Resoconto Intermedio di Gestione www.bancopopolare.it Interim report on operations
as at 30 September 2013 WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa
WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa Interim report on operations as at 30 September 2013
WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa
Banco Popolare Società Cooperativa Registered office and General headquarters: Piazza Nogara, 2 - 37121 Verona Fully paid up share capital as at 30 September 2013: euro 4,294,149,652.83 Tax Code, VAT No. and Verona Companies’ Register Enrolment No. 03700430238 Member of the Interbank Deposit Guarantee Fund and the National Guarantee Fund Parent Company of the Banco Popolare Banking Group Enrolled in the register of Banking Groups
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OFFICERS, DIRECTORS AND INDEPENDENT AUDITORS AS AT 30 SEPTEMBER 2013
Board of Directors Chairman Carlo Fratta Pasini (*) Deputy Chairman Guido Castellotti (*) Deputy Chairman Maurizio Comoli (*) Managing Director Pier Francesco Saviotti (*) Directors Alberto Bauli Angelo Benelli Pietro Buzzi Aldo Civaschi Vittorio Coda Giovanni Francesco Curioni Domenico De Angelis (*) Maurizio Faroni (*) Gianni Filippa Andrea Guidi Valter Lazzari Maurizio Marino Enrico Perotti Gian Luca Rana Claudio Rangoni Machiavelli Fabio Ravanelli Sandro Veronesi Tommaso Zanini Cristina Zucchetti (*) members of the Executive Committee
Board of Statutory Auditors Chairman Pietro Manzonetto Standing Auditors Giuliano Buffelli Maurizio Calderini Gabriele Camillo Erba Alfonso Sonato
Alternate Auditors Marco Bronzato Carlo Sella
General Management General Manager Maurizio Faroni Joint General Manager Domenico De Angelis
Ethics and Disciplinary Committee Standing members Aldo Bulgarelli Luciano Codini Giuseppe Germani
Alternate members Matteo Bonetti Donato Vestita
Manager responsible for preparing the Company’s financial reports Gianpietro Val
Independent Auditors Reconta Ernst & Young S.p.A.
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This interim report on operations may contain forecasts and estimates which reflect the current opinions of Banca Popolare management as regards future events. These forecasts and estimates may include information other than actuals, relating to the future financial situation of Banco Popolare and of the Group and to the relative operating results, strategy, plans, objectives and to future developments in markets in which Banco Popolare and the Group operate or intend to operate. The information contained in this interim report on operations cannot, in any way, be construed as investment advice. Banco Popolare and its representatives decline any liability generated in any way by said information and/or regarding any losses resulting from the use of the same. Forecasts and estimates entail risks and uncertainties that may have a significant impact on the results expected. Given said uncertainties and risks, the reader should not rely excessively on the fact that the information shown in forecasts represents a prediction of actual results. Forecasts and estimates are based on information available to Banco Popolare as at today’s date. Banco Popolare is not obliged to publicly update or revise forecasts and estimates if new information on future events or other becomes available, with the exception of compliance with applicable laws.
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CONTENTS
Group structure...... 6
Group territorial network...... 8
Group financial highlights ...... 10
Notes to the Interim report on operations ...... 12
Operating performance of the Group...... 17
Results ...... 25
Risk management...... 52
Other information ...... 65
Key financial highlights of the main Group companies ...... 66
Significant events after the end of the period ...... 66
Outlook for business operations ...... 68
Declaration of the Manager responsible for preparing the Company’s financial reports...... 69
Attachments ...... 71
5 WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa GROUP STRUCTURE: MAIN COMPANIES
77. % 62.6% 82.4%
CREDITO BERGAMASCO BANCA ALETTI BANCA ITALEASE BP CROATIA 98.2%
20.9% 2.9%
BP LUXEMBOURG 100% 16.5% 14.7% 80% 100% BP PROPERTY ALETTI GESTIELLE SGR RELEASE 100% MANAGEMENT 100% ITALEASE SOCIETÀ 100% GESTIONE BENI GESTIONE SERVIZI 32.8%
ALBA LEASING BIPIELLE REAL ESTATE 100%
TECKMARKET 100%
HOLDING DI 100% PARTECIPAZIONI
AGOS DUCATO 39.0%
24.4% POPOLARE VITA 25.6%
49.9% AVIPOP ASSICURAZIONI
WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa GROUP STRUCTURE: BUSINESS LINES
INVESTMENT & PRIVATE BANKING, CORPORATE CENTRE NETWORK DIVISIONS ASSET MANAGEMENT LEASING AND OTHER
BANCO POPOLARE BANCA ALETTI BANCA ITALEASE BANCO POPOLARE
BPV division Group functions (North East) • Group Finance BPL division ALETTI GESTIELLE SGR RELEASE • Securities portfolio (North and Centre) • Institutional funding BPN division • Custodian bank (North West, Centre ASSOCIATED and South) COMPANIES FOREIGN BANKS • Alba Leasing CREDITO BERGAMASCO PRODUCT AND REAL ESTATE COMPANIES
• Società Gestione Servizi • Bipielle Real Estate
ASSOCIATED COMPANIES
• Agos Ducato • Popolare Vita • Avipop Assicurazioni
The BPV division works with the trademarks: Banca Popolare di Verona, Banco S. Geminiano e S. Prospero, Banco S. Marco, Banca Popolare del Trentino and Cassa di Risparmio di Imola.
The BPL division works with the trademarks: Banca Popolare di Lodi, Cassa di Risparmio di Lucca Pisa e Livorno, Banco di Chiavari e della Riviera Ligure, Banca Popolare di Cremona and Banca Popolare di Crema.
The BPN division works with the trademarks: Banca Popolare di Novara and Banco Popolare Siciliano.
WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa GROUP TERRITORIAL NETWORK
Division
General Management and Operational Headquarters
Division
Territorial Department Banco S.Geminiano e S.Prospero (Modena)
Division
Territorial Department Centre South (Rome)
Division
Territorial Department Cassa di Risparmio Geographical breakdown of Group branches di Lucca Pisa Livorno (Lucca) Banca Popolare di Verona Banca Popolare di Lodi Banco S.Geminiano e S.Prospero Cassa di Risparmio di Lucca Pisa Livorno Banco San Marco Banco di Chiavari e della Riviera Ligure Banca Popolare del Trentino Banca Popolare di Cremona Cassa di Risparmio di Imola Banca Popolare di Crema Banca Popolare di Novara Multi trademark areas Banco Popolare Siciliano
Figures as at 30 September 2013 Credito Bergamasco Banco Popolare not present WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa
Banco Popolare Group Branches (*) Number
Banco Popolare 1,651 Credito Bergamasco 239 Banca Aletti 35 Total 1,925
(*) Excluding 28 treasury branches
Presence abroad
Operations abroad are carried out by subsidiaries BP Luxembourg, BP Croatia, Banca Aletti Suisse and a branch of Banco Popolare in London. The Group’s presence on markets of interest for Italian exports takes the form of Representative Offices in China (Beijing, Hong Kong and Shanghai) India (Mumbai) and Russia (Moscow). Overall, the Group has 37 branches located abroad.
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GROUP FINANCIAL HIGHLIGHTS
The highlights and main ratios of the Group, calculated on the basis of the reclassified financial statements, are presented below. In previous years, the Banco Popolare Group exercised the option of designating financial liabilities issued by the bank at fair value (“fair value option”) as an alternative to hedge accounting, also for issues classified as institutional. Measuring the financial liabilities placed on the institutional market at fair value also entails measuring the impact of the change in its own creditworthiness following the date of issue of the liability. Due to said previous option, the Group’s profit (loss) is influenced to a significant extent by its creditworthiness measured on the basis of market quotations of the specific credit default swap. Given the fact that the economic impact of the fair value option has no value in terms of analysing the Group’s effective profitability, in the tables below, it was considered appropriate to show the impact of the afore-mentioned fair value option in a separate item, also showing the profit (loss) of previous periods compared net of said impact.
(in millions of euro) 30/09/2013 30/09/2012 (*) Change
Income statement figures Financial margin 1,233.0 1,264.6 (2.5%) Net fee and commission income 1,068.5 1,012.2 5.6% Operating income 2,705.8 2,743.3 (1.4%) Operating expenses (1,665.6) (1,739.4) (4.2%) Income (loss) from operations 1,040.2 1,003.9 3.6% Income (loss) before tax from continuing operations 381.2 354.9 7.4% Net income (loss) without FVO 187.1 165.9 12.8% FVO Impact (21.7) (219.8) (90.1%) Net income (loss) 165.4 (53.8)
(*) The figures have been restated in compliance with IFRS 5. The attachments contain a statement of reconciliation between the reclassified income statement schedule published in the Interim Report on Operations as at 30 September 2012 and that restated in this schedule.
(in millions of euro) 30/09/2013 31/12/2012 Change
Balance sheet figures Total assets 129,967.5 131,921.4 (1.5%) Loans to customers (gross) 93,974.0 96,223.1 (2.3%) Financial assets and hedging derivatives 25,187.2 24,201.9 4.1% Shareholders' equity 8,866.3 8,612.4 2.9%
Customers’ financial assets Direct funding 91,843.6 94,506.3 (2.8%) Indirect funding 60,462.5 61,831.8 (2.2%) - Asset management 28,442.2 26,691.9 6.6% - Mutual funds and SICAVs 12,239.6 9,656.3 26.8% - Securities and fund management 6,642.6 7,060.9 (5.9%) - Insurance policies 9,560.0 9,974.7 (4.2%) - Administered assets 32,020.3 35,139.9 (8.9%)
Information on the organisation Average number of employees and other staff (*) 18,367 18,693 Number of bank branches 1,990 1,999
(*) Weighted average calculated on a monthly basis. This does not include the Directors and Statutory Auditors of Group companies.
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Financial and economic ratios and other Group figures
30/09/2013 (*) 31/12/2012 (*)
Profitability ratios (%) Financial margin / Operating income 45.6% 46.9% Net fee and commission income / Operating income 39.5% 37.8% Operating expenses / Operating income 61.6% 62.6%
Operational productivity figures (000s of euro) Loans to customers (gross) per employee (**) 5,116.4 5,147.5 Annualized operating income per employee (**) 196.4 193.2 Annualized operating expenses per employee (**) 120.9 120.9
Credit risk ratios (%) Net doubtful loans / Loans to customers (net) 5.95% 4.69% Net substandard loans / Loans to customers (net) 5.29% 4.96% Net doubtful loans / Shareholders’ equity 59.85% 49.87%
Other ratios Core tier 1 ratio 10.28% 10.07% Tier 1 capital ratio 11.10% 11.18% Total capital ratio 12.27% 13.98% Leverage ratio 4.67% 4.75% Financial assets / Total assets 19.38% 18.35% Derivative assets / Total assets 3.90% 4.96% - trading derivatives / total assets 3.52% 4.36% - hedging derivatives / total assets 0.38% 0.60% Net trading derivatives / Total assets 0.33% 0.02% Net loans / Direct funding 97.15% 96.80%
Banco Popolare stock Number of outstanding shares 1,763,730,805 1,763,730,800 Official closing prices of the stock - Maximum 1.56 1.66 - Minimum 0.89 0.81 - Average 1.15 1.16 (*) The ratios were calculated excluding the effect of the FVO. (**) Arithmetic average calculated on a monthly basis which does not include the Directors and Statutory Auditors of Group companies.
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NOTES TO THE INTERIM REPORT ON OPERATIONS
Structure and content of the Interim report on operations
The Interim report on operations as at 30 September 2013, prepared pursuant to Article 154-ter of Italian Legislative Decree no. 58 of 24 February 1998 and subsequent amendments, aims to promptly provide indications regarding the trend of the Group’s general performance based on rapidly and easily determined economic-financial data. The balance sheet and income statement figures illustrated in this document are prepared by applying the measurement bases already used for the purposes of preparing the consolidated financial statements as at 31 December 2012, considering the clarifications given in this paragraph in relation to the purpose and timing of the preparation of the interim report on operations. For an illustration of recognition, classification, measurement, derecognition and recognition of income components relating to financial statement items, please refer to the content of the financial statements as at 31 December 2012 (“Part A - Accounting policies”). For an overview of the changes to existing standards or of new standards introduced, applicable as of FY 2013, please refer to the paragraph below entitled “New accounting standards or amendments to accounting standards validated by the European Commission”
The Report reflects the balance sheet and income statement situations of Banco Popolare and its subsidiary companies on a consolidated basis. The accounting statements used for drafting the Interim report on operations are those drawn up by the subsidiary companies with reference to 30 September 2013 (or, in the absence thereof, the most recent accounts approved). The accounting statements used for consolidation purposes, have been adjusted, where necessary, to adapt them to the IAS/IFRS; in some cases, the afore-mentioned accounting statements have also been drawn up using estimation procedures different to those normally adopted for the preparation of the annual accounts. More specifically, with reference to certain commission items as well as administrative expenses, given the impossibility of determining the entity of the revenues and expenses associated respectively with services provided and those received but not yet invoiced by means of the usual methods, Group companies have drawn up their accounting statements using the forecast data taken from the respective budgets.
This Interim report on operations is not subject to auditing by the independent auditors.
New accounting standards or amendments to accounting standards validated by the European Commission
The following paragraph contains a list of validation regulations relating to new standards validated or to amendments to existing standards, whose application is mandatory from FY 2013, limited to those that relate to the business activities of the Banco Popolare Group, for which the early application option was not adopted in previous years: regulation no. 475 of 5 June 2012 - IAS 1: the purpose of the amendments to the cited standard is to guarantee more clarity in the statement of comprehensive income, by requesting the provision of separate evidence of income components that will not be recorded in the income statement in the future and of those which, on the contrary, may be subsequently reclassified in the profit (loss) for the year, if specific conditions (e.g. sale, impairment) are met. regulation no. 1255 of 11 December 2012 - IFRS 13: the new IFRS standard 13 “Fair Value Measurement” establishes a single framework for measuring fair value, replacing the rules contained in various accounting standards and providing a complete guide on how to measure the fair value of financial and non financial assets and liabilities, also in the presence of non active and illiquid markets. The new standard does not extend the use of the fair value accounting standard, whose application is instead required or permitted by the other standards, but provides practical, complete and shared instructions on how to measure fair value. regulation no. 1256 of 13 December 2012 - IFRS 7: the changes introduced to IFRS 7 have a dual purpose, to enable those using financial statements to assess the real or potential effects of all offsetting agreements on the entity’s financial position, and to analyse and compare the accounting results of transactions recorded according to international accounting standards - with those recorded according to different US accounting standards. More specifically, entities are required to disclose the financial instruments that have been offset in the balance sheet pursuant to IAS 32 and those recorded as open balances insofar as subject to a “offsetting framework agreement or similar agreements”, which, as they do not comply with the criteria of IAS 32 for offsetting. When providing disclosure of said agreements, the standard also requires the effect of financial collateral received and given to be considered; regulation no. 301 of 27 March 2013 - IAS 16, IAS 32, IAS 34, IFRIC 2: this relates to the validation of the “2009- 2011 annual cycle of improvements of international accounting standards” approved by the IASB on 17 May 2012. The limited changes introduced by the aforementioned cycle of improvements seek to resolve any inconsistencies encountered in the body of IFRS, to provide clarification of terms and to provide additional guidelines on the application of certain requirements.
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With regard to the above, no significant impact was encountered as regards the preparation of this interim report on operations; the changes actually provided some clarification on existing standards or envisaged new disclosure obligations for interim financial statements (IAS 34) or for full financial statements (namely as at 31 December 2013). As regards standard IFRS 13, during the first nine months of the year, a series of activities were undertaken, and are still in progress, to verify the need to fine-tune the methods adopted to measure the fair value of financial assets and liabilities, based on the guidelines and instructions provided by the same standard, with a view to making a better estimate of the price at which a standard sale transaction of an asset or transfer of a liability could take place on the basis of the existing market conditions on the valuation date. In this regard, a change introduced to the method during the course of the first half entailed the use of the OIS (Overnight Indexed Swap) curve, to replace the previous Euribor curve, with a view to discounting the cash flows of derivative instruments. The change to the new OIS curve did not have any significant impact on the Banco Popolare Group’s balance sheet or income statement. For the sake of completeness, note that changes to accounting standard IAS 19 regarding employee benefits validated with regulation no. 475 of 5 June 2012, were adopted early by the Banco Popolare Group as of the Interim report as at 30 June 2012. For a full description, please refer therefore to the consolidated financial statements of the Banco Popolare Group as at 31 December 2012.
Notes for the correct comparison of financial statement schedules
For comparison purposes, the reclassified income statement as at 30 September 2012 has been amended to retroactively reflect, as per IFRS 5, the relative impact of operations that have been discontinued or are in the process of being discontinued, regarding Banco Popolare Hungary and its subsidiary company BP Service, sold in the second quarter of 2013. In particular, the contribution of the cited subsidiaries, a loss of euro 4.3 million, which in the interim report on operations published as at 30 September 2012, had been recorded under different income statement items due to the “line-by-line” consolidation method, was restated under the summary reclassified income statement item “Income (Loss) after tax from discontinued operations”. With respect to the schedule published in the report dated 30 September 2012, the impact of the change in creditworthiness on financial liabilities issued by the Bank, designated at fair value (FVO), was shown as a separate item in the reclassified income statement in order to permit a better and more immediate understanding of the contribution to the financial result.
In order to be able to fully appreciate the dynamics of the main income statement items as at 30 September 2013 compared to the quarters of the previous year, we draw attention to the reorganisation following the implementation of art. 117-bis of the Consolidated Banking Law regarding the fees applied to loans and overdrafts, introduced with Italian Decree Law no. 201 dated 6 December 2001, converted by law no. 214/2011. Under the above regulation, in addition to the interest charged at the agreed rate on the amounts in question, banks may only charge an all-inclusive fee of no more than 0.5% per quarter of the amount made available. In the case of an unarranged overdraft, or borrowing beyond the limit of an agreed amount, banks may only apply a fixed fee called “commissione di istruttoria veloce”. By effect of the above-indicated changes, starting 1 July 2012, Group banks started to apply the new regulations to all new loans granted from said date, and from 1 October 2012, to loans already in place as at 1 July 2012. Starting from the above- cited dates, the new “commissione di istruttoria veloce” has been recorded under the reclassified income statement item “other net operating income”, in line with their characteristics and several clarifications received from the Supervisory Authority; from the same dates, the previous income item called “overdraft charge” has no longer been applied, although it did contribute to the formation of the “interest margin” for the first three quarters of the previous year.
Uncertainties with regard to the use of estimates for drawing up the interim report on operations
The application of certain accounting standards necessarily involves the use of estimates and assumptions which affect the values of the assets and liabilities recorded in the financial statements, the interim financial statements and reports on operations, as well as disclosures made on potential assets and liabilities. The assumptions underlying the estimates made take into account all the information available as of the date of preparation of this interim report on operations, as well as the assumptions considered reasonable in the light of past experience and the current state of the financial markets. In this regard, note that the situation caused by the current economic and financial crisis has made it necessary to make assumptions concerning future performance characterised by significant uncertainty. Precisely in consideration of the uncertain situation, it cannot be excluded that the hypotheses adopted, however reasonable, might not be confirmed by future scenarios in which the Group finds itself operating. The results which will be achieved in the future could therefore differ from the estimates made for the purpose of drawing up the interim report on operations and could consequently make adjustments necessary which at present cannot be foreseen or estimated with respect to the book value of the assets and liabilities recorded in the financial statements. The financial statement items affected the most by the situations of uncertainty are represented by amounts receivable, financial assets, investments in associates, intangible assets, deferred tax assets, financial liabilities designated at fair value through profit and loss, provisions for risks, charges and taxation and obligations relating to employee benefits. For further details on the valuation processes which require estimates and assumptions to a greater extent, reference is made to the content of the 2012 consolidated financial report of the Banco Popolare Group. In any event, we would like to state that, despite the elements of uncertainty that naturally characterise the items described, the valuations used for this report on operations have been formulated on the basis of the going concern principle, as no risks have been identified that could impair the company’s normal course of business.
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With specific reference to the valuation process for receivables, note that the protraction or worsening of the current economic-financial crisis could result in further deterioration of the financial position of borrowers and issuer counterparties, which may generate losses on loans disbursed or financial assets acquired, greater than that which can be currently estimated and consequently considered in drawing up this report on operations. The period of change currently being experienced by the banking industry as regards the launch of the so-called Single Supervisory Mechanism and more specifically, the Comprehensive Assessment of the European banking industry launched in October by the European Central Bank could entail changes in the future to the valuation processes currently used. In this regard, although the figures shown in the interim report on operations as at 30 September 2013 represent management’s best valuation based on current accounting standards, we cannot exclude that these valuations, albeit reasonable, may not be fully confirmed, to the extent that different parameters may be used in the current assessment being made by the Supervisory Authority and the upcoming Asset Quality Review by the European Central Bank.
Tests on the recovery of the value of intangible assets with an indefinite useful life
Pursuant to IAS 36, all intangible assets with an indefinite useful life must undergo impairment testing at least once a year to verify the recoverability of their value. In addition, the standard establishes that the annual analytical calculation may be considered valid for subsequent tests, provided that the probability that the recoverable value is less than the book value of the intangible assets is considered remote. This opinion may be based on the analysis of the events which have occurred and the circumstances which have changed subsequent to the most recent annual impairment test. On the basis of the provisions of the cited standard, the Group has opted to conduct impairment testing of intangible assets with an indefinite useful life on 31 December of each year. In this regard, it is worth pointing out that the last impairment test conducted for the consolidated financial statements as at 31 December 2012 led to value adjustments of euro 19.6 million, entirely attributed to the “Avipop Assicurazioni” CGU, while for the financial statements as at 31 December 2011, value adjustments totalling euro 2,767 million were recorded, mainly attributable to the “Network Divisions” CGU. As at 30 September 2013, the Group’s intangible assets with a residual indefinite useful life amounted to euro 1,811 million, euro 1,589 million is represented by goodwill and euro 222 million by trademarks. Euro 838 million of the above intangible assets are allocated to the “Network Divisions” CGU, euro 897 million to the “Private & Investment Banking” CGU, euro 51 million to the “Avipop Assicurazioni” CGU and euro 25 million to the “Popolare Vita” CGU. For the purpose of this quarterly report, a review was carried out to identify the existence of any further (internal and external) impairment indicators beyond those already considered during the end-of-year impairment testing. The review did not find any evidence of the presence of further impairment indicators with respect to those already considered in the last test conducted. Therefore the estimated recovery value of intangible assets with an indefinite useful life has not been updated; a formal test will be conducted in preparation for the financial statements as at 31 December 2013.
Scope of consolidation and methods
The Interim report on operations includes the balance sheet and income statement results of the Parent Company and its direct and indirect subsidiaries. The scope of consolidation is determined in accordance with the provisions contained in international accounting standard IAS 27. All companies considered as associated on the basis of international accounting standards IAS 28 and 31 are also included. The concept of control is not limited to the mere absolute majority of the share capital of the investee company and is defined as the power to determine the financial and operating policies of an entity, so as to obtain benefits from its activities. The investments in associates and companies subject to joint control held for sale have been recorded in compliance with international accounting standard IFRS 5, which regulates the recording of non-current assets held for sale. For consolidation purposes, shares received as collateral have not been considered since they are not related to the exercise of control or influence over the companies’ management policies, so as to avail of the economic benefits. The reference date of the Interim report on operations coincides with the end date of the Parent Company’s quarterly financial statements. The companies which end the period as of a date other than that of the Parent Company, take steps to draw up a balance sheet and income statement as of the reference date. The assets, liabilities, income and expenses between consolidated companies are eliminated in full. The amounts in this document are stated, unless otherwise specified, in thousands of euro.
Investments in subsidiary companies exclusively consolidated on a line-by-line basis are listed below; there are no companies consolidated proportionally.
% of Type of Investment relationship Company name Registered office relationship available (a) Holder % held votes (b) Parent Banco Popolare soc. coop. Verona Company Aletti & C. Banca di Investimento Mobiliare S.p.A. Milan (1) Banco Popolare 62.576% Credito Bergamasco 20.864% Holding di Partecipazioni 16.560% Aletti Fiduciaria S.p.A. Milan (1) Banca Aletti & C. 100.000% Aletti Gestielle SGR S.p.A. Milan (1) Banco Popolare 100.000%
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% of Type of Investment relationship Company name Registered office relationship available (a) Holder % held votes (b) Aletti Trust S.p.A. Milan (1) Banca Aletti & C. 100.000% Arena Broker S.r.l. Verona (1) Holding di Partecipazioni 57.300% Banca Aletti & C. (Suisse) S.A. CH - Lugano (1) BP Luxembourg 100.000% Banca Italease S.p.A. Milan (1) Banco Popolare 82.420% Holding di Partecipazioni 14.657% Credito Bergamasco 2.923% Banca Italease Funding LLC Delaware (1) Banca Italease 100.000% Banca Popolare di Lodi Capital Company LLC III USA - Delaware (1) Banco Popolare 100.000% Banco Popolare Croatia d.d. HR - Zagreb (1) Banco Popolare 98.256% 98.537% Banco Popolare Luxembourg S.A. L - Luxembourg (1) Banco Popolare 100.000% Bipielle Bank (Suisse) S.A. (in liquidation) CH - Lugano (1) Banco Popolare 100.000% Bipielle Real Estate S.p.A. Lodi (1) Banco Popolare 100.000% BRF Property S.p.A. Parma (1) Partecipazioni Italiane 51.114% Banco Popolare 14.314% BP Covered Bond S.r.l. Milan (1) Banco Popolare 60.000% BP Property Management Soc. Consortile a r.l. Verona (1) Banco Popolare 82.309% Credito Bergamasco 10.000% Bipielle Real Estate 4.615% Banca Aletti & C. 1.000% S.G.S. BP 1.000% Aletti Gestielle SGR 0.538% Holding di Partecipazioni 0.538% BP Trading Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Credito Bergamasco S.p.A. Bergamo (1) Banco Popolare 77.818% Essegibi Promozioni Immobiliari S.p.A. Milan (1) Italease Gestione Beni 100,000% FIN.E.R.T. S.p.A. (in liquidation) Rome (1) Banco Popolare 80.000% HCS S.r.l. Milan (1) Italease Gestione Beni 100.000% Holding di Partecipazioni Finanziarie Banco Popolare Verona (1) Banco Popolare 100.000% S.p.A. Italease Finance S.p.A. Milan (1) Banca Italease 70.000% Italease Gestione Beni S.p.A. Milan (1) Banca Italease 100.000% Liberty S.r.l. Lodi (1) Banco Popolare 100.000% Lido dei Coralli S.r.l. S.T. di Gallura (SS) (1) Bipielle Real Estate 100.000% Mariner S.r.l. Lodi (1) Bipielle Real Estate 100.000% Milano Leasing S.p.A. (in liquidation) Milan (1) Banco Popolare 99.999% Nadir Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Partecipazioni Italiane S.p.A. (in liquidation) Milan (1) Banco Popolare 99.966% 100.000% P.M.G. S.r.l. (in liquidation) Milan (1) Banco Popolare 84.000% Release S.p.A. Milan (1) Banca Italease 80.000% RI Investimenti Due S.r.l. Lodi (1) Sviluppo Comparto 8 100.000% Royle West Ltd. (in voluntary liquidation) IRL – Dublin (1) Banco Popolare 99.000% Seefinanz S.A. (in liquidation) CH - Lugano (1) Banco Popolare 100.000% S.I.A.L. Società Imm. Agricola Lodigiana S.r.l. (*) Lodi (1) Banco Popolare 100.000% Sirio Immobiliare S.r.l. Lodi (1) Bipielle Real Estate 100.000% Società Gestione Servizi BP Soc. Consortile p. az. Verona (1) Banco Popolare 78.500% Banca Aletti & C. 10.000% Credito Bergamasco 10.000% Aletti Gestielle SGR 0.500% Bipielle Real Estate 0.500% Holding di Partecipazioni 0.500% Sviluppo Comparto 6 S.r.l. Lodi (1) Bipielle Real Estate 100.000% Sviluppo Comparto 8 S.r.l. Lodi (1) Bipielle Real Estate 100.000% Tecmarket Servizi S.p.A. Verona (1) Banco Popolare 87.132% Credito Bergamasco 12.868% Tiepolo Finance S.r.l. Lodi (1) Banco Popolare 60.000% Tiepolo Finance II S.r.l. Lodi (1) Banco Popolare 60.000% TT Toscana Tissue S.r.l. Pisa (1) Banco Popolare 100.000% Valori Finanziaria S.p.A. (in liquidation) Verona (1) Banco Popolare 99.889% Verona e Novara (France) S.A. (in liquidation) F – Paris (1) BP Luxembourg 99.748% 99.802% Banca Italease Capital Trust Delaware (4) Banca Italease Funding LLC 100.000%
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% of Type of Investment relationship Company name Registered office relationship available (a) Holder % held votes (b) Banca Popolare di Lodi Investor Trust III USA - Delaware (4) B. Pop. di Lodi Cap. Co. LLC III 100.000% Bipitalia Residential S.r.l. (**) Milan (4) Banco Popolare 4.000% BP Mortgages S.r.l. (**) Brescia (4) - 0.000% BPL Mortgages S.r.l. (**) Conegliano V. (TV) (4) - 0.000% BPV Mortgages S.r.l. (**) Verona (4) - 0.000% Erice Finance S.r.l. (**) Conegliano V. (TV) (4) - 0.000% Gestielle Harmonia Dinamico Milan (4) Banco Popolare 53.412% Gestielle Hedge High Volatility Milan (4) Banco Popolare 68.063% Banca Aletti & C. 8.027% Gestielle Hedge Low Volatility Milan (4) Banco Popolare 54.399% Banca Aletti & C. 3.702% Gestielle Hedge Multi-Strategy Milan (4) Banco Popolare 73.280% Banca Aletti & C. 9.324% Gestielle Hedge Opportunity Milan (4) Banco Popolare 70.291% Gestielle Multimanager Absolute Return Milan (4) Banco Popolare 52.245% Gestielle Multimanager Absolute Return Plus Milan (4) Banco Popolare 67.925% Banca Aletti & C. 5.762% Italfortune International Fund Sicav L - Luxembourg (4) Banco Popolare 89.227% Italfinance RMBS S.r.l. (**) Trento (4) - 0.000% Italfinance Securitisation VH 1 S.r.l. (**) Conegliano V. (TV) (4) Banca Italease 9.900% Italfinance Securitisation VH 2 S.r.l. (**) Conegliano V. (TV) (4) - 0.000% Leasimpresa Finance S.r.l. (**) Conegliano V. (TV) (4) - 0.000% Pami Finance S.r.l. (**) Milan (4) - 0.000% (a) Type of relationship: (1) Control under art. 2359 Italian civil code, paragraph 1, no. 1 (majority of voting rights in ordinary shareholders’ meeting) (4) Other forms of control (b) The availability of effective votes during Ordinary Shareholders’ meetings is only indicated if it differs from the percentage of investment in the share capital. (*) Company undergoing disposal as per IFRS 5. (**) Majority of the benefits and the risks (SIC-12 Consolidation – Special purpose companies)
Changes in the scope of consolidation
The changes in the scope of consolidation with respect to the situation as at 31 December 2012 are shown in the table below:
Companies consolidated line-by-line
Companies no longer consolidated due to disposal 1. Banco Popolare Hungary Zrt 2. BP Service KFT Companies no longer consolidated due to mergers Name of merged company Name of merging company 1. FIN.E.R.T. S.p.A. (in liquidation) Servizi Riscossione Imposte SE.R.I. S.p.A. (in liquidation) 2. Immobiliare BP S.r.l. Bipielle Real Estate S.p.A. 3. Braidense Seconda S.r.l. Bipielle Real Estate S.p.A. Companies no longer consolidated due to company liquidation 1. Bipielle International Holding S.A.
