BANCA MONTE DEI PASCHI DI SIENA SpA 2002 CONSOLIDATED FINANCIAL STATEMENTS MONTE DEI PASCHI DI SIENA BANKING GROUP MPS 2002 FINANCIAL STATEMENTS BANCA MONTE DEI PASCHI DI SIENA S.p.A. BANKING GROUP TABLE OF CONTENTS 10 MPS GROUP: SUMMARY FINANCIAL DATA 11 CORPORATE OFFICERS, SENIOR MANAGEMENT AND AUDITORS 12 TREND OF BMPS SHARES AND REVIEW OF SHAREHOLDER BASE 15 DEBT RATINGS 16 CORPORATE GOVERNANCE 29 LETTER TO THE SHAREHOLDERS 2002 CONSOLIDATED FINANCIAL STATEMENTS MPS BANKING GROUP REPORT ON CONSOLIDATED OPERATIONS 52 THE IMPLEMENTATION OF THE MPS GROUP BUSINESS PLAN 56 OVERVIEW OF ECONOMY AND INDUSTRY TRENDS 63 CONSOLIDATED FINANCIAL STATEMENTS AS OF 31 DECEMBER 2002 63 Reclassified Balance Sheet and Reclassified Profit and Loss Statement 67 MPS Group Key Data and Ratio Analysis 68 OVERVIEW OF OPERATIONS 68 Capital Aggregates 69 Funds Management 75 Lending 79 Structured Finance And Merchant Banking 80 International Banking Activity 82 Customer Portfolio 84 DOUBTFUL LOANS 86 SECURITIES PORTFOLIO AND TREASURY ACTIVITY 86 Securities Portfolio 87 Treasury Activity 88 INTEGRATED RISK MANAGEMENT 88 Risk Management Process At The Mps Group 89 Credit Risks 94 Interest-Rate And Liquidity Risks On The Consolidated Banking Book 97 Market Risks On Mps Group Trading Portfolio 100 Operating Risks 101 CAPITAL AND CAPITAL REQUIRED FOR REGULATORY PURPOSES 104 PROFITABILITY 105 Interest Margin 105 Service Margin 106 Total Banking Income 107 Administrative Expenses 107 Gross Operating Profit 108 Adjustments and Provisions 109 Extraordinary Items and Taxes 111 PROFITABILITY BY BUSINESS AREA 111 Retail 114 Corporate 116 International Affairs 116 Tax Collection 117 Finance & Investment Banking 118 ORGANIZATIONAL STRUCTURE 118 Main Initiatives in Organizational Development 119 MPS Group Organizational Model 122 Distribution Channels 124 MPS Group Branches in Italy 127 Human Resources 130 INNOVATION, RESEARCH AND DEVELOPMENT 130 Commercial Programs 135 Product Innovation 141 Communications and Public Relations 141 MPS Group's Commitment to Environmental Protection and Social Responsibility 144 Banking Transparency, Management of Claims, Prevention and Safety, Safeguarding of Privacy 145 Cultural Activity and Trade Events 147 Relationships aith Universities and Research Centers 148 MATERIAL EVENTS SUBSEQUENT TO YEAR END 150 OUTLOOK FOR 2003 CONSOLIDATED FINANCIAL STATEMENTS - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS 154 FORM AND CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS 156 Consolidated Balance Sheet 157 Liabilities and Shareholders' Equity 158 Guarantees and Commitments 159 Consolidated Profit and Loss Statement COMPARATIVE FINANCIAL STATEMENTS 162 Consolidated Balance Sheet 163 Consolidated Balance Sheet 164 Guarantees and Commitments 165 Consolidated Profit and Loss Statement NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 169 Part A - Valuation Criteria 181 Part B - Information on the Consolidated Balance Sheet 239 Part C - Information on the Consolidated Profit and Loss Statement 249 Part D - Other Information ATTACHMENTS TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 254 Statement of Changes in Consolidated Shareholders' Equity COMPARATIVE SCHEDULES 260 Balance Sheet (in EUR’000s) 261 Balance Sheet (in EUR’000s) 262 Guarantees and Commitments (in EUR’000s) 263 Profit and Loss Statement (in EUR’000s) 265 REPORT OF INDEPENDENT AUDITORS 2002 FINANCIAL