CONSOLIDATED INTERIM REPORT ON OPERATIONS AS AT 30 SEPTEMBER 2020
Consolidated interim report on operations as at 30 September 2020 Contents
The present document is the English translation of the Italian Consolidated interim report on operations, prepared for and used in Italy, and has been translated only for the convenience of international readers. The Consolidated interim report on operations was prepared using International Reporting Standards (IAS/IFRS); therefore it is not intended to present the financial position and results of operations and cash flows according to accounting principles and practices other than IAS/IFRS.
BPER Banca S.p.A. Head office in Via San Carlo 8/20, Modena, Italy Tel. 059/2021111 – Fax 059/2022033 Register of Banks no. 4932 Parent Company of the BPER Banca S.p.A. Banking Group Registered in the Register of Banking Group with ABI code 5387.6 http://www.bper.it, http://istituzionale.bper.it; E-mail: [email protected] – Certified e-mail (PEC): [email protected] Company belonging to the BPER Banca VAT Group VAT no. 03830780361 Tax Code and Modena Companies Register no. 01153230360 Modena Chamber of Commerce 222528 Share capital as at 28 October 2020 € 2,100,435,182.40 Member of the Interbank Deposit Protection Fund and of the National Guarantee Fund Ordinary shares listed on the MTA market
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Consolidated interim report on operations as at 30 September 2020 Contents
Contents
Directors and officers of the Parent Company at the date of approval of the consolidated interim report on operations as at 30 September 2020 page 5
Group interim report on operations as at 30 September 2020 page 7
Consolidated financial statements
Consolidated balance sheet as at 30 September 2020 page 75 Consolidated income statement as at 30 September 2020 page 76 Consolidated statement of other comprehensive income page 77 Consolidated statement of changes in shareholders' equity page 78
Explanatory notes
Form and content of the consolidated interim report on operations as at 30 September 2020 page 81 Information on the consolidated balance sheet page 95 Information on the consolidated income statement page 111 Information on risks and related hedging policies page 123 Information on consolidated shareholders' equity page 131 Information on business combinations page 137
Attachments Financial statements of the Parent Company page 141 Restatement of the Reclassified balance sheet of the Parent Company as at 31 December 2019 page 143 Restatement of the Reclassified income statement of the Parent Company as at 30 September 2019 page 145 Information on loans to third-party funds page 146 Geographical organisation page 151
Certifications of the Manager responsible for preparing the Company's financial reports page 153
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Messaggio pubblicitario istituzionale. Consolidated interim report on operations as at 30 September 2020 Corporate officers
Directors and officers of the Parent Company at the date of approval of the consolidated interim report on operations as at 30 September 2020
Board of Directors
Chairman: Pietro Ferrari
Deputy chairman: Giuseppe Capponcelli
Chief Executive Officer: * Alessandro Vandelli
Directors: * Riccardo Barbieri Massimo Belcredi Mara Bernardini * Luciano Filippo Camagni Alessandro Robin Foti Elisabetta Gualandri Silvia Elisabetta Candini (#) Ornella Rita Lucia Moro * Mario Noera Marisa Pappalardo * Rossella Schiavini Valeria Venturelli
(*) Members of the Executive Committee
Board of Statutory Auditors
Chairman: Paolo De Mitri
Acting Auditors: Cristina Calandra Buonaura Diana Rizzo Francesca Sandrolini Vincenzo Tardini
Substitute Auditors: Patrizia Tettamanzi Veronica Tibiletti
(#) Silvia Elisabetta Candini was appointed at the Shareholders' Meeting of 6 July 2020. The authorised number of directors was restored following the resignation of Roberta Marracino with effect from 30 June 2020.
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Consolidated interim report on operations as at 30 September 2020 Corporate officers
General Management
General Manager: Alessandro Vandelli
Deputy General Managers:* Stefano Rossetti (Vice) Eugenio Garavini Pierpio Cerfogli Gian Enrico Venturini
Manager responsible for preparing the Company's financial reports
Manager responsible for preparing the Marco Bonfatti Company's financial reports:
Independent Auditors
Deloitte & Touche s.p.a.
(*) Claudio Battistella (formerly the Deputy General Manager responsible for the Lending Department) resigned with effect from 12 April 2020.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Group interim report on operations as at 30 September 2020
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Contents
Introduction page 9
1 . Key figures 1.1 BPER Banca Group's structure as at 30 September 2020 page 11 1.2 Summary of results page 12 1.3 Performance ratios page 15
2 . Significant events and strategic transactions 2.1 Increase in share capital of BPER Banca and acquisition of a business line from the Intesa Sanpaolo Group page 17 2.2 The 2019-2021 Business Plan of the BPER Banca Group: update of financial forecasts page 19 2.3 Covid-19 emergency: strategies adopted by BPER Banca Group page 22 2.4 Progress of de-risking activities page 24 2.5 Other significant events page 25 2.6 Subsequent events to the 30 September 2020 page 30 2.7 European Single Supervisory Mechanism (SSM) page 30
3. Scope of consolidation of the BPER Banca Group 3.1 Composition of the Group as at 30 September 2020 page 33
4 . The BPER Banca Group's results of operations 4.1 Balance sheet aggregates page 36 4.2 Own funds and capital ratios page 49 4.3 Reconciliation of consolidated net profit/shareholders' equity page 51 4.4 Income statement aggregates page 53 4.5 Employees page 62 4.6 Geographical organisation page 62
5 . Other information 5.1 Treasury shares in portfolio page 63 5.2 Share price performance page 63 5.3 Rating as at 30 September 2020 page 64 5.4 Disclosure of exposures to sovereign debt held by listed companies page 66 5.5 Contributions to the Single Resolution Fund and the Deposit Guarantee Fund and developments in the Interbank Deposit Protection Fund: Voluntary scheme and Solidarity Fund page 69 5.6 Inspections and audits page 69
6 . Outlook for operations 6.1 Outlook for operations page 72
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Introduction
The world economy in the third quarter confirmed the signs of recovery already visible in June after it collapsed in March and April at the height of the Covid-19 pandemic. However, significant differences have emerged from country to country: while the pace of growth in China and the United States remained fairly constant throughout the period, in Europe the recovery suffered a gradual deceleration. This difference also had an impact on the dynamics of consumer prices: while inflation in the United States showed some signs of recovery, in Europe - and in Japan - it remained at all-time lows.
Analysing the individual areas, in the Eurozone the economy showed encouraging signs of recovery at the beginning of the third quarter, having suffered an 11.8% contraction in the period April to June compared with the previous quarter. A classic leading indicator of the business cycle, the Purchasing Managers Index (PMI), returned into the expansion area thanks to a simultaneous improvement in both manufacturing and services. In September, however, the situation deteriorated in the wake of developments on the health emergency front: with a new increase in the number of Covid-19 infections, various countries were forced to adopt new containment measures. Inevitably, the most affected were businesses in the services sector: being the most exposed to social distancing procedures, they showed no signs of growth, with the result that the Eurozone PMI for Services fell again, indicating a contraction. This renewed weakness was also reflected in the inflation rate, which was negative in September at -0.3% compared with the previous year. There was no particular news on the monetary policy front, apart from confirmation from the European Central Bank of its commitment to increase stimuli if necessary. In terms of fiscal policies, following the proposal formulated a few weeks earlier by the European Commission, in July the Heads of State of the EU-Member Countries reached an agreement for a new EU- wide aid plan. Through a total endowment of Euro 750 billion (Euro 360 billion in loans and Euro 390 billion in grants), support will be disbursed over the coming years to the economies of the countries most affected by the pandemic.
Nothing new to report on the Brexit front. Negotiations are still underway between the United Kingdom and the European Union to come to an agreement that regulates relations between London and Brussels (especially for trade) when the transition period ends on 31 December. Although the talks between the respective negotiators have been intense in recent months, no agreement has been reached.
As regards Italy, the economy has more or less followed the trend of the entire Eurozone. Despite an apparent recovery in the summer, the economy as a whole - measured by the Composite PMI - returned close to stagnation, at the same time that the deflationary pressures that had already appeared in the second quarter got worse (the figure for Italian inflation in September was -0.5% compared with the previous year) .
In the United States, the economic cycle remained expansionary throughout the quarter. The labour market continued its slow but steady path of normalisation, with the result that unemployment - having reached 14.7% in April - gradually decreased to 7.9% in September. Private consumption, represented by retail sales, helped by generous government subsidies, started growing again in line with the trend seen just before the pandemic, while the various PMIs remained firmly in the expansion area throughout the period (the Composite PMI figure for September was 54.3). Inflation, which decreased significantly during the months of lockdown, showed signs of recovery: in August the general index rose by 1.3% compared with the previous year, while the core index - net of the more volatile components - saw an
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increase of 1.7%. In the area of monetary policy, the Federal Reserve confirmed that it was determined to support the recovery: after extending all of the loan programmes introduced to help the American economy until the end of the year, the U.S. Central Bank reiterated that interest rates will remain at their current level until the United States has completely overcome the crisis and brought closer to the goals of full employment and price stability. Governor Powell also announced a transition to an "average inflation" system: the Fed's target will no longer be a spot value of 2%, but "an average inflation of 2% over time". In concrete terms, this suggests that the Central Bank will tolerate periods of varying length when the consumer price inflation can exceed 2% without the Fed necessarily having to intervene by tightening its monetary policy. On the fiscal policy front, however, there continued to be a stalemate within the U.S. Congress for the launch of the new aid package for the economy and, at this point, its approval before the U.S. Presidential Elections appears more and more unlikely.
The recovery of the global economy has naturally also affected emerging countries, although some of them have had to deal with a Covid-19 related health situation that is still very critical. Similarly to what happened in developed countries, emerging economies also continued to find support from expansionary monetary policies; some central banks, such as those of Brazil, South Africa and Russia, actually intervened during the third quarter by again reducing their official rates.
On the strength of its exit from lockdown prior to the other main macro areas and thanks to the support measures implemented by the central government, China consolidated the signs of economic recovery that had already emerged in the second part of the first half.
As regards financial markets, the third quarter of the year confirmed the generally good trend, so that the main asset classes - equities and bonds - turned in positive changes, apart from a few rare and not very significant exceptions. The MSCI AC World equity index closed 7.67% up, although there was strong polarisation at both sector and geographical level: in fact, after the second-quarter corporate results, investors rewarded above all the technology giants, at the same time penalising those stocks, such as energy and financial, that are more closely linked to the economic cycle. The indices with a greater technological content, such as those in the U.S.A., were therefore the real protagonists of this battle (the S&P500 rose by 8.47%), while the European stock exchanges, largely represented by companies operating in more traditional businesses, stayed more or less where they were (the Stoxx600 turned in a modest +0.21%, while the Italian index, the FtseMib, managed to fall by 1.86%). There were also positive changes in Asian markets (Japan's Topix: +4.28%), as well as in emerging markets (MSCI Emerging Markets: +8.73%), helped by the weak dollar. In bonds, government securities were supported by the intervention of the Central Banks and by a certain diffidence, still very widespread, regarding the path of economic recovery. The performance of the bonds of the Euro-peripheral countries was particularly brilliant, as they were the major beneficiaries of the EU aid plan approved in July, posting a widespread rise in prices. A certain appetite for risk also favoured emerging nation and corporate bonds, once again favoured by the search for yield on the part of operators. In currency terms, the Euro appreciated against all the main G10 currencies, particularly against the US dollar, which lost more than 4% during the quarter. The aid plan approved by EU leaders to counter the effects of the pandemic sent a clear signal about the desire to strengthen what are, all too often, the precarious foundations of the European Union, and this also provided support for the single currency. Lastly, among raw materials, oil ended the quarter essentially unchanged, while gold was once again pushed upwards (+5.89%) by a further compression of real American interest rates.
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1. Key figures
1.1 BPER Banca Group's structure as at 30 September 2020
BPER Bank Finitalia S.p.A. 78.547% Bibanca S.p.A. 20.522% 100.000% Luxembourg S.A. 100.000% 99.069%
Arca Holding S.p.A. Emilia Romagna Factor 57.061% S.p.A. Banco di Sardegna S.p.A. (d) 95.954% 100.000% (a)
Estense CPT Covered Arca Fondi S.p.A. SGR Bond S.r.l. Tholos S.p.A. 100.000% 60.000% 100.000% (c)
Nadia S.p.A. Modena Terminal S.r.l. Numera S.p.A. 100.000% 100.000% 100.000%
BPER Trust Company 46.933% Optima S.p.A. - SIM S.p.A. 52.741% Sardaleasing S.p.A. 100.000% 100.000% 99.674% (c)
Estense Covered Bond BPER Credit S.r.l. 70.000% Management S.C.p.A. 20.000% 60.000% 100.000% (c) (b)
a) Equivalent to 98.677% of the entire Share Capital consisting of In addition to the above members of the banking group, the scope of consolidation also includes ordinary and preference. the following subsidiary companies which are not members of the banking group since they do not b) The following Companies are also shareholders of BPER Credit contribute directly to its activities. Management S.C.p.A.: These companies are consolidated under the - Sardaleasing S.p.A. (6.000%); equity method of the Parent Company: - Bibanca S.p.A. (3.000%); - Adras S.p.A. (100%); - Emilia Romagna Factor S.p.A. (1.000%). - Italiana Valorizzazioni Immobiliari S.r.l. (100%); - Sifà S.p.A. (51%). c) Subsidiary companies consolidated under the equity method.
d) Subsidiary company which is not member of the banking group since it does not contribute directly to its activities.
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1.2 Summary of results
The profit made by the BPER Banca Group in the first nine months of 2020, Euro 200.6 million, is 61.64% down on the figure reported at 30 September 2019. A number of non-recurring components, already recorded in the first half, had an impact on the results: (i) the recognition of additional expected losses on loans of over Euro 90 million (including about Euro 50 million already prudentially provided for in the first quarter of 2020) as a significant reaction to the deterioration of the macroeconomic situation caused by the healthcare emergency, (ii) the recognition of impairment losses on loans totalling Euro 16.4 million on the "Spring" securitisation of bad loans in the second quarter, (iii) adjustment of the profit-sharing contribution payable to the Resolution Fund in accordance with the agreements associated with the purchase of Nuova Carife s.p.a. (Euro 11.5 million payable to the seller following the recovery of prior-year tax losses), (iv) the recognition of impairment on equity investments for a total of Euro 8.2 million. Profit for the third quarter of 2020 stands at Euro 95.9 million, a decrease compared with Euro 98.6 million in the second quarter, but a distinct increase on Euro 6.1 million in the first quarter. The third- quarter result benefited from the growth in core revenue (Net interest income and Net commission income) for a total of Euro 587.6 million (+5.80% compared with the second quarter of 2020) and the containment of operating costs for Euro 379.8 million (-7.39% compared with the second quarter of 2020), accompanied by a reduction in the cost of credit compared with the previous quarter (20 bps in the third quarter of 2020). The third-quarter 2020 result was negatively affected by having to book the ordinary contribution to the Deposit Guarantee Scheme (DGS) for an estimated Euro 30.5 million (Euro 2.2 million in the second quarter of the year).
The financial strength of the Group at 30 September 2020 is confirmed by a pro-forma Fully Loaded CET1 ratio 1 of 13.03%, 102 bps up on 12.01% at the end of 2019. The Phased In CET1 ratio at 30 September 2020 is 14.29%, which far exceeds the minimum SREP requirement of 8.125% set by the ECB, with a total capital buffer of Euro 2.1 billion. There is substantial liquidity, with an LCR index of 175.8%, which is well above the regulatory threshold of 100%, and a liquidity buffer of Euro 15.7 billion.
Asset quality continues to improve with a reduction in the stock of gross and net non-performing loans to Euro 4,896.1 million and Euro 2,483.4 million respectively (-20.03% and -17.18% since the end of 2019), also thanks to the "Spring" securitisation finalised last July for a gross book value of Euro 1.2 billion. In particular, at 30 September 2020: • the gross and net NPE ratio come to 8.83% and 4.70% respectively, well down from 11.07% and 5.77% at the end of 2019; • The annualised default rate is down sharply by 40 bps to 1.3% from 1.7% at the end of 2019; • the Texas ratio has fallen to 67.95% from 79.04% at 31 December 2019 (-11.09% y/y).
Operating income came to Euro 1,863.5 million, up by 13.37% compared with 30 September 2019 (Euro 1,643.8 million). In particular:
1 The pro-forma Fully Loaded Common Equity Tier1 Ratio has been estimated excluding the effects of the current transitional arrangements and including the result for the period, to the extent not allocated for dividends, and the expected absorption of the deferred tax assets recognised on the FTA of IFRS 9. The inclusion of the result for the period in CET1 is subject to the approval of the European Central Bank. The process of authorising the request for recognition of the result for the period has not yet begun and will be finalised with reference to the reporting date for regulatory purposes of December 2020. 12
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• Net interest income amounted to Euro 943.7 million, 9.47% (Euro 81.7 million) higher than the comparative figure (Euro 862.1 million at 30 September 2019), thanks to the Group's expansion following the business combinations carried out in the second half of last year. The result includes the benefit attributable to the first nine months of participation in the TLTRO-II issues that were repaid on 24 June 2020, Euro 18.9 million, and the new TLTRO-III issue, Euro 38.1 million; • Net commission income amounted to Euro 774.8 million, with an increase of Euro 118.8 million (+18.10%) compared with 30 September 2019, mainly due to the business combinations in the second half of 2019. Compared with the previous quarter in 2020, net commission income for the third quarter saw an increase of 6.95% as the restrictive health measures were relaxed and customers were able to be more operative again. In particular, there were increases in the commissions earned from asset management (+11.53%), from the use of cards and payment systems (+13.24%) and from loans and guarantees (+2.59%). The contribution made by the Bancassurance segment remained stable; • Net profit from financial activities (including dividends of Euro 17.4 million) amounted to Euro 113.0 million (Euro 90.8 million at 30 September 2019), up by Euro 22.2 million; this result for the first nine months was mainly influenced by the net gains from the disposal of financial assets and loans of Euro 117.2 million, net capital losses on the measurement of securities and derivatives of Euro 22.4 million and other positive elements for Euro 0.8 million.
Operating costs amounted to Euro 1,200.9 million, an increase of 12.05% compared with 30 September 2019, mainly due to the increased size of the Group. In particular: • Staff costs totalled Euro 721.3 million, higher than in the same period of 2019 (+9.67%); • Other administrative expenses amounted to Euro 351.6 million, up by 15.14% compared with the same period last year; in addition to the increase in size, this caption was affected by the charges connected with the extraordinary transactions that affected the BPER Banca Group during the period, as well as the charges connected with the measures adopted to deal with the Covid-19 health emergency: these involved - particularly during the first half of the year - extraordinary expenses for the purchase of hygiene-sanitary materials, licences and technical support for smart working, advertising and publicity, donations and building maintenance; however, some savings were made with respect to budget due to the suspension or reduction of certain activities as a result of the emergency (such as travel, training courses and cash collections); • Net adjustments to property, plant and equipment and intangible assets totalled Euro 128.0 million, up by 17.71% compared with 30 September 2019, including impairment losses on properties of Euro 3.7 million. The depreciation of right-of-use assets under leases amounted to Euro 45.3 million (Euro 38.4 million at 30 September 2019), while the adjustments for contracts closed-out early came to Euro 0.7 million.
Net impairment losses for credit risk, amounting to Euro 406.3 million (Euro 309.1 million at 30 September 2019), were almost entirely attributable to financial assets measured at amortised cost (Euro 405.2 million). This result was affected by having to account for expected credit losses following the deterioration in the macroeconomic context caused by the Covid-19 health emergency and further provisions of Euro 16.4 million relating to the sale of the mezzanine and junior tranches of the "Spring” securitisation of bad debts concluded in July.
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Considering just loans to customers, the cost of credit was 76 bps in the first nine months of 2020, equal to 101 bps on an annualised basis (58 bps at 30 September 2019 and 86 bps at 31 December 2019) and included the impact of the non-recurring items mentioned previously. In the balance sheet: • Net loans to customers, just for the portion measured at amortised cost, total Euro 52,889.3 million (+1.70% compared with 31 December 2019); this trend was influenced by the 2.85% increase in performing exposures since the end of 2019, helped by the disbursement of loans guaranteed by the State in response to the health emergency and mainly attributable to the retail and small business segments; • Direct deposits (Euro 59,780.4 million) increased by 2.97% compared with 31 December 2019: among the various technical forms, current accounts and demand deposits increased (+8.34%), mainly attributable to deposits of retail and corporate customers, while time deposits decreased (-85.59%), as did bonds (-16.02%), especially issues subscribed by ordinary customers, and repurchase agreements (-66.08%). The trends within this aggregate again show a propensity on the part of customers for more liquid forms of deposit. The ratio of loans to direct deposits comes to 88.47% (89.58% at 31 December 2019); • Indirect deposits, Euro 110,229.2 million, were substantially in line with the figure at 31 December 2019 (-0.36%); a partial recovery by the markets and the net inflows of managed deposits during the nine months made it possible to recoup the end-of-year valuations almost entirely, after the decline recorded at the end of the first quarter of 2020, due to market tensions caused by the pandemic.
Capital ratios, calculated taking into account the AIRB methodology for credit risk requirements, are as follows: • Common Equity Tier 1 Ratio (Phased In) of 14.29% 2 (14.11% at 30 June 2020, 13.60% at 31 March 2020 and 13.91% at 31 December 2019). This ratio, calculated on a Fully Loaded pro- forma basis, comes3 to 13.03% (12.57% at 30 June 2020, 12.07% at 31 March 2020 and 12.01% at 31 December 2019); • Tier 1 Ratio (Phased In) of 14.74% 4 (14.56% at 30 June 2020, 14.05% at 31 March 2020 and 14.35% at 31 December 2019); • Total Capital Ratio (Phased In) of 17.21% 5 (17.03% at 30 June 2020, 16.59% at 31 March 2020 and 16.82% at 31 December 2019).
Leverage ratios6: • on a transitional (Phased In) arrangement of 5.3% (5.6% at 30 June 2020, 5.7% at 31 March 2020, 6.1% at 31 December 2019);
2 Reg. 2395/2017 "Transitional provisions to mitigate the impact of IFRS 9 on Own Funds" introduced the transitional (or so-called "Phased In") arrangement for the impact of IFRS 9 on Own Funds, giving banks a chance to spread the effect on Own Funds over a period of 5 years (from March 2018 to December 2022), sterilizing the impact on CET1 by applying decreasing percentages over time. The BPER Banca Group chose to adopt the so-called "static approach" to be applied to the impact from comparing the IAS 39 adjustments at 31 December 2017 and the IFRS 9 adjustments at 1 January 2018. The "pro-forma" regulatory ratios, i.e. including the result for the third quarter of 2020 equal to Euro 95.9 million, thus simulating the effects of the prior authorisation issued by the ECB for the inclusion of these profits in Own Funds pursuant to art. 26, para. 2 of the CRR, are equal to 14.61% for the pro-forma Phased In Common Equity Tier 1 (CET1) Ratio, 15.05% for the pro-forma Phased In Tier 1 Ratio and 17.53% for the pro-forma Phased In Total Capital Ratio. 3 Please refer to the note at the beginning of this paragraph. 4 See previous note on transitional provisions. 5 See previous note on transitional provisions. 6 See paragraph "1.3 Performance ratios" for the definition of leverage ratios. 14
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• on a pro-forma (Fully Loaded) basis7 of 4.9% (4.9% at 30 June 2020, 5.1% at 31 March 2020 and 5.3% at 31 December 2019).
Liquidity levels are higher than the required minimums: • Liquidity Coverage Ratio (LCR) of 175.8% (161.8% at 30 June 2020, 167.9% at 31 March 2020 and 158.9% at 31 December 2019); • Net Stable Funding Ratio (NSFR), although not yet available at 30 September 2020, is reckoned to be over 100% (118.8% at 30 June 2020, 113.7% at 31 March 2020 and 114.0% at 31 December 2019).
1.3 Performance ratios8
Financial ratios 30.09.2020 2019 (*)
Structural ratios Net loans to customers/total assets 59.68% 65.80% Net loans to customers/direct deposits from customers 88.47% 89.58% Financial assets/total assets 26.19% 23.99% Gross non-performing loans/gross loans to customers 8.83% 11.07% Net non-performing loans/net loans to customers 4.70% 5.77% Texas ratio9 67.95% 79.04%
Profitability ratios ROE10 5.42% 8.66% ROTE 11 6.26% 9.92% ROA12 0.33% 0.50% Cost to income ratio13 64.44% 65.20% Cost of credit risk 14 0.76% 0.31%
(*) The comparative patrimonial ratios, together with ROE, ROTE and ROA, have been calculated on figures at 31 December 2019 as per the Consolidated financial statements as at 31 December 2019, while economical ratios have been calculated on figures at 30 September 2019 as per the Consolidated interim report on operations as at 30 September 2019.
7 See previous note. 8 The information provided is consistent with the ESMA document of 5 October 2015 "Guidelines - Alternative performance indicators", aimed at promoting the usefulness and transparency of Alternative Performance Indicators included in prospectuses or regulated sources of information. To construct ratios, reference was made to the balance sheet and income statement figures of the reclassified statements prepared from a management point of view as mentioned in chapter “The BPER Banca Group’s results of operations” as per this Report. 9 The texas ratio is calculated as total gross non-performing loans on net tangible equity increased by impairment provisions for non-performing loans. 10 ROE has been calculated as annualized net profit for the period on average shareholders’ equity of Group not including net profit. 11 ROTE has been calculated as annualized net profit for the period on average shareholders’ equity of Group not including net profit and intangible assets. 12 ROA has been calculated as annualized net profit for the period (including net profit for the period pertaining to minority interests) on total assets. 13 The Cost to income ratio has been calculated on the basis of the layout of the reclassified income statement (operating costs/operating income); when calculated on the basis of the layout provided by the 6th update of Bank of Italy Circular no. 262, the Cost to income ratio is at 68.99% (68.65% at 30 September 2019 as per the Consolidated interim report on operations as at 30 September 2019). 14 The Cost of credit risk has been calculated as net impairment losses to loans to customers on net loans to customers. 15
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
(cont.) Financial ratios 30.09.2020 2019 (*)
Own Funds (Phased in) (in thousands of Euro) 15 Common Equity Tier 1 (CET1) 4,803,225 4,828,807 Own Funds 5,786,627 5,839,914 Risk-weighted assets (RWA) 33,618,188 34,721,277
Capital and liquidity ratios Common Equity Tier 1 Ratio (CET1 Ratio) - Phased in16 14.29% 13.91% Tier 1 Ratio (T1 Ratio) - Phased in17 14.74% 14.35% Total Capital Ratio (TC Ratio) - Phased in18 17.21% 16.82% Common Equity Tier 1 Ratio (CET1 Ratio) - Fully Loaded pro-forma 19 13.03% 12.01% Leverage Ratio - Phased in20 5.3% 6.1% Leverage Ratio - Fully Loaded pro-forma 21 4.9% 5.3% Liquidity Coverage Ratio (LCR) 175.8% 158.9% Net Stable Funding Ratio (NSFR)22 n.a. 114.0%
(*) The comparative ratios have been calculated on figures at 31 December 2019 as per the Consolidated financial statements as at 31 December 2019.
15 Items have been calculated according to the provisions of Regulation (EU) 575/2013 (CRR), as amended by the Commission Delegated Regulation (EU) 2395/2017. 16 Reg. 2395/2017 "Transitional provisions to mitigate the impact of IFRS 9 on Own Funds" introduced the transitional (or so-called "Phased In") arrangement for the impact of IFRS 9 on Own Funds, giving banks a chance to spread the effect on Own Funds over a period of 5 years (from March 2018 to December 2022), sterilizing the impact on CET1 by applying decreasing percentages over time. The BPER Banca Group chose to adopt the so-called "static approach" to be applied to the impact from comparing the IAS 39 adjustments at 31 December 2017 and the IFRS 9 adjustments at 1 January 2018. The "pro-forma" regulatory ratios, i.e. including the result for the third quarter of 2020 equal to Euro 95.9 million, thus simulating the effects of the prior authorisation issued by the ECB for the inclusion of these profits in Own Funds pursuant to art. 26, para. 2 of the CRR, are equal to 14.61% for the pro-forma Phased In Common Equity Tier 1 (CET1) Ratio, 15.05% for the pro-forma Phased In Tier 1 Ratio and 17.53% for the pro-forma Phased In Total Capital Ratio. 17 See previous note. 18 See previous note. 19 The Fully Loaded Common Equity Tier 1 ratio pro-forma has been estimated excluding the effects of the transitional provisions in force and taking into account the result for the period, net of the expected pro-quota dividends, and the expected absorption of deferred tax assets relating to first-time adoption of IFRS9. The inclusion of the result for the period in CET1 is subject to the approval of the European Central Bank. The authorization process for the request for recognition of the result for the period has not yet begun and will be finalized with reference to the reporting date for regulatory purposes of December 2020. 20 Ratios have been calculated according to the provisions of Regulation (EU) 575/2013 (CRR), as amended by the Commission Delegated Regulation (EU) 62/2015. 21 The Leverage Ratio Fully Loaded pro-forma has been estimated excluding the effects of the transitional provisions in force and taking into account the result for the period, net of the expected pro-quota dividends, and the expected absorption of deferred tax assets relating to first-time adoption of IFRS9. The inclusion of the result for the period is subject to the approval of the European Central Bank. The authorization process for the request for recognition of the result for the period has not yet begun and will be finalized with reference to the reporting date for regulatory purposes of December 2020. 22 The NSFR, not yet available, is in any case estimated to exceed 100% (118.8% as at 30 June 2020). 16
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
2. Significant events and strategic transactions
2.1 Increase in share capital of BPER Banca and acquisition of a business line from the Intesa Sanpaolo Group
On 29 September 2020, under the mandate granted by the Extraordinary Shareholders' Meeting of 22 April 2020 pursuant to art. 2443 of the Italian Civil Code, the Board of Directors of BPER Banca resolved to increase the share capital on one or more occasions, on a cash basis, for a maximum amount including share premium of Euro 802,258,257.60, approving the final terms and conditions. The underwriting agreement for the increase in share capital was also signed on 29 September 2020. In particular, Mediobanca – Banca di Credito Finanziario s.p.a. (as sole global coordinator and joint bookrunner), BofA Securities Europe s.a. and Citigroup Global Markets Limited (acting as co-global coordinator and joint bookrunner), J.P. Morgan Securities plc (acting as senior joint bookrunner), Banco Santander s.a., Barclays Bank Ireland PLC, BNP Paribas, Crédit Agricole Corporate and Investment Bank, Equita SIM s.p.a., Intermonte SIM s.p.a., Mainfirst Bank AG and MPS Capital Services Banca per le Imprese s.p.a. (as joint bookrunner) have undertaken to subscribe, separately and without any solidarity constraint between them, according to the terms and conditions provided for in the underwriting agreement, the new shares that are not subscribed at the end of the offer on the MTA of the rights that may have remained unexercised pursuant to art. 2441, paragraph 3, of the Italian Civil Code, up to the maximum amount corresponding to the total value of the increase in share capital. CONSOB's approval of the prospectus (Registration Document, Information on the Financial Instruments and Summary Note relating to the increase in share capital and the admission to listing on the MTA of the new shares) was received by BPER Banca on 1 October 2020. At this point it was possible to launch the increase in share capital23, which was carried out by issuing 891,398,064 BPER Banca ordinary shares, without par value (new shares), with regular dividend rights, offered under option to the shareholders and to the holders of the convertible bonds (par value Euro 250,000) coming from the "Additional Tier 1" convertible bond loan issued on 25 July 2019 at a ratio of 8 new shares for every 5 option rights held at the subscription price of Euro 0.9024 for each new share, of which Euro 0.60 charged to share capital and Euro 0.30 to share premium. In particular, one option right was awarded to each outstanding BPER Banca share and 59,523 option rights were awarded to each convertible bond25. The offer was not subject to any conditions and there were no minimum or maximum subscription quantities. The calendar for this operation provided for the option rights valid for the subscription of the new shares to be exercised, under penalty of forfeiture, from 5 October 2020 to 23 October 2020 included (the "Option Period") and that they could be traded on the MTA (electronic equities market) organised and managed by Borsa Italiana s.p.a. from 5 October 2020 to 19 October 2020 included. The option rights not exercised by the end of the Option Period were to be offered on the MTA on 27 and 28 October, pursuant to art. 2441, paragraph 3, of the Italian Civil Code, but all of the unexercised option rights were sold on 27 October, so the offer was closed on 28 October 2020. Further information on the
23 Please refer to the contents of the Prospectus for further details on (i) the purposes of the increase in share capital, (ii) the characteristics of the acquisition of the business line from Intesa Sanpaolo and (iii) the update of the financial forecasts of the BPER Banca Group. 24 The issue price of the new shares included a discount of 30.97% with respect to the Theoretical Ex Right Price (TERP) of BPER's ordinary shares, calculated according to current methods, based on Borsa Italiana s.p.a.'s reference price for BPER shares at 29 September 2020. 25 Amount equal to the number of shares theoretically due to the holders of the Convertible Bonds, calculated on the basis of the AT1 convertible bond loan regulations. 17
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
outcome of the increase in share capital is provided in section of this Report entitled "Subsequent events to the 30 September 2020". The new shares deriving from the increase in share capital have the same characteristics and attribute the same administrative and equity rights as the BPER Banca shares already in circulation and are automatically admitted to trading on the MTA.
The purpose of the increase in share capital is to finance the acquisition of the business line, launched by BPER Banca in the early months of 2020 with a view to significantly increasing the size of the Group and its customer base for banking services, which has since developed over the course of 2020 according to the following timeline: - on 17 February 2020 general guidelines were established for this deal, which involves the acquisition from the Intesa Sanpaolo Group of a line of business comprising a substantial number of branches (the "Business line"). The deal forms part of the Public Exchange Offer (PEO) launched by Intesa Sanpaolo for the share capital of UBI Banca26 and relates to a series of branches, mostly located in Northern Italy, as well as the related assets, liabilities and legal relationships; - on 19 March 2020, BPER Banca and Intesa Sanpaolo signed the First Supplementary Agreement, amending the mechanism for calculating the acquisition price of the business line; - on 15 June 2020, the parties signed the Second Supplementary Agreement that defined more precisely the perimeter of the business line and further revised the mechanism for calculating the acquisition price; - on 5 August 2020, the parties signed the Third Supplementary Agreement on the definitive mechanism for calculating the acquisition price of the business line; - on 7 August 2020, the Italian competition authority (AGCM - the Italian Antitrust Authority) communicated its approval of the transaction, also following the favourable opinion issued by the Italian Insurance Supervisory Authority (IVASS), having established that the deal in question did not raise any doubts from an antitrust point of view; - on 2 September 2020, the European Central Bank also communicated its authorisation to proceed.
The business line involved in these various agreements includes: (i) 532 branches located mostly in Northern Italy (principally in Lombardy), unless compliance with the general principles of the Agreement entails a lower number of branches, (ii) maximum value of risk-weighted assets (RWA) of Euro 15.5 billion, and (iii) total net loans of between Euro 25.2 billion and Euro 27.2 billion. In particular, the 532 branches (501 UBI Banca and 31 Intesa Sanpaolo), specifically identified by province, will result in a significant increase in the BPER Banca Group's presence in the north-west regions of Italy (especially Lombardy), while also strengthening and extending coverage in other areas of the country, including the Adriatic coast.