Companies consolidated at equity
Companies no longer consolidated due to company liquidation 1. Eurocasse SIM S.p.A. (in liquidation) 2. Finanziaria ICCR BBL S.p.A. (in liquidation)
Note that, at the same time as the cited merger by incorporation of Finert into the parent company Seri, the incorporating company changed its name to FIN.E.R.T Finanziaria Esattorie Ricevitorie Tesorerie in liquidazione S.p.A.
Lastly, note that in April, the subsidiary company TR Toscana Resort S.r.l. changed its name to BP Trading Immobiliare S.r.l.
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For further details on the transactions described, please refer to the section that illustrates the significant events that occurred during the period.
OPERATING PERFORMANCE OF THE GROUP
Economic scenario
The international scenario
In the third quarter of 2013, the global economy continued to expand despite the less lively trend recorded in emerging and newly industrialised countries, which led to the forecast for world growth being revised to 2.8% from the previous 3%. Looking in more detail at individual industrialised economies, note that the growth of the US GDP in the third quarter of the year, based on initial estimates, is 2.8% annualised (+2.5% in the second quarter), reflecting the positive contribution of consumer spending (+1.5%), exports (+4.5%) and fixed investment in residential property (+14.6%). A particularly significant increase in stock was recorded, adding 0.83 percentage points to the growth rate (against 0.41 in the second quarter). In forecasts, the estimate for 2013 as a whole has been reduced, in the meantime, to 1.7% from the previous 1.8%, also due to the recent temporary interruption to activities of a large part of the US Public Administration. Moreover, the positive evolution of the US economy was also confirmed by an improvement in labour market conditions, where the rate of unemployment recorded was 7.2% in September, and by the continuing uptrend of real estate prices in recent months. Economic growth continued in Japan also in the third quarter of the year. Forecasts actually point to an annualised GDP growth rate of 2.8%, after the +1.3% recorded for the previous quarter, due above all to the combined effect of public spending and a highly expansive monetary policy. The confidence indicators for enterprise continue to be highly positive, while those regarding retail customers are causing some minor concern, which could be related to the negative impact of rising prices on consumption. In China, the support measures implemented by the Government enabled a growth rate of 7.8% yoy to be recorded in the third quarter of 2013, marking a faster rate than the 7.5% recorded in the second quarter and above the 7.7% recorded in the first. Inflation in the main economies appears to be under control: in the USA, the annual rate of inflation stopped at 1.5% in August; in Japan, it became positive only in September (+1.1%), and in China, the quarter closed with an increase in consumer prices of 3.1% yoy. This was determined by the moderate trend of international commodity prices: only crude oil prices showed some considerable tension in the summer period (from the end of June, the price of Brent crude oil rose following the reduced amount of oil supplied by North Africa and due to concerns over the deterioration of the situation in Syria), but settled towards the beginning of September, while the rise in industrial metal prices was offset by the reduction of agricultural product ones, encouraged by prospects of a good harvest in the US.
The Eurozone and Italy
In the third quarter, the Eurozone economy appears to have maintained a positive trend: after GDP bounced back in the second quarter when, after six consecutive quarters of negative figures, it rose 0.3% against the previous quarter (-0.5% against the same quarter of 2012), the main research institutions are predicting an increase of 0.1% against the previous quarter (-0.4% against the same quarter of the previous year). However, there continues to be a certain inconsistency between positive qualitative data (in primis confidence indicators for enterprise and retail customers) and less harmonious quantitative data. In September retail sales fell by 0.6% compared to the previous month (+0.5% in August); industrial production, although up 1% on the previous quarter, is still -2.1% behind the same quarter of the previous year. The rate of unemployment continues to be high, recording 12% in September, confirming the continuing difficulties of the labour market, which may have hindered the start of a more stable and sustained growth trend through an increased rate of consumption and of other components of domestic demand. The weakness of growth did, however, remove some pressure from consumer prices, which in the quarter continued to drop (1.1% as at September 2013 against the corresponding period of 2012). Over the summer, in the wake of the improvement recorded for the European economic cycle, the Italian economy showed faint positive signs of recovery, particularly in qualitative terms. The confidence indicator for enterprise rose to 83.3 in September from 76.6 in June; revenues from industry in August improved against the previous month by 1% overall and by 3.1% as regards the foreign component; in the same month, total orders rose 2% against July (+3.9% domestic orders and - 0.5% orders from abroad). Enterprise indicated a more positive approach in terms of the attractiveness of investments, returning close to the levels recorded in the summer of 2011. The fall in industrial production also slowed down in August, improving by 0.3% against July, after recording a 1.1% decrease against the previous month. Inflation recorded a very modest trend: despite the rise in VAT, in September the national consumer price index (NIC) fell 0.3% against the previous month and rose 0.9% against the same period of the previous year (+1.2% in August), also reflecting the deflationary impact of the disastrous unemployment situation. In September, the rate of unemployment was 12.5%, up 0.1% compared to the previous month and 1.6% yoy. According to initial estimates, the situation of the Italian economy appears to have stopped deteriorating, due to the positive impact of exports, which again recorded a steady uptrend. After the fall in GDP recorded in the second quarter of the year of 0.3% against the previous month and 2.1% yoy, forecasts for the third quarter indicate a substantially stable figure, with a marginal decrease (-0.1%) against the previous quarter (an estimated -1.9% against the
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third quarter of 2012). The positive figures recorded continue to reflect a fragile situation, linked to maintaining stability, particularly in terms of the assessment of sovereign risk assigned to Italy.
The financial markets and monetary authority and fiscal measures
Monetary policy in the major economies continued to be expansive. In the USA, despite confirmation over the summer of a reduction of monetary incentives, at a meeting on 18 September, the FED decided not to change the rate of purchase of mortgage-backed securities and of long-term Treasury bonds (USD 85 billion per month), whilst awaiting further confirmation of the improvement of economic prospects as well as clarification as the direction of US Fiscal policy in the near future. In order to meet its inflation objective (2%), the Bank of Japan confirmed the programme to expand the monetary base by amounts of between YEN 60,000 and 70,000 billion per year. In turn, at a meeting in July, the ECB confirmed its intention to maintain monetary policy interest rates stable for an extended period, changing its communication strategy to include a form of forward guidance, characteristic of the Federal Reserve. Uncertainties regarding the imminent reduction of monetary incentives in the United States (called tapering) triggered acute turbulence in international financial markets: T-Bond and Bund interest rates rose sharply, while the dollar weakened rapidly. This led to difficulties for the currencies of various emerging countries, so much so as to drive the Brazilian and Indian monetary authorities to utilise market instruments, such as raining official interest rates and operations on the exchange market, and to adopt administrative measures, such as slackening restrictions on capital inflows, with a view to limiting the net outflow of capital. The conditions of western financial markets, and of European ones in particular, gradually improved from the end of September onwards. This was also due to the fact that the result of the German political elections was in line with expectations, while Italian political tensions, after an initial period in which they appeared to be particularly concerning, abated and had a limited impact on the markets.
The Italian banking system
Over the summer months, tension on lending abated, albeit to a marginal extent; the disbursement of loans continues to be held back by the critical situation of the economy, which appears to be more serious and longer lasting than our Eurozone counterparts, and by a growing trend in terms of customer risk, as shown by figures for doubtful loans. The release of payments of trade receivables due to enterprise from the Public Administration further reduced the already weak demand for credit, while, in terms of retail customers, the stagnant situation of the real estate market, combined with the difficult conditions of the labour market and the erosion of available income (also due to higher taxation) is maintaining the demand for mortgages weak. As regards the main aggregates, as at September, according to surveys and findings by the ABI (Italian Banking Association), loans to retail customers and enterprise decreased by 3.2% against the same months of 2012, following a decrease of 4.2% for the segment of loans for up to one year and of 2.9% for the segment of loans with a term of over 12 months. Credit quality continues to deteriorate: as at September, gross doubtful loans rose euro 26.8 billion in twelve months (+22.9%), while the net figure rose euro 16.6 billion (+28.3%). As at September, total funding (bonds and deposits) fell 1.1% against one year earlier, the combined effect of a rise in customer deposits (+3.4%) and a fall in bank bonds (-10.1%). Within the first aggregate, as at September, current accounts rose 2.9%, deposits with a fixed term rose 13.1% and deposits redeemable against notice instead rose 2.4%. Over the period, interest income and expense showed a slight downtrend: the first, relating to retail and non-financial corporate customers, recorded 3.81% as at September 2013, against 3.83% in September 2012. Interest expense, relating to the total funding aggregate, fell to 1.93%, from 2.09% in September 2012. Overall interest rates on deposits in euros fell from 1.27% to 1.02% in the same period, while those on bonds rose from 3.32% to 3.46%. The bank interest spread, calculated as the difference between the average interest rate on loans to retail and non-financial corporate customers and the average interest rate on total funding, consequently rose 14 percentage points, from 1.74% to 1.88%. The mark-up, calculated as the difference between the average interest rate on loans and the 3-month Euribor rate, was stable, rising from 358 b.p. in September 2012 to 359 b.p. in September 2013. The mark-down, calculated as the difference between the 3- month Euribor and the interest rate on total funding, improved for the bank system as a whole, rising 13 b.p. from -184 b.p. in September 2012 to -171 b.p. in September 2013.
Significant events during the period
The main events which occurred during the first nine months of the year are described below.
Events relating to the process to simplify corporate structure and organisation
Project to reorganise the Network and the distribution model
Given the current difficult economic climate, the Board of Directors, in meetings held at the end of May and in June 2013, approved new structural interventions with a view to cutting the “Cost-to-serve” and “Cost income” rations, in order to achieve higher operational and commercial flexibility and efficiency, at the same time safeguarding the level of service provided to customers.
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More specifically, the projects launched, which should be completed by June 2014, regard: the introduction of a more flexible Distribution Network structure, by adopting a “Hub&Spoke” model, in around 70% of the Group Network; this model will lead to a higher flexibility of the specialist resources within the “Hub&Spoke” nucleus and “lightweight” on-site control structures, improving the service provided to customers at the same time, thanks to the availability of the specialist resources located in “Hub” branches at “Spoke” branches; the conversion of over 110 branches into “Business Branches” and the consequent elimination of the current 76 Business Centres in the BPV, BPL and BPN Divisions, with a view to improving customer relations, operational management and credit risk monitoring, preserving the specialist nature of Corporate Managers (a distinguishing feature of the current model); the rationalisation of the Branch Network, through the closure of around a further 60 branches (identified from the smallest and non-performing ones) with respect to the objectives of the previous Business Plan; the closure of around 10 Business Areas to respond efficiently to the reduction in the number of Branches directly reporting to the Area Managers, following the introduction of the “Hub&Spoke” model; the simplification and the development of the “chain of responsibility” by: eliminating the three “overlapping” Territorial Departments (Territorial Departments whose offices coincide with those of the BPV, BPL and BPN head offices) adopting a classification of “Private” and “Business” customers, abandoning the current “Retail” and “Corporate” one, and consequently improving customer service; centralising the management of Large Corporate customers (National and Local) with revenues exceeding euro 250 million, previously in the hands of the Business Areas of the Departments, to the Business Department at Banco Popolare’s Head Office.
Several projects have been identified to increase the revenues generated by: banking business (development of “Foreign Commercial” business, definition of an evolved roadmap of Transnational Banking Services and the enhancement of CRM tools); bancassurance (launch of new insurance products “Health” and “Motor”, enhancement of the range of pension- related products, extension of the availability of products on “YouBanking” and on other direct channels); Banca Aletti (structuring of new investment products).
Project to reorganise the real estate segment
As part of the wider process to reorganise and simplify the Group structure, in the first few months of 2013, a project to reorganise the real estate segment was launched. On 26 February 2013, the Board of Directors resolved to proceed with the merger by incorporation of subsidiary companies Immobiliare BP and Braidense Seconda into Bipielle Real Estate. The operation was concluded on 30 June 2013, by means of a simplified procedure, insofar as the companies involved were already wholly owned by Banco Popolare; tax and accounting effects were backdated to 1 January 2013 and there was no impact on the consolidated balance sheet or on capital ratios.
The transfer of the equity investment held in TR Toscana Resort from Banco Popolare to Bipielle Real Estate was also approved, with a view to guaranteeing the professional management of the real estate assets and optimise financial management. The transfer was completed on 12 April at a consideration of euro 3.9 million. Following said operation, TR Toscana Resort, which then changed its name into BP Trading Immobiliare and moved its registered office from Pisa to Lodi, and will act as a vehicle within the Group for properties resulting from datio in solutum arrangements, which will be managed and valued with a view to their disposal. As of 24 April 2013, BP Trading Immobiliare has been included within the scope of the Banco Popolare Banking Group.
Events relating to the management of investments in subsidiaries, associates and joint ventures
Agreement reached with Crédit Agricole on Agos Ducato
On 7 May 2013, Banco Popolare reached an agreement with the majority shareholder of Crédit Agricole with a view to returning the Agos Ducato joint venture, 61% of which is held by Crédit Agricole and 39% by Banco Popolare, to profitability; the agreement establishes the equity, financial and commercial aspects of the partnership. The agreement reached substantially confirmed existing arrangements, introducing reciprocal guarantee mechanisms between the Agos Ducato partners, both in terms of the financial support to be given to the company’s business activities and of the protection of the value of the investment and the development of the company. The strengthening of the company also envisages the consolidation of the company’s equity, for a total of euro 450 million, euro 300 million of which will be made through a share capital increase and the remaining euro 150 million through the issue of financial liabilities, the characteristics of which will enable the same to be calculated as lower tier 2 capital. In terms of timing, the agreement envisages that the capital strengthening will be achieved in two separate stages during the current year: firstly, a share capital increase of euro 240 million and the subscription of subordinated loans by partners for a total of euro 120 million is envisaged; secondly, before the end of the current year, a new share capital increase of euro 60 million will be subscribed as well as subordinated loans for a further euro 30 million. The share capital increases will be subscribed by
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partners proportionally to their respective shares. Banco Popolare’s share of 39% entails a total investment of euro 117 million. Banco Popolare’s commitment in terms of the subscription of the newly-issued subordinated loans is instead limited to a total of euro 10 million. The aim of the capital strengthening plan illustrated is to guarantee, on the basis of Agos Ducato’s new Business Plan, the maintenance of the total capital ratio and a level in compliance with regulatory provisions. In line with that envisaged in the agreement, in May, the first part of the capital strengthening operation of the associated company was performed by means of a share capital increase of euro 240 million, achieved through the issue of 461,538 new shares with a nominal value of euro 520 each, without a premium. Banco Popolare fully subscribed and paid up its share for a total of euro 93.6 million. During the half year, Banco Popolare also subscribed and paid up its share of the Lower Tier II subordinated loan issued by the associated company, corresponding to euro 8 million.
On the same date as the agreement (7 May 2013), Agos Ducato held a Board of Directors’ meeting during which the new business plan, the impairment test conducted on the goodwill recognised in the financial statements and the draft financial statements as at 31 December 2012 were approved. The new business plan for 2013-2017 approved, envisages a return to profit for the company from financial year 2014. Agos Ducato’s consolidated financial statements as at 31 December 2012, approved by the Shareholders’ Meeting on 22 May 2013, show a net loss for the year of euro 604.8 million, after net value adjustments on loans of euro 1,102.8 million and after having written down goodwill for a total of euro 241.7 million. The consolidated shareholders’ equity as at 31 December 2012 amounted to euro 1,308.0 million. Agos Ducato’s results for 2012 were already reflected in the financial statements of Banco Popolare as at 31 December 2012 following the prudential valuation of the equity investment and the consequent write-downs booked to the income statement for 2012, which had brought the book value of the equity investment in Agos Ducato to euro 382.4 million.
During the first nine months of the year, Agos Ducato recorded a loss of euro 140.1 million, in line with the budgeted figure for 2013 contained in the new business plan. The share of the loss pertaining to Banco Popolare amounts to euro 54.3 million, and was deducted from the income statement as at 30 September 2013. Following said recognition, the value of the equity investment was found to be lower with respect to the pertinent share of the book value of shareholders’ equity referring to 30 September 2013. In order to align the value of the equity investment with the result of the valuation under the net equity method, a write-back of euro 105.8 million has already been made to the income statement for the first half of the year.
Expiry of call option contract on Credito Bergamasco shares
On 30 June, the call option held by Banco Popolare and granted by the Fondazione Cassa di Risparmio di Lucca relating to the equity investment held by the latter in Credito Bergamasco came to a natural expiry. The investment was represented by 7,136,711 ordinary shares, corresponding to 11.562% of share capital.
Sale of the subsidiary Banco Popolare Hungary
As part of its strategy to focus on its core banking business in Italy, on 30 March 2013, Banco Popolare signed an agreement to transfer 100% of the share capital of the subsidiary Banco Popolare Hungary (and consequently of the subsidiary of the same BP Service KFT) to the Magnet Hungarian Community Bank. The transaction received the required approval from the competent Hungarian supervisory authorities in April, and was finalised on 5 June for a price of euro 0.5 million, paid in cash. The sale did not have any significant impact on Banco Popolare’s income statement.
Merger of Group companies
On 29 January 2013, the merger by incorporation of FINERT into the parent company SERI was finalised, simultaneously changing the name of the incorporating company (SERI) into “FIN.E.R.T. Finanziaria Esattorie Ricevitorie Tesorerie S.p.A.” in Liquidation, and registering the deed of merger in the Company Register. The transactions of the company to be incorporated were booked to the financial statements of the incorporating company as of 1 January 2013; the transaction is effective from a tax perspective from the same date. The merger, which took place without the exchange of shares or cash, resulted in the termination of the incorporated company and its exclusion from the scope of consolidation of the Banco Popolare Banking Group.
Liquidation of Group companies
Over the course of the period, procedures to wind up the Swiss subsidiary company Bipielle International Holding S.A. and the associated companies Eurocasse Sim and Finanziaria ICCRI BBL were completed, with the cancellation of the same from the relative Company Registers. Banco Popolare held a 20.981% and 50% share in the latter two respectively. The removal from the scope of consolidation of the above-cited investee companies did not have an impact on the consolidated income statement.
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Other events in the period
Repurchase of Group Tier 1 and Tier 2 securities by Banco Popolare
On 16 May 2013, Banco Popolare formally invited the holders of Tier 1 and Tier 2 financial instruments of the Banco Popolare Group to submit offers to sell the same to Banco Popolare. The purpose of the repurchase transaction was to recalibrate the structure of regulatory capital of Banco Popolare and of the Group, with a view to the regulatory changes envisaged under Basel III standards, at the same time offering the holders of the instruments the opportunity to cash in their investments at higher prices than the market values recorded in the period prior to the offer. The transaction, authorised by the Banca d’Italia, was finalised on 30 May 2013, the settlement for securities submitted for purchase within the term of 24 May, and accepted by the purchaser Banco Popolare. The total amount (nominal value) of the securities submitted for purchase and accepted by the purchaser was euro 425.9 million, corresponding to 31.25% of the total nominal value of the same securities. The securities covered by the offer to sell are shown in the following table:
Nominal Purchase price (as Acceptance amount value/liquidation % of the nominal Description of the securities ISIN for the series (in amount outstanding value/liquidation thousands of euro) after the settlement amount) date Perpetual Step-Up Subordinated Fixed/Floating Rate Notes issued by Banco Popolare Soc. Coop. XS0304963290 66.50 21,600 51,450 (formerly Banco Popolare di Verona e Novara S.c.a r.l.) Perpetual Non Step-Up Subordinated Fixed/Floating Rate Notes issued by Banco Popolare Soc. Coop. XS0304963373 66.00 19,600 104,950 (formerly Banco Popolare di Verona e Novara S.c.a r.l) Non-cumulative Guaranteed Floating Rate Perpetual Trust Preferred Securities issued by Banca Italease XS0255673070 40.00 12,979 17,505 Capital Trust Non-cumulative Guaranteed Fixed/Floating Rate Perpetual Trust Preferred Securities issued by Banca XS0223454512 86.00 105,840 248,192 Popolare di Lodi Investor Trust III Lower Tier II Subordinated Callable Floating Rate XS0259400918 91.00 29,280 34,741 Notes due June 2016 issued by Banca Italease S.p.A. Lower Tier II Subordinated Callable Step-Up Floating Rate Notes due June 2016 issued by Banco Popolare XS0256368050 91.75 55,050 109,600 Soc. Coop. (formerly Banco Popolare di Verona e Novara S.c.a r.l.) Lower Tier II Subordinated Callable Step-Up Floating Rate Notes due November 2016 issued by Banco XS0276033510 90.75 20,200 137,700 Popolare Soc. Coop. (formerly Banco Popolare di Verona e Novara S.c.a r.l.) Lower Tier II Subordinated Callable Step-Up Floating Rate Notes due February 2017 issued by Banco XS0284945135 92.00 30,400 81,650 Popolare Soc. Coop. (formerly Banco Popolare di Verona e Novara S.c.a r.l.) Lower Tier 2 Subordinated 5.473% Fixed Rate Notes due November 2016 issued by XS0464464964 105.25 131,002 151,502 Banco Popolare Soc. Coop.
On the settlement date, the holders of the securities were paid a cash amount, calculated in percentage terms with respect to the relative nominal value. With the exception of the Banca Italease Preferred Securities, on which no interest was paid, the holders of the securities accepted for the purchase received the interest accrued between the last interest or dividend payment date and the settlement date of the offer.
The above transaction had an overall positive impact of around euro 25.2 million, net of the relative tax effect, on the consolidated income statement for the period. The impact includes the gain on repurchasing the securities and the positive effect generated by terminating the derivative contracts entered to hedge interest rate risk. Lastly, it should be noted that the repurchase of the securities will have a positive impact on the income statement for the current year due to lower interest expense debited to the income statement, estimated to be around euro 7.6 million (euro 5.2 million after tax).
Issue of senior notes for euro 1.25 billion
In January, Banco Popolare placed 3-year senior bond issue with institutional investors as part of the EMTN programme for the figure of euro 1.25 billion. The bond, which has a fixed-rate coupon, has a final return corresponding to the mid-swap rate plus 310 basis points.
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The operation, initially announced with a return corresponding to the 3-year mid-swap rate plus a spread of 340 basis points, was priced at the mid-swap rate plus 310 basis points, following the significant demand and the numerous orders recorded (around 350 orders for a total amount of around euro 4.5 billion), with an especially high participation of asset managers, insurance and private banking. The largest allocations regarded investors from European countries, in particular the United Kingdom (20%), France (16%), Germany and Austria (7%), Benelux (4%), Switzerland (3%) and Nordic countries (2%), as well as those from the domestic market (35%). The funds collected, to be used for current operations, are contributing to strengthening Group liquidity.
Banco Popolare wins the ABI Innovation Award for YouBanking
Banco Popolare’s YouBanking project won the 2013 ABI Innovation award in April. The award ceremony was held in Milan at the head office of ABI, where awards were made based on “originality and tangibility” in which Banco Popolare competed in the “Innovative Channels” category. In particular, attention was drawn to the fact that through the YouBanking project, Banco Popolare seeks to combine traditional banking with last generation online services. The Jury declared the project the winner due to the attention addressed to new ways of involving customers in the internet banking channel, thanks to the presence of a series of features that encourage customers to access the platform frequently and enable the service offered to be customised.
Banca Italease - derisking process
Negotiations with the leading debtors continue, aimed at closing the default positions or restoring them to performing status. In the first nine months of 2013, in particular, the following events took place:
Relations with main debtors Statuto Group: in July, the transfer of three leasing contracts by the Fiat Group to Release was finalised, with a total value of euro 90.9 million, with a positive impact on the income statement of euro 11.2 million, already recorded in the income statement for the first half. The exposure was then reduced following collections relating to restructured loans amounting to around euro 21 million between August and September; Ramondetti Group: in July, Banca Italease signed a leasing contract with a new performing counterparty, relating to the property underlying the residual exposure towards the Ramondetti Group, previously classified as doubtful. The agreement became effective in September and resulted in the cancellation of exposure towards of the group in question, amounting to around euro 48 million.
Other events Partial redemption by Release of one position, previously classified as restructured, amounting to around euro 9 million; The reclassification from substandard to restructured of a position held by Banca Italease with an exposure of around euro 11 million; The reclassification from past due to performing of a position held by Banca Italease with an exposure of around euro 12 million; Collection of euro 3.2 million by Release, relating to a mortgage loan classified as substandard.
Other transactions During the period, the Banca Italease sub Group assigned loans to specialist operators, relating to 1,319 contracts classified as doubtful, with a gross overall risk of euro 53.1 million, of which 959 contracts with a gross risk of euro 32.1 million undertaken by Banca Italease and 360 contracts with a gross risk of euro 21 million undertaken by Release. The above transaction did not have a significant impact on the income statement for the period insofar as the positions assigned related to doubtful loans, without underlying assets and almost fully covered by hedges.
Covered bond transactions and securitisations
As part of the Residential CB Programme, on 31 January 2013, following the signature of the relative contracts, a new portfolio of suitable assets (the eighth) was assigned to BP Covered Bond S.r.l., with a total residual debt of around euro 802 million and partly comprised by receivables resulting from the unwinding of the BPL Mortgages 4 operation and partly by further residential mortgage and landed loans originating from Group banks. To honour the purchase price of the receivables portfolio, the company utilised the disbursement of the seventh tranche of the subordinated revolving loan granted by the assigning banks. Following the downgrading by Moody’s on 8 July 2013, which reduced Banco Popolare’s rating from “Baa3” to “Ba3”, the rating of the Residential CB Programme fell from “A2” to “Baa2”. At the time of the annual renewal of the Prospectus, several changes were made to the structure of the programme, including the reduction of the minimum rating level of Banco Popolare to act as custodian bank, to hold certain accounts of the SPE, to be appointed as Back-up Servicer, and for the subordinated loan repayment procedures (from “Baa3” to “Ba3”). These amendments were approved by the Bondholder Representative and by the other parties involved in the programme, subject to confirmation of the rating by the rating agencies.
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Under the Residential CB Programme, the overall value of the receivables sold to the SPE was around euro 10.4 billion as at 30 September 2013. On 5 April 2013, Banco Popolare issued the Sixth Series of Residential Covered Bonds for a notional amount of euro 150 million; these are fixed-rate (4%) bonds maturing on 31 March 2023. Overall, the bonds issued by Banco Popolare under this programme as at 30 September 2013 correspond to euro 7.45 billion (listed on the Luxembourg Stock Exchange, rating assigned by Fitch “BBB+”, while the Moody’s rating is “Baa2”).
