centers, to favor the shift from more product-oriented professional skills to a stronger customer/entrepreneur-centered vocation. The managerial training of Branch Managers continued, with the objective of learning, sharing and experimenting an entrepreneurial planning, management and control method with regard to the goals of the point of sale, with a special focus on human resource management to improve the commercial effectiveness of the team. An important 60-hour training action was implemented to favor a more widespread knowledge of consumer protection regulations regarding insurance contracts; other actions were aimed at enhancing Customer communication in the selling/advisory process, in keeping with the spirit of the Code and the new Regulation issued by ISVAP. This initiatives involved about 1400 colleagues. Many training proposals aimed at supporting Credit matters, and there were also training activities dedicated to colleagues working in the Head Office, both Heads and Professionals, to strengthen their competencies in view of a stronger orientation towards a successful performance and of an improved service to internal customers.
Remuneration policies and incentive schemes
Following the merger of the BPVN and BPI Groups, Banco Popolare immediately focused on the analysis and monitoring of the remuneration dynamics of the various banks belonging to the Group, covering both the variable and the fixed wage portion, since it was deemed important to be able to substantiate decisions conducive to internal equity and competitiveness with the external market. To this regard, the participation by all the banks of the Group in the remuneration survey coordinated by the Italian Banking Association (ABI) was a useful groundwork to access to homogeneous and up-to-data comparative data. In 2007, Banco Popolare introduced a number of incentive scheme regulations enacted by the companies where these systems were a well-established practice. Already in the course of the year, a major effort was devoted to the designing of variable wage systems to be applied in 2008. Said systems, which are functional to the support of profitability and financial targets set out in the Business plan, display strong common features, while guaranteeing the necessary company specificities and providing for rules of reciprocal solidarity across the single company roles and between the companies and the Parent company.
The foundation of the incentive and loyalty-building plan devoted to Top Management lies on a motivation towards company value growth over time, by aligning the latter with the variable wage dynamic and at the same time making an effective loyalty-building tool available. The managers participating in this plan are assessed and monitored based on assigned profitability and financial objectives, customer service quality and objectives associated with the development of managerial skills. Also the management’s contribution to the achievement of the results projected in the main organizational and commercial development processes envisaged in the business plan are assessed and incentivized. The positive assessment of the “service quality” view has become for all managers an essential pre-requirement to be granted a bonus. In other words, not even outstanding profitability and financial results are rewarded if they are not achieved in keeping with the internal and external customer service levels, that are becoming more and more the ultimate differentiators in terms of company value on the market.
Consulting and Relations with Trade Unions
The formation of Gruppo Banco Popolare called for an intense exchange with trade unions, before and in anticipation of the merger, to favor the dissemination of information and knowledge of the deal’s key characteristics and opportunities. The following step, when the merger data was getting closer, was the signing of three key agreements: the Framework Agreement, which defines a set of common and uniform rules to be applied in the various implementation phases of the Business plan after the merger; the Migration agreement, which identifies rules to manage the harmonization of IT procedures across all the companies of the Group, and the Protocol of Trade Union Relations, centered on the principle of fair trade union relations and on the need for a constructive consultation. These agreements were then supplemented by the Agreement on the Solidarity Fund, to support the necessary personnel rebalancing between head office and network activities and to minimize the recourse to more radical reorganization interventions. Again as part of the merger, it was planned to extend part-time work regulations to the entire Group, in expectation of making a wider use of part-time employees. In the second half of the year, talks with Trade unions covered the implementation aspects of the Business plan together with all the associated reorganization and harmonization actions. In particular, the parties discussed the Bipielle ICT-SGS merger, the transfer of the business segment “Banco Popolare real estate management”, the reorganization of the Group Functions Finance and Audit, including the combination involving Bipitalia Gestioni SGR, Organization, Purchasing, Auxiliary Services, Technical Service, Custodian Bank and Direct Bank, and the sale of Banca Bipielle Net.
Pre-merger bargaining in former Gruppo BPVN
Consultation with trade unions before the merger led to the signing of numerous agreements, among which the “For.te.” Agreement, which promotes training programs to consolidate and develop competencies and fosters the permanent training and professional growth of human resources; by signing the trade union agreement we were granted access to the financing facilities of the solidarity Fund.
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Among other signed agreements, worth mentioning are the agreements regarding the 2007 Company Premium, the definition of better financial terms for personnel, the first so called Contratto Integrativo Aziendale (CIA) (supplementary employment agreement) signed by Banca Aletti and by Aletti Gestielle and the renewal of Creberg’s CIA, the trade union electronic bulletin board, recording systems for telephone orders and the Contact Center.
Pre-merger bargaining in former Gruppo BPI
Also in the former BPI Group numerous agreements were signed before the merger, among which those covering ordinary Personnel mobility, the profit allocation of Banca Popolare Italiana and of Banca Popolare di Crema, the classification of the professional roles at branch network level, recording systems for telephone orders and the reorganization of Banca Popolare di Crema.
Renewal of the National Bargaining Agreement (CCNL) dated February 12th, 2005
On December 8th, 2007 the agreement for the renewal of the CCNL dated February 12th, 2005 for banking employees was entered into. The consultation, whose solutions have become a national reference point in the debate on the reform of the contract model, saw the direct participation in the bargaining of the Managing Director of Banco Popolare, in his capacity as Chairman of the Delegation for ABI’s negotiations.
Internal audit
In the course of 2007, the Parent company’s Group Audit activities were in line with the objectives addressing the constant assessment of the adequacy of the internal auditing system not only in the Parent company, but also in the entire Group. Audits were conducted to verify that regulatory, operational and business requirements were met, and at the end they were transposed in information, assessments and recommendations regarding the correctness of the business activity and the effectiveness of the auditing system, while possible improvement areas have been pointed out.
The Parent company’s Group Auditing Service is in charge of conducting institutional, coordination and service audits. In particular, on site and remote activities were performed regarding the Parent company’s central and peripheral structures, with a special focus on particularly critical processes, the Parent company’s Group structures in Italy and abroad, as well as the central and peripheral structures of the banks and companies covered by a specific outsourcing agreement, in virtue of which a global or partial auditing service is delivered. The individual auditing functions of the subsidiary companies and banks, when existing, are in charge of the remaining activities that have not been outsourced, still in coordination with the Parent company’s Auditing Service.
In detail, outsourced activities mainly covered audits on central structures with a special focus on investment service provisions - an ambit where in many cases also the management of customer complaints was outsourced - ICT auditing, the specialized operational support to the Regulatory Boards set up in the single group companies under Law D. 231/01, as well as the remote monitoring of the banks’ branch networks in terms of credit, accounting-operational, anti-money laundering and financial risks.
Following the merger between the groups Banca Popolare Italiana and Banco Popolare di Verona e Novara, which led to the formation of Gruppo Banco Popolare, a specific monitoring activity was launched over the integration plan that was developed based on the guidelines set forth in the Business plan. A special attention was devoted to the migration of information systems for the banks of the former Gruppo BPI onto the Group target system.
In the course of the year, the auditing function devoted a special attention to the assessment of the project dealing with the adoption of the indications put forward by prudential supervisory regulations with regard to credit, operational and market risks. With regard to credit risks, the activity was planned in view of the validation application with the Bank of Italy scheduled in 2008. The audits conducted on the branch networks of the single banks did not evidence any particular criticalities and basically confirmed the compliance of ongoing operations. Following the adoption of MiFid, complaint management is expected to be transferred from Auditing to Compliance.
The constant support granted to the other corporate functions was significant, for example cooperating in verifying regulations to be issued, or analyzing the processes to assess the adequacy of single products to be offered to customers. A strong support was given to the Supervisory Board, the Auditing Committee, the Management Board and the Chief Executive Officer, as well as to the Boards of Statutory Auditors of the Group companies, by submitting to the attention of the above boards the possible improvements to the risk management policies, to risk measurement tools and procedures, as well as by assisting the Auditing company for the obligations associated with the auditing of the financial statements and the support activities related to the certifications required by ABI’s “Patti Chiari” initiative.
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Compliance
The Group Compliance Function must identify, assess, mitigate, manage and monitor the “non-compliance risk” associated with the activities performed by the Group’s banking, financial and operating companies, namely, the risk of incurring judiciary or administrative sanctions, substantial financial losses or reputational damages as a result of breaches of imperative legal or regulatory provisions, or statutory provisions (articles of associations, codes of conduct, corporate governance). The non-compliance risk may materialize at any level of the corporate organization, especially across operational structures, and by nature it is more suited to be managed primarily through prevention, also by raising employees’ awareness and sense of responsibility.
The mission and goals of the Compliance Functions are: x to contribute to the transposition of the credit/financial regulations, identifying the regulations applicable to the Parent company and to the other Companies of the Group, measuring and assessing their impact on corporate processes and procedures, providing the functions in charge of adopting and transposing them with their interpretation. x to coordinate the compliance functions set up in the companies belonging to the Group in keeping with the guidelines given by the Head Office and in accordance with the requirements of the Regulatory Authorities.
In general, the most important regulations with regard to the non-compliance risk are those related to brokerage, management of conflicts of interest, customer transparency, and in general consumer protection regulations. The Compliance Function assists the functions in charge of preparing internal regulations for a correct transposition of credit/financial laws and offers advice on the interpretation and enactment of regulation regarding for example the provision of credit, the provision of investment services, the protection of investors and savers. Hence, as part of its activities this function must also verify the compliance of the organizational structure and of the rules and regulations of internal processes with the existing laws. The function takes part in the decision making processes of the parent company bank and of the Group companies in its capacity as process and procedure validator, or co-validator, within ad hoc committees (for example, the Committee for the innovation of financial products), and it supports the operating structures to set up operations or processes that have a high compliance risk or impact. As a result, it is a privileged party in so called first level audits, and it tends to organize along specialized units devoted to financial, banking and corporate governance issues.
Technological and administrative services
The technological and administrative services of the new Group have been centralized in Società Gestione Servizi BP S.p.A. (hereinafter SGS), which is the “operational engine” of the Group.
For SGS 2007 was a year of change and development, during which its role within the Group increased, both as a result of the centralization of activities which were previously performed by the banks, and of the new and wider configuration of Banco Popolare.
With regard to the centralization of new activities, as of January 1st, 2007 SGS started to manage the Group security through a function specializing in active and passive security issues, in charge of defining security strategies and standards, of guaranteeing and safeguarding the safety, health and security of employees and third parties and protecting corporate assets.
In the second half of 2007, when Gruppo Banco Popolare was formed on July 1st, the following administrative services were centralized in SGS: Back Office, Payment and Collection, Finance and Special Loans of the former Gruppo BPI, leading to the detachment of about 300 employees assigned to these tasks. On December 5th, 2007, the merger by acquisition of Bipielle ICT S.p.A., the former BPI Group’s IT company, into SGS was finalized.
During the year, the Technological and administrative services were not only characterized by a growth in terms of resources, activities and served customers, but also by a significant commitment towards the achievement of a challenging goal, that is, completing the IT migration of all the banks of the ex-Gruppo BPI onto the target system in eight months. This integration objective was successfully met, and service quality in the meanwhile was always maintained constant not only with regard to IT issues, but also across the administrative activities involved in the pre- and post-migration phases.
With regard to design, in 2007 important IT system upgrades and new implementations were carried out, aiming at improving performance and controls, as well as at implementing compulsory banking projects and products satisfying business needs; all this was achieved while making a huge effort towards the unification of the Banks’ IT systems and the integration of technological solutions across the Group.
Ordinary technological development activities were mainly devoted to system upgrades. Worth mentioning are: x the enhancement of the “Business Continuity” technological architectures through the add-on of an external “Coupling Facility” which avoids the risk that the failure of one of the CPUs may impair performance; x rationalization of departmental computers by upgrading the hardware and the entire architecture design;
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x completion and consolidation of the new data transmission network MPLS, enabling the support of web-oriented applications (for ex. Ve.Ra.) offering a greater opportunity to develop new applications and services; x the constant renewal of ATM machines, installed in keeping with plans and with the need to bring them up to date with microcircuit technology; x completion of the press unit outsourcing, resulting in a containment of postal costs, which would have otherwise significantly increased due to the recent increase in postal rates.
Ordinary Centralized Administrative Service activities covered various aspects, among which the transfer of the authorization of POS records in Branches, support to the activation of the new check procedure, activities associated with the activation of the OTC Derivatives Rate module, dematerialization of auto compliance certificates. Much effort was also devoted to activities associated with the Custodian bank function, among which the activation of a new Hedge Fund (Alpha Fund) of Aletti Gestielle Alternative, the transfer in Banca Aletti of the Asset Management unit of Bipitalia Gestioni SGR, the transfer of the proprietary portfolio of BPL’s London branch to the Parent company and finally the transfer of derivative contracts listed by the former BPI Group from Centrosim to Banca Aletti.
Technological projects and investments
Migration of the Bank’s information systems
The unification of the information systems and of the technological architectures across the Group represented the greatest effort from the point of view of technological projects in 2007. System integration represented a major planning challenge considering the large number of branches involved, the number of workstations and the technological complexity caused by the different software architectures in use in the two Groups. Integration actions were completed in a short period of time, after just 8 months from the formation of the new Group.
The first intervention took place with the formation of Banco Popolare, on July 1st, 2007, leading to the consequent closing of the two pre-existing Parent companies (BPI and BPVN) and the spin-off of the branch networks which formed the two new commercial banks. To achieve all this, ad hoc project units were set up, which have rapidly planned and successfully implemented the necessary IT actions, guaranteeing the operational continuity to the branch network and to the central structures.
Quite different were the activities to be implemented for the banks of the former Gruppo BPI, which before the formation of Banco Popolare used applications managed by Bipielle ICT and technological environments delocalized in IBM. It was immediately clear that it was necessary to rationalize IT tools, accelerating the use of unified platforms and systems across the whole Group. It was decided to adopt as target information system for the BP Group the one in use at the ex BPVN banks, and SGS’s technological environment was confirmed. For the first time the “Big-Bang” migration mode was adopted, that is, the complete migration of data and applications of an entire bank between the evening closing and the following working day opening of the branch network. The migrations performed in 2007 were : x week-end 8-9 September: migration of Banca Popolare di Crema, identified as Pilot (44 branches were migrated); x week-End 3-4 November: migration of Banca Popolare di Lodi (540 branches were migrated).
The first migration in Banca Popolare di Crema ran smoothly, without significant impacts on operations, in keeping with the expected schedule and enabling the ordinary provision of services to customers right from the opening of the branches on the following Monday. Also the training courses that were delivered in parallel were key to the success of the migrations. 64 Tutors of the former BPVN Group worked with the branches and the Head Office, together with 22 Teachers and 51 Experts, and a remote support was predisposed through an ad hoc Help Desks located in SGS in Verona, Pandino (CR) and Lucca.
The migration of Banca Popolare di Lodi, which took place in the first week-end of November, replicated the same model that had been adopted for Banca Popolare di Crema; although the number of branches to be migrated was significantly higher, they were all migrated in a “Big-Bang” scenario in one single week-end. The whole migration process and the launch of the activities onto the new system were fully successful also for Banca Popolare di Lodi, and all the branches could regularly start operating right from the opening on Monday morning, and right from day one they generated transaction volumes in line with pre-migration days.
Migrations continued in 2008, until completion, along the following schedule: x week-end 2-3 February 2008: migration of Cassa di Risparmio di Lucca Pisa Livorno and Banca Popolare di Mantova (a total of 253 branches); x week-end 1-2 March: migration of Banca Popolare di Cremona and Banca Caripe (a total of 129 branches).
In order to achieve the expected results, project activities were broken down in 6 application project groups and 7 technological project groups, with the supervision of coordination and support groups.
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Centralized Administrative Services combination project
The project for the combination of the activities of, following the consolidation in SGS of the structures of the former BPI Group, aims at rationalizing the activities within the new Centralized Administrative Services structure, at maximizing efficiencies of scale and optimizing the effectiveness of Disaster Recovery policies; all this while guaranteeing an adequate manning in specific territorial areas and creating units specialized by function in the field. Training activities involved about 100 ex BPVN employees who were asked to change their assignments within the same Back Office area (Finance or Payment and Collection) and about 170 BPI employees who were experiencing an information system changeover while changing their assignments. More than 2,300 training days were scheduled on the whole, primarily for shadowing and support, and about 900 man/days to provide post-combination support.
In the last quarter 2007 the Centralized Administrative Services successfully supported the migration of the information systems in Banca Popolare di Crema and Banca Popolare di Lodi with the changeover onto the Target information system. The Back Office units in Guamo, Lodi, Modena and Novara, each for their specific area of competence, ensured the correct data migration from one information system to the other and enabled the start of Back Office activities in the Target environment without any service discontinuity. The project is scheduled to be completed in the first half 2008.
Basel 2
In 2007 the activities regarding the Basel 2 project progressed. The project aims at setting the conditions to obtain the Bank of Italy’s validation of the advanced approaches to determine the Group’s capital requirements. Illustrated below is the work-in-progress of the various sub-projects on December 31st, 2007.
Credit risk
The merger between the two groups BPI and BPVN did not modify the goal to obtain by 2008 the Bank of Italy’s validation of the advanced IRB systems to determine the Group’s capital requirements already planned in the past financial year, to be then progressively extended to the “Corporate”, the “Credit Institutions” and the “Public Administrations” portfolios.
Credit risk assessment models
Models have been developed for the assignment of “Loss given Default” and “Exposure at Default”, together with the relative construction of historical series, of 10 and 7 years respectively. The “Probability of Default” (PD) internal rating models have been estimated anew for “Corporate” customers and internal validation has been performed. A stress test model has been developed, aiming primarily at assessing the capital adequacy of the banking group against the credit risks incurred; to this regard, the internal portfolio model in charge of estimating the economic capital has been fine- tuned.
Risk measurement
Illustrated below are the results achieved in this area: x going live of the processes to calculate capital requirements on credit risks; x fine-tuning of the “Parallel Calculation” of Group consolidated capital requirements.
The Top Management and of Corporate Boards throughout the year have constantly participated in the planning and regular sharing of project results.
Operational Risks
The adoption of the Standardized methodology are well under way and should be completed in concomitance with the Supervisory Reporting on June 30th, 2008. The integration of past experiences accrued in the BPVN and BPI Groups led to the implementation of all the infrastructures necessary to manage operational risk, in particular: x the definition of the Group’s new risk policy; x the integration and implementation of risk identification and assessment processes, as well as the new integrated capital requirement calculation model; x the definition of new risk exposure reporting and assessment models; x the implementation of a self-assessment cycle across the risk management system.
The internal operational risk regulation was approved by the Group corporate boards in February 2008 and the actual adoption of the envisaged organizational model shall be completed by the month of April. The methodological analysis for the development of models and tools to calculate capital requirements based on the so called Advanced Measurement Approach – A.M.A. have progressed. The internal model upgraded in 2007, has been
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developed, for the former BPVN Group alone, and extended in order to enhance the procedures that had already been designed so as to be able to make a reliable estimate of the absorbed capital at Group level and for the single subsidiaries.
Risk integration and capital adequacy assessment.
In 2007, methodologies, systems and processes to measure traditional business risks to which the Group is exposed have started to be harmonized and consolidated, combining the experience accrued in the banks of the BPVN and BPI Groups. At the same time, the capital adequacy assessment process (so called “Second Pillar” of the new banking prudential supervisory regulations) was launched, in particular by running a first prospective capital absorption simulation and by fine- tuning the integration modalities between the strategic plan definition process and the risk planning activities, based on the metrics adopted to measure new risks. A number of projects were launched regarding the Internal Capital Adequacy Assessment Process – ICAAP, that shall be fully implemented in the first half of 2008. Worth mentioning are: x self-assessment of significant business risks; x preliminary analyses to define the methodology to estimate capital absorption and to introduce appropriate organizational controls against liquidity, reputational and strategic risks; x preliminary analysis to estimate possible correlation benefits among main risks (credit, market and operational).
The Group corporate boards have adopted a number of fundamental decisions covering: x the process to define Gruppo Banco Popolare’s risk propensity, with the identification of capitalization targets and external rating targets, the latter on a medium term horizon; x the definition of guidelines for the implementation of the Second Pillar of Basel 2; x the definition of the working plan to adopt the Second Pillar regulations, and to make the organizational structure and corporate processes compliant.
Validation of market risk models
During the year a number of analyses were conducted aiming at redefining market risk measurement processes and systems; in particular, the historical simulation VaR methodology (Value at Risk) and the state of the art pricing systems in use in Gruppo Banco Popolare have been judged the most appropriate tools to ensure a more effective and precise measurement and control on market risks caused by exposures in complex derivative instruments, also from a regulatory standpoint. At the end of the year, the new market risk measurement system started to be implemented and developed, at organizational, process and system level, and the goal is to achieve during the first half 2008 the activation of the new VaR system, to be applied within the Group’s range of market risks (cash and derivative products).
Compliance with the EU Directive MiFid
The EU Markets in Financial Instruments Directive n. 2004/39/EC (for short MiFid) aims at harmonizing the regulatory framework across Europe to keep up with the evolution of financial markets, where investors have grown in number and the range of services and instruments they are offered are increasingly complex. MiFid was transposed in our national law and came into effect on November 1st, 2007. On October 30th, 2007, through Resolution n. 16190, Consob issued a new Regulation on Intermediaries that abolishes and replaces the previous one, and changed the Market Regulations. The modalities through which customer contracts effective as of October 30th, 2007 must be changed to be made compliant are clarified, and the deadline is June 30th, 2008. MiFid’s regulatory framework produced significant impacts on the provision of investment services, as a result of the liberalization of transactions (abolition of the concentration rule, new trading marketplaces adding on to regulated markets), but also the introduction of stringent rules for the protection of final investors.
The choices made by the Group to adapt to the new regulatory environment led to: x the creation of a multilateral trading system (Hi-MTF); x the definition of an operational model whereby: - Banca Aletti acts as Group manager and trader; in particular, it acts as Systematic Internalizer for branded and non-branded bonds that are not admitted to trading in regulated markets or Hi-MTF and covered warrants and certificates not admitted to trading on regulated markets; - the Banche del Territorio act as executors on behalf of their customers only with regard to order handling (except for the trading service in case of repurchase agreements and derivatives not admitted to trading on regulated markets).
The new rules of conduct envisaged by MiFid to increase investor protection (client categorization and profiling, completeness of information, best execution and transparency) called for: x a revision of the existing contract forms; x a revision of the set of information to be supplied to customers; x the revision of existing forms used to manage the new operational modalities; x the revision of arrangement and agreement forms in use between Group companies and operating companies (so called product factories).
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Other technological projects
In spite of the extraordinary effort associated with the information system migration, the Group’s technological and IT structures continued to be developed, touching numerous important areas. Illustrated below are some of the most important.
“Foreign Banks” and support to AS 400 environments
This project was activated to identify and set up an information system in AS400 environment located in SGS, to manage the unified operations of the Group’s Eastern European banks (Czech Republic, Romania, Hungary and Croatia), so as to progressively replace the miscellaneous local systems currently in use. The goal of the project is to achieve a full service provision by SGS to these type of banks. The project also ported the AS400 system currently in use in Bipitalia Ducato and located in IBM to the SGS service center in Verona.
Branch Decentralization of the POS validation system
The administrative process for the activation of POS terminals was revised and the activities to validate and dispatch the information necessary to activate the POS on the various issuers (Pagobancomat, Key Client, CartaSi, American Express) to the Terminal Operator have been decentralized in the branches. This new modality reaped significant efficiency gains and a reduction in the POS installation time.
Business Continuity
As of Spring 2007, the Business continuity plan was approved by the Board of directors of the Parent company, Credito Bergamasco, Banca Popolare di Novara and Banca Aletti. In keeping with the Continuity plan, numerous technological and organizational test sessions have been conducted and the results were in line with expectations and with continuity targets. In particular, service recovery tests were carried out in the Emergency Processing Center (Centro Elaborativo di Emergenza) in Settimo Milanese, including departmental systems and recording a restart time of the mainframe of about 2 hours. Organizational tests in few cases detected some criticalities and the appropriate corrective actions were identified. Plans were made also to guarantee in the future the automatic update and the following control of the Continuity Plan with regard to size aspects (personnel, organizational charts, physical sites). The periodic intervention by the Audit Service, with an analysis update as at September 30th 2007, generated the global assessment of “Essentially adequate”.
“New Special Loans Procedure”
The goal of the project was to offer Special Loans a new IT tool capable of improving operations and of obtaining efficiency gains based on the release of a new procedure and a “Lean Organization”- oriented process optimization. With regard to “Loan Securitizations”, sufficiently industrialized procedures were implemented both for sales (mono and multi-originator) and repurchases; finally, the RES mortgages securitization activities have been completed.
“Dormant Relations”
On June 22nd, 2007, M. Decree n. 116 was issued, for the adoption of the provisions governing “Dormant Deposits”. The project dealt with the implementation of IT measures necessary to comply with the new instructions. According to the procedure governing the management of dormant deposits, first dormant relations have to be identified, customers have to be notified and possible complaints managed, a report must be sent to the Ministry of Economy and Finance and finally the unclaimed funds must be deposited in the Ministry’s fund. All these steps (which are expected to be completed in 2008) require IT tools and operations developed by SGS.
“SEPA”
The membership to SEPA (Single Euro Payments Area) represents a key step along the adoption of the principles governing the free movement of citizens, goods and capital in the single market. This system allows consumers in the Euro area to make payments at the same basic terms and irrespective of where they are, making no difference between domestic and cross-border payments (payments shall in general be referred to as “domestic”). SEPA breaks down in four main classes: x SEPA Credit Transfer; x SEPA Direct Debit; x SEPA Cards; x SEPA Cash.
The first significant launch was successfully carried out in January 2008 with SEPA Credit Transfer.
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“Target 2”
Also in this case it is a European-wide project dealing with the standardization of payment systems. Each country uses different technological modalities to receive various payments from the other European states (bank transfers, giros, money exchange, etc.), and to make them to the other countries. In Italy we use the “BIREL” system, that shall have to be replaced with the advent of the new Target 2 technological platform. Once the working groups were organized and the first activities carried out, the tests required by the Bank of Italy were positively performed and the project will proceed with the activation of the new functionalities by May 2008.
“Non regulated Derivatives”
Initially the project focused on non-regulated equity derivatives and on managing exchange rate derivatives, and in 2007 it turned to interest rate derivatives. After activating the module managing interest rate OTC derivatives for the new Banco Popolare, as of July 23rd, 2007 the same module manages the new trading activities of Banca Aletti and of the Group Commercial Banks. These activities, that are rather consuming also in terms of resources, allow the Group to calculate the daily mark to market for all the outstanding derivative contracts with the Risque application. Said application is available on the Target information system.
“SSO – Sistema di scambi organizzato” – Organized Trading System
Trading of financial instruments issued or distributed by the Group in collaboration with Banca Aletti was activated. This made it possible to modify the trading modalities of the following financial instruments which up to now could be traded only in a “Basket”: x Bonds issued by the banks of Gruppo Banco Popolare; x Bonds issued by third parties and distributed by the banks of Gruppo Banco Popolare; x Covered warrants and Certificates issued by Banca Aletti and not listed on Sedex.
Monetics and Innovative Channels
In 2007, the actions implemented on the Internet Banking platform paved the way to a significant enhancement of the customer offer. Product innovations were primarily directed towards security, yet confirming the previous choice in terms of digital certificate access authentication, as it proved to be highly valid in deterring fraud attempts to which customers using these services are often exposed. Also the modality used to deliver service access codes was changed. Thanks to interventions on the application systems, it was possible to cut back on withdrawal commissions on all the ATMs of Gruppo BPVN, extended to all the banks of the former Gruppo BPI. As a result, the customers of Gruppo Banco Popolare can benefit from a network of more than 2000 ATMs free of withdrawal commissions. This functionality provides visibility and tangible benefits directly to customers.
As of October 2007, customer holders of ATM cards can withdraw from all the ATMs of the Group banks (provided that they are certified on the Target information system), and shall obtain an intragroup withdrawal ceiling equal to the one granted on the ATMs of their own bank of belonging.
Communications
Communications and External Relations
Press relations in 2007 were particularly intense, also as a result of the formation of Gruppo Banco Popolare. 154 press releases were issued, from price sensitive, to commercial, corporate, institutional releases and reports illustrating the charity initiatives of the companies of the Group. More than 25 press conferences were held, covering the numerous activities performed by the banks of the Group and highlighting initiatives closely tied to the territory. Banco’s coverage on local TV and radio stations was widely used to disseminate market and product information.
The main event characterizing institutional communications in Gruppo Banco Popolare in 2007 was the merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana and the ensuing formation of Banco Popolare. This prompted the creation of the Group institutional image, first by defining the new logo and the new graphic symbol, that were then transposed onto the single subsidiary banks. The need for a common brand identifying the Group and its members was blended with the need to safeguard the specificities of the individual local brands, hence the graphics of the lettering was left unchanged.
As to External Communications, in 2007 the Group organized and sponsored a variety of cultural events on the territory. With regard to exhibitions, “Il Settimo Splendore” held in the Palazzo della Ragione in Verona and organized by the Art Gallery Galleria d’Arte Moderna Palazzo Forti was highly praised. Banca Popolare di Lodi sponsored the exhibit “Ottocento - Novecento. Arte a Lodi tra due secoli”, which was held in Autumn in the prestigious setting designed by Renzo Piano.
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In 2007 symphonic music once again played a starring role. The collaboration with Solisti Veneti, conducted by Claudio Scimone, has been renewed and deepened through a series of concerts held by the music ensemble in the towns where the banks of the Group enjoy a well-established and long-standing presence. Banco, in collaboration with Banca Aletti, also consolidated its relations with Accademia I Filarmonici di Verona for the Sunday concerts “I concerti della domenica”. Worth mentioning is the world and domestic tour organized by Ferrari for its 60 anniversary that involved Banca Popolare di Verona-S.Geminiano e S.Prospero, Banca Popolare di Novara and Banco di Chiavari e della Riviera Ligure, which supported the three Italian stages in the towns of Verona, Genova and Modena. Cassa di Risparmio di Lucca Pisa Livorno sponsored the initiative “Banca delle Piazze” aiming at promoting its relations with its territories of belonging. The sponsorship of sports initiatives has been a red thread across all the banks of the Group; the agreement initially entered into by Banca Popolare di Lodi with the soccer team Juventus FC was taken over by Banco Popolare. The role of “Main Sponsor” with l’AC Chievo Verona was confirmed for Banca Popolare di Verona-S.Geminiano e S.Prospero, and with Triboldi Basket (A2 league) for Banca Popolare di Cremona as second sponsor. Other noteworthy sponsorships are the long standing relations with Ente Verona Fiere, for the sponsoring of well-established shows such as “Vinitaly”, “Fieragricola” and “Fieracavalli” and with the Industrial Associations of the towns of Verona, Vicenza, Padova e Trento. Both Credito Bergamasco, and Banca Popolare di Novara promoted a number of initiatives on their territory, such as the support lent by Credito Bergamasco to the social and charity project “Progetto Pigmei – a scuola di diritti umani” to promote schooling among Pygmies of Eastern Congo and its support to Atalanta Bergamasca Calcio now in its seventeenth year. Banca Popolare di Novara sponsored the concert of Solisti Veneti, with the participation of Lilya Zilberstein, held in Novara at the Teatro Coccia. The books edited by Banco and distributed to its customers and employees for Christmas were dedicated to “Verona” and to “Il Ducato di Modena e Reggio”. As is tradition, these volumes highlight the historical and artistic value of our territories of belonging.
Also Internal Events planned and organized a variety of events aiming at bringing our people together and getting to know each other better, primarily to favor the quality of our decision making processes through the exchange of knowledge and experiences. The Convention organized for managers fulfilled said goals, as the about 400 managers of the Group had the opportunity to share corporate strategies as well as their opinions on current, financial and economic news supported by experts. The Road Shows of Banca Popolare di Verona – S.Geminiano e S.Prospero and of Banca Popolare di Lodi were organized, which toured a total of 13 towns and allowed the Top Management of the two banks to meet their colleagues in their operational territories, thus favoring an updating and an exchange of opinion with regard to Group goals and strategies.
Investor relations
Illustrated below are the activities carried out by Investor Relations in 2007, together with an overview on registered and ordinary shareholders, ratings and stock performance. For further details, an Investor Relations section is present on the corporate website (www.bancopopolare.it).
Table 1: Summary of events and meetings with investors and analysts
2006 2007 BPVN BPI
Total investors and analysts met (1) 741 497 290 Total events managed 177 144 208 (1) Excluding participants in presentations organized by Banco Popolare. Also investors who participated in floor presentations in trade conferences are not included
Table 2 analyses the mix of events managed in 2007, in Italy and abroad, with the participation of the Group’s Top Management.
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Table 2: Mix of events managed by Investor Relations
2007 Number %
Presentations of Banco Popolare: webcast phone conferences 4 2.3 Roadshows (equity) 17 9.6 of which: Italy 1 of which: United Kingdom 5 of which: United States 2 of which: other European countries 9 Trade conferences 13 7.3 Other meetings (one to one and group of investors) 69 38.9 Phone and video conferences 64 36.2 Roadshows and other fixed income events 6 3.4 Meetings with rating firms 4 2.3 Total events 177 100
Banco Popolare’s stock is actively covered by about 26 equity research firms, and the Group has entertained a constant open dialogue with their “sell-side” analysts.
Shareholders
Banco Popolare’s share capital is subdivided between retail investors, marked by a very strong fragmentation reflecting the Group’s retail nature, and institutional investors in Italy and abroad. According to Consob, in March 2008 6 institutional investors held an interest greater than 2% in Banco Popolare, as shown in Table 3.
Table 3: Main shareholders of Banco Popolare (25 March 2008)
Shareholders share capital %
JP Morgan Chase Bank NA 3.820 Franklin Mutual Advisers LLC 3.313 State Street bank & Trust CO 2.396 Amber Capital For Amber Master Fund 2.129 UBS AG 2.008 Stichting Pensioenfonds ABP 2.002
Based on in-house estimates, the top 10 institutional investors of Banco Popolare own about 16% of outstanding shares, while the first 20 own about 20%.
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PERFORMANCE OF THE MAIN COMPANIES OF THE GROUP
For a more in-depth analysis, below is a brief overview of the performance of the main companies of the Group.
Banco Popolare Soc. Coop.
31-12-2007 31-12-2006 (A) (B) (A/B)
Income statement (in million euro) Net interest, dividend and similar income 339.3 799.3 -57.6% Net commission income 184.1 350.9 -47.5% Total income 736.8 1.265.3 -41.8% Operating costs 275.0 562.3 -51.1% Profit from operations 461.8 739.1 -37.5% Income before tax from continuing operations 770.8 794.6 -3.0% Income after tax from continuing operations 483.3 587.8 -17.8% Net income for the year 483.3 587.8 -17.8%
Balance sheet (in million euro) Total assets 43,014.6 41,317.6 4.1% Loans to customers (gross) 1,717.6 24,374.8 -93.0% Financial assets and hedging derivatives 8,262.2 4,466.8 85.0% Shareholders’ equity 9,635.7 3,967.8 142.8%
Customer financial assets (in million euro) Direct customer funds 15,993.0 28,481.6 -43.8% Indirect customer funds 26,053.1 26,187.5 -0.5% - Assets under Management 13,383.1 14,320.4 -6.5% - Mutual funds and Sicav 6,274.5 6,400.8 2.0% - Managed accounts invested in securities and in funds 4,177.8 4,887.6 -14.5% - Insurance policies 2,930.8 3,032.0 -3.3% - Assets under custody 12,669.9 11,867.1 6.8%
Other Average number of employees (*) 4,178 5,338 -21.7% Bank branches - 548 -100.0% Gross customer loans per employee (€/1000) 411.1 4,566.3 -91.0% Total income per employee (€/1000) 176.4 242.7 -27.3% Operating costs per employee (€/1000) 65.8 104.2 -36.8% (*) Monthly arithmetic mean.
As already explained, on July 1st the merger between Banco Popolare di Verona e Novara (BPVN) and Banca Popolare Italiana (BPI) became fully effective, giving rise to a new company called Banco Popolare, Parent company of the Banking Group Banco Popolare. For the purpose of financial disclosure, the merger is recognized in compliance with international accounting standards, in particular IFRS 3, which, based on a number of size and quality parameters, defines the above deal as an acquisition by Gruppo BPVN of Gruppo BPI. Accordingly, Banco Popolare’s financial statements as at December 31st, 2007 were prepared in consistency with the book values of Banco Popolare di Verona e Novara.
Credit intermediation
Customer funds
As at December 31st, 2007, direct customer funds, including subordinated debt securities in issue, stood at 15,993 millions from 28,481.6 millions on December 31st, 2006. The 43.8% reduction is mainly attributable to the demerger of the branch network, transferred to BPV – SGSP S.p.A., which on July 1st, 2007 entailed the transfer to the subsidiary of all payables and bonds sold to retail customers. The decrease in securities was offset by the merger with BPI, which entailed the transfer to Banco of all bonds issued by ex BPI Soc. Coop. to institutional investors.
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Financial liabilities measured at fair value during the year decreased by 22.2%, and they comprised bonds issued by Banco that have been fair value hedged with derivatives, and where it was deemed more economical to opt for the fair value designation instead of the more expensive recognition according to the Hedge accounting rules provided for by IAS 39.
Customer loans
On December 31st, 2006 customer funds included the balances associated with loans extended by the BPVN S.c.a.r.l. business segment, which was then transferred on July 1st, 2007 to BPV - SGSP S.p.A. Hence, as at December 31st, 2007, loans to customers did not include third party granting of mortgages, credit lines or checking account lines. In particular, this item comprises operating checking accounts with subsidiary companies or banks of the Group, and primarily outstanding bonds issued by special purpose vehicles for securitizations performed by Group banks and companies. The item includes only performing loans.
Financial assets
On December 31st, 2007, Banco reported 8,260 millions in financial assets, up 85.3% with respect to the year before. This increase was mainly driven by the fact that Banco Popolare in second half 2007 accepted the entire securities portfolio belonging to subsidiary banks, in compliance with the integration business plan.
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Equity investments
Equity investments experienced a marked increase as a result of the extraordinary transactions carried out in 2007. Specifically, from 2,611 millions on December 31st, 2006 they went up to the current 12,065.9 millions.
Increments Book value Book value Shareholding (in thousand Euro) Merger Decrements % 31 12 2006 extraord. Other 31 12 2007 transactions
Aletti & C. Banca di Investimento Immobiliare S.p.a. - Milano 133,908 - - 133,908 61.77% Aletti Gestielle SGR SpA 11,860 - - 11,860 21.63% Aletti Merchant SpA 45,600 - - 45,600 0.00% Banca Popolare di Novara SpA 780,268 - - 780,268 100.00% Banco Popolare Croatia dd 36,701 15,221 - 51,922 85.25% Banco Popolare di Verona e Novara (Luxembourg) S.A. 32,559 - - 32,559 99.97% BPVN Immobiliare Srl 36,983 - - 36,983 100.00% Compagnia finanziaria Ligure Piemontese - COFILP SpA 12,146 - - 12,146 100.00% (under liquidation) Credito Bergamasco SpA 1,004,177 - - 1,004,177 87.72% Holding di Partecipazioni Finanziarie Popolare di Verona e 147,245 214,000 - 361,245 100.00% Novara SpA IC Bank Zrt (Hungary) - 47,988 - 47,988 100.00% IC Banka as (Czech Republic) - 28,157 - 28,157 100.00% Immobiliare BP Srl 2,566 322,821 - 325,387 100.00% Seefinanz S.A. (under liquidation) 11,062 - - 11,062 100.00% Società di Gestione Servizi - BP SpA 77,824 - - 77,824 75.49% Tecmarket Servizi SpA 1,425 - - 1,425 47.50% Banca Popolare di Lodi Capital Company LLC - 1,041 - 1,041 100.00% Banca Popolare di Lodi Capital Company LLC II - 1,009 - 1,009 100.00% Banca Popolare di Lodi Capital Company LLC III - 27,079 - 27,079 100.00% Banca Popolare di Lodi SpA - 2,115,319 - 2,115,319 100.00% Banca Popolare di Verona - SGSP SpA - 2,305,899 - 2,305,899 100.00% Banca Valori SpA - 62,172 14,686 - 76,858 98.00% Bipielle Bank (Suisse) SA - 33,548 9,282 - 42,830 92.06% Bipielle Fondi Immobiliari SGR SpA - 10,837 - 10,837 100.00% Bipielle Information Communication Technology SpA - 16,901 - 16,901 0.00% Bipielle International (UK) Ltd - 248 - 248 0.00% Bipielle International Holding SA - 10,027 - 10,027 100.00% Bipielle Real Estate SpA - 467,345 - 467,345 100.00% Bipielle Società di Gestione del Credito SpA - 99,290 - 99,290 100.00% Bipitalia Alternative SGR SpA - 3,540 - 3,540 20.00% Bipitalia Gestioni SGR SpA - 268,249 4,363 - 272,613 99.36% Cassa di Risparmio di Lucca Pisa Livorno SpA - 1,576,414 6,189 - 1,582,602 78.92% Efibanca SpA - 920,313 45,600 - 965,913 90.60% Italfortune International Advisors SA - 930 - 930 100.00% Tiepolo Finance Srl - 10 - 10 60.00% Bipitalia Broker (ex Ducato Insurance) - 1,525 - 1,525 100.00% Banca BPL Network - 130,868 - 130,868 0.00% BIPIELLE Ducato - 774,280 - 774,280 100.00% Auto Trading SA - 11,021 - 11,021 99.95% Carfid - 48 - 48 100.00% Royel West Ltd - - - - 99.00% Novara Assicura spa - 7,811 -7,811 0.00% Novara Vita SpA 33,431 6,000 - 39,431 50.00% Polo Finanziario spa 15,000 - - 15,000 0.00% Banca per il Leasing - Italease SpA 67,407 131,245 - 29,155 169,498 13.14% BPV Vita SpA 31,587 - - 31,587 0.00% Delta SpA 40,308 - - 40,309 13.29% Istituto Centrale delle Banche Popolari Italiane SpA 18,598 47,309 - 65,908 24.62% Società Coop. Banche Popolari "L. Luzzatti" S.c.r.l. 41 4 - 45 26.69% Arca SGR - 14,209 - 14,209 10.28% Centrosim SpA - 1,526 449 - 1,975 7.50% Finoa Srl - 79,919 - 79,919 50.00% Unione Fiduciaria - 1,062 - 1,062 4.00% Finanziaria ICCRI - Bruxelles Lambert - 6,059 -1,500 4,559 50.00% Evoluzione 94 - 2,405 - 2,405 17.87% GEMA - Magazzini Generali Popolare di Verona BSGSP spa 2,353 - -2,353 0.00% Linea SpA 67,987 12,485 - 80,473 47.96% Partecipazioni Italiane (ex Necchi SpA) - 16,948 - 16,948 7.31% Total 2,611,037 6,688,030 3,185,622 - 418,752 12,065,936
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In the column “merger extraordinary transactions”, the table above shows the ex IFRS 3 carrying value of equity investments acquired from ex BPI Soc. Coop. following the merger on July 1st, 2007. Note once again, that in said merger BPVN S.c.a.r.l., which then changed its name into Banco Popolare, was identified as the “acquiring bank”. Moreover, right before the merger and coming into effect on July 1st, 2007, BPVN S.c.a.r.l. transferred its business segment comprising the branch network and all its direct activities on the territory to BPV – SGSP S.p.A., offsetting assets and liabilities directly against the recognition of equity investments totaling 2,305.9 millions. The equity investments in Polo Finanziario S.p.A. and in Gema S.p.A were transferred as part of these transactions (changes are shown in the table under “Increments – other” and decrements in correspondence with the single equity investments). A similar transaction was carried out by BPI Soc. Coop., which recognized the equity investment in BPL S.p.A., that after the merger with BPVN S.c.a.r.l. was then passed over to Banco Popolare.
With regard to the reorganization of the Group companies in compliance with the business plan developed for the integration of the two Groups, it is worth mentioning that: x in second half 2007, Aletti Merchant S.p.A. was merged into Efibanca S.p.A. and therefore the carrying value of the interest held in Aletti Merchant, totaling 45.6 millions, incremented the carrying value of Efibanca S.p.A.’s merger; x the 79.73% majority interest held in Banca Bipielle Network was sold for 104.7 millions. The deal did not generate capital gains, while the residual interest of 26.1 millions was reclassified under assets available for sale, as it is no more a core investment; x Bipielle Information Communication Technology S.p.A. was sold to the subsidiary Società Gestione Servizi S.p.A. for a disposal value that generated a capital gain of 48 thousand euro; x the interest held in Bipielle International UK was sold for 0.4 millions, generating a capital gain of 0.1 millions.
In the consumer credit area, the Group decided to strengthen its consumer credit subsidiary, Ducato S.p.A. and to sell the other equity investments engaging in this same activity. Hence, after Linea S.p.A.’s capital increase in the first part of the year, with Banco subscribing 192,002 shares with a nominal value of 10 euro each and a total investment of 12.5 millions, Banco decided to sell the stake and signed an agreement with the company Compass of Gruppo Mediobanca. The deal shall be finalized in 2008 and the stake’s carrying value has been reclassified under “non-current assets held for sale and discontinued operations”. With regard to the other stake held in the consumer credit company of the Gruppo, Delta S.p.A., Banco did not subscribe the share capital increase approved by the company, therefore its interest went from 20% to 13.29% and the carrying value was reclassified under financial assets available for sale as it is no more a core investment.
In order to strengthen the Group’s presence in Eastern European markets, Banco participated in the capital increase of Banco Popolare Croatia dd (ex Banka Sonic dd), and acquired 37,000 additional shares with a total investment of 15.2 million euro, bringing its stake to 85.25%. Aiming at expanding its presence in Eastern European markets, in the first half of the year BPVN S.c.a.r.l. acquired IC Bank ZRT in Hungary and IC Banka in Prague, as resolved the year before, with a total investment of 25.8 and 28.2 millions, respectively. After that, only IC Bank ZRT carried out two consecutive capital increases entirely subscribed by Banco, that as a whole paid an additional amount of 29.7 million euro, which raised the total accounting cost of the equity investment to about 48 million euro. On December 31st, 2007 Banco held 100% of the share capital of both companies, which engage in retail banking in their towns of belonging. Finally, Banco and the subsidiary “Holding di partecipazione finanziaria Popolare di Verona e Novara” acquired the entire share capital of the Romanian leasing company Auto Trading Leasing SA and after that it subscribed the resolved capital increase. The total investment for Banco was 11 millions for a stake of 99.95%.
With regard to the bancassurance sector, Banco redefined the partnership agreements with Gruppo Fondiaria SAI, and scaled down those outstanding with Gruppo Cattolica Assicurazioni. After subscribing the capital increase of Novara Assicura S.p.A. against an investment of 7.8 millions, both this stake and the interest held in the company BPV Vita S.p.A. have been sold for 250 and 371 millions, respectively, with a total capital gain of 165.4 and 267.8 millions. As to other equity investments in insurance companies, Banco subscribed the capital increase of Novara Vita S.p.A. for 6 million shares with a nominal value of 1 euro, with a total investment of 6 millions and a 50%interest.
As to the facts involving Banca per il Leasing – Italease S.p.A., Banco, together with the other shareholders who entered into the stability agreement, confirmed its financial support to the subsidiary. Hence, during the year Banco subscribed its two capital increases, the first with 1,045,728 shares and an investment of 39.3 millions, the second with 10,101,756 shares and a total investment of 91.9 millions. As a result, Banco’s direct interest in the company rose to 13.14%, while the indirect interest considering the stakes held by other investee companies increased to 30.36%. On December 31st, 2007, the stake’s carrying value was impaired to 7.66 euro per share, corresponding to the Bank’s consolidated share of accounting shareholders’ equity (net of goodwill recognized under balance sheet assets), as recognized in the annual report as at December 31st, 2007 approved on March 17th, 2008.
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In order to provide the subsidiary “Holding di partecipazione finanziaria Popolare di Verona e Novara S.p.A.” with the necessary financial means to purchase shareholdings, Banco granted to the subsidiary a 214 million “shareholders’ capital account contribution”.
In order to reorganize the Group’s real estate assets, on December 29th, 2007, Banco transferred its real estate business segment, comprising properties with all the operating equipment and technical and administrative structure, to the real estate company Immobiliare BP (ex Immobiliare BPV), owned 100%; the business segment value was fixed at 720 million euro, which Banco posted as equity investment to offset the deduction of the net accounting value of the business segment of 322.8 millions, generating a capital gain through profit and loss of 397.2 millions. In compliance with international accounting standards, said capital gain was then written off to offset the value of the equity investment, as this was a transaction with a fully owned company. The 2.5 million carrying value of the equity investment increased by 322.8 millions, therefore the total book value of Immobiliare BP came in at 325.4 millions.
Equity investments being acquired from ex BPI Soc. Coop., following initial recognition, have undergone the following changes: x the interest in Banca Valori increased to 98% following the purchase of 1,279,355 additional shares with a total investment of 14.7 millions; x subscription of the entire capital increase of Bipielle Bank Suisse, against a total investment of 9.3 millions for 4,000 shares; as a result, Banco’s interest rose to 92.06%; x having exercised the put options held by Fondazione della Cassa di Risparmio di Lucca Pisa e Livorno, Banco purchased 47,051,797 shares of Cassa di Risparmio di Lucca Pisa e Livorno with a total investment of 6.2 millions, and its stake rose to 78.92%; x the interest in Bipitalia Gestioni SGR was increased to 99.36% by purchasing 386 shares against a total investment of 4.3 millions.
Under the sales agreements in force before the merger, also the book value of the interest in Partecipazioni Italiane (ex Necchi S.p.A.) was reclassified under “non-current assets held for sale and discontinued operations”. As to Finanziaria ICCRI – Bruxelles Lambert under liquidation, the book value impairment is a result of a partial allotment which took place in second half 2007. Finally, note that the book values of the equity investments acquired by way of the Centrosim S.p.A. and Evoluzione 94 merger through the merger with BPI Soc. Coop., were increased as a result of the reclassification of the carrying values of said securities that were already owned by ex BPVN S.c.a.r.l. from “assets available for sale”, for a total amount of 0.4 and 2.5 millions, respectively.
Income statement
As of July 1st, following the merger, Banco Popolare as Parent company primarily performs management and coordination activities. Consequently, the 2007 income statement was characterized by the results of the traditional banking activities performed by BPVN S.c.a r.l. in the first half, while the second half of the year featured revenues and charges from financial operations, in particular equity investments.
In particular, net financial income came in at 195.5 millions from 54.2 millions in 2006. This result was mainly driven by the 111.9 million profit on disposal of financial assets available for sale and by a net 70.9 million profit on financial assets and liabilities measured at fair value, while a net trading loss of 9.5 millions was posted.
Profit on disposal was primarily generated by the merger of Borsa Italiana S.p.A. into the London Stock Exchange with 110.8 millions. A strong contribution to the big profit on financial assets and liabilities measured at fair value was made by the change in the credit spread on bonds issued, which generated 96.5 millions in capital gains, partly offset by capital losses on fund units and structured securities included in the portfolio of assets designated at fair value. Also the net trading loss was primarily affected by the capital losses on securities comprised in the trading portfolio.
During the year, an impairment loss was recognized on some financial assets available for sale. In particular, the shareholdings in Hopa S.p.A. (it had been acquired through the merger at a carrying value of 1 euro per share, and was recognized at 0.22 cents) and in Alpi Eagles were written down by 78.8 millions and 3.6 millions, respectively. Two bonds from securitizations (Brooklands) were also written down by 5.1 millions and a structured note (G Square) by 6.3 millions.
Finally, profit and loss on disposal equity investments and real estate totaled 421 millions, from 144.4 the year before. The above profit was almost entirely generated in the second half of 2007 and it amounted to 418.7 millions, while in the first half there was only a 2.3 million net capital gain from property disposal. In detail, the most significant profits came from the sale of BPV Vita for 267.8 millions, of Novara Assicura for 165.4 millions and Sestri S.p.A. for 5.5 millions, as well as form the disposal of property for 8.7 millions. This item also includes the impairment of the equity investment in Banca per il Leasing – Italease S.p.A. of 29.2 millions. This amount was calculating by making reference to the unit value of owned shares based on the net consolidated accounting shareholders’ equity per share (net of goodwill recognized in balance sheet assets), as recognized in the annual report as at December 31st, 2007 approved on March 17th, 2008.
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Banca Popolare di Verona - S.Geminiano e S.Prospero
Financial highlights 31/12/2007
Income statement (in million euro) Net interest, dividend and similar income 388.5 Net commission income 176.8 Total income 606.9 Operating costs -348.5 Profit from operations 258.4 Income before tax from continuing operations 209.4 Income after tax from continuing operations 107.9 Net income for the year 107.9
Balance sheet (in million euro) Total assets 35,002.7 Loans to customers (gross) 26,867.1 Financial assets and hedging derivatives 326.7 Shareholders’ equity 2,448.2
Customer financial assets (in million euro) Direct customer funds 22,647.9 Indirect customer funds 23,853.2 - Assets under management 12,364.8 - Mutual funds and Sicav 5,860.4 - Managed accounts invested in securities and in mutual funds 3,693.0 - Insurance policies 2,811.4 - Assets under custody 11,488.5
Other Average number of employees (*) 4,548 Bank branches 558 (*) Monthly arithmetic mean.
BPV-SGSP S.p.A. was formed through the business segment transfer by BPVN S.c.a.r.l. on July 1st, 2007, therefore second half 2007 represents the Bank’s first financial year. Since no comparative data is available, the comparison was made with the opening balances at transfer.
Credit intermediation
As at December 31st, 2007, direct customer funds, including subordinated debt securities in issue, reached 22,647.9 million euro from 22,706.3 millions on July 1st, 2007, reporting a slight decrease of 0.3%. Note, that the aggregate as at December 31st, 2007 included also customer funds raised by the London branch, amounting to 4.941,8 million euro, while as of January 1st, 2008 the London branch was transferred to the Parent company as a result of the business segment spin-off. Financial liabilities measured at fair value are made up of bonds that have been fair-value hedged through derivatives. Net of the London branch funds, the aggregate amounted to 17,706.1 million euro, up 15.8% with respect to 15,288.7 million euro on July 1st, 2007. Again excluding the London branch, which reported a marked decrease in certificates of deposit, the main growth driver was due to customers, which grew by 14.7% as compared with the same figure at transfer. Growth is also partly ascribable to the 20.3% increase in debt securities in issue (including financial liabilities measured at fair value, entirely represented by debt securities issued by the Bank), which went from 2,946.1 million euro at transfer to 3,545.9 million euro at year-end.
Moreover, even after excluding the most volatile elements of funding, namely repurchase agreements, the aggregate added up to 14,975.7 million euro, up 10% as compared with the same figure at transfer. Due to customers reported a sustained growth in repurchase agreements and in checking accounts. The growth in deposits was also sustained by the increase in liabilities associated with loans sold in securitizations and not derecognized from the balance sheet.
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(in thousand euro) 31/12/2007
Impaired assets 1,095,699 - non-performing loans 646,994 - watchlist loans 309,851 - restructured loans 73,667 - past dues 65,187 Performing loans 25,771,434 Country risk 6,595 Other performing loans 25,764,839 Total gross loans 26,867,133 Individual write-downs -385,546 Collective write-downs -118,637 Total net loans 26,362,950
Indirect customer funds
Marked to market indirect customer funds totaled 23,853.2 million euro, down 8.4% as compared with 26,053.1 million euro at transfer.
Assets under custody, which are a component of this aggregate and include assets from institutional customers (mutual funds, banking foundations, merchant banks, leasing and factoring companies, asset management companies, SICAV, fund managers, insurance companies, pension funds and other social security funds, regulatory authorities and banking trade associations) reported a rather marked drop, from 12,669.9 millions on July 1st, 2007 down to 11,488.5 millions on December 31st, 2007, equal to a 9.3% decrease. This fall was due to the fact that assets under custody include a significant amount of Parent company shares that over the period sustained a significant loss in value totaling about 525 million euro. Excluding said impairment, assets under custody would have reported a 5.2% decrease. Also assets under management suffered from a marked reduction, affecting mainly traditional managed assets, managed accounts invested in mutual funds, and mutual funds, which decreased by about 900 million euro. This performance closely fits that of the entire banking industry, which suffered from a net outflow of assets from the various asset management classes. Including the slight drop of insurance policies, at year-end managed assets amounted to 12,364.8 million euro, down 7.6% as compared to 13,383.2 million euro at transfer. As a result, on December 31st, 2007, total customer funds (direct + indirect) came in at 46,501.1 million euro, down 4.6% as compared with 48,759.4 million euro on July 1st, 2007.
Excluding the London branch, total customer funds at year-end stood at 41,559.3 million euro, basically unchanged with respect to the same data at transfer, totaling 41,341.8 million euro (+0.5%).
Operating results
Net interest income stood at 388.5 million euro, with interest income totaling 941.7 million euro and interest expense 553.2 million euro.
The main component of interest income is represented by net customer interest, which added up to 419.4 million euro, and is the result of an interest income on loans of 778.9 million euro less an interest expense on checking accounts and savings deposits of 203.9 million euro and on debt securities and certificates of deposit in issue of 155.5 million euro. Interest income on financial assets held in portfolio was 3.7 million euro and on other assets was 1.1 million euro. Total interest expense is also made up of net interest paid to banking counterparties, which stood at 10.9 million euro, and primarily by net negative spreads on hedging transactions, totaling 24.7 million euro. The latter component was mainly affected by the unfavorable performance of market rates associated with the financial derivatives used to: - hedge the market risk of debt securities in issue measured at fair value, totaling 9.7 million euro; - hedge demand balance sheet items (checking accounts and deposits), amounting to 12.4 million euro.
Net commission income was 176.8 million euro, as a result of a commission income of 195.8 million euro and a commission expense of 18.9 million. In specific, commissions on management, brokerage and advisory services accounted for 60.78% of total net commissions. Commissions on “other services” were related to ATM and credit card income, adding up to 7.8 million euro, and to securitization servicing income, totaling 0.8 million euro.
In particular, the primary contributor in management, brokerage and advisory services was distribution of third party services. This type of insurance products (unit and index linked policies) generated an income of 28.2 million euro, while managed accounts in Banca Aletti contributed with 16 million euro and other products with 7.5 million euro.
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A significant contribution was made by commissions on sales of securities. Worth mentioning are commissions received by “other companies” of Gruppo Banco Popolare on mutual funds sold to customers.
Other revenues added up to 20.8 million euro, and are the result of 29.7 million revenues from charges to savings deposits and checking accounts, and 2.8 million operating charges associated with transaction costs for legal actions exceeding the existing provisions.
This aggregate breaks down in a net trading income of 8.3 million euro - where the primary contributor is foreign exchange with 6.6 million euro, followed by net capital gains from the measurement of financial assets held for trading of one million and a derivatives trading income of 0.5 million euro. Derivatives trading results include customer transaction costs and provisions for risk positions totaling 7.3 million euro.
Net trading income also included a net result of 1.5 millions in credit default swaps, that were executed to hedge against the credit risk on some loan positions, so as to reduce regulatory capital absorption. Moreover, net financial income also includes a profit from sale of debt securities in issue of 0.4 million euro, and primarily the net income from debt securities in issue measured at fair value and the associated hedging derivatives (12.1 million euro). The capital gain over the period generated by the credit spread on bonds issued amounted to 13.1 million euro.
As a result, other operating income came in at 218.4 million euro, while total income added up to 606.9 million euro.
Operating costs came in at 348.5 million, and as a result the Bank’s cost-income ratio was 57.42%. Net of non-recurring items associated with personnel costs, the above ratio was 51.2%.
Personnel expenses stood at 197.8 million euro, net of recoveries associated with employees detached to other companies of the Group. This aggregate includes non-recurring costs related to the ongoing integration process totaling 40.7 million euro, of which 26.5 million euro for the redundancy fund, 9.4 million euro for early retirement schemes and 4.8 million euro for the merger bonus given to all employees.
Other administrative expenses amounted to 144.4 million euro, of which 41 million euro were direct costs, and the rest were charges by companies of the Group. In particular, costs charged by the Parent company refer to 12.6 million euro worth of rents paid to use the property where the Bank branches are located, and to services provided centrally for 29.7 million euro. The remaining costs have been charged by Società Gestione Servizi with regard to IT and back-office services (50.9 million euro), by Bipielle SGC for credit recovery services (2.9 millions) and by Banca Aletti (4.7 million euro).
Amortization and depreciation came in at 6.3 million euro, of which 2.6 million euro refer to own property and equipment, and 3.5 million euro to leasehold improvements, mainly restructuring of rented property occupied by the branches.
As a result, profit from operations came in at 258.4 million euro. Net of non-recurring items, it rises to 296.2 million euro.
Net write-downs for loan impairment amounted to 37 millions, and they include a profit on sales without recourse of impaired loans of 1.6 million euro. Stripping out the effect of said sales, net write-downs would rise to 38.6 million euro, with a net cost of credit of 28 basis points.
Provisions for risks and charges totaled 11.9 million euro, and are primarily attributable to provisions set aside for clawback and legal actions outstanding on December 31st, 2007.
Net of negligible losses from sales of investments, income before tax from continuing operations totaled 209.4 million euro. Net of the above mentioned non-recurring items, the 2007 pre-tax income would have been 245.6 million euro. This item was not significantly affected by the contribution of the London branch, which was spun off on January 1st, 2008, because in the second half of 2007 said branch reported a loss of 0.4 million euro.
Net income for the year added up to 107.9 million euro, after an income tax of 101.5 millions.
Net of non-recurring items, net income was 141.4 millions, after an income tax of 104.1 millions.
Noteworthy events during the year
In summary, worth mentioning are the securitization of performing residential mortgages in December 2007, the joining of the insurance products distribution agreements signed by the Parent company with Fondiaria-SAI, the activation of the Solidarity Fund and of the early retirement schemes, the centralization of the securities portfolio with the Parent company and the bonus distributed to all employees to celebrate the 140th anniversary of the founding of Banca Popolare di Verona.
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Banca Popolare di Lodi
(in million euro) 31/12/2007
Income statement Net interest, dividend and similar income 235,387 Net commission income 74,785 Total income 316,318 Operating costs -305,993 Profit from operations 10,325 Income before tax from continuing operations -336,556 Income after tax from continuing operations -305,735 Net income for the year -305,735
Balance sheet Total assets 21,861,842 Loans to customers (gross) 12,918,375 Financial assets and hedging derivatives 668,061 Shareholders’ equity 1,501,727
Customer financial assets Direct customer funds 15,711,964 Indirect customer funds 10,723,721 - Assets under management 4,552,228 - Mutual funds and Sicav 2,417,323 - Managed accounts invested in securities and in mutual funds 1,316,058 - Insurance policies 818,847 - Assets under custody 6,171,493
Other Average number of employees (*) 3,995 Bank branches 539 (*) Monthly arithmetic mean
Credit intermediation
As at December 31st, 2007, total customer funds of Banca Popolare di Lodi S.p.A. totaled 26.436 millions and reported a slight drop compared to July 1st (-0.9%). The fall was caused by the performance of indirect customer funds. In particular direct customer funds (namely due to customers plus debt securities in issue) stood at 15,712 millions (+4.4%), while indirect customer funds came in at 10,723 millions (-7.8%). Due to customers stood at 10,551.5 millions (+10.2%), with checking accounts growing up to 8,258.7 millions (+12.5%) and also liabilities sold and not yet derecognized amounting to 2,103.6 (+12.1%). Debt securities in issue and liabilities measured at fair value are instead decreasing and came in at 5,160 millions (-5.7%). As to indirect customer funds, assets under management reached 4,552.2 millions (-9.5%), and assets under custody added up to 6,171.5 millions (-6.5%). With regard to lending, total gross loans to customers as at December 31st, 2007 amounted to 12,918 millions, slightly lower compared to July 1st, 2007 (-1.4%). The various components of this aggregate contributed differently: mortgages enjoyed a strong growth while checking accounts decreased. Active checking accounts totaled 2,532 millions (-20.9%); mortgages, which reported a marked increase accounting for 32.4% of total loans to customers, totaled 3,878 millions (+12.8%), other transactions added up to 4,156 millions (+5.3%). Impaired assets made up of non-performing loans, watchlist loans, restructured loans or under restructuring and past dues are increasing and came in at 645.6 millions (+44.9%).
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(in thousand euro) 31/12/2007 Impaired assets 1,174,620 - non-performing loans 427,170 - watchlist loans 681,660 - restructured loans 23,892 - past dues 41,898 Performing loans 11,743,755 Country risk 674 Other performing loans 11,743,081 Total gross loans 12,918,375 Individual write-downs -528,996 Collective write-downs -403,060 Total net loans 11,986,319
Operating performance
Net interest income totaled 235.4 millions. Interest income amounted to 581.9 millions and mainly refer to interest accrued on customer loans (including securitized loans) of about 391 millions and on loans to other banks of 160 millions. Interest expense stood at 346.5 millions and mainly refer to interest accrued on due to customers of 99 millions, debt securities of 87 millions and due to other banks of 129 millions. Note, that net interest income was not inclusive of the positive effect of 15.9 millions as at December 31st, 2007 from the interest income accrued on loan facilities granted to the Barilla group to acquire the Kamps and Harry’s group, as said interest has been written off under loan impairments. Net commission income came in at 74.8 millions; commission income amounted to 84.5 millions, while commission expense stood at 9.7 millions. The most significant component of commission income was commissions from management, brokerage and advisory services, amounting to 47.3 millions. Other revenues totaled 15.2 millions. Other operating income amounted to 31.9 millions and included expense recoveries on deposits and checking accounts of 21.5 millions, transaction recoveries of 4,4 millions and contingent assets of 3.1 millions. Other operating expense totaled 16.6 millions and were mainly represented by contingent liabilities. As a result a net financial loss of 9.1 millions was posted, which includes a trading loss of 11.5 millions, a loss on disposal to the Parent company of investment securities of 3.7 millions, an income on sale of financial liabilities of 0.7 millions and a gain on financial liabilities measured at fair value of 5.4 millions. As a result, total income added up to 316.3 millions. Operating costs amounted to 306 millions and comprised personnel expenses of 155.2 millions, other administrative expenses of 141.9 and a depreciation of property and equipment of 8.9 millions. Personnel expenses include 24.9 millions worth of costs associated with integration charges, for example the redundancy allowance, early retirement schemes, training and interim costs for the migration of information systems in November. As a result, profit from operations stood at 10.3 millions. Net impairment of loans, guarantees and commitments totaled 156.3 millions. Specifically, write-downs of impaired loans totaled 87.8 millions and write-downs of performing loans amounted to 110.3 millions. Write-backs of impaired loans totaled 35,2 millions and of performing loans were 1.9 millions. Net write-downs owing to time value effect (discounting of impaired loans) were 7.5 millions. Write-backs of guarantees and commitments stood at 2.2 millions. Loan write-downs do not include the impairment associated with the interest accrued on the credit facility granted to the Barilla group for the acquisition of Kamps ed Harry’s, amounting to 15.9 millions, reclassified to subtract interest income. About 95 millions out of the write-downs of impaired loans and on watch were due to non-recurring impairments on provisions for old loans extended by ex BPI. Write-downs on performing loans include 43.6 millions worth of additional provisions, calculated on the initial performing loan stock, caused by the adoption of the loan valuation criteria of former Gruppo BPVN. After the Bank joined Gruppo Banco Popolare, it was necessary to adopt a harmonized Group methodology. According to said methodology, expected losses are estimated based on Probability of Default and Loss Given Default. While waiting for the PD and LGD “validated” by the Bank of Italy, it was decided to adopt a temporary solution whereby the PD is replaced by the average annual system decay rates retrieved from the Bank of Italy’s public database, and the LGD is replaced by recovery rates calculated on the non-performing positions opened and closed in the period from 1997 to 2006. Net of the above mentioned non-recurring items, net impairments of loans, guarantees and commitments totaled 17.7 millions. Net impairment of other financial transactions came in at 11.3 millions and were represented by write-downs on securities from securitizations (mezzanine Tiepolo II) of 10.3 millions and on securities available for sale of 1 million. Provisions for risks and charges totaled 42.1 millions. Losses on equity investments stood at 137.1 millions and were represented by the impairment of the interest held in Banca Popolare di Cremona following the impairment test conducted on the carrying value of equity investments on December 31st, 2007. As a result, a loss before tax from continuing operations of 336.6 millions was posted. Tax on income from continuing operations posted a positive amount of 30.8 millions. Deferred taxes have been activated on the fiscal loss for the period, because since the bank transferred the tax credit to the Parent company by joining the tax consolidation regime, said tax credit will be completely recovered. The net loss for the period totaled 305.7 millions.
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Noteworthy events in the period
On June 26th, 2007, the deed for the business segment transfer from Banca Popolare Italiana to Banca Popolare di Lodi S.p.A. was signed. The business segment under transfer was essentially comprised of the network of branches, primarily located in the banks’ original franchise, of the head office functions, primarily engaging in retail and corporate banking and lending. Banca Popolare di Lodi also acquired some controlling stakes in banks (Banca Popolare di Crema, Banca Popolare di Cremona, Banca Popolare di Mantova and Banca Caripe). The transfer of the business segments came into effect shortly before the coming into effect of the merger (July 1st, 2007). On December 31st, 2007, the deed for the demerger of their London branches was signed by Banca Popolare di Verona – San Geminiano e San Prospero S.p.A. and Banca Popolare di Lodi S.p.A. in favor of Banco Popolare Soc. Coop.. Also from an accounting and fiscal point of view, the demerger came into effect on January 1st, 2008.
Banca Popolare di Novara
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Net interest, dividend and similar income 442.9 396.4 11.7% Net commission income 207.9 213.3 -2.5% Total income 727.0 702.6 3.5% Operating costs 446.8 390.3 14.5% Profit from operations 280.2 312.4 -10.3% Income before tax from continuing operations 227.0 256.1 -11.4% Income after tax from continuing operations 120.4 146.2 -17.6% Net income for the year 120.4 146.2 -17.6%
Balance sheet Total assets 19,746.7 16,842.0 17.2% Loans to customers (gross) 12,722.8 10,694.0 19.0% Financial assets and hedging derivatives 765.6 3,390.6 -77.4% Shareholders’ equity 1,036.1 1,032.7 0.3%
Customer financial assets Direct customer funds 13,845.5 10,994.8 25.9% Indirect customer funds 21,494.8 31,786.2 -32.4% - Assets under management 8,320.8 9,120.9 -8.8% - Mutual funds and Sicav 2,854.0 3,542.0 -19.4% - Managed accounts invested in securities and in mutual funds 2,906.1 3,398.3 -14.5% - Insurance policies 2,560.7 2,180.6 17.4% - Assets under custody 13,174.0 22,665.3 -41.9%
Other Average number of employees (*) 3,393 3,425 -0.9% Bank branches 418 413 1.2% (*) Monthly arithmetic mean
Credit intermediation
As at December 31st, 2007, direct customer funds totaled 13,845 million euro (+2,851 millions, +25.9% over 31.12.2006); this aggregate includes the Balance sheet items n. 20 (due to customers, inclusive of third party assets under custody), n. 30 (debt securities in issue, which on 31.12.2006 included the residual subordinated bonds with redemption/extinction on May 9th, 2007) and n. 50 (financial liabilities measured at fair value). Direct customer funds now include also Liabilities from assets sold and not derecognized in offset to loans from securitizations relating to deals performed during the year (as at December 31st they amounted to 1,222 millions); excluding said amount the comparison shows a growth of about 1,629 million euro over December 2006 (+14.8%). This increase was driven by the dynamics of checking accounts and other types of instruments, repurchase agreements and bonds. Year on year, all items (except for certificates of deposits) reported an increase, albeit of very different magnitude.
As to lending activities, the strong expansion that had already characterized 2006 has continued. As at December 31st, 2007 gross loans to retail customers totaled 12,723 million euro, up 2,029 millions (+19.0%) over 31.12.2006.
Write-downs (inclusive of discounting to net present value) amounted to 243.8 millions (+28.7 millions, +13.4% over 31.12.2006): accordingly, net loans stood at 12,479 million euro, up 2,000 millions (+19.1%) over 31.12.2006. The
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aggregate includes Assets sold and not derecognized of 1,248 millions, relating to performing loans from securitizations (that must be still recognized since they do not meet the requirements to be actually derecognized).
Performing loans totaled 12,175 million euro gross of collective write-downs, and 12,085 millions net of collective write- downs (both aggregates reported an increase in excess of 18% over 31.12.2006); impaired loans, including non-performing loans, watchlist loans, restructured loans or under restructuring and past dues, added up to 548 millions gross (+30.7% year on year) and to 394 millions net of write-downs (+38.3% over 31.12.2006).
The performing loan to total net loan ratio was 96.84%, slightly lower compared to 97.28% of one year before; as a result, net impaired loans accounted for 3.16% (2.72% at the end of 2006).
The coverage ratio of impaired loans, namely the write-down/discounting to total gross loan ratio, went down to 28.07% from 32.01% on December 2006.
Gross non-performing loans totaled 284.0 million euro (up 38.8 millions y/y). It should be noted, that the risk ratio between NPLs and loans, gross of write-downs, was 2.23%, down from 2.29% on December 31st, 2006. Net of write-downs the risk ratio was 1.33% (1.34% on December 31st, 2006).
Gross watchlist loans (221 millions) grew by 74 millions compared to the end of the year before; net of write-downs the aggregate came in at 187 millions, up 67 millions year on year; this dynamic was affected by some large positions that have been put on watch.
(in thousand euro) 31/12/2007 31/12/2006 Changes
Impaired assets 547,811 419,108 128,703 30.7% - non-performing loans 283,968 245,191 38,777 15.8% - watchlist loans 221,239 147,063 74,176 50.4% - restructured loans 13,004 14,113 -1,109 - 7.9% - past dues 29,600 12,741 16,859 132.3% Performing loans 12,175,010 10,274,881 1,900,129 18.5% Country risk 263 536 -273 - 50.9% Other performing loans 12,174,747 10,274,345 1,900,402 18.5% Total gross loans 12,722,821 10,693,989 2,028,832 19.0% Individual write-downs -153,549 -134,055 19,494 14.5% Collective write-downs -90,245 -81,011 9,234 11.4% Total net loans 12,479,027 10,478,923 2,000,104 19.1%
Indirect customer funds
It is worth remembering that as of January 2005, the Group organizational modalities of managed accounts invested in securities (GPM) and invested in mutual funds (GPF) have changed: the sub-advisory system was replaced with the direct distribution of asset management services provided by Banca Aletti. To provide a like-to-like comparison of total managed assets and to highlight their volume (that generate significant a significant commission income), illustrated below are the amounts referring to Assets under Management, despite they are no more part of BPN’s portfolios.
As at December 31st, 2007 total assets under management (Funds, Managed accounts, Sicav and insurance products) amounted to 8,321 million euro, reporting a y/y decrease of 800 millions, -8.8%. Said dynamic is ascribable to Mutual funds - which in twelve months reported a fall of -740 millions, resulting from a net outflow of -815 millions and a positive market effect of 75 millions – and to the performance of Assets under Management as an aggregate, down -492 millions over the period (net outflow of -479 millions and negative market effect of -13 millions). Said falls were offset by an increase in insurance policies (+380 millions) and, to a minor extent, by Hedge funds (+41 millions) and Sicav (+11 millions).
In 2007, Bancassurance premiums written totaled 858 millions, driven in particular by the sale of Index Linked Policies with a yearly business of 799 millions. As at December 31st, 2007, total Index Linked Policies amounted to 2,561 million euro.
At year-end, customer assets under custody totaled 13,174 millions, down 9,491 millions year on year (-41.9%). This fall was entirely due to a decrease in volume by two corporate customers (totaling –9.1 billions year on year), otherwise this aggregate would have remained unchanged. The breakdown shows that Retail customer assets under custody were 4,621 millions, down –4.6% compared to December 31st, 2006; Corporate assets under custody went plummeting down at 2,557 millions as a result of the above mentioned outflow.
Total customer funds (direct and indirect customer funds) came in at 35,340 millions, down –17.4% from 42,781 millions on December 31st, 2006. Stripping out the amounts associated with the two above companies, the change becomes positive (+5.1%).
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Operating performance
Net interest, dividend and similar income totaled 442.9 million euro (+46.5 millions, +11.7% y/y), resulting an from interest income of 924.5 million euro and an interest expense of 481.6 million euro.
The strong increase in the above income net of hedging interest expense (474.9 millions, +76.0 millions, +19.1%) was partly offset by the increase in net negative spreads on hedging transactions (-31,9 million euro, -2,4 millions al 31.12.2006).
Commission income came in at 237.9 millions (down 7.1 millions y/y) and are mainly represented by revenues from management, brokerage and advisory services (158.1 million euro), accounting for about 66% of total commissions. Commission expense (30.0 millions, +1.7 millions compared to 31.12.2006) break down in 37% management and brokerage service charges (11.0 millions), mostly payments to other Companies of the Group in exchange for outsourced activities. Net commission income as a result was 207.9 millions (213.3 millions on December 31st, 2006).
On December 31st, net financial income stood at 23.3 millions, up 7.1 millions compared to the year before. The dynamic of this aggregate is mainly the result of a net trading loss (-7.3 millions caused by the unfavorable market performance) and of a profit on assets and liabilities measured at fair value (+28.2 millions, against +10.5 in 2006), which includes in particular a gain of 12.9 millions from the sale of Hedge Funds to the Parent company (of which about 4.7 millions are tax credit) and 16.6 millions from unrealized capital gains on financial liabilities (bonds) due to the change in credit spread during the year.
Other revenues came in at 52.9 millions, down 23.9 millions from 76.8 millions on December 31st, 2006. The latter included “non-recurring” operating revenues of 18.0 million euro, from capital gains on the sale of two business segments totaling 9 bank branches in Center Italy to banks of the then BPI Group; net of this component, the year on year change would be –5.9 millions. Revenues were primarily made up of recoveries on customer overdrawn deposits and checking accounts (55.0 million euro).
Accordingly, other operating income (operating income other than net interest, dividend and similar income) amounted to 284.1 millions, -7.2% with respect to one year before.
As a result of the above performance, total income came in at 727.0 million euro (+24.4 millions, +3.5% compared to December 31st, 2006).
Operating costs totaled 446.8 million euro, reporting a marked increase year on year (+56.5 millions, +14.5%) and break down in personnel expenses of 252.0 millions (+34.3 millions, +15.8%), other administrative expenses of 191.1 millions (+20.8 millions, +12.2%) and net impairment of property and equipment and of intangible assets of 3.6 millions (+1.4 millions, +62.6%).
The strong increase in Personnel expenses (+34.3 millions, +15.8%) over December 2006 was particularly affected by the fact that data as at December 31st, 2007 were encumbered with charges associated with early-retirement schemes and with the activation of the Solidarity Fund, as well as those connected with the granting of the merger bonus, “non-recurring” charges which proved much greater (34.7 millions) than the other positive “non-recurring” component represented by lower Personnel costs as a result of the new methodologies to measure Termination Benefits introduced by the supplementary pension reform (11,5 millions). In “recurring” terms, Personnel expenses were 228.8 millions; the relative increase dwindles down to about 11 millions (+5%), and was due to various factors, for example: adjustments introduced by the national bargaining agreement (CCNL), higher travel expenses, linked also to activities functional to post-merger migrations, lower positive incidence compared to 2006 of total reclassifications carried out since the adoption of international accounting standards.
Profit from operations was 280.2 million euro, down 32.1 millions with respect to one year before (-10.3%).
Net impairment of loans and guarantees and commitments totaled –47.2 millions (-42.6 millions as at 31.12.2006), resulting from write-downs and provisions of 68.5 millions and write-backs of 21.3 millions (66.6 millions and 24.0 millions respectively in 2006). Net provisions to risks and charges amounted to 6.1 millions (against 13.7 millions as at 31.12.2006).
Income before taxes of continuing operations, after accounting for the above adjustments, stood at 227.0 million euro (256.1 millions a year before).
After accounting for income taxes of 106.6 millions, net income as at December 31st, 2007 totaled 120.4 millions, down – 17.7% compared to twelve months before.
However, some clarifications are due. First of all, income taxes are only slightly less than in 2006 (106.9 millions against 109.8 millions) although gross income widely differed. The reason lies in particular in the fact that the changes in the measurement of deferred tax assets and liabilities (due to the changes in IRES and IRAP introduced by the 2008 Budget Law) significantly burdened the income tax for financial year 2007, that was only partly mitigated by the reduction in IRAP as a
95 Report on group operations
result of the “fiscal wedge”. Moreover, as already mentioned, “non-recurring” items comprised in gross income as at December 31st, 2007, which were all associated with Personnel expenses, lead to a total loss of about –23.2 million euro, while in 2006 they resulted in a gain of 18.0 millions. Taking only “recurring” items into account, the 2007 Income before tax was 250.2 millions, up 12.1 millions (+5.1%) as compared to the same item on 31.12.2006 (238.0 millions).
As to net income (120.4 millions), the “non-recurring” portion was –17.0 millions (against +12.1 millions in 2006) and the “recurring” one 137.4 millions: the relative increase over 134.1 millions in 2006 is only 3.3 millions (+2.4%), caused by the above mentioned higher tax burden in 2007.
Noteworthy events in the period
Among the most noteworthy events, in summary there are two performing residential mortgage securitizations, the participation in the insurance product distribution agreements signed by the Parent company, the activation of the Solidarity Fund and early retirement schemes, and the centralization of the securities portfolio with the Parent company.
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Credito Bergamasco
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Net interest, dividend and similar income 363.6 363.5 - Net commission income 135.4 136.4 -0.7% Total income 549.5 543.7 1.1% Operating costs 267.5 240.1 11.4% Profit from operations 282.0 303.6 -7.1% Income before tax from continuing operations 310.9 335.3 -7.3% Income after tax from continuing operations 212.4 241.6 -12.1% Net income for the year 212.4 241.6 -12.1%
Balance sheet Total assets 14,683.6 13,595.2 8.0% Loans to customers (gross) 11,565.8 10,178.3 13.6% Financial assets and hedging derivatives 127.0 698.7 -81.8% Shareholders’ equity 1,323.9 1,167.1 13.4%
Customer financial assets Direct customer funds 11,502.6 9,702.2 18.6% Indirect customer funds 10,665.9 11,554.0 -7.7% - Assets under management 3,832.6 4,346.6 -11.8% - Mutual funds and Sicav 1,462.6 1,511.5 -3.2% - Managed accounts invested in securities and in mutual funds 1,331.2 1,769.5 -24.8% - Insurance policies 1,038.9 1,065.6 -2.5% - Assets under custody 6,833.3 7,207.4 -5.2%
Other Average number of employees (*) 2,093 2,084 0.4% Bank branches 246 241 2.1% (*)Monthly arithmetic mean.
Credit intermediation
Financial year 2007 was characterized by a constant expansion of operations with customers and therefore a satisfactory growth in intermediated volumes. As at 31.12.2007, Credito Bergamasco reported 11,502.6 millions in direct customer funds – namely due to customers, debt securities in issue and financial liabilities (bonds) measured at fair value, up 18.6% from 9,702.3 at year-end 2006. This aggregate includes liabilities for assets sold (mortgage securitization) of 737.2 million, and bonds subscribed by the Parent company, inclusive of accrued interest, of 1,406.7 millions (1,002.4 millions on 31.12.2006). To this regard, note that on October 15th, 2007, in order to balance customer funds in view of the positive dynamics of medium to long term lending and having established the satisfactory terms, the bank’s board of directors authorized the Parent company to issue 400 million two-year Medium Term Notes in its name and on behalf of Credito Bergamasco. After the issue, Banco Popolare transferred the corresponding financial proceeds by subscribing an equivalent amount of Creberg bonds at the same terms, and Credito Bergamasco added the proceeds to its direct funds. This bond issue adds up to those carried out in 2003, 2005 and 2006, for a total nominal amount of one billion euro.
