Annual financial report 2019 Financial Year

Economic results

Reclassified income statement¹

* This item includes personnel costs, other administrative expenses and operating amortisation/depreciation.
(Figures in millions of euro)	31/12/2019
Interest margin	1,179
Net commissions	644
Dividends	3
Net trading revenues	177
Net interest and other banking income	2,003
Net value adjustments/write-backs	(313)
Income from financial activities	1,690
Operating charges*	(1,575)
Net allocations to provisions for risks and charges	(20)
Other income (charges)	222
Value adjustments to goodwill and other intangible assets	(27)
Profit (loss) from disposal of investments and equity investments	(5)
Gross current result	285
Income tax	(60)
Profit (loss) for the year for minority interests	(4)
Net result of the Parent Company	221

¹ In order to provide a better management representation of the results, the reclassified income statement figures differ from the layouts of the financial statements envisaged by Bank of Italy Circular no. 262 of 2005, 6^th update.

Financial position aggregates

Reclassified statement of financial position¹

(Figures in millions of euro)	31/12/2019
ASSETS
Cash and cash equivalents	555
Exposures to banks	1,166
Exposures to customers	41,230
of which at fair value	286
Financial assets	26,689
Equity investments	89
Tangible and intangible assets	1,353
Tax assets	872
Other asset items	851
Total assets	72,805
LIABILITIES
Due to banks	7,474
Direct funding	56,669
Due to customers	50,055
Debt securities in issue	6,614
Other financial liabilities	101
Provisions (Risks, charges and personnel)	386
Tax liabilities	80
Other liability items	1,611
Total liabilities	66,321
Third party minority interests	4
Group equity	6,480
Consolidated equity	6,484
Total liabilities and equity	72,805

¹ In order to provide a better management representation of the results, the reclassified income statement figures differ from the layouts of the financial statements envisaged by Bank of Italy Circular no. 262 of 2005, 6^th update.

Affiliated Banks

The affiliated Banks represent the most important part of the Group’s consolidated assets and the strength of the Group’s current and future development. The affiliated Banks traditionally operate with the aim of fostering the development of communities and the local economy. The principles of mutuality, which characterise cooperative credit, allow banks to play a fundamental role in the national banking industry and be an important reference point for households and small and medium-sized enterprises (hereinafter also “SMEs”).

The Group’s strategic plan aims to develop relationships with households and SMEs by making the most of the territorial network and exploiting synergies, the expansion of the commercial offer and economies of scale resulting from belonging to a Group of national importance.

In general, the structure of cooperative credit banks reflects the nature of territorial banks, characterised by high customer funding deriving from historical ties with the territory to which they belong, a prevalence of loans to counterparties represented by households and small companies and a low ratio of loans to deposits, with excess liquidity invested mainly in government securities.

Below is a summary representation of the main income statement and statement of financial position aggregates of the affiliated Banks, with a focus on the individual territorial areas in which the Group operates.

(Figures in millions of euro)

LOANS TO CUSTOMERS	Trentino-Alto Adige	North East	North West	Central	South and the Islands	Total
Gross customer loans	10,164	9,161	9,604	9,581	4,043	42,553
- of which performing	9,152	8,400	8,644	8,717	3,574	38,487
- of which non-performing	1,012	761	960	864	469	4,066
Value adjustments	582	498	586	551	303	2,520
Net customer loans	9,582	8,663	9,018	9,030	3,740	40,033

The operations of the affiliated Banks are mainly concentrated in the northern part of Italy, in line with the territorial structure of the branches.

Total gross loans amounted to EUR 42.6 billion at the end of 2019 (approximately EUR 40.0 billion net of adjustment funds) and was allocated on a uniform basis to four of the five geographical areas into which the Group is divided. There is less of a presence in the South and the Islands area which sees a significant number of affiliated Banks, but on average of small size. In a year in which the many activities connected with the launch of the first Italian Cooperative Banking Group have certainly fully engaged the operating structures, the affiliated Banks have seen a constant growth in the volumes of credit, confirming their central role in supporting the growth, including economic growth, of the reference territories. New credit provisions to both households and local SMEs have grown, in a development that has characterised all territorial areas, but more rapidly for the South and the Islands.