Under the Commercial CB Programme, on 16 February 2013, Group banks transferred a new portfolio of suitable assets (the third) with a residual debt of around euro 1.1 billion, partly comprised by receivables resulting from the unwinding of the BPL Mortgages 4 operation and partly by further residential and commercial mortgage and landed loans originating from the Assigning Banks. To honour the purchase price, the SPE partly utilised available liquidity and partly the disbursement of a third tranche of the subordinated revolving loan granted by the assigning banks. The main purpose of the portfolio assigned was to create the overcollateralisation needed to obtain a rating on the bonds issued from rating agency Moody’s. On 29 July 2013, the prospectus for the Programme underwent its annual update, and at the same time it was assigned an official rating by Moody’s (“Baa3”). At this time, several changes were made to the structure of the Programme, including the reduction of the rating level required to act as custodian bank, to hold certain accounts of the SPE and to be appointed as Back-up Servicer (from “Baa3” to “Ba3”). These amendments were approved by the Bondholder Representative and by the other parties involved in the programme, subject to confirmation of the rating by the rating agencies. Under the Commercial CB programme, the overall value of the receivables sold to the Special Purpose Vehicle was around euro 2.6 billion as at 30 September 2013. On 31 July 2013, Banco Popolare issued the Third Series of CB for a nominal value of euro 200 million; it is a floating rate “soft bullet” CB (3m Euribor + 30 bps), maturity 30 September 2015). Overall, the bonds issued by Banco Popolare under this Programme as at 30 September 2013 correspond to euro 1.9 billion; these bonds have a rating of “Baa3” from Moody’s, are listed on the Luxembourg Stock Exchange, subscribed by Banco Popolare and used as collateral in ECB refinancing operations.
As regards securitisations, on 28 January 2013, the mortgage loans underlying the securitisation transaction carried out via the Special Purpose Entity BPL Mortgages in July 2009 (“BPL Mortgages 4”) were repurchased by Banco Popolare and Credito Bergamasco; BPL Mortgages carried out the early redemption of the securities issued on the interest payment date of 8 February 2013, fully subscribed by Banco Popolare. With regard to the “BPL Mortgages 5” securitisation transaction, launched in November 2012 through the assignment to the Special Purpose Vehicle BPL Mortgages S.r.l. of a first portfolio of residential mortgage loans and the subsequent issue of senior notes (“A2” rating from Moody’s and “A” from DBRS), on 10 March 2013, the originator banks sold a further portfolio of residential mortgage loans with a total residual debt of around euro 1 billion. To fund the purchase of the second portfolio, the Special Purpose Vehicle increased the outstanding amount of securities already issued in December 2012; more specifically, on 28 March 2013, the amount of senior notes was increased by euro 739.1 million, while junior notes were increased by euro 347.8 million; the total amount of notes issued and subscribed was euro 3.5 billion. Both classes of notes were subscribed by the originator banks to the extent of their share of the total receivables sold. Following the declaration of allocatability, the senior notes were used for refinancing operations with the European Central Bank. On 22 February 2013, Banco Popolare and Credito Bergamasco (the originator banks) sold a loan portfolio resulting from landed, mortgage, agrarian and unsecured loan agreements disbursed to SMEs to the Special Purpose Entity BPL Mortgages, a portion of which resulted from the unwinding of the “BPL Mortgages 4” transaction (“BPL Mortgages 6”). The residual debt of the receivables included in the portfolio sold was around euro 5.2 billion; to fund the purchase of the loan portfolio, on 11 March 2013, the company issued two classes of notes: a class of senior notes for a total nominal value of euro 3.3 billion, listed on the Irish Stock Exchange (rated “A2” by Moody’s and “A” by DBRS) and a class of unrated junior notes for a total nominal value of euro 1.9 billion. The originator banks subscribed both the senior and junior notes in proportion to their shares of the total receivables sold. In April 2013, the senior notes obtained a declaration of allocatability, to be used by Banco Popolare for refinancing operations with the European Central Bank. During the period, several securities of securitisation transactions were downgraded relating to the following SPEs: BP Mortgages S.r.l, Bipitalia Residential S.r.l, Italease Finance S.p.A., Italfinance Securitization Vehicle S.r.l, Italfinance Securitization Vehicle 2 S.r.l and Leasimpresa Finance S.r.l. Following the downgrading of Banco Popolare on 8 July 2013 by Moody’s (from “Baa3” to “Ba3”), contractual changes had to be made to several current securitisation transactions; these changes are currently being finalised with the rating agencies and with the bondholder representatives.
Agreements relating to employees
As part of the continuing campaign to cut operating expenses, which include personnel expenses, note that also in the third quarter of 2013, the Bank continued to monitor the agreements signed in the first quarter and to take further measures to reduce structural personnel costs, which also seek to have as limited impact as possible on said employees.
As illustrated below, the agreements signed at the beginning of the year contribute to achieving objectives of reducing labour costs by managing surplus personnel and adopting measures to maintain employment status:
Access to the ordinary provisions of the Solidarity Fund for the industry The trade union agreements have established the terms for the temporary suspension of working activities for all employees through the use of the ordinary provisions of the Solidarity Fund, for a total number of working days set as around 63,000 at
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Group level in 2013. For the days on which working activities are suspended, employees will receive reduced pay, covered by social security (INPS).
Outstanding holiday leave, accumulated hours and permits for bank holidays In line with the operating and organisational requirements of Group Companies, an agreement has been reached with the Trade Unions for the use of leave accumulated during the year in the form of holiday leave, accumulated hours and bank holiday permits, and therefore the significant reduction of the outstanding figures, and of the relative allocations to provisions made in previous years.
Termination of employment contracts for those that meet retirement requirements Following the application of the agreements reached, the termination of employment for 32 employees is envisaged, who meet the legal requirements to immediately receive a pension.
Access to the extraordinary provisions of the Solidarity Fund for the industry Following the application of the agreements reached and the subsequent extension established for the submission of voluntary applications for access to the extraordinary provisions of the Solidarity Fund for the industry, a higher number of applications than the minimum objective of 250 employees at group level was received.
As explained in more detail in the section illustrating significant events after the end of the period, on 3 October, an agreement was signed with the Trade Unions for the adoption of further measures to cut structural personnel costs.
Closure of the tax inspection of Banca Aletti
On 21 February, the inspection of Banca Aletti that began in February 2011, carried out by the Tax Police Corps of the Finance Police, was concluded. The inspection regarded single stock futures transactions (listed derivative contracts whose reference value is that of a single share, also listed) and, to a lesser extent, share issues made between 2005 and 2009, namely operations relating to share securities that are part of standard investment banking activities. The results of the inspection led to two formal reports on findings. In the first formal report on findings, received in 2011 and relating to 2006 only, the inspectors disputed that the purpose of the single stock futures transactions performed by the Bank on its own account was unlawful (pursued by the market counterparty that was not resident in Italy), namely to evade the application of withholding tax of 27% on the dividends of the shares representing the underlying assets of the cited futures. The Lombardy Regional Headquarters, acknowledging the findings of the inspectors, classified it in a different way, without prejudice to the supposed evasion, and sent two payment orders to the Bank, envisaging the payment of euro 17.6 million in non-applied withholding tax and a fine of euro 26.4 million, plus interest. Although convinced of the groundlessness of the Tax Authority’s claims, with a view to lowering this amount, the Bank attempted to reach a settlement, which was unsuccessful due to the failure of the Finance Police to close the inspection. Consequently, the Bank submitted an appeal to the Provincial Tax Commission of Milan, and once the inspection was concluded, started judicial conciliation proceedings. In the second report on findings, received on 21 February 2013, and relating to 2005 to 2009, the inspectors again disputed the evasive nature of single stock futures transactions and, as regards 2008, the share issue transactions performed with non- resident counterparties and, as regards these transactions, they proposed a series of findings relating to withholding tax, direct taxes and credit for taxes discharged abroad. When these findings are passed to the Lombardy Regional Headquarters, which is responsible for examining the report of the Finance Police and issuing any payment orders, the tax claim could amount to euro 283.1 million in unpaid withholding tax, euro 42.5 million in terms of IRES and IRAP and euro 114.7 million in terms of undue credit for taxes discharged abroad, plus any fines and interest. Both the findings relating to the notice of assessment and to the formal report for 2006, and even more so those contained in the formal report received at the end of February 2013 appear to be groundless insofar as the theory of presumed “misuse of a right” made by the Finance Police is based on mere presumptions and therefore not on real assumptions. The findings were also drawn up with no regard for factual circumstances or technical elements. In the light of the above, based on information that is currently available, and also with the support of a reliable external opinion, we believe that the potential liability resulting from the above-illustrated reports should be classified as possible but improbable. Although convinced of the legitimacy of its action and aware of the groundlessness of the claims made, as is standard practice in these circumstances, the Bank sought to negotiate with the Lombardy Regional Headquarters with a view to safeguarding its rights and understanding whether it was possible to reach an out-of-court settlement relating to the findings contained in the documents issued and those formulated in the second formal report on findings. The reason for this is that settling the dispute out of court is in any event retained as preferable to facing the costs, the lengthy period involved and the undeniable uncertainties of a dispute.
Group ratings
In the first nine months of 2013, the rating agencies made the following changes to the ratings of Banco Popolare and to those of several Group subsidiaries. On 18 March, following the downgrade of Italy’s long-term rating to ‘BBB+’ with a negative outlook by Fitch Ratings on 8 March 2013, the latter confirmed Banco Popolare’s long and short term ratings as ‘BBB+’ and ‘F3’, but changed the long term outlook from ‘stable’ to ‘negative’. As the same time, Banco Popolare’s Viability Rating was confirmed as ‘bbb’. On 8 July, Moody’s Investors Service decided to downgrade Banco Popolare’s long term rating from Baa3 to Ba3, its short
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term rating from P-3 to NP (Not-Prime) and the BFSR (Bank Financial Strength) from D+ to E+. The ratings were assigned a negative outlook, in line with that assigned to Italy and to the Italian banking industry, reflecting the difficult operating scenario. Banco Popolare formally disputed this decision in a press release published on the same date. With regard to Standard & Poor’s, the latter made several changes over the nine month period: on 22 March, it changed Banco Popolare’s long and short term ratings, as well as those of Credito Bergamasco and Banca Aletti from “BBB/A-3”, with a negative outlook to “BB+/B” maintaining the negative outlook. On the same day, Banco Popolare issued a press release indicating its disagreement with this rating change, listing the reasons for its dissent; subsequently, on 24 July, following the downgrade of the long term rating for Italy from “BBB+” to “BBB” on 9 July and the subsequent downgrade by one step of the so-called anchor of the banking industry, as part of a review that involved the Italian banking system, it downgraded the long term rating of Banco Popolare and of the subsidiaries Credito Bergamasco and Banca Aletti from “BB+” to “BB”, with a negative outlook. At the same time, Standard & Poor’s confirmed the short term rating of “B” and removed the CreditWatch annotation with its negative implications assigned on 12 July.
The table below compares the Group’s ratings as at 30 September 2013 with those as at 31 December 2012.
Rating agency Type of Rating Rating as at 30/09/2013 Rating as at 31/12/2012
BBB BBB Long term (IDR) Fitch Ratings (Negative outlook) (Stable outlook) Short term (IDR) F3 F3 Baa3 Ba3 Long term (Under Review for possible (Negative outlook) downgrade) Moody’s P-3 Short term NP (Under Review for possible downgrade) BB BBB- Long term (Negative outlook) (Negative outlook) Standard & Poor's Short term B A-3
RESULTS
Introduction
The balance sheet and income statement schedules shown below have been reclassified, according to operating criteria, in order to provide clear indications on the trend of the Group’s general performance based on the economic-financial data that can be determined rapidly and easily. The reclassification criteria for income statements are unchanged with respect to those applied as at 31 December 2012; however, several restatements of data relating to previous periods were necessary in order to guarantee a like-for-like comparison. In particular, note that the figures relating to the first nine months of the previous year have been appropriately reclassified in order to retroactively reflect the transfer of the economic contribution of the investee company Banco Popolare Hungary Zrt and of its subsidiary BP Service Kft, sold in the second quarter of 2013, to “Income/(loss) after tax from discontinued operations”.
The attachments to this document contain a statement of reconciliation between the reclassified income statement published in the interim report on operations as at 30 September 2012 and the same restated for comparative purposes, contained in this interim report on operations. With respect to the schedule published in the report dated 30 September 2012, the impact of the change in creditworthiness on financial liabilities issued by the Bank, designated at fair value (FVO), was shown as a separate item in the reclassified income statement in order to permit a better and more immediate understanding of the contribution to the financial result.
Disclosures on the business combinations and the reclassifications made to the financial statements envisaged by Circular no. 262/05, in compliance with the requirements of Consob as per communication no. 6064293 dated 28 July 2006 are shown below: the figurative cost relating to the financing of the financial assets acquired to create structured financial products for trading purposes, has been reclassified from the interest expense item (item 20) to the net financial result; dividends on shares classified under financial assets available for sale and assets held for trading (item 70) have been reclassified under the net financial result; the profits and losses on the disposal of loans, not represented by debt securities, (included in item 100) have been grouped, together with net losses/recoveries on impairment of loans, under item “Net adjustments on loans
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to customers”; the profits and losses on the disposal of financial assets available for sale, receivables represented by debt securities and financial liabilities (recognised under item 100) have been stated under the net financial result. This last aggregate also includes adjustments due to impairment on debt securities classified in the loans portfolio, which in the financial statements are shown under item 130; recoveries on taxes and other costs (included in item 220) have been booked directly against administrative expenses, where the relative cost has been recognised, rather than being indicated in the reclassified aggregate “other net operating income”; the amortisation of leasehold improvement costs (recorded in item 220) has been stated together with value adjustments on property and equipment and intangible assets, rather than stated together with other net operating income; the portion of the economic results pertaining to investee companies carried at equity (included in item 240) has been stated in a specific item which represents, together with the interest margin, the aggregate defined as the financial margin; the income and expenses of the investee companies relating to merchant banking activities carried out by the Group, which do not fall within the sphere of application of IFRS 5 but which in essence represent discontinued operations, are recorded in the reclassified income statement under Income/(Loss) after tax from discontinued operations; the aggregate “Losses/recoveries on investments in associates and companies subject to joint control and goodwill” includes all adjustments relating to goodwill and to investments in associates and companies subject to joint control made following annual impairment testing; the impact of the change in creditworthiness on financial liabilities issued by the Bank, designated at fair value (FVO), recorded under item 110, is shown as a separate item in the reclassified income statement, together with the relative tax (recognised in item 290 of the income statement).
Reclassified consolidated income statement
Reclassified income statement items 30/09/2013 30/09/2012 (*) Change (in thousands of euro) Interest margin 1,267,290 1,356,690 (6.6%) Income (loss) from investments in associates carried at equity (34,312) (92,099) (62.7%) Financial margin 1,232,978 1,264,591 (2.5%) Net fee and commission income 1,068,499 1,012,150 5.6% Other net operating income 136,034 41,222 230.0% Net financial result (without FVO) 268,295 425,323 (36.9%) Other operating income 1,472,828 1,478,695 (0.4%) Operating income 2,705,806 2,743,286 (1.4%) Personnel expenses (1,035,966) (1,084,153) (4.4%) Other administrative expenses (532,843) (556,863) (4.3%) Net value adjustments on property and equipment and intangible assets (96,799) (98,376) (1.6%) Operating expenses (1,665,608) (1,739,392) (4.2%) Income (loss) from operations 1,040,198 1,003,894 3.6% Net adjustments on loans to customers (689,004) (600,867) 14.7% Net adjustments on receivables due from banks and other assets (66,492) (21,265) 212.7% Net provisions for risks and charges 1,708 (21,366) Recoveries (Losses) on investments in associates and companies subject to 95,496 (10,000) joint control and goodwill Profits (Losses) on disposal of investments in associates and companies (709) 4,543 subject to joint control and other investments Income (loss) before tax from continuing operations 381,197 354,939 7.4% Taxes on income from continuing operations (182,208) (173,868) 4.8% Income (loss) after tax from discontinued operations (753) (3,868) (80.5%) Income (Loss) attributable to minority interests (11,130) (11,276) (1.3%) Income (loss) for the period without FVO 187,106 165,927 12.8% Change in the Bank’s creditworthiness (FVO) (32,427) (328,328) (90.1%) Taxes on the change in creditworthiness (FVO) 10,724 108,578 (90.1%) FVO Impact (21,703) (219,750) (90.1%) Parent Company’s net income (loss) 165,403 (53,823) (*) The figures relating to the previous period have been restated to provide a like-for-like comparison
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Reclassified consolidated income statement – Quarterly changes
Reclassified income statement items FY 2013 FY 2012 (*) (in thousands of euro) Q3 Q2 Q1 (*) Q4 Q3 Q2 Q1 Interest margin 426,481 432,270 408,539 402,732 441,714 444,815 470,161 Income (loss) from investments in associates carried at equity (5,825) (33,113) 4,626 25,301 (33,022) (65,999) 6,922 Financial margin 420,656 399,157 413,165 428,033 408,692 378,816 477,083 Net fee and commission income 324,741 378,294 365,464 352,179 334,586 341,260 336,304 Other net operating income 35,954 47,701 52,379 45,536 18,846 13,012 9,364 Net financial result (without FVO) 96,813 94,643 76,839 43,063 90,284 52,380 282,659 Other operating income 457,508 520,638 494,682 440,778 443,716 406,652 628,327 Operating income 878,164 919,795 907,847 868,811 852,408 785,468 1,105,410 Personnel expenses (346,871) (339,636) (349,459) (310,786) (354,068) (365,635) (364,450) Other administrative expenses (173,996) (178,783) (180,064) (147,852) (187,872) (182,315) (186,676) Net value adjustments on property and equipment and (33,994) (31,037) (31,768) (62,433) (32,666) (30,294) (35,416) intangible assets Operating expenses (554,861) (549,456) (561,291) (521,071) (574,606) (578,244) (586,542) Income (loss) from operations 323,303 370,339 346,556 347,740 277,802 207,224 518,868 Net adjustments on loans to customers (248,015) (211,642) (229,347) (683,455) (203,888) (185,623) (211,356) Net adjustments on receivables due from banks and other assets (6,668) (54,075) (5,749) (21,391) (4,556) (15,078) (1,631) Net provisions for risks and charges 5,604 (4,836) 940 7,976 (9,556) 60,355 (72,165) Recoveries (Losses) on investments in associates and companies - 95,496 - (432,534) - (10,000) - subject to joint control and goodwill Profits (Losses) on disposal of investments in associates and (491) (357) 139 239 (810) 5,390 (37) companies subject to joint control and other investments Income (loss) before tax from continuing operations 73,733 194,925 112,539 (781,425) 58,992 62,268 233,679 Taxes on income from continuing operations (42,660) (75,521) (64,027) (5,275) (62,535) 13,726 (125,059) Income (loss) after tax from discontinued operations (124) (877) 248 (22,157) (1,056) (1,994) (818) Income (Loss) attributable to minority interests 441 (3,536) (8,035) 16,317 (810) (5,579) (4,887) Income (loss) for the period without FVO 31,390 114,991 40,725 (792,540) (5,409) 68,421 102,915 Change in the Bank’s creditworthiness (FVO) (33,071) (75,801) 76,445 (146,710) (115,661) 104,035 (316,702) Taxes on the change in creditworthiness (FVO) 10,937 25,067 (25,280) 48,517 38,249 (34,404) 104,733 FVO Impact (22,134) (50,734) 51,165 (98,193) (77,412) 69,631 (211,969) Parent Company’s net income (loss) 9,256 64,257 91,890 (890,733) (82,821) 138,052 (109,054) (*) The figures relating to previous periods have been restated to provide a like-for-like comparison.
Note that, in accordance with that envisaged by the reference international accounting standard (IFRS 3), the Banco Popolare Group’s income statement includes the economic impacts deriving from the allocation of the cost of the business combination transactions (so-called Purchase Price Allocation – PPA) which took place in 2007 (merger with the Banca Popolare Italiana Group as of 1 July 2007) and 2009 (acquisition of control of the Group to which Banca Italease belongs as of 1 July 2009).
The following schedules show the impact of the above-cited business combination transactions on the income statements for the first nine months of 2013 and 2012. The tables clearly show the contribution to the consolidated income statement of both the part relating to the former Italease group, which substantially represents “run off” assets, and that relating to Banco Popolare as a “stand alone”. In this regard, note that the economic impact on the interest margin is attributable to the higher and lower value respectively recognised at the time of PPA for receivables as regards Banco Popolare Stand Alone and for the financial liabilities issued by Banca Italease. The economic impact on other net operating income and on value adjustments to property and equipment and intangible assets for Banco Popolare Stand Alone regards the amortisation charges for intangible assets with a definite useful life recognised at the time of PPA and the depreciation charge on the greater value of the properties acquired as part of the business combination.
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Contribution to the Income Statement of Banco Popolare “stand alone” and of the former Italease Group
30 September 2013 Banca Official Banco Contribution Italease PPA Contribution (in thousands of euro) Financial Popolare PPA BPI of Banco without Italease of Italease Statements without PPA Popolare PPA INTEREST MARGIN 1,267,290 1,234,152 2,922 1,237,074 33,493 (3,277) 30,216 DIVIDENDS AND PROFITS FROM INVESTMENTS IN (34,312) (29,729) (29,729) (4,583) (4,583) SHAREHOLDERS’ EQUITY FINANCIAL MARGIN 1,232,978 1,204,423 2,922 1,207,345 28,910 (3,277) 25,633 Net fee and commission income 1,068,499 1,065,956 1,065,956 2,543 2,543 Other net operating income/expense 136,034 142,687 (24,209) 118,478 17,556 17,556 Net financial result (without FVO) 268,295 273,724 273,724 (5,429) (5,429) OTHER OPERATING INCOME 1,472,828 1,482,367 (24,209) 1,458,158 14,670 - 14,670 OPERATING INCOME 2,705,806 2,686,790 (21,287) 2,665,503 43,580 (3,277) 40,303 Personnel expenses (1,035,966) (1,025,682) (1,025,682) (10,284) (10,284) Other administrative expenses net of recoveries (532,843) (497,257) (497,257) (35,586) (35,586) Value adjustments on property and equipment and (96,799) (82,484) (2,707) (85,191) (11,608) (11,608) intangible assets OPERATING EXPENSES (1,665,608) (1,605,423) (2,707) (1,608,130) (57,478) - (57,478) INCOME (LOSS) FROM OPERATIONS 1,040,198 1,081,367 (23,994) 1,057,373 (13,898) (3,277) (17,175) Net adjustments on loans (customers) (689,004) (633,685) (633,685) (55,319) (55,319) Net value adjustments on other assets (66,492) (66,499) (66,499) 7 7 Provisions for risks and charges 1,708 1,285 1,285 423 423 Recoveries (Losses) on investments in associates and 95,496 95,496 - 95,496 - - companies subject to joint control and goodwill Profits (losses) on disposal of investments in associates and companies subject to joint control and (709) 557 (74) 483 (1,192) (1,192) other investments INCOME (LOSS) BEFORE TAX FROM CONTINUING 381,197 478,521 (24,068) 454,453 (69,979) (3,277) (73,256) OPERATIONS Taxes on income from continuing operations (182,208) (208,070) 7,843 (200,227) 16,935 1,084 18,019 Income (Loss) after tax from discontinued operations (753) (753) (753) - - Income (Loss) attributable to minority interests (11,130) (14,284) 9 (14,275) 3,131 14 3,145 NET RESULT WITHOUT FVO 187,106 255,414 (16,216) 239,198 (49,913) (2,179) (52,092) Change in the Bank’s creditworthiness (FVO) (32,427) (32,427) (32,427) - - Taxes on the change in creditworthiness (FVO) 10,724 10,724 10,724 - - FVO IMPACT (21,703) (21,703) - (21,703) - - - NET RESULT 165,403 233,711 (16,216) 217,495 (49,913) (2,179) (52,092)
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30 September 2012 Banca Official Banco Contribution Italease PPA Contribution (in thousands of euro) Financial Popolare PPA BPI of Banco without Italease of Italease Statements without PPA Popolare PPA INTEREST MARGIN 1,356,690 1,354,561 (16,267) 1,338,294 32,121 (13,725) 18,396 DIVIDENDS AND PROFITS FROM INVESTMENTS IN (92,099) (88,326) (88,326) (3,773) (3,773) SHAREHOLDERS’ EQUITY FINANCIAL MARGIN 1,264,591 1,266,235 (16,267) 1,249,968 28,348 (13,725) 14,623 Net fee and commission income 1,012,150 1,008,732 1,008,732 3,418 3,418 Other net operating income/expense 41,222 47,896 (26,177) 21,719 19,505 (2) 19,503 Net financial result (without FVO) 425,323 421,320 421,320 4,003 4,003 OTHER OPERATING INCOME 1,478,695 1,477,948 (26,177) 1,451,771 26,926 (2) 26,924 OPERATING INCOME 2,743,286 2,744,183 (42,444) 2,701,739 55,274 (13,727) 41,547 Personnel expenses (1,084,153) (1,069,282) (1,069,282) (14,871) (14,871) Other administrative expenses net of recoveries (556,863) (517,411) (517,411) (39,452) (39,452) Value adjustments on property and equipment and (98,376) (79,593) (2,827) (82,420) (15,956) (15,956) intangible assets OPERATING EXPENSES (1,739,392) (1,666,286) (2,827) (1,669,113) (70,279) - (70,279) INCOME (LOSS) FROM OPERATIONS 1,003,894 1,077,897 (45,271) 1,032,626 (15,005) (13,727) (28,732) Net adjustments on loans (customers) (600,867) (570,774) (570,774) (30,093) (30,093) Net value adjustments on other assets (21,265) (20,800) (20,800) (465) (465) Provisions for risks and charges (21,366) 6,244 378 6,622 (27,988) (27,988) Recoveries (Losses) on investments in associates and (10,000) (10,000) (10,000) - - companies subject to joint control and goodwill Profits (losses) on disposal of investments in associates and companies subject to joint control and 4,543 4,794 (85) 4,709 (166) (166) other investments INCOME (LOSS) BEFORE TAX FROM CONTINUING 354,939 487,361 (44,978) 442,383 (73,717) (13,727) (87,444) OPERATIONS Taxes on income from continuing operations (173,868) (207,279) 14,881 (192,398) 13,991 4,539 18,530 Income (Loss) after tax from discontinued operations (3,868) (4,186) (4,186) 318 318 Income (Loss) attributable to minority interests (11,276) (16,549) 14 (16,535) 5,199 60 5,259 NET RESULT WITHOUT FVO 165,927 259,347 (30,083) 229,264 (54,209) (9,128) (63,337) Change in the Bank’s creditworthiness (FVO) (328,328) (328,328) (328,328) - - Taxes on the change in creditworthiness (FVO) 108,578 108,578 108,578 - - FVO IMPACT (219,750) (219,750) - (219,750) - - - NET RESULT (53,823) 39,597 (30,083) 9,514 (54,209) (9,128) (63,337)
In compliance with the instructions contained in Consob Communication no. DEM/6064293 of 28 July 2006, the following paragraphs provide information on the effects that non-recurrent events or transactions had on the consolidated economic result of the periods compared.
For the purposes of identifying the non-recurrent components, the following approaches are used on the whole: the results of disposal transactions relating to all fixed assets (investments in associates and companies subject to joint control, property and equipment) are considered to be non-recurrent; gains and losses on non-current assets held for sale and discontinued operations are considered to be non- recurrent; the income statement components associated with improvements, reorganisations, etc. (e.g. expenses for use of the redundancy fund, leaving incentives) are considered to be non-recurrent; income statement components for a significant amount which are not destined to reoccur frequently (e.g. fines, impairments of fixed assets, effects associated with legislative changes, exceptional results, etc.) are considered to be non-recurrent; impacts on the income statement, as long as significant, resulting from valutational aspects and/or changes in parameters in the application of the valuation methods applied on an on-going basis are instead considered to be recurrent.
In the light of the above criteria, in addition to the amounts already included in items that are per se non-recurrent (e.g. profit (loss) on assets held for sale), the profit (loss) for the first nine months of 2013 was negatively influenced by change in the book value of the financial liabilities issued by the Group, measured at fair value, due to the change in its creditworthiness compared to the end of the previous financial year (euro -32.4 million before tax). In this regard, it is worth noting that the creditworthiness of Banco Popolare deteriorated in the first quarter of 2013, which had a positive impact of euro 76.4 million before tax on the income statement for the period. In the second and third quarters, the reduction of Banco Popolare’s credit spreads compared to the first quarter had a negative impact on the economic statements for those quarters of euro 75.8 and 33.1 million before tax.
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The income statement for the first nine months of 2013 benefited from capital gains resulting from the buy-back of financial liabilities at the end of May 2013, and from the early termination of the relative correlated derivatives (euro +37.6 million before tax), as well as from capital gains related to the sale of shares held in Azimut Holding S.p.A., included in the AFS portfolio, for the figure of euro 31.3 million, before tax. Note that “personnel expenses” included an extraordinary expense (euro -41.9 million before tax) resulting from the agreement reached on 27 June with the Trade Unions to enable the future retirement of 250 employees through the use of provisions of the Solidarity Fund. The above extraordinary expense was fully offset by specific measures to cut the variable part of pay for all employees already charged to the income statement in the previous year (euro +42.3 million before tax). “Net losses on impairment of other assets” mostly includes impairments relating to investments in private equity funds and in similar investment entities, that can be classified as financial assets available for sale (euro -41.5 million), which are considered as extraordinary. Lastly, note that in the second quarter, “Recoveries/Losses on investments in associates and companies subject to joint control and goodwill” included the partial recovery of the equity investment held in Agos Ducato, against impairment recorded in the consolidated financial statements for 2012, based on the limited information available at the time. The draft financial statements as at 31 December 2012 and the new business plan for 2013-2017 were actually only approved at a board meeting held on 7 May 2013. The latter plan envisages a return to profit for the company from financial year 2014. Based on this new information, a recovery on the investment in the investee company of euro 105.8 was recorded, adjusting the book value of the same to the relevant share of the book value of shareholders’ equity as at 30 June 2013. The same item also included a value adjustment of euro 10.3 million, made to bring the book value of the equity investment in Finoa S.r.l., currently being disposed, to its book value, net of selling costs.
