CONSOLIDATED HALF-YEAR REPORT
AT 30 JUNE 2009
CONTENTS
INTERIM REPORT ON OPERATIONS
BPVI GROUP STRUCTURE... 5
TERRITORIAL PRESENCE OF THE BPVi GROUP AT 30 June 2009... 6
PRINCIPAL DATA AND SUMMARY INDICATORS FOR BANCA POPOLARE DI VICENZA ... 8
PRINCIPAL DATA AND SUMMARY INDICATORS FOR THE BPVi GROUP... 10
ECONOMIC AND FINANCIAL SCENARIO ... 12
Overview of the macroeconomic situation... 12
International economic scenario ... 13
The Italian economy ... 15
The credit and savings market... 16
Innovations in the regulatory framework ... 18
GROWTH OF THE BPVi GROUP: ACTIVITIES OF STRATEGIC IMPORTANCE... 21
Implementation of the Business Plan 20082011... 22
Measurement of capital adequacy (ICAAP) ... 27
Purchase of line of business from the UBI Banca Group ... 28
Ratings... 28
Other information ... 29
OPERATIONAL STRUCTURE... 31
Territorial presence of the Banca Popolare di Vicenza Group ... 31
Human resources... 33
COMMERCIAL ACTIVITIES: CHARACTERISTICS AND RESULTS ... 39
Products, services and markets ... 39
Commercial communications and promotional initiatives ... 41
Research and development ... 42
THE SYSTEM OF INTERNAL CONTROLS AND AUDITING... 43
The system of internal controls and audit functions ... 43
Compliance Function... 45
Risk Management ... 46
-Information about the exposure to high-risk financial products pursuant to the recommendations on transparency issued by the Financial Stability Forum FSF (now Financial Stability Board) ... 54
Information about lending ... 61
CONSOLIDATED RESULTS OF OPERATIONS... 68
Scope of consolidation... 68
Direct deposits... 71
Indirect deposits ... 73
Loans to customers ... 74
Financial assets and liabilities ... 78
Interbank position... 80
PRINCIPAL EQUITY INVESTMENTS ... 81
EQUITY AND REGULATORY CAPITAL ... 84
COMMENTS ON THE INCOME STATEMENT ... 86
INFORMATION ON OTHER BANKS IN THE BPVi GROUP ... 94
Banca Nuova S.p.A. ... 94
Cariprato S.p.A... 96
Farbanca S.p.A. ... 98
ATYPICAL AND/OR UNUSUAL TRANSACTIONS... 100
SIGNIFICANT SUBSEQUENT EVENTS... 101
OUTLOOK FOR OPERATIONS... 101
GLOSSARY ... 103
-CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS
BALANCE SHEET…... ...- 112 -INCOME STATEMENT ...- 114 -
STATEMENT OF COMPREHENSIVE INCOME ...- 115 -
STATEMENT OF CHANGES IN EQUITY ...- 116 -
STATEMENT OF CASH FLOWS ...- 118 -
EXPLANATORY NOTES TO THE CONDENSED FINANCIAL STATEMENTS ...- 119 -
INTERIM REPORT ON OPERATIONS
AT 30 JUNE 2009
BPVI GROUP STRUCTURE
The structure of the Banca Popolare di Vicenza Group at 30 June 2009 is analyzed below by business area.
Nuova Merchant S.r.l. Nordest Merchant S.p.A.
80%
NEM DUE SGR S.p.A. NEM SGR S.p.A. Banks
Consumers Loans
Asset Management
Services
Corporate & Investment Banking Banca Nuova S.p.A.
99.61% CariPrato S.p.A.79%
Prestinuova S.p.A. 6.33%
Servizi Bancari S.c.p.A.
97% Immobiliare Stampa S.p.A.100%
B.P.Vi Fondi SGR S.p.A. 50% Farbanca S.p.A. 47.52% Proprietary Trading BPV Finance International Plc 99.99% 100% 88.67% 1.00% 1.00% 1.00% Nuova Merchant S.r.l. Nordest Merchant S.p.A.
80%
NEM DUE SGR S.p.A. NEM SGR S.p.A. Banks
Consumers Loans
Asset Management
Services
Corporate & Investment Banking Banca Nuova S.p.A.
99.61% CariPrato S.p.A.79%
Prestinuova S.p.A. 6.33%
Servizi Bancari S.c.p.A.
97% Immobiliare Stampa S.p.A.100%
B.P.Vi Fondi SGR S.p.A. 50% Farbanca S.p.A. 47.52% Proprietary Trading BPV Finance International Plc 99.99% 100% 88.67% 1.00% 1.00% 1.00%
TERRITORIAL PRESENCE OF THE BPVi GROUP AT 30 June 2009
Presence in Italy
Distribution of branches BPVi’s Group
at June 2008
15
16
66
259
12
4
2
94
80
85
BPVi
Cariprato
Banca Nuova
Farbanca
1
Distribution of branches BPVi’s Group
at June 2008
15
16
66
259
12
4
2
94
80
85
BPVi
Cariprato
Banca Nuova
Farbanca
1
15
16
66
259
12
4
2
94
80
85
BPVi
Cariprato
Banca Nuova
Farbanca
1
Branches Financial shops Private bank. outlets TOTAL
Banca Popolare di Vicenza 432 1 19 452
Cassa di Risparmio di Prato 94 - 4 98
Banca Nuova 107 22 5 134
Farbanca 1 - - 1
Total 634 23 28 685
The sales network of the BPVi's Group
Number
Comp. %
Nord Italy
433
68.3%
Center Italy
106
16.7%
Sud Italy
95
15.0%
Total
634
100.0%
Geographical distribution of branches
30/06/2009
Presence abroad
The presence of the BPVi Group abroad is assured by three Representative Offices: in Hong
Kong, operational since the 1980s, in Shanghai, opened in June 2005, and in New Delhi, which
was opened in April 2006.
In addition, the BPVi Group holds equity investments in a number of Central and Eastern
European banks, in order to support those Italian firms that maintain commercial relations with
the countries concerned. This support is guaranteed by Italian-speaking personnel who work for the International desks of the local banks in which investments are held.