The percentage of impaired loans to gross loans, around 9.3% at Group level, is more virtuous in the North-East and progressively higher in the Central, South and the Islands areas. It should be noted that in all areas, during the Group’s first year of operations, there was a marked reduction in the stock of impaired loans, in line with the Group’s guidelines and strategies.

Confirming the Group’s strong focus on risk management and credit risk management in particular, provisions have been further increased and have reached average coverage levels, for the affiliated Banks, among the highest in the national banking system, despite the sharp decline in the stock of impaired loans.

(Figures in millions of euro)

FUNDING	Trentino-Alto Adige	North East	North West	Central	South and the Islands	Total
Overall funding	19,652	17,166	18,395	15,884	6,416	77,513
Direct funding	13,489	11,343	12,633	11,335	5,717	54,517
Indirect funding*	1,822	5,823	5,762	4,549	699	22,996
- of which administrated	1,822	2,131	2,377	1,460	371	8,161
- of which managed	4,341	3,692	3,385	3,089	328	14,835

* Indirect funding is expressed at market values

Direct funding also sees a distribution among the territorial areas proportionally in line with that already described for the credit volumes. All areas show a structural surplus of funding resources in the ratio of lending to funding, which results in a high degree of liquidity for the affiliated Banks and therefore for the Group. The prudent approach to the investment of resources funded from depositors (typically households) historically characterises the operations of the BCC-CR-RAIKAs, which allocate these resources mainly to households and small and medium-sized enterprises in the area of reference.

Administrated and managed funding of the affiliated Banks, amounting to approximately EUR 23 billion, accounts for 30% of total funding, with a differentiated situation at the level of individual geographical areas, spanning from 34% in the North-East to 11% in the South and the Islands. In indirect funding volumes, the incidence of managed and insurance funding products prevails, with the exception of the South and the Islands area where volumes are very low.

This operation has always seen affiliated Banks lagging behind the rest of the banking industry, having historically favoured the placement of direct funding products. The trend has changed in recent years; important investments have been made in the specialist training of staff of the affiliated Banks in order to increase their ability to offer shareholders and customers a high level of advisory support. These investments, supported by the careful research of the Industrial Group’s companies for products suitable for BCC-CR-RAIKAs’ shareholders and customers, is gradually closing the gap, while maintaining a high level of attention to the quality of the overall service offered to the savings customer.

(Figures in millions of euro)

MARGINS AND COMMISSIONS	Trentino-Alto Adige	North East	North West	Central	South and the Islands	Total
Interest margin	266	238	229	257	145	1,136
Net commissions	112	125	130	127	53	547
Net interest and other banking income	413	388	389	420	222	1,832

The income contribution from the interest margin for the affiliated Banks amounts to approximately EUR 1.1 billion, equal to 62% of net interest and other banking income, with a higher percentage in the South and the Islands and Trentino-Alto Adige.

The contribution of the interest margin to overall profitability is high, confirming the predominantly traditional banking operations that characterise the affiliated Banks and therefore the Group as a whole. The main source of income remains the traditional activity of collection of savings and lending in the territories where the affiliated Banks are located. To this must be added the investment of excess liquidity mainly in securities of government issuers or in relation to the Parent Company.

The prevailing market conditions have for years now seen interest rates at an all-time low. These conditions have contributed to the gradual reduction of the contribution of the interest margin to primary profitability. The ability of the affiliated Banks to offer shareholders and customers services capable of completing the commercial offer and increasing margins from services, is becoming increasingly decisive. This path will continue, but always with a strong focus on the protection of shareholders and customers in compliance with the cooperative principles that are the basis of the operations of the affiliated Banks.

The net commissions of the affiliated Banks totalled EUR 547 million, with a contribution which shows a fairly uniform distribution in the Centre and North of Italy. The percentage of net commissions is increasing for the Group as a whole and for the individual territorial areas, confirming the progressive greater capacity of the affiliated Banks to diversify their sources of income. The average contribution of the net commissions of the territorial areas to net interest and other banking income is 30%, with the territorial incidence spanning from 24% in the South and the Islands to 33% in the North-West.