The income statement for the first nine months of last year had been penalised by the impact of the higher book value of the financial liabilities issued by the Group, measured at fair value, due to the change in the creditworthiness of Banco Popolare compared to the end of the previous financial year (euro 328.3 million before tax). On the other hand, it benefited from capital gains resulting from the buy-back of its own financial liabilities in February 2012, and from the early termination of the relative correlated derivatives (euro 109.9 million before tax). In the first nine months of 2012, the investee company Agos Ducato made a negative contribution of euro 116.3 million, recorded under Losses on investments in associates carried at equity, which includes the share pertaining to the Group of the loss recorded by the investee company in the first nine months of 2012 and the loss of the previous financial year, 2011, as approved by the Shareholders’ Meeting of the same company in June 2012. Lastly, the economic result of the first nine months of 2012 benefited from the recognition of credit resulting from the deductibility of IRAP, for IRPEF purposes, which had been applied to the labour cost of employees for the tax years prior to that ending 31 December 2012, amounting to a total of euro 64.7 million, as provided for by art. 2 of Italian Decree Law no. 201 of 6 December 2011 (so-called “Monti Decree”), subsequently amended by art. 2 of Italian Decree Law no. 16 of 2 March 2012 (“Tax simplification Decree”).
The main income statement items as at 30 September 2013 are illustrated below, compared with the figures for the corresponding period of the previous year.
Operating income
Interest margin
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change Financial assets held for trading 248,385 212,381 36,004 17.0% Financial assets available for sale 284,117 309,734 (25,617) (8.3%) Investments held to maturity 61,963 923 61,040 6613.2% Net interest due to banks (82,686) (109,438) (26,752) (24.4%) Net interest due to customers 1,755,668 2,116,648 (360,980) (17.1%) Hedging derivatives (net balance) 93,062 70,352 22,710 32.3% Net interest on other assets/liabilities 6,016 8,484 (2,468) (29.1%) Debt securities issued (579,968) (682,533) (102,565) (15.0%) Financial liabilities held for trading (237) (81) 156 192.6% Financial liabilities designated at fair value through profit and loss (519,030) (569,780) (50,750) (8.9%) Total 1,267,290 1,356,690 (89,400) (6.6%)
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Interest margin
600
500 470.2 444.8 441.7 432.3 426.5 402.7 408.5 400
300
200 (millions of euro) of (millions
100
0 Q.1 12 Q.2 12 Q.3 12 Q.4 12 Q.1 13 Q.2 13 Q.3 13
The interest margin amounted to euro 1,276.3 million, down 6.6% on the corresponding period of the previous year (euro 1,356.7 million), with a contribution of euro 426.5 million in the third quarter of 2013, down 1.3% compared to euro 432.3 million in the second quarter. When assessing this performance, bear in mind that from the third quarter of 2012, in accordance with that prescribed by the Supervisory Authority, revenues represented by the new “commissione di istruttoria veloce” introduced by Italian Decree Law no. 201 of 6 December 2011, converted by Italian Law no. 214/2011 were recorded under the item “other operating income”. This commission has replaced the overdraft charge previously recorded in the interest margin. Therefore, the figures for the first three quarters of 2013 do not include a contribution relating to overdraft charges, which instead is included in the figure relating to the corresponding period of 2012. If the impact of overdraft charges is excluded from the latter, the interest margin for the first nine months of 2013 would have recorded an increase of 11.2% (8.4% if the impact of the PPA is excluded) compared to corresponding period of the previous year. This rise is mostly due to concerted efforts made on repricing loans and the gradual stabilisation of funding costs. The mark-up on loans rose by 26 b.p. compared to 30 September 2012, offsetting a weak mark-down (-9 b.p. compared to 30 September 2012). The contribution of the period to the interest margin of the companies that are part of the former Banca Italease Group was around euro 30.2 million (including the impact of the PPA), euro 9.7 million of which refer to the third quarter of 2013, and euro 11.3 million to the second quarter.
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change Network Divisions 1,238,825 1,426,304 (187,479) (13.1%) Investment Banking, Private Banking, Asset Management 84,956 47,026 37,930 80.7% Leasing 33,493 32,121 1,372 4.3% Total business areas 1,357,274 1,505,451 (148,177) (9.8%) Corporate Centre and Other (89,629) (118,769) 29,140 24.5% PPA (355) (29,992) 29,637 98.8% Total interest margin 1,267,290 1,356,690 (89,400) (6.6%)
6.3% 2.5%
Network Divisions
Inv./Priv.Bank, AM
Leasing
91.3%
The Network Divisions, which represent over 90% of the item’s results, reported net interest down by 13.1%. Excluding the component relating to the overdraft charge, of 217.2, which was included in the first nine months of 2012, the commercial network reported a higher interest margin at 30 September 2013 compared to the corresponding period of 2012, due to repricing action, which increased the mark-up to such an extent that it more than offset the fall in the mark-down.
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The interest margin of investment banking and asset management rose against the corresponding period of the previous year, due to the higher contribution of interest resulting from the larger securities portfolio held by the subsidiary Banca Aletti, where the liquidity received by the company for the issue of certificates is invested. The Parent Company’s securities portfolio boasted higher interest income, which enabled the Corporate Centre to contain the negative overall margin linked to the cost of institutional funding, which in any event lower in the first nine months of 2013 than that of the corresponding first period of 2012.
Income (loss) from investments in associates carried at equity
Income (loss) from investments in associates carried at equity recorded a loss of euro -34.3 million, compared with euro - 92.1 million recorded in the corresponding period of the previous year, and includes the portion of the results reported by associated companies in the first nine months of 2013, mainly represented by euro -54.3 million from Agos Ducato (euro - 116.3 million as at 30 September 2012), euro 22.1 million from Popolare Vita (euro 20.3 million as at 30 September 2012), euro 4 million from Avipop Assicurazioni (euro 7.9 million as at 30 September 2012), euro -4.7 million from Alba Leasing (euro -4 million as at 30 September 2012), which however represented the result recorded by the company in the first half of 2012 insofar as the investee company, as at the date of the interim report on operations, had not approved subsequent financial statements), and euro -1.8 million from Energreen, relating to the relevant portion of the result recorded by the investee company in the second half of 2012. Note that the income statement at the end of the third quarter of 2013 also benefited from the recovery recorded for the investment held in Agos Ducato, amounting to euro 105.8 million, recorded under “Recoveries/Losses on investments in associates and companies subject to joint control and goodwill” as described in more detail in the specific item. The contribution of the companies of the former Banca Italease Group to the consolidated result was a loss of euro -4.7 million, and was related to the contribution of Alba Leasing.
Net fee and commission income
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change MANAGEMENT, BROKERAGE AND ADVISORY SERVICES 501,095 504,193 (3,098) (0.6%) Distribution of savings products 383,440 369,323 14,117 3.8% - Placement of securities 24,254 62,730 (38,476) (61.3%) - Asset management 279,313 226,492 52,821 23.3% - Bancassurance 79,873 80,101 (228) (0.3%) Consumer credit 26,128 31,976 (5,848) (18.3%) Credit cards and other products 25,202 28,076 (2,874) (10.2%) Custodian bank 7,907 7,536 371 4.9% Trading securities, currencies and acceptance of orders 43,661 48,343 (4,682) (9.7%) Other 14,757 18,939 (4,182) (22.1%) CURRENT ACCOUNT MANAGEMENT AND LOANS TO CUSTOMERS 415,388 348,512 66,876 19.2% COLLECTION AND PAYMENT SERVICES 90,070 91,076 (1,006) (1.1%) GUARANTEES GIVEN 17,723 16,631 1,092 6.6% OTHER SERVICES 44,223 51,738 (7,515) (14.5%) Total 1,068,499 1,012,150 56,349 5.6%
Net fee and commission income 500
400 365.5 378.3 341.3 352.2 336.3 334.6 324.7
300
200
100 (millions of euro) of (millions
0 Q.1 12 Q.2 12 Q.3 12 Q.4 12 Q.1 13 Q.2 13 Q.3 13
Net fee and commission income amounted to euro 1,068.5 million, up 5.6% compared to the euro 1,012.2 million recorded as at 30 September 2012, with a third-quarter contribution of euro 324.7 million, down against that of the second
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quarter of 2013 (which was euro 378.3 million), but in line with that of the third quarter of 2012 (334.6 million). The increase was mainly due to loan brokering activities, due to commission income relating to the maintenance and management of current accounts and loans to customers (+19.2%), as well as to guarantees given (+6.6%), while management, brokerage and advisory services recorded net commission in line with last year (-0.6% against 30 September 2012). In this regard, the distribution of savings products recorded an increase of 3.8%, driven by the distribution of savings products managed by the Group (+23.3%).
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change Network Divisions 1,030,658 972,711 57,947 6.0% Investment Banking, Private Banking, Asset Management 42,934 33,291 9,643 29.0% Leasing 2,543 3,418 (875) (25.6%) Total business areas 1,076,135 1,009,420 66,715 6.6% Corporate Centre and Other (7,636) 2,730 (10,366) Total net fee and commission income 1,068,499 1,012,150 56,349 5.6%
4.0% 0.2%
Network Divisions
Inv./Priv.Bank, AM
Leasing 95.8%
As with the interest margin, the Network Divisions represent by far the largest source of fee and commission income, which recorded a sharp rise compared to last year resulting from the higher volumes of investment products placed with customers. Investment Banking & Asset Management recorded a significant rise, due to the higher commissions received by Banca Aletti for the placement of savings products in the private banking network and for the structuring of unit-linked policies. The contribution from the Leasing business was marginal and down insofar as linked to lower volumes of new products.
Other net operating income
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change Income on current accounts and loans 115,487 3,526 111,961 3175.3% Rents receivable 42,471 41,304 1,167 2.8% Maintenance on property and leased assets (7,717) (5,157) 2,560 49.6% Other income and charges 10,002 27,726 (17,724) (63.9%) Subtotal 160,243 67,399 92,844 137.8% Client relationship (PPA) (24,209) (26,177) 1,968 7.5% Total 136,034 41,222 94,812 230.0%
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Other net operating income
60 52.4 47.7 50 45.5
40 36.0
30 18.8 20 13.0 9.4 (millions of euro) of (millions 10
0 Q.1 12 Q.2 12 Q.3 12 Q.4 12 Q.1 13 Q.2 13 Q.3 13
Other net operating income recorded a positive balance of euro 136.0 million compared to the positive contribution of euro 41.2 million recorded in the same period of the previous year. The largest contribution recorded in the first nine months of 2013 was due to the recognition of the previously-mentioned “commissione di istruttoria veloce” in this income statement item (euro 115.5 million, euro 33.1 million of which in the third quarter), which only recorded euro 3.5 million in the corresponding period of the previous year. The aggregate also includes rents receivable of euro 42.5 million (against euro 41.3 million as at 30 September 2012), mainly originating from the properties repurchased within the derisking exercise of Italease, and from adjustments due to the amortisation of the value attributed to customer relations at the time of the business combinations completed in previous years of euro -24.2 million (euro -26.2 million as at 30 September 2012). The item also includes the income generated from the services distributed by the subsidiary company Tecmarket of euro 19.2 million (euro 11.7 million in the first nine months of 2012). Other income and expenses as at 30 September 2013 were down compared to the corresponding period of last year, due to the fact that in the first nine months of 2012, non-recurrent income resulting from transactions with representatives of the former BPI and from other extraordinary transactions amounting to around 19.3 million were recorded. The contribution to this item for the period from the former Italease Group companies amounted to euro 17.6 million, euro 2.6 million of which refer to the third quarter and euro 7.8 million to the second quarter, and which mostly regards rent from properties resulting from credit collection, net of the relative maintenance expenses.
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change
Network Divisions 115,572 3,525 112,047 3178.6% Investment Banking, Private Banking, Asset Management 380 19 361 1900.0% Leasing 17,556 19,505 (1,949) (10.0%) Corporate Centre and Other 26,735 44,350 (17,615) (39.7%) Total business areas 160,243 67,399 92,844 137.8% PPA (24,209) (26,177) 1,968 7.5% Total other net operating income 136,034 41,222 94,812 230.0%
16.7% Network Divisions
Inv./Priv.Bank, AM 11.0%
0.2% Leasing
72.1% Corporate Center and Other
With regard to the Network Divisions, the result for the first nine months mainly relates to the introduction of income generated by “commissioni di istruttoria veloce”, which was only present to a limited extent in the corresponding period of the previous year. The contribution of Leasing to the consolidated result, down 10%, is instead related to income from the rental of properties resulting from the recovery of receivables, net of charges relating to the maintenance of the same. The
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result of the Corporate Centre instead is due to amounts received from renting the properties of other Group real estate companies to third parties, as well as from income from Tecmarket, which are up due to the development of new functions in the e-money area.
Net financial result
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change Dividends and similar income on financial assets 9,679 11,367 (1,688) (14.9%) Fair value adjustments in hedge accounting (1,165) 6,564 (7,729) Profit/Loss on disposal of investments held to maturity - 4,177 (4,177) Banca Aletti 148,407 199,052 (50,645) (25.4%) Securities portfolio and Parent Company derivatives 111,374 204,163 (92,789) (45.4%) Total net of FVO 268,295 425,323 (157,028) (36.9%) Change in creditworthiness (FVO) (32,427) (328,328) 295,901 90.1% Total 235,868 96,995 138,873 143.2%
Net financial result (without FVO)
300 282.7
200
90.3 94.6 96.8 100 76.8 52.4 (millions of euro) of (millions 43.1
0 Q.1 12 Q.2 12 Q.3 12 Q.4 12 Q.1 13 Q.2 13 Q.3 13
The net financial result net of FVO was a profit of euro 268.3 million, compared with the euro 425.3 million recorded for the same period of the previous year. When comparing results, it should be borne in mind that there are significantly different contributions from buybacks of financial liabilities issued by the Bank (euro +37.6 million in the first nine months of 2013 against +109.9 million recorded in the corresponding period of 2012), from the disposal of financial assets available for sale (a profit of euro 14 million was recorded in the first nine months of 2012, while in the first nine months of the current year, profits totalling euro 70.5 million were recorded, euro 31.3 million of which in the third quarter, due to the sale of the investment in Azimut Holding) and from fluctuations in the fair value of Government securities classified in the portfolio of financial assets held for trading (euro -9.8 million in the first nine months of 2013, compared to euro +46.2 million in the corresponding period of 2012. Net of the above components, the net financial result was euro 170.0 million, down euro 85.3 million against the euro 255.3 million recorded in the first nine months of 2012. The contribution of the third quarter of 2013, again net of the more volatile components, was euro 50.3 million, against euro 55.7 million recorded in the second quarter of 2013 and euro 67.5 million in the third quarter of 2012. The impact of the change in the creditworthiness of the liabilities issued measured at fair value (FVO) (shown under a separate item of the reclassified income statement) was negative, at euro -32.4 million (euro -21.7 million after tax). This result was generated by opposing trends recorded in the three quarters. The positive impact of the first quarter, corresponding to euro 76.4 million (euro 51.2 million after tax), was offset in the second and third quarters by decreases of euro 75.8 and 33.1 million respectively (euro -50.7 and -22.1 million net of tax). The extreme volatility of this income component can also be seen in the comparison with the first nine months of 2012. The FVO actually had a negative impact on the income statement of euro 328.3 million (euro 219.8 million after tax).
Absolute (in thousands of euro) 30/09/2013 30/09/2012 % change change Network Divisions 7,035 12,967 (5,932) (45.7%) Investment Banking, Private Banking, Asset Management 148,349 199,315 (50,966) (25.6%) Corporate Centre and Other 118,340 209,038 (90,698) (43.4%) Total business areas 273,724 421,320 (147,596) (35.0%) Leasing (5,429) 4,003 (9,432) PPA & FVO (32,427) (328,328) 295,901 90.1% Total net financial result 235,868 96,995 138,873 143.2%
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2.6%
Network Divisions
43.2% Corporate Center and Other 54.2%
Inv./Priv.Bank, AM
The contribution of the Investment Banking to the net financial consolidated result, net of the change in creditworthiness of its own liabilities issued, is mostly due to the result of the subsidiary Banca Aletti, which was euro 148.4 million, compared to euro 199.1 million recorded in the same period of the previous year. The decrease with respect to the corresponding period of 2012 is due to the downturn in both sales volumes of structured products by the Group’s distribution network, and to the fall in trading in derivatives, as well as the different contribution of the portfolio of Italian debt securities and of banking securities in the Banca Aletti; in the first nine months of 2012, the latter had benefited from significant gains. More specifically, it should be noted that the fall in the financial result generated by Banca Aletti was offset by an increase of the interest margin and is consequent to the decision to expand the business of issuing and placing certificates.
The decrease in the contribution of the Corporate Center can be justified by the previously-mentioned different contributions recorded for the periods compared from the buyback of its subordinated liabilities, the sale of financial assets available for sale and the profit generated by the Government securities portfolio.
Core Banking Business 2,410.1 2,471.8
2500 41.2 136.0
2000 1,012.2 1,068.5 1500
1000
1,356.7 1,267.3 (millions of euro) of (millions 500
0 30/09/2012 30/09/2013
interest margin net fee and commission income other net operating income
The total revenues of the core business, meaning the sum of the items on the reclassified income statement given by the interest margin, net fee and commission income and other net operating income, amounts to euro 2,471.8 million, and is up 2.6% compared to the euro 2,410.1 million recorded in the corresponding period of the previous year.
Operating expenses
Personnel expenses totalled euro 1,036.0 million, and include a provision (euro 41.9 million) for the expense resulting from the agreement reached on 27 June with the Trade Unions to enable the future retirement of 250 employees through the use of provisions of the Solidarity Fund. This extraordinary expense has been substantially offset by specific measures to cut the variable part of pay for all employees. Personnel expenses were down 4.4% compared to euro 1,084.2 million recorded in the corresponding period of the previous year, due to a reduction of the number of employees following measures to improve efficiency. As at 30 September 2013, the total number of employees was 18,319 “full time equivalents” against 18,372 on 30 June 2013 and 18,293, which represents the figure rendered comparable for the beginning of the year.
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The personnel expenses for the period relating to companies belonging to the former Banca Italease Group were euro 10.3 million.
Other administrative expenses amounted to euro 532.8 million, down 4.3% with respect to the euro 556.9 million recorded in the first nine months of 2012 due to careful cost control. The share of said expenses relating to the former Banca Italease Group was euro 35.6 million.
Net value adjustments on property and equipment and intangible assets totalled euro 96.8 million, compared to the figure of euro 98.4 million in the corresponding period of last year, recording a decrease of 1.6%. The share of said expenses relating to the former Banca Italease Group was euro 11.6 million.
Operating expenses were therefore euro 1,665.6 million and showed a decrease of 4.2% compared to euro 1,739.4 million recorded in the corresponding period of 2012. The cost/income ratio for the period, calculated as the relationship between total operating expenses and total operating income was 61.6%, an improvement on the 63.4% recorded as at 30 September 2012. The total operating expenses, in terms of contribution to the consolidated result, of the companies belonging to the former Banca Italease Group amounted to euro 57.5 million.
Income (loss) from operations
Income (loss) from operations amounted to euro 1,040.2 million, compared to euro 1,003.9 million recorded in the corresponding period of 2012. The comparison must consider the different contribution of the more volatile components of the net financial result illustrated previously.
Adjustments and provisions
(in thousands of euro) 30/09/2013 BP Stand Alone Sub-Italease
Impaired loans 721,876 662,743 59,133 - Doubtful loans 511,115 444,831 66,284 - Substandard loans 171,535 166,060 5,475 - Restructured loans (12,607) 4,446 (17,053) - Past due loans 51,833 47,406 4,427 Performing loans (32,872) (29,058) (3,814) Total 689,004 633,685 55,319
Net adjustments on loans to customers 683.5 700
600 109.9
500
400 211.4 248.0 185.6 203.9 229.3 211.6 300 573.6 47.1 9.9 7.2 17.5 200 13.0
(millions of euro) of (millions 238.6 100 201.4 172.7 196.7 194.2 200.9
0 -9.3 -100 Q.1 12 Q.2 12 Q.3 12 Q.4 12 Q.1 13 Q.2 13 Q.3 13
sub-banco sub-banco sub-italease sub-italease
Net adjustments on loans to customers were euro 689.0 million (compared to euro 600.9 million recorded in the corresponding period of last year). The contribution of the third quarter was euro 248.0 million, up 17.2% compared to the second quarter of 2013. The cost of credit, measured by the ratio of net value adjustments on loans to gross loans, yoy, was 98 basis points, compared with 82 basis points recorded for the corresponding period of the previous year, and with 92 b.p. recorded in the first quarter of this year.
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Net adjustments on receivables due from banks and other assets amounted to euro 66.5 million (euro 6.7 million in third quarter of 2013), a higher figure than that recorded in the corresponding period of last year, euro 21.3 million. The higher adjustments recorded in the first nine months of 2013 mostly relate to investments in private equity funds and in similar investment entities, that can be classified as financial assets available for sale. The adjustments were made because the rigorous thresholds identifying the existence of objective evidence of impairment envisaged in the specific “valuation policy” adopted by the Group, were surpassed.
Net provisions for risks and charges recorded a positive balance of +1.7 million, compared to euro -21.4 million recorded in the corresponding period of last year.
Recoveries/losses on investments in associates and companies subject to joint control and goodwill recorded a positive balance of euro 95.5 million, while a net loss of euro 10 million had been recorded at the end of September 2012. This item includes a recovery to align the residual book value of the equity investment held in Finoa to the presumed sale value of euro 10.3 million (euro 10 million as at 30 September 2012), and the partial recovery (euro 105.8 million) of the impairment (euro 399.5 million) recognised in the financial statements as at 31 December 2012 based on a risk assessment relating to the equity investment in Agos Ducato. In the second quarter of the current year, the new business plan for 2013- 2017 was drawn up and approved as well as the financial statements as at 31 December 2012 of the associated company, on the basis of which the estimated recoverable value of the investment was recalculated. Due to the above-cited recovery, the equity investment held in Agos Ducato is now recognised in the consolidated financial statements of Banco Popolare for an amount proportional to the bank’s share capital quota as at 30 September 2013.
Profits (losses) on disposal of investments in associates and companies subject to joint control and other investments recorded a loss of euro 0.7 million, mostly due to the disposal of properties during the period, while in the first nine months of 2012, the item had recorded a profit of euro 4.5 million, mostly due to the sale of the interest held in Arca SGR (euro 4.3 million).
Income (loss) before tax from continuing operations
Income (loss) before tax from continuing operations was euro 381.2 million compared to euro 354.9 million recorded in the corresponding period of 2012.
Other revenue and cost items
Income (loss) after tax from discontinued operations recorded a loss of euro 0.8 million (euro -3.9 million as at 30 September 2012), mainly due to the loss made on the sale of BP Hungary (euro -0.5 million).
Taxes on income for the period from continuing operations amounted to euro 182.2 million against euro 173.9 million in the first nine months of 2012. The latter benefited from out-of-period income relating to the recognition of credit resulting from the reimbursement of the deductibility of IRAP from taxable income for IRES relating to personnel expenses and similar, for tax years 2007 to 2011 (euro 64.7 million).
Net of the share of income pertaining to minority interests of euro 11.1 million (euro 11.3 million in the first nine months of 2012), and of the impact of the FVO illustrated above, the net income for the period was euro 165.4 million against a loss of euro 53.8 million recorded in the corresponding period of the previous year.
Consolidated balance sheet figures
The reclassified balance sheet represents a simple aggregation of the items envisaged in the balance sheet layout as per the Bank of Italy circular No. 262 dated 22 December 2005. The main aggregations regarding the balance sheet are as follows: the asset item “Financial assets and hedging derivatives” encompasses the financial instruments shown in the portfolios relating to “Financial assets held for trading”, “Financial assets designated at fair value through profit and loss”, “Financial assets available for sale”, “Investments held to maturity” and “Hedging derivatives” shown under assets items 20, 30, 40, 50, and 80 in the Bank of Italy schedule; the residual asset item “Other assets” aggregates the “Fair value change of financial assets in macro fair value hedge portfolios”, “Tax assets” and “Other assets” (respectively asset items 90, 140 and 160); the grouping of the amount due to customers (item 20) and securities issued (classified under items 30 and 50, as a function of the application or otherwise of the fair value option) into a single item; the inclusion of the financial instruments recognised in the financial statements in portfolios relating to “Financial liabilities held for trading” and “Hedging derivatives” (respectively liability items 40 and 60) as a single aggregate; the grouping of the “Liability provisions” for “Employee termination indemnities” (item 110) and “Provisions for risks and charges” (item 120) into a single item; the residual liability item “Other liabilities” includes the “Fair value change of financial assets in macro fair value hedge portfolios”, “Tax liabilities” and “Other liabilities” (respectively liability items 70, 80 and 100);
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the indication of “capital and reserves” as an aggregate, net of any treasury shares held (financial statement items 140, 160, 170, 180, 190 and 200).
Reclassified asset items 30/09/2013 31/12/2012 Changes (in thousands of euro)
Cash and cash equivalents 543,944 672,164 (128,220) (19.1%) Financial assets and hedging derivatives 25,187,211 24,201,862 985,349 4.1% Due from banks 4,427,528 4,471,871 (44,343) (1.0%) Loans to customers 89,227,447 91,481,232 (2,253,785) (2.5%) Investments in associates and companies subject to joint control 991,563 847,506 144,057 17.0% Property and equipment 2,067,114 2,105,112 (37,998) (1.8%) Intangible assets 2,308,448 2,325,166 (16,718) (0.7%) Non-current assets held for sale and discontinued operations 139,259 256,387 (117,128) (45.7%) Other assets 5,074,970 5,560,084 (485,114) (8.7%)
Total 129,967,484 131,921,384 (1,953,900) (1.5%)
Reclassified liabilities and shareholders’ equity 30/09/2013 31/12/2012 Changes (in thousands of euro)
Due to banks 17,737,007 17,573,037 163,970 0.9% Due to customers, debt securities issued and financial liabilities designated at fair value through profit and loss 91,843,626 94,506,345 (2,662,719) (2.8%) Financial liabilities and hedging derivatives 5,471,903 6,352,817 (880,914) (13.9%) Liability provisions 1,047,463 1,134,708 (87,245) (7.7%) Liabilities associated with non-current assets held for sale and 18,724 84,726 (66,002) (77.9%) discontinued operations Other liabilities 4,609,104 3,288,847 1,320,257 40.1% Minority interests 373,363 368,517 4,846 1.3%
Shareholders' equity 8,866,294 8,612,387 253,907 2.9% - Capital and reserves 8,700,891 9,556,943 (856,052) (9.0%) - Income (loss) for the period 165,403 (944,556) 1,109,959
Total 129,967,484 131,921,384 (1,953,900) (1.5%)
The trends in the main balance sheet items as at 30 September 2013 are illustrated below, compared with the figures as at 31 December of the previous year.
Note that, in order to understand the contribution of Banca Italease and its subsidiaries, the analysis of the loans component as at 30 September 2013 is also shown in a version that separates the contribution of the former Banca Italease Group from that of the rest of the Banco Popolare Group (“Banco Popolare stand-alone”). Both the above aggregates are stated before the effects of the infragroup transactions which took place between the Banco Popolare stand-alone Group companies and those of the former Banca Italease Group.
Loan brokering activities
Direct funding
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Due to customers 49,171,413 53.5% 49,518,110 52.4% (346,697) ( 0.7%) Deposits and current accounts 36,711,616 40.0% 38,986,705 41.3% (2,275,089) ( 5.8%) - current accounts and demand deposits 35,055,482 38.2% 36,735,663 38.9% (1,680,181) ( 4.6%) - time deposits 1,656,134 1.8% 2,251,042 2.4% (594,908) ( 26.4%) Repurchase agreements 10,776,367 11.7% 8,965,526 9.5% 1,810,841 20.2% Loans and other payables 1,683,430 1.8% 1,565,879 1.7% 117,551 7.5% Securities 42,672,213 46.5% 44,988,235 47.6% (2,316,022) ( 5.1%) Bonds and other securities 40,304,166 43.9% 42,415,435 44.9% (2,111,269) ( 5.0%) Certificates of deposit 2,368,047 2.6% 2,572,800 2.7% (204,753) ( 8.0%) Total direct funding 91,843,626 100.0% 94,506,345 100.0% (2,662,719) (2.8%)
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As at 30 September 2013, direct funding totalled 91,843.6 million, compared to 94,506.3 million as at 31 December 2012, showing a 2.8% fall (-3.3% compared to 30 June 2013). The lower figure with respect to December 2012 is due substantially to the fall in funding in deposits and current accounts (around euro -2.3 billion against the end of 2012) partially offset by the increase in repurchase agreement, which recorded a rise of 20.2%, resulting above all from the rise in funding with the Clearing and Guarantee House. The securities segment recorded a fall of around euro 2.3 billion (-5.1% against 31 December 2012), mostly in the bonds category, which were also the subject of buyback agreements in the second quarter of 2013. The decrease in funding, net of repurchase agreements, already evident at the end of June 2013 reflects the Group’s decision to systematically relinquish forms of funding that are retained excessively expensive.
