Annual Report 1997
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Annual Report 1997 Istituto Bancario San Paolo di Torino Annual Report 1997 Incorporated as a Società per Azioni Registered Office: Piazza San Carlo 156, Turin, Italy Turin Company Register No. 4382/91 Parent Bank of the San Paolo Banking Group Member of the Interbank Deposit Guarantee Fund Board of Directors Gianni Zandano (*) Chairman Emilio Ottolenghi (*) Deputy Chairman Luigi Maranzana (*) Managing Director (CEO) Emilio Botin Director Tommaso Capitanio Director Marco Desiderato Director Mario Ercolani Director Renato Tullio Ferrarí (*) Director Cesare Ferrero Director Gabriele Galateri di Genola e Suniglia (*) Director Gian Franco Gambigliani Zoccoli Director Divo Gronchi (*) Director Juan Rodriguez Inciarte (*) Director Rainer Masera (*) Director Iti Mihalich (*) Director Michele Moretti Director Enrico Scerni Director Sergio Siglienti Director Francesco Vasino Director (*) Members of the Executive Committee Board of Statutory Auditors Lamberto Jona Celesia Chairman Alessandro Rayneri Auditor Pier Giorgio Scotta Auditor Giacomo Verme Auditor Francesco Vesce Auditor General Management Luigi Maranzana General Manager and Chief Executive Piero Gavazzi Deputy General Manager and Chief Business Officer Amadio Lazzarini Deputy General Manager and Chief Operations Officer Bruno Picca Deputy General Manager and Chief Financial Officer Independent Auditors Arthur Andersen SpA Contents AGENDA OF SHAREHOLDERS’ MEETING 7 LETTER FROM THE CHAIRMAN 9 Group results 12 Progress on three-year business plan 15 Alternative strategies for growth 18 Group structure 21 Principal financial and operating information 22 Analysis of the 1997 results 24 Group operating network 26 THE BANK’S FINANCIAL STATEMENTS AND REPORTS 29 Reclassified statement of income 31 Reclassified balance sheet 33 Report on operations 35 Economic background 37 The international economy 37 The Italian economy 39 The Bank's results 42 Overview of performance 42 Net interest income 44 Net interest and other banking income 48 Operating income 50 Income before taxes 51 Net income 53 Deposits 56 Deposit business 56 Direct deposits 57 Managed and administered savings 59 Lending 63 Lending business 63 Analysis of the loan portfolio 68 Financial market activity 73 Securities, derivatives and treasury management 73 Placement business and dealing for customers 77 Integrated financial risk management 81 Risk management 81 Market risk 82 Liquidity risk 83 Lending risk 83 Asset & Liability Management 84 Non-business risks 86 Legal risk 87 Capital adequacy 89 Shareholders’ equity 89 Adjusted equity and capital adequacy ratio 89 Adjusted equity and capital adequacy ratio at Group levels 90 Officers and management committees 92 Organization of operations 93 The branch network 93 Automation and electronic banking 94 Organizational structure 95 Human resources 97 The Business Units 99 Equity investments 102 Changes during the year 102 Performance of companies representing equity investments 105 Intercompany transactions 106 Ratings 109 Share price performance 111 Share ownership 112 Significant events after the year-end 114 General background 114 The Bank: key events, performance to date and outlook 115 Amendment of art. 22 of the Articles of Association; transfer of the statutory reserve to the extraordinary reserve 121 Charging of substitute tax on reserves under decree 467/97 to the reserve created under art.7.3 of law 218/90 123 Proposal to approve the financial statements and allocate distributable the extraordinary reserve 124 Independent auditing of the annual financial statements and review of the interim financial statements for the three years 1998-2000 125 Appointment of directors and statutory auditors 128 Report of the Board of Statutory Auditors 129 Report of the Independent Auditors 137 Financial Statements 139 Balance sheet 140 Statement of income 142 Explanatory notes 143 Introduction - Background information 144 Part A - Accounting policies 150 Part B - Balance sheet 159 Part C - Statement of income 208 Part D - Other information 224 Attachments 227 Statement of changes in shareholders’ equity 229 Statement of cash flows 230 Key financial data of subsidiary companies and of companies subject to significant influence 232 Analysis of assets restated under revaluation laws 236 List of bonds convertible into shares 238 List of properties owned by the bank 239 CONSOLIDATED FINANCIAL STATEMENTS AND REPORTS 253 Reclassified consolidated statement of income 255 Reclassified consolidated balance sheet 257 Report on operations 259 Results for 1997 261 Overview of Group’s results 261 Net interest income 262 Net interest and other banking income 263 Operating income 265 Income before taxes 267 Net income 269 Operating performance 271 