The Industrial Group is represented by the Parent Company and the subsidiaries and associates that operate in different areas of activity, namely:

ICT and back office services, with the subsidiary Allitude S.p.A. (hereinafter also “Allitude” and until the subsequent integration into Allitude: CESVE S.p.A. and Bologna Servizi Bancari S.r.l. (hereinafter also “CESVE” and “BSB”);
leasing services, with the subsidiary Claris Leasing S.p.A. (hereinafter also “Claris Leasing” or “Claris”);
insurance services, with the subsidiaries Assicura Agenzia S.r.l. and Assicura Broker S.r.l. (hereinafter also “Assicura Agenzia” and “Assicura Broker”);
collective asset management services, with the subsidiary Nord Est Asset Management S.A. (hereinafter also “NEAM”);
other ancillary services, with the subsidiaries Centrale Credit Solutions S.r.l., Centrale Soluzioni Immobiliari S.r.l., Centrale Casa S.r.l. and the associate Centrale Trading S.r.l.

Below are the main figures for the Industrial Group as at 31 December 2019.

(Figures in millions of euro)

LOANS TO CUSTOMERS*	31/12/2019
Gross customer loans	1,294
- of which performing	1,169
- of which non-performing	125
Value adjustments	97
Net customer loans	1,197

* Management data including all intra-group eliminations.

With regard to loans to customers, the contribution of the Industrial Group to the Cassa Centrale Group’s statement of financial position is mainly due to the activities of the Parent Company and the subsidiary Claris Leasing. Gross loans to customers, amounting to approximately EUR 1.3 billion, are in fact concentrated on these structures and provisions for adjustment funds of approximately EUR 95 million have been set aside with net loans amounting to EUR 1.2 billion.

(Figures in millions of euro)

FUNDING*	31/12/2019
Overall funding	6,776
Direct funding	2,152
Indirect funding**	4,623
-of which administrated	2,657
- of which managed	1,966

* Management data including all intra-group eliminations.
** Indirect funding is expressed at market values.

Funding from customers of the Industrial Group amounted to EUR 6.8 billion and was attributable to the Parent Company. EUR 2,2 billion is composed of direct funding which is mainly represented by transactions with the counterparty Cassa di Compensazione e Garanzia. Indirect funding 7, on the other hand, amounted to approximately EUR 4.6 billion, of which EUR 2.0 billion, or 43%, related to assets under management, with operations mainly related to asset management products, while assets under administration amounted to EUR 2.6 billion and represented 57% of indirect funding, with operations mainly in the bond market.

*** The indirect funding represented refers to the component placed by Cassa Centrale Banca directly with customers and does not include the component placed through banks.

Reduction in impaired assets

During 2019, Cassa Centrale Banca continued its plan to reduce the stock of the Group’s impaired loans by initiating various sale transactions, including the multi-originator securitisation transaction Buonconsiglio 2, which saw the sale of more than half a billion gross non-performing loans mostly belonging to the CBG.

In this context, attention is also drawn to the assignment without recourse of non-performing loans initiated in October 2019 coordinated by Centrale Credit Solutions S.r.l., which had as its purpose, a portfolio of gross nonperforming loans of approximately EUR 345 million.

The above transactions were carried out with the aim of improving asset quality by removing assets from banks’ financial statements, and are part of the Group’s broader NPL management plan. At 31 December 2019 the NPL ratio was 9.3%.

Business combinations between banks

Following the birth of the Group, the following 3 business combinations between affiliated Banks took place.

Such business combinations pursue objectives of stability, efficiency and competitiveness. During 2019 the number of affiliated Banks reached 80. Details of the business combinations subsequent to the creation of the Group are provided below:

Banca Prealpi - Banca S. Biagio del Veneto Orientale: effective 1 July 2019, Veneto Region;
CR Adamello Brenta - CR di Pinzolo - CR Val Rendena: effective 1 July 2019, Trentino-Alto Adige region;
CR Alta Vallagarina - CR di Lizzana: effective 1 July 2019, Trentino- Alto Adige region.