In short, acquisition of the business line should enable BPER Banca to (i) increase its loan portfolio by about 50% and total assets by around 40% (to about Euro 117 billion); (ii) improve its gross NPE Ratio, based on the figures at 30 June 2020, by about one percentage point; (iii) confirm the financial strength
26 The Public Purchase and Exchange Offer (PPEO), revised with respect to the PEO originally launched, before being supplemented by an element of monetary consideration) was closed successfully on 3 August 2020 with acceptances for 90.203% of the eligible UBI Banca shares. 18
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of the BPER Banca Group, with an estimated Fully Phased Consolidated CET 1 Ratio of over 12.50% from the date of completion of the acquisition. Lastly, it should be noted that, taking into account the context in which this operation takes place and the negative effects that the Covid-19 pandemic has had on the business and on the profitability of the BPER Banca Group, the acquisition of the business line should also help contrast any deterioration in the Group's profit margins, as explained in greater detail in the following paragraphs.
2.2 The 2019-2021 Business Plan of the BPER Banca Group: update of financial forecasts
On 27 February 2019, the BPER Banca Group approved and presented to the market its new "Business Plan 19/21 – BEST WAY" 27. These forecasts were then updated by later market communications including, most recently: (i) announcement of the agreement signed with Intesa Sanpaolo for the acquisition of a business line represented by branches of the former-UBI Banca on 17 February 2020 and (ii) the subsequent supplementary agreements, which defined more precisely the perimeter of the business line and revised the mechanism for calculating the price.
The emergency associated with the Covid-19 pandemic and the consequent significant change in the current and future macroeconomic context has also had a substantial effect on the economic and financial dynamics of the BPER Banca Group that were originally envisaged in the Business Plan 2019-21. In fact, the restrictive measures adopted by the Italian government (e.g. lockdowns), the macroeconomic scenarios expected for the economy, the significant changes in monetary policy made at European level and the government action introduced in support of households and businesses, taken together, significantly alter the assumptions underlying the economic-financial targets contained in the Business Plan.
Without prejudice to the strategic directions embodied in the BEST WAY Plan, which are confirmed, the Parent Company started work in April 2020 on updating the forecasts by simulating alternatives for the growth prospects of the BPER Banca Group. These simulations considered different macroeconomic and financial scenarios linked to the possible duration of the emergency, the potential impacts that it might cause and the effects of the mitigating measures adopted, and to be adopted, by government and banking sector authorities. The Board of Directors of BPER Banca has recognised both the substantial alteration of market prospects, due to the major change in the macroeconomic context caused by the emergency, and the latest forecasts for interest rates that show them in negative territory for an extended period, rather than making the recovery envisaged in the original plan. Given this, the Board approved the updated financial forecasts for 2020-2021 of the BPER Banca Group on 5 August 2020 28. This update also takes appropriate account of the change in the macroeconomic situation, the change in scope following the aggregation of Arca Holding - not envisaged in the original plan, the acquisition of the business line according to the agreement with Intesa Sanpaolo and the related increase in share capital, which for obvious reasons were not planned either. The latest forecasts acknowledge that the revenue dynamics - being significantly slower than originally planned - and the dynamics of impairment losses on loans - affected by the different and worse
27 See the Directors' report on Group operations accompanying the Consolidated financial statements as at 31 December 2019 for an explanation of the basic principles underlying this Plan. 28 A further update of the financial forecasts was approved by the Board of Directors on 29 September 2020, to reflect the most recent forecasts on the timing of execution of the agreements with Intesa Sanpaolo, initially assumed to be by the end of 2020. 19
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expectations for economic performance - will not allow the profit target of Euro 450 million that was forecast in the original plan to be reached by the end of 2021, assuming that the scope remains unchanged. That said, the acquisition of control over Arca, not included in the original plan, will provide partial internal compensation for the difference in profitability attributable to the changed scenario, thus mitigating the shortfall with respect to the profit target included in the plan. The business line acquired from Intesa Sanpaolo is also expected to make a contribution in this regard. In confirmation of the above, the new combined entity is expected to generate a consolidated profit in 2021 of Euro 348 million, to which the result of the Purchase Price Allocation relating to the acquisition of the business line from Intesa Sanpaolo will then have to be added. In addition, the target gross NPE Ratio, originally expected to fall below 9% by the end of the Plan, has also been affected by the deterioration in the macroeconomic scenario. The adoption of additional measures to contain and reduce the stock of non-performing loans should however result in a ratio at the end of 2021 that is only slightly higher than the expected level and, in any case, close to 10%. Financial strength, as reflected in the target CET1 ratio, is expected to exceed 13%29. Below there is a summary of the main extraordinary transactions envisaged in the BEST WAY Plan and already carried out at the date of this Interim Report.
Transactions carried out in 2019 Reference is made in particular to the following: • absorption of the BPER Services consortium by BPER Banca; • purchase from the Unipol Group of 100% of Unipol Banca (and therefore, indirectly, of Finitalia) and its subsequent absorption by BPER Banca; • disposal to the Unipol Group, at the same time, of a portfolio of bad loans totalling about Euro 1 billion; • significant reduction in the Group's minority holdings by purchasing the minority interests in Banco di Sardegna.
In addition, again in 2019, a further interest was purchased during the year in Arca Holding (and therefore, indirectly, in Arca Fondi SGR), resulting in the acquisition of control.
Transactions carried out in 2020 Last July, the Parent Company's absorption of the two Piedmontese subsidiaries Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. was completed, as described below.
On 26 and 27 March 2020, the Boards of Directors of Cassa di Risparmio di Bra s.p.a., Cassa di Risparmio di Saluzzo s.p.a. and BPER Banca s.p.a. approved, each to the extent of their responsibilities, the plan for the absorption of Cassa di Risparmio di Bra and Cassa di Risparmio di Saluzzo by BPER Banca, as well as the increase in the share capital of BPER to service the absorption of Cassa di Risparmio di Bra. The overall operation is designed to simplify further and rationalise the organisational structure and governance of the Group, as well as to improve operational efficiency and facilitate the monitoring and control of risks. The standard statutory procedure applied to the absorption of Cassa di Risparmio di Bra, as BPER Banca held 84.286% of the share capital; the procedure for the absorption of Cassa di Risparmio di Saluzzo was
29 In addition to the effects of the acquisition of the business line from Intesa Sanpaolo, this forecast also includes other levers for optimising regulatory capital. 20
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simplified pursuant to art. 2505 of the Italian Civil Code, as BPER Banca held the entire share capital of the other bank. The Board of Directors of Cassa di Risparmio di Bra and BPER Banca determined a share exchange ratio of 1 BPER ordinary share for every 14 ordinary shares held in Cassa di Risparmio di Bra. In order to service the merger by absorption, BPER Banca issued 1,237,500 ordinary shares, with the same characteristics as those already outstanding, to be assigned to the shareholders of Cassa di Risparmio di Bra other than BPER Banca. The extraordinary meetings of the participant banks have approved the merger plan (Cassa di Risparmio di Saluzzo on 24 June 2020, BPER Banca and Cassa di Risparmio di Bra on 6 July 2020) and the merger deed was signed on 22 July 2020. This deed was filed on 27 July 2020 with the relevant Companies Registers, after expiry of the period required by art. 57, para. 3, of Legislative Decree 385/93. The merger takes effect for legal purposes from 27 July 2020; the tax and accounting effects will be backdated to 1 January 2020.
Macroeconomic and financial forecasts In the context of updating the forecasts included in the Plan for 2019-2021, the changes in the principal economic and financial aggregates of the BPER Banca Group were determined by estimating the volumes, interest rates and spreads applicable to customers, partly with reference to forecasts about macroeconomic trends and the performance of the banking sector prepared by leading research centres. The effects of the various planned initiatives were applied to the information obtained in the above manner. The macroeconomic variables of greatest importance for the BPER Banca Group relate to the Italian economy. The dynamics of international variables (trends in the GDPs of principal world economies, changes in the monetary policies of non-Eurozone countries and exchange rate movements) are relevant to the extent that they affect the Italian economy. The assumptions about the changes in the macroeconomic scenario and the dynamics of the banking system that underpin the Business Plan for 2019-2021 were made with reference to forecasts, selected from among those available at the time, made by leading economic research centres and applied by the Parent Company considering the context and dynamics within which the Group operates. As stated, the principal macroeconomic variables underpinning the Plan have been heavily conditioned by the change in scenario imposed by the Covid-19 emergency. At the time of preparing this Consolidated interim report on operations as at 30 September 2020, the global macroeconomic picture is still clouded by significant uncertainties. Preparation of updated forecasts inevitably suffers from this uncertainty, which led the principal providers (including the Bank of Italy, the ECB, specialist companies and the research offices of leading banks and asset managers) to assume different forward-looking scenarios, depending on the effectiveness of the health, political and economic actions taken by the competent institutions: • rapid and effective response to the pandemic (2-3 months): return to the initial conditions within a relatively short period (so-called "V-shape" recovery); • effective response, but with a second wave of contagion at national/regional level: return to the initial conditions over a longer period and with a less linear growth trend than before (so-called "U-shape stepwise" recovery); and • inability to respond to the pandemic (until a vaccine becomes available): risk of recession or recovery over a very extended period (so-called "L-shape" or "very extended U-shape" recovery).
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The updated forecasts for the economic performance of the country that were used to revise the BEST WAY business plan targets fall between the first and second scenarios, representing a possible alternative scenario that may have to be updated later. These forecasts combine the changes in GDP and other economic changes considered significant (default rates, unemployment, trends in lending and funding etc.) with assumptions about the duration and intensity of the lockdown measures. In addition, they take account of the economic support measures (moratoria, etc.) introduced by the government and the banks, as well as the effects of the extraordinary liquidity measures adopted by the ECB. More specifically, the update takes into consideration a substantial drop in GDP for 2020 (-9.4%), followed by a partial recovery in 2021 (+5.4%). Normalisation is assumed to be a gradual process, starting from May 2020. Additionally, the debt/GDP ratio and the public accounts generally are expected to deteriorate significantly, followed by only a partial recovery. Full recovery is expected to be long and difficult, with different effects depending on the sector and geographical area. A return to pre-crisis conditions was not considered likely prior to 202430.
2.3 Covid-19 emergency: strategies adopted by BPER Banca Group
Since the start of the emergency, the BPER Banca Group has tackled the situation with immediate answers, taking steps to contain risk, safeguard the health of employees and customers, guarantee the continuity of critical business processes and implement economic support measures for households and businesses. A Consultation Committee was set up immediately to monitor the evolution of the healthcare emergency. Coordinated by the Group Crisis Manager, this committee comprises the Chief Human Resource Officer (CHRO), the Safety Officer (RSPP), the Chief Operating Officer (COO), the Chief Risk Officer (CRO), the Business Continuity Manager and representatives from the Systems Department, the Risk Management Department and the Service Desk Department. The first actions related to the "Red Zone", being the geographical area worst hit by the initial contagion, with the closure of branches and the suspension of work, including quarantine for the employees and residents, in compliance with the procedures laid down in regional and governmental regulations. As the emergency continued, the Committee's lines of intervention involved various areas: the management of human resources, business continuity, protection of the general public and support for the economy, with differentiated actions according to the various phases that the emergency passed through.
Management of human resource In order to tackle the healthcare emergency, the BPER Banca Group implemented a series of solutions to safeguard the health of personnel and ensure that they work safely. The methods of work activated made possible a major reduction in their physical presence in the workplace, especially during the initial phase of the emergency: a substantial number of workstations were activated for emergency smart working (workers with IT installations deemed suitable for smart working by the Group were able to work from home, following authorisation from the managers of their organisational units, who were later able to steadily reduce this flexible working, in line with the falling risk of contagion, based on their specific office needs); platforms were purchased to enable the delivery of training at home (smart learning), shifts were agreed at organisational units, a number of branches were closed, opening hours were changed and
30 The summary outcomes of the scenario used are consistent with the equivalent results of the macroeconomic scenario prepared by the ECB/Bank of Italy in June 2020. 22
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
the maximum number of customers present in each branch was restricted (currently, access is by appointment only for all advisory services, while no appointment is needed for cash services. However, the number of customers present at a branch cannot exceed the number of cashiers and these services are only provided in the morning). During the first phase of the emergency, the Group devised a package of paid and unpaid leave of absence for all employees, partly to take account of the nationwide suspension of education activities; ad hoc leave arrangements were also made for certain categories of employee (parents with children under 14, persons with weakened immune systems, parents with disabled children, pregnant women not yet on maternity leave). An agreement was signed with the trade unions for access to the sector solidarity fund, in order to cover the periods of work reduction/suspension during the first phase of the emergency. Under another such agreement in the second phase, the Group made available additional paid and unpaid leave of absence to all employees, with a special focus on specific categories of employee (parents with children under 14, persons with weakened immune systems, parents with disabled children, pregnant women not yet on maternity leave). Some of these measures continued to be applied until 30 September 2020. Informing all personnel about the introduction or modification of security measures took place promptly and effectively by means of FAQs on the corporate intranet or by bulk e-mails. Business travel remains strictly limited to cases of real need and is subject to authorisation from the manager of the organisational unit concerned. Meetings are mostly held by video-conference. Hygiene and sanitary measures were further strengthened at all branches and central offices. The telephone line introduced to provide professional psychological support was maintained and health insurance cover was extended to protect employees. In parallel with all these initiatives, the Safety Officer (RSPP) maintains constant contact with the Workers' Representatives (RLS) in order to facilitate the nationwide exchange of information about COVID-19.
Business Continuity The solutions adopted from the early stages of the emergency (remote work thanks to mobile equipment, twin units, alternative sites, back up) made it possible to supply critical services and processes on a continuous basis; central services did not therefore suffer any interruptions. A system is still operating to transfer calls made to branches that are closed to ones that are open and instructions were issued to ensure that the customers of temporarily closed branches can still obtain services.
Protection of the general public Since the beginning of the emergency, all of the measures indicated in the Prime Minister's decrees (DPCM), in the official documents of the Ministry of Health and in the recommendations of the health authorities (including international ones), as well as in local ordinances, have been implemented, with a view to limiting the risk for customers. The protocols signed by the trade association and the trade unions were applied and supplementary instructions were issued at the level of best practice to protect the health of employees and customers. Ever since the first phase, precautions have been taken to reduce the presence of customers in branches (reservations for service, restricted access, etc.). The BPER Banca Group was one of the first financial institutions to introduce the obligation to wear a mask and (temporarily, in some regions) for customers to wear gloves, not just employees, as well as to supply Plexiglass screens for front office workstations. Sanitising gel for frequent hand sanitation has always been made available to customers at all branches and company locations open to the public.
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Support for the economy and local communities In order to mitigate the adverse effects of the Covid-19 on the real economy, the Group activated a series of measures in favour of households and businesses, while also adopting and implementing the related ministerial decrees. Action included the suspension of instalment payments for various reasons, including job loss and liquidity shortages due to the emergency, as well as loans against government- assisted redundancy pay (CIG). More specifically, as at 30 September 2020 the BPER Banca Group has arranged31: • moratoria for more than 48,400 loans, in line with the requirements specified in the Decree Law or in banking sector agreements for Retail customers, with a gross exposure of Euro 3.4 billion; • moratoria for more than 54,200 loans to businesses, in line with the requirements specified in the Decree Law or in banking sector agreements for Corporate customers, for residual debt of over Euro 7.8 billion.
The "BPER Banca per l’Italia" initiative was launched at the same time, with the creation of two funds amounting respectively to Euro 100 million (for individuals, professionals, artisans and traders) and Euro 1 billion (for firms in order to provide access to liquidity and short/medium-term loans). In order to help businesses in crisis, the Group strengthened its commitment to enable applicant customers to access the guarantee fund for SMEs and other loans backed by public guarantees. As at 30 September 2020, loans guaranteed by the State totalling more than Euro 2.7 billion have been granted to businesses.
With a view to strengthening efforts to tackle Covid-19 in the context of the "United beyond expectations" project (an initiative that directly involves Group employees, top management and the Directors), the Parent Company has made donations to healthcare facilities for the purchase of ventilators and other equipment, and planned significant charitable payments totalling Euro 2.4 million to various bodies and associations active in the healthcare and social arenas in the territories served. Recipients of the above amount include schools in the 19 regions served, to facilitate the use of distance learning; social solidarity shops and canteens for the needy to tackle new forms of poverty; healthcare facilities; and associations that provide social care and support to families. In addition, a Trust Onlus (charity) is being established to manage emergency funds, which will focus primarily on the families of deceased healthcare workers. As a sign of unity, hope and courage, BPER Banca has turned on "luci della ripresa" (recovery lights) that illuminate the façades of major branches, including those in Modena, Bologna, Matera, Sassari and Lanciano, with the colours of the Italian flag.
Throughout the emergency, constant contact has been maintained with the Local Authorities, the Ministry of Health and ABI in order to monitor the national situation and identify any instructions issued and actions taken by the banking system. The regular flow of information to the Directors and the Supervisory Authorities has been maintained throughout the crisis period.
2.4 Progress of de-risking activities
The strategic directions identified in the BEST WAY Plan include objectives for reducing the portfolio of non-performing loans; as already mentioned, this strategic objective, pursued with determination by the Group in recent years, has most likely been affected by the economic crisis caused by the Covid-19
31 Amounts taken from management sources. 24
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pandemic. Nevertheless, the NPL portfolio has been reduced significantly during the first nine months of 2020.
Operation "Spring" - securitisation of bad loans On 18 June 2020, BPER Banca, Banco di Sardegna and Cassa di Risparmio di Bra formalised the bad loan securitisation operation known as "Spring". In particular, a portfolio of bad loans, comprising 57% secured loans and 43% unsecured with a gross carrying amount of about Euro 1,219 million at 30 September 2019 (economic effect of the disposal from 1 October 2019), was assigned to Spring SPV s.r.l., a securitisation vehicle formed pursuant to Law 130/99. The loans granted by BPER Banca totalled Euro 1,022.5 million, by Banco di Sardegna Euro 135.5 million and by Cassa di Risparmio di Bra Euro 61 million. The SPV funded the purchase by issuing three classes of security on 18 June 2020, for a total of Euro 343.4 million, comprising: • a senior tranche, amounting to Euro 320 million, corresponding to 26.2% of the gross carrying amount, to which the investment grade ratings were assigned by Moody's (Baa1) and Scope Ratings (BBB); • a mezzanine tranche of Euro 20 million; • a junior tranche of Euro 3.4 million.
The Mezzanine and Junior securities were initially taken up by the originator banks. On 6 July 2020, Banco di Sardegna and Cassa di Risparmio di Bra sold all their Mezzanine and Junior Notes, representing 16.22% of all the notes issued by the SPV, while BPER Banca sold 78.78% of the Mezzanine and Junior Notes (transactions settled for accounting purposes on 7 July 2020). At a consolidated level therefore, the BPER Banca Group has retained 5% of all the Mezzanine and Junior notes issued by the special purpose vehicle, in compliance with the retention rule. The overall negative impact of the Spring operation was Euro 16.4 million (Euro 14.2 million of which from the sale of the Mezzanine and Junior securities), shown in the financial statements as impairment losses on loans. The Senior securities will be retained in the portfolios of the originator banks. For these securities, the procedure for requesting the GACS State guarantee has been activated.
2.5 Other significant events
New name for subsidiary company Bibanca s.p.a. (formerly Banca di Sassari s.p.a.) The extraordinary session of the Shareholders' Meeting of this subsidiary, held on 16 April 2020, amended art. 1 of the articles of association to adopt the new name of Bibanca S.p.a, instead of Banca di Sassari s.p.a. The new name and logo (chosen in collaboration with the Holden School of Turin and the Milan office of Agenzia Giugnini Associati, based in Cagliari) expresses the dual nature of the bank, which focuses on the funding and payment needs of customers, while also specialising in the tools of the digital economy. This change was also needed to separate the bank from the territorial connotations associated with its original name, now that services are provided to the entire domestic market. Due to the Covid-19 emergency, the promotion of the new name was limited to the more formal and urgent requirements; the other activities planned for the launch of the new brand have been postponed to a future date, depending on how the pandemic develops.
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New distribution agreement with UnipolSai on introduction of the Assurbanca model A distribution agreement between the BPER Banca Group and UnipolSai Assicurazioni was finalised on 21 April 2020, introducing a new model called Assurbanca and, at the same time, reinforcing the Bancassurance model already applied in the BPER Banca Group. The agreement identifies two specific macro-solutions: • Assurbanca: UnipolSai agencies will be able to distribute BPER Banca Group banking products to their customers, both private individuals and firms (up to Euro 10 million in turnover); • Bancassurance: BPER Banca Group branches be able to distribute UnipolSai insurance products to their customers in the corporate segment, in addition to the Arca Assicurazioni catalogue.
The agreement will allow significant synergies for the BPER Banca Group, generated by the Assurbanca and Bancassurance activities, with additional business possibly coming from over 200,000 new customers and around 40,000 insured firms. The distribution agreement for the presentation of UnipolSai customers to the branches of the BPER Banca group is operational from 4 May 2020. Production in the first few months was not in line with target due to the Covid-19 pandemic which made it impossible to implement the many initiatives that had been planned. Thirteen Assurbanca territorial contacts have been identified and made operational, located in the Regional Departments with the task of training and stimulating the UnipolSai agencies. After a difficult start for the above reasons, this activity has been steadily improving and the current results are approximately 1,000 new current accounts. The goal is to achieve full operation and completion of the project launch activities at the beginning of 2021.
Events of the Parent Company BPER Banca
- Shareholders' Meeting on 22 April 2020 The Shareholders' Meeting of BPER Banca, held in ordinary session on 22 April 2020, approved the proposal made by the Board of Directors to allocate the entire profit for 2019, Euro 385,435,201.37, to reserves. This proposal was approved by the Board of the Parent Company on 1 April 2020 in response to the strong recommendation expressed by the European Central Bank on 27 March 2020 (the effects of which were extended to 1 January 2021 on the recommendation of the European Central Bank of 27 July 2020) "to avoid the payment of dividends and any irrevocable commitments to pay dividends for 2019 and 2020". This recommendation reflects the consideration made by the ECB that banks should enhance their capital adequacy in support of lending to households and firms, in a context marked by the serious repercussions of the Covid-19 healthcare emergency.
This meeting, in an extraordinary session, also approved the proposal to grant the Board of Directors the power under art. 2443 of the Italian Civil Code, to be exercised by 31 March 2021, to increase the share capital for payment on one or more occasions, also in several tranches, for a total maximum amount of Euro 1,000,000,000, including any share premium, by issuing ordinary shares without par value to be offered under option to those entitled to them under art. 2441 of the Italian Civil Code. On 29 September 2020, the Bank's Board of Directors resolved to increase the share capital for payment, based on the aforementioned mandate; details of this operation are provided in a dedicated section of this Report.
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- Shareholders' Meeting on 6 July 2020 The Shareholders' Meeting of BPER Banca, held in ordinary and extraordinary session on 6 July 2020, approved the following proposals: • integration of the Board of Directors for the rest of the three-year period 2018-2020 by appointing a Director to replace the one who has resigned; Silvia Elisabetta Candini was elected to replace Roberta Marracino, who resigned for personal reasons on 3 June 2020, with effect from 30 June 2020, as detailed below; • Approval of the merger plan for Cassa di Risparmio di Saluzzo S.p.A. and Cassa di Risparmio di Bra S.p.A. to be absorbed by BPER Banca S.p.A. and increase in share capital to service the merger of Cassa di Risparmio di Bra S.p.A. with consequent amendment of art. 5 of the articles of association.
With the amendments approved by the Extraordinary Shareholders' Meeting of 22 April 2020 and 6 July 2020, the articles of association of BPER Banca were updated on 8 September 2020 and were made available, in accordance with current legislation, at the head office and filed with Borsa Italiana s.p.a. and on the Bank's website www.bper.it - Institutional Site.
- Composition of the Board of Directors: resignation of a director and new appointment On 3 June 2020 Director Roberta Marracino informed the Board of Directors and the Chairman of the Board of Statutory Auditors of BPER Banca of her decision to resign from the Board, for personal reasons, with effect from 30 June 2020. Roberta Marracino was appointed at the Shareholders' Meeting held on 14 April 2018 for the three-year period 2018-2020 and, pursuant to art. 19 of the articles of association, was drawn from the second list by number of votes obtained that was unrelated to the first-placed list. In the circumstances, the list concerned was presented by Studio Legale Trevisan & Associati on behalf of 11 managers of 24 funds. On 6 July 2020, the Shareholders' Meeting integrated the Board of Directors for the rest of the three- year period 2018-2020 by appointing Silvia Elisabetta Candini to replace Roberta Marracino. The appointment took place in application of article 20, paragraphs 3.2 and 3.3, of the articles of association, without the list method, taking into account that Ms. Candini's candidature, proposed by the Trevisan & Associati Law Firm on behalf of 3 managers of 3 funds, was the only one presented. On 9 July 2020, the Board of Directors appointed Ms. Candini as a member of the Nominations Committee and of the Remuneration Committee. This was necessary as the automatic replacement envisaged in art. 20, paras. 3 and 3.1, of the articles of association was not possible due to the absence of unelected candidates on the list from which the retiring director had been taken. On 5 August 2020, the Board of Directors of BPER Banca approved her suitability, based on the declarations made and the information available to the Parent Company, in accordance with the applicable legislation. Verification of the independence requirements, as regards any financial and professional relationships of the person concerned, was carried out on the basis of parameters identified by the Board of Directors, pursuant to art. 21, paragraph 2, of the articles of association.
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- Amendments to the articles of association relating to the appointment of the Corporate Bodies On 5 August 2020, the Board of Directors exercised its power to assess the corporate governance system and, in order to take into account the evolution that has taken place in the shareholder structure, drew up new draft articles of association with the following key elements concerning the Board of Directors: • adoption of a proportional criterion for the election of the Board of Directors based on the so- called "Partial Quotients Method"; • provision of a limit by virtue of which no list can express more than seven Directors, in order to ensure ample and adequate board representation to all the various components of the shareholder structure; • provision of an "access to allotment" threshold, aimed at ensuring stability and cohesion to the functioning of the Board of Directors, according to which, without prejudice to the legal requirement to ensure the possibility of the first unconnected minority list expressing at least one Director, the other unconnected lists (i.e. lists other than the most voted list and the most voted minority list that is not connected in any way to the first) will only be able to compete for the appointment of the Board if they have obtained votes equal to at least 5% of the capital with voting rights at the Shareholders' Meeting. In derogation from the proportional system described in the previous point and in order to ensure full correspondence between the number of votes obtained by the list and its representation within the Board, this project also envisages that the limit of seven Directors does not apply if the list that came first obtained a number of votes greater than 50% of the share capital with voting rights at the Shareholders' Meeting. In this case, a similar rule will be applied to that foreseen in the articles of association of BPER Banca at the date of approval of this Report, with consequent extraction from the first list of a number of Directors between twelve and fourteen and the possibility for the second list that is not connected in any way to the first to appoint one to three Directors depending on the distance between the two lists in terms of votes.
In line with the choice to leave decisions relating to the composition of the Board of Directors to the Shareholders, the faculty of the outgoing Board to present a list of candidates for the election of the Administrative Body has been done away with. Lastly, the draft amendment to the articles of association provides for, among other things: • elimination of the role of Honorary Chairman; • modification of the structure of the Executive Bodies, making the appointment of the Executive Committee optional, as well as the possibility of setting up one or more management committees on the proposal of the Chief Executive Officer; • expanding the rules governing board committees and better definition of the powers of the General Manager; • reduction in the number of acting members of the Board of Statutory Auditors from five to three.
Events of the subsidiary Banco di Sardegna
- Mandatory conversion of savings shares into preference shares On 30 July 2020, the Extraordinary Shareholders' Meeting of Banco di Sardegna s.p.a., as well as the Special Meeting of the Savings Shareholders and the Special Meeting of the Preference Shareholders approved: (i) the mandatory conversion of the savings shares of Banco di Sardegna into preference shares
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(the "Mandatory Conversion"), at an exchange ratio of one preference share for each savings share, and (ii) the amendment of certain rights of the preference shares (the "Amendment of Rights"). Following the Mandatory Conversion and Amendment of Rights, the holders of savings shares and preference shares of Banco di Sardegna, if entitled, were able to exercise their right of withdrawal by 10 September 2020. The liquidation value of the preference shares (formerly savings shares) subject to withdrawal, determined pursuant to art. 2437-ter, paragraph 3, of the Italian Civil Code was set at Euro 8.83 per share and the liquidation value of the preference shares subject to withdrawal determined pursuant to art. 2437-ter, paragraph 2, of the Italian Civil Code is set at Euro 7.19 per share. BPER Banca fully exercised its option right, as well as the pre-emption right on all the shares subject to withdrawal that remained unexercised. The Mandatory Conversion took effect on 18 September 2020, so from that date 6,600,000 savings shares of Banco di Sardegna were removed from listing on the electronic exchange (MTA) organised and managed by Borsa Italiana s.p.a. and converted into an equal number of preference shares; the Amendment of Rights took effect on the same date. Following the execution of the shareholders' resolutions of 30 July, the share capital of Banco di Sardegna s.p.a., fully subscribed and paid in, of Euro 155,247,762.00, at 30 September 2020 is made up of 51,749,254 shares, without par value, of which 43,981,509 ordinary shares and 7,767,745 preference shares. 26 October 2020 marked the end of the offer period under option and pre-emption for the shareholders of Banco di Sardegna of 3,770 preference shares of Banco di Sardegna and 178,915 preference shares deriving from the conversion of savings shares, which took place on 18 September 2020, in relation to which the right of withdrawal was exercised as a result of the resolutions passed on 30 July 2020. At the end of the offer period, the shareholders of Banco di Sardegna expressed their willingness to purchase - both as a result of the option rights and as a result of the pre-emption right pursuant to art. 2437-quater, third paragraph, of the Italian Civil Code - all of the shares subject to withdrawal. At the end of this transaction, BPER Banca holds 100% of the ordinary shares and 93.53% of the preference shares of Banco di Sardegna.
- Disposal of branches in Sardegna On 17 July 2019, the Italian Antitrust Authority authorised the purchase of Unipol Banca s.p.a., subject to implementation of measures to resolve certain competition worries that emerged in the investigation into the banking market in Sardinia. These measures included the sale of 5 branches in Sassari, Alghero, Iglesias, Nuoro and Terralba to third parties. The trustee appointed to sell the branches in compliance with the Authority's orders contacted a large number of banks as potential buyers, but without receiving any offers. So despite carrying out all of the appropriate procedures to sell the branches, BPER Banca found it objectively impossible to implement the prescribed measures, as was communicated to the Authority in September. Discussions are underway with the Authority to identify possible alternative measures in a climate of absolute collaboration and transparency.
Rationalisation of the branch network During the first nine months of 2020, the BPER Banca Group rationalised a total of 39 branches distributed over 10 Regions, of which 4 belonging to Banco di Sardegna and 35 to BPER Banca. The rationalisations regarding BPER Banca involved 11 Regional Departments and 5 limited service branches out of a total of 35.
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As a result, the number of Italian branches within the BPER Banca Group network has decreased from 1,349 at 31 December 2019 to 1,310 at 30 September 2020.
BPER Banca VAT Group The BPER Banca VAT Group is operational from 1 January 2019 as a VAT payer regulated by the EU legislation introduced into Italian law (Law 232 of 11 December 2016). This taxpayer replaces the individual participants, limited to the scope of application of value added tax, which otherwise retain distinct legal status from a legal, accounting and fiscal standpoint. Arca Holding s.p.a., Arca Fondi SGR s.p.a. and Finitalia s.p.a. became members of the BPER Banca VAT Group with effect from 1 January 2020. In fact, BPER Banca had acquired control over these companies, as defined in art. 2359, para. 1.1, of the Italian Civil Code during 2019. They were able to join the VAT Group because both constraints envisaged in art. 70-bis of D.P.R. 633/1972 were satisfied.
2.6 Subsequent events to the 30 September 2020
Completion of the Increase in share capital of BPER Banca 23 October 2020 marked the end of the period for exercising the option rights relating to the offer of a maximum 891,398,064 newly issued BPER Banca ordinary shares. During the offer period, which began on 5 October 2020 and ended on 23 October 2020 included, 552,724,115 rights were exercised for the subscription of 884,358,584 new shares, equal to 99.21% of the total number of new shares, for a total value of Euro 795,922,725.60. All of the unexercised rights were subscribed during trading on 27 October 2020: the unexercised rights were used for the subscription of the new shares, again at the price of Euro 0.90 per new share (of which Euro 0.30 by way of share premium), with an exchange ratio of 8 new shares for every 5 unexercised rights purchased, carrying out the residual part of the increase in share capital for a total of Euro 6,335,532, through the issue of further 7,039,480 new shares. The increase in share capital was therefore concluded with the 891,398,064 New Shares being fully subscribed for a total of Euro 802,258,257.60, so the underwriters did not have to intervene. BPER's new share capital therefore comes to Euro 2,100,435,182.40, split into 1,413,263,512 ordinary shares without par value.
2.7 European Single Supervisory Mechanism (SSM)
BPER Banca and its Banking Group are among the major European banks supervised directly by the ECB32. Consistent with the European SSM, BPER Banca has organised a process of constant discussion and alignment with the ECB that includes the provision of detailed periodic information flows in response to requests from the Joint Supervisory Team (JST). On 26 November 2019, after completing the 2019 annual SREP prudential review and evaluation process33, BPER Banca received notification from the ECB of the latest prudential requirements to be met
32 Regulation (EU) 1024 of 15 October 2013 assigned specific tasks to the European Central Bank (ECB) regarding the prudential supervision of banks in cooperation with the national Supervisory Authorities of the participating countries, within the Single Supervisory Mechanism (SSM). The ECB accepted the tasks assigned by this Regulation on 4 November 2014; they are performed with assistance from the Bank of Italy, in the manner envisaged in Regulation (EU) 468/2014 of 16 April 2014. The ECB works closely with the various European Authorities including the European Banking Authority (EBA), as it has to perform its functions in compliance with EBA regulations. 33As required by CONSOB Communication 6 of 15 March 2019. 30
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on a consolidated basis pursuant to art. 16 of EU Regulation 1024/2013. Based on the outcome of the SREP performed, the ECB decided that BPER Banca should maintain the following consolidated minimum capital ratios from 1 January 2020: • Common Equity Tier 1 Ratio: of 9%, being the sum of the minimum requirement pursuant to art. 92 of Regulation (EU) 575/2013 (4.50%), plus the additional Pillar 2 requirement in accordance with art. 16 of Regulation (EU) 1024/2013 (P2R component equal to 2%), plus the capital conservation buffer in accordance with art. 129 of Directive 2013/36/EU as transposed into national law (2.50%); • Total Capital Ratio: of 12.50%, being the sum of the minimum requirement pursuant to art. 92 of Regulation (EU) 575/2013 (8.00%), plus the additional Pillar 2 requirement in accordance with art. 16 of Regulation (EU) 1024/2013 (P2R component equal to 2%), plus the capital conservation buffer in accordance with art. 129 of Directive 2013/36/EU as transposed into national law (2.50%).
In addition, with effect from 12 March 2020 due to the emergency linked to the spread of Covid-19, the ECB announced a series of measures and flexible options for banks interested in • operating with temporarily smaller capital conservation buffers; • this was followed by a letter dated 8 April 2020 stating that the additional 2% Pillar 2 Requirement must be at least 56.25% satisfied by CET1 instruments and at least 75% by T1 (effectively revising the composition of the requirement assigned in the 2019 SREP Letter and lowering the minimum CET1 to 8.125%).
