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The consolidated income statement
Joint stock co-operative company Registered office: Bergamo, Piazza Vittorio Veneto 8 Operating offices: Bergamo, Piazza Vittorio Veneto 8; Brescia, Via Cefalonia 74 Member of the Interbank Deposit Protection Fund and the National Guarantee Fund Tax Code, VAT No. and Bergamo Company Registration No. 03053920165 ABI (Italian Banking Association) 3111.2 Register of Banks No. 5678 Register of banking groups No. 3111.2 Parent of the Unione di Banche Italiane Banking Group Share capital as at 31st December 2011: euro 2,254,366,897.50 fully paid up www.ubibanca.it Contents Letter from the chairmen........................................................................................................ UBI Banca: company officers .................................................................................................. UBI Banca Group: branch network as at 31st December 2011 ...................................................... UBI Banca Group: the main investments as at 31st December 2011 ............................................ UBI Banca Group: principal figures and performance indicators .................................................. The rating ............................................................................................................................................. Notice of call ........................................................................................................................................ 5 8 9 10 12 13 15 CONSOLIDATED FINANCIAL STATEMENTS OF THE UBI BANCA GROUP AS AT AND FOR THE YEAR ENDED 31ST DECEMBER 2011 CONSOLIDATED MANAGEMENT REPORT ............................................................................................ 18 ▪ ▪ ▪ ▪ ▪ ▪ ▪ 19 The macroeconomic scenario ....................................................................................................... Significant events that occurred during the year ....................................................................... Commercial activity ........................................................................................................... The distribution network and market positioning ..................................................................... Human resources ......................................................................................................................... The consolidation scope ................................................................................................................ Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules ..................... Reclassified consolidated balance sheet ..................................................................................... Reclassified consolidated quarterly balance sheets ..................................................................... Reclassified consolidated income statement ............................................................................... Reclassified consolidated quarterly income statements ............................................................... Reclassified consolidated income statement net of the most significant 30 42 57 65 74 83 83 84 85 86 non-recurring items ................................................................................................................... ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Reconciliations schedules .......................................................................................................... Notes to the reclassified consolidated financial statements ......................................................... The consolidated income statement ............................................................................................ General banking business with customers: funding ................................................................. Funding policies ........................................................................................................................ Total funding ............................................................................................................................. Direct funding ........................................................................................................................... Indirect funding and assets under management ......................................................................... General banking business with customers: lending .................................................................. Performance of the loan portfolio ............................................................................................... Risk .......................................................................................................................................... The interbank market and the liquidity situation ...................................................................... Financial assets ............................................................................................................................. Equity and capital adequacy ........................................................................................................ Reasearch & Development ............................................................................................................ The system of internal control ................................................................................................... Transactions with related parties ...................................................................................... Consolidated companies: the principal figures ................................................................... The performance of the main consolidated companies ....................................................... Other information ............................................................................................................. Treasury shares......................................................................................................................... Litigation ................................................................................................................................... Inspections ................................................................................................................................ Tax aspects ............................................................................................................................... Investor relations and external communication .......................................................................... Social and environmental responsibility ..................................................................................... Legislation on the protection of personal data ............................................................................ 1 87 88 89 . 90 103 103 105 106 112 . 115 115 121 126 . 132 151 . 155 156 157 160 164 199 199 199 200 201 209 211 214 ▪ ▪ Principal risks and uncertainties to which the UBI Banca Group is exposed ...................... Subsequent events occurring and the business outlook for consolidated operations................................................................................................ 215 221 STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE COMPANY ACCOUNTING DOCUMENTS .................. 222 INDEPENDENT AUDITORS’ REPORT .......................................................................................... 226 CONSOLIDATED FINANCIAL STATEMENTS .................................................................... 230 ▪ ▪ ▪ ▪ ▪ Consolidated balance sheet ............................................................................................... Consolidated income statement. ........................................................................................ Consolidated statement of comprehensive income .................................................................... Statement of changes in consolidated equity ..................................................................... Consolidated statement of cash flows ................................................................................ 231 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ......................................................... 238 ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ PART A – Accounting policies ............................................................................................ Part B – Notes to the consolidated balance sheet ............................................................... Part C – Notes to the consolidated income statement ......................................................... Part D – Consolidated comprehensive income .................................................................... Part E – Information on risks and the relative hedging policies .......................................... PART F – Information on consolidated equity ..................................................................... Part G – Business combination transactions concerning companies or lines of business .... Part H – Transactions with related parties ......................................................................... PART I – Share-based payments ........................................................................................ Part L – Segment Reporting ............................................................................................... 239 ATTACHMENT ....................................................................................................................................... 469 ▪ Disclosures concerning the fees of the independent auditors and services other than auditing in compliance with Art. 149 duodecies of the Consob Issuers’ Regulations ........... 232 233 234 236 283 347 367 368 451 458 459 465 467 469 SEPARATE FINANCIAL STATEMENTS OF UBI BANCA SCPA AS AT AND FOR THE YEAR ENDED 31ST DECEMBER 2011 MANAGEMENT REPORT ........................................................................................................... 1* ▪ ▪ ▪ ▪ ▪ 2* UBI Banca: principal figures and performance indicators .................................................. The UBI Banca organisation chart ..................................................................................... The macroeconomic scenario ............................................................................................. Human resources .............................................................................................................. Reclassified financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules............................. Reclassified balance sheet ......................................................................................................... Reclassified quarterly balance sheets ......................................................................................... Reclassified income statement ................................................................................................... Quarterly reclassified income statements ................................................................................... Reclassified income statement net of the most significant non recurring items ................................................................................................................... ▪ ▪ Reconciliation schedules............................................................................................................ Notes to the financial statements ............................................................................................... The income statement ....................................................................................................... General banking business ................................................................................................. Funding .................................................................................................................................... 2 3* 5* 5* 7* 7* 8* 9* 10* 11* 12* 13* 14* 24* 24* ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Lending ..................................................................................................................................... Operations on the interbank market .......................................................................................... Financial assets ................................................................................................................ Equity and capital adequacy ............................................................................................. Relations with Group member companies .......................................................................... Research & Development................................................................................................... The system of internal control ........................................................................................... Transactions with related parties ................................................................................................ Share performance and shareholder structure ................................................................... Share performance .................................................................................................................... Report on corporate governance and the ownership structure .................................................... Treasury shares......................................................................................................................... Report on the admission of new registered shareholders............................................................. Report on mutual objects........................................................................................................... De jure and delegated powers of the corporate bodies ................................................................. Other information ............................................................................................................. Litigation ................................................................................................................................... Legislation on the protection of personal data ............................................................................ Principal risks and uncertainties to which UBI Banca is exposed....................................... Subsequent events and the business outlook .................................................................... Proposal to replenish the loss for the year and to declare a dividend .................................. 26* 28* 31* 39* 41* 41* 41* 42* 44* 44* 44* 46* 46* 48* 50* 51* 51* 52* 52* 52* 53* STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE COMPANY ACCOUNTING DOCUMENTS ................................ 55* INDEPENDENT AUDITORS’ REPORT .......................................................................................... 58* SEPARATE FINANCIAL STATEMENTS ........................................................................................ 62* ▪ ▪ ▪ ▪ ▪ 63* Balance sheet.................................................................................................................... Income statement.............................................................................................................. Statement of comprehensive income .................................................................................. Statement of changes in equity .......................................................................................... Statement of cash flows. .................................................................................................... 64* 65* 66* 68* NOTES TO THE ACCOUNTS ...................................................................................................... 70* ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ 71* Part Part Part Part Part Part Part Part Part Part A – Accounting policies .............................................................................................. B – Notes to the balance sheet ................................................................................... C – Notes to the income statement ............................................................................. D – Comprehensive income ........................................................................................ E – Information on risks and the relative hedging policies .......................................... F – Information on equity ........................................................................................... G – Business combination transactions concerning companies or lines of business .... H – Transactions with related parties ......................................................................... I – Share based payments .......................................................................................... L – Segment Reporting ............................................................................................... 105* 163* 186* 188* 269* 276* 277* 285* 286* ATTACHMENTS TO THE SEPARATE FINANCIAL STATEMENTS .................................................... 288* ▪ ▪ ▪ 289* ▪ List of real estate properties .............................................................................................. Convertible bonds ............................................................................................................. List of significant equity investments held in unlisted companies as at 31st December 2011 in compliance with Art. 126 of Consob Resolution No. 11971/1999 ................................... Disclosures concerning the fees of the independent auditors and services other than auditing in compliance with Art. 149 duodecies ..................................................................... 3 294* 295* 300* REPORT ON CORPORATE GOVERNANCE AND THE OWNERSHIP STRUCTURE OF UBI BANCA SCPA .. REPORT OF THE 1** SUPERVISORY BOARD TO THE SHAREHOLDERS’ MEETING in compliance with Art.153, paragraph 1 of Legislative Decree No. 58 of 24th February 1998 and Art. 46, paragraph 1, letter h) of the corporate by-laws ......................................................... 59** REPORTS ON THE OTHER ITEMS ON THE AGENDA OF THE SHAREHOLDERS’ MEETING ................... 73** REPORT ON REMUNERATION ........................................................................................................ 78** GLOSSARY .................................................................................................................................. 113** BRANCH NETWORK OF THE UBI BANCA GROUP CALENDAR OF CORPORATE EVENTS OF UBI BANCA FOR 2012 RESOLUTIONS PASSED BY THE ANNUAL GENERAL MEETING HELD ON ..... 2012 CONTACTS Key The following abbreviations are used in the tables: - dash (-): when the item does not exist; - not significant (n.s.): when the figure is insufficient to reach the minimum level in question or is in any case not significant; - not available (n.a.): when the information is not available - a cross “X”: when no amount is to be given for the item (in compliance with Bank of Italy instructions). All figures are given in thousands of euros, unless indicated otherwise. 4 Letter from the chairmen Dear registered and non registered shareholders, In 2011, the financial crisis, which never died down completely, was stoked by a dangerous new source of difficulty in the euro area, which, with unforeseeable intensity, gradually affected the sovereign debts of countries with high debt and weak development prospects in the medium-term, including Italy. Growing fears of insolvency for sovereign issuers had repercussions on the banking industry and caused a sudden deterioration in the terms and conditions for wholesale funding offered to Italian banks, which were trapped between requests to strengthen capital and demands to support small and medium-sized businesses, the backbone of the country’s economy. In this context, thanks to the strategic policies pursued over the years and in particular to the adequacy of the increase in the share capital concluded in July 2011, UBI Banca was again able to continue to benefit from good capital strength, a well-balanced capital structure and low levels of risk, without prejudice to its focus on service to customers (small to medium-sized businesses and families), the key strength of the Group’s companies. These are results which assume even more importance in the light of the difficulties which arose during the year and they enable the UBI Banca Group to take its place as one of the soundest in Italy. Adequate capitalisation All the capital ratios, calculated on the basis of the “standardised approach”, showed improvement: a core tier one ratio of 8.56% (up from 6.95% at the end of 2010) and a total capital ratio of 13.5% (up from 11.17% before). The Group therefore has no plans whatsoever of performing any new operation to increase its share capital on the market. Any capital requirements needed to reach the core tier one ratio of 9% recommended by the European Banking Authority (EBA), which may remain on the basis of assessments made as at 30th June 2012, will be met, if substantial, by the partial conversion of outstanding convertible bonds. Well-balanced capital structure Maintenance of high standards of structural balance was ensured by consolidation and growth in funding from ordinary (non institutional) customers, which represents over 80% of total direct funding for the UBI Banca Group and also by a change in the composition of funding with a preference for longer-term funding through the placement of bonds. Total Group funding as at 31st December 2011, consisting of total amounts administered on behalf of customers, reached almost €175 billion, of which approximately €103 billion was direct funding and €72 billion indirect funding (the latter figure having been penalised by price trends on financial markets). On the lending front, with demand for loans affected by the deterioration of the economic environment, the management policy pursued was designed to guarantee full support for businesses and households, with a reduction in exposure to the large corporate segment and rationalisation of disbursements to customers outside the Group. At the end of December loans to customers are close to €100 billion (77% of total assets) with a ratio of lending to funding of 97% (95.4% at the end of 2010). 5 A low risk profile The Group has no sovereign debt exposure to countries at risk. The quality of Group loans continues to be high with a ratio of non-performing loans to loans, both gross and net of impairment losses, of 4.27% and 2.49% respectively, compared to data for the Italian banking sector as a whole of 6.24% for gross nonperforming loans and 3.09% for net non-performing loans. The loan loss rate has improved and now stands at 0.61% (0.69% at the end of 2010). Risk weighted assets, which consist of credit and counterparty risk, fell to €91 billion, accounting for approximately 70% of balance sheet assets, while financial assets accounted for 8.5%, with Italian government securities in particular representing approximately 6% of total balance sheet assets. Appropriate liquidity Sound liquidity management was ensured during the year by several lines of action which were pursued. The liquidity reserve, consisting of assets eligible for refinancing with European Central Bank, was increased and the Bank participated in two refinancing operations conducted by the ECB with a three year maturity (with the allotment of €12 billion). The liquidity reserve, consisting of the portfolio of assets eligible for refinancing with the central bank, calculated net of haircuts, amounted to €11.6 billion at the end of 2011, with a margin still available of €5.6 billion. Total Group assets eligible for refinancing had risen to €24.5 billion as at 20th March 2012, with a margin of liquidity still available of €12.2 billion, a more than twofold increase compared to December. Results for the year The management of operations in 2011 was yet again (and even more severely) affected by the economic situation and by foreseeable future scenarios. The UBI Banca Group adopted normal prudent criteria and recognised impairment losses on finite useful life intangible assets that had arisen following the merger between the former BPU Banca Group and the former Banca Lombarda e Piemontese Group. In other words it significantly impaired (by €2,397 million gross, accounting for 44% of the total on the books at the end of 2010) the carrying amounts that had been recognised. Since these amounts had been generated by a “paper for paper” transaction, with no cash payments involved, the treatment introduced by IFRS requires recognition of the impairment through profit and loss – with a loss of €1.8 billion recognised in the income statement as a consequence – even if that impairment generated effects of an accounting nature only, with no impact on the Group’s operations, or repercussions on its liquidity, capital ratios (because these are calculated after deducting all intangible assets) or future profits. Replenishment of the loss, caused by the impairment loss, will be carried out by drawing on the share premium reserve, which had received the amounts resulting from the increase in the share capital at the service of the merger of Banca Lombarda e Piemontese into the Bank. Following the replenishment of the loss, the equity of the Group (inclusive of non controlling interests) will amount to €9,838 million. The year 2011 ended with consolidated profit before impairment of €349 million, an increase of 97% compared to €177 million the year before, as a result of good performance by revenues, notwithstanding the variable market conditions. The Group also continued to progressively contain costs, partly in relation to action designed to rationalise and simplify the corporate structure, already decided and currently being implemented. 6 More specifically, in the fourth quarter of the year, during which the crisis of confidence in the country reached its peak, the trends in progress seemed to be confirmed with total ordinary revenues of €904 million and operating expenses (normalised) of €609 million. The effectiveness of the constant action taken to contain current spending is also confirmed by average quarterly figures (normalised), which fell progressively from €618 million in 2009, to €608 million in 2010 and €603 million in 2011. In consideration of the Group’s sound capital structure and as a sign of appreciation for the support that our registered and unregistered shareholders continue to show the UBI Banca Group, the Management Board will propose to shareholders the declaration of a dividend of 0.05 euro per share on the 900,546,759 ordinary shares outstanding. This dividend, if approved in the amount proposed, will be paid on 21st May 2012 with value date 24th May 2012. The total dividend payment will amount to €45 million and will be drawn from extraordinary reserves. At the end of a year which was one of the most complex in our history, we feel obliged to convey our sincerest and warmest thanks to the personnel of the Group who have worked so hard and to our registered and unregistered shareholders who have supported us and the strategic policies of the Group. We also wish in particular to thank all our customers for whom we have the greatest consideration and to whom we give maximum attention in order to provide them with the highest quality of service. The Chairman of the Management Board The Chairman of the Supervisory Board Emilio Zanetti Corrado Faissola April 2012 7 UBI Banca: company officers Honorary Chairman Giuseppe Vigorelli Supervisory Board (appointed by a Shareholders’ Meeting on 24th Chairman Senior Deputy Chairman Deputy Chairman Deputy Chairman April 2010) Management Board (appointed by the Supervisory Board on 27th April 2010) Chairman Deputy Chairman Chief Executive Officer Corrado Faissola Giuseppe Calvi Alberto Folonari Mario Mazzoleni Battista Albertani Giovanni Bazoli(*) Luigi Bellini Mario Cattaneo Silvia Fidanza Enio Fontana Carlo Garavaglia Alfredo Gusmini Pietro Gussalli Beretta Giuseppe Lucchini Italo Lucchini Federico Manzoni Toti S. Musumeci Sergio Orlandi Alessandro Pedersoli(*) Giorgio Perolari Sergio Pivato Roberto Sestini Giuseppe Zannoni Emilio Zanetti Flavio Pizzini Victor Massiah Giampiero Auletta Armenise Giuseppe Camadini Mario Cera Giorgio Frigeri Gian Luigi Gola(**) Guido Lupini Andrea Moltrasio Franco Polotti General Management General Manager Senior Deputy General Manager Deputy General Manager Deputy General Manager Deputy General Manager Deputy General Manager Deputy General Manager Graziano Caldiani(***) Francesco Iorio(****) Rossella Leidi Giovanni Lupinacci Ettore Medda Pierangelo Rigamonti Elvio Sonnino(*****) Senior Officer Responsible in accordance with Art. 154 bis of the Consolidated Finance Act Elisabetta Stegher Independent auditors KPMG Spa (*) Resigned with effect from 29th March 2012 (**) Appointed by the Supervisory Board on 30th June 2010 (***) He occupies the position until 30th April 2012. (****) He occupies the position from 1st February 2012 until 30th April 2012. He will be appointed to the position of General Manager on 1st May 2012. (*****) He occupies the position from 1st February 2012 until 30th April 2012. He will be appointed to the position of Senior Deputy General Manager on 1st May 2012. 8 UBI Banca Group: branch network as at 31st December 2011 9 UBI Banca Group: the main investments as at 31st December 2011 10 11 UBI Banca Group: principal figures and performance indicators1 31.12.2011 31.12.2010 31.12.2009 31.12.2008 STRUCTURAL INDICATORS Net loans to customers/total assets 76.8% 78.0% 80.1% 79.0% Direct funding from customers/total liabilities 79.2% 81.8% 79.5% 80.0% Net loans to customers/direct funding from customers Equity (including profit for the year)/total liabilities 97.0% 5.5% 95.4% 8.5% 100.8% 9.3% 98.7% 9.1% Assets under management/indirect funding from private customers Leverage ratio 51.2% 54.6% 53.2% 53.1% 25.3 18.8 16.5 17.1 4.9% 1.5% 2.3% 0.6% 8.5% 3.0% 4.4% 1.2% ROA (Profit for the year/total assets) Cost/income ratio (operating expenses/operating income) 0.27% 0.13% 0.22% 0.06% 69.5% 70.6% 64.4% 63.9% Personnel expense/operating income Net impairment losses on loans/net loans to customers (loan losses) Net interest income/operating income 41.4% 0.61% 41.5% 0.69% 37.5% 0.88% 38.8% 0.59% 61.7% 61.3% 61.5% 68.7% Net commission income/operating income 34.7% 33.9% 31.1% 33.3% 0.2% 1.0% 3.2% -5.9% 2.49% 1.91% 1.36% 0.88% 43.31% 48.69% 51.57% 54.58% 5.03% 3.91% 3.24% 2.08% 30.55% 34.89% 35.93% 38.22% 9.09% 7.47% 7.96% 7.73% (total assets - intangible assets) /(equity inclusive of profit (loss) + equity attributable to non-controlling interests intangible assets) PROFIT INDICATORS ROE (Profit for the year/equity excluding profit (loss) for the year) ROTE [profit for the year/tangible equity (inclusive of profit (loss), net of intangible assets)] Net result on financial activities/operating income RISK INDICATORS Net non-performing loans/net loans to customers Net impairment losses on non-performing loans/gross non-performing loans (coverage for non-performing loans) Net non-performing + net impaired loans/net loans to customers Net impairment losses on non-performing and impaired loans/gross non-performing loans+impaired loans (coverage) CAPITAL RATIOS Basel 2 standard Tier 1 ratio (tier 1 capital/total risk weighted assets) Core tier 1 ratio after specific deductions to tier 1 capital (tier 1 capital net of preference shares and savings shares or privileged shares of non controlling interests/total risk weighted assets) 8.56% 6.95% 7.43% 7.09% 13.50% 11.17% 11.91% 11.08% 12,282,153 10,536,200 10,202,555 9,960,812 8,276,278 7,047,888 6,816,876 6,944,723 Risk weighted assets INCOME STATEMENT, BALANCE SHEET FIGURES (in thousands of euro), STRUCTURAL DATA (numbers) 91,010,213 94,360,909 85,677,000 89,891,825 Profit (loss) for the year attributable to the Parent (1,841,488) 172,121 270,099 69,001 111,562 105,116 173,380 425,327 Total capital ratio [(supervisory capital+tier 3/total risk weighted assets]] Supervisory capital (in thousands of euro) of which: Tier one capital after the application of prudential filters and specific deductions Profit (loss) for the year attributable to the Parent normalised Operating income Operating expenses Net loans to customers of which: net non-performing loans 3,438,339 3,496,061 3,906,247 4,089,739 (2,389,626) 99,689,770 (2,468,564) 101,814,829 (2,514,347) 98,007,252 (2,611,348) 96,368,452 2,481,417 1,939,916 1,332,576 848,671 net impaired loans 2,533,780 2,032,914 1,845,073 1,160,191 Direct funding from customers 102,808,654 106,760,045 97,214,405 97,591,237 72,067,569 36,892,042 78,078,869 42,629,553 78,791,834 41,924,931 74,288,053 39,430,745 Indirect funding from customers of which: assets under management Total funding from customers 174,876,223 184,838,914 176,006,239 171,879,290 Equity (including profit (loss) for the year) 8,939,023 10,979,019 11,411,248 11,140,207 Intangible assets 2,987,669 5,475,385 5,523,401 5,531,633 Total assets Branches in Italy 129,803,692 1,875 130,558,569 1,892 122,313,223 1,955 121,955,685 1,944 19,405 19,699 20,285 20,680 18,828 713 19,384 786 20,185 880 20,606 924 Total personnel at the end of year (actual employees in service + workers on agency leasing contracts) Average total personnel (actual employees in service + workers on agency leasing contracts) (*) Financial advisors The profit indicators for 2011 were calculated on profit before impairment losses on goodwill and finite life intangible assets, which amounted to €349,373 thousand. 1 The indicators have been calculated using the reclassified figures contained in the section “Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules” in the Consolidated Management Report. Information on the share is reported in the relative section of the UBI Banca Management Report. (*) Part-time employees have been calculated within total average personnel numbers according to convention on a 50% basis. 12 The rating As the sovereign debt crisis worsened since the summer, all the agencies have reviewed their ratings for Italy several times. The downgrade of the Republic of Italy’s debt then gave rise to generalised downgradings of the ratings assigned to Italian banks, including UBI Banca. On 19th September, after the review commenced on 20th May had come to an end, Standard & Poor’s lowered its sovereign rating for Italy by 1 notch from A+ to A with a negative outlook. Then as part of a more general review of 16 eurozone countries on credit watch with possible downgrading since December 2011, on 13th January 2012 the agency lowered its long term rating for Italy by two notches from A to BBB+, again with a negative outlook. Following its first downgrade, on 18th October 2011 S&P announced that it was downgrading its BICRA rating (Bank Industry Country Risk) for Italy, which summarises its vision of the strengths and weaknesses of each banking system, bringing it down from two to three (on a scale where one is the best). This downgrade gave rise to a series of measures involving a large number of Italian banks and financial institutions. For UBI Banca in particular, its long term rating was downgraded from A to A- with a stable outlook, while its short-term rating fell from A-1 to A-2. As a result of a further sovereign debt downgrade and a consequent lowering of the Italian BICRA rating (from three to four), on 10th February 2012 the agency took a series of negative measures involving 37 Italian financial institutions, including UBI Banca whose long term rating was again downgraded from Ato BBB+, with a negative outlook. On 4th October 2011, when Moody’s concluded its review started on 23rd June, it reduced its rating on Italian government debt by three notches from Aa2 to A2, with a negative outlook. Then as part of a broader review of European sovereign ratings, Italy’s rating was again downgraded on 13th February 2012 from A2 to A3, again with a negative outlook. This first action had been followed on 5th October, by widespread medium and long-term downgradings of Italian banks, ranging from between one and three notches, partly in relation to a revision of the assumptions of systemic support incorporated within those ratings following Italy’s sovereign debt downgrade. In this context, the rating on UBI Banca’s long term deposits had fallen from A2 to A3 (-1 notch), with a stable outlook, while the short-term rating had been lowered from P-1 to P-2. On the other hand, the Bank Financial Strength Rating remained unchanged. It had been lowered from C to C- on 1st September 2011 with a stable outlook1, to reflect the impact of the difficult operating context in Italy for company profits and more specifically the chance of a significant improvement in the short-term. In consideration of a background context made difficult by the prolonged and adverse impacts of the euro crisis, on 15th February 2012 Moody’s announced a general review for possible downgrading of the ratings of 114 financial institutions operating in 16 European countries, one of which was UBI Banca. On 7th October 2011, Fitch Ratings reduced its long-term rating for the Republic of Italy by 1 notch from AA- to A+ with a negative outlook. As part of action taken on six eurozone countries (placed on negative rating watch on 16th December), on 27th January 2012, this agency reduced its rating for Italy from A+ to A- (-2 notches), again with a negative outlook. After its first Italian downgrade, on 11th October the agency made a series of cuts to the ratings of five major Italian banks. As part of this operation, UBI Banca’s long-term rating was reduced from A to A-, with a negative outlook, its viability rating was lowered from a to a- and its short-term rating from F1 to F2. Following a further downgrade for Italy, on 6th February 2012 Fitch removed its negative rating watches assigned on 20th December and made a series of cuts to the ratings of the main Italian banks. For UBI Banca, its long-term and the viability ratings were reduced from A-/a- to BBB+/bbb+ with a negative outlook. The tables below summarise the ratings currently assigned to the Group by the three international agencies. 1 The reduction in the Bank Financial Strength Rating was accompanied by a downgrade of ratings on long-term deposits from A1 to A2 with a negative outlook. 13 STANDARD & POOR’S Short-term Counterparty Credit Rating (i) A-2 Long-term Counterparty Credit Rating (i) BBB+ Stand Alone Credit Profile (SACP) (ii) bbb+ Outlook Negative RATINGS ON ISSUES Senior unsecured debt BBB+ Subordinated debt (Lower Tier 2) Preference shares (former BPB-CV and former BPCI) BBB French Certificats de Dépôt Programme A-2 BB+ MOODY'S A3 Long-term debt and deposit rating on review for possible downgrade (I) Prime-2 Short-term debt and deposit rating on review for possible downgrade (II) CBank Financial Strength Rating (BFSR) (III) on review for possible downgrade Baa1 Baseline Credit Assessment (BCA) (IV) on review for possible downgrade RATINGS ON ISSUES A3 Senior unsecured LT on review for possible downgrade Lower Tier 2 subordinated on review for possible downgrade Preference shares (former BPB-CV and Banca Lombarda) on review for possible downgrade Euro Commercial Paper Programme on review for possible downgrade Covered Bond on review for possible downgrade Baa1 (i) The issuer credit rating reflects the agency’s opinion of the intrinsic creditworthiness of the bank combined with an assessment of the potential for future support that the bank might receive in the event of default (from government or from the group to which it belongs). Short-term: ability to repay short term debt with a maturity of less than one year (A-1: best rating – C: worst rating) Long-term: ability to pay interest and principal on debt with a maturity of longer than one year (AAA: best rating – C: default) (ii) The SACP is a rating of the intrinsic creditworthiness of the bank in the absence of external support (from government or from the group to which it belongs). It is calculated on the basis of an “anchor SACP” which summarises economic and industry risk for the Italian banking sector. This is then adjusted to take account of bank-specific factors such as capitalisation, market positioning, exposure to risk and the funding and the liquidity situation, which are also assessed from a comparative viewpoint. (I) The ability to repay long-term debt (maturing after one year) in local currency. By using the JDA method (Joint Default Analysis), this rating associates the financial strength rating (BFSR – Bank Financial Strength Rating) with the probability of intervention if needed by external support (shareholders, the group to which it belongs or official institutions) (AAA: best rating – C: default). (II) The ability to repay debt in local currency maturing in the short term (due in less than one year). (Prime -1: highest quality – not prime: speculative grade) (III) This rating does not relate to the ability to repay debt, but considers the bank’s intrinsic financial strength (by analysing factors such as its geographical market presence, the diversification of its activities, the financial basics) in the absence of external support (A: best rating– E: worst rating). (IV) The Baseline Credit Assessment represents the equivalent of the Bank Financial Strength Rating on the traditional scale of the long term rating. Ba1(hyb) Prime-2 Aa2 FITCH RATINGS Short-term Issuer Default Rating (1) F2 Long-term Issuer Default Rating (2) BBB+ Viability Rating (3) bbb+ Support Rating (4) Support Rating Floor (5) Outlook (Long-term Issuer Default Rating) 2 BBB Negative RATINGS ON ISSUES Senior unsecured debt BBB+ Lower Tier 2 subordinated BBB Preference shares BB Euro Commercial Paper Programme F2 AA+ Covered Bond Rating Watch Negative (1) The ability to repay debt in the short term (maturity less than 13 months) (F1: best rating – C: worst rating). (2) The ability to meet financial commitments in the long term, independently of the maturity of individual obligations. This rating is an indicator of the probability that an issuer will default (AAA: best rating – D: default). (3) An assessment of a bank’s intrinsic strength in the event that it cannot rely on forms of external support (a: best rating - d: default). The Viability Rating has replaced the Bank Individual Rating since 20th July 2011. (4) A rating of the possibility of concrete and timely external support (from the state or large institutional investors) if the bank finds itself in difficulty (1: best rating – 5: worst rating). (5) This rating gives additional information, closely linked to the Support Rating, in that for each level of the Support Rating it identifies the minimum level which the Issuer Default Rating could reach if negative events were to occur. 14 Notice of call1 An Ordinary General Meeting of the Shareholders of Unione di Banche Italiane S.c.p.A is convened in first call on Friday 27th April 2012 at 5:00 p.m. in the Conference Room of UBI Banca at No. 11 Piazza Mons. Almici, Brescia and in second call on Saturday 28th April 2012 at 9:30 a.m. in the premises of the Brescia Trade Fair at No. 5 Via Caprera, Brescia to discuss and vote on the following Agenda 1 Presentation of the separate and consolidated financial statements as at and for the year ended 31st December 2011; proposal for the distribution of a dividend drawn from the extraordinary reserves. 2 Appointments to fill places on the Supervisory Board in accordance with the provisions of Art. 36 of Decree Law No. 201 of 6th December 2011 converted into law with Law No. 214/2011. 3 Appointment of the Board of Arbitration. 4 Report on remuneration 5 2012 incentive scheme based on financial instruments: - proposal to pay a portion of the variable remuneration of “top management” and the “highest management level of the control functions” by assigning ordinary shares of the Parent UBI Banca to them; - proposal to authorise the Management Board to purchase treasury shares for use in incentive schemes. *** The subscribed and paid up share capital of UBI Banca Scpa amounts to € 2,254,366,897.50 consisting of 901,746,759 shares with a nominal value of € 2.50 each. At the date of this notice UBI Banca possesses 1,200,000 treasury shares. The total number of registered shareholders with the right to vote is 82,840. Persons wishing to participate in Shareholders Meetings, to exercise voting rights and to be eligible for election to corporate bodies must have been a registered shareholder for at least 90 (ninety) days from the date of registration in the shareholders’ register. Legitimate entitlement to participate in Shareholders’ Meetings and to exercise voting rights is certified by a communication to the Bank, performed – pursuant to Art. 83-sexies of Legislative Decree No. 58 of 24th February 1998 – by the relative intermediary, a member of the Monte Titoli Spa centralised management system, on the basis of its accounting records, in favour of the party holding the right to vote. In this regard, Registered Shareholders for whom the said communication has been made to the Bank by the end of the third market trading day prior to that set for the Shareholders’ Meeting in first call may attend the Shareholders’ Meeting, in accordance with the law. The legitimate right to attend and vote nevertheless remains, should the communications be received by the Bank later than the aforementioned time limit, provided they are received before the commencement of the proceedings of each single session of the shareholders’ meetings. Registered shareholders holding shares that have not yet been dematerialised pursuant to the legislation and regulations in force must deliver them in good time to an approved intermediary in order to perform the dematerialisation procedure required and to make the communication mentioned above. The communication performed by the intermediary shall contain a special section which may be used to authorise a proxy by signing the said section. In compliance with the procedures and the time limits set by law, a number of registered shareholders equal to not less than one fortieth of the total number of registered shareholders entitled on the date of the request, may make an application in writing for additions to be made to the agenda to be dealt with in the meeting, as it results from the notice of call, with the indication in the request of the additional 1 Published in the Official Journal No. 41 of 5th April 2012. 15 items proposed. The signature of each Registered Shareholder on the application must be authenticated either in accordance with the law or by employees of the Bank or its subsidiaries specifically authorised for that purpose. The legitimacy of that right is given by the validity of the documentation testifying to the possession of the shares on the date of the presentation of the application. Each registered shareholder has the right to one vote only no matter how many shares are held and it may not be exercised by correspondence. Each Registered Shareholder has the right to be represented by written proxy issued to another Registered Shareholder entitled to attend the Meeting. Proxies may not be granted to any members of the Management Board or the Supervisory Board, or to employees of the Bank, or to any of its subsidiaries or to any member of the management or control bodies, or employees of the aforesaid subsidiaries, or to the firm of external statutory auditors appointed or to the person responsible for the statutory audit of the Bank, or to parties to whom one of the other conditions of incompatibility apply according to the law. Each registered shareholder may act as a proxy for not more than 3 (three) other registered shareholders. The procedure that will be followed for the purpose of making appointments to fill places on the Supervisory Board will comply with Art. 45 of the Corporate By-Laws which states as follows “(…) If, during the course of the financial year, the Board lacks one or more members, where it is a case of replacing members elected in the majority list, the first candidate not elected on that list shall be appointed. In the absence of such a candidate, the appointment shall be by a relative majority vote with no list obligation, since the Supervisory Board itself may present candidacies, if necessary, on the basis of proposals from the Appointments Committee. (...) If, however, board members belonging to the minority list must be replaced the following procedure is employed: - if only one board member has been appointed from the minority list, then the first candidate not elected on the list from which the member to be replaced was drawn shall be appointed, or, in the absence of such a candidate, the first candidate on any other minority lists there may be shall be taken on the basis of the number of votes received in descending order. Should this not be possible, the Shareholders’ Meeting shall make the replacement in compliance with the principle of the necessary representation of minorities; (...) The replacement candidates, identified in accordance with the provisions of this article, must confirm that they accept their appointment and also make declarations that no cause for ineligibility and incompatibility exists and that they possess the requirements prescribed by law and by these Corporate By-Laws for the office. A member of the Supervisory Board called upon to replace a previous member remains in office until the original mandate of the replaced member expires.” In compliance with Bank of Italy recommendations concerning regulations governing the organisation and corporate governance of banks, the ideal profiles of candidates for membership of the Supervisory Board are made available at the Bank and on the corporate website www.ubibanca.it. The documentation relating to the items on the agenda will be deposited and made available to the public at the registered address of the Bank and on the website www.ubibanca.it and it will be filed with Borsa Italiana SpA within the time limits and according to the procedures of the Law and regulations. Registered Shareholders may view and obtain copies of the aforementioned documentation in accordance with the law by applying in advance to the Management Board Support and Registered Shareholders Department. Bergamo, 27th March 2012 The Chairman of the Management Board Emilio Zanetti (signed on the original) 16 The macroeconomic scenario In a general context already characterised by growing difficulty in overcoming the great 20082009 crisis, the year just ended was distinguished by a marked worsening of the sovereign debt crisis which, starting with Greece1, rapidly spread to a fair number of countries in the euro area (especially Italy and Spain). It resulted in increased volatility and a “flight to quality” to United States and German government securities, which gave rise in the summer to sharp falls in share and corporate bond prices – especially in the banking sector, due to its exposure to sovereign risk because of the government securities held – and to outflows of capital from emerging countries. At the same time conditions on interbank markets in the euro area became problematic again, a sign of renewed short-term funding difficulties for banks, with an increase in resort to financing and liquidity deposits with the ECB. The spreads between the yields of government securities in the euro area and those of the German bund reached new record highs since the introduction of the euro for Greece, Portugal, Italy, Spain, Belgium and France, despite huge purchases made by the ECB as part of its securities markets programme. Pressures on Italy caused a sharp increase in November in the spread between ten year BTPs and the German bund equivalents Ten-year BTP-Bund spread Graph No 1 to 550 basis points, a reflection of 600 uncertainties firstly over the 550 approval of the second public 500 finance act in August and then 450 over the presentation of the plan 400 to revive the economy 2 . The Basis 350 installation of a new government points 300 and measures taken to 250 consolidate public debt and liberalise markets helped to 200 reduce the risk premium, but this 150 did not become really clear for ten 100 year maturities until the second 50 half of January 20123. 0 J F M A M J J A S O N D J F M A M J J A S O N D J F M The confidence crisis brought to light a series of structural flaws in the construction of the original single currency area and as a consequence of the European Union. More specifically, damage was done by the lack of a clear establishment of the sovereignty of European bodies and the inability to convince public opinion in member countries of the project to unite Europe. Although important measures were decided in 2011 to strengthen integration, the new provisions were limited from a fiscal viewpoint, still along the original lines defined by the stability pact rules, with greater penalties and a stronger compulsory nature. The positions of different countries on the issue of eurobonds, European bonds guaranteed jointly by all member countries of the eurozone, are still very far apart. 2010 2011 2012 In detail: 1 Greece’s position hit crisis levels again during the spring of 2011 when its delays in implementing fiscal consolidation compromised the disbursement of a tranche of aid needed to repay maturing securities. At the end of June, the concrete risk of imminent debt restructuring persuaded the Greek parliament to approve a new medium term fiscal austerity plan and the European Union and the International Monetary Fund to prepare a second package of aid. 2 All three of the main rating agencies (Standard & Poor’s, Moody’s and Fitch Ratings) reduced their ratings for Italy and set negative outlooks between the middle of September and the first half of October, and they also downgraded the ratings on a number of banks. At the end of the year those same agencies placed the credit ratings of almost all the sovereign states in the euro area under review, including those with an AAA rating like Germany, France and the Netherlands. On 13th January 2012 S&P’s then downgraded the sovereign debt of nine countries, including France (from AAA to AA+), Spain (from AA- to A) and Italy (from A to BBB+) and three days later it also lowered the rating on the European Financial Stability Fund. On 27th January Fitch also reduced its rating on five countries including Italy (from A+ to A-) and Spain (from AA- to A), followed by Moody’s which cut its rating on six countries on 13th February, including Italy (from A2 to A3) and Spain (from A1 to A3). 3 At the beginning of March the spread between BTPs and German bund allowed that spread to reach and fall below the same spread between Spanish bonos and German bund for the first time since August 2011. 19 the European semester was introduced for the first time in the Ecofin meeting held in September 20104; temporary funds (European Financial Stability Facility, EFSF) and permanent funds (European Stability Mechanism, ESM) were created in March to support countries in financial difficulty. They replaced the bilateral loans used previously; the European Parliament approved a reform of the stability and growth pact in June designed to increase the weighting attributed to the debt indicator with respect to net debt, with the introduction of a severe repayment programme and matching penalty mechanisms; in summit meetings held on 26th October, 9th December and 30th January 2012, the heads of state and government of the area gradually made further decisions designed: to improve European Governance The commitment, already agreed in March 2011, to implement budget rules at constitutional or equivalent level in national legislations, consistent with those set at European level with the Stability Pact, was reaffirmed. It was also decided in the summit held in December that those rules should include an automatic mechanism to correct any deviations and that the European Union Court of Justice would be responsible for judging the compliance of national legislation with European rules5. On that same occasion European institutions were requested to examine regulatory proposals submitted by the European Commission at the end of November. These provide for greater coordination for euro area countries when preparing budgets by defining a common calendar for the presentation of budgets to the Commission before they are approved by the respective national parliaments and by granting the Commission greater supervisory powers over countries in receipt of financial assistance or which are in any case in serious financial difficulty. to clarify the role of private sector investors in the solution of the Greek crisis The Greek government and private sector investors (banks and insurance companies) have been urged to reach a voluntary agreement in order to facilitate the return of public debt to 120% of GDP by 2020, by reducing the nominal value of Greek government securities held by the private sector by 50%6. It was also decided that any future involvement of private sector investors in the solution of sovereign debt crises will be based on IMF principles and practices, that the decisions concerning Greece are to be considered as one-off and exceptional and that uniform collective action clauses would be introduced for all new issues of government securities in the euro area. to strengthen financial stabilisation instruments It was decided to increase the capacity of the EFSF to intervene, by increasing its financial impact using two options which could be used simultaneously if necessary. These involve in the one case the granting of partial guarantees on new issues of government securities by countries in the area and in the other the establishment of one or more special purpose vehicles (co-investment funds, CIF) which would purchase government securities on the primary and secondary market, using funds supplied by private sector investors and by the EFSF. In both cases the intervention would be dependent on the acceptance by beneficiaries of stringent conditions on the policies to be pursued to re-establish financial stability. The process to approve the treaty to set up the ESM was then accelerated with the objective of bringing forward the date on which it comes into force to July 2012. The EFSF will remain active to finance programmes started before the middle of 2013, working alongside the ESM for one year, while the total lending capacity of the two bodies was confirmed at €500 billion. The adequacy of those funds will be reviewed in March 2012. to increase the capital of banks to facilitate access to longer term funding With a view to increasing confidence in the banking system, the European Banking Authority (EBA) approved a recommendation which involves the creation of a temporary capital buffer for the larger banks. This will allow them to achieve a capital ratio of 9% (in terms of the highest quality capital), on the basis of the market value of government securities held in portfolio at the end of September 2011. In order to ease medium to long-term funding difficulties, the European Commission established uniform rules for all EU countries concerning access by banks to national government guarantees (in terms of conditions and costs). to increase the funds available to the International Monetary Fund (IMF) to support countries in difficulty EU countries are committed to assessing the possibility of providing the IMF with additional funds of up to €200 billion, to bring the funds available into line with the requirements caused by the crisis. 4 The new procedure led to the harmonisation of time schedules for the enactment of budget laws in member countries and its aim is to lead to greater co-ordination of tax policies through improved policy co-ordination. 5 The reduction of public debt above a threshold of 60% of GDP is assessed using a numerical parameter and must be equal to one twentieth of the difference with respect to that threshold. This measure is in addition to that by which the structural deficit must not exceed 0.50% of GDP during each economic cycle. If it does, then automatic penalties apply if the deficit exceeds 3% of GDP. 6 It was only agreement on a larger cut (53.5%) to the nominal amount of securities held by the private sector that made it possible to unlock the second package of aid on 21st February 2012, amounting to €130 billion, as a result of which the default of the Greek Republic was avoided, ensuring that a public debt to GDP ratio of 120.5% could be reached in 2020. 20 Monetary policy action taken by the European Central Bank (ECB) at the same time as the intervention described above also became particularly incisive. With increasing tensions on financial markets, an unfavourable outlook for growth and inflationary pressures slackening, the new governing council of the ECB reduced the interest rate on principal refinancing operations by 25 basis points in each of its meetings at the beginning of November and the beginning of December, bringing it down to 1% thereby eliminating the effect of the two increases made in April and July7. New measures were decided in December to support the liquidity of banks and their lending to households and businesses consisting of two refinancing operations with a maturity of 36 months, full allotment of bids and rates equal to the average of the principal refinancing rate over the duration of the operation, for which an early redemption option was provided after one year8. It was also decided to broaden the range of assets eligible as collateral for refinancing operations, by reducing the rating requirements for some ABS instruments and by allowing national central banks the autonomy to accept bank loans which meet precise conditions of eligibility. Finally, starting from the first maintenance period in 2012, the compulsory reserve requirement for banks was reduced by 2% to 1% in order to free up liquidity and support money market activities. The programme to purchase covered bonds issued by banks up to a total of €40 billion was also resumed in November. *** The difficult path to normal market conditions will firstly require concrete application of the new economic governance rules recently approved by the EU. At the same time it will be important to rapidly render the mprovements to European financial stability tools, such as the EFSF and ESM, operational, increasing their effectiveness and quickly exploiting their power. By raising doubts over the future of the single currency, the sovereign debt crisis has caused the euro to depreciate against all the main international currencies. As shown in Graph No. 2, after a temporary recovery when it exceeded 1.48 dollars to the euro, the single currency has fallen sharply, especially since August. In the first few weeks of the new year it showed signs of recovery as pressures on financial markets eased. Euro-dollar and dollar-yen exchange rates (2009-2011) Graph No.2 1,62 103 1,58 €/$ 101 $/Yen (scala dx.) 1,54 99 1,50 97 1,46 95 1,42 93 1,38 91 1,34 89 1,30 87 1,26 85 1,22 83 1,18 81 1,14 79 1,10 77 1,06 JG FF M M A M M A G J L J A A S S O O N N D D G J F F M A A M M M G J L J A A S O O NN S D JG FF M M A A M M D 2010 2009 G J L J A A S O O S N D D N 75 2011 The main exchange rates and oil (Brent) and commodities prices at the end of the period Dec-11 A Euro/Dollar Euro/Yen Euro/Yuan Euro/Franc CH Euro/Sterling Dollar/Yen Dollar/Yuan Futures - Brent (in $) CRB Index (commodities) 1.2945 99.57 8.1449 1.2133 0.8328 76.94 6.2939 107.38 305.30 Sept-11 B 1.3384 103.11 8.5363 1.2151 0.8587 77.04 6.3780 102.76 298.15 Jun-11 C 1.4504 116.79 9.3747 1.2185 0.9037 80.52 6.4635 112.48 338.05 Mar-11 D 1.4165 117.77 9.2757 1.3009 0.8833 83.15 6.5483 117.36 359.43 Dec-10 E 1.3377 108.60 8.8148 1.2486 0.8572 81.15 6.5900 94.75 332.80 % change A/E -3.2% -8.3% -7.6% -2.8% -2.8% -5.2% -4.5% 13.3% -8.3% Source: Thomson Financial Reuters 7 Outside the euro area monetary policies in the main advanced economies remained strongly expansionary. The Federal Reserve announced its intention to maintain the interest rate on federal funds unchanged at 0-0.25% until the end of 2014 and it continued to change the composition of its government securities portfolio, designed to lengthen average maturities, and to reinvest the proceeds of mortgage-backed securities in similar instruments. Both the Bank of England and the Bank of Japan left their reference interest rates unchanged at 0.5% and 0-0.1% respectively and continued with their securities purchasing programmes. The central banks of the main emerging countries started to gradually slacken monetary conditions in the last few months of 2011. At the beginning of December China reduced its compulsory reserve requirements by 50 basis points to 21% after six rises performed in the first part of the year when bank lending rates were also raised three times to 6.56%. The reference rate in Brazil, which now stands at 9.75%, was cut five times by in August, October, November, January and February 2012, after five increases made between January and July 2011. In Russia the reference rate fell by 25 bp in December to 8%, after two rises in February and May. On the other hand the Indian central bank, concerned over continuing high levels of inflation, progressively increased its reference rate to 8.50%, with seven consecutive rises. 8 A total of 523 banks took part in the first operation conducted on 21st December 2011 and they obtained funds of approximately €490 billion. The actual injection of new liquidity by the Eurosystem, net of maturing operations, amounted to approximately €210 billion. In the second operation performed on 29th February 2012, the ECB made loans of €529.5 billion to 800 banks who made bids. 21 The macroeconomic framework The recovery at world level progressively weakened during 2011 9 , due to the strong slowdown that is occurring in industrialised countries, particularly in the euro area and in Japan, and also to the moderate deceleration in emerging economies, while the United States benefited from fiscal stimulus measures implemented in recent years. The economic situation was characterised by high levels of unemployment, while the inflationary pressures that emerged over the summer weakened as a result of a fall in commodity prices. After rising in the first quarter, the prices of the main non energy resources fell generally, pricing in lower expectations of growth. On the other hand, having risen to over 125 dollars per barrel when the war in Libya broke out, Brent oil then stabilised at between 100 dollars and 120 dollars – held up by geopolitical tensions in North Africa and the Middle East – only to rise again above 125 dollars in February 2012, following the worsening of the Iranian nuclear experiments crisis. Having recorded almost zero first quarter growth, the United States economy then showed signs of recovery. The last quarter ended with an annualised increase in output over three months of 3% (+1.8% in the third quarter and +1.3% in the second), driven by household consumption and the reconstitution of inventories, while fixed investments weakened. On the other hand, the balance of trade made a zero contribution to growth, affected, amongst other things, by the slowdown in progress in the euro area. Brent oil prices (2009-2011) Graph No. 3 Overall United States GDP 130 125 improved by 1.7% during the 120 year compared to +3% in 115 2010. 110 105 The labour market showed 100 encouraging signals towards 95 the end of the year with the 90 85 unemployment rate down 80 from 8.9% in October to 8.5% 75 in December, after remaining 70 65 stable at around 9% in the 60 months before. A further fall 55 to 8.3% in January 2012 50 brought this statistic to the 45 40 same levels as in February 35 G F M A M G L A S O N D G F M A M G L A S O N D G F M A M G L A S O N D 2009. While remaining high 2009 2011 2010 historically (8.9%), the average for 2011 appears to have decreased compared to the previous year (9.6%). After increasing progressively until it peaked in September (3.9%), inflation rapidly fell in the months that followed to end the year at 3% (1.5% at the end of 2010). Core inflation (net of food and energy products) seems on the other hand, to have stabilised at 2.2% in November and December (0.8% in December 2010), the highest level since the autumn of 2008. The balance of trade deficit grew over twelve months to 558 billion dollars (+11.6%), due mainly to trade with OPEC countries, China and the euro area. J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Having now established itself as the second largest economic power, China maintained strong growth, although this slowed progressively with GDP increasing by 9.2% (10.4% in 2010). All components of domestic demand made significant contributions to growth. Fixed investments were up by 23.9% with particularly high peaks in the manufacturing sector (+44.6% for electrical machinery and equipment), retail sales of consumer goods were up 17.1% and industrial production was up 13.9%, driven again by heavy industry with increases of over 15% in some manufacturing sectors. Despite a further reduction in the balance of trade surplus to 155.1 billion dollars (-15.3% compared to 2010) – the result of stronger growth in 9 According to the most recent IMF updates (World Economic Outlook update, January 2012), world GDP grew by 3.8% in the year that has just ended (5.2% in 2010). 22 imports (+24.9%) than in exports (+20.3%) – currency reserves had risen in December to 3,181 billion dollars (2,847 billion dollars at the end of 2010). Over one third of the total currency reserves, which have remained basically stable since June, continues to be invested in United States treasuries. After peaking in July (6.5%) inflation fell to 4.1% in December (5.4% on average over the year) – the result of repeated action taken to tighten monetary policy by the Chinese central bank in the first seven months of the year – only to climb back to 4.5% in January 2012. Actual and forecast data: the principal emerging countries Gross dom estic product Percentages 2010 2011 China 10.4 9.2 India 10.3 Brazil Russia 2012(1) Consumer prices Unemployment (average annual rate) (average annual rate) 2010 2011 8.1 3.3 5.4 7.3 6.8 12.0 7.5 2.7 3.0 4.0 4.1 3.3 2012(1) Reference interest rates 2012(1) 2010 2011 Dec 10 Dec 11 3.3 4.1 4.0 4.0 5.81 6.56 10.6 8.6 n.a. n.a. n.a. 6.25 8.50 5.0 6.6 5.2 6.7 6.7 7.5 10.75 11.00 6.9 8.9 7.3 7.5 7.3 7.1 7.75 8.00 (1) Forecasts Source: Prometeia, IMF and official statistics Growth also tended to ease off in the other major emerging countries. GDP grew by 6.9% year-on-year in India in the third quarter, affected by a fall in investment – caused by weak foreign demand and tighter monetary policies – while exports again performed very strongly. Consumption slowed marginally due to continuing high levels of inflation (9.1% in November). Economic activity in Brazil was slowed by the combined effect of several factors: a particularly tight monetary policy was pursued, foreign demand decelerated and the prices of raw materials, which the country exports, fell. The Russian economy on the other hand appeared to grow further (4.8% growth in GDP year-on-year in the third quarter) – although not as fast as in the pre-crisis years – due to good performance by consumption and investments, while inflation – 6.1% in December – had decreased compared to the high at the beginning of 2011 (9.6% in January) partly the result of the relaxation of pressures on food prices. Economic activity weakened again in Japan in the fourth quarter, after the recovery seen over the summer. The quarterly fall in GDP of 0.2% (-1.8%, -0.3% and +1.7% respectively in the three previous periods) reflected a negative contribution made by the balance of trade – affected by a slowdown in world demand and the appreciation of the yen – and weaker domestic demand for consumer goods, offset by a sharp increase in non residential investments. Industrial output contracted in the last quarter by 0.4% compared to the previous quarter, despite greater than expected performance in December (+3.8% compared to November), which confirmed the uncertainty of the situation recorded in the Tankan report. On the labour market the unemployment rate, which had fallen to 4.2% in September, climbed back to 4.5% in December (4.9% at the end of 2010). On the prices front, the Japanese economy remains in a condition of basic deflation which has now lasted since 2009 (-0.1% in December 2011). Actual and forecast data: industrialised countries Gross domestic product Percentages United States Japan Euro Area Italy Germany Consumer prices Unemployment (average annual rate) (average annual rate) Public Sector Deficit (% of GDP) Reference interest rates 2010 2011 2012(1) 2010 2011 2012(1) 2010 2011 2012 (1) 2010 2011 (1) 2012(1) Dec-10 Dec-11 3.0 4.4 1.9 1.7 -0.7 1.4 1.5 1.8 -0.3 1.6 -0.7 1.6 3.2 -0.3 2.7 2.1 0.4 2.2 9.6 5.0 10.1 8.9 4.5 10.1 8.4 4.3 10.7 10.7 8.4 6.2 8.3 11.1 4.3 7.6 9.4 2.7 0-0,25 0-0,10 1.00 0-0,25 0-0,10 1.00 1.8 3.7 0.4 3.0 -1.3 0.6 1.6 1.2 2.9 2.5 2.6 2.0 8.4 7.1 8.2 5.9 8.4 6.0 4.6 4.3 3.9 1.3 2.5 0.1 - - 1.5 1.7 0.4 1.7 2.3 2.1 9.8 9.8 10.0 7.1 5.7 4.3 - - Portugal Ireland 1.4 -0.4 -1.6 0.9 -3.3 0.5 1.4 -1.6 3.6 1.2 2.4 1.4 12.0 13.7 12.7 14.5 13.5 14.5 9.8 31.3 5.7 9.9 5.9 8.5 - - Greece Spain -3.5 -0.1 -6.8 0.7 -4.4 -1.0 4.7 2.0 3.1 3.1 2.0 1.7 12.5 20.1 16.5 21.7 21.0 23.1 10.6 9.3 9.6 8.0 7.1 5.0 - - 2.1 0.8 0.6 3.3 4.5 2.1 7.9 7.8 8.2 10.3 9.6 France United Kingdom (1) Forecasts 7.7 0.50 0.50 Source: Prometeia and official statistics Economic activity slowed progressively in the euro area during 2011 with a fall in GDP in the fourth quarter of 0.3% in quarterly terms (+0.8%, +0.1% and +0.1% respectively in the preceding periods), due mainly to a sharp slowdown by Germany and Italy going into recession. The result reflects a weakening in all components and in net foreign demand in 23 particular where a sharp drop in exports occurred against an equally sharp recovery in imports. On aggregate average annual GDP increased by 1.5% (+1.9% in 2010). The trend for industrial output has been negative since September on a monthly basis (-1.1% in December), in line with the response of key confidence indicators. Consequently the unemployment rate, which was stable at 10% until June, rose again in the second half of the year to 10.6% in December with very critical conditions in Spain (23.1%) and Greece (19.9% in November). Inflation, as measured by the harmonised consumer price index, was more volatile rising to 3% from September to November, the highest levels seen since the autumn of 2008, before ending the year at 2.7% (2.2% twelve months before). Even net of foodstuffs, energy products, alcohol and tobacco, the index almost doubled in the first nine months of the year, to then stabilise at 2% (1.1% at the end of 2010)10. The outlook for the euro area is affected by the tight pro-cyclical budgetary policies pursued by many countries to balance budgets in deficit, with a possible increase in credit restrictions due to the need for banks to recapitalise as required by the EBA and to a marked deterioration in confidence by businesses. Italy has been heavily affected by a confidence crisis at international level since the summer and this made it absolutely essential to take a number of financial and legislative initiatives which will affect Italy’s potential for future growth. In the last quarter of the year, the Italian economy went into a technical recession with a quarterly fall in GDP of 0.7%, after a fall of 0.2% in the previous quarter. In 2011 output increased overall by 0.4% (+1.8% in 2010), benefiting mainly from the result for the balance of trade, with an increase in exports and stationary imports, while investments and inventories fell. However, the fall recorded in the last quarter was to be expected from the performance of industrial production (as seasonally adjusted), which after eight months of albeit modest month-on-month growth, saw the trend reverse since September (-1.8% in December after 4.1% in November). Industrial production remained unchanged on average over the year compared to 2010, with decreases in almost all sectors including “Textiles” (-7.3%), “Chemicals” (-5.8%) and “Electrical equipment ” (-4.9%), while “Fabrication of machinery and plant” (+8.6%), “Metallurgy” (+3.9%) and “Mineral extraction” (+2.1%) were among the few to go against the trend. The unemployment rate, which had fallen to 7.9% in August (8.3% at the end of 2010), also rose rapidly again to 8.9% in December with a peak of 30% for young people. This figure increased further to 9.2% in January 2012. On the other hand a generalised reduction was recorded in the use of state lay-off and redundancy benefits, which was greater for the extraordinary component, with 953 million hours authorised compared to 1,203 million in 2010 (-20.8%). On the prices front, after rising suddenly in March to around 3% and falling temporarily in July and August, the harmonised consumer price index has accelerated sharply since September with rises not seen since the Autumn of 2008 (3.7% in December 2011 compared to 2.1% twelve months before), mainly a reflection of the rise in indirect taxation11. Average annual inflation was 2.9% (1.6% in 2010). The Italian balance of trade deficit totalled €24.3 billion over twelve months, an improvement compared to €30 billion recorded in 2010 despite an increased energy deficit. The performance by exports (+11.4%) exceeded that for imports (+8.9%) and was greater in both cases for trade with non EU countries. With regard to public finances, the drastic deterioration in financing conditions made further legislative intervention necessary in November to balance government accounts for the years 2012-14, the third since July. The “Save Italy” bill12, passed in December, was designed to 10 The rises in energy product prices came in addition to the impact of indirect tax increases (Greece, Portugal, Ireland, Spain and Italy) and to the statistical effects of the new treatment of seasonal products (Italy, Greece and Portugal). The maximum and minimum inflation recorded in all the single currency countries therefore differed greatly from the average for the euro area. 11 The high volatility recorded during the year was also a result of methodological changes introduced since the beginning of the year to the measurement of prices for seasonal products, the effects of which are more pronounced in months in which promotional sales are concentrated and in those which immediately follow them. Comparisons with the previous year are distorted as a consequence. 12 Decree Law No. 201 of 6th December 2011, converted into Law No. 214 of 22nd December 2011. According to official figures, the legislation will generate funds of €32.1 billion in 2012, €34.8 billion in 2013 and €36.7 billion in 2014. These funds will be used to reduce net debt by over €20 billion (1.3 percentage points of GDP) in each of the next three years, to finance a package of measures designed to increase growth and reduce the contribution needed to contain the deficit which will come from tax and welfare reform. 24 permanently balance public accounts and to comply with commitments made at European level to balance the budget in 2013. In order to create the conditions necessary to revive the Italian economy, the legislation was followed in 2012 by new liberalisation and deregulation measures and the start at the same time of negotiations with trade unions and employers to reform the labour market. The most recent ISTAT (national office for statistics) estimates for 2011 show the deficit to GDP ratio falling to 3.9% (4.6% in 2010) and a debt to GDP ratio of 120.1% (118.7% in 2010). Financial markets During the second half of the year the United States and European yield curves both shifted downwards for maturities of over one year, a reflection of a move by investors towards lower risk, United States and German securities. While in the United States the trend was affected, amongst other things, by weaker expectations of growth and the consequent continuation of particularly accommodative monetary polices, the change in the European yield curve was the result of two cuts to the reference rate made by the ECB and of the expectation of a further cut in the light of reduced pressures on inflation. For the short term, however, the European yield curve is much higher than the American curve, incorporating a higher perception of risk. After a positive start, the equity markets of major world economies started to feel the effects of the growing sovereign debt crisis, with heavy losses over the summer, which affected the performance measured over the whole twelve months to a large extent, despite the signs of recovery seen in the last quarter. As shown in the table, almost all the main stock markets ended the year with significant losses except for the United States share indices which, because of their lower volatility, remained basically unchanged compared to the end of 2010. Turbulence over the summer also affected emerging markets (-20.4% for the MSCI index). Downward pressures seemed to ease in the first few weeks of 2012 due to measures taken by the ECB and corrective action taken on public accounts in some countries in the euro area, including Italy. Taken together, the three finance laws enacted since the summer of 2011 should reduce the deficit by three percentage points of GDP in 2012 and 4.7 points on average in 2013 and 2014. 25 Equity markets managed by Borsa Italiana were more penalised than other major European stock markets, ending 2011 with losses of approximately 25% year-on-year. They were attributable even more than in the recent past to the substantial impact of the banking sector which, despite the soundness of Italian banks, were particularly affected by the multiple shocks generated by the The principal share indices in local currency progressive spread of the Dec-11 Sept-11 Jun-11 Mar-11 Dec-10 % change sovereign debt crisis. A B C D E A/E Trade in shares increased 15,090 14,836 20,187 21,727 20,173 -25.2% Ftse Mib (Milan) in terms of the number of FTSE Italia All Share (Milan) 15,850 15,570 20,913 22,454 20,936 -24.3% contracts (€68.5 million; Xetra Dax (Frankfurt) 5,898 5,502 7,376 7,041 6,914 -14.7% Cac 40 (Paris) 3,160 2,982 3,982 3,989 3,805 -17.0% +10.1%), but the value fell Ftse 100 (London) 5,572 5,128 5,946 5,909 5,900 -5.6% compared to the previous S&P 500 (New York) 1,258 1,131 1,321 1,326 1,258 0.0% year (€709.7 billion; -5.1%). DJ Industrial (New York) 12,218 10,913 12,414 12,320 11,578 5.5% Nasdaq Composite (New York) 2,605 2,415 2,774 2,781 2,653 -1.8% Despite the difficult context, Nikkei 225 (Tokyo) 8,455 8,700 9,816 9,755 10,229 -17.3% the markets managed by Topix (Tokyo) 729 761 849 869 899 -18.9% Borsa Italiana nevertheless MSCI emerging markets 916 880 1,146 1,171 1,151 -20.4% managed to set further new records: new record highs for trading on the ETF Plus market on which ETFs (exchange traded funds) and ETCs (exchange traded commodities) are traded, with a value of €85.8 billion and over 3.6 million contracts; new record highs for fixed income trades (MOT and ExtraMOT) for a total of 4.7 million contracts (a value of €206.8 billion); record trades for equities derivatives on the IDEM (Italian Derivatives Market), with a daily average of 187 thousand standard contracts and a total of 47.8 million contracts entered into (a record high for the third consecutive year); continued European leadership for contracts on electronic markets for both ETFs and the MOT (electronic bond market). At the end of the year listed companies on the Milan stock exchange numbered 328, down compared to 332 twelve months before as a result of ten new listings and 14 delistings. The total market capitalisation of listed companies also fell to €332.4 billion from €425.1 billion at the end of 2010, equivalent to approximately one fifth of Italy’s GDP. As a consequence of the increase in the value of equity trades, while capitalisation was lower, turnover velocity13 increased from 176% to 214% over twelve months. Graph No. 6 Principal long-term interest rates (2010-2011) 7.5 7 US Treasury 10 years BTP 10 years Bund 10 years 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 GGGGF F F FMMMMAAAMMMMGGGL J FF FMMMMAAAAMMMGGGGL M A M J LJL LAAAS A SSS S OOONNNNDDDDGGGF O N D J F M A M J L LJLAAAAS A SSS OOOONNNNDDD O N D 2011 2010 On 29th June 2011, the London Stock Exchange Group, the company which controls Borsa Italiana, and the TMX Group, the owner of the Toronto stock exchange, announced in a joint press release that the merger agreement reported on 9th February 2011 would not go ahead. 13 An indicator which, as the ratio of the value of the shares traded electronically to the capitalisation, gives a measure of the turnover of the shares traded. 26 In the light of the very serious crisis affecting financial markets, 2011 was a particularly unfavourable year for the mutual fund sector notwithstanding the entrance into force on 1st July of the expected reform of the tax regime which introduced taxation on gains “realised” and that is on the gain or loss recorded when units are sold, rather than on the “mark-tomarket” value, thereby bringing the tax treatment into line with that for foreign funds. Net inflows for the year were negative by €33.3 billion14 (positive by €5.7 billion in 2010), the result of a decrease for Italian registered funds (-€34.5 billion) against an increase for foreign registered funds (+€1.2 billion), which account for almost 64% of assets. The outflow was generalised in terms of the type of fund and mostly affected monetary funds (-€12.2 billion), bond funds (-€9.2 billion), equity funds (-€4.3 billion) and flexible funds (-€4 billion), while decreases were more moderate for hedge funds (-€2.1 billion) and balanced funds (-€1.5 billion). At the end of the December assets under management had therefore fallen to €419.1 billion from €460.4 billion at the end of 2010, with a change in composition into bond funds (up from 41.6% to 43.3%) and flexible funds (from 13.4% to 14.5%) compared to a fall in the percentage of monetary funds (from 13.7% to 11.6%). The banking system Pressures on the government securities market and the consequent uncertainty that spread on financial markets affected bank funding and wholesale funding in particular, although the phenomenon reduced as a result of the ability of banks to resort to refinancing operations with the Eurosystem. Lending to the economy slowed progressively affected by demand factors linked to the economic situation and also to supply factors associated with liquidity conditions and a deterioration in credit quality. On the basis of Bank of Italy figures15, at the end of December the annual rate of change in direct funding (deposits of residents and bonds) was +3.3%, a recovery compared to the lows of +1.2% reached in June and +1.4% in November (+3.3% in December 2010 also). The trend for the aggregate was driven by bonds (up 13.4% from -1.6% twelve months before) for which the total also benefited in December from issues with government guarantees made possible by the “Save Italy” decree in order to facilitate the participation of Italian banks in the three year refinancing operations performed by the ECB16. On the other hand other types of funding fell on aggregate (down 2.6% from +6.6% at the end of 2010), caused by a substantial contraction in repurchase agreements (-39%), and also by current account deposits, only partially offset by the increase in term deposits. As, however, concerns loans to private sector residents, after peaking in the first half (+6.7% in February; +6.1% in May), the rate of growth slackened to a low in December (+1.8% compared to +4.2% twelve months before). As concerns the type of borrower, Bank of Italy figures show a generalised weakening of lending to households (+4.3%; +19.4% in December 2010), which was particularly marked for home purchases (+4.4%; +25.6% at the end of 2010) and was also seen in the consumer credit sector (up 2.1% from +8.5%) and for other loans (+4.9% from +12.3%). The year-on-year trend for loans to businesses, which slowed over the summer compared to the high reached in May (+6.1%), returned in December to the same levels recorded at the end of 2010 (+3.1% compared to +2.1% twelve months before), partly in relation to a fall in total volumes, which seems to have occurred in December, attributable mainly to the short term component (less than one year). 14 Assogestioni (national association of asset management companies), “Map of assets under management (collective instruments and customer portfolio management) 4th quarter 2011, February 2012 edition. 15 Bank of Italy, Supplement to the Statistics Bulletin Moneta e Banche, March 2012. 16 Net of securities repurchased and supplied to guarantee the refinancing operations mentioned, the year-on-year change for bonds was +8.4% while the trend for total funding was +1.3% (Italian Banking Association Monthly Outlook, Annual Report, Evoluzione dei Mercati Finanziari e Creditizi, February 2012. 27 From the viewpoint of risk, in December non-performing loans to the private sector gross of impairment losses had exceeded €106.8 billion (+17.7% compared to €90.8 billion in January17), including €36 billion relating to households and €70.2 billion to businesses. The ratio of gross non-performing private sector loans to private sector loans was 6.24% (4.61% at the end of 2010), while the ratio of gross non-performing private sector loans to capital and reserves was 28.16% (22.20%). On the other hand, net non-performing loans totalled €59.4 billion, an increase of €10.5 billion compared to €48.9 billion in January (+21.5%), with a ratio of net non-performing loans to total loans up to 3.09% from 2.43% in December 2010 and a ratio of net non-performing loans to capital and reserves of 15.65% (13.31%)18. At the end of the year, securities issued by residents in Italy held in the portfolios of Italian banks had increased year-on-year by 20.9% to €670.6 billion (+€115.8 billion), driven by growth in the total in progress since April, which increased in December (+€60.2 billion compared to the month before), assisted by investments in the bonds already mentioned, backed by government guarantees. The increase was mainly in “other certificates” (+€99.2 billion over twelve months including +€55.1 billion in the last month) and more specifically in bank bonds (+€88.5 billion of which +€52.2 billion in December alone), which now account for 64% of the total (57.1% at the end of 2010). On the other hand, the year-on-year increase in Italian government securities was more modest (+8.6%), driven by both short term securities (BOTs and CTZs; +17%) and by government securities with longer maturities (BTPs and CCTs; +5.1%) despite the fall in the latter between September and November when the crisis of confidence in Italy worsened. At the end of December, the average weighted interest rate on bank funding from customers calculated by the Italian Banking Association19 (which includes the yield on deposits, bonds and repurchase agreements in euro for households and non-financial companies) had risen to 1.97% (1.50% twelve months before). The average weighted interest rate on lending to households and non financial companies on the other hand had risen to 4.23% (3.62% at the end of 2010). *** In addition to the developments in progress in international regulations already mentioned, a number of changes were introduced into the legislative framework for Italian banks in 2011 and in the first few weeks of 2012: Law No. 120 was enacted on 12th July and came into force on the following 12th August, with which as in other European countries, gender quotas were introduced in Italy for the composition of the management bodies of listed companies and unlisted government controlled companies. The new regulations on female quotas require companies to appoint at least one third of places on management and control bodies to the least represented gender. These measures apply with effect from the first renewal to occur one year after the law came into force. As a transitory measure the gender quota for the first mandate must be at least one fifth of the least represented sex on elected corporate bodies; Law No. 217 of 15th December 2011 (2010 EC Law) in force since 17th January 2012, increased the Bank of Italy’s powers on bank supervision. Additions were made to the consolidated banking act enabling the central bank to issue provisions of a general nature concerning the following: corporate governance; administrative and accounting organisation; internal control, remuneration and incentive systems. The Bank of Italy may also adopt specific measures with regard to single banks on those matters concerning the following: the restriction of activities or structure geographically; a prohibition on performing determined operations, including ownership operations and on the distribution of profits or other components of equity also with reference to financial instruments eligible for inclusion in supervisory capital; a ban on paying interest. It may also set limits on the 17 From January 2011, the figures relating to gross and net non-performing loans are not statistically comparable with past figures following corporate ownership operations by some banking groups. As a consequence, the annual rates of change for both items are no longer significant. 18 The trend for deteriorated loans should also be affected from 2012 by the expiry of the concession granted by Basel 2 to Italian banks to report past due loans after 180 days, making it compulsory to report them after 90 days as already occurs for other European banking systems. 19 Italian Banking Association, Monthly Outlook, Annual Report, Evoluzione dei Mercati Finanziari e Creditizi, March 2012. 28 total of the variable component of remuneration in a bank, when this is necessary to maintain a solid capital base. For banks which benefit from exceptional government support, the Bank of Italy may also set limits on the total remuneration of corporate personnel. Decree Law No. 201 of 6th December 2011, (the “Save Italy” decree), converted with Law No. 214 of 22nd December 2011 and published in the Official Journal on 27th December 2011 not only reformed the pension system20, and a series of matters regarding tax 21, but it also introduced other important changes which concern the banking sector. It included the following: the application of a single all-inclusive commission on contracts which grant credit, calculated proportionally in relation to the sum of the credit granted and to the duration of the authorisation and a rate of interest payable on the sums withdrawn. The amount of the commission may not exceed 0.5%, per quarter of the sum made available to a customer. For overdrafts in the absence of authorisation or for amounts in excess of an authorisation, the only charge to be borne by a customer is a processing fee and a rate of interest payable on the amount in excess of the authorisation; the ability of Italian banks to benefit until 30th June 2012 from a bank guarantee on liabilities with maturities of from three months to five years and from 1st January 2012 to seven years for covered bonds, issued after the decree comes into force. The amount of the guarantees granted is limited to that which is strictly necessary to restore the medium to long term funding capacity of the beneficiary banks and may not exceed the supervisory capital inclusive of the tier three capital for individual banks; the reduction from €2,500 to €1,000 of the limit on the legal use of cash and bearer instruments as a means of payment 22 and a related reduction in the interbank commissions borne by retailers on transactions performed using electronic payment cards; as measures to safeguard competition in the credit sector, the introduction of a prohibition for those occupying positions on management, supervisory and control bodies in companies operating in the credit, insurance and financial markets on accepting and occupying positions in competing companies. to complete the contents of the “Save Italy” decree, Decree Law No. 1 of 20th January 2012 (liberalisations measure) states that when banks, credit institutions and financial institutions make the grant of a mortgage dependent of signing a life insurance contract, they are required to submit at least two estimates from two different insurance groups to the customer. That same decree, converted into law with Law No. 28 of 24th March 2012 established, amongst other things, the creation of a new “basic” bank account, the features of which will be set by a decree of the Ministry of the Economy in consultation with the Bank of Italy. This will also put a cap on bank commissions on withdrawals made from the ATMs of a bank which is not that of the cardholder; with regard to bank commissions, Decree Law No. 29 of 24th March 2012 restored the provisions initially contained in the “Save Italy” decree following the approval of a parliamentary amendment, when the measures on liberalisations, which had abolished them completely, where passed; with regard to the supervision of banks and brokerage companies, the Directives 2006/48/EC and 2006/49/EC were amended on 24th November 2010 by Directive 2010/76/EC of the European Parliament and the Council (“CRD III”), the provisions of which apply, starting with the supervisory reporting relating to 31st December 2011. The new measures concern the rules for supervisory capital, remuneration policies and incentives, credit risk, securitisations, market risk and disclosures to the public. More specifically, CRD III completed the implementation in Europe of the recommendations given by the Basel Committee in the document “Enhancements to the Basel II framework” of July 2009. 20 For which the following section “Human Resources” may be consulted. 21 For which the following section “Other information” may be consulted. 22 In this respect the Italian Banking Association in a circular of 11th January 2012 and the Ministry of the Economy and Finance in Circular No. 2 of 16th January 2012 specified that the limit on cash cannot be applied to payments and withdrawals made in banks. 29 Significant events that occurred during the year The organisational changes planned in the 2011-2015 Business Plan of the UBI Banca Group On 13th May 2011, the Management Board and the Supervisory Board of UBI Banca approved the Group Business Plan containing strategic guidelines and operating, financial and capital targets for the period 2011-2013/20151. The plan, consisting of 16 business projects with a substantial impact on the achievement of the objectives set, groups organisational changes into three focus areas: business, governance and support, and product companies and special projects. The business area includes the largest number of projects, which are also the most important: the reorganisation of commercial activity (distribution model), changes to service models and also plans to accelerate commercial results, to be achieved through enhancing the Group’s distribution capacity and customer base by means of the following: ▪ a new “hour-glass” shaped distribution model, which combines the best features of the conventional “hierarchical” and “portfolio” models to create synergies from interaction between the different markets and different supply chains, generated by the co-ordination of new Local Headquarters; ▪ a more effective market segmentation and greater variety in the range of value added services, with the development of customised products and services, such as a modular current account, and a wide range of advisory services; ▪ a “mass market machine”, with the introduction in retail branches of a joint pool of account managers and operational staff for mass market customers and the selection of retail account managers to work on commercial development; ▪ a “pricing excellence project” to improve the structured management of pricing and to close gaps with the sector nationally, found by studies; ▪ acceleration of the integrated multi-distribution channel project. At the same time specific organisational and technological initiatives were identified with regard to problem loan management: ▪ pro-active management of non-performing loans with: - the implementation of a new technologically advanced IT platform to manage the life cycle of deteriorated loans; - a revision of the organisational model to refine operating processes, differentiated by exposure and type of loan; - segmentation and division of positions into portfolios assigned to account managers who are allocated specific credit recovery budgets; ▪ the optimisation of problem loan management through a new “by objectives” approach, which allocates a budget for the management of problem loan portfolios at the branch or corporate centre level of each network bank; ▪ extension to the main product companies of the credit monitoring model to structurally reduce loan impairment rates. At the same time, the Business Plan also included a significant effort to streamline and/or automate internal operational and management processes and sales processes in order to shorten customer response times and improve transparency and clarity in contracts and regulations. This is also focused on reducing costs. 1 The Business Plan was approved before the European sovereign debt crisis and the Italian crisis in particular manifested with an intensity which rendered internationally co-ordinated institutional action urgently necessary. This had inevitable repercussions on the expected performance of the real economy and on economic and financial market trends. 30 The “hour glass” shaped distribution model The revision of the distribution model of the Group’s network banks continued as an organisational requirement designed to strengthen the Group’s “local banking” identity by redefining departmental and network bank units and streamlining commercial, credit and loan approval processes at the same time. The “hour glass” model, which was already operational at the time of this report, introduced “Local Headquarters”, the main points of reference for “Local Banks” as key units in the commercial process for all customer segments and markets (branches, CBUs and PBUs), with a twofold organisational interconnection: cross market (retail, private banking, corporate) and cross process (commercial and credit). The new headquarters will be responsible for the most significant commercial, credit and operational risk aspects, developing relationships with local customers and with major clients and opinion leaders (“local social capital”). The establishment of “micro-areas” within local areas was continued and strengthened with the extension of the retail branch co-ordination model based on “head branches” and “grouped branches”. The first implementation action – in the commercial sphere – commenced on 1st August 2011 (Stage 1) with the introduction of the new “hour glass” model, applied on a flexible basis to take account of local differences, customer portfolios and the characteristics of individual network banks. The introduction involved the following: the revision of the structures of the Commercial Areas of the network banks (with the creation of specialist units to support Commercial Department Heads); the start-up of Local Headquarter units with a consequent revision of the distribution structure; the revision of commercial processes (approval of interest rates and conditions) consistent with the new organisational units; the refinement of customer segmentation criteria with a view to the following: expanding the retail business segment by grouping it with the lower corporate segment (managed by the Retail Market since 2012); a stronger focus on the more complex affluent (Premium) customers and on SMEs; more active management of SEO customers (small economic operators) not allocated, assigned to affluent/mass market team account managers; finally; more effective specialisation for the large corporate segment (only for BPB, BBS, BPCI and BRE); the revision of the overall structure of local private and corporate banking facilities (CBUs, PBUs and the relative “corners”), which was completed in January 2012. The completion of the changes in credit operations (Stage 2), which took place in January 2012, with the revision of network bank credit units and a new loan approval process, which involved the following: the revision of the organisation of Credit Departments in the standard model, adopted by the larger network banks of the Group, with the introduction of Local Credit Units (the former local loan approval centres), specialist local units, physically close to Local Headquarters; the introduction of customer contacts for Credit Quality in Local Headquarters; the creation of Local Loan Approval Committees (LLACs), bodies which approve loans with a joint commercial/credit signature, designed to increase synergies between both processes and to “develop a credit culture”. Mass market team/Developers The “hour glass” model is completed at branch level by the mass market team (responsible for the management of branch mass market portfolios) and by the presence of developers (who report directly to Local Headquarters). In fact a standard branch has two quite separate areas of commercial operations: specialist (small business and affluent) and pooled operations (reserved to mass market operations). The creation of mass market teams (MMTs), using a pool approach, is designed to optimise the use of human resources previously dedicated to operating activities and the management of mass market customers. It involves branch personnel and simplifies the relative products and improves service costs at the same time, as the result of exploiting “interchannel” management 31 (branch, contact centre and direct channels), with the migration of “low value” transactions on the one hand and the strengthening of cross selling on the other. From an organisational viewpoint, in their full version MMTs are composed of the following: a customer contact, focused primarily on the sale of the more complex products, on credit and risk management activities, and also on post sales assistance and management (and, where necessary, on support to accounting and administrative processes); a customer assistant, who mainly performs various cashier functions and sells simple products, while also providing support to back-office activities; an operations area assistant who performs mainly back-office activities. - The team manages the mass market by reacting to customer flows from the contact centre and to spontaneous customer flows making strong resort to complementary channels for both development activities and for the migration of business. Preparatory activities (analysis, definition and revision of branch activities affected, setting the size of network units, management and selection of staff, carrying out a pilot test, job shadowing, publication of rule books) were completed in 2011, while team operating activities started in 2012. At the same time the retraining of selected staff from network branches allowed the “Developers Project” to be launched, the creation of a significant developer force to focus on the “high value” segments (affluent, SEOs and SMEs with up to €15 million of turnover) and on high potential growth geographical areas. Development follows a systematic “businessbusiness person” approach (based on business-family relationships) and it benefits from specific marketing initiatives, designed to enhance local relationships. Developers operate within the branch to which they are assigned with the task of acquiring new customers. The management of customers acquired continues to be performed by developers themselves for a period of between 12 and 24 months before being handed over to ordinary branch management. The stages for the launch of the programme (with the identification of the branches allocated, communication to the network branches, motivational initiatives) and the selection of the candidates (with the formation of catchment areas on which to draw from, fuelled by selfcandidates and supplemented with personnel proposed by the network banks) were concluded in December 2011. The first appointments to the position were made in January and February and training for qualification began. The programme will involve a workforce of approximately 700 developers, when fully operational. The management of problem loans The Business Plan contains four projects – the pro-active management of non-performing loans, problem credit quality, a non-performing loan platform, a new monitoring model – the implementation of which took place firstly in the network banks as follows: a new governance model, with the overall revision of models and units at UBI Banca and in network branches. With the launch of LLACs (local loan approval committees), the cross process perimeter in the credit recovery sphere was extended at the same time, with the introduction of a customer contact role operating locally on problem loans. Like the local customer contacts for the credit quality of performing loans, this is a specialist role which monitors portfolios of impaired customers, supports the heads of Local Headquarters in the management and monitoring of distribution network activities and directly manages the positions assigned to them. They work with customers in taking action to correct problem loan positions; active management of the credit quality of performing loans designed to prevent problems from arising, through a local commercial approach overseen by Local Headquarters which, supported by a horizontally integrated IT platform across commercial and credit processes, performs pro-active monitoring of portfolios, translating information into action to be taken by commercial account managers; segmentation of problem loans (past-due, operationally impaired and repayable) on the basis of the customer segment to which they belong, the amount of the sums involved and the consequent implicit risks, and a cluster approach with specialist roles at Local Headquarters; pro-active management of non-performing loans based on an industrialised and centralised credit approach, which involves the following: the segmentation of the portfolio on the basis of either outsourced or internal strategies (with outsourcing of structured, automated and 32 dynamic use of credit recovery services in the field for the management of small amounts and periodic disposals where recovery has failed, or internal management specialised by type with the assignment of portfolios to non performing loan account managers at UBI Banca); the assignment of recovery objectives and the management and valuation of property guarantees. The “simplicity” objective This project, which had already been commenced when the Business Plan was approved and was incorporated within it because of its importance and the new areas identified for its development, consists of three lines of action: a) the simplification and streamlining of distribution network processes. Twenty two initiatives were already completed in 2011 concerning the “easy sale of banking products” (integration and automation of contract forms, the introduction of checklists for documentation to be acquired), the “easy sale of financial and investment products and loans” (the revision of processes for the sale of bonds, the automation of forms for the subscription of SICAVs and the creation of a multi-SICAV form for switches, redemptions and additional payments, an electronic diary of financial movements, the automation/integration of forms for loans to small businesses and private individuals) and “Easy Work” (a new UBI Desk work station, circular editing of customer directories, optimisation of the management of portfolio receipts, the integration of remote banking movements in a series of procedures, the automation of utility statements and cheque book supplies, new design for financial profile questionnaires). An additional twelve initiatives to simplify branch operations have been planned for 2012 in both the commercial and the operational spheres; b) the use of signatures on tablets (a technology that can be used to sign forms and documents by placing a signature directly on the screen of a tablet). In the second half of 2011, the experimental pilot stage of current account paying in and withdrawal transactions was commenced for private individual customers in selected branches with high volumes of business, in view of extending the technology to all operational outlets of the Groups and just as soon as regulations will allow, it will be extended to a larger number of branch processes (the paperless banking project); c) streamlining of internal regulations, by means of a new dedicated intranet site, “The Regulations Portal”. Activities to “rationalise” regulations (on a mass basis or when regulation booklets were issued) has been virtually completed (regulations have been reduced from approximately 100,000 documents existing in November 2010 to a little more than 4,600 circulars). The new portal is also now online and accessible by all the network banks and product companies, with a simple and functional interface that can be customised on the basis of user requirements. 33 Further simplification of the customer service model Although not comprised within the original Business Plan, subsequent decisions taken by the Management Board on 14th November 2011 concerning the simplification of the customer service model, constitute a completion of the achievement of the objectives of the UBI Banca Group. They facilitate shorter decision-making processes, strengthen risk management and internal synergies and improve clarity and organisational simplicity. The process in progress is leading to the redefinition of the service models for the large corporate and consumer credit segments and of some network banks with regard to geographical market coverage, activities which will also involve corporate ownership operations to be performed in 2012 and the first half of 2013. Large corporate customers and investment banking The new service model involves the creation of a new “Large Corporate and Investment Banking” division at UBI Banca, which will operate in: - the management and development of business with a limited number of large corporate clients not directly related to local areas covered by the network banks; - the structuring and grant of complex finance both with Group and non-captive clients; - the provision of value added services (e.g. advisory) to both Group and non-captive clients. In order to optimise operations, it was decided to merge Centrobanca into UBI Banca and incorporate its current business and finance activity within the Parent. More specifically, with regard to the latter, this centralisation will take place in the context of a new finance model which involves the following: clear separation between finance for customers and finance for the Bank; the unification of trading rooms (access to markets, product structuring); the creation of a market hub on which all customer requests will be concentrated. Completion of the merger is planned for the first half of 2013. Streamlining of “consumer credit” business: In relation to the higher risk of some lines of business and the need to focus lending operations, the Group has decided to reposition the activities performed by B@nca 24-7 in the consumer credit sector. The action undertaken – some currently being implemented – is as follows: - new grants of special purpose and personal loans to non-captive customers cease and activities are limited to the management of outstanding loans; - the disbursement of mortgages to non-captive customers through external networks was transferred to the network banks of the UBI Group in May 2011, with a view to the acquisition of new customers and a more balanced management of funding and risk control. No use of additional credit brokerage companies is planned; - distribution of personal loans to captive customers by the network banks; - the specialisation of the company Prestitalia (100% UBI Banca Group), appropriately expanded, in salary backed loan business. Approximately €3.3 billion of outstanding salary backed loans held at present by B@nca 24-7 will be transferred to that company. The reorganisation of activities gave rise to the start of procedures for the contribution to Prestitalia of salary backed loan operations and the subsequent merger of B@nca 24-7 into UBI Banca. In this respect UBI Sistemi e Servizi was tasked with implementing a special project for the migration of the IT system to the UBI Banca target platform and with providing operational coordination and technical implementation services required to carry out the merger. In addition to the specific costs for the migration, derecognitions of impairment losses on intangible assets were performed in relation to the retirement of the B@nca 24-7 IT system, amounting to €3.5 million (charged to income statement in 2011). 34 The contribution of the outstanding salary backed loans and the merger into UBI Banca will take place after 1st May 2012, with effect for accounting and tax purposes from 1st January 2012. The creation of a single banking operation in the North West Again with a view to Group simplification and local market focus, the creation of a single North West banking operation is planned through the merger of Banca Regionale Europea and Banco di San Giorgio. Before going ahead with the merger of Banco di San Giorgio into BRE, the latter, which already holds 57.50% of the share capital of the Liguria bank will acquire all the shares of Banco di San Giorgio held by UBI Banca (over 38% of the share capital). Also the following was planned in order to preserve the ties between Banco di San Giorgio and the local markets on which it operates after the merger: the brand is maintained; a foundation will be created to maintain links with local communities in Liguria. The foundation will be formed with an initial endowment from the “new” Banca Regionale Europea and its capital will be added to annually through the allocation of the main part of a provision made for initiatives and institutions with charitable, humanitarian, social, cultural and artistic purposes to be written into the corporate by-laws of Banca Regionale Europea. The size of BRE’s supervisory capital will allow the merger to take place without affecting its capital strength. The new entity will also perform centralised management of funding and lending in order to achieve a better structural balance. On 21st December 2011, the Boards of Directors of the two banks approved the project to merge Banco di San Giorgio into Banca Regionale Europea. On 27th March 2012 the Management Board of UBI Banca approved changes to the parameters for the merger, following the results of the impairment test performed at the end of December by an external appraiser. BRE will purchase the ordinary shares held by UBI Banca (26,001,474 shares) at a price per share of €4.344 on the basis of the parameters set by the Italian Civil Code and with the application of the dividend discount model method as at 31st December 2011. Shareholders other than BRE (4.31% of the share capital of the merged bank is held by non-Group, non controlling shareholders who number approximately 3,300) have the right to sell their shares. The new price at which that right may be exercised will be set by the Board of Directors of BRE, having received the opinion of the Board of Statutory Auditors and of the external statutory auditors of BRE. The exchange ratio, calculated on the basis of the dividend discount model was set at 2.33 ordinary shares of BRE for one ordinary share of BSG. On the basis of that exchange ratio, the non-controlling shareholders may be allotted a maximum of 6,832,310 new ordinary shares of Banca Regionale Europea with a nominal value of 0.52 euro each and a maximum total value of 3,552,801.20 euro. The new shares shall have the same dividend entitlement as the ordinary shares outstanding on the date on which the merger takes effect for non controlling interests. The share capital of BRE will be increased if necessary from 468,880,348.04 euro to a maximum amount of 472.433.149,24 euro. It is estimated that the project may be completed by July 2012, effective for accounting and tax purposes from 1st January 2012. *** On the basis of what are only very preliminary estimates, which will be further refined, the three projects should involve one-off integration costs in 2012 of approximately €27 million and require investments to be capitalised of approximately €17 million, while it is expected that it will generate annual synergies conservatively estimated, on a pro-rata basis in the year of implementation and entirely in future years, at over €36 million. 35 Strengthening capital The share capital increase In the spring of 2011, UBI Banca performed a large increase in its share capital of one billion euro in order to anticipate changes underway in the regulatory context and, thanks to the traditional solidity of the Group, also to grasp opportunities for endogenous growth. A summary is given below of the stages of the operation announced on 28th March 2011. 13th May 2011 The Management Board, after receiving authorisation from the Supervisory Board, passed a resolution to implement the authorisation conferred on it by the Shareholders’ Meeting of 30th April 2011 to increase the share capital, in more than one issuance and for payment in cash, by a maximum amount of 1 billion euro inclusive of the share premium with option rights for shareholders and holders of the convertible bonds “UBI 2009/2013 convertibile con facoltà di rimborso in azioni”. It also provided for the presentation of a prospectus to the Consob (Italian securities market authority) for prior authorisation to publish it. 1st June 2011 The governing bodies of the bank decided to issue a maximum number of 262,580,944 ordinary shares with a par value of 2.50 euro each, of the same class as those in issue and with normal dividend entitlement, to be offered as an option to shareholders and to the holders of the convertible bonds “UBI 2009/2013 convertibile con facoltà di rimborso in azioni”, at a price of 3.808 euro per share, inclusive of a share premium of 1.308 euro, for a maximum nominal amount of 656,452,360 euro and for a total maximum amount (inclusive of the share premium) of 999,908,234.75 euro. The shares were offered at a ratio of eight new shares for every 21 shares owned and/or every 21 “UBI 2009/2013 convertibile con facoltà di rimborso in azioni” convertible bonds owned. The subscription price was calculated by applying a discount of approximately 22.43% on the theoretical ex-rights price of UBI Banca shares, calculated on the basis of the official stock market price on 1st June 2011. Following the issue of authorisation from the Consob (memorandum No. 11050124), the prospectus was published in accordance with the law and made available to the public at the registered offices of the Bank, on the corporate website (www.ubibanca.it) and on the Borsa Italiana website (www.borsaitaliana.it). It was filed with the Consob on 3rd June 2011. 5th June 2011 In implementation of Art. 7 of the regulations for the “Warrant azioni ordinarie UBI Banca 2009/2011” warrants an adjustment to the exercise price was announced following the increase in the share capital. The price for the exercise of the warrants fell from 12.30 euro per share to 11.919 euro per share2. 6th-24th June 2011 (rights offer period) 6th-17th June 2011 (option rights are traded) During the rights offer period, 636,120,051 rights were exercised and therefore a total of 242,331,448 shares were subscribed (92.3% of the total shares offered) for a total amount of 922,798,153.98 euro. Also the Banca del Monte di Lombardia Foundation and the Cassa Risparmio di Cuneo Foundation received authorisation from the Ministry of the Economy and participated in the share capital increase by exercising all the option rights due to them. At the end of the period, 53,154,927 rights for the subscription of 20,249,496 shares (7.7% of the shares offered) had not been exercised for a total amount of 77,110,080.77 euro. 2 Art. 7, letter a) of the Regulations stated that if between the issue date of the warrants and 7th July 2011, a resolution were passed and implemented to increase the share capital by payment in cash through the issue of new shares, the exercise price must be reduced by an amount calculated according to the provisions contained in those Regulations. 36 4th-7th July 2011 (offer period of option rights not exercised) In compliance with paragraph three of article 2441 of the Italian Civil Code, the unexercised rights were offered on the stock exchange. In the first five days of the offer (4th July 2011), all the 53,154,927 unexercised options rights were sold through Mediobanca at an auction price of 0.04 euro, with proceeds for UBI Banca of 2,126,197.08 euro, recognised within the share premium reserve. 11th July 2011 At the end of the period for the subscription of unexercised rights, 5,706,984 shares (2.17% of the total newly issued shares offered) were subscribed, for a total of 21,732,195.07 euro. Therefore. 14,542,512 shares (5.54% of the shares offered) remained that had not been subscribed for a total amount of 55,377,885.70 euro, which on the following 18th July were made available to the underwriting syndicate3, in accordance with the underwriting agreement signed on 1st June 2011. The increase in the share capital of 999,908,234.75 euro, which was fully subscribed for a total of 262,580,944 new shares was therefore completed on that date. Share capital - number of shares: changes occurring during 2011 Date Number of shares issued Reason Number of shares 31.12.2010 3.3.2011 3.6.2011 24.6.2011 24.6.2011 268 Bond conversion February 2011 96 Bond conversion May 2011 242,331,448 Exercise of rights for share capital increase 5.7.2011 7.7.2011 11.7.2011 18.7.2011 240 Bond conversion June 2011 Share premium reserve 639,145,902 1,597,864,755.0 7,100,378,060 639,146,170 1,597,865,425.0 7,100,380,807 639,146,266 1,597,865,665.0 7,100,381,791 881,477,714 2,203,694,285.0 7,417,351,325 881,477,714 2,203,694,285.0 7,401,115,955 881,477,954 2,203,694,885.0 7,401,118,415 881,497,263 2,203,743,157.5 7,403,426,483 887,204,247 2,218,010,617.5 7,410,891,218 901,746,759 2,254,366,897.5 7,429,912,824 Recognition of the expenses incurred for the increase in the share capital net of tax 30.6.2011 5.7.2011 Share capital 7,401,115,955 7,403,244,612 Sale of unexercised rights (*) 19,309 Conversion of w arrants June 2011 5,706,984 Exercise of unexercised rights 14,542,512 Subscription by the syndicate Bonds: "UBI 2009/2013 Convertibile con facoltà di rimborso in azioni" - w arrants: "Warrant azioni ordinarie UBI Banca 2009/2011" (*) The sale of 53,154,927 unexercised rights at 0.04 euro each gave rise to proceeds of €2,126,197.08. Other changes affecting the share capital of UBI Banca Conversion of the bond “UBI 2009/2013 convertibile con facoltà di rimborso in azioni”4 A total of 604 shares were issued against the presentation of bonds for a nominal amount of 7,701 euro in the period from 10th January 2011 (date from which the right was exercisable) until the date of this report for the exercise of conversion rights held by bondholders in accordance with article 5 of the regulations. More specifically, 240 new ordinary shares were issued on 5th July (in relation to bonds for a nominal amount of 3,060 euro presented for conversion in June). On 3rd June, 96 shares were issued against requests received in May (for a nominal amount of 1,224 euro presented), while 268 shares were issued on 3rd March (for a nominal amount of 3,417 euro in relation to applications presented in February). 