Indirect funding
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Managed assets 28,442,162 47.0% 26,691,909 43.2% 1,750,253 6.6% - mutual funds and SICAVs 12,239,577 20.2% 9,656,343 15.6% 2,583,234 26.8% - securities and fund management 6,642,625 11.0% 7,060,867 11.4% (418,242) (5.9%) - insurance policies 9,559,960 15.8% 9,974,699 16.1% (414,739) (4.2%) of which: Lawrence Life policies 3,072,225 5.1% 2,816,147 4.6% 256,078 9.1% Administered assets 32,020,293 53.0% 35,139,924 56.8% (3,119,631) ( 8.9%) Total indirect funding 60,462,455 100.0% 61,831,833 100.0% (1,369,378) (2.2%)
The third quarter of 2013 closed with a balance of indirect funding of 60,462.5 million, down (-2.2%) compared to the figure recorded as at 31 December 2012, when indirect funding totalled euro 61,831.8 million. The decrease recorded for the period is due to the administered assets component, which reported a fall of 8.9% against the end of 2012. Instead, managed assets rose in the first nine months, reaching euro 28.4 billion, reporting a 6.6% increase since the start of the year. This increase is substantially due to placements of shares of funds and SICAVs (+26.8% against the end of 2012), which more than offset the fall recorded in securities and fund management (-5.9% against the beginning of the year). Insurance policies also recorded a decrease (-4.2%).
Loans to customers
Banco Popolare Group
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Current accounts 14,732,879 16.5% 14,863,425 16.2% (130,546) (0.9%) Repurchase agreements 7,605,204 8.5% 8,467,436 9.3% (862,232) (10.2%) Mortgage loans 41,287,927 46.3% 43,025,621 47.0% (1,737,694) (4.0%) Credit cards, personal loans and salary-backed loans 379,990 0.4% 364,470 0.4% 15,520 4.3% Financial leases 4,583,133 5.1% 4,931,502 5.4% (348,369) (7.1%) Factoring 20,795 0.0% 36,260 0.0% (15,465) (42.7%) Other loans 20,067,355 22.5% 19,187,334 21.0% 880,021 4.6% Debt securities 550,164 0.6% 605,184 0.7% (55,020) (9.1%) Total net loans to customers 89,227,447 100.0% 91,481,232 100.0% (2,253,785) (2.5%)
As at 30 September 2013, total net loans had reached the figure of euro 89,227.4 million, down compared to the figure of euro 91,481.2 million recorded as at 31 December 2012. The decrease regarded practically all types of loan, with the exception of “credit cards, personal loans and salary-backed loans” and other loans. The decrease in mortgage loans was particularly significant. Weak demand and a more careful assessment of customer creditworthiness at the time of disbursement led to a fall due to the normal amortisation of existing loans, not offset by new disbursements.
Net of value adjustments, Group loans amounted to euro 93,974.0 million, marking a decrease of 2.3% against the euro 96,223.1 million recorded at the beginning of the year (-1.5% against 30 June 2013).
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Banco Popolare Group (stand-alone)
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Current accounts 14,738,631 17.4% 14,873,478 17.2% (134,847) (0.9%) Repurchase agreements 7,605,204 9.0% 8,467,436 9.8% (862,232) (10.2%) Mortgage loans 40,245,546 47.5% 41,889,020 48.4% (1,643,474) (3.9%) Credit cards, personal loans and salary-backed loans 379,990 0.4% 364,470 0.4% 15,520 4.3% Factoring 20,795 0.0% 36,260 0.0% (15,465) (42.7%) Other loans 21,657,885 25.5% 20,778,334 24.0% 879,551 4.2% Debt securities 135,056 0.2% 137,007 0.2% (1,951) (1.4%) Total net loans to customers 84,783,107 100.0% 86,546,005 100.0% (1,762,898) (2.0%)
Net of the total value adjustments and the contribution of the Banca Italease group, loans came to euro 84,783.1 million, compared to euro 86,546 million as at 31 December 2012 (-2%; -1.5% against 30 June 2013), due to the reduced demand for credit, in particular for mortgage loans to Retail Customers, as well as to a careful disbursement policy adopted by the Group as regards Small Business Operators and Medium Enterprises. On a quarterly basis, the segments linked to Retail Customers, to Small Business Operators and to Medium Enterprises recorded slight decreases in performing loans (-0.8%, - 1.0% and -1.8% respectively), while the Large Corporate segment recorded a more substantial fall (-4.2%) linked to a decrease in short-term lending, although higher than the levels recorded in September 2012.
Banca Italease Group
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Current accounts 65 0.0% 143 0.0% (78) (54.5%) Mortgage loans 1,048,764 15.8% 1,142,916 16.0% (94,152) (8.2%) Financial leases 4,699,405 71.0% 5,054,393 70.6% (354,988) (7.0%) Other loans 453,550 6.9% 490,310 6.9% (36,760) (7.5%) Debt securities 415,108 6.3% 468,177 6.5% (53,069) (11.3%) Total net loans to customers 6,616,892 100.0% 7,155,939 100.0% (539,047) (7.5%)
Net loans to customers as at 30 September 2013 amounted to euro 6,616.9 million, down 7.5% compared to the end of December 2012. Before value adjustments and infragroup components, Banca Italease’s loans continue to decrease, falling from euro 8,264.1 million at the beginning of the year to the current euro 7,704.2 million (-6.8%). The fall in receivables for lease contracts and mortgage loans compared to December 2012, not only linked to early extinguishments and the assignment of impaired loans, was also affected by the normal amortisation of performing loans given the scant volume of new disbursements. More specifically, euro 4,699.4 million refers to receivables for lease contracts, euro 1,048.8 million to mortgage loans and the remainder to other receivables. Other receivables also includes receivables relating to assets under construction and those relating to assets awaiting finance leases (euro 145.9 million). Debt securities, totalling euro 415.1 million are mostly represented by junior notes and senior notes not placed on the market, corresponding to the portfolio transferred to Alba Leasing by means of an agreement on securitised loans, drawn up at the end of 2009. The agreement envisages that the above securities continue to belong to Banca Italease.
Credit quality
Banco Popolare Group
(in thousands of euro) 30/09/2013 31/12/2012 Absolute Net exposure % impact Net exposure % impact % change change Doubtful loans 5,306,543 5.9% 4,294,741 4.7% 1,011,802 23.6% Substandard loans 4,723,778 5.3% 4,536,591 5.0% 187,187 4.1% Restructured loans 2,108,286 2.4% 2,175,906 2.4% (67,620) (3.1%) Past due loans 878,195 1.0% 892,333 1.0% (14,138) (1.6%) Impaired loans 13,016,802 14.6% 11,899,571 13.0% 1,117,231 9.4% Performing loans 76,210,645 85.4% 79,581,661 87.0% (3,371,016) (4.2%) Total loans to customers 89,227,447 100.0% 91,481,232 100.0% (2,253,785) (2.5%)
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(in thousands of euro) 30/09/2013 31/12/2012 Change in Change in Change in gross gross total value Gross Total Net Gross Total Net Coverage Coverage exposure exposure % adjustments exposure adjustments exposure exposure adjustments exposure a) Doubtful loans before derecognition of 11,496,785 (6,190,242) 5,306,543 53.84% 9,663,636 (5,368,895) 4,294,741 55.56% 1,833,149 19.0% 821,347 receivables relating to insolvency proceedings b) Doubtful loans relating to insolvency proceedings 3,125,542 (3,125,542) - 2,606,994 (2,606,994) - derecognised Doubtful loans after derecognition of receivables relating to 8,371,243 (3,064,700) 5,306,543 36.61% 7,056,642 (2,761,901) 4,294,741 39.14% 1,314,601 18.6% 302,799 insolvency proceedings (a- b) Substandard loans 5,661,567 (937,789) 4,723,778 16.56% 5,671,928 (1,135,337) 4,536,591 20.02% (10,361) (0.2%) (197,548) Restructured loans 2,457,382 (349,096) 2,108,286 14.21% 2,557,035 (381,129) 2,175,906 14.91% (99,653) (3.9%) (32,033) Past due loans 945,401 (67,206) 878,195 7.11% 962,355 (70,022) 892,333 7.28% (16,954) (1.8%) (2,816) Impaired loans 17,435,593 (4,418,791) 13,016,802 25.34% 16,247,960 (4,348,389) 11,899,571 26.76% 1,187,633 7.3% 70,402 Performing loans 76,538,417 (327,772) 76,210,645 0.43% 79,975,162 (393,501) 79,581,661 0.49% (3,436,745) (4.3%) (65,729) Total loans to customers 93,974,010 (4,746,563) 89,227,447 5.05% 96,223,122 (4,741,890) 91,481,232 4.93% (2,249,112) (2.3%) 4,673
Doubtful loans relating to debtors subject to insolvency proceedings
The Bank of Italy Circular no. 272 dated 30 July 2008 (IV update dated 18 December 2012) envisages the option to derecognise the portion of doubtful loans retained unrecoverable from the accounts. The cited regulation includes the decision made by competent corporate bodies which, by means of a specific resolution, have acknowledged the non- recoverability of all or part of the loan or have ceased collection proceedings for economic reasons, as a circumstance for derecognition. Group banks exercised this option both in the current year and in previous years. The derecognition regarding the part retained non-recoverable of all receivables due from debtors, who, during the year, were subject to insolvency proceedings (bankruptcy, administrative compulsory liquidation, arrangement with creditors, extraordinary receivership of large companies in difficulty), even though the banks were regularly admitted as creditors in the insolvency proceedings for the entire amount of the receivable in question. More specifically, in 2013, doubtful loans (to the extent of the part retained non-recoverable) amounting to euro 600.6 million were derecognised. At the time of derecognition, specific adjusting entries of around euro 380.6 million were in place following value adjustments on loans already charged to the income statement. Therefore, the derecognition resulted in further charges of around euro 220 million to the income statement. In 2013, insolvency proceedings involving receivables totalling euro 82.1 million that had already been derecognised in previous years were finalised. As a result of the above change, as at 30 September 2013, the doubtful receivables derecognised relating to insolvency proceedings that are still under way amounted to euro 3,125.5 million. In order to calculate the effective level of coverage of doubtful receivables, the amount of the above-mentioned derecognised receivables must also be taken into account. The effective level of coverage of Group doubtful loans as at 30 September 2013 was 53.8%, as shown in line a) “doubtful loans before derecognition of receivables relating to insolvency proceedings” in the above table.
Impaired loans (doubtful, substandard, restructured and past due), net of value adjustments, amounted to euro 13,016.8 million as at 30 September 2013 and recorded a 9.4% rise with respect to euro 11,899.6 million recorded at the beginning of the year. The related trend shows net impaired loans representing a higher percentage of total net loans to customers, rising from 13% at year end to 14.6% at the end of September 2013 (13.8% as at 30 June and 13.7% at 31 March 2013); a similar increase was recorded for the percentage represented by the same before value adjustments, rising to 18.6% (17.7% at 30 June and at 31 March 2013) from 16.9% at the end of 2012. Without considering receivables for doubtful loans relating to debtors undergoing insolvency proceedings, which as at 30 September were still in progress, but have already been derecognised from the accounts, the coverage through hedge accounting of impaired loans was 25.3%, down against the figure of 26.8% at the end of 2012 (the coverage as at 30 June and 31 March 2013 was 25.7% and 26.1% respectively). If receivables that are the subject of settlements are also included, the coverage of impaired loans rises to 36.7% (as at 30 June 2013) against 36.9% recorded as at 31 December 2012.
More specifically, doubtful loans before and after value adjustments amounted to euro 8,371.2 million and euro 5,306.5 million respectively (+18.6% and +23.6% respectively compared to 31 December 2012), while the percentage represented by the same of total loans to customers before and after value adjustments, was 8.9% and 5.9% respectively (against 7.3% and 4.7% respectively for the same period of the previous year). Taking into account receivables for doubtful loans relating to debtors undergoing legal proceedings, which as at 30 September were still in progress, but have already been derecognised from the accounts, the rate of coverage was 53.8%, against 55.6% as at 31 December 2012 (54.7% as at 30 June 2013).
Substandard loans before and after value adjustments amounted to euro 5,661.6 million and euro 4,723.8 million respectively (-0.2% and +4.1% respectively compared to 31 December 2012), while the percentage represented by the
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same of total loans to customers before and after value adjustments, was 6% and 5.3% respectively (against 5.9% and 5% respectively for the same period of the previous year). The rate of coverage was 16.6%, compared to 20% last year.
Restructured loans before and after value adjustments amounted to euro 2,457.4 million and 2,108.3 million respectively, and were down compared to the corresponding values for the end of 2012 (-3.9% and -3.1% respectively). The rate of coverage was 14.2% (14.9% as at 31 December 2012).
Past due loans before and after value adjustments amounted to euro 945.4 million and 878.2 million respectively, and were slightly down compared to the corresponding values for the end of 2012. The rate of coverage was 7.1%, substantially in line with that of the end of 2012.
The coverage of performing loans fell slightly to 0.43% from 0.49% at the end of 2012, following an update of calculation parameters as at June 2013.
Banco Popolare Group (stand-alone)
(in thousands of euro) 30/09/2013 31/12/2012 Net Net Absolute % impact % impact % change exposure exposure change Doubtful loans 4,075,479 4.8% 3,380,900 3.9% 694,579 20.5% Substandard loans 4,125,571 4.9% 3,550,315 4.1% 575,256 16.2% Restructured loans 1,066,071 1.3% 1,032,678 1.2% 33,393 3.2% Past due loans 803,319 0.9% 821,206 0.9% (17,887) (2.2%) Impaired loans 10,070,440 11.9% 8,785,099 10.2% 1,285,341 14.6% Performing loans 74,712,667 88.1% 77,760,906 89.8% (3,048,239) (3.9%) Total loans to customers 84,783,107 100.0% 86,546,005 100.0% (1,762,898) (2.0%)
(in thousands of euro) 30/09/2013 31/12/2012 Change in Change in Change in gross gross total value Gross Total Net Gross Total Net Coverage Coverage exposure exposure adjustments exposure adjustments exposure exposure adjustments exposure % a) Doubtful loans before derecognition of receivables 9,541,896 (5,466,417) 4,075,479 57.29% 8,116,879 (4,735,979) 3,380,900 58.35% 1,425,017 17.6% 730,438 relating to insolvency proceedings b) Doubtful loans relating to insolvency proceedings 3,125,542 (3,125,542) - 2,606,994 (2,606,994) - derecognised Doubtful loans after derecognition of receivables 6,416,354 (2,340,875) 4,075,479 36.48% 5,509,885 (2,128,985) 3,380,900 38.64% 906,469 16.5% 211,890 relating to insolvency proceedings (a-b) Substandard loans 4,906,603 (781,032) 4,125,571 15.92% 4,434,233 (883,918) 3,550,315 19.93% 472,370 10.7% (102,886) Restructured loans 1,282,018 (215,947) 1,066,071 16.84% 1,265,568 (232,890) 1,032,678 18.40% 16,450 1.3% (16,943) Past due loans 864,749 (61,430) 803,319 7.10% 887,392 (66,186) 821,206 7.46% (22,643) (2.6%) (4,756) Impaired loans 13,469,724 (3,399,284) 10,070,440 25.24% 12,097,078 (3,311,979) 8,785,099 27.38% 1,372,646 11.3% 87,305 Performing loans 74,972,632 (259,965) 74,712,667 0.35% 78,082,701 (321,795) 77,760,906 0.41% (3,110,069) (4.0%) (61,830) Total loans to customers 88,442,356 (3,659,249) 84,783,107 4.14% 90,179,779 (3,633,774) 86,546,005 4.03% (1,737,423) (1.9%) 25,475
Impaired loans (doubtful, substandard, restructured and past due), net of value adjustments, amounted to euro 10,070.4 million as at 30 September 2013 and recorded a 14.6% rise with respect to euro 8,785.1 million recorded at the beginning of the year. The related trend shows net impaired loans representing a higher percentage of total net loans to customers, rising from 10.2% to 11.9% (10.9% as at 30 June and 10.8% as at 31 March 2013); a similar increase was recorded for the percentage represented by the same before value adjustments, rising from 13.4% from the previous 15.2%. Due partially to the deterioration of the current economic crisis, in the third quarter the aggregate starting to rise again, following the substantially stable performance recorded in the second quarter of 2013. Without considering receivables for doubtful loans relating to debtors undergoing insolvency proceedings, which as at 30 September were still in progress, but have already been derecognised from the accounts, the average coverage of impaired loans was 25.2% (26.3% as at 30 June and 26.7% as at 31 March 2013) down against the figure at the end of 2012 (27.4%). If receivables that are the subject of settlements are included, the coverage of impaired loans rises to 39.3% against 40.3% recorded at the end of 2012.
More specifically, doubtful loans before and after value adjustments amounted to euro 6,416.4 million and euro 4,075.5 million respectively (+16.5% and +20.5% respectively compared to 31 December 2012), while the percentage represented by the same of total loans to customers before and after value adjustments, was 7.3% and 4.8% respectively (against 6.1% and 3.9% respectively for the same period of the previous year). Taking into account receivables for doubtful loans relating to debtors undergoing legal proceedings, which as at 30 September were still in progress, but had already been derecognised from the accounts, the rate of coverage of doubtful loans was 57.3% (57.6% as at 30 June and 57.9% as at 31 March 2013) against 58.3% as at 31 December 2012 (this rate rises to 91.6% if real guarantees are included).
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Substandard loans before and after value adjustments amounted to euro 4,906.6 million and euro 4,125.6 million respectively (+10.7% and +16.2% respectively compared to 31 December 2012), while the percentage represented by the same of total loans to customers before and after value adjustments, was 5.5% and 4.9% respectively (against 4.9% and 4.1% respectively for the same period of the previous year). The rate of coverage was 15.9% (17.7% as at 30 June and 18.1% as at 31 March 2013) compared to 19.9% last year. The fall in the level of coverage is linked to the transfer of several large positions, with specific guarantees, that were transferred to the doubtful loans segment.
Restructured loans before and after value adjustments amounted to euro 1,282 million and 1,066.1 million respectively, substantially stable compared to the corresponding values for the previous year. The rate of coverage was 16.8% (17.1% as at 30 June and 19.1% as at 31 March 2013) compared to 18.4% last year.
Past due loans before and after value adjustments were euro 864.7 million and euro 803.3 million respectively, and were lower than the corresponding figures for 2012 (euro 887.4 million and euro 821.2 million respectively). The rate of coverage was down slightly, at 7.1%, compared to 7.5% last year.
The coverage of performing loans fell slightly to 0.35% from 0.41% as at 31 December 2012, following an update of calculation parameters as at 30 June 2013.
Banca Italease Group
(in thousands of euro) 30/09/2013 31/12/2012 Net Net Absolute % impact % impact % change exposure exposure change Doubtful loans 1,231,064 18.6% 913,841 12.8% 317,223 34.7% Substandard loans 598,207 9.0% 986,276 13.8% (388,069) (39.3%) Restructured loans 1,042,215 15.8% 1,143,228 16.0% (101,013) (8.8%) Past due loans 74,876 1.1% 71,127 1.0% 3,749 5.3% Impaired loans 2,946,362 44.5% 3,114,472 43.5% (168,110) (5.4%) Performing loans 3,670,530 55.5% 4,041,467 56.5% (370,937) (9.2%) Total loans to customers 6,616,892 100.0% 7,155,939 100.0% (539,047) (7.5%)
(in thousands 30/09/2013 31/12/2012 Change in Change in Change in of euro) gross gross total value Gross Total Gross Total Net exposure Coverage Net exposure Coverage exposure exposure % adjustments exposure adjustments exposure adjustments Doubtful loans 1,954,889 (723,825) 1,231,064 37.03% 1,546,757 (632,916) 913,841 40.92% 408,132 26.4% 90,909 Substandard loans 754,964 (156,757) 598,207 20.76% 1,237,695 (251,419) 986,276 20.31% (482,731) (39.0%) (94,662) Restructured loans 1,175,364 (133,149) 1,042,215 11.33% 1,291,467 (148,239) 1,143,228 11.48% (116,103) (9.0%) (15,090) Past due loans 80,652 (5,776) 74,876 7.16% 74,963 (3,836) 71,127 5.12% 5,689 7.6% 1,940 Impaired loans 3,965,869 (1,019,507) 2,946,362 25.71% 4,150,882 (1,036,410) 3,114,472 24.97% (185,013) (4.5%) (16,903) Performing loans 3,738,337 (67,807) 3,670,530 1.81% 4,113,173 (71,706) 4,041,467 1.74% (374,836) (9.1%) (3,899) Total loans to 7,704,206 (1,087,314) 6,616,892 14.11% 8,264,055 (1,108,116) 7,155,939 13.41% (559,849) (6.8%) (20,802) customers
As regards the Italease Group, consolidated gross impaired loans (doubtful, substandard, restructured and past due loans), net of value adjustments, amounted to euro 2,946.4 million as at 30 September 2013, substantially stable compared to euro 3,114.5 million recorded at the beginning of the year. Considering that the performing loans portfolio is in substantial run- off and therefore continuously falling, the percentage represented by impaired loans net of value adjustments of total net loans to customers, rose from 43.5% at year end to 44.5% as at 30 September 2013 (a similar increase was recorded for the percentage represented by the same before value adjustments, rising to 51.5% from the previous 50.2%). The rate of coverage of impaired loans was 25.7%, compared to 25% at the end of 2012.
More specifically, doubtful loans before and after value adjustments amounted to euro 1,954.9 million and euro 1,231.1 million respectively (+26.4% and +34.7% respectively compared to 31 December 2012), while the percentage represented by the same of total loans to customers before and after value adjustments, was 25.4% (20.8% as at 30 June and 19.5% as at 31 March 2013) and 18.6% respectively (14.6% as at 30 June and 13.2% as at 31 March 2013); against 18.7% and 12.8% respectively for the same period of the previous year). The rate of coverage was 37%, lower than last year, also due to the assignment without recourse of doubtful positions with coverage of close to 100% in June. If properties used as collateral are taken into consideration, the rate of coverage of doubtful loans exceeds 100% of gross exposures. The segment recorded a significant increase due to the transfer of several large substandard loans, which already have adequate coverage and guarantees.
Substandard loans before and after value adjustments amounted to euro 755 million and euro 598.2 million respectively (- 39% and -39.3% respectively compared to 31 December 2012), while the percentage represented by the same of total loans to customers before and after value adjustments, was 9.8% (14% as at 30 June and 14.8% as at 31 March 2013) and 9% respectively (15.0% and 13.8% respectively for the same period of the previous year). The rate of coverage was 20.8%
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(18.1% as at 30 June and 17.8% as at 31 March 2013) compared to 20.3% last year. If properties used as collateral are taken into consideration, the rate of coverage of gross substandard loans exceeds 100%.
Restructured loans before and after value adjustments amounted to euro 1,175.4 million and 1,042.2 million respectively, down 9% and 8.8% respectively compared to the corresponding values for the previous year. The rate of coverage was 11.3% (11.5% at the end of 2012).
Past due loans before and after value adjustments amounted to euro 80.7 million and 74.9 million respectively. The rate of coverage rose to 7.2%, compared to 5.1% last year, in line with the values of the Stand Alone Group.
The rate of coverage of performing loans was 1.8%, substantially stable with respect to 31 December 2012 (1.7%).
Financial assets
% % Absolute (in thousands of euro) 30/09/2013 31/12/2012 % change impact impact change Financial assets held for trading 4,168,189 16.5% 4,687,847 19.4% (519,658) (11.1%) Financial assets designated at fair value through profit and loss 2,574 0.0% 8,924 0.0% (6,350) (71.2%) Financial assets available for sale 11,743,184 46.6% 12,938,022 53.5% (1,194,838) (9.2%) not Investments held to maturity 4,198,924 16.7% 17,192 0.1% 4,181,732 significant Total Securities portfolio 20,112,871 79.9% 17,651,985 72.9% 2,460,886 13.9% Derivative trading and hedging instruments 5,074,340 20.1% 6,549,877 27.1% (1,475,537) (22.5%) Total Financial assets 25,187,211 100.0% 24,201,862 100.0% 985,349 4.1%
The breakdown by type of assets is as follows:
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Debt securities 17,949,893 71.3% 15,825,206 65.4% 2,124,687 13.4% Equity instruments 1,263,642 5.0% 811,808 3.4% 451,834 55.7% UCIT units 899,336 3.6% 1,014,971 4.2% (115,635) (11.4%) Total Securities portfolio 20,112,871 79.9% 17,651,985 72.9% 2,460,886 13.9% Derivative trading and hedging instruments 5,074,340 20.1% 6,549,877 27.1% (1,475,537) (22.5%) Total Financial assets 25,187,211 100.0% 24,201,862 100.0% 985,349 4.1%
The Group’s financial assets as at 30 September 2013 amounted to euro 25,187.2 million, up on the figure of euro 24,201.9 million recorded as at 31 December 2012 (+4.1%); the increase is attributable to the investments held to maturity segment, which offset the sharp drop recorded for the portfolio of financial assets available for sale. An analysis by asset type indicates that this increase regards almost exclusively debt securities, which as at 30 September 2013, represented over 70% of the portfolio (at the end of 2012, the percentage of debt securities was around 65%).
Financial assets held for trading
% % Absolute % (in thousands of euro) 30/09/2013 31/12/2012 impact impact change change Debt securities 3,078,354 35.2% 4,060,550 38.9% (982,196) (24.2%) Equity instruments 662,582 7.6% 197,940 1.9% 464,642 234.7% UCIT units 427,253 4.9% 429,357 4.1% (2,104) (0.5%) Total Securities portfolio 4,168,189 47.7% 4,687,847 44.9% (519,658) (11.1%) Financial and lending derivatives 4,578,224 52.3% 5,754,922 55.1% (1,176,698) (20.4%) Total 8,746,413 100.0% 10,442,769 100.0% (1,696,356) (16.2%)
As regards the debt securities component of financial assets held for trading, euro 1,615.4 million is represented by Italian Government securities and euro 0.2 million by securities of other EU member States, while the remainder is comprised by corporate securities issued mainly by Italian and foreign banks.
The trading share portfolio is mostly comprised by securities relating to leading Italian and foreign companies.
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Financial assets designated at fair value through profit and loss
% % Absolute (in thousands of euro) 30/09/2013 31/12/2012 % change impact impact change Debt securities 1 0.0% 3 0.0% (2) (66.7%) Equity instruments 846 32.9% 1,159 13.0% (313) (27.0%) UCIT units 1,727 67.1% 7,762 87.0% (6,035) (77.8%) Total 2,574 100.0% 8,924 100.0% (6,350) (71.2%)
Financial assets designated at fair value through profit and loss are mainly represented by investments in UCIT units (Undertakings for collective investment in transferable securities), mostly comprised by shares of hedge funds managed by the subsidiary company Aletti Gestielle SGR.
Equity instruments exclusively relate to the value of the insurance policy subscribed by Banco Popolare to cover the liabilities of the S.I.PRE. paid to some executives.
Financial assets available for sale
% % Absolute % (in thousands of euro) 30/09/2013 31/12/2012 impact impact change change Debt securities 10,672,614 90.9% 11,747,461 90.8% (1,074,847) (9.1%) Equity instruments 600,214 5.1% 612,709 4.7% (12,495) (2.0%) UCIT units 470,356 4.0% 577,852 4.5% (107,496) (18.6%) Total 11,743,184 100.0% 12,938,022 100.0% (1,194,838) (9.2%)
As at 30 September 2013, the portfolio of debt securities was comprised by Italian Government securities with a total book value of euro 9,025.5 million. The portfolio of debt securities also includes securities of European Union Member States with a total book value of euro 223.2 million, mostly represented by Spanish securities (nominal amount of euro 200 million) maturing between 2014 and 2015. The remainder of the debt securities portfolio is comprised of securities issued by international organisations (EIB, IBRD etc.) worth euro 96.9 million (nominal 166.4 million) and by corporate securities (mainly Italian and foreign banks), worth 1,299.1 million (nominal 1,398.6 million). During the year, a significant reduction of the debt securities segment was recorded, and particularly of Italian Government securities, resulting from the reorganisation of the Group’s securities portfolio, following the strategic decision to gradually reduce investments in assets classified in the same portfolio.
UCIT units mainly include hedge funds with a book value of euro 6.8 million, real estate funds of euro 34.5 million, share funds of euro 111.4 million, bond funds of euro 124.1 million and flexible funds of euro 156.3 million.
The portfolio of equity instruments is represented by investments whose value is less than 20% of the share capital of said companies, which is not considered a strategic investment by the Banco Popolare Group. The main investments in shareholdings of this nature refer to Dexia Crediop, amounting to euro 105.4 million, the Istituto Centrale delle Banche Popolari Italiane for euro 139.6 million, Palladio Finanziaria for euro 37.4 million, the investment in the Bank of Italy for euro 36.5 million, A4 Holding for euro 19.1 million, Autostrade del Brennero for euro 17.2 million, Arca SGR for euro 26.9 million, Earchimede for 15.8 million, Factorit for euro 17.3 million, S.A.C.B.O. for euro 27.2 million, SIA for euro 27.3 million and lastly Banca Nuova Terra for euro 9.5 million.
Investments held to maturity
Absolute (in thousands of euro) 30/09/2013 % impact 31/12/2012 % impact % change change Debt securities 4,198,924 100.0% 17,192 100.0% 4,181,732 not significant Total 4,198,924 100.0% 17,192 100.0% 4,181,732 not significant
The investments held to maturity segment recorded a rise of around euro 4.2 billion, related exclusively to purchases of Italian Government securities by the Parent Company during the period, following the resolution of the Board of Directors on 20 February 2013. The securities purchased have a maturity of between 3 and 5 years.