During the reporting year, three combination processes were activated which may lead to the completion of the authorisation process and the approval by the extraordinary shareholders’ meetings of the affiliated Banks involved in further rationalising the territorial presence of the CBG.

Industrial reorganisation of IT and banking services

In October 2019, with the aim of reorganising the corporate structure of the entities of the Cassa Centrale Group operating in the ICT and back office services sector, the merger by incorporation of the following so-called service companies was approved: Servizi Bancari Associati S.p.A., Centro Sistemi Direzionali S.r.l., Informatica Bancaria Trentina S.r.l., Informatica Bancaria Finanziaria S.p.A., (hereinafter also “SBA”, “CSD”, “IBT”, “IBFin”) - into Phoenix Informatica Bancaria S.p.A. (hereinafter also “Phoenix”). The integration operation was carried out in line with the established objectives and deadlines that saw the start-up of the new structure, Allitude S.p.A. (hereinafter also referred to as “Allitude”), from 1 January 2020. During the first half of 2020, with effect from 1 July 2020, the merger of CESVE S.p.A. and Bologna Servizi Bancari S.r.l. into Allitude will also be completed.

This has led to the creation of a single reference IT and banking services company in order to guarantee efficiency and involvement, as well as to develop operational synergies and build specialist centres, including territorial centres, always at the service of the business development of the affiliated Banks and the Group as a whole. The aim of this process was to enhance the best practices in the Group and make them a common factor. In the reorganisation of the ICT side, particular attention was paid to further enhancing the indispensable “market company” profile by also supporting third parties with services and products.

Strengthening the commercial offer

With the aim of strengthening its presence in certain sectors of activity, the Group has carried out the following operations:

start-up of Prestipay S.p.A.’s operations by obtaining the Bank of Italy’s authorisation to operate on 10 December 2019. As early as 2018, Cassa Centrale Banca, through its specialised business area, had already laid the foundations for direct control of the consumer credit market segment through the launch of the proprietary brand Prestipay and the incorporation of Prestipay S.p.A. by deed dated 5 October 2018, 60% of which was held by CCB and the remaining 40% by Deutsche Bank S.p.A. As a result of this authorisation being obtained in 2020, a spin-off of the operating unit from Cassa Centrale Banca to the subsidiary will take place;
incorporation, on 18 December 2019, of Claris Rent S.p.A. (hereinafter also “Claris Rent”), with sole shareholder the subsidiary Claris Leasing S.p.A., in order to implement the long-term rental development project (hereinafter also “NTL”). Operationally, Claris Rent will begin operations in 2020, thus increasing the range of products available to the CBG both for the management of its own machine inventory and to meet specific customer needs.

Establishment and start-up of the Cassa Centrale Cooperative Banking Group

Having completed all the formalities required by the regulations on the part of the Parent Company and the affiliated Banks, the Supervisory Authority, by resolution of the Executive Board of 18 December 2018, has ordered that the Cassa Centrale Group be entered in the Register of Banking Groups, with effect from 1 January 2019.

2019 is therefore the first year for Cassa Centrale Banca, as the Parent Company of the Cooperative Banking Group (hereinafter also referred to as “CBG”). Cassa Centrale Banca and its affiliated Banks, being among the largest and most complex banks, are subject to the supervision of the European Central Bank (hereinafter also “ECB”).

The establishment of the CBG has brought with it significant impacts in terms of change and in particular in the area of corporate governance. The Cohesion Contract is now the main instrument that ensures the Group’s consistency in its strategic direction and operational objectives, as well as the unity and effectiveness of its management and control tools. In order to guarantee the solidity and stability of the Group, the Parent Company has management and coordination powers over its affiliated Banks and other Group Companies directly controlled. The organisational model that the Cassa Centrale Group pursues guarantees broad autonomy to its affiliated Banks which are in the highest risk categories, albeit within guidelines and regulations that ensure unity of purpose and the pursuit of shared strategic guidelines.