PRINCIPAL DATA AND SUMMARY INDICATORS FOR BANCA POPOLARE DI VICENZA (+/-) % (+/-) % Banking business 45,367 43,995 43,881 1,372 3.1% 1,486 3.4% Total funding 28,583 27,977 28,197 606 2.2% 386 1.4% Direct deposits 15,836 15,051 14,146 785 5.2% 1,690 11.9% Indirect deposits 12,747 12,926 14,051 -179 -1.4% -1,304 -9.3%
of which: asset management 2,324 2,450 3,461 -126 -5.1% -1,137 -32.9%
of which: retirement savings 1,548 1,536 1,466 12 0.8% 82 5.6%
of which: assets under administration 8,875 8,940 9,124 -65 -0.7% -249 -2.7%
Loans to customers 16,784 16,018 15,684 766 4.8% 1,100 7.0%
Total Assets 23,930 22,881 22,265 1,049 4.6% 1,665 7.5%
Goodwill 677 680 722 -3 -0.4% -45 -6.2%
Net interbank position -1,062 -467 -747 -595 127.4% -315 42.2%
Equity (including net income for the year) 2,831 2,844 2,816 -13 -0.5% 15 0.5%
Regulatory capital 2,818 2,859 2,704 -41 -1.4% 114 4.2%
(+/-) % (+/-) %
Net interest income 192.0 405.6 197.5 n.s. n.s. -5.5 -2.8%
Net fee and commission income 85.5 177.6 91.1 n.s. n.s. -5.6 -6.1%
Net interest and other banking income 332.8 654.2 344.6 n.s. n.s. -11.8 -3.4%
Net adjustments to loans -51.7 -101.3 -47.9 n.s. n.s. -3.8 7.9%
Operating costs -195.1 -434.1 -235.6 n.s. n.s. 40.5 -17.2%
of which: payroll -121.4 -254.3 -127.0 n.s. n.s. 5.6 -4.4%
of which: other administrative costs -89.9 -179.4 -88.6 n.s. n.s. -1.3 1.5%
Profit from current operations before tax 71.3 190.3 168.8 n.s. n.s. -97.5 -57.8%
Net income for the period 56.7 151.0 146.9 n.s. n.s. -90.2 -61.4%
(+/-) % (+/-) %
Number of employees at the end of the period 3,457 3,508 3,466 -51 -1.5% -9 -0.3%
Number of branches 432 436 433 -4 -0.9% -1 -0.2%
Balance sheet highlights
(in millions of euro) 30/06/2009 31/12/2008 30/06/2008
Changes 30/06/09 - 31/12/08
Changes 30/06/09 - 30/06/08
Income statement highlights
(in millions of euro) 30/06/2009 31/12/2008 30/06/2008
Changes 30/06/09 - 31/12/08 Changes 30/06/09 - 30/06/08 Changes 30/06/09 - 31/12/08 Changes 30/06/09 - 30/06/08 Other information 30/06/2009 31/12/2008 30/06/2008
Key performance indicators 30/06/2009 31/12/2008 30/06/2008 30/06/09 - Changes 31/12/08 Changes 30/06/09 - 30/06/08 Structure ratios (%)
Loans to customers / Total assets 70.1% 70.0% 70.4% 0.1 p.p. -0.3 p.p.
Direct deposits / Total assets 66.2% 65.8% 63.5% 0.4 p.p. 2.7 p.p.
Loans to customers / Direct deposits 106.0% 106.4% 110.9% -0.4 p.p. -4.9 p.p.
Asset management and retirement savings / Indirect deposits 30.4% 30.8% 35.1% -0.4 p.p. -4.7 p.p.
Total Assets / Equity (leverage) 8.5 x% 8 x 7.9 x% 0.5 x 0.6 x
Profitability and efficiency ratios (%)
Adjustments to loans / Net interest and other banking income 15.5% 15.5% 13.9% 0.0 p.p. 1.6 p.p. Net interest and other banking income / Total average assets (1) 1.4% 3.0% 1.6% n.s. -0.2 p.p.
Administrative costs, amortization and depreciation / Total average assets (1) 0.9% 2.0% 1.0% n.s. -0.1 p.p.
Cost/Income (2) 61.0% 65.4% 61.0% -4.4 p.p. 0.0 p.p.
Productivity ratios (3)
Direct deposits per employee (in millions of euro) 4.5 4.4 4.1 2.3% 9.8%
Indirect deposits per employee (in millions of euro) 3.6 3.7 4.1 -2.7% -12.2%
Loans to customers per employee (in millions of euro) 4.8 4.6 4.6 4.3% 4.3%
Net interest income per employee (in thousands of euro) 54.6 117.2 57.9 n.s. -5.7% Net interest and other banking income per employee (in thousands of euro) 94.7 189.1 101.1 n.s. -6.3%
Payroll costs per employee (in thousands of euro) 34.5 73.5 37.3 n.s. -7.5%
Risk ratios (%)
Net impaired loans/Net loans 5.05% 3.51% 3.47% 1.54 p.p. 1.58 p.p.
Net non-performing loans/Net loans 1.54% 1.39% 1.52% 0.15 p.p. 0.02 p.p.
Non-performing loans coverage (%) (4) 51.61% 49.82% 46.62% 1.79 p.p. 4.99 p.p.
Impaired loans coverage (%) 28.97% 34.52% 33.29% -5.55 p.p. -4.32 p.p.
Performing loans coverage (%) 0.40% 0.45% 0.54% -0.05 p.p. -0.14 p.p.
Capital adequacy ratios (%) (5)
Core Tier 1 15.91% 15.99% 13.89% -0.08 p.p. 2.02 p.p.
Tier 1 (Tier 1 capital / Total weighted assets) 15.91% 15.99% 13.89% -0.08 p.p. 2.02 p.p. Total Capital Ratio (Regulatory capital / Total weighted assets) 21.66% 22.17% 18.63% -0.51 p.p. 3.03 p.p.
(1) Total average assets are determined as the simple average of total assets at the end of the current period/year and at
the end of the previous year.
(2) This indicator reports administrative costs (caption 150) plus net adjustments to property, plant and equipment and
intangible assets (captions 170 and 180) as a proportion of net interest and other banking income (caption 120) plus other operating charges/income (caption 190).
(3) The productivity indicators are calculated with reference to the average number of employees.
(4) The coverage of non-performing loans at 30 June 2009, including write-offs for bankruptcy proceedings still in
progress at 30 June 2009, was 65.36% (66.63% at 31 December 2008 and 62.29% at 30 June 2008).
(5) Capital adequacy ratios at 31 December 2008 and at 30 June 2008 have been restated according to the consultative
document concerning the update of the Bank of Italy Circular 262 dated 22 December 2005 recently published by the Supervisory Authorities. The above capital adequacy indicators have been determined in accordance with the methods for quantifying risk assets used at 31 December 2008 and do not take account of the recent clarifications issued by the Supervisory Authorities in relation to the prudential treatment of certain types of loan secured by property mortgages for which intermediaries had requested clarification.