At the end of December, indirect customer funds, net of an extraordinary securities account opened in 2005 which on 31.12.2007 amounted to 1,554.2 millions, reached 9,111.7 millions, down 2.6% from 9,351.8 millions on 31.12.2006. Among the components making up indirect customer funds, assets under management went down to 3,832.6 millions from 4,346.6 at year-end 2006, in line with the general performance of the banking industry at large. In particular, Banca Aletti’s managed accounts distributed by the branch network of Credito Bergamasco amounted to 1,331.2 millions, compared to 1,769.5 millions on 31.12.2006, total insurance policies stood at 1,038.9 millions against 1,065.6 millions at year-end 2006, while mutual investment funds came in at 1,462.5 millions, from 1,511.5 millions one year before. Indirect customer funds under custody totaled 5,279.1 millions, up 5.5% from 5,005.2 millions at year-end 2006. Including the extraordinary securities deposit mentioned above – whose market value dropped from 2,202.2 millions on 31.12.2006 to 1,554.2 millions on 31.12.2007 – indirect customer funds reached 1,.665.9 millions, compared to 11,554 millions at the end of 2006. As a result total customer funds added up to 22,168.5 millions, up 4.3% from 21,256.3 millions on 31.12.2006.
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On the assets side, the constant strengthening of the Bank’s ties with its territory and its communities, as well as the support lent to the development of its local economy and the constant focus on commercial loans at times to the detriment of more financial-like loans, resulted in total customer loans of 11,413.8 millions, up 13.7% from 10,040.3 millions at year-end 2006. Worth mentioning is the performance of annual average loans, that according to management accounts increase by 8.1% over the previous year’s average. Among the different loan products, worth mentioning is the growth of customer mortgages, which went from 3,648.8 millions at the end of 2006 up to 4,255.8 millions (including 743.5 millions in securitized mortgages) at year-end 2007, with an annual growth rate of 16.6%.
(in thousand euro) 31/12/2007 31/12/2006 Changes
Impaired assets 327,187 280,730 46,457 16.5% - non-performing loans 147,631 124,814 22,817 18.3% - watchlist loans 138,515 116,852 21,663 18.5% - restructured loans 13,013 14,056 -1,043 - 7.4% - past dues 28,028 25,008 3,020 12.1% Performing loans 11,238,607 9,897,558 1,341,049 13.5% Country risk - 386 -386 Other performing loans 11,238,607 9,897,172 1,341,435 13.6% Total gross loans 11,565,794 10,178,288 1,387,506 13.6% Individual write-downs -85,519 -65,616 19,903 30.3% Collective write-downs -66,465 -72,334 -5,869 - 8.1% Total net loans 11,413,810 10,040,338 1,373,472 13.7%
A disciplined and effective risk monitoring and control exercised by the competent bank functions minimized the impact of domestic economic distress onto our loan book quality. On 31.12.2007 gross non-performing loans totaled 147.6 millions; net of write-downs, they stood at 78.7 millions, and the net NPL to total loan ratio decreased to 0.69% from 0.70% at the end of 2006. Gross watchlist loans, restructured loans and under restructuring and past dues on 31.12.2007 amounted to 179.6 millions; net of write-downs, they came in at 161.9 millions, accounting for 1.42% of total net loans from 1.43% at year-end 2006.
Operating performance
On 31.12.2007, as a result of growing operations with customers and of the interest rate rise, net interest income stood at 342.8 millions, up 11.6% from 307.1 millions on 31.12.2006. Profit from equity investments carried at equity – including a 15.5 million non-recurring share of loss of Credito Bergamasco relative to Banca Italease S.p.A. (2.923% shareholding) – amounted to 20.7 millions, compared to 56.4 millions one year before, considering that the latter included a 22.6 million share of the capital gain generated by the associate Aletti Merchant S.p.A. on the disposal of 92.2% of Theme Parks Holding S.p.A. (controlling company of Gardaland) by Cornel S.a.r.l. (39.9% held by the merchant bank).
Net interest, dividend and similar income added up to 363.6 millions, compared to 363.5 millions the year before. Net of non-recurring items, it came in at 379 millions, up 11.2% from 340.9 millions on 31.12.2006. Other operating income was 185.9 millions, compared to 180.2 millions the year before (+3.2%). This figure includes net advisory commissions of 135.4 millions, reporting a slight slip from 136.4 millions one year before; net financial income – inclusive of 3.7 millions in profit on disposal of assets available for sale (2.2 millions one year before) – totaled 20.3 millions from 13 millions on 31.12.2006; other revenues stood at 30.2 millions compared to 30.8 millions the year before.
Total income totaled 549.5 millions, up 1.1% from 543.7 millions the year before. Total income, net of non-recurring items, came in at 561.2 millions, up 8.2% from 518.8 millions adjusted for comparison of one year before. Personnel expenses grew by 6% to 161.4 millions, and were significantly impacted by non-recurring items. On December 31st, 2007, the entire provision for charges associated with the agreement signed with trade unions governing personnel management during the formation of Gruppo Banco Popolare was charged to income: 2 millions in merger bonus distributed to employees in September, 8 millions for the solidarity fund for the voluntary exit of eligible employees and 6.7 millions for the early retirement scheme of employees already qualified for retirement. These non-recurring charges have actually been offset by a positive gain of 5.6 millions referring to the accounting impact from the recalculation of employee termination benefits as a result of regulatory changes introduced in 2007. Net of the above non-recurring items, personnel expenses came in at 150.3 millions, reporting an annual decrease of 1.3%. Other administrative expenses stood at 100.1 millions, up 22.5% year on year. In addition to the 3.6 million worth of non- recurring ancillary charges associated with the disposal of BPV Vita, this growth was driven by the increase in operating volumes, by the expenses for the opening of 5 new branches during the year, by the outsourcing of the “security” service to S.G.S.-BP, by the contracting out of activities regarding Administration and Accounting, Real Estate, Legal Affairs, Human Resources, Non-performing Loans and Loan Recovery to Banco Popolare and SGC BP as of July 1st, 2007, leading to the detachment of Creberg employees. This contract produced an increase in intragroup costs against a reduction in direct operating costs (in particular personnel expenses) incurred by Credito Bergamasco.
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Other administrative expenses include also Creberg’s share of cost of the new services/projects launched in the second half of 2007 (lending policies, compliance, bancassurance, …) across the Banking group.
Depreciation and amortization stood at 5.9 millions, compared to 6.1 millions one year before. Hence, on 31.12.2007, total operating costs came in at 267.5 millions from 240.1 millions on 31.12.2006 (+11.4%), while total recurring operating costs amounted to 252.8 millions (+5.3%). The “ordinary” cost/income ratio, namely recurring operating costs over total income, was 45%, decreasing from 46.3% adjusted for comparison of the year before. Profit from operations totaled 282 millions (303.6 millions the year before); excluding non-recurring items, it came in at 308.5 millions, up 10.6% year on year. Net loan impairments reached 34 millions (of which 0.5 millions in loan sales), slightly increasing (+1.7%) from 33.4 millions the year before; net provisions for risks and charges totaled 0.9 millions (5.6 millions on 31.12.2006), while profit on measurement and disposal of equity and other investments reached 63.7 millions. This amount is almost entirely the product of the combined effect of two non-recurring items. On the one side, the 81.6 million gross write-down of the share held by Credito Bergamasco in Banca Italease (2.923% of share capital), that was resolved in keeping with Banco Popolare as a result of the well known facts that involved the associate; on the other side, the 144.5 million gross capital gain on the disposal of the stake (15%) held by Credito Bergamasco in BPV Vita to Fondiaria-SAI, in keeping with the Bancassurance plan of the Banking Group Banco Popolare. Note, that in 2006 gains on measurement and disposal of equity and other investments had reached 70.7 millions, of which 70.6 millions were related to a gross capital gain on the merger by acquisition of Leasimpresa S.p.A. in Banca Italease. Income before tax from continuing operations came in at 310.9 millions, from 335.3 millions the year before; excluding non-recurring items, it was 274 millions, up 13.9% from 240.7 millions on 31.12.2006. Income taxes amounted to 98.5 millions compared to 93.7 millions on 31.12.2006 and net income added up to 212.4 millions, from 241.6 millions on 31.12.2006; net of non-recurring components, the bottom line was 175 millions, up 15.3% from 151.7 millions one year before. The year-end ROE, namely the ratio between net income and equity plus reserves, reached 19.1% compared to 26.1% the previous year; on a recurring basis, ROE was 15.7%, compared to 16.4% on 31.12.2006.
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Cassa di Risparmio di Lucca Pisa Livorno
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Net interest, dividend and similar income 285.2 258.7 10.2% Net commission income 82.9 82.1 1.0% Total income 397.7 396.0 0.4% Operating costs -236.5 -198.4 19.2% Profit from operations 161.2 197.6 -18.4% Income before tax from continuing operations 109.6 135.7 -19.2% Income after tax from continuing operations 55.4 93.1 -40.5% Net income for the year 55.4 93.1 -40.5%
Balance sheet Total assets 10,575.1 9,502.7 11.3% Loans to customers (gross) 8,522.9 7,464.8 14.2% Financial assets and hedging derivatives 108.2 240.4 -55.0% Shareholders’ equity 1,259.9 1,281.4 -1.7%
Customer financial assets Direct customer funds 7,499.3 6,138.3 22.2% Indirect customer funds 5,381.7 5,592.2 -3.8% - Assets under management 3,177.9 3,407.5 -6.7% - Mutual funds and Sicav 1,690.4 1,787.9 -5.5% - Managed accounts invested in securities and in mutual funds 998.4 1,118.0 -10.7% - Insurance policies 489.1 501.6 -2.5% - Assets under custody 2,203.8 2,184.7 0.9%
Other Average number of employees (*) 1,758 1,208 45.5% Bank branches 236 235 0.4% (*)Monthly arithmetic mean
Credit intermediation
The strong growth in direct customer funds, + 22.2% (+ 1,361 millions) over year-end 2006, was driven by various factors: first of all the growth of checking accounts and demand deposits (+185 millions), up 5.5%; time deposits, which at the end of 2006 were rather sparse, grew by 72 millions, with a growth rate of 470.1% over the end of 2006. Repurchase agreements grew by 107 millions, up + 15.4%, while assets sold and not derecognized related to mortgage securitizations grew by 273 millions, or 110% compared to the previous year, as a result of the finalization of a 345 million euro residential mortgage securitization performed during the year. The greatest contribution to this aggregate however was made by debt securities in issue, with the issue of a 40 million euro subordinated bond program for institutional investors and the issue of a 500 million euro bond program subscribed by the Parent company. It should also be remembered, that in 2007 with the adoption of the fair value option, debt securities in issue are reported separately from financial liabilities measured at fair value. Should we analyze the dynamics of these two combined components, the bond compartment reported an increase of 722 millions, with a growth rate of 40.7%. In any case, net of the two above mentioned issues, the sale of securities to retail customers still reported a significant growth of 182 millions, up 10.3% over the end of 2006. At yearend, net customer loans came in at 8,294 million euro, up 1,008 million euro, of 13.8%, compared to last December. This growth was primarily driven by mortgages, with + 56.9%. To this regard, note that this increase was brought about non only by the persisting positive dynamics of medium and long term lending in 2007, but also by a 700 million euro loan, that had been extended under the form of an overdraft facility to a Group company, that was turned into a mortgage. This compartment underwent deep changes also as a result of the developments of the residential and commercial mortgages sold in 2005. In April, Cassa repurchased the residential mortgages sold in 2005, for a residual loan value of 241 million euro, and in the same month sold again a pool of residential mortgages of 348 million euro as part of a securitization which was finalized at the end of the year. In October, Cassa repurchased the commercial mortgages sold in 2005 for a residual loan value of 314 million euro. The net effect of the above transactions was an increase of about 207 million euro offset by a similar posting of opposite sign under assets sold and not derecognized. Net of the above transactions, mortgages were still growing significantly, albeit more moderately, by 24.2%. Assets sold and not derecognized decrease by 39.7%, also as a result of ordinary mortgage amortization. Personal loans decreased by 47.5%, in synch with the corporate choice to address the household credit market with the products of the companies of the “Ducato” Group, specializing in consumer credit. On the contrary, other lending transactions, namely credit facilities not associated with checking accounts and foreign financing facilities, grew by 9.3%.
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Impaired assets, namely non-performing loans, watchlist loans, past dues and restructured loans, reported an increase that calls for a clarification: first of all, the repurchase of mortgages sold in 2005 caused the reclassification of positions that in the meantime had been classified as impaired (30 million NPL, watchlist and past dues on 31/12/2006). Non-performing loans were also highly impacted by Cartiera Fenili. Watchlist loans reported a more modest dynamic. Net impaired assets on 31/12/2007 accounted for 4.2% of total net loans against 3.7% at the end of 2006.
(in thousand euro) 31/12/2007 31/12/2006 Changes
Impaired assets 530,835 410,609 120,226 29.3% - non-performing loans 218,459 148,185 70,274 47.4% - watchlist loans 138,928 133,206 5,722 4.3% - restructured loans 2,035 1,977 58 2.9% - past dues 171,413 127,241 44,172 34.7% Performing loans 7,992,110 7,054,231 937,879 13.3% Country risk 248 324 -76 -23.5% Other performing loans 7,991,862 7,053,907 937,955 13.3% Total gross loans 8,522,945 7,464,840 1,058,105 14.2% Individual write-downs -179,079 -141,158 37,921 26.9% Collective write-downs -49,350 -36,893 12,457 33.8% Total net loans 8,294,516 7,286,789 1,007,727 13.8
Indirect customer funds
Indirect customer funds at year-end reached 5,382 million euro, down 3.8%. The most affected items were assets under management, which went down 6.7%, with managed accounts invested in securities and in mutual funds decreasing by 119 million euro, or 10.7%. Securities under administration remained stable with a 0.9% growth rate, while the insurance segment slipped slightly (-2.5%).
Operating performance
The growth in intermediated volumes, coupled with the hike in interest rates, sustained net interest income and thus net interest, dividend and similar income, which reached 285.2 million euro, up 10.2% with respect to end 2006. Specifically, interest income increased by 26.7% over December 2006 to 52.,8 million euro, while interest expense - considering the dynamics of due to other banks, the growth in the most expensive components of funding and the performance of spreads paid on hedging derivatives, which with increasing interest rates is having a negative impact – totaled 242.6 million euro, up 53.9% over the end of 2006. Among other operating income, net commission income came in at 82.9 million euro, basically stable with respect to December 2006 (+1.0%), and other revenues amounted to 24.3 million euro, up 37.1%, but this was mainly the result of the marked decrease (-66.1%) in operating charges (in 2006 contingent liabilities had been posted caused by Parmalat damages and commission refund). The most important revenue items were expense recoveries on deposits and checking accounts which decreased by 4.8%. Net financial income went from 37.4 million euro in 2006 to 5.3 million euro in 2007. The 2006 result was generated by disposals that had produced a profit of about 29 million euro. Total income remained basically stable with respect to the previous year, and reached 397.7million euro from 396.0 the year before. Operating costs totaled 236.5 million euro, up 19.2%. Personnel expenses grew by 29.8% from 99.1 million euro in December 2006 to 128.6 million euro at year-end 2007. It should be noted that said increase is associated with special events: in 2006 personnel costs were more contained because the additional resources acquired (57) with the 11 branches of former BPVN had impacted only one quarter, and the same holds true for hires carried out in the second half of the year, to fill personnel vacancies that had developed in the meanwhile, which impacted a time period of less than six months. Moreover, the costs associated with the business plan and the personnel turnover with the activation of the early retirement scheme and the solidarity fund generated a charge of about 8 million euro. Then, the accounting criteria for bonuses associated with the incentive scheme have changed, and this led to additional 2.4 million euro costs, and similarly the merger bonus distributed in September cost 1.7 million euro. Cost dynamics, net of these non-recurring events which took place in 2007, grew by 15.8%. Other administrative expenses increased by 8.5% over 2006. Also in this case we should consider the increase in the number of branches, whose expenses impacted the whole year, while in 2006 they had had an effect only for one quarter. Net impairment of property and equipment and intangible assets grew by 14.4%, also as a result of actions take during the year to adapt the bank structure to the new geographical organization. As a result of the above dynamics and operating facts, profit from operations came in at 161.2 million euro from 197.6 in 2006, down 18.4%. Net loan impairments stood at 49.8 millions. Note, that this item was affected by the change in the method used to estimate losses on performing loans, which generated a total increase of 13.2 millions in collective write-downs. In any case the dynamic decreased by 25.41%. Net impairments of other assets amounted to 1.5 millions, and are the result of a 2.0 million charge posted under write- downs of Financial Assets available for sale due to the write-down of interest on Tiepolo stock, and of a 3,5 million write-
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back posted under write-backs of other financial transactions, following the valuation of a guarantee fund linked to a non- performing loan securitization carried out in 2000. Provisions for risks and charges were 4.4 millions, down 50.7%. Profit from disposal of equity and other investments came in at 1.2 millions for the capital gain on the disposal of the real estate in Via Borra in Livorno, compared to 13.7 in 2006 that were primarily generated by the capital gain on the disposal of the stake held in Società Gestione Credito BP S.p.A. to the Parent company. Income before tax from continuing operations totaled 109.6 millions from 135.7 in 2006, down 19.2%. Income tax for the year in 2007 amounted to 54.2 millions, up 27.2% with respect to the year before. Net income for the period came in at 55.4 millions, down 40.5%. Some clarifications are necessary, considering that there is a higher taxation compared to the previous year with a lower gross income. This is partly due to the changes in the IRES and IRAP tax rates, from 33% to 27.50% and from 5.25% to 4.8176%, respectively, which caused deferred taxes to be recalculated (including those outstanding on December 31st, 2007), and partly to the fact that in the previous year high profits had been posted from the sale of shareholdings in pex.
If we exclude non-recurring events, described in the explanatory notes, the dynamics of the main P&L items turn out to be quite different. Net interest, dividend and similar income remains basically stable at 10.2%, other operating income grew by 3.9%, and total income grew by 8.4%. Operating charges become less substantial and increase only by 12.1% and therefore profit from operations increases by 4.0%. In the light of the weight of non-recurring events on write-downs, income before tax from continuing operations in 2007 amounted to 135.7 millions compared to 88.1 millions in 2006, up 54.1%. After tax, recurring income reached 74.4 millions with respect to 47.9 in 2006, up 55.1%.
Noteworthy events in the period
In the first week-end of the month of February, under the coordination of the Group Organization Department and of SGS BP, the adoption of the Group information system and the Group network model were finalized. This operation was facilitated by the presence in all branches of experts from the other companies of the Group, to guarantee the correct course of operations and monitor and correct any anomalies. In the meanwhile, all regulations supporting the new operating activities were approved, thus bringing the integration plan to completion: the new internal regulations, the credit line regulation and all the rules and regulations in general associated with the new operational modalities adopted. The change was noteworthy, especially with regard to the network organizational model: in addition to the distribution logic that was already in place before the merger, with customer segmentation and assignment of portfolios of customer classes to specialists, the new definition also envisages the introduction of operating units specialized by segment, the Corporate centers, dedicated to corporate clients, and a different organization of branches, which depending on their size may be defined “specialized” when they have managers specialized by segment, and “small” when they run on a simplified model based on a greater role flexibility and fungibility. The network comprises 236 branches, distributed over nine geographical areas, with 12 Corporate centers. In addition to the structures staffing the Managing Director, the company Secretary and the Network Auditing Department, the Head Office comprises also the Resources and Services Department (Servizio Risorse e Servizi) which has a support and coordination function with the Parent company for all outsourcing activities, while the commercial activities are managed through the Corporate and Credit Services, the Retail Service, and the Public Finance Department, in charge of developing relations with Public Entities.
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Bipitalia Ducato
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Net interest, dividend and similar income 147.9 124.7 18.6% Net commission income 6.3 1.9 231.6% Total income 211.0 189.6 11.3% Operating costs 80.5 72.7 10.7% Profit from operations 66.7 73.3 -9.0% Income before tax from continuing operations 66.7 73.3 -9.0% Income after tax from continuing operations 30.7 41.7 -26.4% Net income for the year 30.7 41.7 -26.4%
Balance sheet Total assets 5,206.3 4,126.7 26.2% Loans to customers (gross) 4,904.3 3,855.2 27.2% Financial assets and hedging derivatives 34.8 20.8 67.3% Shareholders’ equity 342.1 346.5 -1.3%
Other Average number of employees (*) 661 598 10.5% Bank branches 77 73 5.5% (*) Monthly arithmetic mean
(in thousand euro) 31/12/2007 31/12/2006 Changes
Impaired assets 219 146 73 50.0% - non-performing loans 136 103 33 32.0% - watchlist loans 83 43 40 93.0% - restructured loans - - - - past dues - - - Performing loans 4,685 3,709 976 26.3% Country risk - - - Other performing loans 4,685 3,709 976 26.3% Total gross loans 4,904 3,855 1,049 27.2% Individual write-downs -136 -105 31 29.5% Collective write-downs 4,768 3,750 1,018 27.1%
Total loans to customers amounted to 4,768 millions, up 27.1% compared to 31/12/2006, driven by the considerable increase in consumer credit volumes, that reached 4,641 millions, also thanks to the distribution of consumer loans through the Group’s branches (up 67% over the previous year). As a whole, loan sizes grew by 19.6%, 5 points more than Assofin operators average, reaching 3.2 billions. The most significant loans belonged to the open-end credit class (+37.7%). An excellent result was obtained also by salary-backed loan products, which grew by 104% with 54 millions worth of loans extended, and a good result in the credit card segment, where credit card use reached 485 millions with a 14.8% increase. The P&L posted an increase of 18.6% in net interest income, from 124.7 to 147.9. Net commission income rose from 1.9 to 6.3 millions, driven by commissions on the distribution of insurance products supplementing loans, while operating income and costs reported an increase of about 11%. Profit from operations fell by 9% compared to the year before, also as a result of the increase in loan write-downs (+29.5%) generated by the above mentioned increase in loans present in the loan book. Net income for the year came in at 30.7 millions, down 26.4% compared to 2006, due to the higher tax burden (the tax rate rose from 43.2% to 54.0%) caused primarily by the change in deferred tax rates.
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Banca Aletti & C.
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Total income 285.5 220.9 29.2% Operating costs 99.3 80.5 23.4% Profit from operations 186.1 140.4 32.5% Net income for the year 124.6 95.1 31.0%
Balance sheet Indirect customer funds 20,757.8 14,105.9 47.2% Total assets 26,062.7 14,729.8 76.9% Shareholders’ equity 430.2 291.6 47.5%
Other Average number of employees (*) 420 380 10.5% Bank branches 33 20 65.0% (*) Monthly arithmetic mean
Aletti & C. Banca di Investimento Mobiliare, for short “Banca Aletti & C.”, is organized along three departments that work in close synergy with the Group’s sales networks: • Private Banking; • Investment Management; • Investment Banking.
Private Banking
At the end of 2007, Banca Aletti reported Euro 34 billion in total assets under management (custody and management), of which Euro 12.2 billion from private customers and the remaining Euro 21.8 billion from institutional customers. Financial year 2007 was characterized by a strong focus on asset growth and customer base expansion. Net customer fund inflows (1.36 billions in the private segment alone) were particularly significant and definitely outperformed the 2007 business plan targets. In second half 2007, the integration of the former BPI private network started. The integration schedule matches the migration of information systems. In second half 2007, 33 Private Bankers from Banca Popolare di Lodi and 4 from Banca Popolare di Crema were detached in Banca Aletti and 9 former BPI private centers of Lodi, Piacenza, Chiavari, Gallarate, Milan, Rome, Catania, Imola and Crema have been turned into Banca Aletti units. The integration process shall be completed in the first quarter 2008 and will involve also the other banks of the former Gruppo BPI. Following the opening of the units in Mantua, Savona and Trento and the startup of the 9 ex BPI private centers, Banca Aletti’s network at the end of 2007 could count on 33 Units and 156 Private Bankers.
Investment Management
The returns offered by managed products proved to be in line with benchmark indexes, and in absolute terms their values were more contained compared to the previous year. Customer preferences proceeded along the same trend of the last two years, with a penchant for products characterized by more innovative management approaches: a positive inflow was reported on capital protected secured products, as well as on investment lines characterized by a strongly active management approach.
During the year, activities were consolidated on new management lines characterized by a more active and dynamic approaches introduced the year before. Over the year, new management contracts were made available to retail and private customers, characterized by more contained risk profiles and by more dynamic investments, oriented towards the outperformance of risk-free returns, with a special focus on capital protection. The range of products and services designed for institutional customers was broadened with the introduction of new contracts tailored on every single client, total return oriented, without a predefined benchmark, supported by maximum risk levels represented by the VAR indicator. The last months of 2007 were characterized by the regulatory changes introduced by the coming into effect of the European Directive MiFid, calling for an intense revision and broadening of the investment product range, which shall continue also in the first half of 2008. Assets under management at the end of December 2007 added up to about 24 billions, as a result of the transfer of the business segment of Bipitalia Gestioni SGR in September.
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Investment Banking
Derivative and Structured Products - Financial Engineering During the year, Banca Aletti reported a clear-cut increase in the demand for equity–linked products driven by the good performance of equity markets in previous years and in the first half of 2007 and by stronger flows originated by the integration of the BPI group. Also the demand for exchange rate-linked retail products increased, while mutual fund products were on the downturn.
The presence of Banca Aletti as market maker of volatility products and more in general of structured products was further consolidated. Banca Aletti won the Italian Certificate Award as issuer of the best leverage certificate of the year and as second best issuer of leverage certificates.
In 2007, the demand for interest rate risk hedges originated by the banks on behalf of their corporate customers grew, accounting for about 30% of volumes.
Stock markets After a very positive start, in the second half of the year trading on equity markets suffered a strong slowdown caused by a drop in investor confidence on stock listings, fueled also by the subprime mortgage crisis. Although in absolute terms Banca Aletti reported an increase in traded volumes of about 25%, its market share slipped slightly, despite the flows originated by the integration with the former BPI group, from 1.59% in 2006 to 1.45% in 2007 (source: Assosim). A stronger fall was reported on foreign markets, where volumes went down to 3.8 billions in 2007 from 4.6 billions in 2006. Listed derivatives performed positively, reporting a 14% increase in 2007 over 2006 in terms of traded lots (about 3,100,000).
Bond markets In 2007 the US subprime mortgage crisis deeply affected fixed income markets. The corporate bond market (especially banking or financial issuers) was particularly hit and suffered a general spread widening and price drop. Thinner liquidity and the resulting widening of the ask/bid spreads caused customers to grow disaffected with these instruments and intermediated volumes plunged. In order to rationalize investment service provisions and to improve advisory transparency and the quality, in October Banca Aletti activated the new Organized Trading System to trade financial instruments issued and distributed by the Group to its customers.
Market Making & Securities Lending Market Making on single stock futures reported a further volume increase, so much so that in 2007 Banca Aletti ranked first in terms of market share, with 23.18%, accounting for overall trades (proprietary and on behalf of third parties). With regard to the proprietary portfolio, basket trading, which became operational as of April 2007, was added to traditional trading characterized by market neutral arbitrage strategies, with a special focus on merger arbitrages that produced outstanding positive returns. Securities Lending, fully operational on the equity segment, saw the introduction of Bond Lending as well, with an average outstanding of 1,850 millions.
Capital Market Debt Capital Market In the first half, Banca Aletti took active part in the structuring and launch of two important residential mortgage securitizations originated by Gruppo BPVN, amounting to about € 3 billion, which brought Gruppo BPVN to rank immediately after Unicredit (€ 3.9 billion) and Intesa SanPaolo (3.6 billions) in terms of securitizations performed in the first six months of 2007. In the second half of the year, the dramatic market changes caused by the serious subprime mortgage crisis, negatively affected trading on these market segments. In the fourth quarter, Banca Aletti, acting as Sole-Arranger, structured the first deal of Gruppo Banco Popolare relative to the securitization of mortgages entirely originated by Reti Esterne Specializzate (RES -External Specialized Networks), finalized on December 20th with the sale of 700 millions in mortgage pools and the issue of the note subscribed directly by Banco Popolare.
Equity Capital Market In 2007, a total of 29 companies went public in Italy, 8 IPOs more compared to 2006 (+38%). IPO turnover in 2007 was 4 billions, down from 4.8 billions in 2006. Only 12 listed companies conducted share capital increases in 2007, as compared to 23 in 2006, raising 3.9 billions, compared to 5.1 billions in 2006.
Banca Aletti took part in all Public Tender Offers which took place in Italy in 2007, with a total underwriting of € 32.6 millions. In the first half, it also acted as Co-Lead Manager in the institutional underwriting for Prysmian (the biggest IPO in 2007 in turnover terms) and Zignago Vetro, with a total underwriting of € 20.9 millions.
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In June, Banca Aletti acted as Sole Book runner in the Accelerated Book Building (ABB) deal for the sale to institutional investors of about 12% of the share capital of Sadi Servizi Industriali.
Equity Research The consolidation of the activities of the research desk in 2006 continued in 2007 with new official coverages and the expansion of the database of analyzed companies, which to date covers more than 70 companies and shall be further increased during the year. In view of the Group’s franchise, coverage continues to focus on Italian Small/Mid Caps.
Forex and Money Market The thinning down of liquidity and of counterparties, prompted the structure to expand the financing business, identifying all possible opportunities with balance sheet assets offered by the monetary policy. During the year, the structure was involved in the analysis and integration of the Group Treasury, whose operational processes started to be centralized in July. As to traded volumes, despite the business crunch, the structure matched the same trading volumes of the year before. The drop in unsecured trades (-20% over 2006) was offset by the increase in ST Derivative trades (53% over 2006), while secured trades consolidated the significant volumes traded the year before (357 billions). The Forex market was characterized by the USD’s marked weakening trend against all the other main currencies. Compared to the previous year, traded volumes reached 91.6 billions, down 6%, associated with an increase in the number of trades, amounting to 71,500 (+8,53%).
Institutional Sales In 2007, Institutional Sales expanded the investment product catalog for the Banks of the Group, acquired new customers and market share in the non-captive segment and developed the Equity business in the institutional customer portfolio. Total structured investment products for the Group Banks exceeded 5 billion euro (+8% over 2006). Compared to the past, the product mix has changed: the marked increase in the sale of index linked policies (+64%) and Certificates (+87%) was counterbalanced by a reduction in the volume of structured bond issues (-7%) and capital guaranteed management products (-44%). Towards the end of the year, the investment product focus shifted significantly onto direct funding through non-structured bonds. With regard to the Italian market of Certificates, Banca Aletti confirmed to be one of the primary players, with an average annual market share of 19% (+3% over 2006), 119 listed certificates and sales of 548 million euro. The participation in dedicated events and press communications further promoted Aletti’s brand. As to non-captive customers, the provision of insurance and banking product coverage was supplemented with the sale of Certificates and Euribor Cap CW, leading to the acquisition of new customers. Cross-selling was strongly promoted with the participation in Pension Fund bid auctions, the launch by some banks of money-market, forex and trading activities, with the marketing of the Hi-Mtf market and with our Funds of Hedge Funds and Mezzanine Funds.
Corporate Desk The unrelenting rising trend of short term interest rates, that started in the second half of 2007, characterized the activities of the Corporate desk throughout the year. In particular, plain vanilla products had the lion’s share, with a strong growth in the demand for CAP options as a flexible insurance form, together with the traditional IRS (interest rate swaps) to hedge against interest rate risks. Also hedging against exchange rate risks raised a similar interest, although recently companies started to change their attitude, and although they have not ceased to hedge against this risk, they are more selective both in terms of time frames and sizes. Consequently, deals with a higher nominal value dwindled down, while small tranche hedges of a hundred thousand dollars, where competition among banks is aggressive, came in numbers.
Operating performance for the period
At year-end 2007, Banca Aletti reported an increase in net income of 31.08%, from 95,055 thousand Euro on December 31st, 2006 to 124,600 thousand Euro on December 31st, 2007. The net income increase confirms the consolidation of the Bank’s operating structure on the markets of financial intermediation and Private Banking.
Total income grew by 29.61% to 285,474 thousand Euro (220,248 thousand Euro on December 31st, 2006). Other operating income increased as a whole by 22.16% driven by a strong growth of net financial income, which rose from 130,629 thousand Euro on December 31st, 2006 to 167,836 thousand euro on December 31st, 2007. This item includes 17,098 thousand euro in capital gains on the acquisition of SIA in SSB and the merger between Borsa Italiana and LSE. Net commission income grew by 12.6 %, from 90,928 thousand euro on December 31st, 2006 to 102,389 on December 31st, 2007, also thanks to the consolidation of the Asset Management and Private Banking structures. Operating Costs grew by 24.35 % from 79,880 thousand Euro on December 31st, 2006 to 99,327 thousand euro on December 31st, 2007, also as a result of the opening of new Private Banking branches and of the assets transferred in Banca Aletti as part of the BPI – BPVN integration plan.
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Tax provisions, calculated on the income for the period, totaled 61,548 thousand Euro (45,313 thousand Euro on December 31st, 2006) and benefited from the different taxation of stock proceeds. The performance of the above key financials shows that in 2007 Banca Aletti further strengthened its market positioning. P&L data highlight a strong growth as compared to the previous year, which gives evidence of greater intragroup operations as well as of a stronger market presence. This is further confirmed by the growth rates on the balance sheet side. Said growth produced also a growth in size for the bank, not only in terms of number of employees (+28.3 % on year-end headcount), but also in terms of number of bank branches (+65 %). This expansion did not alter its structure in terms of unit revenues (+24.5%), while it produced a lower unit cost increase (+19.4%). The combined effect led to a decrease in the cost/income ratio to 34.8 % (4.1% reduction over 2006) and an increase in operating profit per employee (+27.3%). ROE stood at 45.5%, down from 48.4% on December 31st, 2006, thanks to the bank’s stronger capital solidity The shareholders’ equity grew from 196.5 to 305.6 millions).
Efibanca
(in million euro) 31/12/2007 31/12/2006 (*) Changes
Financial assets held for trading 87.0 37.8 49.2 130.2% Financial assets available for sale 311.1 332.6 - 21.5 - 6.5% Equity investments 111.0 148.6 - 37.6 - 25.3% Customer loans 4,146.7 4,097.8 48.9 1.2% Total investments (1) 4,257.7 4,246.4 11.3 0.3% (*) Restated balances to include the contribution of Aletti Merchant, acquired in FY 2007. (1) Net of write-downs and capital refunds
Financial year 2007 saw the creation of Gruppo Banco Popolare and the launch of a highly complex and sizable Integration plan, be it at operational and at corporate level. Efibanca was directly involved in the implementation of a significant part of the Plan; on October 1st, 2007 the merger of Aletti Merchant into Efibanca came into effect, giving rise to a primary player in Corporate and Investment banking products and services.
The 2007 annual report posted a net income for the year of 125.6 millions (+51%). This result confirms the positive trend experienced from 2005 to 2007, when the company ROE went from 8.3% in 2005 to 13.8% in 2007. In 2007, Efibanca enjoyed an expansion of merchant banking activities, also thanks to the acquisition of Aletti Merchant, with an investment portfolio amounting to 475.7 millions. Net interest income stood at 62.8 millions, up 2% compared to the previous year, while total income rose to 211.8 millions, up 24% from 170.4 millions in 2006. The contribution to the Bank’s profitability of the merchant banking segment was 121.8 millions, generated by capital gains mostly on disposals, of which the most noteworthy were Générale de Santé and IGLI.
As to key financials, customer loans totaled 4,147 millions; assets under management were 3,876 millions, from 4,020 millions in 2006, in line with the bank’s business activities. In particular, Customer Loans, which on December 2007 totaled 4,146.7 millions, increased by 48.9 millions compared to the end of 2006 (+1.2%). In 2007 the main cash flow components reported contract expirations of 904 millions, early loan settlements of 675 millions and credit facilities of 1,665 millions compared to 1,517 millions the year before (+9.8%).
The 87 millions posted under Financial Assets Held for Trading break down as follows: 10 millions in Debt Securities, 11 millions in UCITS units and 66 millions in interest rate derivatives. This was the main driver of the increase compared to 2006, as at the end of the previous year it amounted to 15 millions. Financial Assets Available for Sale and Equity Investments (including Discontinued operations) were entirely associated with the Merchant Banking segment and total 422.1 millions against 481.2 millions at year-end 2006, down 59.1 millions (- 12%). The difference was due to 158.7 millions in new acquisitions and 216.4 millions in disposals which, net of write- downs, generated in 2007 a profit of 107.2 millions.
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Aletti Gestielle SGR
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Total income 24.0 27.9 -14.0% Profit from operations 4.6 7.8 -41.0% Net income for the year 2.3 4.2 -45.2%
Balance sheet Total assets 174.6 119.4 46.2% Shareholders’ equity 92.5 35.5 160.6%
Business volumes Net asset value of managed funds 16,487.0 14,508.9 13.6% Subscriptions 9,025.8 9,245.5 -2.4% Redemptions 12,105.7 10,541.4 14.8%
Other Number of employees (average) (*) 106 96 10.4% (*) Monthly arithmetic mean
As part of the global merger plan between the BPVN group and BPI, the company was involved in the integration of asset management, which, as more extensively illustrated at the beginning of the Report on Operations, required the business segment comprising collective managed assets and supplementary pension accounts to be transferred from Bipitalia Gestioni SGR to Aletti Gestielle SGR S.p.A and the entire product range, the contract terms for investors and the fund regulations to be harmonized, to be effective on the same date of effectiveness of the merger, namely 29/12/2007.
With regard to the funds set up by Bipitalia Gestioni SGR and not involved in the merger, the product range was supplemented with a dedicated system called “Sistema Laurin” exclusively distributed by the Cassa di Risparmio di Bolzano and a fund called “CR Cento Valore” exclusively distributed by Cassa di Risparmio di Cento.
In 2007, the Company reported a decrease in AuM from 14,509 millions at year-end 2006 to 11,769 millions on 28/12/2007 (before the UCITS merger) , posting a 19% fall. With regard to net inflows, the 41 mutual funds of Aletti Gestielle reported as a whole a net outflow of (3,079.93) millions.
As to managed funds, during the year Gruppo Banco Popolare ranked fifth among management groups, with a market share of 3.77% and total assets under management of 21,481.60 millions, of which 11,769.2 millions managed by the company.
Following the integration and harmonization process, the company’s assets under management rose to 16,487 millions, as illustrated below.
(in million euro) 31/12/2007 31/12/2006 Changes
Equity funds 3,417 2,947 470 15.9% Fixed income funds 11,963 10,492 1,471 14.0% Balanced funds 335 512 -177 - 34.6% Flexible funds 194 558 -364 - 65.2% Non-harmonized funds 578 558 20 3.6% Net assets under management 16,487 15,067 1,420 9.4%
Evidencing the unrelenting effort devoted to asset management, also in 2007 the company won the credit of the asset management industry and was awarded the Premio Alto Rendimento organized by Gruppo Il Sole 24-Ore CSF Rating as: x Second Best Italian Mutual Fund Manger – BIG class; x Best Geographical Equity Fund in the Emerging Equity class with Gestielle East Europe; x Best America Fixed Income Fund with Gestielle Bond Dollars.
Also in 2007 the commitment to ethical finance was worth of notice: thanks to the assets accrued on ethical funds, the Board of Directors granted a contribution of 184 thousand Euro to domestic and international humanitarian initiatives.
As to the development of the so called non-captive market (i.e., sales activities through banks and networks not belonging to Gruppo Banco Popolare) also in 2007 the company successfully increased product promotion and sales. Although financial
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year 2007 has been recognized as the worst year ever for the Italian Asset Management industry in terms of net fund outflows, for the fifth year in a row the company reported a net positive inflow of about 83 millions. Thanks to this result, and to the closing of new distribution agreements, assets accrued in this business area reached 1,171 millions. Training courses, product information and communication meetings with the distribution networks continued to be organized also in 2007 in-house and at the various branches to support sales and promotion.
With regard to the Open Pension Fund Gestielle Pensione e Previdenza, note that Net Assets for the Distribution of Benefits grew from 13.997 millions at the end of 2006 to 16.084 millions in 2007, up 14.91% and hitting the 1.343 member mark.
Illustrated below are intercompany relations with Banco and with the other Group subsidiaries: x Banco Popolare di Verona e Novara Scarl, which as at July 1st, 2007 transferred its business segment to Banca Popolare di Verona - SGSP SpA, and other companies of the Group, namely Credito Bergamasco S.p.A., Banca Aletti & C S.p.A., Banca Popolare di Novara S.p.A. and, as of 31/10/07, Banca Popolare di Lodi S.p.A. and Cassa di Risparmio di Lucca Pisa e Livorno S.p.A. were in charge of the sale and distribution of managed funds; x Banco Popolare di Verona e Novara Scarl (as of 1/07/2007 Banca Popolare di Verona SGSP) and Credito Bergamasco S.p.A. acted as Custodian Banks for the managed funds
Bipielle Finanziaria (ex Bipitalia Gestioni SGR)
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Total income 26.3 37.0 -28.9% of which: net commissions 24.4 46.4 -47.4% of which: other revenues and charges - 0.2 - 12.0 -98.3% Profit from operations 16.6 26.2 -36.6% Net income for the year 10.0 16.3 -38.7%
Balance sheet Total assets 84.1 119.0 -29.3% Shareholders’ equity 71.7 77.9 -8.0%
(in million euro) 31/12/2007 31/12/2006 Changes
Fund commission income 43.7 43.5 0.5% Asset management commission income 49.4 82.2 -39.9% Fund performance fee income 2.7 15.4 -82.5% Performance gap fee income 0.8 1.5 -46.7% Other commission income 1.1 1.2 -8.3% Operating revenues 97.7 143.8 -32.1% Fund commission expense -40.0 -40.1 -0.2% Asset management commission expense -31.6 -52.6 -39.9% Fund performance fee expense -1.6 -4.2 -61.9% Other commission expense -0.1 -0.5 -80.0% Operating costs -73.3 -97.4 -24.7% Net commission income 24.4 46.4 -47.4%
Following the transfer of the individual asset management business segment to Banca Aletti (effective as of September 3rd, 2007) and of the collective asset management and supplementary pension business segments to Aletti Gestielle (effective as of December 29th, 2007), at the end of the year the company had no residual assets under management. As to the income statement, total income, which includes commission income, net interest, dividend and similar income and other revenues and charges, added up to Euro 26.3 millions, with a sharp fall with respect to December 31st, 2006 when it amounted to Euro 37 millions. Commissions suffered a sharp decrease, reflecting both the dynamics associated with the decrease in mutual fund and collective managed account assets, and the partial contribution until September 3rd, 2007 of commissions from individual managed accounts. Commission income on December 31st, 2007 stood at Euro 97.7 millions, as compared to Euro 143.8 millions on December 31st, 2006, down 32.1%, while commission expense went from Euro 97.4 millions on December 31st, 2006 to Euro 73.3 millions on December 31st, 2007, down 24.7%. Total commission income, excluding performance fees, from the asset management segment (inclusive of commissions on gpm-gpf funds) totaled Euro 49.4 millions (Euro 82.2 millions in 2006), while commission income from mutual funds totaled Euro 43.7 millions (Euro 43.5 millions in 2006). Other commissions came in at Euro 1.1 millions (Euro 1.2 millions in 2006) and mainly refer to the financial and administrative management of pension funds. Total commission expense from the asset management segment totaled Euro 31.6 millions (Euro 52.6 millions in 2006), and from the mutual fund segment, excluding performance fees, totaled Euro 40 millions (Euro 40.1 millions in 2006).
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The contribution of financial income was Euro 2.1 millions (Euro 2.6 millions in 2006). Other revenues and charges came in at Euro –0.2 millions while on December 31st, 2006 they totaled Euro -12 millions as they included the loss (12 million Euro) associated with the sale of a structured note. Administrative expenses totaled Euro 9.7 millions (Euro 10.8 millions on December 31st, 2006), slightly lower than the previous year. In particular, personnel expenses, net of recoveries, went from Euro 3.6 millions on December 31st, 2006 to Euro 2.9 millions at year-end 2007; Information Technology costs stood at Euro 1.6 millions (Euro 2.8 millions in 2006); other administrative expenses (Euro 4.9 millions) are made up of Euro 1.1 millions in non-recurring charges for the transfer of business segments to Banca Aletti and Aletti Gestielle. Profit from Operations on December 31st, 2007 amounted to Euro 16.6 millions from Euro 26.2 millions in 2006. Income tax was Euro 6 millions (Euro 9.9 millions in 2006), representing a tax burden of 37.36%. Net income came in at Euro 10 millions (Euro 16.3 millions in 2006).
Aletti Gestielle Alternative SGR
Financial year 2007 closed with a net income of 5.3 millions. Net commission income amounted to 51 millions, and recorded a significant increase compared to the previous year, driven by the increase in assets under management and by the performance levels attained during the year. With regard to assets-unrelated costs, the increase was particularly small both with regard to personnel expenses and to administrative expenses.
(in million euro) 31/12/2007 31/12/2006 Changes
Management fee income 34.9 24.2 10.7 44.2% Performance fee income 13.2 10.3 2.9 28.2% Front-end fee income 2.9 2.9 - -
Net fund inflows totaled 280.2 millions. Sale and distribution activities were performed primarily by the networks of Gruppo Banco Popolare. During the year, the distribution of some non-captive networks continued, and the commercial activities for institutional customers were boosted.
Two new low volatility funds were launched during the year, Gestielle Hedge Market Neutral and Gestielle Hedge Alpha Fund, and the investment policies of the fun Gestielle Hedge Mosaico were changed from mixed fund to low volatility fund of funds. Two additional Funds were launched, originating from the UCITS transfer: Concentrated Low 3 and Concentrated Low 5.
During the year the company further strengthened its organizational structure by adding four more employees, of whom two from Bipitalia Alternative SGR. The total headcount at the end of 2007 was fifteen employees. The investment advisory agreement with London’s Union Bancaire Privée continued to each other’s satisfaction, and a collaboration was started with FIM Advisers Ltd in London for funds coming from the transfer of Bipitalia Alternative SGR.
Illustrated below are the intercompany relations with Banco and with the other companies of the Group: x Banco Popolare Soc. Coop., and other companies of the Group, namely Banca Popolare di Verona e Novara S.c.a.r.l., Credito Bergamasco S.p.A., Banca Aletti & C S.p.A., Banca Popolare di Novara S.p.A., Banca Popolare di Lodi, Banca Popolare di Mantova, Banca Popolare di Crema, Banca Popolare di Cremona, Banca Valori, Cassa di Risparmio di Lucca Pisa e Livorno and Cassa di Risparmio di Pescara were in charge of the sale and distribution of the managed funds; x Banca Popolare di Verona e Novara S.c.a.r.l. and Banca Popolare di Lodi acted as Custodian Banks for the managed funds.
Bipitalia Alternative SGR
(in million euro) 31/12/2007 31/12/2006 Changes
Income statement Total income 2.9 2.4 20.8% of which: net commissions 2.8 2.3 21.7% Profit from operations 2.1 1.8 16.7% Net income for the year 1.3 1.1 18.2%
Balance sheet Total assets 8.9 7.5 18.7% Shareholders’ equity 4.4 4.1 7.3%
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(in million euro) 31/12/2007 31/12/2006 Changes
Fund commission income and subscription rights 0.3 0.1 200.0% Fund management fee income 7.9 6.7 17.9% Fund performance fee income 3.8 3.0 26.7% Operating revenues 12.0 9.8 22.4% Subscription commission expense -0.3 -0.1 200.0% Advisory commission expense -2.1 -1.7 23.5% Fund management fee expense -3.9 -3.2 21.9% Fund performance fee expense -2.2 -1.8 22.2% Lead commission fee expense -0.7 -0.6 16.7% Other fund incentive commission expense -0.2 -100.0% Operating costs -9.2 -7.6 21.1% Net commission income 2.8 2.2 27.3%
Following the transfer of the “speculative fund” management business segment to Aletti Gestielle Alternative Sgr, effective as of December 1st, 2007, at year-end the company had no assets under management and the income statement as at December 31st, 2007 reflects commission income and expense covering eleven months of fund management. As to the income statement, total income, which includes commission income, net interest, dividend and similar income and other revenues and charges, added up to Euro 2.9 millions, on the upturn compared to December 31st, 2006 when it amounted to Euro 2.4 millions. In particular, commission income enjoyed a marked increase, despite the P&L accounts only eleven months of UCITS management, as a result of the increase in assets under management, as well as of a higher performance fee income compared to the previous year. Commission income totaled Euro 12 millions as at December 31st, 2007 from Euro 9.8 millions on December 31st, 2006, up 22.4%, while commission expense went from Euro 7.6 millions on December 31st, 2006 to Euro 9.2 millions on December 31st, 2007, up 21.1%. Net interest income came in at Euro 0.1 millions on December 31st, 2007, in line with the previous year (Euro 0.1 millions). Operating costs totaled Euro 0.8 millions (Euro 0.6 millions on December 31st, 2006), slightly higher than the previous year. In particular, personnel expenses amounted to Euro 0.2 and refer to costs for detached employees from other Group companies; advisory and third party service costs include Euro 0.1 millions in non-recurring costs linked to the business segment transfer; information service costs totaled Euro 0.1 millions. Income before tax as at December 31st, 2007 reached Euro 2.1 millions from Euro 1.8 millions in 2006. Income tax for the year was Euro 0.8 millions (Euro 0.7 millions in 2006), and the total tax burden was 39.1%. Net income for the year added up to Euro 1.3 millions (Euro 1.1 millions in 2006).
Relations with subsidiaries and associates
Please, refer to the Explanatory Notes, Chapter H, for a more detailed illustration of transactions with related parties. MUTUALITY AND PUBLIC INTEREST INITIATIVES
Criteria followed in managing social actions to fulfill the mutuality purpose
This paragraph was prepared in compliance with article 2545 of the Civil Code, stating that directors of cooperatives, also when not prevailingly mutual, must “explicitly indicate the criteria followed in managing social actions to fulfill their mutuality purpose" in the report on operations.
Banco Popolare Società Cooperativa, Parent company of Gruppo Bancario Banco Popolare, was formed on July 1st, 2007 from the merger of Banco Popolare di Verona e Novara S.c.a.r.l. and Banca Popolare Italiana – Banca Popolare di Lodi Società Cooperativa.
The Banco Popolare Group is organized along a listed Parent Holding company (Banco Popolare), which directs and coordinates the local retail banks (Banche del Territorio), the specialized Banks and the Operating companies (product factories) falling within the corporate consolidation scope. The Banche del Territorio make up the Group’s sales network: they include all the bank branches. The fulfillment of the mutuality purpose is achieved through the joint action of the Parent company and its subsidiary Banche del Territorio.
With regard to our mutuality purpose, in 2007 our shareholders approved the Bank’s new Articles of Association. Article 4 specifies the Company’s business activity scope ("The objects of the Company are to collect and maintain saving funds and issue loans and credit, in its various forms …."); it specifies the entities to which banking services are offered ("… both its registered shareholders and non-shareholders") and that when engaging in banking activities it is guided "by the principles
111 Report on group operations
underlying Cooperative Credit". Hence, the Bank focuses in particular on its communities and territories, on small and medium enterprises, on households and on customer-shareholders. To this end the Company devotes a special attention to the territories served by its banks through a pervasive presence of the Group’s branch network. In keeping with its institutional mission, the Company extends favorable conditions, also through its subsidiaries, to its customer shareholders for the use of specific services.
To this regard, Banco Popolare interprets mutuality both in its strict definition (the relationship between shareholders who contribute capital to the bank and receive services as customers), and in a more general sense (as the interaction between the bank and the social and economic setting in which its shareholders live).
Note, that as a result of the merger between BPVN and BPI, Banco Popolare on 31/12/2007 had 172,909 registered shareholders. Registered shareholders with shares deposited with the banks of the Group were about 144,500, and Registered shareholders with a commercial checking account accounted for 80% of total shareholders, which confirms the importance of the shareholder-customer identity that has always been a distinctive feature of cooperative “popolari” banks, whose foundations lie on reciprocal trust and loyalty. It is certainly worth illustrating how some of the above mutuality criteria are put into practice.
A first qualifying moment of implementation of the principle of mutuality is reflected in the shareholders’ meeting procedures, a key event of corporate life; and more in general, in the thorough monitoring over the observance of legal and statutory regulations governing the status of Registered shareholder and corporate life. In particular, in order to promote the principle of democracy in shareholders’ meetings, Banco Popolare is committed to favoring the highest shareholders attendance to the important engagement with the General Annual Meeting and to encouraging a direct participation in resolutions, bearing witness to the actual sharing and involvement in Banco Popolare’s corporate life. In practice, this is achieved by predisposing a large and adequate venue to host a large number of participants, and from an organizational viewpoint, by putting shareholders in a position to exercise their corporate rights in the best way possible.
On May 3rd, the first General Annual Meeting of Banco Popolare’s shareholders shall take place, and shareholders will be asked to approve by-law amendments, the first financial statements of the company and corporate offices. It is worth remarking that BPVN’s special shareholders’ meeting held on March 10th, 2007, that was asked to approve the merger plan, was attended by 11,145 shareholders’, of which 7,179 directly. BPI’s special shareholders’ meeting held on the same date again to approve the merger with BPVN was attended by 5,169 shareholders, of which 3,620 directly.
In the second half, the Shareholders’ Office of Banco Popolare processed 7,635 shareholders applications, in addition to 9,947 new shareholders registered in the first half: in all cases applications have been accepted in compliance with the articles of association and under the law with regard to the maximum shareholding threshold. Again in line with the principle of mutuality, worth mentioning are the favorable terms granted to Shareholder customers and the initiatives in favor of the civil and social fabric of the Bank’s historical franchise, both in terms of economic development and charity.
Through its Banche del Territorio, Banco Popolare offers to its Shareholders a complete and manifold package of products and services called “Insieme Soci”. In order to favor the broadening of the corporate structure, a similar initiative called “Premier Club” was made available to the customers of the Banche del Territorio that previously belonged to Gruppo BPI. ”Insieme Soci” was first introduced in 2003 and it is activated by opening a fixed fee checking account, featuring favorable terms, which includes a wide range of banking, insurance and non-banking services. The fee includes the cost for securities administration, the right to receive a customized CartaSi Oro credit card, and it gives access to all the on-line services of the Bank. At the end of 2007, more than 47,000 had subscribed the special offer reserved to them and they are still growing. “Insieme Soci Giovani” was geared to Shareholders below 36 years of age, and has the same characteristics of Insieme Soci at an even lower cost. In November 2007 the “Insieme Soci” range was extended to sole proprietorships with an offer called “Insieme Soci Impresa”.
In addition to the above program, Shareholders may benefit from a free insurance policy, called Polizza Doppio Valore, linked to the value of Banco Popolare shares deposited with the Banks of the Group. It features a compensation equal to double the value of Banco Popolare shares in portfolio in case of death or permanent disability as a result of an accident. With regard to lending formulas devoted to our shareholders, favorable terms are granted on home mortgages and personal loans. Each Shareholder is also exempted from custody account charges for Banco shares deposited with the Banks of the Group.
The support to the civil and social fabric of the historical franchises of Banco Popolare represents the second main class of initiatives through which Banco fulfills its mutuality purpose. In turn, it can be broken down in two main ambits: banking activities and charity.
With regard to banking activities, Banco Popolare operates through a very close knitted network of branches, concentrated in its historical franchises, with a strong and pervasive coverage of the territory. This allows the bank to offer credit services not only to large metropolitan areas, but also to smaller municipalities, thus becoming the bank of choice among many communities. The strong ties with its historical territories allow the bank to focus its attention on the entities that
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characterize the social and economic system of its franchises: households and small and medium companies, that make up the vast majority of the Group’s customer base. Loans and deposits from small and medium companies in Gruppo Banco Popolare have a greater weight over total loans and deposits compared to the Italian banking average.
Over time, despite the Group’s national scope, by basing Group activities on a relationship banking approach it was still possible to retain a strong local bank identity, paying a keen attention to local issues and guaranteeing a strong deep-rooted presence in the served territories.
Social solidarity, charitable and public interest activities are yet another institutional goal of Banco Popolare, who takes heed of the needs and requirements of its territory, as said activities well contribute to the fulfillment of mutuality purposes. To this end, Banco provides for 7.5% of net income of the year, after reserve allocation, to be destined to social solidarity and public interest aims.
Group charitable activities are performed either directly or through the Banche del Territorio and their Foundations. Although the various foundations have been established at different historical times and each has its own distinctive traits, they all share a common denominator: pursue charitable aims in favor of local communities. Specific areas for action are schooling and education, social solidarity initiatives, safeguarding architectural and artistic works, as well as promoting culture, publishing and sports.
Below is a brief review of the main charitable activities performed in the past year. Traditionally, over the years the main charitable initiatives illustrated in the annual report have always been discussed in the section dealing with the proposed income allocation, as if to form an ideal continuum between the cash dividend distributed to shareholders and what could be defined as a “social dividend” distributed to the communities living in our franchises, in keeping with the cooperative and mutual spirit of Banco Popolare.
Finally, note that every year the Group prepares its Social report, which gives a detailed description of initiatives in favor of stakeholders, and devotes great attention to charitable initiatives.
Charitable, social solidarity and public interest initiatives
Last year, a number of important events have directly involved our banking organization; the first part of 2007 was characterized by several activities which led to the formation of Banco Popolare: on July 1st, following the approval by the Special Shareholders’ meetings of Banco Popolare di Verona e Novara and Banca Popolare Italiana, convened on March 10th, 2007, the merger came into effect and gave rise to one of the first five banking groups in Italy, the first among cooperative banks by number of branches. Banco Popolare is a bank founded on the principles of Cooperative Credit, fully capable of facing the challenges and issues raised by the current economic and financial setting, and proud of having been able to grow and set up an organization and structure without severing its strong local ties along the process. Despite the remarkable size reached with the merger, Banco Popolare preserved its strong local identity, so much so that Banche del Territorio, although they are not cooperatives, still kept up the mutual relationship between bank and social and economic context that had primarily characterized the activities of the banks of Gruppo BPVN. In order to confirm growth objectives, the text of the new Articles of Associations adopted the dual corporate governance system, whose social and cultural objectives were further promoted in the new governance organization. Among the numerous initiatives supporting the social and civil fabric of our traditional franchises, charity represented a way to take heed of the needs of served territories, satisfying requirements that are part of the institutional objectives of Banco Popolare, hence of the Banche del Territorio, or their Foundations, all joining forces to pursue the above mentioned mutual purposes. Already in the Articles of Association of BPVN, art. 57, letter b) provided for 7.50% of net income for the year to be destined to charitable, social solidarity and public interest activities; out of said amount, 6/16 are to be allocated to Fondazione BPN per il Territorio (in 2007 the contribution was 8,825,505.36 euro) and 1/16 to be allocated to Fondazione di culto Banco San Geminiano e San Prospero (in 2007 the contribution totaled 1,470,917.56 euro). Further social and cultural initiatives have been promoted and implemented through Fondazione Giorgio Zanotto, which benefited from a 300,000 euro contribution from Banca Popolare di Verona – SGSP. After the incorporation of Banco Popolare on July 1st, 2007, the funds earmarked by the Shareholders’ meeting of Banco Popolare di Verona e Novara on May 5th, 2007 were reconfirmed by the new Banco, to be further supported and supplemented by Banca Popolare di Verona San Geminiano e San Prospero S.p.A., as direct expression of the historical geographical branch network, including the Emilia branches of Banco San Geminiano e San Prospero and the Venetian branches of Banco San Marco. These resources in the second half of 2007 were partly left to the discretionary liberality of the Boards of Directors of the single banks, and partly destined to the Foundations set up by the Banche del Territorio: namely, Fondazione Banca Popolare di Novara per il Territorio, Fondazione di Culto BSGSP and Fondazione Credito Bergamasco, who all share the same purpose, that is, charity to the benefit of the communities of their respective territories.
In a year characterized by signs of economic and financial crisis, social needs and emergencies proliferated, as reflected by the more intense appeal for support by associations striving to meet the primary needs of old and new urban poverties.
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This led to an increase in the demand for grants in favor of health care, both for research and for technical instruments, in favor of university and school boards, as well as for the restoration and protection of important artistic and architectural works in Banco’s territory of belonging, mainly as a result of dwindling public subsidies supporting these sectors. Also the demand for contributions supporting religious activities were not left unheard, and the same holds true for social solidarity initiatives, including some particularly meaningful ones, not only in our historical franchises, but also in emerging countries with a high poverty rate, reflecting our spirit of global social solidarity. The latter gives evidence of the strong missionary presence, which made it possible through the Church to cross geographical borders. Consequently, the profit allocation approved, under the Articles of Association, by the Shareholders’ meeting of Banco Popolare di Verona e Novara on May 2007 made it possible to seamlessly pass the overall actions performed by Gruppo BPVN on to Gruppo Banco Popolare. In particular, the Group did not miss the opportunity to grant donations in favor of situations of serious social malaise, and to take significant action for the renovation of works of art and monuments. It is certainly worth giving a brief overview of last year’s main initiatives, characterizing Banco Popolare’s wide-ranging charitable actions in favor of civil society in the served territories.
FONDAZIONE BANCA POPOLARE DI LODI
On November 1st, 2006, Banco Popolare di Verona e Novara signed with Banca Popolare Italiana a letter of intent committing to grant a one-off contribution of 2 million euro to the coming Fondazione Banca Popolare di Lodi, whose creation was decided by the Board of Directors of Banca Popolare di Lodi on December 19th, 2007. Then, the Board of Directors of Bipielle decided to grant the entire contribution to Fondazione “Parco Tecnologico Padano” di Lodi, a project supported by the Province, the Municipality and the Chamber of Commerce of Lodi, to set up in the Lodi district a center of zoo-technical and agro-food scientific research and innovation: a business park that is going to put resources to work to the advantage of the local social and economic environment.
CASSA DI RISPARMIO DI LUCCA PISA LIVORNO S.P.A.
In 2007, a greater impulse was devoted to social solidarity and cultural initiatives. Worth mentioning are the contribution for the restoration of the Church Pietro in Vincolis in Pisa, the collaboration with the Teatro del Giglio in Lucca and the grants for young praiseworthy university students. A contribution was offered also for the organization of some important conferences held in the region. In keeping with the historical tradition of the three banks that make up the original core of the Cassa, an extensive and plentiful collaboration was also granted to trade associations and in particular to voluntary organizations and parish communities.
CREDITO BERGAMASCO E FONDAZIONE CREDITO BERGAMASCO
Credito Bergamasco and its Foundation confirmed also in 2007 their active presence in supporting worthy initiatives, promoted by local entities and making a perfect match for the objectives of the Charity Fund that was made available by bank shareholders, as, in keeping with the Articles of Association, shareholders cede part of their profit to allocate it to this fund, to be used to the advantage of the communities of belonging. A special support was given to culture and art, by promoting the restoration and recovery of works of art and buildings of high artistic interest, to schooling and education, scientific research, healthcare and aid to the destitute. Illustrated below are some of the most meaningful initiatives, subdivided by area for action.
Cultural and artistic ambit
For the VI Edition of the “Invito a Palazzo” initiative promoted by the Italian Banking Association (ABI), on Saturday October 6th and Sunday October 7th 2007, Credito Bergamasco opened its head offices to the public and organized guided tours to visit the art exhibition organized by Fondazione Credito Bergamasco featuring some splendid paintings made available by primary bank customers, all associated with the theme of “Vanitas”, as well as a show of the best paintings decorating Creberg’s head office. The exhibition was greeted with so much success by the public, with more than 1,700 visitors, that it was prolonged until October 26th, 2007, and totaled more than 4,000 visitors. In May 2007, considering the favor with which the previous editions were met, the concert of “I Solisti Veneti” was proposed for the third edition of the show “Dai credito alla solidarietà” (note of the translator: give credit to solidarity). The music execution characterized by a program entirely associated with the renowned musician Antonio Vivaldi, won the applause of the audience crowding Teatro Donizzetti, of critics and of the press alike, for the high artistic level reached by musicians, as well as for the worthy cause underlying the initiative: all the proceeds from the music show was donated to the Italian Parkinson Disease Association. In November, for the fourth edition of the show “Dai credito alla solidarietà”, a concert of Paolo Conte was proposed, aiming at offering the audience a highly suggestive charitable soiree; the proceeds were donated to two important Organizations active on the Bergamo province, that is the Bergamo section of the Lega Italiana per la Lotta ai Tumori (cancer association), and the Associazione Cure Palliative (association for palliative care). A significant contribution was granted to the organization of the “Festival di divulgazione scientifica” (science festival) characterized by a clear-cut educational approach and geared to the youth; the donation made it possible to offer a completely free access to the various initiatives, playing host to 80 scientific seminars with authoritative guests.
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Another significant contribution went to the Museo Diocesano di Milano, more precisely to the Fondazione Sant’Ambrogio di Milano, covering the three-year period from 2006 to 2008. For the artistic project “Bergamo Poesia” (poetry), Fondazione Creberg sustained part of the expenses incurred to organize the show, starring Roberto Benigni reading Dante’s Divina Commedia to the Bergamo audience gathered in the Stadio Atleti Azzurri d’Italia.
Health care and medical-scientific research
The Bank, through its Foundation, signed an arrangement with the Hospital organization for the development of research in the field of heart failure prevention, diagnosis and medical-surgical treatment, building on the already existing specialized center in the Cardiovascular Department. To this end, the Foundation promised to grant 450,000 euro, subdivided into three annual equal amounts as of 2007, to contribute to the purchase of the necessary instruments and materials to conduct research projects – clinical, experimental or basic research – and to solve organizational issues, to finance grants to be awarded to dedicated personnel and/or to hire free-lancers. In 2007 Credito Bergamasco renewed its support to San Martino onlus – again by way of its Foundation. The objective of this association is social and humanitarian solidarity, social scientific research in the field of prevention, diagnosis and treatment of human diseases, fund-raising to support solidarity projects and research activities also in collaboration with public and private facilities, research centers, universities and other foundations. The granted multi-annual donations shall be used to set up a Research Center on liver diseases under an arrangement signed by Fondazione San Martino with Ospedali Riuniti di Bergamo, to be integrated with the Hospital’s activities, and, concomitantly with the launch of the adult and child liver transplant program, to equip the center with research equipment and with the necessary funds for the liver department of Ospedali Riuniti. Creberg continued also in 2007 to support the Association devoted to the research and development of treatment of blood neoplasias. The bank decided to grant a two year contribution totaling 100,000 euro to make the cell and genic therapy center “Gilberto Lanzani”, inaugurated in 2003 on initiative of Associazione Paolo Belli – Lotta alla Leucemia, compliant with European regulations The Bank supported the Bergamo Section of Lega Italiana per la lotta contro i tumori, that for many years has been actively fighting for the prevention of cancer, promoting research and aiding those more in need. A significant contribution was granted to the Istituto di Ricerche Farmacologiche Mario Negri in Bergamo to support its medical and scientific research.
Preservation and promotion of architectural heritage
Either directly or through its Foundation, Credito Bergamasco has always devoted a special attention to Bergamo’s Accademia Carrara, either by giving precious works of art under gratuitous bailment, or by shouldering the burden of important exhibitions, and especially by financing the restructuring of the facilities that shall host the Gallery of Modern and Contemporary Art (Galleria d’Arte Moderna e Contemporanea). Indeed, when analyzing what facilities were necessary to spread art among general public, it became evident that Bergamo lacked specific spaces to host non-permanent exhibitions. The Bank therefore decided to hire a professional to design a museum envisaging an easily accessible exhibition hall for ancient arts as well as for modern and contemporary arts. Fondazione Credito Bergamasco shall be directly involved in the construction of the underground hall with all its fixings and furniture, which should be ready in two years’ time. In order to restore an important page of Bergamo’s history, Credito Bergamasco and its Foundation support the restoration of the Duomo di Città Alta. Once the restoration is completed, it will be possible to visit the remains of the original cathedral dating back to Early Christian age (IV° century after Christ), of the Romanesque - High medieval construction (XI° century), as well as the bases of the 22 domus romane lying under the structures that were built over them. The Bank also allocated a substantial amount for the recovery and restoration of a building next to Chiesa SS. Trinità di Albino, as part of the more wide-ranging project of building a Cultural and Spiritual Center. The Bank shall also make a substantial three-year contribution to restore and consolidate the decorations of the fifteenth- century Church devoted to S. Mary in the Parish of Santo Stefano Protomartire.
Sports and leisure time
Building on the long-standing and close collaboration with CAI in Bergamo, the Bank supported the organization of the historical ski/mountain-climbing contest “Trofeo Parravicini” held in the Rifugio Calvi valley. Worth mentioning is also the contribution for the Piazza Brembana sub-section of the restructuring of the alpine refuge Benigni in the Municipality of Ornica. Credito Bergamasco also donated substantial contributions to support sports and social initiatives promoted by several non- professional associations, all characterized by very strong ties with their territory, by a wide membership base and by their active pedagogic and social role devoted in particular to children and the young.
Other ambits
Worth mentioning are the contributions to the Ente Promoberg Manifestazioni Fieristiche to support fair exhibitions that are an important promotional vehicle for the produces and trades of the Bergamo province.
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Together with Banca Popolare di Bergamo, the Bergamo Chamber of Commerce, S.A.C.B.O. and Fondazione Italcementi, and with the support of the Bergamo Municipality and Province and the assistance of the University of Bergamo, in collaboration with scholars of other national and international Universities, Credito Bergamasco contributed to the creation of ICCSAI (“International Center for Competitiveness Studies in the Aviation Industry”). The project, launched by S.A.C.B.O. (operator of the Orio al Serio airport), aims at promoting the creation of an international Research Center on air transportation.
FONDAZIONE BANCA POPOLARE DI NOVARA PER IL TERRITORIO
In keeping with the amendment approved by the Board of Directors on March 16th, 2007, which was made necessary in order to match the start of the corporate financial year with the period in which Banco Popolare allocates the contribution for charitable and social solidarity objectives to the Foundation, the Foundation’s balance sheet closing date was anticipated to June 30th, 2007. At the end of the first half, the Foundation had five years of intense activities behind, and even in 2007 it devoted a special attention to the needs of its territory, in particular the Novara area, without however neglecting significant interventions also in other geographical areas where the Bank is active. The Foundation promotes two main lines of action: financing social solidarity projects in highly important social and economic fields, and micro-charity donations. The goal pursued by the Foundation through these two areas is to serve its territory, an objective that has been a distinctive feature of Banca Popolare di Novara since its inception. During the six months covered by its Financial statements, the Foundation posted about 5 million euro in contributions, satisfying 325 approved applications. The areas that most benefited from contributions were: culture (735,000 euro), health-care (521,000 euro), historical buildings in Novara (457,000 euro), cultural and recreational events (399,000 euro), religious buildings (298,000 euro), tourism (275,000 euro), University and Master courses (265,000 euro) and Social welfare organizations (231,000 euro). Micro-charity donations granted during the year totaled about 340,000 euro. The half-year financial statements also showed significant allocations in favor of key intervention sectors in the Provinces of Novara, Vercelli and Verbano, Cusio and Ossola, ASL 13 (Local Health Care Organization) in Novara, the Hospital organization in Novara, the Diocese in Novara, the Università del Piemonte Orientale, the Municipality of Novara and Fondazione Teatro Caccia. Specifically, contributions were granted for the restoration of the Cinema Teatro Foraggiana in Novara; to Fondazione Teatro Caccia onlus in Novara to organize the 2006/2007 theater season; to the Fondazione Amici della Cattedrale di Novara to furnish the Museum Canonica della Cattedrale; to the natural reserve of Sacro Monte di Varallo to restore the Chapel Secondo Sogno di San Giuseppe; to the Brotherhood of San Giovanni Battista Decollato to restore their Church; to the Università del Piemonte Orientale “Avogadro” to organize the fifth edition of the Master class in Economics and Financial Intermediation management in the Faculty of Economics and the 2007/2008 Master class on Food Quality in the Faculty of Pharmacy; to ASL 13 in Novara to purchase a multi-mode lithotriptor (a state of the art medical device to treat stones) for the Hospital SS. Trinità di Borgomanero; to ASL 14 VCO to purchase a urology table for the Hospital San Biagio di Domodossola. In the process of identifying the initiatives to be supported, the collaboration of the “Consulta” proved highly valuable – the Consulta being a council whose members represent the social, cultural and economic milieus of the geographical areas where Banca Popolare di Novara is active, and whose objective is to give advice and promote synergies favoring the best operational management of the Foundation and a careful allocation of its financial resources. Thanks to its strong ties with its territories, it is possible to pick the most worthy priorities to be supported with great care.
FONDAZIONE DI CULTO BANCO SAN GEMINIANO E SAN PROSPERO
In 2007 numerous initiatives were approved, mostly in the area of the Archdiocese of Modena-Nonantola, then in the Diocese of Reggio Emilia-Guastalla and in the Diocese of Carpi. In detail, the Archdiocese of Modena-Nonantola received a significant support for the restructuring of the Casa del Clero, the restoration of the Cappella dell’Arcivescovado and the Archivio Arcivescovile. Other interventions were related to local parishes, going from Church renovations to repairs to oratories and presbyteries. In the Diocese of Reggio Emilia-Guastalla the most sizable project in terms of contribution was the restoration of the entire complex of the Seminario Vescovile di Marola, with structural, technical and fixture interventions to put the buildings fit for functional use. An additional significant contribution was destined to the Parish of Fabbrico to restore and renovate the fixtures of Chiesa di S. Francesco. Other donations were granted to new parish works and for buildings to be used for pastoral activities, oratories and for social activities for the elderly. The Diocese of Carpi used its funds in particular for the restoration and restructuring of buildings for children education in collaboration with ACEG (Attività Cattoliche Educative Gioventù).
FONDAZIONE GIORGIO ZANOTTO
On October 24th, 2001, Fondazione Giorgio Zanotto was founded to honor the memory of Giorgio Zanotto, of his unfailing and passionate endeavor, of his enthusiasm and civic zeal reflected in all his public and private offices. The Foundation took inspiration from the ideals of Giorgio Zanotto, testified by a life of thought and action, rich in civil, moral, professional and religious values, and intends pursuing objectives exclusively devoted to public interest, education and schooling, social services and scientific research. In 2007, the Foundation’s charity was devoted to training, to medical and scientific research and to social solidarity and culture. In the training area, worth mentioning is the conclusion of the third edition of the Master in Public Administration Management, which is the second year edition of the well-established Master in Public Administration Management and
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Innovation, which is part of the training program of the Law Faculty of the University of Verona. The Foundation contributed also to the training of graduates, managers and entrepreneurs on key topics for the development and innovation of business management through a grant to the Master in Business Intelligence and Knowledge Management, organized by the department of Business Economy of the Faculty of Economics of the University of Verona. A significant contribution was also given for a research study on employment and third sector, conducted in collaboration with Argis (Association for the corporate governance of nonprofit organizations chaired by the economist Giulio Sapelli). The Foundation also financed two grants dedicated to Giorgio Zanotto to support, disseminate and promote the outcome of the research and to study the governance of nonprofit organizations. Again with regard to training, in collaboration with the Faculty of Training and Education of the University of Verona, in 2006 the project Educ@tamente Informatica was launched, aiming at disseminating the IT literacy among children, with an updating of IT programs by translating IT content into novels and images. With regard to medical-scientific research, Fondazione Giorgio Zanotto promoted the awarding of a 2006-2007 grant to an expert in neurophysiopathological techniques and intra-surgery monitoring for the innovative treatment of diskinetic syndromes. Additional grants were awarded to the research on pancreatic cancer. In the field of art and culture, the Foundation continued to support the Centro Studi Verona Innova, as well as to promote music initiatives, through the granting of contributions for the organization of classical music concerts starring major interpreters across the towns of the Verona province, in the traditional annual appointments; as to art, in 2007 the painting contest “I colori di Verona” was set up to support the young Verona artists. In the field of social solidarity, among the various interventions carried out by Fondazione worth mentioning are the coordination and conscious raising activities in favor of "Progetto Burundi - Università degli Studi di Verona", for medical training at the hospital of Ngozi in Burundi.
BANCO POPOLARE SOCIETA’ COOPERATIVA– BANCA POPOLARE DI VERONA – SGSP S.P.A.
As mentioned above, after the incorporation of Banco Popolare on July 1st, 2007, the funds earmarked by the Shareholders’ meeting of Banco Popolare di Verona e Novara on May 5th, 2007 were reconfirmed by the new Banco, to be further supported and supplemented by Banca Popolare di Verona San Geminiano e San Prospero S.p.A., as direct expression of the historical geographical branch network, including the Emilia branches of Banco San Geminiano e San Prospero and the Venetian branches of Banco San Marco. Illustrated below is a brief overview of the main charitable and social solidarity initiatives carried out in the various fields.
Local economy, research and university
A strong support was lent to the development of local economies by taking part in the project to build new multifunctional fair premises, that could be dedicated to the memory of our Chairman Giorgio Zanotto, intended to host the exhibitions of Isola della Scala (Verona), in particular the Rice Fair (Fiera del Riso) which every year sees the participation of numerous rice producers of the provinces of Verona, Mantua, Vercelli and Novara. Banco’s traditional attention for the academic and university world remained high also in 2007, both directly and by way of its local Foundations, supporting the activities of the Verona University with grants, scholarships and contributions to courses and conferences. In particular, a specific action was planned for the Verona Law Faculty, which had been set up also thanks to the financial aid of Banca Popolare di Verona during the Chairmanship of Prof. Giorgio Zanotto, aiming at equipping the faculty with an Auditorium to host university lectures and sundry events associated with the cultural and scientific fabric of the Verona district. An additional contribution shall be granted to this Faculty to expand the University’s library, Our Bank also approved the application submitted by the Verona Hospital Organization and granted a generous donation for the restructuring and technological modernization of the Medical and Cultural Center “Giorgio Marani” of the Ospedale Civile Maggiore di Verona, that was built in the eighties with the financial contribution of the Bank, to host local cultural activities, in memory and dedicated to our Chairman Giorgio Marani, who was also Vice Chairman of the Hospital. The Bank continued to support the Vascular Surgery Specialization school of the University of Verona and the scientific research projects on deafness and bionic rehabilitation promoted by the Ear Nose and Throat Clinic of the Verona University. Again in the medical and biomedical field, 51 scholarships were made available, for a total amount of 490,000 euro, destined to the Hospital Organization of Verona, to the Università degli Studi di Verona and to the local health care organizations of the Veronese province. Contributions were also given to the organization of several specialized medical conferences, which are another way to provide professional updates to the medical staff of university clinics and hospitals. Worth mentioning is the support offered to the University Course in Vine-growing and Wine-making Science and Techniques and to the organization of a 2nd level Master in Economics and Finance. Contributions were granted also in favor of the Università di Modena e Reggio Emilia, in particular to the Faculty of Philosophy and the Faculty of Engineering.
Preservation and promotion of artistic and architectural heritage
The restoration of the southern rosette of the Basilica di Sant’Antonio in Padua has been completed, while a substantial contribution was granted to the restoration of the Bell tower of San Romedio of the Duomo di Trento; a similar contribution was made in favor of the Church Santa Lucia in Pol, in Pescantina, a building that was built around the XI° century and that hosts an valuable series of frescos, to be restored to their original beauty.
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During the year, the restoration of the Basilica di Santa Anastasia went on. This is the most important and substantial commitment for Banco, also considering the worth and value of that this great monument represents not only for the Veronese Church, but also for the national artistic and architectural heritage. The external works have been completed, now the internal restoration of the Basilica is starting. No doubt, this will require a long time, as it calls for the renovation of all the internal decorations, namely, paintings, frescos, marbles, stuccos, statues and monuments made of the most varied materials, as well as a series of polychromes that will require highly complex and delicate recovery techniques. The recovery of the entire right aisle and of the Cavalli Chapel has been successfully completed, and now works are starting in the Pellegrini Chapel. In 2008, the high and the apsidal altars shall be restored, while the entire renovation should be completed reasonably by 2009, with the complete restoration of the Giusti and Rosario Chapels, the Sacristy and the repair of the entire floor, which shall be performed in various stages. Minor interventions, albeit not in terms of artistic or religious importance, have been made in more than a dozen Parishes and Religious Centers, for example Pieve Rurale di San Giovanni Battista in Campagna in Bovolone, dating back to the beginning of the IX° century and featuring a Church and a Baptistery; this is where the ancient VIII century baptismal font was discovered, together with important series of frescos. Among art exhibitions, most noteworthy was the contribution destined to the exhibition “Andrea Mantegna e le Arti a Verona, 1450-1500”, organized by the National Committee for the celebrations of the V° centennial of the death of this renowned painter of the Italian Renaissance. The exhibition was hosted in three towns of the historical franchise of Banca Popolare di Verona: Mantua, Padua and Verona, and the countless visitors could experience a unique artistic and human journey admiring the works and places where Mantegna lived and worked.
Social, religious and international initiatives
On September 1st and 2nd, 2007, in the presence of the Holy Pope Benedict XVI, the largest youth gathering organized by the Italian Episcopal Conference was held, a significant stage to the XXIII World Youth Day to be held in Sidney in 2008. The gathering was an occasion to exchange views and to pray for the young who couple the exuberance of their young age to the fervor of an enthusiast and stirring apostolate. Through the Unione Medico Missionaria onlus in Negrar it was possible to complete the construction of an orphanage in Mali, and other charitable initiatives were supported in Brazil (a refectory for the poor), in Zambia, in Bolivia (in favor of street boys in Santa Cruz) and in Byelorussia (“cystic fibrosis” project). Finally, the bank is committed to supporting a qualifying project in Brazil, developed on the initiative of H.E. Mons. Adelio Tomasin who made it possible to inaugurate in 2004 the Catholic Faculty in the town of Quixadà, in the heart of Cearà, one of the poorest regions in Brazil. Thanks to the commitment of Mons. Tomasin, 13 faculties have been opened, attended by about 1,650 students following curricula in Nursing, Pharmacy, Physiotherapy, Biomedicine and Dentistry, with scholarships available to the most worthy indigent students. In 2008, thanks to Banco’s support, a Medical School shall be opened to train new doctors who in turn will promote the development of hospital and health care activities.
Other charitable activities
Significant contributions were granted to important charitable, scientific and cultural institutions, among which: Istituto Giuridico Italiano in Padua, Istituto Oncologico Veneto, Ospedale Pediatrico in Florence, Fondazione Exodus in Milan, Associazione Comunità Papa Giovanni XXIII di don Oreste Benzi, Associazione Banco Alimentare, Centro di Spiritualità dedicated to Papa Luciani, Congregazione dei Poveri Servi della Divina Provvidenza for the planned exhibitions and the celebration of the centennial of Opera Don Calabria, Fondazione RUI, the Faculty of Theology of the Triveneto, Fondazione Antiusura Beato G. Tovini, Comunità di S. Egidio and Istituto Don Nicola Mazza in Verona.
OPERATIONAL OUTLOOK
The current business cycle slowdown, triggered by numerous factors of international origin, may bring about a growth reduction in the Country, which will affect household and corporate credit demand and consumption. In the short term, also the persistence of financial market tensions will exact a toll on wholesale market liquidity, and market players will have to devote a renewed attention to the various risk factors.
No doubt, this is an environment that is not particularly favorable to the development of lending activities, affected also by the slowdown of the real estate market. In general, however, the dynamics of customer intermediation banking aggregates should remain solid, while the worst repercussions should affect the profitability profile, eroded by the meager contribution of non-interest income.
Against this difficult and complex backdrop, Gruppo Banco Popolare shall redress its initiatives based on its new Strategic Plan, so as to leverage our strong points and take advantage of all the opportunities offered by the market scenario. Banco’s distinctive success factors, namely its strong retail funding capability, the high credit risk fragmentation, the absence of residual risk positions or exposures on foreign or subprime markets, are the founding assets upon which Gruppo Banco Popolare relies to overcome past weaknesses and face the coming financial year with a positive outlook.