In accordance with regulations for the prudential supervision of banks, failure to comply with the CET1 Ratio and Total Capital Ratio minimum requirements would lead to limitations on the distribution of earnings and the need to adopt a plan for the conservation of capital. The ECB has confirmed that the Italian Group banks and the Luxembourg bank must constantly meet the requirements for Own Funds and liquidity on the basis of Regulation (EU) 575/2013, of national legislation enabling Directive 2013/36/EU, and of any applicable national liquidity requirement, in compliance with article 412 paragraph 5 of EU Regulation 575/2013.
These quantitative capital objectives were accompanied by the following qualitative requests to be sent to the ECB, related principally to the achievement of the targets established in the Business Plan and the management of the Non-Performing Exposures (NPE). To be more specific, the ECB recommended that BPER Banca should implement, for regulatory purposes, a gradual adjustment of the coverage for the stock of non-performing loans outstanding at 31 March 2018 until full coverage is achieved, with the following objectives: 1) achieving minimum 50% coverage of secured NPEs outstanding for more than 7 years by the end of 2020, with a linear increase towards full coverage by the end of 2025; 2) achieving minimum 60% coverage of unsecured NPEs outstanding for more than 2 years by the end of 2020, with a linear increase towards full coverage by the end of 2024. These requirements were confirmed in the ECB letter dated 26 November 2019.
The measures and flexibility activated by the ECB from March 2020, with subsequent amendments, in order to tackle the Covid-19 emergency, include an extension for 12 months for sending the ECB an operating plan and adjusted NPE strategy that recognise and estimate better the effects of the Covid-19 pandemic on the quality of lending and implementation of the strategy.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
BPER Banca operates continuously, defining and implementing the appropriate measures to comply with the Authority's requests by the prescribed deadlines. In addition, note that between January and September 2020: • further work was carried out to align internal models with the new definition of default, which was implemented for the purpose of classifying credit exposures from 8 October 2019, following authorisation from the Supervisory Authorities on 19 September 2019; • a Remedy Plan was sent to the Supervisory Authority in response to the matters raised in the final decision letter received in March 2020 regarding the "Targeted Review of Internal Models" (TRIM, which commenced in 2018 and was completed in March 2019); following this, a new Large Corporate PD model was released for use in the calculation of capital requirements with effect from the Supervisory Reporting dated 31 March 2020; • an application was sent to the Supervisory Authority in March 2020 for permission to apply the advanced AIRB methodology to the credit exposures originated by the former Unipol Banca, which was absorbed by the Parent Company in November 2019; • an application was sent to the Supervisory Authority on 29 July 2020 for permission to apply the advanced AIRB methodology to the credit exposures originated by the former Cassa di Risparmio di Saluzzo, which was absorbed by BPER Banca on 27 July 2020; • in order to comply with the requirements of the Resolution Authority, the information set requested by the Authority was updated by preparing and sending the Working Technical Notes and templates (Liability Data Report, Additional Liability Data Report, Critical Function Template, Financial Market Infrastructure Template and CIR Template). In addition, considering the contents of the Working Priorities 2020, the Resolvability Work Programme sent to the Authorities contains the actions envisaged in 2020 in the context of the resolution planning cycle 2020. A first draft of the IMF contingency plan was also prepared and the activities involved in updating the bail-in playbook were begun. In the Recovery area, updating began on the 2020 Recovery Plan, which has to be sent to the Supervisory Authority by the end of December 2020.
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3. Scope of consolidation of the BPER Banca Group
3.1 Composition of the Group as at 30 September 2020
The BPER Banca Group has been registered since 7 August 1992 with code no. 5387.6 in the Register of Banking Groups referred to in art. 64 of Legislative Decree 385 of 1 September 1993. The following is a list of the Banks and Companies included in the scope of consolidation at 30 September 2020, distinguishing between Banks and Companies consolidated on a line-by-line basis and Banks and Companies, whether or not belonging to the Group, measured using the equity method. The BPER Banca Group has decided to align the consolidation methodology used for accounting purposes with that required for prudential reporting purposes. This is discussed further in the notes to this report. Details are also provided below of the percentage held by the Group34, with further specific information provided, where necessary, by means of footnotes. a) Subsidiaries consolidated on a line-by-line basis: 1) BPER Banca S.p.A., based in Modena (Parent Company); 2) BPER Bank Luxembourg s.a., based in the Grand Duchy of Luxembourg (100%); 3) Banco di Sardegna s.p.a., based in Cagliari, which is held as follows: 100% of the ordinary shares and 91.184% of the preference shares, representing 98.677% of total capital; 4) Bibanca s.p.a., based in Sassari (99.069%) 35; 5) Nadia s.p.a., based in Modena, property company (100%); 6) Modena Terminal s.r.l., based in Campogalliano (Modena), the activities of which are the storage of goods, the storage and ageing of cheeses and the cold storage of meat and perishable products (100%); 7) Emilia Romagna Factor s.p.a., based in Bologna, a factoring company (95.954%); 8) Optima s.p.a. SIM, based in Modena, investment broker (100%); 9) Sardaleasing s.p.a., based in Sassari, leasing company (99.674%) 36; 10) Numera s.p.a., based in Sassari, IT company and subsidiary of Banco di Sardegna s.p.a. which holds 100% of share capital; 11) Tholos s.p.a., based in Sassari, property company and subsidiary of Banco di Sardegna s.p.a. which holds 100% of share capital; 12) BPER Credit Management s.cons.p.a., based in Modena, a consortium for the recovery and management of non-performing loans (100%)37; 13) Arca Holding s.p.a.38 based in Milan (57.061%); 14) Arca Fondi SGR s.p.a. based in Milan, asset management company wholly owned by Arca Holding s.p.a.; 15) Finitalia s.p.a. based in Milan, company that specialises in consumer lending (100%).
34 Unless stated otherwise, percentages refer to the Parent Company. 35 Held by: the Parent Company (78.547%) and Banco di Sardegna s.p.a. (20.522%). 36 Held by: the Parent Company (52.741%) and Banco di Sardegna s.p.a. (46.933%). 37 Held by: the Parent Company (70.000%), Banco di Sardegna s.p.a. (20.000%), Sardaleasing s.p.a. (6.000%), Bibanca s.p.a. (3.000%) and Emilia Romagna Factor s.p.a. (1.000%). 38 The company is not a member of the Banking Group. 33
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b) Other subsidiaries measured using the equity method 39: 1) Estense Covered Bond s.r.l. based in Conegliano (Treviso), a vehicle for the issue of Guaranteed Bank Bonds under art. 7 bis of Law 130/99 (60%); 2) BPER Trust Company s.p.a., based in Modena, with the role of trustee for trusts established by customers, as well as providing advice on trust matters (100%); 3) Estense CPT Covered Bond s.r.l., based in Conegliano (Treviso), a vehicle for the issue of Guaranteed Bank Bonds under art. 7 bis of Law 130/99 (60%).
In addition to the above companies that belong to the Banking Group, the following direct and indirect subsidiaries are including in this grouping at 30 September 2020, even though they are not members of the Banking Group since they do not contribute to its banking activities40: • Italiana Valorizzazioni Immobiliari s.r.l. (100%); • Adras s.p.a. (100%); • SIFA’- Società Italiana Flotte Aziendali s.p.a. (51%).
c) Associated companies measured using the equity method 1) Cassa di Risparmio di Fossano s.p.a., based in Fossano (Cuneo) (23.077%); 2) Cassa di Risparmio di Savigliano s.p.a., based in Savigliano (Cuneo) (31.006%); 3) Alba Leasing s.p.a., based in Milan (33.498%); 4) CO.BA.PO. - Consorzio Banche Popolari s.con., based in Bologna (23.587%); 5) Sofipo s.a. in liquidation, based in Lugano, held by BPER Bank Luxembourg SA. which holds 30% of share capital; 6) CAT Progetto Impresa Modena s.c.r.l., based in Modena (20%); 7) Resiban s.p.a., based in Modena (20%); 8) Unione Fiduciaria s.p.a., based in Milan (24%); 9) Atriké s.p.a., based in Modena (45%); 10) Sarda Factoring s.p.a., based in Cagliari (21.484%)41; 11) Emil-Ro Service s.r.l., based in Bologna (25%)42; 12) Lanciano Fiera - Polo fieristico d’Abruzzo - consortium based in Lanciano (25%); 13) Immobiliare Oasi nel Parco s.r.l., based in Milan (36.80%).
The Quotaholders' Meeting of CONFORM – Consulenza Formazione e Management s.c.a.r.l. was held on 13 February 2020. At that time, the withdrawals as quotaholders of BPER Banca and Banco di Sardegna were approved. This decision had previously been authorised by the Board of Directors of the two banks in order to reduce their investments in companies with activities unrelated to the core business.
On 27 July 2020, Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. were absorbed by BPER Banca s.p.a. as resolved by the respective Boards of Directors on 26 and 27 March 2020. Details of this transaction are provided in chapter 2.5 "Other significant events" of this Report. It takes the form of a "business combination between entities under common control"; it is therefore excluded from the application of IFRS 3 – Business Combinations. The merger takes effect for legal purposes from 27 July 2020; the tax and accounting effects will be backdated to 1 January 2020.
39 Following alignment of the scope of consolidation for accounting purposes with that used for supervisory purposes. 40 Following alignment of the scope of consolidation for accounting purposes with that used for supervisory purposes. 41 Held by: Banco di Sardegna s.p.a. (13.401%) and the Parent Company (8.083%). 42 Held by: the Parent Company (16.667%) and Emilia Romagna Factor s.p.a. (8.333%). 34
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
In the "Attachments" to this Report, specific reconciliation schedules have been prepared for the individual reclassified statements of BPER Banca, restated at 30 September 2019, as regards the income statement figures, and at 31 December 2019, as regards the balance sheet figures, to simulate the effects of the merger in the comparison periods, thereby allowing comments to be made "on a like-for- like basis" in the section entitled "The BPER Banca Group's results of operations" of this Group interim report on operations.
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4. The BPER Banca Group's results of operations
4.1 Balance sheet aggregates
The most important consolidated balance sheet aggregates and captions at 30 September 2020 are presented below on a comparative basis with 31 December 2019, in thousands of Euro, indicating the changes between periods in absolute and percentage terms. In the following tables, the detailed information relating to the Parent Company, i.e. the figures as at 31 December 2019, takes into account the absorption of Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. which took place on 27 July 2020 with effect for tax and accounting purposes on 1 January 2020, simulating the effects on the comparative balances (for further details on the methods of restatement, please refer to the "Attachments" to this Report; these figures have not been audited).
For additional clarity the presentation of the results for the period, the formats envisaged by the 6th update to Bank of Italy Circular no. 262/2005 are presented below on a reclassified basis. In particular: • Debt securities measured at amortised cost (caption 40 “Financial assets measured at amortised cost”) have been reclassified under caption “Financial assets”; • “Other assets” include captions 110 “Tax assets” and 130 “Other assets”; • “Other liabilities” include captions 60 “Tax liabilities”, 80 “Other liabilities”, 90 “Employee termination indemnities” and 100 “Provisions for risks and charges”; • assets and liabilities classified as held for sale (asset caption 120 “Non-current assets and disposal groups classified as held for sale” and liability caption 70 “Liabilities associated with assets classified as held for sale”) are presented in their original portfolios in order to report the aggregates more clearly43.
43 The balance sheet data include the amounts for 5 branches held for sale. These branches belong to the group of 10 Unipol Banca branches acquired by BPER Banca on 25 November 2019 and subsequently transferred to Banco di Sardegna. In that regard, the Italian competition authority (Autorità Garante della Concorrenza e del Mercato - AGCM) authorised the operation on condition that the 5 branches located in Sardinia would be sold subsequently. The disposal is intended to resolve the competition issue identified in the AGCM investigation, which found excessive concentration in the Municipalities of Sassari, Alghero, Iglesias, Nuoro and Terralba, which would create and/or strengthen a dominant position. 36
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Assets
(in thousands) Assets 30.09.2020 31.12.2019 Change % Change
Cash and cash equivalents 464,244 566,930 (102,686) -18.11 Financial assets 23,212,173 18,956,906 4,255,267 22.45 a) Financial assets held for trading 257,216 270,374 (13,158) -4.87 b) Financial assets designated at fair value 126,045 130,955 (4,910) -3.75 c) Other financial assets mandatorily measured at fair value 703,080 692,995 10,085 1.46 d) Financial assets measured at fair value through other comprehensive income 6,322,985 6,556,202 (233,217) -3.56 e) Debt securities measured at amortised cost 15,802,847 11,306,380 4,496,467 39.77 - banks 4,236,290 2,744,570 1,491,720 54.35 - customers 11,566,557 8,561,810 3,004,747 35.09 Loans 60,025,257 54,353,634 5,671,623 10.43 a) Loans to banks 7,110,099 2,321,809 4,788,290 206.23 b) Loans to customers 52,889,342 52,006,038 883,304 1.70 c) Financial assets measured at fair value 25,816 25,787 29 0.11 Hedging derivatives 49,631 82,185 (32,554) -39.61 Equity investments 220,254 225,869 (5,615) -2.49 Property, plant and equipment 1,345,489 1,369,724 (24,235) -1.77 Intangible assets 660,733 669,847 (9,114) -1.36 - of which: goodwill 434,758 434,758 - - Other assets 2,640,208 2,808,403 (168,195) -5.99 Total assets 88,617,989 79,033,498 9,584,491 12.13
Loans to customers
Net loans to customers solely comprise loans allocated in asset captions 40 b) "Financial assets measured at amortised cost – loans to customers" and 120 "Non-current assets and disposal groups classified as held for sale".
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Current accounts 4,081,406 4,841,510 (760,104) -15.70 Mortgage loans 34,187,049 32,540,195 1,646,854 5.06 Repurchase Agreement 433,944 591,175 (157,231) -26.60 Leases and factoring 3,791,195 3,833,890 (42,695) -1.11 Other transactions 10,395,748 10,199,268 196,480 1.93 Net loans to customers 52,889,342 52,006,038 883,304 1.70
Loans to customers, net of impairment provisions, total Euro 52,889.3 million (Euro 52,006.0 million at 31 December 2019) up by Euro 883.3 million since 31 December 2019. As regards the various technical forms, the increase particularly affects mortgage loans for Euro 1,646.9 million, while there was a decrease in current accounts for Euro 760.1 million and repurchase agreements for Euro 157.2 million. The increase in mortgage loans, also evident in the quarterly trends below, is also attributable to the disbursement of loans to support the economy during the health emergency, including disbursements guaranteed by the State, mainly to the retail and small business segment.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Net loans to customers in millions
54,000
52,884 52,889 52,000 52,496 52,006 51,034 50,000
48,000
46,000
44,000
42,000 30.09.2019 31.12.2019 31.03.2020 30.06.2020 30.09.2020
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Gross non-performing exposures 4,896,055 6,122,541 (1,226,486) -20.03 Bad loans 2,357,652 3,448,761 (1,091,109) -31.64 Unlikely to pay loans 2,355,582 2,478,777 (123,195) -4.97 Past due loans 182,821 195,003 (12,182) -6.25 Gross performing exposures 50,571,383 49,169,481 1,401,902 2.85 Total gross exposure 55,467,438 55,292,022 175,416 0.32 Impairment provisions for non-performing exposures 2,412,648 3,124,116 (711,468) -22.77 Bad loans 1,507,704 2,277,480 (769,776) -33.80 Unlikely to pay loans 868,008 818,231 49,777 6.08 Past due loans 36,936 28,405 8,531 30.03 Impairment provisions for performing exposures 165,448 161,868 3,580 2.21 Total impairment provisions 2,578,096 3,285,984 (707,888) -21.54 Net non-performing exposures 2,483,407 2,998,425 (515,018) -17.18 Bad loans 849,948 1,171,281 (321,333) -27.43 Unlikely to pay loans 1,487,574 1,660,546 (172,972) -10.42 Past due loans 145,885 166,598 (20,713) -12.43 Net performing exposures 50,405,935 49,007,613 1,398,322 2.85 Total net exposure 52,889,342 52,006,038 883,304 1.70
At the end of the first nine months of 2020, the impairment provisions for non-performing loans amount to Euro 2,412.6 million (Euro 3,124.1 million at 31 December 2019; -22.77%), for a coverage ratio of 49.28% (51.03% at 31 December 2019), while impairment provisions for performing loans amounted to Euro 165.4 million (Euro 161.9 million at 31 December 2019; +2.21%), leading to a coverage ratio of 0.33%, the same as in 2019. The average decrease in the level of coverage, as shown better below, is mainly due to the NPL securitisation carried out in 2020 (the so-called "Spring" operation). Considering the direct write-offs of bad loans involved in bankruptcy proceedings, Euro 358.6 million (Euro 444.0 million at 31 December 2019), the coverage ratio increases to 52.74% (54.34% at 31 December 2019). The total coverage ratio is therefore 4.65%, down compared with the figure at 31 December 2019 (5.94%). Based on the same considerations set out above concerning direct write-offs, the total effective coverage of loans comes to 5.26% (6.69% at 31 December 2019).
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
(in thousands) Loans to customers 30.09.2020 31.12.2019 % % % Gross Net Gross Net Gross Net Coverage change change ratio
1. BPER Banca s.p.A. 45,389,028 43,559,153 44,871,402 42,422,442 1.15 2.68 4.03 2. BPER Bank Luxembourg s.a. 235,786 227,217 248,608 240,039 -5.16 -5.34 3.63 3. Bibanca s.p.a. 1,412,210 1,391,563 1,299,644 1,282,601 8.66 8.50 1.46 4. Banco di Sardegna s.p.a. 7,518,648 7,100,194 8,052,242 7,550,322 -6.63 -5.96 5.57 Total banks 54,555,672 52,278,127 54,471,896 51,495,404 0.15 1.52 4.17 5. Sardaleasing s.p.a. 3,350,914 3,085,635 3,356,780 3,081,446 -0.17 0.14 7.92 6. Emilia Romagna Factor s.p.a. 961,623 943,430 1,090,696 1,071,966 -11.83 -11.99 1.89 7. Finitalia s.p.a. 578,920 561,841 593,824 578,396 -2.51 -2.86 2.95 Other companies and consolidation (3,979,691) (3,979,691) (4,221,174) (4,221,174) -5.72 -5.72 - adjustments Total of balance sheet 55,467,438 52,889,342 55,292,022 52,006,038 0.32 1.70 4.65
Net non-performing loans amount to Euro 2,483.4 million (-17.18% compared with 31 December 2019), equating to 4.70% of total net loans to customers (5.77% at 31 December 2019), whereas, on a gross basis, the non-performing loans on loans to customers ratio equates to 8.83% (11.07% at 31 December 2019). More specifically, net bad loans amount to Euro 849.9 million (-27.43% compared with 31 December 2019), net unlikely to pay loans total Euro 1,487.6 million (-10.42% compared with 31 December 2019) and net past due loans total Euro 145.9 million (-12.43% compared with 31 December 2019). Coverage has fallen to 49.28% since 31 December 2019 (51.03%). The reduction in the gross and net incidence of the non-performing portfolio on total loans and the corresponding coverage ratio has been affected by the securitisation of bad loans (the so-called "Spring" operation), completed on 7 July 2020 with the sale of 95% of the ABS Mezzanine and Junior securities, initially subscribed by the BPER Banca Group, and consequent derecognition of the portfolio.
(in thousands) Non-performing loans 30.09.2020 31.12.2019 % % % Gross Net Gross Net Gross Net Coverage change change ratio
1. BPER Banca s.p.a. 3,366,646 1,658,212 4,421,953 2,095,214 -23.87 -20.86 50.75 2. BPER Bank Luxembourg s.a. 10,000 1,778 9,898 1,776 1.03 0.11 82.22 3. Bibanca s.p.a. 43,261 26,824 35,434 23,397 22.09 14.65 37.99 4. Banco di Sardegna s.p.a. 848,417 448,334 983,153 497,976 -13.70 -9.97 47.16 Total banks 4,268,324 2,135,148 5,450,438 2,618,363 -21.69 -18.45 49.98 5. Sardaleasing s.p.a. 584,760 332,864 624,791 360,570 -6.41 -7.68 43.08 6. Emilia Romagna Factor s.p.a. 24,927 9,120 29,109 12,494 -14.37 -27.00 63.41 7. Finitalia s.p.a. 18,044 6,275 18,203 6,998 -0.87 -10.33 65.22 Total of balance sheet 4,896,055 2,483,407 6,122,541 2,998,425 -20.03 -17.18 49.28 Direct write-offs of bad loans 358,622 - 444,039 - -19.24 n.s. 100.00 Adjusted total 5,254,677 2,483,407 6,566,580 2,998,425 -19.98 -17.18 52.74 Non-performing loans (Total of balance sheet)/Loans to customers 8.83% 4.70% 11.07% 5.77%
Net bad loans amount to Euro 849.9 million (-27.43% compared with 31 December 2019), representing 1.61% of total net loans to customers (2.25% at 31 December 2019), whereas, on a gross basis, the bad loans on total loans to customers ratio comes to 4.25% (6.24% at 31 December 2019). The coverage of bad loans is 63.95% compared with 66.04% at 31 December 2019.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
(in thousands) Bad loans 30.09.2020 31.12.2019 % % % Gross Net Gross Net Gross Net Coverage change change ratio
1. BPER Banca s.p.a. 1,512,444 498,213 2,463,892 776,859 -38.62 -35.87 67.06 2. BPER Bank Luxembourg s.a. 6,104 262 6,004 262 1.67 - 95.71 3. Bibanca s.p.a. 8,888 2,363 7,312 1,521 21.55 55.36 73.41 4. Banco di Sardegna s.p.a. 481,319 209,242 613,293 249,194 -21.52 -16.03 56.53 Total banks 2,008,755 710,080 3,090,501 1,027,836 -35.00 -30.92 64.65 5. Sardaleasing s.p.a. 315,257 130,491 321,987 131,725 -2.09 -0.94 58.61 6. Emilia Romagna Factor s.p.a. 20,852 5,679 23,613 7,647 -11.69 -25.74 72.77 7. Finitalia s.p.a. 12,788 3,698 12,660 4,073 1.01 -9.21 71.08 Total of balance sheet 2,357,652 849,948 3,448,761 1,171,281 -31.64 -27.43 63.95 Direct write-offs of bad loans 358,622 - 444,039 - -19.24 n.s. 100.00 Adjusted total 2,716,274 849,948 3,892,800 1,171,281 -30.22 -27.43 68.71 Bad loans (Total of balance sheet)/Loans to customers 4.25% 1.61% 6.24% 2.25%
Net unlikely-to-pay loans total Euro 1,487.6 million (-10.42% compared with 31 December 2019), representing 2.81% of total net loans to customers (3.19% at 31 December 2019), while on a gross basis the ratio is 4.25% (4.48% at 31 December 2019). The coverage of unlikely-to-pay loans has increased since the end of 2019 to 36.85%, compared with 33.01% at 31 December 2019.
(in thousands) Unlikely to pay loans 30.09.2020 31.12.2019 % % % Gross Net Gross Net Gross Net Coverage change change ratio
1. BPER Banca s.p.a. 1,771,736 1,093,206 1,846,503 1,221,479 -4.05 -10.50 38.30 2. BPER Bank Luxembourg s.a. 3,896 1,516 3,894 1,514 0.05 0.13 61.09 3. Bibanca s.p.a. 6,296 3,838 7,139 4,715 -11.81 -18.60 39.04 4. Banco di Sardegna s.p.a. 316,887 198,008 332,535 216,927 -4.71 -8.72 37.51 Total banks 2,098,815 1,296,568 2,190,071 1,444,635 -4.17 -10.25 38.22 5. Sardaleasing s.p.a. 252,325 188,523 281,588 210,722 -10.39 -10.53 25.29 6. Emilia Romagna Factor s.p.a. 1,932 1,423 4,600 4,003 -58.00 -64.45 26.35 7. Finitalia s.p.a. 2,510 1,060 2,518 1,186 -0.32 -10.62 57.77 Total of balance sheet 2,355,582 1,487,574 2,478,777 1,660,546 -4.97 -10.42 36.85 Unlikely to pay loans/Loans to customers 4.25% 2.81% 4.48% 3.19%
The net amount of past due loans of Euro 145.9 million (-12.43% compared with 31 December 2019) represents 0.28% of total net loans to customers (0.32% at 31 December 2019), whereas, on a gross basis, the past due loans on total loans to customers ratio is 0.33% (0.35% at 31 December 2019). The coverage of past due loans is 20.20% (14.57% at 31 December 2019).
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
(in thousands) Past due loans 30.09.2020 31.12.2019 % % % Gross Net Gross Net Gross Net Coverage change change ratio
1. BPER Banca s.p.a. 82,466 66,793 111,558 96,876 -26.08 -31.05 19.01 2. Bibanca s.p.a. 28,077 20,623 20,983 17,161 33.81 20.17 26.55 3. Banco di Sardegna s.p.a. 50,211 41,084 37,325 31,855 34.52 28.97 18.18 Total banks 160,754 128,500 169,866 145,892 -5.36 -11.92 20.06 4. Sardaleasing s.p.a. 17,178 13,850 21,216 18,123 -19.03 -23.58 19.37 5. Emilia Romagna Factor s.p.a. 2,143 2,018 896 844 139.17 139.10 5.83 6. Finitalia s.p.a. 2,746 1,517 3,025 1,739 -9.22 -12.77 44.76 Total of balance sheet 182,821 145,885 195,003 166,598 -6.25 -12.43 20.20 Past due loans/Loans to customers 0.33% 0.28% 0.35% 0.32%
The distribution of loans to non-financial corporates is analysed by ATECO category below:
(in thousands) Distribution of loans to 30.09.2020 % non-financial corporates
A. Agriculture, forestry and fishing 798,648 1.51 B. Mining and quarrying 36,251 0.07 C. Manufacturing 7,500,982 14.19 D. Provision of electricity, gas, steam and air-conditioning 811,424 1.53 E. Provision of water, sewerage, waste management and rehabilitation 342,908 0.65 F. Construction 2,226,099 4.21 G. Wholesaling and retailing, car and motorcycle repairs 4,350,165 8.23 H. Transport and storage 1,432,021 2.71 I. Hotel and restaurants 1,432,413 2.71 J. Information and communication 292,733 0.55 L. Real estate 3,064,295 5.79 M. Professional, scientific and technical activities 913,981 1.73 N. Rentals, travel agencies, business support services 1,069,623 2.02 O. Public administration and defence, compulsory social security 2,412 - P. Education 32,245 0.06 Q. Health and welfare 390,436 0.74 R. Arts, sport and entertainment 161,138 0.30 S. Other services 432,003 0.82 Total loans to non-financial corporates 25,289,777 47.82 Individuals and other not included above 21,712,347 41.05 Financial corporates 3,424,015 6.47 Insurance companies 46,343 0.09 Governments and other public entities 2,416,860 4.57 Total loans 52,889,342 100.00
41
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Financial assets and equity investments Debt securities measured at amortised cost included in financial assets solely consist of bonds allocated to the asset captions 40 a) and b "Financial assets measured at amortised cost – loans to banks and loans to customers".
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Financial assets measured at fair value through profit or loss 1,086,341 1,094,324 (7,983) -0.73 - of which derivatives 138,911 142,662 (3,751) -2.63 Financial assets measured at fair value through other comprehensive income 6,322,985 6,556,202 (233,217) -3.56 Debt securities measured at amortised cost 15,802,847 11,306,380 4,496,467 39.77 a) banks 4,236,290 2,744,570 1,491,720 54.35 b) customers 11,566,557 8,561,810 3,004,747 35.09 Total financial assets 23,212,173 18,956,906 4,255,267 22.45
Financial assets amount to Euro 23,212.2 million, including Euro 22,276.6 million of debt securities (95.97% of the total). Of these, Euro 10,662.4 million relates to sovereign States and Central Banks (+28.35% compared with 31 December 2019, mainly due to the purchase of securities measured at amortised cost), while Euro 7,913 million relates to Banks (+15.11% compared with 31 December 2019). Equity instruments come to Euro 313.4 million (1.35% of the total), inclusive of Euro 200.3 million of stable equity investments classified in the FVOCI portfolio. "Financial assets held for trading" include financial derivatives of Euro 138.9 million (-2.63% since 31 December 2019), comprising operational hedging derivatives linked to debt securities classified in "Financial assets measured at fair value through profit or loss" and forward transactions in foreign currencies (traded with customers and/or used in managing the foreign exchange position), interest rate and foreign exchange derivatives intermediated with customers and derivatives related to securitisations.
(in thousands) Financial assets 30.09.2020 31.12.2019 Change % Change
1. BPER Banca s.p.a. 21,447,056 17,185,617 4,261,439 24.80 2. BPER Bank Luxembourg s.a. 162,016 152,243 9,773 6.42 3. Bibanca s.p.a. 11,058 10,956 102 0.93 4. Banco di Sardegna s.p.a. 1,564,780 1,578,812 (14,032) -0.89 Total banks 23,184,910 18,927,628 4,257,282 22.49 Other companies and consolidation adjustments 27,263 29,278 (2,015) -6.88 Total 23,212,173 18,956,906 4,255,267 22.45
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Equity investments 220,254 225,869 (5,615) -2.49 of which subsidiaries 8,886 6,712 2,174 32.39 of which associates 211,368 219,157 (7,789) -3.55
Following alignment of the consolidation methodology with that used for prudential reporting purposes, as extensively covered in the Explanatory Notes, this caption comprises significant investments (non-Group companies subject to significant influence, usually being investments in which the equity interest is greater than or equal to 20%), subsidiaries that are not members of the Banking Group since they do not contribute to its banking activities, and Group companies not meeting the requirements of art. 19 of Regulation (EU) 575/2013 that are measured using the equity method. The impairment test identified a need to write-down the goodwill embedded in the carrying amounts of the investments in Cassa di Risparmio di Fossano s.p.a. and Cassa di Risparmio di Savigliano s.p.a. by a total of Euro 8.2 million.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Fixed assets
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Intangible assets 660,733 669,847 (9,114) -1.36 of which goodwill 434,758 434,758 - -
Intangible assets include amounts of goodwill for a total of Euro 434.8 million, unchanged compared with the end of the previous year, as follows:
(in thousands) Goodwill 30.09.2020 31.12.2019
1. Group companies 230,366 230,366 1.1 Banks/Other companies 204,392 204,392 - Banco di Sardegna s.p.a. 27,606 27,606 - Emilia Romagna Factor s.p.a. 6,768 6,768 - Arca Holding s.p.a. 170,018 170,018 Total 434,758 434,758
The BPER Banca CGU includes goodwill arising from bank acquisitions and subsequent mergers by absorption, as well as goodwill relating to purchases of bank branches from the Unicredit Group.
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Property, plant and equipment 1,345,489 1,369,724 (24,235) -1.77 of which owned land and buildings 906,630 916,771 (10,141) -1.11 of which rights of use acquired with leasing 273,138 302,573 (29,435) -9.73
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Interbank and liquidity position
The amount of loans to banks comprises solely the loan component allocated to assets caption 40 a) "Financial assets measured at amortised cost – loans to banks".
(in thousands) Net interbank position 30.09.2020 31.12.2019 Change % Change
A. Loans to banks 7,110,099 2,321,809 4,788,290 206.23 1. Current accounts and deposits 310,559 441,913 (131,354) -29.72 2. Other 6,799,540 1,879,896 4,919,644 261.70 B. Due to banks 19,188,980 12,213,133 6,975,847 57.12 Total (A-B) (12,078,881) (9,891,324) (2,187,557) 22.12
The following table gives details of such operations with the ECB. Since 31 December 2019, the Group has benefited from the additional financial instruments made available by the Regulator by repaying early the TLTRO-II loans expiring subsequent to 30 June 2020 and arranging two new tranches of TLTRO-III.
(in millions) Refinancing transactions with the European Central Bank Capital Maturity
1. Targeted Long Term Refinancing Operation (TLTRO-III) - BPER Banca 14,000 28.06.2023 2. Targeted Long Term Refinancing Operation (TLTRO-III) - BPER Banca 2,710 27.09.2023
Total 16,710
The BPER Banca Group has therefore obtained Euro 16,710 million of TLTRO III loans, which is 100% of its participation limit. At 30 September 2020, the Central Treasury held significant resources relating to securities eligible for refinancing at the ECB, of an overall amount, net of margin calls, of Euro 27,452 million (Euro 20,911 million at 31 December 2019). The available portion amounts to Euro 9,907 million (Euro 10,363 million at 31 December 2019).
(in millions) Counterbalancing Capacity Nominal Guarantee Restricted Available value value portion portion Eligible securities and loans 27,452 17,545 9,907 1 Securities as collateral for own and third-party commitments 353 353 2 Securities subject to funding repurchase agreements 501 501 3 Securities and loans not transferred to the Pooling Account 7,555 7,555 4 Securities and loans transferred to the Pooling Account 19,043 16,691 2,352 of which: Own securitisations 1,499 1,382 Guaranteed Bank Bonds issued by the Bank 5,150 4,432 COllateralized BAnk Assets 5,209 4,120
As summarised above, at 30 September 2020, the Pooling account of the Central Treasury possessed significant resources relating to securities eligible for refinancing by the ECB, of an overall amount, net of margin call, of Euro 19,043 million, of which Euro 16,691 million has been refinanced (Euro 2,352 million is still available).
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
These include: • securities from self-securitisations of performing residential mortgage portfolios given to the Bank's own customers (currently Euro 1,120.7 million, eligible for refinancing up to Euro 1,031.1 million), using the special purpose vehicles Dedalo s.r.l. and Sardegna RE Finance s.r.l.; • securities from self-securitisations of performing residential mortgage portfolios given to the Bank's own customers in the Small and Medium-sized Corporates segment (currently Euro 377.9 million, eligible for refinancing up to Euro 351.2 million), using the special purpose vehicle Multi Lease AS s.r.l.; • Guaranteed Bank Bonds issue by the Bank with a nominal value of Euro 5,150 million, eligible for refinancing up to Euro 4,432 million, using the special purpose vehicles Estense Covered Bond s.r.l. and Estense CPT Covered Bond s.r.l; • COllateralized BAnk Assets (A.BA.CO.) for Euro 5,209 million at 30 September 2020, of which Euro 4,120 million eligible for refinancing.
Liabilities and shareholders' equity
(in thousands) Liabilities and shareholders' equity 30.09.2020 31.12.2019 Change % Change
Due to banks 19,188,980 12,213,133 6,975,847 57.12 Direct deposits 59,780,401 58,055,608 1,724,793 2.97 a) Due to customers 55,145,698 52,220,719 2,924,979 5.60 b) Debt securities issued 4,634,703 5,834,889 (1,200,186) -20.57 Financial liabilities held for trading 167,410 165,970 1,440 0.87 Hedging derivatives 459,681 294,114 165,567 56.29 Other liabilities 3,568,127 3,013,126 555,001 18.42 Minority interests 137,257 131,662 5,595 4.25 Shareholders' equity pertaining to the Parent Company 5,316,133 5,159,885 156,248 3.03 a) Valuation reserves 53,367 37,750 15,617 41.37 b) Reserves 2,351,088 2,035,205 315,883 15.52 c) Equity instruments 150,000 150,000 - - d) Share premium reserve 1,002,722 1,002,722 - - e) Share capital 1,565,596 1,561,884 3,712 0.24 f) Treasury shares (7,259) (7,259) - - g) Profit (Loss) for the period 200,619 379,583 (178,964) -47.15 Total liabilities and shareholders' equity 88,617,989 79,033,498 9,584,491 12.13
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Deposits
Direct deposits include the amounts due to customers classified in liability caption 70 "Liabilities associated with assets classified as held for sale".