PRINCIPAL DATA AND SUMMARY INDICATORS FOR THE BPVi GROUP (+/-) % (+/-) % Banking business 61,673 60,001 59,201 1,672 2.8% 2,472 4.2% Total funding 37,981 37,296 37,150 685 1.8% 831 2.2% Direct deposits 22,186 21,406 19,815 780 3.6% 2,371 12.0% Indirect deposits 15,795 15,890 17,335 -95 -0.6% -1,540 -8.9%
of which: asset management 3,125 3,219 4,431 -94 -2.9% -1,306 -29.5%
of which: retirement savings 2,096 2,078 2,014 18 0.9% 82 4.1%
of which: assets under administration 10,574 10,593 10,890 -19 -0.2% -316 -2.9%
Loans to customers 23,692 22,705 22,051 987 4.3% 1,641 7.4%
Total Assets 30,262 28,933 27,919 1,329 4.6% 2,343 8.4%
Goodwill 942 944 994 -2 -0.2% -52 -5.2%
Net interbank position -1,627 -771 -1,670 -856 111.0% 43 -2.6%
Equity (including net income for the year) 2,734 2,730 2,719 4 0.1% 15 0.6%
Regulatory capital 2,444 2,425 2,469 19 0.8% -25 -1.0%
(+/-) % (+/-) %
Net interest income 306.1 653.0 319.3 n.s. n.s. -13.2 -4.1%
Net fee and commission income 130.7 271.9 136.3 n.s. n.s. -5.6 -4.1%
Net interest and other banking income 473.5 952.4 481.0 n.s. n.s. -7.5 -1.6%
Net adjustments to loans -75.9 -152.1 -66.7 n.s. n.s. -9.2 13.8%
Operating costs -308.7 -678.9 -353.4 n.s. n.s. 44.7 -12.6%
of which: payroll -197.8 -411.5 -203.2 n.s. n.s. 5.4 -2.7%
of which: other administrative costs -129.7 -261.2 -128.9 n.s. n.s. -0.8 0.6%
Profit from current operations before tax 77.3 172.1 150.9 n.s. n.s. -73.6 -48.8%
Net income for the period 52.5 108.7 114.8 n.s. n.s. -62.3 -54.3%
(+/-) % (+/-) %
Number of employees at the end of the period 5,656 5,645 5,596 11 0.2% 60 1.1%
Number of branches 634 637 634 -3 -0.5% - 0.0% Other information 30/06/2009 31/12/2008 30/06/2008 Changes 30/06/09 - 31/12/08 30/06/09 - 30/06/08Changes Changes 30/06/09 - 31/12/08 30/06/09 - 30/06/08Changes Income statement highlights
(in millions of euro) 30/06/2009 31/12/2008 30/06/2008
30/06/2008 30/06/09 - 31/12/08Changes 30/06/09 - 30/06/08Changes 31/12/2008
30/06/2009 Balance sheet and income statement
highlights
Key performance indicators 30/06/2009 31/12/2008 30/06/2008 30/06/09 - Changes 31/12/08 Changes 30/06/09 - 30/06/08 Structure ratios (%)
Loans to customers / Total assets 78.3% 78.5% 79.0% -0.2 p.p. -0.7 p.p.
Direct deposits / Total assets 73.3% 74.0% 71.0% -0.7 p.p. 2.3 p.p.
Loans to customers / Direct deposits 106.8% 106.1% 111.3% 0.7 p.p. -4.5 p.p.
Asset management and retirement savings / Indirect deposits 33.1% 33.3% 37.2% -0.2 p.p. -4.1 p.p.
Total Assets / Equity (leverage) 11.1 x 10.6 x 10.3 x 0.5 x 0.8 x
Profitability and efficiency ratios (%)
Adjustments to loans / Net interest and other banking income 16.0% 16.0% 13.9% 0.0 p.p. 2.1 p.p. Net interest and other banking income / Total average assets (1) 1.6% 3.4% 1.7% n.s. -0.1 p.p.
Administrative costs, amortization and depreciation / Total average assets (1) 1.1% 2.5% 1.2% n.s. -0.1 p.p.
Cost/Income (2) 67.2% 70.2% 68.0% -3.0 p.p. -0.8 p.p.
Productivity ratios (3)
Direct deposits per employee (in millions of euro) 3.9 3.8 3.6 2.6% 8.3%
Indirect deposits per employee (in millions of euro) 2.8 2.9 3.1 -3.4% -9.7%
Loans to customers per employee (in millions of euro) 4.2 4.1 4.0 2.4% 5.0%
Net interest income per employee (in thousands of euro) 53.8 117.3 58.0 n.s. -7.2% Net interest and other banking income per employee (in thousands of euro) 83.2 171.1 87.3 n.s. -4.7%
Payroll costs per employee (in thousands of euro) 34.8 73.9 36.9 n.s. -5.7%
Risk ratios (%)
Net impaired loans/Net loans 5.61% 3.77% 3.60% 1.84 p.p. 2.01 p.p.
Net non-performing loans/Net loans 1.69% 1.54% 1.58% 0.15 p.p. 0.11 p.p.
Non-performing loans coverage (%) (4) 51.03% 49.37% 46.89% 1.66 p.p. 4.14 p.p.
Impaired loans coverage (%) 28.09% 34.31% 33.20% -6.22 p.p. -5.11 p.p.
Performing loans coverage (%) 0.40% 0.45% 0.52% -0.05 p.p. -0.12 p.p.
Capital adequacy ratios (%) (5)
Core Tier 1 7.35% 7.34% 6.67% 0.01 p.p. 0.68 p.p.
Tier 1 (Tier 1 capital / Total weighted assets) 7.35% 7.34% 6.67% 0.01 p.p. 0.68 p.p. Total Capital Ratio (Regulatory capital / Total weighted assets) 11.36% 11.41% 10.40% -0.05 p.p. 0.96 p.p.
(1) Total average assets are determined as the simple average of total assets at the end of the current period/year and at
the end of the previous year.
(2) This indicator reports administrative costs (caption 180) plus net adjustments to property, plant and equipment and
intangible assets (captions 200 and 210) as a proportion of net interest and other banking income (caption 120) plus other operating charges/income (caption 220).
(3) The productivity indicators are calculated with reference to the average number of employees.
(4) The coverage of non-performing loans at 30 June 2009, including write-offs for bankruptcy proceedings still in
progress at 30 June 2009, was 63.05% (63.60% at 31 December 2008 and 60.97% at 30 June 2008).
(5) The above capital adequacy indicators have been determined in accordance with the methods for quantifying risk
assets used at 31 December 2008 and do not take account of the recent clarifications issued by the Supervisory Authorities in relation to the prudential treatment of certain types of loan secured by property mortgages for which intermediaries had requested clarification.
ECONOMIC AND FINANCIAL SCENARIO
Overview of the macroeconomic situation
Macroeconomic conditions during the first six months of 2009 were marked by a progressive easing of the financial crisis and the emergence of its effects on the real economy, at a time when the economic and financial situation remains extremely uncertain and challenging. The central banks and governments of the principal countries have adopted both conventional and unconventional measures in a decisive and, for the first time, coordinated response to the crisis. This action has considerably reduced tensions in the interbank markets and laid the foundations for the next economic recovery which, however, is not much in evidence yet, especially in Europe. The adverse effects of the crisis on employment is causing concern, given the related impact on consumption and the level of consumer confidence. Against this background, timid signs that the recession is easing are starting to emerge, as shown by the latest surveys of Italian and European households and businesses.
The banking system was also affected early on by the financial crisis and, more recently, has been hit by the economic recession. Indeed, the leading rating agencies have downgraded the credit ratings of numerous US and European banks, providing evidence that the level of risk remains high. The Italian banking system has tackled these operational difficulties by strengthening its capital base and focusing on funding activities, with a view to ensuring that adequate support is available for households and businesses. The dynamics of lending were much reduced during the first half of 2009, despite continuing their upward trend. By contrast, there has been a worrying upturn in non-performing loans and the general riskiness of banking assets, as an inevitable consequence of the serious recession currently underway. The decisive action to expand the money supply taken by central banks, pushing their policy rates to historical lows, has resulted in a marked drop in bank rates and in lending rates in particular. This has squeezed the spread even further. This said, the latest data suggests that the pricing of lending and funding may be stabilizing, assisted by the likely stability of the reference rates at current levels.