In brief, illustrated below are the guidelines of the new Plan:
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x greater control on the financial balance between deposits and loans, thanks to the high capability of self-financing the loan development of the local Banche del Territorio; hence, a lower need for funding on the institutional market, which is more volatile and expensive; x a progressive focus on the “core business” customers of a large cooperative Group, namely households and small-sized enterprises, with a reduction in exposures to the large corporate segment; hence, a rigorous loan repricing policy, that takes into account the changing conditions on monetary markets and the actual risk profile of borrowers; x an operational structure benefiting from the corporate integration – the only large national group that has already completed it – and is already reaping the results from the changes in the former Gruppo BPI, with strongly growing profitability results.
The structural focus on those customer segments where Banco Popolare is a market leader shall improve marginal contribution, and this, coupled with the group’s well-established ability to control its cost structure, shall pave the way towards the achievement of a stable and recurring income stream.
Noteworthy events after the balance sheet date
In keeping with the special regulations issued by the Bank of Italy, noteworthy events after the balance sheet date are illustrated in the Explanatory Notes, Chapter A, Section 3.
Lodi, 29 March 2007
The Management Board
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STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE MANAGER IN CHARGE OF PREPARING ACCOUNTING DOCUMENTS
Head offi ce Banca Popolare di Novara, inner courtyard, Novara 122 Translation from the Italian original which remains the definitive version
Certification of the consolidated financial statements under art. 81-ter of Consob Regulation n. 11971 of May 14th, 1999 and following amendments and integrations
1. We, the undersigned, Fabio Innocenzi, as Chief Executive Officer of Banco Popolare Soc.Coop., and Gianpietro Val, as Manager in charge or preparing the financial reports of Banco Popolare Soc. Coop., in keeping also with art. 154-bis, paragraphs 3 and 4, of Law Decree n. 58 of February 24th, 1998, herewith certify that the administrative and accounting procedures followed to prepare the 2007 consolidated financial statements: • were adequate with regard to the company features, and • were effectively applied.
2. The assessment of the adequacy and of the effective application of the administrative and accounting procedures for the preparation of the financial statements as at December 31st, 2007 took place amid the redefinition of business processes and information systems following the merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana, and it was based on an internal model defined by Banco Popolare Soc. Coop., in conformity with the model issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Report”), representing the generally accepted standard worldwide for internal auditing systems.
3. We also certify that the financial statements as at December 31st, 2007: x are congruous with accounting books and book-keeping entries; x were prepared in compliance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) issued by IASB and adopted by the European Commission, and to our best knowledge, are fit to provide a truthful and correct representation of the financial and operating situation of the issuer and of the companies falling within the consolidation scope.
Verona, 29 March 2008
Fabio Innocenzi Gianpietro Val Managing Director and CEO Manager in charge of preparing the Company’s financial reports
Signed on the original Signed on the original
INDEPENDENT AUDITORS’ REPORT
Head offi ce Credito Bergamasco, Bergamo 126 ERNST & YOUNG
CONSOLIDATED FINANCIAL STATEMENTS
Head offi ce Cassa di Risparmio di Lucca Pisa Livorno, Lucca Consolidated financial statements
130 Consolidated financial statements
CONSOLIDATED BALANCE SHEET
Assets 31/12/2007 31/12/2006 Changes (in thousand euro)
10 Cash and cash equivalents 692,029 360,546 91.9% 20 Financial assets held for trading 10,039,860 8,424,623 19.2% 30 Financial assets measured at fair value 888,437 314,430 182.6% 40 Financial assets available for sale 1,812,657 1,053,752 72.0% 50 Financial assets held to maturity 712,527 939,319 -24.1% 60 Due from other banks 14,189,365 8,680,735 63.5% 70 Loans to customers 84,551,034 45,244,563 86.9% 80 Hedging derivatives 43,741 38,847 12.6% 90 Fair value change of assets In hedged portfolios -4,227 -4,093 3.3% 100 Equity investments 870,477 796,935 9.2% 120 Property, plant and equipment 1,505,608 538,047 179.8% 130 Intangible assets 6,433,928 447,753 n.s. of which: goodwill 5,454,708 413,027 n.s. 140 Tax assets 1,786,491 661,465 170.1% a) current 725,046 290,397 149.7% b) deferred 1,061,445 371,068 186.1% 150 Non-current assets held for sale and discontinued operations 880,524 239 160 Other assets 3,990,290 1,197,774 233.1% Total 128,392,741 68,694,935 86.9%
Liabilities and Shareholders’ equity 31/12/2007 31/12/2006 Changes (in thousand euro)
10 Due to other banks 13,107,806 8,116,144 61.5% 20 Due to customers 51,126,139 28,905,375 76.9% 30 Debt securities in issue 30,151,847 16,334,515 84.6% 40 Financial liabilities held for training 3,124,621 1,844,528 69.4% 50 Financial liabilities measured at fair value 11,951,082 5,334,143 124.0% 60 Hedging derivatives 33,551 54,847 -38.8% 70 Fair value change of liabilities In hedged portfolios -43,663 -57,936 -24.6% 80 Tax liabilities 1,201,048 416,354 188.5% a) current 447,727 192,554 132.5% b) deferred 753,321 223,800 236.6% 90 Liabilities associated with discontinued operations 416,158 - 100 Other liabilities 4,987,143 2,111,034 136.2% 110 Employee termination benefits 436,982 350,079 24.8% 120 Provisions for risks and charges 825,239 269,073 206.7% a) retirement and similar obligations 188,069 25,964 624.3% b) other provisions 637,170 243,109 162.1% 140 Valuation reserves 141,953 240,820 -41.1% 160 Common stock equivalents 2,534 - 170 Reserves 2,752,729 2,044,798 34.6% 180 Share premiums 4,880,023 202,304 n.s. 190 Share capital 2,305,733 1,351,182 70.6% 200 Treasury shares ( - ) -28,163 - 210 Minority interest 402,756 144,761 178.2% 220 Net income for the period 617,223 1,032,914 -40.2% Total 128,392,741 68,694,935 86.9%
131 Consolidated financial statements
CONSOLIDATED INCOME STATEMENT Income statement 2007 2006 Changes (in thousand euro)
10 Interest income and similar revenues 4,582,419 2,596,175 76.5% 20 Interest expense and similar charges -2,767,830 -1,255,431 120.5% 30 Net interest income 1,814,589 1,340,744 35.3% 40 Commission income 1,174,507 948,185 23.9% 50 Commission expense -152,533 -104,099 46.5% 60 Net commission income 1,021,974 844,086 21.1% 70 Dividend and similar income 138,617 89,594 54.7% 80 Net trading income 46,559 106,555 -56.3% 90 Fair value adjustments in hedge accounting -199 1,029 100 Profit (Loss) on disposal or repurchase of: 143,338 55,248 159.4% a) loans 398 36,362 -98.9% b) financial assets available for sale 140,382 16,919 729.7% d) financial liabilities 2,558 1,967 30.0% 110 Profit (loss) on financial assets and liabilities measured at fair value 172,919 29,219 491.8% 120 Total income 3,337,797 2,466,475 35.3% 130 Net write-downs/write-backs on impairment of: -452,189 -138,366 226.8% a) loans -343,845 -133,820 156.9% b) financial assets available for sale -108,078 -2,194 4826.1% d) other financial transactions -266 -2,352 -88.7% 140 Net income from financial activities 2,885,608 2,328,109 23.9% 170 Net income from financial and insurance activities 2,885,608 2,328,109 23.9% 180 Administrative expenses: -2,092,809 -1,354,565 54.5% a) personnel expenses -1,369,577 -884,265 54.9% b) other administrative expenses -723,232 -470,300 53.8% 190 Net provisions for risks and charges -106,421 -58,762 81.1% 200 Net impairment / write-backs on property, plant and equipment -79,370 -46,728 69.9% 210 Net impairment / write-backs on intangible assets -72,591 -29,912 142.7% 220 Other operating income (expense) 334,864 277,913 20.5% 230 Operating costs -2,016,327 -1,212,054 66.4% 240 Profit (Loss) on equity investments 259,882 387,980 -33.0% 270 Profit (Loss) on disposal of investments 19,947 41,798 -52.3% 280 Income before tax from continuing operations 1,149,110 1,545,833 -25.7% 290 Tax on income from continuing operations -504,886 -488,062 3.4% 300 Income after tax from continuing operations 644,224 1,057,771 -39.1% 310 Income (Loss) after tax from discontinued operations 15,081 6,225 142.3% 320 Net income for the period 659,305 1,063,996 -38.0% 330 Minority interest -42,082 -31,082 35.4% 340 Net income for the period attributable to the Parent company 617,223 1,032,914 -40.2%
132 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
Changes over the year Allocation of net income from previous year Changes in shareholders’ equity Opening balance Closing balance Net income (Loss) for 2007 Changes in reserves Purchase of treasury the period (in thousand euro) Reserves Issue of new shares Changes in Derivativ Dividends shares Special common es on Stock and other dividend stock treasury options Third Third allocations Third Third distribution Third Group Group Group Third parties Group Group equivalents shares Group Group Third parties parties parties parties parties parties
Share capital: 1,351,182 24,389 - - -48,628 127,215 1,003,179 - - - - 2,305,733 151,604 a) common shares 1,351,182 24,389 - - -48,628 127,215 1,003,179 - - - - 2,305,733 151,604 b) other ------
Share premiums 202,304 3,319 - - -213,068 58,074 4,890,787 - - - - 4,880,023 61,393
Reserves: 2,044,798 84,128 692,452 22,523 14,903 39,341 ------576 2,752,729 145,992 a) retained earnings 1,766,964 80,941 692,452 22,523 -42,699 39,341 ------576 2,417,293 142,805 b) other 277,834 3,187 57,602 ------335,436 3,187
Valuation reserves: 240,820 1,843 -98,867 64 141,953 1,907 a) financial assets available 171,119 1,629 -40,187 54 130,932 1,683 for sale b) special revaluation laws 66,679 -57,693 8,986 - c) other 3,022 214 -987 10 2,035 224
Common stock equivalents - - - 2,534 2,534 -
Treasury shares - - 292,043 -222 - - -320,206 - -28,163 -222
Net income (loss) for the year 1,032,914 31,082 -692,452 -31,082 -340,462 617,223 42,082 617,223 42,082
Shareholders’ equity 4,872,018 144,761 - -8,559 -340,462 -53,617 224,472 5,893,966 - -320,206 - - 2,534 - 576 617,223 42,082 10,672,032 402,756 Consolidated financial statements statements financial Consolidated 133 Consolidated financial statements statements financial Consolidated 134
Changes over the year Allocation of net income from previous year Changes in shareholders’ equity Opening balance Closing balance Net income (loss) for the 2006 Changes in reserves (in thousand euro) Purchase of treasury Changes in Derivativ period Reserves Dividend and Issue of new shares Special shares common es on Stock other dividend stock treasury options Third allocations Third Third Third distribution Group Third parties Group Group Group Group equivalents shares Group Third parties Group Third parties parties parties parties parties
Share capital: 1,342,569 22,869 - - 1,520 8,613 - - - - 1,351,182 24,389 a) common shares 1,342,569 22,869 - - 1,520 8,613 - - - - 1,351,182 24,389 b) other ------
Share premiums 184,031 1,308 - - 2,011 18,273 - - 202,304 3,319
Reserves: 1,734,261 76,512 307,877 7,943 749 -327 - - - - 1,911 2,044,798 84,128 a) retained earnings 1,461,068 73,325 307,877 7,943 -1,981 -327 - - - - 1,766,964 80,941 b) other 273,193 3,187 2,730 - - - - 1,911 277,834 3,187
Valuation reserves: 163,118 689 77,702 1,154 240,820 1,843 a) financial assets available 94,459 689 76,660 940 171,119 1,629 for sale b) special revaluation laws 69,409 - -2,730 - 66,679 - c) other -750 - 3,772 214 3,022 214
Common stock equivalents - - - - -
Treasury shares ------
Net income (loss) for the year 597,054 15,687 -307,877 -15,687 -289,177 1,032,914 31,082 1,032,914 31,082
Shareholders’ equity 4,021,033 117,065 - -7,744 -289,177 78,451 4,358 26,886 ------1,911 1,032,914 31,082 4,872,018 144,761 Consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
Direct method (in thousand euro)
Operating activities 31/12/2007 31/12/2006 1. Cash flow from operations 917,687 1,199,398 - Interest income received (+) 4,582,419 2,596,175 - Interest expense paid (-) -2,767,830 -1,255,431 - dividend and similar income 138,617 89,594 - net commissions (+/-) 1,021,974 844,086 - personnel expenses -1,369,577 -884,265 - net premiums written (+) - - - other insurance revenues/charges (+/-) - - - other costs (-) -915,539 -220,686 - other revenues (+) 717,428 511,762 - taxes -504,886 -488,062 - costs/revenues associated with assets held for sale, net of fiscal effect 15,081 6,225 2. Cash flow from / used in financial assets 3,609,012 -8,888,620 - financial assets held for trading 2,534,606 -516,488 - financial assets measured at fair value -574,007 -21,768 - financial assets available for sale 89,828 -32,002 - loans to customers -4,323,605 -4,968,670 - due from other banks 6,033,841 -2,832,382 - other assets -151,651 -517,310 3. Cash flow from / used in financial liabilities -3,035,825 7,995,719 - due to other banks -9,261,200 16,564 - due to customers 4,487,693 4,136,551 - debt securities in issue -6,159,512 3,402,367 - trading liabilities 768,377 258,841 - financial liabilities measured at fair value 6,616,939 50,984 - other liabilities 511,878 130,412 Net cash flow from / used in operating activities 1,490,874 306,497 Investing activities 31/12/2007 31/12/2006 1. Cash flow generated from: 853,657 266,994 - disposal of equity investments 785,575 215,468 - dividends received from equity investments - - - disposal of financial assets held to maturity 708 - - disposal of property, plant and equipment 67,374 51,059 - disposal of intangible assets - 467 - disposal of subsidiaries or business segments - - 2. Cash flow used for: -813,367 -370,372 - purchase of equity investments -371,716 -124,248 - purchase of financial assets held to maturity -193,564 -107,978 - purchase of property, plant and equipment -147,616 -55,308 - purchase of intangible assets -100,471 -82,838 - purchase of subsidiaries or business segments - - Net cash flow from / used in investing activities 40,290 -103,378 Financing activities 31/12/2007 31/12/2006 - issue / purchase of treasury shares -859,220 107,248 - issue / purchase of common stock equivalents - - - distribution of dividends and other allocations -340,461 -289,177 Net cash flow from / used in financing activities -1,199,681 -181,929 Net cash flow generated / used in the year 331,483 21,190
Reconciliation 31/12/2007 31/12/2006
- Cash and cash equivalents at year start 360,546 339,356 - Net cash flow generated (used) in the year 331,483 21,190 Cash and cash equivalents at year end 692,029 360,546
135
NOTES TO THE CONSOLIDATED ACCOUNTS
Head offi ce Banca Popolare di Cremona, interior, Cremona Notes to the consolidated accounts
138 Notes to the consolidated accounts
CHAPTER A – ACCOUNTING POLICIES
A.1 – IN GENERAL
Introductory note
On July 1st the merger between Banco Popolare di Verona e Novara (BPVN) and Banca Popolare Italiana (BPI) became fully effective, leading to the formation of a new company called Banco Popolare, Parent company of the Banking Group bearing the same name. In order to prepare the consolidated financial reports, the merger was recognized in compliance with the international accounting standards, more precisely with IFRS 3, according to which, based on given size and qualitative parameters, the above transaction is defined as the acquisition of Gruppo BPI (acquiree) by Gruppo BPVN (acquirer). Hence, the consolidated annual report of Gruppo Banco Popolare as at December 31st has been prepared as a continuum to the consolidated financial statements of Gruppo BPVN, while the companies belonging to Gruppo BPI join the new Group only as of July 1st.
Consequently, the consolidated financial statements as at December 31st, 2007 are comprised of: x consolidated balance sheet as at December 31st, 2007 as compared with the consolidated balance sheet as at December 31st, 2006 of Gruppo BPVN; x income statement of financial year 2007 compared with the consolidated income statement of financial year 2006 of Gruppo BPVN; x consolidated statement of changes in shareholders’ equity as at December 31st, 2007 compared with the same statement as at December 31st, 2006 of Gruppo BPVN; x statement of changes in cash flows, showing the most significant cash flows in 2007, as compared with last year’s statement for Gruppo BPVN.
However, in order to provide an appropriate disclosure of the financial and profitability data pertaining to the Group headed by Banco Popolare and to report the effects of the above mentioned merger, pro-forma consolidated Balance Sheet and Income Statement charts for financial year 2007 have been prepared. The pro-forma profitability data have been obtained by combining the consolidated profit and loss data of Gruppo BPVN and of Gruppo BPI.
Section 1 – Statement of conformity with International Accounting Standards
This consolidated annual report was prepared in compliance with the international accounting standards IAS/IFRS approved by the European Union and effective as at December 31st, 2007. The consolidated financial statements are prepared in compliance with the orders enacting art. 9 of Law D. n. 38/2005, precisely: x Consob Resolution n. 15519 of 27/7/06 - "Financial statements instructions"; x Consob Resolution n. 15520 of 27/7/06 - "Amendments and integrations to the Regulation on Issuers adopted with Resolution n. 11971/99"; x Consob Communication n. 6064293 of 28/7/06 - "Corporate disclosure pursuant to art. 114, paragraph 5, L.D. 58/98"; x Bank of Italy Circular n. 262 of 22/12/05 - "Banks’ financial statements: layouts and preparation".
The Report provides a consolidated representation of the financial position and performance of Banco Popolare Soc.Coop. and of its subsidiaries. The financial statements used to prepare this consolidated quarterly report were delivered by the subsidiaries and refer to their position on December 31st, 2007, adjusted when necessary to comply with IAS/IFRS.
Section 2 – General accounting standards
This report comprises the balance sheet, the income statement, the statement of changes in shareholders’ equity, the cash- flow statement and these explanatory notes, and it is supplemented by the Executive report on operations and on the general performance of the companies falling under the consolidation scope.
The consolidated financial statements are expressed in thousand of Euro.
The consolidated financial statements were drawn up so as to provide a clear, fair and correct representation of the assets and liabilities, the profits and losses and the financial performance generated during the year.
Should the information required by the international accounting standards and by the directives spelled out in the Bank of Italy’s Circular n. 262 of December 22nd, 2005 not suffice to provide a truthful and correct representation, the notes to the accounts provide relevant supplementary information.
139 Notes to the consolidated accounts
If, in exceptional cases, the adoption of a provision under the international accounting standards is incompatible with a truthful and correct representation of the assets and liabilities, profits and losses and financial performance, said provision shall not be applied. The notes shall give an explanation for this possible deviation and the impact on the representation of the assets and liabilities, profits and losses and the financial performance.
The financial statements were drawn up in compliance with the following general principles:
Going concern: financial statements are drawn up on the assumption that the Group shall continue as a going concern;
Accrual basis of accounting: financial statements are prepared using the accrual basis of accounting, except for cash flow information;
Consistency of presentation: the presentation and classification of items in the financial statements are retained from one financial year to the next, unless a standard or an interpretation require a presentation change, or a different presentation or classification proves to be more appropriate under IAS 8. In this case, the notes to the financial statements shall contain due disclosure of the changes introduced as compared with the previous year.
Materiality and aggregation: the faces of the balance sheet and income statements are made up of items (marked by Arabic numerals), by sub-items (marked by letters) and by further details (“of which” in items and sub-items). Items, sub-items and details make up the financial accounts. The charts comply with the guidelines released by the Bank of Italy in Circular n. 262 of December 22nd, 2005. Additional items can be added to these charts if their content cannot be associated with any of the items already shown in the charts and only if they represent significant amounts. The sub-items envisaged in the charts can be grouped together when one of the two following conditions occurs: a) the sub-item amount is immaterial; b) the aggregation favors a clear financial statement presentation; in this case in the notes to the accounts the sub- items that had been grouped together shall be presented separately.
The balance sheet and the income statement do not include accounts that show no amounts for the current balance sheet year, nor for the previous year.
Offsetting: assets and liabilities, income and expense shall not be offset unless permitted or required by an international accounting standard or its interpretation, or by the prescriptions contained in the above mentioned Circular released by the Bank of Italy;
Comparative information: each item in the balance sheet and income statement is matched with a comparative item referring to the previous year. In case the accounts are not comparable, the previous year’s accounts shall be reclassified. In case of non-comparability, adjustments, or failure to do so, said events shall be disclosed and commented upon in the notes to the accounts.
Section 3 – Consolidation scope and methods
The consolidated annual report illustrates the financial position, financial performance and cash-flows of the Parent company and its direct and indirect subsidiaries. The consolidation scope is defined in compliance with the provisions set forth in the international accounting standard IAS 27. Also all associates and joint ventures are included in compliance with the international accounting standards IAS 28 and 31. The concept of control goes beyond the percentage interest in the share capital of an investee, and is rather defined as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Equity investments available for sale are accounted for in compliance with the international accounting standard IFRS 5, which prescribes the accounting of non-current assets held for sale. The consolidated financial statements date coincides with the Parent company’s balance sheet date. Companies whose financial year ends on a date other than that of the Parent company prepare an ad hoc report on their financial position and financial performance as at the reference date.
Full consolidation is the line-by-line combination of assets, liabilities, profit and loss of subsidiaries. Upon the identification and recognition of minority interests in net assets and net income under a specific item, the carrying amount of the investment is eliminated as an offset to the residual portion of the subsidiary’s equity. Any difference resulting from the above operation, if positive – after being accounted for under the subsidiary’s assets or liabilities – shall be initially recognized as goodwill under the item “Intangible assets” upon the first consolidation, and then under “Other reserves”. Negative differences are charged to income. The cost allocation of business combinations is provisionally measured, as permitted by international accounting standards. Paragraph 62 of IFRS 3 prescribes that the initial accounting of business combination effects must be completed within twelve months of the date of acquisition.
Assets, liabilities, revenues and expenses among consolidated companies are eliminated in full.
140 Notes to the consolidated accounts
The financial performance of a subsidiary acquired during the period are included into the consolidated financial statements as from the date of acquisition. The financial performance of a subsidiary which has been disposed of are included in the consolidated financial statements until the date of disposal. The difference between the proceeds from the disposal and its carrying amount as of the date of disposal, including any exchange rate difference recognized period by period in equity upon consolidation, is carried at income. If necessary, the financial statements of consolidated companies, when prepared in compliance with different accounting standards, shall be uniformed to the Group’s accounting procedures.
Investees on which the Group exercises a significant influence (so called “associates”), that is, enterprises in which the Group has the power to participate in the financial and operating policy decisions, but is not in control over those policies, and which are neither a subsidiary nor a joint venture, are carried at equity. If an associate applies other accounting standards than those used by the Group, adjustments are made to the associate’s financial statements used by the Group to apply the equity accounting method.
Under the equity method, the investment is initially recognized at cost and the carrying amount is then adjusted based on the proportionate interest in the investee. The difference between the carrying amount of the investment and the investee’s equity is treated similarly to the line-by-line consolidation differences described above. In measuring the pro-rata share of net assets, potential voting rights are not considered. The pro-rata share of net income from the associate is recognized under a specific item of the consolidated income statement.
Investments in jointly controlled companies are recognized using the equity method. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when a unanimous consensus by all venturers (i.e., the parties to a joint venture, having joint control over it) is required to make strategic financial and operational decisions.
The balance sheet and P&L statements of the consolidated companies whose money of account is not the Euro, are translated based on the following rules: x balance sheet assets and liabilities are translated at the exchange rate in effect at year-end; x P&L revenues and costs are translated at the year’s average exchange rate; x all exchange rate differences originated by the conversion are recognized in a specific and separate reserve under shareholder’s equity. Said reserve is eliminated through profit or loss when the equity interest is disposed of.
Equity investments in subsidiaries, associates and joint ventures (full or proportionate consolidation method)
Shareholding Voting Type of relation (in thousand euro) Head Office right % (a) Company % Share (b) A. Companies A.1 Line-by-line consolidation Banco Popolare S.c. a r.l. Verona Parent company AB Capital S.p.A. Pescara (1) Efibanca 51.000% Acque Minerali Riunite S.p.A. Roma (1) Efibanca 100.000% Aletti & C. Banca di Investimento Mobiliare S.p.A. Milan (1) Banco Popolare 61.772% Credito Bergamasco 21.312% Bipitalia Gestioni 16.916% Aletti Fiduciaria S.p.A. Milan (1) Banca Aletti & C. 100.000% Aletti Gestielle SGR S.p.A. Milan (1) Banco Popolare 21.630% Credito Bergamasco 12.994% Holding di Partecipazioni 31.702% Bipitalia Gestioni 33.674% Aletti Gestielle Alternative SGR S.p.A. Milan (1) Holding di Partecipazioni 51.414% Credito Bergamasco 21.204% Bipitalia Alternative SGR 27.382% Aletti Private Equity SGR S.p.A. Verona (1) Efibanca 99.857% Holding di Partecipazioni 0.143% Andromeda Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Antares Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Antilia Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Arena Broker S.r.l. Verona (1) Holding di Partecipazioni 57.300% Auto Trading Leasing IFN s.a. RO - Bucharest (1) Banco Popolare 99.950% Holding di Partecipazioni 0.050% Azimuth Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% B.P.I. International (UK) Ltd. UK - London (1) Bipielle Bank (Suisse) 82.000% Banca Aletti & C. (Suisse) S.A. CH - Lugano (1) BPVN Luxemborg 100.000% Banca Caripe S.p.A. Pescara (1) Banca Popolare di Lodi 95.000%
141 Notes to the consolidated accounts
Shareholding Voting Type of relation (in thousand euro) Head Office right % (a) Company % Share (b) Banca Popolare di Crema S.p.A. Crema (1) Banca Popolare di Lodi 94.468% Banca Popolare di Cremona S.p.A. Cremona (1) Banca Popolare di Lodi 99.577% Banca Popolare di Lodi S.p.A. Lodi (1) Banco Popolare 100.000% Banca Popolare di Lodi Capital Company LLC USA - Delaware (1) Banco Popolare 100.000% Banca Popolare di Lodi Capital Company LLC II USA - Delaware (1) Banco Popolare 100.000% Banca Popolare di Lodi Capital Company LLC III USA - Delaware (1) Banco Popolare 100.000% Banca Popolare di Mantova S.p.A. Mantua (1) Banca Popolare di Lodi 55.095% Banca Popolare di Novara S.p.A. Novara (1) Banco Popolare 100.000% Banca Popolare di Verona - S. Geminiano e S. Verona (1) Banco Popolare 100.000% Prospero S.p.A. Banca Valori S.p.A. Brescia (1) Banco Popolare 98.001% Banco Popolare Ceská Republika, a.s. CZ - Prague (1) Banco Popolare 100.000% Banco Popolare Croatia d.d. HR - Zagreb (1) Banco Popolare 85.252% 98.236% Banco Popolare Hungary Zrt. H - Budapest (1) Banco Popolare 100.000% Banco Popolare Luxembourg S.A. L - Luxembourg (1) Banco Popolare 99.969% Holding di Partecipazioni 0.031% Banco Popolare Service Kft. H - Budapest (1) BP Hungary 100.000% Basileus S.p.A. Lodi (1) Bipielle Real Estate 100.000% BFI S.p.A. Lodi (1) Banco Popolare 100.000% Bio Energy International S.A. L - Luxembourg (1) Efibanca 99.998% Bipielle Bank (Suisse) S.A. CH - Lugano (1) Banco Popolare 92.060% Bipielle International Holding S.A. CH - Lugano (1) Banco Popolare 100.000% Bipielle Real Estate S.p.A. Lodi (1) Banco Popolare 100.000% Bipitalia Alternative SGR S.p.A. Lodi (1) Bipitalia Gestioni 80.000% (1) Banco Popolare 20.000% Bipitalia Broker S.r.l. Milan (1) Banco Popolare 100.000% Bipitalia Ducato S.p.A. Lucca (1) Banco Popolare 100.000% Bipitalia Gestioni SGR S.p.A. Lodi (1) Banco Popolare 99.358% Bormioli Rocco & Figlio S.p.A. Fidenza (1) Partecipazioni Italiane 81.114% Efibanca 14.314% Bormioli Rocco S.A.S. E - S. Sulpice (1) Bormioli Rocco France 100.000% Bormioli Rocco (Spagna) S.A. E - Guadalajara (1) Bormioli Rocco Intern. 100.000% Bormioli Rocco Glass Co. Inc. S.C. USA - New York (1) Bormioli Rocco Intern. 100.000% Bormioli Rocco International S.A. L - Luxembourg (1) Bormioli Rocco & Figlio 100.000% Bormioli Rocco France S.A. F - S. Sulpice (1) Bormioli Rocco Intern. 56.640% Bormioli Rocco & Figlio 43.360% Bormioli Rocco Valorisation S.A.S. F - Masnieères (1) Verreries de Masnières 100.000% BPVN Immobiliare S.r.l. Verona (1) Banco Popolare 100.000% Braidense Seconda S.r.l. Milan (1) Efibanca 100.000% Carfid S.r.l. Roma (1) Banco Popolare 100.000% Cassa di Risparmio di Lucca Pisa Livorno S.p.A. Lucca (1) Banco Popolare 78.921% Castimm S.r.l. Livorno (1) C.R. Lucca Pisa Livorno 100.000% Compagnia Finanziaria Ligure Piemontese S.p.A. Milano (1) Banco Popolare 100.000% (under liquidation) Credito Bergamasco S.p.A. Bergamo (1) Banco Popolare 87.719% Critefi SIM S.p.A. Brescia (1) Nazionale Fiduciaria 100.000% Decoro Fidenza S.r.l. Fidenza (1) Bormioli Rocco & Figlio 100.000% Easynetwork S.p.A. Rome (1) Bipitalia Ducato 80.000% Efibanca S.p.A. Rome (1) Banco Popolare 93.903% Credito Bergamasco 6.097% Efigestioni SGR S.p.A. Milan (1) Efibanca 100.000% FIN.E.R.T. S.p.A (under liquidation) Marano (NA) (1) SE.RI. 100.000% Holding di Partecipazioni Finanziarie Popolare di Verona (1) Banco Popolare 100.000% Verona e Novara S.p.A. Immobiliare BP S.r.l. Verona (1) Banco Popolare 100.000% Istituto Pisano Leasing S.p.A. (under liquidation) Pisa (1) C.R. Lucca Pisa Livorno 100.000% Italfortune International Advisors S.A. L - Luxembourg (1) Banco Popolare 100.000% Lido dei Coralli S.r.l. S.T. di Gallura (SS) (1) Bipielle Real Estate 100.000% Milano Leasing S.p.A. (under liquidation) Milan (1) Efibanca 99.999% Monticchio Gaudianello S.p.A. Melfi (1) Acque Minerali Riunite 100.000%
142 Notes to the consolidated accounts
Shareholding Voting Type of relation (in thousand euro) Head Office right % (a) Company % Share (b) Nadir Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Nazionale Fiduciaria S.p.A. Brescia (1) Banca Valori 100.000% Novara Invest SIM S.p.A. (under liquidation) Milan (1) Banco Popolare 99.000% Aletti Gestielle SGR 1.000% Parchi del Garda S.p.A. Milan (1) Efibanca 73.636% Partecipazioni Italiane S.p.A. Milan (1) Glass Italy 92.654% 92.679% (1) Banco Popolare 7.312% 7.321% Pegaso Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Perseo Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Royle West Ltd. IRL - Dublin (1) Banco Popolare 99.000% Seefinanz S.A. (under liquidation) CH - Lugano (1) Banco Popolare 100.000% Servizi Riscossione Imposte SE.R.I. S.p.A. (under liq.) Naples (1) Banco Popolare 80.000% Sirio Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Società Gestione Crediti BP S.p.A. Lodi (1) Banco Popolare 100.000% Società Gestione Servizi BP S.p.A. Verona (1) Banco Popolare 75.490% Credito Bergamasco 24.510% Soluzioni Finanziarie S.p.A. Lucca (1) Bipitalia Ducato 100.000% Tecmarket Servizi S.p.A. Verona (1) Banco Popolare 47.500% S.G.S. BP 52.500% Tiepolo Finance S.r.l. Lodi (1) Banco Popolare 60.000% Tiepolo Finance II S.r.l. Lodi (1) BP S.G.Crediti 60.000% Tirrena Professional Factor S.p.A. (under liquidation) Pisa (1) C.R. Lucca Pisa Livorno 69.498% Verona e Novara France S.A. F - Paris (1) BPVN Luxemborg 99.888% Verreries de Masnières S.A. F - Masnieères (1) Bormioli Rocco France 100.000%
Bipitalia Residential S.r.l. (*) Milan (4) Banco Popolare 4.000% BP Mortgages S.r.l. (*) Brescia (4) BPL Consumer S.r.l. (*) Milan (4) BPL Mortgages S.r.l. (*) Conegliano V. (TV) (4) BPV Mortgages S.r.l. (*) Verona (4) Cartesio Global Equity Fund EUR Milan (4) Glass Italy B.V. NDL - Amsterdam (4) Stichting Glass Italy 94.999% Efibanca 5.001% Stichting Glass NDL - Amsterdam (4)
A.2 Proportionate consolidation N/A (a) Types of relation: (1) Control under art. 2359 of the civil code, paragraph 1, n. 1, (majority of voting rights in general shareholders’ meetings) (4) Other forms of control (b) The actual voting right percentage in the General Annual Meeting is indicated only if it differs from the shareholding percentage. (*) Majority of benefits and risks (SIC-12 Consolidation – Special Purpose Company)
Section 4 – Noteworthy events after the balance sheet date
Illustrated below are the most significant events occurred between the balance sheet date and its approval by the Board of Directors.
Operating property valorization and rationalization On March 25th, 2008, following the resolution passed by Banco’s Supervisory and Management Boards, the second phase of the Group’s real estate valorization and rationalization plan was rolled out. This second step, which follows the management of the investment property portfolio, involves about 2/3 of the operating real estate assets, aiming at: x uncovering the intrinsic value of said property; x retaining the availability of business spaces used by the banks of the Group while gaining a greater management flexibility; x maximizing the economic return on invested capital by freeing up capital to be invested in the Group’s core assets. The rationalization and valorization plan for the operating real estate assets of Gruppo Banco Popolare intends: x setting up a private real estate fund, through the contribution of more than 500 property units, with a conservative market value set at about € 1 billion; x and then placing fund units to institutional investors, within December 31st, 2008.
143 Notes to the consolidated accounts
The fund shall be created and managed by a primary real estate investment company, and its structure shall envisage a maximum leverage of 60% of the value of the contributed real estate. The Fund features a long-term duration, as well as a long term stability and sustainability of the income profile, thanks to the long term lease of the operating property to the Group. In turn, the long term and the characteristics of the lease agreement allow Banco to retain the availability and manageability of its sales network, as well as to retain a free hand in the reorganization of the leased spaces through own investments. The fund units shall be placed by Banca IMI (Gruppo Intesa Sanpaolo), acting as placement agent, with whom Banco signed an underwriting agreement whereby Banca IMI undertakes to purchase any residual fund units that have not been placed by December 31st, 2008. Based on appraisals and preliminary internal valuations, assuming that all the property units foreseen in the plan are contributed and the placement of the units in keeping with the Underwriting Agreement, the deal shall generate a capital gain of about €500 million (net 400 millions) for Banco.
Consumer credit partnership with Credit Agricole
Banco Popolare and Crédit Agricole S.A., one of Europe’s leading banking groups, started exclusive negotiations to end on April 30th, 2008, aiming at combining in Italy their companies specializing in consumer credit, Agos and Ducato. The combination would give rise to the n.1 consumer credit organization in Italy, with a market share of about 14% (13 billion euro in loans at the end of 2007). The new entity shall have access to a network of 256 direct branches, to the branches of Banco Popolare (over 2,100) and of Cariparma and FriulAdria (700), in addition to 25,000 accredited points of sale. This project relies on a long term collaboration view, it is based on shared cooperative values, and it can count on Crédit Agricole’s European-wide expertise in consumer credit on the one side, and on the deeply-rooted territorial franchise of Banco Popolare in Italy on the other, as well as on the complementarity of the two companies: Agos is a leader in closed-end credit and revolving credit cards, while Ducato is one of the leading operators in personal loans. With a favorable outlook of the Italian market, this deal should open the way to the availability of a complete range of products to be offered to a wider and diversified customer base, to a productivity optimization in Italy thanks to the rationalization of the operational platforms, to the availability of effective risk assessment models, the consolidation of information systems and the enhancement of the growth potential of the two original brands that shall be retained. The technical modalities of the combination shall not give rise to cash flows and shall lead to shareholdings in line with the contributions of the two Groups.
Sale of 50% of Aletti Gestielle Alternative to Union Bancaire Priveé
Banco Popolare and Union Bancaire Privée (hereinafter UBP), a world leading Alternative Asset Management organization, signed an agreement on March 29th, 2008 to set up a partnership in the sector of Alternative Asset Management in Italy. Based on the agreement, UBP shall acquire 50% of Aletti Gestielle Alternative, owned 100% by Banco Popolare. the partnership, subject to the prior authorizations by the Supervisory authority, shall further strengthen Aletti Gestielle Alternative’s competitive position and growth prospects on the Italian market by developing non-captive business, both among institutional and private customers, and by accelerating customer penetration among the Group’s private customers. The deal shall lead to the generation of a net estimated capital gain of about 80 millions for Banco Popolare.
Reorganization of the Group’s geographical network
On March 11th, 2008, following the completion of the organizational and IT integration of the former BPI banks, the reorganization of the geographical network of Gruppo Banco Popolare initiated. The redesign shall take place through a series of branch swaps between Banca Popolare di Lodi, Banca Popolare di Verona SGSP and Banca Popolare di Novara. The deal shall have no impact on the consolidated financial statements, and it aims at removing existing overlaps in some geographical areas, at strengthening the local banks’ presence in their franchises and at fostering productivity realignment and cost synergies.
Branch sale to Credito Emiliano
On March 28th, 2008, Banca Popolare di Verona S.Geminiano e S.Prospero signed an agreement to sell 33 bank branches located in Tuscany to Credito Emiliano. To Gruppo Banco Popolare, this deal represents the final step in the reorganization of the Group’s geographical network, and it achieves a further optimization of its presence in six Tuscan provinces (Florence, Livorno, Lucca, Pisa, Prato, Pistoia), removing inefficiency caused by overlaps within the Group and completing the geographical and commercial focalization of Banca Popolare di Verona S. Geminiano e S. Prospero back on its own historical franchise. Cassa di Risparmio di Lucca Pisa Livorno is thus handed over all but the entire commercial coverage of Tuscany. Bank branches under sale on December 31st, 2007 reported 2,131 millions in total assets under custody and 229 employees. The deal value, amounting to 155 millions, shall generate an estimated capital gain of about 110 millions after tax, and shall have a positive impact on supervisory prudential ratios. The deal is subject to the prior authorization of the relevant Authorities.
144 Notes to the consolidated accounts
Section 5 – Other aspects
Changes in consolidation scope
Illustrated below are the changes in consolidation scope reported in 2007 with respect to financial year 2006: x on May 14th, 2007 the purchase of 100% of the share capital of Banco Popolare Ceská Republika (ex- IC Banka a.s) is finalized; x on the same date the purchase of 100% of Banco Popolare Hungary (ex-IC Bank Zrt) is also finalized; consequently, also the subsidiary Banco Popolare Service Kft (ex-ICB Service Kft) falls within the consolidation scope; x again on May 14th, 2007, BPV-SGSP Servizi Amministrativi S.r.l. is formed, a company that on July 1st, 2007, following the transfer of the banking business segment of Banco Popolare di Verona e Novara S.c.a r.l., changes its name in Banca Popolare di Verona – SGSP S.p.A.; x as of July 1st, 2007 the following subsidiaries of the former BPI Group fall within the consolidation scope: Banca Popolare di Lodi Cassa di Risparmio di Lucca Pisa Livorno Banca Popolare di Crema Banca Popolare di Cremona Banca Caripe Banca Popolare di Mantova Bipielle Bank (Suisse) Banca Bipielle Network Bipielle Previdenza Assicurativa Servizi Assicurativi Banca Valori Bipitalia Gestioni SGR Bipitalia Alternative SGR Bipielle Fondi Immobiliari SGR Bipitalia Ducato Efibanca Italfortune International Advisors Bipielle Società di Gestione del Credito Bipitalia Broker Nazionale Fiduciaria Criteri SIM Bipielle International Holding BPI International (UK) Area Life International Assurance Banca Popolare di Lodi Capital Company LLC Banca Popolare di Lodi Capital Company LLC II Banca Popolare di Lodi Capital Company LLC III Bipielle ICT Bipielle Real Estate Basilues Sirio Immobiliare Nadir Immobiliare Lido dei Coralli Andromeda Immobiliare Antares Immobiliare Antilia Immobiliare Azimuth Immobiliare B.S.R. Gestioni Turistiche Immobiliari Lisbona Immobiliare Pegaso Immobiliare Perseo Immobiliare Framo Easynetwork Efigestioni SGR Soluzioni Finanziarie Royle West Tirrena Professional Factor Istituto Pisano Leasing Braidense Seconda Carfid Castimm
145 Notes to the consolidated accounts
AB Capital Gruppo Acque Minerali Riunite Glass Italy Gruppo Partecipazioni Italiane BPL Mortgages Tiepolo Finance Tiepolo Finance II Bipitalia Residential RMBS 2004 Bipitalia Residential RMBS 2005 Bipitalia Residential CMBS 2005 Bipielle Consumer ABS 2004 Bipielle Consumer ABS 2005 Bipielle Consumer ABS 2007; x on July 18th, 2007, the purchase of 100% of the share capital of Auto Trading Leasing IFN was finalized, a company based in Romania; x on September 26th, 2007 the sale of 79.73% of the share capital of Bipielle Network is finalized. The residual interest of 19.90%, is recognized under financial assets available for sale of the consolidated balance sheet. Following this sale, Bipielle Network, together with the subsidiaries Bipielle Previdenza Assicurativa and Servizi Assicurativi are no longer part of the consolidation scope; x on the same date, the sale of 100% of the share capital of Area Life International Assurance was finalized, and as a result also this company is no longer fully consolidated; x on December 27th, 2007 the liquidation of the consortium company Framo S.c.ar.l. was completed, that previously was fully consolidated; x as a result of the almost full subscription of the units of the Cartesio Global Equity Fund by Banco Popolare, the fund was fully consolidated starting from the financial statements as at December 31st, 2007; x starting from financial year 2007, the consolidation scope also includes the following special purpose vehicles set up for multioriginator securitizations performed in May and at year end: BP Mortgages, based in Brescia, and BPV Mortgages, based in Verona. The consolidation is carried out pursuant to SIC 12 – Consolidation of special purpose vehicles, as a function of the majority of benefits and risks, albeit in the absence of any equity interests in the share capital of said vehicles.
Changes in the scope of companies carried at equity
Illustrated below are the changes in the scope of companies carried at equity in comparison with December 31st, 2006: x Aletti Merchant on February 5th, 2007, increased its share in Bertani Holding to 22.33%. On December 31st, 2006 it held a 18.999% interest, and shares were classified under financial assets available for sale (item 40 of assets). As a result, as of financial year 2007 the associate is consolidate using the equity method; x upon its creation, on May 15th, 2007, the Group subscribed a 25% share in HI-MTF, as a result the company is carried at equity; x in June part of the interest held in Pama was sold. As a result, the Group’s stake decreased to 12%, and the interest, which previously was carried at equity, was deconsolidated and shares were classified under item 40 of assets “financial assets available for sale”; x in first half 2007 the liquidation of the company Cornel was completed. The company was previously carried at equity and was now deconsolidated; x as of July 1st, 2007 the following associates of the former Group BPI fall within the scope of companies carried at equity: Arca SGR Centrosim Unione Fiduciaria Assipromos Gruppo Finoa Ali Gruppo Comital Efibanca Palladio Finanziaria SGR Evoluzione 94 Tortella CF Assicurazioni Alfa Iota Black & Blue Bussentina Coima Eurocasse SIM Finanziaria ICCRI BBL Plastisud Portone
146 Notes to the consolidated accounts
Qualiter Quantoro Tre Pi; x on October 11th, 2007, the Group acquired 100% of the share capital of Novara Assicura (now AviPop Assicurazioni) by way of Banco Popolare and Holding di Partecipazioni Finanziarie Popolare di Verona e Novara, each with a 50% stake. Then on December 14th, 2007, in keeping with the insurance partnership agreements with Gruppo Aviva, Banco Popolare sold its 50% interest, while Holding di Partecipazioni Finanziarie Popolare di Verona e Novara sold one share of its stake. Following said transactions, the Group by way of Holding di Partecipazioni holds 50% less one share of the company, which as a result is carried at equity; x on December 19th, 2007, following the capital increase carried out by Delta in which the Gruppo did not take part, its interest in the company decreased from 20% to 13.293%. The interest, which was previously carried at equity, is now recognized under financial assets available for sale in the consolidated balance sheet; x on December 27th, 2007 the liquidation procedure of the company Assipromos was completed, and as a result the company is no longer part of the consolidation scope.
In the course of the year, the Group was also involved in the following mergers: x on October 1st, 2007 Efibanca acquired Aletti Merchant; x on December 5th, 2007, Società Gestione Servizi BP acquired Bipielle ICT: x on December 10th, 2007 Bipielle Real Estate acquired the subsidiaries B.S.R. Gestioni Turistiche Immobiliari and Lisbona Immobiliare. Clearly the above deals have no impact on the Group’s structure, however in some cases they produce a change in the shareholding percentages and associations. To this regard, please refer to the relevant section in the Report on Operations dealing with noteworthy events during the year.
Changes in the application of accounting standards
Employment termination benefits
As a result of the supplementary pension reform, pursuant to Legal Decree n. 252 of December 5th, 2005, depending on the choice made by employees, termination benefits accrued as of January 1st, 2007 were destined to supplementary pension schemes or transferred to a fund managed by the Italian Social Security Institute (INPS).
The coming into effect of this reform introduced a change in the method of accounting for the provision for Termination benefits compared with the financial statements as at December 31st, 2006 and the first quarter report on operations. Specifically, employee termination benefits accrued as of January 1st, 2007 are determined without applying any actuarial methodology, as the only charge to be borne by companies is the contribution they have to pay as provided for by the Civil Code (defined contribution plan under IAS 19). The provision for termination benefits accrued as at December 31st, 2006 continues to be accounted for as a defined benefit plan under IAS 19. However, the liability associated with the accrued termination benefits must be measured based on actuarial estimates without applying the pro-rata of the service provided as the benefit to be measured can be considered entirely accrued.
The change in the accounting method described above produced a reduction in the liability valued along the prior measurement procedures. The difference, which amounted to 35.5 million euro, was carried at income for the second quarter under the item “personnel expenses”.
Fair Value Option on bonds issued
Following the merger between Gruppo BPVN and Gruppo BPI, the Directors of Banco Popolare deemed it a priority to harmonize the administrative processes and the accounting options applied across the Group. This process called for the identification and examination of possible misalignments associated with the use different accounting methods for the same type of transactions. In particular, with regard to the operating hedging of debt securities in issue, in order to reduce accounting misalignments produced by bonds being measured at amortized cost and their hedging derivatives being measured at fair value, Gruppo BPVN and Gruppo BPI had adopted different accounting options. More precisely, Gruppo BPI had adopted hedge accounting rules, while Gruppo BPVN had opted for the Fair Value Option. In order to guarantee the necessary alignment in the accounting of these types of transactions, the Directors decided to adopt the Fair Value Option at Group level, thus setting aside hedge accounting both for new bond issues and their hedging derivatives issued as of July 1st, 2007 as well as for bonds outstanding on June 30th, 2007 and December 31st, 2006 as shown in the financial statements of the companies of the former Gruppo BPI. The decision to introduce this change made it possible to harmonize the accounting methods used for similar transactions across the new Group, considering that the effect from the application of the Fair Value Option on the financial statements of the former Gruppo BPI were immaterial.
147 Notes to the consolidated accounts
Fair Value Option on bonds issued – credit spread change
As illustrated above, the Group opted for the possibility of measuring hedged debt securities in issue at fair value in order to reduce accounting misalignments in alternative to the hedge accounting method.
The application of the Fair Value Option to hedged bonds issued by the bank of the Group entails that also the latter are measured at fair value. When measuring their fair value, different factors must be taken into account that market participants would consider when fixing a price. Among the factors to be considered, there is also the credit risk from a possible change in the issuer’s creditworthiness. Since the Fair Value Option was released as a review of IAS 39 (November 2005) and until first half 2007, Fair Value changes attributable to changes in creditworthiness were neglectable; however, after the notorious subprime mortgage crisis that affected financial markets as of August 2007, investors started to require a much higher risk premium for investments in the banking sector. The increase in spreads offered in new sales caused the Fair Value of the bond portfolio under FVO to shrink remarkably, generating measurement gains (due to the impairment of balance sheet liabilities). This positive impact is not offset by an opposite change in the hedging derivatives associated with the bonds, as the credit risk priced in bonds measured at fair value is not hedged.
In compliance with the relevant accounting standards, the deterioration of the creditworthiness of Gruppo Banco Popolare caused an impairment of bonds issued, with a positive impact on the consolidated income statement, recognized under the item “Profit/loss on financial assets and liabilities measured at fair value”, amounting to 155.7 millions, gross of the fiscal effect. In compliance with the accounting standard IFRS 7 (§10), in the explanatory notes the amount of Fair Value change developed during the period and the cumulative change (as of the date of issue) attributable to the changes in the credit risk of financial liabilities in issue are duly explained. Measurement capital gains generated by the widening of credit spreads in this financial year shall be “released” as measurement capital losses in future income statements throughout the residual bond duration, as a function of the creditworthiness changes that may be reported in the future.
Finally, in keeping with the current supervisory regulations, the positive impact on the net income for the year from the change in creditworthiness does not contribute to the measurement of the regulatory capital. Moreover, considering the materiality of the positive impact on the Income Statement, it was deemed appropriate not to distribute the share of capital gains attributable to the change in creditworthiness to shareholders, and to allocate it to a restricted reserve under art. 6, paragraph 2 of Legal Decree 38/2008 when allocating net income.
Change in classification criteria
In the second quarter of 2006, following the replacement of the software application dedicated to the recognition of foreign currency transactions, it was possible to make the account taking of exchange derivatives compliant. With respect to the former accounting standards, the spread between the spot exchange rate upon the contract finalization and the exchange rate agreed in the contract has been reclassified from “net interest income” to “net financial income”.
As of the second quarter 2006, the recognition in the reclassified income statement of dividends collected from equity securities classified as financial assets held for trading and financial assets available for sale has changed. Dividends are now shown under “net financial income”. The item “dividends and profit (Loss) from equity investments” now includes only the share of profit generated by the investee companies carried at equity.
As of the second quarter 2007, the figurative cost to fund financial assets purchased by the Group investment bank to produce structured financial products for trading was recognized in the reclassified income statement under the item “Net financial income” instead of “Net interest income”. In order to have a like-to-like comparative basis, the same reclassification was extended to prior quarters. This new recognition criterion should provide a clearer representation of the evolution of results generated by the different operating areas of the Group.
Finally, note that the previous year’s quarterly data have been restated on a comparative basis, to take into account the changes in consolidation scope. In particular, the contributions made in 2006 by the subsidiaries that have been disposed of during that same year have been eliminated (Leasimpresa, Sestri, Sannitica Riscossioni, Compagnie d’Angely and Aletti International).
A.2 – SECTION DEVOTED TO THE MAIN ACCOUNT ITEMS
The annual report as at December 31st, 2007 were prepared in compliance with the same accounting standards used to prepare the consolidated financial statements of Gruppo BPVN the year before.
With regard to the tables in the explanatory notes that in keeping with Circular n. 262/2005 of the Bank of Italy should distinguish between “banking group”, “insurance company” and “other companies”, note that no insurance companies are
148 Notes to the consolidated accounts
shown as no insurance company is being fully consolidated. Moreover, in the event that the amounts referring to “other companies” were not material both in the balance sheet financial year and in the previous one, then the information was not presented in the table but directly in the notes.
Below are the applied accounting standards illustrated by account item.
Cash and cash equivalents
This item includes legal currencies, including foreign paper notes and coins and demand deposits with the Central Banks of the Country or Countries where the Group is active with companies or branches. The item is recognized at its face value. For foreign currencies, the face value is translated into Euro at the closing exchange rate in effect at year-end.
Financial assets held for trading
This category includes only debt and equity securities and the positive value of derivatives that are held for trading. Derivative contracts include those embedded in structured financial instruments that have been recognized separately from their host contract because: x their economic characteristics and risks are not closely related to those of the host contract; x a separate instrument with the same terms as the embedded derivative would meet the definition of derivative; x the hybrid instruments to which they belong are not measured at fair value with changes in fair value through profit or loss.
Financial assets are initially recognized on the settlement date in case of debt and equity securities, and on the subscription date for derivative contracts. Upon their initial recognition, financial assets held for trading are measured at cost, meaning the instrument’s fair value. Any embedded derivative in complex contracts, which is not closely related to its host contract and qualifies as derivative, is separated from its host contract and measured at fair value, while the host contract is accounted for along its relevant accounting standard.
Subsequently to initial recognition, financial assets held for trading are measured at fair value.
To determine the fair value of financial assets quoted in an active market, quoted market prices are used (bid-ask prices or average prices). In the absence of an active market, estimate methods and valuation models are used, that take into account all the risk factors associated with the instruments and that are based on market inputs, such as: methods based on the fair value of other quoted instruments that are substantially the same, discounted cash flow analysis, option pricing models, recent arm’s length market transactions.
In case no reliable estimate of the fair value is possible in keeping with the above guidelines, equity instruments and related derivatives are measured at cost and are written down in case of impairment losses.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
Financial assets measured at fair value
A financial asset is measured at fair value through profit or loss upon initial recognition only when: 1. it is a hybrid contract containing one or more embedded derivatives, and the embedded derivative significantly changes the financial flows that would otherwise be expected from the contract; 2. the measurement at fair value through profit or loss makes it possible to provide a more reliable information as: x it eliminates or considerably reduces a lack in homogeneity in measurement or recognition, that would otherwise be caused by measuring assets or liabilities or recognizing the associated profit and loss along different approaches; x a group of financial assets, or financial liabilities, or both is managed and its performance measured at fair value based on a documented risk management or investment strategy, and group reporting is provided internally to managers in charge of strategic functions based on this approach.
These financial assets are designated on initial recognition to be measured at fair value. Initial revenues and costs are directly recognized in profit or loss.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
149 Notes to the consolidated accounts
Financial assets available for sale
This category includes non-derivative financial assets not designated as Loans, Held for trading assets, Held to maturity assets or Assets measured at fair value. In particular, this category includes also shareholdings that are not held for trading and do not qualify as interests in subsidiaries, associates and joint ventures, including private equity investments, as well as the portion of subscribed syndicated loans that had been designated at origin as available for sale. Financial assets are initially recognized on the settlement date in case of debt and equity securities, and on the origination date in case of other financial assets not classified as loans. Upon their initial recognition, assets are measured at cost, meaning their fair value, inclusive of transaction costs or proceeds directly associated with the instrument itself. If recognition follows a reclassification of Assets held to maturity, assets will be recognized at their fair value at the time of reclassification.
Subsequently to initial recognition, available for sale assets go on being measured at fair value through recognition of the corresponding amortized cost value in income, while profits or losses generated by changes in fair value are recognized in a specific Equity reserve until the financial asset is derecognized or an impairment loss is recognized, and the entire difference between the carrying value and the sale price or fair value is recognized through profit or loss. The fair value is measured using the same criteria illustrated for financial assets held for trading. In case no reliable estimate of the fair value is possible in keeping with the above guidelines, equity securities and related derivatives are measured at cost and written down in case of impairment. The assessment of objective evidence of impairment losses is carried out at each balance sheet or interim reporting date. If the reasons for an impairment loss are no more valid due to an event occurring after the impairment was originally recognized, write-backs are recognized through profit and loss. The write-back in any case cannot exceed the instrument’s amortized cost in the absence of previous adjustments.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
Financial assets held to maturity
This category includes debt securities with fixed or determinable payments and fixed maturity date, that the Group has the positive intention and ability to hold to maturity. If a held-to-maturity investment must be sold as a consequence of a reconsideration or of an event beyond the entity’s control, the asset is reclassified as available for sale.
Financial assets are initially recognized on the settlement date. Upon initial recognition, financial assets designated as held to maturity are measured at cost, i.e., the fair value of the exchanged amount, including any directly associated costs or revenues. If the recognition in this category follows a reclassification from Assets available for sale, the fair value of the asset at the time of reclassification is recognized at the asset’s new amortized cost.
Subsequently to initial recognition, financial assets held to maturity are measured at amortized cost, using the effective interest method. Gains or losses from fair value changes in assets held to maturity are recognized through profit and loss at the time of derecognition. The assessment of objective evidence of impairment losses is carried out at each balance sheet or interim reporting date. In case of objective evidence, the impairment is computed as the difference between the asset’s carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The impairment loss is recognized through profit and loss. If the reasons for an impairment loss are no more valid due to an event occurring after the impairment was originally recognized, write-backs are recognized through profit and loss.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
Loans to banks and customers
Loans include loans to customers and to banks, either originated or acquired, with fixed or determinable payments, that are not quoted in an active market and that were not designated from inception as financial assets Available for sale. Loans include receivables, repurchase agreements, loans originating from financial leases and securities acquired as a result of a private placement or subscription, with fixed or determinable payments, not quoted on an active market. As to loans acquired without recourse, they are classified as loans, provided there are no contract provisions significantly changing the risk exposure of the assignee company.
Loans are initially recognized on the origination date or, in case of debt security, on the settlement date, based on the fair value of the financial instrument, the recognition being equal to the extended amount, or subscription price, including costs/revenues directly associated to the individual loan and that can be determined from the start of the transaction, although settled later on. Costs are excluded, that, although carrying the above characteristics, are refunded by the
150 Notes to the consolidated accounts
borrowing counterparty or fall under normal internal administrative costs. For loans that are not negotiated at arm’s length market conditions, the fair value is computed using specific valuation techniques; the difference with the extended amount or the subscription price is charged directly to income. Buyback and repurchase agreements or reverse repurchase agreements are recognized in the balance sheet as loans payable or receivable. In particular, securities sold subject to repurchase agreements (repos) are recorded as loans payable with respect to the amount received spot, while securities purchased under agreements to resell (reverse repos) are recorded as loans receivable with respect to the amount paid spot.
After initial recognition, loans are valued at amortized cost, equal to the initial recognition value decreased/increased by capital refunds, write-down/write-backs and the amortization – computed along the effective interest rate method – of the difference between the extended amount and the amount repayable at maturity, typically comparable to the costs/revenues directly associated to the individual loan. The effective interest rate is determined by computing the rate that equals the loan’s present value of future principal and interest cash flows, to the extended amount including costs/rewards associated with the loan. This accounting method, based on a financial logic, spreads the economic effect of costs/revenues throughout the loan’s expected residual life. The amortized cost method is not used for short-term loans, whose limited life span makes the discounting effect immaterial. Said loans are measured at historical cost and their costs/revenues are recognized in profit and loss linearly throughout the loan contract life.
The same measurement criterion is used for demand loans. At each balance sheet or interim report date, loans are reviewed to identify loans that due to events occurred after their initial recognition, show objective evidence of an impairment loss. These are loans classified as non-performing, watchlist or restructured under the current rules of the Bank of Italy, in line with IAS requirements.
Said impaired loans undergo an analytical, or individual valuation, whereby the write-down of each loan is equal to the difference between the loan’s book value at the time of measurement (amortized cost) and the present value of expected future cash flows, using the original effective interest rate. Expected cash flows factor in the expected recovery time, the estimated realizable value of collaterals, and possible costs incurred to recover the credit exposure. The cash flows of loans that are expected to be recovered within a short period of time are not discounted. The original effective interest rate of each loan remains unchanged over time, unless a loan restructuring or workout agreement has been negotiated that changes the contractual interest rate, or unless in practice the transaction bears no contractual interest.
The write-down is charged to income. The original loan value is reinstated in following financial years whenever the reasons for their original write-down no longer apply, provided said evaluation is objectively correlated to an event occurred after the write-down. Write-backs are recognized in profit and loss and in any case cannot exceed the loan’s amortized cost had no write-downs been carried out in the past.
Individual loans that give no objective evidence of impairment, that is generally speaking performing loans, including loans to counterparties residing in countries at risk, undergo a collective valuation. This valuation is carried out by loan classes carrying similar credit risk characteristics and their percentage loss is estimated by taking into account their historical loss experience, adjusted on the basis of current observable data, so as to estimate the loss latent in every loan group. Collectively determined write-downs are charged to income. At each balance sheet and interim report date, any additional write-down or write-back is recalculated differentially making reference to the entire performing loan book on the same date.
Sold loans are derecognized only if the sale entails the substantial transfer of all risks and rewards associated to the loans. On the contrary, should the risks and rewards associated with the sold loans be retained, the loans will continue to be recognized, although from a legal point of view the loan ownership has been actually transferred. In case the substantial transfer of risks and rewards cannot be verified, loans are derecognized if control of the loans has been relinquished. Otherwise, if be it even a partial control has been retained, the loans will continue to be recognized to the extent of the Group’s residual involvement, based on the exposure to the changes in value of the sold loans and to their changes in cash flows. Finally, sold loans are derecognized in case the contractual rights to receive the relevant cash flows are retained, with the concurrent obligation to pay said flows, and nothing more, to third parties.
Hedging derivatives
Assets and liabilities include hedging credit and financial derivatives, which at the balance sheet date reported a positive and negative fair value, respectively.
A hedge aims at neutralizing potential losses associated with a given financial instrument or a group of financial instruments, attributable to a specific risk, by offsetting them with the profit associated with a different financial instrument or group of financial instruments in case that given risk should actually materialize. IAS 39 provides for the following categories of hedges: x a fair value hedge, that is, a hedge of the exposure to changes in fair value of a recognized asset or liability attributable to a particular risk; x cash flow hedge is a hedge of the exposure to variability in cash flows attributable to a particular risk associated with a recognized asset or liability; x a hedge of foreign currency transactions or operations.
151 Notes to the consolidated accounts
With regard to the consolidated financial statements or the half-year report, only instruments involving an external counterparty to the group may be designated as hedging instruments. Any result associated with intragroup internal transactions is eliminated.
The derivative instrument can be designated as a hedge provided that the hedging relationship between the hedged and the hedging instruments is formally documented, and it is effective at the time of origination and prospectively throughout its entire life. The hedge effectiveness depends on the extent to which the changes in the fair value or in the expected cash flows of the hedged item are actually offset by those of the hedging instrument. As a result, effectiveness is measured by comparing said changes, while considering the aim pursued by the company when the hedge was established. A hedge is effective (within a range of 80 to125%) when changes in the fair value (or in the cash flows) of the hedging instrument neutralize almost completely the changes in the hedged item attributable to the hedged risk. Hedge effectiveness is assessed at each reporting date, using: x prospective tests, that justify the application of hedging accounting in that they demonstrate its expected effectiveness; x retrospective tests, demonstrating the hedge’s actual effectiveness achieved over the period being examined. In other words, they measure to what extent actual results diverge from a perfect hedge.
Should the above tests give evidence of a hedge ineffectiveness, hedge accounting, as described above, is suspended. In this case the derivative contract is reclassified among trading instruments. The hedged instrument is recognized in its class of belonging at a value equal to its fair value at the time ineffectiveness triggered in.
Hedges are measured at fair value; in particular: x in case of a fair value hedge, the change in fair value of the hedged item is offset against the change in fair value of the hedging instrument. Said offset is recognized by recognizing in profit or loss the value changes referring both to the hedged item (referring to the changes generated by the underlying risk factor), as well as to the hedging instrument. Any resulting difference, which reflects the partial hedge ineffectiveness, represents a net income effect; x in case of cash flow hedge, the portion of changes in the fair value of the derivative that are determined to be an effective hedge is recognized directly in equity, while it is recognized in profit and loss only when the hedged cash transaction affects profit or loss; x hedges of foreign currency transactions are accounted for similarly to cash flow hedges.
Hedging assets and liabilities are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset or liability is disposed of, and all risks and rewards of ownership of the asset have been substantially transferred.
Value change of financial assets and liabilities under macrohedging (hedged portfolios)
These items indicate the positive or negative balance of value changes of assets in hedged portfolios (macrohedging) and the positive or negative balance of value changes of liabilities in portfolios hedged against interest rate risk, in compliance with IAS 39, paragraph 89A.
Equity investments
This item includes interest held in associate companies, which are carried at equity. Associate companies are enterprises on which the Group has a significant influence and are not subsidiaries. By significant influence we assume all cases in which the Group holds 20% or more of voting the power of the investee, and, irrespective of the shareholding percentage, whenever it can partake in business and financial decisions of the investees.
Financial assets are initially recognized on the settlement date. Upon initial recognition, financial assets classified under this category are recognized at cost.
If there is any indication that an investment in an associate may be impaired, the recoverable value of the associate is estimated, including the present value of future cash flows expected to be generated by the associate, and the proceeds on the ultimate disposal of the investment. Should the resulting recoverable amount be lower than the carrying amount, the difference is recognized in profit and loss. Whenever the reasons of the impairment loss are no longer valid due to an event occurring after the recognition of said impairment, write-backs are recognized through profit and loss.
Financial assets are derecognized when the contractual rights to receive the cash flows generated by the assets have expired, or when the financial asset is disposed of, and all risks and rewards of ownership of the assets have been substantially transferred.
152 Notes to the consolidated accounts
Property, plant and equipment
Tangible assets (PPE) include land, operating property, real estate investments, technical plants, furniture, fittings and equipment of any type. Said tangible assets are held to be used for the production or provision of goods and services, to be rented to third parties, or for administrative use, and they are expected to be used for more than one period. This item includes also assets used under finance lease contracts, provided that the legal ownership of the assets rests within the leasing company. Said item also includes improvements and incremental expenses incurred on third party assets that do not fall under “other assets”.
Tangible assets are initially recognized at cost, which includes the purchase price and all expenditures directly attributable to the acquisition of the item and to bring the asset to working conditions. Non-recurring maintenance costs entailing probable future economic benefits are included in the asset’s carrying amount, while other repairs and maintenance are charged to income. Restructuring costs for rented buildings are capitalized under the rationale that throughout the lease contract life the lessee retains the control over the assets and may obtain future economic benefits from it. The restructuring costs of rented buildings are depreciated over a period not exceeding the lease contract life.
Tangible assets, including “non-operating” property, are measured at cost, less any depreciation and impairment. Tangible assets are systematically depreciated throughout their useful life, along the straight-line method, with the exception of: x land, whether purchased separately or as part of the buildings standing on it, in that land has an unlimited life. In case its value is embedded in the value of the buildings built on it, in virtue of the application of the approach by components, land is considered a separate asset from the building; the separation between the land and the building values is based on the survey of independent experts; x works of art, because the useful life of a masterpiece cannot be estimated and its value normally is destined to increase with time.
At each balance sheet date, if there is an indication that an asset may be impaired, the asset’s carrying amount is compared with its recoverable amount, that is equal to the lower of the asset’s fair value, net of sale costs, and its value in use, meaning the present value of future cash flows originated by the asset. Any write-downs are charged to income. Whenever the reasons of the impairment loss are no longer valid, write-backs are recognized, that must not exceed the asset’s value had no impairment taken place in the past, net of accrued depreciation.
A tangible asset is derecognized from the balance sheet at the time of disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
Intangible assets
Intangible assets include goodwill and software applications to be used for several years. Goodwill is the positive difference between the cost of the acquisition and the fair value of the acquired assets and liabilities. Other intangible assets are recognized as such if identifiable and if originating from legal or contractual rights.
An intangible asset can be recognized as goodwill when the positive difference between the cost of the acquisition (including accessory charges) and the fair value of the acquired assets and liabilities is representative of future economic benefits to be generated by the subsidiary (goodwill). Should this difference be negative (badwill or negative goodwill) or in the assumption that goodwill is not justified by the anticipated future economic benefits generated by the subsidiary, the difference is directly recognized through profit and loss. Other intangible assets are carried at cost including any accessory charges only if it is probable that the future economic benefits that are attributable to the asset will be realized and if the cost of the asset can be measured reliably. Otherwise, the cost of the intangible asset is recognized in profit and loss of the year in which it was incurred.
Goodwill is tested any time there is evidence of impairment, and in any case at least once a year following the preparation of the three-year plan an impairment test is carried out. To this end, the cash-generating unit to which the goodwill is allocated is identified. The impairment amount is calculated based on the difference between the goodwill’s carrying amount and its recoverable amount, if lower. Said recoverable amount is equal to the higher of the fair value of the cash- generating unit, net of selling costs, and its value in use. The value in use is the current value of future financial flows expected from cash-generating units to which goodwill was allocated. Any resulting write-down is charged to income.
The cost of intangible assets is amortized on a straight-line basis over its useful life. If their useful life is not definable, amortization will not be applied, and periodically the assets will be tested for impairment. At each balance sheet date, if there is evidence of impairment losses, the asset’s recoverable amount is estimated. The loss, which is charged to income, is equal to the difference between the asset’s carrying amount and its recoverable amount.
An intangible asset is derecognized from the balance sheet at the time of disposal and whenever no more future economic benefits are expected.
153 Notes to the consolidated accounts
Tax assets and liabilities
Said items include current and deferred tax assets, and current and deferred tax liabilities.
Income tax is recognized through profit and loss, with the exception of taxes on items credited or debited directly to equity. Income tax provisions are based on a conservative projection of the current tax burden, together with deferred tax assets and liabilities, based on the applicable tax regulations.
Deferred tax assets and liabilities are based on temporary differences arising between the tax base of assets and liabilities and their carrying amounts, without any time limits. Deferred tax assets are recognized in the annual or half-year report when it is probable that they can be recovered, measured based on the ability of the company concerned and of the Group, as a result of the so called “tax consolidation” option, to continue to generate positive taxable income in future financial years. Deferred tax liabilities are recognized in the annual or half-year report, with the exception of assets recognized at an amount higher than the value recognized fiscally and of reserves under tax suspension, where it is reasonable to believe that no operations will be performed deliberately that would trigger taxation. Recognized tax assets and liabilities are systematically measured to account for any regulatory or tax rate changes, as well as for any changes in the position of the single Group companies. The tax provision also includes charges associated with possible disputes with fiscal authorities.
Non-current assets held for sale and discontinued operations and liabilities associated with discontinued operations.
These items include non-current assets and liabilities and discontinued operations. In specific, said assets and liabilities are measured at the lower of fair value less costs to sell and their carrying amount. Any gains or charges are presented in the income statement under a separate item, net of fiscal effects.
Other assets
This item includes assets that do not belong to the other balance sheet assets items. This item for example may include: a. gold, silver and precious metals; b. the positive value of management contracts (so called “servicing assets”) under IAS 39; c. accrued income other than those that are to be capitalized onto the associated financial assets ; d. any inventories under IAS 2; e. improvements and incremental expenses incurred on third party assets other than those associated with the item “Property, plant and equipment”. In particular, assets that do not meet the criteria required by IAS 38 (integral assets). Also balances (“debit balance”) of temporary or suspense items that have not been allocated to the relevant accounts can be presented under this item, but only if the amount is immaterial.
Due to other banks and customers and debt securities in issue
The items “Due to banks”, “Due to customers” and “Debt securities in issue” include various forms of interbank and customer loans and funding through certificates of deposit and bonds outstanding, net of any repurchased amount. Also loans registered by lessees as part of financial leases are included.
These financial liabilities are first recognized when the raised amounts are received or the debt securities issued. The initial recognition is based on the fair value of liabilities, generally the consideration received or the issue price, plus any additional costs/revenues directly attributable to the single funding or issue operation and not refunded by the lending counterparty. Internal administrative costs are excluded.
After initial recognition, financial liabilities are measured at amortized cost along the effective interest rate method. Short- term liabilities are an exception, if the time factor is immaterial: they are stated at their received value and any incurred costs are charged to income on a straight-line basis over the liability contract life. Note, that Funding instruments under an effective hedge are measured along the standards prescribed for hedges.
For structured instruments, provided that the requirements under IAS 39 are satisfied, the embedded derivative is separated from the host contract and measured at fair value as a trading liability. In this case the host contract is recognized at the amortized cost.
Financial liabilities are derecognized from the annual or half-year report when expired or exhausted. Removal takes place also in case of repurchases of securities issued. The difference between the carrying amount of liabilities and the consideration paid is registered in the income statement. The subsequent sale of own shares following their repurchase is considered as a new issue, recognized at the new selling price, with no effect on the income statement.
154 Notes to the consolidated accounts
Financial liabilities held for trading
This item includes the negative amount of trading derivative contracts measured at fair value and financial liabilities held for trading. It also includes embedded derivatives, which were separated from their host financial instruments under IAS 39, as well as liabilities originating from technical overdrafts generated by securities trades.
Gains and losses from changes in the fair value and/or from the sale of trading instruments are stated in the income statement.
Trading liabilities are derecognized from the annual or half-year report when expired or exhausted.
Financial liabilities measured at fair value
A financial liability is measured at fair value through profit or loss upon initial recognition only when: 1. it is a hybrid contract containing one or more embedded derivatives, and the embedded derivative significantly changes the financial flows that would otherwise be expected from the contract; 2. or when the measurement at fair value through profit or loss makes it possible to provide more reliable information as: x it eliminates or considerably reduces a lack in homogeneity in measurement or recognition, that would otherwise be caused by measuring assets or liabilities or recognizing the associated profit and loss along different approaches; x a group of financial assets, or financial liabilities, or both is managed and its performance measured at fair value based on a documented risk management or investment strategy, and group reporting is provided internally to managers in charge of strategic functions based on this approach.
The financial liabilities under examination are measured at fair value right from the initial recognition. Initial revenues and charges are immediately charged or credited to income. Financial liabilities are derecognized from the annual or half-year report when expired or exhausted.
Other liabilities
This item includes liabilities that cannot be associated with other balance sheet liability items. For example, this item may include: a. payment agreements that under IFRS 2 must be classified as debts; b. the negative value of management contracts (so called “servicing liabilities”) under IAS 39; c. the initial recognition of guarantees issued and the equated credit derivatives under IAS 39, as well as the following impairment write-downs; d. payables associated with the payment of received goods or services; e. accrued liabilities others than those to be capitalized onto the relevant financial liabilities.
Employee termination benefits
Following the supplementary pension reform, under Legal Decree n. 252 of December 5th, 2005, employee termination benefits accrued as of January 1st, 2007 are measured without applying any actuarial methodology, since the charge to be incurred by companies is limited to the contributions borne by them under the Civil Code (defined contribution plan under IAS 19). The termination benefit provision accrued as at December 31st, 2006 goes on being accounted for as a defined benefit plan under the classification spelled out by IAS 19. The liability associated with the accrued termination benefits however must be measured at actuarial value without applying the pro-rata of the rendered service since the benefit to be measured may be considered fully accrued. Pension plans and liabilities associated with the so called “personnel seniority bonuses” are distinguished between defined benefits and defined contributions. Under defined contribution plans, the charge associated with the contributions to be paid under the plan is recognized in profit and loss, while under defined benefit plans, the burden of insufficient contributions or an insufficient return from the assets contributions have been invested in falls onto the company. The liability calculation is based on the actuarial methodology defined in IAS 19.
Provisions for risks and charges
Other provisions for risks and charges include the provisions related to present obligations originated from past events where it is more likely than not that an outflow of resources will be required to settle the obligation, provided the amount can be reliably estimated. The sub-item “retirement provisions and similar obligations" show only defined-benefit and defined-contribution supplementary pension funds backed by a legal or secured guarantee issued by Banco on the capital repayment and/or on
155 Notes to the consolidated accounts
the return in favor of beneficiaries, classified as “internal provisions” under the current pension regulations. The item also includes “external provisions”, backed by a guarantee on capital repayment and/or the return in favor of beneficiaries. The sub-item “other provisions” show the provisions for risks and charges that were set aside in compliance with international accounting standards, except for impairments caused by the deterioration of guarantees issued and for equated credit derivatives under IAS 39, that are shown under the item "other liabilities". The item “Provisions for risks and charges” includes provisions for long-term benefits and post-employment benefits covered by IAS 19 as well as provisions for risks and charges covered by IAS 37. The Group recognizes provisions for risks and charges only when: x there is a present obligation (legal or constructive) as a result of past events; x it is likely that an outflow of resources will be required to produce economic benefits to settle the obligation; x the obligation amount can be reliably estimated.
Whenever the time factor is significant, provisions are discounted using current market rates. The effect of discounting to net present value is recognized in profit and loss. If it is unlikely that resources shall have to be used to fulfill the obligation, the liability is derecognized; moreover, a provision is used to pay for outlays for which the provision itself had been originally set aside.
Valuation reserves
Said item includes valuation reserves for financial assets available for sale, for foreign investment hedging, cash flow hedging, and for translation exchange differences, as well as for “individual assets” under disposal and discontinued operations. It also includes the revaluation reserves recognized in compliance with special revaluation regulations, also if fiscal exempt.
Common stock equivalents
The item includes shareholders’ equity components other than share capital and reserves.
Reserves
This item includes retained earnings and Equity reserves.
Share capital and treasury shares
Share capital includes common and preferred stock issued by the bank net of any capital already subscribed but not yet paid in at the balance sheet date or at the date of the interim report. This item includes any treasury stock held by the bank. The latter are shown with a minus sign in the item bearing their name under balance sheet liabilities. The original cost of repurchased treasury shares and the gain or loss originated by their subsequent sale are recognized as changes to shareholders’ equity.
Minority interest
This item shows the portion of consolidated shareholders’ equity attributable to shares owned by minority shareholders based on “equity ratios”. The amount is net of any treasury shares repurchased by consolidated companies.
Foreign currency transactions
Upon initial recognition, foreign currency transactions are recognized in the money of account, and the exchange rate applied to the amount expressed in foreign currency is the one in effect at the date of the transaction.
At each balance sheet date, items expressed in foreign currencies are measured as follows: x cash items are translated at the exchange rate in effect at the closing date; x non-cash items measured at their historical cost are translated at the exchange rate in effect at the date of transaction; x non-cash items measured at fair value are translated based on the exchange rates in effect at the closing date.
Exchange rate differences originated by the settlement of cash items, or by the translation of cash items at rates other than the initial ones, or by the conversion of the previous financial statements, are recognized in profit and loss at the time of their accrual.
When a gain or loss from a non-cash item is carried at equity, the relevant exchange rate difference is also carried at equity. Conversely, when a gain or loss is carried at income, also the associated exchange rate difference is carried at income.
156 Notes to the consolidated accounts
Business combinations and Goodwill
Business combinations are accounted for using the purchase method of accounting, whereby the cost of the business combination is first measured and then at acquisition date the purchase price is allocated by recognizing acquired assets, liabilities and contingent liabilities. Goodwill acquired in a business combination is initially recognized at cost, measured as the excess of the cost of acquisition over the Group’s interest in the net fair values of identifiable asset, liabilities and contingent liabilities acquired. After initial recognition, goodwill is recognized at cost less any accrued impairment losses. In order to assess it for impairment, at acquisition date goodwill arising on a business combination is allocated to the Group’s single cash- generating units, or to a group of cash-generating units that should benefit from the combination synergies, irrespective of whether other acquiree’s assets or liabilities are assigned to said units or group of units. When goodwill is part of a cash-generating unit (or group of cash-generating units), and part of the internal assets belonging to said unit are sold, goodwill associated with the sold assets is included in the accounting value of the assets to measure the profit or loss on the sale. Goodwill sold under said circumstances is measured by reference of the relative values of the sold assets and of the portion of unit still outstanding. Reorganizations involving two or more companies or business activities belonging to Gruppo Banco Popolare are not considered business combinations. International accounting standards do not apply to transactions between entities under common control, that are accounted for using the predecessors value method, where financial statements are a continuation of amounts that had been reported previously, in compliance with IAS 8 par.10, stating that in the absence of an IFRS that specifically applies to a transaction, event or condition, management uses its judgment in selecting and applying an accounting policy that results in relevant, reliable and prudent financial information, reflecting the transaction’s economic content.
Other information
Share based payments
Under IFRS 2, stock options granted to employees are measured at their fair value at grant date. The cost of the granted options, represented by the periodically measured fair value, is recognized through profit or loss throughout its vesting period, and offset in a specific equity reserve, in case of equity-settled transactions, or in a liability item in case of cash- settled transactions.
Dividends and revenue recognition
Revenues are recognized when received or in any case when it is likely that future benefits will be received and that said benefits can be reliably measured. In particular: x default interests, if provided for by the contract, are recognized in profit and loss only when actually collected; x dividends are recognized in profit and loss when their distribution is ratified; x revenues from the brokerage of trading financial instruments, represented by the difference between the transaction price and the instrument fair value, are recognized in profit and loss when the transaction is recognized if the fair value can be measured based on recent parameters or transactions performed on the same market on which the instrument is traded. Proceeds from financial instruments that cannot be measured along the above procedure are taken to the income statement throughout the transaction’s life; x any revenues on bond issues generated by the difference between the transaction cost and the instrument’s fair value are recognized through profit and loss throughout the whole duration, as either the measurement techniques used to measure the fair value upon initial recognition include parameters that are not directly observable, or the retail market measurements are in line with transaction costs.
Segment reporting
For the applied criteria please refer to the specific section of the explanatory notes.
157 Notes to the consolidated accounts
CHAPTER B – NOTES TO THE CONSOLIDATED BALANCE SHEET
ASSETS
Section 1 – Cash and cash equivalents – Item 10
1.1 Cash and cash equivalents: breakdown
Total Total (thousand euro) Banking group Other companies 31/12/2007 31/12/2006
a) Cash 686,712 37 686,749 360,358 b) Demand deposits with Central Banks 4,996 284 5,280 188 Total 691,708 321 692,029 360,546
Section 2 – Financial assets held for trading
2.1 Financial assets held for trading: breakdown by instrument
Banking group Other companies Total Total (thousand euro) Quoted Unquoted Quoted Unquoted 31/12/2007 31/12/2006 A. Cash assets 1. Debt securities 1,521,632 559,052 - - 2,080,684 2,816,831 1.1. Structured securities 4 5 - - 9 31,828 1.2. Other debt securities 1,521,628 559,047 - - 2,080,675 2,785,003 2. Equity securities 1,112,891 1,007 - - 1,113,898 599,449 3. UCITS units 18,281 259,822 - - 278,103 951,844 4. Loans ------4.1. Repurchase agreements ------4.2. Other ------5. Impaired assets ------6. Assets sold and not derecognized 3,980,157 315,367 - - 4,295,524 2,488,331 Total A 6,632,961 1,135,248 - - 7,768,209 6,856,455 B. Derivatives 1. Financial derivatives 281,159 1,982,489 45 - 2,263,693 1,568,168 1.1 Trading 281,159 1,889,181 - - 2,170,340 1,461,320 1.2 under Fair value option - 82,140 - - 82,140 84,787 1.3 Other - 11,168 45 - 11,213 22,061 2. Credit derivatives - 7,958 - - 7,958 - 2.1 Trading - 7,026 - - 7,026 - 2.2 under Fair value option ------2.3 Other - 932 - - 932 - Total B 281,159 1,990,447 45 - 2,271,651 1,568,168 Total (A+B) 6,914,120 3,125,695 45 - 10,039,860 8,424,623
On December 31st, 2007, financial assets held for trading amounted to 10,039.9 millions, up 19.2% from 8,424.6 millions on December 31st, 2006, while compared to the pro-forma 12,026.1 millions on December 31st, 2006 it went down 16.5%. Assets sold and not derecognized are entirely represented by securities sold in reverse repurchase agreements. Derivatives under fair value option are represented by derivatives that are operationally linked to assets and/or liabilities measured at fair value, in compliance with IAS 39, paragraph 9. The category “quoted” contains financial instruments whose price is quoted on an active market, as prescribed by IAS 39 and as illustrated in Chapter A – Accounting Policies.
