BANCA POPOLARE DI RAVENNA SPA

Transcription

__________________________________________________________________________________________________________________
ANNUAL REPORT FOR THE YEAR ENDED
DECEMBER 31, 2008
Report on Operations
Financial statements
Notes to the financial statements
Abridged English translation of the original issued in Italian
GRUPPO CREDITIZIO BANCA CARIM - CASSA DI RISPARMIO DI RIMINI S.p.A.
_________________________________________________________________________________________________
Banca Carim – Cassa di Risparmio di Rimini S.p.A.
Member of the Interbank Deposit Protection Fund
Rimini Companies’ Register at no. 13899
Register of Banking Groups - Code 6285.1
Share Capital at 29 April 2009 €117,498,000.00 fully paid-in
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CORPORATE OFFICERS AND SENIOR MANAGEMENT
____________________________________________________________________________________________________
BOARD OF DIRECTORS
Chairman
Giuliano Ioni
Deputy Chairman
Luciano Liuzzi
Directors
Fabio Bonori
Roberto Ferrari
Mauro Gardenghi
Mauro Ioli
Vincenzo Leardini
Raffaele Mussoni
Franco Paesani
Gianfranco Vanzini
Ulderico Vicini
EXECUTIVE COMMITTEE
Chairman
Giuliano Ioni
Members
Luciano Liuzzi
Franco Paesani
Ulderico Vicini
BOARD OF STATUTORY AUDITORS
Chairman
Pier Paolo Paganini
Standing Auditors
Marcello Pagliacci
Bruno Piccioni
SENIOR MANAGEMENT
General Manager
Alberto Martini
Deputy General Manager Claudio Grossi
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REPORT ON OPERATIONS
MACROECONOMIC CONTEXT
In 2008 the world economy grew by 3.4%, witnessing a sharp fall from the 5.2%
increase of the previous year. The painful financial crisis that began in the summer of
2007 was exacerbated in the autumn of 2008, resulting in a substantial decrease of
industrial output and a strong GDP contraction in the main industrial countries. The pace
of economic growth slowed down considerably also in the emerging countries, even
though these economies are still acting as engines for global growth. The year was
marked by the high volatility of oil prices, as the average price per barrel first rose from
$72.5 to $98.5 and then plunged in the second half of the year.
In the year just ended, the United States saw its GDP go up by 1.3%, compared
with 2.0% in 2007, and showed strong recession signals toward the end of the period. The
slowdown of the US economy was due mainly to the serious contraction of investments,
especially those in the housing sector which declined by 20%. Imports, too, decreased
(down 3.3%) while consumer spending was nearly flat (up 0.3%). The US government
reacted by implementing an expansive fiscal policy which translated into a higher public
expenditure (up 2.9%).
In Japan GDP even fell (down 0.7%), due mainly to the economy’s dismal
performance, particularly in the last quarter, the worst in the last 35 years, with a
negative growth rate of 4.6%.
In the Euro area GDP grew by 0.8% for the year as a whole, showing a substantial
decrease from 2.7% a year earlier. Growth was kept in check especially by consumer
spending (up 0.6%) while fixed investments, imports and exports performed slightly
better. Also in this area, the most worrying signals came from the latter part of the year,
considering that in December the manufacturing output dropped by 11.1% on an annual
basis. The rate of inflation rose above the 3% limit (3.3% in 2008 as against 2.1% in 2007),
as prices came under pressure throughout the main European countries. Concerning the
currency market, 2008 saw the euro rise further against the US dollar - as the average
exchange rate for the year stood at 1.471, compared with 1.371 in 2007 – and the pound
sterling. On the other hand, the euro lost ground against the Japanese yen, falling from
161.3 to 152.3.
The year under review saw also a significant easing in monetary policy. In its
attempt to deal with the serious financial and economic crisis, the US Federal Reserve cut
the fed funds rate as many as 7 times during the year, from 4.25% at the end of 2007 to a
level ranging from 0% and 0.25%. The European Central Bank began by a partial
tightening, so as to stave off the inflation fuelled by rising commodity prices. However,
starting in October, it too began to implement an expansionary monetary policy,
lowering the refi rate three times, to 2.5% at year-end (compared with 4.0% at the end of
2007). After two additional cuts after March 11, 2009, the refi rate was down to 1.50%.
In 2008, Italy’s GDP decreased. After negative growth rates for three quarters in a
row, the average for the year was -0.9% (compared with a positive growth rate of 1.5%
for 2007). The recession worsened in the last few months, as manufacturing output fell
by as much as 14.3% on an annual basis. During the year under review, the only positive
485
component was government expenditure (up 1.1%) , while fixed investment (down
0.7%), consumer spending (down 0.4%), imports (down 2.1%) and exports (down 0.5%)
were all negative compared with 2007. The unemployment rate went up again, after
several years, and stood at 6.7% in the third quarter, as opposed to 6.2% for the
comparable year-earlier period (however, Italy’s unemployment rate is lower than the
average for the Euro Area). On the consumer price front, the average for 2008 rose to
3.2% as against 1.7% in 2007. The public budget deteriorated again, as the deficit-to-GDP
ratio should reach 2.6%, which is 1 percentage point higher than the comparable figure in
2007. This deficit increase and lower GDP growth caused the debt-to-GDP ratio to rise
again, reaching 105.9%, compared with 104.1% in 2007. In keeping with the highly
negative performance of all equity markets, the Italian Stock Exchange’s index, Mibtel,
posted a 48.7% decrease for the year.
GDP in the Emilia Romagna region are expected to have risen 0.1%, reflecting a
substantial slowdown from the 2.0% growth rate posted in 2007, which was still higher
than the national average. Output, new orders and sales weakened as the months went
by. Consumer spending decreased for small and medium retailers, and rose at a slower
pace for large retailers. Positive news came from a limited number of sectors – in some
cases with rather low growth rates – such as air and sea shipping. The only growth
signals came from agriculture, whose value added went up by 7.4%.
As noted above, regional demand decelerated, especially household spending,
which should be down 0.1%. Fixed investments proved more resilient (up 1.5%) while
exports rose by 1.2%. The rate of unemployment rose again, from 2.8% to 3.3%, reflecting
one of the lowest rates of increase for the country as a whole.
In line with the Emilia Romagna region as a whole in the year under review, the
Province of Rimini saw the progressive deterioration of the main economic indicators.
The growth achieved in the first half was followed by a sharp drop in the third quarter,
which was further exacerbated in the following months. The overall manufacturing
output should decrease by 0.5%, while new orders should decrease by 0.7%. Exports
should still be positive (up 1.8%), though much worse than in 2007 (up 3.9%).
Labour market data is available for 2007. After years of constant growth, the size of
the workforce (129,000) and the employment rate (65.9%) remained stable, compared
with 2006. On the other hand, the unemployment rate deteriorated, and went from 4.2%
to 4.5%, and was higher than the average for the region.
Despite some difficulties, the 2008 tourist season proved resilient. Total arrivals
were up 0.8% on the previous year, thanks mainly to the Italian component (up 1.4%)
while the foreign inflow declined by 1.4%.
In 2008 total visitors decreased by 0.9%, also in this case due to foreign tourists
(down 2.4%) more than to the Italian (down 0.5%).
The above trends confirmed a preference for shorter stays, as these fell further, to
5.20 days in 2008, compared with 5.30 days in 2007.
The congress and fair sectors slowed down as well. Data in the first half of the year
saw an increase in the number of days to 2.9% (a far cry from the 29.5% in the previous
year). The number of participants improved as in the same period they totalled 882,000,
with a 9.7% increase. In 2008, the Rimini Exhibition Centre had a total of 1,583,000
visitors, showing a 9.8% increase on the preceding year.
486
In 2008, the “Federico Fellini” airport posted a contraction in passenger traffic, with
passenger arrivals down 13% and departures down 14%. However, in both cases absolute
numbers were above 200,000 passengers each. The only growth segment was cargo
traffic, as the volume of goods shipped rose by 18%.
Concerning the banking system at national level, funding rose by 11.7%, compared
with 7.9% in 2007. Growth in this area was driven once again by bonds, which rose by
21.2%, followed, in terms of percentage change, by repurchase agreements (up 10.2%).
New loans provided by banks showed a decrease closely related to the recession
and the resulting cuts in firms’ investment plans. Loans rose by only 4.9%, which was
considerably lower than the 9.8% increase for the previous year. The increase was fuelled
mainly by short-term lending (up 6.6%) while medium-to-long term loans rose at a
slower pace (up 3.9%). The main risk indicators show that credit quality was good also in
2008, as non-performing loans decreased by 2.7% while the ratio of non-performing loans
to total loans fell from 1.18% to 1.08%.
After experiencing significant pressures, money market rates declined significantly
toward the latter part of 2008. In particular, the 3-month Euribor ended at 3.29%,
compared with 4.85% at the end of December 2007 (in October 2008 this rate rose to as
much as 5.11%). This translated into an increase in the rates of interest extended by
Italian banks. The average funding rate went from 2.89% at the end of 2007 to 3.01% in
December 2008. In the same period, average lending rates decreased from 6.18% to 6.08%.
As regards the local credit market, based on figures available at 30 September 2008,
over the past 12 months the number of branches in the province of Rimini rose from 292
to 295.
In the same period, in the province deposits rose by 6.0%. This was higher than the
comparable increase at the national level (4.8%) but the lending rate was higher still
(6.5%).
Over the past 12 months, non-performing loans rose at a pace lower than the
lending rate (5.6%). This underperformed the national trend, which featured a 9.6%
decrease in non-performing loans.
In terms of concentration, the number of residents per branch fell further, from
1,039 at the close of 2006 to 1,015 at the end of 2007 (latest year for which figures are
available).
OUR BANK
Also 2008 was an eventful year for our Bank. In a scenario characterized by a
further slowdown of the economy and extreme volatility on financial markets, Banca
Carim pursued its goals of customer satisfaction, business growth and financial
soundness thanks to the efficient use of its assets, thus enhancing its role as the key bank
for the province of Rimini.
As in previous years, in the period under review Banca Carim saw a significant
increase of direct funding (up 12.72%), which was even higher than the 11.1% rise posted
in 2007. As in the past, this performance was fostered by a high propensity to save in
highly liquid instruments. Thus, the products the provided the greatest boost to the
increase in direct funding were certificates of deposit and bonds, which went up by €340
million.
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This increase showed that our strong roots in the community are still a significant
competitive factor, as it nurtures the widespread perception that in such volatile financial
markets our products are safe. Bonds showed a constant increase throughout the year
while certificates of deposit gathered speed toward the end of the year, as the financial
crisis became acute.
Indirect funding, instead, experienced a declined in 2008, due to the fall in equities
and customer divestments. This item decreased by 16.8%, reflecting an amount that
nearly offset the increase in direct funding. The decrease occurred mostly in asset
management products (segregated accounts, mutual funds and insurance products). Also
securities held in custody decreased, though at a lower rate than asset management
products. On the other hand, repurchase agreements, which for reporting purposes are
accounted for as indirect funding, experienced a significant increase.
In the year under review, loans rose by 6.1%, This shows that also in such difficult
circumstances as those that characterized the economy, especially in the second half of
2008, Banca Carim was paramount in supporting economic growth in the community in
which it operates.
As in past years, these were mostly medium-to-long term loans secured by
adequate collateral. Meanwhile, our Bank continued to diversify its loan portfolio, by
lending to a greater variety of industries and to a larger number of borrowers.
The large increase in direct funding allowed our Bank to increase its market share.
In the province of Rimini, such market share in direct funding (demand deposits, saving
passbooks and certificates of deposit) exceeded 30% once again, as it went from 30.1% in
September 2007 to 30.3% in the same month of 2008. On the other hand, the Bank’s loan
market share fell from 19.8% in September 2007 to 18.9% in September 2008, an indication
of the growing pressure exercised by new competitors in the province of Rimini.
As to operating results, it is worthy of note that the increase in loans and deposits,
together with the trend in spreads in the phase of rising interest rates until the autumn of
2008, made it possible to post a 5.1% increase in net interest income, which crossed the
€100 million threshold (€102.8 million).
On the service front, results were good. The uncertainty of financial markets and
the difficulties in distributing products associated with them had an impact on net
commission income, which in any case was in line with the previous year’s.
Administrative expenses went up by 8.10%, a rate of increase significantly higher
than in the past few years. However, it should be emphasized that this was related to the
exceptional effort undertaken to change the corporate information system.
On October 10, 2008 Standard & Poor’s confirmed, in connection with its annual
review, Banca Carim’s short- and long-term counterparty ratings and changed the
outlook from stable to negative.
Thus, the Bank’s ratings are as follows:
• Long term “BBB+“;
• Short term “A-2”;
• Outlook: “negative”.
488
The main indicators related to the Company’s specific activity, and its performance
and financial situation, are summarized in the introduction and are described in greater
detail in this report as a comment to the individual items. Such indicators are confirmed
by the tables in the notes.
On March 12, 2009 the €250 million Eurobond issued in 2004 came to maturity.
Repayment was made in full, without any refinancing, which reflected the Bank’s
financial strength and its ability to manage effectively its cash despite significant capital
market tensions.
DISCLOSURE ON FINANCIAL PRODUCTS AND THE CRISIS IN FINANCIAL MARKETS
The current negative phase in the national and international financial markets, and
the difficulties experienced by several financial institutions, including some prominent
ones, prompted domestic and supranational Supervisors to urge financial operators to
use the utmost transparency in illustrating their exposure to market and credit risk in all
their forms.
During the last few months of 2008, several initiatives were undertaken, both
nationally and internationally, to mitigate the impact of the financial crisis, which
resulted in losses in value of debt securities that were more severe than warranted by the
current risk scenarios in terms of their consequences for company accounts. Specifically:
On October 10, 2008 the FASB (Financial Accounting Standards Board, the US
accounting standard setter) published FAS 157-3 to provide guidance on how to
determine fair value when markets are no longer active. The IASB (International
Accounting Standards Board, the IFRS setter) informed that its staff considers the
content of this paper consistent with the IFRS;
On October 13, 2008, the IAS published, in a very short timeframe, amendments to
IAS 39 and IFRS 7 in the matter of financial instruments, permitting the
reclassification, in “rare circumstances”, of part of the financial instruments held in
portfolio so as to recognize them at cost or amortized cost and not at their fair value.
On October 31, 2008 the IASB Expert Advisory Panel published guidance on the use
of “valuation models” to measure the fair value of financial instruments traded in
markets that are no longer active. This guidance clarified in a conclusive manner
that prices resulting from forced transactions or distress sales should not be used,
indicating that to measure fair value properly, the preparer of financial statements
can use all the information that the market makes available.
These steps were taken in relation to the use of fair value as a valuation criterion
adopted at international level to measure and report the current market value of
financial instruments in company balance sheets. In fact, the use of such approach links
inevitably the carrying value of financial instruments to market vagaries, thus leading to
the recognition of unrealized gains and losses, enhancing volatility in turn. The situation
becomes particularly sensitive in a situation such as that determined by the financial
crisis, with its illiquid market and turmoil, where thin trading and its irregular pattern
give a distorted view of the value of the firm or the bond underlying the quoted financial
instrument.
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FUNDING
Total funding at 31 December 2008, including insurance premiums, amounted to
€5,667.52 million, which was basically unchanged (up 0.15%) from the previous year
(€5,658.78 million).
Direct funding - which includes customers’ deposits (net of repurchase
agreements), bonds issued by the Bank and financial liabilities (also issued by the Bank)
recognized at fair value - amounted to €3,664.05 million, showing a 12.72% growth rate
on the comparable amount at the end of 2007 (€3,250.68 million).
The financial crisis affected negatively indirect funding, which as usual is reported
at market value and includes repurchase agreements, fell by 16.80%, to €2,003.47 million.
Considering also shares deposited by companies, total indirect funding amounted
to €2,455.70 million, compared with €2,857.90 million in previous period (down 14.07%).
Among the most important components, assets under management amounted to
€554.47 million, with a substantial decrease from the comparable year-earlier figure
(down 33.11%), espescially because of the decline in segregated accounts (€277.30
million). With respect to segregated accounts in particular, the system as a whole posted
a a 36% decrease in November 2008 (source Monthly Outlook – March 2009).
LOANS
At financial year-end loans to customers, inclusive of write-downs, amounted to
€3,067.82 million, registering an increase of 6.05% on the previous year.
As at the reporting date, the ratio of gross non-performing loans to gross loans was
1.65% (1.04% at year-end 2007). This ratio was significantly better than the national
average which, at 30 September 2007, stood at 2.80% (source Bank of Italy’s Statistical
Bulletin) , providing further evidence to the constant and prudent cash and asset/liability
management policy adopted by Banca Carim.
The ratio of gross loans to direct funding was 83.73% (88.99% at 31 December 2007).
Following the repayment of the €250 million Eurobond on March 12, 2009, this ratio was
88.23%, as compared with 84.07% for the system as a whole (source Monthly Outlook –
March 2009).
A comparison with previous years shows that medium- and long-term loans, net of
any write-downs, which are secured by adequate collateral, rose by 8.75%, to €2,097.06
million. Short-term loans stood at €970.76 million.
Non-performing loans, net of write-downs on a specific basis, totalled €27.18
million, with a ratio to total net loans of 0.91% (0.51% at 31 December 2007). At October
31, 2008 the comparable ratio for the industry as a whole was 1.08% (source Monthly
Outlook – March 2009).
Problem loans represent financing granted to entities undergoing temporary
difficulties and included in class risks monitored and evaluated by the Bank on a specific
490
basis. This sub-item, gross of write-downs on a specific basis, amounts to €116.39 million,
with a 21.19% increase on the comparable amount at December 31, 2007.
The latest developments introduced by the Bank of Italy in the area of supervisory
returns at December 31, 2008 involved a change in the way problem loans are
determined, indicating also specific criteria for loans to qualify for the new category of
“objectively-determined” problem loans. As with performing and past due loans, it was
deemed appropriate to write down such loans, which are described extensively in Section
A – Accounting Policies, on a collective basis. These loans, which are shown gross of
write-downs, amounted to €31.70 million. Overall, problem loans stood at €148.09
million, with an increase of €52.84 million, due to the progressive deterioration of the
economy.
The ratio of problem loans, excluding those “objectively determined”, to total
loans, before write-downs, was 3.79% (3.29% in the previous year).
The same ratio, calculated by including “objectively-determined” loans, was 4.83%.
The recession triggered by the financial crisis had a negative impact on loans past
due over 90 days, which showed a substantial increase to €129.77 million, compared with
€40.89 million at December 31, 2007.
FINANCIAL INVESTMENTS
Financial investments, net of required reserves, amounted to €926.88 million as
compared with €652.87 million at 31 December 2007, marking an increase of 41.97%.
In 2008, interbank loans, net of required reserves, fell from €251.85 million at the
end of the preceding year to the current €243.45 million. Thus, at 31 December 2008, gross
financial investments – inclusive of required reserves - amounted to €1,010.71 million.
The financial crisis of 2008 and the large number of defaults resulting from it
eroded substantially market confidence in the global banking system. This reverberated
onto bond prices, which in 2008 were hit hard both due to the higher risk premium
required by bond investors and to the drying up of liquidity in a thinly traded corporate
bond market, featuring widening bid-asked spreads and phases of mounting panic.
Against this backdrop, and despite its prudent approach to financial management, at
December 31, 2008 the fair value of Banca Carim’s financial assets fell overall by €35.67
million, due mainly to the decrease in the value of government bonds – due to the effects
of the financial crisis – mutual funds and other bonds held in portfolio, such bonds being
floating, denominated in euros and nearly all of them senior.
The difficult situation in the financial markets, which resulted in losses in the value
of debt securities that were more severe than warranted by the current risk scenarios, and
the intention to report financial instruments at their fair value, led the Bank to adopt an
internal valuation model, in keeping with the IASB’s guidance, that could be utilized to
estimate the fair value of financial instruments in inactive markets, as illustrated
specifically in Part A – Accounting Policies in the notes.
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The positive effects determined by the use of this model, amounting to
approximately €24.00 million, will be described more extensively in the section on
operating results. Moreover, attention is called to the Bank’s good liquidity condition
(which continues in 2009) and to the relatively short tenor of the financial instruments in
question, which make it possible, at this stage, to wait until they mature. All this to
prevent that the decrease in value of the financial assets turn into realized losses, thus
using the rising value of these financial instruments to boost profit in future years by
as much as €33.24 million for the entire bond portfolio of the Bank, which does not
include any “toxic assets”.
The current portfolio composition, particularly that significant component valued
with the above model, was affected by the decision to use the proceeds of the Eurobond
issue (which took place in March 2004) by investing in financial instruments by highlyrated issuers, capable of generating a positive spread over the funding cost (3-month
Euribor + 0.25% all-in), without taking any interest rate or currency risk.
Banca Carim has confirmed its soundness in terms of risk, liquidity and
capitalization. All these aspects allowed it to deliver positive results also in 2008, in a
particularly negative market environment, dominated by a pervasive lack of confidence.
The Bank’s low risk profile is in essence due to its operations, which focus mainly on
retail customers while special attention is paid to the collateral received to secure its
loans. Mortgages account for 2/3 of this collateral and volumes are generated mostly in
the Province of Rimini, the community where the Bank has long operated. The good
liquidity determined by the difference between loans and deposits – with the relevant
ratio at 83.73% at December 31, 2008 – is aided also by the Bank’s typical retail funding
sources, which are well diversified, and a product offering that ensure adequate stability.
INTERBANK BORROWING
Interbank borrowing amounted to €44.59 million, compared with €90.20 million at
31 December 2007, representing a decrease of 50.56%.
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OPERATING RESULTS
A reclassified income statement has been prepared, as shown at the end of this
section, to illustrate the changes during the year.
The constant and progressive increase in loans and deposits and rising interest
rates resulted in higher net interest income. This item amounted to €102.80 million,
representing a 5.11% increase on the comparable amount for the previous year (€97.80
million).
Net non-interest income, including the difference between both net commission
income (amounting to €21.84 million) and other operating income and expense
(reflecting solely recoveries/charges for €9.38 million), amounted to €31.22 million, which
was largely unchanged from the previous period (down 0.14%).
Trading and hedging activities, which includes dividends and similar income for
the year, resulted in a loss of €24.79 million, compared with a loss of €4.91 million at 31
December 2007.
This negative result for the year was due entirely to the €33.72 million decrease in
fair value of the Bank’s financial instruments. Such amount includes also €10.33 million
related to the distribution of reserves created out of retained earnings by Credito
Industriale Sammarinese S.p.A.
As already commented in the section devoted to financial investments, the Bank - in
light of the difficult situation of the financial markets – has adopted an internal valuation
model in accordance with IASB guidance to value certain financial instruments traded in
markets that are no longer active, and for which there was no reference in the way of
adequate and real market transactions.
The use of this valuation model to the bonds of Italian and foreign banks and
companies that are no longer traded in an active market, excluding obviously the bonds
issued by Lehman Brothers, had an impact on the income statement, in terms of lower
write-downs, for a total of €24.00 million. It should be noted that the Bank’s good present
and future liquidity, and the relatively short original maturities of the bonds, make it
possible to wait for the repayment of these instrument at maturity. This will allow the
Bank to prevent the write-downs to turn into realized losses and to recover, gradually,
the amounts written down, thus enhancing future profits by approximately €33.24
million (of which about €12.90 million “marked to model”, which should be recovered
between 2012 and 2016).
The simulations run to check the out come of the reclassifications to other
categories, in accordance with the amendments to IAS 39 of October 13, 2008 (which are
not applicable to the types of portfolio used by the Bank) are further evidence to the
validity of the valuation model adopted. In fact, these simulations show for the financial
instruments in question lower write-downs for approximately €25.30 million. This
amount does not reflect the negative effect, if any, of the impairment test to be conducted
on the portfolio into which the financial instruments are reclassified.
Total income, which reflected net interest income, non-interest income and the loss
from trading and hedging activities, fell by 12.02% to €109.23 million, compared with
€124.16 million at 31 December 2007.
493
Administrative expenses, at €75.00 million, rose by 8.10%. This also included staff
costs, which rose by 16.14%. To this end, it should be noted that the figure at December
31, 2007 was affected by a positive economic effect of €3.00 million, due to the new laws
on post-employment benefits. In the absence of such non-recurring event, the rate of
increase on a “normalized” 2007 would have been 8.04%. The further rise was due to the
temporary staff increase to handle adequately the start of the migration to the new
information system.
Other administrative expenses, which were affected by the fringe benefits provided
for by the temporary employment agreements signed to start the new information system
and by the additional expenses related to the migration into the new structure (Consorzio
Servizi Bancari) at the end of May 2008, amounted to €28.54 million, a 2.86% decrease
from €29.39 million for the previous year.
Operating income stood at €34.23 million, reflecting a 37.51% decrease from the
comparable amount in the preceding year (€54.77 million).
Amortization and depreciation fell by 94.48%, to €3.22 million.
The cost/income ratio (which has been restated on the basis of new acquisitions)
went from 58.60% at 31 December 2007 to the current 71.61%, as it was heavily affected
by the portfolio write-downs. If the ratio is adjusted for the effects of the portfolio writedowns, the result is 54.72%, compared with 54.86 for the previous year.
Net operating income amounted to €31.01 million, showing a 39.68% decrease from
the comparable amount at 31 December 2007 (€51.40 million).
Net impairment/write-backs, including also write-downs of loans and other
financial assets, amounted to €19.17 million, compared with €11.45 million at 31
December 2007, accounting for 2.55% of total loans (as against 2.21% at December 31,
2007). At the end of 2008 the allowance for loan losses, which is made to handle any bad
loans to customers, amounted to €75.84 million. Details off this item are provided in the
Notes (Part E – Section 11 - On- and off-balance-sheet exposure to customers).
Such increase in allowance for loan losses was affected by the progressive
deterioration of the economic conditions, as well as by the need to mitigate credit risk. At
the reporting date, total allowance for loan losses calculated on a collective basis
(performing, past due, and objectively-determined problem loans was 1.45%, compared
with 1.35% at December 31, 2007).
At year-end, this sub-item accounted for 2.55% of total loans (2.21% at December
31, 2007).
Net profit for the year amounted to €8.34 million, reflecting a decrease of 58.70% on
the comparable amount for the previous year (€20.19 million).
On a “normalized” basis - that is after adjusting for the effects of the above nonrecurring events that took place during the year, including the distribution of retained
earnings by Credit Industrial Sammarinese, amounting to €10.33 million, and the
decrease in the value of the financial instruments held in portfolio by the Bank (€33.72
million) – net profit would have been equal to €20.20 million, thus largely in line with the
previous year’s amount.