International economic scenario
Following the crash in output between the end of 2008 and the start of 2009, there are now early
indications that the worldwide recession may be easing. These signals are stronger in Asia,
but still weak in the industrialized economies. The timing and intensity of recovery must however be assessed with extreme caution, especially in view of the serious effects of the recession on employment, given that international demand is unlikely to recover rapidly in the near future. In Europe, in particular, the fall in GDP between the end of 2008 and the start of 2009 was greater than that seen in the United States, affecting all the old world economies at the same time. Those countries with an industrial base, such as Germany and Italy, were most affected, while the economies of France and Spain held up better. GDP in the Euro area contracted by 2.5% during the first quarter of 2009 with respect to the previous quarter, marking the fourth
consecutive reduction and the worst performance since the 1970s. The latest information
suggests, however, that this recessionary slide eased during the second quarter: industrial
production rose during May for the first time in a year (+0.5% with respect to April), reflecting a
better-than-expected increase in Germany and France. In addition, the improved climate of
consumer and business confidence identified by European Commission surveys was
consolidated in June, even though the current situation is viewed negatively - especially with regard to conditions in the job market.
As expected, inflation dropped rapidly throughout Europe during the second quarter of 2009. Indeed, the latest data released by Eurostat indicates deflation in June and July (-0.1% in June and an estimate of -0.6% at the end of July with respect to the prior year) for the first time since the time series was started back in 1991. This outcome largely reflects a reduction in the tensions associated with rising oil prices, as confirmed by the somewhat limited slowdown in the core rate of inflation (in the year to June, this measure which excludes energy and food rose by 1.3%). Of most concern, albeit expected, has been the impact of the international recession on employment in Europe. This is reflected in the latest statistics from Eurostat, which indicate that unemployment rose to 9.4% of the active population at the end of June. This is the highest level since 1999, consolidating the steady rise seen in recent months.
International monetary policy
EUROPE AND USA Rates trend -0.0 1.0 2.0 3.0 4.0 5.0 6.0 Dec-0 6 Jan-0 7 Fe b-07 Mar-0 7 Apr-0 7 May-0 7 Jun-0 7 Jul-0 7 Aug-0 7 Sep-0 7 Oct-0 7 Nov-0 7 Dec-0 7 Jan-0 8 Fe b-08 Mar-0 8 Apr-0 8 May-0 8 Jun-0 8 Jul-0 8 Aug-0 8 Sep-0 8 Oct-0 8 Nov-0 8 Dec-0 8 Jan-0 9 Fe b-09 Mar-0 9 Apr-0 9 May-0 9 Jun-0 9 BCE FED
Given the weak macroeconomic situation and the steady decline in inflation, the European Central Bank reduced its official rates by 25 basis points to 1.0% in early May, representing the lowest ever level. The ECB's reference rate remained unchanged at later meetings, although it was confirmed that 1% is not necessarily the minimum interest rate. Nevertheless, the current rate is deemed "appropriate" and the ECB has provided further assurance to the market that all developments will continue to be monitored very closely. At the same time, the European Central Bank has continued to facilitate the functioning of the markets, and a partial recovery of confidence in the interbank market, by guaranteeing the availability of significant liquidity. In particular, the ECB's first-ever 1 year auction held at the end of June placed about 440 billion euro (at a fixed rate of 1%), which was the most ever. Additionally, its program of covered bond purchases, launched on 6 July, saw acquisitions totaling 60 billion euro in order to provide further financial support to the economy. This ready access to funds has significantly eased tensions in the interbank markets: the differentials between the rates for unsecured loans (Euribor) and those for secured loans (Eurepo), a measure of the risk premium in the interbank market, have declined further since the start of April. Indeed, the differential on three-month maturities was down to less than 50 basis points by the end of June.
On 24 June, the Fed confirmed its intention to maintain unchanged, for an extended period, the target range for the interest rate on federal funds. This range was set at 0.0%-0.25% in December 2008. The pricing of futures on fed funds indicates that monetary policy for rates is not expected to change for the whole of 2009.
The Italian economy
Turning to the Italian economy, the prospects for recovery still look highly uncertain. Despite a moderate recovery in the confidence of households and businesses, domestic demand remains extremely weak in view of the cautious spending of Italian families, faced by the risk of a further deterioration in the employment situation, and there is little sign of improvement on the industrial front: according to the latest Istat data, industrial production unexpectedly dropped by a further 1.2% in June with respect to the prior month, reflecting a 21.9% drop with respect to June of last year. These conditions have had serious consequences for GDP, which is estimated to have fallen by an additional 0.5% during the second quarter with respect to the first (-6.0% with respect to the prior year), although this was better than the 2.7% drop reported for the first quarter of 2009. Assuming that GDP does not slide further during the remainder of 2009, this means that the contraction over the year will still exceed 5%.
Just as elsewhere in the Euro area, there was a sharp fall in the rate of inflation in Italy during the first half of the year. The preliminary estimate made by Istat actually shows that prices were unchanged in July with respect to both the prior month (current conditions) and the prior year (overall trend). This zero growth in the Italian consumer price index was partly due to favorable comparative statistics (the relevant monthly rise in the prior year was 0.5%, one of the largest in 2008), which should become less significant in the coming months and therefore give rise to a slight upturn in inflation. This is consistent with expectations for the rest of the Euro area, not least due to the recent upturn in international commodity prices.
The information available about the Italian job market, covering the first quarter of 2009, shows the initial consequences of the economic crisis, with a 0.9% fall in employment with respect to the prior year (-204 thousand jobs) and an increase in the overall unemployment rate to 7.9% (but to 26.3% among those under the age of 24, due to lower recruitment and the increased difficulty of renewing temporary contracts).
The credit and savings market
Trend of operating volumes % YoY -0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
g-08 l-08 a-08 s-08 o-08 n-08 d-08 g-09 f-09 m-09 a-09 m-09 g-09
Loans Deposits
Bank lending and credit risk indicators
Loans to customers and non financial companies ( % YoY ) -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
g-08 l-08 a-08 s-08 o-08 n-08 d-08 g-09 f-09 m-09 a-09 m-09 g-09
customers companies
Lending to the private sector during the first half of 2009 continued to reflect the currently weak economic conditions, as conditioned on the supply side by the ability of banks to access
liquidity and capital. According to data issued by the Bank of Italy, lending to Italian residents in
the private sector at the end of June was, nevertheless, up by 2.7% with respect to June 2008 (+0.4% since 31 December 2008), being slightly more than in previous months.
This performance reflects the progressive slowdown in lending to non-financial companies over the past year, especially with regard to the short-term element, due to slower demand for loans from businesses and also to supply restrictions which, however, have eased somewhat compared with previous quarters. By contrast, there has been an upturn in lending to
households and family businesses, with a rise of 4.7% over the year to June, reflecting growth
not seen for more than a year.
The quality of bank assets continued to deteriorate during the first half of 2009. Gross non-performing loans at the end of June were 18.3% higher than at the end of 2008, mainly due to a deterioration in the risk profiles of companies. As a consequence of this increase, the ratio of non-performing loans to total lending at the end of June 2009 was 3.19%, following a sharp rise from 2.70% in December 2008. The total exposure to borrowers designated as non-performing for the first time during the first quarter of 2009 (flow of new non-performing loans) was almost 50% higher than in the comparative period of 2008. This increased level of risk is confirmed by the data for other anomalous accounts, such as watchlist loans which, at the end of the first quarter, were about 15% higher than in December 2008. In addition, past due and overdrawn accounts were actually up by more than 26% over the quarter, signaling a further deterioration in the quality of bank portfolios over the coming months.