Exposure to sovereign risk
Over the summer, the major Eurozone economies recorded, as mentioned earlier, a moderate but overall improvement of their economic indicators, driven by the predicted end to the recession in the Eurozone, even though the recovery of the economic cycle continues to be slow and marked by elements of fragility. Several nations recorded stability towards the end of the third quarter or at the beginning of the fourth: in Germany, Chancellor Merkel won the political elections,
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reconfirming her leadership; market tension relating to the political situation in Italy was temporarily abated; the ECB reconfirmed its intention to support the recovery and the European banking system by implementing an accommodative monetary policy, given the absence of any substantial signs of inflation. The improvement in the level of confidence of retail customers and enterprise over the summer months also regarded Spain, Portugal and Greece. The positive export trend, as well as the decrease in imports, particularly in the peripheral nations involved in their respective sovereign debt and banking system crises, made an important contribution to growth, or to a lesser decline. However, several factors continue to hinder growth in the Eurozone: budget policies have maintained restrictive overtones, even though limited room for manoeuvre has been implemented in order not to suffocate the weaker economies in the area, and the labour market continues to be particularly difficult. Nevertheless, for the first time, the peripheral nations contributed to slowing down the rate of unemployment. In Germany and Portugal, employment figures rose for the second time since 2009, reversing the negative trend, in Spain, the rate of decrease halved, after recording 1% quarter after quarter for around two years and lastly, in Ireland, employment figures started to rise in the beginning of 2012 and continue to do so. Overall, Europe appears to be acquiring an underlying resistance to external turbulence: the elections in Germany, political tension in Italy and uncertainties as to tax policy (remember the “shutdown”) and monetary policy (tapering) in the USA have influenced the spread between the securities of the peripheral nations and the German Bund to a lesser extent than in the past in similar situations. More specifically, the interest rate spread between peripheral Eurozone countries and the 10-year German Bund at the end of the period was lower than those recorded at the beginning of the quarter, with the exception of Portugal, where the spread widened to 43 b.p., reflecting the deterioration of the political situation at the beginning of the period. The Greek interest rate spread also recorded a positive trend, although at very high levels, benefiting from weak signs of a return to economic stability and from the willingness of the European authorities to intervene in any event with a further rescue plan if necessary, closing the period at 770 b.p., after starting off at 914 b.p. The BTP yield spread fluctuated significantly up until mid August, when it reached a record low for the first time of 233 b.p., and then started to partially recover, as internal political tension rose alongside difficulties in public finances, although characterised by a higher level of volatility, recording a lateral trend in a wide bracket and then closing at 267 b.p. During this second phase, on a number of occasions, the BTP spread surpassed that of the Spanish Bonos, which on 23 September recorded a record low of 234 b.p. (again against the Bund), indicating a lower perceived level of risk for the Iberian peninsula. Lastly, the spread of Irish securities (against the 10-year Bund) recorded a positive trend: of the PIGS, Ireland appears to be the nation that has made the most significant progress, today in a relatively better economic situation than the other peripheral countries. In conclusion, it appears that the efforts made during the period by both European Institutions and individual countries to give more economic/institutional stability to the Monetary Union have resulted in gradual progress, contributing to launching and in some cases consolidating the embryonic stage of economic recovery in peripheral member states as well.
The Group’s total exposure in sovereign debt securities as at 30 September 2013 was euro 15,180.1 million, and is provided below, broken down by country (in thousands of euro):
Countries Debt securities Loans Total
Italy 14,829,840 95,375 14,925,215 Spain 210,353 - 210,353 Germany 220 - 220 Other EU Countries 14,784 - 14,784 Total EU Countries 15,056,852 95,375 15,152,227 USA 27,903 - 27,903 Total other countries 27,903 - 27,903 Total 15,084,755 95,375 15,180,130
More specifically, the exposure is represented by: loans granted to the Italian State of euro 95.4 million; debt securities issued by central and local government of euro 15,084.8 million, euro 15,056.9 million of which was issued by EU Member States. This position is mostly held by the Parent Company Banco Popolare which, as at 30 September 2013, held a total of euro 14,203 million, euro 13,992 million of which related to Italian Government securities.
The tables below provide more detailed information on the breakdown of the exposure in debt securities to EU nations, which represented 99.2% of total exposure, by accounting portfolio, residual life bracket and fair value hierarchy.
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Financial assets held for trading
Matures Matures by Matures between Matures Total fair value Country between 2019 Total fair value by hierarchy 2013 2014 and 2018 beyond 2023 as at 30.06.13 and 2023 LEVEL 1 LEVEL 2 LEVEL 3 Italy 1,608,572 6,711 89 1,615,372 1,615,370 - 2 Other EU Countries - 219 - 1 220 220 Total - 1,608,791 6,711 90 1,615,592 1,615,590 - 2
Financial assets available for sale
Matures Matures Matures Total fair Matures by between Net AFS Value Country between 2014 beyond value as at Total fair value by hierarchy 2013 2019 and Reserve adjustments and 2018 2023 30.06.13 2023 LEVEL 1 LEVEL 2 LEVEL 3 Italy 167,834 7,530,426 312,017 1,015,205 9,025,482 (57,932) - 8,989,525 35,958 - Spain - 210,353 - - 210,353 (1,173) - 210,353 - - Other EU Countries 3,278 9,566 - - 12,844 31 2,694 10,149 - Total 171,112 7,750,345 312,017 1,015,205 9,248,679 (59,074) - 9,202,572 46,107 -
Investments held to maturity
Matures Matures Matures Total book Matures by Total fair Country between 2013 between 2018 beyond value as at Total fair value by hierarchy 2013 value and 2018 and 2023 2023 30.06.13 LEVEL 1 LEVEL 2 LEVEL 3
Italy - 4,188,985 1 - 4,188,986 4,190,877 4,190,877 Greece - - - - - Other EU Countries - 3,595 - - 3,595 3,611 3,611 Total - 4,192,580 1 - 4,192,581 4,194,488 4,194,488 - -
Investments in sovereign debt securities of EU Member States, in terms of book value, represent 80.6% of the Group’s total portfolio invested in debt securities, 98.5% of which regards investment in securities issued by the Italian Government. Around 10.7% of said investments have been allocated to the trading portfolio and 61.5% to the financial assets available for sale portfolio, while 27.8% has been classified as investments held to maturity.
Around 91% of total exposure is represented by debt securities that mature before 2018.
Exposure towards Greece, Portugal and Ireland
As regards the Group’s exposure to the sovereign debt of countries defined as “euro-peripheral”, note the absence of positions vis-à-vis Greece, Portugal and Ireland, while the exposure towards Spain has remained unchanged at euro 200 million.
Net Interbank Position
Due from banks % Absolute (in thousands of euro) 30/09/2013 31/12/2012 % impact % change impact change Due from central banks 591,063 13.3% 259,981 5.8% 331,082 127.3% Due from other banks 3,836,465 86.7% 4,211,890 94.2% (375,425) ( 8.9%) Current accounts and demand deposits 579,586 13.1% 608,565 13.6% (28,979) ( 4.8%) Time deposits 2,371,349 53.6% 2,778,537 62.1% (407,188) ( 14.7%) Repurchase agreements 375,666 8.5% 481,306 10.8% (105,640) ( 21.9%) Debt securities 191,084 4.3% 203,472 4.6% (12,388) ( 6.1%) Other loans 318,780 7.2% 140,010 3.1% 178,770 127.7% Total loans (A) 4,427,528 100% 4,471,871 100% (44,343) ( 1.0%)
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Due to banks % Absolute (in thousands of euro) 30/09/2013 31/12/2012 % impact % change impact change Due to central banks 13,682,375 77.1% 13,619,350 77.5% 63,025 0.5% LTRO 13,680,600 77.1% 13,617,507 77.5% 63,093 0.5% Other payables (overnight deposits) 1,775 0.0% 1,843 0.0% (68) ( 3.7%) Due to other banks 4,054,632 22.9% 3,953,688 22.5% 100,944 2.6% Current accounts and demand deposits 873,564 4.9% 936,705 5.3% (63,141) ( 6.7%) Time deposits 1,063,162 6.0% 1,327,562 7.6% (264,400) ( 19.9%) Repurchase agreements 669,335 3.8% 876,027 5.0% (206,692) ( 23.6%) Other payables 1,448,571 8.2% 813,394 4.6% 635,177 78.1%
Total payables (B) 17,737,007 100% 17,573,038 100% 163,969 0.9%
Absolute (in thousands of euro) 30/09/2013 31/12/2012 % change change Mismatch loans/payables (A) - (B) (13,309,479) (13,101,167) 208,312 1.6% Due to central banks: LTRO (13,680,600) (13,617,507) 63,093 0.5% Interbank balance (excl. LTRO) 371,121 516,340 (145,219) ( 28.1%) Mismatch towards central banks (excl. LTRO) 589,288 258,138 331,150 128.3% Interbank balance towards other banks (218,167) 258,202 (476,369)
The overall net interbank position, after credit lines from the ECB for LTROs (which were euro 13,680.6 million and substantially stable compared to 31 December 2012), was euro 371.1 million, down compared to the euro 516.3 million recorded at the end of last year. If net exposures towards central banks are not considered (in reality linked to the mandatory reserve), the net interbank balance towards other banks is euro -218.2 million (as at 31 December 2012, the balance was positive at euro 258.2 million).
The Group continues to maintain an excellent liquidity profile, which as at 30 September 2013 was characterised by the availability of assets that could be allocated to the ECB and to date not used, net of haircuts, amounting to euro 18.8 billion (as at 30 June 2013, while the figure as at 31 December 2012 was euro 14.5 billion). The increase in the first nine months of these assets is due to the finalisation of two securitisation transactions, of residential mortgage loans and mortgage loans to SMEs. This wide liquidity buffer will more than cover maturities for this year and 2014. The Liquidity Coverage Ratio (LCR) and NSFR (Net Stable Funding Ratio) were substantially above the targets currently required by Basel 3 and exceeded 100%.
Investments in associates and companies subject to joint control
Investments in associates and companies subject to significant influence and in subsidiaries subject to joint control as at 30 September 2013 amounted to euro 991.6 million, compared with euro 847.5 million as at 31 December 2012.
The increase of euro 144.1 million recorded in the period includes: the share capital increase resolved by the associated company Alba Leasing in January for a total of euro 70 million: the share subscribed by the Group, used to increase the book value of the above company was euro 23 million; the payment of euro 93.6 million to the associated company Agos Ducato relating to the share capital increase resolved by the company in May; the impact resulting from the valuation of investments in associated companies using the equity approach, relating to the share of the results recorded by associated companies, which totalled euro -34.3 million, to the reduction of capital of Popolare Vita due to the distribution of dividends (euro -49.8 million), and to the increase in reserves of said companies attributable to the Group of euro 7.9 million; the increase relating to a recovery on the equity investment held in Agos Ducato of euro 105.8 million, as illustrated above; other minor decreases mainly due to the return of a payment for future share capital increases of the investee company Renting Italease (euro -1.5 million) and to the closure of the liquidation of Finanziaria ICCRI BBL (euro - 0.4 million).
Lastly, note that the book value of equity investments held for sale is shown under “Non-current assets held for sale and discontinued operations”; as at 30 September 2013, this item also included the consolidated book value of the equity investment in Finoa, corresponding to euro 16.2 million, after a value adjustment on the same of euro 10.3 million, already recorded in the income statement for the first half year.
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Property and equipment
(in thousands of euro) 30/09/2013 31/12/2012 % change BP Stand Sub- BP Stand Sub- Total Total Alone Italease Alone Italease Owned assets used in operations 724,204 723,294 910 754,803 753,640 1,163 (4.1%) Owned assets used for investment purposes 1,342,910 527,054 815,856 1,350,309 528,935 821,374 (0.5%)
Total property and equipment (item 120) 2,067,114 1,250,348 816,766 2,105,112 1,282,575 822,537 (1.8%) Assets held for sale and discontinued operations 116,457 46,287 70,170 97,656 22,710 74,946 19.3% (item 150) Total 2,183,571 1,296,635 886,936 2,202,768 1,305,285 897,483 (0.9%)
The breakdown of property and equipment by type is shown in the table below:
(in thousands of euro) 30/09/2013 31/12/2012 % change
Owned assets used for investment purposes 1,327,490 1,334,797 (0.5%) Owned assets used in operations: land 222,295 223,154 (0.4%) Owned assets used in operations: buildings 418,744 445,179 (5.9%) Owned assets used in operations: other 82,987 86,284 (3.8%) Assets acquired under financial lease 15,598 15,698 (0.6%) Total 2,067,114 2,105,112 (1.8%)
As at 30 September 2013, the total property and equipment held by the Group amounted to euro 2,067.1 million, marking a decrease of around euro 38 million compared to the figure for last year, due mainly to the process of depreciation.
Assets held for sale and discontinued operations at 30 September 2013 included euro 116.5 million of property and equipment (euro 97.7 million as at 31 December 2012), euro 70.2 million of which relates to the former Italease group (euro 74.9 million at the end of the previous year) and euro 46.3 million to the rest of the Group (euro 22.7 million as at 31 December 2012). The decrease recorded in the sub-Italease segment regards the reclassification of a property worth euro 4.8 million under property and equipment, which was previously recorded under assets held for sale, due to the decision to no longer sell the property in the short term. Instead, the increase recorded for the rest of the Group refers to property and equipment belonging to the subsidiary RI Investimenti Due, amounting to euro 24.7 million.
Shareholders’ equity and solvency coefficients
Consolidated shareholders’ equity
10,000
8,000 8,612.4 8,866.3 6,000 4,000
2,000 (millions of euro) of (millions 0 31/12/2012 30/09/2013
The Group’s consolidated shareholders’ equity as at 30 September 2013, including valuation reserves and net income for the period, amounted to euro 8,866.3 million, compared to the figure at the end of 2012 of euro 8,612.4 million. The change observed in the period is mostly due to the comprehensive income relating to positive contribution of the share attributable to the Group of euro 256.1 million. The latter includes the profit for the period of euro 165.4 million and the increase of valuation reserves as at 30 September 2013 of euro 90.7 million, detailed in the following table:
Financial Actuarial Special Investments in assets Property and Cash flow gains/(Losses) on (in thousands of euro) revaluation associates Total available for Equipment hedges defined benefit laws carried at equity sale pension plans Initial balance (28,175) 217 (9,037) 2,314 (25,303) (28,926) (88,910) Increases 252,459 - 3,941 - 5,956 9,227 271,583 Decreases (175,981) - (1,301) - (1,794) (1,840) (180,916) Final balance 48,303 217 (6,397) 2,314 (21,141) (21,539) 1,757
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The change in the reserve for financial assets available for sale compared to last year is mainly due to debt securities, particularly those of the Italian Government. As regards investments in associates and companies subject to joint control carried at equity, the increases mostly regard valuation reserves for financial assets available for sale of the associated company Popolare Vita.
The following table provides a reconciliation between the Parent Company’s shareholders’ equity and net income (loss) for the period with the corresponding consolidated balances.
Net income (loss) for the (in thousands of euro) Shareholders' equity period Balance as at 30/09/2013 as per the Parent Company’s financial statements 7,142,515 43,320 Impact of the consolidation of subsidiaries 1,450,872 183,234 Impact of the valuation at net equity of associated companies 155,032 14,854 Cancellation of the dividends received during the year from subsidiaries and associates - (77,365) Cancellation of the impact of business combination transactions under joint control: - of which: disposals of business divisions (112,670) 85 - of which: mergers 410,742 - Other consolidation adjustments (180,197) 1,275 Balance as at 30/09/2013 as per the consolidated financial statements 8,866,294 165,403
Capital ratios
With regard to the measurement of risk-weighted assets, note that the Banco Popolare Group is authorised to use the following methods based on its own internal models: internal system to measure credit risk relating to corporate and retail customers, according to the advanced approach (Advanced IRB), to calculate the relative consolidated and separate capital requirements, based on the provisions of the Bank of Italy, established in Circular no. 263 of 27 December 2006 (“New provisions for the prudential supervision of banks”) supplemented with subsequent amendments; internal model to measure market risk (generic and specific on equity instruments, generic on debt securities and position-related for UCIT units) to calculate the relative separate and consolidated capital requirements, based on the provisions of Circular no. 263 cited above. The model applies at individual level to Banco Popolare Soc.Coop. and to Banca Aletti S.p.A. As envisaged by regulations, in the provisions of its authorisation, the Supervisory Authority indicated the minimum consolidated level of capital requirement against credit, market, counterparty and operational risks as 85% (floor) of the capital requirement calculated according to the provisions of the Supervisory Instructions for banks in force up until 2006 (so-called “Basel 1”).
In the third quarter, the Group improved on the Core Tier 1 Ratio achieved at the end of 2012 and as at 30 June 2013 (which had recorded 10.1% on both dates), by recording 10.3%. The profit generated and the reduction in risk-weighted assets recorded in the period were offset by the increase in items to be deducted. The rise in the latter is mainly due to the increase in the surplus of expected losses on receivables with respect to value adjustments made in the accounts (known as the shortfall) resulting from the rise in impaired loans. The increase of equity investments in financial entities also contributed to the cited rise, due to the subscription of the share capital increase of Agos Ducato, the write-back made as regards said investee company as well as the cancellation, from 1 January 2013, of the legal option to fully deduct equity investments in insurance companies acquired prior to 20 July 2006 from Total capital, instead of from Tier 1 and Tier 2.
The Tier 1 ratio and the Total capital ratio have recorded a decrease since the beginning of the year from 11.2% to 11.1% and from 14.0% to 12.3% respectively, due to the buy-back and subsequent partial cancellation of its own equity instruments, included to date in Tier 1 or Tier 2 capital, but which will no longer be included in the calculation in view of the application of new rules introduced by Basel 3. Both ratios recorded an improvement against the figures as at June 2013, when the Tier 1 ratio was 10.9% and the Total capital ratio was 12.2%.
Communication regarding the prudential filters of the “Assets available for sale” portfolio
With effect from 30 June 2010, the Group has adopted the approach envisaged by the Bank of Italy Provision dated 18 May 2010, which allows the share of valuation reserves relating to debt securities issued by the central government authorities of countries belonging to the European Union, held in the “Financial assets available for sale” portfolio to be excluded from the calculation of the regulatory capital. More specifically, in alternative to the “asymmetrical” approach (complete deduction of net losses from Tier 1 capital and partial inclusion (50%) of net gains in Tier 2 capital) already envisaged by Italian legislation, the above-mentioned Provision has acknowledged the possibility of fully neutralising the gains and losses recorded in revaluation reserves (“symmetrical”
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approach). This option must be extended to all the securities of the type held in the aforementioned portfolio, it must be applied consistently by the Group and maintained constant over time. As at 30 September 2013, net losses on securities issued by Central Administrations of countries belonging to European Union neutralised in the calculation of regulatory capital due to the approach adopted amount to euro 67 million.
RISK MANAGEMENT
General principles
The Banco Popolare Group implements processes for the selection, undertaking, governance and mitigation of the risks originated by banking and financial activities to pursue stable and sustainable growth objectives over time, in line with the general policies established by the Board of Directors and disciplined, inter alia, by the “Group Risk Regulations”. As regards said policies, the following are of particular note: the distribution of credit risk, in line with the objective of mainly lending to small and medium enterprises and retail customers, market risk-taking in relation to commercial requirements as well as to property investment opportunities, close monitoring of liquidity for the purpose of ensuring the ability to promptly deal with expected and unexpected financial requirements as well as the exclusion of risks unrelated to core business activities. The entire process to manage and control the risks the Group is exposed to is coordinated by Banco Popolare, in its dual capacity as Parent Company and entity in which all the functions of mutual interest to the Group are located. This process operates at different levels of the organisational structure. The Board of Directors of the Parent Company has a fundamental role in the management and control of risk, at Group level, as it decides the strategic direction, approves risk management policies and assesses the level of efficiency and adequacy of the system of internal controls, also with the support of specific Committees, including the Committee for Internal Control and Risks, established within its ranks and, with specific tasks relating to the processes of taking, managing, measuring and controlling risks, the Risks Committee, the Finance and ALM Committee and the Committee for Financial Product Innovation. The risk management function is carried out by the Risks Department through the Risk Management Service located at the Parent Company Banco Popolare, which has direct access to the corporate bodies. The Risks Department, the organisational unit that reports directly to Banco Popolare’s Managing Director, oversees, at Group level and in an integrated way, risk management, measurement and control processes, compliance risk, the process of validating internal risk measurement models and the legal support and advisory process for the Parent Company and for Group Companies. At least on a quarterly basis, the Group assesses its capital adequacy using management-type risk measurement tools, primarily based on statistical-quantitative methodologies related to the VaR (Value at Risk) technique. The same techniques are used, both for current analyses and for forecasts, to produce the ICAAP (Internal Capital Adequacy Assessment Process) Report, sent annually to the Bank of Italy. With regard to obtaining authorisation from the Supervisory Authority (notice dated 18 May 2012) to use the advanced method to calculate capital requirements against credit risk, the deadline for the publication of the Disclosure to the Public pursuant to the Third Pillar of Basel 2 has become at least six-monthly for all quantitative schedules and at least quarterly for information regarding regulatory capital and the Group’s capital adequacy. These documents are made available in accordance with the terms envisaged by law on the website www.bancopopolare.it in the investor relations section. In the first half of the year, in compliance with the provisions of art. 13, paragraph 2 of the joint Bank of Italy-Consob Regulations, the Risk Management Service submitted the annual report of the risk management function on the control activities carried out in 2012, regarding enterprise risk associated with the provision of services and investment activities, as well as collective funds management. As envisaged in the “Manual of compulsory disclosures of supervised parties” which came into force on 1 July 2010, the report was approved by the management bodies of the Group’s main companies and sent to Consob.
The Internal Basel 2 Project
On 18 May 2012, Banco Popolare received the authorisation of the Supervisory Body for the adoption of its own internal models for the regulatory measurement of credit risk and market risk for figures as at 30 June 2012. In the provisions of its authorisation, the Supervisory Authority indicated the minimum consolidated level of capital requirement against First Pillar risks, which may not be lower than 85% (floor) of the standard capital requirement calculated according to the Supervisory Instructions for Banks in force up until 2006 (so-called “Basel 1”). In terms of credit risk, the authorisation regards the advanced internal rating models (PD, for both monitoring and acceptance, and LGD) regarding loans to corporate and retail customers of Banco Popolare and Credito Bergamasco. The standard regulatory approach will continue to be adopted, for prudential reasons, for loans portfolios that are not included in the scope of first validation A-Irb, including those relating to Banca Aletti and to former Banca Italease Group companies. In the first nine months of 2013, Banco Popolare continued with the implementation of several improvement measures requested by the Supervisory Authority for the validation of internal credit risk and market risk models (so-called Action Plan).
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In addition, a plan for the development of internal rating models has been prepared and submitted to the Supervisory Authority relating to the segments and companies that have not been included in the scope of validation. The exposures included in the Roll Out are specifically: PD and LGD models: with regard to Banca Aletti, the release of both the PD model (for “first acceptance” and under monitoring) and the LGD model is envisaged by 2014, while as regards the companies of the former Italease Group, the release of the PD model (for “first acceptance” and under monitoring) and the LGD one is envisaged by 2017; model to estimate “Exposure at Default” (EAD): the release of the model for all Group banks (Banco Popolare, Credito Bergamasco, Banca Aletti, companies of the former Italease - Banca Italease Group and Release) is envisaged from 2016 and not beyond 2017; credit exposures towards supervised intermediaries: the release of PD, LGD and EAD models for Banco Popolare, Credito Bergamasco, Banca Aletti and the former Italease Group is envisaged by the end of 2017. As regards market risk the Banco Popolare Group has obtained the authorisation of the Supervisory Authority to use an internal model to calculate capital absorption for the trading portfolios of Banca Aletti and of the Parent Company. The scope of application is the generic and specific risk of equity instruments, the generic risk of debt securities and the risk relating to UCIT units. The remaining market risks will continue to be measured using the “standard” approach and a Roll Out is not envisaged. As regards operational risk, in the second half of 2012, a project called “Operational Risk - AMA” was launched, with a view to adopting, at consolidated level, the AMA method for the calculation of capital requirements for operational risk. In the first nine months of 2013, the Group continued with its internal plan to develop the AMA risk management and measurement framework, with a view to the forthcoming validation of the internal model: the definition and implementation by the Human Resources Department, in collaboration with Risk Management and Group Organisation, of an important training project to enhance awareness on the governance and mitigation of operational risk, in the form of targeted and dedicated sessions involving all Group personnel; the introduction of several innovations to methods relating to the Risk Self Assessment process, with a view to the assessment of the Group’s future exposure to operational risk, innovations already implemented in the 2013 RSA campaign; the review, again for the purpose of configuring the overall risk management framework, of the Internal Regulations of the Operational Risk Measurement and Management System; the finalisation of management and operational reporting, with the aim of providing detailed information on causal factors, on drivers and on trends of operating losses, in particular to provide support to the assessment and implementation of the appropriate measures to mitigate risk; the strengthening of the AMA calculation model through the adoption of solutions based on principles that are simple to apply, transparent, use robust and conservative methods, adopting familiar statistical tools that are widely used in literature and that are not discretional; the expansion of the IT architecture with a view to achieving the integration of all functions to store and process operating loss data. In coming months, the Group will concentrate on completing and setting in place the calculation model and the relative support processes (in particular the completion of a second risk self assessment exercise), to ensure that all quantitative and qualitative requirements of the law are complied with and to best support how findings of operating risk are used, with a view to finalising the project in 2014.
The governance of risks via the system of limits
Within the Group, from an operational perspective, the undertaking of business risk is specifically disciplined by the system of risk limits. With the exception of liquidity risk (for which a “maturity ladder” is used), the limits are defined in terms of VaR (Value at Risk) and represent the maximum level of potential losses which it is believed can be sustained on a consistent basis with the risk-return profile chosen by the Group. Responsibility for observance of each limit is assigned to specific corporate functions/bodies which govern the operational leverages and determine the dynamics of the risks. The system is therefore organised as follows: an overall risk limit, measured with regard to all significant risks to which the Group is exposed; limits for the main types of risk (credit, counterparty, market, operating, interest rate on the banking portfolio, liquidity); maximum limits for losses applied to market risk; prudential limits relating to undertaking risk vis-à-vis related parties. The specific limits established for each type of risk are also structured into detailed sub-limits which refer, according to the type of risk, to the individual legal entity, to portfolios (retail and corporate) and to the areas of operations (human resources, practices, systems, procedures and external factors). This categorisation complies with the need to allow improved monitoring and to a more efficient handling of risks by the parties responsible. Accordingly, the limits undertake operational leverage validity as well. With regard to the liquidity risk, the exposure limits are defined by means of the structure of the maturity ladder, where the future cash flows generated by the expiry of the financial and loan brokerage transactions are placed within the corresponding time brackets. Net requirements are established by means of the algebraic sum of expected in- and out-flows of liquidity. The purpose of liquidity risk limits is to verify the ability of available liquid reserves to ensure coverage of net
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liquidity requirements. Maximum limits are also envisaged for the concentration of funding by counterparty and wholesale source. The system of limits (overall and specific) is also supported by detailed operational limits, specific to risk type, which envisage the use of statistical and traditional indicators (e.g. sensitivity and stop loss limits), calculated with reference to given organisational units (e.g. the Investment Bank desks that manage market risk) or specific operating areas (e.g. limits relating to the financial risks of foreign banks), as well as clearly identified risk components (e.g. the risk of concentration of exposures within credit risk). The process to establish the overall system of limits entails continuous verification and review/recalibration on an annual basis, at the same time as the review of the strategic plan and/or as the formulation of the new budget, as well as in the case of events able to substantially change exposure to risk and/or available capital. Lastly, it should be noted that with reference to that envisaged in Heading V, Chapter V of Circular 263/2006 “New regulations for the prudential supervision of banks”, as of December 2012, the Group has adopted a system of limits for propensity to risk, relating to its risk exposure towards Related Parties (company representatives, subsidiaries or companies subject to significant influence, relative related parties).
Credit risk
The Banco Popolare Group pursues lending policy objectives that seek to: support the growth of the business activities operating in its market territories, with a strong customer relationship focus on small and medium sized companies, as well as on retail customers; diversify its portfolio, limiting loan concentration on single counterparties/groups, on single sectors of economic activity or geographical areas; adopt a uniform credit management model based on rules, methods, processes, IT procedures and internal regulations harmonized and standardised for all Group banks and companies. With the aim of optimising credit quality and minimising the global credit risk cost for both the Group and the single companies, under the organisational model the Parent Company’s Loans Department is in charge of loan policy guidelines for both the banks and companies of the Group. The credit portfolio monitoring, carried out by the afore-mentioned Department, is focused on the performance analysis of risk profile of economic sectors, geographical areas, customer segments and types of granted credit lines, as well as on other analysed spheres of action, allowing the definition of possible corrective actions at central level. Guidelines have also been set at Group level, defining how to behave with respect to credit risk-taking, to avoid excessive concentrations, limit potential losses and guarantee credit quality. In particular, in the loan approval phase, the Parent Company exercises the role of management, direction and support for the Group. The role of the Risk Management Service within the Risks Department is to provide support to Top Management in the planning and control of risk exposure and capital absorption, with a view to maintaining the stability of the Group, checking capital adequacy forecasts and compliance with the Group’s risk limits and propensity to risk. More specifically, the Risk Management Service’s task is to develop, manage and optimise internal rating models (First Pillar), the loans portfolio model (Second Pillar) over time, and to supervise - as part of second level controls - the calculation of weighted risk assets using advanced methods. In particular, with regard to credit risk estimation models, in the first half of 2012, the Group obtained the authorisation of the Supervisory Authority for the use of “Internal Rating Based” (“IRB”) methods. Portfolio risk monitoring is based on a default model that is applied on a monthly basis mainly to credit exposures of the Banco Popolare Group, with regard to performing loans, cash loans and endorsement credits, of resident customers. This model allows operating capital absorption to be estimated, taking into account the portfolio concentration and the assumption of a joint default of counterparties, in a predefined context of significant macroeconomic variables. The confidence interval used is 99.9% and the time horizon of reference is one year.