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INCOME STATEMENT- RECLASSIFIED ON THE BASIS OF IAS/IFRS
IAS
31 December
2008
Description
31 December
2007
Change
% Change
10
Interest and similar income
238,833
192,464
46.369
24.09%
20
Interest and similar expense
-136,036
-94,665
41.371
43.70%
30
Net interest income (10 + 20)
102,797
97,799
4.998
5.11%
40
Commission income
24,510
24,710
-199
-0.81%
50
Commission expense
-2,673
-3,286
613
-18.65%
60
Commission income, net (40+50)
21,837
21,424
413
1.93%
9,383
9,840
-457
-4.64%
Non-interest income (60+190 a)
31,220
31,264
-44
-0.14%
70
Dividends and similar revenues
10,705
433
10.272
2.372.34%
80
Trading income, net
-1,561
-109
-1.452
1.334.40%
90
Gains/Losses on hedging activities
100
Gains (losses) on disposal or repurchase of receivables, financial assets/liabilities
848
327
522
159.68%
110
Net result of financial assets and liabilities recognized at fair value
-34,781
-5,556
-29.225
525.99%
Income from trading and hedging activities (70+80+90+100+110)
-24,788
-4,905
-19.883
405.34%
120
Total income
109,229
124,157
-14.928
-12.02%
150
Administrative expenses
-75,002
-69,385
-5.617
8.10%
- Staff costs
-46,458
-40,000
-6.458
16.14%
- Other administrative expenses
190 a) Other operating income and expense – recoveries/expenses
-28,544
-29,385
841
-2.86%
Operating income
34,227
54,772
-20.545
-37.51%
170
Net adjustments/write-backs of property, plant and equipment
-2,512
-2,141
-371
17.35%
180
Net adjustments/write-backs of intangible assets
-176
-210
34
-16.23%
-531
-1,019
488
-47.87%
190 b) Other operating income and charges – amortization and depreciation – other
130
160
Amortization and depreciation (170+180+190 b)
-3,219
-3,370
-151
4.48%
Net operating income
31,008
51,402
-20.394
-39.68%
Net impairment/write-backs of:
-19,169
-11,445
-7.724
67.49%
- loans
-17,882
-11,355
-6.526
57.48%
- financial assets
-1,288
-90
-1.198
1.327.62%
Provisions
-3,693
-3,526
-167
4.74%
1
94
-93
-98.85%
8,146
36,525
-28.379
-77.70%
193
-16,334
-16.141
101.18%
8,339
20,191
-11.852
-58.70%
8,339
20,191
-11.852
-58.70%
210
Gains (losses) on investments
220
Result of recognition at fair value of property, plant and equipment and
intangible assets
230
Goodwill impairment
240
Gains (losses) on disposal of investments
250
Profit (loss) before tax from continuing operations
260
Income tax for the period on continuing operations
270
Net profit (loss) from continuing operations
280
Net profit (loss) from assets included in disposal groups
290
Net profit (loss) for the period
Captions including different items
Reclassified items
495
EQUITY
At 31 December 2008 equity, without net profit for the year and its allocation to the
different reserves, amounted to €378.12 million, as against €377.20 million at year-end
2007.
Equity increased by €10.93 million, due to:
- a €0.03 million increase in share premium reserve due to purchases and sales of
treasury shares;
- a €4.78 million increase in reserves, resulting from the difference between the
€7.27 million allocated to reserves out of net profit for 2007 and the €2.49
charged to retained earnings to correct a past error, as described more
extensively in Part A – Accounting Policies – Section 17 – Other information –
“Accounting standards, changes in accounting estimates and errors”. The
accounting effects of this adjustment were recognized in equity, in accordance
with IAS 8;
- a €3.88 million increase in the revaluation reserve determined by:
- negative changes in the fair value of available-for-sale financial instruments, as
described in detail in the Notes;
As shown in the Notes, especially in part F (Information on equity), also in the year
under review capital adequacy was well above the requirements of the Supervisory
Authority for banking groups. Capital adequacy is in compliance also with the
requirements set to cover credit and market risk.
The table below shows the amounts of the Bank’s various equity items as well as
their ratio to risk assets. It should be noted that the Bank of Italy requires a minimum
capital adequacy ratio of 8%, on an individual basis, for banks that are part of banking
groups.
TREASURY SHARES
At the reporting date, the Bank did not own treasury shares. During the year, Banca
Carim bought back 145,902 shares with a total value of €1.24 million from shareholders.
The same shares, in a situation characterized by a substantial demand and a long waiting
list, were then sold for €2.83 million. The Company has over 7,600 shareholders.
CASH FLOW STATEMENT
In accordance with current rules and regulations, together with the balance sheet and
income statement, a cash flow statement is provided, as resulting from the application of
the direct method, for both the current and the past financial year. The cash flow
statement shows that net cash generation for the year amounted to €99.10 million.
496
INTERCOMPANY TRANSACTIONS
At 31 December 2008 the Banca Carim Group was unchanged compared with the
previous year and was structured as follows:
THE GROUP
60%
100%
At 31 December 2008, Credito Industriale Sammarinese was a wholly-owned
subsidiary of the Bank. The value of the investment, which was unchanged from the
previous year, amounted to €35,000,000, as represented by 35,000 shares with a par value
of €1,000 each.
Following the reform of the tax collection sector, in accordance with Law Decree
no. 203 dated 30 September 2003, the investment in CORIT – Riscossioni Locali S.p.A.,
which originated from the proportionate spin-off of the former CORIT – Rimini e Forlì –
Cesena S.p.A., reflected at December 31, 2008 a 60% equity ownership, with a nominal
value of €1,872,000, as represented by 3,600 shares with a nominal value of €520,000 each.
Law 2 of January 28, 2009, which converted as amended Law Decree 185 of
November 29, 2009, provided for tax collection companies to have a fully paid-in share
capital of at least €10 million. Consequently, in a special meeting held on March 6, 2009,
the shareholders of CORIT – Riscossioni Locali S.p.A. approved the issue of 13,240 new
shares to be offered to the current shareholders, in proportion to their existing holdings,
with proceeds to be used to raise share capital from €3,120,000 to €10,004,800. Following
the placement of the new shares, Banca Carim still owns 60% of the Company, as
represented by 11,544 shares with a par value of €520.00 each, for a total nominal amount
of €6,002,880
Pursuant to the 5th paragraph of article 2497 bis of the Italian civil code, at 31
December 2008, and as reported in the Notes, transactions with subsidiaries included:

CORIT Riscossioni Locali S.p.A.
- Credit lines of €3.30 million, which at year end were unused;
497

Guarantees granted of €1.00 million, of which a total of €0.44 million had been
used at year end;
Liabilities of €42.11 million;
Revenue of €79 thousand;
Total costs of €138 thousand.
Credito Industriale Sammarinese S.p.A.
- Loans outstanding of €25.00 million;
- Total liabilities of €314.13 million;
- Total costs of €14,143 thousand;
- Total revenue of €39 thousand.
TRANSACTIONS WITH COMPANIES SUBJECT TO SIGNIFICANT INFLUENCE
At year end there was a single equity investment, which reflected a 20% interest in
EGI – European & Global Investments Ltd – a company based in Ireland that manages
mutual funds distributed also in Italy.
REAL ESTATE
In 2008 the new Punta dell’Est branch was opened in Riccione, thus bringing Banca
Carim’s total branches to 111.
Activities to refurbish and improve the Bank’s real estate portfolio proceeded at a
fast pace. The restructuring of the prestigious, liberty-style building where the branch of
San Giovanni in Marignano is located was completed. The Bank has owned the building,
which was erected in the 1920s to house the local Banca Popolare, since 1941, the year
when Banca Popolare was acquired by Cassa di Risparmio di Rimini.
In May the restructuring of the property housing the branch of Riccione d’Alba,
Via Dante 249, was completed. The facilities were restructured inside and outside, in
accordance with a prestigious architectural design, in light of their location in an area of
significant commercial importance.
Activities began also at the former Bank of Italy building in Via Gambalunga in
Rimini. The property, which is supervised by the Superintendence for Architectural and
Archeological Heritage, is undergoing in-depth philological restoration intended, among
other things, to enhance historic “artefacts” from the Roman period. The project is
expected to be completed by the end of 2010, thus making the relocation of several
departments possible. The building was purchased from the Bank of Italy through the
early exercise in December 2008 of the option to buy under the original lease agreement.
Currently, completion of the purchase deed is pending, as the Ministry of Culture has yet
to notify the waiver of its pre-emptive right to buy.
In 2008, activities began for the architectural and scientific restoration of the
building in Via Ferrari, starting from the façade, fixtures, front doors and balconies.
498
At the end of the summer, the restructuring of the part of the building purchased
next to the branch of Flaminia Conca was completed, together with the relocation of the
Area Rimini Centro department.
In September 2008 restructuring began at the branches of Rome, Via Boccea,
Sant’Elia a Pianisi (Campobasso) and Campomarino (Campobasso). The activities
involved the temporary transfer of the banking operations in some provisional locations
or – in the case of the Roma Boccea branch – the transfer to other areat the same building.
Restructuring was completed in December for the Sant’Elia a Pianisi branch and in
January and March 2009 for the Roma Boccea and Campomarino branches, respectively.
In the year under review, an agreement was finalized to purchase raw space on the
ground floor of a building under construction in Rimini, Via XXIII Settembre, corner Via
Sacramora, which, following installation of the relevant fixtures and equipment, will be
used as a new location of the Rimini Celle branch. This branch is currently located in a
leased space.
In January 2009, a new space was purchased in Via Cavalieri in Rimini, next to that
bought in January 2008, where, after proper restructuring, some areat the administrative
department were relocated.
Maintenance activities were undertaken during the year to improve the branches
from a functional and security point of view.
STAFF AND TRAINING
During 2008, staff training programmes were intensified, in keeping with similar
activities conducted in previous years, though with added emphasis on management
aspects.
With respect to “loan”, “investment services”, and “branches” the
“supplementary” training programme started in 2007, intended for branch employees,
was completed.
Particularly important – for its length and for the number of employees involved –
was the training programme related to the implementation of the new corporate
information system. In this context, procedural solutions were illustrated also on the
implementation of rules on banking operations, such as anti-money laundering
regulation and MIFID on investment services.
The year under review saw once again the periodic meetings, also via
videoconference, between management and employees, both from head office and the
branches, to review the Bank’s performance in the period of reference, as well as to set
and share the strategies to be implemented in order to achieve growth in all the areat
interest for the Company.
On May 29, 2008 the supplementary labour agreement was signed.
499
Moreover, plans were implemented to manage the operational risk related to the
occurrence of vacancies in the Bank’s “relevant positions” determined by normal
employee turnover. These plans involve the professional development of employees
with the potential to take over the relevant functions and the definition of specific
training and career plans related to the particular needs of the Bank. Once it has been
fully implemented, this should be a systematic plan to fill any vacancy in all the “relevant
positions” over a time horizon of 6/30 months.
At 31 December 2008 the headcount stood at 770, including 623 permanent
employees, 138 employees with a training contract, 3 with an individual-project fixed
term contract, and 14 with a temporary contract.
During the year, the following staff retired: Cavessi Ones, Deangeli Giorgio, De
Santis Basso, Della Valle Renzo, Di Prospero Sergio, Dotti Mauro Ugo, Farina Edo, Felici
Pier Ferdinando, Frisoni Renzo, Lanciani Romano, Manduchi Viviano, Righetti Francesco
and Tonni Renzo.
We mourn the premature loss of Giorgetti Alessandro.
ORGANIZATION AND SERVICES
During the year under review, the Bank undertook an in-depth organizational
review, as a further step in the development plan started in the past few years and
intended to maximize organizational efficiency. These actions included:
•
Creation of Compliance e Risk Management units within the Legal and Corporate
Affairs department and the Governance department, respectively. This step is
consistent with the policies of the supervision body governing, within banks, also
compliance, i.e. the function designed to monitor the risk of any lack of compliance
with the law. In 2008 these units were fully operational, with the appointment of
specifically dedicated employees. In this context, the following activities were
conducted:
•
A specific policy and the relevant operational rules were issued for he
Compliance unit and the schedule of its activities for 2009 was approved;
•
•
As to the Risk Management unit, the Board of Directors prepared and
approved a document (“Risk management policies”) where all the policies
issued by the various departments are collected in a systematic manner.
Creation of the Area Coordinator within the Commercial Division. This figure is
responsible for the development and coordination of commercial policies for the
more distant and recently-established geographical areas, such as Lazio, Abruzzo
Nord, Molise and Umbria;
During the last quarter the Board of Directors approved a further review of the
Bank’s organizational structure. Even though emphasis is placed on continuity with the
past, the new plan will introduce a system to ensure constant and necessary changes in
the organizational chart.
Below a description is provided of the guidelines that inform the new organizational
plan, which has been implemented in the early months of 2009:
500
•
•
•
•
An even more effective commercial and business development action, with the
establishment of specific policy and coordination functions of the branch network
effort.
A more effective and prompt management of problem loans in the pre-litigation
stage, through the enlargement of the role and responsibilities of the Credit
department. This would include the creation of a Problem Loan Management unit
designed to support areas and branches in managing problem situations, working
in close cooperation with the Credit Monitoring department of the Governance
department;
Control of credit quality to prevent, where possible, the materialization of default
situations through a review of functional contents by the Credit Monitoring Sector;
The need to respond adequately to changes in the regulatory framework and
Supervisory Instructions.
Special attention was paid to projects related to the implementation of important
regulations for the banking sector, such as:
•
•
•
•
•
The MiFID (Market in Financial Instruments Directive) directive, which came into
force in November 2007. This entailed a profound revision of the way investment
services are provided to customers. Among the activities conducted during the year
to implement the MiFID, attention is called to the most important of them, that is
the signing of new agreements related to the positions of the customers;
In connection with the progressive and full adoption of the Bank of Italy’s new
prudential rules (so-called “Basel 2”), the Bank completed the initial preparation,
according to the new criteria, of its risk exposure and the so-called ICAAP report.
The ICAAP report, in particular, is a document where the Bank’s risk management
policy is updated and formalized and a self-assessment of the Bank’s capital
adequacy is provided vis-à-vis its exposure to the different types of risk. This selfassessment confirmed the Bank’s compliance with the capital requirements set by
the Supervision Authority, albeit in he presence of deteriorating economic
conditions;
The new anti-money-laundering law (legislative decree 231/2007), which innovated
substantially the criteria that banks and financial intermediaries have to adopt in
connection with the combating of money laundering and terrorism financing. In
particular, attention is called to the rules on “adequate customer verification” (to be
conducted as long as the customer has an account, according to an approach based
on the evaluation of the risk related to the customer) and to limit transfer and
circulation of cash and bearer securities (particularly with respect to cheques and
bearer passbooks);
The implementation of the directives under Law 266/2005 on “dormant accounts”,
which saw the Bank engaged in information and communication activities with the
holders of dormant accounts and in the first payment of amounts unclaimed by
customers to the Fund specifically established by the Ministry of the Economy and
Finances;
The application of law 93/2008 on the renegotiation of mortgages, following the
signing of the Agreement between the Italian Banking Association and the Ministry
of the Economy and Finances, to which Banca Carim was a party.
Moreover, a project for the “development of potentials” was implemented, as
already noted in the section on Staff and Training.
501
However, the key organizational event of the year, which involved the entire
organization, was the adoption of the information system provided by CSE – Consorzio
Servizi Bancari, from San Lazzaro di Savena (Bologna), to replace the previous system,
which had been provided by UGIS – Unicredit Global Information Services (a company
of the Unicredit Group).
The strategic decision to change system was due mainly to the growing criticalities
emerged, particularly toward the end of the cooperation period, in the adoption of
“application solutions” developed by UGIS for a global banking group, thus increasingly
unfit for the requirements of a regional, retail bank such as Banca Carim. It was felt that
this situation was going to generate a growing number of cumbersome procedures and
greater expenses for their implementation.
Following up on the initial analysis and comparison between the systems carried
out in the last months of 2007, the plan to implement the CSE system was developed in
the first half of 2008 with the preparation of the migration, an activity that involved all of
the Bank’s central departments (with the standardization of their own information
system procedures and the selection of the best operational/application solutions).
Meanwhile a significant training programme was implemented for all branch staff,
so as to disseminate the necessary knowledge to operate the new system and to provide
useful tools to realign professional skills, taking account of the duties and responsibilities
of each individual employee.
The transition to the new information system occurred on May 26, 2008 with the
full replacement of the application procedures used by the branches and by
Headquarters.
The migration of the archives and the activation of the CSE system took place as
scheduled and, even though there were problems typical of such complex undertakings,
there were no significant disruptions. Utmost attention and priority in the calibration and
settlement of the system was given to the “branch” components, acting on the quality of
the service to reduce the impact on customers as much as possible.
The effort made by the entire organization made it possible to reach adequate levels
of operational efficiency in a reasonable timeframe.
As already planned in the migration design phase, in the latter part of the year,
after the use of the procedures reached steady state, the Bank’s central departments
focused on the gathering of information and proposals to CSE about steps that might
make the working of the system more efficient and to correct any discrepancy with the
previous system.
The change of the information system is expected to make the Bank’s operations
more efficient, and such expectation has already been fulfilled in part after only few
months after migration, at an attractive and favourable cost for the management of the
system. CSE’s organization as a consortium, which provides the information system to a
number of banks of the most disparate sizes and characteristics, will allow Banca Carim
to play a more proactive role in the future development of the applications, ensuring that
502
such applications are more in keeping with the organizational and operational
procedures adopted.
During the year, synergies continued to be developed with the subsidiary “CORIT
RISCOSSIONI LOCALI S.P.A.”, in relation to the provision of services for local
authorities, especially the provinces of Rimini and Forlì-Cesena.
ADMINISTRATIVE LIABILITY OF ORGANIZATIONS – LEGISLATIVE DECREE 231/2001
With reference to the complex and far-reaching legal system provided for by
Legislative Decree 231/2001 on the administrative liability of organizations, in the first
half of 2008 the Bank implemented the “Governance System” required to be adopted to
prevent individuals who serve in top management positions within the company or
individuals reporting to them from committing criminal offences (specifically defined by
law).
According to Legislative Decree 231/2001, in case of any such occurrence, a
company is exempt from any liability if it can prove that:
•
it has an governance and risk management model in place capable of preventing
such offences;
•
it has assigned the task of supervising the working of this model to an internal
body with independent powers to initiate and perform audits; and
•
this body has not failed in performing, or has exercised to a sufficient extent, its
supervisory authority.
The Supervisory Board is a Technical Committee set up and overseen by the Board
of Directors, which ensures its independence and autonomy.
The “Governance Model” will be reviewed from time to time in keeping with
changes in the law and in the organizational and operational solutions adopted by the
Bank in connection with the processes relevant under Legislative Decree 231/2001.
PERSONAL DATA PROTECTION
Concerning the provisions of Legislative Decree no. 96 dated 30 June 2003 on
“personal data protection”, the Board of Directors, in its capacity as “Data Owner”,
updated the “Security Planning Document”, which was issued in the preceding years.
RULES ON SAFETY AT WORK
With reference to the provisions of Law 626 of September 19, 1994 as subsequently
amended, a document was prepared with the evaluation of all the company’s risks for its
employees’ safety and health.
On May 15, 2008 a new Consolidated Law on safety and health at work came into
force (Legislative Decree 81 of April 9, 2008) and, consequently, the Bank prepared a new,
updated document on this matter.
503
The constant effort devoted to environmental protection is attested by the rational
management of resources, particularly energy resources, as well as the attention paid to
the disposal or recycling of the waste generated by the Company’s activities.
CASH MANAGEMENT
During 2008 cash management activities performed on behalf of 37 authorities
involved €1,113 million in collections and €1,131 million in payments. Total payment
orders and collection vouchers handled amounted to 120,154.
CORPORATE STRATEGIES AND POLICIES
The year under review saw the Bank solidify its business in traditional banking
activities, confirming its role as “bank of reference” in the Province of Rimini, for
households and small and medium enterprises, the true engine of growth of the local
economy.
During the year under review the Bank operated in light of the guidelines set out in
the 2007-2009 plan, that is through the growth of loans and deposits, the constant search
for greater efficiency and further cost curbing. The Bank’s focus on system migration and
the restoration, in as short a period of time as possible, of adequate functionality and
quality of the services provided to customers, entailed a slowdown of the plan to open
new branches, which will be brought back up to speed in 2009.
In this area in particular, attention is called to the opening of a new branch in Punta
dell’Est, in Riccione, and the restructuring of the branch in Alba.
In a macroeconomic picture characterized by a critical international financial
situation, direct funding becomes increasingly important for the banking system in
general. In 2008, the increase experienced in direct funding enabled Banca Carim to give
impetus to the activities of those businesses that applied with it to finance their projects.
As usual, the Bank sought to diversify as much as possible its lending base, in
supporting small and medium companies, financing all the various economic sectors
(manufacturing, craftsmanship, retail, tourism, agriculture).
Special attention is paid to the firming up and development of relationships with
households, a key asset for the Bank.
The Bank continued to develop online services to meet growing customer
requirements, providing increasing opportunities and longer hours to carry on banking
business.
In the early months of the new year, the Bank continued to review and adjust to the
new organizational structure.
504
SUBSEQUENT EVENTS
The international financial crisis has had significant repercussions on the EU
economies. The situation is still uncertain and the negative economic conditions will
continue throughout 2009, with a feeble recovery expected to take hold in 2010.
The effects of this situation in the early months of the current year are
reverberating on companies, which have to cope with a significant decline in industrial
output and consumer spending.
In order to meet this challenge and adequately meet its customers’ requirements,
the Parent Company, Banca Carim, has implemented several actions – including the
extension of credit lines – to support the small and medium companies that operate in
various industries in the province of Rimini. These actions have been extended also to
households.
On March 12, 2009 the €250 million Eurobond issued in 2004 matured and was
repaid. Repayment was made in full, without any refinancing, reflecting once again the
Bank’s financial strength and its ability to manage effectively its cash despite significant
capital market tensions.
PRINCIPAL RISKS AND UNCERTAINTIES
Information on the risks and uncertainties to which the Bank is exposed is provided
extensively in the Report on operations and in the Notes.
In particular, the risks related to the financial crisis are illustrated in the
introductory part of the Report on operations.
As to the risks for the Bank’s financial strength and its ability to operate as a going
concern, a description is provided in the Notes, Part A – Accounting Policies, as
recommended also by the joint paper published by the Bank of Italy, Isvap and Consob
on February 6, 2009.
The disclosure of financial and operational risks and the strategies adopted to
mitigate them are illustrated in detail in Part E of the Notes. Disclosure of the liquidity
risk is made in this Report on operations in the section on financial investments.
OUTLOOK
The progressive deterioration of the crisis in domestic and international financial
markets is inevitably dragging down the real economy, thus triggering a recession.
According to the latest surveys, the widespread slowdown of the principal economies
will continue into the following year. The Parent Company’s operations will continue to
be conducted in accordance with the guidelines set out in the 2007-2009 strategic plan
approved by the Parent Company, that is through the growth of loans and deposits, the
constant search for greater efficiency and further cost containment. Special and constant
attention will be paid – especially at such times as this - to all customers’ needs through
direct contact, which will translate into greater satisfaction and confidence.
505
The Bank’s geographical expansion will continue also in 2009, with the opening of
new branches in accordance with the Parent Company’s plans. These plans call for the
opening of approximately twenty new branches in the next two years. Growth will
continue to be pursued in keeping with the mission and the guidelines adopted so far,
with the development of a firmer presence in existing markets.
As in past years, the key objective will include active staff management, focusing
on the development of training programmes, especially more marketing-oriented ones.
As to the lending business, in an environment such as the current one, which is
expected to deteriorate, special and constant attention will be paid to risk assessment and
monitoring, also through counterparty diversification. Emphasis will be placed also on
retail customers (individuals, households and small and medium companies).
ACTION AND DEVELOPMENT PLANS
In 2008 Banca Carim continued to research and develop new banking products and
services, trying constantly to identify new financial requirements and to meet customers’
emerging needs.
Given a slowdown in real estate sales, Banca Carim has, on one side, continued to
support construction projects and, on the other, financed home purchases.
In 2008, in a period when interest rates affected customers’ decisions to a significant
extent, Banca Carim not only provided all the different types of mortgages with
repayment schedules in keeping with the ability of households to meet their obligations
but it was also party to an agreement for the renegotiation of variable-rate mortgages
between the Ministry of the Economy and Finances and the Italian Banking Association
(ABI), in connection with the measures adopted by the Italian Government to safeguard
the purchasing power of households.
The difficult economic conditions of the last few months are proving quite
challenging for the companies in the Bank’s main geographical market, as these have to
cope with a slowdown in production and consumer spending as well as with a 2009 that
is sending further negative signals. Banca Carim adopted a fresh approach to its
customers’ needs in these trying times by making available to companies a special €20
million credit line. This initiative concerns the provision of liquidity to small and medium
companies. The credit line was made available to the Credit Consortia (Consorzi Fidi),
created by the various trade associations, which operate in the different industries
present in the Bank’s main geographical market.
The difficult conditions that are affecting all segments of the economy are making it
harder for households to cope with their current expenditures and mortgage payments.
Given these situations, with a growing use of unemployment benefits by workers, Banca
Carim has launched an initiative to support its mortgagees. Specifically, the initiative,
which is intended for employed workers and small businessmen, concerns the
suspension of mortgage payments until June 30, 2010, by postponing collection of the
payments suspended until after the original maturity and a small new loan to deal with
the most pressing family needs.
506
Special attention was paid to retirees who, when the economy is in difficult
conditions, are not always in a position to meet their current expenditures. To meet these
customers’ needs, the Bank entered into an agreement with Euvis S.p.A., to provide
fixed-rate reverse mortgage loans to citizens over sixty-five years of age.
On the investment side, Banca Carim proposed solutions meeting the objectives of
the individual investors, with products suitable to the different risk profiles, particularly
low-risk instruments fit for all customers.
The Bank continued to offer the different types of bond that it issued also in 2008.
Still on the funding front, another good opportunity was represented by the issue of
foreign-denominated certificates of deposit, with the currency risk hedged. This was
afforded a good reception especially by short-term investors.
The Bank was able to meet its customers’ demand for bancassurance products,
through the issue of “asset specific” products capable of meeting needs in terms of risk
and expected return.
In the service area, Banca Carim emphasized also insurance products, introducing
new forms of loss coverage and capital protection for customers
Given the growing sensitivity of customers to energy saving, the Bank designed
new offerings intended to reduce the use of energy produced from traditional sources.
The initiative, which is intended for individuals and companies, aims to facilitate the
construction of photovoltaic plants, solar thermal energy plants and to carry out energy
conversion for buildings.