3 The share issue was underwritten by a syndicate of banks co-ordinated and led by Mediobanca – Banca di Credito Finanziario S.p.A. and Centrobanca – Banca di Credito Finanziario e Mobiliare S.p.A., as joint global co-ordinators, and by Morgan Stanley as co-global co-ordinator. Mediobanca – Banca di Credito Finanziario Sps, Morgan Stanley, Barclays Capital, BNP Paribas, Citi, Deutsche Bank AG London Branch and ING as joint bookrunners, together with the co-bookrunners, agreed to subscribe – under the usual terms and conditions for this type of operation – those shares not taken up at end of the offer period on the stock exchange. Crédit Agricole Corporate & Investment Bank, EQUITA S.I.M. Spa, HSBC, Intermonte, Natixis, Nomura, Société Générale Corporate & Investment Banking and The Royal Bank of Scotland participated in the consortium as co-bookrunners. 4 UBI Banca did not take advantage of its right to settlement in cash under article seven of the regulations for the bond, nor did it announce its intention to call the bonds under article 12 of the regulations. 37 Exercise of “Warrant azioni ordinarie UBI Banca 2009/2011” warrants On 30th June 2011, the exercise period came to an end for the warrants which gave the right to subscribe newly issued ordinary shares of UBI Banca (with a par value of 2.50 euro each) at a conversion ratio of one share for every 20 warrants at an adjusted subscription price of 11,919 euro per share. In compliance with article four of the regulations for the warrants, following the exercise of 386,180 warrants, 19,309 shares with normal dividend entitlement and of the same class as outstanding shares were made available on 7th July to rights holders. All rights attaching to the warrants which had not been exercised by the expiry date of 30th June 2011 expired and had no validity to all effects and purposes. Repurchase of treasury shares In implementation of a shareholders’ resolution of 30th April 2011, which involved the purchase of treasury shares to be assigned to the senior management of the Group as part of the Group incentive schemes, on 12th and 13th July 2011 UBI Banca proceeded to repurchase 1,200,000 treasury shares on the market (corresponding to the number purchasable) at an average price of 3.6419 euro per share for a total amount of €4.37 million, less than the total maximum amount set in the shareholders’ authorisation (€5.5 million). The purchase transactions were performed on the regulated market in compliance with the limits set in the shareholders’ resolution, by the provisions of the law and EC Directive 2273/2003 and by admissible market practices. UBI Banca currently holds 1,200,000 treasury shares (0.13% of the share capital). European Banking Authority (EBA) requests In view of the substantial increase in systemic risk caused by the sovereign debt crisis in the euro area, as part of a broader package of measures approved by the European Council, on 26th October the European Banking Authority (EBA) decided to create an exceptional and temporary capital “buffer” for the banking system in the area. This buffer, to be created using primary quality capital, is not designed to meet losses on sovereign debt, but is of a prudent nature, intended to reassure markets of the ability of banks to withstand shocks, by maintaining adequate levels of capital. More specifically, banks are requested to recapitalise to a level where their core tier one ratio reaches 9% by the end of June 2012. This is to be achieved principally through the use of private sector funds (share capital increases of the highest quality, retained profits, restrictions on company bonuses, etc.). The possible extra capital requirement was calculated on the basis of balance sheet figures as at 30th September 2011. The underlying methodology for the exercise was set out in advance by the EBA, in order to ensure uniform implementation in all the 71 European banks participating in it. The final results of the exercise, conducted in co-operation with the competent national authorities were disclosed on 8th December 2011: the total recapitalisation requested at European level should amount to €114.7 billion, including €15.4 billion relating to four of the five Italian banking groups involved, one of which is UBI Banca. On the basis of the exercise, UBI Banca has an increased capital requirement amounting to €1,393 million. The EBA has asked all banks for which the above exercise resulted in increased capital requirements to submit a plan to national supervisory authorities by 20th January 2012 to reach a core tier one ratio of 9% by the end of June 2012. In consideration of the temporary nature of the requested increase, the UBI Banca plan does not include any possibility of new resort to the market following the substantial operation conducted in the spring of 2011. It relies substantially on the adoption by the end of the first half 2012 of advanced internal models for the calculation of capital requirements on corporate credit risk, on further action to optimise risk weighted assets and on self funding. Any requirement remaining as at 30th June 2012, will be met, if substantial, by the partial conversion of outstanding convertible bonds. 38 Action undertaken on the branch network of the Group At the same time as it introduced the new “hour glass” distribution model in 2011, the UBI Banca Group also conducted a gradual and progressive rationalisation and reorganisation of its geographical market coverage, which followed on from action that accompanied and followed the branch switching operations carried out in January 2010. Action taken on the Group branch network in Italy in the 2011 Transformation of treasury mini-branches branches into mini-branches Opening of: branches Closures of: branches mini-branches Transformation of Transformation of branches into mini- mini-branches into branches branches Banca Popolare di Bergamo Spa 1 1 - 3 6 2 1 Banco di Brescia Spa - 2 - - - - - Banca Popolare Commercio e Industria Spa - 1 - - - - - Banca Regionale Europea Spa 3 2 - 2 3 1 - Banca Popolare di Ancona Spa 1 1 4 6 10 9 - Banca Carime Spa 1 - - - 1 - - Banca di Valle Camonica Spa - - 2 - - - - Banco di San Giorgio Spa 1 - - - 1 1 - UBI Banca Private Investment Spa - - - 5 - - - TOTAL 7 7 6 16 21 13 1 In the spring of 2011, the Parent and the network banks involved approved a package of measures designed to eliminate geographical overlap between branches and to improve efficiency in customer relationships. These actions, which involved Banca Popolare di Bergamo, Banca Regionale Europea, Banca Popolare di Ancona and UBI Banca Lombarda Private Investment, took effect from 18th April 2011 and can be summarised as follows: the closure of 16 branches and 12 mini-branches; 13 small branches transformed into mini-branches and one mini-branch into a branch. This mass operation was reinforced by further closures of mini-branches performed by some banks during the year. The Group did not abandon internal growth, but opened 13 new branches5 and transformed six units formerly operated as “treasury” branches into mini-branches. Changes to the distribution structure were also made in the first half of the year with the introduction of new “head branches” and “group branches”6 and the consequent creation of a level of co-ordination between retail units, based on head branches required to co-ordinate one or more grouped branches. Although to differing degrees of implementation, the process involved a total of 552 units (391 grouped branches and 161 head branches) belonging to four network banks (Banco di Brescia, Banca Carime, Banca di Valle Camonica and Banca Regionale Europea) The further worsening of the economic environment that occurred in the second half of the year, which was particularly severe for the banking sector, required an even more heavily weighted assessment across the entire banking sector of the “cost-to-serve” customers in branches and of operations to implement business plans already formulated. After the end of the year, the UBI Banca Group therefore announced and carried out new initiatives, effective from 27th February 2012, which involved almost all the network banks, designed to further streamline geographical market coverage in areas where markets are 5 The figure does not include the transfer between Group banks of a mini-branch, which was closed and then reopened, which is included among the 2011 changes reported in the table. 6 Grouped branches have a manager and are independent from accounting, credit (approval of credit authorisations and unauthorised overdrafts) and commercial (authorisations and powers on interest rates, conditions and repayments) viewpoints. Head branches are larger in size and have greater approval powers on commercial and credit matters and they are more structured (because all commercial roles are present). They are therefore able to act as a point of reference in local areas and to support the operations of grouped branches. 39 saturated or have limited margins for growth. Action was taken on units with insufficient current and/or potential profitability and at the same time branches close to those where action was taken and also those with the best prospects for growth were expanded. The mass operation – which will also result in contained operating expenses through the termination of expensive rental contracts – involved the following: the closure of 32 branches7 and 46 mini-branches; the transformation of 40 branches into mini-branches and one mini-branch into a branch; the partial transfer of customers belonging to one branch and changes to a parent unit for three mini-branches. Action taken in February 2012 also includes the extension of the “head branch-grouped branch” model to include the branch network of Banca Popolare Commercio e Industria in Emilia. Action taken on the Group branch network in Italy up until 27th March 2012 Opening of: branches Closures of: mini-branches branches Transformation of Transformation of branches into mini- mini-branches into mini-branches branches branches Banca Popolare di Bergamo Spa 1 - 1 - 2 Banco di Brescia Spa - - 16 6 - - Banca Popolare Commercio e Industria Spa - - 9 1 20 1 Banca Regionale Europea Spa - 1 - 5 7 - Banca Popolare di Ancona Spa 1 - 4 9 11 - Banca Carime Spa - - 1 23 - - Banco di San Giorgio Spa - - - 2 - - UBI Banca Private Investment Spa - - 1 - - - TOTAL 2 1 32 46 40 1 The above action was taken at a time when the short and long-term strategy for new branch openings was being revised along more prudential lines. They will now be limited to real commercial opportunities which arise from time to time on local markets, while the policy to develop alternatives to physical channels will continue. The logistical transfer of operating units within the towns and cities where they are currently located is also planned with a view to a more appropriate size for units and also to optimising costs. A detailed report on closures and openings in the branch network of the Group that occurred in 2011 and the first few months of 2012 is given in the subsequent section “The distribution network and positioning”, which may be consulted. 7 For logistics and organisational reasons, the closure of two Banca Popolare di Bergamo branches may not be performed until after the preparatory stage for the transformation into mini-branches. These branches have therefore been counted among transformations into mini-branches in the table for 2012 changes. 40 Disposal of UBI Pramerica SGR operations consisting of alternative fund managements On 15th June 2011, UBI Pramerica signed an agreement with an independent asset management company, Tages Capital SGR, for UBI Pramerica to contribute alternative fund management operations to Tages. These operations consist of three hedge funds (Capitalgest Alternative Conservative, Capitalgest Alternative Dynamic and Capitalgest Alternative Equity Hedge) with assets under management as at 31st December 2010, which totalled approximately €290 million. The contribution – which occurred on 4th October with effect from 1st October 2011 – also regarded the personnel involved, the assets and liabilities and the service and outsourcing contracts. On completion of the operation, UBI Pramerica acquired a 10% stake in the share capital of Tages Capital8. An agreement was signed for the distribution on the UBI Banca distribution network over a number of years of all the alternative funds (hedge and UCITS) managed by Tages. The agreement reached will allow UBI Pramerica to focus strategically on its mutual investment funds and customer portfolio managements, which already represent the core business of the company today. Moreover, on the basis of the partnership, the UBI Banca Group will be able to continue to offer its customers a broad range of hedge funds and to benefit from Tages’ high level of international specialisation. Banque de Dépôts et de Gestion While this bank was penalised by the unfavourable performance of financial and securities markets in 2011, only partially offset by the gain realised on the sale of the historic Neuchâtel property, from a strategic viewpoint the various initiatives designed to reposition the bank in the private banking segment and to further significantly contain and reduce costs continued. A search was commenced at the beginning of the current year for a new General Manager, which led, on 1st March 2012, to the appointment of Thierry De Loriol who replaced Gianluca Trombi, who occupied the position previously. Again in the first quarter of 2012, BDG promptly launched a plan of corrective action designed to provide a rapid solution to issues raised in relation to the results of supplementary audit activities required by the Swiss supervisory authorities. 8 The stake fell to 7.74% at the end of 2011 as a result of capital operations performed by Tages SGR after the contribution. 41 Commercial activity Commercial policies in 2011 and the outlook for 2012 In 2011 the UBI Banca Group completed Business Plan action designed to optimise the distribution network and to improve customer service models. In detail: - the new “hour-glass” shaped distribution model was introduced in the network banks on 1st August, together with “Local Departments” for improved co-ordination of the different customer segments (retail, private banking and corporate) in specific local areas; - preparatory and preliminary work began in October on “Mass market team” and “Developer” projects (operational since January 2012), which revised customer segmentation and the relative service models. The commercial performance of the Group in 2011 was affected by a context of high volatility on markets and by substantial liquidity problems on the interbank market, especially in the fourth quarter. This made it extremely important to increase direct funding in a manner consistent with maintaining high standards of structural balance. The following initiatives were designed to achieve that objective: the campaigns “Half an hour for your savings” (designed to acquire new financial wealth in any form, with enhancement at the same time of the advisory service) and “Zero zero UBI for three” (a promotional offer consisting of a charge free, zero interest current account, a certificate of deposit with a promotional interest rate and a points accelerator in the “Formula UBI” fidelity programme) and the initiative “Brilliant savings” (which allowed customers who had provided new funding to take part in a competition, with diamonds as prizes). These initiatives for private individual customers were accompanied by action taken to improve funding products for businesses, especially in the corporate segment. Initiatives concerning direct funding were accompanied by a strategy to manage lending designed to ensure full support for medium to small-size and core corporate businesses, by developing customer relations across a broad spectrum with re-pricing actions, the consequence of severe worsening of funding conditions. Additional action was also taken to rationalise lending to the large corporate segment, with careful management of trends for volumes and pricing. During the year, the Group also maintained a strong focus on the supply of advisory services to both businesses (“corporate advisory” for mid and large corporate customers) and private individuals (“pro-active wealth advisory" and “family business advisory” for private banking customers; the new evolved service and advisory model UBI Gold for “top affluent” customers as well as the normal investment advisory services provided by the financial planning and advisory platform in the UBI Light version). Work continued at the same time to improve the multi-channel strategy, with the launch of the online sale of the Enjoy and Qui UBI cards, the expansion of the platform for private individual and small business customers enhanced with new information and payment functions, the release of a mobile application for BlackBerry. Direct marketing initiatives through the Contact Centre were also intensified. Numerous new changes were also made in the payment cards sector, including the following: the completion of the migration to chip technology; various initiatives launched with the Enjoy card (including the “Enjoy special edition” initiative) and the launch of the debit card ‘I WANT TUBI’ for minors. Work also continued to upgrade payment systems to comply with the European directive on payment services (PSD) and the relative subsequent provisions and migration to SEPA payment instruments was commenced. 42 Finally, the UBI Banca Group increased its commitment to support the third sector by launching a new service model dedicated to the church and non-church nonprofit world, named UBI Community. Recent legislation is having a significant impact both in terms of supply processes and prices on strategies to develop the Group’s commercial activities: the revision of tax rates from 1st January 2012, with standardisation of treatment for bonds, current accounts and term deposits makes new short term funding products that accompany existing products more attractive. The impacts on the remuneration of credit authorisations and unauthorised overdrafts are also substantial, requiring the revision of the commissions applied. The new regulations on the sale of insurance policies on mortgages and on auto liability policies and possible further regulations on payment cards are also having an impact. The retail market The retail market includes a total of 3.7 million customers, consisting of 3.3 million private individuals (mass market and affluent), 354 thousand businesses (small economic operators – SEO 1 and small to medium-sized enterprises – SME 2 ) and approximately 30 thousand authorities and associations. Following the process to revise the customer segmentation thresholds concluded in January 2012, approximately 3,800 businesses have been transferred from the corporate to the small business segment. These customers are served by 6,900 staff consisting of account and branch managers. “Anti Crisis” measures to support small to medium-size enterprises and families During the year the banks in the Group participated in new initiatives organised at national and local level and continued measures launched since 2009 to help families and businesses in their respective local markets, co-operating with public institutions (chambers of commerce, regional and provincial governments) and guarantee bodies. With regard to action for SMEs, the UBI Banca Group adhered on 21st March 2011 to the “Agreement on Loans to Small to medium-size enterprises” (the “moratorium”) signed on 16th February 2011 by the Italian Banking Association, the Ministry of the Economy and Finance and by other business associations3. That agreement involved: - the extension from 31st January 2011 until 31st July 2011 of the time limit for the presentation of applications to defer loans to banks by SMEs that had not already taken advantage of a similar benefit, under the same conditions as the 2009 “Joint Announcement”; - the extension of the repayment schedules for medium to long-term loans which had benefited from the deferral under the Joint Announcement by up to a maximum of two years (three years for secured loans). By signing that agreement, the Group is committed to maintaining the contractually agreed interest rate if, amongst the other conditions, the extension had benefited from the intervention by the Cassa Deposito e Prestiti (CDP – state controlled fund and deposit institution) with the use of funds made available by that institution. To achieve that a special agreement with the CDP was signed along the same lines as that signed previously by the Italian Banking Association. 1 Businesses with a turnover of less than €300 thousand. 2 Businesses with a turnover of more than €300 thousand. 3 An extension to the validity of the “Joint Announcement” for medium to long-term loans for the whole of 2012 was signed on 28th February 2012. 43 The grant of loans by banks in the Group to strengthen the capital of SMEs, again in accordance with the Agreement, continued. From the start of the initiative until 31st December 2011, the Group had received approximately 16,800 applications to benefit from the intervention provided under the “Joint Announcement” – basically attributable to medium to long-term loans – for a total of €4.8 billion, of which over 14,500 had already been processed for a quota of deferred repayment on capital amounting to €585 million. Almost all the applications meeting the requirements for eligibility were accepted. In accordance with the “Agreement on Loans to Small to medium-size Enterprises”, again as at 31st December 2011, 85 applications to extend repayment schedules on loans had been processed, for which the remaining debt, in terms of the principal, amounted to approximately 56 million euro. Again as part of “anti crisis” action taken, the Group continued with the grant of loans to SMEs through the use of funding from the Cassa Deposito e Prestiti (CDP) resulting from post office savings. In detail, with regard to the first convention agreement of May 2009, which involved the assignment to the banking sector of €3 billion with a duration of the loans of five years only, Group banks have approved around 1,200 applications for intervention with over €107 million of loans disbursed. With regard to the second convention agreement of 17th February 2010, which made €5 billion available with greater flexibility in terms of duration (three, five and seven years), the banks in the Group supported approximately 3,000 applications for intervention with over €225 million of loans disbursed. On 17th December 2010, the Italian Banking Association and the CDP signed the third convention agreement which sets out the criteria for the distribution and use of funds amounting to €8 billion. Compared to the previous agreements, the main changes concern greater opportunities offered with the allocation of: a “ten year budget” usable for loans with a maturity of from seven to ten years, with funding to the banking sector nationally of one billion euro; a “stable budget” to finance the growth of SMEs, into which the funds not fully used by the previous budgets are gradually flowing, and which offers all maturities (three, five, seven and ten years). With regard to the third convention, as at 31st December 2011 the Group had disbursed approximately 3,000 loans for an amount of €215 million. Finally, UBI Banca adhered to the “Memorandum of Intent” signed on 22nd September 2011, by the Italian Banking Association Regional Commission with Assolombarda (a regional employers’ association) in relation to regulations on matters relating to reporting accounts past due. The Group was thereby committed to examining applications submitted by businesses that are members of Assolombarda to examine their position should they fall within those defined as “past-due” after 31st December 2011, following the reduction of the time limit for reporting to 90 days. The examination is designed to verify the relationship between credit lines granted and drawing, showing amounts past-due with particular reference to their size and duration. A similar agreement was reached at national level when a “Memorandum of Intent” was signed on 23rd November 2011 between the Italian Banking Association and various employers’ associations: Alleanza delle Cooperative Italiane (Alliance of Italian Co-operatives, Assoconfidi (association of loan guarantee consortiums), Confagricoltura (the farmers association), Confedilizia (confederation of builders), CIA (Italian farmers confederation), Coldiretti (the direct small farmers’ association), Confapi (the SMEs’ association), Confindustria (confederation of industry) and Rete Imprese Italia. The Group also promptly adhered to this initiative on 12th January 2012. In consideration of the continuing difficulties in gaining access to credit and in meeting the relative costs, initiatives to support families hit by the economic crisis in 2011 consisted above all of carrying forward the institutional initiatives already commenced in previous years. In detail: 44 • • • • • the “Italian Banking Association moratorium”, which forms part of the “Families Programme4”, extended until 31st July 2012. At the end of year Group customers who had benefited numbered approximately 2.500, for a residual debt of €230 million; the “solidarity fund for the purchase of a main dwelling5”, which was created as the result of an initiative by the Ministry of the Economy and Finance and became operational at the end of 2010; the “Loans of hope”6 which as a result of amendments made in 2010 by the Italian Banking Association and the Italian Episcopal Conference, increased its effectiveness with the disbursement of 72 loans for a total of €417 thousand, approximately four times the amount disbursed the year before; the “New babies loan”, which involves the creation of a guarantee fund to facilitate access to credit for families with a child born or adopted between 2009 and 2011. It has allowed 438 families to obtain a guaranteed loan for a total of over €2.2 million; the agreement signed between the Italian Banking Association and the CDP for the grant of loans to support Abruzzo families hit by the 2009 earthquake. In September 2011, the Group adhered to the “Give them a future” programme, set up by the Italian Banking Association and the Youth Ministry, to disburse subsidised loans to young students, by means of a loan of the same name, which follows on from the previous “Give them credit” programme. The Group has already received the first applications and an assessment of the success of the initiative will become possible as the year progresses. Adhesion to another Italian Banking Association initiative, the “Young Couples’ Fund” is also in progress to provide the guarantees needed to obtain a mortgage for young couples or even single parent families with young children with “atypical” or temporary employment contracts to purchase a first home. To confirm the Group’s closeness to its traditional local markets, it intervened, through Banco di Brescia and Banco di San Giorgio, to support towns in the Veneto and Liguria regions respectively, hit by flooding in October 2010 and November 2011, by adhering promptly – both for families and for SMEs – to the measures of the Ordinances of the President of the Council of Ministers No. 3906 of 13th November 2010 and No. 3974 of 5th November 2011 (deferral of mortgage repayments). Private individuals The commercial strategy for the private individual segment in 2011 was designed to attract new financial wealth and more specifically to attract new direct funding in order to provide adequate support for the maintenance of overall structural balance. Commercial action included specific initiatives focused primarily on enhancing the Group advisory approach as the main distinctive feature of the Group with respect to the competition. Examples included the “Half an hour for your savings” campaign and promotional initiatives on products, some of which linked to competitions with prizes, such as the “Marry us out of interest” and “Brilliant savings”. These commercial initiatives were supported by specific advertising activities in all branches and by a carefully designed advertising campaign in all the main national and local media channels (press releases, radio commercials, poster and internet campaigns). 4 The agreement involves the deferment for at least twelve months of repayments on mortgages of up to €150,000 taken out for the purchase, construction or renovation of a main dwelling even with arrears in payments of up to 180 consecutive days for customers: - with taxable annual income of up to €40,000; - who have suffered from particularly negative events (death, job-loss, becoming non self-sufficient, becoming eligible for state redundancy benefits). 5 For mortgage contracts for the purchase of a main dwelling for borrowers, the fund gives the possibility for a customer, if certain conditions are met, to apply for the deferral of repayments not more than twice for a maximum period of not longer than 18 months in the life of the mortgage. 6 For families that have lost all income from work, have no unearned income or income other than that generated by the ownership of a home or ordinary or extraordinary state redundancy benefits. It is designed to implement projects for the return to work or the start of small businesses. 45 In the fourth quarter of 2011, the Group launched a new service model for high income bracket “affluent” customers (over €300 thousand), in accordance with the guidelines defined in the Business Plan. It was named UBI Gold and oriented on three key spheres: the adoption of an advisory approach structured on investment and protection areas, scheduled financial check-ups during the year and the provision of specialist products and fidelity initiatives. The new model was publicised by means of press campaigns, maxi poster campaigns, direct marketing and events held in co-operation with the Accademia del Teatro della Scala (La Scala opera house academy). A presentation road-show was also organised in major towns and cities in which all the main branch and affluent account managers were involved. At the same time the functions of the financial advisory platform were also developed to increase their capacity to formulate appropriate investment proposals, which take account of both financial optimisation approaches and the professionalism of the account managers and their ability to assist customer-investors with the optimum allocation of assets in their portfolio. The advisory approach was also extended to other spheres and to lending in particular, where a tool was implemented which supports the commercial network when making proposals to customers. This also simplifies all the processing work involved in mortgage applications. With a view to increasing fidelity, the Group launched an important initiative in 2011 with the new programme “Formula UBI”, dedicated to holders of Libra credit cards and Enjoy prepaid cards. The programme contains a distinctive feature compared to conventional fidelity programmes employed in the sector because it not only rewards use of the card, but also a wide range of Group products and services (e.g. loans, non life insurance policies, etc.). DEVELOPMENT OF PRODUCTS AND SERVICES: CURRENT ACCOUNTS On 8th September 2011 the new offer, “I WANT TUBI”, targeted at teenagers aged 13 to 17, was launched with which UBI Banca has conquered first place in the category of accounts for children and young people in the special class for the best banking products chosen by the financial daily Milano Finanza. “I WANT TUBI” is an original promotion which involves products and services specially designed for this customer segment, presented on a special young and innovative website. The brand was chosen to represent the world of teenagers facing the stimulating challenge of becoming adults, winning their own independence and establishing their own personalities in all aspects of life. The account I WANT TUBI is completely free of charge and includes a “Bancomat” debit card, to make secure cash withdrawals and purchases in Italy, online and while on vacation abroad. The debit card is fitted with an innovative on/off function which allows the card to be activated and deactivated at any moment according to need. A Qui UBI Internet Banking information service is also provided so that customers can check all their spending. The account also offers gross interest earned on the account of 1%. New customers immediately receive a prize awarded to the young account holders, who also gain access to a mix of true and genuine opportunities, the result of co-operation agreements with partners and brands of interest to the target customers. A competition is also held with valuable prizes and the opportunity to be selected for a study scholarship. Advertising and customer relationship activity continued, again for the young target segment, dedicated to Clubino, the savings book for children aged from 0 to 12, which has received two prestigious awards (“GrandPrix Relational Strategies” and the Premio Freccia d’Oro Assocomunicazione). UBI Banca has also renewed the terms and conditions for the Duetto Basic account, eliminating charges for branch withdrawals to make this account even more suited to the over 65 target segment. This action has also partially met the requirements of Decree Law No. 201/2011, which requires the existence of a dedicated current account for “socially disadvantaged” groups that is totally exempt from bank charges and expenses. Work on a project is in progress on the products front for the renewal of the range of current accounts with the definition of a new modular current account, better able to meet demands resulting from the following factors: 46 - - the global financial crisis, which has reduced the size of markets substantially and rendered customers increasingly more demanding in their requirements for simplicity, clarity, customised services, assistance and stability; the changed regulatory context which in responding to consumers demands, requires a stronger focus on issues such as the simplicity of product ranges and transparency in the terms and conditions that apply. Small Businesses The Group renewed its commitment to support small to medium-size enterprises in 2011, especially with regard to businesses able to show good prospects for growth. The growing cost of funding nevertheless required the use of attentive pricing policies, extremely carefully gauged to match the risk profile of corporate customers. Activity was therefore commenced and organised for the constant monitoring of pricing and to bring price levels into line with company credit ratings and the cost of funding. Initiatives were launched during the year as part of the SME project, designed to improve performance and to increase the capacity to assist businesses in four areas: the development of foreign related activities, as a result of increased co-operation between branches and specialist foreign services units; approved growth in short term lending; the ability to attract and manage the liquidity of businesses; the ability to acquire new customers and serve them fully. The importance of further reinforcing the role of small business account managers became evident so that they can become true partners to businesses, able to assist them in the choice of sources of funding, treasury management, internationalisation processes and in acquiring knowledge of opportunities for subsidised loans and guarantees. A training project was therefore started which will continue throughout 2012. It is designed to spread best practices on the subjects identified, throughout the whole distribution network. PRODUCT DEVELOPMENT FOR THE SEGMENT: CURRENT ACCOUNTS Marketing of Utilio Click&Go was launched during the year, a bundled product, which provides the use of a set of products and services under special terms and conditions for the payment of a fixed monthly charge. It is targeted at shop-keepers, free-lance professionals and trades persons who prefer to use electronic channels such as internet banking, POS terminals and ordinary and evolved ATMs. Customers are also given the opportunity to customise the range of products and services according to their own need, by adding further product combinations, such as a POS terminal or a credit card with special terms. Utilio Click&Go won the “Innovation Award” prize in the “Business accounts and cards” category, awarded by the financial daily Milano Finanza in co-operation with Accenture. The prize was awarded for the innovative features of the bundle offered. LOANS Guarantee fund for SMEs (pursuant to Law No. 662/1996) The use of public sector, credit risk mitigation instruments, such as the Guarantee fund for SMEs (pursuant to Law No. 662/1996), continued, in order to facilitate access to credit for SMEs. Businesses may benefit from intervention by the fund for any type of operation, provided it is directly related to a business’s activities. The guarantee generally covers between 50% and 70% of the amount of the loan up to a total maximum amount guaranteed per company of €1,500,000 euro, depending on the nature of the eligible operations, the type of beneficiaries and their location. Banca Carime and Banca Popolare di Ancona are among the main banks involved in the use of the fund in the sector in terms of volumes. Total loans granted amounted to €725 million, of which €331 million in 2010 and €346 million in 2011. These figures should increase because in 2011 the internal process for guarantee applications became fully operational in the other network banks. UBI Banca and SF Consulting, a company controlled by the Finservice Group and in which a 35% interest is held by the Group, signed a convention for the provision of support and advisory activities in relation to formalities for the issue of guarantees from the fund, valid for all the network banks (except for Carime and BPA, already operational). The aims of the convention are to support account managers in numerous activities ranging from the assessment of the feasibility of an operation (including verification of the subjective and objective requirements of a business) to the acquisition of the guarantee 47 certification. As part of the convention, SF Consulting has created a special IT platform, implemented by the Group, which allows account managers to interact with the company while applications are being processed. Direct guarantee from SGFA - Società di Gestione Fondi per l’Agroalimentare Srl The Group commenced operations using the “direct” first level guarantees which SGFA is able to issue in order to acquire an additional means to protect against risk towards farming businesses and at the same time to satisfy requests from trade associations to facilitate access to credit by these businesses. This guarantee is the same as a standard unsecured bank guarantee issued to the bank on behalf of the borrowing business, after independent risk assessment has been performed. The “direct” guarantee issued by SGFA covers 70-80% of the amount of the loan and is recognised as an appropriate credit risk mitigation instrument because that company is covered by a guarantee of last resort from the Italian government. Subsidised loans In order to facilitate access by customers to the main forms of subsidised loans provided by regional, national and EC legislation, the UBI Banca Group, assisted by SF Consulting, a company specialised in the supply of consulting services in the subsidised loans sector, is able to offer companies full support as follows: assessment of the eligibility of companies for subsidies, the preparation of investment projects, the assessment of investment plans and general assistance in making and processing applications for subsidised loans right through until disbursements are actually received. SECTOR PRODUCTS Agreement with Assofranchising During the year the Group also concluded a commercial co-operation agreement with Assofranchising – the Italian Franchising Association, designed to develop the franchising sector. The franchising sector is one which stands out for its fast growth over the last two years and the Group intends to support it further, by continuing to work at the side of local business communities. The agreement involves the willingness of the Group, for franchisors, to support investments and worthwhile financial operations relating to affiliated brands. For franchisees, in addition to access to basic banking services, a dedicated credit line is offered to meet the investment needs of both franchisees who are already operational and those at the start-up stage. This line was designed in co-operation with the main commercial guarantee consortiums with whom solid relationships have been established over many years. Authorities, Associations and the third sector The year 2011 saw the progressive establishment of service models for authorities and third sector associations performed with the following objectives: to meet the specific demands of these customers more efficiently and effectively; to grasp opportunities provided by market trends; to exploit developments in the legislative and regulatory contexts of the sectors concerned. New types of portfolio were created to help achieve these objectives, currently being added to, which will become fully operational in the first half of 2012, once details of accounts had been examined and reclassified following the issue in August 2011 of a new more accurate classification of the different types of authority (based on the different types of legal status and organisational models). This action will make it possible to improve the detection of specific needs, the definition of targeted commercial strategies, the development of dedicated products and services and therefore the management of the respective business areas. ASSOCIATIONS AND GUARANTEE BODIES In the context of policies to provide financial support to SMEs on the Group’s local markets and with a view to facilitating access to credit under competitive conditions, even in the current difficult economic environment, a central role has always been played by guarantee consortiums and trade associations as well as by public sector instruments to mitigate credit risk. The latter include the Guarantee fund for SMEs (pursuant to Law No. 662/1996) and the fund managed by SGFA (Fund Management Company for the agricultural and food sectors) for farms. 48 As a result of new loan disbursements – €1,666 million for over 20,800 loans – total outstanding loans backed by guarantee bodies and guarantee funds amounted at year-end to almost €4 billion. The broad range of existing products was updated to incorporate the main initiatives organised in co-operation with trade associations (e.g. Assofranchising) and local public institutions (chambers of commerce, regions and provinces), in addition to specific initiatives launched at local level by individual Group banks. During the year the range of services and products was also reviewed to simplify and update the rates and charges applied to convention agreement credit lines to bring them more into line with the increased cost of funding and credit risk and with the actual value of the guarantees acquired in terms of compliance with the requirements set by the Bank of Italy supervisory regulations for the purposes of reducing capital requirements. With regard to the latter, in order to able to benefit from the smaller capital requirements made possible by the measures mentioned, changes were made in the last quarter of the year to IT and reporting systems designed to identify guarantees acquired on the basis of the following factors: the legal status of the guarantor (guarantee bodies registered pursuant to Art. 106 or Art. 107 of the consolidated banking act), type of guarantee (direct or first request or subsidiary), the possible presence of suitable counter guarantees. In the light of the growing Group business with guarantee bodies and the corporate changes in progress concerning these (company reorganisations and mergers between guarantee bodies and the transformation of some guarantee bodies into intermediaries supervised by the Bank of Italy), a new service model was adopted during the year designed to standardise the processes for stipulating conventions, for assessing guarantee bodies and monitoring operations for all the banks in the Group. In order to support that business, the internet platform “UBI-Confidi Web” (with registrations to-date by over 125 guarantee bodies) was implemented with new functions designed to facilitate information exchange between the Bank and guarantee bodies with which agreements are held and also to manage business. Finally, with a view to supporting local businesses and providing a concrete answer to worrying concerns over credit rationing for the real economy, initiatives are being studied for specific “local aggregations” (represented for example by trade associations), designed to acquire liquidity to be “recycled” by making credit lines available under competitive conditions destined to business communities in the local markets of the Group. THIRD SECTOR Changes in the quantitative and qualitative nature of the demand for welfare, resulting from the growing differentiation in social needs, have made standard responses provided by public sector provision insufficient, especially in consideration of the continuous and structural contraction of its finances. In this context new space has opened up for intervention by the third sector, which is now called upon to play a fundamental role in society in Italy. In order to meet this challenge, nonprofit organisations must rethink their activities to address the emergency of the growing need for resources in a context of progressively diminishing public and private sector finance caused by the economic crisis. The role of the banking sector is therefore central because it can make an important contribution in assisting the third sector on its path to social innovation and sustainable growth. In July 2011 the banks in the Group started to market products and services under the brand name UBI Community, a new service model dedicated to the church and non-church, nonprofit world. The model was identified and developed as part of a project launched in 2010, designed to further develop the good positioning of the UBI Banca Group in the sector (strengthened by a share of deposits and loans historically higher than the average for the banking sector, thanks to a traditional presence in regions in which nonprofit organisations are more numerous) and to furnish concrete answers to the needs mentioned above. The network banks organised a series of meetings for the launch of UBI Community, designed mainly for operators in the sector in the principal towns and cities in which they operate. The road-show got off the ground in Milan on 10th November 2011, moving to Pavia, Jesi, Genoa and Bergamo. It will continue in 2012 to reach other important towns and cities: Brescia, Turin, Varese, Rome. The requirement on which the UBI Community service model is based is the presence in branches of willing and qualified personnel who are able to understand the specific nature of nonprofit realities. The network banks therefore started a dedicated training programme for 49 specific professional roles, designed to transfer the necessary skills to the distribution network needed to establish effective and virtuous relationships. So far approximately 600 employees have been trained, mainly branch managers and commercial and credit liaison officers as well as personnel from central units and local areas. The commercial range offered for nonprofit organisations is composed of solutions for everyday operations and for growth, to support not only liquidity requirements that arise during ordinary operations, but also and above all investments in new initiatives and of a project nature. Our products and services, which will gradually grow in time, include the following a low charge dedicated current account with a base number of transactions free of charge; financial solutions for advances on donations and income from public and private sector institutions; a range of loans for development and growth; products and services supplied with subsidised terms and conditions for stakeholders (employees, associate workers, volunteers, association members and users of the services provided by the organisations themselves). Tools were also designed for a more accurate assessment of the creditworthiness of nonprofit organisations, with the objective of valuing them on the basis of their specific characteristics, by acquiring information of a non accounting and qualitative nature. AUTHORITIES The “authorities” segment comprises public authorities and those institutions for which the banks in the Group provide treasury and cash services (at the end of the year, 2,174 services of this type were managed). In November the Group was subject to an audit in accordance with regulations for the renewal of its certification for the quality of treasury services provided to public authorities (UNI EN ISO standard 9001:2008) issued by an accredited certification institute. The audit was concluded successfully and the quality certification for the provision of treasury services was renewed for the three year period 2012-2014, allowing the Group to continue to improve its operations in order to increase the quality of the products and services provided and to increase customer satisfaction. Procedures were introduced at the beginning of 2012 to renew the direct authorisation for the service for the “payment of pension instalments in Italy on behalf of the INPS (national insurance institute)” which will allow the Group to manage the payment of over 500,000 pensions each month. PattiChiari Consortium: commitments to quality Work to rationalise the quality commitments promoted by the PattiChiari Consortium was concluded in 2011. The objective was to both make them clearer and easier to communicate to customers and to align the general voluntary regulatory framework with changes that have since occurred in compulsory regulations, in order to avoid unnecessary overlap. The dynamic nature of the project led to the exclusion of some initial commitments from the scope of the PattiChiari initiative and to incorporate others (comparison of current accounts; transfer of services; home banking and payment card security and assistance; assistance with loans) in uniform areas, while basically maintaining the entire contents of the existing service7. All the standards defined as part of the PattiChiari project to allow customers to make more aware and informed choices are currently applied as standard practice in all the network banks. The most important commitment for 2012 is to consolidate knowledge of them and to ensure they are functioning properly, partly through constant monitoring of the results achieved. 7 The perimeter of the project currently comprises eleven quality commitments (current accounts compared, basic account, average times for closing current accounts, transferability of payment services, transferability of mortgage information, transferability of securities dossiers, transferability of collection orders, FARO – ATM function services, home banking security, payment card security, certification of mortgage expenses and interest charges) and two optional initiatives (list of services provided on an account, information for access to credit for small-to-medium sized enterprises). 50 Again with regard to financial education, the commitment of banks in the Group to the organisation of teaching programmes for schools continued in the local markets in which the Group operates. The quality and overall success of the results led the PattiChiari Consortium to write an official letter of appreciation to underline its merits within the sector. The Private Banking Market Private Banking service of the UBI Banca Group is a specialist service available throughout the country, provided through network banks which operate with 350 “private bankers” in more than 100 dedicated units. UBI Private Banking is the third largest private banking operator nationally in Italy with €35 billion of assets under management and 29,000 relationships (around 63,000 customers). Again in 2011 the UBI private banking service model underwent intense development in 2010 with the expansion of advisory services at the same time in the following areas: 1. the “Pro-Active Wealth Advisory Service” (a customised financial advisory service which performs thorough assessments of the characteristics and needs of family groups, analysing estates and proposing the best investment solutions available on the market) was further developed in terms of the following: - synergies with UBI Pramerica SGR; - systematic comparison with the major international investment houses; - professionalism and team commitment (over 2,000 meetings with customers and over 4,000 customised reports delivered); - a tested and systematically updated quantitative method with the development of performance attribution (analysis for each customer of the impact of strategies proposed by the ProAWA service); - expansion of the procedures employed to verify the appropriateness of customer portfolios and the investment proposals submitted with the adoption of a multivariate approach; - broadening the sphere of service activities to include strategy implementation (recommendations on one or more financial instruments); - advanced investment and support tools; 2. the “Family Business Advisory Service” – designed to meet specific customer requirements for generation turnover, capital protection, family and corporate governance and estate control structures – has been gradually consolidated by means of an in-depth training programme and the organisation of meetings with customers; 3. the functional evolution of the Planning and financial consulting platform which, on the basis of customer profile analyses acquired from answers to the MiFID questionnaire, is used to formulate financial solutions which constitute increasingly closer matches to a customer’s requirements. The following progress was made with the product range in 2011 the “UBI Pramerica asset management” range of products was broadened: - the number of indices underlying the open, customer portfolio management products was increased to give greater customisation of the product; - the range of Sicav classes dedicated to the private banking market was enlarged (Sicav cedola certa); the range of banc assurance products was revised by: - the modification, within the broad range of products, of two private banking products8, with lower entrance thresholds to make the products available to retail customers also. The products were also modified with the reduction of the redemption penalties and the ability to redeem them from the first year. 8 Soluzione Unit Tar. UB1 and Soluzione Unit Tar. UB13. 51 Advertising and marketing initiatives to support the market comprised a variety of activities including editorial supervision of special private banking articles published in major national daily newspapers and periodicals and also an initiative was organised in co-operation with Radio 24. This involved commercials and answers to listeners questions provided by professionals from UBI Private Banking. Finally, two important partnerships were formed with Porsche Italia and Rotary, with similar target customers to those of UBI Private Banking, to organise local co-marketing initiatives and events. The Corporate Market In order to introduce its new distribution model, the corporate distribution network developed organisational changes in 2011 to focus the service model more carefully on client needs. It created operational units at the level of the Parent’s Commercial Department to specialise specifically in non local “top large” and “large” clients, while maintaining the management of local corporate clients with the Corporate Banking Units, which report directly to the heads of local departments. This change in the organisational structure of the commercial distribution network was designed to provide better management of lending (both with regard to volumes and pricing) and funding from large corporate clients, in order to be able to guarantee constant maintenance of structural balance, a requirement felt particularly in the last months of the year, when the Group was obliged to manage liquidity difficulties which manifested at system level. After the revision of the distribution model, at the end of 2011, the corporate market (with the access threshold raised from a turnover of €5 million to €15 million and the transfer of these clients to retail branches) numbered 31,500 clients, divided into segments and assisted on the basis of operational complexity and financial needs. Clients are assisted by 700 account managers and assistants, working in 64 Corporate Banking Units (of which four for the management of “top large” clients) and 34 “corners”, supported, for “foreign commercial” activities, by 300 specialists operating in 37 foreign centres. The distinctive approach to corporate clients is based on the concept of an integrated range of products and services, further strengthened by the creation of Corporate Advisory Teams working within the Commercial Departments of the network banks. The task of these teams, composed of product support personnel, is to develop synergies between network bank customers and the product companies in order to significantly increase the quality and variety of the UBI Banca range of products and services with a particular focus on high value added services. The Corporate Advisory Teams in network banks are also required to manage the demands of businesses on the basis of guidelines already formulated in 2010, which involve specific programmes as follows: • Mid Corporate Advisory: systematic activity to analyse the future needs of small to mediumsize businesses by means of the joint bank-client formulation of a three-year commercial plan (Corporate Active View); • Large Corporate Advisory: formulation and implementation of a detailed commercial plan for “large corporate” counterparties with the involvement of the main areas of expertise in the Group for the segment (network banks, foreign centres, product companies and centres of excellence). From the viewpoint of the development of commercial activity, the negative performance by the economy and markets resulted in the need in the second half of the year to formulate a commercial strategy differentiated by customer segment. This involved selective growth of loans to non local large corporate counterparties and the maintenance of support for local core corporate counterparties, with resort to subsidised credit instruments or subsidised funding for the Group where possible in order to maintain the competitivenes of the solutions notwithstanding the impact of the liquidity crisis. 52 As concerns the Foreign-Commercial Sector, the Group strengthened its market position within the context of a general crisis, which nevertheless recorded progress for both Italian exports (+11.4%) and imports (+8.9%) compared to the year before. The commitment and effort in this area allowed the network banks to increase the quantity and quality of their volumes of business with corporate clients, with positive returns also in terms of customer satisfaction. The increases represent significant results above all for the non EU markets, areas on which the Group has a particular focus. The policy to locate representative offices on each of the BRIC markets is now being seen as a winning strategy and an excellent tool for increasing the level of service and advice provided to clients. The focus on business with emerging economies (Turkey, India, China, Brazil, Russia, Middle East) is therefore continuing in order to identify – with the assistance of commercial agreements and partnerships with major international operators – business areas with high valued added connected with the world of trade finance. The Group also continues to invest in: a) initiatives designed to strengthen its image and that of its individual local banks. After the success of the initiative “U will Be International” organised in 2010 at the Kilometro Rosso venue in Bergamo, “UBI International Open Day” was organised in Brescia in 2011, a genuine international trade fair open to businesses, which saw the participation as exhibitors of professional firms operating directly on emerging markets; b) constant monitoring of the quality of the service provided to clients by the dedicated distribution network, combined with the search for new technical and organisational solutions to render processes increasingly more efficient. The efforts made were rewarded by customer satisfaction surveys which recorded an extremely flattering opinion from the corporate clients interviewed; c) an increase in the professionalism of personnel, achieved as a result of a continuing commitment to the commercial and technical training of the personnel involved in the delivery of foreign commercial services. INITIATIVES IN CO-OPERATION WITH THE EUROPEAN INVESTMENT BANK (EIB) During the year, the UBI Banca Group fully used the first tranche of an EIB covered bond loan of €250 million, subscribed in April 2010 to fund businesses operating in industrial, agricultural, tourism and service sectors, to implement investment projects in Italy and the European Union. The companies funded (some in the form of finance leases) are SMEs with personnel numbering fewer than 250 employees or in any event businesses with employees numbering between a minimum of 250 and a maximum of 2,999 (mid caps). A total of 229 loans and finance transactions were disbursed from that tranche, of which 209 to SMEs (for a total of €161 million) and 20 to mid caps (€89 million). On 11th November 2011 the Group renewed its framework agreement with the European Investment Bank, which allowed it to create an additional lending budget of €250 million reserved to SMEs and mid caps. At the end of the year, finance of €27 million had been disbursed and finance of a further €20 million was at the approval or grant stage. Again with regard to initiatives with the EIB, as part of the credit line of €100 million granted by the Marches Region to BPA, the maximum amount of the investments that may be financed for appropriate development programmes by SMES was raised from €1.6 million to €2.5 million in May. At the end of December financing totalling €65 million had been disbursed. Customer Care The Consultation Project In consideration of the attention given and the key importance attributed to customers by the UBI Banca Group, the “consultation” project continued into its third year of activity. The 53 objective of the customer satisfaction survey is recognised as increasingly more central, which means that it now plays an operational rather than a mere reporting role. One of the main aims of the survey is in fact to improve the quality of services provided and to develop commercial and customer relationship strategies. As a consequence, the consultation project is losing its character as a project and is becoming a process, while consultation has turned into dialogue. Approximately 134,000 customers were interviewed in 2011 in three markets. This allowed a satisfaction score (TRI*M INDEX* 9 ) to be assigned to each organisational unit involved in customer relationships. During that same period approximately 21,000 interviews were carried out on the customers of competing banks (in order to define a benchmark), a large sample, because of the need for comparative data at local level and benchmark Group satisfaction index readings for each province 58 in which the Group 57 57 operates and also to 57 56 56 56 56 56 56 56 56 improve the accuracy of the 56 analysis. 55 The results of this survey, which requires extensive customer involvement, rewarded the work which the Group carries out with retail counterparties: the satisfaction score for UBI Banca 10 was 56 points, three points above the benchmark. 55 55 55 55 55 55 55 55 55 55 54 54 54 54 54 55 54 54 54 54 54 53 53 53 53 53 53 53 53 52 53 53 52 52 52 52 52 52 52 52 52 51 2009 index Jul-10 Sep-10 Oct-10 Nov-10 2010 Index Mar-11 Retail Apr-11 May-11 Corporate Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 2011 Index Private The Group also succeeded in increasing the degree of corporate client satisfaction in a delicate period historically for the market and for relationships with the banking sector: the TRI*M INDEX actually increased by two points compared to 2010, with a score of 54 points. The score for private banking customers implicitly confirmed the difficulties caused by a crisis that has not yet ended, with a confidence level of 52 points for this customer segment (down by three points compared to 2010). Having reached the third year of How satisfied are you with your contact? Base: total sample the surveys and data analysis, it AVERAGE 8.6 1 is now known that the destruction or creation of 6 11 82 customer satisfaction hinges on Score 1‐6 Score 7 the relationship which is establised with the customers themselves. With average satisfaction (on a scale of one to ten) of eight, which rises to 8.6 for relationships with habitual contacts, customers recognise the following qualities in the UBI Banca Group: the ability to keep its promises; it allows customers to speak to habitual contacts in the bank; it is precise with its transactions; it pays attention to safeguard a customer’s interests. The survey also provides information on areas for improvement requested by customers: more proposal making; more post sales attention; and when problems arise (even if only 10% of our customers declare they have had any), more effective management of them. 9 The score measures the level of customer satisfaction as the weighted sum of the judgements which interviewees make of the Bank on the basis of four variables: two linked to the degree of satisfaction (overall satisfaction and recommendability) and the other two which measure fidelity (probability of repeat purchases and advantage over the competition). 10 The scores for 2009 and 2010 are different from those published in the 2010 Annual Report, because they have been recalculated following changes to the reference scale, which was enlarged to improve the accuracy and to therefore refine the analysis. 54 This dialogue with customers is not only used to create a satisfaction score to monitor the perceived quality of services, but it is also an indispensible tool for acquiring the opinions of customers on a large number of variables involved in relationships and products and services. In-depth focus groups (on products and services, commercial image, institutional image, social responsibility, etc.) were used to investigate the requirements and expectations of those involved, with corrective action taken to constantly improve the service. Complaints The focal point of the Group’s capacity to manage complaints is to consider a complaint as an opportunity to improve the quality of services and as an instrument needed to monitor the level of customer satisfaction. A virtuous process can be commenced on the basis of the opinion of a customer or potential customer expressed through official dispute channels or simply as a complaint. The presentation of a complaint can in fact be experienced as the manifestation of an act of direct and constructive participation, which expresses basic trust in our organisation and which therefore differs from more radical reactions to leave the bank immediately. It is UBI Banca’s objective to strengthen and progressively refine its Verbal/telephone complaints management system by 0.1% increasing capacities to consult and Email 23.1% involve customers and to correct inefficiencies. This led it again in 2011 Hardcopy 66.1% Website 10.7% to make investments designed to make it easier for customers to inform it of failings and to educate personnel on the proactive management of inefficiencies. Action was therefore taken to improve the sections of the websites dedicated to these subjects designed to further simplify access to the Bank through remote channels (use of the website and electronic mail represents 34% of the channels through which official complaints are made). Investment in personnel was made in terms of classroom training, with sessions on specialist subjects and with modules for integration in already existing courses. A total of 1,655 employees were involved during the year. Distribution of complaints received by network banks in 2011 by channel of receipt The process for the active management of complaints, introduced with operational units in 2009, continues to produce positive results. A further reduction was recorded in 2011 in the main type of complaint which was inefficiencies in the execution of transactions (-8.9% and a percentage of the total which fell from 41.8% in 2009 to 32.4% in 2011), with faster response times (24.8 days on average) and a decrease in the amounts reimbursed to customers. A total of 4,518 complaints were processed in absolute terms by the network banks with a percentage resolved in favour of the complainants of 39%. The reduction in complaints due to operational inefficiencies was accompanied by a numerical increase in problems relating to the application of terms and conditions and compounding of interest (+40.5% accounting for 7.4% of total complaints), caused partly by regulations which are far from clear. In this context, as a result of Legislative Decree No. 28/2010, which came into force in March, a compulsory mediation system has come into operation in Italy as a necessary condition for taking legal action and that now includes action involving banking and insurance contracts. This system was welcomed by the UBI Banca Group, because it enables a direct dialogue to be opened up with customers on points in dispute. Consequently solutions can be sought, with the chance to re-establish relationships before appearing before a judge with opposing positions. Over twelve months, 278 applications for mediation have been presented by customers, to which particular attention was paid. Only those which were clearly without grounds and which assumed no common ground for discussion were rejected. As many as 215 of the 278 55 applications received were processed during the year with only 39 settled in favour of the customer. The data for complaints contested in 2011 is as follows: 78 applications to the Financial Banking Arbitrator; five applications to the Banking Ombudsman; four applications to the Consob Chamber of Reconciliation and Distribution of complaints received in 2011 by network Arbitration. distribution unit of the network banks outlets11 Less than 60% of network bank were involved in official complaints: - 41% received no complaints during the whole of the year; - 18% received one complaint only; - 14% received two complaints; - 27% received an average of 6.07 complaints annually. 41% 27% 18% 14% Again in 2011 data on complainants Oultets with over two complaints per year Outlets with two complaints per year showed that over 94% were from Outlets with one complaint per year Outlets with no complaints customers with active accounts with the Group’s network banks, while the remaining portion were presented by non customers. What emerges is an indicator of the frequency of complaints from existing customers of a little over eleven complaints for every 10,000 customer relationships. The figures available for the sector nationally (source: Italian Banking Association) show a percentage of complaints for the network banks of the UBI Banca Group of a little over 3%, significantly less than the market share of the Group in terms of branches (5.6%). 11 Bank outlets: branches, mini-branches, corporate banking units, private banking units, company branches, treasury branches and other operating units at the service of customers. 56 The distribution network and positioning The branch network of the Group As at 31st December 2011 the UBI Banca Group had 1,884 branches (reduced to 1,809 at the date of this report) compared to 1,901 at the end of 2010. The branch network of the UBI Banca Group in Italy and abroad 31.12.2011 31.12.2010 Change 27.3.2012 UBI Banca Scpa Banca Popolare di Bergamo Spa (1) Banco di Brescia Spa 2 358 364 2 365 362 -7 2 2 358 342 Banca Popolare Commercio e Industria Spa (2) Banca Regionale Europea Spa (3) Banca Popolare di Ancona Spa Banca Carime Spa Banca di Valle Camonica Spa 235 229 238 294 66 234 229 248 294 64 1 -10 2 225 225 226 270 66 Banco di San Giorgio Spa UBI Banca Private Investment Spa Centrobanca Spa IW Bank Spa B@nca 24-7 Spa Banque de Dépôts et de Gestion Sa - Svizzera 57 26 6 2 1 3 57 31 6 2 1 3 -5 - 55 25 6 2 1 3 number of branches UBI Banca International Sa - Lussemburgo 3 3 - 3 TOTAL 1,884 1,901 -17 1,809 Total Branches in Italy 1,875 1,892 -17 1,800 713 2,451 61,224 786 2,470 61,220 -73 -19 4 Financial advisors ATMs POS terminals (1) The figure as at 31st December 2010 included a temporary mini-branch for the launch of the prepaid card Enjoy. (2) The figures do not include nine units dedicated exclusively to pawn credit operating under the Banca Popolare Commercio e Industria brand. (3) The figures include three foreign branches. As already reported in the previous section “Significant events that occurred during the year”, the changes that occurred compared to the end of 2010 mainly reflect further reorganisation of geographical market coverage, performed between 2011 and 2012. In detail: - the action taken with effect from 18th April 2011 led to the closure of 16 branches and 12 mini-branches affected by geographical overlap, along with the transformation of 13 smaller branches into mini-branches and one mini-branch into a branch; - action taken after the end of the year, effective from 27th February 2012, involved the closure of 32 branches and 46 mini-branches, as well as the transformation of 40 branches into mini-branches and one mini-branch into a branch. A detailed summary is given below of the changes that occurred in 2011 and until the date of this report, which affected the Group presence in Italy: • BANCA POPOLARE DI BERGAMO closed a mini-branch in March 2011, temporarily opened in Viale Vittorio Emanuele II in Bergamo for the commercial launch of the prepaid card Enjoy, and opened one new branch at Casatenovo (Lecco) in May, while it closed six branches in 57 April1. It closed down a mini-branch in Viale Vittorio Emanuele II in Bergamo on 1st July located in the national insurance offices and opened a new mini-branch in Cagliari in August. In November it transferred a mini-branch in Via Rizzoli (at the company RCS), Milan to BPCI and a Como branch was closed in February 2012, while a new Rome branch was opened in March 2012 in Via dello Statuto; • BANCO DI BRESCIA opened two mini-branches in March in Brescia in Via Volturno and at 86 Via Orzinuovi, while it closed a total of 22 branches in February 20122; • BANCA POPOLARE COMMERCIO E INDUSTRIA in November opened a mini-branch in Via Rizzoli (at the company RCS), Milan while in February 2012 it closed a total of ten units3; • BANCA REGIONALE EUROPEA opened new branches between February and March 2011 at Ovada (Alessandria) and in Turin, in Corso Regina Margherita and also two new minibranches at Casale Monferrato and Tortona in the public health centre premises, while it closed two mini-branches again at Casale Monferrato in Via Hugues and at Rivoli (Turin) in Piazza Martiri della Libertà. On the other hand it closed three units in April4, while in June it opened a branch at Chieri (Turin). In January 2012, a new mini-branch opened in Alessandria at the Santi Antonio e Biagio hospital, while five mini-branches closed in February 20125; • BANCA POPOLARE DI ANCONA opened a total of one branch in May at Faenza (Ravenna) and five new mini-branches: in January 2011 at Frosinone at the air and naval base and between April and June at Torre San Patrizio (Fermo), Acquasanta Terme (Ascoli Piceno), Limatola (Benevento) and Riardo (Caserta) by transforming four existing treasury branches. It performed 14 closures in April6. At the end of 2011 two mini-branches closed in Naples in Via Acton at the naval base and in Via Salvator Rosa, while total closures in February 2012 numbered 137. Finally a branch was opened in March 2012 at San Salvo (Chieti); • BANCA CARIME opened a second branch at Brindisi in April in Via Commenda, while in March 2011 it closed a mini-branch at Vibo Valentia in Corso Vittorio Emanuele III. On the other hand 24 closures occurred in February 20128; • BANCA DI VALLE CAMONICA • BANCO DI SAN GIORGIO opened a new branch in June at Finale Ligure (Savona) and closed a mini-branch in March 2011 in Via alla Porta degli Archi in Genoa. On the other hand, in February 2012, two mini-branches ceased operations in Via Nazionale, La Spezia and in Via Pietro Gori, Sarzana (La Spezia); • UBI BANCA PRIVATE INVESTMENT closed five branches in April in Cagliari, at Castellammare di Stabia (Naples), at Macerata, in Naples in Via Alvino and in Rome in Via Anicio Gallo, while the branch in Via Ricasoli, Florence closed in February 2012. transformed two former treasury branches at Castione della Presolana (Bergamo) and Provaglio d’Iseo (Brescia) in the district of Provezze into minibranches in June; A full list of all Group branches in Italy and abroad is given in the final pages of this publication. 1 Monza at 27 Via Cavallotti; Varese at 146 Viale Borri and in Via Magenta; Gallarate (Varese) in Via Verdi; Saronno (Varese) in Via San Giuseppe; Olgiate Comasco (Como) at 39 Via Roma. 2 Barghe, Chiari in Via Maffoni, Gussago in Via Richiedei, Leno in Via Garibaldi, Lumezzane in Via Montini in the San Sebastiano district and in Via Bixio in the district of Pieve, Manerbio in Via Cremona, Ospitaletto in Via Rizzi, Salò (Brescia) in Piazza Vittoria; Soncino (Cremona) in Largo Manzella; Lodi in Via Fissiraga; Codogno (Lodi) in Via Rome; Mantua in Via Bertani; Quistello (Mantua) in Via Europa in the Nuvolato district; Cologno Monzese (Milan) in Via Cavallotti; Paderno Dugnano (Milan) in Via Tripoli; Arta Terme (Udine); Viterbo in Via Cattaneo ed in Via San Lorenzo; Venezia; Verona in Piazza Simoni; Storo (Trento) in the Lodrone district. 3 Milan in Viale Pirelli, in Piazza Siena and in Via Saffi; Gorgonzola (Milan); Brallo di Pregola (Pavia); Voghera (Pavia) in Via Sant’Ambrogio; Imola and San Giovanni in Persiceto (Bologna); Formigine (Modena); Colorno (Parma). 4 Novara at 5 Largo Don Minzoni, Pinerolo (Turin) in Piazza Vittorio Veneto; Borgosesia (Vercelli) in Via Duca d’Aosta. 5 Cuneo in Via Margarita; Casteldelfino and Crissolo (Cuneo); Valenza (Alessandria) in Via Lega Lombarda; Ghiffa (Verbania) 6 Ancona in Via Trieste; Osimo (Ancona) in Via Marco Polo; Jesi (Ancona) in Via Gallodoro; Pesaro on the Adriatica state road and Via Strada delle Marche; Urbino in Borgo Mercatale; Novafeltria (Pesaro Urbino) in Piazza Cappelli in the Secchiano District; Civitanova Marche (Macerata) in Via Pellico in the Santa Maria Apparente District; Ascoli Piceno in Via Angelini; Montappone (Fermo); Rome in Via Milano; San Gregorio da Sassola (Rome); Naples in Via Schipa; Bacoli (Naples). 7 Belvedere Ostrense and Ostra Pianello (Ancona); Appignano (Macerata); Pennabilli and Piobbico (Pesaro Urbino); Riardo (Caserta); Naples in Piazza del Gesù Nuovo; Terzigno (Naples); Rimini in Via Caduti di Marzabotto; Guidonia Montecelio (Rome) in Piazza Buozzi; Perugia in Via dei Filosofi; Collazzone and Fossato di Vico (Perugia). 8 Carolei, Francavilla Marittima, Grimaldi, Rocca Imperiale Marina (Cosenza); Squillace (Catanzaro); Cutro (Crotone); Bovalino, Delianuova, Gioiosa Ionica, Molochio (Reggio Calabria); Briatico (Vibo Valentia); Matera in Via Dante Alighieri; Maratea (Potenza); Atena Lucana and Sapri (Salerno); Bari in Corso Italy and in Via M. Cristina di Savoia; Fasano (Brindisi) in Via National in the Pezze di Greco district and in Teano in the Montalbano district; San Pietro Vernotico (Brindisi); San Severo (Foggia) in Corso Garibaldi; Gallipoli and Ruffano (Lecce); Taranto in Via Battisti. 58 The Italian distribution network of the Group is completed by units dedicated specifically to private banking customers (private banking units and the associated “corners”) and to corporate customers (corporate banking units and the associated “corners”). These were also affected by a series of organisational changes in parallel with the changes to the distribution model. As can be seen from the table, at the end of the year, 107 private banking facilities were operational together with 98 corporate banking facilities 9 , an increase of four units. The organisational changes were concluded in January 2012: Banco di Brescia opened a new corporate banking unit (CBU) in Brescia, and transformed CBUs into “corners” at Iseo (Brescia) and Bergamo, while Banca Regionale Europea opened a new CBU in Turin. Consequently, at the date of this report corporate banking facilities numbered 100 (64 CBUs and 36 “corners”). The distribution network of the Group is also supported by a network of 713 financial advisors reporting to UBI Banca Private Investment, consisting of 383 operating in the Central and Northern Division and 330 in the Central and Southern Division. The decrease compared to 786 financial advisors operating at the end of 2010 forms part of the rationalisation process started in the second half of 2008 and concluded during the year, designed to increase the average per capita portfolio of financial advisors 10 and to improve the quality of the network. P rivate banking and corporate units Private Banking Units 31.12.2011 31.12.2010 107 107 Private Banking Units (PBU) Banca Popolare di Bergamo Banco di Brescia Banca Popolare Commercio e Industria Banca Regionale Europea Banca Carime Banca Popolare di Ancona Banca di Valle Camonica Banco di San Giorgio UBI Banca Private Investment Private corners Banca Popolare di Bergamo Banco di Brescia Banca Popolare Commercio e Industria Banca Regionale Europea Banca Carime Banca Popolare di Ancona Banco di San Giorgio Corporate Banking Units Corporate Banking Units (CBU) Banca Popolare di Bergamo Banco di Brescia Banca Popolare Commercio e Industria Banca Regionale Europea Banca Carime Banca Popolare di Ancona Banca di Valle Camonica Banco di San Giorgio Corporate corners Banca Popolare di Bergamo Banco di Brescia Banca Popolare Commercio e Industria Banca Regionale Europea Banca Carime Banca Popolare di Ancona Banca di Valle Camonica Banco di San Giorgio 58 14 7 8 6 5 7 2 3 6 49 21 6 5 1 7 9 98 58 14 12 8 6 3 5 1 3 6 49 18 3 5 1 11 11 - 94 64 19 11 9 8 5 7 2 3 34 2 11 5 2 3 9 2 - Change -5 2 2 1 3 3 -4 -2 4 66 18 15 9 8 5 6 2 3 28 1 8 4 3 3 7 1 1 -2 1 -4 1 6 1 3 1 -1 2 1 -1 In an increasingly more concentrated sector (the four largest companies occupy approximately 64% of the market), the data for December published by Assoreti (national association of stock brokerage companies) place UBI Banca Lombarda Private Investment in tenth place in terms of total assets (ninth in terms of banking groups), with a market share of close to 2.20%, almost unchanged compared to the end of 2010. 9 The following changes occurred during 2011: - with regard to private banking facilities, in January Banco di Brescia streamlined its presence in Milan and Brescia unifying the four units previously operating in the two Lombard cities into just two PBUs, while in April it opened two separate corners at Cremona and Mantua, following the closure of its Cremona and Mantua PBU. In October it closed its Verona and Mantua PBU and its Mantua corner, but opened a new corner at Treviso and transformed its Lodi PBU into a corner. Banca Carime, on the other hand, closed a corner at Vibo Valentia in March and a corner at Lagonegro (Potenza) in August, while it transformed two corners at Reggio Calabria and Lecce into PBUs. In August Banca di Valle Camonica opened a new PBU in Brescia. In that same month Banca Popolare di Bergamo transformed two PBUs at Grumello del Monte and Ponte San Pietro (Bergamo) into corners, opening two new PBUs in Bergamo and at Varese and a new corner in Milan. Again in August Banca Popolare di Ancona transformed two corners at Ascoli Piceno and Caserta into PBUs; - as concerns corporate banking facilities, in January Banco di Brescia unified two units operating previously in Milan into one single CBU and it transformed its Cremona CBU into a corner, while opening a new corner in Milan at Lambrate. In October this bank closed its CBU at Vicenza and transformed its CBU at Montichiari (Brescia) into a corner, while opening a new corner at Verona. Finally two corners were closed in December at Mestre (Venice) and Lumezzane (Brescia). Banco di San Giorgio closed a corner at Imperia in January, while in the same month Banca Carime transformed a corner at Lecce into a CBU and opened a new corner at Martina Franca (Taranto). In August that same bank closed a CBU at Andria and a corporate corner at Lamezia Terme (Catanzaro), while it opened a new corner at Foggia. In May Banca Regionale Europea closed a corner at Vercelli and in August Banca Popolare di Ancona opened three corners at Civitanova Marche (Macerata), Campobasso and Osimo (Ancona) and transformed a corner at Aversa (Caserta) into a CBU. Again in August Banca di Valle Camonica and Banca Popolare Commercio e Industria opened two new corners at Brescia and Assago (Milan) respectively. In October Banca Popolare di Bergamo opened a new CBU at Palazzolo sull’Oglio (Brescia) and a corner at Tradate (Varese). 10 The average size of financial advisors’ portfolios increased from approximately €6 million to €6.2 million of total assets over twelve months. 59 The international presence The international presence of the UBI Banca Group at the date of this report was structured as follows: • two foreign banks: Banque de Dépôts et de Gestion Sa (with branches in Switzerland at Lausanne, Geneva and Lugano) and UBI Banca International Sa (with headquarters in Luxembourg and branches in Munich and Madrid); • three foreign branches of Banca Regionale Europea in France (at Nice, Menton and Antibes); • representative offices in Sao Paolo in Brazil, Mumbai, Shanghai, Hong Kong and Moscow11; • equity investments (mainly controlling interests) in four foreign companies: UBI Trustee Sa, Lombarda China Fund Management Co., UBI Management Co. Sa and BDG Singapore Private Ltd12. • a Branch of UBI Factor Spa in Krakow in Poland; • 37 commercial co-operation agreements with foreign banks (covering more than 50 countries), two “Trade Facilitation” agreements with the European Bank for Reconstruction and Development (EBRD) and with the International Financial Corporation (IFC) and also a “product partnership” in the Middle East and in Asia with Standard Chartered Bank to guarantee effective assistance on all the principal markets in those areas. In the first few weeks of 2012, Centrobanca signed a co-operation agreement on merger & acquisition and advisory operations with Banco Votorantim13, the third largest privately held Brazilian bank, in order to support extraordinary operations of our corporate clients abroad and to support Brazilian investments in Italy. During the year the UBI Banca Group sponsored events of national and international importance in order to strengthen its brand in Italy and abroad and to consolidate its closeness to customers who operate on international markets. It also organised conventions, meetings and events, in co-operation with other Group companies14. 11 Just three years after opening, in July our representative office in Moscow received an award from the Association of Regional Russian banks as the best foreign bank present in Russia on the basis of the quality of its contacts with Russian counterparties, the activity performed with these and also the professional esteem which these have for the UBI Banca team. 12 The transfer of the latter is currently in progress from its present parent, Banque de Dépôts et de Gestion Sa, to UBI Banca International Sa, subject to receipt of the relative authorisations. The operation was decided by the Parent in the autumn and will be completed by the end of the first half. 13 Banco Votorantim, jointly controlled equally by the Votorantim Group (a major Latin American industrial group) and Banco do Brasil, it is the seventh largest bank in Brazil with assets of 112 billion Brazilian reais and the sixth largest loan portfolio with 59 billion reais. 14 The very many activities included the following: - the organisation of three different stages of the ”International Open Day” initiative designed to promote the internationalisation of Italian businesses. The event was held in Turin on 21st June, at Jesi on 23rd June and in Brescia on 21st and 22nd November and it was attended by representatives of the Group’s international network. An important new feature of the Brescia edition was the presence of 25 stands of professional exhibitors from all over the world, known to the UBI Group in various international financial centres. A total of 400 persons, representing 250 businesses, attended during the two day event which was partnered by the financial daily Il Sole 24 Ore; - the fifth edition of the International Banking Forum, held in Brescia on 16th and 17th June, entitled “Risk and Trade in the new Emerging Markets: the CIVETS” (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa). The initiative, which was organised to consolidate correspondent banking business and relationships with foreign banks, was attended by 57 counterparties consisting of foreign banks, international bodies and supranational institutions from 23 countries to give a total of 130 participants; - participation for the second year running as the exclusive banking sponsor in the eighth edition of the China Trader Award, an important and prestigious prize for Italian companies that have excelled – in terms of determination, dynamism, innovation and creativity – in the development of business relations with Hong Kong and China; - the launch of a privileged partnership with the La Scala Theatre Academy on the occasion of the celebrations for the 150th anniversary of the unification of Italy, which resulted in the organisation in 2011 of an international tournée in ten foreign cities in which the Group is present with its foreign network (Mumbai, Madrid, Moscow, Luxembourg, Munich, Singapore, Hong Kong and Shanghai, Lausanne and San Paolo in Brazil). 60 Remote channels Market coverage by the Group is integrated by IT functions to give information and manage accounts for use by network bank customers using multi-channel services. These concentrate all the direct channels available to private individuals and businesses on one technological platform: internet and mobile banking, contact center, interbank corporate banking, self service branches such as ATMs and kiosks, cards and evolved payment systems, POS terminals. Integrated multi-channel services help achieve key objectives to acquire new customers, develop the existing customer base, reduce operating costs and exploit technological innovation. They improve the services provided to customers in terms of convenience, security, 24-7 accessibility and the ability to customise them to meet customer requirements. Channels available to private individual customers include: • the QUI UBI internet banking service for information on banking positions (current accounts, securities deposits, payment cards, mortgages, insurance policies, etc.) and to perform numerous payment and investment transactions autonomously, with maximum security, speed and savings. The “business” version for small business clients provides specific functions for single bank management of a company, which include the payment of single or multiple bills of exchange and the management of commercial portfolios; • the QUI UBI Contact Centre service, contactable on a toll free number even outside normal branch opening times, available to customers less likely to use the internet or who do not have a connection; • the Mobile Banking service for customers who wish to use the main internet banking functions while mobile, directly from their smartphones in both the optimised version of the website or by using dedicated applications for iPhones and Androids; • a network consisting of approximately 2,500 self service branches (ATMs and kiosks), including over 300 able to receive payments in cash and cheques using a “Bancomat” debit card or free-of-charge VersaQuick card (evolved ATMs). At the end of the year customers of the QUI UBI Internet Banking service exceeded 775 thousand (+20% over twelve months). Use of the QUI UBI Affari service was equally popular, having reached 90 thousand users at the end of 2011 from over 65 thousand in December 2010 (+38%). Mobile banking recorded approximately 100 thousand accesses per month to the site optimised for cell phone navigation (approximately 15 thousand in 2010), while 50 thousand downloads of applications for iPhones and Androids were performed. The popularity with customers was also confirmed by the results for use over twelve months: +32%, to over 6 million, for payment and reload transactions; over 52% of securities trades on regulated markets performed via internet (55% excluding branch transactions for the sale and purchase of rights related to the share capital increase); over 17% of payments made using evolved ATMs. These results were also assisted by continuous improvements, as follows: the platform for private individual and small business customers was improved with new consultation functions (full capital gain position and display of existing losses, POS terminal movements, automated collection orders due for payment, etc.), payment functions (payment into postal accounts, receipt of email advice for use of payment cards, bank transfers for home renovation/energy savings) and dedicated functions to increase the security of payment cards (selection of approved foreign countries); • increase of “My accounts” services with the receipt via email of documents relating to mortgages, other loans and savings books; • the launch of free-of-charge internet banking consultation services for teenagers aged 13 to 17 named “I WANT TUBI” designed to help the very young to use the internet; • 61 • • • the release of a mobile application for BlackBerry; the release for the Contact Center of an upgrade to the software applications used by operators and the “Branch Manager Diary” designed to improve the scheduling of appointments with customers and general commercial support and development activity for both existing and potential customers; the launch of a series of marketing initiatives as follows: “Enjoy Your World” to support the roll-out of the online sales platform and “Activate my accounts and win” to support the distribution of the service for the electronic receipt of mail15. Action is also planned during the current year to enhance internet banking products: the release of an application for tablet PCs (iPads and Android tablets) and a new version for smartphones (iPhones, Androids and BlackBerrys); the development of a virtual assistant (avatar) available in the Qui UBI Internet Banking reserved area and on public websites in order to launch marketing support activities and facilitate customer navigation; the development of the online sales platform with a wider range of products on sale (current accounts, debit, credit and prepaid cards); the introduction of a remote digital signature for internet banking customers; new payment functions for QUI UBI and QUI UBI Affari16. The service QUI UBI Imprese also exists for corporate clients, the UBI Banca Group corporate banking interbank (CBI) platform. It is available in a variety of configurations (single company/multi-company and single bank/multi-bank) and allows corporate clients to consult movements on accounts remotely and to make payments with many advantages. These include considerable savings in time, the optimisation of cash flows, improved organisation of administrative activities, the automation of record making processes and the verification and reconciliation of bank transactions. The process to transfer some small economic operator (SEO) customers to the QUI UBI Affari service continued in 2011, which is more appropriate to the requirements of these counterparties, while service provision for corporate and SME clients was focused on QUI UBI Imprese, the Group’s CBI multi-bank product. Consequently at the end of December companies connected to the CBI channel had fallen to 123 thousand euro, which nevertheless confirmed the growth in the number of payment and receipt instructions communicated on electronic channels. Cards Notwithstanding the difficult economic environment, the UBI Group has also been active in the payment card sector. It has worked on the distribution of the prepaid card Enjoy and to complete the process to replace magnetic strip cards, without, however neglecting action to increase customer security17. At the end of 2011, a total of 752 thousand Libra credit cards issued by B@nca 24-7 and CartaSì were in issue, a decrease compared to 840 thousand cards twelve months before18. The downwards trend is due partially to the effects of the mass migration to microchip cards, which meant that with inactive cards either no request for replacement was received from customers or a request was received for the debit card component only (Libramat) of multifunction cards. The range currently offered by the UBI Group is differentiated by type of user: 15 The number of customers who agreed to forgo hardcopy correspondence in 2011 more than doubled to 404 thousand. At the same time the number of current and deposit accounts linked to the “My accounts” service increased significantly (+82% to 554 thousand in December 2011). 16 Other important initiatives include: an inter-channel platform for sending SMSs to inform customers of the latest news on services provided and to improve marketing initiatives resulting from interaction with Contact Center operators; the launch of a new software application named “QUI Multibanca plus” to help develop new information and payment services on ATMs with the ability to send marketing messages calibrated to match customer profiles. 17 It is planned to consolidate the “3D Secure” system in 2012, which adds a further level of security to online transactions and which will make it possible to make purchases online even using debit cards. 18 Considered net of duplications due to the replacement process in progress on that date. 62 • • private individual customers can choose between charge card, revolving or flexible cards (with repayment either of the balance or in instalments) of different varieties according to the market (retail or private banking); companies, on the other hand, are offered business and corporate cards which vary according to the credit limit and the services. Some types of card are issued as part of a bundle with Duetto and Utilio accounts and with mechanisms linked to the amount spent the year before (rebate programme), which eliminates the subscription charge. A marketing initiative with prizes, named “Formula UBI”, was launched in February 2011 to increase customer loyalty, reserved to holders of the Libra MasterCard and managed on the multi-channel platform (branches, QUI UBI, Contact Center and SMS). The year 2011 was particularly successful for prepaid cards with the total increasing by 25% to 220 thousand, mainly as a result of the success of the Enjoy card and marketing initiatives linked to it. In detail: • various partnerships were created with universities, local authorities, businesses and associations. The success of these initiatives was facilitated by the ability to customise the graphics of the card (e.g. by inserting the logo of a partner or images selected by it on the card) and also the functions, so that the card could be used not only for purely banking transactions, but also to use specific services provided by the partner; • the ability to purchase the Enjoy cards online was introduced in October either through the internet sites of the network banks or directly from QUI UBI and the web site www.ubibanca.com; • The Enjoy Special Edition card was launched in December 2011, an Enjoy card reserved to employees of the UBI Banca Group, with customised graphics and the ability to select charity projects to which a portion of the proceeds resulting from spending at POS terminals using the card could be donated; • the prize initiative “Formula UBI”, already mentioned was extended to include holders of the Enjoy card in December. The following important developments are planned for 2012: a prepaid card linked to an IBAN for retired customers to which their pension can be credited; a new prepaid card with microchip technology, available for adults and also for minors under the age of 18, which in addition to normal functions will also allow high levels of customisation already available with the Enjoy card; a new version of the Enjoy card (named One Card) which will enable customers to customise the graphics directly, by using an application available on the internet. The main news concerning debit cards is the completion of the process to replace magnetic strip cards with new microchip cards launched in the second half of 2010. The total number of Libramat cards (debit cards used on the Bancomat-Pagobancomat and Maestro networks) was affected in part by the activity just mentioned, with a reduction in the total of approximately 2%19 to 1,346,000 cards, which, however, mainly concerned inactive cards. The trend for use of the card was positive overall (+4.7% for the Bancomat network; +4% for the Pagobancomat network). As with other cards, the UBI Banca Group did not fail to innovate with debit cards too in 2011: • a process was commenced in July to unify the PINs on the Bancomat-Pagobancomat and Maestro networks with the objective of further simplifying use for customers; • again in July, innovations were introduced to increase security. On-off functions and “geographical activation” were introduced to allow a cardholder to autonomously temporarily deactivate a card or to extend its use to include non European countries, while the email alarm service guarantees constant monitoring of purchases made and provides weekly or monthly statements of card use. All the new functions are accessible through the multi-channel platform (branches, telephone, internet banking); • the sale of the “I WANT TUBI” card was launched in the second half, the Libramat card reserved for teenagers between the age of 13 and 17. 19 The change calculated compared to the 2010 figure considered net of duplications due to the replacement process in progress on that date. 63 The Group also has over 61 thousand POS terminals installed in retail outlets, unchanged compared to twelve months before. In 2012 the sector should benefit, both in terms of units installed and volumes of business, from the new measures introduced by the government to limit the use of cash for amounts below one thousand euro only. More widespread acceptance of payments using cards is expected by retailers for which average payments are for small amounts and who therefore currently accept almost exclusively payments in cash. The positioning of the Group The table summarises the market positioning of the UBI Group in terms of branches, conventional funding (excluding bonds) and lending in provinces, where it has a more significant presence – on the basis of the latest available data from the Bank of Italy (30th September for branches and 30th June for the balance sheet data on the basis of the location of the branch) – both with respect to the national market and for the main areas in which the banks in the Group operate. Despite the reorganisation performed in April 2011, the positions at the end of September and at the end of June did not record any significant changes compared to the data as at the end of 2010. In terms of branches, the Group can continue to count on a market share of at least 10% in 19 Italian provinces and also on an important presence in Milan (over 9%) and Rome (around 4%). As a result of the characteristics of the two original groups, in some areas where the Group’s local presence is stronger, it has a market share of traditional funding and/or lending that is greater than the percentage of branches. UBI Banca Group: market share 30.9.2011 Branches North Italy (*) 30.6.2011 Funding (**) (***) 31.12.2010 Lending (***) Branches Funding (**) (***) Lending (***) 6.4% 6.3% 7.2% 6.4% 6.1% 7.3% Lombardy Prov. of Bergamo Prov. of Brescia Prov. of Como Prov. of Lecco Prov. of Sondrio Prov. of Mantua Prov. of Milan Prov. of Monza Brianza Prov. of Pavia Prov. of Varese 12.9% 21.0% 22.7% 5.9% 5.8% 8.1% 5.6% 9.2% 8.3% 15.5% 23.1% 10.8% 31.5% 36.3% 5.5% 4.9% 1.7% 3.7% 5.3% 8.4% 16.8% 30.3% 10.8% 43.1% 35.0% 8.2% 7.0% 3.6% 4.3% 4.5% 9.3% 12.0% 21.7% 12.9% 21.0% 22.6% 6.2% 5.4% 8.1% 5.7% 9.1% 8.5% 15.6% 23.7% 10.7% 32.2% 33.3% 5.9% 4.8% 1.6% 3.6% 5.3% 7.9% 16.6% 30.4% 10.9% 43.5% 35.9% 8.5% 6.5% 3.6% 4.7% 4.5% 9.1% 12.4% 23.2% Piedmont Prov. of Alessandria Prov. of Cuneo Prov. of Novara 8.4% 11.8% 24.4% 4.6% 5.4% 8.4% 22.8% 3.1% 7.1% 10.5% 20.5% 8.3% 8.4% 11.1% 24.5% 5.1% 4.9% 8.8% 23.6% 2.4% 6.7% 9.7% 19.4% 8.0% Liguria Prov. of Genoa Prov. of Imperia Prov. of Savona Prov. of La Spezia 6.0% 4.8% 5.8% 6.3% 10.1% 5.5% 5.1% 3.8% 3.4% 12.2% 8.3% 7.8% 9.2% 10.1% 7.0% 6.0% 5.0% 5.8% 5.9% 10.3% 5.0% 4.3% 3.5% 3.2% 12.6% 8.2% 7.8% 9.3% 10.0% 6.7% Central Italy 3.5% 2.9% 2.6% 3.6% 3.0% 2.5% Marches Prov. of Ancona Prov. of Macerata Prov. of Fermo Prov. of Pesaro and Urbino 8.1% 10.0% 8.8% 10.8% 6.9% 9.3% 13.8% 11.5% 10.3% 4.1% 8.9% 11.1% 10.4% 15.1% 4.8% 8.8% 10.6% 9.5% 10.6% 8.1% 9.3% 13.1% 11.3% 10.0% 5.0% 9.0% 10.6% 10.9% 15.1% 5.2% Latium Prov. of Viterbo Prov. of Rome 4.2% 14.8% 3.9% 3.0% 13.0% 3.0% 2.7% 11.3% 2.6% 4.3% 14.8% 4.0% 3.2% 13.3% 3.2% 2.5% 11.3% 2.3% South Italy 8.3% 6.7% 5.3% 8.3% 6.5% 5.3% Campania Prov. of Caserta Prov. of Salerno Prov. of Naples 6.0% 9.0% 8.0% 5.0% 4.1% 6.7% 5.2% 3.7% 4.2% 7.0% 6.2% 3.3% 6.1% 8.6% 8.1% 5.5% 4.0% 6.3% 4.8% 3.7% 4.1% 6.7% 6.3% 3.2% Calabria Prov. of Catanzaro Prov. of Cosenza Prov. of Crotone Prov. of Reggio Calabria Prov. of Vibo Valentia 22.1% 14.2% 25.7% 18.9% 22.4% 26.3% 21.1% 17.5% 27.3% 11.8% 15.8% 28.5% 14.2% 9.7% 19.3% 7.2% 11.5% 18.7% 22.2% 14.3% 25.7% 18.9% 22.1% 28.2% 21.0% 16.1% 27.9% 12.2% 16.2% 28.2% 13.8% 9.5% 19.0% 6.9% 10.7% 19.0% Basilicata Prov. of Matera Prov. of Potenza 14.3% 15.7% 13.6% 11.5% 10.0% 12.4% 8.9% 7.4% 9.9% 14.4% 15.7% 13.8% 12.0% 10.0% 13.4% 8.8% 7.3% 9.7% Apulia Prov. of Brindisi Prov. of Bari Prov. of Barletta Andria Trani Prov. of Taranto 8.2% 12.1% 10.0% 6.3% 8.4% 7.1% 9.1% 8.5% 7.1% 7.2% 4.9% 5.9% 5.4% 5.7% 5.3% 8.2% 11.5% 10.1% 6.4% 8.5% 6.9% 9.1% 8.4% 6.6% 7.1% 4.8% 5.9% 5.5% 5.2% 5.1% 5.6% 5.2% 5.7% 5.6% 5.1% 5.8% Total Italy (*) The financial data is taken from Bank of Italy statistics. From 30th June 2011, the Bank of Italy statistics related to total ordinary customers excluding financial and monetary institutions. This change, which with respect to the past excludes three sub groupings of economic activities of marginal importance both for deposits and loans, does not produce any significant discontinuities in the data in the comparison with December. (**) Current accounts, certificates of deposit, savings deposits. (***) M arket share by location of the branch. 64 Human resources The composition of Group personnel and changes in 2011 Group personnel Employees actually in service Number Banca Popolare di Bergamo Spa Banco di Brescia Spa Banca Carime Spa Banca Popolare Commercio e Industria Spa Banca Popolare di Ancona Spa Banca Regionale Europea Spa UBI Banca Scpa Banco di San Giorgio Spa Banca di Valle Camonica Spa Centrobanca Spa IW Bank Spa B@nca 24-7 Spa UBI Banca Private Investment Spa UBI Banca International Sa Banque de Dépôts et de Gestion Sa TOTAL FOR BANKS UBI Sistemi e Servizi SCpA UBI Leasing Spa UBI Factor Spa UBI Pramerica SGR Spa Prestitalia Spa UBI Insurance Broker Srl UBI Fiduciaria Spa Silf Spa BPB Immobiliare Srl UBI Gestioni Fiduciarie Sim Spa InvestNet International Sa Centrobanca Sviluppo Impresa SGR Spa Coralis Rent Srl UBI Trustee Sa BDG Singapore Pte Ltd UBI Management Company Sa S.B.I.M. Spa TOTAL Workers on personnel leasing contracts TOTAL PERSONNEL Employees on the payroll 31.12.2011 31.12.2010 Changes 31.12.2011 31.12.2010 Changes A B A-B C D C-D 3,723 2,584 2,182 1,713 1,710 1,513 1,250 419 348 316 275 206 165 98 68 3,761 2,632 2,221 1,756 1,715 1,552 1,367 417 346 325 291 227 167 98 102 -38 -48 -39 -43 -5 -39 -117 2 2 -9 -16 -21 -2 -34 3,795 2,594 2,319 1,896 1,797 1,577 2,170 419 345 316 289 166 153 93 67 3,808 2,625 2,363 1,952 1,795 1,585 2,171 418 346 316 312 172 163 92 100 -13 -31 -44 -56 2 -8 -1 1 -1 -23 -6 -10 1 -33 16,570 16,977 -407 17,996 18,218 -222 2,021 255 153 142 104 38 24 9 9 7 5 6 5 4 18 3 1 1,860 242 153 142 105 40 23 14 9 7 7 6 6 4 14 2 1 161 13 -1 -2 1 -5 -2 -1 4 1 - 676 245 144 120 96 34 17 23 4 4 7 2 4 16 3 - 665 250 145 122 102 36 17 25 4 4 8 2 4 12 2 - 11 -5 -1 -2 -6 -2 -2 -1 4 1 - 19,374 19,612 -238 19,391 19,616 -225 31 87 -56 31 87 -56 19,405 19,699 -294 25 17 8 19,430 19,716 -286 On secondment outside the Group - out - in TOTAL WORKFORCE 8 13 -5 19,430 19,716 -286 The table above gives details for each company of the actual distribution of ordinary employees (workers on permanent and temporary contracts and on apprenticeship contracts) within the Group as at 31st December 2011, adjusted to take account of secondments to and from other entities within or external to the Group (column A) compared with the position at the end of 2010 (column B) restated on a consistent basis. Column C, on the other hand, gives details for each company of the number of employees on the payroll as at 31st December 2011 compared with the end of 2010 restated on a consistent basis (column D). Compared to the figures published in the 2010 Annual Report, the personnel of Banque de Dépôts et de Gestion as at 31st December 2010 reported in the Table: includes six personnel (of which five are employees) from Gestioni Lombarda (Swiss) merged in December 2010; does not include 14 personnel (of which 12 are employees) of BDG Singapore Pte Ltd, now reported separately. As already reported, at the end of 2010, the company was still at the start-up stage of its asset management business, having just obtained a license to operate from the local authorities in October. 65 At the end of 2011, the total personnel of the UBI Banca Group numbered 19,405 compared to 19,699 in December 2010, a decrease over twelve months of 294, which reflects less use of flexible contracts (agency leasing contracts and temporary contracts at the Parent and the other Group banks and companies). However, this is above all the combined result of personnel turnover and the remaining persons leaving on redundancy schemes which regarded ordinary employee personnel. Greater synergies were created in the network banks (-254 personnel, of which 208 employees and 46 on agency leasing contracts). Numbers also fell for the rest of the Group consisting of other banks and Group companies (-40, of which 30 employees and 10 on agency leasing contracts), although they related to different trends in individual companies in relation to their specific organisational and market contexts. In this respect, the significant increase in personnel numbers at UBI Sistemi e Servizi (+161) is attributable to the centralisation of contact centre activities at the company (performed by UBI Banca until 31st December 2010) and to the expansion of units to support mortgage disbursement. Employees on the payroll 31.12.2011 Number Total employees of whichpermanent on temporary contracts apprentices (*) 31.12.2010 The table gives details of changes in the type of employee contract, with a total decrease in numbers over twelve months of 2251. In detail, 583 persons left – of which 60 for access to the “solidarity fund”, 11 for retirement and 203 for end of contract – compared to 358 new appointments. The latter were distributed as follows: Change 19,391 19,616 -225 19,270 19,419 -149 104 172 -68 17 25 -8 (*) Contract regulated by Legislative Decree No. 276/2003 (Biagi Law) for young people between the ages of 18 and 29, by which they acquire a qualification through training at work which provides them with specific occupational skills. The duration varies from a minimum of 18 months to a maximum of 48 months. New appointments permanent temporary Q1 40 36 Q2 35 96 Q3 31 64 Q4 30 26 Total 2011 136 222 As can be seen, appointments on temporary contracts were concentrated in the middle of the year in relation to seasonal activity by BPB Immobiliare and to the need to ensure the regular operation of branches during the main vacation periods. Intragroup mobility involved 472 personnel consisting of 404 on secondment and 68 leaving and being re-appointed in a new Group member company. This mobility relates primarily to processes to reallocate personnel as a consequence of the initiative to increase efficiency performed in implementation Composition of personnel in Group Banks by rank of the trade union agreement of 20th May 2010 and also as Number 31.12.2011 % 31.12.2010 % a result of a programme to Senior managers 389 2.2% 408 2.2% enhance human resources by Middle managers 3rd and 4th level 3,262 18.1% 3,207 17.6% providing intragroup Middle managers 1st and 2nd level 3,877 21.5% 3,873 21.3% experience. 3rd Professional Area (office staff) 10,236 56.9% 10,491 57.6% 1st and 2nd Professional Area (other personnel) TOTAL FOR BANKS 232 1.3% 239 1.3% 17,996 100.0% 18,218 100.0% The difference between the total as at 31st December 2010 reported in the table and that published in the 2010 Annual Report (18,225) is attributable to Banque de Dépôts et de Gestion. See the footnote to the table on Group personnel in this respect. As shown in the table no significant changes in the composition of personnel by rank occurred. The average age of Group employees as at 31st December 2011 was 44 years and four months compared to 43 years and five months at the end of 2010, while the average length of service was 17 years and seven months compared to 16 years and nine months a year before. 1 In terms of actual personnel, the reduction in employees was greater during the year (-238) due to the combined effect of increased secondments outside the Group (+8), mainly to UBI Assicurazioni, and less use of personnel from outside the Group (-5). 66 The percentage of part-time employees was 7.9% (7.3% at the end of 2010). Female personnel accounted for 36.8% of the total, unchanged compared to 36.7% the year before. Further details in trends and in the composition of Group personnel are given in the 2011 Social Report, which may be consulted. *** As concerns the fourth quarter, total personnel fell by 110, consisting mainly of employees (down by a total of 82) partly as a result of temporary contracts coming to an end (50). Personnel on agency leasing contracts were also affected by contracts ending, with a reduction of 28 in the quarter. The redundancy scheme pursuant to the agreement of 14th August 2007 The redundancy scheme implemented by the UBI Banca Group on the basis of the trade union agreement of 14th August 2007 was concluded in 2011. The last 60 employees left during the year with access to the sector “solidarity fund” (of which seven in the 4th quarter) – postponed in relation to measures introduced by Decree Law No. 78/2010 converted into Law No 122/2010 – which brought the total number of redundancies to 960. The numerous changes that have occurred in the legislation since 2010 involving the pension system - the latest contained in the “Save Italy” decree2 – had no significant impact on those who had already gained access to the “solidarity fund” formed with Ministerial Decree No. DM 158/2000 on the basis of redundancy schemes implemented in the Group. Renewal of the national labour agreement and changes to the pension system An agreement was signed on 19th January 2012 to renew the national labour agreement of 8th December 2007 – which had expired on 31st December 2010 – for middle management and personnel employed in “professional areas”, which will be subject to approval by workers, the regulatory and economic effects of which will be effective from 2012. The agreement was concluded in an extremely complex context due to the worsening of the macroeconomic environment and of economic and financial conditions in Italy. Consequently the parties to the agreement made the responsible decision to take corrective action to counter the potential competitive decline of banks and to support a recovery in profitability, the growth of productivity and the creation of new permanent employment. A “National fund to support employment in the credit sector” was created to achieve the latter aim, a unique new development in trade union relations in Italy. The fund will be financed by contributions from all employees and will be used to facilitate the appointment of young people, disadvantaged persons or laid-off workers to permanent positions and to transform contracts from temporary to permanent. Again in order to encourage new employment, it was agreed that workers appointed since 1st February 2012 to the first level of the 3rd Professional area on permanent contracts, including apprenticeship contracts, should receive a lower wage for a period of four years, but that at the same time employers will pay a contribution of 4% to supplementary pensions for the same period of time. 2 See the following sub-section. 67 The Group is also considering the application of the new provisions concerning branch opening hours contained in the renewal agreement, designed to support the rationalisation of operating costs. Companies will in fact have the freedom, subject to consulting with trade unions, to set branch opening hours between 8:00 a.m. and 8:00 p.m. with the ability to extend that period from 7:00 a.m. to 10:00 p.m. by agreement with trade unions. An agreement was also signed on 29th January 2012 to extend the national labour agreement for the senior management of banking, financial and production companies, whereby the parties agreed to extend the validity of the legal and financial terms of the national labour contract signed on 10th January 2008 until 30th June 2014. *** On 1st January 2012, Decree Law No. 201 of 6th December 2011 – the “Save Italy” decree – converted into Law No. 214 of 22nd December 2011 introduced substantial changes to the pension system, designed to strengthen long term sustainability in terms of pensions as a percentage of government spending. The new welfare system involves three types of treatment only: a) the “old age pension” granted exclusively on the basis of age requirements (62 for women and 66 for men, with harmonisation at 67 in 2021); b) “early retirement pension” granted exclusively on the basis of contribution requirements (42 years and one month for men in 2012 and 41 years and one month for women both increased by one month in each year following 2012); c) as an exception for those meeting the old length of service (level 96 for workers on employee contracts) and age (60 and at least 20 years of contributions for women) requirements for a pension in 2012, a pension can be granted when the age of 64 is reached. Furthermore, the requirements specified in a) and b) above, must be updated every three years from 2013 on the basis of life expectation data. The sudden and unprogrammed increase in pension age requirements summarised above resulted in substantial changes to potential redundancies scheduled in the Business Plan of the UBI Banca Group for the two year period 2014-2015, the concrete conditions of which are still being defined. This considerably reduces the number of employees who could be retired. The “General Leaving Incentive Proposal” made by the Group in March 2012 falls within this context. It is designed for employees who are covered by the safeguards provided for by the aforementioned “Save Italy” decree for those who met pension requirements by 31st December 2011. Remuneration and incentive policies Details of remuneration and incentive policies are given in the remuneration report which is given in another part of this document. It was prepared pursuant to the “Provisions on remuneration and incentive policies and practices in banks and banking groups” issued by the Bank of Italy on 30th March 2011 and to articles 123-ter of the Consolidated Finance Act and 84-quater of the Issuers’ Regulations. Further information is given on the matter in the UBI Banca report on corporate governance, again in an attachment to this document. 68 Personnel management policies and instruments In a particularly difficult economic context like that of the present, the Group’s policies are still strongly focused on the enhancement and growth of its “human capital” in terms of professional abilities. Personnel management policies and tools are reviewed and updated annually on the basis of objectives and strategies. Almost all Group member companies have now adopted a role system, skill assessment, performance assessment, measurement of potential and managerial appraisal (assessment using structured interviews), tools that are all used to increase knowledge of human resources and to define action consistent with supporting their career growth and development. A new software application was released in 2011 to manage performance assessment which required a more flexible configuration to address increasing intragroup mobility. Performance assessment and skill assessment is used for all personnel, with the sole exception of General Management positions. Combined interpretation of the results provides valuable information on personnel that can be used to define career growth paths, training requirements and remuneration. Work on the management of the potential measurement and managerial appraisal is increasing progressively with a view to drawing maximum benefit from the aptitudes of each person and to defining career paths to match their characteristics. Measurement of potential was performed on 343 staff in 2011 (+30% compared to the previous year) and obtaining this data was introduced as a compulsory step in the careers of future branch managers. Ninety one of these measurements regarded mass market account managers, young personnel on average who had recently joined the Group. Managerial appraisal was extended at the same time to include senior management. Over 180 interviews were carried out during the year with two objectives: to map key Group personnel (with a view to enhancement and development) and to provide personnel – through feedback interviews – with self-awareness tools with which to take self-training and self-determination action. Trade union relations Work on trade union relations was intense in 2011 with agreements signed at both Group and individual company level and also to complete procedures concerning the new Group Business Plan. A memorandum of intent was signed in February concerning the transfer of new mortgages originated by external distribution networks, previously managed by B@nca 24-7, to the network banks, while a memorandum of intent concerning the tax relief on productivity for 2011 was signed in April. At company level, an agreement was signed in March regarding the rationalisation of Banca Popolare di Ancona’s branch network, a project which did not have any significant impact on personnel. An agreement was signed on the reorganisation of UBI Leasing in April. This initiative, which did not give rise to any employment problems, was designed primarily to improve the efficiency and effectiveness of risk management processes and to better identify centres of responsibility with regard to the activities performed by individual units. A trade union procedure was commenced in June for the rationalisation of B@nca 24-7 operations in local centres and the centralisation of some activities in the Tax and Administration Area of UBI Banca. It was concluded with an agreement signed on 25th July. 69 The operation required the adoption of limited geographical and occupational mobility measures for the workers concerned. A procedure was commenced again in June relating to the action to streamline the distribution network of the network banks in accordance with the 2011-2015 Group Business Plan. This involved the roll out of the new “hour glass” distribution model started on 1st August and the start in October of preparatory and preliminary activities necessary for the implementation of the “mass market team” and “developers” projects to run from 2012. Discussions were commenced in October on company bonuses for 2010 and were concluded with the signing of the relative trade union agreements in all Group banks and companies. Contract negotiations, started on 21st September 2011 were also concluded with a trade union agreement in November concerning changes to the organisational structure of Centrobanca and the transfer of the management of non-performing loans to the “Problem Loans and Credit Recovery” Area at UBI Banca. The operation involved the adoption of limited geographical mobility measures. Finally, to complete the picture of discussions and negotiations with trade unions, mention must be made of agreements reached on specific company issues, normally involving second level negotiations, signed at UBI Banca, Banca Popolare di Bergamo, Banca Regionale Europea, Banco di Brescia, Banco di San Giorgio and Banca di Valle Camonica. Negotiations were commenced at the start of the new year on a series of actions to streamline the branch network of the Group and to revise the distribution model at Banca Popolare Commercio e Industria, with the introduction of a “Head Branch” and “Group Branch” model already in operation in other Group banks3. Here too, the repercussions involved the adoption of limited geographical mobility measures. Finally negotiations were commenced on 9th March 2012, concerning the merger of B@nca 24-7 into UBI Banca and the contribution of assets consisting of salary or pension backed loans from B@nca 24-7 to Prestitalia3. Naturally the most appropriate solutions will be sought in the trade union negotiations required under labour agreements to reduce social repercussions on the working conditions of employees, by making use of the instruments provided for in the labour agreements and the relative law. Training Training activities are traditionally designed to develop and enhance the technical and professional knowledge, managerial experience and abilities and the ethical and cultural behaviours present in the Group. In 2011 they involved the delivery of over 103 thousand training days (inclusive of Training activity by subject areas in 2011 classroom, job experience and Total Remote Classroom ob experienc person/days of % remote training), an increase of training training 7% compared to the previous Subject area 14,726 14,990 29,716 28.7% year and an average of Insurance Commercial 9,248 161 9,409 9.1% 4,351 290 195 4,836 4.7% approximately 5.6 training days Finance Credit 8,412 447 2,521 11,380 11.0% per person (5.2 in 2010). Managerial-Behavioural 9,732 9,732 9.4% Regulatory Operational and other subjects 6,260 4,214 20,624 3,570 7 3,692 26,891 11,476 26.0% 11.1% 100.0% 56,943 39,921 6,576 103,440 The main initiatives carried TOTAL forward during the year included: the completion of the “ValoRe in Rete”, training workshop started in 2010, designed to stimulate and enhance the role of existing Branch Managers; 3 See the section “Significant events that occurred during the year” for further information. 