Credit quality
The Banco Popolare Group makes use of an elaborate set of instruments to monitor credit portfolio quality. Internal ratings are an important part of this. Their calculation is based on models that are differentiated and estimated specifically for each customer segment (large corporate, mid corporate plus, mid corporate, small business and private customers). Rating plays a key role in loan granting, monitoring and management processes. In particular, it plays a role in deciding which the competent bodies to approve loans are, as well as on the mechanism for the automatic renewal of uncommitted credit facilities, and it contributes to guiding the decisions of loan managers when classifying positions based on their performance. Special dedicated units within the Group are in charge of managing impaired loans, which operate by means of predefined management and recovery method that differ depending on the type of loan by amount and risk profile. Impaired loans are classified according to specific criteria, based on prudence, and objective risk parameters. In general, impaired loans include loans that give rise to a severely abnormal evolution of the business relations between the customer and the Group banks, serious irregularities found in the reports to the Central Credit Register, a worrying situation of financial accounts, the onset of adverse events that may restrict the creditworthiness, decrease the value of the guarantees or impair the loan.
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Value adjustments are measured on an individual basis for each single position, they are based on the criteria of prudence in relation to the possibilities of actual recovery, also related to the existence of any collateral and they are regularly verified. The situation of the Group’s impaired loans as at 30 September 2013 has already been illustrated in the previous section, which commented on the Results for the period. With regard to the future development of credit risk, there continues to be a situation of uncertainty as to the evolution of the economic scenario. This situation makes it difficult to predict the evolution of the risk in question. With regard to the process of integration of the former Banca Italease group, there has been a constant commitment, in terms of managing the portfolio of loans in default, reducing risk and focusing particularly on those of a high amount (so- called large risks).
Outcome of rating system backtesting
In order to calculate capital requirements against credit risk (AIRB system), the Banco Popolare Group adopts internal estimates of Probability of Default (PD) and of Loss Given Default (LGD) for Corporate and Private Customer portfolios. The comparison between estimates and empirical data is made separately for PD on a six-monthly basis at least, for LGD on an annual basis, by means of backtesting conducted by the Internal Validation service. With regard to PD models, the Banco Popolare Group adopts performance measures to verify the discriminatory range of the estimates (accuracy ratio-AR) and calibration tests (classic binomial tests corrected for cyclical factors) to compare default rates over an annual time horizon with estimated PD values. As regards the Corporate segments, the latest backtesting exercise showed a good discriminatory range of models, both in terms of single modules and final ratings, which produced values comparable and at times superior to those obtained in development. In terms of calibration, satisfactory values were obtained for the Large Corporate model, while the Mid Corporate Plus, Mid Corporate and Small Business segments show, for some rating classes, default rates higher than the corresponding average PD, which should mostly be attributed to an increase in the level of risk in the backtesting sample, resulting from the deterioration of economic conditions over the course of 2011 (a phenomenon that is also confirmed by the “stability” of the binomial tests corrected for cyclical factors). In the Private Customer segment, the model performed well overall, while as regards the calibration tests, the results were satisfactory and better than those observed in the previous backtesting exercise, with acceptable values if the effects of the current economic crisis are incorporated in the estimates. In terms of LGD, it should be noted how the approach adopted at the time of development (including the most recent data and various prudential elements required at the time of validation by the Regulator) guarantees the application of parameters that represent conservative loss estimates.
Counterparty Risk
Counterparty risk is defined as the risk that the counterparty in a transaction regarding specific financial instruments defaults before said transaction is settled. As regards this type of risk, for operating purposes and to provide support for capital adequacy assessment processes (ICAAP process), the Group uses an internal method to estimate unexpected losses resulting from the possible default of counterparties in OTC derivative transactions (the most significant source of risk for the Group). This method is mostly based on statistical-quantitative approaches, partially linked to the techniques used for VaR (Value at Risk) estimates, which assesses the impact that market and credit risk factors may have in terms of unexpected losses on the positive future market value of the overall portfolio of positions in derivatives. At the end of April 2013, a project addressed to strengthening the methods, process and IT architecture was launched, which focused, in an initial stage, on obtaining a better measurement of exposure to counterparty risk for the entire portfolio of OTC derivatives, and on the implementation of new measurements in the chain of credit processes for positions held with institutional counterparties. In the third quarter of 2013, current processes were analysed and the areas in which to intervene were established. A centralised database of the Archive of Contracts with counterparties has been operational since February 2013, which, also integrated with the system available to Risk Management to control Counterparty Risk, provides the parameters and important elements of contracts to mitigate risk for the OTC derivatives segment (ISDA/CSA).
Financial risks
Trading portfolio
The organisational model adopted by the Banco Popolare Group for the trading portfolios exposed to interest rate risk and price risk requires the centralisation: of the management of Treasury and of Proprietary Portfolio positions in Group Finance; in the subsidiary Banca Aletti of the risk positions and the operating flows associated with securities, currency, OTC derivative trading and other financial assets. In addition to this, there are the main interest rate risk exposures from the trading portfolio of Banca Aletti relating to operations both on money markets, and the associated listed or plain vanilla derivatives (covered by the Trading & Brokerage Service), both on the markets of listed and OTC derivatives, and OTC structured products (covered by the Structured Products Service).
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This model does not include the former Banca Italease Group, as there are no significant positions that may affect market risk. Credito Bergamasco continues to hold positions that are insignificant compared to the above portfolios, which were not centralised in the Parent Company, because they are held for specific needs and purposes of the individual bank, or are directly linked to commercial activities. The function in charge of controlling the financial risk management for all the Banks of the Group with the aim of identifying the type of risks, define the methods to measure risks, control limits at strategic level and verify the consistency between trade limits and the risk/return targets assigned is centralised in the Parent Company under the responsibility of the Risk Management Service for all Group banks. Risk analyses of the Trading portfolio are carried out by means of indicators, both deterministic, such as the sensitivity to market risk factors, and probabilistic, such as VaR (Value at Risk), which measures the maximum potential loss of the portfolio over a certain time horizon and with a given level of confidence. Risk capital estimates under the VaR approach are made using the historical simulation method and considering a time horizon of one working day and a statistical confidence interval of 99%. A VaR is calculated both by applying a Lambda coefficient (decay factor) of 0.99, so as to render the estimate more reactive to the most recent changes in market parameters, and by equi-weighting historic observations. If the latter is higher than the VaR calculated with the above decay factor, it is used for risk estimates. In the period under examination, changes in risk mostly depend on the specific component (issuer risk), relating, in particular to Italian government bonds.
Regulatory trading portfolio Q3 2013 (in millions of euro) 30/09/2013 average maximum minimum Interest rate risk 1.434 1.789 4.322 0,214 Exchange rate risk 0.167 0.186 2.988 0.080 Equity risk 1.481 1.628 4.771 1.034 Specific risk 10.988 11.724 18.367 7.227 Total uncorrelated 14.070 Diversification effect -0.841 Combined Risk 13.229 12.701 19.097 7.496
Daily VaR and VaR by risk factor BANCO POPOLARE GROUP: Regulatory trading portfolio
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0 08 Jul08 Jul19 Jul30 02 Jan02 Jan13 Jan24 Apr11 Apr22 Jun05 Jun16 Jun27 04 Feb04 Feb15 Feb26 Mar09 Mar20 Mar31 10 Aug 21 Aug 01 Sep 12 Sep 23 Sep 03 May 14 May 25 May
INTEREST RATE VAR EQUITY VAR FOREX VAR SPECIFIC VAR TOTAL VAR
Following the validation of the internal model for the calculation of the capital requirement relating to market risks, backtesting is conducted on a daily basis, with a view to verifying the solidity of the VaR model adopted. These tests are conducted on the regulatory trading portfolio of Banco Popolare and of Banca Aletti. The graphs below show the backtesting relating to the VaR method, calculated on the generic risk of debt securities, generic and specific equity risk, interest rate risk and exchange rate risk. For backtesting purposes, as envisaged by supervisory regulations in force, we used the equally-weighted VaR measurement instead of using a decay factor used in operational approaches.
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Backtesting of Banco Popolare
4,000,000
2,000,000
0
-2,000,000
-4,000,000
-6,000,000
-8,000,000 05/10/2012 21/10/2012 06/11/2012 22/11/2012 08/12/2012 24/12/2012 09/01/2013 25/01/2013 10/02/2013 26/02/2013 14/03/2013 30/03/2013 15/04/2013 01/05/2013 17/05/2013 02/06/2013 18/06/2013 04/07/2013 20/07/2013 05/08/2013 21/08/2013 06/09/2013 22/09/2013
VaR P&L Actual Backtesting P&L Hypothetical Backtesting
Furthermore, note that at operating level, a risk assessment is conducted on the loss of value of the debt securities of the trading portfolio due to the migration of the credit rating or the default of the issuer using an Incremental Risk Charge - IRC approach.
Banking portfolio
The interest rate risk relating to the banking portfolio is eminently associated with the core activity performed by the bank acting as an intermediary in the process of transformation of maturities. In particular, the issue of fixed rate bonds, the granting of fixed rate commercial loans and mortgages and funding from demand current accounts represent a fair value interest rate risk, while floating rate financial assets and liabilities represent a cash flow interest rate risk. The structure in charge of managing interest rate risk is the ALM, part of the Group Finance Service of the Parent Company, which carries out this task also on behalf of the banks and subsidiary financial companies, and pursues the maximisation of the economic return from the bank’s commercial activity in compliance with the set interest rate risk exposure limits. The Interest Rate and Liquidity Risk unit of the Parent Company’s Risk Management Service is in charge of monitoring and controlling the interest rate risk of the banking portfolio, and it performs this function also on behalf of the banks and financial subsidiaries. This activity, is performed on a monthly basis, to verify that the limits in terms of changes in interest margin or equity or the economic value of the banking portfolio are complied with, as regards regulatory capital. Interest rate risk is monitored using Sensitivity Analyses and the parametric Value at Risk method. As regards sensitivity analysis (assumption of an instantaneous, single and parallel shift of the rates curve by +/-100 basis points), the aggregate results are shown in the table below. Both the short term indicator, represented by the margin at risk, and the medium-long term indicator, represented by the economic value at risk, showed a slightly lower sensitivity to interest rate fluctuations compared to the same period of the previous year, continuing in the direction of further reducing risk, which has now reached very low levels.
2013 (first 9 months) 2012 (first 9 months)
Risk ratios (%) 30 September average 2013 Maximum minimum 30 September average 2012 For a shift of + 100 bp Financial margin at risk / 2.9% 2.5% 4.4% 0.4% 3.5% 4.4% Financial margin Economic value at risk / -0.1% -0.8% 0.2% -1.8% -1.2% -2.5% Economic value of capital
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2013 (first 9 months) 2012 (first 9 months)
Risk ratios (%) 30 September average 2013 Maximum minimum 30 September average 2012 For a shift of - 100 bp Financial margin at risk / -1.8% -1.5% -0.2% -3.2% -2.1% -4.9% Financial margin Economic value at risk / 0.1% 0.7% 2.1% -1.0% 1.2% 3.0% Economic value of capital
With regard to the banking portfolio, the Group also evaluates its exposure to the risk of default and to the migration of debt securities classified as “Financial assets available for sale”, “Receivables” and “Financial assets held to maturity”, based on IAS standards, using an Incremental Risk Charge (IRC) method. Instead, positions classified as “Financial assets designated at fair value through profit and loss” are measured using the Value at Risk (VaR) method, with historic simulations.
Operational Risk
Operational risk is the risk of suffering losses caused by inadequacy or failure attributable to procedures, human resources and internal systems, or caused by external events. Losses resulting from fraud, human error, interruption of operations, non- availability of systems, contractual breaches and natural disasters are included in this type of risk. Operational risk also encompasses legal risk, while strategic and reputational risk are not included. As regards this type of risk, the Group currently adopts the standardized regulatory approach envisaged by supervisory provisions (combined with the basic method for companies not significant in size) to calculate capital requirements against operational risk, although a project to develop the advanced AMA method is close to completion. The Group has been using an internal VaR type internal model for some time (level of confidence 99.9%), applied to the perimeter of the Parent Company, of Credito Bergamasco, Banca Aletti and SGS, which is specifically based on internal operating loss data, external data (DIPO consortium) and on the results of the risk self-assessment (questionnaires to gather assessments of future exposure to operational risk), to estimate economic capital requirements against operational risk. This estimate is used for ICAAP/risk limit purposes and for management reporting and internal operations. The model in question is currently being fine-tuned with a view to its validation for prudential purposes (AMA project). For further details on the state of progress of AMA project activities and on the work completed in the first nine months of 2013, please refer to the previous section entitled “The Internal Basel 2 Project”.
Liquidity Risk
Liquidity risk is generated by the time mismatch between expected cash in- and out-flows even in a very short time horizon. In addition to the difficulty/impossibility of hedging such mismatches, the liquidity risk can also entail an interest rate risk caused by the need to raise/lend funds at unknown rates that could be potentially unfavourable. The Parent Company’s Group Finance Service is in charge of monitoring liquidity risk limits, according to the supervisory measurement system, as a first-level control; the Parent Company’s Risk Management Service is in charge of second-level controls, as well as monitoring mismatches of operating liquidity through the Asset & Liability Management procedure, also used to measure the interest rate risk of the banking portfolio. As regards liquidity risk, at aggregate level, the Group has applied a liquidity monitoring system for some time now, using both regulatory and operating measurements, that also entails the use of models to estimate behavioural and/or optional parameters. This system is flanked by internal operating thresholds based on stringent levels, monitored on a daily (supervisory) and ten-day (operating) basis. In the first nine months of 2013, the Group’s liquidity profile remained at an adequate level, above the minimum limits established internally and the threshold indicated by the Bank of Italy for our group, despite the impact on the annual horizon of important maturities of institutional PO, whose liquidity profile, in any event demonstrates redemption capacity.
Other risk factors
Risks associated with pending legal proceedings
The Banco Popolare Group is involved in numerous legal proceedings associated with the natural unfolding of the business activities. The main risk positions at Group level relating to Clawback actions and Pending lawsuits are detailed below.
Area S.p.A. dispute. In July and September 2009, Banco Popolare (and others) were summoned, by means of separate actions brought by two separate groups of former shareholders of Area S.p.A.. In the first proceedings, 42 plaintiffs requested that the defendants be ordered to pay compensation of euro 13.15 million, on the assumption of an alleged agreement between the former Banca Popolare di Lodi (BPL) S.c.a.r.l. and Banca Intesa S.p.A., which would have led among other things to the exclusion of Area S.p.A.’s minority shareholders, without the payment which would have been due on exercise of the right to withdraw as a consequence of the merger of Area S.p.A. in Bipielle Investimenti S.p.A..
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In the second proceedings, 76 plaintiffs requested the sentencing of Banco Popolare, the former BPL S.p.A. and its former managing director, Mr. Gianpiero Fiorani, subject to ascertaining the alleged criminal liability of the latter and liability pursuant to Article 5 of Italian Legislative Decree No. 231/2001 of the two banks, to compensate the alleged damages of euro 25.2 million, inferring the same profiles as the first proceedings. On 20 January 2010, Banca Intesa San Paolo summoned BPL and Mr. Fiorani in proceedings filed by 9 plaintiffs to extend the sentence to the Bank. In these proceedings, an order to pay alleged damages of euro 1.7 million was requested for the same reasons as the previous two cases. The three proceedings were concluded, with an order of the Milan Court, which in judgements dated 8-9 May 2013, totally rejected the demands made by the plaintiffs, ordering the same to pay legal expenses; appeals have been filed against the judgements relating to the first two proceedings. Based on the opinion of external legal experts, Banco Popolare believes that there is only a remote risk of losing.
Raffaele Viscardi S.r.l. The law suit, notified on 30 April 2009 and which has a petitum of around euro 46 million, concerns the operations of a branch in Salerno relating to the granting of agricultural loans to the plaintiff company, which alleges that it was led to subscribe Banco Popolare bonds to guarantee the sums disbursed and claims damages to its image due to reporting in the Italian Central Credit Register. Based on the opinion of external legal experts, Banco Popolare believes that there is only a remote risk of losing.
Potenza Giovanni This dispute stems from relations between the former ICCRI and a company called CRIA and regards the renovation of a large building complex in Milan. In 1984, ICCRI granted various credit facilities, all secured with mortgages. The shareholder of CRIA at the time was Giovanni Potenza, who, due to economic difficulties being experienced by the company, agreed with ICCRI to transfer 87% of the company’s shareholding to IMMOCRI (ICCRI’s real estate company) by means of a shareholder’s agreement. Following the sale of the real estate assets of CRIA to the Norman Group, Mr. Giovanni Potenza filed, starting on 22 November 2001, a series of lawsuits to demonstrate the damages incurred by the sale of said real estate assets by ICCRI and IMMOCRI at a price he retained as inadequate, as well as to obtain the annulment of the settlement agreements between the Norman Group and ICCRI and of the relative contract of sale of the assets. Whilst awaiting the first instance of the civil proceedings, the plaintiff also initiated criminal proceedings accusing officials of ICCRI and associated companies of extortion. The accusations were then dismissed by the Public Prosecutor’s Office. An appeal has been made against the sentence of the court of first instance in 2009, which ruled in favour of the Bank and ordered the plaintiff to pay legal expenses. Based on external legal advice, Banco Popolare believes it is likely that the ruling of the first instance will be confirmed.
ITTIERRE S.p.A. The company was placed under extraordinary receivership. By means of a summons, both the former BPL and the former BPN were requested to return, pursuant to art. 67 of the Finance Law, the total sum of euro 16,560,533.84 for the principal creditor and euro 4,936,669.14 for the secondary creditor. An objection was raised as to the erroneous duplication of the request, which in reality referred to the same current account migrated from BPL to BPN following a swap of branches. Furthermore, the grounds of the request were challenged, due to the imprecision of the same insofar as the counterparty had not specified which remittances were being disputed. The lawsuit against the former BPN is at the preliminary stage, while the lawsuit against the former BPL is close to a final judgement. The Judge has rejected all of the counterparty’s pre-trial requests.
Criminal proceedings relating Banca Italease
The Bank has appealed to the Supreme Court against the Appeal ruling which confirmed the confiscation, reducing it to euro 54.1 million, as administratively liable under Italian Legislative Decree no. 231/2001 as well as a fine of euro 1.9 million; both the fine and the confiscation cannot be enforced until the ruling has been sentenced by the court. Supported by various opinions of external lawyers, with regard to the confiscation, the Bank considers the potential liability possible, while with regard to the fine, it considers the potential liability as likely, and therefore has made an allocation to provisions of the full amount of euro 1.9 million to cover the monetary fine.
Banca Italease was committed for trial in its capacity as liable administratively as per Italian Legislative Decree No. 231/2001 and cited as the civilly liable party in the criminal proceedings relating to the former members of the Executive Committee for the crime of false company communication regarding the approval of the 2008 half-yearly financial statements of the Bank.
Banca Italease was summoned as a civilly liable party with relation to Mr. Fabio Innocenzi, the former Deputy Chairman of Banca Italease, for offences of false company communication and market manipulation. In a ruling dated 27 May 2013, the Court of Milan. Mr. Innocenzi was fully acquitted.
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Civil proceedings relating Banca Italease
Egerton Capital Limited By means of a summons dated 14 March 2008, Banca Italease was ordered to appear before the court by Egerton Capital Limited (on its own account and behalf of some managed funds) on a claim of damages of euro 105 million relating to investments in Banca Italease shares made in the period between January and May 2007, alleging illicit conduct of the Bank, namely that it had concealed the fact that a considerable amount of business activities regarded high-risk complex derivatives from the market, by circulating financial statements, interim reports and the prospectus dated January 2007 regarding the share capital increase. In the court of first instance, Banca Italease was ordered to pay euro 79.8 million plus legal expenses of euro 495 thousand. As part of its de-risking process and with a view to reducing the risks relating to the disputes underway, Banca Italease has reached an out-of-court settlement for the dispute with Egerton Capital Limited, the funds for which will be taken from the provisions already allocated as at December 2012, and therefore there will be no impact on the income statement for the current year.
Kevios By means of summons served on 18 December 2009, Kevios S.p.A. summoned Banca Italease before the Milan Court, so as to obtain the upholding of the request for compensation of damages of around euro 65 million, founded essentially on the alleged existence of numerous cases represented therein: abuse of economic dependence, abuse of the law and contractual breach, primarily attributable to the Bank. In a ruling dated 26 June 2013, the Court of Milan rejected the requests of the plaintiff company as groundless, ordering the same to pay the legal expenses of the Bank. An appeal has been presented against the first instance sentence.
Wheelrent Car Rental By means of a summons dated 5 February 2008, the plaintiff company summoned Banca Italease before the court, requesting the invalidity, ineffectiveness and annulment for a number of reasons of derivative contracts (IRS) drawn up between February 2005 and December 2006. Furthermore, the plaintiff company also requested that the reporting of the name of the company in the Central Italian Credit Register to be declared illegitimate and, therefore claimed compensation for damages incurred, quantified as over euro 38 million. The plaintiff also initiated criminal proceedings for the offence of misappropriation. In a ruling issued on 12 September 2012, the Judge, acknowledging the objection to the settlement formulated by the Bank’s defence, stated that he was not competent to decide on the dispute in question and ordered Wheelrent to pay legal expenses. Given the developments in these proceedings, with the support of various external legal advisors, Banca Italease has made the appropriate risk assessments.
Bankruptcy of Dimafin S.p.A. The insolvent company Dimafin has asked the Court of Rome to declare the null and void and/or to revoke the “termination agreement by mutual consent” signed on 16 June 2010 by Dimafin, Mercantile Leasing (incorporated into Banca Italease) and Release related to the finance lease contract for the property located in Palazzo Sturzo in Rome. By virtue of the annulment request, the Judge has been asked to declare that the original finance lease contract is fully in force and effective for the parties, therefore condemning the defendants to immediately make the property available again or, if this is not possible, to pay a corresponding amount in cash, as well as return all instalments of the commercial lease received or to be received as of 1 July 2010. In a ruling dated 22 April 2013, the Court of Rome rejected the requests made by the insolvent company, ordering it to pay legal expenses. An appeal has been presented against the first instance sentence.
With regard to the criminal proceedings for fraudulent bankruptcy and preferential bankruptcy relating to the default of the Di Mario group, on 20 June 2012, Italease received a seizure notice for euro 7.9 million, corresponding to the sum that is presumed to be preferential or groundless. At present, given the fact that the proceedings are at a preliminary stage, no assessment of any risk of losing the case can be made.
Bankruptcy of S.E.R. The insolvent company S.E.R. summoned a series of entities including Mercantile Leasing (incorporated into Banca Italease) seeking to obtain the declaration of invalidity, and, therefore, the unenforceability against the bankruptcy estate, of the transfer deed regarding the property named “Palazzo Sturzo”, entered into between S.E.R., at the time not subject to bankruptcy proceedings, and the Partito Popolare, as well as the transfer deeds which followed, including that which was entered into between Mercantile Leasing, Dima Costruzioni and Dimafin (value of the property around euro 50 million). The Rome Court of Appeal, in a ruling dated 6 September 2013, confirming the judgement passed in the first instance, fully rejected the bankruptcy applications, and ordering the same to pay legal expenses. The term for an appeal to the Supreme Court has not yet expired.
Dispute with G.D.M. S.p.A. under Extraordinary Receivership On 19 October 2012, the subsidiary company Banca Italease received communication of the exclusion of the senior receivable of euro 22.6 million due from the company G.D.M. S.p.A. placed under extraordinary receivership by the Court of Milan in January 2012, in relation to a mortgage loan granted in 2007.
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Obviously, this decision was challenged in light of the due completion of the mortgage loan and the regular acquisition of consolidated and opposable mortgage collateral, on extensive assets. Moreover, G.D.M. S.p.A. also has two proceedings under way before the Court of Milan disputing the declaration of the state of insolvency and the subsequent start of the extraordinary receivership procedure.
Risks associated with current disputes with the Tax Authority
Banco Popolare, the companies that merged to form the same, the incorporated subsidiary companies and the subsidiary companies underwent various inspections by the Tax Authorities in 2013 and in previous years. These activities concerned the taxable income declared for the purpose of income tax, VAT, registration tax, and more generally the manner in which the tax legislation in force at the time was applied. Following said inspections, the Banco Popolare Group is involved in numerous legal proceedings.
The potential liabilities relating to tax disputes underway that involve Banco Popolare and its subsidiaries amounted as at 30 September 2013 to euro 926.9 million, of which euro 379.1 million relate to notices of assessment, settlement notices and tax demands, and euro 547.8 million relate to formal reports on findings served. In this regard, note that the estimate of said potential liabilities relating to the notices of assessment and the settlement notices does not consider any interest, while the estimate of potential liabilities relating to formal reports on findings does not include interest or fines, insofar as they are not indicated in the latter document. As at 31 December 2012, the claims of the Tax Authority resulting from the notices of assessment and the formal reports on findings served amounted to euro 482.2 million.
With regard to the disputes listed above, note that provisional payments totalling euro 23.7 million have been made to the Tax Authority relating to tax demands notified. These provisional payments have been recorded as receivables towards the Tax Authority.
Developments in the first nine months of the year
New disputes that emerged in the period and/or developments of existing disputes following formal reports on findings served
In the first nine months of the year, potential liabilities rose by euro 445.6 million, resulting mainly from the receipt by the subsidiary Banca Aletti on 21 February 2013 of a second formal report on findings on conclusion of the inspection conducted by the Finance Police - Milan Branch of the Tax Police, which had regarded specific verification of dividends distributed under art. 89 ITCL relating to 2005, 2006, 2007, 2008 and 2009. The inspection regarded single stock futures transactions (listed derivative contracts whose reference value is that of a single share, also listed) and, to a lesser extent, share issues made between 2005 and 2009, namely operations relating to share securities that are part of standard investment banking activities. In the first formal report on findings, received in 2011 and relating to 2006 only, the inspectors had disputed that the purpose of the single stock futures transactions performed by the Bank on its own account was unlawful (pursued by the market counterparty that was not resident in Italy), namely to evade the application of withholding tax of 27% on the dividends of the shares representing the underlying assets of the cited futures. The Lombardy Regional Headquarters, acknowledging the findings of the inspectors, classified it in a different way, without prejudice to the supposed evasion, and sent two payment orders to the Bank, envisaging the payment of euro 17.6 million in non- applied withholding tax and a fine of euro 26.4 million, plus interest. The Bank submitted an appeal to the Provincial Tax Commission of Milan, and started judicial conciliation proceedings. In the new formal report on findings, the inspectors again disputed the evasive nature of single stock futures transactions and, as regards 2008, the share issue transactions performed with non-resident counterparties and, as regards these transactions, they proposed a series of findings relating to withholding tax, direct taxes and credit for taxes discharged abroad. When these findings are passed to the Lombardy Regional Headquarters, which is responsible for examining the report of the Finance Police and issuing any payment orders, the tax claim could amount to euro 283.1 million in unpaid withholding tax, euro 42.5 million in terms of IRES and IRAP and euro 114.7 million in terms of undue credit for taxes discharged abroad, plus any fines and interest. Both the findings relating to the notice of assessment and to the formal report for 2006, and even more so those contained in the formal report received at the end of February 2013 appear to be groundless insofar as the theory of presumed “misuse of a right” made by the Finance Police is based on mere presumptions and therefore not on real assumptions. The findings were also drawn up with no regard for factual circumstances or technical elements. In the light of the above, based on information that is currently available, and also with the support of a reliable external opinion, we believe that the potential liability resulting from the above-illustrated reports should be classified as possible but improbable. Even though certain of the legitimacy of its actions and aware of the groundlessness of the accusations made, as usual in these circumstances, the opportunity of reaching a possible settlement for the dispute with the Tax Authority after the notification of the first formal report on findings has been examined. The reason for this is that settling the dispute out of court is in any event retained as preferable to facing the costs, the lengthy period involved and the undeniable uncertainties of a dispute.
The other tax liabilities that emerged regard a series of settlement notices served to Banco Popolare and Credito Bergamasco for the alleged failure to pay substitute tax on loans pursuant to art. 15 of Italian Presidential Decree 601/1973 relating to agreements stipulated abroad (totalling euro 4 million) and two adjustment and settlement notices for registration tax on the
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value of goodwill declared, regarding agreements related to the infragroup transfer signed on 28 July 2011 of the business divisions represented by branches of the former Banca Popolare di Lodi and the former Banca Popolare di Cremona to Credito Bergamasco Spa (euro 1.3 million).
Disputes concluded and/or settled during the year
The potential liabilities that are no longer due in the first nine months of the year following the handling of disputes by the Group totalled euro 0.9 million. This regards the cancellation of due disputes relating to the recovery of taxes for a higher IRAP rate applicable to the taxable income generated in the Veneto region, pending against Credito Bergamasco SpA for 2004 and 2005. The Regional Tax Commission of Milan issued favourable final judgements for said disputes. In addition, liabilities decreased relating to the fines applied to Aletti Gestielle SGR relating to the alleged failure to apply VAT to custodian bank commissions in 2007 (euro 0.4 million).