In the context of the diversification of distribution channels for its services,
particularly the use of the internet, which is increasingly liked by the customers, the
internet banking service was restructured. The new version combines new functions and
more modern security systems, an area that is increasingly critical for this service.
507
Dear shareholders,
To conclude this report on operations for the year ended 31 December 2008, we
trust you will approve the operations carried out and the results reported.
We wish to extend our appreciation and thanks to the members of the Board of
Statutory Auditors for their valuable suggestions and ongoing controls undertaken while
carrying out their duties.
Our special thanks go to the General Manager, Mr. Alberto Martini, for his
unflagging commitment, which made it possible to achieve these results.
The Bank is grateful to Mr. Claudio Grossi, Deputy General Manager, for his
professionalism and dedication to his job.
We also wish to thank all senior managers for their essential contributions to the
Bank’s performance.
We wish to thank the Bank’s middle managers and all our staff for their constant
effort in achieving these results.
We wish to express our gratitude to Mr. Rosario Coppola, the manager of the Bank
of Italy’s Forlì branch, for his authoritative and willing assistance.
Heartfelt thanks are due to all our shareholders. We wish to assure them of our
continuing commitment to achieving results worthy of their trust.
We wish to express our gratitude to all of our customers whose loyalty prompts us
to strive to serve them with increasing commitment and dedication.
Lastly, we wish to acknowledge all public and private entities and institutions for
their interest in our Bank.
508
PROPOSED APPROPRIATION OF NET PROFIT
Pursuant to article 23 of the Articles of Association, and considering that the legal
reserve has reached the balance provided for by article 2340 of the Italian Civil Code, we
recommend that net profit be appropriated as follows:
Reserve article 6 paragraph 2 Legislative Decree 38/2005
Share buyback reserve
Dividends paid to shareholders
Net profit for the period
(in euros)
1,315,479
2,676,450
4,347,426
8,339,355
The dividend amounts to €0.185 per share, representing a 3.70% return on the par value
of each share.
Rimini, 30 March 2009
The Board of Directors
509
510
ANNEX A – SEPARATE FINANCIAL STATEMENTS
______________________________________________________________
511
512
FINANCIAL STATEMENTS
________________________________________________________________________________________________________________________
BALANCE SHEET AT 31 DECEMBER 2008
____________________________________________________________________________________________________
513
514
BALANCE SHEET AT 31 DECEMBER 2008
31
December
2008
ASSETS
10. CASH AND CASH EQUIVALENTS
31
December
2007
128,984,413
29,881,812
5,949,161
1,028,632
728,030,401
491,220,899
30,681,678
31,631,239
282,678,354
280,267,568
2,989,622,517
2,828,814,121
100. INVESTMENTS
118,358,281
118,358,281
110. PROPERTY, PLANT AND EQUIPMENT
130,477,145
126,966,403
29,894,592
29,703,879
29,283,000
29,283,000
130. TAX ASSETS
19,078,270
21,294,900
A) CURRENT
2,273,102
7,078,072
16,805,168
14,216,828
257,384,409
118,324,866
4,721,139,221
4,077,492,600
20. FINANCIAL ASSETS HELD FOR TRADING
30. FINANCIAL ASSETS RECOGNIZED AT
FAIR VALUE
40. AVAILABLE-FOR-SALE FINANCIAL ASSETS
60. LOANS AND ADVANCES TO BANKS
70. LOANS AND ADVANCES TO CUSTOMERS
120. INTANGIBLE ASSETS
OF WHICH: GOODWILL
B) DEFERRED
150. OTHER ASSETS
TOTAL ASSETS
515
31
December
2008
LIABILITIES AND EQUITY
10. BANKS’ DEPOSITS
31
December
2007
44,592,475
90,203,569
20. CUSTOMERS’ DEPOSITS
2,005,027,493
1,828,068,052
30. SECURITIES ISSUED
1,670,445,867
1,320,920,107
10,905,727
9,016,919
239,710,900
230,902,052
30,010,157
37,952,136
30,010,157
37,952,136
302,501,303
131,790,306
6,516,000
7,922,132
24,967,698
23,327,231
8,106,259
8,645,200
16,861,439
14,682,031
52,636,493
56,514,453
166,350,811
161,578,460
41,636,942
41,607,781
117,498,000
117,498,000
8,339,355
20,191,402
4,721,139,221
4,077,492,600
40. FINANCIAL LIABILITIES HELD FOR TRADING
50. FINANCIAL LIABILITIES RECOGNIZED AT FAIR VALUE
80. TAX LIABILITIES
A) CURRENT
B) DEFERRED
100. OTHER LIABILITIES
110. EMPLOYEE TERMINATION BENEFITS
120. PROVISIONS
A) PENSION FUNDS AND SIMILAR COMMITMENTS
B) OTHER
130. REVALUATION RESERVE
160. RESERVES
170. SHARE PREMIUM RESERVE
180. SHARE CAPITAL
200. NET PROFIT (LOSS) FOR THE PERIOD (+/-)
TOTAL LIABILITIES AND EQUITY
516
FINANCIAL STATEMENTS
__________________________________________________________________________________________________________________
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
____________________________________________________________________________________________________
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
DESCRIPTION
2008
2007
10. INTEREST AND SIMILAR INCOME
238,832,927
192,464,076
20. INTEREST AND SIMILAR EXPENSE
-136,036,130
-94,665,445
30. NET INTEREST INCOME
102,796,797
97,798,631
40. COMMISSION INCOME
24,510,220
24,709,693
50. COMMISSION EXPENSE
-2,673,009
-3,285,611
60. COMMISSION INCOME, NET
21,837,211
21,424,082
70. DIVIDENDS AND SIMILAR INCOME
10,705,108
432,996
80. TRADING INCOME, NET
-1,560,861
-108,816
848,339
326,690
848,339
326,690
120. TOTAL INCOME
-34,780,913
99,845,681
-5,556,160
114,317,423
130. NET IMPAIRMENTS/WRITE-BACKS OF:
-19,169,421
-11,445,374
-17,881,611
-11,355,168
-1,287,810
-90,206
80,676,260
102,872,049
100. GAINS (LOSSES) ON SALES OR REPURCHASES OF:
A) LOANS
B) AVAILABLE-FOR-SALE FINANCIAL ASSETS
C) HELD-TO-MATURITY FINANCIAL ASSETS
D) FINANCIAL LIABILITIES
110. NET RESULT OF FINANCIAL ASSETS AND LIABILITIES RECOGNIZED AT FAIR VALUE
A) LOANS
D) OTHER FINANCIAL TRANSACTIONS
140. INCOME (LOSS) FROM BANKING OPERATIONS
150. ADMINISTRATIVE EXPENSES:
-75,001,948
-69,384,920
A) STAFF COSTS
-46,457,657
-39,999,746
B) OTHER ADMINISTRATIVE EXPENSES
-28,544,291
-29,385,174
160. PROVISIONS
-3,692,981
-3,525,766
170. NET ADJUSTMENTS/WRITE-BACKS OF PROPERTY, PLANT AND EQUIPMENT
-2,512,150
-2,140,707
-175,600
-209,622
8,851,692
8,820,255
-72,530,987
-66,440,760
1,084
94,212
8,146,357
192,998
36,525,501
-16,334,099
8,339,355
8,339,355
20,191,402
20,191,402
180. NET ADJUSTMENTS/WRITE-BACKS OF INTANGIBLE ASSETS
190. OTHER OPERATING INCOME/COSTS
200. OPERATING COSTS
240. GAINS (LOSSES) ON SALE OF INVESTMENTS
250. PROFIT(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS
260. INCOME TAX ON CONTINUING OPERATIONS
270. NET PROFIT(LOSS) FROM CONTINUING OPERATIONS
290. NET PROFIT(LOSS) FOR THE PERIOD
519
Share capital
Equity as at 31 December 2007
Net profit (loss) for the
period ended 31 December
2007
Stock options
Derivatives on own
shares
Changes in equity
instruments
Distribution of
special dividends
New share issues
Change in reserves
Dividends and other
allocations
Share buyback
Changes during the year
Transactions involving equity items
Allocation net profit
for preceding period
Reserves
Balance at 1 January 2007
Changes in opening
balances
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2007
Balance at 31 December
2006
(Thousands of euros)
117,498
117,498
117,498
117,498
117,498
117,498
Share premium reserve
41,594
41,594
Reserves:
a) retained earnings
155,302
155,302
155,302
155,302
Revaluation reserves:
49,804
a) available for sale
6,919
c) other
of which
- revaluation of property,
plant and equipment
a) ordinary shares
b) other shares
1,256
7,344
7,344
-1,242
41,608
-1,068
-1,068
161,578
161,578
49,804
6,710
56,514
6,919
2,620
9,539
42,885
42,885
4,090
46,975
42,885
42,885
4,090
46,975
b) other
b) cash flow hedges
Equity instruments
Treasury shares
Equity
19,094
19,094
383,292
383,292
-7,344
-11,750
-11,750
5,642
The change in “Issue of new shares” was due to the sale of shares previously bought back
520
1,256
-1,242
20,191
20,191
20,191
397,389
Share capital
a) ordinary shares
Equity as at 31 December 2008
ended 31 December 2008
Stock options
Derivatives on own shares
Changes in equity
instruments
Distribution of special
dividends
New share issues
Change in reserves
Dividends and other
allocations
Share buyback
Allocation net profit
for preceding period
Reserves
Balance at 1 January 2008
Changes in opening balances
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2008
Balance at 31 December 2007
(Thousands of euros)
117,498
117,498
117,498
117,498
117,498
117,498
41,608
41,608
b) other shares
Reserves:
2,833
-2,804
41,637
161,578
-2,494
159,084
7,267
166,351
161,578
-2,494
159,084
7,267
166,351
b) other
56,514
56,514
-3,878
52,636
9,539
9,539
-3,928
5,611
c) other
46,975
46,975
50
47,025
of which
- revaluation of property,
plant and equipment
46,975
46,975
50
47,025
20,191
20,191
b) cash flow hedges
Equity instruments
Treasury shares
Equity
397,389
-2,494
394,895
-7,267
-12,924
-12,924
-3,878
2,833
-2,804
8,339
8,339
8,339
386,461
The change in the opening balances was due to an adjustment to reserves – in accordance with IAS 8 - resulting from the correction of an error occurred before 2008, which is described in detail in part A –
Accounting Policies Section 17 – Other Information.
521
(THOUSANDS OF EUROS)
CASH FLOW STATEMENT
DIRECT METHOD
Amount
A. OPERATING ACTIVITIES
2008
1. Banking operations
- interest income received (+)
- interest expense paid (-)
- dividends and similar revenues (+)
- commissions, net (+/-)
- staff costs (-)
- other costs (-)
- other revenues (+)
- taxes (-)
- costs/revenues related to groups of assets held for sale, net of the tax
effect (+/-)
2. Cash generated by/used for financial assets
- financial assets held for trading
- financial assets recognized at fair value
- available-for-sale financial assets
- loans and advances to customers
- loans and advances to banks: demand
- loans and advances to banks: other
- other assets
3. Cash generated by/used for financial liabilities
- banks’ deposits: demand
- banks’ deposits: other
- customers’ deposits
- securities issued
- financial liabilities held for trading
- financial liabilities recognized at fair value
- other liabilities
Cash flow from (for) operating activities
B. INVESTMENT ACTIVITIES
1. Cash generated by:
- sales of investments
- dividends from investments
- sales/repayment of held-to-maturity financial assets
- sales of property, plant and equipment
- sales of intangible assets
- sales of subsidiaries and assets
2. Cash used for:
- purchase of investments
- purchase of held-to-maturity financial assets
- purchases of property, plant and equipment
- purchases of intangible assets
- purchases of subsidiaries and assets
Cash flow from (for) investment activities
C. FINANCING ACTIVITIES
- issues/purchases of own shares
- issues/purchases of equity instruments
- dividends and other distributions
Cash flow from (for) financing activities
INCREASE/DECREASE IN CASH FOR THE PERIOD
KEY:
(+) generated
(-) used
522
2007
57,733
229,286
-126,678
10,705
17,680
-43,060
-31,980
7,041
-5,261
40,775
188,997
-83,197
433
16,191
-40,583
-35,572
13,236
-18,730
-601,356
-369,836
-272,004
-6,853
-181,800
-2,411
-69,499
-52
-178,948
-121,085
-138,288
659,765
-45,611
-252
348,550
-22,581
176,959
349,526
1,928
8,809
168,154
116,142
147,450
226,180
-4,116
-7,632
-2,152
-3,750
-366
-5,304
-176
-4,116
-7,632
-12,924
-12,924
99,102
-11,750
-11,750
107
1,004
-3,503
19,489
(THOUSANDS OF EUROS)
RECONCILIATION
Amount
Description
2008
2007
Cash and cash equivalents – opening balance
29,882
29,775
Cash inflow/outflow for the period
99,102
107
128,984
29,882
Cash and cash equivalents: effects of changes in exchange rates
Cash and cash equivalent – closing balance
523
524
NOTES
PART A – ACCOUNTING POLICIES
PART B – NOTES TO THE BALANCE SHEET
PART C – NOTES TO THE INCOME STATEMENT
PART D – SEGMENT REPORTING
PART E – INFORMATION ON RISKS AND THE RELEVANT HEDGING POLICIES
PART F – INFORMATION ON EQUITY
PART G – BUSINESS COMBINATIONS INVOLVING COMPANIES OR DIVISIONS
PART H – RELATED-PARTY TRANSACTIONS
PART I – SHARE-BASED PAYMENTS
525
_______________________________________________________________________________________________________________
NOTES
PART A - ACCOUNTING POLICIES
A.1 – GENERAL INFORMATION
Section 1 – Statement of compliance with IAS/IFRS
Section 2 - Basis of preparation
Section 3 - Subsequent events
Section 4 - Other aspects
A.2 – NOTES TO THE MAIN FINANCIAL STATEMENT ITEMS
1 – Financial assets held for trading
2 – Available-for-sale financial assets
3 – Held-to-maturity financial assets
4 – Loans
5 – Financial assets recognized at fair value
6 – Hedging transactions
7 – Investments
8 – Property, plant and equipment
9 – Intangible assets
10 – Non-current assets held for sale
11 – Current and deferred taxes
12 – Provisions
13 – Deposits and securities issued
14 – Financial liabilities held for trading
15 – Financial liabilities recognized at fair value
16 – Foreign exchange transactions
17 – Other information
529
530
The separate financial statements at and for the year ended 31 December 2007 have been prepared
in accordance with the international financial reporting standards (IAS/IFRS), issued by the
International Accounting Standards Board (IASB), and the relevant interpretations of the
International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the European
Commission by Regulation (EC) no. 1606 dated 19 July 2002. The annual accounts have been
prepared by applying the standards in force at the reporting date (including the interpretation
documents known as SIC and IFRIC).
Section 2 – Basis of preparation
The consolidated financial statements consist of the balance sheet, income statement, statement of
changes in equity, cash flow statement, notes and are accompanied by a report on operations. The
formats of the balance sheet, income statement, statement of changes in equity and cash flow
statement are consistent article 9 of Legislative Decree 38/2005 and circular no. 262 dated 22
December 2005 issued by the Bank of Italy, titled “The financial statements of banks: formats and
compilation instructions”.
According to the regulations in force, financial statements have been prepared in Euros, without
decimals, except for the notes, where amounts are in thousands of euros. To this effect, items and
“of which” sub-items have been rounded to the nearest unit. The algebraic sum of the rounding
differences has been added to “Other assets/liabilities”, for the balance sheet, and to
“Extraordinary income/expense”, for the income statement. Any breakdown between euro and
foreign currencies, where required and as shown in the notes to the financial statements, refers to
differences between the currency of the countries of the European Union and other currencies.
The financial statements have been prepared in accordance with the matching principle. Assets
and liabilities, costs and revenues are offset only where required or allowed by a standard or one
of its interpretations.
Application of the going-concern principle
Pursuant to a cooperation agreement reached on the application of IAS/IFRSs, the Bank of Italy,
Consob (Italy’s financial market regulator) and Isvap (Italy’s insurance regulator) published jointly
Document no. 2 of February 6, 2009, whereby they require, among other things, financial
statements for the year ended December 31, 2008 to address specifically the ability of the reporting
company to operate as a going concern. According to these regulators, companies have to give
indications on their viability for the foreseeable future, with such foreseeable future covering,
according to IAS 1, at least 12 months from the balance sheet date.
Against this backdrop, the financial statements of the companies of the Banca Carim Group were
prepared on the assumption that such companies are going concerns as, based on the available
information analyzed in light of the economic context in which they operate, there is no financial,
profitability or operational indicator that might cast doubt on such assumption.
The substantial equity base of the Group companies, past and current positive results, easy access
to the financial resources necessary to carry on their business – including in the current economic
and financial crisis – are evidence of the solid ground on which the going concern assumption
rests.
Concerning equity, part F of the Notes (Information on consolidated equity) and a specific
reference in the report on operations confirm that also the financial year under review, in keeping
with the past, showed capital requirements in line with regulations, as summarized below:
531
In millions of euros
Tier 1 capital
Regulatory capital
Total prudential requirements
Risk-weighted assets
Tier 1 capital
--------------------------------------Risk-weighted assets
Regulatory capital
--------------------------------------Risk-weighted capital
2000
2001
2002
2004
2005
1998
1999
178.1
186.4
70.1
1,002.1
232.5
232.5
83.8
1,197.6
241.5
237.7
101.2
1,445.1
253.9
252.6
117.5
1,678.7
212.7
212.7
144.7
2,067.6
224.4
224.3
158.3
2,261.6
262.2
261.9
188.0
2.685.1
288.4
287.5
213.2
3,048.3
292.0
386.4
230.5
3,296.5
297.0
397.1
246.4
3,524.0
297.9
395.9
273.8
3,423.4
17.77%
19.41%
16.71%
15.12%
10.29%
9.92%
9.76%
9.46%
8.86%
8.43%
8.70%
18.60%
19.41%
16.45%
15.05%
10.29%
9.92%
9.75%
9.43%
11.72%
11.27%
11.57%
2003
2006
2007
2008
To support the above statement, below profits to the shareholders of the Parent Company are
shown since 2005 (first year of consolidation), that is:
Net profit at year-end
1998
8.88
1999
9.88
2000
11.63
2001
15.31
2002
12.47
2003
13.1
2004
13.65
2005
14.06
2005 IAS
23.08
2006 IAS 2007 IAS 2008 IAS
19.09
20.19
8.34
Further confirmation of the validity of the going concern assumption comes from possible future
benefits that will result from the reversal of the write-down of the financial instruments held,
especially by the Parent Company, as described specifically in Part C – Section 7 “Net result of
financial assets and liabilities recognized at fair value – Caption 110”.
Section 3 – Subsequent events
On March 12, 2009 the €250 million Eurobond issued in 2004 came to maturity. Repayment was
made in full, without any refinancing, which reflected the Bank’s financial strength and its ability
to manage effectively its cash despite significant capital market tensions.
In a special meeting held on March 6, 2009, the shareholders of CORIT – Riscossioni Locali S.p.A.
– in keeping with article 32 of Law Decree no. 185 of November 29, 2009, which was converted into
Law no. 2 of January 28, 2009 – approved the issue of 13,240 new shares to be offered at par to the
current shareholders, in proportion to their existing holdings, with proceeds to be used to raise the
share capital from €3,120,000 to €10,004,800. Following the placement of the new shares, Banca
Carim still owns 60% of the Company, as represented by 11,544 shares with a par value of €520.00
each, for a total nominal amount of €6,002,880.
Section 4 – Other aspects
Determination of fair value for financial assets – General principles
IAS/IFRSs require changes in the fair value of financial assets designated as FVTPL (Fair value
Trough Profit or Loss) and AFS (Available for sale) to be recognized through the income statement
and equity, respectively.
There is no doubt that prices quoted in an active market, that is a market where prices reflect the
outcome of transactions conducted at arm’s length, are the best indication of fair value. In fact,
quoted prices provide a proper measure to value financial instruments (mark-to-market
approach). Thus, it is paramount to determine when a market is considered active, especially in a
situation such as the current one, where market prices do not reflect the real value of a quoted firm
or financial instrument.
IAS/IFRSs, especially the guidelines issued on October 31, 2008 by the IASB, provide certain
measures to be used for that purpose, such as volumes and levels of trading activities, availability
of prices and whether they are current, changes in credit spreads relative to risk, excessive price
volatility, etc.
532
In the absence of an active market, the fair value of financial instruments is determined by using
valuation techniques designed to determine the price at which the financial instruments would be
sold, on the valuation date, in a transaction driven solely by commercial considerations.
Such techniques include:
• Reference to indirectly-related market values as observed in products with similar
characteristics (so-called comparable approach);
• Valuations based, including only in part, on non-market observable inputs, where use is made
of estimates and assumptions (so-called “mark-to-model” approach).
The choice of methodology to be adopted is not arbitrary, as these techniques are ranked according
to a specific order of importance. In other words, if quoted prices are available in an active market
the use of the alternative techniques is not permitted.
Accordingly, to determine the fair value of its investments in bonds quoted in inactive financial
markets issued by:
- Banks – subordinated bonds;
- Italian banks;
- US banks;
- Foreign banks (non-US.);
- Industrial firms;
- Financial firms;
Banca Carim used a specific valuation model created in cooperation with a primary financial
analysis firm.
Market inactivity was evaluated for each financial instrument by considering the changes in the
relevant bid-ask spread, over a given period of time, and the standard deviation of the asset swap
spread for the financial instrument. For the market of a financial instrument to be considered
inactive, the following must occur:
- the ratio of the bid-ask spread at the valuation date to the average bid-ask spread for a period
where the market was considered active (first half of 2007) is greater than 1.5, a threshold
regarded as marking a turning point from an active to an inactive market.
Alternatively:
- the ratio of the standard deviation of the asset swap spread at the valuation date to the average
of the standard deviations of the asset swap spreads for a period where the market was
considered active (first half of 2007) is greater than 15, a threshold regarded as marking a
turning point from an active to an inactive market.
The thresholds of both the bid-ask spread (1.5) and the standard deviation of the asset swap
spread (15) used for each financial instrument - to determine the point at which the relevant
market becomes inactive – were defined by using the time series of such ratios, identifying the
relevant “normality” conditions. Specifically:
-
-
to define the threshold for the first ratio, the distribution of the average bid-ask ratios of all the
financial instruments examined was calculated for the first month of 2007 and the first half of
2007, to determine the relevant dispersion in an active market. The analysis showed that this
ratio was lower than or equal to 1.5 for 90% of the financial instruments reviewed.
to define the threshold for the standard deviation of the asset swap spread for all the financial
instruments examined, the distribution of the standard deviations was calculated for the first
and the second half of 2007, to determine the relevant dispersion in an active market. The
analysis showed that this ratio was lower than or equal to 15 for 90% of the financial
instruments reviewed.
533
Subsequently, for such instruments as were traded in inactive markets – as determined in
accordance with the above – the daily changes in the bid and ask prices were analyzed in the forty
business days preceding the valuation date (inclusive) for three market operators. When a bid or
ask price was unchanged for at least four non-consecutive days and in the period considered there
were at least eight such occurrences (the lack of change refers to either bid or ask prices and is
calculated by excluding always the first day), the market of the financial instrument was
considered inactive. The materialization of such conditions in the prices quoted by all the three
operators under observation constitutes ground to consider inactive the market for that financial
instrument (application of the valuation model instead of market price).
If the above conditions materialize only with respect to two market operators, the average bid-ask
spread is calculated with respect to the other operator and that financial instrument, for the month
related to the valuation date (always end of month). Only if the average is equal to or greater than
60 basis points is the market for that specific financial instrument considered inactive (application
of the valuation model instead of market price). In all the other cases the financial instrument is
valued in accordance with the model.
The valuation model used to measure financial instruments in the presence of inactive markets is
described in paragraph 5 of the accounting policies – Financial assets recognized at fair value.
Reclassification of financial assets (Amendments to IAS 39)
On October 13, 2008 the IASB approved an amendment to IAS 39 and IFRS 7, which was adopted
as a matter of urgency by the European Commission on October 15, 2008 with Regulation
1004/2008.
Under this amendment, in the presence of given conditions, an entity is permitted to reclassify
financial instruments recognized initially as held for trading to the category of “Available-for-sale
financial assets”. Before such amendment, reclassifications were allowed only between “Availablefor-sale financial assets” and “Held-to-maturity financial assets”.
Based on paragraphs 50D and 50E of the new version of IAS 39, the following may be reclassified:
- financial instruments, other than derivatives, previously classified as held for trading. On the
other hand, following the adoption of the so-called fair value option, financial assets recognized at
fair value cannot be reclassified. The new category is “Loans and receivables”. To be eligible for
reclassification, financial instruments must fulfil the requirements for recognition as “Loans and
receivables” on the transfer date. Moreover, the entity has to have the intention and the ability to
hold the financial instrument for the foreseeable future or until maturity;
- Non-derivative financial instruments classified as available for sale may be reclassified to “Loans
and receivables” if, on the reclassification date, they qualified as “Loans and receivables” and the
entity had the intention and the ability to hold them for the foreseeable future or until maturity
Any other non-derivative debt or equity instrument may be reclassified out of “Held-for-trading
financial assets” to “Available-for-sale financial assets” or out of “Held-for-trading financial
assets” to “Held-to-maturity financial assets” (only debt securities) if such instruments are no
longer held for trading in the short term. However, according to paragraph 50B, this is permitted
only in rare circumstances.
In a press release of October 13, 2008, the IASB indicated that it considered the deterioration of the
global financial markets in the third quarter of 2008 an example of “rare circumstance”.
A reclassified financial asset is recognized in the new category (“Loans and receivables”,
“Financial assets held to maturity”, “Available-for-sale financial assets”) at its fair value on the date
of reclassification, which represents its new cost or amortized cost.
However, it is expressly provided that, for reclassifications approved before November 1, 2008, the
financial instrument be recognized in the new category at its fair value at July 1, 2008. For all the
reclassifications approved after November 1, 2008, the reclassified financial instruments are
recognized in the new category at their fair value at the date of reclassification approval.
Once they are transferred, the financial instruments are valued and recognized in accordance with
the rules for the new category, save as otherwise specified below. Thus, for financial assets
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recognized at amortized cost, the effective rate of return to be used from the reclassification date
should be calculated.
For reclassified assets, any subsequent positive change in expected cash flows is a factor in
determining the effective interest rate at the date of change in the expected cash flow. Such change
will be recognized along the term to maturity of the instrument instead of through profit or loss, as
is the case instead with assets that are not reclassified.