70 the implementation of the “Value at the Centre” and “Value at UBI.S” projects, carried out in line with the previous project designed for central unit managers to strengthen a culture of service to the distribution network and an orientation towards internal customers; the consolidation of the new compulsory training programme for the qualification of potential branch managers. The examination sessions led to the qualification of 150 new potential Branch Managers (a total of 260 in the two year period 2010-2011). the completion of the “Excellence in Corporate Banking” programme, a highly specialist two year programme designed to provide all the Corporate Account Managers in the Group with a high level of specific expertise and excellence; the implementation of the CSR – corporate social responsibility – project: an initiative targeted at all personnel to promote a culture and the principles and content of CSR and to encourage a knowledge and the dissemination of Group values (ethics code) and the adoption of responsible actions by individuals; the launch, in the last quarter, of a qualification and retraining programme for customer service and customer contact staff involved in the introduction of the new branch “mass market team” unit (operational since January 2012). Over a third of all activity was devoted to improving the technical and professional abilities (operational, commercial, credit and financial) of distribution network personnel. With regard to credit in particular, this included the initiative “internal rating systems and the credit process”, for small business and corporate segment supervisors. The subject of insurance continued to account for a significant proportion (29%) of the training delivered during the year through programmes specialised by market and by customer segment (private individuals, corporate). They were designed to qualify personnel to sell insurance products and to update them, in compliance with ISVAP (Insurance Authority) regulation No. 5/2006. Updates on regulations and legislation (26% of the total) involved banking operations and included those on “transparency”, “health and safety at the workplace” and “anti money laundering”. This last project improved knowledge on the part of all distribution network personnel on up-to-date procedures for managing suspect transactions, appropriate verification of customers and record-keeping obligations; The managerial training programme continued again in 2011, designed for roles with greater responsibility in which the various initiatives included participation at intercompany events to create opportunities for cultural exchange with others in different professional fields The in-house instructor corps consists of over 400 personnel who delivered almost 13,200 training hours (approximately 60% of total classroom training). The 2011 “Facilitatori di Valore” convention of the UBI Banca Group instructor corps and school for instructors was held on 20th October. Over 140 internal instructors took part, in the presence of top managers, in an important event for the sharing of experiences and discussion on the fundamental role of training in the development of human capital in the Group. Programmes for 2012 involve no less than 92,000 training days, in line with 2011-2015 Business Plan programming (90,000 person/days on average annually for a total of 450,000 person/days in the five year period), net of any new extraordinary training projects which may be decided during the year. Planned initiatives include the following: - completion of the occupational retraining programme for personnel involved in the new branch “mass market team” project; - the implementation of the training course to support “Developers” (core unit in the new distribution network service model, which will involve 700 staff when fully operational), both in terms of qualification training and refinement and supervision over time of the skills required for the role; - extension of the “ValoRe in Rete” method already implemented for branch managers to other key business roles and specialists operating in the retail, private and corporate banking sectors; - the revision of compulsory role qualification programmes; 71 - courses to increase knowledge and educate on the subjects of customer satisfaction and pricing excellence. THE “VALORE IN RETE” TRAINING PROGRAMME FOR BRANCH MANAGERS The important strategic project “ValoRe in Rete”, started in 2010, was completed during the year. It was designed to stimulate and enhance the professional skills of existing Branch Managers as key figures in local market coverage and in the development of complex commercial activities. The “ValoRe in Rete” project is an innovative and structured training programme, a genuine “workshop” in which Branch Managers worked and addressed the challenge of the “virtuous behaviour” – whether commercial, credit, organisational or HR management – needed to “make a difference” in the excellent management of branch teams and in relationships with customers and the community. A total of almost 1,500 managers were involved in the two year period, led by a select team of 45 branch managers working in the delicate role of “teacherfacilitator”. The results of the workshop confirmed the validity and success of this innovative approach, designed also to share best experiences and practices employed within the Group. As a result of this positive outcome, the 2011-2015 Business Plan identified the methodology of this training approach as a model on which to base action to enhance and stimulate other important business roles. Consequently the programme will be gradually extended in 2012 and 2013 to include Corporate Account Managers, Small Business Account Managers, Private Bankers and Affluent Market Account Managers. UBI ACADEMY The foundation of UBI Academy, the new corporate university of the UBI Banca Group is planned for the second quarter of 2012. It is a service consortium company and its business purpose will be the planning and provision of services for life long learning and the professional and managerial development of the personnel of the UBI Banca Group. On the one hand, by centralising Group training activity, UBI Academy is designed to provide support to develop and enhance the technical and professional knowledge and the managerial experience and skills of UBI Banca Group personnel. On the other hand, the new company intends to make use of the academic world and the best social and cultural institutions in local communities in order to incorporate the capacity to innovate inherent in these institutions. Internal communication The main commitment during the year concerning internal communication was the development and subsequent relaunch of the new Group corporate portal (October 2011). Many new features were introduced beginning with the editorial layout, which was completely renewed and enhanced with simple and effective new graphics. The home page of the portal is focused on the constant supply of information on the most important Group initiatives. New interactive tools and environments were introduced with the objective of making corporate communication and information an increasingly more participatory and circular activity. These included a “survey” area to allow employees to express their opinions on determined issues, an “ideas box” to collect suggestions from colleagues on the specific subjects proposed, a “my profile” area in which each employee can put their photos and give a description of their main interests outside work and finally a FAQ area with a series of answers to frequently asked questions, accessible and always available from every page of the portal. Some pages on specific professional subjects are independently maintained and edited by company different teams. The new portal contains an entire section dedicated to the new online magazine YOUBI live, which has replaced the Group’s traditional hardcopy house organ YOUBI (the last three 72 editions were published in 2011). An annual almanac will be published in a hardcopy version with the most important news that has occurred in the life of the Group. The new online magazine is divided into different sections and sub-sections rich in information and variety on both strictly work oriented subjects and those of a broader nature. It is also designed to encourage active participation by all personnel. Comments may be made on each article published to create a natural blog in order to be able to share ideas, opinions and individual experiences. The Internal Communication unit took advantage during the year of multimedia functions introduced in 2010 as follows: the production of videos on important key issues. These included the traditional UBI Click with the involvement of top management and numerous videos with the participation of the managers of important projects (the new service model, the developers project, the new regulatory portal, the multichannel platform, internal customers); the organisation – following on from the two organised previously – of three “UBIPods” (a tool modelled on the style of a radio broadcast) with the direct involvement of branch managers who participated on the training course “ValoRe in Rete”; updates on the main issues brought up during the Annual General Meeting of UBI Banca in e-book format – an easy to consult electronic magazine – able to manage different types of media (texts, images. audio and video recordings) in an environment with uniform graphics. Finally the Internal Communication unit worked on the organisation of a convention dedicated to the new Business Plan. The meeting was held on 30th May 2011 in Milan with the participation of approximately 3,000 personnel from different realities within the Group. The work environment The section “Principal risks and uncertainties to which the UBI Banca Group is exposed” may be consulted for information on matters regulated by Legislative Decree No. 81 of 9th April 2008 (health and safety at the workplace), while information on environmental responsibility is given as part of the information on corporate social and environmental responsibility contained in the section “other information”. Welfare The main initiatives carried forward in the field of welfare are reported as part of the information given on corporate social responsibility contained in the section “Other information”. 73 Consolidation scope The companies that formed part of the consolidation as at 31st December 2011 are listed below, divided into subsidiaries (consolidated line-by-line) and associates (consolidated using the equity method). The percentage of control or ownership attributable to the Group (direct or indirect), their headquarters (registered address or operating headquarters) and the share capital is also indicated for each of them. Companies consolidated on a line-by-line basis (control is by the Parent of the Group where no other indication is given): 1. Unione di Banche Italiane Scpa – UBI Banca (Parent) registered address: Bergamo, Piazza Vittorio Veneto, 8 – share capital: 2,254,366,897.50 euro1 2. Banca Popolare di Bergamo Spa (100% controlled) registered address: Bergamo, Piazza Vittorio Veneto, 8 – share capital: 1,350,514,252 euro 3. Banco di Brescia San Paolo CAB Spa (100% controlled) registered address: Brescia, Corso Martiri della Libertà, 13 – share capital: 615,632,230.88 euro 4. Banca Popolare Commercio e Industria Spa (75.0769% controlled) registered address: Milano, Via della Moscova, 33 – share capital: 934,150,467.60 euro 5. Banca Regionale Europea Spa (74.9437% controlled)2 registered address: Cuneo, Via Roma, 13 – share capital: 468,880,348.04 euro 6. Banca Popolare di Ancona Spa (92.9340% controlled) registered address: Jesi (Ancona), Via Don A. Battistoni, 4 – share capital: 122,343,580 euro 7. Banca Carime Spa (92.8332% controlled) registered address: Cosenza, Viale Crati snc – share capital: 1,468,208,505.92 euro 8. Banca di Valle Camonica Spa (74.2439% controlled and Banco di Brescia holds 8.7156%) registered address: Breno (Brescia), Piazza Repubblica, 2 – share capital: 2,738,693 euro 9. Banco di San Giorgio Spa (the Parent holds 38.1927% and 57.5001% controlled by BRE) registered address: Genova, Via Ceccardi, 1 – share capital: 102,119,430 euro 10. Banque de Dépôts et de Gestion Sa (100% controlled) registered address: Avenue du Théâtre, 14 - Lausanne (Switzerland) – share capital: 10,000,000 Swiss francs 11. BDG Singapore Pte Ltd (100% controlled by Banque de Dépôts et de Gestion) registered address: 391B Orchard Road # 15-01 Ngee Ann City Tower B – Singapore – share capital: 5,600,000 Singapore dollars 12. UBI Banca International Sa (90.6031% controlled and Banco di Brescia holds 5.8519%, BPB 3.3723% and Banco di San Giorgio 0.1727%) registered address: 37/A, Avenue J.F. Kennedy, L – Luxembourg – share capital: 59,070,750 euro 13. UBI Trustee Sa (100% controlled by UBI Banca International) registered address: 37/A, Avenue J.F. Kennedy, L – Luxembourg – share capital: 250,000 euro 14. B@nca 24-7 Spa (100% controlled) operating headquarters: Bergamo, Via A. Stoppani, 15 – share capital: 316,800,000 euro 1 The share capital as at 31st December 2010 was 1,597,864,755 euro. See the section “Significant events that occurred during the year” for further information. 2 The percentage of control relates to the total share capital held. The Group does in fact possess 80.1054% of the ordinary shares, 26.4147% of the privileged shares and 59.127% of the savings shares. 74 15. Barberini Sa (100% controlled) registered address: Woluwe-Saint-Pierre, Avenue de Tervueren, 237 – Brussels (Belgium) – share capital: 3,000,000 euro3 16. Prestitalia Spa (100% controlled by B@nca 24-7) registered address: Roma, Via Ostiense, 131/L – share capital: 46,385,482 euro 17. Silf Società Italiana Leasing e Finanziamenti Spa (100% controlled) registered address: Cuneo, Via Roma, 13 – share capital: 2,000,000 euro 18. IW Bank Spa (65.0392% controlled and Centrobanca holds 23.496%) registered address: Milano, Via Cavriana, 20 – share capital: 18,404,795 euro 19. InvestNet International Spa (100% controlled by IW Bank) registered address: Milano, via Cavriana, 20 – share capital: 12,478,465 euro 20. UBI Banca Lombarda Private Investment Spa (100% controlled) registered address: Brescia, Via Cefalonia, 74 – share capital: 67,950,000 euro 21. Centrobanca Spa (94.2715% controlled and BPA holds 5.4712%) registered address: Milano, Corso Europe, 16 – share capital: 369,600,000 euro 22. Centrobanca Sviluppo Impresa SGR Spa (100% controlled by Centrobanca) registered address: Milano, Corso Europe, 16 – share capital: 2,000,000 euro 23. UBI Pramerica SGR Spa (65% controlled) operating headquarters: Milano, Via Monte di Pietà, 5 – share capital: 19,955,465 euro 24. UBI Management Company Sa (100% controlled by UBI Pramerica SGR) registered address: 37/A, Avenue J.F. Kennedy, L – Luxembourg – share capital: 125,000 euro 25. UBI Insurance Broker Srl (100% controlled) registered address: Bergamo, Via f.lli Calvi, 15 – share capital: 3,760,000 euro 26. UBI Leasing Spa (79.9962% controlled and BPA holds 18.9965%) registered address: Brescia, Via Cefalonia, 74 – share capital: 241,557,810 euro 27. Unione di Banche Italiane per il Factoring Spa - UBI Factor Spa (100% controlled) registered address: Milano, Via f.lli Gabba, 1/a – share capital: 36,115,820 euro 28. BPB Immobiliare Srl (100% controlled) registered address: Bergamo, Piazza Vittorio Veneto, 8 – share capital: 185,680,000 euro 29. Società Bresciana Immobiliare Mobiliare - S.B.I.M. Spa (100% controlled) registered address: Brescia, Via A. Moro, 13 – share capital: 35,000,000 euro 30. Società Lombarda Immobiliare Srl - SOLIMM (100% controlled) registered address: Brescia, Via Cefalonia, 74 – share capital: 100,000 euro 31. BPB Funding Llc (100% controlled) registered address: One Rodney Square, 10th floor, Tenth and King Streets, Wilmington, New Castle County, Delaware, USA – share capital: 1,000,000 euro 32. BPB Capital Trust (100% controlled by BPB Funding Llc) registered address: One Rodney Square, 10th floor, Tenth and King Streets, Wilmington, New Castle County, Delaware, USA – share capital: 1,000 euro 33. Banca Lombarda Preferred Capital Company Llc (100% controlled) registered address: 1209, Orange Street the Corp. Trust Center, Wilmington, New Castle County, Delaware, USA – share capital: 1,000 euro 34. Banca Lombarda Preferred Securities Trust (100% controlled) registered address: 1209, Orange Street the Corp. Trust Center, Wilmington, New Castle County, Delaware, USA – share capital: 1,000 euro 35. BPCI Funding Llc (100% controlled) registered address: One Rodney Square, 10th floor, Tenth and King Streets, Wilmington, New Castle County, Delaware, USA – share capital: 1,000,000 euro 3 UBI Banca also holds 92,784 financial instruments termed “parts bénéficiaires” issued by the company which do not form part of the share capital. 75 36. BPCI Capital Trust (100% controlled by BPCI Funding Llc) registered address: One Rodney Square, 10th floor, Tenth and King Streets, Wilmington, New Castle County, Delaware, USA – share capital: 1,000 euro 37. UBI Fiduciaria Spa (100% controlled) registered address: Brescia, Via Cefalonia, 744 – share capital: 1,898,000 euro 38. UBI Gestioni Fiduciarie Sim Spa (100% controlled by UBI Fiduciaria) registered address: Brescia, Via Cefalonia, 744 – share capital: 1,040,000 euro 39. Coralis Rent Srl (100% controlled) registered address: Milano, Via f.lli Gabba, 1 – share capital: 400,000 euro 40. UBI Sistemi e Servizi SCpA5 – Consortium Stock Company (70.8453% controlled and 2.9599% held by: Banca Popolare di Bergamo, Banco di Brescia, Banca Popolare Commercio e Industria, Banca Popolare di Ancona, Banca Carime and Banca Regionale Europea; 1.4799% held by: Banco di San Giorgio, Banca di Valle Camonica, UBI Banca Private Investment, UBI Pramerica SGR, Centrobanca and B@nca 24-7; 0.74% held by UBI Factor; 0.074% held by: IW Bank, UBI Insurance Broker, SILF and Prestitalia) registered address: Brescia, Via Cefalonia, 62 – share capital: 35,136,400 euro 41. UBI Finance Srl6 (60% controlled) registered address: Milano, Foro Bonaparte, 70 – share capital: 10,000 euro 42. UBI Finance CB 2 Srl (10% interest held) registered address: Milano, Foro Bonaparte, 70 – share capital: 10,000 euro 43. 44. 45. 46. 47. 48. 49. Albenza 3 Srl7 Orio Finance Nr. 3 Plc7 24-7 Finance Srl8 Lombarda Lease Finance 4 Srl9 UBI Finance 2 Srl10 UBI Finance 3 Srl11 UBI Lease Finance 5 Srl12 4 With effect from 1st January 2011, UBI Fiduciaria and UBI Gestioni Fiduciarie Sim transferred their registered addresses in Brescia from 70, via Cefalonia to 74, via Cefalonia in the new UBI Banca management centre. 5 The Group holds a controlling 98.52% interest in the share capital of UBI.S; the remaining 1.48% is held by UBI Assicurazioni. 6 A special purpose entity in accordance with Law No. 130/1999, this company, enrolled on the general list of intermediaries pursuant to Art. 106 of the consolidated banking act, was formed on 18th March 2008 to allow the Parent to implement a programme to issue covered bonds. 7 Special purpose entities formed in compliance with Law No. 130/1999 for the securitisations performed in 2001 and 2002 by the former BPB-CV Scrl (Albenza 3 Srl) and by BPU International Finance Plc Ireland, subsequently closed down – (Orio Finance Nr. 3 Plc). They were included in the consolidated financial statements because they are in reality controlled, since their assets and liabilities were originated by Group member companies. The consolidation only concerns those assets subject to securitisation and the relative liabilities issued. 8 A special purpose entity (formerly Lombarda Lease Finance 1 Srl) used in compliance with Law No. 130/1999 for the B@nca 24-7 securitisations performed in 2008. It was included in the consolidated financial statements because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 9 A special purpose entity formed in accordance with Law No. 130/1999 when a securitisation was performed in 2005 by SBS Leasing. It was included in the consolidated financial statements because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 10 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation performed in 2001 by Banco di Brescia and completed in the meantime. The company (formerly “Lombarda Mortgage Finance 1 Srl”) was used as an SPE (special purpose entity) for the securitisation of a portfolio of performing loans performed by Banco di Brescia at the beginning of 2009. It was included in the consolidated financial statements because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 11 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation performed by SBS Leasing in 2002 and completed in the meantime. The company (formerly Lombarda Lease Finance 2 Srl) was used as an SPE (special purpose entity) for the securitisation of a portfolio of performing loans performed by Banca Popolare di Bergamo at the end of 2010. It was included in the consolidated financial statements because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 12 A special purpose entity formed in compliance with Law No. 130/1999 and used as an SPE for the securitisation of performing loans by UBI Leasing in November 2008. It was included in the consolidated financial statements because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 76 Companies consolidated using the equity method (the investment is by the Parent where no other indication is given): 1. Aviva Vita Spa (50% controlled) registered address: Milan, Viale Abruzzi, 94 – share capital: 155,000,000 euro 2. Aviva Assicurazioni Vita Spa (formerly UBI Assicurazioni Vita Spa) (49.9999% interest held) registered address: Milano, Viale Abruzzi, 94 – share capital: 49,721,776 euro 3. Lombarda Vita Spa (40% interest held) registered address: Brescia, Corso Martiri della Libertà, 13 – share capital: 185,300,000 euro 4. UBI Assicurazioni Spa (49.9999% interest held) registered address: Milano, via Tolmezzo, 1513 – share capital: 32,812,000 euro 5. Polis Fondi SGRpA (19.6% interest held) registered address: Milano, Via Solferino, 7 – share capital: 5,200,000 euro 6. Lombarda China Fund Management Company (49% interest held) registered address: 47, Sin Mao Tower, 88 Century Boulevard, Pudong Area 200121, Shanghai (China) – share capital: 120,000,000 yuan/renminbi 7. SF Consulting Srl (35% interest held) operating headquarters: Mantova, Via P.F. Calvi, 40 – share capital: 93,600 euro 8. Sofipo Sa14 (30% interest held by Banque de Dépôts et de Gestion) registered address: Via Balestra, 22B - Lugano (Switzerland) – share capital: 2,000,000 Swiss francs 9. Arca SGR Spa (23.1240% interest held by the Parent and 3.5840% by BPA) registered address: Milano, Via M. Bianchi, 6 – share capital: 50,000,000 euro 10. S.P.F. Studio Progetti Finanziari Srl (25% interest held by BPA) registered address: Roma, Via National, 243 – share capital: 92,960 euro 11. Prisma Srl (20% interest held) registered address: Milano, Via S. Tecla, 5 – share capital: 120,000 euro 12. Siderfactor Spa – in liquidation (27% interest held by UBI Factor) registered address: Milano, Via f.lli Gabba, 1/A – share capital: 1,200,000 euro 13. Capital Money Spa (20.6711% interest held) registered address: Milano, Via Lausanne, 16 – share capital: 2,042,955 euro 14. BY YOU Spa (formerly Rete Mutui Italia Spa, 10% interest held )15 registered address: Milano, Corso Venezia, 37 – share capital: 650,000 euro 15. UFI Servizi Srl (23.1667% interest held by Prestitalia) registered address: Roma, Via G. Severano, 24 – share capital: 150,000 euro Changes in the consolidation scope No changes were made to the consolidation scope compared to 31st December 2010, except for those reported below. The descriptions of the changes are grouped into those for banks and those for other companies for which details of the rationalisation process and action taken to strengthen capital are given. Network banks: • Banca Popolare di Ancona Spa: UBI Banca made further purchases during the year from non controlling shareholders, for a total of 8,744 shares (a small fraction amounting to 13 In a meeting of 20th May the Board of Directors of UBI Assicurazioni Spa passed a resolution to transfer the registered address from 12 Piazzale Zavattari to 15 Via Tolmezzo (still in Milan) from 20th June 2011. 14 The company changed its name (from Sofipo Fiduciaire Sa to Sofipo Sa), effective from 30th May 2011 (date of publication by the Swiss Commercial Register). 15 This company, which has 100% control of By You Piemonte Srl – in liquidation, By You Liguria Srl – in liquidation, By You Mutui Srl (which controls Sintesi Mutuo Srl) and By You Adriatica Srl – in liquidation, is consolidated because UBI Banca holds 20% of the voting rights. 77 0.0357% of the share capital), which brought its controlling interest up from 92.8983% at the end of 2010 to 92.9340% as at 31st December 2011; • Banca Carime Spa: in the first three months of the year the Parent acquired 14,630 shares from non controlling shareholders which changed its control of the subsidiary to 92.8332% (92.8322% in December); • Banco di San Giorgio Spa: after 31st December 2010, UBI Banca continued with purchases from private individual shareholders and acquired a total of 1,203,424 shares during the year in this Liguria bank. In the meantime the bank was recapitalised, which resulted in the issue of 4,981,435 new shares on 12th October 2011. More specifically, on the basis of a specific authorisation from an extraordinary Shareholders’ Meeting held on 8th January 2010 and subsequent resolutions passed by the Board of Directors: in the period between 1st August and 16th September 2011, option rights and pre-emption rights were exercised on the increase in the share capital from 94,647,277.50 euro to 102,119,430.00 euro, which involved the issue of a maximum of 4,981,435 ordinary shares, with normal dividend entitlement and a par value of 1.50 euro per share, to be offered as an option right to shareholders at a ratio of three new ordinary shares for every 38 ordinary shares owned at a price of 4.00 euro per share (of which 2.50 euro as a share premium). A total of 4,783,365 new shares were subscribed by rights holders (96.02% of the total shares offered in the share issue), as follows: 2,856,015 shares subscribed by BRE, 1,885,383 by UBI Banca and 41,967 by non-controlling shareholders. The portion on which rights were not exercised (198,070 shares) were allotted as follows: 9,493 shares were applied for under pre-emption rights by non-controlling shareholders, while the remaining 188,577 shares went to the majority shareholders (74,986 to the Parent and 113,591 to Banca Regionale Europea). On completion of the operation, Banco di San Giorgio therefore had share capital of €102,119,430, composed of 68,079,620 shares. With account taken of the purchases made, control by the UBI Banca Group had risen to 95.6928%, of which 57.5001% held by BRE and 38.1927% by UBI Banca (as at 31st December 2010 the Group held 93.5271%, with 57.3332% held by BRE and 36.1939% by UBI Banca); On 14th November 2011, the creation of a single North West banking operation was announced through the merger of Banco di San Giorgio into Banca Regionale Europea planned for July 2012, with a view to Group simplification and local market focus. Other Banks: • IW Bank: as a result of transactions which occurred during the year, which led to the delisting of the Company, control by the Group rose from 78.77% at the end of 2010 (55.2740% held by UBI Banca and 23.4960% by Centrobanca) to 88.5352% as at 31st December 2011 (65.0392% held by the Parent and 23.4960% by Centrobanca). These stakes reported do not include the treasury shares held by IW Bank accounting for 1.1290% of the share capital, while Webstar holds the remaining 10.3358%. A summary of the main stages of the change is given below: - - 27th October 2010: after an interest of greater than 90% of the share capital with voting rights came to be held (a threshold which determines the obligation to purchase the remaining shares of the issuer), UBI Banca and Webstar (bound by a shareholders’ agreement) jointly announced, in compliance with Art. 50 of the Issuers’ Regulations (residual public tender offer), their intention not to restore the free float, but to comply with the obligation to purchase the floating shares; 16th February 2011: with Resolution No. 17669, the Consob (Italian securities market authority) set the share price at 1.988 euro per share for the purchase, in accordance with Art. 108, paragraph 2 of the Consolidated Finance Act, of the ordinary shares of IW Bank by the offerors; 78 - - - - - - 22nd February 2011: UBI Banca decided to pay an increase on the price set by the Consob, thereby bringing it up to 2.043 euro16 for each share offered for sale, if it came to hold at least 95% of the share capital; 15th March 2011: with Note No. 11019656 the Consob authorised the publication of the information document in relation to the operation for the obligation to purchase 7,189,039 ordinary shares of IW Bank (9.8767% of the share capital with voting rights and 9.7652% of the total share capital) in compliance with Art 108, paragraph 2 of the Consolidated Finance Act; 21st March 2011: start of the period for the presentation of applications to sell on the Mercato Telematico Azionario (electronic stock exchange); 7th April 2011: UBI Banca disclosed that applications to sell had been received representing 4,007,842 ordinary shares of IW Bank, equal to 5.5062% of the share capital with voting rights and 5.4440% of the total share capital and that as a consequence, the threshold of 95% of the share capital (calculated net of treasury shares held in portfolio) had been exceeded. The conditions set by law had therefore been met for compliance with the purchase obligation pursuant to Art. 108, paragraph 1 of the Consolidated Finance Act, and for the exercise of the right to purchase the remaining shares in circulation, pursuant to Art. 111 of the Consolidated Finance Act, by means of a joint operation agreed with the Consob and Borsa Italiana; 8th April 2011: end of the period for the presentation of applications to sell. The UBI Banca Group disclosed that it held (with account taken of the IW Bank shares held by Webstar S.A. and the treasury shares held in portfolio by IW Bank itself) a total of 70,398,647 ordinary shares, accounting for 96.7174% of the share capital with voting rights (95.6254% of the total share capital); 12th April 2011: UBI Banca published the results of the purchase obligation operation in compliance with articles 108, paragraph 2, and 109 of the Consolidated Finance Act and details of the manner of compliance with the obligation and of the right to purchase in accordance with articles 108 and 111 of the Consolidated Finance Act. In the period from 21st March until 8th April, 4,799,674 shares of IW Bank were offered under the purchase obligation operation, accounting for approximately 67% of the total remaining shares subject to the operation and for 6.5940% of the share capital with voting rights (6.5196% of the total share capital), for a total price of €9.8 million (date of payment: 13th April). After the end of the period for the presentation of applications to sell, the joint operation for the purchase of the remaining 2,389,365 ordinary shares of IW Bank still in circulation (3.2826% of the share capital with voting rights and 3.2456% of the total share capital) commenced. These were purchased at a price of 2.043 euro per share for a total of €4.9 million (date of execution of the operation and payment: 19th April); 19th April 2011: after the suspension of the IW Bank share from trading in the sessions of 14th, 15th and 18th April, Borsa Italiana removed the share from the listing on the Mercato Telematico Azionario (electronic stock exchange) with effect from that date; • Centrobanca Spa: in November, at the same time as the announcement of the merger of this corporate bank into UBI Banca (planned for the first half of 2013 and designed to streamline operations), the Parent proceeded to purchase shares held by non-controlling shareholders (mainly banking counterparties). During the year the Parent purchased a total of 6,349,434 shares (including the 24,322 shares acquired on 21st April 2011) for consideration of approximately €11 million. The investment held by UBI Banca therefore rose from 92.3818% at the end of 2010 to 94.2715% as at 31st December 2011, while Group control increased at the same time over twelve months from 97.8530% to 99.7427%. Subsequent to 31st December 2011, a further 139,565 shares were purchased for consideration of approximately €243 thousand, which brought the percentage control of the Group to 99.7842%. • B@nca 24-7 Spa: as part of Group reorganisation activity, procedures were started to be begin the merger of this bank into UBI Banca, as announced on 14th November 2011 when it was approved by the Management Board. It is forecast to be completed in 2012. 16 The highest official market price of the IW Bank share in the preceding 12 months. 79 Other companies: • Lombarda Lease Finance 3: following the early close down of the securitisation transaction in the summer of 2010 and the redemption of all the notes issued, the underlying business was removed from the consolidation on 1st January 2011 (although the company remains operational). Only the items in the income statement relating to the assets and liabilities of the company recognised during the preceding twelve months and no longer present at year end, still appeared in the accounts for the year ended 31st December 2010; • UBI Sistemi e Servizi Scpa: on 13th January 2011, UBI Pramerica SGR sold 50,000 shares of UBI.S to IW Bank for €38 thousand euro. This allowed this internet bank to become a shareholder of the consortium company with 0.074%, while the interest held by UBI Pramerica SGR fell from 1.5539% at the end of 2010 to 1.4799%; On 30th November 2011, UBI Banca transferred 50,000 UBI.S shares to Prestitalia for €38 thousand. The Parent’s investment therefore fell from 70.9193% at the end of 2010 to 70.8453%, thereby allowing Prestitalia to acquire a 0.074% stake; • Polis Fondi SGRpA: on 14th February 2011 an agreement was completed, signed on 28th July 2010 by the principal shareholders: Sopaf on the one hand (which held 49% of the share capital) and UBI Banca together with Banco Popolare, BPER, Banca Popolare di Sondrio and Banca Popolare di Vicenza on the other, five “popular” bank shareholders who together also held 49%. The purpose of the agreement was to acquire the investment held by Sopaf for consideration of € 8 million. Following the issue of the authorisation by the Bank of Italy (on 18th January 2011), the planned transactions commenced. In this context UBI Banca acquired a further 9.8% of the share capital (50,960 shares) for payment of €1.6 million. The interest held by UBI Banca therefore rose from 9.8% at the end of 2010 to 19.6% as at 31st December 2011. The five “popular” banks and Unione Fiduciaria (original shareholder, with a 2% stake) then signed a new five year shareholders’ agreement, the contents of which determined a change in the method of consolidation. Since it was no longer able by itself to influence decisions on significant matters in terms of joint control, UBI Banca no longer qualified as possessing control, although it does meet the conditions for significant influence. This meant that it was no longer consolidated with the proportionate method (applied as at 31st December 2010) and is now an equity-accounted investee; • Sintonia Finance Srl: the multi-originator securitisation performed on 23rd December 2002 – which saw the involvement of Centrobanca and another bank outside the Group in this securitisation of performing loans, mainly residential mortgages granted to private individuals with the remaining commercial mortgages granted to companies resident in Italy – was redeemed in advance on 25th November 2011 (with the close down of the entity on the same date). The securitisation was initially on loans of €324 million transferred (of which €166.3 million relating to Centrobanca), funded through the issue of class A (€302.8 million nominal) and Class B (€21 million) asset backed securities together with a junior Class C tranche (€17.4 million, of which €8 million repurchased by Centrobanca). On conclusion of the operation, loans remained of approximately €40 million, of which €19.3 million related to Centrobanca, against senior securities (Class A and Class B), subject to early redemption for €22 million and €15.6 million respectively; • UBI Finance CB 2 Srl: the company was formed on 20th December 2011 for the sole purpose of the issue of covered bonds pursuant to Art.7 bis of Law No. 130 of 30th April 1999. The company was formed in view of the commencement of a second programme of covered bond issues on commercial non residential mortgages scheduled for April 2012. Ten percent of the share capital (€10,000) is held by UBI Banca and 90% by the Dutch registered company Stichting Viola. Other companies: organisational simplification • Prestitalia Spa: on 10th January 2011, Barberini Sa sold its entire investment held in Prestitalia (53,378 shares accounting for 100% of the share capital) to B@nca 24-7 for a 80 total price of €77 million. Consequently, as at 31st December 2011 this bank, which specialises in consumer credit, possessed full and direct control of the company. On 24th March 2011, in connection with the agreements to purchase the entire share capital of Barberini Sa and Prestitalia Spa, UBI Banca paid Medinvest International and Pharos Sa the last instalment of the amount relating to Barberini: €1.6 million, which was subject to determined conditions concerning the agency network of Presitalia being met, and €74 thousand as the final balance on the purchase of 92,784 financial instruments termed "parts bénéficiaires"; • UBI Trust Company Ltd: on 10th February 2011 the local monetary authority – Jersey Financial Services Commission Companies Registry – announced that it had removed UBI Trust Company from the companies register. Following the geographical repositioning of trustee services to Luxembourg, the company was closed down with effect from 30th June 2010 (99.9980% controlled by UBI Banca International); • Invesclub Srl: on 2nd March 2011, a Shareholders’ Meeting of the company passed a resolution to wind it up by placing it into voluntary liquidation in accordance with Art. 2484 of the Italian Civil Code. This was in consideration of its non strategic importance both for its parent, IW Bank, and for the Group. This company, which was excluded from the Group consolidation at the end of 2011, was removed from the register of companies on 12th March 2012; • Tex Factor Srl – in liquidation: on 31st March 2011 the voluntary liquidation of the company was completed with its removal from the consolidation and, on 13th April 2011, also from the company register; • InvestNet International Spa: on 14th April 2011 a shareholders’ meeting of InvestNet International Sa – a Luxembourg registered company – passed a resolution to transfer the registered address of the company to Italy (to Milan, at 20 Via Cavriana), with the consequent transformation of the company into an Italian registered joint stock company named InvestNet International Spa. It was enrolled in the companies register on 19th September2011. The company will be merged into its Parent, IW Bank, which wholly owns it, as part of the process to simplify Group structure. The Boards of Directors of InvestNet International and of the merging bank approved the relative merger project on 16th December 2011. • BY YOU Spa: on 27th April 2011, UBI Banca, a shareholder with a 40% stake, sold 30% of the share capital of BY YOU (accounting for 195,000 shares) to Bluestar, Linea Mutui and Promozione Mutui for a price of €5 million to be paid at a later date, except for a sum of €195 thousand paid immediately in cash. As part of that sale, the shareholders also signed a five year shareholders agreement by which reciprocal put and call options are held on the remaining 10% stake held by UBI Banca in BY YOU. As a result of the sale, the necessary conditions for joint control of the company (and its subsidiaries) ceased to exist as at 31st December 2011, although it continues to be included within the consolidation using the equity method. This is because of the existence of a pledge on shares representing a further 10% of the share capital with voting rights for UBI Banca, which therefore holds 20% of the voting rights; • Ge.Se.Ri. – Gestione Servizi di Riscossione Spa in liquidation: on 24th May 2011 the Management Board of UBI Banca approved a project for the merger of the company into its parent which wholly owns it, Banca Regionale Europea, to be performed by merger on an acquisition basis and on the basis of the simplified procedure pursuant to article 2505 of the Italian Civil Code. The transaction – authorised by the Bank of Italy on 20th September 2011 – became effective on 29th December 2011 and is effective for accounting and tax purposes from 1st January 2011. Consequently Ge.Se.Ri. has no longer been included in the consolidation since the end of December; • Investnet Italy Srl: on 17th June 2011 the merger of the company into its parent according to the simplified procedure pursuant to Art. 2505 of the Italian Civil Code was approved by a shareholders’ meeting of Investnet Italia and by the Board of Directors of IW Bank, which wholly owned the company. The operation, authorised by the Bank of Italy on the preceding 30th May, forms part of a broader process to simplify and streamline the organisational structure of Group. The merger took effect from 1st August 2011, while it is effective for 81 accounting and tax purposes from 1st January 2011. The company has not been included in the consolidation scope since 30th September 2011; • FinanzAttiva Servizi Srl: on 26th July 2011, the Management Board of UBI Banca decided (in accordance with Art. 2501 ter of the Italian Civil Code) a project for the merger of FinanzAttiva Servizi (approved by the Board of Directors of the latter on 29th July), by means of the simplified procedure pursuant to Art. 2505 of the Italian Civil Code, since the company is wholly owned by the Parent. The transaction, authorised by the Bank of Italy on 19th October 2011, is effective from 30th December 2011 (and for accounting and tax purposes from 1st January 2011). The company has no longer been included in the consolidation since the end of December; • Siderfactor Spa – in liquidation: on 12th December 2011 a shareholders’ meeting voted for the early winding up of the company and to put it into voluntary liquidation, with effect from the date on which the decision was registered (11th January 2012). The company performed all transactions designed to facilitate the receipt and payment of receivables owed to and by companies in the Marcegaglia Spa Group. As a consequence of changes in the regulatory and operating environment, the viability of these operations and the ability to generate future profits was prejudiced as shown by the findings of analyses conducted in 2011. It was therefore decided to close it down. Other companies: share capital increases • BDG Singapore Pte Ltd: following the start-up of operations (asset management), on 19th January 2011 the parent company, Banque de Dépôts et de Gestion, made a payment of 5,275,000 Singapore dollars to strengthen the capital of the company, in accordance with a shareholders’ resolution of 10th December 2010. The share capital therefore rose to 5,600,000 Singapore dollars (from 325,000 Singapore dollars before); • Aviva Vita Spa: on 23rd February 2011, UBI Banca (which holds 50% of the company) paid up its part (€5 million) of the first tranche of a share capital increase for a total of €20 million, approved by a shareholders’ meeting on that same date. This increase was designed to provide Aviva Vita with adequate resources for its solvency margin, now and in the future, in view of the growth in its premium income and the redemption of a subordinated loan. On 26th July 2011, the Board of Directors of Aviva Vita decided to ask the shareholders to pay a second tranche of the share capital increase (a total of €10 million, including €5 million from UBI Banca, which made the payment on the following 29th July). On the following 15th December 2011, a Shareholders’ Meeting of the company passed a resolution for a further increase in the share capital for a total of €20 million, designed to reconstitute a more adequate solvency margin, which had been eroded by price fluctuations involving government securities held in portfolio. UBI Banca paid its share of the increase on that same date (€10 million). As a result of the operations performed during the year, the share capital rose from €115,000,000 at the end of 2010 to €155,000,000 as at 31st December 2011; • UBI Leasing Spa: on 6th April 2011 the shareholders of the company passed a resolution to increase the equity of the company by €60 million. The operation gave rise to an increase in the share capital of €45 million from the previous €196,557,810 to the new amount of €241,557,810, through the issue of 7.5 million new ordinary shares, with a par value of € 6 each, at a price of €8 per share. The difference of €15 million between the par value of the share and the issue price – the latter designed to take account of the increase in the capital value of the company – was recognised in the share premium reserve. The increase in own funds – a consequence of changes in the supervisory context, the need to maintain adequate levels of capitalisation and to fund future investments and comply with regulatory capital ratios – was supported on a pro rata basis by UBI Banca and Banca Popolare di Ancona, with no change in the respective percentage interests held. 82 Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules Reclassified consolidated balance sheet 31.12.2011 31.12.2010 Changes % changes Figures in thousands of euro ASSETS 10. Cash and cash equivalents 625,835 609,040 16,795 2.8% 20. Financial assets held for trading 30. Financial assets at fair value 2,872,417 2,732,751 139,666 5.1% 126,174 147,286 -21,112 -14.3% 40. Available-for-sale financial assets 8,039,709 10,252,619 -2,212,910 -21.6% 60. Loans to banks 6,184,000 70. Loans to customers 99,689,770 3,120,352 3,063,648 98.2% 101,814,829 -2,125,059 80. Hedging derivatives 1,090,498 -2.1% 591,127 499,371 84.5% 90. Fair value change in hedged financial assets (+/-) 704,869 429,073 275,796 64.3% 100. Equity investments 120. Property, equipment and investment property 130. Intangible assets 2,987,669 5,475,385 -2,487,716 -45.4% of which: goodwill 2,538,668 4,416,660 -1,877,992 -42.5% 140. Tax assets 2,817,870 1,723,231 1,094,639 63.5% 150. Non-current assets and disposal groups held for sale 22,020 8,429 13,591 161.2% 160. Other assets 2,244,343 1,172,889 1,071,454 91.4% Total assets 129,803,692 130,558,569 -754,877 -0.6% 352,983 368,894 -15,911 -4.3% 2,045,535 2,112,664 -67,129 -3.2% LIABILITIES AND EQUITY 10. Due to banks 9,772,281 5,383,977 4,388,304 81.5% 20. Due to customers 54,431,291 58,666,157 -4,234,866 -7.2% 30. Securities issued 48,377,363 48,093,888 283,475 0.6% 40. Financial liabilities held for trading 1,063,673 954,423 109,250 11.4% 60. Hedging derivatives 1,739,685 1,228,056 511,629 41.7% 80. Tax liabilities 702,026 993,389 -291,363 -29.3% 90. Liabilities associated with activities under disposal 100. Other liabilities - - - 3,139,616 2,600,165 539,451 20.7% 110. 120. Post-employment benefits 394,025 393,163 862 0.2% Provisions for risks and charges: 345,785 303,572 42,213 13.9% 76,460 68,082 8,378 12.3% 269,325 235,490 33,835 14.4% 10,780,511 10,806,898 -26,387 -0.2% 898,924 962,760 -63,836 -6.6% -1,841,488 172,121 -2,013,609 n.s. 129,803,692 130,558,569 -754,877 -0.6% a) pension and similar obligations b) other provisions 140.+170. +180.+190.+ 200. Share capital, share premiums, reserves, fair value reserves and treasury shares 210. Non-controlling interests 220. Profit (loss) for the year Total liabilities and equity 83 - Reclassified consolidated quarterly balance sheet 31.12.2011 30.9.2011 30.6.2011 31.3.2011 31.12.2010 30.9.2010 30.6.2010 31.3.2010 Figures in thousands of euro ASSETS 10. Cash and cash equivalents 20. Financial assets held for trading 625,835 568,540 595,685 569,052 609,040 586,075 632,183 637,113 2,872,417 2,250,881 1,093,974 1,613,809 2,732,751 2,836,561 2,640,330 1,990,806 30. Financial assets at fair value 40. Available-for-sale financial assets 60. Loans to banks 6,184,000 5,314,336 4,384,636 4,510,008 3,120,352 3,427,795 3,290,637 2,996,834 70. Loans to customers 99,689,770 102,765,316 102,774,467 102,702,444 101,814,829 101,195,034 100,157,746 97,805,640 80. Hedging derivatives 1,090,498 995,341 413,389 351,398 591,127 816,673 916,055 743,946 90. Fair value change in hedged financial assets (+/-) 704,869 675,977 254,474 194,086 429,073 796,414 621,964 450,741 100. Equity investments 120. Property, equipment and investment property 130. Intangible assets 2,987,669 5,268,352 5,287,195 5,452,328 5,475,385 5,478,993 5,475,662 5,497,679 of which: goodwill 2,538,668 4,286,210 4,286,210 4,416,659 4,416,660 4,413,791 4,397,766 4,401,911 140. Tax assets 2,817,870 2,604,967 2,312,956 1,704,774 1,723,231 1,379,250 1,362,428 1,616,739 150. Non-current assets and disposal groups held for sale 22,020 6,874 7,041 6,023 8,429 48,256 40,285 134,769 160. Other assets 2,244,343 2,272,277 2,476,298 2,442,098 1,172,889 1,622,444 1,801,061 2,351,971 Total assets 129,803,692 133,628,369 132,750,897 132,737,610 130,558,569 131,744,211 132,099,415 124,016,391 126,174 130,494 468,038 474,114 147,286 153,951 155,143 159,658 8,039,709 8,365,381 10,223,610 10,252,511 10,252,619 10,954,989 12,501,312 7,123,883 352,983 351,463 381,376 378,196 368,894 375,800 406,789 419,289 2,045,535 2,058,170 2,077,758 2,086,769 2,112,664 2,071,976 2,097,820 2,087,323 LIABILITIES AND EQUITY 10. Due to banks 9,772,281 8,611,714 4,966,574 7,332,517 5,383,977 7,126,257 9,252,062 4,612,141 20. Due to customers 54,431,291 56,392,736 56,199,737 56,144,592 58,666,157 57,412,547 58,534,315 52,754,329 30. Securities issued 48,377,363 47,502,685 49,964,140 48,678,875 48,093,888 46,463,566 44,828,119 45,670,177 40. Financial liabilities held for trading 1,063,673 654,949 844,259 1,040,163 954,423 978,064 896,016 948,995 60. Hedging derivatives 1,739,685 1,569,117 953,439 1,020,994 1,228,056 1,827,144 1,560,152 1,130,958 80. Tax liabilities 702,026 1,389,753 1,309,724 1,083,134 993,389 908,091 814,057 1,277,497 90. Liabilities associated with activities under disposal - 827 987 - - - - 803,894 100. Other liabilities 3,139,616 4,554,208 4,778,011 4,606,189 2,600,165 4,288,484 3,697,804 3,859,410 110. Post-employment benefits 394,025 389,096 383,467 382,333 393,163 402,921 405,118 414,667 120. Provisions for risks and charges: 345,785 326,203 335,057 321,912 303,572 295,747 271,353 277,233 76,460 65,806 67,022 67,317 68,082 69,560 70,464 70,982 269,325 260,397 268,035 254,595 235,490 226,187 200,889 206,251 10,780,511 11,105,404 11,821,241 11,088,990 10,806,898 10,886,557 10,867,923 11,351,150 898,924 949,008 942,551 973,302 962,760 957,099 870,422 877,815 -1,841,488 182,669 251,710 64,609 172,121 197,734 102,074 38,125 129,803,692 133,628,369 132,750,897 132,737,610 130,558,569 131,744,211 132,099,415 124,016,391 a) pension and similar obligations b) other provisions 140.+170.+ 180.+190.+ 200. Share capital, share premiums, reserves, fair value reserves and treasury shares 210. Non-controlling interests 220. Profit for the period/year Total liabilities and equity 84 Reclassified consolidated income statement Figures in thousands of euro 10.-20. 70. 80.+90.+ 100.+110. 220. 4th Quarter 2010 D 2010 Changes % changes A B A-B A/B Changes % changes C-D C/D (1.1%) (18.3%) 544,614 (12,441) 548,555 (14,598) (3,941) (2,157) Net interest income of which: effects of the purchase price allocation 2,119,915 (49,931) 2,142,526 (61,141) (22,611) (11,210) Net interest income excluding the effects of the PPA 2,169,846 2,203,667 (33,821) (1.5%) 557,055 563,153 (6,098) (1.1%) 19,997 24,099 (4,102) (17.0%) 89 3,531 (3,442) (97.5%) 9,947 17,613 (7,666) (43.5%) (3,171) (1,867) 1,304 69.8% 1,193,708 11,728 1,185,297 15,384 8,411 (3,656) 0.7% (23.8%) 315,142 11,728 313,767 15,384 1,375 (3,656) 0.4% (23.8%) 7,329 34,044 (26,715) (78.5%) 23,999 20,573 3,426 16.7% 87,443 92,482 (5,039) (5.4%) 23,653 25,893 (2,240) (8.7%) Dividends and similar income Profits (losses) of equity-accounted investees 40.-50. 4th Quarter 2011 C 2011 Net commission income of which performance fees Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value Other net operating income Operating income (0.7%) (14.8%) 3,438,339 3,496,061 (57,722) (1.7%) 904,326 910,452 (6,126) (0.7%) 3,488,270 (1,423,196) 3,557,202 (1,451,584) (68,932) (28,388) (1.9%) (2.0%) 916,767 (350,339) 925,050 (344,469) (8,283) 5,870 (0.9%) 1.7% 180.a Operating income excluding the effects of the PPA Personnel expense 180.b Other administrative expenses (717,988) (769,744) (51,756) (6.7%) (195,751) (201,335) (5,584) (2.8%) Net impairment losses on property, equipment and investment property and intangible assets of which: effects of the purchase price allocation (248,442) (69,823) (247,236) (74,889) 1,206 (5,066) 0.5% (6.8%) (66,574) (17,455) (63,996) (18,722) 2,578 (1,267) 4.0% (6.8%) 8.5% 200.+210. excluding the effects of the PPA 130.a 130.b+c+d 190. 240.+270. (178,619) (172,347) 6,272 3.6% (49,119) (45,274) 3,845 Operating expenses (2,389,626) (2,468,564) (78,938) (3.2%) (612,664) (609,800) 2,864 Operating expenses excluding the effects of the PPA (2,319,803) (2,393,675) (73,872) (3.1%) (595,209) (591,078) 4,131 Net operating income 1,048,713 1,027,497 21,216 291,662 300,652 (8,990) (3.0%) Net operating income excluding the effects of the PPA 1,168,467 1,163,527 4,940 0.4% 321,558 333,972 (12,414) (3.7%) Net impairment losses on loans (607,078) (706,932) (99,854) (14.1%) (208,413) (251,217) (42,804) (17.0%) Net impairment losses on other assets and liabilities (135,143) (49,721) 85,422 171.8% 3,694 (31,529) 35,223 n.s. (31,595) (27,209) 4,386 16.1% (11,812) (15,204) (3,392) (22.3%) (54.5%) Net provisions for risks and charges 2.1% 0.5% 0.7% Profits from disposal of equity investments 7,119 95,872 (88,753) (92.6%) 5,616 12,346 (6,730) Pre-tax profit from continuing operations 282,016 339,507 (57,491) (16.9%) 80,747 15,048 65,699 Pre-tax profit from continuing operations excluding the effects of the PPA 401,770 475,537 (73,767) (15.5%) 110,643 48,368 62,275 128.8% 95,942 39,423 (231,980) 43,770 327,922 (4,347) n.s. (9.9%) (48,585) 9,842 (34,693) 10,720 13,892 (878) 40.0% (8.2%) 436.6% 290. Taxes on income for the year/period from continuing operations of which: effects of the purchase price allocation 310. Post-tax profit (loss) from discontinued operations 248 83,368 (83,120) (99.7%) 226 (1) 227 n.s. 330. Profit for the year/period attributable to non-controlling interests of which: effects of the purchase price allocation (28,833) 8,687 (13,602) 10,034 15,231 (1,347) 112.0% (13.4%) (9,477) 2,132 (5,967) 2,503 3,510 (371) 58.8% (14.8%) Profit (loss) for the year/period attrib utab le to the shareholders of the Parent b efore impairment losses on goodwill and finite useful life intangib le assets excluding the effects of the PPA 421,017 259,519 161,498 62.2% 40,833 (5,516) 46,349 n.s. Profit (loss) for the period/year attributable to the shareholders of the Parent before impairment losses on goodwill and finite useful life intangible assets 349,373 177,293 172,080 22,911 (25,613) 48,524 n.s. 210,+260, 340. 97.1% Impairment losses on goodwill and finite useful life intangible assets net of taxes and non controlling interests (2,190,861) (5,172) 2,185,689 n.s. (2,047,068) - (2,047,068) n.s. Profit (loss) for the year/period attributable to the shareholders of the Parent (1,841,488) 172,121 (2,013,609) n.s. (2,024,157) (25,613) 1,998,544 n.s. (71,644) (82,226) (10,582) (12.9%) (17,922) (20,097) (2,175) (10.8%) Total impact of the purchase price allocation on the income statement 85 Reclassified consolidated quarterly income statements 2011 Figures in thousands of euro 10.-20. 70. Net interest income 220. 2010 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter 544,614 534,185 513,579 527,537 548,555 543,197 517,441 533,333 (12,441) (11,636) (12,018) (13,836) (14,598) (14,060) (15,934) (16,549) Net interest income excluding the effects of the PPA 557,055 545,821 525,597 541,373 563,153 557,257 533,375 549,882 89 1,243 16,555 2,110 3,531 2,331 16,862 1,375 (3,171) 3,496 4,953 4,669 (1,867) 8,414 6,043 5,023 315,142 291,989 294,641 291,936 313,767 263,973 313,929 293,628 - 15,384 - - (4,922) Dividends and similar income Net commission income of which performance fees 80.+90.+ 100.+110. 3rd Quarter of which: effects of the purchase price allocation Profits (losses) of equity-accounted investees 40.-50. 4th Quarter 11,728 - - Net income (loss) from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value 23,999 (23,891) (7,391) 14,612 20,573 19,357 (964) Other net operating income 23,653 20,874 21,263 21,653 25,893 25,327 17,170 24,092 904,326 827,896 843,600 862,517 910,452 862,599 870,481 852,529 Operating income 916,767 839,532 855,618 876,353 925,050 876,659 886,415 869,078 180.a Operating income excluding the effects of the PPA Personnel expense (350,339) (334,913) (373,217) (364,727) (344,469) (359,587) (376,496) (371,032) 180.b Other administrative expenses (184,835) 200.+210. 130.a 130.b+c+d 190. 240.+270. 290. (195,751) (165,947) (185,209) (171,081) (201,335) (183,844) (199,730) Net impairment losses on property, equipment and investment property and intangible assets (66,574) (60,365) (61,779) (59,724) (63,996) (60,425) (61,729) (61,086) of which: effects of the purchase price allocation Net impairment losses on property, equipment and investment property and intangib le assets excluding the effects of the PPA (17,455) (17,456) (17,456) (17,456) (18,722) (18,723) (18,722) (18,722) (49,119) (42,909) (44,323) (42,268) (45,274) (41,702) (43,007) (42,364) Operating expenses (612,664) (561,225) (620,205) (595,532) (609,800) (603,856) (637,955) (616,953) Operating expenses excluding the effects of the PPA (598,231) (595,209) (543,769) (602,749) (578,076) (591,078) (585,133) (619,233) Net operating income 291,662 266,671 223,395 266,985 300,652 258,743 232,526 235,576 Net operating income excluding the effects of the PPA 321,558 295,763 252,869 298,277 333,972 291,526 267,182 270,847 (208,413) (135,143) (158,148) (105,374) (251,217) (134,011) (189,845) (131,859) 3,694 (119,245) (17,959) (1,633) (31,529) (147) (18,660) 615 (11,812) (5,228) (4,136) (10,419) (15,204) (5,383) (4,407) (2,215) Net impairment losses on loans Net impairment losses on other assets and liabilities Net provisions for risks and charges Profits from disposal of equity investments 5,616 170 1,152 181 12,346 80,498 2,936 92 Pre-tax profit from continuing operations 80,747 7,225 44,304 149,740 15,048 199,700 22,550 102,209 Pre-tax profit from continuing operations excluding the effects of the PPA 110,643 36,317 73,778 181,032 48,368 232,483 57,206 137,480 Taxes on income for the period from continuing operations (48,585) (70,191) 291,636 (76,918) (34,693) (103,144) (34,285) (59,858) 9,842 9,575 9,936 10,070 10,720 10,545 11,153 11,352 226 22 - - (1) 12 83,035 322 (9,477) (6,097) (5,046) (8,213) (5,967) (908) (2,179) (4,548) of which: effects of the purchase price allocation 310. Post-tax profit (loss) from discontinued operations 330. Profit for the period attributable to non-controlling interests of which: effects of the purchase price allocation 210,+260, 340. 2,132 2,114 2,139 2,302 2,503 2,395 2,622 2,514 Profit (loss) for the period attrib utab le to the shareholders of the Parent b efore impairment losses on goodwill and finite useful life intangib le assets excluding the effects of the PPA 40,833 (51,638) 348,293 83,529 (5,516) 115,503 90,002 59,530 Profit (loss) for the period/year attributable to the shareholders of the Parent before impairment losses on goodwill and finite useful life intangible assets 22,911 (69,041) 330,894 64,609 (25,613) 95,660 69,121 38,125 Impairment losses on goodwill and finite useful life intangible assets net of taxes and non controlling interests (2,047,068) - (143,793) - - - (5,172) - Profit (loss) for the period attributable to the shareholders of the Parent (2,024,157) (69,041) 187,101 64,609 (25,613) 95,660 63,949 38,125 (17,922) (17,403) (17,399) (18,920) (20,097) (19,843) (20,881) (21,405) Total impact of the purchase price allocation on the income statement 86 Reclassified consolidated income statement net of the most significant non-recurring items non-recurring items 2011 Figures in thousands of euro Net interest income (including the effects of PPA) Dividends and similar income Profits of equity-accounted investees Net commission income of which performance fees Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value Other net operating income Operating income (including the effects of PPA) Personnel expense Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets (including the effects of PPA) Impairment losses on available-forImpairment sale equity losses on securities goodwill and Intesa on finite useful life intangible Sanpaolo, A2A and Siteba assets and on OICR units (AFS) non-recurring items UBI Banca tax realignment in 2011 Impact of IRAP accordance with adjustment for Write-off of net of nonDiscontinuation Law No. recurring deferred tax Release of B@nca 24-7 of the UBI 111/2011 and items provisions IT system excess Leasing agent write off of recognised as provisions held for deferred income network A at 31st disposal tax December 2010 assets/deferred IRAP tax assets 2010 Impairment losses on available-forContribution sale equity of depository securities banking Intesa operations Sanpaolo, A2A and TLcom fund (AFS) Net impairment losses on goodwill of Gestioni Lombarda (Switzerland) Leaving incentives Partial Disposal disposal of BDG partial of the interest held in branches Lombarda Vita Tax effect of branch switching operations Disposal of Write-off property in of IT via Solferino, systems Milan 2010 net of nonrecurring items Changes % changes B A-B A/B 2,119,915 2,119,915 2,142,526 2,142,526 (22,611) (1.1%) 19,997 19,997 24,099 24,099 (4,102) (17.0%) (43.5%) 9,947 9,947 17,613 17,613 (7,666) 1,193,708 1,193,708 1,185,297 1,185,297 8,411 0.7% 11,728 11,728 15,384 15,384 (3,656) (23.8%) 35,418 (28,089) (79.3%) 91,525 (737) (0.8%) 3,496,478 (54,794) (1.6%) (1,418,351) 32,777 2.3% (769,744) (51,756) (6.7%) 7,329 87,443 3,438,339 3,345 - - - - 3,345 (1,423,196) - - (27,932) (717,988) 34,044 92,482 3,441,684 3,496,061 (1,451,128) (1,451,584) (717,988) (769,744) 1,374 (957) - (957) - - - - 1,374 - - 33,233 3,473 (244,969) (247,236) (242,781) 2,188 0.9% (2,389,626) - - - - - (27,932) 3,473 (2,414,085) (2,468,564) - - - 33,233 - - - 4,455 - (2,430,876) (16,791) (0.7%) Net operating income (including the effects of PPA) 1,048,713 - - - - 3,345 (27,932) 3,473 1,027,599 1,027,497 - (957) - 33,233 - - 1,374 4,455 - 1,065,602 (38,003) (3.6%) Net impairment losses on loans (607,078) (607,078) (706,932) (706,932) (99,854) (14.1%) Net impairment losses on other assets and liabilities (135,143) 12.5% Operating expenses (including the effects of PPA) Net provisions for risks and charges (248,442) 7,329 90,788 Profits from disposal of equity investments 7,119 Pre-tax profit from continuing operations (including the effects of PPA) 282,016 Taxes on income for the year from continuing operations Post-tax profit (loss) from discontinued operations Profit for the period attributable to minority interests Profit for the year attributable to the shareholders of the Parent before impairment losses on goodwill and finite useful life intangible assets 125,453 (31,595) 2,363 - 95,942 (9,690) (49,721) (29,232) (27,209) 7,119 95,872 - - 5,708 (27,932) 3,473 388,718 339,507 41,111 (957) (2,292) (352,841) 6,267 (1,407) 7,681 (1,125) (247,775) (231,980) (609) 263 248 (925) 349,373 - (2,190,861) 2,190,861 Profit (loss) for the year attributable to the Parent (1,841,488) 2,190,861 41,111 125,453 (28,833) Impairment losses on goodwill and finite useful life intangible assets net of taxes and non controlling interests 4,455 123,161 123,161 (352,841) (352,841) 5,342 5,342 129 4,301 4,301 (20,122) (20,122) 2,348 2,348 248 83,368 (83,356) (29,629) (13,602) 173 111,562 177,293 - (5,172) 111,562 172,121 40,502 (83,877) - - (81,095) (6,596) (5,442) (83,877) 4,145 1,080 2,023 7.4% 2,739 4,380 159.9% 33,233 - (81,095) (5,222) 4,455 (5,442) 325,590 63,128 19.4% (9,139) 18,294 20,201 1,566 (1,444) 1,759 (201,089) 46,686 23.2% (1,711) (2,951) 22,383 15,343 (279) (60,894) (3,656) 2,732 (3,683) 4,145 40,502 (8,610) (27,209) 22,383 15,343 (60,894) (3,656) 2,732 (3,683) 12 236 n.s. (18,370) 11,259 61.3% 106,143 5,419 5.1% (1,027) 1,027 - 105,116 6,446 6.1% -17.1% 1.0% 1.6% 1.0% Cost / Income ratio (including the effects of PPA) 69.5% 70.1% 70.6% 69.5% Cost / Income ratio (excluding the effects of PPA) 66.5% 67.1% 67.3% 66.2% ROE 87 Reconciliation schedule to 31st December 2011 RECLASSIFIED INCOME STATEMENT Items Figures in thousands of euro 10.-20. 70. reclassifications 2011 mandatory consolidated financial statements Net interest income 80.+90.+ 100.+110. 220. Other net operating income Operating income 180.b Other administrative expenses Net operating income Net impairment losses on loans 130.b+c+d Net impairment losses on other assets and liabilities 240.+270. Net provisions for risks and charges 1,193,708 7,329 7,329 243,065 (163,065) 3,584,014 (163,065) 7,443 9,947 87,443 7,443 - - 3,438,339 (1,423,196) 163,065 (717,988) 542,497 (248,442) (3,087,745) (783,496) 163,065 - (7,443) (7,443) - 542,497 (2,389,626) 496,269 - 9,947 - - 542,497 1,048,713 (607,078) (607,078) (135,143) (135,143) (31,595) Profits (loss) from disposal of equity investments (1,856,783) Pre-tax profit from continuing operations (2,134,330) 290. Taxes on income for the year from continuing operations 310. Post-tax profit from discontinued operations 330. Profit (loss) for the year attributable to minority interests (31,595) (9,947) - - - - 271,991 1,873,849 7,119 2,416,346 282,016 (176,049) 95,942 (49,436) (28,833) 248 Profit (loss) for the year attributable to the shareholders of the Parent before impairment losses on goodwill and finite useful life intangible assets Loss for the year attributable to the Parent 248 20,603 (1,841,488) Impairment losses on goodwill and finite useful life intangible assets 210.+260. net of taxes and non controlling interests 340. 9,947 1,774 (881,053) Operating expenses 190. 19,997 (1,423,196) Net impairment losses on property, equipment and investment 200.+210. property and intangible assets 130.a 2,119,915 9,947 1,191,934 Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value Personnel expense (1,774) - Net commission income 180.a reclassified consolidated financial statements 19,997 Profits of equity-accounted investees 40.-50. depreciation Net impairment profit of equityfor losses on Consolidation accounted improvements goodw ill and finite reclassification useful life investees to leased intangible assets assets tax recoveries 2,121,689 Dividends and similar income 2011 349,373 (1,841,488) - - - - (2,190,861) (2,190,861) - (1,841,488) Reconciliation schedule to 31st December 2010 RECLASSIFIED INCOME STATEMENT reclassifications 2010 mandatory consolidated financial statements Items tax recoveries 2010 depreciation for maximum net impairment profit of equityimprovements overdraft losses on accounted to leased charge goodwill investees assets reclassification reclassified consolidated financial statements Figures in thousands of euro 10.-20. 70. Net interest income Dividends and similar income 2,146,598 Profits of equity-accounted investees 40.-50. 80.+90.+ 100.+110. 220. Net commission income Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value Other net operating income Operating income 180.a Personnel expense 180.b Other administrative expenses Net impairment losses on property, equipment and investment property and 200.+210. intangible assets Operating expenses 130.a 240.+270. 24,099 - 17,613 17,613 1,181,225 4,072 34,044 1,185,297 34,044 239,430 (153,846) 3,625,396 (153,846) 6,898 - 17,613 6,898 92,482 - (1,451,584) (923,590) 2,142,526 3,496,061 (1,451,584) 153,846 (769,744) (240,338) (6,898) (247,236) (2,615,512) 153,846 - - (6,898) - (2,468,564) Net operating income 1,009,884 - - 17,613 - - 1,027,497 Net impairment losses on loans (706,932) (706,932) (49,721) (49,721) 130.b+c+d Net impairment losses on other assets and liabilities 190. (4,072) 24,099 Net provisions for risks and charges (27,209) Profits from disposal of equity investments 108,313 Pre-tax profit from continuing operations 334,335 290. Taxes on income for the year from continuing operations 310. Post-tax profit from discontinued operations 330. (27,209) - 5,172 (17,613) 5,172 - 95,872 - - (231,980) 339,507 (231,980) 83,368 83,368 Profit for the year attributable to non-controlling interests (13,602) (13,602) Profit for the year attributable to the Parent before net impairment losses on goodwill 172,121 260. Impairment on goodwill net of taxes and non controlling interests 340. Profit for the year attributable to the Parent - 172,121 88 5,172 - - - 177,293 - - - 172,121 (5,172) - - (5,172) Notes to the reclassified consolidated financial statements The mandatory financial statements have been prepared on the basis of Bank of Italy Circular No. 262 of 22nd December 2005 and subsequent updates. The contribution of the depository banking operations was completed on 31st May 2010. With regard to the balance sheet, this involved the disposal on that date of all the assets and liabilities associated with these operations, and of direct funding in particular – the most significant component consisting of the accounts for the management of the UBI Pramerica investment funds – which had been reclassified from 30th September 2009 and until 31st March 2010 within “liabilities associated with assets held for sale”. With regard to the income statement, in addition to the gain resulting from that contribution, the interim figures for 2010 included the income and expense relating to assets held for sale, for the first five months only. The following rules have been applied to the reclassified financial statements to allow a vision that is more consistent with a management accounting style: - the tax recoveries recognised within item 220 of the mandatory financial statements (other net operating income/expenses) were reclassified as a reduction in indirect taxes included within other administrative expenses; - the item profits (losses) of equity-accounted investees includes the profits (losses) of equity-accounted investees included within item 240 of the mandatory financial statements; - the item other net operating income/expense includes item 220, net of the reclassifications mentioned above. the item net impairment losses on property, equipment and investment property and intangible assets includes items 200 and 210 (the latter only partially) in the mandatory financial statements and also the instalments relating to the depreciation of leasehold improvements classified within item 220; - the item profits (losses) from the disposal of equity investments includes the item 240, net of profits (losses) of equity-accounted investees and also item 270 in the mandatory financial statements; - impairment losses on goodwill and finite useful life intangible assets (net of taxation and non-controlling interests) include items 210 (partially) and 260 in the mandatory financial statements. The reconciliation of the items in the reclassified financial statements with the figures in the mandatory financial statements has been facilitated, on the one hand, with the insertion in the margin against each item of the corresponding number of the item in the mandatory financial statements with which it is reconciled and, on the other hand, with the preparation of specific reconciliation schedules. The comments on the performance of the main balance sheet and income statement items are made on the basis of the reclassified financial statements and of the reclassified financial statements for the comparative periods, and the tables providing details included in the subsequent sections of this financial report have also been prepared on that same basis. In order to facilitate analysis of the Group’s performance and in compliance with Consob Communication No. DEM/6064293 of 28th July 2006, a special schedule has been included in the reclassified financial statements to show the impact on earnings only of the principal non-recurring events and items – since the relative effects on capital and cash flow, being closely linked, are not significant – which are summarised as follows: full year 2011: - impairment losses on goodwill and finite useful life intangible assets (net of taxation and non-controlling interests); impairment losses on AFS equity investments in Intesa Sanpaolo, A2A and Siteba; Impairment losses on AFS units in OICRs (collective investment instruments); write-off of the B@nca 24-7 IT system held for disposal; tax realignment in accordance with Decree Law No. 98/2011 converted with amendments into Law No. 111 of 15th July 2011 and write-off of deferred income tax assets/deferred IRAP tax assets; impact of IRAP adjustment for deferred tax provisions recognised as at 31st December 2010; expenses incurred for restructuring of UBI Leasing agent network; release of excess provisions; full year 2010: - impairment losses on AFS equity investments in Intesa Sanpaolo and A2A and also in the AFS fund TLcom; the contribution of depository banking operations; impairment losses on goodwill of Gestioni Lombarda (Switzerland); leaving incentives (trade union agreement of 20th May 2010); tax impact of the branch switching operation; partial disposal (9.9%) of the investment held in the Lombarda Vita Spa joint venture; disposal of two branches by BDG; write-off of some components of IT systems by UBI.S and IW Bank; disposal by the Parent of a property located in via Solferino, Milan 89 The consolidated income statement The income statement figures commented on are based on the reclassified consolidated financial statements (the income statement, the quarterly income statements and the income statement net of the principal non-recurring items) contained in another section of this report and the tables furnishing details presented below are also based on those statements. The notes that follow those reclassified financial statements may be consulted as may the reconciliation schedules for a description of the reclassification. Furthermore, the commentary examines both changes that occurred over twelve months (2011 compared to the year before) and those occurring in the last quarter of the year (this, which is highlighted with a slightly different background colour, is compared with the previous quarter in order to bring to light trends underlying progressive changes in interim results during the year). The financial crisis has been stoked for two years now by a new and dangerous source of difficulty in the euro area. After Greece, Ireland, Portugal and Spain, the turmoil has now involved Italy with its high levels of public debt and weak prospects for growth in the medium term. On their part financial markets have gradually attributed an excessive likelihood of insolvency to sovereign issuers in the area, which had a sudden negative impact on the terms and conditions for wholesale funding offered to Italian banks, which are squeezed between: demands to strengthen capital, increase transparency and customer services and to improve the terms and conditions they offer businesses consistent with risk and to support the local economies on which they operate. In consideration of the unfavourable economic environment and probable future scenarios, the UBI Banca Group has adopted extremely prudential criteria and has recognised impairment on its goodwill and finite useful intangible assets – recognised principally following the merger between the former BPU Banca Group and the former Banca Lombarda e Piemontese Group – with significant write-downs (€2,397 million gross, accounting for 44% of the total on the books at the end of 2010) of the carrying amounts which had been recognised for those assets. Since those amounts had been generated by a “paper for paper” transaction, that is with no cash payments, the accounting treatment introduced by IFRS – which requires recognition of the impairment loss through profit and loss – generated effects of an accounting nature only, which have no impact on the Group’s operations. More specifically, it had no impacts on liquidity, capital ratios (because these are calculated by deducting all intangible assets) or future profits, which will in fact benefit from lower PPA amortisation from 2012. Consequently, in order to allow a consistent analysis of Group profits and operations, the impairment losses relating to this treatment have been stated separately (a detailed analysis is given in the Notes to the Consolidated Financial Statements) in a single separate item net of tax and non-controlling interests, shown in the reclassified consolidated financial statements on the last line item before net profit for the year. The UBI Banca Group, ended 2011 with consolidated net profit before impairment of €349.4 million, +97.1% compared to €177.3 million the year before. In the fourth quarter of the year, the crisis of confidence in the country reached its peak and at the same time structural reforms, a necessary condition for economic and financial recovery, were commenced. A profit for the period before impairment of €22.9 million was recorded in the quarter, compared with a loss of €25.6 million in the same quarter of 2010, and an even greater loss incurred in the second quarter of 2011 (-€69 million). Operating difficulties experienced during the year are summarised by the performance of operating income, which totalled €3,438.3 million (-1.7% compared to 2010). This item, which included all income from ordinary activities, seemed to be recovering progressively in the first part of the year, but repeated turbulence on markets then put a break on business in the banking sector and this brought operating income down to levels lower than the already low results recorded in 2010. On a quarterly basis, operating income earned between 1st October and 31st December 2011 amounted to €904.3 million, slightly down compared to €910.5 million in the fourth quarter of 2010 – the result of improvements by net commissions and financial activities – but showing a 90 marked improvement compared to €827.9 million in the preceding third quarter, penalised by the loss incurred on those same financial activities (-€23.9 million). Net interest income, which included the expense of the purchase price allocation of €49.9 million, amounted to €2,119.9 million (-€22.6 million compared to 2010), the consequence, for each component of the item1, of the increased impact of interest expense in line with market trends for interest rates2: • the net balance on business with customers was down by 5% to €1,874.5 million, (-€94.9 million of which resulting from greater interest payments to the Cassa di Compensazione e Garanzia - a central counterparty clearing house 3 ), despite the partial widening of the spread on business with customers (+12 basis points for network banks). affected by the cost of funding and interest rates, especially for medium to long-term lending (due also to a delay in repricing floating rate items). As concerns volumes of business, lending grew slightly over twelve months (+2.2% for the network banks), held back by short-term loans, while funding remained more or less steady, the composition of which changed partially in favour of the longer term maturities of bonds. The net balance also benefited from €45.2 million (€105.8 million in 2010) of positive differentials earned on fix rate bond hedges; Interest and similar income: composition Debt instruments Figures in thousands of euro 1. Financial assets held for trading 2. Financial assets at fair value 3. Available-for-sale financial assets 3. Held-to-maturity investments 5. Loans to banks 6. Loans to customers 7. Hedging derivatives 2011 2010 40,910 373,970 - 1,482 - - 42,392 373,970 - 31,634 328,149 - 2,993 1,270 - 53,174 3,562,559 - 160 7,382 - 56,327 3,571,211 - 29,782 3,129,890 - 8. Other assets Total Other transactions Financing - - 1,872 1,872 1,785 419,143 3,617,215 9,414 4,045,772 3,521,240 2011 2010 Interest and similar expense: composition Borrowings Other transactions Securities Figures in thousands of euro 1. Due to central banks 2. Due to banks 3. Due to customers 4. Securities issued (21,520) (62,117) (412,256) - (1,325,414) (219) (4,251) - (21,520) (62,336) (416,507) (1,325,414) (14,115) (29,972) (196,582) (1,069,742) (12,574) - - (728) (12,574) (728) (9,108) (789) (508,467) (1,325,414) (86,778) (91,976) (86,778) (1,925,857) (58,406) (1,378,714) 2,119,915 2,142,526 5. Financial liabilities held for trading 6. Financial liabilities at fair value 7. Other liabilities and provisions 8. Hedging derivatives Total Net interest income • financial assets held in the owned securities portfolio generated net interest income of €271.8 million, (+€85.3 million), despite disinvestments in debt instruments over twelve months amounting to €1.9 billion. However, total debt instruments (consisting mainly of Italian government securities) continued to make an important contribution to net interest income (€374 million of interest income earned on available-for-sale assets). 1 The calculation of net balances was performed by allocating interest for hedging derivatives and financial liabilities held for trading within the different areas of business (financial, with banks, with customers). 2 The average progressive one month Euribor rate practically doubled in the comparison between the two years from 0.573% in 2010 to 1.190% in 2011. 3 In relation to transactions employed to fund investments in government securities. 91 Generally, however, these investments were impacted by the cost of hedging fixed interest rate securities (differentials paid on derivatives), although these decreased; • the net balance on interbank business showed net expense of €27.5 million (-€14.3 million in 2010), reflecting a relative increase in average debt and the related expense, in a context of rising interest rates, although growth in average loans to banks was recorded at the same time. The changes in interest rates in the fourth quarter – after the vertical rises over the summer – partly favoured the growth and also the composition of interest income, which rose to €544.6 million, up by 2% compared to the third quarter (+€10.4 million). This performance was driven by a greater contribution from financial activities (up by €10.7 million, even though total bonds held in portfolio remained unchanged during the quarter) and by basic stability for business with customers (up by €2.4 million, the aggregate result of greater interest income, but a higher cost of amounts due to customers, as a result of the different forms of funding employed), while the interbank balance worsened (held down by growth in interest expense, +€5 million). Dividends of €20 million (€24.1 million in 2010), relate mainly to securities held in the AFS portfolio of UBI Banca and included €11.6 million relating to the ordinary shares of Intesa Sanpaolo, which were remunerated by the same amount in the comparative year (0.08 euro per share). The profits of equity-accounted investees4 €9.9 million compared to €17.6 million in 2010 were generated by: Aviva Vita (€6 million compared to €2 million before), Lombarda Vita (€4.5 million compared to €14.3 million), UBI Assicurazioni (a profit of €3.2 million compared to a loss of €2.2 million), Aviva Assicurazioni Vita (a loss of €2.4 million compared to profit of €1.5 million before) and Arca SGR (a loss of €1.1 million compared to a profit of €2 million before). Commission income: composition Commission expense: composition 2011 Figures in thousands of euro a) guarantees granted c) management, trading and advisory services 1. trading in financial instruments 2. foreign exchange trading 2010 49,793 42,648 622,140 38,410 683,743 39,462 11,868 12,259 277,518 72,042 205,476 273,077 72,968 200,109 13,702 - 15,788 7,751 6. placement of securities 74,538 105,533 7. receipt and transmission of orders 40,852 43,565 4,855 4,855 - 6,062 5,958 104 160,397 180,246 42 42 68 68 119,723 127,927 3. portfolio management 3.1. individual 3.2. collective 4. custody and administration of securities 5. depository banking 8. advisory activities 8.1 on investments 8.2 on financial structure 9. distribution of third party services 9.1. portfolio management 9.1.1. individual 9.2. insurance products 9.3. other products 40,632 52,251 d) collection and payment services f) services for factoring transactions 150,128 26,486 146,820 26,995 i) current account administration 216,501 213,902 j) other services 288,553 268,081 1,353,601 1,382,189 Total 2011 Figures in thousands of euro a) guarantees received c) management and trading services: 1. trading in financial instruments 2. foreign exchange trading 2010 (807) (809) (82,257) (18,268) (90,276) (16,368) (38) (281) 3. portfolio management 3.1. own 3.2. on behalf of third parties (6,236) (6,236) (5,772) (5,083) (689) 4. custody and administration of securities 5. placement of financial instruments (6,979) (4,416) (8,569) (4,942) (46,320) (54,344) (44,141) (32,688) (60,899) (44,908) (159,893) (196,892) 1,193,708 1,185,297 6. financial instruments, products and services distributed through indirect networks d) collection and payment services e) other services Total Net commission income Net commission income totalled €1,193.7 million (+€8.4 million compared to 2010). In detail: commission income on ordinary banking business performed positively as follows: +€7.1 million from guarantees granted, +€20.1 million from collection and payment services (in 4 The item consists of the net profits of the companies recognised on the basis of the percentage interest held by the Group. 92 relation to higher volumes of business), +€2.6 million from “current account administration” and +€32.7 million from “other services” (which include commitment fees) 5; management, trading and advisory services6, on the other hand, decreased by €53.4 million to €528.1 million (accounting for 44.2% of total net commission income compared to 49.1% before). The change is the aggregate result on the one hand of an increase in portfolio management commissions (+€4 million, the result, amongst other things, of a realignment of commissions on collective asset management instruments) and on the other hand of falls in the following items: placement of securities (-€30.5 million, in relation to lower orders for “third party securities”); distribution of insurance products (-€8.2 million); depository banking (-€7.7 million following the contribution of these operations in May 2010); receipt of orders and investment advisory services (-€3.9 million, as volatility on markets increased and customers adopted a prudent approach). A reduction in commission expense also occurred in relation to the distribution of financial instruments, products and services through indirect networks (-€8 million), due largely to the rationalisation of UBI Banca Lombarda Private Investment’s network of financial advisors. Even net of performance fees7 (relating entirely to UBI Pramerica SGR and recognised in the fourth quarter, amounting to €11.7 million in 2011, compared to €15.4 million in 2010), quarterly net commission income held up well compared to previous interim periods and totalled €303.4 million (€292 million in the third quarter of 2011, €294.6 million in the second quarter and €291.9 million in the first). Changes within the item partially replicated annual trends and more specifically a comparison with the third quarter shows the following: an improvement in income from securities (+€3.1 million, attributable partly to customer portfolio managements, but above all to the distribution of insurance products, in the presence of lower securities brokerage and trading income) accompanied by good performance from commissions of a strictly banking nature (+€7.8 million). The performance during the year of assets classified under the fair value option affected the net result for financial activities, which was €7.3 million, compared to €34 million in 2010. In detail: • trading activities generated €10.7 million, compared to a loss previously of -€56.9 million, due almost entirely to the unwinding and ineffectiveness of hedging derivatives, used on a macro-hedge basis, for fixed rate mortgages subject to either early repayment or renegotiation. It is a phenomenon which had a greater impact in 2010 and which reduced considerably in 2011. Net of that unwinding phenomenon (-€18.4 million in 2011 and -€55.8 million in 2010), normal activities generated the following: +€26.4 million (-€14.6 million) from debt instruments (inclusive of financial liabilities held for trading) and the related derivative instruments; -€15.9 million (-€2.7 million) from equity instruments and the related derivative instruments, which incorporates the impairment loss on Medinvest International8 of €12.2 million; -€0.3 million (+€0.4 million) from investments in hedge funds; and +€13.7 million (+€14.7 million) from foreign currency business; • the result for financial assets and liabilities at fair value – a loss of €38.8 million, compared to a profit of €6.7 million in 2010 – incorporated disposals of UBI Pramerica funds in the third quarter with a loss of €22 million, when a stop-loss9 mechanism was triggered (in compliance with the limits set by the Financial Risks Policy) losses on Tages hedge funds, formerly Capitalgest (-€11.4 million) and the fair valuation of residual positions in other hedge funds; 5 All the changes were calculated by subtracting commission expense from the respective commission income. 6 The amount consists of management, trading and advisory services net of the corresponding expense items and is calculated excluding currency trading. 7 The item accounts for 1% of total net commission income compared to 1.3% before. 8 Medinvest International Sca (Luxembourg), classified within private equity investments and in which a 19.57% interest is held, is a merchant bank which invests in companies and also provides financial advisory services to SMEs. The impairment loss was recognised in relation to the poor performance of the main investment held in its portfolio. 9 The losses incurred on the mutual fund portfolio caused UBI Pramerica SGR to firstly change the composition of the mix of products used for the Parent’s investments, with preference given to strictly monetary funds and then, in consideration of the continuing adverse conditions on markets, to sell all units held in funds at the end of September (€329.3 million as at 30th June 2011). 93 • net hedging income – which represents the change in the fair value of hedging derivatives and the relative items hedged – was €8.9 million (+€67.2 million in 2010). Both results should be interpreted in combination with the information reported on trading activity concerning the unwinding of hedges; Net trading income (loss) Gains Profits from trading Losses Losses from trading Net income (loss) 2011 Figures in thousands of euro (A) (B) (C) (D) [(A+B)-(C+D)] 1. Financial assets held for trading 1.1 Debt instruments 25,564 21,020 168,696 56,096 (126,008) (16,287) (135,644) (30,497) (67,392) 30,332 (204,553) (20,392) 4,486 19 3,586 26 (16,429) (158) (2,131) (152) (10,488) (265) (4,374) 387 1.2 Equity instruments 1.3 Units in O.I.C.R. (collective investment instruments) 1.4 Financing - - - - - - 39 108,988 (93,134) (102,864) (86,971) (180,174) 2,520 1,662 - 7 - (4,027) (4,027) - (2) (2) - (1,502) (2,367) - 10,479 10,410 (8) 1.5 Other 2. Financial liabilities held for trading 2.1 Debt instruments 2.2 Payables 2.3 Other 3. Financial assets and liabilities: exchange rate differences 858 7 X 4. Derivative instruments 4.1 Financial derivatives - on deb t instruments and interest rates - on equity instruments and share indices X 541,790 541,790 525,882 2,174,634 2,174,634 2,143,116 199 X (597,976) (597,976) (573,906) (2,139,555) (2,139,555) (2,115,024) (130) (11,802) 6,346 X - other 15,709 25,172 (23,940) - - - 569,874 2,343,337 (728,011) Total X X - on currencies and gold 4.2 Credit derivatives 2010 X 865 77 (5,011) 2,204 84,616 84,616 (19,932) 134,979 135,768 (60,417) (5,387) 1,635 105,723 192,668 (12,729) 4,212 1,882 - - (789) (2,275,201) 10,711 (56,891) X Net hedging income 2011 Figures in thousands of euro Net hedging income 2010 8,938 67,209 Profit from disposal or repurchase Profits Losses Net profit 2011 2010 Figures in thousands of euro Financial assets 1. Loans to banks - 2. Loans to customers 3. Available-for-sale financial assets 7,848 12,372 (5,384) - 1,463 (5,313) 31,245 (443) 2,464 11,929 3.1 Debt instruments 1,407 (380) 1,027 19,089 3.2 Equity instruments 8,467 (63) 8,404 10,120 3.3 Units in O.I.C.R (collective investment instruments). 3.4 Financing 2,498 - - 2,498 - 2,036 - 4. Held-to-maturity investments Total assets Financial liabilities 1. Due to banks 2. Due to customers 3. Securities issued - - - - 20,220 (5,827) 14,393 27,395 - - - - 21,198 (9,062) 12,136 (10,338) Total liabilities 21,198 (9,062) 12,136 (10,338) Total 41,418 (14,889) 26,529 17,057 Net profit (loss) on financial assets and liabilities at fair value 2011 Figures in thousands of euro Net profit (loss) on financial assets and liabilities at fair value Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value 2010 (38,849) 6,669 7,329 34,044 • net income from the disposal/repurchase of financial assets and liabilities totalled €26.5 million and included €12.1 million from the repurchase of securities issued – by the Parent (€14.1 million), mainly consisting of securities in the EMTN programme, and by Centrobanca (€4 million), as part of ordinary business with customers – while €14.4 million was from the disposal of financial assets. The latter consisted of €6.8 million from the total disposal of the investment in the London Stock Exchange (formerly Borsa Italiana), €1.6 million from the disposal of other minor 94 equity investments (including PerMicro), €2.5 million from the redemption of units in funds (of which €2.2 million managed by UBI Pramerica SGR resulting from the disposal of funds owned by the former Capitalgest SGR), approximately €1 million from debt instruments (of which €1.2 million relating to IW Bank) and €2.5 million from disposals of unsecured nonperforming loans (the main operation concerned B@nca 24-7 which disposed of two portfolios and realised a profit of €2.1 million). In 2010 the item amounted to €17.1 million and consisted of the following: €19.1 million from debt instruments, €10.1 million from equity instruments (of which €9.1 million relating to the disposal of the interest held in CartaSi Spa), €2 million from units in monetary and bond mutual funds, -€10.3 million from the repurchase of securities issued as part of ordinary business with customers, -€5.3 million from disposals of impaired loans by Centrobanca and +€1.5 million from the disposal by UBI Banca International of a loan to banks. The result for financial activities in the fourth quarter was a profit of €24 million (a profit of €20.6 million in the same quarter in 2010), compared to -€23.9 million in the previous three months. Trading activity contributed €14.1 million (-€5.3 million in the third quarter 2011), attributable primarily to trading in debt instruments and the relative derivatives and in interest rate derivatives (+€17.6 million, excluding -€2.6 million for hedge unwinding in the period) and foreign currency trading (+€4.3 million), while a loss was incurred on equity instruments and the relative derivatives (-€5.9 million), in connection mainly with a further impairment loss incurred on the equity investment in Medinvest (-€4.5 million). Financial assets designated at fair value recorded a loss of €4.4 million (the result of losses on remaining hedge funds). Hedging activity gave rise to a loss of €1.9 million, while profits from disposals and repurchases amounted to €16.2 million, including €12.8 million in relation to repurchases of securities issued already mentioned, €2 million to the gain on the disposal of unsecured non-performing loans by B@nca 24-7 and €1.4 million to the disposal of equity investments (Banca Valsabbina and PerMicro). Other net operating income amounted to €87.4 million (-€5 million) as a result of a reduction in revenues and in the item prior year income in particular (-€8.2 million), offset, but to a lesser extent, by a reduction in prior year expenses (-€3 million). The item included €3 million relating to requests for intervention by the Interbank Deposit Protection Fund and €3.3 million (non-recurring) allocated for the Other net operating income and expense termination of UBI Leasing 2011 2010 agent contracts (see also net Figures in thousands of euro provisions for risks and Other operating income 157,219 165,869 Recovery of expenses and other income on current accounts 15,458 13,745 charges). Recovery of insurance premiums 31,644 33,125 While income included lower Recoveries of taxes 163,065 153,846 recoveries for insurance Rents and other income for property management 8,158 8,959 14,181 14,020 premiums (-€1.5 million, to be Recovery of expenses on finance lease contracts 87,778 96,020 interpreted in relation to the Other income and prior year income Reclassification of "tax recoveries" (163,065) (153,846) corresponding expense item), an operating expenses (69,776) (73,387) improvement was recorded in Other Depreciation of leasehold improvements (7,443) (6,898) the item “recovery of expenses Costs relating to finance lease contracts (7,145) (7,169) and other income on current Expenses for public authority treasury contracts (6,977) (7,542) accounts” (+€1.7 million), Ordinary maintenance of investment properties (55,654) (58,676) consistent with the volumes of Other expenses and prior year expense Reclassification of depreciation of leasehold improvements 7,443 6,898 business with customers during 87,443 92,482 Other net operating income and expense the year. In 2010 the item included the following: a payment of €2.5 million to IW Bank for the final settlement of the litigation that had arisen with former officers of that bank; €1.7 million relating to a recovery from a network bank clawback revocation action and approximately € 1 million (non-recurring) for the disposal of BPCI’s correspondent banking operations (as part of the contribution of depository banking operations). Operating expenses decreased by €78.9 million (-3.2% compared to 2010), to €2,389.6 million. If non-recurring items are excluded, expenses fell by €16.8 million (-0.7%). Personnel expense amounted to €1,423.2 million, down by €28.4 million, because they included non-recurring income of €27.9 million recognised in the third quarter within the line 95 item “expenses for retired personnel” relating to a release of excess provisions10. In 2010 on the other hand, leaving incentives of €33.2 million (non-recurring) were charged to the income statement within the item “other employee benefits” in relation to a trade union agreement of 20th May. Personnel expense: composition Net of those items the personnel expense increased over twelve months by €32.8 million. This increase relates above all to variable components of wages (company bonuses and incentive schemes), net of which, despite normal growth (length of service increases, promotions and national labour contract increases), personnel expense was unchanged compared to 2010. 2011 2010 Figures in thousands of euro 1) Employees a) Wages and salaries b) Social security charges c) Post-employment benefits d) Pension expense e) Provision for post-employment benefits f) Pensions and similar obligations: - defined contribution - defined service g) Payments to external supplementary pension plans: - defined contribution - defined benefits h) Expenses resulting from share based payments The total expense continued to i) Other employee benefits benefit from savings (approximately €39 million) in relation to a 2) Other personnel in service - Expenses for agency personnel on staff leasing reduction in average personnel contracts numbers (556), which includes the - Other expenses decrease in expense for workers on 3) Directors and statutory auditors personnel leasing contracts (-€10.5 4) Expenses for retired personnel million) and lower payments made Total to directors and statutory auditors (-€3.1 million). (1,425,623) (983,736) (267,758) (1,411,084) (948,075) (250,714) (60,928) (74) (62,432) (105) (9,078) (2,930) - (10,817) (4,144) - (2,930) (50,431) (50,154) (4,144) (50,411) (50,363) (277) - (48) - (50,688) (84,386) (6,504) (18,130) (3,671) (14,216) (2,833) (3,914) (19,001) (22,118) 27,932 (1,423,196) (252) (1,451,584) Other administrative expenses – €718 million – fell by €51.7 million (of which €5.2 million due to lower indirect taxes). Savings on current spending over twelve months (€46.5 million), included action to contain spending as follows: • professional and advisory services, down by €12.4 million, including -€5.2 million of savings on strategic and organisational advisory services linked to projects, -€4.3 million on professional IT services and -€2.9 million on other advisory services; • telephone and data transmission expenses, down by €11.4 million, including €4 million of savings in relation to the provision to manage IT fraud on credit cards, following the completion of the changeover to microchip technology, -€4.5 million on telephone expenses, -€2.1 million on information providers and -€0.8 million on data transmission expenses; • rent payable (-€5.8 million, due mainly to the renegotiation of existing contracts), postal expenses (-€5.3 million, partly in relation to lower volumes of hardcopy communication), outsourced services (-€4.8 million), to be interpreted in conjunction with the trend for postal expense), SW license and maintenance fees and HW lease instalments (-€2.8 million), printed stationery and consumables (-€2.2 million), credit recovery expenses (-€2.1 million), insurance premiums in relation to commercial products (-€1.5 million) and membership fees (-€1.4 million). Increases in expenses, on the other hand, involved the tenancy of premises (+€3.0 million, of which +€5.9 million for higher utilities expenses partially offset by lower condominium expenses) and advertising (+€1.3 million). Net impairment losses on property, equipment and investment property and intangible assets totalled €248.4 million and included a non recurring item of €3.5 million for the write-off of the B@nca 24-7 IT system held for sale. If the figure is normalised (€245 million), no significant change was recorded in impairment losses with respect to the comparative year 10 This was the release of amounts recognised in previous years due to actuarial recalculations of post-retirement benefits, now no longer considered due. In the third quarter of 2011, the defined benefit obligation and the existing mathematical reserve were eliminated as a consequence with a positive impact on the item “administrative expenses: personnel expense” of approximately €27.9 million and the relative portion of the “fair value reserve actuarial gains/losses on defined benefit plans” amounting to approximately €2 million was reclassified within “retained earnings”. In consideration of the non-recurring nature of the event, the effects were subject to normalisation in the income statement. 96 (+0.9%). The changes summarise the increased cost in relation to new software introduced in 2010, which was partially offset by the reduction at the same time in depreciation for peripheral hardware (work stations). In 2010 the item (€247.2 million) included a non-recurring amount of €4.5 million for the write-off of some components of the UBI.S IT system (€3.1 million, related mainly to retirements for end of service contract and for replacement of products) and of IW Bank (€1.4 million, mainly for the retirement of the bank’s previous legacy system and to a lesser extent for the Twice Sim and InvestNet software). On a quarterly basis, normalised operating expenses totalled €609.2 million, (€605.3 million in the same period of 2010), compared to €589.2 million in the third quarter of 2011). While the figures for the two corresponding quarters were unchanged, the growth observed with respect to the third quarter of 2011 is the result of seasonal effects for some factors of expense, as was also confirmed by the average normalised quarterly data, which fell progressively from €618 million in 2009 to €608 million in 2010 and to €603 million in 2011. In detail, the following trends emerged in the composition: - - - personnel expense fell by €12.5 million Other administrative expenses: composition to €350.3 million, as a result of different timings in the provisions made for 2011 2010 variable remuneration, but above all Figures in thousands of euro (666,346) (712,876) due to the release of provisions made A. Other administrative expenses Rent payable (72,060) (77,847) in relation to the signing of the Professional and advisory services (90,225) (102,647) national labour contract; Rentals of hardware, software and other assets (36,211) (38,679) Maintenance of hardware, software and other assets (40,483) (40,842) other administrative expenses rose by Tenancy of premises (54,755) (51,748) €29.8 million to €195.8 million, as a Property maintenance (27,245) (27,816) result of the particular characteristics Counting, transport and management of valuables (16,004) (16,503) Membership fees (9,468) (10,818) of the two periods compared, which Information services and land registry searches (12,612) (13,168) present opposing seasonal trends for Books and periodicals (1,877) (1,901) some expense items, which were Postal (26,576) (31,906) nevertheless partially reduced by the Insurance premiums (44,276) (45,806) Advertising (26,007) (24,663) policy to contain spending Entertainment expenses (2,017) (2,099) implemented precisely in the fourth Telephone and data transmission expenses (58,531) (69,934) quarter of the year. The greatest Services in outsourcing (46,439) (51,223) increases in spending were for Travel expenses (23,476) (23,476) Credit recovery expenses (44,000) (46,103) professional and advisory services Forms, stationery and consumables (11,137) (13,304) (+€15.3 million), insurance premiums Transport and removals (7,354) (6,987) (+€3.9 million), property maintenance Security (9,736) (9,651) (+€3.6 million), credit recovery services Other expenses (5,857) (5,755) (51,642) (56,868) (+€3 million), outsourced services B. Indirect taxes Indirect taxes and duties (37,498) (40,467) (+€1.6 million), travel expenses (+€1.4 Stamp duty (140,749) (129,567) million) and telephone and data Municipal property tax (8,806) (9,029) transmission services (+€1.3 million); Other taxes (27,654) (31,651) Reclassification of "tax recoveries" 163,065 153,846 net impairment losses on property, Total (717,988) (769,744) equipment and investment property and intangible assets also rose (+€2.7 million) to €63.1 million, incorporating depreciation and amortisation for new IT investments. As a result of action taken to contain costs, net operating income rose to €1,048.7 million in 2011 (+2.1%). On a quarterly basis the result was €291.7 million, a decrease (-3%) compared to the fourth quarter of 2010, but a marked improvement (+9.4%) on the previous quarter. Net impairment losses on loans fell to €607.1 million in 2011 from €706.9 million before (-€100 million approximately), the aggregate result of an almost general reduction for both the network banks and the product companies. Particular improvements were recorded for B@nca 24-7 (-€44.5 million), as a result of action taken to bring its credit quality up to Group standards, and also for the network banks (-€52.6 million). The loan loss rate – total net impairment losses as a percentage of net loans to customers – fell as a consequence to 0.61% from 0.69% in 2010. 97 Net impairment losses on loans: composition Impairment losses/reversals of impairment losses, net Specific Figures in thousands of euro 2011 Impairment losses/reversals of impairment losses, net Portfolio Specific 4th Quarter 2011 Portfolio A. Loans to banks B. Loans to customers (3) (544,777) (114) (62,184) (117) (606,961) 1 (195,115) (18) (13,281) (17) (208,396) C. Total (544,780) (62,298) (607,078) (195,114) (13,299) (208,413) Impairment losses/reversals of impairment losses, net Specific Figures in thousands of euro 2010 Impairment losses/reversals of impairment losses, net Portfolio Specific 4th Quarter 2010 Portfolio A. Loans to banks B. Loans to customers (630,973) 23 (75,982) 23 (706,955) (2) (217,325) 42 (33,932) 40 (251,257) C. Total (630,973) (75,959) (706,932) (217,327) (33,890) (251,217) In detail, net impairment losses on the performing loan portfolio fell as a whole to €62.3 million (-€13.7 million compared to the previous year), while specific impairment losses on deteriorated loans – down to €544.8 million – improved by €86.2 million, including €27.7 million relating to the network banks only and €56.5 million to the product companies and Centrobanca. The improvement by B@nca 24-7 in particular should be underlined (-€37 million), although the impairment losses of the company included €19.4 million for impairment relating to the Ktesios Group11, of which €8 million recognised as the reclassification of a provision for risks and charges made in the fourth quarter of 2010. Reversals during the year (net of present value discounting) remained high at €216.8 million, compared to €196.2 million in 2010. Net impairment losses/reversals of impairment losses on loans: quarterly performance Figures in thousands of euro Specific Portfolio 1st Quarter Specific Portfolio 2nd Quarter Specific Portfolio 3rd Quarter Specific Portfolio 4th Quarter 2011 (96,010) (9,364) (105,374) (142,877) (15,271) (158,148) (110,779) (24,364) (135,143) (195,114) (13,299) (208,413) 2010 (105,366) (26,493) (131,859) (184,080) (5,765) (189,845) (124,200) (9,811) (134,011) (217,327) (33,890) (251,217) 2009 (122,845) (36,728) (159,573) (176,919) (58,703) (235,622) (178,354) (18,995) (197,349) (281,668) 9,001 (272,667) 2008 (64,552) 4,895 (59,657) (85,136) (8,163) (93,299) (77,484) (25,384) (102,868) (219,512) (90,887) (310,399) In quarterly terms, net impairment losses of €208.4 million fell by €42.8 million compared to the same quarter in 2010 and increased by €73.3 million compared to €135.1 million in the third quarter of 2011, consisting of -€11 million of portfolio impairment losses and +€84.3 million of specific impairment losses. The latter included a specific impairment loss on a UBI Factor exposure to Fondazione Centro San Raffaele del Monte Tabor (gross exposure of €31 million) of €9.5 million, after a reversal of impairment amounting to €6 million recognised last December in relation to the acceptance of an improved offer on the disposal of this hospital. Consequently the loan loss rate for the quarter (annualised) was 0.84% (0.99% in the fourth quarter of 2010 and 0.53% in the third quarter of 2011). Net impairment losses on other financial assets and liabilities amounted to €135.1 million for the year, of which €9.7 million relating to impairment losses on available-for-sale financial assets and impairment losses on guarantees granted and €125.4 million to impairment losses on available-for-sale financial assets classified as non-recurring. In detail these consisted of the following: €7.5 million of impairment losses on units in OICR funds (collective investment instruments) (of which €4.3 million relating to the Polis property fund) held by UBI Banca, €1.6 million of impairment losses on investments in Banco di 11 See the section “General banking business with customers: lending” for further information. 98 Brescia and €116.3 million of impairment losses on investments in A2A (€3.3 million), in Siteba Spa12 (€0.5 million) and in Intesa Sanpaolo. The latter incurred a total impairment loss of €112.5 million during the year on the basis of the official share price quoted on 30th December 2011 (1.2891 euro) 13 . The amount actually incorporates the impairment loss recognised in the first half (€15.9 million, recognised on the basis of the share price quoted at the end of June of 1.8075 euro), together with the recognition of a further impairment loss that became necessary in the third quarter (€112.9 million), which was then offset by a recovery in the share price in the fourth quarter (+€16.3 million). Impairment losses of €49.7 million were recognised in 2010 including €41.1 million classified as non-recurring, of which: €36.8 million resulting from impairment losses on the investment in Intesa Sanpaolo, €2.6 million relating to the company A2A and €1.7 million to the impairment loss on units held in the British TLcom fund. Net provisions for risks and charges rose to €31.6 million14 and were concentrated mainly in the items “litigation” (all relating to the network banks and to legal action regarding financial investments and compounding of interest, down by €6.5 million compared to 2010) and “other provisions”, which, however, increased during the year by €9.4 million, and included the following: ▪ B@nca 24-7 amounting to €7.5 Net provisions for risks and charges million, net of the release of provisions amounting to +€8 2011 2010 million, made in 2010 for Ktesios Figures in thousands of euro (2,248) (1,440) Spa, as a transfer to impairment Net provisions for risks and charges for revocations Provisions for personnel (450) (79) losses on loans. The provisions Net provision for bonds in default (286) 46 were made principally to meet Net provisions for litigation (10,425) (16,924) (18,186) (8,812) operating risks attaching to the Other provisions for risks and charges (31,595) (27,209) disbursement of consumer loans Total and salary backed loan transactions brokered by financial companies in conditions of objective difficulty (of which €3.6 million relating to Ktesios); ▪ IW Bank amounting to €2.1 million in relation to the closure of transit accounts which failed to balance, regarding the former legacy platform and created at the time of the followup performed following the IT migration carried out in February; ▪ UBI Leasing amounting to €2.4 million, a non-recurring item. These provisions were made as part of the discontinuation of the network of agents, to terminate their contracts (to be interpreted in conjunction with non-recurring operating costs already mentioned amounting to €3.3 million). The income statement contains an aggregate item, profits from the disposal of investments (item 270) and from equity investments (item 240, excluding profits from equity-accounted investees) amounting to €7.1 million, composed as follows: • approximately €5 million from the sale of two properties: the historic property of Neuchâtel by Banque de Dépôts et de Gestion (€3.8 million) and a property located in Varese by Banca Popolare di Bergamo; • €2.3 million from the gain on the partial disposal of the equity investment in BY YOU in April 2011, although this was offset by the negative impact of its removal from the consolidation (-€4.1 million, as a decrease in goodwill). The item consisted of a profit of €95.9 million in 2010 and was mainly of a non-recurring nature. It included the following significant gains: €81.1 million on the partial disposal of Lombarda Vita to a joint venture partner (Società Cattolica di Assicurazione), €6.6 million on the disposal by BDG of its Yverdon and Neuchâtel branches and €5.4 million on the disposal of property belonging to the Parent located in Milan. 12 Sistemi Telematici Bancari is an interbank company specialising in outsourced technical support services to banks and acquirers of payment cards. UBI Banca holds close to 7% of the share capital. The impairment loss was recognised as a result of a loss in value of greater than 35%. 13 The impairment loss was recognised on the basis of the new number of ordinary shares of Intesa Sanpaolo (186,458,028) held by the UBI Banca Group following the increase in the share capital (when 41,435,116 new ordinary shares were subscribed at a price per share of 1.369 euro). 14 Net provisions for risks and charges amounted to €27.2 million in 2010 and included the following: a provision of €8 million made by B@nca 24-7, relating to the company Ktesios, which operated in the salary backed loan sector as the agent of B@nca 24-7, performing servicing activities for the collection of debts, by itself and through and associate; a provision of €2 million made by Centrobanca to meet the costs of a possible clawback revocation action against the Burani Group; a provision of €2.3 million made by IW Bank to meet future risks and charges connected with differences found when inspections were performed (increased and further intensified for the migration of the IT system) relating to transit accounts. 99 As a result of the performance described above, pre-tax profit from continuing operations fell to €282 million from €339.5 million in the year before. On a quarterly basis pre-tax profit increased to €80.8 million. It had remained at €15 million in the fourth quarter of 2010 and at €7.2 million in the previous three months. Taxes on income for the year for continuing operations showed tax income of €95.9 million, compared to tax expense of €232 million15 in 2010. The item included a non-recurring component of +€352.8 million, relating to the Parent, consisting of: +€377.8 million from the realignment of taxation on goodwill and other intangible assets in accordance with Decree Law No. 98 of 6th July 2011, converted with amendments into Law No. 111 of 15th July 2011. This legislation allowed, in accordance with the principles of Law No. 2 of 28th January 200916, the recognition for tax purposes of higher values attributed to controlling interests acquired through extraordinary transactions. The realignment is performed by the payment of a substitute tax of 16% (€525.6 million paid in November 2011), which allows tax to be deducted on the amortisation of the amount subject to tax relief (€3,285.3 million) at constant rates over ten years with effect from 2013. Consequently, from the first half of 2011 deferred tax assets of €903.4 million were recognised within item 290 of the income statement, corresponding to the future benefit arising from the deduction of amortisation on the intangible assets subject to tax relief; -€25 million from the derecognition of deferred tax assets for IRAP (local production tax) purposes, already recognised in the financial statements as at and for the year ended 31st December 2010. As a result of the tax deductibility of the amortisation of the amount subject to tax relief mentioned above, the Parent does not have sufficient taxable income for IRAP purposes to recover the deferred tax assets which had been recognised, since IRAP is not included in the tax consolidation. Consequently the conditions for its recognition were no longer met. With the increase of 0.75% in the rate for IRAP introduced by Art. 23, paragraph 5 of Decree Law No. 98/2011 already mentioned, applicable to banks and financial companies and in force with effect from the tax year 2011, changes arose in both current taxation (with the recognition of greater current taxes of -€16.2 million) and deferred taxation. The latter amounted to -€6.3 million (non-recurring), resulting from the adjustment of deferred tax liabilities recognised in the financial statements as at and for the year ended 31st December 2010, which related principally to intangible assets arising from the purchase price allocation for the merger of the former Banca Lombarda e Piemontese Group (and therefore classified as non-recurring). The negative impact of the rise in the IRAP rate (local production tax) was partially offset by the benefit resulting from the concessions introduced by Art. 1 of Decree Law No. 201 of 6th December 2011, converted with amendments by Law No. 214 of 22nd December 2011 (“aid to economic growth”). In order to provide incentives to strengthen the balance sheets of businesses, this measure introduced a reduction, effective from 2011, in taxable income (IRES – corporate income tax) in relation to the new capital injected into the business in the form of cash contributions from shareholders or the allocation of profits to reserves. The overall effect, connected mainly with the increase in the share capital decided in 2011 by the Parent, resulted in the recognition of a reduction in current taxation of €6.1 million. In normalised terms, taxes of €247.8 million were recognised in 2011 (€201.1 million in 2010) to give a tax rate of 63.74% (up from 61.76% previously). Compared to the theoretical tax rate (33.07%), the taxation levied was affected by the combined effect of greater IRES (corporate income tax) and IRAP, due to: - the non-deductibility of impairment losses on equity investments, accounting for one percentage point; 15 The tax expense in 2010 included the impacts of extraordinary events including the following: the reorganisation of equity investments resulting from the “branch switching” operation (€18.3 million) and, as part of the renewal of partnership agreements with the Cattolica Group, the taxation on the gain from the partial disposal of Lombarda Vita (€20.2 million), having benefited only marginally from the participation exemption regime. 16 Some companies in the UBI Banca Group had taken advantage of the law mentioned in their 2008 income tax returns to obtain tax relief on goodwill not acknowledged for tax purposes recognised in their separate financial statements (UBI Banca for €569 million, BRE for €68.6 million, BPA for €10.2 million and Carime for €23.3 million). The operation involved the recognition of higher current taxation (substitute tax of 16%) in the consolidated financial statements amounting to €107.4 million and lower taxation for deferred taxes of €216.8 million, with a net positive impact, net of non controlling interests, of €104.4 million (the difference between the rate of the substitute tax and the ordinary tax rate). 