STATEMENTS REPORT OF THE BOARD OF DIRECTORS 274 BANCA MPS: KEY FINANCIAL DATA 275 REPORT ON OPERATIONS AS OF 31 DECEMBER 2002 275 Reclassified Balance Sheet and Reclassified Profit and Loss Statement 277 BANCA MONTE DEI PASCHI DI SIENA 277 Reclassified Balance Sheet (in EUR mn) 278 Reclassified Profit And Loss Statement (in EUR mn) 279 Key Data and Ratio Analysis 280 OVERVIEW OF OPERATIONS 281 Funding 285 Lending 289 CUSTOMER PORTFOLIO 290 DOUBTFUL LOANS 292 SECURITIES PORTFOLIO AND TREASURY 292 Proprietary Finance Activity 292 Securities Portfolio 293 Treasury Activity 294 Asset-Liability Management 295 CAPITAL AND CAPITAL REQUIRED FOR REGULATORY PURPOSES 298 PROFITABILITY 299 Interest Margin 299 Service Margin 301 Administrative Expenses 301 Gross Operating Profit 302 Tax Collection Activity (Direct Management) 303 Adjustments and Provisions 304 Extraordinary Items and Taxes 306 EQUITY INVESTMENTS 306 Investments in MPS Group Companies 310 Other Equity Investments 312 OTHER INFORMATION 312 Transactions with Related Parties 314 BANK ORGANIZATION STRUCTURE 314 Distribution Channels 317 Human Resources 320 MATERIAL EVENTS SUBSEQUENT TO YEAR END 321 OUTLOOK FOR 2003 FINANCIAL STATEMENTS AS OF 31 DECEMBER 2002 NOTES TO THE FINANCIAL STATEMENTS 324 Form and Content of the Financial Statements as of 31 December 2002 FINANCIAL STATEMENTS AS OF 31 DECEMBER 2002 326 Balance Sheet 327 Balance Sheet 328 Guarantees and Commitments 329 Profit and Loss Statement FINANCIAL STATEMENTS WITH COMPARATIVE DATA FROM PRIOR YEAR 332 Balance Sheet 333 Balance Sheet 334 Guarantees and Commitments 335 Profit and Loss Statement NOTES TO THE FINANCIAL STATEMENTS 339 Part A - Valuation Criteria 349 Part B - Information on the Balance Sheet 402 Part C - Information on the Profit and Loss Statement 249 Part D - Other Information SUPPLEMENTAL INFORMATION 419 Statement of Changes in Financial Position 420 Statement of Changes in Shareholders' Equity FINANCIAL STATEMENTS WITH COMPARATIVE DATA FROM PRIOR YEAR 424 Balance Sheet 425 Balance Sheet 426 Guarantees and Commitments 427 Profit and Loss Statement 429 REPORT OF INDEPENDENT AUDITORS MPS GROUP: SUMMARY FINANCIAL DATA (in EUR mn) 31.12.02 31.12.01 Change restated Total banking income 4,751 5,004 -5.1% Total banking income excluding profits (losses) from financial transactions 4,611 4,625 -0.3% Gross operating profit 1,843 2,177 -15.3% Gross operating profit excluding profits (losses) from financial transactions 1,703 1,798 -5.3% Net profit 582 619 -6.0% 31.12.02 31.12.01 restated R.O.E. 12.1% 13.4% R.O.E. adjusted 14.3% 15.8% (in EUR mn) 31.12.02 31.12.01 Change restated Aggregate customer funding 172,505 168,498 2.4% Customer loans 68,472 63,038 8.6% (number at end of period) 31.12.02 31.12.01 Absolute change restated Total number of customers (number at end of period) 4,450,400 4.340,750 109,650 Number of online customers (number of connections) 1,203,083 964,952 238,131 Total branches in Italy (number at end of period) 1,827 1,787 40 10 CORPORATE OFFICERS, SENIOR MANAGEMENT AND AUDITORS BOARD OF DIRECTORS Pier Luigi Fabrizi, Chairman Mauro Faneschi, Deputy Chairman Antonio Silvano Andriani, Director Stefano Bellaveglia, Director Francesco Saverio Carpinelli, Director Giuseppe Catturi, Director Carlo Querci, Director Ivano Sacchetti, Director Antonio Sclavi, Director Giovanni Semeraro, Director Alessandro Vercelli, Director BOARD OF STATUTORY