Classification of the Cassa Centrale Cooperative Banking Group as a significant entity

On 19 February 2019, the ECB sent specific notice regarding the decision to classify Cassa Centrale Banca as a significant supervised entity under Article 6(4) of Council Regulation (EU) no. 1024/2013. In accordance with Regulation no. 468/2014 (ECB/2014/17), each of the supervised entities belonging to the group that are part of the supervised CBG must be considered as significant supervised entities. For these reasons, the Parent Company and all entities that are part of the supervised Group have been included in the ECB list of supervised entities.

Banca Carige S.p.A. Cassa di Risparmio di Genova e Imperia - Carige transaction

After the failure, in December 2018, to approve the capital increase of Banca Carige S.p.A. Cassa di Risparmio di Genova e Imperia (hereinafter also “Carige”) the ECB has placed the bank under extraordinary administration. Starting from the first months of 2019, several due diligences have been carried out by institutional investors with the aim of defining a rescue plan for the Ligurian Bank, which would require, as a first indispensable and urgent step, a substantial capital strengthening to be completed through a share capital increase operation.

In this context, at the beginning of June, Cassa Centrale Banca was contacted by the Fondo Interbancario di Tutela dei Depositi (Interbank Deposit Protection Fund - hereinafter also referred to as “FITD”) in order to verify its interest in being involved in the Carige rescue project. Although conducted in a very limited time, given the strict deadline imposed by the Supervisory Authority for the definition of an agreement, the analyses and activities carried out have shown potential in terms of industrial synergies. On 9 August 2019, the Cassa Centrale Group signed a framework agreement with the FITD and the Schema Volontario di Intervento del Fondo Interbancario di Tutela dei Depositi (Interbank Deposit Protection Fund’s Voluntary Intervention Scheme - hereinafter also referred to as “SVI”). concerning the commitments undertaken in relation to the execution of the Carige rescue operation.

For Cassa Centrale Banca, the agreement provided for participation in the share capital increase of a total of EUR 700 million with a disbursement of EUR 63 million (equal to 8.34% of the share capital) and the subscription of EUR 100 million of the subordinated bond loan at an annual rate of 8.25% on a total of EUR 200 million issued by Carige. At the same time, a call option contract was signed, whereby FITD and SVI grant Cassa Centrale Banca an irrevocable purchase option on the Carige shares held by the latter following the execution of the capital increase. This option will be exercisable between 1 July 2020 and 31 December 2021. These two transactions - the subscription of Carige’s capital increase and the possible exercise of the call option by the end of 2021 - are formally and substantially separate.

Over the next few months, appropriate initiatives will be launched to analyse the overall benefits of the transaction and adequately weigh up any risks arising from the business combination between Cassa Centrale Banca and Carige in order to provide the Board of Directors with all the elements necessary to reach a final decision for the Group.

Agreement with the Iccrea Group

In October 2019, an agreement between Cassa Centrale Banca and Iccrea Banca S.p.A. (hereinafter also referred to as “Iccrea”) was signed, which allowed for the reorganisation of the respective holdings in the instrumental companies as well as the definition of the progressive withdrawal of the Cassa Centrale Group from the share capital of Iccrea. It should be noted that Cassa Centrale Banca and its affiliated Banks held a stake of more than 18% of Iccrea itself.

This agreement allowed, by 31 December 2019, the share of the Cassa Centrale Group to be reduced below the 10% threshold. The remainder will be sold in full in annual and proportional instalments by 31 December 2022. In addition, as from 1 January 2020 and until complete disposal, the Cassa Centrale Group will be able to fully exercise the equity rights inherent in the shareholding, previously sterilised for the portion exceeding 10% as established by the new Iccrea Articles of Association.

The agreement also made it possible to define reciprocal relationships regarding further shareholding structures in the service companies controlled by the respective Parent Companies, thus dissolving interweaving situations and rationalising the corporate structures.

The reorganisation of the ownership structure will enable the Cassa Centrale Group to promote stability, competitiveness and efficiency even more incisively.