100 the partial non deductibility of interest expense (4%), introduced by Law No. 133 of 6th August 2008 accounting for 6.2 percentage points; - non-tax deductible expenses, costs and provisions accounting for 1.6 percentage points; - the total non-deductibility for IRAP purposes of net impairment losses on loans, provisions for risks and charges and personnel expense and the partial non deductibility of other administrative expenses and depreciation and amortisation, accounting for 26.1 percentage points. These impacts were only partially offset by the effect of the “aid to economic growth” concessions (1.6 percentage points), by the effect of tax exemption on dividends (1.1 percentage points), by the valuation of equity investments according to the equity method, not significant for tax purposes (0.9 percentage points) and by the disposal of equity investments covered by the participation exemption regime (0.5 percentage points). - On a quarterly basis, taxes (normalised) fell to €50.2 million from €63.4 million in third quarter of 2011 (€33.3 million in the fourth quarter of 2010) to give a tax rate of 67.25% compared to 66.24% in the previous quarter. These changes reflect both developments in the tax base and the different structure of income in the two periods, as well as different trends relating to taxable components for IRAP purposes. Finally in 2010 a post-tax profit from discontinued operations of €83.4 million (non-recurring) was recognised in relation to the contribution of the “depository banking operations” in May 2010 by the Parent to RBC Dexia Investor Services (over €1 million, approximately, related to BPCI, recognised within operating income and expense, resulting from the disposal at the same time of correspondent banking contracts). As a result of the performance already reported and as a result of the greater profits earned by the principal banks in the Group, profit for the period attributable to non-controlling interests (inclusive of the effects of consolidation entries) rose to €28.8 million from €13.6 million in 2010. In compliance with IAS 36 (Impairment of Assets), the recoverability of the carrying amounts for indefinite useful life intangible assets (goodwill) and finite useful life intangible (brands, core deposits and assets under management), recognised following the merger of the former BPU Group and the former BLP Group must be tested annually. On the basis of the impairment tests carried out at the end of December 2011, that recoverability was no longer guaranteed. This was due, on the one hand, to lower future income flows in the light of the significant deterioration in the economic environment compared to assumptions made in the 2011-2015 Business Plan, which were used as a basis for the impairment tests conducted in June 2011, and on the other hand to a higher discount rate used to estimate the final amounts (opportunity cost of capital), penalised by country risk. The reclassified income statement contains a single item, stated net of taxes and noncontrolling interests, for net impairment losses on goodwill (item 260) and impairment losses on finite useful life intangible assets (part of item 210) recognised for the year, which totalled €2,190.9 million (€5.2 million in 2010 17 ). They were composed of €1,865.5 million for impairment losses on goodwill and €305.9 million for impairment losses on finite useful life intangible assets, while the remaining €19.5 million (recognised in the second quarter of the year) relates to the full impairment loss on intangible assets associated with the investment in BY YOU (partially disposed of in April 2011), following the renegotiation of distribution agreements. In detail, the impairment test gave rise to total impairment losses of €2,396.8 million, composed as follows: €1,873.8 million for the total impairment loss recognised on goodwill, of which: 17 The preceding comparative periods have also been restated on a consistent basis, with the recognition of these impairment losses on the same line. The amount of €5.2 million for 2010, consisted of €4.1 million from the impairment loss on the goodwill of Gestioni Lombarda Suisse and a little more than €1 million from the Barberini impairment loss. 101 €521.2 million for the full impairment loss on goodwill recognised by UBI Banca arising from the business combination involving the former BPU Group and the former BLP Group, which took Net impairment losses on goodwill and finite useful life intangible assets net of taxes effect from 1st April and non controlling interests - 2011 2007; Finite useful life - €1,331 million for Figures in thousands of euro Goodwill Total intangible assets reductions in goodwill 522,980 1,873,849 2,396,829 arising on Impairment 2011: gross amounts -171,506 -4,543 -176,049 consolidation, of which Impairment 2011: taxes Impairment 2011: non controlling interests -45,605 -3,831 -49,436 €987.5 million relating Impairment 2011: net amounts 305,869 1,865,475 2,171,344 to the network banks, Impairment of intangible assets in relation to the interest held in BY YOU 19,517 €234.5 million to the Total 2,190,861 main product difference between total goodwill as at 31st December 2011 and as at 31st December 2010 (€1,877,992 companies, €96.8 The thousand) is the result, in addition to the gross impairment reported in the table (€1,873,849 thousand), of the million to the other effect of the removal of BY YOU, partially disposed of in that month, from the consolidation. banks and €12.2 million to other minor companies; - €21.6 million for impairment losses on goodwill recognised in the separate balance sheets arising from previous merger transactions (€12.1 million for Banca Carime, €7.2 million for Centrobanca, €2 million for UBI Leasing and €0.3 million for BRE); €523 million for impairment losses on all the finite useful life intangible assets (except for those relating to assets under custody and software): €193 million relating to brands, €241.7 million to core deposits and €88.3 million to assets under management. - As a result of the above, the consolidated income statement recorded a net loss of -€1,841.5 million, compared to a net profit of €172.1 million recognised in 2010 18. Consequently the net loss for the fourth quarter was -€2,024.2 million; -€25.6 million in the same quarter of 2010 and a loss of -€69 million in the third quarter 2011. 18 Expenses were recognised in both periods compared as a consequence of the purchase price allocation for the merger amounting to €71.6 million in 2011 and to €82.2 million in 2010. Net of non-recurring items, profit for the year was €111.6 million compared to €105.1 million the year before. Non-recurring expense amounted to €1,953 million, net of tax and non-controlling interests (mainly the result of impairment losses on goodwill and other intangible assets, although marginally offset by tax realignments), while in 2010 non-recurring items consisted of income of €67 million, again net of tax and non-controlling interests (principally in relation to the contribution of the depositary banking operations and the partial disposal of Lombarda Vita, although this was offset by impairment losses on available-for-sale equity investments and leaving incentives payments). 102 The comments that follow are based on items in the consolidated balance sheet contained in the reclassified consolidated financial statements on which the relative tables furnishing details are also based. The sections “Consolidated companies: the principal figures” and “The performance of the main consolidated companies” may be consulted for information on individual banks and Group member companies. General banking business with customers: funding Funding policies The year 2011 was one of severe financial turmoil, especially in the second half of the year, when the heightened perception of country risk for Italy by investors – in the context of the broader crisis which affected the sovereign debt of some countries in the euro area – resulted in an unprecedented widening of the yield spreads between Italian and German securities. This caused a significant increase in the cost of funding, affected also by repeated downgrades performed by the main rating agencies, while international institutional funding and interbank monetary markets became inaccessible for Italian banks. In this scenario the UBI Banca Group benefited from its decision to move forward and concentrate important international placements to cover its requirement for the whole year in the first few months of 2011. A modest resumption of activity only occurred towards the end of the year with a few private placements for small amounts. The total nominal amount of securities subscribed by institutional investors in 2011 accounted for approximately 140% of items that matured. Preference was given to covered bonds with longer maturities, in relation to the lower cost with respect to senior EMTN issues for the same maturities, while the EMTN programme was reserved for three year maturities. UIB Banca made three covered bond issuances: - a public placement in January for one billion euro with a ten year maturity (28th January 2021) and a coupon of 5.25%; - a second public offering in February of €750 million with a fifteen year maturity (22nd February 2016) and a coupon of 4.5%. - a private issuance in November for €250 million with the European Investment Bank, consisting of a second tranche under an agreement signed in April 2010 to finance Italian SMEs. At the date of publishing this report, UBI Banca had eight issuances of covered bonds in issue for a total nominal amount of €5.75 billion (including €11 million already amortised)1. Two public placements made performed under the EMTN programme: the first in February for €700 million, with a two year maturity (28th February 2013) at a fixed rate of 3.875%; the second in April for €1 billion with a two and a half year maturity (21st October 2013) at a fixed rate of 4.125%. Following those, only private placements for smaller amounts were performed (€50 million in June and €105 million in December). Volumes of funding in the short-term institutional sector – where the Group operates using euro commercial paper and French certificates of deposit (instruments listed in Luxembourg 1 In consideration of the large pool of segregated assets available at UBI Finance, three new issuances for a total €750 million were made on 22nd February 2012. These were not placed on the market but used to strengthen the pool of assets eligible for refinancing with the central bank. 103 and issued by UBI Banca International) – reduced progressively: in the first half of the year as a consequence of the significant medium and long-term funding acquired (where short-term funding is used as a “buffer” to optimise liquidity management and total funding) and in the second half, due to the effects of country risk for Italy which affected asset flows strongly and shortened the maturities of investments, even if a partial recovery occurred towards the end of the year. It must also be stated that, even if the repeated downgrades by rating agencies brought the ratings on ECP and French CD programmes to levels more consistent with the internal investment policies of some institutional operators, the UBI Banca Group still has outstanding issues in the current year, that are virtually unchanged compared the end of 2011 and it is succeeding in renewing all maturing issues. Finally, following the revision of supervisory regulations concerning redemptions and the repurchase of liabilities eligible for inclusion in supervisory capital – which eliminated the replacement obligation that put limits on the ability to manage and optimise liabilities – the UBI Banca Group performed a repurchase operation in February and March 2012 by launching a public offer on its own institutional liabilities, consisting of preference shares. The offer was taken up for a total nominal amount of €109 million, equivalent to approximately one fourth of the nominal amount of the securities issued, and it generated a net gain of approximately €15.8 million recognised in the first quarter of 2012. This also made it possible to generate higher quality capital in line with Basel 3 recommendations and to benefit from lower interest expense of over €7 million per year. The difficult conditions on funding markets have led to a focus on funding from ordinary customers, which has also been a factor of relative strategic strength for the Group and will be increasingly more important in the future, although in a context of growing competitiveness. Bond issues subscribed by customers amounted to €9.36 billion in 2011 compared to maturities of €8.7 billion. In reality, with the exception of Centrobanca – in relation to the nature of its business (non captive customers) and because it had net maturities of €1 billion during the year – the Group’s ability to place issuances with its own captive customers was even stronger. In fact total issuances by the network banks and UBI Banca amounted to €9.34 billion compared to maturities of €7.67 billion, with a ratio of new issuances to maturities of 122%. In this context, placements by UBI Banca – nine listed issuances for a nominal amount of €1.9 billion, three of which, totalling over €1 billion, with a lower tier two subordination clause – concentrated above all in the second quarter and towards the end of the year, have gradually replaced issuances by the network banks which recorded a slightly negative balance on the ratio of new issuances to maturities. 104 Total funding Total group funding, consisting of total amounts administered on behalf of customers, stood at €174.9 billion a decrease of almost €10 billion over twelve months. This was attributable, on the one hand, to the negative trend for indirect funding (-7.7%), penalised in the second half by the impact on prices of the progressive deterioration on financial markets, and on the other to the fall in direct funding (-3.7%), affected by the contractions in repurchase agreements with the Cassa di Compensazione e Garanzia (CCG – a central counterparty clearing house) taken out to fund the owned securities portfolio (-€4.6 billion). Net of repos with the CCG, total Group funding fell by €5.4 billion (-3.1%) which basically reflects the effect of market prices on indirect funding. Total funding from customers 31.12.2011 31.12.2010 % Changes % Figures in thousands of euro Direct funding Indirect funding of which: assets under management Total funding from customers amount % 102,808,654 58.8% 106,760,045 57.8% -3,951,391 72,067,569 41.2% 78,078,869 42.2% -6,011,300 -3.7% -7.7% 36,892,042 21.1% 42,629,553 23.1% -5,737,511 -13.5% 174,876,223 100.0% 184,838,914 100.0% -9,962,691 -5.4% As concerns market segmentation by customer2, management accounting figures for end of year volumes of total funding for the network banks and for UBI Banca Private Investment show that at the end of the year 66.1% Direct funding and indirect funding of the total came from the retail market (end of quarter totals in millions of euro) (65.9% in December 2010), 26.4% from 120,000 the private banking market (26.8%), 5.8% from the corporate market (6%) and 1.7% from institutional customers 100,000 (1.4%). In terms of annual changes, those same management accounting figures show generalised negative trends. In detail, the retail market fell as a whole by 4.2%, attributable primarily to private individual customers (-3.9%) and to a lesser extent to small businesses (-2.6%) and to the BPI network of financial advisors (-8.2%); the private banking market contracted by 5.7%, while the reduction for the corporate market was 6.4%, due primarily to the large corporate segment (-11.1%). Only the institutional market moved in the opposite direction (+16.9%). 80,000 60,000 40,000 20,000 0 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 2008 2009 Direct funding 1 Q 2 Q 3 Q 4 Q 2010 1 Q 2 Q 3 Q 4 Q 2011 Indirect funding 2 Retail: comprises mass market customers (private individuals with financial wealth – direct and indirect funding – of less than €50 thousand), affluent customers (private individuals with financial wealth – direct and indirect funding - of between €50 thousand and €500 thousand) and small businesses (firms with a turnover of up to €15 million); Corporate: comprises corporate clients (firms with a turnover of between €15 million and €250 million) and large corporate clients (groups of firms and firms with turnover of over €250 million). Private banking: comprises customers consisting of private individuals with financial wealth (direct and indirect funding) of greater than €500 thousand. 105 Direct funding The direct funding of the Group amounted to €102.8 billion, down by approximately €4 billion over twelve months (-3.7%), the aggregate result of different and at times opposing trends for individual items. With a view to stabilising liabilities, policies were pursued in the last part of the year to give preference to funding from bonds over shorter term forms of funding. In detail the item AMOUNTS DUE TO CUSTOMERS amounted to €54.4 billion, down by €4.2 billion (-7.2%), attributable almost entirely to the item “Financing”. Changes in the item were affected to a significant extent by the trend for funding from repurchase agreements, both with customers (down to a little less than €1 billion from €1.8 billion at the end of 2010) and in particular with the Cassa di Compensazione e Garanzia (a central counterparty clearing house), used to fund investments by the Parent in Italian government securities. Total repurchase agreements with the CCG were almost halved (€4.6 billion compared to €9.2 billion at the end of 2010), a reflection of disposals and maturities in the first few months of the year of investments in Italian government securities, followed towards the end of the year by the termination of the outstanding transactions amounting to €2.8 billion, without disposing of the underlying securities but using the three-year liquidity obtained from the ECB in the auction on 21st December 2011 (an operation which gave greater stability to balance sheet liability structure). Net of repurchase agreements with the CCG, amounts due to customers and also direct funding increased slightly year-on-year by 0.7% and 0.6% , respectively. The fall in repurchase agreements was only partly offset by positive growth in funding from current accounts (+€0.9 billion to €46.1 billion), facilitated, amongst other things, by the significant increase in deposits of liquidity by UBI Pramerica with the Parent (on the basis of an agreement signed in April 2011, UBI Banca became the holder of deposits used to meet the investment requirements of some funds managed by this asset management company). In reality time deposits, which were more or less unchanged at €1.4 billion, actually recorded growth of €0.5 billion in the last quarter of the year, as a result of marketing initiatives implemented in the period with private individual customers in order to exploit fixed term forms of funding. SECURITIES ISSUED, of which 90% were bonds, amounted to €48.4 billion (+€0.3 billion). Different trends were recorded within the item for different types and forms of funding. As a consequence of the significant institutional issuances made in the first four months of the year, which covered maturities for the entire year, bond funding increased over twelve months by €1.5 billion, which more than offset the decrease in “Other certificates”, which includes institutional funding from euro commercial paper. Certificates of deposit, on the other hand, remained unchanged at €2.4 billion, the result of opposing trends by the institutional component, consisting of French certificates of deposit (€0.4 billion) and the ordinary customer component, consisting of certificates denominated in yen, which rose from €0.77 billion to €1.12 billion. In terms of type of customer, securities subscribed by institutional customers amounted to €18.7 billion, only slightly down on December 2010 (-€0.1 billion), after reaching almost €20 billion at the end of the first half of the year. Institutional funding was affected by a heightened perception of “Italy risk” in the second half of the year, which made the EMTN and covered bond markets inaccessible for Italian banks and caused a significant contraction in business on monetary markets. In this context the UBI Banca Group benefited from the decision mentioned above to move forward and concentrate important medium and long-term placements in the first few months of the year. As a result of three placements totalling a nominal amount of €2 billion, funding in covered bonds reached €6.1 billion, an increase of €2.4 billion. 106 On the other hand, while significant amounts were issued under the EMTN programme (€1.86 billion nominal), they did not fully cover maturities, redemptions and repurchases during the year (€2.8 billion nominal): total outstanding EMTN funding fell as a consequence to €10.3 billion (-€0.9 billion). Funding from French certificates of deposit and euro commercial paper on monetary markets reduced progressively, with a partial recovery in the last quarter. At first this reflected lower Group requirements when medium to long-term institutional issuances were made and subsequently the decreased propensity of investors to lend as country risk for Italy worsened. In total terms, funding obtained using these instruments amounted to €1.8 billion, down from €3.4 billion at the end of 2010. Direct funding from customers 31.12.2011 % 31.12.2010 % Figures in thousands of euro Current accounts and deposits Changes amount % 46,065,651 44.8% 45,209,037 42.3% 856,614 Time deposits 1,396,835 1.4% 1,341,501 1.3% 55,334 4.1% Financing 6,022,955 5.8% 11,152,853 10.4% -5,129,898 -46.0% 5,568,351 5.4% 11,011,766 10.3% -5,443,415 -49.4% 4,615,754 4.5% 9,190,455 8.6% -4,574,701 -49.8% 222.2% - repurchase agreements of which: repos with Cassa di Compensazione e Garanzia - other 1.9% 454,604 0.4% 141,087 0.1% 313,517 945,850 0.9% 962,766 1.0% -16,916 -1.8% TOTAL AMOUNTS DUE TO CUSTOMERS (item 20 Liabilities) 54,431,291 52.9% 58,666,157 55.0% -4,234,866 -7.2% Bonds 44,429,027 43.2% 42,880,256 40.2% 1,548,771 3.6% 2,447,560 2.4% 2,475,557 2.3% -27,997 -1.1% Other payables Certificates of deposit Other certificates TOTAL SECURITIES ISSUED (item 30 Liabilities) 1,500,776 1.5% 2,738,075 2.5% -1,237,299 -45.2% 48,377,363 47.1% 48,093,888 45.0% 283,475 0.6% of which: securities subscribed by institutional customers: - The EMTN programme (*) - The French certificates of deposit programme 18,671,921 18.2% 18,797,662 17.6% -125,741 -0.7% 10,292,174 10.0% 11,158,751 10.5% -866,577 -7.8% 750,616 0.7% 1,148,017 1.1% -397,401 -34.6% - The euro commercial paper programme 1,044,055 1.0% 2,260,184 2.1% -1,216,129 -53.8% - The covered bond programme 6,128,355 6.0% 3,752,819 3.5% 2,375,536 63.3% 456,721 0.4% 477,891 0.4% -21,170 -4.4% 27,749,274 27.0% 27,581,980 25.8% 167,294 0.6% - Preference shares (**) bonds subscribed by ordinary customers - of the Group: issued by UBI Banca issued by the network banks 6,856,713 6.7% 5,035,176 4.7% 1,821,537 36.2% 16,624,904 16.2% 17,336,752 16.2% -711,848 -4.1% 4.9% -942,395 -18.1% 100.0% -3,951,391 -3.7% - external distribution networks: issued by Centrobanca Total direct funding 4,267,657 102,808,654 4.2% 100.0% 5,210,052 106,760,045 (*) The corresponding nominal amounts were €10,186 million (€212 million subordinated) as at 31st December 2011 and €11,128 million (€502 million subordinated) as at 31st December 2010. The amount as at 31st December 2011 reported in the table does not include two private placements and a partial repurchase of senior securities for a total of €93 million, which were eliminated in the consolidation because they were intragroup. (**) The preference shares were issued for nominal amounts by BPB Capital Trust of €300 million, by Banca Lombarda Preferred Securities Trust of €155 million and by BPCI Capital Trust of €115 million. Following the public exchange offer concluded on 25th June 2009, the remaining nominal amounts consisted of €227,436 million for the BPB Capital Trust issue, €124,636 million for that of Banca Lombarda Preferred Securities Trust and €101,388 million for the BPCI Capital Trust issue. 107 Listed securities Bonds listed on the MOT (electronic bond market) ISIN number Book value as at Nominal amount of issue 31.12.2011 31.12.2010 IT0001197083 Centrobanca zero coupon 1998-2018 L. 800 billion € 157,100,369 € 154,479,568 IT0001257333 Centrobanca 1998/2014 reverse floater L. 300 billion € 106,581,450 € 120,874,797 IT0001267381 Centrobanca 1998/2018 reverse floater capped L. 320 billion € 121,608,918 € 120,200,696 IT0001278941 Centrobanca 1998/2013 equity linked coupon L. 100 billion € 41,153,616 € 42,938,603 IT0001300992 Centrobanca 1999/2019 step dow n indicizzato al tasso sw ap euro 10 anni € 170,000,000 € 117,189,043 € 117,297,396 IT0001312708 Centrobanca 1999/2019 step dow n eurostability bond € 60,000,000 € 54,765,695 € 53,656,336 IT0003834832 Centrobanca 2005/2013 inflazione Italia con leva € 16,280,000 € 9,826,128 € 9,779,702 IT0003210074 Banca Popolare di Bergamo-CV 2001/2012 a tasso variabile subordinato ibrido - upper tier 2 € 250,000,000 € 250,191,408 € 250,161,359 IT0004424435 UBI subordinato low er tier 2 a tasso variabile con ammortamento 28.11.2008-2015 € 599,399,000 € 474,738,713 € 591,835,287 IT0004457187 UBI subordinato low er tier 2 a tasso variabile con ammortamento 13.3.2009-2016 € 211,992,000 € 209,976,428 € 208,919,029 IT0004457070 UBI subordinato low er tier 2 fix to float con rimborso anticipato 13.3.2009-2019 € 370,000,000 € 383,885,598 € 381,946,207 IT0004497050 UBI subordinato low er tier 2 fix to float con rimborso anticipato 30.6.2009-2019 € 365,000,000 € 370,940,321 € 366,190,696 IT0004497068 UBI subordinato low er tier 2 a tasso variabile con ammortamento 30.6.2009-2016 € 156,837,000 € 154,914,482 € 154,171,471 IT0004497043 Unione di Banche Italiane Scpa tasso misto 30.6.2009-2014 € 219,990,000 € 217,147,237 € 216,057,808 IT0004496557 Unione di Banche Italiane Scpa tasso misto 7.7.2009-2014 € 200,000,000 € 198,215,118 € 199,346,886 IT0004517139 Unione di Banche Italiane Scpa tasso misto 4.9.2009-2013 € 84,991,000 € 84,809,448 € 84,972,035 IT0004572860 UBI subordinato low er tier 2 a tasso variabile con ammortamento 23.2.2010-2017 € 152,587,000 € 151,473,168 € 150,468,611 IT0004572878 UBI subordinato low er tier 2 a tasso fisso con ammortamento 23.2.2010-2017 € 300,000,000 € 309,378,048 € 301,729,015 IT0004624547 Unione di Banche Italiane Scpa tasso fisso 2,30% 31.8.2010-2012 Welcome Edition € 278,646,000 € 280,204,675 € 278,908,777 IT0004632680 Unione di Banche Italiane Scpa tasso fisso 2,15% 28.9.2010-2012 € 450,000,000 € 450,650,823 € 448,161,421 IT0004626617 IW Bank Obbligazioni agosto 2015 con opzione di tipo call asiatica (*) € 1,103,000 € 1,081,021 € 1,115,514 IT0004642382 IW Bank Obbligazioni ottobre 2015 con opzione di tipo call asiatica - II tranche (*) € 954,000 € 923,710 € 944,346 IT0004645963 UBI subordinato low er tier 2 a tasso fisso con ammortamento 5.11.2010-2017 € 400,000,000 € 397,739,866 € 380,788,851 IT0004651656 Unione di Banche Italiane Scpa tasso fisso 2,30% 2.12.2010-2013 Welcome Edition IT0004652043 Unione di Banche Italiane Scpa tasso misto 2.12.2010-2014 € 81,322,000 € 81,041,477 € 80,835,676 € 174,973,000 € 173,997,117 € 173,588,891 IT0004710981 Unione di Banche Italiane Scpa tasso fisso 3,65% 20.5.2011-20.11.2013 € 5,787,000 € 5,914,831 5,914,831 IT0004713654 Unione di Banche Italiane Scpa tasso misto 10.6.2011-2015 € 120,000,000 € 121,935,110 - IT0004718489 UBI subordinato low er tier 2 tasso fisso con ammortamento 5,50% 16.6.2011-2018 Welcome Edition € 400,000,000 € 412,216,859 - IT0004723489 UBI subordinato low er tier 2 tasso fisso con ammortamento 5,40% 30.6.2011-2018 € 400,000,000 € 412,473,438 - IT0004767742 UBI subordinato low er tier 2 tasso misto 18.11.2011-2018 Welcome Edition € 222,339,000 € 219,055,454 - IT0004777550 Unione di Banche Italiane Scpa tasso fisso 5% 9.12.2011-9.6.2014 € 203,313,000 € 204,273,814 - IT0004777568 Unione di Banche Italiane Scpa tasso fisso 5% 30.12.2011-30.6.2014 Welcome Edition € 176,553,000 € 176,231,023 - IT0004779713 Unione di Banche Italiane Scpa tasso fisso 4,50% 30.12.2011-30.6.2014 € 287,722,000 € 286,920,098 - IT0004780711 Unione di Banche Italiane Scpa tasso fisso 5% 29.12.2011-29.6.2014 € 95,109,000 € 94,660,143 - IT0004785876 Unione di Banche Italiane Scpa tasso fisso 4,3% 17.2.2012-17.3.2014 € 19,991,000 - - IT0004785892 Unione di Banche Italiane Scpa tasso fisso 3,8% 31.1.2012-28.2.2014 € 25,000,000 - - (*) The figures relate to bonds outstanding, that is net of repurchases by the company itself. Convertible bonds listed on the MOT (electronic bond market) ISIN number IT0004506868 UBI 2009/2013 convertibile con facoltà di rimborso in azioni Covered bonds listed on the London Stock Exchange 31.12.2011 31.12.2010 € 639,145,872 € 653,777,805 € 652,263,445 31.12.2011 31.12.2010 Nominal amount of issue ISIN number IT0004533896 Nominal amount of issue UBI Covered Bonds due 23 September 2016 3,625% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,068,507,939 € 1,028,582,677 IT0004558794 UBI Covered Bonds due 16 December 2019 4% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,081,847,471 € 1,011,116,295 IT0004599491 UBI Covered Bonds due 30 April 2022 floating rate amortising guaranteed by UBI Finance Srl IT0004619109 UBI Covered Bonds due 15 September 2017 3,375% guaranteed by UBI Finance Srl IT0004649700 UBI Covered Bonds due 18 October 2015 3,125% guaranteed by UBI Finance Srl IT0004682305 IT0004692346 IT0004777444 € 250,000,000 € 239,418,111 € 1,000,000,000 € 1,028,594,052 € 971,231,814 € 500,000,000 € 510,433,699 € 491,344,223 UBI Covered Bonds due 28 January 2021 5,25% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,131,286,542 - UBI Covered Bonds due 22 February 2016 4,5% guaranteed by UBI Finance Srl € 750,000,000 € 817,037,468 - UBI Covered Bonds due 18 November 2021 floating rate amortising guaranteed by UBI Finance Srl € 250,000,000 € 251,229,559 - Nominal amount of issue 31.12.2011 31.12.2010 Innovative equity instruments (preference shares) listed on international markets ISIN number € 250,543,687 Luxem bourg XS0123998394 Non-cumulative Fixed/Floating Rate Guaranteed Trust Preferred Securities Banca Popolare di Bergamo Capital Trust € 300,000,000 € 229,648,799 € 244,086,637 XS0131512450 9% Non-cumulative Guaranteed Trust Preferred Securities Banca Popolare Commercio e Industria Capital Trust € 115,000,000 € 101,929,335 € 106,899,082 Step-Up Non-voting Non-cumulative Trust Preferred Securities Banca Lombarda Preferred Securities Trust € 155,000,000 € 125,142,835 € 126,904,945 London XS0108805564 The list does not include the numerous EMTN issues listed in London and in Luxembourg, nor the securities generated by securitisations performed for internal purposes by B@nca 24-7, UBI Leasing, Banco di Brescia and Banca Popolare di Bergamo, all listed on the Dublin stock exchange, nor the issues of French certificates of deposit and of euro commercial paper, listed in Luxembourg. 108 In detail, institutional funding was composed as follows as at 31st December 2011: EMTN securities (Euro Medium Term Notes) amounting to €10.3 billion (€212 million subordinated), issued by UBI Banca as part of a programme for a maximum issuance of €15 billion. All the securities are admitted for trading on the London stock exchange with the sole exception of those which had been issued by the former Banca Lombarda e Piemontese listed in Luxembourg; covered bonds amounting to €6.1 billion, consisting of eight issues by UBI Banca for a total nominal amount of €5.75 billion (including €11 million already ammortised), as part of a multi-originator programme for a maximum issuance of €10 billion euro. The securities are listed in London; French certificates of deposit amounting to €0.8 billion, issued by the UBI Banca International as part of a programme for a maximum issuance of €5 billion euro, listed in Luxembourg; euro commercial paper amounting to €1 billion euro, issued by UBI Banca International as part of a programme for a maximum issuance of €6 billion euro, listed in Luxembourg; preference shares amounting to €0.5 billion composed of the securities still in issue following the public exchange offer of June 2009. These consist of three issuances for a total €0.453 billion nominal, two of which listed in Luxembourg and one in London. At the date of this report, following the voluntary public tender offer to purchase, which took place between 7th February and 12th March 2012, the nominal amount had fallen to €0.344 billion. The downgrades of UBI Banca by Moody's and Fitch performed in the last part of 2011 in the wake of the lowering of Italy’s credit rating had the consequence, amongst other things, of making it necessary for UBI Banca and other national banking groups to take a series of actions on its programme for the issue of covered bonds. In order to prevent probable downgrades of the programme, accounts had to be opened with a third party counterparty (Bank of New York Mellon, also the paying agent) in order to collateralise the swap contracts between UBI Banca and UBI Finance, the special purpose entity for the programme. Margins were paid into these accounts, calculated on the basis of the provisions of the swap contract originally entered into (asset swaps and liability swaps). At the same time, the liquidity accounts of the entity UBI Finance were transferred from UBI Banca International Luxembourg to Bank of New York Mellon, in relation to the minimum rating level requested by the two agencies for the bank used for them. At the end of 2011 the ratings for the programme were “Aaa” for Moody’s and “AAA” for Fitch, under review in both cases for possible negative impacts. In the weeks that followed, when further downgrades of the rating were performed on the Republic of Italy and on national banking Groups, the ratings for UBI Banca’s covered bond programme were also downgraded: from “Aaa” to “Aa2” by Moody’s (16th January 2012) and from “AAA” to “AA+” by Fitch (8th February 2012). The new ratings were, however, maintained under review for possible negative impacts. As at 31st December 2011 the segregated portfolio of residential mortgages (cover pool), created at UBI Finance to cover issuances totalled approximately €9.647 billion, of which 24.8% originated by Banca Popolare di Bergamo, 22.3% by Banco di Brescia, 17.4% by Banca Popolare Commercio e Industria, 11% by Banca Regionale Europea, 10.3% by Banca Popolare di Ancona, 6.1% by Banca Carime, 4.9% by Banco di San Giorgio, 2% by Banca di Valle Camonica and the remaining 1.2% by UBI Banca Private Banking Investment. The segregated portfolio again also had a high degree of fragmentation, including over 136 thousand mortgages with average residual debt of €70.9 thousand, distributed with approximately 75% in North Italy. On 1st February 2012 a new transfer of assets was made by Banca Popolare di Bergamo, Banco di Brescia, Banca Carime and UBI Banca Private Investment who transferred mortgages already held on their books to the special purpose entity for a total of €1.171 billion consisting of the remaining principal3. A second UBI Banca covered bond programme is currently being organised. This programme, which will probably be completed by April 2012, is designed for issuances which will be subscribed by UBI Banca itself in order to be able to have assets eligible for refinancing. A pool of mainly commercial mortgages and, in addition, residential mortgages eligible according to national legislation, but not considered in the rating agencies’ methodologies for the first programme (residential), will be transferred to UBI Finance CB 2 Srl, to back the issues of this new series of covered bonds. The programme will in fact have no specific rating, but will benefit exclusively from the senior rating of the Parent, UBI Banca. The issuances made under this second programme will be entirely subscribed by UBI Banca itself and they will add to the available pool of assets eligible for refinancing. On 1st March 2012, the first transfer of assets was completed by Banca Popolare Commercio e Industria, Banca Popolare di Ancona, Banca Regionale Europea and Banca di Valle Camonica which transferred 3 Another two transfers of assets were performed in 2011 for use in the covered bond programme as follows: - on 1st May Banca Popolare di Bergamo and Banco di Brescia transferred mortgages already held on their books to UBI Finance for a total of €1.377 billion consisting of the remaining principal owed; - on 31st October Banca Popolare Commercio and Industria, Banca Regionale Europea, Banca Popolare di Ancona and Banco di San Giorgio transferred mortgages already held on their books to the special purpose entity for a total of €1.587 billion consisting of the remaining principal on the loans. 109 mortgages already held on their books to UBI Finance CB 2 for a total of €1.3 billion of the remaining principal. Banco di Brescia, Banca Popolare di Bergamo, Banca Carime e Banco di San Giorgio will also make their first transfer with value date of 1st April 2012 for a total estimated amount of approximately €1.8 billion. Funding from bonds issued to ordinary customers amounted to €27.8 billion, essentially unchanged compared to the previous year (+€0.2 billion), although changes for individual items were in opposite directions. More specifically listed bonds issued by UBI Banca destined to network bank customers reached almost €7 billion, an improvement of €1.8 billion. New placements by the Parent – nine issuances for a total of €1.9 billion nominal concentrated in the second quarter and towards the end of the year, including three totalling over €1 billion, with a lower tier two subordination clause – were used mainly to replace bonds maturing issued through Centrobanca’s non captive channel (-€0.9 billion) and to a lesser extent network banks issues that matured (-€0.7 billion). Maturities of bonds outstanding as at 31st December 2011 Nominal amounts in millions of euro UBI BANCA* of which: EMTNs 1st Quarter 2012 2nd Quarter 2012 3rd Quarter 2012 4th Quarter 2012 2013 2014 Subsequent years 1,542 1,566 799 1,131 4,673 4,413 8,625 22,749 1,500 1,495 70 1,000 3,447 2,234 440 10,186 - 11 - 11 51 51 5,615 5,739 1,378 1,217 1,183 999 5,562 3,376 2,626 16,341 Covered bonds ** Network banks Other banks in the Group Total Total 7 1 5 173 102 431 3,594 4,313 2,927 2,784 1,987 2,303 10,337 8,220 14,845 43,403 * The EMTN subordinated bonds were placed on the date of the maturity or the exercise of a call option. Preference shares have not been included. ** The first half year amortisation, amounting to €11 million, took place in the fourth quarter 2011. As concerns market segmentation, management accounting figures for end of period volumes of direct funding for the network banks and for UBI Banca Private Investment show that in December 76.2% of funding came from the retail Geographical distribution of direct funding from market (77% in December 2010), 10.6% from the customers by region of location of the branch (*) private banking market (10.7%), 9.6% from the (excluding repurchase agreements and bonds) corporate market (9.2%) and 3.6% from institutional customers (3.1%). Percentage of total 31.12.2011 31.12.2010 Lombardy Latium Piedmont Apulia Calabria Marches Campania Liguria Emilia Romagna Veneto Basilicata Umbria Abruzzo 59.14% 59.07% 8.54% 8.02% 4.71% 8.70% 4.50% 3.97% 3.88% 2.42% 1.23% 1.01% 0.95% 0.52% 0.42% 7.62% 4.78% 4.77% 4.01% 3.88% 2.49% 0.98% 1.14% 1.01% 0.49% 0.41% Friuli Venezia Giulia 0.26% 0.25% Tuscany 0.19% 0.18% 0.03% 0.16% Molise Valle d'Aosta Trentino Alto Adige Sardinia 0.02% 0.00% 0.20% 0.01% 0.02% 0.01% Total 100.00% 100.00% North 72.14% 71.59% - North West 69.62% 69.19% - North East 2.52% Central Italy South 13.22% 14.64% 2.40% 13.36% 15.05% In terms of annual changes, those same management accounting figures show basic stability for the retail market (-0.8%) and for the main components of it: -0.4% for private individual customers and -0.1% for small businesses. No change was recorded for the private banking market, while the corporate market improved (+2.9%), as a result of action taken to improve funding products for businesses, as did funding from the institutional market (+16.9%). The table, “Geographical distribution of direct funding from customers by region of location of the branch”, gives the geographical distribution of traditional funding (consisting of current accounts, savings deposits and certificates of deposit) in Italy. The figures show an increase in the already significant geographical concentration of the Group in northern regions (up to 72.1% from 71.6% in 2010) and more specifically in the North West where the network banks have their greatest presence. (*) The aggregates relate to banks only. 110 The public tender offer to purchase tier one instruments (preference shares) in issue In order to optimise the structure of the consolidated supervisory capital with particular reference to the highest quality component (common equity in accordance with Basel 3), UBI Banca made a public tender offer to purchase the entire amount of the Group’s tier one instruments in circulation, with an offer of 80% of the nominal amount. The offer, authorised by the Bank of Italy, took place as follows: the “institutional offer” for qualified Italian and international investors [as defined by Art. 34-ter, paragraph 1, letter b) of the issuers’ regulations] took place between 7th and 16th February 2012. It was held under an exemption regime in accordance with the laws and regulations governing public purchase and exchange offers. In addition to the price, those accepting the offer were paid interest accruing up to the settlement date (22nd February); the “retail offer” on the other hand took place between 24th February and 12th March 2012 in accordance with Art. 102 and following of the consolidated finance act. It was destined to preference shareholders resident or domiciled in Italy who are not qualified investors. This offer, authorised by the CONSOB (Italian securities market authority) with Resolution No. 18111 of 22nd February 2012, was on the securities in issue on conclusion of the institutional offer. In this case too, those accepting the offer were paid interest accruing up to the payment date (16th March); The public tender offer to purchase tier one instruments (preference shares) of the Group ISIN num ber Consideration Nom inal am ount as a of the securities percentage of in issue on the the nom inal date of the offer am ount Issuer Nom inal am ount of the securities repurchased Institutional Offer Retail Offer Nom inal am ount of the securities in issue subsequent to the offer XS0123998394 Banca Popolare di Bergamo Capital Trust € 227,436,000 80% € 40,966,000 € 852,000 € 185,618,000 XS0131512450 Banca Popolare Commercio e Industria Capital Trust € 101,388,000 80% € 28,746,000 € 5,284,000 € 67,358,000 XS0108805564 Banca Lombarda Preferred Securities Trust € 124,636,000 80% € 29,117,000 € 4,057,000 € 91,462,000 € 98,829,000 € 10,193,000 € 344,438,000 € 453,460,000 Total From an earnings and capital viewpoint, on conclusion of the two offers the UBI Banca Group will recognise a net gain in the first quarter of 2012 of €15.8 million (€21.8 million before tax), corresponding to approximately two basis points in terms of the core tier one ratio, calculated on the basis of risk weighted assets as at 31st December 2011. The repurchase will also result in a benefit in terms of a decrease in interest expense of over €7 million per year. 111 Indirect funding and assets under management Indirect funding from ordinary customers 31.12.2011 % 31.12.2010 Changes % amount Figures in thousands of euro % Assets under custody 35,175,527 48.8% 35,449,316 45.4% -273,789 -0.8% Assets under management Customer portfolio management 36,892,042 7,898,346 51.2% 11.0% 42,629,553 9,112,815 54.6% 11.7% -5,737,511 -13.5% -1,214,469 -13.3% of which: fund based instruments Mutual investment funds and SICAV’s Insurance policies and pension funds of which: Insurance policies Total indirect funding from ordinary customers 1,699,935 2.4% 2,065,172 2.6% -365,237 -17.7% 17,250,549 11,743,147 23.9% 16.3% 21,189,141 12,327,597 27.1% 15.8% -3,938,592 -584,450 -18.6% -4.7% -579,719 -4.8% 11,545,015 16.0% 12,124,734 15.5% 72,067,569 100.0% 78,078,869 100.0% Group indirect funding from ordinary customers amounted to €72.1 billion December 2011, a decrease as at of €6 billion compared to €78.1 billion at the end of 2010 (-7.7%). If the estimated impact of the unfavourable performance of the market prices of the different components is excluded, the fall in the total over twelve months was slight. 31st As can be seen from the graph, the trend for the total over the last three years was basically stable for assets under custody, while that for assets under management was more volatile, still far from the pre-crisis levels of 2008. The latter was particularly penalised in the second half of 2011 by the progressive deterioration of conditions on financial markets. -6,011,300 -7.7% Indirect funding (end of quarter totals in millions of euro) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1 Q 2 Q 3 Q 4 Q 2008 1 Q 2 Q 3 Q 4 Q 2009 Assets under management 1 Q 2 Q 3 Q 4 Q 2010 1 Q 2 Q 3 Q 4 Q 2011 Assets under custody This therefore explains why the contraction in indirect funding over twelve months (-€6 billion) is attributable almost entirely to assets under management (down by €5.7 billion to €36.9 billion; -13.5%). Seventy percent of the negative trend for this item was due to mutual funds and Sicav’s (-€3.9 billion; -18.6%) and also to customer portfolio managements (-€1.2 billion; -13.3%), while the fall in insurance products was less (-€0.6 billion; -4.7%). The annual performance of assets under custody, which was more or less unchanged at €35.2 billion (-€0.3 billion; -0.8%), was affected by the strong contraction that occurred over the summer which wiped out the increases recorded during the other quarters of the year. *** 112 As concerns mutual investment funds and Sicav’s, at the end of December the Assogestioni (national association of asset management companies) figures 4 for asset management companies of the UBI Banca Group reported the following for 2011: net negative inflows of €3.7 billion, corresponding to -17.7% of ASSETS UNDER MANAGEMENT ORIGINATED at the end of 2010 (the fall for the sector nationally was €33.3 billion, -7.2% of the assets originated twelve months before); assets originated of €16.5 billion – inclusive of assets entrusted under a management mandate to Prudential totalling €2.73 billion (€1.50 billion of equity funds and €1.23 billion of bond funds)5 – a decrease of 21.3% compared to approximately €21 billion at the end of 2010, which places the UBI Group in sixth place in the Assogestioni6 classification with a market share of 4% (4.56% at the end of 2010); a reduction in assets originated by a greater percentage than that for the sector nationally (-21.3% compared to -10.2%). Fund assets originated UBI Banca Group 31.12.2011 % 31.12.2010 Changes % amount Figures in millions of euro % Equities 2,362 14.3% 2,734 13.1% -372 -13.6% Balanced 1,293 7.8% 1,512 7.2% -219 -14.5% Bond 9,387 56.9% 11,784 56.2% -2,397 -20.3% Monetary funds 2,782 16.9% 3,715 17.7% -933 -25.1% 612 3.7% 840 4.0% -228 -27.1% Flexible Hedge funds TOTAL (a) Sector 68 0.4% 378 1.8% -310 -82.0% 16,504 100.0% 20,963 100.0% -4,459 -21.3% 31.12.2011 % 31.12.2010 Changes % amount Figures in millions of euro Equities Balanced Bond Monetary funds Flexible Hedge funds Total (b) MARKET SHARE OF THE UBI BANCA GROUP (a)/(b) % 94,580 22.9% 107,423 23.4% -12,843 -12.0% 18,277 180,040 48,720 4.4% 43.6% 11.8% 21,305 189,212 62,333 4.6% 41.1% 13.5% -3,028 -9,172 -13,613 -14.2% -4.8% -21.8% 62,051 15.0% 67,089 14.6% -5,038 -7.5% 9,353 2.3% 12,686 2.8% -3,333 -26.3% 413,021 100.0% 460,048 100.0% -47,027 -10.2% 4.00% 4.56% The summary figures in the table confirm the prudent approach of UBI Group customers as follows: a constantly higher percentage of lower risk funds (monetary funds and bonds) compared to sector figures, accounting as a whole for 73.8% of the total (55.4% for the Assogestioni sample), despite greater decreases, especially for bond funds (-20.3% compared to -4.8%); a percentage of equity funds that is increasingly smaller as a consequence than that for the sector (14.3% compared to 22.9%), while the class has decreased more over twelve months compared to the Assogestioni sample (-13.6% compared to -12%); a relatively larger percentage of balanced funds (7.8% compared to 4.4%), while investments in hedge funds almost disappeared (-82% year-on-year, compared to 26.3% for the sector). With regard to periodic surveys performed by Assogestioni (national association of asset management companies), since August the new “Monthly map of assets under management” 4 “Map of assets under management (collective instruments and customer portfolio management)” for the 4th quarter of 2011. 5 Funds managed under a mandate by Prudential as at 31st December 2010 amounted to €2.65 billion (€1.71 billion of equity funds and €0.94 billion of bond funds). 6 The Group fell by three places compared to December 2010, overtaken by Am Holding – a new asset management company created in 2011 from an alliance between Anima SGR and Prima SGR, two asset management companies which, considered singly, have lower assets under management and market share than those of the UBI Banca Group, – by the Mediolanum Group and by Franklin Templeton Investment. 113 only provides an update of ASSETS UNDER DIRECT MANAGMENT7 for mutual investment funds and Sicavs – calculated net of assets managed under a mandate by third parties – which are therefore to be considered less in line with the actual assets under management originated by the UBI Banca Group. On the basis of those surveys the UBI Group recorded the following performance as at 31st December 2011: negative net inflows for assets actually under management of €3.9 billion, down by 21.5% compared to assets managed at the end of 2010 (net inflows for the sector nationally were negative by €33 billion, down by 7.2% over assets managed twelve months before). However, it must be considered that this data does not include funds managed under a mandate by Prudential, which recorded positive net inflows year-on-year of €0.2 billion; assets under management of €13.8 billion – again net of over €2.7 billion of assets managed by Prudential – which placed the Group in eighth position among operators in the sector with a market share of 3.29%, down compared to 3.98% at the end of 2010; a reduction in assets under management of €4.5 billion (-24.8%) compared to a fall of €41.4 billion for the Assogestioni sample (-9%). *** If all assets under management are considered (collective instruments and customer portfolio managements), at the end of the fourth quarter the UBI Banca Group was positioned in eighth place in the sector8 – sixth among Italian groups – with assets under management, net of Group funds and mutual funds managed under a mandate by Prudential, of €22.8 billion – including €2.5 billion relating to institutional customers – and a fall in market share 2.66% (3.19% at the end of 2010). *** For a more appropriate reading of annual changes in net inflows for mutual funds and sicavs and in the relative market shares, it must be considered that as difficulties increased in the financial context, Italian banks were faced with a liquidity crisis which reached systemic levels in the fourth quarter. This led them to give preference to commercial policies which ensured priority was given to support the various forms of direct funding. It must also be considered that Assogestioni’s representative sample of the sector also includes non banking operators. Consequently, market shares for the UBI Banca Group are naturally smaller than those for direct funding, lending and number of branches (see the preceding section, “The distribution network and market positioning”, in this respect). 7 Assets originated to which assets received for management under a mandate from another manager are added and from which assets entrusted under mandate to another manager for management are subtracted. 8 Source: Assogestioni (national association of asset management companies), “Map of assets under management (collective instruments and customer portfolio management) 4th quarter 2011. The UBI Group fell by two places in the Assogestioni classification compared to December 2010 overtaken by Am Holding and by the BNP Paribas Group. Since this classification is based on assets under management net of Group funds, the market share calculated using Assogestioni data does not take account of the €2.73 billion of mutual fund assets managed under a mandate by Prudential. 114 General banking business with customers: lending Performance of the loan portfolio Composition of loans to customers 31.12.2011 of which deteriorated % Figures in thousands of euro Current account overdrafts Reverse repurchase agreements Mortgage loans and other medium to longterm financing Credit cards, personal loans and salary backed loans Finance leases Factoring Other transactions Debt instruments: 31.12.2010 Changes of which deteriorated % amount % 12,907,301 13.0% 1,151,331 13,723,925 13.5% 1,067,391 -816,624 -6.0% 923,859 0.9% - 323,597 0.3% - 600,262 185.5% 56,238,200 56.4% 3,172,375 53,943,966 53.0% 2,512,658 2,294,234 4.3% 5,527,788 8,886,514 5.6% 8.9% 206,948 937,571 6,344,773 9,590,800 6.2% 9.4% 144,009 769,279 -816,985 -704,286 -12.9% -7.3% 3,199,870 11,797,162 209,076 3.2% 11.8% 0.2% 62,427 748,232 1,000 2,988,697 14,846,953 52,118 2.9% 14.6% 0.1% 16,946 749,846 1,000 211,173 -3,049,791 156,958 7.1% -20.5% 301.2% - structured instruments 8,893 0.0% - 3,409 0.0% - 5,484 160.9% - other debt instruments 200,183 0.2% 1,000 48,709 0.1% 1,000 151,474 311.0% 6,279,884 101,814,829 5,261,129 -2,125,059 -2.1% Total loans to customers 99,689,770 Lending to customers at the end of December amounted to €99.7 billion, a decrease of €2.1 billion compared to €101.8 billion twelve months before (-2.1% compared to +1.8% for the banking sector nationally to the private sector). 100.0% 100.0% Year‐on‐year rate of change in loans to the private sector (*) 10% 9% 8% Sector Nationally 7% UBI Group 6% After a positive start, which saw the 4% portfolio reach a peak of €102.8 3% billion at the end of June (+€1 billion in the first half), total loans 2% remained stable over the summer, 1% but declined sharply (-€3.1 billion) 0% in the last few months of the year, ‐1% as pressures worsened on financial ‐2% markets and generalised and ‐3% growing difficulty was experienced by the banking sector in obtaining funding. As a result, an operation (*) Net of loans to public administrations was performed on the Group loan portfolio to reduce exposures, which affected the “large corporate” segment in a context of a general deterioration in the real economy which dampened the demand for credit by other categories of businesses. 4 Q 11 3 Q 11 2 Q 11 1 Q 11 4 Q 10 3 Q 10 2 Q 10 1 Q 10 4 Q 09 3 Q 09 2 Q 09 1 Q 09 4 Q 08 3 Q 08 2 Q 08 1 Q 08 5% If the large corporate segment is excluded, the annual change in lending was positive by 0.9%. Furthermore, the Group also took action in 2011 to rationalise its lending to non-captive customers, belonging mainly to B@nca 24-7, but also to Centrobanca and UBI Factor, but only marginally. Net also of this last category of loans, the annual change in the consolidated loan portfolio was an increase of 2%. In terms of origin, the performance of the consolidated portfolio was attributable basically to the network banks, which accounted for 66% of the consolidated aggregate. As a result of 116 processes to improve credit quality which affected the non-captive market, the contribution made by the product companies was also negative overall, although it was offset to a substantial degree by growth in lending by UBI Banca to counterparties outside the Group. The performance by the different types of lending over twelve months was not uniform: • mortgages and other medium to long-term lending progressively increased to over €56.2 billion (+€2.3 billion; +4.3%), which confirmed it as the main form of lending, accounting for over 56% of the total. On the basis of management accounting figures for the network banks, Centrobanca and B@nca 24-7, performing residential mortgages totalled €22.8 billion in December (€21.8 billion in December 2010), of which 46% with a loan to value ratio (LTV) of less than 60%; • reverse repurchase agreements almost tripled to €924 million, (+€0.6 billion), a reflection of increased business by the Parent with the Cassa di Compensazione e Garanzia (CCG – a central counterparty clearing house) in the last part of the year. This business must be interpreted in relation to changes in financial liabilities held for trading (uncovered short positions on securities) and also to intermediation performed during the period in consideration of the favourable market conditions; • other debt instruments increased by €0.2 billion as a result of a new banking investment made by the Parent towards the end of 2011, which as a result of its eligibility qualifications, was added to the pool of assets eligible for refinancing with the central bank; • factoring loans granted by UBI Factor reached €3.2 billion (+€0.2 billion; +7.1%), having grown progressively after a decrease in the first quarter; • on the other hand, finance leases decreased to €8.9 billion (-€0.7 billion; -7.3%), partly in relation to the reorganisation of lending processes completed by UBI Leasing in 2011, in parallel with a change of focus in its business towards the captive market; • similarly the other forms of consumer credit also decreased to €5.5 billion (-€0.8 billion; -12.9%). This trend basically reflects the performance of B@nca 24-7’s lending portfolio (down by €0.6 billion to approximately €5.5 billion; -10%) in the light of precise decisions to strategically reposition business, taken in order to improve credit quality. These led to the progressive discontinuation of high risk business segments consisting of special purpose loans and consumer credit to non captive customers, for which only operations for the servicing of existing loans remain. In terms of types of lending a decrease was recorded in special purpose loans (down by €0.3 billion to €0.4 billion) brokered by SILF and in other personal loans (down by €0.3 billion to €1.9 billion) – originated mainly through the network banks. The reduction in the latter affected both the captive component and the residual component originated by the SILF network in equal measure. While outstanding loans remained unchanged at €3.1 billion, salary and pension backed loans – originated almost entirely by external distribution networks – came to account for 56% of B@nca 24-7’s total outstanding consumer loans. Although the company was affected by a change in the focus of this lending business in the second quarter towards captive customers through the Group subsidiary Prestitalia Spa, while external distribution networks were discontinued (i.e., Ktesios Spa) at the same time, total salary backed loans did not record any significant changes; • taken together, other types of short-term lending recorded a decrease to €3.8 billion (-€3 billion for “Other transactions”, -€0.8 billion for current account overdrafts), concentrated mainly in the last quarter of the year. More specifically, after growth of €0.7 billion in the first three quarters, current account overdrafts decreased by €1.5 billion in the fourth quarter to €12.9 billion. “Other transactions” (loans for advances, portfolio, import/export transactions, very short term lending, etc.) amounted to €11.8 billion at the end of the year, as the progressive decrease that had occurred in the first nine months (-€0.8 billion) worsened in the last quarter (-€2.2 billion). In terms of maturities (and also as a result of the performance reported above), at the end of the year the Group portfolio consisted of medium to long-term loans totalling €70.7 billion (up 1% year-on-year, despite a fall of 1.1% in the third quarter), accounting for 71% of the total, and of short term loans amounting to €29 billion (-9% year-on-year; -7.3% over the last three months). 117 The ratio of lending to funding in the December was 97%, an increase compared to the end of 2010 (95.4%), but down with respect to 98.9% in September. If funding is considered net of repurchase agreements with the CCG, the ratio was 101.5% (104.4% in December 2010 and 106.5% in September 2011). As concerns customer market segmentation, end of period management accounting figures for lending by network banks and by UBI Banca Private Investment show that at the end of the year 58.8% was destined to the retail market (55.4% in December 2010), 39.5% to the corporate market (43.2%), 1.4% to the private banking market (1.1%), while the remaining 0.3% was to institutional customers (0.3%). In terms of annual trends, those same management figures show an improvement for the retail market (+1.3%) – driven by the private individuals segment (+2.3%), while the small business segment remained almost unchanged (-0.3%) – and a marked decrease for the corporate market (-12.6%), of which 80% attributable to the large corporate segment (-27.6%) and the remaining part to the core segment (-3.9%). Distribution of loans by economic sector (management accounting figures for performing loans of the network banks and Centrobanca) 31.12.2011 Manufacturing and service companies (non financial companies and producer households) of which: other services destined for sale Commerce, recovery and repair services Construction and public works Energy products Metal products, excluding machines and means of transport Agricultural, forestry and fishery products Hotels and restaurants Foodstuffs, beverages and tobacco products Textiles, leather and footwear, clothing Agricultural and industrial machinery Consumer households 30.9.2011 30.6.2011 31.3.2011 31.12.2010 61.8% 62.9% 63.2% 62.8% 62.8% 17.0% 9.5% 9.1% 3.7% 2.4% 2.3% 2.0% 1.9% 1.5% 1.4% 16.7% 9.9% 9.0% 4.5% 2.5% 2.2% 1.9% 1.9% 1.7% 1.5% 17.2% 10.0% 9.1% 4.4% 2.5% 2.2% 2.0% 1.9% 1.7% 1.5% 17.0% 10.3% 9.2% 3.3% 2.5% 2.2% 2.0% 2.0% 1.6% 1.5% 17.7% 9.9% 9.3% 3.6% 2.4% 2.1% 2.0% 1.6% 1.6% 1.4% 32.3% 30.3% 30.0% 29.5% 29.4% Financial companies 2.8% 3.7% 3.6% 4.5% 4.6% Public administrations 1.0% 1.0% 1.0% 0.8% 0.9% Other (not-for-profit institutions and the rest of the world) 2.1% 2.1% 2.2% 2.4% 2.3% 100.0% 100.0% 100.0% 100.0% 100.0% Total Again on the basis of management figures, the results given in the table for network banks and Centrobanca only – an aggregate which represents approximately 67% of gross loans – showed the following in December 2011: 94.1% of outstanding loans are destined to manufacturing and service companies and consumer households, a proportion which had increased further compared to 92.2% twelve months before), which confirms the traditional mission of the Group to support communities in its markets; the distribution by sector of performing loans to non financial companies and to producer households also confirmed the fragmentation of the portfolio with “Other services destined for sale” and “Commerce, recovery and repair services”, which are by nature heterogeneous, continuing to account for the largest percentage of total lending (26.5%), although slightly down compared to December 2010 (27.6%). 118 Details of the geographical distribution of lending in Italy are given in the table “geographical distribution of loans to customers by region of location of the branch”. The total share of loans to northern regions amounted to 82.8% of the total, (of which 79.1% to the NorthWest), slightly less than twelve months before, while that granted to central regions was 9.5%. The remaining 7.7% was destined to southern regions. Concentration of risk (largest customers or groups as a percentage of total loans and guarantees ) Customers or Groups 31.12.2011 30.9.2011 30.6.2011 31.3.2011 31.12.2010 Largest 10 3.5% 3.9% 4.0% 4.1% 4.1% Largest 20 5.6% 6.4% 6.5% 6.7% 6.8% Largest 30 7.1% 8.0% 8.2% 8.5% 8.5% Largest 40 8.2% 9.1% 9.3% 9.5% 9.6% Largest 50 9.1% 10.1% 10.3% 10.4% 10.5% From the viewpoint of the concentration, a significant and generalised improvement was recorded with respect to all the comparative periods, which increased in the last quarter in particular, partly in relation to the action already mentioned which was taken. Geographical distribution of loans to customers (*) by region of location of the branch Percentage of total 31.12.2011 Lombardy Piedmont Latium Marches Liguria Campania Apulia Emilia Romagna Calabria Veneto Umbria Abruzzo Basilicata Friuli Venezia Giulia Molise Tuscany Valle d'Aosta Trentino Alto Adige Sardinia 31.12.2010 69.59% 6.63% 4.81% 3.84% 2.91% 2.30% 2.14% 1.98% 1.92% 1.45% 0.68% 0.62% 0.43% 0.25% 0.23% 0.20% 0.02% 0.00% - 70.37% 6.39% 4.62% 3.84% 2.82% 2.17% 2.07% 1.97% 1.82% 1.59% 0.64% 0.61% 0.40% 0.24% 0.24% 0.20% 0.01% 0.00% 0.00% Total 100.00% 100.00% North 82.8% 83.4% - North West 79.1% 79.6% - North East 3.7% 3.8% 9.5% 7.7% 9.3% 7.3% Central Italy South (*) The aggregates relate to banks only. As concerns “large exposures” on the other hand, according to the new regulations introduced in December 2010 by the Bank of Italy, these are now measured on the basis of the nominal value, instead of the amount weighted for counterparty risk. Consequently, at the end of 2011, the Group had three positions which exceeded 10% of the supervisory capital (five at the end of 2010) for a total €15.4 billion, generally down compared to both €22.2 billion twelve months before and to all the other comparative periods: • €7.8 billion to the Ministry of the Treasury, mainly in relation to investments in government securities by the Parent (€8.3 billion twelve months before); • €6 billion with the CCG, relating to all the operations by the Parent (€10.2 billion at the end of 2010); • €1.6 billion attributable to different types of transactions outstanding with a major banking group (only one banking Group was reported at the end of 2010, not the same as that reported here, for an exposure of €1.4 billion). Exposures of €2.3 billion had also been reported in December 2010 consisting of authorised credit to two major corporate counterparties, as part of ordinary lending business with customers. In consideration of the reduction in the number of counterparties reported with respect to the comparative periods and the Large exposures application of a zero weighting factor for transactions with 31.12.2011 30.9.2011 30.6.2011 31.3.2011 31.12.2010 the government, the only two Figures in thousands of euro Number of positions 3 5 5 6 5 actual risk positions for the Exposure 15,388,367 20,595,725 22,775,787 25,270,584 22,164,767 UBI Group existed after Positions at risk 1,127,147 2,460,896 4,486,718 4,668,018 1,782,442 weightings, down significantly to €1.1 billion from €1.8 billion in 2010. The percentage of consolidated supervisory capital is well below the limit of 25% set for banking groups for each of the exposures reported. At the end of the year guarantees granted by the UBI Group totalled €7.3 billion, an increase of 20% compared to €6.1 billion in December 2010. 119 The change recorded was caused by a large increase in financial guarantees, which almost doubled to €3 billion (+€1.4 billion), compared to a slight fall for commercial guarantees of €4.3 billion (-€0.2 billion). *** A report is given below on some of the product companies and/or external networks with which the Group operated or has operated. B@nca 24-7: Ktesios Spa The financial company Ktesios (hereinafter also “the Company”), placed in voluntary liquidation on 14th April 2011, operated in the brokering of salary backed loans and the deduction of loan repayments from salary. More specifically Ktesios operated as an agent for numerous banks, including B@nca 24-7, using its own distribution network consisting of agents, brokers and financial intermediaries (indirect channels). Ktesios is controlled in Italy by CQS Holding Srl, which is in turn a subsidiary of KTP Global Finance Sca, a Luxembourg holding company of which 47.45% of the share capital is held by the CIR Group, 47.45% by Merrill Lynch - Bank of America Group and 5.1% by minority investors (mainly management). B@nca 24-7 had total outstanding salary backed loans on its books as at 31st December 2011 of €3,067 million, of which €883 million1 were originated through the finance company Ktesios. However, this amount did not constitute a direct exposure of the UBI Banca Group to Ktesios, but represented receivables held by B@nca 24-7 from customers making payments from their salaries or pensions. In other words it represented receivables from the end beneficiaries of the loans (over 70,000 positions, 60% of which public sector, government or retired employees). These loans were: guaranteed by the transfer to B@nca 24-7 (transferee) of the receivables consisting of the transferable portions of salaries or pensions which the customers (transferors) of the bank are owed by the transferring debtors, which is to say their employers (central government administrations, local public authorities, private sector companies, etc.) or pension funds (INPS – national insurance institute, INPDAP – public administration institute, etc.); guaranteed by compulsory insurance to cover cases of predecease and loss of employment for the employees who are the beneficiaries of the loan. Following the liquidation already mentioned, the Company, the owners and banks signed a general agreement on 24th October 2011 designed to wind up the company without losses. On the basis of that agreement, the banks, which had made credit facilities available to the Company to fund its salary backed loan business, waived their right to enforce the “deducted for non payment” clause and assumed all responsibility resulting from the direct management of the business, while the shareholders agreed to provide the Company with the financial means necessary to meet its other commitments and to allow the successful completion of the liquidation. In addition, B@nca 24-7 was asked to waive its right to enforce the pledge which backed any losses which might have arisen on the loans. Under the terms of the agreement signed the receiver, who from May 2011 only paid to B@nca 24-7 amounts resulting from early repayments, paid funds received in the meantime to repay the loans to B@nca 24-7 (approximately €68 million). The outstanding loans will be repaid over the next five years. The impact of the agreement on the income statement involved a loss of €19.4 million on the receivables recognised in the balance sheet in relation to the Ktesios Group, including approximately €11.4 million2 recognised through profit and loss in 2011 and €8 million resulting from the reclassification of a previous provision for risks and charges made in the fourth quarter of 2010. 1 €46 million of the €883 million was brokered through the subsidiary Kema. 2 €10.4 million relating to Ktesios and €1 million to its subsidiary Kema. 120 Agreement between BPCI and Altachiara Italia Spa Consistent with the policies contained in the new Business Plan to limit the use of external distribution networks in the residential mortgage sector, a co-operation agreement signed in 2007 with Altachiara came to an end in August. That company operated as a financial intermediary pursuant to Art. 106 of the Consolidated Banking Act and the agreement was for the distribution of Banca Popolare Commercio e Industria mortgages to non Group private individual customers. It is underlined that in order to guarantee the quality of the loans granted, the agreement required the loans to be processed, approved and concluded directly by BPCI – which entered into the contract directly with the customer – after verifying the existence of the necessary documentation produced by the agents and brokers, inclusive of declarations relating to anti-money laundering, criminal activities and privacy laws. The total amount in euro of the mortgages brokered by Altachiara currently held on the books of BPCI is approximately €700 million, accounting for less than 10% of total lending by the bank (approximately €8.6 billion). Risk Loans to customers as at 31st December 2011 Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (*) Deteriorated loans - Non-performing loans - Impaired loans (8.38%) (4.27%) (2.77%) 8,589,416 4,377,325 2,844,167 2,309,532 1,895,908 310,387 (6.30%) (2.49%) (2.54%) 6,279,884 2,481,417 2,533,780 26.89% 43.31% 10.91% - Restructured loans - Past due loans (0.91%) (0.43%) 933,786 434,138 93,096 10,141 (0.84%) (0.43%) 840,690 423,997 9.97% 2.34% (91.62%) 93,951,550 541,664 (93.70%) 93,409,886 0.58% 102,540,966 2,851,196 99,689,770 2.78% Performing loans Total loans to customers The item as a percentage of the total is given in brackets. Loans to customers as at 31st December 2010 Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (*) Deteriorated loans - Non-performing loans (7.14%) (3.62%) 7,465,062 3,780,973 2,203,933 1,841,057 (5.17%) (1.91%) 5,261,129 1,939,916 29.52% 48.69% - Impaired loans - Restructured loans (2.22%) (0.85%) 2,320,471 889,070 287,557 60,577 (2.00%) (0.81%) 2,032,914 828,493 12.39% 6.81% 3.11% - Past due loans (0.45%) 474,548 14,742 (0.45%) 459,806 Performing loans (92.86%) 97,073,520 519,820 (94.83%) 96,553,700 0.54% 104,538,582 2,723,753 101,814,829 2.61% Total loans to customers The item as a percentage of the total is given in brackets. (*) Coverage is calculated as the ratio of impairment losses to gross exposure. Total outstanding gross deteriorated loans were unchanged at €8.59 billion in the fourth quarter 2011. Despite this performance, the overall result of action taken by the Group to manage credit quality, the cumulative change over twelve months was an increase of €1.12 billion (+15.1%), including €0.44 billion relating to the first quarter, €0.10 billion to the second quarter, €0.52 billion to the third and just €0.06 billion to the fourth. The annual increase was the result of performance by non-performing loans (+€0.60 billion) and impaired loans (+€0.52 billion), while growth in restructured loans was modest (+€45 million), almost fully offset by the reduction in exposures past due and/or in arrears (-€40 million). At the end of December net deteriorated loans totalled €6.28 billion, an increase year-on-year of €1.02 billion (+19.4%), consisting of: €0.38 billion for the first quarter, €0.16 billion for the second, €0.46 billion for the third and €0.02 billion for the fourth. The trends reported were accompanied by a reduction of 2.63 percentage points in the total coverage (down from 29.52% to 26.89%), of which 1.78 percentage points reflect disposals of 121 unsecured non-performing loans (€219.4 million), almost fully written-off, while the remaining part is due to lower estimated losses on newly classified positions3. Coverage for performing loans, on the other hand, increased to 0.58% from 0.54% in December 2010. From the viewpoint of the types of loan, as can be seen from the table, “Composition of loans to customers”, approximately 65% of the annual growth in net deteriorated loans regards the item “mortgage loans and other medium to long-term loans” backed by collateral, which results automatically in a lower level of coverage, while 21% relates to the non-banking financial sector. NON-PERFORMING LOANS Gross non-performing loans rose to €4.38 billion from €3.78 billion at the end of 2010, up by €596.4 million (+15.8%), of which €198.6 million relating to the first quarter, €42.8 million to the second, €207 million to the third and €148 million to the fourth4. As already reported, the trend for the second quarter includes the effects of the disposal of unsecured non-performing loans for a total of €119.9 million (€58.5 million relating to B@nca 24-7, €36.1 million to the network banks and €25.3 million to UBI Leasing), while changes in the fourth quarter incorporated the two additional disposals performed by B@nca 24-7 amounting to €93.1 million and by UBI Leasing amounting to €6.4 million. Around 90% of the year-on-year increase is attributable to the network banks and to UBI leasing. Performance during the year with respect to the previous year saw on the one hand a reduction of 16% in inflows from other classes of deteriorated exposures (from impaired loans in particular) and on the other an increase in payments received and disposals. Gross non-performing loans backed by collateral increased constantly over the twelve month period to reach €2.65 billion (+€0.60 billion; +29.4%) accounting for 60.6% of total gross loans (54.2% in December 2010). On the other hand, net non-performing loans rose from €1.94 billion to €2.48 billion, up by €541.5 million (+27.9%), of which €131.7 million relating to the first quarter, €123.5 million to the second quarter, €147.4 million to the third and €138.9 million to the fourth quarter. The total outstanding at the end of the year included just 11% not backed by any type of guarantee (collateral or other). As a result of the trends reported above, the ratio of non-performing loans to loans reached 4.27% in gross terms and to 2.49% in net terms (i.e. net of impairment losses). Despite this, the credit quality of the Group continues to outperform the average for Italian banks, which is 6.24% for gross non-performing loans and 3.09% for net non-performing loans in the private sector. Coverage fell to 43.31% from 48.69% twelve months before, a reflection of both the increase in the proportion of positions backed by collateral – and therefore with less recognition of impairment losses – and the disposals of unsecured non-performing loans, almost fully written-off (98.4%), already mentioned. If the phenomena just mentioned, which accounted for 197 and 263 basis points respectively, is not considered then the coverage for non-performing loans would have been 47.91%. Coverage for non-performing loans not backed by collateral, considered gross of write-offs (the write-off of positions subject to bankruptcy proceedings and the relative impairment losses), was 77.45% at the end of December (80.82% in December 2010). Net of the disposal of 3 Either as a result of the existence of collateral or because they are operational impairment or restructured loans for which agreements have been reached to reschedule debt by agreeing to a debt repayment schedule pursuant to article 67 or to a debt restructuring plan pursuant to article 182-bis of the Bankruptcy Act. 4 A gross exposure of €31 million relating to Fondazione Centro San Raffaele del Monte Tabor was classified as non-performing in the fourth quarter of 2011. 122 unsecured loans mentioned above, the coverage for non performing loans not backed by collateral was 78.72%. In addition to the disposals of non-performing loans mentioned, in the fourth quarter the Group disposed of €23 million of unsecured loans subject to proceedings by creditors, with the recovery of €0.7 million. Furthermore, Centrobanca disposed of loans (mainly performing) to generate a gain of €0.5 million. Total disposals of receivables and non-performing loans during the year gave rise to reversals of impairment losses of €2.5 million, including €2.1 million relating to B@nca 24-7, which confirmed the appropriateness of the valuations and impairment losses made by that bank. UBI Factor: exposure to Fondazione Centro San Raffaele del Monte Tabor This exposure amounted to approximately €31 million and relates to advances made in 2004 on VAT credits held with the tax authorities totalling €137.2 million, subsequently found to be uncollectable in court proceedings in relation to litigation between the invoice seller and the tax authorities themselves. Total impairment losses of €9.5 million had been recognised on this exposure at the end of the year after a reversal of impairment amounting to €6 million was recognised following the acceptance of an improved offer on the disposal of this hospital with respect to the original proposal contained in the arrangement with creditors presented by the Foundation (ruling of the Bankruptcy Court of Milan of 27th October 2011), which offered a higher percentage of recovery of the unsecured loan than had been originally estimated. On 19th March 2012 the creditors approved the proposed arrangement. The classification of the position as non-performing loan had a significant impact on the ratio of net nonperforming loans to net loans to customers of this company, which rose from 0.55% in September to 1.27% at the end of year (0.42% in December 2010). IMPAIRED LOANS After four months of progressive growth, total outstanding gross impaired loans decreased for the first time in the last three months of 2011, although only slightly, amounting to €2.84 billion. Nevertheless, the cumulative change over twelve months was an increase of €523.7 million (+22.6%), of which +€184.3 million attributable to the first quarter, +€192.4 million to the second quarter, +€222.4 million to the third and -€75.4 million to the fourth quarter. Approximately three quarters of the year-on-year increase was attributable to Centrobanca and the network banks. Gross impaired loans backed by collateral rose to €1.85 billion (+€0.44 billion year-on-year; +31.3%) to account for 65% of total outstanding gross loans at the end of December (60.7% at the end of 2010), notwithstanding a fall in the last quarter (-€42 million), but nevertheless smaller than that for total gross impaired loans. Performance during the year with respect to the previous year saw a reduction in the flow into new classifications, although with a higher percentage of new classifications from performing loans than transfers from other classes of deteriorated exposures. The trend for net impaired loans was similar to that for gross impaired loans, rising from €2.03 billion to €2.53 billion during the year, up by €500.9 million (+24.6%) including +€200 million relating to the first quarter, +€171.5 million to the second quarter, +€214.2 million to the third and -€84.8 million to the fourth quarter. The year-on-year fall in coverage from 12.39% to 10.91% basically reflects the increase in the percentage of positions backed by collateral, as already mentioned. Net of secured loans, coverage for impaired loans stood at 19.04% (22.41% twelve months before). 123 Loans to customers: changes in deteriorated gross exposures in 2011 Non-performing Impaired loans loans Figures in thousands of euro Restructured exposures Past due exposures Opening gross exposure as at 1st January 2011 3,780,973 2,320,471 889,070 474,548 Increases 1,491,771 2,172,222 250,048 785,998 transfers from performing exposures 415,216 1,612,768 33,930 759,222 transfers from other classes of deteriorated exposures 873,878 387,217 136,218 3,244 other increases 202,677 172,237 79,900 23,532 -895,419 -1,648,526 -205,332 -826,408 -37,316 -353,276 -1 -239,867 Decreases transfers into performing exposures full impairment losses -328,588 -2,003 -2,963 -1 payments received -315,552 -368,314 -178,198 -57,097 disposals -174,581 transfers to other classes of deteriorated exposure -3,482 other decreases Final gross exposure as at 31st December 2011 -897,419 - - -18,616 -481,040 -35,900 -27,514 -5,554 -48,403 4,377,325 2,844,167 933,786 434,138 Loans to customers: changes in deteriorated gross exposures in 2010 Non-performing Impaired loans loans Figures in thousands of euro Restructured exposures Past due exposures Opening gross exposure as at 1st January 2010 2,751,588 2,208,369 479,520 934,119 Increases transfers from performing exposures 1,649,454 422,669 2,484,776 1,258,375 1,046,418 181,571 1,811,969 1,617,752 1,114,275 112,510 780,327 446,074 372,139 492,708 30,112 164,105 -620,069 -1,606 -285,864 -2,372,674 -294,429 -83 -636,868 -28,558 -1,521 -2,271,540 -1,228,549 - -227,721 -287,673 -505,955 -53,547 transfers from other classes of deteriorated exposures other increases Decreases transfers into performing exposures full impairment losses payments received disposals -29,486 transfers to other classes of deteriorated exposure other decreases -3,013 -72,379 3,780,973 Final gross exposure as at 31st December 2010 - - - -1,379,429 -411,060 -31,859 -68,975 -882,552 -106,892 2,320,471 889,070 474,548 RESTRUCTURED LOANS Reflecting a performance similar to that of impaired loans, although less marked, gross restructured loans increased year-on-year, but fell in the fourth quarter. Over twelve months, the total rose from €889.1 million to €933.8 million, up by €44.7 million (+5%), of which +€8.6 million attributable to the first quarter, +€19.1 million to the second quarter, +€32.9 million to the third and -€15.9 million to the fourth. Over 80% of the year-on-year change was attributable to UBI Leasing and the network banks (although with differing performance within the item) and it benefited, with respect to the previous year, from fewer new classifications from performing loans and fewer transfers from other categories of deteriorated exposures. Coverage of 10% had increased by over three percentage points compared to 6.8% at the end of 2010. EXPOSURES PAST DUE AND/OR IN ARREARS Gross exposures past due and in arrears performed in the opposite direction to other categories of deteriorated loans, reducing overall from €474.5 million to €434.1 million, benefiting from action taken for the qualitative management of single items, which had the effect of halving new classifications from performing loans compared to the previous year. 124 In detail, the annual change (-€40.4 million; -8.5%) is the aggregate result of the following changes: • +€48.4 million between January and March, due mainly to positions for which the Italian Banking Association - Ministry of the Economy and Finance moratorium has expired and which are being assessed until an extension is granted; • -€149.9 million in the period April-June, as a result of significant repayments and returns to performing status; • +€62.4 million between July and September, including €42.5 million due to delays in payments by public administration counterparties of UBI Factor; • -€1.4 million between October and December. This category was affected by an increase in the fourth quarter in the past due category for the B@nca 24-7 portfolio (up by €51.4 million compared to previous period), while outstanding UBI Factor exposures decreased (-€34.4 million), partly in relation to the progressive disengagement of the company from business with customers operating with public administrations. Within this class, “PD 90” positions – i.e. exposures past due and in arrears for more than 90 days, backed by property mortgages, considered at the level of single transaction and gross of impairment losses – fell by €125.4 million to €173 million (€298.4 million in December 2010, €299.7 million in March, €210.3 million in June, €211.3 million in September). As a percentage of the total, these positions fell progressively over twelve months from 62.9% to 39.9%. The trend for coverage increased from 3.11% in December 2010 to 3.27% in June 2011 and then inverted, falling to 2.34% at the end of the year. This performance must be interpreted in relation to the increase, as a percentage of the total, in positions in B@nca 24-7’s “salary backed loans” portfolio and in UBI Factor positions attributable to technical delays in payments made by public administrations, for which coverage is naturally lower because of their nature. 125 The interbank market and the liquidity situation Quarterly changes in net interbank debt Figures in thousands of euro Loans to banks of which: loans to central banks Due to banks of which: due to central banks Net interbank position Figures in thousands of euro Loans to banks of which: loans to central banks Due to banks of which: due to central banks Net interbank debt 31.12.2011 A 30.9.2011 B 30.6.2011 C 31.3.2011 D 31.12.2011 E 6,184,000 5,314,336 4,384,636 4,510,008 739,318 1,485,674 325,450 345,625 3,120,352 739,508 9,772,281 8,611,714 4,966,574 7,332,517 5,383,977 6,001,500 4,000,333 - 1,255,064 2,219,152 -3,588,281 -3,297,378 -581,938 -2,822,509 -2,263,625 31.12.2010 F 30.9.2010 G 30.6.2010 H 31.3.2010 I 31.12.2009 L 3,120,352 3,427,795 3,290,637 2,996,834 739,508 295,430 375,415 282,815 3,278,264 641,788 5,383,977 7,126,257 9,252,062 4,612,141 5,324,434 2,219,152 2,000,056 2,977,481 479,002 639,753 -2,263,625 -3,698,462 -5,961,425 -1,615,307 -2,046,170 The deterioration of the Italian sovereign debt crisis has heightened the perception of risk attaching to Italian banks – among the main holders of that debt – since the summer. This has caused on the one hand, a progressive reduction in interbank transactions, with increasingly fewer foreign counterparties involved and on the other it has made the longer maturity institutional markets (EMTNs and covered bonds) actually inaccessible for Italian banks, which has also affected trading on monetary markets (euro commercial paper and certificates of deposit) as a result. These phenomena have had a particularly strong impact on the availability of funds, notwithstanding the high proportion of retail funding which traditionally characterises Italian banks and represents a very stable source of liquidity. The consequence was an increase in recourse to funding from the Eurosystem (loans in euro to Italian banks for monetary policy purposes), which rose progressively from €41 billion at the end of June to €105 billion in September, reaching almost €210 billion in December, to then stabilise at around €200 billion in January and February 2012. On its part, the governing council of the ECB has encouraged refinancing by adopting exceptional monetary policy measures. It introduced three-year fixed rate operations with full allotment of bids. It has further widened the range of eligible assets, by extending the criteria for the acceptability of loans and it has reduced the compulsory reserve requirement from 2% to 1%. These measures were added to by an initiative taken by the Italian government, which introduced government guarantees on the medium-term funding of banks. The liquidity injected into the banking system at a low cost has in fact significantly reduced pressures on funding, thereby allowing banks to make operational decisions which do not compromise their continued lending to the economy and also to invest in securities. In this context described above, the UBI Banca Group has addressed its liquidity management by introducing a number of lines of action: • it has strengthened its liquidity reserves represented by assets eligible for refinancing with the ECB. In this context the Parent also made use of the government measures by issuing government backed bonds at the beginning of 2012: two issuances on 2nd January for a total nominal amount of €3 billion (€2 billion with a three-year maturity and €1 billion with a five-year maturity), followed by a further €3 billion nominal on 27th February (€2 billion, three-year and €1 billion, five-year); • it participated in two refinancing operations with a three-year maturity (longer-term refinancing operation – LTRO) to compensate for the absence of institutional funding 126 • • and to thereby guarantee greater stability to the liability structure of its balance sheet in a market context still far from “normality”; The Group was allotted financing of €6 billion in the auction held on 21st December and a further €6 billion in the second operation on 29th February 2012 (with value date 1st March); it took action designed on the one hand to contain lending, especially to the “large corporate” segment, and on the other hand to consolidate and increase funding from customers, which represents 80% of total direct funding for the UBI Banca Group. The above was performed with a view to further safeguarding the structural balance between funding and lending business with customers, with consequent effects on the consolidated liquidity position. An examination of balance sheet items at the end of 2011 shows that the net interbank debt of the Group rose to -€3.6 billion from -€2.3 billion in December 2010, after reaching -€0.6 billion in June (the lowest level in the last two years). Analysis of items with a residual maturity of less than three months also shows a net balance calculated net of auctions with the central bank of +€2.1 billion (+€0.3 billion in December 2010). As shown in the table, the quarterly performance of the items was quite varied during 2011. After a significant improvement in the net balance in the second quarter, made possible, amongst other things, by the results of institutional issuances1 – accompanied also by the elimination of the exposure to central banks – the Group began in the summer to participate in weekly auctions held by the Eurosystem for increasingly larger amounts. Weekly operations with the central bank were supplemented in October with financing of one billion euro with a maturity of one year (maturity 1st November 2012). The subsequent participation in December in the first of the two LTROs for €6 billion allowed the Group to completely eliminate its outstanding debt (€4 billion including the one-year one billion euro loan just mentioned), replacing it and supplementing it with funds available on a stable basis for three years. In detail, loans to banks as at 31st December 2011 totalled €6.2 billion, almost twice the amount recorded in the previous December. The change that occurred reflects an increase in lending to banks other than the central bank (up by €3.1 billion to €5.4 billion), while the sum on the centralised account held with the central bank for compulsory reserve requirements, was basically unchanged at €0.7 billion. In terms of types of lending, the increase in interbank lending was composed as follows: ‐ an increase in current accounts and deposits (+€1.4 billion, of which +€0.8 billion in the fourth quarter alone); ‐ new investments of €1.1 billion in debt instruments issued by banks made towards the end of the year (securities eligible for refinancing used to increase the pool of assets eligible for refinancing with the ECB); ‐ increased financing (+€0.6 billion), above all in the form of reverse repurchase agreements (+€0.5 billion), used for the acquisition of securities eligible for refinancing. After significant growth at the beginning of the year, in relation to the need to temporarily supplement the “collateral pool” held with the ECB, the latter were reduced in the third quarter when a second rating was obtained for the securitisation of B@nca 24-7 residential mortgages and when eligibility was obtained for the securitisation of Banca Popolare di Bergamo performing loans to SMEs. 1 See the previous section “funding policies” in this respect. 127 Loans to banks: composition 31.12.2011 31.12.2010 % Changes % Figures in thousands of euro Loans to central banks Term deposits Compulsory reserve requirements Reverse repurchase agreements Other Loans to banks Current accounts and deposits Term deposits Other financing: - reverse repurchase agreements amount 739,318 738,100 11.9% 11.9% 739,508 739,508 23.7% 23.7% -190 -1,408 0.0% -0.2% 1,218 0.0% - - 1,218 n.s. 5,444,682 2,516,230 455,701 1,329,819 88.1% 40.7% 7.4% 21.5% 2,380,844 1,161,396 466,445 753,003 76.3% 37.3% 14.9% 24.1% 3,063,838 1,354,834 -10,744 576,816 128.7% 116.7% -2.3% 76.6% 534,373 8.6% 988 0.0% 533,385 98 0.0% 165 0.0% -67 -40.6% 795,348 12.9% 5.8% - finance leases - other Debt instruments Total % n.s. 751,850 24.1% 43,498 1,142,932 18.5% - - 1,142,932 n.s. 6,184,000 100.0% 3,120,352 100.0% 3,063,648 98.2% Interbank funding at the end of year was close to €10 billion, up by €4.4 billion over twelve months, due primarily to the transactions with the ECB (+€3.8 billion) already mentioned, but also to greater recourse to the market (+€0.6 billion), mainly in terms of repurchase agreements. Outstanding exposure to central banks of €6 billion consisted entirely of liquidity with a threeyear maturity obtained in the auction held on 21st December 2011. With regard to amounts due to other banks, a comparison in terms of type of funding between the two year-end positions shows a reduction of €0.2 billion for current accounts and demand and term deposits considered as a whole (down from €1.9 billion to €1.7 billion). In reality, the quarterly performance saw temporary growth in the first quarter which reached €3 billion, followed by a decrease as the management of all interbank liquidity converged on the Eurosystem as a consequence of the increase in country risk. Furthermore, term deposits at the end of year (€0.8 billion) included a European Investment Bank (EIB) deposit of €0.6 billion. The item “financing”, amounting to €1.9 billion, increased by €0.7 billion. This change reflects an increase in repurchase agreements to finance assets ineligible for refinancing, to be interpreted in relation to the corresponding asset item. “Other” financing includes a medium to long-term transaction with the European Investment Bank relating to the Parent for a residual amount, after repayments for the year, of €588 million (€672 million at the end of 2010). Due to banks: composition 31.12.2011 31.12.2010 % Changes % Figures in thousands of euro amount % Due to central banks 6,001,500 61.4% 2,219,152 41.2% 3,782,348 170.4% Due to banks Current accounts and deposits 3,770,781 896,512 38.6% 9.2% 3,164,825 692,788 58.8% 12.9% 605,956 203,724 19.1% 29.4% 778,119 1,881,780 8.0% 19.2% 1,199,455 1,149,003 22.3% 21.3% -421,336 732,777 -35.1% 63.8% 1,007,037 10.3% 290,737 5.4% 716,300 246.4% 874,743 8.9% 858,266 15.9% 16,477 1.9% 214,370 2.2% 123,579 2.3% 90,791 73.5% 9,772,281 100.0% 5,383,977 100.0% 4,388,304 81.5% Term deposits Financing: - repurchase agreements - other Amounts due for commitments to repurchase own equity instruments Other payables Total 128 With regard to the liquidity reserve, consisting of the portfolio of assets eligible for refinancing with the central bank, total assets net of haircuts at the end of 2011 amounted to €11.6 billion (€9.1 billion at the end of 2010), composed of €8 billion of assets deposited in the “collateral pool” with the European Central Bank and €3.6 billion of government securities not refinanced with the Cassa di Compensazione e Garanzia (a central counterparty clearing house), available and non “pool”. Given the current use of €6 billion, the liquidity margin still available is €5.6 billion. Total Group assets eligible for refinancing had reached €24.5 billion as at 20th March 2012, composed of approximately €16 billion of assets deposited in the “collateral pool” and €8.5 billion of government securities not refinanced with the Cassa di Compensazione e Garanzia, available and non “pool”. Since the assets pledged on that date amounted to €12.3 billion2, the liquidity margin still available was €12.2 billion, a more than twofold increase compared to December. Assets eligible for refinancing 20.3.2012 Figures in billions of euro Securities owned (AFS, HTM and L&R) (*) Government backed bonds Covered bonds B@nca 24-7 residential mortgage securitisation (**) B@nca 24-7 salary backed loan securitisation (**) B@nca 24-7 consumer loan securitisation (**) UBI Leasing leased assets securitisation Banco di Brescia securitisation of performing loans to SMEs Banca Popolare di Bergamo securitisation of performing loans to SMEs Eligible assets resulting from participation in ABACO (***) Securities acquired through repurchase agreements Total 31.12.2011 30.9.2011 amount amount nominal eligible (net of eligible (net of amount haircuts) haircuts) nominal amount 30.6.2011 31.3.2011 31.12.2010 amount amount amount amount nominal nominal nominal nominal eligible (net of eligible (net of eligible (net of eligible (net of amount amount amount amount haircuts) haircuts) haircuts) haircuts) 13.55 6.00 0.75 13.33 5.65 0.69 6.25 - 5.76 - 1.31 - 1.07 - 1.50 - 1.36 - 1.41 - 1.28 - 1.40 - 1.34 - 1.40 0.75 1.44 0.76 1.48 0.88 0.00 0.00 0.00 0.00 1.71 1.30 - - - - 0.00 0.00 0.00 0.00 0.00 0.00 0.38 0.31 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.13 1.73 2.54 1.83 3.44 2.47 3.44 2.46 3.44 2.47 3.44 2.76 3.44 2.87 0.46 0.33 0.59 0.44 1.56 0.43 1.56 1.18 1.56 1.17 1.56 1.25 1.86 1.30 1.86 1.28 1.86 1.25 - - - - - - 0.59 0.59 0.65 0.65 0.41 0.41 0.39 0.39 0.30 0.30 0.27 0.27 - - 0.33 0.28 1.57 0.88 2.21 1.58 2.16 1.64 14.56 11.64 11.63 7.38 9.10 6.98 8.87 7.15 27.15 24.47 10.89 9.07 (*) These include unencumbered government securities, not refinanced with the Cassa di Compensazione e Garanzia (a central counterparty clearing house), for the following amounts: 31st December 2011: €3.6 billion (net of haircuts) entirely available, non-pool; 20th March 2012: €11.8 billion (net of haircuts), of which €3.3 billion contributed to the pool and €8.5 billion available, non-pool. (**) The amounts for the B@nca 24-7 securitisations were shown as nil from 31st March 2011 because a second rating had not yet been acquired and they were therefore temporarily ineligible. The securitisation of salary backed loans was closed down in December 2011 because of its low value. (***) ABACO (bank assets eligible as collateral) is the name given to procedures drawn up by the Bank of Italy for the management of loans eligible for refinancing. In order to qualify as eligible, an asset must meet specific requirements concerning the following: type of debtor/guarantor (public sector, non financial company, international and supranational institutions), high credit rating (single “A-” credit quality level, equivalent to a default probability of 0.10%) and a minimum amount (one million euro for national use until 2011). The increase in the size of the portfolio of assets eligible for refinancing was the result of many operations of various types carried out in 2011 and above all in the first few months of 2012. The requirement for a second rating came into force on 1st March 2011 when ABS instruments were required to obtain ratings from two different international agencies in order to be eligible. This made it necessary to commence processes for the assignment of a second rating for internal securitisations used by the UBI Banca Group, which in the meantime had become no longer eligible. They were temporarily compensated for with the acquisition of securities eligible for refinancing from external counterparties by means of reverse repurchase agreements. In August, the eligibility of a B@nca 24-7 residential mortgage securitisation was restored and the eligibility of a securitisation of performing loans (mainly to SMEs) granted by Banca Popolare di Bergamo was approved. The above amounts made it possible to compensate for both the reduction in the Banco di Brescia securitisation, following the partial repayment of the nominal amount (-€0.81 billion net of haircuts over the three month period) and for other changes caused by changes in market prices, with only a marginal renewal of the reverse repurchase agreements. 2 €12 billion with a three-year maturity acquired through participation in two auctions in December 2011 (€6 billion) and February 2012 (€6 billion) and €0.3 billion relating to finance in dollars obtained last January maturing on 29th March 2012. 129 The collateral pool also benefited in the last quarter from new investments in securities eligible for refinancing issued by banks for a total of €1.1 billion net of haircuts (€1.35 billion nominal). The significant increase in the liquidity reserve obtained in the first few months of 2012 (+€12.9 billion) was the result of the following: • new government backed UBI Banca issuances for a total nominal amount of €6 billion (€5.65 billion net of haircuts); • new covered bond issuances not placed on the market (“self-retained”) amounting to €0.75 billion nominal (€0.69 billion, net of haircuts); • an increase in unencumbered government securities not refinanced with the Cassa di Compensazione e Garanzia to reach a total of €11.8 billion net of haircuts, of which €3.3 billion contributed to the pool of assets eligible for refinancing with the ECB and €8.5 billion available non-pool. The above action offset the effects of the grace period on the UBI Leasing UBI securitisation (€0.64 billion net of haircuts), the reduction in the contribution from investments in eligible securities issued by banks (-€0.55 billion net of haircuts) and the absence of securities acquired through reverse repurchase agreements (-€0.28 billion). *** The downgrade’s by Moody's and Fitch, performed in the last quarter of 2011 in the wake of the lowering of Italy’s credit rating, had the consequence, amongst other things, of making it necessary for UBI Banca – and also several other national banking groups – to restructure the securitisations it had originated and held on its books as owned by the Group, in order to ensure continuity to the investments of the special purpose entities without compromising the eligibility of the senior securities issued. More specifically, on the one hand the ratings on the financial instruments invested in by the special purpose entities had to be redefined and on the other hand collateral had to be lodged on behalf of those entities for the swaps which back those securitisations, where UBI Banca is a direct counterparty. The main action taken was as follows: ‐ 24-7 Finance Srl (B@nca 24-7 residential mortgages): redefinition of “eligible investments” bringing the minimum up to the rating levels of UBI Banca in order to enable the entity to continue to invest in ECP and French CDs issued by UBI Banca International Lux. As a consequence of that redefinition Moody’s downgraded from “Aaa” to “Aa3”. DBRS’s A (high) rating , on the other hand, was confirmed; ‐ 24-7 Finance Srl (B@nca 24-7 consumer loans): redefinition of “eligible investments” to bring the minimum up to the current rating levels of UBI Banca and to thereby enable the entity to continue to invest in ECP and French CDs issued by UBI Banca International Lux. Action on the swaps with accounts opened to lodge collateral with a third party counterparty. As a consequence of that redefinition Moody’s downgraded from “Aaa” to “Aa2”. The early winding up of the securitisation is currently being considered, following the new downgrade of UBI Banca by Fitch in February 2012 and also in consideration of the significant amortisation of the senior tranche scheduled for the end of May 2012; ‐ 24-7 Finance Srl (B@nca 24-7 salary backed loans): the procedure for obtaining a second rating was not commenced for this securitisation, in consideration of the advanced state of amortisation and the consequent minimum notional nominal amount reached by the senior tranche. On 11th October 2011, the Management Board of UBI Banca decided on early redemption. On 20th December 2011 the securitisation was wound up in advance by returning the loan portfolio to the originator with early redemption of the securities issued and the early termination of all the contracts; ‐ UBI Lease Finance 5 Srl (UBI Leasing performing assets): redefinition of “eligible investments” to bring the minimum up to the current rating levels of UBI Banca and to thereby enable the entity to continue to invest in ECP and French CDs issued by UBI Banca International Lux. Action on the swaps with accounts opened to lodge collateral with a third party counterparty. As a consequence of that redefinition Moody’s downgraded from “Aaa” to “Aa2” and Fitch from “A” to “A-“; ‐ UBI Finance 2 Srl (Banco di Brescia performing loans to SMEs): redefinition of “eligible investments” to bring the minimum up to the current rating levels of UBI Banca and to thereby enable the entity to continue to invest in ECP and French CDs issued by UBI Banca International Lux. Action on the swaps with accounts opened to lodge collateral with a third party counterparty. As a consequence of that redefinition Moody’s downgraded from “Aaa” to “Aa2” and Fitch from “Aaa” to “A-“; ‐ UBI Finance 3 Srl (Banca Popolare di Bergamo performing loans mainly to SMEs): redefinition of “eligible investments” to bring the minimum up to the current rating levels of UBI Banca and to thereby enable the entity to continue to invest in ECP and French CDs issued by UBI Banca International Lux. Action on the swaps with accounts opened to lodge collateral with a third party counterparty. As a consequence of that redefinition Moody’s downgraded from “Aaa” to “Aa2” and Fitch from “Aaa” to “A-“; 130 The new ratings assigned to the above securitisations did not compromise their eligibility for refinancing operations with the European Central Bank. The only exception to this was the B@nca 24-7 consumer loan securitisation, which remains ineligible because it has only one of the two ratings required by the ECB. The downgrade of UBI Banca’s ratings by Fitch in 2012 made it necessary to take action again with further restructuring of the three securitisations rated by Fitch (UBI Finance 2, UBI Finance 3 and UBI Lease Finance 5). The following action was therefore taken: UBI Finance 2 Srl: the frequency of the coupon was changed from half yearly to quarterly and the alignment of the swap hedges was modified as a consequence; the liquidity accounts of the special purpose entity were moved from UBI Banca International Lux to another eligible counterparty (currently Bank of New York Mellon); provision in the documentation of the payment of the “commingling” guarantee3, as defined with Fitch; further changes to the definition of eligible investments so that the special purpose entity may continue to invest in the Group’s commercial paper (ECP and French certificates of deposit issued by UBI Banca International Lux); UBI Finance 3 Srl: the frequency of the coupon was changed from half yearly to quarterly and the alignment of the swap hedges was modified as a consequence; the liquidity accounts of the special purpose entity were moved from UBI Banca International Lux to another eligible counterparty (currently Bank of New York Mellon); provision in the documentation of the payment of the “commingling” guarantee, as defined with Fitch; further changes to the definition of eligible investments so that the special purpose entity may continue to invest in the Group’s commercial paper (ECP and French certificates of deposit issued by UBI Banca International Lux); UBI Lease Finance 5 Srl: creation of an extraordinary payment date (24th February 2012) on which an early extraordinary amortisation of the funds which had been formed until then on the accounts of the special purpose entity was performed with a consequent decrease by approximately €900 million of the senior tranche (nominal amount down from €3,440,500,000 to €2,539,986,695); the frequency of the coupon was changed from half yearly to quarterly and the alignment of the swap hedges was modified as a consequence; provision in the documentation of the payment of a “commingling” guarantee and the actual payment of the sum with value date 24th February 2012, as defined with Fitch; further changes to the definition of eligible investments so that the special purpose entity may continue to invest in the Group’s commercial paper (ECP and French certificates of deposit issued by UBI Banca International Lux). Finally, further action on swaps is still under study, designed mainly to reduce the margins paid. The action described above, together with that taken in the fourth quarter of 2011, helped to reduce the linkage between the securitisations in question with the Parent, UBI Banca, making them much less vulnerable to possible further downgrades caused by changes in the Parent’s rating. While the restructuring work was in progress in February 2012, Fitch confirmed its “A-“ rating for the three securitisations in question, for UBI Finance 2 and UBI Finance 3 and for UBI Lease Finance 5 on completion of that work. During that same period, however, Moody’s cut its rating on those same securitisations from “Aa2” to “Aa3”. The new ratings assigned to the above securitisations nevertheless remain compatible with the eligibility requirement for refinancing operations with the European Central Bank. 3 Guarantee in cash to be paid into an account held in the name of the special purpose entity to be able to maintain management of the collection accounts, which is to say the accounts into which the amounts are paid for the repayment of the loans transferred by the originators. 131 Financial assets The year 2011 was an extremely critical one for Italy. The weak signals of recovery that manifested at the beginning of the year were not repeated in the second half and the difficulties caused by the development of the sovereign debt crisis worsened, resulting in a significant widening of the yield spreads between BTPs and German bunds. This had severe repercussions on the banking system, which in the meantime saw the institutional funding market close and the need to strengthen capital grow. In this context, the UBI Banca Group gradually reduced government securities held in portfolio financed through the Cassa di Compensazione e Garanzia (a central counterparty clearing house), only partly renewing maturing investments and changing the internal composition in terms of available-for-sale (AFS) financial assets and financial assets held for trading (HFT). In the last quarter of the year, management policy returned to focus on new purchases of Italian government securities, mainly BOTs and BTPs with maturities of up to three years, classified as held for trading, partly with a view to supporting interest income and net trading income. Total financial assets of the Group amounted to €11 billion as at 31st December 2011, a marked decrease of €2.1 billion compared to twelve months before. Net of financial liabilities, over half of which consisted of financial derivatives, net financial assets amounted to €10 billion (€12.2 billion in 2010). As shown in the table, changes in the total were attributable primarily to the trend for AFS securities, which decreased by €2.2 billion in the third quarter following maturities of government securities concentrated in September 2011. This reduced the proportion of that portoflio as a pecentage of the total to 72.8% from 78% at the end of 2010, while a modest increase in assets held for trading was recorded (up by €0.1 billion year-on-year), which was in reality the end result of large fluctuations during the year. Financial assets held for trading increased as a percentage of the total portfolio from 20.8% to 26%. On the other hand assets classified in application of the fair value option remained more or less unchanged at €126.2 million, all held by the Parent consisting of residual investments in hedge funds. Financial assets/liabilities 31.12.2011 Figures in tho usands o f euro Financial assets held for trading of which: financial derivatives contracts Financial assets at fair value Amount 31.12.2010 % Amount Changes amount % % 2,872,417 26.0% 2,732,751 20.8% 139,666 5.1% 596,986 5.4% 514,141 3.9% 82,845 16.1% 126,174 1.2% 147,286 1.1% -21,112 -14.3% 8,039,709 72.8% 10,252,619 78.1% -2,212,910 -21.6% 11,038,300 100.0% 13,132,656 100.0% -2,094,356 -15.9% - deb t instruments 9,687,568 87.8% 11,611,039 88.4% -1,923,471 -16.6% - of which: Italian government securities 7,838,038 71.0% 9,646,573 73.5% -1,808,535 -18.7% 485,294 4.4% 667,497 5.1% -182,203 -27.3% -16.3% Available-for-sale financial assets Financial assets (a) of which: - equity instruments 2.1% 274,362 2.1% -44,849 Financial liabilities held for trading (b) - Units in O.I.C.R. (collective investment instruments) 1,063,673 100.0% 954,423 100.0% 109,250 11.4% of which: financial derivatives contracts 625,772 58.8% 545,161 57.1% 80,611 14.8% -2,203,606 -18.1% Net financial assets (a-b) 229,513 9,974,627 12,178,233 The portfolio consisting of “financial assets held for trading” (€2,872,417 thousand) was smaller than the same portfolio held by the Parent (€3,515,897 thousand) due to the presence of financial derivatives contracts entered into by UBI Banca with the Group network banks and product companies. These instruments, in addition to being subject to partial and potential elimination as intercompany items, were classified by the Parent as held for trading because the relative assets hedged were recognised in the balance sheets of the Group network banks and product companies. When the consolidation was prepared, those instruments, entered into to hedge the underlying assets, were recognised within hedging derivatives. Total financial derivatives held for trading by the Parent amounted to €1,432,457 thousand at the end of year, while the figure for the Group was €596,986 thousand. 132 Management accounting figures1 as at the 31st December 2011, show the following: - - - - in terms of type of financial instrument, the securities portfolio of the Group was composed as follows: 80.5% of government securities, 17% of corporate securities (approximately 72% were issued by major Italian and international banks and financial institutions and 88% of the investments in corporate securities also carry an “investment grade” rating), 1.3% of hedge funds and the remainder (1.2%) consisting of funds and equities; from a financial viewpoint, floating rate securities accounted for 50.3% of the portfolio2 and fixed rate securities for 40.4%, while structured instruments (for which the optional component concerned the coupons only and not the capital invested), present mainly in the AFS portfolio, accounted for 6.7%, while the remainder were composed of equities, funds and convertible bonds; as regards the currency of denomination, 98.7% of the securities were denominated in euro and 0.6% in dollars with currency hedges, while in terms of geographical distribution, 95.8% of the investments (excluding hedge funds) were issued from countries in the euro area and 2% from the USA; finally, an analysis by rating (for the bond portfolio only) shows that 98.1% of the portfolio consisted of “investment grade” securities with an average rating of Baa1 (A2 in December 2010). Available-for-sale financial assets “Available for sale financial assets” (AFS), asset item 40, are measured at fair value with the recognition of changes in a separate fair value reserve in equity, except for losses due to reductions in value that are considered significant or prolonged. In this case the reduction in value that occurred in the period is recognised through profit or loss, the amount being transferred from the negative or positive reserve that may have been recognised in equity previously. Following the recognition of impairment losses, recoveries in value continue to be recognised in the separate fair value reserve in equity. Any decreases below the level of the previous impairment losses are recognised through profit and loss. Information on the fair value hierarchy (levels one, two and three) is given in Section A.3 of Part A – Accounting Policies in the Notes to the Consolidated Financial Statements. Available-for-sale financial assets: composition 31.12.2011 Figures in thousands of euro Debt instruments of which: Italian government securities Equity instruments Units in O.I.C.R. (collective investment instruments) Financing Total Level 1 Level 2 31.12.2010 Level 3 Total Level 1 Level 2 Changes Level 3 Total amount % 6,621,026 920,410 10,296 7,551,732 8,509,464 1,115,988 10,255 9,635,707 -2,083,975 -21.6% 5,625,881 251,226 338,292 46,963 88,444 5,964,173 386,633 7,366,675 346,586 409,872 73,614 70,357 7,776,547 490,557 -1,812,374 -103,924 -23.3% -21.2% 39,064 - 62,280 - - 101,344 - 18,313 - 106,596 - 1,446 124,909 1,446 -23,565 -1,446 -18.9% -100.0% 6,911,316 1,029,653 98,740 8,039,709 8,874,363 1,296,198 82,058 10,252,619 -2,212,910 -21.6% Available-for-sale financial assets amounted to €8 billion at the end of 2011, having decreased from €10.2 billion twelve months before. They were composed principally as follows: - the UBI Banca AFS portfolio amounting to €6,706 million (€8,698 million in December 2010); - the IW Bank portfolio, designed to stabilise that bank’s net interest income given the nature of its normal operations, amounting to €722 million (€845 million); 1 The management accounting figures relate to a smaller portfolio than that recognised in the consolidated financial statements, because they exclude equity investments and some minor portfolios, while they include transactions that may be performed at the end of the period with the value date for settlement in the following month. 2 The fixed rate securities purchased as part of asset swaps are also considered as floating rate. They account for 77% of the floating rate securities. 133 - the Centrobanca corporate bond portfolio, which represents activity complementary to and consistent with the lending approach of that bank, amounting to €479 million (€557 million). Changes in this item, which remained basically stable in the first half, saw a contraction in the second half of the year (-€2.2 billion, of which -€1.9 billion in the third quarter and -€0.3 billion in the fourth quarter), attributable primarily to debt instruments (down by over €2 billion in the second half, of which €1.8 billion relating to Italian government securities). At the end of the year debt instruments 3 amounted to €7.6 billion and were composed as follows: €6.6 billion in fair value level one4, €920 million in level two (which included €338.3 million of Italian sovereign debt, while corporate securities consisted primarily of unlisted bank bonds issued mainly by Italian banks) and a little more than €10 million in fair value level three (of which €8.7 million in Equitalia perpetual financial instruments). This item, 83% of which is held by the Parent, includes securities which matured mainly in September 2011 (BTPs and CTZs), in a difficult market context, which is the aggregate result also of repurchases of short-term (up to three years) Italian government securities. These changes, to which decreases in fair value must be added, occurred above all in the last quarter of the year, and were attributable to the falls in prices following the widening of the country risk spread for Italy. As concerns IW Bank, which holds a portfolio composed almost entirely of floating rate Italian government securities, the decrease that occurred over twelve months (-€123 million) was the result of falls in fair value (-€83 million), due to decreases in prices and maturities and redemptions (down by approximately €47 million). The Centrobanca portfolio – composed mainly of investment grade companies – decreased by €78 million, including €57 million as a result of impairment losses on assets and over €35 million due to redemptions. Investment policies over twelve months for its corporate bond portfolio were progressively oriented on refocusing on the Group’s captive customers, with investments targeted on Italian corporate issuers and major European players with business activities and subsidiaries operating on the domestic market. The financial crisis caused a decrease in the market value of debt instruments with a relative negative impact on the fair value reserve of €935 million (before tax). Equity instruments5 fell to €387 million from €491 million the year before, as a result of the combined effect of sales and disposals of investments and reductions in fair value, which affected instruments recognised within fair value level one in particular. This category determined the trend for the item (a total decrease of €103.9 million), falling by €95.4 million, attributable principally to: • the disposal by the Parent of its interest held in London Stock Exchange (a book value of €15.5 million in December 2010); • the reclassification of the equity investment in ETF Track on the EuroStoxx 50 (€17.1 million) within units in O.I.C.R.s (collective investment instruments); 3 As at 31st December 2010, debt instruments also included a securitisation of INPS (national insurance institute) assets (valued at €89.1 million), held by the Parent, which matured in the third quarter of 2011. Consequently the AFS portfolio no longer contains any direct investments in ABS instruments. However, own securitisations, eliminated when consolidating the accounts, still exist amounting to €29.9 million, down compared to €39.3 million twelve months before, mainly the result of the early redemption of Sintonia Finance (in the Centrobanca AFS portfolio amounting to €7.2 million at the end of 2010). They were composed as follows: - Lombarda Lease Finance 4 (ABS instruments classified within the UBI Banca available-for-sale portfolio) amounting to €3.9 million (€5.8 million); - Orio Finance (RMBS securities held by the Parent and classified within financial assets held for trading), amounting to €5 million (€5.3 million); - Lombarda Lease Finance 4 amounting to €21 million, classified within L&R and held by UBI Leasing (unchanged compared to December 2010). 4 Fair value level one debt instruments also include government securities held by the network banks (with a carrying amount of approximately €80 million) lodged as a guarantee for the issue of bankers’ drafts. 5 Shareholdings that are not classified as companies subject to control, joint control or significant influence and that are not held for merchant banking and private equity activities, are recognised here. 134 • decreases in the fair value of the share A2A Spa, down from €11.6 million to €8.3 million, and in the share Intesa Sanpaolo in particular, for which the market value at consolidated level fell to €240.4 million, after recognition of total impairment losses of €112.5 million. As already reported, in June 2011 the UBI Banca Group participated in the increase in the share capital by subscribing 41,435,116 ordinary shares at a price of 1.369 euro per share, for an amount of €56.7 million. As a result of that subscription, the Group holds 186,458,028 shares, accounting for 1.20% of the share capital with voting rights. On the other hand, unlisted equity investments with a level two and three fair value decreased overall by €8.6 million, partly in relation to the disposal of investments by the Parent (PerMicro and Banca Valsabbina Scpa with book values in December 2010 of €0.4 million and €1.7 million, respectively) and by Banco di Brescia (Hopa Spa for €2.7 million), while a new investment was made by UBI Pramerica SGR in Tages Capital Sgr 6 (+€0.5 million). The decrease was also caused net decreases in fair value of approximately €4.5 million, due in detail to the following impairment losses recognised: S.A.C.B.O. (-€4.4 million), Aedes Spa – ordinary shares category C (-€1.1 million), Immobiliare Fiera di Brescia Spa (-€1 million), Siteba Spa (-€0.8 million) and Risparmio e Previdenza Spa (-€0.4 million). These were partially offset by increases in the fair value of the companies SIA Spa (formerly S.I.A.-S.S.B. Spa, +€1.5 million), Società per i mercati di Varese Spa (+€0.6 million) and Autostrade Lombarde Spa (+€0.5 million). Units in O.I.C.R. (collective investment instruments) – held almost entirely by UBI Banca – amounted to €101.3 million, down by €23.6 million over twelve months, the aggregate result of opposing trends for fair value levels one and two. Level two in particular fell by €44.3 million, as a result of the combined effect of net falls in the fair value of investments, redemptions (although new subscriptions of units in funds were made) and disposals (€18.5 million) performed by UBI Pramerica SGR as part of the management of its proprietary portfolio7. This category included an investment in the closed-end fund Centrobanca Sviluppo Impresa with a fair value of €26.6 million, partially redeemed during the year for €12.8 million (of which €3.8 million represented profit). Fair value level one investments on the other hand increased by €20.7 million, primarily due to a more accurate reclassification of the instrument ETF Track on the EuroStoxx 50, with a book value of €17.1 million (previously classified within equity instruments) and of the Azimut Dividend Premium Class A fund (with a book value of €9.5 million, previously recognised within fair value level two), but also to an impairment loss recognised on the Polis property fund (€12.4 million as at 31st December 2011 and €18.3 million twelve months before). Units in O.I.C.R.s include a total of €20 million (€26.6 million the year before) invested in property funds. 6 With effect from 1st October 2011, UBI Pramerica SGR contributed its Capitalgest Alternative Investments Fund management operations to Tages SGR – comprising the assets and liabilities, the service and outsourcing contracts and the specialist personnel. On conclusion of that transaction, the Group’s asset management company held a 10% investment in Tages SGR, which had fallen as at 31st December 2011 to 7.74%, as a result of capital operations performed by Tages SGR after the capital contribution mentioned above. 7 With a view to improving its liquidity management, in the first half of 2011 UBI Pramerica SGR completed the disposal of the units it held in its proprietary mutual funds resulting from the contribution of the Capitalgest SGR Spa operations in January 2008. This had commenced in the last quarter of 2010 and was designed to further reduce the risk attaching to proprietary investments. A profit of €2.2 million was realised on the disposals. 