Deposits
Recent data highlights the stabilization of funding activity in Italy, although the level remains high. At the end of June, the Euro deposits of Italian banks (deposits from resident customers and bonds) were 10.8% higher than in June 2008 (+5.2% since December 2008), reflecting the essential stability of customer deposits and a slight downturn in bonds. In particular with regard to deposits, there was a 23% decline in repurchase agreements with customers in the year to June, as already noted in earlier months, while there was an upturn in the more liquid forms of deposit due to the preference of households for secure assets at this time of significant uncertainty. With regard to asset management, the latest data for July signals - at last - the first signs of a
recovery in the mutual funds sector. For the second time this year, there were positive net
inflows of about 1.8 billion euro, led by the foreign funds promoted by Italian and foreign groups: this performance bodes well for the annual results of this sector which, since January, is still down by about 12.5 billion euro. At the end of July, the total investment in mutual funds and sicavs exceeded 412 billion euro, up by 2.5% since the end of 2008.
Bank interest rates
The reductions in the ECB's policy rates have been reflected in the entire structure of banking rates, which touched historical lows at the end of the period.
With regard to lending rates, ABI's weighted-average rate for loans to households and non-financial companies dropped during the first six months of the year by 175 basis points. Nevertheless, this was less than the fall in market rates (e.g. 3-month Euribor) over the same period, resulting in a slight increase in mark up since the end of 2008. The latest data indicates that the rate of decline in lending rates is now slower than in the first part of the year, which suggests that they will stabilize soon.
Funding rates have also continued to decline, albeit slower than the fall in market and bank lending rates. This reflects the need of banks to secure the largest possible supply of funds from customers, given the current uncertainties about the sources of wholesale funding. Over the six-month period to the end of June, the rates paid on deposits and bonds fell by 106 and 138 basis points respectively. The larger decline in market rates has resulted in a significant contraction in the mark down to historically low levels.
The rate of decline in the banking spread, being the difference between lending and funding rates, is clearly much slower at the end of June and can be expected to stabilize in the coming months, possibly with a slight recovery towards the end of the year.
Innovations in the regulatory framework
The current regulatory framework reflects measures taken in the first half of the year to tackle the serious crisis affecting the international economy. Among the more significant changes for the banking sector was the adoption of Law 2 dated 28 January 2009, which converted Decree
185 dated 29 November 2008 (the "Anti-crisis Decree"). Art. 2 bis, added to this law upon
conversion, renders void any contract clauses governing the commission charged on the maximum overdraft drawdown, if the current account is overdrawn for a continuous period of less than thirty days and a line of credit has not been agreed with the customer. This article also rends void any clauses remunerating the bank for making facilities available to current account holders, regardless of the actual drawdown and regardless of the actual period for which such funds are used by the customer, except if:
− the consideration for the service provided by the bank is predetermined, together with the interest rate to be charged on the actual drawdown, in a written agreement that is not renewable automatically which specifies an all-inclusive cost that is proportional to the amount and the duration of the credit line requested;
− this consideration is specifically identified in a statement provided to the customer at least once each year, indicating the actual drawdown during the reference period and
− the customer has the right to withdraw from the agreement at any time.
Pursuant to para. 2 of this article, the interest, fees and commissions deriving under whatever name from clauses that envisage remuneration for the bank, based on the actual period for which funds are used by the customer, are covered by the anti-usury regulations (art. 1815 of the Italian Civil Code, art. 644 of the Penal Code and arts. 2 and 3 of Law 108/1996). Until the average overall effective interest rates are determined pursuant to the new regulations, the instructions ruling when the above conversion law came into force will continue to apply, with reference to transition arrangements to be issued by the Ministry of the Economy and Finance.
In addition, a moratorium for loans to SMEs was signed and came into force on 3 August 2009 between ABI, Confindustria, the Ministry of the Economy and trade associations belonging
to the Permanent observatory for banks and companies. This agreement envisages a freeze
for at least 12 months in payments of the principal element of installments on property loans and leases, and for 6 months in the case of leases of operating assets. In addition, the accord - which covers firms with fewer than 250 employees and sales of less than 50 million euro - envisages the deferral by 270 days of the due dates for the payment of short-term balances. These facilities will be extended without any change in the interest rates charged. The agreement is however voluntary: following signature, banks have up to 45 days to decide whether or not to participate. Among the other measures relevant to the sector, Consob Decision 16840 dated 19 March
2009 ("Decision 16840") modified Regulation 11971 dated 14 May 1999 ("Issuers' Regulation") to
complete at a secondary level the alignment of Italian regulations with the requirements of the Prospectus Directive. The new Issuers' Regulation came into force on 1 July 2009, with certain important exceptions that will come into force on the fifteenth day following the publication of Decision 16840 in the Italian Official Gazette. These include the exemption from the rules applying to public offers of qualified investor, as redefined in the new text. The adoption of this Directive in Italy has taken a long time. The Directive itself envisaged adoption by 1 July 2005. Regulation 809/2004/EC was adopted in April 2009. This provides enabling instructions for the Prospectus Directive in terms of the information contained in schedules, the format of schedules, the inclusion of information in the form of references, the publication of prospectuses and the communication of advertising messages. About one week after issuing Decision 16840 dated 19 March 2009, Consob published Decision 16850 dated 1 April 2009 which completed the alignment of the Issuers' Regulation with the Transparency Directive. This harmonizes the transparency requirements for information about issuers whose securities are admitted for trading in a regulated market, introducing standard rules for the disclosures to be made by listed issuers and their stockholders, as well as regulations for the communication of corporate information to the public. A second-level directive was issued in March 2007 (Directive 2007/14/EC), which
determined how to apply certain provisions contained in the Transparency Directive. Decree 195/2007, which came into force in November 2007, adopted the Transparency Directive into Italian legislation, modifying a series of instructions contained in Decree 58 dated 14 February 1998 (the "Consolidated Finance Law" or "TUF"), especially in relation to the provision of financial information. This decree delegated to Consob the issue of detailed regulations for certain specified topics. In execution of these powers, Consob presented the proposed changes to the Issuers' Regulation for public consultation. This process was completed in September 2008, resulting in publication by the authority of a new version of the Issuers' Regulation that completed the adoption in Italy of the Transparency Directive.
By a decision dated 18 June 2009 (published in the Italian Official Gazette 144 on 24 June 2009) “Instructions for systems for the out-of-court settlement of disputes about banking and
financial services and transactions”, the Bank of Italy established the role of the Banking and
Financial Arbitrator (ABF). The new system is intended to enable the customers of banks and financial intermediaries to obtain an impartial decision, simply, quickly and cheaply, about complaints that were not resolved by direct discussion with the intermediary concerned. In particular, recourse may be made to the ABF concerning all disputes about the existence of rights, obligations and available elections, regardless of the value of the relationship concerned. If, however, the request of the appellant relates to payment of a sum of money, the amount concerned must not exceed Euro 100,000.