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Current accounts and demand deposits 51,702,997 47,724,679 3,978,318 8.34 Time deposits 137,525 954,077 (816,552) -85.59 Repurchase agreements 80,972 238,736 (157,764) -66.08 Lease liabilities 269,343 306,037 (36,694) -11.99 Other short-term loans 2,954,861 2,997,190 (42,329) -1.41 Bonds 4,274,665 5,089,892 (815,227) -16.02 - subscribed by institutional customers 3,152,656 3,278,364 (125,708) -3.83 - subscribed by ordinary customers 1,122,009 1,811,528 (689,519) -38.06 Certificates 8,803 36,541 (27,738) -75.91 Certificates of deposit 351,235 708,456 (357,221) -50.42 Direct deposits from customers 59,780,401 58,055,608 1,724,793 2.97 Indirect deposits (off-balance sheet figure) 110,229,208 110,623,352 (394,144) -0.36 - of which managed 41,081,130 41,714,305 (633,175) -1.52 - of which administered 69,148,078 68,909,047 239,031 0.35 Customer funds under administration 170,009,609 168,678,960 1,330,649 0.79 Bank borrowing 19,188,980 12,213,133 6,975,847 57.12 Funds under administration or management 189,198,589 180,892,093 8,306,496 4.59
Direct deposits from customers of Euro 59,780.4 million have increased by 2.97% since 31 December 2019. Among the various technical forms, the most significant reductions were in time deposits, Euro 816.6 million (-85.59%), bonds, Euro 815.2 million (-16.02%), particularly with regard to the issues subscribed by ordinary customers, and repurchase agreements, Euro 157.8 million (-66.08%). On the other hand, current accounts and demand deposits, mainly attributable to deposits belonging to retail and corporate customers, have increased significantly by Euro 3,978.3 million (+8.34%). The trends within this aggregate again show for this quarter a propensity on the part of customers for more liquid forms of deposit. Indirect deposits from customers, marked to market, come to Euro 110,229.2 million, substantially in line with the figure at 31 December 2019 (-0.36%); a partial recovery by the markets and the net inflows of managed deposits during the nine months made it possible to recoup the end-of-year valuations almost entirely, after the decline recorded at the end of the first quarter of 2020, due to market tensions caused by the pandemic. Total funds under administration or management by the Group, including deposits from banks (Euro 19,189.0 million) amount to Euro 189,198.6 million.
(in thousands) Direct deposits 30.09.2020 31.12.2019 Change % Change
1. BPER Banca s.p.a. 48,577,496 47,301,234 1,276,262 2.70 2. BPER Bank Luxembourg s.a. 874,084 817,559 56,525 6.91 3. Bibanca s.p.a. 140,165 133,271 6,894 5.17 4. Banco di Sardegna s.p.a. 10,405,669 10,009,648 396,021 3.96 Total banks 59,997,414 58,261,712 1,735,702 2.98 Other companies and consolidation adjustments (217,013) (206,104) (10,909) 5.29 Total 59,780,401 58,055,608 1,724,793 2.97
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Direct deposits include subordinated liabilities:
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Non-convertible subordinated liabilities 748,462 761,177 (12,715) -1.67 Total subordinated liabilities 748,462 761,177 (12,715) -1.67
There are no convertible subordinated liabilities at 30 September 2020 (as at 31 December 2019).
(in thousands) Indirect deposits 30.09.2020 31.12.2019 Change % Change
1. BPER Banca s.p.a. 89,451,051 89,355,334 95,717 0.11 2. BPER Bank Luxembourg s.a. 674,611 575,377 99,234 17.25 3. Banco di Sardegna s.p.a. 4,581,423 4,750,082 (168,659) -3.55 Total banks 94,707,085 94,680,793 26,292 0.03 4. Arca Fondi SGR s.p.a. 29,204,058 29,822,478 (618,420) -2.07 Other companies and consolidation adjustments (13,681,935) (13,879,919) 197,984 -1.43 Total 110,229,208 110,623,352 (394,144) -0.36
Indirect deposits from customers, marked to market, come to Euro 110.2 billion, down by 0.36% on the end of the 2019, mainly due to the market effect during the period on assets under management, which was still negative overall (estimated at around Euro -0.7 billion since the beginning of the year), partially offset by net inflows of managed deposits during the first nine months of 2020, equal to Euro 0.4 billion. Assets under management amount to Euro 41.1 billion (-1.52% from the year-end), of which Euro 16.7 billion relating to Arca Holding, net of the portion of funds placed by the BPER Banca Group network (-2.44% since the end of 2019). Assets under administration amount to Euro 69.1 billion (+0.35% since the end of 2019) which includes administered deposits of a leading insurance company.
The graph shows the dynamics of direct and indirect deposits in the last five years:
Deposits in millions 120,000
105,000 110,623 110,229
90,000
75,000
60,000 58,056 59,780 45,000 47,748 50,246 49,996 30,000 35,865 36,257 32,871
15,000
0 31.12.2016 31.12.2017 31.12.2018 31.12.2019 30.09.2020 DIRECT INDIRECT The indirect deposits mentioned above do not include the aggregates linked to the placement of insurance policies; the stock of customer assets invested in insurance products has increased by 6.15% since 31 December 2019.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
(in thousands) Bancassurance 30.09.2020 31.12.2019 Change % Change
Insurance premiums portfolio 7,363,740 6,937,036 426,704 6.15 - of which life sector 7,242,984 6,821,131 421,853 6.18 - of which non-life sector 120,756 115,905 4,851 4.19
The third quarter of 2020 also continued to highlight the positive trend in customer assets invested in life insurance products, up compared with the first two quarters of the year (+2.88% on June 2020, +6.18% on December 2019). This trend reflects the overall net inflows during the first nine months of 2020, equal to Euro 0.4 billion.
If life insurance premiums are added to the managed portion of indirect deposits, the total comes to Euro 48,324.1 million, which represents 41.14% of the overall total of indirect deposits and life insurance premiums (Euro 117,472.2 million).
Shareholders' equity
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Shareholders' equity pertaining to the Parent Company 5,316,133 5,159,885 156,248 3.03 - of which profit (loss) for the period 200,619 379,583 (178,964) -47.15 - of which shareholders' equity excluding profit (loss) for the period 5,115,514 4,780,302 335,212 7.01
(in thousands) Captions 30.09.2020 31.12.2019 Change % Change
Minority interests 137,257 131,662 5,595 4.25 - of which profit (loss) for the period pertaining to minority interests 19,362 14,869 4,493 30.22 - of which shareholders' equity pertaining to minority interests excluding their share of profit (loss) for the period 117,895 116,793 1,102 0.94
(in thousands) Shareholders' equity 30.09.2020 31.12.2019 Change % Change
1. BPER Banca s.p.a. 4,936,893 4,728,332 208,561 4.41 2. BPER Bank Luxembourg s.a. 63,550 59,480 4,070 6.84 3. Bibanca s.p.a. 283,082 273,856 9,226 3.37 4. Banco di Sardegna s.p.a. 896,218 925,866 (29,648) -3.20 Total banks 6,179,743 5,987,534 192,209 3.21 Other companies and consolidation adjustments (946,334) (1,090,439) 144,105 -13.22 Total 5,233,409 4,897,095 336,314 6.87 Profit (Loss) for the period pertaining to the Parent Company 200,619 379,583 (178,964) -47.15 Profit (loss) for the period pertaining to minority interests 19,362 14,869 4,493 30.22 Total shareholders' equity 5,453,390 5,291,547 161,843 3.06
This figure is made up of liability captions 120, 140, 150, 160, 170, 180, 190 and 200.
The total net tangible shareholders' equity (after deduction of intangible assets of Euro 660.7 million) amounted to Euro 4,792.7 million.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
4.2 Own funds and capital ratios
The harmonised rules for banks and investment companies contained in Regulation (EU) 575/2013 (CRR) and in the 2013/36/EU Directive (CRD IV) approved on 26 June 2013 and published in the Official Journal of the European Union the next day, entered into force on 1 January 2014. This regulatory framework, which is the only set of rules that seeks to harmonise prudential regulations of the Member States of the European Community, was made applicable in Italy by the Bank of Italy's Circular 285, published on 17 December 2013 and subsequent updates. From 30 June 2015 the accounting scope of consolidation is aligned with that required for prudential reporting purposes: companies excluded are treated in the same way as the Banks and Companies subject to significant influence and measured using the equity method.
On 30 September 2020, the BPER Banca Group adopted internal models for measuring the capital requirements relating to the credit risk represented by asset classes with exposures to both corporates and retail customers. The perimeter of the models44 includes BPER Banca, Banco di Sardegna and Bibanca. Sardaleasing is formally included in the roll-out plan45 and will adopt the IRB method in accordance with the planned timetable. The other BPER Banca Group companies and asset classes not included in the roll-out plan will continue to use the Standardised Approach.
Based on the results of the prudential review and assessment process carried out during 2019 with reference to the situation at 31 December 2018, the ECB established a minimum Common Equity Tier 1 coefficient of 9.0% at a consolidated level with effect from 1 January 2020. However, in order to support supervised banks in their lending to the real economy under the extraordinary circumstances linked to the spread of the Coronavirus (Covid-19), the ECB informed BPER Banca on 8 April 2020 (with effect from 12 March 2020) about a new method for holding the additional Pillar 2 Requirement (of 2%), being at least 56.25% of CET1 and 75% of T1. At 30 September 2020, the Common Equity Tier 1 Ratio requirement to be met was therefore equal to 8.125% Phased In and Fully Phased.
This requirement is also influenced by the additional Countercyclical Capital Reserve requirement specified for the BPER Banca Group of 0.003% at 30 September 2020, raising the overall minimum to 8.128%. Compared with that limit, the amount of available equity (CET 1) at 30 September 2020 can be quantified at Euro 2,072 million (about 616 bps of CET1) under the transitional arrangements (Phased In), while on a pro-forma Fully Loaded basis it can be put at Euro 1,646 million, or about 490 bps of CET 1.
Pursuant to art. 26, para. 2, of Regulation (EU) 575/2013 (CRR), the economic and financial position at 30 September 2020 has not been subjected to the audit of profit for the purpose of inclusion in CET 1.
The inclusion of the result for the period in CET1 is subject to the approval of the European Central Bank. The process of authorising the request for recognition of the result for the period has not yet begun and will be finalised with reference to the reporting date for regulatory purposes of December 2020.
44 The ECB authorised the use of internal models on 24 June 2016. 45 The roll-out plan also included Cassa di Risparmio di Saluzzo, which has now been absorbed by BPER Banca together with Cassa di Risparmio di Bra. 49
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
The following table shows the BPER Banca Group's capital ratios and the minimum capital adequacy requirements for regulatory purposes as at 30 September 2020.
(in thousands) 30.09.2020 30.09.2020 31.12.2019 31.12.2019 Change in % Fully Phased in Fully Phased in Phased in Change Loaded Loaded pro-forma Common Equity Tier 1 capital- CET1 4,374,431 4,803,225 4,154,505 4,828,807 (25,582) -0.53 Additional Tier 1 capital - AT1 151,140 151,140 152,092 152,092 (952) -0.63 Tier 1 capital - Tier 1 4,525,571 4,954,365 4,306,597 4,980,899 (26,534) -0.53 Tier 2 capital - Tier 2 - T2 833,114 832,262 858,760 859,015 (26,753) -3.11 Total Own Funds 5,358,685 5,786,627 5,165,357 5,839,914 (53,287) -0.91 Total Risk-weighted assets (RWA) 33,585,464 33,618,188 34,579,423 34,721,277 (1,103,089) -3.18 CET1 Ratio (CET1/RWA) 13.03% 14.29% 12.01% 13.91% 38 bps Tier 1 Ratio (Tier 1/RWA) 13.48% 14.74% 12.45% 14.35% 39 bps Total Capital Ratio (Total Own Funds/RWA) 15.96% 17.21% 14.94% 16.82% 39 bps RWA/Total assets 37.90% 37.94% 43.75% 43.93% -599 bps
The capital ratios are as follows: • Common Equity Tier 1 Ratio (Phased In) of 14.29% 46 (14.11% at 30 June 2020, 13.60% at 31 March 2020 and 13.91% at 31 December 2019). This ratio, calculated on a pro-forma Fully Loaded basis 47, comes to 13.03% (12.57% at 30 June 2020, 12.07% at 31 March 2020 and 12.01% at 31 December 2019); • Tier 1 Ratio (Phased In) of 14.74% 48 (14.56% at 30 June 2020, 14.05% at 31 March 2020 and 14.35% at 31 December 2019); • Total Capital Ratio (Phased In) of 17.21% 49 (17.03% at 30 June 2020, 16.59% at 31 March 2020 and 16.82% at 31 December 2019). Note that the BPER Banca Group uses different methods for calculating risk-weighted assets, which are summarised below: • credit risk: for Group entities represented by BPER Banca, Banco di Sardegna and Bibanca, the credit risk measurement is performed using the AIRB method. For Banks and other Companies that are not in the scope of validation and for other risk assets not included in the validated models, the standardized approach has been maintained; • credit down-rating risk: the standardized approach is used;
46 Reg. 2395/2017 "Transitional provisions to mitigate the impact of IFRS 9 on Own Funds" introduced the transitional (or so-called "Phased In") regime for the impact of IFRS 9 on Own Funds, giving banks a chance to spread the effect on Own Funds over a period of 5 years (from March 2018 to December 2022), sterilizing the impact on CET1 by applying decreasing percentages over time. The BPER Banca Group chose to adopt the so-called "static approach" to be applied to the impact from comparing the IAS 39 adjustments at 31 December 2017 and the IFRS 9 adjustments at 1 January 2018. The "pro- forma" regulatory ratios, i.e. including the result for the third quarter of 2020 equal to Euro 95.9 million, thus simulating the effects of the prior authorisation issued by the ECB for the inclusion of these profits in Own Funds pursuant to art. 26, para. 2 of the CRR, are equal to 14.61% for the pro-forma Phased In Common Equity Tier 1 (CET1) Ratio, 15.05% for the pro- forma Phased In Tier 1 Ratio and 17.53% for the pro-forma Phased In Total Capital Ratio. 47 The pro-forma Fully Loaded Common Equity Tier1 Ratio has been estimated excluding the effects of the current transitional arrangements and including the result for the period, to the extent not allocated for dividends, and the expected absorption of the deferred tax assets recognised on the FTA of IFRS 9. The inclusion of the result for the period in CET1 is subject to the approval of the European Central Bank. The process of authorising the request for recognition of the result for the period has not yet begun and will be finalised with reference to the reporting date for regulatory purposes of December 2020. 48 See previous note on transitional provisions. 49 See previous note on transitional provisions.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
• market risk: the standardized approach is used for assessing market risk (general and specific risk on equity instruments, general risk on debt securities and positioning risk for UCITS units) to determine the related individual and consolidated capital requirement; • operational risk: operational risk measurement uses the standardized approach.
4.3 Reconciliation of consolidated net profit/shareholders' equity
Consolidated net profit pertaining to the Parent Company comprises, on shareholding basis, the sum of profits (losses) at 30 September 2020 of the following Banks and Companies of the Group included in the scope of line-by-line consolidation.
(in thousands) Reconciliation of consolidated profit (loss) for the period 30.09.2020
BPER Banca s.p.a. 118,303 Other Group companies: 98,702 BPER Bank Luxembourg s.a. 43,620 Banco di Sardegna s.p.a. (consolidated figure) 2,838 Bibanca s.p.a. 9,944 Cassa di Risparmio di Bra s.p.a. 4,837 Cassa di Risparmio di Saluzzo s.p.a. 3,777 Finitalia s.p.a. 3,646 Nadia s.p.a. 24,415 Optima s.p.a. SIM 4,048 Modena Terminal s.r.l. (468) Emilia Romagna Factor s.p.a. (9) Sardaleasing s.p.a. 596 BPER Credit Management s.c.p.a. 1,056 Arca Holding s.p.a. (consolidated figure) 402 Total profit (loss) of the Group 217,005 Consolidation adjustments (16,386) Consolidated profit (loss) for the period 200,619
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
As required by current regulations, the following statement is presented with regard to the position at 30 September 2020:
Reconciliation of the shareholders’ equity and economic result of the Parent Company with the related consolidated amounts
(in thousands) Increase (decrease) Profit (Loss) Shareholders' for the equity period AMOUNTS RELATING TO THE PARENT COMPANY 118,303 5,055,196 DIFFERENCES between the shareholders' equity of companies consolidated on a line-by- line basis (net of minority interests) and the book value of the related equity investments 90,076 243,482 held by their parent companies, as follows: - consolidation adjustments (6,404) - - derecognition of intercompany profits and losses (2,222) - - share of the results of companies consolidated on a line-by-line basis after tax effect 98,702 - DIVIDENDS collected from companies consolidated on a line-by-line basis or stated under the equity method (6,506) 3 DIFFERENCE between the interest in shareholders' equity (including results for the period) and the book value of companies consolidated under the equity method. (1,254) 17,452
Profit (Loss) for the period and shareholders' equity pertaining to the Parent Company as at 30.09.2020 200,619 5,316,133 Profit (Loss) for the period and shareholders' equity pertaining to Minority interests as at 30.09.2020 19,362 137,257 Consolidated Profit (Loss) for the period and shareholders' equity as at 30.09.2020 219,981 5,453,390 Consolidated Profit (Loss) for the period as at 30.09.2019 537,993 Consolidated shareholders' equity as at 31.12.2019 5,291,547
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
4.4 Income statement aggregates
Summary data from the consolidated income statement at 30 September 2020 is presented below in thousands of Euro, appropriately compared with the amounts at 30 September 2019; the scope of consolidation in the two periods is not the same because of the business combinations that took place in the third quarter of 2019 involving Unipol Banca and Arca Holding. In the following tables, the detailed information relating to the Parent Company, i.e. the figures as at 30 September 2019, takes into account the absorption of Unipol Banca s.p.a. carried out on 25 November 2019, with effect for tax and accounting purposes on 1 July 2020, and that of Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. carried out on 27 July 2020 with effect for tax and accounting purposes on 1 January 2020, simulating the effects on the comparative balances (for further details on the methods of restatement, please refer to the "Attachments" to this Report; these figures have not been audited).
The results presented have been reclassified to the formats envisaged by the 6th update to Bank of Italy Circular no. 262/2005. The principal reclassifications relate to the following captions: • "Net income from financial activities" includes captions 80, 90, 100 and 110 in the standard reporting format; • Indirect tax recoveries, allocated for accounting purposes to caption 230 "Other operating expense/income", have been reclassified as a reduction in the related costs under "Other administrative expenses" (Euro 103,478 thousand at 30 September 2020 and Euro 100,051 thousand at 30 September 2019); • "Net adjustments to property, plant and equipment and intangible assets" include captions 210 and 220 in the standard reporting format; • "Gains (Losses) on equity investments, disposal investments and impairment losses on goodwill" include captions 250, 270 and 280 in the reporting format; • "Contributions to the SRF, DGS and IDPF-VS funds" has been shown separately from the specific accounting technical forms to give a better and clearer representation, as well as to leave the "Other administrative expenses" as a better reflection of the trend in the Group's operating costs. In particular, at 30 September 2020, this caption represents the component allocated for accounting purposes to administrative costs in relation to: • the 2020 contribution to the SRF (European Single Resolution Fund) for Euro 25,992 thousand; • additional contribution requested by the SRF (European Single Resolution Fund) for 2018 from Italian banks for Euro 8,149 thousand; • the 2020 contribution to the DGS (Deposit Guarantee Schemes) for Euro 30,512 thousand, representative of the estimate of what will be required by the end of the year.
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Consolidated income statement
(in thousands) Captions 30.09.2020 30.09.2019 Change % Change
10+20 Net interest income 943,743 862,093 81,650 9.47 40+50 Net commission income 774,824 656,070 118,754 18.10 70 Dividends 17,393 13,650 3,743 27.42 80+90+100+110 Net income from financial activities 95,589 77,186 18,403 23.84 230 Other operating expense/income 31,969 34,771 (2,802) -8.06 Operating income 1,863,518 1,643,770 219,748 13.37 190 a) Staff costs (721,302) (657,676) (63,626) 9.67 190 b) Other administrative expenses (351,600) (305,357) (46,243) 15.14 Net adjustments to property, plant and equipment and 210+220 intangible assets (128,003) (108,741) (19,262) 17.71 Operating costs (1,200,905) (1,071,774) (129,131) 12.05 Net operating income 662,613 571,996 90,617 15.84 130 a) Net impairment losses to financial assets at amortised cost (405,192) (308,021) (97,171) 31.55 - loans to customers (400,361) (305,369) (94,992) 31.11 - other financial assets (4,831) (2,652) (2,179) 82.16 130 b) Net impairment losses to financial assets at fair value (495) 582 (1,077) -185.05 Gains (Losses) from contractual modifications without 140 derecognition (624) (1,618) 994 -61.43 Net impairment losses for credit risk (406,311) (309,057) (97,254) 31.47 200 Net provisions for risks and charges (30,010) (9,202) (20,808) 226.12 ### Contributions to SRF, DGS, IDPF - VS (64,653) (58,414) (6,239) 10.68 250+270 Gains (Losses) on equity investments, disposal investments +280 and impairment losses on goodwill (4,020) 8,810 (12,830) -145.63 275 Gain on a bargain purchase - 353,805 (353,805) -100.00 290 Profit (Loss) from current operations before tax 157,619 557,938 (400,319) -71.75 300 Income taxes on current operations for the period 62,362 (19,945) 82,307 -412.67 330 Profit (Loss) for the period 219,981 537,993 (318,012) -59.11 340 Profit (Loss) for the period pertaining to minority interests (19,362) (15,068) (4,294) 28.50 Profit (Loss) for the period pertaining to the Parent 350 Company 200,619 522,925 (322,306) -61.64
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Consolidated income statement by quarter
(in thousands) Captions 1st 2nd 3rd 1st 2nd 3rd 4th quarter quarter quarter quarter quarter quarter quarter 2020 2020 2020 2019 2019 2019 2019
10+20 Net interest income 307,971 310,280 325,492 273,896 272,288 315,909 302,446 40+50 Net commission income 267,595 245,102 262,127 192,544 195,210 268,316 275,880 70 Dividends 809 12,034 4,550 539 9,687 3,424 451 80+90+100+110 Net income from financial activities 5,642 46,832 43,115 22,062 5,403 49,721 36,807 230 Other operating expense/income 14,607 9,724 7,638 6,337 8,923 19,511 16,308 Operating income 596,624 623,972 642,922 495,378 491,511 656,881 631,892
190 a) Staff costs (255,576) (249,088) (216,638) (213,631) (213,109) (230,936) (392,010) 190 b) Other administrative expenses (114,546) (116,917) (120,137) (90,930) (96,204) (118,223) (146,473) Net adjustments to property, plant and 210+220 equipment and intangible assets (40,957) (44,051) (42,995) (33,172) (35,380) (40,189) (76,335) Operating costs (411,079) (410,056) (379,770) (337,733) (344,693) (389,348) (614,818)
Net operating income 185,545 213,916 263,152 157,645 146,818 267,533 17,074 Net impairment losses to financial assets at 130 a) amortised cost (139,553) (157,769) (107,870) (72,485) (74,551) (160,985) (139,526) - loans to customers (139,991) (153,846) (106,524) (71,328) (74,632) (159,409) (139,449)
- other financial assets 438 (3,923) (1,346) (1,157) 81 (1,576) (77) Net impairment losses to financial assets at fair 130 b) value 105 (963) 363 421 (392) 553 674 Gains (Losses) from contractual modifications 140 without derecognition (195) (247) (182) (891) (76) (651) (1,361) Net impairment losses for credit risk (139,643) (158,979) (107,689) (72,955) (75,019) (161,083) (140,213)
200 Net provisions for risks and charges 2,276 (17,177) (15,109) (1,995) (9,698) 2,491 (2,991) ### Contributions to SRF, DGS, IDPF - VS (31,978) (2,185) (30,490) (23,184) (9,459) (25,771) (2,267)
250+270+280 Gains (Losses) on equity investments, disposal investments and impairment losses on goodwill 321 (5,481) 1,140 3,809 4,586 415 (2,199) 275 Gain on a bargain purchase - - - - - 353,805 (10,444) Profit (Loss) from current operations before 290 tax 16,521 30,094 111,004 63,320 57,228 437,390 (141,040) Income taxes on current operations for the 300 period (6,119) 75,066 (6,585) (12,266) 987 (8,666) (2,501) 330 Profit (Loss) for the period 10,402 105,160 104,419 51,054 58,215 428,724 (143,541) Profit (Loss) for the period pertaining to minority 340 interests (4,320) (6,563) (8,479) (3,083) (5,694) (6,291) 199 Profit (Loss) for the period pertaining to the 350 Parent Company 6,082 98,597 95,940 47,971 52,521 422,433 (143,342)
55
Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Net interest income Net interest income amounted to Euro 943.7 million, which was higher than the comparative figure (Euro 862.1 million at 30 September 2019) due to the growth of the Group thanks to the business combinations carried out in the second half of last year. The result includes the benefit attributable to the first nine months of participation in the TLTRO-II issues that were repaid on 24 June 2020, Euro 18.9 million, and the new TLTRO-III issue, Euro 38.1 million. In addition to recalling the dynamics of loans and interest-bearing deposits, highlighted in paragraph 4.1 "Balance sheet aggregates", an indication of the trend in average lending/funding rates is given below for a better understanding of the trend in interest rates for loans and deposits: • the average interest rate for the period, based on Group lending rates to customers, was 2.31%, a rise of around 1 bp compared with the average rate for the first nine months of the previous year; • the average rate of return of the securities portfolio was 0.74%, down by 25 bps compared with the first nine months of 2019 as a result of the reduction in market rates, as well as the disposals made during the period; • the average cost of direct deposits from customers was 0.27%, which is down by about 6 bps ith respect to the first nine months of last year (0.33%); • total interest-bearing liabilities involved a cost of 0.14%, a decrease of 14 bps compared with 0.28% in the same period of the previous year; • the spread between lending and deposit rates of Group relationships with customers came to 2.04% (1.97% at 30 September 2019); • the overall gap between the average annual rate of return on interest-bearing assets and the average annual cost of interest-bearing liabilities amounted to 1.62% (1.61% as at 30 September 2019).
(in thousands) Net interest income 30.09.2020 30.09.2019 Change % Change
1. BPER Banca s.p.a. 673,479 611,445 62,034 10.15 2. BPER Bank Luxembourg s.a. 3,880 3,595 285 7.93 3. Bibanca s.p.a. 36,587 31,397 5,190 16.53 4. Banco di Sardegna s.p.a. 144,651 155,650 (10,999) -7.07 Total banks 858,597 802,087 56,510 7.05 Other companies and consolidation adjustments 85,146 60,006 25,140 41.90 Total 943,743 862,093 81,650 9.47
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
The quarterly trend in Net interest income, shown in the following chart, highlights the growth with respect to the previous quarters, mainly due to the negative interest calculated on the TLTRO III operations subscribed on 24 June 2020.
Net interest income in thousands
330,000
320,000 325,492
310,000 315,909 310,280 300,000 307,971 302,446 290,000
280,000
270,000
260,000
250,000
240,000
230,000 3Q 2019 4Q 2019 1Q 2020 2Q 2020 3Q 2020
Net commission income Net commission income, Euro 774.8 million, is higher (+18.10%) than at 30 September 2019, mainly due to the business combinations carried out in the second half of last year.
(in thousands) Net commission income 30.09.2020 30.09.2019 Change % Change
Trading in currency/financial instruments 4,939 6,626 (1,687) -25.46 Indirect deposits and insurance policies 344,207 253,874 90,333 35.58 Credit cards, collections and payments 117,800 116,118 1,682 1.45 Loans and guarantees 281,555 248,597 32,958 13.26 Other commissions 26,323 30,855 (4,532) -14.69 Total net commission income 774,824 656,070 118,754 18.10
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Net commission income in thousands
300,000
275,880 260,000 268,316 267,595 262,127 245,102
220,000
180,000
140,000
100,000 3Q 2019 4Q 2019 1Q 2020 2Q 2020 3Q 2020
The quarterly trend in Net commission income in the above chart shows an increase of 6.95% with respect to the previous quarter, substantially returning to where it was in the first quarter of 2020 as the restrictive health measures were relaxed and customers were able to be more operative again. In particular, there were increases in the commissions earned from asset management (+11.53%), from the use of cards and payment systems (+13.24%) and from loans and guarantees (+2.59%). The contribution made by the Bancassurance segment remained stable.
Net income from financial activities The income from financial activities (including dividends of Euro 17.4 million) was Euro 113.0 million (Euro 90.8 million at 30 September 2019), influenced by the disposal of securities on the market. This result was brought about in particular by: • gains from disposal of financial assets for Euro 120.2 million; • losses from disposal of loans for Euro 3 million; • net capital losses on financial assets of Euro 22.4 million; • other positive elements for Euro 0.8 million.
(in thousands) Net income from financial activities (including 30.09.2020 30.09.2019 Change % Change dividends) Dividends 17,393 13,650 3,743 27.42 Gain from disposal of financial assets and loans 117,169 69,052 48,117 69.68 Capital gains on financial assets 12,764 33,703 (20,939) -62.13 Capital losses on financial assets (35,184) (30,255) (4,929) 16.29 Other revenues (losses) 840 4,686 (3,846) -82.07 Total 112,982 90,836 22,146 24.38
Operating income Considering Other operating expense/income of Euro 32 million (Euro 34.8 million at 30 September 2019), Operating income came to Euro 1,863.5 million (+13.37% compared to the same period last year).
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Consolidated interim report on operations as at 30 September 2020 Group interim report on operations
Operating costs Operating costs amounted to Euro 1,200.9 million, an increase compared with the first nine months of 2019 due to the increase in size of the Group as a result of the business combinations carried out in the second half of 2019. The main components of operating costs are as follows.
Staff costs amount to Euro 721.3 million, up by 9.67% compared with the same period in the prior year, mainly due to the increase in the size of the Group as a consequence of the business combinations carried out in the second half of 2019.
Other administrative expenses, shown net of indirect taxes recovered (Euro 103.5 million at 30 September 2020) and the contributions paid to the Resolution Funds (Euro 64.7 million), come to Euro 351.6 million, up by 15.14% compared with the same period last year. This caption was also affected by the increase in scale, as well as by the charges incurred in relation to the extraordinary transactions carried out by the BPER Banca Group during the period. Performance was also influenced by the Covid-19 healthcare emergency: non-recurring expenses were incurred, above all during the first half of the year, on the purchase of hygiene-sanitary materials, licences and technical support for smart working, advertising and publicity, donations and building maintenance; by contrast, some savings were made with respect to budget, due to the suspension or reduction of activities as a result of the ongoing emergency (travel, training courses, cash collections).
Net adjustments to property, plant and equipment and intangible assets amounted to Euro 128.0 million (Euro 108.7 million in the first nine months of 2019), including Euro 3.7 million of impairment adjustments on owned buildings. The depreciation of right-of-use assets under leases amounted to Euro 45.3 million (Euro 38.4 million at 30 September 2019), while the adjustments for contracts closed-out
early totalled Euro 0.7 million.
(in thousands) Operating costs 30.09.2020 30.09.2019 Change % Change
1. BPER Banca s.p.a. 945,494 854,162 91,332 10.69 2. BPER Bank Luxembourg s.a. 3,474 3,149 325 10.32 3. Bibanca s.p.a. 26,181 23,667 2,514 10.62 4. Banco di Sardegna s.p.a. 184,737 186,213 (1,476) -0.79 Total banks 1,159,886 1,067,191 92,695 8.69 Other companies and consolidation adjustments 41,019 4,583 36,436 795.03 Total 1,200,905 1,071,774 129,131 12.05
Net operating income therefore came to Euro 662.6 million (Euro 572.0 million at 30 September 2019).
Net impairment losses for credit risk Net impairment losses for credit risk amounted to Euro 406.3 million (Euro 309.1 million at 30 September 2019); the trend of this caption was influenced by the higher expected credit losses (ECL) recognised as a result of the worsening of the macroeconomic context caused by the Covid-19 health emergency.
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In particular, Net impairment losses on financial assets measured at amortised cost totalled Euro 405.2 million (Euro 308.0 million at 30 September 2019), while the measurement of securities with an impact on overall profitability resulted in losses of Euro 0.5 million.
The net impairment losses for credit risk on loans to customers are analysed below:
(in thousands) Net impairment losses for credit risk on loans to 30.09.2020 30.09.2019 Change % Change customers
1. BPER Banca s.p.a. 338,751 224,659 114,092 50.78 2. BPER Bank Luxembourg s.a. - 496 (496) -100.00 3. Bibanca s.p.a. 4,354 2,537 1,817 71.62 4. Banco di Sardegna s.p.a. 32,095 57,716 (25,621) -44.39 Total banks 375,200 285,408 89,792 31.46 Other companies and consolidation adjustments 25,161 19,961 5,200 26.05 Total 400,361 305,369 94,992 31.11
The overall cost of credit at 30 September 2020, calculated solely on loans to customers, is 76 bps, corresponding to 101 bps on an annual basis; the cost of credit at 30 September 2019 was 58 bps, while the actual cost at 31 December 2019 was 86 bps.
Net provisions for risks and charges Net provisions for risks and charges come to Euro 30.0 million (Euro 9.2 million at 30 September 2019). Similarly to what was said about the "Net impairment losses on loans”, this caption includes the increase in ECL on endorsement credits and irrevocable commitments, accounted for to reflect the deterioration in the macroeconomic context caused by the Covid-19 health emergency; it also includes write-backs that bring the balance to show a net write-back of Euro 0.7 million (net write-backs of Euro 6.8 million were recorded at 30 September 2019). The "Net provisions for risks and charges" amount to Euro 30.7 million (Euro 16.0 million at 30 September 2019). These mainly reflect adjustment of the "profit sharing" element payable to the National Resolution Fund under the agreements for the acquisition of Nuova Carife s.p.a. (Euro 11.5 million payable to the seller following the recovery of prior-year tax losses), in addition to other provisions relating to legal risks on disputes.
Contributions to the SRF, DGS and IDPF-VS Funds At 30 September 2020 the contributions paid amounted to Euro 64.7 million (Euro 58.4 million in the period to 30 September 2020), of which Euro 26 million (Euro 23 million in the period to 30 September 2019) for the ordinary contribution to the SRF (Single Resolution Fund), Euro 8.1 million for the additional payment relating to 2018 requested by the SRF and Euro 30.5 million for the ordinary contribution to the DGS (Deposit Guarantee Scheme), which will be paid in the fourth quarter.
Gains (Losses) on equity investments, disposal of investments and impairment losses on goodwill The net loss of Euro 4.0 million (gain of Euro 8.8 million in the period to 30 September 2019) principally deriving from adjustments to the goodwill included in the equity investments in Cassa di Risparmio di Fossano (Euro 6.8 million) and Cassa di Risparmio di Savigliano (Euro 1.3 million), already accounted for
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at 30 June 2020. The measurement at equity of the investments in companies subject to significant influence resulted in a gain of Euro 3.7 million.