On the other hand, any decrease in expected cash flow at the date of reclassification will be treated
in accordance with previous rules, that is if such decreases reflect a loss in value they will be
recognized through profit or loss.
Gains and losses on available-for-sale financial assets with a pre-established maturity date,
recognized previously through equity, are released along the term to maturity of the relevant
financial assets, in accordance with the amortized cost principle. On the other hand, if the financial
instrument does not have a pre-established maturity date (e.g. perpetuities), the attendant gains
and losses will not be released from the revaluation reserve until sale or repayment.
As it availed itself of the fair value option, and recognized its financial instruments at their fair
value, the Bank could not implement the above changes.
Uncertainties on the use of estimates in preparing the financial statements for the period
The application of certain accounting standards involves significant judgment on the basis of
estimates and assumptions that show a degree of uncertainty when they are made.
The assumptions adopted for these financial statements are deemed appropriate and,
consequently, they provide a true and fair view of the financial conditions, operating results and
cash flows for the year.
In order to make reliable estimates and assumptions, reference was made to historical experience,
as well as to other factors considered reasonable for the situation at hand, in light of all the
available information.
However, it cannot be ruled out that changes in such estimates and assumptions might determine
significant effects on the financial condition and operating results, as well as on the contingent
assets and liabilities disclosed in the financial statements, in the presence of any change in
previous judgments.
In particular, management had to resort to subjective measurements in the following cases:
- in determining the fair value of financial assets when such determination could not be made by
observing active markets. The subjective factors include the selection of the valuation models or
the inputs that might be non-market observable;
- in quantifying provisions and post-employment benefits, due to the uncertainty of amounts, time
and the actuarial assumptions used;
- in estimating the recoverability of deferred tax assets.
These cases are mentioned to provide the user with a better understanding of the main areat
uncertainty, and are in no way intended to suggest that alternative assumptions might be
appropriate.
In addition, estimates are made on the assumption that the Company is a going concern, as no risk
has been identified which might disrupt the orderly functioning of its operations. Risk disclosures,
especially that on liquidity risk, are provided in Part E – Information on risks and the relevant
hedging policies.
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A.2 NOTES TO THE MAIN FINANCIAL STATEMENT ITEMS
Below the accounting policies applied to the main financial statement items are discussed. Such
accounting policies have been adopted to prepare the financial statements in accordance with the
instructions of the Bank of Italy issued by circular no. 262 dated 22 December 2005.
1 – FINANCIAL ASSETS HELD FOR TRADING
a) Recognition
Financial assets are recognized initially on the settlement date, in the case of securities, and on the
signing date, in the case of derivative contracts. Financial assets are recognized at fair value,
without considering transaction income or costs associated with the financial instrument.
b) Classification
Trading financial assets include financial instruments held with the objective to generate, in the
short run, profits arising from changes in prices.
c) Measurement
Subsequently, financial assets held for trading are measured at fair value, except unlisted equity
instruments which, in the event that their fair value cannot be measured, are carried at cost. The fair
value of instruments listed on active markets is determined on the basis of the market prices
prevailing on the last day of the period. In the absence of an active market, use is made of
estimates based on the market price of comparable instruments, on the prices for recent
comparable transactions or using valuation models involving the discounting to present value of
future cash flows, taking into account all risk factors associated with the instruments and that are
observable in the market.
The fair value hierarchy and the valuation models used to measure financial instruments are
described in section 5 of the accounting policies – Financial assets recognized at fair value.
d) Derecognition
Financial assets are derecognized when cash flow rights associated with them expire or when they
are sold, thereby transferring also all the relevant risks and benefits.
e) Recognition of gains and losses
Gains and losses on the sale or repayment of financial instruments held for trading, as well as
unrealized gains and losses resulting from changes in fair value, are recognized through profit or
loss and shown in the net result of trading activities.
2 – AVAILABLE-FOR-SALE FINANCIAL ASSETS
a) Recognition
Available-for-sale financial assets are recognized initially on the settlement date, in the case of
securities, and on the disbursement date, in the case of loans. Available-for-sale financial assets are
initially recognized at fair value, which usually reflects the amount disbursed/paid inclusive of
costs and revenues that are directly attributable.
b) Classification
Available-for-sale financial assets include financial assets other than derivatives and those
classified as loans, financial assets held for trading or held to maturity. This item includes also
equity instruments not held for trading and that do not create any subsidiary, associate or joint536
venture relationship. Available-for-sale financial assets include a capitalisation contract entered
into with an insurance company.
c) Measurement
Available-for-sale financial assets are measured at their fair value, except for such equity
instruments as are not quoted in an active market and which are reported at cost, in the event that
their fair value cannot be determined in a reliable manner. The fair value of instruments traded in
an active market is determined by reference to the prices prevailing on the last trading day. In the
absence of an active market, use is made of estimate methods based on the prices for recent
transactions involving comparable quoted instruments or by discounting their future cash flows,
taking into account all risk factors related to such instruments on the basis of market observed
data.
Equity instruments that are not listed on active markets, in case that their fair value can be reliably
recognized, are reported at cost.
d) Derecognition
Financial assets are derecognized when the contractual rights on the cash flows arising therefrom
expire, or when a financial asset is sold, transferring all the risks and benefits associated to it.
At each reporting date, a financial instrument is checked for impairment, taking into account the
following:
a) concerning debt instruments, information considered paramount for determining any
impairment includes the following:
- existence of significant difficulties experienced by the issuer, as attested by defaults or lack
of payments of interest or principal;
- likely initiation of a bankruptcy procedure;
- disappearance of an active market for the financial instruments;
- deterioration of economic conditions affecting the issuer’s cash flows;
- downgrading of issuer’s rating, in the case of rated bonds, when accompanied by negative
news on the issuer’s financial conditions.
In the case of bonds, consideration is given to the availability of specialized sources or information
by news info-providers (such as Bloomberg, Reuters), which can give more accurate reports on the
issuer’s deterioration. In the absence of such elements, reference is made to the quoted prices of
instruments similar to those examined, in terms of both bond characteristics and issuer’s
creditworthiness.
b) Concerning equity instruments, information considered paramount for determining any
impairment includes, in addition to the above,
a. changes in the technological, market, economic and legal environment in which the
issuing company operates;
b. a significant and/or lasting decrease in the fair value of an equity instrument below
its cost can be considered evidence of impairment.
More specifically, the factors listed below are considered indicative of the need to recognize
impairment:
- Fair value of the instrument over 30% lower than the amount initially recognized;
or
- Fair value of the instrument lower than its carrying value for more than 12 months.
Concerning investments in equity instruments, the need to recognize impairment is determined by
the existence of one or more of the following conditions:
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-
the Fair value of the investment is significantly lower than cost or otherwise significantly
lower than the fair value of comparable companies in the same sector;
the company’s management is deemed inadequate and otherwise unable to drive the share
price back up;
the rating is downgraded from that assigned on the date of purchase;
significant decrease of profits and cash flows or deterioration of the issuer’s net cash
position since the date of purchase;
dividends are reduced or discontinued;
the market for the bonds issued is no longer active;
changes in the regulatory, operating, and technological framework, with a negative impact
on the issuer’s financial condition, operating results and cash flows;
negative prospects in the issuer’s market, industry or geographical area.
Impairment reflects the difference between the amortised cost of the impaired instruments and
their recoverable or current value (fair value).
Losses are recognized through profit or loss as value impairments. Increases in value over time are
recognized in the income statement as interest income. Any write-back of debt instruments are
recognized through profit or loss whilst write-backs for equity instruments are recognized in
equity.
Write-backs of unlisted equity instruments recognized at cost cannot be accounted for in the
financial statements.
Concerning available-for-sale financial instruments:
- interest income is calculated by applying the effective interest rate method;
- unrealised gains and losses determined by changes in fair value are recognized in a specific
equity reserve, net of the relevant tax effect, until the financial asset is sold or impaired.
As the available-for-sale financial asset is sold, unrealised gains and losses recognized in an equity
reserve until such time are transferred to “gains (losses) on sales or repurchases of available-forsale financial assets” in the income statement.
When an available-for-sale financial asset is impaired, cumulative losses due to changes in fair
value recognized in equity are reported as “Net impairments of available-for-sale financial assets”
in the income statement. A value impairment is recognized in the presence of observable evidence
of value reductions.
Any write-back is accounted for in equity, in the case of equity instruments, and through profit or
loss, in the case of loans or debt instruments. The amount of the write-back can under no
circumstances exceed the amortised cost at which the instrument would be shown in the absence
of prior adjustments.
3 – HELD-TO-MATURITY FINANCIAL ASSETS
a) Recognition
The initial recognition of financial assets occurs on the settlement date, for securities, and on the
signing date, for derivative contracts. Held-to-maturity financial assets are recognized at fair value,
inclusive of any costs or income that is directly attributable.
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b) Classification
Held-to-maturity financial assets include debt instruments, with fixed maturity and payments,
which the company intends to hold until maturity. At the reporting date, there were no held-tomaturity financial instruments.
c) Measurement
Subsequently, held-to-maturity financial assets are recognized at their amortised cost, utilizing the
effective interest rate method.
d) Derecognition
Held-to-maturity financial assets are derecognized when the contractual rights on the cash flows
associated with them expire, or when the financial asset is sold, thereby transferring all rights and
benefits related to it.
Gains and losses arising from held-to-maturity financial assets, if any, are recognized through
profit or loss when such assets are derecognized or are impaired, as well as through the
amortization of the difference between the amount recognized and the amount repayable at
maturity. Held-to-maturity financial assets are periodically tested for impairment (at the close of
each fiscal year and interim period) to determine whether there is objective evidence of
deteriorated value. Any value impairment, which is calculated as the difference between the
carrying value and the present value of cash flows determined by using the effective interest rate,
is recognized through profit or loss. Any write-back, following the above losses, is recognized
through profit or loss.
4- LOANS
a) Recognition
The initial recognition of a loan occurs at the date of disbursement or, in the case of debt
instruments, on the settlement date. The financial instrument is initially recognized at fair value,
which usually reflects the amount disbursed or the subscription price, inclusive of transactions
costs/income that are directly attributable. In the event that the net value at which the loan is
recognized is lower than its fair value, due to below-market rates or to interest rates lower than
those applicable to loans with similar characteristics, initial recognition takes place for an amount
equivalent to the present value of future cash flows as discounted at a suitable market rate.
Contangoes and repurchase and resale agreements are recognized as deposits or loans, as the case
may be. Specifically, sale and simultaneous forward purchases of securities are recognized as
deposits for the amount collected at the time of sale, while purchases and simultaneous forward
sales of securities are recognized as loans for the amount of the purchase.
b) Classification
Loans include loans and advances to customers and banks, with fixed or determinable payments,
which are not listed on an active market and are not classified initially among available-for-sale
financial assets. Loans include also receivables, resale agreements, receivables arising from
factoring transactions.
c) Measurement
After initial recognition, loans are measured at amortized cost, utilizing the effective interest rate
method. Such effective interest rate reflects the discount rate at which the present value of future
cash flows of the loan, inclusive of principal and interest, is equal to the amount of the loan,
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inclusive of the costs/revenues that are directly attributable. This accounting method makes it
possible to spread the economic effect of costs/revenues over the remaining life of the loan.
Starting from 2008, and in relation to the information system adopted in the year, the amortized
cost method is applied also to short-term loans.
At the close of each fiscal year and interim period, the loans are tested for impairment to
determine any reduction of their realisable value. Such test is carried out individually for
substandard loans, that is loans included in such risk categories as non-performing, “alleged
problem” (a category that includes loans analyzed individually) and restructured loans (if any), as
defined by the relevant Supervision rules. On the other hand, performing, past due and
“objectively-determined problem” loans are tested collectively, after they are grouped in
categories sharing similar risk characteristics, such as economic sector.
The amount of the impairment of substandard loans is calculated by discounting to present value
the expected cash flows, inclusive of principal and interest, taking due account of any collateral. In
determining the present value of the cash flows, key features include the estimated recovery
amounts, the time involved and the applicable discount rate.
In relation to substandard loans, such as non-performing loans, estimated recoveries and the
relevant repayment schedules are determined by reference to the assumptions and estimates of the
employees responsible for such activities on the basis of the borrower’s solvency and taking into
account, for these types of loan, any collateral. As to the discount rate, given the inability to utilize
in a sufficiently reliable manner, at first-time adoption, the original interest rate applied to the
individual loans, use has been made of interest rates available within the Bank for the year when
they were classified as non-performing. After such date, use is made of the interest rates applied
prior to their classification as non-performing.
As to alleged problem loans and restructured positions, to determine the estimated cash flows of
each loan, reference is made to the assumptions and estimates of the employees responsible for
such activities within the various Group companies on the basis of the borrower’s solvency and
taking into account, for these types of loan, any underlying collateral. Moreover, by using the time
series of the aggregate of reference for the past few years, the percentage is calculated of the
problem loans that are classified to the non-performing category (which in turn are classified as
loans transferred within one year and within two years) and those that are reinstated as
performing. The percentages so calculated are applied to existing loans and their expected
realizable value is discounted utilizing, but only at first-time adoption, the average interest rates,
available within the various Group companies, for the year when the individual loans were
classified as problem loans, instead of the original interest rates. Subsequently, the interest rates
used are those applied to the loans before their classification as problem.
Objectively-determined problem loans - represented by such loans as feature the conditions
provided for by the supervision rules enacted in December 2008 and for which the Parent
Company did not deem it appropriate, in terms of recoverability, to perform an individual
evaluation – are assessed on a collective basis. Like performing loans, these are evaluated by
segmenting the portfolio by industry, in accordance with the supervision rules. The cash flows of
the loans so segmented are assigned – as with performing loans – a loss percentage calculated
depending on the time series common to the two loan aggregates. Such percentages are based on
elements observable on the valuation date, which make it possible to estimate the potential loss in
each category of loans so segmented, as adjusted in terms of probability of default, to keep in due
account the historical and statistical experience of problem loans vis-à-vis non-performing loans.
The assessment of performing and past due loans concerns asset portfolios featuring objective
evidence of a collective loss. Performing loans are classified by risk category, depending on the
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economic sector, as indicated in the current Supervision rules. Loss percentages calculated on the
basis of time series, based on observable elements at the evaluation date, are applied to the
estimated cash flows of the assets so segmented, to arrive at an estimate of the possible losses for
any of the loan categories so defined.
Starting from the year under review, and in connection with the criteria adopted to determine a
general loss, in order to make the determination model more consistent with the rules on
deteriorated loans, as amended by the new supervisory returns, the percentages applied to each
industry at the reporting date to determine provisions for loan losses have been restated.
Considering that until the end of 2007 the Bank prudently included under problem loans also
“watchlist” loans – i.e. loans that, even though they did not qualify under the supervision rules
then prevailing as problem loans, showed early warning signals.
Considering this classification, these positions were used to calculate the probabilities of default
for each industry, thus affecting negatively the time series used to set the percentages to make
provisions for loan losses.
Thus, it was necessary to adjust the time series related to these positions by excluding specifically
those watchlist loans that at the reporting date have been collected or restored to performing loans.
The effects of this correction in the time series resulted in the calculation of the percentages set to
make provisions to the allowance for loan losses more consistent with real loan losses, and the
ensuing lower provisions, the effects of which are shown in section 17, below “Other information”.
d) Derecognition
Financial assets are derecognized when the contractual rights on the associated cash flows expire,
or when the financial asset is sold, thereby transferring all risks and benefit related to it. On the
other hand, if the risks and benefits related to loans sold are kept, such loans continue to be carried
on the balance sheet, even though legal title has been transferred (i.e. continuing involvement).
Interest on loans, calculated utilizing the effective interest method, is recognized through profit or
loss so as to spread the effects of transaction costs/revenues over the expected life of the loan.
Write-downs and write-backs (both individual and collective) are recognized through profit or loss
(among write downs/write-backs due to loan impairment), by up to the amortised cost at which
the loan would be recognized without any previous adjustment.
5 – FINANCIAL ASSETS RECOGNIZED AT FAIR VALUE
a) Recognition
Under IAS/IFRS companies can recognize as financial instruments at fair value through profit or
loss any financial asset so designated at the time of purchase. This item refers to the application of
the fair value option to financial assets with a “natural” hedge, which is designed to create a more
balanced effect of the changes in value of financial assets and liabilities on earnings.
b) Classification
At first-time adoption, even though they might not have been held for trading, certain financial
instruments are classified as financial assets recognized at fair value through profit or loss, as
allowed by IAS 39.
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c) Measurement
Subsequently, this portfolio is measured at fair value, except for equity instruments that are not
listed on an active market, whose fair value cannot be determined in a reliable manner, and that, as
such, are carried at cost.
Financial assets are recognized in this category at their fair value through profit or loss. The choice
of the model to be adopted is not arbitrary, as the relevant techniques are ranked by order of
importance.
Hierarchy of fair value
The fair value of financial instruments is determined according to methodologies ranked by order
of importance. The first and foremost determinants of fair value are prices quoted in an active
market, followed by the observation of prices resulting from comparable transactions and then by
specific valuation models.
Therefore, the fair value of financial instruments is determined in accordance with one of the
approaches listed below in a decreasing order of importance.
1. Prices in an active market (Mark to market Approach)
Fair value reflects the market price of the financial instrument under evaluation, as determined on
the basis of the prices quoted in the active market on the last day of the fiscal year. A financial
instrument is considered as quoted in an active market if quoted prices result from arm’s length
transactions and are readily available through markets, brokers, intermediaries, operators, price
quote services or authorized entities at the time such prices result from actual and regular
transactions conducted in a normal period of reference.
2. Value of comparable financial assets (Comparable Approach)
When no market price is available, the fair value of the financial instrument is determined on the
basis of prices or credit spreads derived from the official prices of instruments largely similar in
terms of risk factors, by using specific calculation methodologies. This approach involves an
investigation into transactions conducted in active markets involving instruments comparable in
terms of risk factors to the instrument under evaluation. The calculation methodologies adopted
make it possible to reproduce the prices of financial instruments quoted in active markets without
including discretionary factors, thus providing solid ground for the determination of the fair value
of the instrument in question. However, the IASB indicated that it is not necessary to use this
measurement by “analogy” when prices are formed in inactive markets.
3. Valuation models (Mark to Model Approach)
In the presence of inactive markets, as defined above, financial instruments are evaluated using
different standards. Accordingly, reference is made to market inputs as well as more discretionary
factors. Fair value determined with the mark-to-model approach should take due account any
adjustments for the counterparty’s liquidity and credit risks.
According to this approach, the financial instrument is evaluated using a calculation methodology
based on internationally established techniques.
Valuation model of Banca Carim
The valuation model is specific to each financial instrument at the valuation date. In the presence
of an inactive market, as defined above, this model calls for the replacement of quoted market
prices for the individual instrument with a price calculated in accordance with the internal model,
taking into account interest rate, credit, liquidity and option risks.
Thus, fair value is measured using the mark-to-model approach:
• by determining the present value of expected cash flows as discounted by using the term
structure of interest rates, namely:
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for fixed-income instruments, through the use of nominal interest rate and each
coupon period;
o for floating-rate instruments, through the use the term structure of interest rates at the
valuation date to determine the expected forward rates linked to the nominal interest
rate of the instruments, as applicable on the relevant reset dates;
by adjusting for credit risk, as calculated using the average of specific credit default swaps
(CDS) applicable to the issuer, over the 12-month period preceding the valuation date, with
maturities equal to that of the financial instruments to be evaluated.
by adjusting for liquidity risk, as calculated using the average – over a defined time
horizon (1st quarter of 2008) – of the differences calculated initially on the individual
instrument, and subsequently by industry, (so-called “Base”), between the credit default
swap (CDS) and the asset swap spread (ASW) with maturities equal to the maturity of the
instrument to be evaluated.
o
•
•
In the event that the value of the credit default swap of the instrument cannot be calculated, all
risks (credit and liquidity) are estimated jointly through the time series of the asset swap spread
with the same maturity as the financial instrument, calculating the average for the 12-months
period preceding the valuation date.
In the case of structured bonds with embedded options, the adjustment for the liquidity risk is
made by used the “Base” specific to the instrument which incorporates also the option risk.
The average over the 12-month period before the valuation date used to adjust credit default
swaps and asset swap spreads for credit risk was deemed the most appropriate – following a
careful assessment and the analysis of a number of alternative hypotheses (6- and 9-month period
before). In fact, this profile is considered as the most appropriate to mitigate the effects of market
turmoil, both in the period of reference and in future periods, and is in line, in the presence of an
inactive market, with the reasons that led the Institute to adopt the internal valuation model. The
simulations run using the alternative hypotheses (average for the 9-month period before the
valuation date) would have involved lower write-downs for the Parent Company alone, i.e.
approximately €21.98 million instead of the current €24 million accounted for.
In short, adjustments for each of the credit, liquidity and option risk, and all of them combined, are
made according to the following model:
Credit risk
Liquidity
risk
Bonds with options and CDS
Bonds without options and CDS
Bonds with options and without CDS
Bonds without options and without CDS
CDS t
BASE t
BASE industry
ASW t
CDS t
CDS t
Credit and liquidity
risk
Option and liquidity
risk
Credit, option
and liquidity
risk
BASE t
BASE sector
ASW t
ASW t
Credit Defaul Swap – average for 12 months before valuation date
Difference between "CDS" and "ASW" of the specific instrument
Difference between "CDS" and "ASW" of the industry to which the issuer belongs
Asset Swap Spread - average for 12 months before valuation date
d) Derecognition
Financial assets are derecognized when the contractual rights on the associated cash flows expire
or when the financial asset is sold, thereby transferring all the related risks and benefits.
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Gains and losses on the sale or repayment of financial instrument recognized at their fair value, as
well as unrealized gains and losses arising from changes in fair value, are recognized through profit
or loss and shown in net result of assets and liabilities recognized at fair value.
6 – HEDGING TRANSACTIONS
a) Recognition
Hedging derivative financial instruments are recognized upon inception of the hedge at fair value.
b) Classification
This balance sheet item reflects hedging derivatives, which break down as follows:
- fair value hedges of a specific asset or liability;
- cash flow hedges, or hedges of future cash flows attributable to a specific asset or liability;
- hedges of net investment in a foreign operation.
Hedge derivatives are utilized to manage interest rate risk, currency risk, credit risk associated to
assets and liabilities. The designation of a financial instrument as hedge requires employees in
charge to substantiate through documentary evidence:
- the relationship between the hedging instrument and the hedged item, including the
objectives of risk management;
- the hedging strategy;
- the methods that will be utilized to check the effectiveness of the hedge.
Generally, a hedge is considered highly effective if, at inception and during its life, the changes in
fair value or in the cash flows of the hedged item are offset by changes in the opposite direction of
the fair value and the cash flows of the hedging item, within an interval ranging from 80% to 125%.
Transactions no longer qualify as hedging if:
- the hedge represented by the derivative ceases or is no longer highly effective;
- the derivative matures, is sold, terminated or exercised;
- the hedged item is sold, matures or is repaid;
- the designation as hedge is cancelled.
The ineffective portion of the hedge is the difference between the change in fair value of the
hedging instrument and the change in fair value of the hedged item, or the difference between the
change in cash flows of the hedging instrument and the change in the (expected or effective) cash
flows of the hedged item.
c) Measurement
Subsequently, hedging derivatives are measured at fair value. The fair value of derivative
instruments is determined on the basis of prices prevailing on regulated markets or provided by
qualified operators on the basis of option valuation models (or on the basis of discounted cash
flow models).
d) Recognition of gains and losses
In effective fair value hedges, changes in fair value are recognized through profit or loss. Changes in
fair value of the hedged item, attributable to the risk hedged with the derivative instrument, are
recognized through profit or loss as contra-entries to changes in the carrying value of the hedged
item.
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If the hedging relationship is discontinued for reasons other than the sale of the hedged item, and
the hedged item is measured at amortized cost, the difference between the carrying value of the
hedged item upon discontinuance and the carrying value that would have been recognized had
the hedge never existed is amortized through profit or loss throughout the remaining life of the
original hedge. In the case of non-interest-bearing instruments, this difference is recognized
through profit or loss. In the case that the hedged item is sold or repaid, the unamortized portion
of the fair value is recognized through profit or loss.
In the case of cash flow hedges, the portion of income or loss of the hedging instrument that is
considered effective is recognized initially in equity, whilst the portion that is not considered
effective is recognized through profit or loss. When the hedged cash flows materialize, and are
recognized through profit or loss, the relevant gain or loss on the hedged item is charged to equity
and released to the corresponding income statement item.
If the cash flow hedge of a future transaction is no longer effective, or the hedging relationship is
discontinued, the total gains or losses on that hedging instrument recognized in equity are
recognized through profit or loss as the transaction occurs.
7 – INVESTMENTS
a) Recognition
Investments in subsidiaries, associated companies and joint ventures are recognized on the
settlement date.
b) Classification
Investments include interests in:
- associates, involving ownership of voting shares ranging between 20% and 50%;
- joint ventures, on the basis of contractual arrangements, shareholders’ agreements or other
agreements for the management of the operation and accounted for with the equity method.
Minority interests are included in available-for-sale financial instruments, which are accounted for
in accordance with the criteria described above.
c) Derecognition
Investments are derecognized when the contractual rights on the cash flows associated with them
expire, or when the investment is sold, thereby transferring all the risks and benefit related to it.
If the impairment test shows that the recoverable value is lower than the carrying value, the
difference is shown as a cost through profit or loss among write-downs/write-backs due to the
impairment of other financial assets and the asset is shown in the balance sheet at its recoverable
value.
Any write-back is recognized through profit or loss, up to the historical cost of the investment.
8 – PROPERTY, PLANT AND EQUIPMENT
a) Recognition
Items of property, plant and equipment are initially recognized at cost, inclusive of all the
incidental costs that are directly attributable to the purchase and the start of operation of the asset.
Non-routine maintenance expenses resulting in an increase of future economic benefits are
accretive of the value of the assets, whilst routine maintenance costs are expensed as incurred.
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b) Classification
Property, plant and equipment include property used in production, investment property,
leasehold improvements of autonomous properties, technical installations, furniture, fittings and
equipment of any kind. Property used in production is that utilized for the provision of services or
for administrative purposes while investment property is that held to earn rentals and/or for
capital appreciation purposes. This item includes also assets held under a finance lease contract,
even though the lessor might have legal title to the goods, and are therefore accounted for in
accordance with IAS 17.
c) Measurement
Subsequently, items of property, plant and equipment are measured at cost, net of accumulated
depreciation and any value impairment. Depreciation is calculated every year on the basis of the
remaining useful life of the asset concerned. The remaining useful life of each asset is checked
periodically. In case of changes in the initial estimates also the relevant depreciation rate is
changed. Depreciation does not apply to the land pertaining to buildings, which is therefore
accounted for separately as it has an indefinite useful life, and to works of art, since their useful
lives cannot be estimated and their value is usually expected to increase with time.
d) Derecognition
Items of property, plant and equipment are usually derecognized at the time of disposal or when
the asset is permanently retired and no future economic benefits are expected from its
decommissioning.