135 Financial instruments held for trading Financial assets held for trading Asset item 20, “Financial assets held for trading”, comprises financial trading instruments “used to generate a profit from short-term fluctuations in price”. They are recognised at fair value through profit or loss – FVPL. Information on the fair value hierarchy (levels one, two and three) is given in Section A.3 of Part A – Accounting Policies in the Notes to the Consolidated Financial Statements. Financial assets held for trading: composition 31.12.2011 Level 1 Figures in tho usands o f euro A. On-balance sheet assets Debt instruments of which: Italian government securities Equity instruments Units in O.I.C.R. (co llective investment instruments) Financing Total (a) B. Derivative instruments Financial derivatives Credit derivatives Total (b) Total (a+b) Level 2 31.12.2010 Level 3 Total Level 1 Level 2 Changes Level 3 Total amount % 2,135,752 84 - 2,135,836 1,964,319 11,013 - 1,975,332 160,504 8.1% 1,873,865 12,811 - 85,850 1,873,865 98,661 1,870,026 72,856 2 104,082 1,870,026 176,940 3,839 -78,279 0.2% -44.2% 447 101 1,447 1,995 512 54 1,601 2,167 -172 -7.9% - 38,939 - 38,939 - 64,171 - 64,171 2,149,010 39,124 87,297 2,275,431 2,037,687 75,240 105,683 2,218,610 -25,232 56,821 -39.3% 2.6% 220 - 596,766 - - 596,986 - 1,014 - 509,601 - 3,526 - 514,141 - 82,845 - 16.1% - 220 596,766 - 596,986 1,014 509,601 3,526 514,141 82,845 16.1% 2,149,230 635,890 87,297 2,872,417 2,038,701 584,841 109,209 2,732,751 139,666 5.1% Financial assets held for trading had risen to €2.9 billion as at 31st December 2011, (up by €0.1 billion compared to the previous year), as a result of the performance by debt instruments8 (+€0.2 billion). The basic stability of Italian government securities – almost 90% of the total – is the result of considerable fluctuations that occurred during the year. Disposals and maturities progressively reduced the total to €0.5 billion in the first half, while mainly short-term (up to three years) BOTs and BTPs were purchased from the third quarter onwards – favoured, amongst other things, by the significant fall in prices – which brought the total for government securities to almost €1.9 billion. The total also includes over €234.4 million of government securities issued by France and Germany. Equity instruments decreased during the year from €177 million to €98.7 million. Disposals of fair value level one instruments by UBI Banca (-€38.3 million) and by Centrobanca (-€21.7 million) accounted for €60 million of this reduction. For the Parent, this consisted of the disposal of an equity portfolio managed under a mandate by UBI Pramerica SGR (European equities classified here amounted to €39 million as at 31st December 2010). The new management strategy employed in the first quarter of 2011 was oriented towards investments in UBI Pramerica mutual funds, classified under the fair value option, initially amounting to €330 million, which were completely disposed of in the following September due to turbulence on financial markets (see the following sub-section in this respect). For Centrobanca, this consisted of the disposal of an equity instrument subscribed in December 2010 and disposed of in January 2011. 8 Debt instruments included residual direct investments in “Asset Backed Securities”, all held by the subsidiary, UBI Banca International Sa, consisting mainly of mortgage backed securities (MBS), with the underlying assets principally of European origin amounting to €0.3 million (€0.5 million twelve months before). At the end of the year, on the other hand, a structured product matured – similar in terms of risk to ABS instruments – also held by UBI Banca International Sa, with a book value of €2.6 million in December 2010. 136 This category also includes investments in equity instruments classified within fair value level three, held as part of merchant banking and private equity business, in connection with Centrobanca. These had fallen to €85.9 million in December 2011 from €104.1 million the year before, due to the combined effect of impairment losses recognised on some investments (-€12.2 million for Medinvest International9 and -€0.5 million for Manisa Srl, both held by the Parent) and the disposal of an investment held by Centrobanca (-€12.1 million), which were partially offset by the increase in the fair value of an asset held by this subsidiary (+€4.4 million) and also by a new acquisition for €2.2 million towards the end of the year. Investments in OICR units (collective investment instruments) amounted to approximately €2 million and related mostly to hedge funds classified within fair value level three, purchased by UBI Banca prior to 30th June 2007 and still held, amounting to €1.5 million10. The item financing (€39 million compared to €64.2 million in December 2010) relates entirely to positions held by the subsidiary, Prestitalia Spa. Finally, financial assets classified as held for trading also included derivative instruments amounting to €597 million (€514.1 million twelve months before) entirely of a financial nature, for which the performance and amount must be interpreted in strict relation to the corresponding item recognised within financial liabilities held for trading. *** As already reported, at the end of 2010 fair value level two debt instruments still included impaired assets amounting to €0.9 million – fully disposed of in the first few months of 2011 – attributable to the expected realisable value of bonds issued by Lehman Brothers and subscribed by UBI International and by the Parent for a total nominal amount of €10 million. As concerns the position of the Group with regard to Lehman Brothers, as already reported in the previous 2009 and 2010 annual reports: - UBI Banca and Centrobanca have filed proof of claim applications with the Southern District Court of New York in connection with derivatives contracts which had been entered into with companies in the Lehman Brothers Group; - Centrobanca has filed proof of claim applications in relation to derivatives contracts which it had entered into with Lehman Brothers Special Financing Inc. subject to Chapter 11 bankruptcy proceedings in the USA; With regard to the above positions, following the approval on 5th December 2011 of a distribution plan proposed by Lehman Brothers Holding Inc. in the context of the Chapter 11 proceedings mentioned, which were approved by the competent court on 6th December 2011, distribution to creditors (including UBI Banca and Centrobanca) should start in 2012 on the basis of the plan mentioned. As concerns the position of Lehman Brothers International (Europe), a company belonging to the Lehman Brothers Group and subject to an administration order in the United Kingdom, as already reported in the 2010 Annual Report, on 17th September 2010 UBI Banca filed a creditor’s claim for GBP 485,930.71 in relation to derivatives contracts that had been entered into with Lehman Brothers International (Europe). Finally,in relation to that last position, as already reported, UBI Banca has already filed creditor claims against Lehman Brothers Holdings Inc., as the guarantor of Lehman Brothers International (Europe), in the context of the Chapter 11 proceedings in the USA mentioned above. 9 See the previous section “The consolidated income statement” for further details. 10 The following sub-section, “financial assets at fair value”, may be consulted for a full picture of the Group’s investments in hedge funds. 137 Financial liabilities held for trading Financial liabilities held for trading: composition 31.12.2011 Level 1 Figures in thousands of euro Level 2 31.12.2010 Level 3 Level 1 Total Level 2 Changes Level 3 amount Total % A. On-balance sheet liabilities Due to banks 335,123 - - 335,123 110,657 - - 110,657 224,466 202.8% Due to customers Debt instruments 102,778 - - - 102,778 - 298,605 - - - 298,605 - -195,827 - -65.6% - Total (a) 437,901 - - 437,901 409,262 - - 409,262 28,639 7.0% 187 625,585 - 625,772 1,191 543,970 - 545,161 80,611 14.8% - - - - - - - - 187 625,585 - 625,772 1,191 543,970 - 545,161 80,611 14.8% 438,088 625,585 - 1,063,673 410,453 543,970 - 954,423 109,250 11.4% B. Derivative instruments Financial derivatives Credit derivatives Total (b) Total (a+b) Financial liabilities held for trading (liabilities item 40) had risen to €1.1 billion as at 31st December 2011 (up by €109.3 million on the previous year), due mainly to an increase in fair value level two financial derivatives – consisting almost entirely of contracts on interest rates – the changes in which are to be interpreted primarily in relation to volumes of business. On-balance sheet liabilities, held entirely by the Parent, remained steady at €0.4 billion of which €0.2 billion relating to uncovered short positions on Italian government securities (€0.4 billion at the end of 2010). A change in the composition occurred within the item, out of amounts due to customers (-€0.2 billion) and into amounts due to banks (+€0.2 billion). Financial assets at fair value The item “financial assets at fair value” includes financial instruments classified as such in application of the fair value option (FVO). They are composed exclusively of units in O.I.C.R. (collective investment instruments) and include the remaining units in hedge funds subscribed after 1st July 2007. These financial assets are recognised at fair value through profit or loss. Information on the fair value hierarchy (levels one, two and three) is given in Section A.3, of Part A – Accounting Policies in the Notes to the Consolidated Financial Statements. Financial assets at fair value: composition 31.12.2011 Figures in thousands of euro Debt instruments Equity instruments Units in O.I.C.R. Level 1 Level 2 31.12.2010 Level 3 Level 1 Total Level 2 Changes Level 3 amount Total % - - - - - - - - - - Financing 104,846 - - 21,328 - 126,174 - 116,208 - - 31,078 - 147,286 - -21,112 - -14.3% - Total 104,846 - 21,328 126,174 116,208 - 31,078 147,286 -21,112 -14.3% (c ollec tive investment instruments) As at 31st December 2011, financial assets designated at fair value consisting of units in O.I.C.R.s classified within fair value levels one and three – held entirely by the Parent – amounted to €126.2 million (down by €21.1 million on December 2010). Investments of €104.9 million were recognised within fair value level one relating to three Tages funds (formerly Capitalgest Alternative), which incurred losses of €11.4 million over twelve months, which account for the change compared to December 2010. With regard to the management mandate conferred on the Group’s asset management company, units in UBI Pramerica mutual funds were subscribed in March 2011 for a total of €0.3 billion (fair value level one), 138 which were fully disposed of in the third quarter when a stop-loss mechanism was triggered 11 (in compliance with limits set by the financial risk policy). The remaining investments in hedge funds amounting to €21.3 million are classified within fair value level three. If the remaining amount of €1.5 million recognised within financial assets held for trading, (fair value level three OICR units, purchased before 30th June 2007) are also included, then investments in hedge funds as at 31st December 2011 totalled €22.8 million (€32.7 million at the end of 2010). Redemptions of approximately €5 million12 were received during the year, net of redemption fees13. As concerns redemption applications, management accounting figures show that at the end of 2011 seven funds, amounting to €14 million, are expected to pay and/or have declared that they were implementing a deferred redemption plan (known as a "gate") – as allowed for in their respective regulations; another 17 funds have created “side pockets” for an amount of €8.8 million. *** As concerns the Madoff collapse and the court proceedings initiated by UBI Banca against the fund Thema International Plc and the relative depository bank, HSBC Institutional Trust Services Ltd, held before the Commercial Court of Dublin, the “discovery” stage during which the parties exchange documentation and relevant information for the purposes of the proceedings in question, is still in progress. In the meantime, UBI Banca is monitoring the class actions brought in the USA and the liquidation proceedings in progress in the British Virgin Islands brought against three funds attributable to Madoff, Fairfield Sigma Ltd., Kingate Euro Ltd. and Kingate Global Ltd., in order to protect UBI Banca’s creditor rights also with respect to these actions. *** As concerns the Dynamic Decisions Growth Premium 2X fund, in liquidation, following the signing of an agreement with the receivers which gives UBI Banca preference in the redemption of sums recovered in the liquidation, in return for financing paid to the receivers, no significant and/or relevant developments have occurred. Exposure to sovereign debt risk On 28th July 2011, the European Securities and Markets Authority (ESMA) published document No. 2011/266 relating to information on sovereign debt to be disclosed in annual and half year financial reports prepared by listed companies that adopt IAS/IFRS. Details of the exposures of the UBI Banca Group are given on the basis that, according to the instructions issued by this European supervisory authority, “sovereign debt” is defined as debt instruments issued by central and local governments and by government entities and also as loans granted to them. As at 31st December 2011, the book value of sovereign exposures amounted to €8.7 billion, concentrated almost fully in Italy (approximately 98%). In addition to credit exposure to Italian public administrations amounting to €884 million, the Group also held Italian government securities amounting to €7.6 billion, (89% of which held by the Parent) of which almost €6 billion classified within available-for-sale assets and €1.6 billion within financial assets held for trading (considered net of uncovered short positions). Sovereign debt risk exposures to countries other than Italy are therefore kept low and for loans mainly regarded Spain (€117.5 million, inclusive of factoring transactions) and Luxembourg (€92.7 million). Both exposures relate to a foreign subsidiary of the Group which carries on business in both countries. 11 The losses incurred on the mutual fund portfolio caused UBI Pramerica SGR to firstly change the composition of the mix of products used for investments, with preference given to strictly monetary funds and then, in consideration of the continuing adverse conditions on markets, to sell all units held in funds at the end of September (€329.3 million as at 30th June 2011). 12 A further one million euro has been received since the beginning of 2012. 13 The technical term used to indicate expenses for repayment. 139 As concerns, on the other hand, portfolio investments in securities, these consisted of fairly modest exposures and mainly regarded core Eurpean Union countries: Germany (€9 million) and France (-€2.9 million). Positions existing as at 30th June 2011, relating to Finland (€5 million nominal) and Spain (€2.5 million nominal), both consisting of securities with ten-year maturities, were disposed of in July. UBI Banca Group: exposures to sovereign debt risk 31.12.2011 Country / portfolio of classification 30.6.2011 Nominal amount Carrying amount Fair value Nominal amount Carrying amount Fair value figures in thousands of euro 9,201,954 8,512,083 8,512,083 8,757,285 8,816,455 financial assets and liabilities held for trading (net exposure) 1,674,474 1,664,216 1,664,216 31,773 32,935 32,935 available-for-sale financial assets 6,649,895 5,964,173 5,964,173 7,740,276 7,789,305 7,789,305 877,585 883,694 883,694 985,236 994,215 994,215 117,470 117,470 117,470 118,429 118,468 118,468 - - - 2,519 2,558 2,558 117,470 117,470 117,470 115,910 115,910 115,910 97 - Italy loans - Spain financial assets and liabilities held for trading (net exposure) loans 8,816,455 15,150 9,189 9,189 97 97 15,005 9,044 9,044 7 7 7 loans 145 145 145 90 90 90 - France -1,999 -2,909 -2,909 -4,989 -5,170 -5,170 -1,999 -2,909 -2,909 -4,989 -5,170 -5,170 92,712 92,712 92,712 129,010 129,010 129,010 - Germany financial assets and liabilities held for trading (net exposure) financial assets and liabilities held for trading (net exposure) - Luxembourg loans 92,712 92,712 92,712 129,010 129,010 129,010 - Holland 10 10 10 10 10 10 loans 10 10 10 10 10 10 2,941 705 705 1,528 673 673 2,941 705 705 1,528 673 673 - - - 5,000 5,132 5,132 - - - 5,000 5,132 5,132 9,428,238 8,729,260 8,729,260 9,006,370 9,064,675 9,064,675 - Argentina financial assets and liabilities held for trading (net exposure) - Finland financial assets and liabilities held for trading (net exposure) Total on-balance sheet exposures The table below shows the distribution by maturity of Italian government securities held in portfolio. The average maturity of the AFS portfolio is 10/11 years, while the average residual maturity of Italian government securities in the HFT portfolio is 1.12 years. M aturities of Italian government securities 31.12.2011 Financial assets Available-for-sale held for trading (*) financial assets 30.6.2011 Total % Financial assets Available-for-sale held for trading (*) financial assets Total % figures in thousands of euro Up to 6 months 385,154 107,971 493,125 6.5% -200,033 2,352,909 2,152,876 27.5% Six months to one year 750,458 - 750,458 9.8% 178,513 107,549 286,062 3.7% One year to three years 451,206 1,409,166 1,860,372 24.4% 68,526 49,872 118,398 1.5% Three years to five years 77,171 711,089 788,260 10.3% - 884,250 884,250 11.3% 216 1,786,281 1,786,497 23.4% 9,524 2,100,108 2,109,632 27.0% 3 1,949,666 1,949,669 25.6% -23,596 2,294,612 2,271,015 29.0% 1,664,208 5,964,173 7,628,381 100.0% 32,935 7,789,299 7,822,234 100.0% Five years to ten years Over ten years Total (*) Net of the relative uncovered short positions. Due to the significant amounts for securities maturing in the third quarter (€2.2 billion), a comparison with the comparative figures as at 30th June 2011 shows a reduction in exposure on the shorter term segment of the yield curve (down from 27.5% to 6.5% at the end of year), with a repositioning at the same time towards maturities from “six months to one year” and from “one year to three years” (which together account for a percentage of the portfolio which rose from 5.2% to 34.2%), consistent with the policy to purchase securities with maturities of up to three years pursued by the Parent in the last part of the year. 140 As concerns the longer-term segment of the curve – over five years – a slight reduction in the exposure occurred (down from 56% in June to 49% at the end of 2011), although no change was made to UBI Banca’s policy to invest in longer-term BTPs, over 50% of which are hedged by asset swaps. 141 Exposures to some types of products This section provides an update of the position of the UBI Banca Group with regard to some types of financial instruments, which since the subprime mortgage crisis in 2007, are now considered at high risk. Special purpose entities (SPEs) The involvement of the UBI Group in special purpose entities (SPEs14) concerns the following types: - entities formed to allow the issue of preference shares; - conventional securitisation transactions 15 performed by Group member companies in accordance with Law No. 130 of 30th April 1999; - the issue of covered bonds, in accordance with Art. 7 bis of Law No.130/1999. Special purpose entities existed as at 31st December 2011, within the UBI Banca Group for the issue of preference shares used as innovative equity instruments on international capital markets. These issues, which current supervisory regulations allow to be included in the consolidated tier one capital, take the form of non redeemable instruments and they have particularly junior levels of subordination. The preference shares included in the tier one capital amounted to €453.46 million and they were issued by a number of the banks which formed the Group prior to the merger. On the one hand, securitisations form part of a strategic policy to expand lending by simultaneously freeing up part of the supervisory capital relating to the amounts transferred and on the other they constitute an important medium to long-term funding instrument. The underlying assets securitised consist of performing assets of the network banks and other product companies. The list of SPEs used for the securitisations in which the Group is involved is as follows: Orio Finance Nr. 3 Plc, Albenza 3 Srl, Lombarda Lease Finance 4 Srl, UBI Lease Finance 5 Srl, 24-7 Finance Srl (multi compartment SPE – 3 securitisations), UBI Finance 2 Srl, UBI Finance 3 Srl. Finally, with regard to the issue of covered bonds, the SPEs UBI Finance Srl and UBI Finance CB 2 Srl (the latter formed on 20th December 2011) were formed for the purchase of loans from banks in order to create cover pools for covered bonds issued by the Parent, in accordance with the structure of these operations. The special purpose entities listed above are included in the consolidated accounts because these companies are in reality controlled, since their assets and liabilities were originated by Group member companies. As concerns Sintonia Finance, this securitisation (of a multioriginator nature) was wound up at the end of November 2011 by the repurchase of the remaining loans by Centrobanca and the other originator, the early redemption of the bonds and the winding up of the related hedging derivatives. The securitisations concerning the special purpose entities, 24-7 Finance Srl, UBI Lease Finance 5 Srl, UBI Finance 2 Srl and UBI Finance 3 Srl were performed in order to form a 14 Special Purpose Entities (SPEs) are special companies formed to achieve a determined objective. 15 With normal securitisations the originator sells the portfolio to a special purpose entity which then issues tranches of asset-backed securities in order to purchase it. With a synthetic securitisation, on the other hand, the originator purchases protection for a pool of assets and transfers the credit risk attaching to the portfolio – either fully or in part – by using credit derivatives such as CDSs (credit default swaps) and CLNs (credit-linked notes) or by means of personal guarantees. 142 portfolio of assets eligible as collateral for refinancing with the European Central Bank, consistent with Group policy for the management of liquidity risk. They were carried out on performing residential mortgages, salary backed loans (redeemed in advance on 20th December 2011) and consumer loans of B@nca 24-7 (24-7 Finance Srl), on lease contracts of UBI Leasing (UBI Lease Finance 5 Srl), on performing loans to small to medium-sized enterprises of Banco di Brescia (UBI Finance 2 Srl) and on performing loans to SMEs of Banca Popolare di Bergamo (UBI Finance 3 Srl). In the securitisations in question, the senior securities issued by the entities – assigned a rating – are listed and can be used for refinancing operations with the ECB, with the sole exception of the 24-7 Finance Srl securitisation of consumer loans for which early winding up of the operation is currently being considered. A securitisation commenced in December 2010 through the transfer of performing loans to businesses held by Banca Popolare di Bergamo to the SPE UBI Finance 3 Srl was completed in July 2011 when UBI Finance 3 issued securities (the transfer of the loans by the originator took place with effect from 1st December 2010 for approximately €2.8 billion). The issue of covered bonds is designed to diversify sources of funding for the Group and also to contain the cost of it. As at 31st December 2011, UBI Banca had performed placements of covered bonds for a total nominal amount of €5.75 billion (€2 billion issued in 2011) as part of a programme for a maximum issuance of €10 billion euro. The originator banks issued a subordinated loan to the SPE, UBI Finance Srl, equal to the value of the loans sold, in order to fund the purchase. At the end of December, these loans amounted to approximately €9.72 billion (€9.11 billion in June 2011; €7.83 billion in December 2010). In this respect, exposures are present in the Group which relate solely to the special purpose entities formed for the securitisations mentioned and they all fall within the consolidation scope. Ordinary lines of liquidity existed as at 31st December 2011 granted by the Parent to the special purpose entity Orio Finance Nr.3 Plc for a total of €5 million euro, but not drawn on (also not drawn on as at 31st December 2010). Ordinary lines of liquidity were also granted by B@nca 24-7 to the entity 24-7 Finance Srl for a total of €227.4 million, fully drawn on (€37.3 million, also fully drawn on, at the end of 2010). Following downgrades by the rating agencies Moody’s and Fitch on 5th and 11th October 2011 respectively, UBI Banca made a liquidity facility available for UBI Finance 2 amounting to €16.3 million and for UBI Finance 3 amounting to €28 million. The programme to issue covered bonds and all the securitisations are hedged by swap contracts where the main objective is to normalise the flow of interest generated by the transferred or securitised portfolio and to concretely protect the special purpose entity from interest rate risk. As a consequence of the downgradings of UBI Banca’s ratings in October 2011, it became necessary to provide margins for the swap contracts entered into between the Parent or other Group member companies and the SPEs for the securitisations and the covered bond programme. The accounts used for the margins were opened with an eligible institution which was Bank of New York Mellon (ratings: Moody’s, Aa2 negative; S&P, AA- stable; Fitch, AA- stable). The margins were paid from 26th October 2011 for an initial total amount of a little more than €1,015 million, of which €717 million for the covered bond programme and €298 million for the securitisations. The total balance at the end of 2011 amounted to €785 million, of which €632 million for the covered bond programme and €153 million for internal securitisations. No exposures exist to special purpose entities or other conduit operations with underlying securities or investments linked to United States subprime and Alt-A loans. The total assets of SPEs relating to securitisations and to covered bonds amounted to €21.6 billion (€21.9 billion at the end of 2010). Details by asset class are given in the table below: 143 SPE underlying assets Classification of underlying assets of the securitisation Figures in millions of euro Entity Total assets Albenza 3 Srl Sintonia Finance 24-7 Finance 24-7 Finance 24-7 Finance Lease Finance 4 UBI Lease Finance 5 Orio Finance 3 UBI Finance UBI Finance 2 UBI Finance 3 23.1 4,670.3 162.3 3,913.4 23.1 9,686.0 1,013.7 2,109.4 Class of underlying asset 31.12.2011 Accounting Classification Measurement criteria adopted L&R L&R L&R L&R L&R L&R L&R L&R L&R L&R L&R CA CA CA CA CA CA CA CA CA CA CA Mortgages Mortgages Mortgages Salary backed loans Consumer loans Leasing Leasing RMBS Notes (ALBENZA 3 Srl) Mortgages Loans to SMEs and small businesses Loans to businesses 22.2 1,688.2 1,322.0 143.9 3,753.3 23.1 9,570.2 949.9 2,047.0 Total impaired assets, mortgages and loans Total impaired assets, leasing TOTAL Gross of impairment losses 21,601.2 31.12.2010 Net of impairment losses 22.1 1,681.4 1,283.9 143.4 3,753.3 23.1 9,554.1 946.8 2,039.6 (*) (*) (*) (*) (*) Gross of impairment losses (*) (*) (*) (*) (*) 36.3 25.5 1,903.9 414.1 1,809.6 232.1 2,449.4 37.4 7,700.0 1,241.8 2,707.7 Net of impairment losses (*) (*) (*) (*) (*) (*) 36.3 23.4 1,894.5 413.7 1,761.8 226.7 2,445.8 37.4 7,687.2 1,236.9 2,699.5 668.5 195.6 393.6 179.0 372.2 157.3 242.4 153.9 20,383.9 20,020.3 19,087.3 18,859.5 (*) (*) (*) (*) (*) (*) (*) assets transferred not derecognised on the books of the originators The distribution by geographical location and credit rating of the securities issued relating to the securitisations by the special purpose entities Lombarda Lease Finance 4 and UBI Lease Finance 5 are given below. Securitisations of UBI Leasing: distribution of the underlying assets and of the securities issued (31st December 2011) DISTRIBUTION BY GEOGRAPHICAL AREA DISTRIBUTION OF ASSETS BY CREDIT RATING 0.74% 0.00% 1.19% 14.34% 17.29% 1.60% 4.17% 1.96% 51.35% 7.76% 4.63% 84.92% 10.05% Lombardy Piedmont Trentino Alto Adige Liguria Veneto Latium Emilia Romagna Friuli Venezia Giulia AAA A BBB unrated Exposures in ABS, CDO, CMBS and other structured credit products As at 31st December 2011, the UBI Banca Group held direct investments in ABS instruments amounting to €0.3 million (€92.2 million in December 2010), consisting of ABS instruments recognised within financial assets held for trading, belonging to the subsidiary UBI Banca International, with underlying assets of European origin (€0.5 million in December 2010). In the second half of the year, ABS instruments were redeemed for a total of €89.1 million (classified within available-for-sale financial assets), relating to the senior tranche of INPS (national insurance institute) securitisations, in addition to structured credit products for a total of €2.6 million (classified within financial assets held for trading in the UBI Banca International portfolio). No direct investments exist in securities backed by commercial mortgages (CMBS). 144 The table summarises direct Group exposures in ABS instruments: none of the positions listed contained underlying assets linked to subprime or Alt-A loans. Direct exposure in ABS Classifications Figures in millions of euro 31.12.2010 31.12.2011 Hedged by Counterparty relationship Type of exposure Rating Seniority Accounting Classification Gross of Net of impairment losses Hedged by techniques to Gross of Net of impairment reduce impairment impairment reduce losses counterparty/ losses losses counterparty/ credit risk investor investor investor ABS ABS Other structured AAA Senior HFT AFS HFT TOTAL 0.3 - 0.3 - 0.3 0.3 no - techniques to credit risk 0.5 88.7 2.6 0.5 89.1 2.6 91.8 92.2 no no no Own securitisations, eliminated when consolidating the accounts, totalled €12.1 billion (€11.1 billion at the end of 2010) and related mainly to ABS instruments (including €9.5 billion of senior securities) used as collateral for advances from the ECB. Further details are provided in the previous section “The interbank market and the liquidity situation”, which may be consulted. In addition to the direct exposures, hedge funds or funds of hedge funds were identified among the assets present in Group portfolios with exposures to structured credit products of the CDO and CMBS type. Investment in these funds as at 31st December 2011 amounted to approximately €105 million (net of impairment losses/reversals) and presented low percentages of exposure. Total indirect exposure to CDOs and CMBSs amounted to approximately €0.3 million (€0.1 million in December 2010). Other subprime and Alt-A exposures Again at the end of the 2011, indirect exposures to subprime and Alt-A mortgages existed that were contained in hedge funds or funds of hedge funds held by the Parent. The percentages of exposure to subprime and Alt-A mortgages were again low (no fund had a percentage exposure of greater than 1%), with total exposure to subprime and Alt-A loans of approximately €0.3 million (€0.3 million as at 31st December 2010). Exposures to monoline insurers Indirect exposures to monoline insurance companies exist in hedge funds or funds of hedge funds held by UBI Banca. The percentages of exposure remained very modest with an overall amount of less than €0.1 million, unchanged compared to December 2010. Leveraged Finance The term leveraged finance is used in the UBI Banca Group to refer to finance provided for a company or an initiative which has debt that is considered higher than normal on the market and is therefore considered a higher risk. Usually this finance is used for specific acquisition purposes (e.g. the acquisition of a company by other companies – either directly or through vehicles/funds – owned by internal [buy-in] or external [buy-out] management teams). They are characterised by “non investment grade” credit ratings (less than BBB-) and/or by remuneration that is higher than normal market levels. Leveraged finance business is performed by Centrobanca and is regulated by the Group Credit Risk Policy designed to combine the achievement of budget targets in terms of business volumes and profits with appropriate management of the attached risks. Briefly, operations are based on a maximum investment ceiling, reviewed annually and allocated on the basis of rating classes for operations according to predefined maximum percentages. The system of limits is calculated to seek appropriate diversification both in terms of sector and the concentration of risk on single company or Group counterparties. 145 The table below summarises on- and off-balance sheet exposure for leveraged finance by Centrobanca. That activity accounts for 11.2% of total lending and unsecured guarantees granted by Centrobanca (12.2% as at 31st December 2010). The amounts shown as at 31st December 2011 relate to 85 positions (grouped by Group of companies), for an average exposure per loan of €10.6 million. There were around seven Groups of companies with exposures greater than €20 million (all on-balance sheet loans) corresponding to approximately 32.1% of the total. Centrobanca leveraged finance business figure s in millions of e uro On-balance sheet exposure Guarantees gross exposure to customers gross exposure to customers used impairment used impairment 31 Decem ber 2011 857.2 -14.1 46.2 -3.9 31 Decem ber 2010 853.0 -7.7 51.9 -6.0 The graphs below show the distribution of leveraged exposures by geographical area and by sector. Distribution of Centrobanca leveraged exposures (the figures as at 31st December 2010 are given in brackets) EXPOSURE BY GEOGRAPHICAL AREA Usa and Messico 8% (4%) EXPOSURE BY SECTOR Commerce and services 23% (39%) Europe 18% (21%) Manifacturing 77% (61%) Italy 74% (75%) Residual exposures also exist within the UBI Banca Group – approximately €218 million (€265 million as at 31st December 2010) – relating to leveraged finance transactions performed before this type of business was centralised at Centrobanca. They were performed by the network banks relating to a total of 26 positions with average exposure per transaction of €8.4 million. The distribution by bank was as follows: Banco di Brescia (€105.1 million), Banca Popolare di Bergamo (€61.2 million), Banca Popolare Commercio e Industria (€19.7 million), Banca Regionale Europea (€17.1 million) and Banca di Valle Camonica (€15.3 million). 146 Financial derivative instruments for trading with customers The analysis performed as at 31st December 2011 for internal monitoring purposes shows that the risks assumed by customers continue to remain generally low and they outlined a conservative profile for the Group business in OTC derivatives with customers. The quantitative data updated at the end of the 2011 showed the following: - an increase in the total negative mark-to-market for customers, which stood at 4.95% of the notional amount of the contracts compared to 3.35% twelve months before. The worsening of the mark-to-market amounts is strictly connected with the European financial crisis, which became more severe in the last quarter of 2011 and caused a generalised reduction in interest rate levels; - the notional amount for existing contracts, totalling €6.979 billion, was attributable to interest rate derivatives amounting to €6.486 billion and currency derivatives amounting to €0.486 billion plus a marginal notional amount for commodities contracts of €7 million; - hedging derivative transactions accounted for approximately 96.3% of the notional amount traded for interest rate derivatives and 93.3% of the notional amount for currency derivatives; - the net total mark-to-market (interest rate, currency and commodities derivatives) amounted to approximately -€330 million. Those contracts with a negative mark-to-market for customers were valued at approximately -€346 million. In 2011 the Group incorporated regulations for its business in OTC derivative instruments with customers in its “Policy for the trading, sale and subscription of financial products” and the relative regulations to implement it as follows: customer segmentation and classes of customers associated with specific classes of products, stating that the purpose of the derivatives transactions must be hedging and that transactions containing speculative elements must be of a residual nature; rules for assessing the appropriateness of transactions, defined on the basis of the products sold to each class of customer; principles of integrity and transparency on which the range of OTC derivatives offered to customers must be based, in compliance with the guidelines laid down by the Italian Banking Association (and approved by the CONSOB) for illiquid financial products; rules and processes for assessing credit exposure, which grant credit lines with maximum limits for trading in interest rate and currency derivatives and credit lines on each single transaction for commodities derivatives or derivatives with private individual retail counterparties, while counterparty risk is assessed on the basis of Bank of Italy circular No. 263/2006; rules and processes for managing restructuring operations, while underlining their exceptional nature; the rules and processes for the settlement of transactions in OTC derivative instruments with customers that are subject to verbal or official dispute; the catalogue of products offered to customers and the relative credit equivalents, updated with respect to previous versions. 147 OTC interest rate derivatives: details of instrument types and classes of customer Data as at 31st December 2011 Product class Type of instrument Number of transactions Customer classification Notional MtM of which negative MtM 1 Purchase of caps Qualified 3: Professional 2: Non private individual retail 1: Private individual retail 16 65 1,536 1,348 2,965 43,657,849.17 163,662,255.80 445,861,683.93 155,743,481.13 808,925,270.03 60,611.39 159,037.07 2,384,069.75 967,691.59 3,571,409.80 - Qualified 3: Professional 2: Non private individual retail 1: Private individual retail 37 77 1,425 3,491 5,030 160,254,084.86 301,679,162.21 958,861,499.49 381,614,617.15 1,802,409,363.71 -3,208,669.12 -8,340,825.99 -24,620,257.59 -5,877,855.03 -42,047,607.73 -3,208,669.12 -8,340,825.99 -24,620,257.59 -5,877,855.03 -42,047,607.73 Qualified 3: Professional 2: Non private individual retail 1: Private individual retail 34 264 819 420 1,537 191,187,309.94 1,392,153,515.28 1,503,310,200.59 62,774,972.80 3,149,425,998.61 -9,256,382.00 -106,195,476.99 -116,210,376.73 -2,435,842.93 -234,098,078.65 -9,256,382.00 -106,366,993.09 -116,213,208.02 -2,435,842.93 -234,272,426.04 Qualified 3: Professional 2: Non private individual retail 1: Private individual retail 3 19 66 1 89 3,954,716.77 71,838,019.94 142,579,084.10 991,216.36 219,363,037.17 -629,914.31 -5,976,266.23 -25,876,602.48 -84,169.34 -32,566,952.36 -629,914.31 -5,976,266.23 -25,899,299.89 -84,169.34 -32,589,649.77 Qualified 3: Professional 2: Non private individual retail 1 2 7 10 6,638,426.56 7,812,579.89 12,186,698.85 26,637,705.30 -327,112.45 -216,025.95 -707,007.29 -1,250,145.69 -327,112.45 -216,025.95 -707,007.29 -1,250,145.69 9,631 6,006,761,374.82 -306,391,374.63 -310,159,829.23 98.49% 92.61% 91.88% 91.97% Purchase of caps Total Capped swaps Capped swaps Total IRS Plain Vanilla IRS Plain Vanilla Total IRS Step Up IRS Step up Total Purchase of collars Purchase of collars Total Total Class 1: hedging derivatives Class 1: % of Group total 2 Purchase of caps with KI/KO 3: Professional 2: Non private individual retail 2 8 10 23,364,818.85 13,495,234.37 36,860,053.22 -342,393.26 -209,592.42 -551,985.68 -342,393.26 -209,592.42 -551,985.68 3: Professional 2: Non private individual retail 1 3 4 4,500,000.00 6,378,838.44 10,878,838.44 -72,577.53 -983,352.46 -1,055,929.99 -72,577.53 -983,352.46 -1,055,929.99 IRS Cap spreads(¹) IRS Cap spreads Total 2: Non private individual retail 1 1 250,293.00 250,293.00 -941.81 -941.81 -941.81 -941.81 IRS Convertible Qualified 3: Professional 2: Non private individual retail 1 9 25 35 6,000,000.00 140,105,154.61 46,512,996.83 192,618,151.44 -496,638.79 -4,863,267.94 -2,584,193.89 -7,944,100.62 -496,638.79 -4,863,267.94 -2,584,193.89 -7,944,100.62 240,607,336.10 -9,552,958.10 -9,552,958.10 3.71% 2.86% 2.83% Purchase of caps with KI/KO Total Purchase of collars with KI/KO Purchase of collars with KI/KO Total IRS Convertible Total Total Class 2: hedging derivatives with possible exposure to contained financial risks 50 Class 2: % of Group total 0.51% 3a IRS Range 3: Professional 2: Non private individual retail 1: Private individual retail¹ IRS Range Total Memory floor(¹) Memory floors Total 3: Professional Total Class 3a: partial hedging derivatives with pre-established maximum l 12 68 1 81 65,493,024.02 132,705,415.96 500,000.00 198,698,439.98 -4,390,254.90 -10,629,173.76 -35,236.40 -15,054,665.06 -4,390,254.90 -10,629,173.76 -35,236.40 -15,054,665.06 1 1 4,000,000.00 4,000,000.00 -950,335.52 -950,335.52 -950,335.52 -950,335.52 82 202,698,439.98 -16,005,000.58 -16,005,000.58 3b Gap floater swaps Gap floater swaps Total 2: Non private individual retail 3 3 5,964,460.00 5,964,460.00 -226,037.92 -226,037.92 -235,941.48 -235,941.48 IRS corridor accruals(¹) IRS corridor accruals Total 3: Professional 2 2 7,000,000.00 7,000,000.00 -25,675.64 -25,675.64 -25,675.64 -25,675.64 IRS Range stability 3: Professional 2: Non private individual retail 2 9 11 7,000,000.00 16,150,000.00 23,150,000.00 -413,931.86 -845,078.92 -1,259,010.78 -413,931.86 -845,078.92 -1,259,010.78 IRS Range stability Total Total Class 3b: speculative derivatives with unquantifiable maximum loss Total Class 3: derivatives not for hedging 16 36,114,460.00 -1,510,724.34 -1,520,627.90 98 238,812,899.98 -17,515,724.92 -17,525,628.48 Class 3: % of Group total 1.00% 3.68% 5.25% 5.20% Total UBI Banca Group 9,779 6,486,181,610.90 -333,460,057.65 -337,238,415.81 (1) Prior transaction not attributable to catalogue products. 148 OTC currency derivatives: details of instrument types and classes of customer Data as at 31st December 2011 Product class Type of instrument Customer classification Number of transactions Notional of which negative MtM MtM 1 Vanilla currency options purchased by the customer 3: Professional Vanilla currency options purchased by the customer Total 1 1 740,740.74 740,740.74 779.39 779.39 - Qualified 3: Professional 2: Non private individual retail 20 263 54 337 6,874,415.23 195,739,722.69 23,056,523.52 225,670,661.44 316,269.27 -1,775,333.44 178,210.62 -1,280,853.55 -1,921.81 -3,330,143.53 -490,261.44 -3,822,326.78 Qualified 3: Professional 2: Non private individual retail 19 110 163 292 6,043,494.98 83,981,559.83 52,191,390.18 142,216,444.99 27,758.33 1,112,860.60 696,844.63 1,837,463.56 -94,398.33 -1,439,064.66 -1,184,798.69 -2,718,261.68 3: Professional 2: Non private individual retail Currency collars Total 17 5 22 3,346,088.54 414,459.75 3,760,548.29 121,604.83 3,877.89 125,482.72 -29,512.79 -11,858.26 -41,371.05 Total Class 1: hedging derivatives 652 372,388,395.46 682,872.12 -6,581,959.51 75.12% 76.61% - 80.29% Forward synthetic Forward synthetic Total Plafond Plafond Total Currency collars Class 1: % of Group total 2 Knock in collars Knock in collars Total 3: Professional 46 46 11,195,527.93 11,195,527.93 -733,629.62 -733,629.62 -733,629.62 -733,629.62 Knock in forward Qualified 3: Professional 2: Non private individual retail 4 78 11 93 1,130,975.59 61,837,184.12 3,612,313.87 66,580,473.58 54,116.15 3,681,068.48 92,112.78 3,827,297.41 -176.94 -156,165.30 -156,342.24 5 5 3,557,951.47 3,557,951.47 -472,498.68 -472,498.68 -472,498.68 -472,498.68 144 81,333,952.98 2,621,169.11 -1,362,470.54 16.59% 16.73% - 16.62% Knock in forwards Total Average rate options Average rate options Total 3: Professional Total Class 2: hedging derivatives with possible exposure to contained financial risks Class 2: % of Group total 3b Knock out forward Knock out forward Total 3: Professional 11 11 11,756,629.40 11,756,629.40 273,738.21 273,738.21 -40,195.06 -40,195.06 Knock out knock in forward Knock out knock in forwards Total 3: Professional 38 38 14,549,121.36 14,549,121.36 337,629.89 337,629.89 -11,318.01 -11,318.01 Vanilla currency options sold by the customer 3: Professional Vanilla currency options sold by the customer Total 23 23 6,031,993.22 6,031,993.22 -201,435.56 -201,435.56 -201,435.56 -201,435.56 Total Class 3: derivatives not for hedging Class 3: % of Group total Total UBI Banca Group 72 32,337,743.98 409,932.54 -252,948.63 8.29% 6.65% - 3.09% 868 486,060,092.42 3,713,973.77 -8,197,378.68 OTC commodities derivatives: details of instrument types and classes of customer Data as at 31st December 2011 Product class Type of instrument Customer classification Number of transactions Notional MTM of which negative MtM 2 Commodity swaps Qualified 3: Professional 2: Non private individual retail Commodity swaps Total 1 14 2 17 971,095.14 4,004,500.60 145,000.00 5,120,595.74 -41,169.95 -65,180.19 -19,809.00 -126,159.14 -41,169.95 -214,912.55 -19,809.00 -275,891.50 Commodity collars Commodity collars Total 3: Professional 2 2 1,232,500.00 1,232,500.00 81,022.00 81,022.00 - Forward synthetic Forward synthetic Total 2: Non private individual retail 3 3 552,990.00 552,990.00 19,091.00 19,091.00 - 22 6,906,085.74 -26,046.14 -275,891.50 22 6,906,085.74 -26,046.14 -275,891.50 6,979,147,789.06 -329,772,130.02 -345,711,685.99 Total Class 2: hedging derivatives with possible exposure to contained financial risks Total UBI Banca Group TOTAL UBI BANCA GROUP 10,669 149 OTC derivatives: first five counterparties by bank (figures in euro) Data as at 31st December 2011 Bank Centrobanca Banco di Brescia Banca Popolare Commercio e Industria Banca Popolare di Ancona Banca Regionale Europea Banca Popolare di Bergamo Banco di San Giorgio Banca di Valle Camonica Banca Carime Classification 3: 3: 2: 3: 2: 3: 3: 3: 2: 3: 2: 2: 2: 3: 3: 2: 3: 2: 2: 3: 3: 3: 3: 3: 2: 2: 3: 3: 3: 3: 2: 2: 2: 2: 2: 3: 3: 2: 3: 3: 2: 2: 3: 3: 2: MtM Professional and qualified Professional and qualified Non private individual retail Professional and qualified Non private individual retail Professional and qualified Professional and qualified Professional and qualified Non private individual retail Professional and qualified Non private individual retail Non private individual retail Non private individual retail Professional and qualified Professional and qualified Non private individual retail Professional and qualified Non private individual retail Non private individual retail Professional and qualified Professional and qualified Professional and qualified Professional and qualified Professional and qualified Non private individual retail Non private individual retail Professional and qualified Professional and qualified Professional and qualified Professional and qualified Non private individual retail Non private individual retail Non private individual retail Non private individual retail Non private individual retail Professional and qualified Professional and qualified Non private individual retail Professional and qualified Professional and qualified Non private individual retail Non private individual retail Professional and qualified Professional and qualified Non private individual retail 150 -22,089,182 -17,628,112 -4,592,902 -2,668,981 -2,298,605 -3,941,365 -2,422,093 -2,392,160 -2,104,871 -1,871,467 -5,792,980 -3,253,929 -2,124,512 -1,992,515 -1,357,625 -5,600,150 -1,461,592 -1,355,723 -1,329,991 -1,022,818 -3,871,660 -1,379,541 -963,679 -906,539 -595,627 -2,617,310 -2,116,962 -1,846,520 -1,570,024 -1,568,704 -818,271 -703,776 -694,470 -630,316 -616,126 -654,747 -615,507 -471,014 -443,706 -296,879 -615,077 -509,482 -451,842 -366,827 -214,872 of which negative MtM -22,089,182 -17,628,112 -4,592,902 -2,668,981 -2,298,605 -3,941,365 -2,422,093 -2,392,160 -2,104,871 -1,871,467 -5,792,980 -3,253,929 -2,124,512 -1,992,515 -1,357,625 -5,600,150 -1,461,592 -1,355,723 -1,329,991 -1,022,818 -3,871,660 -1,379,541 -963,679 -906,539 -595,627 -2,617,310 -2,116,962 -1,846,520 -1,570,024 -1,568,704 -818,271 -703,776 -694,470 -630,316 -616,126 -657,126 -615,507 -471,014 -443,706 -296,879 -615,077 -509,482 -452,441 -366,827 -214,872 Equity and capital adequacy Reconciliation between equity and result for the year of the Parent with consolidated equity as at 31st December 2011 and profit for the year then ended Figures in thousands of euro Equity Equity and result for the year in the financial statements of the Parent Effect of the consolidation of subsidiaries including joint ventures Effect of measuring other significant equity investments using the equity method Dividends received during the year Other consolidation adjustments (including the effects of the PPA) Equity and result for the year in the consolidated financial statements of which: Result for the year 7,609,829 1,651,195 -2,713,054 403,078 -21,038 - 10,760 -338,369 -300,963 796,097 8,939,023 -1,841,488 The consolidated equity of the UBI Banca Group as at 31st December 2011, inclusive of profit for the year, amounted to €8,939 million, down compared to €10,979 million at the end of 2010. As can be seen from the statement of changes in equity, contained among the mandatory consolidated financial statements, in addition to the loss for the year of €1,841.5 million the following items contributed to the total decrease of €2,040 million that occurred over twelve months: • the allocation of 2010 consolidated profit to dividends and other uses amounting to €102.2 million1; • the positive impact, totalling €986 2 million, attributable almost entirely to the capital increase performed in June and July, which led to the issue of 262,580,944 new shares following the exercise of option rights, the sale on the stock exchange and the subsequent exercise of rights not taken up and the final subscription by the underwriting syndicate, was as follows: • • • • • +€656.5 million the impact on share capital; +€329.5 million the increase in the share premium reserve, inclusive of the deduction from that item of the expenses incurred to complete the operations net of tax (€16.2 million) and the proceeds from the sales of rights not exercised (€2.1 million); a decrease of €4.4 million as a consequence of the purchase of treasury shares in July, to be assigned to the Senior Management of the Group in relation to incentive schemes; the negative impact on consolidated income generated by the overall reduction in the fair value reserves amounting Fair value reserves attributable to the Group: composition to €1,062.1 million. This Figures in thousands of euro 31.12.2011 31.12.2010 consisted of -€1,039.5 -1,350,979 -311,493 million relating to Available-for-sale financial assets Cash flow hedges -3,217 -619 available-for-sale financial Foreign currency differences -243 -243 assets, -€2.6 million to Actuarial gains/losses -34,155 -14,518 72,729 73,146 cash flow hedges, -€19.6 Special revaluation laws -1,315,865 -253,727 million to “actuarial Total gains/losses on defined benefit plans” and -€0.4 million to “special revaluation laws”; a decrease on aggregate in reserves of profits amounting to €15.8 million. This included: -€9.2 million relating to the public tender offer to purchase IW Bank shares; -€4.4 million for the increase in the investment in Banco di San Giorgio, following an operation to increase the share capital of this bank in Liguria; +€2.1 million for the positive impact of exchange rate differences on the equity of Swiss subsidiaries; 1 The 2010 consolidated net profit was fully drawn on with an allocation to reserves of €69.9 million. 2 This amount also includes the residual effect of the conversion of the convertible bond “UBI 2009/2013 convertibile con facoltà di rimborso in azioni” and the exercise of the warrants “Warrant azioni ordinarie UBI Banca 2009/2011”, which led to the issue of a further 19,213 new shares with an increase in the share capital and the share premium reserve amounting to €49,782.5 and €188,063 respectively. 151 Fair value reserves of available-for-sale financial assets attributable to the Group: changes in the period Debt instrum ents Figures in thousands of euro 1. Opening balances as at 1st January 2011 Financing Total 54,646 -1,036 - -311,493 24,330 3,899 9,727 3,053 7,307 4,294 - 41,364 11,246 17,930 3,852 1,549 - 23,331 6,650 3,759 1,403 - 11,812 11,280 93 146 - 11,519 2.2 Transfer to incom e statem ent of negative reserves - following impairment losses - from disposal 2.3 Other changes 2,501 2,822 1,464 - 6,787 -1,052,126 -1,019,357 -17,233 -9,125 -11,491 -7,531 - -1,080,850 -1,036,013 -4,760 -7,290 -3,460 - -15,510 3.2 Im pairm ent losses 3.3 Transfer to incom e statem ent of positive reserves: from dis 3.4 Other changes 4. Closing balances as at 31st December 2011 (collective investment instruments) -365,103 2. Positive changes 2.1 Increases in fair value 3. Negative changes 3.1 Reductions in fair value OICR units Equity instrum ents -28,009 -818 -500 - -29,327 -1,392,899 47,140 -5,220 - -1,350,979 Fair value reserves of available-for-sale financial assets attributable to the Group : comp osition 31.12.2011 Figures in thousands of euro Pos itive res erve 31.12.2010 Negative res erve Total Pos itive res erve Negative res erve Total 1. Debt ins trum ents 78,744 -1,471,643 -1,392,899 66,715 -431,818 -365,103 2. Equity ins trum ents 3. Units in O.I.C.R. 51,267 -4,127 47,140 58,225 -3,579 54,646 6,973 -12,193 -5,220 9,124 -10,160 -1,036 - - - - - - 136,984 -1,487,963 -1,350,979 134,064 -445,557 -311,493 (collective investment instruments) 4. Financing Total As shown in the table, the decrease mentioned above of €1,039.5 million in the “fair value reserve for available-for-sale financial assets” is attributable mainly to debt instruments held in portfolio (down by €1,027.8 million to -€1,392.9 million net of tax and the portion attributable to non-controlling interests) and in particular to Italian government securities for which the reserve amounted to -1,174.5 milion3 at the end of the year. The reserve for debt instruments was affected during the year by decreases in fair value of €1,019.4 million. This included -€863.8 million attributable to the Parent (approximately 90% relating to Italian government securities), -€64.1 million to Lombarda Vita, -€51.3 million to IW Bank (relating almost entirely to Italian government securities) and -€36.3 million to Centrobanca. Increases, on the other hand, included transfers of negative reserves for disposals to the income statement following the sale of securities, almost entirely government, comprised within the UBI Banca (+€6.1 million) and IW Bank (+€2.7 million) portfolios. Approximately 90% of the decreases in the fair value of equity instruments were attributable to UBI Banca (-€4.6 million attributable almost entirely to the interest held in S.A.C.B.O.) and to Banco di Brescia (-€3.5 million). The table also shows a transfer from the positive reserve to the income statement of €7.3 million, including €6.9 million relating to the Parent: €5.8 million (net of tax) attributable to the entire disposal of the interest held in the London Stock Exchange completed in month May and €1.1 million from the disposal of shares of Banca Valsabbina. The decreases in fair value relating to OICR units were generated almost entirely by UBI Banca (-€4.9 million) and by Lombarda Vita (-€2.6 million). 3 On the basis of management accounting estimates this had reduced to €629 million as at 26th March 2012. As already reported, the negative available-for-sale reserve for Italian government securities as at 30th September 2011, used as a capital filter in the EBA exercise on capital, amounted to -€868 million. 152 Capital adequacy Capital ratios (Basel 2 standardised approach) 31.12.2011 Figures in thousands of euro Tier 1 capital before filters 31.12.2010 8,075,253 6,766,798 Preference shares and savings/privileged shares attributable to non-controlling interests 489,191 489,191 Tier 1 capital filters -137,541 -73,593 8,426,903 -150,625 7,182,396 -134,508 8,276,278 7,047,888 4,305,074 -150,625 3,770,505 -134,508 4,154,449 3,635,997 -148,574 -147,685 12,282,153 10,536,200 6,746,523 73,545 6,952,925 106,636 460,749 - 489,312 - 7,280,817 7,548,873 Tier 1 capital after filters Deductions from tier 1 capital Tier 1 after filters and specific deductions (Tier 1) Supplementary capital after filters Deductions from supplementary capital Supplementary capital after filters and specific deductions (Tier 2) Deductions from tier 1+supplementary capital Total supervisory capital Credit and counterparty risk Market risk Operational risk Other prudential requirements Total prudential requirements Subordinated liabilities Tier 3 Nominal amount - - Amount eligible - - 91,010,213 94,360,909 Risk weighted assets Core tier 1 ratio after specific deductions from tier 1 capital (tier 1 capital net of preference shares/risk weighted assets) 8.56% 6.95% Tier 1 capital ratio (tier 1 capital/Risk weighted assets) 9.09% 7.47% 13.50% 11.17% Total capital ratio [(Supervisory capital+tier 3 eligible)/risk weighted assets] With a provision of 18th May 2010 and a later communication of 23rd June 2010 (“Clarification of supervisory measures concerning supervisory capital – prudential filters”), the Bank of Italy issued new supervisory instructions for the treatment of fair value reserves relating to debt instruments held in the “available-for-sale financial assets” portfolio for the purposes of calculating supervisory capital (prudential filters). More specifically, as an alternative to the “asymmetric approach” (full deduction of net losses from the tier one capital and inclusion of 50% of the net gains in the tier two capital) already provided for by Italian regulations, it was permitted – in compliance with 2004 CEBS guidelines – to completely neutralise gains and losses recognised in the reserves mentioned (“symmetrical approach”) subsequent to 31st December 2009, but limited to securities issued by the central governments of countries belonging to the European Union. The Group decided to take advantage of the option and reported the decision to the Bank of Italy on 29th June 2010. It was therefore applied uniformly by all members of the banking Group, commencing with the calculation of supervisory capital as at 30th June 2010. The supervisory capital of the UBI Banca Group amounted to €12.3 billion as at 31st December 2011, an increase compared to €10.5 billion at the end of 2010 (+€1.8 billion), the result of increases in both the tier one capital and the tier two capital. The increase in the tier one capital (up €1.2 billion to €8.3 billion) mainly reflects the results of the increase in the share capital completed in July, but also the elimination of the negative filter regarding the substitute tax on goodwill and the increases in deductions and negative filters, together with a fall in capital attributable to non-controlling interests. Changes in the tier two capital (up €0.5 billion to €4.2 billion), on the other hand, were attributable almost entirely to the trends for subordinated bonds, notwithstanding the increase in negative filters and deductions. More specifically, the issue of subordinated liabilities sold to retail customers of the Group (+€1 million) more than compensated on the one hand for issues matured/redeemed/amortised during the year (approximately -€0.5 153 billion) and on the other hand for the negative effects of further changes (-€43 million) mainly attributable to filters and deductions. Compliance with capital adequacy requirements determined an absorption of capital of €7.3 billion, a decrease of €0.3 billion compared to the previous year, mainly the result of less absorption for credit and counterparty risk (-€0.2 billion). The latter change, which was negative on aggregate, was connected with falls in volumes of business over twelve months, which was only partially offset by the greater requirement, estimated at almost €70 million, following the downgrade of the ratings for UBI Banca that occurred in the last quarter of 2011. The other capital requirements also decreased, although more moderately: -€33.1 million for market risks, due mainly to a decrease in the generic risk on debt and equity instruments, and -€28.6 million for operational risk as a result of the fall in gross income at consolidated level. As a consequence, risk weighted assets, consisting principally of credit and counterparty risk, fell by over €3.3 billion to €91 billion. The changes in the aggregates reported above caused a generalised improvement in all the capital ratios calculated as at 31st December 2011: on that date the core tier one ratio and the tier one ratio stood at 8.56% (6.95% at the end of 2010) and 9.09% (7.47%) respectively, while the total capital ratio rose to 13.50% (11.17%)4. The impairment losses recognised on goodwill had no impact on the capital ratios and the supervisory capital was calculated inclusive of the effects of the distribution of a dividend of 0.05 euro per share. The European stress test UBI Banca, together with four other Italian banks, took part in the 2011 European stress tests conducted by the European Banking Authority (EBA) – in co-operation with the Bank of Italy, the European Central Bank (ECB), the European Commission (EC) and the European Systemic Risk Board (ESRB) – on 90 banks representing more than 65% of the total assets of the European banking system. The results were published simultaneously on 15th July 2011. The tests were designed to assess the ability of European banks to resist sever shocks and their degree of capital adequacy if hypothetical stress events occurred under particularly adverse conditions. The hypotheses and the methodology of the exercise were designed to assess the capital adequacy of banks using a benchmark of a core tier one ratio of 5% and to increase market confidence in the soundness of the banks taking part in the exercise. The adverse scenario used was defined by the ECB and covered a time horizon of two years (2011-2012) 5. The stress test was conducted assuming that the balance sheets of the banks had remained unchanged compared to December 2010, without considering the effects of company strategies and/or future management initiatives and it did not constitute a profit forecast of the single banks taking part. UBI Banca passed the stress test with a level of capitalisation well above the benchmark set [and also above the observation threshold set (5%-6%)], which confirmed the soundness of the Group. In the adverse scenario hypothesised, the core tier one ratio, estimated on the consolidated figures for UBI Banca, resulted to have risen from 7% in December 2010 to 7.4% at the end of 2012. This last figure incorporated the effects of the increase in the share capital, which was fully underwritten and announced to the market in a binding manner before 30th April 2011, but excluded the impacts of future action taken to strengthen capital available to management. 4 As already reported, savings shares and privileged shares have been excluded from the core tier one capital since 31st December 2010, while they are included in the tier one capital. 5 The scenario involved a decrease in GDP and adverse performance by all the main macroeconomic variables with a related estimated impact on PD and LGD and, as a result, on forecasts of impairment losses in the lending portfolio. A greater than expected increase in interest rates was hypothesised together with a widening of sovereign debt spreads with a consequent increase in the cost of funding and falls in equity prices. 154 Research & Development Research & Development activity was performed centrally by the Group’s service company. The main project work carried out in 2011 involved in some cases the continuation of projects already initiated in the previous year and in others the development of new opportunities offered by technological progress to support corporate processes and customer relationships. The first cases included the “new work station” project designed as its initial area of application to simplify and increase the efficiency of mortgage processing activities for retail customers. Once the first stage was completed with the introduction of a document management platform with a view to paperless processing, digitalised communication to notary firms was commenced in June with the combined use of digital signatures, certified electronic email and legally valid electronic storage. In the mobile internet sector, where clear potential exists for the use of mobile telephones to deliver and use banking information and services – the upgrade for the main existing devices and terminals (iPhones, Androids, BlackBerrys) of the application for the use of home banking services was completed. At the same time new evolved functions were developed which will be released shortly: extension of functions to include securities trading and a version dedicated specifically for tablets. Following the success achieved with the introduction of the iPad platform for the management and sharing of documents by top management in board and committee meetings, wifi networks are currently being introduced in the management departments of the Parent. Based on careful user profile information they will allow, in total security, optimum use of the service as a result of integration with the corporate document management system. New R&D activity has been undertaken with specific reference to new market trends and technological advances, on the one hand in the paperless document sector, especially with regard to branch procedures and on the other with the launch of the “enterprise services 2.0” web project (blog and forum). The line of research into paperless documents involved the analysis and testing of biometric/graphometric signatures 1 for the production of digital signatures right from the outset, thereby eliminating as a consequence the need to print and store hardcopy documents. Following successful testing, this solution was adopted in five Banca Popolare di Bergamo branches in the last quarter of the year for numerically frequent transactions (paying in and withdrawals performed through cashier desks) with the objective of extending the use in 2012 to other types of transaction such as bank transfers. As concerns web 2.0 blog and forum tools, since they are now widely used in numerous contexts due to their ease of use and effectiveness, possible applications are currently being studied to improve corporate processes and to make the diffusion of information in the Group more effective and rapid. Continuous testing of enterprise 2.0 solutions and technologies is currently in progress in the IT Systems unit at UBI Sistemi e Servizi. This has already led to the development of concrete solutions in this area and also in the new Group corporate portal in the last quarter of 2011 within which blogs and areas for corporate initiatives (“YOUBI live”) have been activated together with true and genuine forums (“The ideas box”). 1 Biometric/graphometric technology can be used to place a naturally produced digital signature on documents and that is the placing of a graphics stroke on a special tablet that is able to “capture” its five characteristic traits: the rhythm, speed, pressure, acceleration and movement. 155 The system of internal control The document “Report on the corporate governance and ownership structure of UBI Banca Scpa” attached to these reports may be consulted for a description of the architecture, rules and organisational units of the system of internal controls. It also gives specific information required under Art. 123 bis, paragraph 2b) of the Consolidated Finance Act (Legislative Decree No. 58/1998) concerning the risk management and internal control systems that govern the financial reporting process. 156 Transactions with related parties With Resolution No. 17221 of 12th March 2010 – amended by the subsequent Resolution No. 17389 of 23rd June 2010 – the Consob (Italian securities market authority) approved a Regulation concerning related-party transactions. The new regulations concern the procedures to be followed for the approval of transactions performed by listed companies and the issuers of shares with a broad shareholder base with parties with a potential conflict of interest, including major or controlling shareholders, members of the management and supervisory bodies and senior managers including their close family members. The regulations currently apply within the UBI Banca Group to UBI Banca Scpa only as a listed company. Banco di San Giorgio, to which the regulations applied until 31st December 2011 because it had a significantly broad shareholder base, has been excluded since 1st January 2012 due to changes in the shareholder structure. As specifically concerns UBI Banca, in November 2010 the Supervisory Board appointed a Related Parties Committee from among its members to which transactions falling within the scope of the regulations must be submitted in advance. In this respect the UBI Banca regulations have excluded the following transactions from their scope of application and these are consequently not subject to the disclosure obligations required under the Consob regulation, but without prejudice to the provisions of Art. 5, paragraph 8, where applicable, of the said Consob Regulation: (a) shareholders’ resolutions concerning the remuneration of the Members of the Supervisory Board passed in accordance with Art. 2364-bis of the Italian Civil Code, including those concerning the determination of a total sum for the remuneration of the Members of the Supervisory Board assigned particular offices, powers and functions; (b) remuneration schemes based on financial instruments approved by shareholders in accordance with Art. 22, letter b) of the Corporate By-Laws and in compliance with Art. 114-bis of the Consolidated Finance Act and the relative operations to implement them; (c) resolutions, other than those referred to under the preceding letter a) of this article, concerning the fees of Members of the Management Board appointed to special positions and other key management personnel and also the resolutions with which the Supervisory Board determines the fees of the Members of the Management Board on condition that: (i) UBI Banca has adopted a remuneration policy; (ii) the Remuneration Committee formed by the Supervisory Board in accordance with Art. 49 of the Corporate By-Laws has been involved in the definition of that remuneration policy; (iii) a report setting out the remuneration policy has been submitted for approval or a consultative vote to a Shareholders' Meeting; (iv) the remuneration awarded is consistent with that policy; (d) “transactions of negligible amount” are those related-party transactions for which the amount is less than €250 thousand. If a related-party transaction is concluded with a member of the key management personnel, a close family member of that person or with companies controlled by or subject to significant influence of those persons, it will be considered a transaction of negligible amount if the amount of the transaction is not greater than €100 thousand; (e) transactions which fall within the ordinary performance of operating activities and the related financial activities concluded under equivalent market or standard conditions; (f) transactions to be performed on the basis of instructions for the purposes of stability issued by the supervisory authority, or on the basis of instructions issued by the Parent of the Group to carry out instructions issued by the supervisory authority in the interests of the stability of the Group; (g) transactions with or between subsidiaries and also venturers in joint ventures, as well as transactions with associates, if no significant interests of other related parties exist in the subsidiaries or associates that are counterparties to the transaction. Also, in compliance with Consob recommendations, transactions with related-parties of UBI Banca performed by subsidiaries are subject to the regulations in question if, under the provisions of the Corporate By-Laws or internal regulations adopted by the Bank, the Supervisory Board, in response to a proposal of the Management Board, or even an officer of the Bank on the basis of powers conferred on that officer, must preliminarily examine or approve a transaction to be performed by subsidiaries. In accordance with Art. 5, paragraph 8 of Consob Resolution No. 17221 of 12th March 2010, already mentioned, the following related-party transactions concluded in 2011, were excluded 157 from the scope of the regulations for related-party transactions with UBI Banca, because they were concluded with subsidiaries: UBI Leasing - in relation to funding requirements, UBI Banca provided short term funding totalling €6,587 million. This funding is subject to specific regulations which govern intragroup transfer pricing; UBI Factor - in relation to funding requirements, UBI Banca provided short term funding totalling €3,012 million. This funding is subject to specific regulations which govern intragroup transfer pricing; UBI Pramerica - in relation to operational requirements to cover foreign currency transactions, credit lines granted for maximum forward currency transactions of €500 million at the beginning of year, were subsequently increased by a further €250 million to bring them up to a total of €750 million; Centrobanca - in relation to operational requirements, at the beginning of 2011 UBI Banca increased the maximum limit for the issue of unsecured bank guarantees for subscribers of bonds amounting to €1.1 billion, to bring it up to a total of €5.5 billion; ‐ in accordance with Decree Law No. 201 of 6th December 2011, the “Save Italy” decree, UBI Banca decided to take advantage of the Italian government guarantee for the issue of debt and liability instruments. The magnitude of the guarantees issued by UBI Banca in favour of Centrobanca totalled €3 billion, corresponding to maturities to be refinanced in relation to bond issues placed on the retail and institutional market in the first quarter of 2012. The terms and conditions of those instruments, issued on 2nd January 2012 and for which a guarantee was requested, are as follows: ‐ first issue - nominal amount: €2,000,000,000; original duration: 36 months; amortisation profile: redeemed in one payment on maturity; interest rate: fixed at 6.5%; ‐ second issue - nominal amount: €1,000,000,000; original duration: 60 months; amortisation profile: redeemed in one payment on maturity; interest rate: fixed at 7%. On 14th November 2011, the Supervisory Board of UBI Banca approved the commencement of a project to merge Banco di San Giorgio into Banca Regionale Europea. As a company with a significantly broad shareholder base, in accordance with Consob Regulation No. 17221 of 12th March 2010, in 2010 Banco di San Giorgio adopted “Regulations for related-party transactions” and it appointed its own “Related Parties Committee”, composed of three directors, the majority of whom independent. In 2011, the percentage of the total share capital of that bank held by non-controlling shareholders fell below the threshold of 5%, which meant that the conditions for qualification as an issuer with a significantly broad shareholder base were no longer met by the company. Notwithstanding this, because issuers with a broad shareholder base are considered to be such until the end of the financial year in which those conditions are no longer met, the Related Parties Committee carried out its activities in the period from 1st January until 31st December 2011. Specific reports were prepared with regard to transactions of greater importance concluded by Banco di San Giorgio in 2011, which were submitted in advance to the examination of the Related Parties Committee. These reports, together with the corresponding opinions expressed by the Related Parties Committee, were sent to the Consob and published on the corporate website of Banco di San Giorgio. Furthermore: no transactions were performed in the reporting period with other related parties which influenced the capital position or the results of the Parent Bank, UBI Banca to a significant extent; there have been no modifications and/or developments of transactions with related parties, which may have been reported in previous financial reports, that could have a significant effect on the capital position or the results of the Parent, UBI Banca. *** 158 In compliance with IAS 24, Part H of the Notes to the Consolidated Financial Statements provides information on balance sheet and income state transactions between related parties of UBI Banca and Group member companies, as well as those items as a percentage of the total for each item in the consolidated financial statements. Further information is given in the “Report on corporate governance and the ownership structure of UBI Banca Scpa” attached to these reports. 159 Consolidated figures companies: the principal Profit Figures in thousands of euro 2011 Unione di Banche Italiane Scpa (1) Banca Popolare di Bergamo Spa 2010 Change (2,713,054) 283,720 (2,996,774) 171,768 106,719 65,049 % change n.s. 61.0% Banco di Brescia Spa 94,952 71,979 22,973 31.9% Banca Popolare Commercio e Industria Spa Banca Regionale Europea Spa (2) 50,010 30,186 21,914 246,375 28,096 (216,189) 128.2% (87.7%) (87.6%) Banca Popolare di Ancona Spa (3) Banca Carime Spa (4) Banca di Valle Camonica Spa Banco di San Giorgio Spa UBI Banca Private Investment Spa Centrobanca Spa (5) Centrobanca Sviluppo Impresa SGR Spa Banque de Dépôts et de Gestion Sa (*) B@nca 24-7 Spa IW Bank Spa (6) 2,276 18,340 (16,064) 45,981 37,652 8,329 22.1% 728 1,574 (846) (53.7%) 1,190 (1,609) 375 57 815 (1,666) 1,225 16,153 (14,928) 260 287 (27) (6,894) 18,341 (7,767) (5,723) (873) 24,064 217.3% n.s. (92.4%) (9.4%) (11.2%) n.s. 2,814 (704) 3,518 10,307 8,908 1,399 15.7% 37,576 (30,151) 38,475 (20,632) (899) 9,519 (2.3%) 46.1% 8,564 18,601 (10,037) (54.0%) 700 747 (47) (6.3%) Società Bresciana Immobiliare Mobiliare - S.B.I.M. Spa 1,373 1,251 122 9.8% UBI Sistemi e Servizi SCpA UBI Fiduciaria Spa (186) 209 (395) UBI Assicurazioni Spa (49,99%) 2,000 (2,168) 4,168 Aviva Assicurazioni Vita Spa (49,99%) 3,245 1,500 1,745 116.3% Aviva Vita Spa (50%) Lombarda Vita Spa (40%) 5,500 4,507 2,000 14,333 3,500 (9,826) 175.0% (68.6%) UBI Insurance Broker Srl 3,594 3,571 23 0.6% 23 25 (2) (8.0%) (1,841,488) 172,121 (2,013,609) UBI Banca International Sa (*) UBI Pramerica SGR Spa UBI Leasing Spa (7) UBI Factor Spa BPB Immobiliare Srl UBI Trustee Sa CONSOLIDATED (8) n.s. n.s. n.s. n.s. (*) The profit shown is from the financial statements prepared for the consolidation according to the accounting policies followed by the Parent. (1) The figure for 2011 includes impairment losses of €3,029.8 million on Group equity investments, goodwill and other intangibles (net of tax). (2) The figure for 2010 included a gain of €225.4 million (net of taxes) realised on the sale of an interest held in BPCI to the Banca del Monte di Lombardia Foundation on conclusion of the branch switching operation. If the effect of the main non-recurring items is excluded for both years, the normalised profit for 2011 of €30 million increased by €7.3 million compared to €22.7 million the year before. (3) The figure for 2011 includes the effects of the recognition of impairment losses on the investments in UBI Leasing (€16.2 million) and in Centrobanca (€11.9 million). (4) The figure for 2011 includes the effects of the recognition of impairment losses of €12.1 million on the goodwill of the bank. (5) The figure for 2011 includes the effects of the recognition of impairment losses of €7.2 million on the goodwill of the bank. (6) The figure for 2010 has been restated for consistency by including the result for InvestNet Italia Srl, merged on 1st August 2011. (7) The figure for 2011 includes the effects of the recognition of impairment losses of €2 million on the goodwill of the company. (8) The figure for 2011 includes the recognition of impairment losses on goodwill and finite useful life intangible assets of €2,190.9 million (net of tax and non-controlling interests). 160 Net loans to customers Figures in thousands of euro 31.12.2011 31.12.2010 Change % change Unione di Banche Italiane Scpa 15,692,663 14,536,121 1,156,542 8.0% Banca Popolare di Bergamo Spa Banco di Brescia Spa Banca Popolare Commercio e Industria Spa 19,609,764 13,561,110 8,563,354 20,276,206 15,078,204 8,885,600 -666,442 -1,517,094 -322,246 -3.3% -10.1% -3.6% Banca Regionale Europea Spa Banca Popolare di Ancona Spa 6,916,708 7,810,341 6,851,620 7,702,345 65,088 107,996 0.9% 1.4% Banca Carime Spa Banca di Valle Camonica Spa Banco di San Giorgio Spa 4,865,871 1,889,840 2,811,916 4,765,224 1,885,564 2,787,617 100,647 4,276 24,299 2.1% 0.2% 0.9% UBI Banca Private Investment Spa Centrobanca Spa 460,742 7,160,450 439,511 6,972,678 21,231 187,772 4.8% 2.7% 205,020 10,511,749 1,087,454 207,425 11,219,553 1,095,406 -2,405 -707,804 -7,952 -1.2% -6.3% -0.7% IW Bank Spa UBI Factor Spa 246,010 2,868,344 207,028 2,744,758 38,982 123,586 18.8% 4.5% UBI Leasing Spa 9,045,465 9,698,555 -653,090 -6.7% CONSOLIDATED 99,689,770 101,814,829 -2,125,059 -2.1% Banque de Dépôts et de Gestion Sa B@nca 24-7 Spa UBI Banca International Sa Risk indicators Percentages Net non-performing loans / net loans 31.12.2011 31.12.2010 Net impaired loans / net loans 31.12.2011 31.12.2010 Net non-performing loans + Net impaired loans / net loans 31.12.2011 31.12.2010 Unione di Banche Italiane Scpa Banca Popolare di Bergamo Spa Banco di Brescia Spa Banca Popolare Commercio e Industria Spa Banca Regionale Europea Spa Banca Popolare di Ancona Spa Banca Carime Spa Banca di Valle Camonica Spa Banco di San Giorgio Spa UBI Banca Private Investment Spa Centrobanca Spa 2.29% 1.62% 3.60% 2.18% 4.35% 1.93% 2.79% 2.65% 1.45% 1.48% 1.74% 1.23% 2.96% 1.88% 3.73% 1.24% 1.60% 1.68% 1.17% 1.16% 2.41% 2.84% 2.15% 2.44% 3.50% 3.34% 3.05% 5.32% 1.23% 3.52% 1.87% 2.11% 2.53% 1.91% 3.29% 2.27% 2.52% 4.34% 1.34% 2.07% 4.70% 4.46% 5.75% 4.62% 7.85% 5.27% 5.84% 7.97% 2.68% 5.00% 3.61% 3.34% 5.49% 3.79% 7.02% 3.51% 4.12% 6.02% 2.51% 3.23% Banque de Dépôts et de Gestion Sa B@nca 24-7 Spa UBI Banca International Sa 0.09% 2.18% 0.08% 0.09% 1.55% 0.07% 1.74% 1.05% 2.31% 0.65% 0.65% 1.93% 1.83% 3.23% 2.39% 0.74% 2.20% 2.00% IW Bank Spa UBI Factor Spa UBI Leasing Spa 1.27% 4.52% 0.42% 3.19% 0.14% 0.16% 2.85% 0.01% 0.15% 1.91% 0.14% 1.43% 7.37% 0.01% 0.57% 5.10% CONSOLIDATED 2.49% 1.91% 2.54% 2.00% 5.03% 3.91% 161 Direct funding from customers Figures in thousands of euro 31.12.2011 Unione di Banche Italiane Scpa Banca Popolare di Bergamo Spa Banco di Brescia Spa 31.12.2010 Change % change 31,300,106 19,714,160 11,980,422 31,369,474 20,546,068 11,736,765 -69,368 -831,908 243,657 -0.2% -4.0% 2.1% Banca Popolare Commercio e Industria Spa Banca Regionale Europea Spa Banca Popolare di Ancona Spa 7,496,973 5,608,417 6,429,378 7,994,465 5,391,805 6,485,148 -497,492 216,612 -55,770 -6.2% 4.0% -0.9% Banca Carime Spa Banca di Valle Camonica Spa Banco di San Giorgio Spa UBI Banca Private Investment Spa 7,552,126 1,358,499 1,652,028 517,020 7,562,665 1,421,234 1,572,492 489,429 -10,539 -62,735 79,536 27,591 -0.1% -4.4% 5.1% 5.6% Centrobanca Spa Banque de Dépôts et de Gestion Sa B@nca 24-7 Spa UBI Banca International Sa (1) 4,374,547 362,182 900 1,060,263 5,345,526 419,437 23,861 1,266,869 -970,979 -57,255 -22,961 -206,606 -18.2% -13.7% -96.2% -16.3% IW Bank Spa CONSOLIDATED 1,907,380 1,513,127 394,253 26.1% 102,808,654 106,760,045 -3,951,391 -3.7% Direct funding from customers includes amounts due to customers and securities issued, with the exclusion of bonds subscribed directly by companies in the Group. Direct funding for the following banks was therefore adjusted as follows: BANKS UBI Banca Banca Popolare di Bergamo 31.12.2011 31.12 2010 €3,922.9 million €3,421 million €50 million €50 million €752.3 million €382.2 million Banca Popolare Commercio e Industria - €181 million Banca Popolare di Ancona - €352 million €2,326.2 million €201.6 million Banco di Brescia Centrobanca Banca Regionale Europea €201.3 million €201 million Banca di Valle Camonica €254.3 million €201.7 million Banco di San Giorgio €763.8 million €332.4 million B@nca 24-7 €5,773 million €4,321 million (1) The figure for 31st December 2011 is net of issues of French certificates of deposit and euro commercial paper totalling €5,318.8 million (€7,042.5 million as at 31st December 2010). 162 Indirect funding from customers (at market prices) Figures in thousands of euro 31.12.2011 Unione di Banche Italiane Scpa 31.12.2010 Change % change 5 14 -9 -64.3% 24,563,676 12,893,350 10,057,784 24,944,977 14,849,800 11,186,686 -381,301 -1,956,450 -1,128,902 -1.5% -13.2% -10.1% Banca Regionale Europea Spa Banca Popolare di Ancona Spa 6,842,123 3,533,775 7,267,934 3,828,041 -425,811 -294,266 -5.9% -7.7% Banca Carime Spa Banca di Valle Camonica Spa Banco di San Giorgio Spa 5,375,500 1,049,267 1,429,294 5,753,026 1,065,405 1,644,556 -377,526 -16,138 -215,262 -6.6% -1.5% -13.1% UBI Banca Private Investment Spa Banque de Dépôts et de Gestion Sa 5,003,443 835,893 5,420,922 991,880 -417,479 -155,987 -7.7% -15.7% Lombarda Vita Spa Aviva Assicurazioni Vita Spa UBI Pramerica SGR Spa 5,007,705 2,121,844 20,288,875 5,149,988 2,305,298 25,047,354 -142,283 -183,454 -4,758,479 -2.8% -8.0% -19.0% UBI Banca International Sa IW Bank Spa 2,904,707 3,161,568 2,971,932 3,037,925 -67,225 123,643 -2.3% 4.1% Aviva Vita Spa 4,234,773 4,374,554 -139,781 -3.2% 72,067,569 78,078,869 -6,011,300 -7.7% Banca Popolare di Bergamo Spa Banco di Brescia Spa Banca Popolare Commercio e Industria Spa CONSOLIDATED Assets under management (at market prices) Figures in thousands of euro 31.12.2011 Unione di Banche Italiane Scpa Banca Popolare di Bergamo Spa 31.12.2010 Change %change 11,267,911 9 12,460,373 -9 -1,192,462 -100.0% -9.6% Banco di Brescia Spa Banca Popolare Commercio e Industria Spa 6,488,943 4,132,113 7,569,511 4,743,435 -1,080,568 -611,322 -14.3% -12.9% Banca Regionale Europea Spa Banca Popolare di Ancona Spa 3,719,506 1,562,412 4,205,324 1,879,189 -485,818 -316,777 -11.6% -16.9% Banca Carime Spa Banca di Valle Camonica Spa 2,894,381 437,371 3,688,062 513,063 -793,681 -75,692 -21.5% -14.8% Banco di San Giorgio Spa 492,037 637,651 -145,614 -22.8% UBI Banca Private Investment Spa Banque de Dépôts et de Gestion Sa 3,659,999 835,893 4,073,214 991,880 -413,215 -155,987 -10.1% -15.7% Lombarda Vita Spa Aviva Assicurazioni Vita Spa 5,007,705 2,121,844 5,149,988 2,305,298 -142,283 -183,454 -2.8% -8.0% UBI Pramerica SGR Spa UBI Banca International Sa 20,288,875 181,843 25,047,354 289,940 -4,758,479 -108,097 -19.0% -37.3% 462,063 4,234,773 496,899 4,374,554 -34,836 -139,781 -7.0% -3.2% 36,892,042 42,629,553 -5,737,511 -13.5% IW Bank Spa Aviva Vita Spa CONSOLIDATED 163 The performance of the main consolidated companies BANCA POPOLARE DI BERGAMO SPA 31.12.2011 31.12.2010 Change %change Figures in thousands of euro Balance sheet Loans to customers Direct funding (*) Net interbank debt Financial assets held for trading Available-for-sale financial assets Equity (excluding profit for the year) 19,609,764 19,764,170 1,603,761 61,943 20,196 2,117,762 20,276,206 20,596,076 2,537,387 51,761 20,795 2,143,727 -666,442 -831,906 -933,626 10,182 -599 -25,965 -3.3% -4.0% -36.8% 19.7% -2.9% -1.2% 25,074,514 24,563,676 24,455,885 24,944,977 618,629 -381,301 2.5% -1.5% 11,267,911 12,460,373 -1,192,462 -9.6% 503,565 184 443,493 254 60,072 (70) 13.5% (27.6%) 316,002 2,105 21,413 302,214 9,650 13,311 13,788 (7,545) 8,102 4.6% (78.2%) 60.9% Operating income Personnel expense Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets 843,269 (272,399) (197,029) (7,692) 768,922 (277,279) (204,095) (7,178) 74,347 (4,880) (7,066) 514 9.7% (1.8%) (3.5%) 7.2% Operating expenses Total assets Indirect funding from customers (including insurance) of which: assets under management Income statement Net interest income Dividends and similar income Net commission income Net income from trading, hedging and disposal/repurchase activities Other net operating income/(expense) (477,120) (488,552) (11,432) (2.3%) Net operating income Net impairment losses on loans (**) Net impairment losses on other assets/liabilities 366,149 (83,114) (262) 280,370 (96,212) (1,873) 85,779 (13,098) (1,611) 30.6% (13.6%) (86.0%) Net provisions for risks and charges Profit (loss) on the disposal of equity investments (56) 1,486 187 (30) (243) 1,516 n.s. n.s. 284,203 (112,435) 182,442 (75,723) 101,761 36,712 55.8% 48.5% 171,768 106,719 65,049 61.0% 358 3,724 365 3,779 -7 -55 8.11% 56.58% 2.29% 2.41% 4.98% 63.54% 1.74% 1.87% Pre-tax profit from continuing operations Taxes on income for the year from continuing operations Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios ROE [profit for the year/equity (excluding profit for the year)] Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (*) (**) Inclusive of bonds subscribed by the Parent amounting to €50 million as at 31st December 2011 (€50 million also as at 31st December 2010). The item for 2010 included an impairment loss of €1.4 million relating to the Mariella Burani Group. The share capital of Banca Popolare di Bergamo as at 31st December 2011 was wholly owned by UBI Banca. The year 2011 ended with a profit of €171.8 million, up significantly compared to €106.7 million in 2010 (+€65.1 million; +61%), the result of good performance by net operating profit (+€85.7 million to €366.1 million), with an increase in revenues (+€74.3 million to €843.3 million) and a contraction at the same time in the most significant expense items (-€11.4 million to €477.1 million). Revenues performed as follows: - net interest income reached €503.6 million (+€60.1 million) as a result of favourable market trends for interest rates; 164 - - - net commission income rose to €316 million (+€13.8 million), the aggregate result of an overall decrease in commissions on indirect funding, which was more than offset by an increase in commissions on current accounts (which also included those for commitment fees); the contribution from net income from trading, hedging and disposals and repurchases, amounting to €2.1 million, was down on the previous year (-€7.5 million), due mainly to the negative impacts of hedges on fixed rate mortgages and on fair value changes in hedges on bonds; other net operating income and expense increased to €21.4 million (+€8.1 million) benefiting to a large extent from net income from securitisations and covered bonds, as well as increased tax recoveries. Expenses included: - personnel expense down to €272.4 million (-€4.9 million). Both years were affected by extraordinary items 1 , net of which this expense increased by €12.1 million from 271.2 million to €283.3 million, as a result of greater costs for company bonuses, salary trends and incentive schemes, partly offset by decreases in average personnel numbers; - the overall reduction in other administrative expenses to €197 million (-€7 million) is the aggregate result of a significant containment in the cost of some items (-€2.4 million for professional and advisory services; -€1.6 million for outsourced services; -€1.4 million for postal expenses and -€1.2 million for both credit recovery and rent payable), while the few items which increased included the tenancy of premises (+€1.6 million), fees for services provided by Group companies (+€1.5 million) and above all indirect taxes (+€3.7 million); - impairment losses on tangible and intangible assets increased by €0.5 million a €7.7 million. As a result of the performance reported above, the cost:income ratio improved from 63.5% to 56.6%. Net impairment losses on loans fell from €96.2 million to €83.1 million (-€13.1 million), including €73.6 million for specific impairment losses recognised on deteriorated loans (€48.5 million on non-performing loans and €19 million on impaired loans) and €9.5 million for collective impairment losses on performing loans. The loan loss rate stood at 0.42% compared to 0.47% twelve months before. A sum of €1.5 million – classified within profits from the disposal of equity investments – contributed to pre-tax profit. It related to the sale of a property previously used as a branch which was then closed in 2010, when the distribution network was rationalised. As concerns the balance sheet, loans fell progressively from €20.3 billion to €19.6 billion (-€0.7 billion; -3.3%), while the composition changed with an increase in mortgages and other medium to long-term loans (+€0.9 billion to €12.7 billion), accounting for 64.6% of total loans (58.1% in December 2010). On the other hand, short-term loans decreased, especially with regard to “Other transactions” (-€0.9 billion to €2.5 billion) affected by the repayment of some significant loans to “large corporate” clients. In terms of type of borrower, loans to “households and local businesses” increased by 4.5% year-on-year, while loans to the large corporate segment already mentioned decreased by 33.3%, consistent with the objective of not failing to provide support and liquidity to local economies. From the viewpoint of the quality of lending, net deteriorated loans increased over twelve months from €1,061.8 million to €1,212.5 million (+€150.7 million), although the trend reversed in the fourth quarter: +€95.1 million to €448.4 million for non-performing loans 2 mainly due to transfers from impaired loans; +€92.5 million to €472.1 million for impaired loans, fuelled above all by new classifications from performing loans; -€31 million to €270 million for restructured loans; -€5.9 million to €22 million for exposures past due and in arrears. Within the latter, exposures in arrears for between 90 and 180 days relating to 1 The figure for 2011 benefited from the release of provisions set aside previously and better than expected results amounting to €10.9 million before tax. In 2010, on the other hand, the item included higher expense of €6.1 million for leaving incentives, again before tax. 2 In the second quarter, Banca Popolare di Bergamo disposed of unsecured non-performing loans amounting to €2.4 million, written down by 87.5%, which gave rise to a net loss on the sale of €0.2 million. 165 exposures secured by real estate property fell from €23 million to €19.7 million. As a result of these trends both the ratio of net impaired loans to net lending and the ratio of non-performing loans to net loans increased from 1.74% to 2.29% and from 1.87% to 2.41% respectively. Penalised by the current difficulty in accumulating household savings, direct funding totalled €19.8 billion, a decrease of €0.8 billion compared to €20.6 billion at the end of 2010 (-4%)3, basically a reflection of changes in amounts due to customers (-0.8 billion to €12.9 billion) and in particular to the fall in current accounts and deposits (-€0.8 billion to €12.3 billion), which accounted for over 95% of the decrease. Repurchase agreements with ordinary customers also decreased, by half (-€0.2 billion), although offset by an increase in term deposits (+€0.1 billion) and other types of funding (+€0.1 billion). Securities issued performed steadily, unchanged at €6.9 billion, although a partial change in the composition occurred out of bonds (-€0.2 billion to €6.2 billion) and into other certificates (+€0.2 billion to €0.7 billion), for which the increase was mainly attributable swaps on certificates of deposit denominated in yen. Indirect funding from private individual customers also fell during the year from €24.9 billion to €24.5 billion (-€0.4 billion; -1.5%)4, the aggregate result of opposing trends within the item. On the one hand, assets under custody rose to €13.3 billion (+€0.8 billion), the consequence, amongst other things, of campaigns to sell financial instruments which resulted in new subscriptions of €0.7 billion. On the other hand, all components of assets under management (-€1.2 billion to below €11.2 billion) decreased – especially with regard to mutual investment funds and Sicav’s (-€0.7 billion to €5.3 billion) – due both to the results for net new subscriptions and to a generalised reduction in market prices. At the end of year the net interbank position showed funds of €1.6 billion, down compared to €2.5 billion twelve months before, a reflection of the increased impact of borrowings using repurchase agreements entered into with the Parent since August, for which the underlying was class A securities issued on 25th July 2011 by UBI Finance 3 and subscribed by the bank as part of the securitisation transaction commenced in December 2010. Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 16.33% (16.23% at the end of 2010) and a total capital ratio (supervisory capital and reserves to riskweighted assets) of 18.48% (18.38%). The proposal for the allocation of profit is to distribute dividends of €51.6 million after legal and by-law allocations and to allocate €108.3 million to the voluntary reserve. 3 Net of intragroup items and the “large corporate” segment, total direct funding amounted to €18.9 billion a decrease of approximately 3% year-on-year. 4 Net of the “large corporate” component, indirect funding amounted to €24 billion, an increase of 0.3% year-on-year. 166 BANCO DI BRESCIA SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers 13,561,110 15,078,204 -1,517,094 -10.1% Direct funding (*) Net interbank debt Financial assets held for trading Available-for-sale financial assets 12,732,715 167,426 64,158 26,690 12,118,974 -2,490,173 100,954 20,913 613,741 2,657,599 -36,796 5,777 5.1% n.s. -36.4% 27.6% Equity (excluding profit for the year) Total assets 1,373,992 15,752,411 1,388,125 17,621,805 -14,133 -1,869,394 -1.0% -10.6% Indirect funding from customers (including insurance) 12,893,350 14,849,800 -1,956,450 -13.2% 6,488,943 7,569,511 -1,080,568 -14.3% 324,449 1,280 199,666 1,426 325,858 1,249 196,007 (1,477) (1,409) 31 3,659 2,903 (0.4%) 2.5% 1.9% n.s. of which: assets under management Income statement Net interest income Dividends and similar income Net commission income Net income (loss) from trading, hedging and disposal/repurchase activities Other net operating income/(expense) 14,920 14,845 75 0.5% Operating income Personnel expense 541,741 (173,677) 536,482 (172,843) 5,259 834 1.0% 0.5% Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets (128,828) (10,255) (133,321) (11,101) (4,493) (846) (3.4%) (7.6%) Operating expenses (312,760) (317,265) (4,505) (1.4%) Net operating income Net impairment losses on loans (**) Net impairment losses on other assets/liabilities (***) Net provisions for risks and charges 228,981 (65,704) (2,493) (5,718) 219,217 (97,859) (849) (2,875) 9,764 (32,155) 1,644 2,843 4.5% (32.9%) 193.6% 98.9% Profit on the disposal of equity investments Pre-tax profit from continuing operations Taxes on income for the year from continuing operations 184 155,250 (60,298) 1,296 118,930 (46,951) (1,112) 36,320 13,347 (85.8%) 30.5% 28.4% 94,952 71,979 22,973 31.9% 364 2,584 362 2,634 2 -50 6.91% 57.73% 1.62% 2.84% 5.19% 59.14% 1.23% 2.11% Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios ROE [profit for the year/equity (excluding profit for the year)] Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (*) (**) (***) Inclusive of bonds subscribed by the Parent amounting to €752.3 million as at 31st December 2011 (€382.2 million as at 31st December 2010). The item for 2010 included an impairment loss of €1.4 million relating to the Mariella Burani Group. The item included impairment losses in 2011 on the available-for-sale companies Immobiliare Fiera di Brescia (€1 million) and Risparmio e Previdenza (€0.6 million). The share capital of Banco di Brescia as at 31st December 2011 was wholly owned by UBI Banca. Banco di Brescia ended 2011 with a profit of €95 million, an increase compared to €72 million earned in the year before. Net operating income rose to €229 million from €219.2 million before, due to the combined effect of an increase in operating income (+€5.3 million) and a reduction in operating expenses (-€4.5 million). The main items of revenues, which totalled €541.7 million, performed as follows: - net interest income remained fairly stable at €324.4 million (-€1.4 million), the aggregate result of the following: higher funding costs even though average volumes fell; on the lending front, the effect of repricing action with a fall in volumes of short-term loans was only partially offset by growth in medium to long-term lending; the absence of net interest income from the business of the foreign branch (contributed in December 2010); - net commission income reached almost €200 million (+€3.7 million), a reflection of income earned on insurance products (+€3.9 million), collection and payment services (+€1.9 167 - - million) and other services (+€5.3 million; inclusive of commitment fees), which more than compensated for the contraction in commissions from the placement of securities (-€6.2 million), attributable primarily to a fall in the placement of third party bonds; trading, hedging and disposal and repurchase activities generated income of €1.4 million (a loss of €1.5 million in 2010), the result of opposing performance by the individual items: losses on fixed rate mortgage hedges (-€2.4 million) and repurchases of financial liabilities (€0.4 million) were offset by profits on fair value changes in bond hedges (€1.8 million) and business in domestic currency swaps, in relation to swaps on certificates of deposit (totalling €1.6 million); the residual item, other net operating income and expense, amounted to €14.9 million, unchanged compared to the year before. Expenses, down to €312.8 million, performed as follows: - personnel expense of €173.7 million rose slightly (+0.5%) due principally to growth in the average cost of the various components of income, which was only partially offset by a decrease in average personnel numbers; - other administrative expenses of €128.8 million fell significantly (-€4.5 million) – which by themselves account for the decrease in the whole aggregate – the result of a careful policy to monitor expenses and improve efficiency. The main savings were made on “telephone and data transmission expenses” (-€3.2 million) 5 , “postal expenses” (-€0.8 million) and “outsourced services” (-€1.4 million), while increases were recorded by “fees for services provided by Group companies” (+€1.7 million) and “tenancy of premises” expenses (+€0.6 million); - impairment losses of €10.3 million on tangible and intangible assets decreased by €0.8 million compared to the previous year. As a result of the performance reported above, the cost:income ratio fell from 59.1% to 57.7%. Net impairment losses on loans fell to €65.7 million compared to €97.9 million in 2010 which included an impairment loss for a large amount on a non-performing position. Specific impairment losses on non-performing loans amounted to €60.7 million (€77.2 million), of which €48.1 million on non-performing loans, while collective impairment losses on performing loans amounted to €5 million (€20.7 million the year before). As a consequence, the loan loss rate fell to 0.48% (0.65% in 2010). Net impairment losses on other assets and liabilities were recognised amounting to €2.5 million (€0.8 million in 2010). The item includes impairment losses on securities classified within the available-for-sale portfolio relating to equity investments held in the companies Immobiliare Fiera di Brescia and Risparmio & Previdenza Spa (a total of €1.6 million). Net provisions for risks and charges increased from €2.9 million to €5.7 million, a reflection of greater charges for revocation clawback actions and legal action relating to compounding of interest. As concerns balance sheet items, loans to customers amounted to €13.6 billion, a fall of 10.1% year-on-year, attributable to a reduction in short-term loans: current account overdrafts (-€0.4 billion to €2.2 billion) and other transactions (-€1.3 billion to €2.2 billion), while mortgages and other forms of medium to long-term lending held firm (+€0.2 billion to €9.1 billion), now accounting for 67.1% of total lending. At the end of the year, the net deteriorated loans of the Bank had risen to €838 million (+12.3% million euro over twelve months). In detail, increases were recorded for net nonperforming loans (up from €184.9 million to €220.2 million) and impaired loans (up from €318.7 million to €384.9 million), while slight decreases occurred for restructured exposures (down from €201.5 million to €194.7 million) and positions past due and/or in arrears (down from €41 million to €38.3 million), which included €26.8 million of exposures in arrears for between 90 and 180 days secured by mortgage collateral. 5 Due, amongst other things, to the absence of an expense for participation in a guarantee system designed to cover the costs of damages resulting from the fraudulent use of magnetic strip cards (subject to mass replacement with cards fitted with microchips in 2011). 168 Direct funding reached €12.7 billion, up by 5.1% compared to 2010. Amounts due to customers rose to €9.2 billion (+3.1%), benefiting from an increase in current accounts and term deposits (a total increase of €0.5 million), which offset the fall in repurchase agreements (-€0.2 million). Securities issued also increased, rising from €3.2 billion to €3.5 billion, due principally to the issue of a bond for €0.6 billion subscribed by the Parent and designed to improve structural balance, while a similar debt instrument was redeemed early for €0.3 billion. Indirect funding from ordinary customers amounted to €12.9 billion, down by 13.2%, attributable to negative trends for all components. Although benefiting from the placement of bonds issued by third parties and by the Parent (a total of €0.5 billion), assets under custody fell to €6.4 billion (-€0.9 billion) affected by the performance of equity and bond markets. Assets under management, amounting to €6.5 billion, also fell significantly (-€1.1 billion), penalised by both the performance effect and by negative net inflows for mutual investment funds and Sicav’s (-€0.8 billion) and customer portfolio managements (-€0.3 billion). At the end of year the bank had a net interbank position consisting of funding of €0.2 billion (debt of €2.5 billion the year before). The change occurred in relation to diminished debt to the Parent in the form of both the correspondence account, as a result of a decrease in the volumes of business with customers, and repurchase agreements (-€0.8 billion), following the first amortisation of the class A notes (senior tranches) issued by UBI Finance 2 as part of a securitisation transaction. Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 15.43% (12.82% at the end of 2010) and a total capital ratio (supervisory capital and reserves to riskweighted assets) of 15.75% (13.28%). The proposal for the allocation of profit is to distribute dividends of €28.5 million after legal and by-law allocations. 169 BANCA POPOLARE COMMERCIO E INDUSTRIA SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Direct funding (*) Net interbank debt Financial assets held for trading 8,563,354 7,496,973 -139,265 41,756 10,366 1,159,664 9,819,351 10,057,784 4,132,113 8,885,600 8,175,503 253,106 32,731 19,314 1,159,451 10,129,982 11,186,686 4,743,435 -322,246 -678,530 -392,371 9,025 -8,948 213 -310,631 -1,128,902 -611,322 -3.6% -8.3% n.s. 27.6% -46.3% 0.0% -3.1% -10.1% -12.9% 216,731 137,313 (832) 3,868 197,832 2 134,274 (2,145) 7,791 18,899 (2) 3,039 (1,313) (3,923) 9.6% (100.0%) 2.3% (61.2%) (50.4%) Operating income Personnel expense Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets 357,080 (127,136) (106,440) (7,097) 337,754 (137,261) (116,059) (6,122) 19,326 (10,125) (9,619) 975 5.7% (7.4%) (8.3%) 15.9% Operating expenses Net operating income (loss) Net impairment losses on loans (***) Net impairment losses on other assets/liabilities (240,673) 116,407 (25,220) (888) (259,442) 78,312 (30,827) (13) (18,769) 38,095 (5,607) 875 (7.2%) 48.6% (18.2%) n.s. (2,134) (2) (2,718) (20) (584) (18) 88,163 (38,153) 44,734 (22,820) 43,429 15,333 97.1% 67.2% 50,010 21,914 28,096 128.2% 235 1,713 234 1,756 1 -43 4.31% 67.40% 3.60% 2.15% 1.89% 76.81% 2.96% 2.53% Available-for-sale financial assets Equity (excluding profit for the year) Total assets Indirect funding from customers (including insurance) of which: assets under management Income statement Net interest income Dividends and similar income Net commission income Net loss from trading, hedging and disposal/repurchase activities Other net operating income/(expense) (**) Net provisions for risks and charges Profit on the disposal of equity investments Pre-tax profit from continuing operations Taxes on income for the year from continuing operations Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios ROE [profit for the year/equity (excluding profit for the year)] Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (*) (**) (***) (21.5%) (90.0%) The item included bonds as at 31st December 2010 subscribed by the Parent amounting to €181 million. The item included approximately one million euro in 2010 as the price received for the sale to RBC Dexia of the correspondence banking operations and €1.7 million of amounts recovered following the bankruptcy of a counterparty. The item for 2010 included an impairment loss relating to the Mariella Burani Group amounting to €1.6 million. As at 31st December 2011, UBI Banca held 75.0769% of the share capital of Banca Popolare Commercio, the Banca del Monte di Lombardia Foundation held 16.2369% and the remaining 8.6862% was held by Aviva Spa. The Bank ended the year with a profit of €50 million, a more than twofold increase compared to €21.9 million earned in 2010. Net operating income amounted to €116.4 million (+€38.1 million compared to 2010), the result of both an increase in operating income (+6% to €357.1 million) and the containment of costs (-7.2% to €240.7 million). The performance by operating income (+€19.3 million) was driven primarily by net interest income, up from €197.8 million to €216.7 million, which benefited from growth in interest rate spreads and also from greater volumes of medium to long-term lending business. Net commission income also made a positive contribution, although to a more moderate extent, rising from €134.3 million to €137.3 million, as a result of contributions from “foreign business”, “collection and payment services” and “current account management”. Trading and hedging activity recorded a net loss of €0.8 million (a loss of €2.1 million at the end of 2010), as it continued to be affected by the negative impact of hedges on fixed rate 170 mortgages (-€6.5 million) and the loss on disposals and repurchases of financial liabilities (-€0.8 million), while a profit of €0.6 million was earned on fair value changes in hedges on bonds and of €2.7 million on trading activity. Other net operating income and expense fell to €3.9 million from €7.8 million the year before. As already reported, in 2010 the item had benefited from extraordinary recoveries (€2.4 million) and a non-recurring contribution of approximately one million euro resulting from the sale of corresponding banking contracts to RBC Dexia. As concerns operating expenses, personnel expense decreased by 7.4% (down from €137.3 million to €127.1 million), attributable primarily to a reduction in average personnel numbers notwithstanding an increase in the average cost of the different components of employment contracts (company bonus and salary and incentive scheme trends). Other administrative expenses of €106.4 million fell by almost €10 million compared to the previous year, as a result of a reduction in intragroup service fees (-€3.8 million) and in “rent payable” (-€2.4 million) in addition to savings on the following: “telephone and data transmission expenses”, “postal expenses”, “property and equipment maintenance” and “professional and advisory services” expenses (for total savings of €2.6 million). Net impairment losses on property, equipment and investment property and intangible assets amounted to €7.1 million, an increase of approximately €1 million euro. As a result of the performance reported above, the cost:income ratio improved considerably falling from 76.8% to 67.4%. Net impairment losses on loans fell to €25.2 million (-€5.6 million), as a result of constant attention paid to monitoring and risk management, which helped to improve the quality of the portfolio. Provisions for risks and charges, which included provisions made to meet existing litigation risks (compounding of interest, investment services, bonds, banking contracts and clawback revocatory proceedings), also fell, down from €2.7 million to €2.1 million. As concerns balance sheet items, loans to customers amounted to €8.6 billion a decrease compared to €8.9 billion in 2010, reflecting falls in short term lending (“current account overdrafts” and “other transactions”), which were only partially offset by growth in mortgages and other forms of medium to long-term lending, which rose to €5.8 billion (68.2% of total lending). Net deteriorated loans, amounting to €552.3 million, remained virtually unchanged compared to €549.5 million the year before. In detail, increases were recorded in net non-performing loans, up from €263.3 million to €308.7 million, and in restructured exposures, up from €42.3 million to €53.4 million, while impaired loans reduced from €225 million to €184.4 million, together with past due loans, which fell from €18.9 million to €5.8 million, as a result of a significant decrease in arrears for between 90 and 180 days relating to exposures secured by real estate property (€5.1 million compared to €18.3 million at the end of 2010). At the end of the year the direct funding of the Bank totalled €7.5 billion, down by €0.7 billion, attributable in particular to securities issued (-€0.5 billion), the result, amongst other things, of the early redemption of a bond subscribed by the Parent amounting to €180 million. At the same time, indirect funding from private customers also fell with respect to 2010, falling from €11.2 billion to €10 billion, affected by negative performance by financial markets and by a decrease in net inflows of new subscriptions. All the main components recorded decreases: assets under custody fell to €5.9 billion (€6.5 billion in December 2010), while assets under management amounted to €4.1 billion (€4.7 billion), penalised by the trend in the mutual fund and Sicav sectors (-€0.5 billion to €2 billion). At the end of 2011, the net interbank position was one of debt of €0.1 billion (funds of €0.3 billion twelve months before), due to increased debt to the Parent, in the form of both current 171 accounts and deposits and term deposits, partly as a result of the early redemption of the bond already mentioned, amounting to €180 million. Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 20.75% (19.78% at the end of 2010) and a total capital ratio (supervisory capital and reserves to riskweighted assets) of 20.74% (19.81%). The proposal for the use of profit is to distribute dividends of €47 million after legal and by-law allocations. 172 BANCA REGIONALE EUROPEA SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Direct funding (*) Net interbank debt Financial assets held for trading Available-for-sale financial assets Equity (excluding profit for the year) Total assets 6,916,708 5,809,713 -101,899 19,406 12,912 1,439,972 8,033,252 6,851,620 5,592,784 -195,497 25,269 9,610 1,216,497 8,132,305 65,088 216,929 -93,598 -5,863 3,302 223,475 -99,053 6,842,123 7,267,934 -425,811 -5.9% 3,719,506 4,205,324 -485,818 -11.6% 168,367 403 97,927 (500) 6,817 147,363 1,318 99,330 (946) 8,809 21,004 (915) (1,403) (446) (1,992) 14.3% (69.4%) (1.4%) (47.1%) (22.6%) Operating income Personnel expense Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets 273,014 (109,376) (75,927) (7,653) 255,874 (110,126) (80,870) (6,644) 17,140 (750) (4,943) 1,009 6.7% (0.7%) (6.1%) 15.2% Operating expenses Net operating income Net impairment losses on loans Net impairment losses on other assets/liabilities Net provisions for risks and charges (**) (192,956) 80,058 (26,965) (1,162) (975) (197,640) 58,234 (27,430) (169) 3,253 (4,684) 21,824 (465) 993 (4,228) (2.4%) 37.5% (1.7%) 587.6% n.s. (226) 50,730 (20,544) 230,662 264,550 (18,175) (230,888) (213,820) 2,369 n.s. (80.8%) 13.0% 30,186 246,375 (216,189) (87.7%) 229 1,513 229 1,552 -39 2.10% 70.68% 2.18% 2.44% 20.25% 77.24% 1.88% 1.91% Indirect funding from customers (including insurance) of which: assets under management Income statement Net interest income Dividends and similar income Net commission income Net loss from trading, hedging and disposal/repurchase activities Other net operating income/(expense) Profit (loss) on the disposal of equity investments and impairment of goodwill (***) Pre-tax profit from continuing operations Taxes on income for the year from continuing operations Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios ROE [profit for the year/equity (excluding profit for the year)] Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (*) (**) (***) 0.9% 3.9% -47.9% -23.2% 34.4% 18.4% -1.2% Inclusive of bonds subscribed by the Parent amounting to €201.3 million as at 31st December 2011 (€201 million as at 31st December 2010). In 2010 the item included the release of a provision made in prior years for litigation with the Ministry of the Economy amounting to €3.9 million. In 2011 the item included an impairment loss on the goodwill of the Nice branch amounting to €0.2 million. In 2010, on the other hand, the item related primarily to a gain on the sale of an interest held in BPCI to the Banca del Monte di Lombardia Foundation. As at 31st December 2011, UBI Banca held 74.9437% of the share capital of Banca Regionale Europea, the Cassa di Risparmio di Cuneo Foundation held 24.98% and the remaining 0.0763% was held by non controlling shareholders. The year 2011 ended with a profit of €30.2 million, a decrease compared to €246.4 million the year before, which, however, benefited from a significant gain (€225.4 million net of taxes), realised following the sale of an interest held in the share capital of Banca Popolare Commercio e Industria to the Banca del Monte di Lombardia Foundation as part of the reorganisation of the ownership structure following the “branch switches” performed in January 2010. In normalised terms, net of non-recurring items, 2011 profit amounted to €30 million, an increase compared to €22.7 million in 2010 (+€7.3 million; +32.5%). Net operating income performed well (+€21.8 million to €80 million), with over three quarters of the growth attributable to increased income (+€17.1 million to €273 million) and the remaining part to savings on costs (down by €4.7 million to approximately €193 million). Revenues performed as follows: 173 - - - net interest income reached €168.4 million (+€21 million), mainly as a result of pricing policies implemented on loans as a whole and on mortgages in particular; the fall in dividends (-€0.9 million to €0.4 million) arose from the absence of a dividend distributed by the subsidiary Banco di San Giorgio; net commission income fell slightly to €97.9 million (-€1.4 million), the aggregate result of a fall in items relating to indirect funding, consisting of the placement of third party securities and the distribution of third party services, while an increase was recorded on commissions on current accounts (which also included those for commitment fees); net trading and hedging activity again recorded a loss of €0.5 million, although this was an improvement compared to the loss of €0.9 million the year before. It was affected by the negative impact of hedges on fixed rate mortgages and the repurchase of own bonds on the secondary market, which was only partially offset by gains from fair value changes in hedges on bonds; other net operating income and expense fell to €6.8 million (-€2 million) due to the absence of extraordinary components, which the 2010 result had benefited from. Expenses included: - personnel expense of €109.4 million, almost unchanged compared to €110.1 million before which, however, included redundancy expenses of €2.3 million. Net of that non recurring item, this expense increased by €1.8 million, the aggregate result of opposing trends with a reduction in personnel numbers on the one hand and an increase in the average cost of the components of employment contracts on the other; - other administrative expenses fell to €75.9 million (-€5 million), benefiting from an attentive policy to control expenses and improve efficiency, which resulted in significant savings on the following: telephone data transmission expenses (-€2 million 6 ), insurance premiums (-€1.4 million), outsourced services (-€0.9 million), professional and advisory services (-€0.6 million) and postal expenses (-€0.5 million). The most significant increases, on the other hand, were for tenancy of premises expenses (+€0.7 million) and above all for indirect taxes (+€1.2 million); - net impairment losses on property, equipment and investment property and intangible assets (+€1 million to €7.7 million) included the depreciation on the new headquarters in Turin, to which General Management and central offices previously located in Milan and decentralised units at Cuneo were transferred in January 2011. As a result of the performance reported above, the cost:income ratio improved from 77.2% to 70.7%. Net impairment losses on loans fell slightly to approximately €27 million (-€0.4 million) and included specific impairment losses on non-performing loans of €25.2 million (€23.4 million in 2010) and collective impairment losses on performing loans of €1.8 million (€4 million in 2010). On the other hand, net impairment losses on other assets and liabilities increased to €1.1 million (+€1 million), including €0.6 million7 relating to available-for-sale financial assets and €0.5 million to guarantees. Net provisions for risks and charges of approximately €1 million were recognised in relation to risks for current litigation, while net reversals of €3.3 million were recognised in 2010, which had benefited from a release of €3.9 million as a result of a settlement agreement concerning litigation with the Ministry of the Economy and Finance. The income statement also recorded a loss on the disposal of investments and impairment losses on goodwill amounting to €0.2 million, which included an impairment loss on the goodwill relating to the French branch in Nice, while the 2010 figure originated from the gross gain, already mentioned, of €230.7 million made on the disposal of the interest held in BPCI. 6 Due, amongst other things, to the absence of an expense for participation in a guarantee system designed to cover the costs of damages resulting from the fraudulent use of magnetic strip cards (subject to mass replacement with cards fitted with microchips in 2010). 7 This included €0.40 million in 2011, relating to the new investment in the fund Eptasviluppo. 174 As concerns the balance sheet, loans exceeded €6.9 billion (+0.9%), including €127.5 million relating to the foreign branches. A change in the composition of the item occurred with an increase in medium to long-term loans, consisting mainly of mortgages (+€0.2 billion to €4.1 billion), accounting for 58.8% of total loans (56.3% in December 2010). As concerns the quality of lending, net deteriorated loans increased over twelve months from €306.2 million to €360.7 million (+€54.5 million), although this trend reversed in the last quarter. In detail: +€22.3 million to €150.8 million for non-performing loans8, due mainly to transfers from impaired loans; +€37.9 million to €168.8 million for impaired loans, fuelled above all by new classifications from performing loans; +€10.5 million to €30.8 million for restructured loans, following the transfer of three positions previously classified within impaired loans; -€16.2 million to €10.3 million for exposures past due and in arrears. Within the latter, exposures in arrears for between 90 and 180 days relating to exposures secured by real estate property fell from €22.6 million to €7.9 million. As a result of these trends, both the ratio of net impaired loans to net lending and the ratio of non-performing loans to net loans increased to 2.44% and to 2.18% respectively. Direct funding totalled €5.8 billion, an increase of €0.2 billion compared to €5.6 billion at the end of 2010 (+3.9%), driven by the growth in amounts due to customers (+€0.1 billion to €4 billion9), in the context of which the fall in repurchase agreements was more than offset by increases in current accounts and deposits. Securities issued reached €1.8 billion (+€0.1 billion), a reflection of good performance by certificates of deposit (+€0.1 billion), used mainly for swaps in yen. Indirect funding from private customers fell overall during the year from €7.3 billion to €6.8 billion (-€0.4 billion; -5.9%), fully reflecting the decreases in assets under management (-€0.5 billion to €3.7 billion) and in mutual investment funds and Sicav’s in particular (-€0.4 billion to €1.7 billion), which were offset by growth in assets under custody (+€0.1 billion to over €3.1 billion). At the end of year the net interbank position, which related primarily to the Parent, consisted of debt of €0.1 billion (an increase compared to -€0.2 billion in 2010). Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 26.19% (25.38% at the end of 2010) and a total capital ratio (supervisory capital and reserves to riskweighted assets) of 28.52% (27.69%). The proposal for the allocation of profit is to distribute dividends of €28.6 million after legal allocations and an allocation to the voluntary reserve. As reported in the preceding section, “Significant events that occurred during the year ”, on 21st December 2011, the Board of Directors of Banca Regionale Europea passed a resolution to merge its subsidiary, Banco di San Giorgio Spa, into itself, scheduled for July 2012 with a view to Group simplification and the creation of a North West banking centre. Finally with effect from 1st February 2012, Riccardo Barbarini was appointed General Manager of Banca Regionale Europea to replace Roberto Tonizzo, who will occupy the same position in another bank in the Group. 8 In the second quarter, Banca Regionale Europea disposed of unsecured non-performing loans for €10.1 million, written down by 97%, which gave rise to a net loss on the sale of €43 thousand. 9 Inclusive of €45.2 million relating to foreign branches. 