Category after
reclassfication
Amount
reclassified
Since the Boards of Directors of the Parent Bank and the subsidiary BPV Finance resolved to make these reclassifications before 1 November 2008, they have been made with effect from 1 July 2008 (as permitted by the amendment to IAS 39), with the fair value recognized in the new category equal to the related book value at 30 June 2008. Purchases of additional securities after 30 June 2008 have been reclassified with effect from the purchase date, using the price on such date as the fair value. As a result of these reclassifications, the financial instruments reclassified to “loans and advances to customers” and “loans and advances to banks” are now being measured at “amortized cost” as adjusted to take account of any impairment in compliance with IAS 39.
At 31 December 2008 the book value of financial assets reclassified in the year amounted to 461.8 million euro compared with a fair value of 387.9 million euro. The fair value of the above financial assets has been determined on the basis of the related market prices at 31 December 2008 which in some cases reflect situations of severe illiquidity.
The following table provides the information required by paragraph 12A of IFRS 7 in the event of reclassifying financial instruments from the fair value through profit or loss category (in
compliance with paragraph 50B or 50D of IAS 39) or from the “available for sale” category (in compliance with paragraph 50E of IAS 39):
recognised in profit/loss in the previous year recognised in profit/loss in the year not recognised in profit/loss in the year not recognised in AFS reserve in the year
Financial assets available for
sale Loans and advances to customers 257.9 199.2 - - - -58.7 Financial assets available for
sale Loans and advances to banks 150.7 135.5 - - - -15.2 Financial assets held for
trading Financial assets available for sale 53.2 53.2 -6.7 -16.1 -2.4 -
Total 461.8 387.9 -6.7 -16.1 -2.4 -73.9
Fair value as at 31/12/08
fair value gain/loss:
(in millions of Euro)
Category before reclassfication Category after reclassfication Book value as at 31/12/2008
At the reclassification date, the effective interest rate of the financial assets reclassified from “financial assets available for sale” and “financial assets held for trading” to “loans and advances to customers” or to “loans and advances to banks” is close to the nominal interest rate of the reclassified financial instruments, and in view of the fact that they are classified as performing, the estimated amount of expected cash flows are near to their book value.
Determination of fair value of financial assets
With reference to the methods of measuring financial instruments if their market is “not active”, the IASB set up an advisory panel in May 2008 to define the rules for determining fair value in illiquid or no longer active markets; the results were published on 31 October 2008 in a paper entitled "Measuring and disclosing the fair value of financial instruments in markets that are no longer active".
These guidelines are consistent with those already issued by the Financial Accounting Standards Board (FASB) in the United States and are designed to allow greater use of valuation techniques, also based on assumptions by management, if the market for an asset is no longer considered to be active.
In brief, the paper includes the following indications:
− no deviations are permitted from fair value;
− the objective of a fair value measurement is to establish the price at which a transaction would ordinarily take place between market participants, not the price resulting from a forced liquidation or a distress sale;
− even at times of market crisis not all market activity represents forced liquidations or distress sales, meaning that even if a market is inactive the price of transactions cannot be ignored;
− the fundamental value (independent estimate by a company's management on the basis of expected cash flows) if left unadjusted, is unsuitable for determining fair value since it does not consider factors that the market would consider (credit/liquidity risk);
− if a market becomes inactive - meaning there is little observable input data - it is possible to determine values other than market prices that are equally reliable using valuation techniques and models which consider the different factors of risk;
− if a valuation technique is used for determining fair value, it is necessary to periodically calibrate the model used for observable market data to ensure that it represents current market conditions and to identify any weaknesses in it;
− if the fair value measurement differs from market prices, the disclosures are of prime importance for the purposes of measurement transparency.
As regards the criteria for determining fair value, the new guidelines have confirmed the approach already generally followed by the Group.
Direct deposits
Direct deposits, excluding “liabilities for assets sold but not derecognized”, amounted to 20,253 million euro at 31 December 2008, reporting an increase of 13.4% on the year before (+9.9% including “liabilities for assets sold but not derecognized”).
(+/-) %
Current accounts and unrestricted deposits 10,002 8,625 1,377 16.0% Current accounts and restricted deposits 182 25 157 628.0% Repurchase agreements and other payables 801 1,074 -273 -25.4% Bonds 8,968 7,827 1,141 14.6% Certificates of deposit and other securities 300 302 -2 -0.7%
sub-total 20,253 17,853 2,400 13.4%
Liabilities for assets sold but not derecognized 1,153 1,631 -478 -29.3%
Total direct deposits 21,406 19,484 1,922 9.9%
Direct deposits
(in millions of Euro) 31/12/2008 31/12/2007
The changes in the different types of direct deposit reflect strong growth in “bonds” (+14.6%) and “current accounts and unrestricted deposits” (+16.0%), but a contraction in “repurchase agreements and other payables” (-25.4%). This downward trend in repurchase agreements in favour of other types of funding is a positive sign in terms of liquidity, with our Group closing such funding transactions with lending transactions generally in the same technical form. “Certificates of deposit and other securities” and “current accounts and restricted deposits” have settled for some time now at much reduced levels: while the former posted a modest decrease over the twelve months of 0.7%, the later grew by 157 million euro in absolute terms (+628.0%).
With reference to the Group's own bond issues, which account for 42% of all direct deposits, the Group made no new issues in the year under its European Medium Term Notes programme , after issuing more than 1,815 million euro in notes in 2007; consequently, the entire change for the year is attributable to ordinary placement activities with retail customers , with obvious benefits in terms of diversification of the sources and cost of funding.
“Liabilities for assets sold but not derecognized” were 29.3% lower than at 31 December 2007. These relate to the "Berica 5 Residential MBS" and “Berica 6 Residential MBS” securitizations arranged in 2004 and 2006 respectively, which, as discussed in the section on loans, have been “reinstated” in the balance sheet, as required by IAS 39. In fact, they represent notes issued by vehicle companies that are backed by securitized home mortgages; their decrease since 31 December 2007 reflects partial repayment of such securities and the Parent Bank's repurchase of 208.9 million euro in senior and mezzanine notes issued as part of the above securitizations which have consequently been derecognized.
With reference to the latest securitization known as “Berica 7 Residential MBS”, carried out in November 2008 and also “reinstated” in the balance sheet under IAS 39, since all the related asset backed securities (ABS) were subscribed by the originator banks (BPVi, Banca Nuova and Cariprato), no “liabilities for assets sold but not derecognized” have been recognized.