At the close of each year or interim period, any indication of value impairment of an asset
determines a comparison between the carrying value of such asset and its recoverable value. The
recoverable value is the difference between the fair value of the asset, net of selling costs, and the
relevant value in use, or the present value of future cash flows originated by the asset. Value
impairments are recognized through profit or loss. Any write-back, up to the cost of the asset net
of depreciation calculated in the absence of previous loss impairments, is recognized through
profit or loss.
In accordance with IAS 17, property held under lease finance contracts is recognized as an asset
whilst the amount due to the lessor is entered as a liability. Depreciation is taken throughout the
estimated useful life of the asset. Fees paid to the lessor are applied against the liability to reduce
the principal owed and as interest expense in the income statement.
9 – INTANGIBLE ASSETS
a) Recognition
Intangible assets include goodwill, multi-year software applications, as well as the value of the
trademark. Goodwill is the positive difference between the cost and the fair value, at the acquisition
date, of assets and other operations taken over in business combinations. Any negative difference
is recognized in the income statement.
Other intangible assets are recognized at cost, as adjusted for incidental costs, only if the future
economic benefits attributable to the asset are likely to be realized and if the cost of the asset can be
determined in a reliable manner. If no such future benefits are expected, the cost of intangible
assets is expensed as incurred.
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b) Classification
Intangible assets are recognized as such if they are identifiable and are linked to legal or
contractual rights.
c) Measurement
Goodwill arising on business combinations is not amortized, as its useful life is considered
indefinite. However, it is tested for impairment at least once a year and whenever there are
indications that its carrying value is impaired. The amount of any impairment is determined on
the basis of the difference between the carrying value of goodwill and its recoverable value, if this
is lower. The carrying value is equal to the greater of the fair value of the cash generating unit, net
of any selling cost, and the relevant value in use. To this end, the cash generating unit to which
goodwill must be attributed is identified. Any adjustments recognized through profit or loss
cannot be reversed, even though in subsequent years the reasons for such adjustments no longer
apply.
The cost of the remaining intangible assets is amortized in equal instalments over their remaining
useful lives.
d) Derecognition
Intangible assets are derecognized upon disposal, and if no future economic benefits are expected.
If the intangible asset does not meet the requisites of identifiability, control and existence of future
economic benefits, the relevant cost is expensed out as incurred.
As to goodwill, a negative difference between the fair value of the assets acquired and the cost of
the investment is recognized in the income statement. A positive difference is instead recognized
as goodwill among intangible assets and any impairment is charged to the income statement.
10 – NON-CURRENT ASSETS HELD FOR SALE
a) Recognition
This item includes non-current assets (or groups of assets held for sale) whose value will be
realized mainly thanks to their sale instead of their use.
b) Classification
Non-current assets held for sale are recognized at the lower of carrying value and their fair value,
net of selling costs.
c) Derecognition
Non-current assets held for sale are derecognized upon disposal.
Gains and losses (net of the tax effect) arising from these assets are shown in the income statement
under a separate caption.
11 – CURRENT AND DEFERRED TAXATION
a) Recognition
Tax expense or credit reflects the total amount of current and deferred taxes included in the
calculation of net income for the period. Concerning deferred taxation, a deferred tax asset,
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reflecting income taxes recoverable in future years, is recognized for all the tax-deductible timing
differences in accordance with IAS 12, if the company is likely to generate taxable income against
which such tax-deductible timing difference can be recovered. In the absence of evidence on the
lack of sufficient taxable income in the future by the Bank, the application of the foregoing criteria
appears consistent and supported by a track record of consistent taxable income amounts
generated in the previous years. No deferred taxes have been calculated on non-taxable reserves,
on the basis of the provisions of paragraph 51 A and B of IAS 12, as these reserves are not expected
to be distributed.
b) Classification
Current taxes reflect the income tax payable or recoverable with reference to the taxable income or
loss for a period. The income tax is calculated in accordance with the tax laws in force.
Deferred tax liabilities reflect the amount of income taxes payable in future periods with respect to
taxable timing differences.
Deferred tax assets reflect the income tax amounts recoverable in future years due to:
- tax-deductible timing differences;
- unused tax loss carryforwards;
- unused tax credits.
Timing differences are differences between the book value of an asset or a liability and its tax base.
c) Measurement
Deferred tax assets and liabilities are computed by applying to the nominal values of the
corresponding timing differences the tax rates that, based on the tax regulations in force at the time
of calculation, will be applicable in the future periods, when the timing differences will reverse.
Moreover, when tax regulations provide for different tax rates for different fractions of the same
income, use can be made, for the future periods when the timing differences is reversed, of the
weighted average tax rate for the reporting period.
Current and deferred taxes are recognized through profit or loss except when they refer to gains or
losses on available-for-sale financial assets and to changes in fair value of hedging derivatives (cash
flow hedges), which are recognized in equity on an after-tax basis.
12 – PROVISIONS
PENSION FUNDS AND SIMILAR COMMITMENTS
a) Recognition, classification and measurement
At the reporting date, the pension fund reflects the amount of supplementary pension benefits due
to such retired and active employees who, during 2000, when the employee pension fund was
changed pursuant to Legislative Decree 124/93 as amended and supplemented, opted to continue
their enrolment in the defined-benefit plan. Following the agreement reached in 2002 with the
trade unions, on 31 December 2002 the defined-contribution section of this fund was wound up
and all the relevant positions were outsourced. The relevant liability is recognized on the basis of
its actuarial value, as it qualifies as benefits payable under a defined-benefit plan. The present
value of the liability is calculated by an independent expert and the effects of this estimate are
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b) Recognition of gains or losses
Losses related to the adjustments of the provisions for defined-benefit plans are recognized in the
income statement as staff costs. For defined-contribution plans (external funds), the contributions
paid by the Bank are expensed out as incurred and are determined in accordance with the
employment service.
EMPLOYEE TERMINATION BENEFITS
Employee termination benefits are recognized as a liability on the basis of their actuarial value, as
they are employee benefits payable under a defined-benefit plan. Defined-benefit plans are
measured on the basis of actuarial estimates of the benefits accrued by employees during their
years of service, as discounted to determine the present value of the Company’s liability. The
present value of this liability is calculated by an independent actuary and the effects of this
process are recognized through profit or loss.
Based on Law no. 296 of 27 December 2006 (2007 Budget Act), companies with at least 50
employees are required, at 1 January 2007, to pay their monthly contributions to employee
termination benefits, locally known as TFR (Trattamento di Fine Rapporto), to the supplementary
pension funds selected by the individual employees or to the Fund for private-sector employee
termination benefits referred to by article 2120 of the Italian Civil Code (hereinafter Treasury
Fund) managed by INPS, the Italian social security agency.
This gave rise to two different positions:
- The employee termination benefits accruing at 1 January 2007, for employees who elected to
have their contributions deposited in the Treasury Fund, and at the month following their
election, for employees who have opted to have their contributions deposited in a
supplementary pension plan, are a defined contribution plan, which does not need actuarial
calculations. The same approach applies to all employees hired after 31 December 2006,
regardless of where they elect to have their contributions deposited.
Employee termination benefits accrued at the above dates continue to be treated as a defined
benefit plan.
Employee termination benefits accrued during the year, equivalent to the average present value
of the benefits accrued by employees during the year, are recognized in the income statement as
staff costs.
OTHER PROVISIONS
a) Recognition and classification
Provisions for risks and charges reflect costs and charges of a given nature, whose existence is
certain or probable but the amount and payment date are uncertain. These provisions are
recognized when:
- there is a current (legal or implied) obligation as a result of a past event;
- the fulfilment of the obligation is likely to require an outflow of resources for the production of
economic benefits;
- the amount of the obligation can be estimated in a reliable manner.
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b) Measurement
Provisions reflect the present value of the charges that will presumably be incurred to fulfil the
obligation, in the event that the passage of time is considered important. The present value is
calculated by using the current market rates.
c) Derecognition
Provisions for risks and charges are derecognized when the obligation that originated them ceases.
Provisions and releases are recognized through the income statement under provisions.
13 – DEPOSITS AND SECURITIES ISSUED
a) Recognition
These financial liabilities are initially recognized upon receipt of the sums deposited or of the
proceeds of debt instruments sold. The liability is recognized initially at fair value, which is usually
the sum collected or the issue price, as adjusted for any transaction cost/income.
b) Classification
Banks’ deposits, customers’ deposits, securities issued and subordinated liabilities include the
different types of funding obtained in the interbank market and from customers or via the issue of
certificates of deposit and bonds, net of any repurchased amount. Customers’ deposits include
amounts due to lessors in connection with any finance lease contract.
c) Measurement
Subsequently, the financial liabilities in question are measured at amortised cost, as calculated on
the basis of the effective interest rate methodology, except for short-term liabilities. The amortised
cost method is not applied to short-term debt, as the effect of discounting any such amount to
present value would be immaterial and, as a result, amortised cost would be very close to
historical cost.
d) Derecognition
Financial liabilities are derecognized when they mature or are repaid. Derecognition occurs also
for buybacks of previously issued securities.
e) Recognition of gains or losses
Interest expense on such debt instruments is classified as interest expense on debt and similar
charges. Gains or losses arising on the buyback of own securities are recognized through profit or
loss. The placement on the market of own securities after a buyback is considered as a new issue
and recognized at the new placement price, without any effects on the income statement.
14 – FINANCIAL LIABILITIES HELD FOR TRADING
a) Recognition
Financial liabilities held for trading are recognized initially at fair value, on the date of issue, in the
case of debt instruments, or of stipulation, in the case of structured contracts.
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b)
Classification
This item comprises the negative value of trading derivatives, as well as the negative value of
derivatives embedded in complex contracts but closely related to them. In addition they include
liabilities arising from short positions created in security trading activities.
c) Measurement
All financial liabilities held for trading are recognized at their fair value.
d) Derecognition
Financial liabilities held for trading are derecognized when they mature or are repaid. Own
securities repurchased are also derecognized.
The difference between the carrying value of the liability and the amount paid to purchase it is
recognized through profit or loss as write-downs/write-backs due to impairment of other financial
liabilities
15 – FINANCIAL LIABILITIES RECOGNIZED AT FAIR VALUE
Under IAS/IFRS any financial liability can be recognized at fair value at the time of purchase, if so
designated (so-called fair value option). This item refers to the application of the fair value option to
financial liabilities with a “natural” hedge, which is designed to create a more balanced effect of
the changes in value of financial assets and liabilities on earnings.
b) Measurement
Liabilities under this caption are recognized at fair value.
c) Derecognition
These financial liabilities are derecognized when they mature or are repaid. Own securities
repurchased are also derecognized.
d) Recognition of gains or losses
recognized through profit or loss under Net result of financial assets and liabilities recognized at
their fair value.
16 – FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions are recognized initially in the reporting currency by applying to the
foreign currency the spot rate prevailing on the transaction date.
b) Measurement
At the close of each year or interim period, foreign-denominated items are measured as follows:
- monetary items are translated at the exchange rate prevailing on the closing date;
- non-monetary items recognized at their historical cost are translated at the spot exchange rate
prevailing on the transaction date;
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-
non-monetary items recognized at fair value are translated utilising the spot exchange rate at
the closing date.
c) Recognition of gains or losses
Exchange rate differences arising from payments or from the translation of monetary elements at
exchange rates other than those applied initially, or applied to the previous financial statements,
are recognized through profit or loss in the period in which they materialize.
17 – OTHER INFORMATION
Recognition of treasury shares
Any treasury shares held are deducted from shareholders’ equity. Similarly, gains or losses arising
on their disposal are recognized as changes in equity.
Revenue recognition
Revenues are recognized upon collection or whenever future benefits are likely to be received and
such benefits can be quantified in a reliable manner.
Specifically:
- Interest on customers ’and banks’ loans are classified as interest income and similar revenues
and recognized on an accrual basis. Late-payment interest charges are accounted for on an
accrual basis and written down for the amount deemed irrecoverable;
- Dividends are recognized upon collection;
- Commission and interest income or expense related to financial instruments is accounted for
on an accrual basis;
- Revenues from financial instrument trading are recognized through profit or loss, if the fair
value of such instruments can be determined by reference to recent standards or transactions
observable on the same market where they are traded. Alternatively, absent these standards of
reference, revenues flow to the income statement throughout the term of the transaction.
Leasehold improvements
Leasehold improvements are capitalized in view of the future economic benefits flowing to the
user of the asset throughout the term of the lease. These costs, which are classified as Other assets,
in accordance with the Bank of Italy’s instructions, are amortized over the shorter of the period
during which the improvements can be used and the term of the lease (inclusive of any lease
renewal, if this depends on the tenant). These are value-accretive improvements and expenses that
cannot be severed from the assets, as these cannot be used and operated separately. In the absence
of such value-accretive improvements, such costs would be recognized as property, plant and
equipment
Other information
As specifically indicated in part 4 – “Loans” of this section, on the basis of reasoned opinion, as of
2008 estimates of the general losses on performing loans were changed. The effect of this estimate
change led to a benefit for the Group of €9.2 million, with the relevant percentage of provisions for
loan losses settling at 1.46% as opposed to 1.35% at 31 December 2007.
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ACCOUNTING STANDARDS, CHANGES IN ESTIMATES AND ERRORS.
As the financial statements for the year ended December 31, 2008 were being prepared, it became
obvious that adjustments had to be made to certain balance sheet and income statement items for
previous years, with the following effects:
- Reserves – decrease of €2,494.27 thousand resulting from the recalculation of the proper
interest amount for each installment of several mortgages between 1994 and December 31,
2008.
Accordingly, at January 1, 2008 equity declined from €397,389 thousand to €394,895 thousand.
IAS 8 states that:
- an accounting error relating to prior periods does not affect the income statement for the
periods presented but retrospective adjustments are made by restating the comparative
amounts for the prior periods presented;
- a prior period error shall be corrected by retrospective restatement except to the extent that
it is impracticable to determine either the period-specific effects or the cumulative effect of the
order;
- when it is impracticable to determine the period-specific effects o fan error on comparative
information for one or more periods presented, the entity shall restate the opening balance of
assets, liabilities and equity for the earliest period for which retrospective re statement is
practicable (which may be the current period).
According to this standard, and considering the impracticability of restating the effects for each
prior period, Banca Carim changed the comparative balances in the balance sheet at December 31,
2007, showing the relevant adjustments also in the statement of changes in equity for 2008, in the
columns related to the opening balances, in accordance with the instructions in Circular 262 issued
by the Bank of Italy in December 2005.
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ANNUAL REPORT FOR THE YEAR ENDED
DECEMBER 31, 2008
Report on Operations
Consolidated Financial statements
Notes to the consolidated financial statements
Abridged English translation of the original issued in Italian
GRUPPO CREDITIZIO BANCA CARIM - CASSA DI RISPARMIO DI RIMINI S.p.A.
___________________________________________________________________________________________________
Member of the Interbank Deposit Protection Fund
Rimini Companies’ Register at no. 13899
Register of Banking Groups - Code 6285.1
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REPORT ON OPERATIONS
INTRODUCTION
Pursuant to Legislative Decree no. 38 dated 28 February 2005, the Banca Carim
Credit Group has been preparing its consolidated financial statements in accordance with
IAS/IFRSs since the year ended 31 December 2005.
In 2008 the basis of consolidation did not change, therefore, at year-end 2008, the
Banca Carim - Cassa di Risparmio di Rimini S.p.A. Group consisted of:
THE GROUP
60%
100%
Attention is called to the regulatory context in which Credito Industriale
Sammarinese operates, featuring the extensive application of “banking secrecy”, where
details of customers and banking transactions are strictly confidential. In the presence of
these conditions, even though it exercises significant influence over this subsidiary’s
governance thanks to participation in the board and senior management, Banca Carim
preserved the continuity and autonomy of Credito Industriale Sammarinese (providing
the strategic guidance designed to encourage a conduct in line with the Parent
Company’s principles of prudence and efficiency).
MACROECONOMIC CONTEXT
In 2008 the world economy grew by 3.4%, witnessing a sharp fall from the 5.2%
increase of the previous year. The painful financial crisis that began in the summer of
2007 was exacerbated in the autumn of 2008, resulting in a substantial decrease of
industrial output and a strong GDP contraction in the main industrial countries. The pace
of economic growth slowed down considerably also in the emerging countries, even
though these economies are still acting as engines for global growth. The year was
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marked by the high volatility of oil prices, as the average price per barrel first rose from
$72.5 to $98.5 and then plunged in the second half of the year.
In the year just ended, the United States saw its GDP go up by 1.3%, compared
with 2.0% in 2007, and showed strong recession signals toward the end of the period. The
slowdown of the US economy was due mainly to the serious contraction of investments,
especially those in the housing sector which declined by 20%. Imports, too, decreased
(down 3.3%) while consumer spending was nearly flat (up 0.3%). The US government
reacted by implementing an expansive fiscal policy which translated into a higher public
expenditure (up 2.9%).
In Japan GDP even fell (down 0.7%), due mainly to the economy’s dismal
performance, particularly in the last quarter, the worst in the last 35 years, with a
negative growth rate of 4.6%.
In the Euro area GDP grew by 0.8% for the year as a whole, showing a substantial
decrease from 2.7% a year earlier. Growth was kept in check especially by consumer
spending (up 0.6%) while fixed investments, imports and exports performed slightly
better. Also in this area, the most worrying signals came from the latter part of the year,
considering that in December the manufacturing output dropped by 11.1% on an annual
basis. The rate of inflation rose above the 3% limit (3.3% in 2008 as against 2.1% in 2007),
as prices came under pressure throughout the main European countries. Concerning the
currency market, 2008 saw the euro rise further against the US dollar - as the average
exchange rate for the year stood at 1.471, compared with 1.371 in 2007 – and the pound
sterling. On the other hand, the euro lost ground against the Japanese yen, falling from
161.3 to 152.3.
The year under review saw also a significant easing in monetary policy. In its
attempt to deal with the serious financial and economic crisis, the US Federal Reserve cut
the fed funds rate as many as 7 times during the year, from 4.25% at the end of 2007 to a
level ranging from 0% and 0.25%. The European Central Bank began by a partial
tightening, so as to stave off the inflation fuelled by rising commodity prices. However,
starting in October, it too began to implement an expansionary monetary policy,
lowering the refi rate three times, to 2.5% at year-end (compared with 4.0% at the end of
2007).
In 2008, Italy’s GDP decreased. After negative growth rates for three quarters in a
row, the average for the year was -0.9% (compared with a positive growth rate of 1.5%
for 2007). The recession worsened in the last few months, as manufacturing output fell
by as much as 14.3% on an annual basis. During the year under review, the only positive
component was government expenditure (up 1.1%) , while fixed investment (down 0.7%),
consumer spending (down 0.4%), imports (down 2.1%) and exports (down 0.5%) were all
negative compared with 2007. The unemployment rate went up again, after several years,
and stood at 6.7% in the third quarter, as opposed to 6.2% for the comparable year-earlier
period (however, Italy’s unemployment rate is lower than the average for the Euro Area).
On the consumer price front, the average for 2008 rose to 3.2% as against 1.7% in 2007.
The public budget deteriorated again, as the deficit-to-GDP ratio should reach 2.6%,
which is 1 percentage point higher than the comparable figure in 2007. This deficit
increase and lower GDP growth caused the debt-to-GDP ratio to rise again, reaching
105.9%, compared with 104.1% in 2007. In keeping with the highly negative performance
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of all equity markets, the Italian Stock Exchange’s index, Mibtel, posted a 48.7% decrease
for the year.
GDP in the Emilia Romagna region are expected to have risen 0.1%, reflecting a
substantial slowdown from the 2.0% growth rate posted in 2007, which was still higher
than the national average. Output, new orders and sales weakened as the months went
by. Consumer spending decreased for small and medium retailers, and rose at a slower
pace for large retailers. Positive news came from a limited number of sectors – in some
cases with rather low growth rates – such as air and sea shipping. The only growth
signals came from agriculture, whose value added went up by 7.4%.
As noted above, regional demand decelerated, especially household spending,
which should be down 0.1%. Fixed investments proved more resilient (up 1.5%), while
exports rose by 1.2%. The rate of unemployment rose again, from 2.8% to 3.3%, reflecting
one of the lowest rates of increase for the country as a whole.
In line with the Emilia Romagna region as a whole in the year under review, the
Province of Rimini saw the progressive deterioration of the main economic indicators.
The growth achieved in the first half was followed by a sharp drop in the third quarter,
which was further exacerbated in the following months. The overall manufacturing
output should decrease by 0.5%, while new orders should decrease by 0.7%. Exports
should still be positive (up 1.8%), though much worse than in 2007.
Labour market data is available for 2007. After years of constant growth, the size of
the workforce (129,000) and the employment rate (65.9%) remained stable, compared
with 2006. On the other hand, the unemployment rate deteriorated, and went from 4.2%
to 4.5%, and was higher than the average for the region.
In 2008, “Federico Fellini” airport posted a contraction in passenger traffic, with
passenger arrivals down 13% and departures down 14%. However, in both cases absolute
numbers were above 200,000 passengers each. The only growth segment was cargo
traffic, as the volume of goods shipped rose by 18%.
Despite some difficulties, the 2008 tourist season proved resilient. Total arrivals
were up 0.8% on the previous year, thanks mainly to the Italian component (up 1.4%)
while the foreign inflow declined by 1.4%. In 2008 total visitors decreased by 0.9%, also in
this case due to foreign tourists (down 2.4%) more than to the Italian (down 0.5%).
The above trends confirmed a preference for shorter stays, as these fell further, to
5.20 days in 2008, compared with 5.30 days in 2007.
The congress and fair sectors slowed down as well. Data in the first half of the year
saw an increase in the number of days to 2.9% (a far cry from the 29.5% in the previous
year). The number of participants improved as in the same period they totalled 882,000,
with a 9.7% increase. In 2008, the Rimini Exhibition Centre had a total of 1,583,000
visitors, showing a 9.8% increase on the preceding year.
Concerning the banking system at national level, funding rose by 11.7%, compared
with 7.9% in 2007. Growth in this area was driven once again by bonds, which rose by
21.2%, followed, in terms of percentage change, by repurchase agreements (up 10.2%).
New loans provided by banks showed a decrease closely related to the recession
and the resulting cuts in firms’ investment plans. Loans rose by only 4.9%, which was
considerably lower than the 9.8% increase for the previous year. The increase was fuelled
mainly by short-term lending (up 6.6%) while medium-to-long term loans rose at a
slower pace (up 3.9%). The main risk indicators show that credit quality was good also in
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2008, as non-performing loans decreased by 2.7% while the ratio of non-performing loans
to total loans fell from 1.18% to 1.08%.
After experiencing significant pressures, money market rates declined significantly
toward the latter part of 2008. In particular, the 3-month Euribor ended at 3.29%,
compared with 4.85% at the end of December 2007 (in October 2008 this rate rose to as
much as 5.11%). This translated into an increase in the rates of interest extended by
Italian banks. The average funding rate went from 2.89% at the end of 2007 to 3.01% in
December 2008. In the same period, average lending rates decreased from 6.18% to 6.08%.
As regards the local credit market, based on figures available at 30 September 2008,
over the past 12 months the number of branches in the province of Rimini rose from 292
to 295.
In the same period, in the province deposits rose by 6.0%. This was higher than the
comparable increase at national level (4.8%) but the lending rate was higher still (6.5%).
Over the past 12 months, non-performing loans rose at a pace lower than the
lending rate (5.6%). This underperformed the national trend, which featured a 9.6%
decrease in non-performing loans.
In terms of concentration, the number of residents per branch fell further, from
1,039 at the close of 2006 to 1,015 at the end of 2007.
With reference to Credito Industriale Sammarinese, the Republic of San Marino saw
once again the number of residents increase – in line with a pattern that has taken hold
over the past few years – as in 2008 these rose by 477 from 30,792 to 31,269 individuals.
At December 2008, there were 6,464 firms operating in the Republic of San
Marino, reflecting a 6.6% increase on the comparable year-earlier figure.
During the year, the extensive review of bank rules and regulations continued in
the Republic of San Marino. Law 92 of 17 June 2008 – “Rules on prevention and
combating of money laundering and terrorism financing “- was particularly important, as
it introduced into San Marino’s legal system rules consistent with the treaties signed by
the Republic of San Marino and in line with the recommendations issued by competent
international bodies. In particular, the new law instituted the Financial Information
Agency (FIA) for the prevention and combating of money laundering and terrorism
financing. Subsequently, enabling legislation was enacted to address in particular:
- skills, integrity, and independence requirements for the FIA’s directors;
- the procedures to close unregulated bearer passbooks;
- custody, administration and management of frozen funds;
- controls on the cross-border transfer of cash and similar instruments.
It should be noted that the review of the San Marino situation with respect to its
adaptation to international standards adopted to combat money laundering and
terrorism financing, which ended in Strasbourg last December, did not produce the
hoped-for outcome. In fact, even though it expressed appreciation for the new rules
introduced, Moneyval suspended its judgment until September 2009, in order to check
the effectiveness of the new rules.
Thus, Moneyval’s considerations precluded the Republic of San Marino’s inclusion
in the so-called white list, i.e. the list of non-EU countries that apply rules to combat
money laundering and terrorism financing equivalent to those enacted by the EU. This
resulted in the immediate position adopted by the Bank of Italy, with its own circular,
which showed possible difficulties in the fulfilment of anti-money laundering obligations
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provided for by Italian law on the part of San Marino’s banking and financial
counterparties.
In 2008, the Central Bank of the Republic of San Marino continued to enact
legislation implementing and supplementing its Law on financial, banking and insurance
firms and services (LISF – Legge sulle imprese e sui servizi bancari finanziari e
assicurativi). In particular, attention is called to the following:
- regulation 2008/01, which came into force on 5 May 2008, governing life
insurance operations, and related sub-branches, and applicable to insurance
companies headquartered in San Marino;
- regulation 2008/02, setting forth the accounting and preparation standards
for bank financial statements, providing for the notes and the balance sheet and
income statement formats; the new regulation will take effect in financial year 2009
and will standardize the presentation of the financial statements for the San Marino
banks, “also to prepare progressively the banking system for the application of the
IAS/IFRSs.”