The ABF is not empowered to consider:
− disputes concerning services, investment activities and other cases not covered by Book VI of the Consolidated Banking Law pursuant to art, 23.4 of the Consolidated Finance Law;
− claims for damages that are not an immediate and direct consequence of non-performance or a breach of contract by the intermediary;
− questions concerning tangible assets or services other than banking and financial services covered by the contract between the customer and the intermediary, or by related contracts;
− disputes relating to transactions or behavior that took place prior to 1 January 2007;
− disputes already placed before the judicial authorities, referred to arbitration or which are already the subject of mediation effort (except that recourse may be made to the ABF within six months of the breakdown of an attempted conciliation, even if more than twelve months have elapsed since presentation of the complaint to the intermediary).
The ABF will comprise three panels, based in Milan, Rome and Naples. Customers may make recourse to this new system for the out-of-court settlement of disputes from the end of September 2009.
GROWTH OF THE BPVi GROUP: ACTIVITIES OF STRATEGIC IMPORTANCE
Operating conditions during the first half of 2009 were extremely difficult and uncertain. During this period, the BPVi Group continued to pursue the development guidelines set out in the Business Plan 2008–2011, concentrating efforts on the consolidation of growth while ensuring the necessary support at all times for households and businesses in the areas covered by Group operations. This approach truly expresses the values of a people's bank dedicated to serving its various local territories.
The changes in corporate governance are first in order of importance. These were made pursuant to the new "Supervisory instructions for the organization and governance of banks", issued on 4 March 2008, and presented as amendments to the articles of association for approval at the Stockholders' Meeting held at the end of April 2009. Additional changes to the governance of the Group were introduced at the end of the prior year. These included revisions
to the planning and control tools and processes employed so that they focus more on the
best use of capital, the identification and monitoring of risk, and the careful management of costs. Action to relaunch the Commercial Network has included the recent activation of the new
Network Model, which simplifies the chain of command for sales outlets and restores the "central
role" of the Branch manager. The launch of the “Start” program was also closely coordinated with the introduction of the new Network Model. The objective of this program is to improve the effectiveness of customer relationship management activities, both in terms of personnel behavior and with regard to communications and the tools used. Work has also continued on the
plan to renew the range of products and services offered, with several commercial
innovations dedicated to the business segment.
Key organizational measures completed to improve the operational efficiency of the Group have included the centralization of back office management (for BPVI, Cariprato and Banca Nuova) at Servizi Bancari, a consortium with about 230 employees after spin-off of the related line of business from each Group bank, and of ICT management processes at the Parent Bank.
Action to optimize the Group structure has also continued in accordance with the Business Plan. The merchant banking and private equity sector has been rationalized via the absorption of Nuova Merchant by Nordest Merchant, both Group companies operating in this sector, and by starting the process for the absorption of NEM SGR S.p.A. by NEM DUE SGR S.p.A., both Group companies that manage closed-end mutual funds.
On 16 April, the Bank of Italy announced a follow-up inspection to verify the suitability of the steps to reorganize taken by the Parent Bank, in order to overcome the weaknesses identified during the earlier inspection that ended in March 2008. This inspection was completed on 7 August.
Finally, Standard & Poor’s and Fitch Ratings have recently maintained their positive ratings, in confirmation of the financial strength of the Bank and the proper implementation of the consolidation strategy set out in the Business Plan 2008-2011, despite the continuation of highly uncertain and challenging macroeconomic and sector conditions.
Implementation of the Business Plan 2008-2011
As described in the Report on operations at 31 December 2008, a special program of change was devised and launched following approval of the Business Plan 2008-2011 on 11 September 2008. The purpose of this program is to guide the necessary work and ensure that the Plan's objectives are achieved. The various programs and projects were brought together in a Master Plan and organized into “directions” dedicated to revising the Group's governance model, evolving the processes and tools employed for governance and control, optimizing the corporate and organizational structure, relaunching the Group's commercial strategy and rationalizing the sales network. Supervision of the work was entrusted to a Group Coordination Committee which receives periodic reports from the “Business Plan Committee”, which comprises the persons responsible for each “direction”. In addition, progress is also checked periodically by the Internal
Audit Department and the Board of Statutory Auditors.
About half (54%) of the activities envisaged in the detailed master plan have already been completed by the end of the first half of 2009 (76 activities out of 140), while 41% are currently in
progress and just 5% have not yet commenced. This performance highlights the efforts being made by all Group functions to achieve the Plan, which has a three-year time horizon.
Revision of the Group's governance model and evolution of the processes and tools employed for guidance, governance and control
The principal objectives of the Business Plan include strengthening the ability of the Parent
Bank to provide strategic guidance and operational coordination by revising the organizational structure and the related governance and control processes.
Before considering in detail the action taken in the area of Group governance and control pursuant to the new regulations for corporate governance and organization set out in the
“Supervisory instructions for the organization and governance of banks” issued on 4
March 2008, it is important to note that the Board of Directors of BPVi carried out an assessment of the composition of corporate bodies and committees during the first half of 2009, including the procedures for appointing and removing their members, as well as the rights of shareholders, the financial structure and the process for managing conflicts of interest. This work identified a number of appropriate changes to be made to the articles of association, having regard for the above Instructions. In particular, having completed the review, obtained clarification from the Supervisory Authorities, held discussions with lawyers and taken account of recommendations made by the National Association of People's Banks, the changes to the articles of association presented for approval at the Stockholders' Meeting included:
− extending the duties of the Ordinary meeting to approve the remuneration policy for directors, employees and consultants not associated with the bank via employment contracts, as well as any plans based on financial instruments;
− increasing the maximum number of proxies that may be held by an individual stockholder (from one to two), in order to facilitate the participation of members at meetings;
− procedures for the appointment of corporate bodies and for the nomination of stockholders as members of these bodies;
− a requirement for at least two directors to be independent and at least four to be non-executive directors;
− rewording the list of matters that cannot be delegated by the Board of Directors;
− rewording the duties and powers allocated to the statutory auditors, including the specific exclusion due to incompatibility of non-audit appointments at other Group companies and at companies representing strategic investments despite not belonging to the Group.
Key organizational action to improve the Group's operational efficiency has included the
completion of work to centralize back office management (for BPVI, Cariprato and Banca
Nuova) at Servizi Bancari, a consortium, and to transfer departmental ICT management
processes from Servizi Bancari to the Parent Bank, along with the related rationalization of
With regard to the centralization of back office activities, the Servizi Bancari consortium now has about 230 employees, following spin-off of the relevant line of business from each Group bank, and commenced its new activities from 1 March 2009.
Following recent action to centralize activities, a further check will be made for opportunities to simplify/rationalize the structure of the Group's banking subsidiaries by centralizing other non-core activities within the Parent Bank. This will enable the banking subsidiaries to focus more on business development and credit control, while maintaining appropriate supervision of their systems, personnel, operational and risk management, reporting and compliance/general secretariat functions.
Action to strengthen the ability to direct, govern and control the Group's activities has included work to revise the planning and control tools and processes employed, so that they focus more on the best use of capital, the identification and monitoring of risk, and the careful management of costs. In particular, the Group's strategic and operational planning processes have been
revised and formalized in a regulation approved by the Board of Directors of the Parent Bank,
and the boards of all banks and companies within the Group. This regulation defines and standardizes at Group level the criteria for and approach adopted by the processes for strategic and operational planning, the evaluation of strategic investments and operational control. The objective is to ensure the consistent identification of objectives and actions by the Parent Bank and Group companies, as part of a coordinated entrepreneurial approach that fully respects the decision-making process underlying the selection of strategic investments. The new processes are supported by updated operational and reporting tools. Innovations have include the implementation and initial use by the Parent Bank of a new system of operational reporting at both Bank and Business Unit/Segment level, and the development of reports to monitor the results of the commercial networks from a more integrated risk/yield perspective. In addition, a Group-level working party on cost management has been formed, with a view to refining the processes followed for the planning, management and control of spending and investment at Group level.