175 BANCA POPOLARE DI ANCONA SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Direct funding (*) Net interbank debt Financial assets held for trading 7,810,341 6,429,378 -839,437 44,342 7,702,345 6,837,163 -209,751 25,159 107,996 -407,785 629,686 19,183 1.4% -6.0% 300.2% 76.2% Available-for-sale financial assets Equity (excluding profit for the year) Total assets 19,740 874,448 8,744,167 22,140 875,143 9,100,755 -2,400 -695 -356,588 -10.8% -0.1% -3.9% Indirect funding from customers (including insurance) 3,533,775 3,828,041 -294,266 -7.7% 1,562,412 1,879,189 -316,777 -16.9% 213,559 1,025 112,157 204,263 3,757 105,328 9,296 (2,732) 6,829 4.6% (72.7%) 6.5% (1,001) 3,140 2,970 2,732 (3,971) 408 n.s. 14.9% 328,880 (126,647) 319,050 (125,953) 9,830 694 3.1% 0.6% (87,431) (11,489) (90,704) (11,980) (3,273) (491) (3.6%) (4.1%) (225,567) 103,313 (43,334) 726 (228,637) 90,413 (51,481) 955 (3,070) 12,900 (8,147) (229) (1.3%) 14.3% (15.8%) (24.0%) Net provisions for risks and charges Profit (loss) on the disposal of equity investments (***) (1,282) (28,147) (1,057) 25 225 (28,172) 21.3% n.s. Pre-tax profit from continuing operations Taxes on income for the year from continuing operations 31,276 (29,000) 38,855 (20,515) (7,579) 8,485 (19.5%) 41.4% 2,276 18,340 (16,064) (87.6%) of which: assets under management Income statement Net interest income Dividends and similar income Net commission income Net income (loss) from trading, hedging and disposal/repurchase activities Other net operating income/(expense) Operating income Personnel expense Other administrative expenses assets Operating expenses Net operating income Net impairment losses on loans (**) Net impairment losses on other assets/liabilities Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios ROE [profit for the year/equity (excluding profit for the year)] Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers 238 248 -10 1,727 1,749 -22 0.26% 68.59% 4.35% 3.50% 2.10% 71.66% 3.73% 3.29% (*) The item included bonds as at 31st December 2010 subscribed by Parent amounting to €352 million. (**) The item for 2010 included an impairment loss relating to the Mariella Burani Group amounting to €0.9 million. (***) The figure for 2011 included the effects of the recognition of impairment losses on the investments in UBI Leasing (€16.2 million) and in Centrobanca (€11.9 million). As at 31st December 2011, UBI Banca held 92.934% of the share capital of the Banca Popolare di Ancona, Aviva Spa held 6.486% and the remaining 0.580% was held by non controlling shareholders. The year 2011 ended with a profit of €2.3 million (€18.3 million in 2010), affected by losses of €28.1 million incurred for impairment losses recognised on investments in UBI Leasing (€16.2 million) and Centrobanca (€11.9 million), as a result of impairment tests. Net of those items, classified as non-recurring, profit amounted to €30.4 million, an increase compared to the normalised figure for the year before (€21.6 million). Net operating income recorded growth of 14.3% to €103.3 million, due to the combined effect of higher operating income (+3.1%) and lower costs (-1.3%). The main items of income, which amounted to €328.9 million (+€9.8 million), performed as follows: - net interest income rose to €213.6 million (+€9.3 million), as a result of an increase in the contribution from net interest from customers, which benefited from an increase in medium to long-term loans; 176 - - - dividends and similar income fell from €3.8 million to €1 million and related to remuneration on investments held in Centrobanca and Arca Sgr; net commission income of €112.2 million increased by €6.8 million, benefiting from growth in commissions on current accounts (including commitment fees) and also on collection and payment services; trading, hedging and disposal and repurchase activities generated a loss of approximately €1 million (a profit of €3 million in 2010), attributable mainly to the negative impact of hedges on fixed rate mortgages and losses on the repurchase of financial liabilities, even if profits were recognised on fair value changes in hedges on bonds and domestic currency swap business in relation to swaps on certificates of deposit (primarily with Japanese yen); other net operating income and expense rose to €3.1 million from €2.7 million the year before. Operating expenses, which fell by €3.1 million to €225.6 million, performed as follows: personnel expense of €126.6 million increased slightly due to an increase in the average cost of the components of employment contracts, which was only partially offset by the reduction in average personnel numbers; - other administrative expenses, however, fell to €87.4 million (-€3.3 million), due in particular to lower expenses for rent payable, professional and advisory services, outsourced services and postal expenses; - net impairment losses on property, equipment and investment property and intangible assets also fell to €11.5 million, from €12 million the year before. As a result of work performed to improve the quality of loans, commenced as far back as 2008 by improving management and monitoring processes, net impairment losses on loans fell significantly from €51.5 million to €43.3 million (€38 million attributable to specific impairment losses on loans in default) and the loan loss rate fell as a consequence from 0.67% to 0.55%. Net provisions for risks and charges amounted to €1.3 million (€1.1 million in 2010) and related mainly to litigation concerning financial investments and the compounding of interest. As concerns the balance sheet, at the end of year loans to customers had reached €7.8 billion (+1.4% compared to twelve months before), driven by growth in mortgages and other forms of medium to long-term lending (+6.4% to €5.3 billion), while falls were recorded for current account overdrafts (-€0.1 billion to €1.4 billion) and other forms of short term lending (-€0.1 billion to €1.1 billion). The net deteriorated loans of the Bank rose to €661.6 million from €572.3 million in 2010. The trend affected all categories as follows: - net non-performing loans increased by 18.2% to €339.8 million and they increased at the same time as a percentage of total loans from 3.73% to 4.35%; - impaired loans recorded growth of 7.9% to €273.5 million, accounting for 3.5% of total loans (3.29% in December 2010); - restructured exposures almost doubled to €28.9 million due to new classifications of significant counterparties, while positions past due and/or in arrears amounted to €19.4 million (€15.7 million the year before), of which €11.6 million attributable to exposures in arrears for between 90 and 180 days backed by mortgages. Direct funding of €6.4 billion fell by 6% over twelve months. Within the item, securities issued fell to €2.1 billion (-€0.3 billion), affected mainly by the early redemption of a bond (€350 million) subscribed by the Parent, while growth was recorded in the item “Other certificates” (+€0.1 billion), composed mainly of certificates of deposit denominated in foreign currency (primarily Japanese yen). However, the fall in amounts due to customers was more modest (-€0.1 billion to approximately €4.4 billion), in relation to new demand for repurchase agreements by customers. In a particularly difficult market context, indirect funding also decreased to €3.5 billion from €3.8 billion in December 2010, penalised by negative performance by all components of assets 177 under management, which fell overall to €1.6 billion (-16.9%), and by mutual funds and Sicav’s in particular (-€0.2 billion to €0.6 billion). Assets under custody on the other hand increased slightly (+1.2% to approximately €2 billion), benefiting above all from the contribution of €0.2 billion made by bonds issued by the Parent and by third parties. At the end of year the net interbank position again consisted of debt of €0.8 billion (-€0.2 billion in December 2010), due to the maturity of term deposits held with the Parent and, in terms of liabilities, to new term deposits made by the Parent, designed to maintain structural balance. Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 15.84% (15.13% in 2010) and a total capital ratio (supervisory capital and reserves to risk-weighted assets) of 16.27% (15.57%). The proposal for the allocation of profit is to distribute dividends of €2.1 million after an allocation to the extraordinary reserve of €131 thousand and an allocation of €90 thousand to a fund available to the Board of Directors. 178 BANCA CARIME SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers 4,865,871 4,765,224 100,647 2.1% Direct funding Net interbank debt 7,552,126 3,555,824 7,562,665 3,670,923 -10,539 -115,099 -0.1% -3.1% 3,395 27,661 2,698 27,793 697 -132 25.8% -0.5% Equity (excluding profit for the year) Total assets 1,548,395 9,684,175 1,551,681 9,784,297 -3,286 -100,122 -0.2% -1.0% Indirect funding from customers (including insurance) 5,375,500 5,753,026 -377,526 -6.6% 2,894,381 3,688,062 -793,681 -21.5% 250,208 122 237,036 107 13,172 15 5.6% 14.0% 112,158 (928) 109,737 2,018 2,421 (2,946) 2.2% n.s. Financial assets held for trading Available-for-sale financial assets of which: assets under management Income statement Net interest income Dividends and similar income Net commission income Net income (loss) from trading, hedging and disposal/repurchase activities Other net operating income/(expense) (*) Operating income Personnel expense (**) Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets 9,955 4,618 5,337 115.6% 371,515 (144,902) (94,708) 353,516 (153,219) (94,309) 17,999 (8,317) 399 5.1% (5.4%) 0.4% (14,082) (14,582) (500) (3.4%) (253,692) (262,110) (8,418) (3.2%) Net operating income Net impairment losses on loans 117,823 (22,778) 91,406 (22,875) 26,417 (97) 28.9% (0.4%) Net impairment losses on other assets/liabilities Net provisions for risks and charges Loss on the disposal of equity investments and impairment of goodwill (***) Pre-tax profit from continuing operations Taxes on income for the year from continuing operations (488) (2,676) (11,392) 80,489 (34,508) (434) 862 (2) 68,957 (31,305) 54 (3,538) 11,390 11,532 3,203 12.4% n.s. n.s. 16.7% 10.2% 45,981 37,652 8,329 22.1% Operating expenses Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) 294 294 - 2,183 2,224 -41 Financial ratios ROE [profit for the year/equity (excluding profit for the year)] 2.97% 2.43% Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers 68.29% 1.93% 3.34% 74.14% 1.24% 2.27% (*) In 2011 the item included insurance compensation of approximately €4 million following a decision by the Court of Appeal of Catanzaro. (**) In 2011 the item included the release of a provision made previously of €3.7 million. (***) In 2011 the item included an impairment loss of €12.1 million on the goodwill of the Bank. As at 31st December 2011, UBI Banca held 92.8332% of the share capital of Banca Carime, Aviva Spa held 7.1476% and the remaining 0.0192% was held by non controlling shareholders. Banca Carime ended 2011 with a profit of €46 million an increase compared to €37.7 million 2010, even though it incurred an impairment loss on goodwill of €12.1 million. Net operating income recorded growth of 28.9% to €117.8 million, as a result of increased operating income (+€18 million to €371.5 million) and a decrease in operating expenses at the same time (-€8.4 million to €253.7 million). In detail, income performed as follows: - net interest income of €250.2 million rose by 5.6% (+€13.2 million), principally as a result of higher interest rates combined with larger volumes of medium to long-term lending; - net commissions amounted to €112.2 million (+2.2%; +€2.4 million) due in particular to current account commissions, inclusive of commitment fees, which more than compensated for the reduction in commissions on the placement of securities, on loan origination for B@nca 24-7 (due to a decrease in loans) and on insurance; - the net result on trading, hedging and disposal and repurchase of financial assets/liabilities fell from a profit of €2 million to a loss of €0.9 million, due to the negative impact of fair value changes in hedges on bonds (-€0.6 million), hedges on fixed rate mortgages (-€0.3 179 - million) and the repurchase of own bonds on the secondary market (-€1.6 million), while profits were earned on securities trading (+€0.9 million); other operating income and expenses increased from €4.6 million to €10 million, benefiting from an insurance reimbursement of approximately €4 million. As concerns operating expenses: - personnel expense fell by 5.4%, to €144.9 million, attributable mainly to a reduction in average personnel numbers, while variable components of remuneration increased; - other administrative expenses of €94.7 million remained almost unchanged compared to 2010 (+0.4%). Within the item, increases were recorded in “fees for services provided by Group companies” (+€1.3 million), “insurance premiums” (+€1.2 million) and “tenancy of premises” (+€0.9 million), while expenses decreased for “professional and advisory services” (-€0.8 million), “outsourced services” (-€0.7 million), “postal expenses” (-€0.6 million) and “telephone and data transmission” expenses (-€0.5 million); - net impairment losses on property, equipment and investment property and intangible assets also remained stable at €14.1 million (€14.6 million). As a result of these changes, the cost:income ratio improved by almost six percentage points, falling from 74.1% to 68.3%. Net impairment losses on loans fell slightly to €22.8 million (€22.9 million twelve months before), the result of a reduction in collective impairment losses (-€5.1 million) and an increase in specific net impairment losses (+€5 million). Net impairment losses on other assets/liabilities were again marginal at €0.5 million (€0.4 million), while net provisions for risks and charges amounted to €2.7 million consisting mainly of provisions made for litigation with customers for compounding of interest (in 2010 the item consisted of net reversals of €0.9 million). Finally net operating income for the year included an expense of €11.4 million, the net result of an impairment loss of €12.1 million on goodwill and gains on the sale of properties of €0.7 million. As concerns the balance sheet, loans to customers rose to €4.9 billion with growth of €0.1 billion (+2.1%), driven by growth in medium to long-term lending (+€0.2 billion), consisting principally of mortgages, which now accounts for 71.6% of the loan portfolio, while a generalised fall was recorded by short term loans (-€0.1 billion). The continuation of the economic crisis in a local economy, which was already particularly fragile, was reflected in a decline in the quality of credit, with an increase in net deteriorated loans to €270.5 million (+€85.9 million). In detail, net non-performing loans increased (+€35 million to €93.9 million) as did net impaired loans (+54.3 to €162.3 million), while slight decreases occurred for restructured exposures (-€0.1 million to €2.1 million) and past due exposures (-€3.3 million to €12.2 million), which included €8.7 million of exposures in arrears for between 90 and 180 days secured by real estate property. Direct funding from customers, totalling €7.6 billion, remained unchanged compared to the year before. Within the item, amounts due to customers remained stable at €5.2 billion as did securities issued at €2.4 billion, while a partial change in the composition occurred within the item, out of bonds and into certificates of deposit, mainly into certificates of deposit denominated in yen. On the other hand indirect funding from customers amounting to €5.4 billion, fell by €0.4 billion due to decreases in assets under management (-0.8 billion to €2.9 billion), penalised by significant declines in mutual investment funds and Sicav’s (-€0.7 billion to €1.6 billion). On the other hand assets under custody rose to €2.5 billion (+€0.4 billion), as a result of the placement of bonds issued by third parties and by the Parent in particular (a total increase of €0.4 billion nominal). At the end of 2011 the net interbank position consisted of funds of €3.6 billion (-€0.1 billion compared to the end of 2010), a reflection of the significant liquidity held by the Banca. 180 Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 27.19% (25.23% at the end of 2010) and a total capital ratio (supervisory capital and reserves to riskweighted assets) of 31.63% (29.82%). The proposal for the allocation of profit is to distribute total dividends of €42.4 million after legal and by-law allocations. 181 CENTROBANCA SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Direct funding (*) Net interbank debt Financial assets held for trading Available-for-sale financial assets Equity (excluding profit for the year) Total assets 7,160,450 6,700,750 -642,178 520,086 487,522 542,566 10,672,079 6,972,678 5,547,161 -1,514,777 447,633 566,135 577,124 10,512,435 187,772 1,153,589 -872,599 72,453 -78,613 -34,558 159,644 2.7% 20.8% -57.6% 16.2% -13.9% -6.0% 1.5% 86,672 939 33,638 15,288 2,002 100,212 1,532 42,102 14,010 5,351 (13,540) (593) (8,464) 1,278 (3,349) (13.5%) (38.7%) (20.1%) 9.1% (62.6%) Operating income Personnel expense Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets 138,539 (31,347) (19,512) (1,005) 163,207 (32,957) (21,049) (1,003) (24,668) (1,610) (1,537) 2 (15.1%) (4.9%) (7.3%) 0.2% Operating expenses Net operating income Net impairment losses on loans (***) Net impairment losses on other assets/liabilities Net provisions per risks and charges (****) (51,864) 86,675 (60,439) (3,602) (1,040) (55,009) 108,198 (65,430) (3,564) (7,669) (3,145) (21,523) (4,991) 38 (6,629) (5.7%) (19.9%) (7.6%) 1.1% (86.4%) Income statement Net interest income Dividends and similar income Net commission income Net income from trading, hedging and disposal/repurchase activities (**) Other net operating income/(expense) Loss on the disposal of equity investments and impairment of goodwill (*****) Pre-tax profit from continuing operations Taxes on income for the year from continuing operations Profit for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios ROE [profit for the year/equity (excluding profit for the year)] Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (7,188) (15) (7,173) n.s. 14,406 (13,181) 31,520 (15,367) (17,114) (2,186) (54.3%) (14.2%) 1,225 16,153 (14,928) (92.4%) 6 316 6 325 -9 0.23% 37.44% 1.48% 3.52% 2.80% 33.71% 1.16% 2.07% (*) Inclusive of bonds subscribed by the Parent and by Banco di San Giorgio amounting to €2,326.2 million as at 31st December 2011 (€201.6 million euro as at 31st December 2010). (**) In 2010 the item included a loss on the disposal/repurchase of loans amounting to €5.3 million. (***) The item for 2010 included an impairment loss of €6 million relating to the Mariella Burani Group. (****) In 2010 the item included an extraordinary provision amounting to €1.3 million made for a derivative in probable default. (*****) In 2011 the item related to an impairment loss on the entire goodwill of the Bank. As at 31st December 2011, UBI Banca held 94.2715% of the share capital of Centrobanca, while 5.4712% was held by Banca Popolare di Ancona Spa, 0.1008% by Veneto Banca Holding Scpa and the remaining portion totalling 0.1565% was held by 16 different banks, mainly “popular” banks. Centrobanca is the bank in the Group which specialises in corporate and investment banking to support corporate clients with innovation, expansion and financial restructuring. The new 2012-2015 Business Plan of the Group initially envisaged a redefinition of the operating scope of the Bank, with a progressive focus on corporate and investment banking, with the transfer to the network banks of the less complex corporate lending transactions and a consequent reduction in new loans and the related income. With a view to further simplification of the UBI Banca Group’s customer service model, it was officially decided in November 2011 to strengthen activities typical of Centrobanca’s business by merging it into the Parent to create a division dedicated to “large corporate” clients and investment banking, to be completed by 201310. The year 2011 ended with a profit of €1.2 million (-€14.9 million compared to €16.2 million the year before), affected, amongst other things, by the impairment loss on goodwill of €6.5 million (net of tax). In normalised terms, net of extraordinary items, 2011 profit would have been €7.7 million compared to €16.6 million the year before. 10 See the preceding section “Significant events that occurred during the year” for further information. 182 Net operating income fell (-€21.5 million to €86.7 million), the aggregate result of a decrease in operating income (-€24.7 million to €138.5 million), which was only partially offset by further reductions in costs (-€3.1 million to €51.9 million). Income performed as follows: - net interest income decreased to €86.7 million (-€13.5 million), the result mainly of higher funding costs (during the year the Bank gave priority to the issue of medium and long-term instruments to create a greater balance with the duration of loans) and of an attentive loan selection and pricing policy designed to maintain a constant income from interest bearing assets; - dividends (-€0.6 million to €0.9 million) incorporated the lower contribution from the interest held in IW Bank; - net commission income (-€8.5 million to €33.6 million) was affected by a decrease in the component relating to lending, attributable to both a slowdown in the growth of assets recorded in the last part of the year and the contraction already mentioned in the operating scope regarding corporate lending activity; - net income from trading hedging and disposal/repurchase activity was €15.3 million (+€1.3 million), the aggregate result on the one hand of a decrease in trading activities (-€6 million of which -€6.5 million on transactions on interest rates connected with derivatives to hedge own liabilities) and on the other of an overall increase in hedging and disposal and repurchase activity (+€7.3 million) relating largely to gains on the unwinding of hedges regarding repurchases of own securities; - other net operating income and expense totalled €2 million (-€3.4 million) and included the recovery of legal costs of €1.6 million incurred by the Bank. Within operating expenses, personnel expense fell to €31.3 million (-€1.6 million) as a result of a decrease in average personnel numbers and lower fees paid to directors, while other administrative expenses fell to €19.5 million (-€1.5 million), due mainly to lower services costs and IT expenses, which benefited from economies of scale and from the renegotiation of Group contracts. As a result of the performance described above, the cost:income ratio increased to 37.4% from 33.7% at the end of 2010. Net impairment losses on loans, amounting to €60.4 million, an improvement compared to €65.4 million the year before, the aggregate result of a substantial decrease in specific net impairment losses (down to €45.4 million from €68.3 million in 2010) and an increase in collective impairment losses on loans (€15 million compared to reversals of €2.9 million before) in relation to changes in methodologies and not to a deterioration in the quality of performing loans. Net provisions for risks and charges also decreased to €1 million (-€6.7 million) and related mainly to a single case of current litigation. Finally, pre-tax profit was affected by the full write-off of goodwill already mentioned, amounting to €7.2 million, following impairment tests. As concerns the balance sheet, loans to customers amounted to €7.2 billion, slightly down compared to €7 billion in 2010 (+2.7%). In terms of type of business, both corporate lending (+3.7%) and Acquisition & Project Finance (+5.5%) increased, while corporate finance decreased (-15.1%). Affected, amongst other things, by the trend in investments in the second half of the year, a decrease in loans approved was recorded in 2011 (-32.4% to €2.3 billion). New loans (-12.3% to €1.9 billion) were affected on the one hand by the change in the operating scope of Centrobanca and on the other by a policy of growth in assets targeted on “core” clients, with non financial companies again the main recipients. Total net deteriorated loans rose over twelve months to €523.2 million (+€85.4 million; +19.5%), but were accompanied, nevertheless, by a change in the composition as follows: nonperforming loans increased to €106.1 million (+€24.9 million), mainly as a result of transfers from impaired loans; impaired loans increased to €251.9 million (+€107.8 million), due 183 principally to new classifications from performing loans; however, restructured loans and exposures past due and in arrears fell to €159.8 million (-€8.6 million) and to €5.4 million (€38.7 million) respectively. As a result of these trends, both the ratio of net impaired loans to net loans and the ratio of net non-performing loans to net loans increased from 2.07% to 3.52% and from 1.16% to 1.48% respectively, while the ratio of net deteriorated loans to net loans rose to 7.31% (6.28% at the end of 2010). During the year, net interbank debt more than halved to €0.6 billion (-€0.9 billion; -57.6%), due mainly to the requirement to restore balance to the ratio of short-term funding to medium to long-term funding, which led to a reduction in debt owed to the Parent, which was replaced by bond issues always subscribed by it. On the other hand, direct funding increased to €6.7 billion (+€1.2 billion; +20.8%) as a result of bonds placed amounting to €2.15 billion, subscribed entirely by the Parent, while maturities for the year totalled €1.08 billion. Financial assets held for trading rose from €447.6 million to €520.1 million (+€72.5 million; +16.2%), mainly the result of increases in derivatives due to hedging performed on behalf of Group customers. The portfolio of available-for-sale financial assets, consisting almost entirely of investments in corporate bonds made as part of Centrobanca’s overall lending business, decreased to €487.5 million from €566.1 million the year before (-€78.6 million; -13.9%). Again in 2011, investment policies were designed to refocus on captive Group customers with investments in Italian corporate issuers and the major European players operating in Italy. Capital ratios as at 31st December 2011 consisted of a tier one ratio (tier one capital to risk weighted assets) of 8.25% (8.72% at the end of 2010) and a total capital ratio (supervisory capital and reserves to risk-weighted assets) of 10.10% (11.19%). The proposal for the allocation of profits is to first allocate €0.06 million to the legal reserve and then to distribute dividends of €1.34 million, by drawing €0.18 million from retained profits. With effect from 8th April 2011, Massimo Capuano, the General Manager of the Bank since 1st February 2011, was appointed to the position of Managing Director. 184 B@NCA 24-7 SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Direct funding (*) Net interbank debt Equity (excluding profit for the year) Total assets 10,511,749 5,773,917 -6,220,848 342,624 11,219,553 4,344,858 -7,757,694 348,179 -707,804 1,429,059 -1,536,846 -5,555 -6.3% 32.9% -19.8% -1.6% 13,294,909 12,957,569 337,340 2.6% 159,181 1 19,624 (10,578) 200,453 17,634 (24,036) (41,272) 1 1,990 (13,458) (20.6%) 11.3% (56.0%) Income statement Net interest income Dividends and similar income Net commission income Net loss from trading, hedging and disposal/repurchase activity Other net operating income/(expense) 36,223 29,817 6,406 21.5% Operating income Personnel expense 204,451 (12,322) 223,868 (13,046) (19,417) (724) (8.7%) (5.5%) Other administrative expenses Net impairment losses on property, equipment and investment property and intangible assets (46,651) (187) (45,921) (180) 730 7 1.6% 3.9% (59,160) 145,291 (105,303) (7,855) (59,147) 164,721 (149,833) (8,912) 13 (19,430) (44,530) (1,057) 0.0% (11.8%) (29.7%) (11.9%) 32,133 (13,792) 5,976 (11,699) 26,157 2,093 437.7% 17.9% 18,341 (5,723) 24,064 n.s. 1 206 1 227 -21 28.94% 2.18% 1.05% 26.42% 1.55% 0.65% Operating expenses Net operating income Net impairment losses on loans Net provisions for risks and charges (**) Pre-tax profit from continuing operations Taxes on income for the year from continuing operations Profit (loss) for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) Financial ratios Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (*) (**) Inclusive of bonds subscribed by the Parent amounting to €5,773 million as at 31st December 2011 (€4,321 million as at 31st December 2010). In 2010, the item included a provision of eight million euro in relation to estimated risks on the lending portfolio brokered by Ktesios Spa. The share capital of B@nca 24-7 as at 31st December 2011 was wholly owned by UBI Banca. As part of an overall improvement in credit risk management at Group level, this Bank, which specialises in consumer credit, underwent profound reorganisation in 2011, with the objective of discontinuing some higher risk lines of business (special purpose loans and consumer credit to non captive customers) as already reported in the previous section “Significant events that occurred during the year”. The reorganisation of operations will be completed after 1st May 2012, with the contribution of outstanding salary and pension backed loans to Prestitalia and the subsequent merger of B@nca 24-7 into UBI Banca, effective for accounting and tax purposes from 1st January 2012. The Bank ended the year with a profit of €18.3 million, compared to a loss of €5.7 million the previous year, as a result of a substantial decrease in net impairment losses on loans (-€44.5 million to €105.3 million), notwithstanding a lower contribution from net operating income (-19.4 million to €145.3 million), entirely attributable to lower operating income (-€19.4 million to €204.5 million). Income performed as follows: - net interest income fell to €159.2 million (-€41.3 million), as a result of lower volumes of business, following the change in the focus of operations in progress. The fall in interest income was accompanied by an increase in interest expense on securities issued and on amounts due to banks, which was only partly offset by a reduction in the negative differentials on hedges on loans to customers; - the contribution from net commissions increased to €19.6 million (+€2 million), due to a fall in commission expense (in relation to the distribution of credit cards and insurance products through indirect networks), which was greater than that for commission income; 185 - - the net result for financial activities was again an overall loss of €10.6 million (a loss of €24 million in 2010), the result of an improvement in the trading component (due to the unwinding of derivatives positions), notwithstanding a worsening of the hedge component. Profits of €2.1 million were also earned on disposals and repurchases, following the disposal of unsecured non-performing loans concluded during the year; other net operating income and expense increased to €36.2 million (+€6.4 million), benefiting from increased income from securitisations. Operating expenses, which remained almost unchanged over twelve months, included a fall in personnel expense (-€0.7 million to €12.3 million), due, amongst other things, to a reduction in personnel numbers, which was fully offset by an increase in other administrative expenses (+€0.7 million to €46.6 million), attributable mainly to higher expenses for outsourced IT services and consulting services in connection with the IT migration project and the merger of B@nca 24-7 into the Parent. Although still high, net impairment losses on loans fell by approximately 30%, benefiting from action taken to contain risks, which took the form of the progressive discontinuation of the SILF network of agents and indirect networks (i.e. Ktesios Spa11), with the concentration, at the same time, of new salary backed loans in the subsidiary Prestitalia Spa. Similarly, provisions for risks and charges in relation to possible operating risks connected with salary backed lending and personal loan business, decreased by €1 million to €7.9 million12. Pre-tax profit of €32.1 million recorded significant growth compared to €6 million at the end of 2010. However, tax expense of €13.8 million was particularly high, due to the limits on the deductibility of impairment losses on loans and to the increase in the rate for IRAP (local production tax), despite the benefits resulting from the disposals of loans concluded during the year. As concerns the balance sheet, the difficult economic context and the strategic reorganisation activity affected total outstanding loans, which fell to €10.5 billion (-€0.7 billion; -6.3%), the aggregate result of a general reduction in all types of lending, which was greater for non captive loans brokered by SILF (down from 9.7% to 6.3% of the total) and for captive loans originated through Group branches (down from 15.9% to 15.6%). While the total amounts fell slightly, an increase as a percentage of the total was recorded for salary backed loans13 (up from 27.7% to 29.2%) and mortgages 14 (up from 45.9% to 48%). On the other hand, the remaining types of lending were practically unchanged (up from 0.8% to 0.9%). Total new loans disbursed almost halved, down to €1.5 billion from €2.7 billion in 2010. These were composed as follows: €0.6 billion of salary backed loans brokered by the subsidiary Prestitalia and indirect networks (-44.7%); approximately €0.6 billion of personal and special purpose loans distributed through the network banks (-12%) and the SILF distribution network (-37.8%); €0.3 billion of mortgages (-66%), brokered principally through the BY YOU network before the transfer of new disbursements to the network banks. At the end of the year total active cards issued by B@nca 24-7 to Group customers (net of cards being replaced) had reached €551 thousand (+9.1% compared to €505 thousand at the end of 2010), with a significant increase in the total value of the transactions performed (+€0.3 billion to €1.8 billion; +21.3%). Over the twelve month period, net deteriorated assets increased from €269.3 million to €403.9 million (+50%) as follows: net non-performing loans 15 rose from €173.7 million to €229.2 million (+32%) and net impaired loans rose from €73.1 million to €110.1 million (+50.7%), while exposures past due and in arrears – which included an increase in positions relating to 11 Losses on loans recognised in the financial statements in relation to the Ktesios Group amounted to €19.4 million, including €11.4 million recognised through profit and loss in 2011 and €8 million resulting from the reclassification of a previous provision for risks and charges made in the fourth quarter of 2010. 12 The figure includes a total of €3.6 million relating to the Ktesios Group. 13 As at 31st December 2011, salary backed loans brokered through the Ktesios Group amounted to €883 million. 14 Following a revision of the Group arrangements with the BY YOU network, activity to disburse new mortgages was transferred directly to the network banks on 18th May 2011, leaving the management of outstanding mortgages only to the Bank. 15 In 2011 the Bank performed two disposals of unsecured non-performing loans for a total gross amount of €151.6 million, which had been written down almost entirely: €58.5 million in June and €93.1 million in December. 186 late payments for technical reasons by public administrations – increased from €22.5 million to €64.6 million (+186%). Lending business is financed mainly through intragroup interbank funding (current account overdrafts, term deposits and repurchase agreements with the Parent, where the underlying for the latter consists of senior securities resulting from securitisations16), but also through the issue of bonds subscribed by the Parent and classified within securities issued. In this respect, B@nca 24-7 issued three new bonds during the year at a fixed rate with maturities of two, three and four years, subscribed entirely by UBI Banca for a total of €1.4 billion nominal. As a consequence, while consisting of debt of €6.2 billion, the net interbank position as at 31st December 2011, had improved compared to the previous year (-€7.8 billion). Capital ratios consisted of a tier one ratio (tier one capital to risk weighted assets) of 7.49% (6.85% at the end of 2010) and a total capital ratio (supervisory capital and reserves to riskweighted assets) of 9.99% (9.36%). The proposal for the allocation of the profit for the year of €18.3 million is to allocate €9.6 million to retained earnings, after allocating €0.9 million to the legal reserve, replenishment of the loss for the previous year of €5.7 million and replenishment of the loss in relation to the negative first time adoption reserve, resulting from the partial spin-off of former SILF operations amounting to €2.1 million. 16 On 20th November 2011, the Bank wound up in advance a securitisation of salary backed loans which had been formed on 26th September 2008 by the issuer 24-7 Finance Srl. 187 IW BANK SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Direct funding Net interbank debt Financial assets held for trading Available-for-sale financial assets Equity (excluding profit for the year) 246,010 207,028 38,982 18.8% 1,907,380 1,513,127 394,253 26.1% 852,085 401,300 450,785 112.3% 41,830 21,113 20,717 98.1% 721,772 43,216 845,043 36,065 -123,271 7,151 -14.6% 19.8% 11.2% Total assets 3,195,580 2,874,217 321,363 Indirect funding from customers (including insurance) 3,161,568 3,037,925 123,643 4.1% 462,063 496,899 -34,836 -7.0% of which: assets under management Income statement Net interest income Net commission income 35,700 24,047 11,653 48.5% 31,057 33,062 (2,005) (6.1%) Net income from trading, hedging and disposal/repurchase activities 3,312 7,787 (4,475) (57.5%) Other net operating income/(expense) (*) 1,293 4,175 (2,882) (69.0%) Operating income Personnel expense 71,362 (19,258) 69,071 (20,577) 2,291 (1,319) Other administrative expenses intangible assets (**) (31,560) (31,977) (417) (1.3%) (6,601) (8,470) (1,869) (22.1%) Operating expenses (57,419) (61,024) (3,605) (5.9%) 13,943 (1,472) 8,047 (969) 5,896 503 Net operating income Net impairment losses on loans Net impairment losses on other assets/liabilities 3.3% (6.4%) 73.3% 51.9% (373) (613) (240) Net provisions for risks and charges (***) (3,317) (2,933) 384 13.1% Profit on the disposal of equity investments (****) Pre-tax profit from continuing operations Taxes on income for the year from continuing operations (454) 8,327 (5,513) (1,982) 1,550 (1,994) (1,528) 6,777 3,519 (77.1%) 437.2% 176.5% 2,814 (444) 3,258 n.s. Profit (loss) for the year Other information Number of branches Total work force (actual employees+personnel on leasing contracts) 2 2 - 276 292 -16 Financial ratios ROE [profit for the year/equity (excluding profit for the year)] 6.51% -1.23% Cost:income ratio (operating expenses/operating income) 80.46% 88.35% 0.14% 0.01% Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (39.2%) The figures as at and for the year ended 31st December 2010 have not been restated on a pro-forma basis to take account of InvestNet Italia, merged into the Bank on 15th July 2011, but relate to IW Bank only. (*) (**) (***) In 2010 the item included prior year income of €2.5 million, following the conclusion of a settlement agreement with former Directors. In 2010 the item included impairment losses on intangible assets of €1.4 million. In 2011 the item included provisions of €2.1 million for unreconciled accounts, while in 2010 the item included a provision of €2.3 million, in relation to differences found when inspections were performed on suspense accounts when the migration to the new IT platform was performed. (****) In 2010 the item included an impairment loss on interests held in InvestNet International and Investnet Italia amounting to two million euro. As at 31st December 2011, UBI Banca held 65.039% of the share capital of IW Bank, Centrobanca held 23.496% and Webstar Sa held 10.336%, while the remaining 1.129% consisted of treasury shares held in portfolio by the Bank. IW Bank specialises in the provision of banking and financial services to retail and institutional customers almost exclusively through the internet. Its range of services includes trading in financial instruments, the distribution of OICRs (collective investment instruments), current accounts, the issue of credit and debit cards, electronic money, insurance, personal loans and mortgages. On 6th May 2011, the Board of Directors approved a strategic business plan for the period 2011-2015, which involves, amongst other things, the creation of new synergies with the Parent, a new commercial service model, the expansion of the range of high quality products and services for customers and the rationalisation of the internal processes of the bank and its cost structure, designed to employ IW Bank as a channel for the direct funding of the Group in Italy. These initiatives were made possible, amongst other things, by the migration to a new IT system supplied by the company Cedacri and they included the 188 launch of high remuneration deposit products (IW Power “Special”) which, assisted by an effective advertising campaign, has resulted in a substantial increase in direct funding. In 2011, IW Bank further increased the number of active accounts held, up to 112.1 thousand from 105.8 thousand at the end of 2010. Also the average daily number of orders received from customers and executed rose to 36.6 thousand from 35.5 thousand in 2010. It is underlined that the comparative figures in reclassified balance sheet and income statement for 2010 presented here have not been restated on a consistent basis to include the figures for Investnet Italia Srl merged with a deed of 1st August 2011, with effect for accounting and fiscal purposes from 1st January 2011. From an operational viewpoint, the year ended with a profit of €2.8 million compared to a loss of €0.4 million the year before. Moreover, the result for the year was significantly affected by expenses relating to non-recurring items consisting of provisions of €2.1 million, net of tax, to meet possible future risks and charges connected with further accounting differences in relation to the former IT system (€3.9 million in 2010, connected mainly with operational decisions concerning the reorganisation of the Group and the replacement with the Bank’s IT platform). Net of those extraordinary items, profit for the year amounted to €4.9 million (€3.5 million in 2010). The year ended with net operating income of close to €14 million, up over twelve months by €5.9 million, of which more than 60% attributable to lower costs (-€3.6 million to €57.4 million) and the remainder to higher income (+€2.3 million to €71.4 million). Income included an increase in net interest income (+€11.7 million to €35.7 million) – relating mainly to the new structure of the available-for-sale securities portfolio and an increase in loans and receivables – which was partially offset by decreases in all the other items: -€2 million to €31.1 million for net commission income, due to less business activity with customers for order routing and greater commission expense on trading in financial instruments; -€4.5 million to €3.3 million for net income from trading, hedging and disposal and repurchase activity, which mainly reflected lower gains on the fixed rate component of the available-for-sale securities portfolio; -€2.9 million to €1.3 million for other net operating income and expense which, however, had benefited from €2.5 million of extraordinary items connected with the conclusion of a settlement agreement with former Bank personnel. The improvement in operating expenses was general and included the following: -€1.3 million to below €19.2 million for personnel expense due to lower personnel numbers; -€0.4 million to €31.6 million for other administrative expenses due on the one hand to greater expense for outsourced services provided by third parties and for the advertising campaign to promote the IW Power “Special” products and other minor expenses relating to supply contracts for the merged company Twice Sim and lower strategic and organisational consulting costs; -€1.9 million to €6.6 million for net impairment losses on property, equipment and investment property and intangible assets which included the write-off of intangible assets amounting to €1.4 million the year before. Greater net impairment losses on loans were also recognised (+€0.5 million to €1.5 million), along with increased provisions (+€0.4 million to €3.3 million), including the €2.1 million already mentioned to meet possible future risks and charges related to further accounting differences connected with the former legacy IT system, with particular reference to settlement accounts. As concerns balance sheet items, direct funding increased appreciably to €1.9 billion (+€0.4 billion; +26.1%), attributable principally to the launch of the new IW Power “Special” products. Indirect funding also rose overall to €3.2 billion (+€0.1 billion; +4.1%), although within the item, assets under management fell to €462.1 million (-€34.8 million; -7%). Loans to customers increased at the end of 2011 to €246 million (+€39 million; +18.8%), consisting of €177.4 million attributable to mortgages, €7.4 million to personal loans, €15.1 million to the use of credit cards, the grant of credit lines for margin trading and for temporary 189 overdrafts, while the remaining €11.5 million related to other transactions (postal deposits, security deposits, commercial loans and guarantee margins with clearing houses). The net interbank position, consisting mainly of positions with the Parent, more than doubled to €852.1 million (€401.3 million in December 2010). The portfolio of available-for-sale financial assets, amounting to €721.8 million (-€123.3 million; -14.6%), consisted mainly of Italian government securities, including €714 million of floating rate certificates (CCT). In September, the equity of the Bank decreased as a result of the creation of a negative fair value reserve in application of international accounting standards due to the change in the fair value of the availablefor-sale financial assets held in its securities portfolio. In consideration of the transitory nature of those reserves – which are negative because of changes in the prices of Italian government securities of which almost all of the owned portfolio of IW Bank is composed – and the probability that they will presumably be eliminated (especially if the securities are held until their natural maturity), on 29th September 2011, UBI Banca, the sole and controlling shareholder made a “payment into an account for a future increase in the share capital to be decided by 27th April 2012” amounting to €60,179 thousand, equal to the negative amount of the fair value reserve recognised as at 28th September 2011 and not eligible for inclusion in the supervisory capital. In a later disclosure of 22nd November 2011, the Parent reported that given the continuing high volatility on bond markets, as a partial rectification and in order to provide greater stability, the “payment” mentioned was to be considered as being without the time limit of the 27th April 2012, and that the decision on the best timing for the conversion into share capital, if necessary, or its return should the negative effects of the fluctuations in the prices on the securities in the Bank’s portfolio be reversed was to be made by IW Bank, in co-ordination with UBI Banca. In the light of those developments, IW Bank decided to postpone all decisions on the question during the course of the year in order to acquire a clearer view of the outlook in both capital and corporate terms. An appreciable recovery in the prices of the Italian government securities held in portfolio occurred after the end of the year, with a consequent positive impact on the “fair value reserves” recognised within the equity of the Bank, which rose from a negative balance of €71,452 thousand as at 31st December 2011 to a negative balance of €18,390 thousand as at 8th March 2012. Capital ratios as at 31st December 2011 consisted of a tier one ratio (tier one capital to risk weighted assets) of 13.02% (10.91% at the end of 2010) and a total capital ratio (supervisory capital and reserves to risk-weighted assets) of 13.01% (10.99%). The proposal for the allocation of profit is to allocate €2,673 thousand to retained earnings, after allocating €141 thousand to the legal reserve. 190 UBI LEASING SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers Due to customers Net interbank debt Financial assets available-for trading Available-for-sale financial assets Equity (excluding profit for the year) Total assets Income statement Net interest income Net commission income Net income (loss) from trading, hedging and disposal/repurchase activities Other net operating income/(expense) (*) Operating income Personnel expense Other administrative expenses Net impairment losses on property, equipment and investment property and intangible 9,045,465 9,698,555 -653,090 -6.7% 387,638 682,963 -295,325 -43.2% -9,532,793 60 -10,501,685 1,598 -968,892 -1,538 -9.2% -96.2% 26 26 - - 329,046 289,749 39,297 13.6% 10,382,757 11,601,054 -1,218,297 -10.5% 96,439 114,422 (17,983) (15.7%) (1,879) 1,632 (2,283) (14,615) (404) 16,247 (17.7%) n.s. 31,514 44,037 (12,523) (28.4%) 127,706 (17,376) (27,423) 141,561 (15,820) (28,979) (13,855) 1,556 (1,556) (9.8%) 9.8% (5.4%) (995) (603) 392 65.0% (45,794) 81,912 (111,556) (45,402) 96,159 (114,612) 392 (14,247) (3,056) 0.9% (14.8%) (2.7%) (2,497) (1,962) (2,646) 20 (149) (1,982) (5.6%) n.s. Pre-tax loss from continuing operations Taxes on income for the year from continuing operations (34,103) 3,952 (21,079) 447 13,024 3,505 61.8% n.s. Loss for the year (30,151) (20,632) 9,519 46.1% 255 242 13 35.86% 32.07% 4.52% 2.85% 3.19% 1.91% Operating expenses Net operating income Net impairment losses on loans Net provisions for risks and charges (**) Profit (loss) on the disposal of equity investments (***) Other information Total work force (actual employees+personnel on leasing contracts) Financial ratios Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers (*) The item for 2011 includes €3.3 million of expenses incurred in relation to the termination of mandates conferred on UBI leasing agents. (**) The item for 2011 includes €2.4 million for provisions relating to the termination of mandates conferred on UBI leasing agents. (***) In 2011 the item included an impairment loss of €2 million on goodwill. As at 31st December 2011, UBI Banca held 79.9962% of the share capital of UBI Leasing, 18.9965% was held by Banca Popolare di Ancona Spa and the remaining 1.0073% was held by Banca Valsabbina Scpa. The year 2011 was a difficult one for the leasing sector as the economic crisis continued and businesses failed to invest as a consequence. On the basis of Assilea (national association of leasing companies) data, the value of contracts signed nationally fell to €24.6 billion from €27.3 billion the year before (-9.8%; -€2.7 billion). In terms of business sector, the crisis hit the property sector particularly hard (-21%; -€1.9 billion) and also the machinery and equipment (10.6%; -€842 million) and aeronautical sectors (-27.3%; -€294 million), while the automobile sector (-1%; -€59 million) performed with more stability. Only the energy sector recorded positive performance (+10.5%; +€384 million). In the already difficult economic environment just mentioned, UBI Leasing’s operations were also affected by internal structural problems, exacerbated by an uncertain and weak market. Consequently, the company saw its market share fall from 6.81% to 3.16% to reach tenth place in the Assilea classification (from fourth place at the end of 2010). The Company has more that halved its business in terms of both the number of contracts signed (down from 10,216 to 4,999) and in terms of value (-€1.1 billion to €0.8 billion; -58.1%). As shown in the table, significant decreases were recorded in all sectors, as a consequence, at least in part, of substantial organisational and procedural changes introduced during the year 191 by the “Company restructuring programme” launched by the Board of Directors on 16th February 201117. Performance by business sector 2011 Figures in thousands of euro number 2010 amount number % change amount number amount Auto 2,901 109,671 5,745 223,580 -49.5% of which: - motor vehicles 1,685 52,731 3,240 103,752 -48.0% -49.2% 732 17,117 1,560 36,237 -53.1% -52.8% - commercial vehicles -50.9% - industrial vehicles 484 39,823 945 83,591 -48.8% -52.4% Machinery and equipment 1,639 169,521 3,351 328,832 -51.1% -48.4% 54 335 17,081 339,370 242 731 93,689 794,155 -77.7% -54.2% -81.8% -57.3% 70 142,615 147 418,648 -52.4% -65.9% 4,999 778,258 10,216 1,858,904 -51.1% -58.1% Aeronautical Property Energy Total The main points of the programme consisted of the following: a revision of the organisational structure, with a view to simplification and alignment with the organisational design indicated by the Parent: a Risk Control Service was introduced, on the staff of the Managing Director, consisting of two functions (compliance, risk management and anti money-laundering); in the commercial sphere, with effect from 1st July 2011, the distinction between the banking and the agent distribution channels was eliminated and replaced by two general geographical areas (Northern and “Central and Southern”), with a subsequent drastic reduction in the network of agents, which at the end of the year was composed of six agencies for a total of nine agents compared to 85 twelve months before18. At the same time the proactive presence of personnel in bank branches was increased in line with the new distribution model – which came into operation on 1st October 2011 – focused almost exclusively on business with captive Group customers, with the main objective of acquiring new customers on which to perform cross-selling activity through the network banks; the Credit Approval and Operations departments were reorganised and centralised; action was undertaken in the first half of the year to reorganise the structure of the company and its lending processes as part of a specific “Revision of credit quality” project, launched in 2010 with the objective of improving the credit quality of the company, in consideration of the critical condition in which it lay. Measures which gradually became operational included the following: the implementation of electronic credit authorisation software (PEF Leasing); the introduction of new software to manage problem loans; the revision of the automatic approval tools used for the non captive channel (Experian scoring); the centralisation at the Company Credit Department of approvals for counterparties classified as medium and/or high risk by the rating models used by the Group19; the completion of a specific “Qualitative Self Risk Assessment” project designed to identify the main operational risks, the relative risk management controls and possible future policies to allow the Company to correct the failings found. As concerns the balance sheet, lending to customers over twelve months fell to €9 billion (-€0.7 billion; -6.7%), while within the item, the proportion subject to securitisation as a result of transactions relating to UBI Lease Finance 5 increased by approximately 45%. 17 These initiatives were decided independently by the UBI Banca Group. UBI Leasing was never subject to specific inspections, but it was involved, together with the Parent and the network banks, in inspections conducted between February and July 2010, designed to assess the profile of the Group with regard to the management, governance and control of credit risk in the corporate customer segment. 18 On 16th February, the Board of Directors of the Company revoked the general powers of attorney conferred on its agents, with the exception of area chiefs. The new commercial model was communicated by registered letter in April, as a result of which, from 1st October 2011 the UBI Leasing agents no longer provide assistance to banks and receive a commission if they find new business with the Group’s network banks. Almost all the agency contracts were terminated in 2011, with specific provisions made in the accounts for indemnities which may be due (€2.4 million). 19 At the same time that those initiatives were introduced, further action was also taken to set reference prices for the various markets and products and the minimum prices applicable on the basis of the 2011 budget and to reorganise the structure of regulations for Company processes and procedures and the relative manuals in order to protect the Company from incurring operating losses which are not connected to business risk profiles. 192 The continuing deterioration of the overall economic and financial environment caused a further increase in deteriorated loans, which came to total €1,178.8 million (gross of impairment), an increase of €216.6 million (+22.5%), attributable almost entirely to the property sector which accounted for three quarters of problem loans at the end of the year20. In terms of categories, the deterioration mainly regarded non-performing loans 21 (+€138 million), which represented more than 50% of total deteriorated loans, and impaired loans (+€81.8 million), but also restructured loans (+€19 million), while a decrease in past due exposures was recorded (-€22.2 million). Although the total deteriorated loan portfolio recorded growth, coverage remained almost unchanged (up from 20.1% to 20.5%) at levels lower than the Group average, considering both the secured nature of the loans granted (ownership of the asset leased) and the prevalence of property transactions. On the other hand the coverage for performing loans rose from 0.40% to 0.63% as a result of an increase in impairment losses recognised in the fourth quarter. Furthermore, the capital was strengthened in the second quarter with an increase in the share capital of €60 million (inclusive of €15 million recognised in the share premium reserve) to take into account both changes in the supervisory context and the need to provide adequate capital to fund future investments. From an operating viewpoint, the fall in net operating income (-€14.2 million to €81.9 million) was attributable almost entirely to lower income (-€13.9 million to €127.7 million), due to increased difficulties on financial markets and, although to a lesser extent, to the effects of commercial and distribution restructuring. Net interest income (-€18 million to €96.4 million) worsened due to both a decrease in average lending and to increased costs for funding, even if supplied by the Parent, while the results for net trading and hedging income (+€16.2 million to €1.6 million) and for other net operating income and expense (-€12.5 million to €31.5 million) were affected mainly by the absence of the results of the Lombarda Lease Finance 3 securitisation, which was wound up in 2010. The latter category also included greater costs of €3.3 million connected with the closure of agent networks and the termination of contracts with UBI leasing agencies. On the other hand, the modest rise in operating expenses (+€0.4 million to €45.8 million) was attributable entirely to higher depreciation and amortisation charges (+€0.4 million to €1 million), while the increase in personnel expense (+€1.6 million to €17.4 million), connected, amongst other things, with an increase in personnel numbers, was fully offset by the fall in other administrative expenses (-€1.6 million to €27.4 million). Although slightly down over twelve months, net impairment losses on loans, were again particularly high (€111.6 million), while net provisions for risks and charges of €2.5 million were almost entirely attributable to the termination of agency contracts already mentioned. The “item profits from the disposal of equity investments and impairment losses on goodwill” related to the full write-off of goodwill arising from the prior year acquisition of Veneta Factoring operations, which until the previous year had been recognised within intangible assets. The change already mentioned in the commercial and distribution strategies made by the Company and the consequent discontinuation of business generated by the network of agents meant that the reasons for maintaining that goodwill on the books no longer applied. The proposal to replenish the loss for the year is to draw €30.2 million from the share premium reserve. Capital ratios as at 31st December 2011 consisted of a tier one ratio (tier one capital to risk weighted assets) of 4.81% (3.89% at the end of 2010) and a total capital ratio (supervisory capital and reserves to risk-weighted assets) of 6.64% (5.57%). 20 UBI Leasing therefore decided to create an organisational unit within the Problem Loan Department for the recovery, management and sale of real estate assets repossessed by the Company following the termination of lease contracts. 21 In 2011 the Company performed two disposals of unsecured non-performing loans for a total gross amount of €31.7 million, which had been written down almost entirely: €25.3 million in the second quarter and €6.4 million in the fourth quarter. 193 UBI PRAMERICA SGR SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro OWN "RETAIL CUSTOMERS" 6,782,454 7,724,350 -941,896 -12.2% 5,082,519 5,659,178 -576,659 -10.2% 1,699,935 2,065,172 -365,237 -17.7% 14,026,614 18,958,811 -4,932,197 -26.0% 1,190,291 1,882,328 -692,037 -36.8% 110,961 125,379 -14,418 -11.5% SICAV’s and other (net of duplications) 781,059 371,900 409,159 110.0% TOTAL ASSETS UNDER MANAGEMENT 20,288,875 25,047,354 -4,758,479 -19.0% Of which: customer portfolio management FUND BASED INSTRUMENTS FUNDS of which: Pramerica funds included in fund based instruments Other duplications Income statement Net interest income 1,739 924 815 88.2% Net commission income 68,356 70,142 (1,786) (2.5%) Performance fees Net income from trading, hedging and disposal/repurchase activity 11,728 2,073 14,982 2,048 (3,254) 25 (21.7%) 1.2% Other net operating income/(expense) 69 (43) 112 n.s. Operating income Personnel expense 83,965 (14,406) 88,053 (15,490) (4,088) (1,084) (4.6%) (7.0%) Other administrative expenses (14,383) (15,114) (731) (4.8%) (124) (120) 4 3.3% Operating expenses (28,913) (30,724) (1,811) (5.9%) Net operating income 55,052 57,329 (2,277) (4.0%) 20 55,072 (17,722) 226 292 57,621 (19,146) - (272) (2,549) (1,424) 226 (93.2%) (4.4%) (7.4%) - 37,576 38,475 (899) (2.3%) 142 142 Net impairment losses on property, equipment and investment property and intangible assets Net provisions for risks and charges Pre-tax profit from continuing operations Taxation for the year Profit from discontinued operations Profit for the year Other information Total work force (actual employees+personnel on leasing contracts) - As at 31st December 2011, UBI Banca held 65% of the share capital of UBI Pramerica SGR and the remaining 35% was held by Prudential International Investments Corporation. Significant events occurred during the course of 2011. The operation to contribute three Capitalgest Alternative hedge funds (Conservative, Dynamic and Equity Hedge) to Tages Sgr Spa was concluded with effect from 1st October 2011. The operation, commenced in the previous April, involved the acquisition of a stake - recognised within available-for-sale financial assets –, of 7.74% as at 31st December 2011 in the share capital of Tages Sgr which received the contribution and a gain of approximately €0.2 million (net of tax). Following the tax reform for Italian registered mutual funds (in February) and the reform on financial income (in August), the Company had to make important changes to its IT, organisational, administrative and sales procedures in order to make them compliant with the new legislation. The operation to dispose of the units it held in its proprietary mutual funds resulting from the contribution of the Capitalgest Sgr Spa operations in January 2008 was completed in the first half. That disposal generated liquidity of €18.5 million and a gross profit of €2.2 million. With regard to the marketing of new products, the activity as the main distributor of the subsidiary UBI Management Company S.A. was performed. In detail, the sales for the new UBI Sicav sector entitled “UBI Sicav Coupon Certa 2012-2015” - for which UBI Pramerica is both the manager and the distributor - was concluded in December 2011. UBI Pramerica SGR Spa received important recognition in 2011: in February the “Capitalgest Alternative Conservative” funds received the 2011 “Premio Mondo Hedge Award” as the “best low and medium volatility funds in 2010”; in March, with regard to the 2010 “High Return Prize”, the “UBI Pramerica Obbligazioni Dollari” fund was nominated as the “Best American Bond Fund” as a result of its performance over three years, while 194 UBI Pramerica SGR finished in second place in the classification for “The best Italian mutual fund manager in the BIG category” still in March, the company received the Milano Finanza “Tripla A Fondi Comuni di Investimento” prize for the results achieved by the “UBI Pramerica Portafoglio Moderato” and “UBI Pramerica Euro Cash” funds over a period of 36 months in March as well,UBI Pramerica received four prizes at the 2011 Lipper Fund Awards granted to: the “UBI Pramerica Euro B.T.” fund as the best “bond-eurozone-short term” fund over three, five and ten years; the “UBI Pramerica Euro Corporate” fund as the best “bond euro-corporates” fund over five years; the “UBI Pramerica Euro Medio/Lungo Termine” fund as the best “bond eurozone long term” fund over five years; and “UBI Pramerica Portfolio Moderato”, as the best “mixed asset EUR cons-global” fund over five years. Further recognition was also received in 2012: in the 2012 “Grands Prix – Fundclass” awards, UBI Pramerica SGR received the 2012 “European Funds Trophy-Fundclass” prize as the best management company in the category “16-25 funds”; with regard to the 2011 “High Return Prize”, for the second year running, the “UBI Pramerica Obbligazioni Dollari” fund was again recognised as the “Best American Bond Fund” as a result of its achievements over three years, while UBI Pramerica Sgr was classified in third place as “The best Italian mutual fund manager in the BIG category”. In terms of volumes, total assets managed by UBI Pramerica as at 31st December 2011 – on behalf of ordinary customers – amounted to €20.3 billion, a decrease compared to €25 billion at the end of 2010, given the difficulties experienced by the sector. If the customer portfolios managed on behalf of institutional customers are also considered, total assets under management by UBI Pramerica at the end of 2011 amounted to €22.8 billion (net of duplications) compared to 29.4 billion (again net of duplications) twelve months before. In terms of the income statement, net operating income fell by €2.3 million to €55.1 million, the result of a contraction in revenues (-4.1 to €84 million), only partially compensated by costs decrease (-1.8 to €28.9 million). Within operating income, the reduction in net commissions (-€5 million; -5.9%) was affected by both a lower contribution from performance fees (-€3.3 million) and a contraction in total assets managed, although mitigated by the commission reallignement carried out in the firt part of the year. On the other hand, net interest income recorded a slight increase (+€0.8 million to €1.7 million), a reflection of a general increase in interest rates and a more efficient allocation of liquidity. On the expense front, personnel expense fell slightly (-€1.1 million; -7%) as did other administrative expenses (-€0.7 million; -4.8%), which, moreover, benefited from a reduction in costs for the service provided by the Group IT outsourcer. As a result of the performance reported above, the year 2011 ended with a profit of €37.6 million, compared to €38.5 million earned in the previous year. The proposal for the allocation of profits is to distribute dividends of €37.3 million. 195 UBI FACTOR SPA 31.12.2011 31.12.2010 Change % change Figures in thousands of euro Balance sheet Loans to customers 2,868,344 2,744,758 123,586 4.5% Due to customers Net interbank debt 5,161 -2,732,941 9,539 -2,609,221 -4,378 123,720 -45.9% 4.7% 121,170 2,898,354 107,499 2,775,049 13,671 123,305 12.7% 4.4% 38,295 12,637 34,821 16,251 3,474 (3,614) 10.0% (22.2%) Equity (excluding profit for the year) Total assets Income statement Net interest income Net commission income Other net operating income/(expense) 3,644 2,159 1,485 68.8% Operating income Personnel expense 54,576 (11,750) 53,231 (11,180) 1,345 570 2.5% 5.1% Other administrative expenses (12,314) (9,859) 2,455 24.9% (823) (649) 174 26.8% Operating expenses (24,887) (21,688) 3,199 14.8% Net operating income Net impairment losses on loans (*) 29,689 (14,813) 31,543 (3,147) (1,854) 11,666 (5.9%) 370.7% Net provisions for risks and charges (1) (1) - - Profit on the disposal of equity investments 84 - 84 - 14,959 (6,395) 28,395 (9,794) (13,436) (3,399) (47.3%) (34.7%) 8,564 18,601 (10,037) (54.0%) - Net impairment losses on property, equipment and investment property and intangible assets Pre-tax profit from continuing operations Taxation for the year on profit from continuing operations Profit for the year Other information Total work force (actual employees+personnel on leasing contracts) 153 153 Financial ratios R.O.E. [Profit for the year/equity (excluding profit for the year)] 7.07% 17.30% Cost:income ratio (operating expenses/operating income) Net non-performing loans/net loans to customers Net impaired loans/net loans to customers 45.60% 1.27% 0.16% 40.74% 0.42% 0.15% (*) In 2011 the item included a provision of €9.5 million for a credit position relating to the Fondazione Centro San Raffaele del Monte Tabor. The share capital of UBI Factor as at 31st December 2011 was wholly owned by UBI Banca. UBI Factor, the Group member company which specialises in factoring business, performs “captive factoring” activity, mainly with network banks customers and to an increasingly smaller extent with public administrations. According to Assifact (The Italian Factoring Association) data, in 2011 the Company was positioned in fourth place nationally in the sector, both in terms of outstanding amounts (receivables which have been purchased, but not yet received), with a market share of 5.90%, and in terms of advances with and without recourse, with a market share of 6.41%. The pursuit of policies to gradually reduce business with public administrations, no longer considered core business, continued in 2011, in consideration also of the increasing delays with which payments are received from public sector authorities. On the other hand, the Company focused progressively on the search for captive counterparties originated by the network banks, with particular and constant attention paid to monitoring due dates and the real quality of invoice sellers in terms of overall creditworthiness. Customers held in common with the network banks now represent almost 80% of the counterparties of the company, consistent with the role of Group “product company” assigned to UBI Factor. The growth in the Company’s business is also being driven by an important increase in international activity both directly and through co-operation with foreign correspondent factors within Factors Chain International. The commercial initiative in operation since 2008 on the Turkish market, originally designed to establish a local operating presence, received a strong boost within the Factors Chain International network, partly as a result of increased geographical coverage, no longer limited to the Italian market, but extended to include the EU, with important market shares in areas where either the UBI Banca Group or UBI Factor itself 196 have branches (Poland, Spain and Germany), with a significant diversification by business sector22. The extension of that business generated natural growth in operating relationships with other correspondents, mainly Turkish, but also in Spain, where intragroup synergies are being developed with UBI Banca International. The following is reported with regard to equity investments: the liquidation period for Tex Factor Spa was concluded with the redemption of shares to shareholders, in accordance with a resolution passed by an extraordinary shareholders meeting of the Company itself held on 11th February 2011. UBI Factor derecognised its investment with a profit of €84 thousand; Siderfactor Spa was placed in voluntary liquidation with a resolution passed by an extraordinary shareholders meeting on 12th December 2011, with effect from 11th January 2012. The liquidation should be completed in 2012 with the disposal of all the assets and the extinction of the liabilities recognised. The year 2011 ended with a profit of €8.6 million, a decrease compared to €18.6 million the year before, the result primarily of recognised higher impairment losses. Net operating income amounted to €29.7 million, down on 2010 (-€1.9 million; -5.9%), the aggregate result of growth in operating expenses (+€3.2 million to €24.9 million) only partly offset by an improvement in income (+€1.3 million to €54.6 million). The trend for income was the result of net interest income, which rose to €38.3 million (+€3.5 million; +10%) – due to increases in advances and a focus on more profitable business – and other net operating income and expense, which increased to €3.6 million (+€1.5 million mainly for recoveries of expenses; +68.8%), while net commission income fell to €12.6 million (-€3.6 million; -22.2%), mainly as a result of greater sums paid to Group banks on the basis of a commercial co-operation agreement signed in 2008. On the expenses front, on the other hand, other administrative expenses increased to €12.3 million (+€2.5 million; +24.9%), attributable primarily to legal expenses for litigation concerning amounts owed by the health department of the Regional Government of Latium and also expenses for the migration to the new IT platform. Personnel expense, which increased to €11.7 million (+€0.6 million; +5.1%), included a provision for 2011 performance bonuses and the relative contributions of €0.2 million, while the increase in depreciation and amortisation related almost entirely to intangible assets. As a consequence, the cost:income ratio worsened by almost five percentage points, rising from 40.7% to 45.6%. Net impairment losses on loans rose from €3.1 million to €14.8 million (+€11.7 million), attributable principally to loans to public administrations, no longer considered core business for the Company. They included €9.5 million relating to the exposure to Fondazione Centro San Raffaele del Monte Tabor, details of which are given in the previous section “Banking business with customers: lending”. As concerns volumes of business, despite the discontinuation of business with public administrations, the turnover for business generated during the year amounted to €8.2 billion (+8.6%), including €7.8 billion of factoring business (+10%). Consequently, advances to customers rose to approximately €2.9 billion (including 3% for the Polish branch), an increase of 4.5% compared to €2.7 billion twelve months before. The performance within net deteriorated assets, which increased from €17.3 million to €63.6 million (+€46.3 million), was as follows: non-performing loans increased from €11.5 million to €36.5 million (+€25 million, including €21.5 million relating to the classification of the exposure to San Raffaele, already mentioned, as non-performing); 22 Negotiations to acquire the Turkish company Strateji Factoring Hizmetleri A.S. were interrupted because of a change in the orientation by some of the shareholders in the company being acquired, who wished to make changes to some terms of the contract and to policies, which were not considered acceptable to UBI Factor and the Parent in terms of legitimacy and feasibility. However, this did not affect the validity of the existing commercial agreement with Strateji Factoring concerning export factoring, which benefited in 2011 from increases in volumes of business. 197 impaired loans – attributable mainly to receivables purchased from public administrations and classified as deteriorated exposures because of the remaining duration of the advance and not on the basis of the collectability – increased slightly to €4.5 million (+€0.3 million); advances past due and in arrears totalled €22.6 million, an annual increase of €21 million, two thirds of which consisting of positions with public administrations. Capital ratios as at 31st December 2011, consisted of a tier one ratio (tier one capital to risk weighted assets) of 7.05% (7.55% at the end of 2010) and a total capital ratio (supervisory capital and reserves to risk-weighted assets) of 7.04% (7.53%). The proposal for the allocation of profits is to distribute dividends of €1.04 million. 198 Other information Treasury shares In 2011, the companies included in the consolidation did not hold any treasury shares or those of the Parent, with the sole exception of IW Bank which, as at 31st December 2011, held 831,168 treasury shares, (corresponding to 1.13% of the share capital), unchanged compared to twelve months before, for a nominal amount of €207,792 and a value at the purchase price of approximately €2.6 million. Litigation THE MARIELLA BURANI GROUP On 11th October 2011, Centrobanca was served with a writ of summons from the Burani Designers Holding NV (“BDH”) Receivership (advised by Prof. Avv. Bruno Inzitari) to appear before the Court of Milan. It claimed Centrobanca was liable in relation to a public tender offer to purchase launched by Mariella Burani Family Holding Spa on the shares of Marella Burani Fashion Group Spa (“MBFG”). According to the writ of summons, the Burani family and the directors of BDH provided an inaccurate representation of the accounts to non-controlling shareholders and markets and conceived of and promoted the public tender offer to purchase with the sole purpose of artificially inflating the price of the MBFG share, in order to delay the bankruptcy of the Burani Group. In this context, Centrobanca is considered responsible for the abusive grant of loans to support the aforementioned operation, thereby generating, as a consequence, false confidence in the capital and financial solidity of the Burani Group on the part of creditors and the market. The damages claimed against Centrobanca in the writ of summons amount to approximately €134 million. Centrobanca – which has been duly accepted as a creditor in all the bankruptcy proceedings concerning the Burani Group – considers that this claim made through the courts is without foundation and has already applied to the court arguing both on points of law and merit to defend against the Receiver’s claim and in support of the complete rightfulness of its conduct. The first hearing, originally scheduled for February 2012, has been postponed until 19th June. On 1st March 2012, Centrobanca was served with a writ of summons from the Mariella Burani Family Holding Receivership (advised by the lawyers Stefano Ambrosini and Barbara Rovati), containing a claim for compensation, again in this case too, amounting to approximately €134 million, based on arguments of fact and law similar to those already served in the summons served by BDH Receiver. The first hearing was set for 30th June 2012. The same defence team employed to defend Centrobanca against the previous summons was engaged, in order to carry out the investigations needed for the Bank to defend itself in the courts. As already reported, the total gross exposure of the UBI Banca Group to the Burani Group amounts to approximately €74.2 million, on which impairment losses of 94.6%. have been recognised. NOTIFICATIONS In 2011, the Guardia di Finanza (Finance Police) served five “Written notifications of findings” for failure to report suspect transactions for a total of €3,447,000: three notifications for €1,836,500 were received in the first half and the remaining two, totalling €1,640,500, were received in the second half. The recipients of the allegations, served jointly on the legally authorised representatives of the respective network banks, are three branch managers of Banco di Brescia and two branch 199 managers of Banca Popolare Commercio e Industria. The relative defence documents were filed with the Ministry of the Economy and Finance within the set time limits. With regard to a notification served in 2006, the Ministry of the Economy and Finance summoned the recipient of the provision, jointly with Banca Popolare di Bergamo, to a hearing that was held on 8th February 2011. The legal advisor of the bank presented defence documents and the case was dismissed with a provision of the following 23rd May. Inspections The Bank of Italy performed inspections of the Group between the end of January and the end of June 2011, pursuant to Art. 68 of Legislative Decree No. 385/1993 (consolidated banking act). They concerned the management and measurement of risks assumed by the product companies which use large distribution networks (UBI Banca Lombarda Private Investment and B@nca 24-7) or operate online (IW Bank). On 23rd September the supervisory authority communicated its “Remarks and observations” with regard to those inspections. Some failings were reported into which the units responsible at the Parent conducted a thorough investigation to assess the weaknesses found, together with the lines of action already actually taken during the inspection. On 24th October UBI Banca furnished detailed replies to each of the remarks and observations contained in the inspection report. Some of the actions of an ownership nature already taken with regard to B@nca 24-7 are reported in the section on significant events that occurred during the year. Moreover, with regard to B@nca 24-7, irregularities were alleged pursuant to Art. 145 of Legislative Decree No. 385/1993 already mentioned, which mainly regarded the prior position of the company, with the commencement of the relative penalty procedures concerning company personnel. B@nca 24-7 presented its defence to the supervisory authority against those claims. On 14th December 2011, the Italian Supervisory Authority announced the commencement of inspections in accordance with articles 54 and 68 of Legislative Decree No. 385/1993, designed to assess the adequacy of initiatives taken following the findings of the September 2010 inspections concerning liquidity risks and also in relation to the particular situation on markets. The inspections were concluded on 16th March 2012. As part of the programme to validate internal models introduced by the Group some time ago, in October and November 2011 the Bank of Italy carried out an initial survey (pre-validation) of the activities undertaken by the Group in view of the introduction of an internal model for the calculation of capital requirements for credit risk (A-IRB approach). Following that action and further progress made on Group projects, on 9th March 2012 the Supervisory Authority officially announced the commencement of final verifications (validation) of conformity of the system to the qualitative and quantitative requirements set by the relative regulations. At the same time, an official application was made by the UBI Banca Group for recognition for supervisory purposes of its internal rating based, credit risk management system. A similar programme was followed, although with different timing, for operational risks. The pre-validation phase was carried by the Supervisory Authority in the first quarter of 2011, while validation inspections at the Parent took place in February 2012. With regard to the above, authorisation by the Bank of Italy for the use of internal models is expected in time for the supervisory reports to be made as at 30th June 2012. On 12th May 2011, the Consob (Italian securities market authority) notified Banca Popolare di Bergamo of the results of inspections conducted in 20101. It had found a few matters requiring attention on which it asked the managing body of the bank to take corrective action. 1 The inspection, conducted by the Intermediaries Division – Supervisory Office of the Consob, commenced in December 2009 and was concluded on 25th October 2010. Its purpose was to ascertain the actual degree of compliance by the bank with regulations which implemented the MiFID regarding the provision of investment services, with particular regard to the advisory service and the progressive update of the solutions adopted pursuant to Consob Communication No. 9019104 of 2nd March 2009 (Level 3 – 200 In a meeting of 11th July 2011, the Board of Directors examined and studied the matters raised, taking note of the Consob’s observations. It decided to set up a specific working group, which included personnel from the relevant functions at the Parent, designed to identify and programme appropriate organisational and IT action to remedy the matters raised. That working group has already concluded some of its planned activities designed to comply with the Supervisory Authority’s recommendations and it has made periodic progress reports to the management body. Further activities are continuing in order to fully define the action decided. FINES With Resolution No. 17727 of 29th March 2011, notified on 6th April 2011, the Consob imposed administrative fines on twelve employees of IW Bank and also jointly on the bank itself on conclusion of the administrative penalty proceedings initiated with a letter of 12th April 2010 for violation of Art. 187 nonies of the Consolidated Finance Act and the relative provisions to implement it issued by the CONSOB in the period 1st January 2007 – 3rd December 2008 (further information is given in the 2010 Annual Report). The total amount of the fines imposed, which vary from a maximum of €32 thousand to a minimum of €12 thousand for the individuals involved, was €252,900. The proceedings which led to the imposition of the fines was initiated by the Spot Markets Office of the Markets Division of the Consob, following the inspections conducted at IW Bank in the period from 13th March until 3rd December 2008. On 27th July 2011, the Bank of Italy notified Centrobanca of a provision concerning the application, pursuant to Art. 145 of Legislative Decree No. 385/1993 (the consolidated banking act), of administrative fines for a total of €339 thousand on members and former members of the management and supervisory bodies and on the former General Manager in office at the time of the matters in question (2008). The provision was issued following inspections conducted in the period February-July 2010, designed to assess the Group with regard to the management, governance and control of credit risk in the corporate customer segment, during which the supervisory authority found irregularities relating to Centrobanca subject to penalties (failures in the organisation and management of credit by the General Manager, failures in organisation and internal controls on the part of members and former members of the Board of Directors and also failures with controls by the Board of Statutory Auditors); Tax aspects Summary of changes introduced during the year Provisions were issued during the year, which involved the financial sector. These were the “Development Decree” Decree Law No. 70 of 13th May 2011, the “Financial stabilisation decrees” Decree Law No. 98 of 6th July 2011, Decree Law No. 138 of 13th August 2011 and the “Save Italy” Decree Law No. 201 of 6th December 2011, some of which are still with no definitive interpretative framework. Amendments were made to these towards the end of the year with the “thousand extensions” Decree Law No. 216 of 29th December 2011 and at the beginning of 2012, with the “Liberalisations” Decree Law No. 1 of 24th January 2012. The most important points of these measures are given below. Intermediary Regulations) concerning the duty of an intermediary to act with integrity and transparency when distributing illiquid financial products. In accordance with Art. 145, paragraph 10 of the Consolidated Banking Act, Centrobanca is civilly liable to make the payment, with the obligation to recover the amounts from those responsible. 201 Development Decree – Decree Law No. 70/2011 This decree, converted into Law No. 106 of 12th July 2011, introduced simplifications into the tax obligations of taxpayers, with regard to the following: - tax inspections; - tax assessment enforcement; - tax collection; - income tax and/or substitute tax returns; - the documentation for some transactions; - recalculation of some asset values for tax purposes. Measures affecting property funds are particularly important with the introduction of a 20% tax on income paid to investors on condition that they do not hold more than 5% of the fund itself. In this event, taxation is on a “transparency basis” (tax on earnings declared by the fund is paid directly by the individual investors). Financial stabilisation decree – Decree Law No. 98/2011 This decree, converted into Law No. 111 of 15th July 2011, has significant effects for the banking sector: ‐ an increase of 0.75 percentage points from 3.90% to 4.65% in the base rate on the Imposta Regionale sulle Attività Produttive (IRAP - local production tax) tax for banks and financial intermediaries. Extra regional percentages must then be added to this base rate. The measure is effective from 1st January 2011; ‐ an appreciable increase in stamp duty on the communication relating to the custodial deposit of customer securities. The new measure sets a duty ranging from a minimum of €34.20 to a maximum of €680 annually, depending on the value of the securities deposited. The following Decree Law No. 138/2011 and Decree Law No. 201/2011 made further significant changes to the stamp duty; ‐ the introduction of the right to realign, for tax purposes, increases in the value of equity investments either held by parties required to prepare consolidated financial statements for them or acquired through company disposals. The realignment only concerns increases in the value of equity investments attributable to goodwill, brands or other intangible assets as stated in the consolidated financial statements. UBI Banca took advantage of that right with regard to the extraordinary ownership operation that took place in 2007, involving the merger of Banca Lombarda e Piemontese Spa into UBI Banca, where the latter recognised equity investments attributable to the former in its accounts. The amortisation for tax purposes of the increased value may be performed from 2013 over ten tax years; ‐ further measures of a procedural nature concerning tax inspections and business relations with investees resident in EU countries. Second financial stabilisation decree – Decree Law No. 138/2011 This decree, converted into Law No. 148 of 14th September 2011, introduced the following: ‐ an increase in the ordinary VAT rate from 20% to 21%; ‐ a change in the withholding tax on income from capital and on capital gains to 20% from the previous rates of 12.5% or 27% for bank deposits, current accounts and certificates of deposit. The new rate, which does not apply to Italian government securities, entered into force on 1st January 2012, except for some transitory mechanisms. This involved costly changes in procedures, both in terms of IT systems and documents regarding customers; ‐ the reduction to €2,500 of the threshold for the use of cash and bearer instruments. This threshold was further reduced to €1,000 with the subsequent Decree Law No. 201/2011; ‐ further obligations for reporting to tax authorities on financial relationships with customers (i.e. selected lists). This measure was amended again by Decree Law No.201/2011. The “Save Italy” decree – Decree Law No. 201/2011 This decree, converted into Law No. 214 of 22nd December 2011, involves the following: ‐ a new measure in force from 1st January 2012 on stamp duty, regarding communications concerning financial products and instruments sent to customers. Stamp duty is applicable to communications regarding financial investments, even if they do not relate to custodial deposits. The duty is calculated on an annual proportional basis of one per thousand (0.1%) from 2012 and one and a half per thousand (0.15%) from 2013, with a minimum amount of €34.20. A maximum amount of €1,200 has been set for 2012 only; ‐ modifications in force from 1st January 2012 to stamp duty due on bank statements sent by banks to their customers. The stamp duty was extended to include bank statements for savings books. The amount of the duty has been raised overall for entities other than private individuals from €73.80 to €100, while it remains unchanged overall for private individuals (€34.20). Private individuals are 202 exempt from the duty if average annual deposits resulting from bank statements and savings books do not exceed a total of five thousand euro. A decree will be issued to implement this; ‐ a special stamp duty of four per thousand (0.4%) in relation to assets which were repatriated between 2001 and 2010 or were “regularised” in accordance with capital repatriation laws and on which confidentiality was still maintained as at 31st December of the previous year. The duty is due in the amount of ten and thirteen and a half per thousand (1.0% and 1.35%) for the years 2012 and 2013. This new measure appears extremely onerous from a practical viewpoint for banks; ‐ an extraordinary tax for 2012 of ten per thousand (1.0%) concerning assets that had been “regularised” which, as at 6th December 2011, had been wholly or partially drawn from the deposit, custodial or management accounts as a result of regularisation procedures or in any case withdrawn; ‐ an aid to economic growth with effect from the tax period in progress as 31st December 2011, consisting of the deduction from corporate income (IRES -corporate income tax) of the notional return on increases in equity with respect to the equity existing at the end of the financial year in progress as at 31st December 2010. That return has been set at 3% for the first three years; ‐ the deduction for IRES purposes, with effect from the tax period in progress as at 31st December 2012, of an amount equal to the IRAP (local production tax) corresponding to the taxable portion of employee and similar personnel expenses, but net of the deductions already allowed; ‐ various amendments to the “tax wedge” with effect from the tax period following that in progress as at 31st December 2011. More specifically, the deduction of €4,600 for IRAP purposes for every permanent employee on the payroll during the tax period was increased to €10,600 for female employees and for those below the age of 35; ‐ a new proposal for transforming deferred tax assets into tax credits with regard to tax losses (cf. Art. 84 of the Consolidated Income Tax Act) arising from the deduction of some negative components of income (impairment losses on loans, amortisation of goodwill and other intangible assets) already provided for originally in paragraphs 55 to 58 of Art. 2 of Decree Law No. 225/2010, converted with Law No.10/2011. In this regard, on 22nd September 2011 the tax authorities issued Resolution No. 94/E, which regulated the transformation of deferred tax assets into tax credits in accordance with Decree Law No. 225/2010 just mentioned. More specifically, where statutory accounting losses have been recorded, companies may use that legislation from the approval of the relative financial report onwards. ‐ the obligation from 1st January 2012, for financial operators to periodically report movements and all information concerning business with customers to the tax authorities, for tax inspection purposes. That data will be entered in a special section of the tax authorities’ database and the director of the tax authorities will issue a special provision to implement this after consultation with the trade associations of financial operators and with the Personal Data Protection Authority. That information may also be used by the tax authorities, employing centralised procedures and based on criteria identified in a provision issued by the authorities, to draw up special selected lists of those taxpayers at greatest risk of tax evasion. In this case too banks may be involved in onerous compliance formalities in terms of both practical operations and the related responsibilities; ‐ ‐ the reduction to €1,000 of the threshold for the use of cash and bearer instruments; the experimental application with effect from 1st January 2012 of the Municipal Property Tax for the years 2012, 2013 and 2014. That tax which makes taxation on property more severe, brings together the previous municipal property tax (ICI) and personal income tax on income from properties not rented. For businesses in particular, the base rate will be 0.76% of the revalued assumed property income for tax purposes, with the possibility for municipalities to increase or decrease this by 0.30%. The “thousand extensions” decree – Decree Law No. 216/2011 and the “Liberalisations” decree – Decree Law No. 1/2012 These provisions introduced adjustments to the tax reform for financial assets with effect from 1st January 2012, with particular regard to taxation on current account interest and on repurchase agreements and stock lending involving financial instruments with subsidised rates. TAX FOR ENTITIES SUBJECT TO IFRS A Ministerial Decree of 8th June 2011 was published on 13th June 2011, which adds to previous regulations concerning the tax treatment for corporate income tax (IRES) and local production tax (IRAP) purposes for those entities subject to IFRS and more specifically concerning the implementation of the “reinforced derivation principle”. The following is of particular interest in this decree: ‐ the definition of hedges for tax purposes which also comprise assets designated at fair value; ‐ the tax treatment for financial instruments reclassified into different portfolios pursuant to IAS 39; ‐ the tax treatment, with regard to companies, for the grant of shares to employees; ‐ confirmation of the tax classifications for properties regardless of the different classification under IFRS; 203 ‐ ‐ the tax treatment of provisions or other liabilities as designated by IFRS; the application for tax purposes of classifications under the Consolidated Income Tax Act concerning shares and bonds as opposed to the provisions of IAS 32. *** With regard to interpretation, the tax authorities issued the following circulars: Circular No. 7/2011, which illustrates the treatment for IRES purposes of items in financial statements prepared according to IFRS and that is on the combined basis of Legislative Decree No. 38/2005, Law No. 244/2007 and Ministerial Decree No. 48/2009. The income of those entities subject to IFRS, which include all the companies in the UBI Group, is first determined according to the “simple derivation” principle, while the “reinforced derivation” principle has been in force since 1st January 2008. The latter principle also applies retroactively under certain conditions. The circular confirms the validity of practices followed by UBI Banca Group companies for those years and we therefore consider that the pending tax disputes in this regard can be concluded by applications for internal review or abandonment of each inspection; Circular No. 23/2011, which follows on from the previous circular No. 51/2010, provides further clarification of legislation concerning CFCs, “Controlled Foreign Companies”, introduced to prevent the attribution of income to foreign companies located in blacklisted countries, or with tax levels 50% lower than the corresponding national IRES, which would otherwise be attributable to the Italian parent. This is also useful for the purposes of preparing the relative applications for non application; Circular No. 33/2011 illustrates the new tax regime for Italian and foreign registered mutual investment funds in force from 1st July 2011. The regime for the taxation of income from funds on a mark-to-market basis was repealed on that date with tax now levied when earnings are received by investors or when the investment is redeemed. This followed the approval of Decree Law No. 225 of 29th December 2010, converted into Law No. 10 of 26th February 2011, which removed the penalisation of domestic funds with respect to the same funds registered abroad. From an operational viewpoint, the change in the legislation required considerable action to be taken with regard to procedures and above all the need to properly adjust the amounts and taxation for those instruments held by customers as at 30th June 2011. The circular in question contains important clarifications concerning “tax substitutes” (who apply withholding taxes) and intermediaries and, in particular, on the documentation and procedures that apply to them for the correct application of the new tax regulations. BUSINESS WITH NON RESIDENTS – TRANSFER PRICES With regard to the special procedures designed to prevent resident companies from being subject to tax penalties in relation to violations concerning the determination of “transfer prices” for tax purposes (Art. 110, paragraph 7 of the Consolidated Income Tax Act) in relation to transactions and business with foreign subsidiaries, UBI Banca prepared the relative “master file” and the national documentation for the tax year 2010. BUSINESS WITH SUBSIDIARIES RESIDENT ABROAD According to that which has already been reported above on Circular No. 23/E/2011, the UBI Banca Group has presented seven applications for non application with regard to its subsidiaries located in the state of Delaware (USA) – Banca Lombarda Preferred Capital Company LLC, Banca Lombarda Preferred Securities Trust, Banca Popolare di Bergamo Funding LLC, Banca Popolare di Bergamo Capital Trust, Banca Popolare Commercio e Industria Funding LLC, Banca Popolare Commercio and Industria Capital Trust – and to the subsidiary UBI Banca International located in Luxembourg. The tax authorities requested additional documentation which was duly provided. We feel confident that all the documentation furnished will confirm the proper tax conduct of our subsidiaries and that no “tax transparency” effects with result for the Parent. 204 Tax litigation As already reported, Group companies have adopted IAS-IFRS accounting standards in accordance with Legislative Decree No. 35/2005 and the relative taxation for direct tax purposes was not clearly defined in the legislation until the enactment of the 2008 Finance Act (Law No. 244/2007) and the issue of the relative Regulation No. 48/2009, which was supplemented by a ministerial decree of 8th June 2011. It was not until the issue of the tax authorities Circular No. 7/E/2011 that the interpretative framework was set out by the financial authorities, a good six years after the first income tax return affected by IFRS was filed. This, together with the complexity of specific tax legislation in the financial and banking sectors has generated questions of interpretation both now and in the past, with respect to which the tax authorities make objections of an interpretative nature or with regard to tax avoidance and evasion. In relation to the above, the Group has been subjected to a significant number of tax inspections in recent years followed by tax assessment reports, from which notices of tax assessment have arisen which generally confirm what was found during the inspection. Where tax consolidation for corporate income tax (IRES) purposes exists, with the relative joint liability, these inspections are then duplicated for the Parent as the consolidating company. The initiatives of importance which took place during the year are described below. Banca Popolare di Ancona: on conclusion of a tax inspection conducted for the tax years 2007 and 2008, on 10th June 2011 the Marches Regional Department of the tax authorities served a tax assessment report which raised questions over the attribution of some expenses incurred. Considering the differing interpretation in law of the concept of the attribution of expenses, inclusive of documentation factors, an application was filed for full compliance by consent with the tax assessment report pursuant to Art. 5 bis of Legislative Decree No. 218/1997. A total payment of €602.7 thousand was therefore made on 7th September 2011. Banca Popolare Commercio e Industria, Banca Popolare di Bergamo: the tax authorities – the Regional Department for Lombardy – Large Taxpayers Office – served a notice of assessment on BPCI on 24th October 2011 and on BPB on 6th December 2011, which challenged them over the treatment applied for VAT purposes to revenues received in 2006 for activity performed as a depository bank for mutual investment funds. More specifically, it was alleged that Banca Popolare Commercio e Industria had failed to pay taxes of €1.202 million and a fine of €2.777 million, while Banca Popolare di Bergamo was accused of failing to pay taxes of €2.774 million and a fine of €4.682 million. This issue is a common one in the banking sector and it arises over the interpretation at national level of the EU Directive 77/388/EEC of 17th May 1977. The banking sector believes that the consideration for that activity is exempt from VAT (Italian Banking Association Circular, Tax Series No. 25 of 28th December 2010 and Assogestioni – national association of asset management companies – Circular No. 138 of 10th December 2010), while the tax authorities consider it subject to VAT in full. The issue is currently being analysed by the relative associations, partly in view of a hoped for solution to the interpretation. In the meantime the banks in question will present appeals to the competent tax commission. Banca Regionale Europea: on 20th December 2011, on conclusion of inspections relating to 2008, the tax authorities’ Regional Department for Piedmont delivered the relative tax assessment report where the tax deduction of losses was alleged for the disposal without recourse of the loans to a customer in difficulty in 2008 by the bank, together with other banks and finance company creditors in a broader context of the restructuring of the customer’s debt. More specifically, the inspectors alleged the absence of the assumptions of certainty and finality of the disposal because of the existence of guarantees granted to the creditors recognised by the purchaser. As a consequence, the bank was considered to have greater taxable income for IRES and IRAP purposes of €2.836 million, which gave rise to increased taxes for IRES and IRAP totalling approximately €916 thousand, in addition to fines – estimated at between €152 thousand and €305 thousand – plus interest. The inspectors evidently did not consider the principle known as “reinforced derivation”, which the bank employs as an entity subject to IFRS where, as in the case in question, the requirements are met for the derecognition of the loans in question. Banco di Brescia: on 16th November 2011, Banco di Brescia and UBI Banca (as the consolidating company) were served with notices of assessment and notified of fines for corporate income tax (IRES) purposes relating to 2006 for a total of €5.134 million (of which €1.945 million for increased taxation, €272 thousand for interest and €2.917 million of fines). These notices resulted from a tax assessment report received by Banco di Brescia on 19th June 2009, the findings of which are fully accepted, in which 205 a different criterion is used to calculate the timing of tax deductions for impairment losses on loans. On 6th December 2011, an application for tax assessment by consent was filed in order to obtain, as a reduction in the increased tax demanded, what had already been paid voluntarily in accordance with Law No. 244/2007 for the realignment of statutory accounts with tax accounts with regard to existing provisions for risks and charges. This procedure was concluded on 1st February 2012 without the parties having reached an agreement. The bank reserves the right to appeal within the legal time limits. Centrobanca: following the tax assessment report received on 23rd July 2009, with which the Lombardy Regional Department of the tax authorities did not approve the criteria employed for the recognition of disposal of loans to customers, and that is the impairment losses recognised on them, even where the reinforced derivation principle, introduced for entities subject to IFRS with Law No.244/2007, applies. On 20th July 2011, a notice of assessment was received from the same regional department for a total of €6.920 million (of which €2.736 million for increased taxation, €351 thousand of interest and €3.832 million of fines). This notice takes no account whatsoever of the outcome of the criminal proceedings (which occurred in the meantime and concluded with a ruling of 8th June 2011 by the Court of Milan dismissing the case because there was “no case to answer”) and in fact confirmed the results of the tax assessment report. An unsuccessful attempt was made to use compliance by consent procedures in relation to that notice of assessment and therefore court proceedings were initiated. UBI Assicurazioni: on conclusion of inspections relating to 2008, on 30th November 2011 the tax authority inspectors from the Lombardy Regional Department delivered their tax assessment report from which the following amounts can be estimated: increased IRES of €87 thousand, increased IRAP (local production tax) of €13 thousand and increased VAT of €40 thousand. These findings mainly concerned questions relating to the tax period or the VAT regime for co-insurance. In consideration of the small amounts of the demands, the new owners of UBI Assicurazioni agreed with the proposal to file an application for tax assessment by consent. As already reported, under the clauses of the contract signed with the controlling shareholder of the company, UBI Banca is not required to pay any compensation because the case in question is within the exemption limits. UBI Banca: on 28th November 2011, UBI Banca was served with a notice of assessment and notified of fines imposed for corporate income taxes relating to 2003 for a total of €47.138 million (of which €17.986 million for increased corporate income tax, €3.970 million for interest and €25.181 million of fines). This notice resulted from a tax assessment report received by the bank on 8th July 2010, which contained one irregularity only that was fully reproduced in the notice of assessment. Very briefly, with regard to the contributions of banking operations made by BPB-CV Scrl in June 2003 to the newly formed BPB Spa and BPCI Spa (as part of the operation which gave rise to the BPU Banca Group), the full deduction of the provisions for risks and charges taxed separately by the contributor (BPB-CV Scrl) was contested, because the tax authorities considered that those provisions should have been deducted in subsequent years by the contributing companies (BPB and BPCI). The above tax assessment report gave rise to criminal proceedings (fiscal offence of inaccurate income tax returns) against the legally authorised representative of BPU Banca, when the tax returns for 2003 were filed. The case was closed on 21st July 2010 with an order for no further action by the Criminal Court of Bergamo, both because of the absence of specific intent and because the statute of limitations applied to the alleged offence. The assessment was performed as a result of Ruling No. 247 of 25th July 2011 of the Constitutional Court, which doubled the length of the assessment period for fiscal offences, even if the ascertainment of the criminal offence occurs when the ordinary assessment period has expired. This issue is subject to broad debate, which is still in progress. In the case in question, the inspection relating to 2003 took place well after the time limit pursuant to article 43 of Presidential Decree No. 600/1973 had expired. On 6th December 2011, UBI Banca filed an application for tax assessment by consent in relation to the notice of assessment, the procedures for which are still in progress. UBI Banca: on 12th December 2011, UBI Banca as the consolidating company and the Large Taxpayers Office of the Lombard Regional Department of the tax authorities, signed a legal reconciliation agreement in order to reduce the litigation concerning a series of appeals relating to 2004, presented by UBI Banca and some of the consolidated companies (Banco di Brescia, UBI Leasing, Grifogest SGR and Banca Lombarda Private Investment). An increased payment resulted from that agreement totalling approximately €744 thousand compared to an original demand of approximately €4 million, for which appropriate provisions had been made. The payment documentation is expected from the competent authorities. UBI Banca: on 23rd June, the Bergamo tax unit of the Guardia di Finanza (finance police) commenced a tax inspection for the year 2008. The inspection was suspended indefinitely to allow the inspectors to coordinate their work with the Regional Department of the tax authorities. UBI Banca and Banco di Brescia: in compliance with Supervisory Recommendations issued in Bank of Italy Circular No. 229/1999, in 1999-2000 the former Banca Lombarda e Piemontese Spa, its subsidiary 206 Banco di Brescia Spa, the former Banca Popolare di Bergamo-Credito Varesino Scrl and the former Banca Popolare Commercio e Industria Scrl each individually conducted operations to strengthen capital, the results of which are still in existence, by issuing preference shares through special companies located in the State of Delaware (U.S.A.). These operations were authorised by the Bank of Italy and were conducted in compliance with the authorisation received. As already reported, at the time (1999-2000) and in any case until the introduction of the company reform pursuant to Legislative Decree No. 6/2003 (the “Vietti Reform”), the direct issue in Italy of financial instruments with the characteristics necessary to comply with the requirements of the above supervisory regulations was forbidden and, in view of that circumstance, those same supervisory recommendations stated that “the innovative capital instruments, such as preference shares, are instruments issued by foreign subsidiaries included in the banking group”. Between 2009 and 2011, the Large Taxpayers Office of the Lombard Regional Department of the tax authorities served specific notices of tax assessment on UBI Banca and Banco di Brescia for the years 2004, 2005 and 2006 in relation to those transactions (for a total of €41.363 million of which €17.997 million for increased corporate income tax, €2.568 million for interest and €20.780 million of fines) alleging the failure to apply a withholding tax of 12.5% pursuant to article 26 paragraph 5 of Presidential Decree No. 600/1973 by the Italian bank (UBI Banca and BBS) on the interest paid on the subordinated deposit made by the LLC located in Delaware. The tax authorities’ argument is based on a change in the classification for tax purposes only of the subordinated deposit from the foreign company to the Italian company (exempt from withholding tax) as a loan (subject to withholding tax of 12.5%). The banks appealed against those notices. After a number of hearings, on 22nd December 2011 section 35 of the Tax Commission of Milan rejected the appeal presented by UBI Banca relating to 2004, based on the statements made by the Bank of Italy for supervisory capital purposes, rather than on the provisions of the Italian Civil Code or tax legislation. Moreover, that same commission held that fines were not due because of the objective uncertainty surrounding the regulations. The hearing that regards Banco di Brescia in relation to 2004 is set for 25th October 2012. With regard to the litigation in question, in the light, amongst other things, of expert opinions received by the Parent and Banco di Brescia, the risk of losing is considered unlikely and more specifically it is held that the legal basis of the appeal will be recognised in the courts. UBI Banca, BPB Immobiliare and Banca Carime – These companies in the UBI Banca Group have appealed against notices of tax assessment with which the tax authorities have reclassified transactions as property disposals, which the companies had considered contributions of property operations performed in 2003 to Immobiliare Serico, with a consequent demand for increased corporate income tax and VAT and the relative fines for a total of approximately €82.8 million. These companies won their cases in the court of first instance and in 2011 hearings were held in the competent regional tax commissions initiated by the relative departments of the tax authorities which had lost. The Lombard Regional Tax Commission upheld the decision of the court of first instance with regard to both UBI Banca and BPB Immobiliare, while a ruling by the Calabria Regional Tax Commission regarding Carime has not yet been issued. UBI Leasing: on 20th June 2011, on conclusion of a tax inspection which initially concerned the tax year 2007, but was subsequently extended to also include the following years, the Brescia tax unit of the Guardia di Finanza (finance police) issued a tax assessment report to UBI Leasing (the inspection, which was interrupted repeatedly, had started in February 2009). The tax assessment report was centred primarily on the legality in civil (violation of the prohibition on agreements of forfeiture) and tax law of sale and lease back transactions on property (land), from which greater VAT payable arose amounting to €7.2 million. The company considers that the inspectors classified the transaction incorrectly and in that respect it commenced negotiations with the relative department of the tax authorities and filed its observations on the tax assessment report (in accordance with the Taxpayers Statute Law 212/2000). Banque de Dépôts et de Gestion: in May the Swiss tax authorities rejected the appeal made by UBI Banca and Banque de Dépôts et de Gestion against a demand concerning the failure by BDG to apply a withholding tax of 15% on dividends paid in the years 2006-2008 to its parent, UBI Banca, because in the opinion of the Swiss authorities, as a co-operative UBI Banca is not entitled to the exemption allowed for joint stock companies. Since it is held, on the contrary, that grounds exist in the case in question for the application of the parent-subsidiary directives, a further appeal was lodged against the decision in the competent Federal Administrative Court. That court rejected the appeal in January 2012. The litigation regards a sum of €1.59 million in addition to tax credits recognised by the Swiss tax authorities worth approximately €2 million. UBI Banca will assess the action to be taken in the light of studies currently in progress in order to see its right to refunds or tax relief upheld, partly in the light of the bilateral Italian-Swiss Convention. An appeal was lodged in this respect on 23rd February 2012 with the Federal Court against the decision of the Federal Administrative Court. 207 Further details of tax inspections concerning the Group in recent years are given in the Notes to the Consolidated Financial Statements, Part B, Section 12.5 Liabilities, Contingent Liabilities, which may be consulted. 208 Investor relations and external communication Relations with analysts and institutional investors and communication through the corporate website In the difficult environment experienced in 2011, due to the increasing severity of a crisis, the duration of which is now without precedent, the investor relations office, which reports directly to the CEO, has continued to carefully monitor market events in order to allow a prompt and transparent response to the demands of equity and debt investors, analysts and the financial community as a whole for information. Furthermore, during the year, ordinary activities were added to by those for the presentation of the 2011-2015 Business Plan and the increase in the share capital completed in July 2011, which were performed in particularly complex periods for markets. As part of its investor relations activities, dialogue with the financial community took place as follows: conference calls 2 organised when annual and interim results were approved and for the presentation of the Business Plan; the participation of UBI Banca as a speaker at seven international conferences for institutional equity and debt investors; periodic meetings with Italian and international investors and with the analysts who cover the UBI share (the share is currently followed by 23 brokerage houses, including 17 international, while the remainder are Italian). Altogether, senior management and/or the investor relations officer met more than 200 institutional investors (equity and debt) over the twelve month period, sometimes on more than one occasion; the very many occasions on which analysts and investors were provided with information in response to telephone or email queries, especially in view of the intense reporting activity required by the situation on markets. Work continued at the same time on updating and improving the corporate website, www.ubibanca.it, in both the Italian and English version, also in the light of the everincreasing importance of online communications, both in terms of regulations and use. A new section of the site was implemented during the year containing an interactive version of the financial statements of the Group. It can be used to navigate the consolidated financial statements of the Group covering a number of years, with graphs of trends for the main balance sheet items and information of interest can be downloaded in excel or pdf format. Significant improvements were also made to the corporate social responsibility section. The efforts and investments made over the years to improve online financial communication resulted in the UBI Banca website achieving 12th position in the Italian league table compiled annually by the specialist web ranking company Hallvarsson & Halvarsson (KWD Group), and it again held second position in the Italian banking sector. Press relations Communication activity continued in 2011, with a maximum of transparency and co-operation with each publication and with each journalist, in order to ensure an accurate perception of the distinguishing features and values of the Group. In continuation with the policy pursued in previous years, the network banks were in involved in the issue of press releases at local level in order to attain widespread distribution of information to the public. As a result of UBI Banca’s communication strategy, the network banks continue to obtain coverage in the Italian press and in the local press above all, thereby helping to provide further visibility to the Parent. 2 With a view to encouraging the fullest participation of those potentially concerned, all the invitations (prepared in the English language) are not only sent to a mailing list of analysts and investors, but are also communicated to the Consob and Borsa Italia Spa through NIS (the Borsa Italia network information service) and published on the corporate website at the same time. A copy of the presentation is made available on the Bank’s website, in good time beforehand. 209 In 2011, UBI Banca obtained visibility in the Italian press in 8,266 articles, 35.7% of which (2,955 articles) described the Group and its banks in detail, with a readership (an estimate of the number of people who read these articles) of more than 1.5 billion readers (+30% compared to 2010)3. The percentage of positive articles out of total high standing articles was 17% while negative articles accounted for 13%. Compared to 2010, the percentage of positive articles fell as did that for negative articles. The consequent increase in neutral articles is explained by the quantity of articles which analysed the sector and the huge attention paid by the general media to economic and financial issues, which were given more space as a result of the crisis in progress. A total of 67% of the positive articles were dedicated entirely to the UBI Banca Group. In one of the most complex years in recent times, UBI Banca has demonstrated its ability to maintain a substantial presence in the national media by means of the following: the announcement of concrete and “preventative” measures such as the capital increase, which received international admiration from supervisory and regulatory bodies and from a major international financial newspaper (Financial Times), which reflected positively on Italy and in other countries; the presentation of the new business plan to the financial community, which achieved strong visibility, both nationally and locally; continuous and constant local coverage, confirmed, amongst other things, by the concrete approach and high standards of quality acknowledged by the media in relations with families and businesses (with regard above all to international services and agreements with associations). Events and sponsorships In order to enhance its brand and support commercial advertising, as it does every year, UBI Banca promoted a series of events on its local markets. It organised a road show in important towns and cities to present the XVI Rapporto Einaudi (Einaudi report) on the global economy and Italy, the result of a study performed by the Einaudi Centre and supported by UBI Banca. In order to present opportunities for internationalisation to businesses, it organised “UBI International Day” in co-operation with the Sole 24 Ore Group, a two-day event during which businesses were given the chance to learn from the Group’s international specialists of the services provided on foreign markets and to study different subjects in specialists workshops. A tournée was organised with the Accademia del Teatro alla Scala in ten foreign cities where the UBI Banca Group has a presence, in order to increase foreign visibility on the occasion of the 150th anniversary of the Unification of Italy. These events met with great success in local communities, which acknowledged the Group’s role as a sponsor of prestigious artistic initiatives. A series of meetings was organised by the network banks in important towns and centres to launch the UBI Community service model, dedicated to the third sector, which saw the involvement of leading protagonists in the nonprofit sector. The cycle of meetings is continuing in the current year. Again in order to help promote the UBI Community project, UBI Banca supported the 2011 Sodalitas Social Innovation Award, organised by the Sodalitas Foundation to give visibility to major nonprofit organisation projects of social value and to illustrate the expected returns of forprofit-nonprofit partnerships, thereby helping to reduce the distances between the parties involved. Important sponsorships again included the partnerships with the Goggi Ski Club in Bergamo and with the Bergamo international tennis tournament. A sponsorship of the cycling team TX Active Bianchi also continued. This mountain bike team is led by Felice Gimondi and is dedicated to the mountain bike and cross country fields and the sponsorship encourages a sport close to nature out in the fresh air. Co-operation was renewed in the cultural field with the “Popotus a scuola” project, organised by the daily newspaper Avvenire. UBI Banca has supported this initiative of the publishing group for years now. The objective is to help children to read and understand newspapers by using a specific tool to attract them. 3 Data processed by a company external to the Group. 