Net profit The profit from current operations before tax amounts to Euro 157.7 million (Euro 557.9 million at 30 September 2019, affected by the provisional allocation of the badwill of Euro 353.8 million deriving from the business combination with Unipol Banca s.p.a.). Income taxes for the period, Euro 62.4 million, were determined by applying the regulations in force at 30 September 2020 and, therefore, considering the changes introduced by the "Cura Italia"50 Decree. They include, in particular, the transformation into tax credits of the deferred tax assets on tax losses and excess ACE on the disposal of non-performing exposures. The regulation also envisages the transformation of deferred tax assets not already recognised. For the purposes of this transformation, tax losses and excess ACE can be considered up to a maximum of 20% of the nominal value of the loans sold. The positive impact on the income statement of this transformation was Euro 52.9 million. During the period, the Parent Company also franked pursuant to Decree 185/2008 the goodwill allocated to the Arca Holding CGU and the intangible assets deriving from the measurement at fair value of the customer relationships of Unipol Banca, with a positive impact on the income statement of Euro 33.9 million. No deferred tax assets have been recognised on temporary differences due to reverse after the five-year time horizon considered for the probability test (2020-2024). In addition, following the results of the test, only part of the deferred tax assets on carry-forward tax losses were recognised.
The profit, net of taxes, amounts to Euro 220 million (Euro 538 million at 30 September 2019). The Profit pertaining to minority interests amounts to Euro 19.4 million (Euro 15.1 million at 30 September 2019). The profit pertaining to the Parent Company amounts to Euro 200.6 million (Euro 522.9 million at 30 September 2019).
(in thousands) Net profit 30.09.2020 30.09.2019 Change % Change
1. BPER Banca s.p.a. 118,303 481,094 (362,791) -75.41 2. BPER Bank Luxembourg s.a. 2,838 4,730 (1,892) -40.00 3. Bibanca s.p.a. 10,065 11,908 (1,843) -15.48 4. Banco di Sardegna s.p.a. 44,205 30,053 14,152 47.09 Total banks 175,411 527,785 (352,374) -66.76 Other companies and consolidation adjustments 25,208 (4,860) 30,068 -618.68 Total 200,619 522,925 (322,306) -61.64
50 Decree 18 of 17 March 2020 61
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4.5 Employees
Employees 30.09.2020 31.12.2019 Change
1. BPER Banca s.p.a. 10,512 10,748 (236) 2. BPER Bank Luxembourg s.a. 23 22 1 3. Bibanca s.p.a. 141 144 (3) 4. Banco di Sardegna s.p.a. 2,296 2,468 (172) Total banks 12,972 13,382 (410) Subsidiaries consolidated line-by-line 433 423 10 Total of balance sheet 13,405 13,805 (400)
The figures refer to the point number of employees at 30 September 2020. The BPER Banca figure as at 31 December 2019 includes the employees of Cassa di Risparmio di Bra s.p.a. (158) and Cassa di Risparmio di Saluzzo s.p.a. (174), which were absorbed by the Parent Company on 27 July 2020. The Group companies' employees at 30 September 2020 includes 558 persons seconded within the Group (667 at 31 December 2019).
4.6 Geographical organisation
Branches 30.09.2020 31.12.2019 Change
1. BPER Banca s.p.a. 971 1,006 (35) 2. Banco di Sardegna s.p.a. 339 343 (4) Total Italian banks 1,310 1,349 (39) 3. BPER Bank Luxembourg s.a. 1 1 - Total 1,311 1,350 (39)
The number of BPER Banca branches as at 31 December 2019 includes the branches of Cassa di Risparmio di Bra s.p.a. (26) and Cassa di Risparmio di Saluzzo s.p.a. (22), which were absorbed by the Parent Company on 27 July 2020. Please refer to the "Attachments" of this Consolidated interim report on operations as at 30 September 2020 for details of the Bank's presence in the area.
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5. Other information
5.1 Treasury shares in portfolio
No quotas or shares in Group companies are held through trust companies or other third parties; furthermore, such parties were not used during the period to buy or sell shares or quotas in Group companies.
The carrying amount of the Group’s interest in the treasury shares held by consolidated companies, classified as a deduction from shareholders' equity caption 180, is Euro 7,259 thousand, of which Euro 7,253 thousand relates to BPER Banca shares held by the Parent Company.
Shares of BPER Banca s.p.a. Number of shares Total par value
Total as at 30.09.2020 455,458 7,253,180 Total as at 31.12.2019 455,458 7,253,180
There are also 62,110 shares of Bibanca s.p.a. (formerly Banca di Sassari), held by it, for a total of Euro 6 thousand.
5.2 Share price performance
The beginning of 2020 was characterised by the severe economic and financial crisis triggered off by the worldwide health emergency. In the first part of the year, international stock markets collapsed, and then recorded important recoveries thanks to the monetary and fiscal stimulus measures implemented by the monetary authorities and governments of influential macro-areas. After the considerable gains in the second quarter, equity markets continued to rise in the third quarter, albeit at a much slower pace. The recovery was stronger in the USA, where - unlike most other countries - stock market indexes rose higher than their level at the start of the year. Markets rose less in Europe, in line with the lower strength of the economic recovery. In these nine months, the S&P500 equity index in the United States rose by 4.4%. The Euro Stoxx 50 in Europe, on the other hand, fell by 14.8%. The Italian FTSE MIB index was among those that suffered the most substantial losses, falling by 19.1%. The financial sector was particularly penalised, with the Banks index showing a decline of 31.4% since the beginning of the year. In this difficult context, BPER Banca's official share price slid from Euro 3.0345 at 30 December 201951 to Euro 1.3456 at 30 September 2020. The trading volumes of BPER Banca shares have stabilised at a daily average of about Euro 8 million shares since the beginning of the year.
51 Borsa Italiana provided the new prices of the ordinary shares of BPER Banca, on which an adjustment factor of 0.67688248 has been applied, following the increase in share capital which began on Monday, 5 October 2020. The whole time series has been modified. 63
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BPER share price and volumes
56,000,000 4.50
4.25 51,000,000 4.00
46,000,000 3.75
3.50 41,000,000 3.25
36,000,000 3.00
2.75 31,000,000 2.50 26,000,000 2.25
21,000,000 2.00
1.75 16,000,000 1.50
11,000,000 1.25
1.00 6,000,000 0.75
1,000,000 0.50
Volumes Share prices
5.3 Ratings as at 30 September 2020
Fitch Ratings The ratings given by Fitch Ratings to BPER Banca in April were confirmed as of 30 September 2020. The details are as follows.
Last Support International Short Long Rating Viability Support Subordinated review rating Rating Agency Term Term watch Rating rating debt date floor bb Fitch Ratings 01.04.2020 B BB (RWN) Negative 5 No floor B+(RWN) (RWN)
Short Term (Issuer Default Rating): Debt repayment capacity in the short term (less than 13 months) (F1: best rating – D: default). Long Term (Issuer Default Rating): Ability to meet financial commitments in a timely manner regardless of the maturity of the individual bonds. This rating is an indicator of the issuer's probability of default (AAA: best rating – D: default). Viability Rating: Evaluation of the bank's intrinsic solidity, seen on the assumption that it cannot rely on extraordinary forms of external support (aaa: best rating – f: default). Support rating: Judgement on the probability of any extraordinary external intervention (by the State or major shareholders) if the bank finds it difficult to honour its senior bonds [1: high probability of external support - 5: one cannot rely on any support (as in the case of European banks under the BRRD resolution regime)]. Support rating floor: This rating is an accessory piece of information, closely related to the Support Rating, as it identifies, the minimum level for each level of Support Rating that the Issuer Default Rating could reach in the case of negative events (No Floor for European Banks under the BRRD resolution scheme). Subordinated debt: Opinion on the issuer's ability to honour subordinated debt. Fitch adds "+" or "-" to report the relative position with respect to the category. Rating watch: indicates a high probability of a change in rating and the likely direction of that change. The indicator may be "positive", if the rating is expected to remain stable or improve; "negative", if the rating is expected to remain stable or deteriorate; or "evolving", if the rating might be raised, lowered or confirmed.
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Fitch confirmed the Bank's ratings on 23 October 2020. The Long-Term Issuer Default Rating ("IDR") and Viability Rating ("VR") were confirmed at BB with a Stable outlook and bb respectively and, at the same time, the Rating Watch Negative ("RWN") was removed. Confirmation of the ratings reflects the progress made in improving asset quality, also as a result of the "Spring" bad loan securitisation concluded recently for a gross carrying amount of Euro 1.2 billion. Fitch's decision also follows completion of the Euro 802 million increase in share capital to finance the acquisition of 532 branches from the Intesa Sanpaolo Group which, thanks to the significant growth in size, should help support the BPER Banca Group's profitability in the coming years. Lastly, Fitch believes that both of these transactions can help offset external pressures resulting from the economic slowdown. The "Stable" outlook incorporates the Rating Agency's expectation that BPER's capitalisation will remain satisfactory relative to its level of rating and able to absorb the expected deterioration in asset quality and profitability, mainly due to the economic crisis following the health emergency. The updated parameters are reported below.
Last Support International Short Long Rating Viability Support Subordinated review rating Rating Agency Term Term watch Rating rating debt date floor Fitch Ratings 23.10.2020 B BB Stable bb 5 No floor B+
Moody’s The ratings given by Moody's to BPER Banca in March this year were confirmed as of 30 September 2020. The details are as follows.
Outlook Outlook Baseline Last Short Long Long International (Long- (Long- Credit Subordinated review Term Term Term Rating Agency term term Assessment debt date Deposit Deposit Issuer Deposit) Issuer) (“BCA”)
Moody's 26.03.2020 P-3 Baa3 Negative Ba3 Negative ba2 Ba3
Short-Term Deposit: Ability to repay deposits in local currency in the short term (original maturity equal to or less than 13 months) (Prime-1: highest quality – Not Prime: not classifiable among the Prime categories). Long-Term Deposit: Ability to repay deposits in local currency in the long term (original maturity equal to or greater than 1 year) (Aaa: best rating – C: default). Outlook: it indicates the possible future evolution of the rating that can be "positive", "stable", "negative" or "developing". Long-Term Issuer: Opinion on the issuer's ability to honour senior debt and bonds (Aaa: best rating – C: default). Baseline Credit Assessment (BCA): The BCA is not a rating but an opinion on the intrinsic financial strength of the bank in the absence of external support (aaa: best rating – c: default). Subordinated debt: Opinion on the issuer's ability to honour subordinated debt. Moody’s adds 1, 2, and 3 to each generic class; 3 indicates that the issuer is positioned in the lower part of the category.
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5.4 Disclosure of exposures to sovereign debt held by listed companies
Details are provided below of bonds issued by Central and Local Governments and by Government entities, as well as loans granted to them52.
Debt securities
Nominal OCI Issuer Rating Cat Book value Fair Value % value Reserves
Governments (*): 9,525,941 10,020,972 10,288,278 5,475 93.98% Italy BBB - 7,151,680 7,528,073 7,758,979 4,498 70.60% FVTPLT 1,407 1,654 1,654 # FVO 100,000 119,396 119,396 # FVTPLM 50,000 50,988 50,988 # FVOCI 384,425 424,500 424,500 4,498 AC 6,615,848 6,931,535 7,162,441 # Spain A - 1,407,500 1,467,537 1,487,037 - 13.76% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI - - - - AC 1,407,500 1,467,537 1,487,037 # European Stability Fund AA 282,000 318,240 325,855 368 2.98% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI 95,000 111,462 111,462 368 AC 187,000 206,778 214,393 # Germany AAA 180,000 188,598 189,286 - 1.77% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI - - - - AC 180,000 188,598 189,286 # France AA 100,000 133,793 131,626 - 1.26% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI - - - - AC 100,000 133,793 131,626 #
52 Information required by CONSOB Communication DEM/11070007 of 5 August 2011 and by the Letter dated 31 October 2018 which CONSOB sent to listed bank issuers. 66
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Nominal OCI Issuer Rating Cat Book value Fair Value % value Reserves
Ireland A+ 116,000 128,923 132,016 - 1.21% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI - - - # AC 116,000 128,923 132,016 # Others - 288,761 255,808 263,479 609 2.40% FVTPLT 761 742 742 # FVO - - - # FVTPLM - - - # FVOCI 90,000 78,326 78,326 609 AC 198,000 176,740 184,411 #
Other public entities: 794,631 641,458 646,223 (283) 6.02% Italy - 196,107 15,482 15,717 109 0.15% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI 6,236 6,354 6,354 109 AC 189,871 9,128 9,363 # Germany - 312,000 338,068 339,763 - 3.17% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI - - - - AC 312,000 338,068 339,763 # France - 168,000 171,003 172,494 (191) 1.60% FVTPLT - - - # FVO - - - # FVTPLM - - - # FVOCI 31,000 34,675 34,675 (191) AC 137,000 136,328 137,819 # Others - 118,524 116,905 118,249 (201) 1.10% FVTPLT 24 7 7 # FVO - - - # FVTPLM - - - # FVOCI 79,000 77,391 77,391 (201) AC 39,500 39,507 40,851 # Total as at 30.09.2020 10,320,572 10,662,430 10,934,501 5,192 100.00%
(*)The individual percentages shown in the above table may not agree with the total because of roundings. The ratings indicated are those of Fitch Ratings at 30 September 2020.
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Loans
Nominal Book Fair OCI Issuer Rating Cat % value value value Reserves
Governments (*): 2,100,971 2,100,971 2,100,971 - 86.93% Italy BBB+ 2,100,971 2,100,971 2,100,971 - 86.93%
FVTPLT - - - # FVO - - - # FVTPLM - - - - FVOCI - - - # AC 2,100,971 2,100,971 2,100,971 # Other public entities: 315,890 315,890 315,890 - 13.07%
Italy - 314,462 314,462 314,462 - 13.01%
FVTPLT - - - # FVO - - - # FVTPLM - - - - FVOCI - - - # AC 314,462 314,462 314,462 # Algeria - 1,428 1,428 1,428 - 0.06%
FVTPLT - - - # FVO - - - # FVTPLM - - - - FVOCI - - - # AC 1,428 1,428 1,428 # Total loans as at 30.09.2020 2,416,861 2,416,861 2,416,861 - 100.00%
(*)The individual percentages shown in the above table may not agree with the total because of roundings. The ratings indicated are those of Scope Ratings at 30 September 2020.
Based on their book value, repayment of these exposures is distributed as follows:
on demand until 1 year 1 to 5 years over 5 years Total
Debt securities - 342,960 4,753,443 5,566,027 10,662,430 Loans 303,475 5,968 68,231 2,039,187 2,416,861 Total 303,475 348,928 4,821,674 7,605,214 13,079,291
Control over the risks inherent in the portfolio is maintained by the Directors who monitor the effects on profitability, liquidity and the Group's capital base, also through sensitivity analyses. No critical elements have been identified on the basis of these analyses.
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5.5 Contributions to the Single Resolution Fund and the Deposit Guarantee Fund and developments in the Interbank Deposit Protection Fund: Voluntary scheme and Solidarity Fund
Once again in 2020, the BPER Banca Group contributed to the mechanisms to safeguard the soundness of the banking system, established in 2015 at European and Italian level. In April 2020, the BPER Banca Group received a request for the ordinary contribution to the Single Resolution Fund (SRF) for 2020, for a total amount of Euro 26 million (BPER Banca's share is Euro 23.2 million). In June 2020, on top of the ordinary contributions, additional contributions were requested in relation to 2018 totalling Euro 8.1 million at Group level (Euro 9.6 million requested for 2017, received in 2019). The determination of the contribution base of the Deposit Guarantee Scheme (DGS) according to protected deposits at 30 September 2020 led to an obligation to pay in the third quarter of the year; on this basis, BPER Banca and the other Italian Group banks charged a total of Euro 30.5 million to Other administrative expenses (of which Euro 24.2 million relates to the Parent Company). The Interbank Deposit Protection Fund – Scheme of intervention on a voluntary basis (IDPF-VS) and the Solidarity Fund established by the 2016 Stability Law did not require specific contributions at 30 September 2020.
5.6 Inspections and audits
Note that the disclosure provided below is for information purposes only with regards to the checks carried out as part of the ordinary supervisory activity to which the BPER Banca Group is subject, as it operates in a highly regulated sector. As indicated in the Explanatory notes to this Consolidated interim report on operations, the Directors are of the opinion that the observations that emerged in the various inspection areas do not entail significant impacts in terms of income, assets and cash flows of the BPER Banca Group. In any case, the Group always prepares suitable action plans to implement the Supervisory Authority's recommendations as quickly as possible. The most significant updates in the first nine months of 2020 are detailed below; for any matters not discussed here, please refer to the information provided in the consolidated financial statements as at 31 December 2019.
European Central bank – ECB The following information relates to the ECB's audits of the BPER Banca Group currently in progress (or already carried out, but with action plans prepared or sent in 2020).
1) From September to December 2018 the BPER Banca Group was the subject of a targeted review of internal rating models (TRIM) by the ECB. This was also carried out at a European level at other banks supervised by the ECB. The follow-up letter on the results of the inspection was received on 2 March 2020. On 28 March 2020 BPER Banca sent the Action Plan to the Supervisory Authority in response to the recommendations made.
2) From November 2018 to April 2019 the BPER Banca Group was subjected to an on-site Credit Quality Review (CQR) by the ECB. The inspection involved analysing a sample of Corporate loans of various
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Group Banks and Companies, as well as checking that the internal credit processes and procedures comply with the Supervisory Regulations. The follow-up letter on the results of the inspection was received on 17 December 2019 and the Bank answered it on 3 February 2020 by sending a specific action plan with respect to the following areas of intervention: • provisioning for bad loans and the management of secured guarantees; • policies and internal processes in relation to ratings; • updates to internal policies following the application of IFRS 9.
3) The BPER Banca Group was inspected by the ECB between May and July 2019 to assess its corporate governance. The ECB follow-up letter on the results of the inspection was received on 8 April 2020. On 6 May 2020 BPER Banca sent the Action Plan to the ECB in response to the recommendations made.
4) In June 2019, the Regulator carried out an inspection at BPER Banca to check use of the IRB system in the context of the Eurosystem Credit Assessment Framework (ECAF). In particular, assurance was sought that the IT systems and administrative and organisational processes of BPER Banca are capable of reporting correctly the required information about the debtors considered potentially suitable for monetary policy refinancing (static pools), as measured by the internal rating system (IRB). The letter about the outcome of the inspection was received on 29 January 2020, indicating that the check on the process of managing the static pools was "mostly satisfactory". A number of possible improvements were however identified, as addressed in the specific Action Plan submitted by the Bank on 28 February 2020. They cover the following areas: • enhanced controls for monitoring the administrative status of the parties included in the static pools and updating significant information held about them; • improvement of the IT procedure for managing the comments made when reporting the static pools; • greater formalisation of the related internal documentation.
5) From 14 October 2019 to 24 January 2020, the BPER Banca Group has been the subject of an on-site inspection by the ECB focusing on IT risk assessment. The ECB follow-up letter on the results of the inspection was received on 12 October 2020. In response to this, BPER Banca is preparing a specific Action Plan for the following areas of intervention: • strengthening the IT component to support company development by bringing the IT strategy plans into line with the timing of the Business Plan; • strengthening the self-assessment of IT risk mitigation controls; • strengthening and optimising certain processes in the field of IT Security; • reviewing part of the documentation that supports the IT Asset Management processes; • optimising the activities of the Operations Centre for Safety; • optimising IT reporting to the Corporate Bodies.
CONSOB and the Bank of Italy – inspections begun after 30 September 2020 1) Since October 2020, BPER Banca has been subject to an inspection by CONSOB to ascertain the state of compliance with the new MiFID II regulation following the transposition of Directive 2014/65/EU into Italian law. The inspection was still underway at the date this document was prepared.
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2) Since October 2020, the subsidiary Arca Fondi SGR has been subject to an inspection by the Bank of Italy regarding the company's overall situation. The inspection was still underway at the date this document was prepared.
Financial administration - admission to the cooperative compliance regime Under the cooperative compliance regime, the Bank must guarantee to maintain and administer a Tax Control Framework (TCF) that is monitored and updated systematically. For this purpose, the Tax Unit within the Parent Company has been identified as the specialist control function that, working together with the Compliance Function, ensures the systematic analysis, assessment and coverage of tax risks. Work to improve the TCF continued during the first nine months of 2020, including: • extension of access to the ABITacs application to all Tax Unit personnel; • formalisation of operating manuals for authorised users, describing in detail the available functions; • systematic issue of regulatory alerts to the relevant Bank and Group structures (this was extremely important during the period, in view of the numerous measures issued by the tax authorities, partly in relation to the ongoing epidemic); • routine drafting of compliance and effectiveness checks on the topics planned for the current year continued; • in coordination with the Corporate Bodies and Regulatory Compliance Office, discussions were held with the other control bodies regarding the assessment of the risk profiles associated with the introduction of certain tax crimes within the scope of Legislative Decree 231/01 (art. 25- quinquiesdecies).
In addition, as required by the regulation, an annual report on Tax Risk Management has been prepared pursuant to art. 4, para. 2, of Decree 128 dated 5 August 2015. This document, described in detail to the Controls and Risks Committee on 9 June 2020 and to the Board of Directors of the Parent Company on 11 June 2020, contains the required plan for checks to be performed by the Tax Specialist Function during the three-year period 2020-2022. In the context of the overall planning process, the Compliance Function has adopted the TCF-related activities proposed for 2020. On 25 March 2020 an online meeting (due to the Covid-19 healthcare emergency) was held between representatives of the Cooperative Compliance Office of the Tax Authorities and representatives of BPER Banca with a view to closing the "procedure", pursuant to para. 6.1 of Decision 101573 dated 26 May 2017. That meeting: • summarised and acknowledged all the positions taken during the procedure on matters notified by the Bank or analysed by the CCO, specifying in each case whether or not the position of the Office was agreed. The absence of disagreements was confirmed during the meeting; • covered the outcome of an inspection of the control system carried out by the Tax Authorities; • summarised the matters that will be addressed further over the coming year.
The meeting ended with the issue of minutes by the Cooperative Compliance Office of the Tax Authorities. Lastly, it should be remembered that on 6 October 2020 a summary note was sent to the Tax Authorities - by certified email - on developments in the activities carried out by the Tax Control Framework (TCF) on the workings of the control system and, in particular, on the points that emerged in the letter accompanying the tax audit report of 3 October 2018, already acknowledged by BPER Banca on 20 February 2020.
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6. Outlook for operations
6.1 Outlook for operations
The effects of the health emergency on the global economy are currently difficult to quantify, even if a significant decrease in production and consumption can reasonably be expected for the current year, with a prospect of recovery in economic activity in 2021, helped by the massive intervention on the part of governments and central banks to support the liquidity and income of households and businesses to cope with this moment of great difficulty caused by the health emergency.
In this difficult context, the BPER Group is confident that it will be able to express a good margin on traditional revenues during the year, especially with reference to net interest income, which should benefit from an increase in loans and a reduction in the cost of funding. At the same time, operating costs are expected to diminish gradually, not least due to the steady lowering of staff costs as the efficiency improvements envisaged in the business plan are implemented. Even if there is a prudently estimated cost of credit of around 100-110 bps, these elements should help sustain the profitability expected for the current year. Asset quality should continue the trend of improvement in the fourth quarter of the year, despite the context of high uncertainty and the marked deterioration in the economic scenario. Capital strength and liquidity will remain high.
Modena, 4 November 2020
The Board of Directors The Chairman Pietro Ferrari
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(in thousands) Assets 30.09.2020 31.12.2019
10. Cash and cash equivalents 464,244 566,924 20. Financial assets measured at fair value through profit or loss 1,112,157 1,120,111 a) financial assets held for trading 257,216 270,374 b) financial assets designated at fair value 126,045 130,955 c) other financial assets mandatorily measured at fair value 728,896 718,782 Financial assets measured at fair value through other comprehensive 30. income 6,322,985 6,556,202 40. Financial assets measured at amortised cost 75,710,690 65,541,246 a) loans to banks 11,346,389 5,066,379 b) loans to customers 64,364,301 60,474,867 50. Hedging derivatives 49,631 82,185 70. Equity investments 220,254 225,869 90. Property, plant and equipment 1,344,461 1,368,696 100. Intangible assets 660,733 669,847 of which: - goodwill 434,758 434,758 110. Tax assets 1,925,563 2,024,579 a) current 332,827 466,312 b) deferred 1,592,736 1,558,267 120. Non-current assets and disposal groups classified as held for sale 97,691 97,142 130. Other assets 709,580 780,697 Total assets 88,617,989 79,033,498
(in thousands) Liabilities and shareholders' equity 30.09.2020 31.12.2019
10. Financial liabilities measured at amortised cost 78,830,382 70,135,262 a) due to banks 19,188,980 12,213,133 b) due to customers 55,006,699 52,087,240 c) debt securities issued 4,634,703 5,834,889 20 . Financial liabilities held for trading 167,410 165,970 40. Hedging derivatives 459,681 294,114 60. Tax liabilities 65,112 75,737 a) current 6,838 5,405 b) deferred 58,274 70,332 70 . Liabilities associated with assets classified as held for sale 139,340 134,077 80. Other liabilities 2,733,573 2,069,511 90. Employee termination indemnities 160,321 191,120 100. Provisions for risks and charges 608,780 676,160 a) commitments and guarantees granted 55,290 55,995 b) pension and similar obligations 154,740 161,619 c) other provisions for risks and charges 398,750 458,546 120 . Valuation reserves 53,367 37,750 140. Equity instruments 150,000 150,000 150. Reserves 2,351,088 2,035,205 160. Share premium reserve 1,002,722 1,002,722 170. Share capital 1,565,596 1,561,884 180. Treasury shares (-) (7,259) (7,259) 190. Minority interests (+/-) 137,257 131,662 200. Profit (Loss) for the period (+/-) 200,619 379,583 Total liabilities and shareholders' equity 88,617,989 79,033,498
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Consolidated income statement as at 30 September 2020 (in thousands) Captions 30.09.2020 30.09.2019
10. Interest and similar income 1,086,160 1,057,644 of which: interest income calculated using the effective interest method 1,079,978 1,039,265
20. Interest and similar expense (142,417) (195,551) 30. Net interest income 943,743 862,093 40. Commission income 902,370 720,079 50. Commission expense (127,546) (64,009) 60. Net commission income 774,824 656,070 70. Dividends and similar income 17,393 13,650 80. Net income from trading activities (15,796) (23,554) 90. Net income from hedging activities (2,522) (4,178) 100. Gains (Losses) on disposal or repurchase of: 136,059 110,205 a) financial assets measured at amortised cost 127,262 39,458 b) financial assets measured at fair value through other comprehensive income 8,348 70,311 c) financial liabilities 449 436 110. Net income on financial assets and liabilities measured at fair value through profit or loss (22,152) (5,287) a) financial assets and liabilities designated at fair value (4,166) (6,965) b) other financial assets mandatorily measured at fair value (17,986) 1,678 120 . Net interest and other banking income 1,831,549 1,608,999 130. Net impairment losses for credit risk relating to: (405,687) (307,439) a) financial assets measured at amortised cost (405,192) (308,021) b) financial assets measured at fair value through other comprehensive income (495) 582 140. Gains (Losses) from contractual modifications without derecognition (624) (1,618) 150. Net income from financial activities 1,425,238 1,299,942 180. Net income from financial and insurance activities 1,425,238 1,299,942 190. Administrative expenses: (1,241,033) (1,121,498) a) staff costs (721,302) (657,676)
b) other administrative expenses (519,731) (463,822)
200. Net provisions for risks and charges (18,558) (9,202) a) commitments and guarantees granted 705 6,837
b) other net provisions (19,263) (16,039)
210. Net adjustments to property, plant and equipment (84,092) (69,649) 220. Net adjustments to intangible assets (43,911) (39,092) 230. Other operating expense/income 123,995 134,822 240. Operating costs (1,263,599) (1,104,619) 250. Gains (Losses) of equity investments (4,523) 10,539 275. Gain on a bargain purchase - 353,805 280. Gains (Losses) on disposal investments 503 (1,729) 290. Profit (Loss) from current operations before tax 157,619 557,938 300. Income taxes on current operations for the period 62,362 (19,945) 310. Profit (Loss) from current operations after tax 219,981 537,993 330. Profit (Loss) for the period 219,981 537,993 340. Profit (Loss) for the period pertaining to minority interests (19,362) (15,068) 350. Profit (Loss) for the period pertaining to the Parent Company 200,619 522,925
Earning per Earning per share (Euro) share (Euro)
30.09.2020 30.09.2019
Basic EPS 0.385 1.069 Diluted EPS 0.361 1.050
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Consolidated statement of other comprehensive income
(in thousands) Captions 30.09.2020 30.09.2019
10. Profit (Loss) for the period 219,981 537,993 Other comprehensive income, after tax, that will not be reclassified to profit or loss
20. Equity instruments designated at fair value through other comprehensive income 29,992 (52,067) Hedging of equity instruments designated at fair value through other comprehensive 40. income (192) - 70. Defined benefit plans 329 (39,094) 80. Non-current assets and disposal groups classified as held for sale
90. Share of the valuation reserves of equity investments carried at equity (249) 1,145 Other comprehensive income, after tax, that may be reclassified to profit or loss
120. Cash-flow hedges (1,187) 6 140. Financial assets (no equity instruments) measured at fair value through other comprehensive income (8,401) 73,749 170. Total other comprehensive income after tax 20,292 (16,261) 180. Total other comprehensive income (Captions 10+170) 240,273 521,732 190. Consolidated other comprehensive income pertaining to minority interests 19,359 19,554 200. Consolidated other comprehensive income pertaining to the Parent Company 220,914 502,178
77
(in thousands) Balance as at Changes in Balance as at Allocation of prior year Changes during the period Shareholders' equity as at 31.12.19 o pening 1.1.20 results 30.09.2020 balances R eserves D ividends Changes in Transactions on shareholders' equity Other and o ther reserves comprehensive allocations Issue o f P urchase Extrao rdinary Changes in Derivatives Sto ck Changes in income as at new o f distribution of equity o n treasury o ptio ns participato ry 30.09.2020 shares treasury dividends instruments shares interests shares Gro up M ino rity interests
Share capital: 1,599,279 - 1,599,279 (299) - - 3,712 - - - - - (8,304) - 1,565,596 28,792 a) ordinary shares 1,599,279 - 1,599,279 (299) - - 3,712 - - - - - (8,304) - 1,565,596 28,792 b) other shares ------Share premium reserve 1,009,055 - 1,009,055 ------(2,117) - 1,002,722 4,216 R eserves: 2,102,623 - 2,102,623 391,528 - (59,219) (838) ------2,351,088 83,006 a) from profits 1,501,654 - 1,501,654 391,528 - (38,850) ------1,772,797 81,535 b) other 600,969 - 600,969 - - (20,369) (838) ------578,291 1,471 Valuation reserves 43,397 - 43,397 - - (8,441) ------20,292 53,367 1,881 Equity instruments 150,000 - 150,000 ------150,000 - T reasury shares (7,259) - (7,259) ------(7,259) - Profit (Loss) for the period 394,452 - 394,452 (391,229) (3,223) ------219,981 200,619 19,362 Group shareholders' equity 5,159,885 - 5,159,885 - - (67,569) 2,874 - - - - - 29 220,914 5,316,133 - M ino rity interests 131,662 - 131,662 - (3,223) (91) ------(10,450) 19,359 - 13 7 ,2 5 7 Balance as at Changes in Balance as at Allocation of prior year Changes during the period Shareholders' equity as at 31.12.18 o pening 1.1.19 results 30.09.2019 balances R eserves D ividends Changes in Transactions on shareholders' equity Other and o ther reserves comprehensive allocations Issue o f P urchase Extrao rdinary Changes in Derivatives Sto ck Changes in income as at new o f distribution of equity o n treasury o ptio ns participato ry 30.09.2019 shares treasury dividends instruments shares interests shares Gro up M ino rity interests
Share capital: 1,582,935 - 1,582,935 - - - 9 9 ,0 0 0 - - - - - (88,152) - 1,542,925 50,858 a) ordinary shares 1,582,935 - 1,582,935 - - - 99,000 - - - - - (88,152) - 1,542,925 50,858 b) other shares ------Share premium reserve 1,011,302 - 1,011,302 - - - 6 9 ,3 0 0 - - - - - (66,712) - 999,373 14,517 R eserves: 1,838,838 - 1,838,838 371,301 - 15,169 (49,005) ------2,088,106 88,197 a) from profits 1,234,613 - 1,234,613 371,301 - (14,834) ------1,509,027 82,053 b) other 604,225 - 604,225 - - 30,003 (49,005) ------579,079 6,144 Valuation reserves 24,962 - 24,962 - - (8,490) ------(32,529) (16,261) (39,838) 7,520 Equity instruments ------150,000 - - - - 150,000 - T reasury shares (7,259) - (7,259) ------(7,259) - Profit (Loss) for the period 445,790 - 445,790 (371,301) (74,489) ------537,993 522,925 15,068
Group shareholders' equity 4,389,111 - 4,389,111 - (62,511) 41,786 119,295 - - 150,000 - - 116,373 502,178 5,256,232 - M ino rity interests 507,457 - 507,457 - (11,978) (35,107) ------(303,766) 19,554 - 176,160 Consolidated interim report on operations as at 30 September 2020 Explanatory notes
Explanatory notes
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Form and content of the consolidated interim report on operations as at 30 September 2020 page 81 Information on the consolidated balance sheet page 95 Information on the consolidated income statement page 111 Information on risks and related hedging policies page 123 Information on consolidated shareholders' equity page 131 Information on business combinations page 137
Key to abbreviations in tables:
FV: Fair value FV*: Fair value excluding variations due to changes in the credit worthiness of the issuer since the issue date NV: Nominal or notional value BV: Book value L1: Fair value hierarchy – Level 1 L2: Fair value hierarchy – Level 2 L3: Fair value hierarchy – Level 3 X: not applicable
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Form and content of the consolidated interim report on operations as at 30 September 2020
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Introduction
The Consolidated interim report on operations as at 30 September 2020 (hereinafter "the Report") of the BPER Banca Group has been prepared on a voluntary basis, following changes to the Consolidated Finance Act introduced by Legislative Decree 25 of 15 February 2016, which followed the European Directive 2013/50/EU (Transparency II): by replacing the content of paragraph 5 of article 154-ter, it cancelled the need for quarterly interim reports to be prepared by issuers with Italy as their member state of origin, granting Consob the power to request the publication of periodic financial information in addition to half-yearly and annual reports.
The BPER Banca Group chose, as a policy regarding additional periodic financial information, to publish such information on a voluntary basis as at 31 March and 30 September of each financial year in the form of Interim Reports on Operations approved by the Board of Directors of the Parent Company.
The choice made by the BPER Banca Group was therefore based on continuity in the preparation and publication of periodic financial reportings53.
1. Declaration of compliance with International Financial Reporting Standards
The Report has been prepared in accordance with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), endorsed by the European Commission, as provided by EU Regulation 1606 dated 19 July 2002, and currently in force, including the related interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and the Standing Interpretations Committee (SIC).
Reference was also made, where necessary, to the "Framework for the preparation and presentation of financial statements" and to the documents prepared by the Italian Accounting Body (OIC) and the Italian Banking Association (ABI). In the absence of a standard or interpretation specifically applicable to a particular transaction, the Parent Company makes use of the professional opinion of its own staff, in particular the Administration and Reporting Department, to develop a rule for accounting recognition that makes it possible to provide reliable financial information and ensure that financial reporting provides a true and fair view of the financial position, result of operations and cash flows of the Group, reflecting the economic substance of each transaction and its key aspects. In formulating these accounting rules, reference is made as far as possible to International Accounting Standards and interpretations dealing with similar or comparable matters.