158 Notes to the consolidated accounts
2.2 Financial assets held for trading: breakdown by debtor/issuer
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
A. Cash assets 1. Debt securities 2,080,684 - 2,080,684 2,816,831 a) Governments and Central banks 703,602 - 703,602 779,756 b) Other public entities 1,747 - 1,747 229 c) Banks 818,931 - 818,931 1,173,975 d) Other issuers 556,404 - 556,404 862,871 2. Equity securities 1,113,898 - 1,113,898 599,449 a) Banks 183,395 - 183,395 84,973 b) Other issuers: 930,503 - 930,503 514,476 - insurance companies 51,086 - 51,086 18,940 - financial companies 207,956 - 207,956 79,255 - non-financial companies 671,461 - 671,461 416,281 - other - - - - 3. UCITS units 278,103 - 278,103 951,844 4. Loans - - - - a) Governments and Central banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 5. Impaired assets - - - - a) Governments and Central banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 6. Assets sold and not derecognized 4,295,524 - 4,295,524 2,488,331 a) Governments and Central banks 3,329,940 - 3,329,940 2,119,365 b) Other public entities - - - - c) Banks 487,006 - 487,006 75,316 d) Other counterparties 478,578 - 478,578 293,650 Total A 7,768,209 - 7,768,209 6,856,455 B. Derivatives a) Banks 1,581,840 - 1,581,840 1,206,509 b) Customers 689,766 45 689,811 361,659 Total B 2,271,606 45 2,271,651 1,568,168 Total (A+B) 10,039,815 45 10,039,860 8,424,623
159 Notes to the consolidated accounts
2.3 Financial assets held for trading: derivatives
2.3.1 Banking group
Interest Currencies Equity (thousand euro) Loans Other 31/12/2007 31/12/2006 rates and gold securities
A) Quoted derivatives 1. Financial derivatives: 53 - 247,549 - 33,557 281,159 163,034 a) With exchange of capital 53 - 38,840 - - 38,893 11,616 - Purchased options - - 33,247 - - 33,247 11,616 - Other derivatives 53 - 5,593 - - 5,646 - b) Without exchange of capital - - 208,709 - 33,557 242,266 151,418 - Purchased options - - 208,709 - - 208,709 151,418 - Other derivatives - - - - 33,557 33,557 - 2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------Total A 53 - 247,549 - 33,557 281,159 163,034 B) Unquoted derivatives 1. Financial derivatives: 1,008,717 169,644 804,128 - - 1,982,489 1,405,134 a) With exchange of capital - 118,316 54,742 - - 173,058 130,686 - Purchased options - 43,230 54,742 - - 97,972 80,724 - Other derivatives - 75,086 - - - 75,086 49,962 b) Without exchange of capital 1,008,717 51,328 749,386 - - 1,809,431 1,274,448 - Purchased options 147,485 43,391 749,386 - - 940,262 582,432 - Other derivatives 861,232 7,937 - - - 869,169 692,016 2. Credit derivatives: - - - 5,188 2,770 7,958 - a) With exchange of capital ------b) Without exchange of capital - - - 5,188 2,770 7,958 - Total B 1,008,717 169,644 804,128 5,188 2,770 1,990,447 1,405,134 Total (A+B) 1,008,770 169,644 1,051,677 5,188 36,327 2,271,606 1,568,168
The derivatives listed in the table are broken down by type of underlying risk. The column “interest rates” by convention includes also financial derivatives with debt securities as underlying. The column “equity securities” includes also trades on equity indexes. The column “other” includes also derivatives on commodities, precious metals (except gold) and structured derivatives embedding multiple risks.
2.3.2 Insurance companies
No insurance companies fall within the consolidation scope.
160 Notes to the consolidated accounts
2.3.3 Other companies
Currencies Equity (thousand euro) Interest rates Loans Other 31/12/2007 31/12/2006 and gold securities
A) Quoted derivatives 1. Financial derivatives: - - 45 - - 45 - a) With exchange of capital ------Purchased options ------Other derivatives ------b) Without exchange of capital - - 45 - - 45 - - Purchased options - - 45 - - 45 - - Other derivatives ------2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------Total A - - 45 - - 45 - B) Unquoted derivatives 1. Financial derivatives: ------a) With exchange of capital ------Purchased options ------Other derivatives ------b) Without exchange of capital ------Purchased options ------Other derivatives ------2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------Total B ------Total (A+B) - - 45 - - 45 -
2.4 – Cash financial assets held for trading (other than assets sold and not derecognized and impaired assets): annual changes
2.4.1 Banking group
Equity (thousand euro) Debt securities UCITS units Loans Total securities
A) Opening balance 2,816,831 599,449 951,844 - 4,368,124 B) Increases 51,794,247 10,988,263 1,514,524 - 64,297,034 1. Purchases 50,072,439 10,864,763 1,500,363 - 62,437,565 (of which for business combinations) 1,996,060 216,325 34,566 - 2,246,951 2. Positive fair value changes 10,378 27,502 5,393 - 43,273 3. Other changes 1,711,430 95,998 8,768 - 1,816,196 C) Decreases -52,530,394 -10,473,814 -2,188,265 - -65,192,473 1. Sales -46,005,739 -9,988,972 -2,179,664 - -58,174,375 (of which for business combinations) - - - - - 2. Redemptions -3,086,084 - - - -3,086,084 3. Negative fair value changes -30,917 -101,596 -3,805 - -136,318 4. Other changes -3,407,654 -383,246 -4,796 - -3,795,696 D) Closing balance 2,080,684 1,113,898 278,103 - 3,472,685
Sub-items “B.3 – Increases: other changes” and “C.4 – Decreases: other changes” include profit or loss on trading, accrued interest, technical overdrafts and reverse repurchase agreements.
161 Notes to the consolidated accounts
2.4.2 Insurance companies
No insurance companies fall within the consolidation scope.
2.4.3 Other companies
No increases or decreases in “financial assets held for trading” attributable to other companies were reported.
Section 3 – Financial assets measured at fair value – Item 30
3.1 Financial assets measured at fair value: breakdown by instrument
Banking group Other companies (thousand euro) 31/12/2007 31/12/2006 Quoted Unquoted Quoted Unquoted 1. Dent securities 74,875 345,240 5,085 - 425,200 3,789 1.1 Structured securities ------1.2 Other debt securities 74,875 345,240 5,085 - 425,200 3,789 2. Equity securities - 10,098 25,247 - 35,345 9,901 3. UCITS units 41,859 371,083 - 14,950 427,892 300,740 4. Loans ------4.1 Structured ------4.2 Other ------5. Impaired assets ------6. Assets sold and not derecognized ------Total 116,734 726,421 30,332 14,950 888,437 314,430 Cost 118,373 743,385 30,008 14,882 906,648 281,445
Financial assets measured at fair value on December 31st, 2007 increased by 182.6% compared to December 31st, 2006. All types of instruments reported an increase.
UCITS units are mainly represented by shares in hedge funds, while equity securities include insurance contracts whose benefits are linked to stock performance. The designation at fair value of hedge funds lies on the need to manage and represent a portfolio of financial instruments in consistency with a given investment strategy and based upon a performance target.
Insurance contracts recognized under “equity securities” are designed to build up the provision required to pay out supplementary pension benefits to some managers upon their retirement. The fair value designation of this investments is linked to the cost of employee benefits, that is recognized under retirement provisions in compliance with IAS 19.
As at December 31st, 2007 the difference between the book value and the cost of financial assets designated at fair value was 18 millions.
162 Notes to the consolidated accounts
3.2 Financial assets measured at fair value: breakdown by debtor/issuer
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Debt securities 420,115 5,085 425,200 3,789 a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks 66,444 - 66,444 1,714 d) Other issuers 353,671 5,085 358,756 2,075 2. Equity securities 10,098 25,247 35,345 9,901 a) Banks 202 3,030 3,232 - b) Other issuers: 9,896 22,217 32,113 9,901 - insurance companies 9,631 2,426 12,057 2,514 - financial companies - 5,688 5,688 - - non-financial companies - - - - - other 265 14,103 14,368 7,387 3. UCITS units 412,942 14,950 427,892 300,740 4. Loans - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 5. Impaired assets - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 6. Assets sold and not derecognized - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - Total 843,155 45,282 888,437 314,430
3.3 Financial assets measured at fair value (other than assets sold and not derecognized and impaired assets): annual changes
3.3.1 Banking group
Equity (thousand euro) Debt securities UCITS units Loans Total securities
A. Opening balance 3,789 9,901 300,740 - 314,430 B. Increases 742,933 5,831 333,666 - 1,082,430 1. Purchases 740,016 4,540 314,563 - 1,059,119 (of which for business combinations) 182,521 - 229,131 - 411,652 2. Positive fair value changes 2,228 169 9,017 - 11,414 3. Other changes 689 1,122 10,086 - 11,897 C. Decreases -326,607 -5,634 -221,464 - -553,705 1. Sales -302,245 -808 -208,523 - -511,576 (of which for business combinations) - - - - - 2. Redemptions -17,068 - -9,478 - -26,546 3. Negative fair value changes -491 -4,051 - - -4,542 4. Other changes -6,803 -775 -3,463 - -11,041 D. Closing balance 420,115 10,098 412,942 - 843,155
Sub-items “B.1 – Purchases” and “C.1 – Sales” represent the accounting value of purchase and sale transactions reported upon settling the transactions. In particular, with regard to equity issues, “purchases” include also the value of investments carried out during the year to increase the nominal value of insurance contracts to offset the additional benefits assigned to managers during 2007.
Sub-items “B.2 – Positive fair value changes” and “C.3 – Negative fair value changes” include the capital gains and losses reported in the income statement under item 110 “Profit/Loss on financial assets and liabilities designated fair value”.
163 Notes to the consolidated accounts
3.3.2 Insurance companies
No insurance companies fall within the consolidation scope.
3.3.3 Other companies
The 45 million increase in “Financial assets measured at fair value” attributable to other companies is entirely attributable to purchases linked to business combinations.
Section 4 - Financial assets available for sale – Item 40
4.1 Financial assets available for sale: breakdown by instrument
Banking group Other companies 31/12/2007 31/12/2006 (thousand euro) Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted 1. Debt securities 142,846 156,393 - - 142,846 156,393 161,690 334,457 1.1 Structured ------securities 1.2 Other debt 142,846 156,393 - - 142,846 156,393 161,690 334,457 securities 2. Equity securities 300,722 793,195 - 8,250 300,722 801,445 114,042 378,735 2.1 Measured at fair 300,721 753,073 - - 300,721 753,073 114,031 318,848 value 2.2 Measured at cost 1 40,122 - 8,250 1 48,372 11 59,887 3. UCITS units 911 98,875 - - 911 98,875 910 21,778 4. Loans ------5. Impaired assets ------6. Assets sold and not derecognized 163,264 148,201 - - 163,264 148,201 42,140 - Total 607,743 1,196,664 - 8,250 607,743 1,204,914 318,782 734,970
Financial assets available for sale as at December 31st, 2007 amounted to 1,812.7 millions, up 72% from 1,053.8 millions in the previous year, while compared to the pro-forma 2,127.3 millions on December 31st, 2006 they went down 14.8%.
Equity securities, accounting for 60.8% of total financial assets, are represented by non significant shares and units in companies.
Assets sold and not derecognized are entirely represented by securities sold in reverse repurchase agreements.
Fair value changes of “financial assets available for sale” are offset with the shareholders’ equity item “valuation reserves”, net of deferred tax.
164 Notes to the consolidated accounts
4.2 Financial assets available for sale: breakdown by debtor/issuer
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Debt securities 299,239 - 299,239 496,147 a) Governments and Central Banks 23,147 - 23,147 117,584 b) Other public entities - - - - c) Banks 85,932 - 85,932 208,570 d) Other issuers 190,160 - 190,160 169,993 2. Equity securities 1,093,917 8,250 1,102,167 492,777 a) Banks 241,178 - 241,178 115,316 b) Other issuers: 852,739 8,250 860,989 377,461 - insurance companies 45,415 - 45,415 48,206 - financial companies 262,480 - 262,480 149,600 - non-financial companies 543,907 - 543,907 124,465 - other 937 8,250 9,187 55,190 3. UCITS units 99,786 - 99,786 22,688 4. Loans - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 5. Impaired assets - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 6. Assets sold and not derecognized 311,465 - 311,465 42,140 a) Governments and Central Banks 43,941 - 43,941 20,439 b) Other public entities - - - - c) Banks 94,628 - 94,628 21,701 d) Other counterparties 172,896 - 172,896 - Total 1,804,407 8,250 1,812,657 1,053,752
4.3 Financial assets available for sale: hedged assets
4.3.1 Banking group
Hedged assets Hedged assets 31/12/2007 31/12/2006 (thousand euro) Fair value Cash flows Fair value Cash flows
1. Debt securities 155,132 - 168,258 - 2. Equity securities 15,518 - - - 3. UCITS units 911 - 910 - 4. Loans - - - - 5. Portfolio - - - - Total 171,561 - 169,168 -
4.3.2 Insurance companies
No insurance companies fall within the consolidation scope.
4.3.3 Other companies
At the balance sheet date 8.2 millions in “financial assets available for sale – hedged” attributable to other companies and referring to equity securities were reported.
165 Notes to the consolidated accounts
4.4 Financial assets available for sale: assets under specific hedging
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Financial assets under specific fair value hedging: 171,463 8,250 179,713 169,168 a) interest rate risk 155,135 8,250 163,385 168,258 b) price risk - - - - c) exchange rate risk 16,328 - 16,328 910 d) credit risk - - - - e) multiple risks - - - - 2. Financial assets under specific 98 - 98 - cash flow hedging: a) interest rate risk - - - - b) exchange rate risk - - - - c) other 98 - 98 - Total 171,561 8,250 179,811 169,168
Le financial assets available for sale under specific hedging are represented by fixed income debt securities, for which it was decided to hedge the risk of fair value changes due to interest rates. The fair value change reported by said securities was recognized through profit and loss under item 90 “Fair value adjustments in hedge accounting”
4.5 Financial assets available for sale (other than assets sold and not derecognized and impaired assets): annual changes
4.5.1 Banking group
Debt Equity (thousand euro) UCITS units Loans Total securities securities
A. Opening balance 496,147 484,527 22,688 - 1,003,362 B. Increases 314,001 1,146,018 108,174 - 1,568,193 1. Purchases 237,650 937,301 78,255 - 1,253,206 (of which for business combinations) 140,333 675,654 59,139 - 875,126 2. Positive fair value changes 794 118,346 7,341 - 126,481 3. Write-backs 802 650 - - 1,452 - carried at income ------carried at equity 802 650 - - 1,452 4. Transfers from other portfolios - 728 - - 728 5. Other changes 74,755 88,993 22,578 - 186,326 C. Decreases -510,909 -536,628 -31,076 - -1,078,613 1. Sales -114,827 -363,373 -28,451 - -506,651 (of which for business combinations) - - - - - 2. Redemptions -19,393 -9 -1,223 - -20,625 3. Negative fair value changes -1,167 -49,143 -933 - -51,243 4. Impairments -31,675 -94,316 -163 - -126,154 - carried at income -20,607 -85,060 -163 - -105,830 - carried at equity -11,068 -9,256 - - -20,324 5. Transfers to other portfolios - -11,523 - - -11,523 6. Other changes -343,847 -18,264 -306 - -362,417 D. Closing balance 299,239 1,093,917 99,786 - 1,492,942
Sub-items “B.1 – Purchases” and “C.1 – Sales” represent the accounting value of the purchase and sale transactions reported upon settling the transactions.
Sub-items “B.2 – Positive fair value changes” and “C.3 – Negative fair value changes” include the capital gains and losses, gross of their relevant fiscal effect, recognized in the shareholders’ equity under item 130 “Valuation reserves” in the balance sheet liabilities, net of the portion referring to securities under specific hedging, which was recognized under item 90 “Fair value adjustments in hedge accounting”, as illustrated above.
Sub-item “B.5 – Increases: other changes” includes accrued interest credited to income under item 10 “interest income on securities”, as well as trading profit entered under item 100 “profit/loss on disposal of financial assets available for sale” in the income statement. It also reports 40.3 millions relative to the reclassification of Delta S.p.A. as equity investment.
166 Notes to the consolidated accounts
Sub-item “C.6 – Decreases: other changes” includes accrued coupon interest charged to income under item 20 “interest expense on securities”, the write-down for the recognition of securities at amortized cost, and trading losses charged to income under item 100 “profit/loss on disposal of financial assets available for sale”.
4.5.2 Insurance companies
No insurance companies fall within the consolidation scope.
4.5.3 Other companies
The only change in financial assets available for sale attributable to other companies refers to equity securities purchases for 8.3 millions.
Section 5 - Financial assets held to maturity – Item 50
5.1 Financial assets held to maturity: breakdown by instrument
Banking group Other companies 31/12/2007 31/12/2006 (thousand euro) Book value Fair value Book value Fair value Book value Fair value Book value Fair value 1. Debt securities 133,370 128,137 450 450 133,820 128,587 79,502 78,121 1.1 Structured securities ------1.2 Other debt securities 133,370 128,137 450 450 133,820 128,587 79,502 78,121 2. Loans ------3. Impaired assets ------4. Assets sold and not derecognized 578,707 564,921 - - 578,707 564,921 859,817 840,773 Total 712,077 693,058 450 450 712,527 693,508 939,319 918,894
On December 31st, 2007, financial assets held to maturity amounted to 712.5 millions, down 24.1% from 939.3 millions at the end of 2006, while compared to the pro-forma 1,023.0 millions on December 31st, 2006 they went up 30,4%.
Investments belonging to this portfolio fall under a balanced asset and liability management strategy, designed to create a minimum income floor, by stabilizing part of the interest income and the return on capital. Debt securities included in this item at the time of purchase generally have a fixed rate and a maximum five year term.
Most securities included in this portfolio are used in customer repurchase agreements.
The criteria used to measure the fair value are illustrated in Chapter A of these explanatory notes.
167 Notes to the consolidated accounts
5.2 Financial assets held to maturity: breakdown by debtor/issuer
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
1. Debt securities 133,370 450 133,820 79,502 a) Governments and Central Banks 111,029 - 111,029 60,789 b) Other public entities - - - - c) Banks 7,514 450 7,964 18,713 d) Other issuers 14,827 - 14,827 - 2. Loans - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 3. Impaired assets - - - - a) Governments and Central Banks - - - - b) Other public entities - - - - c) Banks - - - - d) Other counterparties - - - - 4. Assets sold and not derecognized 578,707 - 578,707 859,817 a) Governments and Central Banks 458,019 - 458,019 731,071 b) Other public entities - - - - c) Banks 36,761 - 36,761 26,679 d) Other counterparties 83,927 - 83,927 102,067 Total 712,077 450 712,527 939,319
5.3 Financial assets held to maturity: assets under specific hedging
(thousand euro) 31/12/2007 31/12/2006
1. Exchange rate risk 2,313 806 2. Credit risk - - 3. Multiple risks 1 - Total 2,314 806
5.4 Financial assets held to maturity: annual changes
(thousand euro) Debt securities Loans Total
A. Opening balance 79,502 - 79,502 B. Increases 637,013 - 637,013 1. Purchases 193,564 - 193,564 (of which for business combinations) 87,047 - 87,047 2. Write-backs - - - 3. Transfers from other portfolios - - - 4. Other changes 443,449 - 443,449 C. Decreases -582,695 - -582,695 1. Sales -708 - -708 (of which for business combinations) - - - 2. Redemptions -405,772 - -405,772 3. Write-downs - - - 4. Transfers to other portfolios - - - 5. Other changes -176,215 - -176,215 D. Closing balance 133,820 - 133,820
Sub-items “B.1 – Purchases” and “C.1 – Sales” represent the accounting values of purchase and sale transactions reported upon settling the transactions.
Sub-item “B.4 – Increases: other changes” include coupon accrued interest credited to income under item 10 “interest income on securities”.
Sub-item “C.4 –Decreases: other changes” include the coupon accrued interest charge to income under item 20 “interest
168 Notes to the consolidated accounts
expense on securities”, as well as the write-down for the recognition of securities at amortized cost, charged under the same income item.
Section 6 – Due from banks – Item 60
6.1 Due from banks: breakdown by instrument
6.1.1 Banking group
(thousand euro) 31/12/2007 31/12/2006
A. Due from Central Banks 2,951,132 685,660 1. Time deposits 1,200,000 - 2. Compulsory reserve 1,716,778 685,178 3. Repurchase agreements - - 4. Other 34,354 482 B. Due from other banks 11,068,983 7,994,821 1. Checking accounts and demand deposits 2,226,196 1,369,768 2. Time deposits 3,236,881 1,833,738 3. Other loans: 5,585,843 4,791,315 3.1 Repurchase agreements 4,064,823 3,677,572 3.2 Finance lease - - 3.3 Other 1,521,020 1,113,743 4. Debt securities 20,062 - 4.1 Structured securities - - 4.2 Other debt securities 20,062 - 5. Impaired assets - - 6. Assets sold and not derecognized 1 - Total (book value) 14,020,115 8,680,481 Total (fair value) 13,919,772 8,680,487
Due from banks belonging to the banking group on December 31st, 2007 came in at 14,020 millions, up 61.5% from 8,681 millions the year before.
The criteria used to measure the fair value are illustrated in Chapter A of these explanatory notes. Since the counterparties have a high standing and since most loans are short term, the fair value of due from banks is basically in line with the book value.
6.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
6.1.3 Other companies
At the balance sheet date, due from other banks attributable to other companies amounted to 169 million euro, down from 254 million euro on December 31st, 2006, and are exclusively represented by checking accounts and demand deposits.
6.2 Due from banks: assets under specific hedging
No material due from banks under specific hedging were reported.
6.3 Finance lease
The Group reported no finance lease receivables from banks.
169 Notes to the consolidated accounts
Section 7 – Loans to customers – Item 70
7.1 Loans to customers: breakdown by instrument
7.1.1 Banking group
(thousand euro) 31/12/2007 31/12/2006
1. Checking accounts 17,710,129 10,318,965 2. Repurchase agreements 1,882,482 514,744 3. Mortgages 31,823,680 18,092,144 4. Credit cards, personal loans and payroll secured loans 3,856,263 467,672 5. Finance lease 11,971 48 6. Factoring 202,524 307,166 7. Other transactions 19,417,734 14,339,636 8. Debt securities 710,311 59,937 8.1 Structured securities - - 8.2 Other debt securities 710,311 59,937 9. Impaired assets 2,625,653 1,144,205 10. Assets sold and not derecognized 6,309,960 - Total (book value) 84,550,707 45,244,517 Total (fair value) 85,174,332 46,528,076
On December 31st, 2007 net loans reached 84,550.7 millions, up 86.9% from 45,244.5 millions on December 31st, 2006.
The criteria used to measure the fair value are illustrated in Chapter A of these explanatory notes. For “impaired loans”, please refer to Chapter E – Risks and associated hedging policies, Section 1 – Credit risk.
7.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
7.1.3 Other companies
At the balance sheet date, customer loans attributable to other companies totaled 327 thousand, from 46 thousand the year before, and they refer to other transactions.
170 Notes to the consolidated accounts
7.2 Loans to customers: breakdown by debtor/issuer
7.2.1 Banking group
(thousand euro) 31/12/2007 31/12/2006
1. Debt securities 710,311 59,937 a) Governments - - b) Other public entities - - c) Other issuers 710,311 59,937 - non-financial companies 699,855 48,089 - financial companies 10,456 11,848 - insurance companies - - - other - - 2. Loans to: 74,904,783 44,040,374 a) Governments 145,905 22,187 b) Other public entities 496,588 233,626 c) Other counterparties 74,262,290 43,784,561 - non-financial companies 52,650,861 31,307,478 - financial companies 8,101,990 4,195,115 - insurance companies 22,700 581 - other 13,486,739 8,281,387 3. Impaired assets: 2,625,653 1,144,206 a) Governments - - b) Other public entities 20,712 6,397 c) Other counterparties 2,604,941 1,137,809 - non-financial companies 1,893,438 925,196 - financial companies 106,375 6,563 - insurance companies 40 36 - other 605,088 206,014 4. Assets sold and not derecognized: 6,309,960 - a) Governments - - b) Other public entities - - c) Other counterparties 6,309,960 - - non-financial companies 430,437 - - financial companies 1,094 - - insurance companies - - - other 5,878,429 - Total 84,550,707 45,244,517
7.2.2 Insurance companies
No insurance companies fall within the consolidation scope.
7.2.3 Other companies
Loans attributable to other companies fall under the class “other counterparties”.
7.3 Loans to customers: assets under specific hedging
7.3.1 Banking group
(thousand euro) 31/12/2007 31/12/2006
1. Loans under specific fair value hedge: 268,435 84,713 a) interest rate risk 268,348 - b) exchange rate risk - - c) credit risk - - d) multiple risks 87 84,713 2. Loans under specific cash flow hedging: 34,257 - a) interest rate risk 19,161 - b) exchange rate risk 14,966 - c) other 130 - Total (book value) 302,692 84,713
171 Notes to the consolidated accounts
7.3.2 Insurance companies
No insurance companies fall within the consolidation scope.
7.3.3 Other companies
No customer loans under specific hedging attributable to other companies were reported.
7.4 Finance lease
As at December 31st, 2007, the Group reported 12 millions in customer finance lease receivables, almost entirely referred to the Romanian subsidiary Auto Trading Leasing IFN S.A.
Section 8 – Hedging derivatives – Item 80
8.1 Hedging derivatives: breakdown by type of contract and underlying asset
8.1.1 Banking group
Currencies Equity (thousand euro) Interest rates Loans Other 31/12/2007 and gold securities
A) Quoted derivatives 1. Financial derivatives: ------a) With exchange of capital ------Purchased options ------Other derivatives ------b) Without exchange of capital ------Purchased options ------Other derivatives ------2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------Total A ------B) Unquoted derivatives 1. Financial derivatives: 41,426 2,315 - - - 43,741 a) With exchange of capital - 2,315 - - - 2,315 - Purchased options ------Other derivatives - 2,315 - - - 2,315 b) Without exchange of capital 41,426 - - - - 41,426 - Purchased options ------Other derivatives 41,426 - - - - 41,426 2. Credit derivatives: ------a) With exchange of capital ------b) Without exchange of capital ------Total B 41,426 2,315 - - - 43,741 31/12/2007 41,426 2,315 - - - 43,741 31/12/2006 38,847 - - - - 38,847
Positive values of hedging derivatives are illustrated in this Section, while fair value changes of hedged assets and liabilities are illustrated in Section 9 of assets “fair value change of assets in hedged portfolios” and in Section 7 of liabilities “fair value change of liabilities in hedged portfolios”.
8.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
8.1.3 Other companies
No hedging derivatives attributable to other companies were reported.
172 Notes to the consolidated accounts
8.2 Hedging derivatives: breakdown by hedged portfolio and by type of hedge (book value)
8.2.1 Banking group
Fair Value Cash flow Specific (thousand euro) Interest Exchange Multiple Generic Specific Generic Credit risk Price risk rate risk rate risk risks 1. Financial assets available for sale 54 2,315 - - - X - X 2 Loans and receivables - - - X - X 13,343 X 3. Financial assets held to maturity X - - X - X - X 4. Portfolio X X X X X - X - Total assets 54 2,315 - - - 0 13,343 - 1. Financial liabilities 565 - - X - X - X 2. Portfolio X X X X X 27,464 X - Total liabilities 565 - - - - 27,464 - -
Positive values of derivatives “fair value – specific” refer to hedging derivatives for the securities illustrated in Section 4 illustrated above.
8.2.2 Insurance companies
No insurance companies fall within the consolidation scope.
8.2.3 Other companies
No hedging derivatives attributable to other companies were reported.
Section 9 – Fair value change of assets in hedged portfolios – Item 90
9.1 Fair value change of hedged assets: breakdown by hedged portfolios
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Positive fair value changes - - - - 1.1 in specific portfolios: - - - - a) loans and receivables - - - - b) assets available for sale - - - - 1.2 Aggregate - - - - 2. Negative fair value change -4,227 - -4,227 -4,093 2.1 in specific portfolios: -4,227 - -4,227 -4,093 a) loans and receivables -4,227 - -4,227 -4,093 b) assets available for sale - - - - 2.2 Aggregate - - - - Total -4,227 - -4,227 -4,093
173 Notes to the consolidated accounts
9.2 Interest rate risk macrohedging
(thousand euro) 31/12/2007 31/12/2006
1. Loans and receivables 97,487 114,309 2. Assets available for sale - - 3. Portfolio - - Total 97,487 114,309 Section 10 – Equity investments – Item 100 10.1 Equity investments in jointly controlled companies (carried at equity) and in companies under a significant influence: shareholding information
Shareholding Type of Voting right Head office relation (a) % (b) Company % share
A. Companies carried at equity A.1 Companies under joint control AF Mezzanine SGR S.p.A. Milan (7) Efibanca 50.000% Novara Vita S.p.A. Novara (7) Banco Popolare 50.000% Polo Finanziario S.p.A. Verona (7) BPV-SGSP 33.333% A.2 Companies under significant influence Abitando S.p.A. Milan (8) Efibanca 20.000% Alfa Iota 2002 S.r.l. Milan (8) Efibanca 35.000% Ali S.p.A. Rome (8) Efibanca 28.350% Arca SGR Milan (8) Banco Popolare 10.280% Holding di Partecipazioni 7.568% Banca Pop. di Cremona 5.310% Banca Pop. di Crema 5.118% Assipromos S.r.l. (under liquidation) Livorno (8) C.R. Lucca Pisa Livorno 34.000% AviPop Assicurazioni S.p.A. Milan (8) Holding di Partecipazioni 50.000% Banca per il Leasing - Italease S.p.A. Milan (8) Banco Popolare 13.139% Holding di Partecipazioni 14.657% Credito Bergamasco 2.923% Bertani Holding S.p.A. Verona (8) Efibanca 22.330% Black & Blue GMBH D - Munchen (8) Efibanca 24.820% Bussentina S.c.a.r.l. Rome (8) Bipielle Real Estate 20.000% Centrosim S.p.A. Milan (8) C.R. Lucca Pisa Livorno 10.000% Banco Popolare 7.500% Banca Pop. di Crema 4.852% Banca Pop. di Cremona 2.500% CF Assicurazioni S.p.A. Rome (8) Bipitalia Ducato 40.000% Co.Im.A. S.r.l. Acireale (CT) (8) Banca Popolare di Lodi 33.330% Comital S.p.A. Volpiano (TO) (8) Efibanca 29.864% 30.980% Efibanca Palladio Finanziaria SGR S.p.A. Milan (8) Efibanca 50.000% Energreen S.A. L - Luxembourg (8) Efibanca 45.000% Estates Capital Venture S.A. L - Luxembourg (8) Efibanca 43.368% Eurocasse SIM S.p.A. (under liquidation) Milan (8) Banco Popolare 20.795% (8) C.R. Lucca Pisa Livorno 0.186% Evoluzione 94 S.p.A. Milan (8) Banco Popolare 17.871% Efibanca 2.100% Banca Pop. di Crema 0.750% Finanziaria ICCRI BBL (under liquidation) Milan (8) Banco Popolare 50.000% Finoa S.r.l. Milan (8) Banco Popolare 50.000% G.I. Holding S.p.A. Milan (8) Efibanca 29.346% 30.412% Castelnovo GEMA Magazzini Generali BPV-BSGSP S.p.A. (8) BPV-SGSP 33.333% Sotto (RE) Gruppo Operaz. Underwriting Banks Popolari S.r.l. Milan (8) Banca Aletti 22.500% HI-MTF S.p.A. Milan (8) Banca Aletti 25.000% Istituto Centrale delle Banks Popolari Italiane S.p.A. Milan (8) Banco Popolare 24.619% Holding di Partecipazioni 7.089% Banca Pop. di Crema 1.023%
174 Notes to the consolidated accounts
Shareholding Type of Voting right Head office relation (a) % (b) Company % share
Novara Promuove S.r.l. Novara (8) Banca Popolare di Novara 49.000% Nuova Foar S.r.l. (under bankruptcy procedure) Pavia (8) COFILP 29.973% Plastisud S.r.l. Sulmona (8) AB Capital 20.540% Popolare Vita S.p.A. Verona (8) Holding di Partecipazioni 50.000% Portone S.c.a.r.l. (under liquidation) Ravenna (8) Bipielle Real Estate 30.000% Qualiter S.c.a.r.l. Pescara (8) AB Capital 30.000% Quantoro S.r.l. (under liquidation) Teramo (8) AB Capital 23.330% Phoenix S.p.A. Verona (8) Efibanca 40.000% Soc. Coop. fra le Banks Pop. "L.Luzzatti" S.c.r.l. Rome (8) Banco Popolare 26.693% Tortella S.p.A. Ortona (CH) (8) AB Capital 21.515% Tre Pi S.p.A. (arrangement with creditors) Rome (8) Efibanca 20.000% Triera S.p.A. Rovigo (8) Bio Energy 49.000% Unione Fiduciaria S.p.A. Milan (8) Banca Pop. di Crema 20.000% Holding di Partecipazioni 5.229% Banco Popolare 4.000% B. Companies under proportionate consolidation N/A (a) Type of relation: (7) Joint control (8) Associate (b) Effective voting right percentage in General Annual Meeting is indicated only if different from shareholding percentage.
10.2 Equity investments in jointly controlled companies and companies under a significant influence: financial highlights
Total Total Income Shareholder (thousand euro) Book value Fair value assets revenues (Loss) s’ equity
A. Companies carried at equity A,1 Under joint control 57,224 AF Mezzanine 2,278 1,872 416 1,682 844 X Novara Vita 3,864,020 1,626,119 8,605 88,413 41,338 X Polo Finanziario (1) 60,322 504 93 45,124 15,042 X A,2 Under significant influence 813,253 Abitando (1) 50 202 534 -74 - * Alfa Lota 2002 - - - - 51 * Ali 24,129 80,320 -310 3,532 1,089 * Arca SGR 193,148 75,189 12,693 105,054 37,620 * Assipromos 227 40 -11 14 - * AviPop Assicurazioni 17,506 1,747 -116 14,146 7,757 * Banca per il Leasing - Italease (2) 25,774,076 -285,910 -525,627 1,538,834 398,870 493,636 Bertani Holding 17,720 12,185 546 5,715 5,631 * Black & Blue GMBH - - - - 1 * Bussentina 440 - -5 -278 - * Centrosim 189,484 25,339 2,468 23,879 7,194 * CF Assicurazioni 5,838 184 -663 4,337 1,735 * Co,Im,A, - - - - 220 * Comital (2) 446,958 461,546 -15,950 13,357 23,269 * Efibanca Palladio Finanziaria SGR 20,906 18,088 5,089 20,906 6,053 * Energreen ( ex Veronagest) 224,388 36,562 40,027 78,620 40,451 * Estates Capital Venture 31 - - 31 1,237 * Eurocasse SIM 12,619 10 675 15,500 - * Evoluzione 94 11,283 422 -485 10,902 2,679 * Finanziaria ICCRI BBL 23,258 200 96 22,858 4,637 * Finoa 178,957 149,368 2,922 3,208 79,640 * G,I, Holding (2) 23,375 20,414 -1,543 1,984 1,029 * GEMA Magazzini Generali BPV - BSGSP 4,800 1,606 -251 4,124 643 * Gruppo Operazioni Underwriting Banche Popolari 103 50 15 93 21 *
175 Notes to the consolidated accounts
Total Total Income Shareholders’ Book (thousand euro) Fair value assets revenues (Loss) equity value
HI-MTF 3,993 53 -409 3,591 898 * Istituto Centrale delle Banche Popolari Italiane (2) 4,717,513 130,841 35,126 313,528 123,595 * Novara Promuove 112 122 -9 75 46 * Popolare Vita 2,604,414 119,297 6,046 97,306 58,184 * Portone 53 - - 26 8 * Quantoro - - - - - * Società Coop. fra le Banche Pop. "L. Luzzatti" 257 17 - 248 67 * Tre Pi - - - - - * Triera 15,129 292 -166 13,487 2,638 * Unione Fiduciaria 35,444 20,561 2,203 27,366 7,990 * B. Companies under proportionate consolidation Note * Unquoted company (1) Shareholders’ equity is net of capital subscribed and not yet paid in (2) Data refer to the consolidated financial statements
10.3 Equity investments: annual changes
Insurance Other (thousand euro) Banking group 2007 2006 companies companies
A. Opening balance 635,663 - 161,272 796,935 431,025 B. Increases 1,337,158 - 69,005 1,406,163 607,522 B.1 Purchases 622,461 - 1,700 452,151 124,248 B.2 Write-backs - - - - - B.3 Revaluations - - - - - B.4 Other changes 714,697 - 67,305 782,002 483,274 C. Decreases -1,332,621 - - -1,332,621 -241,612 C.1 Sales -785,575 - - -785,575 -215,468 C.2 Write-downs -170,409 - - -170,409 - C.3 Other changes -376,637 - - -376,637 -26,144 D. Closing balance 640,200 - 230,277 870,477 796,935 E. Total revaluations - - - - - F. Total impairments -170,409 - - -170,409 -
On May 31st, 2007, Banco Popolare di Verona e Novara and Banca Popolare Italiana signed an agreement with Fondiaria- Sai (“FonSAI”) to develop a strategic bancassurance agreement for the Life and Pension business of Banco Popolare. The Group held 50% of BPV Vita through Banco Popolare (with a 35% share) and Credito Bergamasco (with a 15% share). An additional 50% share of the company was acquired from Società Cattolica di Assicurazione on August 31st, 2007, after receiving the necessary authorization, through the subsidiary Holding di Partecipazioni Finanziarie Popolare di Verona e Novara, against a total investment of 64.2 millions.
In keeping with this agreement, finalized on September 7th, 2007, FonSAI purchased 50% plus one share of BPV Vita, the special purpose company for the operational implementation of the partnership, from Banco Popolare and its subsidiary Credito Bergamasco. The total purchase price paid by FonSAI was 530 millions, leading to the recognition in third quarter 2007 of a capital gain of 433 millions net of fiscal effects and of minority interest. Said capital gain was fully recognized through profit and loss upon preparing the third quarter report on operations as at September 2007, as at that date the purchase price allocation (PPA) under IFRS 3 had not been completed yet. At the balance sheet date, the PPA process was completed, and therefore the data shown in the quarterly report as at September 30th, 2007 had to be restated, adjusting the capital gain carried at income by 102.5 millions gross of fiscal effects. This write-down represents the goodwill paid for the acquisition of Gruppo Banca Popolare Italiana carried out as part of the transaction under examination.
On June 20th, 2007, Banco Popolare di Verona e Novara, Banca Popolare Italiana and Aviva signed an agreement for the development of a strategic bancassurance partnership for the Protection business of Banco Popolare. According to the agreement, after prior authorization from the competent authorities, Banco Popolare would sell to Aviva a 50% stake (plus one share) of the share capital of Novara Assicura (now AviPop Assicurazioni), which the Group had acquired 100% on October 11th, 2007 against a total investment of 15.6 millions. The sale was finalized on December 14th, 2007 for 250 millions. Taking into account the information acquired at the end of the purchase price allocation process (PPA) under IFRS 3, the capital gain carried at income was 165.2 millions, gross of fiscal effects. The goodwill paid for the acquisition of Gruppo Banca Popolare Italiana carried out as part of the transaction under examination totaled 77 millions.
The agreements signed with the acquiring counterparties (Fondiaria SAI and Aviva) provided for crossed options (put & call)
176 Notes to the consolidated accounts
aiming at protecting both parties from specific events, as illustrated in the report on operations. At the balance sheet date, the likelihood that said events may occur was deemed minimal and consequently the options have been recognized at a value equal to zero.
10.4 Commitments relating to investments in jointly controlled companies
No commitments relating to investments in jointly controlled companies were reported.
10.5 Commitments relating to investments in companies under a significant influence
No commitments relating to investments in companies under a significant influence were reported.
Section 11 – Technical insurance reserves reassured with third parties – Item 110
The Group has no shareholding in insurance companies.
Section 12 – Property, plant and equipment – Item 120
As at December 31st, 2007, PPE amounted to 1,505.6 millions, up 179.8% from 538 millions at the end of the previous year. Compared to the pro-forma data as at December 31st, 2006 of 1,485.1 millions, it increased by 1.4%.
12.1 Property, plant and equipment: breakdown of assets measured at cost
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
A) Operating property 1. Owned 1,323,817 51,818 1,375,635 486,229 a) land 308,367 23,573 331,940 72,733 b) buildings 882,094 26,300 908,394 349,431 c) furniture 48,692 645 49,337 19,615 d) electronic systems 56,297 685 56,982 35,060 e) other 28,367 615 28,982 9,390 2. Under financial lease 32,410 524 32,934 20,062 a) land 4,162 - 4,162 - b) buildings 28,248 455 28,703 19,936 c) furniture - - - - d) electronic systems - - - - e) other - 69 69 126 Total A 1,356,227 52,342 1,408,569 506,291 B) Investment property 1. Owned 26,290 70,749 97,039 31,756 a) land 13,993 58,972 72,965 14,406 b) buildings 12,297 11,777 24,074 17,350 2. Under financial lease - - - - a) land - - - - b) buildings - - - - Total B 26,290 70,749 97,039 31,756 Total (A+B) 1,382,517 123,091 1,505,608 538,047
Set out below is the estimated useful life of depreciated property, plant and equipment, by class of asset: - land indefinite - buildings 33 years - investment property 33 years - furniture 7-9 years - equipment 3-7 years
177 Notes to the consolidated accounts
12.2 Property, plant and equipment: breakdown of assets measured at fair value or revalued
The Group has no tangible assets measured at fair value or revalued.
12.3 Operating property, plant and equipment: annual changes
12.3.1 Banking group
Electronic (thousand euro) Land Buildings Furniture Other Total systems
A) Gross opening balance 72,733 718,362 100,088 193,186 54,586 1,138,955 A.1 Net impairments - -351,160 -80,522 -158,483 -45,196 -635,361 A.2 Net opening balance 72,733 367,202 19,566 34,703 9,390 503,594 B) Increases: 254,783 645,880 37,852 50,918 25,768 1,015,201 B.1 Purchases 253,101 607,183 35,982 50,674 18,585 965,525 (of which for business combinations) 253,101 593,029 25,406 28,640 11,134 911,310 B.2 Capitalized expenditure on improvements - 21,702 - - - 21,702 B.3 Write-backs ------B.4 Positive fair value changes carried at: ------a) equity ------b) income ------B.5 Positive exchange differences - - - 4 - 4 B.6 Transfer from investment property - 116 - - - 116 B.7 Other changes 1,682 16,879 1,870 240 7,183 27,854 C) Decreases -14,987 -102,740 -8,726 -29,324 -6,791 -162,568 C.1 Sales -10,070 -49,678 -1,342 -1,250 -32 -62,372 (of which for business combinations) ------C.2 Depreciation - -36,687 -7,246 -22,097 -6,634 -72,664 C.3 Impairment losses charged to: - - -4 -19 -70 -93 a) equity ------b) income - - -4 -19 -70 -93 C.4 Negative fair value changes charged to: ------a) equity ------b) income ------C.5 Negative exchange differences ------C.6 Transfer to: -3,920 -11,862 - - - -15,782 a) investment property, plant and equipment -1,185 -1,055 - - - -2,240 b) assets held for sale -2,735 -10,807 - - - -13,542 C.7 Other changes -997 -4,513 -134 -5,958 -55 -11,657 D) Net closing balance 312,529 910,342 48,692 56,297 28,367 1,356,227 D.1 Net impairments - -387,847 -87,768 -180,580 -51,900 -708,095 D.2 Gross closing balance 312,529 1,289,189 136,460 236,877 80,267 2,064,322 E) Measured at cost ------
178 Notes to the consolidated accounts
12.3.2 Insurance companies
No insurance companies fall within the consolidation scope.
12.3.3 Other companies
Electronic (thousand euro) Land Buildings Furniture Other Total systems
A) Gross opening balance - 2,952 152 706 221 4,031 A.1 Net impairments - -787 -103 -349 -95 -1,334 A.2 Net opening balance - 2,165 49 357 126 2,697 B) Increases: 28,380 25,046 689 509 749 55,373 B.1 Purchases 28,380 21,851 689 509 749 52,178 (of which for business combinations) 28,380 21,306 615 238 584 51,123 B.2 Capitalized expenditure on improvements - 1 - - - 1 B.3 Write-backs ------B.4 Positive fair value changes carried at: ------a) equity ------b) income ------B.5 Positive exchange differences ------B.6 Transfer from investment property ------B.7 Other changes - 3,194 - - - 3,194 C) Decreases -4,807 -456 -93 -181 -191 -5,728 C.1 Sales - - - - -15 -15 (of which for business combinations) ------C.2 Depreciation - -437 -91 -175 -147 -850 C.3 Impairment losses charged to: ------a) equity ------b) income ------C.4 Negative fair value changes charged to: ------a) equity ------b) income ------C.5 Negative exchange differences ------C.6 Transfers to: - - - - -28 -28 a) investment property, plant and equipment - - - - -28 -28 b) assets held for sale ------C.7 Other changes -4,807 -19 -2 -6 -1 -4,835 D) Net closing balance 23,573 26,755 645 685 684 52,342 D.1 Net impairments - -1,224 -194 -524 -242 -2,184 D.2 Gross closing balance 23,573 27,979 839 1,209 926 54,526 E) Measured at cost ------
179 Notes to the consolidated accounts
12.4 Investment property, plant and equipment: annual changes
Banking group Other companies Total (thousand euro) Land Buildings Land Buildings Land Buildings A) Opening balance 14,406 17,350 - - 14,406 17,350 B) Increases 1,577 3,389 60,108 11,988 61,685 15,377 B.1 Purchases 288 397 58,433 11,988 58,721 12,385 (of which for business combinations) 288 172 58,433 11,902 58,721 12,074 B.2 Capitalized expenditure on improvements - 14 - - - 14 B.3 Positive fair-value changes ------B.4 Write-backs ------B.5 Positive exchange differences ------B.6 Transfer from operating property 1,185 1,055 - - 1,185 1,055 B.7 Other changes 104 1,923 1,675 - 1,779 1,923 C) Decreases -1,990 -8,442 -1,136 -211 -3,126 -8,653 C.1 Sales -142 -2,111 - - -142 -2,111 (of which for business combinations) ------C.2 Depreciation - -1,168 - -211 - -1,379 C.3 Negative fair value changes ------C.4 Impairment losses - - -1,136 - -1,136 - C.5 Negative exchange differences ------C.6 Transfers to other asset portfolios -1,848 -5,162 - - -1,848 -5,162 a) operating properties - -116 - - - -116 b) non-current assets held for sale -1,848 -5,046 - - -1,848 -5,046 C.7 Other changes - -1 - - - -1 D) Closing balance 13,993 12,297 58,972 11,777 72,965 24,074 E) Measured at fair value 41,911 70,644 54,863 11,777 96,774 82,421
12.5 Commitments to purchase property, plant and equipment (IAS 16/74.c)
No commitments to purchase property, plant and equipment were reported.
Section 13 – Intangible assets – Item 130
13.1 Intangible assets: breakdown by type of asset
Banking group Other companies 31/12/2007 31/12/2006 (thousand euro) Limited Unlimited Limited Unlimited Limited Unlimited Limited Unlimited useful life useful life useful life useful life useful life useful life useful life useful life
A.1 Goodwill X 5,454,316 X 392 X 5,454,708 X 413,027 A.1.1 attributable to the group X 5,454,316 X 392 X 5,454,708 X 413,027 A.1.2 attributable to third parties X X X X X X X X A.2 Other intangible assets 708,163 270,500 557 - 708,720 270,500 34,726 - A.2.1 Assets measured at cost: 708,163 270,500 557 - 708,720 270,500 34,726 - a) Internally generated intangible assets ------b) Other assets 708,163 270,500 557 - 708,720 270,500 34,726 - A.2.2 Assets measured at fair value ------a) Internally generated intangible assets ------b) Other assets ------Total 708,163 5,724,816 557 392 708,720 5,725,208 34,726 413,027
180 Notes to the consolidated accounts
13.2 Intangible assets: annual changes
13.2.1 Banking group
Other intangible assets
(thousand euro) Goodwill Internally generated Other Total
Lim. Unlim. Lim. Unlim. A. Opening balance 412,832 - - 40,786 - 453,618 A.1 Net impairments - - - -6,504 - -6,504 A.2 Net opening balance 412,832 - - 34,282 - 447,114 B. Increases: 5,331,970 - - 746,686 270,500 6,349,156 B.1 Purchases 5,331,964 - - 746,674 270,500 6,349,138 (of which for business combinations) 5,320,929 - - 699,132 270,500 6,290,561 B.2 Increase in internal intangible assets X - - - - - B.3 Write-backs X - - - - - B.4) Positive fair value changes carried at ------equity X ------income X - - - - - B.5) Positive exchange differences - - - 12 - 12 B.6) Other changes 6 - - - - 6 C. Decreases -290,486 - - -72,805 - -363,291 C.1 Sales -290,486 - - - - -290,486 (of which for business combinations) ------C.2 Write-downs - - - -72,791 - -72,791 - Amortization X - - -72,791 - -72,791 - Impairments charged to ------equity X ------income ------C.3 Negative fair value changes charged to ------equity X ------Income X - - - - - C.4 Transfer to non-current assets held for sale ------C.5 Negative exchange differences - - - -14 - -14 C.6 Other changes ------D. Net closing balance 5,454,316 - - 708,163 270,500 6,432,979 D.1 Net impairments - - - -79,295 - -79,295 E. Gross closing balance 5,454,316 - - 787,458 270,500 6,512,274 F. Measured at cost ------
13.2.2 Insurance companies
No insurance companies fall within the consolidation scope.
181 Notes to the consolidated accounts
13.2.3 Other companies
Other intangible assets
(thousand euro) Goodwill Internally generated Other Total
Lim. Unlim. Lim. Unlim. A. Opening balance 195 - - 596 - 791 A.1 Net impairments - - - -152 - -152 A.2 Net opening balance 195 - - 444 - 639 B. Increases: 81,936 - - 597 - 52,533 B.1 Purchases 81,936 - - 597 - 82,533 (of which for business combinations) 81,936 - - 28 - 81,964 B.2 Increase in internal intangible assets X - - - - - B.3 Write-backs X - - - - - B.4) Positive fair value changes carried at ------equity X ------income X - - - - - B.5) Positive exchange differences ------B.6) Other changes ------C. Decreases -81,739 - - -484 - -82,223 C.1 Sales -18,950 - - - - -18,950 (of which for business combinations) -18,950 - - - - -18,950 C.2 Write-downs - - - -484 - -484 - Amortization X - - -484 - -484 - Impairments charged to ------equity X ------income ------C.3 Negative fair value changes charged to ------equity X ------Income X - - - - - C.4 Transfer to non-current assets held for sale -62,783 - - - - -62,783 C.5 Negative exchange differences ------C.6 Other changes -6 - - - - -6 D. Net closing balance 392 - - 557 - 949 D.1 Net impairments - - - -636 - -636 E. Gross closing balance 392 - - 1,193 - 1,585 F. Measured at cost ------
13.3 Other information
As at December 31st, 2007 no commitments referring to intangible assets were reported.
182 Notes to the consolidated accounts
Section 14 – Tax assets and liabilities – Item 140 of assets and Item 80 of liabilities
14.1 Deferred tax assets: breakdown
14.1.1 Banking group
(thousand euro) IRES IRAP Other 31/12/2007 31/12/2006
A) through Profit and Loss Impairment of loans deductible in coming financial years 371,771 - - 371,771 65,754 Provisions and impairments deductible in coming financial years 145,586 821 - 146,407 81,982 Fair value measurement of financial assets and liabilities deductible in coming financial years 71,703 - - 71,703 77,498 Deferred taxes on intragroup capital gains eliminated upon consolidation 27,493 - - 27,493 27,579 Personnel costs and termination benefit provisions deductible in coming financial years 48,593 - - 48,593 47,160 Impairment of equity investments deductible in coming financial years - - - - 7,927 Depreciation of non-operating property deductible in coming financial years 788 - - 788 5,649 Other 239,660 1,116 1,005 241,782 47,212 Total A 905,594 1,937 1,005 908,537 360,761 B) through Net Equity Fair value measurement of financial assets available for sale 8,139 1,322 223 9,684 10,299 Other 115,973 16,664 - 132,637 7 Total B 124,112 17,986 223 142,321 10,306 Total (A+B) 1,029,706 19,923 1,228 1,050,858 371,067
14.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
14.1.3 Other companies
(thousand euro) IRES IRAP Other 31/12/2007 31/12/2006 A) through Profit and Loss Impairment of loans deductible in coming financial years 1,222 - - 1,222 - Provisions and impairments deductible in coming financial years 3,551 - - 3,551 - Fair value measurement of financial assets and liabilities deductible in coming financial years - - - - - Deferred taxes on intragroup capital gains eliminated upon consolidation - - - - - Personnel costs and termination benefit provisions deductible in coming financial years - - - - - Impairment of equity investments deductible in coming financial years - - - - - Depreciation of non-operating property deductible in coming financial years - - - - - Other 5,756 32 26 5,814 1 Total A 10,529 32 26 10,587 1 B) through Net Equity Fair value measurement of financial assets available for sale - - - - - Other - - - - - Total B - - - - - Total (A+B) 10,529 32 26 10,587 1
183 Notes to the consolidated accounts
14.2 Deferred tax liabilities: breakdown
14.2.1 Banking group
(thousand euro) IRES IRAP Other 31/12/2007 31/12/2006
A) through Profit and Loss Fair value measurement of financial instruments taxable in coming financial years 36,433 6 - 36,439 72,146 Goodwill impairments deducted but not yet charged to income 29,151 2,488 - 31,639 28,465 Other impairments deducted but not yet charged to income 35,204 1,965 - 37,169 33,095 Deferred taxes on retained earnings of companies carried at equity 16,703 86 - 16,789 7,543 Capital gains taxable in coming financial years 7,750 8 - 7,758 13,322 Other 488,703 76,227 335 565,265 47,523 Total A 613,9444 80,780 335 695,059 202,094 B) through Net Equity Measurement at fair value of financial assets available for sale 8,147 3,400 - 11,547 15,205 Other 35,777 2,062 1,009 38,848 6,412 Total B 43,924 5,462 1,009 50,395 21,617 Total (A+B) 657,868 86,242 1,344 745,454 223,711
14.2.2 Insurance companies
No insurance companies fall within the consolidation scope.
14.2.3 Other companies
(thousand euro) IRES IRAP Other 31/12/2007 31/12/2006 A) through Profit and Loss Fair value measurement of financial instruments taxable in coming financial years - - - - - Goodwill impairments deducted but not yet charged to income - - - - - Other impairments deducted but not yet charged to income 48 - 4 52 21 Deferred taxes on retained earnings of companies carried at equity 109 - - 109 - Capital gains taxable in coming financial years - - - - - Other 6,883 730 - 7,613 7 Total A 7,040 730 4 7,774 28 B) through Net Equity Measurement at fair value of financial assets available for sale - - - - - Other 82 11 - 93 61 Total B 82 11 - 93 61 Total (A+B) 7,122 741 4 7,867 89
184 Notes to the consolidated accounts
14.3 Changes in deferred tax assets (through profit and loss)
Other (thousand euro) Banking group 2007 2006 companies
1. Opening balance 360,761 1 360,762 331,974 2. Increases 1,085,296 14,896 1,100,192 163,956 2.1 Deferred tax assets recognized during the year 348,654 1,828 350,482 159,808 a) referring to prior years 11,447 25 11,472 14,215 b) due to changes in accounting standards - - - - c) write-backs - - - 45 d) other 337,207 1,803 339,010 145,548 2.2 New taxes or tax rate increases 5,814 53 5,867 110 2.3 Other increases 730,828 13,015 743,843 4,038 (of which for business combinations) 728,326 13,015 741,341 478 3. Decreases -537,520 -4,310 -541,830 -135,168 3.1 Deferred tax assets derecognized during the year -371,079 -2,752 -373,831 -80,246 a) transfers -370,791 -2,752 -373,543 -80,246 b) impairment of non-recoverable items -288 - -288 - c) changes in accounting standards - - - - 3.2 Tax rate reductions -145,250 -1,240 -146,490 -381 3.3 Other decreases -16,961 -318 -17,276 -54,541 (of which for business combinations) -257 - - -5,881 4. Closing balance 908,537 10,587 919,124 360,762
14.4 Changes in deferred tax liabilities (through profit and loss)
Other (thousand euro) Banking group 2007 2006 companies
1. Opening balance 202,094 28 202,122 133,720 2. Increases 795,246 14,207 809,453 160,442 2.1 Deferred tax assets recognized during the year 150,373 138 150,511 145,331 a) referring to prior years 15,464 - 15,464 13,909 b) due to changes in accounting standards 45 - 45 109 c) other 134,880 138 135,018 131,313 2.2 New taxes or tax rate increases 4,861 - 4,861 64 2.3 Other increases 640,012 14,069 654,081 15,047 (of which for business combinations) 636,689 12,312 649,001 - 3. Decreases -302,281 -6,461 -308,742 -92,040 3.1 Deferred tax assets derecognized during the year -131,378 -4,439 -135,817 -90,400 a) transfers -129,891 -4,439 -134,330 -64,669 b) impairment of non-recoverable items -314 - -314 - c) changes in accounting standards -1,173 - -1,173 -25,731 3.2 Tax rate reductions -159,209 -288 -159,497 -528 3.3 Other decreases -11,694 -1,734 -13,428 -1,112 (of which for business combinations) - - - -395 4. Closing balance 695,059 7,774 702,833 202,122
185 Notes to the consolidated accounts
14.5 Changes in deferred tax assets (through equity)
Other (thousand euro) Banking group 2007 2006 companies
1. Opening balance 10,306 - 10,306 11,705 2. Increases 137,936 - 137,936 1,608 2.1 Deferred tax assets recognized during the year 2,998 - 2,998 1,606 a) referring to prior years - - - - b) due to changes in accounting standards - - - - c) other 2,998 - 2,998 1,606 2.2 New taxes or tax rate increases - - - 2 2.3 Other increases 134,938 - 134,938 - (of which for business combinations) 10,161 - 10,161 - 3. Decreases -5,921 - -5,921 -3,007 3.1 Deferred tax assets derecognized during the year -2,639 - -2,639 -96 a) transfers -2,639 - -2,639 -96 b) impairment of non-recoverable items - - - - c) changes in accounting standards - - - - 3.2 Tax rate reductions -1,331 - -1,331 - 3.3 Other decreases -1,951 - -1,951 -2,911 (of which for business combinations) - - - - 4. Closing balance 142,321 - 142,321 10,306
14.6 Changes in deferred tax liabilities (though equity)
Other (thousand euro) Banking group 2007 2006 companies
1. Opening balance 21,617 61 21,678 14,387 2. Increases 55,019 32 55,051 9,841 2.1 Deferred tax assets recognized during the year 13,323 - 13,323 9,229 a) referring to prior years - - - - b) due to changes in accounting standards - - - - c) other 13,323 - 13,323 9,229 2.2 New taxes or tax rate increases 1,806 - 1,806 177 2.3 Other increases 39,890 32 39,922 435 (of which for business combinations) 39,276 32 39,308 - 3. Decreases -26,241 - -26,241 -2,550 3.1 Deferred tax assets derecognized during the year -12,300 - -12,300 -2,477 a) transfers -12,174 - -12,174 -585 b) impairment of non-recoverable items -36 - -36 -152 c) changes in accounting standards -90 - -90 -1,740 3.2 Tax rate reductions -13,506 - -13,506 - 3.3 Other decreases -435 - -435 -73 (of which for business combinations) - - - - 4. Closing balance 50,395 93 50,488 21,678
14.7 Other information
Fiscal position of the Group Illustrated below is the analysis of the fiscal position of the Group, divided into what pertains to the former BPVN Group on the one side and to the companies of the former BPI Group on the other.
Fiscal position of the former Banco Popolare di Verona e Novara Group Fiscal position of former Banco Popolare di Verona e Novara
On the balance sheet date, only fiscal years 2003, 2004, 2005 and 2006 are still open from the point of view of direct taxes and VAT. In 2004, Banco decided to exercise the options made available by Law n. 289 of December 27th, 2002 and following amendments and supplements, and as a result: • it closed the fiscal position of Banco for fiscal year 2002 under art. 9 for the purpose of direct taxes; • it closed fiscal year 2002 under art. 9 for the purposes of VAT.
186 Notes to the consolidated accounts
On May 4th, 2007 a tax levy was notified for an assessment of 3.7 million euro in IRAP settlement, sanctions and default interest for delayed assessment in 2003. The IRS claim referred in particular to the IRAP rate applicable for 2003 to banks with regard to the net output value generated by the activities performed on the territory of the Veneto Region, with the ordinary tax rate being 4.25% and not – as objected – the surtax rate of 5.25%. A petition against said assessment and tax levy was filed with the Provincial Tax Commission of Verona. On October 23rd, 2007 the Tax Commission passed its decision – filed on November 20th, 2007 – whereby it accepted said petition and cancelled the assessment and the tax levy. At present, the term for IRS to appeal to the Regional Tax Commission is still pending (it shall expire after one year and forty- six days of the filing of the first instance decision).
On 3/3/2008 a similar tax levy for 4.8 million euro in IRAP settlement, sanctions and default interest was notified relating to an assessment on fiscal year 2004 in the Veneto and Tuscany Regions, as the payment was calculated on a 4.25% tax rate instead of the surtax rates of 5.25% and 4.40% respectively introduced (illegitimately) by Regional Laws. Shortly a petition shall be filed with the Provincial Tax Commission of Verona against said tax levy and relative assessment.
Fiscal position of former Banca Popolare di Verona SGSP S.c.a.r.l. (Banco Popolare di Verona e Novara was formed by merging the latter with Banca Popolare di Novara)
No fiscal years are open for the purpose of direct taxes or VAT.
Fiscal position of the former Banca Popolare di Novara S.c.a.r.l. (Banco Popolare di Verona e Novara was formed by merging the latter with Banca Popolare di Verona SGSP)
In 2004, Banco decided to exercise the options made available by Law n. 289 of December 27th, 2002 and following amendments and supplements. As a result of automatic settlement, no fiscal years are open for the purpose of direct taxes or VAT, nor with regard to withholding agent obligations.
Fiscal position of the acquired Banco S.Geminiano e S.Prospero
On February 7th, 2008, the Court of Cassation rejected the appeal filed by the State legal advisory office referring to the assessment of fiscal year 1987. Also the pending litigation referring to INVIM due for the sale of property in Bologna by former Banco S. Geminiano e S. Prospero S.p.A. was closed under art. 16. With regard to the above events, to date no additional litigations are outstanding.
Fiscal position of the former Banco Popolare Italiana Group
Fiscal position of former Banca Popolare Italiana soc. coop. On the balance sheet date, only fiscal years 2003, 2004, 2005 and 2006 are still open from the point of view of direct taxes and VAT. In 2004, Banca Popolare Italiana soc.coop. decided to exercise the options made available by Law n. 289 of December 27th, 2002 and following amendments.
Illustrated below are the pending litigations. 1. In its capacity as acquirer of Eurosistemi, SpA, a petition is pending with the Provincial Tax Commission of Lodi, that was discussed on February 2008. The dispute regards the greater goodwill value assigned by the Lodi IRS to a business segment (custodian bank for mutual funds and managed portfolios) under disposal, in 2004, between Banca Eurosistemi S.p.A. (then acquired by Banca Popolare Italiana Soc. Coop.) and Banca Popolare di Lodi Soc. Coop.. The Office carried out the adjustment by applying to the sold direct and indirect funds valuation rates of 2.5% and 1% , respectively, and as a result it recognized a goodwill against a zero value stated by the parties. The petition maintains that the type of sold funds (inter-bank funds, specifically intragroup) is not apt to generate any kind of goodwill, based on a previous sworn estimate report and on a valuation of the business segment alogn the so called revenue valuation method. The notice of valuation adjustment amounts to euro 7.0 million, that were suspended against guaranty. 2. Further pending actions are: x for BiPielle Network – a company sold in 2007 – two tax levies of 2.0 million euro for the alleged failure to pay withholding and substitutive taxes in financial year 2002 and of 1.6 million euro for a rejected IRAP 2003 tax credit – received by the acquiree AREA SpA – and the alleged failure to pay withholding and substitutive taxes; x pending with the Provincial Tax Commission of Lodi is another petition – discussed in February 2008 – relating to alleged failure to pay withholding taxes and a rejected IRAP tax credit objected to the company following a partial spin-off, totaling 0.6 million euro.
Analyzed below are the contingent tax liabilities based on objections raised in some notification reports and requests for
187 Notes to the consolidated accounts
clarifications under art. 37-bis, paragraph four, D.P.R. n. 600, 29 September 1973, as well as on claims raised in a notice of payment.
a) notification report prepared and notified against Banca Popolare di Lodi by Revenue Services (Guardia di Finanza), Regional Department of the Tax Police of Lombardy, on July 26th, 2004; on September 24th, 2004 Banca Popolare di Lodi filed with the Lodi Office, under art. 12, paragraph seven l. n. 212 of July 27th, 2000, a brief containing all its remarks regarding the above notification report.
b) notification report prepared and notified against Reti Bancarie Holding by the Internal Revenue Service – Regional Department of Tuscany, on October 12th, 2005; on December 7th, 2005 a brief was filed with the Lucca Office, under art. 12, paragraph seven l. n. 212, mentioned above, a brief containing all its remarks regarding the above notification report.
b-i) tax payment and sanction notice n. 136255/2006, notified “per relationem” to the notification report sub b), to Banca Popolare Italiana (in its capacity as acquirer of Reti Bancarie Holding, former Banco di Chiavari e della Riviera Ligure) on December 21st, 2006, raising a total tax claim of € 13.6 million euro. The petition against said tax payment notice was discussed on September 24th, 2007 before the Provincial Tax Commission of Milan. To date no decision has been filed yet.
b-ii) questionnaire prot. 78742, notified “per relationem” to the notification report sub b), by the Lucca Office to Banca Popolare Italiana (in its capacity as acquirer of Reti Bancarie Holding, former Banco di Chiavari e della Riviera Ligure), under art. 37-bis, paragraph four, D.P.R. n. 600, mentioned above. The questionnaire regards the anti-tax evasion objection raised with regard to the transaction performed in 2003 on the real estate of Banco di Chiavari e della Riviera Ligure. On March 1st, 2007 a brief was filed, where the same remarks already illustrated in the brief sub b) were repeated, regarding the legitimacy of the objected transaction.
Illustrated below are noteworthy events occurred after the balance sheet date. x As acquirer of Bipielle Investimenti S.p.A., a petition was filed against the “silence-rejection” opposed to the request for relief submitted to the Lodi IRS to obtain the relief of a tax levy on an alleged failure to pay withholding taxes, income taxes and VAT totaling 8.2 mln euro; x As acquirer of the former Banca Popolare Italiana and as co-liable entity with Cassa di Risparmio di Lucca Pisa e Livorno s.p.a., a 14.48 million euro tax levy was notified for the assessment carried out by the Local IRS Office of Pisa, pending the appeal decision on the notice to settle the main stamp duty on the reclassification as business segment transfer of the securities sale carried out between in 2002 between Cassa di Risparmio di Pisa s.p.a. and Banca Popolare Italiana soc. coop..
Fiscal position of Banca Popolare di Crema The litigation against the IRPEG and ILOR assessment for fiscal year 1986 is still pending before the Regional Tax Commission of Lombardy. Among contingent tax liabilities, there is questionnaire n. Q00071/2006, notified “per relationem” to the notification report already described above by the Crema Office to Banca Popolare di Crema, under art. 37-bis, paragraph four, D.P.R. n. 600, mentioned above. The questionnaire regards the anti-tax evasion objection raised with regard to the reorganization of Banca Popolare di Crema carried out in 2003. On December 21st, 2006 Banca Popolare di Crema prepared a brief illustrating the legitimacy of the objected transaction.
Fiscal position of Banca Popolare di Cremona The litigations against the IRPEG and ILOR assessment notices for fiscal years 1978, 1979, 1980, 1982 and 1983 are still pending before the Central Tax Commission.
Fiscal position of Banca Caripe A litigation is pending regarding the petition filed against the “silence-rejection” opposed by IRS to the requests for refund referring to the wrongful IRPEG and ILOR taxation of interest income accrued on tax return credits.
Fiscal position of Cassa di Risparmio di Lucca Pisa Livorno SpA A tax levy of 14.5 million euro is still pending, referring to an assessment carried out by the Local IRS Office of Pisa, pending the appeal decision on the notice to settle the main stamp duty on the restatement as business segment transfer of the securities sale carried out between in 2002 between Cassa di Risparmio di Pisa s.p.a. and Banca Popolare Italiana soc. coop..
Fiscal position of BiPielle Real Estate In 2007, the Regional Commission of Milan gave an opinion on the petition regarding the reclassification by the Milan IRS of a series of property transfer (followed by the transfer to the parent company of the equity investments received in exchange for the transfer) as business segment transfers, resulting in the application of stamp, mortgage and land registry duties. The transfers under reclassification were carried out in 2002 between Cassa di Risparmio di Lucca S.p.A., la Cassa di
188 Notes to the consolidated accounts
Risparmio di Livorno S.p.A., la Cassa di Risparmio di Pisa S.p.A. (today acquired by Cassa di Risparmio di Lucca Pisa e Livorno S.p.A.), Banca Bipielle Centrosud S.p.A., Banca Eurosistemi S.p.A., Bipielle Investimenti S.p.A., ICCRI Banca S.p.A. (today acquired by Banco Popolare Soc. Coop.) as transferors and Bipielle Immobili S.p.A. (today Bipielle Real Estate S.p.A.) as transferee. The Office carried out the reclassification based on the data derived by the minutes of the meetings of the Boards of Directors of the various companies and based upon a series of factual elements. The petition was based on the analysis of the actual behaviors of the parties and on the jurisprudential analysis of the required requirements to reclassify deeds in compliance with article 20 of DPR 131 of 1986. We lost the litigation in both instances. In the absence of notification of the decision passed by the second instance court, the deadline to file an appeal with the Court of Cassation is still pending, and should expire on January 26th, 2009, unless IRS sends an additional notification. The claim due to the Regional Commission is 15.0 million euro (taxes and interest accrued as of the tax levy date) plus legal expenses. The subsidiary charged said amount to income in 2007, net of the portion of stamp duties recognizable as accessory cost of the property acquired by way of the above described transfer deals.
Among contingent liabilities there are: x tax payment and sanction notice n. n. 136255/2006, notified on December 21st, 2006 to the Company (as contract counterparty to Reti Bancarie Holding, former Banco di Chiavari e della Riviera Ligure, cfr. par. 1. b-i)), raising a total tax claim of 13.6 million euro. The petition against such tax payment notice was discussed on September 24th last before the Provincial Tax Commission of Milan. To date no decision has been filed yet. x notification report prepared and notified against the Company by IRS – Regional Department of Lombardy, on September 14th, 2007. On November 12th, 2007, a brief was filed with the Lodi Office, under art. 12, paragraph seven, l. n. 212, mentioned above, containing all the remarks regarding the above notification report.
Fiscal position of Sirio Immobiliare Srl After the balance sheet date, a tax levy was notified for a total amount of 1.6 million euro regarding anomalies in the 2004 VAT return.
Fiscal position of Bipitalia Alternative SGR SpA After the balance sheet date, a tax levy was notified for a total amount of 14.3 million euro. The objection was raised because the company filed more than one UNICO tax return for fiscal year 2004, in application of the remedial action institution as provided for under fiscal law- but the IRS Processing center processed the tax returns improperly, replicating the same positions again and again.
Fiscal position of Bipitalia Gestioni SGR SpA After the balance sheet date, a tax levy was notified for a total amount of 21.9 million euro regarding anomalies in section RH of the 2005 Unico tax return, due to a formal mistake in filling out the return.
About 150 minor tax levies have been identified across the entire Gruppo Banco Popolare Soc coop., expressing a total potential risk of about 2.2 million euro.
As a result of contingent liabilities, specific provisions have been set aside in the balance sheets of the companies concerned.
National Consolidation and Fiscal Transparency
The Group opted for the new fiscal regime envisaging a national consolidation of the income tax of groups of companies under articles from 117 to 129 of DPR n. 917 of December 22nd, 1986.
This option, covering fiscal period from 2007 to 2009, refers to all the Group companies that meet the requirements set forth by the above regulation, namely: 1. Aletti Fiduciaria S.p.A.; 2. Aletti Gestielle SGR S.p.A.; 3. Aletti Gestielle Alternative SGR S.p.A.; 4. Aletti Merchant S.p.A. (merged by acquisition into Efibanca in 2007); 5. Aletti Private Equity SGR S.p.A.; 6. Banca Aletti & C. S.p.A.; 7. Banca Bipielle Network S.p.A (sold in 2007); 8. Banca CARIPE SpA; 9. Banca Popolare di Crema S.p.A.; 10. Banca Popolare di Cremona S.p.A.; 11. Banca Popolare di Lodi S.p.A.; 12. Banca popolare di Mantova; 13. Banca Popolare di Novara S.p.A.; 14. Banca Popolare di Verona SGSP S.p.A.; 15. Banca Valori S.p.A.;
189 Notes to the consolidated accounts
16. Basileus SpA 17. Bipitalia Alternative Investments SGR S.p.A.; 18. Bipitalia Broker SpA.; 19. BFI SpA.; 20. Bipielle I.C.T. SpA.(merged by acquisition into SGS Spa in 2007); 21. Bipielle Previdenza Assicurativa S.r.l. (sold in 2007); 22. Bipielle Real Estate SpA.; 23. Società Gestione Crediti BP SpA.; 24. Bipitalia Ducato S.p.A.; 25. Bipitalia Gestioni SGR S.p.A.; 26. BPVN Immobiliare s.r.l.; 27. Cassa di Risparmio di Lucca Pisa Livorno; 28. Credito Bergamasco S.p.A.; 29. Critefi Sim S.p.A.; 30. Efibanca S.p.A.; 31. Holding di Partecipazioni Finanziarie; 32. Immobiliare BP S.r.l.; 33. Lido dei Coralli S.r.l.; 34. Nadir Immobiliare S.r.l.; 35. Nazionale Fiduciaria S.p.A.; 36. Parchi del Garda SpA; 37. Sirio Immobiliare S.r.l.; 38. Società Gestione Servizi BP S.p.A:; 39. Tecmarket Servizi S.p.A; in addition to the former parent company banks: x Banco Popolare di Verona e Novara Scarl; x Banca Popolare Italiana soc. coop. which were merged by consolidation into Banco Popolare società cooperativa.
The above mentioned Parent company banks exercised the tax consolidation option together with the companies belonging to the former groups by June 20th, 2007, before the merger came into effect.
In reply to the specific inquiry filed under art. 124 of DPR 917/86, the Central Legal Office of IRS confirmed that the residual part of the three-year term of the option is not affected by any discontinuation effects. It was also clarified that tax losses that have not been utilized yet by former Banca Popolare Italiana shall be recognized as past losses upon entering into the new tax consolidation term, and as such may be utilized only by Banco Popolare soc. coop.
Following the corporate events occurred in 2007, Leasimpresa Spa is no longer part of the consolidation scope.
The advantages of exercising the national consolidation option in 2007 are mainly linked: x to the fact that taxes are levied on one single taxable income, resulting from the summation of the taxable income of the above companies that exercised the option; x that intercompany dividends are fully exempted from income taxes; x and that there is the possibility of transferring assets other than those generating tax-free revenues and capital gains among consolidated companies in a tax-neutral environment.
As of financial year 2008, the advantages on intercompany dividends and of selling assets in a tax-neutral environment were abolished by the 2008 Budget Law.
With the adoption by Banco Popolare soc. coop. of Group taxation and the fiscal consolidation of the above mentioned subsidiaries, its administrative responsibilities and duties have increased, as illustrated below: x exclusive responsibility for the fulfillment of duties associated with the calculation of the group’s total consolidated income; x joint responsibility for any increased tax, sanctions and interest on the total taxable income of each consolidated company; x joint responsibility with all the relevant companies for the failure to pay what due based on the consolidated income tax return.
To this end, Banco prepared the “consolidation agreements” governing Banco’s relations with the above mentioned subsidiaries that joined the consolidated taxation treatment. The agreements were approved by the individual Boards of Directors.
In second half 2005 Banco also made use of the option under art. 115 of DPR n. 917 of December 22nd, 1986, governing transparent taxation with Novara Vita S.p.A.
190 Notes to the consolidated accounts
This option brings with it a number of advantages, like for example total exemption for dividends distributed by the associate company whose income is transparently taxed.
Since also transparent taxation caused Banco’s administrative responsibilities towards Tax Authorities to increase, in this case with regard to fiscal obligations to which the transparently-taxed associate is bound, Banco entered into a specific framework agreement regulating the relevant relations with the associate company.
Section 15 – Non-current assets held for sale and discontinued operations, and associated liabilities – Item 150 of assets and Item 90 of liabilities
15.1 Non-current assets held for sale and discontinued operations: breakdown by type of asset
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
A. Single assets A.1 Equity investments 99,439 1,198 100,637 - A.2 Property, plant and equipment 20,431 - 20,431 239 A.3 Intangible assets - - - - A.4 Other non-current assets - - - - Total A 119,870 1,198 121,068 239 B. Discontinued operations B.1 Financial assets held for trading - - - - B.2 Financial assets measured at fair value - - - - B.3 Financial assets available for sale - 9 9 - B.4 Financial assets held to maturity - - - - B.5 Due from other banks 118 4,257 4,375 - B.6 Loans to customers - 18 18 - B.7 Equity investments - 101,949 101,949 - B.8 Property, plant and equipment - 288,997 288,997 - B.9 Intangible assets 32 41,205 41,237 - B.10 Other assets - 322,871 322,871 - Total B 150 759,306 759,456 - C. Liabilities associated with single assets under disposal C.1 Payables - - - - C.2 Securities - - - - C.3 Other liabilities - - - - Total C - - - - D. Liabilities associated with discontinued operations D.1 Due to other banks - 150,570 150,570 - D.2 Due to customers - 1,191 1,191 - D.3 Debt securities in issue - - - - D.4 Trading liabilities - - - - D.5 Financial liabilities measured at fair value - - - - D.6 Provisions - 17,110 17,110 - D.7 Other liabilities 85 247,202 247,287 - Total D 85 416,073 416,158 -
15.2 Other information
No other material information is reported.
15.3 Information on equity investments in companies under significant influence not carried at equity
There are no associate companies under significant influence not carried at equity.
191 Notes to the consolidated accounts
Section 16 – Other assets – Item 160
16.1 Other assets: breakdown
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
A. Receivables 464,251 6,638 470,889 149,984 1. Commission receivables 170,639 1,558 172,197 108,364 2. Other receivables 293,612 5,080 298,692 41,620 B. Other entries 3,447,619 71,782 3,519,401 1,047,790 1. Checks and other valuables 226,998 - 226,998 112,838 2. Items still under processing 536,964 45 537,009 418,793 3. Securities and coupons to be settled 1,215,743 - 1,215,743 229,411 4. Other transactions to be settled 318,016 - 318,016 108,030 5. Improvements and similar expenses on third party assets 21,820 3,982 25,802 19,334 6. Other entries 1,128,078 67,755 1,195,833 159,384 Total 3,911,870 78,420 3,990,290 1,197,774
Items still under processing include account debit entries for utility bills and for POS payments.
Improvements and similar expenses on third party assets refer to the restructuring of third party property, which enjoy no operating autonomy. During the year this item increased by roughly 6.5 million euro. The useful life of these improvements is deemed to be 5 years and in any case it does not exceed the term of the lease contract on the third party property for which the aforesaid expenses have been incurred. The item “other entries” include receivables for collaterals, sundry receivables and pending items under allocation to their destination accounts.
192 Notes to the consolidated accounts
LIABILITIES
Section 1 – Due to banks – Item 10
1.1 Due to banks: breakdown by instrument
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Due to central banks 9,725 - 9,725 6,386 2. Due to other banks 13,090,931 7,150 13,098,081 8,109,758 2.1 Checking accounts and demand deposits 2,254,182 1 2,254,183 188,094 2.2 Time deposits 5,051,517 - 5,051,517 3,981,477 2.3 Loans 4,823,787 7,149 4,830,936 3,483,262 2.3.1 finance lease 14,207 - 14,207 16,169 2.3.2 other 4,809,580 7,149 4,816,729 3,467,093 2.4 Commitments to repurchase own shares - - - - 2.5 Liabilities associated with assets sold and not derecognized 818,561 - 818,561 317,940 2.5.1 reverse repurchase agreements 627,966 - 627,966 317,940 2.5.2 other 190,595 - 190,595 - 2.6 Other payables 142,884 - 142,884 138,985 Total 13,100,656 7,150 13,107,806 8,116,144 Fair value 14,048,722 7,150 14,055,872 8,115,515
As at December 31st, 2007, due to banks totaled 13,107.8 million euro, up 61.5% with respect to 8,116.1 millions the year before. Compared to the corresponding pro-forma data as at December 31st, 2006 of 15,474.5 millions, it went down by 15.3%. For due to banks the fair value measurement is almost identical to the book value, since they are mostly short term loans.
1.2 Breakdown of item 10 “Due to banks”: subordinated loans
At the balance sheet date, as at the end of the previous year, no material subordinated loans payable to banks were reported.
1.3 Breakdown of item 10 “Due to banks: structured debts
A At the balance sheet date, as at the end of the previous year, no structured debts payable to banks were reported.
1.4 Due to banks under specific hedging
(thousand euro) 31/12/2007 31/12/2006
1. Payables under specific fair value hedging: 286 - a) interest rate risk 286 - b) exchange rate risk - - c) multiple risks - - 2. Payables under specific cash flow hedging: 190,595 189,265 a) interest rate risk 190,595 189,265 b) exchange rate risk - - c) multiple risks - - Total 190,881 189,265
1.5 Finance lease payables
Due to banks for finance leases shown in table 1.1 “Due to banks: breakdown by instrument” are represented by a payable to Banca Italease S.p.A. for the purchase under lease of some buildings, recorded under item 120 “Property, plant and equipment” of assets for a residual value, net of accrued depreciation as at the date of the balance sheet, of 32.9 millions (Chapter B, Section 12, of these explanatory notes).
193 Notes to the consolidated accounts
Section 2 – Due to customers – Item 20
2.1 Due to customers: breakdown by instrument
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Checking accounts and demand deposits 38,328,794 - 38,328,794 22,080,458 2. Time deposits 3,101,754 - 3,101,754 2,065,334 3. Third party assets under custody 50,451 - 50,451 47,553 4. Loans 5,333,342 84 5,333,426 2,242,550 4.1 Finance lease 8,404 - 8,404 - 4.2 Other 5,324,938 84 5,325,022 2,242,550 5. Commitments to repurchase own shares - - - - 6. Liabilities associated with assets sold and not derecognized 2,707,637 214 2,707,851 1,306,527 6.1 Reverse repurchase agreements 2,707,637 - 2,707,637 464,014 6.2 Other - 214 214 842,513 7. Other payables 1,603,863 - 1,603,863 1,162,953 Total 51,125,841 298 51,126,139 28,905,375 Fair Value 51,317,130 298 51,317,428 28,905,532
As at December 31st, 2007, due to customers stood at 51,126.1 million euro, up 76.9% with respect to the previous year. As compared with the pro-forma data as at December 31st, 2006 of 44,516.2 millions, it went up 14.8%.
2.2 Breakdown of item 20 “Due to customers”: subordinated loans
At the balance sheet date, no material subordinated loans payable to customers were reported.
2.3 Breakdown of item 20 “Due to customers”: structured debts
At the balance sheet date, as in the previous year, no structured debts payable to customers were reported.
2.4 Due to customers under specific hedging
At the balance sheet date, no material payables to customers under specific hedging were reported.
2.5 Finance lease payables
As at December 31st, 2007, 8.4 million euro in finance lease payables to customers were reported.