- regulation 2008/03, amending Regulation 2007/02 in insurance and
reinsurance intermediation, which came into force on 5 December 2008;
- regulation 2008/4, which came into force on 1 January 2009, reflecting the
first amended version of the Rules on deposit-taking and banking activities.
Within the scope of the powers attributed to it, in 2008 the Central Bank of San
Marino enacted, in its capacity as Supervisory Authority, circulars and instructions
containing general and operational provisions to San Marino’s authorized entities. At 24
November 2008, the issue of instructions on the combating and prevention of money
laundering and terrorism financing falls exclusively within the purview of the Financial
Information Agency, which became operational on that date.
Lastly, attention is called to Recommendation 2009/01, issued by the Central Bank
on 30 January 2009, and Instruction 2009/02, issued by the Financial Information Agency
on 6 February 2009, due to the importance of the question addressed and the importance
of their content for the entire financial system of San Marino. These documents clarified
the conduct that San Marino’s authorized entities must follow, in the event that their
foreign counterparts request information, to comply with the rules of adequate
verification of customers enacted by their national laws, provided that these are
equivalent to, or consistent with, San Marino’s laws.
FUNDING
Total consolidated funding at December 31, 2008, including insurance premiums,
amounted to €6,230.79 million, marking a decrease of 1.31% from the previous year
(€6,313.37 million).
Direct funding, which reflects customers’ deposits (reported, as usual, net of
repurchase agreements), securities in issue and liabilities recognized at fair value, rose by
an impressive 10.10% on the previous year, settling at €3,726.64 million, compared with
€3,384.82 million at 31 December 2007.
561
Indirect funding, which is reported at market value and, as usual, also includes
repurchase agreements, fell by 14.49% from the comparable amount in 2007, to €2,504.15
million.
LOANS
At year-end loans to customers, net of provisions for loan losses, amounted to
€3,314.87 million, registering an increase of 4.95% on the previous year (€3,158.56
million).
A credit policy inspired by the Parent Company’s typically prudential approach
has made it possible to maintain good portfolio quality, despite the constant growth
achieved.
OPERATING RESULTS
For a better discussion of performance, a reclassified income statement has been
prepared, as shown at the end of this section.
Net interest income, amounting to €120.51 million, rose by 6.33% (€113.34 million
at 31 December 2007). This increase was fuelled by the constant and progressive increase
experienced by loans and direct deposits as well as by constantly favourable interest
rates.
Non-interest income, including net commission income (€26.06 million) as well as
other operating income and expenses (but only for recoveries/changes of €9.266 million),
amounted to €35.72 million, which was slightly up (0.12%) from the comparable amount
for the previous year.
Income from trading and hedging activities, which includes dividends and similar
income and net results of trading, hedging, available-for-sale and fair-value assets and
liabilities, amounted to a negative €34.47 million, compared with a negative €4.35 million
at 31 December 2007.
The financial crisis of 2008 and the large number of defaults resulting from it
eroded substantially market confidence in the global banking system. This reverberated
onto bond prices, which in 2008 were hit hard both due to the higher risk premium
required by bond investors and to the drying up of liquidity in a thinly traded corporate
bond market, featuring widening bid-asked spreads and phases of mounting panic.
Against this backdrop, and despite its prudent approach to financial management, at
December 31, 2008 the fair value of Banca Carim Group’s financial assets fell overall by
€34.61million, due mainly to the decrease in value of government bonds – due to the
effects of the financial crisis – mutual funds and bonds held in portfolio (including those
issued by an insolvent Lehman Brothers).
The difficult situation in the financial markets, which resulted in losses in the value
of debt securities that were more severe than warranted by the current risk scenarios, led
the Group to adopt an internal valuation model, in keeping with the IASB’s guidance,
562
that could be utilized to estimate the fair value of financial instruments in inactive
markets, as illustrated specifically in Part A – Accounting Policies in the notes.
The positive effects determined by the use of this model, amounting to
approximately €25.10 million, will be described more extensively in the section on
operating results. Moreover, attention is called to the Group’s good liquidity condition
(which continues in 2009) and to the relatively short tenor of the financial instruments in
question, which make it possible, at this stage, to wait until they mature. All this to
prevent that the decrease in value of the financial assets turn into realized losses, thus
using the rising value of these financial instruments to boost profit further in future
years.
Financial and insurance income, which reflects interest and non-interest income as
well as income from trading and hedging activities, fell by 15.83%, to €121.76 million,
compared with €144.67 million at 31 December 2007.
Administrative expenses, amounting to €83.02 million, rose by 8.21%. Within this
item, staff expenses totalled €50.79 million, up 15.97%. However, it should be noted that
the Parent Company’s figures at December 31, 2007 were affected by the positive
economic effect of €3.00 million determined by the new rules on post-employment
benefits applicable starting in 2007 and by the temporary staff increase to handle the
start-up of migration into the Parent’s information system. Other administrative expenses
stood at €32.23 million, increasing by 2.11%.
Operating income stood at €38.74 million, showing a 42.98% decrease from the
comparable amount at 31 December 20067(€67.95 million).
Amortization and depreciation fell (down 3.31%), to €3.76 million.
Net operating income amounted to €34.98 million, showing a 5.39% decrease from
the comparable amount at 31 December 2007.
Write-downs/write-backs due to impairment, including also write-downs of loans
and other financial assets, amounted to €25.47 million, compared with €16.37 million at
31 December 2007 (down 55.61%), representing 2.74% of total loans (2.24% at 31
December 2007). At year-end 2008, total allowance for loan losses, reflecting provisions
for losses incurred on loans to customers details of which are provided in Part E –
Section 1 (On- and off-balance-sheet exposure to customers) amounted to €93.40 million.
Profit before tax from continuing operations amounted to €5.82 million, down
86.85% from the comparable amount in 2007. This was obtained by taking into account
provisions, gains or losses on investments, and gains or losses on disposal of investments.
Net profit attributable to shareholders of the Parent Company, after tax for the
period of €0.70 million and income attributable to non-controlling interests of €0.006
million, amounted to €5.12 million, an 81.25% decrease from €27.30 million at 31
December 2007.
563
2008 RECLASSIFIED CONSOLIDATED INCOME STATEMENT
IAS
Description
2008
2007
Change % Change
10
Interest and similar income
265,443
215,137
50,306
23..38
20
Interest and similar expense
-144,933
-101,800
-43,133
42.37
30
Net interest income (10 + 20)
120,510
113,337
7,173
6.33
40
Commission income
29,363
29,466
-103
-0.35
50
Commission expense
-3,300
-3,707
407
-10.98
60
Commission income, net
26,063
25,759
304
1.18
220 a)
Other operating income and expense – recoveries/expenses
Non-interest income (60 + 220 a)
70
Dividends and similar revenues
80
Trading income (loss), net
90
Gains/Losses on hedging activities
100
Gains (losses) on disposal or repurchase of receivables, financial assets/liabilities
9,661
9,922
-261
-2.63
35,724
35,681
43
0.12
446
803
-357
-44.46
-1,493
-79
-1,414
1.798.97
0
0
0
0.00
848
327
521
159.33
Net result of financial assets and liabilities recognized at fair value
-34,272
-5,400
-28,872
534.67
Income from trading and hedging activities (70 + 80 + 90 + 100 + 110)
-34,471
-4,349
-30,122
692.62
120
Financial and insurance income (expense):
121,763
144,669
-22,906
-15.83
180
Administrative expenses
-83,020
-76,721
-6,299
8.21
- Staff costs
-50,791
-43,796
-6,995
15.97
- Other administrative expenses
-32,229
-32,925
696
-2.11
110
Operating income
38,743
67,948
-29,205
-42.98
200
Net adjustments/write-backs of property, plant and equipment
-2,745
-2,377
-368
15.48
210
Net adjustments/write-backs of intangible assets
-470
-496
26
-5.24
Other operating income and charges – amortization and depreciation – other
-549
-1,020
471
-46.18
220 b)
130
Amortization and depreciation (200 + 210 + 220b)
-3,764
-3,893
129
-3.31
Net operating income
34,979
64,055
-29,076
-45.39
-25,468
-16,367
-9,101
55.61
-24,180
-16,277
-7,903
48.55
-1,288
-90
-1,198
1.331.11
-3,693
-3,526
-167
4.74
Write-down/write-back of:
- loans
- financial assets
190
Provisions
240
Gains (losses) on investments
0
0
0
0.00
270
Gains (losses) on disposal of investments
1
94
-93
-98.94
280
Profit (loss) before tax from continuing operations
5,819
44,256
-38,437
-86.85
-695
-16,892
16,197
-95.89
5,124
27,364
-22,240
-81.27
290
Income tax for the period on continuing operations
300
Net profit (loss) from continuing operations
310
Net profit (loss) from assets included in disposal groups
320
330
Net profit (loss) attributable to non-controlling interests
340
Net profit (loss) attributable to shareholders of the Parent Company
Captions including different items
Reclassified items
564
0
0
0
0.00
5,124
27,364
-22,240
-81.27
-6
-62
56
-90.32
5,118
27,302
-22,184
-81.25
EQUITY
At 31 December 2008 consolidated equity amounted to €406.69 million, inclusive of
net profit of €5.12 million attributable to shareholders of the Parent Company.
As to circular 262 issued by the Bank of Italy on 22 December 2005 providing
instructions on consolidated financial statements, the equity and net profit of the parent
company are reconciled with consolidated equity and net profit.
Statement of reconciliation between equity and net profit
for the period of the Parent Company and the
corresponding amounts in the consolidated financial
statements
Equity
Net profit for
the period
Equity
Net profit for
the period
31 December 31 December 31 December 31 December
2008
2008
2007
2007
Share capital
Reserves
Revaluation reserves
Total Banca Carim – Cassa di Risparmio di
Rimini S.p.A.
117,498
41,637
166,351
52,636
378,122
Revaluation reserves attributable to other Group
companies
Other reserves attributable to other Group
companies
Net results of companies consolidated on a lineby-line basis
Elimination of intercompany dividends
Total Group companies consolidated on a lineby-line basis
8,339
8,339
117,498
41,608
161,578
56,514
377,198
2,842
2,809
20,605
14,801
6,721
-9,936
Total Banca Carim – Cassa di Risparmio di
Rimini S.p.A. Group (inclusive of noncontrolling interests)
Consolidated equity of Banca Carim – Cassa di
Risparmio di Rimini S.p.A. Group
Share capital
Reserves
Revaluation reserves
Equity attributable to non-controlling interests
Consolidated equity and profit
Equity and profit attributable to non-controlling
interests
Equity and profit attributable to shareholders of
the Parent Company
20,191
7,172
23,447
-3,215
17,610
7,172
401,569
5,124
394,808
27,363
117,498
41,637
186,956
55,479
1,311
565
20,191
402,881
5,124
5,124
1,311
401,570
117,498
41,608
175,074
59,323
1,305
394,808
27,363
27,363
6
1,305
61
5,118
393,503
27,302
TREASURY SHARES
At the reporting date the Bank did not own treasury shares. During the year the
parent company, Banca Carim, bought back 145,902 shares with a total value of €2.80
million from shareholders. The same shares were then sold for a price of €2.83 million.
The Parent Company has over 7,600 shareholders.
CASH FLOW STATEMENT
In accordance with current rules and regulations, together with the balance sheet and
income statement, a cash flow statement is provided, as resulting from the application of
the direct method, for both the current and the past fiscal year.
HUMAN RESOURCES AND DISTRIBUTION STRUCTURE
During 2008 personnel training activities were intensified, in keeping with the
approach developed in previous years, though with a stronger focus on the commercial
aspects and the important regulatory changes introduced both in Italy and the Republic
of San Marino.
At 31 December 2008, the Group’s average headcount was 826, an increase of 41
employees from the comparable 2007 figure.
The distribution structure consists of 115 branches. Of these, 110 belong to Banca
Carim, the Parent Company, and are located in the regions of Emilia Romagna, Marche,
Abruzzo, Molise, Umbria and Lazio, with a high concentration in the province of Rimini.
Credito Industriale Sammarinese has 4 branches and they are all located in the Republic
of San Marino.
SUBSEQUENT EVENTS
The international financial crisis has had significant repercussions on the EU
economies. The situation is still uncertain and the negative economic conditions will
continue throughout 2009, with a feeble recovery expected to take hold in 2010.
The effects of this situation in the early months of the current year are reverberating
on companies, which have to cope with a significant decline in industrial output and
consumer spending.
In order to meet this challenge and adequately respond to its customers’
requirements, the Parent Company, Banca Carim, has implemented several actions –
including the extension of credit lines – to support the small and medium companies that
operate in the various industries in the province of Rimini. These actions have been
extended also to households.
566
OUTLOOK
The progressive deterioration of the crisis in domestic and international financial
markets is inevitably dragging down the real economy, thus triggering a recession.
According to the latest surveys, the widespread slowdown of the principal economies
will continue into the following year. The Parent Company’s operations will continue to
be conducted in accordance with the guidelines set out in the 2007-2009 strategic plan
approved by the Parent Company, that is through the growth of loans and deposits, the
constant search for greater efficiency and further cost containment. Special and constant
attention will be paid – especially at such times as this - to all customers’ needs through
direct contact, which will translate into greater satisfaction and confidence.
The Bank’s geographical expansion will continue also in 2009, with the opening of
new branches in accordance with the Parent Company’s plans. These plans call for the
opening of approximately twenty new branches in the next two years. Growth will
continue to be pursued in keeping with the mission and the guidelines adopted so far,
with the development of a firmer presence in existing markets.
As in past years, the key objective will include active staff management, focusing
on the development of training programmes, especially more marketing-oriented ones.
As to the lending business, in an environment such as the current one, which is
expected to deteriorate, special and constant attention will be paid to risk assessment and
monitoring, also through counterparty diversification. Emphasis will be placed also on
retail customers (individuals, households and small and medium companies).
With respect to Credito Industriale Sammarinese S.p.A., a three-year development
plan has been adopted. This and favourable economic conditions, marked by growth in
the different areas of activity, enabled this subsidiary to deliver 2008 results in line with
expectations.
Lastly, with respect to CORIT – Riscossioni Locali S.p.A., which engages in local tax
collection, the primary goal for the next few years will be to become a major player in
bringing together, and meeting, the needs of both local tax authorities and taxpayers.
This goal will be achieved also thanks to the use of innovative services implemented to
fulfil the specific requirements of local authorities, exploring and developing also
through specific synergies with other companies, new businesses, in order to differentiate
services in qualitative terms, thus expanding opportunities in such a traditional business
as tax collection.
The availability of new services, together with the ability to manage tax
collection, will enable the company to grow in its geographic market.
Rimini, 30 March 2009
Board of Directors
567
568
CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________________________
__________________________________________________________________________________________________________________
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2008
________________________________________________________________________________________________________________________
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2008
31
31
December December
2008
2007
ASSETS
10. CASH AND CASH EQUIVALENTS
132,815
35,204
5,949
1,029
772,746
544,929
31,629
32,578
289,953
333,452
3,314,870
3,158,562
139,803
135,629
72,608
72,673
71,672
71,672
140. TAX ASSETS
19,641
21,092
A) CURRENT
2,343
6,715
B) DEFERRED
17,298
14,377
160. OTHER ASSETS
260,614
119,534
TOTAL ASSETS
5,040,628
4,454,682
20. FINANCIAL ASSETS HELD FOR TRADING
30. FINANCIAL ASSETS RECOGNIZED AT
FAIR VALUE
40. AVAILABLE-FOR-SALE FINANCIAL ASSETS
60. LOANS AND ADVANCES TO BANKS
70. LOANS AND ADVANCES TO CUSTOMERS
120. PROPERTY, PLANT AND EQUIPMENT
130. INTANGIBLE ASSETS
OF WHICH: GOODWILL
573
31
31
December December
2008
2007
LIABILITIES AND EQUITY
10. BANKS’ DEPOSITS
44,181
91,473
20. CUSTOMERS’ DEPOSITS
2,403,791
2,249,294
30. SECURITIES ISSUED
1,555,730
1,232,725
10,906
9,017
239,711
230,902
30,759
39,178
40. FINANCIAL LIABILITIES HELD FOR TRADING
50. FINANCIAL LIABILITIES RECOGNIZED AT FAIR VALUE
80. TAX LIABILITIES
A) CURRENT
131
B) DEFERRED
30,628
39,178
315,616
148,398
6,741
8,173
25,194
23,412
8,106
8,645
17,088
14,767
55,478
59,323
186,957
175,074
41,637
41,608
117,498
117,498
210. NON-CONTROLLING INTERESTS
1,311
1,305
220. NET PROFIT (LOSS) FOR THE PERIOD
5,118
27,302
5,040,628
4,454,682
100. OTHER LIABILITIES
110. EMPLOYEE TERMINATION BENEFITS
120. PROVISIONS
A) PENSION FUNDS AND SIMILAR COMMITMENTS
B) OTHER
140. REVALUATION RESERVE
170. RESERVES
180. SHARE PREMIUM RESERVE
190. SHARE CAPITAL
TOTAL LIABILITIES AND EQUITY
574
__________________________________________________________________________________________________________________
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
________________________________________________________________________________________________________________________
576
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
31
31
December December
2008
2007
DESCRIPTION
10. INTEREST AND SIMILAR INCOME
265,443
215,137
20. INTEREST AND SIMILAR EXPENSE
-144,933
-101,800
120,510
113,337
29,363
29,466
30. NET INTEREST INCOME
40. COMMISSION INCOME
50. COMMISSION EXPENSE
60. COMMISSION INCOME, NET
70. DIVIDENDS AND SIMILAR INCOME
80. TRADING INCOME, NET
-3300
-3,707
26,063
25,759
446
803
-1,493
-79
848
327
848
327
110. NET RESULT OF FINANCIAL ASSETS AND LIABILITIES RECOGNIZED AT FAIR VALUE
-34,271
-5,400
120. TOTAL INCOME
112,102
134,747
130. NET IMPAIRMENT/WRITE-BACKS OF:
-25,468
-16,367
-24,180
-16,277
100. GAINS (LOSSES) ON SALES OR REPURCHASES OF:
A) LOANS
D) FINANCIAL LIABILITIES
A) LOANS
-1,288
-90
140. INCOME (LOSS) FROM BANKING OPERATIONS
D) OTHER FINANCIAL TRANSACTIONS
86,634
118,380
170. INCOME FROM BANKING AND INSURANCE OPERATIONS, NET
86,634
118,380
180. ADMINISTRATIVE EXPENSES:
-83,020
-76,721
A) STAFF COSTS
-50,791
-43,796
B) OTHER ADMINISTRATIVE EXPENSES
-32,229
-32,925
190. PROVISIONS
-3,693
-3,526
200. NET ADJUSTMENTS/WRITE-BACKS OF PROPERTY, PLANT AND EQUIPMENT
-2,745
-2,377
210. NET ADJUSTMENTS/WRITE-BACKS OF INTANGIBLE ASSETS
220. OTHER OPERATING INCOME/COSTS
230. OPERATING COSTS
-470
-496
9,112
8,902
-80,816
-74,218
1
94
5,819
44,256
240. GAINS (LOSSES) ON INVESTMENTS
270. GAINS (LOSSES) ON SALE OF INVESTMENTS
280. PROFIT(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS
290. INCOME TAX ON CONTINUING OPERATIONS
-695
-16,892
300. NET PROFIT(LOSS) FROM CONTINUING OPERATIONS
5,124
27,364
320. NET PROFIT(LOSS) FOR THE PERIOD
5,124
27,364
330. NET PROFIT (LOSS) ATTRIBUTABLE TO MINORITY INTERESTS
340. NET PROFIT (LOSS) ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT COMPANY
577
-6
-62
5,118
27,302
STATEMENT OF CHANGES IN CONSOLIDATED EQUITY AT 31 DECEMBER 2007
Share capital
a) ordinary shares
117,498
117,498
117,498
117,498
117,498
117,498
41,594
41,594
Noncontrolling
interests
Equity at 31
December 2007
Group
Noncontrolling
interests
Group
Stock options
Changes in equity instruments
Share
buybacks
Noncontrolling
interests
Extraordinary distribution of
dividends
Group
Noncontrolling
interests
Issue of new
shares
Net profit (loss)
for the period
ended 31
December 2007
Group
Change in reserves
Noncontrolling
interests
Group
Dividends and other
allocations
Group
Noncontrolling
interests
Reserves
Balance at 1
January 2007
Noncontrolling
interests
Group
Noncontrolling
interests
Group
Balance at 31
December
2006
Allocation net profit for
preceding period
b) other shares
Reserves:
1,256
-1,242
41,608
163,358
768
163,358
768
12,782
8
-1,118
52
468
175,074
1,244
163,358
768
163,358
768
12,782
8
-1,118
52
468
175,074
1,244
b) other
52,579
52,579
6,744
59,323
6,918
6,918
2,620
9,538
c) other (details to be provided)
45,661
45,661
4,124
49,785
of which
- revaluation of properties on FTA
45,661
45,661
4,124
49,785
b) cash flow hedges
Equity instruments
Treasury shares
Equity
24,532
8
24,532
8
-12,782
-8
-11,750
399,561
776
399,561
776
0
0
-11,750
578
5,626
1,308
468
-1,242
27,302
61
27,302
61
27,302
61
420,805
1,305
STATEMENT OF CHANGES IN CONSOLIDATED EQUITY AT 31 DECEMBER 2008
117,498
117,498
41,608
41,608
Noncontrolling
interests
Group
Equity at 31
December 2008
Noncontrolling
interests
Group
Stock options
Changes in equity instruments
Share
buybacks
Noncontrolling
interests
Extraordinary distribution of
dividends
Group
Issue of new
shares
Noncontrolling
interests
Group
Change in reserves
Noncontrolling
interests
Group
Dividends and other
allocations
Noncontrolling
interests
Group
Reserves
Balance at 1
January 2008
117,498
117,498
Noncontrolling
interests
Group
Noncontrolling
interests
Balance at 31
December
2007
Group
Share capital
a) ordinary shares
Net profit (loss) for
the period ended 31
December 2008
Allocation net profit for
preceding period
117,498
117,498
b) other shares
Reserves:
b) other
2,833
-2,804
41,637
175,074
1,244
-2,494
172,580
1,244
14,376
61
186,956
1,305
175,074
1,244
-2,494
172,580
1,244
14,376
61
186,956
1,305
59,323
59,323
-3,844
55,479
9,538
9,538
-3,928
5,610
49,785
49,785
84
49,869
49,785
49,785
84
49,869
b) cash flow hedges
c) other (details to be provided)
of which
- revaluation of properties on FTA
Equity instruments
Treasury shares
Equity
27,302
61
420,805
1,305
-2,494
27,302
61
418,311
1,305
-14,376
-61
-12,926
-12,926
-3,844
2,833
-2,804
5,118
6
5,118
6
5,118
6
406,688
1,311
The change in the opening balances was due to an adjustment to reserves – in accordance with IAS 8 - resulting from the correction of an error occurred before 2008, which is described in detail in part A –
Accounting Policies Section 17 – Other Information.
579
CONSOLIDATED CASH FLOW STATEMENT
DIRECT METHOD
Amount
A. OPERATING ACTIVITIES
2008
1. Banking operations
- interest income received (+)
- interest expense paid (-)
- dividends and similar revenues (+)
- commissions, net (+/-)
- staff costs (-)
- other costs (-)
- other revenues (+)
- taxes (-)
2. Cash generated by/used for financial assets
- financial assets held for trading
- financial assets recognized at fair value
- available-for-sale financial assets
- loans and advances to customers
- loans and advances to banks
- other assets
3. Cash generated by/used for financial liabilities
- banks’ deposits
- customers’ deposits
- securities issued
- financial liabilities held for trading
- financial liabilities recognized at fair value
- other liabilities
Cash flow from (for) operating activities
B. INVESTMENT ACTIVITIES
1. Cash generated by
- sales of investments
- dividends from investments
- sales/repayment of held-to-maturity financial assets
- sales of property, plant and equipment
- sales of intangible assets
- sales of subsidiaries and assets
2. Cash used for
- purchase of investments
- purchase of held-to-maturity financial assets
- purchases of property, plant and equipment
- purchases of intangible assets
- purchases of subsidiaries and assets
Cash flow from (for) investment activities
C. FINANCING ACTIVITIES
- issues/purchases of own shares
- issues/purchases of equity instruments
- dividends and other distributions
Cash flow from (for) financing activities
INCREASE/DECREASE IN CASH FOR THE PERIOD
KEY:
(+) generated
(-) used
580
2007
60,466
255,884
-135,619
446
21,644
-47,288
-35,783
7,815
-6,633
-754,255
-381,167
-6,786
-182,789
-43,216
-140,297
809,373
-5,272
196,740
442,478
1,928
8,809
164,690
115,584
53,227
211,670
-90,332
803
20,477
-43,482
-39,860
13,346
-19,395
-361,456
30
-65,221
-52
-175,486
-120,674
-53
329,881
-22,336
256,878
99,202
1,004
-4,867
21,652
1,577
1,577
-5,049
-10,274
-2,100
-4,646
-403
-7,241
-933
-5,049
-12,924
-8,697
-11,282
468
-12,924
-12,924
97,611
-11,750
-11,282
1,673
RECONCILIATION
Description
Amount
2008
Cash and cash equivalents – opening balance
Cash inflow/outflow for the period
Cash and cash equivalents: effects of changes in exchange rates
Cash and cash equivalent – closing balance
581
2007
35,204
97,611
33,531
1,673
132,815
35,204
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART B – NOTES TO THE CONSOLIDATED BALANCE SHEET
PART C – NOTES TO THE CONSOLIDATED INCOME STATEMENT
PART D – SEGMENT REPORTING
PART E – INFORMATION ON RISKS AND THE RELEVANT HEDGING POLICIES
PART F – INFORMATION ON CONSOLIDATED EQUITY
PART G – BUSINESS COMBINATIONS INVOLVING COMPANIES OR BUSINESS UNITS
PART H – RELATED-PARTY TRANSACTIONS
PART I – SHARE-BASED PAYMENTS
584
_______________________________________________________________________________________________________________
585
NOTES
PART A - ACCOUNTING POLICIES
Section 2 - Basis of preparation
Section 3 - Basis and method of consolidation
A.2 – NOTES TO THE MAIN FINANCIAL STATEMENT ITEMS
1 – Financial assets held for trading
2 – Available-for-sale financial assets
3 – Held-to-maturity financial assets
4 – Loans
5 – Financial assets recognized at fair value
6 – Hedging transactions
7 – Investments
8 – Property, plant and equipment
9 – Intangible assets
10 – Non-current assets held for sale
11 – Current and deferred taxes
12 – Provisions
13 – Deposits and securities issued
14 – Financial liabilities held for trading
15 – Financial liabilities recognized at fair value
16 – Foreign exchange transactions
17 – Other information
587
588
The consolidated financial statements at and for the year ended 31 December 2008 have been
prepared in accordance with the international financial reporting standards (IAS/IFRS), issued by
the International Accounting Standards Board (IASB), and the relevant interpretations of the
International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the European
Commission by Regulation (EC) no. 1606 dated 19 July 2002. The annual accounts have been
prepared by applying the standards in force at the reporting date (including the interpretation
documents known as SIC and IFRIC).