210 Social and environmental responsibility By progressively integrating social responsibility objectives in its Business Plan, UBI Banca pursues the convergence of corporate strategies, policies and objectives with its values and principles and with the expectations of its stakeholders. The objective is to create sustainable value through the control of reputational risk, to establish a strong and distinctive corporate identity and to seek a climate of trust with its staff, its shareholder base and markets. All the organisational units in the Group are involved in the definition and pursuit of social responsibility objectives, with support from the Corporate Social Responsibility Function, which formulates proposals for policies and guidelines, contributes to the management and control system, supports the involvement of stakeholders and manages reporting activities. A summary of the main social responsibility activities performed in 2011 is given below, while the Social Report may be consulted for further information and in-depth analysis. CORPORATE GOVERNANCE (Code of Ethics) On conclusion of joint activity involving management, consisting of a series of interviews and a working group composed of different functions formed by the “Macro Areas” of UBI Banca, the network banks and the principal product companies, on 13th and 14th December 2010 the Supervisory Board and the Management Board of UBI Banca approved the Code of Ethics, which is an integral part of the “Organisational, Management and Control Model pursuant to Legislative Decree 231/01”. At the beginning of 2011 that same text was (i) adopted by all the banks and companies in the Group with official approval by the management bodies, (ii) communicated to all Group personnel by means of internal memos and publication on the corporate intranet, (iii) delivered to all subsidiaries and associates and published in English and Italian on the corporate website of the Group. As planned, the first initiatives to implement the Code of Ethics were commenced during the year and the Code of Conduct was published, for which procedures were concluded in December when the management bodies of UBI Banca approved it and it was sent to Group companies and banks for formal implementation, with resolutions passed by management bodies. The Code of Ethics training programme consisted of a classroom course in which over 1,900 managers of central and network units were involved and an online training course for all Group personnel with over 9,000 personnel benefiting. Training activity will continue in 2012 with further classroom sessions planned and the repeat of the online course to include those who were unable to benefit from it in 2011 and also new personnel who have been appointed in the meantime. The training programme was designed to communicate the most important aims and contents of the Group Code of Ethics simply and directly, and to link them with broader corporate social responsibility issues. The intention was to support the integration of CSR in business strategies and to make it a source of innovation and enhanced competitiveness and reputation, by educating personnel on the strategic nature of the CSR approach in the banking world and by increasing awareness of its economic value for the Group and of actions taken to strengthen its impact. The managers of organisational units also took a questionnaire to assess conduct observed at work from an ethical viewpoint. The survey was conducted by an outside company which ensured anonymity and the results are currently being analysed. MARKET Business management is oriented towards innovation in products and services, marketing approaches and distribution processes consistent with the ethical, social and environmental expectations of stakeholders and in implementation of the mutual and community vocation of the Group. In addition to the action taken to assist families and businesses already reported in the preceding section on commercial activity, the most important initiatives were as follows: the launch of UBI Community, the new customer service model which includes a range of products and services specially designed for the third sector and Church related institutions. The UBI Community range of services was designed on the basis of a series of 211 meetings with representatives of both Church and non-Church organisations to learn their characteristics and specific requirements; the conclusion of the partnership with PerMicro to develop micro-credit for social inclusion and to support employment; the conclusion of the pilot project with a range of services designed for immigrants, which allowed the Group to assess important features of the service to use as tool with a view to social inclusion and enhancement of this group within the context of the various segments of the retail market; participation, together with the leading banking groups in Italy, in the working round table “Science for Peace”, organised by the Veronesi Foundation to draw up a “Code of responsibility for finance to the arms industry”, consistent with the orientation of the Group since 2007, when it set its policy for transactions with counterparties operating in the arms and materials for armaments sectors. SOCIAL INTERVENTION The management of social intervention is designed to strengthen and support those large numbers of nonprofit organisations which work in the following fields: social, recreational and sport; welfare and solidarity; education and training; culture: university and research; restoration of artistic heritage and the protection of the environment. In 2011 the Group, with contributions from the Parent, the network banks, the main product companies and its foundations, disbursed a total of approximately €15 million (-7.4% compared to 2010), in the form of donations and sponsorships. Each entity in the Group operates independently in response to the demands it encounters and considers consistent with its own values and social responsibility objectives. While the Social Report furnishes a full and complete view of the activity performed during the year, one of the most important longstanding partnerships is that with CESVI (one of the main Italian NGOs operating in the field of humanitarian emergencies throughout the world) as part of which UBI Banca supported the initiative “CESVI sUBIto for the Horn of Africa” in 2011 for people in Somalia hit by famine. UBI Banca made its Group branches available to receive donations from customers, which successfully reached the ceiling of a total of €100 thousand (including €40 thousand from the private banking sector). ENVIRONMENTAL RESPONSIBILITY In addition to its pursuit of full and substantial compliance with regulations in force, it is Group policy to contribute to sustainable economic development, thereby also concretely implementing the principles of the Global Compact. The environmental policy approved in December 2008 commits the Group to reducing its environmental impact through the intelligent and responsible management of both direct impacts (i.e. impacts generated by its own operating activities through the consumption of resources, the production of waste and harmful emissions) and also indirect impacts (i.e. impacts generated by the conduct of third parties with whom the Bank does business, such as its customers and suppliers). The Group Energy Manager and Mobility Manager, appointed within the UBI Sistemi e Servizi Real Estate Department and the Human Resources Area of the Parent respectively, are the main protagonists assigned the role of promoting and supporting the implementation of policy through targeted initiatives, in co-operation with the Group Corporate Social Responsibility Function of the Group. With regard to direct impacts, in 2011 the Group yet again made exclusive use of electricity certified as from renewable sources (RECS certificates) and for the first year 184,099 kWh of energy was generated by the photovoltaic plant installed at Jesi. This made it possible to reduce total CO2 emissions by 63.1% in the last three years. The largest consumption amounted to 746,879 GJ of electricity (-5.7% in the last three years) and 2,000,705 kg of paper (-2.3% compared to 2010). Waste production remained almost unchanged (+0.4% for a total of 2,161 tons). As concerns indirect impacts, the Group has been active for some time in its commercial activities with “green” products, and that is credit lines provided for investments in energy savings and in the diversification of energy sources, with particular attention given to renewable sources or those with a low environmental impact, the volumes of which are reported in the preceding section “Commercial activity”. During 2011, loans granted amounted altogether to € 736 million. 212 ECONOMIC REPORT In 2011 the Group generated economic value of €2,849 million (-6.5% compared to 2010). Economic value distributed amounted to €3,035 thousand, inclusive of the loss attributable to non controlling interests. Net of that item, economic value distributed amounted to €3,055 thousand: 46.6% to employees, 29.9% to public administrations for taxes, 21.6% to suppliers, 1.5% to registered and unregistered shareholders, 0.4% to the community (see the 2011 Social Report for further details). REPORTING AND CONTROL The Social Report, together with the social responsibility section of the Group corporate website, is the main instrument for integrated reporting on the economic aspects (the economic value generated and distributed), social aspects (commitments, objectives and results achieved in terms of satisfying the legitimate expectations of stakeholders) and environmental aspects (commitments, objectives and results for controlling direct and indirect impacts) of operations. In accordance with requirements expressed by stakeholders in consultation activities conducted during the year, consisting of the Consultation Project for customers and focus groups with trade associations and local nonprofit organisations, and with developments in best practices, it was decided to publish the following for 2011: a summary document, of an informative nature, to involve the broadest possible range of stakeholders, designed for consultation on the internet and using tablets and smartphones. Printed in 3,000 copies, it is published and distributed to shareholders on the occasion of the Annual General Meeting together with the consolidated and separate annual report; a detailed document, prepared for the first time in compliance with the highest level A+ of the “Sustainability Reporting Guidelines G3.1”, accompanied by a “Financial Services Sector Supplement” of the Global Reporting Initiative4 and subject to independent auditing by the independent auditors KPMG Spa. This document is published in electronic format only and is translated into English, while hardcopy versions are produced and sent only on request. The social responsibility section of the Group corporate website underwent a series of improvements in 2011, in order to achieve the following objectives: reorganisation and simplification of the navigation tree; the insertion of new contents, especially on corporate social responsibility governance (e.g. the social responsibility model, relevant issues, reputational risk management) and on the Social Report in order to make it accessible to stakeholders with the ease of navigation on the web. As a consequence, the corporate social responsibility section reached 15th position overall (+2 positions compared to the previous year) and 4th position among banks in the 2011 CSR Online Awards Italy league table. The classification, drawn up each year by the communication company Lunquist, assesses the quality of the online communication of businesses on social and environmental, ethical and corporate governance issues and on the level of dialogue with stakeholders. Meetings were again held in 2011 with representatives of trade associations and nonprofit organisations, conducted by an independent company using the focus group method, in order to verify the level of awareness and agreement with the social responsibility policies of the Group and the quality of the reporting provided in the communities concerned and to survey expectations and acquire recommendations for improvement. The meetings were held in Turin, at the new headquarters of Banca Regionale Europea, in Genoa for the Banco di San Giorgio and at Breno for Banca di Valle Camonica. 4 An independent nonprofit foundation located in Amsterdam which was formed from a project started in 1997 by CERES of Boston (a coalition of investors, environmental organisations and public interest groups, which came together to promote corporate social responsibility by addressing businesses directly on social and environmental issues). Its mission is to produce global standards for sustainability reporting, thanks to the contribution of hundreds of experts in a large number of countries throughout the world. 213 Legislation on the protection of personal data With a view to simplifying personal data requirements (Art. 45), Decree Law No. 5 of 9th February 2012 “urgent measures on simplification and development (published in the Official Journal No. 33 on 9th February 2012), abolished the obligation to prepare an annual update of the “Security Programme Document” pursuant to Legislative Decree No. 196 of 30th June 2003 (“Privacy Code”). Since the change introduced had no effect on the general security obligations under Art. 31 and following of that code, the banks and companies in the Group went ahead with all the updates required with regard to the treatment of data, risk analysis and security measures. 214 Principal risks and uncertainties to which the UBI Banca Group is exposed Risks The UBI Banca Group attributes primary importance to the measurement, management and monitoring of risk, as activities necessary to the sustainable creation of value over time and to the consolidation of its reputation on its markets. In compliance with the regulations in force for the prudential supervision of banks (Bank of Italy Circular No. 263/2006), the Group has put a process in place to calculate its capital adequacy requirement – for the present and the future – to meet all significant risks to which the Group is or might be exposed (ICAAP - Internal Capital Adequacy Assessment Process). In this respect very careful identification is performed on a continuous basis of the risks subject to measurement. Risk identification activity is designed to verify the magnitude of Group risks already subject to measurement and to detect signals of other types of risk which may manifest. Identification involves precise conceptual definition of the risks to which the Group is exposed, an analysis of the factors which combine to generate them and a description of the relative manner in which they manifest. This activity was achieved by means of a centralised process of analysis supplemented by self assessment conducted on all the entities of the Group. Once the activity to identify significant risks is completed, the ICAAP process involves the measurement of the risks identified and the calculation of the total capital1 required to meet it (capital adequacy), both at present and in the future. Use is also made of specific (by assessing impacts on a single risk) and global (by assessing impacts on all risks at the same time) stress tests to perform a better assessment of exposure to risk and of systems for mitigating and monitoring it and calculating capital requirements. The UBI Banca Group has a system of risk governance and management in place which takes account of organisation, regulations and methods in order to ensure consistency in its operations and its relative propensity to risk. In consideration of its mission, the operations of the Group and also the market context in which it operates, the risks to be subjected to measurement in the ICAAP assessment process were identified and divided into first pillar and second pillar risks, as required by the relative regulations. First pillar risks – already managed under the requirements of supervisory regulations – are as follows: credit risk (including counterparty risk): the risk of incurring losses resulting from the default of a counterparty with whom a position of credit exposure exists. This also comprises the definition of counterparty risk, which constitutes a particular type of credit risk. It is the risk that a counterparty to a transaction involving determined types of financial instruments defaults before the transaction itself is settled. • financial risks: risk of changes in the market value of financial instruments held, due to unexpected changes in market conditions and in the credit rating of the issuer; operational risk: the risk of incurring losses resulting from the inadequacy or malfunction of procedures, human resources and internal events or from exogenous events. This includes losses resulting from fraud, human error, business disruption, system failure, non performance of contracts and natural disasters and it comprises legal risk. In addition to first pillar risks, second pillar risks were identified, consisting of the following: 1 See Part F, section 1 A. Qualitative Information of the Notes to the Consolidated Financial Statements for a definition of total capital. 215 • risks defined as measurable, for which established quantitative methods have been identified, which lead to the determination of internal capital or for which useful quantitative thresholds or limits can be defined which, combined with qualitative measurements, allow allocation and monitoring processes to be defined; risks defined as non measurable, for which policies and measures for control, reduction or mitigation are considered more appropriate because no established approaches exist for the measurement of internal capital that are useful for allocation purposes. The second pillar risks subject to analysis are as follows: MEASURABLE RISKS: ‐ concentration risk: risk resulting from exposures in the banking portfolio to counterparties, or groups of counterparties in the same economic sector or counterparties engaged in the same business or belonging to the same geographical area. Concentration risk can be divided into two types: single name concentration risk and sector concentration risk; ‐ interest rate risk: the current or future risk of a change in net interest income and in the economic value of the Group, following unexpected changes in interest rates which have an impact on the banking book. ‐ business risk: the risk of adverse and unexpected changes in profits and margins with respect to forecasts, connected with volatility in volumes of business due to competitive pressures and market conditions; ‐ equity risk: the risk of losses incurred in equity investments that are not fully consolidated on a lineby-line basis. ‐ fixed asset risk: the risk of changes in the value of the intangible fixed assets of the Group. By convention measurable risks also include those risks for which, although no well established approaches exist for the estimate of internal capital, operational limits of a quantitative nature, for which there is a consensus in the literature, can be set to measure, monitor and mitigate them. These risks are: - liquidity risk: the risk of the failure to meet payment obligations which can be caused either by an inability to raise funds or by raising them at higher than market costs (funding liquidity risk), or by the presence of restrictions on the ability to sell assets (market liquidity risk) with losses incurred on capital account; - structural liquidity risk: the risk resulting from a mismatch between the sources of funding and lending. NON MEASURABLE RISKS: - risks resulting from securitisations: the risk that the underlying economic substance of a securitisation is not fully reflected in decisions made to measure and manage risk; - compliance risk: the risk of incurring legal or administrative penalties, substantial financial losses or damage to reputation resulting from violations of laws and mandatory external regulations or internal regulations (by-laws, codes of conduct and voluntary codes); - reputational risk: the risk of incurring losses resulting from a negative perception of the image of the Bank by customers, counterparties, shareholders of the Bank, investors, the supervisory authority or other stakeholders; - residual risk: the risk of incurring losses resulting from the unforeseen ineffectiveness of established methods of mitigating risk used by the Bank (e.g. mortgage collateral); - strategic risk: the current or future risk of a fall in profits or in capital resulting from changes in the operating context, inadequate decision-making, failure to react to changes in a competitive environment. Details are given below of risks which have significant impacts for the UBI Banca Group and the action taken to mitigate them. Risks other than those reported below, which are of marginal importance, are not expected to change during the course of the year. 216 Credit risk Credit risk constitutes the most important characteristic risk of the UBI Banca Group: historically this risk accounts for approximately 90% of the supervisory risk capital. The year just ended was characterised by weak domestic demand, which was confirmed by recent economic indicators (two consecutive falls in Italian GDP in the third and fourth quarters of 2011) and opinion among businesses. The continuing difficulties of the economy in general and the related consumer crisis have continued to have a negative impact on the ability of businesses and individuals to meet their obligations, thereby maintaining high levels of credit risk and as a consequence also high rates of loan impairment and credit provision. In this situation of objective difficulty, the Group has nevertheless reviewed its credit monitoring and control processes, in order to prevent a further deterioration in its portfolio and to also maximise recoveries on already deteriorated loans. The following initiatives were taken in this respect during 2011: • the CR2 Programme – Credit Recovery and Regularisation: - the consolidation and progressive rationalisation of the process for monitoring performing positions in order to anticipate intervention by account managers for at risk counterparties and to prevent the deterioration of accounts by taking prompt action; - the update and development of the credit recovery system in order to increase credit recovery on non-performing loans partly through improving IT support and innovation in operating processes. • the Problem Loan Quality Project: an initiative launched in the network banks to reduce size of the impaired loan portfolio, through the adoption of a new approach to the management of non-performing loans, as a consequence of portfolio segmentation and the assignment of strategies and objectives to personnel in the distribution network; • Credit Quality Contacts: improved monitoring at local level in the network banks with the introduction of a new role responsible for credit quality management. Liquidity risk The problems of confidence on institutional and interbank markets, caused primarily by fears of sovereign state insolvencies, in a context of a slowdown in trends for traditional funding, due to lower household disposable income, has led to the risk of shortfalls in the liquidity required to fund the core lending of the Bank. In this context, the recent Eurosystem refinancing operations relaxed pressures on funding. Nevertheless, the recent recommendation on capital issued by the European Banking Authority (EBA) on 8th December 2011, designed to strengthen the capital positions of European banks, by creating an exceptional and temporary capital buffer by the end of June 2012, sufficient to bring the core tier one ratio up to 9%, could have further repercussions on bank lending. In the light of this the Group took part in the ECB’s LTRO operations and prepared a capital management plan compatible with the EBA recommendations. Detailed information on financial risk management objectives and policies and also on the exposure of the Group to price risk, credit risk, liquidity risk and the risk of changes in cash flows – pursuant to article 2428 of the Italian Civil Code – is given in Part E of the notes to the consolidated financial statements, which may be consulted. Uncertainties An uncertainty is defined as a possible event for which the potential impact, attributable to one of the risk categories just mentioned, cannot be determined and therefore quantified at present. The scenario in which the Group is operating is one of a recession already in progress – and which will probably last for most of 2012 – with substantial risks of it worsening, due mainly to the continuation of the process to solve the European sovereign debt crisis and the 217 uncertainty surrounding the outcomes, despite the steps forward taken in recent days with the approval of a budget discipline pact and a permanent stability fund (Fiscal Compact and ESM – European Stability Mechanism). A final solution, which would therefore succeed in at least partially restoring the confidence of investors, seems today to be only on the horizon, at a difficult point in time when in the first half of 2012 alone, the euro area has to face substantial government debt issuances. The elements of uncertainty identified could manifest with impacts attributable primarily to credit and business risk, but without affecting the capital strength of the Group. In detail, the main uncertainties identified for 2012 are linked to the following aspects: - developments in the macroeconomic situation. The persistent pressures on sovereign debt in the euro area and the continuing uncertainty over the consolidation of United States finances, is having repercussions on the outlook for growth in advanced economies. This is reflected in Italy by heavily depressed domestic demand, accompanied by household incomes that are still contracting, high and growing unemployment and the consolidation of government finances which will further cool the economic climate. In the light of these considerations, in 2012 the rate of defaults is expected to remain at the same high levels reached during the crisis and credit risk will only be able to reduce significantly at the end of the restructuring process that is affecting the whole national economy and the industrial sector in particular; - changes in the legislative and regulatory context. The regulatory context is subject to various processes of change following both the issue of a number of legislative provisions at EU and national level, with the introduction of the relative regulations to implement them, relating to the provision of banking services, and also to the related jurisprudence and decisions by the courts (e.g. the form, content and modification of contracts, interest, other items of remuneration for credit lines and overdrafts and the sale of insurance policies). This scenario, which has introduced discontinuities in operations and has at times directly affected the profits of banks, and/or costs for customers, requires particular effort both in terms of interpretation and implementation. Recent provisions that should be underlined include the Save Italy and Liberalisations decrees which may have negative impacts on profits. The Group is studying action to soften the impacts of that legislation, which includes constant and attentive monitoring of operating costs and a constant search for efficiency in internal processes. *** The risks and uncertainties described above were subject to a process of assessment designed, amongst other things, to examine the impacts of changes in market parameters and conditions on corporate performance. The Group does in fact possess instruments to measure the possible impacts of risks and uncertainties on its operations (sensitivity analysis and stress tests in particular), which allow it to rapidly and continuously adapt its strategies – in terms of its distribution, organisation and cost management systems – to changes in the operating context. Risks and uncertainties are also under constant observation through the implementation of the policies and regulations to govern risk adopted by the Group: policies are updated in relation to changes in strategy, context and market expectations. Periodic monitoring of policies is designed to verify their state of implementation and their adequacy. The findings of the analyses performed show that the Group is able to meet the risks and uncertainties to which it is exposed, which therefore confirms the assumption that it is a going concern. 218 Risks relating to health and safety at the workplace (Legislative Decree No. 81 of 9th April 2008) The main issues involved in 2011 in the complex activity carried out to ensure the proper implementation of regulations on this subject were as follows: - the development of the work-related stress assessment process; - start of the process to comply with UNI INAIl (national insurance institute for accidents at the workplace) Guidelines to increase the effectiveness of the organisation and management model already in place with regard to the administrative liability of companies concerning prevention offences pursuant to article 25 septies of Legislative Decree 231/2001; - analysis of robberies with a focus on the impact of those events on the mental and physical well-being of personnel. As concerns the assessment of work-related stress, the methodological process commenced in the Group involves a number of connected and sequential stages. The first was completed in 2011 and consisted of the acquisition, processing and comparison (against a sector benchmark, amongst other things) of numerically significant, objective data (“alarm bell” events, working context and content indicators). Rather than merely compiling INAIL forms, which are extremely generic, it was decided to analyse real situation contextualised risk factors, in order to bring to the fore preventative measures already adopted by Group companies to manage issues of pressing social concern, such as the enhancement of human resources, working conditions and how work is organised. The stage where workers and/or their representatives are involved must still be completed. In order to prevent this from transforming into an opportunity for negotiations and/or conflict, it was decided to employ the focus group method (which involves the sole presence of an outside observer, who is usually a psychologist) across all companies, which has already been successfully employed in smaller units in the Group where no trade union representatives are present. As mentioned above, this is just the first level of compliance with the legislation, a sort of introductory phase needed to identify those factors, among all those analysed, which it is considered may generate a risk of exposure to work-related stress in relation to the specific workplace. Risk analysis in the field of the application of health and safety legislation must necessarily consider the relationship of that legislation (which as is known requires those occupying the positions of Official Employer, senior manager and company officers to act as guarantors and therefore to be personally liable) to Legislative Decree No. 231/2001, which regulates the administrative liability of legal entities. Activities programmed for the three year period 2011-2013 include a project launched to update the current organisation, management and control model pursuant to Legislative Decree No. 231 to comply with the provisions of Art. 30 of Legislative Decree No. 81/2008, with specific reference to the UNI INAIl Guidelines, in order to increase the effectiveness of these in terms of exemption from the administrative liability of natural persons with regard to prevention offences pursuant to Art. 25 septies of Legislative Decree No. 231 (serious or very serious malicious bodily harm or manslaughter in violation of safety regulations). One of the essential requirements of the UNI INAIl Guidelines is the need for health and safety to become an integral part of corporate policies and strategies, so that the application of regulations under Legislative Decree No. 81/2008 is based primarily on company organisation that is explicitly structured in those terms. A working group was set up for that purpose, which, by actively involving personnel from different units, and not only at the Parent but also at UBI.S, involved in various ways in sensitive processes, will analyse the compliance with the UNI-INAIL recommendations of corporate processes which impact health and safety. It will then identify changes and/or additions needed with a view to achieving official approval of a process that is fully integrated and consistent with the Group’s administrative liability procedures (Decree No. 231) and which will form a special part of those procedures with specific regard to offences under Art. 25 septies. 219 Compliance of corporate health and safety procedures with the UNI-INAIl Guidelines will also bring automatic savings on annual INAIL insurance contributions (“fluctuation of the prevention premium”, which results in a reduction of 7% in the annual premium), which this national accident insurance institute offers to companies which can demonstrate that they have adopted virtuous practices on prevention and occupational risks at the workplace to improve health and safety conditions over and above those required by law2. Particular attention was also paid to an interpretation of developments in criminal phenomena (robberies and thefts) both in the sector nationally and in the UBI Banca Group. A constant reduction in the number of events has been seen since 2008 (approximately 30% less each year, which for the UBI Banca Group translates into a total reduction of 64% in 2011 compared to the figure for 2008). However, there has been a worrying increase in robberies performed using methods which result in the need for psychological assistance (robberies with personnel taken hostage for long periods). The trend for robberies considered “serious” in terms of the impact on the mental and physical well-being of personnel has in fact reversed, with an increase inversely proportional to the overall phenomenon. The ratio of “serious” robberies to total robberies therefore rose from 21% in 2008 to 51% in 2011. A joint working group was therefore set up on the issue with Group organisational units responsible for the management of safety, designed to identify and agree upon new solutions of both a technical and organisational nature, which will act as a deterrent to crime, by effectively integrating with the measures already implemented in order to continue to achieve the positive results so far attained. The following is reported to complete the picture of initiatives put in place to address health and safety risks: the creation of a special section in the new Group portal, in operation since the last quarter of 2011, in which information can easily be found on the following: legislation and Group regulations; news on safety organisation in the Group; classroom material for training purposes; training initiatives conducted as part of multi-year training programmes for the various figures and roles involved. Remote training courses were made available in 2011 on risks specific to the banking industry, such as that connected with the use of video monitors (completed by 14,355 staff, accounting for 79% of potential participants) and robberies (completed by 7,564 staff, accounting for 68% of potential participants). The latter course supplemented conventional classroom training activities. The positive trend for work-related accidents and illnesses in the banking sector continued in 2011, with the Group again placed in the lowest class both in terms of absolute severity and the frequency and seriousness of accidents. “Accidents while travelling” which occur while travelling to and from work were again the most prevalent of total accidents. In this respect the data for the UBI Banca Group is not only perfectly in line with that for the sector, but it also pursues special policies designed to reduce road accident risks at the source, by encouraging, where possible, the use of public transport even for work activities, or by making collective transport facilities available, where restructuring processes result in significant travelling requirements for personnel The remaining potential sources of accident risk normally present at the workplace, (known as “interference risks” connected with ordinary and extraordinary maintenance work performed at the premises of Group companies) are subject to constant educational campaigns for UBI.S personnel who manage relations with Group suppliers directly. 2 In the absence of that certification, the benefit of the “premium fluctuation” is subject to the production of detailed and complex documentation. While that certification has not yet been obtained, the validity of the health and safety procedures in place in the UBI Banca Group was confirmed indirectly when INAIl reduced the premium required for 2012 from the Parent, UBI.S and all the Group’s network banks, including UBI Banca Lombarda Private Investment. 220 Subsequent events and the business outlook for consolidated operations Part A, Section 4 of the Notes to the Financial Statements may be consulted for significant events occurring after the end of the year. *** With regard to the business outlook for operations, we report the forecasts given below on the basis of information currently available. The background environment (economic recession, low short-term interest rates, constraints resulting from EBA recommendations, competitive pressure on the cost of retail funding) will affect profits in the financial year 2012. The year will nevertheless benefit from commercial action already undertaken in 2011 and also from the positive results expected from the active management of the financial structure of the Group. Operating expenses are forecast to fall further compared to 2011, as a result of continuing action to contain them, which should make it possible to offset increases resulting from automatic contract clause increases, inflation, the full application of the increases in indirect taxation and from operations announced to streamline the Group. Action undertaken to monitor credit quality should enable impairment losses to be contained at levels close to those recorded in 2011. Consequently, growth in profits on ordinary operations, although only slight, is forecast for 2012, other economic factors remaining unchanged. The fundamental strategic lines of the 2011-2013/2015 Business Plan remain unchanged and no update is planned unless greater stability in the context is seen. Bergamo, 27th March 2012 THE MANAGEMENT BOARD 221 STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE COMPANY ACCOUNTING DOCUMENTS 222 223 Certification of the consolidated financial statements pursuant to Art. 81-ter of the Consob Regulation 14th May 1999, No.11971 and subsequent modifications and integrations 1. The undersigned Victor Massiah, Chief Executive Officer, and Elisabetta Stegher, Senior Officer Responsible for preparing the company accounting documents of UBI Banca Scpa, having taken account of the provisions of paragraphs 3 and 4 of article 154 bis of Legislative Decree No. 58 of 24th February 1998, hereby certify: the adequacy in relation to the characteristics of the company and the effective application of the administrative and accounting procedures for the preparation of the consolidated financial statements during the course of 2011. 2. The model employed The assessment of the adequacy of the administrative and accounting procedures for the preparation of the consolidated financial statements as at and for the year ended 31st December 2011 was based on an internal model defined by UBI Banca Scpa and developed in accordance with the framework drawn up by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) and with the framework Control Objectives for IT and related technology (COBIT) which represent the generally accepted international standards for internal control systems. 3.Furthermore, it is certified that: 3.1 the consolidated financial statements: a) were prepared in compliance with the applicable international financial reporting standards recognised by the European Community in accordance with the Regulation No. 1606/2002 (EC) issued by the European Parliament on 19th July 2002; b) correspond to the records contained in the accounting books; c) give a true and fair view of the capital, operating and financial position of the issuer and of the group of companies included in the consolidation. 3.2 the management report comprises a reliable analysis of the performance, operating results and position of the issuer and of the companies included in the consolidation, together with a description, insofar as they are known, of the main risks and uncertainties to which they are exposed. Bergamo, 27th March 2012 Victor Massiah Elisabetta Stegher Chief Executive Officer Senior Officer Responsible for preparing the company accounting (signed on the original) (signed on the original) 224 225 Independent auditors’ report 226 227 228 229 Consolidated Balance Sheet Consolidated Balance Sheet ASSETS (figures in thousand of euro) 10. Cash and cash equivalents 20. Financial assets held for trading 30. Financial assets at fair value 40. Available-for-sale financial assets 60. Loans to banks 70. Loans to customers 80. Hedging derivatives 90. Fair value change in hedged financial assets 100. Equity investments 120. Property, equipment and investment property 130. Intangible assets of which: goodwill 140. Tax assets: a) current b) deferred 150. Non current assets and disposal groups held for sale 160. Other assets Total assets 31/12/2011 31/12/2010 625,835 2,872,417 126,174 8,039,709 6,184,000 99,689,770 1,090,498 704,869 352,983 2,045,535 2,987,669 609,040 2,732,751 147,286 10,252,619 3,120,352 101,814,829 591,127 429,073 368,894 2,112,664 5,475,385 2,538,668 2,817,870 459,282 2,358,588 22,020 2,244,343 4,416,660 1,723,231 650,177 1,073,054 8,429 1,172,889 129,803,692 130,558,569 Table 1: 100O|1 - NOTA1 ai “Criteri di redazione” . ldi di confronto al 31 dicembre 2006 si riferiscono al solo ex Gruppo BPU Banca.ai LIABILITIES AND EQUITY (figures in thousand of euro) 10. 20. 30. 40. 60. 80. Due to banks Due to customers Securities issued Financial liabilities held for trading Hedging derivatives Tax liabilities: a) current b) deferred 100. Other liabilities 110. Post-employment benefits 120. Provisions for risks and charges: a) pension and similar obligations b) other provisions 140. Fair value reserves 170. Reserves 180. Share premiums 190. Share capital 200. Treasury shares 210. Non-controlling interests 220. Profit (loss) for the year Total liabilities and equity “Criteri di redazione” . 31/12/2011 31/12/2010 9,772,281 54,431,291 48,377,363 1,063,673 1,739,685 702,026 383,364 318,662 3,139,616 394,025 345,785 76,460 269,325 (1,315,865) 2,416,471 7,429,913 2,254,367 (4,375) 898,924 (1,841,488) 5,383,977 58,666,157 48,093,888 954,423 1,228,056 993,389 441,433 551,956 2,600,165 393,163 303,572 68,082 235,490 (253,727) 2,362,382 7,100,378 1,597,865 129,803,692 130,558,569 962,760 172,121 231 Consolidated Income Statement figures in thousands of euro 10. Interest and similar income 2011 2010 4,047,546 3,525,312 20. Interest expense and similar (1,925,857) (1,378,714) 30. Net interest income 40. Commission income 2,121,689 1,351,827 2,146,598 1,378,117 50. Commission expense 60. Net commission income 70. Dividends and similar income 80. Net trading income (loss) 90. Net hedging income 100. Income (loss) from disposal or repurchase of: a) loans and receivables (159,893) (196,892) 1,191,934 19,997 1,181,225 24,099 10,711 (56,891) 8,938 67,209 26,529 17,057 2,464 (3,850) b) available-for-sale financial assets 11,929 31,245 d) financial liabilities 12,136 (10,338) 110. Net income (loss) on financial assets and liabilities at fair value (38,849) 6,669 3,340,949 (742,221) 3,385,966 (756,653) a) loans (607,078) (706,932) b) available-for-sale financial assets (128,182) (42,364) 120. Gross income 130. Net impairment losses on: d) other financial transactions (6,961) (7,357) 140. Net financial income 2,598,728 2,629,313 170. Net income from banking and insurance operations 180. Administrative expenses 2,598,728 (2,304,249) 2,629,313 (2,375,174) (1,423,196) (1,451,584) (881,053) (923,590) a) personnel expense b) other administrative expenses 190. Net provisions for risks and charges (31,595) (27,209) 200. Net impairment losses on property, equipment and investment property (110,888) (109,838) 210. Net impairment losses on intangible assets (672,608) (130,500) 220. Other net operating income 243,065 239,430 (2,876,275) 10,248 (2,403,291) 99,027 260. Net impairment losses on goodwill (1,873,849) (5,172) 270. Profits on disposal of investments 6,818 14,458 280. Pre-tax profit (loss) from continuing operations 290. Taxes on income for the year from continuing operations (2,134,330) 271,991 334,335 (231,980) 300. Post-tax profit (loss) from continuing operations 310. Post-tax profit from discontinued operations (1,862,339) 248 102,355 83,368 320. Profit (loss) for the year 330. (Profit) loss attributable to non-controlling interests (1,862,091) 20,603 185,723 (13,602) 340. Profit (loss) for the year attributable to the shareholders of the Parent (1,841,488) 172,121 230. Operating expenses 240. Profits of equity investments a seguito della fusione tra gli ex Gruppi BPU e Bana Lombarda, nonché della variazione del principio contabile relativo ai piani a benefici definiti per i dipendenti, i rispetto a quelli già pubosito si rimanda a quanto I Iesposto nella sezione relativa ai “Criteri di redazione” . icembre 2006 si riferiscono al solo ex Gruppo BPU Banca. 232 Consolidated statement of comprehensive income Fig ure s in tho us a nds o f e uro 10. PROFIT (LOSS) FOR THE YEAR 2011 2010 (1,862,091) 185,723 (981,503) (456,017) Other comprehensive income (expense) net of taxes 20. Available-for-sale financial assets 30. P roperty, equipment and investment property - - 40. Intangible assets - - 50. Foreign investment hedges - - 60. Cash flow hedges (2,694) 1,356 70. Foreign currency differences - - 80. Non-current assets held for sale - - 90. Actuarial losses on defined benefit plans (21,435) (12,537) Share of fair value reserves of equity-accounted investees (62,742) (30,398) 100. 110. Total other comprehensive expense net of taxes (1,068,374) (497,596) 120. COM PREHENSIVE EXPENSE (item 10 + 110) (2,930,465) (311,873) (27,256) 7,017 (2,903,209) (318,890) CONSOLIDAT ED COMP REHENSIVE INCOME (EXP ENSE) AT T RIBUT ABLE T O NON130. CONT ROLLING INT EREST S 130 CONSOLIDATED COM PREHENSIVE EXPENSE ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT 233 Statement of changes in consolidated equity interests as at 31/12/2011 of the Parent as at 31/12/2011 Equity as at 31/12/2011 (expense) Consolidated comprehensive income Stock options Derivatives on treasury shares dividends Change in equity instruments New share issues Repurchase of treasury shares Equity transactions Changes in reserves Reserves Balances as at 01/01/2011 Restatement of opening balances Balances as at 31/12/2010 year profit Equity attributable to the shareholders Changes during the year Allocation of prior Extraordinary distribution of (figures in thousands of euro) Equity attributable to non-controlling to 31/12/2011 Dividends and other uses Share capital: 2,112,552 - 2,112,552 - - (10,932) 656,502 - - - - - - 2,758,122 2,254,367 503,755 a) ordinary shares 2,076,462 - 2,076,462 - - (10,932) 656,502 - - - - - - 2,722,032 2,254,367 467,665 36,090 - 36,090 - - - - - - - - - - 36,090 - 36,090 Share premiums 7,179,155 - 7,179,155 - (2,604) 329,535 - - - - - 7,506,086 7,429,913 76,173 Reserves b) other shares 2,690,200 - 2,690,200 69,885 - (25,197) - - - - - - 2,734,888 2,416,471 318,417 Fair value reserves (225,851) - (225,851) - - (458) - - - - - - (1,068,374) (1,294,683) (1,315,865) 21,182 Equity instruments - - - - - - - - - - - - - - - - T reasury shares - - - - - - - (4,375) - - - - - (4,375) (4,375) - P rofit (loss) for the year Equi ty: - attri butabl e to sharehol ders of the Parent - attri butabl e to noncontrol l ing i nterests 185,723 - 185,723 (69,885) (115,838) - - - - - - (1,862,091) (1,862,091) (1,841,488) (20,603) 11,941,779 - 11,941,779 - (115,838) (39,191) 986,037 (4,375) - - - - (2,930,465) 9,837,947 8,939,023 898,924 10,979,019 - 10,979,019 - (102,236) (16,213) 986,037 (4,375) - - - - (2,903,209) 8,939,023 X X - - (13,602) (22,978) - - - - - - (27,256) 898,924 X X 962,760 962,760 T he figures presented in this statement of changes in equity correspond to those reported in T able B.1 (Consolidated equity by type of company) contained in P art F of the Notes to the Financial Statements. Detai l s of fair val ue reserves: 31.12.10 NCI 31.12.11 Parent Parent 31.12.11 NCI a) available for sale -311,493 -4,355 -1,350,979 -9,115 b) cash flow hedge -619 -32 -3,217 -128 c) foreign currency differences -243 0 -243 0 -14,518 -1,684 -34,155 -3,482 d) actuarial gains/losses e) special revaluation law s 31.12.10 73,146 33,947 72,729 33,907 -253,727 27,876 -1,315,865 21,182 234 interests as at 31/12/2010 of the Parent as at 31/12/2010 Equity as at 31/12/2010 (expense) Consolidated comprehensive income Stock options Derivatives on treasury shares dividends Change in equity instruments Repurchase of treasury shares New share issues Changes in reserves Dividends and other uses Reserves Balances as at 01/01/2010 Restatement of opening balances Balances as at 31/12/2009 Equity transactions year profit Equity attributable to the shareholders Changes during the year Allocation of prior Extraordinary distribution of (figures in thousands of euro) Equity attributable to non-controlling to 31/12/2010 Share capital: 2,033,305 - 2,033,305 - - 79,247 - - - - - - - 2,112,552 1,597,865 514,687 a) ordinary shares 1,997,215 - 1,997,215 - - 79,247 - - - - - - - 2,076,462 1,597,865 478,597 36,090 - 36,090 - - - - - - - - - - 36,090 - 36,090 Share premiums 7,186,217 - 7,186,217 - (7,062) - - - - - - 7,179,155 7,100,378 78,777 Reserves b) other shares 2,555,746 - 2,555,746 69,878 - 64,576 - - - - - - 2,690,200 2,362,382 327,818 Fair value reserves 287,175 - 287,175 - - (15,430) - - - - - - (497,596) (225,851) (253,727) 27,876 Equity instruments - - - - - - - - - - - - - - - - T reasury shares - - - - - - - - - - - - - - - - 287,147 - 287,147 (69,878) (217,269) - - - - - - 185,723 185,723 172,121 13,602 12,349,590 - 12,349,590 - (217,269) 121,331 - - - - - (311,873) 11,941,779 10,979,019 962,760 11,411,248 - 11,411,248 - (200,221) 86,882 - - - - - - (318,890) 10,979,019 - - 34,449 - - - - - - P rofit for the year Equity: - attributabl e to sharehol ders of the Parent - attributabl e to noncontrol l ing interests 938,342 938,342 (17,048) 7,017 962,760 X X X X T he figures reported are presented to show amounts for the entire business, i.e. attributable to the P arent and to non controlling interests. 235 Consolidated Statement of Cash Flows (Indirect method) Figures in thousands of euro 2011 2010 A. OPERATING ACTIVITIES 1. Ordinary activities - profit (loss) for the year (+/-) 654,177 84,058 (1,841,488) 172,121 - gains/losses on financial assets held for trading and on financial assets/liabilities at fair value ( 28,138 50,222 - gains/losses on hedging activities (-/+) (8,938) (67,209) - net impairment losses on loans (+/-) 742,221 756,653 2,657,343 240,338 31,595 32,381 - net premiums not received (-) - - - other insurance income/expens e not received (+/-) - - (860,402) (360,522) - net impairment losses on plant, equipment and inves tment property and intangible assets (+/-) - net provisions for risks and charges and other expense/income (+/-) - outstanding taxes and duties (+) - net impairment losses on disposal groups held for sale after tax (+/-) - other adjustments (+/-) 2. Cash flows generated/absorbed by financial assets - financial assets held for trading - financial assets at fair value - available-for-sale financial assets - loans to banks: repayable on demand - loans to banks: other loans - loans to customers - other assets 3. Cash flows generated/absorbed by financial liabilities - amounts due to banks repayable on demand - amounts due to banks: other payable s - due to customers - - (94,292) (739,926) (3,015,466) (8,758,001) (128,955) (1,213,878) (18,919) 33,110 2,084,728 (3,908,724) - - (4,065,648) 157,912 1,495,981 (4,514,509) (2,382,653) 688,088 1,608,723 8,769,541 - - 4,388,304 59,543 (4,234,866) 5,801,196 - securities issued 283,475 3,744,444 - financial liabilities held for trading 109,250 99,036 - financial liabilities at fair value - other liabilities Cash flows generated/absorbed by operating activities - - 1,062,560 (934,678) (752,566) 95,598 39,429 218,289 B. INVESTING ACTIVITIES 1. Cash flows generated by - disposals of equity investments - dividends received on equity investments - disposals of held-to-maturity investments - disposals of property, equipment and investment property - disposals of intangible assets - disposals of lines of businesses 2. Cash flows absorbed by - purchases of equity investments - purchases of held-to-maturity investments 2,704 81,095 19,997 24,099 - - 9,662 14,458 - 811 7,066 97,826 (149,494) (188,471) (36,000) (13,988) - - - purchases of property, equipment and investment property (48,992) (105,507) - purchases of intangible assets (64,502) (68,976) - purchases of lines of business - - (110,065) 29,818 Cash flows generated/absorbed by investing activities C. FUNDING ACTIVI TIES - issues/repurchases of treasury shares - - 981,662 - - issues/purchases of equity instruments - - - distribution of dividends and other uses (102,236) (200,221) 879,426 (200,221) 16,795 (74,805) Cash flows generated/absorbed by funding activities CASH FLOWS GENERATED/ABSORBED DURING THE YEAR Key: (+) generated (-) absorbed 236 Reconciliation Figures in thousan ds of euro Cash and cash equivalents at beginning o f year Cash and cash equivalent inflow on 01/04/2007 following the merger Total net cash flows generated/absorbed du ring the year Cash and cash equivalents: effect of changes in exchange rates Cash and cash equivalents at end of year 2011 2010 609,040 - 683,845 - 16,795 (74,805) - - 625,835 609,040 237 PART A – Accounting policies A.1 – General Part A.2 – The main items in the financial statements PART B – Notes to the consolidated balance sheet Assets Liabilities Other information PART C – Notes to the consolidated income statement PART D – Consolidated statement of comprehensive income PART E – Information on risks and the relative hedging policies PART F – Information on consolidated equity PART G – Business combination transactions concerning companies or lines of business Notes to the Consolidated Financial Statements PART H – Transactions with related parties PART I – Share-based payments PART L – Segment Reporting The figures contained in the tables in the notes to the consolidated financial statements are stated in thousands of euro, unless specified otherwise. 238 Part A – Accounting policies A.1 – GENERAL PART Section 1 Statement of compliance with IFRS This consolidated financial report has been prepared in compliance with the international financial reporting standards issued by the International Accounting Standards Board (IASB) and endorsed at the date of publication and also in compliance with the related interpretations of the International Financial Reporting Interpretation Committee (IFRIC)1. The report is composed of the balance sheet, income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and the notes to the financial statements, accompanied by the consolidated management report, subjected to audit by the independent auditors and it relates to the companies (subsidiaries, associates and companies subject to joint control) included in the consolidation. The consolidated financial statements as at and for the year ended 31st December 2011 have been clearly stated and give a true and fair view of the capital and financial position, the result for the year, the changes in equity and the cash flows. Section 2 Basis of preparation These consolidated financial statements have been prepared according to the general accounting principles contained in IAS 1 “Presentation of financial statements” and they therefore report information on a going concern basis, recognising income and expenses on an accruals basis, without offsetting assets against liabilities and revenue against expenses. The information contained in this annual report is expressed, unless otherwise indicated, in euro as the accounting currency and the financial information, the balance sheet and income statement, the notes and comments and the explanatory tables are presented in thousands of euro. The relative rounding of the figures has been performed on the basis of Bank of Italy instructions. Items for which there are no values for the current and the previous period have been omitted. The mandatory financial statements used in this annual report comply with those defined in Bank of Italy Circular No. 262/2005, as amended by the first update of 18th November 2009 and by subsequent communications from the supervisory authority. In addition to the accounts as at 31st December 2011, they also provide the same comparative information as at 31st December 2010. On 10th February 2012, the Bank of Italy issued “addendum” letter No. 0125853/12 (complied with for the preparation of these financial statements) concerning “financial statements and supervisory reporting” with which it provided banks and financial intermediaries with replies to requests for clarification that it had received concerning the correct treatment for the recognition of certain transactions. The recommendations contained in it were found to be in line with Group practice. 1 See the “List of IAS/IFRS standards approved by the European Commission”. The standards listed there and the relative interpretations are applied on the basis of events occurring that are disciplined by them in the year from which application becomes compulsory, unless indicated otherwise. 239 Accounting policies The accounting policies contained in Part A.2 concerning the classification, valuation and derecognition phases are essentially the same as those adopted for the preparation of the 2010 annual financial statements. The accounting policies employed tend to apply the cost criterion with the exception of the following financial assets and liabilities, which are valued using the fair value criterion: financial instruments held for trading (including derivative products), financial instruments designated at fair value (in application of the fair value option) and available-for-sale financial instruments. To complete the information, non-current assets available for sale (and the liabilities associated with them) have been recognised at the lower of the carrying amount and the fair value (net of sales costs). With regard to changes in IFRS, during the reporting year the European Commission published EC Regulation 149/2011, which makes various slight changes to the IFRS as part of the annual improvement process designed to simplify and clarify them. These amendments, which became compulsory for the financial year 2011, concern various standards as can be seen from the “List of IAS/IFRS standards adopted by the European Commission” later in this report. Application of the following EU regulations, published by the European Commission in 2010, became compulsory in 2011: Regulation No. 574/2010 – “Amendments to IFRS 1 and IFRS 7”; Regulation No. 632/2010 – IAS 24 “Related party transactions”; Regulation No. 633/2010 – IFRIC 14 “The limit on a defined benefit asset”; Regulation No. 662/2010 – IFRIC 19 “Extinguishing financial liabilities with equity instruments”. The effect of these new standards is of a purely informative nature in this annual report. Section 3 Consolidation scope and methods The consolidated financial statements include the financial and operating results of UBI Banca Scpa and the companies either directly or indirectly controlled by it, including within the scope of the consolidation also those companies which operate in sectors different from that to which the Parent belongs and the special purpose entities, when the conditions of effective control exist, even in the absence of an equity stake, but in relation to what is termed “business”. The following principal changes occurred in the consolidation scope compared with the situation as at 31st December 2010. Changes in the consolidation scope ‐ ‐ ‐ the disposal, on 27th April 2011, of 30% of the share capital of BY You S.p.A.. As a result of that sale the company and its subsidiaries are no longer consolidated with the proportionate method. Due to the existence of a pledge on shares representing 10% of the share capital with voting rights for UBI Banca, the company is recognised using the equity method; on the basis of agreements concluded between the main shareholders and the company Sopaf and the signing of a new shareholders’ agreement, the company Polis Fondi SGR S.p.A. is now consolidated using the equity method instead of the previous proportionate method; on 25th November 2011, the securitisation transaction performed using the company Sintonia Finance S.r.l. was redeemed in advance. That company was excluded from the consolidation from that date; 240 ‐ the formation, on 20th December 2011, of the company UBI Finance CB 2 S.r.l. The creation of that company was necessary for the coming launch of a second programme of covered bond issuances. No extraordinary transactions were recorded as taking place within the Group in 2011. However, a series of transactions to purchase shares or subscribe share issuances took place, which resulted in changes in consolidation methods. Further information on the changes described above is given in the section “The consolidation scope” contained in the Management Report, which may be consulted. With regard to the consolidation methods used, companies subject to control are consolidated using the line-by-line method, those subject to joint control are proportionately consolidated, while those interests over which the Group exercises significant influence are valued using the equity method. The line-by-line consolidation method Subsidiaries subject to control are consolidated using the full line-by-line method. The concept of control goes beyond a majority percentage interest in the share capital of the company invested in and is defined as the power to determine the financial and operating policies of the entity in question for the purpose of obtaining the benefits from its activities. The line-by-line consolidation method involves summing the items of the income statements and balance sheets of subsidiaries on a line-by-line basis The following adjustments are made for this purpose: (a) the carrying amounts of the subsidiaries held by the Parent and the corresponding part of the equity are eliminated; (b) the proportion of equity and of profit or loss for the year attributable to other shareholders is stated under a separate item If the results of the above adjustments are positive, then they are recognised (after first allocating them if possible to the assets or liabilities of the subsidiary) as goodwill within item 130 “intangible assets” on the date of the first consolidation, if the necessary conditions apply. If the resulting differences are negative they are normally charged to the income statement. Intragroup balances and transactions, including revenues, costs and dividends are completely eliminated. The operating results of a subsidiary that is acquired during the period are included in the consolidated balance sheet starting from the date on which it is acquired Similarly, the operating results of a subsidiary that is disposed of are included in the consolidated balance sheet until the date on which control over the company is released. The accounts used in the preparation of consolidated financial statements are stated as of the same date. The consolidated financial statements have been prepared using uniform accounting policies for like transactions and events. If a subsidiary uses different accounting policies from those employed in the consolidated financial statements for like transactions and other events in similar circumstances, adjustments are made to its accounts for the purposes of the consolidation. The proportionate method An equity investment is considered as subject to joint control even in the absence of equal voting rights, if control over the operating activities and strategic policies of the company invested in is shared with others on the basis of contractual agreements. Application of the proportionate method involves the inclusion in the investor’s balance sheet of its share of the assets controlled jointly and of its share of the liabilities for which it is jointly responsible. 241 The income statement of the investor includes the relative share of the income and expenses of the jointly controlled entity. Intragroup balances and transactions, including revenues, costs and dividends are eliminated on the basis of the share of joint control. The investor ceases the use of the proportionate consolidation method for the purposes of consolidation from the date on which it ceases to have joint control over the investment The equity method Equity investments over which the Group exercises significant influence, which is the power to participate in the financial and operating policy decisions but not to control or have joint control over them are measured using the equity method. Under this method an equity investment is initially recorded at cost and the carrying amount is increased or decreased to reflect the investor's share of the profit or loss of the associate after the acquisition date. The proportion of the profit or loss for the year made by the investee attributable to the investor is stated in the income statement of the latter. Dividends received from an investee reduce the carrying value of the investment; adjustments to the carrying amount may also be required arising from a change in the portion of the investee's equity attributable to the investor that have not been recognised in the income statement. These changes include changes arising from the revaluation of property, equipment and investment property and from exchange rate differences on items in foreign currency. The portion of those changes attributable to the investor are recorded directly in its equity. Where potential voting rights exist, the investor's share of profit or loss of the investee and of changes in the investee's equity is determined on the basis of present ownership interests and does not reflect the possible exercise or conversion of potential voting rights. Where the investee incurs continued losses, if these exceed the carrying value of the investee, the carrying value is written off and further losses are only recognised if the investor has contracted legal or implicit obligations or has made payments on behalf of the investee. If the investee subsequently realises a profit, the investor resumes recognition of its share of the profits only after reaching the share of the profit which was previously not recognised. For the purposes of consolidating investments in associates, the figures from the financial statements prepared and approved by the boards of directors of the individual companies are used. Where accounts prepared according to international standards are not available those prepared according to national accounting standards are used after first verifying that there are no significant differences. The consolidating entity ceases use of the equity method from the date on which it ceases to exercise significant influence over the associate and the investment is classified within either “financial assets held for trading” or “available-for-sale financial assets”, according to the case, starting from that date on condition that the associate does not become a subsidiary or subject to joint control. 242 1. Equity investments in companies subject to exclusive control and to joint control (proportionately consolidated) Headquarters A.1 Line-by-line consolidated companies 1. Unione di Banche Italiane Scpa - UBI Banca 2. 24-7 Finance Srl 3. Albenza 3 Srl 4. Barberini Sa 5. BDG Singapore Pte Ltd 6. B@nca 24-7 Spa 7. Banca Carime Spa 8. Banca di Valle Camonica Spa Bergamo Brescia Milan Brussels (Be lgium) Singapore Bergamo Cosenza Breno (BS) 9. Banca Lombarda Preferred Capital Company LLC 10. Banca Lombarda Preferred Securities Trust 11. Banca Popolare Commercio e Industria Capital Trust 12. Banca Popolare Commercio e Industria Funding LLC 13. Banca Popolare Commercio e Industria Spa 14. Banca Popolare di Ancona Spa 15. Banca Popolare di Bergamo Spa 16. Banca Regionale Europea Spa 17. Banco di Brescia Spa 18. Banco di San Giorgio Spa Delaware Delaware Delaware Delaware Milan Jesi ( AN) Bergamo Cuneo Brescia Genoa 19. 20. 21. 22. 23. Banque de Depots et de Ge stion Sa BPB Capital Trust BPB Funding LLC BPB Immobiliare Srl Centrobanca Spa Lausanne (Switze rland) Delaware (USA) Delaware (USA) Bergamo Milan 24. 25. 26. 27. 28. Centrobanca Sviluppo Impresa SGR Spa Coralis Re nt Srl Investnet International Spa Invesclub srl in liquidazione IW Bank Spa 29. 30. 31. 32. 33. 34. 35. Lombarda Lease Finance 4 Srl Orio Financ e Nr. 3 Plc Prestitalia Spa Silf - Società Italiana Leasing e Finanziamenti Spa Società Bresciana Immobiliare - Mobiliare SBIM Spa Società Lombarda Immobiliare Srl - SOLIMM UBI Banca International Sa 36. UBI Banca Private Inv estment Spa 37. UBI Factor Spa 38. UBI Fiduciaria Spa Share capital Type of ownership Name % of votes Investing company % held PARENT euro 10,000 euro 10,000 euro 3,092,784 Sing. dollars 5,600,000 euro 316,800,000 euro 1,468,208,505,92 euro 2,738,693 4 4 1 1 1 1 1 euro 1,000 euro 1,000 euro 1,000 euro 1,000,000 euro 934,150,467,60 euro 122,343,580 euro 1,350,514,252 euro 468,880,348,04 euro 615,632,230,88 euro 102,119,430 1 1 1 1 1 1 1 1 1 1 Swiss francs 10,000,000 euro 1,000 euro 1,000,000 euro 185,680,000 euro 369,600,000 1 1 1 1 1 Milan Milan Milan Milan Milan euro 2,000,000 e uro 400,000 euro 12,478,465 euro 10,000 euro 18,404,795 1 1 1 1 1 Brescia Dublin (Ireland) Rome Cuneo Brescia Brescia Luxembourg euro 10,000 euro 10,000 euro 46,385,482 euro 2,000,000 euro 35,000,000 e uro 100,000 euro 59,070,750 4 4 1 1 1 1 1 Brescia Milan Brescia euro 67,950,000 euro 36,115,820 euro 1,898,000 1 1 1 (USA) (USA) (USA) (USA) Details of investment UBI Banca Scpa X UBI Banca Scpa Banque de Depots e t de Gestion Sa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa Banco di Bresc ia Spa UBI Banca Scpa UBI Banca Scpa BPCI Funding Llc - USA UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa Banca Regionale Europea Spa UBI Banca Scpa BPB Funding Llc - USA UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa Banca Popolare di Ancona Spa Ce ntrobanca Spa UBI Banca Scpa IW Bank Spa IW Bank Spa UBI Banca Scpa Ce ntrobanca Spa UBI Banca Scpa X Banca 24-7 Spa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa Banco di Bresc ia Spa Banco di San Giorgio Spa Banca Popolare di Bergamo Spa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa 10.000% X 100.000% 100.000% 100.000% 92.833% 74.244% 8.716% 100.000% 100.000% 100.000% 100.000% 75.077% 92.934% 100.000% 74.944% 100.000% 38.193% 57.500% 100.000% 100.000% 100.000% 100.000% 94.271% 5.471% 100.000% 100.000% 100.000% 100.000% 65.039% 23.496% 10.000% X 100.000% 100.000% 100.000% 100.000% 90.603% 5.852% 0.173% 3.372% 100.000% 100.000% 100.000% 10.000% X 100.000% 100.000% 100.000% 92.833% 82.960% 100.000% 100.000% 100.000% 100.000% 75.077% 92.934% 100.000% 75.800% 100.000% 95.693% 100.000% 100.000% 100.000% 100.000% 99.742% 100.000% 100.000% 100.000% 100.000% 88.535% 10.000% X 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 243 39. 40. 41. 42. 43. 44. 45. UBI Finance Srl UBI Finance 2 Srl UBI Finance 3 Srl UBI Gestioni F iduciarie Sim Spa UBI Insurance Broker Srl UBI Lease Finance 5 Srl UBI Leasing Spa 46. UBI Management Company Sa 47. UBI Pramerica SGR Spa 48. UBI Sistemi e Servizi Scpa Milan Brescia Brescia Brescia Bergamo Brescia Brescia Luxembourg Milan Brescia euro 10,000 euro 10,000 euro 10,000 euro 1,040,000 euro 3,760,000 euro 10,000 euro 241,557,810 1 4 4 1 1 4 1 e uro 125,000 euro 19,955,465 euro 35,136,400 1 1 1 UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa UBI Fiduciaria Spa UBI Banca Scpa UBI Banca Scpa UBI Banca Scpa Banca Popolare di Ancona Spa UBI Pramerica SGR Spa UBI Banca Scpa UBI Banca Scpa Banca Carime Spa Banca Popolare Commercio e Industria Spa Banca Popolare di Ancona Spa Banca Popolare di Bergamo Spa Banca Regionale Europea Spa Banco di Bresc ia Spa Banca 24-7 Spa Banca di Valle Camonica Spa 49. UBI Trustee Sa 50. UBI Finance CB 2 Srl Luxembourg Milan e uro 250,000 euro 10,000 1 4 Banco di San Giorgio Spa Ce ntrobanca Spa UBI Banca Priv ate Investme nt Spa UBI Pramerica SGR Spa UBI Fac tor Spa Silf Spa IW Bank Spa Prestitalia Spa UBI Insurance Broker Srl UBI Banca International Sa UBI Banca Scpa 60.000% 10.000% 10.000% 100.000% 100.000% 10.000% 79.996% 18.997% 100.000% 65.000% 70.845% 2.960% 2.960% 2.960% 2.960% 2.960% 2.960% 1.480% 60.000% 10.000% 10.000% 100.000% 100.000% 10.000% 98.993% 100.000% 65.000% 98.520% 1.480% 1.480% 1.480% 1.480% 1.480% 0.740% 0.074% 0.074% 0.074% 0.074% 100.000% 10.000% 100.000% 10.000% Key (1) Type of ownership: 1 = majority of voting rights in ordinary general meetings 2 = dominating influence over ordinary general meetings 3 = agreements with other shareholders 4 = other forms of control 5 = “unitary management” control under Art. 26, paragraph 1, of “Legislative Decree No. 87/92” 6 = “unitary management” control under Art. 26, paragraph 2, of “Legislative Decree No. 87/92 7 = joint control (2) (Votes available at ordinary shareholders’ meetings, distinguishing between actual and potential) 244 2. Other information Companies in which no equity investment is held, but for which shares have been received as pledges are excluded from the consolidation scope, in consideration of the purpose of possession, which is to secure the loan granted and not to exercise control and determine financial and operating policies in order to obtain the economic benefits deriving from them. The balance sheet, income statement and statement of cash flows of consolidated companies which operate with a reference currency other than the euro are translated at the exchange rate ruling at the end of the year. All the exchange rate differences resulting from the translation are recognised in a specific reserve in equity. If an investment is disposed of, this reserve is eliminated with a simultaneous debit or credit to the income statement at the time of disposal. International financial reporting standards require the recognition in the financial statements of corporate events in a manner which reflects the underlying economic substance of them. No equity investments held directly or indirectly by the Parent with an interest of less than 20% existed at the reporting date over which it is considered it exerted significant influence. Furthermore, with the exception of equity investments held for merchant banking activities classified within item 20 “Financial assets held for trading”, no equity investments held directly or indirectly by the Parent Bank with an interest of more than 20% existed as at the reporting date over which it is considered it did not exert significant influence. No significant restrictions existed as at the balance sheet date on the capacity of associate companies to transfer funds to the investing company in payment of dividends or repayment of loans or advances. The reporting dates of the companies valued according to the equity method and of those consolidated proportionately were the same as that of the Parent. Section 4 Subsequent events With regard to the provisions of IAS 10, subsequent to 31st December 2011, the reporting date, and until 27th March 2012, the date on which the draft Annual Report was approved by the Management Board for submission to the Supervisory Board, no events occurred to make adjustments to the figures presented in the report necessary. For information purposes, the following events are mentioned: ▪ 20th January 2012: in compliance with requests made by the European Banking Authority (EBA), UBI Banca presented a programme for achieving a core tier one ratio of 9% by 30th June 2012. In consideration of the temporary nature of the requested increase, the plan does not include any possibility of new resort to the market. It relies substantially on the adoption, by the end of the first half of 2012, of advanced internal models for the calculation of capital requirements on corporate credit risk, on further action to optimise risk weighted assets and on self funding. Any requirement remaining as at 30th June 2012, will be met, if substantial, by the partial conversion of outstanding convertible debt instruments; ▪ in January and February 2012, as part of action taken to strengthen the liquidity reserve consisting of assets eligible for refinancing, UBI Banca took advantage of the opportunity to issue government backed bonds: on 2nd January it made two issuances for a total €3 billion nominal (€2 billion with a three year maturity and €1 billion with a five year maturity), followed on 27th February by two additional issuances of €3 billion nominal (€2 billion with a three year maturity and €1 billion with a five year maturity); ▪ between 7th February and 12th March 2012, a public tender offer to purchase was launched on tier one instruments (preference shares) in issue. The offer made to both qualified and other investors was taken up for a total nominal amount of €109 million, equivalent to approximately one fourth of the nominal amount of the securities issued, and it generated a net gain of approximately €15.8 million recognised in the first quarter of 2012 (see the section “General banking business with customers: funding” in the Consolidated Management Report for further information); 245 ▪ 14th March 2012: the UBI Banca Group disclosed that it had informed Arca SGR of its desire to withdraw from the share capital of that company, with respect to all the shares held. The right of withdrawal arose, in accordance with Art. 2347 of the Italian Civil Code, because the Group did not vote in favour of the resolution passed by an Extraordinary Shareholders’ Meeting which, on 20th February 2012 (filed with the Company Registrar of Milan on 5th March 2012), had made amendments to the Corporate By-Laws of Arca SGR. The withdrawal involves 13,354,000 shares held by the UBI Banca Group (11,562,000 by UBI Banca and 1,792,000 by Banca Popolare di Ancona), accounting for 26.708% of the share capital of Arca SGR, valued at consolidated level at an average of € 2.09 per share. Following the exercise of that right to withdrawal, the UBI Banca Group will have the right to cash payment for the shares held, in the amount of € 2.70 per share, as determined according to the law by the Board of Directors of Arca SGR. The payment will take place within the time limits set by the Italian Civil Code; ▪ 27th March 2012: with regard to the plan to merge Banco di San Giorgio into Banca Regionale Europea - approved by the boards of directors of the two banks on 21st December 2011 – the Management Board of UBI Banca approved modifications to the parameters for the merger to take account of the results of impairment tests conducted at the end of the year. The new share price for the purchase by BRE of the ordinary shares held by the Parent was € 4.344. Shareholders of Banco di San Giorgio other than BRE have the right to sell their shares at a price that will be set by the Board of Directors of BRE, having received the opinion of the Board of Statutory Auditors and of the external statutory auditors (see in this respect the information given in the section “Significant events that occurred during the year” contained in the Consolidated Management Report); ▪ in the first quarter of 2012, UBI Banca made further investments of €5 billion in Italian government securities, including €3 billion classified with held-to-maturity investments and €2 billion within available-for-sale financial assets. This action, designed to support net interest income, mainly regarded securities with a maturity of three years, and therefore with the same duration as the funding acquired through the Eurosystem. Section 5 Other aspects Collective impairment losses on performing loans Activity to revise the process for the management and monitoring of credit was completed in 2010 and it included the measurement of collective impairment losses on the performing loans of the network banks, with a refinement and update of the approach based on the Basel 2 risk parameters. Improved methods for the classification of customer risk and internal models for the measurement of credit risk were employed in 2011, which also included an increase in the length of the period considered for the use of historical data series in the calculation of PD. Revisions of internal models mainly involved the business regulatory segment for which validation of the advanced approach is being performed, currently in progress with the Bank of Italy. Impairment losses on available-for-sale equity instruments In June 2011, the UBI Banca Group participated in the increase in the share capital performed by Intesa Sanpaolo, which involved the assignment of two new shares for every seven old shares already held at a subscription price of 1.369 euro for each new share. The operation involved a total payout of €56.7 million and resulted in the acquisition of 41,435,116 new shares, so that the Intesa Sanpaolo shares currently held, which are recognised as “available-for-sale financial assets”, now number 186,458,028 (145,022,912 shares as at 31st December 2010). With specific reference to the valuation of the share in question and in compliance with the impairment policy pursued by the Group and with IAS 39, further impairment losses of €112.5 246 million were recognised through profit or loss in 2011, of which €15.9 million had already been recognised as at 30th June 2011. Impairment losses of euro €15.3 million were also recognised during the year on non significant share holdings and also on units held in OICRs (collective investment instruments). Realignment of values for tax purposes relating to goodwill and other intangible assets Paragraphs 12 to 15 of article 23 of Decree Law No. 98 of 6th July 2011, converted into Law No. 111 of 15th July 2011, containing measures for financial stabilisation, allows values for statutory accounting and for tax purposes relating to goodwill and other intangible assets to be realigned. More specifically the legislation in question allows, in accordance with the principles of Law No. 2 of 28th January 2009, the recognition for tax purposes of higher values attributed to controlling interests acquired through extraordinary transactions, consisting of the value of goodwill, business brands and other intangible assets recognised autonomously in the consolidated financial statements. That realignment is performed by the payment of a substitute tax of 16% and it allows the amount in question to be deducted (but not in the statutory accounts) for corporate income tax (IRES) and local production tax (IRAP) purposes at constant rates over ten years. With specific regard to the tax relief on the amounts relating to prior year extraordinary transactions, and that is those performed before the law in question entered into force, a oneoff substitute tax could be paid by 30th November 2011, while the deduction of the amortisation (for tax purposes only) runs from 2013. As already reported in the interim financial report as at and for the period ended 30th June 2011, in view of the above, UBI Banca decided to take advantage of the option in question with regard to the following: goodwill recognised in the consolidated financial statements as at 31st December 2010, arising from: - the purchase price allocation performed following the merger between the former BPU Banca Group and the former Banca Lombarda e Piemontese Group, net of the €569 million already subject to tax relief in 2009 – consisting of goodwill recognised in the separate balance sheet of UBI Banca – for a total amount subject to tax relief of €2,361.7 million; - the acquisition of IW Bank, with an amount subject to tax relief of €54.6 million; other intangible assets, recognised in the consolidated balance sheet as at 31st December 2010, arising from the purchase price allocation following the merger between the former BPU Group and the former Banca Lombarda e Piemontese Group. In detail, these intangible assets consist of the following: - core deposits, with an amount subject to tax relief of €312 million; - assets under management, with an amount subject to tax relief of €165 million; - assets under custody, with an amount subject to tax relief of €54 million; - brands, with an amount subject to tax relief of €338 million. Reference was made with regard to the accounting treatment, as occurred in 2008, to the Italian Accountants Association (Organismo Italiano di Contabilità) document, “Application No. 1 - Hypothesis for the accounting treatment for the substitute tax for tax relief on goodwill pursuant to paragraph 10, Art. 15 of Decree Law No. 185 of 29th November 2008”. This document allows the simultaneous recognition of the substitute tax and the relative deferred tax assets in the income statement. Following the resolution, passed by the Management Board on 25th August 2011 and confirmed by the Supervisory Board on 29th August 2011, to take advantage of the options provided by the legislation in question, as at 30th June 2011 the amount relating to the substitute tax (16%) was charged to the income statement and deferred tax assets based on the nominal corporate income tax rate (27.5%) were recognised2. With regard to deferred local production tax (IRAP) assets, the decision to take advantage of the tax relief resulted in a decrease in the tax base of UBI Banca of €328,526 thousand, with a 2 In this regard, in compliance with IAS 12 tax assets are recognised on the assumption that it is probable that sufficient taxable profit will be available against which the deductible temporary difference can be utilised. 247 consequent absence of taxable income for IRAP purposes in the future. Consequently deferred tax assets for IRAP purposes were not recognised and those that had been recognised previously were released. In the consolidated financial statements, higher current taxation of €525,642 thousand was recognised in the 2011 income statement, due to the substitute tax, the recognition of the IRAP deferred tax assets already mentioned of €24,964 thousand was reversed and lower taxation was recognised with a new deferred tax liability for IRES of €903,447 thousand. The net positive impact amounted to €352,841 thousand. Changes to rates for local production tax (IRAP) Paragraph 5 of article 23 of the aforementioned Decree Law No. 98 of 6th July 2011 raises the rate for IRAP by 0.75% for banks and financial companies. The rate therefore rises from the current level of 3.9% (4.82% for banks which operate in regions which levy an additional tax) to 4.65% (5.57% for banks which operate in regions which levy an additional tax). The change applies from the tax year 2011 and involved the recognition in the consolidated accounts of higher current taxation of €16.2 million (€15.1 million net of non controlling interests) and an increase in deferred tax liabilities recognised as at 31st December 2010 of €6,267 thousand (€5,342 thousand net of non controlling interests). The amount relating to the increase in the deferred tax liabilities recognised in the balance sheet as at 31st December 2011, which relates mainly to deferred tax liabilities for intangible assets arising from the purchase price allocation, was considered non recurring for the purposes of the normalised income statement, while the recognition of higher current taxes was not subject to normalisation. Use of estimates and assumptions in the preparation of the consolidated financial statements Balance sheet items are measured according to the policies set out in subsequent Part A.2 “The main balance sheet items” of these accounting policies. Where it is impossible to measure items in the financial statements with precision, the application of those policies involves the use of estimates and assumptions which may even have a significant effect on the amounts recognised in the balance sheet and in the income statement. The use of reasonable estimates forms an essential part of the preparation of financial statements and we have listed here those items in the financial statements in which the use of estimates and assumptions is most significant: measurement of loans and receivables; measurement of financial assets not listed in active markets; measurement of intangible assets and equity investments; quantification of provisions for risks and charges; quantification of deferred taxes; definition of the depreciation and amortisation charges for property, equipment and investment property and intangible assets with finite useful lives. Furthermore, in this respect an adjustment may be made to an estimate following a change in the circumstances on which it was based or if new information is acquired or yet again on the basis of greater experience. A change in an estimate is applied prospectively and it therefore generates an impact on the income statement in the year in which it is made and, if it is the case, also in future years. No significant changes were made this financial year to the criteria previously employed for estimates in the financial statements as at 31st December 2010, except for the items described below. - Useful life of UBI Sistemi e Servizi centralised hardware The useful life of centralised hardware assets was revised during the year. These consist of data storage equipment and the relative servers. 248 The revision of the useful life of these fixed assets was supported by an analysis conducted by an external firm of experts and arises from the recognition that the economic useful life and therefore the related economic benefits resulting from their use has increased principally as a result of technological developments in the hardware and software equipment in question. Consequently, a useful life of 48 months was considered appropriate instead of 30 months, as estimated previously. The revised useful life was adopted prospectively and therefore for assets acquired from 2011 and it involved recognition of lower depreciation of €1.3 million for the year. - Useful life of UBI Sistemi e Servizi software The consortium company UBI Sistemi e Servizi possesses application software used exclusively by Banca 24-7 under a service contract. As a consequence of the extraordinary operation to be performed in the near future which will lead, eventually, to the retirement of that software, UBI Sistemi e Servizi adjusted its useful life accordingly and it recognised increased expense of approximately €3.5 million in its income statement for 2011. ******* Amendments to IAS 39 The process of the full revision of IAS 39, is still in progress and at present no documents issued by the IASB have been endorsed by the European Commission. With regard to the compulsory adoption of the new accounting rules, on 16th December 2011 the IASB issued the amendment “Mandatory Effective Date of IFRS 9 and Transition Disclosures”, which postponed the date in question until 1st January 2015, because the projects on the impairment of financial instruments measured at amortised cost and on hedge accounting (stages two and three of the full project to revise IAS 39) and also that on insurance contracts are still in progress. The definition of stage two “impairment” and the first part of stage three on “general hedge accounting” is expected in 2012, while the issue of an exposure draft on the second part of stage three “macro hedge accounting” is currently scheduled for the third quarter of 2012. 249 List of the main IFRS standards endorsed by the European Commission IAS/IFRS ACCOUNTING STANDARD IAS 1 Presentation of financial statements IAS 2 IAS 7 Inventories Statement of cash flows IAS 8 Accounting policies, changes in accounting estimates and errors IAS 10 Events after the reporting date IAS 11 Construction contracts IAS 12 Income taxes IAS 16 Property, plant and equipment IAS 17 Leases IAS 18 IAS 19 Revenues Employee benefits IAS 20 IAS 21 Accounting for government grants and disclosure of government assistance The effects of changes in foreign exchange rates IAS IAS IAS IAS IAS Borrowing costs Related party disclosures Retirement benefit plans Consolidated and separate financial statements Investments in associates 23 24 26 27 28 IAS 29 Financial reporting in hyperinflationary economies IAS 31 Interests in joint ventures IAS 32 Financial instruments: presentation IAS 33 Earnings per share IAS 34 Interim financial reporting IAS 36 Impairment of assets IAS 37 Provisions, contingent liabilities and contingent assets IAS 38 Intangible assets IAS 39 Financial instruments: recognition and measurement ENDORSEMENT Reg. 1274/2008, 53/2009, 70/2009, 494/2009, 243/2010, 149/2011 Reg. 1126/2008 Reg. 1126/2008, 1274/2008, 70/2009, 494/2009, 243/2010 Reg. 1126/2008, 1274/2008, 70/2009 Reg. 1126/2008, 1274/2008, 70/2009, 1142/2009 Reg. 1126/2008, 1274/2008 Reg. 1126/2008, 1274/2008, 495/2009 Reg. 1126/2008, 1274/2008, 70/2009, 495/2009 Reg. 1126/2008, 243/2010 Reg. 1126/2008, 69/2009 Reg. 1126/2008, 1274/2008, 70/2009 Reg. 1126/2008, 1274/2008, 70/2009 Reg. 1126/2008, 1274/2008, 69/2009, 494/2009, 149/2011 Reg. 1260/2008, 70/2009 Reg. 632/2010 Reg. 1126/2008 Reg. 494/2009 Reg. 1126/2008, 1274/2008, 70/2009, 494/2009, 495/2009, 149/2011 Reg. 1126/2008, 1274/2008, 70/2009 Reg. 1126/2008, 70/2009, 494/2009, 149/2011 Reg. 1126/2008, 1274/2008, 53/2009, 70/2009, 495/2009, 1293/2009, 149/2011 Reg. 1126/2008, 1274/2008, 495/2009 Reg. 1126/2008, 1274/2008, 70/2009, 495/2009, 149/2011 Reg. 1126/2008, 1274/2008, 69/2009, 70/2009, 495/2009, 243/2010 Reg. 1126/2008, 1274/2008, 495/2009 Reg. 1126/2008, 1274/2008, 70/2009, 495/2009, 243/2010 Reg. 1126/2008, 250 IAS 40 Investment property IAS 41 Agriculture IFRS 1 First-time adoption of international financial reporting standards IFRS 2 Share-based payment IFRS 3 IFRS 4 Business combinations Insurance contracts IFRS 5 Non-current assets held for sale and discontinued operations IFRS 6 IFRS 7 Exploration for and evaluation of mineral resources Financial instruments: disclosures IFRS 8 Operating segments SIC/IFRIC IFRIC 1 IFRIC 2 IFRIC 4 IFRIC 5 IFRIC 6 IFRIC 7 IFRIC 9 IFRIC 10 IFRIC 12 IFRIC 13 IFRIC 14 IFRIC 15 IFRIC 16 INTERPRETATION DOCUMENTS Changes in existing decommissioning, restoration and similar liabilities Members' shares in co-operative entities and similar instruments Determining whether an arrangement contains a lease 1274/2008, 53/2009, 70/2009, 494/2009, 495/2009, 824/2009, 839/2009, 1171/2009, 243/2010, 149/2011 Reg. 1126/2008, Reg. 1274/2008, Reg. 70/2009 Reg. 1126/2008, 1274/2008, 70/2009 Reg. 1126/2009, 1164/2009, 550/2010, 574/2010, 662/2010, 149/2011 Reg. 1126/2008, 1261/2008, 495/2009, 243/2010 , 244/2010 Reg. 495/2009, 149/2011 Reg. 1126/2008, 1274/2008, 1165/2009 Reg. 1126/2008, 1274/2008, 70/2009, 494/2009, 1142/2009, 243/2010 Reg. 1126/2008 Reg. 1126/2008, 1274/2008, 53/2009, 70/2009, 495/2009, 824/2009, 1165/2009, 574/2010, 149/2011 Reg. 1126/2008, 1274/2008, 243/2010, 632/2010 ENDORSEMENT Reg. 1126/2008, 1274/2008 Reg. 1126/2008, 53/2009 Reg. 1126/2008, 70/2009 Reg. 1126/2008 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds Liabilities arising from participating in a specific market - waste Reg. 1126/2008 electrical and electronic equipment Applying the restatement approach under IAS 29 “Financial Reg. 1126/2008, reporting in hyperinflationary economies” 1274/2008 Reg. 1126/2008, Reassessment of embedded derivatives 495/2009, 1171/2009, 243/2010 Reg. 1126/2008, Interim financial reporting and impairment 1274/2008 Reg. 254/2009 Service concession arrangements Customer loyalty programmes Prepayments of a minimum funding requirement Agreements for the Construction of Real Estate Reg. 1262/2008, 149/2011 Reg. 1263/2008, Reg. 1274/2008, 633/2010 Reg. 636/2009 IFRIC 17 Distributions of non-cash assets to owners Reg. 460/2009, Reg. 243/2010 Reg. 1142/2009 IFRIC 18 Transfers of assets from customers Reg. 1164/2009 IFRIC 19 Extinguishing financial liabilities with equity instruments Reg. 662/2010 Hedges of a net investment in a foreign operation 251 SIC 7 Introduction of the euro SIC 10 Government assistance – no specific relation to operating activities SIC 12 Consolidation – special purpose entities SIC 13 Jointly controlled entities – non-monetary contributions by venturers SIC 15 Operating leases – Incentives SIC 21 Income taxes – Recovery of revalued non-depreciable assets SIC 25 SIC 27 Income taxes – Changes in the tax status of an enterprise or its shareholders Evaluating the substance of transactions in the legal form of a lease SIC 29 Service concession arrangements: disclosures SIC 31 Revenue – Barter transactions involving advertising services SIC 32 Intangible assets – Website costs Reg. 1126/2008, 1274/2008, 494/2009 Reg. 1126/2008, 1274/2008 Reg. 1126/2008 Reg. 1126/2008, 1274/2008 Reg. 1126/2008, 1274/2008 Reg. 1126/2008 Reg. 1126/2008, 1274/2008 Reg. 1126/2008 Reg. 1126/2008, 1274/2008, 70/2009 Reg. 1126/2008 Reg. 1126/2008, 1274/2008 252 A.2 – THE MAIN ITEMS IN THE FINANCIAL STATEMENTS 1. Financial assets and liabilities held for trading and financial assets and liabilities at fair value This category includes: 1.1. Definition of financial assets and liabilities held for trading A financial asset or liability is classified as held for trading (at fair value through profit or loss – FVPL) and is stated within either item 20 “Financial assets held for trading” or item 40 “Financial liabilities held for trading”, if it is: acquired or incurred for sale or repurchase in the short term; part of a portfolio of identified financial instruments which are managed together and for which there is evidence of a recent and effective strategy of short term profit taking; a derivative (except for derivatives designated and effective as a hedging instrument – see the relative section below). 1.1.1. Derivative financial instruments A “derivative” is defined as a financial instrument or other contract with the following characteristics: its value changes in response to the change in an interest rate, in the price of a financial instrument, in a commodity price, in a foreign currency exchange rate, in a price, interest rate or credit rating index, or credit worthiness index or other specific variable; it requires no initial investment, or a net initial investment that is smaller than would be required for other types of contract from which a similar response to changes in market factors would be expected; it is settled at a future date. The UBI Group holds derivative financial instruments for both trading and for hedging purposes (see the relative section below for information on the latter). 1.1.2. Embedded derivative financial instruments An "embedded derivative financial instrument" is defined as a component of a hybrid (combined) instrument which also includes a “host” non derivative contract such that some of the cash flows of the combined instrument behave in a way similarly to the derivative as a stand-alone instrument. The embedded derivative is separated from the host contract and treated in the accounts as a stand-alone derivative if and only if: the economic risks and characteristics of the embedded derivative are not closely related to the economic risks and characteristics of the host contract; a separate instrument with the same conditions as the embedded derivative would satisfy the definition of a derivative; the hybrid (combined) instrument is not recognised within financial assets or liabilities held for trading. 253 1.2. Definition of financial assets and liabilities at fair value Financial assets and liabilities may be designated on initial recognition under “financial assets and liabilities at fair value” and recorded under items 30 “Financial assets at fair value” and 50 “Financial liabilities at fair value”. A financial asset/liability is designated at fair value through profit or loss on initial recognition only when: a) it is a hybrid contract containing one or more embedded derivatives and the embedded derivative significantly alters the cash flows that would otherwise be generated by the contract; b) the designation at fair value through profit or loss allows better information to be provided because: it eliminates or considerably reduces an asymmetry in the valuation or in the recognition, which would otherwise result from the valuation of assets or liabilities or from recognition of the relative profits and losses on a different basis; or, a group of financial assets, financial liabilities or of both is managed and its performance is valued on the basis of its fair value according to a documented risk management procedure or investment strategy and the information on the group is provided internally on that basis to senior managers with strategic responsibilities. 1.3. Recognition criteria The financial instruments “Financial assets and liabilities held for trading and financial assets at fair value” are recognised at the time of settlement if they are debt or equity instruments; or, on the trade date if they are derivative contracts. Measurement on initial recognition is at cost considered to be the fair value of the instrument without considering any transaction costs or income directly attributable to the instruments themselves. 1.4. Measurement criteria Subsequent to initial recognition, the financial instruments in question are measured at fair value with changes recognised in the income statement within item 80 “Net trading income (loss)”, for assets/liabilities held for trading and within item 110 “Net income/loss on financial assets and liabilities at fair value” for financial assets/liabilities at fair value”. The measurement of the fair value of the assets and liabilities held in a trading portfolio is based on prices quoted on active markets or on internal valuation models which are generally used in financial practice as described in greater detail in Part A.3.2 of the Notes to the financial statements “Fair Value Hierarchy”. 1.5. Derecognition criteria “Financial assets and liabilities held for trading and financial assets at fair value” are derecognised in the accounts when the rights to the cash flows from the financial assets or liabilities expire or when the financial assets or liabilities are transferred with the substantial transfer of all the risks and rewards deriving from ownership of them. The result of the transfer of financial assets or liabilities held for trading is recognised in the income statement within item 80 “Trading income (loss)”, while the result of the transfer of financial assets or liabilities at fair value is recognised within item 110 “Net income/loss on financial assets and liabilities at fair value”. 254 2. Available-for-sale financial assets 2.1 Definition Available-for-sale financial assets (AFS) are defined as non-derivative financial assets designated on initial recognition as such or that are not classified as: (1) loans and receivables (see section below); (2) financial investments held until maturity (see section below); (3) financial assets held for trading and measured at fair value recognised through profit or loss (see section below). These financial assets are recognised within item 40 “Available-for-sale financial assets”. 2.2 Recognition criteria Available-for-sale financial assets are recognised initially when, and only when, the company becomes a party in the contract clauses of the instrument and that is on the date of settlement, at fair value which generally coincides with the cost of them. This value includes costs or income directly connected with the instruments themselves. The recognition of available-for-sale financial assets may result also from the reclassification out of “held-to-maturity investments” or, but only and only in rare circumstances and in any case only if the asset is no longer held for sale or repurchase in the short term, out of “financial assets held for trading”; in this case the recognition value is the same as the fair value at the moment of reclassification 2.3 Measurement criteria Subsequent to initial recognition, available-for-sale financial assets continue to be recognised at fair value with interest (resulting from application of the amortised cost) recognised through profit or loss and changes in fair value recognised in equity within item 140 “Fair value reserves”, except for losses due to impairment, until the financial asset is derecognised, at which time the profit or loss previously recognised in equity must be recognised through profit or loss. Equity instruments for which the fair value cannot be reliably measured according to the methods described are recognised at cost. The measurement of the fair value of available-for-sale financial assets is based on the prices quoted on active markets or on internal measurement models which are generally used in financial practice as described in greater detail in Part A.3.2 of the Notes to the financial statements “Fair Value Hierarchy”. At the end of each financial year or interim reporting period, objective evidence of impaired value is assessed, which in the case of equity instruments is also held to be significant or prolonged. As concerns the significance of the impairment, significant indications of impairment exist where the market value of an equity instrument is less than 35% of its historical cost of acquisition. In this case impairment is recognised through profit or loss without further analysis. If the impairment is less then it is recognised only if the valuation of the instrument performed on the basis of its fundamentals does not confirm the soundness of the company and that is its earning prospects. As concerns the permanence of the impairment, it is defined as prolonged when the fair value remains below its historical cost of purchase for a period of longer than 18 months. In this case the impairment is recognised through profit or loss without further analysis. If the fair value continues to remain below its historical purchase cost for periods shorter than 18 months, then the impairment to be recognised through profit or loss is determined by considering, amongst other things, whether the impairment is attributable to general negative 255 performance by stock markets rather than to the specific performance of the individual counterparty. If there is permanent impairment, the cumulative change, including that previously recognised in equity under the aforementioned item, is recognised directly in the income statement within item 130 “net impairment losses on b) available-for-sale financial assets”. Permanent impairment loss is recognised when the acquisition cost (net of any repayments of principal and amortisation) of an available-for-sale financial asset exceeds its recoverable amount. Any recoveries of value, which are only possible when the causes of the original permanent impairment no longer exist are treated as follows: if they relate to investments in equity instruments, then with a balancing entry directly in the equity reserve; if they relate to investments in debt instruments, they are recognised in the income statement within item 130 “Net impairment losses on b) available-for-sale financial assets”. The amount of the reversal of the impairment loss may not in any case exceed the amortised cost which, in the absence of previous value adjustments, the instrument would have had at that time. Because the UBI Group applies IAS 34 “Interim financial reporting” to its half year interim reports with consequent identification of a half year “interim period”, any impairment incurring is recognised historically at the end of the half year. 2.4 Derecognition criteria Available-for-sale financial assets are derecognised in the accounts when the contractual rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and benefits deriving from ownership of them. The result of the disposal of available-for-sale financial assets is recognised in the income statement within item 100 “Income/loss from the disposal or repurchase of b) available for sale financial assets”. Upon derecognition any corresponding amount of what was previously recognised in shareholders’ equity under 140 “Fair value reserves” is written off against the income statement. 256 3. Held-to-maturity investments 3.1 Definition Held-to-maturity investments (HTM) are defined as non derivative financial assets with fixed or determinable payments and fixed maturity that a company intends and is able to hold to maturity. Exception is made for those: (a) held for trading and those designated upon initial recognition at fair value through profit or loss (see previous section); (b) designated as available for sale (see previous section); (c) which satisfy the definition of loans and receivables (see section below). When annual and interim reports are prepared the intention and ability to hold financial assets until maturity is assessed. The assets in question are recognised under item 50 “Held-to-maturity investments”. 3.2 Recognition criteria Held-to-maturity investments are recognised initially when, and only when, the company becomes a party in the contract clauses of the instrument and that is on the date of settlement, measured at cost inclusive of any costs and income directly attributable to it. If the recognition of assets in this category is the result of the reclassification out of “available-forsale financial assets” or, but only and only in rare circumstances if the asset is no longer held for sale or repurchase in the short term, out of the “financial assets held for trading”, the fair value of the assets as measured at the time of the reclassification is taken as the new measure of the amortised cost of the assets. 3.3 Measurement criteria Held-to-maturity investments are valued at amortised cost using the criteria of the effective interest rate (see the section below “loans and receivables” for a definition). The result of the application of this method is recognised in the income statement in the item 10 “Interest and similar income”. When annual financial statements or interim reports are prepared objective evidence of the existence of an impairment of the value of the assets is assessed. If there is permanent impairment, the difference between the recognised value and the present value of expected future cash flows discounted at the original effective interest rate is included in the income statement under the item 130 “Net impairment losses on c) held-to-maturity investments”. Any reversal of impairment losses recorded, should the cause that gave rise to the previous recognition of impairment loss no longer exist, are recognised under the same item in the income statement. The fair value of held-to-maturity investments is measured for disclosure purposes or where effective currency or credit risk hedges exist (in relation to the risk hedged) and it is estimated as described in greater detail in Part A.3.2 of the Notes to the financial statements “Fair Value Hierarchy”. 257 3.4 Derecognition criteria Held-to-maturity investments are derecognised when the rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and rewards deriving from ownership of them The result of the disposal of held-tomaturity financial assets is recognised in the income statement under the item 100 “Income/loss from disposal or repurchase of c) held-to-maturity investments”. 4. Loans and receivables 4.1 Definition Loans and receivables (L&R) are defined as non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The following are exceptions: (a) those which it is intended to sell immediately or in the short term, that are classified as held for trading and those that may have been designated on initial recognition as at fair value through profit or loss; (b) those designated upon initial recognition as available for sale; (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration; in this case they are classified as available-for-sale. Loans and receivables are recognised under the items 60 “Loans to banks” and 70 “Loans to customers”. 4.2 Recognition criteria Loans and receivables are initially recognised when the company becomes part of a loan contract, which is to say when the creditor acquires the right to the payment of the sums agreed in the contract. That moment corresponds to the date on which the loan is granted. Recognition in this category may result also from the reclassification out of “available-for-sale financial assets” or, but only and only in rare circumstances if the asset is no longer held for sale or repurchase in the short term, out of “financial assets held for trading”. The amount initially recognised is that of the fair value of the financial instrument which is the same as the amount granted inclusive of costs or income directly attributable to it and determinable from the outset, independently of when they are paid. The amount of the initial recognition does not include all those expenses that are reimbursed by the debtor counterparty or that are attributable to internal expenses of an administrative character. If the recognition is the result of reclassification, the fair value of the asset recognised at the time of the reclassification is taken as the new measure of the amortised cost of the assets. For loans not granted under market conditions, the initial fair value is calculated by using special measurement techniques described below; in these circumstances the difference between the fair value that is calculated and the amount granted is included directly in the income statement within the item interest. Contango and repo agreements with the obligation or right to repurchase or resell at term are recognised as funding or lending transactions. For transactions with a spot sale and forward repurchase, the spot cash received is recognised in the accounts as borrowings while the spot purchase transactions with forward resale are recognised as lending for the spot amount paid. 4.3 Measurement criteria Loans and receivables are measured at amortised cost using the criteria of effective interest. The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability was measured upon initial recognition net of principal 258 repayments, plus or minus the cumulative amortisation using the effective interest criterion on any difference between that initial amount and the maturity amount, and minus any reduction (arising from an impairment or uncollectability). The effective interest criterion is a method of calculating amortised cost of an asset or liability (or group of assets and liabilities) and of distributing the interest income or expense over its relative life. The effective interest rate is the rate that exactly discounts the estimated flow of future cash payments or receipts until the expected maturity of the financial instrument. To determine the effective interest rate, the cash flows must be estimated taking into consideration all the contractual conditions of the financial instrument (e.g. payment in advance, a purchase option or similar), but future impairments of the loan are not considered. The computation includes all fees and basis points paid or received between parties to the contract which are integral parts of the effective interest, the transaction costs and all other premiums or discounts. At each reporting date or when interim reports are prepared, any objective evidence that a financial asset or group of financial assets has suffered impairment loss is assessed. This circumstance occurs when it is probable that a company may not be able to collect amounts due on the basis of the original contracted conditions or, for example, in the presence of: (a) significant financial difficulties of the issuer or debtor; (b) an infringement of the contract such as default or failure to pay interest or repay principal; (c) the lender, because of the economic or legal factors relating to the financial difficulties of the debtor, granting a concession to the latter which the lender would not otherwise have considered; (d) the probability of the beneficiary declaring procedures for loan restructuring; (e) the disappearance of an active market for that financial asset due to financial difficulties; (f) available data which indicate a substantial decrease in expected future cash flows for a similar group of financial assets since the time of the initial recognition of those assets, although the decrease cannot yet be identified with the single financial assets of the group. The measurement of non-performing loans (loans which, according to Bank of Italy definitions, are non performing, impaired, restructured and past due, including exposures in arrears for between 90 and 180 days secured by property mortgages) is performed on a case-by-case basis. The remaining loans are measured using collective statistical methods which group uniform classes of risk together. The method for calculating the impairment losses recognised on non-performing loans is based on discounting expected future cash flows for principal and interest, taking account of any guarantees attached to positions and of any advances received. The basic elements for determining the present value of cash flows are the identification of the estimated receipts, the relative maturity dates and the discount rate to apply. The amount of the loss is equal to the difference between the recognised value of the asset and the present value of expected future cash flows, discounted at the original effective interest rate. The measurement of performing loans relates to asset portfolios for which no objective evidence of impairment exists and which are therefore valued collectively. Percentage rates of loss calculated from historical data series are applied to the estimated cash flows from the assets, grouped into uniform classes with similar characteristics in terms of credit risk for the network banks of the Group, according to Basel 2 regulations, to which appropriate corrective factors are applied to give a measurement consistent with the relative accounting standard. If a loan is subject to individual measurement and shows no objective impairment loss, it is placed in a class of financial assets with similar credit risk characteristics and subjected to collective measurement. Permanent impairment that is found is immediately recognised in the income statement under the item 130 “Net impairment losses on a) loans and receivables” as are reversals of part or all of the impairment losses previously recognised. Reversals of impairment losses are recognised where there is an improvement in credit quality sufficient to provide reasonable certainty of prompt collection of the principal and the interest according to the original conditions of the 259 original loan contract, or in the presence of a progressive reversal of the present value calculated at the time of recognising the impairment loss. Where loans are measured on a collective basis, any upward value adjustments or reversals of impairment losses are recalculated as differences in relation to each performing loan at the measurement date. The fair value of medium and long-term loans and receivables is measured by considering future cash flows discounted at the replacement rate or the market rate existing at the measurement date and relating to a position with the same characteristics as the loan measured. The fair value is measured for all loans and receivables for information purposes only. For loans and receivables subject to effective hedging, the fair value is calculated in relation to the risk that is hedged for measurement purposes. 4.4 Derecognition criteria Loans and receivables are derecognised when the rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and rewards deriving from ownership of them. Otherwise loans and receivables continue to be recognised for an amount equal to the remaining involvement, even if legal title has been transferred to a third party. The assets in question are derecognised even when the Bank maintains the contractual right to receive cash flows from them, but when at the same time it has a contractual obligation to pay those cash flows to a third party. The profit or loss on the disposal of loans and receivables is recognised in the income statement within the item 100 “Income from the disposal or repurchase of a) loans and receivables”. 5. Hedging derivatives 5.1 Definition Hedging transactions are designed to neutralise potential losses on a specific item (or group of items) attributable to a determined risk, by means of the gains realised on another instrument or group of instruments if that particular risk should actually result in losses. The UBI Group uses the following type of hedging transactions, appropriately represented in the financial statements and described below: a fair value hedge: the objective is to offset adverse changes in the fair value of the asset or liability hedged; a cash flow hedge: the objective is to hedge against the exposure to variability in expected cash flows with respect to the initial expectations. Derivative contracts stipulated with external counterparties are designated as hedging instruments. 5.2 Recognition criteria As with all derivatives, derivative financial instruments used for hedging are initially recognised and subsequently measured at fair value and are classified in the balance sheet under assets within item 80 “Hedging derivatives” and under liabilities within item 60 “Hedging derivatives”. A relationship qualifies as a hedge and is appropriately represented in the financial statements if, and only if, all the following conditions are satisfied: 260 at the start of the hedging transaction the relationship is formally designated and documented, including the company’s risk management objective and strategy for undertaking the hedge. This documentation includes identification of the hedging instrument, the item or transaction hedged, the nature of the risk being hedged, and how the company will assess the hedging instrument's effectiveness in offsetting the exposures to changes in the fair value of the item hedged or in the cash flows attributable to the risk hedged; the hedging is expected to be highly effective; the planned transaction hedged, for hedging cash flows, is highly probable and presents an exposure to changes in cash flows that could have effects on the income statement; the effectiveness of the hedging can be reliably measured; the hedging is measured on an ongoing basis and is considered highly effective for all the financial years in which it was designated. 5.2.1 Methods for testing effectiveness A hedge relationship is judged effective, and as such is appropriately represented in the financial statements, if at its inception and during its life the changes in the fair value or cash flows of the hedged item attributable to the hedged risk are almost always completely offset by the changes in the fair value or cash flows of the hedging instrument. This conclusion is reached when the actual result falls within a range of between 80% and 125%. The effectiveness of hedging is tested at inception by means of a prospective test and when annual reports are prepared by means of a retrospective test; the outcome of the test justifies the application of hedging accounting because it demonstrates its expected effectiveness. Retrospective tests are conducted monthly on a cumulative basis where the objective is to measure the degree of effectiveness of the hedging in the reporting period and therefore to verify whether the hedging has actually been effective in the period. Derivative financial instruments that are considered hedges from a profit and loss viewpoint but which do not satisfy the requirements to be considered effective instruments for hedging are recognised under item 20 “Financial assets held for trading” or under item 40 “Financial liabilities held for trading” and the profits and losses under the corresponding item 80 “Trading income (loss)”. If the above tests do not confirm the effectiveness of the hedge, then if it is not derecognised, the derivative contract is reclassified within derivatives held for trading and the instrument hedged is again measured according to the criterion applied for its balance sheet classification. 5.3 Measurement criteria 5.3.1 Fair value hedging Fair value hedging is treated as follows: the profit or loss resulting from measuring a hedging instrument at fair value is included in the income statement under item 90 “Net hedging income (loss)”. the profit or loss on the item hedged attributable to the hedged risk adjusts the value in the accounts of the hedged item and is recognised immediately, regardless of the type of asset or liability hedged, in the income statement within the aforementioned item. Hedge accounting is discontinued prospectively in the following cases: 1. the hedging instrument expires or is sold, terminated, or exercised; 2. the hedge no longer meets the hedge accounting criteria described above; 3. the entity revokes the designation. In case 2, if the assets or liabilities hedged are valued at amortised cost, the higher or lower value resulting from valuing them at fair value as a result of the hedge becoming ineffective is recognised through profit or loss, according to the effective interest rate method prevailing at the time of revocation of hedge. 261 The methods used for measurement of the fair value of the risk hedged in the assets or liabilities hedged are described in the notes that comment on available-for-sale financial assets, loans and held-to-maturity investments. 