194 Notes to the consolidated accounts
Section 3 – Debt securities in issue – Item 30
3.1 Debt securities in issue: breakdown by instrument
Banking group Other companies 31/12/2007 31/12/2006 (thousand euro) BV FV BV FV BV FV BV FV A. Quoted securities 2,750,602 2,750,602 558,166 558,166 3,308,768 3,308,768 - - 1. Bonds 2,750,602 2,750,602 558,166 558,166 3,308,768 3,308,768 - - 1.1 structured ------1.2 other 2,750,602 2,750,602 558,166 558,166 3,308,768 3,308,768 - - 2. Other securities ------2.1 structured ------2.2 other ------B. Unquoted securities 26,843,079 26,409,318 - - 26,843,079 26,409,318 16,334,515 16,334,297 1. Bonds 20,412,957 19,978,565 - - 20,412,957 19,978,565 8,704,569 8,704,182 1.1 structured 2,206 2,187 - - 2,206 2,187 245,143 245,143 1.2 other 20,410,751 19,976,378 - - 20,410,751 19,976,378 8,459,426 8,459,039 2. Other securities 6,430,122 6,430,753 - - 6,430,122 6,430,753 7,629,946 7,630,115 2.1 structured ------2.2 other 6,430,122 6,430,753 - - 6,430,122 6,430,753 7,629,946 7,630,115 Total 29,593,681 29,159,920 558,166 558,166 30,151,847 29,718,086 16,334,515 16,334,297 BV = book value FV = fair value
As at December 31st, 2007 debt securities in issue came in at 30,151.8 million euro, up 84.6% as compared with the previous year. Considering the pro-forma data as at December 31st, 2006 of 32,861.8 millions, it went down 8.2%.
For the bond component of debt securities in issue, the fair value is measured by discounting the residual cash flows that the Banks of the Group could obtain by issuing at the balance sheet date loans sharing the same characteristics. For other securities, represented by certificates of deposit, the fair value is assumed to be reasonably close to their carrying value, since they are short term liabilities.
3.2 Breakdown of item 30 “Debt securities in issue”: subordinated securities
At the balance sheet date, subordinated debt securities in issue totaled 4,697.0 million euro, from 1,777.9 millions in the previous year.
The characteristics of subordinated loans outstanding as at December 31st, 2007 are illustrated in Chapter F, Section 2 “Banking regulatory capital and solvency ratios”.
3.3 Debt securities in issue: securities under specific hedging
(thousand euro) 31/12/2007 31/12/2006
1. Payables under specific fair value hedging: - - a) interest rate risk - - b) exchange rate risk - - c) multiple risks - - 2. Payables under specific cash flow hedging: 166,054 138,330 a) interest rate risk 166,053 138,330 b) exchange rate risk - - c) multiple risks 1 - Total 166,054 138,330
195 Notes to the consolidated accounts accounts consolidated to the Notes 196 Section 4 – Financial liabilities held for trading – Item 40
4.1 Financial liabilities held for trading: breakdown by instrument
Banking group Other companies 31/12/2007 31/12/2006
(thousand euro) FV FV FV FV NV FV* NV FV* NV FV* NV FV* Q UQ Q UQ Q UQ Q UQ
A. Cash liabilities 1. Due to banks 2,496 5 91 96 - - - - 2,496 5 91 96 17,641 9,997 7,618 17,615 2. Due to customers 27,947 18,262 - 18,262 - - - - 27,947 18,262 - 18,262 2,543 7,029 9 7,038 3. Debt securities ------3.1 Bonds ------3.1.1 Structured - - - X - - - X - - - X - - - X 3.1.2 Other bonds - - - X - - - X - - - X - - - X 3.2 Other securities ------3.2.1 Structured - - - X - - - X - - - X - - - X 3.2.2 Other - - - X - - - X - - - X - - - X Total A 30,443 18,267 91 18,358 - - - - 30,443 18,267 91 18,358 20,184 17,026 7,627 24,653 B. Derivatives X X X X X X X X 1. Financial derivatives X 795,312 2,309,720 X X - - X X 795,312 2,309,720 X X 291,156 1,528,713 X 1.1 Trading X 761,306 2,230,167 X X - - X X 761,306 2,230,167 X X 291,154 1,528,039 X 1.2 Associated with fair value option X - 79,553 X X - - X X - 79,553 X X - 28 X 1.3 Other X 34,006 - X X - - X X 34,006 - X X 2 646 X 2. Credit derivatives X - 1,231 X X - - X X - 1,231 X X - 6 X 2.1 Trading X - 1,207 X X - - X X - 1,207 X X - 6 X 2.2 Associated with fair value option X - - X X - - X X - - X X - - X 2.3 Other X - 24 X X - - X X - 24 X X - - X Total B X 795,312 2,310,951 X X - - X X 795,312 2,310,951 X X 291,156 1,528,719 X Total (A+B) X 813,579 2,311,042 X X - - X X 813,579 2,311,042 X X 308,182 1,536,346 X FV = Fair value FV* = Fair value calculated excluding value changes caused by a change in the issuer’s credit standing with respect to the issue date NV = Nominal value Q = Quoted UQ = Unquoted Notes to the consolidated accounts
4.2 Breakdown of item 40 “Financial liabilities held for trading”: subordinated liabilities
At the balance sheet date, as at the end of the previous year, no subordinated financial liabilities were reported.
4.3 Breakdown of item 40 “Financial liabilities held for trading”: structured debts
At the balance sheet date, as at the end of the previous year, no structured debts were reported among trading liabilities.
4.4 Financial liabilities held for trading: derivative instruments
4.4.1 Banking group
Currencies Equity (thousand euro) Interest rates Loans Other 31/12/2007 31/12/2006 and gold securities
A) Quoted derivatives 1) Financial derivatives: 103 - 795,214 - - 795,317 328,018 a) with exchange of capital - - 76,850 - - 76,850 21,767 - issued options - - 71,766 - - 71,766 21,767 - other derivatives - - 5,084 - - 5,084 - b) without exchange of capital 103 - 718,364 - - 718,467 306,251 - issued options - - 718,319 - - 718,319 306,249 - other derivatives 103 - 45 - - 148 2 2) Credit derivatives: ------a) with exchange of capital ------b) without exchange of capital ------Total A 103 - 795,214 - - 795,317 328,018 B) Unquoted derivatives 1) Financial derivatives: 1,152,301 216,255 941,158 - - 2,309,714 1,491,851 a) with exchange of capital - 212,497 172,191 - - 384,688 203,734 - issued options - 78,554 172,038 - - 250,592 125,350 - other derivatives - 133,943 153 - - 134,096 78,384 b) without exchange of capital 1,152,301 3,758 768,967 - - 1,925,026 1,288,117 - issued options 161,706 - 768,967 - - 930,673 777,852 - other derivatives 990,595 3,758 - - - 994,353 510,265 2) Credit derivatives: - - - 1,232 - 1,232 6 a) with exchange of capital ------b) without exchange of capital - - - 1,232 - 1,232 6 Total B 1,152,301 216,255 941,158 1,232 - 2,310,946 1,491,857 Total (A+B) 1,152,404 216,255 1,736,372 1,232 - 3,106,263 1,819,875
4.4.2 Insurance companies
No insurance companies fall within the consolidation scope.
4.4.3 Other companies
Not present for other companies.
4.5 Cash trading financial liabilities (excluding “technical overdrafts”): annual changes
No cash trading financial liabilities are reported, as due to banks are entirely represented by technical overdrafts and there were no changes during the year.
197 Notes to the consolidated accounts accounts consolidated to the Notes 198 Section 5 Financial liabilities measured at fair value – Item 50
5.1 Financial liabilities measured at fair value: breakdown by instrument
Banking group Other companies 31/12/2007 31/12/2006
(thousand euro) FV FV FV FV NV FV* NV FV* NV FV* NV FV* Q UQ Q UQ Q UQ Q UQ
1. Due to banks ------1.1 Structured - - - X - - - X - - - X - - - X 1.2 Other - - - X - - - X - - - X - - - X 2. Due to customers ------2.1 Structured - - - X - - - X - - - X - - - X 2.2 Other - - - X - - - X - - - X - - - X 3. Debt securities 12,418,539 109,614 11,841,468 11,979,890 - - - - 12,418,539 109,614 11,841,468 11,997,690 5,494,706 - 5,334,143 5,334,179 3.1 Structured 2,534,098 - 2,500,441 X - - - X 2,534,098 - 2,500,441 X 1,228,716 - 1,228,745 X 3.2 Other 9,884,441 109,614 9,341,027 X - - - X 9,884,441 109,614 9,341,027 X 4,265,990 - 4,105,398 X Total 12,418,539 109,614 11,841,468 11,979,890 - - - - 12,418,539 109,614 11,841,468 11,997,690 5,494,706 - 5,334,143 5,334,179 FV= Fair value FV* = FV calculated excluding value changes caused by a change in the issuer’s credit standing with respect to the issue date NV= nominal value Q= Quoted UQ= unquoted
5.2 Breakdown of item 50 “Financial assets measured at fair value”: subordinated liabilities
As at December 31st, 2007, financial liabilities measured at fair value represented by subordinated liabilities totaled 646.4 million euro. Notes to the consolidated accounts
5.3 Financial liabilities measured at fair value: annual changes
Debt securities in (thousand euro) Due to banks Due to customers Total issue
A. Opening balance - - 5,334,143 5,334,143 B. Increases: - 45 11,997,922 11,997,967 B.1 Issues - - 3,111,982 3,111,982 B.2 Sales - - 1,021,107 1,021,107 B.3 Positive fair value changes - - 75,427 75,427 B.4 Other changes - 45 7,789,406 7,789,451 C. Decreases - -45 -5,380,983 -5,381,028 C.1 Purchases - - -1,747,241 -1,747,241 C.2 Redemptions - - -1,624,619 -1,624,619 C.3 Negative fair value changes - - -259,148 -259,148 C.4 Other changes - -45 -1,749,975 -1,750,020 D. Closing balance - - 11,951,082 11,951,082
Items B.3 and C.3 include, respectively, the positive and negative fair value annual changes that were recorded under Item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement. The same item includes the fair value changes of derivatives under the fair value option, whose positive and negative valuations at the balance sheet date are shown in tables 2.1 of Section 2 of the balance sheet assets and 4.1 of Section 4 of balance sheet liabilities in Chapter B – Notes to the consolidated balance sheet.
Item B.4 “Increases: other changes” includes accrued interest as at December 31st, 2007, recognized under item 20 “interest expense on financial liabilities measured at fair value” of the income statement, as well as losses on the disposal or extinguishment of said financial liabilities, recorded under item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement.
Item C.4 “Decreases: other changes” includes deducted accrued interest as at December 31st. 2007, recognized under item 20 “interest expense on financial liabilities measured at fair value” of the income statement, as well as profits on the disposal or extinguishment of said financial liabilities, recorded under item 110 “profit/loss on financial assets and liabilities designated at fair value” of the income statement.
Fair Value Option on bonds issued – credit spread change As described in Chapter A of the Explanatory Notes, in the section devoted to changes in the application of accounting standards, the Group opted for the possibility of measuring hedged debt securities in issue at fair value in order to reduce accounting misalignments in alternative to the hedge accounting method. Among the factors to be considered, there is also the credit risk from a possible change in the issuer’s creditworthiness. The risk premium increase in new issues from the banking sector caused the Fair Value of the bond portfolio under FVO to shrink remarkably, generating measurement gains (due to the impairment of balance sheet liabilities). This positive impact is not offset by an opposite change in the hedging derivatives associated with the bonds, as the credit risk priced in bonds measured at fair value is not hedged.
In compliance with the relevant accounting standards, the deterioration of the creditworthiness of Gruppo Banco Popolare caused an impairment of bonds issued, with a positive impact on the consolidated income statement, recognized under the item “Profit/loss on financial assets and liabilities measured at fair value”, amounting to 155.7 millions, gross of the fiscal effect. Measurement capital gains generated by the widening of credit spreads in this financial year shall be “released” as measurement capital losses in future income statements throughout the residual bond duration, as a function of the creditworthiness changes that may be reported in the future.
In compliance with the accounting standard IFRS 7 (§10), the amount of Fair Value change developed during the period and the cumulative change (as of the date of issue) attributable to the changes in the credit risk of financial liabilities in issue totaled 155.7 millions.
199 Notes to the consolidated accounts
Section 6 – Hedging derivatives – Item 60
6.1 Hedging derivatives: breakdown by type of contracts and underlying assets
6.1.1 Banking group
Currencies and Equity (thousand euro) Interest rates Loans Other 31/12/2007 gold securities
A) Quoted derivatives 1) Financial derivatives: ------a) with exchange of capital ------issued options ------other derivatives ------b) without exchange of capital ------issued options ------other derivatives ------2) Credit derivatives: ------a) with exchange of capital ------b) without exchange of capital ------Total A ------B) Unquoted derivatives 1) Financial derivatives: 33,551 - - - - 33,551 a) with exchange of capital ------issued options ------other derivatives ------b) without exchange of capital 33,551 - - - - 33,551 - issued options ------other derivatives 33,551 - - - - 33,551 2) Credit derivatives: ------a) with exchange of capital ------b) without exchange of capital ------Total B 33,551 - - - - 33,551 31/12/2007 33,551 - - - - 33,551 31/12/2006 54,847 - - - - 54,847
6.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
6.1.3 Other companies
No hedging derivatives attributable to other companies were reported.
6.2 Hedging derivatives: breakdown by hedged portfolios and by type of hedge
6.2.1 Banking group
Fair value Cash flows Specific (thousand euro) Interest Exchange Multiple Generic Specific Generic Credit risk Price risk rate risk rate risk risks 1. Financial assets available for sale 1,483 - - - - X - X 2. Loans 7,491 - - X - X - X 3. Financial assets held to maturity X - - X - X - X 4. Portfolio X X X X X 24,577 X - Total Assets 8,974 - - - - 24,577 - - 1. Financial liabilities - - - - - X - X 2. Portfolio X X X X X - X - Total Liabilities ------
200 Notes to the consolidated accounts
6.2.2 Insurance companies
No insurance companies fall within the consolidation scope.
6.2.3 Other companies
No hedging derivatives attributable to other companies were reported.
Section 7 Fair value change of liabilities in hedged portfolios – Item 70
7.1 Fair value change of liabilities in hedged portfolios
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Positive changes to financial liabilities 329 - 329 - 2. Negative changes to financial liabilities -43,992 - -43,992 -57,936 Total -43,663 - -43,663 -57,936
This item refers to the fair value change recorded on the funding of payable checking accounts under item due to customers, that were put under a fair value derivative macrohedging. Profit or loss on value adjustments referring to hedging derivatives and to the hedged portfolio are recognized under item 90 “Fair value adjustments in hedge accounting”.
7.2 Liabilities under macrohedging of interest rate risk: breakdown
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Due to customers 2,518,306 - 2,518,306 5,299,000 2. Debt securities in issue - - - - 3. Subordinated liabilities - - - - 4. Financial liabilities - - - - 5. Portfolio - - - - 6. Due to banks - - - - Total 2,518,306 - 2,518,306 5,299,000
Section 8 – Tax liabilities – Item 80
This Section was illustrated in Section 14 of the balance sheet assets in Chapter B – Notes to the consolidated balance sheet.
Section 9 - Liabilities associated with non-current assets held for sale and discontinued operations – Item 90
This Section was illustrated in Section 15 of the balance sheet assets in Chapter B – Notes to the consolidated balance sheet.
Section 10 – Other liabilities – Item 100
10.1 Other liabilities: breakdown
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies Due to Inland revenue for sums to be paid on behalf of third 149,873 9 149,882 56,463 parties Due to Personnel 261,368 16 261,384 187,266 Due to Suppliers 423,858 21,094 444,952 123,409 Items in transit between branches not yet allocated to destination 868,778 - 868,778 193,096 accounts Amounts available to be paid to third parties 373,644 16 373,660 78,292 Bank transfers to be cleared 542,457 - 542,457 568,577 Adjustments for illiquid portfolio entries 316,014 - 316,014 180,468 Other entries 2,012,509 17,507 2,030,016 723,463 Total 4,948,501 38,642 4,987,143 2,111,034
201 Notes to the consolidated accounts
Section 11 – Employee termination benefits – Item 110
11.1 Employee termination benefits
Other (thousand euro) Banking group 2007 companies
A. Opening balance 349,538 541 350,079 B. Increases 310,177 212 310,389 B.1 Provisions for the year 31,364 99 31,463 B.2 Other increases 278,813 113 278,926 C. Decreases -223,393 -93 -223,486 C.1 Termination benefits paid -74,040 -89 -74,129 C.2 Other decreases -149,353 -4 -149,357 D. Closing balance 436,322 660 436,982
Section 12 – Provisions for risks and charges – Item 120
12.1 Provisions for risks and charges: breakdown
(thousand euro) Banking group Other companies 31/12/2007 31/12/2006
1. Post-employment benefits 188,069 - 188,069 25,964 2. Other provisions for risks and charges 623,703 13,467 637,170 243,109 2.1 litigations 333,926 - 333,926 188,906 2.2 personnel charges 125,009 250 125,259 5,713 2.3 other 164,768 13,217 177,985 48,490 Total 811,772 13,467 825,239 269,073
12.2 Provisions for risks and charges: annual changes
Banking group Other companies Total Post- Post- Post- (thousand euro) Other Other Other employment employment employment provisions provisions provisions benefits benefits benefits A. Opening balance 25,964 242,972 - 137 25,964 243,109 B. Increases 165,965 643,823 - 14,317 165,965 658,140 B.1 Provisions for the year 8,872 216,438 - - 8,872 216,438 B.2 Time-value changes 576 2,643 - - 576 2,643 B.3 Discount-rate related changes 323 196 - - 323 196 B.4 Other increases 156,194 424,546 - 14,317 156,194 438,863 C. Decreases -3,860 -263,092 - -987 -3,860 -264,079 C.1 Utilization during the year -1,994 -31,990 - -987 -1,994 -32,977 C.2 Discount-rate related changes -1,301 -828 - - -1,301 -828 C.3 Other decreases -565 -230,274 - - -565 -230,274 D. Closing balance 188,069 623,703 - 13,467 188,069 637,170
12.3 Defined benefit pension plans
Defined benefit pension plans are mainly related to the Parent company.
Section 13 – Insurance reserves – Item 130
The Group has no shareholdings in insurance companies falling within the consolidation scope.
Section 14 – Redeemable shares – Item 150
14.1 Redeemable shares: breakdown
At the balance sheet date, as on December 31st, 2006, the Group held no redeemable shares.
202 Notes to the consolidated accounts
Section 15 – Group Shareholders’ equity - Items 140, 160, 170, 180, 190, 200 and 220
15.1 Group Shareholders’ equity: breakdown
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
1. Share capital 2,305,733 - 2,305,733 1,351,182 2. Share premiums 4,880,023 - 4,880,023 202,304 3. Reserves 2,771,828 -19,099 2,752,729 2,044,798 4. (Treasury shares) -28,163 - -28,163 - a) parent company - - - - b) subsidiaries -28,163 - -28,163 - 5. Valuation reserves 141,736 217 141,953 240,820 6. Common stock equivalents 2,534 - 2,534 - 7. Group net income (loss) for the year 614,562 2,661 617,223 1,032,914 Total 10,688,253 -16,221 10,672,032 4,872,018
As at December 31st, 2007, the Group’s shareholders’ equity stood at 10,672.0 million euro, up 119.0% compared to December 31st, 2006. Compared to the pro-forma data as at December 31st, 2006 of 11,733.5 millions, it went down 9%. Please, refer to the “Statement of changes in Shareholders’ equity” for a more detailed analysis.
15.2 Share capital and Treasury shares: breakdown
As at December 31st, 2007, the Group’s share capital was made up of 640,481,325 common shares with a par value of 3.6 euro each (375,328,315 common shares at the end of 2006).
As at December 31st, 2007, n. 12 treasury shares were held in portfolio, while no treasury shares were present at the end of 2006.
15.3 Share capital – Parent company shares: annual changes
Common Other
A. Shares outstanding at year start 375,328,315 - - fully paid-in 375,328,315 - - not fully paid-in - - A.1 Treasury shares ( - ) - - A.2 Shares outstanding: opening balance 375,328,315 - B. Increases 278,681,952 - B.1 New issues 278,660,839 - - against payment: 278,660,839 - - business combinations 277,573,299 - - converted bonds 1,290 - - exercised warrants - - - other 1,086,250 - - scrip issue: - - - to employees - - - to directors - - - other - - B.2 Sale of treasury shares 21,113 - B.3 Other changes - - C. Decreases -13,528,930 - C.1 Cancellation - - C.2 Purchase of treasury shares -13,528,930 - C.3 Business transfers - - C.4 Other changes - - D. Shares outstanding: closing balance 640,481,337 - D.1 Treasury shares (+) 12 - D.2 Shares outstanding at year-end 640,481,325 - - fully paid-in 640,481,325 - - not fully paid-in - -
203 Notes to the consolidated accounts
15.4 Share capital: other information
All common shares outstanding as at December 31st, 2007 are authorized and fully paid in. The par value per share is 3.6 euro; shares are bound by no constraints or privilege of any kind and each share has the same rights in terms of dividend payment and capital redemption. At the balance sheet date, Banco held n°12 treasury shares. With regard to rights assigned under the stock option plan, see Chapter I – “ Share-based payments“ of these explanatory notes.
15.5 Retained earnings: other information
(thousand euro) 31/12/2007 31/12/2006
a) Legal reserve 439,183 380,399 b) Statutory reserves 689,696 629,555 c) Other retained earnings 1,288,414 757,010 Total 2,417,293 1,766,964
15.6 Valuation reserve: breakdown
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
1. Financial assets available for sale 130,932 - 130,932 171,119 2. Property, plant and equipment - 217 217 217 3. Intangible assets - - - - 4. Hedges of foreign investments - - - - 5. Cash flow hedges 1,818 - 1,818 2,805 6. Exchange differences - - - - 7. Non-current assets held for sale - - - - 8. Special revaluation laws 8,986 - 8,986 66,679 Total 141,736 217 141,953 240,820
15.7 Valuation reserves: annual changes
15.7.1 Banking group
Financial assets Property, Hedges of Non-current Special Intangible Cash flow Exchange (thousand euro) available for plant and foreign assets held revaluation assets hedges differences sale equipment investments for sale laws
A. Opening balance 171,119 - - - 2,805 - - 66,679 B. Increases 86,439 - - - 5,091 - - - B.1 Fair value increases 81,858 - - - 3,668 - - X B.2 Other changes 4,581 - - - 1,423 - - - (of which for business combinations) ------C. Decreases -126,626 - - - -6,078 - - -57,693 C.1 Fair value decreases -57,054 - - - -331 - - X C.2 Other changes -69,572 - - - -5,747 - - -57,693 (of which for business combinations) ------D. Closing balance 130,932 - - - 1,818 - - 8,986
15.7.2 Insurance companies
No insurance companies fall within the consolidation scope.
204 Notes to the consolidated accounts
15.7.3 Other companies
Financial assets Property, Hedges of Non-current Special Intangible Cash flow Exchange (thousand euro) available for plant and foreign assets held revaluation assets hedges differences sale equipment investments for sale laws
A. Opening balance - 217 ------B. Increases ------B.1 Fair value increases ------X B.2 Other changes ------(of which for business combinations) ------C. Decreases ------C.1 Fair value decreases ------X C.2 Other changes ------(of which for business combinations) ------D. Closing balance - 217 ------
15.8 Valuation reserves for financial assets available for sale: breakdown
Banking group Other companies 31/12/2007 31/12/2006 (thousand euro) Positive Negative Positive Negative Positive Negative Positive Negative reserve reserve reserve reserve reserve reserve reserve reserve
1. Debt securities 4,637 -27,299 - - 4,637 -27,299 7,078 -19,642 2. Equity securities 171,497 -25,649 - - 171,497 -25,649 192,620 -8,612 3. UCITS units 9,165 -1,419 - - 9,165 -1,419 1,120 -1,445 4. Loans ------Total 185,299 -54,367 - - 185,299 -54,367 200,818 -29,699
15.9 Valuation reserves for financial assets available for sale: annual changes
15.9.1 Banking group
(thousand euro) Debt securities Equity securities UCITS units Loans
1 Opening balance -12,564 184,008 -325 - 2 Positive changes 4,387 71,917 9,160 - 2.1 Fair value increases 4,387 68,536 8,935 - 2.2 Reclassification to profit and loss from negative provisions: - - - - - due to impairment - - - - - due to disposal - - - - 2.3 Other changes - 3,381 225 - (of which for business combinations) - - - - 3 Negative changes -14,485 -110,077 -1,089 - 3.1 Fair value decreases -14,483 -41,549 -1,022 - 3.2 Impairment losses - - - - 3.3 Reclassification to profit and loss from positive provision: -1 -59,271 - - due to disposal 3.4 Other changes -1 -9,257 -67 - (of which for business combinations) - - - - 4 Closing balance -22,662 145,848 7,746 -
15.9.2 Insurance companies
No insurance companies fall within the consolidation scope.
15.9.3 Other companies
No valuation reserves for financial assets available for sale pertaining to other companies were reported.
205 Notes to the consolidated accounts
Section 16 – Minority interest – Item 210
16.1 Minority interest: breakdown
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
1. Share capital 144,902 6,702 151,604 24,389 2. Share premiums 46,323 15,070 61,393 3,319 3. Reserves 182,595 -36,603 145,992 84,128 4. (Treasury shares) -222 - -222 - 5. Valuation reserves 1,746 161 1,907 1,843 6. Common stock equivalents - - - - 7. Minority interest 32,154 9,928 42,082 31,082 Total 407,498 -4,742 402,756 144,761
As at December 31st, 2007, minority interest amounted to 402.8 million euro, up 178.2% with respect to 144.8 millions the year before. Compared to the pro-forma data as at December 31st, 2006, of 292.4 millions, it still reports a 37.8% increase.
16.2 Valuation reserves: breakdown
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
1. Financial assets available for sale 1,683 - 1,683 1,629 2. Property, plant and equipment - 161 161 161 3. Intangible assets - - - - 4. Hedges of foreign investments - - - - 5. Cash flow hedges 63 - 63 53 6. Exchange differences - - - - 7. Non-current assets held for sale - - - - 8. Special revaluation laws - - - - Total 1,746 161 1,907 1,843
16.3 Common stock equivalents: breakdown and annual changes
This item includes 2.5 million euro for the option to convert at the acquisition value, defined at the date of effectiveness (July 1st, 2007) of the merger with BPI, included in the convertible bond program acquired by former BPI.
16.4 Valuation reserves of financial assets available for sale: breakdown
Banking group Other companies 31/12/2007 31/12/2006 (thousand euro) Positive Negative Positive Negative Positive Negative Positive Negative reserve reserve reserve reserve reserve reserve reserve reserve
1. Debt securities 1 -2 - - 1 -2 - - 2. Equity securities 1,960 -305 - - 1,960 -305 1,643 -6 3. UCITS units 36 -7 - - 36 -7 39 -47 4. Loans ------Total 1,997 -314 - - 1,997 -314 1,682 -53
206 Notes to the consolidated accounts
16.5 Valuation reserves: annual changes
16.5.1 Banking group
Property, Hedges of Non-current Special Financial assets Intangible Cash flow Exchange (thousand euro) plant and foreign assets held for revaluation available for sale assets hedges differences equipment investments sale laws
A. Opening balance 1,629 - - - 53 - - - B. Increases 1,832 - - - 10 - - - B.1Fair value increases 1,785 - - - 8 - - X B.2 Other changes 47 - - - 2 - - - C. Decreases -1,778 ------C.1 Fair value decreases -997 ------X C.2 Other changes -781 ------D. Closing balance 1,683 - - - 63 - - -
16.5.2 Insurance companies
No insurance companies fall within the consolidation scope.
16.5.3 Other companies
Property, Hedges of Non-current Special Financial assets Intangible Cash flow Exchange (thousand euro) plant and foreign assets held for revaluation available for sale assets hedges differences equipment investments sale laws
A. Opening balance - 161 ------B. Increases ------B.1Fair value increases ------B.2 Other changes ------C. Decreases ------C.1 Fair value decreases ------C.2 Other changes ------D. Closing balance - 161 ------
207 Notes to the consolidated accounts
Other information
1. Guarantees given and commitments
Other (thousand euro) Banking group 31/12/2007 31/12/2006 companies
1) Financial guarantees given 4,223,628 - 4,223,628 1,586,986 a) Banks 2,251,295 - 2,251,295 106,697 b) Customers 1,972,333 - 1,972,333 1,480,289 2) Commercial guarantees given 6,513,665 - 6,513,665 4,879,004 a) Banks 1,008,855 - 1,008,855 994,475 b) Customers 5,504,810 - 5,504,810 3,884,529 3) Irrevocable commitments to grant credit lines 7,788,193 - 7,788,193 2,825,160 a) Banks 1,237,580 - 1,237,580 319,754 i) certainty of utilization 727,577 - 727,577 168,594 ii) uncertainty of utilization 510,003 - 510,003 151,160 b) Customers 6,550,613 - 6,550,613 2,505,406 i) certainty of utilization 227,036 - 227,036 293,813 ii) uncertainty of utilization 6,323,577 - 6,323,577 2,211,593 4) Commitments underlying credit derivatives: protective puts 30,569 - 30,569 - 5) Assets pledged to secure third party obligations - - - 7 6) Other commitments 2,225,692 - 2,225,692 1,891,757 Total 20,781,747 - 20,781,747 11,182,914
2.Assets pledged as collateral for own liabilities and commitments
(thousand euro) 31/12/2007 31/12/2006 1. Financial assets held for trading 4,580,478 2,894,013 2. Financial assets measured at fair value 418,325 - 3. Financial assets available for sale 381,614 114,821 4. Financial assets held to maturity 578,707 862,857 5. Due from banks 2,324,950 123,890 6. Loans to customers 937,703 - 7. Property, plant and equipment - - Total 9,221,777 3,995,581
3.Information on operating leases
As at December 31st, 2007, there were no operating lease assets and liabilities.
4.Breakdown of investments associated with unit-linked and index linked policies
On December 31st, 2007, the Group held no investments associated with unit and index linked policies.
208 Notes to the consolidated accounts
5. Asset management and brokerage on behalf of third parties: banking group
(thousand euro) Amounts
1. Trading of financial instruments on behalf of third parties 15,856,266 a) Purchase 7,466,661 1. settled 7,273,171 2. unsettled 193,490 b) Sale 8,389,605 1. settled 8,258,427 2. unsettled 131,178 2. Managed accounts 23,243,056 a) individual 23,240,847 b) collective 2,209 3. Securities custody and administration 142,438,418 a) non-proprietary securities on deposit: as custodian bank (excluding managed accounts) 3,972,722 1. securities issued by companies falling within the consolidation scope 1,924,262 2. other securities 2,048,460 b) other non-proprietary securities on deposit (excluding managed accounts): other 59,961,365 1. securities issued by companies falling within the consolidation scope 12,677,890 2. other securities 47,283,475 c) non-proprietary securities deposited with others 58,211,933 d) proprietary securities deposited with others 20,292,398 4. Other transactions 2,501,452
6. Asset management and brokerage on behalf of third parties: insurance companies
No insurance companies fall within the consolidation scope.
7. Asset management and brokerage on behalf of third parties: other companies
No asset management and brokerage activities on behalf of third parties were performed by other companies
209 Notes to the consolidated accounts
CHAPTER C – NOTES TO THE CONSOLIDATED INCOME STATEMENT
Section 1 – Interest income and expense – Items 10 and 20
1.1 Interest income and similar revenues: breakdown
1.1.1 Banking group
Impaired Performing financial assets Other (thousand euro) financial 2007 2006 assets Debt securities Loans assets
1. Financial assets held for trading 219,419 - - 5,142 224,561 172,912 2. Financial assets measured at fair value 3,657 - - - 3,657 104 3. Financial assets available for sale 27,501 - - 3 27,504 21,677 4. Financial assets held to maturity 25,611 - - - 25,611 25,647 5. Due from banks 29,578 389,698 - 1,899 421,175 188,017 6. Loans to customers 11,914 3,589,926 63,156 4,085 3,669,081 2,131,786 7. Hedging derivatives X X X - - 11,451 8. Financial assets sold and not derecognized 20,357 179,505 173 - 200,035 40,727 9. Other assets X X X 7,582 7,582 3,839 Total 338,037 4,159,129 63,329 18,711 4,579,206 2,596,160
1.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
1.1.3 Other companies
Impaired Performing financial assets Other (thousand euro) financial 2007 2006 assets Debt securities Loans assets
1. Financial assets held for trading ------2. Financial assets measured at fair value 233 - - - 233 - 3. Financial assets available for sale ------4. Financial assets held to maturity 16 - - - 16 10 5. Due from banks 332 1,167 - 1,330 2,829 4 6. Loans to customers - - - - - 1 7. Hedging derivatives X X X - - - 8. Financial assets sold and not derecognized ------9. Other assets X X X 135 135 - Total 581 1,167 - 1,465 3,213 15
210 Notes to the consolidated accounts
1.2 Interest income and similar revenues: spreads on hedging transactions
Please, refer to paragraph 1.5 below, as the spread balance is negative.
1.3 Interest income and similar revenues: other information
1.3.1 Interest income on financial assets denominated in foreign currency
(thousand euro) 2007 2006 Interest income on foreign currency assets 134,764 33,077
1.3.2 Interest income on finance lease receivables
(thousand euro) 2007 2006
Interest income on finance lease transactions - 94,855
1.3.3 Interest income on loans with third party assets under custody
(thousand euro) 2007 2006 Interest income on third party assets under custody 1,193 152
1.4 Interest expense and similar charges: breakdown
1.4.1 Banking group
Deposits/ Other (thousand euro) Securities 2007 2006 payables liabilities
1. Due to banks 422,514 X - 422,514 254,611 2. Due to customers 890,642 X - 890,642 391,988 3. Debt securities in issue X 1,055,777 - 1,055,777 432,319 4. Financial liabilities held for trading - - - - 1,000 5. Financial liabilities measured at fair value - 222,783 - 222,783 160,157 Financial liabilities on assets sold and not 6. 88,834 - 8 88,842 14,751 derecognized 7. Other liabilities X X 1,165 1,165 597 8. Hedging derivatives X X 71,294 71,294 - Total 1,401,990 1,278,560 72,467 2,753,017 1,255,423
Interest reported in the sub-item “Hedging derivatives” represents the balance of all spreads accrued on assets and liabilities hedges and on derivatives classified in the trading portfolio, but operationally associated with liabilities measured at fair value or assets classified in the trading portfolio.
1.4.2 Insurance companies
No insurance companies fall within the consolidation scope.
1.4.3 Other companies
Deposits/ Other (thousand euro) Securities 2007 2006 payables liabilities
1. Due to banks 314 X - 314 15 2. Due to customers -30 X - -30 - 3. Debt securities in issue X 14,382 - 14,382 - 4. Financial liabilities held for trading - - - - - 5. Financial liabilities measured at fair value - - - - - 6. Financial liabilities on assets sold and not derecognized 7. Other liabilities X X 147 147 - 8. Hedging derivatives X X - - - Total 284 14,382 147 14,813 15
211 Notes to the consolidated accounts
1.5 Interest expense and similar charges: spreads on hedging transactions
Other (thousand euro) Banking group 2007 companies
A. Positive spreads on: A.1. Specific fair value hedging of assets 94,113 - 94,113 A.2. Specific fair value hedging of liabilities 331,734 - 331,734 A.3. Macrohedging of interest rate risk 207,922 - 207,922 A.4. Specific cash flow hedging of assets - - - A.5. Specific cash flow hedging of liabilities 6,358 - 6,358 A.6. Macrohedging of cash flows 8,514 - 8,514 Total positive spreads (A) 648,641 - 648,641 B. Negative spreads on: B.1. Specific fair value hedging of assets -85,208 - -85,208 B.2. Specific fair value hedging of liabilities -350,111 - -350,111 B.3. Macrohedging of interest rate risk -271,122 - -271,122 B.4. Specific cash flow hedging of assets - - - B.5. Specific cash flow hedging of liabilities -5,745 - -5,745 B.6. Macrohedging of cash flows -7,749 - -7,749 Total negative spreads (B) -719,935 - -719,935 C. Balance (A-B) -71,294 - -71,294
1.6 Interest expense and similar charges: other information
1.6.1 Interest expense on liabilities denominated in foreign currency
(thousand euro) 2007 2006
Interest expense on foreign currency liabilities 54,293 40,691
1.6.2 Interest expense on finance lease payables
(thousand euro) 2007 2006
Interest expense on finance lease payables 508 573
1.6.3 Interest expense on third-party assets under custody
(thousand euro) 2007 2006
Interest expense on third-party assets under custody 344 160
212 Notes to the consolidated accounts
Section 2 – Fees and commissions
2.1 Commission income: breakdown
2.1.1 Banking group
(thousand euro) 2007 2006
a) guarantees given 40,114 29,826 b) credit derivatives 151 - c) Management, brokerage and advisory services: 722,725 623,920 1. trading of financial instruments 38,681 34,405 2. currency trading 6,143 11,375 3. managed accounts 330,239 301,757 3.1 individual 93,985 88,085 3.2 collective 236,254 213,672 4. securities administration and custody 10,872 8,679 5. custodian bank 26,419 27,658 6. underwriting of securities 88,230 92,864 7. order collection 31,063 26,386 8. advisory services 1,905 4,765 9. distribution of third-party services 189,173 116,031 9.1 managed accounts 384 - 9.1.1 individual 379 - 9.1.2 collective 5 - 9.2 insurance products 143,907 87,152 9.3 other products 44,882 28,879 d) payment and collection services 144,946 117,320 e) securitization servicing 3,596 188 f) factoring services - 3 g) tax collection services - - h) other services 255,505 170,803 Total 1,167,037 942,060
2.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
2.1.3 Other companies
(thousand euro) 2007 2006 c) management, brokerage and advisory services: 7,470 6,125 9. distribution of third-party services 7,470 6,125 9.1 managed accounts - - 9.1.1 individual - - 9.1.2 collective - - 9.2 insurance products 7,470 6,125 9.3 other products - - Total 7,470 6,125
213 Notes to the consolidated accounts
2.2 Commission income: distribution channels of products and services
2.2.1 Banking group
(thousand euro) 2007 2006
a) Through own branches: 364,656 299,294 1. managed accounts 87,582 90,416 2. underwriting of securities 88,228 92,864 3. third-party products and services 188,846 116,014 b) Off-branch distribution: 242,667 211,358 1. managed accounts 242,657 211,341 2. underwriting of securities 2 - 3. third-party products and services 8 17 c) Other distribution channels: 319 - 1. managed accounts - - 2. underwriting of securities - - 3. third-party products and services 319 -
2.3 Commission income: breakdown
2.3.1 Banking group
(thousand euro) 2007 2006
a) Guarantees given 1,464 729 b) Credit derivatives - - c) Management and brokerage services: 70,034 41,176 1. trading of financial instruments 19,215 16,848 2. currency trading 17 262 3. managed accounts: 923 1 3.1 proprietary portfolio 923 1 3.2 non-proprietary portfolio - - 4. securities custody and administration 9,410 7,554 5. underwriting of financial instruments 32,558 13,606 6. off-branch distribution of financial instruments, products and services 7,911 2,905 d) Payment and collection services 33,845 27,256 e) Other services 45,693 34,313 Total 151,036 103,474
During the year no credit derivative transactions were performed, therefore Item b) “credit derivatives” is not filled in.
2.3.2 Insurance companies
No insurance companies fall within the consolidation scope.
2.3.3 Other companies
(thousand euro) 2007 2006
c) Management and brokerage services: 1,345 579 6. off-branch distribution of financial instruments, products and services 1,345 579 e) Other services 152 46 Total 1,497 625
214 Notes to the consolidated accounts
Section 3 – Dividend and similar income – Item 70
3.1 Dividend and similar income: breakdown
Banking group Other companies 2007 2006
(thousand euro) Profit from Profit from Profit from Profit from Dividends UCITS Dividends UCITS Dividends UCITS Dividends UCITS units units units units
A. Financial assets held for trading 113,936 5,681 - - 113,936 5,681 74,434 3 B. Financial assets available for sale 18,473 125 - - 18,473 125 14,076 77 C. Financial assets measured at fair value - - 402 - 402 - - - D. Equity investments - X - X - X 1,004 X Total 132,409 5,806 402 - 132,811 5,806 89,514 80
Section 4 – Net trading income – Item 80
4.1 Net trading income: breakdown
4.1.1 Banking group
Capital Trading Capital Trading Net profit (thousand euro) gains income losses loss or loss ( A ) ( B ) ( C ) ( D ) (A+B)-(C+D)
1. Financial assets held for trading 44,758 90,738 -135,863 -267,114 -267,481 1.1 Debt securities 12,402 50,376 -31,045 -31,062 671 1.2 Equity securities 27,470 29,840 -101,216 -231,320 -275,226 1.3 UCITS units 4,886 8,557 -3,599 -4,703 5,141 1.4 Loans - 116 - - 116 1.5 Other - 1,849 -3 -29 1,817 2. Financial liabilities held for trading 1 16,855 -259 -11 16,586 2.1 Debt securities - - - - - 2.2 Deposits and payables 1 16,855 -259 -11 16,586 2.3 Other - - - - - 3. Other financial assets and liabilities: exchange differences X X X X 15,173 4. Derivatives 1,014,658 4,025,510 -848,886 -3,912,540 281,109 4.1 Derivatives: 1,005,993 4,024,588 -848,156 -3,906,678 275,747 - on debt securities and interest rates 392,668 3,594,988 -502,848 -3,399,382 85,426 - on equity securities and equity indices 613,287 429,295 -345,003 -507,273 190,306 - on currencies and gold X X X X 2,367 - Other 38 305 -305 -23 15 4.2 Credit derivatives 8,665 922 -730 -5,862 2,995 Total 1,059,417 4,133,103 -985,008 -4,179,665 45,387
4.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
215 Notes to the consolidated accounts
4.1.3 Other companies
Capital Trading Capital Trading Net profit (thousand euro) gains income losses loss or loss ( A ) ( B ) ( C ) ( D ) (A+B)-(C+D) 1. Financial assets held for trading - - - - - 1.1 Debt securities - - - - - 1.2 Equity securities - - - - - 1.3 UCITS units - - - - - 1.4 Loans - - - - - 1.5 Other - - - - - 2. Financial liabilities held for trading - - - - - 2.1 Debt securities - - - - - 2.2 Deposits and payables - - - - - 2.3 Other - - - - - 3. Other financial assets and liabilities: exchange differences X X X X - 4. Derivatives - 18,662 -3 -17,487 1,172 4.1 Financial derivatives: - 18,662 -3 -17,487 1,172 - on debt securities and interest rates - 18,443 - -16,902 1,541 - on equity securities and equity indices - 219 -3 -585 -369 - on currencies and gold X X X X - - Other - - - - - 4.2 Credit derivatives - - - - - Total - 18,662 -3 -17,487 1,172
Section 5 – Fair value adjustments in hedge accounting – Item 90
5.1 Fair value adjustments in hedge accounting
Banking Other (thousand euro) 2007 2006 group companies
A. Income on: A.1 Fair value hedging derivatives 25,974 - 25,974 13,244 A.2 Hedged financial assets (fair value) 4,145 - 4,145 1,119 A.3 Hedged financial liabilities (fair value) 43,118 - 43,118 48,105 A.4 Cash flow hedging derivatives 11,447 - 11,447 - A.5 Foreign currency assets and liabilities - - - - Total hedging income (A) 84,684 - 84,684 62,468 B. Expense on: B.1 Fair value hedging derivatives -35,552 - -35,552 -41,390 B.2 Hedged financial assets (fair value) -9,836 - -9,836 -13,230 B.3 Hedged financial liabilities (fair value) -27,455 - -27,455 -6,819 B.4 Cash flow hedging derivatives -9,335 - -9,335 - B.5 Foreign currency assets and liabilities -2,705 - -2,705 - Total hedging expense (B) -84,883 - -84,883 -61,439 C. Net profit/loss on hedging transactions (A-B) -199 - -199 1,029
216 Section 6 – Profit (Loss) on disposal/repurchase – Item 100
6.1 Profit (loss) on disposal/repurchase
Banking group Other companies 2007 2006 (thousand euro) Profit Loss Net result Profit Loss Net result Profit Loss Net result Profit Loss Net result
Financial assets 1. Due from banks 497 -4,241 -3,744 - - - 497 -4,241 -3,744 - - - 2. Customer loans 5,358 -1,216 4,142 - - - 5,358 -1,216 4,142 59,568 -23,206 36,362 3. Financial assets available for sale 140,947 -565 140,382 - - - 140,947 -565 140,382 17,506 -587 16,919 3.1 Debt securities 185 -1 184 - - - 185 -1 184 33 -29 4 3.2 Equity securities 140,762 -564 140,198 - - - 140,762 -564 140,198 14,970 -556 14,414 3.3 UCITS units ------2,503 -2 2,501 3.4 Loans ------4. Financial assets held to maturity ------Total Assets 146,802 -6,022 140,780 - - - 146,802 -6,022 140,780 77,074 -23,793 53,281 Financial liabilities 1. Due to banks ------2. Due to customers ------3. Debt securities in issue 2,638 -80 2,558 - - - 2,638 -80 2,558 2,071 -104 1,967 Total Liabilities 2,638 -80 2,558 - - - 2,638 -80 2,558 2,071 -104 1,967 Notes to the consolidated accounts accounts consolidated to the Notes 217 Notes to the consolidated accounts
Section 7 - Profit/Loss on financial assets and liabilities designated at fair value – Item 110
7.1 Fair value change in financial assets and liabilities designated at fair value: breakdown
7.1.1 Banking group
Capital Trading Capital Trading Net profit (thousand euro) gains income losses loss or loss ( A ) ( B ) ( C ) ( D ) (A+B)-(C+D)
1. Financial assets 42,525 20,492 -44,872 -5,515 12,630 1.1 Debt securities 19,304 2,263 -88 -2,354 19,125 1.2 Equity securities 169 - -1,241 -266 -1,338 1.3 UCITS units 8,976 16,141 -9,478 -1,386 14,253 1.4 Loans 14,076 2,088 -34,065 -1,509 -19,410 2. Financial liabilities 229,471 19,623 -37,208 -3,913 207,973 2.1 Debt securities in issue 229,471 19,623 -37,208 -3,913 207,973 2.2 Due to banks - - - - - 2.3 Due to customers - - - - - Foreign currency financial assets and 3. liabilities: exchange differences X X X X 2,446 4. Derivatives 151,122 59,868 -250,217 -13,472 -54,396 4.1 Financial derivatives 151,122 59,868 -250,217 -13,472 -54,396 - on debt securities and interest rates 68,878 56,250 -199,086 -8,563 -82,521 - on equity securities and equity indices 82,241 3,618 -51,096 -4,909 29,854 - on currencies and gold X X X X -1,697 - Other 3 - -35 - -32 4.2 Credit derivatives - - - - - Total 423,118 99,983 -332,297 -22,900 168,653
This item includes the 155.7 million positive effect, before tax, of the impairment of liabilities in issue caused by the deterioration of the creditworthiness of Gruppo Banco Popolare, resulting from the fair value measurement of hedged own securities issued.
7.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
7.1.3 Other companies falling within the consolidation scope
Profit on assets and liabilities measured at fair value pertaining to other companies total 4.3 million euro and is mainly related to financial assets.
Section 8 - Net write-downs/write-backs on impairment – Item 130
8.1 Net write-downs for loan impairment: breakdown
8.1.1 Banking group
Write-downs Write-backs (thousand euro) Individual Individual Collective 2007 2006 Collective Write-offs Other A B A B
A. Due from banks - - -3,505 - - - 68 -3,437 -276 B. Due from customers -60,645 -383,347 -174,740 93,578 137,822 11,148 35,439 -340,745 -133,666 C. Total -60,645 -383,347 -178,245 93,578 137,822 11,148 35,507 -344,182 -133,942 A= interest-related B= Other write-backs
218 Notes to the consolidated accounts
8.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
8.1.3 Other companies
Write-downs Write-backs (thousand euro) Individual Individual Collective 2007 2006 Collective Write-offs Other A B A B
A. Due from banks ------B. Due from customers - -688 -122 - 1,147 - - 337 122 C. Total - -688 -122 - 1,147 - - 337 122 A= interest-related B= Other write-backs
8.2 Net write-downs for impairment of financial assets available for sale: breakdown
8.2.1 Banking group
Write-downs Write-backs (thousand euro) Individual Individual 2007 2006 Write-offs Other A B
A. Debt securities -5 -22,726 - - -22,731 - B. Equity securities -52 -85,295 X X -85,347 -2,194 C. UCITS units - - X - - - D. Loans to banks ------E. Loans to customers ------F. Total -57 -108,021 - - -108,078 -2,194 A= interest-related B= Other write-backs
8.2.2 Insurance companies
No insurance companies fall within the consolidation scope.
8.2.3 Other companies
No write-downs for impairment of financial assets available for sale pertaining to other companies were reported.
8.3 Net write-downs for impairment of financial assets held to maturity: breakdown
No write-downs for impairment of financial assets held to maturity were reported during the year.
8.4 Net write-downs for impairment of other financial transactions: breakdown
8.4.1 Banking group
Write-downs Write-backs Total Total (thousand euro) Individual Individual Collective Collective 2007 2006 Write-offs Other A B A B
A. Guarantees given - -4,572 -480 - 4,596 - 37 -419 -2,351 B. Credit derivatives ------Commitments to grant C. - - -28 - - - - -28 - loans D. Other transactions - -22 - - - - 203 181 -1 E. Total - -4,594 -508 - 4,596 - 240 -266 -2,352 A= Interest-related B= Other write-backs
219 Notes to the consolidated accounts
8.4.2 Insurance companies
No insurance companies fall within the consolidation scope.
8.4.3 Other companies falling within the consolidation scope
No write-downs for impairment of other financial transactions pertaining to other companies were reported. Section 9 – Net premiums – Item 150
Not material for the Group. Section 10 - Other insurance revenues and charges – Item 160
Not material for the Group. Section 11 - Administrative expenses – Item 180
11.1 Personnel expenses: breakdown
Other (thousand euro) Banking group 2007 2006 companies
1) Employees on payroll 1,331,036 3,365 1,334,401 870,587 a) wages and salaries 907,575 2,374 909,949 595,397 b) social security charges 227,799 796 228,595 162,745 c) termination benefits 17,470 174 17,644 774 d) pension expenses 1,091 - 1,091 201 e) provisions for employee termination benefits 17,943 14 17,957 26,752 f) provisions for post-employment benefits and similar: 15,255 - 15,255 1,836 - defined contributions 7,181 - 7,181 1,824 - defined benefits 8,074 - 8,074 12 g) payments to external supplementary pension funds: 15,295 - 15,295 16,328 - defined contributions 13,047 - 13,047 5,553 - defined benefits 2,248 - 2,248 10,775 h) costs associated with share-based payments 404 - 404 1,911 i) other employee benefits 134,034 7 134,041 66,568 l) expense recovery for detached personnel -5,830 - -5,830 -1,925 2) Other staff 20,149 323 20,472 7,057 3) Directors 14,625 79 14,704 6,621 Total 1,365,810 3,767 1,369,577 884,265
Item h) “costs associated with share-based payments” includes charges on options issued in favor of employees covering the portion pertaining to the current financial year. For more information on the existing stock option plan, see Chapter I of these explanatory notes.
11.2 Average number of employees by category – Banking group
2007(*) 2007 2006
Employees on payroll 21,364 17,069 12,364 a) senior managers 366 294 213 b) total managers 7,523 6,144 4,678 of which: 3rd and 4th level 3,483 2,886 2,208 c) remaining staff on payroll 13,475 10,631 7,473 Other staff 449 388 137 Average number of employees of the Banking group 21,813 17,457 12,501
(*) Monthly based average
220 Notes to the consolidated accounts
11.3 Post-employment defined benefit plans: total costs
(thousand euro) 2007 2006
a) Pension costs related to current employment services - - b) Pension costs related to past employment services -150 -113 c) Financial charges -9 - d) Expected return on plan assets - - e) Actuarial gains and losses - - f) Profit and loss on curtailments or settlements - 467 Total -159 354
11.4 Other employee benefits
The item referring to other employee benefits, whose costs are shown in the previous table 11.1, item “i) other employee benefits”, includes charges associated with loyalty bonuses.
11.5 Other administrative expenses: breakdown
Other (thousand euro) Banking group 2007 2006 companies
a) property expenses: 126,136 463 126,599 79,380 - rental and maintenance 89,510 363 89,873 52,472 - cleaning of premises 11,980 31 12,011 8,594 - energy, water and heating 24,646 69 24,715 18,314 b) direct and indirect taxes 138,529 258 138,787 102,330 c) postage, telephone, print-outs and other office expenses 74,275 166 74,441 50,690 d) maintenance and rents for furniture, plant and equipment 56,163 53 56,216 47,602 e) fees to external professionals 64,307 293 64,600 44,546 f) information and survey expenses 29,992 5 29,997 25,875 g) security and armored truck guards 15,077 18 15,095 12,544 h) third party services 62,003 1,740 63,743 35,623 i) advertising, entertainment and gifts 33,835 64 33,899 20,921 l) insurance premiums 17,277 111 17,388 11,326 m) transportation, rentals and other travel expenses 12,123 34 12,157 8,541 n) other sundry costs and expenses 89,179 1,131 90,310 30,922 Total 718,896 4,336 723,232 470,300
Section 12 - Net provisions for risks and charges – Item 190
12.1 Net provisions for risks and charges
Reallocated (thousand euro) Provisions 2007 2006 surpluses
1. Provisions to post-employment benefit plan -159 X -159 354 2. Provisions to other risks and charges: -124,951 18,689 -106,262 -59,116 a) litigations -67,484 8,731 -58,753 -55,723 b) personnel costs -997 - -997 - c) other -56,470 9,958 -46,512 -3,393 Total -125,110 18,689 -106,421 -58,762
221 Notes to the consolidated accounts
Section 13 – Net impairments of property, plant and equipment – Item 200
13.1 Net write-downs/Write-backs on property, plant and equipment: breakdown
13.1.1 Banking group
Impairment Depreciation Write-backs Net result (thousand euro) write-downs (a) (b) (c) (a+b-c) A. Property, plant and equipment A.1 Owned: -73,079 -3,346 - -76,425 - operating -71,911 -3,346 - -75,257 - investment -1,168 - - -1,168 A.2 Under finance lease: -747 - - -747 - operating -747 - - -747 - investment - - - - Total -73,826 -3,346 - -77,172
13.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
13.1.3 Other companies
Impairment Depreciation Write-backs Net result (thousand euro) write-downs (a) (b) (c) (a+b-c)
A. Property, plant and equipment A.1 Owned: -996 -1,136 - -2,132 - operating -785 - - -785 - investment -211 -1,136 - -1,347 A.2 Under finance lease: -66 - - -66 - operating -66 - - -66 - investment - - - - Total -1,062 -1,136 - -2,198
Section 14 – Net impairments of intangible assets – Item 210
14.1 Net write-downs of intangible assets: breakdown
14.1.1 Banking group
Impairment Amortization Write-backs Net result (thousand euro) write-downs (a) (b) (c) (a+b-c)
A. Intangible assets A.1 Owned: -71,810 -296 - -72,106 - generated in-house - - - - - other -71,810 -296 - -72,106 A.2 Under finance lease - - - - Total -71,810 -296 - -72,106
14.1.2 Insurance companies
No insurance companies fall within the consolidation scope.
222 Notes to the consolidated accounts
14.1.3 Other companies
Impairment Amortization Write-backs Net result (thousand euro) write-downs (a) (b) (c) (a+b-c)
A. Intangible assets A.1 Owned: -485 - - -485 - generated in-house -3 - - -3 - other -482 - - -482 A.2 Under finance lease - - - - Total -485 - - -485
Section 15 - Other operating income and expense – Item 220
15.1 Other operating expense: breakdown
Banking Other (thousand euro) 2007 2006 group companies
a) charges on fixed assets under finance lease - - - - b) depreciation of expenses for leasehold improvements -9,170 - -9,170 -8,430 c) other -59,176 -1,843 -61,019 -21,750 Total -68,346 -1,843 -70,189 -30,180
15.2 Other operating income: breakdown
Banking Other (thousand euro) 2007 2006 group companies
a) charges attributable to third parties debited on receivable deposits and checking accounts 167,855 - 167,855 135,650 b) tax recoveries 120,183 - 120,183 90,211 c) expense recoveries 27,826 1,122 28,948 18,640 d) proceeds from securitizations 4,695 - 4,695 3,295 e) rent income from property 7,685 501 8,186 2,879 f) other 67,297 7,889 75,186 57,418 Total 395,541 9,512 405,053 308,093
223 Notes to the consolidated accounts
Section 16 – Profit (loss) on equity investments – Item 240
16.1 Profit (loss) on equity investments: breakdown
(thousand euro) Banking group Other companies 2007 2006
1) Companies under joint control A. Income 4,538 - 4,538 118,253 1. Write-ups 4,538 - 4,538 18,370 2. Gains upon disposal - - - 99,711 3. Write-backs - - - 172 4. Other positive changes - - - - B. Expense - - - - 1. Write-downs - - - -1,532 2. Impairment losses - - - - 3. Losses upon disposal - - - - 4. Other negative changes - - - - Net result 4,538 - 4,538 116,721 2) Companies under significant influence - A. Income 591,531 - 591,531 353,120 1. Write-ups 20,396 - 20,396 234,478 2. Gains upon disposal 543,550 - 543,550 102,815 3. Write-backs - - - 14,561 4. Other positive changes 27,585 - 27,585 1,266 B. Expense -336,106 - -336,106 -81,861 1. Write-downs -164,577 -81 -164,658 -13,492 2. Impairment losses -170,409 - -170,409 - 3. Losses upon disposal - - - -5,990 4. Other negative changes -1,120 - -1,120 -62,379 Net result 255,425 -81 255,344 271,259 Total 259,963 -81 259,882 387,980
Section 17 – Fair value changes of tangible and intangible assets – Item 250
17.1 Fair value changes (or revaluation changes) of tangible and intangible assets: breakdown
The Group has no tangible or intangible assets measured at fair value or revalued.
Section 18 - Goodwill impairment – Item 260
The impairment tests conducted on goodwill recognized in the consolidated balance sheet as at December 31st, 2007, as already illustrated in Section 13 of Chapter B of theses explanatory notes, did not give rise to the need for goodwill impairment.
224 Notes to the consolidated accounts
Section 19 - Profit (loss) on disposal of investments – Item 270
19.1 Profit (loss) on disposal of investments: breakdown
(thousand euro) Banking group Other companies 2007 2006
A. Property 14,968 - 14,968 42,346 - Gains upon disposal 14,968 - 14,968 42,354 - Losses upon disposal - - - -8 B. Other assets 4,979 - 4,979 -548 - Gains upon disposal 5,124 - 5,124 314 - Losses upon disposal -145 - -145 -862 Net result 19,947 - 19,947 41,798
Section 20 - Tax on income from continuing operations – Item 290
20.1 Tax on income from continuing operations: breakdown
(thousand euro) Banking group Other companies 2007 2006
1. Current tax ( - ) -635,817 -4,175 -639,992 -459,825 2. Changes in current tax in prior years (+/-) -847 -129 -976 7,118 3. Reduction in current tax for the year (+) 148 36 184 - 4. Changes in deferred tax assets (+/-) -46,340 -462 -46,802 28,392 5. Changes in deferred tax liabilities (+/-) 177,985 4,715 182,700 -63,747 6 Income tax for the year (-) -504,871 -15 -504,886 -488,062 (-1 +/- 2 + 3 +/- 4 +/- 5)
20.2 Reconciliation between theoretical and effective tax charges recognized in the financial statements
2007 2006 (thousand euro) Gross % of gross Gross % of gross Income tax Income tax income income income income
Gross income 1,280,801 1,545,833 IRES tax 358,298 27.97% 394,561 25.52% IRAP tax 129,948 10.15% 93,501 6.05% Other taxes (foreign taxes, substitutive taxes, etc) 16,640 1.30% 0.00% Total 504,886 39.42% 488,062 31.57%
225 Notes to the consolidated accounts
20.2.1 Reconciliation between nominal and actual tax rate
2007 2006 Gross IRES Gross income/ % of gross income/ % of gross (thousand euro) Taxable Tax Tax income Taxable income income ( 1 ) income ( 1 )
Theoretical tax 1,280,801 422,664 33.00% 1,545,833 510,125 33.00% Actual tax 1,085,752 358,298 27.97% 1,195,639 394,561 25.52% Change under reconciliation -195,049 -64,366 -5.03% -350,194 -115,564 -7.48%
IRES % of gross % of gross Tax Tax (thousand euro) income income
Changes from individual consolidated tax rate - Undeductible taxes (ICI, undeductible foreign taxes, etc) 1,750 0.14% 1,459 0.09% - Undeductible costs, contingent liabilities and losses 20,620 1.61% 2,626 0.17% - Undeductible capital losses from tax-exempted equity 180,352 14.08% 2,152 0.14% investments - Other increases 88,017 6.87% 13,518 0.87% - Undeductible capital losses under DL 203/05 16,225 1.27% 13,274 0.86% - Adjustment of deferred tax assets and liabilities from -3,821 -0.30% 9,347 0.60% prior years - Dividends excluded -113,860 -8.89% -36,765 -2.38% - Tax-exempted capital gains on sale of tax-exempted -182,948 -14.28% -91,855 -5.94% equity investments net of associated expenses - Losses and profits of foreign companies not - 0.00% -172 -0.01% deductible/taxable under IRES - Profit allocated to tax deductible charity -3,777 -0.29% -4,664 -0.30% - Profit allocated to directors -2,740 -0.21% - 0.00% - Tax-free UCITS proceeds -1,005 -0.08% -1,713 -0.11% - Benefits from consolidated tax treatment -63 -0.00% -2,870 -0.19% - Tax-free contingent assets -30,140 -2.35% -250 -0.02% - Other decreases -49,366 -3.85% -2,115 -0.14% - Effects from deferred tax adjustment to the new IRES tax 86,547 6.76% - 0.00% rate prescribed by 2008 Budget Law
Fiscal impact from IFRS 3 adjustments: - less taxes on equity investments -671 -0.05% - less taxes on customer loans -6,346 -0.50% - more taxes on other changes 164 0.01%
Adjustments from IFRS 3- related fiscal impact - adjustment of tax on equity investments -5,123 -0.40% - adjustment of tax on customer loans -66,995 -5.23% - adjustment of tax on trademarks -14,878 -1.16% - adjustment of tax on goodwill 18,932 1.48% - adjustment of tax on other changes -8,130 -0.63%
Fiscal impact on consolidation entries and eliminations - Changes in equity investments carried at equity net of 12,888 1.01% -17,536 -1.13% changes in deferred taxes on distributable earnings
Reconciled total -64,367 -5.03% -115,564 -7.48%
226 Notes to the consolidated accounts
2007 2006 Gross IRAP Gross income/ % of gross income/ % of gross (thousand euro) Taxable Tax Tax income Taxable income income ( 1 ) income ( 1 )
Theoretical tax ( 2 ) 1,280,801 65,816 5.14% 1,545,833 74,200 4.80% Effective tax 2,528,819 129,948 10.15% 1,947,938 93,501 6.05% Change under reconciliation 1,248,018 64,132 5.01% 402,105 19,301 1.25%
IRAP % of gross % of gross Tax Tax (thousand euro) income income
Changes from individual consolidated tax rate - Undeductible costs and expenses related to own and 59,212 4.62% 39,315 2.54% third-party personnel and collaborations - Loan write-downs and provisions for risks and charges, 27,580 2.15% 7,929 0.51% net of utilization - Undeductible non-recurring charges 1,342 0.10% 318 0.02% - Undeductible interest expense 9,934 0.78% 0.00% - Capital losses on valuation/sale financial fixed assets 29,395 2.30% - 0.00% - Other increases 15,946 1.24% 381 0.02% - Adjustment for deferred tax assets and liabilities from 358 0.03% -1,495 -0.10% prior years - Dividends excluded -19,551 -1.53% -5,574 -0.36% - Tax-free non-recurring revenues -2,331 -0.18% -6,372 -0.41% - Capital gains on valuation/sale financial fixed assets net -38,931 -3.04% - 0.00% of associated charges - Other decreases -11,778 -0.92% -15,201 -0.98% - Effects from adjustment/cancellation deferred tax assets/liabilities under the new IRAP regulation 663 0.05% prescribed by the 2008 Budget Law
Fiscal impact from IFRS 3 adjustments: - new taxes on customer loans - 4,133 -0.32% - new taxes on other changes 159 0.01%
Adjustments from IFRS 3- related fiscal impact - tax adjustment on other changes - 5,704 -0.45%
Fiscal impact on consolidation entries and eliminations - more taxes on other items 1,973 0.15%
Total 64,132 5.01% 19,301 1.25%
Section 21 - Income (Loss) after tax from discontinued operations – Item 310
21.1 Income (Loss) after tax from discontinued operations: breakdown
Banking Other (thousand euro) 2007 2006 group companies
Discontinued operations / liabilities 1. Income - 273,808 273,808 36,662 2. Expense - -260,568 -260,568 -27,555 3. Valuation difference of discontinued operations and associated liabilities 104 - 104 - 4. Profit (Loss) on sale - - - - 5. Tax -39 1,776 1,737 -2,882 Profit (Loss) 65 15,016 15,081 6,225
227 Notes to the consolidated accounts
21.2 Breakdown of income tax on discontinued operations
(thousand euro) 2007 2006
1. Current tax ( - ) -147 -2,882 2. Changes in deferred tax assets ( +/- ) 1,884 - 3. Changes in deferred tax liabilities ( -/+ ) - - 4. Income tax for the year (-1 +/- 2 +/- 3) 1,737 -2,882
Section 22 - Minority interest – Item 330
22.1 Breakdown of item 330 “minority interest”
(thousand euro) 2007 2006
Credito Bergamasco S.p.A. 21,456 24,498 Partecipazioni Italiane 8,888 Cassa di Risparmio Lucca Pisa Livorno 6,114 Banca Aletti S.p.A. 3,397 2,994 Leasimpresa S.p.A. 657 Banca Popolare di Mantova 597 Efibanca / Aletti Merchant 287 2,507 Banca Popolare di Crema 257 Banca Caripe 176 Arena Broker S.r.l. 115 103 Aletti Gestielle S.G.R. S.p.A. 55 102 Aletti Gestielle Alternative S.G.R. S.p.A. 190 102 Other 550 119 Total 42,082 31,082
Item Other includes non material minority interest.
Section 23 – Other information
No additional material information is available other than what illustrated in the previous sections.
Section 24 – Earnings per share
Weighted average of common Share of profit (euro) euro shares
EPS - stated 578,708,285 640,480,672 0.904 EPS - diluited 576,993,241 700,007,471 0.824
24.1 Average number of diluted common shares
The dilutive effect on the number of common shares outstanding is due to the intrinsic conversion option of the subordinated bond program expiring on June 2010 for 7,906,627 shares, to the issue of warrants assigned to the subscribers of the capital increase carried out by former Banca Popolare Italiana in 2006 for 49,458,937 shares, and to the issue of shares as a result of the options exercised under the stock option plan for 2,161,250 shares.
The comparative EPS is not reported, as it would be meaningless because Gruppo Banco Popolare in its current form was formed on July 1st, 2007.
24.2 Other information
No additional material information is available other than what illustrated in the previous sections.
228 Notes to the consolidated accounts
CHAPTER D – SEGMENT REPORTING
This chapter illustrates the consolidated results subdivided by business segment in keeping with the accounting standard IAS 14. In particular Gruppo Banco Popolare chose the following segment reporting format: - primary format: breakdown of consolidated results by business segment; - secondary format: breakdown of consolidated results by geographical segments.
A. Primary format
Gruppo Banco Popolare decided to adopt the “business segment” as its primary reporting format.
Criteria followed to identify the business segments
The business segments were identified by classifying the various group companies based on the prevailing business activity performed by each of them. The results of each segment result from the aggregation of the data reported in the statutory financial statements of the legal entities assigned to that specific segment.
Business segments
The identified segments are: x Banche del Territorio (local retail banks) x Investment and Private Banking, Asset Management x Consumer Credit x Other.
The “Banche del Territorio” segment comprises the following companies: x Banca Popolare di Verona - S. Geminiano e S. Prospero S.p.A. x Banca Popolare di Lodi S.p.A. x Banca Popolare di Novara S.p.A. x Credito Bergamasco S.p.A. x Cassa di Risparmio di Lucca Pisa Livorno S.p.A. x Banca Popolare di Crema S.p.A. x Banca Popolare di Cremona S.p.A. x Banca Caripe S.p.A. x Banca Popolare di Mantova S.p.A. x Banco Popolare Repubblica Ceská Republika, a.s. x Banco Popolare Croatia d.d. x Banco Popolare Hungary Zrt x Banco Popolare di Verona e Novara (Luxembourg) S.A.
The segment “Investment and Private Banking, Asset Management” includes the companies engaging in merchant banking and asset management, mainly related to Efibanca and Gruppo Aletti. The segment “Consumer Credit” includes all personal loan, credit card and consumer credit activities mainly related to Bipitalia Ducato. Finally, the residual segment “Other” includes primarily the service companies and the real estate companies.
229 Notes to the consolidated accounts
A.1 Segment reporting by business sector – P&L data
Shown below is a summary of the 2007 profitability data compared with 2006 data restated to account for changes in consolidation scope mainly caused by the merger between Gruppo BPVN and Gruppo BPI.
Core Invest. Bank, 31/12/2007 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
1. Net interest, dividend and similar income 1,552,523 64,448 178,738 -79,091 1,716,618 2. Other operating income 682,558 589,789 26,423 355,106 1,653,876 3. Total income (1+2) 2,235,081 654,237 205,161 276,015 3,370,494 4. Operating costs -1,029,152 -125,902 -43,080 -696,104 -1,894,238 5. Profit from operations (3+4) 1,205,929 528,335 162,081 -420,089 1,476,256 6. Write-downs and provisions -276,978 29,737 -30,372 137,646 -139,967 7. Income before tax from continuing operations 928,951 558,072 131,709 -282,443 1,336,289
Core Invest. Bank, 31/12/2006 pro-forma Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
1. Net interest, dividend and similar income 1,316,686 63,804 131,583 763,149 2,275,222 2. Other operating income 885,629 678,370 64,949 319,918 1,948,866 3. Total income (1+2) 2,202,315 742,174 196,532 1,083,067 4,224,088 4. Operating costs -1,364,780 -152,307 -72,895 -753,630 -2,343,612 5. Profit from operations (3+4) 837,535 589,867 123,637 329,437 1,880,476 6. Write-downs and provisions -465,126 77,318 -43,443 202,989 -228,262 7. Income before tax from continuing operations 372,409 667,185 80,194 532,426 1,652,214
A.2 Segment reporting by business sector – Balance sheet data
Illustrated below is a summary of balance sheet data as at December 31st, 2007 and 2006.
Values as at December 31st, 2007
Core Invest. Bank, 31/12/2007 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
Customer loans 72,572,717 6,482,188 4,733,396 762,733 84,551,034 Total assets 85,592,823 20,397,491 5,184,766 17,217,661 128,392,741
Core Invest. Bank, 31/12/2007 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
Due to customers, debt securities in issue and financial 72,091,975 4,264,019 10,006 16,863,068 93,229,068 liabilities measured at fair value Total liabilities 85,592,823 20,397,491 5,184,766 17,217,661 128,392,741
Values as at December 31st, 2007 – Equity investments in associates and joint ventures
Core Invest. Bank, 31/12/2007 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
Under joint control - 844 - 56,380 57,224 Under significant influence - 127,978 - 685,275 813,253
230 Notes to the consolidated accounts
Values as at December 31st, 2006
Core Invest. Bank, 31/12/2006 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
Customer loans 44,683,217 574,621 - -13,275 45,244,563 Total assets 65,296,703 15,096,171 14,554 -11,712,493 68,694,935
Core Invest. Bank, 31/12/2006 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
Due to customers, debt securities in issue and financial 49,230,557 1,468,404 - -124,928 50,574,033 liabilities measured at fair value Total liabilities 65,869,896 14,793,010 14,554 -11,982,525 68,694,935
Values as at December 31st, 2006 – Equity investments in associates and joint ventures
Core Invest. Bank, 31/12/2006 Consumer commercial Priv. Bank., Other Total (thousand euro) Credit banks Asset Man.
Under joint control 123,328 636 - 15,013 138,977 Under significant influence 94,684 499,347 18 63,909 657,958
B. Secondary format
The secondary segment reporting format chosen by Gruppo Banco Popolare is the “geographical segment”.
Criteria followed to identify the geographical segments
The segment reporting under IAS-14 of financial and profitability information of Gruppo Banco Popolare for the secondary format comprises two geographical areas and a residual area: x Italy: it refers to the business activities of the operational offices of the commercial banks and the companies of the group whose registered offices are in Italy; x Foreign: it includes the business activities of the companies of the group whose registered offices are in foreign countries, as well as the business activities of foreign operational offices of Italian companies; x Other: it includes intra-segment relations, which, in compliance with the regulations, have been segregated in a separate column for the reconciliation with the group’s consolidated results.
The following legal entities contribute to the profitability results of the Foreign segment: x Banco Popolare Croatia d.d. x Banco Popolare di Verona e Novara (Luxembourg) S.A. x Banco Popolare Hungary Zrt x Banco Popolare Ceskà Republika a.s. x Banca Aletti & c. (Suisse) S.A. x Bio Energy International S.A. x B.P.I. International (UK) Ltd. x Banca Popolare di Lodi Capital Company LLC x Banca Popolare di Lodi Capital Company LLC II x Banca Popolare di Lodi Capital Company LLC III x Bipielle Bank (Suisse) S.A. x Glass Italy B.V. x Banco Popolare Service Kft x Seefinanz S.A. (under liquidation) x Verona e Novara France S.A. x Bipielle International Holding S.A. x Italfortune International Advisors S.A. x Estates Capital Venture S.A. x Veronagest S.A. x Black & Blue GMBH x Royle West Ltd.
The remaining legal entities belong to the Italy segment.
231 Notes to the consolidated accounts
Criteria for the preparation of the income statement and the balance sheet by Business Segments in the secondary format
Both the balance sheet and the income statement have been prepared by referring to the accounting values of total income and total assets of the companies allocated in the two segments mentioned above. Any intra-segment relation has been segregated, as required by the regulations, in a separate column for the reconciliation with the group’s consolidated results.
B.1 Segment reporting by geographical areas – P&L data
Illustrated below are the main consolidated profitability data by geographical area in financial year 2007, compared to financial year 2006 restated to account for changes in consolidation scope mainly caused by the merger between Gruppo BPVN and Gruppo BPI.
31/12/2007 Italy Foreign Other Total (thousand euro)
3,335,514 37,321 -2,341 3,370,494 Total income 3,335,514 37,321 -2,341 3,370,494
31/12/2006 pro-forma Italy Foreign Other Total (thousand euro)
4,221,120 3,836 -868 4,224,088 Total income 4,221,120 3,836 -868 4,224,088
B.2 Segment reporting by geographical areas – Balance sheet data
31/12/2007 Italy Foreign Other Total (thousand euro)
121,762,293 12,697,784 -6,067,336 128,392,741 Total assets 121,762,293 12,697,784 -6,067,336 128,392,741
31/12/2006 Italy Foreign Other Total (thousand euro)
67,425,690 8,921,923 -7,652,678 68,694,935 Total assets 67,425,690 8,921,923 -7,652,678 68,694,935
232 Notes to the consolidated accounts
CHAPTER E – RISKS AND ASSOCIATED HEDGING POLICIES
Section 1 – Risks for the Banking Group
1.1 CREDIT RISK
QUALITATIVE INFORMATION
1. In general
Gruppo Banco Popolare is the backbone of its territory’s business development. It focuses on containing risk levels through an accurate loan selection upon approval, a careful credit relationship management during the loan life, and an accurate geographical ad sector diversification of loans. With reference to the corporate segment, our commitment to support local economic business continues unfailingly, especially for small and medium sized enterprises which characterize the economic fabric of our Country, with a special focus on medium and long term loans, dedicated to research and development, to supporting production investments, and to the enhancement of the financial structure of companies. A distinctive factor in our Group is the research of innovative products to better meet our customers’ needs. With regard to the retail segment, specific marketing actions have been put in place, especially in the residential mortgage and personal loans sectors (also through the operating company “Ducato”) aiming at positioning our Group as the partner of choice for households. Gruppo Banco Popolare systematically and carefully monitors its loan book, with precise analyses of the performance of risk profiles by economic sector, geographical area, customer segment and type of instrument. In case of prospective analyses or special negative events that might affect specific sectors, the necessary corrective actions are immediately taken at central level. With regard to portfolios, our loans are well diversified in terms of sectors, and the counterparty risk is well spread. Over time, internal models have been developed to assign a counterparty rating, which vary depending upon the customer segment. Said models, that were developed also in view of the application of the new regulatory provisions issued by the Bank of Italy (which in turn transpose “Basel II” regulations), are adopted in the procedures of new loan approvals or renewal/change of existing loans, in performance management processes and in risk measurement and capital absorption measurement processes.
2. Credit risk management policies
2.1 Organizational aspects
The loan book risk profile is sensitive to the general economic performance, to structural and technological changes within the borrowing companies, to changes in the competitive position of counterparties, to structural macroeconomic factors (for example, the growing indebtedness of households) and to other external factors, such as the existing legal and regulatory framework. With regard to the organizational structures in charge of managing and controlling credit risk, specific roles and competences have been identified. As of July 1st, 2007, with the formation of the new Gruppo Banco Popolare, the Group Loan Regulation was introduced, which among other things prescribes that the Parent company must guarantee a single governance, management, coordination and control of the credit procedure and associated risks for all the Banche del Territorio and the Operating Companies. The Regulation defines the appropriate policies, procedures and processes, the assessment criteria, as well as the organizational, management, information and training tools. The Banche del Territorio and the Operating Companies shall cooperate with the Parent company to the fine-tuning of credit regulations, methodologies and tools through the contribution of their skills and experience accrued in the daily direct contact with their customers and territory. Gruppo Banco Popolare is constantly in search of competitive edges, based on specialization and integration logics, and for this reason it decided to assign the management of non-ordinary credit activities (for ex. corporate finance, merchant banking, specific consumer credit classes, leases, as well as the management of non-performing loan recovery) to dedicated structures. With the aim of optimizing credit quality and minimizing the global credit risk cost for both the Group and the single companies, the Group organizational model includes the function Credit and Loan Policies at the Parent company’s, whose aim is to foster the lending business and to manage loan policies for the banks and the companies of the Group. In particular: a) Loan Policies - in line with the economic objectives and strategies approved by the Parent company’s Management Board, it sets forth the loan policies with the aim of establishing the global size, distribution and diversification of the Group’s loan book, optimizing the risk adjusted profitability and minimizing the lending cost; - it sets forth the loan policy directions, with the aim of optimizing the Group’s loan book mix and composition, also in terms of maximum exposure for each main component (for ex. geographical area, sector, counterparty,
233 Notes to the consolidated accounts
type of loan instrument, …); - it cooperates with the relevant functions in charge of forecasting the evolution of the Group’s loans.
b) Rating systems - it creates, defining its basic characteristics, manages and optimizes over time, monitoring its validity, the Internal Rating System, including Scoring Systems; - it authorizes overrides, namely discretionary and motivated deviations from ratings, for all the companies of the Group.
c) Major Customers - it supports the Corporate General Management Team in the evaluation and management of “major customers” at Group level; - it defines and proposes loan limits for the Group’s “major customers” to be submitted to the approval of the relevant deliberative boards and to be distributed among the various banks of the Group, in case of common customers, monitoring their compliance; - it receives reports for loans granted by subsidiaries to customers for amounts lying within given thresholds; - it puts forth a compulsory, non binding opinion on the maximum amount of loans that can be granted to customers whose exposures exceed given thresholds.
d) Loan control and management of adversely classified loans - it ensures the coordination of the activities aiming at implementing the loan policies and guidelines by the companies of the Group and it conducts a precise control activity across the whole Group. - it defines the delinquency management rules and the recovery coordination, even with regard to specific dedicated companies/units.
The rules, methodologies and procedures/tools underlying the lending process were defined with the aim of ensuring a uniform approach and terminology across the Group,. The Banche del Territorio prepare the enacting criteria – within given autonomy margins – for the Parent company instructions. Their head offices have a planning and control role, and must also approve the larger loans and manage adversely classified loans, in addition to fixing amount thresholds. The Branch Network is in charge of the operational management of the positions, with different roles and responsibilities between Business Areas and Branches. In the banks the lending power is bound by “cascading” limits, that is, top down decreasing power from the head office boards to the branch deliberative bodies. Ordinary customers of the Banche del Territorio are followed along specific management approach. The target information system, the processes and lending rules for Gruppo Banco Popolare are those used in the former BPVN group. In 2007, Banca Popolare di Lodi and Banca Popolare di Crema have already migrated, while the changeover of the remaining banks of the former BPI group shall be completed by March 2008.
2.2 Management, measurement and control systems
In keeping with the requirements set forth by the new prudential regulations issued by the Supervisory Authorities, the Parent company is setting up an Internal Rating System, which by now is well along the implementation stage. An Internal Rating System is a structured and documented suite of methodologies, organizational and auditing processes, and database organizational modalities for the collection and processing of material information leading to the generation of concise ratings of the creditworthiness of borrowers and of the risks inherent in each lending transaction. Counterparty rating represents the quantitative and qualitative evaluation over a given time horizon and based on all available information, expressed by classifying the ability of a borrower or prospective borrower to deliver on contract obligations along a predefined scale. Each rating class is linked to a probability of default (PD). Rating classes must be arranged depending on their credit risk. This means that by shifting from a low risk class to a higher risk class, the probability of borrowers defaulting is greater. In the development stage, the loan book was segmented based on size and record criteria, in order to maximize the models’ discriminating ability and predictive power. With regard to corporate customers, in 2007 a new generation of models was developed, based on the summary of evaluations regarding different risk profiles, namely: - quantitative data referring to the financial statements. If the company is not required to prepare financial statements, a simplified operating and financial performance analysis is performed. Environmental data are added to the latter, identified through a geographical and sector-related score that combines the sector risk level with the geographical area where the company operates; - performance of the business relationship between bank and customer (analysis of the bank’s internal data); - performance of the business relationship between the banking industry at large and the customer (analysis of the “Centrale dei Rischi”, namely the banking exposure database).
The Integrated Statistical Score is then implemented with qualitative data, that are collected by the position manager in the Customer Id Record. The global score is obtained by combining the two data. The analysis of the distribution of scores assigned to customers led to the definition of rating classes.