Section 2 – Basis of preparation
The consolidated financial statements consist of the balance sheet, income statement, statement of
changes in equity, cash flow statement, notes and are accompanied by a report on operations. The
formats of the different schedules shown in the relevant section are consistent with circular no. 262
dated 22 December 2005 issued by the Bank of Italy, titled “The financial statements of banks:
formats and compilation instructions”.
According to the regulations in force, financial statements have been prepared in Euros, without
decimals. The tables in the notes are in thousands of Euros. To this effect, items and “of which”
sub-items have been rounded to the nearest unit. The algebraic sum of the rounding differences
has been added to “Other assets/liabilities”, for the balance sheet, and to “Extraordinary
income/expense”, for the income statement. Any breakdown between euro and foreign currencies,
where required and as shown in the notes to the financial statements, refers to differences between
the currency of the countries of the European Union and other currencies.
The financial statements have been prepared in accordance with the matching principle. Assets
and liabilities, costs and revenues are offset only where required or allowed by a standard or one
of its interpretations.
Application of the going-concern principle
Pursuant to a cooperation agreement reached on the application of IAS/IFRSs, the Bank of Italy,
Consob (Italy’s financial market regulator) and Isvap (Italy’s insurance regulator) published jointly
Document no. 2 of February 6, 2009, whereby they require, among other things, financial
statements for the year ended December 31, 2008 to address specifically the ability of the reporting
company to operate as a going concern. According to these regulators, companies have to give
indications on their viability for the foreseeable future, with such foreseeable future covering,
according to IAS 1, at least 12 months from the balance sheet date.
Against this backdrop, the financial statements of the companies of the Banca Carim Group were
prepared on the assumption that such companies are going concerns as, based on the available
information analyzed in light of the economic context in which they operate, there is no financial,
profitability or operational indicator that might cast doubt on such assumption.
The substantial equity base of the Group companies, past and current positive results, easy access
to the financial resources necessary to carry on their business – including in the current economic
and financial crisis – are evidence of the solid ground on which the going concern assumption
rests.
Concerning equity, part F of the Notes (Information on consolidated equity) and a specific
reference in the report on operations confirm that also the financial year under review, in keeping
with the past, showed capital requirements in line with regulations, as summarized below:
589
2005
2006
2007
2008
Tier 1 capital
245.5
263.8
277.2
273.8
Regulatory capital
292.1
358.5
377.9
374.5
Total prudential requirements
260.4
272.5
290.6
293.0
3,255.4
3,405.6
3,631.9
3,662.9
7.54
7.74
7.58
7.47
8.97
10.53
10.40
10.22
Risk-weighted assets
Tier 1 capital
---------------------------------------Risk-weighted assets
Regulatory capital
---------------------------------------Risk-weighted assets
To support the above statement, the profit attributable to shareholders of the Parent Company
since 2005 (first year of consolidation) is shown:
Millions of euros
Profit attributable to shareholders of Parent
Company
2005
2006
2007
2008
28.05
24.53
27.3
5.12
Further confirmation of the validity of the going-concern assumption comes from possible future
benefits that will result from the reversal of the write-down of the financial instruments held,
especially by the Parent Company, as described specifically in Part C – Section 7 “Net result of
financial assets and liabilities recognized at fair value – Caption 110”.
Section 3 – Basis and method of consolidation
The consolidated financial statements comprise the situation of the Parent Company, Banca Carim
- Cassa di Risparmio di Rimini S.p.A., and that of its direct and indirect subsidiaries. The table
below shows the companies that have been fully consolidated following the adoption of IAS/IFRS:
Company name
Registered
office
Type of
relations
hip (1)
Equity interest
Holding company
% held
Available
votes %
60%
100%
60%
100%
A. Companies
A1 Fully consolidated
1. Corit – Riscossioni Locali S.p.A.
Rimini
2. Credito Industriale Sammarinese S.p.A. San Marino
A2 Consolidated proportionately
1
1
Banca Carim S.p.A.
Banca Carim S.p.A.
(1) Type of relationship
1 = Majority of voting shares
Subsidiaries are fully consolidated. There is only one associated company (20% held) – E.G.I.,
European & Global Investments Ltd – whose shares are held as “available for sale”.
590
Full consolidation
Full consolidation, or consolidation “on a line-by-line basis”, involves the addition of each item of
the balance sheet and the income statement of the subsidiaries. Following the creation of a separate
caption for minority interests, so as to attribute to them the relevant share of equity and net
income, the amount of the investment carried by the parent company is eliminated against the
corresponding portion of the subsidiary’s equity. Any positive difference – after allocations to the
assets and liabilities of the subsidiary – is reported as goodwill when the accounts are first
consolidated. Negative differences are recognized in profit and loss. Assets, liabilities, income and
costs arising from transactions among consolidated companies are eliminated. The financial
statements of the Parent Company and those of the consolidated companies have the same
reporting date.
The €250 million Eurobond issued by the Parent company in 2004 matured on March 12, 2009.
Repayment was made in full, without any refinancing, which reflected the Parent Company’s
financial strength and its ability to manage effectively its cash despite significant capital market
tensions.
In a special meeting held on March 6, 2009, the shareholders of CORIT – Riscossioni Locali S.p.A.
– in keeping with article 32 of Law Decree no. 185 of November 29, 2009, which was converted into
Law no. 2 of January 28, 2009 – approved the issue of 13,240 new shares to be offered at par to the
current shareholders, in proportion to their existing holdings, with proceeds to be used to raise the
share capital from €3,120,000 to €10,004,800. Following the placement of the new shares, Banca
Carim still owns 60% of the Company, as represented by 11,544 shares with a par value of €520.00
each, for a total nominal amount of €6,002,880.
Determination of fair value for financial assets – General principles
IAS/IFRSs require changes in the fair value of financial assets designated as FVTPL (Fair value
Trough Profit or Loss) and AFS (Available for sale) to be recognized through the income statement
and equity, respectively.
There is no doubt that prices quoted in an active market, that is a market where prices reflect the
outcome of transactions conducted at arm’s length, are the best indication of fair value. In fact,
quoted prices provide a proper measure to value financial instruments (mark-to-market Approach).
Thus, it is paramount to determine when a market is considered active, especially in a situation
such as the current one, where market prices do not reflect the real value of a quoted firm or
financial instrument.
IAS/IFRSs, especially the guidelines issued on October 31, 2008 by the IASB, provide certain
measures to be used for that purpose, such as volumes and levels of trading activities, availability
of prices and whether they are current, changes in credit spreads relative to risk, excessive price
volatility, etc.
In the absence of an active market, the fair value of financial instruments is determined by using
valuation techniques designed to determine the price at which the financial instruments would be
sold, on the valuation date, in a transaction driven solely by commercial considerations.
Such techniques include:
• Reference to indirectly-related market values as observed in products with similar
characteristics (so-called comparable approach);
591
•
Valuations based, including only in part, on non-market observable inputs, where use is made
of estimates and assumptions (so-called “mark-to-model” approach).
The choice of methodology to be adopted is not arbitrary, as these techniques are ranked
according to a specific order of importance. In other words, if quoted prices are available in an
active market the use of the alternative techniques is not permitted.
Accordingly, to determine the fair value of its investments in bonds quoted in inactive financial
markets issued by:
- Banks – subordinated bonds;
- Italian banks;
- US banks;
- Foreign banks (non-US.);
- Industrial firms;
- Financial firms;
Banca Carim used a specific valuation model created in cooperation with a primary financial
analysis firm.
Market inactivity was evaluated for each financial instrument by considering the changes in the
relevant bid-ask spread, over a given period of time, and the standard deviation of the asset swap
spread for the financial instrument. For the market of a financial instrument to be considered
inactive, the following must occur:
- the ratio of the bid-ask spread at the valuation date to the average bid-ask spread for a period
where the market was considered active (first half of 2007) is greater than 1.5, a threshold
regarded as marking a turning point from an active to an inactive market.
Alternatively:
- the ratio of the standard deviation of the asset swap spread at the valuation date to the average
of the standard deviations of the asset swap spreads for a period where the market was
considered active (first half of 2007) is greater than 15, a threshold regarded as marking a
turning point from an active to an inactive market.
The thresholds of both the bid-ask spread (1.5) and the standard deviation of the asset swap
spread (15) used for each financial instrument - to determine the point at which the relevant
market becomes inactive – were defined by using the time series of such ratios, identifying the
relevant “normality” conditions. Specifically:
-
to define the threshold for the first ratio, the distribution of the average bid-ask ratios of all the
financial instruments examined was calculated for the first month of 2007 and the first half of
2007, to determine the relevant dispersion in an active market. The analysis showed that this
ratio was lower than or equal to 1.5 for 90% of the financial instruments reviewed.
- to define the threshold for the standard deviation of the asset swap spread for all the financial
instruments examined, the distribution of the standard deviations was calculated for the first
and the second half of 2007, to determine the relevant dispersion in an active market. The
analysis showed that this ratio was lower than or equal to 15 for 90% of the financial
instruments reviewed
Subsequently, for such instruments as were traded in inactive markets – as determined in
accordance with the above – daily changes in the bid and ask prices were analyzed in the forty
business days preceding the valuation date (inclusive) for three market operators. When a bid or
ask price was unchanged for at least four non-consecutive days and in the period considered there
were at least eight such occurrences (the lack of change refers to either bid or ask prices and is
calculated by excluding always the first day), the market of the financial instrument was
considered inactive. The materialization of such conditions in the prices quoted by all the three
592
operators under observation constitutes ground to consider inactive the market for that financial
instrument (application of the valuation model instead of market price).
If the above conditions materialize only with respect to two market operators, the average bid-ask
spread is calculated with respect to the other operator and that financial instrument, for the month
related to the valuation date (always end of month). Only if the average is equal to or greater than
60 basis points is the market for that specific financial instrument considered inactive (application
of the valuation model instead of market price). In all the other cases the financial instrument is
valued in accordance with the model.
The valuation model used to measure financial instruments in the presence of inactive markets is
described in paragraph 5 of the accounting policies – Financial assets recognized at fair value.
Reclassification of financial assets (Amendments to IAS 39)
On October 13, 2008 the IASB approved an amendment to IAS 39 and IFRS 7, which was adopted
as a matter of urgency by the European Commission on October 15, 2008 with Regulation
1004/2008.
Under this amendment, in the presence of given conditions, an entity is permitted to reclassify
financial instruments recognized initially as held for trading to the category of “Available-for-sale
financial assets”. Before such amendment, reclassifications were allowed only between “Availablefor-sale financial assets” and “Held-to-maturity financial assets”.
Based on paragraphs 50D and 50E of the new version of IAS 39, the following may be reclassified:
- financial instruments, other than derivatives, previously classified as held for trading. On the
other hand, following the adoption of the so-called fair value option, financial assets recognized at
fair value cannot be reclassified. The new category is “Loans and receivables”. To be eligible for
reclassification, financial instruments must fulfil the requirements for recognition as “Loans and
receivables” on the transfer date. Moreover, the entity has to have the intention and the ability to
hold the financial instrument for the foreseeable future or until maturity;
- non-derivative financial instruments classified as available for sale may be reclassified to “Loans
and receivables” if, on the reclassification date, they qualified as “Loans and receivables” and the
entity had the intention and the ability to hold them for the foreseeable future or until maturity
Any other non-derivative debt or equity instrument may be reclassified out of “Held-for-trading
financial assets” to “Available-for-sale financial assets” or out of “Held-for-trading financial
assets” to “Held-to-maturity financial assets” (only debt securities) if such instruments are no
longer held for trading in the short term. However, according to paragraph 50B, this is permitted
only in rare circumstances.
In a press release of October 13, 2008, the IASB indicated that it considered the deterioration of the
global financial markets in the third quarter of 2008 an example of “rare circumstance”.
A reclassified financial asset is recognized in the new category (“Loans and receivables”,
“Financial assets held to maturity”, “Available-for-sale financial assets”) at its fair value on the date
of reclassification, which represents its new cost or amortized cost.
However, it is expressly provided that, for reclassifications approved before November 1, 2008, the
financial instrument be recognized in the new category at its fair value at July 1, 2008. For all the
reclassifications approved after November 1, 2008, the reclassified financial instruments are
recognized in the new category at their fair value at the date of reclassification approval.
Once they are transferred, the financial instruments are valued and recognized in accordance with
the rules for the new category, save as otherwise specified below. Thus, for financial assets
recognized at amortized cost, the effective rate of return to be used from the reclassification date
should be calculated.
For reclassified assets, any subsequent positive change in expected cash flows is a factor in
determining the effective interest rate at the date of change in the expected cash flow. Such change
will be recognized along the term to maturity of the instrument instead of through profit or loss, as
is the case instead with assets that are not reclassified.
593
On the other hand, any decrease in expected cash flow at the date of reclassification will be treated
in accordance with previous rules, that is if such decreases reflect a loss in value they will be
Gains and losses on available-for-sale financial assets with a pre-established maturity date,
recognized previously through equity, are released along the term to maturity of the relevant
financial assets, in accordance with the amortized cost principle. On the other hand, if the financial
instrument does not have a pre-established maturity date (e.g. perpetuities), the attendant gains
and losses will not be released from the revaluation reserve until sale or repayment.
As it availed itself of the fair value option, and recognized its financial instruments at their fair
value, the Group could not implement the above changes.
Uncertainties on the use of estimates in preparing the financial statements for the period
The application of certain accounting standards involves significant judgment on the basis of
estimates and assumptions that show a degree of uncertainty when they are made.
The assumptions adopted for these financial statements are deemed appropriate and,
consequently, they provide a true and fair view of the financial conditions, operating results and
cash flows for the year.
In order to make reliable estimates and assumptions, reference was made to historical experience,
as well as to other factors considered reasonable for the situation at hand, in light of all the
available information.
However, it cannot be ruled out that changes in such estimates and assumptions might determine
significant effects on the financial condition and operating results, as well as on the contingent
assets and liabilities disclosed in the financial statements, in the presence of any change in
previous judgments.
In particular, management had to resort to subjective measurements in the following cases:
- in determining the fair value of financial assets when such determination could not be made by
observing active markets. The subjective factors include the selection of the valuation models or
the inputs that might be non-market observable;
- in quantifying provisions and post-employment benefits, due to the uncertainty of amounts, time
and the actuarial assumptions used;
- in estimating the recoverability of deferred tax assets.
These cases are mentioned to provide the user with a better understanding of the main areas of
uncertainty, and are in no way intended to suggest that alternative assumptions might be
appropriate.
In addition, estimates are made on the assumption that the Company is a going concern, as no risk
has been identified which might disrupt the orderly functioning of its operations. Risk disclosures,
especially that on liquidity risk, are provided in Part E – Information on risks and the relevant
hedging policies.
594
A.2 NOTES TO THE MAIN FINANCIAL STATEMENT ITEMS
Below the accounting policies applied to the main financial statement items are discussed. Such
accounting policies have been adopted to prepare the financial statements in accordance with the
instructions of the Bank of Italy issued by circular no. 262 dated 22 December 2005.
1 – FINANCIAL ASSETS HELD FOR TRADING
a) Recognition
Financial assets are recognized initially on the settlement date, in the case of securities, and on the
signing date, in the case of derivative contracts. Financial assets are recognized at fair value,
without considering transaction income or costs associated with the financial instrument.
b) Classification
Trading financial assets include financial instruments held with the objective of generating, in the
short run, profits arising from changes in prices.
c) Measurement
Subsequently, financial assets held for trading are measured at fair value, except unlisted equity
instruments which, in the event that their fair value cannot be measured, are carried at cost. The fair
value of instruments listed on active markets is determined on the basis of the market prices
prevailing on the last day of the period. In the absence of an active market, use is made of estimate
and valuation models based on the market price of comparable instruments, on future cash flows
or on the prices for recent comparable transactions.
d) Derecognition
Financial assets are derecognized when cash flow rights associated with them expire or when they
are sold, thereby transferring also all the relevant risks and benefits.
Gains and losses on the sale or repayment of financial instruments held for trading, as well as
unrealized gains and losses resulting from changes in fair value, are recognized through profit or
loss and shown in the net result of trading activities.
2 – AVAILABLE-FOR-SALE FINANCIAL ASSETS
a) Recognition
Available-for-sale financial assets are recognized initially on the settlement date, in the case of
securities, and on the disbursement date, in the case of loans. Available-for-sale financial assets are
initially recognized at fair value, which usually reflects the amount disbursed/paid inclusive of
costs and revenues that are directly attributable.
b) Classification
Available-for-sale financial assets include financial assets other than derivatives and those
classified as loans, financial assets held for trading or held to maturity. This item includes also
equity instruments not held for trading and that do not create any subsidiary, associate or jointventure relationship. Available-for-sale financial assets include a capitalisation contract entered
into with an insurance company.
595
c) Measurement
Available-for-sale financial assets are measured at their fair value, except for such equity
instruments as are not quoted in an active market and which are reported at cost, in the event that
their fair value cannot be determined in a reliable manner. The fair value of instruments traded in
an active market is determined by reference to the prices prevailing on the last trading day. In the
absence of an active market, use is made of estimate methods based on the prices for recent
transactions involving comparable quoted instruments or by discounting their future cash flows,
taking into account all risk factors related to such instruments on the basis of market observed
data.
Equity instruments that are not listed on active markets, in case that their fair value can be reliably
recognized, are reported at cost.
d) Derecognition
Financial assets are derecognized when the contractual rights on the cash flows arising therefrom
expire, or when a financial asset is sold, transferring all the risks and benefits associated to it.
At each reporting date, a financial instrument is checked for impairment, taking into account the
following:
a) Concerning debt instruments, information considered paramount for determining any
impairment includes the following:
- existence of significant difficulties experienced by the issuer, as attested by defaults or
lack of payments of interest or principal;
- likely initiation of a bankruptcy procedure;
- disappearance of an active market for the financial instruments;
- deterioration of economic conditions affecting the issuer’s cash flows;
- downgrading of issuer’s rating, in the case of rated bonds, when accompanied by
negative news on the issuer’s financial conditions.
In the case of bonds, consideration is given to the availability of specialized sources or information
by news info-providers (such as Bloomberg, Reuters), which can give more accurate reports on the
issuer’s deterioration. In the absence of such elements, reference is made to the quoted prices of
instruments similar to those examined, in terms of both bond characteristics and issuer’s
creditworthiness.
b) Concerning equity instruments, information considered paramount for determining any
impairment includes, in addition to the above,
a. changes in the technological, market, economic and legal environment in which the
issuing company operates;
b. a significant and/or lasting decrease in the fair value of an equity instrument below its
cost can be considered evidence of impairment.
More specifically, the factors listed below are considered indicative of the need to recognize
impairment:
- Fair value of the instrument over 30% lower than the amount initially recognized;
or
- Fair value of the instrument lower than its carrying value for more than 12 months.
Concerning investments in equity instruments, the need to recognize impairment is determined by
the existence of one or more of the following conditions:
-
the Fair value of the investment is significantly lower than cost or otherwise significantly
lower than the fair value of comparable companies in the same sector;
596
-
the company’s management is deemed inadequate and otherwise unable to drive the share
price back up;
the rating is downgraded from that assigned on the date of purchase;
significant decrease of profits and cash flows or deterioration of the issuer’s net cash
position since the date of purchase;
dividends are reduced or discontinued;
the market for the bonds issued is no longer active;
changes in the regulatory, operating, and technological framework, with a negative impact
on the issuer’s financial condition, operating results and cash flows;
negative prospects in the issuer’s market, industry or geographical area.
Impairment reflects the difference between the amortised cost of the impaired instruments and their
recoverable or current value (fair value).
Losses are recognized through profit or loss as value impairments. Increases in value over time are
recognized in the income statement as interest income. Any write-back of debt instruments are
recognized through profit or loss whilst write-backs for equity instruments are recognized in
equity.
Write-backs of unlisted equity instruments recognized at cost cannot be accounted for in the
financial statements.
Concerning available-for-sale financial instruments:
- interest income is calculated by applying the effective interest rate method;
- unrealised gains and losses determined by changes in fair value are recognized in a specific
equity reserve, net of the relevant tax effect, until the financial asset is sold or impaired.
As the available-for-sale financial asset is sold, unrealised gains and losses recognized in an equity
reserve until such time are transferred to “gains (losses) on sales or repurchases of available-forsale financial assets” in the income statement.
When an available-for-sale financial asset is impaired, cumulative losses due to changes in fair
value recognized in equity are reported as “Net impairments of available-for-sale financial assets”
in the income statement. A value impairment is recognized in the presence of observable evidence
of value reductions.
Any write-back is accounted for in equity, in the case of equity instruments, and through profit or
loss, in the case of loans or debt instruments. The amount of the write-back can under no
circumstances exceed the amortised cost at which the instrument would be shown in the absence
of prior adjustments.
3 – HELD-TO-MATURITY FINANCIAL ASSETS
a) Recognition
The initial recognition of financial assets occurs on the settlement date, for securities, and on the
signing date, for derivative contracts. Held-to-maturity financial assets are recognized at fair value,
inclusive of any costs or income that is directly attributable.
597
b) Classification
Held-to-maturity financial assets include debt instruments, with fixed maturity and payments,
which the company intends to hold until maturity. At the reporting date, there were no held-tomaturity financial instruments.
c) Measurement
Subsequently, held-to-maturity financial assets are recognized at their amortised cost, utilizing the
effective interest rate method.
d) Derecognition
Held-to-maturity financial assets are derecognized when the contractual rights on the cash flows
associated with them expire, or when the financial asset is sold, thereby transferring all rights and
benefits related to it.
Gains and losses arising from held-to-maturity financial assets, if any, are recognized through
profit or loss when such assets are derecognized or are impaired, as well as through the
amortization of the difference between the amount recognized and the amount repayable at
maturity. Held-to-maturity financial assets are periodically tested for impairment (at the close of
each fiscal year and interim period) to determine whether there is objective evidence of
deteriorated value. Any value impairment, which is calculated as the difference between the
carrying value and the present value of cash flows determined by using the effective interest rate,
is recognized through profit or loss. Any write-back, following the above losses, is recognized
4 – LOANS
a) Recognition
The initial recognition of a loan occurs at the date of disbursement or, in the case of debt
instruments, on the settlement date. The financial instrument is initially recognized at fair value,
which usually reflects the amount disbursed or the subscription price, inclusive of transactions
costs/income that are directly attributable. In the event that the net value at which the loan is
recognized is lower than its fair value, due to below-market rates or to interest rates lower than
those applicable to loans with similar characteristics, initial recognition takes place for an amount
equivalent to the present value of future cash flows as discounted at a suitable market rate.
Contangoes and repurchase and resale agreements are recognized as deposits or loans, as the case
may be. Specifically, sale and simultaneous forward purchases of securities are recognized as
deposits for the amount collected at the time of sale, while purchases and simultaneous forward
sales of securities are recognized as loans for the amount of the purchase.
b) Classification
Loans include loans and advances to customers and banks, with fixed or determinable payments,
which are not listed on an active market and are not classified initially among available-for-sale
financial assets. Loans include also receivables, resale agreements, receivables arising from
factoring transactions.
c) Measurement
After initial recognition, loans are measured at amortized cost, utilizing the effective interest rate
method. Such effective interest rate reflects the discount rate at which the present value of future
cash flows of the loan, inclusive of principal and interest, is equal to the amount of the loan,
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inclusive of the costs/revenues that are directly attributable. This accounting method makes it
possible to spread the economic effect of costs/revenues over the remaining life of the loan.
Starting from 2008, and in relation to the information system adopted by the Parent Company in
the same year, the amortized cost method is applied also to short-term loans. At the close of each
fiscal year and interim period, loans are tested for impairment to identify any objective evidence of
loss in value, as a result of events occurring after their initial recognition.
At the close of each fiscal year and interim period, the loans are tested for impairment to
determine any reduction of their realisable value. Such test is carried out individually for
substandard loans, that is loans included in such risk categories as non-performing, “alleged
problem” (a category that includes loans analyzed individually) and restructured loans (if any), as
defined by the relevant Supervision rules. On the other hand, performing, past due and “objectivelydetermined problem” loans are tested collectively, after they are grouped in categories sharing
similar risk characteristics, such as economic sector.
The amount of the impairment of substandard loans is calculated by discounting to present value
the expected cash flows, inclusive of principal and interest, taking due account of any collateral. In
determining the present value of the cash flows, key features include the estimated recovery
amounts, the time involved and the applicable discount rate.
In relation to substandard loans, such as non-performing loans, estimated recoveries and the
relevant repayment schedules are determined by reference to the assumptions and estimates of the
employees responsible for such activities in the various Group companies on the basis of the
borrower’s solvency and taking into account, for these types of loan, any collateral. As to the
discount rate, given the inability to utilize in a sufficiently reliable manner, at first-time adoption,
the original interest rate applied to the individual loans, use has been made of interest rates
available within the various Group companies for the year when they were classified as nonperforming. After such date, use is made of the interest rates applied prior to their classification as
non-performing.
As to alleged problem loans and restructured positions, to determine the estimated cash flows of
each loan, reference is made to the assumptions and estimates of the employees responsible for
such activities within the various Group companies on the basis of the borrower’s solvency and
taking into account, for these types of loan, any underlying collateral. Moreover, by using the time
series of the aggregate of reference for the past few years, the percentage is calculated of the
problem loans that are classified to the non-performing category (both after one year and after two
years) and those that are reinstated as performing. The percentages so calculated are applied to
existing loans and their expected realizable value is discounted utilizing, but only at first-time
adoption, the average interest rates, available within the various Group companies, for the year
when the individual loans were classified as problem loans, instead of the original interest rates.
Subsequently, the interest rates used are those applied to the loans before their classification as
problem.
Objectively-determined problem loans - represented by such loans as feature the conditions
provided for by the supervision rules enacted in December 2008 and for which the Parent
Company did not deem it appropriate, in terms of recoverability, to perform an individual
evaluation – are assessed on a collective basis. Like “performing” loans, these are evaluated by
segmenting the portfolio by industry, in accordance with the supervision rules. The cash flows of
the loans so segmented are assigned – as with “performing” loans – a loss percentage calculated
depending on the time series common to the two loan aggregates. Such percentages are based on
elements observable on the valuation date, which make it possible to estimate the potential loss in
each category of loans so segmented, as adjusted in terms of probability of default, to keep in due
account the historical and statistical experience of problem loans vis-à-vis non-performing loans.