Reduction in impaired assets

During 2019, Cassa Centrale Banca continued its plan to reduce the stock of the Group’s impaired loans by initiating various sale transactions, including the multi-originator securitisation transaction Buonconsiglio 2, which saw the sale of more than half a billion gross non-performing loans mostly belonging to the CBG.

In this context, attention is also drawn to the assignment without recourse of non-performing loans initiated in October 2019 coordinated by Centrale Credit Solutions S.r.l., which had as its purpose, a portfolio of gross nonperforming loans of approximately EUR 345 million.

The above transactions were carried out with the aim of improving asset quality by removing assets from banks’ financial statements, and are part of the Group’s broader NPL management plan. At 31 December 2019 the NPL ratio was 9.3%.

Business combinations between banks

Following the birth of the Group, the following 3 business combinations between affiliated Banks took place.

Such business combinations pursue objectives of stability, efficiency and competitiveness. During 2019 the number of affiliated Banks reached 80. Details of the business combinations subsequent to the creation of the Group are provided below:

Banca Prealpi - Banca S. Biagio del Veneto Orientale: effective 1 July 2019, Veneto Region;
CR Adamello Brenta - CR di Pinzolo - CR Val Rendena: effective 1 July 2019, Trentino-Alto Adige region;
CR Alta Vallagarina - CR di Lizzana: effective 1 July 2019, Trentino- Alto Adige region.

During the reporting year, three combination processes were activated which may lead to the completion of the authorisation process and the approval by the extraordinary shareholders’ meetings of the affiliated Banks involved in further rationalising the territorial presence of the CBG.

Industrial reorganisation of IT and banking services

In October 2019, with the aim of reorganising the corporate structure of the entities of the Cassa Centrale Group operating in the ICT and back office services sector, the merger by incorporation of the following so-called service companies was approved: Servizi Bancari Associati S.p.A., Centro Sistemi Direzionali S.r.l., Informatica Bancaria Trentina S.r.l., Informatica Bancaria Finanziaria S.p.A., (hereinafter also “SBA”, “CSD”, “IBT”, “IBFin”) - into Phoenix Informatica Bancaria S.p.A. (hereinafter also “Phoenix”). The integration operation was carried out in line with the established objectives and deadlines that saw the start-up of the new structure, Allitude S.p.A. (hereinafter also referred to as “Allitude”), from 1 January 2020. During the first half of 2020, with effect from 1 July 2020, the merger of CESVE S.p.A. and Bologna Servizi Bancari S.r.l. into Allitude will also be completed.

This has led to the creation of a single reference IT and banking services company in order to guarantee efficiency and involvement, as well as to develop operational synergies and build specialist centres, including territorial centres, always at the service of the business development of the affiliated Banks and the Group as a whole. The aim of this process was to enhance the best practices in the Group and make them a common factor. In the reorganisation of the ICT side, particular attention was paid to further enhancing the indispensable “market company” profile by also supporting third parties with services and products.

Strengthening the commercial offer

With the aim of strengthening its presence in certain sectors of activity, the Group has carried out the following operations:

start-up of Prestipay S.p.A.’s operations by obtaining the Bank of Italy’s authorisation to operate on 10 December 2019. As early as 2018, Cassa Centrale Banca, through its specialised business area, had already laid the foundations for direct control of the consumer credit market segment through the launch of the proprietary brand Prestipay and the incorporation of Prestipay S.p.A. by deed dated 5 October 2018, 60% of which was held by CCB and the remaining 40% by Deutsche Bank S.p.A. As a result of this authorisation being obtained in 2020, a spin-off of the operating unit from Cassa Centrale Banca to the subsidiary will take place;
incorporation, on 18 December 2019, of Claris Rent S.p.A. (hereinafter also “Claris Rent”), with sole shareholder the subsidiary Claris Leasing S.p.A., in order to implement the long-term rental development project (hereinafter also “NTL”). Operationally, Claris Rent will begin operations in 2020, thus increasing the range of products available to the CBG both for the management of its own machine inventory and to meet specific customer needs.