53On 9 January 2020, the following information was given to the market: "BPER Banca has chosen voluntarily to continue publishing additional periodic financial information with respect to the half-yearly and annual financial reporting, with reference to 31 March and 30 September of each financial year, including the information provided in art. 154-ter paragraph 5 letter a) and b) of Legislative Decree 58/1998 "Consolidated law on financial intermediation" (i.e. the data contained in the former interim financial reportings), ensuring consistency and fairness as well as comparability with the corresponding data contained in the press releases and financial reportings previously disclosed to the public". 82
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As part of its guidance and coordination activity, the Parent Company requires the other Group Banks and Companies to apply the Group's own accounting recognition rules, in the right circumstances. In any case, the Report does not constitute an "interim financial reporting" as intended by International Accounting Standard (IAS) 34.
As required by IAS 8, the following table shows the new international accounting standards or amendments to standards already in force, whose application is mandatory from 2020.
EC Approval Title In force from years Regulation beginning 2075/2019 The Commission Regulation (EU) No 2019/2075 of 29 November 1 January 2020 2019, published in the Official Journal of the European Union L 316 on 6 December 2019, adopts amendments to references in the conceptual framework in International Financial Reporting Standards. The objective of the amendments is to update existing references in several standards and interpretations to previous frameworks with references to the revised Conceptual Framework.
2104/2019 The Commission Regulation (EU) No 2019/2104 of 29 November 1 January 2020 2019, published in the Official Journal of the European Union L 318 on 10 December 2019, adopts amendments to IAS 1 and IAS 8. The objective of the amendments is to clarify the definition of ‘material’ to make it easier for companies to make materiality judgements and to enhance the relevance of the disclosures in the notes to the financial statements.
34/2020 The Commission Regulation (EU) No 2020/34, published in the Official 1 January 2020 Journal of the European Union on 16 January 2020, adopts amendments to IAS 39, IFRS 9 and IFRS 7. The objective of the amendments is to provide temporary and narrow exemptions to the hedge accounting requirements so that companies can continue to meet the requirements assuming that the existing interest rate benchmarks are not altered because of the interbank offered rate reform.
551/2020 The Commission Regulation (EU) No 2020/551, published in the 1 January 2020 Official Journal of the European Union on 22 April 2020, adopts amendments to Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standard 3. The objective of the amendments is to clarify the definition of a business with a view to facilitating its practical implementation.
1434/2020 The Commission Regulation (EU) No 2020/1434 of 9 October 2020, 1 June 2020 published in the Official Journal of the European Union on 12 October 2020, adopts amendements to Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standard 16. The amendment to IFRS 16 provides optional, temporary Covid-19 related operational relief for lessees benefitting from lease payments holidays without undermining the relevance and usefulness of financial information reported by companies.
With regard to these changes, the BPER Banca Group has elected to apply early, and therefore from the Financial Reporting as at 31 December 2019, the amendments made to IAS 39, IFRS 9 and IFRS 7, as introduced by Regulation (EU) 34/2020.
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The changes introduced by the other Regulations have not had a significant impact on the Group nor required additional disclosures. In relation to the approval by the European Union of the amendments made to IFRS 16, the BPER Banca Group has not obtained any suspension of lease payments at 30 September 2020. Starting from 1 July 2020, the BPER Banca Group applies the Hedge Accounting rules provided for by IFRS 9 – Chapter 6 (in an "opt-out" regime until 30 June 2020, as the Group's choice on FTA of IFRS 9 was to maintain the IAS 39 rules on hedge accounting). This choice required a re-assessment of the hedging strategies with reference to the transactions outstanding as of 30 June 2020; in particular, the analyses carried out showed that: • some relationships continued in line with the procedures already in place according to IAS 39; • others have been revised, with the aim of providing a better representation in the financial statements of the management and financial objectives being pursued (for example, by applying the so-called "risk component approach" envisaged in IFRS 9); • new relationships have been qualified (for example, hedges on equity instruments classified as HTC&S, which do not form part of IAS 39 hedge accounting). Application of the new rules is prospective, so it did not entail FTA impacts despite some relationships having been discontinued and re-designated.
2 - Basis of preparation
In terms of the schedules presented and its technical form, this Report is prepared in accordance with the requirements of Bank of Italy Circular 262/2005, as amended (most recently by the 6th amendment dated 30 November 2018, effective from 1 January 2019) – issued in implementation of art. 9 of Decree 38/2005 – and the additional instructions detailed in separate communications not yet incorporated into the main document54. Preparation also takes full account of the requirements of the Italian Civil Code. This Report consists of the balance sheet, the income statement, the statement of other comprehensive income and the statement of changes in shareholders' equity, as well as the explanatory notes. It is accompanied by the Directors’ report on the operations of the Group.
The currency used in the Financial Reporting is the Euro. Figures are expressed in thousands of Euro55.
The general criteria underlying the preparation of the Report are presented below: • Going Concern: assets, liabilities and off-balance sheet transactions are measured in the context of continuity over time. • Accrual Basis of Accounting: costs and revenues are recognised in accordance with the matching principle, regardless of when they are settled. • Materiality and Aggregation: each material class of similar captions is presented separately in the financial statements. Captions that are dissimilar in terms of their nature or use are only aggregated if they are individually immaterial.
54 For example, the instructions contained in the letter from the Bank of Italy dated 23 December 2019. 55 As regards roundings, reference has been made to the instructions given in BI Circular 262/2005 and subsequent updates, entering the amount due to rounding in "Other assets/other liabilities" in the balance sheet and "Other operating charges/income" in the income statement. 84
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• Offsetting: assets and liabilities, income and expenses are not offset unless required or permitted by a standard or an interpretation, or by the Bank of Italy’s regulations for the preparation of financial statements. • Frequency of disclosures: information must be prepared annually or more frequently; if an entity changes its accounting reference date, the reason must be indicated together with the fact that the information provided is not comparable. • Comparative Information: comparative information is disclosed in respect of the previous period for all amounts reported in the financial statements, unless required otherwise by a standard or an interpretation. • Consistency of Presentation: the presentation and classification of captions is maintained over time to ensure that information is comparable, unless specified otherwise in new accounting standards or their interpretations, or unless a change is required to improve the meaningfulness and reliability of the amounts reported. The nature of changes in account presentation or classification is described, together with the related reasons; where possible, the new criterion is applied on a retroactive basis.
The Explanatory Notes and attachments provide any additional information deemed necessary in order to present and complete, true and fair view of the Group.
Uncertainties in the use of estimates The preparation of the Report requires recourse to estimates and assumptions that may affect the amounts recorded in the balance sheet and the income statement. as well as the information about contingent assets and liabilities. The development of such estimates involves the use of available information and the adoption of subjective assessments, partly based on historical experience, in order to make reasonable assumptions for the recognition of operating events. By their nature, the estimates and assumptions used may change from period to period and, accordingly, it may be that the actual amounts recorded in the financial statements in subsequent periods are significantly different as a consequence of changes in the subjective assessments made. The principal situations in which management is required to make subjective assessments include: • quantification of the losses arising from the impairment of loans and, in general, other financial assets; • determination of the fair value of financial instruments, in particular, the use of measurement models to determine the fair value of financial instruments that are not listed in active markets and those that are not routinely measured at fair value; • quantification of the provisions for employee benefits and the provisions for risks and charges; • estimates and assumptions about the recoverability of deferred tax assets; • measurement of goodwill and other intangible assets.
With regard to the quantification of the impairment losses recognised in relation to financial assets, the determination of the fair value of financial instruments, the results of the impairment test of goodwill, the considerations made regarding the recoverability of deferred tax assets, the estimates and assumptions relating to them and used to prepare this Report, they may be subject to amendment in the event of further drastic consequences of the Covid-19 pandemic. The measurement criteria applied to the main captions in the financial statements, as well as the principal assumptions and measurement models used in preparing this Report, are described in the Explanatory notes to the Consolidated financial statements as at 31 December 2019. They have not
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changed significantly during the first nine months of 2020, except as discussed below, which had in part already been applied and explained in the condensed consolidated half-year financial statements as at 30 June 2020. As clarified in the IASB document dated 27 March 202056, the usual measurement models adopted by the BPER Banca Group (in particular, the models used to estimate the ECL and determine the SICR in the context of the IFRS 9 impairment calculation) cannot be applied "mechanically" in highly exceptional situations, when the related input information needed does not satisfy the "reasonable and supportable" requirements. In these situations, measurements can be made using alternative approaches that also comply with the relevant IAS/IFRS. See section "5 – Other aspects" for further details about the measurement criteria adopted for the preparation of this Report.
Going Concern In preparing the Report as at 30 September 2020, the Directors considered the going-concern assumption to be appropriate because they did not find any uncertainties related to events or circumstances that, individually or collectively, could give rise to doubts about the going concern. This assessment took account of the capitalisation of the Group, which has significant buffer capital with respect to the minimum requirement for 2020 established by the European Central Bank, as well as the liquidity position and related buffer with respect to the regulatory threshold, and the likely outlook for operations despite the uncertainties linked to the current emergency.
Inspections and audits The Directors believe that the observations arising from the various inspection areas will not have a significant impact on the income, balance sheet and cash flows of the BPER Banca Group. Nevertheless, in all cases, recommendations made by the Supervisory Authorities are disclosed in the Report and suitable action plans are prepared in order to ensure a timely response.
3 - Scope of consolidation and methodology
The consolidation criteria and methodology are described in Part A of the explanatory notes to the Consolidated financial statements as at 31 December 2019. Current regulations require the scope of consolidation to be managed on two levels: • the accounting scope of consolidation governed by IFRS 1057 "Consolidated financial statements", IAS 27 "Separate financial statements", IAS 28 "Investments in Associates and Joint Ventures" and, if required by the circumstances, IFRS 11 "Joint Agreements" (all adopted by Regulation (EU) 1254/2012 and effective from 1 January 2014 and subsequent amendments) and IFRS 3 "Business Combinations" (adopted by Regulation (EU) 495/2009 and effective from 1 July 2019 and subsequent amendments). • the scope of prudential consolidation governed by Regulation (EU) 575/2013, in which art. 19 indicates the entities to be excluded from the prudential consolidation. The above regulations contribute to determining the scope of consolidation at each level, as well as the methodologies to be used for each consolidation.
56 IASB 27 March 2020: "IFRS 9 and Covid-19 – Accounting for expected credit losses applying IFRS 9 Financial Instruments in the light of the current uncertainty resulting from the Covid-19 pandemic". 57 IFRS 10 §B86 in relation to consolidation procedures. 86
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International accounting standards require subsidiaries to be consolidated on a line-by-line basis, while jointly controlled entities and non-controlling interests in which the Group exercises significant influence are accounted for using the equity method. Art. 19 of the CRR58 excludes from the scope of line-by-line consolidation all financial entities and operating companies, including members of the Banking Group, whose total assets and off-balance sheet amounts are less than the lower of the following two amounts: • Euro 10 million; • 1% of the total assets and off-balance sheet amounts of the parent company or the entity that holds the equity investment.
The BPER Banca Group has decided to adopt the consolidation method envisaged for prudential supervisory purposes, bringing the two scopes of consolidation ("for accounting purposes" and "for regulatory purposes") into line. This decision was needed to rationalise, simplify and streamline the production of consolidated information for supervisory and financial reporting purposes. Its effects on the latter are negligible. In terms of the areas affected, the marginal dynamics previously indicated in the income statement on a line-by-line basis are now summarised in the "Gains (Losses) of equity investments" caption; in the assets and liabilities sides of the balance sheet, the "Equity investments" caption reports the amounts that have not been eliminated that were previously recognised on a line-by-line basis, while shareholders' equity remains unchanged. The following members of the Banking Group currently do not satisfy the requirements of art. 19 of the CRR: • Estense Covered Bond s.r.l.; • BPER Trust Company s.p.a.; • Estense CPT Covered Bond s.r.l.
The other subsidiaries that are not members of the banking Group, since their activities do not contribute to its banking operations, are: • Italiana Valorizzazioni Immobiliari s.r.l.; • Adras s.p.a.; • SIFA’ - Società Italiana Flotte Aziendali s.p.a.
At 30 September 2020, these companies have been consolidated under the equity method.
58 Regulation (EU) 575/2013. 87
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1. Investments in subsidiaries
1.1 Equity investments within the Group consolidated line-by-line
Nature of holding % Type of Operational Registered Share capital Available Company name relationship head office head office in Euro votes (1) Parent % (2) company holding
1. Banco di Sardegna s.p.a. Sassari Cagliari 1 155,247,762 BPER Banca 98.677 100.000 2. Bibanca s.p.a. Sassari Sassari 1 74,458,607 BPER Banca 78.547 B. Sard. 20.522 3. BPER Bank Luxembourg SA Luxembourg Luxembourg 1 30,667,500 BPER Banca 100.000 4. Nadia s.p.a. Modena Modena 1 87,000,000 BPER Banca 100.000 5. Sardaleasing s.p.a. Milan Sassari 1 152,632,074 BPER Banca 52.741 B. Sard. 46.933 6. Optima s.p.a. S.I.M. Modena Modena 1 13,000,000 BPER Banca 100.000 7. Tholos s.p.a. Sassari Sassari 1 52,015,811 B. Sard. 100.000 8. Numera Sistemi e Sassari Sassari 1 2,065,840 B. Sard. 100.000 Informatica s.p.a. 9. Modena Terminal s.r.l. Campogalliano Campogalliano 1 8,000,000 BPER Banca 100.000 10. Emilia Romagna Factor Bologna Bologna 1 54,590,910 BPER Banca 95.954 s.p.a. 11. BPER Credit Management Modena Modena 1 1,000,000 BPER Banca 70.000 s.cons.p.a. B. Sard. 20.000 Bibanca 3.000 EmilRo 1.000 Factor Sardaleasing 6.000 12. Arca Holding s.p.a.(*) Milan Milan 1 50,000,000 BPER Banca 57.061 13. Arca Fondi SGR s.p.a Milan Milan 1 50,000,000 Arca 100.000 Holding 14. Finitalia s.p.a. Milan Milan 1 15,376,285 BPER Banca 100.000
(*) not a member of the banking Group.
The "% Available votes" column is only used if the actual share of votes exercisable at the Ordinary Shareholders' Meeting is different from the interest held in the company's share capital. The scope of companies consolidated on a line-by-line basis changed during the third quarter of 2020 as the absorption of Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. by BPER Banca s.p.a. took place on 27 July 2020 as resolved by the respective Boards of Directors of 26 and 27 March 2020. Details of the transaction were provided in the chapter entitled "Significant events and strategic transactions" of the Interim Report on Operations.
Key:
(1) Type of relationship: 1 Majority of votes at the ordinary shareholders' meeting. (2) Available votes at ordinary shareholders' meeting, distinguishing between actual and potential.
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1.2 Equity investments within the Group consolidated with the application of the equity method
Nature of holding % Type of Share Operational Registered Available Company name relationship capital in head office head office Parent % votes (1) Euro company holding (2)
A. Subsidiaries Companies that are not members of the Banking Group
1. Adras s.p.a. Milan Milan 1 1,954,535 BPER Banca 100.000 2. Italiana Valorizzazioni Milan Milan 1 2,000,000 BPER Banca 100.000 Immobiliari s.r.l. 3. SIFA' - Società Italiana Flotte Milan/Reggio Trento 1 122,449 BPER Banca 51.000 Aziendali s.p.a. Emilia B. Subsidiaries Companies that are members of the Banking Group but do not satisfy the requirements of art. 19 of the CRR 4. Estense Covered Bond s.r.l. Conegliano Conegliano 1 10,000 BPER Banca 60.000 5. BPER Trust Company s.p.a. Modena Modena 1 500,000 BPER Banca 100.000 6. Estense CPT Covered Bond s.r.l. Conegliano Conegliano 1 10,000 BPER Banca 60.000
The "% Available votes" column is only used if the actual share of votes exercisable at the Ordinary Shareholders' Meeting is different from the interest held in the company's share capital.
Key:
(1) Type of relationship: 1 Majority of votes at the ordinary shareholders' meeting. (2) Available votes at ordinary shareholders' meeting, distinguishing between actual and potential.
2. Significant assessments and assumptions made when determining the scope of consolidation
As regards the companies included in the scope of consolidation, no facts or circumstances have emerged over the past quarter that, as envisaged in IFRS 10, might change the assessments made regarding the possession of control, joint control or significant influence.
3. Significant restrictions
At the Banks and Companies that make up the BPER Banca Group's scope of consolidation, there are no significant restrictions as foreseen by IFRS 12 § 13.
4. Other information
The line-by-line consolidations were carried out using the accounts as at 30 September 2020 prepared under IAS/IFRS and approved by the companies concerned. The consolidated Italian companies within the Group and BPER Bank Luxembourg s.a. are subject to the respective national accounting standards; accordingly, they prepared Reporting Packages under international accounting standards solely for consolidation purposes. The value of Group subsidiaries carried at equity was measured with reference to their accounting information prepared and approved at 30 September 2020. 89
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Other investments carried at equity were measured with reference to the latest financial statements available, in some cases, prior to the reporting date, in compliance with the requirements of IAS 28.
4 – Subsequent events to the reporting date
The Consolidated interim report on operations as at 30 September 2020 was approved on 4 November 2020 by the Board of Directors of BPER Banca, which authorised its publication simultaneously. Information about events that occurred after the reporting date is presented and discussed in the Group interim report on operations. These events did not affect the Report pursuant to IAS 10.
5 – Other aspects
Criteria for recognition in the financial statements
The measurement criteria adopted for the "Financial assets measured at amortised cost" comprising loans disbursed are presented below: • they were applied when preparing this Report as an exception to the measurement criteria normally adopted by the BPER Banca Group, as already indicated in the section on "Uncertainties in the use of estimates"; • the criteria for the recognition, measurement and derecognition of income statement components of hedging transactions after the application from 1 July 2020 of Chapter 6 Hedge Accounting of IFRS 9, which replaced the previous accounting rules contained in IAS 39.
The other criteria for the recognition, classification, measurement and derecognition of income statement components of captions in the financial statements as at 30 September 2020 are unchanged with respect to those applied when preparing the Consolidated financial statements as at 31 December 2019, to which reference should be made.
Financial assets measured at amortised cost
Accounting treatment of the Covid-19 moratoria The accounting treatment adopted by the BPER Banca Group for contractual amendments made to financial assets already recognised in the financial statements generally requires reflection of the amendments made to exposures known to be in financial difficulty (classified as forborne exposures) in the value of the loan, with an impact on income statement caption 140. "Gains/losses on contractual amendments without derecognition" (so-called "modification accounting"). As stated by the EBA in the "Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the Covid-19 crisis" dated 4 April 2020, moratoria granted to customers pursuant to the law and sector agreements (ABI agreements), are not considered indicators of financial difficulty for the purpose of classifying the individual positions concerned as forborne exposures (with consequent inclusion in Stage 2). The internal moratoria, granted to customers on the initiative of the BPER Banca
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Group, were agreed in a "standardised" manner on simple receipt of their applications. In this sense, the characteristics of the internal moratoria are similar to those of the law and, therefore, are not deemed to represent the provision of assistance for financial difficulties. In application of the BPER Banca Group policy, none of the Covid-19 moratoria qualify as forbearance measures and, therefore, have not been recognised in accordance with modification accounting.
Method for determining the extent of impairment
A. Financial assets The models implemented by the BPER Banca Group to determine the expected credit loss (ECL) pursuant to IFRS 9 use risk parameters linked to the expected macroeconomic scenarios. The uncertainties created by the spread of Covid-19 and the related economic consequences have raised doubts about whether the information needed to implement these models still satisfies the "reasonable and sustainable" criteria.
For internal verification purposes, based on the indications and suggestions provided by the authorities59, in the second quarter of 2020 the Parent Company carried out analyses and simulations to understand whether the macroeconomic scenarios had been taken into sufficient account to reflect the consequences of the pandemic on the Group's loan book (using a so-called "top-down approach"). In order to capture the dynamics of the crisis, especially with regard to the Corporate portfolio, the above analyses included adjustments to the rating of each counterparty based on micro-sectoral assessments (using a "bottom-up approach"). This rating adjustment was carried out using prospective data provided by a top forecasting company, based on a micro-founded assessment, looking forward to 2021, of the financial statement parameters in the context of the macroeconomic scenarios defined by the ECB / Bank of Italy. In order to avoid double-counting, the PD curves used in the ECL simulation were not conditioned by the macroeconomic factors using satellite models. The estimate of ECL derived from this simulation at the reporting date was essentially equivalent to that obtained by the BPER Banca Group's impairment model, updated with reference to the latest macroeconomic scenarios (obtained from a leading forecasting company used by the Group, these scenarios were more severe than those published by the ECB in June 2020), confirming that the geo- sectoral diversification of the BPER Banca Group's Corporate portfolio substantially reflects the characteristics of the Italian production system and, therefore, replicates the effects envisaged by the macroeconomic scenarios. Leading on from this, as part of the assessments of the financial statements as at 30 September 2020, an analysis has been carried out to assess how best to intercept the evolution of the crisis and the effect of the mitigation measures taken in the third quarter of the year, as summarised in the macroeconomic forecasts of September 2020. Having acquired the results of this analysis, Management considered it inappropriate, when preparing this report, to apply parameters updated to the most recent date (being
59 See in particular: ESMA – Public statement "Accounting implications of the Covid-19 outbreak on the calculation of expected credit losses in accordance with IFRS 9" dated 25 March 2020; EBA – "Statement on the application of the prudential framework regarding Default, Forbearance and IFRS 9 in light of Covid-19 measures" dated 25 March 2020; EBA – "Statement on consumer and payment issues in light of Covid-19" dated 25 March 2020; IASB – "IFRS 9 and Covid-19 Accounting for expected credit losses applying IFRS 9 Financial Instruments in the light of current uncertainty resulting from the Covid-19 pandemic" dated 27 March 2020; ECB – "IFRS 9 in the context of the Coronavirus (Covid-19) pandemic" dated 1 April 2020; EBA – "Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the Covid-19 crisis" dated 4 April 2020. 91
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more optimistic. especially with regard to the recovery prospects in the coming years), instead maintaining the macroeconomic scenario in line with the more prudent one of June 2020.
Hedging operations
From 1 July 2020, the BPER Banca Group has adopted Chapter 6 Hedge Accounting of IFRS 9.
Recognition Hedges are arranged to neutralise losses that may be incurred in relation to a given element or group of elements, as a consequence of a given risk, via profits that would be earned on another element or group of elements should that particular risk crystallise. There are two types of hedge: • fair value hedges: arranged to hedge the exposure to changes in the fair value of a balance sheet caption; • cash flow hedges: arranged to hedge the exposure to changes in future cash flows attributable to specific balance sheet captions.
Classification Financial instruments are designated as hedges when the relationship between the hedged and the hedging instrument is adequately documented and formalised, if the hedge is effective both at the start and prospectively throughout its life.
Measurement Hedging derivatives are measured at their fair value. The method of accounting for the gains and losses deriving from changes in fair value depends on the type of hedge: • fair value hedge: the change in the fair value of the hedged element representing the hedged risk is recognised in the income statement, together with the change in the fair value of the derivative instrument; any difference, which represents the ineffective portion of the hedge, determines the consequent net economic effect. • cash-flow hedge: to the extent that the hedge is effective, changes in the fair value of the derivative are recognised in shareholders' equity; they are only recognised in the income statement when changes in the cash flows from the hedged item need to be offset, or when the hedge becomes ineffective.
In application of the standard, hedging relationships must satisfy the following requirements: • there has to be an economic relationship between the hedged item and the hedging instrument; • there must not be a predominance of credit risk within the fair value changes relating to this economic relationship; • the definition of a hedge ratio that identifies the quantities of hedged items and hedging instruments considered in the hedging relationship, so as not to create a mismatch that generates an element of ineffectiveness that does not correctly reflect the objectives of the hedge.
The BPER Banca Group monitors compliance with these requirements when defining the hedging strategy and throughout its duration; in particular, the presence of an economic relationship between the hedged item and the hedging instrument is identified in the first instance through a qualitative analysis
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of the characteristics of the two instruments and a further quantitative analysis is carried out to verify the presence of a high degree of prospective correlation between the two. In fact, although not required by IFRS 9, for the sole purpose of further confirming the qualitative verification that there is an economic relationship between the hedged item and the hedging instrument, the BPER Banca Group has chosen to maintain the pre-existing system of quantitative tests to verify the effectiveness of hedging relationships (adapted to the new characteristics of the relationships) according to the so-called "Dollar Offset Method". This method involves comparing the change in fair value of the hedging instrument with that of the hedged instrument within a given time frame. The two changes must be attributable only to the type of risk being hedged. The BPER Banca Group confirms the existence of the economic relationship when changes in the fair value of (or cash flows from) the hedging instrument, caused by the hedged risk factor, almost entirely offset those of the hedged instrument (the percentage limits fall into the range between 80% to 125%). This monitoring is carried out on a quarterly basis, using: • prospective tests that justify the application of hedge accounting, by demonstrating the expected effectiveness of the hedge; • retrospective tests that show the effectiveness of the hedge during the period under review. In other words, they measure by how much the actual results differ from the perfect hedge.
Derecognition If transactions do not meet the effectiveness test, hedge accounting - as described above - is terminated and the derivative contract is reclassified as an instrument held for trading. Hedge accounting is also terminated in the following situations: • the hedged item is sold and redeemed; • the hedging instrument expires, is sold, terminated or exercised.
Recognition of components affecting the income statement Income elements are allocated to the relevant income statement captions on the following basis: • differentials earned on derivatives that hedge interest-rate risk (and the interest on the hedged positions) are allocated to the "Interest and similar income" or "Interest and similar expense" captions; • capital gains and losses deriving from the measurement of hedging instruments and the positions covered by fair value hedges are allocated to the "Net income from hedging activities" caption; • capital gains and losses deriving from measurement of the effective part of cash flow hedges are allocated to a special equity reserve called "Cash flow hedges", net of the deferred tax effect. Gains and losses relating to the ineffective part of such hedges are recorded in the "Net income from hedging activities" caption of the income statement.
In the case of hedging equity instruments for which the option for recognition in the statement of other comprehensive income of subsequent fair value changes has been irrevocably exercised, the capital gains and losses deriving from the measurement of hedging derivatives, relating to the hedged component, are allocated to the same shareholders’equity caption.
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Domestic tax group election
BPER Banca has elected to establish a Domestic Tax Group, which was introduced by Legislative Decree 344/2003 and subsequent amendments and is governed by arts. 117-129 of the Consolidated Income Tax Law. Under this arrangement, which is binding for three years, the subordinate members transfer their results to the parent, for fiscal purposes only, which then calculates a single consolidated taxable income or tax loss. Finitalia s.p.a., Arca Fondi Sgr s.p.a. and Arca Holding s.p.a. have been included from 1 January 2020. With respect to the situation shown in the following table, the renewal for the three-year period 2020- 2022 is acknowledged for Emilia Romagna Factor s.p.a., which will be carried out regularly by submitting the tax return of the consolidating company. Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. were absorbed by BPER Banca s.p.a. on 27 July 2020.
Consolidated companies 2018 2019 2020 2021 2022
Bibanca s.p.a. x x x Banco di Sardegna s.p.a. x x x Optima s.p.a. SIM x x x Emilia Romagna Factor s.p.a. x x x Sardaleasing s.p.a. x x x SIFA' - Società Italiana Flotte Aziendali s.p.a. x x x BPER Trust Company s.p.a. x x x Nadia s.p.a. x x x Finitalia s.p.a. x x x Arca Fondi Sgr s.p.a. x x x Arca Holding s.p.a. x x x
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Information on the consolidated balance sheet
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Assets
Financial assets measured at fair value through profit or loss Caption 20
2.1 Financial assets held for trading: breakdown by product
Total Total Description/Amounts 30.09.2020 31.12.2019 L1 L2 L3 L1 L2 L3
A. Cash assets 1. Debt securities 60,608 7,308 7 41,823 20,749 8 1.1 Structured securities 34,473 1,897 - 27,060 1,571 - 1.2 Other debt securities 26,135 5,411 7 14,763 19,178 8 2. Equity instruments 48,232 2,118 32 61,684 3,416 32 3. UCITS units ------4. Loans ------4.1 Repurchase agreements ------4.2 Others ------Total (A) 108,840 9,426 39 103,507 24,165 40 B. Derivative instruments 1. Financial derivatives 11 111,245 27,655 7 127,926 14,729 1.1 trading 11 111,245 27,655 7 127,926 14,729 1.2 connected with the fair value option ------1.3 others ------2. Credit derivatives ------2.1 trading ------2.2 connected with the fair value option ------2.3 others ------Total (B) 11 111,245 27,655 7 127,926 14,729 Total (A+B) 108,851 120,671 27,694 103,514 152,091 14,769
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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2.2 Financial assets held for trading: breakdown by borrowers/issuers/counterparties
Total Total Description/Amounts 30.09.2020 31.12.2019
A. Cash assets 1. Debt securities 67,923 62,580 a) Central Banks - - b) Public Administrations 2,403 16,221 c) Banks 13,224 11,706 d) Other financial companies 46,570 31,389 of which: insurance companies 329 1,327 e) Non financial companies 5,726 3,264 2. Equity instruments 50,382 65,132 a) Banks 12,939 16,102 b) Other financial companies 3,715 5,319 of which: Insurance companies 902 2,570 c) Non financial companies 33,728 43,711 d) Other issuers - - 3. UCITS units - - 4. Loans - - a) Central Banks - - b) Public Administrations - - c) Banks - - d) Other financial companies - - of which: insurance companies - - e) Non financial companies - - f) Households - - Total (A) 118,305 127,712 B. Derivative instruments a) Central counterparties - - b) Others 138,911 142,662 Total (B) 138,911 142,662 Total (A+B) 257,216 270,374
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2.3 Financial assets designed at fair value: breakdown by product
Total Total Description/Amounts 30.09.2020 31.12.2019 L1 L2 L3 L1 L2 L3 1. Debt securities - 125,377 668 - 129,872 1,083 1.1 Structured securities ------1.2 Other debt securities - 125,377 668 - 129,872 1,083 2. Loans ------2.1 Structured ------2.2 Others ------Total - 125,377 668 - 129,872 1,083
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
2.4 Financial assets designated at fair value: breakdown by borrowers/issuers
Total Total Description/Amounts 30.09.2020 31.12.2019 1. Debt securities 126,045 130,955 a) Central Banks - - b) Public Administrations 119,396 123,901 c) Banks 1,994 1,963 d) Other financial companies 3,987 4,008 of which: Insurance companies 3,987 4,008 e) Non financial companies 668 1,083 2. Loans - - a) Central Banks - - b) Public Administrations - - c) Banks - - d) Other financial companies - - of which: Insurance companies - - e) Non financial companies - - f) Households - - Total 126,045 130,955
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2.5 Other financial assets mandatorily measured at fair value: breakdown by product
Total Total Description/Amounts 30.09.2020 31.12.2019 L1 L2 L3 L1 L2 L3 1. Debt securities - 98,120 59,053 - 99,232 63,117 1.1 Structured securities ------1.2 Other debt securities - 98,120 59,053 - 99,232 63,117 2. Equity instruments 1,532 - 61,112 2,301 - 64,149 3. UCITS units 258,869 1,000 223,394 249,052 - 215,144 4. Loans - - 25,816 - - 25,787 4.1 Repurchase agreements ------4.2 Others - - 25,816 - - 25,787 Total 260,401 99,120 369,375 251,353 99,232 368,197
–--
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
2.6 Other financial assets mandatorily measured at fair value: breakdown by borrowers/issuer
Total Total 30.09.2020 31.12.2019 1. Equity instruments 62,644 66,450 of which: banks 22,017 22,017 of which: other financial companies 6,380 8,999 of which: non-financial companies 34,247 35,434 2. Debts securities 157,173 162,349 a) Central Banks - - b) Public Administrations 50,988 51,859 c) Banks 29,807 29,720 d) Other financial companies 74,307 78,516 of which: insurance companies - - e) Non financial companies 2,071 2,254 3. UCITS Units 483,263 464,196 4. Loans 25,816 25,787 a) Central Banks - - b) Public Administrations - - c) Banks - - d) Other financial companies 25,816 25,787 of which: insurance companies 25,816 25,787 e) Non financial companies - - f) Households - - Total 728,896 718,782
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Financial assets measured at fair value through other comprehensive income Caption 30
3.1 Financial assets measured at fair value through other comprehensive income: breakdown by product
Total Total Description/Amounts 30.09.2020 31.12.2019 L1 L2 L3 L1 L2 L3 1. Debts securities 5,712,207 401,457 8,987 5,824,852 485,236 21,156 1.1 Structured securities ------1.2 Other debt securities 5,712,207 401,457 8,987 5,824,852 485,236 21,156 2. Equity instruments - 2,352 197,982 16 2,377 222,565 3. Loans ------Total 5,712,207 403,809 206,969 5,824,868 487,613 243,721
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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3.2 Financial assets measured at fair value through other comprehensive income: breakdown by borrowers/issuers
Total Total Description/Amounts 30.09.2020 31.12.2019 1. Debt securities 6,122,651 6,331,244 a) Central Banks - - b) Public Administrations 732,708 714,793 c) Banks 3,631,666 4,086,582 d) Other financial companies 1,114,234 1,030,167 of which: insurance companies 41,988 41,878 e) Non financial companies 644,043 499,702 2. Equity instruments 200,334 224,958 a) Banks 31,717 32,166 b) Other issuers: 168,617 192,792 - other financial companies 139,361 163,826 of which: insurance companies 104,330 104,330 - non financial companies 29,213 28,924 - others 43 42 3. Loans - - a) Central Banks - - b) Public Administrations - - c) Banks - - d) Other financial companies - - of which: insurance companies - - e) Non financial companies - - f) Households - - Total 6,322,985 6,556,202
3.3 Financial assets measured at fair value through other comprehensive income: gross value and total impairment provisions
Gross value Total impairment provisions Total First Second Third First Second partial Third stage stage stage stage stage stage write-off Debt securities 5,788,575 339,063 26 3,528 1,477 8 - Loans ------Total 30.09.2020 5,788,575 339,063 26 3,528 1,477 8 - Total 31.12.2019 6,031,315 304,428 26 3,458 1,059 8 -
At 30 September 2020 none of the debt securities classified in Stage 3 has been written off.