234 Notes to the consolidated accounts
For banks, a model has been developed and is long in use, based on a system that when assigning a rating takes into consideration the ratings of major rating firms, the operating and financial performance of the counterparties compared to the aggregates of the banking industry of belonging, the size and the qualitative data entered by the analyst. The rating expressed by the model is verified by an analyst, who shall validate it or change it based on the information gathered and/or on a detailed analysis, providing a concise explanation thereof. The rating procedure for countries of interest to our Group is based on a score obtained by normalizing and weighing the ratings expressed by major rating and research firms. The internal analyst validates, or corrects, the score based on the precise analysis of macro-economic data and on a close monitoring of national and international events concerning the country under examination. Based on the final rating, countries are arranged according to a top-down ranking which is then related back to rating classes. In 2008, an internal rating system is going to be developed also for the retail segment. For the time being a specific credit scoring system is used for the approval of retail customer loans, that can assess the repayment ability of the applicant after a preliminary investigation to verify if there are any negative events and the level of indebtedness with the banking industry at large. If the evaluation expressed by the system is not positive, it shall decrease the ordinary loan threshold. For customers who borrow from various banks of our Group, in order to guarantee a univocal rating, the system verifies the amount of loans outstanding with the banks concerned: the prevailing rating shall be the one determined by the bank that has the higher loan utilization (rating spreading rule). The recent regulations issued by the supervisory authorities require that the adoption of advanced risk analysis methodologies be subordinated to the full use of rating in lending processes, that must constantly support the position manager, on whom lies the ultimate responsibility for the position. In order to ensure that rating is central within lending processes, in 2007 the pre-existing processes have been fine-tuned referring to the assessment and verification of rating by loan officers, the modalities to revise ratings assigned by the model, cases in which it is possible to deviate from the rating process results. Within the loan granting process, the rating must be necessarily approved by the position manager, who must provide a comment on the evaluation expressed by the system. The manager can ask the relevant head office function to change the rating (so called “override”), given the occurrence of specific cases. Again, in order to make a full use of rating in lending processes, the evaluation supplied by the system is used by the relevant functions to decide on loan approvals and has an influence on the application of the automatic renewal mechanism for positions with revocable credit lines. The key position played by rating in lending processes is reflected also in the monitoring and management of the position performance, as a tool that guides the decisions of managers when classifying positions. This process, when referred to the performing loan book, is based on the predictivity of rating, hence on its ability to identify in advance deteriorating positions. As a result, due corrective actions can be taken on time, prior to the actual occurrence of a default. The goals of performance management are: - to reduce the cost of risk, by identifying in advance a limited number of deteriorating positions, that must be closely monitored and managed, following predefined operational rules; - to highlight and promote low risk loans, for the development of marketing initiatives.
According to operational rules, for customers belonging to the worst classes there are specific risk reduction targets and predefined time limits for staying in said low-end classes, under the supervision of specific business area and head office professionals. In particular, there is a cycle of activities that starts as soon as the position manager views the positions that show a marked credit risk deterioration and ends with the assignment of the operational classification. The classification and definition of actions are guided by a system of operational rules and a system of decision-making responsibilities that allocates the decision making power among branches, business areas and head office, depending on the type of proposal put forward by the system and on the time or amount limits. The control activities performed by the branch network and by the head office have long been supported by a system that expresses a score for all borrowing customers based on the relationship performance, and, by area of inquiry, it produces a list of detected anomalies. The score expressed by this system is used any time a rating is not available. Rating is also a parameter used to define the objectives of the incentive system with regard to the loan portion. For the retail segment, an approval system has been implemented to support the Branches with the granting of new loans. Models generating the first loss estimates in case of default (loss given default - LGD) and exposure at default (EAD) have been implemented. The portfolio risk monitoring is based on a default model, that is applied on a monthly basis to the loan exposure of the commercial banks of the former Gruppo BPVN (Banco Popolare di Verona e Novara, Credito Bergamasco, Banca Popolare di Novara), with regard to performing loans, cash loans and guarantees and commitments, and on resident and non resident retail customers. This model allows to estimate operating capital absorption, taking into account the portfolio concentration and the assumption of a joint default of counterparties, in a predefined context of significant macroeconomic variables. The rate of confidence used is 99.96% and the time frame is one year. The portfolio model is integrated with a Montecarlo simulation model, that was developed in-house. In the first half of 2008, the reengineering of the portfolio model is going to be completed, and it shall then be possible to extend the Credit Var calculation to all counterparties, ordinary and non-ordinary, and to all the commercial banks belonging to Gruppo Banco Popolare, hence it will also be possible to reconcile risk measurements with regulatory data.
235 Notes to the consolidated accounts
2.3 Credit risk mitigation techniques
The Group has always kept a watchful eye on the collection of loan collaterals and securities, i.e. the use of tools and techniques that mitigate credit risk. When deemed necessary, the typical bank guarantees are required, namely collaterals based on property or financial instruments, as well as personal securities. In general, the decision to require a collateral is based on the customer’s creditworthiness and on the characteristics of the transaction. Following this analysis, it may be deemed appropriate to require additional guarantees to mitigate credit risk, considering the estimated recoverable value offered by the collateral. The assessment of loss given default (LGD) gave evidence of the good credit recovery capability, also thanks to the effective collateralization policy adopted by the Group. In 2007, under the Basel II project – CRM, a new system was put on stream and enhanced, that improves the recording of collateral property, displays the market value of the property, allows to periodically revaluate the property, to manage property fractioning, view filed cadastral surveys referring to the property. The value of the financial collaterals is constantly and automatically monitored, so as to compare the present value of the collateral to the initial one, and to allow the manager to act on time in case the collateral suffers from a significant impairment loss. With regard to derivative transactions with market counterparties, we favor entities with which we have entered into agreements requiring the posting of collateral, especially ISDA - Credit Support Annex, so as to obtain a significant reduction of credit risk.
2.4 Impaired financial assets
The Group avails itself of special organizational units in charge of the management of impaired loans, which apply predefined management and recovery methodologies, that differ based on the type of loan by amount and risk profile. Loan classifications follow fixed precautionary criteria, based on objective risk parameters. In general, impaired loans cover loans that give rise to a severely abnormal evolution of the business relations between the customer and the Group, serious irregularities evidenced in the reports sent to the Centrale Rischi, (i.e. the databank managed by the Bank of Italy that gathers information on the solvency of banking customers), a worrisome situation of financial accounts, the onset of negative events that may decrease the value of the accessory securities or that in any case may impair loans. Write-downs are measured on an individual basis for each single position, they are based on precautionary criteria based on the actual recovery likelihood, also in association with the existence of collateral securities, and they are regularly verified. In particular, non-performing loans are managed by a specific dedicated company, owned 100% by the Parent company, that acts as a servicer of non performing loans, specializing in business processes focusing on loan characteristics, to improve loan recovery capabilities and optimize the ratio between costs and collection percentages. As a result, the activity is oriented towards the economic result, privileging whenever possible out-of-court settlements and focusing on the timeless and speed of the recovery action. This company makes use of peripheral structures, specific IT and performance control tools that systematically produce reports.
236 QUANTITATIVE INFORMATION
A. Credit Quality
A.1 Impaired and performing loans: amounts, write-downs, dynamics, economic and geographical distribution
A.1.1 Breakdown of financial assets by portfolio and credit quality (book values)
Banking group Other companies Non- (thousand euro) Restructured Other Total performing Watchlist loans Past due loans Country risk Impaired Other loans assets loans 1. Financial assets held for trading - 901 - - 46 10,038,868 - 45 10,039,860 2. Financial assets available for sale - - - - - 1,804,407 - 8,250 1,812,657 3. Financial assets held to maturity - - - - - 712,077 - 450 712,527 4. Due from banks - - - - 41,963 13,978,152 - 169,250 14,189,365 5. Customer loans 881,381 1,281,385 124,989 377,288 7,615 81,878,049 - 327 84,551,034 6. Financial assets measured at fair value - - - - - 843,155 - 45,282 888,437 7. Non-current assets held for sale - - - - - 118 - 4,284 4,402 8. Hedging derivatives - - - - - 43,741 - - 43,741 31/12/2007 881,381 1,282,286 124,989 377,288 49,624 109,298,567 - 227,888 112,242,023 31/12/2006 550,498 470,730 49,712 76,768 14,820 63,524,741 - 9,000 64,696,269 Notes to the consolidated accounts accounts consolidated to the Notes 237 Notes to the consolidated accounts accounts consolidated to the Notes 238 A.1.2 Breakdown of financial assets by portfolio and credit quality (gross and net values)
Impaired assets Other assets (thousand euro) Individual Collective Collective write- Total Gross exposure Net exposure Gross exposure Net exposure write-downs write-downs downs A. Banking group 1. Financial assets held for trading 4,601 -3,700 - 901 X X 10,038,914 10,039,815 2. Financial assets available for sale - - - - 1,807,041 -2,634 1,804,407 1,804,407 3. Financial assets held to maturity - - - - 712,077 - 712,077 712,077 4. Due from banks - - - - 14,023,874 -3,759 14,020,115 14,020,115 5. Customer loans 4,233,176 -1,438,866 -129,267 2,665,043 82,638,015 -752,351 81,885,664 84,550,707 6. Financial assets measured at fair value - - - - X X 843,155 843,155 7. Non-current assets held for sale - - - - 118 - 118 118 8. Hedging derivatives - - - - X X 43,741 43,741 Total A 4,237,777 -1,442,566 -129,267 2,665,944 99,181,125 -758,744 109,348,191 112,014,135 B. Other companies falling within the consolidation scope 1. Financial assets held for trading - - - - X X 45 45 2. Financial assets available for sale - - - - 8,250 - 8,250 8,250 3. Financial assets held to maturity - - - - 450 - 450 450 4. Due from banks - - - - 169,250 - 169,250 169,250 5. Customer loans - - - - 449 -122 327 327 6. Financial assets measured at fair value - - - - X X 45,282 45,282 7. Non-current assets held for sale - - - - 4,284 - 4,284 4,284 8. Hedging derivatives - - - - X X - - Total B - - - - 182,683 -122 227,888 227,888 31/12/2007 4,237,777 -1,442,566 -129,267 2,665,944 99,363,808 -758,866 109,576,079 112,242,023 31/12/2006 1,761,706 -612,445 -1,553 1,147,708 55,044,337 -270,879 63,548,561 64,696,269 Notes to the consolidated accounts
A.1.3 Cash and off-balance sheet exposure to banks: gross and net values
Individual write- Collective write- (thousand euro) Gross exposure Net exposure downs downs
A. Cash exposure A.1 Banking group a) Non-performing loans - - - - b) Watchlist loans - - - - c) Restructured loans - - - - d) Past due loans - - - - e) Country Risk 45,722 X -3,759 41,963 f) Other assets 16,000,261 X - 16,000,261 Total A.1 16,045,983 - -3,759 16,042,224 A.2 Other companies a) Impaired - - - - b) Other 176,996 X - 176,996 Total A.2 176,996 - - 176,996 Total A 16,222,979 - -3,759 16,219,220 B. Off-balance sheet exposure B.1 Banking group a) Impaired - - - - b) Other 7,347,463 X -1,170 7,346,293 Total B.1 7,347,463 - -1,170 7,346,293 B.2 Other companies a) Impaired - - - - b) Other - X - - Total B.2 - - - - Total B 7,347,463 - -1,170 7,346,293
A.1.4 Cash exposure to banks: evolution of gross impaired exposures subject to “country risk”
Non- Watchlist Restructured Past due (thousand euro) performing Country risk loans loans loans loans
A. Gross opening balance - - - - 6,684 - of which: loans sold and not derecognized - - - - - B. Increases - - - - 45,875 B.1 Transfers from performing loans - - - - - B.2 Transfers from other impaired loans - - - - - B.3 Other increases - - - - 45,875 C. Decreases - - - - -6,837 C.1 Transfers to performing loans - - - - - C.2 Write-offs - - - - - C.3 Collections - - - - -208 C.4 Gains on disposal - - - - - C.5 Transfers to other impaired loans - - - - - C.6 Other decreases - - - - -6,629 D. Gross closing balance - - - - 45,722 - of which: loans sold and not derecognized - - - - -
239 Notes to the consolidated accounts
A.1.5 Cash exposure to banks: evolution of total write-downs
Non- Watchlist Restructured Past due (thousand euro) performing Country risk loans loans loans loans
A. Gross opening balance - - - - 355 - of which: loans sold and not derecognized - - - - - B. Increases - - - - 3,815 B.1 write-downs - - - - 3,411 B.2 transfers from other impaired loans - - - - x B.3 other increases - - - - 404 C. Decreases - - - - -411 C.1 write-backs from valuation - - - - -25 C.2 write-backs from collection - - - - -3 C.3 write-offs - - - - - C.4 transfer to other impaired loans - - - - x C.5 other decreases - - - - -383 D. Gross closing balance - - - - 3,759 - of which: loans sold and not derecognized - - - - -
A.1.6 Cash and off-balance sheet exposures to customers: gross and net values
Portfolios / Quality Individual write- Collective write- Gross exposure Net exposure (thousand euro) downs downs
A. Cash exposure A.1 Banking group a) Non-performing loans 2,012,492 -1,041,133 -89,978 881,381 b) Watchlist loans 1,686,503 -372,387 -32,731 1,281,385 c) Restructured loans 145,348 -20,342 -17 124,989 d) Past due loans 388,833 -5,004 -6,541 377,288 e) Country Risks 7,827 X -166 7,661 f) Other assets 91,738,679 X -754,819 90,983,860 Total A.1 95,979,682 -1,438,866 -884,252 93,656,564 A.2 Other companies a) Impaired - - - - b) Other 50,969 X -122 50,847 Total A.2 50,969 - -122 50,847 Total A 96,030,651 -1,438,866 -884,374 93,707,411 B. Off-balance sheet exposure B.1 Banking group a) Impaired 87,482 -9,067 -2,582 75,833 b) Other 14,983,005 X -3,541 14,979,464 Total B.1 15,070,487 -9,067 -6,123 15,055,297 B.2 Other companies a) Impaired - - - - b) Other 45 X - 45 Total B.2 45 - - 45 Total B 15,070,532 -9,067 -6,123 15,055,342
240 Notes to the consolidated accounts
A.1.7 Cash exposures to customers: evolution of gross impaired exposures subject to “country risk”
Non- Watchlist Restructured Past due (thousand euro) performing Country risk loans loans loans loans
A. Gross opening balance 1,064,495 553,048 59,437 77,414 9,364 - of which: loans sold and not derecognized - - - - - B. Increases 2,680,180 2,402,914 229,173 695,327 36,827 B.1 Transfers from performing loans 168,058 1,065,693 765 328,685 - B.2 Transfers from other impaired loans 310,713 103,495 67,452 5,808 - B.3 Other increases 2,201,409 1,233,726 160,956 360,834 36,827 C. Decreases -1,732,183 -1,269,459 -143,262 -383,908 -38,364 C.1 Transfers to performing loans -605 -244,161 -3,137 -185,267 - C.2 Write-offs -418,282 -6,199 -3,464 - - C.3 Collections -225,477 -337,017 -42,886 -44,917 -457 C.4 Gains on disposal -12,100 - -11,508 -2 - C.5 Transfers to other impaired loans -42,148 -338,715 -4,974 -101,631 - C.6 Other decreases -1,033,571 -343,367 -77,293 -52,091 -37,907 D. Gross closing balance 2,012,492 1,686,503 145,348 388,833 7,827 - of which: loans sold and not derecognized - 31,528 - 3,302 -
A.1.8 Cash exposures to customers: evolution of total write-downs
Non- Watchlist Restructured Past due (thousand euro) performing Country risk loans loans loans loans
A. Gross opening balance 514,844 84,268 9,725 646 873 - of which: loans sold and not derecognized - - - - - B. Increases 1,491,274 475,510 61,633 43,776 157 B.1 write-downs 337,072 182,986 7,134 5,000 34 B.2 transfers from other impaired loans 54,687 1,528 31,986 1,038 x B.3 other increases 1,099,515 290,996 22,513 37,738 123 C. Decreases -875,007 -154,660 -50,999 -32,877 -864 C.1 write-backs from valuation -43,498 -23,581 -27,853 -31,724 -17 C.2 write-backs from collection -59,471 -21,698 -4,418 - -42 C.3 write-offs -416,171 -6,201 -3,464 - - C.4 transfer to other impaired loans -27,486 -61,008 -729 -16 x C.5 other decreases -328,381 -42,172 -14,535 -1,137 -805 D. Gross closing balance 1,131,111 405,118 20,359 11,545 166 - of which: loans sold and not derecognized 18,852 8,126 - 10 -
241 Notes to the consolidated accounts accounts consolidated to the Notes 242 A.2 Classification of exposures based on internal and external ratings
A.2.1 Breakdown of cash and off-balance sheet exposures by external rating classes (book values)
Exposures AAA/AA- A+/A- BBB+/BBB- BB+/BB- B+/B- Below B- Unrated Total
A. Cash exposure 3,165,741 16,224,740 1,031,780 2,275,545 1,029 3 87,314,381 110,013,218 B.1 Financial derivatives 518,460 178,186 6,387 110,353 10,038 - 1,448,832 2,272,256 B.2 Credit derivatives - 30,569 - - - - - 30,569 C. Guarantees given 464,367 351,764 200,319 280,686 - - 11,003,254 12,300,390 D. Commitments 144,377 273,598 159,900 152,257 900 525 7,056,637 7,788,193 Total 4,292,945 17,058,858 1,398,385 2,818,841 11,966 528 106,823,104 132,404,626
A.2.2 Breakdown of cash and “off-balance sheet” exposures by internal rating classes (book values)
Banks AA A BBB BB B Unrated Total Exposures
A. Cash exposure 1,227,776 6,030,734 183,533 1,013,995 87 2,474,704 10,930,830 B.1 Financial derivatives 433,647 138,857 3,657 92,308 8,396 589,024 1,265,888 B.2 Credit derivatives 30,569 30,569 C. Guarantees given 47,875 219,233 97,226 227,810 531,298 1,123,442 D. Commitments 139,619 107,558 26,530 297,406 1,758 283,328 856,199 Total 1,879,486 6,496,382 310,946 1,631,518 10,241 3,878,354 14,206,927 Large Corporate 1 2 3 4 5 6 7 8 Unrated Total Exposures
A. Cash exposure 432,054 1,931,527 1,259,808 1,528,181 937,633 316,909 40,915 999,870 7,446,898 B. Financial derivatives 2,540 7,339 9,284 6,129 3,839 342 33 4,552 34,059 C. Guarantees given 6 67,920 680,717 683,659 627,276 209,576 92,125 2,693 364,768 2,728,739 D. Commitments 1,272 57,278 257,291 185,992 289,540 130,682 13,257 211 144,345 1,079,868 Total 1,278 559,792 2,876,874 2,138,743 2,451,127 1,281,730 422,633 43,853 1,513,535 11,289,565
Mid Corporate 1 2 3 4 5 6 7 8 9 Unrated Total Exposures
A. Cash exposure 205,462 1,448,511 3,585,875 5,394,364 6,574,518 4,471,096 2,009,246 459,356 202,748 30,648 24,381,824 B. Financial derivatives 3,901 14,996 20,710 37,224 29,115 18,407 13,037 2,173 705 173 140,440 C. Guarantees given 100,738 323,854 546,637 490,835 704,550 288,579 60,224 10,055 9,840 3,101 2,538,413 D. Commitments 124,964 333,073 445,246 419,003 329,763 149,274 50,320 7,696 1,866 2,273 1,863,479 Total 435,066 2,120,435 4,598,468 6,341,426 7,637,946 4,927,355 2,132,827 479,281 215,158 36,195 28,924,156
Small Business 1 2 3 4 5 6 7 8 9 Unrated Total Exposures
A. Cash exposure 29,345 272,532 1,148,403 2,895,283 3,101,047 2,575,970 1,121,313 494,103 189,156 17,517 11,844,668 B. Financial derivatives 284 1,477 2,830 6,816 4,447 3,501 1,448 625 264 32 21,724 C. Guarantees given 14,722 56,579 97,209 168,172 114,245 67,257 22,962 7,591 4,970 807 554,515 D. Commitments 30,386 91,124 127,749 211,131 117,051 59,859 17,763 5,411 2,045 952 663,469 Total 74,737 421,712 1,376,190 3,281,403 3,336,790 2,706,586 1,163,486 507,730 196,434 19,308 13,084,375
Tables in A.2.2 represent the breakdown by rating class of performing loans referring to companies that have migrated onto the Target system as at December 31st, 2007. The “Unrated” class reports the entire customer loan portfolio of the Banks of the Group that are going to use the Target information system in 2008. The percentage of the rated corporate portfolio accounts for 97% of the total portfolio. Notes to the consolidated accounts accounts consolidated to the Notes 243 Notes to the consolidated accounts accounts consolidated to the Notes 244 A.3 Breakdown of secured exposures by type of security
A.3.1 Secured cash exposure to banks and customers
Collateral guarantees (1) Personal guarantees (2) Credit derivatives Guarantees and commitments Total (thousand euro) Exposure Other (1)+(2) Property Securities Other assets Other public Other public Other States Banks counter- States Banks 31/12/2007 entities entities entities parties 1. Secured exposures to banks: 4,213,454 2,427 4,064,878 4,035 - - - - - 3,397 1,742 136,847 4,213,326 1.1. fully secured 4,209,942 2,427 4,064,878 4,030 - - - - - 3,397 1,727 136,846 4,213,305 1.2. partly secured 3,512 - - 5 ------15 1 21 2. Secured exposures to customers: 48,280,641 63,177,076 3,378,470 1,856,098 - - 65,744 973,726 52,187 105,810 2,439,649 41,441,955 113,490,715 2.1. fully secured 40,759,297 61,904,899 3,175,522 1,546,414 - - 30,744 441,461 49,919 92,397 2,380,679 40,381,125 110,003,160 2.2. partly secured 7,521,344 1,272,177 202,948 309,684 - - 35,000 532,265 2,268 13,413 58,970 1,060,830 3,487,555 Total 52,494,095 63,179,503 7,443,348 1,860,133 - - 65,744 973,726 52,187 109,207 2,441,391 41,578,802 117,704,041
A.3.2 Secured off-balance sheet exposure to banks and customers
Collateral guarantees (1) Personal guarantees (2) Credit derivatives Guarantees and commitments Total (thousand euro) Exposure Other (1)+(2) Property Securities Other assets Other public Other public Other States Banks counter- States Banks 31/12/2007 entities entities entities parties 1. Secured exposures to banks: 380,027 - 40,796 250,503 ------5,876 - 297,175 1.1. fully secured 93,709 - 40,796 3,143 ------1,652 - 45,591 1.2. partly secured 286,318 - - 247,360 ------4,224 - 251,584 2. Secured exposures to customers: 6,840,757 3,856,350 181,540 273,764 - - 24,256 204,689 - 1,747 154,181 2,831,692 7,528,219 2.1. fully secured 3,650,863 3,557,694 132,277 198,831 - - - 86,968 - 1,179 132,795 2,649,911 6,759,655 2.2. partly secured 3,189,894 298,656 49,263 74,933 - - 24,256 117,721 - 568 21,386 181,781 768,564 Total 7,220,784 3,856,350 222,336 524,267 - - 24,256 204,689 - 1,747 160,057 2,831,692 7,825,394 A.3.3 Impaired secured cash exposure to banks and customers
Guarantees (fair value) Collateral guarantees Personal guarantees Difference Secured (thousand euro) Exposure Credit derivatives Guarantees and commitments Total fair value, amount guarantee Other Gov. and Other Other Gov. and Other Other Property Securities Financial Insurance Non-fin. Financial Insurance Non-fin. assets Central public Banks counter- Central public Banks counter- companies companies companies companies companies companies Banks entities parties Banks entities parties
1.Secured exposure ------to banks: 1.1 over 150% ------1.2 between 100% ------and150% 1.3 between 50% ------and100% 1.4up to 50% ------
2,Secured exposure 2,593,101 2,588,801 3,383,134 12,313 56,983 ------2,500 1,909 10,835 269,099 4,124 937,347 2,560,966 7,239,210 4,650,409 to customers: 2.1 over 150% 1,133,556 1,445,011 2,807,762 6,246 27,052 ------41 6,765 207,937 861 803,220 2,129,738 5,989,622 4,544,611 2.2 between 100% and 201,292 351,896 201,705 831 10,607 ------758 230 6,632 - 46,995 154,657 422,415 70,519 150% 2.3 between 50% and 546,519 761,145 361,858 3,846 16,672 ------2,500 1,107 3,688 54,140 3,263 85,309 262,980 795,363 34,218 100% 2.4 up to 50% 711,734 30,749 11,809 1,390 2,652 ------3 152 390 - 1,823 13,591 31,810 1,061
Total 2,593,101 2,588,801 3,383,134 12,313 56,983 ------2,500 1,909 10,835 269,099 4,124 937,347 2,560,966 7,239,210 4,650,409 Notes to the consolidated accounts accounts consolidated to the Notes 245 Notes to the consolidated accounts accounts consolidated to the Notes 246 A.3.4 Impaired off-balance sheet secured exposure to banks and customers
Guarantees (fair value) Collateral guarantees Personal guarantees Difference Secured (thousand euro) Exposure Credit derivatives Guarantees and commitments Total fair value, amount guarantee Other Gov. and Other Other Gov. and Other Other Property Securities Financial Insurance Non-fin. Financial Insurance Non-fin. assets Central public Banks counter- Central public Banks counter- companies companies companies companies companies companies Banks entities parties Banks entities parties
1.Secured exposure ------to banks: 1.1 over 150% ------1.2 between 100% ------and150% 1.3 between 50% ------and100% 1.4up to 50% ------
2,Secured exposure 70,298 44,099 27,136 2,606 2,032 ------2,781 - 14,822 54,246 103,623 59,721 to customers: 2.1 over 150% 17,956 17,960 24,193 33 28 ------578 - 11,243 36,465 72,540 54,580 2.2 between 100% and 150% 6,653 6,653 2,771 1,745 476 ------16 - 878 2,373 8,259 1,606 2.3 between 50% and 100% 16,152 19,077 131 774 1,449 ------2,187 - 2,701 15,370 22,612 3,535 2.4 up to 50% 29,537 409 41 54 79 ------38 212 -
Total 70,298 44,099 27,136 2,606 2,032 ------2,781 - 14,822 54,246 103,623 59,721 B. Loan distribution and concentration
B.1 Breakdown by sector of cash and “off-balance sheet” exposures to customers
Governments and Central banks Other public entities Financial companies Insurance companies Non-financial companies Other counterparties Individual write- Individual Collective write- write- Individual Collective write- write- Individual Collective write- write- Individual Collective write- write- Individual Collective write- write- Individual Collective write- Gross exposure Gross exposure Gross exposure Gross exposure Gross exposure Gross exposure Net exposure Net exposure Net exposure Net exposure Net exposure Net exposure downs downs downs downs downs downs downs downs downs downs (thousand euro) downs downs
A. Cash exposure A.1 Non-performing 2,876 - - 2,876 2,729 -1,483 - 1,246 39,224 -34,848 - 4,376 66 -27 - 39 1,412,986 -770,928 -1 642,057 554,611 -233,881 -89,943 230,787 loans A.2 Watchlist loans - - - - 631 -208 - 423 137,874 -53,016 -15 84,843 - - - - 1,113,833 -269,483 -2,163 842,187 434,165 -51,711 -28,522 353,932
A.3 Restructured loans - - - - 5,020 -40 - 4,980 3,445 -1,082 - 2,363 - - - - 136,684 -19,220 -17 117,447 199 - - 199
A.4 Past due loans - - - - 14,192 - -130 14,062 23,668 - -218 23,450 - - - - 276,621 -3,680 -6,650 266,291 74,352 -20 -847 73,485
A.5 Other loans 4,815,902 X -699 4,815,203 505,026 X -4,245 500,781 10,017,417 X -341,560 9,675,857 170,794 X -72 170,722 55,555,993 X -386,099 55,169,894 20,732,343 X -22,432 20,709,911
Total 4,818,778 - -699 4,818,079 527,598 -1,731 -4,375 521,492 10,221,628 -88,946 -341,793 9,790,889 170,860 -27 -72 170,761 58,496,117 -1,063,311 -394,930 57,037,876 21,795,670 -285,612 -141,744 21,368,314
B. “Off-balance sheet” exposure B.1 Non-performing ------28,513 -5,907 - 22,606 176 -8 - 168 loans B.2 Watchlist loans ------353 -249 - 104 - - - - 40,079 -4,683 - 35,396 2,828 -5 - 2,823 B.3 Other impaired - - - - 1,026 - - 1,026 ------12,761 -797 - 11,964 1,737 0 - 1,737 loans B.4 Other loans 400 X - 400 75,459 X - 75,459 1,367,296 X -2,544 1,364,752 39,166 X - 39,166 11,204,836 X -997 11,203,839 1,933,057 X - 1,933,057
Total 400 - - 400 76,485 - - 76,485 1,367,649 -249 -2,544 1,364,856 39,166 - - 39,166 11,286,189 -11,387 -997 11,273,805 1,937,798 -13 - 1,937,785
31/12/2007 4,819,178 - -699 4,818,479 604,083 -1,731 -4,375 597,977 11,589,277 -89,195 -344,337 11,155,745 210,026 -27 -72 209,927 69,782,306 -1,074,698 -395,927 68,311,681 23,733,468 -285,625 -141,744 23,306,099
31/12/2006 3,884,349 - -27 3,884,322 280,429 -1,801 -1,614 277,014 7,423,136 -6,660 -21,152 7,395,324 104,459 -334 -125 104,000 39,283,756 -488,117 -198,919 38,596,720 10,817,099 -118,217 -51,108 10,647,774 Notes to the consolidated accounts accounts consolidated to the Notes 247 Notes to the consolidated accounts accounts consolidated to the Notes 248 B.2 Breakdown of loans to non-financial companies
(thousand euro) 31/12/2007
a) trade services, recovery and repairs 7,997,545 b) construction and public works 6,881,172 c) metal products, excluding machines and transportation means 2,060,239 d) food, beverages and tobacco-based products 1,937,636 e) industrial and agricultural machinery 1,805,483 f) other sectors 31,634,462 Total 52,316,537
B.3 Geographical breakdown of cash and “off-balance sheet” exposures to customers (book values)
Italy Other European countries America Asia Rest of the world (thousand euro) Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure
A. Cash exposure A.1 Non-performing loans 1,991,147 875,310 13,657 4,569 633 149 1 724 7,054 629 A.2 Watchlist loans 1,620,659 1,250,811 36,347 18,031 29,494 12,541 1 1 2 1 A.3 Restructured loans 135,627 117,956 9,721 7,033 ------A.4 Past due loans 376,942 370,127 7,156 3,448 574 574 4,158 3,136 3 3 A.5 Other loans 85,269,687 84,702,499 5,339,389 5,057,129 803,930 900,610 138,369 136,637 195,131 194,646 Total 89,394,062 87,316,703 5,406,270 5,090,210 834,631 913,874 142,529 140,498 202,190 195,279 B. “Off-balance sheet” exposure B.1 Non-performing loans 28,684 22,769 ------B.2 Watchlist loans 42,962 38,027 255 253 ------B.3 Other impaired loans 15,572 14,775 ------B.4 Other loans 13,396,933 13,359,845 1,014,960 1,014,953 121,590 121,587 26,345 59,902 50,341 50,341 Total 13,484,151 13,435,416 1,015,215 1,015,206 121,590 121,587 26,345 59,902 50,341 50,341 31/12/2007 102,878,213 100,752,119 6,421,485 6,105,416 956,221 1,035,461 168,874 200,400 252,531 245,620 31/12/2006 58,543,861 57,687,039 2,641,900 2,618,123 422,075 421,324 128,203 128,023 57,191 50,648 B.4 Geographical breakdown of cash and “off-balance sheet” exposures to banks
Italy Other European countries America Asia Rest of the world (thousand euro) Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure
A. Cash exposure A.1 Non-performing loans ------A.2 Watchlist loans ------A.3 Restructured loans ------A.4 Past due loans ------A.5 Other loans 10,404,306 10,404,302 5,234,944 5,112,109 234,948 234,943 156,587 156,262 15,198 134,608 Total 10,404,306 10,404,302 5,234,944 5,112,109 234,948 234,943 156,587 156,262 15,198 134,608 B. “Off-balance sheet” exposure B.1 Non-performing loans ------B.2 Watchlist loans ------B.3 Other impaired loans ------B.4 Other loans 4,213,660 4,212,674 1,066,843 1,066,720 46,097 46,083 120,573 120,529 54,769 54,766 Total 4,213,660 4,212,674 1,066,843 1,066,720 46,097 46,083 120,573 120,529 54,769 54,766 31/12/2007 14,617,966 14,616,976 6,301,787 6,178,829 281,045 281,026 277,160 276,791 69,967 189,374 31/12/2006 8,137,867 8,137,863 4,475,033 4,474,871 147,952 147,941 294,523 294,303 18,712 18,695
B.5 Major risks (under Supervisory regulations)
One major risk position is reported, totaling 848,696 thousand euro. Notes to the consolidated accounts accounts consolidated to the Notes 249 Notes to the consolidated accounts
C. Securitizations and sales
C.1 Securitizations
QUALITATIVE INFORMATION
In recent years securitizations have been used as a strategic funding channel as part of the global action plan aiming at satisfying the Group’s financial requirements. Finding medium term funding sources at competitive costs and for significant amounts and freeing up capital that can be used for new loans represent the main objectives of the Group’s current deals on the securitization market. To this end, the Group set up a dedicated structure located in the Parent company’s Finance Department, that can autonomously structure its asset securitizations. The collateralized pools of the performed transactions are constantly monitored by way of monthly and quarterly reports detailing the performance of principal and interest collections and the loan status. Illustrated below is a description of the Group’s securitizations.
S.P.V. BPL Mortgages (December 2007)
In general
During the year, some banks of the former BPI group finalized a mortgage securitization performed pursuant to law 130 of April 30th, 1999 with the special purpose entity BPL Mortgages srl. On April 21st, 2007 the SPV finalized the acquisition of a loan pool made up of residential mortgages issued by four banks of the former Gruppo Banca Popolare Italiana (now Gruppo Banco Popolare) and totaling Euro 1,000,057,166.02. The acquired pool has been allocated as follows: x Banca Popolare Italiana Soc. Coop. (now Banca Popolare di Lodi S.p.A.) 500,967,019.97 x Banca Popolare di Crema S.p.A. 59,809,491.38 x Banca Popolare di Cremona S.p.A. 91,274,745.52 x Cassa di Risparmio di Lucca Pisa Livorno S.p.A. 348,005,909.15
The transaction was finalized in 2 steps: the first on April 21st with the sale without recourse of a loan pool, the second on December 17th, 2007 with the issue of the fixed income notes to finance the loan purchase. Following the introduction of international accounting standards, in compliance with SIC 12, assets sold have been recognized in these financial statements under “Customer loans: assets sold and not derecognized” and offset in “Due to customers: liabilities associated with assets sold and not derecognized” reporting an amount equal to the difference between the loan value and the nominal value of the subscribed junior notes.
Identification of the parties
Loan acquirer: BPL MORTGAGES S.R.L. (former Giano Finance s.r.l.), company formed on June 30th, 2006, in compliance with and under art. 3 of law n. 130 of April 30th, 1999, with registered offices in Via Vittorio Alfieri n. 1 – CONEGLIANO (TV), registered with the relevant Enterprise Registry under n. 04078130269 and registered in the special lists under articles 106/107 of L.D. n. 385 of 1.9.1993. Acquirees: Banca Popolare di Lodi Società S.p.A., Banca Popolare di Crema S.p.A., Banca Popolare di Cremona S.p.A. e Cassa di Risparmio di Lucca Pisa Livorno S.p.A. Acquirer Obligations: At the sale date, the Transferor Banks issued a Guarantee Statement, under which the Transferor Banks guaranteed the existence of the sold loans and of any collaterals. Moreover, they accepted to hold the Issuer harmless with regard to costs, expenses and liabilities incurred by the latter in case the statements issued by the Transferors proved incorrect under the sale agreement and the relevant attachments. Under the above mentioned statement, the Transferors guaranteed the following categories: a) The status of the Transferor and general issues regarding the Transfer Agreement and the Servicing Agreement; b) statements and guarantees referring to the Loans, the Mortgage loan Contracts and relevant Mortgages and Collaterals; c) statements and guarantees referring to the Fixed Assets; d) statements and guarantees on the truthfulness of the reported data; e) statements and guarantees on the insurance policies backing the mortgage contracts. Servicers: Banca Popolare di Lodi S.p.A., Banca Popolare di Crema S.p.A., Banca Popolare di Cremona S.p.A., Cassa di Risparmio di Lucca Pisa Livorno S.p.A. Under the servicing agreement signed on April 21st, 2007, servicers are given a mandate to administer and collect the mortgage-associated loans, to manage their recovery procedures either in or out of court, as well as any judgment on the merits of said loans, in the name and on behalf of the issuer and with regard to the entire mortgage portfolio, in addition to the following activities:
250 Notes to the consolidated accounts
Monitoring, Management, Collection, Recovery and other connected activities. Moreover it transfers to the Acquirer all the sums collected on behalf of the Company with regard to loans, including: i) sums deriving from the recovery of principal and interest amounts due (also default interest); ii) sums deriving from the collection of insurance refunds or other guarantees in favor of the Transferor; iii) sums deriving from the exercise of other related rights. Arrangers Banco Popolare Soc. Coop. Representative Deutsche Trustee Company Limited of Note-holders Swap Counterparty IXIS Corporate & Investment Bank Calculation Agent Deutsche Bank AG London Principal Paying Agent Deutsche Bank AG London and Agent Bank Transaction Bank and Deutsche Bank S.p.A. Italian Paying Agent Italian Account Bank Banca Popolare di Lodi S.p.A. Luxembourg Agent Deutsche Bank Luxembourg S.A. Corporate Servicer Securitisation Services S.p.A. Administrative Servicer Banca Popolare di Lodi S.p.A.
Issue characteristics
Asset backed securities BPL MORTGAGES S.R.L., issued Senior notes (class A) for a total amount of Euro 935,750,000, with limited recourse: mezzanine notes (class B) for a total amount of Euro 14,900,000, mezzanine notes (class C) for a total amount of Euro 24,900,000 and junior notes (class D) for a total amount of Euro 19,929,000. Junior notes have been fully subscribed by the transferring banks on a pro-rata basis with respect to the sold loans. All notes issued have a limited recourse on purchased loans, on the other associated rights and on any other supplementary guarantee backing the transaction. Class A Senior notes Currency: EURO Amount : Euro 935,750,000 Rate : Floating Parameter: Three month Euribor + spread 0.45% per year Coupon: Quarterly Legal maturity: December 2045 Redemption: Amortization linked to the collection of underlying loans Rating: Moody’s Aaa; Fitch Ratings AAA; Standard & Poor’s AAA Applicable law: Italian law Class B Mezzanine Notes Currency: EURO Amount: Euro 14,900,000 Rate: Floating Parameter: Three month Euribor + spread 1.70% per year Coupon: Quarterly Legal maturity: December 2045 Redemption: Amortization linked to the collection of underlying loans Rating: Moody’s Aa2; Fitch AA; Standard & Poor’s AA Applicable law: Italian law Class C Mezzanine Notes Currency: EURO Amount: Euro 24,900,000 Rate: Floating Parameter: Three month Euribor + spread 3.00% per year Coupon: Quarterly Legal maturity: December 2045 Redemption: Amortization linked to the collection of underlying loans Rating: Moody’s A3; Fitch Ratings BBB; Standard & Poor’s BBB Applicable law: Italian law Class D
251 Notes to the consolidated accounts
Junior Notes Currency: EURO Amount: Euro 19,929,000 Rate: Floating Parameter: Three month Euribor + 4.00% per year Coupon: Quarterly Additional return: Additional Return Legal maturity: December 2045 Redemption: Amortization linked to the collection of underlying loans Rating: Unrated Applicable law: Italian law
Class D Junior Notes were subscribed by the transferors on a pro-rata basis with respect to the sold pool. x Banca Popolare Italiana Soc. Coop. (now Banca Popolare di Lodi S.p.A.) 9,993,0000 x Banca Popolare di Crema S.p.A. 1,194,0000 x Banca Popolare di Cremona S.p.A. 1,823,000 x Cassa di Risparmio di Lucca Pisa Livorno S.p.A. 6,919,000
Class A, B and C Notes were listed on the Irish Stock Exchange.
Allocation of cash flows generated by the portfolio The allocation of the cash flows generated by the sold loans is directed primarily towards the payment of third parties participating in the securitization, secondarily to the payment of the interest and principal of rated securities, and finally to the repayment of the liquidity facility and then Junior Notes to which any residue is allocated. Payments essentially follow the order illustrated below: (i) Third party expenses, tax charges; (ii) Expense refund in order to guarantee the issuer’s business continuity in compliance with current laws; (iii) Commissions charged on the deal and carrying costs for the vehicle; (iv) Payment of Swap margins; (v) Interest on Class A; (vi) Interest on Class B; (vii) Interest on Class C; (viii) Principal of Class A up to full repayment; (ix) Principal of Class B up to full repayment; (x) Principal of Class C up to full repayment; (xi) Interest on Class D; (xii) Principal of Class D up to full repayment; (xiii) The residue is allocated to Class D notes as “Additional Return”.
Accessory transactions
In concomitance with the securities issued, the company performed a Swap contract with IXIS Corporate & Investment Bank, to hedge the risk of mismatch between the securitized loan rates and the yields of the issued bonds; to hedge against the risk of illiquidity periods, the company set aside a Cash Reserve of Euro 24,388,750, as at 31/12/07 the Cash Reserve had not been utilized yet. In order to strengthen the guarantees backing rated notes (classes A, B and C), the Originator Banks signed a First Demand Guarantee with which they secure the obligations deriving from the Servicer and Interim Account Bank services for Banca Popolare di Lodi. The maximum secured amounts are: x euro 1,045,801 Banca Popolare di Crema S.p.A. x euro 1,708,923 Banca Popolare di Cremona S.p.A. x euro 9,410,193 Cassa di Risparmio di Lucca Pisa Livorno S.p.A. x euro 21,632,602 Banca Popolare di Lodi S.p.A.
For the same maximum secured amounts, an additional guarantee was set up by the parent company Banco Popolare Soc. Coop. again with regard to the Servicer and Interim Account Bank services provided by the subsidiary banks.
252 Notes to the consolidated accounts
Quantitative information
Illustrated below are the deal’s accounting effects:
Gross Accounting Net Accounting Profit/Loss on Bank Sale price Balance Balance disposal
Banca Popolare di Crema S.p.A. 59,809,491 59,809,491 59,809,491 Banca Popolare di Cremona S.p.A. 91,274,746 91,274,746 91,274,746 Cassa di Risparmio di Lucca Pisa Livorno S.p.A. 348,005,909 348,005,909 348,005,909 Total 1,000,057,166 1,000,057,166 1,000,057,166
The deal did not give rise to profit or loss as the sale was performed at book value inclusive of accrued interest at the sale date: x Banca Popolare Italiana Soc. Coop. (now Banca Popolare di Lodi S.p.A.) 1,780,445 x Banca Popolare di Crema S.p.A. 141,290 x Banca Popolare di Cremona S.p.A. 263,401 x Cassa di Risparmio di Lucca Pisa Livorno S.p.A. 2,392,738
Illustrated below are some securitization details, net of accrued interest:
Breakdown of securitized assets by geographical areas:
Cassa di Risparmio Region Banca Popolare di Banca Popolare di Banca Popolare di Grand total di Lucca Pisa (thousand euro) Lodi S.p.A Crema S.p.A. Cremona S.p.A. Livorno S.p.A.
Abruzzo 574 574 Basilicata 646 646 Calabria 1,129 100 1,229 Campania 2,885 145 332 3,362 Emilia Romagna 78,087 193 3,381 945 82,606 Friuli Venezia Giulia 471 471 Lazio 41,706 45 269 996 43,016 Liguria 142,957 231 863 9,071 153,122 Lombardy 119,073 58,083 84,951 2,119 264,226 Marche 2,101 148 2,249 Molise 8,531 8,531 Piedmont 13,858 241 14,099 Puglia 281 211 492 Sardinia 2,646 436 248 1,027 4,357 Sicily 65,019 - 104 47 65,170 Tuscany 1,954 166 372 328,578 331,070 Trentino Alto Adige 851 366 170 1,387 Umbria 354 2,002 2,356 Valle d'Aosta 456 456 Veneto 15,608 267 187 16,062 Total 499,187 59,668 91,011 345,613 995,481
All mortgages have been granted in euro to borrowers residing in Italy and refer to properties located on the Italian territory
Breakdown by economic activity sector:
Cassa di Risparmio Economic Activity Sector Code Banca Popolare di Banca Popolare di Banca Popolare di Grand total di Lucca Pisa (thousand euro) Lodi S.p.A Crema S.p.A. Cremona S.p.A. Livorno S.p.A.
Consumer households 486,322 59,183 90,736 335,362 971,603 Producer households 12,865 486 275 10,251 23,877 Total 499,187 59,669 91,011 345,613 995,480
253 Notes to the consolidated accounts
Evolution of loans by originator
Bank Value as at % Portfolio as at Value as at %Portfolio as at (thousand euro) 21/04/2007 21/04/2007 31/12/2007 31/12/2007
Banca Popolare di Lodi 499,187 50.15% 455,009 50.01% Banca Popolare di Crema 59,668 5.99% 55,752 6.13% Banca Popolare di Cremona 91,011 9.14% 81,173 8.92% CR Lucca Pisa Livorno 345,613 34.72% 317,899 34.94% Total 995,479 100.0% 909,833 100.0%
Performance of impaired loans
Bank Non-performing % Non-performing Watchlist loans % Watchlist loans (thousand euro) loans al 31/12/07 loans al 31/12/07 al 31/12/07 al 31/12/07 Banca Popolare Lodi 70 29.11% Banca Popolare Crema Banca Popolare Cremona CR Lucca Pisa Livorno 92 100.00% 171 70.89% Total 92 100.0% 241 100.0%
S.P.V. Tiepolo Finance (December 2000)
In the second half of 2000, Banca Popolare di Lodi and Cassa di Risparmio di Lucca Pisa Livorno carried out a securitization of non-performing mortgage and ordinary loans, in keeping with the prescriptions of Law n. 130 of April 30th, 1999. In particular, on December 30th, 2000, the banks sold non-performing loans to a special purpose entity, Tiepolo Finance S.r.l., set up in compliance with art. 1 of Law 130/99 and registered under art. 107 of Law Decree n. 385 of September 1st, 1993, of which the Group acquired the control in the first half of 2001. The special purpose entity financed the purchase of loans by issuing bonds subdivided into three classes, A, B and C. Illustrated below are the features of the three classes of issued notes: 1) Class A Notes (senior notes): floating rate bonds (six-month Euribor plus an annual 0.58% spread) totaling 75 million euro, rated AAA (Fitch) and Aaa (Moody's); 2) Class B Notes (mezzanine notes): fixed rate bonds (5.5% annual) totaling 30 million euro, rated AA- (Fitch) and Aa2 (Moody's); 3) Class C Notes (junior notes): floating rate bonds (six-month Euribor plus an annual 0.40% spread) totaling 50.5 million euro, subscribed by the originators upon issuance.
Class A and Class C notes were issued at par, while Class B notes were issued below par with a 0.43% issue discount. Class A and Class B notes are listed on the Luxembourg Stock Exchange. The different note classes have been assigned a different subordination when defining the principal and interest repayment priorities. In particular, Class A notes have a first repayment priority over Class B notes, while Class C notes are the most subordinated and have the lowest priority. As an additional guarantee for the principal and interest payments of Class B notes, Banca Popolare di Lodi granted a limited recourse mortgage under the form of securities lending of 33 million euro. Third parties extended 12 million euro credit line to the SPV, secured by Banca Popolare di Lodi by granting a subordinated loan, under the form of securities lending, of 13.2 million euro; the other banks of the Group that took part in the deal, currently merged into Cassa di Risparmio di Lucca Pisa e Livorno, were committed to contributing pro-rata to any charges that should emerge from the use of said guarantees. Banca Popolare di Lodi acted both as Servicer, managing the recovery and collection of loans, and as Cash Manager for the whole deal. The risks still encumbering the Group as a result of the above described transaction are represented by the subordinated bonds (Class C notes), and by the above mentioned commitment to contribute on a pro-rata basis to the charges that should emerge from the sum of the guarantees backing the granting of the subordinated loan and the limited recourse mortgage loan. Banca Popolare di Lodi subscribed a share of the Class C notes (junior) of 13.5 millions, while Cassa di Risparmio di Lucca Pisa Livorno subscribed the remaining share of 37 millions. Said notes, in compliance with the international accounting standards, were classified under “Financial assets available for sale”. Based on the results of the securitization’s global performance, in the past financial years the Class C notes present in the pool had been written down of their entire value, in addition to the coupon amount and interest accrued at the end of the period. Illustrated below are the main features of the sold loans (in Euro):
254 Notes to the consolidated accounts
Table 1 Loan breakdown by originator (evolution)
Bank Value as at % Portfolio as at Value as at % Portfolio as at (thousand euro) 31/12/07 31/12/07 31/12/06 31/12/06
Banca Popolare di Lodi 10,143 41.83% 13,273 39.46% CR Lucca Pisa Livorno 14,106 58.17% 20,367 60.54% Total 24,248 100.0% 33,641 100.0%
The loan total purchase price was Euro 153,463,469, as at December 31st, 2007 the residue was Euro 24,248,900 .
Table 2 Classification of sold loans by original technical form (evolution)
Value as at % Portfolio as at Value as at % Portfolio as at Bank 31/12/07 31/12/07 31/12/06 31/12/06
Checking accounts 9,153 37.75% 12,322 36.63% Mortgage loans 12,943 53.37% 18,661 55.47% Ordinary loans 1,884 7.77% 2,357 7.01% Portfolio 268 1.11% 301 0.89% Total 24,249 100.0% 33,640 100,0%
S.P.V. Bipitalia Residential (June 2004)
In the first half of 2004, Banca Popolare di Lodi, Banca Popolare di Crema and Cassa di Risparmio di Lucca Pisa Livorno, in keeping with the regulatory prescriptions of Law 130/99, finalized jointly with other banks belonging to the group the securitization of performing residential mortgage loans. The banks sold at par about 1,002 millions in mortgages to the special purpose entity Bipitalia Residential, which financed the purchase by issuing bonds. The notes, issued on June 30th, 2004, were subdivided into 5 different classes A1, A2, B, C and D, with the following features: 1) Class A1 notes (senior): bonds whose yield is indexed against Euribor plus 10 basis point per year, issued at par for nominal 230,000,000 euro, rated AAA by Fitch and Aaa by Moody’s; 2) Class A2 notes (senior): bonds whose yield is indexed against Euribor plus 17.5 basis point per year, issued at par for nominal 733,000,000, rated AAA by Fitch and Aaa by Moody’s; 3) Class B notes (mezzanine): bonds whose yield is indexed against Euribor plus 30 basis point per year, issued at par for nominal 16,000,000, rated AA by Fitch and Aa2 by Moody’s; 4) Class C notes (mezzanine): bonds whose yield is indexed against Euribor plus 80 basis point per year, issued at par for nominal 19,000,000, rated BBB by Fitch and Baa1 by Moody’s; 5) Class D notes (junior): bonds with a 2% annual yield on top of any “Additional Return”, issued at par for nominal 4,500,000, they were subscribed on a pro-rata basis by the transferees.
Except for the first two classes, which have the same subordination, the other bonds feature a cascading subordination in terms of repayment priority. Under the deal, Banca Popolare di Lodi S.p.A. also approved and extended a limited recourse subordinated loan of 12 million euro as a liquidity reserve; Junior notes have been entirely subscribed by the transferee banks on a pro-rata basis with respect to the sold loans; namely: 1. Banca Popolare di Lodi for nominal 2,650,000 euro; 2. Banca Popolare di Crema for nominal 200,000 euro; 3. Cassa di Risparmio di Lucca Pisa Livorno for nominal 1,650,000 euro.
Under the deal, Banca Popolare di Lodi acts also as Servicer of the portfolio and as Administrative Servicer, with the other group banks stepping in as Sub Servicers and S.G.C. BP as Special Servicer for delinquent loans. The transaction was finalized in 2 steps: the first on 17/05/04 by signing the sale without recourse of a pool of money loans under the form of home mortgages. Then on 30/06/04, the bonds were issued to finance the loan purchase. In concomitance with the note issuance, the SPV signed a Swap contract with Dresdner Bank AG to hedge the risk of mismatch between the securitized loan rates and the yields of the issued bonds. Following the introduction of international accounting standards, in compliance with SIC 12, assets sold have been recognized in these financial statements under “Customer loans: assets sold and not derecognized” and offset in “Due to customers: liabilities associated with assets sold and not derecognized” reporting an amount equal to the difference between the loan value and the nominal value of the subscribed junior notes. Illustrated below are the main features of the sold loans (in Euro):
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Loan evolution by originator
Bank Value as at % Portfolio as Value as at % Portfolio as Value as at % Portfolio as (thousand euro) 17/05/04 at 17/05/04 31/12/06 at 31/12/06 31/12/07 at 31/12/07
Banca Popolare Lodi 576,176 57.47% 390,521 58.25% 313,954 57.38% CR Lucca Pisa Livorno 375,327 37.44% 249,155 37.16% 209,910 38.36% Banca Popolare Crema 50,987 5.09% 30,808 4.59% 23,320 4.26% Total 1,002,490 100.0% 670,484 100.0% 547,184 100.0%
The loan total purchase price was Euro 1,002,489,784; on December 31st, 2007 the residue was Euro 547,184,439. The deal started in 2004 and was finalized in the same financial year with the issue of the notes that financed the loan purchase. As at 31/12/2007 collections were regular, the percentage of early redemption was normal, as also the percentage of mortgages presenting delayed repayments: Watchlist and non performing loans are illustrated below:
Impaired loans
Bank Non-performing loans al % Non-performing Watchlist loans al % Watchlist loans al (thousand euro) 31/12/07 loans al 31/12/07 31/12/07 31/12/07 Banca Popolare di Lodi 2,723 61.12% 1,684 39.08% CR Lucca Pisa Livorno 1,444 32.42% 2,415 56.05% Banca Popolare Crema 288 6.46% 210 4.87% Total 4,455 100.0% 4,309 100.0%
Securitizations of residential and commercial loans in the “warehousing” stage – S.P.V. Bipitlia Residential
In financial year 2005, Banca Popolare Italiana, Cassa di Risparmio di Lucca Pisa Livorno, Banca Popolare di Cremona and Banca Popolare di Crema finalized a number of sales of commercial and residential mortgages, with the aim of securitizing them. Transactions were finalized in subsequent steps and made it possible to set up in 2005 two pools called Residential CMBS and Residential RMBS; the two pools were refinanced by unrated securities and purchased back by Banca Popolare Italiana Soc. Coop. In 2007, the unrated securities were purchased on a pro-rata basis by the other transferor banks and the transaction was closed with the repurchase by the Originator Banks of the loans outstanding on the sale date and the subsequent securities redemption. In particular, RMBS mortgages were repurchased in two subsequent tranches, on April 5th, 2007 (three quarters of the outstanding pool) and on August 27th, 2007 (the residual quarter of the pool). On August 31st, 2007 the RMBS securities repurchased by the same transferor banks were redeemed. Mortgages outstanding on the sale date belonging to the CMBS pool, as compared to the original pool, were repurchased on October 15th, 2007 and on October 31st the CMBS securities repurchased by the same transferor banks were redeemed. Based on these circumstances, the sale agreements provided for a netting between what was due by the Purchasers and what was due by the Seller.
S.P.V. Tiepolo Finance II (April 2002)
Third party securitizations include the unlisted Junior Notes ‘Class D’ issued by Tiepolo Finance II Srl, originated by the securitization of a non-performing loan pool that the originator Bipielle Società di Gestione del Credito had previously purchased from some banks of the Group, including the former Parent company Banca Popolare Italiana. Total ‘Class D’ notes issued amounted to 150 millions and the issuance was fully subscribed by the banks that originally owned the lending relationship, namely: 1. Banca Popolare di Lodi subscribed notes corresponding to a nominal amount of euro 108,780,000; 2. Banca Popolare di Crema subscribed notes corresponding to a nominal amount of euro 3,000,000; 3. Cassa di Risparmio di Lucca Pisa Livorno subscribed notes corresponding to a nominal amount of euro 23,100,000; 4. Banca Popolare di Mantova subscribed notes corresponding to a nominal amount of euro 150,000; 5. Efibanca subscribed notes corresponding to a nominal amount of euro 15,000,000.
The transaction also called for the issue of 151 million in ‘Class C’ notes (mezzanine) with a lower subordination compared to the ‘Class D’ Notes present in the pool, which was fully subscribed by Banca Popolare di Lodi. The expected yield of said Notes, that were not required to be rated, is 7% yearly; the coupon payment, which has a first priority compared to the principal repayment, is in any case subordinated to the full repayment of senior notes. As an additional credit enhancement instrument for the securitization, Banca Popolare di Lodi committed a liquidity facility up to a maximum amount of 90 million euro to guarantee the necessary liquidity to the Notes Issuer, so as to allow the SPV to fulfill the obligations associated with Senior class notes (170 millions in Class A notes and 15 millions in Class B notes).
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Securitized assets underlying the securities originated by the securitization
Illustrated below are the balances net of write-downs at the sale date and at the end of each financial year.
(thousand euro) Net value
Sale value 486,029 31/12/2003 427,630 31/12/2004 369,457 31/12/2005 168,516 31/12/2006 125,746 31/12/2007 94,276
During the year, the Banks sold the Class D notes recognized under “Financial assets available for sale” to third parties. Based on the results of the securitization’s global performance, in the past financial years these Notes had already been written down of their entire value, in addition to the coupon amount and interest accrued at the end of the period. The mezzanine ‘Class C’ notes present in the pool as at December 31st, 2007 for nominal 151 millions were written down by 126 millions, of which 9 millions in the first half for Banca Popolare di Lodi and the remaining portion in the previous years.
S.P.V. Sintonia Finance S.r.l. (December 2002)
In 2002, in keeping with Law 130/99, Banca Popolare di Cremona set up a performing loan securitization with mortgage backed loans extended to retail and corporate customers. In order to minimize costs, the transaction was executed jointly with Centrobanca S.p.A. The deal was structured with the collaboration of Arca Bim Spa, Finanzattiva SIM Spa and Schroder Salomon Smith Barney as Arrangers. The rating firms in charge of carrying out the due diligence were Standard and Poor’s and Fitch Ratings. The securitization was started in the second half of 2002 with the sale without recourse of loans to a Special purpose entity (SPE), called Sintonia Finance Srl, of which the Bank holds a 5% interest, registered as number 34481 in the general register of financial intermediaries under art.106 of L.D. 385/93. The transfer agreement was signed on December 23rd, 2002: Società Sintonia Finance Srl paid the selling price of € 166,919 thousand to the Bank for the loan pool, of which € 157,520 thousand referred to the nominal value of sold loans and € 9,399 thousand to the excess spread. As additional guarantee backing the transaction, the SPE was granted a subordinated loan by the originator, whose residual value as at December 31st, 2007 was € 4,754 thousand. In order to guarantee the success of the transaction and the redemption of the issued bonds, the originator signed a compensation and guarantee agreement, holding the issuer harmless from risks associated with any failure to meet requirements on the part of the loans originally sold and failure to redeem Junior Notes. Illustrated below are the features of the issued notes, with regard to the pool of the entire transaction:
Tranches Rating S.&P / Fitch ISIN Amount
Senior Notes Class A AAA / AAA XS0163298432 302,790 Senior Notes Class B AA / AA XS0163298515 21,040 Junior Notes Class C1 XS0163325268 9,399 Junior Notes Class C2 XS0163325854 7,984 Total 341,213
All notes underlying the securitization were issued and subscribed on March 14th, 2003, pursuant to the hedge clause. Banca Popolare di Cremona subscribed the entire Junior tranche totaling € 9.4 millions, equal to its excess spread, while the € 7.9 million tranche was subscribed by Centrobanca S.p.A.
The Junior note tranche subscribed by the Bank was recognized in the annual report as at December 31st, 2007 under trading assets at a residual value of € 6,100 thousand. With regard to its securitized loans, the Bank acts as a Servicer, and therefore is in charge of the loan management, administration and collection, receiving a commission of 0.1%, that on 31.12.2007 amounted to € 37,200. As at December 31st, 2007, the residual loan pool totaled € 56,871thousand.
BPV Mortgages (December 2001)
Transactions performed on December 13th, 2001 by Banca Popolare di Verona – Banco S. Geminiano e S. Prospero then combined in BPVN S.c.a.r.l. as a result of the merger by consolidation with Banca Popolare di Novara S.c.a.r.l., with the special purpose entity BPV Mortgages S.r.l., which financed the deal by issuing the following types of notes: x euro 92 million in Class A1 Residential Mortgages Backed Floating Rate Notes due 2021 (Class A1 notes) already fully redeemed on December 31st, 2007;
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x euro 392 million in Class A2 Residential Mortgages Backed Floating Rate Notes due 2021 (Class A2 notes), already fully redeemed on December 31st, 2007; x euro 26 million in Class B Residential Mortgages Backed Floating Rate Notes due 2021 (Class B notes and, together with Class A1, A2 and B notes, Senior notes), already fully redeemed on December 31st, 2007; x euro 2.495 million in Class C Residential Mortgages Backed Floating Rate Notes due 2021 (Class C notes – junior).
The transaction was taken over by BPV-SGSP S.p.A. after the transfer of the business segment of BPVN S.c.a.r.l. to the Bank on July 1st, 2007. Since this transaction took place before October 2002, in compliance with IAS 39, although it does not meet the requirements for a derecognition of sold loans, upon the first adoption of IAS the loans were not shown in the financial statements of BPVN S.c.a.r.l.. On October 15th, 2007, the residual loans sold and not yet collected were fully repurchased by the Bank, in keeping with the contract provisions, at a total price of 153.2 million euro. The repurchase led to the recognition of 0.6 million euro in non-performing loans. Concomitantly, the early termination of the Interest Rate Swap between the Bank and the external banking counterparty was carried out at no charge. As at December 31st, 2007 the ”originator” (BPV) is still owning only 3.1 million euro in “junior” notes recognized under customer loans, incremented by the additional return of 6.3 million euro. The notes were not written down, because based on the current available information there are no signs of a possible redemption failure either of the nominal value or of the returns accrued at year-end. The notes generated no additional return in second half 2007.
BP Mortgages Srl (March 2007)
The transaction was performed on March 16th, 2007 between BPVN S.c.a.r.l. and the special purpose entity BP Mortgages srl against a purchase price of 1,447 million euro. The purchase of the pool was financed by issuing: x euro 202.7 million in Class A1 Residential Mortgage Backed Floating Rate Notes due 2017; x euro 1,172.65 million in Class A2 Residential Mortgage Backed Floating Rate Notes due 2043; x euro 25.3 million in Class B Residential Mortgage Backed Floating Rate Notes due 2043; x euro 32.6 million in Class C Residential Mortgage Backed Floating Rate Notes due 2043; x euro 14.5 million in Class M Residential Mortgage Backed Floating Rate Notes due 2043.
Class A1, A2, B and C notes are senior rated notes, while Class M notes are junior unrated notes and were fully subscribed by BPVN S.c.a.r.l. above par at a price of 108 for each nominal 100 euro, and they were classified as customer loans. Junior notes have a return corresponding to the three-month Euribor plus 2.5%. On July 1st, 2007 BPVN S.c.a.r.l. transferred the banking segment to BPV S.p.A, including the following assets and liabilities linked to the securitization under examination: x 1,383.5 million euro in loans sold and not derecognized (valued at amortized cost net of loan impairments) x Junior notes, transferred to the subsidiary Banca Popolare di Verona S.p.A. following the transfer of the business segment, at a book value of 15.8 million euro x Additional return of 8.6 million euro x 1,392 million euro in payables to the SPE classified as due to customers.
BP Mortgages Srl (June 2007)
On June 29th, 2007, a securitization of home and mortgage loans on performing residential property was performed between Banca Popolare di Novara, Credito Bergamasco and the special purpose entity BP Mortgages S.r.l. The pools under securitization had a total value of 1,609.8 million euro (862.8 for BPN’s pool and 747 for Creberg’s pool), and to finance their purchase the Acquirer Company (BP Mortgages) issued the following notes: x euro 147.3 million in Class A1 Ireland Stock Exchange due 2018; x euro 1,382 million in Class A2 Ireland Stock Exchange due 2044; x euro 28.2 million in Class B Ireland Stock Exchange due 2044; x euro 36.2 million in Class C Ireland Stock Exchange due 2044; x euro 8.6 million in Class M Ireland Stock Exchange due 2044; x euro 7.5 million in Class M Ireland Stock Exchange due 2044.
Class A1, A2, B and C notes are senior rated notes, while Class M notes are junior unrated notes and have been fully subscribed by the originators BPN (8.6 millions) and Creberg (7.5 millions) Similarly to the March 2007 transaction, since the originators by subscribing the junior notes retain a risk associated with the sold loans, in keeping with IAS 39 the Banks continued to recognize the sold loans in their accounts under item 70 of balance sheet asset “Customer loans” as “Assets sold and not derecognized”, offsetting the failed derecognition by recognizing an ad hoc liability under item 20 of balance sheet liabilities “Due to customers” as “Liabilities associated with assets sold and not derecognized”.
258 Notes to the consolidated accounts
BPV Mortgages Srl (December 2007)
On December 4th, 2007, the securitization of residential mortgage loans extended to retail customers by the specialized external networks (so called reti esterne specializzate – specifically Rete Essere and Rete UBH) was finalized, where the originators were the Bank, together with BPN and Creberg, companies belonging to Gruppo Banco Popolare. The transaction is to be carried out in two steps. The first was the “warehousing” phase, where the originator banks sold various tranches of mortgage pools with a total value of 1.5 billion euro, financed by the special purpose entity BPV Mortgages Srl through the issue of “partly paid private securities” with the following features: • The collateral portfolio’s initial nominal value was lower than that of the issued securities; • They provide for the additional payments by the subscriber owner of the unrated and unlisted securities.
On the above mentioned date the first tranche was sold to the Bank for 208.2 million euro, and together with the other originators for a total amount of 693.5 million euro. On December 20th, 2007 private securities were issued (junior) as described above totaling 693.45 million euro, with a return corresponding to the three-month Euribor plus a 60 basis point spread, fully subscribed by the Parent company Banco Popolare, which shall apply to an institutional market counterparty for funding. The rational of having the Parent company subscribe the securities and take care of the financing instead of the originators was the need to minimize funding costs. After the first “warehousing” stage, the “takeout” stage shall take place, namely a public securitization with the issue of rated securities sold to institutional investors. In order to complete the initial stage, the following steps must be carried out: • contract agreement between Banco Popolare and one or more external counterparties, whereby Banco Popolare shall sell the subscribed private securities at the same subscription price, while the counterparty shall take on the obligation to subscribe the additional tranches of private securities and is committed to turn back in the private securities at Banco Popolare upon expiration of the agreement against payment of the prices paid for the securities and of the additional payments made; Banco Popolare shall recognize to the counterparty a remuneration corresponding to the three-month Euribor plus a 60 basis point spread, while the counterparty shall recognized to Banco Popolare the coupon of the private securities incremented by the excess spread generated by the SPV. • contract agreement between Banco Popolare and the subsidiary originator banks, whereby Banco Popolare shall pay the amount received by the institutional counterparty (equal to the sum of the private securities coupon and the excess spread generated by the SPV) and shall receive from the originators a remuneration corresponding to the three-month Euribor plus a 60 basis point spread. The recognition of the excess spread through profit and loss led to the recognition of receivables/payables due from/to the subsidiaries and the SPV that for the time being have been classified as other assets/liabilities.
As at December 31st, 2007, only the agreement with the originator banks and Banco Popolare had been signed, while the agreement between Banco and the external institutional counterparty had not been signed yet. However, by virtue of the “total return swap” between Banco Popolare and the originator banks, the credit risk of the entire transaction falls on the originators, that as a result have continued to recognize the sold loans under “customer loans” in compliance with IAS 39, and the payable to the SPV under due to customers.
DU.CA. SPV (September 2001)
With regard to the securitization carried out through Du.Ca. SPV, the special purpose entity, set up under art. 1 of Law n.130 of April 30th, 1999 and registered in the register under art. 107 of L.D. n. 385 of September 1st, 1993, had financed the purchase of loans originated by finalized and personal loans, by issuing bonds subdivided into three classes:
- Class A notes: € 467,280,000 in floating rate notes (three-month Euribor plus a 0.42 spread), Issue Price 99,86% of the nominal value, rated Aaa (Moody’s) and AAA (Fitch);
- Class B notes: € 25,120,000 in floating rate notes (three-month Euribor plus a 0,90 spread), Issue Price 100% of the nominal value, rated A2 (Moody’s) and A (Fitch);
- Class C notes: € 6,020,000 floating rate notes (three-month Euribor plus a 1.80 spread), Issue Price 100% of the nominal value, rated Baa2 (Moody’s) and BBB (Fitch);
- Class M notes (unrated): € 5.817.619 fixed rate bonds (4% per year plus an Additional Return based on collection), fully subscribed by Ducato upon issuance.
The different class of securities have been assigned a different subordination when defining the principal and interest repayment priorities. In particular, Class A notes have a first repayment priority over Class B notes, Class B notes have higher repayment priority over Class C notes, while Class M notes have the lowest priority.
Ducato S.p.A., originator of the transaction, made the monthly “refills” to the pool (reinvesting principal payments in additional receivables to replenish the pool) until August 31st, 2005, depending on collection performance, and in its
259 Notes to the consolidated accounts
function as Servicer it was in charge of collecting and recovering sold loans, in keeping with the procedures examined and shared by the transaction parties. Collections, accounted for through reporting instruments, undergo specific annual audits carried out by auditing firms of international standing.
In the period between 01/01/2007 and 31/12/2007 no additional monthly pool refills were performed by Ducato, as since September 2005 the transaction entered the amortizing period:
Dates Amount Sold Principal amount collected in the month
31/01/2007 Amortization 13.032.367,54 28/02/2007 Amortization 10.742.248,08 31/03/2007 Amortization 11.050.632,29 30/04/2007 Amortization 9.585.724,98 31/05/2007 Amortization 10.399.417,29 30/06/2007 Amortization 8.795.452,05 31/07/2007 Amortization 8.994.866,93 31/08/2007 Amortization 7.857.196,84 30/09/2007 Amortization 6.923.834,35 31/10/2007 Amortization 7.790.440,92 30/11/2007 Amortization 6.855.479,14 31/12/2007 Amortization 6.201.563,06
With the monthly refill of 31/08/2005 the revolving period was over. Collections received from 01/09/2005 were used to redeem bonds in compliance with the Note-holders rights and along the repayment priority provided for under the contract agreements.
Since the beginning of the transaction, the originator repurchased some loans that did not meet the requirements set forth in the Transfer Contract governing the entire transaction. Said loans to date have been reintroduced in Ducato S.p.A.’s portfolio. Total assets sold to the SPV amounted to € 123,754.23.
The liquidity generated by the monthly collections from the securitized loans is deposited on the Collection account of the SPV. The money deposited on the Collection Account of the SPV, depending on the market performance, is used in Repurchase Agreements in the time span between the two interest payment dates. The maturity of said transactions is a single redemption date falling five days before the interest payment date of the corresponding Notes. The return of the above transactions is added to the total revenues generated by the transaction on a quarterly basis.
As at 31/12/2007 , the pool of sold loans, amounting to € 99,565,904.44, broke down as follows: 26.67% finalized loans for the purchase of new cars, 23.43% for the purchase of used cars, 17.81 % other finalized loans, and 32.09% personal loans. 79.57% of loans was originated by Ducato S.p.A. branches located in Southern Italy and in the Islands, while the remaining 20.43% was originated by Ducato S.p.A. branches located in Northern and Central Italy. 47.97% of payments of the sold loan pool are by post office draft and 52.03% by checking account debiting. Loans sold were not written down by the SPV and Ducato S.p.A. has no shareholding in the SPV Du.Ca. S.r.l. All activities performed by Ducato S.p.A. for the securitization have been examined by the Internal Audit since 2002. Up to now, the audits, that were carried out regularly, did not identify any serious flaws. As at 31/12/2007, servicing fees totaled € 832,472.11 and on the same date all threshold values (Trigger), as illustrated in the Offering Circular and to be complied with for a correct performance of the transaction, were fully complied with, as evidenced in the Servicer Monthly Report and in the Payment Report – Du.Ca. Transaction. The failure to comply with the fixed parameters would make the securitization default. As at 31/12/2007, total sold loans amounted to € 1,456,264,246.66 and total default was € 64,627,168.43. The default level reached up to now is perfectly in line with default projections, with a First Delinquency Ratio at 4.45% and a Second Delinquency Ratio at 2.58%. As at 31/12/2007 also the First and Second Default Ratios stood at 3.35% and 4.44%, respectively. Triggers are no more applicable as the transaction has entered the amortization period, while during the revolving period they have always been complied with.
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Illustrated below is the breakdown of loans by number of overdue installment payments (up to 9 overdue installments).
Total securitized loan pool as at 31.12.2007 (thousand euro)
99,566
Breakdown of securitized loans with more Principal overdue Interest overdue Total overdue and than 1 overdue installment: Principal and unpaid and unpaid unpaid (thousand euro)
2 overdue installments 1,449 206 25 231 3 overdue installments 835 179 21 200 4 overdue installments 695 157 22 179 5 overdue installments 482 125 19 144 6 overdue installments 462 147 20 167 7 overdue installments 506 164 27 191 8 overdue installments 584 212 36 248 9 overdue installments 424 183 26 209 Total 5,437 1,373 196 1,569
With regard to the profitability of the securitized assets, in 2007 an Additional Return of 4,055 thousand euro was generated.
S.P.V BPL Consumer (November 2002)
With regard to the securitization performed through BPL Consumer, the special purpose entity, set up under art. 1 of Law n.130 of April 30th, 1999 and registered under art. 107 of L.D. n. 385 of September 1st, 1993, financed the purchase of loans, originated from finalized and personal loans, by issuing bonds subdivided into three classes:
- Class A notes: € 470,030,000 in floating rate bonds (three-month Euribor plus a 0.38 spread), Issue Price100% of the nominal value, rated Aaa (Moody’s) and AAA (Fitch);
- Class B notes: € 20,000,000 in floating rate bonds (three-month Euribor plus a 0.80 spread), Issue Price 100% of the nominal value, rated A1 (Moody’s) and A (Fitch);
- Class C notes: € 7,000,000 in floating rate bonds (three-month Euribor plus a 1.50 spread), Issue Price 100% of the nominal value, rated Baa1 (Moody’s) and BBB (Fitch);
- Junior Class notes (unrated): € 3,000,000 in fixed rate bonds (4% yearly plus an Additional Return based on collections), fully subscribed by Ducato upon issuance.
The different class of securities have been assigned a different subordination when defining the principal and interest repayment priorities. In particular, Class A notes have a first repayment priority over Class B notes, Class B notes have a higher repayment priority over Class C notes, while Junior Class notes have the lowest priority.
Ducato S.p.A. made the monthly refills to the pool until October 10th, 2005, depending on collection performance, and in its function as Servicer it was in charge of collecting and recovering sold loans, in keeping with the procedures examined and shared by the transaction parties. Collections, accounted for through reporting instruments, undergo specific annual audits carried out by auditing firms of international standing.
As of 10/10/2005 the transaction entered its amortizing period, therefore Ducato S.p.A. made no additional quarterly pool refills.
Illustrated below are the collections in the quarters under examination:
From To Principal amount collected in the Quarter
11/01/2007 10/04/2007 36.215.548,68 11/04/2007 10/07/2007 30.582.872,64 11/07/2007 10/10/2007 24.641.599,34 11/10/2007 10/01/2008 20.542.839,52
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With the refill of 10/10/2005 the revolving period was over. Collections received as of 11/10/2005 were used to redeem bonds in compliance with the Note-holders rights and along the repayment priority provided for under the contract agreements.
Since the beginning of the transaction, the originator repurchased some loans that did not meet the requirements set forth in the Transfer Contract governing the entire transaction. Said loans to date have been reintroduced in Ducato S.p.A.’s portfolio. Total assets sold to the SPV amounted to € 35,253.30.
The liquidity generated by the monthly collections from the securitized loans is deposited on the Collection account of the SPV. The money deposited on the Collection Account of the SPV, depending on the market performance, is used in Repurchase Agreements in the time span between the two interest payment dates. The maturity of said transactions is a single redemption date falling five days before the interest payment date of the corresponding Notes. The return of the above transactions is added to the total revenues generated by the transaction on a quarterly basis.
As at December 31st, 2007 , the pool of sold loans, amounting to € 82,855,509.51, broke down as follows: 20.26% finalized loans for the purchase of new cars, 32.88% for the purchase of used cars, 10.26 % other finalized loans, and 36.61% personal loans. 78.77% of loans was originated by Ducato S.p.A. branches located in Southern Italy and in the Islands, while the remaining 21.23% was originated by Ducato S.p.A. branches located in Northern and Central Italy. 40.11% of payments of the sold loan pool are by post office draft and 59.89% by checking account debiting.
The portfolio composition percentages have always complied with the terms illustrated in the offering circular during the revolving period.
Sold loans were not written down by the SPV and there is no shareholding in the SPV BPL Consumer S.r.l.
All activities performed by Ducato S.p.A. for the securitization have been examined by the Internal Audit since 2002. Up to now, the audits, that were carried out regularly, did not identify any serious flaws.
As at 31/12/2007, servicing fees totaled € 187,574.92and on the same date all Triggers specified in the Offering Circular were fully complied with, as evidenced in the Servicer quarterly report – BPL Consumer Transaction. As at 31/12/2007, total sold loans at the closing date amounted to € 1,246,093,820.13 and total default was € 41,178,446.03. The default level reached up to now is perfectly in line with default projections, below the maximum threshold provided for across the entire revolving period. As at 31/12/2007 also the Delinquency Ratio was complied with, as it stood at 1.34% , hence below the 6% maximum threshold.
Illustrated below is the breakdown of loans by number of overdue installment payments (up to 9 overdue installments).
Total securitized loan pool as at 31 12 2007 (thousand euro)
82,855
Breakdown of securitized loans with more Principal overdue Interest overdue Total overdue and than 1 overdue installment: (31.12.2007) Principal and unpaid and unpaid unpaid (thousand euro)
2 overdue installments 1,785 299 33 332 3 overdue installments 1,170 273 33 306 4 overdue installments 869 236 30 266 5 overdue installments 623 212 25 237 6 overdue installments 593 212 28 240 7 overdue installments 659 250 34 284 8 overdue installments 519 224 30 254 9 overdue installments 500 217 34 251 Total 6,718 1,923 247 2,170
With regard to the profitability of the securitized assets, in 2007 an Additional Return of 6,082 thousand euro was generated.
S.P.V. BPL Consumer (June 2004)
On June 29th, 2004, Ducato Spa finalized the third revolving securitization on a pool of performing loans, acting as Originator, in order to diversify funding sources, in compliance with Law n.130 of April 30th, 1999. On June 14th, 2004 the Company sold consumer loans with a principal value of € 500,998,101.22 to a special purpose entity, BPL Consumer S.r.l., set up under art. 1 of Law n.130 of April 30th, 1999 and registered under art. 107 of L.D. n.385 of September 1st, 1993. Based on the collections from the loans under securitization, the Company every six months shall
262 Notes to the consolidated accounts
sell additional loans in keeping with the agreement governing the pool refill and pre-requisite for the performance of the transaction. The revolving period ended in October 2007.
The special purpose entity financed the loan purchase by issuing bonds subdivided into three classes:
- Class A notes: € 466,400,000 floating rate notes (three-month Euribor plus a 0.22 spread), Issue Price100% of the nominal value, rated Aaa (Moody’s) and AAA (Fitch);
- Class B notes: € 29.600.000 floating rate notes (three-month Euribor plus a 0.50 spread), Issue Price 100% of the nominal value, rated A1 (Moody’s) and A (Fitch);
- Class C notes: € 2,000,000 floating rate notes (three-month Euribor plus a 1.00 spread), Issue Price 100% of the nominal value, rated Baa1 (Moody’s) and BBB (Fitch);
- Junior Class notes (unrated): € 2,950,000 floating rate notes (three-month Euribor plus a 1.50 spread and an Additional Return based on collections), fully subscribed by Ducato S.p.A. upon issuance.
The different class of securities have been assigned a different subordination when defining the principal and interest repayment priorities. In particular, Class A notes have a first repayment priority over Class B notes, Class B notes have a higher repayment priority over Class C notes, while Junior Class notes have the lowest priority.
Ducato S.p.A. acted also as Servicer, as it was in charge of collecting and recovering sold loans, in keeping with the procedures examined and shared by the transaction parties. The transaction risk for the Company is constantly monitored, based on the performance of collections, that are accounted for through reporting instruments, undergoing specific annual audits carried out by auditing firms of international standing.
Since this was a revolving transaction, in the period between 01/01/2007 and 31/12/2007 the following pool refills were made on a six-month basis.
Dates Sold amount
15/06/2007 124,591,732.26
Collections in the quarters under examination were:
From To Principal amount collected in the Quarter
16/12/2006 15/03/2007 60,102,318.31 16/03/2007 15/06/2007 57,452,461.11 16/06/2007 15/09/2007 60,069,185.01 16/09/2007 15/12/2007 58,881,685.55
As at 31/12/2007, the sold loan pool, totaling € 374,741,051.66, broke down as follows: 9.57% finalized loans for the purchase of new cars, 29.39% for the purchase of used cars, 11.64 % other finalized loans, and 49.41% personal loans. 62.77% of loans refers to residents in Southern Italy and in the Islands, while the remaining 37.23% refers to residents in Northern and Central Italy. 36.94% of payments of the sold loan pool are by post office draft and 63.06% by checking account debiting.
The portfolio composition percentages have always complied with the terms illustrated in the offering circular during the revolving period, as illustrated below:
Personal loans Portfolio composition <= to 53% Used cars Portfolio composition <= to 31% New cars Portfolio composition at least 8% Other finalized loans Portfolio composition at least 8% Loans originated in branches in Southern Italy and Islands Portfolio composition <= to 65% Type of payment – automated account debiting Portfolio composition at least 60%
Sold loans were not written down by the SPV and Ducato S.p.A. has no shareholding in the SPV BPL Consumer S.r.l.
Since the beginning of the transaction, the originator repurchased some loans that did not meet the requirements set forth in the Transfer Contract governing the entire transaction. Said loans to date have been reintroduced in Ducato S.p.A.’s portfolio. Total assets sold to the SPV amounted to € 173,217.20.
263 Notes to the consolidated accounts
The liquidity generated by the monthly collections from the securitized loans is deposited on the Collection account of the SPV. The money deposited on the Collection Account of the SPV, depending on the market performance, is used in Repurchase Agreements in the time span between the two interest payment dates. The maturity of said transactions is a single redemption date falling five days before the interest payment date of the corresponding Notes. The return of the above transactions is added to the total revenues generated by the transaction on a quarterly basis.
As at 31/12/2007, servicing fees totaled € 643,851.89 and on the same date all Triggers specified in the Offering Circular were fully complied with, as evidenced in the Servicer quarterly report – BPL Consumer Transaction, attachment B. As at 31/12/2007, after the refill the pool amounted to € 374,741,051.66, while total defaults amounted to € 29,760,049.88, the level reached by the Cumulative Default Trigger was 1.9763 %, and the maximum threshold provided for by the agreements in the period between March 2007 and June 2007 was 5.10 %. The default level reached up to now is perfectly in line with default projections, below the maximum threshold provided for across the entire observation period. As at 31/12/2007 also the Delinquency Ratio Rolling Average was complied with, as it stood at 5.62% , hence below the 6% maximum threshold. Also the Collateral Ratio has been complied with, as it stood at 86.56% , below the 95% minimum threshold.
All activities performed by Ducato S.p.A. for the securitization have been examined by the Internal Audit since 2004. Up to now, the audits, that were carried out regularly, did not identify any serious flaws.
Illustrated below is the breakdown of loans by number of overdue installment payments (up to 9 overdue installments)
Breakdown of securitized loans with more Principal overdue Interest overdue Total overdue and than 1 overdue installment: (31.12.2007) Principal and unpaid and unpaid unpaid (thousand euro)
2 overdue installments 7,483 615 143 758 3 overdue installments 4,150 486 111 597 4 overdue installments 2,915 423 104 527 5 overdue installments 2,271 392 97 489 6 overdue installments 2,091 431 103 534 7 overdue installments 1,644 381 92 473 8 overdue installments 1,393 382 86 468 9 overdue installments 1,604 434 107 541 Total 23,551 3,544 843 4,387
With regard to the profitability of the securitized assets, in 2007 an Additional Return of 6,689 thousand euro was generated.