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The assessment of performing and past due loans concerns asset portfolios featuring objective
evidence of a collective loss. Performing loans are classified by risk category, depending on the
economic sector, as indicated in the current Supervision rules. Loss percentages calculated on the
basis of time series, based on observable elements at the evaluation date, are applied to the
estimated cash flows of the assets so segmented, to arrive at an estimate of the possible losses for
any of the loan categories so defined.
Starting in 2008, and in connection with the criteria adopted to determine a general loss, in order to
make the determination model more consistent with the rules on deteriorated loans, as amended
by the new supervisory returns, the percentages applied to each industry at the reporting date to
determine provisions for loan losses have been restated. Considering that until the end of 2007 the
Parent Company prudently included under problem loans also “watchlist” loans – i.e. loans that,
even though they did not qualify under the supervision rules then prevailing as problem loans,
showed early warning signals –, the time series of these loans have been redefined by excluding
those watchlist loans that at the reporting date have been collected or restored to performing loans.
d) Derecognition
Financial assets are derecognized when the contractual rights on the associated cash flows expire,
or when the financial asset is sold, thereby transferring all risks and benefit related to it. On the
other hand, if the risks and benefits related to loans sold are kept, such loans continue to be carried
on the balance sheet, even though legal title has been transferred (i.e. continuing involvement).
Interest on loans, calculated utilizing the effective interest method, is recognized through profit or
loss so as to spread the effects of transaction costs/revenues over the expected life of the loan.
Write-downs and write-backs (both individual and collective) are recognized through profit or
loss (among write downs/write-backs due to loan impairment) , by up to the amortised cost at
which the loan would be recognized without any previous adjustment.
5 – FINANCIAL ASSETS RECOGNIZED AT FAIR VALUE
a) Recognition
Under IAS/IFRS companies can recognize as financial instruments at fair value through profit or
loss any financial asset so designated at the time of purchase (so-called fair value option). This item
refers to the application of the fair value option to financial assets with a “natural” hedge, which is
designed to create a more balanced effect of the changes in value of financial assets and liabilities
on earnings.
b) Classification
At first-time adoption, even though they might not have been held for trading, certain financial
instruments are classified as financial assets recognized at fair value through profit or loss, as
allowed by IAS 39.
c) Measurement
Subsequently, this portfolio is measured at fair value, except for equity instruments that are not
listed on an active market, whose fair value cannot be determined in a reliable manner, and that, as
such, are carried at cost.
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Financial assets are recognized in this category at their fair value through profit or loss. The choice
of the model to be adopted is not arbitrary, as the relevant techniques are ranked by order of
importance.
Hierarchy of fair value
The fair value of financial instruments is determined according to methodologies ranked by order
of importance. The first and foremost determinants of fair value are prices quoted in an active
market, followed by the observation of prices resulting from comparable transactions and then by
specific valuation models.
Therefore, the fair value of financial instruments is determined in accordance with one of the
approaches listed below in a decreasing order of importance.
1. Prices in an active market (Mark to market Approach)
Fair value reflects the market price of the financial instrument under evaluation, as determined on
the basis of the prices quoted in the active market on the last day of the fiscal year. A financial
instrument is considered as quoted in an active market if quoted prices result from arm’s length
transactions and are readily available through markets, brokers, intermediaries, operators, price
quote services or authorized entities at the time such prices result from actual and regular
transactions conducted in a normal period of reference.
2. Value of comparable financial assets (Comparable Approach)
When no market price is available, the fair value of the financial instrument is determined on the
basis of prices or credit spreads derived from the official prices of instruments largely similar in
terms of risk factors, by using specific calculation methodologies. This approach involves an
investigation into transactions conducted in active markets involving instruments comparable in
terms of risk factors to the instrument under evaluation. The calculation methodologies adopted
make it possible to reproduce the prices of financial instruments quoted in active markets without
including discretionary factors, thus providing solid ground for the determination of the fair value
of the instrument in question. However, the IASB indicated that it is not necessary to use this
measurement by “analogy” when prices are formed in inactive markets.
3. Valuation models (Mark to Model Approach)
In the presence of inactive markets, as defined above, financial instruments are evaluated using
different standards. Accordingly, reference is made to market inputs as well as more discretionary
factors. Fair value determined with the mark-to-model approach should take due account any
adjustments for the counterparty’s liquidity and credit risks.
According to this approach, the financial instrument is evaluated using a calculation methodology
based on internationally established techniques.
Valuation model of the Banca Carim Group
The valuation model is specific to each financial instrument at the valuation date. In the presence
of an inactive market, as defined above, this model calls for the replacement of quoted market
prices for the individual instrument with a price calculated in accordance with the internal model,
taking into account interest rate, credit, liquidity and option risks.
Thus, fair value is measured using the mark-to-model approach:
• by determining the present value of expected cash flows as discounted by using the term
structure of interest rates, namely:
o for fixed-income instruments, through the use of nominal interest rate and each
coupon period;
o for floating-rate instruments, through the use the term structure of interest rates at the
valuation date to determine the expected forward rates linked to the nominal interest
rate of the instruments, as applicable on the relevant reset dates;
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•
•
by adjusting for credit risk, as calculated using the average of specific credit default swaps
(CDS) applicable to the issuer, over the 12-month period preceding the valuation date, with
maturities equal to that of the financial instruments to be evaluated.
by adjusting for liquidity risk, as calculated using the average – over a defined time
horizon (1st quarter of 2008) – of the differences calculated initially on the individual
instrument, and subsequently by industry, (so-called “Base”), between the credit default
swap (CDS) and the asset swap spread (ASW) with maturities equal to the maturity of the
instrument to be evaluated.
In the event that the value of the credit default swap of the instrument cannot be calculated, all
risks (credit and liquidity) are estimated jointly through the time series of the asset swap spread
with the same maturity as the financial instrument, calculating the average for the 12-months
period preceding the valuation date.
In the case of structured bonds with embedded options, the adjustment for the liquidity risk is
made by used the “Base” specific to the instrument which incorporates also the option risk.
The average over the 12-month period before the valuation date used to adjust credit default
swaps and asset swap spreads for credit risk was deemed the most appropriate – following a
careful assessment and the analysis of a number of alternative hypotheses (6- and 9-month period
before). In fact, this profile is considered as the most appropriate to mitigate the effects of market
turmoil, both in the period of reference and in future periods, and is in line, in the presence of an
inactive market, with the reasons that led the Institute to adopt the internal valuation model. The
simulations run using the alternative hypotheses (average for the 9-month period before the
valuation date) would have involved lower write-downs for the Parent Company alone, i.e.
approximately €21.98 million instead of the current €24 million accounted for.
In short, adjustments for each of the credit, liquidity and option risk, and all of them combined, are
made according to the following model:
Credit risk
Bonds with options and CDS
CDS t
Bonds without options and CDS
CDS t
Bonds with options and without CDS
Bonds without options and without CDS
CDS t
BASE t
BASE industry
ASW t
Liquidity
risk
Credit and liquidity
risk
Option and liquidity
risk
Credit, option
and liquidity
risk
BASE t
BASE sector
ASW t
ASW t
Credit Defaul Swap – average for 12 months before valuation date
Difference between "CDS" and "ASW" of the specific instrument
Difference between "CDS" and "ASW" of the industry to which the issuer belongs
Asset Swap Spread - average for 12 months before valuation date
d) Derecognition
Financial assets are derecognized when the contractual rights on the associated cash flows expire
or when the financial asset is sold, thereby transferring all the related risks and benefits.
Gains and losses on the sale or repayment of financial instrument recognized at their fair value, as
well as unrealized gains and losses arising from changes in fair value, are recognized through profit
or loss and shown in net result of assets and liabilities recognized at fair value.
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6 – HEDGING TRANSACTIONS
a) Recognition
Hedging derivative financial instruments are recognized upon inception of the hedge at fair value.
b) Classification
This balance sheet item reflects hedging derivatives, which break down as follows:
- fair value hedges of a specific asset or liability;
- cash flow hedges, or hedges of future cash flows attributable to a specific asset or liability;
- hedges of net investment in a foreign operation.
Hedge derivatives are utilized to manage interest rate risk, currency risk, credit risk associated to
assets and liabilities. The designation of a financial instrument as hedge requires employees in
charge to substantiate through documentary evidence:
- the relationship between the hedging instrument and the hedged item, including the
objectives of risk management;
- the hedging strategy;
- the methods that will be utilized to check the effectiveness of the hedge.
Generally, a hedge is considered highly effective if, at inception and during its life, the changes in
fair value or in the cash flows of the hedged item are offset by changes in the opposite direction of
the fair value and the cash flows of the hedging item, within an interval ranging from 80% to 125%.
Transactions no longer qualify as hedging if:
- the hedge represented by the derivative ceases or is no longer highly effective;
- the derivative matures, is sold, terminated or exercised;
- the hedged item is sold, matures or is repaid;
- the designation as hedge is cancelled.
The ineffective portion of the hedge is the difference between the change in fair value of the
hedging instrument and the change in fair value of the hedged item, or the difference between the
change in cash flows of the hedging instrument and the change in the (expected or effective) cash
flows of the hedged item.
c) Measurement
Subsequently, hedging derivatives are measured at fair value. The fair value of derivative
instruments is determined on the basis of prices prevailing on regulated markets or provided by
qualified operators on the basis of option valuation models (or on the basis of discounted cash
flow models).
In effective fair value hedges, changes in fair value are recognized through profit or loss. Changes in
fair value of the hedged item, attributable to the risk hedged with the derivative instrument, are
recognized through profit or loss as contra-entries to changes in the carrying value of the hedged
item.
If the hedging relationship is discontinued for reasons other than the sale of the hedged item, and
the hedged item is measured at amortized cost, the difference between the carrying value of the
hedged item upon discontinuance and the carrying value that would have been recognized had
the hedge never existed is amortized through profit or loss throughout the remaining life of the
original hedge. In the case of non-interest-bearing instruments, this difference is recognized
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through profit or loss. In the case that the hedged item is sold or repaid, the unamortized portion
of the fair value is recognized through profit or loss.
In the case of cash flow hedges, the portion of income or loss of the hedging instrument that is
considered effective is recognized initially in equity, whilst the portion that is not considered
effective is recognized through profit or loss. When the hedged cash flows materialize, and are
recognized through profit or loss, the relevant gain or loss on the hedged item is charged to equity
and released to the corresponding income statement item.
If the cash flow hedge of a future transaction is no longer effective, or the hedging relationship is
discontinued, the total gains or losses on that hedging instrument recognized in equity are
recognized through profit or loss as the transaction occurs.
7 – INVESTMENTS
a) Recognition
Investments in subsidiaries, associated companies and joint ventures are recognized on the
settlement date.
b) Classification
Investments include interests in:
- associates, involving ownership of voting shares ranging between 20% and 50%;
- joint ventures, on the basis of contractual arrangements, shareholders’ agreements or other
agreements for the management of the operation and accounted for with the equity method.
Minority interests are included in available-for-sale financial instruments, which are accounted for in
accordance with the criteria described above.
c) Derecognition
Investments are derecognized when the contractual rights on the cash flows associated with them
expire, or when the investment is sold, thereby transferring all the risks and benefit related to it.
If the impairment test shows that the recoverable value is lower than the carrying value, the
difference is shown as a cost through profit or loss among write-downs/write-backs due to the
impairment of other financial assets and the asset is shown in the balance sheet at its recoverable
value.
Any write-back is recognized through profit or loss, up to the historical cost of the investment.
8 – PROPERTY, PLANT AND EQUIPMENT
a) Recognition
Items of property, plant and equipment are initially recognized at cost, inclusive of all the
incidental costs that are directly attributable to the purchase and the start of operation of the asset.
Non-routine maintenance expenses resulting in an increase of future economic benefits are
accretive of the value of the assets, whilst routine maintenance costs are expensed as incurred.
b) Classification
Property, plant and equipment include property used in production, investment property,
leasehold improvements of autonomous properties, technical installations, furniture, fittings and
equipment of any kind. Property used in production is that utilized for the provision of services or
for administrative purposes while investment property is that held to earn rentals and/or for
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capital appreciation purposes. This item includes also assets held under a finance lease contract,
even though the lessor might have legal title to the goods, and are therefore accounted for in
accordance with IAS 17.
c) Measurement
Subsequently, items of property, plant and equipment are measured at cost, net of accumulated
depreciation and any value impairment. Depreciation is calculated every year on the basis of the
remaining useful life of the asset concerned. The remaining useful life of each asset is checked
periodically. In case of changes in the initial estimates also the relevant depreciation rate is
changed. Depreciation does not apply to the land pertaining to buildings, which is therefore
accounted for separately as it has an indefinite useful life, and to works of art, since their useful
lives cannot be estimated and their value is usually expected to increase with time.
d) Derecognition
Items of property, plant and equipment are usually derecognized at the time of disposal or when
the asset is permanently retired and no future economic benefits are expected from its
decommissioning.
At the close of each year or interim period, any indication of value impairment of an asset
determines a comparison between the carrying value of such asset and its recoverable value. The
recoverable value is the difference between the fair value of the asset, net of selling costs, and the
relevant value in use, or the present value of future cash flows originated by the asset. Value
impairments are recognized through profit or loss. Any write-back, up to the cost of the asset net
of depreciation calculated in the absence of previous loss impairments, is recognized through
profit or loss.
In accordance with IAS 17, property held under lease finance contracts is recognized as an asset
whilst the amount due to the lessor is entered as a liability. Depreciation is taken throughout the
estimated useful life of the asset. Fees paid to the lessor are applied against the liability to reduce
the principal owed and as interest expense in the income statement.
9 – INTANGIBLE ASSETS
a) Recognition
Intangible assets include goodwill, multi-year software applications, as well as the value of the
trademark. Goodwill is the positive difference between the cost and the fair value, at the acquisition
date, of assets and other operations taken over in business combinations. Any negative difference
is recognized in the income statement.
Other intangible assets are recognized at cost, as adjusted for incidental costs, only if the future
economic benefits attributable to the asset are likely to be realized and if the cost of the asset can be
determined in a reliable manner. If no such future benefits are expected, the cost of intangible
assets is expensed as incurred.
b) Classification
Intangible assets are recognized as such if they are identifiable and are linked to legal or
contractual rights.
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c) Measurement
Goodwill arising on business combinations is not amortized, as its useful life is considered
indefinite. However, it is tested for impairment at least once a year and whenever there are
indications that its carrying value is impaired. The amount of any impairment is determined on the
basis of the difference between the carrying value of goodwill and its recoverable value, if this is
lower. The carrying value is equal to the greater of the fair value of the cash generating unit, net of
any selling cost, and the relevant value in use. To this end, the cash generating unit to which
goodwill must be attributed is identified. Any adjustments recognized through profit or loss
cannot be reversed, even though in subsequent years the reasons for such adjustments no longer
apply.
The cost of the remaining intangible assets is amortized in equal instalments over their remaining
useful lives.
d) Derecognition
Intangible assets are derecognized upon disposal, and if no future economic benefits are expected.
If the intangible asset does not meet the requisites of identifiability, control and existence of future
economic benefits, the relevant cost is expensed out as incurred.
As to goodwill, a negative difference between the fair value of the assets acquired and the cost of
the investment is recognized in the income statement. A positive difference is instead recognized
as goodwill among intangible assets and any impairment is charged to the income statement.
10 – NON-CURRENT ASSETS HELD FOR SALE
a) Recognition
This item includes non-current assets (or groups of assets held for sale) whose value will be
realized mainly thanks to their sale instead of their use.
b) Classification
Non-current assets held for sale are recognized at the lower of carrying value and their fair value,
net of selling costs.
c) Derecognition
Non-current assets held for sale are derecognized upon disposal.
Gains and losses (net of the tax effect) arising from these assets are shown in the income statement
under a separate caption.
11 – CURRENT AND DEFERRED TAXATION
a) Recognition
Tax expense or credit reflects the total amount of current and deferred taxes included in the
calculation of net income for the period. Concerning deferred taxation, a deferred tax asset,
reflecting income taxes recoverable in future years, is recognized for all the tax-deductible timing
differences in accordance with IAS 12, if the company is likely to generate taxable income against
which such tax-deductible timing difference can be recovered. In the absence of evidence on the
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lack of sufficient taxable income in the future by the Group’s companies, the application of the
foregoing criteria appears consistent and supported by a track record of consistent taxable income
amounts generated in the previous years. No deferred taxes have been calculated on non-taxable
reserves, on the basis of the provisions of paragraph 51 A and B of IAS 12, as these reserves are not
expected to be distributed.
b) Classification
Current taxes reflect the income tax payable or recoverable with reference to the taxable income or
loss for a period. The income tax is calculated in accordance with the tax laws in force.
Deferred tax liabilities reflect the amount of income taxes payable in future periods with respect to
taxable timing differences.
Deferred tax assets reflect the income tax amounts recoverable in future years due to:
- tax-deductible timing differences;
- unused tax loss carryforwards;
- unused tax credits.
Timing differences are differences between the book value of an asset or a liability and its tax base.
c) Measurement
Deferred tax assets and liabilities are computed by applying to the nominal values of the
corresponding timing differences the tax rates that, based on the tax regulations in force at the time
of calculation, will be applicable in the future periods, when the timing differences will reverse.
Moreover, when tax regulations provide for different tax rates for different fractions of the same
income, use can be made, for the future periods when the timing differences is reversed, of the
weighted average tax rate for the reporting period.
Current and deferred taxes are recognized through profit or loss except when they refer to gains or
losses on available-for-sale financial assets and to changes in fair value of hedging derivatives (cash
flow hedges), which are recognized in equity on an after-tax basis.
12 – PROVISIONS
PENSION FUNDS AND SIMILAR COMMITMENTS
At the reporting date, the pension fund reflects the amount of supplementary pension benefits due
by the Parent Company to such retired and active employees who, during 2000, when the
employee pension fund was changed pursuant to Legislative Decree 124/93 as amended and
supplemented, opted to continue their enrolment in the defined-benefit plan. Following the
agreement reached in 2002 with the trade unions, on 31 December 2002 the defined-contribution
section of this fund was wound up and all the relevant positions were outsourced. The relevant
liability is recognized on the basis of its actuarial value, as it qualifies as benefits payable under a
defined-benefit plan. The present value of the liability is calculated by an independent expert and
the effects of this estimate are recognized through profit or loss.
This pension fund is recognized only in the Parent Company’s balance sheet, and not in that of the
subsidiaries.
Losses related to the adjustments of the provisions for defined-benefit plans are recognized in the
income statement as staff costs. For defined-contribution plans (external funds), the contributions
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paid by the Bank are expensed out as incurred and are determined in accordance with the
employment service.
EMPLOYEE TERMINATION BENEFITS
Employee termination benefits – for the parent Company and the subsidiary CORIT – Riscossioni
Locali S.p.A. - are recognized as a liability on the basis of their actuarial value, as they are
employee benefits payable under a defined-benefit plan. Defined-benefit plans are measured on
the basis of actuarial estimates of the benefits accrued by employees during their years of service,
as discounted to determine the present value of the Company’s liability. The present value of this
liability is calculated by an independent actuary and the effects of this process are recognized
Based on Law no. 296 of 27 December 2006 (2007 Budget Act), companies with at least 50
employees are required, at 1 January 2007, to pay their monthly contributions to employee
termination benefits, locally known as TFR (Trattamento di Fine Rapporto), to the supplementary
pension funds selected by the individual employees or to the Fund for private-sector employee
termination benefits referred to by article 2120 of the Italian Civil Code (hereinafter Treasury
Fund) managed by INPS, the Italian social security agency.
This gave rise to two different positions:
- The employee termination benefits accruing at 1 January 2007, for employees who elected to
have their contributions deposited in the Treasury Fund, and as of the month following their
election, for employees who have opted to have their contributions deposited in a
supplementary pension plan, are a defined contribution plan, which does not need actuarial
calculations. The same approach applies to all employees hired after 31 December 2006,
regardless of where they elect to have their contributions deposited.
- Employee termination benefits accrued at the above dates continue to be treated as a defined
benefit plan. Accordingly, last year it was necessary to perform an actuarial calculation of such
benefits at 31 December 2006, in order to consider the following:
- alignment of salary increase assumptions to those under article 2120 of the Italian Civil Code;
- elimination of the proportionate share of past service, as the obligation is accrued.
Gains or losses arising from such restatement are recognized through profit and loss, in
accordance with paragraphs 109-115 of IAS 19 on curtailments and settlements.
For Credito Industriale Sammarinese there is a different regime, whereby according to the law
and other labour agreements, the amounts of employment termination benefits accrued are paid
to employees every year.
Employee termination benefits accrued during the year, equivalent to the average present value
of the benefits accrued by employees during the year, are recognized in the income statement as
staff costs.
OTHER PROVISIONS
Provisions for risks and charges reflect costs and charges of a given nature, whose existence is
certain or probable but the amount and payment date are uncertain. These provisions are
recognized when:
- there is a current (legal or implied) obligation as a result of a past event;
- the fulfilment of the obligation is likely to require an outflow of resources for the production of
economic benefits;
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-
the amount of the obligation can be estimated in a reliable manner.
b) Measurement
Provisions reflect the present value of the charges that will presumably be incurred to fulfil the
obligation, in the event that the passage of time is considered important. The present value is
calculated by using the current market rates.
c) Derecognition
Provisions for risks and charges are derecognized when the obligation that originated them ceases.
Provisions and releases are recognized through the income statement under provisions.
13 – DEPOSITS AND SECURITIES ISSUED
a) Recognition
These financial liabilities are initially recognized upon receipt of the sums deposited or of the
proceeds of debt instruments sold. The liability is recognized initially at fair value, which is usually
the sum collected or the issue price, as adjusted for any transaction cost/income.
b) Classification
Banks’ deposits, customers’ deposits, securities issued and subordinated liabilities include the
different types of funding obtained in the interbank market and from customers or via the issue of
certificates of deposit and bonds, net of any repurchased amount. Customers’ deposits include
amounts due to lessors in connection with any finance lease contract.
c) Measurement
Subsequently, the financial liabilities in question are measured at amortised cost, as calculated on
the basis of the effective interest rate methodology, except for short-term liabilities. The amortised
cost method is not applied to short-term debt, as the effect of discounting any such amount to
present value would be immaterial and, as a result, amortised cost would be very close to
historical cost.
d) Derecognition
Financial liabilities are derecognized when they mature or are repaid. Derecognition occurs also
for buybacks of previously issued securities.
Interest expense on such debt instruments is classified as interest expense on debt and similar
charges. Gains or losses arising on the buyback of own securities are recognized through profit or
loss. The placement on the market of own securities after a buyback is considered as a new issue
and recognized at the new placement price, without any effects on the income statement.
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14 – FINANCIAL LIABILITIES HELD FOR TRADING
a)
Recognition
b)
Classification
Financial liabilities held for trading are recognized initially at fair value, on the date of issue, in the
case of debt instruments, or of stipulation, in the case of structured contracts.
This item comprises the negative value of trading derivatives, as well as the negative value of
derivatives embedded in complex contracts but closely related to them. In addition they include
liabilities arising from short positions created in security trading activities.
c) Measurement
All financial liabilities held for trading are recognized at fair value.
d) Derecognition
Financial liabilities held for trading are derecognized when they mature or are repaid. Own
securities repurchased are also derecognized.
recognized through profit or loss as write-downs/write-backs due to impairment of other financial
liabilities
15 – FINANCIAL LIABILITIES RECOGNIZED AT FAIR VALUE
Under IAS/IFRS any financial liability can be recognized at fair value at the time of purchase, if so
designated (so-called fair value option). This item refers to the application of the fair value option to
financial liabilities with a “natural” hedge, which is designed to create a more balanced effect of
the changes in value of financial assets and liabilities on earnings.
b) Measurement
Liabilities under this caption are recognized at fair value.
c) Derecognition
These financial liabilities are derecognized when they mature or are repaid. Own securities
repurchased are also derecognized.
d) Recognition of gains or losses
recognized through profit or loss under Net result of financial assets and liabilities recognized at
fair value.
16 – FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions are recognized initially in the reporting currency by applying to the
foreign currency the spot rate prevailing on the transaction date.
b) Measurement
610
At the close of each year or interim period, foreign-denominated items are measured as follows:
- monetary items are translated at the exchange rate prevailing on the closing date;
- non-monetary items recognized at their historical cost are translated at the spot exchange rate
prevailing on the transaction date;
- non-monetary items recognized at fair value are translated utilising the spot exchange rate at
the closing date.
c) Recognition of gains or losses
Exchange rate differences arising from payments or from the translation of monetary elements at
exchange rates other than those applied initially, or applied to the previous financial statements,
are recognized through profit or loss in the period in which they materialize.
17 – OTHER INFORMATION
Other information
Recognition of treasury shares
Any treasury shares held are deducted from shareholders’ equity. Similarly, gains or losses arising
on their disposal are recognized as changes in equity.
Revenue recognition
Revenues are recognized upon collection or whenever future benefits are likely to be received and
such benefits can be quantified in a reliable manner.
Specifically:
- Interest on customers’ and banks’ loans are classified as interest income and similar revenues
and recognized on an accrual basis. Late-payment interest charges are accounted for on an
accrual basis and written down for the amount deemed irrecoverable;
- Dividends are recognized upon collection;
- Commission and interest income or expense related to financial instruments is accounted for
on an accrual basis;
- Revenues from financial instrument trading are recognized through profit or loss, if the fair
value of such instruments can be determined by reference to recent standards or transactions
observable on the same market where they are traded. Alternatively, absent these standards of
reference, revenues flow to the income statement throughout the term of the transaction.
Leasehold improvements
Leasehold improvements are capitalized in view of the future economic benefits flowing to the
user of the asset throughout the term of the lease. These costs, which are classified as Other assets,
in accordance with the Bank of Italy’s instructions, are amortized over the shorter of the period
during which the improvements can be used and the term of the lease (inclusive of any lease
renewal, if this depends on the tenant). These are value-accretive improvements and expenses that
cannot be severed from the assets, as these cannot be used and operated separately. In the absence
of such value-accretive improvements, such costs would be recognized as property, plant and
equipment
611
Other information
As specifically indicated in part 4 – “Loans” of this section, on the basis of reasoned opinion, as of
2008 estimates of the general losses on performing loans were changed. The effect of this estimate
change led to a benefit for the Group of €9.2 million, with the relevant percentage of provisions for
loan losses settling at 1.46% as opposed to 1.35% at 31 December 2007.
612

BANCA POPOLARE DI RAVENNA SPA

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