5.3.2 Cash flow hedging When a derivative is designated as a hedge of exposure to changes in expected cash flows from an asset or liability in the balance sheet or a future transaction considered highly probable, the accounting treatment of the hedge is as follows: the profits or losses (from the valuation of the hedging derivative) attributable to the effective portion of the hedge are recognised in a special reserve in equity termed 140 “Fair value reserves the profits or losses (from measurement of the hedging derivative) attributable to the ineffective portion of the hedge are recognised directly in the income statement under item 90 “Net hedging income (loss)”; the asset or liability hedged is measured according to the class of asset or liability to which it belongs. If a future transaction occurs which involves recognising non-financial assets and liabilities, the corresponding profits or losses initially recognised under item 140 “Fair value reserves” are then transferred from that reserve and included as an initial cost of the asset or liability that is recognised If the future hedged transaction subsequently involves recognition of a financial asset or liability, the associated profits or losses that were originally recognised under the item 140 “Fair value reserves” are reclassified to the income statement in the same reporting period or periods during which the assets acquired or liabilities incurred have an effect on the income statement If a portion of the profits or losses recognised in the fair value reserve are not considered recoverable, it is reclassified into the income statement within item 80 “Net trading income (loss)”. In all cases other than those already described, the profits or losses initially recognised under the item 140 “Fair value reserves” are transferred to the income statement to reflect the time and manner in which the future transaction is recognised in the income statement An entity must discontinue hedge accounting prospectively in each of the following circumstances: (a) the hedging instrument expires or is sold, terminated, or exercised (for this purpose the replacement or exchange of one hedging instrument with another hedging instrument is not a conclusion or termination if that replacement or exchange forms part of an entity’s documented hedging strategy). In this case the total profit (or loss) on the hedging instrument continues to be recognised directly in equity until the reporting period in which the hedge became effective and it continues to be recognised separately until the programmed hedging transaction occurs; (b) the hedge no longer satisfies the criteria for hedge accounting. In this case the total profit or loss on the hedging instrument continues to be recognised directly in equity starting from the reporting period in which the hedge became effective and it continues to be recognised separately in equity until the programmed hedging transaction occurs; (c) it is no longer considered that the future transaction should occur, in which case any related total profit or loss on the hedging instrument recognised directly in equity starting from the reporting period in which the hedge became effective must be recognised through profit or loss; (d) the entity revokes the designation. For hedges of a programmed transaction, total profits or losses on the hedging instrument recognised directly in equity starting from the reporting period in which the hedge became effective continue to be recognised separately in equity until the programmed transaction occurs or it is expected that it will no longer occur. If it is expected that the transaction will no longer occur the total profit (or loss) that had been recognised directly in equity is transferred to the income statement. 262 5.3.3 Hedging portfolios of assets and liabilities Hedging of portfolios of assets and liabilities (“macrohedging”) and appropriate accounting treatment is possible after first: - identifying the portfolio to be hedged and dividing it by maturity dates; designating the risk to be hedged; identifying the interest rate risk to be hedged; designating the hedging instruments; determining the effectiveness. The portfolio for which the interest rate risk is hedged may contain both assets and liabilities. This portfolio is divided on the basis of expected maturity or repricing dates of interest rates after first analysing the structure of the cash flows. Changes in the fair value of the hedged instrument are recognised in the income statement under item 90 “Net hedging income (loss)” and in the balance sheet under item 90 “Fair value change in hedged financial assets” or under item 70 “Fair value change in hedged financial liabilities”. Changes occurring in the fair value of the hedging instrument are recognised in the income statement within item 90 “Net hedging income (loss)” and under assets in the balance sheet in item 80 “Hedging derivatives” or under liabilities side in item 60 “Hedging derivatives”. 6. Equity investments 6.1 Definition 6.1.1 Associates An “associate” is defined as a company in which at least 20% of the voting rights are held or over which the investing company exercises significant influence and which is neither a subsidiary nor a company subject to joint control by the investing company. Significant influence is the power to participate in the financial and operating policy decisions of the company invested in but not to control or have joint control of it. 6.1.2 Companies subject to joint control A “company subject to joint control” is defined as a company governed by a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. 6.2 Recognition criteria Equity investments in associates or joint ventures are recognised at cost of purchase plus any accessory costs. 263 6.3 Measurement criteria Investments in associates are valued using the equity method. Investments in companies subject to joint control are measured by adopting either the equity method or the proportionate method Any objective evidence that an equity investment has been subject to impairment is assessed as at each annual or interim reporting date. The recoverable amount is then calculated, considering the present value of the future cash flows which may be generated by the investment, including the final disposal value. If the recoverable amount calculated in this way is less than carrying value the difference is recognised in the income statement under 240 “Profits (losses) of equity investments (valued at equity)”. Any future reversals of impairment are also included in the item where the reasons for the original impairment no longer apply. 6.4 Derecognition criteria Equity investments are derecognised in the balance sheet when the contractual rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and rewards deriving from ownership of them. The result of the disposal on investments valued using the equity method recognised in the income statement under item 240 “Profits (losses) of equity investments (valued at equity)”; the result of the disposal of equity investments other than those valued using the equity method is recognised in the income statement under item 270 “Profits (losses) on the disposal of investments. 7. Property, equipment and investment property 7.1 Definition of assets for functional use “Assets for functional use” are defined as tangible assets possessed to be used for the purpose of carrying on a company’s business and where the use is planned to last longer than one year. Assets for functional use also include properties rented to employees, ex employees and their heirs, as well as works of art. 7.2 Definition of investment property “Investment property” is defined as properties held in order to earn rentals or for capital appreciation. As a consequence, investment property is to be distinguished from assets held for the use of the owner because they generate cash flows that are very different from the other assets held by the banking group. Finance lease contracts are also included within property, equipment and investment property (for functional use and held for investment) even if the legal title to the assets remains with the leasing company. 7.3 Recognition criteria 264 Tangible assets, functional and other, are initially recognised at cost (item 120 “Property, equipment and investment property”), inclusive of all costs directly connected with bringing the assets to working condition for the use of the assets and of purchase taxes and duties that are not recoverable This amount is subsequently increased to include expenses incurred from which it is expected future benefits will be obtained. The costs of ordinary maintenance are recognised in the income statement at the time at which they are incurred while extraordinary maintenance costs (improvements) from which future benefits are expected are capitalised by increasing the value of the relative asset. Improvements and expenses incurred to increase the value of leased assets from which future benefits are expected are recognised: – – under the most appropriate category of item 120, “Property, equipment and investment property” if they are independent and can be separately identified, whether they are leased assets the property of others or whether they are held under a financial leasing contract under item 120 “Property, equipment and investment property” if they are not independent and cannot be separately identified as an increase to the type of assets concerned if held by means of a financial leasing contract or under item 160 “Other assets” if they are held under an ordinary leasing contract The cost of property, equipment and investment property is recognised as an asset if, and only if: it is probable that the future economic benefits associated with the asset will flow to the enterprise; the cost of the asset can be reliably determined. 7.4 Measurement criteria Subsequent to initial recognition, items of property, equipment and investment property for use in operations are recognised at cost, as defined above, net of accumulated depreciation and any permanent cumulative impairment. The depreciable amount, equal to cost less the residual value (i.e. the amount that would be normally obtained from disposal, less disposal costs, if the asset was normally in the conditions, including age, expected at the end of its useful life), should be allocated on a systematic basis over the asset's useful life by adopting the straight line method of depreciation. The useful life of an asset, which is reviewed periodically to detect any significant change in estimates compared to previous figures, is defined as: the period of time over which it is expected that the asset can be used by a company or, the quantity of products or similar units that a company expects to obtain from the use of the asset. Since property, equipment and investment property may consist of items with different useful lives, land, whether by itself or as part of the value of a building is not depreciated since it constitutes a fixed asset with an indefinite life. The value attributable to the land is deducted from the total value of a property for all buildings in proportion to the percentage of ownership. Buildings, on the other hand, are depreciated according to the criteria described above. Works of art are not depreciated because they generally increase in value over time. Depreciation of an asset starts when it is available for use and ceases when the asset is derecognised, which is the most recent of when it is classified as for sale and the date of derecognition. As a consequence depreciation does not stop when an asset is left idle or is no longer in use, unless the asset has already been fully depreciated. Improvements and expenses which increase the value are depreciated as follows: if they are independent and can be separately identified, according to the presumed useful life as described above; if they are not independent and cannot be separately identified, then if they are held under an ordinary leasing contract, over the shorter of the period in which the improvements and expenses can be used and that of the remaining life of the contract taking account of any 265 individual renewals, or if the assets are held under a finance lease contract, over the expected useful life of the assets concerned. The depreciation of improvements and expenses to increase the value of leased assets recognised under item 160 “Other assets” is recognised under item 220 “Other operating income (expense)”. At the end of each annual or interim reporting period the existence of indications that demonstrate the impairment of the value of an asset are assessed. The loss is determined by comparing the carrying amount of the item of property, equipment and investment property with the lower recoverable amount. The latter is the greater of the fair value, net of any sales costs, and the relative use value intended as the present value of future cash flows generated by the asset. The loss is immediately recognised in the income statement under item 200 “Net impairment losses on property, equipment and investment property”; the item also includes any future recovery in value if the causes of the original write down no longer exist 7.4.1 Definition and measurement of fair value 7.4.1.1 Properties The fair value is measured on the basis of the market value intended as meaning the best price at which the sale of a property might reasonably be expected to have been completed unconditionally for cash consideration on the measurement date, assuming: that the seller and the purchaser are independent counterparties; the intention of the seller to sell the assets is real; that there is a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the property and for the agreement of price and terms necessary to complete the sale; that the market trend, level of values and other circumstances were, at the date of signing the preliminary contract of purchase and sale, identical to those existing at the measurement date; that no account is taken of bids by purchasers for whom the property has characteristics which make it “outside the market range”. The procedures adopted for determining the market value are based on the following methods: the direct comparative or market method, based on a comparison between the asset in question and other similar assets subject to sale or currently on sale on the same market or competing markets; the income method based on the present value of potential market incomes for a similar property, obtained by capitalising the income at a market rate. The above methods are performed individually and the values obtained are appropriately averaged. 7.4.1.2 Determination of the value of land The method used for identifying the percentage of the market value attributable to land is based on an analysis of the location of the property, taking account of the type of construction, the state of conservation and the cost of rebuilding the entire building. 266 7.5 Property, equipment and investment property acquired through finance leases A finance lease is a contract that substantially transfers all the risks and rewards incident to ownership of an asset. Legal title may or may not be transferred at the end of the lease term. The beginning of the lease term is the date on which the lessee is authorised to exercise his right to use the asset leased and therefore corresponds to the date on which the lease is initially recognised. When the contract commences, the lessee recognises the financial lease transactions as assets and liabilities in its balance sheet at the fair value of the asset leased or, if lower, at the present value of the minimum payments due. To determine the present value of the minimum payments due, the discount rate used is the contractual interest rate implicit in the lease, if practicable, or else the lessee’s incremental borrowing rate is used. Any initial direct costs incurred by the lessee are added to the amount recognised for the asset. The minimum payments due are apportioned between the finance charges and the reduction of the residual liability. The former are allocated over the lease term so as to produce a constant rate of interest on the residual liability. The finance lease contract involves recognition of the depreciation charge for the asset leased and of the finance charges for each financial year. The depreciation policy used for assets acquired under finance leases is consistent with that adopted for owned assets. See the relative paragraph for a more detailed description. 7.6 Derecognition criteria Property, equipment and investment property are derecognised when they are disposed of or when they are permanently retired from use and no future economic benefits are expected from their disposal. Any gains or losses resulting from the retirement or disposal of the property, equipment and investment property, calculated as the difference between the net consideration on the sale and the carrying amount of the asset are recognised in the income statement under item 270 “Profit (loss) on the disposal of investments”. 8. Intangible assets 8.1 Definition An intangible asset is defined as an identifiable non-monetary asset without physical substance that is used in carrying on a company’s business. The asset is identifiable when: it is separable, which is to say capable of being separated and sold, transferred, licensed, rented, or exchanged; it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from other rights and obligations. An asset possesses the characteristic of being controlled by the company as a result of past events and the assumption that its use will cause economic benefits to flow to the enterprise. An entity has control over an asset if it has the power to obtain future economic benefits arising from the resource in question and may also limit access by others to those benefits. Future economic benefits arising from an intangible asset might include receipts from the sale of products or services, savings on costs or other benefits resulting from the use of the asset by an enterprise. 267 An intangible asset is recognised if, and only if: (a) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; (b) the cost of the asset can be measured reliably. The probability of future economic benefits occurring is assessed on the basis of reasonable and supportable assumptions that represent the best estimate of the economic conditions that will exist over the useful life of the asset. The degree of probability attaching to the flow of economic benefits attributable to the use of the asset is assessed on the basis of the sources of information available at the time of initial recognition, giving greater weight to external sources of information. In addition to goodwill and software used over several years, brands, core deposits, assets under management and assets under management recognised following the merger of the former BPU Banca and the former Banca Lombarda e Piemontese are also considered as intangible assets. 8.1.1 Intangible assets with a finite useful life A finite useful life is defined for an asset where it is possible to estimate a limit to the period over which the related economic benefits are expected to be produced. Intangible assets considered as having a finite useful life include software, core deposits, assets under management and brands. 8.1.2 Intangible assets with an indefinite useful life An indefinite useful life is defined for an asset where it is not possible to estimate a predictable limit to the period over which the asset is expected to generate economic benefits for the Bank. The attribution of an indefinite useful life to an asset does not arise from having already programmed future expenses which restore the standard level of performance of the asset over time and prolong its useful life. Intangible assets considered as having an indefinite useful life include goodwill. 8.2 Recognition criteria Assets recognised under the balance sheet item 130 “Intangible assets” are stated at cost and any expenses subsequent to the initial recognition are only capitalised if they are able to generate future economic benefits and only if those expenses can be reliably determined and attributed to the assets. The cost of an intangible asset includes: the purchase price including any non-recoverable taxes and duties on purchases after commercial discounts and bonuses have been deducted; any direct costs incurred in bringing the asset into use. 8.3 Measurement criteria Subsequent to initial recognition, intangible assets with a finite useful life are recognised at cost net of total amortisation and impairment losses that may have occurred. Amortisation is calculated on a systematic basis over the estimated useful life of the asset (see definition included in the section “Property, equipment and investment property ”) using the straight line method for all intangible assets with the exception of intangible assets relating to customer accounts recognised following the purchase price allocation resulting from the merger of the former BPU Banca and the former Banca Lombarda e Piemontese. In this case the amortisation is calculated using percentage rates of amortisation which represent the probability of the customer accounts ending over time. 268 Amortisation begins when the asset is available for use and ceases on the date on which the asset is derecognised. Intangible assets with an indefinite useful life (see goodwill as defined in the section below if positive) are recognised at cost net of any impairment loss resulting from periodic reviews when tests are performed to verify the appropriateness of the carrying amount of the assets (see section below). As a consequence amortisation of these assets is not calculated. No intangible assets arising from research (or from the research phase of an internal project) are recognised. Research expenses (or the research phase of an internal project) are recognised as expenses at the time at which they are incurred. An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, the following can be demonstrated: (a) the technical feasibility of completing the intangible asset so that it becomes available for sale or use; (b) the intention of the company to complete the intangible asset to use it or sell it; (c) the capacity of the company to use or sell the intangible asset. At the end of each annual or interim reporting period the existence of potential impairment of the value of intangible assets is assessed. The impairment is given by the difference between the carrying value of the assets and the recoverable amount and is recognised, as are any recoveries of value, under the item 210 “Net impairment losses on intangible assets”, with the exception of impairment losses on goodwill which are recognised under item 260 “Net impairment losses on goodwill”. 8.4 Goodwill Goodwill is defined as the difference between the purchase cost and the fair value of assets and liabilities acquired as part of a business combination which consists of the union of separate enterprises or businesses in a single entity required to prepare financial statements. The result of almost all business combinations consists in the fact that a sole entity, an acquirer, obtains control over one or more separate businesses of the acquiree. When an entity acquires a group of activities or net assets that do not constitute a business it allocates the cost of the group to individual assets and liabilities identified on the basis of their relative fair value at the date of acquisition. A business combination may give rise to a holding relationship between a parent company and a subsidiary in which the acquirer is the parent company and the acquiree is the subsidiary. All business combinations are accounted for using the purchase method of accounting. The purchase method involves the following steps: (a) identification of the acquirer (the acquirer is the combining enterprise that obtains control of the other combining enterprises or businesses); (b) determination of the acquisition date; (c) determination of the cost of the business combination, intended as the consideration transferred by the purchaser to the shareholders of the acquiree; (d) the allocation, as at the acquisition date, of the cost of the business combination by means of the recognition, classification and measurement of the identifiable assets acquired and the identifiable liabilities assumed; (e) recognition of any existing goodwill. Business combinations performed with subsidiary undertakings or with companies belonging to the same group are recognised on the basis of the significant economic substance of the transactions. In application of that principle, the goodwill arising from those transactions in the separate financial statements is recognised: 269 (a) within asset item 120 of the balance sheet if significant economic substance is found; (b) as a deduction from equity if it is not found. These transactions are eliminated from the consolidated financial statements and are therefore recognised solely as the relative costs incurred in relation to parties external to the Group. The goodwill recognised in the consolidated financial statements of the Group (“goodwill arising on consolidation” resulting from the elimination of the equity investments in subsidiaries) is the result of all the goodwill and positive consolidation differences relating to some of the companies controlled by the Parent. Any changes in the share of ownership which do not result in the loss or acquisition of control are to be considered, in compliance with IAS 27, as transactions between shareholders and as a consequence the relative effects must be recognised as either an increase or a decrease in equity. 8.4.1. Allocation of the cost of a business combination to assets and liabilities and contingent liabilities The acquirer: (a) recognises the goodwill acquired in a business combination as assets; (b) measures that goodwill at its cost to the extent that it is the excess of the cost of the business combination over the acquirer's share of interest in the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities. Goodwill acquired in a business combination represents a payment made by the acquirer in the expectation of receiving economic future benefits from the asset which cannot be identified individually and recognised separately. After initial recognition, the acquirer values the goodwill acquired in a business combination at the relative cost net of cumulative impairment. The goodwill acquired in a business combination must not be amortised. The acquirer tests the asset for impairment annually or more frequently if specific events or changed circumstances indicate that it may have suffered a reduction in value, according to the relative accounting standard. The standard states that an asset (including goodwill) has suffered an impairment loss when the amount recognised in the accounts exceeds the recoverable amount understood as the greater of the fair value, net of any sales expenses and its value in use, defined by paragraph 6 of IAS 36. In order to test for impairment, goodwill must be allocated to cash generating units or to groups of cash generating units, in observance of the maximum aggregation limit which cannot exceed the operating segment identified in accordance with IFRS 8. 8.4.2. Negative goodwill If the acquirer’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination the acquirer: (a) reviews the identification and measurement of the identifiable assets, liabilities and contingent liabilities of the acquiree and the determination of the cost of the business combination; (b) immediately recognises any excess existing after the new measurement in the income statement. 270 8.4.3. Derecognition criteria Intangible assets are derecognised following disposal or when no economic future benefit is expected from its use or disposal. 9. Liabilities, securities issued (and subordinated liabilities) The various forms of interbank and customer funding are recognised in the balance sheet items 10 “Due to banks”, 20 “Due to customers” and 30 “Securities issued”. These items also include liabilities recognised by a lessee in financial leasing operations. 9.1 Recognition criteria The liabilities in question are recognised in the balance sheet at the time when the funding is received or when the debt securities are issued. The amount initially recognised is the fair value, which is normally the same as either the consideration received or the issue price, inclusive of any additional expenses or income that are directly attributable to the transaction and determinable from the outset, regardless of when they are paid. The amount of the initial recognition does not include all those costs that are reimbursed by the creditor counterparty or that are attributable to internal costs of an administrative character. 9.2 Measurement criteria After initial recognition, medium to long-term financial liabilities are measured at amortised cost using the effective interest method as defined in previous paragraphs. Short-term liabilities, for which the time factor is insignificant, are measured at cost. 9.3 Derecognition criteria Financial liabilities are derecognised when they expire or are extinguished. The repurchase of own securities issued results in derecognition of the securities with the consequent redefinition of the liability for debt instruments issued. Any difference between the repurchase value of the own securities and the corresponding carrying value of the liabilities is recognised in the income statement under the item 100 “Income from the disposal or repurchase of d) financial liabilities”. Any subsequent re-issue of the securities previously subject to derecognition in the accounts constitutes a new issue for accounting purposes with the consequent recognition at the new issue price without any effect in the income statement. 10. Tax assets and liabilities Tax assets and liabilities are stated in the balance sheet under the items 140 “Tax assets” and 80 “Tax liabilities”. 271 10.1. Current tax assets and liabilities Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled; any excess compared to the amount due is recognised as an asset. Current tax liabilities (assets) for the current and prior years, are measured at the amount expected to be paid to/recovered from taxation authorities, using the enacted tax rates and tax laws in force. Current tax assets and liabilities are derecognised in the year in which the assets are realised or the liabilities are extinguished. 10.2. Deferred tax assets and liabilities Deferred tax liabilities are recognised for all taxable temporary differences unless the deferred tax liability arises from: goodwill for which amortisation is not deductible for tax purposes or the initial recognition of an asset or a liability in a transaction which: is not a business combination and at the time of the transaction, affects neither the accounting nor the taxable profit. Deferred tax assets are not calculated for higher values of assets for which the tax regime has been suspended relating to equity investments and to reserves for which the tax regime has been suspended because it is considered there are no reasonable grounds to assume they will be taxed in future. Deferred tax liabilities are recognised in the balance sheet item 80 “Tax liabilities b) deferred”. A deferred tax asset is recognised for all deductible temporary differences if it is probable that a taxable income will be used against which it will be possible to use the deductible temporary difference, unless the deferred tax asset arises from: negative goodwill which is treated as deferred income; the initial recognition of an asset or liability in a transaction which: is not a business combination and affects neither the accounting profit nor the taxable profit at the time of the transaction. assets for prepaid taxes are recognised under the balance sheet item 140 “Tax assets b) deferred. Deferred tax assets and deferred tax liabilities are subject to constant monitoring and are measured using the tax rates that it is expected will apply in the period in which the tax asset will be realised or the tax liability will be extinguished on the basis of the tax regulations established by laws currently in force. Deferred tax assets and deferred tax liabilities are derecognised in the accounts in the year in which: the temporary difference which gave rise to them becomes payable with regard to deferred tax liabilities or deductible with regard to deferred tax assets; the temporary difference which gave rise to them is no longer valid for tax purposes. Deferred tax assets and deferred liabilities are not discounted to present values nor offset one against the other. 272 11. Non-current assets and disposal groups held for sale – Liabilities associated with disposal groups held for sale Non-current assets and liabilities and groups of non-current assets and liabilities for which it is presumed that the carrying value will recovered by selling them rather than by continued use are classified respectively under items 150 “Non-current assets and disposal groups held for sale” and 90 “Liabilities associated with disposal groups held for sale”. In order to be classified within these items the assets or liabilities (or disposal groups) must be immediately available for sale and there must be active, concrete programmes to sell the assets or liabilities in the short term. These assets or liabilities are measured at the lower of the carrying amount and their fair value net of disposal costs. Profits and losses attributable to groups of assets or liabilities held for sale are recognised in the income statement under item 310 “Post-tax profit from discontinued operations Profits and losses attributable to individual assets held for disposal are recognised in the income statement under the most appropriate item. 12. Provisions for risks and charges 12.1. Definition A provision is defined as a liability of uncertain timing or amount. A contingent liability, however, is defined as: a possible obligation, the result of past events, the existence of which will only be confirmed by the occurrence or (non occurrence) of future events that are not totally under the control of the company; a present obligation that is the result of past events, but which is not recognised in the accounts because: it is improbable that financial resources will be needed to settle the obligation; the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognised in the accounts, but are only reported, unless they are considered a remote possibility. 12.2. Recognition criteria and measurement A provision is recognised if and only if: there is a present obligation (legal or implicit) that is the result of a past event, and it is probable that the use of resources suitable for producing economic benefits will be required to fulfil the obligation, and a reliable estimate can be made of the amount arising from fulfilment of the obligation. The amount recognised as a provision represents the best estimate of the expenditure required to settle the present obligation at the reporting date and reflects the risks and uncertainties that inevitably characterise a number of facts and circumstances. The amount of a provision is measured by the present value of the expenditure that it is assumed will be necessary to settle the obligation where the effect of the present value is a substantial aspect. Future events that 273 might affect the amount required to settle the obligation are only taken into consideration if there is sufficient objective evidence that they will occur. Provisions made for risks and charges include those for the risk attaching to any existing tax litigation. 12.3. Derecognition criteria The provision is reversed when it becomes improbable that the use of resources suitable for producing economic benefits will be required to settle the obligation. 13. Foreign currency transactions 13.1. Definition A foreign currency is a currency other than the functional currency of the entity, which is the currency of the primary economic environment in which an entity operates. 13.2. Recognition criteria A foreign currency transaction is recorded at the time of initial recognition in the functional currency applying the spot exchange rate between the functional currency and the foreign currency ruling on the date of the transaction. 13.3. Measurement criteria At each reporting date: (a) foreign currency monetary amounts3 are translated using the closing rate; (b) non-monetary items4 measured at historical cost in foreign currency are translated using the exchange rate at the date of the transaction; (c) non-monetary items carried at fair value in a foreign currency are translated using the exchange rates that existed on the dates when the fair values were determined. Exchange rate differences arising from the settlement of monetary items, or from the translation of monetary items at rates different from those at which they were translated when initially recognised during the year or in previous financial statements, are recognised in the income statement for the period except for exchange rate differences arising on monetary items that form part of a net investment in a foreign operation. 3 4 “Monetary” items are defined as relating to determined sums in foreign currency, which is to say to assets and liabilities which must be received or paid for a determined amount in foreign currency. The defining characteristic of a monetary item is the right to receive or an obligation to pay a set or calculable number of foreign currency units. See the note on “monetary” items for the contrary. 274 Exchange rate differences arising from a monetary item that forms part of a net investment in a foreign operation of an entity that prepares financial statements are recognised in the income statement of the separate company financial statements of the entity that prepares the financial statements or the separate company financial statements of the foreign operation. These exchange rate differences in the financial statements that include the foreign operation (e.g. in the consolidated accounts when the foreign operation is a subsidiary) are initially recognised as a separate component in equity and are recognised in the income statement at the time of the disposal of the net investment. When a profit or loss on a non-monetary item is recognised directly in equity, each change in that profit or loss is also recognised directly in equity. However, when a profit or loss on a nonmonetary item is recognised in the income statement each change in that profit or loss is recognised in the income statement. The financial statements of foreign subsidiaries and associates which employ an accounting currency that is different from that of the Parent are translated using the exchange rates ruling at the reporting date 14. Other information 14.1 Treasury shares Treasury shares if present in the UBI Group portfolio are deducted from equity. No profit or loss arising from the purchase, sale, issue or cancellation of treasury shares is recognised in the income statement. The differences between the purchase and sale price arising from these transactions are recorded in equity reserves. 14.2 Provisions for guarantees granted and commitments Provisions made on a case-by-case and collective basis to estimate possible payments to be made connected with the assumption of credit risks attaching to guarantees granted and commitments assumed are calculated by applying the same criteria as that reported for loans. These provisions are recognised within the item 100 “Other liabilities” against the item in the income statement 130d “Net impairment losses on: other financial transactions”. 14.3 Employee benefits 14.3.1 Definition Employee benefits are defined as all forms of consideration given by a company in exchange for services rendered by employees. Employee benefits can be classified as follows: short-term employee benefits (not including benefits due to employees for severance payments and benefits paid in the form of equity instruments) due entirely within twelve months after the service is rendered by employees; post-employment benefits due after the contract of employment has terminated; post-employment benefit plans subsequent to the termination of the employment contract and that is agreements whereby the company provides benefits subsequent to the termination of the employment contract; long-term benefits, other than the previous, due entirely within the twelve months subsequent to the end of the financial year in which employee rendered the relative service. 275 14.3.2 Post-employment benefits and defined benefit plans 14.3.2.1 Recognition criteria Following the reform of supplementary pensions pursuant to Legislative Decree No. 252/2005, portions of post-employment benefit funds maturing from 1st January 2007 constitute a “defined benefit plan”. The liability relating to those portions is measured on the basis of the contributions due without the application of any actuarial methods. However, post-employment benefits maturing up until 31st December 2006 continue to constitute a “post employment benefit” belonging to the “defined benefit plan” series and as such require the amount of the obligation to be determined on an actuarial basis and to be discounted to present values because the debt may be extinguished a long time after the employees have rendered the relative service. The amount is accounted for as a liability amounting to: (a) the present value of the defined benefit obligation as at the reporting date; (b) plus any actuarial gains (less any actuarial losses) recognised in a separate reserve in equity; (c) less any pension costs relating to past service rendered not yet recognised; (d) less the fair value at the reporting date of any assets at the service of the plan. 14.3.2.2 Measurement criteria As concerns the accounting treatment for actuarial gains/losses, the UBI Group has opted for direct recognition of these items within fair value reserves in equity. “Actuarial gains/losses” comprise adjustments arising from the reformulation of previous actuarial assumptions as a result of actual experience or from changes in the actuarial assumptions themselves. The “Projected Unit Credit Method” is used to calculate the present value. This considers each single period of service as giving rise to an additional unit of severance payment and therefore measures each unit separately to arrive at the final obligation. This additional unit is obtained by dividing the total expected service by the number of years that have passed from the time service commenced until the expected payment date. Application of the method involves making projections of future payments based on historical analysis of statistics and of the demographic curve and discounting these flows on the basis of market interest rates. The rate used for discounting to present value is calculated as the average of the swap, bid and ask rates at the measurement date appropriately interpolated for intermediate maturity dates. 14.3.3 Stock Option/Stock granting Stock option and stock granting plans are defined as personnel remuneration schemes where the service rendered by an employee (or a third party) is remunerated by using equity instruments (including options on shares). The cost of these transactions is measured at the fair value of equity instruments granted and is recognised in the income statement under item 180 “Administrative expenses a) personnel expenses” on a straight line basis over the original life of the plan The fair value determined relates to the equity instruments granted at the time of grant and takes account of market prices, if available, and the terms and conditions upon which the instruments were granted. 276 14.4 Segment reporting Segment reporting is defined as the manner in which financial information on a company is reported by operating segment. An operating segment is intended as a component of an entity: that engages in business activities that generate revenues and expenses; whose operating results are reviewed regularly by the entity’s chief operating decision maker, to make decisions about the resources to be allocated to the segment and assess its performance; and for which discrete financial information is available. Segment reporting is based on elements that senior management uses to make operating decisions (a “management approach”) and consequently the identification of operating segments is performed on the basis of the current system of reporting to management which is based primarily on management analysis of legally recognised entities. Segment reporting is completed by information on the geographical areas in which revenues are produced and assets are held. 14.5 Revenues 14.5.1 Definition Revenues are the gross inflow of economic benefits resulting from business arising from the ordinary operating activities of a company when these inflows create an increase in equity other than an increase resulting from payments made by shareholders. 14.5.2 Recognition criteria Revenues are measured at the fair value of the consideration received or due and are recognised when they can be reliably estimated. The result of the rendering of services can be reliably estimated when the following conditions are met: the amount of revenue can be measured reliably; it is probable that the economic benefits arising from the transaction will flow to the company; the stage of completion of the operation as at the reporting date can be measured reliably; the costs incurred, or to be incurred, to complete the transaction can be measured reliably. Revenue recognised in return for services rendered is recognised by reference to the stage of completion of the transaction. Revenue is only recognised when it is probable that the economic benefits arising from the transaction will be enjoyed by the company. Nevertheless when the recoverability of an amount already included within revenues is uncertain, the amount not recoverable or the amount for which recovery is no longer probable is recognised as a cost instead of adjusting the revenue originally recognised. Revenue arising from the use by third parties of the company’s assets which generate interest or dividends are recognised when: it is probable that the economic benefits arising from the transaction will be received by the company; the amount of the revenue can be reliably measured. 277 Interest is recognised on an accruals basis that takes into account the effective yield of the asset. In detail: interest income includes the amortisation of any discounts, premiums or other differences between the initial carrying amount of a security and its value at maturity; arrears of interest that are considered recoverable are recognised in the item 10 “Interest and similar income”, but only the part considered recoverable. Dividends are recognised when shareholders acquire the right to receive payment. Expenses or revenues resulting from the sale or purchase of financial instruments, determined by the difference between the amount paid or received for the transaction and the fair value of the instrument are recognised in the income statement on initial recognition of the financial instrument when the fair value is determined: by making reference to current and observable market transactions in the same instrument; by using valuation techniques which use, as variables, only data from observable markets. 14.6 Expenses Expenses are recognised in the accounts at the time at which they are incurred while following the criteria of matching expenses to revenues that result directly and jointly from the same transactions or events. Expenses that cannot be associated with revenues are recognised immediately in the income statement. Expenses directly attributable to financial instruments measured at amortised cost and determinable from the outset, regardless of the time at which they are settled, are recognised in the income statement by applying the effective interest rate, a definition of which is given in the section “Loans and receivables”. Impairment losses are recognised through profit and loss in the year in which they are measured. 278 A.3 – INFORMATION ON FAIR VALUE A Information on fair value A.3.1 Transfers between portfolios The UBI Banca Group performed no reclassifications of financial asset portfolios as a result of changes in the purpose or use of those assets, during both the current and the previous financial year. A.3.2 Fair value hierarchy The fair value used for measuring financial instruments is determined on the basis of criteria, listed below, which involve the use of what are termed observable or unobservable inputs. Observable inputs are parameters developed on the basis of available market data and they reflect the assumptions that market participants should use when they price financial instruments. On the other hand, unobservable inputs are parameters for which market data are not available and which are therefore developed on the basis of the best available information on the assumptions that market participants should use when they price financial instruments. Fair value determined on the basis of level 1 inputs: The measurement is based on observable inputs, i.e. prices listed on active markets for identical financial instruments to which the entity can gain access on the valuation date of the instrument. A market is defined as active when the prices quoted reflect normal market transactions, are regularly and readily available and if those prices represent actual and regular market trading. Fair value determined on the basis of level 2 inputs: The measurement is performed using methods that are used if the instrument is not listed on an active market and is therefore based on inputs that are different from those of level one. The measurement of the financial instrument is based on prices inferred from market quotations for similar assets or by using measurement techniques for which all the significant factors – credit spreads and liquidity spreads – are inferred from observable market variables. Although this is the application of a measurement technique, there is basically no element of discretion in the resulting price, because the most important parameters used are drawn from markets and the calculation methods used replicate quotations existing on active markets. Fair value determined on the basis of level 3 inputs: The measurement is performed using methods which consist of measuring unlisted instruments by employing significant inputs not inferable from markets and which therefore involve the use of estimates and assumptions made by management. The choice of the method of measuring fair value is not optional, because the methods must be applied in hierarchical order. Level 1 Equity instruments quoted on regulated markets, bonds quoted on the EuroMot circuit and those for which prices that represent actual and regular market transactions continuously available from the main contribution platforms occurring on the basis of a normal reference period with price fluctuations over the last five days which occur at intervals considered normal are considered as quoted on an active market. Those derivatives for which a quotation on an active reference market (e.g. IDEM) are also considered as quoted, to the extent that the markets are considered highly liquid. The fair value of these instruments is calculated on the basis of the relative closing prices on the last day of the month on the markets on which they are quoted. 279 Level 2 Where no prices are available on active markets, the fair value of instruments is measured by using measurement models which make use of market inputs. The resulting measurement is therefore based on factors inferred from official quotations, essentially similar in terms of risk factors, by applying a determined method of calculation. With regard to derivatives, almost all the trading instruments consist of over the counter derivatives and they are therefore measured using internal models that use market inputs. The options implicit in structured bonds and in the respective hedging derivatives are measured using appropriate pricing models which make use of directly observable market inputs (e.g. interest rate curves, volatility matrices and correlations, exchange rates). The calculation methodologies used replicate the prices of financial instruments listed on active markets without making discretionary assumptions which might influence the final price. As concerns equity instruments recognised within the available-for-sale portfolio, these are classified as within level two if they are measured on the basis of measurement methods which consider transactions occurring in the instrument in a reasonable period of time with respect to the date of measurement and in some cases, by means of stock market multiples for comparable companies. Finally the “plain vanilla” bonds in issue and the “plain vanilla” component of structured bonds are valued by discounting future cash flows to present values. The curve used for subordinated issues is obtained by applying the UBI subordinated spread observed for transactions with a duration equal to the residual life of the bond to the risk free curve. The curve used for senior issues destined for institutional customers is the UBI EMTN curve. Finally the curve used to determine the fair value of issues subscribed by ordinary customers is obtained by applying the spreads observed in the last quarter for issues with a maturity equal to the residual life of individual bonds to the risk free curve. Level 3 Level three is defined as the fair value determined using measurement models which use inputs that are not directly observable on markets and which involve the use of estimates and assumptions by management. Complex OTC derivatives are measured using internal models that use implicit assumptions; the credit risk component is also considered explicitly for these. The remaining part of the equity instruments classified as available-for-sale are measured using methods based on an analysis of the fundamentals of the company in question and, as an alternative of last resort, at cost. It is necessary to use valuation models to measure the level three fair value of options with underlying equity instruments that involve the use of market inputs that are not directly observable and which involve the use of estimates and assumptions in the measurement. More specifically the measurement instruments are designed using appropriate calculation methods based on specific assumptions that regard: • the performance of future cash flows, affected by future events to which probabilities are assigned based on historical experience or on behavioural assumptions; • determined input parameters not observable on active markets which are estimated from financial instruments observable on the market but not identical to the instruments measured. Finally, with regard to bonds issued, these are recognised within level 3 and measured at cost if this correlates directly with the financing operation. 280 Information on the valuation models used for securities and derivatives The target instrument used for pricing securities and derivatives in the UBI Group is the software application Mxg2000 by Murex. This software takes account of all market factors in measuring the value of financial instruments. The majority of the market data is acquired through the information provider Reuters, partly in real time (i.e. prices, yield curves and exchange rates) and partly at preset times (ATM volatility for swaptions and ATM volatility and smile curves for caps and floors). The application is also fed “on demand” with a series of market parameters supplied by the provider Bloomberg: correlations, dividend yields, index and forex volatility. Fair value is calculated daily as follows: the market parameters acquired in real time by Mxg2000 (prices, yield curves and exchange rates) are crystallised at 4.45 p.m. and used as reference data for calculating the mark-to-market. The last update of the day for the volatilities of swaptions and caps/floors (and the other market data acquired on demand if necessary) is performed at 4.45 p.m.; at the end of the day closure (which occurs at 9.00 p.m.), a series of software procedures are performed which extract various information from Mxg2000 including the reference mark-to-market for the day. The pricing of unlisted financial assets is currently calculated using the software application Risk Watch by Algorithmics, before the full migration of Group portfolios onto the Mxg2000 Front Office target system takes place. For these instruments the future cash flows are discounted to present values using interest rates which take into account the specific nature of the issuer (credit spread). OTC derivatives on interest rates and exchange rates and derivatives used to hedge bonds (with interest rates and currencies as the underlying) are valued using the target software (Mxg2000). Values are measured for all contracts which can be priced using closed formula models. In detail, the main pricing models used in Mxg2000 for OTC derivatives are: Black Yield, Black Fwd, Black Swap Yield, Cox Fwd, Trinomial, Lnormal and CMS Convexity Analytical. Derivative instruments that are not managed in Murex, relating to embedded options in structured bonds issued and in the respective derivative hedges are valued using internal models (stochastic models with MonteCarlo simulations). Pricing for unlisted “plain vanilla” liabilities securities and the “plain vanilla” component of structured securities is currently calculated on the Front Office Mxg2000 target system. The pricing models employed for securities and derivatives are used continuously over time and are only modified when substantial market changes occur. 281 A.3.2.1 Accounting portfolios: distribution by fair value level 31.12.2011 Financial assets/liabilities measured at fair value Level 1 1. Financial assets held for trading 2. Financial assets at fair value 3. Available-for-sale financial assets 4. Hedging derivatives Total 1. Financial liabilities held for trading 31.12.2010 Level 2 Level 3 Level 1 Level 2 Level 3 2,149,230 635,890 87,297 2,038,701 584,841 109,209 104,846 - 21,328 116,208 - 31,078 6,911,316 1,029,653 98,740 8,874,363 1,296,198 82,058 - 1,090,498 - - 591,127 - 9,165,392 2,756,041 207,365 11,029,272 2,472,166 222,345 - 438,088 625,585 - 410,453 543,970 2. Financial liabilities at fair value - - - - - - 3. Hedging derivatives - 1,739,685 - - 1,228,056 - 438,088 2,365,270 - 410,453 1,772,026 - Total A.3.2.2 Annual changes in financial assets recognised at fair value (Level 3) FI NANCI AL ASSETS held fo r trading 1. Opening balances 2. Increases meas ured at fair value available-for-sale hed ges 109,209 9,587 31,078 1,776 82,058 34,249 - 2.1. Purchase s 2.2. Profits rec ognise d in: 2.2.1. Income stateme nt 2,276 - - - 4,395 1,290 - - - of which gains 2.2.2. Equity 2.3. Transfers from other leve ls 4,369 X 311 1,172 30,944 - 2.4. Other incre as es 752 X - 2,605 486 2,133 - 3. Decreases (31,499) (11,526) (17,567) - 3.1.Sales 3.2. Redemptions 3.3. Loss es rec ognise d in: (11,60 9) (5,89 3) (4,790) (3 ,004) (124) - 3.3.1. Income stateme nt - of which losse s 3.3.2. Equity (13,61 0) (13,61 0) X (6,736) (6,628) X (1 ,812) (1 ,812) (644) - 3.4. Transfers to othe r lev els 3.5. Other dec rease s 4. Closing balances (38 7) - (11 ,856) (127) - 87,297 21,328 98,740 - Within the increases, item 2.3 “transfers from other levels” includes the investment in ICBPI Istituto Centrale Banche Popolari (available-for-sale financial assets) transferred to level 3 in compliance with the methodology described in point A.3.3. The relative accrued interest is included in item 2.4 “other increases”. Within the decreases, item 3.4 “transfers to other levels” relates mainly to equity investments in Siteba SpA amounting to €1.5 million and in SSB amounting to €9.8 million. Losses recognised in the income statement include €12.2 million relating to Medinvest International Sca. A.3.2.2 Annual changes in financial liabilities recognised at fair value (level 3) No financial liabilities recognised at fair value level 3 exist in the UBI Group. 282 PART B – Notes to the consolidated balance sheet ASSETS SECTION 1 Cash and cash equivalents – Item 10 1.1 Cash and cash equivalents: composition 31/12/2011 a) Cash in hand b) Deposits with central banks Total 31/12/2010 625,835 625,835 609,040 609,040 SECTION 2 Financial assets held for trading – Item 20 2.1 Financial assets held for trading: composition by type 31/12/2011 Items/Amounts 31/12/2010 31/12/2011 L1 L2 L3 L1 31/12/2010 L2 L3 A. On-balance sheet assets 1. Debt instruments 2,135,752 84 - 2,135,836 1,964,319 11,013 - 1.1 Structured instruments 173 - - 173 8 2,792 - 2,800 1.2 Other debt instruments 2,135,579 84 - 2,135,663 1,964,311 8,221 - 1,972,532 176,940 2. Equity instruments 3. Units in O.I.C.R. (collective investment instruments) 4. Financing 12,811 - 85,850 98,661 72,856 2 104,082 447 101 1,447 1,995 512 54 1,601 2,167 - 38,939 - 64,171 - 64,171 4.1 Reverse repurchase agreements - - - 4.2 Other - 38,939 - Total A 1,975,332 2,149,010 39,124 87,297 38,939 38,939 2,275,431 2,037,687 - - 64,171 - - 64,171 75,240 105,683 2,218,610 B. Derivative instruments 1. Financial derivatives 1.1 for trading 220 596,766 - 596,986 1,014 509,601 3,526 514,141 220 596,766 - 596,986 1,014 504,659 3,526 509,199 1.2 connected with fair value options - - - - - 1.3 other - - - - - 4,942 - - - 4,942 2. Credit derivatives - - - - - - - - 2.1 for trading - - - - - - - - 2.2 connected with fair value options - - - - - - - - 2.3 other - - - - - - - - Total B Total (A+B) 220 596,766 - 596,986 1,014 509,601 3,526 514,141 2,149,230 635,890 87,297 2,872,417 2,038,701 584,841 109,209 2,732,751 Equity instruments also include equity investments held for merchant banking activity, performed mainly by Centrobanca Spa. As at 31.12.2010, item 1.2 “Other debt instruments – Level 2” included impaired assets consisting of bonds issued by Lehman Brothers for a nominal amount of €10 million recognised at 8.625% of the nominal amount. Those instruments were fully disposed of in the first quarter of 2011, with the realisation of a profit of approximately €1.6 million. Item 3 “OICR units (collective investment instruments)” relates exclusively to remaining investments in hedge funds. Item 4 “ Financing – Level 2” relates to salary backed loans of the subsidiary Prestitalia Spa to be sold to third parties. 283 2.2 Financial assets held for trading: composition by debtors/issuers 31/12/2011 31/12/2010 A. ASSETS 2,135,836 2,108,953 1. D e b t in s t ru m e n t s a ) Go ve rnm e nts a nd c e ntra l ba nks 7 7 7,377 35,394 b) Othe r public a utho ritie s c ) B a nks 1,975,332 1,906,508 19,499 33,423 a ) B a nks 98,661 2,598 176,940 5,400 b) Othe r is s ue rs : 96,063 171,540 d) Othe r is s ue rs 2 . E q u it y in s t ru m e n t s - 3,605 85,848 47,368 - no n-fina nc ia l c o m pa nie s 6,415 116,713 - o the r 3,800 3,854 1,995 2,167 38,939 - 64,171 - b) Othe r public a utho ritie s - - c ) B a nks - - d) Othe r 38,939 64,171 2,275,431 2,218,610 159,984 - ins ura nc e c o m pa nie s - fina nc ia l c o m pa nie s 3 . Un it s in O .I.C .R . ( c o lle c t iv e in v e s t m e n t in s t ru m e n t s ) 4 . F in a n c in g a ) Go ve rnm e nts a nd c e ntra l ba nks To ta l A B. DERIVATIVE INSTRUM ENTS a ) B a nks - fa ir va lue 72,409 b) C us to m e rs - - fa ir va lue 524,577 354,157 596,986 514,141 2,872,417 2,732,751 Total B Total (A+B) 2.3 Financial assets held for trading: annual changes C h a n g e s / Un d e rlyin g a s s e t s D e b t in s t ru m e n t s Un it s in O .I.C .R . E q uit y in s t ru m e n t s ( c o lle c t iv e i nv e s t me nt F in a n c in g To ta l i ns t rume nt s ) A . O p e nin g b a la n c e s B . Inc re a s e s B .1 P urc ha s e s B .2 P o s itive c ha nge s in fa ir va lue B .3 Othe r c ha nge s C . D e c re a s e s C .1 S a le s C .2 R e de m ptio ns C .3 Ne ga tive c ha nge s in fa ir va lue 1,9 7 5 ,3 3 2 17 6 ,9 4 0 2 ,16 7 6 4 ,17 1 2 ,2 18 ,6 10 2 3 ,7 14 ,7 10 9 7 ,4 0 2 459 3 8 ,9 3 9 2 3 ,8 5 1,5 10 23,176,857 89,311 367 38,939 21,760 4,358 19 - 26,137 516,093 3,733 73 - 519,899 ( 2 3 ,5 5 4 ,2 0 6 ) ( 17 5 ,6 8 1) ( 6 3 1) D . F in a l b a la n c e s ( 2 3 ,7 9 4 ,6 8 9 ) (22,371,111) (156,867) (401) (64,171) (22,592,550) (728,238) - (3) - (728,241) (19,838) (16,528) (225) - (36,591) - - - - - (435,019) (2,286) (2) - (437,307) C .4 Tra ns fe rs to o the r po rtfo lio s C .5 Othe r c ha nge s ( 6 4 ,17 1) 23,305,474 2 ,13 5 ,8 3 6 9 8 ,6 6 1 1,9 9 5 3 8 ,9 3 9 2 ,2 7 5 ,4 3 1 Within debt instruments, item B.3 “Other changes” (increases), the amount of €437.9 million relates to uncovered short positions existing at the end of the year. Similarly, item C.5, “Other changes” (decreases) includes an amount of €409.3 million relating to the total uncovered short positions existing at the end of the previous year. 284 SECTION 3 Financial assets at fair value –Item 30 3.1 Financial assets at fair value: composition by type 31/12/2011 Items/Amounts 1. Debt instruments 1.1 Structured instruments 1.2 Other debt instruments 31/12/2010 Total L1 Total L1 L2 L3 L2 L3 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 104,846 - 21,328 126,174 116,208 - 31,078 147,286 - - - - - - - - - - - - - - - - 4.2 Other Total 104,846 - 126,174 - - - - - 21,328 116,208 - 31,078 147,286 Cost 104,846 - 21,328 126,174 116,208 - 31,078 147,286 2. Equity instruments 3. Units in O.I.C.R. (collective investment instruments) 4. Financing 4.1 Structured : 103000O|1 – NOTA Level one investments consisted of a hedge fund of the company Tages Capital SGR. The amount shown for level three relates to the residual value of non Group hedge funds. Further information on this item is given at the foot of Table 7.1 in income statement Section 7 – “Net value change in financial assets/liabilities at fair value”, which may be consulted. 3.2 Financial assets at fair value: composition by debtors/issuers It e m s / A m o u n t s 3 1/ 12 / 2 0 11 3 1/ 12 / 2 0 10 a ) Go ve rnm e nts a nd c e ntra l ba nks - - b) Othe r public a utho ritie s - - c ) B a nks - - d) Othe r is s ue rs - - a ) B a nks - - b) Othe r is s ue rs : 1. D e b t in s t ru m e n t s 2 . E q u it y in s t ru m e n t s - - - ins ura nc e c o m pa nie s - - - fina nc ia l c o m pa nie s - - - no n-fina nc ia l c o m pa nie s - - - o the r - - 126,174 147,286 a ) Go ve rnm e nts a nd c e ntra l ba nks - - b) Othe r public a utho ritie s - - c ) B a nks - - d) Othe r - - 126,174 147,286 3 . Un it s in O .I.C .R . ( c o lle c t iv e in v e s t m e n t in s t ru m e n t s ) 4 . F in a n c in g To ta l 285 3.3. Financial assets at fair value: annual changes Debt instruments Equity instruments Units in O.I.C.R. (collective investment instruments) Financing Total A. Opening balances - - 147,286 - 147,286 B. Increases - - 656,146 - 656,146 B.1 Purchases - - 654,370 - 654,370 B.2 Positive changes in fair value - - 752 - 752 B.3 Other changes - - 1,024 - 1,024 C. Decreases - - (677,258) - (677,258) C.1 Sales - - (630,477) - (630,477) C.2 Redemptions - - (4,790) - (4,790) C.3 Negative changes in fair value - - (17,990) - (17,990) C.4 Other changes D. Final balances - - (24,001) - (24,001) - - 126,174 - 126,174 The majority of the amounts for purchases and sales relate to transactions performed during the year for investments and disposals of units in the funds of UBI Pramerica SGR. SECTION 4 Available-for-sale financial assets – Item 40 4.1 Available-for-sale financial assets: composition by type 31/12/2011 Items/Amounts L1 31/12/2010 Total L1 L2 L3 6,621,026 920,410 10,296 7,551,732 8,509,464 1,115,988 10,255 1.1 Structured instruments 73,426 - 3,773 77,199 177,191 - - 177,191 1.2 Other debt instruments 6,547,600 920,410 6,523 7,474,533 8,332,273 1,115,988 10,255 9,458,516 1. Debt instruments L2 L3 Total 9,635,707 2. Equity instruments 251,226 46,963 88,444 386,633 346,586 73,614 70,357 490,557 2.1 At fair value 251,226 46,937 54,467 352,630 346,586 73,588 46,008 466,182 - 26 33,977 34,003 - 26 24,349 24,375 39,064 62,280 - 101,344 18,313 106,596 - 124,909 - - - - - - 1,446 1,446 6,911,316 1,029,653 98,740 8,039,709 8,874,363 1,296,198 82,058 10,252,619 2.2 At cost 3. Units in O.I.C.R. (collective investment instruments) 4. Financing Total Equity instruments are recognised within “Level 3” if, for example, in the absence of a price quoted on an active market, their fair value is estimated by assuming the value at cost or the quota of the equity corresponding to the interest held. In consideration of the particular nature of the shareholding, the equity investment held by Banca Carime Spa in the Bank of Italy of approximately €422 thousand is recognised at cost. Amounts recognised at cost also include all the equity investments held by the Group for the purposes of a more solid presence on its local markets and for the development of commercial agreements. The units in O.I.C.R.s – Level 1 relate almost exclusively to investments in the Polis Portafoglio Immobiliare fund amounting to €12.4 million, to the Trackers EURSTOXX50 ETF amounting to €17.1 million and to the Azimut Dividend Premium Class A fund amounting to €9.5 million. The units classified within level two relate to investments in private equity funds. 286 4.2 Available-for-sale financial assets: composition by debtors/issuers It e m s / A m o u n t s 3 1/ 12 / 2 0 11 3 1/ 12 / 2 0 10 1. D e b t in s t ru m e n t s 7 ,5 5 1,7 3 2 9 ,6 3 5 ,7 0 7 a ) Go ve rnm e nts a nd c e ntra l ba nks 5,964,174 b) Othe r public a utho ritie s c ) B a nks d) Othe r is s ue rs 2 . E q u it y in s t ru m e n t s a ) B a nks b) Othe r is s ue rs : - ins ura nc e c o m pa nie s 7,779,641 - - 914,064 890,267 673,494 965,799 3 8 6 ,6 3 3 4 9 0 ,5 5 7 275,412 332,655 111,221 157,902 4,131 4,499 - fina nc ia l c o m pa nie s 14,877 54,758 - no n-fina nc ia l c o m pa nie s 91,579 95,883 - o the r 3 . Un it s in O .I.C .R . ( c o lle c t iv e in v e s t m e n t in s t ru m e n t s ) 4 . F in a n c in g 634 2,762 10 1,3 4 4 12 4 ,9 0 9 - 1,4 4 6 a ) Go ve rnm e nts a nd c e ntra l ba nks - - b) Othe r public a utho ritie s - - c ) B a nks - - d) Othe r - 1,446 To ta l 8 ,0 3 9 ,7 0 9 10 ,2 5 2 ,6 19 Equity instruments include shares acquired by the network banks following partial conversions of restructured loans. |1 - NOTA 4.3 Available-for-sale financial assets: hedged assets Items/Components 31/12/2011 31/12/2010 1. Financial assets subject to fair value specific hedge a) interest rate ris k 3,913,760 5,694,419 b) price risk - - c) currency risk - - d) credit risk - - - - a) interest rate ris k - - b) currency risk - - 3,913,760 5,694,419 e) multiple risks 2. Financial assets subject to cash flow specific hedge c) other Total Investments in available-for-sale financial assets (government securities – and other debt instruments) subject to specific fair value hedges on interest rate risk were decreased during the year. As summarised in section 5.1 of the part on the income statement, item 90 “Net hedging income”, the fair value changes in hedging contracts and the underlying securities led to the recognition of a net gain of €3.2 million. 287 4.4 Available-for-sale financial assets: annual changes Debt instruments Equity instruments Units in O.I.C.R. (collective investment instruments) Financing Total A. Opening balances 9,635,707 490,557 124,909 1,446 B. Increases 2,044,579 68,543 35,173 - 2,148,295 1,982,067 58,015 6,659 - 2,046,741 14,638 3,028 5,195 - 22,861 - 234 2,059 - 2,293 - recognised in the income statement - - - - - - recognised in equity - 234 2,059 - 2,293 B.1 Purchases B.2 Positive changes in fair value B.3 Reve rsal of impairment losses B.4 Transfers from other portfolios - - - - - 47,874 7,266 21,260 - 76,400 (4,128,554) (172,467) (58,738) (1,446) (4,361,205) (542,935) (22,358) (23,893) - (589,186) (2,595,261) (125) (16,509) - (2,611,895) B.5 Other changes C. Decreases C.1 Sales C.2 Redemptions C.3 Negative changes in fair value (949,864) (8,883) (6,840) - (965,587) (373) (119,733) (11,128) - (131,234) (373) (119,733) (8,076) - (128,182) - - (3,052) - (3,052) - - - - - (40,121) (21,368) (368) (1,446) (63,303) 7,551,732 386,633 101,344 - 8,039,709 C.4 Impairment losses - recognised in the income statement - recognised in equity C.5 Transfers to other portfolios C.6 Other changes D. Final balances 10,252,619 Purchases of debt instruments consisted mainly of investments in government securities (approximately €1.8 billion), while the remaining part consisted of purchases of bonds issued by major banks. Again with regard to debt instruments, the decrease in fair value was attributable to the serious economic situation on markets (especially in the last quarter of the year). The mark-tomarket recognition of instruments was performed in a separate fair value reserve in equity. Purchases of investments in equity instruments related almost totally to the subscription of the Intesa Sanpaolo S.p.A. share increase for €56.7 million, while sales mainly regarded the following: - London Stock Exchange Group amounting to €16.6 million; Hopa S.p.A. amounting to €2.7 million; Banca Cooperativa Valsabbina Scrl amounting to €1.5 million; Permicro amounting to €0.7 million. Impairment losses charged to the income statement relate mainly to shares held in Intesa Sanpaolo S.p.A., amounting to €112,542 thousand. The schedule below shows changes and the effects in the income statement of the shares held in Intesa Sanpaolo S.p.A.. amounts as at 31/12/2010 historical amounts number of shares unit price 145,022,912 cost 5.686 824,600 Subscription of share capital increase (June 2011) number of shares unit price 41,435,116 1.369 unit price fair value cost 56,725 2.0423 movements in reserves and in the income statement to 31/12/2010 reversal of share to reserve (gross of tax) recognition in the income statement (126,069) (36,807) 296,180 amounts as at 31/12/2011 new historical amounts number of shares unit price 186,458,028 4.727 cost 881,325 unit price fair value 1.2891 240,363 movements in reserves and in the income statement to 31/12/2011 fair value change of share in reserve (gross of tax) recognition in the income statement 0 (112,542) 288 Purchases of units of O.I.C.R.s consisted of investments in private equity funds made during the year. Impairment losses charged to the income statement regarded the Polis Portafoglio Immobiliare fund amounting to €4.3 million and other private equity funds amounting to €3.8 million. SECTION 5 Held-to-maturity investments – Item 50 5.1 Held-to-maturity investments: composition by type No held-to-maturity investments were recognised. 5.2. Held-to-maturity investments: debtors/issuers No items of this type exist in the UBI Group. 5.3 Held-to-maturity investments: hedged No items of this type exist in the UBI Group. 5.4 Held-to-maturity investments: annual changes No movements in the item occurred in 2011. Table 2: 105030O|1 - NOTA SECTION 6 Loans to banks – Item 60 6.1 Loans to banks: composition by type Type of transaction/Amounts A. Loans to central banks 1. Term deposits 2. Compulsory reserve requireme nt 3. Rev erse repurchase agreements 4. Other B. Loans to banks 1. Current accounts and deposits 2. Term deposits 3. Other loans 3.1 Reverse repurchase agree ments 3.2 Finance leases 3.3 Other 4. Debt instruments 31/12/2011 739,318 31/12/2010 739,508 - - 738,100 739,508 - - 1,218 - 5,444,682 2,380,844 2,516,230 1,161,396 455,701 466,445 1,329,819 753,003 534,373 988 98 165 795,348 751,850 1,142,932 - 4.1 Structured instruments - - 4.2 Other debt instruments 1,142,932 - Total (carrying amount) 6,184,000 3,120,352 Total (fair value) 6,184,350 3,120,509 Deteriorated loans to banks as at 31/12/2011 amounted to €48 thousand. Item 3.3.3 “Other loans - other” consists mainly of mortgages, cheques drawn on third parties and pooled financing. 289 6.2 Loans to banks: assets subject to specific hedging Type of transaction/Amounts 31/12/2011 31/12/2010 1. Loans subject to fair value specific hedge: a) interest rate risk 31,143 - c) currency risk d) credit risk - - e) multiple risks - - a) interest rate - - b) exchange rate c) expected transactions - - - - 31,143 - 2. Loans subject to cash flow specific hedge: d) other Total Loans to banks subject to specific hedges relate to a single without recourse sale in foreign currency, which matures in April 2012. 6.3 Finance leases minimum payments Duration deteriorated exposures gros s investment quota of principal of which secured remaining amount quota of interes t of which unsecured remaining amount on demand - - - - - - up to 3 months - 17 - 1 18 - between 3 months and 1 year - 52 - 1 53 - from 1 year to 5 years - 29 - - 29 - more than 5 years - - - - - - indeterminate maturity - - - - - - - 98 - 2 100 - total gross value SECTION 7 Loans to customers – Item 70 7.1 Loans to customers: composition by type 31/12/2011 Type of transaction/Amounts Performing 1. Current accounts 2. Reverse repurchase agreements 3. Long term loans 31/12/2010 Deteriorated Performing Deteriorated 11,755,970 1,151,331 12,656,534 923,859 - 323,597 1,067,391 - 53,065,825 3,172,375 51,431,308 2,512,658 4. Credit cards, personal loans and salary backed loans 5,320,840 206,948 6,200,764 144,009 5. Finance leases 7,948,943 937,571 8,821,521 769,279 6. Factoring 7. Other transactions 8. Debt instruments 3,137,443 62,427 2,971,751 16,946 11,048,930 748,232 14,097,107 749,846 1,000 208,076 1,000 51,118 8.1 Structured instruments 8,893 - 3,409 - 8.2 Other debt instruments 199,183 1,000 47,709 1,000 Total (carrying amount) 93,409,886 6,279,884 96,553,700 5,261,129 Total (fair value) 96,393,361 6,240,636 98,756,310 5,260,108 On the basis of Bank of Italy instructions, since 31st December 2009 deteriorated assets have included loans that have been past due and/or in arrears for more than 90 days backed by property mortgages, which amounted to €171.3 million. Reverse repurchase agreements amounting to €0.9 million were performed with Cassa di Compensazione e Garanzia (a central counterparty clearing house). Other transactions included a security deposit with the Cassa di Compensazione e Garanzia amounting to €458 million. Table 3: 107000O|1 - NOTA2_ASS 290 7.2 Loans to customers: composition by debtors/issuers 3 1/ 12 / 2 0 11 3 1/ 12 / 2 0 10 T yp e o f t ra n s a c t io n / A m o u n t s P e rf o rm in g 1. D e b t in s t ru m e n t s D e t e rio ra t e d 2 0 8 ,0 7 6 a ) Go ve rnm e nts b) Othe r public a utho ritie s c ) Othe r is s ue rs - no n-fina nc ia l c o m pa nie s - fina nc ia l c o m pa nie s P e rf o rm in g 1,0 0 0 D e t e rio ra t e d 5 1,118 1,0 0 0 - - - 7,637 - 8,026 - 200,439 1,000 43,092 1,000 1,256 - 5,524 - 199,183 1,000 37,568 1,000 - ins ura nc e c o m pa nie s - - - - - o the r - - - - 2 . F in a n c in g t o 9 3 ,2 0 1,8 10 6 ,2 7 8 ,8 8 4 9 6 ,5 0 2 ,5 8 2 5 ,2 6 0 ,12 9 a ) Go ve rnm e nts 180,989 - 91,716 1 b) Othe r public a utho ritie s 869,391 18,857 1,001,685 2,323 c ) Othe r - no n-fina nc ia l c o m pa nie s - fina nc ia l c o m pa nie s - ins ura nc e c o m pa nie s - o the r To ta l 92,151,430 6,260,027 95,409,181 5,257,805 52,452,519 4,506,570 55,995,639 3,958,314 4,418,276 94,053 4,981,460 68,283 134,419 197 124,449 112 35,146,216 1,659,207 34,307,633 1,231,096 9 3 ,4 0 9 ,8 8 6 6 ,2 7 9 ,8 8 4 9 6 ,5 5 3 ,7 0 0 5 ,2 6 1,12 9 7.3 Loans to customers: assets subject to specific hedging Type of trans action/Amounts 31/12/2011 31/12/2010 1. Loans subjec t to fair value specific hedge: a) interest rate ris k 640,551 370,600 c) currency risk - - d) credit risk - - e) multiple risks - - a) interest rate ris k - - b) currency risk - - c) other - - 640,551 370,600 2. Loans subjec t to cash flow specific he dge: Total 7.4 Finance leases minimum payments Duration deteriorated exposures gross investment quota of principal of which unsecured remaining amount of which secured quota of interest remaining amount on demand 83,293 341,649 - - - up to 3 months 10,597 274,581 14,634 78,243 352,824 between 3 months and 1 year - 29,746 772,030 50,294 219,315 991,345 from 1 year to 5 years 129,418 2,634,726 261,331 839,489 3,474,215 more than 5 years 279,447 3,701,878 832,828 871,521 4,573,399 indeterminate maturity 405,070 224,079 - - 224,079 - 937,571 7,948,943 1,159,087 2,008,568 9,615,862 - total Net loans to customers for finance leases, net of intercompany eliminations, totalled €8,886,514 thousand of which €937,571 thousand were “deteriorated assets” and €143,394 thousand “assets transferred not derecognised”. The lending portfolio for the finance leases of UBI leasing consisted of 73,971 contracts, composed as follows: - 71 % property sector; - 14 % machinery and equipment sector; - 7 % energy sector; 291 - 5 % auto sector; - 3 % aeronautical sector. The ten largest exposures had a total remaining value of €261,615,988. Indexing of €67,909 thousand was recognised during the year on lease instalments relating to floating rate contracts. SECTION 8 Hedging derivatives – Item 80 8.1 Hedging derivatives: composition by type of contract and underlying assets Type of derivative/Underlying assets 31/12/2011 31/12/2010 1,090,498 NOMINAL AMOUNT 27,975,915 - 591,127 1,010,954 26,887,383 - 560,918 - 79,544 1,088,532 - 30,209 - - - - - - - - - - - - - - - - - - - - 1) Fair value - - - - - - - - - - 2) Cash flow Total - 1,090,498 - 1,090,498 27,975,915 - 591,127 - 591,127 19,718,767 L1 A) Financial derivatives L2 L3 - 1,090,498 1) Fair value - 1,010,954 2) Cash flow - 79,544 3) Foreign investments - B) Credit derivatives Total - L1 L2 L3 591,127 NOMINAL AMOUNT 19,718,767 560,918 19,117,091 30,209 601,676 Total - 8.2 Hedging Derivatives: composition by portfolios hedged and type of hedge C a s h f lo w F a ir Va lu e S p e c if ic T ra n s a c t io n s / T yp e o f h e d g in g In t e re s t ra t e ris k 1. Ava ila ble -fo r-s a le fina nc ia l a s s e ts 2. Lo a ns a nd re c e iva ble s 3. He ld-to -m a turity inve s tm e nts X 4. P o rtfo lio X 5. Othe r tra ns a c tio ns To ta l a s s e ts C u rre n c y ris k C re d it ris k - - - - - X X X X X - X - X X - X - X X - X - X X - - - - - 409 - - - - 1,010,545 X X 1,0 10 ,5 4 5 X - X - X - M a c ro - h e d g e F o re ig n in v e s t m e n t s - 2. P o rtfo lio S p e c if ic M u lt ip le ris k s P ric e ris k 409 1. F ina nc ia l lia bilitie s T o t a l lia b ilit ie s M a c ro - h e d g e X - 1. Expe c te d tra ns a c tio ns X X X X X 2. P o rtfo lio o f fina nc ia l a s s e ts a nd lia bilitie s X X X X X 79,544 - X 7 9 ,5 4 4 X X - - - X X X X - X X - - X - X X X X - - 292 SECTION 9 Fair value change in hedged financial assets – Item 90 9.1 Fair value change in hedged assets: composition by portfolios hedged Fair value change in hedged ass ets/Group components 31/12/2011 31/12/2010 1. Positive changes 1.1 of specific portfolios: a) loans 704,869 429,073 704,869 429,073 - - - - b) available-for-sale assets 1.2 general 2. Negative changes 2.1 of specific portfolios - - a) loans - - b) available-for-sale assets - - 2.2 general Total - - 704,869 429,073 09000O|1 - NOTA 9.2 Assets of the banking group subject to interest rate risk macro hedge: composition Hedged assets 1. Loans 31/12/2011 31/12/2010 7,383,359 12,523,038 2. Available-for-sale assets - - 3. Portfolio - - 7,383,359 12,523,038 Total 293 SECTION 10 Equity investments – Item 100 10.1 Equity investments in companies subject to joint control (accounted for using the equity method) and in companies subject to significant influence: information on investments Nam e Headquarters Type of ownership Details of investment Investing company % held % of votes B. Companies UBI Banca Scpa 23.124% 1. Arca SGR Spa Milan Significant influence 2. Aviva Assicurazioni Vita Spa Milan Significant influence UBI Banca Scpa 49.999% 49.999% 3. Aviva Vita Spa Milan Significant influence UBI Banca Scpa 50.000% 50.000% 4. Capital Money Spa Milan Significant influence UBI Banca Scpa 20.671% 20.671% 5. Polis Fondi SGR Milan Significant influence UBI Banca Scpa 19.600% 19.600% 49.000% Banca Popo lare di Anco na Spa 3.584% 25.000% 6. Lo mbarda China Fund Management Co. Shenzen (China) Significant influence UBI Banca Scpa 49.000% 7. Lo mbarda Vita Spa Brescia Significant influence UBI Banca Scpa 40.000% 40.000% 8. Prisma Srl Milan Significant influence UBI Banca Scpa 20.000% 20.000% 9. SF Co nsulting Srl Mantua Significant influence UBI Banca Scpa 35.000% 35.000% 10. Sider Factor Spa Milan Significant influence UBI Factor Spa 27.000% 27.000% 11. Sofipo Fiduciarie Sa Lugano (Svizzera) Significant influence Banque de Depots et de Gestion Sa 30.000% 30.000% 12. SPF Studio Progetti Finanziari Srl Rome Significant influence Banca Popo lare di Anco na Spa 25.000% 25.000% 13. By You Spa Milan Significant influence UBI Banca Scpa 10.000% 20.000% 14. UBI Assicurazioni Spa Milan Significant influence UBI Banca Scpa 49.999% 49.999% 15. UFI Servizi Srl Rome Significant influence Prestitalia Spa 23.167% 23.167% The balance sheet as at 31st December 2011 includes equity-accounted investees only. The larger equity investments were subjected to impairment testing, in some cases using the average of the multiples of a sample of comparable companies, while in other cases the dividend discount model method was employed. Greater information is given here on the market values relating to the more significant equity investments recognised in the consolidated financial statements of the UBI Banca Group. Furthermore, the market value for the insurance companies Aviva Assicurazioni Vita Spa, Aviva Vita Spa and Lombarda Vita Spa was calculated on the basis of a sample of companies quoted on active European stock markets considering the multiple price/book value (P/BV) adjusted for non controlling interests and for intangible assets. The source for the amounts used was Bloomberg. The equity value was compared with the carrying amount of the equity investments in the consolidated financial statements. - Aviva Vita Assicurazioni Spa – the equity attributable to the Parent, amounting to €51.1 million, inclusive of 2011 profit for the year and also of a positive consolidation difference amounting to €2.6 million, compared to an equity value (pro rata) of €86.1 million; - Aviva Vita Assicurazioni Spa – the equity attributable to the Parent amounted to €102.3 million, inclusive of 2011 profit for the year, compared to an equity value (pro rata) of €162.7 million; - Lombarda Vita Spa – the equity attributable to the Parent, amounting to €121.7 million, inclusive of 2011 profit for the year and a positive consolidation difference amounting to €29.4 million, compared to an equity value (pro rata) of €160.0 million. The equity attributable to the Parent for UBI Assicurazioni Spa amounted to €37.3 million, inclusive of the profit for the year and a positive consolidation difference of €5.6 million, compared to an equity value (pro rata) of €72.9 million, calculated on the base of a development of the dividend discount model financial method, based on financial projections for the company over the period 2012-2014 and applying a solvency ratio of 125% of the required margin and a long-term growth rate of 2%. The equity attributable to the Parent for Arca SGR Spa amounted to €28 million, inclusive of profit for the year, compared to an equity value (pro rata) of €36.1 million, consistent with a liquidation value determined by the Board of Directors of Arca SGR for the purposes of the exercise of the right of withdrawal pursuant to Art. 2437 of Italian Civil Code, as described in Section 4 Part A of the notes to the financial statements. 294 For further details “Part A. Accounting policies – Section 3 – Consolidation scope and methods” of this report may be consulted. 10.2 Equity investments in companies subject to joint control and in companies subject to significant influence: accounting information Name Total assets Total revenues Profit (Loss) Consol idated carrying amount Equity A. Equity accounted investees 1. Arca SGR Spa 162,675 159,539 (3,748) 104,704 27,964 2. Aviva Assicurazioni Vita Spa 2,096,641 261,200 (4,500) 96,988 51,104 3. Aviva Vita Spa 4,132,700 656,600 13,100 204,683 102,392 7,981 11,264 35 3,650 1,572 4. Capital Money Spa 5. Lombarda China Fund Management Co. 6. Lombarda Vita Spa 14,544 5,293,856 8,755 1,086,305 (1,471) 12,524 6,137 11,268 230,810 121,690 7. Prisma Srl 1,264 1,025 41 198 32 8. SF Consulting Srl 7,916 8,554 151 707 247 47,847 2,552 763 4,121 1,113 3,023 763 2,513 754 988 1,039 644,733 196,974 9. Sider Factor Spa 10. Sofipo Fiduciarie Sa 11. SP F Studio P rogetti e Servizi Finanziari Srl 12. UBI Assicurazioni Spa 13. UFI Servizi Srl 14. Polis Fondi SGR Spa 15. By You Spa TOTAL 464 347 12,883 6,102 (99) 6,490 817 140 37 63,331 37,258 163 39 8,892 1,743 12,734 40,674 1,976 3,068 901 12,440,249 2,441,693 24,823 736,492 352,983 The fair value is not given because they are investments in companies that are not listed on active markets. 295 10.3 Annual changes in equity investments 31/12/2011 A Opening balances 31/12/2010 368,894 413,943 53,869 34,868 36,000 13,988 B.2 Reversals of impairment losses - - B.3 Revaluations - - 17,869 20,880 B Increases B.1 Purchases B.4 Other changes C Decreases (69,780) (79,917) C.1 Sales - (36,812) C.2 Impairment losses - - (69,780) (43,105) C.3 Other changes D Final balances 352,983 368,894 E Total revaluations - - F Total impairment losses - - The amount recognised on line B.1 “Purchases” represents increases in the share capital subscribed and paid up by the Parent for Lombarda Vita S.p.A. amounting to €16 million and for Aviva Vita S.p.A. amounting to €20 million. The amount recognised on line B.4 “Other changes” consists of the following: ‐ ‐ an amount of €3,726 thousand of which €132 thousand for positive exchange rate differences and €2,649 thousand due to the change from proportionate consolidation to equity method accounting for the companies Polis Fondi SGR S.p.A. and By You S.p.A. and other changes in reserves amounting to €934 thousands of euro; total profit for the period of €14,143 thousand. In detail: o Aviva Vita Spa €5,950 thousand o Lombarda Vita Spa €4,507 thousand o UBI Assicurazioni Spa €3,245 thousand The amount recognised on line C.3 “Other changes” consists of the following: ‐ ‐ ‐ dividends of €1,335 thousand; total losses for the period of €4,196 thousand, of which €2,388 thousand relating to Aviva Vita Assicurazioni SpA, €1,086 thousand to Arca SGR Spa and €721 thousand to Lombarda China Fund Management Co.; other decreases of €64,248 thousand relating almost totally to changes in the fair value reserves of Lombarda Vita Spa amounting to €58,068 thousand and to UBI Assicurazioni Spa amounting to €4,674 thousand. 10.4 Commitments relating to equity investments in subsidiaries Commitments relating to the possible exercise of options Banca Popolare Commercio e Industria/Banca Carime/Banca Popolare di Ancona – banc assurance agreement with the Aviva Group: this agreement between UBI Banca and Aviva involves three call options granted to UBI on equity investments in banks (BPCI, Carime and Popolare di Ancona) for which the trigger events are connected with the performance of the joint-venture or the termination of the distribution agreement or the exclusive distribution condition. If UBI fails to exercise the call options, Aviva will have the right from 30th September 296 2016 (from 1st January 2020 in the case of the investment in Popolare di Ancona), to exercise a put option on the same investments at a price equal to the fair value at the time of exercise. 10.5 Commitments relating to equity investments in companies subject to joint control Commitments connected with the possible payment of further tranches of the price Nothing to report. 10.6 Commitments relating to equity investments in companies subject to significant influence Commitments relating to the possible exercise of options Lombarda Vita Spa: as part of the renewal of life banc assurance agreements with the Cattolica Assicurazioni Group concluded on 30th September 2010, the options on the respective investments in the Lombarda Vita joint venture were reformulated with purchase options only, exercisable on the basis of the occurrence of predetermined conditions. Lombarda China Fund Management Company: the partnership agreement signed between UBI Banca and Goudu Securities Banca Ltd in the asset management sector, focused on the Chinese market, involves a series of intersecting put and call options which can be exercised if determined trigger events occur concerning the respective investment held in Lombarda China Fund Management. Recapitalisation commitments Aviva Vita Spa: on 13th February 2012, a shareholders meeting of Aviva Vita passed a resolution to increase the share capital by a total of €15 million (€7.5 million attributable to UBI Banca), in order to provide a more adequate solvency margin, which could be eroded by possible fluctuations in the prices of government securities held in portfolio. It granted the Board of Directors a mandate to request the payment if the solvency margin should fall below the stability threshold of 120%. 297 SECTION 11 Technical reserves of reinsurers – Item 110 No items of this type exist. SECTION 12 Property, equipment and investment property – Item 120 12.1 Property, equipment and investment property: composition of assets measured at cost Assets/amounts 31/12/2011 31/12/2010 A. Assets used in operations 1.1 owned a) land b) buildings c) furnishings d) electronic equipment e) other 1.2 acquired through finance leases a) land b) buildings c) furnishings d) electronic equipment e) other Total A B. Assets held for investment 2.1 owned a) land b) buildings 2.2 acquired through finance leases a) land b) buildings Total B Total (A+B) 1,822,888 875,524 774,081 45,265 56,909 71,109 1,891,547 884,296 814,977 50,393 62,646 79,235 40,127 20,914 44,075 22,123 19,143 70 21,518 203 113 118 1,863,015 1,935,622 182,520 109,843 72,677 177,042 103,864 73,178 - - 182,520 2,045,535 177,042 2,112,664 12.2 Property, equipment and investment property: composition of the assets at fair value or revalued No property, equipment and investment property at fair value are held. 298 12.3 Property, equipment and investment property used in operations: annual changes Land A. Gross opening bal ances A.1 Total net reductions in value A.2 Net open ing balances B. Increases B.1 Pu rchases B.2 Capitalised impro vement expenses B.3 Reversal of impairment lo sses B.4 Po sitive changes in fair value reco gnised in: a) equity b) income statement B.5 Po sitive exchange rate differences B.6 Transfers from pro perties held for investment B.7 Other changes - business combinations - o ther changes Buildings Electro nic equipment Furnishings Other Total 1,026,280 (119,861) 1,403,926 (567,431) 200,891 (150,295) 416,108 (353,349) 382,371 (303,018) 3,429,576 (1,493,954) 906,419 1,771 8 - 836,495 10,148 3,920 4,060 - 50,596 4,925 4,825 - 62,759 24,220 23,940 - 79,353 16,337 16,235 - 1,935,622 57,401 48,928 4,060 - - - - - - - - - - - - - 1 1,762 - 23 2,145 - 100 - 280 - 102 - 24 4,389 - 1,762 2,145 100 280 102 4,389 (11,752) (2,650) - (53,419) (2,566) (42,895) - (10,256) (55) (9,870) - (30,070) (40) (29,663) - (24,511) (93) (24,015) - (130, 008) (5,404) (106,443) - (8,739) (5,102) (7,694) (4,408) - - - (16,433) (9,510) (3,637) (363) (363) (3,286) (264) (264) (331) (331) (367) (367) (403) (403) (6,923) (1,728) (1,728) D. Fin al net balances D.1 Total net reductions in value 896,438 (17,904) 793,224 (481,050) 45,265 (104,650) 56,909 (304,351) 71,179 (215,511) 1,863,015 (1,123,466) D.2 Fin al gross balances 914,342 1,274,274 149,915 361,260 286,690 2,986,481 C. Decreases C.1 Sales C.2 Depreciation C.3 Impairment losses recognised in: a) equity b) income statement C.4 Negative changes in fair valu e a) equity b) income statement C.5 Negative exchange rate differences C.6 Transfers to: a) tangible assets held for investment b) assets held for sale C.7 Other changes - business combinations - o ther changes 12.4 Annual changes in tangible assets held for investment Total A. Opening balances B. Increases B.1 Purchases B.2 Capitalised improvement expenses B.3 Positive changes in fair value B.4 Reversals of impairment losses B.5 Positive exchange rate differences B.6 Transfers from properties used in o perations B.7 Other changes C. Decreases C.1 Sales C.2 Depreciation C.3 Negative changes in fair value C.4 Impairment losses C.5 Negative exchange rate differences C.6 Transfers to other asset portfolio s a) properties for use in operations b) non current assets held for disposal C.7 Other changes D. Final balances E. Fair value Land 103,864 9,121 64 - Buildings 73,178 6,230 107 - 5,102 3,955 (3,142) (2,126) 4,408 1,715 (6,731) (2,132) (1) - (4,445) (23) - (1,015) 109,843 138,125 (131) 72,677 131,096 Since land and buildings are recognised at cost, the Parent arranged for expert external appraisers to estimate the fair value of all property assets for the purposes of the annual impairment test on the carrying amounts. The estimate was based on generally accepted valuation principles, by applying the following valuation criteria: the direct comparative or market method, based on a comparison between the asset in question and other similar assets subject to sale or currently on sale on the same market or competing markets; the income method, based on the present value of potential market incomes for a property, obtained by capitalising the income at a market rate. 299 These valuation methods were performed individually and the values obtained were appropriately averaged The appraisals performed basically confirmed the appropriateness of the carrying amounts. 300 12.5 Commitments for the purchase of property, equipment and investment property 31/12/2011 Assets/amou nts 31/12/2010 A. Assets used in operations 1.1 owned 1,506 - land - buildings - fu rnishings 9,558 - - 1,191 1,959 21 222 - 3,710 294 3,667 - - - land - - - buildings - - - fu rnishings - - - electronic equipment - - - o ther - - 1,506 9,558 2.1 owned - 633 - land - - - buildings - 633 - electronic equipment - o ther 1.2 Finance lease Total A B. Assets held for investment 2.2 Finance lease - - - land - - - buildings - - - 633 1,506 10,191 Total B Total (A+B) SECTION 13 Intangible assets – Item 130 13.1 Intangible assets: composition by type of asset A.2 Other intangible assets A.2.1 Assets measured at cost: a) Internally generated intangible assets b) Other assets A.2.2 Assets at fair value: X 2, 538, 668 448,964 448,964 Indefinite useful life Indefinite useful life Finite useful life A.1 Goodwill 31/12/2010 Finite useful life 31/12/2011 Assets/amounts 37 37 X 4,416,660 1,058,688 1,058,688 37 37 249 - 409 - 448,715 37 1,058,279 37 - - - - a) Internally generated intangible assets - - - - b) Other assets - - - - 448,964 2, 538, 705 1,058,688 4,416,697 Total 301 Details of the item “Goodwill” are given below. Figures in thousands of euro UBI Banca Scpa 31.12.2011 31.12.2010 changes - 521,245 ( 521,245) Banco di Brescia Spa 671,960 1,267,763 ( 595,803) Banca Carime Spa 649,240 812,454 ( 163,214) Banca Popolare di Ancona Spa 249,049 249,049 - Banca Popolare Commercio e Industria Spa 209,258 232,543 ( 23,285) Banca Regio nale Europea Spa 173,785 309,121 ( 135,336) UBI Pramerica SGR Spa 170,284 205,489 ( 35,205) Banco di San Giorgio Spa 133,404 155,265 ( 21,861) Banca Popolare di Bergamo Spa 100,045 100,044 1 65,846 65,846 - Banca di Valle Camonica Spa 43,224 103,621 ( 60,397) Prestitalia Spa 24,895 24,895 - UBI Factor Spa 20,554 61,491 ( 40,937) UBI Banca Private Investment Spa 20,189 20,189 - InvestNet International Sa 2,719 2,719 - UBI Sistemi e Servizi SCpA 2,122 2,122 - UBI Insurance Broker Srl 2,094 2,094 - UBI Leasing Spa - 160,337 ( 160,337) B@nca 24-7 Spa - 71,132 ( 71,132) Centrobanca Spa - 17,785 ( 17,785) UBI Banca International Sa - 15,080 ( 15,080) UBI Management Company Sa - 9,155 ( 9,155) Twice Sim Spa - - - By You Spa - 3,459 ( 3,459) UBI Fiduciaria Spa - 2,052 ( 2,052) CB Invest Spa - - - UBI Gestio ni Fiduciarie Sim Spa - 778 ( 778) IW Bank Spa Sintesi Mutui Srl - 685 ( 685) Solimm Spa - 172 ( 172) Capitalgest Alternative Investments SGR Spa - - - Gestioni Lombarda (Suisse) Sa - - - Barberini Sa - - - Other goodwill - 75 ( 75) 2,538,668 4,416,660 ( 1,877,992) TOTAL In compliance with IAS 36, an impairment test is performed at the end of each year (or more frequently if evidence exists from an analysis of internal or external circumstances that might give rise to doubts that the value of the assets can be recovered). The result of the impairment test as at 31st December 2011 determined a total impairment loss on goodwill of €1,873,849 thousand. Details are given in the income statement table 18.1 “Net impairment losses on goodwill: composition”. Furthermore, following the disposal of almost all the shares held (with the consequent exclusion of the companies from the consolidation), the goodwill of the BY You Group and of Sintesi Mutui amounting to €4,143 thousand was derecognised. “Other finite useful life intangible assets” amounting to €448,964 thousand were comprised mainly of the following: “brands” totalling €126,038 thousand arising from the purchase price allocation performed on 1st April 2007 following the merger of the BPU Banca and Banca Lombarda banking groups. That amount relates to the value of the brands of the banks 302 in the former Banca Lombarda Group subject to amortisation since 2010 (residual life of 18 years). The amortisation for the year amounted to €18,770 thousand. The result of the impairment test was an impairment loss of €193,053 thousand. Net of ordinary amortisation and of impairment losses, the value of the brands of the single banks was as follows: Banco di Brescia Spa Banca Regionale Europea Spa Banca di Valle Camonica Spa Banco di San Giorgio Spa TOTAL €90,475 €29,167 €2,771 €3,625 €126,038 thousand thousand thousand thousand thousand “core deposits”, intangible assets associated with customer relationships totalling €41,221 thousand. These assets arose from the purchase price allocation already mentioned and from that relating to Banco di S. Giorgio Spa following its acquisition, at the beginning of 2009, of operations consisting of 13 branches from Banca Intesa San Paolo Spa. In view of their close dependence on customer relationships, they are by definition finite useful life assets and are subject to systematic amortisation according to a schedule that takes account of the probability of current accounts being closed. Amortisation for the year totalled €29,107 thousand. On the basis of the results of the impairment test performed at the end of year, an impairment loss of €241,679 thousand was recognised on core deposits; “asset management business” consisting both of the actual management and the relative distribution activities totalled €62,323 thousand. These assets are amortised over the useful remaining life of the customer relationships. The amortisation for the year was €14,437 thousand while the impairment loss recognised as a result of the impairment test was €88,248 thousand; “assets under custody” business totalled €48,949 thousand with total amortisation in 2011 of €5,148 thousand; the remaining balance consists almost exclusively of software, allocated mainly to UBISS scpa, the UBI Group service company. Finally, the renegotiation of distribution agreements with By You resulted in changes in the cash flows that will be generated from that distribution channel. As a result of these, impairment losses of €19.5 million were recognised as at 30th June 2011 on the intangible assets previously recognised in the separate financial statements of the Parent. These intangible assets amounted to €21 million as at 31st December 2010. 303 13.2 Annual changes in intangible assets Other intangible assets: internally generated Goodwill Other intangible assets: other Indefinite useful life Finite useful life Balances as at I ndefinite useful life Finite useful life 31/12/2011 A Opening gross balances A.1 Total net reductions in value 4,605,452 ( 188,792) 4,358 ( 3,949) - 1,331,716 ( 273,437) 37 - 5,941,563 ( 466,178) A.2 Net opening balances B. Increases B.1 Purchases B.2 Increases in intangible internal assets B.3 Reversal of impairment lo sses 4,416,660 X X 409 - - 1,058,279 64,503 64,502 - 37 - 5,475,385 64,503 64,502 - - - - - 1 - 1 ( 1,877,992) ( 4,143) ( 160) - - ( 674,067) - - ( 2,552,219) ( 4,143) ( 1,873,849) X ( 1,873,849) X ( 1,873,849) - ( 672,448) ( 125,765) ( 546,683) ( 546,683) - - X ( 160) ( 160) - - ( 2,546,457) ( 125,925) ( 2,420,532) ( 2,420,532) - X - - - B.4 Po sitive changes in fair value - in equity - in the inco me statement B.5 Po sitive exchange rate differences B.6 Other changes C. Decreases C.1 Sales C.2 Impairment lo sses - Amortisation - I mpairment losses + equity + income statement C.3 Negative changes in fair value - in equity - in the inco me statement X X - - C.4 Transfers to non current assets held fo r sale. - - - - - - C.5 Negative exchange rate differences C.6 Other changes - - - ( 1,619) - ( 1,619) D. Final net balances D.1 Total net impairment losses 2,538,668 ( 180,528) 249 ( 4,109) - 448,715 ( 857,107) 37 - 2,987,669 ( 1,041,744) E. Final gross balances F. Value at cost 2,719,196 - 4,358 - - 1,305,822 - 37 - 4,029,413 - 13.3 Other information Software The useful life of software considered for the purposes of amortisation is three years. Contracted commitments to purchase intangible assets amounted to €17,667 thousand for the acquisition of software. Impairment tests on goodwill Frequency The carrying amount for goodwill is tested systematically, at least annually, for impairment as described in Part A.2 of the notes to the financial statements. In 2011, goodwill was tested for impairment both as at 30th June 2011, following the approval of the 2011-2015 Business Plan, and as at 31st December 2011. Impairment procedure and cash flows used for the test The impairment test was conducted with the assistance of an outside expert of high standing on the basis of a procedure which was approved (prior to the examination of the financial statements) by the Management Board on 21st February 2012 and submitted to the Supervisory Board on 7th March 2012. The Management Board considered it prudent not to use the figures for the 2011-2015 Business Plan, approved in May 2011 and used for the impairment test performed as at 30th June 2011, because the assumptions underlying that plan had been formulated in an environment prior to the rapid deterioration of financial and conditions that occurred in the second half of 2011, which led to the following: a general rise in spreads, the closure of some conventional financial markets and a compression of interest rates together with competitive pressures on normal funding. This was then added to with intervention by the EBA, which issued a recommendation on 8th December 2011 concerning the capital of banks, designed to strengthen their capital position through the constitution of 304 an exceptional and temporary capital buffer. The capital buffer, which must lead to a core tier one ratio of 9% for banks by the end of June 2012, is having repercussions on the growth of lending by banks. While the basic strategy behind the 2011 – 2015 Business Plan remains firmly in place, in the current context it no longer seemed to be a logical predictor of expected average cash flows. Therefore the 2012 budget approved by the competent bodies in February 2012 was used for measurement purposes, together with 2013 – 2016 projections based on the best estimates made by management and on the current market context. The budget and the projections were formulated by first assessing the following factors: a) an examination of the differences between the 2011 budget figures and the actual figures; b) examination of the reliability of the projections made by comparing them with inputs from external sources (consensus macroeconomic forecasts, consensus forecasts made by equity analysts), with emphasis placed on those referred to for impairment testing purposes in IAS 36 (§ 33 letter a)); c) verification of the consistency between the implied risk in discount rates and the implementation risk of the plan; d) growth rate assumptions, never greater than the expected long-term inflation rate of 2%. The projections are based on the following assumptions: a) a moderate growth rate for the world economy, technical recession in the euro area and a more significant contraction for Italian GDP in terms of magnitude and duration; b) the implementation of unconventional monetary policies by the ECB; c) estimated short-term interest rates (Euribor one month) below 1% until 2013, then rising to higher levels, but still below 3% in 2016. The magnitude of the rise in rates will ensure a progressive return to normality for markups and markdowns, although still below historical levels observed before the crisis; d) a flat scenario for projections of growth in direct funding and lending in which a ratio of lending to funding nevertheless reappears which favours the latter; e) projections for operating expenses basically unchanged compared to 2011; f) a cost of risk falling progressively from 2011 levels, but still remaining higher than those forecast in the 2011 - 2015 Business Plan; g) a partial reopening of institutional markets with funding possible on that channel from 2013. CGU The impairment test was conducted on single legal entities to which the goodwill was allocated (the cash generating units - CGUs) and on the consolidated financial statements as a whole (second level impairment test). In the cases of those CGUs which were not wholly owned, the goodwill was re-calculated on a notional basis for the purposes of the test, including also the goodwill attributable to non controlling interests (not recognised in the consolidated financial statements) by a process of “grossing up” (i.e. goodwill attributable to the Parent/percentage interest held), in accordance with example No. 7 in IAS 36. Value measurement The value measurement used to calculate the recoverable amount of the CGUs was that of the value in use or the fair value if the value in use was lower than the carrying amount. In fact in the current year the recoverable amount for those CGUs operating in the commercial and corporate banking sectors was the value in use, because the criterion which was based on 305 comparable transactions for corporate assets consisting of branches, was no longer considered useable because the market, at least for transactions concerning small business units or transactions between related parties, had become inactive. The discounted cash flow criterion was used to estimate the value in use. This considers the value of each CGU as the result of the sum of the following: 1) the present value of the cash flows forecast over the period for which the projections were made (2012 – 2016) discounted at a rate that expresses the risk for those flows (the opportunity cost of the equity); and 2) the present value of the cash flows that can be generated beyond the explicit forecast period, obtained by capitalising the cash flow for the last year of the forecast (2016) at a rate that results from the difference between the opportunity cost of the equity and the expected long-term growth rate for the cash flows. Discount rates The discount rates were estimated using the same method as that used in previous impairment tests, in compliance with IAS 36 and with the “Guidelines for impairment tests on goodwill in contexts of financial and real crisis” issued by the Organismo Italiano di Valutazione (OIV – Italian Valuation Body). The estimate of the opportunity cost of equity as at 31.12.2011, net of the growth rate for income assumed for the estimate of the terminal value was 9.45%, 1.45% higher than the percentage assumed for impairment testing purposes in the previous year (8%). That increase, which affected the reduction in value recorded for all CGUs the year before, was attributable entirely to the increase in country risk: the one year average of daily yields to maturity on ten year Italian instruments rose from 4.0% as at 31.12.2010 to 5.3% as at 31.12.2011, an increase of 1.3%. For the purposes of estimating the opportunity cost of equity we report the following: a) a capital asset pricing model was used; b) in accordance with IAS 36 § A18, the estimate of the cost of equity includes country risk, which was incorporated into the estimate of the equity risk premium – assumed to be 6% – and in the beta. These estimates were assumed in compliance with the recommendations of the OIV guidelines mentioned (reported in § LG35 b); c) the specific yield to maturity of the interbank rate for each year of the forecast was assumed as the risk free rate. The current yield curve requires the present value of short term cash flows to be discounted at a short-term rate and long term cash flows to be discounted with long term rates. This is to avoid discounting short-term cash flows based on short-term rates and an excessively high rate. In this respect appendix A of IAS 36 specifies the use of the term structure of interest rates (§ A21, IAS 36); d) the risk free rate used to estimate the cost of equity is consistent with future interest rates forecast by management and assumed for the estimate of future cash flows used in the measurement. The risk free rate assumed in the terminal value was the yield to maturity on the ten year interest rate swap, which was 3.11%. That rate, although higher, is in line with the estimate of the future long-term rate forecast by UBI Banca management; e) for the network banks and for the Group as a whole (second level impairment test), the method used to estimate the beta was the same as that used in previous years. That beta is based on the historical volatility over one year of the UBI banca share linked to the benchmark volatility of the Stoxx 600 European market index. The beta estimate assumed was 1.39x and it was compared with beta estimates calculated on the basis of historical returns for the share and the market over two 306 years (beta = 1.29x) and five years (1.03x). Since all three of these estimates were equally significant statistically, the choice of that beta measurement, which is the most conservative, was made not only on the basis of the principle of prudence, but also on that of the following factors: i) continuity with the method used in previous years, ii) the greater ability of this estimate to express more recent trends in terms of both country risk and risk in the banking sector and finally iii) alignment of the estimate with that obtainable on the basis of more recent volatilities implied in options on the UBI Banca share, on the Stoxx 600 and on the Eurex market; f) for the other companies, the beta (comprised within a range of between 0.99x and 1.39x) was estimated using the same method as that used in the previous year, on the basis of the returns for comparable European companies. The beta estimated includes the share of country risk, not already incorporated in the equity risk premium; g) the following were assumed for the purposes of estimating the rate of capitalisation of income for the calculation of the terminal value: growth rates aligned with future inflation of 2% for the network banks and similar companies in terms of business risk; growth rates of a fundamental nature, i.e. calculated on the basis of profit retention and expected income assumed for the terminal value for the other companies. The table below shows the opportunity cost of equity for different CGUs. CGU Initial discount rate net of taxes Banche Rete, Centrobanca, UBI International, UBI Private 8.93% Investment IW Bank 6.55% Final discount rate net of taxes Nominal growth rate in income for the calculation of the terminal value 11.45% 2.00% 9.07% 2.00% Prestitalia 6.86% 9.38% 1.89% B@nca 24-7 6.86% UBI Leasing / UBI Factor 7.89% 9.38% 10.41% 0.47% 0.00% UBI Pramerica 8.41% 10.91% 0.00% The following is reported with regard to the opportunity cost of equity estimated in the terminal value for the network banks and the entire Group: a) the estimate of 11.45% is in line with the consensus estimate of 11.50% made by the financial market analysts who follow the UBI Banca share; b) if an alternative method was used to estimate the opportunity cost of equity (which incorporated country risk in the risk free rate only), then an estimate for the cost of equity would have been obtained in line with the measurement assumed of 11.45%. More specifically, if the approach suggested in letter a) of the OIV guidelines given in § LG35 were followed, then an estimate of the risk free rate of 5.3%, an equity risk premium of 5% and a beta of 1.25x (calculated on the basis of daily yields over one year for the share and the Ftse Italy All Share market index), would give an opportunity cost of equity of 11.55%. 307 Second level impairment test Because the UBI Group presents costs that were not allocated to single CGUs, a second level impairment test was performed on the Group as a whole in accordance with sections 101 and 103 of IAS 36 (and illustrative example 8 of IAS 36). The second level impairment test compared the total recoverable amount for UBI Banca with the consolidated equity of the Group. Impairment test results As a consequence of the above, the impairment tests performed on the single CGUs resulted in the need to recognise total impairment losses on goodwill of €1,873,849 thousand (of which €126.3 million already recognised as at 30th June 2011), with €1,410,721 thousand allocated to the network banks and €463,128 thousand to the other Group member companies. Impairment tests on finite useful life intangible assets Finite useful life assets are subject to systematic amortisation over the estimated useful life of the asset. As described in Part A.2 of the notes to the financial statements, at the end of each financial period, tests are also performed for impairment losses resulting from differences between the carrying amount and the recoverable amount for the assets. Following changes in the macroeconomic and financial environment, the results of that test resulted in the recognition of impairment losses on all finite useful life intangible assets, except for those attaching to assets under custody business and software. To complete the information, for all the intangible assets subjected to impairment testing, the analyses performed on the remaining economic lives as at 31.12.2011 found no requirements to reduce them. Details are given below on finite useful life intangible assets subjected to impairment tests, while, as already reported, the intangible assets resulting from the By You distribution agreements were entirely written down by €19.5 million as at 30th June 2011 as described in the previous section 13.1. Brand names Impairment was recognised on the brand name because the total estimated value of the UBI brand name made by independent experts, and on which the previous measurements used for impairment testing were based, was revised downwards below the level of annual amortisation charge for it. The impairment test on the value of the brand name was based on public independent estimates of the value of the UBI brand. Those estimates were linked to the network banks of the former Banca Lombarda e Piemontese, for which the brand names were identified among the intangible assets when the purchase price allocation was performed. The analysis, based on the multiple “value of the brand/pre-tax income” implied in the independent estimate by the public source already mentioned, resulted in a total impairment loss of €193,053 thousand. Core Deposits The assets attaching to core deposits were tested for impairment because of continuing flat curves for interest rates, which reduced the profits on these assets due to the low markdowns on them. The value of core deposit goodwill was estimated for impairment test purposes on the basis of the present value of the income from these assets over their residual useful life. The estimate of the value was based on the following assumptions: a remaining useful life of the core deposit goodwill, equal to the life of the purchase price allocation (PPA) adjusted for the time elapsing between the date of the PPA (1.4.2007) and the measurement date (31.12.2011). This was performed once it had 308 been verified that the overall rate of loss on assets that occurred between the date of the PPA and 31.12.2011 was lower than or equal to the rate of amortisation; the total amount of the deposits as at 31.12.2011 consisting of the customers deposits of the network banks existing as at 31.12.2011 on the basis of the PPA perimeter; the forecasts for markdowns and commissions on current accounts are those implied in the 2012 budget assumptions and in the 2013 – 2016 forecasts for each network bank to which the intangible assets attaching to the core deposits were allocated. These forecasts are the same as those used to estimate the recoverable amount of the goodwill; operating expenses are consistent with forecasts of the cost:income ratio for the network bank to which the core deposits relate for the period 2012 – 2016; the opportunity cost of equity is the same as that used to test the goodwill of the network banks recognised in the consolidated financial statements for impairment. The value of the core deposit goodwill assets was less than the respective carrying amounts, which resulted in the need to recognise a total impairment loss of €241,679 thousand. For Banca Popolare di Bergamo and Banca Popolare Commercio & Industria, the core deposit goodwill allocated resulted from an operation to streamline the branch network geographically because contributions of operations had been made consisting of the branches of the former Banca Lombarda e Piemontese (Banco di Brescia and Banca Regionale Europea). Assets under management Intangible assets attaching to asset management business were tested for impairment because of reduced profits on this business triggered by general falls in prices on both equity and bond markets. The same procedure used for testing core deposit goodwill for impairment was employed for these intangible assets. The following was therefore performed: - the remaining useful life of the assets as at 31.12.2011 was verified; the value of the intangible assets attaching to asset management business was estimated using: the remaining useful life estimated as at 31.12.2011 (equal to the weighted average life estimated for the PPA adjusted for the time elapsed); the total assets under management as at 31.12.2011 acquired at the time of the PPA (including insurance funding); income from those assets under managment assumptions and 2013 – 2016 forecasts; an opportunity cost of equity the same as that used to test the goodwill of the network banks recognised in the consolidated financial statements for impairment. consistent with 2012 budget The estimate of the total intangible assets in question was less than the respective carrying amount, which therefore resulted in the need to recognise a total impairment loss of €88,248 thousand. To complete the information a sensitivity analysis was performed to identify, for those CGUs not subject to impairment, the variation in key variables that would render the recoverable amount equal to the carrying amounts in the consolidated financial statements. The table below gives the maximum tolerable increase in the cost of equity and the cost of risk for each of the above CGUs in order for the recoverable amount to equal the carrying amount and therefore for an impairment loss to be recognised. 309 Cash Generating Unit Increase in the cost of equity Increase in the cost of risk Banca Popolare di Ancona 0.41% 0.055% Banca Popolare di Bergamo 16.0% 1.269% 3.4% 0.683% 0.25% 0.061% 0.477% 0.217% Prestitalia UBI Banca Private Investment IW Bank The analysis reported shows that in the case of the network bank CGUs, the lowest margin of tolerance regarded the CGU Banca Popolare of Ancona, for which an increase of 0.055% in the cost of risk would bring the recoverable amount into line with the carrying amount. As concerns the GCUs operating in non banking financial sectors, the table shows that for the UBI Banca Lombarda Private Investment, a rise in the cost of equity of 0.25% or in the cost of risk of 0.061% would make the recoverable amount equal to the carrying amount. The table below gives a summary of impairment losses on intangible assets as at 31/12/2011: (amounts in euro) Banco di Brescia B.R.E Core Deposits 135,135,000.00 51,621,000.00 T axes -44,034,631.64 -16,821,043.55 Non-controlling interests B. Val l e Cam. 12,430,000.00 B. S. Giorgio B.P.C.I. 7,599,000.00 28,408,000.00 241,679,000.00 -78,752,697.23 -8,719,575.57 -1,427,926.22 -4,773,044.66 -15,879,259.55 6,951,676.25 -958,713.10 26,080,380.88 AUM 14,030,000.00 10,808,000.00 602,000.00 5,465,000.00 T axes -4,571,768.10 -3,521,858.13 -196,165.67 -1,780,806.32 9,458,231.90 6,486,000.00 Total -9,256,934.29 -2,113,505.91 91,100,368.36 Net AUM UBI Pramerica -4,050,397.54 -2,476,184.30 Net core deposits Non-controlling interests B.P.B 4,164,102.59 14,378,021.05 -1,825,636.33 -75,950.16 -918,216.31 5,460,505.54 329,884.16 2,765,977.37 61,000.00 147,047,043.22 57,282,000.00 88,248,000.00 -19,877.25 -18,665,717.76 -28,756,193.24 -13,515,703.14 -16,335,505.94 25,100,579.10 43,156,300.82 41,122.75 Brand names 105,912,000.00 63,138,000.00 7,130,000.00 193,053,000.00 T axes -35,109,828.00 -20,930,247.00 -5,593,399.50 -2,363,595.00 -63,997,069.50 -10,575,694.03 -1,922,100.40 -892,012.36 -13,389,806.80 70,802,172.00 31,632,058.97 9,357,500.10 3,874,392.64 115,666,123.70 Total Gross 255,077,000.00 125,567,000.00 29,303,000.00 15,331,000.00 33,873,000.00 Total Taxes -83,716,227.74 -41,273,148.68 -9,643,797.04 -5,035,944.98 -11,037,740.61 -2,133,383.16 -18,665,717.76 -171,505,959.97 Non-controlling interests Net brand names -21,120,905.93 Total non-control l ing interests Net Total 171,360,772.26 63,172,945.39 16,873,000.00 4,372,494.09 -3,350,026.62 -1,926,675.63 16,309,176.34 6,547,000.00 -5,691,260.98 8,368,379.40 17,143,998.41 57,282,000.00 522,980,000.00 -13,515,703.14 4,413,616.84 -45,604,572.29 25,100,579.10 305,869,467.74 310 SECTION 14 Tax assets and tax liabilities – Asset item 140 and Liability item 80 14.1 Deferred tax assets: composition 31/12/2011 31/12/2010 Balancing entry in the income statement Balancing entry in equity 1,831,151 527,437 885,951 187,103 Total for the follow ing reasons: - impairment loss on loans to banks and customers and unsecured guarantees not deducted - losses - post-employment benefits - maintenance expenses - application of IFRS (amortised cost in particular) - advance depreciation and amortisation - property, equipment and investment property - personnel expense - entertainment expenses - provisions for risks and charges not deducted - sales price adjustments, long term costs and non-recurring transactions - intangible assets and goodwill - fair value change in securities and equity investments - impairment losses on properties - purchase price allocation of bonds - revaluation of hedged subordinated liabilities - non-recurring expenses not deducted - cash flow hedges - other 2,358,588 1,073,054 516,236 2,165 7,285 1,924 85,110 8,705 33,584 19,591 11 63,535 5,291 1,085,288 514,943 149 10 1,011 1,617 12,133 443,311 8,841 1,972 84,468 8,045 36,127 16,353 134 56,251 2,305 227,549 167,299 962 194 46 629 295 18,273 14.2 Deferred tax liabilities: composition 31/12/2011 Balancing entry in the income statement Balancing entry in equity Total 31