Following the introduction of international accounting standards, in compliance with SIC 12, assets sold have been recognized in these financial statements under “Customer loans: assets sold and not derecognized” and offset by payables of an amount equal to the sums received for the sale of the loans, net of the securitization notes held in the Company’s portfolio.
S.P.V. BPL Consumer (October 2006)
In June 2005, Ducato finalized a warehousing securitization of a pool of performing loans, acting as Originator, in order to diversify its funding sources, in compliance with Law n.130 of April 30th, 1999. On June 19th and 26th, the Company sold consumer loans with a principal value of € 200,079,893.48 to a special purpose entity, BPL Consumer S.r.l., set up under art. 1 of Law n.130 of April 30th, 1999 and registered under art. 107 of L.D. n. 385 of September 1st, 1993. Based on the collections from the loans under securitization, the Company sold additional loans in keeping with the Transfer Framework Agreement to refill the portfolio. Three sales were performed: on 15/10/2005 for € 100,029,004.22; on 15/04/2006 for € 150,033,541.01 and on 15/07/2006 for € 160,079,199.44. The above additional sales were a pre-requisite for the performance of the transactions and have been the means through which the total loan pool with the last sale on 15/07/2006 reached a value of € 500,000,000.00 at the end of the warehousing period. Each loan sale during the warehousing period corresponded to a new issue of unrated Notes, fully subscribed by Dresdner Kleinwort Wasserstein. On 13/07/2006, the total number of unrated Notes were purchased by Banca Popolare Italiana, which replaced Dresdner Kleinwort Wasserstein as Holder of the unrated Notes. On 19/10/2006 the unrated Notes were entirely sold (the notes issued until July 13th plus those issued after the loan sale on July 15th) to a new special purpose entity, Ducato Consumer srl, set up under art. 1 of Law n.130 of April 30th, 1999 and registered under art. 107 of L. D. n. 385 of September 1st, 1993, which issued the bonds. Said Notes were then rated by the rating firms Fitch and Moody’s, as required in all other public securitization transactions, and were sold on the international market. On October 19th, 2006, € 501,623,000 in Bonds were issued, and the revolving step of the new public transaction executed at the end of the warehousing period started. Bonds are subdivided into three classes:
- Class A notes: € 461,500,000 in floating rate bonds (three month Euribor plus a 0.16 spread) Issue Price100% of the nominal value, rated Aaa (Moody’s) and AAA (Fitch);
264 Notes to the consolidated accounts
- Class B notes: € 28.100.000 in floating rate bonds (three month Euribor plus a 0.30 spread) Issue Price100% of the nominal value, rated A1 (Moody’s) and A (Fitch);
- Class C notes: € 9,050,000 in floating rate bonds (three month Euribor plus a 0.60 spread) Issue Price100% of the nominal value, rated Baa1 (Moody’s) and BBB (Fitch);
- Junior Class notes (unrated): € 2,973,000.00 fixed rate bonds (three month Euribor plus a 1.50 and an Additional Return based on collections), fully subscribed by Ducato upon issuance.
The different class of securities have been assigned a different subordination when defining the principal and interest repayment priorities. In particular, Class A notes have a first repayment priority over Class B notes, Class B notes have a higher repayment priority over Class C notes, while Junior Class notes have the lowest priority.
Ducato S.p.A. acted also as Servicer, as it was in charge of collecting and recovering sold loans, in keeping with the procedures examined and shared by the transaction parties. The transaction risk for the Company is constantly monitored, based on the performance of collections, that are accounted for through reporting instruments, undergoing specific annual audits carried out by auditing firms of international standing.
The transaction, followed by Banca Popolare Italiana as Arranger, allowed the company to open a big autonomous line of credit, in parallel and as an alternative to those already in use, at arm’s length, which takes on a special strategic importance in view of the future expansion of the extended credit. In the period between 01/01/2007 and 31/12/2007 the following additional loan sales were performed:
Dates Amount
15/01/2007 45,605,017.02 15/04/2007 50,789,191.72 15/07/2007 52,842,077.89 15/10/2007 54,081,401.24 15/01/2008 55,524,421.21
Collections in the quarters under examination were:
From To Principal amount collected in the Quarter
16/01/2007 15/04/2007 50,238,128.38 16/04/2007 15/07/2007 53,541,905.48 16/07/2007 15/10/2007 54,190,342.79 16/10/2007 15/01/2008 54,701,502.81
As at 15/01/2008 the sold loan pool amounting to € 491,097,569.26 broke down as follows: 9.01% finalized loans for the purchase of new cars, 14.61% for the purchase of used cars, 5.87% other finalized loans and 70.51% personal loans. 62.65% of sold loans refers to residents in Southern Italy and in the Islands, while the remaining 37.35 % refers to residents in Northern and Central Italy. 27.92 % of payments of the sold loan pool are by post office draft and 72.08% by checking account debiting.
The portfolio composition percentages have always complied with the terms illustrated in the offering circular during the revolving period, as illustrated below:
Personal loans Portfolio composition <= to 80% Used cars Portfolio composition <= to 16% New cars Portfolio composition at least 2% Other finalized loans Portfolio composition at least 2% Loans originated in branches in Southern Italy and Islands Portfolio composition <= to 75% Loans originated in branches in Northern and Central Italy Portfolio composition <= to 25% Type of payment – automated account debiting Portfolio composition at least 65%
Sold loans were not written down by the SPV and Ducato S.p.A. has no shareholding in the special purpose entity BPL Consumer S.r.l.. Since the beginning of the transaction, the originator repurchased some loans that did not meet the requirements set forth in the Transfer Contract governing the entire transaction. Said loans to date have been reintroduced in Ducato S.p.A.’s portfolio. Total assets sold to the SPV amounted to € 5,238.6. The liquidity generated by the monthly collections from the securitized loans is deposited on the Collection account of the SPV. The money deposited on the Collection Account of the SPV, depending on the market performance, is used in Repurchase Agreements in the time span between the two interest payment dates. The maturity of said transactions is a
265 Notes to the consolidated accounts
single redemption date falling five days before the interest payment date of the corresponding Notes. The return of the above transactions is added to the total revenues generated by the transaction on a quarterly basis As at 31/12/2007 servicing fees totaled € 527,530.69 and on the same date all Triggers specified in the Offering Circular were fully complied with, as evidenced in the Servicer quarterly report – BPL Consumer Transaction, attachment B. As at 15/01/2008 after the refill the pool amounted to € 491,097,569.26 while total defaults amounted to € 9,883,083.97. the level reached by the Cumulative Default Trigger was 1.22978 % and the maximum threshold provided for by the agreements in the period between October 2007 and January 2008 was 2.54%. The default level reached up to now is perfectly in line with default projections, below the maximum threshold provided for across the entire observation period. As at 15/01/2008 also the Delinquency Ratio Rolling Average was complied with, as it stood at 5.12 % hence below the 6% maximum threshold. Also the Collateral Ratio has been complied with, as it stood at 97.738%, below the 95% minimum threshold. All activities performed by Ducato S.p.A. for the securitization have been examined by the Internal Audit since 2005. Up to now, the audits, that were carried out regularly, did not identify any serious flaws. Up to now, the redemption of ABS notes has not started yet, as it shall start in the amortization period, in compliance with the Note-holders rights and along the repayment priority provided for under the contract agreements. As at 31/12/2007, 9,883 thousand euro in defaults were reported.
Illustrated below is the breakdown of loans by number of overdue installment payments (up to 9 overdue installments)
Breakdown of securitized loans with more Principal overdue Interest overdue Total overdue and than 1 overdue installment: (31.12.2007) Principal and unpaid and unpaid unpaid (thousand euro)
2 overdue installments 7,861 448 129 577 3 overdue installments 4,418 351 104 455 4 overdue installments 2,884 301 89 390 5 overdue installments 2,391 289 92 381 6 overdue installments 2,013 283 91 374 7 overdue installments 1,969 326 99 425 8 overdue installments 1,710 297 99 396 9 overdue installments 1,660 312 105 417 Total 24,906 2,607 808 3,415
With regard to the profitability of the securitized assets, in 2007 an Additional Return of 11,276 thousand euro was generated.
Following the introduction of international accounting standards, in compliance with SIC 12, assets sold have been recognized in these financial statements under “Customer loans: assets sold and not derecognized” and offset by payables of an amount equal to the sums received for the sale of the loans, net of the securitization notes held in the Company’s portfolio.
S.P.V. DUCATO CONSUMER (July 2007 – in warehousing)
On July 13th, 2007 the fifth securitization was performed, approved by Ducato’s Board of Directors with resolution dated April 13th, 2007, structured in two steps: a first “warehousing” step, during which Ducato sells blocks of loan pools to the special purpose entity (Ducato Consumer S.r.l.) up to euro 500,000,000, followed by a second revolving step, characterized by the issue of listed securities and periodic “refills” to maintain the total value of loans sold during the warehousing period constant. In this fifth securitization, the SPV shall finance the purchase of the pools sold during the warehousing period with a loan extended by Banca IMI SpA. The warehousing phase shall last for about six months, and shall be followed by a public phase after the first note issue. The loans that have been and will be purchased by the SPV over time derive from performing consumer loans granted to purchase cars and consumer goods, or belong to the personal loan class. During the warehousing stage, Ducato sold the loan pool en bloc and without recourse, with the following residual principal value:
Dates Amount
11/07/2007 400,053,066.21 05/11/2007 143,070,006.36
266 Notes to the consolidated accounts
Collections carried out from the beginning of the transaction up to 31/12/2007 are:
Dates Principal amount collected in the month
11/07/2007 to 05/09/2007 20,248,081.29 06/09/2007 to 05/10/2007 11,584,448.99 06/10/2007 to 05/11/2007 11,512,177.87 06/11//2007 to 05/12/2007 15,738,074.23 06/12/2007 to 05/01/2008 14,223,847.42
During the warehousing stage, the SPV funds the purchase price of the pools by drawing from the bridge loan extended by Banca IMI S.p.A.. The bridge loan should have a term no longer than six months and shall be repaid with the proceeds from the issue of asset backed securities. The Bridge Loan was to expire on February 1st, 2008, but in agreement with Banca IMI , after receiving prior authorizations from the Bank of Italy for the postponement of the loan, also in consideration of the market conditions, it was deemed appropriate to extend it for 4 additional months. The payment obligations taken over by the SPV are guaranteed by Banco Popolare under an autonomous first call guarantee issued by Banco Popolare in favor of Banca IMI. Under the transfer agreement, at a date prior to the issue of the first tranche, under art. 58 of T.U. Ducato shall repurchase the loans that at that date should report two or more delinquent and unpaid installments.
Following the introduction of international accounting standards, in compliance with SIC 12, assets sold have been recognized in these financial statements under “Customer loans: assets sold and not derecognized” and offset by payables of an amount equal to the sums received for the sale of the loans.
Protection of the interest of Note-holders
When executing the four public securitizations, a special attention was devoted to the safeguard of the interest of Note- holders. Already when preparing the Agreements governing the transactions, an explicit reference is made in various instances to the different forms of protection. In particular, in the Servicing Agreements there are various references, briefly illustrated below, that hold true for all the transactions underway: x Consensus request in case of appointment of Authorized Companies (agents of the Servicer for administration, collection or recovery); x Disclosure requirements in case of settlement agreements between the Servicer and the customer, other than those governed by the Agreement: x Agreed Procedures: the Servicer is obliged to act with respect for Note-holders, in case of changes in the agreed procedures the written consent of the note-holders’ representative shall be required; x Document custody: it is one of the duties of the Servicer, in case of dismissal from the assignment, the consent of the Note-holders’ Representative is required; x Right to access documents by the Representative (including magnetic media supplied by the Servicer) and to carry out inspections; x Servicer Quarterly Report forwarded also to the Note-holders’ Representative, together with the Auditors’ certificate; x Event of Default: should it occur, the Servicer should fulfill its duties and comply with the instructions given by the Representative; x Revocation of the Servicer’s mandate or withdrawal from the mandate by the Servicer.
267 Notes to the consolidated accounts accounts consolidated to the Notes 268 QUANTITATIVE INFORMATION
C.1.1 Exposures resulting from securitizations classified by underlying asset quality
Cash exposure Guarantees given Credit lines
Underlying asset Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Quality / Exposure (thousand euro) Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net exposure Exposure exposure Exposure exposure Exposure exposure Exposure exposure Exposure exposure Exposure exposure Exposure exposure Exposure exposure Exposure
A. Proprietary underlying 1,018,253 1,018,253 187,931 62,185 824,688 807,605 - - 33,798 33,798 - - - - 136,200 132,921 - - assets a) impaired - - 151,000 25,254 57,781 6,525 ------136,200 132,921 - -
b) other 1,018,253 1,018,253 36,931 36,931 766,907 801,080 - - 33,798 33,798 ------B. Third party underlying 286,229 286,229 11,510 11,510 ------assets a) impaired 130 130 ------
b) other 286,099 286,099 11,510 11,510 ------
C.1.2 Exposures resulting from main “proprietary” securitizations broken down by type of securitized asset and by type of exposure
Cash exposure Guarantees given Credit lines
Type of securitized Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior assets / Exposure (thousand euro) Write- Write- Write- Write- Write- Write- Write- Write- Write- Book Book Book Net Net Net Net Net Net downs/ downs/ downs/ downs/ downs/ downs/ downs/ downs/ downs/ value value value exposure exposure exposure exposure exposure exposure Write-backs Write-backs Write-backs Write-backs Write-backs Write-backs Write-backs Write-backs Write-backs
A. Fully derecognized 6,240 30,008 9,215 24,363 132,921 1,953
B. Partially derecognized
C. Not derecognized 1,012,013 32,177 783,242 4,844 33,798 Notes to the consolidated accounts
C.1.3 Exposures resulting from main “third-party” securitizations broken down by type of securitized assets and by type of exposure
CASH EXPOSURE Type of underlying Senior Mezzanine Junior assets / Exposures Write-downs/ Write-downs/ Write-downs/ (thousand euro) Book value Book value Book value write-backs write-backs write-backs
AAREAL BK GCO3B TV30 3,938 -111 - - - - Other - ARMS II 02/33 EUR 6,332 -10 - - - - Other AYT CED EUR TV 12 19,929 - - - - - Other BANCAJA 6 A2 EUR /36 13,030 -96 - - - - Mortgages BANKINTER/36 3A CL A 11,277 -63 - - - - Mortgages BELUGA A1 TV 96 EUR 20,167 - - - - - Mortgages BROOKLANDS 01-11 TV - - 3,209 -1,805 - - Other BROOKLANDS 01-11 TV 6,716 -3,308 - - - - Other CAMBER A3 04-53 TV - - 3,293 - - - Other CEDULAS TDA EUR TV16 11,882 -50 - - - - Other DELPHINUS EUR TV 66 7,138 -13 - - - - Mortgages F-E GREEN TV 04-18 9,166 -28 - - - - Lease contracts G SQUARE FIN04-50 TV 605 -6,279 - - - - Other HIPOCAT 6A 03/34 TV 1,826 - - - - - Other INPS TV 03-08 33,737 -17 - - - - Other INTESA LEAS 04-15 TV 7,335 -19 - - - - Lease contracts INTESABCI 03-23 A2 8,819 -38 - - - - Mortgages MUTINA TV 03-09 3,214 -7 - - - - Mortgages S.C.C INPS 08 TV 34,608 -1 - - - - Pension benefits S.C.C.INPS TV 04-09 15,225 - - - - - Pension benefits SAECURE EUR TV 36 5,080 -20 - - - - Other SCIC TV 04-23 23,781 -36 - - - - Loans SECURSEL 02/20 TV B - - 5,008 - - - Other SIENA M.TV 2002-3 A2 8,725 -18 - - - - Mortgages SILVER ARR EUR TV 12 5,042 -23 - - - - Consumer loans TDA CAM 2A/32 EUR TV 10,993 -67 - - - - Mortgages TDA IBERCAJA 35 TV 8,761 -56 - - - - Mortgages
269 Notes to the consolidated accounts
CASH EXPOSURE Type of underlying Senior Mezzanine Junior assets / Exposures Write-downs/ Write-downs/ Write-downs/ (thousand euro) Book value Book value Book value write-backs write-backs write-backs
VELAH HOME TV 03-27 8,903 -42 - - - - Mortgages
The table illustrating guarantees given and credit lines is omitted in that none were reported.
C.1.4 Exposure resulting from securitizations broken down by pool of financial assets and by type
Financial Financial Financial Financial assets assets under assets (thousand euro) assets held to Loans 31/12/2007 31/12/2006 held for trading fair value available for maturity option sale 1. Cash exposure 286,078 3,938 54,135 - 14,199 358,350 177,453 - Senior 274,970 3,938 13,561 - - 292,469 135,894 - Mezzanine 5,008 - 31,756 - 4,754 41,518 3,022 - Junior 6,100 - 8,818 - 9,445 24,363 38,537 2. Off-balance sheet loans - - - - 132,921 132,921 - - Senior ------Mezzanine - - - - 132,921 132,921 - - Junior ------
C.1.5 Total amount of securitized assets underlying junior notes or other forms of credit support
(thousand euro) Traditional securitizations Synthetic securitizations
A. Proprietary underlying assets: 4,240,464 A.1 Fully derecognized 29,274 X 1. Non-performing loans 20,456 X 2. Watchlist loans X 3. Restructured loans X 4. Past due loans X 5. Other assets 8,818 X A.2 Partially derecognized X 1. Non-performing loans X 2. Watchlist loans X 3. Restructured loans X 4. Past due loans X 5. Other assets X A.3 Not derecognized 4,211,190 1. Non-performing loans 3,846 2. Watchlist loans 9,105 3. Restructured loans 4. Past due loans 1,204 5. Other assets 4,197,035 B. Third party underlying assets: B.1 Non-performing loans B.2 Watchlist loans B.3 Restructured loans B.4 Past due loans B.5 Other assets
270 Notes to the consolidated accounts
C.1.6 Stakes in special purpose entities
Name Registered office Shareholding % Tiepolo Finance S.r.l. Lodi 60 Tiepolo Finance II S.r.l. (*) Lodi 60 Sintonia Finance S.r.l. (**) Milan 5 Bipitalia Residential S.r.l. Lodi 4 (*) interest held by way of the subsidiary Società Gestione Crediti BP S.p.A. (**) interest held by way of the subsidiary Banca Popolare di Cremona S.p.A.
271 Notes to the consolidated accounts accounts consolidated to the Notes 272 C.1.7 Servicer activities – collection of securitized loans and redemption of notes issued by the special purpose entity
Securitized assets Loan collections in the Percentage of redeemed notes (end-of-period) year (end-of-period) Servicer Special purpose entity Senior Mezzanine Junior Impaired Performing Impaired Performing Impaired Performing Impaired Performing Impaired Performing assets assets assets assets assets assets
Banca Popolare di Verona SGSP S.p.A. BPV Mortgages S.r.l. (secur.2001) - - 333 14,183 100.00% 100.00%
BP Mortgages S.r.l. (secur.Mar.2007) 3,982 1,283,650 141,217 BPV Mortgages S.r.l. (secur.2007) 206,660 1,934 Banca Popolare di Novara S.p.A. BP Mortgages S.r.l. (secur.June.2007) 758 808,271 5 54,670 BPV Mortgages S.r.l. (secur.2007) 430,439 1,659 Credito Bergamasco S.p.A. BP Mortgage S.r.l. 2,853 684,930 56,635 BPV Mortgage S.r.l. - 55,720 202 Banca Popolare di Lodi S.p.A. Tiepolo Finance S.r.l. 20,456 13,543 98.85% Tiepolo II S.r.l. 86,320 31,979 87.36% Bipitalia Residential S.r.l. (RMBS 2004) 8,157 540,818 5,637 116,526 45.67% Bipitalia ResidentialS.r.l. (RMBS 2005) 228 923,440 100.00% Bipitalia Residential S.r.l. (CMBS 2005) 10,259 663,805 100.00% BPL Mortgages S.r.l. 334 906,793 85,535 Bipitalia Ducato S.p.A. Du. Ca. S.r.l. 2,085 97,481 2,189 102,336 81.73% BPL Consumer S.r.l. 2,271 85,126 2,910 109,074 88.16% BPL Consumer S.r.l. 12,571 360,451 7,970 228,535 27.07% BPL Consumer S.r.l. 8,413 439,247 3,997 208,675 Ducato Consumer S.r.l. 122 471,832 19 73,287
C.1.8 Special purposes entities belonging to the banking group
The special purpose entities Tiepolo Finance S.r.l. and Tiepolo Finance II S.r.l. belong to Gruppo Bancario Banco Popolare. C.2 Sale transactions
C.2.1 Financial assets sold and not derecognized
Financial assets held for Financial assets measured at Financial assets available for Financial assets held to Due from banks Customer loans TOTAL TOTAL (thousand euro) trading fair value sale maturity A B C A B C A B C A B C A B C A B C 31/12/2007 31/12/2006
A. Cash assets
1. Debt securities 4,177,070 - - - - - 311,465 - - 578,707 - - 2,086,155 - - 937,703 - - 8,091,100 3,357,470
2. Equity securities 118,454 ------X X X X X X X X X 118,454 32,818
3. UCITS ------X X X X X X X X X - -
4. Loans ------6,202,998 - - 6,202,998 -
5. Impaired assets ------39,389 - - 39,389 -
B. Derivatives - - - X X X X X X X X X X X X X X X - -
31/12/2007 4,295,524 - - - - - 311,465 - - 578,707 - - 2,086,155 - - 7,180,090 - - 14,451,941
31/12/2006 2,488,331 - - - - - 42,140 - - 859,817 ------3,390,288
A=financial assets sold and fully recognized (book value) B=financial assets sold and partially recognized (book value) C= financial assets sold and partially recognized (full value)
C.2.2 Financial liabilities associated with financial assets sold and not derecognized
Financial assets held Financial assets Financial assets Financial assets held to (thousand euro) Due from banks Customer loans Total for trading measured at fair value available for sale maturity
A. Due to customers 96,945 - - - 20,668 195,586 313,199 a) relating to fully recognized assets - - - - 20,668 195,586 216,254 b) relating to partially recognized assets 96,945 - - - - - 96,945 B. Due to banks 624,352 - - - - - 624,352
a) relating to fully recognized assets 624,352 - - - - - 624,352 accounts consolidated to the Notes b) relating to partially recognized assets ------31/12/2007 721,297 - - - 20,668 195,586 937,551 31/12/2006 1,223,223 - - 473,873 - - 1,697,096 273 Notes to the consolidated accounts
D. Credit risk assessment models
To assess the credit and the portfolio risks, the Risk Management function avails itself of an operational model fed with risk variables, that is now being fine-tuned. For this reason no comparison was made between actual losses and the losses derived from the internal model, as the latter are not considered perfectly stable yet.
1.2 MARKET RISKS
1.2.1 Interest rate risk – regulatory trading book
QUALITATIVE INFORMATION
A. In general
The organizational model adopted by the new Gruppo Banco Popolare for the trading portfolios exposed to the interest rate risk hinges on the centralization: - in the Parent company of the “investment portfolio”, whose management was delegated to Banca Aletti, and whose main allocation in line with the management policies already adopted in the past, is bonds, characterized by a limited interest rate exposure; at the end of the year the positions that were previously held by the local retail “Banche di Territorio” of the former Gruppo BPVN have been centralized in this portfolio; - in the subsidiary Banca Aletti of the risk positions and of the operating flows relating to the trading of securities, currencies, otc derivatives and other financial assets; in particular in 2007 Banca Aletti received the risk positions previously held by the Banche del Territorio to manage securities trading (so called “securities baskets’) and the secondary markets of fixed and floating rate securities issued by the Group, following the opening of the MTF market (Multilateral Trading Facility) for both the public platform and for the section devoted to the in-house organized trading system within the Group. In addition to this, there are the main interest rate risk exposures from the trading portfolio of Banca Aletti relating to Investment Banking trades both on money markets, and the associated listed or plain vanilla derivatives covered by the Forex and Money Market, Fixed Income, Equity Proprietary Trading and GSF functions, as well as on the markets of derivatives and OTC structured products and of listed derivatives, covered by the Derivatives & Structured Products function; the Banche del Territorio still hold positions, which are extremely residual as compared to the above portfolios, that were not centralized in the Parent company, because they are held for specific needs and objectives of the individual Banks, or are directly linked to the commercial activity. Said portfolios are monitored by Banca Aletti, if deriving from trades with the commercial networks, represented by securities tranches that are not negotiable or not immediately tradable on the market. Additional positions are assigned to the monitoring and to the Finance Department of the Parent company, relating to: treasury bonds deposited as security, extremely residual positions deriving from trading activities that cannot be immediately transferred to Banca Aletti because they do not meet the minimum amount requirements required by market settlement systems; other positions in mutual funds and Sicav, which invest in money market segments and therefore with regard to risks are similar to a trading portfolio exposed to the interest rate risk; additional positions that from an operating point of view are considered an investment-trading, but from an accounting viewpoint are classified in the banking book. In particular: bonds subscribed as an alternative funding source, classified as loans and receivables (LnR) and therefore, similarly to other positions in securities available for sale (AFS) and held to maturity (HTM), are classified in the banking book; positions which from an accounting viewpoint are deducted from balance sheet liabilities or eliminated upon consolidation, for example: • securitization tranche of proprietary loans, subscribed upon issue and from an accounting viewpoint deducted from balance sheet liabilities as an offset against loans sold and not derecognized; • bond issues repurchased by the commercial networks and pending derecognition, from an accounting viewpoint are directly written off; • subscription by BP of securities issued finalized to intragroup funding policies, for example private placements performed to allow the local retail banks (Banche del Territorio) to indirectly participate in the Parent company’s EMTN (Euro Medium Term Notes) programs, and that from an accounting viewpoint are eliminated upon consolidation.
The Group’s investment portfolio on December 31st, 2007 amounted to 3,472.7 millions and was made of 2,080.7 millions in debt securities, 1,113.9 millions in equity securities and 278.1 millions in UCITS units.
Investment portfolio of Banco Popolare managed by Banca Aletti.
The “investment portfolio” of Banco Popolare, managed by Banca Aletti, was set up as a result of the centralization of the investment portfolios of the Banche del Territorio which was completed at the end of the current financial year. It represents the major source of interest rate risk associated with the Parent company’s trading portfolio; it is mainly comprised of bonds, characterized by a limited exposure to the interest rate risk, ensured also by careful hedges with listed derivatives or over the counter plain vanillas. The delegated management mentioned above is due to the centralization of risk positions and
274 Notes to the consolidated accounts
operating flows relating to securities and currency trading in the Group’s investment bank - Banca Aletti - carried out in previous financial years. The portfolio under sub-advisory actually represents almost the entire investment portfolio of the Parent company. At the end of 2007, the composition of Banco Popolare’s bond portfolio managed by Banca Aletti broke down as follows: about 61% floating rate notes, 13% asset swap structures hedged against interest rate risk through derivatives (mainly plain vanilla I.R.S.), and the remaining 26% fixed rate notes. The average duration of the bond portfolio not used in asset swaps is about 0.76 years. Considering the associated interest rate derivatives used in the investment strategy (interest rate swap and futures) and the asset swap portfolio, this portfolio sensitivity rate shrinks to about 2 months, and the sensitivity value, estimated based on a parallel 100 basis point yield curve movement, is about 5.4 million euro. Since it is no longer necessary to hold securities portfolios to support the trading activities of the Banche del Territorio with the commercial network, following the opening of the MTF market (Multilateral Trading Facility) and of the organized trading system for secondary markets of securities issued and sold by the Group, said positions have been scaled down to values below 0.2 million Euro for each single Banca del Territorio (BPV-sgsp Spa, BPL Spa, BPN Spa, CB Spa) made up of securities with a size below the minimum tradable or negotiable size. The sub-advisory mandate between Banco Popolare and Banca Aletti fixes the operational limits in terms of stock, interest rate sensitivity, asset allocation in terms of type of issuer and its creditworthiness, as well as concentration on a single company and rating class of belonging. Said limits have been decided by the Management Board and monitored on a daily basis by the Financial Monitoring Function. Daily and periodic reports give an account of assets and exposures. For a more detailed description, please refer to the following paragraph on risk management and assessment processes.
Trading portfolio of Banca Aletti, held as part of its investment banking activities
In its capacity as Group investment bank, the subsidiary Banca Aletti holds a trading portfolio whose main exposures to the interest rate risk are linked to trades on the money market by the Investment Banking Function, with the associated listed or plain vanilla derivatives covered by the Forex and Money Market Function and by the Fixed Income Office, as well as on the markets of derivatives and OTC structured product and listed derivatives, covered by the Derivatives & Structured Products Function. In particular: trades on the money and forex markets generated a total interest rate risk exposure on December 31st, 2007 of about 6.2 million Euro, assuming a 100 basis points parallel change in the interest rate curve. Said exposures include also positions primarily in short term treasury notes, that at year-end amounted to about 630 million euro, with an average duration of 0.5 years, largely used in repurchase agreements; the investment bond portfolios and the associated listed derivatives, held by the Fixed Income Function, are characterized by a prudent interest rate risk management; in particular, with regard to year-end positions, the 77.5 million euro portfolio, including accrued interest, comprised primarily floating rate notes (46%) or hedged against the interest rate risk as part of asset swap structures (13%), with a portfolio average duration of 0.43 years, considering also the correlated interest rate derivative transactions used in the investment strategy (interest rate swap and futures); the bond trading portfolio, which as at December 31st, 2007 amounted to about 67 million Euro, is almost entirely made up of floating rate notes (87%) and has an average duration of about 0.25 years. This portfolio also includes positions deriving from trades on the organized trading system, for the management of the secondary markets of non structured securities issued by the Group, amounting to about 20 million Euro including accrued interest, with an average duration of about 1 year, as well as positions in securities from securitizations of the Banks of the Group, amounting to little more than 30 million Euro. Upon consolidation the latter positions are deducted from liabilities recognized against loans sold and not derecognized; trades in structured instruments and listed and unlisted derivatives, including trades on the secondary market of structured products issued or sold by the banks of the Group, represent a third type of trading. By de-structuring complex trades based on the underlying it is possible to achieve a centralized management of the interest rate, exchange rate and price risks within the specific Offices of the Bank’s Structured Products Function, which use sophisticated position keeping systems. In particular, the total interest rate sensitivity (delta) at year-end, net of long and short positions on the various currencies and nodes of the interest curves, was below 100,000 euro. This exposure is measured on the basis of the value changes of the financial instruments present in the portfolio, assuming two market scenarios whereby all measurable market rates undergo a 100 basis point upward or downward movement. Banca Aletti’s risk positions are monitored on a daily basis to verify their compliance with the operating thresholds set by the Board of Directors on the entire portfolio and on the single underlying assets. In particular, for derivative trades, exposures (delta-gamma and vega) are also weighted against the volatility levels of the single underlying instruments and against their reciprocal intercorrelations. For information on the objectives and strategies underlying the trading activity, see the Report on operations.
275 Notes to the consolidated accounts
B. Interest rate risk management process and assessment methods
The function in charge of controlling the financial risk management for all the Banks of the Group, with the aim of identifying the type of risks, define the methods to assess risks, control limits at strategic level and verify the consistency between trade limits and the risk/return targets assigned, is the Risk Management function. Single trading limits are then applied, acting as a guideline for market activities, and their monitoring and control is a responsibility of the Financial Monitoring Function, which is part of the Parent company’s Finance Department and is functionally connected with the Risk Management Function. In particular, for the identification, measurement, management and operating control of the risk positions of the Banks of the Group, the Parent company’s Finance Department and Banca Aletti’s Investment Banking Function make use of a sophisticated position keeping and risk control system that provide a constant control over exposure levels and over the compliance with the operating limits defined by the Management Board and by the Boards of Directors. In particular, as of December 2007 trading activities in listed and unlisted derivatives and in structured products are based on a specific application specializing in interest/exchange rate derivatives and equity instruments. In case of very complex and innovative structures, these models are complemented by pricing and sensitivity measurement models developed in house, that were validated by a Validation Group coordinated by the Parent company’s Risk Management function, after all the necessary operating tests mainly conducted by the Financial Monitoring Function and by the Finance department under the supervision of academic experts. This position keeping system, automatically fed by market platforms and by the sales networks in case of trades in cash and in listed derivatives, is constantly aligned with accounting procedures and guarantees the constant measurement and control of position indicators, sensitivity and operational results. It is also closely integrated with the Value at Risk control systems, developed by the Risk Management Function. Financial risks are monitored on a daily basis by using deterministic indicators (risk exposure, duration, sensitivity) as well as probabilistic indicators (VaR). Value at Risk (VaR), which indicates the maximum potential loss associated with market movements in unexceptional conditions, represents a synthetic risk measurement. The method used to calculate VaR belongs to the variance-covariance methods, that assume that the risk factors affecting the distribution of value changes follow a normal distribution. The values are calculated based on a 99% confidence level and a time interval of 10 days. The observation period is 250 days, and the observations for the estimate of the variance/covariance matrix (the used matrix supplies levels, volatility and correlations on a daily and monthly evaluation horizon, for more than 470 risk factors) are weighed along an exponential method. The reference aggregate for the VaR calculation is the Trading Book and all positions sensitive to the exchange rate risk. The current model fully covers generic position risks and exchange rate risks, while the specific risk is calculated only for equity securities. Risk factors are aggregated with the correlations of the variance/covariance matrix, which is updated very day. VaR reports are prepared, providing information at Group level, and at single bank level, both by organizational unit, and by single trading portfolio. Said reports are sent to the Bank Head Office, the Finance Department and to Internal Audit. Risk factors are aggregated with the correlations present in the variance/covariance matrix which is updated daily. In 2007 analyses were conducted to redefine the market risk measurement processes and systems, and the VaR (Value at Risk) method, Historical Simulation and the state of the art pricing systems in use in Gruppo Banco Popolare were deemed to be the most suited tools to ensure a more effective and precise measurement and control of market risks ensuing from exposure in complex derivative instruments, also from a regulatory viewpoint. At the end of 2007 implementation and development activities were started, aiming at activating the new VaR system in the first half of 2008, to be applied to the Group’s entire market risk range (cash and derivative products). This method shall make it possible to extend the VaR calculation also to the specific risk component relating to debt securities. As to scenario analyses (“stress testing”), aiming at verifying the exposure to extreme events or factors and the relevant capital adequacy, the general approach and the methodological, organizational, IT and process requirements have been defined and shared with the Bank of Italy, and stress tests shall soon be conducted, in particular to assess the current and prospective level of capital adequacy, as required by Basel II second pillar regulations. The VaR model we are using internally at present is not utilized to calculate capital requirements in association with market risks.
276 Notes to the consolidated accounts
QUANTITATIVE INFORMATION
Regulatory trading portfolio: internal models and other sensitivity analysis methods
Shown below are the VaR for 2007 referring to the regulatory trading book of Gruppo Banco Popolare (the table specifies also the correlation effects between risk factors).
Regulatory trading portfolio FY 2007 (*) (in million euro) 31 December Average Max Min
Interest rate risk 7.3 27.0 34.0 7.3 Exchange rate risk 5.4 7.6 11.7 4.5 Equity risk 22.7 23.6 35.2 16.4 Diversification effect 6.2 -14.2 n.s. n.s. Correlated Total 29.3 44.1 58.2 25.6 (*) Weekly data as of July 6th, 2007
Shown below is a chart depicting the weekly data for 2007, showing the VaR by single risk factor and total VaR (including the correlation effect).
Group VaR and associated risk factors for the Regulatory Trading Portfolio
VaR Totale VaR Rischio Interesse VaR Rischio Cambio VaR Rischio Azionario 70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
6-jul-07 3-aug-07 7-sep-07 5-oct-07 2-nov-079-nov-07 7-dec-07 13-jul-0720-jul-0727-jul-07 10-aug-0717-aug-0724-aug-0731-aug-07 14-sep-0721-sep-0728-sep-07 12-oct-0719-oct-0726-oct-07 16-nov-0723-nov-0730-nov-07 14-dec-0721-dec-0728-dec-07
1.2.2 Interest rate risk – Banking book
QUALITATIVE INFORMATION
A. General issues, management procedures and interest rate risk assessment methods
The interest rate risk borne by Gruppo Banco Popolare in correlation with its banking book is mainly associated with the core activity performed by the bank acting as an intermediary in the process of transformation of maturities. In particular, the issue of fixed rate bonds, the granting of fixed rate commercial loans and mortgages and funding from demand checking accounts represent a fair value interest rate risk; indexed rate financial assets and liabilities represent a cash flow interest rate risk. The Parent company’s Risk Management function is in charge of monitoring and controlling the interest rate risk inherent in the banking book, and it performs this function also on behalf of the subsidiary banks. This activity is performed on a monthly basis to verify that the limits in interest income or equity changes are complied with, with intra-month updates in case of material transactions or significant events. The structure in charge of measuring and managing the interest rate risk is the Parent company’s ALM & Asset Backed
277 Notes to the consolidated accounts
Funding Function, which carries out this task also on behalf of the subsidiary banks, and pursues the maximization of the economic return from the bank’s commercial activity in compliance with the set interest rate risk exposure limits. The interest rate risk is measured by way of spreadsheets prepared based on the Operating Asset & Liability Management (ALMO) procedure, in particular the simulation module by aggregating positions analyzes the mismatches between deposits and loans. In December a project was launched to obtain a more frequent measurement. This, together with an operational limit system, shall lead to a more precise and careful monitoring of mismatch evolution. The Group’s net structural mismatch is slightly “asset sensitive”. The exposure to the interest rate risk is in any case contained.
B. Fair value hedging
As a result of the management policy adopted by Gruppo Banco Popolare, aiming at minimizing asset mismatches, part of the fixed rate bond issues, generally with maturities ranging between two and five years, were not hedged and were used as natural hedges of fixed rate assets. All structured bond issues were instead fully hedged. With regard to demand deposits, the exposure to the short term interest rate in recent years was assessed by way of econometric and statistical analyses, which showed a stability of the assets under examination and a certain resilience to interest rate movements, which means that the economic maturity of these aggregates, about three years, differs from the contract maturity, generally 1 day. Already as of the second half o 2005, the stabilization of the interest income generated by these items was based on fair value macro-hedges with plain vanilla swaps on part of the demand deposits. Again to reduce the exposure to the interest rate risk generated by assets, the Group carried out a fair value hedging of a pool of similar mortgages by way of an amortizing swap expiring in 2011.
C. Cash flow hedging
In order to stabilize the cost of its floating rate deposits, Gruppo Banco Popolare resorted to macro cash flow hedges. Outstanding hedges are fully covered in terms of amount by the notional amounts of floating rate notes issued on international markets.
QUANTITATIVE INFORMATION
Banking book: internal models and other sensitivity analysis methods
The group makes use of a Strategic Asset & Liability Management procedure (ALMS) measure every month the impact (“sensitivity”) on the expected net interest, dividend and similar income and on the economic value of capital related to the banking and trading books that may occur through changes in interest rates. With regard to the expected net interest, dividend and similar income, the ALM system estimates its changes on a one year horizon in the assumption of deterministic shocks of the interest rate curves (+/-100 basis points applied to all the interest rate curves as if it were a sudden, single and parallel change), shocks to adjust to the forward rates implied in money market rates, and again shocks from projections that reflect alternative scenarios. Estimates are based on the assumption that the capital structure remains unchanged in terms of aggregate assets and liabilities, as well as in terms of financial characteristics (rates, spreads, duration). With regard to the economic value of capital, the same assumptions on the interest rate curve changes are applied, measuring the change in present value of all transactions and comparing it with the economic value of capital. Shown below are the main sensitivity data referring to the second half of 2007, when the new group was formed, with regard to its banking and trading books.
FY 2007 Risk ratios (%) 31 December Average* Max* Min*
Per shifts + 100 bp Net interest, dividend and similar income at risk/ Net interest, dividend 6.2 5.0 6.7 2.0 and similar income Economic value at risk / Capital Economic value 3.3 3.8 5.4 2.2 Per shifts - 100 bp Net interest, dividend and similar income at risk/ Net interest, dividend -6.6 -4.8 -1.4 -7.0 and similar income Economic value at risk / Capital Economic value -3.0 -3.6 -1.9 -5.2 * measurements covering the period between 01 July 2007 - 31 December 2007, following the formation of Gruppo Banco Popolare
278 Notes to the consolidated accounts
Shown below are VaR data for 2007, referring to the banking book of Gruppo Banco Popolare, restricted to positions related to deposit, loan and repurchase agreement transactions with interbank counterparties, as well as those classified as AFS, CFV, L&R and HTM.
Banking portfolio FY 2007 (*) (in million euro) 31 December Average Max Min
Interest rate risk 10.7 4.3 10.7 2.1 Exchange rate risk 1.1 0.8 1.1 0.3 Equity risk 15.0 16.4 23.5 9.4 Diversification effect -10.2 -7.0 n.s. n.s. Correlated Total 16.5 14.5 20.5 7.7 (*) Weekly data as at July 6th, 2007
The chart below illustrates the weekly data for 2007, showing the VaR by single risk factor and the total VaR (including the correlation effect).
Group VaR and associated risk factors for the Banking Book
VaR Totale VaR Rischio Interesse VaR Rischio Cambio VaR Rischio Azionario 30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
7 -07
6-jul-07 7-sep-07 5-oct-07 9-nov-07 7-dec-07 13-jul-0720-jul-0731-jul-0710-aug-016-aug-0724-aug-0731-aug-07 14-sep-0721-sep-0728-sep-07 12-oct-0719-oct 26-oct-0731-oct-07 16-nov-0723-nov-0730-nov-07 14-dec-0731-dec-07
1.2.3 Price risk – Regulatory trading portfolio
QUALITATIVE INFORMATION
A. In general
With regard to the organizational model of the securities portfolios, please refer to the section devoted to the trading portfolio exposed to the interest rate risk.
Investment portfolio of Banco Popolare managed by Banca Aletti.
As already illustrated in the report on operations, the equity portfolio has always maintained a low risk profile both in terms of global exposure and of single sectors, thanks to the careful diversification policy. The sub-advisory mandate between Banco Popolare and Banca Aletti sets operating limits in terms of total stock and of single issuer concentration, decided by the Management Board and monitored on a daily basis by the Financial Monitoring Function. Said activities and the outstanding exposures are illustrated in daily and periodic reports. For further information, please refer to the specific and following paragraph, dealing with risk management and measurement processes.
279 Notes to the consolidated accounts
Trading portfolio of Banca Aletti, as part of its Investment banking activities.
In its capacity as Group investment bank, Banca Aletti holds a trading portfolio whose main price risk exposures are related to the trading activities of the Investment Banking Function on cash markets and associated listed or plain vanilla derivatives, covered by the Equity and Fixed Income Functions, as well as on derivatives and OTC structured products and listed derivatives markets covered by the Derivatives & Structured Products Function. In particular: Equity portfolios with their listed derivatives, held by the Equity Function for trading, for market making on single Stock Futures and for specialist services, are characterized by limited net daily overnight exposures. With regard to the proprietary portfolio, worth mentioning is the launch of basket trading on the Italian index SPMIB as of the month of April 2007. Said portfolio comprises cash positions and derivatives on forty stocks, hedged by the sale of futures on the same index; the Derivatives and Structured Products function is in charge of trades in structured instruments and listed and unlisted derivatives, including trades on the secondary market of structured products issued by the banks of the Group. By de- structuring complex trades based on the underlying it is possible to achieve a centralized management of the interest rate, exchange rate and price risks within the specific Offices of the Function, which use a sophisticated position keeping system. This application is specialized in interest rate, exchange rate and price risks and is integrated with pricing models and risk measurement (Greeks) developed in-house and validated by a specific Model Validation Group coordinated by the Parent company’s Risk Management Function, under the supervision of academic experts. At year-end, the total price risk exposure of the derivative portfolio of the Structured Products Function is equivalent to a short position of little less than 40 million Euro, net of hedges with derivatives and cash financial assets. The above risk exposures are monitored on a daily basis to verify their compliance with the operating thresholds set by the Board of Directors on the entire portfolio and on the single underlying assets (time curves and nodes). In particular, for derivative trades, exposures (delta-gamma and vega) are also weighted against the volatility levels of the single underlying instruments and against their reciprocal intercorrelations.
Additional residual portfolios of Banco Popolare or of the single retail banks Banche di Territorio of the Group, monitored and managed by Banca Aletti or by the Parent company’s Finance Department.
Please refer to the summarized account given in the consolidated report on operations. These positions are held in compliance with Regulatory limits or against prior specific resolutions of the Board and are monitored on a daily basis by the Financial Monitoring Function. Daily and periodic reports give an account of assets and exposures.
B. Price risk management processes and measurement methods
The price risk of the trading book is monitored and controlled by using the internal VaR model extensively described in the section “Interest rate risk – Regulatory Trading Portfolio”.
QUANTITATIVE INFORMATION
1. Regulatory trading book: cash exposures in equity securities and UCITS
Book value (thousand euro) Quoted Unquoted A. Equity securities 1,231,324 6,788 A.1 Shares 1,231,324 934 A.2 Innovative common stock equivalents - 5,778 A.3 Other equities - 76 B. UCITS 18,331 259,761 B.1 Italian 6 254,286 - open-end compliant - 179,996 - open-end non-compliant - 15,747 - closed-end 6 16,339 - reserved - 42,204 - speculative - - B.2 Other EU Countries 18,325 18 - compliant 18,325 18 - open-end non-compliant - - - closed-end non-compliant - - B.2 Other non-EU Countries - 5,457 - open-end - 5,457 - closed-end - - Total 1,249,655 266,549
280 Notes to the consolidated accounts
2. Regulatory trading portfolio: distribution of exposures in equity securities and equity indices for the main listing Countries
Quoted (thousand euro) Unquoted Italiy Other countries A. Equity securities 779,820 468,744 1,010 - long positions 763,862 467,694 1,010 - short positions 15,958 1,050 - B. Unsettled trades on equity securities 163,732 74,589 - - long positions 102,409 40,053 - - short positions 61,323 34,536 - C. Other equity derivatives 646,451 1,414,577 2,483,847 - long positions 299,892 511,864 1,202,302 - short positions 346,559 902,713 1,281,545 D. Equity index derivatives 4,278,481 297 113,311 - long positions 1,739,441 - 1,020 - short positions 2,539,040 297 112,291
3. Regulatory trading book: internal models and other sensitivity analysis methodologies
The price risk of the trading book is estimated by using the internal VaR model extensively described in section “Interest rate risk – Regulatory trading portfolio”.
1.2.4 Price risk – Banking book
QUALITATIVE INFORMATION
A. General issues, management processes and price risk assessment measures
This portfolio contains alternative assets held for the strategic purpose of de-correlating the overall portfolio from market performance. Please refer to the report on operations for further details.
B. Price risk hedging
The price risk of the banking book, which is monitored on a daily basis, is not hedged.
QUANTITATIVE INFORMATION
1. Banking book: cash exposures in equity securities and UCITS
Book value (thousand euro) Quoted Unquoted A. Equity securities 300,722 1,730,402 A.1 Shares 243,516 1,727,166 A.2 Innovative common stock equivalents - - A.3 Other equities 57,206 3,236 B. UCITS 42,770 512,212 B.1 Italian 326 434,487 - open-end compliant - - - open-end non-compliant - - - closed-end 326 65,095 - reserved - 368 - speculative - 369,024 B.2 Other EU Countries 37,934 10,250 - compliant 37,934 - - open-end non-compliant - 10,250 - closed-end non-compliant - - B.2 Other non-EU Countries 4,510 67,475 - open-end 4,510 67,475 - closed-end - - Total 343,492 2,242,614
281 Notes to the consolidated accounts
2. Banking book: internal models and other sensitivity analysis methods
The price risk of the banking book made up of funds of hedge funds is monitored and controlled by using the internal VaR model extensively described in section ”Interest rate risk – Regulatory trading portfolio2. The risk is estimated by tracing each hedge fund back to a mix of risk factors representing management strategies (as well as a factor representing the relative specific risk component). The risk inherent in each strategy is estimated based on the volatility of the associated risk factors, and volatilities are updated on a monthly basis.
1.2.5 Exchange rate risk
QUALITATIVE INFORMATION
A. General issues, management procedures and exchange rate risk assessment methods
Banca Aletti’s exchange rate risk management is centralized in the Money Market Function. The exposures, which are extremely limited, refer to the main currencies, in particular US dollar, Japanese yen, Swiss franc and British pound. As to trades in exchange rate derivatives, cash equivalent exposures are extremely limited.
B. Exchange rate risk hedging
Exposures, which are very limited, refer to primary currencies, in particular US dollars, Japanese yens, Swiss francs and British pounds. As to trades in exchange rate derivatives, exposures are basically closed down every day.
QUANTITATIVE INFORMATION
1. Breakdown by currency of denomination of assets and liabilities and of derivatives
Currencies (thousand euro) Koruna Czech Other USA Dollars Pounds Swiss Francs Yen Republic currencies
A. Financial assets 1,429,251 630,762 431,255 214,010 37,925 243,702 A.1 Debt securities 60,176 7,845 16,824 1,559 - 5,658 A.2 Equity securities 160,012 162,916 44,266 73,970 - 1,319 A.3 Loans to banks 325,562 231,014 117,445 39,088 17,452 105,671 A.4 Loans to customers 883,501 228,987 252,720 99,393 20,473 125,597 A.5 Other financial assets - - - - - 5,457 B. Other assets 15,537 2,537 6,772 327 - 4,970 C. Financial liabilities 2,412,961 1,304,895 379,177 769,979 7,445 267,547 C.1 Due to banks 794,575 110,508 150,672 11,162 1 64,202 C.2 Due to customers 899,364 274,254 62,770 79,935 7,390 146,579 C.3 Debt securities 639,127 896,178 154,136 667,697 - 50,721 C.4 Other financial liabilities 79,895 23,955 11,599 11,185 54 6,045 D. Other liabilities 14 - - - - - E. Financial derivatives 6,501,925 1,151,925 488,579 1,254,020 31,993 196,197 - Options 1,978,246 2,857 97,333 155,314 - 27,538 + long positions 905,933 2,527 31,601 75,011 - 7,635 + short positions 1,072,313 330 65,732 80,303 - 19,903 - Other 4,523,679 1,149,068 391,246 1,098,706 31,993 168,659 + long positions 2,704,685 870,669 241,363 860,041 23,812 96,437 + short positions 1,818,994 278,399 149,883 238,665 8,181 72,222 Total assets 5,055,406 1,506,495 710,991 1,149,389 61,737 352,744 Total liabilities 5,304,282 1,583,624 594,792 1,088,947 15,626 359,672 Mismatch (assets - liabilities) -248,876 -77,129 116,199 60,442 46,111 -6,928
2. Internal models and other sensitivity analysis methods
The exchange rate risks generated by the trading portfolio and the banking book are monitored through an internal VaR model extensively described in section “Interest rate risk – Regulatory trading portfolio”.
282 Notes to the consolidated accounts
1.2.6 Financial derivative instruments
QUALITATIVE INFORMATION
Given the trades in derivatives, Gruppo Banco Popolare introduced specific and robust validation and control processes of the Pricing Model and the related Market Parameters.
Validation and control process of Market Parameters
Gruppo Banco Popolare makes use of a rigorous process to track, validate and control the market parameters used to measure market values and to estimate the risk of derivative positions, with the collaboration of the operating control structures belonging to the Parent company’s Finance Department (Financial Monitoring Function) and Risk Management Function. In particular, this process regulates: x the constant update of the source book, containing the main parameters used and their most significant features; x the constant update of the parameter control methodologies; x the daily validation and control of the listed/quoted parameters, automatically fed by external info-providers, by the middle office structures; x the qualitative and quantitative daily validation and control of illiquid parameters, from an accounting and operating viewpoint, by the Financial Monitoring and Risk Management functions.
In order to support control activities, the Group introduced a state of the art application (fed by the front office system and, for benchmarking purposes, by alternative and highly specialized info-providers) under development, to monitor over time the performance of the parameters, featuring the statistical analysis of variations and operating warnings.
Validation process of Pricing Models of OTC derivative products
Gruppo Banco Popolare deals wit OTC derivative instruments, and in order to measure them, it uses quantitative pricing models already available in the front office application, or models developed by Banca Aletti’s financial engineering. In order to ensure a precise and rigorous control over the adoption of new pricing models, a validation process is in place: x activation of the model validation group, made up of the heads of the various corporate functions and coordinated by the Parent company’s Risk Management Function; x model validation based on rigorous consistency and robustness tests, conducted with the support of academic experts; x official validation of new models by a Financial Product Innovation Committee, with the collaboration of key corporate managers.
QUANTITATIVE INFORMATION
The table below illustrates the fair value of derivative positions of Banca Aletti’s Structured Product Function. On behalf of Gruppo Banco Popolare, the Bank manages the market risk associated with derivative trading.
Table: Fair value of derivative positions
Number of Positive Negative Aggregate Fair Value contracts Fair Value Fair Value
Total 22,267 -3,492 +5,214 -8,706 of which: Listed Derivatives 6,078 -3,362 +290 -3,652 of which: OTC derivatives measured with proprietary models 14,745 +168 +4,240 -4,072 of the Front Office system of which: OTC derivatives measured with internal models 1,444 -298 +684 -982 developed by Banca Aletti’s finance engineering
283 Notes to the consolidated accounts accounts consolidated to the Notes 284 A. FINANCIAL DERIVATIVES
A.1 Regulatory trading portfolio: end-of-period and average notional amounts
Debt securities Equity securities Exchange rates and gold Other valuables 31/12/2007 31/12/2006 (thousand euro) and interest rates and equity indexes Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted
1. Forward rate agreement - 263,550 ------263,550 - - 2. Interest rate swap - 40,659,865 ------40,659,865 6,531 32,973,221 3. Domestic currency swap ------4. Currency interest rate swap - - - - - 62,991 - - - 62,991 - - 5. Basis swap - 15,051,294 - - - 3,952 - - - 15,055,246 - 12,770,357 6. Equity index swaps ------7. Real index swaps ------8. Futures 13,926,981 - 1,018,148 - - - - - 14,945,129 9,122,750 - 9. Cap options - 21,291,755 ------21,291,755 - 19,205,712 - Purchased - 5,264,058 ------5,264,058 - 2,376,225 - Issued - 16,027,697 ------16,027,697 - 16,829,487 10. Floor options - 7,650,127 ------7,650,127 - 14,259,607 - Purchased - 2,504,675 ------2,504,675 - 3,888,706 - Issued - 5,145,452 ------5,145,452 - 10,370,901 11. Other options - 2,087,014 5,031,705 21,031,401 - 1,423,665 - - 5,031,705 24,542,080 7,503,694 9,863,378 - Purchased - 1,353,824 2,273,271 7,063,576 - 708,006 - - 2,273,271 9,125,406 3,056,756 5,571,620 - Plain vanilla - 1,353,824 2,273,271 4,949,213 - 117,285 - - 2,273,271 6,420,322 3,056,756 359,136 - Exotic - - - 2,114,363 - 590,721 - - - 2,705,084 - 5,212,484 - Issued - 733,190 2,758,434 13,967,825 - 715,659 - - 2,758,434 15,416,674 4,446,938 4,291,758 - Plain vanilla - 733,190 2,758,434 9,981,748 - 269,421 - - 2,758,434 10,984,359 4,446,938 185,082 - Exotic - - - 3,986,077 - 446,238 - - - 4,432,315 - 4,106,676 12. Futures contracts 273,242 11,972 212,500 522 - 7,842,018 - - 485,742 7,854,512 - 5,056,906 - Purchase 186,520 7,958 131,124 522 - 4,459,814 - - 317,644 4,468,294 - 3,212,767 - Sale 86,722 4,014 81,376 - - 2,974,724 - - 168,098 2,978,738 - 1,834,588 - Currency against currency - - - - - 407,480 - - - 407,480 - 9,551 13. Other derivative contracts - - - 336,684 - 774,970 - - - 1,111,654 - - Total 273,242 100,942,558 5,244,205 22,386,755 - 10,107,596 - - 5,517,447 133,436,909 16,632,975 94,129,181 Average values 221,554 14,667,551 29,097 1,854,436 - 2,575,889 - - 250,651 19,097,876 3,799,629 51,788,671 A.2 Banking book: end-of-period and average notional amounts
A.2.1 Hedging derivatives
Debt securities Equity securities Exchange rates and gold Other valuables 31/12/2007 31/12/2006 (thousand euro) and interest rates and equity indexes Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted
1. Forward rate agreement ------2. Interest rate swap - 44,767 ------44,767 - 19,254 3. Domestic currency swap ------4. Currency interest rate swap ------5. Basis swap - 16,307 ------16,307 - - 6. Equity index swaps ------7. Real index swaps ------8. Futures ------9. Cap options ------Purchased ------Issued ------10. Floor options ------Purchased ------Issued ------11. Other options ------Purchased ------Plain vanilla ------Exotic ------Issued ------Plain vanilla ------Exotic ------12. Futures contracts - - - - - 15,664 - - - 15,664 - - - Purchase ------Sale - - - - - 15,664 - - - 15,664 - - - Currency against currency ------Notes to the consolidated accounts accounts consolidated to the Notes 13. Other derivative contracts ------Total - 61,074 - - - 15,664 - - - 76,738 - 19,254 Average values - - - - - 4,302 - - - 4,302 - 2,056,005 285 Notes to the consolidated accounts accounts consolidated to the Notes 286 A.2.2 Other derivatives
Debt securities Equity securities Exchange rates and gold Other valuables 31/12/2007 31/12/2006 (thousand euro) and interest rates and equity indexes Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted
1. Forward rate agreement ------2. Interest rate swap - 3,192,572 ------3,192,572 - 491,584 3. Domestic currency swap ------4. Currency interest rate swap - - - - - 25,726 - - - 25,726 - - 5. Basis swap - 200,052 - - - 45,000 - - - 245,052 - - 6. Equity index swaps ------7. Real index swaps ------8. Futures ------9. Cap options - 167,286 ------167,286 - 336,028 - Purchased - 84,661 ------84,661 - 181,551 - Issued - 82,625 ------82,625 - 154,477 10. Floor options - 57,000 ------57,000 - - - Purchased - 57,000 ------57,000 - - - Issued ------11. Other options - - - 2,879,798 - 13,991 - - - 2,893,789 - 117,827 - Purchased - - - 952,951 - - - - - 952,951 - 35,737 - Plain vanilla - - - 660,793 - - - - - 660,793 - 5,737 - Exotic - - - 292,158 - - - - - 292,158 - 30,000 - Issued - - - 1,926,847 - 13,991 - - - 1,940,838 - 82,090 - Plain vanilla - - - 702,652 - 13,991 - - - 716,643 - 58,360 - Exotic - - - 1,224,195 - - - - - 1,224,195 - 23,730 12. Futures contracts ------Purchase ------Sale ------Currency against currency ------13. Other derivative contracts ------Total - 3,616,910 - 2,879,798 - 84,717 - - - 6,581,425 - 945,439 Average values - 1,293,400 - 807,095 - 477 - - - 2,100,972 - - A.3 Financial derivatives: purchase and sale of underlying assets
Debt securities Equity securities Exchange rates and gold Other valuables 31/12/2007 31/12/2006 and interest rates and equity indexes (thousand euro) Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted Quoted Unquoted
A. Regulatory trading portfolio: 273,009 86,310,310 5,244,205 22,422,315 - 10,106,335 - - 5,517,214 118,838,960 18,334,151 89,201,900 1. With capital exchange 273,009 11,972 1,342,953 3,596,722 - 9,549,910 - - 1,615,962 13,158,604 2,883,306 9,943,327 - Purchase 186,287 7,958 700,799 2,886,654 - 5,400,645 - - 887,086 8,295,257 1,738,470 5,127,789 - Sale 86,722 4,014 642,154 710,068 - 3,670,378 - - 728,876 4,384,460 1,144,836 4,673,905 - Currency against currency - - - - - 478,887 - - - 478,887 - 141,633 2. Without capital exchange - 86,298,338 3,901,252 18,825,593 - 556,425 - - 3,901,252 105,680,356 15,450,845 79,258,573 - Purchase - 40,335,090 2,331,193 8,108,791 - 326,853 - - 2,331,193 48,770,734 4,451,408 38,788,390 - Sale - 45,963,248 1,570,059 10,716,802 - 141,183 - - 1,570,059 56,821,233 10,999,437 40,419,609 - Currency against currency - - - - - 88,389 - - - 88,389 - 50,574 B. Banking book: - 3,358,947 - 2,494,581 - 54,472 - - - 5,908,000 - 1,304,154 B.1 Hedging derivatives - 44,767 - - - 15,664 - - - 60,431 - - 1. With capital exchange - - - - - 15,664 - - - 15,664 - - - Purchase ------Sale - - - - - 15,664 - - - 15,664 - - - Currency against currency ------2. Without capital exchange - 44,767 ------44,767 - - - Purchase - 5,000 ------5,000 - - - Sale - 39,767 ------39,767 - - - Currency against currency ------B.2 Other derivatives - 3,314,180 - 2,494,581 - 38,808 - - - 5,847,569 - 1,304,154 1. With capital exchange - 179,844 - - - 25,726 - - - 205,570 - - - Purchase - - - - - 25,726 - - - 25,726 - - - Sale - 179,844 ------179,844 - - - Currency against currency ------2. Without capital exchange - 3,134,336 - 2,494,581 - 13,082 - - - 5,641,999 - 1,304,154 - Purchase - 2,763,672 - 1,336,457 - 12,512 - - - 4,112,641 - 632,521 - Sale - 370,664 - 1,158,124 - 570 - - - 1,529,358 - 671,633 Notes to the consolidated accounts accounts consolidated to the Notes - Currency against currency ------287 Notes to the consolidated accounts accounts consolidated to the Notes 288 A.4 “Over the counter” financial derivatives: positive fair value– Counterparty risk
Debt securities and interest rates Equity securities and equity indexes Exchange rates and gold Other valuables Sundry underlying assets (thousand euro) Gross Future Gross Future Gross Future Gross Future Future Gross settled Gross settled Gross settled Gross settled Settled unsettled exposure unsettled exposure unsettled exposure unsettled exposure exposure
A. Regulatory trading portfolio: A.1 Governments and Central 9 ------Banks A.2 Public entities 576 - 140 ------A.3 Banks 157,522 644,901 40,973 200,510 310,161 79,628 43,846 13,482 19,447 - - - 448,347 195,837 A.4 Financial companies 15,623 106,677 8,286 132,812 71,703 64,739 2,207 4,127 1,451 - - - 78,656 51,322 A.5 Insurance companies 541 ------A.6 Non-financial companies 84,932 - 23,209 - - - 84,602 - 19,427 - - - - - A.7 Other entities 6,471 - 217 73,982 - 55,221 10,564 - 1,046 - - - - - 31/12/2007 265,674 751,578 72,825 407,304 381,864 199,588 141,219 17,609 41,371 - - - 527,003 247,159 B. Banking book B.1 Governments and Central ------Banks B.2 Public entities ------B.3 Banks 43,968 - 4,811 40,281 - 52,541 9,730 - 2,424 - - - - - B.4 Financial companies 1,178 - 200 ------B.5 Insurance companies ------B.6 Non-financial companies ------201 - 19 - - - - - B.7 Other entities - - - - - 11,837 ------31/12/2007 45,146 - 5,011 40,281 - 64,378 9,931 - 2,443 - - - - - A.5 “Over the counter”: financial derivatives: negative fair value – Financial risk
Debt securities and interest rates Equity securities and equity indexes Exchange rates and gold Other valuables Sundry underlying assets (thousand euro) Gross Future Gross Future Gross Future Gross Future Future Gross settled Gross settled Gross settled Gross settled Settled unsettled exposure unsettled exposure unsettled exposure unsettled exposure exposure
A. Regulatory trading portfolio A.1 Governments and Central ------Banks A.2 Public entities 55 - 190 - - - 67 - 29 - - - - - A.3 Banks 217,087 426,211 82,278 65,851 383,281 50,384 93,836 61,977 32,686 - - - - - A.4 Financial companies 16,724 128,402 6,703 28,395 60,299 30,464 9,840 19,933 6,561 - - - - - A.5 Insurance companies 206,591 - 11,573 250,744 - 437,944 ------A.6 Non-financial companies 88,511 - 40,036 5 - 180 16,240 - 10,412 - - - - - A.7 Other entities 45,983 - 21,301 678,121 - 257,606 21,496 - 6,592 - - - - - 31/12/2007 574,951 554,613 162,081 1,023,116 443,580 776,578 141,479 81,910 56,280 - - - - - 31/12/2006 766,180 304,474 68,653 625,808 394,777 363 112,663 41,080 19,840 58,512 2,856 9,785 174,323 9,683 B. Banking book B.1 Governments and Central ------Banks B.2 Public entities ------B.3 Banks 94,698 - 9,698 6,563 - 2,577 ------B.4 Financial companies 2,228 - 438 698 ------B.5 Insurance companies ------B.6 Non-financial companies ------B.7 Other entities - - 202 - - 50,243 ------31/12/2007 96,926 - 10,338 7,261 - 52,820 ------31/12/2006 2,313 - 400 ------Notes to the consolidated accounts accounts consolidated to the Notes 289 Notes to the consolidated accounts
A.6 Residual life of “over the counter” financial derivatives: notional values
Between 1 (thousand euro) Up to 1 year Over 5 years Total and 5 years
A. Regulatory trading portfolio 34,608,135 70,850,187 21,636,625 127,094,947 A.1 Financial derivatives on debt securities and interest rates 19,892,999 56,540,522 18,202,436 94,635,957 A.2 Financial derivatives on equity securities and equity indexes 5,393,246 13,600,347 3,394,989 22,388,582 A.3 Financial derivatives on exchange rates and gold 9,321,890 709,318 39,200 10,070,408 A.4 Financial derivatives on other valuables - - - - B. Banking book 2,826,322 3,207,143 624,698 6,658,163 B.1 Financial derivatives on debt securities and interest rates 1,694,415 1,703,471 280,098 3,677,984 B.2 Financial derivatives on equity securities and equity indexes 1,093,948 1,441,250 344,600 2,879,798 B.3 Financial derivatives on exchange rates and gold 37,959 62,422 - 100,381 B.4 Financial derivatives on other valuables - - - - 31/12/2007 37,434,457 74,057,330 22,261,323 133,753,110 31/12/2006 37,869,478 71,895,207 17,920,876 127,685,561
Comparative data referring to 31/12/2005 are not shown, in that, in keeping with the temporary instructions issued by the Bank of Italy upon publishing Circular n. 262 of December 22nd, 2005, last year the Group made use of the option not to show the residual life of over the counter financial derivatives.
B. CREDIT DERIVATIVES
B.1 Credit derivatives: end-of-period and average notional amounts
Regulatory trading portfolio Other transactions
(thousand euro) multiple multiple one counterparty counterparties one counterparty counterparties (basket) (basket)
1. Protective calls 1.1 With capital exchange 34,000 - 372,082 - - Total rate of return swap - - - - - Credit default swap - - 372,082 - - Other 34,000 - - - 1.2 Without capital exchange 30,569 - 1,381,814 - - Total rate of return swap - - - - - Credit default swap 30,569 - 1,206,814 - - Other - - 175,000 - Total 31/12/2007 64,569 - 1,753,896 - 2. Protective puts 2.1 With capital exchange - - - - - Total rate of return swap - - - - - Credit default swap - - - - - Other - - - - 2.2 Without capital exchange 30,569 - - - - Total rate of return swap - - - - - Credit default swap 30,569 - - - - Other - - - - Total 31/12/2007 30,569 - - -
290 Notes to the consolidated accounts
B.2 Credit derivatives: positive fair value – Counterparty risk
Type of transactions Notional value Positive fair value Future exposure (thousand euro)
A. REGULATORY TRADING PORTFOLIO 30,569 268 3,503 A.1 Protective calls with counterparties: 16,983 255 1,946 1. Governments and Central Banks - - - 2. Other public entities - - - 3. Banks 16,983 255 1,946 4. Financial companies - - - 5. Insurance companies - - - 6. Non-financial companies - - - 7. Other counterparties - - - A.2 Protective puts with counterparties: 13,586 13 1,557 1. Governments and Central Banks - - - 2. Other public entities - - - 3. Banks - - - 4. Financial companies 13,586 13 1,557 5. Insurance companies - - - 6. Non-financial companies - - - 7. Other counterparties - - - B. BANKING BOOK 967,846 7,691 1,446 B.1 Protective calls with counterparties: 967,846 7,691 1,446 1. Governments and Central Banks - - - 2. Other public entities - - - 3. Banks 330,000 4,010 125 4. Financial companies 637,846 3,681 1,321 5. Insurance companies - - - 6. Non-financial companies - - - 7. Other counterparties - - - B.2 Protective puts with counterparties: - - - 1. Governments and Central Banks - - - 2. Other public entities - - - 3. Banks - - - 4. Financial companies - - - 5. Insurance companies - - - 6. Non-financial companies - - - 7. Other counterparties - - - 31/12/2007 988,415 7,959 4,949
B.3 Credit derivatives: negative fair value – Financial risk
Negative fair (thousand euro) Notional value value
Regulatory trading portfolio 1. Protective calls with counterparties 1.1 Governments and Central Banks - - 1.2 Other Public entities - - 1.3 Banks 13,586 13 1.4 Financial companies - - 1.5 Insurance companies - - 1.6 Non-financial companies - - 1.7 Other counterparties 34,000 - 31/12/2007 47,586 13 31/12/2006 276 10
291 Notes to the consolidated accounts
B.4 Residual life of credit derivatives: notional values
Between 1 year (thousand euro) Up to 1 year Over 5 years Total and 5 years
A. Regulatory trading portfolio - 95,138 - 95,138 A.1 Credit derivatives with “qualified reference obligation" - 47,586 - 47,586 A.2 Credit derivatives with “unqualified reference obligation" - 47,552 - 47,552 B. Banking book 212,494 1,442,598 98,804 1,753,896 B.1 Credit derivatives with “qualified reference obligation" 113,818 517,959 90,128 721,905 B.4 Credit derivatives with “unqualified reference obligation" 98,676 924,639 8,676 1,031,991 31/12/2007 212.494 1,537,736 98,804 1,849,034 31/12/2006 400 - - 400
1.3 LIQUIDITY RISK
QUALITATIVE INFORMATION
A. General issues, management procedures and liquidity risk assessment methods
Liquidity risk comes from the time mismatch between expected cash in- and out-flows in a very short time horizon. In addition to the difficulty/impossibility of hedging such mismatches, the liquidity risk can also entail an interest rate risk caused by the need to raise/lend funds at unknown rates that could be potentially unfavorable. The organizational model of Banco Popolare assigns the operational management of the treasury of the Banks of the entire Group to Banca Aletti - Investment Banking Service –Forex and Money Market Function. The first line defense against the liquidity risk is the daily monitoring and control of the cumulated mismatch of operating liquidity, generated by transactions with interbank and institutional counterparties, in the following time frames: overnight, 14 days, 1 month and 3 months. The ALM and Asset Backed Securities Function of the Group Finance Service is in charge of monitoring operating liquidity risk limits as a first line control; the Risk Management Function of the Risk Control and Research Study Office is in charge of the second line control. The second line defense against the liquidity risk is the monitoring of any structural liquidity mismatch, generated by transactions of the entire banking book, in the following time frames: overnight, 14 days, 1 month and 3 months. The Risk Management Function of the Risk Control and Research Study Office is in charge of monitoring structural liquidity risk limits. The third line defense against the liquidity risk is the measurement and management of the structural liquidity risk by the ALM & Asset Backed Funding Function of the Group Finance Service. The measurement of the structural liquidity risk, that is the availability of the necessary monetary resources to cover financial outflows, is carried out by using the spreadsheets supplied by the Operational Asset & Liability Management (ALMO) procedure, in particular the simulation module, used also to measure the interest rate risk. The measurement of the structural liquidity risk is carried out from a static view, by measuring the liquidity requirement based on the liquidity gap in the single time frames (difference between due loans and deposits) as well as from a dynamic view, by determining the liquidity requirement in different scenarios, characterized by the variation of some key financial elements that can affect the liquidity time profile. In spite of the various medium/long term loans extended during the year aiming at reducing the term mismatch, the Group reports a short term mismatch mainly determined by interbank funding and by the London branch funding for the short term Euro Commercial Paper (ECP) and Euro Certificate of Deposit (ECD) programs. In 2007, 3.5 billion euro in senior bonds for the EMTN program and 1.2 billion euro subordinated bonds were issued. Finally, four performing residential mortgage securitizations were executed (of which three were public and one private) originated by the banks of the Group and amounting to 4.7 billion Euro.
292 QUANTITATIVE INFORMATION
1. Time distribution of financial assets and liabilities by residual contract life.
between 15 between 6 Currency of denomination: Euro between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets 29,432,271 4,483,100 1,523,293 3,648,323 6,046,195 5,094,681 5,012,081 26,292,862 18,601,266 A.1 Government bonds 45 - 71,142 - 224,584 893,566 649,536 2,564,241 235,790 A.2 Listed debt securities - - - 189 53,634 59,810 170,874 718,213 1,921,467 A.3 Other debt securities 19,986 1,535 - - 450 31,125 89,679 484,831 469,576 A.4 UCITS units 779,568 ------A.5 Loans: 28,632,672 4,481,565 1,452,151 3,648,134 5,767,527 4,110,180 4,101,992 22,525,577 15,974,433 - Banks 3,282,654 3,524,511 483,709 1,725,177 1,741,116 860,628 226,342 4,675,134 3,246,933 - Customers 25,350,018 957,054 968,442 1,922,957 4,026,411 3,249,552 3,875,650 17,850,443 12,727,500 Cash liabilities 38,838,137 3,075,705 3,368,934 2,978,389 7,925,569 3,814,519 5,452,338 18,545,147 10,418,023 B.1 Deposits 37,972,823 1,082,153 1,127,800 881,667 2,362,835 359,156 674,830 258,936 39,881 - Banks 942,050 876,881 844,413 564,493 1,864,183 288,445 638,869 181,264 37,949 - Customers 37,030,773 205,272 283,387 317,174 498,652 70,711 35,961 77,672 1,932 B.2 Debt securities 202,308 472,100 575,504 763,672 2,553,372 2,466,682 4,533,654 18,188,968 9,938,739 B.3 Other liabilities 663,006 1,521,452 1,665,630 1,333,050 3,009,362 988,681 243,854 97,243 439,403 Off-balance sheet transactions 7,344,025 1,847,634 1,505,815 2,781,761 2,371,141 1,468,671 2,631,743 2,482,175 3,178,355 C.1 Financial derivatives with exchange of capital 116,741 1,798,300 605,095 2,064,474 2,172,654 1,253,895 840,678 618,686 37,111 - Long positions 75,121 945,081 298,573 1,069,206 691,454 299,397 214,226 293,023 19,068 - Short positions 41,620 853,219 306,522 995,268 1,481,200 954,498 626,452 325,663 18,043 C.2 Deposits and loans to be settled 93,554 20,000 881,918 671,662 125,000 64,234 - - - - Long positions 46,777 10,000 107,313 669,477 62,500 32,117 - - - - Short positions 46,777 10,000 774,605 2,185 62,500 32,117 - - - C.3 Irrevocable commitments 7,133,730 29,334 18,802 45,625 73,487 150,542 1,791,065 1,863,489 3,141,244 - Long positions 695,670 29,334 18,802 45,625 73,487 148,562 1,122,457 1,853,083 3,136,640 - Short positions 6,438,060 - - - - 1,980 668,608 10,406 4,604 Notes to the consolidated accounts accounts consolidated to the Notes 293 Notes to the consolidated accounts accounts consolidated to the Notes 294
between 15 between 6 Currency of denomination: US dollar between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets A.1 Government bonds 3,402 94 53 41 A.2 Listed debt securities 295 523 43 1,561 405 765 4,641 501 A.3 Other debt securities 511 31,180 3,985 A.4 UCITS units 20,756 A.5 Loans: - Banks 153,964 91,907 8,937 21,093 63,720 52,383 23,501 65,715 15 - Customers 194,457 21,553 60,146 94,172 164,452 104,575 18,417 147,927 154,017 Cash liabilities B.1 Deposits - Banks 90,855 145,736 53,074 100,553 142,104 249,968 54,418 39 - Customers 640,452 37,566 2,237 154,134 39,337 1,453 5,766 9 B.2 Debt securities 15,666 203,517 48,091 227,060 101,425 23,500 19,887 B.3 Other liabilities 27,668 18,466 21,511 20,523 2,836 1,039 Off-balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 4,665 289,171 241,303 405,668 618,811 647,522 483,630 701,144 - Short positions 6,745 537,829 282,541 951,026 465,695 235,409 374,386 701,118 C.2 Deposits and loans to be settled - Long positions 54,344 29,550 - Short positions 54,344 29,550 C.3 Irrevocable commitments - Long positions 25,525 475 24,867 8,349 108,520 44,086 73,948 - Short positions 254,001 1,265 30,569 between 15 between 6 Currency of denomination: British pound between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets A.1 Government bonds A.2 Debt securities Quoted 8 7,228 18 A.3 Other Debt securities 4 535 A.4 UCITS units A.5 Loans: - Banks 70,902 128,357 29,285 40,039 1,855 3,168 30,163 - Customers 61,310 9,115 23,022 18,204 9,952 1,808 7,586 76,111 120,223 Cash liabilities B.1 Deposits - Banks 74,214 49,845 1,781 27,575 12,538 22,360 - Customers 59,748 140,585 1,792 50,051 21,405 618 16 B.2 Debt securities 6,553 27,517 36,963 280,464 455,683 88,999 B.3 Other liabilities 5,916 13,943 291 3,650 154 Off-balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 51,577 29,952 225,343 424,297 117,588 2,785 9,538 - Short positions 54,951 14,141 24,251 200,806 3,340 6,194 2,973 C.2 Deposits and loans to be settled - Long positions 15,682 34,090 - Short positions 15,682 34,090 C.3 Irrevocable commitments - Long positions 9,473 1,322 15,084 9,468 - Short positions 35,347 Notes to the consolidated accounts accounts consolidated to the Notes 295 Notes to the consolidated accounts accounts consolidated to the Notes 296
between 15 between 6 Currency of denomination: Swiss franc between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets A.1 Government bonds A.2 Listed debt securities 10,100 A.3 Other debt securities A.4 UCITS units A.5 Loans: - Banks 37,047 42,937 3,310 10,838 35,639 30,528 1,449 - Customers 16,906 2,464 7,071 14,098 91,080 5,601 2,478 8,990 13,854 Cash liabilities B.1 Deposits - Banks 192 124,139 18,131 34,512 4,091 4,230 13,809 - Customers 60,242 7 56 152 155 219 573 B.2 Debt securities 4,830 77,890 59,669 11,747 B.3 Other liabilities 1,206 7,407 21 1,715 1,015 100 136 Off-balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 89,017 30,285 66,395 63,606 25,533 5,000 - Short positions 74,273 53,750 51,034 4,372 118 5,000 C.2 Deposits and loans to be settled - Long positions 16,500 - Short positions 16,500 C.3 Irrevocable commitments - Long positions 1,539 5 212 - Short positions 217 1,541 between 15 between 6 Currency of denomination: Yen between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets A.1 Government bonds 132 326 A.2 Listed debt securities 279 423 12 110 A.3 Other debt securities 284 A.4 UCITS units A.5 Loans: - Banks 18,602 4,035 5,061 3,214 4,696 3,638 3,729 3,425 629 - Customers 25,085 5,598 3,853 15,307 23,494 9,950 3,796 8,975 154 Cash liabilities B.1 Deposits - Banks 3,585 1,516 6,063 - Customers 78,435 194 1,204 B.2 Debt securities 1,568 52,867 139,780 356,891 107,903 8,739 B.3 Other liabilities 9 10,067 1,109 Off-balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 1,316 124,525 78,106 126,560 437,968 163,053 24,177 97 - Short positions 974 132,538 67,883 4,291 72,929 47,983 12,788 C.2 Deposits and loans to be settled - Long positions 12,005 - Short positions 12,005 C.3 Irrevocable commitments - Long positions 26,955 65 - Short positions 26,254 700 Notes to the consolidated accounts accounts consolidated to the Notes 297 Notes to the consolidated accounts accounts consolidated to the Notes 298
between 15 between 6 Currency of denomination: Czech Krone between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets A.1 Government bonds A.2 Listed debt securities A.3 Other debt securities A.4 UCITS units A.5 Loans: - Banks 1,103 14,962 68 2,298 - Customers 1,128 59 819 565 282 1,955 13,890 1,770 Cash liabilities B.1 Deposits - Banks - Customers 13,714 4,829 2,036 508 2,874 372 96 B.2 Debt securities B.3 Other liabilities 54 Off-balance sheet transactions C.1 Financial derivatives with exchange of capital - Long positions 16,302 1,878 5,633 - Short positions 8,181 C.2 Deposits and loans to be settled - Long positions - Short positions C.3 Irrevocable commitments - Long positions - Short positions between 15 between 6 Currency of denomination: other currencies between 1 between 7 between 1 between 3 between 1 on demand days and 1 months and 1 over 5 years (thousand euro) and 7 days and 15 days and 3 months and 6 months and 5 years month year
Cash assets A.1 Government bonds - - - 109 - 215 2,119 - - A.2 Listed debt securities - - - - 72 18 18 3,274 2 A.3 Other debt securities ------A.4 UCITS units 5,457 ------A.5 Loans: 101,857 27,025 1,844 6,462 18,323 30,071 7,441 54,802 15,308 - Banks 90,150 21,902 264 739 1,877 12,947 3,494 2,202 211 - Customers 11,707 5,123 1,580 5,723 16,446 17,124 3,947 52,600 15,097 Cash liabilities B.1 Deposits 83,539 32,060 5,275 14,157 16,421 30,256 16,100 8,495 2,285 - Banks 8,874 27,970 12 1,777 1,305 21,345 - 112 1,102 - Customers 74,665 4,090 5,263 12,380 15,116 8,911 16,100 8,383 1,183 B.2 Debt securities ------50,721 - B.3 Other liabilities 1,810 3,846 110 1,692 396 - - - - Off-balance sheet transactions C.1 Financial derivatives with exchange of capital 252 84,658 100 3,225 203,808 14,089 13,703 9,797 - - Long positions - 37,813 48 2,822 183,114 11,047 6,834 9,666 - - Short positions 252 46,845 52 403 20,694 3,042 6,869 131 - C.2 Deposits and loans to be settled - 78,160 - - - 21,502 - - - - Long positions - 39,080 - - - 10,751 - - - - Short positions - 39,080 - - - 10,751 - - - C.3 Irrevocable commitments 42,598 41,279 - 4 694 1,290 3,042 4,212 - - Long positions 660 41,279 - 2 347 645 1,521 2,106 - - Short positions 41,938 - - 2 347 645 1,521 2,106 - Notes to the consolidated accounts accounts consolidated to the Notes 299 Notes to the consolidated accounts
2. Sector distribution of financial liabilities
Governments and Other Public Financial Insurance Non-financial Other (thousand euro) Central Banks entities companies companies companies entities
1. Due to customers 104,834 1,229,345 8,678,472 944,361 16,971,082 23,197,747 2. Debt securities in issue 2 2,955 1,286,779 132,270 144,721 28,026,954 Financial liabilities held for 3. 1,934 165 328,408 457,335 121,046 2,215,733 trading 4. Financial liabilities at fair value - - - - - 11,951,082 31/12/2007 106,770 1,232,465 10,293,659 1,533,966 17,236,849 65,391,516 31/12/2006 53,701 225,175 5,574,289 801,899 10,805,603 34,957,718
3. Geographical distribution of financial liabilities
Other Rest of the (thousand euro) Italy European America Asia world countries
1. Due to customers 47,387,842 3,111,046 577,066 18,617 31,270 2. Due to banks 7,281,272 4,800,102 6,698 112,412 900,172 Debt securities in 3. 14,314,422 14,636,489 608,166 34,591 13 issue 4. Financial liabilities held for trading 1.769.193 1,223,049 132,348 - 31 5. Financial liabilities at fair value 9.959.407 1,991,675 - - - 31/12/2007 80,712,136 25,762,361 1,324,278 165,620 931,486 31/12/2006 47,181,037 12,399,093 336,496 43,747 573,873
1.4 OPERATIONAL RISKS
QUALITATIVE INFORMATION
A. General issues, management procedures and operational risk assessment methods
Type of risk
Operational risk is the risk of suffering losses caused by inadequacy or failure attributable to procedures, human resources and internal systems, or caused by external events. The strategic and reputational risks do not belong to this type of risk, while the legal risk is, considered as the risk of infringing laws and other compulsory regulations, of failing to comply with contract and extra-contract liabilities, as well as other litigations that may arise with counterparties in the course of business activities.