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Financial assets measured at amortised cost Caption 40
4.1 Financial assets measured at amortised cost: breakdown by product of loans to banks
Total Total 30.09.2020 31.12.2019 Book value Fair value Book value Fair value Type of of which: of which: transaction/ purchased purchased Amounts First and or First and or Third Third second originated L1 L2 L3 second originated L1 L2 L3 stage stage stage impaired stage impaired financial financial assets assets A.Loans to Central Banks 5,818,047 - - - - 5,818,047 1,142,900 - - - - 1,142,900 1. Time deposits 58,935 - - X X X 63,322 - - X X X 2. Reserve requirement 5,748,221 - - X X X 1,068,684 - - X X X 3. Repurchase agreements - - - X X X - - - X X X 4. Others 10,891 - - X X X 10,894 - - X X X B.Loans to banks 5,528,342 - - 4,177,735 146,164 1,292,052 3,923,479 - - 2,628,345 159,248 1,178,909 1. Loans 1,292,052 - - - - 1,292,052 1,178,909 - - - - 1,178,909 1.1 Current accounts and demand deposits 259,597 - - X X X 372,822 - - X X X 1.2. Time deposits 50,962 - - X X X 69,091 - - X X X 1.3 Other loans: 981,493 - - X X X 736,996 - - X X X - Repurchase agreements - - - X X X - - - X X X - Finance leases - - - X X X - - - X X X - Others 981,493 - - X X X 736,996 - - X X X 2. Debts securities 4,236,290 - - 4,177,735 146,164 - 2,744,570 - - 2,628,345 159,248 - 2.1 Structured securities ------2.2 Other debt securities 4,236,290 - - 4,177,735 146,164 - 2,744,570 - - 2,628,345 159,248 -
Total 11,346,389 - - 4,177,735 146,164 7,110,099 5,066,379 - - 2,628,345 159,248 2,321,809
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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4.2 Financial assets measured at amortised cost: breakdown by product of loans to customers
Total Total 30.09.2020 31.12.2019 Book value Fair value Book value Fair value Type of of which: of which: transaction/ purchased purchased Amounts First and or First and or Third Third second originated L1 L2 L3 second originated L1 L2 L3 stage stage stage impaired stage impaired financial financial assets assets 1. Loans 50,317,015 2,480,729 1,098,339 - - - 48,917,173 2,995,884 1,209,236 - - 54,055,240
1.1.Current accounts 3,721,751 356,467 140,402 X X X 4,356,780 480,226 188,651 X X X
1.2. Repurchase agreements 433,944 - - X X X 591,175 - - X X X
1.3. Mortgages 32,690,380 1,412,483 818,204 X X X 30,781,966 1,676,662 860,236 X X X 1.4. Credit cards, personal loans and assignments of one- fifth of salary 2,777,699 46,187 14,084 X X X 2,773,256 46,842 15,693 X X X
1.5. Financial leasing 2,525,432 322,816 16,238 X X X 2,404,847 353,379 14,539 X X X
1.6. Factoring 938,515 4,432 414 X X X 1,068,044 7,620 587 X X X
1.7. Other loans 7,229,294 338,344 108,997 X X X 6,941,105 431,155 129,530 X X X 2. Debt securities 11,566,557 - - 10,831,600 128,963 902,787 8,561,810 - - 7,941,167 92,198 695,264 2.1. Structured securities ------2.2. Other debt securities 11,566,557 - - 10,831,600 128,963 902,787 8,561,810 - - 7,941,167 92,198 695,264 Total 61,883,572 2,480,729 1,098,339 10,831,600 128,963 902,787 57,478,983 2,995,884 1,209,236 7,941,167 92,198 54,750,504
The sub-caption "Other loans" of performing loans includes: € 3,788 million of bullet loans (+24.77%), € 1,812 million of advances on invoices subject to collection (-21.05%), € 822 million of import/export advances (-6.27%), € 32 million of credit assignment (-38.46%) and € 775 million of other miscellaneous entries (+13.80%). The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3
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4.3 Financial assets measured at amortised cost: breakdown by borrowers/issuers of loans to customers
Total Total 30.09.2020 31.12.2019
of which: of which: Type of transaction/Amounts purchased or purchased or First and originated First and originated Third stage Third stage second stage impaired second stage impaired financial financial assets assets
1. Debt securities 11,566,557 - - 8,561,810 - - a) Public Administration 9,756,935 - - 7,400,406 - - b) Other financial companies 1,511,541 - - 1,042,760 - - of which: insurance companies 14,961 - - 4,990 - - c) Non financial companies 298,081 - - 118,644 - - 2. Loans: 50,317,015 2,480,729 1,098,339 48,917,173 2,995,884 1,209,236 a) Public Administration 2,401,236 15,625 2,720 2,332,522 19,520 4,855 b) Other financial companies 3,303,216 90,576 62,597 3,526,215 116,165 75,666 of which: insurance companies 46,343 - - 42,900 - - c) Non financial companies 23,484,525 1,790,384 742,147 22,591,200 2,211,484 807,671 d) Households 21,128,038 584,144 290,875 20,467,236 648,715 321,044 Total 61,883,572 2,480,729 1,098,339 57,478,983 2,995,884 1,209,236
4.4 Financial assets measured at amortised cost: gross value and total impairment provisions
Gross value Total impairment provisions
Total partial
Second Third Second Third write-off First stage First stage stage stage stage stage
Debt securities 15,792,710 17,448 - 7,235 76 - -
Loans 52,307,103 5,292,365 4,891,899 79,881 92,473 2,411,170 358,493
Total 30.09.2020 68,099,813 5,309,813 4,891,899 87,116 92,549 2,411,170 358,493 Total 31.12.2019 58,045,183 4,671,520 6,118,985 70,451 100,890 3,123,101 443,912
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Hedging derivatives Caption 50
5.1 Hedging derivatives: breakdown by type of hedge and level
FV 30.09.2020 FV 31.12.2019 NV NV
L1 L2 L3 30.09.2020 L1 L2 L3 31.12.2019
A. Financial derivatives 1. Fair Value - 49,373 - 1,852,322 - 80,964 - 2,675,330 2. Cash flows - 258 - 54,446 - 1,221 - 54,446 3. Foreign investments ------B. Credit derivatives 1. Fair Value ------2. Cash flows ------Total - 49,631 - 1,906,768 - 82,185 - 2,729,776
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: NV = Notional Value L1 = Level 1 L2 = Level 2 L3 = Level 3
5.2 Hedging derivatives: breakdown by hedged portfolio and type of hedge
Fair Value Cash-flow hedges Specific Transactions/Type of Foreign debt equity hedge investments securities instruments currencies General credit goods others Specific General and interest and stock and gold rates indexes
1. Financial assets measured at fair value through other comprehensive income - - - - X X X - X X 2. Financial assets measured at amortised cost - X - - X X X 258 X X 3. Portfolio X X X X X X - X - X 4. Other operations ------X - X - Total assets ------258 - - 1. Financial Liabilities 49,373 X - - - - X - X X 2. Portfolio X X X X X X - X - X Total liabilities 49,373 ------1. Expected transactions X X X X X X X - X X 2. Portfolio of financial assets and liabilities X X X X X X - X - -
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Liabilities
Financial liabilities measured at amortised cost Caption 10
1.1 Financial liabilities measured at amortised cost: breakdown by product of due to banks
Total Total 30.09.2020 31.12.2019 Type of transaction/Amounts Fair Value Fair Value B V B V L1 L2 L3 L1 L2 L3 1. Due to Central Banks 16,671,889 X X X 9,542,136 X X X 2. Due to banks 2,517,091 X X X 2,670,997 X X X 2.1 Other current accounts and demand deposits 144,472 X X X 158,545 X X X 2.2 Time deposits 3,437 X X X 5,799 X X X 2.3 Loans 2,366,970 X X X 2,502,711 X X X 2.3.1 Repurchase agreements 1,956,913 X X X 2,067,901 X X X 2.3.2 Others 410,057 X X X 434,810 X X X 2.4 Payables for commitments to repurchase own equity instruments - X X X - X X X 2.5 Lease payables 1,616 X X X 1,901 X X X 2.6 Other payables 596 X X X 2,041 X X X Total 19,188,980 - - 19,188,980 12,213,133 - - 12,213,133
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019. The fair value is assumed to be the same as the book value since they are sight or short-term transactions, mainly at floating rates.
Key: BV = Book value L1 = Level 1 L2 = Level 2 L3 = Level 3
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1.2 Financial liabilities measured at amortised cost: breakdown by product of due to customers
Total Total 30.09.2020 31.12.2019 Type of transaction/Amounts Fair Value Fair Value BV BV L1 L2 L3 L1 L2 L3 1. Current accounts and demand deposits 51,565,922 X X X 47,592,520 X X X 2. Time deposits 137,525 X X X 954,062 X X X 3. Loans 2,008,784 X X X 2,170,814 X X X 3.1 Repurchase agreements 80,972 X X X 238,736 X X X 3.2 Other 1,927,812 X X X 1,932,078 X X X 4. Payables for commitments to repurchase own equity instruments - X X X - X X X 5. Lease payables 268,474 X X X 305,008 X X X 6. Other payables 1,025,994 X X X 1,064,836 X X X Total 55,006,699 - - 55,006,699 52,087,240 - - 52,087,240
The classification levels used (fair value hierarchy) are desc ribed in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019. The fair value is assumed to be the same as the book value since they are sight or short-term transactions, mainly at floating rates.
Key: BV = Book value L1 = Level 1 L2 = Level 2 L3 = Level 3
1.3 Financial liabilities measured at amortised cost: breakdown by product of debt securities issued
Total Total 30.09.2020 31.12.2019 Type of transaction/Amounts Fair Value Fair Value BV BV L1 L2 L3 L1 L2 L3
A. Securities 1. bonds 4,274,665 2,963,890 1,397,686 - 5,089,892 3,231,215 1,989,707 430 1.1 structured ------1,2 others 4,274,665 2,963,890 1,397,686 - 5,089,892 3,231,215 1,989,707 430 2. other securities 360,038 - 8,831 351,235 744,997 - 36,767 708,456 2.1 structured 8,803 - 8,831 - 36,541 - 36,767 - 2.2 others 351,235 - - 351,235 708,456 - - 708,456 Total 4,634,703 2,963,890 1,406,517 351,235 5,834,889 3,231,215 2,026,474 708,886
"Bonds" include € 748.5 million in non-convertible subordinated securities. In the "Level 3" column of point 2.2, the fair value is assumed to be the same as the book value as these are short-term transactions. The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: BV = Book value L1 = Level 1 L2 = Level 2 L3 = Level 3
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Financial liabilities held for trading Caption 20
2.1 Financial liabilities held for trading: breakdown by product
Total Total 30.09.2020 31.12.2019
Type of transactions/Amounts Fair Value Fair Fair Value Fair NV Value NV Value L1 L2 L3 * L1 L2 L3 *
A. Cash liabilities 1. Due to banks ------2. Due to customers ------3. Debt securities - - - - X - - - - X 3.1 Bonds - - - - X - - - - X 3.1.1 Other securities - - - - X - - - - X 3.1.2 Other bonds - - - - X - - - - X 3.2 Other securities - - - - X - - - - X 3.2.1 Structured - - - - X - - - - X 3.2.2 Others - - - - X - - - - X Total A ------B. Derivative instruments 1. Financial derivatives X 620 158,749 7,707 X X 1,137 156,674 6,476 X 1.1 Trading X 620 141,584 7,707 X X 1,137 134,491 6,476 X 1.2 Connected with the fair value option X - 17,150 - X X - 21,017 - X 1.3 Others X - 15 - X X - 1,166 - X 2. Credit derivatives X - 334 - X X - 1,683 - X 2.1 Trading X - 334 - X X - 1,683 - X 2.2 Connected with the fair value option X - - - X X - - - X 2.3 Others X - - - X X - - - X Total B X 620 159,083 7,707 X X 1,137 158,357 6,476 X Total (A+B) X 620 159,083 7,707 X X 1,137 158,357 6,476 X
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: NV = Nominal or Notional Value L1 = Level 1 L2 = Level 2 L3 = Level 3 Fair value*: Fair value excluding variations due to changes in the creditworthiness of the issuer since the issue date
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Hedging derivatives Caption 40
4.1 Hedging derivatives: breakdown by type of hedge and hierarchy levels
Fair value 30.09.2020 NV Fair value 31.12.2019 NV
L1 L2 L3 30.09.2020 L1 L2 L3 31.12.2019 A. Financial derivatives - 459,681 - 5,952,996 - 294,114 - 5,101,684 1) Fair value - 453,755 - 5,902,996 - 288,369 - 5,051,684 2) Cash flows - 5,926 - 50,000 - 5,745 - 50,000 3) Foreign investments ------
B. Credit derivatives ------1) Fair value ------2) Cash flows ------Total - 459,681 - 5,952,996 - 294,114 - 5,101,684
The classification levels used (fair value hierarchy) are described in Part A.4 of the Explanatory notes to the Consolidated financial statements at 31 December 2019.
Key: NV = Notional Value L1 = Level 1 L2 = Level 2 L3 = Level 3
4.2 Hedging derivatives: breakdown by hedged portfolio and type of hedge
Fair Value Cash flow Specific
Operations/Type debt Foreign equity of hedge securities investments instruments currencies General and credit goods others Specific General and stock and gold interest indexes rates 1. Financial assets measured at fair value through other 189,914 - - - X X X 5,926 X X comprehensive income 2. Financial assets measured at 263,841 X - - X X X - X X amortised cost 3. Portfolio X X X X X X - X - X 4. Other operations ------X - X - Total assets 453,755 ------5,926 - - 1. Financial liabilities - X - - - - X - X X 2. Portfolio X X X X X X - X - X Total liabilities ------1. Expected X X X X X X X - X X transactions 2. Portfolio of financial assets and X X X X X X - X - - liabilities
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Consolidated interim report on operations as at 30 September 2020 Explanatory notes
Information on the consolidated income statement
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Interests Captions 10 and 20
1.1 Interest and similar income: breakdown
Total Total Debt Other Captions/Technical forms Loans 30.09.2020 30.09.2019 securities transactions
1. Financial assets measured at fair value through profit or loss: 5,390 - - 5,390 17,022
1.1 Financial assets held for trading 699 - - 699 869 1.2 Financial assets designated at fair value 2,478 - - 2,478 13,327 1.3 Other financial assets mandatorily measured at fair value 2,213 - - 2,213 2,826 2. Financial assets measured at fair value through other comprehensive income 46,179 - X 46,179 71,945 3. Financial assets measured at amortised cost: 88,829 911,000 X 999,829 963,151 3.1 Loans to banks 18,223 1,838 X 20,061 19,547 3.2 Loans to customers 70,606 909,162 X 979,768 943,604 4. Hedging derivatives X X (28,697) (28,697) (31,660) 5. Other assets X X 426 426 414 6. Financial liabilities X X X 63,033 36,772 Total 140,398 911,000 (28,271) 1,086,160 1,057,644 of which: interest income on impaired financial assets 3 83,176 - 83,179 97,508 of which: interest income on finance lease - 45,572 - 45,572 46,563
Caption "6. Financial liabilities" includes the interest calculated with the application of negative interest rates on funding acquired from the ECB as part of the TLTRO II operations for € 18.9 million and TLTRO III for € 38.1 million.
1.3 Interest and similar expense: breakdown
Debts Other Total Total Captions/Technical forms Loans securities transactions 30.09.2020 30.09.2019 1. Financial liabilities measured at amortised cost 81,203 64,066 X 145,269 186,677 1.1 Due to central banks - X X - - 1.2 Due to banks 16,847 X X 16,847 38,239 1.3 Due to customers 64,356 X X 64,356 74,412 1.4 Debt securities issued X 64,066 X 64,066 74,026 2. Financial liabilities held for trading 8 - 1,185 1,193 11,724 3. Financial liabilities designated at fair value - - - - - 4. Other liabilities and provisions X X 407 407 481 5. Hedging derivatives X X (6,307) (6,307) (10,035) 6. Financial assets X X X 1,855 6,704 Total 81,211 64,066 (4,715) 142,417 195,551 of which: interest expense on lease payables 1,659 - - 1,659 1,305
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Commissions Captions 40 and 50
2.1 Commission income: breakdown
Type of service/Amounts Total Total 30.09.2020 30.09.2019 a) guarantees granted 22,339 20,989 b) credit derivatives - - c) management, brokerage and consulting: 467,444 323,268 1. trading on financial instruments 458 330 2. trading on foreign currencies 5,409 6,926 3. portfolio management 268,672 105,536 3.1 individuals 25,449 22,902 3.2 collectives 243,223 82,634 4. custody and administration of securities 27,323 11,765 5. depositary bank - - 6. placement of securities 77,950 110,447 7. order taking and trasmission 9,518 9,940 8. advisory services 2,581 6,094 8.1 on investments - - 8.2 on financial structure 2,581 6,094 9. distribution of third-party services 75,533 72,230 9.1 portfolio management 288 1,313 9.1.1 individuals - - 9.1.2 collectives 288 1,313 9.2 insurance products 51,890 47,977 9.3 other products 23,355 22,940 d) collection and payments services 99,846 101,745 e) services related to securitisations 65 29 f) services for factoring transactions 7,149 7,894 g) tax collection services - - h) management of multilateral trading system - - i) maintenance and management of current accounts 148,516 131,896 j) other services 157,011 134,258 1. commissions income on other loans to customers 104,547 88,693 2. commissions income on pos and pagobancomat services 21,791 19,618 3. other commisions income 30,673 25,947 Total 902,370 720,079
Comparison of the figures is heavily impacted by the change in size and composition of the scope of consolidation of the BPER Banca Group following the extraordinary operations carried out in 2019 with effects from the second half (the acquisition and merger of Unipol Banca and the acquisition of control of Arca Holding), as well as by the Covid-19 pandemic which, due to lockdown, affected bank production in the second quarter of 2020.
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2.2 Commission expense: breakdown
Total Total Type of services/Amounts 30.09.2020 30.09.2019 a) guarantees received 996 875 b) credit derivatives - - c) management and brokerage services 98,717 36,348 1.trading on financial instruments 914 545 2. trading on foreign currencies 4 - 3. portfolio management: 88,339 31,512 3.1 own portfolio 88,339 31,512 3.2 third party portfolio - - 4. custody and administration of securities 3,095 1,592 5. placement of financial instruments 10 85 6. out-of-branche offer of securities, financial instruments, products and services 6,355 2,614 d) collection and payment services 3,837 5,245 e) other services 23,996 21,541 Total 127,546 64,009
The commission expense from the management of own portfolios includes the commissions recognised by Arca Fondi SGR to external intermediaries. Comparison of the figures is heavily impacted by the change in size and composition of the scope of consolidation of the BPER Banca Group following the extraordinary operations carried out in 2019 with effects from the second half (the acquisition and merger of Unipol Banca and the acquisition of control of Arca Holding).
Dividends and similar income Caption 70
3.1 Dividends and similar income: breakdown
Total Total 30.09.2020 30.09.2019 Captions/Income Similar Similar Dividends Dividends income income A. Financial assets held for trading 439 - 2,640 - B. Other financial assets mandatorily measured at fair value 51 5,208 188 3,608 C. Financial assets measured at fair value through other comprehensive income 11,695 - 7,214 - D. Equity investments - - - - Total 12,185 5,208 10,042 3,608
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Net income from trading activities Caption 80
4.1 Net income from trading activities: breakdown
Net result Capital Profits on Capital Losses on Transactions /Income items [(A+B) - gains (A) trading (B) losses (C) trading (D) (C+D)] 1. Financial assets held for trading 5,397 2,211 (9,361) (10,124) (11,877) 1.1 Debt securities 3,605 1,425 (1,159) (2,820) 1,051 1.2 Equity instruments 1,792 786 (8,202) (7,304) (12,928) 1.3 UCITS units - - - - - 1.4 Loans - - - - - 1.5 Others - - - - - 2. Financial liabilities held for trading - - - - - 2.1 Debt securities - - - - - 2.2 Debts - - - - - 2.3 Others - - - - - 3. Financial assets and liabilities: exchange X X X X 7,369 differences 4. Derivative instruments 53,137 104,008 (48,983) (115,381) (11,288) 4.1 Financial derivatives: 53,113 101,324 (48,983) (114,357) (12,972) - on debt securities and interest rates 51,231 82,525 (48,001) (90,984) (5,229) - on equities and stock indexes 1,882 12,995 (982) (11,240) 2,655 - on currency and gold X X X X (4,069) - others - 5,804 - (12,133) (6,329) 4.2 Credit derivatives 24 2,684 - (1,024) 1,684 of which: natural hedges connected with the fair value X X X X - Total 58,534 106,219 (58,344) (125,505) (15,796)
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Net income from hedging activities Caption 90
5.1 Net income from hedging activities: breakdown
Total Total Income items/Amounts 30.09.2020 30.09.2019
A. Income from: A.1 Fair value hedging derivatives 17,504 41,685 A.2 Hedged financial assets (fair value) 207,106 354,543 A.3 Hedged financial liabilities (fair value) 1,352 1,623 A.4 Cash-flow hedging derivatives 2 - A.5 Foreign currency assets and liabilities - - Total income from hedging activity (A) 225,964 397,851 B. Charges from: B.1 Fair value hedges 213,627 361,053 B.2 Hedged financial assets (fair value) 26 1,937 B.3 Hedged financial liabilities (fair value) 14,833 39,033 B.4 Cash-flow hedging derivatives - 6 B.5 Foreign currency assets and liabilities - - Total charges from hedging activity (B) 228,486 402,029 C. Net income from hedging activities (A-B) (2,522) (4,178) of which: result of hedging on net positions - -
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Gains (Losses) on disposal or repurchase Caption 100
6.1 Gains (Losses) on disposal or repurchase: breakdown
Total Total 30.09.2020 30.09.2019 Captions/Income items Net Net Gains Losses Gains Losses result result Financial assets 1. Financial assets measured at amortised cost 159,364 (32,102) 127,262 65,972 (26,514) 39,458 1.1 Loans to banks 6,397 (1) 6,396 3,080 - 3,080 1.2 Loans to customers 152,967 (32,101) 120,866 62,892 (26,514) 36,378 2. Financial assets measured at fair value through other comprehensive income 8,417 (69) 8,348 70,544 (233) 70,311 2.1 Debt securities 8,417 (69) 8,348 70,544 (233) 70,311 2.2 Loans ------Total assets (A) 167,781 (32,171) 135,610 136,516 (26,747) 109,769 Financial liabilities measured at amortised cost 1. Due to banks ------2. Due to customers ------3. Debt securities issued 1,424 (975) 449 798 (362) 436 Total liabilities (B) 1,424 (975) 449 798 (362) 436
The net result from "Financial assets measured at amortised cost relating to customers" includes the net profit on the sale of financial assets, € 130.3 million, and losses on the disposal of loans, € 3 million. The gains realised on the FVOCI portfolio mainly relate to the disposal of debt securities classified in the HTC&S portfolio.
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Net income on financial assets and liabilities measured at fair value through profit or loss Caption 110
7.1 Net change in value of other financial assets and liabilities measured at fair value through profit or loss: breakdown on financial assets and liabilities designated at fair value
Gains on Losses on Net result Capital gains Capital losses Transactions / Income items disposal disposal [(A+B) - (A) (C) (B) (D) (C+D)]
1. Financial assets - - (4,166) - (4,166) 1.1 Debt securities - - (4,166) - (4,166) 1.2 Loans - - - - - 2. Financial liabilities - - - - - 2.1 Debt securities issued - - - - - 2.2 Due to banks - - - - - 2.3 Due to customers - - - - - 3. Foreign currency financial assets and liabilities: exchange differences X X X X - Total - - (4,166) - (4,166)
7.2 Net change in value of other financial assets and liabilities measured at fair value through profit or loss: breakdown of other financial assets mandatorily measured at fair value
Gains on Losses on Net Result Capital losses Transactions/Income items Capital gains (A) disposal disposal [(A+B) - (C) (B) (D) (C+D)] 1. Financial assets 3,213 3,499 (21,657) (2,654) (17,599) 1.1 Debt securities 246 2,144 (3,007) (128) (745) 1.2 Equity securities 173 8 (661) (9) (489) 1.3 UCITS units 2,794 1,347 (17,989) (2,517) (16,365) 1.4 Loans - - - - - 2. Foreign currency financial assets: exchange differences X X X X (387) Total 3,213 3,499 (21,657) (2,654) (17,986)
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Net impairment losses for credit risk Caption 130
8.1 Net impairment losses for credit risk relating to financial assets measured at amortised cost: breakdown
Impairment losses (1) Write - backs (2) Total Total Third stage First and First and Transactions/Income items Third second second Write-off Others stage 30.09.2020 30.09.2019 stage stage
A. Loans to banks (3,643) - - 27 - (3,616) (2,110) - Loans (2,960) - - 27 - (2,933) (1,512) - Debt securities (683) - - - - (683) (598) of which: purchased or originated credit-impaired financial assets ------B. Loans to customers (31,118) (26,140) (564,904) 1,443 219,143 (401,576) (305,911) - Loans (29,901) (26,140) (564,904) 1,441 219,143 (400,361) (305,369) - Debt securities (1,217) - - 2 - (1,215) (542) of which: purchased or originated credit-impaired financial assets ------Total (34,761) (26,140) (564,904) 1,470 219,143 (405,192) (308,021)
8.2 Net impairment losses for credit risk relating to financial assets measured at fair value through other comprehensive income: breakdown
Impairment losses (1) Write - backs (2) Total Total
Transactions/Income First First and Third stage and items Third stage 30.09.2020 30.09.2019 second second stage Write-off Others stage
A. Debt securities (509) - - 14 - (495) 582 B. Loans ------to customers ------to banks ------of which: purchased or originated credit- impaired financial assets ------Total (509) - - 14 - (495) 582
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Administrative expenses Caption 190
12.1 Staff costs: breakdown
Total Total Type of costs/Amounts 30.09.2020 30.09.2019
1) Employees 708,481 637,895 a) wages and salaries 514,358 462,566 b) social security charges 136,546 121,614 c) Termination indemnities 28,936 24,949 d) Pension expenses 455 105 e) provision for employee termination indemnities 509 2,472 f) provision for pension and similar commitments: 969 481 - defined contribution plan - - - defined benefit plans 969 481 g) payments to external supplementary pension funds: 15,497 13,864 - defined contribution plan 15,497 13,864 - defined benefit plans - - h) costs from share based payments (246) 186 i) other personnel benefits 11,457 11,658 2) Other not-retired employees 5,516 12,454 3) Directors and Statutory Auditors 7,222 6,582 4) Retired employees 83 745 Total 721,302 657,676
12.2 Average number of employees by category
30.09.2020 30.09.2019
Employees: 12,769 11,787 a) Managers 247 238 b) Middle managers 4,398 3,982 c) Other employees 8,124 7,567 Other employees 102 337
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12.2.1 Number of employees by category: banking group
30.09.2020 30.09.2019
Employees: 13,405 13,910 a) Managers 244 264 b) Total 3rd and 4th level middle managers 1,804 1,890 c) Total 1st and 2nd level middle managers 2,711 2,827 d) Other employees 8,646 8,929 Other employees 103 275
12.5 Other administrative expenses: breakdown
Captions 30.09.2020 30.09.2019 Indirect taxes and duties 116,239 114,531 Stamp duty 99,069 93,963 Other indirect taxes with right of recourse 5,698 7,254 Municipal property tax 7,761 7,487 Others 3,711 5,827 Other costs 403,492 349,291 Maintenance and repairs 50,297 37,469 Rental expense 14,279 13,524 Post office, telephone and telegraph 15,110 13,110 Data transmission fees and use of databases 32,788 25,543 Advertising 10,277 11,613 Consulting and other professional services 76,214 63,958 Lease of IT hardware and software 24,143 26,600 Insurance 7,004 5,140 Cleaning of office premises 10,512 6,916 Printing and stationery 6,922 5,017 Energy and fuel 13,370 14,214 Transport 7,086 8,343 Staff training and expense refunds 5,583 9,446 Information and surveys 9,341 8,607 Security 7,399 6,838 Use of external data gathering and processing services 12,014 4,633 Membership fees 6,324 6,679 Condominium expenses 3,989 3,095 Contribution to SRF, DGS, IDPF-VS 64,653 58,414 Sundry other 26,187 20,132 Total 519,731 463,822
The increase in this caption was also influenced by the Covid-19 health emergency; non-recurring expenses were incurred during the period on the purchase of hygiene-sanitary materials, licences and technical support for smart working, advertising and publicity, gifts and donations, and building maintenance; however, some savings were made with respect to budget due to the suspension or reduction of certain activities as a result of the emergency (such as travel, training courses and cash collections). The caption "Contributions to SRF, DGS, IDPF-VS" includes the 2020 ordinary contribution to the SRF (European Single Resolution Fund) of € 25,992 thousand; the additional contribution requested by the SRF (European Single Resolution Fund) for 2018 from Italian banks, € 8,149 thousand, and the estimated 2020 contribution to the DGS (Deposit Guarantee Scheme), € 30,512 thousand.
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Other operating expense/income Caption 230
16.1 Other operating expense: breakdown
Description/Amounts 30.09.2020 30.09.2019 Loss on disposal of leased assets 4,513 5,688 Amortisation of leasehold improvement expenditure 2,811 2,065 Out-of-period expense 14,791 530 Other expense 51,539 45,492 Total 73,654 53,775
16.2 Other operating income: breakdown
Description/Amounts 30.09.2020 30.09.2019 Rental income 5,476 5,552 Recovery of taxes 103,478 100,051 Gains on disposal of fixed assets given under finance leases 752 4,893 Other income 87,943 78,101 Total 197,649 188,597
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Consolidated interim report on operations as at 30 September 2020 Explanatory notes
Information on risks and related hedging policies
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Consolidated interim report on operations as at 30 September 2020 Explanatory notes
Risks faced by the Banking Group
It should be noted that, in compliance with the prudential regulations intended to strengthen the ability of banks to absorb shocks deriving from economic and financial tensions, the Group monitors capital adequacy, the exposure to risks and the general characteristics of the related management and control systems, in order to facilitate market discipline. The "Public Disclosures as at 30 September 2020 – Pillar 3" were prepared in accordance with the aforementioned Bank of Italy Circular 285 dated 17 December 2013 and subsequent amendments, which applies in Italy the requirements of Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR) and the subsequent EBA Guidance documents in force on the reporting date.
The document is published quarterly, in this case together with the Consolidated interim report on operations as at 30 September 2020, on the institutional website of the Parent Company https://istituzionale.bper.it.
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Consolidated interim report on operations as at 30 September 2020 Explanatory notes
Risks of consolidated for accounting purpose
Quantitative information
A. Credit quality
A.1 Non-performing and performing credit exposures: amounts, adjustments, changes and economic distribution
A.1.1 Breakdown of financial assets by portfolio classification and credit quality (book values)
Non- Unlikely Performing Other performing Portfolios/quality Bad loans to pay past due performing Total past due loans exposures exposures exposures 1. Financial assets measured at amortised cost 849,071 1,486,506 145,152 460,721 72,769,240 75,710,690 2. Financial assets measured at fair value through other comprehensive income 18 - - - 6,122,633 6,122,651 3. Financial assets designated at fair value - - - - 126,045 126,045 4. Other financial assets mandatorily at fair value - 1,040 - - 181,949 182,989 5. Financial assets classified as held for sale 876 1,068 733 595 88,326 91,598 Total 30.09.2020 849,965 1,488,614 145,885 461,316 79,288,193 82,233,973 Total 31.12.2019 1,171,299 1,661,585 166,598 887,637 68,397,443 72,284,562
A.1.2 Breakdown of financial assets by portfolio classification and credit quality (gross and net values)
Non-performing Performing
Overall Overall Overall Total (net Portfolios/quality Gross Net partial Gross Net impairment impairment exposure) exposure exposure write- exposure exposure provisions provisions off
1. Financial assets measured at amortised cost 4,891,899 2,411,170 2,480,729 358,493 73,409,626 179,665 73,229,961 75,710,690 2. Financial assets measured at fair value through other comprehensive income 26 8 18 - 6,127,638 5,005 6,122,633 6,122,651 3. Financial assets designated at fair value - - - - X X 126,045 126,045 4. Other financial assets mandatorily measured at fair value 1,040 - 1,040 - X X 181,949 182,989 5. Financial assets classified as held for sale 4,156 1,479 2,677 128 89,242 321 88,921 91,598
Total 30.09.2020 4,897,121 2,412,657 2,484,464 358,621 79,626,506 184,991 79,749,509 82,233,973
Total 31.12.2019 6,123,606 3,124,124 2,999,482 444,040 69,143,120 176,092 69,285,080 72,284,562
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Consolidated interim report on operations as at 30 September 2020 Explanatory notes
Low credit quality assets Other activities Portfolios/quality Cumulated capital losses Net exposure Net exposure 1. Financial assets held for trading 354 487 206,347 2. Hedging derivatives - - 49,631 Total 30.09.2020 354 487 255,978 Total 31.12.2019 358 557 286,870
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Risk of prudential consolidation
1.1 Credit risk
The Group's organisation provides for centralisation of the credit risk control function at the Parent Company.
Qualitative information
1. General aspects
After the sharp contraction resulting from the suspension of activities from last March, the global economy gradually recovered during the summer, though the benefits were not spread equally throughout the various countries. In any case, this growth is still largely dependent on the exceptional support and stimulus measures introduced in all the main economies, especially in the Euro-area, where broad monetary stimulus is still needed. In Italy, after declining in the first two quarters of the year (-5.5% and -13.0% on the previous quarter respectively), GDP increased in the third quarter by an estimated +12% (source: Economic Bulletin no. 4/2020, Bank of Italy), driven above all by a strong recovery on the part of industry and a certain dynamism in the construction sector and real estate market. On the other hand, the prospects for services are still uncertain, recovering slightly due to the good trend in domestic tourist flows, but still at very low levels of activity. Bank of Italy surveys are showing that there is a gradual improvement in households' economic conditions, but at the same time they are also reflecting a high propensity to increase savings for precautionary purposes. However, the global picture remains dominated by problems and uncertainties about the evolution of the pandemic, the impact of which has been increasing sharply in recent weeks and could significantly affect the economic recovery of households and businesses. In this context of continuing emergency, after the various measures made available to the local economy since the onset of the health crisis (specific borrowing facilities, measures to suspend payment of instalments and implementation of the various government decrees), the BPER Banca Group has continued to guarantee adequate support measures for households and businesses based on the initiatives coordinated by ABI and Assofin with the various trade associations. In addition, the 2020 Credit Policy guidelines were revised in July to reflect a complete change in the current and prospective macroeconomic scenario, with a view to managing the risk inherent in the loan portfolio and providing management guidelines and asset-allocation objectives that take into account the support measures made available by the government and therefore the State guarantees for new loans to businesses to maintain their liquidity. When revising the 2020 lending and credit management guidelines, a forward-looking approach was adopted with the aim of: • incorporating the sectoral and micro-sectoral forecasts for 2021-22; • assessing the resilience of individual companies' finances by applying simulations of stress due to the health crisis;
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• extending portfolio segmentation to the various branches of the economy in order to intercept dissimilar micro-sector dynamics within the same business areas; • favouring the use of eligible guarantees, especially from Mediocredito Centrale (MCC), and the "consolidation" operations envisaged by the Liquidity Decree; • introducing assessments on climatic, environmental and sustainability risks by "penalising" those branches with the highest energy absorption or characterised by a high fuel dependence; • providing for the development of "green financing" and "technological innovation", transversal to all sectors of the economy and intended to ensure greater competitiveness for the companies concerned.
2. Methods for measuring expected credit losses
The ECL model for calculating expected credit losses is based on the risk parameters estimated for regulatory purposes (IRB Models), appropriately modified to ensure that they fully comply with IFRS 9. Information on impairment models and related risk parameters is presented in Part A of the Explanatory Notes to the Consolidated financial statements as at 31 December 2019, to which reference should be made, except as specified in the "Form and content of the Consolidated interim report on operations as at 30 September 2020 – Other aspects" of these Explanatory Notes, in relation to updating the ECL for the purpose of preparing the Consolidated interim report on operations as at 30 September 2020. It should also be noted that in 2020 the IFRS 9 risk models were updated following the introduction of the new Large Corporate PD model as part of the regulatory models.