Deposit business 271 Direct deposits 271 Managed and administered savings 273 Lending 274 Lending risk profile 276 Securities held 278 Operations in derivatives 279 Structure of operations 280 Performance by sector 281 Banking and finance 281 Managed savings, stockbroking and the sales network 286 Leasing 289 Insurance 289 Tax collection 290 Consumer credit 291 Other companies 291 Significant events after the year-end 293 Report of the Board of Statutory Auditors 295 Report of the Indipendent Auditors on the consolidated financial statements 297 Consolidated financial statements 299 Consolidated balance sheet 300 Consolidated statement of income 302 Explanatory notes to the consolidated financial statements 303 Introduction - Background information on the consolidated financial statements 304 Part A - Accounting policies 313 Part B - Consolidated balance sheet 322 Part C - Consolidated statement of income 363 Part D - Other information 377 Attachments 379 Statement of changes in Group share of consolidated shareholders' equity 381 Statement of consolidated cash flows 382 Reconciliation of the bank’s financial statements and the consolidated financial statements 384 BRANCH NETWORK 385 INVESTOR INFORMATION 391 AGENDA OF SHAREHOLDERS’ MEETING TURIN Extraordinary meeting: 1st calling - April 28, 1998; 2nd calling - April 29,1998; - 3rd calling - April 30, 1998 Ordinary meeting: 1st calling - April 28, 1998; 2nd calling - April 30, 1998 1. Amendments to Art. 22.2 of the Articles of Association; transfer of the Statutory Reserve to the Extraordinary Reserve. 2. Charging of substitute tax under Decree 467/97 to the reserve created pursuant to Art. 7.3 of Law 218/90. 3. Financial statements as of 31 December 1997;related reports of the Board of Directors and Board of Statutory Auditors; associated resolutions on matters including distribution of reserves. 4. Appointment of Independent Auditors pursuant to Art. 2 of Presidential Decree 136/75 and in connection with interim financial statements,for the three years 1998-2000. 5. Fixing of the number of directors, appointment of the Board of Directors, appointment of the Chairman of the Board, fixing of the related remuneration. 6. Appointment of the Board of Statutory Auditors and its Chairman; fixing of the related remuneration. LETTER FROM THE CHAIRMAN hareholders, 1997 was a year of radical change for the Italian banks.The “petri- Sfied forest” (a metaphorical epithet applied in the past to the Italian banking system) has finally come to life, and indeed has been in a state of constant, radical change for some time. The speed and scope of this process may be surprising at first sight. But it is clearer when you consider the urgent need to prepare for the imminent realization of European economic and monetary union on the part of a system emerging from decades of underdevelopment. GIANNI ZANDANO At system level, the priorities are obvious: privatization and concentration are the key mechanisms, whose conjunction implies requirements beyond the quest for mere economies of scale: business rationalization, and reposi- tioning to focus on strategic activities, where it is also vital that we achieve sig- nificant savings based on higher revenues. In micro-economic terms, during 1997 the process of aligning Italy’s in- terest rates with those elsewhere in Europe resulted in major shifts in the LUIGI MARANZANA composition of banking revenues. Pressure on interest margins has grown and the contribution from financial transactions has declined, while com- mission revenues on services have expanded. Against this background of structural change, San Paolo has set the pace, developing bold strategies to meet the novel challenges posed by this evolving scene. The year’s major developments included successful completion of the Bank’s privatization. A fundamentally changed shareholder base is characterized by a core group of substantial, long-term investors, together with a clear market orientation in the form of Italian and non-Italian private and institutional investors who together account for over 52% of the share capital. Ongoing implementation of the 1996-98 three-year plan has brought further progress in enhancing the Bank’s various business streams and in rationalizing its asset base. The former process has led to adoption of the highest standards in savings management and other services, considerably boosting the contribution of commissions to total revenues. Asset-base rationalization has involved incurring exceptional costs associated with the divestment of equity interests and other assets; this year’s results have consequently suffered, while we can confidently say that those of later years will benefit. In the wake of privatization, the bank has reorganized its operating and management structures, breaking