AUDITORS Giuseppe Vittimberga, Chairman Pietro Fabretti, Acting Auditor Luciana Granai De Robertis, Acting Auditor Angiola Lippi, Alternate Auditor Duccio Neri, Alternate Auditor SENIOR MANAGEMENT Vincenzo De Bustis, Chief Executive Officer Pier Giorgio Primavera, Deputy Chief Executive Officer Antonio Vigni, Assistant Chief Executive Officer Pier Luigi Corsi, Assistant Chief Executive Officer INDEPENDENT AUDITORS, KPMG S.p.A. 11 TREND OF BMPS SHARES AND REVIEW OF SHAREHOLDER BASE ■ PRICES, CAPITALIZATION AND SHAREHOLDERS ith the persistent weakness of the economic cycle and growing political tensions on the international front, the financial markets turned in a poor W performance in 2002. With stock prices starting to decline near the end of April and continuing their descent through October, major market indices closed the year with losses of as much as 35 percent in comparison with their values as of the end of 2001. Against this backdrop, the Banca Monte dei Paschi di Siena S.p.A. (BMPS) shares reached an annual high of EUR 3.88 on 26 April, and closed the year at EUR 2.25, having recovered some 30 percent from their annual low at the outset of October. ■ TREND OF SHARE PRICE (from 31/12/01 to 31/12/02) S: Reuters 50 Price Volumes in mn 3.5 40 3 30 2.5 20 2 10 1.5 0 31 Dec- 01 31 Mar-02 30 Jun-02 30 Sep-02 31 Dec-02 The performance of the BMPS shares on an annual basis (-20.3 percent) was better than the average for leading Italian banks, the market indices (MIB 30: -26 percent; DJ Euro Stoxx: -34.5 percent) and the sector indices (MIB Banks: -27.2 percent; DJ Eurostoxx Banks: -26.8 percent; and MSCI Euro Financial -33.9 percent). Annual Change (Jan-Dec 02) DJ Euro STOXX MSCI EURO Financial Mib Banks DJ Euro STOXX Bnk Mib30 Mibtel S&P 500 BMPS -40% -35% -30% -25% -20% -15% -10% -5% 0% Source: Reuters 12 ■ BMPS SHARE PRICE: STATISTICAL SUMMARY 31.12.02 31.12.01 31.12.00 Average price 2.87 3.52 3.75 Low 1.73 2.41 2.91 High 3.88 4.72 4.87 In terms of capitalization, the market value of BMPS was close to EUR 5.9 billion at year end, accounting for roughly 6 percent of the capitalization of the banking sector, and around 1.3 percent of the total capitalization of the Italian Stock Exchange, in line with the comparable figure for the end of 2001. As of the end of December, BMPS ranked as the eighteenth company by capitalization among the shares included in the MIB30, and as the fourth among banking shares. ■ SUMMARY OF REFERENCE PRICES AND CAPITALIZATION 31.12.02 31.12.01 31.12.00 Price (EUR) 2.25 2.82 4.30 No. ordinary shares 2,607,791,591 2,598,557,169 2,351,895,107 No. savings shares 9,432,170 9,432,170 8,574,700 Capitalization (in EUR mn) 5,896 7,205 11,021 As of the end of December, BMPS' capital amounted to EUR 1,675,023,207.04 and consisted of 2,607,791,591 ordinary shares and 9,432,170 savings shares with par value of EUR 0.64 each. Compared with the beginning of the year, the number of shares at the end of the year was 9,234,422 higher as a result of the following transactions: ■ issue of 165,150 ordinary shares on 7 February 2002 for the completion of a stock-granting plan inaugurated at the end of 2001 for employees of BMPS and of several subsidiaries; ■ capital increase and issue of 9,069,272 new ordinary shares to service the merger by incorporation of B121 into BMPS, as approved by a resolution of the extraordinary shareholders' meeting held on 30 November 2002.