Details of disputes unresolved as at 30 September 2013
Due to the developments illustrated in the paragraph above, the main tax disputes unresolved as at 30 September 2013 (potential liability equal to or exceeding euro 1 million) are as follows:
Disputes relating to Banca Italease and its direct subsidiaries
Banca Italease Spa - Liquidation notices to recover the mortgage and cadastral taxes on a loan stipulated in 2006 - the amount claimed totals euro 3.2 million. The appeal submitted by Banca Italease was upheld in the first and second instance. The Attorney General submitted an appeal to the Supreme Court. The Bank has submitted the relative counter-appeal. Banca Italease Spa - Formal report on findings dated 30 November 2012 relating to tax years 2007, 2008 and 2009 mainly regarding costs relating to facts or actions that are considered offences - the failure to apply withholding tax to the interest paid on the deposit on lending opened with the Bank as part of the issue of preferred shares, the relevance for tax purposes of a fund taxed at the time of the share capital increase of Release, with transfer of the business division of other minor findings. The claims amount to euro 76.1 million. In January 2013, defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Banca Italease Spa - Notice of assessment and formal written notice of the sanctions, which contains findings relating to the failure to apply withholding taxes contained in the formal report on findings dated 30 November 2012 regarding tax year 2007. The claims amount to euro 3.2 million. In January 2013, appeals were submitted against the above documents, which are now pending before the competent Provincial Tax Commission. The Tax Authority appeared before the court to submit its counter arguments.
Disputes relating to Banco Popolare and to other subsidiaries
Banco Popolare (formerly Banca Popolare di Verona e Novara) - tax demands regarding IRAP tax paid to the Regional headquarters for Veneto and to that for Tuscany in tax years 2003, 2004, 2005 and 2006. The claims refer to the application of the ordinary rate of 4.25% to the net value of production resulting from business activities performed in Veneto, and for 2004 only in Tuscany, instead of the higher rate of 5.25% and amount to a total of euro 20.6 million. The tax demands have been contested. With regard to the various tax years, the dispute is at different stages of progress and different rulings have been made. As regards tax years 2003 and 2004, a ruling of the Provincial Tax Commission totally in favour of Banco Popolare was then followed by a ruling of the Regional Tax Commission, which partially admitted the claims of the Tax Authority, retaining a rate of 4.75% to be applicable. The outcome is still pending, awaiting the ruling of the Supreme Court. With regard to tax year 2005, the Provincial Tax Commission rejected Banco Popolare’s appeal, while in a ruling dated 10 March 2011, the Regional Tax Commission partially admitted the appeal and declared that the fines requested were not due. An appeal has been submitted to the Supreme Court. With regard to the tax demand for tax year 2006, in a ruling dated 17 May 2011, the Provincial Tax Commission partially admitted the appeal and declared that the fines requested were not due. The Regional Tax Commission confirmed the ruling of the court of first instance, therefore cancelling the tax claim relating higher IRAP regarding the Tuscany Regional Authority. An appeal has been submitted to the Supreme Court. Banco Popolare (formerly Banca Popolare Italiana) - notice of correction regarding the registration tax applicable to the disposal of a business segment in 2004 between Banca Eurosistemi S.p.A. (later incorporated into Banca Popolare Italiana) and Banca Popolare di Lodi Soc. Coop.. The claim resulting from the correction of the value of the business segment amounts to euro 7.4 million. The appeals submitted to the Provincial and Regional Commissions have been rejected. An appeal submitted to the Supreme Court is still pending. Banco Popolare (formerly Banca Popolare Italiana) - notice of settlement regarding registration tax relating to the reclassification of the disposal of a portfolio of securities made in 2002 between Cassa di Risparmio di Pisa and Banca Popolare Italiana as a business segment disposal. The claims amount to euro 14.5 million. In a ruling dated 18 October 2011, the Regional Tax Commission of Florence fully upheld the appeal submitted by Banco Popolare. An appeal submitted to the Supreme Court is still pending. Banco Popolare (formerly Banca Popolare Italiana) - notices of assessment relating to tax year 2005 regarding the
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claimed non-deductibility for IRES and IRAP purposes of costs and value adjustments to receivables relating to facts or actions classified as offences. The claims amount to euro 170.5 million. An appeal was presented to the Provincial Tax Commission. Banco Popolare (formerly Banca Popolare Italiana) - formal report on findings dated 30 June 2011, with relation to tax years 2006-2010 regarding the claimed non-deductibility for IRES and IRAP purposes of costs and value adjustments to receivables relating to facts or actions classified as offences. The claims amount to euro 7.0 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Banco Popolare (formerly Banca Popolare di Novara) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2005. The claim amounts to euro 3.8 million. The Provincial Tax Commission postponed the case to a date to be decided. Banco Popolare (formerly Banca Popolare di Novara) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2006. The claim amounts to euro 3.5 million. The Provincial Tax Commission postponed the case to a date to be decided. Banco Popolare (formerly Banca Popolare di Novara) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2007. The claim amounts to euro 1.9 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Banco Popolare (formerly Banca Popolare di Verona San Geminiano e San Prospero) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2007. The claim amounts to euro 3.2 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Banco Popolare (formerly Banco Popolare di Verona e Novara) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2006. The claim amounts to euro 6.3 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Banco Popolare (formerly Banco Popolare di Verona e Novara) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2007. The claim amounts to euro 6.5 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Banco Popolare (formerly Banca Popolare Italiana) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2006. The claim amounts to euro 5.4 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Banco Popolare (formerly Banca Popolare di Lodi S.p.A.) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2007. The claim amounts to euro 2.0 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Banco Popolare (formerly Banca Popolare di Verona San Geminiano e San Prospero) - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2008 and 2009. The claim amounts to euro 0.4 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Banco Popolare (formerly Banca Popolare di Novara) - formal report on findings regarding the failure to apply VAT to custodian bank fees invoiced in 2008 and the relevance of several losses on receivables deducted in the same administrative period. The claim amounts to euro 3.1 million. Banco Popolare (formerly Banca Popolare Italiana) - formal report on findings regarding the failure to apply VAT to custodian bank fees invoiced in 2007, 2008 and 2009. The claim amounts to euro 4.9 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Banco Popolare (formerly Banca Popolare di Lodi Spa) - formal report on findings - various findings - tax years 2008 and 2009. The claim amounts to euro 1.7 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Banco Popolare (Efibanca Spa) - formal report on findings for tax year 2008. The main finding regards the non- deductibility, for the purposes of IRES, of negative income components recorded against several financial liabilities measured at fair value. The claim amounts to euro 8.5 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Banco Popolare (formerly Banca Popolare di Novara, formerly Banca Popolare di Verona SGSP, formerly Efibanca) – various settlement notices regarding the alleged failure to pay substitute tax on loans pursuant to art. 15 of Italian Presidential Decree 601/1973 relating to certain agreements stipulated abroad. The claim amounts to euro 2.9 million. We are waiting for the case to be discussed by the relevant Provincial Tax Commissions. Banca Aletti Spa - formal report on findings dated 21 February 2013 regarding a specific inspection of dividends distributed under art. 89 ITCL in tax years 2005, 2006, 2007, 2008 and 2009. The claim amounts to euro 440.3 million. Discussions are underway with the Tax Authority with a view to reaching an out-of-court settlement for the dispute. Banca Aletti Spa - notice of assessment and formal written notice regarding the claimed failure to apply withholding tax to dividends as envisaged for securities lending transactions by Article 26, paragraph 3 bis, of Italian Presidential Decree no. 600 of 29 September 1973 relating to tax year 2007. The claim amounts to euro 44.0 million. An appeal has been submitted to the Provincial Tax Commission. Bipielle Real Estate Spa - settlement notices for registration tax regarding the reclassification of a series of property conferrals. The claim amounts to euro 21.4 million. The appeals submitted to the Provincial and Regional Commissions have been rejected. Whilst awaiting the Supreme Court appeal, the tax demands have been paid and the relative amount has been charged to the income statement of previous years. Bipielle Real Estate Spa - settlement notice for registration tax regarding the reclassification of a business segment conferral involving Reti Bancarie Holding (later incorporated into Banca Popolare Italiana Soc. Coop.). The claim
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amounts to euro 13.6 million. The Provincial and Regional Commissions ruled in favour of the subsidiary company Bipielle Real Estate. The Tax Authority has appealed to the Supreme Court. A counter-appeal has been submitted. Bipielle Real Estate Spa - notices of assessment regarding VAT and IRAP taxes for tax year 2005 served to Basileus S.r.l., (a subsidiary company sold in 2008, for which Bipielle Real Estate is fiscally liable for the years prior to the disposal). The claims amount to euro 11.3 million. In January 2012, the ruling of the Lodi Provincial Tax Commission was filed. The ruling annulled the notices of assessment issued against the Company, ordering the Office to pay legal expenses. In a ruling issued in May 2013, the Regional Tax Commission of Milan, changing the ruling in the first instance, upheld the appeal submitted by the Tax Authority, confirming all of the claims. Appeal will be made before the Supreme Court. Aletti Fiduciaria Spa - notice to recover taxes due by the fiduciary company pursuant to the personal liability of the shareholder under art. 36, paragraph 3, of Italian Presidential Decree no. 602/1973. The claim amounts to euro 7.9 million. The company’s appeal was fully upheld in the first and second instance. In January 2013, the Tax Authority appealed to the Supreme Court. Credito Bergamasco Spa - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2006. The claim amounts to euro 2.8 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Credito Bergamasco Spa - notice of assessment regarding the failure to apply VAT to custodian bank fees invoiced in 2007. The claim amounts to euro 4.2 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Credito Bergamasco Spa - formal report on findings regarding the failure to apply VAT to custodian bank fees invoiced in 2008 and 2009. The claim amounts to euro 1.3 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. In September, the tax demand for IRES relating to tax year 2008 was acknowledged in a specific notice of assessment. Credito Bergamasco Spa – various settlement notices regarding the alleged failure to pay substitute tax on loans pursuant to art. 15 of Italian Presidential Decree 601/1973 relating to certain agreements stipulated abroad. The claim amounts to euro 1.1 million. We are waiting for the case to be discussed by the relevant Provincial Tax Commissions. Credito Bergamasco/Banco Popolare: The Inland Revenue has served Credito Bergamasco and Banco Popolare (as the incorporating company of Banca Popolare di Lodi S.p.A. and of Banca Popolare di Cremona S.p.A.) two notices of adjustment and payment of registration tax regarding the deed for the intragroup transfer of business divisions finalised on 28 July 2011. The total amount claimed by the Office is euro 1.3 million. Discussions are underway to reach a settlement pursuant to art. 6, paragraph 2 of Italian legislative decree 218/1997. Aletti Gestielle SGR – notice of fines for the failure to pay VAT on taxable transactions pursuant to Italian Legislative Decree 471/1997 and more specifically on invoices issued for custodian bank services in 2006. The claim amounts to euro 3.4 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Aletti Gestielle SGR – notice of fines for the failure to pay VAT on taxable transactions pursuant to Italian Legislative Decree 471/1997 and more specifically on invoices issued for custodian bank services in 2007. The claim amounts to euro 2.8 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Aletti Gestielle SGR – formal report on findings almost entirely regarding the claimed failure to pay VAT on taxable transactions pursuant to Italian Legislative Decree 471/1997 and more specifically on invoices issued for custodian bank services in 2008 and 2009. The claim amounts to euro 4.7 million. Defensive briefs were submitted pursuant to article 12 of Italian Law no. 212 dated 27 July 2000. Aletti Gestielle SGR – as the incorporating company of Aletti Gestielle Alternative - final notice of fines for the failure to pay VAT on taxable transactions pursuant to Italian Legislative Decree 471/1997 and more specifically on invoices issued for custodian bank services in 2007, 2008 and 2009. The claim amounts to euro 0.7 million. We are waiting for the case to be discussed by the Provincial Tax Commission. Holding di Partecipazioni Finanziarie - as the incorporating company of Bipielle Finanziaria Spa - final notice of fines for the failure to pay VAT on taxable transactions pursuant to Italian Legislative Decree 471/1997 and more specifically on invoices issued for custodian bank services in 2006. The claim amounts to euro 0.9 million. We are waiting for the case to be discussed by the Provincial Tax Commission.
With regard to disputes regarding the alleged failure to apply VAT to custodian bank fees, an issue that regards the entire Italian banking system, last year the trade associations ABI and Assogestioni started talks with the Tax Authority’s Head Office for Assessments with a view to advocating the correctness of the standard interpretation adopted by banks and SGR and, secondarily to facilitate the establishment of terms for an out-of-court settlement of these disputes. Banco Popolare has been informed that, based on these discussions and on inspections conducted on the operating models of the custodian banks that have fully collaborated in this matter, the General Directorate of the Tax Authority has established that 28.3% is the percentage of fees invoiced for custodian bank services that is to be retained as taxable for the purposes of VAT and has envisaged the full cancellation of the fines applied to both the banks and the SGR, given that there are objective uncertainties in the interpretation and scope of application of the law. These recommendations were communicated in an internal directive of the Tax Authority, addressed to and already circulated to local offices, but not yet public. As confirmation of the above, in October, the Tax Authority - Regional Directorate for Lombardy, upheld the arguments contained in the defensive briefs submitted pursuant to art. 16, fourth paragraph, Italian legislative decree no. 472 by Aletti
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Gestielle SGR against the notice of fines for the failure to pay VAT on taxable transactions relating to tax year 2007, cancelling said notice. The relative potential tax liability of euro 2.8 million is therefore retained to be cancelled. In the light of this radical change in opinion of the Tax Authority, the Group has decided to seek, on these bases, a possible settlement of all disputes of this kind. Given the right of banks to recover the VAT that would be paid as regards the out-of- court settlement of the disputes in question, at present, we believe that the settlement of the above-mentioned disputes will not result in any significant liabilities for the Group.
Classification and valuation of potential liabilities in accordance with the provisions of accounting standard IAS 37
In the light of the successful outcomes in the courts of first instance and/or the existence of valid grounds on which to challenge the claims made by the Tax Authority with regard to proceedings underway and also considering the specific opinions issued by authoritative external parties, the potential liabilities classified as possible but unlikely amount to a total of euro 896.3 million. The potential liabilities classified as probable amount in total to euro 30.6 million and have already been fully debited from the income statement when the tax demands received were paid or are entirely covered by provisions allocated under tax liabilities.
Inspections underway as at 30 September 2013
As at 30 September 2013, the following inspections were in progress: regarding Banco Popolare s.c. relating to tax year 2010, conducted by the Tax Authority - Veneto Regional Headquarters - Large Taxpayers Office for IRES, IRAP and VAT purposes. regarding the subsidiary company BP Property Management SCRL, an inspection by the Inspections and Collection Department of the Tax Authority - Regional Headquarters of Veneto. The inspection is general and regards IRES, IRAP AND VAT for tax years 2008 to 2011.
OTHER INFORMATION
Disclosure on earnings per share
30 September 2013 30 September 2012 Annualised Annualised Weighted average of EPS Weighted average EPS attributable result attributable result ordinary shares (euro) of ordinary shares (euro) (euro) (euro) Basic EPS 220,537,463 1,763,730,801 0.125 (71,763,662) 1,763,730,525 (0.041) Diluted EPS 220,537,463 1,763,730,801 0.125 (71,763,662) 1,763,730,525 (0.041)
Note that as at 30 September 2013, as in the previous comparative period, basic EPS coincides with the diluted EPS: an “anti-dilutive” effect was recorded for the only active instrument with potential diluting effects, represented by the “Banco Popolare 2010/2014 4.75%” bond issue convertible into 161,942,556 ordinary shares.
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KEY FINANCIAL HIGHLIGHTS OF THE MAIN GROUP COMPANIES
A summary of the main investments in Group companies is presented below, with an indication of the most significant balance sheet, income statement and operating balances as at 30 September 2013.
Total Shareholders' Direct Indirect Net Income (in millions of euro) assets equity (*) Funding Funding loans (Loss) Banks Credito Bergamasco 13,185.2 1,495.1 8,594.7 9,307.8 12,017.8 59.5 Banca Aletti & C. (Suisse) 110.0 14.2 93.0 363.0 11.9 0.4 Bipielle Bank (Suisse) 94.0 46.5 8.7 - 10.8 0.4 Banco Popolare Luxembourg 2,350.1 72.5 2,149.4 3,903.0 221.2 2.7 Banco Popolare Croatia 290.8 35.0 220.9 - 192.9 (2.7) Banca Aletti & C. 14,718.4 823.6 2,901.5 15,000.3 1,785.7 115.6 Banca Italease 5,830.2 1,203.2 1,137.3 - 4,498.3 (42.6) Financial companies Aletti Gestielle SGR 152.5 112.3 0.4 8,978.3 6.7 14.9 Aletti Fiduciaria 8.9 6.5 - 1,378.1 1.9 0.2 Release 3,421.8 305.1 30.7 - 2,602.9 (15.0) Italease Finance 0.2 0.1 - - - - Other companies Società Gestione Servizi - BP 479.5 105.9 - - 1.0 (2.1) Holding di Partecipazioni Finanziarie Banco Popolare 533.3 529.1 - - - 24.7 Bipielle Real Estate 1,151.9 1,101.6 - - - (0.5) Tecmarket Servizi 19.7 8.2 - - - 3.0 Italease Gestione Beni 120.7 53.9 - - 8.4 4.8 (*) amount inclusive of the income (loss) for the period.
SIGNIFICANT EVENTS AFTER THE END OF THE PERIOD
Disposal of Società Immobiliare Agricola Lodigiana S.r.l.
On 14 October 2013, Banco Popolare finalised the sale of the equity investment in Società Immobiliare Agricola Lodigiana (SIAL) S.r.l. to Società Immobiliare Valvassori S.r.l.. At the same time, the assignment without recourse of the Banco Popolare shareholders’ loan was made to the purchaser, at nominal value. Following the failure of the minority shareholder to exercise its option right on the share capital increase approved by the Shareholders’ Meeting of SIAL on 9 July 2013, at the time of the sale, Banco Popolare held 100% of SIAL’s share capital. The sale, made at the price of euro 0.6 million, will not have a significant impact on the consolidated income statement of the Banco Popolare Group insofar as the recognition value in the consolidated financial statements is already substantially aligned to the sale price.
Winding-up of Group companies
In October, the winding-up of the Irish company Royle West Ltd was finalised. Banco Popolare collected distributable liquid assets corresponding to around euro 60 thousand for the same. The book value in the consolidated financial statements is in line with the outcome of the winding-up operations, therefore there will be no significant impact on the balance sheet or income statement of the Banco Popolare Group.
Agreement for the disposal of Banco Popolare Croatia d.d.
Banco Popolare has recently started negotiations for the disposal of the equity investment held in the subsidiary company Banco Popolare Croatia, launching a specific initiative to find a potential buyer. As at the date of preparation of this interim report on operations, all of the requirements of accounting standard IFRS 5 for the classification of the subsidiary as “held for sale” had not been fulfilled, insofar as, although the equity investment is available for immediate sale in current conditions, the sale cannot be retained as “highly probable”, as not an asset that is actively traded on the market.
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Note that, given the uncertainty as to the value that potential buyers may attribute to the subsidiary, it is possible that the future sale may result in the recognition of a loss, which cannot be established at the current time with respect to value at which the balance sheet assets and liabilities of the subsidiary are recognised in the consolidated financial statements.
Agreements relating to employees
As already mentioned in the section illustrating significant events after the end of the period, on 3 October, an agreement was signed with the Trade Unions, which led to the establishment of the following:
Access to the extraordinary provisions of the Solidarity Fund for the industry Access to the Solidarity Fund was agreed for all resources which meet the requirements envisaged by previously-signed trade union agreements, for a total of 358 resources at Group level. In this regard, note that the agreement signed on 3 October 2013 approved the acceptance of all applications for access to the Solidarity Fund, which significantly surpassed the minimum objective of 250 resources established in the previous agreement of June 2013. As the commitments resulting from the cited agreement, in terms of the acceptance of a higher number of applications, regard decisions taken in October 2013, they will be recorded in the balance sheet and income statement pertaining to the fourth quarter of 2013, as established by the reference accounting standard IAS 10.
Permanent contracts/New employees Following the termination of the employment contracts of part of the workforce that met pension requirements and qualified for access to the Solidarity Fund, with a view to generational change and stable jobs, the Group has agreed, in line with business practices and technical and organisational needs, to arrange for permanent contracts/to hire 133 resources by 31 December 2013.
Part-time contracts Offering part-time contracts is seen as a way for male and female workers to reconcile professional commitments with family ones, as well as a way to maintain levels of employment, job flexibility and to curb labour costs. The current agreement on part-time employees has been extended to 30 June 2014.
Welfare The solution to better manage personnel costs with a view to social sustainability, has been better defined, by addressing a part of the economic resources to forms of company welfare. In reality, this is a first step towards Integrated Welfare, which the Group, together with the Trade Unions are seeking to achieve, with a view to increasingly meeting the needs of colleagues and their families, while containing personnel costs at the same time.
Intervention of the Interbank Deposit Guarantee Fund
On 29 October, the Interbank Deposit Guarantee Fund resolved on a supportive measure pursuant to art. 29 of its Articles of Association in favour of a consortium member in Extraordinary Administration. The intervention of the Fund, which was authorised by the Supervisory Authority, will cover the capital deficit of the above consortium member. The exact amount of said deficit is currently being established. The commitment made by the Fund envisages the disbursement of a maximum contribution of euro 280 million, which will be covered by the consortium banks. On the basis of the current shares of member banks, the potential maximum liability for the Banco Popolare Group is euro 13.5 million.
Disclosure regarding Generali Immobiliare Italia SGR
On 5 November, Banco Popolare received a letter from Generali Immobiliare Italia SGR regarding the conclusion of a tax inspection on the latter. The management company stated that the inspectors had disputed the alleged failure to apply VAT to rental agreements in place between the Mutual Investment Fund “Eracle” and BP Property Management for tax years 2009 to 25 June 2012. The amount of VAT claimed totals euro 35.1 million. In the letter, the management company advised that the Fund and the company in question would seek indemnity from the Banco Popolare Group for any resulting liability. Following this letter, all appropriate measures were immediately taken in order to protect the interests of Banco Popolare and its subsidiaries.
Issue of Lower Tier II Subordinated Loan by Banco Popolare
In a meeting held on 27 August, the Board of Directors of Banco Popolare had authorised the establishment of a maximum amount of euro 600 million to be used by the Parent Company for the issue of Lower Tier II domestic subordinated loans, with a minimum maturity of 7 years and a maximum of 10 years, to be offered for subscription to an non-specific public and/or institutional investors, if necessary in more than one tranche, by 30 June 2014, with the intention in any event of placing at least euro 400 million by 31 December 2013, preferably through the Group’s distribution network. In subsequent months, after close assessment of the Group network’s placement capacity and on customer appreciation, the initial upper limit of euro 600 million was increased to euro 800 million and, as of 17 October, the issue of a new Lower Tier II Fixed Rate Subordinated Loan (ISIN IT0004966823) was approved, with a duration of 7 years (from 18 November
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2013 to 18 November 2020), at a fixed rate of 5.5%, with an annual coupon, to be redeemed with straight-line amortisation from the end of the third year. The placement started on 17 October and will end on 15 November 2013, unless closed earlier; as at the date of this Report, the majority of the security had already been placed. The aim of this operation is to increase direct funding and to strengthen Banco Popolare’s Total Capital Ratio by the end of this year, in view of the entry into force of Basel 3 provisions.
OUTLOOK FOR BUSINESS OPERATIONS
As mentioned in the section that commented on the economy, in the international scenario, we are witnessing the continuation of a moderate uptrend in global economic growth. The global economy appears to have overcome its low point, even though positive prospects are still hampered by a number of factors that could compromise the recovery. In the USA, the compromise reached on the threshold of public debt simply postponed the issue to the end of the year. If agreement is not reached, pressure pushing up interest rates on US state securities, resulting from a lack of market confidence, would have a significant impact on economic growth. Furthermore, while emerging economies continue to grow, albeit at a slower rate, in China, the incentive measures adopted have neither resolved the problem of the current real estate bubble, nor eliminated the risks to which the credit system is exposed. The weakness of the dollar led to difficulties for its Eurozone partners. Lastly, the FED’s intention to reduce monetary incentives (QE3) in the future risks increasing the cost of credit at global level. In this context, recovery in the Eurozone is expected to be weak and fragile, conditioned by the process of fiscal consolidation and structural reforms, which will slow down domestic demand. If there are no more political or financial episodes, Italy could come out of the recession between the end of 2013 and the beginning of 2014, even though domestic demand, and consumption in particular, are being crushed by the dramatic employment situation. The economic recovery should boost the demand for loans by enterprise and, to a lesser extent, retail customers. Nevertheless, given the current weak economic scenario, the default rate for loans, in particular corporate loans, is expected to remain at its current high levels, at least in the short term, and therefore, unless any extraordinary measures are taken, the doubtful to total loans ratio will increase even further. The reduction of the funding gap, even in the light of new liquidity requirements, and the need to continue to strengthen capital, will continue to hinder the expansion of bank loans, while only a return to full access to the wholesale and foreign markets will reduce dependency on the ECB for funding. Although monetary policy is expected to remain accommodative in the USA and Europe, in Italy, political tension could slow down the reduction in the ten-year Btp/Bund spread, with negative effects on the cost of funding for the bank industry. Interest expense rates will therefore continue to be under pressure, following the need to offer an attractive return to customers to stabilise funding, given the forthcoming maturity of the loans received from the ECB, and to cover the high risk premium required for placements, given the increasing weight of impaired loans in bank assets. On the other hand, the high level of credit risk will demand constant and considerable attention on the pricing strategies adopted by banks, also maintaining interest income rates at high levels. The contribution of brokerage volumes will therefore continue to be modest, restricting the increase of margins for commercial banking activities. With money market interest rates at an all time low, Italian banks will still not be able to benefit, as they did in the past, from profits on funding from retail customers. The mark-down will continue to be very negative, due to the funding issues mentioned above, while the average mark-up on loans will continue to be high, due to the risk levels of customers. The persistent increase in impaired loans will also be reflected by the continuing consistent flow of adjustments, which will penalise the profits of the national bank industry. Group profitability, in line with the market situation, will therefore depend on strict risk management, above all of credit risk and on improving operational efficiency by reorganising the distribution model of the commercial network. The commercial network structure will be reorganised according to a model which will maintain the same levels of service to customers, but at the same time will lead to significant savings. The majority of the branches will be part of an organisational model called “Hub & Spoke”, based on higher operational and commercial flexibility, in which, amongst other things, several branches will specialise in serving corporate customers and the chain of responsibility will be simplified. Lastly, several non-profitable branches will be closed. The Group will continue to leverage the strength of its commercial network and on its solid liquidity position (strengthened through the issue of a subordinated loan on the market), to tackle a market that continues to be characterised by pressure on income from ordinary operations and on the cost of credit.
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DECLARATION OF THE MANAGER RESPONSIBLE FOR PREPARING THE COMPANY’S FINANCIAL REPORTS
The Manager responsible for preparing the Company’s financial reports, Gianpietro Val, hereby states, pursuant to the provisions of the second paragraph of art. 154 bis of the “Consolidated Law on Finance”, that the accounting disclosures contained in this Interim Report on operations as at 30 September 2013 of the Banco Popolare Group match the information reported on the company’s documents, books and accounting records.
Verona, 12 November 2013
Manager responsible for preparing the Company’s financial reports
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ATTACHMENTS
Reconciliation between the reclassified income statement as at 30 September 2012 and the same restated for comparative purposes
Reclassified income statement items IFRS 5 30/09/2012 30/09/2012 (in thousands of euro) reclassifications (*) restated Interest margin 1,359,021 (2,331) 1,356,690 Income (loss) from investments in associates carried at equity (92,099) (92,099) Financial margin 1,266,922 (2,331) 1,264,591 Net fee and commission income 1,013,155 (1,005) 1,012,150 Other net operating income 41,299 (77) 41,222 Net financial result 97,041 328,282 425,323 Other operating income 1,151,495 327,200 1,478,695 Operating income 2,418,417 324,869 2,743,286 Personnel expenses (1,087,693) 3,540 (1,084,153) Other administrative expenses (559,375) 2,512 (556,863) Net value adjustments on property and equipment and intangible assets (98,931) 555 (98,376) Operating expenses (1,745,999) 6,607 (1,739,392) Income (loss) from operations 672,418 331,476 1,003,894 Net adjustments on loans to customers (602,001) 1,134 (600,867) Net adjustments on receivables due from banks and other assets (21,265) (21,265) Net provisions for risks and charges (21,366) (21,366) Recoveries (Losses) on investments in associates and companies subject to (10,000) (10,000) joint control and goodwill Profits (Losses) on disposal of investments in associates and companies 4,543 4,543 subject to joint control and other investments Income (loss) before tax from continuing operations 22,329 332,610 354,939 Taxes on income from continuing operations (65,290) (108,578) (173,868) Income (loss) after tax from discontinued operations 414 (4,282) (3,868) Minority interests (11,276) (11,276) Income (loss) for the period without FVO (53,823) 219,750 165,927 FVO Impact (219,750) (219,750) Parent Company’s net income (loss) (53,823) - (53,823) (*) = the column entitled “IFRS 5 reclassifications” also includes, for items “Net financial result” and “Taxes on income for the period from continuing operations”, the impact of the change in creditworthiness on financial liabilities issued by the Bank, designated at fair value (FVO), shown as a separate item.
71 WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa WorldReginfo - 26d367cc-820c-4fad-ab5d-547d458e13aa