Optimization of the corporate structure
In terms of corporate structure, the Business Plan envisages the rationalization of
non-strategic investments and the promotion of companies contributing to the development of the business.
Many steps have been taken in this direction between the end of 2008 and the first half of 2009. In particular, the merchant banking sector has been rationalized via the absorption of Nuova
Merchant by Nordest Merchant, both Group companies. This was completed at the end of July
2009, following a period of 60 days during which no objections were received from creditors.
"Nuove Infrastrutture", a closed-end mutual fund, has been closed early as part of the reorganization of the asset management sector. This fund was launched in 2007 and is
managed by NEM SGR S.p.A., a BPVi Group company that is wholly owned by Nordest Merchant. The objective of the Nuove Infrastrutture fund was to invest in infrastructure projects via the purchase of majority and minority interests in companies operating in the infrastructure sector, and in the management of local public services on a public-private partnership basis. The early closure of this fund, decided by the Parent Bank's Board of Directors at the end of May 2009, reflects the significant difficulties experienced since the end of 2008 in obtaining finance for infrastructure projects. More in general, it also reflects the considerable time required for transactions involving a public-private partnership, which is no longer compatible with the residual life of the fund.
Lastly, a further rationalization of the BPVi Group's corporate structure will take place soon, with the forthcoming absorption of NEM SGR S.p.A. by NEM DUE SGR S.p.A., which was approved by the Parent Bank's Board of Directors on 21 July 2009. These two asset management companies, wholly owned by Nordest Merchant, manage both speculative (NEM DUE SGR S.p.A.) and non-speculative (NEM SGR S.p.A.) closed-end mutual funds. This merger, which would greatly simplify the operations and governance of the two structures, has been made possible by recent changes to the Supervisory regulations allowing speculative asset management companies to manage closed-end, non-speculative funds. The merger should have legal effect from early 2010, once the necessary authorizations have been received from the Supervisory Authorities.
Relaunch of the Group's commercial strategy and rationalization of the sales network
The Business Plan envisages that the further commercial expansion of the Group will be achieved by refocusing on the traditional core business, placing additional emphasis on services and the distribution of products, while also relaunching the sales outlets in terms of
In this regard, the new Network Model was activated by all Group banks during the first quarter of 2009. This simplifies the chain of command sales outlets, facilitating the more effective and timely provision of services to customers and re-establishing the "central role" of the branch manager. This change has eliminated the intermediate level of Area lead branch and resulted in creation of the manager role for the three key markets, Corporate, Small Business and Retail, as well as the activation of new mechanisms for coordination between the branches and the Commercial Areas. The launch of the “Start” program was also closely coordinated with the introduction of the new Network Model. The objective of this program is to improve the effectiveness of customer relationship management activities, both in terms of personnel behavior and with regard to communications and the tools used.
As part of action to rationalize and reposition the sales network, 8 critical branches were closed during the first six months of the year (plus a further 4 by the end of July 2009), while 3 branches were moved to more attractive locations and the opening of 3 additional branches was approved, with the same number of closures. Special action was also taken in support of recently opened branches, and specific plans have been developed for the recovery of each underperforming branch (those with costs in excess of 80% of income).
Work to upgrade the commercial "push" has included the continuation of efforts to renew the
range of products and services, considering the economic-commercial objectives assigned for
each customer segment. The latest additions to the product catalog are described in more detail in the chapter on "Products, Services and Markets".
Control of credit risk
Credit risk is inherent to commercial banking activities. The objective for this area, established in the Business Plan, is to improve constantly the processes, methodologies and tools used to grant, manage, monitor and recover loans. Key action during the period in this regard included
completion of the new rating system for all segments (Private, Small Business, Small,
Medium and, most recently, Large Corporate) and its integration with the processes adopted
for the granting and management of loans. The rating of Large Corporate positions, being
companies with sales in excess of 50 million euro, is determined with reference to direct experience rather than via the statistical procedures used to rate other segments.
Other action involved inclusion of the new lending processes within the electronic lines of credit system (PEF), together with the authorization system defined recently as part of the credit policies approved at Group level at the end of 2008.
With regard to work to prevent the deterioration of loans, via the evolution of existing methodologies and analytical support tools, and the implementation of any corrective action required, a new operational "early warning" model for the environmental monitoring of lending has been installed by all Group banks. Compared with the previous model, the new system considers a larger number of parameters and therefore potential anomalies, while also identifying, reporting and updating the situation with regard to such anomalies on a more timely basis. Further details are provided in the chapter dedicated to Risk Management.
Measurement of capital adequacy (ICAAP)
As described in the Report on operations at 31 December 2008, the requirements associated with introducing the new process for monitoring the overall exposure to risks of intermediaries, known as the Second Pillar of Basel II (Bank of Italy Circular 263/2006 and subsequent updates), involved submission of the complete ICAAP (Internal Capital Adequacy Assessment Process) Statement to the Supervisory Authorities by 30 April 2009, covering Group data at 31 December 2008. The Second Pillar supplements the quantitative rules envisaged by the First Pillar for the determination of prudent capital with a process (the prudent control process) that takes account, via self assessment and discussions between the Supervisory Authorities and the intermediary, of the latter's special cases and specific risk profiles. This means that the possible effect on intermediaries of changes in markets, products and technologies can be evaluated more readily. The key steps taken by the BPVi Group for the preparation of this statement involved the identification of risks and the creation of a risk map for the Group and for the individual functions within the Parent Bank and its subsidiaries, the development of methodologies for the
measurement of "quantifiable" risks and verification of the organizational control over risks (both
quantifiable and unquantifiable), the allocation of roles and responsibilities to boards, committees and functions in relation to ICAAP, the preparation of ICAAP Regulations, and the
validation of the ICAAP Process in terms of its compliance with the regulations by the Board of
Statutory Auditors, assisted by the internal audit function. The opinion on conformity was supplemented by the considerations of the Compliance function regarding compliance with the external and self regulations applying to the ICAAP process. In extreme summary, the assessment of capital adequacy contained in the ICAAP statement sent to the Bank of Italy on 30 April 2009 shows that regulatory capital is adequate, on both a current (31 December 2008) and forward-looking basis (31 December 2009), to deal with all the risks faced by the BPVi Group in relation to its operations, reference markets and propensity to accept risk which, as resolved by the Board of the Parent Bank on 22 December 2008, is measured with reference to a target level of equity and external ratings. This Statement must be prepared on an annual basis and delivered in April with reference to the data at 31 December.