3. Financial assets involved in renegotiations and forborne exposures
The policy for identifying the forborne exposures of the BPER Banca Group is presented in the Explanatory notes to the Consolidated financial statements as at 31 December 2019, to which reference is made given that no significant changes were made to it when preparing this Consolidated interim report on operations as at 30 September 2020. Please also refer to what is mentioned in paragraph "Form and content of the Consolidated interim report on operations as at 30 September 2020 – Other aspects" of these Explanatory notes with regard to the accounting treatment of the Covid-19 moratoria.
In relation to the quantitative information on the size and characteristics of the Covid-19 moratoria granted by the BPER Banca Group at 30 September 2020, please refer to what is said in the Interim report on operations (para. 2.3 – Covid-19 emergency: measures adopted by the BPER Banca Group).
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Quantitative information
A. Credit quality
A.1.4 Prudential consolidation - Cash and off-balance sheet credit exposures to banks: gross and net values
Gross exposure Total Net Total partial Type of exposures/amounts impairment Non- Exposure write-off Performing provisions performing A. Cash exposures a) Bad loans - X - - - - of which: forborne exposures - X - - - b) Unlikely to pay loans - X - - - - of which: forborne exposures - X - - - c) Non-performing past due exposures - X - - - - of which: forborne exposures - X - - - d) Performing past due exposures X 3 - 3 - - of which: forborne exposures X - - - - e) Other performing exposures X 15,034,668 11,591 15,023,077 - - of which: forborne exposures X - - - - Total (A) - 15,034,671 11,591 15,023,080 - B. Off-balance sheet credit exposures
a) Non-performing - X - - - b) Performing X 1,449,960 185 1,449,775 - Total (B) - 1,449,960 185 1,449,775 - Total (A+B) - 16,484,631 11,776 16,472,855 -
A.1.5 Prudential consolidation - Cash and off-balance sheet credit exposures to customers: gross and net values
Gross exposure Total Net Total partial Type of exposures/amounts impairment Non- exposure write-off Performing provisions performing A. Cash exposures a) Bad loans 2,357,678 X 1,507,713 849,965 358,622 - of which: forborne exposures 373,565 X 210,273 163,292 13,186 b) Unlikely to pay loans 2,356,622 X 868,008 1,488,614 - - of which: forborne exposures 1,247,625 X 416,579 831,046 - c) Non-performing past due exposures 182,821 X 36,936 145,885 - - of which: forborne exposures 6 X 1 5 - d) Performing past due exposures X 464,935 3,622 461,313 - - of which: forborne exposures X 6,178 79 6,099 - e) Other performing exposures X 64,502,817 169,778 64,333,039 - - of which: forborne exposures X 529,880 8,329 521,551 - Total (A) 4,897,121 64,967,752 2,586,057 67,278,816 358,622 B. Off-balance sheet credit exposures
a) Non performing 393,320 X 32,570 360,750 - b) Performing X 21,833,848 13,444 21,820,404 - Total (B) 393,320 21,833,848 46,014 22,181,154 - Total (A+B) 5,290,441 86,801,600 2,632,071 89,459,970 358,622
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A. 1.7 Prudential consolidation – cash credit exposures to customers: change in gross non- performing exposures
Non- Unlikely to pay performing Reasons/Categories Bad loans loans past due exposures
A. Opening balance (gross amount) 3,448,787 2,479,816 195,003 - Sold but not derecognised - - - B. Increases 415,388 748,049 193,146 B.1 entry from performing exposures 15,365 292,107 166,699 B.2 entry from purchased or originated impaired financial assets - - - B.3 transfers from other non-performing exposures 298,037 88,574 332 B.4 contractual modifications without derecognitions - - - B.5 other increases 101,986 367,368 26,115 C. Decreases 1,506,497 871,243 205,328 C.1 transfers to performing exposures 436 84,144 43,793 C.2 write-offs 79,652 13,148 130 C.3 recoveries 145,858 406,842 52,200 C.4 sales proceeds 319,884 34,675 - C.5 losses on disposals 3,295 9,295 - C.6 transfers to other non-performing exposures 607 277,131 109,205 C.7 contractual modifications without derecognitions - - - C.8 other decreases 956,765 46,008 - D. Closing balance (gross amounts) 2,357,678 2,356,622 182,821 - Sold but not derecognised - - -
A.1.9 Prudential Consolidation - Non performing cash credit exposures to customers: change in total impairment provisions
Bad loans Unlikely to Non- pay loans performing Reasons/Category past due exposures A. Opening balance in total impairment provisions 2,277,488 818,231 28,405 - Sold but not derecognised - - - B. Increases 380,265 328,887 31,617 B.1 impairment losses on purchased or originated assets - - - B. 2 other value adjustments 285,785 281,313 30,952 B.3 losses on disposal 3,295 9,295 - B.4 transfer from other non performing exposure 85,519 13,561 93 B. 5 contractual modifications without derecognitions - - - B.6 other increases 5,666 24,718 572 C. Decreases 1,150,040 279,110 23,086 C.1 write-backs from assessments 75,099 74,527 4,419 C.2 write-backs from recoveries 48,439 45,678 666 C.3 gains on disposal 3,736 8,283 - C.4 write-offs 79,652 13,148 130 C.5 transfers to other non performing exposures 555 81,612 17,006 C. 6 contractual modifications without derecognitions - - - C.7 other decreases 942,559 55,862 865 D. Closing balance in total impairment provisions 1,507,713 868,008 36,936 - Sold but not derecognised - - -
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Information on consolidated shareholders’ equity
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Consolidated shareholders’ equity
Qualitative information
Equity management and its continuous monitoring in terms of size and quality compared with the risks assumed is an activity that the BPER Banca Group carries on constantly to ensure an adequate level of capitalisation in compliance with the prudential rules. As Parent Company, BPER Banca performs the role of coordination and guidance of Group companies, coordinating the management of capital in each Legal Entity and providing appropriate guidelines. By means of active capital management, a suitable combination of different capitalisation instruments and continuous monitoring, the Parent Company has managed to combine projects for capital growth and optimisation that have enabled the Group to maintain one of the strongest capital profiles among Italian banking groups. The size of the Group's consolidated capital resources and those of the individual Group companies are verified periodically and brought to the attention of management and of the Board of Directors and Board of Statutory Auditors. The capital position is monitored as part of the RAF (Risk Appetite Framework) process, at meetings of the Risk Committee, in periodic reports relating to the financial statements and in the impact simulations relating to extraordinary transactions and regulatory changes. The capital management, planning and allocation activities are aimed at governing and improving the current and prospective financial solidity of the Group. There are also plans to improve the capital base, such as conservative pay-out policies, strategic finance operations (capital increases, convertible loans, subordinated bonds) and levers connected to the containment of risks, such as insurance coverage, management of loans in function of the counterparty risk, the technical form and the guarantees assumed. In line with the recommendations of the European Central Bank, the Board of Directors has decided to suspend payment of the 2020 dividend and to increase revenue reserves by the same amount, thereby strengthening capital solidity and determining greater resilience in the face of necessities, not quantifiable at present, which could arise considering the current state of the health emergency. All of these activities have helped to mitigate the financial impact of several major extraordinary transactions, such as the acquisitions of Unipol Banca and Arca Holding, and to maintain adequate capital solidity in view of the acquisition of the "Going Concern". This consists of 532 branches of UBI Banca and Intesa Sanpaolo, for which the Parent Company BPER Banca has approved an increase in share capital of Euro 802.3 million, as detailed in the chapter of this Report entitled "Significant events and strategic transactions". The Parent Company is subject to the capital adequacy requirements established by the Basel Committee, in accordance with the rules defined by EU Regulation 575/2013 (CRR). In regulatory terms, BPER Banca s.p.a., Banco di Sardegna s.p.a. and Bibanca s.p.a. were authorised from 30 June 2016 to use the AIRB approach for measuring credit risk for Corporate and Retail segments. Other BPER Banca Group companies apply the Standard Method (SA) for the measurement of credit risk while, at the same time, continuing preparations to extend the use of advanced methodologies to other Group entities whose IT systems have already been aligned.
Lastly, with reference to the transition to IFRS 9, the Board of Directors of BPER Banca has decided to make the election allowed by Regulation (EU) 2395/2017 of the European Parliament and of the Council as regards "transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own
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funds". The five-year transition period envisaged in that regulation will end on 1 January 2023 (for 2020 a 70% correction factor has been applied, 85% for 2019), when the provisions recorded will be included in full in the calculation of own funds during the transition to 1 January 2018. BPER Banca has also decided that the entire banking group will adopt the "static" option, which limits deferral of the impact on capital solely to FTA of the regulation.
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Quantitative information
B.1 Consolidated Shareholders' equity: breakdown by business type
Consolidation Prudential Insurance Other adjustments Captions Total consolidation companies companies and eliminations
1. Share capital 2,290,443 - - (696,055) 1,594,388 2. Share premium reserve 1,306,225 - - (299,287) 1,006,938 3. Reserves 3,436,980 - - (1,002,886) 2,434,094 4. Equity instruments 150,000 - - - 150,000 5. (Treasury shares) (7,259) - - - (7,259) 6. Valuation reserves: 49,435 - - 5,813 55,248 - Equity instruments designated at fair value through other comprehensive income 15,003 - - (101) 14,902 - Hedging of equity instruments designated at fair value through other comprehensive income ------Financial assets (no equity instruments) measured at fair value through other comprehensive income 15,749 - - 3,008 18,757 - Property, plant and equipment ------Intangible assets ------Foreign investments hedges ------Cash flow hedges (2,400) - - - (2,400) - Hedging instruments (non-designated elements) ------Exchange differences ------Non-current assets and disposal groups held for sale ------Financial liabilities designated at fair value through profit or loss (variation due to changes in the credit worthiness) ------Actuarial gains (losses) on defined benefit plans (159,619) - - - (159,619) - Share of the valuation reserves of equity investments carried at equity - - - 2,906 2,906 - Special revaluation laws 180,702 - - - 180,702 7. Profit (Loss) for the period (+/-) of group and minority interests 236,307 - - (16,326) 219,981 Total 7,462,131 - - (2,008,741) 5,453,390
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Own funds and capital adequacy ratios
The disclosures about own funds and capital adequacy are provided in the document entitled "Public Disclosures as at 30 September 2020 – Pillar 3", prepared in accordance with the aforementioned Bank of Italy Circular 285 dated 17 December 2013 and subsequent amendments, which applies in Italy the requirements of Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR) and the subsequent EBA Guidance documents in force on the reporting date. The document has been published together with the consolidated interim report on operations as at 30 September 2020 on the website of the Parent Company https://istituzionale.bper.it.
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Information on business combinations
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Transactions carried out as at 30 September 2020
Business combinations
No business combinations pursuant to IFRS 3 were carried out during the period to 30 September 2020.
Operations between entities under common control
The absorption of Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. by BPER Banca s.p.a. was completed on 27 July 2020. For more details please read the Group interim report on operations. The transaction was consistent with the action plan that has reduced the number of Legal Entities belonging to the BPER Banca Group with a view to improving operating efficiency and creating cost/income synergies. As a business combination between entities under common control, the transaction is not addressed by IFRS 3 and has been recognised using the carrying amounts reported in the consolidated financial statements of the Parent Company. As this is a transaction involving the absorption of subsidiaries, it did not have any impact on the Consolidated interim report on operations as at 30 September 2020, except as regards the allocation of the Group's equity between the Parent Company and minority interests.
Transactions carried out subsequent to the third quarter of 2020
Business combinations
No business combinations have been carried out subsequent to 30 September 2020.
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Attachments
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Financial statements of the Parent Company
Balance sheet of the Parent Company as at 30 September 2020 page 141
Income statement of the Parent Company as at 30 September 2020 page 142
Restatement of the Reclassified balance sheet of the Parent Company as at 31 December 2019 page 143
Restatement of the Reclassified income statement of the Parent Company as at 30 September 2019 page 145
Information on loans to third-party funds page 146
Geographical organisation page 151
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Financial statements of the Parent Company
Balance sheet of the Parent Company as at 30 September 2020
(in thousands) Assets 30.09.2020 31.12.2019 Change % Change 10. Cash and cash equivalents 356,420 429,141 (72,721) -16.95
20. Financial assets measured at fair value through profit or loss 914,099 939,799 (25,700) -2.73 a) financial assets held for trading 291,501 311,681 (20,180) -6.47 b) financial assets designated at fair value 122,058 126,947 (4,889) -3.85 c) other financial assets mandatorily measured at fair value 500,540 501,171 (631) -0.13 Financial assets measured at fair value through other 30. comprehensive income 6,122,607 6,202,401 (79,794) -1.29 40. Financial assets measured at amortised cost 67,260,913 56,133,805 11,127,108 19.82 a) loans to banks 13,517,074 8,369,103 5,147,971 61.51 b) loans to customers 53,743,839 47,764,702 5,979,137 12.52 50. Hedging derivatives 49,553 81,869 (32,316) -39.47 70. Equity investments 1,994,385 2,138,421 (144,036) -6.74 80. Property, plant and equipment 806,076 802,101 3,975 0.50 90. Intangible assets 438,919 438,239 680 0.16 of which: - goodwill 230,366 225,792 4,574 2.03 1 00. Tax assets 1,605,440 1,644,103 (38,663) -2.35 a) current 319,270 456,290 (137,020) -30.03 b) deferred 1,286,170 1,187,813 98,357 8.28 Non-current assets and disposal groups classified as held for 110. sale 2,866 3,128 (262) -8.38 120. Other assets 504,970 534,741 (29,771) -5.57 Total assets 80,056,248 69,347,748 10,708,500 15.44
(in thousands) Liabilities and shareholders' equity 30.09.2020 31.12.2019 Change % Change 10. Financial liabilities measured at amortised cost 71,585,024 61,608,916 9,976,108 16.19 a) due to banks 23,007,528 15,749,542 7,257,986 46.08 b) due to customers 43,972,686 40,300,602 3,672,084 9.11 c) debt securities issued 4,604,810 5,558,772 (953,962) -17.16 20. Financial liabilities held for trading 180,686 176,219 4,467 2.53 40. Hedging derivatives 446,498 283,792 162,706 57.33 60. Tax liabilities 35,875 43,633 (7,758) -17.78 b) deferred 35,875 43,633 (7,758) -17.78 80. Other liabilities 2,170,026 1,594,541 575,485 36.09 90. Employee termination indemnities 114,200 123,302 (9,102) -7.38 100. Provisions for risks and charges 468,743 520,564 (51,821) -9.95 a) commitments and guarantees granted 45,291 46,068 (777) -1.69 b) pension and similar obligations 154,331 159,720 (5,389) -3.37 c) other provisions for risks and charges 269,121 314,776 (45,655) -14.50 110 . Valuation reserves (116,679) (135,730) 19,051 -14.04 130. Equity instruments 150,000 150,000 - - 140. Reserves 2,342,507 2,039,723 302,784 14.84 150. Share premium reserve 1,002,722 1,002,722 - - 160. Share capital 1,565,596 1,561,884 3,712 0.24 170. Treasury shares (-) (7,253) (7,253) - - 180. Profit (Loss) for the period (+/-) 118,303 385,435 (267,132) -69.31 Total liabilities and shareholders' equity 80,056,248 69,347,748 10,708,500 15.44
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Income statement of the Parent Company as at 30 September 2020
(in thousands) Captions 30.09.2020 30.09.2019 Change % Change 10. Interest and similar income 817,986 726,049 91,937 12.66 of which: interest income calculated using the effective interest method 811,583 707,951 103,632 14.64 20. Interest and similar expense (144,507) (178,510) 34,003 -19.05 30. Net interest income 673,479 547,539 125,940 23.00 40. Commission income 601,789 476,710 125,079 26.24 50. Commission expense (45,185) (30,352) (14,833) 48.87 60. Net commission income 556,604 446,358 110,246 24.70 70. Dividends and similar income 23,548 33,932 (10,384) -30.60 80. Net income from trading activities (15,914) (26,644) 10,730 -40.27 90. Net income from hedging activities (2,125) (3,966) 1,841 -46.42 100. Gains (Losses) on disposal or repurchase of: 108,445 70,560 37,885 53.69 a) financial assets measured at amortised cost 101,080 16,722 84,358 504.47 b) financial assets measured at fair value through other comprehensive income 6,913 53,237 (46,324) -87.01 c) financial liabilities 452 601 (149) -24.79 Net income on financial assets and liabilities measured at fair value 110. through profit or loss (19,579) 2,562 (22,141) -864.21 a) financial assets and liabilities designated at fair value (4,166) (6,965) 2,799 -40.19 b) other financial assets mandatorily measured at fair value (15,413) 9,527 (24,940) -261.78 120. Net interest and other banking income 1,324,458 1,070,341 254,117 23.74 130. Net impairment losses for credit risk relating to: (344,088) (200,056) (144,032) 72.00 a) financial assets measured at amortised cost (343,598) (200,415) (143,183) 71.44 b) financial assets measured at fair value through other comprehensive income (490) 359 (849) -236.49 Gains (Losses) from contractual modifications without 140. derecognition (682) (1,138) 456 -40.07 150. Net income from financial activities 979,688 869,147 110,541 12.72 160. Administrative expenses: (971,816) (801,997) (169,819) 21.17 a) staff costs (564,818) (460,652) (104,166) 22.61 b) other administrative expenses (406,998) (341,345) (65,653) 19.23 170. Net provisions for risks and charges (10,748) (3,076) (7,672) 249.41 a) commitments and guarantees granted 924 5,594 (4,670) -83.48 b) other net provisions (11,672) (8,670) (3,002) 34.63 180. Net adjustments to property, plant and equipment (70,196) (51,551) (18,645) 36.17 190. Net adjustments to intangible assets (40,167) (35,540) (4,627) 13.02 200. Other operating expense/income 131,116 135,265 (4,149) -3.07 210. Operating costs (961,811) (756,899) (204,912) 27.07 220. Gains (Losses) of equity investments (3,269) (1,188) (2,081) 175.17 250. Gains (Losses) on disposal investments 467 (166) 633 -381.33 260. Profit (Loss) from current operations before tax 15,075 110,894 (95,819) -86.41 270. Income taxes on current operations for the period 103,228 5,800 97,428 -- 280. Profit (Loss) from current operations after tax 118,303 116,694 1,609 1.38 300. Profit (Loss) for the period 118,303 116,694 1,609 1.38
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Restatement of the Reclassified balance sheet of the Parent Company as at 31 December 2019
The following is the Reclassified balance sheet of the Parent Company as at 31 December 2019 restated to show the effects of the absorption of Cassa di Risparmio di Bra s.p.a. and Cassa di Risparmio di Saluzzo s.p.a. in the comparative figures given in paragraph 4.1 "Balance sheet aggregates" of chapter 4. "The BPER Banca Group's results of operations" in the Group interim report on operations.
(in thousands) Assets BPER CR BRA CR Consolidation BPER Banca 31.12.2019 SALUZZO adjustments Banca 31.12.2019 31.12.2019 31.12.2019 restated Cash and cash equivalents 429,141 7,808 7,652 - 444,601 Financial assets 16,829,319 110,072 273,171 (26,945) 17,185,617 a) Financial assets held for trading 311,681 882 29 (8,798) 303,794 b) Financial assets designated at fair value 126,947 - - - 126,947 c) Other financial assets mandatorily measured at fair value 475,384 3,592 918 - 479,894 d) Financial assets measured at fair value through other comprehensive income 6,202,401 105,598 70,779 (30) 6,378,748 e) Debt securities measured at amortised cost 9,712,906 - 201,445 (18,117) 9,896,234 - banks 2,777,687 - - (18,117) 2,759,570 - customers 6,935,219 - 201,445 - 7,136,664 Loans 46,446,686 1,100,826 661,265 (612,078) 47,596,699 a) Loans to banks 5,591,416 76,422 92,710 (612,078) 5,148,470 b) Loans to customers 40,829,483 1,024,404 568,555 - 42,422,442 c) Financial assets measured at fair value 25,787 - - - 25,787 Hedging derivatives 81,869 - 50 (50) 81,869 Equity investments 2,138,421 - - (140,143) 1,998,278 Property, plant and equipment 802,101 17,231 12,210 2,060 833,602 Intangible assets 438,239 6 2 8,343 446,590 - of which: goodwill 225,792 - - 4,574 230,366 Other assets 2,181,972 53,675 16,494 (900) 2,251,241 Total assets 69,347,748 1,289,618 970,844 (769,713) 70,838,497
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(in thousands) Liabilities and shareholders' equity BPER CR BRA CR Consolidation BPER Banca 31.12.2019 SALUZZO adjustments Banca 31.12.2019 31.12.2019 31.12.2019 restated Due to banks 15,749,542 391,805 206,238 (610,087) 15,737,498 Direct deposits 45,859,374 783,122 685,005 (26,267) 47,301,234 a) Due to customers 40,300,602 681,701 610,929 - 41,593,232 b) Debt securities issued 5,558,772 101,421 74,076 (26,267) 5,708,002 Financial liabilities held for trading 176,219 719 10 (463) 176,485 Hedging derivatives 283,792 132 - (132) 283,792 Other liabilities 2,282,040 47,678 27,315 (1,582) 2,355,451 Shareholders' equity 4,996,781 66,162 52,276 (131,182) 4,984,037 a) Valuation reserves (135,730) 2,854 2,951 (8,441) (138,366) b) Reserves 2,039,723 (8,277) 15,462 (22,223) 2,024,685 c) Equity instruments 150,000 - - - 150,000 d) Share premium reserve 1,002,722 13,386 - (13,386) 1,002,722 e) Share capital 1,561,884 57,330 33,280 (86,897) 1,565,597 f) Treasury shares (7,253) - - - (7,253) g) Profit (Loss) for the period 385,435 869 583 (235) 386,652 Total liabilities and shareholders' equity 69,347,748 1,289,618 970,844 (769,713) 70,838,497
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Restatement of the Reclassified income statement of the Parent Company as at 30 September 2019
The following is the Reclassified income statement of the Parent Company as at 30 September 2019 restated to show the effects of the absorption of Cassa di Risparmio di Bra s.p.a., Cassa di Risparmio di Saluzzo s.p.a. and Unipol Banca s.p.a. in the comparative figures given in paragraph 4.4 "Income statement aggregates" of chapter 4. "The BPER Banca Group's results of operations" in the Group interim report on operations.
(in thousands) Captions BPER CR BRA CR Unipol Consolidation BPER Banca 30.09.2019 SALUZZO Banca adjustments Banca 30.09.2019 30.09.2019 30.09.2019 30.09.2019 restated Net interest income 547,539 15,186 9,740 38,977 3 611,445 Net commission income 446,358 9,791 6,212 45,872 15 508,248 Dividends 33,932 37 15 4 - 33,988 Net income from financial activities 42,512 1,825 1,762 14,854 - 60,953 Other operating expense/income 63,089 182 257 1,463 (5,389) 59,602 Operating income 1,133,430 27,021 17,986 101,170 (5,371) 1,274,236 Staff costs (460,652) (8,234) (8,409) (36,279) 72 (513,502) Other administrative expenses (223,694) (6,848) (5,778) (15,026) 5,267 (246,079) Net adjustments to property, plant and equipment and intangible assets (87,091) (965) (691) (5,254) (580) (94,581) Operating costs (771,437) (16,047) (14,878) (56,559) 4,759 (854,162) Net operating income 361,993 10,974 3,108 44,611 (612) 420,074 Net impairment losses to financial assets at amortised cost (200,415) (9,669) (779) (16,345) - (227,208) Net impairment losses to financial assets at fair value 359 16 26 44 - 445 Gains (Losses) from contractual modifications without derecognition (1,138) (151) - 2 - (1,287) Net impairment losses for credit risk (201,194) (9,804) (753) (16,299) - (228,050) Net provisions for risks and charges (3,076) 41 (109) (1,034) - (4,178) Contributions to SRF, DGS, IDPF - VS (45,475) (766) (752) (1,626) - (48,619) Gains (Losses) on equity investments, disposal investments and impairment losses on goodwill (1,354) (5) 8 - - (1,351) Gain on a bargain purchase - - - - 345,590 345,590 Profit (Loss) from current operations before tax 110,894 440 1,502 25,652 344,978 483,466 Income taxes on current operations for the period 5,800 (280) (578) (7,516) 202 (2,372) Profit (Loss) for the period 116,694 160 924 18,136 345,180 481,094
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Information on loans to third-party funds
Jessica Sardinian Urban Development Fund
The Autonomous Region of Sardinia and the European Investment Bank (EIB) signed a loan agreement for the creation of a JESSICA Sardinia Investment Fund to manage the resources available under Axes III and V of the ERDF Regional Operational Programme 2007-2013. Banco di Sardegna was selected for lot 1: Urban Renewal (Axis V).
In July 2012, the EIB and Banco di Sardegna signed the operational agreement for a loan of Euro 33.1 million that, based on the performance achieved, was supplemented in 2015 with an additional Euro 6.3 million. Pursuant to art. 2447 decies of the Italian Civil Code, a separate fund has been set up as part of the Urban Development Fund (UDF) for the specific purpose of managing JESSICA project loans. The resources were made available in the following ways: • direct loans to authorities and public entities; • loans to private companies; • investment in the risk capital of private companies.
In October 2019, Banco di Sardegna received notification that it had passed the EIB assessment for the refinancing of the JESSICA Fund, which will be finalised following receipt of the proposed contractual arrangements.
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As at 30 September 2020, the Investment Committee of the UDF has approved the following loans and all of the resources available have been disbursed.
(in Euro) Disbursements Investment in JESSICA Loan Risk capital Investment the capital of Contract date loan Disbursed JESSICA Paid as at as at 30.09.2020 30.09.2020 Purchase of 12 modern trolleybuses. Two loans 7,126,000 6,769,700 - 18/12/2013 5,328,209 -
Construction and management of a 45,120,239 7,000,000 - 15/04/2014 6,727,662 - natural gas distribution network (*)
Construction and management of a new 18/12/2014 cruise terminal at the 715,000 534,173 - 427,457 - "Molo Rinascita" in Cagliari. Two loans 08/07/2016 Two projects involving the construction and management of a natural gas distribution 38,913,569 8,000,000 4,000,000 16/02/2015 7,742,100 4,000,000 network based on two separate catchment areas (*) Renovation and expansion of the Municipal Market of 4,133,055 1,140,000 - 12/06/2015 798,000 - Oristano with adjacent parking
Redevelopment of a building owned by the 265,000 251,750 - 22/06/2015 167,833 - Municipality of Borutta destined to bar diner
Construction of a residential and daytime comprehensive rehabilitation centre for the intellectually 2,150,000 1,432,695 - 31/08/2015 1,142,186 - and relationally disabled in the Municipality of Selargius
(*) The capital expenditure indicated only considers the technical costs associated with the project. This excludes the financial costs of the operation (costs associated with working capital, interest, commissions, DSRA etc. which still have to be financed during construction).
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(cont.) Disbursements Investment in JESSICA Loan Risk capital Investment the capital of Contract date loan Disbursed JESSICA Paid as at as at 30.09.2020 30.09.2020 Redevelopment of Alghero 600,000 570,000 - 30/10/2015 399,000 - Town Hall
Construction of the municipal indoor 2,100,000 1,915,026 - 30/05/2016 1,404,352 - swimming pool in Alghero Redevelopment of the multi-purpose sports 560,000 532,000 - 24/06/2016 425,600 - area in the Latte Dolce district of Sassari Redevelopment of the multi-purpose sports area in the Monte 750,000 712,500 - 24/06/2016 570,000 - Rosello district of Sassari Redevelopment of the multi-purpose sports 600,000 570,000 - 24/06/2016 456,000 - area in the Carbonazzi district of Sassari Redevelopment of the "Roberta Serradimigni" 4,300,000 4,085,000 - 24/06/2016 3,268,000 - sports hall in Sassari Total 107,332,863 33,512,844 4,000,000 28,856,399 4,000,000
The following table shows simplified accounts for the JESSICA Urban Development Fund at 30 September 2020.
Balance sheet
(in Euro) Assets 30.09.2020 31.12.2019
40. Financial assets measured at amortised cost 4,457,781 3,458,175 a) loans to banks 4,457,781 3,458,175
Total assets 4,457,781 3,458,175
(in Euro) Liabilities and shareholders' equity 30.09.2020 31.12.2019
10. Financial liabilities measured at amortised cost 4,154,490 3,030,946 a) due to banks 4,154,490 3,030,946 80. Other liabilities 230,082 98,027 180. Profit (Loss) for the period 73,209 329,202 Total liabilities and shareholders' equity 4,457,781 3,458,175
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Income statement
(in Euro) Captions 30.09.2020 30.09.2019
10. Interest and similar income 474,197 892,548 30. Net interest income 474,197 892,548 50. Commission expense (400,988) (430,676) 60. Net commission income (400,988) (430,676) 300. Profit (Loss) for the period 73,209 461,872
Sustainable Growth Fund Banco di Sardegna, in association with Medio Credito Centrale (MCC) and other national banks, was awarded the Contract with the Ministry of Economic Development (MISE) to manage the interventions foreseen by the "Sustainable Growth Fund".
The endowment of the Fund will finance programmes and action that will have a significant impact on the competitiveness of the productive system at national level, with a particular focus on: • promoting research, development and innovation of strategic importance in order to relaunch the competitiveness of the productive system, not least by consolidating the R&D centres and organisations of firms; • strengthening the productive system, the reuse of productive plant and the relaunch of areas of national importance hit by complex crises, via the signature of programme agreements; • promoting the international presence of businesses and attracting investment from abroad, partly in coordination with the actions to be implemented by ICE (Agency for the promotion abroad and internationalisation of Italian businesses).
Banco di Sardegna has an internal team dedicated to evaluating and granting the assistance and soft loans made available by the Fund.
The activities of the Fund are based on calls for applications and directives from the Ministry of Economic Development; at 30 September 2020, 22 calls for applications have already been made and the total value of the projects examined was Euro 5.5 billion.
National Operational Programme (NOP) Research and Innovation-MIUR-EIB Fund of Funds
As the Managing Authority for the National Operational Programme "Research and Innovation 2014- 2020", the Ministry of Education, Universities and Research ("MIUR"), signed an agreement with the EIB in December 2016 to manage a Fund of Funds financed by NOP resources. Banco di Sardegna was one of the financial intermediaries that won the EIB selection competition for the management of Euro 62 million. Separate equity allocated for a specific purpose was established in order to manage the Financial Instrument, pursuant to art. 2447 decies of the Italian Civil Code. After signing the operational agreement in August 2018, Banco di Sardegna started the selection and evaluation of research and innovation projects in areas eligible for loans and equity investments, to which about Euro 26.5 million may be associated under co-financing from Banco di Sardegna or other lenders introduced by that bank. The Investment Committee has approved nine loan applications at 30 September 2020 and all of the related contracts have been signed. A further five applications are under review. 149
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The following is a simplified accounting report of the NOP Research and Innovation-MIUR-EIB Fund of Funds at 30 September 2020.
Balance sheet
(in Euro) Assets 30.09.2020 31.12.2019
40. Financial assets measured at amortised cost 13,917,224 8,382,944 a) loans to banks 13,917,224 8,382,944 Total assets 13,917,224 8,382,944
(in Euro) Liabilities and shareholders' equity 30.09.2020 31.12.2019
10. Financial liabilities measured at amortised cost 13,897,489 8,452,800 a) due to banks 13,897,489 8,452,800 80. Other liabilities 47,625 14,157 180. Profit (Loss) for the period (27,890) (84,013) Total liabilities and shareholders' equity 13,917,224 8,382,944
Income statement
(in Euro) Captions 30.09.2020 30.09.2019
10. Interest and similar income 5,578 - 30. Net interest income 5,578 - 50. Commission expense (33,468) (73,041) 60. Net commission income (33,468) (73,041) 300. Profit (Loss) for the period (27,890) (73,041)
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Geographical organisation
The BPER Banca Group's Italian banks are located throughout the Country as can be seen from the following table:
Details BPER BSAR 30.09.2020 31.12.2019 Banca Emilia - Romagna 317 317 333
Bologna 57 57 60
Ferrara 41 41 45
Forlì – Cesena 27 27 31
Modena 79 79 80
Parma 25 25 28
Piacenza 5 5 5
Ravenna 31 31 31
Reggio Emilia 37 37 38
Rimini 15 15 15
Friuli Venezia G. 2 2 2
Pordenone 1 1 1
Trieste 1 1 1
Abruzzo 94 94 97
Chieti 36 36 37
L’Aquila 39 39 41
Pescara 11 11 11
Teramo 8 8 8
Basilicata 29 29 30
Matera 16 16 16
Potenza 13 13 14
Calabria 38 38 38
Catanzaro 9 9 9
Cosenza 14 14 14
Crotone 7 7 7
Reggio Calabria 5 5 5
Vibo Valentia 3 3 3
Campania 94 94 96
Avellino 23 23 23
Benevento 4 4 4
Caserta 6 6 7
Naples 27 27 28
Salerno 34 34 34
Lazio 80 4 84 88 Frosinone 7 7 7
Latina 14 14 15
Rieti 2 2 2
Roma 56 4 60 63 Viterbo 1 1 1
Liguria 8 3 11 11 Genova 5 1 6 6 La Spezia 2 1 3 3 Savona 1 1 2 2 Lombardy 60 1 61 61 Bergamo 2 2 2
Brescia 7 7 7
Como 1 1 1
Cremona 5 5 5
Lecco 1 1 1
Lodi 1 1 1
Mantua 11 11 11
Milan 24 1 25 25 Monza Brianza 3 3 3
Pavia 2 2 2
Varese 3 3 3
Marche 17 17 17
Ancona 6 6 6
Ascoli Piceno 3 3 3
Fermo 1 1 1
Macerata 3 3 3
Pesaro-Urbino 4 4 4
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Details BPER BSAR 30.09.2020 31.12.2019 Banca Molise 10 10 10
Campobasso 7 7 7
Isernia 3 3 3
Piedmont 58 58 61
Alessandria 5 5 5
Asti 4 4 5
Biella 1 1 1
Cuneo 29 29 30
Novara 1 1 1
Turin 18 18 19
Puglia 38 38 40
Bari 12 12 12
Barletta Andria Trani 4 4 4 Brindisi 1 1 1 Foggia 14 14 16
Lecce 4 4 4
Taranto 3 3 3
Sardinia 330 330 334
Cagliari 32 32 35
Nuoro 62 62 63
Oristano 50 50 50
Sud Sardegna 103 103 83
Sassari 83 83 103
Sicily 34 34 36
Agrigento 3 3 3
Catania 7 7 8
Messina 10 10 10
Palermo 8 8 8
Siracusa 4 4 4
Trapani 2 2 3
Tuscany 32 1 33 33 Arezzo 2 2 2
Florence 8 8 8
Grosseto 4 4 4
Pisa 3 1 4 4 Livorno 4 4 4
Lucca 2 2 2
Massa e Carrara 3 3 3
Pistoia 2 2 2
Prato 2 2 2
Siena 2 2 2
Trentino-Alto Adige 4 4 4
Trento 4 4 4
Umbria 9 9 9
Perugia 6 6 6
Terni 3 3 3
Veneto 47 47 49
Belluno 2 2 2
Padua 10 10 10
Rovigo 8 8 10
Treviso 4 4 4
Venice 4 4 4
Verona 12 12 12
Vicenza 7 7 7
Total as at 30.09.2020 971 339 1,310
Total as at 31.12.2019 1,006 343 1,349
Changes during the period of the Group's territorial organization (39)
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Consolidated interim report on operations as at 30 September 2020
Certification of the Manager responsible for preparing the Company's financial reports
153