Risk sources
The main sources of operational risk are: the low reliability of operational processes – in terms of effectiveness /efficiency, internal and external frauds, operational mistakes, the qualitative level of physical and logical security, inadequate IT structure compared to the size of operations, the growing recourse to automation, the outsourcing of corporate functions, a limited number of suppliers, changes in strategies, incorrect personnel management and training policies and finally social and environmental impacts.
Risk management model and organizational structure
Gruppo Banco Popolare adopted a risk management model that includes and complements the previous experiences of the BPI and BPVN Groups. The model illustrates the management modalities and the people involved in risk identification, measurement, monitoring mitigation and reporting, and it is part of the Group Risk Regulation approved by the Corporate Boards in February 2008. In order to set up adequate risk management policies, and in compliance with the relevant regulations, specific functions were identified in charge of governing, managing and controlling the operational risk model. For the operational risk identification and measurement phases, Gruppo Banco Popolare defined a methodology based on a quantitative and qualitative analysis. The quantitative assessment is based first of all on internal loss data, registered and filed in a dedicated software application, in compliance with rules codified in specific regulations, that prescribe processes linked to the operational procedure followed for the accounting recording of the losses under examination: to this end, a system was developed that makes it possible to automate the loss collection process and to take account of commercial refunds and operational losses for the commercial networks. The loss collection process also includes a verification and certification system for the operational risk database, that ensures the completeness, quality and correctness of the single loss identifications.
300 Notes to the consolidated accounts
Secondly, also external loss data available to the Group are used for the quantitative assessment, in particular the inbound flows of the DIPO consortium, set up by the major Italian Banking Groups within ABI, and BPI and BPVN took part in it since its formation (2003). The qualitative risk assessment is carried out to complement the available quantitative data, in particular in case no historical loss data exist that may indicate the risk level associated with specific events (primarily related to low frequency and high impact events) or when the corporate business is being reorganized and revised in such a way as to change its risk exposure, and in general a prospective outlook is assigned to the global assessments. Risk Assessment data is collected periodically through a structured process involving the heads of the various organizational structures, and the data is managed and stored in the integrated loss collection application. Gruppo Banco Popolare implemented a capital requirement calculation model compliant with the standardized approach prescribed by the new Supervisory Regulations and is developing a capital absorption calculation model based on VaR logics, for both regulatory and operational purposes, in view of the adoption in the medium term of the advanced approach models. As to the internal VaR calculation model for the operational risk, the implementation of the methodological and application framework is well under way, and initial simulations have already been performed in some companies of the Group.
Il Banco Popolare implemented a reporting model, featuring: A directional information system with analysis and assessments of all the main issues concerning operational risk (in particular material losses – and the associated recoveries, the overall assessment of the risk profile, capital absorption and the implemented and/or planned risk management policies); An operational reporting system, that is, a tool for the operating structure that take part in loss collection processes, for an adequate risk management in the various areas. The primary goal of the operational risk-related activities planned and implemented by the Group is to adopt the standardized method, to be achieved in 2008, with the basic method being used by the Group companies that in aggregate do not exceed the size prescribed by the Supervisory regulations (so called combined use). The progressive implementation of the framework shall then be followed by the adoption of an internal operational risk management model, compliant with the principles and rules for advanced models specified in the New Supervisory regulations. In order to implement the standardized model, the Group organizational model provides for specific Parent company structures to be in charge of the centralized risk management. Said structures act directly on behalf of the subsidiaries, and in case of companies adopting the standardized method they shall resort to decentralized functions in charge of local risk management.
Legal pending actions
The description of the primary legal pending actions and the possible associated losses are illustrated in “Chapter B – Liabilities – Section 12 Provisions for risks and charges”.
QUANTITATIVE INFORMATION
With regard to sources of operational risk, an analysis was conducted covering pure operational risk events, with gross losses through profit or loss greater or equal to 5000 euro and occurred between 1/1/2006 and 31/12/2007, collected in the Group Loss collection archive. Loss data have been broken down by type of event, with views on impact and frequency, in line with the event classification scheme prescribed by the New Supervisory Regulations.
301 Notes to the consolidated accounts
Gross loss breakdown
Internal fraud 10%
Execution, delivery and process management 31% External fraud 46%
Operating discontinuation and information system failure 0% Employment relation Damages to Customers, products and and workplace safety 4% tangible assets 0% business practices 9%
Frequency breakdown
Execution, delivery and Operating discontinuation process management 20% and information system Internal fraud 2% failure 1% Damages to tangible assets 0% External fraud 71%
Customers, products and business practices 1%
Employment relation and workplace safety 5%
The pie charts show that the main impacts and frequencies are associated with external frauds, primarily robbery, followed by losses during execution and development of operational process with customers. Among the other event classes there are cases of internal fraud with a low frequency but a strong impact, while the other categories both in terms of frequency and impact are below 10%.
Section 2 – Insurance company risks
The Group has a 50% stake in the insurance companies AviPop Insurance companies and Popolare Vita, given the bancassurance agreements signed during the year with Gruppo Aviva and Gruppo Fondiaria SAI; it also has the joint control with Gruppo Fondiaria SAI of Novara Vita. Following the merger between the BPVN and BPI Groups, Banco Popolare has the joint control with Gruppo Aviva also of the insurance companies Eurovita and Aviva Previdenza, by way of the holding company Finoa, owned 50%. Said shareholdings fall within the consolidations scope of companies carried at equity and are shown in the consolidated assets under Equity investments.
With regard to this type of risks, the weight of the above companies on total consolidated assets is of little significance.
Section 3 – Other company risks
No significant additional risks are reported for the remaining companies falling within the consolidation scope that are neither pat of the banking group, nor insurance companies. In particular, with regard to the Group’s real estate companies, most investments are related to Group operating property and specific surveys carried out on the overall real estate assets at the end of 2007 did not give rise to capital losses when compared to book values.
302 Notes to the consolidated accounts
CHAPTER F – CONSOLIDATED SHAREHOLDERS’ EQUITY
Section 1 – Consolidated shareholders’ equity
A. Qualitative information
The corporate shareholders’ equity is made up of the sum of the balances of the following balance sheet liabilities: • Capital net of repurchased treasury shares • Share premiums • Reserves • Valuation reserves • Common stock equivalents • Net income for the period
The description of the modality followed by the Group to pursue its capital management objectives is provided in the following section 2.2.
B. Quantitative information
As at December 31st, 2007 the Group’s shareholders’ equity totaled 10,672 millions, reporting a net increase of 5,800 millions from 4,872 millions that represented the consolidated shareholders’ equity of Gruppo Banco Popolare di Verona e Novara as at December 31st, 2006. Stripped of the net income for the period of 617 millions, shareholders’ equity went up by 5,183 millions as a result of the combination with Gruppo Banca Popolare Italiana accounting for 5,882 millions. Decreases were caused primarily by the distribution of the prior year’s income of 340 millions and by the treasury share buy-back prior to the date of effectiveness of the merger of 320 millions.
Section 2 – Banking regulatory capital and solvency ratios
2.1 Regulatory scope of application
In keeping with the instructions issued by the Bank of Italy in its letter dated December 1st, 2005, the consolidated regulatory capital must be calculated along the guidelines illustrated in circular n. 155 of December 18th, 1991, taking onto account the “prudential filters” that must be applied in case the financial statements are prepared in compliance with international accounting standards. This approach has come into effect on June 30th, 2006. The 12th update of the above mentioned circular, issued on February 5th, 2008, provided the new individual prudential reporting charts transposing the EC directives on capital adequacy (2006/48/CE e 2006/49/CE) and Basel 2, which came into effect on December 31st, 2007.
With circular 263 dated December 27th, 2006, the Bank of Italy issued the new prudential regulatory instructions for banks, slated to come into effect as of January 1st, 2007, except for banks that made use of the option to keep the prior credit risk prudential system (max. until January 1st, 2008). The Parent company Banco Popolare exercised said option and therefore in 2007 it continued to apply the instructions on solvency ratios, market risks, total capital requirements and risk concentration Sept forth in the Supervisory Instructions for Banks (Bank of Italy circular n. 229 of April 21st, 1999), with the exception of the regulatory capital instructions contained in the new circular that came immediately into effect.
2.2 Banking regulatory capital
A. Qualitative information
The Tier 1 (core capital) on December 31st, 2007 primarily comprised share capital and equity reserves calculated in keeping with the Bank of Italy Circular n. 155 of December 18th, 1991 and following updates, net of intangible assets recognized under item 120 of assets and of treasury shares. The Tier 1 capital includes 5 bond programs of the “preference shares” type, illustrated below: x bonds with a nominal value of 25 million euro issued at par on March 6th, 2000 by former BPI Soc.Coop. and transferred to Banco following the merger. The bonds shall be redeemed through a bullet repayment on March 30th, 2049, they have a floating rate with a step-up clause equivalent to the three-month Euribor plus 325 b.p. until March 6th, 2010, then switching to the three-month Euribor plus 487 b.p.. The program has been recognized under item 30 “debt securities in issue” of the balance sheet liabilities at a book value of 25.5 millions (excluding accruing interest); x bonds with a nominal value of 75 millions issued at par on December 29th, 2000 by former BPI Soc.Coop. and transferred to Banco following the merger. The bonds shall be redeemed through a bullet repayment on December 29th, 2049, they have a floating rate with step-up clause equivalent to the three-month Euribor plus 300 b.p. until December 29th, 2010 then switching to the three-month Euribor plus 450 b.p.. The program has
303 Notes to the consolidated accounts
been recognized under item 30 “debt securities in issue” of the balance sheet liabilities at a book value of 75 millions (excluding accruing interest); x bonds with a nominal value of 500 millions issued at par on June 30th, 2005 by former BPI Soc.Coop. e and transferred to Banco following the merger. The bonds shall be redeemed through a bullet repayment on June 30th, 2049, they have a fixed rate of 6.742% until 2015, then will switch to a floating rate equivalent to the three- month Euribor plus 525 b.p.. The program has been recognized under item 30 “debt securities in issue” of the balance sheet liabilities at a book value of 509.2 millions (gross of accrued interest expense of 16.9 millions); x bonds with a nominal value of 300 millions issued at par on June 21st, 2007 by former BPVN S.c.a.r.l., to be redeemed through a bullet repayment on June 21st, 2100. Bonds have a fixed rate of 6.756% until June 21st, 2017 and will then switch to a floating rate equivalent to the three-month Euribor plus 188 b.p.. The program has been classified under item 50 “financial liabilities measured at fair value” at a value of 282.9 millions (gross of accrued interest expense of 10.7 millions); x bonds with a nominal value of 350 millions issued at par on June 21st, 2007 by former BPVN S.c.a.r.l., to be redeemed through a bullet repayment on June 21st, 2100. Bonds have a fixed rate of 6.156% until 21 June 21st, 2017 and will then switch to a floating rate equivalent to the three-month Euribor plus 228 b.p.. The program has been classified under item 50 “financial liabilities measured at fair value” at a value of 328.8 millions (gross of accrued interest expense of 11.4 millions).
Tier 2 (supplementary capital)
The supplementary capital of Banco Popolare Soc.Coop. comprises undisclosed valuation reserves and subordinated liabilities, in the proportion allowed by the above mentioned regulations, as well as valuation reserves available for sale relating to the capital gain portion. It also includes the equity reserve relating to the convertibility option of the only subordinated convertible bond program inherited by Banco from the merger with BPI, totaling 2.5 millions and recognized under item 150 “common stock equivalents” of balance sheet liabilities.
304 Illustrated below are subordinated liabilities included in supplementary capital:
ISIN Issuer type Issue date maturity currency interest rate issued included in Redemption modality coupon amount regulatory capital (in mln €) (in mln €)
IT0001444360 Banco Popolare scarl sub 7-Mar-00 1-June-10 euro 4,75% fixed on a yearly basis 299.95 179.97 bullet repayment upon maturity if not yearly converted XS0166027879 Banco Popolare scarl sub 21-Mar-03 2-Apr-13 euro 3 month Euribor + 80 bp until April 2008 then 3 80.00 79.94 five-year straight-line redemption plan quarterly month Euribor + 140 bp XS0169152468 Banco Popolare scarl sub 23-May-03 23-May-13 euro 3 month Euribor + 70 bp until May 2008 then 3 50.00 49.91 early redemption option as of 21/5/2008 quarterly month Euribor + 130 bp after prior approval of the Bank of Italy XS0169356465 Banco Popolare scarl sub 20-June-03 20-June-13 euro 3 month Euribor + 75 bp until June 2008 then 3 20.00 19.95 early redemption option as of 20/6/2008 quarterly month Euribor + 135 bp after prior approval of the Bank of Italy XS0172617622 Banco Popolare scarl sub 11-July-03 11-July-13 euro 3 month Euribor + 60 bp 20.00 20.00 early redemption option as of 20/7/2008 quarterly after prior approval of the Bank of Italy XS0176877271 Banco Popolare scarl sub 2-Oct-03 2-Oct-13 euro 3 month Euribor + 50 bp until October 2008 50.00 50.00 early redemption option as of 2/10/2008 quarterly then 3 month Euribor + 110 bp after prior approval of the Bank of Italy XS0180225327 Banco Popolare scarl sub 20-Nov-03 20-Nov-13 euro 3 month Euribor + 55 bp until November 2008 30.00 30.00 early redemption option as of 20/11/2008 quarterly then 3 month Euribor + 115 bp after prior approval of the Bank of Italy XS0193585428 Banco Popolare scarl sub 4-June-04 4-June-14 euro 3 month Euribor + 45 bp 150.24 149.89 early redemption option as of 4/6/2009 quarterly after prior approval of the Bank of Italy XS0201659017 Banco Popolare scarl sub 28-Sept-04 28-Sept-14 euro 3 month Euribor + 45 bp until September 2009 20.00 20.00 early redemption option as of 28/9/2009 quarterly then 3 month Euribor + 105 bp after prior approval of the Bank of Italy XS0256368050 Banco Popolare scarl sub 15-June-06 15-June-16 euro 3 month Euribor + 40 bp until June 2011 then 3 500.00 499.30 early redemption option as of 15/6/2011 quarterly month Euribor + 100 bp after prior approval of the Bank of Italy XS0276033510 Banco Popolare scarl sub 22-Nov-06 22-Nov-16 euro 3 month Euribor + 45 bp until 2011 then 3 250.00 250.00 early redemption option as of 2011 after quarterly month Euribor + 105 bp prior approval of the Bank of Italy XS0284945135 Banco Popolare scarl sub 8-Feb-07 8-Feb-17 euro 3 month Euribor + 35 bp until February 2012 550.00 546.53 early redemption option as of 8/2/2012 quarterly then 3 month Euribor + 95 bp after prior approval of the Bank of Italy XS0215451559 Banco Popolare scarl hybrid 23-Mar-05 23-Mar-15 euro 4.625% fixed rate 300.00 298.97 bullet repayment upon maturity yearly IT0003437735 Banca Popolare di Verona sub 12-Mar-03 12-June-13 euro 3 month Euribor until 21st coupon then 3 month 66.51 63.31 early redemption option as of 12/6/2008 quarterly BSGSP Euribor + 50 bp after prior approval of the Bank of Italy IT0003662845 Banca Popolare di Verona sub 10-June-04 10-Sept-14 euro 3 month Euribor until September 2009 then 3 28.51 28.49 bullet repayment upon maturity quarterly BSGSP month Euribor + 60 bp IT0001398392 LINEA spa sub 30-Nov-99 30-Nov-09 euro 6 month Euribor + 60 bp 22.00 0.41 bullet repayment upon maturity six month IT0004234008 LINEA spa sub 31-July-07 31-July-17 euro 6 month Euribor + 175 bp 43.00 15.04 early redemption option as of 31/7/2012 six month after prior approval of the Bank of Italy IT0003554034 BCA CARIPE sub 3-Nov-03 3-Nov-08 euro 4.25% fixed on a yearly basis 35.00 7.00 bullet repayment upon maturity six month IT0004230378 Cr Lucca Pisa Livorno sub 7-May-07 7-May-12 euro Refi rate 6 month Euribor +37 bp 40.00 40.00 five-year straight-line redemption plan six month Notes to the consolidated accounts accounts consolidated to the Notes 305 Notes to the consolidated accounts accounts consolidated to the Notes 306 issued included in Redemption modality ISIN Issuer type Issue date maturity currency interest rate amount regulatory capital coupon (in mln €) (in mln €)
Banca Popolare di 6 month Euribor + 50 bp up to December 2009 early redemption option as of 3/12/2009 IT0003759674 sub 3-Dec-04 3-Dec-14 euro 5.00 5.00 six month Mantova then 6 month Euribor + 100 bp after prior approval of the Bank of Italy
IT0001433322 Banca Popolare di Lodi hybrid 24-Feb-00 30-June-10 euro 6 month Euribor + 250 bp 219.50 214.54 bullet repayment upon maturity six month IT0003053318 Banca Popolare di Lodi hybrid 15-Dec-00 15-Dec-10 euro 6.75% fixed on a yearly basis 100.00 99.95 bullet repayment upon maturity quarterly IT0003053326 Banca Popolare di Lodi hybrid 15-Dec-00 15-Dec-10 euro 3 month Euribor + 100 bp 50.00 49.99 bullet repayment upon maturity quarterly IT0003061857 Banca Popolare di Lodi sub 10-Jan-01 10-Jan-08 euro 6.75% fixed on a yearly basis 20.00 4.00 bullet repayment upon maturity quarterly IT0003061881 Banca Popolare di Lodi sub 10-Jan-01 10-Jan-08 euro 3 month Euribor + 100 bp 25.00 5.00 bullet repayment upon maturity quarterly Banca Popolare di Lodi (ex IT0003209969 hybrid 14-Dec-01 14-Dec-11 euro 5.75% fixed on a yearly basis 50.00 50.00 bullet repayment upon maturity six month reti) Banca Popolare di Lodi (ex IT0003210017 hybrid 14-Dec-01 14-Dec-11 euro 3 month Euribor + 100 bp 75.00 75.00 bullet repayment upon maturity quarterly Reti Bancarie) IT0003411821 Banca Popolare di Lodi hybrid 27-Dec-02 27-Dec-12 euro 5.3% fixed on a yearly basis 100.00 100.00 bullet repayment upon maturity six month IT0003411847 Banca Popolare di Lodi hybrid 27-Dec-02 27-Dec-12 euro Euribor + 50 bp 182.42 182.41 bullet repayment upon maturity six month IT0003846604 Banca Popolare di Lodi sub 29-Apr-05 29-Apr-15 euro 3 month Euribor + 60 bp 173.74 173.74 bullet repayment upon maturity quarterly IT0003481378 EFIBANCA sub 3-June-03 3-June-08 euro 6 month Euribor + 100 bp 50.00 10.00 five-year straight-line redemption plan six month IT0003417422 EFIBANCA sub 16-Jan-03 16-Jan-08 euro 3.9% fixed on a yearly basis 1.00 0.20 five-year straight-line redemption plan yearly Notes to the consolidated accounts
Tier 3 capital
On December 31st, 2007, Banco’s regulatory capital included a Tier 3 component comprising two subordinated loans classified under item 30 “debt securities in issue” of the balance sheet liabilities at a book value of 602 millions (gross of accrued interest expense of 2.3 millions). Below is a brief description of the main contract features of the above mentioned instruments: x 250 million euro in bonds issued below par (99.88) on December 5th, 2006 at a floating rate equivalent to the three-month Euribor plus a 25 basis points spread, with a bullet repayment upon maturity on June 5th, 2009; x 350 million euro in bonds issued below par (99.928) on March 2nd, 2007 at a floating rate equivalent to the three- month Euribor plus a 25 basis points spread, with a bullet repayment September 2nd, 2009.
For all the above mentioned loans, subordination requires that, in the event of liquidation or receivership, bonds be repaid only after all other debts with a higher claim have been satisfied.
B. Quantitative information
31/12/2007
A. Tier 1 prior to the adoption of prudential filters 5,356,558 B. Tier 1 prudential filters: B.1 - positive IAS/IFRS prudential filters (+) B.2 - negative IAS/IFRS prudential filters (-) 137,950 C. Tier 1 gross of deductions (A + B) 5,218,608 D. Deductions from core capital 443,647 E. Total core capital (TIER 1) (C – D) 4,774,961 F. Tier 2 prior to the adoption of prudential filters 3,685,193 G. Tier 2 prudential filters: G.1 - positive IAS/IFRS prudential filters (+) - negative IAS/IFRS prudential filters (-) 72,740 H. Tier 2 gross of deductions (F + G) 3,612,453 J. Deductions from supplementary capital 443,647 L. Total supplementary capital (TIER 2) (H – I) 3,168,806 M. Deductions from total Tier 1 and Tier 2 120,975 N. Regulatory capital (E + L – M) 7,822,792 O. Tier 3 246,214 P. Regulatory capital including TIER 3 (N+O) 8,069,006
2.3 Capital adequacy
A. Qualitative information
The goal of the capital management policies pursued by Gruppo Banco Popolare is on the one side to ensure that the capital base be consistent with the global risk level, with regulatory constraints, with the target rating , and with corporate development plans, and on the other side to optimize the capital makeup, namely the set of elements constituting the regulatory capital, by selecting a mix of financial instruments best suited to minimize the cost of capital.
307 Notes to the consolidated accounts
B. Quantitative information
Weighted Non-weighted amounts / amounts requirements
A. Risk assets (tab 2.3.B of the balance sheet) A.1 Credit risk (standard approach) 108,081,770 85,850,878 CASH ASSETS 99,533,075 78,645,906 1. Exposures (other than equity securities and subordinated assets) with (or secured by): 83,756,155 67,996,091 - 1.1 Governments and Central Banks 6,529,567 - 1.2 Public entities 673,723 158,483 - 1.3 Banks 10,910,353 2,195,098 - 1.4 Other counterparties (other than mortgages on residential and non-residential real 65,642,511 65,642,511 estate) 2. Mortgages on residential real estate 8,559,714 4,283,780 3. Mortgages on non-residential real estate 2,143,894 1,456,541 4. Shares, equity investments and subordinated assets 1,509,289 1,690,092 5. Other cash assets 3,564,023 3,219,401 OFF-BALANCE SHEET ASSETS 8,548,695 7,204,972 1. Guarantees and commitments with (or secured by): 8,378,978 7,164,994 - 1.1 Governments and Central Banks 130,132 - 1.2 Public entities 41,011 8,202 - 1.3 Banks 1,346,554 295,510 - 1.4 Other counterparties 6,861,282 6,861,282 2. Derivative contracts with (or secured by): 169,717 39,978 - 2.1 Governments and Central Banks - 2.2 Public entities - 2.3 Banks 149,602 29,920 - 2.4 Other counterparties 20,114 10,057 B. Capital adequacy requirements (tab 2.3.B of the balance sheet) B1 Credit risks 6,868,070 B2 Market risks 385,925 1. STANDARD APPROACH 385,925 of which: - position risk on debt securities 247,918 - risk position on equity securities 87,691 - exchange rate risk 7,138 - other risks 43,178 2. IN-HOUSE MODELS of which: - position risk on debt securities - risk position on equity securities - exchange rate risk B3 Other capital adequacy requirements 149,021 B4 Total prudential requirements (b1+b2+b3) 7,403,017 C. Risk assets and solvency ratios C1 Risk weighted assets (*) 92,537,708 C2 Tier 1/ Risk weighted assets (Tier1 capital ratio) 5.16% C3 Regulatory capital/ Risk weighted assets (Total capital ratio) 8.72% (*) total prudential requirements times the reciprocal of the minimum obligatory coefficient for credit risks
308 Notes to the consolidated accounts
CHAPTER G – BUSINESS COMBINATIONS
Section 1 – Business combinations performed during the year
1.1 Business combinations
In 2007, Banco Popolare finalized the following additional business combinations:
Net income Income (Loss) Transaction Transaction Total acquired Total income (Loss) recognized upon (million euro) date cost (2) interest (%) (3) (4) (7) for the year acquisition (1) (5) (7) (6) (7)
Banco Popolare Hungary Zrt 14-05-2007 18.4 100% 2.1 -0.7 -5.7
Banco Popolare Ceská 14-05-2007 28.2 100% 6.2 -0.6 -0.2 Republika, a.s. Gruppo Banca Popolare 01-07-2007 5,902.3 100% 1,010.7 275.7 -230.6 Italiana (7) AT Leasing IFN S.A. 18-07-2007 5.9 100% 1.0 - 0.2 (Romania) 1 Date of acquisition of the controlling interest 2 Cost inclusive of accessory charges 3 Percentage interest acquired with voting rights, without voting, rights and as a percentage of total equity 4 Item 120 of Income Statement for the entire first half 2007 5 Income (Loss) for the entire first half 2007 6 Income reported after the acquisition date and included in the consolidated net income 7 For Gruppo Ex-BPI total income, net income for the year upon acquisition and income recognized upon acquisition refer to the aggregate of companies included in the consolidated financial statements
Net Fair Value
Banco Popolare Banca Popolare Banco Popolare AT Leasing IFN (million euro) Ceská Republika, Total Italiana Hungary Zrt S.A. a.s.
Fair value of assets and liabilities 533.3 -0.6 20.2 1.7 554.6
Goodwill 5,369.0 19.0 8.0 4.2 5,400.2
Transaction cost 5,902.3 18.4 28.2 5.9 5,954.8
Transaction cost components
Banco Popolare Banca Popolare Banco Popolare AT Leasing IFN (million euro) Ceská Republika, Total Italiana Hungary Zrt S.A. a.s.
Business combination cost 5,881.8 18.2 28.1 5.8 5,933.9
Costs directly associated with the transaction 20.5 0.2 0.1 0.1 20.9
Transaction costs 5,902.3 18.4 28.2 5.9 5,954.8
1.2 Other information on business combinations
Combination of Gruppo Banca Popolare Italiana
As already described, on July 1st, the merger between Banco Popolare di Verona e Novara (BPVN) and Banca Popolare Italiana (BPI) became fully effective, and gave rise to a new company called Banco Popolare, parent company of the Group bearing the same name.
From an accounting viewpoint, the merger entailed the aggregation of two separate corporate entities into a new reporting entity, and is therefore classified as a “business combination” under international accounting standards, and as such from an accounting point of view it must be treated as prescribed in IFRS 3, that is, by applying the purchase method. This method requires first of all that the virtual acquirer in the business combination be identified. In this case, only for accounting purposes, based on the elements and circumstances indicated in IFRS 3 (prevalence of the number of new common shares to be issued by Banco Popolare to be assigned to the shareholders of Banco Popolare di Verona e Novara over those to be
309 Notes to the consolidated accounts
assigned to the shareholders of Banca Popolare Italiana, difference between the fair values of the two combining entities in favor of Gruppo Banco Popolare di Verona e Novara, difference between the amount of assets and revenues of the two combining entities in favor of Gruppo Banco Popolare di Verona e Novara), the virtual acquirer was identified in Banco Popolare di Verona e Novara and the virtual acquiree in Banca Popolare Italiana. Therefore, only for accounting purposes, the financial statements as at December 31st were prepared in such a way as to guarantee a continuation of amounts reported in the consolidated financial statements of Gruppo BPVN, while the companies of Gruppo BPI were included in the new Group as of July 1st. Under IFRS 3, at the date of effectiveness of the merger the acquirer must measure the cost of the business combination, that must then be allocated by recognizing the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair value at the date of acquisition (merger date of effectiveness). The cost of the business combination under examination was measured by valuing the new shares of Banco Popolare issued and assigned in exchange to the shareholders of Banca Popolare Italiana based on Banco Popolare’s stock price of July 2nd, 2007 (first stock price available after the date of acquisition). At that date the stock price was 21.19 euro per share. Based on this share exchange ratio, the shareholders of Banca Popolare Italiana were assigned 277,573,299 shares of Banco Popolare. As a result, the cost incurred by Banco Popolare di Verona e Novara to consolidate Banca Popolare Italiana amounted to 5,881.8 million euro, plus 20.5 million euro in charges incurred by Banco Popolare di Verona e Novara to finalize the transaction. The total cost of the business combination came in at 5,902.3 million euro.
The accounting shareholders’ equity contributed by Banca Popolare Italiana to Banco Popolare as a result of the merger on July 1st, 2007, after having distributed 1,440.7 million euro worth of reserves to the shareholders of Banca Popolare Italiana, totaled 2,672.7 million euro. The resulting merger difference was 3,229.6 millions. Considering also the goodwill of the equity investments of Banca Popolare Italiana recognized in the financial statements and taking account of the differences in equity investments held in subsidiaries that emerged upon the first consolidation, the total amount to be allocated in compliance with the above mentioned international accounting standard was 6,444.2 million euro.
The net fair value of Banca Popolare Italiana’s assets and liabilities turned out to be 1,828.2 million euro more than the net book value of these same assets and liabilities. More precisely, loans to customers had an excess value of 589.4 million euro, property of 148.9 millions, and intangible assets associated with customer relations and trademarks acquired through the combination of 918.4 millions. The residual difference refers to other balance sheet items, like equity investments, financial assets available for sale, other assets, and it includes the elimination of assets/liabilities for deferred tax assets and liabilities related to the differences between the book values and the fiscal values of goodwill recognized in the financial statements of the acquired investee companies. After deducting the deferred taxes recognized as a result of the difference between the fair value and the book value of the above mentioned assets and liabilities, and taking account of the minority interest, the business combination cost portion allocated to specific acquired balance sheet components came in at 1,075.3 million euro. The residual difference compared to the cost of business combination was recognized in the consolidated financial statements as positive difference from consolidation of the acquired controlling stakes (2.909 million euro) and as goodwill attributable to the Parent company (2,460 millions).
The accounting recognition of the business combination is now complete. Considering that after the acquisition, the quarterly report on operations as at September 30th, 2007 had been prepared by making use of the option of temporarily allocating the cost of the business combination in a specific balance sheet item called “temporary merger difference”, it was now necessary to restate the balance sheet and income statement referring to that period in order to represent also with reference to that date the impact from the recognition of the business combination in compliance with the relevant international accounting standard.
Shown below is a summary table illustrating how the cost of the business combination was measured, and its subsequent allocation (data refer to July 1st, 2007, date of effectiveness of the merger).
310 Notes to the consolidated accounts
(million euro)
Number of BPI shares to be exchanged 645,519,300 Share exchange ratio for BPI shares 0.43 Number of Banco Popolare shares issued 277,573,299 Opening price of Banco Popolare shares on 2-7-2007 21.19 Cost of share issue 5,881.8 Purchase accessory charges 20.5 Cost of business combination 5,902.3 Accounting shareholders’ equity contributed by the merger 2,672.7 Merger difference 3,229.6 Goodwill already recognized in the financial statements of the acquired investee companies or implied in the 3,214.6 value of their equity investments Total difference to be allocated 6,444.2 Difference between book value and fair value of assets and liabilities: loans 589.4 property 148.9 equity investments 61.4 intangible assets 647.9 trademarks 270.5 other balance sheet items 110.1 1,828.2 Deferred tax assets and liabilities on differences between book value and fair value of assets and liabilities -689.3 Minority interest in the difference between book value and fair value of assets and liabilities -63.6 Total difference from book value 1,075.3 Goodwill 5,369.0
Purchase of Banco Popolare Hungary Zrt
On October 18th, 2006, the Parent company signed a preliminary agreement for the purchase of 100% of the share capital of IC Bank Zrt in Budapest (now Banco Popolare Hungary), a bank focusing on small-medium enterprises and retail customers, with a Head office and 6 branches. The bank also fully owns the company ICB Service (now Banco Popolare Service), which manages the branches and the property of the Hungarian bank. On May 14th, 2007, the purchase of the equity investment was finalized, leading to a total investment of 18.4 million euro. The fair value of the acquired assets and liabilities was negative (– 0.6 million euro). The difference was recognized as goodwill.
The accounting recognition of the business combination is complete and shall not require to restate the balance sheets and income statements prepared after the date of acquisition.
Purchase of Banco Popolare Ceskà Republika a.s.
On October 18th, 2006, the Parent company signed a preliminary agreement for a call option on 100% of the share capital of IC Banka a.s. in Prague, (now Banco Popolare Ceská Republika), a bank focusing on small-medium sized enterprises and retail customers, with 2 branches. The bank has no equity investments. On May 14th, 2007, the purchase was finalized, leading to a total investment of 28.2 million euro. o. The fair value of the acquired assets and liabilities was 20.2 million euro. The difference was recognized as goodwill.
The accounting recognition of the business combination is complete and shall not require to restate the balance sheets and income statements prepared after the date of acquisition.
Purchase of Auto Trading Leasing
On July 18th, after receiving the relevant authorizations from the competent authorities, Banco Popolare and Holding di Partecipazioni Finanziarie Popolare di Verona e Novara finalized the purchase of 100% of the share capital of Auto Trading Leasing IFN s.a., with stakes of 99.80% and 0.20%, respectively. The new subsidiary is based in Bucharest (Romania) and the transaction entailed an initial investment of 5.9 million euro. The fair value of the acquired assets and liabilities was 1.7 million euro. The difference was recognized as goodwill.
The accounting recognition of the business combination is complete and shall not require to restate the balance sheets and income statements prepared after the date of acquisition.
311 Notes to the consolidated accounts
1.2.1 Goodwill annual changes
(thousand euro)
Goodwill as at December 31st, 2006 413,027 Increases 5,413,906 Goodwill recognized during the period: - purchase of Gruppo Banca Popolare Italiana 5,368,959 - purchase of Banco Popolare Hungary zrt 21,514 - purchase of Banco Popolare Ceska Republika a.s. 7,968 - purchase of At Leasing IFN A.S. (Romania) 4,221 - purchase of Banco Popolare Service kft 203 Other increases 11,041 Decreases -372,225 Goodwill impairment during the year - Disposals -309,436 Other decreases -62,789 Goodwill as at December 31st, 2007 5,454,708
Other goodwill increases primarily refer to the purchase of an additional share in the subsidiary Banca Valori (7.2 millions).
Section 2 – Business combinations after the balance sheet date
2.1 Business combinations
No business combinations were conducted after the balance sheet date.
312 Notes to the consolidated accounts
CHAPTER H – TRANSACTIONS WITH RELATED PARTIES
Remuneration of Directors and Top Managers
Pursuant to art. 78 of the Enacting Regulation of L.D. n. 58 of February 24th, 1998, governing the code of conduct of issuers, the tables below illustrate the compensations paid to the Directors, Statutory Auditors, the General Manager and Managers with strategic responsibilities of BPVN and to the Directors of the Supervisory and Management Boards, the General Managers and Managers with key responsibilities of Banco. Since Gruppo Banco Popolare from an accounting viewpoint is the seamless continuation of Gruppo BPVN, while the contribution by Gruppo BPI starts as of July 1st, 2007, the tables show the 1H 2007 remunerations only for the corporate boards of Gruppo BPVN, while 2H data refer to Gruppo Banco Popolare post-merger, and therefore include the compensations relating to Gruppo BPI.
Remuneration of Directors and Statutory Auditors
Directors, Statutory Auditors, General Manager and Managers with key responsibilities ex BPVN – first half
Individual Description of the office Remuneration (thousand euro) Other Non- Bonuses considerations Surname and name Office (1) Office term Base salary(2) monetary and other (4) benefits (3) incentives Amount Title
Fratta Pasini Carlo Chairman of the Board of Directors* UNTIL 30/06/2007 360 166 (a) - 68 (b) 29 (c) 2 (d) Comoli Maurizio Deputy Vice Chairman* UNTIL 30/06/2007 196 - - 29 (e) 13 (f) 5 (g) Bauli Alberto Vice Chairman* UNTIL 30/06/2007 181 - - 10 (h) Innocenzi Fabio Chief Executive Officer* UNTIL 30/06/2007 85 747 (i) - 1,104 (j) 59 (k) 131 (l) 21 (m) 1 (n) 0 (o) (5) Boroli Marco Director* UNTIL 30/06/2007 99 - - - Buzzi Pietro Director UNTIL 30/06/2007 91 - - - Campagnolo Valentino Director UNTIL 30/06/2007 95 - - - Corradi Vittorio Director UNTIL 30/06/2007 98 - - - Della Bella Ugo Director UNTIL 30/06/2007 99 - - 28 (p) Fedrigoni Giuseppe Director UNTIL 30/06/2007 92 - - - Guasti Federico Director* UNTIL 30/06/2007 99 - - - Loro Piana Sergio Director UNTIL 30/06/2007 90 - - - Marino Maurizio Director UNTIL 30/06/2007 97 - - - Nicolò Giuseppe Director * UNTIL 30/06/2007 118 (x1) - - - Rana Gian Luca Director UNTIL 30/06/2007 95 - - - Rangoni Machiavelli Director UNTIL 30/06/2007 98 - - 44 (q) Claudio Ravanelli Fabio Director UNTIL 30/06/2007 95 - - - Righetti Luigi Director * UNTIL 30/06/2007 102 - - - Vezzalini Gian Carlo Director * UNTIL 30/06/2007 109 (x2) - - - Zanetta Franco Director UNTIL 30/06/2007 95 - - 184 (r) 26 (s) Chairman of the Board of Statutory Dezzani Flavio UNTIL 30/06/2007 68 - - - Auditors Buffelli Giuliano Standing statutory auditor UNTIL 30/06/2007 45 - - - Calderini Maurizio Standing statutory auditor UNTIL 30/06/2007 45 - - 23 (t) 1 (u) 10 (v) Gaiani Carlo Standing statutory auditor UNTIL 30/06/2007 45 - - 12 (w) Tantini Giovanni Standing statutory auditor UNTIL 30/06/2007 45 - - 26 (x) Minolfi Massimo General manager UNTIL 30/06/2007 - 395 (y) - 750 (j) 20 (j1) (6)
313 Notes to the consolidated accounts
Individual Description of the office Remuneration (thousand euro) Other Non- Bonuses Remuneration for considerations Surname and name Office (1) Office term monetary and other the office(2) (4) benefits (3) incentives Amount Title
Other manager with Other manager with strategic UNTIL 30/06/2007 - 545 (y) - 1,264 (j) strategic responsibilities responsibilities 39 (z) (1) Members of the Executive Committee are marked with * (2) The base salary includes the 1H07 share of profit (3) Estimated values (4) Reason for granting other considerations (a) amount inclusive of Health and welfare insurance and accident insurance (b) Vice Chairman of Credito Bergamasco S.p.A. from 1/1/2007 to 28/4/2007 and Director and member of the Executive Committee from 1/1/2007 to 30/6/2007. (c) Director and member of the Executive Committee of Banca Popolare di Novara from 1/1/2007 to 19/6/2007 (d) Director of Aletti Merchant S.p.A. from 1/1/2007 to 19/6/2007 (e) Director of Banca Popolare di Novara from 1/1/2007 to 30/6/2007 (f) Chairman of Aletti Gestielle SGR S.p.A. from 1/1/2007 to 28/3/2007 (g) Chairman of BPVN Immobiliare S.r.l. from 1/1/2007 until 28/06/2007 (h) Director of Banca Aletti & C. S.p.A. from 1/1/2007 to 30/06/2007 (i) amount inclusive of car, lodging, pension funds,, SI.PRE, health insurance and accident insurance (j) amount inclusive of gross annual salary and termination benefits (j1)amount inclusive of share of profit for the office of Director of Credito Bergamasco from 1/1/2007 to 26/03/2007 (k) Vice Chairman and member of the Executive Committee of Banca Popolare di Novara S.p.A. from 1/1/2007 to 30/06/2007 (l) Deputy Vice Chairman and member of the Executive Committee of Credito Bergamasco S.p.A from 1/1/2007 to 30/06/2007. (m) Deputy Vice Chairman of Banca Aletti & C. S.p.A. from 1/1/2007 to 30/06/2007 (n) Director of Aletti Merchant S.p.A. from 1/1/2007 to 17/04/2007 (o) Director of Aletti Gestielle SGR S.p.A. from 1/1/2007 to 24/01/2007 (p) Director of Banca Popolare di Novara S.p.A. from 1/1/2007 to 26/06/2007 (q) Director of Credito Bergamasco S.p.A. from 1/1/2007 to 30/06/2007 (r) Chairman and member of the Executive Committee of Banca Popolare di Novara S.p.A. from 1/1/2007 to 30/06/2007 (s) Chairman of Novara Vita S.p.A. from 1/1/2007 to 30/06/2007 (t) Standing Statutory Auditor of Banca Popolare di Novara S.p.A. from 1/1/2007 to 30/06/2007 (u) Chairman of the Board of Statutory Auditors of Novara Invest SIM S.p.A. under liquidation from 1/1/2007 to 30/06/2007 (v) Standing Statutory Auditor of Novara Vita S.p.A. from 1/1/2007 to 30/06/2007 (w) Chairman of the Board of Statutory Auditors of Holding di Partecipazioni Finanziarie Popolare di Verona e Novara S.p.A. from 1/1/2007 to 30/06/2007 (x) Chairman of the Board of Statutory Auditors of Credito Bergamasco S.p.A. from 1/1/2007 to 30/06/2007 (y) amount inclusive of car, pension funds, SI.PRE, health insurance and accident insurance (z) for offices held with companies of the Group (x1): amount inclusive of the remuneration for participating in the property commission (x2): amount inclusive of the remuneration for participating in the property commission and in the Modena Credit Committee (5) For the office of Director of Popolare Vita S.p.A.from 1/1/2007 to 30/06/2007the due remuneration was paid to Banco (6) For the offices of Director and member of the Executive Committee of Banca Popolare di Novara S.p.A. and Credito Bergamasco S.p.A., Director of Aletti Merchant S.p.A., the due remunerations were paid to Banco Popolare di Verona e Novara. For the office in Banco Popolare Croatia d.d. and in Banco Popolare Ceska Republika no remuneration is foreseen
314 Notes to the consolidated accounts
Directors of the Supervisory and Management Boards, General Managers and Managers with key responsibilities - Banco Popolare – second half
Individual Description of the office Remuneration (thousand euro) Other Remuneration Non- Bonuses considerations Surname and name Office (1) Office term for the monetary and other (4) office(2) benefits (3) incentives Amount Title
SUPERVISORY BOARD Fratta Pasini Carlo Chairman of the Supervisory Board 2007-2009 369 - - - Deputy Vice Chairman of the Supervisory Giarda Dino Piero 2007-2009 376 (x2) - - - Board Comoli Maurizio Vice Chairman of the Supervisory Board 2007-2009 204 (x2) - - - Boroli Marco Director of the Supervisory Board 2007-2009 65 - - - Buffelli Giuliano Director of the Supervisory Board 2007-2009 120 (x2) - - - Castellotti Guido Duccio Director of the Supervisory Board 2007-2009 67 - - - Manzonetto Pietro Director of the Supervisory Board 2007-2009 115 (x2) - - - Marino Maurizio Director of the Supervisory Board 2007-2009 69 - - - Minoja Mario Director of the Supervisory Board 2007-2009 111 (x1)(x2) - - - Rangoni Machiavelli Claudio Director of the Supervisory Board 2007-2009 102 (x2) - - -
MANAGEMENT BOARD Chairman of the Management Board since Coda Vittorio 2007-2009 50 - - - 6/12/2007 Director of the Management Board 2007-2009 40 - - - Chief Executive Officer with Vice Innocenzi Fabio 2007-2009 - (x3)(x4) 27 (a) - 323 (q) Chairman functions 58 (b) 144 (c) 21 (d) 30 (e) 43 (f) Director of the Management Board and Baronio Franco 2007-2009 25 (x4) 32 (a) - 296 (q) General Manager 39 (q1) - (5) Cariello Alfredo Director of the Management Board 2007 - - - 155 (g) Corsi Luigi Director of the Management Board 2007-2009 46 - - - De Angelis Domenico Director of the Management Board 2007 25 (x4) 37 (a) - 242 (q) 35 (h) 33 (q1) (6) Di Maio Maurizio Director of the Management Board 2007 25 (x4) 42 (a) - 204 (s) 61 (i) (7) Fagioli Marzocchi Enrico Maria Director of the Management Board 2007 - 5 (o) - 288 (j) 5 (k) (8) Faroni Maurizio Director of the Management Board 2007 25 (x4) 183 (p) - 201 (q) 39 (l) 26 (q1) (9) Gronchi Divo Chairman of the Management Board until 6/12/2007 631 14 (n) - 15 (m) (10) Director of the Management Board since Marcegaglia Emma 2007-2009 1 - - - 27/12/2007 Director of the Management Board and Minolfi Massimo 2007-2009 25 (x4) 15 (t) - 309 (q) General Manager (11) Romanin Jacur Roberto Director of the Management Board 2007-2009 41 - - -
Other manager with strategic Other manager with strategic permanent - 64 (a) - 799 (q) responsibilities responsibilities 35 (r) (1) All offices were filled as of July 1st, 2007, except for the Director of the Management Board Ms. Emma Marcegaglia, appointed on 27/12/2007, and Mr. Vittorio Coda, former Director of the Management Board since July 1st, 2007 and appointed Chairman of the Management Board on 6/12/07 in substitution of the resigning Mr. Divo Gronchi.
315 Notes to the consolidated accounts
(2) The base salaries include the 2H07 share of profit to the Non-Executive Members of the Supervisory and Management Boards (3) Estimated value (4) Reason for granting other considerations (a) amount inclusive of car, lodging, pension funds, health insurance and accident insurance (b) Vice Chairman and member of the Executive Committee della Banca Popolare di Novara S.p.A. from 1/7/2007 to 31/12/2007 (c) Deputy Vice Chairman and member of the Executive Committee del Credito Bergamasco S.p.A from 1/7/2007 to 31/12/2007. (d) Deputy Vice Chairman of Banca Aletti & C. S.p.A. from 1/7/2007 to 31/12/2007 (e) Director from 1/7/2007 to 31/12/2007 e Vice Chairman of Banca Popolare di Lodi S.p.A. from 12/12/2007 to 31/12/2007 (f) Vice Chairman and member of the Executive Committee of BPV - SGSP S.p.A. from 1/7/2007 to 31/12/2007 (g) Chief Executive Officer and member of the Executive Committee of Cassa di Risparmio di Lucca Pisa Livorno from 1/7/2007 a 31/12/2007 (h) Chief Executive Officer and member of the Executive Committee of Banca Popolare di Novara S.p.A. from 1/7/2007 a 31/12/2007 (i) Chief Executive Officer of Credito Bergamasco from 1/12/2007 to 31/12/2007. (j) Chief Executive Officer and member of the Executive Committee of Efibanca S.p.A. from 1/7/2007 to 31/12/2007 (k) Director of Monticchio Gaudianello S.p.A. from 1/7/2007 to 31/12/2007 (l) Chief Executive Officer of Banca Aletti & C. S.p.A. from 1/7/2007 to 31/12/2007 (m) Vice Chairman of Cassa di Risparmio di Lucca Pisa Livorno until 6/12/2007 (n) amount relating to the car (o) amount inclusive of car and lodging (p) amount inclusive of car, pension funds, SI.PRE, health insurance and accident insurance (q) amount inclusive of gross remuneration and termination benefits (q1) share of profit referring to 2nd half 2007 for the office of Director of Credito Bergamasco S.p.A. (r) for offices held with companies of the Group (s) amount inclusive of gross remuneration and termination benefits for the office of General Manager of Banca Popolare di Novara until 30/11/2007 (t) amount inclusive of car, pension funds, health insurance and accident insurance (5) For the offices of Director of Banca Aletti & C. S.p.A., Banca Popolare di Lodi S.p.A., Bipitalia Ducato S.p.A., Credito Bergamasco S.p.A., Popolare Vita S.p.A. and of Chief Executive Officer of BPV - SGSP S.p.A., the due remuneration was paid to Banco Popolare (6) For the offices of Director of Banca Aletti & C. S.p.A., SGS BP S.p.A., Novara Vita S.p.A, of Director and member of the Executive Committee of Credito Bergamasco S.p.A. and of Vice Chairman of Aletti Gestielle SGR S.p.A., the due remuneration was paid to Banco Popolare. For Auto Trading Leasing IFN S.A., Banco Popolare Croatia d.d., Banco Popolare Ceska Republika a.s. and Banco Popolare Hungary Bank Zrt no remuneration is foreseen (7) For the offices of Director of Banca Popolare di Lodi S.p.A. and of Director and member of the Executive Committee of Credito Bergamasco S.p.A., the due remuneration was paid to Banco Popolare. For the office in Aletti Merchant S.p.A. no consideration was paid (8) For the offices of Director of Partecipazioni Italiane S.p.A. and Efigestioni SGR S.p.A. no remuneration is foreseen (9) For the offices of Chairman of Aletti Gestielle Alternative SGR S.p.A. and AFMezzanine SGR, of Vice Chairman of Aletti Merchant S.p.A., of Managing Director of Aletti Fiduciaria S.p.A., of Director and member of the Executive Committee of Banca Popolare di Novara S.p.A. and of Credito Bergamasco S.p.A., of Director of Efibanca S.p.A. and of Aletti Gestielle SGR S.p.A., the due remuneration was paid to Banco Popolare (10) For offices filled until 6/12/2007: of Chairman of Efibanca S.p.A., of Director and member of the Executive Committee of Banca Popolare di Novara S.p.A. and of Director of BPV - SGSP S.p.A., the due remuneration was paid to Banco (11) For the offices of Director ot Aletti Merchant S.p.A., of Bipielle Real Estate S.p.A., of Cassa di Risparmio di Lucca Pisa Livorno, of Director and member of the Executive Committee of Efibanca S.p.A. and of BPV - SGSP S.p.A., of Chief Executive Officer of Banca Popolare di Lodi S.p.A., the due remuneration was paid to Banco Popolare. For Auto Trading Leasing IFN S.A., Banco Popolare Croatia d.d., Banco Popolare Ceska Republika a.s. no remuneration is foreseen (x1): amount inclusive of the compensation for the office filled in the Supervisory Board under L.D. 231/01 (x2):amount inclusive of the compensation as member of the Audit Committee (x3): compensation for the office of Director of the Management Board not received in compliance with contract agreements (x4): amount relating to attendance counters for participating in the Management Board was passed to the Parent companyBanco Popolare
Compensation of managers with key responsibilities
Top managers ex BPVN – first half
Managers with (in thousand euro) key Directors (**) responsibilities (*)
Total annual gross compensation 1st half 2007 3,037 859 Share of profit 1st half 2007 85 1,615 Total gross compensation retained for offices filled in the interest of the Group 270 437 Short-term benefits - car 49 - - lodging 30 - - accident insurance 6 - - health insurance 7 - Post-employment benefits - pension fund 15 - - supplementary pension scheme 1,580 - Long-term benefits Termination benefits - termination benefits 81 - Share-based payments - stock option assigned during the year - - - share-based rewards - - (*) 6 executives: Chief Executive Officer, General Manager, 3 Vice General Managers and the Head of the Planning Function (**) for a detailed illustration of directors remuneration see the table above
316 Notes to the consolidated accounts
Top Mangers Banco Popolare – second half
Managers with (in thousand euro) key Directors (**) responsibilities (*)
Total annual gross compensation 2nd half 2007 744 3,912 Share of profit 2nd half 2007 82 Total gross compensation retained for offices filled in the interest of the Group 35 992 Short-term benefits - car 22 76 - lodging 14 70 - accident insurance 3 7 - health insurance 3 9 Post-employment benefits - pension fund 22 22 - supplementary pension scheme - 170 Long-term benefits Termination benefits - termination benefits 55 111 Share-based payments - stock option assigned during the year - - - share-based rewards - - (*) 6 managers in charge of : Operations Department, Corporate Center Department, Human Resource Department (of which one resigned and one stepped in in substitution), Legal Affairs, Equity investments and Compliance Department and Administration and Financial Statements Services (**) Members of the Supervisory Board and of the Management Board (of which 2 are also General Manager and one is Head of the Finance Department)
Information required under art. 78 of Consob’s Resolution n. 11971 of May 14th, 1999
Stock options to Directors and Top Managers ex BPVN – first half
Options Options held at the start of the year Options assigned during 1H 2007 Options exercised during 1H 2007 Options held as at June 30th, 2007 expired in 1H Name and Office Number Average Number Average Number Average Number Average Surname Expiration Expiratio Expiration Number of Expiration of exercise of exercise of exercise of exercise date n date date options date options price options price options price options price Fabio Chief Executive 570,000 11.248 June-07 ------570,000 11.248 June-08 Innocenzi Officer Massimo General Manger 350,000 13.64 June-07 - - - 175,000 13.64 June-07 - 175,000 13.64 June-08 Minolfi Other top Other Mangers 205,000 13.64 June-07 - - - 73,750 13.64 June-07 - 131,250 13.64 June-08 managers with key responsibilities 170,000 13.59 June-07 ------170,000 13.59 June-08
Stock options to Directors and Top Managers Banco Popolare – second half
Options Options held as at December 31st, Options held as at July 1st, 2007 Options assigned during 2H 2007 Options exercised during 2H 2007 expired in 2H 2007 Name and Office Number Average Average Average Number Average Surname Expiration Number Expiratio Number Expiratio Number of Expiration of exercise exercise exercise of exercise date of options n date of options n date options date options price price price options price Fabio CEO 570,000 11.248 June-08 ------570,000 11.248 June-08 Innocenzi Massimo Director of the Minolfi Management Board and 175,000 13.64 June-08 ------175,000 13.64 June-08 General Manager Domenico Director of the De Angelis Management 85,000 13.64 June-08 ------85,000 13.64 June-08 Board and Top manager Maurizio Di Director of the Maio Management 40,000 13.64 June-08 ------40,000 13.64 June-08 Board and Top manager Maurizio Director of the Faroni Management 48,750 13.64 June-08 ------48,750 13.64 June-08 Board and Top manager Other top Other managers managers with key 136,500 13.64 June-08 ------136,500 13.64 June-08 responsibilities
317 Notes to the consolidated accounts
2. Transactions with related parties
Financial and commercial relations with subsidiaries, with companies under a significant influence and with jointly controlled companies
Financial and commercial relations with subsidiaries, companies under a significant influence and jointly controlled companies fall under the normal course of business and are carried out at arm’s length.
The tables below show the assets and liabilities as at December 31st, 2007 and the income components of financial year 2007 associated with companies under a significant influence and jointly controlled companies, as well as with key managers and other related parties.
(a) (b) (c) (d) % of Companies Jointly Managers with key Other (thousand euro) Total consolidated under significant controlled responsibilities and related income control companies governance boards parties
Financial assets held for trading 44,560 539 - - 45,099 0.45% Due from banks 2,570,702 194,902 - - 2,765,604 19.49% Customer loans 267,868 857,787 3,184 1,896,873 3,025,712 3.58% Other assets 8,751 21,752 - - 30,503 0.76% Total assets 2,891,881 1,074,980 3,184 1,896,873 5,866,918 4.57%
Due to banks 408,912 84,689 - - 493,601 3.77% Due to customers 358,897 35,140 - - 394,037 0.77% Financial liabilities held for trading 89,113 340,449 - - 429,562 13.75% Other liabilities 21,949 20 - - 21,969 0.44% Total liabilities 878,871 460,298 - - 1,339,169 1.04% Total guarantees given and commitments 66,226 504 213 154,599 221,542
(a) (b) (c) (d) % of Companies Jointly Managers with key Other (thousand euro) Total consolidated under significant controlled responsibilities and related income control companies governance boards parties
Interest income and similar revenues 69,914 37,209 107,123 2.34% Interest expense and similar charges -15,258 -1,555 -16,813 0.61% Commission income 28,569 130,269 158,838 13.52% Commission expense -5,515 -57 -5,572 3.65% Personnel expenses -342 - -342 0.03% Administrative expenses -14,557 - -14,557 0.70% Other operating income (expense) 2,017 277 2,294 0.69%
Relations with Gruppo Banca Italease
Considering the facts and events involving Gruppo Banca Italease, we deem it appropriate to give more detailed information on the financial and commercial relations as at December 31st, 2007 entertained with the above Group, as well as on other relations during the year.
As at December 31st, 2007 our Group had granted a total of 4,527 million euro in loans to companies belonging to Gruppo Banca Italease. The utilization of the granted credit lines as at the same date totaled 3,349 million euro. The table below breaks down the loans and utilizations at year-end by type of credit:
(in million euro) Credit lines Utilization
Cash loans 3,941 2,371 Guarantees and commitments 511 510 Bonds 74 45 Total 4,526 2,956
318 Notes to the consolidated accounts
The following average terms and conditions are being applied to the above credit relations: x Short term loans: Euribor + 50 b.p.; x Unsecured loans: Euribor + 25 b.p.; x Guarantees and other commitments: Euribor + 45 b.p.
With regard in particular to the derivatives trading performed by the Group as offset to Gruppo Banca Italease through the subsidiary Banca Aletti in 2007, note that: x as at December 31st, 2007 about 0.9 billion euro (notional value) in transactions were outstanding. The fair value measurement of said positions was negative for Banca Aletti by about 14.3 million euro, or 1.53% of notional values; x the above transactions generated an income of about 0.4 million euro.
Also other banks of the Group engaged in derivatives trading with Gruppo Banca Italease. As at December 31st, 2007 the fair value measurement of the outstanding positions was negative for the banks of the Group and for Banco Popolare by about 2.4 million euro.
Loans and guarantees given to other related parties
Pursuant to the instructions issued by the Bank of Italy on December 22nd, 2005 for the preparation of the financial accounts and consolidated accounts of banks in compliance with the international accounting standards IAS/IFRS, the tables below provide the required information on key managers of Banco Popolare.
The table below illustrates the loans and guarantees given to related parties under IAS 24, with the exception of subsidiaries and companies under a significant influence.
Loans have been approved in compliance with art. 136 of L.D. n. 385/93.
Guarantees & Cash Total (thousand euro) Commitments Credit line Utilization Credit line Utilization Credit line Utilization a) Directors 3,271 2,464 245 213 3,516 2,677 b) Managers with key responsibilities 2,158 720 2,158 720 c) Close relatives of individuals under letters a) and b) 962 688 1 1 963 689 d) Subsidiary, or associated company, or under significant 4,036,210 1,896,185 186,270 154,598 4,222,480 2,050,783 influence of individuals under letters a) and b)
Other transactions with related parties
The table below shows other relations - provision of goods and services and real estate transactions – conducted by Banco Popolare with related parties as defined under IAS 24, with the exception of subsidiaries and companies under a significant influence.
Purchase and (thousand euro) sale of goods lease and services a) Directors 1,376 34 b) Managers with key responsibilities c) Close relatives of individuals under letters a) and b) 2,051 4 d) Subsidiary, or associated company, or under significant influence of individuals under letters a) and 6,076 231 b)
Transactions with related parties are not material to the financial, operating and profitability results, and to the financial flows of the companies and of the group.
319 Notes to the consolidated accounts
Ownership of shares by directors, statutory auditors, general managers and key managers
In keeping with art. 79 of Consob’s Resolution n. 11971 of May 14th, 1999, the following tables show the shares of the Parent company and of its subsidiaries held by Directors, Statutory Auditors, the General Manager and the Top managers with strategic responsibilities of BPVN, and by Directors, Statutory Auditors, General Managers and Top managers with strategic responsibilities of Banco, as well as their spouses, if not legally separated, and minor children, either directly or through subsidiaries, fiduciary companies or through a nominee. In particular, the first-half table refers to the shares of Banco Popolare di Verona e Novara, while as at July 1st, share ownership refers to the Banco Popolare share.
Ownership of shares of Banco Popolare di Verona e Novara and subsidiaries – first half
Shares owned as at Shares owned as at Purchased shares Sold shares 31-12-2006 30-06-2007 Surname and name Investee company Ownership Ownership Ownership Ownership
Direct Indirect Direct Indirect Direct Indirect Direct Indirect
Fratta Pasini Carlo Banco Popolare di Verona e Novara 81,119 42,119 19,000 100,119 42,119 Credito Bergamasco 200 - 200 - Comoli Maurizio Banco Popolare di Verona e Novara 46,500 25,040 46,500 25,040 Bauli Alberto Banco Popolare di Verona e Novara 64,081 122,416 64,081 122,416 Innocenzi Fabio Banco Popolare di Verona e Novara 412,700 - 412,700 - Credito Bergamasco 200 - 200 - Boroli Marco Banco Popolare di Verona e Novara 2,549 - 2,549 - Buzzi Pietro Banco Popolare di Verona e Novara 2,219 - 2,219 - Campagnolo Valentino Banco Popolare di Verona e Novara 65,350 2,185 65,350 2,185 Corradi Vittorio Banco Popolare di Verona e Novara 40,000 - 40,000 - Credito Bergamasco 100 - 100 - Della Bella Ugo Banco Popolare di Verona e Novara 12,700 - 500 12,700 500 Fedrigoni Giuseppe Banco Popolare di Verona e Novara 30,000 - 30,000 - Guasti Federico Banco Popolare di Verona e Novara 35,000 5,000 35,000 5,000 Loro Piana Sergio Banco Popolare di Verona e Novara 16,125 1,900 16,125 1,900 Marino Maurizio Banco Popolare di Verona e Novara 497 7,553 497 7,553 Nicolò Giuseppe Banco Popolare di Verona e Novara 35,000 2,800 2,500 37,500 2,800 Rana Gian Luca Banco Popolare di Verona e Novara 1,500 1,000 1,500 1,000 Rangoni Machiavelli Claudio Banco Popolare di Verona e Novara 130,000 7,620 5,000 50 135,000 7,670 Credito Bergamasco 200 - 200 - Ravanelli Fabio Banco Popolare di Verona e Novara 7,000 - 7,000 - Righetti Luigi Banco Popolare di Verona e Novara 21,500 - 8,700 30,200 - Vezzalini Gian Carlo Banco Popolare di Verona e Novara 10,000 - 10,000 - Credito Bergamasco 2 - 2 - Zanetta Franco Banco Popolare di Verona e Novara 5,339 433 5,339 433 Dezzani Flavio Banco Popolare di Verona e Novara 12 - 12 - Buffelli Giuliano Banco Popolare di Verona e Novara 1,000 64,000 5,000 1,000 69,000 Credito Bergamasco 30 500 30 500 Calderini Maurizio Banco Popolare di Verona e Novara 3,533 362 3,533 362 Gaiani Carlo Banco Popolare di Verona e Novara 32,086 - 32,086 - Tantini Giovanni Banco Popolare di Verona e Novara 2,324 1,000 2,324 1,000 Minolfi Massimo Alfonso Banco Popolare di Verona e Novara 115,000 - 175,000 107,585 182,415 - Credito Bergamasco 50 - 50 - Papa Giorgio Banco Popolare di Verona e Novara 26,210 - 25,000 15,365 35,845 - Minotti Francesco ------Faroni Maurizio Banco Popolare di Verona e Novara 87,600 - 48,750 44,570 91,780 - Franceschini Marco Banco Popolare di Verona e Novara 9,380 - 9,380 - Notes: all shares are fully owned
320 Notes to the consolidated accounts
Ownership of shares of Banco Popolare and subsidiaries – second half
Shares and warrants Purchased shares and Sold shares and Shares and warrants owned as at owned as at 01-07-2007 warrants warrants 31-12-2007 Surname and name Investee company Ownership Ownership Ownership Ownership
Direct Indirect Direct Indirect Direct Indirect Direct Indirect
SUPERVISORY BOARD Fratta Pasini Carlo Banco Popolare - shares 100,119 42,119 15,000 115,119 42,119 Credito Bergamasco - shares 200 - 200 - Giarda Dino Piero Banco Popolare - shares 13,223 1,320 3,680 13,223 5,000 Banco Popolare - warrant 2,100 - 2,100 - Comoli Maurizio Banco Popolare - shares 46,500 25,040 59,000 46,500 84,040 Boroli Marco Banco Popolare - shares 2,549 - 2,549 - Buffelli Giuliano Banco Popolare - shares 1,000 69,000 52,000 1,000 121,000 Credito Bergamasco shares 30 500 30 500 Castellotti Guido Duccio Banco Popolare - shares 860 - 1,140 2,000 - Manzonetto Pietro Banco Popolare - shares 52 - 52 - Marino Maurizio Banco Popolare - shares 497 7,553 5,680 6,177 7,553 Minoja Mario Banco Popolare - shares 33 - 1,000 1,033 - Rangoni Machiavelli Claudio Banco Popolare - shares 135,000 7,670 20,000 1,000 155,000 8,670 Credito Bergamasco shares 200 - 200 - MANAGEMENT BOARD Coda Vittorio Banco Popolare - shares 30 400 300 330 400 Credito Bergamasco shares 64 - 64 - Innocenzi Fabio Banco Popolare - shares 412,700 - 412,700 - Credito Bergamasco shares 200 - 200 - Baronio Franco Banco Popolare - shares 23,413 - 6,700 30,113 - Credito Bergamasco shares 100 - 100 - Cariello Alfredo - - - - Corsi Luigi Banco Popolare - shares 120 - 2,000 2,120 - Banco Popolare - warrant 1,503 - 1,503 - De Angelis Domenico Banco Popolare - shares 101,915 - 101,915 - Credito Bergamasco shares 50 - 50 - Di Maio Maurizio Banco Popolare - shares 140,485 - 15,000 155,485 - Fagioli Marzocchi Enrico Maria Banco Popolare - shares 2,808 - 2,192 5,000 - Faroni Maurizio Banco Popolare - shares 91,780 - 91,780 - Gronchi Divo Banco Popolare - shares 41,640 - 38,376 80,016 - Marcegaglia Emma Banco Popolare - shares 8,960 - 8,960 - Minolfi Massimo Alfonso Banco Popolare - shares 182,415 - 182,415 - Credito Bergamasco shares 50 - 50 - Romanin Jacur Roberto Banco Popolare - shares 2,200 8,269 6,600 6,600 8,800 14,869 KEY MANAGERS Apicella Guerra Giuseppe - - - - Franceschini Marco Banco Popolare - shares 9,380 - 9,380 - Menestrina Lucio Banco Popolare - shares 3,150 - 3,850 7,000 - Rigodanza Ottavio Banco Popolare - shares 53,370 - 2,000 55,370 - Speziotto Roberto - - - - Val Gianpietro Banco Popolare - shares 8,500 - 8,500 - Notes: all shares are fully owned
Bonds held by Directors, statutory auditors, general managers and key managers
Not applicable. Directors, statutory auditors, general managers and key mangers hold no convertible bonds.
321 Notes to the consolidated accounts
CHAPTER I – SHARE-BASED PAYMENTS
QUALITATIVE INFORMATION
1. Description of share-based payment agreements
Stock option plan
The Board of Directors of former Banca Popolare di Verona – Banco S.Geminiano e S.Prospero on October 23rd, 2001 had approved the main guidelines of a Stock Option Plan for the managers of the Bank and of the Group, giving the Board of Directors, under art. 2443 of the civil code, the faculty to carry out a dedicated share capital increase to the exclusive service of the approved Plan. Said decisions were then approved by the Special Meetings for the merger of Banca Popolare di Verona – Banco S.Geminiano e S.Prospero and Banca Popolare di Novara held on March 9th, 2002, leading to the formation of Banco Popolare di Verona e Novara. The same Shareholders had then granted the Board of Directors of Banco Popolare di Verona e Novara the faculty to carry out a capital increase exclusively to service the plan for a maximum nominal amount of 26,431,362 euro through the issue of max 7,342,045 common shares. In compliance with the above mentioned mandates, on July 2nd, 2002 the Regulations of the stock option plan of Banco Popolare di Verona e Novara were approved. The plan aimed at fostering a teamwork approach across its management, with a strong focus on the Group’s strategic objectives, as well as at increasing the Group’s ability to retain its most valuable human resources and to cater for the best talents present on the market. The plan provides for the grant of registered, personal and non transferable rights to subscribe newly issued Banco common shares to those managers who, according to the Board of Directors’ undisputable opinion, may have a relevant impact upon the success and the results achieved by Banco and by the Group at large. The plan envisages three yearly grant cycles. Granted options can be exercised later after three years from the grant and within the following three years thereon, provided that on the exercise date there is still an outstanding employment relationship with any one company of the Group. The option exercise price shall not be lower than the greater between the share normal and nominal values. The normal value is the mean of the prices registered by the Milan Stock Exchange in the time window between the option grant date and the same date of the solar month before the grant.
On the same date, the validity was confirmed – and hence the suspension clause discontinued – of the effects of a total of 2,668,000 options already granted on January 26th, 2002 to managers of Gruppo Banca Popolare di Verona - Banco S.Geminiano e S.Prospero, based upon the resolutions passed by its Board of Directors. As a result, said options shall still bear their effects on Banco Popolare di Verona e Novara upon a one to one exchange ratio between shares of Banca Popolare di Verona - Banco S.Geminiano e S.Prospero and those of Banco Popolare di Verona e Novara. The exercise price of said options is that fixed at the time of their original grant, equal to €11.247 per share. On the same date, the completion of the first grant cycle was approved, with the grant of further 1,122,000 options, with an exercise price of €13.4 per share.
The second grant was carried out in financial year 2003, with the grant of 1,241,000 new options at the average exercise price of 10.554 euro, while 823,500 options were cancelled because the managers to whom they had been granted have left the company.
In financial year 2004, 2,572,000 additional new shares have been granted at the exercise price of 13.726 euro, while again as a result of the resignation of granted managers, 21,000 were cancelled.
In May 2005, a total of 1,020,500 options were exercised; during the year, 70,000 options were cancelled and no new grants were carried out.
During 2006 the vesting period for the second tranche of the plan ended and as a result between June 1st and 30th, 2006 (calendar month following the month in which the General Meeting was held) beneficiaries could exercise the above options and the residual options from the first tranche that had not been exercised yet. On said occasion, a total of 2,392,500 options were exercised, against which on July 3rd, 2006, 3,392,500 new shares were issued. In 2006, n. 28,000 options were cancelled and no new grants were carried out.
In first half 2007 the vesting period for the third tranche of the plan ended and as a result the beneficiaries exercised said options, together with the residual options from the first and second tranche that had not yet been exercised. On said occasion, a total of 1,086,250 options were exercised, against which on June 19th, 2007, 1,086,250 new shares were issued. In 2007, no options were cancelled and no new grants were carried out. Upon approving the Merger between Banco Popolare di Verona e Novara and Banca Popolare Italiana, leading to the formation of Banco Popolare Società Cooperativa, the shareholders of BPVN and BPI, on March 10th, 2007, gave mandate to the Management Board to carry out a capital increase for the newly formed Banco Popolare to service the stock option plan for a max. number of shares corresponding to the number of assigned options that on that date had not been exercised yet.
322 Notes to the consolidated accounts
QUANTITATIVE INFORMATION 1. Annual changes
31 December 2007 31 December 2006
number of average average number of average average options prices maturity options prices maturity
A. Opening balance 3,247,500 13.132 5 months 5,668,000 12.225 9.34 B. Increases ------B.1 new issues ------B.2 other changes ------C. Decreases 1,086,250 - - 2,420,500 - - C.1 cancelled - - - 28,000 - - C.2 exercised 1,086,250 13.509 - 2,392,500 11.351 - C.3 expired ------C.4 other changes ------D. Closing balance 2,161,250 12.944 6 months 3,247,500 13.132 5 months E. Options exercisable at the end of 2,161,250 12.944 6 months 3,247,500 13.132 5 months the year 2. Other information
The stock option plan described above is part of share-based payment transactions. The associated cost has already been fully charged to income in the previous years.
Shown below is the information required by Consob with resolution n. 11508 of February 15th, 2000.
31 December 2007 31 December 2006
Number of Average Number of Average Market price Market price shares exercise price shares exercise price
(1) Options outstanding at start of period 3,247,500 13.132 21.720 5,668,000 12.225 17.090 (2) New options assigned in the period ------(3) Options exercisable in the period 1,086,250 13.509 22.03 2,392,500 11.238 20.430 (4) Options expired in the period ------(5) Options cancelled in the period - - - 28,000 (*) - - (6) Options outstanding at end of period 2,161,250 12.944 15.069 3,247,500 13.132 21.720 of which: exercisable 2,161,250 (**) 12.944 15.069 3,247,500 13.132 21.720 The market price is the average of the different dates, weighed for the amount of shares for (2), (3), (4) and (5), spot for (1) and (6). In case of assignment of free shares, options shall have an exercise price equal to zero. (*) Cancelled options as the managers to which they had been assigned are not working with the Group anymore (**) of which: 55,000 exercisable in 2008, 647,500 exercisable in 2008 and 2009 and 1,458,750 exercisable in 2008, 2009 and 2010.
Options assigned as at 31/12/2007 of which exercisable (vested) Exercise prices Residual contract life (euro denominated) between 1 and Average residual below 1 year above 3 years Total Total 3 years contract life Below or equal to 10 ------Above 10 and below or equal to 12 702,500 (*) - - 702,500 702,500 (***) Above 12 and below or equal to 15 1,458,750 (**) - - 1,458,750 1,458,750 (****) Above 15 ------Total 2,161,250 - - 2,161,250 2,161,250 - (*) of which 625,000 options assigned in 2002 and 77,500 options assigned in 2003 (**) 3rd tranche options assigned in 2004 (***) 55,000 exercisable in 2008, 647,500 exercisable in 2008 and 2009 (****) exercisable in 2008, 2009 and 2010.
With regard to the Supplementary Pension Plan - Sistema di Previdenza Integrativa (S.I.Pre.), given the charges generated by said liabilities, the Parent company subscribed an insurance policy, whose value at the balance sheet date was recognized under item 30 “Financial assets measured at fair value” of the balance sheet assets.
323
ATTACHMENTS
Head offi ce Banca Aletti, Milan Attachments
326 Attachments
Table of significant shareholdings under art. 126 of Consob’s Regulation n. 11971 of May 14th, 1999 (*) (Shareholdings above 10% of capital represented by shares with voting rights in unlisted companies, held directly or indirectly at any title)
Percentage Type of Investee company Investing company ownership Direct Indirect
Aosta Factor S.p.A. 13.79% Banca Popolare di Verona Ownership Applicomp (India) Ltd 43.20% Partecipazioni Italiane Ownership Archimede 1 S.p.A. 15.00% Banco Popolare Ownership Banca Bipielle Network S.p.A. 19.90% Banco Popolare Ownership Banca della Nuova Terra S.p.A. 15.00% Banco Popolare Ownership Biasi S.p.A. 10.60% Efibanca Ownership Centrale dei Bilanci S.p.A. 9.56% Banco Popolare Ownership " 0.71% Credito Bergamasco Ownership " 0.56% Cassa di Risparmio di Lucca Pisa Livorno Ownership Cossi Costruzioni S.p.A. 15.00% Efibanca Ownership De Fonseca S.p.A. 15.00% Efibanca Ownership Delta S.p.A. 13.29% Banco Popolare Ownership Deltadator S.p.A. 16.90% Efibanca Ownership Earchimede S.p.A. 10.73% Banco Popolare Ownership Ente per lo sviluppo Zona Porto Industriale 19.73% Cassa di Risparmio di Lucca Pisa Livorno Ownership Euros Consulting S.p.A. under liquidation 6.60% Banco Popolare Ownership " 2.07% Holding di Partecipazioni Ownership " 0.74% Credito Bergamasco Ownership " 0.58% Banca Popolare di Crema Ownership " 1.54% Banca Popolare di Cremona Ownership Faster Holding S.p.A. 15.00% Efibanca Ownership Fira Servizi S.r.l. 15.00% Banca Caripe Ownership Flashmallit S.p.A. 15.60% Efibanca Ownership Gruppo Stabila S.p.A. 12.13% Efibanca Ownership H.D.C. S.p.A. 15.14% Efibanca Ownership Hopa S.p.A. 7.40% Banco Popolare Ownership " 8.39% Banca Popolare di Lodi Pledge " 1.53% Banca Valori Pledge ILP I S.c.a.r.l 21.56% Efibanca Ownership ILP II S.c.a.r.l 21.59% Efibanca Ownership ILP III S.c.a.r.l 22.03% Efibanca Ownership LU.CEN.SE. S.p.A. 12.50% Cassa di Risparmio di Lucca Pisa Livorno Ownership Natura Appennino S.r.l. (under liquidation) 15.00% Banca Popolare di Verona Ownership Nolitel Italia S.r.l. (under liquidation) 100.00% Partecipazioni Italiane Ownership Pama S.p.A. 12.00% Efibanca Ownership Pantex International S.p.A. 13.32% Efibanca Ownership Ponte S.p.A. 10.87% Efibanca Ownership Porto Industriale di Livorno S.p.A. 12.15% Cassa di Risparmio di Lucca Pisa Livorno Ownership Premuda Chartering Navegacao Lda 14.00% Efibanca Ownership Riello Sistemi S.p.A. 18.17% Efibanca Ownership SAGA - Società Abruzzese Gestione 10.73% Banca Caripe Ownership Aeroporto S.p.A. Spal Automotive S.r.l. 12.00% Efibanca Ownership Tecnosistemi S.p.A. 14.50% Efibanca Ownership United Business Holding S.p.A. 17.50% Banco Popolare Ownership Zucchetti. Com S.p.A. 15.00% Banco Popolare Ownership Acquarius S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Ai Mori S.n.c. 100.00% Banca Popolare di Verona Pledge Albergo Basilea S.r.l. 100.00% Banca Popolare di Verona Pledge Ambienti Contemporanei S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Aro Tubi Trafilerie S.p.A. 30.33% Banca Popolare di Lodi Pledge Azienda Agricola di Gradella S.p.A. 33.33% Banca Popolare di Lodi Pledge Berinal SA 100.00% Banca Popolare di Lodi Pledge Bertani Holding S.p.A. 27.42% Banca Popolare di Verona Pledge
327 Attachments
Percentage Type of Investee company Investing company ownership Direct Indirect
Blumen S.r.l. 100.00% Efibanca Pledge Carlo Raimondi fu Rodolfo S.p.A. 13.05% Banca Popolare di Verona Pledge Cartiera Fenili S.r.l. 84.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Castel-Service S.r.l. 100.00% Banca Popolare di Verona Pledge Consultinvest S.p.A. 13.59% Banca Popolare di Verona Pledge Deca S.r.l. 60.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Delfino S.p.A. 51.00% Banca Popolare di Verona Pledge Delta Due S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Edilcementi S.p.A. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Edilversil S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Editoriale Olimpia S.p.A. 68.00% Banca Popolare di Verona Pledge Farmigea S.p.A. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Fenice S.r.l. 100.00% Banca Popolare di Lodi Pledge F.F.M. S.r.l. 40.00% Banca Popolare di Verona Pledge FMH S.p.A. 25.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Fosber S.p.A. 30.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Gesimm S.p.A. 40.00% Banca Popolare di Lodi Pledge Gestioni Armatoriali S.p.A. 27.50% Banca Popolare di Novara Pledge Green Park S.r.l. 100.00% Banca Popolare di Verona Pledge Grifil S.r.l. 70.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Gruppo Stabila S.p.A. 11.66% Banca Popolare di Verona Pledge GSV Marmi S.r.l. 50.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Immobiliare il Piroscafo S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Immofin S.p.A. 51.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Intergomma S.p.A. 50.01% Cassa di Risparmio di Lucca Pisa Livorno Pledge I.T.N. S.p.A. 80.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Latin Spark Italia S.r.l. 51.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge MAE S.p.A. 75.00% Banca Popolare di Novara Pledge Maitò S.r.l. 89.50% Cassa di Risparmio di Lucca Pisa Livorno Pledge Marmi Vicenzi S.p.A. 100.00% Banca Popolare di Verona Pledge ME.RO. S.r.l. 70.50% Cassa di Risparmio di Lucca Pisa Livorno Pledge Milainvest Real Estate S.p.A. 30.00% Banca Popolare di Cremona Pledge Misterday S.r.l. 80.00% Banca Popolare di Verona Pledge Moby S.p.A. 11.41% Cassa di Risparmio di Lucca Pisa Livorno Pledge Monticello Marmi S.r.l. 51.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge New Versilcraft S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Odissea S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Oikos S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Panischi S.r.l. 100.00% Banca Popolare di Lodi Pledge Pierre S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Pierre Uno S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Plastic Company S.p.A. 22.22% Banca Popolare di Verona Pledge Pneus 2000 S.p.A. 20.00% Banca Popolare di Verona Pledge Seif S.p.A. 15.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Sirmione Gestioni S.r.l. 100.00% Banca Popolare di Verona Pledge Sollinox S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Stella Bianca S.p.A. 52.50% Banca Popolare di Lodi Pledge Telma S.r.l. 52.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge Tenuta delle Ripalte - Vallorita S.p.A. 25.75% Banca Popolare di Verona Pledge Tofani Antonino e Tiraboschi Mattia e C. S.r.l. 100.00% Cassa di Risparmio di Lucca Pisa Livorno Pledge TTL S.r.l. 100.00% Efibanca Pledge Villa Quaranta Park S.p.A. 100.00% Banca Popolare di Verona Pledge Villa Sarda S.r.l. 100.00% Banca Popolare di Lodi Pledge Unide S.p.A. 74.19% Banca Popolare di Lodi Pledge Waterland S.r.l. 100.00% Banca Popolare di Verona Pledge Wemar 2002 S.r.l. 100.00% Banca Popolare di Verona Pledge Zaga S.r.l. 100.00% Banca Popolare di Verona Pledge (*) The list does not include companies shown in item 100 (Equity investments) already indicated in this document
328 Attachments
Reconciliation between income statement items and the reclassified income statement
Reclassified income statement Reclassified 2007 Reclassification (in thousand euro) statement
10 Interest income and similar revenues 4,582,419 4,582,419 20 Interest expense and similar charges -2,767,830 24,549 -2,743,281 240 Profit (Loss) on equity investments 259,882 -382,402 -122,520 Net interest, dividend and similar income 2,074,471 -357,853 1,716,618 40 Commission income 1,174,507 1,174,507 50 Commission expense -152,533 -152,533 220 Other operating income (expense) 334,864 -163,353 171,511 Net financial income: 20 Interest expense and similar charges -40,445 -40,445 70 Dividend and similar income 138,617 138,617 80 Net trading income 46,559 46,559 90 Fair value adjustments in hedge accounting -199 -199 100 Profit (loss) on disposals or repurchases 143,338 -398 142,940 110 Profit (loss) on financial assets and liabilities measured at FV 172,919 172,919 Other operating income 1,858,072 -204,196 1,653,876 Total income 3,932,543 -562,049 3,370,494 180 Personnel expenses -1,369,577 159,313 -1,210,264 180 Other administrative expenses -723,232 176,946 -546,286 200 Net impairment / write-backs on property, plant and equipment -79,370 -79,370 210 Net impairment / write-backs on intangible assets -72,591 14,273 -58,318 Operating costs -2,244,770 350,532 -1,894,238 Profit from operations 1,687,773 -211,517 1,476,256 100 Profit (loss) on disposals or repurchases 398 398 130 Net write-downs/write-backs on impairment -452,189 15,896 -436,293 190 Net provisions for risks and charges -106,421 -106,421 260 Goodwill impairment - -170,409 -170,409 240 Profit (loss) on equity investments 552,811 552,811 270 Profit (loss) on disposal of investments 19,947 19,947 Income before tax from continuing operations 1,149,110 187,179 1,336,289 290 Tax on income from continuing operations -504,886 -63,230 -568,116 Income after tax from continuing operations 644,224 123,949 768,173 310 Income (loss) after tax from discontinued operations 15,081 15,081 Integration charges – after tax - -123,949 -123,949 Net income for the period 659,305 123,949 783,254 330 Minority interest -42,082 -42,082 Net income for the period attributable to the Parent company 617,223 - 617,223
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