Purchase of line of business from the UBI Banca Group
Two contracts were signed on 27 February 2009 with the UBI Banca Group for the acquisition of the Corporate Business Unit (CBU) of Banca Popolare Commercio e Industria and its Palermo Branch located in Via Notarbartolo. The acquisition of the Corporate
Business Unit by the Parent Bank, comprising corporate customers in the provinces of Brescia and Bergamo, was supplementary to the previous acquisition on 31 December 2007 of 18 bank branches (out of the 61 branches acquired from the UBI Banca Group) located in these provinces. As such, the transaction took place without the Group paying any additional
consideration. The Palermo Branch was acquired by Banca Nuova at a provisional price of 2
million euro, which will be adjusted if the amount of deposits reported in the final balance sheet is lower than that reported at 31 July 2008 (the reference date for the initial balance sheet). These
acquisitions were completed on 1 March 2009. The balance sheets of these two lines of
business at 1 March 2009 are presented in "Part G - Business combinations" of these Explanatory Notes.
Ratings
The most recent ratings for BPVi given by Standard & Poor’s and Fitch Ratings are summarized below.
Rating's agency Long term Short term Outlook Date
Standard & Poor's A- A-2 Negative 01/07/2009
Fitch Ratings A- F2 Negative 04/08/2009
The usual meetings between the Parent Bank's management and analysts from the rating agencies resulted in confirmation of the positive ratings given previously. This maintenance of BPVi's credit rating is an extremely good outcome, in view of the current highly uncertain and challenging conditions affecting the sector and the macroeconomic situation. The stable rating undoubtedly confirms the solidity of the Bank's capital base and the soundness of the consolidation strategy set out in the Business Plan 2008-2011.
In particular, the two agencies have recognized that the Bank's key strengths include its good positioning in the rich regions of North-East Italy, the good diversification of the loans portfolio and the improvements made in the control and management of risk. Nevertheless, the high level of operating costs, mainly associated with the rapid growth sought in recent years, and the higher than average cost of credit risk, continue to penalize overall performance. The negative outlook reflects, in particular, fears about the impact the recession might have on economic performance and the cost of the risks accepted by the Group. The rating agencies have, nevertheless, recognized the efforts made by management over the past year to improve the management of risk, as well as the Group's focus on the consolidation of growth and the rationalization of its cost structure. Lastly, the level of capitalization achieved at the end of 2008 (Tier 1 of 7.34%) is deemed adequate.
Other information
New securitization: Berica 8 Residential MBS
With the intention of managing liquidity risk more efficiently and effectively, the BPVi Group has securitized its eighth portfolio of residential mortgages. On 29 May 2009, with effect from 1 June 2009, loans totaling euro 1,401,807,817 were sold to “Berica 8 Residential MBS Srl”, based in Vicenza, by Banca Popolare di Vicenza (714.6 million euro), Banca Nuova (488.8 million euro) and Cariprato (198.4 million euro). The securities issued in connection with this securitization, governed by Law 130 dated 30 April 1999, were taken up in full by BPVi Group banks in proportion to the loan portfolios sold by each of them. These securities can be used as collateral for short-term loans at fairly competitive rates at times, such as at present, when the markets are short of liquidity.
Inspection by the Bank of Italy
The inspection completed by the Supervisory Authorities in March 2008 identified organizational and internal control weaknesses subject to administrative fines pursuant to art. 144 of Decree 385 dated 1 September 1993 (Consolidated Banking Law - TUB). In this regard, on 28 April 2009, the Bank of Italy notified the levy of fines totaling 560 thousand euro on the members, at the time, of the Board of Directors and the Board of Statutory Auditors, as well as on the former General Manager.
Commencing from 2008, the Bank has taken a complex series of actions (Business Plan 2008-2011 and detailed master plan for the various "Directions") designed to eliminate the weaknesses found.
On 16 April 2009, pursuant to arts. 54 and 68 of Decree 385 dated 1 September 1993, the Bank of Italy commenced a follow-up inspection designed to evaluate the suitability of the reorganizational measures taken by the Bank to overcome such weaknesses. This inspection was completed on 7 August.
Significant court cases
In March 2008, the "Adusbef" consumers' association presented a complaint to the Vicenza Court, contesting the value of the shares in Banca Popolare di Vicenza and requesting the magistrates to open criminal proceedings against representatives of the Parent Bank. On 21
April 2009, the Judge for the Preliminary Investigation at the Vicenza Court, acting on an
application from the Investigating Magistrate, ruled that the above proceedings should be
archived. Given this ruling, this case is now deemed to be completely closed.
On 28 January 2009, the Lazio Regional Tax Tribunal accepted an appeal lodged by Banca Popolare di Vicenza and Banca Nuova and cancelled the action taken by the Italian Antitrust
Authority in August 2008 against these two Group banks (and numerous others). This action
related to alleged unfair business practices adopted by the Parent Bank and its subsidiary concerning the transferability of mortgages without charge. The Antitrust Authority has until 18 September 2009 to appeal to the Council of State against this decision.
OPERATIONAL STRUCTURE
This section provides information about the territorial presence and positioning of the branch network and the changes in employment by the BPVi Group.
Territorial presence of the Banca Popolare di Vicenza Group
At 30 June 2009, the BPVi Group's network comprises 634 branches (3 fewer than in
December 2008) situated in 11 regions and 57 provinces throughout Italy. This represents
about 1.9% of the national total.
The 5 provinces with the largest number of branches are, in order: Vicenza, Treviso, Brescia,
Udine and Prato
Trend of branches BPVi's Group
332 332 333 345 429 436 432 54 61 67 80 92 94 94 67 99 100 103 106 106 107
dec-2003 dec-2004 dec-2005 dec-2006 dec-2007 dec-2008 jun-2009
BPVI
Cariprato
Banca Nuova
Farbanca
453
492
500
528
628
637
634
The following table shows the territorial presence of the BPVi Group's branch network, analyzed by region and principal province, at 30 June 2009.
Geographical distribution of
branches BPVi's Group
30/06/2009
31/12/2008
Change
Veneto 259 260 -1 Vicenza 95 98 -3 Treviso 56 56 0 Verona 32 32 0 Padova 32 31 1 Venezia 24 23 1
Friuli Venezia Giulia 66 68 -2
Udine 37 39 -2 Pordenone 15 15 0 Lombardia 85 87 -2 Brescia 38 40 -2 Bergamo 23 24 -1 Milano 12 12 0 Emilia Romagna 16 15 1 Liguria 4 4 0 Piemonte 2 2 0
Trentino Alto Adige 1 1 0
NORD ITALY 433 437 -4 Toscana 94 94 0 Prato 34 34 0 Firenze 22 23 -1 Pistoia 9 9 0 Lazio 12 12 0 Roma 9 9 0 CENTER ITALY 106 106 0 Sicilia 80 79 1 Palermo 26 25 1 Trapani 18 18 0 Calabria 15 15 0 SUD ITALY 95 94 1
TOTAL
634
637
-3
At the end of June 2009, the BPVi Group has 3 fewer branches than at 31 December 2008 due to rationalization of the commercial network. In particular, the Parent Bank opened 3 branches in Ferrara, Jesolo (Venice) and Piazzola sul Brenta (Padua), and closed 7 in Nembro (Bergamo), Marchesane di Bassano del Grappa (Vicenza), Spagnago (Vicenza), Ialmicco (Udine), Montichiari no. 1 (Brescia), Udine no. 10 and Vicenza no. 19.
Banca Nuova completed the purchase of a branch in Palermo from the UBI Banca Group,
while the number of Cariprato branches was unchanged following the opening of one branch and the closure of another during the first quarter of the year.